<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1997
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-11030
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First USA, Inc.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 75-2291060
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1601 Elm Street, 47th Floor, Dallas, Texas 75201
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(address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code 214-849-2000
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N/A
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Former Name, Former Address and former Fiscal Year, If Changed Since Last Report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------- ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
[CAPTION]
Class Outstanding at March 31, 1997
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Common Stock, $.01 par value 123,461,673 shares
6 1/4% Mandatory Convertible Preferred
Stock, $.01 par value 5,740,300 shares
<PAGE>
FIRST USA, INC.
FORM 10-Q QUARTERLY REPORT
Table of Contents
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PART I. F I N A N C I A L I N F O R M A T I O N Page
----
ITEM 1. FINANCIAL STATEMENTS.
Condensed Consolidated Balance Sheets -
March 31, 1997 (Unaudited) and June 30, 1996................. 3
Condensed Consolidated Statements of Income (Unaudited) -
Three and Nine Months Ended March 31, 1997 and 1996.......... 4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Nine Months Ended March 31, 1997 and 1996.................... 5
Notes to Interim Condensed Consolidated Financial
Statements (Unaudited)....................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
Financial Condition and Results of Operations................ 10
PART II. O T H E R I N F O R M A T I O N
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Index of Exhibits............................................ 21
Reports on Form 8-K.......................................... 23
SIGNATURES........................................................... 24
<PAGE>
P A R T I. F I N A N C I A L I N F O R M A T I O N
FIRST USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
March 31, June 30,
1997 1996
(Unaudited) (See Note A)
----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks $ 193,301 $ 254,553
Short-term investments 6,801 40,701
Federal funds sold 245,732 97,450
----------- -----------
Cash and cash equivalents 445,834 392,704
Investments, at cost (market value of $3,689,816 and $2,875,309
at March 31, 1997 and June 30, 1996, respectively) 3,685,815 2,903,091
Loans 4,994,421 3,564,434
Allowance for possible credit losses (124,435) (74,163)
----------- -----------
Net loans 4,869,986 3,490,271
Premises and equipment, net 116,969 116,666
Accrued interest receivable 72,963 51,558
Due from securitizations 287,300 182,462
Customer base intangible, net 29,799 70,008
Other assets 716,988 501,741
----------- -----------
$10,225,654 $7,708,501
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank notes and other borrowings $5,152,630 $3,356,506
Interest-bearing deposits 1,618,899 1,460,321
Federal funds purchased 1,516,522 1,308,460
Accrued interest payable 73,046 60,246
Accrued expenses and other liabilities 357,650 409,088
----------- -----------
8,718,747 6,594,621
----------- -----------
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely subordinated
debentures of the Company 200,000 -
Stockholders' equity
6-1/4% mandatory convertible preferred stock, $.01 par value 58 58
Common stock, $.01 par value 1,235 1,210
Additional paid-in capital 623,321 568,840
Retained earnings 682,293 543,772
----------- -----------
1,306,907 1,113,880
----------- -----------
$10,225,654 $7,708,501
=========== ===========
</TABLE>
See Notes to Interim Condensed Consolidated Financial Statements.
3
<PAGE>
FIRST USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION> Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------- -------------------------------
1996 1996
1997 As Restated 1997 As Restated
------------ ------------ ------------ ------------
(See Note A) (See Note A)
<S> <C> <C> <C> <C>
Loans $ 91,063 $ 97,596 $ 277,163 $ 255,757
Investments 57,099 46,007 161,621 131,333
Federal funds sold 5,537 1,399 11,716 5,180
------------ ------------ ------------ ------------
Total Interest Income 153,699 145,002 450,500 392,270
INTEREST EXPENSE
Bank notes and other borrowings 75,154 56,466 198,950 151,417
Deposits 25,630 26,298 69,734 90,926
Federal funds purchased 21,267 20,883 64,022 56,312
------------ ------------ ------------ ------------
Total Interest Expense 122,051 103,647 332,706 298,655
------------ ------------ ------------ ------------
NET INTEREST INCOME 31,648 41,355 117,794 93,615
PROVISION FOR POSSIBLE CREDIT LOSSES 36,928 25,704 142,305 66,607
------------ ------------ ------------ ------------
NET INTEREST INCOME (EXPENSE) AFTER PROVISION
FOR POSSIBLE CREDIT LOSSES (5,280) 15,651 (24,511) 27,008
OTHER OPERATING INCOME
Securitization income 250,030 243,176 760,300 723,950
Gain on sale of subsidiary common stock 3,435 - 110,313 -
Interchange income 9,686 12,023 35,061 19,676
Fee income 8,249 7,379 24,635 20,967
Other 17,193 29,940 98,855 77,209
------------ ------------ ------------ ------------
Total Other Operating Income 288,593 292,518 1,029,164 841,802
OTHER OPERATING EXPENSE
Postage, shipping, stationery and supplies 61,409 39,123 162,870 143,444
Salaries and employee benefits 44,421 39,988 144,675 105,946
Data processing and communications 37,986 26,474 109,589 78,658
Occupancy and equipment 15,343 12,588 48,893 34,079
Amortization of intangibles 13,345 14,080 43,880 41,778
Other 68,322 42,457 228,432 150,862
------------ ------------ ------------ ------------
Total Other Operating Expense 240,826 174,710 738,339 554,767
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES AND SUBSIDIARY
TRUST DISTRIBUTIONS 42,487 133,459 266,314 314,043
Provision for income taxes 15,330 48,460 95,599 115,082
Distributions on preferred securities of subsidiary
trust, net of taxes 3,033 - 3,403 -
------------ ------------ ------------ ------------
NET INCOME $ 24,124 $ 84,999 $ 167,312 $ 198,961
============ ============ ============ ============
Net income per share $ 0.17 $ 0.63 $ 1.22 $ 1.49
============ ============ ============ ============
Weighted average common and common
equivalent shares outstanding 139,103,428 134,130,350 137,450,101 133,388,746
============ ============ ============ ============
Cash dividends paid per common share $ 0.06 $ 0.03 $ 0.165 $ 0.09
============ ============ ============ ============
Cash dividends paid per preferred share $ 0.498 $ 0.498 $ 1.494 $ 1.494
============ ============ ============ ============
</TABLE>
See Notes to Interim Condensed Consolidated Financial Statements.
