For immediate release

The Federal Reserve Board today announced its approval of the notice of Banc One Corporation, Inc., Columbus, Ohio, to merge with First USA, Inc., Dallas, Texas, and thereby engage in certain nonbanking activities. Attached is the Board's Order relating to this action.

Banc One Corporation, Inc. Columbus, Ohio Order Approving Notice to Acquire a Savings Association and to Engage in Certain Nonbanking Activities

Banc One Corporation, Inc., Columbus, Ohio ("Banc One"), a bank holding company within the meaning of the Bank Holding Company Act ("BHC Act"), has requested the Board's approval under section 4(c)(8) of the BHC Act (12 U.S.C. § 1843(c)(8)) and section 225.24(a) of the Board's Regulation Y (12 C.F.R. 225.24(a)) to merge with First USA, Inc., Dallas, Texas ("First USA"), and to acquire First USA's wholly owned subsidiary, First USA Federal Savings Bank, Wilmington, Delaware ("First USA FSB"). Banc One also has requested the Board's approval under section 4(c)(8) of the BHC Act to acquire the direct and indirect nonbank subsidiaries of First USA listed in the Appendix and thereby to operate nonbank depository institutions, and to engage in activities related to extending credit and data processing.1 Notice of the proposal, affording interested persons an opportunity to submit comments, has been published (62 Federal Register 11,895 (1997)).2 The time for filing comments has expired, and the Board has considered the notice and all comments received in light of the factors set forth in section 4(c)(8) of the BHC Act.3 Banc One, with total consolidated assets of approximately $102 billion, is the tenth largest commercial banking organization in the United States. Banc One operates subsidiary banks: Arizona, Colorado, Illinois, Indiana, Kentucky, Louisiana, Ohio, Oklahoma, Texas, Utah, West Virginia, and Wisconsin, controlling approximately 2.7 percent of total banking assets in the United States.4 Banc One also engages through its subsidiaries in a broad range of permissible nonbanking activities in the United States. First USA, with total consolidated assets of $10.2 billion, controls deposits of $1.7 billion in its subsidiary depository institutions.5 After consummation of the proposal, Banc One would be the eighth largest commercial banking organization in the United States, with consolidated assets of $112.2 billion. The Board has determined that operating a savings association by a bank holding company is closely related to banking for purposes of section 4(c)(8) of the BHC Act. The Board requires a savings association acquired by a bank holding company to conform its direct and indirect activities to those permissible for a bank holding company under section 4(c)(8) and Regulation Y. Banc One has committed to conform all activities of First USA FSB to those requirements.6 The Board also has determined by regulation that operating nonbanking depository institutions and engaging in activities related to extending credit and data processing, as discussed in the Appendix, are closely related to banking within the meaning of section 4(c)(8) of the BHC Act. Applicant has committed to conduct these activities subject to the limitations set forth in Regulation Y. Competitive Considerations In order to approve the proposal, the Board also must determine that the performance of the proposed activities is a proper incident to banking, that is, that the proposed transaction "can reasonably be expected to produce benefits to the public . . . that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interests, or unsound banking practices." As part of the Board's evaluation of these factors, the Board has carefully considered the competitive effects of the proposed transaction in light of all the facts of record, including comments contending that the proposal would have an adverse effect on competition in the credit card industry. Banc One and First USA compete as issuers of credit cards and as merchant credit card processors.7 Credit card issuers compete nationally for credit card customers. First USA is the fourth largest credit card issuer in the United States, controlling approximately 6.8 percent of outstanding credit card balances.8 Banc One is the 11th largest credit card issuer, controlling approximately 3.1 percent of outstanding credit card balances. After consummation, Banc One would become the third largest credit card issuer, controlling approximately 10 percent of outstanding credit card balances. The market would remain unconcentrated as measured by the Herfindahl-Hirschman Index ("HHI"),9 and numerous competitors would remain.10 Merchant credit card processors also compete nationally. First USA is the third largest merchant credit card processor, with approximately 7.3 percent of the total credit and debit transactions processed, and Banc One is the tenth largest processor, with approximately 2.7 percent of the total credit and debit transactions processed.11 After consummation, Banc One would become the third largest processor, controlling approximately 10 