-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FEFeT+fUXSqm0If977RFV6e/zWJ4rIrQNENneNtx0Jg8dhVbr/xNAXE7M8wv3p9a GuesxUb1AIy0Vxu5zBVW/w== 0000950152-97-006359.txt : 19970912 0000950152-97-006359.hdr.sgml : 19970912 ACCESSION NUMBER: 0000950152-97-006359 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970828 ITEM INFORMATION: FILED AS OF DATE: 19970829 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANC ONE CORP /OH/ CENTRAL INDEX KEY: 0000036090 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 310738296 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-08552 FILM NUMBER: 97673582 BUSINESS ADDRESS: STREET 1: 100 E BROAD ST CITY: COLUMBUS STATE: OH ZIP: 43271 BUSINESS PHONE: 6142485944 MAIL ADDRESS: STREET 1: 100 EAST BROAD STREET STREET 2: 18TH FLOOR CITY: COLUMBUS STATE: OH ZIP: 43271-0251 FORMER COMPANY: FORMER CONFORMED NAME: FIRST BANC GROUP OF OHIO INC /OH/ DATE OF NAME CHANGE: 19800301 8-K 1 BANC ONE CORPORATION FORM 8-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------- FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of report (Date of earliest event reported): August 29, 1997 BANC ONE CORPORATION (Exact Name of Registrant as Specified in Charter) Ohio (State or Other Jurisdiction of Incorporation) 1-8552 31-0738296 (Commission File Number) (IRS Employer Identification No.) 100 East Broad Street, Columbus, Ohio 43271 (Address of Principal Executive Offices)(Zip Code) Registrant's telephone number, including area code: (614) 248-5944 N/A (Former Name or Former Address, If Changed Since Last Report) 2 ITEM 5. OTHER EVENTS. As previously reported by BANC ONE CORPORATION ("BANC ONE") on its Current Report on Form 8-K filed July 14, 1997 (as amended by Form 8-K/A filed August 13, 1997), on June 27, 1997, subject to the terms and conditions of the Agreement and Plan of Merger (the "Merger Agreement") dated as of January 19, 1997 and amended as of April 23, 1997, between First USA, Inc., a Delaware corporation ("FUSA") and BANC ONE, First USA was merged with and into BANC ONE, with BANC ONE as the surviving corporation (the "Merger"). In accordance with the Merger Agreement, each share of the common stock, par value $0.01 per share, of FUSA outstanding immediately prior to the effective time of the Merger (the "Effective Time") was at the Effective Time converted into the right to receive 1.1659 shares of the common stock, no par value, of BANC ONE. The Merger was accounted for as a "pooling of interests" under generally accepted accounting principles. The following supplemental consolidated financial statements of BANC ONE restating BANC ONE's historical consolidated financial statements as of and for the three years ended December 31, 1996 to reflect the Merger are incorporated herein by reference to Exhibit 99.1 filed herewith: 1. Management's Discussion and Analysis. 2. Consolidated Balance Sheet as of December 31, 1996 and 1995. 3. Consolidated Statement of Income for the three years ended December 31, 1996. 4. Consolidated Statement of Changes in Stockholders' Equity for the three years ended December 31, 1996. 5. Consolidated Statement of Cash Flows for the three years ended December 31, 1996. 6. Notes to the Consolidated Financial Statements. The report of Coopers & Lybrand L.L.P., independent accountants, on the supplemental consolidated financial statements of BANC ONE as of December 31, 1996 and 1995 and for the three years ended December 31, 1996 is filed herewith as part of Exhibit 99.1 and the related consent is filed herewith as Exhibit 23. Both the opinion and the consent are incorporated herein by reference. ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS (a) Financial Statements of Businesses Acquired. Not applicable. 2 3 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 hereunto duly authorized. BANC ONE CORPORATION (Registrant) Date: August 29, 1997 By: /s/ Bobby L. Doxey --------------------------- Bobby L. Doxey Senior Vice President 3 4 (b) Pro Forma Financial Information. Not applicable. (c) Exhibits. Exhibit 11 Statement Regarding Computation of Earnings Per Common Share. Exhibit 12 Statement Regarding Computation of Ratio of Earnings to Fixed Charges. Exhibit 23 Consent of Coopers & Lybrand L.L.P. Exhibit 27 Financial Data Schedules. Exhibit 99.1 Supplemental Consolidated Financial Statements of BANC ONE CORPORATION and Report of Coopers & Lybrand L.L.P. 4 5 EXHIBIT 99.1 I. INTRODUCTION This discussion should be read in conjunction with the consolidated financial statements, notes and tables included elsewhere in this report. "The Corporation" is defined as parent company only. "BANC ONE" is defined as the Corporation and all significant majority-owned subsidiaries. Management's discussion and analysis contains forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. However, such performance involves risks and uncertainties which may cause actual results to differ materially from those in such statements. For a discussion of certain factors that may cause such forward-looking statements to differ materially from BANC ONE's actual results see BANC ONE's Annual Report on Form 10-K for the year ended December 31, 1996. On June 27, 1997, BANC ONE completed its acquisition of First USA, Inc. (First USA). The acquisition was accounted for as a pooling of interests and, accordingly, the information included in this report presents the combined results of BANC ONE and First USA as if the two companies had operated as a combined entity for all periods presented. ACQUISITIONS First USA, Inc. - First USA was acquired in a tax-free exchange of stock, whereby the Corporation exchanged 1.1659 shares of its common stock for each outstanding share of First USA common stock. First USA, a financial service company specializing in the credit card business, had $24.6 billion in managed credit card receivables and 17.8 million cardholders at June 27, 1997 compared to $22.2 billion in managed credit card receivables and 15.9 million card holders at December 31, 1996. First USA had total assets of $10.9 billion and $10.3 billion at June 27, 1997 and December 31, 1996, respectively, and stockholders' equity of $1.2 billion at both June 27, 1997 and December 31, 1996, respectively. First USA has traditionally produced high growth in earnings. However, management estimates that this transaction will be dilutive to BANC ONE's earnings per common share in 1997, neutral in 1998 and accretive to earnings per common share thereafter. Liberty Bancorp, Inc. - On June 1, 1997, the Corporation completed its acquisition of Liberty Bancorp, Inc. (Liberty), a multi-bank holding company headquartered in Oklahoma City, Oklahoma. Liberty had approximately $2.9 billion in assets at December 31, 1996, and 29 banking offices primarily in Oklahoma City and Tulsa. Under the terms of the agreement, the Corporation issued 1.175 shares of its common stock (11.9 million shares in total) for each outstanding share of Liberty common stock. The transaction was accounted for using the purchase method of accounting. Premier Bancorp, Inc.--BANC ONE's financial position and results of operations for periods prior to 1996 have not been restated to include Banc One Louisiana Corporation (BOLC), formerly known as Premier Bancorp, Inc., which was acquired on January 2, 1996, as this acquisition was accounted for using the purchase method of accounting. The acquisition of BOLC significantly impacts performance comparisons between 1996 and prior periods. Throughout the following discussion, the impact of BOLC will be addressed. RESTRUCTURING CHARGES AND MERGER RELATED COSTS In connection with the merger of First USA and other strategic initiatives, BANC ONE identified and recorded in the second quarter of 1997 one-time restructuring charges and merger related costs of $467.4 million ($328.8 million after-tax), of which $337.3 million was recorded as a restructuring charge and $130.1 million was recorded as additional provision for credit losses. The restructuring charge associated with the First USA merger totaled $240.9 million and consisted of: employee benefits, severance and stock option vesting costs; professional services costs; premiums to redeem preferred stock; asset related write-downs and other merger related costs. 1 6 The remaining $96.4 million charge related to costs associated with the strategic initiatives to streamline the retail branch delivery structure by consolidating approximately 200 banking center over the next 18 months and the termination of the development of the Strategic Banking System, a retail banking system. The $130.1 million additional provision for credit losses primarily reflects the reclassification of $2.0 billion of credit card loans previously classified as held for sale to the loan and lease portfolio in connection with the effort to consolidate the BANC ONE and First USA credit card master trusts, as well as an additional provision to align the credit card charge-off policies of BANC ONE and First USA. In 1995, BANC ONE launched a series of strategic initiatives collectively referred to as Project One. These efforts are designed to enhance the effectiveness and efficiency of certain operations by, among other things, decreasing the number of legal entities, combining operations and systems and centralizing many staff and line functions. During 1996, BANC ONE incurred Project One expenses of $150 million. Project One initiatives resulted in higher expense levels during the first half of 1997. II OVERVIEW OF OPERATIONS Net income for 1996 was a record $1.7 billion, or $2.78 per common share, up 15.8% and 14.4%, respectively, from $1.4 billion, or $2.43 per common share in 1995. This reflected a 20.9% increase in net interest income and a 21.2% increase in non-interest income, partially offset by a 17.0% increase in non-interest expense and a higher provision for credit losses. Contributing to the 1996 increase in income was a 12.0% increase in average earning assets, which is a reflection of strong loan growth. The higher provision for credit losses reflected both loan growth and higher levels of net charge-offs, particularly in credit card and consumer loans. Key performance measures continued to be strong during 1996. FIVE YEAR PERFORMANCE SUMMARY
$(millions, except for per share data) 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------------- Net income $1,673 $1,445 $1,188 $1,272 $949 Total revenue 12,099 10,363 8,761 8,194 8,188 Net income per common share 2.78 2.43 1.99 2.25 1.72 Cash dividends declared per common share (as originally reported) $1.36 $1.24 $1.13 $.97 $.81 Return on average assets 1.59% 1.54% 1.28% 1.53% 1.19% Return on average common equity 17.83 17.26 14.73 18.17 15.27 Return on average total equity 17.56 16.95 14.50 17.77 14.89 Average common equity to average assets 8.85 8.81 8.56 8.31 7.65 Average total equity to average assets 9.08% 9.07% 8.83% 8.62% 8.00% At year end: Total assets $112,154 $97,889 $95,283 $89,497 $84,065 Long-term borrowings $6,828 $4,331 $2,939 $2,292 $1,869
2 7 III NET INTEREST INCOME Net interest income, on a fully taxable equivalent basis (FTE), was $5.2 billion in 1996, up $871 million, or 20.1% from the prior year reflecting an increase in average earning assets and net interest margin. For 1996, average earning assets totaled $95.4 billion, up $10.2 billion or 12.0% from 1995. This increase primarily reflected a $5.0 billion average positive impact from the BOLC acquisition complemented by strong underlying loan growth, as average securities and other earning assets increased only slightly. Average loans and leases, excluding loans held for sale, totaled $75.1 billion, a $8.4 billion or 12.6% increase over 1995 levels. Excluding the impact of the BOLC acquisition, average loans increased $5.0 billion or 7.5%. Contributing to this increase was a $2.4 billion increase in credit card loans, and a $1.3 billion increase in commercial loans and leases. These increases are net of loan sales and securitizations. Average investment securities totaled $19.1 billion in 1996, up $2.2 billion, or 13.1% from 1995, primarily attributable to the acquisition of BOLC. The lack of growth in investment securities reflected a decision to reduce the amount of lower yielding securities, primarily through maturity run-off and to use the proceeds to fund higher yielding loans. This strategy improved the overall earning asset yield and net interest margin given the investment securities' typically lower yield as compared to loans. Earning asset growth is funded by traditional bank funding sources, primarily retail deposits, securitizations and the issuance of short and long-term debt. During 1996, average total deposits increased $4.3 billion or 6.4% to $72.4 billion, primarily due to the inclusion of BOLC. Average short-term borrowed funds in 1996 totaled $15.4 billion, up $3.8 billion from the prior year. Average long-term borrowed funds totaled $5.1 billion, up $1.4 billion from 1995. 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. The income effect of securitizing loans results in removing these loans from the balance sheet and recording a gain based upon the present value of net interest income and fees less estimated credit losses and servicing fees on the securitized loans. The managed credit card statistics provided in the following table, include loans sold in credit card securitization transactions and the Company's on balance sheet portfolio. For the "Managed" information, the Company's consolidated statements of income and balance sheets are adjusted to eliminate the effect of securitizing credit card loans. "As reported" information is derived from consolidated financial statements which have been prepared in conformity with generally accepted accounting principles and includes loans held for sale. Accordingly, the following table depicts the Company's key financial data as a result of securitizing credit card loans. 3 8
Year Ended Year Ended December 31, 1996 December 31, 1995 ------------------------------- -------------------------- As Reported Managed As Reported Managed - ------------------------------------------------------------------------------------------------------------- $(millions) INCOME STATEMENT STATISTICS: Net interest income - fully taxable equivalent $ 5,202 $ 7,029 $ 4,331 $ 5,550 Provision for credit losses 943 1,952 526 993 Non-interest income: Credit card servicing income 1,059 0 1,066 0 Other loan servicing income 25 25 21 21 Interchange and processing income 281 507 261 478 Other 1,998 1,998 1,427 1,427 -------- -------- -------- -------- Total non-interest income 3,363 2,530 2,775 1,926 Non-interest expense 5,062 5,051 4,327 4,333 Taxable equivalent adjustment 63 63 79 79 -------- -------- -------- -------- Income before tax (1) $ 2,497 $ 2,493 $ 2,174 $ 2,071 ======== ======== ======== ======== CREDIT CARD STATISTICS: Average credit card loans $ 12,471 $ 31,332 $ 10,058 $ 22,949 End of period credit card loans 14,424 34,838 11,258 28,560 Credit card delinquencies over 30 days as a percentage of ending credit card balances 4.84% 5.22% 3.91% 3.80% Net credit card charge offs as a percentage of average credit card balances 4.48% 5.00% 3.04% 3.37% BALANCE SHEET AND OTHER STATISTICS: Total loans $ 80,864 $103,434 $ 68,921 $ 87,356 Earning asset yield 9.23% 10.31% 9.00% 9.91% Cost of interest bearing liabilities 4.57 4.87 4.76 5.03 Net interest margin 5.45 7.16 5.08 6.51 (1) The difference in income before tax on a reported and managed basis reflects the effect of the gain recognized on excess servicing when credit card loans are securitized and the subsequent amortization of this asset in future periods.