4
<PAGE>
FIRST USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
--------------------------------
1997 1996
------------ ------------
(See Note A)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 167,312 $ 198,961
Adjustments to reconcile net income to net cash provided by
operating activities:
Gain on sale of subsidiary common stock (110,313) -
Gains on securitization transactions, net of amortization 14,911 (92,907)
Provision for possible credit losses 142,305 66,607
Provision for depreciation and amortization 93,036 81,035
Equity in earnings of subsidiary (7,558) -
Net changes in operating assets and liabilities:
Accrued interest receivable (21,474) (14,439)
Accrued interest payable 13,359 (4,347)
Accrued expenses and other liabilities (19,164) 3,694
Other operating activities (224,936) 54,636
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 47,478 293,240
INVESTING ACTIVITIES
Proceeds from maturities of investments 590,308 492,754
Purchases of investments (1,398,727) (1,120,966)
Net increase in loans, excluding acquisitions and sales (5,286,865) (5,224,239)
Proceeds from sales of loans 3,740,522 4,914,292
Proceeds from sale of subsidiary common stock 144,307 -
Purchases of merchant portfolios, processing services and
other acquisitions (192,871) (39,806)
Purchases of premises and equipment (59,965) (58,237)
Other investing activities 2,401 (21,700)
------------ ------------
NET CASH USED FOR INVESTING ACTIVITIES (2,460,890) (1,057,902)
FINANCING ACTIVITIES
Dividends paid to common stockholders (20,200) (10,555)
Dividends paid to preferred stockholders (8,591) (8,591)
Issuance of common stock, net 33,556 11,739
Issuance of First USA Paymentech, Inc. common stock, net - 134,298
Net payments to trustees relating to securitizations (7,336) (3,931)
Net increase in bank notes and other borrowings 1,896,839 801,574
Net increase (decrease) in interest-bearing deposits 166,212 (499,858)
Net increase in federal funds purchased 208,062 687,285
Issuance of subsidiary trust mandatorily redeemable
preferred securities 198,000 -
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,466,542 1,111,961
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS 53,130 347,299
Cash and cash equivalents at beginning of period 392,704 236,778
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 445,834 $ 584,077
============ ============
</TABLE>
See Notes to Interim Condensed Consolidated Financial Statements.
5
<PAGE>
FIRST USA, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
First USA, Inc. and its subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. For purposes of comparability, certain prior period
amounts have been reclassified. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three months ended
March 31, 1997 are not necessarily indicative of the results that may be
expected for the fiscal year ending June 30, 1997. For further information,
refer to the consolidated financial statements and footnotes thereto included in
Amendment No. 1 on Form 10-K/A to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1996.
The Company has restated its prior period financial statements to properly
reflect the two items described below. This restatement did not effect the
Company's net cash flows, liquidity or regulatory capital compliance, nor did
the restatement have an effect on the Company's fiscal 1996 net income. The
restatement did however affect previously reported quarterly results for the
1996 fiscal year.
The Company has previously not recorded gains on securitization transactions
consistent with the Company's belief and common industry assumption that such
gains would not be significant due to the relatively short life of the
outstanding balances and the narrow spread between the account yield and the sum
of the cost of servicing these accounts and investor yield on the
securitizations. As a result of a more detailed analysis of gains on all
securitizations of credit card receivable balances performed in the preparation
for the adoption of Statement of Financial Accounting Standards ("SFAS") No.
125, which is effective January 1, 1997, the Company restated its financial
statements to recognize gains in prior periods.
In addition, the Company has been deferring the costs to solicit new accounts.
These costs were deferred and matched with the future revenues from these new
accounts over a twelve-month period. The average life of these new accounts,
including all annual renewals, is expected to be seven years. During the course
of a review of the Company's accounting policies in connection with the
Company's pending merger with BANC ONE CORPORATION ("Banc One"), the Company
learned that, while its deferred costs were paid to independent third parties,
these costs were not eligible for deferral and that its accounting policy
regarding such solicitation costs did not conform with the accounting policy of
Banc One. As a result, the Company has restated its financial statements to
expense these costs in the period such costs were incurred.
The effect of these changes for the three and nine months ended March 31, 1996
was an increase to net income of $20.9 million, or $0.15 per share, and $21.0
million, or $0.16 per share, respectively.
On October 16, 1996, the Company's Board of Directors approved a two-for-one
common stock split and increased the quarterly cash dividend to $0.06 per share
on a post-split basis. The two-for-one common stock split was effected in the
form of a 100% stock dividend payable November 12, 1996, to stockholders of
record on October 28, 1996. The financial statements presented reflect the
retroactive treatment of this stock split.
NOTE B - MERGER WITH BANC ONE CORPORATION
On January 19, 1997, the Company and Banc One entered into an Agreement and
Plan of Merger, amended as of April 23, 1997, (as amended, the "Merger
Agreement") pursuant to which the Company would merge with and into Banc One and
Banc One
6
<PAGE>
FIRST USA, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
would be the surviving corporation (the "Merger"). Pursuant to the Merger
Agreement, each share of the Company's common stock will be converted into
1.1659 shares of Banc One common stock (the "Common Exchange Ratio"). The Merger
will qualify as a tax-free reorganization under the Internal Revenue Code. Banc
One intends to account for the Merger under the pooling of interests method of
accounting.
Pursuant to the Merger Agreement, certain benefits of the Company's employees
vest upon approval of the Merger by the stockholders of the Company. In
particular, all of the Company's outstanding stock options will vest,
restrictions previously placed upon certain stock grants will lapse and the
loans pursuant to the First USA Paymentech, Inc. ("Paymentech") stock loan
program will be forgiven. The Company expects to incur additional costs related
to the Merger, all of which will be expensed upon consummation of the Merger.
The Merger is subject to approvals by the shareholders of the Company and BANC
ONE and the receipt of all required regulatory approvals. BANC ONE has received
all required regulatory approvals. The Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation and the appropriate state
banking regulators have approved the Merger or have notified BANC ONE that they
do not disapprove of the Merger, as the case may be. The Merger is expected to
close in the second quarter of calendar 1997.
NOTE C - ALLOWANCE FOR POSSIBLE CREDIT LOSSES
The activity in the allowance for possible credit losses is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------- -----------------------
1997 1996 1997 1996
--------- ------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Beginning allowance for possible credit losses $122,587 $ 70,015 $ 74,163 $ 66,000
Provision for possible credit losses 36,928 25,704 142,305 66,607
Recoveries of loans previously charged off 7,548 1,935 11,411 5,595
Loans charged off (42,628) (25,581) (103,444) (66,129)
-------- -------- --------- --------
Ending allowance for possible credit losses $124,435 $ 72,073 $ 124,435 $ 72,073
======== ======== ========= ========
Ending allowance as a % of total loans 2.5% 2.1% 2.5% 2.1%
======== ======== ========= ========
</TABLE>
The provision for possible credit losses for the nine months ended March 31,
1997 includes an increase in the allowance for possible credit losses of $50.3
million due primarily to an increase in on-balance-sheet loans.
NOTE D - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
At March 31, 1997 and June 30, 1996, the Company had interest rate swap
agreements with notional amounts totaling approximately $2.2 billion and $2.1
billion, respectively. The Company enters into interest rate swap agreements to
convert fixed rate liabilities to floating rate liabilities as an efficient
alternative to floating rate funding sources.
7
<PAGE>
FIRST USA, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE E - ASSET SECURITIZATION
The Company had outstanding securitizations of credit card loans of $18.2
billion and $15.2 billion at March 31, 1997 and June 30, 1996, respectively.
These transactions have been recorded as sales and the Company recognized gains
based upon the present value of net interest income and credit card fees less
estimated credit losses and servicing fees over the lives of the securitized
loans.
The Company adopted SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," for all securitization
transactions occurring subsequent to December 31, 1996, including transfers of
receivables pursuant to existing securitization structures that occurred after
December 31, 1996. SFAS No. 125 provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities.
In addition, the statement provides standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings and
provides implementation guidance for securitization transactions and repurchase
agreements. Because the Company restated its financial statements, and
therefore has recorded gains on securitization transactions as a result of the
restatement, the adoption of SFAS No. 125 had no material effect on the
Company's consolidated financial statements as of and for the three months ended
March 31, 1997.