percent of the total credit and debit transactions processed. Market concentration as measured by the HHI would remain moderately concentrated,12 and numerous competitors would remain. Based on all the facts of record, the Board concludes that consummation of this proposal would not have a significantly adverse effect on competition among credit card issuers or merchant credit card processors, or in any other relevant market. Other Considerations As part of its evaluation of the public interest factors, the Board has carefully reviewed the financial and managerial resources of Banc One, First USA, and their subsidiaries, and the effect the transaction would have on such resources in light of all the facts of record.13 The facts of record include confidential financial information from Banc One and reports of examination and other supervisory information received from the primary federal and state supervisors of the organizations assessing the financial and managerial resources of the organizations. Based on all the facts of record, the Board concludes that the financial and managerial resources of the organizations involved in this proposal are consistent with approval.14 In acting on applications to acquire a savings association, the Board has traditionally reviewed the records of performance by the institutions involved under the Community Reinvestment Act (12 U.S.C. § 2901 et seq. ("CRA")).15 Commenters have criticized aspects of the CRA performance records of both institutions and the record of compliance with fair lending laws by Banc One. The Board has considered in detail almost identical comments relating to Banc One in connection with its proposal to acquire Liberty Bancorp, Inc., Oklahoma City, Oklahoma.16 Based on all the facts of record, including the facts and reasons discussed in the Banc One/Liberty Order, which are specifically incorporated herein by reference, the Board concludes that Banc One's record of performance under the CRA and record of compliance with fair lending laws are consistent with approval of the proposal.17 First USA FSB commenced operations in 1996, and has not yet been evaluated for CRA performance by the Office of Thrift Supervision, its primary federal supervisor. As noted, Banc One intends to merge First USA FSB with and into its lead subsidiary bank, Bank One, Columbus, N.A., Columbus, Ohio ("Columbus Bank"), which received an "outstanding" rating at its most recent CRA performance evaluation from the bank's primary federal supervisor, the OCC. First USA's other insured depository institutions, First USA Bank and First USA Financial Services, Inc., received "satisfactory" ratings for CRA performance from their primary federal supervisor, the Federal Deposit Insurance Corporation ("FDIC"), as of August 1996 and September 1996, respectively.18 Based on all the facts of record, and for the reasons discussed above and in the Banc One/Liberty Order, the Board concludes that considerations relating to the CRA performance records of the institutions involved are consistent with approval of the proposal.19 The record indicates that consummation of the proposal would result in benefits to both consumers and merchants. The proposal would enable Banc One to provide First USA customers with access to a broad range of services. In addition, combined credit card operations of Banc One and First USA would enhance the services and products currently provided by each of these organizations. Additionally, there are public benefits to be derived from permitting capital markets to operate so that bank holding companies may make potentially profitable investments in nonbanking companies when those investments are consistent, as in this case, with the relevant considerations under the BHC Act, and from permitting banking organizations to allocate their resources in the manner they believe is most efficient. Based on all the facts of record, the Board has determined that consummation of this proposal can reasonably by expected to produce public benefits that would outweigh any likely adverse effects under the proper incident to banking standard of section 4(c)(8) of the BHC Act. Request for a Hearing Commenters contend that their allegations raise issues of disputed material facts and that a hearing is necessary in order for commenters to obtain and to provide additional information relevant to their allegations, particularly regarding Banc One's record of CRA performance and compliance by Banc One's nonbanking subsidiaries with fair lending laws. Commenters also cite the examination of Banc One Mortgage Company ("BOMC"), a nonbank subsidiary of Banc One, which was discussed in the Banc One/Liberty Order, as evidence of disputed material facts. The Board's rules provide for a hearing on notices under section 4 of the BHC Act to acquire a savings association if there are disputed issues of material fact relating to the acquisition of the savings association that cannot be resolved in some other manner. See 12 C.F.R. 225.25(a)(2). After a careful review of all the facts of