In 1996, off-balance sheet investment products decreased interest income by $49 million and decreased deposit and other borrowing costs by $3 million. This compares with a reduction in 1995 interest income of $145 million and increased deposit and other borrowing costs of $60 million. Off-balance sheet investment product impact on net interest income reflects the cost or benefit of the use of these products to manage interest rate risk. The dollar amounts stated above are not an indication of the effectiveness of the use of these instruments as the on balance sheet instruments hedged move in the opposite direction. The cost or benefit from hedging transactions is significantly impacted by customer preferences, the historical interest rate environment in which the instruments were acquired and current market rates. 4 9 FIVE YEAR SUMMARY -- AVERAGE BALANCES, INCOME AND EXPENSE, YIELDS AND RATES(1,4)
1996 1995 ----------------------------- -------------------------------------- Average Income / Yield / Average Income / Yield/ $(thousands) Balances Expense Rate Balances Expense Rate - ----------------------------------------------------------------------------------------------------------------------------- Assets: Short-term investments $ 662,262 $ 36,771 5.55% $ 1,188,518 $ 75,588 6.36% Loans held for sale 549,370 39,544 7.20 418,540 32,925 7.87 SECURITIES: (3) Taxable 17,378,663 1,128,362 6.49 14,899,874 974,541 6.54 Tax-exempt 1,694,224 139,391 8.23 1,964,544 171,626 8.74 --------- ------- --------- ------- TOTAL SECURITIES 19,072,887 1,267,753 6.65 16,864,418 1,146,167 6.80 LOANS AND LEASES: (2) Commercial, financial and agricultural 19,368,875 1,600,332 8.26 17,439,240 1,426,070 8.18 Real estate: Commercial 6,162,566 553,122 8.98 5,589,638 501,614 8.97 Construction 3,214,428 316,406 9.84 2,441,833 250,116 10.24 Residential 11,898,026 1,104,160 9.28 11,491,299 1,011,832 8.81 Consumer, net 19,943,499 1,881,053 9.43 18,209,617 1,710,328 9.39 Credit card 12,471,309 1,849,694 14.83 10,057,688 1,405,578 13.98 Leases, net 2,025,861 150,547 7.43 1,479,726 107,143 7.24 --------- ------- --------- ------- TOTAL LOANS AND LEASES 75,084,564 7,455,314 9.93 66,709,041 6,412,681 9.61 ---------- --------- ---------- --------- Total earning assets 95,369,083 8,799,382 9.23 85,180,517 7,667,361 9.00 ALLOWANCE FOR CREDIT LOSSES (1,103,377) (966,734) Other assets 10,678,556 9,751,175 ---------- --------- TOTAL ASSETS $ 104,944,262 $ 93,964,958 ============= ============= LIABILITIES: DEPOSITS: Non-interest bearing demand $ 14,203,145 $ 13,137,978 Interest bearing demand 2,391,466 42,883 1.79 8,263,124 175,734 2.13 Savings and money market 29,008,134 963,311 3.32 20,095,413 746,564 3.72 Time deposits: CDs less than $100,000 18,928,796 1,053,236 5.56 19,181,386 1,089,761 5.68 CDs $100,000 and over: Domestic 5,432,193 270,762 4.98 5,855,409 326,715 5.58 Foreign 2,428,889 130,033 5.35 1,531,360 87,582 5.72 --------- ------- --------- ------ TOTAL DEPOSITS 72,392,623 2,460,225 3.40 68,064,670 2,426,356 3.56 BORROWED FUNDS Short-term 15,372,420 803,390 5.23 11,566,327 657,955 5.69 Long-term 5,083,394 333,987 6.57 3,663,272 252,443 6.89 ---------- --------- ---------- ------- Total borrowed funds 20,455,814 1,137,377 5.56 15,229,599 910,398 5.98 ---------- --------- ---------- ------- TOTAL INTEREST BEARING LIABILITIES 78,645,292 3,597,602 4.57 70,156,291 3,336,754 4.76 Other liabilities 2,569,850 2,146,725 --------- --------- TOTAL LIABILITIES 95,418,287 85,440,994 Preferred stock 236,102 249,913 Common stockholders' equity 9,289,873 8,274,051 --------- --------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 104,944,262 $ 93,964,958 ============= ============= NET INTEREST INCOME 5,201,780 5.45 4,330,607 5.08 Provision for credit losses (942,714) (.98) (526,138) (.62) -------- ---- -------- ---- NET FUNDS FUNCTION $ 4,259,066 4.47% $ 3,804,469 4.47% ============= ==== ============= ====
(1) Income amounts are presented on a fully taxable equivalent basis (FTE), which is defined as income on earning assets that is subject to either a reduced rate or zero rate of income tax, adjusted to give effect to the appropriate incremental federal income tax rate and adjusted for non-deductible carrying costs, where applicable. Where appropriate, yield calculations include these adjustments. The federal statutory tax rate was 35% for 1996, 1995, 1994 and 1993 and 34% for 1992. (2) Non-accrual loans are included in loan balances. Interest income includes related fee income. (3) Average securities balances are based on amortized historical cost, excluding SFAS 115 adjustments to fair value which are included in other assets. (4) All average balances are calculated on the basis of daily averages. 5 10
Compound Annual 1994 1993 1992 Growth 1991-1996 - ---------------------------------- -------------------------------- -------------------------------- ------------------- Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Average Income/ Balances Expense Rate Balances Expense Rate Balances Expense Rate Balance Expense - ------------------------------------------------------------------------------------------------------------ ------------------- $ 1,353,781 $ 63,296 4.68% $ 1,771,185 $ 60,393 3.41% $ 3,354,370 $ 132,480 3.95% (27.92)% (29.12)% 562,168 40,822 7.26 839,611 58,128 6.92 427,462 33,684 7.88 26.29 20.42 17,323,493 949,495 5.48 15,521,842 878,256 5.66 15,371,187 1,058,785 6.89 9.24 3.79 2,331,794 202,042 8.66 2,042,759 194,441 9.52 2,065,168 216,009 10.46 (6.02) (11.41) - ----------- ---------- ----------- ---------- ----------- ---------- 19,655,287 1,151,537 5.86 17,564,601 1,072,697 6.11 17,436,355 1,274,794 7.31 7.19 1.23 15,533,301 1,174,391 7.56 14,598,413 1,176,101 8.06 15,545,313 1,267,719 8.15 5.49 2.24 5,228,036 442,323 8.46 4,728,069 404,625 8.56 4,337,654 393,168 9.06 10.98 8.63 1,960,218 184,118 9.39 1,625,081 138,124 8.50 1,569,215 132,386 8.44 12.26 13.68 10,335,934 871,283 8.43 9,579,529 871,444 9.10 8,896,087 851,766 9.57 12.31 9.34 18,768,362 1,614,093 8.60 15,657,193 1,479,106 9.45 13,201,395 1,414,312 10.71 15.35 10.01 9,804,094 1,367,342 13.95 7,297,439 1,150,433 15.76 6,198,294 1,061,098 17.12 21.83 16.82 1,174,142 88,549 7.54 1,020,028 83,882 8.22 991,395 87,740 8.85 17.19 8.94 - ----------- ---------- ----------- ---------- ----------- ---------- 62,804,087 5,742,099 9.14 54,505,752 5,303,715 9.73 50,739,353 5,208,189 10.26 12.17 9.26 - ----------- ---------- ----------- ---------- ----------- ---------- 84,375,323 6,997,754 8.29 74,681,149 6,494,933 8.70 71,957,540 6,649,147 9.24 9.88 7.19 (1,024,377) (1,017,730) (1,001,207) 6.13 9,441,436 9,382,596 8,670,185 7.38 - ----------- ----------- ----------- $92,792,382 $83,046,015 $79,626,518 9.65 =========== =========== =========== $13,551,945 $12,814,476 $11,665,109 11.02 9,277,460 168,959 1.82 8,757,283 141,064 1.61 8,145,956 183,521 2.25 (15.78) (29.02) 20,011,114 551,567 2.76 19,385,667 501,974 2.59 18,261,233 604,514 3.31 15.71 6.58 17,718,121 753,590 4.25 17,826,413 676,142 3.79 19,968,163 993,774 4.98 .55 (3.64) 6,668,240 303,385 4.55 5,854,385 247,479 4.23 5,760,855 285,213 4.95 (1.60) (7.59) 1,298,988 55,683 4.29 694,585 23,509 3.38 560,578 22,348 3.99 41.83 39.41 - ----------- ---------- ----------- ---------- ----------- ---------- 68,525,868 1,833,184 2.68 65,332,809 1,590,168 2.43 64,361,894 2,089,370 3.25 6.52 (1.35) 11,596,801 479,643 4.14 7,027,418 214,376 3.05 5,970,219 211,177 3.54 23.09 20.79 2,825,282 185,956 6.58 2,000,478 130,247 6.51 1,584,600 127,651 8.06 28.55 19.06 - ----------- ---------- ----------- ---------- ----------- ---------- 14,422,083 665,599 4.62 9,027,896 344,623 3.82 7,554,819 338,828 4.48 24.32 20.27 - ----------- ---------- ----------- ---------- ----------- ---------- 69,396,006 2,498,783 3.60 61,546,229 1,934,791 3.14 60,251,604 2,428,198 4.03 8.94 3.12 1,649,925 1,528,295 1,338,020 18.46 - ----------- ----------- ----------- 84,597,876 75,889,000 73,254,733 9.44 249,946 253,385 282,308 1.07 7,944,562 6,903,631 6,089,477 12.25 - ----------- ----------- ----------- $92,792,384 $83,046,016 $79,626,518 9.65% =========== =========== =========== 4,498,971 5.33 4,560,142 6.11 4,220,949 5.87 10.66 (292,222) (.34) (449,694) (.61) (694,969) (.97) 7.22 ---------- ----- ---------- ----- ---------- ----- $4,206,749 4.99% $4,110,448 5.50% $3,525,980 4.90% 11.51% ========== ===== ========== ===== ========== =====
6 11 RATE - VOLUME ANALYSIS (1,2)
1996-95 1995-94 --------------------------------------- ---------------------------------------- Change in Change in Income/ Rate Volume Income / Rate Volume $(thousands) Expense Effect Effect Expense Effect Effect - ---------------------------------------------------------------------------------------------------------------------- Earning assets: Short-term investments $ (38,817) $ (8,650) $ (30,167) $ 12,292 $ 20,723 $ (8,431) Loans held for sale 6,619 (2,985) 9,604 (7,897) 3,188 (11,085) Securities: (5) Taxable 153,821 (7,172) 160,993 25,046 168,666 (143,620) Tax exempt (32,235) (9,586) (22,649) (30,416) 1,655 (32,071) ----------- ----------- ----------- ----------- ----------- ----------- Total securities 121,586 (16,758) 138,344 (5,370) 170,321 (175,691) Loans and leases: (3) (4) Commercial, financial and agricultural 174,262 14,969 159,293 251,679 100,519 151,160 Real estate: Commercial 51,508 85 51,423 59,291 27,708 31,583 Construction 66,290 (10,098) 76,388 65,998 17,769 48,229 Residential 92,328 55,749 36,579 140,549 40,053 100,496 Consumer, net 170,725 7,216 163,509 96,235 145,369 (49,134) Credit Card 444,116 90,342 353,774 38,236 2,801 35,435 Leases, net 43,404 2,889 40,515 18,594 (3,655) 22,249 ----------- ----------- ----------- ----------- ----------- ----------- TOTAL LOANS AND LEASES 1,042,633 161,152 881,481 670,582 330,564 340,018 TOTAL EARNING ASSETS 1,132,021 132,759 999,262 669,607 524,796 144,811 Interest bearing liabilities: Interest bearing demand (132,851) (24,021) (108,830) 6,775 26,471 (19,696) Savings and money market 216,747 (86,014) 302,761 194,997 192,664 2,333 Time deposits: CD's less than $100,00 (36,525) (22,290) (14,235) 336,171 269,810 66,361 CD's $100,000 and over: Domestic (55,953) (33,355) (22,597) 23,330 63,242 (39,912) Foreign 42,451 (5,922) 48,373 31,899 20,777 11,122 ----------- ----------- ----------- ----------- ----------- ----------- Total deposits 33,869 (171,602) 205,472 593,172 572,964 20,208 Borrowed funds: Short-term 145,435 (56,964) 202,399 178,312 179,576 (1,264) Long-term 81,544 (12,249) 93,793 66,487 9,094 57,393 ----------- ----------- ----------- ----------- ----------- ----------- Total borrowed funds 226,979 (69,213) 296,192 244,799 188,670 56,129 ----------- ----------- ----------- ----------- ----------- ----------- TOTAL INTEREST BEARING LIABILITIES 260,848 (240,815) 501,664 837,971 761,634 76,337 ----------- ----------- ----------- ----------- ----------- ----------- NET INTEREST INCOME $ 871,173 $ 373,574 $ 497,598 $ (168,364) $ (236,838) $ 68,474 =========== =========== =========== =========== =========== =========== (1) Fully taxable equivalent basis using the federal statutory rate of 35% for all years presented. (2) The change not solely due to volume or rate has been prorated into rate and volume components. (3) Interest income on loans and leases includes $224 million, $154 million and $191 million of credit card fees in 1996, 1995 and 1994, respectively. Other fees included in interest income are not material. (4) Non-accrual loans and related income are included in their respective loan categories. (5) Average securities balances are based on amortized historical cost, excluding SFAS 115 adjustments to fair value, which are included in other assets.
7 12 IV NON-INTEREST INCOME AND NON-INTEREST EXPENSE NON-INTEREST INCOME
Increase $(MILLIONS) 1996 1995 (Decrease) - ----------------------------------------------------------------------------------------------- Investment management and advisory activities $ 279 $ 239 $ 40 Service charges on deposit accounts 654 545 109 Loan processing and servicing income: Mortgage banking 89 78 11 Interchange and merchant processing fees 281 261 20 Credit card servicing income 1,059 1,066 (7) Other loan servicing income 25 21 4 ------- ------- ------- Total loan processing and servicing income 1,454 1,426 28 Other income: Insurance 118 85 33 Securities activities 71 51 20 Investment banking 39 31 8 Gain on sale of assets 257 49 208 Other 474 351 123 ------- ------- ------- Total other income 959 567 392 ------- ------- ------- Non-interest income before securities transactions 3,346 2,777 569 Securities gain (losses), net 17 (2) 19 ------- ------- ------- TOTAL NON-INTEREST INCOME $ 3,363 $ 2,775 $ 588 ======= ======= =======
Non-interest income in 1996 totaled $3.4 billion, an increase of $588 million, or 21.2% from 1995. Excluding the impact of the BOLC acquisition, non-interest income increased $491 million, or 17.7%. The $97 million increase related to BOLC includes $54 million in service charges on deposit accounts, $16 million in other-other non-interest income and $11 million in investment management and advisory activities. The following discussion of individual non-interest income categories excludes the impact of BOLC. Investment management and advisory activities income for 1996 increased $29 million, or 12.1%, primarily reflecting an increase in investment management fees resulting from continued growth in funds under management and an increase in fees per account. Funds under management at year-end 1996 were $40 billion, up 12.8% from December 31, 1995. Service charges on deposit accounts increased $55 million or 10.1% in 1996 primarily reflecting a $36 million increase in fees on overdrafts, personal savings and checking accounts, as well as an overall increase in demand deposit account volume. The increase in credit card and merchant processing fees was due to increased credit card payment processing volume which is partially offset by a reclassification of income due to a joint venture arrangement entered into with a third party in 1996. Through this arrangement, merchant processing fees of $49 million and salary and other expense of $27 million were included in net earnings from the joint venture and classified as other income. The decrease in credit card servicing income compared with 1995 is due to both the reduction in the excess yield on securitizations as a result of a $542 million increase in net charge offs and a decrease in securitization gains of $100 million, mostly offset by higher volumes of serviced loans. 8 13 Insurance income and income from securities activities increased $28 million and $18 million, respectively, reflecting higher commissions related to increased sales volumes resulting from 1996 national sales programs. Gains on sale of assets increased $109 million in 1996 primarily reflecting a gain of $107 million from the December 1996 sale of a portion of an investment in a subsidiary. As a result of this sale, ownership in this subsidiary was reduced from 77% to 57%. In December 1996, BANC ONE sold $734 million, or approximately 61%, of an affinity credit card portfolio, with servicing released, which resulted in a pretax gain of $97 million which was offset by a reduced gains in 1996 on the sale of other credit card loans. The 1996 increase in other income was primarily due to the recognition of a $52 million increase in the fair value of the venture capital portfolio in 1996. NON-INTEREST EXPENSE
Increase $(MILLIONS) 1996 1995 (Decrease) - -------------------------------------------------------------------------------- Salaries and related costs $2,205 $1,876 $ 329 Net occupancy expense, exclusive of 192 175 17 depreciation Equipment expense 125 111 14 Taxes other than income and payroll 90 91 (1) Depreciation and amortization 448 367 81 Outside services and processing 674 528 146 Marketing and development 446 425 21 Communication and transportation 378 325 53 Other 504 429 75 ------ ------ ------ Total non-interest expense $5,062 $4,327 $ 735 ====== ====== ======
Non-interest expense in 1996 totaled $5.1 billion, up $735 million or 17.0% from the prior year. As mentioned previously, the BOLC acquisition and the ongoing Project One expenses significantly impacted 1996 expense levels. BOLC added $227 million in non-interest expenses during 1996 of which $99 million were in salaries and related costs, $44 million in depreciation and amortization, $27 million in outside services and processing, $11 million in communication and transportation and $16 million in other non-interest expense. Project One expenses totaled $150 million primarily related to $56 million in salaries and related costs, $70 million in outside services and processing and $10 million in communication and transportation expense. The net benefits from this initiative are expected to begin to be realized in the second half of 1997. Excluding the $227 million in BOLC expenses and $150 million in Project One expenses, 1996 non-interest expense totaled $4.7 billion, up $358 million or 8.3% from the prior year. The following discussion of individual non-interest expense categories excludes both BOLC and Project One. The increase in salaries and related costs was due primarily to increased staffing, increased bonuses and incentive pay resulting from the growth in securities and investment banking activities and credit card operations, as well as annual salary increases. Depreciation and amortization increased $37 million, or 10.1% primarily due to the second quarter 1996 write-off of $12 million in software and goodwill related to a non-bank subsidiary. The $49 million or 9.3% increase in outside services and processing expenses is primarily related to the increase in credit card accounts, transaction volumes and balances. Marketing and development costs increased $21 million, or 4.9% as a result of the increase in credit card marketing and solicitations in 1996. 9 14 Communication and transportation expense increased $32 million, or 9.8% reflecting an increase in the number of employees in bank-related businesses and $6 million related to communication systems. The $36 million decline in deposit insurance expense reflected lower deposit insurance premium rates, which provided a $70 million reduction in 1996 expense, offset in part by a one-time $34 million special assessment in 1996 on Savings Association Insurance Fund (SAIF) deposits. Other non-interest expense increased approximately 17.5% primarily due to 1996 amounts related to: (1) $12 million in additional expenses related to servicing deposit accounts; (2) a $9 million interest charge due to settlement of an IRS audit; (3) a $5 million loss on the sale of a subsidiary; and, (4) a $4 million prepayment penalty related to the early extinguishment of long-term debt. These increases were partially offset by a $9 million decrease in litigation expenses. The comparison between 1996 and 1995 also includes reductions in 1995 expenses due to a $10 million benefit from the reversal of an interest charge as a result of a favorable IRS ruling. Income Taxes The provision for income taxes was 33.0% of pretax income for 1996 as compared with 33.5% for 1995. The decrease in the effective tax rate is a result of state tax strategies. In addition, the federal effective rate is lower due to the resolution of certain open issues with taxing authorities. A similar reduction in the effective tax rates is not expected to occur in 1997. V BALANCE SHEET ANALYSIS Loans and Leases Ending loans and leases, excluding loans held for sale, increased $11.0 billion, or 16.0%, from December 31, 1995 to December 31,1996. The increase reflected loan growth in substantially all categories as well as $3.3 billion related to BOLC. Loans held for sale at December 31, 1996 increased to $1.5 billion as compared to $.5 billion at December 31, 1995. This increase reflected $1 billion of credit card loans classified as held for sale in December, 1996. BANC ONE had $.5 billion of mortgage loans held for sale at both December 31, 1996 and 1995. LOAN PORTFOLIO COMPOSITION
December 31, - ------------------------------------------------------------------------------------------------------------ $(millions) 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------ Ending loans and leases: Commercial, financial and agricultural $20,232 $17,904 $16,619 $15,208 $15,086 Real estate: Commercial 6,429 5,668 5,571 4,886 4,746 Construction 3,602 2,692 2,195 1,709 1,516 Residential 13,917 10,756 10,918 9,958 9,559 Consumer, net 19,459 18,408 19,070 17,312 14,063 Credit card 13,424 11,258 9,772 8,922 6,946 Leases, net 2,327 1,732 1,339 1,107 1,000 ------- ------- ------- ------- ------- TOTAL LOANS AND LEASES $79,390 $68,418 $65,484 $59,102 $52,916 ======= ======= ======= ======= =======
Significant loan origination activity is not fully reflected in ending loan balances due to securitizations and sales of $9.1 billion and $12.8 billion in loans during 1996 and 1995, respectively. In addition, loans held for sale are excluded. 10 15 The following table depicts the maturities of certain loans at December 31, 1996. Demand loans having no stated maturity are classified as due within one year. Loans that have adjustable rates are shown in their maturity category by their scheduled principal repayment dates rather than the dates at which they are repriced. The repricing characteristics of certain of the loans included below have been synthetically altered by the use of off-balance sheet investment products; however, classifications below are based on the contractual terms of the loans.
Commercial, Financial Real Estate, and Agricultural Construction --------------------- ---------------------- $(millions) Fixed Variable Fixed Variable - -------------------------------------------------------------------------- 1997 $ 1,532 $ 8,955 $ 137 $ 1,913 1998 through 2001 2,162 5,483 182 1,212 After 2001 719 1,381 66 92 ------- ------- ------- ------- $ 4,413 $15,819 $ 385 $ 3,217 ======= ======= ======= =======
Credit Quality The process for monitoring loan quality includes detailed, monthly analysis of delinquencies, nonperforming assets and potential problem loans. Management extensively monitors credit through appraisals, assessment of the financial condition of borrowers and avoidance of loan concentrations. In addition to these factors, historically-based migration methodologies are used to analyze the appropriate level of the allowance for credit losses for the loans and lease portfolio. Further, each portfolio is reviewed to determine if additional subjective reserves are necessary. This subjective review is systematic for each portfolio, with consideration given to the current trends in the portfolio, projection of future results, changes in underwriting of the product, and results of recent loan review or internal audit examinations. Management believes that its methodology of determining the allowance for credit losses and projection of future economic and business trends is reflected in the current level of the overall allowance. As new markets are entered, a standardized loan-monitoring system and credit policies, including underwriting standards, are implemented immediately. Centralized management of problem assets with active programs for resolution and disposition of foreclosed properties, as well as implementation of internal loan monitoring systems at newly acquired affiliates, have aided in the reduction of the level of nonperforming assets. Excluding the impact of BOLC, non-accrual loans decreased $16 million from December 31, 1995. At year end 1996, other real estate owned (OREO) decreased $23 million from December 31, 1995. The loan portfolio continued to reflect the policy of minimizing concentrations in any one industry. There was no significant loan concentration with any single borrower or area of the country. The commercial loan portfolio consists primarily of numerous small balance loans in diverse businesses located throughout the markets served. The largest concentration of lending was to real estate operators managers and developers and construction contractors which represented 9.70% and 9.06% of total loans and leases at December 31, 1996 and 1995, respectively. At year end 1996, credit card loans totaled $14.4 billion of on-books and $34.8 billion of managed receivables. Foreign loans totaled less than 1% of total loans at December 31, 1996 and 1995. 11 16 NONPERFORMING ASSETS AND PAST DUE LOANS
$(THOUSANDS) 1996 1995 1994 1993 1992 - -------------------------------------------------------------------------------------------------------------------------- Non-accrual loans $374,245 $349,084 $377,409 $482,331 $680,408 Renegotiated loans 8,199 5,211 3,910 7,567 28,361 -------- -------- -------- -------- -------- Total nonperforming loans 382,444 354,295 381,319 489,898 708,769 Other Real Estate Owned (OREO) 52,970 75,483 84,355 153,260 191,665 -------- -------- -------- -------- -------- Total nonperforming assets $435,414 $429,778 $465,674 $643,158 $900,434 ======== ======== ======== ======== ======== Nonperforming loans as a percent of total loans (1) .47% .51% .58% .81% 1.33% Nonperforming loans as a percent of total loans and OREO (1) .54% .62% .71% 1.06% 1.68% Allowance for credit losses as a percent of nonperforming loans 313.17% 284.52% 252.59% 210.30% 141.68% Allowance for credit losses as a percent of nonperforming assets 275.07% 234.55% 206.84% 160.19% 111.52% Loans delinquent 90 days or more and accruing interest $483,942 $300,620 $200,268 $234,610 $242,777 Loans delinquent 90 days or more and accruing interest to total loans (1) .60% .44% .30% .39% .45% Interest foregone on nonperforming loans (after tax) (2) $ 18,148 $ 27,540 $ 18,584 $ 26,727 $ 35,483 (1) Includes loans held for sale. (2) The amount of gross interest on nonperforming loans that would have been recorded during 1996 if the loans had been current throughout the year totaled $42 million. Of this amount, $14 million of interest was actually recorded on nonperforming loans during 1996.