NOTE F - PAYMENTECH PUBLIC OFFERING
In December 1996, Paymentech completed a public offering pursuant to which the
Company and Paymentech sold 4.4 million and 3.1 million shares of Paymentech
common stock, respectively, for $34 per share. Net proceeds to the Company from
the sale of a portion of its investment in Paymentech were $144.3 million and
the Company recognized a pre-tax gain of $110.3 million for the nine months
ended March 31, 1997, which is included in other operating income. As a result
of the offerings, the Company's ownership in Paymentech was reduced from 77% to
57%.
The Company currently accounts for its investment in Paymentech under the
equity method due to the Company's and Banc One's plans to further reduce Banc
One's ownership in Paymentech subsequent to the Merger, but only in a manner
that will preserve the "pooling of interests" accounting treatment of the
Merger, and due to the insignificance of the Company's investment in Paymentech
to its consolidated financial statements. The Company previously consolidated
Paymentech in its financial statements.
NOTE G - COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY SUBORDINATED DEBENTURES OF THE COMPANY
During the quarter ended December 31, 1996, First USA Capital Trust I (the
"Capital Trust"), a wholly owned Delaware business trust, completed a $200
million underwritten offering of 9.33% tax deductible mandatorily redeemable
preferred securities. The Capital Trust invested the proceeds from the
securities in junior subordinated debentures, due January 15, 2027, issued by
the Company. Proceeds from the sale of the junior subordinated debentures by the
Company were used for general corporate purposes, including capital
contributions to operating subsidiaries.
The Company and the Capital Trust agreed, pursuant to a registration rights
agreement, to register new capital securities that are identical in most
material respects with the Securities and Exchange Commission (the "SEC") and to
exchange the new capital securities for those that were offered in December
1996. The Company and the Capital Trust have accordingly filed a registration
statement on Form S-4 with the SEC to register the new capital securities and
expect to complete the exchange offer in the second quarter of 1997.
8
<PAGE>
FIRST USA, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE H - NET INCOME PER SHARE
Net income per share for the three and nine months ended March 31, 1997 and
1996 was calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------------------- --------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Net income $ 24,124 $ 84,999 $ 167,312 $ 198,961
============ ============ ============ ============
Average common shares outstanding 123,289,848 119,500,048 122,399,287 118,630,238
Common stock equivalents:
Stock options 6,227,279 5,047,352 5,464,513 5,175,558
Mandatory convertible preferred stock 9,586,301 9,582,950 9,586,301 9,582,950
------------ ------------ ------------ ------------
Weighted average common and common
equivalent shares outstanding 139,103,428 134,130,350 137,450,101 133,388,746
============ ============ ============ ============
Net income per share $ 0.17 $ 0.63 $ 1.22 $ 1.49
============ ============ ============ ============
</TABLE>
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is one of the nation's largest providers of Visa and MasterCard
services through its wholly owned principal operating subsidiary, First USA
Bank. First USA Bank is an issuer of Visa and MasterCard credit cards with
approximately 16.3 million credit cards issued and $22.9 billion in managed
credit card loans outstanding at March 31, 1997. First USA Bank's profitability
is affected by loan growth, interest rate spread, Cardmember usage, credit
quality and marketing expenses.
The Company's newest wholly owned operating subsidiary, First USA Federal
Savings Bank ("FSB"), conducts its operations as a direct bank, offering
customers banking products via phone, mail and other electronic distribution
channels. FSB's current offerings of financial products include mortgages, home
equity loans, auto loans, insurance and installment loans and soon are expected
to include remote banking, retail certificates of deposit and other financial
products. The Company expects that these new products will create incremental
revenue and strengthen relationships with existing customers.
First USA Paymentech, Inc. ("Paymentech"), a majority-owned subsidiary of the
Company, is the third largest payment processor of bankcard transactions in the
United States, according to published industry sources, with approximately $30.9
billion in sales volume processed in approximately 574.2 million bankcard
transactions for the fiscal year ended June 30, 1996. As a result of
Paymentech's public offerings which occurred during the quarter ended December
31, 1996, the Company's ownership in Paymentech was reduced from 77% to 57%.
MERGER WITH BANC ONE CORPORATION
On January 19, 1997, the Company and BANC ONE CORPORATION ("Banc One") entered
into an Agreement and Plan of Merger, amended as of April 23, 1997, (as amended,
the "Merger Agreement") pursuant to which the Company would merge with and into
Banc One and Banc One would be the surviving corporation (the "Merger").
Pursuant to the Merger Agreement, each share of the Company's common stock will
be converted into 1.1659 shares of Banc One common stock (the "Common Exchange
Ratio"). The Merger will qualify as a tax-free reorganization under the Internal
Revenue Code. Banc One intends to account for the Merger using the pooling of
interests method of accounting.
Pursuant to the Merger Agreement, certain benefits of the Company's employees
vest upon approval of the Merger by the stockholders of the Company. In
particular, all of the Company's outstanding stock options will vest,
restrictions previously placed upon certain stock grants will lapse and the
loans pursuant to the Paymentech stock loan program will be forgiven. The
Company expects to incur additional costs related to the Merger, all of which
will be expensed upon consummation of the Merger.
The Merger is subject to approvals by the shareholders of the Company and BANC
ONE and the receipt of all required regulatory approvals. BANC ONE has received
all required regulatory approvals. The Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation and the appropriate state
banking regulators have approved the Merger or have notified BANC ONE that they
do not disapprove of the Merger, as the case may be. The Merger is expected to
close in the second quarter of calendar 1997.
Following the Merger, Banc One intends to consolidate the management of its
credit card operations with those of the Company. Banc One may also consolidate
the operations of certain other subsidiaries or divisions of Banc One and the
Company, which provide similar services, although no final determination with
respect to such matters has been made. Following the Merger, Banc One and the
Company intend that Paymentech will continue to pursue greater operating
independence and the strategy for growth established under the Company. Banc
One has disclosed that, following the Merger, it intends to reduce its
ownership in Paymentech, but only in a manner that will preserve the "pooling of
interests" accounting treatment of the Merger.
10
<PAGE>
RESULTS OF OPERATIONS
Net income for the quarter ended March 31, 1997, was $24.1 million, or $0.17
per share, compared with restated net income of $85.0 million, or $0.63 per
share, for the quarter ended March 31, 1996. As described in Note A to the
Company's condensed consolidated financial statements, the Company restated its
prior financial statements to reflect the recognition of gains on
securitizations of credit card loans and to expense certain costs to solicit new
accounts in the period they were incurred. The effect of these changes for the
three months ended March 31, 1996 was an increase to net income of $20.9
million, or $0.15 per share. Increases in the Company's net operating results
attributable to a 27.0% growth of average managed loans were more than offset by
increased credit losses, a reduction in net gains on securitization
transactions, and increased marketing costs associated with loan solicitations.
Net income for the nine months ended March 31, 1997 was $167.3 million, or
$1.22 per share, compared with restated net income of $199.0 million, or $1.49
per share, for the nine months ended March 31, 1996. As described in Note A to
the Company's condensed consolidated financial statements, the Company restated
its prior financial statements to reflect the recognition of gains on
securitizations of credit card loans and to expense certain costs to solicit new
accounts in the period they were incurred. The effect of these changes for the
nine months ended March 31, 1996 was an increase to net income of $21.0 million,
or $0.16 per share. Included in net income for the nine months ended March 31,
1997 is a one-time charge of $15.5 million, recorded by Paymentech, related to
an acquisition. This one-time charge reduced the Company's net income by $7.4
million, or $0.06 per share. Increases in operating results attributable to a
30.2% growth of average managed loans were offset by increased credit losses, a
reduction in net gains on securitization transactions, and increased marketing
costs associated with loan solicitations. During the nine-month period ended
March 31, 1997, the Company realized a $110.3 million pre-tax gain on the sale
of a portion of its investment in Paymentech.