record, the Board has concluded that Commenters' arguments amount to a dispute with the weight that should be accorded to, and the conclusions that the Board should draw from, the facts of record, but do not identify disputed issues of fact that are material to the Board's decision. In addition, interested parties have had an opportunity to present their views, and commenters have submitted substantial written comments that have been considered by the Board. Commenters' request fails to show why a written presentation would not suffice and to summarize what evidence would be presented at a hearing or meeting. See 12 C.F.R. 262.3(e). The examination discussed in the Banc One/Liberty Order is intended to resolve a question about fair lending oversight, procedures and practices at Banc One Mortgage Company ("BOMC") based on certain preliminary information that was developed in the course of the Board's supervision of Banc One and on other complaints against Banc One's operations. The Board fully expects that Banc One will take all necessary steps, including adopting and implementing practices and procedures developed in consultation with the Board, to ensure that any areas of weakness in its fair lending policies and practices that may be identified through the Board's examination are adequately addressed, and the Board conditions its action on this proposal on Banc One taking such actions. Based on all the facts of record, including the fact that BOMC accounts for less than 1 percent of Banc One's consolidated net income, the fact that the Board has supervisory authority to require bank holding companies and their subsidiaries to address compliance deficiencies, Banc One's record of addressing supervisory and other issues identified by its supervisor, the condition stated in this order, and Banc One's overall record of performance under the CRA and fair lending laws, the Board does not believe that completion of the BOMC examination, or receipt of additional information at a public hearing or meeting, would provide facts material to the Board's consideration of the proposal at this time. On the basis of all the facts of record, the Board has determined that a public hearing or public meeting is not required or necessary to clarify the factual record in this proposal, or otherwise warranted in this case. Accordingly, the request for a public hearing or meeting on the proposal is hereby denied. Conclusion Based on the foregoing and all the facts of record, the Board has determined that the notice should be, and hereby is, approved. The Board's approval of the proposal is specifically conditioned on compliance by Banc One with the commitments made in connection with this notice and conditions referred to in this order.20 The Board's determination also is subject to all the conditions in Regulation Y, including those in sections 225.7 and 225.23(g) (12 C.F.R. 225.7 and 225.23(g)) and to the Board's authority to require such modification or termination of the activities of a holding company or any of its subsidiaries as the Board finds necessary to assure compliance with, or to prevent evasion of, the provisions and purposes of the BHC Act and the Board's regulations and orders issued thereunder. The commitments and conditions relied on by the Board in reaching this decision shall be deemed to be conditions imposed in writing by the Board in connection with its findings and decision, and, as such, may be enforced in proceedings under applicable law. This transaction shall not be consummated later than three months after the effective date of this order, unless such period is extended for good.cause by the Board or the Federal Reserve Bank of Cleveland, acting pursuant to delegated authority.

By order of the Board of Governors,21 effective May 14, 1997. (signed) Jennifer J. Johnson Jennifer J. Johnson Deputy Secretary of the Board

APPENDIX Nonbanking Subsidiaries Banc One proposes to acquire all of the voting shares of the following nonbanking subsidiaries of First USA: (a) First USA Bank, Wilmington, Delaware, a credit card bank, and thereby engage in making revolving extensions of credit in connection with the issuance of its consumer credit cards, and conducting activities incidental to its credit card business, pursuant to section 225.28(b)(2); (b) First USA Financial Services, Inc., Murray, Utah, an industrial loan company, and thereby engage in making extensions of credit in connection with the issuance of commercial credit cards to businesses, governmental units and other entities, pursuant to sections 225.28(b)(2) and 225.28(b)(4); (c) First USA Merchant Services, Inc., Dallas, Texas, and thereby engage in processing credit and debit card transactions for merchants directly and indirectly through financial institutions and independent sales organizations, including card transaction authorization ("authorization"), processing of card transactions ("capture"), settlement of card transactions ("settlement"), and arranging for deposit of funds in merchants' accounts ("merchant funds deposit"), pursuant