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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES ACT OF 1934

For the quarterly period ended March 31, 2003

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES ACT OF 1934

For the transition period from (not applicable)

Commission file number 1-6880

U.S. BANCORP

(Exact name of registrant as specified in its charter)
     
Delaware
(State or other jurisdiction of
incorporation or organization) 		  41-0255900
(I.R.S. Employer
Identification Number)

800 Nicollet Mall

Minneapolis, Minnesota 55402
(Address of principal executive offices and zip code)

612-973-1111

(Registrant’s telephone number, including area code)

(not applicable)

(Former name, former address and former fiscal year,
if changed since last report)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months, and (2) has been subject to such filing requirements for the past 90 days.

YES   X   NO        

     Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date.

     
Class
Common Stock, $.01 Par Value
  Outstanding as of April 30, 2003
1,919,731,447 shares

TABLE OF CONTENTS

Management’s Discussion and Analysis
Consolidated Balance Sheet
Consolidated Statement of Income
Consolidated Statement of Shareholders’ Equity
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
Consolidated Daily Average Balance Sheet and Related Yields and Rates (a)
Part II -- Other Information
Corporate Information

Table of Contents

Table of Contents and Form 10-Q Cross Reference Index

           
Part I — Financial Information    
1) Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 2)    
 
a)
  Overview   3
 
b)
  Statement of Income Analysis   4
 
c)
  Balance Sheet Analysis   8
 
d)
  Accounting Changes   25
 
e)
  Critical Accounting Policies   25
 
f)
  Controls and Procedures (Item 4)   27
2) Quantitative and Qualitative Disclosures About Market Risk / Corporate Risk Profile (Item 3)    
 
a)
  Overview   9
 
b)
  Credit Risk Management   9
 
c)
  Residual Risk Management   12
 
d)
  Operational Risk Management   14
 
e)
  Interest Rate Risk Management   14
 
f)
  Market Risk Management   17
 
g)
  Liquidity Risk Management   17
 
h)
  Capital Management   20
3) Line of Business Financial Review   20
4) Financial Statements (Item 1)   28
 
Part II — Other Information    
1) Submission of Matters to a Vote of Security Holders (Item 4)   45
2) Exhibits and Reports on Form 8-K (Item 6)   45
3) Signature   46
4) Section 302 CEO and CFO Certifications   47
5) Exhibit 12 — Computation of Ratio of Earnings to Fixed Charges   49
6) Exhibit 99.1 — Section 906 CEO Certification   50
7) Exhibit 99.2 — Section 906 CFO Certification   51

Forward-Looking Statements

     This Form 10-Q contains forward-looking statements. Statements that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements. These statements often include the words “may,” “could,” “would,” “should,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions. These forward-looking statements cover, among other things, anticipated future revenue and expenses and the future prospects of U.S. Bancorp (the “Company”). Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated, including the following, in addition to those contained in the Company’s reports on file with the SEC: (i) general economic or industry conditions could be less favorable than expected, resulting in a deterioration in credit quality, a change in the allowance for credit losses, or a reduced demand for credit or fee-based products and services; (ii) changes in the domestic interest rate environment could reduce net interest income and could increase credit losses; (iii) inflation, changes in securities market conditions and monetary fluctuations could adversely affect the value or credit quality of the Company’s assets, and the availability and terms of funding necessary to meet the Company’s liquidity needs; (iv) changes in the extensive laws, regulations and policies governing financial services companies could alter the Company’s business environment or affect operations; (v) the potential need to adapt to industry changes in information technology systems, on which the Company is highly dependent, could present operational issues or require significant capital spending; (vi) competitive pressures could intensify and affect the Company’s profitability, including as a result of continued industry consolidation, the increased availability of financial services from non-banks, technological developments or bank regulatory reform; (vii) changes in consumer spending and saving habits could adversely affect the Company’s results of operations; (viii) changes in the financial performance and condition of the Company’s borrowers could negatively affect repayment of such borrowers’ loans; (ix) acquisitions may not produce revenue enhancements or cost savings at levels or within time frames originally anticipated, or may result in unforeseen integration difficulties; (x) capital investments in the Company’s businesses may not produce expected growth in earnings anticipated at the time of the expenditure; and (xi) acts or threats of terrorism, and/or political and military actions taken by the U.S. or other governments in response to acts or threats of terrorism or otherwise could adversely affect general economic or industry conditions. Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update them in light of new information or future events.
 