On-balance-sheet loans increased from $3.4 billion at March 31, 1996 to $5.0
billion as of March 31, 1997, which reflects the results of the Company's direct
solicitations, partially offset by the Company's completion of securitizations
of $5.6 billion.
NET INTEREST INCOME
For the three months ended March 31, 1997, net interest income was $31.6
million, a decrease of 23.5% from net interest income of $41.4 million for the
three months ended March 31, 1996. This decrease was due to a decrease in
interest income on loans of $6.5 million, primarily due to a decrease in yield
partially offset by growth in on-balance-sheet loans. Interest expense
increased $18.4 million due to an increase in average interest-bearing
liabilities from $7.0 billion to $8.5 billion, to supplement the funding of loan
growth, which is primarily funded by securitizations, partially offset by a
decrease in cost of funds from 5.98% to 5.85% for the three months ended March
31, 1996 and 1997, respectively. Interest income from investments, excluding
interest income from cash equivalents, increased $12.9 million due to an
increase in average investments from $2.6 billion to $3.6 billion, partially
offset by a decrease in yield from 6.82% to 6.31% for the three months ended
March 31, 1996 and 1997, respectively.
For the nine months ended March 31, 1997, net interest income was $117.8
million, an increase of 25.8% from net interest income of $93.6 million for the
nine months ended March 31, 1996. This increase was due to an increase in
interest income on loans of $21.4 million due to growth in on-balance-sheet
loans partially offset by a decrease in yield. Interest income from
investments, excluding interest income from cash equivalents, increased $33.1
million due to an increase in average investments from $2.5 billion to $3.3
billion, partially offset by a decrease in yield from 6.81% to 6.43% for the
nine months ended March 31, 1996 and 1997, respectively. Interest expense
increased $34.1 million due to an increase in average interest-bearing
liabilities from $6.4 billion to $7.6 billion, to supplement the
11
<PAGE>
NET INTEREST INCOME -- CONTINUED
funding of loan growth, which is primarily funded by securitizations. This
increase was partially offset by a decrease in cost of funds from 6.21% to 5.85%
for the nine months ended March 31, 1996 and 1997, respectively.
Net interest margin on a managed basis was 6.41% for the three months ended
March 31, 1997, compared with 6.06% for the three months ended March 31, 1996.
The increase is due to managed loan interest yield increasing from 12.72% for
the three months ended March 31, 1996 to 13.03% for the three months ended March
31, 1997, reflecting changes in the overall pricing distribution of the credit
card loan portfolio. In addition, cost of funds decreased from 5.98% for the
three months ended March 31, 1996 to 5.82% for the three months ended March 31,
1997.
For the nine months ended March 31, 1997, net interest margin on a managed
basis was 6.62%, compared with 5.75% for the nine months ended March 31, 1996.
The increase is due to managed loan interest yield increasing from 12.70% for
the nine months ended March 31, 1996 to 13.40% for the nine months ended March
31, 1997, reflecting changes in the overall pricing distribution of the credit
card loan portfolio. In addition, cost of funds decreased from 6.18% for the
nine months ended March 31, 1996 to 5.86% for the nine months ended March 31,
1997.
12
<PAGE>
The following tables provide an analysis of net interest income, average
balance sheet data, net interest margin and interest rate spread for the three-
month and nine-month periods ended March 31, 1997 and 1996.
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------------------------------------------------
1997 1996
------------------------------------ --------------------------------------
Average Average Average Average
Balance Rate Interest Balance Rate Interest
----------- ------- -------- ----------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets
Cash equivalents $ 10,863 6.20% $ 166 $ 99,752 7.91% $ 1,961
Federal funds sold 417,463 5.38 5,537 102,029 5.51 1,399
Investments 3,609,329 6.31 56,933 2,581,606 6.82 44,046
Loans 5,107,212 7.13 91,063 4,495,506 8.68 97,596
----------- ----- -------- ----------- ----- --------
Total earning assets 9,144,867 6.72% $153,699 7,278,893 7.97% $145,002
Other assets 1,234,854 1,035,701
----------- -----------
Total assets $10,379,721 $ 8,314,594
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Bank notes and other borrowings $ 5,150,548 5.92% $ 75,154 $ 3,785,644 6.00% $ 56,466
Interest-bearing deposits 1,735,017 5.99 25,630 1,671,450 6.33 26,298
Federal funds purchased 1,575,836 5.47 21,267 1,511,539 5.56 20,883
----------- ----- -------- ----------- ----- --------
Total interest-bearing liabilities 8,461,401 5.85% $122,051 6,968,633 5.98% $103,647
Other liabilities 623,872 424,439
----------- -----------
Total liabilities 9,085,273 7,393,072
Stockholders' equity 1,294,448 921,522
----------- -----------
Total liabilities and stockholders'
equity $10,379,721 $ 8,314,594
=========== ===========
Net interest margin and net interest
income (a) ----- -------- ----- --------
1.38% $ 31,648 2.27% $ 41,355
===== ======== ===== ========
Interest rate spread (b) 0.87% 1.99%
===== =====
OFF-BALANCE-SHEET TRANSACTIONS
Average securitized loans $17,775,852 14.73% $654,490 $13,518,588 14.06% $475,167
Securitized loans cost of funds 17,775,852 5.81 254,588 13,518,588 5.99 201,190
----- -------- ----- --------
Securitized loans net interest
rate spread 8.92% $399,902 8.07% $273,977
===== ======== ===== ========
INCLUDING SECURITIZED LOANS
Total earning assets $26,920,719 12.01% $808,189 $20,797,481 11.93% $620,169
Interest-bearing liabilities 26,237,253 5.82 376,639 20,487,221 5.98 304,837
----- -------- ----------- ----- --------
Net interest margin and net interest
income (a) 6.41% $431,550 6.06% $315,332
===== ======== ===== ========
Interest rate spread (b) 6.19% 5.95%
===== =====
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------------------------------------------------------
1997 1996
--------------------------------------- -------------------------------------
Average Average Average Average
Balance Rate Interest Balance Rate Interest
----------- ------- -------- ----------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets
Cash equivalents $ 48,626 7.79% $ 2,842 $ 89,033 8.42% $ 5,631
Federal funds sold 289,183 5.40 11,716 118,922 5.80 5,180
Investments 3,292,977 6.43 158,779 2,460,820 6.81 125,702
Loans 4,472,913 8.26 277,163 3,998,203 8.53 255,757
----------- ----- ---------- ----------- ------ ----------
Total earning assets 8,103,699 7.41% $ 450,500 6,666,978 7.85% $392,270
Other assets 1,270,853 1,023,776
----------- -----------
Total assets $ 9,374,552 $ 7,690,754
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Bank notes and other borrowings $ 4,459,250 5.94% $ 198,950 $ 3,231,974 6.24 $ 151,417
Interest-bearing deposits 1,559,194 5.96 69,734 1,878,018 6.44 90,926
Federal funds purchased 1,560,202 5.47 64,022 1,295,533 5.78 56,312
----------- ----- ---------- ----------- ----- ----------
Total interest-bearing liabilities 7,578,646 5.85% $ 332,706 6,405,525 6.21% $ 298,655
Other liabilities 580,896 437,932
----------- -----------
Total liabilities 8,159,542 6,843,457
Stockholders' equity 1,215,010 847,297
----------- -----------
Total liabilities and stockholders'
equity $ 9,374,552 $ 7,690,754
=========== ===========
Net interest margin and net interest ----- ---------- ----- ----------
income (a) 1.94% $ 117,794 1.87% $ 93,615
===== ========== ===== ==========
Interest rate spread (b) 1.56% 1.64%
===== =====
OFF-BALANCE-SHEET TRANSACTIONS
Average securitized loans $16,425,798 14.80% $1,822,884 $12,055,475 14.08% $1,273,193
Securitized loans cost of funds 16,425,798 5.86 722,811 12,055,475 6.17 559,035
----- ---------- ----- ----------
Securitized loans net interest rate
spread 8.94% $1,100,073 7.91% $ 714,158
===== ========== ===== ==========
INCLUDING SECURITIZED LOANS
Total earning assets $24,529,497 12.36% $2,273,384 $18,722,453 11.86% $1,665,463
Interest-bearing liabilities 24,004,444 5.86 1,055,517 18,461,000 6.18 857,690
----- ---------- ----- ----------
Net interest margin and net interest
income (a) 6.62% $1,217,867 5.75% $ 807,773
===== ========= ===== ==========
Interest rate spread (b) 6.50% 5.68%
===== =====
</TABLE>
- --------------------
(a) Net interest margin is computed by dividing net interest income by average
total earning assets.
