U.S. Bancorp Annual Report 2002

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FY2002 Annual Report · U.S. Bancorp

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2002 Annual Report and Form 10-K

Five Star

Service Guaranteed

The U.S. Bank Five Star

Service Guarantee

Our service is what ultimately differentiates U.S. Bank from our competitors.

Every day. Every transaction. To win customers, satisfy them, keep them and expand

their business relationship with U.S. Bank, we strive to deliver outstanding service

to every customer.

If we fall short in keeping our service guarantees, and the customer tells us

they did not get the service they expected and deserved, we pay the customer for

the inconvenience. We consider it a privilege to serve our customers; they are the

reason we are in business and because of them, our bank succeeds.

Our service guarantees apply to every line of business, and we pledge

outstanding service to every customer—from personal checking account customers

to large corporate banking clients; from small business partners to private banking

clients. Every one of our ten million customers is covered by one or more guarantees

that encompass accuracy, accessibility, timeliness and responsiveness.

The U.S. Bank Five Star Service Guarantee is fundamental to the way we do

business. Evaluating outstanding customer service is a key element in our recruiting

practices, our training programs and our employee compensation structure.

Help us recognize U.S. Bank employees who exemplify Five Star Service by

nominating a candidate for our prestigious Circle of Service Excellence using the

business reply card attached here.

Contents
1 Corporate Proﬁle

2 Graphs of Selected
Financial Highlights

3 Financial Summary

4 Letter to Shareholders

5 Corporate Governance

6 Outstanding Service and

Convenience

8 Growing Core Revenue

10 Line of Business Highlights:
Consumer Banking and
Payment Services

12 Line of Business Highlights: Private
Client, Trust & Asset Management,
Wholesale Banking, Capital Markets

14 U.S. Bank Hispanic Initiative

15 Every Community Counts

Financial Section
16 Management’s Discussion

and Analysis

61 Responsibility for Financial

Statements

61 Report of Independent

Accountants

62 Consolidated Financial

Statements

66 Notes to Consolidated

Financial Statements

104 Five-Year Consolidated

Financial Statements

106 Quarterly Consolidated

Financial Data

107 Supplemental Financial Data

110 Annual Report on Form 10-K

116 CEO and CFO Certiﬁcations

118 Executive Officers

120 Directors

Inside Back Cover:
Corporate Information

Corporate
Proﬁle

U.S. Bancorp is a multi-state financial holding company with headquarters in
Minneapolis, Minnesota. U.S. Bancorp is the 8th largest ﬁnancial holding company
in the United States with total assets exceeding $180 billion at year-end 2002.

Through U.S. Bank® and other subsidiaries, U.S. Bancorp serves more than

10 million customers, principally through 2,142 full-service branch offices in
24 states. In addition, specialized offices across the country and in several foreign
countries provide corporate, loan, private client and brokerage services. Customers
also access their accounts at U.S. Bancorp through 4,604 U.S. Bank ATMs and
telephone banking. More than 1,300,000 customers also do all or part of their banking
with U.S. Bancorp via U.S. Bank Internet Banking.

U.S. Bancorp and its subsidiaries provide a comprehensive selection of
premium financial products and services to individuals, businesses, nonprofit
organizations, institutions, government entities and public sector clients.

Major lines of business provided by U.S. Bancorp through U.S. Bank and other
subsidiaries include Consumer Banking, Payment Services, Wholesale Banking and
Private Client, Trust & Asset Management. All products and services are backed by
the exclusive U.S. Bank Five Star Service Guarantee.

Recent announcement regarding our capital markets business:

On February 19, 2003, U.S. Bancorp announced its plans to spin off to U.S. Bancorp
shareholders its capital markets business unit, including the investment banking and
brokerage activities primarily conducted
by its wholly owned subsidiary,
U.S. Bancorp Piper Jaffray®. As
a result, U.S. Bancorp share-
holders would receive shares
of the new Piper Jaffray
company in a tax-free stock
dividend distribution. It is
anticipated that the spin-off
will be completed in the
third quarter of 2003. Once
the spin-off is completed,
our capital markets
business will be owned
100 percent by U.S. Bancorp
shareholders, and will become
an independent publicly traded
company. U.S. Bancorp will hold
no continuing equity interest in
the company.

U.S. Bancorp will continue to offer a compre-
hensive range of investment and financial solutions
through U.S. Bank, U.S. Bancorp Asset Management and
U.S. Bancorp Investments. U.S. Bancorp Piper Jaffray,
through its Capital Markets and Private Advisory Services
operations, provides a full range of investment products
and services to individuals, institutions and businesses.

Graphs of Selected Financial Highlights

2 U.S. Bancorp

Net Income(Dollars in Millions)Net Income(Dollars in Millions)Operating Earnings(a)Net Income3,6002,7001,800900098982,519.32,132.999992,799.02,381.800003,106.92,875.601012,550.81,706.502023,537.73,289.2Diluted Earnings Per Common Share(In Dollars)Diluted Earnings Per Common Share(In Dollars)2.001.501.00.50098981.1099991.2300001.500101.8802021.71Dividends DeclaredPer Common Share (b)(In Dollars)Dividends DeclaredPer Common Share (b)(In Dollars).80.60.40.2009898.339999.460000.650101.750202.78Return on Average Assets(In Percents)Return on Average Assets(In Percents)Return on Average Assets (Operating Basis)(a)Return on Average Assets2.251.50.75098981.761.4999991.861.5900001.961.8101011.541.0302022.061.91Return on Average Equity(In Percents)Return on Average Equity(In Percents)Return on Average Equity (Operating Basis)(a)Return on Average Equity2520151050989820.317.2999921.218.0000021.620.0010115.710.5 020220.919.4Dividend Payout Ratio(In Percents)Dividend Payout Ratio(In Percents)Dividend Payout Ratio (Operating Basis)(a)Dividend Payout Ratio10075502509898999931.737.3000040.143.4010157.085.2020242.545.725.329.9Net Interest Margin (Taxable-Equivalent Basis)(In Percents)Net Interest Margin (Taxable-Equivalent Basis)(In Percents)5.003.752.501.25098984.4399994.4000004.3301014.4202024.61Efficiency Ratio(In Percents)Efficiency Ratio(In Percents)Efficiency Ratio (Operating Basis)(a)Efficiency Ratio6045301509898999950.555.7000048.851.9010149.557.5020247.750.358.352.2Banking Efficiency Ratio (c)(In Percents)Banking Efficiency Ratio (c)(In Percents)Banking Efficiency Ratio (Operating Basis)(a)Banking Efficiency Ratio6045301509898999946.352.1000043.546.8010145.252.5020244.046.849.756.1Average Assets(Dollars in Millions)Average Assets(Dollars in Millions)200,000150,000100,00050,00009898142,8879999150,1670000158,4810101165,9440202171,948Average Shareholders’ Equity(Dollars in Millions)20,00015,00010,0005,0000989812,383999913,221000014,365 010116,201020216,963Average Equity to Average Assets(In Percents)Average Equity to Average Assets(In Percents)108642098988.6799998.8000009.0601019.7602029.87Financial Summary

Year Ended December 31 (Dollars and Shares in Millions, Except Per Share Data)

2002

2001

2000

Total net revenue (taxable-equivalent basis) . . . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating earnings (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Merger and restructuring-related items (after-tax) . . . . . . . . . . . .
Cumulative effect of change in accounting principles (after-tax) .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$12,744.9
5,932.5
1,349.0
1,925.7
$ 3,537.7
(211.3)
(37.2)
$ 3,289.2

$11,761.9
5,658.8
2,146.6
1,405.7
$ 2,550.8
(844.3)
—
$ 1,706.5

$11,018.2
5,368.3
828.0
1,715.0
$ 3,106.9
(231.3)
—
$ 2,875.6

Per Common Share
Earnings per share before cumulative effect of

2002
v 2001

8.4%
4.8

2001
v 2000

6.7%
5.4

38.7%

(17.9)%

92.7%

(40.7)%

change in accounting principles . . . . . . . . . . . . . . . . . . . . . . .

$ 1.74

$ .89

$ 1.51

95.5%

(41.1)%

Diluted earnings per share before cumulative

effect of change in accounting principles . . . . . . . . . . . . . . . .
Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends declared per share (b) . . . . . . . . . . . . . . . . . . . . . . . . .
Book value per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Market value per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average diluted shares outstanding . . . . . . . . . . . . . . . . . . . . . . .

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 and Cumulative
Effect of Change in Accounting Principles (a)

Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Efficiency ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Banking efficiency ratio (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Average Balances
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Period End Balances
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory capital ratios

Tangible common equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total risk-based capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.73
1.72
1.71
.78
9.44
21.22
1,916.0
1,926.1

1.91%
19.4
4.61
50.3

2.06%
20.9
47.7
44.0

$ 114,456
28,829
149,143
171,948
105,124
16,963

$ 116,251
2,422
28,488
180,027
115,534
18,101

.88
.89
.88
.75
8.43
20.93
1,927.9
1,939.5

1.03%
10.5
4.42
57.5

1.54%
15.7
49.5
45.2

$ 118,177
21,916
145,165
165,944
104,956
16,201

$ 114,405
2,457
26,608
171,390
105,219
16,461

1.50
1.51
1.50
.65
7.97
23.25
1,906.0
1,918.5

1.81%
20.0
4.33
51.9

1.96%
21.6
48.8
43.5

$ 118,317
17,311
140,606
158,481
103,426
14,365

$ 122,365
1,787
17,642
164,921
109,535
15,168

5.6%
7.8
12.2
7.5

5.7%
7.7
11.7
7.7

6.3%
7.2
10.6
7.4

96.6
93.3
94.3
4.0
12.0
1.4
(.6)
(.7)

(41.3)
(41.1)
(41.3)
15.4
5.8
(10.0)
1.1
1.1

(3.1)%
31.5
2.7
3.6
.2
4.7

1.6%
(1.4)
7.1
5.0
9.8
10.0

(.1)%

26.6
3.2
4.7
1.5
12.8

(6.5)%
37.5
50.8
3.9
(3.9)
8.5

(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 and cumulative effect of change in accounting principles referred to in this Annual
Report and Form 10-K 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 and cumulative effect of change in accounting principles. 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.
(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. These forward-looking statements cover, among other things, anticipated future revenue and expenses and
the future prospects of the Company. Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to
differ materially from those anticipated, including the following, in addition to those contained in U.S. Bancorp’s reports on ﬁle with the SEC: (i) general eco-
nomic or industry conditions could be less favorable than expected, resulting in a deterioration in credit quality, a change in the allowance for credit losses, or
a reduced demand for credit or fee-based products and services; (ii) changes in the domestic interest rate environment could reduce net interest income and
could increase credit losses; (iii) 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; (iv) changes in the extensive
laws, regulations and policies governing ﬁnancial services companies could alter the Company’s business environment or affect operations; (v) the potential
need to adapt to industry changes in information technology systems, on which the Company is highly dependent, could present operational issues or require
signiﬁcant capital spending; (vi) competitive pressures could intensify and affect the Company’s proﬁtability, including as a result of continued industry consoli-
dation, the increased availability of ﬁnancial services from non-banks, technological developments or bank regulatory reform; (vii) acquisitions may not produce
revenue enhancements or cost savings at levels or within timeframes originally anticipated, or may result in unforeseen integration difficulties; and (viii) 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

Fellow

Shareholders:

I am pleased to tell you that U.S. Bancorp achieved its goals for the year 2002 — to successfully

complete the systems integration of Firstar and the “old” U.S. Bancorp without any disruption of

superior service to our customers; to reduce the risk proﬁle of our corporation; and to improve

customer service throughout our entire franchise.

First, it is not overstating to say that
the integration process was virtually
ﬂawless and transparent to our more
than ten million customers. The inte-
gration was completed on schedule and
met or exceeded our high expectations.
We are now a rarity in our industry —
a 24-state, $180 billion corporation
doing business on a totally uniﬁed,
single operating system for all of our
markets and all of our customers. The
service, cost, accuracy and responsive-
ness advantages of that are enormous,
and we are already putting our new
capabilities to work for our customers.
Second, during the year, we
continued to reduce the risk proﬁle
of our corporation. We exited higher
risk businesses; we intensiﬁed and
improved collection efforts; and we
put improved credit and underwriting
policies into effect across the corpora-
tion. While our credit costs are still
too high, reﬂecting the nation’s current
economic condition, it appears credit

quality has stabilized, and the improve-
ments we have made put us in a position
of strength to take every advantage
of our skill and expertise, our products
and services, our markets and an
economic recovery.

Third, a re-energized culture of
outstanding customer service is growing
appreciably throughout our company,
which is especially gratifying in those
markets where our relentless pursuit of
unparalleled service is a newer concept.
We are pleased that our employees
embrace customer service as the single
most important factor in our ongoing
and future success.

Our goals for 2003 are to generate
increased organic growth, maximize our
operating leverage, skillfully manage
credit quality, continue the reduction
of our risk proﬁle — and, as always,
grow revenues faster than expenses.
We are persistent and disciplined in
our approach to these goals — we have
speciﬁc initiatives in process, and fully
anticipate achieving our goals.

In Remembrance

Despite a challenging economy,
we ended 2002 seeing an increase in
core revenue growth, a decrease in
total noninterest expense, improvement
in the net interest margin and a signiﬁ-
cant increase in deposits. Though 2003
will most certainly present its own
demands, we have the pieces in place
to grow and the momentum to meet
whatever challenges may lie ahead.

Please know that, as always, our
highest priority is increasing the value
of your investment in U.S. Bancorp. It
is the reason we come to work each day.

Sincerely,

Jerry A. Grundhofer

Chairman, President and
Chief Executive Officer

February 28, 2003

September 26, 2002, was a sad day for all members of the U.S. Bank family. Four of our U.S. Bank colleagues and a valued

customer were victims of a fatal robbery attempt at a U.S. Bank branch office in Norfolk, Nebraska.

Our hearts are still heavy with the pain of this tragedy, and our thoughts and prayers continue to go out to the families,

friends and co-workers of Lisa, Lola, Jo, Samuel and Evonne.

Lisa Bryant

Lola Elwood

Jo Mausbach

Samuel Sun

Evonne Tuttle

4 U.S. Bancorp

corporate management. You may review
the charters of each of our Board
committees on our Internet web site
at usbank.com.

Management’s Vested Interest
in U.S. Bancorp
We understand clearly that U.S. Bancorp
shareholders are the primary beneﬁciar-
ies of management’s actions. All
U.S. Bancorp executive officers and
directors own shares of company stock,
and in order to further emphasize the
alignment of management’s interests
with those of our shareholders, we have
established stock ownership guidelines
for our executive officers.

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

Shareholder Approval of
Equity Compensation Plans
All equity compensation plans under
which future grants may be made have
been shareholder approved. In addition,
no options issued under any current
plans have been repriced.

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

U.S. Bancorp 5

Corporate
Governance

Good corporate governance promotes
ethical business practices, demands
meticulous accounting policies and
procedures, and includes a structure
with effective checks and balances.
Corporate governance is vital to the
continued success of U.S. Bancorp and
the entire ﬁnancial services industry.

Our ethical standards have rewarded
us with an enviable reputation in today’s
marketplace — a marketplace where
trust is hard to earn. Our shareholders,
customers, communities and employees
demand — and deserve — to do business
with companies they can trust.

U.S. Bancorp operates with
uncompromising honesty and integrity.
Our Board of Directors has had a
Corporate Governance Committee for
many years. We have adopted new
Corporate Governance Guidelines in
response to today’s heightened concern.
Our Corporate Governance Guidelines
are available for you to view on our
Internet web site at usbank.com.

Following are some of the important

elements of our Corporate Governance
practices.

Independent Oversight
Our Audit Committee is composed
entirely of independent outside direc-
tors. In addition, the Board, the Audit
Committee and the other committees of
the Board meet in “executive session”
without management in attendance at
every meeting. The presiding director at

every executive session of the Board
is an independent director. The Board
and each committee also have express
authority to engage outside advisors to
provide additional independent expertise
for their deliberations.

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

Board of Directors’ Knowledge
and Expertise
All of our directors are skilled business
leaders. Directors are encouraged to
attend continuing director education
seminars in order to keep a sharp focus
on current good governance practices.
In addition, the Board and each commit-
tee have express authority to retain
outside advisors.

The Board and each committee
perform annual self-evaluations in order
to assess their performance and to ensure
that the Board and committee structure
is providing effective oversight of

Outstanding

Service and Convenience

Choices. Flexibility. Availability. U.S. Bank customers bank on their own schedules and on

their own terms. Whether it’s visiting one of our 2,142 branch offices in 24 states, logging

onto U.S. Bank Internet Banking from the comfort of home, or stopping by a U.S. Bank

ATM while traveling, our customers enjoy the ease and convenience of financial services

delivered when, where and how they want them. And, regardless of the distribution

system they choose, we deliver responsive, prompt and helpful service — guaranteed.

Broadening Relationships
Across Our Branch Network
Our expansive scope multiplies our
sales opportunities, and enhances the
access our customers have to bank
when and where they want.

Local decision-making, combined

with the strength of our company’s
extensive resources, is the hallmark
of Community Banking. Smaller,
non-urban communities enjoy our full
array of ﬁnancial products and services
delivered by local people living and
working in their communities and
responding to local situations with

autonomy. In our larger and urban
locations, Metropolitan Banking staff
deliver products and services as
separate lines of business, partnering
with all areas of the bank to provide
customers with the specialized services
they need, such as Commercial Banking,
Corporate Banking, Trust or Treasury
Management. Banking with us doesn’t
stop with brick and mortar buildings.
In-Store and Corporate On-Site Banking
brings banking right to customers,
inside grocery and convenience stores,
colleges and universities, workplaces,
retirement centers and other high-traffic

Branch Banking and Specialized Services/Offices

locations. Specialized trust, home
mortgage and brokerage offices across
the country and in several international
cities add to the extensive network of
locations U.S. Bank operates.

Delivering Anytime ATM Access
Customers enjoy 24-hour access to
4,604 U.S. Bank ATMs, making ours
the third largest bank-owned ATM
network in the nation. But our ATM
network isn’t just big; it’s the best in
the business. Customers can withdraw
funds, make deposits, check balances,
receive statements, order checks,
purchase phone minutes and stamps,
transfer funds between accounts and
request check copies. To deliver on
our commitment of convenience,
nearly one-half of the ATMs owned
by U.S. Bank are located in non-bank
settings, including corporate offices,
manufacturing facilities, shopping
centers, gas stations, medical facilities
and airports. We deliver convenient
access where our customers need it.

Providing Anytime Phone
Banking Options
Around the clock, our 24-hour call
center bankers are ready to take
customers’ calls. Our service centers
in Cincinnati, Milwaukee, St. Paul,
Denver and Portland handled over
126 million inbound inquiries in 2002,
including those served by our interactive
voice response system. These centers
also handled over one million inbound

6 U.S. Bancorp

NMTXHILAMSALWVVAGASCNCPANYMEMDDEDCNJCTRIMAVTNHFLMIOKAKCommercial BankingConsumer BankingCorporate BankingPayment ServicesPrivate Client, Trust and Asset ManagementTechnology and Operations ServicesU.S. Bancorp Piper JaffrayCommercial BankingConsumer BankingCorporate BankingPayment ServicesPrivate Client, Trust and Asset ManagementTechnology and Operations ServicesU.S. Bancorp Piper JaffraySpecialized Services/Offices2,142 branch banking offices in 24 states.2,142 branch banking offices in 24 states.Branch Bankingand outbound telesales calls, offering
customers new products and services to
meet their needs while generating rev-
enue growth. Spanish language options
and multilingual call center bankers
are always available to meet the needs
of our non-English-speaking customers.
In 2002, an average of 50,000 callers
each month chose to use the Spanish
version of 24-Hour Banking, represent-
ing a 90 percent increase over 2001.
The number of customer service calls
to our multilingual call center bankers
reached an average of 15,000 each
month, representing a 131 percent
annual increase. Personalized service,
account information, product sales,
and more — all with one phone call
to U.S. Bank.

E-Enabling Customers with
Online Capabilities
Our nationally recognized Internet web
site, usbank.com, makes it easier than
ever for customers to review account

U.S. Bank operates branches across
24 states in a wide variety of traditional
offices and non-traditional locations.
Our Pike Place Market office matches the
excitement, traffic and customer service
renown of the Pike Place Fish Market.
Pictured from U.S. Bank in Seattle are (left)
Jeff Shular, region manager, and (center)
Julie Jin, assistant branch manager.

balances, make transfers, open check-
ing accounts, apply for loans and
more — anywhere they have Internet
access. With a host of new features
introduced in 2002, including a stream-
lined transfer function and online
account opening, U.S. Bank Internet
Banking was ranked in the elite top 10
Internet banking sites by Gomez.com,
an independent quality measurement
company. More than 1.3 million
customers have selected U.S. Bank
Internet Banking to meet their
need for easy-to-use, comprehen-
sive and secure online services.
In 2002, enrollment in U.S. Bank
Bill Pay, our online bill payment
product, increased by 25 percent,
showing that online banking is
quickly becoming the most active
banking delivery channel.

Among other new beneﬁts and
functionality introduced in the past
year, Trust customers can now enjoy
the convenience of U.S. Bank TrustNow
Essentials, a way to retrieve account
information and reports via the Internet.
Corporate Payment Systems has
signiﬁcantly enhanced the capabilities
of PowerTrack®, our innovative online

business to business payment and
transaction system, giving corporate
customers even greater control of costs
in the supply and payment process. And
U.S. Bank AccessOnline, a web-based
program management and reporting
tool, is the next generation in our com-
plete suite of commercial products.

Growing

Core Revenue

Attracting. Retaining. Expanding. These are the building blocks we will use to grow

core revenue, the foundation for creating and sustaining shareholder value. Ultimately,

growth depends on our employees fulﬁlling the ﬁnancial needs of our customers.

By tapping into the tremendous potential of our employee sales force, focusing on

the highest level of service, building cross-market and cross-business partnerships

and developing new products and services, we are exceeding customers’ needs,

positioning us for superior revenue growth.

Taking Ownership of Our Business
Employees, shareholders and customers
are all linked by a common interest —
achieving our goals and performance
expectations. Ownership of these
goals exists at the business line level.
Business lines have the autonomy to
implement industry-competitive busi-
ness models and strategies. Resources
are allocated based on growth and
return expectations, and monthly
financial reviews track results. This
environment creates a front line
accountability where every employee
understands and contributes to sales
volume targets, service standards
and profit objectives. Results are

measured quickly and widely shared.
National sales management calls
provide a forum to communicate sales
opportunities and best practices among
business lines.

Developing a Superior
Sales Culture
Customer needs drive our business.
U.S. Bank continues to develop a sales
culture designed to proactively identify
sales opportunities based on customer
needs. Every employee contributes
to the revenue growth of our company
through sales production, superior
customer service, efficiency and a
continuous focus on shareholder value.
Employees know what is expected
within this dynamic sales environment,
where everyone takes ownership of
our business and is held accountable
for the results. And every
employee can stand proudly
behind our Five Star Service
Guaranteed products and
services because they are
among the ﬁnest in the
industry, backed by up-to-
date processing and technol-
ogy, personalized training,
ongoing product education,
effective marketing cam-
paigns and competitive

performance incentives. Our Pay for
Performance compensation program
rewards employees ﬁnancially and

personally for their achievements in
sales and customer service and for their
contributions to company earnings.

Introducing a New FOCUS
Recognizing the power of the primary
checking customer, on April 1, 2002,
U.S. Bank introduced a dedicated and
focused strategy across the entire
franchise to attract, retain and expand
the core U.S. Bank customer base,
specifically those customers who
maintain a primary checking account
with U.S. Bank. This initiative,
called FOCUS, involves dramatically
modifying our activities, investments
and attention to increase our demand
deposit account base. By concentrating
on this critical segment, we are more
likely to grow and strengthen a cus-
tomer’s existing banking relationship
with us, providing opportunities for
increased sales and service across every
line of business, from credit cards and
trust products to home mortgages and
investments and insurance products.

Among other support programs,
employees are regularly supplied with
specialized tools designed to drive
growth, build new customer relation-
ships and enhance existing relationships.
We are extremely pleased with the
exceptional results of our ﬁrst year’s
FOCUS efforts, which have energized
us for an even more powerful FOCUS
commitment in 2003.

8 U.S. Bancorp

Partnering Across Our Company
We have the power to share ideas,
best practices, capabilities and sales
opportunities across business lines
throughout 24 states. Local relationship
management, combined with expert
advice and support from across our
organization, truly gives our customers
an advantage — personalized service
and increased resources. A great part-
nership in our Private Client Group
shows the power of cross-business
cooperation. In 2002, the collaboration
among Private Banking, Personal Trust
and Asset Management was strength-
ened, allowing clients to manage all
their complex ﬁnancial needs in one
place. Signiﬁcantly more referrals
among these business lines resulted
in a 28 percent increase in Personal
Trust sales.

Providing Innovative
Products and Services
We continuously expand our line of
superior, competitive products and
services to fulﬁll the ﬁnancial needs of
our broad customer base. In 2002,
U.S. Bank introduced a variety of

ﬁnancial services that are helping to
fuel revenue and customer growth,
while providing ﬁrst-rate beneﬁts our
customers expect and deserve.

(cid:127) U.S. Bank Access Online A web-based

program management and reporting
tool that can be conﬁgured to best
support customers’ business processes.

(cid:127) Checking That Pays® Rewards

(cid:127) Quick Credit Line A one-application

customers for using their U.S. Bank
Check Card by giving them up to
a one percent cash rebate for certain
purchases, such as groceries or gas.
(cid:127) Cash Rewards Visa® Card Allows
consumer customers to earn a cash
rebate of up to one percent on all
purchases made with their U.S. Bank
Cash Rewards Visa Card.

(cid:127) Veriﬁed By Visa ® A new security

feature that lets customers add a
personal password to their existing
U.S. Bank Check Card and U.S. Bank
Credit Card.

(cid:127) Private Select Platinum Services
A comprehensive, integrated approach
to ﬁnancial management in the areas
of private banking, personal trust and
investments offered through our
Private Client Group.

(cid:127) PowerTrack® The newest release in
November 2002, signiﬁcantly enhances
customer capability to control costs in
the supply chain and payment process.

line, loan or lease solution for small
business credit needs under $50,000.

(cid:127) SBA Express Provides streamlined

loan processing for Small Business
Administration loans under $250,000.
(cid:127) U.S. Bank TrustNow Essentials
A way for Trust customers to retrieve
and customize account information
and reports via the Internet.

(cid:127) FACTS 529 Trust and Agency Accounts
Unique products combining the beneﬁts
of a 529 Savings Plan with the value
of a ﬁduciary relationship.

(cid:127) First American FundsTM Enhanced
family of funds with three new ﬁxed
income funds — Intermediate Govern-
ment Bond Fund, Short Tax Free Fund
and Ohio Tax Free Fund.

U.S. Bancorp 9

Lines of

Business

Diversiﬁed. Specialized. Extensive. U.S. Bancorp is among the leaders in virtually every

segment of the ﬁnancial services industry. Each U.S. Bancorp line of business works strategically

with customers to meet their needs, deepening each relationship with best-in-class products

and comprehensive service.

Consumer Banking
Consumer Banking delivers an extensive array of products and services

to the consumer and small business markets. Our multiple delivery

channels include full-service banking offices, ATMs, telephone

customer service and telesales, highly-ranked online banking and

37.4%

Contribution to 2002
U.S. Bancorp Total Net Revenue*

direct mail. These channels ensure customers have anytime, all-the-time access to

all of their U.S. Bank accounts. Our Consumer Banking business is a recognized

industry leader with its mandate for service and convenience, new products and other

competitive advantages.

Strengths
(cid:127) 2,142 full-service branch banking offices

Key Business Units
(cid:127) Community Branch Banking

(cid:127) 4,604 ATMs

(cid:127) Top 2 bank lessor

(cid:127) Top 3 Small Business Administration

(cid:127) Metropolitan Branch Banking

(cid:127)

In-Store and Corporate
On-Site Banking

(SBA) bank lender by volume

(cid:127) 24-Hour Banking and Financial Sales

(cid:127) Top 3 small business lender

(cid:127) Consumer Lending

(cid:127) Top 4 branch network

(cid:127) Home Mortgage

(cid:127) Top 4 Small Business Internet Banking
site as rated by Speer and Associates

(cid:127)

Investments and Insurance

(cid:127) Group Sales and Student Banking

(cid:127) Top 9 student loan provider

(cid:127) Top 9 Internet Banking site as rated

by Gomez.com

(cid:127) Unparalleled sales and service culture

built on customer needs

(cid:127) Small Business Banking

Successes
(cid:127) Enhanced usbank.com with a host of new features, including
easy-to-use customer screens, a streamlined transfer function,
online account opening and the ability to nickname accounts.

(cid:127)

Introduced the innovative “Free x 3” checking program,
offering free checking for small business owners, their
businesses and their employees.

(cid:127) U.S. Bank Internet Bill Pay reached 100,000 subscribers

(cid:127) Home Mortgage realized its ﬁfth straight year of increased

in 2002 as enrollment grew by 25 percent.

proﬁtability, with an average annual growth rate of 23 percent.

(cid:127)

In the August 12, 2002, issue of BtoB magazine,
usbank.com was named one of the 100 best business
to business sites in the country.

(cid:127) U.S. Bank SBA Division provided an all-time record

$416.9 million in SBA loans, a 24 percent increase over
2001; originated a record 1,127 loans to small businesses
nationwide, a 91 percent increase over 2001.

* Total net revenue is on a taxable-equivalent basis. Treasury and Corporate Support

contributed 7.2% of 2002 total net revenue.

(cid:127) Consumer Finance achieved a record $5 billion in receivables.
Consumer Finance, a nationally recognized Home Equity
mortgage lender, provides an additional level of credit to
U.S. Bank customers not served by traditional products.

(cid:127) Group Sales and Student Banking reached a milestone
of over 500 Campus Banking relationships with colleges
and universities, and over 6,000 Group Sales workplace
banking relationships with companies across the country.

10 U.S. Bancorp

Payment Services
Our unique payment services business specializes in credit and debit card products,

corporate and purchasing card services and ATM and merchant processing.

18.7%

Customized products and services, coupled with cutting-edge technology, provide

consumers, small and large merchants, government entities, ﬁnancial institutions,

small businesses, large corporations and co-brand partners with the most advanced

payment services tools available. Revenue growth in this business is accelerating

Contribution to 2002
U.S. Bancorp Total Net Revenue*

and its ultimate long-term potential is virtually limitless.

• Processor of 6 percent of all ATM/debit
point of sale transactions in the U.S.

• Processor of ATM/debit/credit

transactions for more than 21 percent
of all banks in the U.S.

• Proprietary technology

• Industry-leading implementation

and service models

Strengths
(cid:127) Top commercial bankcard issuer

(cid:127) Top purchasing bankcard provider

(cid:127) Top corporate bankcard provider

(cid:127) Top 2 ﬂeet card provider

• Top 2 freight payments provider

• Top 3 bank-owned ATM network

• Top 3 merchant payment processor

• Top 6 U.S. credit and debit card issuer

in total sales volume

• Top 9 ATM processor

• Top 8 worldwide credit and debit
card issuer in total sales volume

Successes
(cid:127) We upgraded an additional

1,376 ATMs to meet the enhanced
functionality of our network of 3,408
Super ATMs. Innovative products and
services available include stamp dispensing, event ticket sales,
voice guidance, multi-language support, pre-paid phone minutes,
PIN changes, statements, check reorders and check copy requests.

(cid:127) More than 3,300 ﬁnancial institutions, located in every state and Puerto
Rico, choose Elan Financial Services for credit card issuing and to fulﬁll
their ATM, debit card and merchant processing needs.

(cid:127) PowerTrack, our innovative online business to business payment

and transaction processing system, is our fastest growing Corporate
Payment Systems product, with 2002 revenue growth of 25 percent
and income contribution growth of 60 percent.

(cid:127) Leading the industry, Corporate Payment Systems successfully held its
ﬁrst ever Financial Supply Chain conference, attended by 1,000 clients.

(cid:127) Corporate Payment Systems signed its ﬁrst Global Corporate

Payment Systems client, marking the start of exciting new growth
and revenue potential.

(cid:127)

Introduced eCommerce Suite, an e-procurement product that helps
businesses empower their employees to make company purchases
while simplifying the procurement process.

(cid:127) Retail Payment Solutions launched the U.S. Bank Payroll (AccelaPay)
and Child Support (ReliaCard) products in 2002; one of the ﬁrst four
issuers to launch payroll product.

(cid:127) Retail Payment Solutions successfully launched REI ® Visa and Korean

Air SKYPASS® co-brand credit card programs.

(cid:127) Continued to expand U.S. Bank ATM convenience in non-bank

locations such as corporate offices, manufacturing facilities, shopping
centers, retailers, supermarkets, gas and convenience stores, colleges
and universities, medical facilities, airports and more.

Key Business Units
• Corporate Payment Systems

– Travel and entertainment, purchasing,
ﬂeet, freight payment systems and
business to business payments

• Transaction Services

– ATM banking

– Elan Financial Services

• NOVA Information Systems, Inc.

– Merchant processing with top 3

market share

• Retail Payment Solutions

– Relationship-based retail payment
solutions; includes credit, debit and
stored value cards through U.S. Bank,
correspondent agent banks and
co-brand partners

U.S. Bank Grows in
San Francisco Bay Area
U.S. Bank now offers more convenience
to customers on the West Coast. With the
acquisition of 57 branches in California
from Bay View Bank, completed on
November 1, 2002, U.S. Bank brings a
host of new consumer, commercial and
trust ﬁnancial products and services to
customers throughout the Greater Bay
Area. The branch purchase and deposit
assumption, which included approximately
$3.3 billion in retail and small business
deposits and $336 million in selected
loans, strengthens our geo-

graphic footprint in California,
providing an entry into the

important, fast growing
communities in the Greater
Bay Area. U.S. Bank now
operates 215 full-service branch

offices in California and 256 ATMs
conveniently located throughout the
state. The 57 branch locations that were
acquired by U.S. Bank are in the following
California markets: San Francisco and
the San Francisco peninsula; San Jose;
Alameda County; Contra Costa County;
Santa Rosa; Vallejo-Fairﬁeld-Sonoma;
and Santa Cruz.

U.S. Bancorp 11

Private Client, Trust & Asset Management
To help individual and institutional clients build, manage and

preserve wealth, Private Client, Trust & Asset Management

9.4%

provides mutual fund processing, trust, private banking,

ﬁnancial advisory, retirement, trustee, custody and investment

management services. Experienced, committed advisors

and relationship managers offer thoughtful solutions based

on a highly sophisticated understanding of client needs.

Contribution to 2002
U.S. Bancorp Total Net Revenue*

Key Business Units
• Corporate Trust Services

– Escrow

– Public Finance/Structured

Finance/Corporate Finance

– Document Custody

• Institutional Trust & Custody

– Retirement Plans

– Institutional Custody

– Master Trust

• Private Client Group

– Private Banking

– Personal Trust

– Investment Management

– Financial and Estate Planning

• U.S. Bancorp Asset Management, Inc.

– Private Asset Management

– Securities Lending

– Institutional Advisory

– First American FundsTM

• U.S. Bancorp Fund Services, LLC

– Mutual Fund Administration

and Compliance

– Transfer Agent

– Mutual Fund Accounting

– Fund Distribution

– Partnership Administration

– Offshore Trust Administration

Strengths
• Top municipal ﬁnance trustee

• Top 5 in corporate and asset-backed

bond issues

• Top 5 bank-affiliated U.S. mutual fund family

• Top 5 full-service, third-party provider of

mutual fund services

• Top 6 bank provider of recordkeeping

by assets

• Private Client Group has $63.2 billion

in assets under administration

• U.S. Bancorp Asset Management has
more than $113 billion in assets under
management**; ranks as the 37th largest
asset manager domiciled in the U.S.

• First American Funds family includes

open-end funds with assets of more than
$53 billion**

• 24 First American Funds named Lipper

leaders as of December 31, 2002

• Easy access, ﬂexibility and creative

customization of products and services

U.S. Bank Adds State Street
Corporate Trust Business
to Portfolio
U.S. Bank is a leader in the
corporate trust industry — the
largest trustee in the area of
municipal ﬁnance and in the
top ﬁve for new corporate bond
issuances and structured
ﬁnance. U.S. Bank recently
solidiﬁed our position in the top
tier of corporate trust providers with the
acquisition of State Street Bank’s corporate
trust business. As a result of the transac-
tion, which closed on December 31, 2002,
U.S. Bank Corporate Trust Services
acquired approximately 20,000 new client
issuances, 365,000 bondholders and
$689 billion in assets under administration.
The completion of this transaction makes
U.S. Bank the leading corporate trust
provider in New England in addition to our
current lead status in the Northwest, West
and Central regions of the country.

U.S. Bank Corporate Trust Services
now administers a portfolio of municipal
and corporate bonds with a par value
outstanding that exceeds $1.36 trillion and
serves more than 50,000 bond issuances
and 1.3 million bondholders through a
network of 26 corporate trust offices across
the country.

12 U.S. Bancorp

Successes
• Introduced Private Select Platinum Services, an innovative and comprehensive

approach to ﬁnancial and estate management.

• Private Client Group implemented new ﬁnancial and estate planning software

tools, enhancing our ability to provide sophisticated planning for clients.

• Launched broker resource site within First American Funds Internet web site.

• Automation of the U.S. Bancorp Fund Services compliance and ﬁnancial
reporting in 2002, coupled with the development of online client service
tools, increased efficiencies and accuracy and enhanced client convenience.

• Fund Services grew core revenue by 10 percent due to expansion of services

offered, a solid and winning client base and a strong competitive position.

• Corporate Trust Services introduced U.S. Bank SPANS Online, a state-of-
the-art Internet reporting and processing system for commercial paper and
medium-term issuing and paying agency clients.

• Institutional Trust & Custody introduced Solution Online, an online, fully

automated, multifund-family retirement product.

• Asset Management introduced the FACTS 529 Plan and Oregon College

Savings Plan, and the Private Client Group introduced new FACTS 529 Trust
and Agency Accounts, new tax-efficient ways to save for college expenses.

* Total net revenue is on a taxable-equivalent basis. Treasury and Corporate Support contributed 7.2% of 2002

total net revenue.

** Assets are as of December 31, 2002, 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.

Wholesale Banking
U.S. Bank is a full ﬁnancial partner with the expertise, ﬂexibility and responsiveness to make

a difference. We offer lending, depository, treasury management and other ﬁnancial solutions

to meet the complex needs of middle market, large corporate, ﬁnancial institution and public

sector clients. Whether working with local or global clients, U.S. Bank understands industries

and markets, and has enormous resources to help our customers grow. Partnering with all

areas of U.S. Bank, including Corporate Payment Systems, ATM and Merchant Processing,

Trust, e-Commerce and more, we deliver all the ﬁnancial “pieces” that can mean success.

21.5%

Contribution to 2002
U.S. Bancorp Total Net Revenue*

Key Business Units
• Commercial Banking

• Corporate Banking

• Government Banking

• International Banking

• Real Estate Banking

Strengths
• Leading depository bank for federal, state and municipal governments

• Leading correspondent banking depository for community banks

• Top 5 bank-owned leasing company

• Top 7 treasury management provider

• Locally based relationship managers

• Treasury Management

• Combine superior relationship-based partnerships with the most

• U.S. Bancorp Equipment Finance

effective new electronic systems and technology platforms

• Strategic solutions driven by customer need

Successes
• Launched U.S. Bank E-Payment Service, allowing government entities and businesses

to accept or collect payments via the Internet (e-check).

• Enhanced imaging functionality and Internet access for lockbox customers.

• U.S. Bancorp Equipment Finance ended 2002 with record bookings in the small

ticket leasing group.

• Corporate Banking Capital Markets had a record year using interest rate risk manage-
ment products to help customers take full advantage of the historical low interest rates.

• Record spread on new business volume in U.S. Bancorp Equipment Finance.

• Launched U.S. Bank Global Trade Works, an Internet-based international trade
solution for initiating and reviewing import, export and standby letters of credit,
as well as documentary collections.

Capital Markets
Under the U.S. Bancorp Piper Jaffray brand, the division engages in equity

and ﬁxed income trading activities, offers investment banking and underwriting

services for corporate and public sector clients and provides ﬁnancial advisory

services and securities, mutual funds, annuities and insurance products to con-

sumers and regionally based businesses through a network of brokerage offices.

5.8%

Contribution to 2002
U.S. Bancorp Total Net Revenue*

Key Business Units
• Equity Capital Markets

• Fixed Income Capital Markets

• Private Advisory Services

• Venture Capital

Strengths
• Leading provider of ﬁxed-income

investment banking services

• Leading growth company

investment bank

• Experienced, trusted advisors

• Offers personalized guidance and
convenient ﬁnancial products and
services to meet investment needs

• Provides in-depth research in the

communications, consumer, health
care, ﬁnancial institutions, industrial
growth and technology industries

Successes
• Private Advisory Services enhanced

ﬁnancial advisor tools and streamlined
back office systems, creating greater
client convenience and satisfaction.

• Equity Capital Markets continued to
gain share in merger and acquisition
product area, despite a decline in the
overall industry.

• Expanded in various strategic product
categories, including a signiﬁcant addi-
tion to convertible securities investment
banking and trading product offering.

• Record year for Fixed Income Capital
Markets in public ﬁnance deal volume.

• Fixed Income taxable co-managed

deals doubled over 2001.

U.S. Bancorp 13
U.S. Bancorp 13

U.S. Bank

Hispanic Initiative

You have friends at U.S. Bank.

Our vision is to become the Best Bank
in America for Hispanics. To deliver on
our commitment of providing unparal-
leled products, service and support to
the Hispanic market, the coordinated
U.S. Bank Hispanic Initiative focuses
our strategies on four impact areas:
staffing, marketing, products and com-
munity involvement.

Hiring Spanish-speaking branch

staff and call center representatives is
a priority. Our employees reﬂect the
diversity of their local communities,
maintain strong relationships with
Hispanic individuals, businesses and
community organizations and commu-
nicate most effectively with customers.

Any employee across our company can
contact bilingual bankers using an inter-
nal directory, so customers who speak
another language can be served any-
where, anytime.

Spanish-language marketing tools

assist our employees in fulﬁlling the
ﬁnancial needs of Spanish-speaking
customers. Branch signage, brochures,
bilingual direct mail, billboards and print
and radio advertisements communicate
our products, services and commitment
to the Hispanic market.

We offer many products and

services tailored to meet the speciﬁc
needs of Hispanic customers. Our
ATMs and 24-Hour Banking system
feature complete Spanish language
options. Product information in Spanish
is also available on our web site at
usbank.com/espanol. We accept identiﬁ-

cation issued by the Consulate of
Mexico to open an account. First-time
borrowers can qualify for credit using
our Credit Builder Secured Loan and
the Secured Visa Card, and U.S. Bank is
a partner in the En Su Casa program to
provide homeownership counseling and
ﬂexible mortgages. We reach out to
Hispanic-owned businesses in face-to-
face meetings, calling sessions and letters.

U.S. Bank also sponsors a variety

of cultural and community events of
importance to Hispanic communities,
including events during Cinco de Mayo
and Hispanic Heritage Month. We
sponsor and partner with local and
national Hispanic organizations, includ-
ing the United States Hispanic Chamber
of Commerce (USHCC), the National
Council of La Raza (NCLR) and the
Latin Business Association (LBA).

Iniciativa Hispana

de U.S. Bank

Usted tiene amigos en U.S. Bank.

Nuestra visión es convertirnos en el
Mejor Banco de los Estados Unidos de
América para la comunidad hispana.
Para poder cumplir con nuestro com-
promiso de brindar productos, servicios
y asistencia inigualables al mercado de
la comunidad hispana, la coordinada
Iniciativa Hispana de U.S. Bank
concentra su estrategia en cuatro áreas
de impacto: contratación de personal,
mercadeo, productos y compromiso
con la comunidad.

de un directorio interno, para que los
clientes que hablan otros idiomas
puedan recibir atención en cualquier
lugar y en cualquier momento.

Las herramientas de mercadeo en

español ayudan a nuestros empleados a
satisfacer las necesidades ﬁnancieras
de los clientes de habla hispana. Los
carteles publicitarios de las sucursales,
los folletos, la correspondencia directa
bilingüe, las carteleras y la publicidad
en medios gráﬁcos y radiofónicos
difunden nuestros productos, servicios
y compromiso con el mercado hispano.

Una de nuestras prioridades es la

Ofrecemos múltiples productos y

contratación de personal que hable
español para las sucursales y centros de
atención telefónica. Nuestros empleados
reﬂejan la diversidad de sus comu-
nidades locales, mantienen sólidas
relaciones con particulares, empresas y
organizaciones comunitarias hispanas
y se comunican de un modo muy eﬁcaz
con los clientes. Todos los empleados de
nuestra empresa pueden ponerse en con-
tacto con agentes bilingües por medio

servicios personalizados para satisfacer
las necesidades especíﬁcas de los clientes
hispanos. Nuestros cajeros automáticos
y nuestro Servicio bancario las 24 horas
(24-Hour Banking) presentan todo el
menú de opciones en español. La infor-
mación de productos en español tam-
bién está disponible en nuestro sitio de
Internet: usbank.com/espanol. Aceptamos
documentos de identidad emitidos por
el Consulado de México para abrir una

cuenta. Quienes solicitan un crédito por
primera vez pueden caliﬁcar para dicho
crédito utilizando nuestro Préstamo
Asegurado para el Desarrollo de
Historial de Crédito y la Tarjeta Visa
Asegurada. U.S. Bank es socio del
programa En Su Casa que brinda aseso-
ramiento e hipotecas ﬂexibles a los
propietarios. Llegamos a las empresas
cuyos dueños son hispanos a través de
reuniones personales, sesiones telefónicas
y correspondencia.

U.S. Bank también es patrocinador
de una variedad de acontecimientos cul-
turales y comunitarios de importancia
para la población hispana, entre los
cuales se incluyen los eventos del Cinco
de Mayo y del Mes de la Herencia
Hispana. Patrocinamos y nos asociamos
con organizaciones hispanas locales
y nacionales, incluyendo la Cámara de
Comercio Hispana de los Estados
Unidos de América (USHCC, por sus
siglas en inglés), el Consejo Nacional
de la Raza (NCLR) y la Asociación de
Empresas Latinas/os (LBA).

14 U.S. Bancorp

Every

Community Counts

U.S. Bank supports a wide range of
community events and activities, including
(above) the U.S. Bank Junior Padres pro-
gram for youngsters in San Diego and (left)
U.S. Bank Wild Lights at the St. Louis Zoo.

From Seattle to Sioux Falls, from San
Diego to Paducah, from Minneapolis
to Missoula, U.S. Bank values each
community we serve. Recognizing
that we are only as successful as the
communities in which we operate, we
take a leadership position in economic
development, quality of life issues and
cultural and charitable endeavors.
We offer customers in all our
markets top quality ﬁnancial products
and services, and we offer specialized
products for those customers who
may just be starting out or who need
extra help in getting established or
reestablished ﬁnancially.

Among those specialized products
are our innovative programs for ﬁrst-
time home buyers, small businesses
and affordable housing developers.
In 2002, we made over a billion dollars
in loans and investments to support
the creation of affordable housing,
to launch businesses and to foster
economic revitalization.

U.S. Bancorp Continues Our
Long Tradition of Charitable Giving
Through the U.S. Bancorp Foundation,
in 2002, we provided more than
$22 million in cash grants to a wide
range of qualiﬁed nonproﬁt organiza-
tions. From affordable housing to art
museums, from youth mentorship to
United Way, U.S. Bancorp Foundation
helped communities achieve their
dreams in 2002.

In addition to cash grants, we
provide loan assistance, expertise, more
than 150 sponsor relationships across
our banking region, in-kind donations
and tens of thousands of hours of
volunteering by our employees.

Local Bank Management and
Bank Advisory Boards Ensure
Focus on Each Market
Our bank is structured so that every
community has seasoned leaders,
capable managers and an employee
base committed to their local market.
These leadership teams know their

markets and the people in them; they
know the community needs and what
it takes to build a strong economic
base; they understand the businesses
and the industries that make their
communities strong. In addition, we
have more than 174 local advisory
boards whose 1,266 members are
respected business leaders of the cities,
towns and rural areas in which we do
business. Our advisory boards offer us
valuable insights and perspective.

U.S. Bancorp 15

30% United Way & Human Services 26% Economic Opportunity 19% Arts & Culture 16% Education 6% Employee Matching Gifts 3% MiscellaneousU.S. Bancorp Foundation 2002 Charitable Contributionsby Program AreaManagement’s Discussion and Analysis

OVERVIEW

U.S. Bancorp and its subsidiaries (the ‘‘Company’’) comprise
the organization created by the acquisition by Firstar
Corporation 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 financial 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.

The Company began 2002 with several specific goals. The
first goal was to successfully complete the integration of Firstar
and the former U.S. Bancorp. The second goal was to reduce
the overall risk profile of the Company. Third, the Company
was determined to improve customer service throughout the
franchise in an effort to enhance customer retention and
longer-term revenue growth opportunities. Finally, despite the
efforts to complete these goals, the Company had an
additional objective, to grow revenues faster than expenses.
The Company’s results for 2002 largely reflected the
achievement of these goals and improved significantly over
2001 despite the current economic conditions.