Delinquency and net charge-off trends over time are a reflection of a number of factors including credit quality of the loan portfolio, average seasoning of the accounts, general economic conditions and the successful results of portfolio management techniques including collection strategies. The unfavorable conditions experienced during 1996 in the consumer portfolios, specifically the credit card portfolio, have been a result of increased competition for loans, the maturation of loans in the portfolios and a general increase in personal bankruptcy filings. These trends are expected to continue and the level of net charge-offs are anticipated to grow through the first half of 1997. To mitigate these trends, BANC ONE has tightened and refined the consumer credit underwriting criteria. In addition, BANC ONE's overall portfolio management strategy has included enhancing the collection efforts resulting in earlier contact with delinquent customers which has an impact on managing future delinquencies and net charge-offs. For the remaining non-consumer loan portfolio, management expects to experience a gradual increase in nonperforming assets, delinquencies and net charge-offs to more normal historical levels. 12 17 The following shows net charge-offs and delinquent loans by loan type:
Loans Delinquent 90 Net Charge-offs (1) (4) days or More (2) (4) December 31, December 31, ------------------------- ----------------------- 1996 1995 1996 1995 - --------------------------------------------------------------------------------------------------------------- Wholesale (3) .05% .08% .18% .16% Real estate, residential .16 .07 .24 .25 Consumer 1.12 .74 .49 .34 Credit card 4.48 3.04 2.06 1.52 Leases .27 .53 .07 .03 Total loans and leases 1.08 .71 .60 .44 (1) Ratios presented are expressed as a percent of average balances. (2) Ratios presented exclude nonperforming loans and are expressed as a percent of ending balances. (3) Wholesale loans include commercial, financial, agricultural, commercial real estate and construction real estate loans. (4) Includes loans held for sale.
The increase in the net charge-off ratio for total loans and leases reflected deteriorating consumer credit quality, primarily in credit cards for the reasons noted above. Personal bankruptcies accounted for 44% of managed credit card net charge-offs in 1996, up from 41% in 1995. The net charge-off ratio for other consumer loans reflects the overall trend in consumer credit quality deterioration experienced by the financial services industry. Allowance for Credit Losses The allowance for credit losses at December 31, 1996 totaled $1.2 billion and represented 1.51% of total loans and leases outstanding at December 31, 1996 compared with $1.0 billion, or 1.47%, at December 31, 1995. To maintain an adequate level of allowance for credit losses and allow for loan growth and increased charge-offs, the loan loss provision continued to exceed net charge-offs. In 1996, the provision for credit losses totaled $943 million, $123 million higher than related net charge-offs. This compares with 1995 experience where the total provision for credit losses totaled $526 million, $49 million higher than related net charge-offs. 13 18 The allowance for credit losses as a percentage of ending loans and leases represents one measure of adequacy. The allowance for credit losses expressed as a percentage of nonperforming loans is another. On this basis, the December 31, 1996 allowance for credit losses represented 313% of nonperforming loans, up from 285% at December 31, 1995. It is management's view that the allowance for credit losses at year end 1996 was adequate and consistent with the composition of the portfolio and credit quality trends. Refer to the following two tables for more detail. SUMMARY OF ALLOWANCE FOR CREDIT LOSSES AND SELECTED STATISTICS
$(THOUSANDS) 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------------------------- ALLOWANCES FOR CREDIT LOSSES, BEGINNING OF YEAR $ 1,008,023 $ 963,180 $ 1,030,254 $ 1,004,174 $ 956,403 Charge-offs Commercial, financial and agriculture (57,605) (50,335) (49,504) (95,136) (187,375) Real Estate (35,875) (36,016) (29,373) (64,956) (97,098) Consumer (340,880) (218,763) (176,045) (167,096) (219,552) Credit cards (623,118) (361,460) (318,068) (312,636) (311,545) Leases (8,518) (11,334) (5,737) (11,878) (15,007) ----------- ----------- ----------- ----------- ----------- Total charge-offs (1,065,996) (677,908) (578,727) (651,702) (830,577) =========== =========== =========== =========== =========== Recoveries of loans previously charged off Commercial financial and agriculture 37,994 41,057 60,088 70,917 51,015 Real Estate 22,494 16,696 19,806 13,454 12,424 Consumer 118,363 83,580 80,662 77,252 68,995 Credit cards 64,382 55,669 50,991 45,206 37,951 Leases 3,118 3,499 3,358 4,970 6,175 ----------- ----------- ----------- ----------- ----------- Total recoveries of loans previously charged off 246,351 200,501 214,905 211,799 176,560 ----------- ----------- ----------- ----------- ----------- Net charge-offs (819,645) (477,407) (363,822) (439,903) (654,017) Provision for credit losses 942,714 526,138 292,222 449,694 694,969 Allowance for assets acquired/other 66,587 (3,888) 4,526 16,289 6,819 ----------- ----------- ----------- ----------- ----------- ALLOWANCE FOR CREDIT LOSSES, END OF YEAR $ 1,197,679 $ 1,008,023 $ 963,180 $ 1,030,254 $ 1,004,174 =========== =========== =========== =========== =========== ALLOWANCE AND LOSS RATIOS: Net charge-offs to average total loans 1.08% .71% .57% .79% 1.28% Ending allowance to ending loans 1.51% 1.47% 1.47% 1.74% 1.90%
ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES (1)
1996 1995 1994 ------------------------------------------------------------------------------------------------ Percent of Percent of Percent of Loans to Loans to Loans to $(thousands Amount Total Loans Amount Total Loans Amount Total Loans - ---------------------------------------------------------------------------------------------------------------------- Commercial, financial and agriculture $ 196,281 25% $ 213,911 26% $ 246,561 25% Real Estate 103,743 30 133,035 28 172,411 29 Consumer, net 273,907 25 211,874 27 209,554 29 Credit card 600,977 17 432,979 16 317,641 15 Leases, net 22,771 3 16,224 3 17,013 2 ---------- ---------- ---------- ---------- ---------- ---------- Total Allowance for credit losses $1,197,679 100% $1,008,023 100% $ 963,180 100% ========== ========== ========== ========== ========== ==========
1993 1992 ----------------------------------------------------------------- Percent of Percent of Loans to Loans to $(thousands Amount Total Loans Amount Total Loans - ---------------------------------------------------------------------------------------- Commercial, financial and agriculture $ 284,994 26% $ 360,165 28% Real Estate 204,864 28 157,956 30 Consumer, net 215,742 29 210,234 27 Credit card 308,125 15 256,806 13 Leases, net 16,529 2 19,013 2 ---------- ---------- ---------- ---------- Total Allowance for credit losses $1,030,254 100% $1,004,174 100% ========== ========== ========== ==========
(1) Allowance for potential losses not specifically identified is allocated between the commercial and leases loan categories. 14 19 Deposit Analysis Total deposits at December 31, 1996 increased $4.9 billion, or 7.1%, when compared to December 31, 1995. The increase was primarily due to the inclusion of BOLC, which had deposits of $4 billion at December 31, 1996. The retail deposit mix continues to change as consumers shifted funds out of lower rate savings and demand accounts into higher yielding market rate accounts, primarily money market savings and time deposits. The repricing characteristics of certain of the deposits included in the following table have been synthetically altered with the use of off-balance sheet investment products, however, classifications shown are based on the contractual terms of the deposits. The following represents the contractual time remaining until maturity of time deposits (including all foreign deposits) greater than $100,000:
December 31, December 31, $(MILLIONS) 1996 1995 - ------------------------------------------------------------------------------- 0-3 months $3,786 $3,181 4-6 months 908 854 7-12 months 1,096 1,061 Over 1 year 2,170 1,221 ------ ------ Total $7,960 $6,317 ====== ======
Short and Long-Term Borrowings Short-term borrowings increased $5.8 billion to $18.3 billion at December 31, 1996 from $12.5 billion at December 31, 1995. Long-term borrowings increased $2.5 billion, to $6.8 billion at December 31, 1996 from $4.3 billion at December 31, 1995. Both short-term and long-term funding needs increased in 1996 primarily due to the faster rate of growth in the loan portfolio compared with the growth rate of core deposits. In October 1996, $500 million of 7.625% subordinated debentures due in 2026 were issued. In December 1996, $200 million of 9.33% redeemable preferred securities of a subsidiary trust holding solely subordinated debentures of the Corporation due in 2027 were issued. All but $7 million of the preferred securities were redeemed in June 1997. In addition, during 1996, long-term fixed and variable rate bank notes increased $1.8 billion at December 31, 1996 from $1.9 billion at December 31, 1995. During the first half of 1997, the Corporation established a medium term note facility and issued $750 million of medium term notes due between 2000 and 2002 and issued $500 million of subordinated debentures due 2027 and $400 million of subordinated notes due 2007. VI RISK MANAGEMENT The responsibility for measuring, monitoring and reporting certain risks related to capital markets activities is performed by a centralized risk management function. This function oversees the establishment of measurement principles, limits, monitoring and reporting requirements for all capital markets risks, which include: interest rate risk, liquidity risk, trading risks, and credit risks. These policies and risk positions are regularly reviewed by the Corporation's Asset Liability Committee (ALCO) and approved by the Corporation's Board of Directors. Market Risk Management Market risk is the risk of loss arising from adverse changes in market prices and rates. BANC ONE's market risk is comprised primarily of interest rate risk created by its core banking activities of lending and deposit taking. Additionally, and to a much less significant extent, interest rate and foreign exchange risks are generated from certain trading activities. Management continually develops and applies cost effective strategies to mitigate these risks. Market risk limits are established based on the Corporation's tolerance for risk. 15 20 Interest Rate Risk Management--BANC ONE's primary purpose in managing interest rate risk is to effectively invest the Corporation's capital and to manage and preserve the value created by its core banking businesses. BANC ONE utilizes an investment portfolio as well as off-balance sheet instruments to manage the interest rate risk naturally created through its business activities. The components of interest rate risk which are actively measured and managed include: repricing risk, basis risk, option risk, and the risk of non-parallel shifts in the yield curve. Interest rate risk is measured in two ways to capture both near-term and long-term effects of rate volatility: (1) Earnings At Risk (EAR), a measure of forecasted earnings volatility over each of the next five years, and; (2) Value At Risk (VAR), which is a measure of the volatility of market value of equity. Market value of equity is defined as the present value of all future expected cash flows of currently held assets, liabilities, and off-balance sheet items. To measure these risks, BANC ONE incorporates historical movements (volatility) of market rates to calculate 99% of statistically probable future rate movements over the next 90 days. As a result, the probability of the measured risk positions being realized or exceeded should be less than 1%. The Corporation's EAR and VAR, as of December 31, 1996, are summarized in the table below. As of December 31, 1996, historical volatilities suggest rates could move up by no more than 85 basis points or down by 74 basis points over the next 90 days. Given these potential rate movements, the first line in the table indicates BANC ONE's projected earnings next year would decline by 4.5% in the up rate scenario, and increase by 4.4% in the down rate scenario. The last line of the table indicates the Corporation's market value of equity would decline by 1.9% in the up rate scenario.
Risk Due to an Risk Due to an Increase in Rates Decrease in Rates of 85 Basis Points of 74 Basis Points - ----------------------------------------------------------------------------------- Earnings at Risk (EAR) 1997 (4.5)% 4.4% 1998 (1.0) (1.8) 1999 3.2 (3.4) 2000 5.7 (5.7) 2001 9.0 (6.5) Value at Risk (VAR) (1.9)% 1.0%
Trading Risk Management-- Trading risk is the potential for financial loss as the result of changes in the market value of positions held for proprietary trading or for market making purposes. The primary purpose of maintaining trading portfolios is either to provide an inventory for purposes of customer dealings or to capitalize on perceived market opportunities. BANC ONE is primarily engaged in the former. In order to manage trading risk, policies limit the degree to which the value of aggregate trading assets can be adversely affected by probable changes in the marketplace (interest rates, currencies, etc.). Using historical market volatilities for each asset and the expected time needed to liquidate the position (generally 10 trading days), the maximum adverse value change (using three standard deviations of historical volatility) is calculated. As of December 31, 1996, the value at risk of all trading assets was $4 million. 16 21 Liquidity Risk Management Liquidity is managed in order to preserve stable, reliable and cost effective sources of cash to fund loan growth as well as expected and unexpected outflows of deposits and other liabilities. In addition, liquidity management seeks to avoid over-concentrations on a limited number of liability sources and to minimize reliance on potentially volatile wholesale funds and large liabilities. BANC ONE's funding profile at December 31, 1996 is summarized in the table below:
Percent of On-Balance Percent of PRODUCT TYPE Sheet Funding Total Funding - -------------------------------------------------------------------------------------------------------- Retail: Transaction deposits 50% 40% Time deposits 23 19 WHOLESALE: Short-term: Federal funds purchased and repurchase agreements 12 9 Commercial paper and bank notes 4 4 Eurodollar certificates of deposit 3 2 Other 1 1 Long-term: Long-term borrowings 3 3 Bank notes 4 3 Securitizations 0 19 --- --- Total 100% 100% === ===
Due to BANC ONE's capital, size and high credit quality ratings, the Corporation has access to substantial sources of diverse liquidity. Core deposits, representing approximately 59% of the Corporation's funding, remain BANC ONE's primary source of liquidity, and are generated by a geographically diverse retail network of affiliate banks in 12 states. Approximately 22% of funding is supported through a variety of wholesale markets. Additionally, 19% of funding is generated by asset securitizations, which BANC ONE views as a growing source of reliable and efficient funding. Credit Risk Management for Capital Markets Activities As an inherent part of its business, BANC ONE holds and trades various financial instruments (e.g., securities and derivatives) for itself and for customers. These dealings in the capital markets create credit risk with transaction counterparties and securities issuers. On- and off-balance sheet credit risk is managed by limiting the amount of exposure to a counterparty based on its current financial condition and reputation, by diversifying exposures and by cost-effectively using available risk mitigation tools (e.g., collateralizations, netting agreements, and credit enhancements). There were no past due amounts or reserves for possible credit losses at December 31, 1996, related to off-balance sheet investment product transactions, nor were there any charge-offs during the three years ended December 31, 1996. Customer cap and swap agreements are created to accommodate the needs of BANC ONE's commercial loan customers. BANC ONE enters into offsetting transactions with third parties and has prudent controls on transaction size, term and customer disclosure guidelines. Customer contracts outstanding, excluding offsetting transactions, had notional amounts of $1.6 billion at December 31, 1996. 17 22 VII CAPITAL Capital levels are determined based on many factors, including regulatory requirements, costs of alternative sources of capital, prevailing interest rates, perceived credit risks and liquidity needs. BANC ONE is continuing the implementation of the economic value added (EVAtm) concept, which measures the individual return on capital for each line of business. Under this concept, capital is deployed to each of the lines of business, based on risks incurred, in order to measure the economic value added or residual income provided to shareholders. Residual income or economic value added is the return over and above the required return on capital. The objectives of introducing this concept are to ensure lines of business are continually improving the return on existing capital, making investments which will create value for the shareholder, and maintaining optimal capital levels. Total equity to total assets at December 31, 1996 was 8.80% compared with 9.25% at December 31, 1995. Further, BANC ONE's tangible common equity to net assets ratio was 7.98% and 8.35% at December 31, 1996 and 1995, respectively. This change has been achieved by increasing loans outstanding and purchasing stock. This decrease in tangible capital is in line with the Corporation's stated objective to gradually reduce this ratio to a level which would continue to ensure adequate capital levels while increasing the returns to shareholders. Additionally, BANC ONE's objective is to maintain, at a minimum, a capital position that meets the federal regulators "well capitalized" classification. Regulatory defined Tier I and total risk adjusted capital ratios were 9.98% and 14.07% respectively at December 31, 1996, both significantly above regulatory capital requirements of 4% and 8%, respectively. All the Corporation's banks meet the regulatory definition of well capitalized banks. Common shares outstanding increased from 566.5 million at December 31, 1995 to 570.7 million at December 31, 1996. This change reflected the issuance of stock related to acquisitions, partially offset by the purchase of treasury stock. The common stock dividend payout ratio was 38%, 40% and 41% in 1996, 1995 and 1994, respectively. VIII FOURTH QUARTER REVIEW Net income for the fourth quarter of 1996 was $442 million, or $.74 per common share, compared with the 1995 fourth quarter results of $397 million, or $.67 per common share. This $45 million increase primarily resulted from the improvement in the net interest margin, as well as the following significant pre-tax items affecting non-interest income and expense: - - The inclusion of BOLC in 1996 operations affected the comparability of non-interest income and expense by $27 million and $55 million, respectively. - - A $97 million gain on the sale of a $734 million affinity credit card portfolio was included in 1996. - - Project One expenses of $61 million were included in various non-interest expense categories for 1996. - - A $49 million increase in salaries and related costs was included in 1996. - - Settlement of IRS examinations affected both 1996 and 1995 through a $9 million interest charge in 1996 and a reversal of a $10 million interest charge in 1995. - - A $107 million gain on the sale of a portion of an investment in a subsidiary was included in 1996. 