(b) Interest rate spread is the average earning assets rate minus the average
interest-bearing liabilities rate.
14
<PAGE>
OTHER OPERATING INCOME
Other operating income was $288.6 million for the three months ended March 31,
1997 compared with $292.5 million for the three months ended March 31, 1996.
The three months ended March 31, 1997 included a $6.9 million increase in
securitization income due to additional gains on the transfers of credit card
loans pursuant to securitization structures from the 31.5% increase in average
securitized loans, offset by a reduction in the fair value of the asset recorded
as a result of such gains due to a reduction in projected interest rate spread
on the securitized loans resulting primarily from an increase in estimated
credit losses. In addition, the Company realized an increase in other operating
income resulting primarily from increased payment processing volume for
Paymentech, which was more than offset by the change in method of accounting for
Paymentech to the equity method. During the three months ended March 31, 1997,
Paymentech processed approximately $10.2 billion in sales volume in
approximately 335 million total transactions.
For the nine months ended March 31, 1997, other operating income was $1.0
billion, compared with $841.8 million for the nine months ended March 31, 1996.
The nine months ended March 31, 1997 included a $110.3 million gain of the sale
of Paymentech common stock and a $36.4 million increase in securitization
income, due to the recognition of gains on transfers of credit card loans
pursuant to securitization structures from the 36.3% increase in average
securitized loans, partially offset by a reduction in the fair value of the
asset recorded as a result of such gains due to a reduction in projected
interest rate spread on the securitized loans resulting primarily from an
increase in estimated credit losses. In addition, the Company realized a $21.6
million increase in other operating income resulting primarily from increased
payment processing volume for Paymentech, partially offset by the change in
method of accounting for Paymentech to the equity method. During the nine
months ended March 31, 1997, Paymentech processed approximately $30.3 billion in
sales volume in approximately 941 million total transactions.
OTHER OPERATING EXPENSES
Other operating expenses, excluding amortization of intangibles, increased
41.6% to $227.5 million for the three months ended March 31, 1997, versus $160.6
million for the three months ended March 31, 1996. Postage, shipping,
stationery and supplies increased $22.3 million, data processing and
communications increased $11.5 million, and other expenses increased $25.9
million due to increased marketing costs associated with loan solicitations and
increased accounts, transaction volumes and balances, related to the 27.0%
increase in average managed loans. Salaries and employee benefits increased $4.4
million primarily due to the increase in number of employees. Occupancy and
equipment expenses increased $2.8 million primarily due to facility expansions.
The increases to other operating expenses were partially offset by the Company's
change in method of accounting for Paymentech to the equity method.
Other operating expenses, excluding amortization of intangibles, increased
35.4% to $694.5 million for the nine months ended March 31, 1997, compared with
$513.0 million for the nine months ended March 31, 1996. Postage, shipping,
stationery and supplies increased $19.4 million, data processing and
communications increased $30.9 million, and other expenses, which include
Paymentech's one-time charge of $15.5 million, increased $77.6 million due
primarily to increased marketing costs associated with loan solicitations and
increased accounts, transaction volumes and balances, related to the 30.2%
increase in average managed loans. Salaries and employee benefits increased
$38.7 million primarily due to the increase in number of employees. Occupancy
and equipment expenses increased $14.8 million primarily due to facility
expansions. The increases to other operating expenses were partially offset by
the Company's change in method of accounting for Paymentech to the equity
method.
ASSET QUALITY
The Company's delinquency and net credit loss rates at any time reflect, among
other factors, the quality of the credit card loans, the average seasoning of
the Company's accounts, the success of the Company's collection efforts and
general economic conditions.
15
<PAGE>
ASSET QUALITY -- CONTINUED
As a result of a slower rate of growth, intense competition and the overall
softening in consumer credit, delinquency and net credit loss rates for the
Company trended higher during the quarter. Over the past year, new unseasoned
loans continued to become a smaller percentage of managed credit card loans,
which contributed to the increase in managed delinquency and managed credit card
loss rates. In light of these conditions, the Company continues to tighten and
refine credit underwriting. The Company believes that while recent delinquency
trends have improved due to credit tightening efforts, the net credit loss rates
continue to increase as a result of seasoning and will generally follow industry
trends. The managed delinquency rate improved to 4.96% at March 31, 1997,
compared with 5.19% at December 31, 1996. The managed net credit loss rate for
the three and nine months ended March 31, 1997 was 5.01% and 4.77%,
respectively. The Company's focus continues to be to optimize the profitability
of each account within the context of acceptable risk characteristics. The
Company has developed a credit process through the experience of numerous
marketing, credit and risk management tests which the Company believes is a
reliable basis for predicting the asset quality of new accounts. The Company
also believes that its frequent and early contact with delinquent customers, as
well as active portfolio management, has a significant impact on predicting
delinquency trends and managing net credit losses.
Delinquencies
The following table represents the delinquency trends of the Company's loans
as reported for financial purposes and for managed loans. An account is
contractually delinquent if the minimum payment is not received by the due date.
It is the Company's policy to accrue interest and fee income on all credit card
accounts, except as specified below, until the account is charged off. In
certain situations where an account becomes delinquent and a legitimate hardship
exists, a loan may qualify to be placed on nonaccrual status, provided that the
account is closed and the credit card is returned. All hardship situations
result in either a charge off of the account or a re-establishment to reliable
paying status. The Company has stringent policies governing the placement of
accounts into hardship and the ultimate disposition of these accounts.
