<PAGE>
FORM 8-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) October 6, 1998
--------------------
BANK ONE CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 333-60313 31-1597175
- --------------------------------------------------------------------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
One First National Plaza, Chicago, IL 60670
- --------------------------------------------------------------------------------
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code 312-732-4000
------------
<PAGE>
Item 7. Financial Statements and Exhibits
The Registrant hereby incorporates by reference the information contained
in the Exhibits hereto listed below in response to this Item 7, in connection
with the merger of First Chicago NBD Corporation, a Delaware corporation, with
and into the Registrant, successor to BANC ONE CORPORATION, an Ohio corporation.
<TABLE>
<CAPTION>
Exhibit Number Description of Exhibits
- -------------- -----------------------
<S> <C>
23(a) Consent of Arthur Andersen LLP.
23(b) Consent of Arthur Andersen LLP.
23(c) Consent of PricewaterhouseCoopers LLP.
27 Financial Data Schedules.
99(a) Supplemental financial information as of December 31, 1997
and 1996, and for the three years in the period then ended.
99(b) Supplemental financial information as of June 30, 1998 and
1997, and for the six months then ended.
99(c) Letter from Arthur Andersen LLP regarding preferability of
accounting treatment.
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
BANK ONE CORPORATION
--------------------
(Registrant)
Date: October 6, 1998 By: /s/ William J. Roberts
-------------------------------
Title: Controller
2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description of Exhibits
- -------------- -----------------------
<S> <C>
23(a) Consent of Arthur Andersen LLP.
23(b) Consent of Arthur Andersen LLP.
23(c) Consent of PricewaterhouseCoopers LLP.
27 Financial Data Schedules.
99(a) Supplemental financial information as of December 31, 1997
and 1996, and for the three years in the period then ended.
99(b) Supplemental financial information as of June 30, 1998 and
1997, and for the six months then ended.
99(c) Letter from Arthur Andersen LLP regarding preferability of
accounting treatment.
</TABLE>
3
<PAGE>
Exhibit 23(a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To BANK ONE CORPORATION:
As independent public accountants, we hereby consent to the incorporation
of our report dated October 6, 1998, on the supplemental consolidated
financial statements of BANK ONE CORPORATION included in this Current Report on
Form 8-K dated October 6, 1998, into Banc One Corporation's previously filed
Form S-8 Registration Statement No. 33-03470, Form S-8 Registration Statement
No. 33-14475, Form S-8 Registration Statement No. 33-10822, Form S-8
Registration Statement No. 33-27849, Form S-8 Registration Statement
No. 33-34294, Form S-8 Registration Statement No. 33-37400, Form S-8
Registration Statement No. 33-20890, Form S-8 Registration Statement
No. 33-20990, Form S-8 Registration Statement No. 33-40041, Form S-8
Registration Statement No. 33-45473, Form S-8 Registration Statement
No. 33-46189, Form S-8 Registration Statement No. 33-53752, Form S-8
Registration Statement No. 33-55172, Form S-8 Registration Statement
No. 33-55174, Form S-8 Registration Statement No. 33-54100, Form S-8
Registration Statement No. 33-61760, Form S-8 Registration Statement
No. 33-61758, Form S-8 Registration Statement No. 33-60424, Form S-8
Registration Statement No. 33-50117, Form S-8 Registration Statement
No. 33-55149, Form S-8 Registration Statement No. 33-55315, Form S-8
Registration Statement No. 33-58923, Form S-8 Registration Statement
No. 333-00445, Form S-8 Registration Statement No. 333-26929, Form S-8
Registration Statement No. 333-27631, Form S-8 Registration Statement
No. 333-28281, Form S-8 Registration Statement No. 333-29395, Form S-8
Registration Statement No. 333-30419, Form S-8 Registration Statement
No. 333-30421, Form S-8 Registration Statement No. 333-30425, Form S-8
Registration Statement No. 333-30429, Form S-8 Registration Statement
No. 333-32053, Form S-3 Registration Statement No. 333-38387, and BANK
ONE CORPORATION's Form S-8 Registration Statement No. 333-60313.
ARTHUR ANDERSEN LLP
Chicago Illinois,
October 6, 1998
<PAGE>
Exhibit 23 (b)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To BANK ONE CORPORATION:
As independent public accountants, we hereby consent to the incorporation
of our report dated January 15, 1998, on the consolidated financial statements
of First Chicago NBD Corporation included in this Current Report on Form 8-K
dated October 6, 1998.
ARTHUR ANDERSEN LLP
Chicago, Illinois
October 6, 1998
<PAGE>
Exhibit 23(c)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in Form 8-K of BANK ONE CORPORATION
of our report dated February 12, 1998, on our audits of the consolidated
financial statements of BANC ONE CORPORATION as of December 31, 1997 and 1996,
and for each of the three years in the period ended December 31, 1997, included
in BANC ONE CORPORATION's Annual Report on Form 10-K for the year ended December
31, 1997.
PRICEWATERHOUSECOOPERS LLP
Columbus, Ohio
October 6, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from Form 8-K and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 JUN-30-1998
<CASH> 15,380 16,217
<INT-BEARING-DEPOSITS> 6,910 5,590
<FED-FUNDS-SOLD> 9,168 9,040
<TRADING-ASSETS> 5,246 5,342
<INVESTMENTS-HELD-FOR-SALE> 25,254 31,172
<INVESTMENTS-CARRYING> 0 0
<INVESTMENTS-MARKET> 785 691
<LOANS> 159,579 160,023
<ALLOWANCE> 2,817 2,752
<TOTAL-ASSETS> 239,372 244,181
<DEPOSITS> 153,726 154,507
<SHORT-TERM> 33,152 34,856
<LIABILITIES-OTHER> 11,898 12,803
<LONG-TERM> 21,546<F1> 22,248<F1>
<COMMON> 12 12
0 0
326 190
<OTHER-SE> 18,712<F2> 19,565<F2>
<TOTAL-LIABILITIES-AND-EQUITY> 239,372 244,181
<INTEREST-LOAN> 14,659 7,198
<INTEREST-INVEST> 1,624 926
<INTEREST-OTHER> 1,131 581
<INTEREST-TOTAL> 17,414 8,705
<INTEREST-DEPOSIT> 4,991 2,512
<INTEREST-EXPENSE> 8,084 4,149
<INTEREST-INCOME-NET> 9,330 4,556
<LOAN-LOSSES> 1,988 791
<SECURITIES-GAINS> 101<F3> 82<F3>
<EXPENSE-OTHER> 9,740 5,150
<INCOME-PRETAX> 4,427 2,700
<INCOME-PRE-EXTRAORDINARY> 2,960 1,828
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,960 1,828
<EPS-PRIMARY> 2.48<F4> 1.56<F4>
<EPS-DILUTED> 2.43 1.53
<YIELD-ACTUAL> 4.69 4.46
<LOANS-NON> 609 0<F5>
<LOANS-PAST> 994 0<F5>
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 2,687 2,817
<CHARGE-OFFS> 2,397 1,125
<RECOVERIES> 510 269
<ALLOWANCE-CLOSE> 2,817 2,752
<ALLOWANCE-DOMESTIC> 0<F5> 0<F5>
<ALLOWANCE-FOREIGN> 0<F5> 0<F5>
<ALLOWANCE-UNALLOCATED> 0<F5> 0<F5>
<FN>
<F1> Guaranteed Preferred Beneficial Interest in the Corporation's Junior
Subordinated Debt of $1,003 million is included in long term debt for the
period ended December 31, 1997 and June 30, 1998.
<F2> Treasury Stock of $2,007 million and $2,075 million is included as a
reduction of stockholders' equity for the periods ended December 31, 1997
and June 30, 1998, respectively.
<F3> Investment securities gains do not include the Corporation's equity
securities gains which totaled $334 million and $193 million for the
periods ended December 31, 1997 and June 30, 1998, respectively.
<F4> Primary earnings per share represent Basic earning per share.
<F5> For purposes of this filing, the Corporation has not disclosed this
information. These items will be disclosed on an annual basis in the
Corporation's Form 10-K.
</FN>
</TABLE>
<PAGE>
Exhibit 99 (a)
BANK ONE CORPORATION
SUPPLEMENTAL FINANCIAL REVIEW
Index To Supplemental Financial Review
<TABLE>
<CAPTION>
Page
----
<S> <C>
Introduction............................................................ 1
Supplemental Selected Financial Data.................................... 2
Supplemental Business Segments.......................................... 3
Supplemental Overview of Operations/Earnings Analysis................... 3
Supplemental Risk Management............................................ 10
Supplemental Liquidity Risk Management.................................. 10
Supplemental Market Risk Management..................................... 11
Supplemental Credit Risk Management..................................... 15
Supplemental Derivative Financial Instruments........................... 20
Supplemental Year 2000 Compliance....................................... 22
Supplemental Capital Management......................................... 23
Supplemental Fourth Quarter Review...................................... 24
Supplemental Consolidated Financial Statements.......................... 26
Notes to Supplemental Consolidated Financial Statements................. 30
Report of Independent Public Accountants................................ 58
Supplemental Selected Statistical Information........................... 59
</TABLE>
<PAGE>
Introduction
Effective October 2, 1998, BANC ONE CORPORATION ("BANC ONE") and First Chicago
NBD Corporation ("First Chicago NBD") were combined into a new corporation named
BANK ONE CORPORATION ("BANK ONE" or "the Corporation"). Each share of BANC ONE
common stock was converted into one share of BANK ONE common stock. Each share
of First Chicago NBD common stock was converted into 1.62 shares of BANK ONE
common stock.
In connection with the merger, BANK ONE estimates that a restructuring charge
of approximately $1.25 billion ($837 million after-tax) will be incurred upon
consummation of the merger. Actions incorporated in the business combination
and restructuring plan are principally targeted for implementation over a 12-18
month period following the merger.
Personnel-related items consist primarily of severance and benefits cost for
separated employees and costs associated with change in control provisions in
certain of the Corporation's stock plans. The benefit package to be made
available to affected employees has been approved by management and communicated
on a corporate-wide basis. Facilities and equipment costs include the net cost
associated with the closing and divestiture of identified banking facilities,
and from the consolidation of headquarters and operational facilities. Other
merger-related transaction costs include investment banking fees, registration
and listing fees, and various accounting, legal and other related transaction
costs.
While there can be no assurances as to the achievement of such business and
financial goals, the Corporation currently expects to achieve approximately $1.2
billion in annual pretax synergies as a result of the merger. It is currently
anticipated that essentially all actions necessary to generate such synergies
will be completed in a two-year timeframe. Of this total, BANK ONE expects to
realize approximately $930 million in annual expense savings and approximately
$275 million in enhanced annual revenues. The expense savings will be derived
principally from cost reductions in the credit card, retail banking, commercial
banking, capital markets and indirect lending businesses, in the operations and
technology budgets and in its general and administrative expenses, as well as
through increased purchasing leverage with certain suppliers to the Corporation.
Increased revenues are expected to come principally in cross-selling
opportunities involving the credit card, retail banking and commercial banking
businesses.
On June 12, 1998, BANC ONE completed its acquisition of First Commerce
Corporation ("First Commerce"), resulting in the issuance of approximately 56
million shares of the Corporation's common stock valued at $3.5 billion for all
the outstanding shares of First Commerce common stock, in a tax-free exchange.
First Commerce was a multi-bank holding company with total assets of
approximately $9.3 billion and stockholders' equity of approximately $805
million at June 12, 1998.
In connection with the First Commerce merger, BANC ONE identified
restructuring and merger integration charges of $182 million ($127 million after
tax), of which $127 million was recorded as a restructuring charge, $44 million
represented integration costs, and $11 million was associated with Year 2000
compliance. The restructuring charge of $127 million associated with the First
Commerce merger consisted of employee benefits, severance and retention costs,
and other merger-related costs.
Both transactions have been accounted for as poolings of interests and,
accordingly, the amounts for all current and prior periods reported in this
supplemental filing, except as otherwise noted, are reported on a combined basis
including BANC ONE, First Chicago NBD, and First Commerce.
The major credit rating agencies recently released their credit ratings for
the BANK ONE parent company and its principal banks, as shown in the following
table.
<TABLE>
<CAPTION>
Short-Term Senior
Debt Long-Term Debt
---------------- ----------------
S & P Moody's S & P Moody's
----- ------- ----- -------
<S> <C> <C> <C> <C>
BANK ONE (Parent)....................... A-1 P-1 AA+ Aa3
Principal Banks......................... A-1+ P-1 AA- Aa2
</TABLE>
At June 30, 1998, BANK ONE had assets of $244 billion, total deposits of $155
billion, and stockholders' equity of $20 billion.
1
<PAGE>
Supplemental Selected Financial Data
<TABLE>
<CAPTION>
(In millions, except ratios and per share data) 1997 1996 1995* 1994*
-------- -------- -------- --------
Income and Expense:
<S> <C> <C> <C> <C>
Net interest income--tax-equivalent basis................... $ 9,488 $ 9,301 $ 7,988 $ 7,872
Provision for credit losses................................. 1,988 1,716 1,067 558
Noninterest income.......................................... 6,825 6,110 5,532 4,372
Merger-related and restructuring charges.................... 337 - 267 -
FDIC special assessment..................................... - 57 - -
Operating expense........................................... 9,403 8,624 7,948 7,729
Net income.................................................. 2,960 3,231 2,675 2,493
Per Common Share Data:
Net income, basic........................................... $ 2.48 $ 2.64 $ 2.17 $ 2.00
Net income, diluted......................................... 2.43 2.57 2.12 1.96
Cash dividends declared..................................... 1.38 1.24 1.13 1.03
Book value.................................................. 16.03 16.64 15.28 14.19
Balance Sheet:
Loans:
Managed.................................................. $196,993 $182,799 $163,657 $141,100
Reported................................................. 159,579 153,496 138,478 125,145
Deposits.................................................... 153,726 145,206 145,343 142,443
Long-term debt(1)........................................... 21,546 15,363 12,582 10,275
Total assets................................................ 239,372 225,822 228,298 215,860
Common stockholders' equity................................. 18,724 18,856 17,345 15,647
Total stockholders' equity.................................. 19,050 19,507 18,143 16,568
Performance Ratios:
Return on average assets.................................... 1.29% 1.43% 1.19% 1.20%
Return on average common equity............................. 15.8 17.5 15.7 15.6
Net interest margin:
Managed.................................................. 5.40 5.19
Reported................................................. 4.69 4.64 4.04 4.28
Operating efficiency ratio:
Managed.................................................. 51.3 51.1
Reported................................................. 57.6 56.0 58.8 63.1
Credit Quality:
Net charge-offs to average loans............................ 1.21% 1.04% 0.59% 0.48%
Allowance for credit losses to loans outstanding............ 1.77 1.75 1.75 1.75
Nonperforming assets to loans and other real estate owned... 0.43 0.40 0.56 0.61
Common Stock Data:
Average shares outstanding, basic........................... 1,176 1,199 1,198 1,211
Average shares outstanding, diluted......................... 1,213 1,254 1,248 1,252
Stock price, year end....................................... $ 49.37 $ 39.09 $ 31.10 $ 20.97
Stock dividends............................................. - 10% - 10%
Dividend payout ratio....................................... 61.35% 37.96% 39.59% 44.46%
</TABLE>
___________
(1) Includes trust preferred capital securities.
*Managed results not available for 1995 and 1994.
2
<PAGE>
Supplemental Business Segments
BANK ONE will be organized around five national business segments:
. Credit Card - delivering value principally through the First USA and First
Card brand names.
. Commercial - serving middle market and large corporate customers with a
multitude of banking products (risk management, corporate finance, treasury
management, equipment leasing and asset-based lending); also includes commercial
real estate and private banking.
. Retail - providing banking services to consumers and small businesses through
a variety of delivery channels.
. Finance One - supplying consumer finance products, mortgage lending, and
indirect lending services.
. Investment Management - managing mutual funds, institutional investments and
insurance needs.
In addition, the Corporate Investments unit includes activities such as
capital investing, leveraged leasing and other tax-advantaged investing.
Summary financial results for each of these business lines will be presented,
starting with 1998 performance. Results will be derived from the Corporation's
internal profitability measurement process and will reflect consistent
management accounting principles and policies for the new company.
Supplemental Overview of Operations/Earnings Analysis
Management's discussion and analysis may contain forward-looking statements
that are provided to assist in the understanding of anticipated future financial
performance. However, such performance involves risks and uncertainties that may
cause actual results to differ materially from those expressed in forward-
looking statements.
For funding and risk management purposes, BANK ONE periodically securitizes
loans, primarily in support of credit card activities. The accounting for
securitizations complicates the understanding of underlying trends in net
interest income, net interest margin and noninterest income, as well as the
underlying growth rates of reported loans. For a more complete understanding,
these trends are also reviewed on a "Managed" basis, which adds data on
securitized loans to "Reported" data on loans. The following analysis of
"Reported" results of operations should be read in conjunction with the analysis
of "Managed" performance throughout this document.
BANK ONE adopted Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share," which modified the calculation of previously reported
earnings per share and is effective for periods ending after December 15, 1997.
In accordance with SFAS No. 128, all prior period amounts have been restated.
Unless specified otherwise, all earnings per share amounts are presented under
the diluted basis in accordance with SFAS No. 128.
All per share and average share information has been restated for the 10%
common stock dividend payable February 26, 1998, to BANC ONE shareholders of
record as of February 12, 1998.
Summary of Financial Results
The Corporation reported net income for 1997 of $2.960 billion, or $2.43 per
share, compared with $3.231 billion, or $2.57 per share, in 1996 and $2.675
billion, or $2.12 per share, in 1995.
3
<PAGE>
Operating earnings for 1997 were $3.289 billion, or $2.70 per share, and
excluded the after-tax effect of merger-related and restructuring charges.
Operating earnings for 1996, which excluded the after-tax effect of a special
FDIC assessment, were $3.267 billion, or $2.59 per share. Operating earnings
for 1995, which excluded the after-tax effect of merger-related and
restructuring charges, were $2.866 billion, or $2.28 per share.
<TABLE>
<CAPTION>
(In millions, except per-share data) 1997 1996 1995*
--------------- ------------- ------------
<S> <C> <C> <C>
Net interest income--tax-equivalent basis........................... $9,488 $9,301 $7,988
Provision for credit losses......................................... 1,988 1,716 1,067
Noninterest income.................................................. 6,825 6,110 5,532
Operating expense................................................... 9,403 8,624 7,948
Net income.......................................................... 2,960 3,231 2,675
Common Share Data
Basic earnings per share....................................... $ 2.48 $ 2.64 $ 2.17
Average shares outstanding..................................... 1,176 1,199 1,198
Diluted earnings per share..................................... $ 2.43 $ 2.57 $ 2.12
Average shares outstanding assuming full dilution.............. 1,213 1,254 1,248
Return on average assets............................................ 1.29% 1.43% 1.19%
Return on average common stockholders' equity....................... 15.8 17.5 15.7
Net interest margin
Managed........................................................ 5.40 5.19
Reported....................................................... 4.69 4.64 4.04
Operating efficiency ratio:
Managed........................................................ 51.3 51.1 -
Reported....................................................... 57.6 56.0 58.8
____________
*Managed results not available for 1995.
</TABLE>
Lower net income in 1997 was primarily the result of $329 million in after-tax
merger-related and restructuring charges, discussed below, recorded in
connection with the acquisition of First USA, Inc. ("First USA") and other
strategic initiatives.
Return on average assets and return on average common equity for 1997 were
1.29% and 15.8%, respectively, compared with 1.43% and 17.5%, respectively for
1996. Excluding the impact of merger-related and restructuring charges, return
on average assets and return on average common equity for 1997 remained strong
at 1.43% and 17.6%, respectively.
Key highlights for 1997, compared with 1996, include the following:
. Gross revenue grew 5%, reflecting both strong loan growth and increased loan
processing and servicing income resulting primarily from the impact of credit
card activities.
. Average managed loans grew 9%, reflecting a 11% growth in average managed
credit card loans.
. The managed net interest margin increased to 5.40% from 5.19%.
. Market-driven revenue increased 23%, due primarily to a 63% increase in
trading profits and a 130% increase in investment securities gains.
. Escalating personal bankruptcies caused a drop in credit card profitability.
The net charge-off rate for managed credit card receivables increased to 6.18%
for the year, up from 5.28% in 1996.
Mergers and Acquisitions
First USA, Inc. --On June 27, 1997, the Corporation completed its acquisition
of First USA, Inc. ("First USA"), located in Dallas, Texas. The Corporation
issued 163 million shares of the Corporation's common stock for all the
outstanding common stock of First USA in a tax-free exchange. First USA, a
financial services company specializing in the credit card business, had $24.6
billion in managed credit card receivables and 17.8 million cardholders at June
27, 1997. First USA had total reported assets of $10.9 billion and stockholders'
equity of $1.2 billion at June 27, 1997. The acquisition was accounted for as a
pooling of interests and, therefore, the consolidated financial statements have
been restated for all prior periods to include the results of operations,
financial position and changes in cash flows of First USA.
4
<PAGE>
Liberty Bancorp, Inc.--On June 1, 1997, in a tax-free exchange, the
Corporation acquired all of the outstanding shares of Liberty Bancorp, Inc.
("Liberty"), a multi-bank holding company headquartered in Oklahoma City,
Oklahoma, by issuing 11.9 million shares of the Corporation's common stock
valued at $483.2 million. Liberty had total assets of $2.9 billion at May 31,
1997, and 29 banking offices located primarily in Oklahoma City and Tulsa. The
acquisition was accounted for as a purchase. Under the purchase method, no
effects of an acquisition are included in the financial statements prior to the
date of purchase.
Premier Bancorp, Inc.--BANK ONE's financial position and results of operations
for periods prior to 1996 have not been restated to include Banc One Louisiana
Corporation ("BOLC"), formerly known as Premier Bancorp, Inc. ("Premier"), which
was acquired on January 2, 1996, as this acquisition was accounted for using the
purchase method of accounting. The purchase price of $711 million was funded by
the issuance of 24 million shares of the Corporation's common stock. Premier had
assets of $6.3 billion at December 31, 1995.
First Chicago Corporation/NBD Bancorp, Inc.--On December 1, 1995, First
Chicago Corporation ("First Chicago") merged with and into NBD Bancorp, Inc.
("NBD"), with the combined company renamed First Chicago NBD Corporation. In
aggregate 87.1 million shares of First Chicago common stock were converted into
157.7 million shares of First Chicago NBD. Each share of NBD remained
outstanding and represented one share of First Chicago NBD. The merger was
accounted for as a pooling of interests.
Deerbank Corporation--In July 1995, the Corporation acquired Deerbank
Corporation, a $766 million thrift holding company located in Deerfield,
Illinois. The acquisition was accounted for as a purchase. The purchase price
of $106 million was funded by the issuance of 5.3 million shares of the
Corporation's common stock.
AmeriFed Financial Corp.--In January 1995, the Corporation acquired AmeriFed
Financial Corp., a thrift holding company located in Joliet, Illinois, with
total assets of $910 million. The acquisition was accounted for as a purchase.
The purchase price of $148 million was funded by the issuance of 8.4 million
shares of the Corporation's common stock.
Merger-Related and Restructuring Charges
In connection with the First USA merger and other strategic initiatives, in
the 1997 second quarter, BANK ONE recognized merger-related costs and
restructuring charges of $467 million ($329 million after tax), of which $337
million was recorded as a separate component of noninterest expense and $130
million was recorded as additional provision for credit losses.
The merger restructuring costs associated with the First USA merger totaled
$241 million and consisted of: employee benefits, severance and stock option
vesting costs; professional services costs; premiums to redeem preferred
securities of a subsidiary trust; asset-related write-downs and other
transaction-related costs.
The remaining $96 million charge related to costs associated with strategic
initiatives to streamline the retail delivery structure by consolidating
approximately 200 banking centers over the following 12 months and the
termination of the development of the Strategic Banking System, a retail banking
system.
The $130 million additional provision for credit losses primarily reflects the
reclassification of $2.0 billion of credit card loans previously classified as
held for sale to the loan portfolio in connection with the effort to consolidate
the BANC ONE and First USA credit card master trusts, as well as an additional
provision to align the credit card charge-off policies of First USA and BANK
ONE.
In 1995, merger-related charges were $267 million of which $225 million were
direct merger and restructuring related charges associated with the merger of
First Chicago Corporation and NBD Corporation. An additional $42 million was
recorded associated with the conforming of accounting practices between the two
companies. The effect of conforming these practices was not material to the
Corporation's financial statements.
At December 31, 1997, the remaining balances of these restructuring reserves
were not material.
5
<PAGE>
Net Interest Income
Net interest income includes fundamental spreads on earning assets as well as
such items as loan fees, cash interest collections on problem loans, dividend
income, interest reversals, and income or expense on derivatives used to manage
interest rate risk. Net interest margin measures how efficiently the
Corporation uses its earning assets and underlying capital.
In order to understand fundamental trends in net interest income, average
earning assets and net interest margins, it is useful to analyze financial
performance on a "Managed" portfolio basis, in addition to analyzing "Reported"
information. "Reported" information is derived from consolidated financial
statements which have been prepared in conformity with generally accepted
accounting principles. "Managed" information treats loans sold in credit card
securitization transactions as if they had not been sold. As a result, net
interest income related to such assets is replaced by increased servicing fees,
net of related credit losses. As such, "Managed" information in the following
table includes both these securitized loans and the on-balance sheet portfolio.
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995*
-------------- -------------- ---------------
Managed
<S> <C> <C> <C>
Net interest income--tax-equivalent basis......... $ 12,702 $ 11,795
Average earning assets............................ 235,420 227,421
Net interest margin............................... 5.40% 5.19%
Reported
Net interest income--tax-equivalent basis......... $ 9,488 $ 9,301 $ 7,988
Average earning assets............................ 202,334 200,259 197,757
Net interest margin............................... 4.69% 4.64% 4.04%
_______
*Managed results not available for 1995.
</TABLE>
Managed net interest income for 1997 was $12.7 billion, up $907 million, or
8%, from 1996, due primarily to an $8.0 billion increase in average managed
earning assets. The managed net interest margin for 1997 increased to 5.40%
from 5.19% in 1996, reflecting the positive impact of the generation and
repricing of higher-margin credit card and consumer loans, as well as a
declining level of lower-margin investment securities.
On a reported basis for 1997, net interest income on a tax-equivalent basis
was $9.5 billion, up $187 million, or 2%, from $9.3 billion in 1996, primarily
driven by a $2.1 billion increase in average earning assets. An improved net
interest margin also contributed to the growth in net interest income, due to a
more profitable earning asset mix that was driven by growth in average consumer
loans.
In 1996, reported net interest income on a tax-equivalent basis was up 16%, or
$1.3 billion, from 1995, resulting from favorable pricing trends as well as a
modest growth in average earning assets. The increase in average earning assets
reflected strong underlying loan growth as well as the effect of the Premier
acquisition, which added $5.0 billion in earning assets, partly offset by a
significant reduction in low-margin assets. The reported net interest margin
rose to 4.64% in 1996 from 4.04% in 1995 due to a more profitable earning asset
mix driven by the growth in average credit card and other consumer loans.
6
<PAGE>
<TABLE>
<CAPTION>
Noninterest Income Percent
Increase (Decrease)
------------------------------
(Dollars in millions) 1997 1996 1995 1996-1997 1995-1996
------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Trading profits...................................... $ 117 $ 72 $ 234 63% (69)%
Equity securities gains.............................. 334 332 267 1 24
Investment securities gains (losses)................. 101 44 (14) 130 N/M
------ ------ ------ --------- -----------
Market-driven revenue........................... 552 448 487 23 (8)
Credit card fees..................................... 2,639 2,247 2,114 17 6
Fiduciary and investment management fees............. 746 700 658 7 6
Service charges on deposits.......................... 1,219 1,129 991 8 14
Other service charges and commissions................ 1,172 1,037 896 13 16
------ ------ ------ --------- ---------
Fee-based revenue............................... 5,776 5,113 4,659 13 10
Other................................................ 497 549 386 (9) 42
------ ------ ------ --------- ---------
Total noninterest income...................... $6,825 $6,110 $5,532 12% 10%
====== ====== ====== ========= =========
_________
N/M -- Not meaningful.
