<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. 1
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1996
----------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-11030
---------------------
First USA, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 75-2291060
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1601 Elm Street, 47th Floor, Dallas, Texas 75201
- --------------------------------------------------------------------------------
(address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code 214-849-2000
----------------
N/A
- --------------------------------------------------------------------------------
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.
<TABLE>
<CAPTION>
Class Outstanding at December 31, 1996
- ---------------------------------------- ------------------------------------
<S> <C>
Common Stock, $.01 par value 123,016,240 shares
6 1/4% Mandatory Convertible Preferred
Stock, $.01 par value 5,750,000 shares
</TABLE>
<PAGE>
EXPLANATORY NOTE
As described in Note A to the Company's consolidated financial statements, the
Company has restated its financial statements to properly reflect the two items
described below. The restatement did not affect the Company's net cash flows,
liquidity or regulatory capital compliance, nor did the restatement have an
effect on the Company's fiscal year 1996 and 1995 net income. The restatement
did however have an effect on previously reported quarterly results for the 1996
and 1995 fiscal years.
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 in connection with the
preparation of the adoption of Statement of Financial Accounting Standards No.
125, which is effective January 1, 1997, the Company has restated its financial
statements to recognize gains in those periods where the gains were significant.
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.
These changes had no material effect on net income for the six months ended
December 31, 1995, and the three and six months ended December 31, 1996. The
effect of these changes on the three months ended December 31, 1995 was to
increase net income by $7.2 million, or $0.06 per share.
This Amendment No.1 on Form 10-Q/A to the Quarterly Report on Form 10-Q of the
Company for the fiscal quarter ended December 31, 1996 contains restated
financial statements (Item 1) and management's discussion and analysis of
financial condition and results of operations (Item 2) resulting from the above
changes. Each of the items included herein has been restated in full.
<PAGE>
FIRST USA, INC.
FORM 10-Q/A QUARTERLY REPORT
Amendment No. 1
Table of Contents
-----------------
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
----
<S> <C> <C>
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets -
December 31, 1996 (Unaudited) and June 30, 1996.......................... 3
Condensed Consolidated Statements of Income (Unaudited) -
Three and Six Months Ended December 31, 1996 and 1995.................... 4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Six Months Ended December 31, 1996 and 1995.............................. 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. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Index of Exhibits........................................................ 24
Reports on Form 8-K...................................................... 26
Signatures ....................................................................... 27
</TABLE>
<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>
December 31, June 30,
1996 1996
-------------- --------------
(Unaudited) (See Note A)
<S> <C> <C>
ASSETS
Cash and due from banks $ 173,626 $ 254,553
Short-term investments 2,473 40,701
Federal funds sold 330,200 97,450
-------------- --------------
Cash and cash equivalents 506,299 392,704
Investments, at cost (market value of $3,611,310 and $2,875,309
at December 31, 1996 and June 30, 1996, respectively) 3,608,418 2,903,091
Loans 5,195,859 3,564,434
Allowance for possible credit losses (122,587) (74,163)
-------------- --------------
Net loans 5,073,272 3,490,271
Premises and equipment, net 113,322 116,666
Accrued interest receivable 72,845 51,558
Due from securitizations 186,736 182,462
Customer base intangible, net 42,830 70,008
Other assets 674,857 501,741
-------------- --------------
$ 10,278,579 $ 7,708,501
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank notes and other borrowings $ 5,121,683 $ 3,356,506
Interest-bearing deposits 1,705,124 1,460,321
Federal funds purchased 1,536,450 1,308,460
Accrued interest payable 68,926 60,246
Accrued expenses and other liabilities 368,046 409,088
-------------- --------------
8,800,229 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 1,231 1,210
Additional paid-in capital 608,629 568,840
Retained earnings 668,432 543,772
-------------- --------------
1,278,350 1,113,880
-------------- --------------
$ 10,278,579 $ 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 Six Months Ended
December 31, December 31,
--------------------------- ---------------------------
1996 1995 1996 1995
As Restated As Restated
------------ ------------ ------------ ------------
(See Note A) (See Note A)
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $ 98,271 $ 86,153 $ 186,100 $ 158,161
Investments 54,152 44,920 104,522 85,326
Federal funds sold 4,220 1,488 6,179 3,781
------------ ------------ ------------ ------------
Total Interest Income 156,643 132,561 296,801 247,268
INTEREST EXPENSE
Bank notes and other borrowings 68,744 51,717 123,796 94,951
Deposits 23,341 31,936 44,104 64,628
Federal funds purchased 22,642 20,314 42,755 35,429
------------ ------------ ------------ ------------
Total Interest Expense 114,727 103,967 210,655 195,008
------------ ------------ ------------ ------------
NET INTEREST INCOME 41,916 28,594 86,146 52,260
PROVISION FOR POSSIBLE CREDIT LOSSES 75,750 19,672 105,377 40,903
------------ ------------ ------------ ------------
NET INTEREST INCOME (EXPENSE) AFTER PROVISION
FOR POSSIBLE CREDIT LOSSES (33,834) 8,922 (19,231) 11,357
OTHER OPERATING INCOME
Securitization income 256,398 248,647 510,270 480,774
Gain on sale of subsidiary common stock 106,878 - 106,878 -
Interchange income 13,843 4,335 25,375 7,653
Fee income 9,938 7,107 16,386 13,588
Other 37,505 27,049 81,662 47,269
------------ ------------ ------------ ------------
Total Other Operating Income 424,562 287,138 740,571 549,284
OTHER OPERATING EXPENSE
Postage, shipping, stationery and supplies 51,514 44,561 101,461 104,321
Salaries and employee benefits 49,738 34,714 100,254 65,958
Data processing and communications 37,052 28,435 71,603 52,184
