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(FIVE STAR LOGO)

  Five Star

     Service Guaranteed

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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.

 


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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 shareholders 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 comprehensive 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.


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1 U.S. Bancorp


TABLE OF CONTENTS

Graphs of Selected Financial Highlights
Financial Summary
Letter to Shareholders
Corporate Governance
Outstanding Service and Convenience
Growing Core Revenue
Lines of Business Highlights:
Consumer Banking
Payment Services
Private Client, Trust & Asset Management
Wholesale Banking
Capital Markets
U.S. Bank Hispanic Initiative
Every Community Counts
Management’s Discussion and Analysis
Responsibility for Financial Statements of U.S. Bancorp
Report of Independent Accountants
Consolidated Balance Sheet
Consolidated Statement of Income
Consolidated Statement of Shareholders’ Equity
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
Consolidated Balance Sheet -- Five-Year Summary
Consolidated Statement of Income -- Five-Year Summary
Quarterly Consolidated Financial Data
Supplemental Financial Data
Consolidated Daily Average Balance Sheet and Related Yields and Rates
Annual Report on Form 10-K
Executive Officers
Directors
EX-10.02 Amendment 1 to 2001 Stock Incentive Plan
EX-10.03 1998 Executive Stock Incentive Plan
EX-10.04 Summary 1991 Exec. Stock Incentive Plan
EX-10.05 2001 Employee Stock Incentive Plan
EX-10.06 Firstar 1999 Emp. Stock Incentive Plan
EX-10.07 Firstar 1998 Emp. Stock Incentive Plan
EX-10.08 Star Banc 1996 Starshare Stock Incentive
EX-10.16 Non Qualified Executive Retirement Plan
EX-10.18 Amendment 1 to Deferred Compensation Plan
EX-10.22 Employment Agreement - Edward Grzedzinski
EX-12 Computation of Ratio of Earnings to Fixed
EX-21 Subsidiaries of the Registrant
EX-23 Consent of PricewaterhouseCoopers LLP


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Graphs of Selected Financial Highlights (CHART) (CHART) (CHART) (CHART)

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Financial Summary

                                           
                               
                            2002   2001
Year Ended December 31 (Dollars and Shares in Millions, Except Per Share Data)   2002   2001   2000   v 2001   v 2000

 
 
 
 
 
Total net revenue (taxable-equivalent basis)
  $ 12,744.9     $ 11,761.9     $ 11,018.2       8.4 %     6.7 %
Noninterest expense
    5,932.5       5,658.8       5,368.3       4.8       5.4  
Provision for credit losses
    1,349.0       2,146.6       828.0                  
Income taxes
    1,925.7       1,405.7       1,715.0                  
   
 
 
       
 
Operating earnings (a)
  $ 3,537.7     $ 2,550.8     $ 3,106.9       38.7 %     (17.9 )%
Merger and restructuring-related items (after-tax)
    (211.3 )     (844.3 )     (231.3 )                
Cumulative effect of change in accounting principles (after-tax)
    (37.2 )                            
   
 
 
       
    Net income
  $ 3,289.2     $ 1,706.5     $ 2,875.6       92.7 %     (40.7 )%
   
 
 
       
 
                                       
Per Common Share
                                       
Earnings per share before cumulative effect of 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
    1.73       .88       1.50       96.6       (41.3 )
Earnings per share
    1.72       .89       1.51       93.3       (41.1 )
Diluted earnings per share
    1.71       .88       1.50       94.3       (41.3 )
Dividends declared per share (b)
    .78       .75       .65       4.0       15.4  
Book value per share
    9.44       8.43       7.97       12.0       5.8  
Market value per share
    21.22       20.93       23.25       1.4       (10.0 )
Average shares outstanding
    1,916.0       1,927.9       1,906.0       (.6 )     1.1  
Average diluted shares outstanding
    1,926.1       1,939.5       1,918.5       (.7 )     1.1  
 
                                       
Financial Ratios
                                       
Return on average assets
    1.91 %     1.03 %     1.81 %                
Return on average equity
    19.4       10.5       20.0                  
Net interest margin (taxable-equivalent basis)
    4.61       4.42       4.33                  
Efficiency ratio
    50.3       57.5       51.9                  
 
                                       
Financial Ratios Excluding Merger and Restructuring-Related Items and Cumulative Effect of Change in Accounting Principles (a)
                                       
Return on average assets
    2.06 %     1.54 %     1.96 %                
Return on average equity
    20.9       15.7       21.6                  
Efficiency ratio
    47.7       49.5       48.8                  
Banking efficiency ratio (c)
    44.0       45.2       43.5                  
 
                                       
Average Balances
                                       
Loans
  $ 114,456     $ 118,177     $ 118,317       (3.1 )%     (.1 )%
Investment securities
    28,829       21,916       17,311       31.5       26.6  
Earning assets
    149,143       145,165       140,606       2.7       3.2  
Assets
    171,948       165,944       158,481       3.6       4.7  
Deposits
    105,124       104,956       103,426       .2       1.5  
Total shareholders’ equity
    16,963       16,201       14,365       4.7       12.8  
 
                                       
Period End Balances
                                       
Loans
  $ 116,251     $ 114,405     $ 122,365       1.6 %     (6.5 )%
Allowance for credit losses
    2,422       2,457       1,787       (1.4 )     37.5  
Investment securities
    28,488       26,608       17,642       7.1       50.8  
Assets
    180,027       171,390       164,921       5.0       3.9  
Deposits
    115,534       105,219       109,535       9.8       (3.9 )
Total shareholders’ equity
    18,101       16,461       15,168       10.0       8.5  
Regulatory capital ratios
 Tangible common equity
    5.6 %     5.7 %     6.3 %                
 
Tier 1 capital
    7.8       7.7       7.2                  
 
Total risk-based capital
    12.2       11.7       10.6                  
 
Leverage
    7.5       7.7       7.4                  


(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 economic or industry conditions could be less favorable than expected, resulting in a deterioration in credit quality, a change in the allowance for credit losses, or a reduced demand for credit or fee-based products and services; (ii) changes in the domestic interest rate environment could reduce net interest income and could increase credit losses; (iii) 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 consolidation, 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

 


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Fellow Shareholders: (USBANK LOGO)
   
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 integration 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 responsiveness 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 corporation. While our credit costs are still too high, reflecting the nation’s current economic condition, it appears credit quality has stabilized, and the improvements 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.
     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 significant 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 Signature)

Jerry A. Grundhofer

Chairman, President and
Chief Executive Officer

February 28, 2003


In Remembrance

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


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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 directors. 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 company boards a director may serve on to three. The Chairman, President and Chief Executive Officer of U.S. Bancorp serves on only two other public company boards. Audit Committee members may serve on no more than three other public company audit committees, and the chairman of the Audit Committee serves on no other audit committees.