Earnings Summary The Company reported net income of
$3.3 billion in 2002, or $1.71 per diluted share, compared
with $1.7 billion, or $.88 per diluted share, in 2001. Return
on average assets and return on average equity were
1.91 percent and 19.4 percent in 2002, compared with
returns of 1.03 percent and 10.5 percent in 2001. The
increase in earnings per diluted share, return on average
assets and return on average equity was primarily due to
total net revenue growth, lower noninterest expense and a
reduction in the provision for credit losses. Net income in
2002 included after-tax merger and restructuring-related
items of $211.3 million ($324.1 million on a pre-tax basis)
and a cumulative effect of change in accounting principles
of $37.2 million, or $0.2 per diluted share, compared with
after-tax merger and restructuring-related items of
$844.3 million ($1.3 billion on a pre-tax basis) in 2001.
Refer to the ‘‘Accounting Changes’’ section for further
discussion of the earnings impact of changes in accounting
principles. Merger and restructuring-related items in 2002,
on a pre-tax basis, included $271.1 million of net expenses
associated with the Firstar/USBM merger and $53.0 million
associated with the acquisition of NOVA Corporation and
other smaller acquisitions. In 2001, 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 expense and $382.2 million of provision for

credit losses associated with the Firstar/USBM merger.
Merger and restructuring-related items in 2001 also
included $50.7 million of expense for restructuring
operations of U.S. Bancorp Piper Jaffray, and $48.5 million
related to the acquisition of NOVA and other smaller
acquisitions. Refer to the ‘‘Merger and Restructuring-
Related Items’’ section for further discussion.

The Company reported operating earnings (net income

excluding merger and restructuring-related items and
cumulative effect of change in accounting principles) of
$3.5 billion in 2002, or $1.84 per diluted share, compared
with $2.6 billion, or $1.32 per diluted share in 2001.
Return on average assets and return on average equity,
excluding merger and restructuring-related items and
cumulative effect of change in accounting principles, were
2.06 percent and 20.9 percent in 2002, respectively,
compared with returns of 1.54 percent and 15.7 percent in
2001. Operating earnings in 2002 reﬂected total net revenue
growth, on a taxable-equivalent basis, excluding merger and
restructuring-related gains, of 8.4 percent. This growth was
driven by strong core growth in consumer and payment
processing revenues, cash management fees, and mortgage
banking as well as the impact of acquisitions. This revenue
growth was offset somewhat by growth of 4.8 percent in
noninterest expense, excluding merger and restructuring-
related charges. The change in noninterest expense,
excluding merger and restructuring-related charges, reﬂected
the impact of acquired businesses and a higher level of
impairments of mortgage servicing rights (‘‘MSRs’’), offset
by cost savings and the elimination of goodwill
amortization upon adopting new accounting principles for
business combinations. As a result, the efﬁciency ratio on an
operating basis was 47.7 percent in 2002, compared with
49.5 percent in 2001. The banking efﬁciency ratio (the ratio
of expenses to revenues without the impact of investment
banking and brokerage activity), on an operating basis, was
44.0 percent in 2002, compared with 45.2 percent in 2001.
The change in the banking efﬁciency ratio reﬂected the
favorable impact in 2002 of adopting new accounting
principles and cost savings from ongoing integration efforts,
partially offset by an increase in MSR impairments and the
impact of acquisitions of fee-based businesses that have
higher efﬁciency ratios than the core banking business. The
provision for credit losses, on an operating basis, declined
by $797.6 million from a year ago primarily reﬂecting
credit related actions taken in 2001.

While net income and operating earnings for 2002 and

2001 included a number of signiﬁcant items, core growth
was strong. Notable items in 2002 included net gains on
the sale of securities of $299.9 million, a decrease of

16 U.S. Bancorp

Table 1

Selected Financial Data

Year Ended December 31
(Dollars and Shares in Millions, Except Per Share Data)

Condensed Income Statement
Net interest income (taxable-equivalent basis) (a) *************
Noninterest income ***************************************
Securities gains, net **************************************
Total net revenue **************************************
Noninterest expense **************************************
Provision for credit losses**********************************

Income before taxes and cumulative effect of change in

accounting principles********************************
Taxable-equivalent adjustment ******************************
Income taxes *********************************************

Income before cumulative effect of change in

accounting principles ***********************************
Cumulative effect of change in accounting principles (after-tax) ***
Net income *******************************************

Per Common Share
Earnings per share before cumulative effect of change in

accounting principles ***********************************

Diluted earnings per share before cumulative effect of change

in accounting principles ********************************
Earnings per share****************************************
Diluted earnings per share *********************************
Dividends declared per share (b) ***************************
Book value per share *************************************
Market value per share ************************************
Average shares outstanding ********************************
Average diluted shares outstanding *************************

Financial Ratios
Return on average assets *********************************
Return on average equity **********************************
Net interest margin (taxable-equivalent basis) ****************
Efﬁciency ratio********************************************

Average Balances
Loans ***************************************************
Loans held for sale ***************************************
Investment securities **************************************
Earning assets *******************************************
Assets ***************************************************
Noninterest-bearing deposits *******************************
Deposits *************************************************
Short-term borrowings *************************************
Long-term debt *******************************************
Total shareholders’ equity **********************************

Period End Balances
Loans ***************************************************
Allowance for credit losses *********************************
Investment securities **************************************
Assets ***************************************************
Deposits *************************************************
Long-term debt *******************************************
Total shareholders’ equity **********************************
Regulatory capital ratios

Tangible common equity ********************************
Tier 1 capital ******************************************
Total risk-based capital *********************************
Leverage *********************************************

* Information was not available to compute pre-merger proforma percentages.

2002

2001

2000

1999

1998

$ 6,876.3
5,568.7
299.9

12,744.9
6,256.6
1,349.0

5,139.3
36.6
1,776.3

3,326.4
(37.2)

$ 6,423.0
5,072.0
329.1

11,824.1
6,605.2
2,528.8

2,690.1
55.9
927.7

1,706.5
—

$ 6,091.8
4,918.3
8.1

11,018.2
5,717.0
828.0

4,473.2
85.4
1,512.2

2,875.6
—

$ 5,888.0
4,276.4
13.2

10,177.6
5,661.3
646.0

3,870.3
96.3
1,392.2

2,381.8
—

$ 5,659.9
3,637.2
29.1

9,326.2
5,423.4
491.3

3,411.5
111.2
1,167.4

2,132.9
—

$ 3,289.2

$ 1,706.5

$ 2,875.6

$ 2,381.8

$ 2,132.9

1.74

.89

1.51

1.25

1.12

1.73
1.72
1.71
.78
9.44
21.22
1,916.0
1,926.1

1.91%
19.4
4.61
50.3

$114,456
2,644
28,829
149,143
171,948
28,715
105,124
11,304
29,604
16,963

$116,251
2,422
28,488
180,027
115,534
28,588
18,101

.88
.89
.88
.75
8.43
20.93
1,927.9
1,939.5

1.03%
10.5
4.42
57.5

$118,177
1,911
21,916
145,165
165,944
25,109
104,956
12,980
24,608
16,201

$114,405
2,457
26,608
171,390
105,219
25,716
16,461

1.50
1.51
1.50
.65
7.97
23.25
1,906.0
1,918.5

1.81%
20.0
4.33
51.9

$118,317
1,303
17,311
140,606
158,481
23,820
103,426
12,586
22,410
14,365

$122,365
1,787
17,642
164,921
109,535
21,876
15,168

5.6%
7.8
12.2
7.5

5.7%
7.7
11.7
7.7

6.3%
7.2
10.6
7.4

1.23
1.25
1.23
.46
7.23
21.13
1,907.8
1,930.0

1.59%
18.0
4.40
55.7

$109,638
1,450
19,271
133,757
150,167
23,556
99,920
11,707
20,248
13,221

$113,229
1,710
17,449
154,318
103,417
21,027
13,947

*
7.4
11.0
7.5

1.10
1.12
1.10
.33
6.61
31.00
1,898.8
1,930.5

1.49%
17.2
4.43
58.3

$102,451
1,264
21,114
127,738
142,887
23,011
98,940
11,102
15,732
12,383

$106,958
1,706
20,965
150,714
104,346
18,679
12,574

*
*
*
*

U.S. Bancorp 17

Table 1

Selected Financial Data — Supplemental Information

Financial Results and Ratios on an Operating Basis (c)

Year Ended December 31
(Dollars and Shares in Millions)

2002

2001

2000

1999

1998

Condensed Income Statement
Net interest income (taxable-equivalent basis) (a)************
Noninterest income **************************************
Securities gains, net *************************************
Total net revenue *************************************
Noninterest expense *************************************
Provision for credit losses*********************************

$ 6,876.3
5,568.7
299.9

12,744.9
5,932.5
1,349.0

Income before taxes and merger and restructuring-
related items and cumulative effect of change in
accounting principles ******************************
Taxable-equivalent adjustment*****************************
Income taxes********************************************
Operating earnings **************************************
Merger and restructuring-related items (after-tax) ************
Cumulative effect of change in accounting principles

(after-tax) ********************************************
Net income in accordance with GAAP ******************
Average diluted shares outstanding ************************

Financial Ratios
Return on average assets ********************************
Return on average equity *********************************
Efﬁciency ratio*******************************************
Banking efﬁciency ratio (d) ********************************

$ 6,423.0
5,009.8
329.1

11,761.9
5,658.8
2,146.6

3,956.5
55.9
1,349.8

2,550.8
(844.3)

$ 6,091.8
4,918.3
8.1

11,018.2
5,368.3
828.0

4,821.9
85.4
1,629.6

3,106.9
(231.3)

$ 5,888.0
4,276.4
13.2

10,177.6
5,128.5
638.5

4,410.6
96.3
1,515.3

2,799.0
(417.2)

$ 5,659.9
3,589.1
29.1

9,278.1
4,829.6
453.4

3,995.1
111.2
1,364.6

2,519.3
(386.4)

—

5,463.4
36.6
1,889.1

3,537.7
(211.3)

(37.2)

$ 3,289.2

$ 1,706.5

$ 2,875.6

$ 2,381.8

$ 2,132.9

1,926.1

1,939.5

1,918.5

1,930.0

1,930.5

2.06%
20.9
47.7
44.0

1.54%
15.7
49.5
45.2

1.96%
21.6
48.8
43.5

1.86%
21.2
50.5
46.3

1.76%
20.3
52.2
49.7

(a) Interest and rates are presented on a fully taxable-equivalent basis utilizing a tax rate of 35 percent.
(b) Dividends per share have not been restated for the 2001 Firstar/USBM merger.
(c) 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 and cumulative effect of change in accounting principles referred to in this Annual Report and Form 10-K 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 and cumulative effect of change in accounting principles. 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.

(d) Without investment banking and brokerage activity.

$29.2 million, compared with 2001, and the recognition of
$186.0 million in MSR impairments in 2002, an increase of
$125.2 million, compared with 2001. Results for 2002 also
reflected $67.4 million in gains from credit card portfolio
sales; a $50.0 million litigation charge, including investment
banking regulatory matters at Piper; incremental personnel
costs of $46.4 million, in part to rationalize post-integration
technology, operations and support functions; and
$25.5 million in leasing residual impairments. Notable items
in 2001 included $1.2 billion in the provision for credit
losses representing an incremental third quarter provision of
$1,025 million and a $160 million increase in the first
quarter of 2001 in connection with the acceleration of
certain workout strategies. Results for 2001 also reflected
$36.0 million of leasing residual impairments, $40.2 million
of write-downs of commercial leasing partnerships and
$22.2 million of asset write-downs of tractor/trailer inventory
and other items. Excluding the impact of these items,
accounting changes and acquisitions, the Company’s revenue
growth in 2002 was 5.4 percent while noninterest expense
was essentially flat.

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 and restructuring-
related items and cumulative effect of change in accounting

18 U.S. Bancorp

principles, referred to in this Annual Report and Form 10-K
as ‘‘operating earnings.’’ Management believes that
separately capturing merger and restructuring-related items
in the income statement is important because each
acquisition transaction is discrete, and the amount and
nature of the non-recurring items related to the integration
can vary signiﬁcantly from transaction to transaction.
Moreover, merger and restructuring-related items are not
incurred in connection with the core operations of the
business and their separate disclosure provides more
transparent ﬁnancial information about the Company.
Operating earnings and related discussions are presented as
supplementary information to enhance the reader’s
understanding of, and highlight trends in, the Company’s
core ﬁnancial results by excluding the effects 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
signiﬁcant and may not be comparable to other companies.
Table 2 provides a reconciliation of operating earnings

to net income in accordance with GAAP.

Table 2

Reconciliation of Operating Earnings to Net Income in Accordance with GAAP

Year Ended December 31 (Dollars in Millions, Except Per Share Data)

2002

2001

2000

1999

1998

Operating earnings (a) *************************************
Merger and restructuring-related items

Gains on the sale of branches ***************************
Integration, conversion and other charges *****************
Securities losses to restructure portfolio ******************
Provision for credit losses (b) ****************************

Pre-tax impact *****************************************
Applicable tax beneﬁt ***********************************

Total merger and restructuring-related items (after-tax) **
Cumulative effect of change in accounting principles (after-tax)***

$3,537.7

$ 2,550.8

$3,106.9

$2,799.0

$2,519.3

—
(324.1)
—
—

(324.1)
112.8

(211.3)
(37.2)

62.2
(946.4)
—
(382.2)

(1,266.4)
422.1

(844.3)
—

—
(348.7)
—
—

(348.7)
117.4

(231.3)
—

—
(355.1)
(177.7)
(7.5)

(540.3)
123.1

(417.2)
—

48.1
(593.8)
—
(37.9)

(583.6)
197.2

(386.4)
—

Net income in accordance with GAAP ***********************

$3,289.2

$ 1,706.5

$2,875.6

$2,381.8

$2,132.9

Diluted earnings per share

Operating earnings (a) **********************************
Net income in accordance with GAAP ********************

1.84
1.71

1.32
.88

1.62
1.50

1.45
1.23

1.30
1.10

(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 and cumulative effect of change in accounting principles referred to in this Annual Report and Form 10-K 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 and cumulative effect of change in accounting principles. 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) Provision for credit losses in 2001 includes losses of $201.3 million on the disposition of an unsecured small business product, losses of $76.6 million on the sales of high

loan-to-value home equity loans and the indirect automobile loan portfolio of USBM, a $90.0 million charge to align risk management practices, align charge-off policies and
expedite the transition out of a speciﬁc segment of the health care industry not meeting the lower risk appetite of the Company, and a $14.3 million charge related to the
restructuring of a co-branding credit card relationship.

Acquisition and Divestiture Activity In addition to restating
all prior periods to reﬂect the Firstar/USBM merger,
operating results for 2002 reﬂected the following
transactions accounted for as purchases from the date
of completion.

On December 31, 2002, the Company acquired the

corporate trust business of State Street Bank and Trust
Company (‘‘State Street Corporate Trust’’) in a cash
transaction valued at $725 million. State Street Corporate
Trust was a leading provider, particularly in the Northeast,
of corporate trust and agency services to a variety of
municipalities, corporations, government agencies and other
ﬁnancial institutions serving approximately 20,000 client
issuances representing over $689 billion of assets under
administration. With this acquisition, the Company is
among the nation’s leading providers of a full range of
corporate trust products and services. The transaction
represented total assets acquired of $681 million and total
liabilities of $39 million at the closing date. Included in
total assets were contract and other intangibles with a fair
value of $225 million and the excess of purchase price over
the fair value of identiﬁable net assets (‘‘goodwill’’) of
$444 million. The goodwill reﬂected the strategic value of
the combined organization’s leadership position in the
corporate trust business and processing economies of scale
resulting from the transaction. As part of the purchase
price, $75 million was placed in escrow for up to eighteen
months with payment contingent on the successful
transition of business relationships. Concurrent with the
system conversion expected in 2003, certain State Street

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

On April 1, 2002, the Company acquired Cleveland-

based The Leader Mortgage Company, LLC, a wholly
owned subsidiary of First Deﬁance Financial Corp., in a
cash transaction valued at $85 million. The transaction
represented total assets acquired of $527 million and total
liabilities assumed of $446 million. Included in total assets
were mortgage servicing rights (‘‘MSRs’’) and other
intangibles of $173 million and goodwill of $17 million.
Leader specializes in acquiring servicing of loans originated
for state and local housing authorities. The purchase
agreement allows for an additional payment of up to
$1.2 million if certain performance criteria are met.

On September 7, 2001, the Company acquired Paciﬁc

Century Bank in a cash transaction. The acquisition
included 20 branches located in Southern California with

U.S. Bancorp 19

approximately $712 million in deposits and $570 million
in assets.

On July 24, 2001, the Company acquired NOVA

Corporation, a merchant processor, in a stock and cash
transaction valued at approximately $2.1 billion. The
transaction represented total assets acquired of $2.9 billion
and total liabilities assumed of $773 million. Included in
total assets were merchant contracts and other intangibles
of $650 million and goodwill of $1.6 billion. The goodwill
reﬂected NOVA’s leadership position in the merchant
processing market and its ability to provide a
technologically superior product that is enhanced by a high
level of customer service. The Company believes that these
factors, among others, will allow NOVA to generate
sufﬁcient positive cash ﬂows from new business in future
periods to support the goodwill recorded in connection with
the acquisition.

The following acquisitions were completed during the
year 2000. 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. (now
known as The Schwan Food Company) in Marshall,
Minnesota. Lyon Financial specialized 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.

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

Planned Tax-Free Distribution On February 19, 2003, the
Company announced that its Board of Directors approved a
plan to effect a spin-off of its capital markets business unit,
including investment banking and brokerage activities
primarily conducted by its wholly owned subsidiary,
U.S. Bancorp Piper Jaffray Inc. In 2002, the capital markets
business unit had average assets of $3.0 billion, generated
revenues of $737.3 million (5.8 percent of total
consolidated revenues) and contributed $1.1 million of net
income representing less than 1 percent of the Company’s
consolidated net income.

The Company intends to execute this plan as a tax-free

distribution of 100% of its ownership interests in the
capital markets business and plans to retain $215 million of
subordinated debt of the new company. The distribution is
subject to certain conditions including SEC registration,
regulatory review and approval and a determination that
the distribution will be tax-free to the Company and its
shareholders. While expected to be completed in the third
quarter of 2003, the Company has no obligation to
consummate the distribution, whether or not these
conditions are satisﬁed.

This distribution does not include brokerage, ﬁnancial
advisory or asset management services offered to customers
through its other business units. The Company will
continue to provide asset management services to its
customers through the Private Client, Trust and Asset
Management business units and access to investment
products and services through an extensive network of
licensed ﬁnancial advisors within the retail brokerage
platform of the Consumer Banking business unit.

These statements are forward-looking statements within
the meaning of the Private Securities Litigation Reform Act.
Refer to ‘‘Forward-Looking Statements’’ on page 3 of the
Annual Report on Form 10-K.

STATEMENT OF INCOME ANALYSIS

Net Interest Income Net interest income, on a taxable-
equivalent basis, was $6.9 billion in 2002, compared with
$6.4 billion in 2001 and $6.1 billion in 2000. The increase
in net interest income in 2002 was due to improvement in
net interest margin and growth in average earning assets.
The net interest margin in 2002 was 4.61 percent,
compared with 4.42 percent and 4.33 percent in 2001 and
2000, respectively. Average earning assets were
$149.1 billion for 2002, compared with $145.2 billion and
$140.6 billion for 2001 and 2000, respectively.

The 19 basis point improvement in 2002 net interest

margin, compared with 2001 reﬂected the funding beneﬁts
of the declining interest rate environment, a more favorable
funding mix and improving spreads due to product
repricing dynamics, growth in net free funds and a shift in
mix toward retail loans, partially offset by lower yields on
the investment portfolio. The $3.9 billion (2.7 percent)
increase in average earning assets for 2002, compared with
2001 was primarily driven by increases in the investment
portfolio and retail loan growth, partially offset by transfers
of high credit quality commercial loans to Stellar Funding
Group, Inc. (the ‘‘loan conduit’’) and a decline in
commercial and commercial real estate loans partially due
to current economic conditions.

Total average loans of $114.5 billion in 2002 were

$3.7 billion (3.1 percent) lower, compared with 2001,
reﬂecting strong growth in average retail loans and
residential mortgages of $3.1 billion (9.1 percent) and

20 U.S. Bancorp

$.2 billion (1.9 percent), respectively, which was more than
offset by an overall decline in average commercial and
commercial real estate loans of $6.3 billion (12.5 percent)
and $.4 billion (1.4 percent), respectively. The decline in
commercial and commercial real estate loans was primarily
driven by softness in loan demand, workout activities and
reclassiﬁcations and transfers to other loan categories.
Approximately $721 million of the change in average
commercial loans year-over-year for 2002 was due to the
transfer of high credit quality commercial loans to the loan
conduit. Also included in the change in average commercial
and commercial real estate loans in 2002, compared with
2001, was a reclassiﬁcation of approximately
$634.5 million of commercial loans to other loan
categories, including the commercial real estate category
($266.9 million) and residential mortgages ($327.0 million),
in connection with conforming loan classiﬁcations at the
time of system conversions. Prior years were not restated, as
it was impractical to determine the extent of reclassiﬁcation
for all periods presented.

Average investment securities were $28.8 billion
(31.5 percent) higher in 2002, compared with 2001,
reﬂecting the reinvestment of proceeds from loan sales,
declines in commercial and commercial real estate loan
balances and deposits assumed in connection with the Bay
View transaction. During 2002, the Company sold
$13.7 billion of ﬁxed-rate securities with a portion replaced
with ﬂoating-rate securities in conjunction with the
Company’s interest rate risk management strategies.

Average interest-bearing deposits of $76.4 billion in
2002 were lower by $3.4 billion, compared with 2001.
Growth in average savings products (5.4 percent) for 2002

Table 3

Analysis of Net Interest Income

reﬂected service quality initiatives, product promotions
directed toward government banking sectors and customer
decisions to maintain liquidity given the current economic
environment. The increase in savings products was more
than offset by reductions in the average balances of higher
cost time certiﬁcates of deposit (17.3 percent) and time
certiﬁcates of deposit greater than $100,000 (13.2 percent).
The decline in time certiﬁcates and time deposits greater
than $100,000 reﬂected funding decisions toward more
favorably priced wholesale funding sources given the rate
environment and customers’ desire to maintain liquidity.
Average net free funds increased from a year ago,
including an increase in average noninterest-bearing deposits
of $3.6 billion (14.4 percent) in 2002, compared with 2001.
The increase in noninterest-bearing deposits, primarily in
business and government banking accounts, reﬂected
product promotions and customers maintaining higher
compensating balances given the current rate environment.

The 9 basis point improvement in net interest margin for

2001, compared with 2000, was due to the funding benefit
of the declining rate environment and improved spreads due
to product repricing dynamics and loan conduit activities,
partially offset by the first quarter of 2001 sales of the high
loan-to-value (‘‘LTV’’) home equity portfolios and lower
yields on the investment portfolio. The $4.6 billion
(3.2 percent) increase in average earning assets for 2001,
compared with 2000, was primarily driven by increases in
the investment portfolio, core retail loan growth and the
impact of acquisitions. This growth was partially offset by a
$2.6 billion decline in lower margin residential mortgages
and a $2.2 billion reduction related to transfers of high credit
quality commercial loans to the loan conduit. Average
investment securities were $4.6 billion (26.6 percent) higher
in 2001, compared with 2000, reflecting net purchases of

(Dollars in Millions)

2002

2001

2000

Components of net interest income

Income on earning assets (taxable-equivalent basis) (a)***
Expenses on interest-bearing liabilities ***************

$ 9,590.3
2,714.0

$11,097.8
4,674.8

$12,114.7
6,022.9

Net interest income (taxable-equivalent basis) ************

$ 6,876.3

$ 6,423.0

$ 6,091.8

Net interest income, as reported ************************

$ 6,839.7

$ 6,367.1

$ 6,006.4

2002
v 2001

2001
v 2000

$(1,507.5)
(1,960.8)

453.3

472.6

$(1,016.9)
(1,348.1)

331.2

360.7

Average yields and rates paid

Earning assets yield (taxable-equivalent basis) ********
Rate paid on interest-bearing liabilities ***************

Gross interest margin (taxable-equivalent basis) **********

Net interest margin (taxable-equivalent basis) ************

Average balances

6.43%
2.26

4.17%

4.61%

7.64%
3.92

3.72%

4.42%

8.62%
5.19

3.43%

4.33%

(1.21)%
(1.66)

.45%

.19%

(.98)%

(1.27)

.29%

.09%

Investment securities *******************************
Loans ********************************************
Earning assets ************************************
Interest-bearing liabilities****************************
Net free funds (b) **********************************

$ 28,829
114,456
149,143
120,221
28,922

$ 21,916
118,177
145,165
119,390
25,775

$ 17,311
118,317
140,606
116,002
24,604

6,913
(3,721)
3,978
831
3,147

4,605
(140)
4,559
3,388
1,171

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

U.S. Bancorp 21

securities. Average interest-bearing deposits increased
$241 million (.3 percent) in 2001, compared with 2000.
Growth in average interest checking and money market
deposits was more than offset by reductions in the average
balances of higher cost time certificates of deposit less than
$100,000. The decline in time certificates of deposit less than
$100,000 reflected funding decisions toward more favorably
priced wholesale funding sources given the interest rate
environment during 2001. The increase in average net free
funds of $1.2 billion from 2000 included an increase in
noninterest-bearing deposits of $1.3 billion (5.4 percent).

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 the ‘‘Analysis and Determination of
Allowance for Credit Losses’’ section. The provision for
credit losses was $1,349.0 million in 2002, compared
with $2,528.8 million and $828.0 million in 2001 and
2000, respectively.

The decline in the provision for credit losses of

$1,179.8 million in 2002 and the corresponding increase of

$1,700.8 million in 2001 was primarily related to speciﬁc
credit actions taken in 2001. Included in the provision for
credit losses in 2001 was a $1,025 million incremental
provision recognized in the third quarter of 2001 and a
$160 million charge during the ﬁrst quarter of 2001 in
connection with an accelerated loan workout strategy. The
third quarter of 2001 provision for credit losses was
signiﬁcantly above the level anticipated earlier in that
quarter and was taken after extensive reviews of the
Company’s commercial portfolio in light of the events of
September 11, 2001, declining economic conditions, and
company-speciﬁc trends. This action reﬂected the
Company’s expectations, at that time, of a prolonged
economic slowdown and recovery. In addition to these
actions, the provision for credit losses in 2001 included a
merger and restructuring-related provision of
$382.2 million. The merger and restructuring-related
provision consisted of a $201.3 million provision for losses
related to the disposition of an unsecured small business
product; a $90.0 million charge to align risk management
practices, align charge-off policies and expedite the

Table 4

Net Interest Income — Changes Due to Rate and Volume (a)

(Dollars in Millions)

Increase (decrease) in
Interest income

Commercial loans *******************
Commercial real estate***************
Residential mortgages ***************
Retail loans *************************

Total loans***********************
Loans held for sale ******************
Investment securities*****************
Money market investments************
Trading securities ********************
Other earning assets*****************

Total ****************************

Interest expense

Interest checking ********************
Money market accounts **************
Savings accounts ********************
Time certiﬁcates of deposit less than

$100,000 ************************
Time deposits greater than $100,000 **

Total interest-bearing deposits *****
Short-term borrowings****************
Long-term debt **********************
Company-obligated mandatorily

redeemable preferred securities ****

Total ****************************

Increase (decrease) in net interest

income ***************************

2002 v 2001

2001 v 2000

Volume

Yield/Rate

Total

Volume

Yield/Rate

Total

$(450.8)
(27.5)
(12.6)
288.2

(202.7)
56.4
403.7
(1.8)
12.6
(3.9)

264.3

24.4
8.7
3.3

(215.2)
(83.1)

(261.9)
(68.9)
240.3

62.1

(28.4)

$ (535.7)
(338.9)
(50.3)
(543.6)

(1,468.5)
(32.7)
(235.2)
(14.2)
(31.0)
9.8

$ (986.5)
(366.4)
(62.9)
(255.4)

(1,671.2)
23.7
168.5
(16.0)
(18.4)
5.9

(1,771.8)

(1,507.5)

(125.7)
(406.9)
(20.7)

(282.8)
(244.8)

(1,080.9)
(215.8)
(582.4)

(101.3)
(398.2)
(17.4)

(498.0)
(327.9)

(1,342.8)
(284.7)
(342.1)

(53.3)

8.8

(1,932.4)

(1,960.8)

.8
3.6
(202.9)
248.4

49.9
47.7
314.1
(12.7)
(.6)
(22.1)

376.3

19.2
94.7
(6.7)

(142.9)
9.2

(26.5)
24.5
148.4

43.9

190.3

$ (614.1)
(297.8)
(2.6)
(245.3)

(1,159.8)
(2.9)
(190.5)
(14.6)
2.3
(27.7)

$ (613.3)
(294.2)
(205.5)
3.1

(1,109.9)
44.8
123.6
(27.3)
1.7
(49.8)

(1,393.2)

(1,016.9)

(86.0)
(383.7)
(24.8)

(74.0)
(195.7)

(764.2)
(272.1)
(475.3)

(66.8)
(289.0)
(31.5)

(216.9)
(186.5)

(790.7)
(247.6)
(326.9)

(26.8)

17.1

(1,538.4)

(1,348.1)

$ 292.7

160.6

453.3

$ 186.0

145.2

331.2

(a) This table shows the components of the change in net interest income by volume and rate on a taxable-equivalent basis utilizing a tax rate of 35 percent. This table does not take
into account the level of noninterest-bearing funding, nor does it fully reﬂect changes in the mix of assets and liabilities. The change in interest not solely due to changes in volume
or rates has been allocated on a pro-rata basis to volume and yield/rate.

22 U.S. Bancorp

transition out of a speciﬁc segment of the health care
industry not meeting the lower risk appetite of the
combined company; a $76.6 million provision for losses
related to the sales of high LTV home equity loans and the
indirect automobile loan portfolio of USBM; and a
$14.3 million charge related to the restructuring of a co-
branding credit card relationship. Refer to Note 5 of the
Notes to Consolidated Financial Statements for further
information on merger and restructuring-related items.

Overall, the level of the provision for credit losses and

the level of the allowance for credit losses still reﬂected
elevated levels of nonperforming assets and net charge-offs,
continued stress in certain segments of the portfolio and the
economic uncertainty existing at year-end 2002.

Refer to the ‘‘Corporate Risk Proﬁle’’ section for
further information on the provision for credit losses, net
charge-offs, nonperforming assets and other factors
considered by the Company in assessing the credit quality
of the loan portfolio and establishing the allowance for
credit losses.

Noninterest Income Noninterest income in 2002 was
$5.9 billion, compared with $5.4 billion in 2001 and
$4.9 billion in 2000. Noninterest income in 2001 included
$62.2 million of merger and restructuring-related gains in
connection with the sale of 14 branches representing
$771 million in deposits. Refer to Note 5 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 $5.9 billion in 2002, an increase of
$529.7 million (9.9 percent), compared with 2001. The
growth in noninterest income in 2002, compared with 2001
was primarily driven by growth in banking product

Table 5

Noninterest Income

revenues of $248.7 million (6.3 percent) and increases
resulting from acquisitions, including NOVA, Paciﬁc
Century, Leader and Bay View, which accounted for
approximately $301.3 million of the increase in noninterest
income in 2002. Offsetting these favorable variances was a
decline in capital markets-related revenue of $97.1 million
(10.3 percent), reﬂecting continued softness in the equity
capital markets that has reduced investment banking
activities, brokerage transaction volumes and fees based on
the valuation of assets under management. Credit and debit
card revenue, corporate payment products revenue and
ATM processing services revenue were higher in 2002,
compared with 2001, by $51.1 million (11.0 percent),
$28.0 million (9.4 percent) and $6.3 million (4.8 percent),
respectively, primarily reﬂecting growth in sales and card
usage. Merchant processing services revenue grew by
$258.4 million (83.7 percent), primarily due to the
acquisition of NOVA in July of 2001. Deposit service
charges increased in 2002 by $46.7 million (7.0 percent),
primarily due to fee enhancements and new account
growth. Cash management fees and commercial products
revenue grew by $69.6 million (20.0 percent) and
$41.8 million (9.6 percent), respectively, primarily driven by
changes in the earnings credit rate for business deposits,
growth in commercial business activities, fees related to
loan conduit activities and product enhancements.
Commercial product revenue growth was offset somewhat
by lease residual impairments in 2002. In addition to the
impact of the acquisition of Leader, the $96.2 million
(41.1 percent) increase in mortgage banking revenue was
also due to higher levels of mortgage originations and sales
and loan servicing revenue in 2002, compared with 2001.
Included in noninterest income were net securities gains of

(Dollars in Millions)

2002

2001

2000

2002
v 2001

2001
v 2000

Credit and debit card revenue ***************************
Corporate payment products revenue *********************
ATM processing services********************************
Merchant processing services ***************************
Trust and investment management fees*******************
Deposit service charges ********************************
Cash management fees*********************************
Commercial products revenue ***************************
Mortgage banking revenue ******************************
Trading account proﬁts and commissions *****************
Investment products fees and commissions ***************
Investment banking revenue *****************************
Securities gains, net ************************************
Other *************************************************

Total operating noninterest income ********************
Merger and restructuring-related gains********************

$ 517.0
325.7
136.9
567.3
899.1
714.0
416.9
479.2
330.2
206.5
428.9
207.4
299.9
339.6

5,868.6
—

$ 465.9
297.7
130.6
308.9
894.4
667.3
347.3
437.4
234.0
221.6
460.1
258.2
329.1
286.4

5,338.9
62.2

$ 431.0
299.2
141.9
120.0
926.2
555.6
292.4
350.0
189.9
258.4
466.6
360.3
8.1
526.8

4,926.4
—

Total noninterest income *****************************

$5,868.6

$5,401.1

$4,926.4

* Not meaningful

11.0%
9.4
4.8
83.7
.5
7.0
20.0
9.6
41.1
(6.8)
(6.8)
(19.7)
(8.9)
18.6

9.9
*

8.7%

8.1%
(.5)
(8.0)
*
(3.4)
20.1
18.8
25.0
23.2
(14.2)
(1.4)
(28.3)
*
(45.6)

8.4
*

9.6%

U.S. Bancorp 23

$299.9 million in 2002, compared with $329.1 million in
2001, representing a decline of $29.2 million (8.9 percent).
Other fee income was higher in 2002, compared with 2001,
by $53.2 million (18.6 percent), primarily due to
$67.4 million in gains from credit card portfolio sales in
2002, a reduction in retail leasing residual and other asset
impairments and lower levels of equity investment losses,
compared with 2001, offset somewhat by lower ofﬁcial
check revenue that is sensitive to changes in interest rates.
Excluding merger and restructuring-related gains,
noninterest income was $5.3 billion in 2001, an increase of
$412.5 million (8.4 percent) from 2000. Credit and debit
card revenue increased $34.9 million (8.1 percent) in 2001,
compared with 2000, reﬂecting 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 processing services increased
$188.9 million (157.4 percent), principally due to the
NOVA acquisition in July 2001. Deposit service charges,
commercial product revenue, cash management fees, and
mortgage banking revenue also improved in 2001,
compared with 2000 by $111.7 million (20.1 percent),
$87.4 million (25.0 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

Table 6

Noninterest Expense

the Firstar/USBM merger in February 2001. The increase in
commercial product revenue and cash management fees was
primarily driven by 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 offset 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),
reﬂecting 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 $240.4 million in 2001,
compared with 2000, primarily reﬂecting a $125.0 million
decline in the level of earnings from equity investments and
a $40.0 million impairment of retail leasing residuals in
2001. The decline in other income for 2001 also reﬂected a
decline in gains from sales of buildings of $42.5 million
from 2000.

Noninterest Expense Noninterest expense in 2002 was
$6.3 billion, compared with $6.6 billion and $5.7 billion in
2001 and 2000, respectively. Noninterest expense included
merger and restructuring-related charges of $324.1 million
in 2002, compared with $946.4 million in 2001 and
$348.7 million in 2000. Excluding merger and

(Dollars in Millions)

2002

2001

2000

2002
v 2001

2001
v 2000

Salaries ***********************************************
Employee beneﬁts**************************************
Net occupancy *****************************************
Furniture and equipment ********************************
Professional services ***********************************
Advertising and marketing*******************************
Travel and entertainment ********************************
Capitalized software ************************************
Data processing****************************************
Communication ****************************************
Postage ***********************************************
Printing ***********************************************
Goodwill **********************************************
Other intangible assets *********************************
Other *************************************************

Total operating noninterest expense *******************
Merger and restructuring-related charges *****************

$2,409.2
367.7
409.3
306.0
142.5
117.9
83.6
148.1
112.5
183.8
178.4
79.8
—
553.0
840.7

5,932.5
324.1

$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

2.6%
.4
(2.1)
.2
15.1
(3.0)
(7.7)
8.8
40.6
1.3
(.8)
2.4
*
98.6
19.9

4.8
(65.8)

(3.3)%
(8.4)
5.3
(.9)
13.6
(.4)
(15.3)
21.6
(46.6)
30.7
3.0
(9.9)
6.9
77.0
57.8

5.4
*

Total noninterest expense ****************************

$6,256.6

$6,605.2

$5,717.0

(5.3)%

15.5%

Efﬁciency ratio (a) **************************************
Efﬁciency ratio, operating basis (b) ***********************
Banking efﬁciency ratio, operating basis (b) (c) ************

50.3%
47.7
44.0

57.5%
49.5
45.2

51.9%
48.8
43.5

(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) Operating basis represents the efﬁciency ratios excluding merger and restructuring-related items.
(c) Without investment banking and brokerage activity.
* Not meaningful

24 U.S. Bancorp

restructuring-related charges, noninterest expense, on an
operating basis, was $5.9 billion in 2002, compared with
$5.7 billion in 2001 and $5.4 billion in 2000. The increase
in noninterest expense in 2002, on an operating basis, of
$273.7 million (4.8 percent) was primarily the result of
costs associated with recent acquisitions, an increase in
MSR impairments, litigation costs, post-integration
realignment costs, and core expense growth. Recent
acquisitions, including NOVA, Paciﬁc Century, Leader and
Bay View, accounted for approximately $317.4 million of
the increase in 2002, which was comprised primarily of
increased intangible and personnel expenses. Included in
noninterest expense in 2002 was $186.0 million in MSR
impairments, compared with $60.8 million in 2001, an
increase of $125.2 million. The increase in MSR
impairments was related to increasing mortgage
prepayments driven by declining interest rates. Other
signiﬁcant items impacting noninterest expense included
recognizing a $50.0 million litigation charge in 2002,
including $25.0 million for investment banking regulatory
matters at Piper and a $7.5 million liability for funding
independent analyst research for Piper’s customers, and
$46.4 million of personnel and related costs for post-
integration rationalization of technology, operations and
certain support functions. Offsetting these higher costs was
a reduction in capital markets-related expenses, the
elimination of $251.1 million of goodwill amortization in
connection with new accounting principles adopted in 2002
and a reduction in asset write-downs of $52.6 million
related to commercial leasing partnerships and repossessed
tractor/trailer property taken in 2001. Refer to the
‘‘Acquisition and Divestiture Activity’’ section for further
information on the timing of acquisitions.

The increase in noninterest expense in 2001, compared

with 2000, on an operating basis, of $290.5 million
(5.4 percent) was primarily the result of acquisitions,
including NOVA, Scripps Financial Corporation, Paciﬁc
Century, Lyon Financial Services, Inc. and 41 branches in
Tennessee, and represented an aggregate increase of
approximately $241.7 million. In addition to the impact of
acquisitions, noninterest expense in 2001 increased over
2000 due to the recognition of 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 offset 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 efﬁciency ratio, before merger and restructuring-

related charges, improved to 47.7 percent in 2002,
compared with 49.5 percent in 2001 and 48.8 percent in

2000. The banking efﬁciency ratio, before merger and
restructuring-related charges, was 44.0 percent for 2002,
compared with 45.2 percent in 2001 and 43.5 percent in
2000. The improvement in both the efﬁciency ratio and the
banking efﬁciency ratio for 2002, compared with 2001, was
primarily due to revenue growth, the impact in 2002 of
adopting the new accounting standards related to
amortization of intangibles and cost savings from ongoing
integration efforts, partially offset by an increase in MSR
impairments and the impact of acquisitions of fee-based
businesses that have higher efﬁciency ratios than the core
banking business. Both the efﬁciency ratio and the banking
efﬁciency ratio increased in 2001, compared with 2000,
primarily due to the NOVA acquisition.

Pension Plans Because of the long-term nature of pension
plans, the accounting for pensions is complex and can be
impacted by several factors, including accounting methods,
investment and funding policies and the plan’s actuarial
assumptions. The Company’s pension accounting policy
complies with the Statement of Financial Accounting
Standards No. 87, ‘‘Employer’s Accounting for Pension
Plans’’ (‘‘SFAS 87’’), and reﬂects the long-term nature of
beneﬁt obligations and the investment horizon of plan
assets. The Company has an established process for
evaluating the plans, their performance and signiﬁcant plan
assumptions, including the assumed discount rate and the
long-term rate of return (‘‘LTROR’’). At least annually, an
independent consultant is engaged to assist U.S. Bancorp’s
Compensation Committee in evaluating plan objectives,
investment policies considering its long-term investment
time horizon and asset allocation strategies, funding policies
and signiﬁcant plan assumptions. Although plan
assumptions are established annually, the Company may
update its analysis on an interim basis in order to be
responsive to signiﬁcant events that occur during the year,
such as plan mergers and amendments.

The Company’s pension plan measurement date for
purposes of its financial statements is September 30. At the
measurement date, plan assets are determined based on fair
value, generally representing observable market prices. The
projected benefit obligation is determined based on the
present value of projected benefit distributions at an assumed
discount rate. The discount rate utilized is based on match-
funding maturities and interest payments of high quality
corporate bonds available in the market place to the
projected cash flows of the plan as of the measurement date.
At September 30, 2002 and 2001, the discount rate
approximated the Moody’s Aa corporate bond rating for
projected benefit distributions with duration of 11.6 years.
Periodic pension expense includes service costs, interest costs
based on an assumed discount rate, an expected return on
plan assets based on an actuarially derived market-related

U.S. Bancorp 25

value and amortization of actuarial gains and losses.
Accounting guidance provided within SFAS 87 has the effect
of reducing earnings volatility related to short-term changes
in interest rates and market valuations. Actuarial gains and
losses include the impact of plan amendments and various
unrecognized gains and losses which are deferred and
amortized over the future service periods of active employees.
The market-related value utilized to determine the expected
return on plan assets is based on fair value adjusted for the
difference between expected returns and actual performance
of plan assets. The unrealized difference between actual
experience and expected returns is included in the market-
related value ratably over a five-year period. Any
unrecognized gains or losses related to changes in the amount
of the projected benefit obligation or plan assets resulting
from experience different from the assumed discount rate or
expected returns and from changes in assumptions are
deferred. To the extent an unrecognized gain or loss,
excluding the unrecognized asset gain or loss, exceeds
10 percent of the greater of the projected benefit obligation
or the market-related value of plan assets (‘‘10 percent
corridor’’), the excess is recognized over the future service
periods of active employees. At September 30, 2002, the
accumulated unrecognized loss subject to minimum
amortization requirements under SFAS 87 for 2003
approximated $177 million and was less than the 10 percent
corridor. The total unrecognized asset loss approximated
$675 million and will ratably decrease the actuarially derived
market-related value of plan assets through 2007. The impact
to pension expense of the net unrecognized losses will
increase pension costs in each year from 2004 to 2007, by
approximately $36.6 million, $41.9 million, $52.3 million
and $18.0 million, respectively, during that timeframe. This
assumes that the performance of plan assets meets the
assumed LTROR. Actual results may vary depending on the
performance of plan assets and changes to assumptions
required in the future.

In accordance with its existing practices, the independent

pension consultant utilized by the Company updated the
analysis of expected rates of return and evaluated peer group
data, market conditions and other factors relevant to
determining the LTROR assumptions for determining pension
costs for 2003. In light of recent market performance and the
results of the independent analysis, the Company made a
decision to re-measure its pension plans effective in the third

quarter of 2002 based on current information with respect to
asset values, a reduction in the LTROR, discount rates,
census data and other relevant factors. The impact of
changes to assumptions for the pension plans did not have a
material impact on the future financial results of the
Company. The funding policy is generally to maintain a
funded status sufficient to meet participant benefit
obligations. The Company contributed $150.0 million in
2002 to the qualified pension plan in accordance with this
policy. Future funding requirements are dependent on the
performance of the pension plan but are not expected to
have a material impact on the liquidity of the Company. The
table below provides a summary of changes in pension plan
assumptions as of September 30.

As a result of this interim period re-measurement and

other factors, the Company’s total pension cost for 2002
increased by approximately $1.0 million, reducing the
Company’s pension and proﬁt sharing credit from
$64.8 million in 2001 to $63.8 million in 2002. Pension
costs increased by $32.5 million related to a reduction in
the expected rate of return on the Company’s pension plan
assets, utilizing a lower discount rate to determine the
projected beneﬁt obligation given the declining rate
environment and the impact of changes in employee
demographics. Offsetting this increase were a one-time
curtailment gain of $9.0 million related to freezing certain
beneﬁts of a nonqualiﬁed pension plan, a reduction in
service costs of $11.9 million related to changes in the
pension plans at the time of the plan mergers and a
$10.5 million reduction in pension costs associated with
establishing a proﬁt sharing plan for employees of Piper and
discontinuing their participation in the deﬁned beneﬁt plan.
Contributions to the proﬁt sharing plan in 2002 were
minimal given the lower ﬁnancial performance of the
Capital Markets business line.

For purposes of determining the periodic pension cost

for 2002, the LTROR declined from 12.2 percent for the
Firstar pension plan and 11.0 percent for the USBM plan (a
blended rate of approximately 11.6 percent) in 2001 to
approximately 10.9 percent for 2002. This reflected utilizing
a LTROR of 11.9 percent for the first six months of 2002
and 9.9 percent for the remainder of the year. The discount
rate declined from 8.0 percent for the Firstar pension plan
and 7.8 percent for the USBM pension plan (blended rate of
approximately 7.9 percent) to 7.2 percent for 2002. This

Combined or Weighted Plan Assumptions (a)

USBM

Firstar

As Reported

Expected long-term return on plan assets ***********
Discount rate in determining beneﬁt obligations ******
Rate of increase in future compensation ************

9.9%
6.8
3.5

10.9%
7.2
3.5

11.6%
7.9
4.8

2003

2002

2001

11.0%
7.5
3.5

2000

9.5%
7.8
5.6

2001

12.2%
7.5
3.5

2000

12.2%
8.0
4.0

(a) The weighted rates for 2002 represent a blended rate utilizing the original 2002 assumption for the ﬁrst six months of 2002 and the rates for 2003 for the second six months of

2002. The rates for 2003 represent the most recent information available at the re-measurement date.

26 U.S. Bancorp

reflected utilizing a discount rate of 7.5 percent for the first
six months of 2002 and 6.8 percent for the remainder of the
year. Offsetting these factors somewhat was the expected
benefit of merging the defined benefit pension plan of Firstar,
which used a final average pay formula for determining
pension benefits, with the cash balance pension plan
of USBM.

In 2003, it is estimated that changes to the LTROR

and discount rate will increase 2003 pension costs by
approximately $27.3 million. Offsetting much of this
increase is an expected beneﬁt of approximately
$19.0 million associated with lower interest costs related to
cash balance accounts and actual changes in employee
demographics, such as retirement age. Excluding the impact
of the one-time curtailment gain in 2002, the net increase in
pension cost relative to 2002 will be approximately
$8.3 million.

As discussed above, investment and funding policies

and related pension plan assumptions can have an impact
on the results of the Company. As such, U.S. Bancorp’s
Compensation Committee regularly evaluates plan
objectives, investment policies considering its long-term
investment time horizon and asset allocation strategies,
funding policies and signiﬁcant plan assumptions. The
Company’s pension plan objectives include maintaining a
funded status sufﬁcient to meet participant beneﬁt
obligations over time while reducing long-term funding
requirements and pension costs. In establishing its
investment policies and asset allocation strategies, the
Company considers expected returns and the volatility
associated with different strategies. The independent
consultant performs stochastic modeling that projects

numerous outcomes using a broad range of possible
scenarios, including a mix of possible rates of inﬂation and
economic growth. Some of the scenarios included are: low
inﬂation and high growth (ideal growth), low inﬂation and
low growth (recession), high inﬂation and low growth
(stagﬂation) and high inﬂation and high growth
(inﬂationary growth). Starting with current economic
information, the model bases its projections on past
relationships between inﬂation, ﬁxed income rates and
equity returns when these types of economic conditions
have existed over the previous 30 years, both in the U.S.
and in foreign countries. Approximately ﬁve-hundred
different scenarios are modeled and then the results are
summarized into percentiles that are utilized to evaluate the
potential performance of alternative asset allocation
strategies under different scenarios.