U.S. Bancorp 1

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Table 1 Selected Financial Data

                           
Three Months Ended
March 31,
Percent
(Dollars and Shares in Millions, Except Per Share Data) 2003 2002 Change
Condensed Income Statement
                        
Net interest income (taxable-equivalent basis) (a)
  $ 1,783.8     $ 1,670.4       6.8 %
Noninterest income
    1,382.2       1,288.9       7.2  
Securities gains, net
    140.7       44.1       *  
   
       
 
Total net revenue
    3,306.7       3,003.4       10.1  
Noninterest expense
    1,574.1       1,442.9       9.1  
Provision for credit losses
    335.0       335.0       —  
   
       
 
Income before taxes and cumulative effect of change in accounting principles
    1,397.6       1,225.5       14.0  
Taxable-equivalent adjustment
    8.3       9.1       (8.8 )
Income taxes
    478.1       423.2       13.0  
   
       
Income before cumulative effect of change in accounting principles
    911.2       793.2       14.9  
Cumulative effect of change in accounting principles (after-tax)
    —       (37.2 )     *  
   
       
 
Net income
  $ 911.2     $ 756.0       20.5  
   
       
Per Common Share
                        
Earnings per share before cumulative effect of change in accounting principles
  $ .47     $ .41       14.6 %
Diluted earnings per share before cumulative effect of change in accounting principles
    .47       .41       14.6  
Earnings per share
    .47       .39       20.5  
Diluted earnings per share
    .47       .39       20.5  
Dividends declared per share
    .205       .195       5.1  
Book value per share, period end
    9.65       8.30       16.3  
Market value per share, period end
    18.98       22.57       (15.9 )
Average shares outstanding
    1,919.0       1,919.8       —  
Average diluted shares outstanding
    1,926.6       1,930.1       (.2 )
 
Financial Ratios
                        
Return on average assets
    2.01 %     1.83 %        
Return on average equity
    20.0       19.0          
Net interest margin (taxable-equivalent basis)
    4.56       4.62          
Efficiency ratio (b)
    49.7       48.8          
 
Average Balances
                        
Loans
  $ 116,312     $ 113,708       2.3 %
Loans held for sale
    4,041       2,354       71.7  
Investment securities
    34,220       26,626       28.5  
Earning assets
    157,751       145,937       8.1  
Assets
    183,677       167,772       9.5  
Noninterest-bearing deposits
    32,824       27,485       19.4  
Deposits
    115,815       102,012       13.5  
Short-term borrowings
    10,071       14,564       (30.9 )
Long-term debt
    29,703       26,450       12.3  
Total shareholders’ equity
    18,470       16,159       14.3  
   
       
   
March  31,
2003		  
December 31,
2002		        
   
       
Period End Balances
                        
Loans
  $ 117,172     $ 116,251       .8 %
Allowance for credit losses
    2,409       2,422       (.5 )
Investment securities
    30,451       28,488       6.9  
Assets
    182,231       180,027       1.2  
Deposits
    115,221       115,534       (.3 )
Long-term debt
    32,068       28,588       12.2  
Total shareholders’ equity
    18,520       18,101       2.3  
Regulatory capital ratios
                       
 
Tangible common equity
    5.8 %     5.6 %        
 
Tier 1 capital
    8.0       7.8          
 
Total risk-based capital
    12.4       12.2          
 
Leverage
    7.4       7.5          
 
 * Not meaningful.
(a) Interest and rates are presented on a fully taxable-equivalent basis utilizing a tax rate of 35 percent.
(b) 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.
 