Board of Directors’ Knowledge and Expertise
All of our directors are skilled business leaders. Directors are encouraged to attend continuing director education seminars in order to keep a sharp focus on current good governance practices. In addition, the Board and each committee 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 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 beneficiaries 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 compliance with the standards of the Code. The content of the Code is based not solely on what we have the right to do, but, even more importantly, on what is the right thing to do. Our standards are higher than any legal minimum because our business is built on trust. You may review our Code of Ethics and Business Conduct on our Internet web site at usbank.com. Click on About U.S. Bancorp and then on Ethics at U.S. Bank.
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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 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

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and outbound telesales calls, offering customers new products and services to meet their needs while generating revenue 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, representing 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 balances, make transfers, open checking accounts, apply for loans and more—anywhere they have Internet access. With a host of new features introduced in 2002, including a streamlined 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, comprehensive 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 complete suite of commercial products.(IMAGE)

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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.

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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 business 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 technology, personalized training, ongoing product education, effective marketing campaigns 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.

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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 customer’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 relationships 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.

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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 partnership 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 strengthened, 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.
     •     Checking That Pays® Rewards 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.
     •     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.
     •     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.
     •     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.
     •     PowerTrack® The newest release in November 2002, significantly enhances customer capability to control costs in the supply chain and payment process.
     •     U.S. Bank Access Online A web-based program management and reporting tool that can be configured to best support customers’ business processes.
     •     Quick Credit Line A one-application line, loan or lease solution for small business credit needs under $50,000.
     •     SBA Express Provides streamlined loan processing for Small Business Administration loans under $250,000.
     •     U.S. Bank TrustNow Essentials A way for Trust customers to retrieve and customize account information and reports via the Internet.
     •     FACTS 529 Trust and Agency Accounts Unique products combining the benefits of a 529 Savings Plan with the value of a fiduciary relationship.

(FIRST AMERICAN FUNDS LOGO)

     •     First American Funds™ Enhanced family of funds with three new fixed income funds—Intermediate Government Bond Fund, Short Tax Free Fund and Ohio Tax Free Fund.(SYMBOL)

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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 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.

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Strengths   Key Business Units
-   2,142 full-service branch banking offices   -   Community Branch Banking
-   4,604 ATMs   -   Metropolitan Branch Banking
-   Top 2 bank lessor   -   In-Store and Corporate On-Site Banking
-   Top 3 Small Business Administration (SBA) bank   -   24-Hour Banking and Financial Sales
    lender by volume   -   Consumer Lending
-   Top 3 small business lender   -   Home Mortgage
-   Top 4 branch network   -   Investments and Insurance
-   Top 4 Small Business Internet Banking site as rated by   -   Group Sales and Student Banking
    by Speer and Associates   -   Small Business Banking
-   Top 9 student loan provider        
-   Top 9 Internet Banking site as rated by Gomez.com        
-   Unparalleled sales and service culture built on customer needs        

Successes

  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.
  U.S. Bank Internet Bill Pay reached 100,000 subscribers in 2002 as enrollment grew by 25 percent.
  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.
  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.
  Introduced the innovative “Free x 3” checking program, offering free checking for small business owners, their businesses and their employees.
  Home Mortgage realized its fifth straight year of increased profitability, with an average annual growth rate of 23 percent.
  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.
  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.
 
*   Total net revenue is on a taxable-equivalent basis. Treasury and Corporate Support contributed 7.2% of 2002 total net revenue.

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Payment Services
Our unique payment services business 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, 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 and its ultimate long-term potential is virtually limitless.

(PIE CHART)

                     
    Strengths               Key Business Units
  Top commercial bankcard issuer     Processor of 6 percent of all     Corporate Payment Systems
  Top purchasing bankcard     ATM/debit point of sale     – Travel and entertainment, purchasing, fleet,
provider     transactions in the U.S.     freight payment systems and business to business
Top corporate bankcard     Processor of     payments
provider     ATM/debit/credit     Transaction Services
Top 2 fleet card transactions for more than – ATM banking
provider     21 percent of all banks in the     – Elan Financial Services
Top 2 freight payments provider     U.S.     NOVA Information Systems, Inc.
  Top 3 bank-owned ATM network     Proprietary technology     – Merchant processing with top 3 market share
  Top 3 merchant payment     Industry-leading     Retail Payment Solutions
  processor     implementation and service     – Relationship-based retail payment solutions;
  Top 6 U.S. credit and debit card     models       includes credit, debit and stored value cards
  issuer in total sales volume           through U.S. Bank, correspondent agent banks
  Top 9 ATM processor           and co-brand partners
  Top 8 worldwide credit and debit          
  card issuer in total sales volume            
             
               

(CREDIT CARD PICTURE)

Successes

  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.
  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.
  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.
  Leading the industry, Corporate Payment Systems successfully held its first ever Financial Supply Chain conference, attended by 1,000 clients.
  Corporate Payment Systems signed its first Global Corporate Payment Systems client, marking the start of exciting new growth and revenue potential.
  Introduced eCommerce Suite, an e-procurement product that helps businesses empower their employees to make company purchases while simplifying the procurement process.
  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.
  Retail Payment Solutions successfully launched REI® Visa and Korean Air SKYPASS® co-brand credit card programs.
  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.

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Private Client, Trust & Asset Management

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

(PIE CHART)

                             
Key Business Units               Strengths
  Corporate Trust Services     Private Client Group     Top municipal finance trustee
    -   Escrow       -   Private Banking     Top 5 in corporate and asset-backed bond issues
    -   Public Finance/Structured
Finance/Corporate Finance
      -
-
  Personal Trust
Investment Management
 
Top 5 bank-affiliated U.S. mutual fund family
Top 5 full-service, third-party provider of mutual fund services
    -   Document Custody       -   Financial and Estate Planning     Top 6 bank provider of recordkeeping by assets
  Institutional Trust & Custody     U.S. Bancorp Asset Management, Inc.     Private Client Group has $63.2 billion in assets under administration
    -
-
  Retirement Plans
Institutional Custody
      -
-
  Private Asset Management
Securities Lending
    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.
    -   Master Trust       -   Institutional Advisory     First American Funds family includes open-end funds with assets of more
            -   First American FundsTM     than $52 billion**
              U.S. Bancorp Fund Services, LLC     24 First American Funds named Lipper leaders as of December 31, 2002
                -   Mutual Fund Administration and Compliance     Easy access, flexibility and creative customization of products and services
                -   Transfer Agent        
                -   Mutual Fund Accounting        
                -   Fund Distribution        
                -   Partnership Administration        
                -   Offshore Trust Administration        

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.

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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.

(PIE CHART)

             
    Key Business Units       Strengths
  Commercial Banking     Leading depository bank for federal, state and municipal governments
  Corporate Banking     Leading correspondent banking depository for community banks
  Government Banking     Top 5 bank-owned leasing company
  International Banking     Top 7 treasury management provider
  Real Estate Banking     Locally based relationship managers
  Treasury Management U.S. Bancorp Equipment Finance     Combine superior relationship-based partnerships with the most effective new electronic systems and technology platforms
          Strategic solutions driven by customer need

(PICTURE)

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 management 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 consumers and regionally based businesses through a network of brokerage offices.

(PIE CHART)

             
    Key Business Units       Strengths
  Equity Capital Markets     Leading provider of fixed-income investment banking services
  Fixed Income Capital Markets     Leading growth company investment bank
  Private Advisory Services     Experienced, trusted advisors
  Venture Capital     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 addition 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.