Based on an analysis of historical performance by
asset class, over any 20-year period since the mid-1940’s,
investments in equities have outperformed other investment
classes but are subject to higher volatility. While an asset
allocation including bonds and other assets generally has
lower volatility and may provide protection in a declining
interest rate environment, it limits the pension plan’s long-
term up-side potential. Given the pension plan’s investment
horizon and the financial viability of the Company to meet
its funding objectives, the Committee has determined that an
asset allocation strategy investing in 100% equities diversified
among various domestic equity categories and international
equities is appropriate. The following table provides a
summary of asset allocations adopted by the Company
compared with a typical asset allocation alternative:

Asset Allocation

Typical
Asset Mix

December
2002

Expected Returns

Target (a)

Compound

Average

Asset Class

Domestic Equities

Large Cap ***************************
Mid Cap *****************************
Small Cap ***************************
International Equities ****************
Fixed Income *************************
Other *********************************

Total mix or weighted rates **********

LTROR assumed *********************
Standard deviation********************
Sharpe ratio (c) **********************

30%
15
15

—

100%

8.1%
14.1%
.409

Standard
Deviation

18.0%
21.1
24.0

21.9

33%
18
27

—

36%
18
26

—

8.5%
8.8
9.0

8.7

9.9%

10.8
11.5

10.8

100%

9.1

10.7

18.8

9.9% (b)

18.8%
.382

(a) The target asset allocation was modiﬁed slightly from the existing asset allocation at September 30, 2002, to enhance the portfolio’s diversiﬁcation.
(b) The LTROR assumed for the target asset allocation strategy of 9.9 percent is based on a range of estimates evaluated by the Company, including the compound expected return of

9.1 percent and the average expected return of 10.7 percent.

(c) The Sharpe ratio is a direct measure of reward-to-risk. The Sharpe ratio for these asset allocation strategies is considered to be within acceptable parameters.

Regardless of the extent of the Company’s analysis of

alternative asset allocation strategies, economic scenarios
and possible outcomes, plan assumptions developed are

subject to imprecision and changes in economic factors. To
illustrate, for the period from 1994 to 2001, the actual
return on plan assets was 11.3 percent compared with an

U.S. Bancorp 27

assumed LTROR of approximately 11.1 percent and an
expected compound rate of return of 9.9 percent. As a
result of the modeling imprecision and uncertainty, the
Company considers a range of potential expected rates of
return, economic conditions for several scenarios, historical
performance relative to assumed rates of return and asset
allocation and LTROR information for a peer group in
establishing its assumptions. The Company plans to
use the 9.9 percent LTROR established in the recent
re-measurement to initially estimate its periodic pension
expense for 2003.

Because of the subjective nature of plan assumptions, a

sensitivity analysis to hypothetical changes in the LTROR
and the discount rate is provided below:

Due to the complexity of forecasting pension plan
activities, the accounting method utilized for pension plans,
management’s ability to respond to factors impacting the
plans and the hypothetical nature of this information, the
actual changes in periodic pension costs could be
signiﬁcantly different than the information provided in the
sensitivity analysis.

LTROR

7.9%

8.9%

Base
9.9%

10.9%

11.9%

Incremental beneﬁt (cost) **************************************************************
Percent of 2002 net income************************************************************

$(40.7)

$(20.4)

$ —

$20.4

$40.7

(.77)%

(.38)%

—%

.38%

.77%

Discount

4.8%

5.8%

Base
6.8%

7.8%

8.8%

Incremental beneﬁt (cost) **************************************************************
Percent of 2002 net income************************************************************

$(49.3)

$(25.2)

$ —

$ 9.9

$26.2

(.93)%

(.48)%

—%

.19%

.49%

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.
Merger and restructuring-related items included in pre-tax
earnings were $324.1 million ($211.3 million after-tax) in
2002, compared with $1,266.4 million ($844.3 million
after-tax) and $348.7 million ($231.3 million after-tax) for
2001 and 2000, respectively. Merger and restructuring-
related items in 2002 included $271.1 million of net
expense associated with the Firstar/USBM merger and
$53.0 million associated with NOVA and other smaller
acquisitions. Merger and restructuring-related items in 2002
associated with the Firstar/USBM merger were primarily
related to systems conversions and integration, asset write-
downs and lease terminations recognized at the completion
of conversions. Offsetting a portion of these costs in 2002
was an asset gain related to the sale of a non-strategic
investment in a sub-prime lending business and a mark-to-
market recovery associated with the liquidation of
U.S. Bancorp Libra’s investment portfolio. The Company
exited this business in 2001 and the liquidation efforts were
substantially completed in the second quarter of 2002.

At December 31, 2002, the integration of Firstar and

USBM was completed. Total merger and restructuring-
related items associated with the Firstar/USBM merger were
approximately $1.4 billion and no additional costs are
expected going forward. In connection with the acquisition
of NOVA, the integration of merchant processing platforms
and business processes of U.S. Bank National Association
and NOVA will continue through late 2003. Management
estimates the Company will incur pre-tax merger and
restructuring-related charges of approximately $36.9 million

in 2003 to complete the NOVA acquisition. In addition, the
Company anticipates additional pre-tax merger and
restructuring related expenses in 2003 of $14.7 million
related to the Bay View acquisition, $8.6 million related to
the State Street Corporate Trust acquisition and
$7.2 million as a result of other smaller acquisitions.

Merger and restructuring-related items in 2001

included $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. Total merger and
restructuring-related items in 2001 consisted of
$1,167.2 million related to the Firstar/USBM merger,
$50.7 million of restructuring expenses for Piper and
$48.5 million related to NOVA and other smaller
acquisitions. With respect to the Firstar/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 reafﬁrm a
commitment to its markets and other costs, and a
$62.2 million gain related to the required sale of branches.
In response to signiﬁcant changes in the securities markets
during 2001, including increased volatility, changes in
equity valuations and the increasingly competitive
environment for the industry, Piper restructured its
operations. The restructuring improved the operating
efﬁciency of the business by removing excess capacity

28 U.S. Bancorp

from its product distribution network and by implementing
more effective business processes. Restructuring activities
related to Piper were completed in 2001.

In 2000, merger and restructuring-related items

included in noninterest expense consisted of $227.0 million
related to the merger of Firstar and Mercantile
Bancorporation, $52.6 million related to the merger of
Firstar and Star Banc Corporation and $69.1 million
primarily related to other acquisitions by 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.

Refer to Notes 4 and 5 of the Notes to Consolidated

Financial Statements for further information on these
acquired businesses and merger and restructuring-related
items.

decrease in non-deductible merger and restructuring-related
charges and the change in accounting for goodwill. The
effective tax rate increase in 2001, compared with 2000,
was 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 and restructuring-related costs and the acquisition
of NOVA.

The Company’s net deferred tax liability was
$1,664.1 million at December 31, 2002, compared with
$573.2 million for the year ended 2001. The change in
2002 primarily relates to leasing activities and unrealized
appreciation in securities available-for-sale and ﬁnancial
instruments. For further information on income taxes,
refer to Note 20 of the Notes to Consolidated
Financial Statements.

BALANCE SHEET ANALYSIS

Income Tax Expense The provision for income taxes was
$1,776.3 million (an effective rate of 34.8 percent) in 2002,
compared with $927.7 million (an effective rate of
35.2 percent) in 2001 and $1,512.2 million (an effective
rate of 34.5 percent) in 2000. The decrease in the effective
tax rate in 2002, compared with 2001, was primarily driven
by a change in unitary state tax apportionment factors, a

Average earning assets were $149.1 billion in 2002,
compared with $145.2 billion in 2001. The increase in
average earning assets of $3.9 billion (2.7 percent) was
primarily driven by increases in the investment portfolio,
core retail loan growth, and the impact of acquisitions. This
growth was partially offset by declines in commercial and
commercial real estate loans reﬂecting lower borrowing

Table 7

Loan Portfolio Distribution

December 31 (Dollars in Millions)

Commercial

2002

2001

2000

1999

1998

Amount

Percent
of Total

Amount

Percent
of Total

Amount

Percent
of Total

Amount

Percent
of Total

Amount

Percent
of Total

Commercial ********************** $ 36,584
Lease ﬁnancing ******************
5,360

31.5% $ 40,472
5,858

4.6

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%
3.1

Total commercial **************

41,944

36.1

46,330

40.5

52,817

43.2

45,856

40.5

41,068

38.4

Commercial real estate

Commercial mortgages************
Construction and development *****

20,325
6,542

Total commercial real estate ****

26,867

Residential mortgages************

9,746

Retail

Credit card***********************
Retail leasing ********************
Home equity and

second mortgages (a)**********

Other retail

5,665
5,680

17.5
5.6

23.1

8.4

4.9
4.9

18,765
6,608

25,373

7,829

5,889
4,906

16.4
5.8

22.2

6.8

5.1
4.3

19,466
6,977

26,443

9,397

6,012
4,153

15.9
5.7

21.6

7.7

4.9
3.4

13,572

11.6

12,235

10.7

11,956

9.7

Revolving credit ***************
Installment********************
Automobile *******************
Student **********************

2,650
2,258
6,343
1,526

Total other retail (a)*********

12,777

Total retail ********************

37,694

2.3
1.9
5.5
1.3

11.0

32.4

2,673
2,292
5,660
1,218

11,843

34,873

2.3
2.0
5.0
1.1

10.4

30.5

2,750
2,186
5,609
1,042

11,587

2.2
1.8
4.6
.9

9.5

33,708

27.5

29,471

18,636
6,506

25,142

12,760

5,004
2,123

*
*
*
*

22,344

16.5
5.7

22.2

11.3

4.4
1.9

*
*
*
*

16,602
5,206

21,808

14,982

4,856
1,621

*
*
*
*

15.5
4.9

20.4

14.0

4.5
1.5

*
*
*
*

19.7

26.0

22,623

29,100

21.2

27.2

Total loans **************** $116,251

100.0% $114,405

100.0% $122,365

100.0% $113,229

100.0% $106,958

100.0%

(a) Home equity and second mortgages are included within the total other retail category for the periods prior to the year 2000.
*

Information not available

U.S. Bancorp 29

requirements of commercial customers and credit related
actions of the Company. The increase in average earning
assets was funded with an increase in net free funds,
including an increase in average noninterest-bearing deposits
of $3.6 billion, and an increase in average interest-bearing
liabilities of $.8 billion, consisting principally of higher core
savings balances and more favorably priced longer-term
wholesale funding.

For average balance information, refer to Consolidated

Daily Average Balance Sheet and Related Yields and Rates
on pages 108 and 109.

Loans The Company’s total loan portfolio was
$116.3 billion at December 31, 2002, compared with
$114.4 billion at December 31, 2001, an increase of $1.9
billion (1.6 percent). The increase in total loans was driven
by strong retail loan and residential mortgage growth,
partially offset by a decline in commercial loans due in part
to current economic conditions. During 2002, there were
reclassiﬁcations between loan categories that occurred in

connection with conforming loan classiﬁcations at the time
of system conversions. Prior years were not restated, as it
was impractical to determine the extent of reclassiﬁcation
for all periods presented. Average total loans decreased
$3.7 billion (3.1 percent) in 2002, compared with 2001.
The decline in total average loans in 2002, compared with
2001, was driven by the decline in commercial and
commercial real estate loans in 2002 and the impact of
transfers of high credit quality commercial loans to the loan
conduit in 2001. The decline in commercial and commercial
real estate loans was partially offset by growth in retail
loans and residential mortgages. Average total loans on a
core basis decreased by $2.7 billion (2.2 percent) relative to
the prior year.

Commercial Commercial loans, including lease ﬁnancing,
totaled $41.9 billion at December 31, 2002, compared with
$46.3 billion at December 31, 2001, a decrease of
$4.4 billion (9.5 percent). The decline was driven by
softness in loan demand, credit-related actions including

Table 8

Commercial Loan Exposure by Industry Group and Geography

December 31, 2002

December 31, 2001

Industry Group (Dollars in Millions)

Consumer products and services *************************************
Financials**********************************************************
Capital goods ******************************************************
Commercial services and supplies ************************************
Agriculture *********************************************************
Transportation ******************************************************
Consumer staples **************************************************
Private investors ****************************************************
Paper and forestry products, mining and basic materials ****************
Health care ********************************************************
Property management and development*******************************
Technology*********************************************************
Energy ************************************************************
Other**************************************************************

Total ***********************************************************

Geography

California **********************************************************
Colorado***********************************************************
Illinois *************************************************************
Minnesota *********************************************************
Missouri ***********************************************************
Ohio **************************************************************
Oregon ************************************************************
Washington ********************************************************
Wisconsin**********************************************************
Iowa, Kansas, Nebraska, North Dakota, South Dakota ******************
Arkansas, Indiana, Kentucky, Tennessee ******************************
Idaho, Montana, Wyoming *******************************************
Arizona, Nevada, Utah **********************************************

Total banking region *********************************************
Outside the Company’s banking region********************************

Loans

$ 7,206
5,769
5,486
3,853
3,153
2,231
1,924
1,759
1,664
1,475
1,266
797
575
4,786

$41,944

$ 4,127
1,796
2,214
6,605
2,895
2,455
1,604
3,129
3,052
4,421
1,865
996
986

36,145
5,799

Percent

17.2%
13.7
13.1
9.2
7.5
5.3
4.6
4.2
4.0
3.5
3.0
1.9
1.4
11.4

Loans

$ 7,622
5,859
6,497
4,178
3,433
2,560
2,060
1,864
2,053
1,567
1,384
1,089
410
5,754

Percent

16.5%
12.6
14.0
9.0
7.4
5.5
4.5
4.0
4.4
3.4
3.0
2.4
.9
12.4

100.0%

$46,330

100.0%

9.8%
4.3
5.3
15.7
6.9
5.9
3.8
7.5
7.3
10.5
4.4
2.4
2.4

86.2
13.8

$ 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

Total ***********************************************************

$41,944

100.0%

$46,330

100.0%

30 U.S. Bancorp

workout activities, and reclassiﬁcations to other loan
categories. Included in the change for commercial loans was
a reclassiﬁcation of approximately $1.2 billion from
commercial loans predominately to the commercial real
estate ($.5 billion) and residential mortgages ($.7 billion)
loan categories in 2002. Average commercial loans in 2002
decreased by $6.3 billion (12.5 percent). Approximately
$721 million of the change in average commercial loans
year-over-year for 2002 was due to the transfer of high
credit quality commercial loans to the loan conduit. Also
impacting the decline in average commercial loans was the
transfer of $680 million in unsecured small business
product to loans held for sale in 2001. On a core basis,
average commercial loans decreased by $5.3 billion
(9.9 percent) relative to the prior year.

Table 8 provides a summary of commercial loans by

industry and geographic locations.

Commercial Real Estate The Company’s portfolio of
commercial real estate loans, which includes commercial
mortgages and construction loans, was $26.9 billion at
December 31, 2002, compared with $25.4 billion at
December 31, 2001, an increase of $1.5 billion

(5.9 percent). Included in the change in commercial real
estate loans at year-end was a net reclassiﬁcation of
approximately $.5 billion to the commercial real estate loan
category predominately from the commercial loan category.
Commercial mortgages outstanding increased by
$1.6 billion (8.3 percent), driven by loan reclassiﬁcations
and growth in small business administration lending, while
real estate construction and development loans remained
essentially ﬂat compared with a year ago. Average
commercial real estate loans were essentially ﬂat at
$25.7 billion in 2002, compared with $26.1 billion in 2001.
Table 9 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 sufﬁcient cash
ﬂow to service traditional mortgage ﬁnancing, at which
time, if retained, the loan is transferred to the commercial
mortgage portfolio. Approximately $1.4 billion of
construction loans were permanently ﬁnanced and
transferred to the commercial mortgage loan category in
2002. At year-end 2002, $182 million of tax-exempt
industrial development loans were secured by real estate.

Table 9

Commercial Real Estate Exposure by Property Type and Geography

December 31, 2002

December 31, 2001

Property Type (Dollars in Millions)

Business owner occupied ********************************************
Multi-family*********************************************************
Commercial property

Industrial *******************************************************
Ofﬁce **********************************************************
Retail **********************************************************
Other **********************************************************
Homebuilders ******************************************************
Hotel/motel*********************************************************
Health care facilities*************************************************
Other**************************************************************

Loans

$ 6,513
3,258

1,227
3,564
3,832
1,447
2,142
2,585
1,290
1,009

Percent

24.2%
12.1

Loans

$ 5,159
2,842

Percent

20.3%
11.2

4.6
13.3
14.3
5.4
8.0
9.6
4.8
3.7

1,995
2,948
2,704
1,949
1,417
1,985
1,183
3,191

7.9
11.6
10.7
7.7
5.6
7.8
4.7
12.5

Total ***********************************************************

$26,867

100.0%

$25,373

100.0%

Geography

Total banking region *********************************************
Outside the Company’s banking region********************************

$ 4,277
1,190
1,140
1,508
2,297
2,264
1,614
3,242
2,040
1,895
1,679
682
1,439

25,267
1,600

15.9%
4.4
4.2
5.6
8.6
8.4
6.0
12.1
7.6
7.1
6.2
2.5
5.4

94.0
6.0

$ 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

Total ***********************************************************

$26,867

100.0%

$25,373

100.0%

U.S. Bancorp 31

The Company’s commercial real estate mortgages and
construction loans had unfunded commitments of
$7.9 billion at December 31, 2002, compared with
$6.0 billion at December 31, 2001. The Company also
ﬁnances 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 $635 million at December 31, 2002.

Residential Mortgages Residential mortgages held in the
loan portfolio were $9.7 billion at December 31, 2002,
compared with $7.8 billion at December 31, 2001, an
increase of $1.9 billion (24.5 percent). The increase in
residential mortgages was driven by an increase in
reﬁnancing given the current rate environment and strong
growth in ﬁrst lien home equity loans through the
Company’s Consumer Finance division. The increase also
reﬂects a decision to retain adjustable rate mortgages in the
portfolio for asset liability management purposes and a
reclassiﬁcation of approximately $.7 billion to the
residential mortgages category predominately from the
commercial loan category. This growth was partially offset
by approximately $.9 billion in residential loan sales during
2002. Average residential mortgages of $8.4 billion were
essentially unchanged from a year ago.

Retail Total retail loans outstanding, which include credit
card, retail leasing, home equity and second mortgages and
other retail loans, were $37.7 billion at December 31, 2002,
compared with $34.9 billion at December 31, 2001. The
increase of $2.8 billion (8.1 percent) was driven by an
increase in home equity lines during the recent declining
rate environment and an increase in the retail leasing
portfolio. This growth was partially offset by two credit
card sales in 2002 that totaled approximately $483 million.
Average retail loans increased $3.1 billion (9.1 percent) to
$36.5 billion in 2002. Impacting the growth in average
retail loans in 2002, compared with 2001, were portfolio
sales of $1.3 billion in 2001 related to the high loan-to-
value home equity portfolio and indirect automobile loans.

Table 10

Selected Loan Maturity Distribution

On a core basis, average retail loans increased $1.8 billion
(5.3 percent) from a year ago with growth in most retail
loan categories. Of the total retail loans outstanding,
approximately 89.8 percent are to customers located in the
Company’s banking region.

Loans Held for Sale At December 31, 2002, loans held for
sale, consisting primarily of residential mortgages to be sold
in the secondary markets, were $4.2 billion, compared with
$2.8 billion at December 31, 2001. The $1.3 billion
(47.5 percent) increase primarily reﬂected strong mortgage
loan origination volume in connection with reﬁnancing
activity in 2002 given the declining interest rates for
residential mortgage loans. Residential mortgage production
was $23.2 billion in 2002, compared with $15.6 billion in
2001. This is substantially higher than mortgage production
of $6.7 billion in 2000.

Investment 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 and is used as collateral for public deposits and
wholesale funding sources.

At December 31, 2002, investment securities, both

available-for-sale and held-to-maturity, totaled
$28.5 billion, compared with $26.6 billion at December 31,
2001. The $1.9 billion (7.1 percent) increase reﬂected the
reinvestment of proceeds from loan sales, declines in
commercial and commercial real estate loan balances and
deposits assumed from the recent Bay View transaction.
During 2002, the Company sold $13.7 billion of ﬁxed-rate
securities, in part to realign the portfolio to hedge against
interest rate changes and to generate gains given the impact
of prepayments in the mortgage servicing rights portfolio. A
portion of the ﬁxed-rate securities sold was replaced with
ﬂoating-rate securities in conjunction with the Company’s
interest rate risk management strategies. At December 31,
2002, approximately 18.6 percent of the investment
securities portfolio represented adjustable rate ﬁnancial
instruments, compared with 15.6 percent as of
December 31, 2001.

December 31, 2002 (Dollars in Millions)

Commercial ***********************************************************
Commercial real estate*************************************************
Residential mortgages *************************************************
Retail ****************************************************************

Total loans **********************************************************

Total of loans due after one year with

Predetermined interest rates ******************************************
Floating interest rates ************************************************

One Year
or Less

$21,037
7,382
841
11,660

$40,920

Over One
Through
Five Years

$18,039
13,147
1,827
16,010

$49,023

Over Five
Years

$ 2,868
6,338
7,078
10,024

$26,308

Total

$ 41,944
26,867
9,746
37,694

$116,251

$ 38,185
$ 37,146

32 U.S. Bancorp

The weighted-average yield of the available-for-sale

portfolio was 4.97 percent at December 31, 2002,
compared with 5.58 percent at December 31, 2001. The
average maturity of the available-for-sale portfolio dropped
to 2.8 years at December 31, 2002, down from 5.4 years at
December 31, 2001. The relative mix of the type of
investment securities maintained in the portfolio is provided

Table 11

Investment Securities

in Table 11. The change in investment portfolio mix
reﬂected sales of tax-exempt municipal securities that were
replaced primarily by collateralized mortgage obligations. At
December 31, 2002, the available-for-sale portfolio included
a $714 million net unrealized gain, compared with a net
unrealized gain of $15 million at December 31, 2001.

December 31, 2002 (Dollars in Millions)

Available-for-Sale

Held-to-Maturity

Amortized
Cost

Fair
Value

Weighted
Average
Maturity in
Years

Weighted
Average
Yield

Amortized
Cost

Fair
Value

Weighted
Average
Maturity in
Years

Weighted
Average
Yield

U.S. Treasury and agencies

Maturing in one year or less **********
Maturing after one year through

ﬁve years************************

Maturing after ﬁve years through

ten years ************************
Maturing after ten years **************
Total*************************

Mortgage-backed securities

Maturing in one year or less **********
Maturing after one year through

ﬁve years************************

Maturing after ﬁve years through

ten years ************************
Maturing after ten years **************
Total*************************

Asset-backed securities

Maturing in one year or less **********
Maturing after one year through

ﬁve years************************

Maturing after ﬁve years through

ten years ************************
Maturing after ten years **************
Total*************************

Obligations of states and political

subdivisions
Maturing in one year or less **********
Maturing after one year through

ﬁve years************************

Maturing after ﬁve years through

ten years ************************
Maturing after ten years **************
Total*************************

Other debt securities

Maturing in one year or less **********
Maturing after one year through

ﬁve years************************

Maturing after ﬁve years through

ten years ************************
Maturing after ten years **************
Total*************************

Other investments ******************
Total investment securities ***************

162

164

207

41
11

218

42
12

421

436

$ 3,878

$ 3,904

20,359

20,988

725
5

768
6

$24,967

$25,666

446

199
—

646

459

210
—

670

102

103

263

140
53

558

165

4
262

464

485

275

147
54

579

165

3
233

435

469

$27,541

$28,255

.44

2.97

7.33
11.38

2.64

.61

2.69

5.61
13.85

2.46

.25

3.39

7.12
—

4.53

.42

2.73

6.89
18.32

4.83

.63

2.57

6.54
24.36

14.76

—

2.77

3.83%

$ —

4.37

4.12
5.23

—

—
—

—

—
—

4.16%

$ —

3.33%

$ —

5.18

5.27
6.12

—
—

4.90%

$ 20

5.50%

$ —

5.24

5.72
—

—

—
—

—

—
—

5.39%

$ —

7.26%

$ 34

$ 35

7.26

7.42
9.32

48
69

52
67

7.50%

$213

$220

5.50%

11.41

5.15
2.30

5.80%

—%

4.97%

$ —

—

—
—

$ —

$233

—

—
—

$ —

$240

—

—
—

—

3.25

—
—

3.25

—

—
—

—

.47

2.97

7.20
15.07

7.44

—

—
—

—

7.08

—%

—

—
—

—%

7.67

—
—

7.67%

—%

—

—
—

—%

3.60%

6.20

6.28
5.85

5.69%

—%

—

—
—

—%

5.86%

Note: Information related to asset and mortgage-backed securities included above is presented based upon weighted average maturities anticipating future prepayments. Average

yields are presented on a fully-taxable equivalent basis. Yields on available-for-sale securities are computed based on historical cost balances. Average yield and maturity
calculations exclude equity securities that have no stated yield or maturity.

At December 31 (Dollars in Millions)
U.S. treasuries and agencies ***********************************************************
Mortgage-backed securities*************************************************************
Asset-backed securities ****************************************************************
Obligations of states and political subdivisions ********************************************
Other securities and investments ********************************************************
Total investment securities **********************************************************

2002

2001

Amortized
Cost

421
24,987
646
771
949

$27,774

Percent
of Total

1.5%

90.0
2.3
2.8
3.4

100.0%

Amortized
Cost

439
21,965
2,091
1,148
950

$26,593

Percent
of Total

1.7%

82.6
7.9
4.3
3.5

100.0%

U.S. Bancorp 33

Deposits Total deposits were $115.5 billion at
December 31, 2002, compared with $105.2 billion at
December 31, 2001, an increase of $10.3 billion
(9.8 percent). The increase in total deposits was the result
of the continued desire by customers to maintain liquidity
and speciﬁc deposit gathering initiatives and funding
decisions in 2002.

Noninterest-bearing deposits were $35.1 billion at

December 31, 2002, compared with $31.2 billion at
December 31, 2001, an increase of $3.9 billion
(12.5 percent). Average noninterest-bearing deposits
were $28.7 billion in 2002, an increase of $3.6 billion
(14.4 percent), compared with 2001. The increase in
noninterest-bearing deposits was primarily attributable to
business and government banking customers that
maintained higher compensating balances given the current
interest rate environment.

Interest-bearing savings deposits totaled $50.2 billion at

December 31, 2002, compared with $44.7 billion at
December 31, 2001, an increase of $5.5 billion
(12.3 percent). Average interest-bearing savings deposits
were $45.8 billion in 2002, an increase of $2.3 billion
(5.4 percent), compared with 2001. This growth was related
to speciﬁc deposit gathering initiatives of the Company in
2002, the continued downturn in equity capital markets and
the current interest rate environment prompting many
customers to increase their liquidity in accessible deposits.
Interest-bearing time deposits were $30.2 billion at

December 31, 2002, compared with $29.3 billion at

Table 12

Deposits

The composition of deposits was as follows:

December 31, 2001, an increase of $.9 billion (3.1 percent).
The increase in interest-bearing time deposits was driven by
an increase of $3.7 billion (42.7 percent) in time deposits
greater than $100,000 partially offset by a decline in the
higher cost time certiﬁcates of deposits less than $100,000
of $2.8 billion (13.3 percent). Time certiﬁcates of deposits
are largely viewed as purchased funds and are managed to
levels deemed appropriate given alternative funding sources.
The decline in time certiﬁcates of deposits less than
$100,000 reﬂected a shift in product mix toward savings
products and funding decisions toward more favorably
priced wholesale funding sources given the current interest
rate environment. Average time certiﬁcates of deposit less
than $100,000 declined $4.0 billion (17.3 percent). The
decline in average time certiﬁcates of deposit less than
$100,000 reﬂected 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 $7.8 billion at December 31, 2002, down $6.9 billion
(46.8 percent) from $14.7 billion at year-end 2001. Short-
term funding is managed to levels deemed appropriate given

December 31 (Dollars in Millions)

2002

2001

2000

1999

1998

Amount

Percent
of Total

Amount

Percent
of Total

Amount

Percent
of Total

Amount

Percent
of Total

Amount

Percent
of Total

Noninterest-bearing deposits ***************** $ 35,106
Interest-bearing deposits

30.4% $ 31,212

29.7% $ 26,633

24.3% $ 26,350

25.5% $ 27,479

26.3%

Interest checking ************************
Money market accounts******************
Savings accounts ***********************

Total of savings deposits**************
Time certificates of deposit less than $100,000***
Time deposits greater than $100,000

Domestic *******************************
Foreign ********************************

17,467
27,753
5,021

50,241
17,973

9,427
2,787

15.1
24.0
4.4

43.5
15.5

8.2
2.4

15,251
24,835
4,637

44,723
20,724

7,286
1,274

14.5
23.6
4.4

42.5
19.7

6.9
1.2

Total interest-bearing deposits *********

80,428

69.6

74,007

70.3

13,982
23,899
4,516

42,397
25,780

11,221
3,504

82,902

12.8
21.8
4.1

38.7
23.5

10.3
3.2

75.7

13,141
22,751
5,445

41,337
25,394

9,348
988

12.7
22.0
5.3

40.0
24.5

9.0
1.0

13,385
22,086
6,352

41,823
27,935

6,261
848

12.8
21.2
6.1

40.1
26.8

6.0
.8

77,067

74.5

76,867

73.7

Total deposits *************************** $115,534

100.0% $105,219

100.0% $109,535

100.0% $103,417

100.0% $104,346

100.0%

The maturity of time deposits greater than $100,000 was as follows:

December 31 (Dollars in Millions)

Three months or less ***************************************************************************************************
Over three months through six months ************************************************************************************
Over six months through twelve months ***********************************************************************************
Over twelve months *****************************************************************************************************

Total ****************************************************************************************************************

2002

$ 7,533
1,376
1,701
1,604

$12,214

34 U.S. Bancorp

alternative funding sources. The decrease in short-term
borrowings reﬂected the impact of funding earning assets
primarily through growth in deposits and, to a lesser extent,
a shift toward longer-term funding sources.

Long-term debt was $28.6 billion at December 31,
2002, up from $25.7 billion at December 31, 2001. The
$2.9 billion (11.2 percent) increase in long-term debt
included the issuance of $1.0 billion of ﬁxed-rate
subordinated notes in February 2002, the issuance of
$6.5 billion of medium-term notes and bank notes and the
issuance of $3.1 billion of long-term Federal Home Loan
Bank advances in 2002. The issuance of long-term debt was
partially offset by repayments and maturities of $8.4 billion
in 2002, including the repurchase on August 6, 2002, of
approximately $1.1 billion accreted value of the Company’s
convertible senior notes (the ‘‘CZARS’’) due to mature in
2021. Refer to Note 14 of the Notes to Consolidated
Financial Statements for additional information regarding
long-term debt and the ‘‘Liquidity Risk Management’’
section for discussion of liquidity management of
the Company.

CORPORATE RISK PROFILE

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

Credit Risk Management The Company’s strategy for credit
risk management includes well deﬁned, centralized credit
policies, uniform underwriting criteria, and ongoing risk

monitoring and review processes for all commercial and
consumer credit exposures. The strategy also emphasizes
diversiﬁcation on a geographic, industry and customer level,
regular credit examinations and management reviews of
loans experiencing deterioration of credit quality. The
Company strives to identify potential problem loans early,
take any necessary charge-offs promptly and maintain
adequate reserve levels for probable loan losses.
Commercial banking operations rely on a strong credit
culture that combines prudent credit policies and individual
lender accountability. The Company utilizes a credit risk
rating system to measure the credit quality of individual
commercial loan transactions and regularly forecasts
potential changes in risk ratings and nonperforming status.
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 balance sheet
hedging purposes, foreign exchange transactions and interest
rate swap contracts for customers, settlement risk and the
processing of credit card transactions for merchants. These
activities are also subject to credit review, analysis and
approval processes.

In evaluating its credit risk, the Company considers
changes, if any, in underwriting activities, the loan portfolio
composition (including product mix and geographic,
industry or customer-speciﬁc concentrations), trends in loan
performance, the level of allowance coverage and
macroeconomic factors. The domestic economy has
experienced slower growth since late 2000. During 2001,
corporate earnings weakened and credit quality indicators
among certain industry sectors deteriorated. Large corporate
and middle market commercial businesses announced or
continued to implement restructuring activities in an effort
to improve operating margins. The stagnant economic
growth was evidenced by the Federal Reserve Board’s
(‘‘FRB’’) actions to stimulate economic growth through a
series of interest rate reductions over the past 24 to
30 months. In response to declining economic conditions,
company-speciﬁc 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 ﬁrst six months of 2001 including
aligning the risk management practices and charge-off
policies of the companies and restructuring and disposing of
certain portfolios that did not align with the credit risk
proﬁle of the combined company. Credit portfolio
restructuring activities included a speciﬁc segment of the
Company’s health care portfolio, selling certain USBM

U.S. Bancorp 35

consumer loan portfolios, renegotiating a credit card co-
branding relationship and discontinuing an unsecured small
business product that did not align with the product
offerings 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 conﬁdence 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 it had originally
estimated. Accordingly, the Company conducted a review of
its credit portfolios and recognized the need to address the
impact that these events would have. In response to this
evaluation, the Company increased the provision for credit
losses by approximately $1,025 million in the third quarter
of 2001 beyond expected levels.

By the end of 2002, economic conditions had stabilized

somewhat although the banking sector continued to
experience elevated levels of nonperforming assets and net
charge-offs, especially with respect to certain industry
segments. Unemployment rates had increased slightly from a
year ago and consumer spending and conﬁdence levels had
declined since 2001.

Credit Diversiﬁcation The Company manages its credit risk,
in part, through diversiﬁcation of its loan portfolio. As part
of its normal business activities, it offers a broad array of
traditional commercial lending products and specialized
products such as asset-based lending, commercial lease
ﬁnancing, agricultural credit, warehouse mortgage lending,
commercial real estate, health care and correspondent
banking. The Company also offers an array of retail lending
products including credit cards, retail leases, home equity,
revolving credit, lending to students and other consumer
loans. These retail credit products are primarily offered
through the branch ofﬁce network, specialized trust, home
mortgage and loan production ofﬁces, indirect distribution
channels, such as automobile dealers and a consumer
ﬁnance company. The Company monitors and manages the
portfolio diversiﬁcation by industry, customer and
geography. Table 7 provides information with respect to the
overall product diversiﬁcation and changes in mix in 2002.
The commercial portfolio reﬂects the Company’s focus

on serving small business customers, middle market and
larger corporate businesses throughout its 24-state banking
region and national customers and within certain niche
industry groups. Table 8 provides a summary of the
signiﬁcant industry groups and geographic locations of
commercial loans outstanding at December 31, 2002 and

2001. The commercial loan portfolio is diversiﬁed among
various industries with somewhat higher concentrations in
consumer products and services, capital goods (including
manufacturing and commercial construction-related
businesses), and consumer staple industries. Additionally,
the commercial portfolio is diversiﬁed across the Company’s
geographical markets with 86.2 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. 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.

Certain industry segments within the commercial loan

portfolio, including communications, transportation and
manufacturing sectors, as well as highly leveraged enterprise
value financings, have experienced economic stress in 2002.
Since 2001, the communications sector has been adversely
impacted by excess capacity and represented only 1.2 percent
of the commercial loan portfolio at December 31, 2002. At
December 31, 2002, the transportation sector represented
5.3 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 the trucking
businesses. At year-end 2002, the Company’s transportation
portfolio consisted of airline and airfreight businesses
(28.1 percent of the sector), trucking businesses (52.9 percent
of the sector) and the remainder in the railroad and shipping
businesses (19.0 percent of the sector). Capital goods
represented 13.1 percent of the total commercial portfolio at
December 31, 2002. Included in this sector
were approximately 34.0 percent of loans related to
building products while engineering and construction
equipment and machinery businesses were 31.6 percent and
21.6 percent, respectively. Manufacturing production levels
and inventory reductions continues to cause financial stress in
these portfolios.

Within its commercial lending business, the Company
also provides ﬁnancing to enable customers to grow their
businesses through acquisitions of existing businesses,
buyouts or other recapitalizations. During a business cycle
with slower economic growth, businesses with leveraged
capital structures may experience insufﬁcient cash ﬂows to
service their debt. The Company manages leveraged
enterprise-value ﬁnancings by maintaining well-deﬁned
underwriting standards, portfolio diversiﬁcation and actively
managing the customer relationship. Regardless of these
actions, leveraged enterprise-value ﬁnancings often exhibit
stress during a recession or period of slow economic
growth. Given this risk proﬁle, the Company began to
signiﬁcantly de-emphasize and reduce the size of this

36 U.S. Bancorp

portfolio during the past year. The Company actively
monitors the credit quality of these customers and develops
action plans accordingly. Such leveraged enterprise-value
ﬁnancings approximated $2.9 billion in loans outstanding at
December 31, 2002, compared with approximately
$3.9 billion outstanding at December 31, 2001. The decline
was primarily due to the Company’s decision to reduce its
exposure to these types of lending arrangements through
repayments, reﬁnancing activities and loan sales. The sector
has also been reduced by charge-offs taken during the year.
The Company’s portfolio of leveraged ﬁnancings is included
in Table 8 and is diversiﬁed among industry groups similar
to the total commercial loan portfolio.

The commercial real estate portfolio reﬂects the
Company’s focus on serving business owners within its
footprint as well as regional investment-based real estate.
Table 9 provides a summary of the signiﬁcant property
types and geographic locations of commercial real estate
loans outstanding at December 31, 2002 and 2001. At
December 31, 2002, approximately 24.2 percent of the
commercial real estate loan portfolio represented business
owner-occupied properties that tend to exhibit credit risk
characteristics similar to the middle-market commercial loan
portfolio. Generally, the investment-based real estate
mortgages are diversiﬁed among various property types with
somewhat higher concentrations in multi-family, ofﬁce and
retail properties. Additionally, the commercial real estate
portfolio is diversiﬁed across the Company’s geographical
markets with 94.0 percent of total commercial real estate
loans outstanding at December 31, 2002, within the
24-state banking region. While vacancies in multi-family

and commercial properties had risen during the past
18 months, declining interest rates have allowed real estate
owners to reduce interest costs and generally maintain
adequate cash ﬂows.

Analysis of Loan Net Charge-Offs Total loan net charge-offs
decreased $173.5 million to $1,373.0 million in 2002,
compared with $1,546.5 million in 2001 and
$825.4 million in 2000. The ratio of total loan net charge-
offs to average loans was 1.20 percent in 2002, compared
with 1.31 percent in 2001 and .70 percent in 2000.
Included in loan net charge-offs for 2001 were
$313.2 million of commercial loan charge-offs related to
speciﬁc events or credit initiatives taken by management,
$160 million of loan charge-offs relating to the Company’s
accelerated loan workout strategy and $90 million of loan
write-offs to conform risk management practices, align loan
charge-off policies and expedite the transition out of a
speciﬁc segment of the health care portfolio not meeting the
lower risk appetite of the Company. The level of loan net
charge-offs during 2002 reﬂected the impact of soft
economic conditions and continued weakness in the
communications, transportation and manufacturing sectors,
as well as the impact of the weak economy on highly
leveraged enterprise value ﬁnancings. Assuming no further
deterioration in the economy, net charge-offs are expected
to remain at recent levels until the economy improves.

Commercial and commercial real estate loan net
charge-offs for 2002 were $679.9 million (.98 percent of
average loans outstanding), compared with $884.6 million
(1.16 percent of average loans outstanding) in 2001 and

Table 13

Net Charge-offs as a Percent of Average Loans Outstanding

Year Ended December 31

Commercial

Commercial ********************************************
Lease ﬁnancing*****************************************

Total commercial ************************************

Commercial real estate

Commercial mortgages **********************************
Construction and development ***************************

Total commercial real estate **************************
Residential mortgages **********************************

Retail

Credit card *********************************************
Retail leasing*******************************************
Home equity and second mortgages **********************
Other retail *********************************************

Total retail ******************************************

2002

2001

2000

1999

1998

1.29%
2.67

1.46

.17
.11

.15

.23

4.98
.72
.74
2.10

1.85

1.62%
1.95

1.66

.21
.17

.20

.15

4.80
.65
.85
2.16

1.94

.56%
.46

.41%
.24

*%
*

.55

.03
.11

.05

.11

4.18
.41
*
1.32

1.69

.40

.02
.03

.02

.11

4.00
.28
*
1.26

1.63

.31

*
*

(.04)

.07

4.02
*
*
*

1.54

Total loans (a)************************************

1.20%

1.31%

.70%

.61%

.53%

(a)

In accordance with guidance provided in the Interagency Guidance on Certain Loans Held for Sale, loans held with the intent to sell are transferred to the Loans Held for Sale
category based on the lower of cost or fair value. At the time of transfer, the portion of the mark-to-market losses representing probable credit losses determined in accordance
with policies and methods utilized to determine the allowance for credit losses is included in net charge-offs. The remaining portion of the losses is reported separately as a
reduction of the allowance for credit losses under ‘‘Losses from loan sales/transfers.’’ Had the entire amount of the loss been reported as charge-offs, total net charge-offs would
have been $1,875.8 million (1.59 percent of average loans) for the year ended December 31, 2001.
Information not available

U.S. Bancorp 37

$289.2 million (.38 percent of average loans outstanding) in
2000. Commercial and commercial real estate loan net
charge-offs in 2002 continued to experience higher levels of
net charge-offs related to the leasing portfolio including
airline and other transportation related losses. Additionally,
credit losses related to highly leveraged enterprise value
ﬁnancings continued at elevated levels. Commercial and
commercial real estate loan net charge-offs in 2001 included
approximately $313.2 million related to several factors
including: a large cattle fraud, collateral deterioration
speciﬁc to transportation equipment caused by the impact
of higher fuel prices and the weak economy, deterioration
in the manufacturing, communications and technology
sectors and speciﬁc management decisions to accelerate its
workout strategy for certain borrowers. Also included in
2001 commercial and commercial real estate loan net
charge-offs were $95 million in merger and restructuring-
related charge-offs and charge-offs of $160 million
associated with an accelerated loan workout strategy.
Excluding loan net charge-offs associated with merger and
restructuring-related items, commercial and commercial real
estate loan net charge-offs were .98 percent of average loans
outstanding in 2002, 1.04 percent in 2001 and .38 percent
in 2000. The decrease in commercial and commercial real
estate loan net charge-offs in 2002 when compared with
2001, and the increase for 2001 when compared with 2000
was driven by the speciﬁc credit actions noted above taken
in the third quarter of 2001.

Retail loan net charge-offs in 2002 were $674.0 million
(1.85 percent of average loans outstanding), compared with
$649.3 million (1.94 percent of average loans outstanding)
in 2001 and $523.8 million (1.69 percent of average loans
outstanding) in 2000. The improvement in the retail loan
net charge-offs in 2002, compared with 2001, principally
reﬂected changes in the mix of the retail loan portfolio to
auto loans and leases and home equity products, and
improvement in ongoing collection efforts as a result of
the successful completion of the integration efforts. The
increase in retail loan net charge-offs for 2001, compared
with 2000, was primarily due to increased bankruptcies and
consumer delinquencies in 2001, reﬂecting the downturn
in economic conditions.

Analysis of Nonperforming Assets Nonperforming assets
include nonaccrual loans, restructured loans not performing
in accordance with modiﬁed terms, 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,
2002, total nonperforming assets were $1,373.5 million,
compared with $1,120.0 million at year-end 2001 and
$867.0 million at year-end 2000. The ratio of total
nonperforming assets to total loans and other real estate
increased to 1.18 percent at December 31, 2002, compared
with .98 percent and .71 percent for the years ending 2001
and 2000, respectively.

The $253.5 million increase in total nonperforming
assets in 2002 reﬂected an increase of $284.6 million in
nonperforming commercial and commercial real estate loans
partially offset by a decrease of $27.1 million in
nonperforming residential mortgages and a $21.5 million
decrease in nonperforming retail loans. The increase in
nonperforming commercial and commercial real estate
assets was principally due to the Company’s exposure to
certain communications, cable, manufacturing and highly
leveraged enterprise value ﬁnancings. Nonperforming loans
in the capital goods sector also increased in 2002. Although
the level of nonperforming assets appeared to have
stabilized in late 2002, the Company continues to remain
cautious regarding the economy and its impact on the credit
quality of the portfolio. Nonperforming assets are expected
to remain at elevated levels until the economy rebounds.

The $253.0 million increase in nonperforming assets in

2001 reﬂected 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 2001; loans
written down to secondary market valuations and placed on
nonperforming status; and continued stress in certain
sectors of the economy. The increase was partially offset by
the disposition of nonperforming loans identiﬁed as part of
the Company’s accelerated workout programs and
commercial charge-offs taken during 2001. Certain industry
sectors, including agriculture, had stabilized or improved
from 2000. The increase in nonperforming residential
mortgages and retail loans generally reﬂected changes in
portfolio delinquencies and the national trends in
unemployment and personal bankruptcies during 2001.
The Company had $50.0 million and $18.2 million

of restructured loans as of December 31, 2002 and 2001,
respectively. Commitments to lend additional funds under
restructured loans were $1.7 million and $3.7 million as
of December 31, 2002 and 2001, respectively. Restructured
loans performing under the restructured terms beyond a
speciﬁc timeframe are reported as accruing. Of the
Company’s total restructured loans at December 31, 2002,
$1.4 million were reported as accruing.

Accruing loans 90 days or more past due totaled
$426.4 million at December 31, 2002, compared with
$462.9 million at December 31, 2001, and $385.2 million
at December 31, 2000. These loans were not included in
nonperforming assets and continue to accrue interest
because they are adequately secured by collateral and/or are
in the process of collection and are reasonably expected to
result in repayment or restoration to current status. The
ratio of delinquent loans to total loans declined slightly to
.37 percent at December 31, 2002, compared with
.40 percent at December 31, 2001.

38 U.S. Bancorp

Table 14

Nonperforming Assets (a)

(Dollars in Millions)

Commercial

2002

2001

2000

1999

1998

At December 31,

Commercial *****************************
Lease ﬁnancing *************************
Total commercial *********************

$ 760.4
166.7

927.1

$ 526.6
180.8

707.4

Commercial real estate

Commercial mortgages*******************
Construction and development ************
Total commercial real estate ***********

Residential mortgages*******************

Retail

Credit card******************************
Retail leasing ***************************
Other retail *****************************
Total retail ***************************
Total nonperforming loans **********

Other real estate ************************

Other assets *****************************
Total nonperforming assets *********
Restructured loans accruing interest (b) *******
Accruing loans 90 days or more past due (c) ***
Nonperforming loans to total loans************
Nonperforming assets to total loans plus

other real estate **************************
Net interest lost on nonperforming loans ******

Delinquent Loan Ratios

(as a percent of ending loan balances)
90 days or more past due excluding nonperforming loans

Commercial

Commercial *****************************
Lease ﬁnancing *************************
Total commercial *********************

Commercial real estate

Commercial mortgages*******************
Construction and development ************
Total commercial real estate ***********

Residential mortgages*******************

Retail

$470.4
70.5

540.9

105.5
38.2

143.7

56.9

8.8
—
15.0

23.8

765.3

61.1

40.6

$867.0

$ —
$385.2

.63%

.71%

$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%

$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%

174.6
57.5

232.1

52.0

—
1.0
25.1

26.1

131.3
35.9

167.2

79.1

—
6.5
41.1

47.6

1,237.3

1,001.3

59.5

76.7

$1,373.5

1.4
$
$ 426.4

1.06%

1.18%
65.4

43.8

74.9

$1,120.0

—
$
$ 462.9

.88%

.98%

63.0

$ 50.8

$ 29.5

$ 21.3

2002

2001

2000

1999

1998

At December 31,

.14%
.10

.14

.03
.07

.04

.90

2.09
.19
.54

.72

.14%
.45

.18

.03
.02

.02

.78

2.18
.11
.74

.90

.11%
.02

.10

.07
.03

.06

.62

1.70
.20
.62

.76

.05%
—

.05

.08
.05

.07

.42

1.23
.12
.41

.53

.08%
.03

.07

.06
.06

.06

.52

1.02
.10
.36

.45

.37%

.40%

.31%

.22%

.24%

90 days or more past due including nonperforming loans
Commercial *********************************
Commercial real estate ***********************
Residential mortgages ************************
Retail ***************************************
Total loans *******************************

2002

2.35
.90
1.44
.79

1.43%

2001

1.71
.68
1.79
1.03

At December 31,

2000

1.13
.60
1.23
.83

1999

.59
.74
.99
.62

1998

.68
.59
1.17
.57

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) Nonaccrual restructured loans are included in the respective nonperforming loan categories and excluded from restructured loans accruing interest.
(c) These loans are not included in nonperforming assets and continue to accrue interest because they are secured by collateral and/or are in the process of collection and are

reasonably expected to result in repayment or restoration to current status.