Occupancy and equipment 17,775 11,505 33,550 21,491
Amortization of intangibles 15,384 13,925 30,535 27,698
Other 95,936 58,344 160,110 108,405
------------ ------------ ------------ ------------
Total Other Operating Expense 267,399 191,484 497,513 380,057
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES AND SUBSIDIARY
TRUST DISTRIBUTIONS 123,329 104,576 223,827 180,584
Provision for income taxes 43,827 38,418 80,269 66,622
Distributions on preferred securities of subsidiary trust,
net of taxes 370 370
------------ ------------ ------------ ------------
NET INCOME $ 79,132 66,158 143,188 113,962
============ ============ ============ ============
Net income per share $ 0.58 $ 0.50 $ 1.05 $ 0.86
============ ============ ============ ============
Weighted average common and common
equivalent shares outstanding 136,960,979 133,294,990 136,056,694 133,030,744
============ ============ ============ ============
Cash dividends paid per common share $ 0.06 $ 0.03 $ 0.105 $ 0.06
============ ============ ============ ============
Cash dividends paid per preferred share $ 0.498 $ 0.498 $ 0.996 $ 0.996
============ ============ ============ ============
</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>
Six Months Ended
December 31,
--------------------------------
1996 1995
------------- ------------
(See Note A)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 143,188 $ 113,962
Adjustments to reconcile net income to net cash provided by
operating activities:
Gain on sale of subsidiary common stock (106,878) -
Gains on securitization transactions, net of amortization (2,967) (71,163)
Provision for possible credit losses 105,377 40,903
Provision for depreciation and amortization 70,104 51,241
Equity in earnings of subsidiary (3,306) -
Net changes in operating assets and liabilities:
Accrued interest receivable (21,356) (10,302)
Accrued interest payable 9,239 7,355
Accrued expenses and other liabilities (8,768) (25,879)
Other operating activities (59,651) 96,469
------------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 124,982 202,586
INVESTING ACTIVITIES
Proceeds from maturities of investments 421,249 290,373
Purchases of investments (1,145,436) (631,146)
Net increase in loans, excluding acquisitions and sales (4,393,436) (4,242,418)
Proceeds from sales of loans 2,684,040 3,806,559
Proceeds from sale of subsidiary common stock 139,814 -
Purchases of merchant portfolios, processing services and other acquisitions (192,871) (39,118)
Purchases of premises and equipment (48,927) (34,190)
Other investing activities 124 (12,872)
------------- ------------
NET CASH USED FOR INVESTING ACTIVITIES (2,535,443) (862,812)
FINANCING ACTIVITIES
Dividends paid to common stockholders (12,801) (6,976)
Dividends paid to preferred stockholders (5,727) (5,727)
Issuance of common stock, net 27,601 3,826
Net payments to trustees relating to securitizations (4,336) (3,171)
Net increase in bank notes and other borrowings 1,840,892 757,829
Net increase (decrease) in interest-bearing deposits 252,437 (337,028)
Net increase in federal funds purchased 227,990 498,985
Issuance of subsidiary trust mandatorily redeemable preferred securities 198,000 -
------------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,524,056 907,738
------------- ------------
INCREASE IN CASH AND CASH EQUIVALENTS 113,595 247,512
Cash and cash equivalents at beginning of period 392,704 236,778
------------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 506,299 $ 484,290
============= ============
</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
December 31, 1996 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 financial statements to properly reflect the two
items described below. The restatement did not affect the Company's net cash
flows, liquidity or regulatory capital compliance, nor did the restatement have
an effect on the Company's fiscal year 1996 and 1995 net income. The restatement
did however have an effect on previously reported quarterly results for the 1996
and 1995 fiscal years.
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 in connection with the
preparation of the adoption of Statement of Financial Accounting Standards No.
125, which is effective January 1, 1997, the Company has restated its financial
statements to recognize gains in those periods where the gains were
significant.
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.
These changes had no material effect on net income for the six months ended
December 31, 1995, and the three and six months ended December 31, 1996, and
increased net income by $7.2 million, or $0.06 per share for the three months
ended December 31, 1995.
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 paid on 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 - Proposed Merger with Banc One Corporation
On January 19, 1997, the Company and Banc One entered into an Agreement and
Plan of Merger (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
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, the receipt of all required regulatory approvals and the making of all
necessary governmental filings. The Merger is expected to close in the second
quarter of calendar 1997.
6
<PAGE>
FIRST USA, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note C - Allowance for Possible Credit Losses
The activity in the allowance for possible credit losses is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
--------------------- -----------------------
1996 1995 1996 1995
--------- -------- ---------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Beginning allowance for possible credit losses $ 76,617 $ 68,000 $ 74,163 $ 66,000
Provision for possible credit losses 75,750 19,672 105,377 40,903
Recoveries of loans previously charged off 2,259 5,136 4,203 6,738
Loans charged off (32,039) (22,793) (61,156) (43,626)
---------- --------- ----------- ----------
Ending allowance for possible credit losses $ 122,587 $ 70,015 $ 122,587 $ 70,015
========== ========== =========== ==========
Ending allowance as a % of total loans 2.4 % 1.9 % 2.4 % 1.9 %
========== ========== =========== ==========
</TABLE>
The provision for possible credit losses for the six months ended December 31,
1996 includes an increase in the allowance for possible credit losses of $48.4
million due primarily to an increase in on-balance-sheet loans.
Note D - Financial Instruments with Off-Balance Sheet Risk
At December 31, 1996 and June 30, 1996, the Company had interest rate swap
agreements with notional amounts totaling $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.