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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 unparalleled 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 community 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 communicate most effectively with customers.
     Any employee across our company can contact bilingual bankers using an internal directory, so customers who speak another language can be served anywhere, 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 identification 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, including the United States Hispanic Chamber of Commerce (USHCC), the National Council of La Raza (NCLR) and the Latin Business Association (LBA).(SYMBOL)

(PICTURE)

Iniciativa Hispana de U.S. Bank        
Usted tiene amigos en U.S. Bank.

Nuestra vision es convertirnos en el Mejor Banco de los Estados Unidos de America para la comunidad hispana. Para poder cumplir con nuestro compromiso 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 areas de impacto: contratacion de personal, mercadeo, productos y compromiso con la comunidad.
     Una de nuestras prioridades es la contratacion de personal que hable espanol para las sucursales y centros de atencion telefonica. Nuestros empleados reflejan la diversidad de sus comunidades locales, mantienen solidas 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 contacto con agentes bilingües por medio de un directorio interno, para que los clientes que hablan otros idiomas puedan recibir atencion en cualquier lugar y en cualquier momento.
     Las herramientas de mercadeo en espanol 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 graficos y radiofonicos difunden nuestros productos, servicios y compromiso con el mercado hispano.
     Ofrecemos multiples productos y servicios personalizados para satisfacer las necesidades especificas de los clientes hispanos. Nuestros cajeros automaticos y nuestro Servicio bancario las 24 horas (24-Hour Banking) presentan todo el menu de opciones en espanol. La informacion de productos en espanol tambien esta disponible en nuestro sitio de Internet: usbank.com/espanol. Aceptamos documentos de identidad emitidos por el Consulado de Mexico para abrir una cuenta. Quienes solicitan un credito por primera vez pueden calificar para dicho credito utilizando nuestro Prestamo Asegurado para el Desarrollo de Historial de Credito y la Tarjeta Visa Asegurada. U.S. Bank es socio del programa En Su Casa que brinda asesoramiento e hipotecas flexibles a los propietarios. Llegamos a las empresas cuyos duenos son hispanos a traves de reuniones personales, sesiones telefonicas y correspondencia.
     U.S. Bank tambien es patrocinador de una variedad de acontecimientos culturales y comunitarios de importancia para la poblacion 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 Camara de Comercio Hispana de los Estados Unidos de America (USHCC, por sus siglas en ingles), el Consejo Nacional de la Raza (NCLR) y la Asociacion de Empresas Latinas/os (LBA).(SYMBOL)

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(PICTURE)

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

Every Community Counts

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 organizations. 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..(IMAGE)

(PIE CHART)

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Management’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
 
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 Table 1   Selected Financial Data
                                           
Year Ended December 31
(Dollars and Shares in Millions, Except Per Share Data) 2002 2001 2000 1999 1998

Condensed Income Statement
                                       
Net interest income (taxable-equivalent basis) (a)
  $ 6,876.3     $ 6,423.0     $ 6,091.8     $ 5,888.0     $ 5,659.9  
Noninterest income
    5,568.7       5,072.0       4,918.3       4,276.4       3,637.2  
Securities gains, net
    299.9       329.1       8.1       13.2       29.1  
   
  Total net revenue     12,744.9       11,824.1       11,018.2       10,177.6       9,326.2  
Noninterest expense
    6,256.6       6,605.2       5,717.0       5,661.3       5,423.4  
Provision for credit losses
    1,349.0       2,528.8       828.0       646.0       491.3  
   
 
Income before taxes and cumulative effect of change in accounting principles
    5,139.3       2,690.1       4,473.2       3,870.3       3,411.5  
Taxable-equivalent adjustment
    36.6       55.9       85.4       96.3       111.2  
Income taxes
    1,776.3       927.7       1,512.2       1,392.2       1,167.4  
   
Income before cumulative effect of change in accounting principles
    3,326.4       1,706.5       2,875.6       2,381.8       2,132.9  
Cumulative effect of change in accounting principles (after-tax)
    (37.2 )                        
   
  Net income   $ 3,289.2     $ 1,706.5     $ 2,875.6     $ 2,381.8     $ 2,132.9  
   
Per Common Share
                                       
Earnings per share before cumulative effect of change in accounting principles
  $ 1.74     $ .89     $ 1.51     $ 1.25     $ 1.12  
Diluted earnings per share before cumulative effect of change in accounting principles
    1.73       .88       1.50       1.23       1.10  
Earnings per share
    1.72       .89       1.51       1.25       1.12  
Diluted earnings per share
    1.71       .88       1.50       1.23       1.10  
Dividends declared per share (b)
    .78       .75       .65       .46       .33  
Book value per share
    9.44       8.43       7.97       7.23       6.61  
Market value per share
    21.22       20.93       23.25       21.13       31.00  
Average shares outstanding
    1,916.0       1,927.9       1,906.0       1,907.8       1,898.8  
Average diluted shares outstanding
    1,926.1       1,939.5       1,918.5       1,930.0       1,930.5  
 
Financial Ratios
                                       
Return on average assets
    1.91 %     1.03 %     1.81 %     1.59 %     1.49 %
Return on average equity
    19.4       10.5       20.0       18.0       17.2  
Net interest margin (taxable-equivalent basis)
    4.61       4.42       4.33       4.40       4.43  
Efficiency ratio
    50.3       57.5       51.9       55.7       58.3  
 
Average Balances
                                       
Loans
  $ 114,456     $ 118,177     $ 118,317     $ 109,638     $ 102,451  
Loans held for sale
    2,644       1,911       1,303       1,450       1,264  
Investment securities
    28,829       21,916       17,311       19,271       21,114  
Earning assets
    149,143       145,165       140,606       133,757       127,738  
Assets
    171,948       165,944       158,481       150,167       142,887  
Noninterest-bearing deposits
    28,715       25,109       23,820       23,556       23,011  
Deposits
    105,124       104,956       103,426       99,920       98,940  
Short-term borrowings
    11,304       12,980       12,586       11,707       11,102  
Long-term debt
    29,604       24,608       22,410       20,248       15,732  
Total shareholders’ equity
    16,963       16,201       14,365       13,221       12,383  
 
Period End Balances
                                       
Loans
  $ 116,251     $ 114,405     $ 122,365     $ 113,229     $ 106,958  
Allowance for credit losses
    2,422       2,457       1,787       1,710       1,706  
Investment securities
    28,488       26,608       17,642       17,449       20,965  
Assets
    180,027       171,390       164,921       154,318       150,714  
Deposits
    115,534       105,219       109,535       103,417       104,346  
Long-term debt
    28,588       25,716       21,876       21,027       18,679  
Total shareholders’ equity
    18,101       16,461       15,168       13,947       12,574  
Regulatory capital ratios
                                       
 
Tangible common equity
    5.6 %     5.7 %     6.3 %     *       *  
 
Tier 1 capital
    7.8       7.7       7.2       7.4       *  
 
Total risk-based capital
    12.2       11.7       10.6       11.0       *  
 
Leverage
    7.5       7.7       7.4       7.5       *  

Information was not available to compute pre-merger proforma percentages.
 