2 U.S. Bancorp

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Management’s Discussion and Analysis

OVERVIEW

Earnings Summary U.S. Bancorp and its subsidiaries (the “Company”) reported net income of $911.2 million for the first quarter of 2003, or $.47 per diluted share, compared with $756.0 million, or $.39 per diluted share, for the first quarter of 2002. Return on average assets and return on average equity were 2.01 percent and 20.0 percent, respectively, for the first quarter of 2003, compared with returns of 1.83 percent and 19.0 percent, respectively, for the first quarter of 2002. The Company’s results for the first quarter of 2003 improved over the first quarter of 2002, primarily due to strong growth in consumer banking and payment services revenue, offset somewhat by lower investment banking activity. Notable favorable items in the first quarter of 2003 included gains on the sale of securities of $140.7 million, an increase of $96.6 million over the first quarter of 2002. Offsetting these favorable items was the recognition of $120.9 million of mortgage servicing rights (“MSR”) impairment, driven by lower interest rates and related prepayments. Net income for the first quarter of 2003 also included after-tax merger and restructuring-related items of $11.5 million ($17.6 million on a pre-tax basis), compared with after-tax merger and restructuring-related items of $48.4 million ($74.2 million on a pre-tax basis) for the first quarter of 2002. The $56.6 million decline in merger and restructuring-related expenses was primarily due to the completion of integration activities associated with the merger of Firstar Corporation (“Firstar”) and the former U.S. Bancorp (“USBM”). During the first quarter of 2002, the Company recognized an after-tax goodwill impairment charge of $37.2 million primarily related to the purchase of a transportation leasing company in 1998 by the equipment leasing business. This change was recognized as a “cumulative effect of change in accounting principles” in the income statement. Refer to the “Merger and Restructuring-Related Items” and “Accounting Changes” sections for further discussion on merger and restructuring-related items and the earnings impact of changes in accounting principles.

     Total net revenue, on a taxable-equivalent basis, was $3,306.7 million for the first quarter of 2003, compared with $3,003.4 million for the first quarter of 2002, a 10.1 percent increase from a year ago. This growth was comprised of a 6.8 percent increase in net interest income and a 14.2 percent increase in noninterest income. The increase in net interest income was driven by an $11.8 billion increase in average earning assets, growth in net free funds and favorable changes in the Company’s funding mix. This was offset somewhat by lower yields on investment securities and the repricing of other earning assets relative to interest-bearing liabilities given the current interest rate environment. The net interest margin for the first quarter of 2003 was 4.56 percent, compared with 4.62 percent in the first quarter of 2002, reflecting growth in investment securities as a percent of total earning assets. Noninterest income growth was driven by gains on the sale of securities, growth in consumer banking and payment services revenue, mortgage banking activities and acquisitions. Included in total net revenue were net securities gains of $140.7 million and $44.1 million for the first quarter of 2003 and 2002, respectively, an increase of $96.6 million. Approximately $70.1 million of the increase in year-over-year net revenue was due to acquisitions, including The Leader Mortgage Company, LLC, the 57 branches of Bay View Bank in California and the corporate trust business of State Street Bank and Trust Company.
     Total noninterest expense was $1,574.1 million in the first quarter of 2003, compared with $1,442.9 million in the first quarter of 2002. The year-over-year increase in total noninterest expense of $131.2 million (9.1 percent) primarily reflected a $120.9 million MSR impairment recorded in the first quarter of 2003 and acquisitions, which accounted for approximately $53.2 million of expense growth year-over-year. Partially offsetting the increases in expense over the first quarter of 2002 was a year-over-year reduction in merger and restructuring-related charges of $56.6 million in the first quarter of 2003. The efficiency ratio (the ratio of noninterest expense to taxable-equivalent net revenue excluding net securities gains (losses)) was 49.7 percent for the first quarter of 2003, compared with 48.8 percent for the first quarter of 2002. Refer to the “Acquisition and Divestiture Activity” section for further information on the timing of acquisitions and the “Noninterest Expense” section for further discussion of merger and restructuring-related items.
 