Note E - Asset Securitization
The Company had outstanding securitizations of credit card loans of $17.2
billion and $15.2 billion at December 31, 1996 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.
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,"
which provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishment 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. The
statement is effective for transactions occurring subsequent to
December 31,1996.
7
<PAGE>
FIRST USA, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note E - Asset Securitization -- continued
The Company is currently evaluating the effect of this statement on its
prospective consolidated financial statements and anticipates no material
effects on its financial statements as a result of adopting SFAS No. 125. The
Company will adopt the statement for all securitization transactions occurring
subsequent to December 31, 1996, including transfers of receivables pursuant to
existing securitization structures that occur after December 31, 1996.
Note F - Paymentech Public Offering
In December 1996, Paymentech completed a public offering pursuant to which the
Company and Paymentech sold approximately 4.4 million and 3.1 million shares of
Paymentech common stock, respectively, for $34 per share. During the second
fiscal quarter, net proceeds to the Company from the sale of a portion of its
investment in Paymentech were $139.8 million and the Company recognized a pre-
tax gain of $106.9 million, 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 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 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 redeemable preferred
securities. The Capital Trust invested the proceeds from the redeemable
preferred 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.
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 is calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
-------------------------------- --------------------------------
1996 1995 1996 1995
--------------- ------------- -------------- --------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Net income $ 79,132 $ 66,158 143,188 $ 113,962
============== =============== ============== ===============
Average common shares outstanding 122,439,385 118,498,574 121,957,937 118,199,336
Common stock equivalents:
Stock options 4,938,644 5,213,466 4,515,807 5,248,458
Mandatory convertible preferred stock 9,582,950 9,582,950 9,582,950 9,582,950
-------------- --------------- -------------- ---------------
Weighted average common and common
equivalent shares outstanding 136,960,979 133,294,990 136,056,694 133,030,744
============== =============== ============== ===============
Net income per share $ 0.58 $ 0.50 1.05 $ 0.86
============== =============== ============== ===============
</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 15.9 million credit cards issued and $22.2 billion in managed
credit card loans outstanding at December 31, 1996. 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,
limited testing of auto and homeowners' insurance and unsecured installment
loans and soon is expected to include remote banking, retail certificates of
deposit, auto loans and other financial products.
First USA Paymentech, Inc. ("Paymentech") 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 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%.
Proposed 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 (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 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 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, the receipt of all required regulatory approvals and the making of all
necessary governmental filings. The Merger is expected to close in the second
quarter of calendar 1997.
Results of Operations
Net income for the quarter ended December 31, 1996, was $79.1 million, or
$ 0.58 per share, compared with net income of $ 66.2 million, or $0.50 per
share, for the quarter ended December 31, 1995. The increase in operating
results is attributable to the 28.9% growth of average managed loans from $16.1
billion to $20.7 billion, increased credit card charge volume, an increase in
managed loan
10
<PAGE>
Results of Operations -- continued
yield, a decrease in cost of funds, an increase in gains recorded on
securitization transactions and increased payment processing volume.
These increases were partially offset by increased net credit losses and an
increase in certain costs incurred to solicit new accounts. During
the quarter ended December 31, 1996, the Company recognized a $106.9 million
pre-tax gain on the sale of a portion of its investment in Paymentech. This
pre-tax gain was offset by additional provisions for possible credit losses and
increased expenses generally related to product development and marketing.
Net income for the six months ended December 31, 1996 was $ 143.2 million, or
$ 1.05 per share, compared with $ 114.0 million, or $ 0.86 per share, for the
six months ended December 31, 1995. The increase in operating results is
attributable to the increase in average managed loans from $15.1 billion to
$19.9 billion, an increase in credit card charge volume, an increase in yield, a
decrease in cost of funds, an increase in gains recorded on securitization
transactions and increased payment processing volume. These increases were
partially offset by increased net credit losses and an increase in certain costs
incurred to solicit new accounts. During the quarter ended December 31, 1996,
the Company recognized a $106.9 million pre-tax gain on the sale of a portion of
its investment in Paymentech. This pre-tax gain was offset by additional
provisions for possible credit losses and increased costs to solicit new
accounts. On-balance-sheet loans increased from $3.6 billion at December 31,
1995 to $5.2 billion as of December 31, 1996, which reflects the results of the
Company's direct solicitations, partially offset by the Company's completion of
securitizations of $5.4 billion.
Managed Portfolio Reporting and Analysis
It is management's practice to analyze its financial performance on a
"managed" portfolio basis, in addition to analyzing information as reported
under generally accepted accounting principles. Managed loan statistics include
loans sold in securitization transactions and the Company's on-balance-sheet
loan portfolio. The Company's consolidated statements of income and balance
sheets are adjusted to eliminate the effect of securitizing loans to analyze the
data on a "managed" portfolio basis.
The following table depicts the changes in the Company's key financial data as a
result of securitizing loans as of and for the three and six months ended
December 31, 1996 and 1995. The As Reported information is derived from
consolidated financial statements which have been prepared in conformity with
generally accepted accounting principles. Managed loan data include loans sold
in securitization transactions and the Company's on-balance-sheet loan
portfolio.