U.S. Bancorp 39

Residential mortgages 30 to 89 days or more past due were
2.85 percent of the total residential mortgage portfolio at
December 31, 2002, compared with 3.40 percent at
December 31, 2001, and 2.93 percent at December 31,
2000. Residential mortgages 90 days or more past due
totaled 1.44 percent at December 31, 2002, compared with
1.79 percent at December 31, 2001, and 1.23 percent at
December 31, 2000. The improvement in 2002 reﬂects, in
part, the mix of ﬁrst-lien home equity loans originated
through the Company’s consumer ﬁnance division. Retail
loans 30 to 89 days or more past due were 2.46 percent of
the total retail portfolio at December 31, 2002, compared
with 3.30 percent at December 31, 2001, and 2.96 percent
at December 31, 2000. The percentage of retail loans
90 days or more past due was .79 percent of total retail
loans at December 31, 2002, compared with 1.03 percent at
December 31, 2001, and .83 percent at December 31, 2000.
The improvement in retail loan delinquencies from
December 31, 2001, to December 31, 2002, primarily
reﬂected the risk management actions, stabilization and
improvement in collection efforts resulting from the
successful completion of the integration efforts. The increase
in retail loan delinquencies from December 31, 2000, to
December 31, 2001, was primarily related to the credit
card, home equity and revolving credit line portfolios and
reﬂected the economic slowdown and unemployment trends
during 2001.

Analysis and Determination of the Allowance for Credit

Losses The allowance for credit losses provides coverage
for probable and estimable losses inherent in the Company’s
loan and lease portfolio. Management evaluates the
allowance each quarter to determine that it is adequate to
cover inherent losses. The evaluation of each element and
the overall allowance is based on a continuing assessment of
problem loans and related off-balance sheet items, recent
loss experience and other factors, including regulatory
guidance and economic conditions.

At December 31, 2002, the allowance for credit losses

was $2.4 billion (2.08 percent of loans). This compares
with an allowance of $2.5 billion (2.15 percent of loans) at
December 31, 2001, and $1.8 billion (1.46 percent of loans)
at December 31, 2000. The ratio of the allowance for credit
losses to nonperforming loans was 196 percent at year-end
2002, compared with 245 percent at year-end 2001 and
233 percent at year-end 2000. The ratio of the allowance
for credit losses to loan net charge-offs was 176 percent at
year-end 2002, compared with 159 percent at year-end
2001 and 216 percent at year-end 2000.

Management determined that the allowance for credit

losses was adequate at December 31, 2002.

Several factors were taken into consideration in

evaluating the 2002 allowance for credit losses, including

changes in the risk proﬁle of the portfolios, extent of loan

net charge-offs during the period, the increasing trend in

nonperforming assets, the slight decline in accruing loans

90 days past due and the improvement in retail

delinquencies. Management also considered changes in

economic trends including corporate earnings,

unemployment rates, bankruptcies and economic growth

since December 31, 2001. The increase in the allowance for

credit losses in 2001 reﬂected the impact of continued

weakening of the economy and related deterioration in

certain sectors of the Company’s credit portfolio. During

2001, the allowance for credit losses was impacted by

several factors, including merger and restructuring-related

credit actions and management’s extensive review of the

commercial loan portfolio in light of 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-speciﬁc portfolio trends discussed

previously, and the transfer of the unsecured small business

product portfolio to loans held for sale. It also reﬂected

management’s recognition that the economic slowdown had

accelerated and may be more prolonged as a result of world

events that occurred in the third quarter of 2001.

Management determines the amount of allowance that
is required for speciﬁc 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.
The allowance recorded for commercial loans is based on a
regular review of individual credit relationships. The
Company’s 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 ﬂows. Based on this analysis,
an allowance for credit losses may be speciﬁcally established
for impaired loans. The allowance established for
commercial and commercial real estate loan portfolios,
including impaired commercial and commercial real estate
loans, was $1,090.4 million at December 31, 2002,
compared with $1,428.6 million and $496.9 million at

40 U.S. Bancorp

Table 15

Summary of Allowance for Credit Losses

(Dollars in Millions)
Balance at beginning of year ****************************

2002

2001

2000

1999

1998

$2,457.3

$1,786.9

$1,710.3

$1,705.7

$1,665.8

Charge-offs

Commercial

Commercial *************************************
Lease ﬁnancing**********************************
Total commercial *****************************

Commercial real estate

Commercial mortgages ***************************
Construction and development ********************
Total commercial real estate *******************
Residential mortgages *******************************
Retail

Recoveries

Commercial

Commercial *************************************
Lease ﬁnancing**********************************
Total commercial *****************************

Commercial real estate

Net Charge-offs
Commercial

Commercial *************************************
Lease ﬁnancing**********************************
Total commercial *****************************

Commercial real estate

Credit card **************************************
Retail leasing************************************
Home equity and second mortgages ***************
Other retail**************************************
Total retail ***********************************
Total net charge-offs ***********************
Provision for credit losses *******************************
Losses from loan sales/transfers (a)**********************
Acquisitions and other changes **************************
Balance at end of year**********************************

559.2
188.8

748.0

40.9
8.8

49.7
23.1

304.9
45.2
107.9
311.9

769.9

779.0
144.4

923.4

49.5
12.6

62.1
15.8

294.1
34.2
112.7
329.1

770.1

319.8
27.9

347.7

15.8
10.3

26.1
13.7

235.8
14.8
*
379.5

630.1

1,590.7

1,771.4

1,017.6

67.4
39.9

107.3

9.1
1.4

10.5
4.0

24.6
6.3
10.6
54.4

95.9

217.7

491.8
148.9

640.7

31.8
7.4

39.2
19.1

280.3
38.9
97.3
257.5

674.0

60.6
30.4

91.0

9.1
.8

9.9
3.2

23.4
4.5
12.9
80.0

120.8

224.9

718.4
114.0

832.4

40.4
11.8

52.2
12.6

270.7
29.7
99.8
249.1

649.3

1,373.0

1,349.0
—
(11.3)

1,546.5

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
—
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
—
31.2

*
*

202.3

*
*

23.6
14.4

223.9
*
*
*

533.4

773.7

*
*

81.9

*
*

31.0
3.0

36.9
*
*
*

112.6

228.5

*
*

120.4

*
*

(7.4)
11.4

187.0
*
*
*

420.8

545.2

491.3
—
93.8

$2,422.0

$2,457.3

$1,786.9

$1,710.3

$1,705.7

Allowance as a percent of

Period-end loans ************************************
Nonperforming loans ********************************
Nonperforming assets *******************************
Net charge-offs (a) **********************************

2.08%
196
176
176

2.15%
245
219
159

1.46%
233
206
216

1.51%
329
291
254

1.59%
344
312
313

(a)

In accordance with guidance provided in the Interagency Guidance on Certain Loans Held for Sale, loans held with the intent to sell are transferred to the Loans Held for Sale category based
on the lower of cost or fair value. At the time of the transfer, the portion of the mark-to-market losses representing probable credit losses determined in accordance with policies and methods
utilized to determine the allowance for credit losses is included in net charge-offs. The remaining portion of the losses is reported separately as a reduction of the allowance for credit losses
under ‘‘Losses from loan sales/transfers.’’ Had the entire amount of the loss been reported as charge-offs, total net charge-offs would have been $1,875.8 million for the year ended 2001.
Additionally, the allowance as a percent of net charge-offs would have been 131 percent for the year ended December 31, 2001.
Information not available

U.S. Bancorp 41

December 31, 2001 and 2000, respectively. The decline in
the allowance for commercial and commercial real estate
loans reﬂected a reduction of $93.7 million related to a
change in the volume of commercial and commercial real
estate portfolios and mix of the risk ratings within the
portfolio. The remaining decline of $244.3 million reﬂected
improvements in loss severity rates determined from
historical migration analysis. Although the Company’s level
of commercial and commercial real estate loans in higher
risk loan categories declined approximately 11 percent, the
level of nonperforming loans continued at elevated levels
and increased by 22.6 percent in 2002. The change from
year-end 2000 to year-end 2001 reﬂected higher levels of
nonperforming loans, increased loss severity reﬂected in the
historical migration, increased sector risk in certain
industries and deterioration in credit risk ratings compared
with 2000.

The allowance recorded for the residential mortgages
and retail loan 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-off statistics
for each homogenous category or group of loans. Based on
this information and analysis, an allowance was established
approximating a rolling twelve-month estimate of net
charge-offs. The allowance established for residential
mortgages was $34.2 million at December 31, 2002,

compared with $21.9 million and $11.6 million at
December 31, 2001 and 2000, respectively. The increase in
allowance for the residential mortgage portfolio primarily
reﬂected the growth of the portfolio, a higher percentage of
ﬁrst-lien home equity loans originated by the Company’s
Consumer Finance division that tend to have slightly higher
loss ratios and the impact of the continued downturn in
economic conditions. The allowance established for retail
loans was $699.7 million at December 31, 2002, compared
with $705.3 million and $650.8 million at December 31,
2001 and 2000, respectively. The slight decrease in the
allowance for the retail portfolio in 2002 primarily reﬂected
an improvement in the credit quality and delinquency trends
of the credit card portfolio, offset by the impact of higher
unemployment and continued softness in economic
conditions. The increase in the allowance established for
retail loans in 2001 was due to an increase in net loss ratios
caused by deteriorating 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 portfolios. This is due to several

factors, including inherent delays in obtaining information

regarding a customer’s ﬁnancial condition or changes in

their unique business conditions, the judgmental nature of

individual loan evaluations, collateral assessments and the

Table 16

Elements of the Allowance for Credit Losses (a)

December 31 (Dollars in Millions)

2002

2001

2000

1999

1998

2002

2001

2000

1999

1998

Allowance Amount

Allowance as a Percent of Loans

Commercial

Commercial *******************
Lease ﬁnancing ***************

$ 776.4 $1,068.1 $ 418.8 $ 408.3 $ 343.7
21.5

107.5

107.6

17.7

20.2

2.12%
2.01

2.64%
1.84

.89%
.31

.97%
.53

.91%
.65

Total commercial ***********

884.0

1,175.6

436.5

428.5

365.2

2.11

2.54

Commercial real estate

Commercial mortgages*********
Construction and development **

Total commercial real estate**
Residential mortgages ********

Retail

Credit card********************
Retail leasing *****************
Home equity and

second mortgages**********
Other retail *******************

152.9
53.5

176.6
76.4

206.4

253.0

34.2

21.9

272.4
44.0

114.7
268.6

295.2
38.7

88.6
282.8

42.7
17.7

60.4

11.6

265.6
27.2

107.7
250.3

110.4
22.5

105.2
25.9

132.9

131.1

18.6

27.2

320.8
18.6

*
389.2

304.3
6.5

*
365.6

Total retail *****************

699.7

705.3

650.8

728.6

676.4

Total allocated allowance ****
Available for other factors ***

1,824.3
597.7

2,155.8
301.5

1,159.3
627.6

1,308.6
401.7

1,199.9
505.8

.75
.82

.77

.35

4.81
.77

.85
2.10

1.86

1.57
.51

.94
1.16

1.00

.28

5.01
.79

.72
2.39

2.02

1.89
.26

.83

.22
.25

.23

.12

4.42
.65

.90
2.16

1.93

.95
.51

.93

.59
.35

.53

.15

6.41
.88

*
1.74

2.47

1.16
.35

.89

.63
.50

.60

.18

6.27
.40

*
1.62

2.32

1.12
.47

Total allowance *******************

$2,422.0 $2,457.3 $1,786.9 $1,710.3 $1,705.7

2.08%

2.15%

1.46%

1.51%

1.59%

(a) During 2001, the Company changed its methodology for determining the speciﬁc 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 1998 and 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 to the allocated allowance for 2000 was $1,397.3 million and the allowance available for other factors
portion was $389.6 million. Refer to paragraph four in the section captioned ‘‘Analysis and Determination of Allowance for Credit Losses.’’
Information not available

42 U.S. Bancorp

interpretation of economic trends. Volatility of economic or

management increased the level of the allowance for other

customer-speciﬁc conditions affecting the identiﬁcation and

factors. At December 31, 2002, quantiﬁable factors

estimation of losses from larger non-homogeneous credits

supporting the level of the allowance for other factors

and the sensitivity of assumptions utilized to establish

included $15 million related to imprecision in risk ratings,

allowances for homogeneous groups of loans, loan portfolio

$290 million for volatility of commercial loss rates,

concentrations, and other subjective considerations are

$100 million for volatility of retail loss forecasts and

among other factors. Because of the imprecision

$30 million for uncollectible interest and fees on credit card

surrounding these factors, the Company estimates a range

receivables. The remaining allowance for other factors was

of inherent losses based on statistical analyses and

primarily related to uncertainty in the economic outlook,

management judgment, and maintains an ‘‘allowance for

concentration risk, and other qualitative factors.

other factors’’ that is not allocated to a speciﬁc loan

Although the Company determines the amount of each

category. The amount of the allowance available for other

element of the allowance separately and this process is an

factors was $597.7 million at December 31, 2002,

important credit management tool, the entire allowance for

compared with $301.5 million at December 31, 2001, and

credit losses is available for the entire loan portfolio. The

$627.6 million at December 31, 2000.

actual amount of losses incurred can vary signiﬁcantly from

Given the many subjective factors affecting the credit

the recorded amounts. The Company’s methodology

portfolio, changes in the allowance for other factors may

included several factors intended to minimize the differences

not directly coincide with changes in the risk ratings of the

in recorded and actual losses. These factors allowed the

credit portfolio reﬂected in the risk rating process. This is,

Company to adjust its estimate of losses based on the most

in part, due to a lagging effect between changes in the

recent information available. Refer to Note 1 of the Notes

business cycle, the exposure and mix of loans within risk

to Consolidated Financial Statements for accounting policies

rating categories, levels of nonperforming loans, and the

related to the allowance for credit losses.

timing of charge-offs and recoveries. In late 2000,

management identiﬁed a slowdown in the business cycle,

deteriorating portfolio trends and other adverse factors

relative to credit quality. At the beginning of a downward

business cycle, the accuracy of risk ratings, migration loss

ratios and available information of customers often does

not fully reﬂect the impact of various leading economic

indicators. In 2001, management conducted extensive

reviews of its portfolios and enhanced its commercial

migration methods to better differentiate and weight loss

severity ratios by risk rating category to reﬂect the adverse

impact of loss experienced in 2001. The $326.1 million

decrease in the allowance for other factors in 2001 reﬂected

the impact of that change in loss severity ratios, which led

the Company to increase the allowance established for

commercial loans. In 2002, the Company reduced the level

of higher risk commercial credits and net charge-off ratios

improved by 20 basis points from a year ago. As a result,

loss severity rates determined through historical migration

analysis had improved somewhat relative to 2001. This led

the Company to reduce the level of the allowance

speciﬁcally allocated to commercial loans; however,

nonperforming assets continued to remain at elevated levels,

economic growth continued to be soft and the ability to

further reduce higher risk credits had diminished as

reﬁnancing opportunities had tightened. As such, volatility

of loss rates remained higher relative to prior periods and

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, diversiﬁcation of its leased assets, regular asset

valuation reviews and monitoring of residual value gains or

losses upon the disposition of assets. Commercial lease

originations are subject to the same well-deﬁned

underwriting standards referred to in the ‘‘Credit Risk

Management’’ section which includes an evaluation of the

residual risk. Retail lease residual risk is mitigated further

by originating longer term vehicle leases and effective end-

of-term marketing of off-lease vehicles. Also, to reduce the

ﬁnancial risk of potential changes in vehicle residual values,

the Company maintains residual value insurance. The

catastrophic insurance maintained by the Company provides

for the potential recovery of losses on individual vehicle

sales in an amount equal to the difference between: a)

105 percent or 110 percent of the average wholesale

auction price for the vehicle at the time of sale; and, b) the

vehicle residual value speciﬁed by the Automotive Lease

Guide (an authoritative industry source) at the inception of

the lease. The potential recovery is calculated for each

individual vehicle sold in a particular policy year and is

reduced by any gains realized on vehicles sold during the

same period. The Company will receive claim proceeds if, in

the aggregate, there is a net loss for such period. To reduce

the risk associated with collecting insurance claims, the

U.S. Bancorp 43

Company monitors the ﬁnancial viability of the insurance

difﬁcult to assess the timing and degree of changes in

carrier based on insurance industry ratings and available

residual values that may impact ﬁnancial results over the

ﬁnancial information.

next several quarters.

Included in the retail leasing portfolio was

At December 31, 2002, the commercial leasing

approximately $3.2 billion of retail leasing residuals at

portfolio had $896 million of residuals, compared with

December 31, 2002, compared with $2.8 billion at

$985 million at December 31, 2001. At year-end 2002,

December 31, 2001. The Company monitors concentrations

lease residuals related to railcars were 16 percent of the

of leases by manufacturer and vehicle ‘‘make and model.’’

total residual portfolio. Trucks and other transportation

At year-end 2002, no vehicle-type concentration exceeded

equipment represented 31 percent of the aggregate

ﬁve percent of the aggregate portfolio. Because retail

portfolio, while aircraft and manufacturing were 13 percent

residual valuations tend to be less volatile for longer-term

and 9 percent, respectively. No other signiﬁcant

leases, relative to the estimated residual at inception of the

concentrations of more than 10 percent existed at

lease, the Company actively manages lease origination

December 31, 2002. In 2002, reduced airline travel and

production to achieve a longer-term portfolio. At

higher fuel costs adversely impacted aircraft and

December 31, 2002, the weighted-average term of the

transportation equipment lease residual values. In 2002, the

portfolio was 52 months. Since 1998, the used vehicle

Company recognized $16.0 million in equipment leasing

market has experienced a decline in used car prices. Several

residual impairments primarily related to airline and railcar

factors have contributed to this deﬂationary cycle.

equipment. While not considered signiﬁcant, continued

Aggressive leasing programs by automobile manufacturers

economic stress in certain industries may further impact

and competitors within the banking industry included a

used equipment values into next year.

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 off-lease vehicles causing signiﬁcant

declines in used vehicle prices. Automobile manufacturers

and others have retreated somewhat from these marketing

programs or exited the leasing business. However, zero

percent ﬁnancing offered with rebates continued to exert

pressure on used car pricing. Another factor impacting the

used vehicle market has been the deﬂation in new vehicle

prices. This trend has been driven by surplus automobile

manufacturing capacity and related production and highly

competitive sales programs. Economic factors are expected

to moderate new car production. Production levels have

continued to decline from record levels in 2000. Also, many

Internet marketers failed or transformed into distribution

channels of dealers rather than direct competitors. These

trends are expected to abate the deﬂationary pricing

pressures of the past few years. Another factor that has

slowed the decline in residual values is the growth of

‘‘certiﬁed’’ used car programs. Certiﬁed cars are low

mileage, newer model vehicles that have been inspected,

reconditioned, and usually have a warranty program. The

Company’s exposure to declining valuation should beneﬁt

from certiﬁed car programs that receive premium pricing

from dealers at auction. In response to factors impacting

used vehicle prices, the Company recognized a retail lease

impairment of $9.5 million in 2002 and $40.0 million in

2001. Given the current economic environment, it is

Operational Risk Management Operational risk represents

the risk of loss resulting from the Company’s operations,

including, but not limited to, the risk of fraud by employees

or persons outside the Company, the execution of

unauthorized transactions by employees, errors relating to

transaction processing and technology, and breaches of the

internal control system and compliance requirements. This

risk of loss also includes the potential legal actions that

could arise as a result of an operational deﬁciency or as a

result of noncompliance with applicable regulatory

standards, adverse business decisions or their

implementation, and customer attrition due to potential

negative publicity.

The Company operates in many different businesses in

diverse markets and relies on the ability of its employees

and systems to process a high number of transactions.

Operational risk is inherent in all business activities, and the

management of this risk is important to the achievement of

the Company’s objectives. In the event of a breakdown in

the internal control system, improper operation of systems

or improper employees’ actions, the Company could suffer

ﬁnancial loss, face regulatory action and suffer damage to

its reputation.

The Company manages operational risk through a risk

management framework and its internal control processes.

The framework involves the business lines, corporate risk

management personnel and executive management. Under

this framework, business lines have direct and primary

responsibility and accountability for identifying, controlling,

44 U.S. Bancorp

and monitoring operational risk. Clear structures and

Simulation Analysis and Market Value of Equity Modeling

processes with deﬁned responsibilities are in place. Business

for measuring and analyzing consolidated interest rate risk.

managers maintain a system of controls with the objective

of providing proper transaction authorization and

execution, proper system operations, safeguarding of assets

from misuse or theft, and ensuring the reliability of ﬁnancial

and other data. Business managers ensure that the controls

are appropriate and are implemented as designed.

Each business line within the Company has designated

risk managers. These risk managers are responsible, among

other things, for coordinating the completion of ongoing

risk assessments and ensuring that operational risk

management is integrated into business decision-making

activities. Business continuation and disaster recovery

planning is also critical to effectively manage operational

risks. Each mission critical business unit is required to

develop, maintain and test these plans at least annually to

ensure that recovery activities, if needed, can support

mission critical functions including technology, networks

and data centers supporting customer applications and

business operations. The Company’s internal audit function

validates the system of internal controls through risk-based,

regular and ongoing audit procedures and reports on the

effectiveness of internal controls to executive management

and the Audit Committee of the Board of Directors.

While the Company believes that it has designed

effective methods to minimize operational risks, there is no

absolute assurance that business disruption or operational

losses would not occur in the event of a disaster.

Net Interest Income Simulation Analysis One of the

primary tools used to measure interest rate risk and the

effect of interest rate changes on rate sensitive income and

net interest income is simulation analysis. The monthly

analysis incorporates substantially all of the Company’s

assets and liabilities and off-balance sheet instruments,

together with forecasted changes in the balance sheet and

assumptions that reﬂect the current interest rate

environment. Through these simulations, management

estimates the impact on rate sensitive income of a 300 basis

point upward or downward gradual change of market

interest rates over a one year period. The simulations also

estimate the effect of immediate and sustained parallel shifts

in the yield curve of 50 basis points as well as the effect of

immediate and sustained ﬂattening or steepening of the

yield curve. These simulations include assumptions about

how the balance sheet is likely to be affected by changes in

loan and deposit growth. Assumptions are made to project

rates for new loans and deposits based on historical

analysis, management’s outlook and repricing strategies.

These assumptions are validated on a periodic basis. A

sensitivity analysis is provided for key variables of the

simulation. The results are reviewed by ALPC monthly and

are used to guide hedging strategies. ALPC policy guidelines

limit the estimated change in rate sensitive income to

5.0 percent of forecasted rate sensitive income over the

succeeding 12 months.

Interest Rate Risk Management In the banking industry, a

The table below summarizes the interest rate risk of

signiﬁcant risk exists related to changes in interest rates. To

net interest income and rate sensitive income. The interest

minimize the volatility of net interest income and of the

rate risk position of the Company was more liability

market value of assets and liabilities, the Company manages

sensitive at December 31, 2002, than at December 31,

its exposure to changes in interest rates through asset and

2001. The change in the rate risk position is primarily due

liability management activities within guidelines established

to higher levels of ﬁxed rate investment portfolio securities

by its Asset Liability Policy Committee (‘‘ALPC’’) and

despite the gradual portfolio mix shift toward ﬂoating

approved by the Board of Directors. ALPC has the

rate securities. The rate risk position of these assets is

responsibility for approving and ensuring compliance with

partially offset by higher levels of demand deposits. At

asset/liability management policies, including interest rate

December 31, 2002 and 2001, the Company was well

risk exposure. The Company uses Net Interest Income

within its policy guidelines.

Sensitivity of Net Interest Income and Rate Sensitive Income:

2002

2001

Down 50
Immediate

Up 50
Immediate

Down 300
Gradual

Up 300
Gradual

Down 50
Immediate

Up 50
Immediate

Down 300
Gradual

Up 300
Gradual

Net Interest Income **************
Rate Sensitive Income ***********

.08%
.20%

(.34)%
(.55)%

* %
* %

(1.91)%
(2.57)%

(.10)%
.24%

(.15)%
(.38)%

* %
* %

.10%
(.46)%

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

U.S. Bancorp 45

Market Value of Equity Modeling The Company also utilizes

the market value of equity as a measurement tool in

managing interest rate sensitivity. The market value of

equity measures the degree to which the market values of

the Company’s assets and liabilities and off-balance sheet

instruments will change given a change in interest rates.

ALPC guidelines limit the change in market value of equity

in a 200 basis point parallel rate shock to 15 percent of

the base case. Given the low level of current rates, the

down 200 basis point scenario cannot be computed. The up

200 basis point scenario was a 2.5 percent decrease at

December 31, 2002, compared with a 6.6 percent decrease

at December 31, 2001. ALPC reviews other down rate

scenarios to evaluate the impact of falling rates. The

down 100 basis point scenario was a 1.0 percent decrease

at December 31, 2002, and a 1.8 percent increase at

December 31, 2001. The overall sensitivity was

relatively neutral.

The valuation analysis is dependent upon certain key

assumptions about the nature of indeterminate maturity of

assets and liabilities. Management estimates the average life

and rate characteristics of asset and liability accounts based

upon historical analysis and management’s expectation of

rate behavior. These assumptions are validated on a

periodic basis. A sensitivity analysis is provided to key

variables of the valuation analysis. The results are reviewed

by ALPC monthly and are used to guide hedging strategies.

The results of the valuation analysis as of December 31,

2002, were well within policy guidelines.

Use of Derivatives to Manage Interest Rate Risk In the
ordinary course of business, the Company enters into
derivative transactions to manage interest rate and
prepayment risk and to accommodate the business
requirements of its customers. To manage its interest rate
risk, the Company may enter into interest rate swap
agreements and interest rate options such as caps and
ﬂoors. Interest rate swaps involve the exchange of ﬁxed-rate

and variable-rate payments without the exchange of the
underlying notional amount on which the interest payments
are calculated. Interest rate caps protect against rising
interest rates while interest rate ﬂoors protect against
declining interest rates. In connection with its mortgage
banking operations, the Company enters into forward
commitments to sell mortgage loans related to ﬁxed-rate
mortgage loans held for sale and ﬁxed-rate mortgage
loan commitments.

The Company actively trades foreign exchange

contracts to meet customer business needs and acts as an

intermediary for interest rate swaps and options on behalf

of customers. The Company minimizes its market and

liquidity risks by taking substantively similar offsetting

positions. The Company does not utilize derivative

instruments for speculative purposes.

Derivative instruments are also subject to credit risk

associated with counterparties to the derivative contracts.

Credit risk associated with derivatives is measured based on

the replacement cost should the counterparties with

contracts in a gain position to the Company fail to perform

under the terms of the contract. The Company manages this

risk through diversiﬁcation of its derivative positions among

various counterparties, requiring collateral to support

certain credit exposures, entering into master netting

agreements in certain cases, and having a portion of its

derivatives in 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 and security

deposit requirements, the credit risk is substantially reduced.

Refer to Notes 1 and 21 of the Notes to Consolidated

Financial Statements for signiﬁcant accounting policies

and additional information regarding the Company’s use

of derivatives.

Table 17 summarizes information on derivative

positions as of December 31, 2002.

46 U.S. Bancorp

Table 17

Derivative Positions

Asset and Liability Management Positions

December 31, 2002
(Dollars in Millions)

Interest rate contracts

Receive ﬁxed/pay ﬂoating swaps

Notional amount*********************
Weighted-average

Receive rate *********************
Pay rate*************************

Pay ﬁxed/receive ﬂoating swaps

Notional amount*********************
Weighted-average

Receive rate *********************
Pay rate*************************
Futures and forwards *******************
Options

Maturing

2003

2004

2005

2006

2007

Thereafter

Total

Weighted-
Average
Remaining
Maturity
in Years

Fair
Value

$ 606

$ 473

$1,761

$5,320

$5,670

$5,900

$19,730

$1,555

6.67

6.02%
1.51

6.86%
1.48

5.50%
1.57

3.54%
1.42

4.59%
1.44

6.51%
1.88

5.06%
1.58

$2,200

$2,050

$ 365

$ — $ —

$ 150

$ 4,765

$ (117)

1.64

1.42%
2.74
$6,850

1.42%
3.81

—
—
$ — $ — $ — $ —

1.77%
4.28

—
—

1.31%
4.47

1.45%
3.34
$ — $ 6,850

$ (80)

.13

Written *****************************
Equity contracts ************************

2,940

—

$ — $ — $

—

2,985

$ — $ —

$ — $

$ —

.13

2.92

Customer-related Positions

December 31, 2002
(Dollars in Millions)

Interest rate contracts

Receive ﬁxed/pay ﬂoating swaps

Notional amount*********************

Pay ﬁxed/receive ﬂoating swaps

Notional amount*********************
Basis swaps ***************************
Options

Purchased**************************
Written *****************************

Foreign exchange rate contracts

Swaps and forwards

Buy ********************************
Sell ********************************

$3,292
3,292

Options

Purchased**************************
Written *****************************

199
199

Maturing

2003

2004

2005

2006

2007

Thereafter

Total

Weighted-
Average
Remaining
Maturity
in Years

Fair
Value

$ 715

$ 564

$ 652

$ 630

$ 502

$ 978

$ 4,041

$ 223

4.00

700
—

266
261

564
1

35
35

14
14

—
—

652
—

10
10

630
—

15
15

502
—

63
63

978
—

4,026
1

(201)
—

9
9

398
393

4
(4)

$ — $ — $ —
—

—

$ — $ 3,306
3,306

—

$ 213
(212)

—
—

199
199

8
(8)

3.98
1.67

1.67
1.75

.50
.50

.57
.57

Market Risk Management In addition to interest rate risk,
the Company is exposed to other forms of market risk as a
consequence of conducting normal trading activities.
Business activities that contribute to market risk include,
among other things, market making, underwriting,
proprietary trading and foreign exchange positions. Value at
Risk (‘‘VaR’’) is a key measure of market risk for the
Company. Theoretically, VaR represents the maximum
amount that the Company has placed at risk of loss, with a
ninety-ninth percentile degree of conﬁdence, to adverse
market movements in the course of its risk taking activities.
VaR modeling of trading activities is subject to certain
limitations. Additionally, it should be recognized that there
are assumptions and estimates associated with VaR

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

The Company establishes market risk limits, subject

to approval by the Company’s Board of Directors. The
Company’s VaR limit was $40 million at December 31,
2002 and 2001. The market valuation risk inherent in its
customer-based derivative trading, mortgage banking
pipeline, broker-dealer activities (including equities,

U.S. Bancorp 47

Table 18

Debt Ratings

At December 31, 2002

U.S. Bancorp

Moody’s

Standard &
Poors

Short-term borrowings ***************************************************************
Senior debt and medium-term notes **************************************************
Subordinated debt*******************************************************************
Preferred stock *********************************************************************
Commercial paper*******************************************************************

Aa3
A1
A2
P–1

U.S. Bank National Association

Short-term time deposits *************************************************************
Long-term time deposits *************************************************************
Bank notes *************************************************************************
Subordinated debt*******************************************************************

P–1
Aa2
Aa2/P–1
Aa3

A
A–
BBB+
A–1

A–1
A+
A+/A–1
A

Fitch

F1
A+
A
A
F1

F1+
AA–
A+/F1+
A

ﬁxed-income, and high-yield securities) and foreign
exchange, as estimated by the VaR analysis, was
$8.8 million at December 31, 2002, and $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-effective manner. The
most important factor in the preservation of liquidity is
maintaining public conﬁdence that facilitates the retention
and growth of a large, stable supply of core deposits and
wholesale funds. Ultimately, public conﬁdence is generated
through proﬁtable operations, sound credit quality and a
strong capital position. The Company’s performance in
these areas has enabled it to develop a large and reliable
base of core funding within its market areas and in
domestic and global capital markets. Liquidity management
is viewed from 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
proﬁles, funding sources, and loan and deposit forecasts to
minimize funding risk.

The Company maintains strategic liquidity and

contingency plans that are subject to the availability of asset
liquidity in the balance sheet. Monthly, ALPC reviews the
Company’s ability to meet funding requirements due to
adverse business events. These funding needs are then
matched with speciﬁc asset-based sources to ensure
sufﬁcient funds are available. Also, strategic liquidity
policies require diversiﬁcation of wholesale funding sources
to avoid concentrations in any one market source.
Subsidiary banks are members of various Federal Home
Loan Banks that provide a source of funding through FHLB
advances. The Company maintains a Grand Cayman branch
for issuing eurodollar time deposits. The Company also
establishes relationships with dealers to issue national
market retail and institutional savings certiﬁcates and short-

48 U.S. Bancorp

and medium-term bank notes. Also, the Company’s
subsidiary banks have signiﬁcant 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
certiﬁcates of deposit.

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 the quality of
the balance sheet.

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.

At December 31, 2002, parent company long-term debt
outstanding was $5.7 billion, compared with $6.1 billion at
December 31, 2001. The decrease in long-term debt in 2002
was driven by the issuance of $2.1 billion of ﬁxed- and
variable-rate medium-term notes, which was partially offset
by medium-term note maturities of $1.2 billion and the
repurchase on August 6, 2002, of $1.1 billion accreted
value of the Company’s convertible senior notes. Total
parent company debt scheduled to mature in 2003 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 parent company cash and cash
equivalents. Federal banking laws regulate the amount of
dividends that may be paid by banking subsidiaries without
prior approval. The amount of dividends available to the
parent company from its banking subsidiaries was
approximately $614 million at December 31, 2002. For
further information, see Note 24 of the Notes to
Consolidated Financial Statements.

Refer to Table 19 for further information on

contractual obligations.

Off-Balance Sheet Arrangements Asset securitization and
conduits represent a source of funding the Company’s
growth through off-balance sheet structures. The Company
sponsors two off-balance sheet conduits to which it
transfers high-grade assets: a commercial loan conduit and
an investment securities conduit. These conduits are funded
by issuing commercial paper. The commercial loan conduit
holds primarily high credit quality commercial loans and
held assets of $4.2 billion at December 31, 2002, and
$6.9 billion in assets at December 31, 2001. The investment
securities conduit holds high-grade investment securities and
held assets of $9.5 billion at December 31, 2002, and
$9.8 billion in assets at December 31, 2001. These
investment securities include primarily (i) private label asset-
backed securities, which are insurance ‘‘wrapped’’ by AAA/
Aaa-rated mono-line insurance companies and
(ii) government agency mortgage-backed securities and
collateralized mortgage obligations. The commercial loan
conduit had commercial paper liabilities of $4.2 billion at
December 31, 2002, and $6.9 billion at December 31,
2001. The investment securities conduit had commercial
paper liabilities of $9.5 billion at December 31, 2002, and
$9.8 billion at December 31, 2001. The Company beneﬁts
by transferring commercial loans and investment securities
into conduits that provide diversiﬁcation of funding sources
in a capital-efﬁcient manner and generate income.

Table 19

Contractual Obligations

liabilities are recorded in the income statement as other
income or expense. In addition, the Company recorded at
fair value its retained residual interest in both the
commercial loan and investment securities conduits of
$28.6 million and of $93.4 million, respectively, at
December 31, 2002. The Company recorded revenue of
$132.2 million from the conduits in 2002 and
$132.7 million in 2001, including fees for servicing,
management, administration and accretion income from
retained interests.

At December 31, 2002, the Company had two asset-
backed securitizations to fund indirect automobile loans and
an unsecured small business credit product. The indirect
automobile securitization held $156.1 million in assets at
December 31, 2002, compared with $431.5 million at
December 31, 2001. The Company recognized income from
an interest-only strip and servicing fees from this
securitization of $2.8 million during 2002 and $6.1 million
during 2001. The indirect automobile securitization held
average assets of $276.9 million in 2002 and $655.3 million
in 2001. In January 2003, the Company exercised a cleanup
call option on the indirect automobile loan securitization.
The remaining assets from the securitization were recorded
on the Company’s balance sheet at fair value.

The unsecured small business credit securitization held

$652.4 million in assets at December 31, 2002, of which
the Company retained $150.1 million of subordinated
securities, transferor’s interests of $16.3 million and a
residual interest-only strip of $53.3 million. This compared
with $750.0 million in assets at December 31, 2001, of
which the Company retained $175.3 million of
subordinated securities, transferor’s interests of
$18.8 million and a residual interest-only strip of
$57.3 million. The qualifying special purpose entity issued
asset-backed variable funding notes in various tranches. The
Company provides credit enhancement in the form of
subordinated securities and reserve accounts. The
Company’s risk, primarily from losses in the underlying
assets, was considered in determining the fair value of the
Company’s retained interests in this securitization. The
Company recognized income from subordinated securities,

(Dollars in Millions)

Contractual Obligations

Deposits ***************************************
Short-term debt *********************************
Long-term debt *********************************
Trust preferred securities *************************
Capital leases **********************************
Operating leases ********************************

One Year
or Less

$106,866
7,806
7,937
—
9
358

Over One
Through
Three Years

Over Three
Through
Five Years

$ 5,658
—
13,231
—
15
349

$2,979
—
1,779
—
13
421

Over Five
Years

31
—
5,641
2,994
45
503

U.S. Bancorp 49

an interest-only strip and servicing fees from this
securitization of $52.8 million in 2002 and $5.2 million in
2001. The unsecured small business credit securitization
held average assets of $700.6 million in 2002 and
$123.0 million in 2001.

The corporate and purchasing card securitization
matured in February 2002. At maturity, $420.0 million of
receivables were transferred from the trust to the Company
and recorded at fair value at that time. The Company
recognized servicing income of $.5 million in 2002 and
$4.2 million in 2001 from this securitization.

During 2002, the Company securitized $144.4 million
of highly rated ﬁxed rate municipal bonds. Each municipal
bond is sold into a separate trust that is funded by variable
rate certiﬁcates that reprice weekly. The Company retains a
residual interest in each structure that is accounted for as a
trading asset and is recorded at fair value. The purpose of
the arrangements is to meet our customer demands for
variable rate tax-free investments. Income and cash ﬂows
from these structures were not signiﬁcant in 2002.

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 ﬁnancing structures commonly referred to
as ‘‘synthetic leases.’’ At December 31, 2002, synthetic lease
structures held real estate assets of $434.5 million and
equipment assets of $45.5 million, compared with
$372.7 million and $41.6 million, respectively, at
December 31, 2001. The Company provides guarantees to
the lender in the event of default by the leveraged ﬁnancing
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 maximum end-of-term guarantee, if
the fair value of the assets is less than the purchase price,
was $403.0 million at December 31, 2002, and
$346.3 million at December 31, 2001. The Company
performs an evaluation for possible declines in fair value of
these assets on an annual basis and is not aware of any
material declines in value of these assets.

Credit, liquidity, operational and legal structural risks

exist due to the nature and complexity of asset
securitizations and other off-balance sheet structures. ALPC
regularly monitors the performance of each off-balance
sheet structure in an effort to minimize these risks and
ensure compliance with the requirements of the structures.
The Company utilizes its credit risk management systems to
evaluate the credit quality of underlying assets and regularly
forecasts cash ﬂows to evaluate any potential impairment of
retained interests. Also, regulatory guidelines require
consideration of asset securitizations in the determination of
risk-based capital ratios. The Company does not rely

signiﬁcantly on off-balance sheet arrangements for liquidity
or capital resources.

In January 2003, the Financial Accounting Standards

Board issued Interpretation No. 46 (‘‘FIN 46’’),
‘‘Consolidation of Variable Interest Entities’’ (‘‘VIEs’’), an
interpretation of Accounting Research Bulletin No. 51,
‘‘Consolidated Financial Statements,’’ to improve ﬁnancial
reporting of special purpose and other entities. The
Company is in the process of determining whether its off-
balance sheet structures are subject to the provisions of
FIN 46. Because the loan and investment conduits and the
asset-backed securitizations are qualiﬁed special purpose
entities (‘‘QSPEs’’), which are exempted from consolidation,
the Company does not believe the QSPE structures will
require consolidation in its ﬁnancial statements. The
Company believes it is reasonably possible that synthetic
leases will be consolidated under the provisions of FIN 46.
At this time, the Company does not believe that the
adoption of FIN 46 will have a material adverse impact on
the Company’s ﬁnancial statements.

CAPITAL MANAGEMENT

The Company is committed to managing capital for
shareholder beneﬁt while providing sound protection to its
depositors and to its creditors. The Company continually
assesses its business risks and capital position. The
Company also manages its capital to exceed regulatory
capital requirements for well-capitalized bank holding
companies. To achieve these capital goals, the Company
employs a variety of capital management tools including
dividends, common share repurchases, and the issuance of
subordinated debt and other capital instruments. Total
shareholders’ equity was $18.1 billion at December 31,
2002, compared with $16.5 billion at December 31, 2001.
The increase was primarily the result of corporate earnings,
including merger and restructuring-related items, offset by
dividends, share buybacks, the effect of a change in
accounting principles and acquisitions.

On March 12, 2002, the Company increased its
dividend rate per common share by 4.0 percent, from
$.1875 per quarter to $.1950 per quarter. On February 27,
2001, the Company increased its dividend rate per common
share by 15.4 percent, from $.1625 per quarter to
$.1875 per quarter. Excluding merger and restructuring-
related charges, the dividend payout ratio for 2002
decreased to 42.5 percent, compared with a payout ratio of
57.0 percent in 2001.

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

50 U.S. Bancorp

this authorization. On December 18, 2001, the Board of
Directors approved an authorization to repurchase an
additional 100 million shares of common stock through
2003. During the ﬁrst quarter of 2002, the Company
repurchased 40.0 million shares of common stock in both
public and private transactions related to these
authorizations, completing the July 17, 2001 authorization.
In 2002, the Company purchased 5.2 million shares of
common stock under the December 2001 plan. There are
approximately 91.5 million shares remaining to be
purchased under this authorization. For a complete analysis
of activities impacting shareholders’ equity and capital
management programs, refer to Note 16 of the Notes to
Consolidated Financial Statements.

Banking regulators deﬁne minimum capital
requirements for banks and ﬁnancial services holding
companies. These requirements are expressed in the form of
a minimum tier 1 capital ratio, total risk-based capital ratio,
and tier 1 leverage ratio. The minimum required level for
these ratios is 4.0 percent, 8.0 percent, and 4.0 percent,
respectively. The Company targets its regulatory capital
levels, at both the bank and bank holding company level, to
exceed the ‘‘well capitalized’’ threshold for these ratios of
6.0 percent, 10.0 percent, and 5.0 percent, respectively. As
of December 31, 2002, the Company’s tier 1 capital, total
risk-based capital, and tier 1 leverage ratio were
7.8 percent, 12.2 percent, and 7.5 percent, respectively.
These ratios compare to 7.7 percent, 11.7 percent, and
7.7 percent, respectively, as of December 31, 2001. The

Table 20

Regulatory Capital Ratios

At December 31 (Dollars in Millions)

increase in the total risk-based capital ratio was primarily
related to the issuance of $1.0 billion of subordinated debt
in 2002. All regulatory ratios, at both the bank and bank
holding company level, continue to be in excess of stated
‘‘well capitalized’’ requirements. Table 20 provides a
summary of tier 1 and total risk-based capital ratios as
of December 31, 2002, and 2001, as deﬁned by the
regulatory agencies.

The Company uses tangible common equity expressed

as a percent of tangible common assets as an additional
measure of its capital. At December 31, 2002, the
Company’s tangible common equity ratio was 5.6 percent,
compared with 5.7 percent at year-end 2001.

FOURTH QUARTER SUMMARY

In the fourth quarter of 2002, the Company had net income
of $849.8 million ($.44 per diluted share), compared with
$695.4 million ($.36 per diluted share) in the fourth quarter
of 2001. The Company reported operating earnings (net
income excluding merger and restructuring-related items)
of $920.1 million ($.48 per diluted share) in the fourth
quarter of 2002, compared with operating earnings of
$785.2 million ($.40 per diluted share) in the fourth quarter
of 2001. The Company’s results for the fourth quarter of
2002 improved over the same period of 2001, primarily due
to strong growth in consumer banking and payment services
revenue, offset somewhat by lower investment banking
activity. The fourth quarter of 2002 results included
$152.7 million of signiﬁcant income items, which were

U.S. Bancorp
Tangible common equity *********************************************************************************
As a percent of tangible assets ***********************************************************************
Tier 1 capital *******************************************************************************************
As a percent of risk-weighted assets*******************************************************************
As a percent of adjusted quarterly average assets (leverage ratio) ****************************************
Total risk-based capital **********************************************************************************
As a percent of risk-weighted assets*******************************************************************

Bank Subsidiaries (a)

U.S. Bank National Association

Tier 1 capital*************************************************************************************
Total risk-based capital****************************************************************************
Leverage ****************************************************************************************

U.S. Bank National Association ND

Bank Regulatory Capital Requirements

Tier 1 capital ****************************************************************************************
Total risk-based capital *******************************************************************************
Leverage *******************************************************************************************

(a) These balances and ratios were prepared in accordance with regulatory accounting principles as disclosed in the subsidiaries’ regulatory reports.

2002

2001

$ 9,489

$ 9,374

5.6%

5.7%

$12,606

$12,488

7.8%
7.5%

7.7%
7.7%

$19,753

$19,148

12.2%

11.7%

6.7%

10.8
6.7

13.4%
18.9
12.1

7.5%

11.8
7.7

18.1%
23.1
17.9

Minimum

Well-
Capitalized

4%
8
4

10
5

U.S. Bancorp 51

Table 21

Fourth Quarter Summary

Financial Results and Ratios on an Operating Basis (a)

(Dollars in Millions)

Condensed Income Statement
Net interest income (taxable-equivalent basis) *************************************************************
Noninterest income *************************************************************************************
Securities gains, net ************************************************************************************

Total net revenue ***********************************************************************************
Noninterest expense************************************************************************************
Provision for credit losses *******************************************************************************

Income before taxes and merger and restructuring-related items *****************************************
Taxable-equivalent adjustment ***************************************************************************
Income taxes ******************************************************************************************

Operating earnings *************************************************************************************
Merger and restructuring-related items (after-tax) **********************************************************

Three Months Ended
December 31,

2002

2001

$1,775.0
1,439.9
106.2

3,321.1
1,551.2
349.0

1,420.9
9.2
491.6

920.1
(70.3)

$1,674.2
1,312.2
22.0

3,008.4
1,503.9
265.8

1,238.7
9.9
443.6

785.2
(89.8)

Net income in accordance with GAAP *****************************************************************

$ 849.8

$ 695.4

Financial Ratios
Return on average assets *******************************************************************************
Return on average equity *******************************************************************************
Efﬁciency ratio *****************************************************************************************
Banking efﬁciency ratio (b) ******************************************************************************

2.05%
20.4
48.3
44.1

1.85%
18.6
50.4
46.6

(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 and cumulative effect of change in accounting principles 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 and cumulative effect of change in accounting principles. 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) Without investment banking and brokerage activity.

offset by $161.0 million of noteworthy expense items
and asset write-downs. Notable favorable items in the
fourth quarter included gains on the sale of securities of
$106.2 million, an increase of $84.2 million over the
fourth quarter of 2001, and a $46.5 million gain on the
sale of a co-branded credit card portfolio. Offsetting these
favorable items were the recognition of $54.1 million of
MSR impairment, an increase of $26.8 million over the
fourth quarter of 2001, a $50.0 million litigation charge,
including investment banking regulatory matters at Piper,
incremental personnel costs of $31.4 million for
rationalizing the Company’s post-integration technology,
operations, and support functions, and a $25.5 million
leasing residual impairment.

Fourth quarter net interest income, on a taxable-
equivalent basis, was $1,775.0 million, compared with
$1,674.2 million in the fourth quarter of 2001. Average
earning assets for the fourth quarter of 2002 increased over
the fourth quarter of 2001 by $6.9 million (4.7 percent),
primarily driven by increases in the investment portfolio,
loans held for sale and retail loan growth, partially offset by
a decline in commercial and commercial real estate loans.
The net interest margin in the fourth quarter of 2002 was
4.63 percent, compared with 4.57 percent in the fourth
quarter of 2001. The improvement in the net interest margin

52 U.S. Bancorp

in the fourth quarter of 2002 over the fourth quarter of
2001 reflected higher net free funds, the funding benefits of
the declining interest rate environment, a more favorable
funding mix and improving spreads due to product repricing
dynamics, and a shift in mix toward retail loans, partially
offset by lower yields on the investment portfolio.

The provision for credit losses for the fourth quarter of
2002 was $349.0 million, an increase of $83.2 million over
the fourth quarter of 2001. This higher level of provision
for credit losses reﬂected an increase in nonperforming
assets and net charge-offs year-over-year reﬂecting
continued weakness in certain industry sectors and the
impact of the weak economy on highly leveraged enterprise
value ﬁnancings.

Fourth quarter 2002 noninterest income was

$1,546.1 million, an increase of $211.9 million
(15.9 percent) over the same quarter of 2001. The growth
in noninterest income over the fourth quarter of 2001 was
driven by net securities gains, growth in core banking
product revenues of $60.8 million (4.6 percent), a
$46.5 million gain on the sale of a co-branded credit card
portfolio, a reduction in equity investment losses of
$29.0 million relative to the fourth quarter of 2001, and
acquisitions, including Leader and the Bay View branches,
which contributed approximately $18.3 million of the

favorable variance. Credit and debit card revenue, corporate
payment products revenue and ATM processing services
revenue in the Payment Services line of business were higher
in the fourth quarter of 2002, primarily reﬂecting growth in
sales and card usage. Merchant processing services increased
year-over-year, primarily due to higher charge volume,
offset by slightly lower processing rates. Deposit service
charges increased primarily due to fee enhancements and
new accounts within the Consumer Banking line of
business. Cash management fees revenue grew primarily due
to growth in core business, product enhancements and
lower earning credit rates to customers. Mortgage banking
revenue was higher due to the acquisition of Leader in
April 2002. Mortgage originations and sales and loan
servicing revenue continued to be strong through the fourth
quarter of 2002. Offsetting these favorable variances was a
decline in capital markets-related revenue reﬂecting softness
in the equity capital markets. Other fee income was higher
in the fourth quarter of 2002 primarily due to gains on the
sale of a co-branded credit card portfolio and a reduction in
the level of equity investment losses relative to 2001.