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$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 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 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)
  $ 6,876.3     $ 6,423.0     $ 6,091.8     $ 5,888.0     $ 5,659.9  
Noninterest income
    5,568.7       5,009.8       4,918.3       4,276.4       3,589.1  
Securities gains, net
    299.9       329.1       8.1       13.2       29.1  
   
 
Total net revenue
    12,744.9       11,761.9       11,018.2       10,177.6       9,278.1  
Noninterest expense
    5,932.5       5,658.8       5,368.3       5,128.5       4,829.6  
Provision for credit losses
    1,349.0       2,146.6       828.0       638.5       453.4  
   
 
Income before taxes and merger and restructuring- related items and cumulative effect of change in accounting principles
    5,463.4       3,956.5       4,821.9       4,410.6       3,995.1  
Taxable-equivalent adjustment
    36.6       55.9       85.4       96.3       111.2  
Income taxes
    1,889.1       1,349.8       1,629.6       1,515.3       1,364.6  
   
Operating earnings
    3,537.7       2,550.8       3,106.9       2,799.0       2,519.3  
Merger and restructuring-related items (after-tax)
    (211.3 )     (844.3 )     (231.3 )     (417.2 )     (386.4 )
Cumulative effect of change in accounting principles (after-tax)
    (37.2 )                        
   
 
Net income in accordance with GAAP
  $ 3,289.2     $ 1,706.5     $ 2,875.6     $ 2,381.8     $ 2,132.9  
   
Average diluted shares outstanding
    1,926.1       1,939.5       1,918.5       1,930.0       1,930.5  
 
Financial Ratios
                                       
Return on average assets
    2.06 %     1.54 %     1.96 %     1.86 %     1.76 %
Return on average equity
    20.9       15.7       21.6       21.2       20.3  
Efficiency ratio
    47.7       49.5       48.8       50.5       52.2  
Banking efficiency ratio (d)
    44.0       45.2       43.5       46.3       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.
 
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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

 
 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)
  $ 3,537.7     $ 2,550.8     $ 3,106.9     $ 2,799.0     $ 2,519.3  
Merger and restructuring-related items
                                       
 
Gains on the sale of branches
          62.2                   48.1  
 
Integration, conversion and other charges
    (324.1 )     (946.4 )     (348.7 )     (355.1 )     (593.8 )
 
Securities losses to restructure portfolio
                      (177.7 )      
 
Provision for credit losses (b)
          (382.2 )           (7.5 )     (37.9 )
   
 
Pre-tax impact
    (324.1 )     (1,266.4 )     (348.7 )     (540.3 )     (583.6 )
 
Applicable tax benefit
    112.8       422.1       117.4       123.1       197.2  
   
   
Total merger and restructuring-related items (after-tax)
    (211.3 )     (844.3 )     (231.3 )     (417.2 )     (386.4 )
Cumulative effect of change in accounting principles (after-tax)
    (37.2 )                        
   
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)
  $ 1.84     $ 1.32     $ 1.62     $ 1.45     $ 1.30  
 
Net income in accordance with GAAP
    1.71       .88       1.50       1.23       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.
 
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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
 
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$.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 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
 
 Table 3   Analysis of Net Interest Income
                                           
2002 2001
(Dollars in Millions) 2002 2001 2000 v 2001 v 2000

Components of net interest income
                                       
 
Income on earning assets (taxable-equivalent basis) (a)
  $ 9,590.3     $ 11,097.8     $ 12,114.7     $ (1,507.5 )   $ (1,016.9 )
 
Expenses on interest-bearing liabilities
    2,714.0       4,674.8       6,022.9       (1,960.8 )     (1,348.1 )
   
Net interest income (taxable-equivalent basis)
  $ 6,876.3     $ 6,423.0     $ 6,091.8     $ 453.3     $ 331.2  
   
Net interest income, as reported
  $ 6,839.7     $ 6,367.1     $ 6,006.4     $ 472.6     $ 360.7  
   
Average yields and rates paid
                                       
 
Earning assets yield (taxable-equivalent basis)
    6.43 %     7.64 %     8.62 %     (1.21 )%     (.98 )%
 
Rate paid on interest-bearing liabilities
    2.26       3.92       5.19       (1.66 )     (1.27 )
   
Gross interest margin (taxable-equivalent basis)
    4.17 %     3.72 %     3.43 %     .45 %     .29 %
   
Net interest margin (taxable-equivalent basis)
    4.61 %     4.42 %     4.33 %     .19 %     .09 %
   
Average balances
                                       
 
Investment securities
  $ 28,829     $ 21,916     $ 17,311     $ 6,913     $ 4,605  
 
Loans
    114,456       118,177       118,317       (3,721 )     (140 )
 
Earning assets
    149,143       145,165       140,606       3,978       4,559  
 
Interest-bearing liabilities
    120,221       119,390       116,002       831       3,388  
 
Net free funds (b)
    28,922       25,775       24,604       3,147       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.
 
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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)
                                                       
2002 v 2001 2001 v 2000

(Dollars in Millions) Volume Yield/Rate Total Volume Yield/Rate Total

Increase (decrease) in
                                               
 
Interest income
                                               
   
Commercial loans
  $ (450.8 )   $ (535.7 )   $ (986.5 )   $ .8     $ (614.1 )   $ (613.3 )
   
Commercial real estate
    (27.5 )     (338.9 )     (366.4 )     3.6       (297.8 )     (294.2 )
   
Residential mortgages
    (12.6 )     (50.3 )     (62.9 )     (202.9 )     (2.6 )     (205.5 )
   
Retail loans
    288.2       (543.6 )     (255.4 )     248.4       (245.3 )     3.1  
   
     
Total loans
    (202.7 )     (1,468.5 )     (1,671.2 )     49.9       (1,159.8 )     (1,109.9 )
   
Loans held for sale
    56.4       (32.7 )     23.7       47.7       (2.9 )     44.8  
   
Investment securities
    403.7       (235.2 )     168.5       314.1       (190.5 )     123.6  
   
Money market investments
    (1.8 )     (14.2 )     (16.0 )     (12.7 )     (14.6 )     (27.3 )
   
Trading securities
    12.6       (31.0 )     (18.4 )     (.6 )     2.3       1.7  
   
Other earning assets
    (3.9 )     9.8       5.9       (22.1 )     (27.7 )     (49.8 )
   
     
Total
    264.3       (1,771.8 )     (1,507.5 )     376.3       (1,393.2 )     (1,016.9 )
 
 
Interest expense
                                               
   
Interest checking
    24.4       (125.7 )     (101.3 )     19.2       (86.0 )     (66.8 )
   
Money market accounts
    8.7       (406.9 )     (398.2 )     94.7       (383.7 )     (289.0 )
   
Savings accounts
    3.3       (20.7 )     (17.4 )     (6.7 )     (24.8 )     (31.5 )
   
Time certificates of deposit less than $100,000
    (215.2 )     (282.8 )     (498.0 )     (142.9 )     (74.0 )     (216.9 )
   
Time deposits greater than $100,000
    (83.1 )     (244.8 )     (327.9 )     9.2       (195.7 )     (186.5 )
   
     
Total interest-bearing deposits
    (261.9 )     (1,080.9 )     (1,342.8 )     (26.5 )     (764.2 )     (790.7 )
   
Short-term borrowings
    (68.9 )     (215.8 )     (284.7 )     24.5       (272.1 )     (247.6 )
   
Long-term debt
    240.3       (582.4 )     (342.1 )     148.4       (475.3 )     (326.9 )
   
Company-obligated mandatorily redeemable preferred securities
    62.1       (53.3 )     8.8       43.9       (26.8 )     17.1  
   
     
Total
    (28.4 )     (1,932.4 )     (1,960.8 )     190.3       (1,538.4 )     (1,348.1 )
   
   
Increase (decrease) in net interest income
  $ 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.
 