11
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended December 31,
----------------------------------------------------------------------
1996 1995
--------------------------------- ---------------------------------
As Reported Managed As Reported Managed
--------------- -------------- --------------- --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Income Statement Statistics:
- ---------------------------
Net interest income $ 41,916 $ 395,164 $ 28,594 $ 263,332
Other operating income:
Securitization income 256,398 - 248,647 -
Gain on sale of subsidiary stock 106,878 106,878 - -
Interchange income 13,843 72,376 4,335 52,973
Fee income 9,938 70,910 7,107 44,407
Other 37,505 37,505 27,049 27,049
------------ ------------ ------------- ------------
Total other operating income 424,562 287,669 287,138 124,429
Provision for possible credit losses 75,750 292,627 19,672 126,458
------------ ------------ ------------- ------------
Net revenue after provision for
possible credit losses $ 390,728 $ 390,206 $ 296,060 $ 261,303
============ ============ ============= ============
Balance Sheet and Other Statistics:
- ----------------------------------
Average loans $ 4,541,496 $ 20,714,292 $ 4,131,728 $ 16,069,091
End of period loans 5,195,859 22,404,152 3,592,564 17,454,639
Securitizations 17,208,293 - 13,862,075 -
Loan yield 8.66 % 13.34 % 8.34 % 12.67 %
Cost of funds 5.85 5.86 6.27 6.27
Delinquency rate 3.55 5.19 2.86 3.57
Net credit loss rate 2.62 4.76 1.71 3.10
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended December 31,
--------------------------------------------------------------
1996 1995
----------------------------- -------------------------------
As Reported Managed As Reported Managed
--------------- ----------- --------------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Income Statement Statistics:
- ---------------------------
Net interest income $ 86,146 $ 786,317 $ 52,260 $ 492,441
Other operating income:
Securitization income 510,270 - 480,774 -
Gain on sale of subsidiary stock 106,878 106,878 - -
Interchange income 25,375 129,224 7,653 96,421
Fee income 16,386 124,234 13,588 83,205
Other 81,662 81,662 47,269 47,269
----------- ----------- ----------- ------------
Total other operating income 740,571 441,998 549,284 226,895
Provision for possible credit losses 105,377 509,942 40,903 229,858
----------- ----------- ----------- ------------
Net revenue after provision for
possible credit losses $ 721,340 $ 718,373 $ 560,641 $ 489,478
Balance Sheet and Other Statistics:
- ----------------------------------
Average loans $ 4,162,771 $19,928,216 $ 3,752,254 $ 15,084,124
End of period loans 5,195,859 22,404,152 3,592,564 17,454,639
Securitizations 17,208,293 - 13,862,075 -
Loan yield 8.94 % 13.59 % 8.43 % 12.68 %
Cost of funds 5.85 5.88 6.33 6.30
Delinquency rate 3.55 5.19 2.86 3.57
Net credit loss rate 2.74 4.63 1.97 2.99
</TABLE>
Net Interest Income
For the three months ended December 31, 1996, net interest income was $41.9
million, an increase of 46.6% from net interest income of $28.6 million for the
three months ended December 31, 1995. This increase was due to an increase in
interest income on loans of $12.1 million, primarily due to growth in on-
balance-sheet loans and increased yield. Interest income from investments,
excluding interest income from cash equivalents, increased $10.6 million due to
an increase in average investments from $2.5 billion to $3.3 billion, partially
offset by a decrease in yield from 6.84% to 6.43% for the three months ended
December 31, 1995 and 1996, respectively. Interest expense increased $10.8
million due to an increase in average interest-bearing liabilities from $6.6
billion to $7.8 billion, to supplement the funding of loan growth, which is
primarily funded by securitizations. This increase was partially offset by a
decrease in cost of funds from 6.27% to 5.85% for the three months ended
December 31, 1995 and 1996, respectively.
For the six months ended December 31, 1996, net interest income was $86.1
million, an increase of 64.8% from net interest income of $52.3 million for the
six months ended December 31, 1995. This increase was due to an increase in
interest income on loans of $27.9 million due to growth in on-balance-sheet
loans and an increase in yield. Interest income from investments, excluding
interest income from cash equivalents, increased $20.2 million due to an
increase in average investments from $2.4 billion to $3.1 billion, partially
offset by a decrease in yield from 6.80% to 6.49% for the six months ended
December 31, 1995 and 1996, respectively. Interest expense increased $15.6
million due to an increase in average interest-bearing liabilities from $6.1
billion to $7.1 billion, to supplement the funding of loan
13
<PAGE>
Net Interest Income -- continued
growth, which is primarily funded by securitizations. This increase was
partially offset by a decrease in cost of funds from 6.33% to 5.85% for the six
months ended December 31, 1995 and 1996, respectively.
Net interest margin on a managed basis was 6.49% for the three months ended
December 31, 1996, compared with 5.61% for the three months ended December 31,
1995. The increase is due to managed loan interest yield increasing from 12.67%
for the three months ended December 31, 1995 to 13.34% for the three months
ended December 31, 1996, reflecting changes in the overall pricing distribution
of the credit card loan portfolio. In addition, cost of funds decreased from
6.27% for the three months ended December 31, 1995 to 5.86% for the three months
ended December 31, 1996.
For the six months ended December 31, 1996, net interest margin on a managed
basis was 6.73%, compared with 5.57% for the six months ended December 31, 1995.
The increase is due to managed loan interest yield increasing from 12.68% for
the six months ended December 31, 1995 to 13.59% for the six months ended
December 31, 1996, reflecting changes in the overall pricing distribution of the
credit card loan portfolio. In addition, cost of funds decreased from 6.30% for
the six months ended December 31, 1995 to 5.88% for the six months ended
December 31, 1996.