<TABLE>
<CAPTION>
At March 31, 1997 At June 30, 1996
------------------------- ---------------------------
Percent of Percent of
Loans Total Loans Loans Total Loans
---------- ----------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Managed Loans
- -------------
Loans outstanding $23,242,476 100.00% $18,727,825 100.00%
=========== ====== =========== ======
Loans delinquent
35 to 64 days $ 347,211 1.49% $ 272,496 1.46%
65 to 94 days 213,059 0.92 159,814 0.85
95 or more days 593,511 2.55 378,193 2.02
----------- ------ ----------- -----
Total $ 1,153,781 4.96% $ 810,503 4.33%
=========== ====== =========== =====
As Reported
- -----------
Loans outstanding $ 4,994,421 100.00% $ 3,564,434 100.00%
=========== ====== =========== ======
Loans delinquent
35 to 64 days $ 51,251 1.03% $ 37,221 1.04%
65 to 94 days 30,514 0.61 21,182 0.60
95 or more days 83,340 1.67 50,497 1.42
----------- ------ ----------- ------
Total $ 165,105 3.31% $ 108,900 3.06%
=========== ====== =========== ======
</TABLE>
16
<PAGE>
Net Credit Losses
Net credit losses include the principal amount (excluding accrued finance
charges and fees) of losses resulting from Cardmembers unwilling or unable to
pay, as well as bankrupt and deceased accounts, less current period recoveries.
Loans are charged off prior to the end of the seventh billing cycle after having
become contractually past due unless a payment has been received sufficient to
bring the account into a different delinquency category or bring the account
current.
The following table presents the Company's net credit losses for the periods
indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------- ----------------------------
1997 1996 1997 1996
------------ ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Managed Loans
- -------------
Average loans outstanding $22,883,064 $18,014,094 $20,898,711 $16,053,678
Net credit losses $ 286,346 $ 151,425 $ 747,864 $ 377,268
Net credit losses as a percentage
of average loans outstanding 5.01% 3.36% 4.77% 3.13%
As Reported
- -----------
Average loans outstanding $ 5,107,212 $ 4,495,506 $ 4,472,913 $ 3,998,203
Net credit losses $ 35,080 $ 23,646 $ 92,033 $ 60,534
Net credit losses as a percentage
of average loans outstanding 2.75% 2.10% 2.74% 2.02%
</TABLE>
PROVISION AND ALLOWANCE FOR POSSIBLE CREDIT LOSSES
The provision for possible credit losses includes current period credit losses
and an amount which, in the judgment of management, is necessary to maintain the
allowance for possible credit losses at a level that reflects known and inherent
risks in the loan portfolio. For the three and nine months ended March 31,
1997, the Company's provision for possible credit losses was $36.9 million and
$142.3 million, respectively, which included charges of $1.8 million and $50.3
million, respectively, to increase the allowance for possible credit losses, due
primarily to the increase in on-balance-sheet loans. This compared to provisions
of $25.7 million and $66.6 million for the three and nine months ended March 31,
1996, respectively.
FUNDING AND LIQUIDITY
Traditional asset liquidity is provided by cash, cash equivalents and
investments. These items represented 40.4%, 42.8%, and 44.3% of the Company's
assets as of March 31, 1997, June 30, 1996, and March 31, 1996, respectively.
The Company had securitized loans of $18.2 billion, $15.2 billion and $14.9
billion at March 31, 1997, June 30, 1996, and March 31, 1996, respectively.
During the nine months ended March 31, 1997, the Company completed
securitizations of approximately $3.9 billion. At March 31, 1997, securitized
loans had a weighted average remaining life of 3.5 years. The market for
securities backed by receivables is a reliable, efficient and cost-effective
source of funds, which the Company plans to continue to use as a source of
funding.
17
<PAGE>
FUNDING AND LIQUIDITY -- CONTINUED
When securitized loans amortize, First USA Bank's funding requirements
increase accordingly. The Company plans to fund future amortization of
securitizations through additional securitizations of loans, issuance of bank
and deposit notes, acceptance of additional deposits and the use of other bank
liabilities.
The Company had $2.6 billion and $1.9 billion in bank notes outstanding at
March 31, 1997 and June 30, 1996, respectively. At March 31, 1997, bank notes
had average maturities of 1.7 years. In addition, the Company had approximately
$1.3 billion and $1.0 billion of term federal funds purchased at March 31, 1997
and June 30, 1996, respectively. The average maturities of the term federal
funds purchased were 3 months at March 31, 1997.
Interest-bearing deposits, which primarily represent brokered and directly
placed deposits, totaled $1.6 billion at March 31, 1997 and $1.5 billion at June
30, 1996. The maturity distribution for interest-bearing deposits equal to or
more than $100,000 is set forth in the following table.
<TABLE>
<CAPTION>
At March 31, 1997
----------------------------
Amount Percent
----------- -------
(Dollars in thousands)
<S> <C> <C>
Equal to or more than $100,000
- ------------------------------
Less than three months $ 389,481 24.06%
Three to nine months 406,691 25.12
Nine to twelve months 335,657 20.73
More than twelve months 487,070 30.09
----------- ------
$ 1,618,899 100.00%
=========== ======
</TABLE>
In December 1995, First USA Financial, Inc., the Company's wholly owned
subsidiary, entered into a $300 million, five-year, unsecured revolving credit
facility with a bank syndicate. The credit facility bears interest based on
LIBOR plus 0.25% to 0.65% and commitment fees ranging from 0.125% to 0.25% on
the unused portion based on First USA Financial, Inc.'s debt to capitalization
ratio. The revolving credit facility provides a source of additional liquidity
to manage cash flow, provide capital to subsidiaries for expansion and for other
corporate uses. At March 31, 1997, there were no borrowings under the revolving
credit facility.
At March 31, 1997, the Company had interest rate swap agreements with
commercial banks having a total notional principal amount of $2.2 billion. The
Company enters into interest rate swap agreements to convert fixed rate
liabilities to floating rate liabilities as an efficient alternative to issuing
floating rate funding sources.
In December 1996, Paymentech completed a public offering pursuant to which the
Company and Paymentech sold 4.4 million and 3.1 million shares of Paymentech
common stock, respectively, for $34 per share. Net proceeds to the Company from
the sale of a portion of its investment in Paymentech were $144.3 million and
the Company recognized a pre-tax gain of $110.3 million. As a result of the
offerings, the Company's ownership in Paymentech was reduced from 77% to 57%.
The Company currently accounts for its investment in Paymentech under the
equity method due to the Company's and Banc One's plans to further reduce
ownership in Paymentech subsequent to the Merger, but only in a manner that will
preserve "pooling of interests" accounting treatment of the Merger, and due to
the insignificance of the Company's investment in Paymentech to its consolidated
financial statements. The Company previously consolidated Paymentech in its
financial statements.
18
<PAGE>
FUNDING AND LIQUIDITY -- CONTINUED
During December 1996, First USA Capital Trust I (the "Capital Trust"), a
wholly owned Delaware business trust, completed a $200 million underwritten
offering of 9.33% tax deductible mandatorily redeemable preferred securities.
The Capital Trust invested the proceeds from the securities in junior
subordinated debentures, due January 15, 2027, issued by the Company. Proceeds
from the sale of the junior subordinated debentures by the Company were used for
general corporate purposes, including capital contributions to operating
subsidiaries.
The Company and the Capital Trust agreed, pursuant to a registration rights
agreement, to register new capital securities that are identical in most
material respects with the SEC and to exchange the new capital securities for
those that were offered in December 1996. The Company and the Capital Trust have
accordingly filed a registration statement on Form S-4 with the SEC to register
the new capital securities and expect to complete the exchange offer in the
second quarter of 1997.