</TABLE>
Noninterest income increased to $6.8 billion for 1997, up 12%, or $715
million, from 1996. This followed a 10% improvement that was registered in 1996.
In both periods, fee-based revenue contributed to the year-over-year
improvements in noninterest income. Further details explaining these increases,
including other components of noninterest income, are discussed below.
Trading profits totaled $117 million for 1997, compared with $72 million for
1996 and $234 million for 1995. Derivative trading results in 1997 were
negatively affected by losses recognized in specific portfolio positions, as
well as by a volatile interest rate environment. Foreign exchange trading, on
the other hand, experienced better results, benefiting from the volatility in
foreign currency markets. The following table provides additional details on
total revenue from trading businesses, including both trading profits and
related net interest income.
Trading Revenue
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
Foreign exchange and derivatives.............................................. $ 72 $ 63 $ 83
Fixed income and derivatives.................................................. 11 48 106
Emerging markets.............................................................. - 6 6
Other trading................................................................. 142 98 142
----- ----- -----
Total..................................................................... $ 225 $ 215 $ 337
===== ===== =====
</TABLE>
Equity securities gains were $334 million in 1997 and $332 million in 1996,
compared with $267 million in 1995. Investment securities gains totaled $101
million for 1997, compared with gains of $44 million for 1996 and losses of $14
million for 1995. The higher investment securities gains in 1997 resulted
primarily from planned sales of lower-margin government and mortgage-backed
securities.
Credit card fees, including gains on the sale of credit card loans, were $2.6
billion in 1997, up 17% from 1996. Credit card fees in 1997 were favorably
impacted by gains related to credit card securitizations. During 1997, $12.2
billion of credit card receivables were securitized. As a result, average
securitized loans grew to $32 billion, an increase of 21% over 1996. In
addition, the increased fees resulted from both higher transaction volume and
pricing changes instituted during 1996. The December 1996 sale of a portion of
the Corporation's merchant processing resulted in a $93 million reduction in
1997 credit card fees. Net income from this investment is now recorded in other
income using the equity method of accounting.
Fiduciary and investment management fees include revenue generated by
traditional trust products and services, investment management activities, and
the shareholder services business. These fees increased $46 million and $42
million, or 7% and 6%, in 1997 and 1996, respectively. In 1996, the Corporation
decided to exit its stand-alone global custody and master trust businesses; the
exit was completed in the second quarter of 1997. Revenues from these
activities totaled approximately $11 million for 1997 and $54 million for 1996.
Revenues from the shareholder services business increased to $98 million for
1997 from $88 million for 1996 and $82 million for 1995. This continued growth
was achieved despite industry consolidation and price competition. In February
1998,
7
<PAGE>
the Corporation announced an agreement under which its shareholder services
business will combine with that of Boston EquiServe Limited Partnership,
creating the nation's largest corporate shareholder services provider. As a
result, the Corporation will recognize only its proportionate share of the new
entity's net earnings rather than consolidating the results of its prior
shareholder services business on a line-by-line basis.
Service charges on deposit accounts, which include deficient balance fees,
increased to $1.2 billion for 1997, or 8%, from $1.1 billion for 1996. The
increase was attributable to higher account volumes, as well as the
restructuring of deposit-based product offerings. Growth in cash management
fees was also a contributing factor, due in part to the more extensive cross-
selling of such product offerings.
Other service charges and commissions increased 13% from a year ago.
Increased transaction flow in the loan syndication management business, higher
levels of fees from the sale of investment management products in the retail
banking network, and the introduction of ATM fees for noncustomer transaction
activity contributed to this improved performance.
Other noninterest income for 1996 includes a gain of $107 million from the
sale of a portion of the Corporation's investment in a subsidiary engaged in the
merchant processing segment of the credit card business.
8
<PAGE>
Operating Expense
Operating expense was $9.4 billion in 1997 compared with $8.6 billion for 1996
and $7.9 billion in 1995. The increase in both periods reflected increased staff
and other operating costs associated with higher expenditures related to
technology and reengineering initiatives. These initiatives include century date
compliance, business reengineering projects aimed at enhancing operational
efficiencies and other technology-based infrastructure projects. The 1996
increase also reflected the full year effect of the Premier acquisition which
was completed on January 2, 1996.
Salary and benefit costs were $4.2 billion in 1997 compared with $4.0 billion
in 1996 and $3.7 billion in 1995. The 5 percent increase in 1997 reflects a
modest staffing increase to support growth in certain business activities as
well as annual salary increases and higher performance-based initiatives in
certain business units. The 1996 increase also reflects the effect of the
Premier acquisition and marked the first year of significant business
restructuring initiatives.
Marketing and development costs increased $269 million in 1997, primarily
reflecting marketing activities associated with the credit card business as
credit card account originations grew significantly.
Outside service fees and processing costs increased $189 million in 1997,
attributable to expenses incurred from increased credit card and business
development, data processing and credit card bureau investigation fees, as well
as costs incurred to support technology and other reengineering initiatives.
Intangible amortization expense declined in 1997 as certain identified
intangible assets became fully amortizable. Intangible expense in 1996 reflects
a $12 million write-off of software and goodwill related to a nonbank subsidiary
as well as the increase in intangibles related to purchase acquisitions.
<TABLE>
<CAPTION>
Percent
Increase (Decrease)
-------------------
(Dollars in millions) 1997 1996 1995 1996-1997 1995-1996
------ ------ ------ --------- ---------
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits
Salaries................................ $3,551 $3,363 $3,062 6% 10%
Employee benefits....................... 673 663 635 2 4
------ ------ ------
Total salaries and employee benefits.. 4,224 4,026 3,697 5 9
Net occupancy and equipment expense....... 739 738 682 - 8
Depreciation.............................. 494 448 426 10 5
Amortization of intangibles............... 199 246 214 (19) 15
Outside service fees and processing....... 1,145 956 815 20 17
Marketing and development................. 837 568 511 47 11
Communication and transportation.......... 711 652 570 9 14
Other..................................... 1,054 990 1,033 6 (4)
------ ------ ------
Total other operating expense......... 5,179 4,598 4,251 13 8
Total operating expense............... 9,403 8,624 7,948 9 9
Merger-related and restructuring costs.... 337 - 267 N/M N/M
FDIC special assessment................... - 57 - N/M N/M
------ ------ ------
Total noninterest expense............. $9,740 $8,681 $8,215 12% 6%
====== ====== ======
</TABLE>
- ------------
N/M = Not meaningful.
9
<PAGE>
Supplemental Risk Management
The Corporation's various business activities generate liquidity, market and
credit risks:
. Liquidity risk is the possibility of being unable to meet all present and
future financial obligations in a timely manner.
. Market risk is the possibility that changes in future market rates or
prices will make the Corporation's positions less valuable.
. Credit risk is the possibility of loss from a customer's failure to perform
according to the terms of a transaction.
Compensation for assuming these risks is reflected in interest income,
combined trading profits and fee income. In addition, these risks are factored
into the allocation of capital to support various business activities, as
discussed in the "Supplemental Capital Management" section, beginning on page
23.
The Corporation is a party to transactions involving financial instruments
that create risks that may or may not be reflected on a traditional balance
sheet. These financial instruments can be subdivided into three categories:
. Cash financial instruments, which are generally characterized as on-
balance-sheet transactions, and include loans, bonds, stocks and deposits.
. Credit-related financial instruments, which include such instruments as
commitments to extend credit and standby letters of credit.
. Derivative financial instruments, which include such instruments as
interest rate, foreign exchange, equity price and commodity price
contracts, including forwards, swaps and options.
The Corporation's risk management policies are intended to monitor and limit
exposure to liquidity, market and credit risks that arise from each of these
financial instruments.
Supplemental Liquidity Risk Management
Liquidity is managed in order to preserve stable, reliable and cost-effective
sources of cash to meet all current and future financial obligations in a timely
manner. The Corporation considers strong capital ratios, credit quality and core
earnings as essential to retaining high credit ratings and, consequently, cost-
effective access to market liquidity. In addition, a portfolio of liquid assets
is maintained to meet short-term demands on liquidity.
The Supplemental Statement of Cash Flows, on page 29, presents data on cash
and cash equivalents provided and used in operating, investing and financing
activities.
Through the merger of First Chicago NBD and BANC ONE, a new parent company,
named BANK ONE CORPORATION, was formed. The Corporation's ability to attract
wholesale funds on a regular basis and at a competitive cost is fostered by
strong ratings from the major credit rating agencies. As of December 31, 1997,
the two pre-merger parent companies and the major banking subsidiaries had the
following long- and short-term debt ratings.
Credit Ratings
<TABLE>
<CAPTION>
Short-Term Senior
December 31, 1997 Debt Long-Term Debt
---------------- ----------------
S & P Moody's S & P Moody's
----- ------- ----- -------
<S> <C> <C> <C> <C>
BANC ONE (Parent)..................... A-1+ P-1 AA- Aa3
First Chicago NBD (Parent)............ A-1 P-1 A+ A1
BANC ONE Principal Banks.............. A-1+ P-1 AA Aa2
First Chicago NBD Principal Banks..... A-1+ P-1 AA- Aa3
</TABLE>
Access to a variety of funding markets and customers in the retail and
wholesale sectors is vital both to liquidity management and to cost
minimization. A large retail customer deposit base is one of the significant
strengths of the Corporation's liquidity position. In addition, a diversified
mix of short- and long-term funding sources from the wholesale markets is
maintained through active participation in global capital markets and by
securitizing and selling assets such as credit card receivables.
10
<PAGE>
The Corporation is working toward the specific measures which will be used to
monitor and limit levels of liquidity exposure. These measures, which will be
disclosed in the Corporation's 1998 Annual Report, will include a definition of
liquid assets, a measure of core liabilities used to support core assets, and a
discussion of other primary liquidity risk monitoring techniques.
The following table shows the total funding source mix for the periods
indicated.
<TABLE>
<CAPTION>
Deposits and Other Purchased Funds
(In millions) 1997 1996 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Domestic offices
Demand.............................................. $ 35,954 $ 33,479 $ 31,653 $ 30,463
Savings............................................. 58,946 56,359 52,463 51,637
Time
Under $100,000.................................... 28,815 30,955 31,184 29,267
$100,000 and over................................. 11,329 10,312 10,753 10,780
Foreign offices....................................... 18,682 14,101 19,290 20,296
-------- -------- -------- --------
Total deposits................................. 153,726 145,206 145,343 142,443
Federal funds purchased and securities
Under repurchase agreements.......................... 20,346 21,662 24,906 23,613
Commercial paper...................................... 1,507 2,446 941 1,479
Other short-term borrowings........................... 11,299 10,593 12,781 12,006
Long-term debt (1).................................... 21,546 15,363 12,582 10,275
-------- -------- -------- --------
Total other purchased funds.................... 54,698 50,064 51,210 47,373
-------- -------- -------- --------
Total.......................................... $208,424 $195,270 $196,553 $189,816
======== ======== ======== ========
</TABLE>
____________
(1) Includes trust preferred capital securities.
Supplemental Market Risk Management
Overview
Market risk arises from changes in interest rates, exchange rates, equity
prices and commodity prices. The Corporation has risk management policies to
monitor and limit exposure to market risk. Through its trading activities, the
Corporation strives to take advantage of profit opportunities available in
interest and exchange rate movements. In asset and liability management
activities, policies are in place that are designed to minimize structural
interest rate and foreign exchange rate risk. The measurement of market risk
associated with financial instruments is meaningful only when all related and
offsetting on- and off-balance-sheet transactions are aggregated, and the
resulting net positions are identified. Disclosures about the fair value of
financial instruments, which reflect changes in market prices and rates, can be
found in Note 17.
Trading Activities
The Corporation takes active trading positions in a variety of markets and
instruments, including U.S. government, municipal and money market securities.
It also maintains positions in derivative products associated with these markets
and instruments, such as interest rate and currency swaps, and equity index and
commodity options.
The Corporation's trading activities are primarily customer-oriented, and
trading positions are established as necessary for customers. In order to
accommodate customer demand, an inventory in capital markets instruments is
carried, and access to market liquidity is maintained by making bid-offer prices
to other market makers. Although these two activities constitute proprietary
trading business, they are essential to providing customers with capital markets
products at competitive prices.
11
<PAGE>
Many trading positions are kept open for brief periods of time, often less
than one day. Other trading positions are held for longer periods, and these
positions are valued at prevailing market rates on a present value basis.
Realized and unrealized gains and losses on these positions are included in
noninterest income as trading profits.
The Corporation manages its market risk through a value-at-risk measurement
and control system, and through dollars limits imposed on trading desks and
individual dealers. Value-at-risk is intended to measure the maximum amount the
Corporation could lose in a particular position, given a specified confidence
level over a given period of time. Value-at-risk limits and exposure are
monitored in each significant trading portfolio on a daily basis.
The following table shows the value-at-risk at year-end for trading activities
and other activities, primarily certain investment securities classified as
available-for-sale, that are managed principally as trading risk.
<TABLE>
<CAPTION>
Value-At-Risk
December 31, 1997 (In millions)
Individual market risks
<S> <C>
Interest rate....................................................................................... $25
Exchange rate....................................................................................... 6
Equity price........................................................................................ 3
Commodity price..................................................................................... 1
Risk reduction--diversification..................................................................... (2)
---
Aggregate portfolio market risk........................................................................ $33
===
</TABLE>
Trading revenue totaled $225 million in 1997, $215 million in 1996, and $337
million in 1995. Trading revenue includes trading profits and net interest
income.
The value-at-risk calculation measures potential losses in fair value and is
based on a methodology which uses a one-day holding period and a 99.87%
confidence level. Value-at-risk is calculated using various statistical models
and techniques for cash and derivative positions, including options. Through the
use of observed statistical correlations, the Corporation has made significant
progress in recognizing offsets across different trading portfolios. However,
the Corporation's reported value-at-risk remains somewhat overstated because all
offsets and correlations are not fully considered in the calculation.
At December 31, 1997, approximately 71% of primary market risk exposures were
related to interest rate risk, while exchange rate, equity price and commodity
price risks accounted for 17%, 9% and 3%, respectively.
Approximately 50% of interest rate risk was generated by U.S. Treasury
securities and mortgage-backed securities. Interest rate derivatives accounted
for 21% of the total exposure. About 11% of the risk was generated by U.S.
corporate securities, and 5% of the risk was generated by U.S. municipal
securities. The remaining interest rate risk was derived from money market,
foreign exchange and various other trading activities.
Within the category of exchange rate risk, 91% of the risk was generated by
foreign exchange spot, forward and option trading. The remaining risk was
largely from cross-currency derivatives trading activities.
Equity price risk was primarily generated by equity derivatives trading
activities in Chicago, Tokyo and London.
Commodity price risk was generated by the Corporation's commodity derivatives
desk in Chicago, which specializes in those products eligible for bank trading
under regulatory requirements.
At December 31, 1997 market risk exposures were 21% higher than at year-end
1996. The Corporation's holdings in U.S. Treasury securities, mortgage-backed
securities, and foreign exchange positions were the principal factors behind the
increased exposure in 1997, which was somewhat offset by reduced exposure in
derivatives contracts.
Structural Interest Rate Risk Management
Interest rate risk exposure from the Corporation's non-trading activities is
actively managed, with the goal of minimizing the impact of interest rate
volatility on current earnings and on the market value of equity. The components
of interest rate risk include repricing, option, and basis risks. Repricing risk
occurs when interest rate sensitive assets, liabilities or off-balance sheet
positions reprice at different times as interest rates change. Basis risk arises
from a shift in the relationship of the rates on different financial
instruments. Option risk is due to "embedded options" often present in customer
products including interest rate, prepayment and early withdrawal options,
lagged interest rate changes, administered interest rate products, and certain
off-balance sheet sensitivities. These embedded option
12
<PAGE>
positions are complex risk positions that are difficult to offset completely
and, thus, represent the primary risk of loss to the Corporation.
The measurement tools used to monitor the overall interest rate risk exposure
of both on- and off- balance sheet positions include earnings sensitivity
modeling and market value sensitivity analysis. The specific policy limits for
managing the Corporation's interest rate risk exposure are currently being
developed and will be disclosed in the 1998 year end annual report.
Earnings sensitivity analysis measures the estimated change to pretax earnings
of various interest rate movements. The base case scenario is established using
the forward yield curve. The comparative scenarios assume an immediate parallel
shock of the forward curve in increments of (plus or minus) 100 basis point rate
movements. The interest rate scenarios are used for analytical purposes and do
not necessarily represent management's view of future market movements.
Estimated earnings for each scenario is calculated over a forward-looking 12
month horizon.
As of December 31, 1997, the Corporation's estimated earnings sensitivity
profile was as follows:
<TABLE>
<CAPTION>
Immediate Change in Rates
--------------------------------------
December 31, 1997 +100 bp -100 bp
--------------- -----------------
<S> <C> <C>
Pretax earnings change............................................................ (1.4)% 1.7%
===== ===
</TABLE>
Assumptions are made in modeling the sensitivity of earnings to interest rate
changes. For residential mortgage whole loans, mortgage-backed securities and
collateralized mortgage obligations the earnings simulation model captures the
changing prepayment behavior under changing interest rate environments.
Additionally, the model measures the impact of interest rate caps and floors on
adjustable-rate products. Assumptions regarding the interest rate or balance
behavior of indeterminate maturity products (savings, money market, NOW , and
demand deposits) reflects management's best estimate of expected future
behavior. Sensitivity of service fee income to market interest rate levels, such
as those related to securitized credit card receivables, cash management
products and mortgage servicing, is included as well.
For some embedded option positions, the risk exposure occurs at a time period
beyond the 12 months captured in earnings sensitivity analysis. Management
utilizes a market value of equity sensitivity technique to measure these longer-
term risk positions. Interest rate risk in trading activities and other
activities, primarily certain investment securities classified as available-for-
sale, is managed principally as trading risk.
Access to the derivatives market is an important element in maintaining the
Corporation's desired interest rate risk position. In general, the assets and
liabilities generated through ordinary business activities do not naturally
create offsetting positions with respect to repricing, basis or maturity
characteristics. Using off-balance-sheet instruments, principally interest rate
swaps (asset and liability management ["ALM"] swaps), the interest rate
sensitivity of specific on-balance-sheet transactions, as well as pools of
assets or liabilities, is adjusted to maintain the desired interest rate risk
profile. At December 31, 1997 the notional value of ALM interest rate swaps
totaled $35.1 billion, including $15.1 billion against specific transactions and
$20.0 billion against specific pools of assets or liabilities.
Asset and Liability Management Derivatives - Notional Principal
<TABLE>
<CAPTION>
December 31, 1997 Receive Fixed Received Fixed Pay Fixed Basis Total
(In millions) Pay Floating Amortizing Receive Floating Swaps Swaps
----------------- -------------- ---------------- ---------------- -------
Specific Pool Specific Pool Specific Pool Specific Pool
-------- ------- -------- ---- -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Swaps associated with:
Loans....................... $ - $ 6,662 $ - $252 $ 98 $2,672 $ - $ 695 $10,379
Investment securities....... 104 - 226 - 2,674 - 259 - 3,263
Securitized credit card
receivables..... - 83 - - - - - - 83
Deposits.................... 50 8,385 - 114 - - - - 8,549
Funds borrowed (including
long-term debt)............ 10,527 - - - 450 75 700 1,040 12,792
------- ------- ---- ---- ------ ------ ---- ------ -------
Total.................. $10,681 $15,130 $226 $366 $3,222 $2,747 $959 $1,735 $35,066
======= ======= ==== ==== ====== ====== ==== ====== =======
</TABLE>
Swaps used to adjust the interest rate sensitivity of specific transactions
will not need to be replaced at maturity since the corresponding asset or
liability will mature along with the swap. However, swaps against the asset and
liability pools will have an impact on the overall risk position as they mature
and may need to be reissued to maintain the same interest rate risk profile.
These swaps could create modest earnings sensitivity to changes in interest
rates.
13
<PAGE>
The notional amounts and weighted average pay and receive rates for the ALM
swap position at December 31, 1997 are summarized below. For generic swaps, the
maturities are contractual. The notional amounts and maturities of amortizing
swaps change based on certain interest rate indices. Generally, as rates fall,
the notional amounts of received fixed amortizing swaps decline more rapidly
and, as rates increase, notional amounts decline more slowly. In the table
below, interest rates are assumed to remain constant. The variable interest
rates--which generally are the prime rate, federal funds rate or the one-month,
three-month and six-month London interbank offered rates ("LIBOR") in effect on
the date of repricing--are assumed to remain constant as well. However, interest
rates will change and consequently will affect the related weighted average
information presented in the table.
14
<PAGE>
Asset and Liability Management Swaps - Maturities and Rates
<TABLE>
(Dollars in millions) 1998 1999 2000 2001 2002 Thereafter Total
------ ------ ------ ------ ------ ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Receive fixed/pay floating swaps
Notional amount.................... $5,763 $4,085 $2,981 $2,224 $2,306 $4,402 $21,761
Weighted average
Receive rate.................... 6.08% 6.43% 6.26% 6.53% 6.97% 6.82% 6.46%
Pay rate........................ 5.98% 6.02% 5.92% 5.94% 5.91% 5.93% 5.95%
Receive fixed amortizing
Notional amount.................... $ 423 $ 19 $ 150 $ - $ - $ - $ 592
Weighted average
Receive rate.................... 5.59% 7.26% 5.54% - - - 5.63%
Pay rate........................ 5.90% 6.27% 6.06% - - - 5.95%
Pay fixed/receive floating swaps
Notional amount.................... $1,383 $ 785 $ 625 $ 292 $ 486 $ 893 $ 4,464
Weighted average
Receive rate.................... 5.92% 5.98% 5.85% 5.95% 6.00% 5.96% 5.94%
Pay rate........................ 6.21% 6.47% 6.76% 6.33% 6.37% 6.39% 6.39%
Basis swaps
Notional amount.................... $1,969 $ 464 $ - $ 50 $ - $ 211 $ 2,694
Forward start swaps
Receive fixed/pay floating
Notional amount.................... $ - $ - $ - $1,200 $ 600 $2,250 $ 4,050
Weighted average
Receive rate.................... - - - 6.49% 6.75% 6.45% 6.51%
Pay fixed/receive floating
Notional amount.................... $ - $ 400 $ 100 $ 100 $ 150 $ 755 $ 1,505
Weighted average
Pay rate........................ - 5.98% 6.00% 6.03% 6.04% 6.33% 6.17%
------ ------ ------ ------ ------ ------ -------
Total notional amount................. $9,538 $5,753 $3,856 $3,866 $3,542 $8,511 $35,066
====== ====== ====== ====== ====== ====== =======
Other ALM Derivatives................ $1,519 $ 30 $ 38 $ 36 $ 28 $ 117 $ 1,768
====== ====== ====== ====== ====== ====== =======
</TABLE>
Foreign Exchange Risk Management
Wherever possible, foreign currency-denominated assets are funded with
liability instruments denominated in the same currency. If a liability
denominated in the same currency is not immediately available or desired, a
forward foreign exchange contract is used to fully hedge the risk due to cross-
currency funding.
To minimize the earnings and capital impact of translation gains or losses
measured on an after-tax basis, the Corporation uses forward foreign exchange
contracts to hedge the exposure created by investments in overseas branches and
subsidiaries.
Supplemental Credit Risk Management
The Corporation has developed policies and procedures to manage the level and
composition of risk in its credit portfolio. The objective of this credit risk
management process is to quantify and manage credit risk on a portfolio basis as
well as to reduce the risk of a loss resulting from a customer's failure to
perform according to the terms of a transaction.
Customer transactions create credit exposure that is reported both on and off
the balance sheet. On-balance-sheet credit exposure includes such items as
loans. Off-balance-sheet credit exposure includes unfunded credit commitments
and other credit-related financial instruments. Credit exposures resulting from
derivative financial instruments are reported both on and off the balance sheet,
as explained beginning on page 22.
15
<PAGE>
Selected Statistical Information
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
At year-end
Loans outstanding............................... $159,579 $153,496 $138,478 $125,145
Nonperforming loans............................. 609 536 661 614
Other real estate owned......................... 85 85 116 150
Nonperforming assets............................ 694 621 777 764
Allowance for credit losses..................... 2,817 2,687 2,422 2,192
Nonperforming assets/loans outstanding and other
real estate owned.............................. 0.43% 0.40% 0.56% 0.61%
Allowance for credit losses/loans outstanding... 1.77 1.75 1.75 1.75
Allowance for credit losses/nonperforming loans. 463 501 366 357
For the year
Average loans................................... $155,926 $146,094 $130,614 $117,145
Net charge-offs................................. 1,887 1,522 768 561
Net charge-offs/average loans................... 1.21% 1.04% 0.59% 0.48%
</TABLE>
For analytical purposes, the Corporation's portfolio is divided into commercial,
consumer and credit card segments.
Loan Composition
<TABLE>
<CAPTION>
December 31 (In millions) 1997 1996 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Commercial
Domestic
Commercial.................................... $ 49,033 $ 45,384 $ 40,910 $ 37,090
Real estate
Construction................................ 4,639 4,387 3,820 3,191
Other....................................... 16,545 16,016 15,106 14,105
Lease financing............................... 3,962 3,665 3,012 2,455
Foreign......................................... 5,127 4,160 3,984 3,452
-------- -------- -------- --------
Total commercial.......................... 79,306 73,612 66,832 60,293
Consumer
Residential real estate....................... 15,221 14,862 14,665 13,651
Home equity................................... 12,867 12,079 9,384 7,823
Automotive (1)................................ 17,998 17,293 15,946 16,030
Student....................................... 3,219 3,304 2,856 2,779
Other......................................... 8,303 7,491 7,270 7,309
-------- -------- -------- --------
Total consumer............................ 57,608 55,029 50,121 47,592
Credit card....................................... 22,665 24,855 21,525 17,260
-------- -------- -------- --------
Total..................................... $159,579 $153,496 $138,478 $125,145
======== ======== ======== ========
</TABLE>
- ------------
(1) Includes auto-lease receivables.
Allowance for Credit Losses
The allowance for credit losses is maintained at a level that in management's
judgment is adequate to provide for estimated probable credit losses inherent in
various on- and off-balance-sheet financial instruments. The level of the
allowance reflects management's formal review and analysis of potential credit
losses, as well as prevailing economic conditions. On December 31, 1997, the
allowance represented 463% of nonperforming loans and 1.77% of total loans. A
$130 million additional provision for credit losses was taken during 1997 as a
result of the reclassification of credit card loans and to conform the credit
card charge-off policies of BANK ONE and First USA.
16
<PAGE>
During 1997, net charge-offs totaled $1.887 billion as compared to $1.522
billion in 1996. The 1997 net charge-offs amounts comprised $87 million of
commercial, $420 million of consumer and $1.380 billion of credit card. The
following two tables provide additional details on net charge-offs for the past
four years.
Net Charge-offs (Recoveries) by Loan Type (1)
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 1995 1994
------------- ------------- ------------- -------------
Amount % Amount % Amount % Amount %
------ ---- ------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial........... $ 87 0.11% $ 79 0.11% $ 52 0.08% $ (4) N/M
Consumer............. 420 0.74 328 0.63 192 0.40 129 0.30
Credit card.......... 1,380 6.03 1,115 4.86 524 2.98 436 2.70
------ ---- ------ ---- ---- ---- ---- ----
Total.............. $1,887 1.21% $1,522 1.04% $768 0.59% $561 0.48%
====== ====== ==== ====
</TABLE>
- ------------
(1) Ratios presented as a percent of average loans.
N/M - Not meaningful.