14
<PAGE>
Net Interest Income -- continued
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 six month periods ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
Three Months Ended December 31,
--------------------------------------------------------------------------------
1996 1995
--------------------------------------- --------------------------------------
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 $ 32,229 10.57 % $ 859 $ 108,262 8.20 % $ 2,232
Federal funds sold 309,824 5.40 4,220 100,610 5.88 1,488
Investments 3,313,288 6.43 53,293 2,494,557 6.84 42,688
Loans 4,541,496 8.66 98,271 4,131,728 8.34 86,153
------------- --------- ----------- ------------- --------- -----------
Total earning assets 8,196,837 7.64 % $ 156,643 6,835,157 7.76 % $ 132,561
Other assets 1,385,604 1,102,196
------------- -------------
Total assets $ 9,582,441 $ 7,937,353
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Bank notes and other borrowings $ 4,602,214 5.93 % $ 68,744 $ 3,246,978 6.34 % $ 51,717
Interest-bearing deposits 1,529,541 6.05 23,341 1,974,885 6.43 31,936
Federal funds purchased 1,647,585 5.45 22,642 1,370,762 5.90 20,314
------------- --------- ----------- ------------- --------- -----------
Total interest-bearing liabilities 7,779,340 5.85 % $ 114,727 6,592,625 6.27 % $ 103,967
Other liabilities 592,241 508,367
------------- -------------
Total liabilities 8,371,581 7,100,992
Stockholders' equity 1,210,860 836,361
------------- -------------
Total liabilities and stockholders'
equity $ 9,582,441 $ 7,937,353
============= =============
Net interest margin and net interest --------- ----------- --------- -----------
income (a) 2.05 % $ 41,916 1.67 % $ 28,594
========= =========== ========= ===========
Interest rate spread (b) 1.79 % 1.49 %
========= =========
OFF-BALANCE-SHEET TRANSACTIONS
Average securitized loans $16,172,796 14.66 % $ 592,585 $11,937,363 14.17 % $ 422,852
Securitized loans cost of funds 16,172,796 5.87 239,337 11,937,363 6.27 188,114
--------- ----------- --------- -----------
Securitized loans net interest rate spread 8.79 % $ 353,248 7.90 % $ 234,738
========= =========== ========= ===========
INCLUDING SECURITIZED LOANS
Total earning assets $24,369,633 12.30 % $ 749,228 $18,772,520 11.83 % $ 555,413
Interest-bearing liabilities 23,952,136 5.86 354,064 18,529,988 6.27 292,081
--------- ----------- --------- -----------
Net interest margin and net interest income (a) 6.49 % $ 395,164 5.61 % $ 263,332
========= =========== ========= ===========
Interest rate spread (b) 6.44 % 5.56 %
========= =========
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended December 31,
----------------------------------------------------------------------------------
1996 1995
--------------------------------------- ----------------------------------------
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 $ 67,098 7.91 % $ 2,676 $ 83,732 8.72 % $ 3,670
Federal funds sold 226,436 5.41 6,179 127,276 5.91 3,781
Investments 3,138,240 6.49 101,846 2,401,083 6.80 81,656
Loans 4,162,771 8.94 186,100 3,752,254 8.43 158,161
------------- --------- ----------- ------------- --------- -----------
Total earning assets 7,594,545 7.82 % 296,801 6,364,345 7.77 % $ 247,268
Other assets 1,288,464 1,017,881
------------- -------------
Total assets $ 8,883,009 $ 7,382,226
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Bank notes and other borrowings $ 4,121,114 5.96 % $ 123,796 $ 2,958,147 6.38 % $ 94,951
Interest-bearing deposits 1,473,195 5.94 44,104 1,980,180 6.49 64,628
Federal funds purchased 1,552,556 5.46 42,755 1,188,704 5.93 35,429
------------- --------- ----------- ------------- --------- -----------
Total interest-bearing liabilities 7,146,865 5.85 % $ 210,655 6,127,031 6.33 % $ 195,008
Other liabilities 559,887 444,607
------------- -------------
Total liabilities 7,706,752 6,571,638
Stockholders' equity 1,176,257 810,588
------------- -------------
Total liabilities and stockholders'
equity $ 8,883,009 $ 7,382,226
============= =============
Net interest margin and net interest --------- ----------- --------- -----------
income (a) 2.27 % $ 86,146 1.64 % $ 52,260
========= =========== ========= ===========
Interest rate spread (b) 1.97 % 1.44 %
========= =========
OFF-BALANCE-SHEET TRANSACTIONS
Average securitized loans $15,765,445 14.82 % $1,168,394 $11,331,870 14.08 % $ 798,026
Securitized loans cost of funds 15,765,445 5.89 468,223 11,331,870 6.28 357,845
--------- ----------- --------- -----------
Securitized loans net interest rate spread 8.93 % $ 700,171 7.80 % $ 440,181
========= =========== ========= ===========
INCLUDING SECURITIZED LOANS
Total earning assets $23,359,990 12.54 % $1,465,195 $17,696,215 11.81 % $1,045,294
Interest-bearing liabilities 22,912,310 5.88 678,878 17,458,901 6.30 552,853
--------- ----------- --------- -----------
Net interest margin and net interest income (a) 6.73 % $ 786,317 5.57 % $ 492,441
========= =========== ========= ===========
Interest rate spread (b) 6.66 % 5.51 %
========= =========
</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.
16
<PAGE>
Other Operating Income
Other operating income was $ 424.6 million for the three months ended December
31, 1996 compared with $ 287.1 million for the three months ended December 31,
1995. The three months ended December 31, 1996 included a $106.9 million gain of
the sale of Paymentech common stock, a $7.8 million increase in securitization
income, due to gains associated with the 35.5% increase in average securitized
loans, partially offset by a slight reduction in the net interest rate spread
used to calculate gains on the securitized loans, and increased credit losses.