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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 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
 
 Table 5   Noninterest Income
                                           
2002 2001
(Dollars in Millions) 2002 2001 2000 v 2001 v 2000

Credit and debit card revenue
  $ 517.0     $ 465.9     $ 431.0       11.0 %     8.1 %
Corporate payment products revenue
    325.7       297.7       299.2       9.4       (.5 )
ATM processing services
    136.9       130.6       141.9       4.8       (8.0 )
Merchant processing services
    567.3       308.9       120.0       83.7       *  
Trust and investment management fees
    899.1       894.4       926.2       .5       (3.4 )
Deposit service charges
    714.0       667.3       555.6       7.0       20.1  
Cash management fees
    416.9       347.3       292.4       20.0       18.8  
Commercial products revenue
    479.2       437.4       350.0       9.6       25.0  
Mortgage banking revenue
    330.2       234.0       189.9       41.1       23.2  
Trading account profits and commissions
    206.5       221.6       258.4       (6.8 )     (14.2 )
Investment products fees and commissions
    428.9       460.1       466.6       (6.8 )     (1.4 )
Investment banking revenue
    207.4       258.2       360.3       (19.7 )     (28.3 )
Securities gains, net
    299.9       329.1       8.1       (8.9 )     *  
Other
    339.6       286.4       526.8       18.6       (45.6 )
   
 
Total operating noninterest income
    5,868.6       5,338.9       4,926.4       9.9       8.4  
Merger and restructuring-related gains
          62.2             *       *  
   
 
Total noninterest income
  $ 5,868.6     $ 5,401.1     $ 4,926.4       8.7 %     9.6 %

* Not meaningful

 
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$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 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

 
 Table 6   Noninterest Expense
                                           
2002 2001
(Dollars in Millions) 2002 2001 2000 v 2001 v 2000

Salaries
  $ 2,409.2     $ 2,347.1     $ 2,427.1       2.6 %     (3.3 )%
Employee benefits
    367.7       366.2       399.8       .4       (8.4 )
Net occupancy
    409.3       417.9       396.9       (2.1 )     5.3  
Furniture and equipment
    306.0       305.5       308.2       .2       (.9 )
Professional services
    142.5       123.8       109.0       15.1       13.6  
Advertising and marketing
    117.9       121.6       122.1       (3.0 )     (.4 )
Travel and entertainment
    83.6       90.6       107.0       (7.7 )     (15.3 )
Capitalized software
    148.1       136.1       111.9       8.8       21.6  
Data processing
    112.5       80.0       149.7       40.6       (46.6 )
Communication
    183.8       181.4       138.8       1.3       30.7  
Postage
    178.4       179.8       174.5       (.8 )     3.0  
Printing
    79.8       77.9       86.5       2.4       (9.9 )
Goodwill
          251.1       235.0       *       6.9  
Other intangible assets
    553.0       278.4       157.3       98.6       77.0  
Other
    840.7       701.4       444.5       19.9       57.8  
   
 
Total operating noninterest expense
    5,932.5       5,658.8       5,368.3       4.8       5.4  
Merger and restructuring-related charges
    324.1       946.4       348.7       (65.8 )     *  
   
 
Total noninterest expense
  $ 6,256.6     $ 6,605.2     $ 5,717.0       (5.3 )%     15.5 %
   
Efficiency ratio (a)
    50.3 %     57.5 %     51.9 %                
Efficiency ratio, operating basis (b)
    47.7       49.5       48.8                  
Banking efficiency ratio, operating basis (b) (c)
    44.0       45.2       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
 
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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
 
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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
                                                         
As Reported

Combined or Weighted Plan
Assumptions (a) USBM Firstar

2003 2002 2001 2001 2000 2001 2000

Expected long-term return on plan assets
    9.9 %     10.9 %     11.6 %     11.0 %     9.5 %     12.2 %     12.2 %
Discount rate in determining benefit obligations
    6.8       7.2       7.9       7.5       7.8       7.5       8.0  
Rate of increase in future compensation
    3.5       3.5       4.8       3.5       5.6       3.5       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.
 
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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 Expected Returns


Typical December Standard
Asset Class Asset Mix 2002 Target (a) Compound Average Deviation

Domestic Equities
                                               
 
Large Cap
    30 %     33 %     36 %     8.5 %     9.9 %     18.0 %
 
Mid Cap
    15       18       18       8.8       10.8       21.1  
 
Small Cap
    15       27       26       9.0       11.5       24.0  
 
International Equities
    10       18       20       8.7       10.8       21.9  
 
Fixed Income
    30                                      
 
Other
          4                                
     
     
     
                         
Total mix or weighted rates
    100 %     100 %     100 %     9.1       10.7       18.8  
     
     
     
                         
 
LTROR assumed
    8.1 %             9.9 % (b)                        
 
Standard deviation
    14.1 %             18.8 %                        
 
Sharpe ratio (c)
    .409               .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

 
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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.
                                         
Base
LTROR 7.9% 8.9% 9.9% 10.9% 11.9%

Incremental benefit (cost)
  $ (40.7 )   $ (20.4 )   $     $ 20.4     $ 40.7  
Percent of 2002 net income
    (.77 )%     (.38 )%     %     .38 %     .77 %

                                         
    Base
Discount 4.8% 5.8% 6.8% 7.8% 8.8%

Incremental benefit (cost)
  $ (49.3 )   $ (25.2 )   $     $ 9.9     $ 26.2  
Percent of 2002 net income
    (.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
 
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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.

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 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

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
                                                                                       
2002 2001 2000 1999 1998

Percent Percent Percent Percent Percent
December 31 (Dollars in Millions) Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total

Commercial
                                                                               
 
Commercial
  $ 36,584       31.5 %   $ 40,472       35.4 %   $ 47,041       38.5 %   $ 42,021       37.1 %   $ 37,777       35.3 %
 
Lease financing
    5,360       4.6       5,858       5.1       5,776       4.7       3,835       3.4       3,291       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
    20,325       17.5       18,765       16.4       19,466       15.9       18,636       16.5       16,602       15.5  
 
Construction and development
    6,542       5.6       6,608       5.8       6,977       5.7       6,506       5.7       5,206       4.9  
   
   
Total commercial real estate
    26,867       23.1       25,373       22.2       26,443       21.6       25,142       22.2       21,808       20.4  
 
Residential mortgages
    9,746       8.4       7,829       6.8       9,397       7.7       12,760       11.3       14,982       14.0  
 
Retail
                                                                               
 
Credit card
    5,665       4.9       5,889       5.1       6,012       4.9       5,004       4.4       4,856       4.5  
 
Retail leasing
    5,680       4.9       4,906       4.3       4,153       3.4       2,123       1.9       1,621       1.5  
 