18 23 IX COMPARISON OF 1995 VERSUS 1994 Overview of Operations--Net income for 1995 was $1.4 billion or $2.43 per common share, increasing from $1.2 billion or $1.99 per common share in 1994. Results for 1994 were significantly impacted by securities losses, merger and litigation expense and operations consolidation charges (a total of $271 million after tax). Results for 1995 were favorably impacted by significant earning asset generation in 1995 and 1994. Return on average assets increased to 1.54% in 1995 from 1.28% in 1994. Return on average common equity increased to 17.26% in 1995 from 14.73% in 1994. The ending ratio of average common equity to average assets increased to 8.81% in 1995 from 8.56% in 1994. Net Interest Income--Interest income increased 9.8% to $7.6 billion and interest expense increased 33.5% to $3.3 billion from 1994 to 1995, resulting in a slight decline in net interest income. Net interest margin decreased to 5.08% in 1995 from 5.33% in 1994. This was due primarily to the impact of credit card sales with servicing retained. Net income was essentially unaffected by these loan sales; however, classifications within the income statement changed with net interest income and provision for credit losses decreasing while non-interest income (loan servicing income) increased. Average earning asset increased to $85.2 billion in 1995 from $84.4 billion in 1994. The increase in interest income was primarily due to a significant change in asset mix and the higher level of market interest rates. Interest income on loans and leases (FTE) increased by $671 million in 1995 over 1994. The average balance of loans and leases grew 6.22% in 1995 and the overall yield on loans and leases increased from 9.14% in 1994 to 9.61% in 1995. Margins in some loan portfolios and product lines were negatively impacted by competitive pricing pressure and marketing efforts which utilized introductory pricing to achieve growth in balances. Deposits and Borrowed Funds--Total average interest-bearing liabilities increased to $70.2 billion in 1995 from $69.4 billion in 1994. The average rate paid on these liabilities increased from 3.60% in 1994 to 4.76% in 1995. The increase in the rate paid was attributable to higher market interest rates and a shift in the retail funding base from relatively low-cost deposit products to higher yielding deposit products in order to compete effectively against non-bank providers of retail money market investment products. Various capital market transactions were executed in both 1995 and 1994 to help minimize the sensitivity of earnings to changes in market interest rates. As a result, the significant changes in market interest rates which occurred in 1995 did not significantly impact net interest income. Off-Balance Sheet Investment Products--The use of off-balance sheet investment products, primarily interest rate swaps, decreased interest income by $145 million in 1995 compared with increasing interest income by $22 million in 1994. The use of these investment products increased deposit and other borrowing costs by $60 million in 1995 and decreased such costs by $95 million in 1994. Non-Interest Income and Non-Interest Expense--Total non-interest income increased $924 million in 1995 compared to 1994 and total non-interest expense increased $163 million in 1995 from 1994. Service charges on deposit accounts increased $61 million due to an increase in fees on overdrafts, an overall increase in fees per transaction and improved service fee collection. Loan servicing income increased during 1995 due to an increase in servicing fee income related to sales of loans with servicing retained. Securities losses in 1995 were $2 million compared to losses of $267 million in 1994. The change was due to the sale of U.S. Treasury and Agency securities during 1994 to reduce liability sensitivity which resulted in an aggregate pretax loss of $285 million. 19 24 Salaries and related costs increased $41 million in 1995 as a result increased staffing, merit and other pay increases and a continued shift to incentive compensation in 1995, offset by a decrease due to the recognition of $36 million in severance costs in 1994 related to operations consolidation. Net occupancy expense, equipment expense and depreciation and amortization decreased $15 million, $14 million and $53 million, respectively, in 1995. These decreases were primarily due to expenses recognized during 1994 related to operations consolidation. Taxes other than income and payroll increased $33 million as a result of the resolution of franchise and intangible tax matters which resulted in a refund in 1994. Marketing and development costs increased $145 million as a result of an increase in credit card marketing and solicitations in 1995. FDIC insurance expense decreased $65 million during 1995 due to the FDIC's decision to lower deposit insurance premiums from $.23 to $.04 per $100 in Bank Insurance Fund deposits for "well capitalized" and "well managed" banks. Loan Quality--The allowance for credit losses increased to $1.0 billion at December 31, 1995 from $963 million at December 31, 1994. This increase was due to an increase in the consumer loan and credit card provisions due to the growth in these portfolios and the cyclical deterioration in consumer credit quality offsetting improvement in wholesale credit quality. The allowance for credit losses as a percentage of ending loans remained essentially constant from 1994 to 1995. 20 25 CONSOLIDATED QUARTERLY FINANCIAL DATA (Unaudited)
Quarters ---------------------------------------------------------------------- 1996 1995 ----------------------------------- --------------------------------- $(millions except per share data) Fourth Third Second First Fourth Third Second First --------------------------------------------------------------------------------------------------------------------------------- Selected average balances Loans held for sale $453 $457 $699 $590 $513 $518 $344 $295 Taxable securities (1) 16,653 16,953 17,865 18,057 14,931 14,461 15,391 14,820 Tax exempt securities (1) 1,664 1,651 1,730 1,733 1,769 1,906 2,043 2,145 ------- ------- ------- ------- ----- ----- ----- ----- Total securities 18,317 18,604 19,595 19,790 16,700 16,367 17,434 16,965 Commercial financial and agricultural 19,926 19,294 19,387 18,864 17,913 17,686 17,570 16,570 Real estate: Commercial 6,322 6,238 6,098 5,989 5,611 5,609 5,602 5,536 Construction 3,518 3,321 3,094 2,920 2,657 2,450 2,376 2,281 Residential 13,659 11,610 11,206 11,101 11,670 11,849 11,375 11,060 Consumer, net 19,275 20,301 20,173 20,028 18,387 17,904 17,645 18,912 Credit card 13,662 12,132 11,298 12,785 11,427 9,915 9,274 9,595 Leases, net 2,210 2,142 1,972 1,776 1,636 1,507 1,419 1,354 ------- ------- ------- ------- ----- ----- ----- ----- Net loans and leases 78,572 75,038 73,228 73,463 69,301 66,920 65,261 65,308 Other earning assets 793 618 646 591 659 879 1,047 2,190 Total earning assets 98,135 94,717 94,168 94,434 87,173 84,684 84,086 84,758 Allowance for credit losses (1,137) (1,115) (1,082) (1,079) (986) (960) (957) (963) ------- ------- ------- ------- ----- ----- ----- ----- Total assets 108,171 104,131 103,425 104,024 96,212 93,645 92,817 93,155 Demand deposits: Non-interest bearing 14,602 13,992 14,074 14,143 13,509 13,166 12,800 13,071 Interest bearing 2,086 2,131 2,240 3,115 7,050 8,417 8,677 8,928 Savings and money market deposits 29,430 29,342 29,198 28,053 21,875 19,994 19,202 19,284 Time deposits 26,935 26,689 26,720 26,815 25,417 26,214 27,388 27,278 ------- ------- ------- ------- ----- ----- ----- ----- Total deposits 73,053 72,154 72,232 72,126 67,851 67,791 68,067 68,561 Borrowed funds: Short-term 16,760 14,963 14,593 15,164 12,948 11,296 10,819 11,186 Long-term 5,982 4,934 4,726 4,683 4,217 3,821 3,357 3,245 ------- ------- ------- ------- ----- ----- ----- ----- Total borrowed funds 22,742 19,897 19,319 19,847 17,165 15,117 14,176 14,431 Total interest bearing liabilities 81,193 78,059 77,477 77,830 71,507 69,742 69,443 69,921 Preferred stock 214 241 243 248 250 250 250 250 Common stockholders' equity $9,432 $9,290 $9,160 $9,275 $8,572 $8,347 $8,181 $7,988 Margin analysis (2)(5)(6) Net interest income 5.52% 5.43% 5.43% 5.44% 5.14% 5.09% 5.01% 5.10% Net funds function 4.22% 4.42% 4.60% 4.63% 4.29% 4.37% 4.50% 4.72% Key operating ratios Return on average assets (5) 1.63% 1.58% 1.54% 1.63% 1.64% 1.58% 1.40% 1.52% Return on average common equity (5) 18.49 17.49 17.17 18.15 18.18 17.56 15.65 17.57 Return on average total equity (5) 18.23 17.23 16.90 17.86 17.87 17.25 15.40 17.25 Average common equity to average assets 8.72 8.92 8.86 8.92 8.91 8.91 8.81 8.58 Average total equity to average assets 8.92 9.15 9.09 9.15 9.17 9.18 9.08 8.84 Tier I capital ratio 9.98 9.63 10.11 10.10 10.35 10.36 10.61 10.43 Total risk adjusted capital ratio 14.07 13.32 13.86 14.03 14.39 14.49 14.12 13.93 Tier I leverage ratio 8.88% 8.52% 8.72% 8.44% 8.87% 8.90% 8.78% 8.60% Credit analysis: Net charge-offs to average loans and leases (5) 1.31% 1.10% .94% .97% .91% .75% .62% .54% Ending allowance to loans and leases 1.51 1.48 1.49 1.50 1.47 1.44 1.45 1.45 Nonperforming assets (3): Total $435 $478 $458 $486 $430 $445 $431 $449 Percent of total loans and leases(7) .54% .62% .62% .67% .62% .65% .65% .68% Loans delinquent 90 or more days (4): Total $484 $405 $331 $294 $301 $251 $228 $209 Percent of total loans and .60% .53% .45% .40% .44% .37% .34% .32% leases (7) Allowance to nonperforming loans 313% 272% 284% 263% 285% 272% 268% 259% Common stock: Average shares outstanding (000) 590,675 592,779 595,651 600,409 587,155 587,663 588,404 589,356 Shares traded (000) 54,261 60,724 50,688 62,091 37,100 39,873 53,708 48,353 Per common share data Net income $.74 $.69 $.66 $.69 $.67 $.63 $.54 $.59 Cash dividends declared .34 .34 .34 .34 .31 .31 .31 .31 Book value 16.93 16.42 16.26 15.99 15.54 16.13 15.75 15.41 Stock price: High 47.88 41.38 37.75 38.50 36.48 33.41 31.94 27.39 Low 40.38 31.25 32.88 31.94 30.35 27.95 26.03 22.85 Close $43.00 $41.00 $34.00 $35.63 $34.21 $33.18 $29.32 $25.91 Preferred stock, Series C: Shares traded (000) 926 2,056 880 1,222 1,678 990 1,316 1,233 Stock price: High $91.25 $80.00 $72.63 $73.88 $70.75 $64.00 $61.75 $54.25 Low 77.75 60.75 63.88 62.00 59.38 55.58 52.25 49.63 Close $83.00 $79.13 $66.75 $69.13 $65.63 $63.75 $58.25 $51.75
21 26 CONSOLIDATED QUARTERLY FINANCIAL DATA (Unaudited)
Quarters --------------------------------------------------------------------------- 1996 1995 ----------------------------------- ------------------------------------- $(millions) Fourth Third Second First Fourth Third Second First ----------------------------------------------------------------------------------------------------------------------------- Condensed income statement: Interest income (2) Loan held for sale $6 $9 $13 $11 $10 $10 $7 $6 Taxable securities 271 276 286 295 247 240 254 233 Tax-exempt securities 33 34 36 36 38 42 45 47 ----- ----- ----- ----- ----- ----- ----- ----- Total interest on securities 304 310 322 331 285 282 299 280 Commercial financial and agricultural 413 404 400 384 369 365 361 331 Real estate: Commercial 143 141 135 134 128 126 126 122 Construction 87 81 77 72 68 63 60 59 Residential 322 269 258 255 258 265 251 238 Consumer, net 456 469 468 488 439 423 410 438 Credit card 529 463 403 455 396 350 330 330 Leases, net 41 40 37 32 30 26 25 26 ----- ----- ----- ----- ----- ----- ----- ----- Total interest on loans and leases 1,991 1,867 1,778 1,820 1,688 1,618 1,563 1,544 Total interest on other earning assets 11 9 9 8 10 14 17 35 Total interest income 2,312 2,195 2,122 2,170 1,993 1,924 1,886 1,865 Interest expense: Demand deposits 9 10 10 15 35 43 48 50 Savings and money market deposits 250 245 236 232 206 191 180 170 Time deposits: CDs under $100,000 257 258 261 276 275 280 278 257 CDs $100,000 and over 118 110 77 96 91 97 116 110 ----- ----- ----- ----- ----- ----- ----- ----- Total interest on deposits 634 623 584 619 607 611 622 587 Borrowed funds: Short-term 217 198 189 200 184 161 156 157 Long-term 100 82 77 75 73 67 57 55 ----- ----- ----- ----- ----- ----- ----- ----- Total interest on borrowed funds 317 280 266 275 257 228 213 212 ----- ----- ----- ----- ----- ----- ----- ----- Total interest expense 951 903 850 894 864 839 835 799 ----- ----- ----- ----- ----- ----- ----- ----- Net interest income (2) 1,361 1,292 1,272 1,276 1,129 1,085 1,051 1,066 Provision for credit losses 320 240 194 188 186 153 108 79 ----- ----- ----- ----- ----- ----- ----- ----- Net funds function (2) 1,041 1,052 1,078 1,088 943 932 943 987 Non-interest income: Income from fiduciary activities 77 72 68 63 62 60 59 59 Service charges on deposit accounts 170 166 161 157 145 141 132 127 Loan processing and servicing income 362 371 369 348 372 355 314 282 Securities gains 10 1 4 1 6 1 2 (11) Other 378 228 170 188 177 164 137 192 ----- ----- ----- ----- ----- ----- ----- ----- Total non-interest income 997 838 772 757 762 721 644 649 Non-interest expense: Salaries and related costs 573 541 547 544 484 462 458 470 Other 802 716 691 648 632 605 619 595 ----- ----- ----- ----- ----- ----- ----- ----- Total non-interest expense 1,375 1,257 1,238 1,192 1,116 1,067 1,077 1,065 Taxable equivalent adjustment 15 16 16 16 17 19 21 21 ----- ----- ----- ----- ----- ----- ----- ----- Income before income taxes 648 617 596 637 572 567 489 546 Income tax (provision) benefit (206) (204) (201) (214) (175) (193) (165) (196) ----- ----- ----- ----- ----- ----- ----- ----- Net income $442 $413 $395 $423 $397 $374 $324 $350 ===== ===== ===== ===== ===== ===== ===== ===== Net income available to common stockholders $439 $409 $391 $419 $393 $370 $320 $346 ===== ===== ===== ===== ===== ===== ===== ===== Net income per common share $.74 $.69 $.66 $.69 $.67 $.63 $.54 $.59 ===== ===== ===== ===== ===== ===== ===== ===== 1) Average balances are based on amortized historical cost excluding SFAS 115 adjustments to fair value which are included in other assets. 2) Fully taxable equivalent basis. The Federal statutory rate used was 35% for all periods presented. 3) Excludes certain smaller balance loans collectively evaluated for impairment. 4) Excluding nonperforming loans. 5) Ratios presented on an annualized basis. 6) As a percent of average earning assets. 7) Includes loans held for sale.
22 27 CONSOLIDATED BALANCE SHEET at December 31, 1996 and 1995
DECEMBER 31 ----------------------------- $(THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1996 1995 - ---------------------------------------------------------------------------------------------------------- ASSETS: Cash and due from banks $6,524,428 $5,712,256 Short-term investments 680,629 728,018 Loans held for sale 1,473,756 503,326 Securities: Securities held to maturity 4,398,031 3,630,141 Securities available for sale 14,733,777 14,620,334 ------------ ----------- Total securities (fair value approximates $19,163,000 and $18,299,000, at December 31, 1996 and 1995, respectively) 19,131,808 18,250,475 Loans and leases (net of unearned income of $1,383,000 and $979,000 at December 31, 1996 and 1995, respectively) 79,389,795 68,417,903 Allowance for credit losses 1,197,679 1,008,023 ------------ ----------- Net loans and leases 78,192,116 67,409,880 OTHER ASSETS: Bank premises and equipment, net 1,799,150 1,652,067 Interest earned, not collected 782,069 720,016 Other real estate owned 52,970 75,483 Excess of cost over net assets of affiliates purchased 508,346 344,368 Other 3,008,246 2,492,927 ------------ ----------- Total other assets 6,150,781 5,284,861 ------------ ----------- TOTAL ASSETS $112,153,518 $97,888,816 ============ =========== LIABILITIES: Deposits: Non-interest bearing $16,340,635 $14,937,100 Interest bearing 57,882,353 54,336,273 ------------ ----------- Total deposits 74,222,988 69,273,373 Federal funds purchased and repurchase agreements 12,858,505 8,559,384 Other short-term borrowings 5,466,894 3,919,191 Long-term debt 6,827,823 4,330,501 Accrued interest payable 468,579 472,851 Other liabilities 2,440,642 2,282,072 ------------ ----------- TOTAL LIABILITIES 102,285,431 88,837,372 ------------ ----------- Commitments and contingencies (notes 4,6, and 13) STOCKHOLDERS' EQUITY: Preferred stock, 35,000,000 shares authorized: Series C convertible, no par value, 4,140,314 and 4,992,694 shares issued and outstanding, respectively 207,016 249,635 Convertible preferred stock of pooled affiliate, 5,750,000 and 5,750,000 shares issued and outstanding, respectively 58 58 Common stock, no par value, $5 stated value, 600,000,000 shares authorized, 576,517,822 and 590,624,927 shares issued, respectively 2,882,590 2,953,124 Capital in excess of aggregate stated value 4,346,428 4,920,930 Retained earnings 2,625,138 1,496,667 Net unrealized holding gains on securities available for sale, net of tax 19,925 91,804 Treasury stock (5,829,915 and 24,090,000 shares, respectively), at cost (213,068) (660,774) ------------ ----------- TOTAL STOCKHOLDERS' EQUITY 9,868,087 9,051,444 ------------ ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $112,153,518 $97,888,816 ============ ===========
23 28 CONSOLIDATED STATEMENT OF INCOME for the three years ended December 31, 1996
$(THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1996 1995 1994 ----------------------------------------------------------------------------------------------------------------------- INTEREST INCOME: Loans and leases $7,437,911 $6,392,962 $5,723,494 Loans held for sale 39,544 32,925 40,822 Securities: Taxable 1,127,155 973,448 948,921 Tax-exempt 94,879 116,737 136,841 Other 36,738 71,857 59,498 ---------- ---------- ---------- Total interest income 8,736,227 7,587,929 6,909,576 INTEREST EXPENSE: Deposits Demand, savings and money market deposits 1,006,194 922,298 720,526 Time deposits 1,454,032 1,504,058 1,112,658 Interest on borrowings 1,137,377 910,398 665,599 ---------- ---------- ---------- Total interest expense 3,597,603 3,336,754 2,498,783 ---------- ---------- ---------- NET INTEREST INCOME 5,138,624 4,251,175 4,410,793 Provision for credit losses 942,714 526,138 292,222 ---------- ---------- ---------- Net interest income after provision for credit losses 4,195,910 3,725,037 4,118,571 NON-INTEREST INCOME: Investment management and advisory activities 279,153 239,411 232,700 Service charges on deposit accounts 654,140 544,697 483,884 Loan processing and servicing income 1,449,715 1,323,499 822,747 Securities gains (losses) 16,672 (1,947) (266,617) Other 963,285 669,788 579,181 ---------- ---------- ---------- Total non-interest income 3,362,965 2,775,448 1,851,895 NON-INTEREST EXPENSE: Salaries and related costs 2,204,602 1,875,614 1,834,902 Net occupancy expense, exclusive of depreciation 192,057 175,054 189,602 Equipment expense 125,196 110,547 124,429 Taxes other than income and payroll 90,021 91,126 57,936 Depreciation and amortization 447,503 367,392 420,059 Outside services and processing 674,183 528,257 495,486 Marketing and development 445,937 424,945 280,064 Communication and transportation 378,382 324,743 276,205 Other 504,123 429,270 485,598 ---------- ---------- ---------- Total non-interest expense 5,062,004 4,326,948 4,164,281 ---------- ---------- ---------- Income before income taxes 2,496,871 2,173,537 1,806,185 Provision for income taxes 824,026 728,326 618,117 ---------- ---------- ---------- NET INCOME $1,672,845 $1,445,211 $1,188,068 ========== ========== ========== NET INCOME PER COMMON SHARE $2.78 $2.43 $1.99 ========== ========== ========== Weighted average common shares outstanding (000) 594,853 587,789 589,316
The accompanying notes are an integral part of the consolidated financial statements. 24 29 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY for the three years ended December 31, 1996
Net Unrealized Capital in Holding Total Excess of Gains Treasury Stock- $(thousands, except per Preferred Common Aggregate Retained (Losses) on Stock, holders' share amounts) Stock Stock Stated Earnings Securities at Cost Equity Value Available for Sale --------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1993 249,900 2,698,068 3,399,387 1,400,989 7,748,344 Accounting change adjustment for unrealized gains on securities available for sale at January 1, 1994 84,105 84,105 Net income 1,188,068 1,188,068 Cash dividends: Common ($1.13 per share) (487,218) (487,218) Series C Preferred ($3.50 per share) (17,492) (17,492) Pooled affiliates (23,518) (23,518) Issuance of preferred stock 58 177,344 177,402 Shares issued in acquisitions 15,231 26,957 14,316 (316) 56,188 Exercise of stock options, net of 1,506 (5,186) (3,680) shares purchased Pooled affiliate stock issuance, sales of stock to employee 11,325 (46,477) 96,912 61,760 benefit plans and other Purchase of treasury stock (336,453) (336,453) Change in unrealized holding gains (losses) on securities available for sale, net of tax (195,306) (195,306) -------- ---------- ---------- ---------- ------- ---------- ---------- Balance, December 31, 1994 249,958 2,726,130 3,552,025 2,172,057 (111,517) (336,453) 8,252,200 Net income 1,445,211 1,445,211 Cash dividends: Common ($1.24 per share) (532,807) (532,807) Series C Preferred ($3.50 per share) (17,487) (17,487) Pooled affiliates (21,827) (21,827) Shares issued in acquisitions 5,680 13,086 (3,115) 15,651 Conversion of preferred into common (265) 46 219 Exercise of stock options, net of 8,955 (2,479) 6,476 shares purchased Sales of stock to employee benefit 6,976 18,051 25,027 plans and other Purchase of treasury stock (324,321) (324,321) Change in unrealized holding gains (losses on securities available for 203,321 203,321 sale, net tax 10% common stock dividend at fair 205,337 1,340,028 (1,545,365) market value -------- ---------- ---------- ---------- ------- ---------- ---------- Balance, December 31, 1995 249,693 2,953,124 4,920,930 1,496,667 91,804 (660,774) 9,051,444 Net income 1,672,845 1,672,845 Cash dividends: Common ($1.36 per share) (587,184) (587,184) Series C Preferred ($3.50 per share) (16,363) (16,363) Pooled affiliates (31,443) (31,443) Shares issued in acquisitions 53,415 657,100 710,515 Issuance of subsidiary common stock 79,523 79,523 Conversion of preferred into common (42,619) 8,221 34,398 Exercise of stock options, net of 14,050 2,725 16,775 shares purchased Sales of stock to employee benefit 9,195 (56,556) 90,616 3,674 46,929 plans and other Purchase of treasury stock (1,003,075) (1,003,075) Retirement of treasury stock (102,000) (688,007) 790,007 Change in unrealized holding gains (losses) on securities available for sale, net of tax (71,879) (71,879) -------- ---------- ---------- ---------- ------- ---------- ---------- Balance, December 31, 1996 $207,074 $2,882,590 $4,346,428 $2,625,138 $19,925 $(213,068) $9,868,087 ======== ========== ========== ========== ======= ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. 25 30 CONSOLIDATED STATEMENT OF CASH FLOWS For the three years ended December 31, 1996