to sections 225.28(b)(2) and 225.28(b)(14); (d) First USA Technology, Inc., Dallas, Texas, and thereby engage in serving as licensor for software provided to merchants in connection with credit and debit card processing activities, pursuant to sections 225.28(b)(2) and 225.28(b)(14); (e) First Virtual Holdings Incorporated, San Diego, California, and thereby engage in providing merchants selling their products and services over the Internet with a payment system that verifies the identity of the purchaser and the seller to a credit card transaction, and engage in providing processing services, including authorization, capture, settlement, and merchant funds deposit activities for the credit card transaction; and operating a shared website on the Internet for sellers of information products by managing all aspects of the selling process such as confirmation of purchases, distribution of information products, accounting, settlement, and collection and payment of proceeds, pursuant to section 225.28(b)(14); (f) Gensar Technologies, Inc., Tampa, Florida, and thereby engage in providing certain credit and debit card transaction processing services and equipment for merchants directly and indirectly through financial institutions and independent sales organizations, and acting as licensor of personal computer-based software designed for the processing of financial data, pursuant to sections 225.28(b)(2) and 225.28(b)(14); (g) Merchant Link, Inc., Bethesda, Maryland, and thereby engage in providing specialized help-desk services only in connection with the operation of the bank card modules of certain integrated hotel, restaurant, and retail financial management systems, pursuant to section 225.28(b)(14); and (h) Paymentech New Hampshire, Inc., Salem, New Hampshire, and thereby engage in providing specialized credit and debit card transactions processing services, including authorization, capture, settlement, and merchant funds deposit activities, and providing specialized personal computer-based software that is used by direct response merchants in connection with the entry of customer card data and card transaction processing, pursuant to sections 2225.28(b)(2) and 225.28(b)(14). Other Interests Banc One proposes to acquire the following interest of First USA:22 50 percent ownership interest in PHH/Paymentech, Wilmington, Delaware, a limited liability company that is a joint venture with Paymentech Fleet Services, Inc., a First USA subsidiary, and PHH Vehicle Management Services Corp., and thereby engage in providing credit card marketing, transaction processing and other services to organizations that operate fleets of vehicles, pursuant to section 225.28(b)(2).

Footnotes 1 Banc One and First USA have granted each other an option to purchase up to approximately 19.9 percent of the outstanding common stock of the other company under certain circumstances. These options would terminate on consummation of the proposal. First USA would be required to obtain the Board's approval under section 3 of the BHC Act before exercising its option. 2 Notice of the proposed acquisition of First USA FSB also was published in appropriate newspapers in accordance with the Board's policy regarding applications to acquire a savings association. 3 Commenters on the proposal, including Inner City Press/Community on the Move, the Delaware Community Reinvestment Action Council, and the Black Citizens for Justice, Law & Order (collectively "Commenters") contend that the Board should not consider the substance of Banc One's submissions filed after time periods prescribed in the Board's Rules of Procedure for an applicant's response to comments. See 12 C.F.R. 262.3(e). The Board notes that both Banc One and Commenters filed information and comments after the period provided in the Board's Rules of Procedure. The Board has the sole discretion under its Rules of Procedure to consider comments and responses, including late submissions of information. This notice was filed and many of the comments and responses were submitted before the effective date of the Board's recent revision to Regulation Y. Accordingly, in reviewing this proposal, the Board has considered all the submissions filed, including submissions filed by Commenters and by Banc One after the relevant time periods. 4 Asset and deposit data are as of December 31, 1996. 5 In this context, the term depository institution includes commercial banks, savings banks, and savings associations. 6 Banc One intends to merge First USA FSB with and into Banc One's subsidiary national bank, Bank One, Columbus, N.A, Columbus, Ohio. The merger is subject to the approval of Office of the Comptroller of the Currency ("OCC") under section 18(c) of the Federal Deposit Insurance Corporation Act (12 U.S.C. § 1828(c), the Bank Merger Act), and the Board has consulted with the OCC on the proposed merger. 