During fiscal 1994, the Company issued 5.75 million shares of 6 1/4% mandatory
convertible preferred stock. As required by the Merger Agreement, the Company
has called for redemption all of the shares of the Company's preferred stock on
and as of May 20, 1997, the date on which the preferred stock becomes
convertible at the option of the Company. Upon such redemption, all such shares
of preferred stock will be exchanged for shares of the Company's common stock
and accordingly no shares of the Company's preferred stock will be outstanding
on the effective date of the Merger.
INVESTMENTS
The Company's investments, which totaled $3.7 billion and $2.9 billion at
March 31, 1997 and June 30, 1996, respectively, consist primarily of variable
rate U.S. government agency mortgage-backed securities which enhance yield and
provide a source of secondary liquidity through repurchase agreements and are
primarily classified as held-to-maturity. The average maturity based on
historical payment rates of the investment portfolio at March 31, 1997 was
approximately 6.5 years.
The following table presents maturities of the investment portfolio at March
31, 1997 and reflects scheduled payments and expected prepayments based on
historical payment rates.
<TABLE>
<CAPTION>
Amount Percentage Yield
--------- ---------- -----
(Dollars in thousands)
<S> <C> <C> <C>
Within 1 year $ 473,223 12.84% 6.38%
1 - 5 years 1,436,598 38.98 6.35
5 - 10 years 923,024 25.04 6.36
After 10 years 852,970 23.14 6.32
----------- ------ ----
Total carrying value $ 3,685,815 100.00% 6.35%
=========== ====== ====
</TABLE>
CAPITAL ADEQUACY
The Company's stockholders' equity increased to $1.3 billion at March 31,
1997, compared with $1.1 billion at June 30, 1996, primarily as a result of
retained earnings. In addition, the Company's tangible equity increased to $1.3
billion at March 31, 1997, from $955.0 million at June 30, 1996.
First USA Bank's stockholder's equity increased from $0.9 billion at June 30,
1996 to $1.3 billion at March 31, 1997, primarily as a result of capital
contributions from the Company of $250 million and retained earnings, partially
offset by dividends paid to the Company. First USA Bank is subject to the
capital adequacy guidelines adopted by the Federal Deposit Insurance
Corporation. At March 31, 1997, First USA Bank's risk-based total capital ratio
was 24.56%, its Tier 1 capital ratio was 20.69%, and its leverage ratio was
12.13%. At March 31, 1997, First USA Bank met the requirements of a "well
capitalized" institution.
19
<PAGE>
INCOME TAXES
The Company's consolidated provision for income taxes includes state and
federal income tax components. The Company's effective income tax rate was
36.1% and 35.9% for the three and nine months ended March 31, 1997,
respectively, compared with 36.3% and 36.6% for the three and nine months ended
March 31, 1996, respectively. The decrease in effective rate is due primarily
to the change in the method of accounting for Paymentech to the equity method.
CAPITAL EXPENDITURES
The Company spent $77.1 million and $60.0 million for capital expenditures for
fiscal 1996 and the nine months ended March 31, 1997, respectively. Capital
expenditures are made generally to accommodate growth in loans and provide for
increased operating efficiencies. In addition, the Company has incurred capital
expenditures related to facility expansions and additions.
SELECTED RATIOS
The following table presents certain financial ratios for the Company and
First USA Bank for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
-------- -------- -------- --------
1997 1996 (a) 1997 1996 (a)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
First USA, Inc.
Return on assets (b) 0.93% 4.09% 2.49% 3.45%
Return on stockholders' equity (b) 7.45 36.90 19.18 31.31
Average stockholders' equity to
average assets 12.47 11.08 12.96 11.02
First USA Bank
Return on assets 1.25% 4.46% 2.20% 3.87%
Return on stockholder's equity 9.87 44.84 18.24 40.21
Average stockholder's equity to
average assets 12.64 9.95 12.05 9.62
Net interest margin (managed) 6.41 6.07 6.63 5.75
</TABLE>
(a) As described in Note A to the Company's Notes to Interim Condensed
Consolidated Financial Statements, the data for the three and nine months
ended March 31, 1996 has been restated to reflect the recognition of gains
on the securitization of credit card loans and to expense certain costs to
solicit new accounts in the period they were incurred. The effects of these
restatements on the three and nine months ended March 31, 1996 was an
increase to net income of $20.9 million, or $0.15 per share, and $21.0
million, or $0.16 per share, respectively.
(b) Data for the nine months ended March 31, 1997, excludes Paymentech's one-
time merger, integration and impairment charge of $15.5 million. This one-
time charge reduced the Company's net income for the first fiscal quarter
by $7.4 million, or $0.06 per share.
20
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
The following exhibits are incorporated by reference or filed herewith:
Exhibit Number Description
- -------------- -----------
2.1 Agreement and Plan of Merger dated as of January 19, 1997 by and
between BANC ONE CORPORATION and First USA, Inc., filed as
Exhibit 2.1 on the Company's Current Report on Form 8-K, filed
on January 28, 1997 and incorporated by reference herein.
2.2 Amendment dated as of April 23, 1997 to Agreement and Plan of
Merger dated January 19, 1997, by and between BANC ONE
CORPORATION and First USA, Inc., filed as Exhibit 2.2 to BANC
ONE CORPORATION's Current Report on Form 8-K dated April 24,
1997 and incorporated by reference herein.
3.1 Restated Certificate of Incorporation of the Company, filed as
Exhibit 3.1.1 to the Company's Annual Report on Form 10-K for
the Company's Fiscal Year Ended June 30, 1992 and incorporated
by reference herein.
3.1.1 Certificate of Correction of the Restated Certificate of
Incorporation of the Company, filed as Exhibit 3.1.1 to the
Company's Quarterly Report on Form 10-Q for the Fiscal Quarter
ended December 31, 1993 and incorporated by reference herein.
3.1.2 Certificate of Amendment to the Restated Certificate of
Incorporation of the Company, filed as Exhibit 3.1.2 to the
Company's Quarterly Report on Form 10-Q for the Fiscal Quarter
ended December 31, 1993 and incorporated by reference herein.
3.2 By-Laws of the Company, filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (No. 33-45110) and
incorporated by reference herein.
4.1 Certificate of the Powers, Designations, Preferences and Rights
of the 6 1/4% PRIDES, Mandatory Convertible Preferred Stock,
filed as Exhibit 4.1 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1996 and incorporated by
reference herein.
21
<PAGE>
4.2 Form of Global Bank Note, Floating Rate, filed as Exhibit 4.3 to
the Company's Quarterly Report on Form 10-Q for the Fiscal
Quarter ended December 31, 1995 and incorporated by reference
herein.
4.3 Form of Global Bank Note, Fixed Rate, filed as Exhibit 4.4 to
the Company's Quarterly Report on Form 10-Q for the Fiscal
Quarter ended December 31, 1995 and incorporated by reference
herein.
4.4 Form of Global Deposit Note, Floating Rate, filed as Exhibit 4.5
to the Company's Quarterly Report on Form 10-Q for the Fiscal
Quarter ended December 31, 1995 and incorporated by reference
herein.
4.5 Form of Global Deposit Note, Fixed Rate, filed as Exhibit 4.6 to
the Company's Quarterly Report on Form 10-Q for the Fiscal
Quarter ended December 31, 1995 and incorporated by reference
herein.