Other operating income increased $10.5 million 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
three months ended December 31, 1996, Paymentech processed approximately $11.1
billion in sales volume in approximately 342 million total transactions.
For the six months ended December 31, 1996, other operating income was $740.6
million, compared with $ 549.3 million for the six months ended December 31,
1995. The six months ended December 31, 1996 included a $106.9 million gain of
the sale of Paymentech common stock, a $29.5 million increase in securitization
income, due to gains associated with the 39.1% increase in average securitized
loans, partially offset by a slight reduction in the net interest rate spread
used to calculate gains on the securitized loans, and increased credit losses.
The $34.4 million increase in other operating income resulted 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
six months ended December 31, 1996, Paymentech processed approximately $20.1
billion in sales volume in approximately 605 million total transactions.
Other Operating Expenses
Other operating expenses, excluding amortization of intangibles, increased
41.9% to $252.0 million for the three months ended December 31, 1996, versus
$177.6 million for the three months ended December 31, 1995. Data processing and
communications increased $8.6 million and other expenses increased $37.6 million
due to increased marketing costs associated with loan solicitations and
increased accounts, transaction volumes and balances, resulting primarily from
the 28.9% increase in average managed loans. Salaries and employee benefits
increased $15.0 million primarily due to the increase in number of employees.
Occupancy and equipment expenses increased $6.3 million primarily due to
facility expansions. The increases to other operating expenses were partially
offset by a decrease in postage, shipping, stationary and supplies due primarily
to the high level of mail solicitations which occurred during the prior year
period and the Company's change in method of accounting for Paymentech to the
equity method.
Other operating expenses, excluding amortization of intangibles, increased
32.5% to $467.0 million for the six months ended December 31, 1996, versus
$352.4 million for the six months ended December 31, 1995. Data processing and
communications increased $19.4 million, and other expenses, which include
Paymentech's one-time charge of $15.5 million, increased $51.7 million due
primarily to increased marketing costs associated with loan solicitations and
increased accounts, transaction volumes and balances, resulting primarily from
the 32.1% increase in average managed loans. Salaries and employee benefits
increased $34.3 million primarily due to the increase in number of employees.
Occupancy and equipment expenses increased $12.1 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.
17
<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 became 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 delinquency and net credit loss
rates will continue to increase as a result of this seasoning and will generally
follow industry trends. The managed delinquency rate at December 31, 1996 was
5.19%, and the managed net credit loss rate for the second quarter of fiscal
year 1997 was 4.76%. The managed net credit loss rate for the six months ended
December 31, 1996 was 4.63%. 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 billing
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 December 31, 1996 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 $ 22,404,152 100.00 % $ 18,727,825 100.00 %
============== ========= ============== =========
Loans delinquent
35 to 64 days $ 359,471 1.60 % $ 272,496 1.46 %
65 to 94 days 250,725 1.12 159,814 0.85
95 or more days 552,740 2.47 378,193 2.02
-------------- --------- -------------- ---------
Total $ 1,162,936 5.19 % $ 810,503 4.33 %
============== ========= ============== =========
As Reported
- -----------
Loans outstanding $ 5,195,859 100.00 % $ 3,564,434 100.00 %
============== ========= ============== =========
Loans delinquent
35 to 64 days $57,423 1.10 % $ 37,221 1.04 %
65 to 94 days 39,880 0.77 21,182 0.60
95 or more days 87,365 1.68 50,497 1.42
-------------- --------- -------------- ---------
Total $ 184,668 3.55 % $ 108,900 3.06 %
============== ========= ============== =========
</TABLE>
18
<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 Six Months Ended
December 31, December 31,
--------------------------------- --------------------------------
1996 1995 1996 1995
--------------- --------------- --------------- --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Managed Loans
- -------------
Average loans outstanding $20,714,292 $16,069,091 $19,928,216 $15,084,124
Net credit losses $ 246,657 $ 124,443 $ 461,518 $ 225,843
Net credit losses as a percentage
of average loans outstanding 4.76 % 3.10 % 4.63 % 2.99 %
As Reported
- -----------
Average loans outstanding $ 4,541,496 $ 4,131,728 $ 4,162,771 $ 3,752,254
Net credit losses $ 29,780 $ 17,657 $ 56,953 $ 36,888
Net credit losses as a percentage
of average loans outstanding 2.62 % 1.71 % 2.74 % 1.97 %
</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 six months ended
December 31, 1996, the Company's provision for possible credit losses was $75.8
million and $105.4 million, respectively, which included charges of $46.0
million and $48.4 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 $19.7 million and $40.9 million for the three and six
months ended December 31, 1995, respectively.
Funding and Liquidity
Traditional asset liquidity is provided by cash, cash equivalents and
investments. These items represented 40.0%, 42.8%, and 40.9% of the Company's
assets as of December 31, 1996, June 30, 1996, and December 31, 1995,
respectively.
The Company had securitized loans of $17.2 billion, $15.2 billion and $13.9
billion at December 31, 1996, June 30, 1996, and December 31, 1995,
respectively. During the six months ended December 31, 1996, the Company
completed securitizations of approximately $2.8 billion. At December 31, 1996,
securitized loans had a weighted average remaining life of 3.6 years and a
weighted average cost of funds of approximately 5.93%. 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.
19
<PAGE>
Funding and Liquidity -- continued
When securitized loans amortize, First USA Bank's funding requirements
increase accordingly. The Company plans to fund the amortization of
securitizations in the future through securitization of additional loans,
issuance of bank and deposit notes, acceptance of additional deposits and the
use of other bank liabilities.