$(THOUSANDS) 1996 1995 1994 ------------------------------------------------------------------------------------------------------------------------------- CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: NET INCOME $1,672,845 $1,445,211 $1,188,068 Adjustments: Provision for credit losses 942,714 526,138 292,222 Depreciation 300,770 255,875 281,663 Amortization of other intangibles 146,733 111,517 138,396 Amortization (accretion) of securities premium and 40,951 (50,760) 102,728 discounts, net Amortization of mortgage servicing rights 19,657 12,939 10,948 Net (increase) decrease in trading account (305,407) (30,199) 92,549 Net (increase) decrease in loans held for sale (970,430) (187,758) 869,482 Net decrease (increase) in deferred loan fees and costs 34,343 (4,178) (13,416) Securities (gains) losses (16,672) 1,947 266,617 Gain on the sale of banks and branch offices (19,399) (68,297) (390) Gain on sale of loans and other assets (325,336) (122,878) (147,334) Net (increase) in other assets (333,543) (288,837) (121,602) Net (decrease) increase in other liabilities (42,123) 251,316 58,095 Net increase in deferred income taxes 263,581 179,398 173,090 ----------- ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 1,408,684 2,031,434 3,191,116 ----------- ----------- ----------- CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES: Purchases of securities available for sale (5,581,561) (8,110,473) (11,739,005) Purchases of securities held to maturity (1,789,650) (1,978,071) (2,258,514) Maturities of securities available for sale 4,169,201 6,712,867 2,142,467 Maturities of securities held to maturity 1,040,806 1,904,768 2,767,183 Sales of securities available for sale 3,231,502 2,544,358 10,900,079 Net increase in loans, excluding sales and purchases (15,750,623) (16,261,798) (13,772,643) Sales of loans and other assets 8,218,233 10,818,004 7,941,602 Purchases of loans and related premiums (519,834) (668,879) (666,283) Net decrease (increase) in short-term investments 118,327 3,022,699 (1,980,798) Additions to bank premises and equipment (432,214) (400,646) (355,979) Sale of banks and branch offices (186,773) (236,041) (26,643) Net cash acquired in acquisitions 315,715 42,413 1,180,497 All other investing activities, net (58,877) 191,828 71,515 ----------- ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES (7,225,748) (2,418,971) (5,796,522) ----------- ----------- ----------- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Net increase (decrease) in demand, savings and money market 1,533,765 1,608,888 (1,385,486) deposits Net increase (decrease) in time deposits (592,314) (2,235,625) 2,477,024 Net increase in short-term borrowings 5,414,840 1,229,306 1,709,338 Issuance of long-term borrowings, net 3,486,176 1,742,111 898,662 Repayment of long-term borrowings (1,755,425) (344,729) (251,535) Cash dividends paid (634,990) (696,046) (510,184) Purchase of treasury stocks (1,003,075) (324,321) (336,453) All other financing activities, net 180,259 (16,235) 93,157 ----------- ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 6,629,236 963,349 2,694,523 ----------- ----------- ----------- Increase in cash and cash equivalents 812,172 575,812 89,117 Cash and cash equivalents at January 1 5,712,256 5,136,444 5,047,327 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT DECEMBER 31 $6,524,428 $5,712,256 $5,136,444 =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. 26 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BANC ONE is a bank holding company offering a full range of financial services through operating offices in Arizona, Colorado, Delaware, Illinois, Indiana, Kentucky, Louisiana, Ohio, Oklahoma, Texas, Utah, West Virginia and Wisconsin. BANC ONE also engages in credit card and merchant processing, consumer and education finance, mortgage banking, insurance, trust and investment management, brokerage, venture capital, investment and merchant banking, equipment leasing and data processing activities. "The Corporation" is defined as the parent company only. "BANC ONE" is defined as the Corporation and all significant majority-owned subsidiaries. The consolidated financial statements include the accounts of the Corporation and all significant majority-owned subsidiaries (affiliates). See Note 2 for information relative to acquisitions. Significant intercompany transactions have been eliminated. For purposes of comparability, certain prior period amounts have been reclassified to conform with current year presentation. The following is a summary of significant accounting policies followed in the preparation of the consolidated financial statements. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Loans Held for Sale Certain loan receivables are classified as held for sale because management does not intend to hold such loans until maturity or sales of the loans are pending. Such loans are carried at the lower of aggregate cost or market value by type of loan. Losses, if any, are recorded in non-interest income, based on the difference between the market value (estimated sales proceeds) and aggregate cost. Securities Securities that management has both the positive intent and ability to hold to maturity are classified as securities held to maturity and are carried at cost, adjusted for amortization of premium or accretion of discount using the interest method. Securities that may be sold prior to maturity for asset/liability management purposes, or that may be sold in response to changes in interest rates, changes in prepayment risk, to increase regulatory capital or other similar factors, are classified as securities available for sale and carried at fair value with any adjustments to fair value, after tax, reported as a separate component of stockholders' equity. Securities purchased for trading purposes are held in the trading portfolio at market value, with market adjustments included in non-interest income. Venture capital investments held by qualifying investment companies are carried at fair value with changes in fair value recognized in non-interest income or expense. The fair value of publicly traded investments takes into account their quoted market prices with adjustments made for market liquidity or sale restrictions. For securities that are not publicly traded, estimates of fair value are further adjusted based upon review of the investee's financial results, condition and prospects. Interest and dividends on securities, including the amortization of premiums and the accretion of discounts, are reported in interest and dividends on securities using the interest method. Gains and losses on securities are recorded on the trade date and are calculated based on the security with the highest cost unless specific securities are identified. 27 32 Loans Loans are reported at the principal amount outstanding, net of unearned income. Income earned is recognized principally on the accrual method of accounting. Unearned income, which includes deferred fees, net of deferred direct incremental loan origination costs, is amortized to interest income over the contractual life of the loan using the interest method or the straight-line method if not materially different. Loan origination fees and costs on demand loans are deferred and amortized into interest income on a straight-line basis over a period which is consistent with the understanding between BANC ONE and the borrower or, if no understanding exists, over the estimated loan term. Loan origination fees and costs on credit card and other revolving loans are deferred and amortized into interest income using a straight-line method over one year. Commercial loans are placed on non-accrual at the time the loan is 90 days delinquent unless the credit is well secured and in process of collection. Residential real estate loans are placed on non-accrual at the time the loan is 120 days delinquent. Credit card loans, other unsecured personal credit lines and certain consumer finance loans are charged-off no later than 180 days delinquent. Other consumer loans are charged-off at 120 days delinquent. In all cases, loans must be placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on non-accrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are reasonably assured of repayment within a reasonable time frame and when the borrower has demonstrated payment performance of cash or cash equivalents for a minimum of six months. Leases The leasing operations consist of the leasing of automobiles (carried in consumer loans) and various types of equipment under leases principally classified as direct financing leases. Interest, net of initial direct costs, is deferred and reported as income in decreasing amounts over the term of the lease so as to provide a constant yield on the outstanding principal balance. Leases are charged-off at the earlier of 120 days delinquent or when collection of principal or interest is in doubt. Provision for Credit Losses The provision for credit losses charged to expense is based upon management assessment of current and historical loss experience, loan portfolio trends, prevailing economic and business conditions, specific loan review and other relevant factors. In management's opinion, the provision is sufficient to maintain the allowance for credit losses at a level that adequately provides for potential losses. Loan Securitizations BANC ONE actively packages and sells loan receivables as securities to investors. In such transactions BANC ONE receives a fee for servicing the loans, and receives net interest revenues generated by the loans removed from the balance sheet which are in excess of the interest due investors and net credit losses. The excess interest revenues are recognized as servicing income. Mortgage Banking Activities Mortgage servicing assets are recognized as separate assets when servicing rights are acquired through purchase or loan originations, when there is a definitive plan to sell the underlying loan. Capitalized mortgage servicing rights are reported in other assets and are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying mortgage loans. Capitalized mortgage servicing rights are evaluated for impairment based on the fair value of those rights. 28 33 Bank Premises and Equipment Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is provided principally using the straight-line method over the estimated useful lives of the assets. Upon the sale or other disposal of assets, the cost and related accumulated depreciation are retired and the resulting gain or loss is recognized. Maintenance and repairs are charged to expense as incurred, while renewals and betterments are capitalized. Software costs for internally developed systems are expensed as incurred. Software costs related to externally developed systems are capitalized and include systems intended for internal and external use. On January 1, 1996, BANC ONE adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The impact on the consolidated financial statements for the year ended December 31, 1996, was not material. Other Real Estate Owned Other real estate owned primarily represents properties acquired by the Corporation's affiliates through customer loan default and owned properties no longer used in the banking business. The real estate acquired through foreclosure is stated at an amount equal to the lesser of the loan balance prior to foreclosure, plus certain costs incurred for improvements to the property, or fair value less estimated selling costs of the property. Purchase Method of Accounting Net assets of organizations acquired in purchase transactions are recorded at fair value at date of acquisition. The excess of cost over net assets of affiliates purchased (goodwill) is amortized using the straight-line and accelerated methods over the estimated periods benefited with terms ranging from five to 40 years. Core deposits and other identifiable intangible assets are typically amortized on an accelerated basis. Off-Balance Sheet Activities BANC ONE uses a variety of off-balance sheet investment products as part of its interest rate risk management strategy and in its customer service and trading activities. The most frequently used off-balance sheet investment products are various types of interest rate swaps. However, interest rate floors, options, swap options, caps, forward rate agreements and currency swaps are also utilized. Off-balance sheet investment products are typically classified as synthetic alterations, anticipatory hedges or matched book agreements. The criteria that must be satisfied for each of these methods is as follows: Synthetic Alteration--(1) the asset or liability to be converted creates exposure to interest rate risk, and (2) the off-balance sheet investment product is designated and effective as a synthetic alteration of the balance sheet item. Anticipatory Hedge--(1) the transaction to be hedged creates exposure to interest rate risk; (2) the off-balance sheet investment product acts to reduce the interest rate risk by moving closer to being insensitive to interest rate changes; (3) the off-balance sheet investment product is designated and effective as a hedge of the transaction; (4) the significant characteristics and expected terms of the anticipated transaction are identified; and (5) it is probable that the anticipated transaction will occur. Matched Book--there must be separate agreements that have offsetting payment streams with the same maturity, repricing dates and notional amounts. In order for off-balance sheet investment products with forward-start dates to be accounted for as a synthetic alteration, they must satisfy the appropriate criteria above as well as the following additional criteria: (1) the start date of the off-balance sheet investment product does not extend beyond that point in time at which it is believed that modeling systems produce reliable interest rate sensitivity information; and (2) the related balance sheet item, from trade date to final maturity, has sufficient balances for alteration. If the initial assignment is changed, or should sufficient balances not be available, the excess portion of the off-balance sheet investment product must be marked to market. 29 34 Accrual accounting is applied for off-balance sheet investment products classified as described above and income and expense are recorded in the same category as that of the related balance sheet item. The related balance sheet item is generally a pool of similar products. For matched book transactions, income and expense are recorded in non-interest income. Fees related to these off-balance sheet investment products are amortized on the interest method over the life of the off-balance sheet investment products. If the balance of the related balance sheet item falls below that of the related off-balance sheet investment product, the excess portion of the off-balance sheet investment product is marked to market and the resulting gain or loss included in income, as applicable. If an off-balance sheet investment product is terminated, the gain or loss is deferred and amortized over the remaining life of the off-balance sheet investment product. Off-balance sheet investment products that do not satisfy the criteria above, including those used in trading activities, are carried at market value. Any changes in market value are recognized in non-interest income. In June 1996, the Financial Accounting Standard Board (FASB) issued an Exposure Draft, "Accounting for Derivative and Similar Financial Instruments and for Hedging Activities" (the Exposure Draft), which, if adopted as issued, would significantly change the accounting for derivative and hedging activities. The Exposure Draft would require that all derivative financial instruments be recognized and recorded at fair value. However, key aspects of the exposure draft continue to be discussed and are subject to change; accordingly the impact, if any, to BANC ONE is not presently known. The date for issuance of the final statement has not yet been determined. Investment in Majority-Owned Affiliates (Parent Company Only) The Corporation's investment in affiliates represents the total equity of majority-owned consolidated subsidiaries, using the equity method of accounting. Statement of Cash Flows For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks. Net Income Per Common Share Net income per common share is calculated by dividing net income available to common stockholders (net income less preferred dividends) by the average number of common shares outstanding (total shares issued less treasury stock) and any dilutive common stock equivalents for the period. Stock-Based Compensation BANC ONE applies APB Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its stock-based compensation plans. In 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123) which is effective for fiscal years beginning after December 15, 1995. Under SFAS 123, the Corporation may elect to recognize stock-based compensation expense based on the fair value of the awards or continue to account for stock-based compensation under APB 25. The Corporation has elected to continue to apply the provisions of APB 25. New Accounting Pronouncements BANC ONE adopted Statement of Financial Accounting Standards (SFAS) No. 125. "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," effective January 1, 1997. SFAS 125 requires that after a transfer of financial assets, an entity must recognize the financial and servicing assets controlled and liabilities incurred and derecognize financial assets and liabilities in which control is surrendered or when debt is extinguished. The impact on BANC ONE's consolidated financial position and results of operations is not expected to be material. 30 35 SFAS 128 "Earnings Per Share" was issued in February 1997 and is effective for financial statements issued for periods ending after December 15, 1997. The statement specifies the computation, presentation and disclosure requirements for earnings per share for entities with publicly held common stock. The impact of the statement on BANC ONE's earnings per share is not expected to be material. In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income". This Statement, which is effective for the year ended December 31, 1998, requires the reporting of comprehensive income and its components in an additional full set of general-purpose financial statements. BANC ONE is reviewing the components of comprehensive income as outlined by the Statement and plans to disclose the information as required. In second quarter 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information." This Statement provides guidance for the way public enterprises report information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports. It also requires certain related disclosures about products and services, geographic areas and major customers. The segment and other information disclosures are required for the year ended December 31, 1998. 31 36 NOTE 2 ACQUISITIONS AND DISPOSITIONS On June 27, 1997, the Corporation completed its acquisition of First USA, Inc. ("First USA"), located in Dallas, Texas. The Corporation issued approximately 163 million shares of the Corporation's common stock for all the outstanding common stock of First USA in a tax-free exchange. First USA, a financial service company specializing in the credit card business, had $24.6 billion in managed credit card receivables and 17.8 million cardholders at June 27, 1997 compared to $22.2 billion in managed credit card receivables and 15.9 million card holders at December 31, 1996. First USA had total assets of $10.9 billion and $10.3 billion at June 30, 1997 and December 31, 1996, respectively and stockholders' equity of $1.2 billion at both June 27, 1997 and December 31, 1996. The acquisition was accounted for as a pooling of interests and therefore, these consolidated financial statements have been restated for all periods presented to include the results of operations, financial position and changes in cash flows of First USA. First USA had a June 30 fiscal year end and therefore, adjustments have been made to conform First USA's year end to BANC ONE's calendar year end. These adjustments did not have a material impact on the Consolidated Financial Statements. The separate results of operations for BANC ONE and First USA were as follows (in thousands):