Fourth quarter of 2002 noninterest expense, before

merger and restructuring-related charges, totaled
$1,551.2 million, an increase of $47.3 million (3.1 percent)
over the fourth quarter of 2001. The increase in expense
year-over-year was primarily due to a $50.0 million
litigation charge for investment banking regulatory matters
at Piper, an increase in MSR impairment, the impact of
recent acquisitions, including Leader and the branches of
Bay View, and a charge for the realignment of the
Company’s businesses post-integration. Offsetting these
increases in expense were the impact of adopting new
accounting standards related to business combinations and
the amortization of intangibles, lower capital markets-
related expense and lower core banking expenses, primarily
the result of integration cost savings.

LINE OF BUSINESS FINANCIAL REVIEW

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

Basis for Financial Presentation Business line results are
derived from the Company’s business unit proﬁtability
reporting systems by speciﬁcally attributing managed
balance sheet assets, deposits and other liabilities and their
related income or expense. Funds transfer-pricing
methodologies are utilized to allocate a cost of funds used

or credit for funds provided to all business line assets and
liabilities using a matched funding concept. Also, the
business unit is allocated the taxable-equivalent beneﬁt of
tax-exempt products. Noninterest income and expenses
directly managed by each business line, including fees,
service charges, salaries and beneﬁts, and other direct costs
are accounted for within each segment’s ﬁnancial results in
a manner similar to the consolidated ﬁnancial statements.
Occupancy costs are allocated based on utilization of
facilities by the lines of business. Noninterest expenses
incurred by centrally managed operations or business lines
that directly support another business line’s operations are
not charged to the applicable business line. Goodwill and
other intangible assets are assigned to the lines of business
based on the mix of business of the acquired entity. To
enhance analysis of core business line results, the
amortization of goodwill for all prior periods is reported
within Treasury and Corporate Support. The provision for
credit losses for each business unit is based on its net charge-
offs adjusted for changes in the allowance for credit losses,
reflecting improvement or deterioration in the risk profile of
the business lines’ loan portfolios. The difference 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. Income taxes are assessed
to each line of business at a standard tax rate with the
residual tax expense or benefit to arrive at the consolidated
effective tax rate included in Treasury and Corporate
Support. Merger and restructuring-related charges and
cumulative effects of changes in accounting principles are not
identified by or allocated to lines of business. Within the
Company, capital levels are evaluated and managed centrally;
however, capital is allocated to the operating segments to
support evaluation of business performance. Capital
allocations to the business lines are based on the amount of
goodwill and other intangibles, the extent of off-balance
sheet managed assets and lending commitments and the ratio
of on-balance sheet assets relative to the total Company.
Certain lines of business, such as trust, asset management
and capital markets, have no significant balance sheet
components. For these business units, capital is allocated
taking into consideration fiduciary and operational risk,
capital levels of independent organizations operating similar
businesses, and regulatory requirements.

Designations, assignments and allocations may change

from time to time as management systems are enhanced,
methods of evaluating performance or product lines change
or business segments are realigned to better respond to our
diverse customer base. During 2002, certain organization
and methodology changes were made and, accordingly,

U.S. Bancorp 53

2001 results were restated and presented on a
comparable basis.

The Company’s basis of ﬁnancial presentation differed

signiﬁcantly in 2000 due to organizational changes in
connection with the Firstar/USBM merger. Therefore, the
presentation of comparative business line results for 2000 is
not practical at this time.

Wholesale Banking offers lending, depository, treasury
management and other ﬁnancial services to middle market,
large corporate and public sector clients. Wholesale Banking
contributed $1,372.7 million of the Company’s net
operating earnings in 2002 and $708.4 million in 2001. The
signiﬁcant increase in operating earnings in 2002, compared
with 2001 was primarily driven by a lower provision for
credit losses.

Total net revenue decreased 1.2 percent in 2002,
compared with 2001. Net interest income, on a taxable-
equivalent basis, decreased 6.7 percent, compared with
2001, as average loans declined $6.8 billion in 2002,
compared with 2001. The impact of declining average loans
on net interest income was offset somewhat by improving
spreads and a decrease in the funding cost related to non-
earning assets. The decrease in net interest income also
reﬂected the adverse impact of declining interest rates on
the funding beneﬁts of customer deposits, partially offset by
growth in average deposits of 23.6 percent in 2002,
compared with 2001. Additionally, a decline in required
capital for Wholesale Banking, driven by lower commercial
loan balances and unfunded commitments, reduced the
related earnings credit in 2002, compared with 2001. The
decline in commercial loans was due in part to weak

Table 22

Line of Business Financial Performance

Year Ended December 31 (Dollars in Millions)

Wholesale
Banking

Consumer
Banking

2002

Percent
2001 Change

2002

Percent
2001 Change

Condensed Income Statement
Net interest income (taxable-equivalent basis) ************************************ $1,999.0 $2,141.8
Noninterest income************************************************************
629.4

739.5

(6.7)% $3,295.7 $3,259.7
1,248.4
1,477.4
17.5

1.1%

18.3

Total net revenue **********************************************************
Noninterest expense***********************************************************
Other intangible amortization ***************************************************
Goodwill amortization**********************************************************

2,738.5
395.9
20.7
—

2,771.2
394.5
24.7
—

(1.2)
.4
(16.2)
—

4,773.1
1,695.1
339.0
—

4,508.1
1,698.7
166.2
—

Total noninterest expense ***************************************************

416.6

419.2

(.6)

2,034.1

1,864.9

Operating income *******************************************************
Provision for credit losses ******************************************************

Income before income taxes****************************************************
Income taxes and taxable-equivalent adjustment **********************************

2,321.9
163.9

2,158.0
785.3

2,352.0
1,238.4

1,113.6
405.2

(1.3)
(86.8)

93.8
93.8

2,739.0
428.6

2,310.4
840.7

2,643.2
550.9

2,092.3
761.5

5.9
(.2)
*
—

9.1

3.6
(22.2)

10.4
10.4

Operating earnings, before merger and restructuring-related items and cumulative effect of

change in accounting principles *********************************************** $ 1,372.7 $ 708.4

93.8

$ 1,469.7 $ 1,330.8

10.4

Merger and restructuring-related items (after-tax)************************************

Cumulative effect of change in accounting principles (after-tax) ************************

Net income

Average Balance Sheet Data
Commercial ******************************************************************* $ 31,699 $ 37,586
Commercial real estate *********************************************************
16,959
Residential mortgages **********************************************************
157
Retail ************************************************************************
221

16,113
167
136

Total loans*****************************************************************
Goodwill **********************************************************************
Other intangible assets *********************************************************
Assets ***********************************************************************
Noninterest-bearing deposits*****************************************************
Savings products **************************************************************
Time deposits *****************************************************************

48,115
1,331
127
54,580
13,008
5,563
2,591

54,923
1,384
157
62,024
10,613
4,125
2,386

Total deposits **************************************************************

17,124
Shareholders’ equity************************************************************ $ 5,376 $ 6,117

21,162

(15.7)% $ 7,099 $ 8,278
8,283
8,789
8,229
8,001
23,924
26,928

(5.0)
6.4
(38.5)

(14.2)%
6.1
(2.8)
12.6

(12.4)
(3.8)
(19.1)
(12.0)
22.6
34.9
8.6

23.6
(12.1)

50,817
1,787
945
59,287
12,933
35,790
22,609

48,714
1,724
678
56,906
12,062
34,466
26,864

71,332

73,392
$ 4,858 $ 4,848

4.3
3.7
39.4
4.2
7.2
3.8
(15.8)

(2.8)
.2

* Not meaningful

54 U.S. Bancorp

customer loan demand resulting from the current economic
environment, in addition to the Company’s decisions in
2001 to tighten credit availability to certain types of
lending, industries and customers, and reductions due to
asset workout strategies. Also contributing to the decline
were the transfers of high credit quality commercial loans to
the loan conduit reducing average commercial loans by
$721 million in 2002. Noninterest income increased
17.5 percent in 2002 to $739.5 million in 2002, reﬂecting
core growth in cash management-related fees driven by
lower earnings credit rates and new account growth, an
increase in fee income related to the loan conduit and
growth in commercial leasing income and international
fee income.

Noninterest expense was $416.6 million in 2002,
compared with $419.2 million in 2001. The $2.6 million

decrease was primarily due to the decline in personnel costs
resulting from integration cost savings, in addition to lower
intangible amortization costs, partially offset by increases in
equipment ﬁnancing related write-downs and loan workout
expenses.

During 2002 and 2001, the provision for credit losses

was $163.9 million and $1,238.4 million, respectively.
Included in 2001 was a signiﬁcant charge taken after
extensive reviews of the Company’s commercial loan
portfolio in light of the world events that occurred in the
third quarter of 2001, declining economic conditions, and
company-speciﬁc trends. This action reﬂected management’s
expectations at the time of a prolonged economic slowdown
and recovery. In addition, net charge-offs were relatively
higher in 2001 due to speciﬁc actions taken by management
in response to changes in economic conditions. The

Private Client, Trust
and Asset Management

Payment
Services

Capital
Markets

Treasury and
Corporate Support

Consolidated
Company

2002

Percent
2001 Change

2002

Percent
2001 Change

2002

Percent
2001 Change

2002

Percent
2001 Change

2002

Percent
2001 Change

$ 319.5 $ 317.0
878.2

875.9

.8% $ 703.0 $ 619.5
1,676.5 1,268.4
(.3)

13.5% $ 27.5 $ 23.0
709.8 807.4
32.2

19.6%
(12.1)

$ 531.6 $
389.5

62.0
507.1

*% $ 6,876.3 $ 6,423.0
5,338.9

5,868.6

(23.2)

7.1%
9.9

1,195.4 1,195.2
446.7
30.6
—

443.3
31.1
—

474.4

477.3

721.0
18.4

702.6
255.8

717.9
25.4

692.5
252.1

—
(.8)
1.6
—

(.6)

2,379.5 1,887.9
523.7
55.7
—

637.8
161.0
—

26.0
21.8
*
—

737.3 830.4
735.6 768.5
—
—

—
—

(11.2)
(4.3)
—
—

921.1

569.1
1,471.8 1,297.2
1.2
1.2
— 251.1

61.9
13.5
—
*

12,744.9 11,761.9
5,129.3
278.4
251.1

5,379.5
553.0
—

8.4
4.9
98.6
*

798.8

579.4

37.9

735.6 768.5

(4.3)

1,473.0 1,549.5

(4.9)

5,932.5

5,658.8

4.8

.4
(27.6)

1,580.7 1,308.5
488.9

444.4

1.5
1.5

1,136.3
413.5

819.6
298.2

20.8
(9.1)

38.6
38.7

1.7
(.1)

1.8
.7

61.9
—

61.9
22.5

(97.3)
*

(97.1)
(96.9)

(551.9)
293.8

(980.4)
(157.0)

43.7
*

(845.7)
(370.3)

(823.4)
(333.8)

(2.7)
(10.9)

6,812.4
1,349.0

5,463.4
1,925.7

6,103.1
2,146.6

11.6
(37.2)

3,956.5
1,405.7

38.1
37.0

$ 446.8 $ 440.4

1.5

$ 722.8 $ 521.4

38.6

$ 1.1 $ 39.4

(97.2)

$ (475.4) $ (489.6)

2.9

3,537.7

2,550.8

38.7

(211.3)

(844.3)

(37.2)

—

$ 3,289.2 $ 1,706.5

$ 1,829 $ 1,774
577
182
1,882

585
234
2,082

3.1% $ 2,803 $ 2,584
—
1.4
—
28.6
7,381
10.6

—
—
7,303

8.5% $ 228 $ 178
—
—
—
—
—
(1.1)

—
—
—

28.1%
—
—
—

162 $
236
10
52

(328)
262
8
40

*% $ 43,820 $ 50,072
26,081
8,576
33,448

25,723
8,412
36,501

(9.9)
25.0
30.0

4,730
290
227
5,800
2,322
4,306
473

4,415
289
253
5,787
2,143
4,418
545

7.1
.3
(10.3)
.2
8.4
(2.5)
(13.2)

10,106
1,814
769
13,396
229
7
—

9,965
972
433
11,851
168
6
—

7,101

7,106
$ 1,342 $ 1,403

(.1)
(4.3)

236

174
$ 3,224 $ 2,010

1.4
86.6
77.6
13.0
36.3
16.7
—

35.6
60.4

228
306
—

178
316
—
3,042 3,019
173
—
—

216
—
—

216

173
$ 642 $ 636

28.1
(3.2)
—
.8
24.9
—
—

24.9
.9

460
—
12
35,843
7
130
4,940

(18)
—
—
26,357
(50)
450
6,587

5,077

6,987
$ 1,521 $ 1,187

*
—
*
36.0
*
(71.1)
(25.0)

(27.3)
28.1

114,456
5,528
2,080
171,948
28,715
45,796
30,613

118,177
4,685
1,521
165,944
25,109
43,465
36,382

(12.5)%
(1.4)
(1.9)
9.1

(3.1)
18.0
36.8
3.6
14.4
5.4
(15.9)

105,124

104,956
$ 16,963 $ 16,201

.2
4.7

U.S. Bancorp 55

improvement in provision for credit losses reﬂected a
reduction in net charge-offs, the impact of reductions in
total loan commitments and an improvement in the
projected loss ratios for commercial loan risk rating
categories that has occurred. These trends were attributable
to the improvement in credit quality driven by the
Company’s asset workout strategies, reductions in
commitments to certain industries and customers and lower
net charge-offs. Despite an improvement in risk ratings,
nonperforming assets within the Wholesale Banking
business line continues to be at elevated levels reﬂecting
stress in several industry sectors increasing to $1.0 billion at
December 31, 2002, from $738.7 million a year ago. Refer
to the ‘‘Corporate Risk Proﬁle’’ section for further
information on factors impacting the credit quality of the
loan portfolios.

Consumer Banking delivers products and services to the
broad consumer market and small businesses through banking
offices, telemarketing, on-line services, direct mail and
automated teller machines (‘‘ATMs’’). It encompasses
community banking, metropolitan banking, small business
banking, consumer lending, mortgage banking, workplace
banking, student banking, 24-hour banking and investment
product and insurance sales. Consumer Banking contributed
$1,469.7 million of the Company’s net operating earnings in
2002 and $1,330.8 million in 2001, a 10.4 percent increase.

Total net revenue increased 5.9 percent from 2001. Fee-

based revenue grew by 18.3 percent in 2002 while net
interest income increased 1.1 percent in 2002. The increase
in net interest income in 2002 was due to average loan
growth, improved spreads on retail loans and residential
real estate loans, slightly lower non-earning asset balances
and growth in noninterest-bearing deposit balances and the
related funding beneﬁt. Partially offsetting the increase in
net interest income was the impact of declining interest
rates on the funding beneﬁt of consumer deposits. The
increase in average loan balances of 4.3 percent reﬂected
core retail loan growth of 12.6 percent in 2002 offset by a
decline of 4.1 percent in commercial and commercial real
estate loans. The change in average deposits included core
growth in noninterest-bearing, interest checking and savings
account balances, offset by a reduction in balances
associated with time deposits. The decline in lower margin
time deposits primarily reﬂected a shift in product mix
towards savings products. Fee-based revenue growth in
2002 was driven by increases in deposit service charge
revenue, mortgage banking production and servicing
revenue, investment product revenue, securities gains and
lower end-of-term lease residual losses partially offset by
lower trust and investment management fees. The growth in
mortgage banking servicing and production revenue was
partially attributable to the acquisition of Leader in the

second quarter of 2002, which contributed $48.3 million in
2002, compared with 2001. The additional growth in
mortgage banking servicing and production revenue, net
interest income from higher average loans held for sale and
the increase in securities gains offset the increased MSR
impairments recognized in 2002.

Noninterest expense was $2,034.1 million in 2002,

compared with $1,864.9 million in 2001. The increase in
noninterest expense in 2002 was attributable to the Leader
acquisition of $34.5 million and recognition of higher
MSR impairments in 2002 of $186.0 million, compared
with $60.8 million in 2001, partially offset by expense
control initiatives.

The provision for credit losses decreased $122.3 million

(22.2 percent) in 2002, compared with 2001. The decrease
in the provision primarily reﬂected improvement in the
Community Banking commercial loan portfolio, including
lower net charge-offs, reductions in loan commitments and
improvement in loss ratios on risk rated loan commitments.
The change in the provision also reﬂected an improvement
in retail loss ratios due to enhancements in collection efforts
and lower delinquency levels.

Private Client, Trust and Asset Management provides
mutual fund processing services, trust, private banking and
financial advisory services through four businesses, including:
the Private Client Group, Corporate Trust, Institutional Trust
and Custody, and Fund Services, LLC. The business segment
also offers investment management services to several client
segments, including mutual funds, institutional customers,
and private asset management. Private Client, Trust and
Asset Management contributed $446.8 million of the
Company’s net operating earnings in 2002, an increase of
1.5 percent, compared with 2001.

Total net revenue was $1,195.4 million in 2002,
essentially ﬂat, compared with 2001. Net interest income
increased .8 percent, compared with 2001. The increase in
net interest income in 2002 is due to core growth of
10.6 percent in retail loans, and lower non-earning asset
balances and related funding costs partially offset by the
impact of declining rates on the funding beneﬁt of deposits.
Noninterest income decreased .3 percent, compared with
2001. Core account growth was approximately 2.3 percent
in 2002 contributing $20.3 million. This growth was offset
by a decrease in the value of assets under management
driven by adverse capital market conditions relative to
2001. Noninterest expense decreased $2.9 million
(.6 percent), compared with 2001 primarily attributable to a
reduction in personnel costs.

The provision for credit losses decreased $7.0 million

(27.6 percent) in 2002, compared with the same period of a
year ago. Net charges-offs were $1.4 million higher in
2002, compared with 2001. The improvement in the

56 U.S. Bancorp

provision for credit losses reﬂected lower projected loss
ratios during 2002 based on recent experience as compared
with 2001, as well as a reduction in commercial loan
commitments in 2002 offset by the increase in net
charge-offs.

Payment Services includes consumer and business credit
cards, corporate and purchasing card services, consumer lines
of credit, ATM processing, merchant processing and debit
cards. Payment Services contributed $722.8 million of the
Company’s net operating earnings in 2002, a 38.6 percent
increase over 2001. The business unit’s financial results were,
in part, driven by the impact of the NOVA acquisition
completed during the third quarter of 2001.

Total net revenue was $2,379.5 million in 2002,

representing a 26.0 percent increase over 2001. Net interest
income increased 13.5 percent, while fee-based income
increased 32.2 percent over 2001. Excluding the impact of
NOVA, total net revenue increased approximately
12.7 percent in 2002, compared with 2001 primarily due to
growth in noninterest income of 16.2 percent. Net interest
income, excluding NOVA, was up 7.3 percent in 2002,
primarily due to an increase in average loans and lower
funding costs on the noninterest-bearing corporate card
loan portfolio. Noninterest income, excluding NOVA, was
up 16.2 percent in 2002, primarily due to increases in credit
and debit card revenue, corporate payment product revenue,
ATM servicing revenues and the sales of two co-branded
credit card portfolios.

Total revenue growth was partially offset by an

increase in noninterest expense of $219.4 million
(37.9 percent), primarily due to the NOVA acquisition.
Excluding the impact of the NOVA acquisition, noninterest
expense for the segment was $8.1 million (2.1 percent)
lower in 2002, compared with 2001, primarily due to
personnel and other operating expense cost saves resulting
from integration activities. The provision for credit losses
decreased $44.5 million (9.1 percent), compared with 2001.
The decrease in provision was primarily a reﬂection of the
improvement in projected loss rates due to enhancements in
collection efforts partially offset by an increase in net
charge-offs of $24.7 million in 2002, compared with 2001.

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 $1.1 million of the
Company’s net operating earnings in 2002, a 97.2 percent
decline, compared with 2001. The unfavorable variance in
net operating income from 2001 was due to a decline in
fees related to trading, investment product fees and

commissions, investment banking fees and mark-to-market
valuation adjustments reﬂecting the recent adverse capital
markets conditions. Capital markets activities continued to
experience weak sales volumes and lower levels of
investment banking and merger and acquisition
transactions. Management anticipates continued softness in
sales activities and related revenue growth throughout the
next several quarters. Also contributing to the unfavorable
variances was a litigation charge, including a $25.0 million
settlement for investment banking regulatory matters at
Piper and a $7.5 million liability for funding independent
analyst research for its customers. Given continued adverse
market conditions, the Capital Markets line of business
continued to realign its business activities in 2002 to
improve its operating model and rationalize the distribution
network.

Treasury and Corporate Support includes the Company’s
investment portfolios, funding, capital management and
asset securitization activities, interest rate risk management,
the net effect of transfer pricing related to average balances,
and the change in residual allocations associated with the
provision for loan losses. It also includes business activities
managed on a corporate basis, including enterprise-wide
operations and administrative support functions. Treasury
and Corporate Support recorded net operating losses of
$475.4 million in 2002, a 2.9 percent improvement,
compared with 2001.

During 2002, total net revenue was $921.1 million,
compared with $569.1 million in 2001. The $352.0 million
increase was primarily attributable to an increase in net
interest income of $469.6 million. The increase in net
interest income was primarily due to an increase in average
investments of $6.9 billion from a year ago and the beneﬁt
of changes in the mix of funding during the declining rate
environment. Noninterest income decreased $117.6 million
in 2002 primarily due to a decline in securities gains of
$97.6 million and a reduction in the level of equity
investment losses relative to 2001.

Noninterest expense was $1,473.0 million in 2002,
compared with $1,549.5 million in 2001, a decrease of
4.9 percent. Adjusting for the adoption of SFAS 142 in
2002, noninterest expense excluding goodwill amortization
increased by $174.6 million (13.4 percent) in 2002,
compared with 2001. The increase was primarily the result
of higher costs associated with corporate performance based
compensation due to the improved Company performance
in 2002, compared with 2001, in addition to personnel and
related costs for post integration rationalization of
technology, operations and support functions.

The provision for credit losses for this business unit

represents the residual aggregate of the credit losses
allocated to the reportable business units and the

U.S. Bancorp 57

Company’s recorded provision determined in accordance
with generally accepted accounting principles in the United
States. The provision for credit losses reﬂected within the
other business units is based on its net charge-offs adjusting
for changes in the allowance for credit losses necessary to
reﬂect improvement or deterioration in the risk proﬁle of its
speciﬁc loan portfolios. Historical loss factors are applied to
commercial loan commitments stratiﬁed by risk rating plus
the required amounts for homogeneous loan portfolios
based on twelve month projected losses in computing the
quarter end business unit allowance. The change in the
managerial allowance for credit losses for the business units
is reﬂected within the applicable business unit’s provision
for credit losses. The provision for credit losses was a loss
of $293.8 million in 2002, compared with a net recovery of
$157.0 million in 2001. The increase in the provision for
credit losses in 2002 over 2001 reﬂected the continued
elevated levels of net charge-offs and nonperforming assets
on a consolidated level, despite the improving mix of risk
ratings in the other reportable business units. Improvements
in the level of credit risk and mix of risk classiﬁcations
within the portfolios of the other business units were driven
by reductions in higher risk loan commitments due to the
Company’s workout strategies. Refer to the ‘‘Corporate
Risk Proﬁle’’ section 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

Note 2 of the Notes to Consolidated Financial Statements
discusses new accounting policies adopted by the Company
during 2002 and the expected impact of accounting policies
recently issued or proposed but not yet required to be
adopted. To the extent the adoption of new accounting
standards affects the Company’s ﬁnancial condition,
results of operations or liquidity, the impacts are
discussed in the applicable section(s) of the Management’s
Discussion and Analysis and the Notes to Consolidated
Financial Statements.

CRITICAL ACCOUNTING POLICIES

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

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

Signiﬁcant accounting policies are discussed in Note 1
of the Notes to Consolidated Financial Statements. Those
policies considered to be critical accounting policies are
described below.

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

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

58 U.S. Bancorp

Given the many subjective factors affecting the credit
portfolio, changes in the allowance for other factors may
not directly coincide with changes in the risk ratings of the
credit portfolio reﬂected in the risk rating process. This is,
in part, due to the timing of the risk rating process in
relation to changes in the business cycle, the exposure and
mix of loans within risk rating categories, levels of
nonperforming loans, and the timing of charge-offs and
recoveries. For example, the amount of loans within speciﬁc
risk ratings may change, providing a leading indicator of
improving credit quality, while nonperforming loans and
net charge-offs continue at elevated levels. Because the
allowance speciﬁcally allocated to commercial loans is
primarily driven by risk ratings and loss ratios determined
through migration analysis and historical performance, the
amount of the allowance for commercial and commercial
real estate loans might decline. However, it is likely that
management would maintain an adequate allowance for
credit losses by increasing the allowance for other factors at
a stage in the business cycle that is uncertain and when
nonperforming asset levels remain elevated. Management
believes these conditions existed at December 31, 2002.

Sensitivity analysis to the many factors impacting the

allowance for credit losses is difﬁcult. Some factors are
quantiﬁable while other factors require qualitative
judgment. Management conducts analysis with respect to
the accuracy of risk ratings and the volatility of inherent
loss rates applied to risk categories and utilizes the results
of this analysis to determine retail loss projections. This
analysis is then considered in determining the level of the
allowance for credit losses. Refer to the ‘‘Analysis and
Determination of the Allowance for Credit Losses’’ section
for further information.

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

Mortgage Servicing Rights Mortgage servicing rights
(‘‘MSRs’’) are capitalized as separate assets when loans are

sold and servicing is retained. The total cost of loans sold is
allocated between the loans sold and the servicing assets
retained based on their relative fair values. MSRs that are
purchased from others are initially recorded at cost. The
carrying value of the MSRs is amortized in proportion to
and over the period of, estimated net servicing revenue and
recorded in noninterest expense as amortization of
intangible assets. The carrying value of these assets is
periodically reviewed for impairment using a lower of
carrying value or fair value methodology. For purposes of
measuring impairment, the servicing rights are stratiﬁed
based on the underlying loan type and note rate and the
carrying value for each stratum is compared to fair value
based on a discounted cash ﬂow analysis, utilizing current
prepayment speeds and discount rates. Events that may
signiﬁcantly affect the estimates used are changes in interest
rates and the related impact on mortgage loan prepayment
speeds and the payment performance of the underlying
loans. If the carrying value is less than fair value,
impairment is recognized through a valuation allowance for
each impaired stratum and recorded as amortization of
intangible assets. The changes in the fair value of MSRs at
December 31, 2002, to immediate 25 and 50 basis point
adverse changes in interest rates would be approximately
$81 million and $145 million, respectively. An upward
movement in interest rates at December 31, 2002, of 25
and 50 basis points would increase the value of the MSRs
by approximately $88 million and $169 million,
respectively. Refer to Note 11 of the Notes to Consolidated
Financial Statements for additional information regarding
MSRs.

Goodwill and Other Intangibles The Company records all
assets and liabilities acquired in purchase acquisitions,
including goodwill and other intangibles, at fair value as
required by SFAS 141. Goodwill and indeﬁnite-lived assets
are no longer amortized but are subject, at a minimum, to
annual tests for impairment. Other intangible assets are
amortized over their estimated useful lives using
straight-line and accelerated methods, and are subject to
impairment if events or circumstances indicate a possible
inability to realize the carrying amount. The initial goodwill
and other intangibles recorded and subsequent impairment
analysis requires management to make subjective judgments
concerning estimates of how the acquired asset will perform
in the future using a discounted cash ﬂow analysis.
Additionally, estimated cash ﬂows may extend beyond ten
years and, by their nature, are difﬁcult to determine over an
extended timeframe. Events and factors that may
signiﬁcantly affect the estimates include, among others,
competitive forces, customer behaviors and attrition,
changes in revenue growth trends, cost structures and
technology, and changes in discount rates and speciﬁc

U.S. Bancorp 59

industry or market sector conditions. In determining the
reasonableness of cash ﬂow estimates, the Company reviews
historical performance of the underlying asset or similar
assets in an effort to improve assumptions utilized in its
estimates. In assessing the fair value of reportable operating
segments, the Company may consider other information to
validate the reasonableness of its valuations including public
market comparables, multiples of recent mergers and
acquisitions of similar businesses and third-party
assessments. Refer to Note 12 of the Notes to Consolidated
Financial Statements for additional information regarding
intangible assets.

CONTROLS AND PROCEDURES

Under the supervision and with the participation of the
Company’s management, including its principal executive
ofﬁcer and principal ﬁnancial ofﬁcer, the Company has
evaluated the effectiveness of the design and operation of its
disclosure controls and procedures (as deﬁned in Rule 15d-
14(c) under the Securities Exchange Act of 1934) as of a
date within 90 days prior to the ﬁling date of this report.
Based upon this evaluation, the principal executive ofﬁcer
and principal ﬁnancial ofﬁcer have concluded that, as of
such date, the Company’s disclosure controls and
procedures were effective in making them aware on a timely
basis of the material information relating to the Company
required to be included in the Company’s periodic ﬁlings
with the Securities and Exchange Commission.

There were no signiﬁcant changes made in the

Company’s internal controls during the period covered by
this report or, to the Company’s knowledge, in other
factors that could signiﬁcantly affect these controls
subsequent to the date of their evaluation.

60 U.S. Bancorp

Responsibility for Financial
Statements of U.S. Bancorp

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 ﬂows present fairly, in all
material respects, the ﬁnancial position of U.S. Bancorp and
its subsidiaries at December 31, 2002 and 2001, and the
results of their operations and their cash ﬂows for each of
the three years in the period ended December 31, 2002, in
conformity with accounting principles generally accepted in
the United States of America. These ﬁnancial statements are
the responsibility of the Company’s management; our
responsibility is to express an opinion on these ﬁnancial
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 ﬁnancial statements
are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts
and disclosures in the ﬁnancial statements, assessing the
accounting principles used and signiﬁcant estimates made by
management, and evaluating the overall ﬁnancial statement
presentation. We believe that our audits provide a
reasonable basis for our opinion.

As discussed in Note 12 of the Notes to Consolidated
Financial Statements, in 2002 the Company adopted the
provisions of Statement of Financial Accounting Standards
No. 142, ‘‘Goodwill and Other Intangible Assets.’’

Minneapolis, Minnesota
January 21, 2003, except for Note 3, as to which the date is
February 19, 2003

Responsibility for the ﬁnancial 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 ﬁnancial 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 ﬁnancial information throughout the Annual
Report on Form 10-K is consistent with that in the
ﬁnancial 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 ofﬁcers 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 ﬁnancial
reporting matters.

The Company’s independent accountants,
PricewaterhouseCoopers LLP, have been engaged to render
an independent professional opinion on the financial
statements and to assist in carrying out certain aspects of the
audit program described above. Their opinion on the
financial 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 financial statements, of the
Company’s financial position, operating results and
cash flows.

Jerry A. Grundhofer
Chairman, President and
Chief Executive Ofﬁcer

David M. Moffett
Vice Chairman and
Chief Financial Ofﬁcer

U.S. Bancorp 61

U.S. Bancorp
Consolidated Balance Sheet

At December 31 (Dollars in Millions)

Assets
Cash and due from banks ******************************************************************************
Money market investments******************************************************************************
Trading securities **************************************************************************************
Investment securities

Held-to maturity (fair value $240 and $306, respectively) ************************************************
Available-for-sale ***********************************************************************************
Loans held for sale ************************************************************************************
Loans

Commercial****************************************************************************************
Commercial real estate******************************************************************************
Residential mortgages ******************************************************************************
Retail *********************************************************************************************

Total loans *************************************************************************************
Less allowance for credit losses ***************************************************************

Net loans ***********************************************************************************
Premises and equipment *******************************************************************************
Customers’ liability on acceptances **********************************************************************
Goodwill **********************************************************************************************
Other intangible assets *********************************************************************************
Other assets ******************************************************************************************

2002

2001

$ 10,758
434
898

$ 9,120
625
982

233
28,255
4,159

41,944
26,867
9,746
37,694

116,251
2,422

113,829
1,697
140
6,325
2,321
10,978

299
26,309
2,820

46,330
25,373
7,829
34,873

114,405
2,457

111,948
1,741
178
5,459
1,953
9,956

Total assets ************************************************************************************

$180,027

$171,390

Liabilities and Shareholders’ Equity
Deposits

Noninterest-bearing *********************************************************************************
Interest-bearing ************************************************************************************
Time deposits greater than $100,000 *****************************************************************

Total deposits ***********************************************************************************
Short-term borrowings**********************************************************************************
Long-term debt ****************************************************************************************
Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior

subordinated debentures of the parent company *******************************************************
Acceptances outstanding *******************************************************************************
Other liabilities ****************************************************************************************

$ 35,106
68,214
12,214

115,534
7,806
28,588

2,994
140
6,864

$ 31,212
65,447
8,560

105,219
14,670
25,716

2,826
178
6,320

Total liabilities ***********************************************************************************

161,926

154,929

Shareholders’ equity

Common stock, par value $0.01 a share — authorized: 4,000,000,000 shares

issued: 2002 — 1,972,643,060 shares; 2001 — 1,972,777,763 shares *********************************
Capital surplus *************************************************************************************
Retained earnings **********************************************************************************
Less cost of common stock in treasury: 2002 — 55,686,500 shares; 2001 — 21,068,251 shares ************
Other comprehensive income ************************************************************************

Total shareholders’ equity ************************************************************************

20
4,850
13,719
(1,272)
784

18,101

20
4,906
11,918
(478)
95

16,461

Total liabilities and shareholders’ equity ************************************************************

$180,027

$171,390

See Notes to Consolidated Financial Statements.

62 U.S. Bancorp

U.S. Bancorp
Consolidated Statement of Income

Year Ended December 31 (Dollars and Shares in Millions, Except Per Share Data)

2002

2001

2000

Interest Income
Loans*********************************************************************************
Loans held for sale *********************************************************************
Investment securities

Taxable ****************************************************************************
Non-taxable ************************************************************************
Money market investments **************************************************************
Trading securities **********************************************************************
Other interest income *******************************************************************
Total interest income *************************************************************

Interest Expense
Deposits ******************************************************************************
Short-term borrowings ******************************************************************
Long-term debt ************************************************************************
Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding

solely the junior subordinated debentures of the parent company **************************
Total interest expense ************************************************************
Net interest income*********************************************************************
Provision for credit losses ***************************************************************
Net interest income after provision for credit losses ****************************************
Noninterest Income
Credit and debit card revenue ***********************************************************
Corporate payment products revenue *****************************************************
ATM processing services****************************************************************
Merchant processing services ***********************************************************
Trust and investment management fees***************************************************
Deposit service charges ****************************************************************
Cash management fees*****************************************************************
Commercial products revenue ***********************************************************
Mortgage banking revenue **************************************************************
Trading account proﬁts and commissions *************************************************
Investment products fees and commissions ***********************************************
Investment banking revenue *************************************************************
Securities gains, net ********************************************************************
Merger and restructuring-related gains****************************************************
Other *********************************************************************************
Total noninterest income **********************************************************

Noninterest Expense
Salaries *******************************************************************************
Employee beneﬁts**********************************************************************
Net occupancy *************************************************************************
Furniture and equipment ****************************************************************
Communication ************************************************************************
Postage *******************************************************************************
Goodwill ******************************************************************************
Other intangible assets *****************************************************************
Merger and restructuring-related charges *************************************************
Other *********************************************************************************
Total noninterest expense *********************************************************
Income before income taxes and cumulative effect of change in accounting principles**********
Applicable income taxes ****************************************************************
Income before cumulative effect of change in accounting principles **************************
Cumulative effect of change in accounting principles ***************************************
Net income ****************************************************************************

Earnings Per Share

Diluted Earnings Per Share

Income before cumulative effect of change in accounting principles ***********************
Cumulative effect of change in accounting principles ************************************
Net income*************************************************************************
Average common shares ****************************************************************
Average diluted common shares *********************************************************

See Notes to Consolidated Financial Statements.

$7,743.6
170.6

$ 9,413.7
146.9

$10,519.3
102.1

1,438.2
46.1
10.6
37.1
107.5

9,553.7

1,485.3
249.4
842.7

136.6

2,714.0

6,839.7
1,349.0

5,490.7

517.0
325.7
136.9
567.3
899.1
714.0
416.9
479.2
330.2
206.5
428.9
207.4
299.9
—
339.6

1,206.1
89.5
26.6
57.5
101.6

1,008.3
140.6
53.9
53.7
151.4

11,041.9

12,029.3

2,828.1
534.1
1,184.8

127.8

4,674.8

6,367.1
2,528.8

3,838.3

465.9
297.7
130.6
308.9
894.4
667.3
347.3
437.4
234.0
221.6
460.1
258.2
329.1
62.2
286.4

3,618.8
781.7
1,511.7

110.7

6,022.9

6,006.4
828.0

5,178.4

431.0
299.2
141.9
120.0
926.2
555.6
292.4
350.0
189.9
258.4
466.6
360.3
8.1
—
526.8

5,868.6

5,401.1

4,926.4

2,409.2
367.7
409.3
306.0
183.8
178.4
—
553.0
324.1
1,525.1

6,256.6

5,102.7
1,776.3

3,326.4
(37.2)

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

1,706.5
—

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

2,875.6
—

$3,289.2

$ 1,706.5

$ 2,875.6

1.74
(.02)

1.72

1.73
(.02)

1.71

.89
—

.89

.88
—

.88

1.51
—

1.51

1.50
—

1.50

1,916.0
1,926.1

1,927.9
1,939.5

1,906.0
1,918.5

U.S. Bancorp 63

U.S. Bancorp
Consolidated Statement of Shareholders’ Equity

(Dollars in Millions)

Balance December 31, 1999 ************
Net income ********************************
Unrealized gain on securities available for sale ***
Foreign currency translation adjustment *******
Reclassiﬁcation adjustment for gains realized in
net income *******************************
Income taxes *******************************
Total comprehensive income ***********
Cash dividends declared on common stock ****
Issuance of common stock and treasury shares **
Purchase of treasury stock*******************
Shares reserved to meet deferred

compensation obligations ******************
Amortization of restricted stock ***************

Common
Shares
Outstanding

Common
Stock

Capital
Surplus

Retained
Earnings

Other
Treasury Comprehensive
Income

Stock

Total
Shareholders’
Equity

1,928,509,178

$19.4

$4,258.6

$10,049.4
2,875.6

$ (224.3)

$ (156.6)

436.0
(.5)

(41.6)
(141.8)

32,652,574
(58,633,923)

(444,395)

(1,267.0)

534.9
(1,182.2)

(8.5)

(35.0)

8.5
43.5

$13,946.5
2,875.6
436.0
(.5)

(41.6)
(141.8)

3,127.7
(1,267.0)
499.9
(1,182.2)

—
43.5

Balance December 31, 2000 ************

1,902,083,434

$19.4

$4,275.6

$11,658.0

$ (880.1)

95.5

$15,168.4

Net income ********************************
Unrealized gain on securities available for sale ***
Unrealized gain on derivatives****************
Foreign currency translation adjustment *******
Realized gain on derivatives *****************
Reclassiﬁcation adjustment for gains realized in
net income *******************************
Income taxes *******************************
Total comprehensive income ***********
Cash dividends declared on common stock ****
Issuance of common stock and treasury shares **
Purchase of treasury stock*******************
Retirement of treasury stock *****************
Shares reserved to meet deferred

compensation obligations ******************
Amortization of restricted stock ***************

1,706.5

(1,446.5)

69,502,689
(19,743,672)

(132,939)

1,383.7

(.4)

(823.2)

3.0
67.1

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)
—

—
67.1

Balance December 31, 2001 ************

1,951,709,512

$19.7

$4,906.2

$11,918.0

$ (478.1)

95.4

$16,461.2

compensation obligations ******************
Amortization of restricted stock ***************

3,289.2

10,589,034
(45,256,736)

(85,250)

(1,488.6)

249.3
(1,040.4)

(2.9)

(75.3)

2.9
16.6

1,048.0
323.5
6.9
63.4

(331.6)
(421.6)

3,289.2
1,048.0
323.5
6.9
63.4

(331.6)
(421.6)

3,977.8
(1,488.6)
174.0
(1,040.4)

—
16.6

Balance December 31, 2002 ************

1,916,956,560

$19.7

$4,850.4

$13,718.6

$(1,272.1)

$ 784.0

$18,100.6

See Notes to Consolidated Financial Statements.

64 U.S. Bancorp

U.S. Bancorp
Consolidated Statement of Cash Flows

Year Ended December 31 (Dollars in Millions)

2002

2001

2000

Operating Activities
Net income **************************************************************************
Adjustments to reconcile net income to net cash provided by operating activities

Provision for credit losses **********************************************************
Depreciation and amortization of premises and equipment *****************************
Amortization of goodwill and other intangibles ****************************************
Provision for deferred income taxes *************************************************
Net (increase) decrease in trading securities *****************************************
(Gain) loss on sales of securities and other assets, net********************************
Mortgage loans originated for sale in the secondary market ****************************
Proceeds from sales of mortgage loans**********************************************
Other, net ************************************************************************

$ 3,289.2

$ 1,706.5

$ 2,875.6

1,349.0
285.3
553.0
357.9
81.8
(411.1)
(22,567.9)
20,756.6
92.5

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
279.7

Net cash provided by (used in) operating activities *********************************

3,786.3

2,181.9

4,724.1

Investing Activities
Proceeds from sales of investment securities ********************************************
Maturities of investment securities ******************************************************
Purchases of investment securities *****************************************************
Net (increase) decrease in loans outstanding ********************************************
Proceeds from sales of loans **********************************************************
Purchases of loans *******************************************************************
Proceeds from sales of premises and equipment*****************************************
Purchases of premises and equipment**************************************************
Acquisitions, net of cash acquired ******************************************************
Divestitures of branches***************************************************************
Other, net ***************************************************************************

14,386.9
11,246.5
(26,469.8)
(4,111.3)
2,219.1
(240.2)
211.8
(429.8)
1,368.8
—
(126.1)

19,240.2
4,572.2
(32,278.6)
2,532.3
3,729.1
(87.5)
166.3
(299.2)
(741.4)
(340.0)
(143.9)

10,194.0
2,127.7
(12,161.3)
(13,541.3)
6,655.8
(658.1)
212.9
(382.8)
904.4
(78.2)
(570.6)

Net cash provided by (used in) investing activities *********************************

(1,944.1)

(3,650.5)

(7,297.5)

Financing Activities
Net increase (decrease) in deposits ****************************************************
Net increase (decrease) in short-term borrowings ****************************************
Principal payments on long-term debt***************************************************
Proceeds from issuance of long-term debt **********************************************
Proceeds from issuance of Company-obligated mandatorily redeemable preferred securities of
subsidiary trusts holding solely the junior subordinated debentures of the parent company**
Proceeds from issuance of common stock***********************************************
Repurchase of common stock**********************************************************
Cash dividends paid ******************************************************************

Net cash provided by (used in) ﬁnancing activities *********************************

Change in cash and cash equivalents ********************************************
Cash and cash equivalents at beginning of year *****************************************

7,002.3
(7,307.0)
(8,367.5)
10,650.9

—
147.0
(1,040.4)
(1,480.7)

(395.4)

1,446.8
9,745.3

(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

—
210.0
(1,182.2)
(1,271.3)

2,447.5

(125.9)
9,257.5

Cash and cash equivalents at end of year ****************************************

$ 11,192.1

$ 9,745.3

$ 9,131.6

See Notes to Consolidated Financial Statements.

U.S. Bancorp 65

Notes to Consolidated Financial Statements

Note 1

Signiﬁcant Accounting Policies

U.S. Bancorp and its subsidiaries (the ‘‘Company’’)
comprise 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 ﬁnancial services
holding company headquartered in Minneapolis, Minnesota.
The Company provides a full range of ﬁnancial services
including lending and depository services through banking
ofﬁces 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 ﬁnancial
statements include the accounts of the Company and its
subsidiaries. The consolidation eliminates all signiﬁcant
intercompany accounts and transactions. Certain items in
prior periods have been reclassiﬁed to conform to the
current presentation.

Uses of Estimates The preparation of ﬁnancial statements
in conformity with generally accepted accounting principles
requires management to make estimates and assumptions
that affect the amounts reported in the ﬁnancial statements
and accompanying notes. Actual experience could differ
from those estimates.

BUSINESS SEGMENTS

Within the Company, ﬁnancial 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 offers lending, depository, treasury
management and other ﬁnancial services to middle market,
large corporate, ﬁnancial institution and public
sector clients.

Consumer Banking delivers products and services to the
broad consumer market and small businesses through
banking ofﬁces, telemarketing, on-line services, direct mail
and automated teller machines (‘‘ATMs’’).

Private Client, Trust and Asset Management provides
mutual fund processing services, trust, private banking,
ﬁnancial advisory and investment management services
to afﬂuent individuals, businesses, institutions and
mutual funds.

Payment Services specializes in credit and debit card
products, corporate and purchasing card services and ATM
and merchant processing. Customized products and services,
coupled with cutting-edge technology are provided to
consumer and business customers, government clients,
correspondent ﬁnancial institutions, merchants and
co-brand partners.

Capital Markets provides ﬁnancial advisory services and
securities, mutual funds, annuities and insurance products
to consumers and businesses, and engages in equity and
ﬁxed income trading activities and investment banking
and underwriting services for corporate and public
sector customers.

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 effect 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 ﬁnancial statements with respect to activities
speciﬁcally attributable to each business line. However, the
preparation of business line results requires management to
establish methodologies to allocate funding costs and
beneﬁts, expenses and other ﬁnancial elements to each line
of business. For details of these methodologies and segment
results, see ‘‘Basis for Financial Presentation’’ and Table 22
‘‘Line of Business Financial Performance’’ included in
Management’s Discussion and Analysis which is
incorporated by reference into these Notes to Consolidated
Financial Statements.

66 U.S. Bancorp

SECURITIES

Trading Securities Debt and equity securities held for resale
are classiﬁed as trading 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 securities but may be sold before maturity in
response to changes in the Company’s interest rate risk
proﬁle 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 speciﬁc 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.

EQUITY INVESTMENTS IN OPERATING ENTITIES

Equity investments in public entities in which ownership is
less than 20 percent are accounted for as available-for-sale
securities and carried at fair value. Similar investments in
private entities are accounted for using the cost method.
Investments in entities where ownership interest is between
20 percent and 50 percent are accounted for using the equity
method with the exception of limited partnerships and
limited liability companies where an ownership interest of
greater than 5 percent requires the use of the equity method.
If the Company has a voting interest greater than 50 percent,
the consolidation method is used. All equity investments are
evaluated for impairment at least annually and more
frequently if certain criteria are met.

LOANS

Loans are reported net of unearned income. Interest income
is accrued on the unpaid principal balances as earned. Loan
and commitment fees and certain direct loan origination
costs are deferred and recognized over the life of the loan
and/or commitment period as yield adjustments.

Commitments to Extend Credit Unfunded residential
mortgage loan commitments entered into in connection with
mortgage banking activities are considered derivatives and
recorded on the balance sheet at fair value with changes in
fair value recorded in income. All other unfunded loan
commitments are generally related to providing credit
facilities to customers of the bank and are not actively traded
financial instruments. These unfunded commitments are
disclosed as off-balance sheet financial instruments in
Note 23 in the Notes to Consolidated Financial Statements.

Allowance for Credit Losses Management determines the
adequacy of the allowance 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 signiﬁcant change. The allowance for
credit losses relating to impaired loans is based on the
loans’ observable market price, the collateral for certain
collateral-dependent loans, or the discounted cash ﬂows
using the loan’s effective 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,
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-offs.

The Company also assesses the credit risk associated

with off-balance sheet loan commitments and letters of
credit and determines the appropriate amount of credit loss
liability that should be recorded. The liability for off-
balance sheet credit exposure related to loan commitments
is included in the allowance for credit losses.

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 off by 180 days past due and closed-end consumer
loans other than loans secured by 1-4 family properties are
charged off 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.

Restructured Loans In cases where a borrower experiences
ﬁnancial difﬁculties and the Company makes certain
concessionary modiﬁcations to contractual terms, the loan is
classiﬁed as a restructured loan. Loans restructured at a rate
equal to or greater than that of a new loan with
comparable risk at the time the contract is modiﬁed may be
excluded from restructured loans in the calendar years
subsequent to the restructuring if they are in compliance
with the modiﬁed terms.