The Company had $2.4 billion and $1.9 billion in bank notes outstanding at
December 31, 1996 and June 30, 1996, respectively. At December 31, 1996, bank
notes had average maturities of 1.78 years and an average cost of 6.04%. In
addition, the Company had approximately $1.3 billion and $1.0 billion of term
federal funds purchased at December 31, 1996 and June 30, 1996, respectively.
The average maturities of the term federal funds purchased were three months at
December 31, 1996 with an average cost of 5.61%.
Interest-bearing deposits, which primarily represent brokered and directly
placed deposits, totaled $1.7 billion at December 31, 1996 and $1.5 billion at
June 30, 1996. At December 31, 1996, interest-bearing deposits had an average
cost of 5.94%. The maturity distribution for interest-bearing deposits is set
forth in the following table.
<TABLE>
<CAPTION>
At December 31, 1996
--------------------------
Amount Percent
---------- -----------
(Dollars in Thousands)
Equal to or more than $100,000
- ------------------------------
<S> <C> <C>
Less than three months $ 377,154 22.12 %
Three to six months 313,209 18.37
Six to twelve months 502,821 29.49
More than twelve months 511,940 30.02
------------- ---------
$ 1,705,124 100.00 %
============= =========
</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 December 31, 1996, there were no borrowings under the
revolving credit facility.
At December 31, 1996, 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 approximately 4.4 million and 3.1 million shares
of Paymentech common stock, respectively, for $34 per share. During the second
fiscal quarter, net proceeds to the Company from the sale of a portion of its
investment in Paymentech were $139.8 million and the Company recognized a pre-
tax gain of $106.9 million, 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 insignificance of the Company's investment in
Paymentech to its consolidated financial statements. The Company previously
consolidated Paymentech in its financial statements.
20
<PAGE>
Funding and Liquidity -- continued
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 redeemable preferred
securities. The Capital Trust invested the proceeds from the preferred
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.
During fiscal 1994, the Company issued 5.75 million shares of 6 1/4% mandatory
convertible preferred stock. Beginning May 20, 1997, the Company may redeem
each share of the preferred stock. Upon consummation of the Merger, each share
of the Company's preferred stock will be exchanged for one share of BANC ONE
6 1/4% convertible preferred stock. The terms of the BANC ONE preferred stock
will be substantially the same as the Company's preferred stock except that it
will be convertible into BANC ONE common stock and the conversion ratio will be
adjusted to reflect the Common Exchange Ratio. However, pursuant to the Merger
Agreement, the Company has agreed to call the Company's preferred stock for
redemption on May 20, 1997, and the Company has reserved 11.5 million shares of
common stock to redeem the preferred stock. First USA and BANC ONE anticipate
that the Merger will occur on or after May 20, 1997.
The Company implemented a Dividend Reinvestment and Stock Purchase Plan (the
"DRIP Plan") in December 1995, pursuant to which participants may purchase
shares of the Company's common stock by automatically reinvesting quarterly cash
dividends or by making optional cash investments, and pursuant to which
participants may also sell or otherwise dispose of common stock acquired under
the DRIP Plan. As of December 31, 1996, approximately 1.2 million shares of
common stock had been issued by the Company pursuant to the DRIP Plan, which
generated net proceeds of approximately $34.7 million. From the inception of
the DRIP Plan through December 31, 1996, in excess of 90% of such common stock
purchases were made by financial intermediaries, who may have resold such shares
of common stock shortly before or after acquiring them (including coverage of
short positions). The Company has not extended to any such purchasers any
rights or privileges other than those to which they would otherwise be entitled
as participants or prospective participants in the DRIP Plan, nor has the
Company entered into any agreements with any such persons regarding their
purchases of such shares or any resales or distributions thereof. Pursuant to
the Merger Agreement, the Company is limited to the issuance of 45,000 shares of
common stock per quarter through the DRIP Plan.
Investments
The Company's investments, which totaled $3.6 billion and $2.9 billion at
December 31, 1996 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 December 31, 1996 was
approximately 6.4 years.
21
<PAGE>
Investments -- continued
The following table presents maturities of the investment portfolio at
December 31, 1996 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 $ 467,255 12.95 % 6.41 %
1 - 5 years 1,409,809 39.07 6.41
5 - 10 years 901,165 24.97 6.43
After 10 years 830,189 23.01 6.37
------------ ------------ -----------
Total carrying value $3,608,418 100.00 % 6.56 %
============ ============ ===========
</TABLE>
Capital Adequacy
The Company's stockholders' equity increased to $1.3 billion at December 31,
1996, 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 $1.2
billion at December 31, 1996, from $955.0 million at June 30, 1996.
First USA Bank's stockholder's equity increased from $908.0 million at June
30, 1996 to $1.2 billion at December 31, 1996, 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 December 31, 1996, First USA Bank's risk-based total capital
ratio was 24.24%, its tier 1 capital ratio was 20.46%, and its leverage ratio
was 13.78%. At December 31, 1996, First USA Bank met the requirements of a "well
capitalized" institution.
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
35.5% and 35.9% for the three and six months ended December 31, 1996,
respectively, compared with 36.9% for the three and six months ended December
31, 1995. The decrease in effective rate is due to the change in the method of
accounting for Paymentech to the equity method.
Capital Expenditures
The Company spent $77.1 million and $48.9 million for capital expenditures for
fiscal 1996 and the six months ended December 31, 1996, 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.
22
<PAGE>
Selected Ratios
The following table presents certain financial ratios, as restated, for the
Company and First USA Bank for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------ -----------------------
1996 1995 1996 1995
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
First USA, Inc.