1996 1995 1994 - -------------------------------------------------------------------------------- REVENUE: BANC ONE $10,272,356 $ 8,970,888 $ 7,777,941 First USA 1,826,836 1,392,489 983,530 ----------- ----------- ----------- 12,099,192 10,363,377 8,761,471 =========== =========== =========== NET INCOME: BANC ONE 1,426,533 1,277,863 1,005,109 First USA 246,312 167,348 182,959 ----------- ----------- ----------- $ 1,672,845 $ 1,445,211 $ 1,188,068 =========== =========== ===========
On June 1, 1997, the Corporation acquired all of the outstanding shares of Liberty Bancorp, Inc. (Liberty), a multi-bank holding company headquartered in Oklahoma City, Oklahoma, in exchange for 11.9 million shares of the Corporation's common stock valued at $483.2 million. The acquisition was accounted for as a purchase. Excess cost over net assets purchased of $266.7 million was recognized in the second quarter of 1997 and will be amortized over 25 years using the straight-line method. Liberty had $2.9 billion in assets at December 31, 1996, and 29 banking offices primarily in Oklahoma City and Tulsa. No effects of this acquisition are included in the financial statements prior to the date of purchase and the pro forma effect on prior periods results of operations was not material. On January 2, 1996, the Corporation acquired all of the outstanding shares of Premier Bancorp, Inc. (Premier) of Baton Rouge, Louisiana, in exchange for 24 million shares of the Corporation's common stock valued at $711 million. The acquisition was accounted for as a purchase. Goodwill of $263 million was recognized and will be amortized over 25 years using the straight-line method. Premier had assets of $6.3 billion at December 31, 1995. No effects of this acquisition are included in the financial statements prior to the date of purchase. To reflect the purchase of Premier as if the acquisition occurred on January 1, 1995, BANC ONE's consolidated pro forma total revenue, net income and net income per common share would have been $10.9 billion, $1.5 billion and $2.43, respectively. NOTE 3 RESTRUCTURING CHARGES AND MERGER RELATED COSTS In connection with the First USA merger and other strategic initiatives, BANC ONE identified one-time restructuring charges and merger related costs of $467.4 million ($328.8 million after-tax), of which $337.3 million was recorded as a restructuring charge and $130.1 million was recorded as additional provision for credit losses. 32 37 The restructuring charge associated with the First USA merger totaled $240.9 million and consisted of: employee benefits, severance and stock options vesting costs; professional services costs; premiums to redeem preferred securities of subsidiary trust; asset related write-downs and other merger related costs. The remaining $96.4 million charge related to costs associated with the strategic initiatives to streamline the retail branch delivery structure by consolidating approximately 200 banking centers over the next 18 months and the termination of the development of the Strategic Banking System, a retail banking system.. The $130.1 million additional provision for credit losses primarily reflects the reclassification of $2.0 billion of credit card loans previously classified as held for sale to the loan and lease portfolio in connection with the effort to consolidate the BANC ONE and First USA credit card master trusts; as well as an additional provision to align the credit card charge-off policies of BANC ONE and First USA. NOTE 4 SECURITIES AND OFF-BALANCE SHEET ACTIVITIES Following are the estimated maturities, fair value, amortized cost and weighted average yields of securities by type:
MATURITIES OF SECURITIES AT DECEMBER 31, 1996 (1) DECEMBER 31, ------------------------------------------------------------------ ---------------- 2002- $(MILLIONS) 1997 1998 1999 2000 2001 2006 2007+ 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------- SECURITIES HELD TO MATURITY(2)(3) Tax-exempt Amortized cost $ 213 $ 123 $ 76 $ 87 $ 59 $ 89 $ 38 $ 685 $ 909 Fair Value 216 127 81 91 63 95 41 714 953 Weighted average yield 6.86% 6.82% 6.54% 7.08% 6.65% 6.50% 5.58% 6.71% 6.63% All other Amortized cost 510 432 373 313 274 981 830 3,713 2,721 Fair Value 512 432 373 312 274 981 831 3,715 2,726 Weighted average yield 6.38% 6.43% 6.44% 6.41% 6.42% 6.51% 6.37% 6.58% 6.81% Total amortized cost $ 723 $ 555 $ 449 $ 400 $ 333 $ 1,070 $ 868 $ 4,398 $ 3,630 ======= ======= ======= ======= ======= ======= ======= ======= ======= Total Fair value $ 728 $ 559 $ 454 $ 403 $ 337 $ 1,076 $ 872 $ 4,429 $ 3,679 ======= ======= ======= ======= ======= ======= ======= ======= ======= SECURITIES AVAILABLE FOR SALE(2)(3)(4) United States treasury and agencies Amortized cost $ 882 $ 1,245 $ 351 $ 392 $ 551 $ 911 $ 3 $ 4,335 $ 3,029 Fair Value 883 1,246 349 392 536 904 3 4,313 3,060 Weighted average yield 5.94% 5.89% 5.73% 6.24% 5.53% 6.33% 7.47% 5.97% 6.06% Mortgage and asset-backed securities: Government Amortized cost 543 441 955 1,905 959 1,763 164 6,730 6,553 Fair Value 548 449 967 1,934 972 1,757 165 6,792 6,660 Weighted average yield 5.66% 7.40% 6.66% 6.92% 7.19% 6.95% 7.66% 6.88% 7.05% Other Amortized cost 341 551 328 457 260 110 27 2,074 3,595 Fair Value 340 555 326 453 245 110 27 2,056 3,587 Weighted average yield 5.53% 6.58% 6.12% 6.42% 6.07% 6.61% 11.85% 6.30% 6.43% Tax-exempt Amortized cost 236 103 97 119 119 294 5 973 813 Fair Value 237 104 98 120 120 296 5 980 825 Weighted average yield 4.53% 4.75% 4.78% 4.75% 4.81% 4.91% 7.54% 4.77% 5.02% Other Amortized cost 264 37 9 121 11 57 92 591 486 Fair Value 264 37 10 121 11 57 93 593 488 Weighted average yield 5.92% 6.20% 6.47% 6.06% 8.03% 7.48% 6.67% 6.28% 7.93% Total amortized cost $ 2,266 $ 2,377 $ 1,740 $ 2,994 $ 1,900 $ 3,135 $ 291 $14,703 $14,476 ======= ======= ======= ======= ======= ======= ======= ======= ======= Total fair value $ 2,272 $ 2,391 $ 1,750 $ 3,020 $ 1,884 $ 3,124 $ 293 $14,734 $14,620 ======= ======= ======= ======= ======= ======= ======= ======= =======
(1) Reflects estimated maturity. (2) Weighted average yields on tax-exempt securities are not reflected on a tax equivalent basis. (3) Weighted average yields for both held to maturity and available-for-sale securities are based on amortized historical cost. (4) Includes trading securities carried at fair value of $549 million and $243 million at December 31, 1996 and 1995, respectively. 33 38 The following are net realized gains and losses on securities sold or called and unrealized gains and losses on securities held:
UNREALIZED GAIN (LOSS) AS OF REALIZED GAIN (LOSS) DURING 1996 DECEMBER 31, 1996 ------------------------------------------------------ ---------------------------------- NET NET REALIZED UNREALIZED AMORTIZED REALIZED REALIZED GAIN UNREALIZED UNREALIZED GAIN $(MILLIONS) COST PROCEEDS GAINS LOSSES (LOSS) GAINS LOSSES (LOSS) - ----------------------------------------------------------------------------------------------------------------------------------- Securities held to maturity: Tax-exempt $ 38 $ 40 $ 2 $ 2 $ 35 $ (6) $ 29 All other 13 (9) 4 Securities available for sale: United States treasury 556 558 2 2 8 (30) (22) and federal agencies Mortgage and asset-backed securities: Government 1,728 1,737 21 $ (12) 9 83 (21) 62 Other 903 907 7 (3) 4 11 (29) (18) Tax-exempt and other 166 244 89 (11) 78 13 (5) 8 ------- ------- ------- ------- ------- ------- ------- ------- Total $ 3,391 $ 3,486 $ 121 (26) $ 95 $ 163 $ (100) $ 63 ======= ======= ======= ======= ======= ======= ======= ======= UNREALIZED GAIN (LOSS) AS OF REALIZED GAIN (LOSS) DURING 1995 DECEMBER 31, 1995 ------------------------------------------------------ ---------------------------------- NET NET REALIZED UNREALIZED AMORTIZED REALIZED REALIZED GAIN UNREALIZED UNREALIZED GAIN $(MILLIONS) COST PROCEEDS GAINS LOSSES (LOSS) GAINS LOSSES (LOSS) - ----------------------------------------------------------------------------------------------------------------------------------- Securities held to maturity: Tax-exempt $ 95 $ 96 $ 1 $ 1 $ 51 $ (7) $ 44 All other 24 28 6 $ (2) 4 18 (13) 5 Securities available for sale: United States treasury 635 636 7 (6) 1 33 (2) 31 and federal agencies Mortgage and asset-backed securities: Government 591 585 1 (7) (6) 117 (10) 107 Other 1,209 1,204 3 (8) (5) 25 (33) (8) Tax-exempt and other 108 141 33 33 19 (5) 14 ------ ------ ------ ------ ------ ------ ------ ------ Total $2,662 $2,690 $ 51 $ (23) $ 28 $ 263 $ (70) $ 193 ====== ====== ====== ====== ====== ====== ====== ====== UNREALIZED GAIN (LOSS) AS OF REALIZED GAIN (LOSS) DURING 1994 DECEMBER 31, 1994 ------------------------------------------------------ ---------------------------------- NET NET REALIZED UNREALIZED AMORTIZED REALIZED REALIZED GAIN UNREALIZED UNREALIZED GAIN $(MILLIONS) COST PROCEEDS GAINS LOSSES (LOSS) GAINS LOSSES (LOSS) - ----------------------------------------------------------------------------------------------------------------------------------- Securities held to maturity: Tax-exempt $ 55 $ 56 $ 2 $ (1) $ 1 $ 51 $ (66) $ (15) All other 355 354 4 (5) (1) 31 (111) (80) Securities available for sale: United States treasury 10,556 10,271 140 (425) (285) 5 (12) (7) and federal agencies Mortgage and asset-backed securities: Government 104 103 (1) (1) (106) (106) Other 563 562 1 (2) (1) 26 (98) (72) Tax-exempt and other 64 88 27 (3) 24 8 (1) 7 ------- ------- ------- ------- ------- ------- ------- ------- Total $11,697 $11,434 $ 174 $ (437) $ (263) $ 121 $ (394) $ (273) ======= ======= ======= ======= ======= ======= ======= =======
Off-Balance Sheet Activities The off-balance sheet investment products BANC ONE utilizes are primarily interest rate swaps. Interest rate swap agreements generally involve the exchange of fixed and floating rate interest payments without the exchange of the underlying notional amount on which interest payments are calculated. Interest rate swap agreements that synthetically alter assets and liabilities are entered into as part of a program to manage the impact of fluctuating interest rates. 34 39 The notional amounts of generic swaps do not change during the life of the swap contract. The notional amounts and lives of amortizing swaps change based on certain interest rate indices. Generally, as rates fall the notional amounts of receive fixed amortizing swaps decline more rapidly and as rates increase notional amounts decline more slowly. A key assumption in the maturity information in the following table is that future variable rates move as indicated by the forward interest rate curve in existence at December 31, 1996. To the extent that rates move in a fashion other than indicated by the forward interest rate curve the maturity information will change. Basis swaps are contracts under which amounts are generally received based on LIBOR, typically subject to certain defined caps, and paid based on prime. Accrual of interest on forward starting swaps commences at predetermined future dates. Purchased caps require the payment of a fee for the right to receive interest payments on the contract notional amount when a floating rate (typically LIBOR) rises above a strike rate. The impact on net interest income is the excess of the floating rate over the strike rate less the periodic amortization of the premium paid. The notional amounts shown in the following table represent agreed upon amounts on which calculations of interest payments to be exchanged are based. Notional amounts do not represent direct credit exposures. Direct credit exposure is limited to the net difference between the calculated pay and receive amounts on each transaction, which is generally netted and paid or received quarterly and the ability of the counterparty to perform its payment obligation under the agreement. BANC ONE has very stringent policies governing off-balance sheet investment product activities and collateral is typically exchanged with the counterparties to further minimize credit risk. The methods used to determine counterparty and credit lines are formally reviewed and approved annually. There were $4 million and $23 million of net deferred items primarily representing premiums paid at December 31, 1996 and 1995, respectively. There were no past due payments, nor were there any reserves for credit losses on off-balance-sheet investment products, as of these dates. Trading and dealer activities are not material and thus not separately disclosed. The following table reflects the estimated maturities and weighted average fixed rates of off-balance-sheet investment products by type at December 31, 1996.
MATURITIES OF OFF-BALANCE SHEET INVESTMENT DECEMBER 31, PRODUCTS AT DECEMBER 31, 1996 (1)(2) --------------------------------------------------------------------------- ----------------- 2002- $(MILLIONS) 1997 1998 1999 2000 2001 2006 2007+ 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- RECEIVED FIXED SWAP Notional value $ 4,778 $ 2,198 $ 1,025 $ 1,310 $ 1,050 $ 1,566 $ 800 $12,727 $11,712 Weighted average receive rate 5.37% 5.97% 5.84% 6.27% 6.08% 6.51% 6.97% 5.90% 5.87% Received fixed amortizing swaps Notional value $ 1,453 $ 434 $ 19 $ 150 $ 2,056 $ 7,946 Weighted average receive rate 5.23% 5.58% 7.27% 5.54% 5.35% 5.29% Pay fixed swaps Notional value $ (95) $(1,500) $ (6) $ (507) $(2,108) $(2,673) Weighted average receive rate 8.54% 6.16% 8.68% 6.54% 6.36% 5.76% Net receive fixed position $ 6,136 $ 1,132 $ 1,038 $ 953 $ 1,050 $ 1,566 $ 800 $12,675 $16,985 Purchased caps Notional value 941 1,004 16 1 2 9 1,973 5,253 Basis swaps Notional value 3,730 754 58 50 137 4,729 8,304 Other (3) Notional value $ 1,040 $ 1,000 $ 16 $ 2,056 $ 4,052
(1) Maturities are based on estimated future interest rates from the forward interest rate curve at December 31, 1996. (2) Variable receive and pay interest rates, which are based primarily on three month LIBOR or prime, are not included in the table. (3) Other off-balance sheet investment products include forward-starting contracts ($1.0 billion and $1.4 billion at December 31, 1996 and 1995, respectively), floors, futures, options, swap options and forward rate agreements. Customer transactions of $1.6 billion and $1.2 billion at December 31, 1996 and December 31, 1995, respectively, have been excluded. Unrealized gains and losses in off-balance sheet investments products at December 31, 1996 and 1995 are summarized as follows: 35 40
NET UNREALIZED GAIN (LOSS) AS OF DECEMBER 31, ---------------------------- $(MILLIONS) 1996 1995 - --------------------------------------------------------------------------------------------------------------- Receive fixed swaps $ (28) $ 165 Received fixed amortizing swaps (6) (13) Pay fixed swaps (13) (13) Purchased caps (8) (18) Basis swaps (6) (37) Forward starting and other 10 (8) ------------ ------------ Total $ (51) $ 76 ============ ============
NOTE 5 LOANS AND LEASES The composition of the loan and lease portfolio at December 31, 1996 and 1995 is summarized as follows:
$(THOUSANDS) 1996 1995 - --------------------------------------------------------------------------------------------------------------- Commercial, financial and agricultural $ 20,232,193 $ 17,903,692 Real estate: Commercial 6,429,434 5,667,826 Construction 3,601,958 2,692,587 Residential 13,917,037 10,756,169 Consumer (net of unearned income of $725,476 and $487,147 at December 31, 1996 and 1995, respectively) 19,459,148 18,407,595 Credit card 13,423,517 11,257,838 Leases (net of unearned income of $657, 835 and $491,684 at December 31,1996 and 1995, respectively) 2,326,508 1,732,196 ------------ ------------ Total loans and leases $ 79,389,795 $ 68,417,903 ============ ============
In the normal course of business, BANC ONE issues commitments to extend credit, standby letters of credit, and commercial and other letters of credit to meet the financing needs of its customers. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract amounts of these instruments are shown below
$(MILLIONS) 1996 1995 - --------------------------------------------------------------------------------------------------------------- Commitments to extend credit $ 147,754 $ 117,641 Standby letters of credit 3,140 3,493 Commercial and other letters of credit 163 278
Commitments to extend credit are agreements to lend to a customer provided there is not a violation of any condition established in the contract. Non-credit card commitments generally have fixed expiration dates, may require payment of a fee and contain termination and other clauses that provide for relief from funding in the event that there is a significant deterioration in the credit quality of the customer. Since many of the commitments are expected to or typically expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The exposure to credit loss in the event of nonperformance by the other party to these commitments is represented by the contractual amount. The same credit policies are applied in making commitments for on-balance sheet instruments, mainly by evaluating each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management's credit evaluation of the borrower. The collateral varies, but may include residential real estate, accounts receivable, inventories, investments, property, plant and equipment and income-producing commercial properties. 36 41 Letters of credit are conditional commitments guaranteeing payment on drafts drawn in accordance with the terms of the documents. Commercial letters of credit are used to facilitate trade or commerce with the drafts being drawn when the underlying transaction is consummated. Standby letters of credit guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in making loan commitments to customers. The same credit policies are used in providing these conditional obligations as it does for on-balance sheet instruments. Collateral for those commitments when deemed necessary varies, but may include accounts receivable, inventories, investments and real estate. BANC ONE has entered into several loan securitizations. The risk associated with these transactions is limited to certain on-balance sheet receivables (approximately $374 million at December 31, 1996). The remaining market and credit risks are transferred to the investors and the third-party institutions providing credit enhancement. At December 31, 1996 and 1995, respectively, there were $7.7 billion and $6.2 billion of loans to real estate operators, managers and developers and construction contractors which represented 9.70% and 9.06% of total loans and leases. There were no other significant concentrations. Real estate loans and loan commitments are primarily for properties located throughout the Midwest and Southwest. Repayment of these loans is dependent in part upon the economic conditions in those regions. Each customer's creditworthiness is evaluated on an individual basis. Collateral is required on real estate loans consisting primarily of residential and income-producing properties. Credit card loans, consumer loans and related loan commitments are located throughout the United States. Repayment of these loans is dependent in part upon regional and national economic factors. Collateral is not required on credit card loans because of the low average balance of each loan. Mortgage loans serviced for others approximated $22.5 billion and $19.9 billion at December 31, 1996 and 1995, respectively. NOTE 6 ALLOWANCE FOR CREDIT LOSSES The following summarizes activity in the allowance for credit losses for 1996, 1995 and 1994.
$(THOUSANDS) 1996 1995 1994 - ------------------------------------------------------------------------------------------------ BALANCE, BEGINNING OF PERIOD $ 1,008,023 $ 963,180 $ 1,030,254 Allowances associated with acquisitions and other 66,587 (3,888) 4,526 Provision for credit losses 942,714 526,138 292,222 Total charge-offs (1,065,996) (677,908) (578,727) Recoveries 246,351 200,501 214,905 ----------- ----------- ----------- Net losses charged to the allowance (819,645) (477,407) (363,822) ----------- ----------- ----------- BALANCE, END OF PERIOD $ 1,197,679 $ 1,008,023 $ 963,180 =========== =========== ===========
The provision for credit losses charged to expense is based upon credit loss experience and an evaluation of potential losses in the current loan and lease portfolio, including the evaluation of impaired loans under SFAS No.'s 114 and 118 (collectively, SFAS 114), "Accounting by Creditors for Impairment of a Loan" and "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures". All nonaccrual loans on which a specific reserve calculation is required and significant troubled debt restructurings are considered impaired. Impairment is primarily measured based on the fair value of the loan's collateral. Impairment losses are included in the provision for credit losses. Loans collectively evaluated for impairment include certain smaller balance commercial loans, consumer loans, residential real estate loans and credit card loans. SFAS 114 does not apply to large groups of smaller balance homogeneous loans that are collectively evaluated for impairment, except for those 37 42 loans restructured under a troubled debt restructuring. A loan is considered restructured when certain concessions are made to a financially troubled debtor that are not normally considered. The following table summarizes impaired loan information at December 31, 1996 and 1995.