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     The provision for credit losses was $335.0 million for the first quarter of 2003 and 2002. Refer to the “Corporate Risk Profile” section for further information on the provision for credit losses, net charge-offs, nonperforming assets and factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.

Acquisition and Divestiture Activity The following transactions were accounted for as purchases from the date of completion. On December 31, 2002, the Company acquired the corporate trust business of State Street Bank and Trust Company in a cash transaction. The transaction represented total assets acquired of $682 million and total liabilities assumed of $39 million at the closing date.

     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 assumed of $3.3 billion (primarily retail and small business deposits).
     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 $531 million and total liabilities assumed of $446 million.
     Refer to Notes 3 and 4 of the Notes to Consolidated Financial Statements for additional information regarding business combinations and divestitures and merger and restructuring-related items.

Planned Spin-Off of Capital Markets Business 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 the 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 $736.5 million (5.8 percent of total consolidated revenues) and contributed $.7 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 percent of its ownership interests in the capital markets business and plans to retain up to $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 late 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” discussion on page 1 of this quarterly report on Form 10-Q.

STATEMENT OF INCOME ANALYSIS

Net Interest Income The first quarter of 2003 net interest income, on a taxable-equivalent basis, was $1,783.8 million, compared with $1,670.4 million for the first quarter of 2002, which represented a $113.4 million (6.8 percent) increase from a year ago. The increase in net interest income was driven by an $11.8 billion increase in average earning assets, growth in net free funds and favorable changes in the Company’s funding mix. This is offset somewhat by lower yields on investment securities and the repricing of other earning assets relative to interest-bearing liabilities given the current interest rate environment. The increase in average earning assets year-over-year was primarily driven by increases in investment securities, loans held for sale and retail loans, partially offset by a decline in commercial loans. Also contributing to the year-over-year increase in net interest income were recent acquisitions, including Leader, State Street Corporate Trust and Bay View, which accounted for approximately $24.8 million of the increase in net interest income during the first quarter of 2003. The net interest margin for the first quarter of 2003 was 4.56 percent, compared with 4.62 percent for the first quarter of 2002. The decline in the net interest margin reflected growth in lower yield investment securities as a percent of total earning assets.

     Total average loans for the first quarter of 2003 were $2.6 billion (2.3 percent) higher than the first quarter of 2002. Strong growth in average retail loans of $2.6 billion (7.5 percent) and residential mortgages
 
4 U.S. Bancorp

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of $2.2 billion (27.2 percent) year-over-year was partially offset by an overall decline in commercial loans of $3.8 billion (8.4 percent). The decline in average commercial loans was primarily driven by the current credit market, soft economic conditions and reclassifications to other loan categories partially offset by transfers of corporate-based commercial loans from the loan conduit to the commercial loan portfolio. Included in the change in average commercial loans outstanding in the first quarter of 2003, compared with the first quarter of 2002 were reclassifications of approximately $1.2 billion in average commercial loans predominately to the commercial real estate ($.5 billion) and residential mortgage ($.7 billion) loan categories in connection with conforming loan classifications at the time of system conversions. Prior quarters were not restated, as it was impractical to determine the extent of reclassification for all periods presented.
     Average investment securities for the first quarter of 2003 were higher by $7.6 billion (28.5 percent), compared with the same period of 2002, reflecting the reinvestment of proceeds from loan sales, declines in commercial loan balances and deposits assumed in connection with the Bay View Bank branch acquisition. During the first quarter of 2003, the Company sold $5.7 billion of fixed-rate securities which were classified as available-for-sale.
     Average noninterest-bearing deposits for the first quarter of 2003 were higher by $5.3 billion (19.4 percent), compared with the same period of 2002, primarily due to higher business and government demand deposit balances year-over-year. Average interest-bearing deposits for the first quarter of 2003 were higher by $8.5 billion (11.4 percent), compared with the same period of 2002. Approximately $3.5 billion of the increase in average interest-bearing deposits was due to acquisitions, while the remaining $5.0 billion of growth was driven by increases in savings products balances and the Company’s funding decision to increase time deposits greater than $100,000. Growth in average savings products (15.1 percent) and time deposits greater than $100,000 (52.9 percent) for the first quarter of 2003 was partially offset by a reduction in the average balance of higher cost time certificates of deposit less than $100,000 (15.9 percent).
     Refer to the Consolidated Daily Average Balance Sheet and Related Yields and Rates on page 44 for further information on net interest margin.