Return on assets (a) 3.30% 3.33% 3.39% 3.09%
Return on stockholders' equity (a) 26.14 31.64 25.61 28.12
Average stockholders' equity to average assets 12.64 10.54 13.24 10.98
First USA Bank
Return on assets 1.59% 3.74% 2.76% 3.53%
Return on stockholder's equity 13.93 41.10 23.57 37.44
Average stockholder's equity to average assets 11.40 9.09 11.71 9.43
Net interest margin 1.96 1.65 2.17 1.62
Net interest margin (managed) 6.51 5.61 6.74 5.56
</TABLE>
(a) Data for the six months ended December 31, 1996, 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.
23
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Index of Exhibits
-----------------
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.
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.
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.
24
<PAGE>
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 an 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 Fourth Amendment to the 1991 Stock Option Plan, effective
October 16, 1996, filed as Exhibit 10.11.4 to the Company's
Quarterly Report on Form 10-Q for the Fiscal Quarter ended
September 1996 and incorporated by reference herein.
10.2 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.
10.3 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.
10.4 Amendment No.2 to the Stock Purchase Plan of First USA, Inc.,
filed as Exhibit 99.1 to the Company's Registration Statement
on Form S-8, filed on August 30, 1996 and incorporated by
reference herein.
10.5 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.
10.6 Series 1996-6 Supplement, dated as of November 13, 1996, 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 on the Company's Current Report on Form 8-K, filed on
November 21, 1996 and incorporated by reference herein.
10.7 Series 1996-7 Supplement, dated as of December 11, 1996, 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
99.1 on the Company's Current Report on Form 8-K, filed on
November 21, 1996 and incorporated by reference herein.
10.8 Series 1996-8 Supplement, dated as of December 11, 1996, 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
99.2 on the Company's Current Report on Form 8-K, filed on
November 21, 1996 and incorporated by reference herein.
10.9 Series A Capital Securities Guarantee Agreement dated as of
December 20, 1996 between the Company and The Bank of New
York, as trustee filed as Exhibit 10.9 to the Company's
Quarterly Report on Form 10-Q for the Fiscal Quarter Ended
December 31, 1996 and incorporated by reference herein.
10.10 Registration Rights Agreement dated as of December 20, 1996
among the Company, First USA Capital Trust I and Merrill
Lynch, Pierce Fenner & Smith Incorporated and J. P. Morgan
Securities Inc., as initial purchasers filed as Exhibit
10.10 to the Company's Quarterly Report on Form 10-Q for the
Fiscal Quarter Ended December 31, 1996 and incorporated by
reference herein.
11* Computation of Net Income per Share.
27* Financial Data Schedule
- --------------------
* Filed herewith.
25
<PAGE>
b. Reports on Form 8-K filed during the quarter ended December 31, 1996:
Form 8-K filed November 21, 1996:
Item 5. Other Events - Securitization of credit card receivables
Item 7. Financial Information and Exhibits
Form 8-K filed December 26, 1996:
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 December 31, 1996:
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
26
<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: April 24, 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)
27
<PAGE>
INDEX OF EXHIBITS
-----------------
Sequentially
Exhibit Number Description of Exhibit Numbered Page
- -------------- ---------------------- -------------
11 Computation of Net Income Per Share.
27 Financial Data Schedule.
28
<PAGE>
EXHIBIT 11
FIRST USA, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE
Three and Six Months Ended December 31, 1996 and 1995
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------------ ------------------------------
1996 1995 1996 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Primary
- -------
Net income $ 79,132 $ 66,158 $ 143,188 $ 113,962
============== ============== ============== ==============
Weighted average common and common
equivalent shares outstanding
Average common shares outstanding 122,439,385 118,498,574 121,957,937 118,199,336
Common stock equivalents:
Stock options 4,938,644 5,213,466 4,515,807 5,248,458
Mandatory convertible preferred stock 9,582,950 9,582,950 9,582,950 9,582,950
-------------- -------------- -------------- --------------
Weighted average common and common
equivalent shares 136,960,979 133,294,990 136,056,694 133,030,744
============== ============== ============== ==============
Net income per share $ 0.58 $ 0.50 $ 1.05 $ 0.86
============== ============== ============== ==============
Fully diluted
- -------------
Net income $ 79,132 $ 66,158 $ 143,188 $ 113,962
============== ============== ============== ==============
Weighted average common and common
equivalent shares outstanding
Average common shares outstanding 122,439,385 118,498,574 121,957,937 118,199,336
Common stock equivalents:
Stock options 5,421,013 5,212,922 5,246,728 5,251,870
Mandatory convertible preferred stock 9,582,950 9,582,950 9,582,950 9,582,950
-------------- -------------- -------------- --------------
Weighted average common and common
equivalent shares 137,443,348 133,294,446 136,787,615 133,034,156
============== ============== ============== ==============
Net income per share assuming full dilution $ 0.58 $ 0.50 $ 1.05 $ 0.86
============== ============== ============== ==============
</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> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 506,299
<SECURITIES> 3,608,418
<RECEIVABLES> 5,195,859
<ALLOWANCES> 122,587
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 162,201
<DEPRECIATION> 48,879
<TOTAL-ASSETS> 10,278,579
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 6,826,807
0
58
<COMMON> 1,231
<OTHER-SE> 1,277,061
<TOTAL-LIABILITY-AND-EQUITY> 10,278,579
<SALES> 0
<TOTAL-REVENUES> 1,037,372
<CGS> 0
<TOTAL-COSTS> 708,168
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 105,377
<INTEREST-EXPENSE> 0<F2>
<INCOME-PRETAX> 223,827
<INCOME-TAX> 80,269
<INCOME-CONTINUING> 143,188
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 143,188
<EPS-PRIMARY> 1.05
<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>