$(THOUSANDS) 1996 1995 - -------------------------------------------------------------------------------- Impaired loans with related allowance $109,781 $141,467 Impaired loans with no related allowance 161,579 75,694 -------- -------- Total impaired loans $271,360 $217,161 ======== ======== Allowance on impaired loans $ 33,101 $ 41,119 ======== ======== FOR THE YEAR ENDED DECEMBER 31, -------------------- $(THOUSANDS) 1996 1995 - -------------------------------------------------------------------------------- Average impaired loans $274,545 $219,962 Interest income recognized on impaired loans 7,764 6,706 Cash basis interest income recognized on impaired loans 2,737 3,698
Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is fully assured, in which case interest is recognized on the cash basis. Interest may be recognized on the accrual basis for certain troubled debt restructurings which are included in the impaired loan data above. 38 43 NOTE 7 BANK PREMISES, EQUIPMENT AND LEASES The major categories of bank premises and equipment and accumulated depreciation at December 31, 1996 and 1995, are summarized as follows:
$(THOUSANDS) 1996 1995 - -------------------------------------------------------------------------------- Land $ 220,211 $ 208,164 Building 1,252,757 1,040,104 Equipment 1,873,738 1,601,004 Leasehold improvements 328,740 305,411 ---------- ---------- 3,675,446 3,154,683 Less accumulated depreciation and amortization 1,876,296 1,502,616 ---------- ---------- Bank premises and equipment, net $1,799,150 $1,652,067 ========== ==========
As of December 31, 1996, the future minimum rental payments required under noncancelable operating leases with initial terms in excess of one year are $129 million, $118 million, $100 million, $81 million, and $70 million for each of the years 1997 through 2001, respectively, and $409 million thereafter. Rental expense under operating leases approximated $182 million in 1996, $170 million in 1995 and $182 million in 1994. 39 44 NOTE 8 SHORT-TERM BORROWINGS Information pertaining to short-term borrowings for 1996, 1995 and 1994, is summarized below:
FEDERAL FUNDS REPURCHASE COMMERCIAL BANK $(THOUSANDS) PURCHASED(1) AGREEMENTS(1) PAPER(2) NOTES(3) OTHER (4) - ------------------------------------------------------------------------------------------------------------------------ 1996: Balance end of year $7,009,176 $5,849,329 $1,683,790 $2,783,914 $ 999,190 Highest month-end balance 7,134,536 5,849,329 1,754,113 3,487,832 1,660,603 Average daily balance 6,175,854 4,618,439 1,281,410 2,711,661 581,414 Weighted average interest rate: As of year-end 6.00% 5.01% 5.40% 5.45% 5.13% Paid during year 5.48 4.75 5.32 5.43 5.22 1995: Balance end of year $5,528,313 $3,031,071 $ 652,801 $2,762,642 $ 503,748 Highest month-end balance 6,067,603 4,458,311 1,469,476 2,978,642 1,488,626 Average daily balance 4,405,978 3,154,123 1,278,631 2,144,360 583,234 Weighted average interest rate: As of year-end 5.69% 4.91% 5.72% 5.92% 5.37% Paid during year 5.98 4.98 6.16 5.89 5.56 1994: Balance end of year $2,955,250 $3,247,512 $1,272,660 $3,028,821 $ 752,761 Highest month-end balance 4,363,361 6,737,075 1,272,660 3,117,925 1,563,387 Average daily balance 3,358,740 4,450,598 1,047,795 2,077,603 662,064 Weighted average interest rate: As of year-end 5.56% 4.63% 5.61% 5.00% 5.40% Paid during year 4.46 3.57 4.61 4.62 4.03
(1) Federal funds purchased and repurchase agreements represent primarily overnight borrowings. (2) The commercial paper of the Corporation and certain affiliates is supported by a $2 billion line of credit to the Corporation maturing in the year 2000 with unaffiliated banks carrying an annual commitment fee of .08% (3) Bank notes have both fixed and variable interest rates with maturities of approximately one year. (4) Other includes demand notes payable - U.S. Treasury and other notes. 40 45 NOTE 9 LONG-TERM BORROWINGS Long-term borrowings are summarized as follows:
STATED EFFECTIVE $(THOUSANDS) MATURITY RATE RATE(1) DECEMBER 31, ------------------------- 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------- Corporation: Subordinated notes (2) 2002 7.25% 6.66% $ 348,454 $ 346,337 Subordinated notes (2) 2003 8.74 7.80 170,000 169,881 Subordinated notes (2) 2005 7.00 6.26 298,370 296,155 Subordinated notes (2) 2009 9.88 10.11 196,471 196,012 Subordinated notes (2) 2010 10.00 10.25 197,668 197,369 Subordinated notes (2) 2025 7.75 6.59 297,122 294,272 Subordinated notes (2) 2026 7.63 6.40 495,977 Affiliates: Subordinated notes (3) Various Various Various 752,179 748,580 Bank notes (4) Various Various Various 3,707,648 1,928,134 Redeemable preferred securities (5) 2027 9.33 200,000 Unsecured revolving loans (6) 2000 54,000 Capital leases and other Various Various Various 163,934 99,761 ------- ------ Total $6,827,823 $4,330,501 ========== ========== (1) The effective rate includes amortization of premium or discount. Interest rate swap agreements have been entered into that have altered the stated interest rate for certain of the borrowings to variable interest rates. The effective rates include the impact of these swap agreements at December 31, 1996. The terms to maturity of the swaps are shorter than or equal to the altered borrowings. (2) These notes are not subject to redemption and impose certain limitations relating to funded debt, liens and the sale or issuance of capital stock of significant bank subsidiaries. (3) These notes have stated rates ranging from 6.0% to 7.65%. The effective rates range from 5.19% to 7.10%. The notes mature between 2002 and 2005, and are not subject to early redemption. (4) Notes have stated or variable rates ranging from 5.26% to 6.54%, effective rates ranging from 5.33% to 6.37% ,and mature between 1997 and 2006. (5) These notes are redeemable preferred securities of a subsidiary trust holding solely subordinated debentures of the Corporation. In June, 1997 the company paid a premium of $36 million to redeem $193 million of these securities. (6) The total revolving credit facility is $300 million payable to a bank syndicate. The facility bears interest base on LIBOR plus 0.25% to 0.65% and commitment fees range from 0.125% to 0.25% on the unused portion. This facility was terminated in June, 1997.
At December 31, 1996, the aggregate annual repayments of long-term borrowings for BANC ONE affiliates (excluding the Corporation) are $1,069 million, $1,449 million, $707 million, $18 million and $530 million for each of the years 1997 through 2001, respectively and $1,050 million thereafter. All long-term borrowings of the Corporation are due after the year 2001. NOTE 10 STOCK DIVIDENDS AND CONVERTIBLE PREFERRED STOCK On January 23, 1996 and January 25, 1994, the Corporation declared 10% common stock dividends to stockholders of record on February 21, 1996 and February 10, 1994, respectively. Accordingly, certain common stock share data have been adjusted to include the effect of the stock dividends. Each of the Series C preferred shares can be converted into 1.928982 shares of the Corporation's common stock and provides for cumulative quarterly dividends at an annual rate of $3.50 per share. The Series C preferred shares have a stated liquidation value of $50 per share plus an amount per share equal to all dividends cumulating or accrued and unpaid thereon to the date of such liquidation. The Series C preferred shares were redeemable by 41 46 BANC ONE beginning April 15, 1995 at an initial call price of $52.10 per share, declining to $50.00 per share on and after March 31, 2001. The redemption price was $51.95 for 1996. First USA had 5.75 million shares of 6 1/4% mandatory convertible preferred stock, $.01 par value, at December 31, 1996. Dividends at an annual rate of $1.99 per share on the preferred stock are cumulative and payable quarterly in average. The preferred stock had a liquidation value of $31.875 per share and was convertible into .833 shares of First USA common stock. First USA's preferred stock was converted into BANC ONE common stock in connection with the acquisition on June 27, 1997. NOTE 11 DIVIDEND AND CAPITAL RESTRICTIONS Payment of dividends by bank affiliates and certain other non-bank affiliates is subject to various national and/or state regulatory restrictions. The amount of dividends available from non-bank affiliates that are subject to dividend restrictions is regulated by the governing agency to which they report. At December 31, 1996, $1.3 billion of the total stockholders' equity of banking affiliates was available for payment of dividends without approval by the applicable regulatory authority. BANC ONE and its affiliated banks are subject to various regulatory capital requirements administered by the federal banking agencies. Pursuant to federal holding company and bank regulations, BANC ONE and each bank affiliate is assigned to a capital category. The assigned capital category is largely determined by the three ratios that are calculated in accordance with specific instructions included in the regulations: total risk adjusted capital, Tier 1 capital, and Tier 1 leverage ratios. The ratios are intended to measure capital relative to assets and credit risk associated with those assets and off-balance sheet exposures of the entity. To be categorized as well capitalized each entity must maintain total risk adjusted capital, Tier 1 capital, and Tier 1 leverage ratios of 10.0%, 6.0%, and 5.0%, respectively. However, the capital category assigned to an entity can also be affected by qualitative judgments made by such entity's primary regulatory agency about the risks inherent in that entity's activities that are not reflected in the calculated ratios. There are five capital categories defined in the regulations: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Classification of an affiliate bank in any of the undercapitalized categories can result in certain mandatory and possibly additional discretionary actions by regulators that could have a material effect on a bank's operations. As of December 31, 1996, BANC ONE and each of its affiliate banks are categorized as well capitalized and met all capital adequacy requirements to which each respective entity is subject. There are no conditions or events since December 31, 1996 that management believes have changed any entity's category. The actual and required capital amounts and ratios for BANC ONE and certain significant banking affiliates are presented in the table as follows: 42 47
TO BE CATEGORIZED ACTUAL ADEQUATELY CAPITALIZED ----------------------- ---------------------- AS OF DECEMBER 31, 1996 CAPITAL CAPITAL CAPITAL CAPITAL $(THOUSANDS) AMOUNT RATIO AMOUNT RATIO - --------------------------------------------------------------------------------------------------------------- TOTAL RISK ADJUSTED CAPITAL (TO RISK WEIGHTED ASSETS): BANC ONE CORPORATION (consolidated) $13,482,174 14.07% $ 7,663,080 8.00% Bank One Arizona, N.A 1,297,110 10.76 964,750 8.00 Bank One, Texas, N.A 1,645,923 10.46 1,259,213 8.00 TIER I CAPITAL (TO RISK WEIGHTED ASSETS): BANC ONE CORPORATION (consolidated) 9,556,913 9.98 3,831,540 4.00 Bank One Arizona, N.A 999,699 8.29 482,375 4.00 Bank One, Texas, N.A 1,502,008 9.54 629,606 4.00 TIER I LEVERAGE (TO AVERAGE ASSETS): BANC ONE CORPORATION (consolidated) 9,556,913 8.88 4,303,283 4.00 Bank One Arizona, N.A 999,699 7.25 551,578 4.00 Bank One, Texas, N.A $ 1,502,008 7.37% $ 815,231 4.00%
NOTE 12 INCOME TAXES The Corporation and its affiliates file a consolidated federal income tax return and income tax expense is apportioned among all affiliates based upon their taxable income or loss and tax credits. The effective income tax rate is below the statutory rate due to the following:
$(THOUSANDS) 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------------- Statutory tax rate $ 873,905 35.0% $ 760,738 35.0% $ 632,164 35.0% Increase (reduction) in tax rate resulting from: State income taxes, net of federal income tax benefit 33,991 1.4 56,375 2.6 53,134 2.9 Tax exempt interest (54,620) (2.2) (50,853) (2.3) (59,273) (3.3) Issuance of IRS regulations relating to acquisition of troubled financial Institutions 0 0.0 (22,265) (1.0) 0 0.0 Tax credits (14,296) (0.6) (8,154) (0.4) (7,151) (0.4) Other, net (14,954) (0.6) (7,515) (0.2) (757) (0.0) --------- --------- --------- --------- --------- --------- Actual tax rate $ 824,026 33.0% $ 728,326 33.5% $ 618,117 34.2% ========= ========= ========= ========= ========= ========= Components of provision for income taxes follows: $(THOUSANDS) 1996 1995 1994 - -------------------------------------------------------------------------------- Deferred federal tax $180,113 $155,521 $178,391 Federal amount currently payable 591,620 486,074 356,871 Deferred state fax 9,237 17,625 26,803 State amount currently payable 43,056 69,106 56,052 -------- -------- -------- Total provision $824,026 $728,326 $618,117 ======== ======== ========
Deferred tax assets and liabilities at December 31, 1996 and 1995 consisted of the following: 43 48
$(THOUSANDS) 1996 1995 - ---------------------------------------------------------------------------------------- Deferred tax assets Allowance for credit losses $ 446,306 $ 380,451 Accrued liabilities 86,039 97,525 Other 81,640 63,797 ----------- ----------- 613,985 541,773 =========== =========== Deferred tax liabilities: Leased assets and depreciation (959,236) (649,949) Unrealized holding gain on securities available for sale (10,039) (52,289) Securitization income (77,751) (76,651) Other (111,422) (160,246) ----------- ----------- (1,158,448) (939,135) ----------- ----------- Net deferred tax liability $ (544,462) $ (397,362) =========== ===========
Deferred income taxes are determined separately for each taxable entity of BANC ONE in each tax jurisdiction. For each separate tax paying component, all deferred tax assets and liabilities are netted and presented in a single amount, which is included in other assets or other liabilities on the balance sheet, as follows:
$(THOUSANDS) 1996 1995 - ------------------------------------------------------------------------------- Other liabilities Federal deferred tax liabilities $(482,108) $(340,669) State deferred tax liabilities (62,354) (56,693) --------- --------- Net deferred tax liability $(544,462) $(397,362) ========= =========
NOTE 13 FAIR VALUE OF FINANCIAL INSTRUMENTS The table below summarizes the estimated fair value of financial instruments.
DECEMBER 31, ------------------------------------------------- 1996 1995 ---------------------- ---------------------- CARRYING ESTIMATED CARRYING ESTIMATED $(MILLIONS) AMOUNT FAIR VALUE AMOUNT FAIR VALUE - ------------------------------------------------------------------------------------------ FINANCIAL ASSETS: Cash and short-term investments $ 7,205 $ 7,205 $ 6,440 $ 6,440 Securities - held to maturity 4,398 4,429 3,630 3,679 Securities - available for sale (1) 14,742 14,742 14,622 14,622 Loans, net (2) 73,056 74,379 63,547 65,976 Financial liabilities: Deposits 74,223 74,107 69,273 69,114 Short-term borrowings 18,325 18,326 12,479 12,478 Long-term borrowings 6,828 6,889 4,331 4,621 Off-balance sheet investment products 6 (19) 35 53
(1) The carrying amount and fair value of securities available for sale do not include the related fair value of off-balance sheet investment products, a $8 million loss and a $2 million loss at December 31, 1996 and 1995, respectively. (2) Excludes net leases with a carrying amount of $6,610 million and $4,366 million at December 31, 1996 and 1995, respectively and includes loans held for sale. 44 49 Fair value amounts represent estimates of value at a point in time. Significant assumptions regarding economic conditions, loss experience, risk characteristics associated with particular financial instruments and other factors were used for the purposes of this disclosure. These assumptions are subjective and involve matters of judgment. Therefore, they cannot be determined with precision. Changes in the assumptions could have a material impact on the amounts estimated. While these estimated fair value amounts are designed to represent estimates of the amounts at which these instruments could be exchanged in a current transaction between willing parties (excluding the value of customer relationships), many of BANC ONE's financial instruments lack an available trading market as characterized by willing parties engaged in an exchange transaction. In addition, it is BANC ONE's intent to hold most of its financial instruments to maturity, therefore, it is not probable that the fair values shown will be realized in a current transaction. The estimated fair values disclosed do not reflect the value of assets and liabilities that are not considered financial instruments. In addition, the value of long-term relationships with depositors (core deposit intangibles) and other customers (e.g. credit card intangibles) are not reflected. The value of these items is significant. Because of the wide range of valuation techniques and the numerous estimates which must be made, it may be difficult to make reasonable comparisons of BANC ONE's fair value information to that of other financial institutions. It is important that the many uncertainties discussed above be considered when using the estimated fair value disclosures and to realize that because of these uncertainties, the aggregate fair value amount should in no way be construed as representative of the underlying value of BANC ONE. The following describes the methodology and assumptions used to estimate fair value of financial instruments. CASH AND SHORT-TERM INVESTMENTS. Cash and short-term investments are by definition short-term and do not present any unanticipated market risk. Therefore, the carrying amount is a reasonable estimate of fair value. SECURITIES. The estimated fair values of securities by type are provided in Note 3 to the financial statements. These are based on quoted market prices, when available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. LOANS. The loan portfolio was segmented based on loan type, credit quality and repricing characteristics. For certain variable rate loans with no significant credit concerns and frequent repricing, estimated fair values are based on the carrying values. The fair values of other loans are estimated using discounted cash flow analyses. The discount rates used in these analyses are generally based on BANC ONE's funding cost plus a spread. The spread incorporates the impact of credit quality, servicing costs and the cost of embedded options such as prepayments and caps. Maturity estimates are based on historical experience with prepayments and current economic and lending conditions. The estimated fair value of credit card receivables is based on the present value of cash flows arising from receivables outstanding and does not include the value associated with the relationships BANC ONE has with its credit card customers. DEPOSITS. Under SFAS 107, the fair value of deposits with no stated maturity is equal to the amount payable on demand. The estimated fair value of fixed rate time deposits are based on discounted cash flow. The discount rates used in these analyses are based on market rates of alternative funding sources currently available for similar remaining maturities, adjusted for servicing and deposit insurance costs. SHORT-TERM BORROWINGS. Short-term borrowings reprice frequently, therefore, the carrying amount is a reasonable estimate of fair value. LONG-TERM BORROWINGS. For publicly traded debt, estimated fair values are based on quoted market prices. Where such prices are not available, fair value is estimated using quoted market prices for similar instruments or by discounted cash flow analysis. 45 50 OFF-BALANCE SHEET INVESTMENT PRODUCTS. Carrying values for off-balance sheet investment products represent deferred amounts arising from these financial instruments. Where possible, the fair values are based upon quoted market prices. Where such prices do not exist, these values are based on dealer quotes. COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT AND LETTERS OF CREDIT. The carrying amounts are reasonable estimates of the fair value of these financial instruments. Carrying amounts which are comprised of the unamortized fee income and, where necessary, reserves for any expected credit losses from these financial instruments, are immaterial. NOTE 14 PLEDGED SECURITIES AND CONTINGENT LIABILITIES As of December 31, 1996, securities having a book value of $9.8 billion were pledged as collateral for repurchase agreements, off-balance sheet investment products and as collateral for governmental and trust department deposits in accordance with federal and state requirements. The Corporation's bank affiliates are required to maintain average balances with the Federal Reserve Bank. The average required reserve balances were $.5 billion and $.8 billion for 1996 and 1995, respectively. The Corporation and certain of its affiliates have been named as defendants in various legal proceedings. Management believes that liabilities arising from these proceedings, if any, will not have a material adverse effect on the consolidated financial position, liquidity or results of operations of BANC ONE. NOTE 15 EMPLOYEE BENEFIT PLANS BANC ONE has various non-contributory pension plans covering substantially all employees. The retirement benefits are based on length of service and the employee's highest five years of compensation during the last 10 years of service. BANC ONE's funding policy is to contribute amounts necessary to meet the funding requirements set forth in the Employee Retirement Income Security Act of 1974. The following table sets forth the plans' funded status. Accrued pension cost at December 31, 1996 and 1995 includes $33 million and $23 million, respectively, for BANC ONE's non-qualified, unfunded supplemental pension plans.