U.S. Bancorp 67

Generally, a nonaccrual loan that is restructured
remains on nonaccrual for a period of six months to
demonstrate that the borrower can meet the restructured
terms. However, performance prior to the restructuring, or
signiﬁcant events that coincide with the restructuring, are
considered in assessing whether the borrower can meet the
new terms and may result in the loan being returned to
accrual status at the time of restructuring or after a shorter
performance period. If the borrower’s ability to meet the
revised payment schedule is uncertain, the loan remains
classiﬁed as a nonaccrual loan.

Leases The Company engages in both direct and leveraged
lease ﬁnancing. The net investment in direct ﬁnancing 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.

Residual values on leased assets are reviewed regularly
for other than temporary impairment. Valuations for retail
automobile leases are based on independent assessments of
expected used car sales prices at the end-of-term. Impairment
tests are conducted based on these valuations considering the
probability of the lessee returning the asset to the Company,
re-marketing efforts and ancillary fees and costs. Valuations
for commercial leases are based upon external or internal
management appraisals. When there is other than temporary
impairment in the estimated fair value of the Company’s
interest in the residual value of a leased asset, the carrying
value is reduced to the estimated fair value with the
writedown recognized in the current period in commercial
products revenue or other noninterest income.

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. The Interagency Guidance on Certain Loans
Held for Sale, dated March 26, 2001, requires loans
transferred to LHFS to be marked-to-market (‘‘MTM’’) at
the time of transfer. MTM losses related to the sale/transfer
of non-homogeneous loans that are predominantly credit-
related, are reﬂected in charge-offs. With respect to
homogeneous loans, the amount of ‘‘probable’’ credit loss
determined in accordance with Statement of Financial
Accounting Standards No. 5 (‘‘SFAS 5’’), ‘‘Accounting for

Contingencies,’’ methodologies utilized to determine the
speciﬁc allowance allocation for the portfolio is also
included in charge-offs. Any incremental loss determined in
accordance with MTM accounting, that includes
consideration of other factors such as estimates of future
losses, is reported separately from charge-offs as a reduction
to 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 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 interest rate and
prepayment risk 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 speciﬁc hedge
accounting criteria are met.

All derivative instruments that qualify for hedge

accounting are recorded at fair value and classiﬁed 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
ﬂows to be received or paid related to a recognized asset or
liability or a forecasted transaction (‘‘cash ﬂow’’ hedge).
Changes in the fair value of a derivative that is highly
effective and designated as a fair value hedge and the
offsetting changes in the fair value of the hedged item are
recorded in income. Changes in the fair value of a
derivative that is highly effective and designated as a cash
ﬂow hedge are recognized in other comprehensive income
until income from the cash ﬂows of the hedged item is
recognized. The Company performs an assessment, both at
the inception of the hedge and on a quarterly basis
thereafter, when required, to determine whether these
derivatives are highly effective in offsetting changes in the
value of the hedged items. Any change in fair value
resulting from hedge ineffectiveness is immediately recorded
in noninterest income.

If a derivative designated as a hedge is terminated or
ceases to be highly effective, 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
ﬂow 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

68 U.S. Bancorp

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. Estimated useful lives range up to 40 years
for buildings and from 3 to 20 years for furniture
and equipment.

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
(‘‘MSRs’’) are capitalized as separate assets when loans are
sold and servicing is retained. The total cost of loans sold is
allocated between the loans sold and the servicing assets
retained based on their relative fair values. MSRs that are
purchased from others are initially recorded at cost. The
carrying value of the MSRs is amortized in proportion to,
and over the period of, estimated net servicing revenue and
recorded in noninterest expense as amortization of
intangible assets. The carrying value of these assets is
periodically reviewed for impairment using a lower of
carrying value or fair value methodology. For purposes of
measuring impairment, the servicing rights are stratiﬁed
based on the underlying loan type and note rate and the
carrying value of each stratum is compared to fair value
based on a discounted cash ﬂow analysis, utilizing current
prepayment speeds and discount rates. Events that may
signiﬁcantly affect the estimates used are changes in interest
rates and the related impact on mortgage loan prepayment
speeds and the payment performance of the underlying
loans. If the carrying value is less than fair value,
impairment is recognized through a valuation allowance for
each impaired stratum and recorded as amortization of
intangible assets.

Intangible Assets The price paid over the net fair value of
the acquired businesses (‘‘goodwill’’) is not amortized.
Other intangible assets are amortized over their estimated
useful lives, using straight-line and accelerated methods. The
recoverability of goodwill and other intangible assets is
evaluated annually, at a minimum, or on an interim basis 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 ﬂows
associated with the intangible asset.

Income Taxes Deferred taxes are recorded to reﬂect the tax
consequences on future years of differences between the tax
bases of assets and liabilities and the ﬁnancial reporting
amounts at each year-end.

Statement of Cash Flows For purposes of reporting cash
ﬂows, cash and cash equivalents include cash and money
market investments, deﬁned 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 fixed 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 under the intrinsic value method 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. Refer to Note 19 of the Notes to
Consolidated Financial Statements for information regarding
the proforma impact to the Company’s earnings if the fair
value accounting method was utilized.

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.

Note 2

Accounting Changes

Consolidation of Variable Interest Entities In January 2003,
the Financial Accounting Standards Board issued
Interpretation No. 46 (‘‘FIN 46’’), ‘‘Consolidation of
Variable Interest Entities’’ (‘‘VIEs’’), an interpretation of
Accounting Research Bulletin No. 51, ‘‘Consolidated
Financial Statements,’’ to improve ﬁnancial reporting of
special purpose and other entities. In accordance with the
interpretation, business enterprises that represent the
primary beneﬁciary of another entity by retaining a
controlling ﬁnancial interest in that entity’s assets, liabilities,
and results of operating activities must consolidate the
entity in their ﬁnancial statements. Prior to the issuance of
FIN 46, consolidation generally occurred when an
enterprise controlled another entity through voting interests.
Certain VIEs that are qualifying special purpose entities
(‘‘QSPEs’’) subject to the reporting requirements of
SFAS 140, ‘‘Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities,’’ will not
be required to be consolidated under the provisions of
FIN 46. The consolidation provisions of FIN 46 apply to

U.S. Bancorp 69

VIEs created or entered into after January 31, 2003, and
for pre-existing VIEs in the ﬁrst reporting period beginning
after June 15, 2003. If applicable, transition rules allow the
restatement of ﬁnancial statements or prospective
application with a cumulative effect adjustment. In addition,
FIN 46 expands the disclosure requirements for the
beneﬁciary of a signiﬁcant or a majority of the variable
interests to provide information regarding the nature,
purpose and ﬁnancial characteristics of the entities.

The Company has various relationships with special
purpose entities (‘‘SPEs’’). For details of the Company’s
involvement with SPEs, refer to Note 9 of the Notes to
Consolidated Financial Statements. The Company is in the
process of determining whether its off-balance sheet
structures are subject to the provisions of FIN 46. Because
the loan and investment conduits and the asset-backed
securitizations are QSPEs, which are exempted from
consolidation, the Company does not believe the conduits
or securitizations will require consolidation in its ﬁnancial
statements. Refer to Note 9 of the Notes to Consolidated
Financial Statements for additional information on conduits
and securitizations. The Company believes it is reasonably
possible that synthetic leases will be consolidated under the
provisions of FIN 46. At this time, the Company does not
believe that the adoption of FIN 46 will have a material
adverse impact on the Company’s ﬁnancial statements.

Stock-Based Compensation In December 2002, the
Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 148 (‘‘SFAS 148’’),
‘‘Accounting for Stock-Based Compensation—Transition
and Disclosure,’’ an amendment of Statement of Financial
Accounting Standards No. 123. SFAS 148 provides
alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 requires
prominent disclosures in interim as well as annual ﬁnancial
statements about the method of accounting for stock-based
employee compensation and the effect of the method used
on reported net income. SFAS 148 is effective for ﬁscal
years ended after December 15, 2002. The Company plans
to continue to account for stock-based employee
compensation under the intrinsic value based method and to
provide disclosure of the impact of the fair value based
method on reported income. Employee stock options have
characteristics that are signiﬁcantly different from those of
traded options, including vesting provisions and trading
limitations that impact their liquidity. Therefore, the
existing option pricing models, such as Black-Scholes, do
not necessarily provide a reliable measure of the fair value
of employee stock options. Refer to Note 19 of the Notes
to Consolidated Financial Statements for proforma

disclosure of the impact of stock options utilizing the Black-
Scholes valuation method.

Guarantees In November 2002, the Financial Accounting
Standards Board issued Interpretation No. 45 (‘‘FIN 45’’),
‘‘Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness
of Others,’’ to clarify accounting and disclosure
requirements relating to a guarantor’s issuance of certain
types of guarantees. FIN 45 requires entities to disclose
additional information about certain guarantees, or groups
of similar guarantees, even if the likelihood of the
guarantor’s having to make any payments under the
guarantee is remote. The disclosure provisions are effective
for ﬁnancial statements for ﬁscal years ended after
December 15, 2002. For certain guarantees, the
interpretation also requires that guarantors recognize a
liability equal to the fair value of the guarantee upon its
issuance. This initial recognition and measurement provision
is to be applied only on a prospective basis to guarantees
issued or modiﬁed after December 31, 2002. The Company
does not expect the recognition and measurement provision
to have a material impact on the Company’s ﬁnancial
statements and has provided additional disclosures required
by FIN 45 in the ﬁnancial statements. Refer to Note 23 of
the Notes to Consolidated Financial Statements for further
information on guarantees.

Business Combinations and Goodwill and Other Intangible

Assets In June 2001, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
No. 141 (‘‘SFAS 141’’), ‘‘Business Combinations,’’ and
Statement of Financial Accounting Standards No. 142
(‘‘SFAS 142’’), ‘‘Goodwill and Other Intangible Assets.’’
SFAS 141 mandates that the purchase method of accounting
be used for all business combinations initiated after
June 30, 2001, and establishes speciﬁc criteria for the
recognition of intangible assets separately from goodwill.
SFAS 142 addresses the accounting for goodwill and
intangible assets subsequent to their acquisition. The
Company adopted SFAS 142 on January 1, 2002. The most
signiﬁcant changes made by SFAS 142 are that goodwill and
indeﬁnite lived intangible assets are no longer amortized
and are to be tested for impairment at least annually.
Impairment charges from the initial impairment test were
recognized as a ‘‘cumulative effect 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 were
effective upon adoption of SFAS 142.

Applying the provisions of SFAS 141 to recent
acquisitions and the provisions of SFAS 142 to purchase

70 U.S. Bancorp

acquisitions completed prior to July 1, 2001, increased
after-tax income for the year ending December 31, 2002, by
$205.6 million, or $.11 per diluted share. During the ﬁrst
quarter of 2002, the Company completed its initial
impairment test as required by SFAS 142. As a result of this
initial impairment test, the Company recognized an after-tax
goodwill impairment charge of $37.2 million as a
‘‘cumulative effect of change in accounting principles’’ in
the income statement in the ﬁrst quarter of 2002. The
impairment was primarily related to the purchase of a
transportation leasing company in 1998 by the equipment
leasing business. Banking regulations exclude 100 percent of
goodwill from the determination of capital adequacy;
therefore, the impact of this impairment on the Company’s
capital adequacy was not signiﬁcant.

Acquisitions of Certain Financial Institutions In October
2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 147
(‘‘SFAS 147’’), ‘‘Acquisitions of Certain Financial
Institutions,’’ an amendment of Statements of Financial
Accounting Standards Nos. 72 and No. 144 and Financial
Accounting Standards Board Interpretation No. 9. In
accordance with SFAS 147, the acquisition of all or a part
of a ﬁnancial institution that meets the deﬁnition of a
business is to be accounted for utilizing the purchase
method in accordance with SFAS 141. In addition,
SFAS 147 provides that long-term customer-relationship
intangible assets, except for servicing assets, recognized in
the acquisition of a ﬁnancial institution, should be evaluated
for impairment under the provisions of Statement of
Financial Accounting Standards No. 144, ‘‘Accounting for
the Impairment or Disposal of Long-Lived Assets.’’
SFAS 147 applies to acquisitions completed on or after
October 1, 2002. Adopting the standard is not expected to
have a material impact on the Company.

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 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.

Note 3

Subsequent Event

On February 19, 2003, the Company announced that its
Board of Directors approved a plan to effect a spin-off of
its capital markets business unit, including investment
banking and brokerage activities primarily conducted by its
wholly-owned subsidiary, U.S. Bancorp Piper Jaffray Inc. In
2002, the capital markets business unit had average assets
of $3.0 billion, generated revenues of $737.3 million
(5.8 percent of total revenues) and contributed $1.1 million
of net income, representing less than 1 percent of the
Company’s consolidated net income. This distribution does
not include brokerage, ﬁnancial advisory or asset
management services offered to customers through the retail
brokerage platform of U.S. Bank National Association, U.S.
Bancorp Investments, Inc. or U.S. Bancorp Asset
Management, Inc. The spin-off would be effected through a
dividend of 100% of the Company’s ownership interest in
the capital markets business, and the Company plans to
retain $215 million of subordinated debt of the new
company. The distribution is subject to certain conditions
including SEC registration, regulatory review and approval
and a determination that the distribution will be tax-free to
the Company and its shareholders. While expected to be
completed in the third quarter of 2003, the Company has
no obligation to consummate the distribution, whether or
not these conditions are satisﬁed.

Note 4

Business Combinations

On February 27, 2001, Firstar and USBM merged in a
pooling-of-interests transaction and accordingly all ﬁnancial
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 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 represented total assets acquired of $2.9
billion and total liabilities assumed of $773 million.
Included in total assets were merchant contracts and other
intangibles of $650 million and the excess of purchase price
over the fair value of identiﬁable net assets (‘‘goodwill’’) of
$1.6 billion. The goodwill reﬂected NOVA’s leadership
position in the merchant processing market and its ability to
provide a technologically superior product that is enhanced
by a high level of customer service. The Company believes

U.S. Bancorp 71

that these factors, among others, will allow NOVA to
generate sufﬁcient positive cash ﬂows from new business in
future periods to support the goodwill recorded in
connection with the acquisition.

On December 31, 2002, the Company acquired the

liabilities of $39 million at the closing date. Included in
total assets were contract and other intangibles with a fair
value of $225 million and goodwill of $444 million. The
goodwill reﬂected the strategic value of the combined
organization’s leadership position in the corporate trust
business and processing economies of scale resulting from
the transaction. As part of the purchase price, $75 million
was placed in escrow for up to eighteen months with
payment contingent on the successful transition of business
relationships. Concurrent with the system conversion
expected in 2003, certain State Street Corporate Trust assets
under administration will be transferred to the Company or
its afﬁliated mutual funds.

the Company completed several strategic acquisitions to
enhance its presence in certain markets and businesses.

In addition to these mergers and business acquisitions,

(Dollars and Shares in Millions)

Date

Assets (a)

Deposits

Goodwill
and Other
Intangibles

Cash Paid/
(Received) Shares Issued

Accounting
Method

Corporate Trust business of State

Street Bank and Trust Company *****
Bay View Bank branches *************
The Leader Mortgage Company, LLC **
Paciﬁc Century Bank *****************
NOVA Corporation *******************
U.S. Bancorp************************
First Union branches *****************
Scripps Financial Corporation *********
Lyon Financial Services, Inc. *********
Oliver-Allen Corporation, Inc. **********
Peninsula Bank **********************

December 2002
November 2002
April 2002
September 2001
July 2001
February 2001
December 2000
October 2000
September 2000
April 2000
January 2000

13
362
517
570
949
86,602
450
650
1,289
280
491

—
3,305
—
712
—
51,335
1,779
618
—
—
452

$ 669
483
190
134
2,231
—
347
113
124
68
71

642
(2,483)
85
(43)
842
—
(1,123)
—
307
—
—

—
—
—
—
57.0
952.4
—
9.4
—
4.5
5.1

Purchase
Purchase
Purchase
Purchase
Purchase
Pooling
Purchase
Purchase
Purchase
Purchase
Purchase

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

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:

Year Ended December 31 (Dollars in Millions)

2000

Net interest income

Firstar ****************************************
USBM ****************************************

Total **************************************

Net income

Firstar ****************************************
USBM ****************************************

Total **************************************

Total assets at period end

Firstar ****************************************
USBM ****************************************

Total **************************************

$ 2,699
3,471

$ 6,170

$ 1,284
1,592

$ 2,876

$ 77,585
87,336

$164,921

Refer to Note 12 of the Notes to Consolidated
Financial Statements for additional information regarding
goodwill and other intangible assets.

72 U.S. Bancorp

Note 5

Merger and Restructuring-Related Items

The Company recorded pre-tax merger and restructuring-
related charges of $324.1 million, $1,266.4 million, and
$348.7 million in 2002, 2001, and 2000, respectively. In
2002, merger-related items were primarily incurred in
connection with the Firstar/USBM merger, the NOVA
acquisition and the Company’s various other acquisitions
primarily including BayView and State Street Corporate
Trust. In 2001, merger-related items included costs
associated with integrating USBM, NOVA, Mercantile and
other smaller acquisitions noted below and in Note 4 —
Business Combinations. In response to signiﬁcant changes in
the securities markets during 2001, including increased
volatility, declines in equity valuations and the increasingly
competitive environment for the securities industry, the
Company incurred a charge to restructure its subsidiary,
U.S. Bancorp Piper Jaffray Inc. (‘‘Piper’’).

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

(Dollars in Millions)

2002
Severance and employee-related **************************
Systems conversions and integration***********************
Asset write-downs and lease terminations ******************
Balance sheet restructurings ******************************
Other merger-related items *******************************

USBM

4.1
197.0
104.0
(38.8)
4.8

Total 2002 **********************************************

$ 271.1

Non-interest expense ************************************
Balance sheet recognition ********************************

271.1
—

Merger-related items — 2002 **************************

$ 271.1

2001
Severance and employee-related **************************
Systems conversions and integration***********************
Asset write-downs and lease terminations ******************
Charitable contributions **********************************
Balance sheet restructurings ******************************
Branch sale gain ****************************************
Branch consolidations ************************************
Other merger-related charges *****************************

$ 268.2
208.1
130.4
76.0
457.6
(62.2)
20.0
69.1

Total 2001 **********************************************

$1,167.2

Provision for credit losses ********************************
Non-interest income *************************************
Non-interest expense ************************************

Merger-related charges *******************************
Balance sheet recognition ********************************

$ 382.2
(62.2)
847.2

1,167.2
—

Merger-related items — 2001 **************************

$1,167.2

2000
Severance and employee-related **************************
Systems conversions*************************************
Asset write-downs and lease terminations ******************
Charitable contributions **********************************
Other merger-related charges *****************************

Total 2000 **********************************************

Piper
NOVA Restructuring

Mercantile

Other (a)

Total

$ (3.8)
29.4
14.2
—
(1.1)

$38.7

34.9
3.8

$38.7

$23.3
1.6
34.7
—
—
—
—
24.2

$83.8

$ —
—
1.6

1.6
82.2

$83.8

$ —
—
—
—
—

$ —

—
—

$ —
—
—
—
—

$ —

—
—

$ 9.1
18.1
6.0
—
3.5

9.4
244.5
124.2
(38.8)
7.2

$ 36.7

$ 346.5

18.1
18.6

324.1
22.4

$ —

$ 36.7

$ 346.5

$28.8
—
11.9
—
—
—
—
10.0

$50.7

$ —
—
50.7

50.7
—

$ 13.2
7.3
(.3)
—
—
—
—
2.5

$ 22.7

$ —
—
22.7

22.7
—

$ 4.6
18.7
6.0
—
—
—
—
2.3

$ 338.1
235.7
182.7
76.0
457.6
(62.2)
20.0
108.1

$ 31.6

$1,356.0

$ —
—
24.2

24.2
7.4

$ 382.2
(62.2)
946.4

1,266.4
89.6

$50.7

$ 22.7

$ 31.6

$1,356.0

$ 43.0
115.2
42.7
—
26.1

$227.0

$ 16.4
78.3
4.6
2.5
19.9

59.4
193.5
47.3
2.5
46.0

$121.7

$ 348.7

(a) In 2002, ‘‘Other’’ primarily included merger and restructuring-related items pertaining to the Bay View acquisition, State Street Corporate Trust and the Lyon Financial acquisition. In

2001 and 2000, ‘‘Other’’ primarily included the 1998 acquisition of the former Firstar Corporation by Star Banc. Star Banc was renamed Firstar Corporation.

The Company determines merger and restructuring-

related items and related accruals based on its integration
strategy and formulated plans. These plans are established
as of the acquisition date and are regularly evaluated during
the integration process.

Severance and employee-related charges include the cost

of severance, other beneﬁts and outplacement costs
associated with the termination of employees primarily in
branch ofﬁces 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 beneﬁt period of up to two years
from the time of termination. The total number of
employees included in severance amounts were
approximately 2,860 for USBM, 400 for NOVA, 300 for
the Piper Restructuring and 2,400 for Mercantile (expense
primarily recognized in 1999 and 2000). In 2002, the
Company recognized additional severance costs of

$13.1 million in connection with the USBM merger offset
by net curtailment and settlement gains of $9.0 million
related to changes in certain nonqualiﬁed pension plans.
Changes in severance costs for USBM and NOVA primarily
reﬂected a change in estimate in the liability given the mix
of employees terminated. Severance and employee-related
costs for identiﬁed groups of acquired employees are
included in the determination of goodwill at closing.
Severance and employee-related costs are recorded as
incurred for groups of employees not speciﬁcally identiﬁed
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

U.S. Bancorp 73

expenses related to systems conversions and the integration
of acquired branches and operations.

Asset write-downs and lease terminations represent

lease termination costs and impairment of assets for
redundant ofﬁce 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 2002, this category included $38.2 million of
signage write-offs, $26.9 million of software and equipment
write-offs, $32.0 million of lease and contract cancellations
and $6.9 million of leasehold and other related items
associated with the Firstar/USBM merger. In 2001, asset
write-downs and lease terminations included $45.7 million
of lease and contract cancellation costs, $36.2 million of
software and equipment write-offs and $48.5 million of
other assets deemed to be worthless due to integration
decisions in connection with the merger.

In connection with certain mergers, the Company has
made charitable contributions to reafﬁrm a commitment to
its markets or as part of speciﬁc 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. During 2002, the Company recognized asset
gains related to the sale of a non-strategic investment in a
sub-prime lending business of $28.7 million and a mark-to-

market recovery of $10.1 million associated with the
liquidation of U.S. Bancorp Libra’s investment portfolio.
During 2001, balance sheet restructuring costs incurred in
connection with the Firstar/USBM merger 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 health care 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 aligned 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 risk
exposure policy of the combined entity.

Other merger-related items in 2002 of $7.2 million
primarily represents changes to conform accounting policies
implemented at the time of systems conversions related to
the Firstar/USBM merger and other acquired entities. In
2001, other merger-related charges 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 Firstar/USBM merger and the
acquisition of NOVA, respectively. Also, it included $10.0
million of goodwill impairment related to the Piper
Restructuring and $4.8 million of other costs.

74 U.S. Bancorp

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

(Dollars in Millions)

Balance at December 31, 1999 ***************************
Provision charged to operating expense ****************
Additions related to purchase acquisitions***************
Cash outlays ****************************************
Noncash write-downs and other ***********************

Balance at December 31, 2000 ***************************
Provision charged to operating expense ****************
Additions related to purchase acquisitions***************
Cash outlays ****************************************
Noncash write-downs and other ***********************

Balance at December 31, 2001 ***************************
Provision charged to operating expense ****************
Additions related to purchase acquisitions***************
Cash outlays ****************************************
Noncash write-downs and others **********************

USBM

Piper
NOVA Restructuring

Mercantile

Other (a)

Total

—
—
—
—
—

—
1,167.2
—
(532.5)
(510.4)

124.3
271.1
—
(327.9)
(48.9)

$ —
—
—
—
—

—
1.6
82.2
(32.4)
(3.0)

48.4
34.9
3.8
(36.2)
(35.8)

$ —
—
—
—
—

—
50.7
—
(22.3)
(10.3)

18.1
—
—
(10.8)
(7.3)

$ 21.2
227.0
—
(197.9)
(50.3)

—
22.7
—
(23.8)
1.1

—
—
—
—
—

$ 82.0
121.7
46.0
(169.7)
(30.2)

49.8
24.2
7.4
(53.8)
(13.0)

14.6
18.1
18.6
(27.2)
(5.7)

$ 103.2
348.7
46.0
(367.6)
(80.5)

49.8
1,266.4
89.6
(664.8)
(535.6)

205.4
324.1
22.4
(402.1)
(97.7)

Balance at December 31, 2002 ***************************

18.6

$ 15.1

$ —

$ 18.4

52.1

(a) In 2002, ‘‘Other’’ primarily included merger and restructuring-related items pertaining to the Bay View acquisition, State Street Corporate Trust and the Lyon Financial acquisition. In

2001 and 2000, ‘‘Other’’ primarily included the 1998 acquisition of the former Firstar Corporation by Star Banc. Star Banc was renamed Firstar Corporation.

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 reﬂect a

lower utilization of beneﬁts by affected staff, 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 Firstar/USBM merger:

(Dollars in Millions)

Balance at December 31, 2001 ****************************
Provision charged to operating expense *****************
Cash outlays *****************************************
Noncash write-downs and other ************************

Severance
and
Employee-
Related

$ 88.3
4.1
(83.5)
9.7

$ —
197.0
(197.0)
—

Systems

Asset
Conversions Write-downs
and Lease
Terminations

and
Integration

Balance at December 31, 2002 ****************************

$ 18.6

$ —

Balance
Sheet
Restructurings

$ 2.1
(38.8)
—
36.7

$ —

Other

$ .8
4.8
(.1)
(5.5)

$ —

Total

$ 124.3
271.1
(327.9)
(48.9)

$ 18.6

$ 33.1
104.0
(47.3)
(89.8)

$ —

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

(Dollars in Millions)

Severance ***********************************************************************************************
Other employee-related costs ******************************************************************************
Lease termination and facility costs *************************************************************************
Contracts and system write-offs ****************************************************************************
Other ****************************************************************************************************

Total *************************************************************************************************

December 31,

2002

$30.2
3.1
17.2
.5
1.1

$52.1

2001

$106.3
4.7
64.3
18.3
11.8

$205.4

U.S. Bancorp 75

The merger and restructuring-related accrual by signiﬁcant acquisition or business restructuring was as follows:

(Dollars in Millions)

USBM ***************************************************************************************************
NOVA ***************************************************************************************************
State Street Corporate Trust********************************************************************************
Bay View*************************************************************************************************
Piper Restructuring****************************************************************************************
Other acquisitions *****************************************************************************************

Total *************************************************************************************************

December 31,

2002

$18.6
15.1
7.8
5.8
—
4.8

$52.1

2001

$124.3
48.4
—
—
18.1
14.6

$205.4

At December 31, 2002, the integration of Firstar and

USBM was substantially completed, and no additional
merger and restructuring related charges are expected going
forward. Severance costs will continue to be paid through
the period provided for in the Company’s severance plans.
The integration of merchant processing platforms and
business processes of U.S. Bank National Association and
NOVA will continue through late 2003. In connection with
the NOVA acquisition, management estimates the Company
will incur pre-tax merger-related charges of approximately

Note 6

Restrictions on Cash and Due from Banks

$36.9 million in 2003. In addition, the Company anticipates
additional pre-tax merger-related expenses in 2003 of
$14.7 million related to the Bay View acquisition,
$8.6 million related to the State Street Corporate Trust
acquisition, and $7.2 million as a result of other
smaller acquisitions.

At December 31, 2001, the business unit restructuring

of Piper was substantially completed, with lease cancellation
liabilities to be paid through 2003.

Bank subsidiaries are required to maintain minimum average reserve balances with the Federal Reserve Bank. The amount of
those reserve balances was approximately $157 million at December 31, 2002.

Note 7

Investment Securities

The detail of the amortized cost, gross unrealized holding gains and losses, and fair value of held-to-maturity and available-
for-sale securities at December 31 was as follows:

(Dollars in Millions)

Held-to-maturity (a)

Mortgage-backed securities **********
Obligations of state and political

subdivisions *********************

213

Total held-to-maturity securities *******

233

Available-for-sale (b)

U.S. Treasuries and agencies ********
Mortgage-backed securities **********
Other asset-backed securities ********
Obligations of state and political

subdivisions *********************
Other ******************************

421
24,967
646

558
949

2002

Gross
Unrealized
Holding
Gains

Gross
Unrealized
Holding
Losses

Amortized
Cost

2001

Gross
Unrealized
Holding
Gains

Gross
Unrealized
Holding
Losses

Fair
Value

Amortized
Cost

$ —

$ — $

$ —

$ — $

$ 14

$ 15
699
28

22
2

(7)

220

271

$ (7)

240

299

(2)

278

$ (2)

306

$ — $

—
(4)

(1)
(47)

436
25,666
670

579
904

439
21,937
2,091

877
950

$ 10
111
3

16
35

$ — $

(84)
(30)

(2)
(44)

449
21,964
2,064

891
941

Total available-for-sale securities ******

$27,541

$766

$(52)

$28,255

$26,294

$175

$(160)

$26,309

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

Securities carried at $20.2 billion at December 31,

2002, and $18.1 billion at December 31, 2001, 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 $2.9 billion and $3.0 billion at
December 31, 2002, and 2001, respectively.

76 U.S. Bancorp

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)

Realized gains***************************************************************************
Realized losses**************************************************************************

Net realized gains (losses)*************************************************************

Income tax (beneﬁt) on realized gains (losses) **********************************************

2002

$316.5
(16.6)

$299.9

$114.0

2001

$333.0
(3.9)

$329.1

$115.2

2000

$ 23.1
(15.0)

$ 8.1

$ 2.8

For amortized cost, fair value and yield by maturity
date of held-to-maturity and available-for-sale securities
outstanding as of December 31, 2002, see Table 11

included in Management’s Discussion and Analysis which is
incorporated by reference into these Notes to Consolidated
Financial Statements.

Note 8

Loans and Allowance for Credit Losses

The composition of the loan portfolio at December 31 was as follows:

(Dollars in millions)

Commercial

2002

2001

Commercial****************************************************************************************
Lease ﬁnancing ************************************************************************************

$ 36,584
5,360

$ 40,472
5,858

Total commercial ********************************************************************************

41,944

46,330

Commercial real estate

Commercial mortgages *****************************************************************************
Construction and development ***********************************************************************

Total commercial real estate **********************************************************************
Residential mortgages *****************************************************************************

Retail

Credit card ****************************************************************************************
Retail leasing **************************************************************************************
Home equity and second mortgage*******************************************************************
Other retail

Revolving Credit ********************************************************************************
Installment *************************************************************************************
Automobile *************************************************************************************
Student ****************************************************************************************

Total other retail *****************************************************************************

Total retail **************************************************************************************

20,325
6,542

26,867

9,746

5,665
5,680
13,572

2,650
2,258
6,343
1,526

12,777

37,694

18,765
6,608

25,373

7,829

5,889
4,906
12,235

2,673
2,292
5,660
1,218

11,843

34,873

Total loans **********************************************************************************

$116,251

$114,405

During the third quarter of 2002, reclassiﬁcations

The Company primarily lends to borrowers in the

between loan categories occurred in connection with
conforming loan classiﬁcations at the time of system
conversions. Prior quarters were not restated, as it was
impractical to determine the extent of reclassiﬁcation for all
periods presented. Reclassiﬁcations included approximately
$1.2 billion from the commercial loans category to the
commercial real estate loan category ($.5 billion) and the
residential mortgages category ($.7 billion).

Loans are presented net of unearned interest and
deferred fees and costs which amounted to $1.8 billion and
$2.1 billion at December 31, 2002 and 2001, respectively.
The Company had loans of $26.1 billion at December 31,
2002, and $28.0 billion at December 31, 2001, pledged at
the Federal Home Loan Bank. Loans of $12.7 billion at
December 31, 2002, and $7.2 billion at December 31,
2001, were pledged at the Federal Reserve Bank.

24 states where it has banking ofﬁces. Collateral for
commercial loans may include marketable securities,
accounts receivable, inventory and equipment. For details of
the Company’s commercial portfolio by industry group and
geography as of December 31, 2002, and 2001, see Table 8
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, 2002, and 2001, see Table 9 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.

U.S. Bancorp 77

The following table lists information related to nonperforming loans as of December 31:

(Dollars in Millions)

2002

2001

Loans on nonaccrual status *****************************************************************************
Restructured loans *************************************************************************************

Total nonperforming loans *******************************************************************************

Interest income that would have been recognized at original contractual terms ********************************
Amount recognized as interest income********************************************************************

Forgone revenue ***************************************************************************************

$1,188.7
48.6

$1,237.3

$ 102.1
36.7

65.4

$ 983.1
18.2

$1,001.3

$ 109.2
46.2

63.0

Activity in the allowance for credit losses was as follows:

(Dollars in Millions)

Balance at beginning of year ************************************************************
Add

2002

2001

2000

$2,457.3

$1,786.9

$1,710.3

Provision charged to operating expense (a) ********************************************

1,349.0

2,528.8

828.0

Deduct

Loans charged off*******************************************************************
Less recoveries of loans charged off **************************************************

Net loans charged off ***************************************************************
Losses from loan sales/transfers *********************************************************
Acquisitions and other changes **********************************************************

1,590.7
217.7

1,373.0
—
(11.3)

1,771.4
224.9

1,546.5
(329.3)
17.4

1,017.6
192.2

825.4
—
74.0

Balance at end of year******************************************************************

$2,422.0

$2,457.3

$1,786.9

(a) In 2001, $382.2 million of the provision for credit losses was incurred in connection with the Firstar/USBM merger.

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*********
No valuation allowance required******

Total impaired loans *******************

Average balance of impaired loans during
the year ****************************

Interest income recognized on impaired

loans during the year ****************

2002

2001

2000

Recorded
Investment

Valuation
Allowance

Recorded
Investment

Valuation
Allowance

Recorded
Investment

Valuation
Allowance

$992
—

$992

$839

—

$157
—

$157

$ 694
—

$ 694

$ 780

—

$125
—

$125

$487
127

$614

$526

7.8

$57
—

$57

Commitments to lend additional funds to customers
whose loans were classiﬁed as nonaccrual or restructured at
December 31, 2002, totaled $123.9 million. During 2002
there were $1.4 million of loans that were restructured at
market interest rates and returned to an accruing status.

The allowance for credit losses includes credit loss
liability related to off-balance sheet loan commitments. At
December 31, 2002, the allowance for credit losses includes
an estimated $131.4 million credit loss liability related to
the Company’s $58.3 billion of commercial off-balance
sheet loan commitments and letters of credit.

Note 9

Accounting for Transfers and Servicing
of Financial Assets and Extinguishments
of Liabilities

FINANCIAL ASSET SALES

When the Company sells ﬁnancial assets, it may retain
interest-only strips, servicing rights, residual rights to a cash
reserve account and/or other retained interests in the sold
ﬁnancial assets. The gain or loss on sale depends in part on
the previous carrying amount of the ﬁnancial 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. Quoted market prices are
used to determine retained interest fair values when readily
available. Since quotes are generally not available for
retained interests, the Company estimates fair value based

78 U.S. Bancorp

on the present value of future expected cash ﬂows using
management’s best estimates of the key assumptions
including credit losses, prepayment speeds, forward yield
curves and discount rates commensurate with the risks
involved. Retained interests and liabilities are recorded at
fair value using a discounted cash ﬂow methodology at
inception and are evaluated at least quarterly thereafter.

Conduits and Securitizations The Company sponsors two
off-balance sheet conduits to which it transfers high-grade
assets: a commercial loan conduit and an investment
securities conduit. These conduits are funded by issuing
commercial paper. The commercial loan conduit holds
primarily high credit quality commercial loans and held
assets of $4.2 billion at December 31, 2002, and
$6.9 billion in assets at December 31, 2001. The investment
securities conduit holds high-grade investment securities and
held assets of $9.5 billion at December 31, 2002, and
$9.8 billion in assets at December 31, 2001. These
investment securities include primarily (i) private label asset-
backed securities, which are insurance ‘‘wrapped’’ by AAA/
Aaa-rated mono-line insurance companies and
(ii) government agency mortgage-backed securities and
collateralized mortgage obligations. The commercial loan
conduit had commercial paper liabilities of $4.2 billion at
December 31, 2002, and $6.9 billion at December 31,
2001. The investment securities conduit had commercial
paper liabilities of $9.5 billion at December 31, 2002, and
$9.8 billion at December 31, 2001. The Company beneﬁts
by transferring commercial loans and investment securities
into conduits that provide diversiﬁcation of funding sources
in a capital-efﬁcient manner and generate income.

The Company provides liquidity facilities to both
conduits. In addition, the Company retains the credit risk of
the loans transferred to the commercial loan conduit
through a credit enhancement agreement. Utilization of the
liquidity facilities would be triggered by the conduits’
inability to issue commercial paper to fund their assets. The
credit enhancement provided to the commercial loan
conduit represents a recourse obligation under which the
Company would be required to repurchase loans sold to the
conduit if certain credit-related events of the underlying
assets occur. The recorded fair value of the Company’s
liability for the recourse obligation and for both liquidity
facilities was $56.1 million at December 31, 2002, and was
included in other liabilities. Changes in fair value of these
liabilities are recorded in the income statement as other
income or expense. In addition, the Company recorded at
fair value its retained residual interest in both the
commercial loan and investment securities conduits of
$28.6 million and of $93.4 million, respectively, at
December 31, 2002. The Company recorded revenue of
$132.2 million from the conduits in 2002 and

$132.7 million in 2001, including fees for servicing,
management, administration and accretion income from
retained interests.

The unsecured small business credit securitization held

$652.4 million in assets at December 31, 2002, of which
the Company retained $150.1 million of subordinated
securities, transferor’s interests of $16.3 million and a
residual interest-only strip of $53.3 million. This compared
with $750.0 million in assets at December 31, 2001, of
which the Company retained $175.3 million of
subordinated securities, transferor’s interests of
$18.8 million and a residual interest-only strip of
$57.3 million. The qualifying special purpose entity issued
asset-backed variable funding notes in various tranches in
November 2001 which generated a loss on sale of
$64.7 million. The Company provides credit enhancement
in the form of subordinated securities and reserve accounts.
The Company’s risk, primarily from losses in the underlying
assets, was considered in determining the fair value of the
Company’s retained interests in this securitization. The
Company recognized income from subordinated securities,
an interest-only strip and servicing fees from this
securitization of $52.8 million in 2002 and $5.2 million in
2001. The unsecured small business credit securitization
held average assets of $700.6 million in 2002 and
$122.1 million in 2001.

During 2002, the Company securitized $144.4 million
of highly rated ﬁxed rate municipal bonds. Each municipal
bond was sold into a separate trust that was funded by
variable rate certiﬁcates that reprice weekly. The Company
retained a residual interest in each structure that was
accounted for as a trading asset and is recorded at fair
value. The purpose of the arrangements was to meet our

U.S. Bancorp 79

customer demands for variable rate tax-free investments.
Income and cash ﬂows from these structures were not
signiﬁcant in 2002.

Small Business Administration Programs For the year
ended December 31, 2002, the Company did not sell any
U.S. government guaranteed portions of loans originated
under Small Business Administration (‘‘SBA’’) programs. For
the year ended December 31, 2001, the Company sold
$147.5 million of these loans recognizing a pre-tax gain on
sale of $6.3 million. Generally, these loans are sold with
recourse; however, the SBA guaranty substantially
eliminates the Company’s risk. The Company continues to
own the non-guaranteed portion of these loans. The
Company continues to service the loans and is required
under the SBA programs to retain speciﬁed yield amounts.
A portion of the yield is recognized as servicing fee income
as it occurs and the remainder is capitalized as an excess
servicing asset and is included in the gain on sale
calculation.

Servicing Asset Position

SBA Loans

Year Ended December 31 (Dollars in Millions)

Servicing assets at beginning of year ******
Assets recognized during the year ********
Amortization ****************************

Servicing assets at end of year ***********

2002

$ 7.5
—
(2.3)

$ 5.2

2001

$ 6.9
2.8
(2.2)

$ 7.5

No valuation allowances were required during 2002 or

2001 on servicing assets. Servicing assets are reported in
aggregate but measured on a transaction speciﬁc basis.
Market values were determined using discounted cash ﬂows,
utilizing the assumptions noted in the table below.

Key economic assumptions used in measuring servicing

assets at the date of securitization resulting from
securitizations completed during the year were as follows:

SBA Loans

Year Ended December 31 (Dollars in Millions)

2002

2001

Fair value of assets recognized **********
Prepayment speed (a) ******************
Weighted average life (years) ************
Expected credit losses ******************
Discount rate **************************

8.9
17 CPR
4.4
NA
12%

9.1
21 CPR
3.7
NA
12%

(a) The Company uses a prepayment vector based on loan seasoning for valuation. The

given speed is the effective prepayment speed that yields the same weighted
average life calculated using the prepayment vector.

Sensitivity Analysis At December 31, 2002, key economic assumptions and the sensitivity of the current fair value of
residual cash ﬂows to immediate 10 percent and 20 percent adverse changes in those assumptions were as follows:

December 31, 2002 (Dollars in Millions)

Current Economic Assumptions Sensitivity Analysis

Carrying value (fair value) of retained interests *************
Weighted average life (in years) **************************
Expected remaining life(a)(b)****************************
Impact of 10% adverse change ***************************
Impact of 20% adverse change ***************************

Expected credit losses

(annual)(c)(d)(e) ***************************************
Impact of 10% adverse change ***************************
Impact of 20% adverse change ***************************
Residual cash ﬂow discount rate ***********************
Impact of 10% adverse change ***************************
Impact of 20% adverse change ***************************

Interest rate on variable rate loans and bonds(f)(g)(h)

Impact of 10% adverse change ***************************
Impact of 20% adverse change ***************************

Commercial
Loans

Indirect
Automobile
Loans (i)

$28.6
.5
2.0
$ (2.7)
(5.0)

—
—
—

6.0%

$ (.1)
(.2)
1M LIBOR+
avg spread
157 bps
$ —
—

$22.9
NA
NA
$ —
—

NA
—
—

NA
$ —
—

SBA
Loans

$2.8
4.4
17 CPR
$(.2)
(.3)

NA
—
—

12.0%
$(.1)
(.2)

NA
$—
—

Unsecured
Small
Business
Receivables

$203.4
.8
2.5
$(2.2)
(4.9)

8.4%-9.6%

$(5.1)
(16.4)

11.0%
$(2.0)
(4.0)

Prime/
1M LIBOR
$(1.6)
(3.2)

Investment
Securities

$ 98.4
2.3
4.5
$ (8.5)
(17.7)

—
—
—

6.6%

$ (1.1)
(2.2)
1M LIBOR+
avg spread
69 bps
(.4)
$
(.9)

(a) For the SBA loans, the Company uses prepayment vectors based on loan seasoning for valuation. The given speed is the effective prepayment speed that yields the same

weighted average life calculated using the prepayment vector.

(b) For the small business receivables a monthly principal payment rate assumption is used to value the residual interests.
(c) Credit losses are zero for the commercial loan conduit as removal of assets provisions are designed to cause the removal of assets from the conduit prior to losses being incurred.
(d) Credit losses are zero for the investment securities conduit as the investments are all AAA rated or insured investments.
(e) SBA loan 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.

(f) The commercial loan conduit is match funded. Therefore, interest rate movements create no material impact to the value of the residual interest.
(g) For the small business receivables interest income is based on Prime+ contractual spread. Obligations are based on LIBOR.
(h) The investment securities conduit is mostly match funded. Therefore, interest rate movements create no material impact to the value of the residual interest.
(i) The Company exercised a cleanup call option on the indirect automobile securitization in January 2003.

These sensitivities are hypothetical and should be used
with caution. As the ﬁgures 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 effect of a variation in
a particular assumption on the fair value of the retained
interest is calculated without changing any other

80 U.S. Bancorp

assumptions; 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.

Cash Flow Information The table below summarizes certain cash ﬂows received from and paid to conduit or structured
entities for the loan sales described above:

Year Ended December 31 (Dollars in Millions)

2002

Proceeds from

New sales and securitizations *************
Collections used by trust to purchase new
receivables in revolving securitizations ****

Servicing and other fees received and cash

ﬂows on retained interests***************

2001

Proceeds from

New sales and securitizations *************
Collections used by trust to purchase new
receivables in revolving securitizations ****

Servicing and other fees received and cash

ﬂows on retained interests***************

Commercial
Loans (a)

Indirect
Automobile
Loans

SBA Loans

Corporate
Card
Receivables (b)

Unsecured
Small
Business
Receivables (b)

Investment
Securities

—

83.0

—

57.6

$ —

—

4.0

—

6.1

—

$ —

$1,825.1

610.3

115.0

—

72.7

$ —

$147.5

—

$518.7

$2,356.7

—

26.0

—

7.3

6,487.0

4.2

60.8

8.6

—

75.0

(a) Current system constraints make it impractical to collect information on gross cash ﬂows between the Company and the commercial loan conduit for 2002 and 2001.
(b) The corporate card and small business credit securitizations are revolving transactions where proceeds are reinvested until their legal terminations.

Other Information Quantitative information related to loan sales and managed assets was as follows:

(Dollars in Millions)

Commercial

At December 31

Year Ended December 31

Total Principal
Balance

Principal Amount
90 Days or More Past Due (c)

Average Balance

Net Credit Losses

2002

2001

2002

2001

2002

2001

2002

2001

Commercial ********************
Lease ﬁnancing ****************

$ 41,861
5,360

$ 48,878
5,858

$ 819
172

$ 590
207

$ 45,195
5,573

$ 50,584
5,852

$ 543
149

$ 724
114

Total commercial ************

47,221

54,736

Commercial real estate

Commercial mortgages**********
Construction and development ***

Total commercial real estate **
Residential mortgages *********

Retail

Credit card*********************
Retail leasing ******************
Other retail ********************

20,325
6,542

18,765
6,608

26,867

25,373

9,746

7,829

5,665
5,680
26,505

5,889
4,906
24,510

Total retail ******************

37,850

35,305

991

181
62

243

140

118
12
167

297

797

136
37

173

140

128
12
224

364

50,768

56,436

692

838

19,212
6,511

19,004
7,077

25,723

26,081

8,412

8,576

5,633
5,389
25,756

5,645
4,553
23,905

36,778

34,103

32
7

280
39
360

679

40
12

271
30
360

661

Total managed loans *****
Investment Securities **********

$121,684

$123,243

$1,671

$1,474

$121,681

$125,196

$1,429

$1,564

38,143

36,368

—

38,754

31,743

—

Total managed assets ***********

$159,827

$159,611

$1,671

$1,474

$160,435

$156,939

$1,429

$1,564

Less:

Assets sold or securitized *******

15,088

18,598

Total assets held *********

$144,739

$141,013

Sold or securitized assets

Commercial loans **************
Indirect automobile loans ********
Guaranteed SBA loans **********
Corporate card receivables ******
Small business credit lines ******
Investment securities************

$ 4,151
156
490
—
636
9,655

$ 6,879
432
582
214
731
9,760

$ —
1
—
—
6
—

Total securitized assets ******

$ 15,088

$ 18,598

17,150

16,846

$143,285

$140,093

$ —
4
2
1
4
—

$ 5,715
277
532
—
701
9,925

$ 5,210
655
629
403
122
9,827

$ —
5
—
—
51
—

$ —
11
—
3
3
—

$ 17,150

$ 16,846

U.S. Bancorp 81

Note 10

Premises and Equipment

Premises and equipment at December 31 consisted of the following:

(Dollars in Millions)

Land ***************************************************************************************************
Buildings and improvements ******************************************************************************
Furniture, ﬁxtures and equipment **************************************************************************
Capitalized building and equipment leases ******************************************************************
Construction in progress **********************************************************************************

Less accumulated depreciation and amortization ************************************************************

Total ************************************************************************************************

Note 11

Mortgage Servicing Rights

Changes in mortgage servicing rights are summarized as follows:

Year Ended December 31 (Dollars in Millions)

Balance at beginning of period *****************************************************************************
Rights purchased *****************************************************************************************
Rights capitalized *****************************************************************************************
Amortization**********************************************************************************************
Rights sold ***********************************************************************************************
Impairment ***********************************************************************************************

Balance at end of period **********************************************************************************

2002

$ 275
1,844
2,152
173
4

4,448
2,751

$1,697

2002

$ 360
229
357
(94)
(24)
(186)

$ 642

2001

$ 274
1,854
2,012
173
8

4,321
2,580

$1,741

2001

$ 229
25
315
(45)
(103)
(61)

$ 360

The Company serviced $43.1 billion and $22.0 billion

of mortgage loans for other investors as of December 31,
2002, and December 31, 2001, respectively.

The fair value of mortgage servicing rights (‘‘MSRs’’)

was $655 million at December 31, 2002, and $360 million
at December 31, 2001. At December 31, 2002, the reduction
in the current fair value of MSRs to immediate 25 and
50 basis point adverse interest rate changes would be

approximately $81 million and $145 million, respectively. An
upward movement in interest rates of 25 and 50 basis points
would increase the value of MSRs by approximately
$88 million and $169 million, respectively. The Company
utilizes the investment portfolio as an economic hedge to this
possible adverse interest rate change. The Company also,
from time to time, purchases principal-only securities that act
as a partial economic hedge.