17
<PAGE>
<TABLE>
<CAPTION>
Analysis of Allowance for Credit Losses
(In millions) 1997 1996 1995 1994
------ ------ ------ -------
<S> <C> <C> <C> <C>
Balance, beginning of year........................ $2,687 $2,422 $2,192 $2,222
Provision for credit losses....................... 1,988 1,716 1,067 558
Charge-offs
Commercial
Domestic
Commercial.................................... 200 174 137 118
Real estate-construction...................... 3 3 7 4
Real estate-other............................. 19 28 41 54
Lease financing............................... 12 15 13 9
Foreign........................................ - 2 1 9
------ ------ ------ ------
Total commercial.............................. 234 222 199 194
Consumer
Residential mortgage........................... 18 8 9 10
Home equity.................................... 34 24 9 8
Automotive..................................... 311 248 165 123
Student........................................ 1 1 2 2
Other.......................................... 255 208 125 100
------ ------ ------ ------
Total consumer................................ 619 489 310 243
Credit card...................................... 1,544 1,216 616 522
------ ------ ------ ------
Total charge-offs............................. 2,397 1,927 1,125 959
Recoveries
Commercial
Domestic
Commercial.................................... 97 87 105 119
Real estate-construction...................... 6 10 6 8
Real estate-other............................. 29 27 21 23
Lease financing............................... 3 4 6 4
Foreign........................................ 12 15 9 44
------ ------ ------ ------
Total commercial.............................. 147 143 147 198
Consumer
Residential mortgage........................... 7 4 5 8
Home equity.................................... 7 4 4 3
Automotive..................................... 122 98 70 63
Student........................................ - - 1 1
Other.......................................... 63 55 38 39
------ ------ ------ ------
Total consumer............................... 199 161 118 114
Credit card...................................... 164 101 92 86
------ ------ ------ ------
Total recoveries.............................. 510 405 357 398
Net charge-offs................................... 1,887 1,522 768 561
Other............................................. 29 71 (69) (27)
------ ------ ------ ------
Balance, end of year.............................. $2,817 $2,687 $2,422 $2,192
====== ====== ====== ======
</TABLE>
Nonperforming Assets
At December 31, 1997 nonperforming assets totaled $694 million, compared with
$621 million at year-end 1996 and $777 million at year-end 1995. Nonperforming
assets at December 31, 1997 included $609 million of nonperforming loans and $85
million of other real estate owned.
Consumer Risk Management
Consumer loans consist of credit card receivables as well as residential
mortgage and home equity loans, automobile financing, student loans and other
forms of consumer installment credit. The consumer and credit card loan
portfolio increased during the year to $80.3 billion at year-end 1997. Including
securitized credit card receivables, the consumer portfolio increased $8.5
billion, or 8%, to $117.7 billion at December 31, 1997.
18
<PAGE>
<TABLE>
<CAPTION>
Consumer and Credit Card Loans
December 31 (In millions) 1997 1996 1995 1994
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Credit card........................................ $ 22,665 $ 24,855 $21,525 $17,260
Residential real estate............................ 15,221 14,862 14,665 13,651
Home equity........................................ 12,867 12,079 9,384 7,823
Automotive (1)..................................... 17,998 17,293 15,946 16,030
Student............................................ 3,219 3,304 2,856 2,779
Other consumer..................................... 8,303 7,491 7,270 7,309
-------- -------- ------- -------
Total owned................................... 80,273 79,884 71,646 64,852
Securitized credit card............................ 37,414 29,303 25,179 15,955
-------- -------- ------- -------
Total managed................................. $117,687 $109,187 $96,825 $80,807
======== ======== ======= =======
</TABLE>
____________
(1) Includes auto-lease receivables.
Managed credit card receivables (i.e., those held in the portfolio and those
sold to investors through securitization) were $60.1 billion at December 31,
1997, up 11% from year-end 1996. Average managed credit card receivables were
$54.9 billion for 1997, up 11% from 1996.
Credit card receivables represent the most significant risk element in the
consumer portfolio. The managed credit card charge-off rate of 6.18% in 1997
represented a significant increase from prior years. In addition, 1997
delinquency rates stabilized as presented in the following table.
<TABLE>
<CAPTION>
Credit Card Receivables
(Dollars in millions) 1997 1996
-------- --------
<S> <C> <C>
Average balances
Credit card loans.................................................. $22,880 $22,926
Securitized credit card receivables................................ 31,992 26,533
------- -------
Total average managed credit card receivables..................... $54,872 $49,459
======= =======
Total net charge-offs (including securitizations).................... $ 3,391 $ 2,609
======= =======
Net charge-offs/average total managed receivables.................... 6.18% 5.28%
Credit card delinquency rate at period end
30 or more days.................................................... 4.90 4.96
90 or more days.................................................... 2.11 2.07
</TABLE>
Commercial Risk Management
The commercial risk portfolio includes all domestic and foreign commercial
credit exposure. Credit exposure includes the credit risks associated with both
on- and off-balance-sheet financial instruments.
Commercial loans increased 8% from $73.6 billion at December 31, 1996, to
$79.3 billion at December 31, 1997. Nonperforming commercial assets increased
$73 million to $694 million at year-end 1997, from $621 million at December 31,
1996. Commercial net charge-offs were $87 million in 1997, compared with $79
million in 1996 and $52 million in 1995.
In the commercial portfolio, credit quality is rated according to defined
levels of credit risk. The lower categories of credit risk are equivalent to the
four bank regulatory classifications: Special Mention, Substandard, Doubtful and
Loss. These categories define levels of credit deterioration at which it may be
increasingly difficult for the Corporation to be fully repaid without
restructuring the credit.
Commercial Real Estate
Commercial real estate consists primarily of loans secured by real estate as
well as certain loans that are real estate-related. A loan is categorized as
real estate-related when 80% or more of the borrower's revenues are derived from
real estate activities and the loan is not collateralized by cash or marketable
securities.
19
<PAGE>
At December 31, 1997, commercial real estate loans totaled $21.2 billion, or
27% of commercial loans, compared with $20.4 billion, or 28% of commercial
loans, at December 31, 1996. During 1997, net recoveries in the commercial real
estate portfolio segment were $13 million compared with net recoveries of $6
million in 1996. Nonperforming commercial real estate assets, including other
real estate owned, totaled $304 million, or 1.4% of related assets, at December
31, 1997, compared with $315 million, or 1.5% of related assets, at December 31,
1996.
Foreign Outstandings
The table below presents a breakout of foreign outstandings for the past two
years, where such outstandings exceeded 1.0% of total assets. The amounts have
been prepared using the Federal Financial Institutions Examination Council's
reporting guidelines, which were revised in 1997. Under the revised guidelines,
local country claims, which include both local and nonlocal currency activity,
are reported net of local country liabilities. The 1996 amounts have been
restated to conform to the revised guidelines. Included in claims for both
periods are loans, balances with banks, acceptances, securities, equity
investments, accrued interest and other monetary assets. For 1997, cross-border
claims to Japan include $641 million of current credit exposure on derivative
contracts, which is net of master netting agreements. Current credit exposure on
derivative contracts is not included in the reported 1996 amounts.
<TABLE>
<CAPTION>
Cross-Border Claims
------------------------------------- Total Cross-
Governments Net Local Border & Net
(In millions) & Official Country Local Country
December 31 Banks Institutions Other Claims Claims
----------- ------ ------------ ----- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Japan (1)................ 1997 $4,225 - $386 - $4,611
1996 3,782 - 22 - 3,804
</TABLE>
__________
(1) At year-end 1997 and 1996, local country claims were reduced by local
country liabilities of $83 million and $161 million, respectively.
At December 31, 1997, and December 31, 1996, there were no countries for which
cross-border and net local country claims totaled between 0.75% and 1.0% of
total assets.
Supplemental Derivative Financial Instruments
BANK ONE uses a variety of derivative financial instruments in its trading,
asset and liability management, and corporate investment activities. These
instruments include interest rate, currency, equity and commodity swaps,
forwards, spot, futures, options, caps, floors, forward rate agreements, and
other conditional or exchange contracts, and include both exchange-traded and
over-the-counter contracts. See Note 16, beginning on page 49, for a discussion
of the nature and terms of derivative financial instruments.
20
<PAGE>
Notional Principal or Contractual Amounts of Derivative Financial Instruments
The following tables represent the gross notional principal or contractual
amounts of outstanding derivative financial instruments used in certain
activities. These amounts indicate the volume of transaction activity, and they
do not represent the market or credit risk associated with these instruments. In
addition, such volumes do not reflect the netting of offsetting transactions.
<TABLE>
<CAPTION>
Asset and
Liability Corporate
December 31, 1997 (In billions) Trading Management Investments Total
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Interest rate contracts.................................. $ 825.9 $36.8 $ - $ 862.7
Foreign exchange contracts............................... 422.5 1.6 - 424.1
Equity contracts......................................... 12.3 - 0.1 12.4
Commodity contracts...................................... 2.7 - - 2.7
-------- ----- ---- --------
Total............................................... $1,263.4 $38.4 $0.1 $1,301.9
======== ===== ==== ========
December 31, 1996 (In billions)
Interest rate contracts.................................. $ 649.3 $34.8 $ - $ 684.1
Foreign exchange contracts............................... 375.4 1.7 - 377.1
Equity contracts......................................... 8.6 - 0.2 8.8
Commodity contracts...................................... 3.4 - - 3.4
-------- ----- ---- --------
Total............................................... $1,036.7 $36.5 $0.2 $1,073.4
======== ===== ==== ========
</TABLE>
Accounting for Derivative Financial Instruments
Derivative financial instruments used in trading activities are valued at
estimated fair value. Such instruments include swaps, forwards, spot, futures,
options, caps, floors and forward rate agreements and other conditional or
exchange contracts in the interest rate, foreign exchange, equity and commodity
markets. The estimated fair values are based on quoted market prices or pricing
and valuation models on a present value basis using current market information.
Realized and unrealized gains and losses are included in noninterest income as
trading profits. Where appropriate, compensation for credit risk and ongoing
servicing is deferred and recorded as income over the terms of the derivative
financial instruments.
Derivative financial instruments used in asset and liability management (ALM)
activities, principally interest rate swaps, are typically classified as
synthetic alterations or anticipatory hedges and are required to meet specific
criteria. Such interest rate swaps are designated as ALM derivatives, and are
linked to and adjust the interest rate sensitivity of a specific asset,
liability, firm commitment, or anticipated transaction or a specific pool of
transactions with similar risk characteristics. Interest rate swaps that do not
meet these and the following criteria are designated as derivatives used in
trading activities and are accounted for at estimated fair value.
Synthetic Alteration - (1) the asset or liability to be converted creates
exposure to interest rate risk; (2) the swap is effective as a synthetic
alteration of the balance sheet item; (3) the start date of the swap does not
extend beyond that point in time at which it is believed that modeling systems
produce reliable interest rate sensitivity information; and (4) the related
balance sheet items, from trade date to final maturity, has sufficient balances
for alteration.
Anticipatory Hedge - (1) the transaction to be hedged creates exposure to
interest rate risk; (2) the swap acts to reduce inherent rate risk by moving
closer to being insensitive to interest rate changes; (3) the swap is effective
as a hedge of the transaction; (4) the significant characteristics and expected
terms of the anticipated transaction are identified; and (5) it is probable that
the anticipated transaction will occur.
Income or expense on most ALM derivatives used to manage interest rate
exposure is recorded on an accrual basis, as an adjustment to the yield of the
linked exposures over the periods covered by the contracts. This matches the
income recognition treatment of that exposure, generally assets or liabilities
carried at historical cost, which are recorded on an accrual basis. If an
interest rate swap is terminated early or dedesignated as an ALM derivative, any
unrecognized gain or loss at that point in time is deferred and amortized as an
adjustment of the yield on the linked interest rate exposure position over the
remaining periods originally covered by the swap. If all or part of a linked
position is terminated, e.g., a linked asset is sold or prepaid, or if the
amount of an anticipated transaction is likely to be less than originally
expected, the related pro rata portion of any unrecognized gain or loss on the
swap is recognized in earnings at that time, and the related pro rata portion of
the swap is subsequently accounted for at estimated fair value.
Purchased option, cap and floor contracts are reported in derivative product
assets, and written option, cap and floor contracts are reported in derivative
product liabilities. For other derivative financial instruments, an unrealized
21
<PAGE>
gain is reported in derivative product assets and an unrealized loss is reported
in derivative product liabilities. However, fair value amounts recognized for
derivative financial instruments executed with the same counterparty under a
legally enforceable master netting arrangement are reported on a net basis. Cash
flows from derivative financial instruments are reported net as operating
activities.
Income Resulting from Derivative Financial Instruments
A discussion of BANK ONE's income from derivatives used in trading activities
is included in the Trading Revenue table on page 7.
BANK ONE uses interest rate derivative financial instruments to reduce
structural interest rate risk and the volatility of net interest margin. Net
interest margin reflects the effective use of these derivatives. Without their
use, net interest income would have been lower by $54 million in 1997, and
higher by $16 million in 1996 and $222 million in 1995.
Credit Exposure Resulting from Derivative Financial Instruments
BANK ONE maintains risk management policies that monitor and limit exposure to
credit risks. For a further discussion of credit risks, see the Supplemental
Credit Risk Management section, beginning on page 15.
Credit exposure from derivative financial instruments arises from the risk of
a customer default on the derivative contract. The amount of loss created by the
default is the replacement cost or current fair value of the defaulted contract.
BANK ONE utilizes master netting agreements whenever possible to reduce its
credit exposure from customer default. These agreements allow the netting of
contracts with unrealized losses against contracts with unrealized gains to the
same customer, in the event of a customer default. The table below shows the
impact of these master netting agreements.
<TABLE>
<CAPTION>
December 31 (In millions) 1997 1996
--------- -------
<S> <C> <C>
Gross replacement cost.............................................................. $ 15,052 $15,023
Less: Adjustment due to master netting agreements.................................. (10,035) (9,876)
-------- -------
Current credit exposure............................................................. 5,017 5,147
Less: Unrecognized net gains due to nontrading activity............................ (394) (134)
-------- -------
Balance sheet exposure.............................................................. $ 4,623 $ 5,013
======== =======
</TABLE>
Current credit exposure represents the total loss that BANK ONE would have
suffered had every counterparty been in default on those dates. These amounts
are reduced by the unrealized and unrecognized gains on derivatives used in
asset and liability management activities to arrive at the balance sheet
exposure.
Supplemental Year 2000 Compliance
In order to quickly and effectively resolve systems-related Year 2000 issues,
BANK ONE will continue to execute the project plans established by the
predecessor companies. The total cost of the combined projects are estimated to
be approximately $350 million. During 1996 and 1997, approximately $50 million
of costs were incurred.
The comprehensive programs focus on achieving compliance within specified
deadlines for all phases of the project: inventory and assessment, renovation,
testing and implementation, and contingency planning. The inventory and
assessment component has been completed and all other activities are in various
stages of progress. The Corporation estimates that substantially all affected
applications will be remedied by the end of 1998, and that final testing will be
completed by mid-1999.
Detailed contingency plans have been developed for critical business system
applications to mitigate potential problems or delays associated with system
replacements or vendor delivery dates. The Corporation is working extensively
with external entities to ensure that their systems will be Year 2000 compliant.
The Corporation bears risk and could be adversely affected, however, if outside
parties (e.g., vendors and customers) do not appropriately address their Year
2000 compliance issues.
22
<PAGE>
Supplemental Capital Management
Capital represents the stockholders' investment on which the Corporation
strives to generate attractive returns. It is the foundation of a cohesive risk
management framework and links return with risk. Capital supports business
growth and provides protection to depositors and creditors.
The table below presents BANK ONE capital ratios on a pro forma basis. It is
not intended to suggest that capital has been managed on a combined basis, but
only to present a view of capital when BANC ONE and First Chicago NBD are added
together. Upon consummation of the merger, integrated capital management
policies and practices will be in effect and will be addressed in the
Corporation's 1998 Annual Report.
<TABLE>
<CAPTION>
Selected Capital Ratios
December 31 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Common equity/total assets.................... 7.8% 8.3% 7.6%
Tangible common equity ratio.................. 7.2 7.8 7.1
Stockholders' equity/total assets............. 8.0 8.6 7.9
Double leverage ratio (1)..................... 107 107 108
Dividend payout ratio......................... 61.35 37.96 39.59
___________
(1) Includes trust preferred capital securities.
N/A - Not applicable.
</TABLE>
Regulatory Capital
BANK ONE aims to maintain regulatory capital ratios, including those of the
principal banking subsidiaries, in excess of the well-capitalized guidelines
under federal banking regulations. As shown in the table below, BANK ONE has
maintained a well-capitalized regulatory position over the past three years. In
addition, the principal banking subsidiaries of the Corporation have met or
exceeded the well-capitalized guidelines for the past two years, as shown in
Note 11 on page 41.
<TABLE>
<CAPTION>
Regulatory
December 31 1997 1996 1995 Guidelines
---- ---- ---- ----------
<S> <C> <C> <C> <C>
Risk-based capital ratios (1)
Tier 1...................................... 8.2% 9.5% 9.0% 6.0%
Total....................................... 12.3 13.6 13.0 10.0
Leverage ratio (1)............................ 7.8 8.9 7.8 5.0
___________
(1) Includes trust preferred capital securities.
</TABLE>
The components of the Corporation's regulatory risk-based capital and risk-
weighted assets are shown below:
<TABLE>
<CAPTION>
December 31 (In millions) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Regulatory Risk-Based Capital
Tier 1 capital..................................................... $ 17,958 $ 19,241 $ 16,862
Tier 2 capital..................................................... 9,000 8,196 7,504
-------- -------- --------
Total capital..................................................... $ 26,958 $ 27,437 $ 24,366
======== ======== ========
Total risk-weighted assets......................................... $219,557 $202,213 $186,758
======== ======== ========
</TABLE>
23
<PAGE>
In arriving at Tier 1 and total capital, such amounts are reduced by goodwill
and other nonqualifying intangible assets as shown below.
<TABLE>
<CAPTION>
Intangible Assets
December 31 (In millions) 1997 1996 1995
------ ------ -------
<S> <C> <C> <C>
Goodwill............................................................. $1,120 $ 920 $ 808
Other nonqualifying intangibles...................................... 109 61 97
------ ------ ------
Subtotal............................................................ 1,229 981 905
Qualifying intangibles............................................... 473 278 391
------ ------ ------
Total intangibles................................................... $1,702 $1,259 $1,296
====== ====== ======
</TABLE>
Dividends
In 1997, BANC ONE's cash dividends per share increased by 11% to $1.38 per
share, compared with $1.24 per share in 1996. This represents a dividend payout
ratio of 61% in 1997 and 38% in 1996. The increase in the 1997 dividend payout
was due to restructuring and merger-related charges taken during 1997.
On January 20, 1998 and January 23, 1996, BANC ONE declared a 10% common stock
dividend to shareholders of record on February 12, 1998 and February 21, 1996,
respectively. Accordingly, all common stock share data have been adjusted to
include the effect of the stock dividend.
In 1997, First Chicago NBD's cash dividends per share were increased by 11% to
$1.64 per share, compared with $1.48 per share in 1996. This represents a
dividend payout ratio of 33% in 1997 and 34% in 1996.
Other Capital Activities
BANC ONE and First Chicago NBD rescinded their stock repurchase programs on
May 14, 1997 and April 10, 1998, respectively.
On January 20, 1998, the Corporation elected to redeem all of the shares of
its Series C Convertible Preferred stock on April 16, 1998, at the redemption
price of $51.05 per share plus the amount of any dividends accrued and unpaid.
On November 17, 1997, the Corporation redeemed all shares outstanding of its
8.45% Cumulative Preferred Stock, Series E, and the corresponding redemption of
the related depositary shares, each representing a one-twenty-fifth interest in
a share of the Series E Preferred Stock. The redemption price was $25.27 per
depositary share, which included accrued and unpaid dividends of $0.27 per
depositary share.
On May 2, 1997, the Corporation redeemed all shares outstanding of its 6-1/4%
mandatory convertible preferred stock. The liquidation value was $31.875 per
share. All of the mandatory convertible preferred stock was converted to shares
of the Corporation's common stock.
On April 1, 1997, the Corporation redeemed all shares outstanding of its 5-
3/4% Cumulative Convertible Preferred Stock, Series B, and the corresponding
redemption of the related depositary shares, each representing a one-hundredth
interest in a share of the Convertible Preferred Stock. The redemption price was
approximately $52.44 per depositary share, which included accrued and unpaid
dividends of approximately $0.72 per depositary share. Essentially all of the
Series B Preferred Stock was converted to shares of the Corporation's common
stock prior to the redemption date.
During 1997, the Corporation strengthened its capital position through the
issuance of $900 million in subordinated debt.
Double Leverage
Double leverage is the extent to which the Corporation's debt is used to
finance investments in subsidiaries. On December 31, 1997 and December 31, 1996,
double leverage was 107%. Trust Preferred Capital Securities of $1.003 billion
at year-end 1997 and $948 million at year-end 1996 are included in capital for
purposes of this calculation.
Supplemental Fourth Quarter Review
Net income for the fourth quarter 1997 was $890 million, or $0.75 per common
share, compared with the 1996 fourth quarter results of $848 million, or $0.68
per common share.
24
<PAGE>
Net interest income on a tax-equivalent basis decreased $65 million to $2.301
billion in the fourth quarter of 1997 from $2.366 billion for the same 1996
period. Net interest margin decreased to 4.49% in 1997 from 4.86% in 1996.
Total noninterest expense increased $168 million to $2.448 billion in the
fourth quarter of 1997 from $2.280 billion in the same quarter of 1996. Salaries
and benefits increased in fourth quarter 1997 compared with the same period in
1996 as a result of increased staffing, merit and other pay increases,
commissions related to venture transactions, and a continued shift to incentive
compensation. Outside servicing and processing increased due to a rise in
external consulting and processing services. Other noninterest expense also
contributed to the overall increase from the fourth quarter of 1996 to the same
period in 1997.
25
<PAGE>
<TABLE>
<CAPTION>
Supplemental Consolidated Balance Sheet
BANK ONE CORPORATION and Subsidiaries
December 31 (Dollars in millions) 1997 1996
-------- --------
<S> <C> <C>
Assets
Cash and due from banks.................................................................... $ 15,380 $ 14,792
Interest-bearing due from banks............................................................ 6,910 5,477
Federal funds sold and securities under resale agreements.................................. 9,168 4,916
Trading assets............................................................................. 5,246 5,389
Derivative product assets.................................................................. 4,623 5,013
Investment securities (fair value--$26,054 in 1997 and $27,973 in 1996).................... 26,039 27,942
Loans (net of unearned income--$3,049 in 1997 and $2,241 in 1996)
Commercial.............................................................................. 79,306 73,612
Consumer................................................................................ 57,608 55,029
Credit Card............................................................................. 22,665 24,855
Allowance for credit losses................................................................ 2,817 2,687
-------- --------
Loans, net.............................................................................. 156,762 150,809
Other assets:
Bank premises and equipment, net........................................................... 3,426 3,309
Customers' acceptance liability............................................................ 741 614
Other...................................................................................... 11,077 7,561
-------- --------
Total assets..................................................................... $239,372 $225,822
======== ========
Liabilities
Deposits
Demand.................................................................................. 35,954 33,479
Savings................................................................................. 58,946 56,359
Time.................................................................................... 40,144 41,267
Foreign offices......................................................................... 18,682 14,101
-------- --------
Total deposits................................................................... 153,726 145,206
Federal funds purchased and securities under repurchase agreements......................... 20,346 21,662
Other short-term borrowings................................................................ 12,806 13,039
Long-term debt............................................................................. 20,543 14,415
Guaranteed preferred beneficial interest in the Corporation's junior subordinated debt..... 1,003 948
Acceptances outstanding.................................................................... 741 614
Derivative product liabilities............................................................. 4,629 4,773
Other liabilities.......................................................................... 6,528 5,658
-------- --------
Total liabilities................................................................ 220,322 206,315
Stockholders' Equity
Preferred stock............................................................................ 326 651
Common stock - $0.01 par value............................................................. 12 12
1997 1996
---- ----
Number of shares authorized............................ 2,500,000,000 2,500,000,000
Number of shares issued................................ 1,218,812,323 1,149,602,028
Number of shares outstanding........................... 1,168,188,895 1,133,314,268
Surplus.................................................................................... 12,584 10,030
Retained earnings.......................................................................... 8,063 9,373
Fair value adjustment on investment securities available-for-sale.......................... 203 81
Deferred compensation...................................................................... (137) (94)
Accumulated translation adjustment......................................................... 6 7
Treasury stock at cost, 50,623,428 shares in 1997 and 16,287,760 shares in 1996............ (2,007) (553)
-------- --------
Stockholders' equity.................................................................... 19,050 19,507
-------- --------
Total liabilities and stockholders' equity....................................... $239,372 $225,822
======== ========
The accompanying notes are an integral part of this balance sheet.
</TABLE>
26
<PAGE>
Supplemental Consolidated Income Statement
BANK ONE CORPORATION and Subsidiaries
<TABLE>
<CAPTION>
For the Year (In millions, except per-share data) 1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Interest Income
Loans, including fees................................................ $14,659 $13,712 $12,091
Bank balances........................................................ 451 465 629
Federal funds sold and securities under resale agreements............ 350 546 975
Trading assets....................................................... 330 423 503
Investment securities--taxable....................................... 1,443 1,609 1,825
Investment securities--tax-exempt.................................... 181 193 250
------- ------- -------
Total............................................................ 17,414 16,948 16,273
Interest Expense
Deposits............................................................. 4,991 4,857 5,218
Federal funds purchased and securities under repurchase agreements... 1,073 1,268 1,671
Other short-term borrowings.......................................... 786 799 753
Long-term debt....................................................... 1,234 895 832
------- ------- -------
Total............................................................ 8,084 7,819 8,474
Net Interest Income.................................................. 9,330 9,129 7,799
Provision for credit losses.......................................... 1,988 1,716 1,067
------- ------- -------
Net Interest Income After Provision for Credit Losses................ 7,342 7,413 6,732
Noninterest Income
Trading profits...................................................... 117 72 234
Equity securities gains.............................................. 334 332 267
Investment securities gains (losses)................................. 101 44 (14)
------- ------- -------
Market-driven revenue.............................................. 552 448 487
Credit card fees..................................................... 2,639 2,247 2,114
Fiduciary and investment management fees............................. 746 700 658
Service charges and commissions...................................... 2,391 2,166 1,887
------- ------- -------
Fee-based revenue.................................................. 5,776 5,113 4,659
Other income......................................................... 497 549 386
------- ------- -------
Total............................................................ 6,825 6,110 5,532
Noninterest Expense
Salaries and employee benefits....................................... 4,224 4,026 3,697
Net occupancy and equipment expense.................................. 739 738 682
Depreciation and amortization........................................ 494 448 426
Amortization of intangibles.......................................... 199 246 214
Outside service fees and processing.................................. 1,145 956 815
Marketing and development............................................ 837 568 511
Communication and transportation..................................... 711 652 570
Other................................................................ 1,054 990 1,033
------- ------- -------
Operating Expense.................................................. 9,403 8,624 7,948
Merger-related and restructuring charges............................. 337 - 267
FDIC special assessment.............................................. - 57 -
------- ------- -------
Total............................................................ 9,740 8,681 8,215
Income Before Income Taxes........................................... 4,427 4,842 4,049
Applicable income taxes.............................................. 1,467 1,611 1,374
------- ------- -------
Net Income........................................................... $ 2,960 $ 3,231 $ 2,675
======= ======= =======
Net Income Attributable to Common Stockholders' Equity............... $ 2,921 $ 3,170 $ 2,605
======= ======= =======
Earnings Per Share
Basic.............................................................. $2.48 $2.64 $2.17
Diluted............................................................ $2.43 $2.57 $2.12
</TABLE>
The accompanying notes are an integral part of this statement.