Home equity and second mortgages (a)
    13,572       11.6       12,235       10.7       11,956       9.7       *       *       *       *  
 
Other retail
                                                                               
   
Revolving credit
    2,650       2.3       2,673       2.3       2,750       2.2       *       *       *       *  
   
Installment
    2,258       1.9       2,292       2.0       2,186       1.8       *       *       *       *  
   
Automobile
    6,343       5.5       5,660       5.0       5,609       4.6       *       *       *       *  
   
Student
    1,526       1.3       1,218       1.1       1,042       .9       *       *       *       *  
   
     
Total other retail (a)
    12,777       11.0       11,843       10.4       11,587       9.5       22,344       19.7       22,623       21.2  
   
   
Total retail
    37,694       32.4       34,873       30.5       33,708       27.5       29,471       26.0       29,100       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


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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) Loans Percent Loans Percent

Consumer products and services
  $ 7,206       17.2 %   $ 7,622       16.5 %
Financials
    5,769       13.7       5,859       12.6  
Capital goods
    5,486       13.1       6,497       14.0  
Commercial services and supplies
    3,853       9.2       4,178       9.0  
Agriculture
    3,153       7.5       3,433       7.4  
Transportation
    2,231       5.3       2,560       5.5  
Consumer staples
    1,924       4.6       2,060       4.5  
Private investors
    1,759       4.2       1,864       4.0  
Paper and forestry products, mining and basic materials
    1,664       4.0       2,053       4.4  
Health care
    1,475       3.5       1,567       3.4  
Property management and development
    1,266       3.0       1,384       3.0  
Technology
    797       1.9       1,089       2.4  
Energy
    575       1.4       410       .9  
Other
    4,786       11.4       5,754       12.4  
   
 
Total
  $ 41,944       100.0 %   $ 46,330       100.0 %

Geography
                               

California
  $ 4,127       9.8 %   $ 3,969       8.6 %
Colorado
    1,796       4.3       2,008       4.3  
Illinois
    2,214       5.3       2,339       5.0  
Minnesota
    6,605       15.7       6,511       14.1  
Missouri
    2,895       6.9       2,104       4.5  
Ohio
    2,455       5.9       2,896       6.3  
Oregon
    1,604       3.8       2,014       4.3  
Washington
    3,129       7.5       3,882       8.4  
Wisconsin
    3,052       7.3       3,115       6.7  
Iowa, Kansas, Nebraska, North Dakota, South Dakota
    4,421       10.5       5,059       10.9  
Arkansas, Indiana, Kentucky, Tennessee
    1,865       4.4       1,897       4.1  
Idaho, Montana, Wyoming
    996       2.4       1,014       2.2  
Arizona, Nevada, Utah
    986       2.4       1,057       2.3  
   
 
Total banking region
    36,145       86.2       37,865       81.7  
Outside the Company’s banking region
    5,799       13.8       8,465       18.3  
   
 
Total
  $ 41,944       100.0 %   $ 46,330       100.0 %

 
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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) Loans Percent Loans Percent

Business owner occupied
  $ 6,513       24.2 %   $ 5,159       20.3 %
Multi-family
    3,258       12.1       2,842       11.2  
Commercial property
                               
 
Industrial
    1,227       4.6       1,995       7.9  
 
Office
    3,564       13.3       2,948       11.6  
 
Retail
    3,832       14.3       2,704       10.7  
 
Other
    1,447       5.4       1,949       7.7  
Homebuilders
    2,142       8.0       1,417       5.6  
Hotel/motel
    2,585       9.6       1,985       7.8  
Health care facilities
    1,290       4.8       1,183       4.7  
Other
    1,009       3.7       3,191       12.5  
   
 
Total
  $ 26,867       100.0 %   $ 25,373       100.0 %

Geography
                               

California
  $ 4,277       15.9 %   $ 3,399       13.4 %
Colorado
    1,190       4.4       840       3.3  
Illinois
    1,140       4.2       1,581       6.2  
Minnesota
    1,508       5.6       1,401       5.5  
Missouri
    2,297       8.6       2,439       9.6  
Ohio
    2,264       8.4       2,274       9.0  
Oregon
    1,614       6.0       1,427       5.6  
Washington
    3,242       12.1       2,671       10.5  
Wisconsin
    2,040       7.6       2,128       8.4  
Iowa, Kansas, Nebraska, North Dakota, South Dakota
    1,895       7.1       2,016       8.0  
Arkansas, Indiana, Kentucky, Tennessee
    1,679       6.2       2,055       8.1  
Idaho, Montana, Wyoming
    682       2.5       690       2.7  
Arizona, Nevada, Utah
    1,439       5.4       1,182       4.7  
   
 
Total banking region
    25,267       94.0       24,103       95.0  
Outside the Company’s banking region
    1,600       6.0       1,270       5.0  
   
 
Total
  $ 26,867       100.0 %   $ 25,373       100.0 %

 
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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. 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.
 
 Table 10   Selected Loan Maturity Distribution
                                   
Over One
One Year Through Over Five
December 31, 2002 (Dollars in Millions) or Less Five Years Years Total

Commercial
  $ 21,037     $ 18,039     $ 2,868     $ 41,944  
Commercial real estate
    7,382       13,147       6,338       26,867  
Residential mortgages
    841       1,827       7,078       9,746  
Retail
    11,660       16,010       10,024       37,694  
   
 
Total loans
  $ 40,920     $ 49,023     $ 26,308     $ 116,251  
Total of loans due after one year with
Predetermined interest rates
                          $ 38,185  
 
Floating interest rates
                          $ 37,146  

 
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     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 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.
 
 Table 11   Investment Securities
                                                                     
Available-for-Sale Held-to-Maturity

Weighted Weighted
Average Weighted Average Weighted
Amortized Fair Maturity in Average Amortized Fair Maturity in Average
December 31, 2002 (Dollars in Millions) Cost Value Years Yield Cost Value Years Yield

 
U.S. Treasury and agencies
                                                               
 
Maturing in one year or less
  $ 162     $ 164       .44       3.83 %   $     $             %
 
Maturing after one year through five years
    207       218       2.97       4.37                          
 
Maturing after five years through ten years
    41       42       7.33       4.12                          
 
Maturing after ten years
    11       12       11.38       5.23                          
   
   
Total
  $ 421     $ 436       2.64       4.16 %   $     $             %
   
 
Mortgage-backed securities
                                                               
 
Maturing in one year or less
  $ 3,878     $ 3,904       .61       3.33 %   $     $             %
 
Maturing after one year through five years
    20,359       20,988       2.69       5.18       20       20       3.25       7.67  
 
Maturing after five years through ten years
    725       768       5.61       5.27                          
 
Maturing after ten years
    5       6       13.85       6.12                          
   
   
Total
  $ 24,967     $ 25,666       2.46       4.90 %   $ 20     $ 20       3.25       7.67 %
   
 
Asset-backed securities
                                                               
 
Maturing in one year or less
  $ 1     $ 1       .25       5.50 %   $     $             %
 
Maturing after one year through five years
    446       459       3.39       5.24                          
 
Maturing after five years through ten years
    199       210       7.12       5.72                          
 
Maturing after ten years
                                               
   
   