Provision for Credit Losses The provision for credit losses was $335.0 million for the first quarter of 2003 and 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.

 
Table 2 Analysis of Net Interest Income
                           
Three Months Ended
March 31,
(Dollars in Millions) 2003 2002 Change
Components of net interest income
                        
 
Income on earning assets (taxable-equivalent basis) (a)
  $ 2,351.0     $ 2,371.7     $ (20.7 )
 
Expense on interest-bearing liabilities
    567.2       701.3       (134.1 )
   
Net interest income (taxable-equivalent basis)
  $ 1,783.8     $ 1,670.4     $ 113.4  
   
Net interest income, as reported
  $ 1,775.5     $ 1,661.3     $ 114.2  
   
Average yields and rates paid
                        
 
Earning assets yield (taxable-equivalent basis)
    6.02 %     6.57 %     (.55 )%
 
Rate paid on interest-bearing liabilities
    1.83       2.40       (.57 )
   
Gross interest margin (taxable-equivalent basis)
    4.19 %     4.17 %     .02 %
   
Net interest margin (taxable-equivalent basis)
    4.56 %     4.62 %     (.06 )%
   
Average balances
                        
 
Investment securities
  $ 34,220     $ 26,626     $ 7,594  
 
Loans
    116,312       113,708       2,604  
 
Earning assets
    157,751       145,937       11,814  
 
Interest-bearing liabilities
    125,746       118,379       7,367  
 
Net free funds (b)
    32,005       27,558       4,447  
 
(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, unrealized gain (loss) on available-for-sale securities, non-earning assets, other noninterest-bearing liabilities and equity.
 
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Noninterest Income Noninterest income during the first quarter of 2003 was $1,522.9 million, an increase of $189.9 million (14.2 percent) from the first quarter of 2002. Included in noninterest income during the first quarter of 2003 were net securities gains of $140.7 million, compared with net securities gains of $44.1 million for the first quarter of 2002, a year-over-year increase of $96.6 million.

     The growth in noninterest income in the first quarter of 2003, compared with the first quarter of 2002, was primarily driven by net securities gains, increases in payment services and consumer banking revenue, mortgage banking activity, and acquisitions, including Leader, Bay View, and State Street Corporate Trust, which contributed approximately $45.3 million of the increase in noninterest income in the first quarter of 2003. Credit and debit card revenue, corporate payment products revenue and ATM processing services revenue, primarily in the Payment Services line of business, were $34.9 million (16.2 percent) higher in the first quarter of 2003, compared with the first quarter of 2002, primarily reflecting growth in sales and card usage. Merchant processing services revenue was lower by $6.3 million (4.7 percent) year-over-year, primarily due to weaker economic conditions impacting service-related merchants and airline volumes. The favorable variance in trust and investment management fees of $6.0 million (2.7 percent), compared with the first quarter of 2002, was driven by the acquisition of State Street Corporate Trust, which contributed $19.2 million in fees during the first quarter of 2003, partially offset by the impact of a decline in equity valuations. Deposit service charges increased by $13.0 million (8.3 percent), compared with the first quarter of 2002, primarily due to volume and fee enhancements principally within the Consumer Banking line of business. Cash management fees grew by $7.8 million (7.5 percent) in the first quarter of 2003 over the same period of 2002, with the majority of the variance within the Wholesale Banking line of business. The increase in cash management fees over the first quarter of 2002 was driven by growth in sales and product enhancements. Mortgage banking revenue, within the Consumer Banking line of business, increased by $43.4 million (83.5 percent) in the first quarter of 2003, compared with the first quarter of 2002 due to higher mortgage servicing, originations and sales and the acquisition of Leader, which contributed $22.2 million of the favorable variance. Offsetting these favorable variances was a decline in commercial products revenue of $18.0 million (14.7 percent) and capital markets-related revenue of $15.4 million (7.2 percent). The decline in commercial products revenue reflected lower conduit servicing fees, while the capital markets-related revenue continued to reflect softness in the equity capital markets. Other fee income was higher in the first quarter of 2003 over the same quarter of 2002 by $27.9 million (41.5 percent), due in part to favorable variances in income from equity investments.
     In April 2003, an agreement in principle was announced with respect to the settlement of the antitrust litigation brought against VISA USA and Mastercard by Wal-Mart, Sears and other retailers. Although not a party to the litigation or settlement, the Company anticipates
 