27
<PAGE>
Supplemental Consolidated Statement of Stockholders' Equity
BANK ONE CORPORATION and Subsidiaries
<TABLE>
<CAPTION>
For the Year (In millions) 1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Preferred Stock
Balance, beginning of period....................................... $ 651 $ 798 $ 921
Conversion of preferred stock...................................... (225) (147) (2)
Redemption of preferred stock...................................... (100) - (121)
------- ------- -------
Balance, end of period............................................. 326 651 798
Common Stock
Balance, beginning of period....................................... 12 12 11
10% common stock dividend at fair market value..................... - - 1
------- ------- -------
Balance, end of period............................................. 12 12 12
Surplus
Balance, beginning of period....................................... 10,030 10,683 9,451
Conversion of preferred stock...................................... (66) 44 2
Conversion of stock appreciation rights to stock options........... 10 - -
Conversion of 12-3/4% convertible debentures....................... - 2 -
Issuance of common stock........................................... 6 84 16
Issuance of treasury stock......................................... 50 (111) 11
Acquisition of subsidiaries........................................ 51 71 29
Cancellation of shares held in treasury............................ (441) (790) (380)
10% common stock dividend at fair market value..................... 2,890 - 1,545
Other.............................................................. 54 47 9
------- ------- -------
Balance, end of period............................................. 12,584 10,030 10,683
Retained Earnings
Balance, beginning of period....................................... 9,373 7,269 7,222
Net income......................................................... 2,960 3,231 2,675
Cash dividends declared on common stock............................ (769) (587) (533)
Cash dividends declared on preferred stock......................... (12) (16) (18)
Cash dividends declared on common stock by pooled affiliates....... (568) (545) (477)
Cash dividends declared on preferred stock by pooled affiliates.... (27) (45) (52)
Conversion of preferred stock...................................... - (25) -
Acquisition of subsidiaries........................................ - - (3)
Purchase of treasury stock......................................... - 91 -
Issuance of treasury stock......................................... (4) - -
10% common stock dividend at fair market value..................... (2,890) - (1,545)
------- ------- -------
Balance, end of period............................................. 8,063 9,373 7,269
Fair Value Adjustment on Investment Securities Available-for-Sale
Balance, beginning of period....................................... 81 237 (344)
Change in fair value (net of taxes of $66 in 1997, $(85) in 1996,
and $321 in 1995)................................................. 122 (156) 581
------- ------- -------
Balance, end of period............................................. 203 81 237
Deferred Compensation
Balance, beginning of period....................................... (94) (69) (53)
Awards granted, net of forfeitures and amortization................ (14) (12) (7)
Other.............................................................. (29) (13) (9)
------- ------- -------
Balance, end of period............................................. (137) (94) (69)
Accumulated Translation Adjustment
Balance, beginning of period....................................... 7 8 7
Translation gain (loss), net of taxes.............................. (1) (1) 1
------- ------- -------
Balance, end of period............................................. 6 7 8
Treasury Stock
Balance, beginning of period....................................... (553) (795) (647)
Conversion of preferred stock...................................... 292 125 1
Purchase of common stock........................................... (2,752) (1,415) (851)
Acquisition of subsidiaries........................................ 487 657 262
Cancellation of shares held in treasury............................ 442 790 380
Issuance of stock.................................................. 77 85 60
------- ------- -------
Balance, end of period............................................. (2,007) (553) (795)
------- ------- -------
Total Stockholders' Equity, end of period........................ $19,050 $19,507 $18,143
======= ======= =======
</TABLE>
The accompanying notes are an integral part of this statement.
28
<PAGE>
Supplemental Consolidated Statement of Cash Flows
BANK ONE CORPORATION and Subsidiaries
<TABLE>
<CAPTION>
For the Year (In Millions) 1997 1996 1995
-------- -------- --------
Cash Flows From Operating Activities:
<S> <C> <C> <C>
Net income................................................................. $ 2,960 $ 3,231 $ 2,675
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provision for credit losses............................................ 1,988 1,716 1,067
Depreciation and amortization.......................................... 693 694 640
Equity securities gains................................................ (334) (332) (267)
Investment securities (gains) losses................................... (101) (44) 14
Net (increase) decrease in trading assets.............................. 67 3,017 (2,816)
Net (increase) decrease in net derivative product assets............... 246 (251) 296
Gain on sale of banks and branch offices............................... (60) (31) (71)
Net (increase) in other assets......................................... (1,901) (339) (109)
Net increase (decrease) in other liabilities........................... 934 (422) 443
Merger-related and restructuring charges............................... 337 - 267
Other noncash adjustments.............................................. 306 277 (375)
-------- -------- --------
Net cash provided by operating activities................................. 5,135 7,516 1,764
Cash Flows From Investing Activities:
Net (increase) decrease in federal funds sold and securities
under resale agreements................................................. (4,252) 7,511 3,282
Securities available for sale:
Purchases.............................................................. (24,479) (10,655) (13,461)
Maturities............................................................. 5,109 7,023 10,671
Sales.................................................................. 22,006 8,107 9,925
Securities held to maturity:
Purchases.............................................................. (503) (1,790) (2,130)
Maturities............................................................. 582 1,041 3,027
Credit card receivables securitized........................................ 7,365 7,259 8,456
Net (increase) in loans.................................................... (14,413) (20,667) (24,738)
Loan recoveries............................................................ 510 405 354
Additions to bank premises and equipment................................... (633) (657) (702)
Net cash and cash equivalents due to mergers, acquisitions and dispositions 128 (116) (78)
All other investing activities, net........................................ (486) 1 1,006
-------- -------- --------
Net cash (used in) investing activities.................................... (9,066) (2,538) (4,388)
Cash Flows From Financing Activities:
Net increase in deposits................................................... 8,705 363 1,305
Net (decrease) in federal funds purchased and securities
under repurchase agreements............................................ (1,319) (3,244) 1,784
Net (decrease) in other short-term borrowings.............................. (234) (682) (562)
Proceeds from issuance of long-term debt................................... 23,455 6,005 3,905
Repayment of long-term debt................................................ (17,767) (3,991) (1,609)
Cash dividends paid........................................................ (1,380) (1,180) (1,061)
Proceeds from issuance of common and treasury stock........................ 27 76 29
Purchase of treasury stock................................................. (2,789) (1,479) (852)
Payment for redemption of preferred stock.................................. (100) - (121)
All other financing activities, net........................................ (2,554) (4,256) 1,268
-------- -------- --------
Net cash provided by (used in) financing activities........................ 6,044 (8,388) 4,086
Effect of exchange rate changes on cash and cash equivalents................. (92) (63) 119
Net increase (decrease) in cash and cash equivalents......................... 2,021 (3,473) 1,581
Cash and cash equivalents at beginning of year............................... 20,269 23,742 22,161
-------- -------- --------
Cash and cash equivalents at end of year..................................... $ 22,290 $ 20,269 $ 23,742
======== ======== ========
Other cash flow disclosures:
Interest paid.............................................................. $ 8,077 $ 7,957 $ 8,161
State and federal income taxes paid........................................ 842 1,304 1,299
</TABLE>
The accompanying notes are an integral part of this statement.
29
<PAGE>
Notes to supplemental Consolidated Financial Statements
BANK ONE CORPORATION and Subsidiaries
NOTE 1 -- Summary of Significant Accounting Policies
Consolidated financial statements of BANK ONE CORPORATION ("BANK ONE" or "the
Corporation") have been prepared in conformity with generally accepted
accounting principles. Certain financial statement reclassifications have been
made to prior years' information to conform with the current year's financial
statement preparation. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
(a) Principles of Consolidation
BANK ONE's consolidated financial statements include all accounts of the
Corporation (the "Parent Company") and all significant majority-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated.
(b) Trading Activities
Trading assets and liabilities are carried at fair value. Realized and
unrealized gains and losses related to trading activities are reflected in
noninterest income as trading profits.
Trading profits include interest rate, exchange rate, equity price, and
commodity price trading results from both cash and derivative financial
instruments. More information on BANK ONE's trading revenue is shown in the
"Trading Revenue" table on page 7.
(c) Investment Securities
Debt securities that BANK ONE has both the positive intent and ability to hold
to maturity are classified as securities held-to-maturity and are carried at
cost, adjusted for amortization of premium or accretion of discount using the
interest method.
Debt and equity investment securities classified as available-for-sale are
carried at fair value. Unrealized gains and losses, net of applicable income
taxes, except for those adjustments related to venture capital investments, are
reported in a separate component of stockholders' equity (fair value adjustment
on investment securities available-for-sale).
BANK ONE carries investments of its venture capital subsidiaries at fair
value. Changes in the fair value of such investments are recognized in
noninterest income as equity securities gains. The fair value of publicly traded
investments takes into account their quoted market prices with adjustments made
for market liquidity or sale restrictions. For investments that are not publicly
traded, estimates of fair value are further adjusted based upon review of the
investees' financial results, conditions and prospects, and the values of
comparable public companies.
Realized gains and losses, which are calculated based on the security with the
highest cost unless specific securities are identified, and other than temporary
impairments related to held-to-maturity and available-for-sale securities are
reported in noninterest income as investment or equity securities gains, as
appropriate.
(d) Loans
Loans are generally reported at the principal amount outstanding, net of
unearned income and the allowance for credit losses. Unearned income includes
deferred loan origination fees reduced by loan origination costs.
Loan origination and commitment fees typically are deferred and amortized over
the life of the related loan. Loan origination fees and costs on credit card and
other revolving loans are typically deferred and amortized into interest income
using a straight-line method over one year. Other credit-related fees, such as
syndication management fees, commercial letters of credit fees, and fees on
unused, available lines of credit, are recorded as service charges and
commissions in noninterest income when earned.
Loans, including lease financing receivables, are considered nonperforming
when placed on nonaccrual status, or when renegotiated at terms that represent
an economic concession to the borrower. Nonperforming loans are generally
identified as impaired loans.
A commercial loan is placed on nonaccrual status when the collection of
contractual principal or interest is deemed doubtful by management or becomes 90
days or more past due, and the loan is not well-secured and in the process of
collection. Accrued but uncollected interest is reversed and charged against
interest income when the commercial loan is placed on nonaccrual status.
30
<PAGE>
The interest on these loans is accounted for on a cash basis or cost recovery
method, until qualifying for return to accrual status. Loans are returned to
accrual status when all the principal and interest amounts contractually due are
reasonably assured of repayment within a reasonable time frame and when the
borrower has demonstrated payment performance.
A charge-off on a commercial loan is recorded in the reporting period in which
either an event occurs that confirms the existence of a loss or it is determined
that a loan or a portion of a loan is uncollectible.
Consumer loans are typically charged off rather than placed on nonaccrual
status. The timing and amount of the charge-off will depend on the type of
consumer loan and any related collateral. A credit card loan is charged off
after it becomes approximately 180 days past due or potentially earlier in the
event of notification of bankruptcy. Other consumer loans have delinquency
periods ranging from approximately 120 to 180 days past due prior to a charge-
off being recorded. Accrued but uncollected interest on a consumer loan
typically is reversed against interest income when the loan is charged off.
An economic concession on a renegotiated loan may represent forgiveness of
principal and/or interest or a below-market interest rate offered to the
borrower to maximize recovery of the loan. Generally, this occurs when the
borrower's cash flow is insufficient to service the loan under its original
terms. Subject to the above nonaccrual policy, interest on these loans is
accrued at the reduced rates.
Loans held for sale are valued at the lower of cost or fair value with
unrealized losses as well as realized gains or losses included in other income.
(e) Provision for Credit Losses
The amount of provision for credit losses charged to expense is based upon a
formal review and analysis of potential credit losses, which entails an
assessment of current and historical loss experience, loan portfolio trends,
prevailing economic and business conditions, specific loan review and other
relevant factors. In management's opinion, the provision is sufficient to
maintain the allowance for credit losses at a level that is adequate to provide
for estimated probable credit losses inherent in on- and off-balance-sheet
credit exposure. The allowance for credit losses attributable to off-balance-
sheet credit exposure is not material.
(f) Loan Securitizations
BANK ONE actively packages and sells loan receivables, primarily credit card
receivables, as securities to investors. From these securitizations, BANK ONE
receives (1) a fee for servicing loans and (2) net interest revenues generated
by the loans in excess of the interest due investors and net credit losses. Fees
which are received in excess of the contractual servicing rate, as well as the
excess net interest revenue, are considered financial assets, effectively
interest-only strips.
Certain estimates are inherent in determining the fair value of the interest-
only strip, including interest rates, charge-offs and receivable lives. These
estimates and assumptions are subject to change.
When loans are securitized, the interest-only strips and corresponding gain on
the sale of the receivables are recorded, the loans are removed from the balance
sheet, and amounts that would have been recorded as net interest income and
provision for credit losses are reported in noninterest income as components of
credit card fees. Transaction costs are generally deferred and amortized as a
reduction to loan servicing income over the terms of the related
securitizations.
(g) Mortgage Banking Activities
Mortgage servicing assets are recognized as separate assets when servicing
rights are acquired through purchase or retained in a sale or securitization of
the assets being serviced. Capitalized mortgage servicing rights are reported in
other assets and are amortized into income in proportion to, and over the period
of, the estimated net servicing income of the underlying mortgage loans.
Capitalized mortgage servicing rights are evaluated for impairment based on the
fair value of those rights. Adjustments due to the decline in the fair value of
such rights are included in noninterest income.
(h) Other Real Estate Owned
Other real estate owned includes assets that have been received in
satisfaction of debt. Other real estate is initially recorded and subsequently
carried at the lower of cost or fair value less estimated selling costs. Any
valuation adjustments required at the date of transfer are charged to the
allowance for credit losses. Operating results from other real estate are
recorded in other noninterest expense.
31
<PAGE>
(i) Intangible Assets
Intangible assets, which include goodwill and other identified intangible
assets, are included in other assets. Goodwill, representing the cost of
investments in subsidiaries and affiliated companies in excess of the fair value
of net tangible and identified intangible assets acquired, is amortized using
either straight-line or accelerated methods over estimated periods benefited,
ranging from 5 to 40 years.
Other intangible assets, such as customer lists, core deposits and credit card
relationships, are amortized either on an accelerated or straight-line basis
over the periods benefited. Intangible assets are periodically reviewed for
possible impairment.
(j) Derivative Financial Instruments
For a discussion of BANK ONE's accounting policies for derivative financial
instruments, see the "Derivative Financial Instruments" section, beginning on
page 20.
(k) Foreign Currency Translation
If a foreign installation's functional currency is the U.S. dollar, then its
local currency financial statements are remeasured to U.S. dollars.
Remeasurement effects and the results of related hedging transactions are
included in other income.
If a foreign installation's functional currency is its local currency, then
its local currency financial statements are translated to U.S. dollars.
Translation adjustments, related hedging results and applicable income taxes are
included in accumulated translation adjustment within stockholders' equity.
(l) Income Taxes
Deferred tax assets and liabilities are determined based on temporary
differences between financial reporting and tax basis of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. The effect on deferred tax assets
and liabilities of a change in rates is recognized as income or expense in the
period that includes the enactment date.
(m) Cash Flow Reporting
BANK ONE uses the indirect method, which reports cash flows from operating
activities by adjusting net income to reconcile to net cash flows from operating
activities. Cash and cash equivalents consist of cash and due from banks,
whether interest-bearing or not. Net reporting of cash transactions has been
used when the balance sheet items consist predominantly of maturities of three
months or less, or where otherwise permitted. Other items are reported on a
gross basis.
In 1997 and 1996, $154 million and $45 million, respectively, of the
Corporation's 5-3/4% Cumulative Convertible Preferred Stock, Series B, were
converted into common stock. See Note 10, on page 40, for more details.
Loans transferred to other real estate were $169 million, $107 million and
$109 million in 1997, 1996 and 1995, respectively.
In 1997 and 1995, a noncash transfer of $3.6 billion and $10.1 billion,
respectively, attributable to reclassifying debt investment securities from
held-to-maturity to available-for-sale was made. The decision to reclassify was
made in conjunction with the Financial Accounting Standards Board's ("FASB")
issuance of an implementation guide.
(n) Stock-Based Compensation
In 1996, BANK ONE adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." Under the provisions of this Statement, BANK ONE elected to
retain its current method of measuring and recognizing costs related to employee
stock compensation plans under Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," and to disclose the pro forma
effect of applying the fair value method contained in SFAS No. 123. Information
on BANK ONE's stock-based compensation plans is included in Note 13, beginning
on page 45.
(o) Stock Dividend
All per share and average share information has been restated for the 10%
common stock dividend payable February 26, 1998 to BANC ONE shareholders of
record on February 12, 1998.
(p) New Accounting Pronouncements
32
<PAGE>
Effective January 1, 1997, BANK ONE adopted SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities."
SFAS No. 125 requires that after a transfer of financial assets, an entity must
recognize the financial and servicing assets controlled and liabilities incurred
and derecognize financial assets and liabilities in which control is surrendered
or when debt is extinguished. The impact on BANK ONE's consolidated financial
position and results of operations was not material.
In December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125." SFAS No. 127 deferred the
effective date of SFAS No. 125 related to transfers of financial assets
occurring after December 31, 1997, specifically, such transfers involving
repurchase agreements, dollar-rolls, securities lending and similar
transactions. BANK ONE will adopt SFAS No. 127 as required. The adoption of SFAS
No. 127 is not expected to have a material impact on BANK ONE's consolidated
statement of position or results of operations.
Effective December 31, 1997, BANK ONE adopted SFAS No. 128, "Earnings Per
Share." The Statement specifies the computation, presentation and disclosure
requirements for earnings per share for entities with publicly held common
stock. All reported prior period earnings per share information has been
restated in accordance with SFAS No. 128.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
This Statement establishes standards for reporting and display of comprehensive
income in a full set of general-purpose financial statements. BANK ONE will be
required to adopt this Statement as of January 1, 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This Statement requires certain disclosures
about an entity's operating segments in annual and interim financial reports. It
also requires certain related disclosures about products and services,
geographic areas and major customers. The segment and other information
disclosures are required for the year ended December 31, 1998.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." SFAS No. 132 is effective for
fiscal years beginning after December 15, 1997. SFAS No. 132 supersedes the
disclosure requirements in SFAS No. 87, "Employers' Accounting for Pensions,"
No.88, "Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits," and No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 132
addresses disclosure only. As a result, SFAS No. 132 will have no impact on BANK
ONE's consolidated financial position or results of operations.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 is effective for
fiscal years beginning after December 15, 1998. BANK ONE is in the process of
estimating the impact of SOP 98-1 on its consolidated statement of position and
results of operations.
NOTE 2 -- BANC ONE CORPORATION Merger with First Chicago NBD Corporation
On October 2, 1998, BANC ONE CORPORATION ("BANC ONE") and First Chicago NBD
Corporation ("First Chicago NBD") were each merged into a new company BANK ONE
CORPORATION ("BANK ONE"). Each share of BANC ONE common stock was converted into
one share of common stock of BANK ONE. Each share of common stock of First
Chicago NBD was converted into 1.62 shares of BANK ONE common stock. In
aggregate, 291 million shares of First Chicago NBD were converted into 471
million shares of BANK ONE. Each share of preferred stock of First Chicago NBD
outstanding immediately prior to the merger was converted into one share of a
series of corresponding preferred stock of BANK ONE with substantially the same
terms.
Previously reported financial information for BANC ONE and First Chicago NBD
is shown in the table below.
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenue
BANC ONE................... $13,219 $12,099 $10,363
First Chicago NBD.......... 10,098 10,117 10,681
Net Income
BANC ONE................... $ 1,306 $ 1,673 $ 1,445
First Chicago NBD.......... 1,525 1,436 1,150
</TABLE>
To conform with consistent methods of accounting, certain reclassifications of
certain revenue and expense items were made. In addition, the accounting
treatment for the postretirement transition obligation identified with the
implementation of SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," has been conformed. The December 31, 1994,
33
<PAGE>
balance of retained earnings was decreased by $70 million to reflect a
consistent up-front recognition of the postretirement transition obligation.
Noninterest expense was reduced by $6 million and net income was increased by $4
million for each year presented.
NOTE 3 -- Other Acquisitions
On June 12, 1998, the Corporation completed its acquisition of First Commerce
Corporation ("First Commerce") located in New Orleans, Louisiana, resulting in
the issuance of approximately 56 million shares of the Corporation's common
stock valued at $3.5 billion for all the outstanding shares of First Commerce
common stock, in a tax-free exchange. First Commerce was a multi-bank holding
company with total assets of approximately $9.3 billion and stockholders' equity
of approximately $805 million at June 12, 1998. The acquisition was accounted
for as a pooling of interests and, therefore, these consolidated financial
statements have been restated for all periods presented to include the results
of operations, financial position and changes in cash flows of First Commerce.
On June 27, 1997, the Corporation completed its acquisition of First USA, Inc.
("First USA"). The Corporation issued approximately 163 million shares of the
Corporation's common stock for all the outstanding common stock of First USA in
a tax-free exchange. First USA, a financial service company specializing in the
credit card business, had $24.6 billion in managed credit card receivables and
17.8 million cardholders at June 27, 1997 compared to $22.2 billion in managed
credit card receivables and 15.9 million card holders at December 31, 1996.
First USA had total assets of $10.9 billion and $10.3 billion at June 30, 1997
and December 31, 1996, respectively and stockholders' equity of $1.2 billion at
both June 27, 1997 and December 31, 1996. The acquisition was accounted for as a
pooling of interests and therefore, these consolidated financial statements have
been restated for all periods presented to include the results of operations,
financial position and changes in cash flows of First USA. First USA had a June
30 fiscal year end and, therefore, adjustments have been made to conform First
USA's year-end to BANK ONE's calendar year-end. These adjustments did not have a
material impact on the consolidated financial statements.
On June 1, 1997, the Corporation acquired all of the outstanding shares of
Liberty Bancorp, Inc. ("Liberty"), a multi-bank holding company headquartered in
Oklahoma City, Oklahoma, in exchange for 11.9 million shares of the
Corporation's common stock valued at $483 million. The acquisition was accounted
for as a purchase. Excess cost over net assets purchased of $267 million was
recognized in the second quarter of 1997 and is being amortized over 25 years
using the straight-line method. Liberty had $2.9 billion in assets at May 31,
1997, and 29 banking offices primarily in Oklahoma City and Tulsa. The pro forma
effect on prior-period results of operations is not significant.
On January 2, 1996, the Corporation acquired all of the outstanding shares of
Premier Bancorp, Inc. ("Premier") of Baton Rouge, Louisiana, in exchange for 24
million shares of the Corporation's common stock valued at $711 million. The
acquisition was accounted for as a purchase. Goodwill of $263 million was
recognized and is being amortized over 25 years using the straight-line method.
Premier had assets of $6.3 billion at December 31, 1995. The pro forma effect on
prior-period results of operations is not significant.
On December 1, 1995, First Chicago Corporation ("First Chicago") merged with
and into NBD Bancorp, Inc. ("NBD"), with the combined company renamed First
Chicago NBD Corporation. In aggregate, 87.1 million shares of First Chicago
common stock were converted into 157.7 million shares of First Chicago NBD. Each
share of NBD remained outstanding and represented one share of First Chicago
NBD. The merger was accounted for as a pooling of interests.
In July 1995, the Corporation consummated its merger with Deerbank
Corporation, a $766 million thrift holding company located in Deerfield,
Illinois. The merger was accounted for as a purchase. The purchase price of $106
million was funded by the issuance of 5.3 million shares of the Corporation's
common stock.
In January 1995, the Corporation consummated its merger with AmeriFed
Financial Corp., a thrift holding company located in Joliet, Illinois, with
total assets of $910 million. The purchase price of $148 million was funded by
the issuance of 8.4 million shares of the Corporation's common stock. The merger
was accounted for as a purchase.
34
<PAGE>
NOTE 4 -- Merger-Related and Restructuring Charges
In 1997, BANK ONE identified one-time restructuring charges and merger-related
costs associated with the First USA merger of $467 million ($329 million after
tax), of which $337 million was recorded as a restructuring charge and $130
million was recorded as additional provision for credit losses.
The restructuring charge associated with the First USA merger totaled $241
million and consisted of: employee benefits, severance and stock option vesting
costs; professional services costs; premiums to redeem preferred securities of
subsidiary trust; asset-related write-downs and other merger-related costs.
The remaining $96 million restructuring charge related to costs associated
with strategic initiatives to streamline the retail center delivery structure by
consolidating approximately 200 banking centers and the termination of the
Strategic Banking System, a retail banking system.
The $130 million additional provision for credit losses primarily reflects the
reclassification of $2 billion of credit card loans previously classified as
held for sale to the loan and lease portfolio in connection with the effort to
consolidate the BANC ONE and First USA credit card master trusts, as well as an
additional provision to align the credit card charge-off policies of BANK ONE
and First USA.
In 1995, merger-related charges were $267 million of which $225 million were
direct merger and restructuring related charges associated with the merger of
First Chicago Corporation and NBD Corporation. An additional $42 million was
recorded associated with the conforming of accounting practices between the two
companies. The effect of conforming these practices was not material to the
Corporation's financial statements.
At December 31, 1997, the remaining balances of these restructuring reserves
were not material.
35
<PAGE>
NOTE 5 -- Investment Securities
The amortized cost and estimated fair value of available-for-sale and held-to-
maturity securities and the related unrealized gains and losses were as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------
Investment Securities - Held-to-Maturity
--------------------------------------------------------------------
Amortized Cost Gross Unrealized Gross Unrealized
December 31, 1997 (In millions) (Book Value) Gains Losses Fair Value
-------------- ---------------- ---------------- ------------
<S> <C> <C> <C> <C>
States and political subdivisions........ $ 451 $ 27 $ 6 $ 472
All Other................................ 334 3 9 328
------- ------- ---- -------
Total.................................. $ 785 $ 30 $ 15 $ 800
======= ======= ==== =======
<CAPTION>
--------------------------------------------------------------------
Investment Securities - Available-for-Sale
--------------------------------------------------------------------
Gross Unrealized Gross Unrealized Fair Value
Amortized Cost Gains Losses (Book Value)
-------------- ---------------- ---------------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury............................ $ 7,829 $ 104 $ 13 $ 7,920
U.S. government agencies................. 8,543 134 33 8,644
States and political subdivisions........ 1,893 63 1 1,955
Other debt securities.................... 4,951 21 23 4,949
Equity securities (1)(2)................. 1,654 176 44 1,786
------- ------- ---- -------
Total.................................. $24,870 $ 498 $114 $25,254
======= ======= ==== =======
<CAPTION>
--------------------------------------------------------------------
Investment Securities - Held-to-Maturity
--------------------------------------------------------------------
Amortized Cost Gross Unrealized Gross Unrealized
December 31, 1996 (In millions) (Book Value) Gains Losses Fair Value
-------------- ---------------- ---------------- ------------
<S> <C> <C> <C> <C>
States and political subdivisions........ $ 689 $ 35 $ 6 $ 718
All Other................................ 3,709 12 10 3,711
------- ------- ---- -------
Total.................................. $ 4,398 $ 47 $ 16 $ 4,429
======= ======= ==== =======
<CAPTION>
--------------------------------------------------------------------
Investment Securities - Available-for-Sale
--------------------------------------------------------------------
Gross Unrealized Gross Unrealized Fair Value
Amortized Cost Gains Losses (Book Value)
-------------- ---------------- ---------------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury............................ $ 8,380 $ 46 $ 37 $ 8,389
U.S. government agencies................. 8,731 109 46 8,794
States and political subdivisions........ 2,307 81 5 2,383
Other debt securities.................... 2,577 16 31 2,562
Equity securities (1)(2)................. 1,296 191 71 1,416
------- ------- ---- -------
Total.................................. $23,291 $ 443 $190 $23,544
======= ======= ==== =======
</TABLE>
- ------------
(1) The fair values of certain securities for which market quotations were not
available were estimated. In addition, the fair values of certain
securities reflect liquidity and other market-related factors.
(2) Includes investments accounted for at fair value, in keeping with
specialized industry practice.
The maturity distribution of debt investment securities is shown below. The
distribution of mortgage-backed securities and collateralized mortgage
obligations is based on average expected maturities. Actual maturities may
differ because issuers may have the right to call or prepay obligations.