Total
  $ 646     $ 670       4.53       5.39 %   $     $             %
   
 
Obligations of states and political subdivisions
                                                               
 
Maturing in one year or less
  $ 102     $ 103       .42       7.26 %   $ 34     $ 35       .47       3.60 %
 
Maturing after one year through five years
    263       275       2.73       7.26       62       66       2.97       6.20  
 
Maturing after five years through ten years
    140       147       6.89       7.42       48       52       7.20       6.28  
 
Maturing after ten years
    53       54       18.32       9.32       69       67       15.07       5.85  
   
   
Total
  $ 558     $ 579       4.83       7.50 %   $ 213     $ 220       7.44       5.69 %
   
 
Other debt securities
                                                               
 
Maturing in one year or less
  $ 33     $ 34       .63       5.50 %   $     $             %
 
Maturing after one year through five years
    165       165       2.57       11.41                          
 
Maturing after five years through ten years
    4       3       6.54       5.15                          
 
Maturing after ten years
    262       233       24.36       2.30                          
   
   
Total
  $ 464     $ 435       14.76       5.80 %   $     $             %
   
Other investments
  $ 485     $ 469             %   $     $             %
   
Total investment securities
  $ 27,541     $ 28,255       2.77       4.97 %   $ 233     $ 240       7.08       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.
                                   
2002 2001

Amortized Percent Amortized Percent
At December 31 (Dollars in Millions) Cost of Total Cost of Total

U.S. treasuries and agencies
  $ 421       1.5 %   $ 439       1.7 %
Mortgage-backed securities
    24,987       90.0       21,965       82.6  
Asset-backed securities
    646       2.3       2,091       7.9  
Obligations of states and political subdivisions
    771       2.8       1,148       4.3  
Other securities and investments
    949       3.4       950       3.5  
   
 
Total investment securities
  $ 27,774       100.0 %   $ 26,593       100.0 %

 
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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 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

 
 Table 12   Deposits

The composition of deposits was as follows:

                                                                                     
2002 2001 2000 1999 1998

Percent Percent Percent Percent Percent
December 31 (Dollars in Millions) Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total

Noninterest-bearing deposits
  $ 35,106       30.4 %   $ 31,212       29.7 %   $ 26,633       24.3 %   $ 26,350       25.5 %   $ 27,479       26.3 %
Interest-bearing deposits
                                                                               
 
Interest checking
    17,467       15.1       15,251       14.5       13,982       12.8       13,141       12.7       13,385       12.8  
 
Money market accounts
    27,753       24.0       24,835       23.6       23,899       21.8       22,751       22.0       22,086       21.2  
 
Savings accounts
    5,021       4.4       4,637       4.4       4,516       4.1       5,445       5.3       6,352       6.1  
   
   
Total of savings deposits
    50,241       43.5       44,723       42.5       42,397       38.7       41,337       40.0       41,823       40.1  
Time certificates of deposit less than $100,000
    17,973       15.5       20,724       19.7       25,780       23.5       25,394       24.5       27,935       26.8  
Time deposits greater than $100,000
                                                                               
 
Domestic
    9,427       8.2       7,286       6.9       11,221       10.3       9,348       9.0       6,261       6.0  
 
Foreign
    2,787       2.4       1,274       1.2       3,504       3.2       988       1.0       848       .8  
   
   
Total interest-bearing deposits
    80,428       69.6       74,007       70.3       82,902       75.7       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) 2002

Three months or less
  $ 7,533  
Over three months through six months
    1,376  
Over six months through twelve months
    1,701  
Over twelve months
    1,604  
     
 
 
Total
  $ 12,214  

 
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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
 
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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
 
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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 2002 2001 2000 1999 1998

Commercial
                                       
 
Commercial
    1.29 %     1.62 %     .56 %     .41 %     * %
 
Lease financing
    2.67       1.95       .46       .24       *  
   
   
Total commercial
    1.46       1.66       .55       .40       .31  
 
Commercial real estate
                                       
 
Commercial mortgages
    .17       .21       .03       .02       *  
 
Construction and development
    .11       .17       .11       .03       *  
   
   
Total commercial real estate
    .15       .20       .05       .02       (.04 )
 
Residential mortgages
    .23       .15       .11       .11       .07  
 
Retail
                                       
 
Credit card
    4.98       4.80       4.18       4.00       4.02  
 
Retail leasing
    .72       .65       .41       .28       *  
 
Home equity and second mortgages
    .74       .85       *       *       *  
 
Other retail
    2.10       2.16       1.32       1.26       *  
   
   
Total retail
    1.85       1.94       1.69       1.63       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
 
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$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.
 
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 Table 14   Nonperforming Assets (a)
                                               
At December 31,

(Dollars in Millions) 2002 2001 2000 1999 1998

 
Commercial
                                       
 
Commercial
  $ 760.4     $ 526.6     $ 470.4     $ 219.0     $ 230.4  
 
Lease financing
    166.7       180.8       70.5       31.5       17.7  
   
   
Total commercial
    927.1       707.4       540.9       250.5       248.1  
 
Commercial real estate
                                       
 
Commercial mortgages
    174.6       131.3       105.5       138.2       86.9  
 
Construction and development
    57.5       35.9       38.2       31.6       28.4  
   
   
Total commercial real estate
    232.1       167.2       143.7       169.8       115.3  
 
Residential mortgages
    52.0       79.1       56.9       72.8       98.7  
 
Retail
                                       
 
Credit card
                8.8       5.0       2.6  
 
Retail leasing
    1.0       6.5             .4       .5  
 
Other retail
    25.1       41.1       15.0       21.1       30.4  
   
   
Total retail
    26.1       47.6       23.8       26.5       33.5  
   
     
Total nonperforming loans
    1,237.3       1,001.3       765.3       519.6       495.6  
 
Other real estate
    59.5       43.8       61.1       40.0       35.1  
 
Other assets
    76.7       74.9       40.6       28.9       16.9  
   
     
Total nonperforming assets
  $ 1,373.5     $ 1,120.0     $ 867.0     $ 588.5     $ 547.6  
   
Restructured loans accruing interest (b)
  $ 1.4     $     $     $     $  
Accruing loans 90 days or more past due (c)
  $ 426.4     $ 462.9     $ 385.2     $ 248.6     $ 252.9  
Nonperforming loans to total loans
    1.06 %     .88 %     .63 %     .46 %     .46 %
Nonperforming assets to total loans plus other real estate
    1.18 %     .98 %     .71 %     .52 %     .51 %
Net interest lost on nonperforming loans
  $ 65.4     $ 63.0     $ 50.8     $ 29.5     $ 21.3  

Delinquent Loan Ratios

                                               
At December 31,

(as a percent of ending loan balances) 2002 2001 2000 1999 1998
90 days or more past due excluding nonperforming loans

 
Commercial
                                       
 
Commercial
    .14 %     .14 %     .11 %     .05 %     .08 %
 
Lease financing
    .10       .45       .02             .03  
   
   
Total commercial
    .14       .18       .10       .05       .07  
 
Commercial real estate
                                       
 
Commercial mortgages
    .03       .03       .07       .08       .06  
 
Construction and development
    .07       .02       .03       .05       .06  
   
   
Total commercial real estate
    .04       .02       .06       .07       .06  
 
Residential mortgages
    .90       .78       .62       .42       .52  
 
Retail
                                       
 
Credit card
    2.09       2.18       1.70       1.23       1.02  
 
Retail leasing
    .19       .11       .20       .12       .10  
 
Other retail
    .54       .74       .62       .41       .36  
   
   
Total retail
    .72       .90       .76       .53       .45  
   
     
Total loans
    .37 %     .40 %     .31 %     .22 %     .24 %

                                           
At December 31,
90 days or more past due including nonperforming
loans 2002 2001 2000 1999 1998

Commercial
    2.35       1.71       1.13       .59       .68  
Commercial real estate
    .90       .68       .60       .74       .59  
Residential mortgages
    1.44       1.79       1.23       .99       1.17  
Retail
    .79       1.03       .83       .62       .57  
   
 
Total loans
    1.43 %     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.
 