4.6 Indenture dated as of December 20, 1996 between the Company and
The Bank of New York, as trustee, relating to the Company's
Series A Junior Subordinated Deferrable Interest Debentures due
2027, filed as Exhibit 4.6 to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended December 31, 1996 and
incorporated by reference herein.
4.7 Form of Certificate of the Company's Series A Junior
Subordinated Deferrable Interest Debentures due 2027, filed as
Exhibit 4.7 to the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended December 31, 1996 and incorporated by
reference herein.
4.8 Amended and Restated Declaration of Trust of First USA Capital
Trust I dated as of December 20, 1996 among the administrative
trusses, The Bank of New York (Delaware) as Delaware trustee,
The Bank of New York, as property trustee and First USA, Inc. as
sponsor, filed as Exhibit 4.8 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended December 31, 1996 and
incorporated by reference herein.
10.1 Stock Option Agreement, dated January 19, 1997, between First
USA, Inc., as issuer, and BANC ONE CORPORATION, as grantee,
filed as Exhibit 99.1 on the Company's Current Report on Form 8-
K, filed on January 28, 1997 and incorporated by reference
herein.
10.2 Stock Option Agreement, dated January 19, 1997, between BANC ONE
CORPORATION, as issuer, and First USA, Inc., as grantee, filed
as Exhibit 99.2 on the Company's Current Report on Form 8-K,
filed on January 28, 1997 and incorporated by reference herein.
10.3 Pooling and Servicing Agreement, dated as of December 3, 1996,
between First USA Securitization Corporation, as Transferor,
First USA Federal Savings Bank, as Servicer, and Bankers Trust
(Delaware), as Trustee, filed as Exhibit 99 on the Company's
Current Report on Form 8-K, filed on January 2, 1997 and
incorporated by reference herein.
10.4 Series 1997-1 Supplement, dated as of February 4, 1997, to the
Pooling and Servicing Agreement, dated as of September 1, 1992,
between First USA Bank, as Transferor and Servicer, and The Bank
of New York (Delaware), as Trustee, filed as Exhibit 99 to the
Company's Current Report on Form 8-K filed on February 12, 1997
and incorporated by reference herein.
10.5 Pooling & Servicing Agreement, dated as of March 7, 1997,
between First USA Federal Savings Bank, as Transferor and
Servicer, and Bankers Trust (Delaware), as Trustee, filed as
Exhibit 99 to the Company's Current Report on Form 8-K filed on
April 9, 1997 and incorporated by reference herein.
22
<PAGE>
11* Computation of Net Income per Share.
27* Financial Data Schedule
- ------------
* Filed herewith.
b. Reports on Form 8-K filed during the quarter ended March 31, 1997:
Form 8-K filed January 2, 1997:
Item 5. Other Events - Securitization of credit card receivables
Item 7. Financial Information and Exhibits
Form 8-K filed January 28, 1997:
Item 5. Other Events - Merger Agreement with BANC ONE CORPORATION
Item 7. Financial Information and Exhibits
Form 8-K filed February 12, 1997:
Item 5. Other Events - Securitization of credit card receivables
Item 7. Financial Information and Exhibits
Reports on Form 8-K filed subsequent to the quarter ended March 31, 1997:
Form 8-K filed April 9, 1997:
Item 5. Other Events - Securitization of credit card receivables
Item 7. Financial Information and Exhibits
Form 8-K filed April 24, 1997:
Item 5. Other Events - Restatement of prior financial statements and
amendment to the Merger Agreement with BANC ONE CORPORATION
Form 8-K filed April 25, 1997:
Item 5. Other Events - Announcement of Redemption of 6 1/4% Mandatory
Convertible Preferred Stock, $0.01 par value
Item 7. Financial Information and Exhibits
23
<PAGE>
SIGNATURES
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 thereunto duly authorized.
Date: May 15, 1997
FIRST USA, INC.
By: /s/ Jack M. Antonini
-------------------------------------------
Jack M. Antonini
Vice Chairman and Chief Financial Officer
(Principal Financial Officer and Duly Authorized
Officer)
24
<PAGE>
INDEX OF EXHIBITS
-----------------
Exhibit Number Description of Exhibit
- -------------- ----------------------
11 Computation of Net Income Per Share.
27 Financial Data Schedule.
25
<PAGE>
EXHIBIT 11
FIRST USA, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE
Three and Nine Months Ended March 31, 1997 and 1996
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------ ------------------------------
1997 1996 1997 1996
------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Primary
- -------
Net income $ 24,124 $ 84,999 $ 167,312 $ 198,961
============ ============ ============ ============
Weighted average common and common
equivalent shares outstanding
Average common shares outstanding 123,289,848 119,500,048 122,399,287 118,630,238
Common stock equivalents:
Stock options 6,227,279 5,047,352 5,464,513 5,175,558
Mandatory convertible preferred stock 9,586,301 9,582,950 9,586,301 9,582,950
------------ ------------ ------------ ------------
Weighted average common and common
equivalent shares 139,103,428 134,130,350 137,450,101 133,388,746
============ ============ ============ ============
Net income per share $ 0.17 $ 0.63 $ 1.22 $ 1.49
============ ============ ============ ============
Fully diluted
- -------------
Net income $ 24,124 $ 84,999 $ 167,312 $ 198,961
============ ============ ============ ============
Weighted average common and common
equivalent shares outstanding
Average common shares outstanding 123,289,848 119,500,048 122,399,287 118,630,238
Common stock equivalents:
Stock options 6,232,414 5,485,584 6,354,044 5,760,554
Mandatory convertible preferred stock 9,586,301 9,582,950 9,586,301 9,582,950
------------ ------------ ------------ ------------
Weighted average common and common
equivalent shares 139,108,563 134,568,582 138,339,632 133,973,742
============ ============ ============ ============
Net income per share assuming full dilution $ 0.17 $ 0.63 $ 1.21 $ 1.49
============ ============ ============ ============
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 193,301
<SECURITIES> 3,685,815
<RECEIVABLES> 4,994,421
<ALLOWANCES> 124,435
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 116,969
<DEPRECIATION> 0
<TOTAL-ASSETS> 10,225,654
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 6,771,529
0
58
<COMMON> 1,235
<OTHER-SE> 1,305,614
<TOTAL-LIABILITY-AND-EQUITY> 10,225,654
<SALES> 0
<TOTAL-REVENUES> 1,479,664
<CGS> 0
<TOTAL-COSTS> 1,071,045
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 142,305
<INTEREST-EXPENSE> 0<F2>
<INCOME-PRETAX> 262,911
<INCOME-TAX> 95,599
<INCOME-CONTINUING> 167,312
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 167,312
<EPS-PRIMARY> 1.22
<EPS-DILUTED> 0<F3>
<FN>
<F1>THE CONSOLIDATED BALANCE SHEET INCLUDED IN THE REGISTRANT'S QUARTERLY REPORT ON
FORM 10-Q IS UNCLASSIFIED.
<F2>INTEREST EXPENSE IS CONSIDERED AN OPERATING EXPENSE FOR THE REGISTRANT AS THE
REGISTRANT'S PRIMARY SOURCE OF INCOME IS INTEREST EARNED ON CREDIT CARD LOANS.
<F3>EPS ON A FULLY DILUTED BASIS IS NOT PRESENTED.
</FN>
</TABLE>