<TABLE>
<CAPTION>
December 31, 1997 (In millions) Available-for-Sale Held-to-Maturity
--------------------------------- --------------------------------
Amortized Cost Fair Value Amortized Cost Fair Value
-------------- ---------- -------------- ----------
<S> <C> <C> <C> <C>
Due in one year or less.................. $ 2,816 $ 2,794 $296 $ 298
Due after one year through five years.... 7,239 7,312 315 331
Due after five years through ten years... 4,429 4,518 74 72
Due after ten years...................... 8,732 8,844 100 99
------- ------- ---- -------
$23,216 $23,468 $785 $ 800
======= ======= ==== =======
</TABLE>
36
<PAGE>
NOTE 6 -- Loans
Following is the composition of loans included in the supplemental
consolidated balance sheet as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
(In millions) 1997 1996
-------- ---------
<S> <C> <C>
Commercial
Domestic
Commercial.................................................................... $ 49,033 $ 45,384
Real estate
Construction................................................................ 4,639 4,387
Other....................................................................... 16,545 16,016
Lease financing............................................................... 3,962 3,665
Foreign......................................................................... 5,127 4,160
-------- --------
Total commercial........................................................ 79,306 73,612
Consumer
Residential real estate......................................................... 15,221 14,862
Home equity..................................................................... 12,867 12,079
Automotive...................................................................... 17,998 17,293
Student......................................................................... 3,219 3,304
Other........................................................................... 8,303 7,491
-------- --------
Total consumer.......................................................... 57,608 55,029
Credit Card...................................................................... 22,665 24,855
-------- --------
Total loans............................................................. 159,579 153,496
Less: Allowance for credit losses....................................... 2,817 2,687
-------- --------
Total loans, net........................................................ $156,762 $150,809
======== ========
</TABLE>
BANK ONE's primary goal in managing credit risk is to minimize the impact of
default by an individual borrower or group of borrowers. As a result, BANK ONE
strives to maintain a loan portfolio that is diverse in terms of loan type,
industry, borrower and geographic concentrations. As of December 31, 1997 and
1996, there were no significant loan concentrations with any single borrower,
industry or geographic segment.
Loans available for sale, excluding credit card loans, at December 31, 1997
and 1996, totaled $1.4 billion and $1.0 billion, respectively.
NOTE 7 -- Allowance for Credit Losses
Changes in the allowance for credit losses for the three years ended December
31, 1997, were as follows:
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Balance, beginning of year........................................ $ 2,687 $ 2,422 $ 2,192
Additions (deductions)
Charge-offs...................................................... (2,397) (1,927) (1,125)
Recoveries....................................................... 510 405 357
------- ------- -------
Net charge-offs.................................................. (1,887) (1,522) (768)
Provision for credit losses...................................... 1,988 1,716 1,067
Other............................................................. 29 71 (69)
------- ------- -------
Balance, end of year.............................................. $ 2,817 $ 2,687 $ 2,422
======= ======= =======
</TABLE>
The allowance for credit losses is based on a formal review and analysis of
potential credit losses including an evaluation of impaired loans under SFAS
Nos. 114 and 118, "Accounting by Creditors for Impairment of a Loan" and
"Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosures."
A loan is considered impaired when it is probable that all principal and
interest amounts due will not be collected in accordance with its contractual
terms. Certain loans, such as loans carried at the lower of cost or fair value
or small-balance homogeneous loans (e.g., credit card and installment credit)
are exempt from impairment determinations. Impairment is recognized to the
extent that the recorded investment of an impaired loan or pool of loans exceeds
its value either based on the loan's underlying collateral or the calculated
present value of projected cash flows discounted at the contractual interest
rate. Loans having a significant recorded investment are measured on an
individual basis, while loans not having a significant recorded investment are
grouped and measured on a pool basis.
37
<PAGE>
The following tables summarize impaired loan information.
<TABLE>
<CAPTION>
(In millions) December 31,
1997 1996
------ ------
<S> <C> <C>
Impaired loans with related allowance............................. $ 380 $ 366
Impaired loans with no related allowance (1)...................... 193 108
----- -----
Total impaired loans........................................... $ 573 $ 474
===== =====
Allowance on impaired loans....................................... $ 84 $ 75
===== =====
</TABLE>
(1) Impaired loans for which the discounted cash flows, collateral value or
market price equals or exceeds the carrying value of the loan do not
require an allowance under SFAS No. 114.
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Average impaired loans............................................ $ 534 $ 582 $ 521
Interest income recognized on impaired loans...................... 29 23 22
Cash basis interest income on impaired loans...................... 29 23 20
</TABLE>
Interest payments on impaired loans are typically applied to principal unless
collectability of the principal amount is fully assured, in which case interest
is recognized on a cash basis. Interest may be recognized on the accrual basis
for certain troubled debt restructurings which are included in the impaired loan
data above.
NOTE 8 -- Long-term Borrowings
Long-term debt consists of borrowings having an original maturity of greater
than one year. Original issue discount and deferred issuance costs are amortized
into interest expense over the terms of the related notes. Long-term debt at
December 31, 1997 and 1996, was as follows:
38
<PAGE>
<TABLE>
<CAPTION>
Effective
(In millions) Rate (1) 1997 1996
--------- ------- -------
<S> <C> <C> <C>
Parent Company
Subordinated debt
9% notes due 1999.................................................... 8.37% $ 200 $ 199
9-7/8% notes due 2000................................................ 10.03 99 99
9-1/5% notes due 2001................................................ 9.20 5 5
9-1/4% notes due 2001................................................ 9.26 100 100
10-1/4% notes due 2001............................................... 10.30 100 100
11-1/4% notes due 2001............................................... 8.73 96 96
7-1/4% notes due 2002 (2)............................................ 6.95 347 349
8-7/8% notes due 2002................................................ 6.98 100 100
8-1/10% notes due 2002............................................... 6.91 200 200
8-1/4% notes due 2002................................................ 6.67 100 100
8.74% notes due 2003 (2)............................................. 8.13 170 170
7-5/8% notes due 2003................................................ 7.67 199 199
6-7/8% notes due 2003................................................ 6.90 200 200
Floating rate notes due 2003 (3)..................................... 5.98 150 149
7-1/4% debentures due 2004........................................... 7.27 200 200
Floating rate notes due 2005 (3)..................................... 6.25 96 96
7% notes due 2005.................................................... 6.21 297 298
6-1/8% notes due 2006................................................ 6.08 150 149
7% notes due 2006.................................................... 7.05 149 149
7-1/8% notes due 2007................................................ 7.15 199 199
7-6/10% notes due 2007 (2)........................................... 6.22 397 -
6-3/8% notes due 2009................................................ 5.86 198 198
9-7/8% equity commitment notes due 2009 (2).......................... 10.11 195 196
10% notes due 2010................................................... 10.25 198 198
7-1/2% preferred purchase units due 2023............................. 5.77 150 150
7-3/4% notes due 2025 (2)............................................ 6.54 294 297
7-5/8% notes due 2026 (2)............................................ 6.72 491 496
8% notes due 2027 (2)................................................ 6.54 490 -
9-7/8% equity commitment notes due 1999.............................. 9.90 200 200
Senior debt
8-1/2% notes due 1998................................................ 8.64 100 100
Medium Term Notes.................................................... 5.94 5,015 1,359
Other................................................................ 10.52 1 116
------- -------
Total Parent Company........................................... 10,886 6,467
Subsidiaries
Bank notes, various rates and maturities............................. 5.97 7,597 6,173
Subordinated 7-3/8% notes due 2002................................... 5.78 149 149
Subordinated 6-1/4% notes due 2003................................... 6.25 200 200
Subordinated 6-5/8%-7.65% notes due 2003............................. 6.03-7.52 451 454
Subordinated 6% notes due 2005....................................... 6.51 148 149
Subordinated 8-1/4% notes due 2024................................... 7.77 250 250
8-3/4% notes due 1997-1999........................................... - - 10
Convertible debentures 12-3/4% Series A.............................. 12.75 27 27
Convertible debentures 12-3/4% Series B.............................. 12.75 54 54
Capitalized lease and others, at various rates and maturities........ various 781 482
------- -------
Total subsidiaries............................................. 9,657 7,948
------- -------
Total long-term debt........................................... $20,543 $14,415
======= =======
</TABLE>
(1) The effective rate includes amortization of premium or discount. Interest
rate swap agreements have been entered into that have altered the stated
interest rate for certain of the borrowings to variable interest rates. The
effective rates include the impact of these swap agreements at December 31,
1997. The terms to maturity of the swaps are shorter than or equal to the
altered borrowings.
(2) The notes are not subject to redemption and impose certain limitations
relating to funded debt, liens and the sale or issuance of capital stock of
significant bank subsidiaries.
(3) The floating rate notes due in 2003 have an interest rate priced at the
greater of 4-1/4% or the three-month LIBOR plus 1/8%. The floating rate
notes due in 2005 have an interest rate of the greater of 5-1/4% or the
three-month LIBOR rate plus 1/4%.
39
<PAGE>
Aggregate annual repayments of long-term debt at December 31, 1997:
<TABLE>
<CAPTION>
Total
-------
<S> <C>
1998.............................................. $ 5,012
1999.............................................. 3,152
2000.............................................. 2,394
2001.............................................. 1,722
2002.............................................. 1,972
Thereafter........................................ 6,291
-------
Total........................................... $20,543
=======
</TABLE>
NOTE 9 -- Guaranteed Preferred Beneficial Interest in the Corporation's Junior
Subordinated Debt
The $1.003 billion of Guaranteed Preferred Beneficial Interest in the
Corporation's Junior Subordinated Debt ("Trust Preferred Capital Securities")
represents the net proceeds from the issuance of preferred capital securities by
First Chicago NBD Institutional Capital A ("the Series A Trust"), First Chicago
NBD Institutional Capital B (the "Series B Trust"), and First Chicago NBD
Capital I ("the FCNBD Series I Trust") and First USA Capital Trust I. Each of
the trusts is a statutory business trust organized for the sole purpose of
issuing capital securities and investing the proceeds thereof in junior
subordinated debentures of the Corporation ("Junior Subordinated Debt"). The
preferred capital securities represent preferred individual beneficial interests
in the respective trusts and are subject to mandatory redemption upon repayment
of the Junior Subordinated Debt. The common securities of each trust are owned
by the Corporation. The Corporation's obligations under the Junior Subordinated
Debt and other relevant agreements, in aggregate, constitute a full and
unconditional guarantee by the Corporation of each respective trust's
obligations under the preferred securities issued by such trust.
The Series A Trust issued $500 million in aggregate liquidation amount of
7.95% preferred capital securities on December 1, 1996. The sole asset of the
Series A Trust is $515 million principal amount of 7.95% Junior Subordinated
Debt that will mature on December 1, 2026, and is redeemable prior to maturity
at the option of the Corporation on or after December 1, 2006.
The Series B Trust issued $250 million in aggregate liquidation amount of
7.75% preferred capital securities on December 1, 1996. The sole asset of the
Series B Trust is $258 million principal amount of 7.75% Junior Subordinated
Debt that will mature on December 1, 2026, and is redeemable prior to maturity
at the option of the Corporation on or after December 1, 2006.
The Series I Trust issued $250 million in aggregate liquidation amount of
floating rate preferred capital securities in January 1997. The sole asset of
the Series I Trust is $258 million principal amount of floating rate Junior
Subordinated Debt of the Corporation, bearing interest at an annual rate equal
to three-month LIBOR plus 0.55% that will mature on February 1, 2027, and is
redeemable at the option of the Corporation on or after February 1, 2007.
The First USA Capital Trust I issued $200 million in aggregate liquidation
amount of 9.33% preferred capital securities on December 20, 1996. The sole
asset of the First USA Capital Trust I was $200 million principal amount of
9.33% Junior Subordinated Debt. In June 1997, the Corporation paid a premium of
$36 million to redeem $193 million of those securities.
The Trust Preferred Capital Securities are tax-advantaged issues and qualify
as Tier 1 capital. Distributions on these securities are included in interest
expense on long-term debt.
NOTE 10 -- Stock Dividends, Preferred Stock and Convertible Preferred Stock
On January 20, 1998 and January 23, 1996, the Corporation declared 10% common
stock dividends to BANC ONE shareholders of record on February 12, 1998 and
February 21, 1996, respectively. Accordingly, all common stock share data have
been adjusted to include the effect of the stock dividends.
The Corporation is authorized to issue 50,000,000 shares of preferred stock,
without par value. The Board of Directors is authorized to fix the particular
designations, preferences, rights, qualifications and restrictions for each
series of preferred stock issued. All preferred shares rank prior to common
shares both as to dividends and liquidation, but have no general voting rights.
The dividend rate on each of the cumulative adjustable rate series is based on
stated value and adjusted quarterly, based on a
40
<PAGE>
formula that considers the interest rates for selected short- and long-term U.S.
Treasury securities prevailing at the time the rate is set.
<TABLE>
<CAPTION>
Issued and Outstanding Carrying Amount
December 31 December 31 (In millions)
Stated ---------------------- -------------------------
Value 1997 1996 1997 1996
------- --------- --------- ---- ----
<S> <C> <C> <C> <C> <C>
Preferred Stock
Series B.............................. $ 100 1,191,000 1,191,000 $119 $119
Series C.............................. 100 713,800 713,800 71 71
Series E.............................. 625 - 160,000 - 100
Convertible Series B.................. 5,000 - 30,786 - 154
Series C Convertible.................. No par 2,707,917 4,140,314 136 207
6-1/4% Mandatory Convertible.......... 0.01 - 5,750,000 -
</TABLE>
The minimum, maximum and current dividend rates for individual series of
preferred stock are presented in the following table.
<TABLE>
<CAPTION>
Stated Annual Dividend Rate Earliest
Shares Value Per --------------------------- Redemption Redemption
December 31, 1997 Outstanding Share Maximum Minimum Current Date Price (1)
----------- --------- ------- ------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Cumulative Adjustable Rate
Series B.................... 1,191,000 $100.00 12.00% 6.00% 6.00% (2) $100.00
Series C.................... 713,800 100.00 12.50 6.50 6.50 (2) 100.00
</TABLE>
- ------------
(1) Plus accrued and unpaid dividends.
(2) Currently redeemable.
On January 20, 1998, the Corporation elected to redeem all of the shares of
it's Series C Convertible Preferred stock on April 16, 1998 at the redemption
price of $51.05 per share plus the amount of any dividends accrued and unpaid.
Each of the Series C preferred shares can be converted into 2.121880 shares of
the Corporation's common stock and provides for cumulative quarterly dividends
at an annual rate of $3.50 per share. The Series C preferred shares have a
stated liquidation value of $50 per share plus an amount per share equal to all
dividends cumulating or accrued and unpaid thereon to the date of such
liquidation. The Series C preferred shares were redeemable by the Corporation
beginning April 15, 1995 at an initial call price of $52.10 per share, declining
to $50.00 per share on and after March 31, 2001. The redemption price was $51.40
for 1997.
All shares of the Corporation's 8.45% Cumulative Preferred Stock, Series E
($625 stated value), and the related depositary shares, were redeemed on
November 17, 1997, at the price of $25.27 per depositary share, including
accrued and unpaid dividends of $0.27 per depositary share.
The Corporation had 5.75 million shares of 6-1/4% mandatory convertible
preferred stock, $.01 par value, at December 31, 1996. Dividends at an annual
rate of $1.99 per share on the preferred stock were cumulative and payable
quarterly in arrears. The preferred stock had a liquidation value of $31.875 per
share and was convertible into .833 shares of the Corporation's common stock.
The preferred stock was redeemed by the Corporation on and as of May 2, 1997.
All of the mandatory convertible stock was converted into the Corporation's
common stock.
In February 1997, the Corporation announced it would redeem all shares of its
5-3/4% Cumulative Convertible Preferred Stock, Series B ($5,000 stated value),
and the related depositary shares, on April 1, 1997. Each such depositary share
was convertible into 1.6876 shares of the Corporation's common stock at the
option of the holder and, in 1997, approximately 3.1 million depositary shares
were converted into approximately 5.2 million shares of common stock. In total,
substantially all of the 4.0 million depositary shares had been converted into
6.7 million common shares. Resultant fractional shares were paid in cash. On
April 1, 1997, the Corporation redeemed the remaining shares of the Cumulative
Convertible Preferred Stock, Series B, at the price of $51.725 per depositary
share plus an accrued and unpaid dividend of $0.71875 per depositary share.
NOTE 11 -- Dividends and Capital Restrictions
Dividends that may be paid by national bank subsidiaries are subject to two
statutory limitations. Under the first, dividends cannot exceed the level of
undivided profits. In addition, a bank cannot declare a dividend, without
regulatory approval, in an amount in excess of its net income for the current
year combined with the combined net profits for the preceding two years. State
bank subsidiaries may also be subject to limitations on dividend payments. The
amount of dividends available from certain nonbank subsidiaries that are subject
to dividend restrictions is regulated by the governing agency to which they
report.
41
<PAGE>
Based on these statutory requirements, the bank affiliates could, in the
aggregate, have declared additional dividends of up to approximately $1.5
billion without regulatory approval at January 1, 1998. The payment of dividends
by any bank may also be affected by other factors, such as the maintenance of
adequate capital.
The bank affiliates are subject to various regulatory capital requirements
that may require them to maintain minimum ratios of total and Tier 1 capital to
risk-weighted assets and of Tier 1 capital to average assets. Failure to meet
minimum capital requirements results in certain actions by bank regulators that
could have a direct material effect on the bank affiliates' financial
statements. As of December 31, 1997, management believes that each of the bank
affiliates meets all capital adequacy requirements to which it is subject and is
correctly categorized as well-capitalized under the regulatory framework for
prompt corrective action. There are no conditions or events since that
categorization that management believes have changed the institution's category.
42
<PAGE>
The actual and required capital amounts and ratios for BANK ONE and its
principal banking subsidiaries are presented in the table below.
<TABLE>
<CAPTION>
At December 31, 1997 To Be Categorized
Actual Adequately Capitalized
----------------- ----------------------
($ in Millions) Capital Capital Capital Capital
Amount Ratio Amount Ratio
------- ------- ------- -------
<S> <C> <C> <C> <C>
Risk adjusted capital (to risk weighted assets):
BANK ONE CORPORATION (consolidated)................ $26,958 12.3% $17,565 8.0%
The First National Bank of Chicago................. 6,006 11.0 4,368 8.0
Bank One, N.A...................................... 2,688 10.6 2,026 8.0
Bank One, Texas, N.A............................... 2,348 11.4 1,646 8.0
NBD Bank Michigan.................................. 2,881 13.5 1,705 8.0
FCC National Bank.................................. 1,471 14.3 825 8.0
Bank One, Arizona, N.A............................. 1,409 10.8 1,045 8.0
First USA Bank..................................... 1,382 13.1 844 8.0
Tier 1 capital (to risk weighted assets):
BANK ONE CORPORATION (consolidated)................ 17,958 8.2 8,782 4.0
The First National Bank of Chicago................. 4,207 7.7 2,184 4.0
Bank One, N.A...................................... 1,695 6.7 1,013 4.0
Bank One, Texas, N.A............................... 1,507 7.3 823 4.0
NBD Bank Michigan.................................. 1,914 9.0 853 4.0
FCC National Bank.................................. 1,194 11.6 412 4.0
Bank One, Arizona, N.A............................. 883 6.8 523 4.0
First USA Bank..................................... 1,106 10.5 422 4.0
Tier 1 leverage (to average assets):
BANK ONE CORPORATION (consolidated)................ 17,958 7.8 9,181 4.0
The First National Bank of Chicago................. 4,207 7.6 2,207 4.0
Bank One, N.A...................................... 1,695 6.9 983 4.0
Bank One, Texas, N.A............................... 1,507 6.8 887 4.0
NBD Bank Michigan.................................. 1,914 8.9 864 4.0
FCC National Bank.................................. 1,194 12.6 378 4.0
Bank One, Arizona, N.A............................. 883 6.1 579 4.0
First USA Bank..................................... 1,106 12.9 344 4.0
At December 31, 1996
Risk adjusted capital (to risk weighted assets):
BANK ONE CORPORATION (consolidated)................ $27,437 13.6% $16,177 8.0%
The First National Bank of Chicago................. 5,337 11.2 3,820 8.0
NBD Bank Michigan.................................. 3,134 13.5 1,860 8.0
Bank One, Texas, N.A............................... 1,646 10.5 1,259 8.0
First USA Bank..................................... 1,394 23.7 470 8.0
FCC National Bank.................................. 1,319 13.5 779 8.0
Bank One, Arizona, N.A............................. 1,297 10.8 965 8.0
Tier 1 capital (to risk weighted assets):
BANK ONE CORPORATION (consolidated)................ 19,241 9.5 8,089 4.0
The First National Bank of Chicago................. 3,703 7.8 1,910 4.0
NBD Bank Michigan.................................. 2,157 9.3 930 4.0
Bank One, Texas, N.A............................... 1,502 9.5 630 4.0
First USA Bank..................................... 1,170 19.9 235 4.0
FCC National Bank.................................. 1,030 10.6 390 4.0
Bank One, Arizona, N.A............................. 1,000 8.3 482 4.0
Tier 1 leverage (to average assets):
BANK ONE CORPORATION (consolidated)................ 19,241 8.9 8,619 4.0
The First National Bank of Chicago................. 3,703 7.6 1,959 4.0
NBD Bank Michigan.................................. 2,157 9.6 898 4.0
Bank One, Texas, N.A............................... 1,502 7.4 815 4.0
First USA Bank..................................... 1,170 13.4 351 4.0
FCC National Bank.................................. 1,030 10.6 388 4.0
Bank One, Arizona, N.A............................. 1,000 7.3 552 4.0
</TABLE>
Federal banking law also restricts each bank subsidiary from extending credit
to the Corporation in excess of 10% of the subsidiary's capital stock and
surplus, as defined. Any such extensions of credit are subject to strict
collateral requirements.
43
<PAGE>
NOTE 12 -- Employee Benefits
(a) Pension Plans
BANK ONE has various non-contributory pension plans covering substantially all
salaried employees.
BANK ONE's funding policy is to contribute amounts necessary to meet the
funding requirements set forth in the Employee Retirement Income Security Act of
1974, plus such additional amounts as the Corporation determines to be
appropriate. The following table sets forth the plans' funded status:
<TABLE>
<CAPTION>
(In millions) 1997 1996
------ ------
<S> <C> <C>
Accumulated benefits obligation, including vested benefits of $2,196 and $2,144
in 1997 and 1996, respectively...................................................... $2,220 $2,100
------ ------
Projected benefit obligation for services rendered to date........................... 2,278 2,310
Plan assets at fair value............................................................ 3,195 2,896
------ ------
Excess of plan assets over projected benefit obligation.............................. 917 586
Unrecognized net gain from past experience different from that assumed and effects
of changes in assumptions........................................................... (350) (174)
Unrecognized prior service cost...................................................... (75) 81
Unrecognized net transition asset.................................................... (48) (61)
------ ------
Prepaid pension cost................................................................. $ 444 $ 432
====== ======
</TABLE>
Plan assets primarily consist of equity securities and debt securities issued
by the U.S. government and its agencies or by corporations. The plan assets
include 1.5 million and 1.6 million shares of the Corporation's stock at
December 31, 1997 and 1996, respectively, as adjusted for the 10% common stock
dividend. The fair value of the Corporation's common stock held as plan assets
was $76 million and $60 million at December 31, 1997 and 1996, respectively.
Dividends received by the plans on the Corporation's common stock totaled $1
million in 1997 and 1996.
Net periodic pension cost for 1997, 1996 and 1995, as well as the assumptions
used in determining the projected benefit obligation and net periodic pension
costs of BANK ONE's pension plans included the following:
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Service cost--benefits earned during the period........................ $ 108 $ 117 $ 87
Interest cost on projected benefit obligation.......................... 182 169 150
Actual return on assets................................................ (474) (466) (468)
Net amortization and deferral.......................................... 220 233 257
----- ----- -----
Net periodic pension cost.............................................. $ 36 $ 53 $ 26
===== ===== =====
Actuarial assumptions:
Weighted average discount rate for projected benefit obligation....... 7.00% to 7.00% to 6.50% to
7.25% 7.75% 8.50%
Weighted average rate of compensation increase........................ 5.00% to 5.00% to 5.00% to
5.25% 5.25% 6.00%
Expected long-term rate of return on plan assets...................... 8.00% to 8.00% to 8.00% to
9.50% 9.50% 9.50%
</TABLE>
Accrued pension cost for BANK ONE's nonqualified unfunded supplemental pension
plans was $59 million and $73 million, respectively, at December 31, 1997 and
1996 respectively. Such plans have no assets. The assumed rates used in the
actuarial computations were the same as those used in the qualified plan
computations.
(b) Postretirement Benefits Other Than Pensions
BANK ONE sponsors postretirement life insurance plans and provides health care
benefits for certain retirees and grandfathered employees when they retire. The
postretirement life insurance benefit is noncontributory, while the health care
benefits are contributory.
44
<PAGE>
The following table sets forth the status of BANK ONE's postretirement benefit
obligation at December 31, 1997 and 1996.
<TABLE>
<CAPTION>
(In millions) 1997 1996
----- -----
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees............................................................... $(154) $(139)
Fully eligible active plan participants................................ (25) (39)
Other active plan participants......................................... (57) (53)
----- -----
Accumulated postretirement benefit obligation in excess of plan assets... (236) (231)
Unrecognized net loss (gain)............................................. 2 (8)
Unrecognized prior service cost.......................................... 3 4
----- -----
Accrued postretirement benefit cost...................................... $(231) $(235)
===== =====
</TABLE>
Net periodic cost for postretirement health care and life insurance benefits
during 1997, 1996 and 1995 include the following:
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost--benefits earned during the period......................... $ 5 $ 6 $ 4
Interest cost on accumulated postretirement benefit obligation.......... 17 13 13
Net amortization and deferral........................................... (6) - 13
--- --- ----
Net periodic postretirement benefit cost............................ $16 $19 $ 30
=== === ====
</TABLE>
The weighted average discount rates used in determining the accumulated
postretirement benefit obligation ranged from 7.00 to 7.25% at December 31, 1997
and 7.0 to 7.75% at December 31, 1996.
For measurement purposes, an annual rate of increase in the range of 7.00% to
8.00% was assumed for 1998 in the cost of covered health care benefits; this
range was assumed to decrease gradually to as low as 5.00% in the year 2000 and
thereafter. These assumptions have a significant effect on the amounts reported.
Increasing the assumed health care cost trend rates by one percentage point in
each year would have increased the accumulated postretirement benefit obligation
as of December 31, 1997 by $20 million and the aggregate of the service cost and
interest cost components of net periodic postretirement benefit cost for 1997 by
approximately $1.6 million.
(c) 401(k) Plans
BANK ONE sponsors various 401(k) plans which cover substantially all of its
employees. BANK ONE is required to make contributions to the plans in varying
amounts. For 1997, 1996 and 1995, the expense related to these plans was $78
million, $64 million and $47 million, respectively.
NOTE 13 -- Stock Based Compensation
BANK ONE utilizes several stock-based awards as part of its overall
compensation program. In addition, BANK ONE provides employees the opportunity
to purchase its shares through various employee stock purchase plans. The
compensation cost that has been charged against income for BANK ONE's stock-
based compensation plans was $59 million for 1997, $35 million for 1996 and $24
million for 1995. See Note 1(n) on page 32 for BANK ONE's accounting policies
relating to stock-based compensation.
The BANK ONE stock-based compensation plans provide for the granting of awards
to purchase common shares and include limits as to the aggregate number of
shares available for grants and the total number of shares available for grants
of stock awards in any one year.
(a) Performance Shares
BANK ONE provides performance-based stock awards for its senior managers. The
level of performance shares eventually distributed depends on the achievement of
specific performance criteria that are set at the grant date. The ultimate
expense attributable to these shares is based on the market value of the shares
distributed at the end of the defined performance period. The expense associated
with such awards is recognized over the defined performance period.
(b) Restricted Shares
Restricted shares granted to key officers at BANK ONE require them to either
continue employment for a stated number of years from the grant date before
restrictions on the shares are released or more generally place restrictions
related to the attainment of specified performance criteria over the restriction
period. The market value of the restricted shares as of the date of grant is
amortized to compensation expense ratably over the period the shares remain
restricted. Holders of restricted stock receive dividends and have the right to
vote the shares.
45
<PAGE>
(c) Stock Options and Stock Appreciation Rights (SARs)
BANK ONE's stock option plans generally provide that the exercise price of any
stock option or SAR may not be less than the fair market value of the common
stock on the date of grant.
There are a number of stock option plans and they have distinct provisions.
Awards generally vest over a period of three to four years and expense is
recognized over the vesting period. Options are not exercisable for at least one
year from the date of grant and have a maximum term of eight to twenty years.
Some option plans include the right to receive additional options if certain
criteria are met. The vesting period for such additional options is six months.