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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


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 Table 15   Summary of Allowance for Credit Losses
                                                 
(Dollars in Millions) 2002 2001 2000 1999 1998

Balance at beginning of year
  $ 2,457.3     $ 1,786.9     $ 1,710.3     $ 1,705.7     $ 1,665.8  
 
Charge-offs
                                       
 
Commercial
                                       
   
Commercial
    559.2       779.0       319.8       250.1       *  
   
Lease financing
    188.8       144.4       27.9       12.4       *  
   
     
Total commercial
    748.0       923.4       347.7       262.5       202.3  
 
Commercial real estate
                                       
   
Commercial mortgages
    40.9       49.5       15.8       19.1       *  
   
Construction and development
    8.8       12.6       10.3       2.6       *  
   
     
Total commercial real estate
    49.7       62.1       26.1       21.7       23.6  
 
Residential mortgages
    23.1       15.8       13.7       16.2       14.4  
 
Retail
                                       
   
Credit card
    304.9       294.1       235.8       220.2       223.9  
   
Retail leasing
    45.2       34.2       14.8       6.2       *  
   
Home equity and second mortgages
    107.9       112.7       *       *       *  
   
Other retail
    311.9       329.1       379.5       376.0       *  
   
     
Total retail
    769.9       770.1       630.1       602.4       533.4  
   
       
Total charge-offs
    1,590.7       1,771.4       1,017.6       902.8       773.7  
 
Recoveries
                                       
 
Commercial
                                       
   
Commercial
    67.4       60.6       64.0       84.8       *  
   
Lease financing
    39.9       30.4       7.2       4.0       *  
   
     
Total commercial
    107.3       91.0       71.2       88.8       81.9  
 
Commercial real estate
                                       
   
Commercial mortgages
    9.1       9.1       10.8       15.1       *  
   
Construction and development
    1.4       .8       2.6       1.0       *  
   
     
Total commercial real estate
    10.5       9.9       13.4       16.1       31.0  
 
Residential mortgages
    4.0       3.2       1.3       1.4       3.0  
 
Retail
                                       
   
Credit card
    24.6       23.4       27.5       34.6       36.9  
   
Retail leasing
    6.3       4.5       2.0       1.1       *  
   
Home equity and second mortgages
    10.6       12.9       *       *       *  
   
Other retail
    54.4       80.0       76.8       88.2       *  
   
     
Total retail
    95.9       120.8       106.3       123.9       112.6  
   
       
Total recoveries
    217.7       224.9       192.2       230.2       228.5  
 
Net Charge-offs
                                       
 
Commercial
                                       
   
Commercial
    491.8       718.4       255.8       165.3       *  
   
Lease financing
    148.9       114.0       20.7       8.4       *  
   
     
Total commercial
    640.7       832.4       276.5       173.7       120.4  
 
Commercial real estate
                                       
   
Commercial mortgages
    31.8       40.4       5.0       4.0       *  
   
Construction and development
    7.4       11.8       7.7       1.6       *  
   
     
Total commercial real estate
    39.2       52.2       12.7       5.6       (7.4 )
 
Residential mortgages
    19.1       12.6       12.4       14.8       11.4  
 
Retail
                                       
   
Credit card
    280.3       270.7       208.3       185.6       187.0  
   
Retail leasing
    38.9       29.7       12.8       5.1       *  
   
Home equity and second mortgages
    97.3       99.8       *       *       *  
   
Other retail
    257.5       249.1       302.7       287.8       *  
   
     
Total retail
    674.0       649.3       523.8       478.5       420.8  
   
       
Total net charge-offs
    1,373.0       1,546.5       825.4       672.6       545.2  
   
Provision for credit losses
    1,349.0       2,528.8       828.0       646.0       491.3  
Losses from loan sales/transfers (a)
          (329.3 )                  
Acquisitions and other changes
    (11.3 )     17.4       74.0       31.2       93.8  
   
Balance at end of year
  $ 2,422.0     $ 2,457.3     $ 1,786.9     $ 1,710.3     $ 1,705.7  
   
Allowance as a percent of
                                       
 
Period-end loans
    2.08 %     2.15 %     1.46 %     1.51 %     1.59 %
 
Nonperforming loans
    196       245       233       329       344  
 
Nonperforming assets
    176       219       206       291       312  
 
Net charge-offs (a)
    176       159       216       254       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


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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)
                                                                                     
Allowance Amount Allowance as a Percent of Loans

December 31 (Dollars in Millions) 2002 2001 2000 1999 1998 2002 2001 2000 1999 1998

Commercial
                                                                               
 
Commercial
  $ 776.4     $ 1,068.1     $ 418.8     $ 408.3     $ 343.7       2.12 %     2.64 %     .89 %     .97 %     .91 %
 
Lease financing
    107.6       107.5       17.7       20.2       21.5       2.01       1.84       .31       .53       .65  
   
   
Total commercial
    884.0       1,175.6       436.5       428.5       365.2       2.11       2.54       .83       .93       .89  
 
Commercial real estate
                                                                               
 
Commercial mortgages
    152.9       176.6       42.7       110.4       105.2       .75       .94       .22       .59       .63  
 
Construction and development
    53.5       76.4       17.7       22.5       25.9       .82       1.16       .25       .35       .50  
   
   
Total commercial real estate
    206.4       253.0       60.4       132.9       131.1       .77       1.00       .23       .53       .60  
 
Residential mortgages
    34.2       21.9       11.6       18.6       27.2       .35       .28       .12       .15       .18  
 
Retail
                                                                               
 
Credit card
    272.4       295.2       265.6       320.8       304.3       4.81       5.01       4.42       6.41       6.27  
 
Retail leasing
    44.0       38.7       27.2       18.6       6.5       .77       .79       .65       .88       .40  
 
Home equity and second mortgages
    114.7       88.6       107.7       *       *       .85       .72       .90       *       *  
 
Other retail
    268.6       282.8       250.3       389.2       365.6       2.10       2.39       2.16       1.74       1.62  
   
   
Total retail
    699.7       705.3       650.8       728.6       676.4       1.86       2.02       1.93       2.47       2.32  
   
   
Total allocated allowance
    1,824.3       2,155.8       1,159.3       1,308.6       1,199.9       1.57       1.89       .95       1.16       1.12  
   
Available for other factors
    597.7       301.5       627.6       401.7       505.8       .51       .26       .51       .35       .47