Table 3 Noninterest Income
                           
Three Months Ended
March 31,
Percent
(Dollars in Millions) 2003 2002 Change
Credit and debit card revenue
  $ 127.4     $ 109.3       16.6 %
Corporate payment products revenue
    86.0       75.2       14.4  
ATM processing services
    36.9       30.9       19.4  
Merchant processing services
    127.3       133.6       (4.7 )
Trust and investment management fees
    230.3       224.3       2.7  
Deposit service charges
    168.7       155.7       8.3  
Cash management fees
    112.0       104.2       7.5  
Commercial products revenue
    104.2       122.2       (14.7 )
Mortgage banking revenue
    95.4       52.0       83.5  
Trading account profits and commissions
    60.9       49.9       22.0  
Investment products fees and commissions
    100.3       111.1       (9.7 )
Investment banking revenue
    37.6       53.2       (29.3 )
Securities gains, net
    140.7       44.1       *  
Other
    95.2       67.3       41.5  
   
 
Total noninterest income
  $ 1,522.9     $ 1,333.0       14.2 %
 
* Not meaningful
 
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that the terms of this agreement will adversely affect its debit card fee revenues. Management estimates that the earnings impact will be approximately $.01 per diluted share in 2003. The terms of the settlement permit VISA to renegotiate debit interchange rates for 2004. Although this creates some uncertainty, management currently estimates that the 2004 impact will be approximately $.03 per diluted share.

Noninterest Expense First quarter of 2003 noninterest expense was $1,574.1 million, an increase of $131.2 million (9.1 percent) from the first quarter of 2002. During the first quarter of 2003, noninterest expense included $17.6 million of merger and restructuring-related charges, compared with $74.2 million for the first quarter of 2002, a decrease of $56.6 million.

     The increase in noninterest expense was primarily due to an increase in MSR impairment of $120.9 million, higher pension costs of $15.0 million and approximately $53.2 million related to recent acquisitions. The MSR impairment was driven by declining mortgage rates and higher prepayments due to refinancing activities. Refer to Note 6 of the Notes to Consolidated Financial Statements for a sensitivity analysis on fair value to future changes in interest rates. Offsetting these expense increases was a $56.6 million reduction in merger and restructuring-related charges.
     The Company’s first quarter of 2003 employee benefits costs were higher than prior quarters partially due to a change in the assumed long-term rate of return on pension plan assets in the third quarter of 2002 and for 2003 and lower investment returns experienced in 2002. Refer to the “Pension Plans” section for further information relating to the impact resulting from changes in pension plan assumptions.

Pension Plans Because of the long-term nature of pension plan operations and liabilities, 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 policies comply with the Statement of Financial Accounting Standards No. 87, “Employer’s Accounting for Pension Plans” (“SFAS 87”), and reflect 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. Refer to the Company’s 2002 Annual Report on Form 10-K for a detailed discussion relating to the Company’s pension plan policies.

     In accordance with its existing practices, in September 2002, the Company completed its annual analysis of expected rates of return, evaluated available peer group data, existing market conditions and other factors relevant to determining the LTROR assumptions for determining pension costs for 2003. In response to this analysis, the Company made a decision to re-measure its pension plans effective in the third quarter of 2002. As part of the re-measurement, the Company reviewed all of the assumptions and data used to determine its per