The following tables summarize stock option and SAR activity for 1997 and
1996, respectively, and provide details of stock options outstanding at December
31, 1997 for BANK ONE:
<TABLE>
<CAPTION>
1997 1996
------------------------------- ------------------------------
Wtd. Avg. Wtd. Avg.
Shares Exercise Shares Exercise
(Shares in Thousands) and SARs Price and SARs Price
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Outstanding at January 1....................... 45,001 $18.91 43,781 $15.36
Granted........................................ 12,251 40.40 14,259 24.90
Exercised...................................... (15,242) 14.84 (11,521) 12.38
Forfeited...................................... (1,161) 29.99 (1,513) 22.20
Expired........................................ (51) 25.21 (5) 8.91
------- ------ ------- ------
Outstanding at December 31..................... 40,798 $26.60 45,001 $18.91
======= ====== ======= ======
Exerciseable at December 31.................... 18,275 $19.31 19,964 $14.28
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exerciseable
------------------------------------------ -------------------------
(Shares in Thousands) Number Wtd. Avg.
Outstanding Wtd. Avg. Remaining Wtd. Avg.
Range of Dec 31, Exercise Contractual Number Exercise
Exercise Prices 1997 Price Life Exerciseable Price
--------------- ----------- ---------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Less than $2.16.......... 703 $ 1.80 4.3 years 703 $ 1.80
$2.16 - $5.13............ 27 4.05 3.7 27 4.05
$5.14 - $11.29........... 1,509 9.09 3.6 1,493 9.10
$11.30 - $17.25.......... 6,207 15.00 5.5 5,143 14.75
$17.26 - $25.85.......... 14,866 22.30 7.2 8,731 21.52
Greater than $25.86...... 17,486 36.90 12.0 2,178 34.00
------ ------ ---- ------ ------
Total................. 40,798 $26.60 8.8 years 18,275 $19.31
====== ====== === ====== ======
</TABLE>
(d) Employee Stock Purchase Plans
BANK ONE sponsors various employee stock purchase plans designed to encourage
employee stock ownership. BANK ONE does not recognize any compensation expense
with respect to these plans. These existing employee stock purchase plans have
been assumed by BANK ONE. The general provisions of such plans are as follows:
One of the existing stock purchase plans allows eligible employees to make
deposits to a savings account for two years. The employee then has the option to
withdraw their savings in cash or purchase shares of BANK ONE at a fixed,
discounted price determined at the beginning of the savings period.
Another stock purchase plan affords eligible employees the opportunity to
purchase and sell shares on the open market at current market prices, with no
commission or administrative fees on the purchase of shares.
Finally, a third existing stock purchase plan allows eligible employees the
opportunity to purchase shares at a 15% discount from the current market price.
46
<PAGE>
(e) Pro Forma Costs of Stock-Based Compensation
The grant date fair values of stock options granted under BANK ONE's various
stock option plans and employee stock purchase and savings plan were estimated
using the Black-Scholes option-pricing model. This model was developed to
estimate the fair value of traded options, which have different characteristics
than employee stock options, and changes to the subjective input assumptions can
result in materially different fair market value estimates. Therefore, the
Black-Scholes model may not necessarily provide a reliable single measure of the
fair value of employee stock options and purchase rights.
The following table summarizes stock-based compensation grants and their
related weighted average grant-date fair values for the year ended December 31
for BANK ONE:
<TABLE>
<CAPTION>
1997 1996
---------------------------- ------------------------------
Wtd. Avg. Wtd. Avg.
(Shares in Thousands) Number of Grant Number of Grant
Shares Date Fair Value Shares Date Fair Value
--------- --------------- ------------ ---------------
<S> <C> <C> <C> <C>
Performance shares................................. 642 $36.40 785 $25.00
Restricted shares.................................. 953 36.22 1,047 25.39
Stock option plans................................. 12,251 9.65 14,259 5.28
Employee Stock Purchase and Savings Plan (1)....... 76 5.73 3,961 3.57
</TABLE>
- ----------------
(1) Estimated number of shares employees will purchase under the plan.
The following assumptions were used to determine the Black-Scholes weighted
average grant-date fair value of stock option awards and conversions in 1997,
1996 and 1995: (1) expected dividend yields ranged from 0.33% to 5.55%, (2)
expected volatility ranged from 17.28% to 32.95%, (3) risk-free interest rates
ranged from 5.48% to 7.92%, and (4) expected lives ranged from 3.9 years to 9.0
years.
The following assumptions were used to determine the Black-Scholes weighted
average grant-date fair value of employees' purchase rights under the Employee
Stock Purchase and Savings Plan in 1997 and 1996, respectively: (1) expected
dividend yields of 2.54% and 3.70%, (2) expected volatility of 22.70% and
18.82%, (3) risk-free interest rates of 5.73% and 6.10%, and (4) expected lives
of 1.3 and 2.2 years for 1997 and 1996, respectively.
Had the compensation cost for BANK ONE's stock-based compensation plans been
determined in accordance with the fair value based accounting method provided by
SFAS No. 123, the net income and earnings per share implications for the years
ended December 31, 1997, 1996 and 1995 would have been as follows:
<TABLE>
<CAPTION>
(In millions, except per-share data) 1997 1996 1995
------------------------- ------------------------ -------------------------
Pro As Pro As Pro As
Forma(1) Reported Forma(1) Reported Forma(1) Reported
---------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net income......................... $2,929 $2,960 $3,210 $3,231 $2,666 $2,675
Net income per common share,
basic............................. 2.46 2.48 2.63 2.64 2.17 2.17
Net income per common share,
diluted........................... 2.40 2.43 2.55 2.57 2.12 2.12
</TABLE>
- ----------------
(1) The above pro forma information may not be representative of the pro forma
impact in future years.
47
<PAGE>
NOTE 14 -- Income Taxes
The components of total applicable income tax expense (benefit) in the
consolidated income statement for the years ended December 31, 1997, 1996 and
1995, are as follows:
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income tax expense (benefit):
Current
Federal................................................................... $ 826 $1,216 $1,272
Foreign................................................................... 12 17 27
State..................................................................... 84 108 153
------ ------ ------
Total................................................................ 922 1,341 1,452
Deferred
Federal................................................................... 488 254 (68)
State..................................................................... 57 16 (10)
------ ------ ------
Total................................................................ 545 270 (78)
------ ------ ------
Applicable income taxes...................................................... $1,467 $1,611 $1,374
====== ====== ======
</TABLE>
The tax effects of fair value adjustments on securities available-for-sale,
foreign currency translation adjustments, and certain tax benefits related to
stock options are recorded directly to stockholders' equity. The net tax expense
(benefit) recorded directly in stockholders' equity amounted to $(28) million,
$9 million and $(31) million in 1997, 1996 and 1995, respectively.
A summary reconciliation of the differences between applicable income taxes
and the amounts computed at the applicable regular federal tax rate of 35% is as
follows:
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Statutory tax rate............................................. $1,549 35.0% $1,695 35.0% $1,417 35.0%
Increase (reduction) resulting from:
State income taxes, net of federal income tax benefit....... 92 2.1 81 1.7 93 2.3
Tax exempt interest......................................... (88) (2.0) (98) (2.0) (115) (2.8)
Other, net.................................................. (86) (2.0) (67) (1.4) (21) (0.6)
------ ---- ------ ---- ------ ----
Applicable income taxes........................................ $1,467 33.1% $1,611 33.3% $1,374 33.9%
====== ==== ====== ==== ====== ====
</TABLE>
A net deferred tax liability is included in other liabilities in the
consolidated balance sheet as a result of temporary differences between the
carrying amounts of assets and liabilities in the financial statements and their
related tax bases. The components of the net deferred tax liability as of
December 31, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
(In millions) 1997 1996
------ ------
<S> <C> <C>
Deferred tax liabilities
Deferred income on lease financing..................... $2,294 $1,775
Appreciation on equity security investments............ 47 123
Prepaid pension costs.................................. 117 145
Securitizations of credit card receivables............. 227 -
Other.................................................. 638 361
------ ------
Gross deferred tax liabilities......................... 3,323 2,404
Deferred tax assets
Allowance for credit losses............................ 1,032 992
Securitization of credit card receivables.............. - 3
Other.................................................. 588 529
------ ------
Gross deferred tax assets.............................. 1,620 1,524
Valuation allowance.................................... - -
------ ------
Gross deferred tax assets, net of valuation allowance.. 1,620 1,524
------ ------
Net deferred tax liability............................. $1,703 $ 880
====== ======
</TABLE>
48
<PAGE>
NOTE 15 -- Lease Commitments
The Corporation has entered into a number of operating and capitalized lease
agreements for premises and equipment. The minimum annual rental commitments
under these leases are shown below.
<TABLE>
<CAPTION>
(In millions)
<S> <C>
1998............................ $ 271
1999............................ 240
2000............................ 194
2001............................ 164
2002............................ 142
2003 and Thereafter............. 815
------
$1,826
======
</TABLE>
Occupancy expense has been reduced by rental income from premises leased to
others in the amount of $107 million in 1997, $71 million in 1996, and $76
million in 1995. Rental expense under operating leases approximated $320 million
in 1997, $310 million in 1996, and $315 million in 1995.
NOTE 16 -- Financial Instruments with Off-Balance-Sheet Risk
In the normal course of business, the Corporation is a party to financial
instruments containing credit and/or market risks that are not required to be
reflected in a balance sheet. These financial instruments include credit-related
instruments as well as certain derivative instruments. The Corporation's risk
management policies monitor and limit exposure to credit, liquidity and market
risks.
The following disclosures represent the Corporation's credit exposure,
assuming that every counterparty to financial instruments with off-balance-sheet
credit risk fails to perform completely according to the terms of the contracts,
and that the collateral and other security, if any, proves to be of no value to
the Corporation.
This note does not address the amount of market losses the Corporation would
incur if future changes in market prices make financial instruments with off-
balance-sheet market risk less valuable or more onerous. The measurement of
market risk is meaningful only when all related and offsetting on- and off-
balance-sheet transactions are aggregated, and the resulting net positions are
identified.
(a) Collateral and Other Security Arrangements
The credit risk of both on- and off-balance-sheet financial instruments varies
based on many factors, including the value of collateral held and other security
arrangements. To mitigate credit risk, the Corporation generally determines the
need for specific covenant, guarantee and collateral requirements on a case-by-
case basis, depending on the nature of the financial instrument and the
customer's creditworthiness. The Corporation may also receive comfort letters
and oral assurances. The amount and type of collateral held to reduce credit
risk varies but may include real estate, machinery, equipment, inventory and
accounts receivable, as well as cash on deposit, stocks, bonds and other
marketable securities that are generally held in the Corporation's possession or
at another appropriate custodian or depository. This collateral is valued and
inspected on a regular basis to ensure both its existence and adequacy.
Additional collateral is requested when appropriate.
(b) Credit-Related Financial Instruments
The table below summarizes credit-related financial instruments, including
both commitments to extend credit and letters of credit.
<TABLE>
<CAPTION>
December 31 (In billions) 1997 1996
---------- ----------
<S> <C> <C>
Unused loan commitments....................................................................... $ 99.2 $ 87.0
Unused credit card lines...................................................................... 221.1 202.1
Commercial letters of credit.................................................................. 1.1 1.0
Standby letters of credit and foreign office guarantees....................................... 12.9 10.8
</TABLE>
Since many of the unused commitments are expected to expire unused or be only
partially used, the total amount of unused commitments in the preceding table
does not necessarily represent future cash requirements.
Loan commitments are agreements to make or acquire a loan or lease as long as
the agreed-upon terms (e.g., expiry, covenants or notice) are met. The
Corporation's commitments to purchase or extend loans help its customers meet
their liquidity
49
<PAGE>
needs. Credit card lines allow customers to use a credit card to buy goods or
services and to obtain cash advances. However, the Corporation has the right to
change or terminate any terms or conditions of the credit card account.
Commercial letters of credit are issued or confirmed to ensure payment of
customers' payables or receivables in short-term international trade
transactions. Generally, drafts will be drawn when the underlying transaction is
consummated as intended. However, the short-term nature of this instrument
serves to mitigate the risk associated with these contracts.
Standby letters of credit and foreign office guarantees are issued in
connection with agreements made by customers to counterparties. If the customer
fails to comply with the agreement, the counterparty may enforce the standby
letter of credit or foreign office guarantee as a remedy. Credit risk arises
from the possibility that the customer may not be able to repay the Corporation
for standby letters of credit or foreign office guarantees. At December 31, 1997
and 1996, standby letters of credit and foreign office guarantees had been
issued for the following purposes.
<TABLE>
<CAPTION>
December 31 (In millions) 1997 1996
---------- ----------
<S> <C> <C>
Financial.................................... $10,831 $ 9,123
Performance.................................. 2,100 1,637
------- -------
Total (1)................................. $12,931 $10,760
======= =======
- -------------------
(1) Includes $1.2 billion and $1.0 billion participated to other institutions
at December 31, 1997 and December 31, 1996, respectively.
</TABLE>
At December 31, 1997, $10.4 billion of standby letters of credit and foreign
office guarantees was due to expire within three years and $2.5 billion was to
expire after three years.
(c) Derivative Financial Instruments
The Corporation enters into a variety of derivative financial instruments in
its trading, asset and liability management, and corporate investment
activities. These instruments offer customers protection from rising or falling
interest rates, exchange rates, equity prices and commodity prices. They can
either reduce or increase the Corporation's exposure to such changing rates or
prices.
Following is a brief description of such derivative financial instruments.
. Interest rate forward and futures contracts represent commitments either to
purchase or sell a financial instrument at a specified future date for a
specified price, and may be settled in cash or through delivery.
. An interest rate swap is an agreement in which two parties agree to
exchange, at specified intervals, interest payment streams calculated on an
agreed-upon notional principal amount with at least one stream based on a
specified floating rate index.
. Interest rate options are contracts that grant the purchaser, for a premium
payment, the right either to purchase or sell a financial instrument at a
specified price within a specified period of time or on a specified date
from the writer of the option.
. Interest rate caps and floors are contracts with notional principal amounts
that require the seller, in exchange for a fee, to make payments to the
purchaser if a specified market interest rate exceeds the fixed cap rate or
falls below the fixed floor rate on specified future dates.
. Forward rate agreements are contracts with notional principal amounts that
settle in cash at a specified future date based on the differential between
a specified market interest rate and a fixed interest rate.
. Foreign exchange contracts represent swap, spot, forward, futures and
option contracts to exchange currencies.
. Equity price contracts represent swap, forward, futures, cap, floor and
option contracts that derive their value from underlying equity prices.
. Commodity price contracts represent swap, futures, cap, floor and option
contracts that derive their value from underlying commodity prices.
The Corporation's objectives and strategies for using derivative financial
instruments for structural interest rate risk management and foreign exchange
risk management are discussed on pages 12 to 15.
50
<PAGE>
Balance sheet exposure for derivative financial instruments includes the
amount of recognized gains in the market valuation of those contracts. Those
amounts fluctuate as a function of maturity, interest rates, foreign exchange
rates, equity prices and commodity prices.
The credit risk associated with exchange-traded derivative financial
instruments is limited to the relevant clearinghouse. Options written do not
expose the Corporation to credit risk, except to the extent of the underlying
risk in a financial instrument that the Corporation may be obligated to acquire
under certain written put options. Caps and floors written do not expose the
Corporation to credit risk.
On some derivative financial instruments, the Corporation may have additional
risk. This is due to the underlying risk in the financial instruments that the
Corporation may be obligated to acquire, or the risk that the Corporation will
deliver under a contract but the customer will fail to deliver the
countervailing amount. The Corporation believes its credit and settlement
procedures minimize these risks.
Not all derivative financial instruments have off-balance-sheet market risk.
Market risk associated with options purchased and caps and floors purchased is
recorded in the balance sheet.
The tables on page 21 report the Corporation's gross notional principal or
contractual amounts of derivative financial instruments as of December 31, 1997
and December 31, 1996. These instruments include swaps, forwards, spot, futures,
options, caps, floors, forward rate agreements, and other conditional and
exchange contracts. The amounts do not represent the market or credit risk
associated with these contracts, as previously defined, but rather give an
indication of the volume of the transactions.
NOTE 17 -- Fair Value of Financial Instruments
BANK ONE is required to disclose the estimated fair value of its financial
instruments in accordance with SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments." These disclosures do not attempt to estimate or
represent BANK ONE's fair value as a whole. The disclosure excludes assets and
liabilities that are not financial instruments as well as the significant
unrecognized value associated with core deposits and credit card relationships.
Fair value amounts disclosed represent point-in-time estimates that may change
in subsequent reporting periods due to market conditions or other factors.
Estimated fair value amounts in theory represent the amounts at which financial
instruments could be exchanged or settled in a current transaction between
willing parties. In practice, however, this may not be the case due to inherent
limitations in the methodologies and assumptions used to estimate fair value.
For example, quoted market prices may not be realized because the financial
instrument may be traded in a market that lacks liquidity; or a fair value
derived using a discounted cash flow approach may not be the amount realized
because of the subjectivity involved in selecting underlying assumptions, such
as projecting cash flows or selecting a discount rate. The fair value amount
also may not be realized because it ignores transaction costs and does not
include potential tax effects. BANK ONE does not plan to dispose of, either
through sale or settlement, the majority of its financial instruments at these
estimated fair values.
51
<PAGE>
The following table summarizes the carrying values and estimated fair
values of financial instruments as of December 31, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
Carrying Estimated Carrying Estimated
(In millions) Value Fair Value Value Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Financial assets
Cash and other short term financial instruments (a)... $ 31,458 $ 31,458 $ 25,185 $ 25,185
Trading assets (a).................................... 5,246 5,246 5,389 5,389
Investment securities (b)............................. 26,039 26,054 27,942 27,973
Loans (c)............................................. 159,579 162,185 153,496 152,215
Allowance for credit losses........................... (2,817) -- (2,687) --
-------- -------- -------- --------
Loans, net............................................ 156,762 162,185 150,809 152,215
Derivative product assets
Trading purposes (1)(f)............................... 4,449 4,449 4,895 4,895
Other than trading purposes (f)....................... 174 568 118 252
-------- -------- -------- --------
Total derivative product assets....................... 4,623 5,017 5,013 5,147
Financial instruments in other assets (a)............. 4,767 4,767 3,152 3,152
Financial liabilities
Deposits (d).......................................... $153,726 $153,981 $145,206 $145,165
Securities sold but not yet purchased (a)............. 2,373 2,373 1,281 1,281
Other short-term financial instruments (a)............ 31,520 31,520 34,034 34,034
Long-term debt (2)(e)................................. 21,546 22,253 15,363 15,590
Derivative product liabilities
Trading purposes (1)(f)............................... 4,595 4,595 4,716 4,716
Other than trading purposes (f)....................... 34 95 57 184
-------- -------- -------- --------
Total derivative product liabilities.................. 4,629 4,690 4,773 4,900
Financial instruments in other liabilities (a)........ 1,271 1,271 1,184 1,184
</TABLE>
(1) The estimated average fair values of derivative financial instruments used
in trading activities during 1997 were $4.4 billion classified as assets and
$4.5 billion classified as liabilities.
(2) Includes trust preferred capital securities.
Estimated fair values are determined as follows:
(a) Financial Instruments Whose Carrying Value Approximates Fair Value
A financial instrument's carrying value approximates its fair value when
the financial instrument has an immediate or short-term maturity (generally one
year or less), or is carried at fair value.
The estimated fair values of trading securities and securities sold but not
yet purchased were generally based on quoted market prices or dealer quotes.
The majority of commitments to extend credit and letters of credit would
result in loans with a market rate of interest, if funded. The fair value of
these commitments are the fees that would be charged customers to enter into
similar agreements with comparable pricing and maturity. The recorded book value
of deferred fee income approximates the fair value.
(b) Investment Securities
The estimated fair values of securities by type are provided in Note 5, on
page 36, to the financial statements. Debt investment securities are based on
quoted market prices, when available. If a quoted market price is not available
fair value is estimated using quoted market prices for similar securities. See
Note 1(c), on page 30, for the methodologies used to determine the fair value of
equity investment securities.
(c) Loans
The loan portfolio was segmented based on loan type, credit quality and
repricing characteristics. For certain variable rate loans with no significant
credit concerns and frequent repricing, estimated fair values are based on the
carrying values. The fair values of other loans are estimated using discounted
cash flow analyses. The discount rates used in these analyses are generally
based on the year-end yield curve plus a spread. The spread reflects pricing on
loans with similar characteristics. For loans with embedded options that allow
for prepayment, such as mortgage loans, prepayment assumptions are factored into
the fair value determination based on historical experience and current economic
and lending conditions.
52
<PAGE>
(d) Deposits
The fair value of demand and savings deposits with no defined maturity is
the amount payable on demand at the report date. The fair value of fixed-rate
time deposits is estimated by discounting the future cash flows to be paid,
using the current rates at which similar deposits with similar remaining
maturities would be issued. The fair value of floating-rate time deposits is
based on carrying value.
(e) Long-Term Debt
Quoted market prices or the discounted cash flow method was used to
estimate the fair value of BANK ONE's fixed-rate long-term debt. Discounting was
based on the contractual cash flows and the current rates at which debt with
similar terms could be issued. The fair value of floating-rate long-term debt
typically is based on carrying value.
(f) Derivative Product Assets and Liabilities
The estimated fair values of derivative product assets and liabilities used
for trading and risk management purposes were based on quoted market prices or
pricing and valuation models determined on a present-value basis using current
market information.
NOTE 18 -- Related Party Transactions
Certain executive officers, directors and their related interests are loan
customers of the Corporation's affiliates. The Securities and Exchange
Commission ("SEC") has determined that, with respect to the Corporation and
significant subsidiaries (as defined by the SEC), disclosure of borrowings by
directors and executive officers and certain of their related interests should
be made if the loans are greater than 5% of stockholders' equity, in the
aggregate. These loans in aggregate were not greater than 5% of stockholders'
equity at December 31, 1997 or 1996.
NOTE 19 -- Pledged Securities and Contingent Liabilities
As of December 31, 1997 and 1996, securities having a book value of $32.6
billion and $28.5 billion, respectively, were pledged as collateral for
repurchase agreements, off-balance sheet investment products, governmental and
trust department deposits in accordance with federal and state requirements and
for other purposes required by law.
The Corporation's bank affiliates are required to maintain average balances
with the Federal Reserve Bank. The average required reserve balances were $1.6
billion and $1.9 billion for 1997 and 1996, respectively.
The Corporation and certain of its affiliates have been named as defendants
in various legal proceedings, including certain class actions, arising out of
the normal course of business, and the Corporation has received certain tax
deficiency assessments. Since the Corporation and certain of its subsidiaries,
which are regulated by one or more federal and state regulatory authorities, are
the subject of numerous examinations and reviews by such authorities, the
Corporation is and will, from time to time, normally be engaged in various
disagreements with regulators, related primarily to banking matters. Management
believes that liabilities arising from these proceedings, if any, will not have
a material adverse effect on the consolidated financial position, liquidity or
results of operations of BANK ONE.
53
<PAGE>
NOTE 20 -- Earnings Per Share
In 1997, the Corporation adopted SFAS No. 128, "Earnings Per Share." As
required, all prior periods presented were restated. The Statement replaces
primary earnings per share ("EPS") with earnings per common share ("Basic EPS").
Basic EPS is computed by dividing income available to common stockholders by the
average number of common shares outstanding for the period.
The Statement also requires presentation of EPS assuming dilution. The diluted
EPS calculation includes shares that may be issued under the Employee Stock
Purchase and Savings Plan, outstanding stock options, and common shares that
would result from the conversion of convertible preferred stock and convertible
debentures. In the diluted calculation, income available to common stockholders
is not reduced by preferred stock dividend requirements related to convertible
preferred stock, since such dividends would not be paid if the preferred stock
were converted to common stock.
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Basic:
Net Income.................................................................... $ 2,960 $ 3,231 $ 2,675
Preferred stock dividends..................................................... (39) (61) (70)
------- ------- -------
Net income attributable to common stockholders' equity........................ $ 2,921 $ 3,170 $ 2,605
======= ======= =======
Diluted:
Net Income.................................................................... $ 2,960 $ 3,231 $ 2,675
Interest on convertible debentures, net of tax................................ 7 6 -
Preferred stock dividends excluding convertible series B, where applicable.... (19) (20) (26)
------- ------- -------
Diluted income available to common stockholders............................... $ 2,948 $ 3,217 $ 2,649
======= ======= =======
<CAPTION>
1997 1996 1995
---- ---- ----
<S>............................................................................. <C> <C> <C>
Average shares outstanding...................................................... 1,176 1,199 1,198
Dilutive Shares:
Employee Stock Purchase & Savings Plan........................................ 2 1 -
Stock options................................................................. 17 15 12
Convertible preferred stock................................................... 14 35 38
Convertible debentures assumed to be converted................................ 4 4 -
------- ------- -------
Average shares outstanding assuming full dilution............................. 1,213 1,254 1,248
======= ======= =======
Earnings Per Share:
Basic......................................................................... $ 2.48 $ 2.64 $ 2.17
======= ======= =======
Diluted....................................................................... $ 2.43 $ 2.57 $ 2.12
======= ======= =======
</TABLE>
54
<PAGE>
NOTE 21 -- BANK ONE CORPORATION (Parent Company Only)
Condensed Financial Statements
Condensed Balance Sheet
<TABLE>
<CAPTION>
December 31 (In millions) 1997 1996
------- -------
<S> <C> <C>
Assets
Cash and due from banks--bank subsidiaries...................................... $ 9 $ 46
Interest-bearing due from banks
Bank subsidiaries............................................................. 843 1,172
Other......................................................................... 9 249
Trading assets.................................................................. - 67
Investment securities--available-for-sale....................................... 82 83
Loans and receivables--subsidiaries
Bank subsidiaries............................................................. 4,529 2,169
Nonbank subsidiaries.......................................................... 5,083 3,243
Investment in subsidiaries
Bank subsidiaries............................................................. 17,193 19,423
Nonbank subsidiaries.......................................................... 4,218 2,503
Other assets.................................................................... 312 430
------- -------
Total assets................................................................ $32,278 $29,385
======= =======
Liabilities
Short-term borrowings
Nonbank subsidiaries.......................................................... $ 131 $ 135
Other......................................................................... 726 1,840
Long term debt
Nonbank subsidiaries......................................................... 1,027 771
Other........................................................................ 10,892 6,667
Other liabilities............................................................... 452 465
------- -------
Total liabilities........................................................... 13,228 9,878
Stockholders' equity............................................................ 19,050 19,507
------- -------
Total liabilities and stockholders' equity.................................. $32,278 $29,385
======= =======
</TABLE>
55
<PAGE>
BANK ONE CORPORATION (Parent Company Only)
Condensed Income Statement
<TABLE>
<CAPTION>
For the Year (In millions) 1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Operating Income
Dividends
Bank subsidiaries............................................................. $ 4,243 $ 2,065 $ 1,815
Nonbank subsidiaries.......................................................... 491 159 114
Interest income
Bank subsidiaries............................................................. 209 164 169
Nonbank subsidiaries.......................................................... 244 185 170
Other......................................................................... 44 37 67
Management and other fees from affiliates....................................... 589 181 117
Other income
Bank subsidiaries............................................................. - - 9
Nonbank subsidiaries.......................................................... - (2) 1
Other......................................................................... 19 13 8
------- ------- -------
Total....................................................................... 5,839 2,802 2,470
Operating Expense
Interest expense
Nonbank subsidiaries.......................................................... 85 11 4
Other......................................................................... 708 553 550
Merger-related charges.......................................................... - - 69
Salaries and employee benefits.................................................. 230 139 65
Professional fees and services.................................................. 244 148 48
Marketing and development....................................................... 92 38 38
Other expense................................................................... 128 104 97
------- ------- -------
Total....................................................................... 1,487 993 871
Income Before Income Taxes and Equity in Undistributed
Net Income of Subsidiaries.................................................... 4,352 1,809 1,599
Applicable income taxes (benefit)............................................... (73) (192) (112)
------- ------- -------
Income Before Equity in Undistributed Net Income of Subsidiaries................ 4,425 2,001 1,711
Equity in undistributed net income of subsidiaries
Bank subsidiaries............................................................. 320 268 418
Nonbank subsidiaries.......................................................... (1,785) 962 546
------- ------- -------
Net income...................................................................... $ 2,960 $ 3,231 $ 2,675
======= ======= =======
</TABLE>
56
<PAGE>
BANK ONE CORPORATION (Parent Company Only)
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
For the Year (In millions) 1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income.............................................................. $ 2,960 $ 3,231 $ 2,675
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in net income of subsidiaries.................................. (3,199) (3,333) (2,836)
Dividends received from subsidiaries.................................. 4,618 2,147 1,875
Other noncash adjustments............................................. (103) (86) (231)
------- ------- -------
Total adjustments..................................................... 1,316 (1,272) (1,192)
------- ------- -------
Net cash provided by operating activities............................... 4,276 1,959 1,483
Cash Flows from Investing Activities
Net (increase) decrease in loans to subsidiaries........................ (4,186) (849) (463)
Net decrease in resale agreements with bank subsidiary.................. - 3 39
Net (increase) decrease in capital investments in subsidiaries.......... 33 (453) 105
Purchase of investment securities--available-for-sale................... (329) (194) (30)
Proceeds from sales and maturities of investment securities--
available-for-sale..................................................... 322 150 623
Sale of premises and equipment.......................................... (23) (70) (30)
Other, net.............................................................. (27) 8 (4)
------- ------- -------
Net cash provided by (used in) investing activities..................... (4,210) (1,405) 240
Cash Flows from Financing Activities
Net increase (decrease) in commercial paper and short-term borrowings... (1,124) 934 (416)
Proceeds from issuance of long-term debt................................ 5,306 1,993 1,362
Redemption and repayment of long-term debt.............................. (552) (492) (335)
Dividends paid.......................................................... (1,380) (1,180) (1,061)
Proceeds from issuance of common and treasury stock..................... 27 76 29
Purchase of treasury stock.............................................. (2,789) (1,479) (852)
Payment for redemption of preferred stock............................... (100) - (121)
Other financing activities, net......................................... (60) 126 37
------- ------- -------
Net cash (used in) financing activities................................. (672) (22) (1,357)
Net increase (decrease) in cash and cash equivalents.................... (606) 532 366
Cash and cash equivalents at beginning of year.......................... 1,467 935 569
------- ------- -------
Cash and cash equivalents at end of year................................ $ 861 $ 1,467 $ 935
======= ======= =======
Other Cash Flow Disclosures
Interest paid........................................................... $ 752 $ 555 $ 523
Income tax payment (receipt)............................................ 122 383 265
</TABLE>
In connection with issuances of commercial paper, the Corporation has an
agreement providing future credit availability (back-up lines of credit) with
non-affiliated banks. The agreements aggregated $2.3 billion at December 31,
1997. The commitment fee paid under these agreements was .08%. The back-up lines
of credit, together with overnight money market loans, short-term investments
and other sources of liquid assets, exceeded the amount of commercial paper
issued at December 31, 1997.