Intangible Assets

Note 12
The Company adopted SFAS 142 on January 1, 2002. The
most signiﬁcant changes made by SFAS 142 are that
goodwill and other indeﬁnite lived intangible assets are no
longer amortized and will be tested for impairment at least
annually. The amortization provisions of SFAS 142 apply to
goodwill and intangible assets acquired after June 30, 2001.
With respect to goodwill and intangible assets acquired
prior to July 1, 2001, the amortization provisions of
SFAS 142 were effective upon adoption of SFAS 142.
Prior to the adoption of SFAS 142, the Company
evaluated goodwill for impairment under a projected

undiscounted cash ﬂow model. As a result of the initial
impairment test from the adoption of SFAS 142, the
Company recognized an impairment loss of $58.8 million
resulting in an after-tax loss of $37.2 million in the ﬁrst
quarter of 2002. The impairment was primarily related to
the purchase of a transportation leasing company in 1998
by the equipment leasing business. This charge was
recognized as a ‘‘cumulative effect of change in accounting
principles’’ in the income statement. The fair value of that
reporting unit was estimated using the present value of
future expected cash ﬂows.

82 U.S. Bancorp

Net income and earnings per share adjusted for the exclusion of amortization expense (net of tax) and asset impairments
related to goodwill are as follows:

Year Ended December 31 (Dollars in Millions, Except Per Share Data)

2002

2001

2000

Reported net income *******************************************************************
Goodwill amortization, net of tax ******************************************************
Asset impairments, net of tax ********************************************************

Adjusted net income*****************************************************************

Earnings per share

Reported net income ****************************************************************
Goodwill amortization, net of tax ******************************************************
Asset impairments, net of tax ********************************************************

Adjusted net income *************************************************************

Diluted earnings per share

$3,289.2
—
37.2

$3,326.4

1.72
—
.02

1.74

1.71
—
.02

$1,706.5
242.8
—

$1,949.3

.89
.12
—

1.01

.88
.13
—

$2,875.6
230.1
—

$3,105.7

1.51
.12
—

1.63

1.50
.12
—

Adjusted net income *************************************************************

1.73

1.01

1.62

Applying the provisions of SFAS 141 to recent
acquisitions and the provisions of SFAS 142 to purchase
acquisitions completed prior to July 1, 2001, increased

after-tax income for the year ending December 31, 2002, by
$205.6 million, or $.11 per diluted share.

The following table reﬂects the changes in the carrying value of goodwill for the year ended December 31, 2002:

(Dollars in Millions)

Balance at December 31, 2001 ********
Goodwill acquired*********************
Impairment losses ********************

Balance at December 31, 2002 ********

Wholesale
Banking

Consumer
Banking

Private Client,
Trust and Asset
Management

$1,348
43
(59)

$1,332

$1,706
433
—

$2,139

$289
447
—

$736

Payment
Services

$1,811
2
—

$1,813

Capital
Markets

Consolidated
Company

$305
—
—

$305

$5,459
925
(59)

$6,325

Goodwill acquired in 2002 in Wholesale Banking
included $25 million from an earn-out provision related to
the acquisition of Oliver-Allen Corporation. The Company
recorded $427 million of goodwill related to the Bay View
acquisition in November of 2002, $15 million related to
Wholesale Banking and $412 million related to Consumer

Banking. Also included in the goodwill acquired in
Consumer Banking was $17 million related to the purchase
of Leader in April of 2002. Private Client, Trust and Asset
Management acquired $444 million of goodwill related to
the acquisition of State Street Bank Corporate Trust in
December of 2002.

Amortizable intangible assets consisted of the following:

December 31 (Dollars in Millions)

Goodwill (a) ***************************************************
Merchant processing contracts **********************************
Core deposit beneﬁts ******************************************
Mortgage servicing rights ***************************************
Trust relationships *********************************************
Other identiﬁed intangibles**************************************

Total ******************************************************

Estimated
Life (b)

Amortization
Method (c)

—
8 years
10 years /6 years
5 years
15 years /10 years
8 years /8 years

—
AC
SL/AC
AC
SL/AC
SL/AC

2002

$6,325
596
505
642
371
207

$8,646

Balance

2001

$5,459
680
530
360
169
214

$7,412

(a) The Company adopted SFAS 142 on January 1, 2002, resulting in the elimination of amortization of goodwill and other indeﬁnite lived intangible assets. Prior to adoption, goodwill

was amortized over periods ranging up to 25 years.

(b) Estimated life represents the amortization period for assets subject to the straight line method and the weighted average amortization period for intangibles subject to accelerated

methods. If more than one amortization method is used for a category, the estimated life for each method is calculated and reported separately.

AC = accelerated methods generally based on cash ﬂows

U.S. Bancorp 83

Aggregate amortization expense consisted of the following:

Year Ended December 31 (Dollars in Millions)

Goodwill (a) *****************************************************************************
Merchant processing contracts ************************************************************
Core deposit beneﬁts*********************************************************************
Mortgage servicing rights *****************************************************************
Trust relationships************************************************************************
Other identiﬁed intangibles ****************************************************************

Total**********************************************************************************

2002

$ —
135.1
80.9
280.1
19.3
37.6

$553.0

2001

$251.1
15.3
80.9
106.1
19.3
56.8

$529.5

2000

$235.0
2.4
57.7
35.0
19.6
42.6

$392.3

(a) The Company adopted SFAS 142 on January 1, 2002, resulting in the elimination of amortization of goodwill and other indeﬁnite lived intangible assets.

Below is the estimated amortization expense for the years ended:

(Dollars in Millions)

2003***********************************************************************************************************************
2004***********************************************************************************************************************
2005***********************************************************************************************************************
2006***********************************************************************************************************************
2007***********************************************************************************************************************

$425.1
357.7
305.8
256.2
222.3

Note 13

Short-Term Borrowings

The following table is a summary of short-term borrowings for the last three years:

(Dollars in Millions)

At year-end

Federal funds purchased *****************************
Securities sold under agreements to repurchase ********
Commercial paper ***********************************
Treasury, tax and loan notes **************************
Other short-term borrowings **************************

Total ********************************************

Average for the year

Total ********************************************

Maximum month-end balance

2002

2001

2000

Amount

Rate

Amount

Rate

Amount

Rate

$ 3,025
2,950
380
102
1,349

$ 7,806

$ 4,145
2,496
391
707
3,565

$11,304

$ 7,009
2,950
452
4,164
6,172

.98%
.97
1.20
.91
1.26

$ 1,146
3,001
452
4,038
6,033

1.08%
1.10
1.85
1.27
2.54

$ 2,849
3,347
223
776
4,638

1.03%

$14,670

1.75%

$11,833

2.94%
1.15
1.74
1.50
2.29

$ 4,997
2,657
390
1,321
3,615

5.02%
2.93
3.85
3.53
3.98

$ 5,690
3,028
215
912
2,741

2.21%

$12,980

4.11%

$12,586

$ 7,829
3,001
590
6,618
7,149

$ 7,807
3,415
300
3,578
4,920

5.80%
4.60
6.40
5.20
6.09

5.60%

6.22%
4.83
6.27
6.06
7.69

6.21%

84 U.S. Bancorp

Note 14

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

2002

2001

7.625% due 2002************************************************************************************
8.125% due 2002************************************************************************************
7.00% due 2003*************************************************************************************
6.625% due 2003************************************************************************************
7.25% due 2003*************************************************************************************
8.00% due 2004*************************************************************************************
7.625% due 2005************************************************************************************
6.75% due 2005*************************************************************************************
6.875% due 2007************************************************************************************
7.30% due 2007*************************************************************************************
7.50% due 2026*************************************************************************************
Senior contingent convertible debt 1.50% due 2021*********************************************************
Medium-term notes *************************************************************************************
Capitalized lease obligations, mortgage indebtedness and other *********************************************

Subtotal *****************************************************************************************

Subsidiaries
Fixed-rate subordinated notes

6.00% due 2003*************************************************************************************
6.375% due 2004************************************************************************************
6.375% due 2004************************************************************************************
7.55% due 2004*************************************************************************************
8.35% due 2004*************************************************************************************
7.30% due 2005*************************************************************************************
6.875% due 2006************************************************************************************
6.625% due 2006************************************************************************************
6.50% due 2008*************************************************************************************
6.30% due 2008*************************************************************************************
5.70% due 2008*************************************************************************************
7.125% due 2009************************************************************************************
7.80% due 2010*************************************************************************************
6.375% due 2011************************************************************************************
6.30% due 2014*************************************************************************************
Federal Home Loan Bank advances **********************************************************************
Bank notes*********************************************************************************************
Euro medium-term notes due 2004 ***********************************************************************
Capitalized lease obligations, mortgage indebtedness and other *********************************************

—
—
150
100
32
73
121
191
220
200
200
57
4,127
224

5,695

79
75
150
100
100
100
70
100
300
300
400
500
300
1,500
1,000
9,255
7,302
400
862

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

Subtotal *****************************************************************************************

Total ********************************************************************************************

22,893

$28,588

19,642

$25,716

In August 2002, the Company repurchased for cash
approximately $1.1 billion accreted value of its convertible
senior notes due in 2021 (the ‘‘CZARS’’), in accordance
with the terms of the indenture governing the CZARS.
Approximately $57 million in accreted value of the CZARS
remains outstanding.

In February 2002, the Company’s subsidiary U.S. Bank

National Association issued $1.0 billion of ﬁxed-rate
subordinated notes due August 4, 2014. The interest rate is
6.30% per annum.

Medium-term notes (‘‘MTNs’’) outstanding at

December 31, 2002, mature from February 2003 through
August 2007. The MTNs bear ﬁxed or ﬂoating interest
rates ranging from 1.55 percent to 7.50 percent. The

weighted-average interest rate of MTNs at December 31,
2002, was 3.69 percent.

Federal Home Loan Bank (‘‘FHLB’’) advances
outstanding at December 31, 2002, mature from January
2003 through October 2026. The advances bear ﬁxed or
ﬂoating interest rates ranging from .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 $5.5 billion at December 31, 2002. The
weighted-average interest rate of FHLB advances at
December 31, 2002, was 2.65 percent.

Bank notes outstanding at December 31, 2002, mature

from January 2003 through November 2005. The Bank

U.S. Bancorp 85

notes bear ﬁxed or ﬂoating interest rates ranging from
1.30 percent to 5.63 percent. The weighted-average interest
rate of Bank notes at December 31, 2002, was
1.59 percent. Euro medium-term notes outstanding at
December 31, 2002, bear ﬂoating rate interest at three-
month LIBOR plus 15 basis points. The interest rate at
December 31, 2002, was 1.93 percent.

Note 15

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 speciﬁed rates
as provided in the indentures. The Trusts used the net
proceeds from the offerings 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 effects, in the consolidated
ﬁnancial 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

Maturities of long-term debt outstanding at December 31,
2002, were:

(Dollars in Millions)

Consolidated

2003***************************
2004***************************
2005***************************
2006***************************
2007***************************
Thereafter **********************

7,937
5,577
7,654
194
1,585
5,641

Parent
Company

1,539
909
1,364
3
1,572
308

Total ***************************

$28,588

$5,695

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 specific dates, at a redemption price specified 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
specific dates, at a redemption price specified 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, 2002:

Issuance Trust (Dollars in Millions)

Retail

Trust
Preferred
Securities Debentures
Amount

Amount

Issuance
Date

Rate
Type (a)

Rate

Maturity
Date

Redemption
Date (b)

USB Capital V**************
USB Capital IV *************
USB Capital III *************
USB Capital II **************

December 2001
November 2001
May 2001
April 1998

Institutional

Star Capital I ***************
Mercantile Capital Trust I ****
USB Capital I **************
Firstar Capital Trust I ********
FBS Capital I***************

June 1997
February 1997
December 1996
December 1996
November 1996

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

86 U.S. Bancorp

$300
500
700
350

150
150
300
150
300

$309
515
722
361

155
155
309
155
309

Fixed
Fixed
Fixed
Fixed

Variable
Variable
Fixed
Fixed
Fixed

7.25% December 2031 December 7, 2006
November 2031 November 1, 2006
7.35
May 4, 2006
7.75
April 1, 2003
7.20

May 2031
April 2028

2.18(c)
2.56(d)
8.27
8.32
8.09

June 2027
February 2027

June 15, 2007
February 1, 2007
December 2026 December 15, 2006
December 2026 December 15, 2006
November 2026 November 15, 2006

Note 16

Shareholders’ Equity

At December 31, 2002 and 2001, the Company had
authority to issue 4 billion shares of common stock and
10 million shares of preferred stock. The Company had
1,917.0 million and 1,951.7 million shares of common
stock outstanding at December 31, 2002 and 2001,
respectively. At December 31, 2002, the Company had
272.9 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.

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 effect 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 1.0 million shares and

57.2 million shares of common stock with an aggregate
value of $21.6 million and $1.9 billion in connection with
purchase acquisitions during 2002 and 2001, respectively.
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 acquisition of NOVA. On
December 18, 2001, the Board of Directors approved an
authorization to repurchase an additional 100 million
shares of outstanding common stock throughout 2003.
Under these programs the Company has repurchased
45.3 million and 19.7 million shares of common stock for
$1,040.4 million and $467.9 million in 2002 and 2001,
respectively. The July 17, 2001, authorization has been
effectively completed.

The following table summarizes the Company’s common
stock repurchased in each of the last three years:

(Dollars and Shares in Millions)

Value

2002 *******************************
2001 *******************************
2000 *******************************

45.3
19.7
58.6

$1,040.4
467.9
1,182.2

U.S. Bancorp 87

Shareholders’ equity is affected by transactions and valuations of asset and liability positions that require adjustments to
Accumulated Other Comprehensive Income. The reconciliation of the transactions affecting Accumulated Other
Comprehensive Income included in shareholders’ equity for the years ended December 31, is as follows:

(Dollars in Millions)

Pre-tax

Tax-effect

Net-of-tax

2002
Unrealized gain on securities available-for-sale ********************************************
Unrealized gain on derivatives ***********************************************************
Realized gain on derivatives *************************************************************
Reclassiﬁcation adjustment for gains

realized in net income ***************************************************************
Foreign currency translation adjustments**************************************************

$1,048.0
323.5
63.4

(331.6)
6.9

$(398.0)
(122.9)
(24.1)

126.0
(2.6)

$ 650.0
200.6
39.3

(205.6)
4.3

Total *******************************************************************************

$1,110.2

$(421.6)

$ 688.6

2001
Unrealized gain on securities available-for-sale ********************************************
Unrealized gain on derivatives ***********************************************************
Realized gain on derivatives *************************************************************
Reclassiﬁcation adjustment for gains

realized in net income ***************************************************************
Foreign currency translation adjustments**************************************************

$ 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 *******************************************************************************

5.8

$ (5.9)

(.1)

2000
Unrealized loss on securities available-for-sale*********************************************
Reclassiﬁcation adjustment for gains

realized in net income ***************************************************************
Foreign currency translation adjustments**************************************************

$ 436.0

$(157.8)

$ 278.2

(41.6)
(.5)

15.8
.2

(25.8)
(.3)

Total *******************************************************************************

$ 393.9

$(141.8)

$ 252.1

Note 17

Earnings Per Share

The components of earnings per share were:

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

Income before cumulative effect of change in accounting principles **************************
Cumulative effect of change in accounting principles ***************************************

Net income*************************************************************************

Weighted-average common shares outstanding ********************************************
Net effect of the assumed purchase of stock based on the treasury stock method for options

2002

2001

2000

$3,326.4
(37.2)

$3,289.2

$1,706.5
—

$1,706.5

$2,875.6
—

$2,875.6

1,916.0

1,927.9

1,906.0

and stock plans **********************************************************************

10.1

11.6

12.5

Weighted-average diluted common shares outstanding *************************************

1,926.1

1,939.5

1,918.5

Earnings per share

Income before cumulative effect of change in accounting principles ************************
Cumulative effect of change in accounting principles *************************************

Net income **************************************************************************

Diluted earnings per share

Income before cumulative effect of change in accounting principles ************************
Cumulative effect of change in accounting principles *************************************

Net income **************************************************************************

1.74
(.02)

1.72

1.73
(.02)

1.71

.89
—

.89

.88
—

.88

1.51
—

1.51

1.50
—

1.50

For the years ended December 31, 2002, 2001 and 2000, options to purchase 140 million, 111 million and 107 million

shares, respectively, were outstanding but not included in the computation of diluted earnings per share because they
were antidilutive.

88 U.S. Bancorp

Note 18

Employee Beneﬁts

Retirement Plans Pension beneﬁts are provided to
substantially all employees based on years of service and
employees’ compensation while employed with the
Company. Employees are fully vested after ﬁve years of
service. The Company’s funding policy is to contribute
amounts to its plans sufﬁcient 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. During 2002, the
Company made a $150 million dollar contribution to the
qualiﬁed pension plan, in accordance with this policy. 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 beneﬁts 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/USBM merger, the Company

maintained two different qualiﬁed pension plans, with three
different pension beneﬁt structures during 2001: the former
USBM’s cash balance pension beneﬁt structure, a ﬁnal
average pay beneﬁt structure for the former Firstar
organization, and a cash balance pension beneﬁt structure
related to the Mercantile acquisition. The two pension plans
were merged as of January 1, 2002 under a new ﬁnal
average pay beneﬁt structure; however, the beneﬁt structure
of the new plan does not become effective for the
Mercantile acquisition until January 1, 2003. Under the
new plan’s beneﬁt structure, a participant’s future
retirement beneﬁts are based on a participant’s highest ﬁve
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 beneﬁt structures the participant’s earned retirement
beneﬁts based on their average compensation over their
career. Retirement beneﬁts under the former Firstar beneﬁt
structure were earned based on ﬁnal average pay and years
of service, similar to the new plan. Plan assets primarily
consist of various equity mutual funds and other
miscellaneous assets.

In light of continued deterioration of the equity market

conditions during the second quarter and third quarter of

2002, the company decided to remeasure its pension plan
assets and liabilities effective July 1, 2002, using current,
updated information with respect to the estimated long-term
rate of return on pension assets, the discount rate,
participant census data and other relevant factors.

During 2002, the Company also maintained several

unfunded, nonqualiﬁed, supplemental executive retirement
programs that provided additional deﬁned pension beneﬁts
for senior managers and executive employees. Effective
January 1, 2002, substantially all of these programs were
merged into one nonqualiﬁed retirement plan. Because the
non-qualiﬁed plan was unfunded, the aggregate accumulated
beneﬁt obligation exceeded 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 has recognized curtailment
gains of $11.7 million in 2002 in connection with changes
to nonqualiﬁed pension plans.

Post-Retirement Medical Plans In addition to providing
pension beneﬁts, the Company provides health care and
death beneﬁts to certain retired employees through several
retiree medical programs. As a result of the Firstar/USBM
merger, there were three major retiree medical programs in
place during 2001 with various terms and subsidy
schedules. Effective 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
beneﬁts by meeting deﬁned 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 beneﬁt payments is accrued during the employees’
active service.

U.S. Bancorp 89

The Company uses a measurement date of

September 30 for its retirement plans. At the measurement
date, plan assets are determined based on the fair value
generally representing observable market prices. The

projected beneﬁt obligation is determined based on the
present value of projected beneﬁt distributions at an
assumed discount rate. Information presented in the four
tables below reﬂects a measurement date of September 30.

The following table sets forth the components of net periodic beneﬁt cost for the retirement plans:

(Dollars in Millions)

2002

2001

2000

2002

2001

2000

Pension Plans

Post-Retirement Medical Plans

Components of net periodic beneﬁt cost

Service cost*****************************************
Interest cost *****************************************
Expected return on plan assets************************
Net amortization and deferral**************************
Recognized actuarial (gain) loss ***********************

Net periodic beneﬁt cost *********************************
Curtailment and settlement (gain) loss *****************
Cost of special or contractual termination

beneﬁts recognized *******************************

Net periodic beneﬁt cost after curtailment and settlement

(gain) loss, and cost of special or contractual termination
beneﬁts recognized************************************

$ 49.9
115.1
(214.1)
(6.5)
.8

(54.8)
(11.7)

$ 61.0
118.7
(232.6)
(10.7)
(1.2)

(64.8)
—

$ 65.4
117.3
(201.6)
(13.2)
.7

(31.4)
(17.0)

2.7

—

$ 3.3
19.1
(1.6)
(.1)
—

20.7
—

—

$ 2.1
17.9
(1.0)
.2
(.1)

19.1
—

—

$ 2.0
16.3
(.6)
.2
(1.4)

16.5
10.3

—

$ (63.8)

$ (64.8)

$ (48.4)

$20.7

$19.1

$26.8

The following table summarizes beneﬁt obligation and plan asset activity for the retirement plans:

(Dollars in Millions)

Projected beneﬁt obligation

Beneﬁt obligation at beginning of measurement period ****************
Service cost ******************************************************
Interest cost ******************************************************
Plan participants’ contributions**************************************
Plan amendments *************************************************
Actuarial loss *****************************************************
Beneﬁt payments**************************************************
Curtailments ******************************************************
Settlements*******************************************************
Termination beneﬁts ***********************************************

Beneﬁt obligation at end of measurement period (a)*******************

Fair value of plan assets

Fair value at beginning of measurement period ***********************
Actual return on plan assets****************************************
Employer contributions *********************************************
Plan participants’ contributions**************************************
Acquisition/divestitures *********************************************
Settlements*******************************************************
Beneﬁt payments**************************************************

Fair value at end of measurement period ****************************

Funded status

Funded status at end of measurement period ************************
Unrecognized transition (asset) obligation ****************************
Unrecognized prior service cost*************************************
Unrecognized net (gain) loss ***************************************
Fourth quarter contribution *****************************************

Net amount recognized ********************************************

Components of statement of ﬁnancial position

Prepaid beneﬁt cost ***********************************************
Accrued beneﬁt liability ********************************************

Net amount recognized ********************************************

Pension Plans

Post-Retirement Medical Plans

2002

2001

2002

2001

$1,656.4
49.9
115.1
—
—
—
(147.3)
(.7)
(5.0)
2.7

$1,671.1

$1,611.1
(193.2)
172.1
—
—
—
(147.3)

$1,442.7

$ (228.4)
(.1)
(59.0)
867.8
4.3

$ 584.6

$ 763.9
(179.3)

$ 584.6

$1,595.4
61.0
118.7
—
4.0
47.7
(170.4)
—
—
—

$ 265.1
3.3
19.1
10.4
—
18.1
(33.5)
—
—
—

$1,656.4

$ 282.5

$2,283.2
(531.8)
30.1
—
—
—
(170.4)

$ 35.4
.7
17.2
10.4
—
—
(33.5)

$1,611.1

$ 30.2

$ (45.3)
—
(74.8)
473.2
6.7

$ 359.8

$ 531.6
(171.8)

$ 359.8

$(252.3)
7.4
(8.6)
41.0
13.7

$(198.8)

$ —
(198.8)

$(198.8)

$ 244.1
2.1
17.9
10.3
(2.4)
24.9
(31.8)
—
—
—

$ 265.1

$ 21.8
1.8
33.3
10.3
—
—
(31.8)

$ 35.4

$(229.7)
8.1
(9.5)
16.6
5.7

$(208.8)

$ —
(208.8)

$(208.8)

(a) At December 31, 2002 and 2001, the accumulated beneﬁt obligation for all funded qualiﬁed pension plans was $1.4 billion.

90 U.S. Bancorp

The following table sets forth the weighted-average plan assumptions and other data:

(Dollars in Millions)

Pension plan actuarial computations

Company

USBM

Firstar

2002

2001

2000

2001

2000

Expected long-term return on plan assets (a) *******************************
Discount rate in determining beneﬁt obligations *****************************
Rate of increase in future compensation ***********************************

Post-retirement medical plan actuarial computations

Expected long-term return on plan assets **********************************
Discount rate in determining beneﬁt obligations *****************************
Health care cost trend rate (b)

10.9%
6.8
3.5

11.0%
7.5
3.5

5.0%
6.8

5.0%
7.5

Prior to age 65 *******************************************************
After age 65 *********************************************************

12.0%
14.0

10.5%
13.0

Effect of one percent increase in health care cost trend rate

Service and interest costs ************************************************
Accumulated postretirement beneﬁt obligation*******************************

$ 1.3
19.7

$ 1.2
13.1

Effect of one percent decrease in health care cost trend rate

Service and interest costs ************************************************
Accumulated postretirement beneﬁt obligation*******************************

$ (1.2)
(17.5)

$ (1.0)
(13.6)

9.5%
7.8
5.6

5.0%
7.8

7.7%
7.7

12.2%
7.5
3.5

7.5

10.5%
13.0

$ 1.0
13.1

(.9)
(11.6)

.4
6.0

(.4)
(5.7)

12.2%
8.0
4.0

8.0

7.5%
7.5

.4
5.2

$ (.4)
(4.6)

(a) In connection with the Firstar/USBM merger, 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 diversiﬁed by industry and companies with varying market capitalization levels. This allocation is still in place at
December 31, 2002.

(b) 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.
* The Firstar plan had no assets as of December 31, 2002, 2001 and 2000.

The following table provides information for pension plans with beneﬁt obligations in excess of plan assets:

(Dollars in Millions)

Beneﬁt obligation******************************************************************************************
Accumulated beneﬁt obligation******************************************************************************
Fair value of plan assets ***********************************************************************************

2002

2001

$218.6
210.6
—

$227.5
220.6
—

Employee Investment Plan The Company has deﬁned
contribution retirement savings plans which allow qualiﬁed
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 ﬁrst 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
matching contribution. Although the matching contribution
is initially invested in the Company’s common stock,
effective in 2002 an employee will be allowed to reinvest
the matching contributions among various investment
alternatives. Total expense was $59.5 million, $53.7 million
and $53.6 million in 2002, 2001 and 2000, respectively.

Note 19

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, 2002,

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
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 ﬁve 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

U.S. Bancorp 91

period. Compensation expense related to the restricted stock
was $18.7 million, $71.9 million and $43.4 million in
2002, 2001, and 2000, 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 reﬂect the options originally granted under
acquired companies’ plans.

At December 31, 2002, there were 36.4 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 options plans of the Company:

Year Ended December 31

Stock option plans
Number outstanding at beginning

of year************************
Granted *********************
Assumed/converted ***********
Exercised ********************
Cancelled********************

Number outstanding at end of year **
Exercisable at end of year ********

Restricted share plans
Number outstanding at beginning

of year************************
Granted***********************
Assumed/converted ************
Cancelled/vested **************

Number outstanding at end of year **

Weighted-average fair value of

shares granted ****************

2002

2001

2000

Stock Options

Weighted-Average
Exercise Price

Stock Options

Weighted-Average
Exercise Price

Stock Options

Weighted-Average
Exercise Price

201,610,265
29,742,189
—
(9,594,213)
(15,505,651)

206,252,590
123,195,273

2,177,588
806,355
—
(703,886)

2,280,057

$22.58
21.81
—
13.26
24.18

$22.77
$23.63

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)

2,177,588

$22.80
21.25
16.40
13.44
23.29

$22.58
$22.36

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
—
(1,946,257)

6,377,137

$22.74
19.64
6.85
11.02
19.91

$22.80
$19.78

$ 7.03

$ 6.76

$ 6.32

Additional information regarding options outstanding as of December 31, 2002, is as follows:

Range of Exercise Prices

$.84 — $10.00 **************************************
$10.01 — $15.00************************************
$15.01 — $20.00************************************
$20.01 — $25.00************************************
$25.01 — $30.00************************************
$30.01 — $35.00************************************
$35.01 — $37.20************************************

Options Outstanding

Exercisable Options

Weighted-
Average
Remaining
Contractual
Life (Years)

1.9
4.6
7.8
8.1
6.0
5.4
5.5

7.1

5,408,016
6,161,409
45,564,059
87,344,126
54,953,364
6,005,278
816,338

206,252,590

Weighted-
Average
Exercise
Price

$ 6.19
11.84
18.73
22.49
28.17
32.56
35.79

5,395,464
5,138,594
21,752,900
32,845,987
51,325,867
5,920,123
816,338

$22.77

123,195,273

Weighted-
Average
Exercise
Price

$ 6.18
11.62
18.23
22.79
28.26
32.56
35.79

$23.63

Pro forma information regarding net income and earnings

per share is required under Statement of Financial
Accounting Standard No. 123 (‘‘SFAS 123’’), ‘‘Accounting
for 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. Also,

employee stock options have characteristics that are
signiﬁcantly different from those of traded options,
including vesting provisions and trading limitations that
impact their liquidity. Because employee stock options have
differing characteristics and changes in the subjective input
assumptions can materially affect the fair value estimate, the
Black-Scholes valuation model does not necessarily provide
a reliable measure of the fair value of employee
stock options.

92 U.S. Bancorp

The pro forma disclosures include options granted

through December 31, 2002, 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.

The following table shows proforma compensation expense, net income and earnings per share adjusted for the impact of
following SFAS 123 for stock-based compensation.

(Dollars in Million, Except Per Share Data)

Reported compensation expense*******************************************************
Stock-based compensation******************************************************

Proforma compensation expense****************************************************

Reported net income *****************************************************************
Stock-based compensation, net of tax ********************************************

Year Ended December 31,

2002

2001(a)

2000

$2,776.9
198.5

$2,975.4

$3,289.2
(121.1)

$2,713.3
361.4

$3,074.7

$1,706.5
(227.6)

$2,826.9
193.5

$3,020.4

$2,875.6
(123.5)

Proforma net income **************************************************************

$3,168.1

$1,478.9

$2,752.1

Earnings per share

Reported net income **************************************************************
Stock-based compensation, net of tax ********************************************

Proforma net income **************************************************************

Diluted earnings per share

Reported net income **************************************************************
Stock-based compensation, net of tax ********************************************

Proforma net income **************************************************************

1.72
(.07)

1.65

1.71
(.07)

1.64

.89
(.12)

.77

.88
(.12)

.76

1.51
(.07)

1.44

1.50
(.07)

1.43

(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

2002

2001

Firstar

USBM

Risk-free interest rates ************************************************
Dividend yields *******************************************************
Stock volatility factor **************************************************
Expected life of options (in years) **************************************

3.3%
3.0%
.41
6.0

4.6%
3.0%
.42
4.5

5.4%
2.5%
.37
2.5-5.5

6.1%
3.0%
.37
4.7

2000

U.S. Bancorp 93

Note 20

Income Taxes

The components of income tax expense were:

(Dollars in Millions)

2002

2001

2000

Federal
Current *******************************************************************************
Deferred ******************************************************************************

Federal income tax ******************************************************************

State
Current *******************************************************************************
Deferred ******************************************************************************

State income tax ********************************************************************

$1,273.5
316.6

1,590.1

144.9
41.3

186.2

$ 979.9
(164.5)

815.4

131.8
(19.5)

112.3

$ 996.1
324.5

1,320.6

159.0
32.6

191.6

Total income tax provision************************************************************

$1,776.3

$ 927.7

$1,512.2

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

(Dollars in Millions)

Tax at statutory rate (35%) **************************************************************
State income tax, at statutory rates, net of federal tax beneﬁt *******************************
Tax effect of

Tax-exempt interest, net *************************************************************
Amortization of nondeductible goodwill ************************************************
Tax credits *************************************************************************
Nondeductible merger charges *******************************************************
Sale of preferred minority interest *****************************************************
Other items ************************************************************************

2002

$1,785.9
121.0

(28.6)
—
(85.5)
5.0
—
(21.5)

2001

$922.0
73.0

(38.9)
88.1
(69.4)
52.5
—
(99.6)

2000

$1,535.8
124.5

(56.0)
91.6
(62.7)
4.9
(50.0)
(75.9)

Applicable income taxes ****************************************************************

$1,776.3

$927.7

$1,512.2

The tax effects of fair value adjustments on securities
available-for-sale, derivative instruments in cash ﬂow hedges
and certain tax beneﬁts related to stock options are
recorded directly to shareholders’ equity as part of other
comprehensive income.

Deferred income tax assets and liabilities reﬂect the tax

effect of temporary differences between the carrying
amounts of assets and liabilities for ﬁnancial reporting
purposes and the amounts used for the same items for
income tax reporting purposes.

The components of the Company’s net deferred tax liability as of December 31 were:

(Dollars in Millions)

Deferred tax assets
Allowance for credit losses *****************************************************************************
Pension and postretirement beneﬁts *********************************************************************
Federal AMT credits and capital losses ******************************************************************
Real estate and other asset basis differences*************************************************************
State and federal operating loss carryforwards ************************************************************
Other deferred tax assets, net **************************************************************************

2002

2001

961.0
62.8
48.6
39.1
34.9
487.4

$ 1,043.9
59.5
22.0
32.6
24.4
234.0

Gross deferred tax assets ***************************************************************************

1,633.8

1,416.4

Deferred tax liabilities
Leasing activities **************************************************************************************
Securities available-for-sale and ﬁnancial instruments ******************************************************
Accelerated depreciation *******************************************************************************
Deferred fees *****************************************************************************************
Accrued severance, pension and retirement beneﬁts*******************************************************
Other investment basis differences **********************************************************************
Other deferred tax liabilities, net *************************************************************************

Gross deferred tax liabilities *************************************************************************
Valuation allowance ************************************************************************************

(2,292.2)
(478.8)
(104.4)
(70.6)
(65.0)
(37.2)
(248.7)

(3,296.9)
(1.0)

(1,642.5)
(59.7)
(117.7)
(49.2)
2.2
(32.5)
(73.6)

(1,973.0)
(16.6)

Net deferred tax liability ***************************************************************************

$(1,664.1)

$ (573.2)

94 U.S. Bancorp

The Company has established a valuation allowance to
offset deferred tax assets related to state net operating loss
carryforwards of approximately $553 million, which expire
at various times through 2016.

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

Note 21

Derivative Instruments

In the ordinary course of business, the Company enters into
derivative transactions to manage its interest rate and
prepayment risk and to accommodate the business
requirements of its customers. The Company does not enter
into derivative transactions for speculative purposes. Refer
to Note 1 ‘‘Signiﬁcant Accounting Policies’’ in the Notes to
Consolidated Financial Statements for a discussion of the
Company’s accounting policies for derivative instruments.
For information related to derivative positions held for asset
and liability management purposes and customer-related
derivative positions, see Table 17 ‘‘Derivative Positions,’’
included in Management’s Discussion and Analysis, which
is incorporated by reference in these Notes to Consolidated
Financial Statements.

ASSET AND LIABILITY MANAGEMENT POSITIONS

Cash Flow Hedges The Company has $15.9 billion of
designated cash ﬂow hedges at December 31, 2002. These
derivatives are interest rate swaps that are hedges of the
forecasted cash ﬂows from the underlying variable-rate
LIBOR loans and ﬂoating-rate debt. All cash ﬂow hedges
are highly effective for the year ended December 31, 2002,
and the change in fair value attributed to hedge
ineffectiveness was not material.

At December 31, 2002 and 2001, accumulated other
comprehensive income included a deferred after-tax net gain
of $309.9 million and $98.3 million, respectively, related to
derivatives used to hedge cash ﬂows. The unrealized gain
will be reﬂected in earnings when the related cash ﬂows or
hedged transactions occur and will offset the related
performance of the hedged items. The occurrence of these
related cash ﬂows and hedged transactions remains
probable. The estimated amount of after-tax gain to be
reclassiﬁed from accumulated other comprehensive income
into earnings during 2003 is $61.0 million, which includes
gains related to hedges that were terminated early when the
forecasted transactions are still probable.

Fair Value Hedges The Company has $12.3 billion of
designated fair value hedges at December 31, 2002. These
derivatives are primarily interest rate contracts that hedge

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, 2002,
retained earnings included approximately $101.8 million of
base year reserves for which no deferred federal income tax
liability has been recognized.

the change in fair value related to interest rate changes of
underlying ﬁxed-rate debt, trust preferred stock, and deposit
obligations. In addition, the Company uses forward
commitments to sell residential mortgages loans to hedge its
interest rate risk related to residential mortgage loans held
for sale. The Company commits to sell the loans at speciﬁed
prices in a future period, typically within 90 days. The
Company is exposed to interest rate risk during the period
between issuing a loan commitment and the sale of the loan
into the secondary market.

All fair value hedges are considered highly effective for

the year ended December 31, 2002. The change in fair
value attributed to hedge ineffectiveness was a gain of
$39.4 million related to the Company’s mortgage loans held
for sale and its 2002 production volume of $23.2 billion.

Other Asset and Liability Management Derivative Positions

The Company has derivative positions that are used for
interest rate risk and other risk management purposes but
are not designated as cash ﬂow hedges or fair value hedges
in accordance with the provisions of Statement of Financial
Accounting Standards No. 133, ‘‘Accounting for Derivative
Instruments and Hedge Activities.’’ At December 31, 2002,
the Company had $3.0 billion forward commitments to sell
residential mortgage loans to hedge the Company’s interest
rate risk related to $2.9 billion of unfunded residential
mortgage loan commitments. Gains and losses on mortgage
banking derivatives and the unfunded loan commitments
are included in mortgage banking revenue on the income
statement.

CUSTOMER-RELATED POSITIONS

The Company acts as a seller and buyer of interest rate
contracts and foreign exchange rate contracts on behalf of
customers. At December 31, 2002, the Company had
$15.9 billion of aggregate customer derivative positions,
including $8.9 billion of interest rate swaps, caps and ﬂoors
and $7.0 billion of foreign exchange rate contracts. The
Company minimizes its market and liquidity risks by taking
substantially similar offsetting positions. Gains or losses on
customer-related transactions were not signiﬁcant for the
year ended December 31, 2002.

U.S. Bancorp 95

Note 22

Fair Values of Financial Instruments

Due to the nature of its business and its customers’ needs, the
Company offers a large number of financial instruments, most
of which are not actively traded. When market quotes are
unavailable, valuation techniques including discounted cash
flow calculations and pricing models or services are used. The
Company also uses various aggregation methods and
assumptions, such as the discount rate and cash flow 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 financial
instrument. Also, the estimates reflect a point in time and
could change significantly based on changes in economic
factors, such as interest rates. Furthermore, the disclosure of
certain financial and nonfinancial 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.

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 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 ﬂoating and
ﬁxed-rate loans, the fair value of which was estimated using
discounted cash ﬂow analyses and other valuation
techniques. To calculate discounted cash ﬂows, the loans
were aggregated into pools of similar types and expected
repayment terms. The expected cash ﬂows of loans
considered historical prepayment experiences and estimated
credit losses for nonperforming loans and were discounted
using current rates offered 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 ﬁxed-rate certiﬁcates of deposit was estimated

by discounting the contractual cash ﬂow 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 ﬂoating 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 The estimated fair value of medium-term
notes, bank notes, Federal Home Loan Bank advances,
capital lease obligations and mortgage note obligations
estimated fair value was determined using a discounted cash
ﬂow analysis based on current market rates of similar
maturity debt securities to discount cash ﬂows. 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, Basis Swaps and Options The interest
rate options and swap cash ﬂows were estimated using a
third-party pricing model and discounted based on
appropriate LIBOR, eurodollar futures, swap and treasury
note yield curves.

Loan Commitments, Letters of Credit and Guarantees The
fair value of commitments, letters of credit and guarantees
represents the estimated costs to terminate or otherwise
settle the obligations with a third-party. Residential
mortgage commitments are actively traded and the fair
value is estimated using available market quotes. Other loan
commitments, letters of credit and guarantees are not
actively traded. Substantially all of these commitments have
ﬂoating rates and do not expose the Company to interest
rate risk assuming no premium or discount was ascribed to
loan commitments because funding could occur at market
rates. The Company estimates the fair value of loan
commitments, letters of credit and guarantees based on the
related amount of unamortized deferred commitment fees
adjusted for the probable losses for these arrangements.

96 U.S. Bancorp

The estimated fair values of the Company’s ﬁnancial instruments at December 31 are shown in the table below.

December 31 (Dollars in Millions)

Financial Assets

2002

2001

Carrying
Amount

Fair
Value

Carrying
Amount

Fair
Value

Cash and cash equivalents *******************************************
Trading securities ****************************************************
Investment securities *************************************************
Loans held for sale **************************************************
Loans **************************************************************

$ 11,192
898
28,488
4,159
113,829

$ 11,192
898
28,495
4,159
115,341

$ 9,745
982
26,608
2,820
111,948

$ 9,745
982
26,615
2,820
112,236

Total ﬁnancial assets **********************************************

158,566

$160,085

152,103

$152,398

Nonﬁnancial assets ********************************************

21,461

Total assets ***********************************************

$180,027

Financial Liabilities

Deposits ************************************************************
Short-term borrowings************************************************
Long-term debt ******************************************************
Company-obligated mandatorily redeemable preferred securities of

subsidiary trusts holding solely the junior subordinated debentures of
the parent company***********************************************

19,287

$171,390

$105,219
14,670
25,716

$105,561
14,670
25,801

$115,534
7,806
28,588

$116,039
7,806
29,161

2,994

3,055

2,826

2,915

Total ﬁnancial liabilities ********************************************

154,922

$156,061

148,431

$148,947

Nonﬁnancial liabilities ******************************************
Shareholders’ equity *******************************************

7,004
18,101

Total liabilities and shareholders’ equity ***********************

$180,027

6,498
16,461

$171,390

Derivative Positions

Asset and liability management positions

Interest Rate Swaps *******************************************
Forward commitments to sell residential mortgages ***************

$ 1,438
(80)

Customer-related positions

Interest rate contracts******************************************
Foreign exchange contracts ************************************

22
1

328
72

10
2

328
72

10
2

The fair value of unfunded commitments, standby
letters of credit and other guarantees is approximately equal
to their carrying value. The carrying value of unfunded
commitments and standby letters of credit is $240 million.
The carrying value of other guarantees is $162 million.

Note 23

Commitments and Contingent Liabilities

COMMITMENTS TO EXTEND CREDIT

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

commitments include consumer credit lines that are
cancelable upon notiﬁcation to the consumer.

LETTERS OF CREDIT

Standby letters of credit are conditional commitments the
Company issues to guarantee the performance of a
customer to a third-party. The guarantees frequently
support public and private borrowing arrangements,
including commercial paper issuances, bond ﬁnancings and
other similar transactions. The Company issues commercial
letters of credit on behalf of customers to ensure payment
or collection in connection with trade transactions. In the
event of a customer’s nonperformance, the Company’s
credit loss exposure is the same as in any extension of
credit, up to the letter’s contractual amount. Management
assesses the borrower’s credit to determine the necessary
collateral, which may include marketable securities, real
estate, accounts receivable and inventory. Since the
conditions requiring the Company to fund letters of credit
may not occur, the Company expects its liquidity
requirements to be less than the total outstanding

U.S. Bancorp 97

commitments. The maximum potential future payments
guaranteed by the Company under standby letter of credit
arrangements at December 31, 2002, is approximately

$9.1 billion with a weighted average term of approximately
25 months.

The contract or notional amounts of commitments to extend credit and letters of credit at December 31, 2002, were as
follows:

(Dollars in Millions)

Commitments to extend credit

Commercial ****************************************************************************
Corporate and purchasing cards**********************************************************
Consumer credit cards ******************************************************************
Other consumer ************************************************************************

Letters of credit

Standby *******************************************************************************
Commercial ****************************************************************************

Less Than
One Year

After
One Year

$19,798
20,538
22,002
2,099

4,277
436

$28,957
2,946
—
8,176

4,834
23

Total

$48,755
23,484
22,002
10,275

9,111
459

LEASE COMMITMENTS

Rental expense for operating leases amounted to
$148.0 million in 2002, $165.2 million in 2001 and
$219.3 million in 2000. 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, 2002:

(Dollars in Millions)

2003 ****************************
2004 ****************************
2005 ****************************
2006 ****************************
2007 ****************************
Thereafter ***********************

Total minimum lease payments *****

Less amount representing interest **

Present value of net minimum

lease payments ***************

GUARANTEES

Operating
Leases

$ 357.6
206.5
142.8
319.7
101.8
502.7

$1,631.1

Capitalized
Leases

$ 9.2
8.1
6.9
6.3
6.3
44.9

$81.7

33.1

$48.6

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

Third-Party Borrowing Arrangements The Company
provides guarantees to third parties as a part of certain
subsidiaries’ borrowing arrangements, primarily representing
guaranteed operating or capital lease payments or other
debt obligations with maturity dates extending through
2014. The maximum potential future payments guaranteed
by the Company under these arrangements is approximately
$1.5 billion at December 31, 2002. The Company’s
recorded liabilities as of December 31, 2002 include
$32.4 million representing outstanding amounts owed to
these third parties and required to be recorded on balance
sheet in accordance with generally accepted accounting
principles. The guaranteed operating lease payments are
also included in the disclosed minimum lease obligations.

Commitments from Securities Lending The Company
participates in securities lending activities by acting as the
customer’s agent involving the loan or sale of securities. The
Company indemniﬁes customers for the difference between
the market value of the securities lent and the market value
of the collateral received. Cash collateralizes these
transactions. The maximum potential future payments
guaranteed by the Company under these arrangements is
approximately $9.7 billion at December 31, 2002, and
represents the market value of the securities lent to third
parties. At December 31, 2002, the Company held assets
with a market value of $10.0 billion as collateral for these
arrangements.

Asset Sales The Company has provided guarantees to
certain third parties in connection with the sale of certain
assets, primarily loan portfolios and low income housing
tax credits. These guarantees are generally in the form of
asset buy-back or make-whole provisions that are triggered
upon a credit event or a change in the tax-qualifying status
of the related projects, as applicable, and remain in effect
until the loans are collected or ﬁnal tax credits are realized,
respectively. The maximum potential future payments
guaranteed by the Company under these arrangements is

98 U.S. Bancorp

approximately $1.4 billion at December 31, 2002 and
represents the total proceeds received from the buyer in
these transactions where the buy-back or make-whole
provisions have not yet expired. Recourse available to the
Company includes guarantees from the Small Business
Administration (for SBA loans sold), recourse to the
correspondent that originated the loan or to the private
mortgage issuer, the right to collect payments from the
debtors, and/or the right to liquidate the underlying
collateral, if any, and retain the proceeds. Based on its
established loan-to-value guidelines, the Company believes
the recourse available is sufﬁcient to recover future
payments, if any, under the loan buy back guarantees.

Synthetic Leases Certain of the Company’s operating lease
arrangements involve third party lessors that acquire
business assets through leveraged ﬁnancing structures
commonly referred to as ‘‘synthetic leases.’’ The Company
provides guarantees to the lender in the event of default by
the leveraged ﬁnancing 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 maximum
potential future payments guaranteed by the Company
under these arrangements was approximately $403.0 million
at December 31, 2002. Based on the estimated fair value of
assets held by the structures, the liability for this guarantee
was not signiﬁcant at December 31, 2002. The minimum
lease payments under these operating leases are included in
the Company’s disclosure of minimum lease payment
obligations.

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

A cardholder, through its issuing bank, generally has

until the later of up to four months after the date the
transaction is processed or the receipt of the product or
service to present a chargeback to the Company as the
merchant processor. The absolute maximum potential
liability is estimated to be the total volume of credit card
transactions that meet the associations’ requirements to be
valid chargeback transactions at any given time.
Management estimates that the maximum potential

exposure for chargebacks would approximate the total
amount of merchant transactions processed through the
credit card associations for the last four months. For the
last four months of 2002, this amount totaled
approximately $34.2 billion. In most cases, this contingent
liability is unlikely to arise, as most products and services
are delivered when purchased and amounts are refunded
when items are returned to merchants. However, where the
product or service is not provided until a future date
(‘‘future delivery’’), the potential for this contingent liability
increases. To mitigate this risk, the Company may require
the merchant to make an escrow deposit, may place
maximum volume limitations on future delivery transactions
processed by the merchant at any point in time, or may
require various credit policy enhancements (including letters
of credit and bank guarantees). Also, merchant processing
contracts may include event triggers to provide the
Company more ﬁnancial and operational control in the
event of ﬁnancial deterioration of the merchant. At
December 31, 2002, the Company held as collateral
$24.3 million of merchant escrow deposits.

The Company currently processes card transactions for

several of the largest airlines in the United States. In the
event of liquidation of these airlines, the Company could
become ﬁnancially liable for refunding tickets purchased
through the credit card associations under the chargeback
provisions. Chargeback risk related to an airline is
evaluated in a manner similar to credit risk assessments and
merchant processing contracts consider the potential risk of
default. At December 31, 2002, the value of future delivery
airline tickets purchased was approximately $1.0 billion and
the Company held collateral of $144.3 million in escrow
deposits and lines of credit related to airline customer
transactions.

In the normal course of business, the Company has
unresolved chargebacks that are in process of resolution.
The Company assesses the likelihood of its potential
liability based on the extent and nature of unresolved
chargebacks and its historical experience loss experience. At
December 31, 2002, the Company recorded a liability for
potential losses of $16.0 million.

Contingent Consideration Arrangements The Company has
contingent payment obligations related to certain business
combination transactions. Payments are guaranteed as long
as certain post-acquisition performance-based criteria are
met. At December 31, 2002, the maximum potential future
payments guaranteed by the Company under these
arrangements is approximately $78.7 million and primarily
represents contingent payments related to the acquisition of
the Corporate Trust business of State Street Bank on
December 31, 2002 and are payable within 12 to
18 months.