$(THOUSANDS) 1996 1995 - ------------------------------------------------------------------------------------------------ Accumulated benefit obligation, including vested benefits of $553,750 and $472,738 in 1996 and 1995, respectively $ 583,664 $ 496,104 --------- --------- Projected benefit obligation for service rendered to date $ 768,029 $ 716,809 Plan assets at fair value 841,841 682,269 --------- --------- Excess / (shortfall) of plan assets over projected benefit obligation 73,812 (34,540) Unrecognized net loss / (gain) from past experience difference from that assumed and effects of changes in assumptions (85,295) 25,829 Unrecognized prior service cost 10,865 11,369 Unrecognized net transition asset (11,289) (13,969) --------- --------- Accrued pension cost $ (11,907) $ (11,311) ========= =========
The plan assets primarily consist of U.S. Treasury and Federal Agency securities, and mutual funds. Plan assets include 927,401 shares of the Corporation's common stock at December 31, 1996 and 927,836 shares at December 31, 1995 as adjusted for the 10% common stock dividend payable March 6, 1996. The fair value of the Corporation's common stock held as plan assets was $40 million and $32 million at December 31, 1996 and 1995, respectively. Dividends received by the plans on the Corporation's common stock totaled $1 million in 1996 and 1995. 46 51 Net periodic pension cost for 1996, 1995 and 1994 included the following:
$(THOUSANDS) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- Service cost - benefits earned during the period $ 55,600 $ 42,508 $ 46,498 Interest cost on projected benefit obligation 55,144 46,648 43,503 Actual (return) / loss on plan assets (106,034) (102,068) 28,872 Net amortization and deferral 36,824 43,846 (82,877) --------- --------- --------- Net periodic pension cost $ 41,534 $ 30,934 $ 35,996 ========= ========= ========= Actuarial assumptions: Weighted average discount rate for projected benefit obligation 7.50% 7.50% to 8.50% 7.90% to 8.50% Weighted average rate of compensation increase 5.00% 5.00% to 6.00% 4.50% to 6.25% Expected long-term rate of return on plan assets 8.50% to 9.00% 8.50% to 9.00% 8.50% to 9.75%
Postretirement Benefits Other Than Pension BANC ONE currently sponsors a defined benefit postretirement plan that covers salaried employees. The plan provides medical, dental and life insurance benefits. Benefits are available to retired employees with more than 10 years of service who retire under the normal or early retirement provisions of the BANC ONE Retirement Plan. The medical and dental benefits are contributory, while the life insurance is non-contributory. Prior to 1993, BANC ONE accounted for postretirement benefits other than pensions on the cash basis. BANC ONE is amortizing the unrecognized transition obligation existing at January 1, 1993, when the accrual method of accounting for these benefits was adopted over a 20-year period. BANC ONE funds retiree medical benefits to the extent such benefits are deductible for federal income tax purposes; however, these assets are not restricted as to use for such benefits and therefore do not meet the definition of plan assets. The following table sets forth the status of BANC ONE's postretirement benefit obligation at December 31, 1996 and 1995.
$(THOUSANDS) 1996 1995 - ---------------------------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees $ (87,413) $ (64,149) Fully eligible active plan participants (29,008) (19,323) Other active plan participants (38,929) (33,900) --------- --------- Accumulated postretirement benefit obligation in excess of plan (155,350) (117,372) assets Unrecognized net (gain) / loss 5,375 (20,137) Unrecognized transition obligation 90,053 95,681 --------- --------- Accrued postretirement benefit cost $ (59,922) $ (41,828) ========= =========
Net periodic cost for postretirement health care and life insurance benefits during 1996, 1995 and 1994 include the following: 47 52
$(THOUSANDS) 1996 1995 1994 - ------------------------------------------------------------------------------------------ Service cost - benefits earned during the period $ 3,678 $ 2,954 $ 3,591 Interest cost on accumulated postretirement benefit obligation 8,486 8,595 8,602 Amortization of unrecognized transition obligation 5,628 5,628 5,629 Amortization of unrecognized net gain (420) (1,097) 0 -------- -------- -------- Net periodic postretirement benefit cost $ 17,372 $ 16,080 $ 17,822 ======== ======== ========
The weighted average discount rates used in determining the accumulated postretirement benefit obligation at December 31, 1996, 1995 and 1994 were 7.50%, 7.50% and 8.75%, respectively. For measurement purposes, a 8.0% annual rate of increase in the cost of covered health care benefits was assumed for 1997; the rate was assumed to decrease gradually to 5.0% in the year 2000 and thereafter. A one-percentage point increase in the health care cost trend rate in each year would increase the accumulated postretirement benefit obligation as of December 31, 1996 by $16.0 million, or 10.3%, and would increase the aggregate of the service cost and interest cost components of net periodic postretirement benefit cost for 1996 by $1.1 million or 9.2%. BANC ONE sponsors various 401(k) plans which include substantially all of its employees. BANC ONE is required to make contributions to the plans in varying amounts. For 1996, 1995 and 1994, the expense related to these plans was $19 million, $8 million and $12 million, respectively. NOTE 16 STOCK-BASED COMPENSATION PLANS BANC ONE applies APB 25 and related interpretations in accounting for its stock-based compensation plans. In accordance with SFAS 123, BANC ONE elected to continue to apply the provisions of APB 25. However, pro forma disclosures as if BANC ONE adopted the cost recognition provisions of SFAS 123 in 1995 are required and are presented below along with a summary of the plans and awards. BANC ONE's stock option plans provide for the granting of options to purchase common shares to certain key employees. Generally, the stock option plans provide for the granting of incentive and non-qualified stock options and stock awards for up to an aggregate of one percent of the outstanding common stock of the Corporation as reported in BANC ONE's Annual Report on Form 10-K for the year ending immediately prior to such years plus carry over of certain shares not granted in prior years as defined by the plans. Further, the total number of shares available for grants of stock awards in any year shall not exceed one fourth of one percent of the Corporation's outstanding common stock as so reported. Based on December 31, 1995 outstanding shares, approximately 18.9 million shares of the Corporation's common stock were available for grant in 1996. In 1996, 617,001 shares were granted as stock awards. The plans generally provide that the exercise price of any stock option may not be less than the fair market value of the common stock on the date of grant. No balance sheet recognition is made of options until such options are exercised and no amounts applicable thereto are reflected in net income. Under the plans, the awards vest over a period of years and expense is recognized over the vesting period. Options are not exercisable for at least one year from the date of grant and are thereafter exercisable for such periods as the Board of Directors, or a committee thereof, specify (which may not exceed 10 years for incentive stock options or 20 years for non-qualified stock options), provided that the optionee has remained in the employment of the Corporation or its affiliates. The Board or the committee may accelerate the exercise period for an option upon the optionee's disability, retirement, or death. All options expire at the end of the exercise period. Options of acquired entities are converted to BANC ONE options at the time of acquisition. 48 53 The following summarizes the Corporation's stock options as of December 31, 1996 and 1995, and the changes for the years then ended:
1996 --------------------------------- NUMBER OF WGTD. AVG. SHARES EXERCISE PRICE - -------------------------------------------------------------------------------- Outstanding at beginning of the year 19,080,448 $16.29 Granted 5,891,496 26.65 Exercised 3,572,471 8.17 Forfeited 1,032,220 25.27 Expired 4,695 9.80 Outstanding at the end of the year ---------- 20,362,558 20.25 ========== Exercisable at the end of the year 7,940,319 11.40 ==========
1995 --------------------------------- NUMBER OF WGTD. AVG. SHARES EXERCISE PRICE - -------------------------------------------------------------------------------- Outstanding at beginning of the year 16,952,224 $13.44 Granted 5,410,704 22.37 Exercised 2,557,851 8.23 Forfeited 717,890 24.58 Expired 6,739 33.54 Outstanding at the end of the year ---------- 19,080,448 16.24 ========== Exercisable at the end of the year 8,383,110 8.05 ==========
The following summarizes information about the Corporation's stock options outstanding at December 31, 1996.
SHARES SUBJECT TO OUTSTANDING OPTIONS EXERCISABLE - -------------------------------------------------------------- ----------------------------- OPTIONS WGTD. AVG. RANGE OF SHARES REMAINING WGTD. AVG. NUMBER WGTD. AVG. EXERCISE PRICE OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE - ------------------------------------------------------------------------------------------------- Less than 2.38 2,645,280 4.35 $ 1.68 2,645,280 $ 1.68 $ 2.38 to 5.65 55,963 5.24 2.84 46,636 2.37 $ 5.65 - 8.51 73,584 6.18 7.33 64,257 7.27 $ 8.51 - $12.42 1,750,025 5.55 9.53 1,388,125 9.64 $12.95 - $18.44 3,598,398 7.49 16.81 2,007,348 16.49 $19.25 - $28.43 7,596,705 10.12 23.45 1,743,092 21.61 Greater than $28.59 4,642,602 12.53 33.02 45,581 33.26
49 54 The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions for grants in 1996 and 1995: 1) expected dividend yields ranged from 0.33% to 5.55%, 2) risk-free interest rates ranged from 5.48% to 7.92%, 3) expected volatility ranged from 20.21% to 32.95%, and 4) expected life of options ranged from five to nine years. The weighted average fair value at date of grant for options granted during 1996 and 1995 was $7.20 and $4.78 per option, respectively. Had the compensation cost for the Corporation's stock-based compensation plans been determined in accordance with the fair value based accounting method provided by SFAS 123, the net income and net income per common share for the years ended December 31, 1996 and 1995 would have been as follows:
$(MILLIONS, EXCEPT PER SHARE AMOUNTS) PRO FORMA(1) AS REPORTED - -------------------------------------------------------------------------------- 1996 Net income $1,665 $1,673 1996 Net income per common share 2.76 2.78 1996 Net income 1,443 1,445 1996 Net income per common share 2.43 2.43
(1) Due to the inclusion of only 1996 and 1995 option grants, the effect of applying SFAS 123 in 1996 and 1995 may not be representative of the pro forma impact in future years. NOTE 17 RELATED PARTY TRANSACTIONS Certain executive officers, directors and their related interests are loan customers of the Corporation's affiliates. The Securities and Exchange Commission (SEC) has determined with respect to the Corporation and significant subsidiaries (as defined by the SEC) disclosure of borrowings by directors and executive officers and certain of their related interests should be made, if the loans are greater than 5% of stockholders' equity, in the aggregate. These loans in aggregate were not greater than 5% of stockholders' equity at December 31, 1996 or 1995. NOTE 18 SUPPLEMENTAL DISCLOSURES FOR STATEMENT OF CASH FLOWS
$(THOUSANDS) 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------- Common stock issued in purchase acquisitions $ 710,515 $ 3,647 $ 33,508 =========== =========== =========== Transfer from loans to Other Real Estate Owned (OREO) $ 82,028 $ 91,163 $ 68,806 =========== =========== =========== Securitized mortgage loans $ 1,426,766 =========== Reclassification of private placements from loans to securities $ 533,057 =========== Reclassification of held to maturity securities to available for sale at amortized cost (fair value $2,934,526) $ 2,883,654 =========== Net increase in securities trades not settled $ (140,382) $ 185,009 $ 139,346 =========== =========== =========== Loans issued to facilitate the sale of OREO properties $ 2,453 $ 7,220 $ 26,287 =========== =========== =========== Additional Disclosures: Interest paid $ 3,632,703 $ 3,256,137 $ 2,379,073 =========== =========== =========== Income taxes paid $ 580,659 $ 453,569 $ 502,701 =========== =========== =========== Dividends declared but not paid at year end $ 123,925 ===========
50 55 NOTE 19 PARENT COMPANY FINANCIAL STATEMENTS The condensed financial statements of the Corporation, prepared on a parent company unconsolidated basis, are presented as follows: BALANCE SHEET at December 31, 1996 and 1995
$(THOUSANDS) 1996 1995 - ------------------------------------------------------------------------------------------ ASSETS: Investment in majority-owned affiliates: Banking $10,369,283 $ 8,622,077 Non-banking 549,820 483,615 Advances due from affiliates: Banking 125,000 Non-banking 2,254,062 1,689,104 Other assets 591,560 489,825 ----------- ----------- Total assets $13,889,725 $11,284,621 =========== =========== LIABILITIES: Commercial paper and other short-term borrowings $ 1,616,294 $ 560,360 Notes payable to non-banking affiliates 58,477 53,896 Long-term borrowings 2,204,062 1,500,026 Other liabilities 142,805 118,895 ----------- ----------- Total liabilities 4,021,638 2,233,177 ----------- ----------- Total stockholders' equity 9,868,087 9,051,444 ----------- ----------- Total liabilities and stockholders' equity $13,889,725 $11,284,621 =========== ===========
51 56 STATEMENT OF INCOME for the three years ended December 31, $(thousands, except per share amounts)
$(THOUSANDS) 1996 1995 1994 - -------------------------------------------------------------------------------------------------- INCOME: Dividends from affiliates Banking $1,108,122 $1,129,400 $ 614,617 Non-banking 65,050 0 12,086 Management and other fees from affiliates 180,733 116,623 118,577 Interest 137,569 128,323 100,572 Other 5,518 8,917 28,285 ---------- ---------- ---------- Total income 1,496,992 1,383,263 874,137 ---------- ---------- ---------- EXPENSE: Interest 207,686 183,452 129,302 Other 396,029 214,727 189,145 ---------- ---------- ---------- Total expense 603,715 398,179 318,447 ---------- ---------- ---------- Income before income taxes and equity in undistributed earnings of consolidated affiliates 893,277 985,084 555,690 Income tax benefit 132,550 55,022 31,629 ---------- ---------- ---------- Income before equity in undistributed earnings of consolidated affiliates 1,025,827 1,040,106 587,319 Equity in undistributed earnings of consolidated affiliates 647,018 405,105 600,749 ---------- ---------- ---------- NET INCOME $1,672,845 $1,445,211 $1,188,068 ========== ========== ========== NET INCOME PER COMMON SHARE $ 2.78 $ 2.43 $ 1.99 ========== ========== ========== Weighted average shares outstanding (000) 594,853 587,789 589,316 ========== ========== ==========
52 57 STATEMENT OF CASH FLOWS for the three years ended December 31,
$(THOUSANDS) 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 1,672,845 $ 1,445,211 $ 1,188,068 Adjustments: Equity in undistributed earnings of consolidated affiliates (647,018) (405,105) (600,749) Noncash dividends received (62,645) (54,649) (10,160) Other (48,108) (23,355) (61,167) ----------- ----------- ----------- Net cash provided by operating activities 915,074 962,102 515,992 ----------- ----------- ----------- Cash flows provided by (used in) investing activities: Net (increase) decrease in short-term investments (11,941) 464,320 (203,404) Net (increase) decrease in loans (672,743) (498,366) 768,948 Net increase in investment in majority-owned affiliates (406,838) 3,718 (205,654) All other investing activities, net (71,539) (82,747) 14,882 ----------- ----------- ----------- Net cash provided by (used in) investing activities (1,163,061) (113,075) 374,772 ----------- ----------- ----------- Cash flows provided by (used in ) financing activities: Net (decrease) increase in commercial paper 1,055,934 (623,432) 151,722 Net increase (decrease) in short term borrowings 9,105 52,545 (437,681) Proceeds from the issuance of long-term borrowings 695,955 590,179 0 Cash dividends paid (634,990) (572,121) (518,186) Purchase of treasury shares (1,003,075) (324,321) (336,453) Exercise of stock options, net of shares purchased 16,775 6,476 (3,680) All other financing activities, net 126,091 37,031 261,333 ----------- ----------- ----------- Net cash provided by (used in) financing activities 265,795 (833,643) (882,945) ----------- ----------- ----------- Increase in cash and cash equivalents 17,808 15,384 7,819 Cash and cash equivalents at January 1, 25,350 9,966 2,147 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT DECEMBER 31, $ 43,158 $ 25,350 $ 9,966 =========== =========== ===========
53 58 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and the Board of Directors BANC ONE CORPORATION We have audited the accompanying supplemental consolidated balance sheets of BANC ONE CORPORATION and Subsidiaries as of December 31, 1996 and 1995, and the related supplemental statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The supplemental financial statements give retroactive effect to the merger of BANC ONE CORPORATION and First USA, Inc. on June 27, 1997, which has been accounted for as a pooling of interests as described in Note 2 to the supplemental consolidated financial statements. Generally accepted accounting principles proscribe giving effect to a consummated business combination accounted for by the pooling of interests method in financial statements that do not include the date of consummation. These financial statements do not extend through the date of consummation, however, they will become the historical consolidated financial statements of BANC ONE CORPORATION and Subsidiaries after financial statements covering the date of consummation of the business combination are issued. In our opinion, the supplemental financial statements referred to above present fairly, in all material respects, the consolidated financial position of BANC ONE CORPORATION and Subsidiaries at December 31, 1996 and 1995 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles applicable after financial statements are issued for a period which includes the date of consummation of the business combination. COOPERS & LYBRAND L.L.P. Columbus, Ohio August 28, 1997 54 EX-11 2 EXHIBIT 11 1 EXHIBIT 11 BANC ONE CORPORATION AND SUBSIDIARIES STATEMENT REGARDING COMPUTATION OF EARNINGS PER COMMON SHARE $(MILLIONS, EXCEPT PER SHARE AMOUNTS)
1996 1995 - ----------------------------------------------------------------------------------- PRIMARY: Earnings: Net income $ 1,672.8 $ 1,445.2 Deduct: Dividends on series C preferred shares 16.3 17.5 --------- --------- Net income available to common shareholders 1,656.5 1,427.7 ========= ========= Shares: Weighted average common shares outstanding 575.0 569.3 Add: Dilutive effect of outstanding options, as determined by the application of the treasury stock method 19.9 18.5 --------- --------- Weighted average common shares outstanding, as adjusted 594.9 587.8 ========= ========= PRIMARY EARNINGS PER COMMON SHARE $ 2.78 $ 2.43 ========= ========= FULLY DILUTED: Earnings: Net income $ 1,672.8 $ 1,445.2 ========= ========= Shares: Weighted average common shares outstanding 575.0 569.3 Add: Dilutive effect of outstanding options, as determined by the application of the treasury stock method 21.0 19.5 Add: Conversion of preferred stock 9.1 9.6 --------- --------- Weighted average common shares outstanding, as adjusted 605.1 598.4 ========= ========= FULLY DILUTED EARNINGS PER COMMON SHARE $ 2.76 $ 2.42 ========= =========
EX-12 3 EXHIBIT 12 1 EXHIBIT 12 BANC ONE CORPORATION AND SUBSIDIARIES STATEMENT REGARDING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES $(MILLIONS)
YEARS ENDED DECEMBER 31, -------------------------------------------------------- 1996 1995 1994 1993 1992 -------------------------------------------------------- Calculation excluding interest on deposits Earnings Income before income taxes and change in accounting principle $2,496.9 $2,173.5 $1,806.2 $1,914.7 $1,381.0 Fixed charges 1,202.3 968.7 727.0 397.0 385.5 Less: Capitalized interest (4.9) (1.7) (1.0) (.7) (1.2) -------- -------- -------- -------- -------- Earnings $3,694.3 $3,140.5 $2,532.2 $2,311.0 $1,765.3 ======== ======== ======== ======== ======== Fixed Charges: Interest expense, including interest factor of capitalized leases and amortization of deferred debt expense $1,142.3 $ 912.4 $ 666.8 $ 345.4 $ 340.5 Portion of rental payments under operating leases deemed to be interest 60.0 56.3 60.2 51.6 45.0 -------- -------- -------- -------- -------- Fixed charges $1,202.3 $ 968.7 $ 727.0 $ 397.0 $ 385.5 ======== ======== ======== ======== ======== Ratio of earnings to fixed charges excluding interest on deposits 3.07x 3.24x 3.48x 5.82x 4.58x Calculation including interest on deposits: Earnings: Income before income taxes and change in accounting principle $2,496.9 $2,173.5 $1,806.2 $1,914.7 $1,381.0 Fixed Charges 3,662.5 3,395.1 2,560.2 1,987.2 2,474.9 Less: Capitalized interest (4.9) (1.7) (1.0) (.7) (1.2) -------- -------- -------- -------- -------- Earnings $6,154.5 $5,566.9 $4,365.4 $3,901.2 $3,854.7 ======== ======== ======== ======== ======== Fixed charges: As detailed above $1,202.3 $ 968.7 $ 727.0 $ 397.0 $ 385.5 Interest on deposits 2,460.2 2,426.4 1,833.2 1,590.2 2,089.4 -------- -------- -------- -------- -------- Fixed charges $3,662.5 $3,395.1 $2,560.2 $1,987.2 $2,474.9 ======== ======== ======== ======== ======== Ratio of earnings to fixed charges including interest on deposits 1.68x 1.64x 1.71x 1.96x 1.56x
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