57
<PAGE>
Report of Independent Public Accountants
To the Stockholders and Board of Directors
of BANK ONE CORPORATION:
We have audited the accompanying supplemental consolidated balance sheets of
BANK ONE CORPORATION (a Delaware corporation) and subsidiaries as of December
31, 1997 and 1996, and the related supplemental consolidated statements of
income, stockholders' equity and cash flows for each year in the three-year
period ended December 31, 1997. The supplemental consolidated statements give
retroactive effect to the merger of First Chicago NBD Corporation and BANC ONE
CORPORATION on October 2, 1998, which has been accounted for as a pooling of
interests as described in Note 2. These financial statements are the
responsibility of BANK ONE CORPORATION's management. Our responsibility is to
express an opinion of these supplemental financial statements based on our
audits.
We have previously audited the consolidated financial statements of First
Chicago NBD Corporation and subsidiaries included in the supplemental
consolidated financial statements of BANK ONE CORPORATION and issued our report
thereon dated January 15, 1998. We did not audit the consolidated financial
statements of BANC ONE CORPORATION included in the supplemental consolidated
financial statements of BANK ONE CORPORATION, which statements reflect total
assets, total income and net income constituting 48 percent, 55 percent and 44
percent, respectively, in 1997; 50 percent, 53 percent, and 52 percent,
respectively, in 1996; and 48 percent and 54 percent of total income and net
income in 1995, of the related supplemental consolidated totals. These
statements were audited by other auditors whose report thereon dated February
12, 1998, has been furnished to us, and our opinion expressed herein, insofar as
it relates to the amounts included for BANC ONE CORPORATION, is based solely
upon the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based upon our audits and the report of the other auditors,
the supplemental consolidated financial statements referred to above present
fairly, in all material respects, the financial position of BANK ONE CORPORATION
and its subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, after giving retroactive effect to the merger of First
Chicago NBD Corporation and BANC ONE CORPORATION as described in Note 2, in
conformity with generally accepted accounting principles.
Chicago, Illinois,
October 6, 1998
58
<PAGE>
Supplemental Selected Statistical Information
BANK ONE CORPORATION and Subsidiaries
Securitization of Credit Card Receivables
BANK ONE continues to service credit card accounts even after receivables are
securitized. Net interest income and certain fee revenue on the securitized
portfolio are not recognized; however, these are offset by servicing fees as
well as by lower provisions for credit losses.
For analytical purposes only, the following table shows income statement line
items adjusted for the net impact of securitization of credit card receivables.
<TABLE>
<CAPTION>
1997
----------------------------------------------------------
Credit Card
(In millions) Reported Securitizations Managed
---------------- ----------------- ---------------
<S> <C> <C> <C>
Net interest income--tax-equivalent basis.................... $ 9,488 $ 3,214 $ 12,702
Provision for credit losses.................................. 1,988 2,011 3,999
Noninterest income........................................... 6,825 (1,197) 5,628
Noninterest expense.......................................... 9,740 6 9,746
Net income................................................... 2,960 - 2,960
Total average loans.......................................... 155,926 31,992 187,918
Total average earning assets................................. 202,334 33,086 235,420
Net interest margin.......................................... 4.69% 9.71% 5.40%
Delinquency and charge-off rates:
Credit card delinquencies over 30 days as
a percentage of ending credit loan balances............. 4.61% 5.07% 4.90%
Credit card delinquencies over 90 days as
a percentage of ending credit loan balances............. 1.94% 2.22% 2.11%
Net credit card charge-offs as a percentage of
average credit card balances............................ 6.03% 6.29% 6.18%
</TABLE>
<TABLE>
<CAPTION>
1996
----------------------------------------------------------
Credit Card
(In millions) Reported Securitizations Managed
---------------- ----------------- ---------------
<S> <C> <C> <C>
Net interest income--tax-equivalent basis.................... $ 9,301 $ 2,494 $ 11,795
Provision for credit losses.................................. 1,716 1,456 3,172
Noninterest income........................................... 6,110 (1,049) 5,061
Noninterest expense.......................................... 8,681 (11) 8,670
Net income................................................... 3,231 - 3,231
Total average loans.......................................... 146,094 26,533 172,627
Total average earning assets................................. 200,259 27,162 227,421
Net interest margin.......................................... 4.64% 9.18% 5.19%
Delinquency and charge-off rates:
Credit card delinquencies over 30 days as
a percentage of ending credit loan balances............. 4.59% 5.27% 4.96%
Credit card delinquencies over 90 days as
a percentage of ending credit loan balances............. 1.89% 2.21% 2.07%
Net credit card charge-offs as a percentage of
average credit card balances............................ 4.86% 5.63% 5.28%
</TABLE>
Loans 90 Days or More Past Due and Still Accruing Interest
Loans that were 90 or more days past due and still accruing interest total
$994 million, $918 million, $628 million, $439 million at December 31, 1997,
1996, 1995 and 1994.
59
<PAGE>
Allocated Allowance for Credit Losses
While the allowance for credit losses is available to absorb credit losses in
the entire portfolio, the tables below present an estimate of the allowance for
credit losses allocated by loan type and the percentage of loans in each
category to total loans.
<TABLE>
<CAPTION>
December 31 (Dollars in millions) 1997 1996 1995 1994
------ ------ ------ ------
<S> <C> <C> <C> <C>
Commercial........................... $1,353 $1,330 $1,373 $1,354
Consumer............................. 561 377 298 292
Credit Card.......................... 903 980 751 546
------ ------ ------ ------
Total........... $2,817 $2,687 $2,422 $2,192
====== ====== ====== ======
Percentage of loans to total loans
Commercial........................... 50% 48% 48% 48%
Consumer............................. 36 36 36 38
Credit Card.......................... 14 16 16 14
------ ------ ------ ------
Total........... 100% 100% 100% 100%
====== ====== ====== ======
</TABLE>
60
<PAGE>
Short-Term Borrowings
Borrowings with original maturities of one year or less are classified as
short-term. The following is a summary of short-term borrowings for the two
years ended December 31:
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996
------ ------
<S> <C> <C>
Federal funds purchased
Outstanding at year-end................................... $ 8,361 $11,462
Weighted average rate at year-end......................... 6.08% 5.85%
Daily average outstanding for the year.................... $ 8,819 $ 9,411
Weighted average rate for the year........................ 5.50% 5.67%
Highest outstanding at any month-end...................... $ 9,317 $11,462
Securities under repurchase agreements
Outstanding at year-end................................... $11,985 $10,200
Weighted average rate at year-end......................... 5.48% 5.33%
Daily average outstanding for the year.................... $11,611 $14,560
Weighted average rate for the year........................ 5.07% 5.04%
Highest outstanding at any month-end...................... $13,539 $20,746
Bank notes
Outstanding at year-end................................... $ 7,361 $ 7,130
Weighted average rate at year-end......................... 5.80% 5.54%
Daily average outstanding for the year.................... $ 8,711 $10,071
Weighted average rate for the year........................ 5.84% 5.57%
Highest outstanding at any month-end...................... $ 9,877 $11,760
Commercial paper
Outstanding at year-end................................... $ 1,506 $ 2,445
Weighted average rate at year-end......................... 5.83% 5.39%
Daily average outstanding for the year.................... $ 2,415 $ 2,012
Weighted average rate for the year........................ 5.56% 5.32%
Highest outstanding at any month-end...................... $ 2,937 $ 2,618
Other short-term borrowings
Outstanding at year-end................................... $ 3,939 $ 3,464
Weighted average rate at year-end......................... 4.71% 5.44%
Daily average outstanding for the year.................... $ 3,003 $ 3,161
Weighted average rate for the year........................ 4.77% 4.12%
Highest outstanding at any month-end...................... $ 4,804 $ 5,441
Total short-term borrowings
Outstanding at year-end................................... $33,152 $34,701
Weighted average rate at year-end......................... 5.63% 5.56%
Daily average outstanding for the year.................... $34,559 $39,215
Weighted average rate for the year........................ 5.38% 5.27%
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
Common Stock and Stockholder Data (1) 1997 1996 1995 1994
------- ------- ------- ------
<S> <C> <C> <C> <C>
Market price
High for the year............................ $54.37 $43.53 33.16 31.41
Low for the year............................. 35.57 28.41 20.77 19.95
At year-end.................................. 49.37 39.09 31.10 20.97
Book value (at year-end)...................... 16.03 16.64 15.28 14.19
Dividend payout ratio......................... 61.35% 37.96% 39.59% 44.46%
(1) There were 105,631 common stockholders of record as of December 31, 1997.
</TABLE>
<TABLE>
<CAPTION>
Financial Ratios 1997 1996 1995 1994
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income as a percentage of:
Average stockholders' equity....................... 15.6% 17.1% 15.3% 15.1%
Average common stockholders' equity................ 16.0 17.8 16.1 16.1
Average total assets............................... 1.3 1.4 1.2 1.2
Average earning assets............................. 1.5 1.6 1.4 1.4
Stockholders' equity at year-end as a percentage of:
Total assets at year-end........................... 8.0 8.6 7.9 7.7
Total loans at year-end............................ 11.9 12.7 13.1 13.2
Total deposits at year-end......................... 12.4 13.4 12.5 11.6
Average stockholders' equity as a percentage of:
Average assets..................................... 8.2 8.4 7.8 7.9
Average loans...................................... 12.2 12.9 13.4 14.1
Average deposits................................... 12.9 13.2 12.3 12.2
Income to fixed charges:
Excluding interest on deposits..................... 2.4x 2.6x 2.2x 2.6x
Including interest on deposits..................... 1.5x 1.6x 1.5x 1.6x
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
(Dollars in millions, except 1997 1996
ratios and per share data) ------------------------------------------- ------------------------------------------
Fourth Third Second First Fourth Third Second First
---------- --------- --------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income and Expense:
Net interest income--tax-equivalent
basis............................. $ 2,301 $ 2,393 $ 2,417 $ 2,377 $ 2,366 $ 2,355 $ 2,301 $ 2,279
Provision for credit losses......... 448 477 591 472 524 438 387 367
Noninterest income.................. 1,897 1,862 1,531 1,535 1,734 1,482 1,463 1,431
Merger-related charges.............. - - 337 - - - - -
FDIC special assessment............. - - - - - 23 34 -
Operating expense................... 2,448 2,458 2,300 2,197 2,280 2,139 2,100 2,105
Net income.......................... 890 850 428 792 848 799 788 796
Per Common Share Data
Net income, basic................... $ 0.76 $ 0.72 $ 0.36 $ 0.66 $ 0.70 $ 0.65 $ 0.64 $ 0.65
Net income, diluted................. 0.75 0.70 0.35 0.64 0.68 0.63 0.62 0.63
Cash dividends declared............. 0.345 0.345 0.345 0.345 0.310 0.310 0.310 0.310
Book value.......................... 16.03 16.51 16.43 16.51 16.64 16.31 16.00 15.70
Balance Sheet:
Loans:
Managed............................. $196,993 192,974 189,428 184,124 182,799 177,496 172,983 168,893
Reported............................ 159,579 $157,351 158,626 154,172 153,496 149,490 146,044 142,006
Deposits............................ 153,726 150,796 152,672 146,397 145,206 143,704 144,277 143,150
Long-term debt(1)................... 21,546 21,667 19,329 16,426 15,363 13,133 12,885 12,797
Total assets........................ 239,372 235,629 237,270 230,077 225,822 222,595 226,757 227,031
Common stockholders' equity......... 18,724 18,398 18,509 18,566 18,856 18,515 18,291 17,949
Total stockholders' equity.......... 19,050 18,862 18,983 19,052 19,507 19,264 19,055 18,717
Performance Ratios:
Return on average assets............ 1.52% 1.45% 0.75% 1.43% 1.54% 1.42% 1.39% 1.37%
Return on common equity............. 19.1 18.3 8.9 17.0 17.8 17.1 17.3 17.5
Net interest margin:
Managed........................... 5.30 5.41 5.46 5.52 5.43 5.28 5.16 4.94
Reported.......................... 4.49 4.64 4.79 4.86 4.86 4.72 4.58 4.43
Operating efficiency ratio:
Managed........................ 51.9 51.8 51.7 49.4 50.5 50.7 50.5 52.9
Reported........................ 58.3 57.8 58.3 56.2 55.6 55.7 55.8 56.7
Equity Ratios:
Regulatory leverage ratio........... 7.8 7.9 8.1 8.6 8.9 8.2 8.1 7.8
Risk-based capital:
Tier 1 ratio..................... 8.2 8.3 8.4 9.2 9.5 9.0 9.1 9.1
Total capital ratio.............. 12.3 12.4 12.6 13.2 13.6 12.8 13.0 13.1
Credit Quality:
Net charge-offs to average loans.... 1.18 1.23 1.25 1.19 1.22 1.08 0.93 0.92
Ending allowance to loans........... 1.77 1.80 1.80 1.76 1.75 1.78 1.78 1.79
Nonperforming assets to loans and
other real estate owned........... 0.43 0.44 0.45 0.39 0.40 0.49 0.53 0.60
Common Stock Data:
Average shares outstanding, basic... 1,169 1,177 1,173 1,183 1,193 1,199 1,201 1,207
Average shares outstanding, diluted. 1,196 1,209 1,214 1,235 1,249 1,254 1,257 1,262
Stock price, quarter-end............ $ 49.37 $ 50.91 $ 44.04 $ 36.14 $ 39.09 $ 37.27 $ 30.91 $ 32.39
________
(1) Includes trust preferred capital securities.
</TABLE>
63
<PAGE>
Average Balances/Net Interest Margin/Rates
BANC ONE Corporation and Subsidiaries
<TABLE>
<CAPTION>
1997 1996
Year Ended December 31 ---------------------------------------- -----------------------------------------
(Income and rates on tax-equivalent basis) Average Average Average Average
(Dollars in millions) Balance Interest Rate Balance Interest Rate
------------ ------------ ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Short-term investments........................ $ 14,412 $ 801 5.56% $ 18,040 $ 1,010 5.60%
Trading assets................................ 5,616 331 5.89 7,366 425 5.77
Investment securities (1)
U.S. government and federal agencies......... 18,851 1,273 6.75 20,562 1,451 7.06
States and political subdivisions............ 2,648 220 8.31 3,191 224 7.02
Other........................................ 4,881 246 5.04 5,006 252 5.03
-------- ------- ----- -------- ------- -----
Total investment securities............... 26,380 1,739 6.59 28,759 1,927 6.70
Loans (2)
Commercial................................... 76,636 6,108 7.97 71,376 5,691 7.97
Consumer..................................... 56,410 5,324 9.44 51,792 4,811 9.29
Credit Card.................................. 22,880 3,269 14.29 22,926 3,255 14.20
-------- ------- ----- -------- ------- -----
Total loans............................... 155,926 14,701 9.43 146,094 13,757 9.42
Total earning assets (3).................. 202,334 17,572 8.69 200,259 17,119 8.54
Allowance for credit losses................... (2,751) (2,577)
Other assets.................................. 30,299 27,946
-------- --------
Total assets.............................. $229,882 $225,628
======== ========
Deposits--interest-bearing
Savings...................................... $ 22,408 $ 519 2.32% $ 21,346 $ 491 2.30%
Money market................................. 34,565 1,302 3.77 33,763 1,194 3.54
Time......................................... 41,894 2,315 5.53 43,169 2,355 5.46
Foreign offices (4).......................... 16,476 855 5.19 15,772 817 5.18
-------- ------- ----- -------- ------- -----
Total deposits--interest-bearing.......... 115,343 4,991 4.33 114,050 4,857 4.26
Federal funds purchased and securities under
repurchase agreements........................ 20,430 1,073 5.25 23,971 1,267 5.29
Other short-term borrowings................... 14,129 786 5.56 15,244 799 5.24
Long-term debt (5)............................ 18,945 1,234 6.51 13,277 895 6.74
-------- ------- ----- -------- ------- -----
Total interest-bearing liabilities........ 168,847 8,084 4.79 166,542 7,818 4.69
Demand deposits............................... 31,199 29,279
Other liabilities............................. 10,889 10,907
Preferred stock............................... 487 757
Common stockholders' equity................... 18,460 18,143
-------- --------
Total liabilities and stockholders'
equity.................................. $229,882 $225,628
======== ========
Interest income/earning assets................ $17,572 8.69% $17,119 8.54%
Interest expense/earning assets............... 8,084 4.00 7,818 3.90
------- ----- ------- -----
Net interest margin........................... $ 9,488 4.69% $ 9,301 4.64%
======= ===== ======= =====
__________
(1) The combined amounts for investment securities available-for-sale and held-to-maturity are based on their respective carrying
values. Based on the amortized cost of investment securities available-for-sale, the combined average balance for 1997, 1996,
and 1995 would be $26,246 million, $28,613 million, and $32,841 million, respectively, and the average earned rate in 1997,
1996 and 1995 would be 6.63%, 6.73% and 6.72%, respectively.
(2) Nonperforming loans are included in average balances used to determine rates.
(3) Includes tax-equivalent adjustments based on federal income tax rate of 35%.
(4) Includes international banking facilities' deposit balances in domestic offices and balances of Edge Act and overseas offices.
(5) Includes trust preferred capital securities.
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
1995 1994
----------------------------------- ----------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
-------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
$ 26,737 $ 1,608 6.01% $ 24,095 $ 1,075 4.46%
7,643 505 6.61 5,327 306 5.74
24,520 1,635 6.67 28,037 1,699 6.06
3,162 317 10.03 3,527 348 9.87
5,081 254 5.00 5,838 180 3.08
-------- ------- ----- -------- ------- -----
32,763 2,206 6.73 37,402 2,227 5.95
64,876 5,346 8.24 57,431 4,179 7.28
48,156 4,432 9.20 43,556 3,786 8.69
17,582 2,365 13.45 16,158 2,161 13.37
-------- ------- ----- -------- ------- -----
130,614 12,143 9.30 117,145 10,126 8.64
197,757 16,462 8.32 183,969 13,734 7.47
(2,241) (2,236)
28,591 26,343
-------- --------
$224,107 $208,076
======== ========
$ 28,861 $ 724 2.51% $ 29,678 $ 683 2.30%
22,926 934 4.07 23,631 622 2.63
45,015 2,567 5.70 40,250 1,726 4.29
17,248 993 5.76 13,542 604 4.46
-------- ------- ----- -------- ------- -----
114,050 5,218 4.58 107,101 3,635 3.39
27,936 1,671 5.98 24,617 1,064 4.32
13,228 753 5.69 12,394 544 4.39
11,637 832 7.15 9,613 619 6.44
-------- ------- ----- -------- ------- -----
166,851 8,474 5.08 153,725 5,862 3.81
27,817 28,362
11,972 9,520
880 996
16,587 15,473
-------- --------
$224,107 $208,076
======== ========
$16,462 8.32% $13,734 7.47%
8,474 4.28 5,862 3.19
------- ----- ------- -----
$ 7,988 4.04% $ 7,872 4.28%
======= ===== ======= =====
</TABLE>
65
<PAGE>
Analysis of Changes in Net Interest Income
The following table shows the approximate effect on net interest income of
volume and rate changes for 1997 and 1996. For purposes of this table, changes
that are not due solely to volume or rate changes are allocated to volume.
<TABLE>
<CAPTION>
1997 over 1996 1996 over 1995
------------------------ --------------------------
Year Ended December 31 (In millions) Volume Rate Total Volume Rate Total
------ ----- ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in interest income
Short-term investments........................ $(202) $ (7) $(209) $(493) $(105) $ (598)
Trading assets................................ (103) 9 (94) (18) (62) (80)
Investment securities
U.S. government and federal agency........... (117) (61) (178) (275) 91 (184)
States and political subdivisions............ (41) 37 (4) 3 (96) (93)
Other........................................ (6) - (6) (4) 2 (2)
Loans
Commercial................................... 419 (2) 417 523 (178) 345
Consumer..................................... 435 78 513 337 42 379
Credit Card.................................. (7) 21 14 753 137 890
----- ------
Total...................................... 453 657
Increase (decrease) in interest expense
Deposits
Savings...................................... 25 3 28 (177) (56) (233)
Money market................................. 29 79 108 396 (136) 260
Time......................................... (70) 30 (40) (103) (109) (212)
Foreign offices.............................. 37 1 38 (81) (95) (176)
Federal funds purchased and securities
under repurchase agreements.................. (186) (8) (194) (222) (182) (404)
Other short-term borrowings................... (60) 47 (13) 109 (63) 46
Long-term debt................................ 370 (31) 339 112 (49) 63
----- ------
Total...................................... 266 (656)
----- ------
Increase (decrease) in net interest income..... $ 187 $1,313
===== ======
</TABLE>
66
<PAGE>
Exhibit 99(b)
BANK ONE CORPORATION
Index to Supplemental Quarterly Financial Information
Page
----
Supplemental Financial Data 1
Supplemental Consolidated Financial Statements 2
Notes to Supplemental Consolidated Financial Statements 6
Supplemental Selected Statistical Information 10
<PAGE>
<TABLE>
<CAPTION>
Supplemental Financial Data
BANK ONE CORPORATION and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
(In millions, except per common share amounts) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income and Expense:
Net interest income--tax-equivalent basis............. $ 2,335 $ 2,417 $ 4,618 $ 4,794
Provision for credit losses........................... 400 591 791 1,063
Noninterest income.................................... 2,132 1,531 4,085 3,066
Merger-related and restructuring charges.............. 127 337 127 337
Operating expense..................................... 2,592 2,300 5,023 4,497
Net income............................................ 895 428 1,828 1,220
Per Common Share Data:
Net income, basic..................................... $ 0.76 $ 0.36 $ 1.56 $ 1.02
Net income, diluted................................... 0.75 0.35 1.53 0.99
Cash dividends declared............................... 0.38 0.345 0.76 0.69
Performance Ratios:
Net interest margin:
Managed............................................ 5.14% 5.46% 5.31% 5.49%
Reported........................................... 4.45 4.79 4.46 4.82
Return on assets...................................... 1.49 0.75 1.54 1.08
Return on common equity............................... 18.6 8.9 19.4 12.9
Operating efficiency:
Managed............................................ 52.5 51.7 50.6 50.8
Reported........................................... 58.0 58.3 57.7 57.2
Balance Sheet:
Loans:
Managed............................................ $200,726 $189,428 $200,726 $189,428
Reported........................................... 160,023 158,626 160,023 158,626
Earning assets........................................ 211,858 205,785 211,858 205,785
Total assets.......................................... 244,181 237,270 244,181 237,270
Deposits.............................................. 154,507 152,672 154,507 152,672
Long-term debt (1).................................... 22,248 19,329 22,248 19,329
Common equity......................................... 19,577 18,509 19,577 18,509
</TABLE>
- ----------
(1) Includes trust preferred capital securities.