U.S. Bancorp 99

Other Guarantees The Company provides liquidity and
credit enhancement facilities to two Company-sponsored
conduits, as more fully described in Note 9 — Accounting
for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. Although management
believes a draw against these facilities is remote, the
maximum potential future payments guaranteed by the
Company under these arrangements is approximately
$13.7 billion. The recorded fair value of the Company’s
liability for the credit enhancement recourse obligation and
liquidity facilities was $56.1 million at December 31, 2002
and is included in other liabilities.

The Company guarantees payments to certain

certiﬁcate holders of Company-sponsored investment trusts
with varying termination dates extending through
September 1, 2004. The maximum potential future
payments guaranteed by the Company under these
arrangements is approximately $61.1 million. The Company
has a recorded liability of $56.0 million at December 31,
2002, holds $17.3 million in cash collateral and has other
contractual sources of recourse available to it including
guarantees from third parties and the underlying assets held
by the investment trusts.

OTHER CONTINGENT LIABILITIES

In connection with the industry-wide investigations of
research analyst independence issues, the Company’s
brokerage and investment banking business line recognized
a $50.0 million litigation charge in 2002 which included a
settlement with certain governmental and regulatory
agencies of $25.0 million for investment banking regulatory
matters and $7.5 million for funding independent analyst
research for its customers.

The Company is subject to various other litigation,

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

100 U.S. Bancorp

Note 24

U.S. Bancorp (Parent Company)

Condensed Balance Sheet

December 31 (Dollars in Millions)

Assets
Deposits with subsidiary banks, principally interest-bearing **************************************************
Available-for-sale securities ******************************************************************************
Investments in

Advances to

Bank afﬁliates ***************************************************************************************
Nonbank afﬁliates ***********************************************************************************
Other assets *******************************************************************************************
Total assets**************************************************************************************

2002

2001

$ 5,869
118

17,954
1,598

100
266
2,294

$ 3,184
189

17,907
1,291

1,214
928
2,258

$28,199

$26,971

Liabilities and Shareholders’ Equity
Short-term funds borrowed*******************************************************************************
Advances from subsidiaries ******************************************************************************
Long-term debt *****************************************************************************************
Junior subordinated debentures issued to subsidiary trusts **************************************************
Other liabilities *****************************************************************************************
Shareholders’ equity ************************************************************************************
Total liabilities and shareholders’ equity *************************************************************

380
117
5,695
2,990
916
18,101

$28,199

452
69
6,074
2,990
925
16,461

$26,971

Condensed Statement of Income

Year Ended December 31 (Dollars in Millions)

Income
Dividends from bank subsidiaries ********************************************************
Dividends from nonbank subsidiaries *****************************************************
Interest from subsidiaries ***************************************************************
Service and management fees from subsidiaries*******************************************
Other income **************************************************************************
Total income ********************************************************************

Expenses
Interest on short-term funds borrowed ****************************************************
Interest on long-term debt ***************************************************************
Interest on junior subordinated debentures issued to subsidiary trusts ************************
Merger and restructuring-related charges *************************************************
Other expenses ************************************************************************
Total expenses ******************************************************************
Income before income taxes and equity in undistributed income of subsidiaries ***************
Income tax credit***********************************************************************
Income of parent company **************************************************************
Equity (deﬁciency) in undistributed income of subsidiaries **********************************
Net income *********************************************************************

2002

2001

2000

$3,140.0
15.2
96.9
38.5
16.0

3,306.6

8.9
126.8
214.1
6.7
76.0

432.5

2,874.1
(84.6)

2,958.7
330.5

$1,300.1
10.1
272.8
221.8
21.0

1,825.8

18.5
318.5
141.7
49.5
322.5

850.7

975.1
(102.4)

1,077.5
629.0

$3,010.5
17.3
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)

$3,289.2

$1,706.5

$2,875.6

U.S. Bancorp 101

Condensed Statement of Cash Flows

Year Ended December 31 (Dollars in Millions)

Operating Activities
Net income******************************************************************************
Adjustments to reconcile net income to net cash provided by operating activities

(Equity) deﬁciency in undistributed income of subsidiaries *********************************
(Gain) loss on sales of securities, net ***************************************************
Depreciation and amortization of premises and equipment ********************************
Other, net****************************************************************************

2002

2001

2000

$ 3,289.2

$ 1,706.5

$ 2,875.6

(330.5)
(8.6)
8.4
44.0

(629.0)
(8.2)
8.7
71.2

65.2
4.1
51.7
(386.8)

Net cash provided by (used in) operating activities ************************************

3,002.5

1,149.2

2,609.8

Investing Activities
Proceeds from sales and maturities of investment securities **********************************
Purchases of investment securities ********************************************************
Investments in subsidiaries****************************************************************
Equity distributions from subsidiaries *******************************************************
Net (increase) decrease in short-term advances to afﬁliates **********************************
Long-term advances to afﬁliates ***********************************************************
Principal collected on long-term advances to afﬁliates ****************************************
Other, net *******************************************************************************

Net cash provided by (used in) investing activities *************************************

Financing Activities
Net increase (decrease) in short-term advances from subsidiaries *****************************
Net increase (decrease) in short-term borrowings *******************************************
Principal payments on long-term debt ******************************************************
Proceeds from issuance of long-term debt **************************************************
Proceeds from issuance of junior subordinated debentures to subsidiary trusts *****************
Proceeds from issuance of common stock **************************************************
Repurchase of common stock *************************************************************
Cash dividends paid *********************************************************************

Net cash provided by (used in) ﬁnancing activities*************************************

Change in cash and cash equivalents ***********************************************
Cash and cash equivalents at beginning of year *********************************************

113.1
(52.9)
(536.4)
1,200.0
415.1
(410.0)
1,770.0
44.5

2,543.4

48.4
(72.3)
(2,537.5)
2,075.0
—
147.0
(1,040.4)
(1,480.7)

(2,860.5)

2,685.4
3,183.6

254.9
(73.5)
(1,941.0)
600.0
190.4
(1,144.0)
2,713.2
34.7

92.2
(59.4)
(4.6)
—
122.8
(1,314.8)
203.0
46.3

634.7

(914.5)

(10.6)
228.9
(1,612.8)
1,100.0
1,546.4
136.4
(467.9)
(1,235.1)

(15.6)
53.3
(613.1)
1,792.5
—
210.0
(1,182.2)
(1,271.3)

(314.7)

(1,026.4)

1,469.2
1,714.4

668.9
1,045.5

Cash and cash equivalents at end of year********************************************

$ 5,869.0

$ 3,183.6

$ 1,714.4

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 afﬁliate to
10 percent of the bank’s equity. In aggregate, loans to the
Company and all afﬁliates 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, 2002,
was approximately $614 million.

102 U.S. Bancorp

Note 25

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)

2002

2001

2000

Income taxes paid *********************************************************************
Interest paid **************************************************************************
Net noncash transfers to foreclosed property *********************************************

$ 1,129.5
2,890.1
89.5

$ 658.1
5,092.2
59.9

$ 1,046.5
5,686.3
94.3

Acquisitions and divestitures

Assets acquired ********************************************************************
Liabilities assumed *****************************************************************

$ 2,068.9
(3,821.9)

$1,150.8
(509.0)

$ 3,314.6
(3,755.9)

Net ****************************************************************************

$(1,753.0)

$ 641.8

$ (441.3)

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 components at December 31:

(Dollars in Millions)

Interest-bearing deposits ****************************************************************************************
Federal funds sold **********************************************************************************************
Securities purchased under agreements to resell *******************************************************************

Total money market investments****************************************************************************

2002

$102
61
271

$434

2001

$104
123
398

$625

Regulatory Capital The measures used to assess capital
include the capital ratios established by bank regulatory
agencies, including the specific ratios for the ‘‘well capitalized’’
designation. For a description of the regulatory capital
requirements and the actual ratios as of December 31, 2002

and 2001, for the Company and its bank subsidiaries, see
Table 20 included in Management’s Discussion and Analysis
which is incorporated by reference into these Notes to
Consolidated Financial Statements.

U.S. Bancorp 103

U.S. Bancorp
Consolidated Balance Sheet — Five-Year Summary

December 31 (Dollars in Millions)

2002

2001

2000

1999

1998

Assets
Cash and due from banks **************************************
Money market investments**************************************
Trading securities **********************************************
Held-to-maturity securities **************************************
Available-for-sale securities *************************************
Loans held for sale ********************************************
Loans ********************************************************
Less allowance for credit losses ***********************

$ 10,758
434
898
233
28,255
4,159
116,251
2,422

$ 9,120
625
982
299
26,309
2,820
114,405
2,457

$ 8,475
657
753
252
17,390
764
122,365
1,787

$ 7,324
1,934
617
194
17,255
670
113,229
1,710

$ 8,882
1,039
666
233
20,732
1,794
106,958
1,706

Net loans *******************************************
Other assets **************************************************

113,829
21,461

111,948
19,287

120,578
16,052

111,519
14,805

105,252
12,116

% Change
2001-2002

18.0%
(30.6)
(8.6)
(22.1)
7.4
47.5
1.6
(1.4)

1.7
11.3

Total assets ********************************************

$180,027

$171,390

$164,921

$154,318

$150,714

5.0%

Liabilities and Shareholders’ Equity
Deposits

Noninterest-bearing *****************************************
Interest-bearing ********************************************

$ 35,106
80,428

$ 31,212
74,007

$ 26,633
82,902

$ 26,350
77,067

$ 27,479
76,867

12.5%
8.7

Total deposits *******************************************
Short-term borrowings******************************************
Long-term debt ************************************************
Company-obligated mandatorily redeemable preferred securities ****
Other liabilities ************************************************

Total liabilities *******************************************
Shareholders’ equity *******************************************

115,534
7,806
28,588
2,994
7,004

161,926
18,101

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

9.8
(46.8)
11.2
5.9
7.8

4.5
10.0

Total liabilities and shareholders’ equity ********************

$180,027

$171,390

$164,921

$154,318

$150,714

5.0%

104 U.S. Bancorp

U.S. Bancorp
Consolidated Statement of Income — Five-Year Summary

Year Ended December 31 (Dollars in Millions)

2002

2001

2000

1999

1998

% Change
2001-2002

Interest Income
Loans*********************************************************
Loans held for sale *********************************************
Investment securities

Taxable ****************************************************
Non-taxable ************************************************
Money market investments **************************************
Trading securities **********************************************
Other interest income *******************************************
Total interest income *************************************

Interest Expense
Deposits ******************************************************
Short-term borrowings ******************************************
Long-term debt ************************************************
Company-obligated mandatorily redeemable preferred securities*****
Total interest expense ************************************
Net interest income*********************************************
Provision for credit losses ***************************************
Net interest income after provision for credit losses ****************

Noninterest Income
Credit and debit card revenue ***********************************
Corporate payment products revenue *****************************
ATM processing services****************************************
Merchant processing services ***********************************
Credit card and payment processing revenue**********************
Trust and investment management fees***************************
Deposit service charges ****************************************
Cash management fees*****************************************
Commercial products revenue ***********************************
Mortgage banking revenue **************************************
Trading account proﬁts and commissions *************************
Investment products fees and commissions ***********************
Investment banking revenue *************************************
Securities gains, net ********************************************
Merger and restructuring-related gains****************************
Other *********************************************************
Total noninterest income **********************************

Noninterest Expense
Salaries *******************************************************
Employee beneﬁts**********************************************
Net occupancy *************************************************
Furniture and equipment ****************************************
Communication ************************************************
Postage *******************************************************
Goodwill ******************************************************
Other intangible assets *****************************************
Merger and restructuring-related charges *************************
Other *********************************************************
Total noninterest expense *********************************

Income before income taxes and cumulative effect of change in

accounting principles ****************************************
Applicable income taxes ****************************************
Income before cumulative effect of change in accounting principles **
Cumulative effect of change in accounting principles ***************
Net income ****************************************************

$7,743.6
170.6

$ 9,413.7
146.9

$10,519.3
102.1

$ 9,078.0
103.9

$ 8,802.0
91.9

(17.7)%
16.1

1,438.2
46.1
10.6
37.1
107.5

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

9,553.7

11,041.9

12,029.3

10,582.0

10,408.4

1,485.3
249.4
842.7
136.6

2,828.1
534.1
1,184.8
127.8

3,618.8
781.7
1,511.7
110.7

2,970.0
582.4
1,126.9
111.0

3,234.7
594.7
926.5
103.8

2,714.0

4,674.8

6,022.9

4,790.3

4,859.7

6,839.7
1,349.0

6,367.1
2,528.8

6,006.4
828.0

5,791.7
646.0

5,548.7
491.3

5,490.7

3,838.3

5,178.4

5,145.7

5,057.4

517.0
325.7
136.9
567.3
*
899.1
714.0
416.9
479.2
330.2
206.5
428.9
207.4
299.9
—
339.6

465.9
297.7
130.6
308.9
*
894.4
667.3
347.3
437.4
234.0
221.6
460.1
258.2
329.1
62.2
286.4

431.0
299.2
141.9
120.0
*
926.2
555.6
292.4
350.0
189.9
258.4
466.6
360.3
8.1
—
526.8

*
*
*
*
837.8
887.1
501.1
280.6
260.7
190.4
222.4
450.8
246.6
13.2
—
398.9

*
*
*
*
748.0
788.3
470.3
242.0
138.5
244.6
130.3
306.9
100.4
29.1
48.1
419.8

5,868.6

5,401.1

4,926.4

4,289.6

3,666.3

2,409.2
367.7
409.3
306.0
183.8
178.4
—
553.0
324.1
1,525.1

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

6,256.6

6,605.2

5,717.0

5,661.3

5,423.4

5,102.7
1,776.3

3,326.4
(37.2)

2,634.2
927.7

1,706.5
—

4,387.8
1,512.2

2,875.6
—

3,774.0
1,392.2

2,381.8
—

3,300.3
1,167.4

2,132.9
—

19.2
(48.5)
(60.2)
(35.5)
5.8

(13.5)

(47.5)
(53.3)
(28.9)
6.9

(41.9)

7.4
(46.7)

43.1

11.0
9.4
4.8
83.7
*
.5
7.0
20.0
9.6
41.1
(6.8)
(6.8)
(19.7)
(8.9)
**
18.6

8.7

2.6
.4
(2.1)
.2
1.3
(.8)
**
98.6
(65.8)
14.5

(5.3)

93.7
91.5

94.9
**

$3,289.2

$ 1,706.5

$ 2,875.6

$ 2,381.8

$ 2,132.9

92.7%

* Information for 1999 and 1998 was classiﬁed as credit card and payment processing revenue. The current classiﬁcations are not available.
** Not meaningful

U.S. Bancorp 105

U.S. Bancorp
Quarterly Consolidated Financial Data

(Dollars in Millions, Except Per Share Data)

Interest Income
Loans *************************************
Loans held for sale**************************
Investment securities

Taxable *********************************
Non-taxable *****************************
Money market investments *******************
Trading securities ***************************
Other interest income ***********************
Total interest income ******************

Interest Expense
Deposits ***********************************
Short-term borrowings ***********************
Long-term debt *****************************
Company-obligated mandatorily redeemable

preferred securities************************
Total interest expense *****************
Net interest income *************************
Provision for credit losses ********************

Net interest income after provision for credit

losses ***********************************

Noninterest Income
Credit and debit card revenue ****************
Corporate payment products revenue *********
ATM processing services ********************
Merchant processing services ****************
Trust and investment management fees *******
Deposit service charges *********************
Cash management fees *********************
Commercial products revenue ****************
Mortgage banking revenue *******************
Trading account proﬁts and commissions ******
Investment products fees and commissions ****
Investment banking revenue******************
Securities gains, net*************************
Merger and restructuring-related gains ********
Other **************************************
Total noninterest income***************

Noninterest Expense
Salaries************************************
Employee beneﬁts **************************
Net occupancy *****************************
Furniture and equipment *********************
Communication *****************************
Postage************************************
Goodwill ***********************************
Other intangible assets **********************
Merger and restructuring-related charges ******
Other **************************************
Total noninterest expense *************

Income before income taxes and cumulative

effect of change in accounting principles*****
Applicable income taxes *********************

Income before cumulative effect of change in

accounting principles **********************

Cumulative effect of change in accounting

principles ********************************
Net income*********************************
Earnings per share**************************
Diluted earnings per share *******************

2002

2001

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

$1,931.9
39.2

$1,936.9
36.6

$1,961.2
37.3

$1,913.6
57.5

$2,651.1
16.6

$2,426.7
25.9

$2,275.5
53.9

$2,060.4
50.5

347.8
13.2
3.3
8.2
19.0

346.1
11.7
2.2
9.4
32.7

372.2
10.9
3.3
9.7
25.4

372.1
10.3
1.8
9.8
30.4

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

2,362.6

2,375.6

2,420.0

2,395.5

3,009.0

2,815.8

2,708.3

2,508.8

395.5
78.9
192.1

34.8

701.3

375.8
68.3
216.8

33.9

694.8

370.3
56.4
226.8

34.7

688.2

343.7
45.8
207.0

33.2

629.7

883.7
186.2
366.1

783.0
124.4
318.0

670.0
122.9
282.8

27.2

32.4

33.6

1,463.2

1,257.8

1,109.3

491.4
100.6
217.9

34.6

844.5

1,661.3
335.0

1,680.8
335.0

1,731.8
330.0

1,765.8
349.0

1,545.8
532.4

1,558.0
441.3

1,599.0
1,289.3

1,664.3
265.8

1,326.3

1,345.8

1,401.8

1,416.8

1,013.4

1,116.7

309.7

1,398.5

109.3
75.2
30.9
133.6
224.3
155.7
104.2
122.2
52.0
49.9
111.1
53.2
44.1
—
61.2

131.2
82.5
33.5
144.4
234.9
173.3
104.3
123.7
78.0
49.5
107.4
70.5
30.6
—
73.5

132.8
87.6
36.7
147.3
225.2
192.7
105.8
125.0
111.8
52.6
105.0
35.7
119.0
—
81.1

143.7
80.4
35.8
142.0
214.7
192.3
102.6
108.3
88.4
54.5
105.4
48.0
106.2
—
123.8

109.0
78.8
31.6
30.3
225.0
147.7
76.8
88.2
48.2
71.9
125.7
60.2
216.0
—
101.3

118.8
77.4
33.0
31.4
228.0
177.9
84.9
107.4
57.0
55.8
114.2
71.1
31.3
62.2
87.4

116.8
73.1
32.8
108.0
226.2
170.1
89.7
108.7
60.3
43.6
108.0
56.9
59.8
—
64.4

121.3
68.4
33.2
139.2
215.2
171.6
95.9
133.1
68.5
50.3
112.2
70.0
22.0
—
33.3

1,326.9

1,437.3

1,558.3

1,546.1

1,410.7

1,337.8

1,318.4

1,334.2

588.3
96.4
100.1
76.9
45.7
46.6
—
80.2
74.2
328.4

607.6
91.1
101.8
77.0
44.1
44.4
—
104.7
71.6
378.1

606.0
93.8
103.2
75.7
46.6
44.3
—
211.4
70.4
388.9

607.3
86.4
104.2
76.4
47.4
43.1
—
156.7
107.9
429.7

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

1,436.8

1,520.4

1,640.3

1,659.1

1,798.5

1,594.7

1,567.5

1,644.5

1,216.4
423.2

1,262.7
439.6

1,319.8
459.5

1,303.8
454.0

625.6
215.5

859.8
297.5

60.6
21.9

1,088.2
392.8

793.2

823.1

860.3

849.8

410.1

562.3

38.7

695.4

(37.2)

—

$ 756.0

$ 823.1

$ 860.3

$ 849.8

$ 410.1

$ 562.3

$
$

.39
.39

$
$

.43
.43

$
$

.45
.45

$
$

.44
.44

$
$

.22
.21

$
$

.30
.29

$
$

38.7

$ 695.4

.02
.02

$
$

.36
.36

106 U.S. Bancorp

U.S. Bancorp
Supplemental Financial Data

Earnings Per Share Summary

Earnings per share before cumulative effect of change in

accounting principles*****************************************
Cumulative effect of change in accounting principles **************

Earnings per share ********************************************

Diluted earnings per share before cumulative effect of change in

accounting principles*****************************************
Cumulative effect of change in accounting principles **************

Diluted earnings per share *************************************

Ratios

2002

2001

2000

1999

1998

1.74
(.02)

1.72

1.73
(.02)

1.71

.89
—

.89

.88
—

.88

1.51
—

1.51

1.50
—

1.50

1.25
—

1.25

1.23
—

1.23

1.12
—

1.12

1.10
—

1.10

Return on average assets **************************************
Return on average equity***************************************
Average total equity to average assets ***************************
Dividends per share to net income per share *********************

1.91%
19.4
9.9
45.3

1.03%
10.5
9.8
84.3

1.81%
20.0
9.1
43.0

1.59%
18.0
8.8
36.8

1.49%
17.2
8.7
29.5

Other Statistics (Dollars and Shares in Millions)

Common shares outstanding (a) ********************************
Average common shares outstanding and common stock equivalents
Earnings per share **************************************
Diluted earnings per share *******************************
Number of shareholders (b)*************************************
Common dividends declared ************************************

(a) Deﬁned as total common shares less common stock held in treasury at December 31.
(b) Based on number of common stock shareholders of record at December 31.

Stock Price Range and Dividends

1,917.0

1,951.7

1,902.1

1,928.5

1,903.5

1,916.0
1,926.1
74,805
$1,488.6

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

First quarter *****************************
Second quarter **************************
Third quarter ****************************
Fourth quarter ***************************

2002

Sales Price

2001

Sales Price

High

Low

$23.07
24.50
23.29
22.38

$19.02
22.08
17.09
16.05

Closing
Price

$22.57
23.35
18.58
21.22

Dividends
Declared

$.195
.195
.195
.195

High

Low

Closing
Price

Dividends
Declared

$26.06
23.60
25.24
22.95

$18.49
20.71
18.25
16.50

$23.20
22.79
22.18
20.93

$.1875
.1875
.1875
.1875

The common stock of U.S. Bancorp is traded on the New York Stock Exchange, under the ticker symbol ‘‘USB.’’

U.S. Bancorp 107

U.S. Bancorp
Consolidated Daily Average Balance Sheet and Related Yields

Year Ended December 31

2002

2001

(Dollars in Millions)

Average
Balances

Interest

Yields
and Rates

Average
Balances

Interest

Yields
and Rates

107.5

101.6

9,590.3

6.43

11,097.8

7.64

Assets
Money market investments ********************************
Trading securities ****************************************
Taxable securities ****************************************
Non-taxable securities ************************************
Loans held for sale ***************************************
Loans (b)

Commercial ***************************************
Commercial real estate *****************************
Residential mortgages******************************
Retail*********************************************

665
935
27,892
937
2,644

43,820
25,723
8,412
36,501

10.6
40.9
1,438.2
65.3
170.6

2,622.8
1,636.3
595.3
2,902.8

Total loans *************************************

114,456

7,757.2

Other earning assets *************************************
Allowance for credit losses *****************************

Total earning assets (c) *************************
Other assets *********************************************

1,614
2,542

149,143
25,347

Total assets ************************************

$171,948

Liabilities and Shareholders’ Equity
Noninterest-bearing deposits ******************************
Interest-bearing deposits

Interest checking **************************************
Money market accounts********************************
Savings accounts *************************************
Time certiﬁcates of deposit less than $100,000 ***********
Time deposits greater than $100,000 ********************

Total interest-bearing deposits********************
Short-term borrowings ************************************
Long-term debt ******************************************
Company-obligated mandatorily redeemable

$ 28,715

15,631
25,237
4,928
19,283
11,330

76,409
11,304
29,604

102.3
312.8
25.1
743.4
301.7

1,485.3
249.4
842.7

712
771
20,129
1,787
1,911

50,072
26,081
8,576
33,448

26.6
59.3
1,206.1
128.9
146.9

3,609.3
2,002.7
658.2
3,158.2

118,177

9,428.4

1,678
1,979

145,165
22,758

$165,944

$ 25,109

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
1,184.8

1.60%
4.38
5.16
6.97
6.45

5.99
6.36
7.08
7.95

6.78

6.66

.65
1.24
.51
3.86
2.66

1.94
2.21
2.85

4.70

2.26

preferred securities ************************************

2,904

136.6

Total interest-bearing liabilities********************
Other liabilities *******************************************
Shareholders’ equity **************************************

120,221
6,049
16,963

2,714.0

Total liabilities and shareholders’ equity ***********

$171,948

1,955

127.8

4,674.8

119,390
5,244
16,201

$165,944

Net interest income***************************************

$ 6,876.3

$ 6,423.0

Gross interest margin *************************************

Gross interest margin without taxable-equivalent increments **

Percent of Earning Assets
Interest income ******************************************
Interest expense *****************************************

Net interest margin ***************************************

Net interest margin without taxable-equivalent increments*****

4.17%

4.15

6.43%
1.82

4.61

4.59%

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)
(b)
(c) Before deducting the allowance for credit losses and excluding the unrealized gain (loss) on available-for-sale securities.

108 U.S. Bancorp

3.74%
7.69
5.99
7.21
7.69

7.21
7.68
7.67
9.44

7.98

6.05

1.46
2.85
.93
5.32
4.82

3.54
4.11
4.81

6.54

3.92

3.72%

3.68

7.64%
3.22

4.42

4.38%

and Rates (a)

2000

1999

1998

Average
Balances

Interest

Yields
and Rates

Average
Balances

Interest

Yields
and Rates

Average
Balances

Interest

Yields
and Rates

2001-2002

% Change
Average
Balances

12,114.7

8.62

10,678.3

7.98

10,519.6

8.24

931
779
14,567
2,744
1,303

50,062
26,040
11,207
31,008

53.9
57.6
1,008.3
203.1
102.1

4,222.6
2,296.9
863.7
3,155.1

118,317

10,538.3

151.4

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
1,511.7

109,638

9,101.0

102,451

8,831.2

5.79%
7.39
6.92
7.40
7.84

$ 1,082
630
16,301
2,970
1,450

4.15%
7.59
6.42
7.43
7.17

$ 1,170
428
17,977
3,137
1,264

44.9
47.8
1,047.1
220.6
103.9

3,261.1
1,922.8
1,056.3
2,860.8

113.0

231.0
842.2
111.9
1,322.6
462.3

2,970.0
582.4
1,126.9

63.0
27.6
1,179.5
238.2
91.9

3,093.8
1,784.4
1,208.7
2,744.3

88.2

230.9
825.1
146.7
1,622.7
409.3

3,234.7
594.7
926.5

38,983
20,458
15,604
27,406

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

7.53
8.33
7.60
9.75

8.30

6.70

1.79
3.74
1.88
5.03
5.33

3.89
4.97
5.57

7.93

4.37

43,328
23,076
13,890
29,344

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

8.43
8.82
7.71
10.18

8.91

7.70

2.07
4.39
1.47
5.64
6.32

4.55
6.21
6.75

7.91

5.19

1,400

110.7

6,022.9

116,002
4,294
14,365

$158,481

1,400

111.0

4,790.3

109,719
3,671
13,221

$150,167

1,314

103.8

4,859.7

104,077
3,416
12,383

$142,887

$ 6,091.8

$ 5,888.0

$ 5,659.9

3.43%

3.37

8.62%
4.29

4.33

4.27%

3.61%

3.54

7.98%
3.58

4.40

4.33%

5.38%
6.45
6.56
7.59
7.27

7.94
8.72
7.75
10.01

8.62

6.73

1.88
4.06
2.26
5.49
5.65

4.26
5.36
5.89

7.90

4.67

3.57%

3.48

8.24%
3.81

4.43

4.34%

(6.6)%
21.3
38.6
(47.6)
38.4

(12.5)
(1.4)
(1.9)
9.1

(3.1)

(3.8)
28.4

2.7
11.4

3.6

14.4

12.0
1.2
7.8
(17.3)
(13.2)

(4.3)
(12.9)
20.3

48.5

.7
15.4
4.7

3.6%

U.S. Bancorp 109

Annual Report on Form 10-K

Securities and Exchange Commission
Washington, D.C. 20549

The registrant is an accelerated ﬁler (as deﬁned in

Exchange Act Rule 12b-2).

Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the ﬁscal year ended
December 31, 2002

Commission File Number 1-6880

U.S. Bancorp

Incorporated in the State of Delaware
IRS Employer Identiﬁcation #41-0255900
Address: 800 Nicollet Mall
Minneapolis, Minnesota 55402-7014
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.

Securities registered pursuant to section 12(g) of the

Act: None.

As of January 31, 2003, U.S. Bancorp had

1,918,338,766 shares of common stock outstanding and
74,980 registered holders of its common stock. The
aggregate market value of common stock held by non-
afﬁliates as of June 30, 2002, was approximately
$44.3 billion.

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

Disclosure of delinquent ﬁlers pursuant to Item 405 of

Regulation S-K is contained in the registrant’s deﬁnitive
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.

Index

Part I

Item 1

Item 2

Item 3

Item 4

Part II

Item 5

Item 6

Item 7

Page

Business
General Business Description ****************** 111-112
Line of Business Financial Performance *********** 53-58
Website Access to SEC Reports ******************** 113
Properties **************************************** 112
Legal Proceedings ******************************* none

Submission of Matters to a Vote of

Security Holders ****************************** none

Market Price and Dividends for the Registrant’s Common

Equity and Related Stockholder Matters ***** 3, 50-51,
86-88, 91-93, 107, 110
Selected Financial Data************************** 17-18

Management’s Discussion and Analysis of

Financial Condition and Results of Operations*** 16-60

Item 7A Quantitative and Qualitative Disclosures About

Market Risk ********************************* 43-50
Financial Statements and Supplementary Data **** 62-109

Changes in and Disagreements with Accountants on

Accounting and Financial Disclosure ************* 113

Item 8

Item 9

Part III

Item 10 Directors and Executive Ofﬁcers

of the Registrant ************************** 118-120*
Item 11 Executive Compensation ****************************** *

Item 12 Security Ownership of Certain Beneﬁcial Owners

and Management and Related Stockholder Matters ****
************************************** 112-113*
Item 13 Certain Relationships and Related Transactions ********* *
Item 14 Controls and Procedures**************************** 60

Part IV

Item 15 Exhibits, Financial Statement Schedules and

Reports on Form 8-K *********************** 113-114
Signatures************************************************* 115
Certiﬁcations********************************************* 116-117

*U.S. Bancorp’s deﬁnitive proxy statement for the 2003 Annual Meeting of Shareholders
is incorporated herein by reference, other than the sections entitled ‘‘Report of the
Compensation Committee’’ and ‘‘Stock Performance Chart.’’

110 U.S. Bancorp

General Business Description U.S. Bancorp is a multi-state
ﬁnancial 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 ﬁnancial holding
company and a bank holding company under the Bank
Holding Company Act of 1956. U.S. Bancorp provides a
full range of ﬁnancial 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 $376 million to
$122 billion in deposits and provide a wide range of
products and services to individuals, businesses, institutional
organizations, governmental entities and other ﬁnancial
institutions. Commercial and consumer lending services are
principally offered 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, ﬁnancing and import/export trade,
asset-backed lending, agricultural ﬁnance and other
products. Leasing products are offered through non-bank
subsidiaries. Depository services include checking accounts,
savings accounts and time certiﬁcate 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 ﬁduciary services for individuals,
estates, foundations, business corporations and charitable
organizations.

Banking and investment services are provided through
a network of 2,142 banking ofﬁces principally operating in
24 states in the Midwest and West. The Company operates
a network of 4,604 branded ATMs and provides 24-hour,
seven days-a-week telephone customer service. Mortgage
banking services are provided through banking ofﬁces and
loan production ofﬁces 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 afﬁliations.

U.S. Bancorp’s other non-banking subsidiaries offer a

variety of products and services to the Company’s

customers. Its wholly owned subsidiary U.S. Bancorp Piper
Jaffray Inc. engages in equity and ﬁxed income trading
activities and offers 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 109 brokerage ofﬁces.

On a full-time equivalent basis, employment during

2002 averaged a total of 51,673 employees.

Competition The commercial banking business is highly
competitive. Subsidiary banks compete with other
commercial banks and with other ﬁnancial institutions,
including savings and loan associations, mutual savings
banks, ﬁnance 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 affected 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
ﬁscal policy, international currency regulations and
monetary policies, U.S. Patriot Act and capital adequacy
and liquidity constraints imposed by bank regulatory
agencies.

Supervision and Regulation As a registered bank holding
company and ﬁnancial holding company under the Bank
Holding Company Act, as amended by the Graham-Leach-
Bliley Act of 1999, U.S. Bancorp is subject to the
supervision of, and regulation by, the Board of Governors
of the Federal Reserve System.

Under the Bank Holding Company Act, a ﬁnancial
holding company may engage in banking, managing or
controlling banks, furnishing or performing services for
banks it controls, and conducting other ﬁnancial activities.
U.S. Bancorp must obtain the prior approval of the Federal
Reserve 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 Federal Reserve
Board in connection with engaging in, or acquiring more
than 5 percent of the outstanding shares of a company
engaged in, a new ﬁnancial activity.

Under the Bank Holding Company Act, as amended by
the Riegle-Neal Interstate Banking and Branching Efﬁciency
Act of 1994, U.S. Bancorp may acquire banks throughout

U.S. Bancorp 111

the United States, subject only to state or federal deposit
caps and state minimum age requirements.

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 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 signiﬁcant subsidiaries
occupy headquarter ofﬁces under a long-term lease in
Minneapolis, Minnesota. The Company also leases seven
freestanding operations centers in St. Paul, Portland,
Milwaukee and Denver. The Company owns ﬁve principal
operations centers in Cincinnati, St. Louis, Fargo and
Milwaukee. At December 31, 2002, the Company’s
subsidiaries owned and operated a total of 1,385 facilities
and leased an additional 1,478 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 10
and 23 of the Notes to Consolidated Financial Statements.

Equity Compensation Plan Information The following table summarizes information regarding equity compensation plans in
effect as of December 31, 2002.

Plan Category

Equity compensation plans approved by
security holders (a) ****************

Equity compensation plans not

approved by security holders (b) *****

Total**************************

Number of securities to be issued
upon exercise of outstanding options,
warrants and rights

Weighted-average exercise
price of outstanding options,
warrants and rights

Number of securities remaining
available for future issuance under
equity compensation plans (excluding
securities reﬂected in the ﬁrst column) (c)

103,657,787

16,311,199

119,968,986

$20.66

$22.66

$20.93

36,441,843

(a)

Includes shares underlying stock options and restricted stock units (convertible into shares of the Company’s common stock on a one-for-one basis) under the U.S. Bancorp 2001
Stock Incentive Plan, the U.S. Bancorp 1998 Executive Stock Incentive Plan and the U.S. Bancorp 1991 Executive Stock Incentive Plan. Excludes 87,093,223 shares underlying
outstanding stock options and warrants assumed by U.S. Bancorp in connection with acquisitions by U.S. Bancorp. Of the excluded shares, 73,117,792 underlie stock options
granted under equity compensation plans of the former U.S. Bancorp that were approved by the shareholders of the former U.S. Bancorp.

(b) All of the identiﬁed shares underlie stock options granted to a broad-based employee population pursuant to the U.S. Bancorp 2001 Employee Stock Incentive plan, the Firstar

Corporation 1999 Employee Stock Incentive Plan, the Firstar Corporation 1998 Employee Stock Incentive Plan, the Star Banc Corporation 1996 Starshare Stock Incentive Plan for
Employees and the Star Banc Corporation Starshare 1993 Stock Option Plan for Employees. Under the terms of the Starshare 1993 Stock Option Plan for Employees, any options
outstanding under that plan as of January 28, 2003 terminated on that date, and no future options will be granted under that plan.

(c) No shares are available for the granting of future awards under the U.S. Bancorp 1998 Executive Stock Incentive Plan or the U.S. Bancorp 1991 Executive Stock Incentive plan.
The 36,441,843 shares available under the U.S. Bancorp 2001 Stock Incentive Plan may become the subject of future awards in the form of stock options, stock appreciation
rights, restricted stock, restricted stock units, performance awards or other stock-based awards, except that only 8,746,029 of these shares are available for future grants of awards
other than stock options or stock appreciation rights.

Under the U.S. Bancorp 2001 Employee Stock Incentive

Plan (‘‘2001 Plan’’), 11,600,000 shares have been
authorized for issuance pursuant to the grant of
nonqualiﬁed stock options to any full-time or part-time
employee actively employed by U.S. Bancorp on the grant
date, other than individuals eligible to participate in any of
the Company’s executive stock incentive plans or in U.S.
Bancorp Piper Jaffray Inc.’s annual option plan. As of
December 31, 2002, options to purchase an aggregate of
8,054,500 were outstanding under the plan. All options
under the plan were granted on February 27, 2001.

As of December 31, 2002, options to purchase an
aggregate of 3,250,230 shares of the Company’s common
stock were outstanding under the Firstar Corporation 1999
Employee Stock Incentive Plan (‘‘1999 Plan’’). Under this
plan, stock options were granted to each full-time or part-
time employee actively employed by Firstar Corporation on
the grant date, other than managers who participated in an
executive stock incentive plan.

As of December 31, 2002, options to purchase an
aggregate of 4,377,150 shares of the Company’s common
stock were outstanding under the Firstar Corporation 1998
Employee Stock Incentive Plan (‘‘1998 Plan’’). Under this
plan, stock options were granted to each full-time or part-
time employee actively employed by Firstar Corporation on
the grant date, other than managers who participated in an
executive stock incentive plan.

As of December 31, 2002, options to purchase an

aggregate of 601,086 shares of the Company’s common
stock were outstanding under the Star Banc Corporation
1996 Starshare Stock Incentive Plan for Employees (‘‘1996
Plan’’). Under the plan, stock options were granted to each
employee of Star Banc Corporation, a predecessor company,
other than managers who participated in an executive stock
incentive plan.

No future options will be granted under any of these

plans. Under all of the plans, the exercise price of the
options equals the fair market value of the underlying
common stock on the grant date. All options granted under

112 U.S. Bancorp

the plan have a term of 10 years from the grant date and
become exercisable over a period of time set forth in the
plan or determined by the committee administering the
plan. Options granted under the plan are nontransferable
and, during the optionee’s lifetime, are exercisable only by
the optionee.

If an optionee is terminated as a result of his or her

gross misconduct or offense, all options terminate
immediately, whether or not vested. Under the 2001 Plan,
the 1999 Plan and the 1998 Plan, in the event an optionee
is terminated immediately following a change in control (as
deﬁned in the plans) of U.S. Bancorp, and the termination is
due to business needs resulting from the change in control
and not as a result of the optionee’s performance or
conduct, all of the optionee’s outstanding options will
become immediately vested and exercisable as of the date of
such termination. Under the 1996 Plan, all outstanding
options vest and become exercisable immediately following
a change in control.

If the outstanding shares of common stock of

U.S. Bancorp are changed into or exchanged for a different
number or kind of shares of stock or other securities as a
result of a reorganization, recapitalization, stock dividend,
stock split, combination of shares, reclassiﬁcation, merger,
consolidation or similar event, the number of shares
underlying outstanding options also may be adjusted. The
plans may be terminated, amended or modiﬁed by the
Board of Directors at any time.

Change in Certifying Accountants In response to the
Sarbanes-Oxley Act of 2002, the Audit Committee
determined on November 8, 2002, to segregate the internal
and external auditing functions performed for U.S. Bancorp
in ﬁscal year 2002 by PricewaterhouseCoopers LLP and
appointed Ernst & Young LLP to become the Company’s
external auditors following the ﬁling of the Company’s
2002 Annual Report on Form 10-K during the ﬁrst quarter
of 2003. PricewaterhouseCoopers LLP completed the audit
of the Company’s ﬁnancial statements for the year ended
December 31, 2002, and will continue to provide internal
audit services under the direction of the Company’s internal
audit team.

No report of PricewaterhouseCoopers LLP on the
financial statements of U.S. Bancorp for the past two fiscal
years contained an adverse opinion or a disclaimer of
opinion, or was qualified or modified as to uncertainty, audit
scope or accounting principles. During the Company’s two
most recent fiscal years, there were no disagreements with
PricewaterhouseCoopers LLP on any matter of accounting
principles or practices, financial statement disclosure or

auditing scope or procedure which, if not resolved to the
satisfaction of PricewaterhouseCoopers LLP, would have
caused it to make reference to the subject matter of the
disagreement in connection with its reports on the financial
statements for such years. U.S. Bancorp believes that during
the most two recent fiscal years, there were no ‘‘reportable
events,’’ as defined in Item 304(a)(1)(v) of Regulation S-K of
the Securities and Exchange Commission.

During the Company’s two most recent ﬁscal years, the
Company did not consult with Ernst & Young LLP on any
items regarding the application of accounting principles, the
type of audit opinion that might be rendered on the
Company’s ﬁnancial statements, or the subject matter of a
disagreement or reportable event (as described in Regulation
S-K Item 304(a)(2)).

U.S. Bancorp reported the change in accountants on
Form 8-K on November 14, 2002. The Form 8-K contained
a letter from PricewaterhouseCoopers LLP, addressed to the
Securities and Exchange Commission, stating that it agreed
with the statements concerning PricewaterhouseCoopers
LLP in such Form 8-K.

Website Access to SEC Reports U.S. Bancorp’s Internet
website can be found at www.usbank.com. U.S. Bancorp
makes available free of charge on its website its annual
reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those
reports ﬁled or furnished pursuant to Section 13(a) or
159(d) of the Exchange Act, as well as all other reports
ﬁled by U.S. Bancorp with the SEC, as soon as reasonably
practicable after we electronically ﬁle them with, or furnish
them to, the SEC.

Exhibits

Financial Statements Filed

U.S. Bancorp and Subsidiaries

Consolidated Financial Statements ******************
Notes to Consolidated Financial Statements *************
Report of Independent Accountants ********************

Page

62-65
66-103
61

Schedules to the consolidated ﬁnancial 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, 2002,

and through the date of this report, the Company ﬁled the
following Current Reports on Form 8-K:

Form 8-K ﬁled October 16, 2002, relating to third

quarter 2002 and anticipated full year 2002 earnings.

Form 8-K ﬁled November 14, 2002, announcing a

change in U.S. Bancorp’s certifying accountants.

U.S. Bancorp 113

The Company furnished to the SEC on a Form 8-K
dated November 14, 2002, certiﬁcations by the Company’s
Chief Executive Ofﬁcer and Chief Financial Ofﬁcer of the
Company’s quarterly report on Form 10-Q for the third
quarter of 2002.

Form 8-K dated January 21, 2003, relating to the

Company’s fourth quarter 2002 ﬁnancial results.

Form 8-K dated February 19, 2003, announcing

the planned spin-off of U.S. Bancorp’s capital markets
business unit.

The following Exhibit Index lists the Exhibits to the

Annual Report on Form 10-K.

(1)3.1 Restated Certiﬁcate of Incorporation, as

amended. Filed as Exhibit 3.1 to Form 10-K
for the year ended December 31, 2000.
(1)3.2 Restated bylaws, as amended. Filed as

Exhibit 3.2 to Form 10-K for the year ended
December 31, 2001.

4.1

[Pursuant to Item 601(b)(4)(iii)(A) of
Regulation S-K, copies of instruments
deﬁning the rights of holders of long-term
debt are not ﬁled. 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.

(1)(2)10.1 U.S. Bancorp 2001 Stock Incentive Plan.

Filed as Exhibit 10.1 to Form 10-K for the
year ended December 31, 2001.
(2)10.2 Amendment No. 1 to U.S. Bancorp 2001

Stock Incentive Plan.

(2)10.3 U.S. Bancorp 1998 Executive Stock Incentive

Plan

(2)10.4

Summary of U.S. Bancorp 1991 Executive
Stock Incentive Plan.

(2)10.5 U.S. Bancorp 2001 Employee Stock Incentive

Plan.

(2)10.6

(2)10.7

(2)10.8

Firstar Corporation 1999 Employee Stock
Incentive Plan.

Firstar Corporation 1998 Employee Stock
Incentive Plan.

Star Banc Corporation 1996 Starshare Stock
Incentive Plan for Employees.

(1)(2)10.9 U.S. Bancorp Executive Incentive Plan. Filed

as Exhibit 10.2 to Form 10-K for the year
ended December 31, 2001.

(1)(2)10.10 U.S. Bancorp Executive Deferral Plan, as

amended. Filed as Exhibit 10.7 to Form 10-K
for the year ended December 31, 1999.

114 U.S. Bancorp

(1)(2)10.11 Summary of Nonqualiﬁed Supplemental

Executive Retirement Plan, as amended, of
the former U.S. Bancorp. Filed as
Exhibit 10.4 to Form 10-K for the year
ended December 31, 2001.

(1)(2)10.12 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)10.13 Form of Director Indemniﬁcation 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)10.14 U.S. Bancorp Independent Director

Retirement and Death Beneﬁt Plan, as
amended. Filed as Exhibit 10.17 to
Form 10-K for the year ended December 31,
1999.

(1)(2)10.15 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.

(2)10.16 U.S. Bancorp Non Qualiﬁed Executive

Retirement Plan.

(1)(2)10.17 U.S. Bancorp Deferred Compensation Plan.
Filed as Exhibit 10.11 to Form 10-K for the
year ended December 31, 2001.

(2)10.18 Amendment No. 1 to U.S. Bancorp Deferred

Compensation Plan.

(1)(2)10.19 Form of Change in Control Agreement,
effective November 16, 2001, between
U.S. Bancorp and certain executive ofﬁcers of
U.S. Bancorp. Filed as Exhibit 10.12 to
Form 10-K for the year ended December 31,
2001.

(1)(2)10.20 Employment Agreement with Jerry A.
Grundhofer. Filed as Exhibit 10.13 to
Form 10-K for the year ended December 31,
2001.

(1)(2)10.21 Employment Agreement with John F.
Grundhofer. Filed as Exhibit 10.14 to
Form 10-K for the year ended December 31,
2001.

(2)10.22 Employment Agreement with Edward

Grzedzinski.

Statement re: Computation of Ratio of
Earnings to Fixed Charges.

Subsidiaries of the Registrant.

Consent of PricewaterhouseCoopers LLP.

(1) Exhibit has previously been ﬁled with the Securities and Exchange Commission and

is incorporated herein as an exhibit by reference to the prior ﬁling.

(2) Management contracts or compensatory plans or arrangements.

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, 2003, on its
behalf by the undersigned, thereunto duly authorized.

U.S. Bancorp
By: Jerry A. Grundhofer
Chairman, President and Chief Executive Ofﬁcer

Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below on February 28,
2003, by the following persons on behalf of the registrant
and in the capacities indicated.

John F. Grundhofer

Director

Roger L. Howe

Director

Delbert W. Johnson

Director

Joel W. Johnson

Director

Jerry W. Levin

Director

Frank Lyon, Jr.

Director

Jerry A. Grundhofer

Chairman, President and Chief Executive Ofﬁcer
(principal executive ofﬁcer)

David M. Moffett

Vice Chairman and Chief Financial Ofﬁcer
(principal ﬁnancial ofﬁcer)

Terrance R. Dolan

Executive Vice President and Controller
(principal accounting ofﬁcer)

Linda L. Ahlers

Director

Victoria Buyniski Gluckman

Director

Arthur D. Collins, Jr.

Director

Peter H. Coors

Director

John C. Dannemiller

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

Craig D. Schnuck

Director

Warren R. Staley

Director

Patrick T. Stokes

Director

John J. Stollenwerk

Director

U.S. Bancorp 115

CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

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

(1) I have reviewed this annual report on Form 10-K (this ‘‘Form 10-K’’) of U.S. Bancorp;

(2) Based on my knowledge, this Form 10-K does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this Form 10-K;

(3) Based on my knowledge, the ﬁnancial statements, and other ﬁnancial information included in this Form 10-K, fairly

present in all material respects the ﬁnancial condition, results of operations and cash ﬂows of the registrant as of, and
for, the periods presented in this Form 10-K;

(4) The registrant’s other certifying ofﬁcers and I are responsible for establishing and maintaining disclosure controls and

procedures (as deﬁned in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant,

including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this Form 10-K is being prepared;

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to

the ﬁling date of this Form 10-K (the ‘‘Evaluation Date’’); and

on our evaluation as of the Evaluation Date;

(5) The registrant’s other certifying ofﬁcers and I have disclosed, based on our most recent evaluation, to the registrant’s
auditors and the audit committee of registrant’s board of directors (or persons fulﬁlling the equivalent function):

(a) all signiﬁcant deﬁciencies in the design or operation of internal controls which could adversely affect the registrant’s
ability to record, process, summarize and report ﬁnancial data and have identiﬁed for the registrant’s auditors any
material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves management or other employees who have a signiﬁcant role in the

registrant’s internal controls; and

(6) The registrant’s other certifying officers and I have indicated in this Form 10-K whether there were significant changes in

internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Dated: February 28, 2003

/s /

JERRY A. GRUNDHOFER

Jerry A. Grundhofer
Chairman, President and Chief Executive Ofﬁcer

116 U.S. Bancorp

CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

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