-1-
<PAGE>
Supplemental Consolidated Balance Sheet
BANK ONE CORPORATION and Subsidiaries
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
June 30 December 31 June 30
(Dollars in millions) 1998 1997 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Cash and due from banks............................................................ $16,217 $15,380 $14,758
Interest-bearing due from banks.................................................... 5,590 6,910 7,737
Federal funds sold and securities under resale agreements.......................... 9,040 9,168 9,058
Trading assets..................................................................... 5,342 5,246 5,461
Derivative product assets.......................................................... 4,342 4,623 3,816
Investment securities (fair value--$31,875, $26,054, and $24,917,
respectively)..................................................................... 31,863 26,039 24,903
Loans (net of unearned income--$3,228, $3,049, and $2,856, respectively)
Commercial...................................................................... 83,279 79,306 77,503
Consumer........................................................................ 58,737 57,608 57,721
Credit Card..................................................................... 18,007 22,665 23,402
Allowance for credit losses........................................................ (2,752) (2,817) (2,858)
-------- -------- --------
Loans, net...................................................................... 157,271 156,762 155,768
Other assets:
Bank premises and equipment, net................................................... 3,433 3,426 3,337
Customers' acceptance liability.................................................... 405 741 693
Other.............................................................................. 10,678 11,077 11,739
-------- -------- --------
Total assets................................................................ $244,181 $239,372 $237,270
======== ======== ========
Liabilities
Deposits
Demand.......................................................................... 38,551 35,954 36,701
Savings......................................................................... 59,542 58,946 57,005
Time............................................................................ 37,887 40,144 42,029
Foreign offices................................................................. 18,527 18,682 16,937
-------- -------- --------
Total deposits.............................................................. 154,507 153,726 152,672
Federal funds purchased and securities under repurchase agreements................. 19,088 20,346 19,574
Other short-term borrowings........................................................ 15,768 12,806 16,668
Long-term debt..................................................................... 21,245 20,543 18,326
Guaranteed preferred beneficial interest in the Corporation's junior
subordinated debt................................................................. 1,003 1,003 1,003
Acceptances outstanding............................................................ 405 741 693
Derivative product liabilities..................................................... 4,327 4,629 3,866
Other liabilities.................................................................. 8,071 6,528 5,485
-------- -------- --------
Total liabilities........................................................... 224,414 220,322 218,287
Stockholders' Equity
Preferred stock.................................................................... 190 326 474
Common stock--$0.01 par value...................................................... 12 12 11
June 30, 1998 Dec. 31, 1997 June 30,1997
------------- ------------- -------------
Number of shares authorized..... 2,500,000,000 2,500,000,000 2,500,000,000
Number of shares issued......... 1,221,926,588 1,218,812,323 1,154,061,980
Number of shares outstanding.... 1,170,465,770 1,168,188,895 1,125,767,334
Surplus............................................................................ 12,549 12,584 9,601
Retained earnings.................................................................. 9,096 8,063 9,952
Accumulated other adjustments to stockholders' equity.............................. 177 209 76
Deferred compensation.............................................................. (182) (137) (136)
Treasury stock at cost--51,460,818; 50,623,428; and 28,294,646 shares,
respectively...................................................................... (2,075) (2,007) (995)
-------- -------- --------
Total stockholders' equity...................................................... 19,767 19,050 18,983
-------- -------- --------
Total liabilities and stockholders' equity.................................. $244,181 $239,372 $237,270
======== ======== ========
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-2-
<PAGE>
Supplemental Consolidated Income Statement
BANK ONE CORPORATION and Subsidiaries
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
(In millions, except per-share data) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income
Loans, including fees..................................................... $3,595 $3,689 $7,198 $7,240
Bank balances............................................................. 85 114 186 210
Federal funds sold and securities under resale agreements................. 113 87 213 164
Trading assets............................................................ 90 78 182 156
Investment securities--taxable............................................ 463 378 843 757
Investment securities--tax-exempt......................................... 42 51 83 99
------ ------ ------ ------
Total.................................................................. 4,388 4,397 8,705 8,626
Interest Expense
Deposits.................................................................. 1,255 1,244 2,512 2,430
Federal funds purchased and securities under repurchase agreements........ 270 280 552 556
Other short-term borrowings............................................... 202 206 375 382
Long-term debt............................................................ 357 291 710 552
------ ------ ------ ------
Total.................................................................. 2,084 2,021 4,149 3,920
Net Interest Income....................................................... 2,304 2,376 4,556 4,706
Provision for credit losses............................................... 400 591 791 1,063
------ ------ ------ ------
Net Interest Income After Provision for Credit Losses..................... 1,904 1,785 3,765 3,643
Noninterest Income
Trading profits........................................................... 65 43 125 76
Equity securities gains................................................... 121 88 193 189
Investment securities gains (losses)...................................... 49 (4) 82 37
------ ------ ------ ------
Market-driven revenue.................................................. 235 127 400 302
Credit card fees.......................................................... 674 558 1,412 1,079
Fiduciary and investment management fees.................................. 203 180 401 365
Service charges and commissions........................................... 666 591 1,326 1,159
------ ------ ------ ------
Fee-based revenue...................................................... 1,543 1,329 3,139 2,603
Other income.............................................................. 354 75 546 161
------ ------ ------ ------
Total.................................................................. 2,132 1,531 4,085 3,066
Noninterest Expense
Salaries and employee benefits............................................ 1,123 1,019 2,230 2,044
Net occupancy and equipment expense....................................... 209 174 411 358
Depreciation and amortization............................................. 126 119 250 235
Amortization of intangibles............................................... 41 54 83 107
Outside services and processing........................................... 348 263 621 511
Marketing and development................................................. 221 234 420 387
Communication and transportation.......................................... 190 175 375 337
Other..................................................................... 334 262 633 518
------ ------ ------ ------
Operating expenses..................................................... 2,592 2,300 5,023 4,497
------ ------ ------ ------
Merger-related and restructuring charges.................................. 127 337 127 337
------ ------ ------ ------
Total noninterest expense.............................................. 2,719 2,637 5,150 4,834
Income Before Income Taxes................................................ 1,317 679 2,700 1,875
Applicable income taxes................................................... 422 251 872 655
------ ------ ------ ------
Net Income................................................................ $ 895 $ 428 $1,828 $1,220
====== ====== ====== ======
Net Income Attributable to Common Stockholders' Equity.................... $ 891 $ 417 $1,820 $1,196
====== ====== ====== ======
- --------------------------------------------------------------------------------------------------------------------------
Earnings Per Share
Basic.................................................................. $0.76 $0.36 $1.56 $1.02
Diluted................................................................ $0.75 $0.35 $1.53 $0.99
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
-3-
<PAGE>
Supplemental Consolidated Statement of Stockholders' Equity
BANK ONE CORPORATION and Subsidiaries
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30
(In millions) 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Preferred Stock
Balance, beginning of period......................................................... $ 326 $ 651
Conversion of preferred stock........................................................ (136) (177)
------- -------
Balance, end of period............................................................... 190 474
------- -------
Common Stock
Balance, beginning of period......................................................... 12 12
Issuance of stock.................................................................... - (1)
------- -------
Balance, end of period............................................................... 12 11
------- -------
Capital Surplus
Balance, beginning of period......................................................... 12,584 10,030
Issuance of treasury stock........................................................... (200) (396)
Conversion of preferred stock........................................................ 135 (115)
Acquisition of subsidiaries.......................................................... - 51
Other................................................................................ 30 31
------- -------
Balance, end of period............................................................... 12,549 9,601
------- -------
Retained Earnings
Balance, beginning of period......................................................... 8,063 9,373
Net income........................................................................... 1,828 1,220
Cash dividends declared on common stock.............................................. (528) (323)
Cash dividends declared on preferred stock........................................... (2) (6)
Cash dividends declared on common stock by pooled affiliates......................... (254) (292)
Cash dividends declared on preferred stock by pooled affiliates...................... (6) (18)
Issuance of treasury stock........................................................... (5) (2)
------- -------
Balance, end of period............................................................... 9,096 9,952
Accumulated Other Adjustments to Stockholders' Equity
Fair Value Adjustment on Securities Available for Sale
Balance, beginning of period......................................................... 203 81
Change in fair value (net of taxes) and other........................................ (32) (11)
------- -------
Balance, end of period............................................................... 171 70
------- -------
Accumulated Translation Adjustment
Balance, beginning of period......................................................... 6 7
Translation gain (loss), net of taxes................................................ - (1)
------- -------
Balance, end of period............................................................... 6 6
------- -------
Total Accumulated Other Adjustments To Stockholders' Equity............................. 177 76
Deferred Compensation
Balance, beginning of period......................................................... (137) (94)
Awards granted, net of forfeitures and amortization.................................. (39) (33)
Other................................................................................ (6) (9)
------- -------
Balance, end of period............................................................... (182) (136)
------- -------
Treasury Stock
Balance, beginning of period......................................................... (2,007) (553)
Purchase of common stock............................................................. (375) (1,763)
Conversion of preferred stock........................................................ - 292
Acquisitions of subsidiaries......................................................... 2 487
Issuance of stock.................................................................... 305 542
------- -------
Balance, end of period............................................................... (2,075) (995)
------- -------
Total Stockholders' Equity, end of period............................................... $19,767 $18,983
======= =======
Total Net Income and Changes in Accumulated Other Adjustments To
Stockholders' Equity $ 1,796 $ 1,208
======= =======
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
-4-
<PAGE>
Supplemental Consolidated Statement of Cash Flows
BANK ONE CORPORATION and Subsidiaries
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30
(In millions) 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income................................................................................. $ 1,828 $ 1,220
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization........................................................... 333 342
Provision for credit losses............................................................. 791 1,063
Equity securities gains................................................................. (193) (189)
Securities gains, available for sale.................................................... (82) (37)
Net (increase) decrease in net derivative product balances.............................. (21) 300
Net (increase) in trading assets........................................................ (162) (136)
Net (increase) decrease in other assets................................................. 381 (789)
Net increase (decrease) in other liabilities............................................ 1,254 (3)
Gain on sales of banks and branch offices............................................... (198) (1)
Merger-related and restructuring charges................................................ 127 337
Other noncash adjustments............................................................... 456 (176)
-------- --------
Net cash provided by operating activities.................................................. 4,514 1,931
- ---------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Net (increase) decrease in federal funds sold and securities under resale agreements....... 128 (4,142)
Securities available for sale:
Purchase................................................................................ (16,980) (8,743)
Maturities.............................................................................. 2,648 2,675
Sales................................................................................... 12,175 7,414
Securities held to maturity:
Purchases............................................................................... - (494)
Maturities.............................................................................. 73 607
Credit card receivables securitized........................................................ 1 2,224
Net (increase) in loans.................................................................... (4,772) (6,731)
Loan recoveries............................................................................ 269 259
Additions to bank premises and equipment................................................... (338) (266)
Net cash and cash equivalents due to mergers, acquisitions and dispositions................ (1,907) 218
All other investing activities, net........................................................ (19) (851)
Net cash (used in) investing activities.................................................... (8,722) (7,830)
- ---------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net increase in deposits................................................................... 541 7,484
Net (decrease) in federal funds purchased and securities under repurchase
agreements.............................................................................. (1,259) (2,089)
Net increase in other short-term borrowings................................................ 2,963 3,629
Proceeds from issuance of long-term borrowings............................................. 11,495 9,626
Repayment of long-term debt................................................................ (11,128) (5,553)
Cash dividends paid........................................................................ (801) (647)
Purchase of treasury stock................................................................. (146) (710)
Repurchase of common stock................................................................. (229) (1,056)
All other financing activities, net........................................................ 1,873 (2,511)
-------- --------
Net cash provided by financing activities.................................................. 3,309 8,173
- ---------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents............................... 416 (48)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents....................................... (483) 2,226
Cash and cash equivalents at beginning of period........................................... 22,290 20,269
-------- --------
Cash and cash equivalents at end of period................................................. $ 21,807 $ 22,495
======== ========
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
-5-
<PAGE>
Notes to Consolidated Financial Statements
Note 1--Basis of Presentation
The consolidated financial statements for the Corporation, including its
subsidiaries, have been prepared in conformity with generally accepted
accounting principles. Such preparation requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Although the interim amounts are unaudited, they do reflect all adjustments
that, in the opinion of management, are necessary for a fair presentation of the
results of operations for the interim periods. All such adjustments are of a
normal, recurring nature. Because the results from commercial banking
operations are so closely related and responsive to changes in economic
conditions, fiscal policy and monetary policy, and because the results for the
investment security and trading portfolios are largely market-driven, the
results for any interim period are not necessarily indicative of the results
that can be expected for the entire year.
These financial statements should be read in conjunction with the supplemental
consolidated financial statements for the year ended December 31, 1997. See
Exhibit 99(a) of this Form 8-K.
Note 2--Earnings per Share
In December 1997, the Corporation adopted SFAS No. 128 "Earnings Per Share," as
required, and all prior periods presented were restated. Basic EPS is computed
by dividing income available to common stockholders by the average number of
common shares outstanding for the period. The Statement also requires
presentation of EPS assuming full dilution. The diluted EPS calculation includes
net shares that may be issued under the Employee Stock Purchase and Savings
Plan, outstanding stock options, and common shares that would result from the
conversion of convertible preferred stock and convertible debentures. In the
diluted calculation, income available to common stockholders is not reduced by
preferred stock dividend requirements related to convertible preferred stock,
since such dividends would not be paid if the preferred stock were converted to
common stock.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
(Dollars in millions, except per-share data) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic
Net income................................................... $ 895 $ 428 $1,828 $1,220
Preferred stock dividends.................................... (4) (11) (8) (24)
------ ------ ------ ------
Net income attributable to common stockholders' equity....... $ 891 $ 417 $1,820 $1,196
====== ====== ====== ======
Diluted
Net income................................................... $ 895 $ 428 $1,828 $1,220
Interest on convertible debentures, net of tax............... 2 - 3 3
Preferred stock dividends, excluding convertible Series B,
where applicable............................................. (4) (11) (6) (10)
------ ------ ------ ------
Diluted income available to common stockholders.............. $ 893 $ 417 $1,825 $1,213
====== ====== ====== ======
(In thousands)
Average shares outstanding.................................... 1,169 1,172 1,167 1,178
Dilutive Shares
Employee Stock Purchase and Savings Plan..................... 2 1 2 1
Stock options................................................ 14 19 14 19
Convertible preferred stock.................................. - - 3 22
Convertible debentures assumed to be converted............... 4 4 4 4
------ ------ ------ ------
Average shares outstanding assuming full dilution............. 1,189 1,196 1,190 1,224
====== ====== ====== ======
Earnings per share:
Basic........................................................ $0.76 $0.36 $1.56 $1.02
====== ====== ====== ======
Diluted...................................................... $0.75 $0.35 $1.53 $0.99
====== ====== ====== ======
- ----------------------------------------------------------------------------------------------------------
</TABLE>
-6-
<PAGE>
Note 3--Acquisitions
On June 12, 1998, the Corporation completed its acquisition of First Commerce
Corporation ("First Commerce") located in New Orleans, Louisiana, resulting in
the issuance of approximately 56 million shares of the Corporation's common
stock valued at $3.5 billion for all the outstanding shares of First Commerce
common stock, in a tax-free exchange. First Commerce was a multi-bank holding
company with total assets of approximately $9.3 billion and stockholders' equity
of approximately $805 million at June 12, 1998. This acquisition was accounted
for as a pooling of interests and, therefore, consolidated financial statements
have been restated for all periods presented to include the results of
operations, financial position and changes in cash flows of First Commerce.
In connection with the First Commerce merger, BANK ONE identified restructuring
and merger integration charges of $182 million ($127 million after tax), of
which $127 million was recorded as a restructuring charge, $44 million
represented integration costs, and $11 million was associated with Year 2000
compliance. The restructuring charge of $127 million associated with the First
Commerce merger consisted of employee benefits, severance and retention costs,
and other merger-related costs.
Note 4--New Accounting Pronouncements
The Corporation adopted SFAS No. 130, "Reporting Comprehensive Income," on
January 1, 1998. The Statement defines comprehensive income as including net
income and certain other items that affect stockholders' equity. The other
items include "fair value adjustment on investment securities available for
sale" and "accumulated translation adjustment," which are reported in
stockholders' equity on the Corporation's Supplemental Consolidated Balance
Sheet. The Corporation has elected to disclose these items in its Consolidated
Statement of Stockholders' Equity. Since the Statement solely relates to
display and disclosure requirements, it has no effect on the Corporation's
financial results.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This Statement requires certain
disclosures about an entity's operating segments in annual and interim financial
reports. It also requires certain related disclosures about products and
services, geographic areas and major customers. The segment and other
information disclosures are required for the year ended December 31, 1998.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." SFAS No. 132 is effective for
fiscal years beginning after December 15, 1997. SFAS No. 132 supersedes the
disclosure requirements in SFAS No. 87, "Employers' Accounting for Pensions,"
No.88, "Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits," and No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 132
addresses disclosure only. As a result, SFAS No. 132 will have no impact on
BANK ONE's consolidated financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes new accounting
and reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those derivatives at fair value.
The accounting for the gains or losses resulting from changes in the value of
those derivatives will depend on the intended use of the derivative and whether
it qualifies for hedge accounting. This Statement will significantly change the
accounting treatment for derivatives the Corporation uses in its asset and
liability management activities. The Corporation is required to adopt this
Statement on January 1, 2000. The Corporation is in the process of evaluating
the impact of this new Statement.
Note 5--Cash Flow Reporting
Loans transferred to other real estate owned were $106 million and $58 million
during the first six months of 1998 and 1997, respectively.
In connection with the First USA merger, $3.6 billion of mortgage-backed
securities were reclassified from held to maturity to available for sale during
the 1997 second quarter.
-7-
<PAGE>
In addition, noncash investing activities for the six months ended June 30,
1998, included the following transfers of securitization-related assets: (1) an
interest-only strip of $469 million was transferred from other assets to
securities available for sale and (2) certificated retained interests in credit
card securitizations of $2.4 billion were transferred from loans to securities
available for sale.
Note 6--Fair Value of Financial Instruments
The carrying values and estimated fair values of financial instruments as of
June 30, 1998, have not materially changed on a relative basis from the carrying
values and estimated fair values of financial instruments disclosed as of
December 31, 1997.
Note 7--Impaired Loans
A loan is considered impaired when it is probable that all principal and
interest amounts due will not be collected in accordance with its contractual
terms. The following tables summarize impaired loan information.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
June 30
----------------------
(In millions) 1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans with related allowance................. $ 455 $ 401
Impaired loans with no related allowance (1).......... 190 183
----- -----
Total impaired loans................................. $ 645 $ 584
===== =====
Allowance on impaired loans........................... $ 116 $ 72
===== =====
- ------------------------------------------------------------------------------------
</TABLE>
(1) Impaired loans for which the discounted cash flows, collateral value or
market price equals or exceeds the carrying value of the
loan does not require an allowance.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
(In millions) June 30 June 30
1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average impaired loans................................ $ 660 $ 512 $ 615 $ 497
Interest income recognized on impaired loans.......... 7 7 13 13
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 8--Derivative Financial Instruments
Derivative financial instruments used in trading activities are valued at
estimated fair value. Such instruments include swaps, forwards, spot, futures,
options, caps, floors and forward rate agreements and other conditional or
exchange contracts in the interest rate, foreign exchange, equity and commodity
markets. The estimated fair values are based on quoted market prices or pricing
and valuation models on a present value basis using current market information.
Realized and unrealized gains and losses are included in noninterest income as
trading profits. Where appropriate, compensation for credit risk and ongoing
servicing is deferred and recorded as income over the terms of the derivative
financial instruments.
Derivative financial instruments used in asset and liability management (ALM)
activities, principally interest rate swaps, are typically classified as
synthetic alterations or anticipatory hedges and are required to meet specific
criteria. Such interest rate swaps are designated as ALM derivatives, and are
linked to and adjust the interest rate sensitivity of a specific asset,
liability, firm commitment, or anticipated transaction or a specific pool of
transactions with similar risk characteristics. Interest rate swaps that do not
meet these and the following criteria are designated as derivatives used in
trading activities and are accounted for at estimated fair value.
Income or expense on most ALM derivatives used to manage interest rate exposure
is recorded on an accrual basis, as an adjustment to the yield of the linked
exposures over the periods covered by the contracts. This matches the income
recognition treatment of that exposure, generally assets or liabilities carried
at historical cost, which are recorded on an accrual basis. If an interest rate
swap is terminated early or dedesignated as an ALM derivative, any unrecognized
gain or loss at that point in time is deferred and amortized as an adjustment of
the yield on the linked interest rate exposure position over the remaining
periods originally covered by the swap. If all or part of a linked position is
terminated, e.g., a linked asset is sold or prepaid, or if the amount of an
anticipated transaction is likely to be less than originally expected, the
related pro rata portion of any unrecognized gain or loss on the swap is
recognized in earnings at that time, and the related pro rata portion of the
swap is subsequently accounted for at estimated fair value.
-8-
<PAGE>
Purchased option, cap and floor contracts are reported in derivative product
assets, and written option, cap and floor contracts are reported in derivative
product liabilities. For other derivative financial instruments, an unrealized
gain is reported in derivative product assets and an unrealized loss is reported
in derivative product liabilities. However, fair value amounts recognized for
derivative financial instruments executed with the same counterparty under a
legally enforceable master netting arrangement are reported on a net basis. Cash
flows from derivative financial instruments are reported net as operating
activities.
Note 9--Ratio of Earnings to Fixed Charges
The ratio of earnings to fixed charges for the six months ended June 30, 1998,
excluding interest on deposits, was 2.6x, and including interest on deposits,
was 1.6x. The ratio has been computed on the basis of the total enterprise (as
defined by the Securities and Exchange Commission) by dividing income before
fixed charges and income taxes by fixed charges. Fixed charges consist of
interest expense on all long- and short-term borrowings, excluding or including
interest on deposits.
Note 10--Contingent Liabilities
The Corporation and certain of its subsidiaries are defendants in various
lawsuits, including certain class actions, arising out of the normal course of
business, and the Corporation has received certain tax deficiency assessments.
Since the Corporation and certain of its subsidiaries, which are regulated by
one or more federal and state regulatory authorities, also are the subject of
numerous examinations and reviews by such authorities, the Corporation is and
will, from time to time, normally be engaged in various disagreements with
regulators, related primarily to banking matters. In the opinion of management
and the Corporation's general counsel, the ultimate resolution of the matters
referred to in this note will not have a material effect on the consolidated
financial statements.
-9-
<PAGE>
Supplemental Selected Statistical Information
BANK ONE CORPORATION and Subsidiaries
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Investment Securities -- Held-to-Maturity
- -----------------------------------------------------------------------------------------------------------------------------
Amortized Gross Gross
Cost Unrealized Unrealized
June 30, 1998 (In millions) (Book Value) Gains Losses Fair Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
States and political subdivisions......................... $ 379 $ 23 $ 6 $ 396
All other................................................. 312 2 7 307
------- ---- ---- -------
Total.................................................... $ 691 $ 25 $ 13 $ 703
======= ==== ==== =======
- -----------------------------------------------------------------------------------------------------------------------------
Investment Securities -- Available-for-Sale
- -----------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair Value
June 30, 1998 (In millions) Cost Gains Losses (Book Value)
-----------------------------------------------------------------------------------------------------------------------------
U.S. Treasury............................................. $ 6,548 $ 85 $ 31 $ 6,602
U.S. government agencies.................................. 10,029 98 9 10,118
States and political subdivisions......................... 1,834 60 6 1,888
Other debt securities..................................... 10,648 64 13 10,699
Equity securities (1)..................................... 1,781 134 50 1,865
------- ---- ---- -------
Total.................................................... $30,840 $441 $109 $31,172
======= ==== ==== =======
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes investments accounted for at fair value, in keeping with
specialized industry practice. The fair values of certain securities for
which market quotations were not available were estimated. In addition, the
fair values of certain securities reflect liquidity and other market-
related factors.
-10-
<PAGE>
<TABLE>
<CAPTION>
Analysis of Allowance for Credit Losses
- ----------------------------------------------------------------------------------------------------
For the six months ended June 30 June 30
(In millions) 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning of period........................................ $2,817 $2,687
Provision for credit losses......................................... 791 1,063
Charge-offs
Commercial
Domestic
Commercial...................................................... 95 75
Real estate-construction........................................ - 1
Real estate-other............................................... 6 7
Lease financing................................................. 15 5
Foreign.......................................................... 39 -
------ ------
Total commercial................................................ 155 88
Consumer
Residential mortgage............................................. 13 7
Home equity...................................................... 24 15
Automotive....................................................... 152 164
Student.......................................................... 1 -
Other............................................................ 122 128
------ ------
Total consumer.................................................. 312 314
Credit card........................................................ 658 786
------ ------
Total charge-offs............................................... 1,125 1,188
Recoveries
Commercial
Domestic
Commercial...................................................... 36 47
Real estate-construction........................................ 2 3
Real estate-other............................................... 14 13
Lease financing................................................. 2 2
Foreign.......................................................... 1 2
------ ------
Total commercial................................................ 55 67
Consumer
Residential mortgage............................................. 2 6
Home equity...................................................... 4 3
Automotive....................................................... 59 58
Student.......................................................... - -
Other............................................................ 37 36
------ ------
Total consumer................................................. 102 103
Credit card........................................................ 112 89
------ ------
Total recoveries................................................ 269 259
Net charge-offs..................................................... 856 929
Other............................................................... - 37
------ ------
Balance, end of period.............................................. $2,752 $2,858
====== ======
</TABLE>
-11-
<PAGE>
Supplemental Selected Statistical Information
BANK ONE CORPORATION and Subsidiaries
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Average Balances/Net Interest Margin/Rates
- ---------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 1998 June 30, 1997
- ---------------------------------------------------------------------------------------------------------------
(Income and rates on tax-equivalent basis) Average Average Average Average
(Dollars in millions) Balance Interest Rate Balance Interest Rate
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Short-term investments............................ $ 14,865 $ 400 5.43% $ 13,667 $ 373 5.50%
Trading assets.................................... 6,191 182 5.93 5,427 157 5.83
Investment securities
U.S. government and federal agencies............ 17,983 710 7.96 20,118 669 6.71
States and political subdivisions............... 2,296 91 7.99 2,766 117 8.53
Other........................................... 9,462 165 3.52 4,601 137 6.00
-------- ------ ----- -------- ------ -----
Total investment securities................... 29,741 966 6.55 27,485 923 6.77
Loans (1)
Commercial...................................... 78,636 3,158 8.10 73,823 $2,989 8.16
Consumer........................................ 59,691 2,714 9.17 57,048 2,601 9.19
Credit card..................................... 19,823 1,347 13.70 23,042 1,671 14.62
-------- ------ ----- -------- ------ -----
Total loans................................... 158,150 7,219 9.21 153,913 7,261 9.51
-------- ------ ----- -------- ------ -----
Total earning assets (2)...................... 208,947 8,767 8.46 200,492 8,714 8.76
Allowance for credit losses....................... (2,756) (2,679)
Other assets...................................... 33,341 29,649
-------- --------
Total assets.................................. $239,532 $227,462
======== ========
- ---------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Deposits--interest-bearing
Savings......................................... $ 21,543 248 2.32% $ 23,183 266 2.31%
Money market.................................... 38,255 726 3.83 33,302 616 3.73
Time............................................ 39,405 1,073 5.49 42,321 1,157 5.51
Foreign offices (3)............................. 17,848 465 5.25 15,393 391 5.12
-------- ------ ----- -------- ------ -----
Total deposits--interest-bearing.............. 117,051 2,512 4.33 114,199 2,430 4.29
Federal funds purchased and securities under
repurchase agreements............................ 21,383 552 5.21 21,500 557 5.22
Other short-term borrowings....................... 13,831 375 5.47 14,185 381 5.42
Long-term debt (4)................................ 22,190 710 6.45 16,887 552 6.59
-------- ------ ----- -------- ------ -----
Total interest-bearing liabilities............ 174,455 4,149 4.80 166,771 3,920 4.74
Demand deposits................................... 33,987 30,332
Other liabilities................................. 11,911 11,164
Preferred stock................................... 256 549
Common stockholders' equity....................... 18,923 18,646
-------- --------
Total liabilities and stockholders' equity.... $239,532 $227,462
======== ========
- ---------------------------------------------------------------------------------------------------------------
Interest income/earning assets (2)................ $8,767 8.46% $8,714 8.76%
Interest expense/earning assets................... 4,149 4.00 3,920 3.94
------ ----- ------ -----
Net interest margin............................... $4,618 4.46% $4,794 4.82%
====== ===== ====== =====
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Nonperforming loans are included in average balances used to determine the
average rate.
(2) Includes tax-equivalent adjustments based on a 35% federal income tax rate.
(3) Includes international banking facilities' deposit balances in domestic
offices and balances of Edge Act and overseas offices.
(4) Includes trust preferred capital securities.
-12-
<PAGE>
Exhibit 99(c)
October 6, 1998
The Audit Committee of the
Board of Directors
BANK ONE CORPORATION
One First National Plaza
Chicago, IL 60670
Members of the Audit Committee,
This letter is written to meet the requirements of Regulation S-K calling for a
letter from a registrant's independent accountants whenever there has been a
change in accounting principle or practice.
In connection with the Agreement and Plan of Merger (the "Plan"), as amended,
among First Chicago NBD Corporation ("FCNBD") and BANC ONE CORPORATION ("BANC
ONE") (the "Combination") dated April 10, 1998, the restated results of the BANK
ONE CORPORATION (the "Company") reflect the treatment of the combination as a
pooling of interests. We have been informed that in connection with the pooling
of interests business combination with FCNBD, the Company is electing to conform
the transition method of adopting SFAS 106 "Employers' Accounting for
Postretirement Benefits Other Than Pensions" as of January 1, 1993 to recognize
the entire transition obligation in the year of adoption versus amortizing the
transition obligation over 20 years. The basis for the Company's position is the
belief that the historical financial statements should reflect the combining
companies as if they had always been combined. In that circumstance, a single
transition method would have been applied. At the time of adoption, recognition
of the entire transition obligation was permitted.
A complete coordinated set of financial and reporting standards for determining
the preferability of accounting principles among acceptable alternative
principles has not been established by the accounting profession. Thus, we
cannot make an objective determination of whether the change in accounting
described in the preceding paragraph is to a preferable method. However, we have
reviewed the pertinent factors, including those related to financial reporting,
in this particular case on a subjective basis, and our opinion stated below is
based on our determination made in this manner.
We are of the opinion that the Company's change in method of accounting is to an
acceptable alternative method of accounting, which, based upon the reasons
stated for the change and our discussions with you, is also preferable under the
circumstances in this particular case. In arriving at this opinion, we have
relied on the business judgement and business planning of your management.
Very truly yours,
ARTHUR ANDERSEN LLP