7 Merchant card processing consists of three primary activities: (1) merchant contract acquisition, (2) front-end network processing, and (3) back-end merchant accounting. Merchant contract acquisition includes the marketing and sale of card transaction processing services to merchants. Front-end network processing includes card authorization at the time of a purchase and the electronic capture of sales drafts. Back-end merchant accounting includes recording the number and amount of all sales drafts and credits submitted by each merchant, managing and reporting transaction information, resolving charge backs, and investigating fraudulent activity. 8 Market share is measured by the dollar amount of credit card balances outstanding as of December 31, 1996, and is based on data provided by the 50 largest issuers of Visa and MasterCard credit cards. 9 The HHI would increase 42 points to 642. Under the revised Department of Justice guidelines, 49 Federal Register 26,823 (June 29, 1984), a market in which the post-merger HHI is less than 1000 is considered unconcentrated, and a market in which the post-merger HHI is between 1000 and 1800 is considered moderately concentrated. The Justice Department generally will not challenge an acquisition (in the absence of other factors indicating anticompetitive effects) unless the post-merger HHI is at least 1800. 10 Commenters contend that the market for credit card issuers is too concentrated and that credit card issuers are able to charge higher than normal interest rates. If the competitive effect of the proposal were considered only with respect to the eleven largest credit card issuers (Banc One is the 11th largest credit card issuer), the proposal still would be within the DOJ merger guidelines. The post-merger HHI would increase by 88 points to 1176, and Banc One would control approximately 14.4 percent of the outstanding credit card balances. 11 Market share is measured by the dollar amount of Visa and MasterCard credit and debit transactions processed by the 75 largest firms in 1996. 12 The HHI would increase by 40 points to 1013 as a result of the proposal. 13 The Board has carefully reviewed the effect of the downward revision of earnings recently announced by First USA on the financial considerations of the proposal. The Board concludes that the revision would not have a materially adverse effect on the financial resources of Banc One. 14 Commenters contend that an anonymously written employee newsletter provides evidence of unfair and discriminatory labor practices at a subsidiary of First USA. In addition, some commenters contend that service by a senior First USA executive as a director of an unaffiliated subprime lender that recently reorganized in a bankruptcy proceeding raises adverse managerial considerations. The comments do not provide facts that indicate wrongdoing by the executive. One commenter also generally alleges that the numbers of African Americans in management positions at Banc One and First USA are disproportionately low. As noted, the Board reviewed these comments in light of all the facts of record, including supervisory assessments of the financial and managerial resources of Banc One and relevant First USA subsidiaries, and concluded that financial and managerial considerations are consistent with approval. The Board also previously has stated that its limited jurisdiction to review applications under the BHC Act does not authorize the Board to adjudicate disputes involving an applicant that arise under statutes, other than banking laws, that are administered and enforced by another federal regulatory agency. See, e.g., Norwest Corporation, 82 Federal Reserve Bulletin 580 (1996); see also Western Bancshares v. Board of Governors, 480 F.2d 749 (10th Cir. 1973). Banc One and First USA are required to file an annual report with the Equal Employment Opportunity Commission ("EEOC") covering all employees in its corporate structures under the Department of Labor's regulations. See 41 C.F.R. 60-1.7(a) and 60-1.4. The Department of Labor, and the EEOC in particular, have sufficient statutory authority to address disputes regarding unfair or illegally discriminatory labor practices. 15 Banc One contends that recent changes in laws other than the CRA have made the CRA, by its terms, inapplicable to the acquisition of a savings association by a bank holding company. Section 2203 of the Economic Growth and Regulatory Paper Reduction Act of 1996 ("section 2203") eliminated the requirement for approval by the Office of Thrift Supervision ("OTS") of acquisitions of savings associations by bank holding companies. There is no indication that section 2203 was intended to alter the applicability of the CRA. First USA FSB is an insured depository institution that is subject to evaluation under the CRA. Banc One's contention also is inconsistent with the Board's long-standing policy of considering the CRA record of bank holding companies in reviewing applications by bank holding companies to acquire savings associations. In this light, the Board concludes that the language and intent of the CRA support taking CRA performance into account in an application by a bank holding company to acquire a savings association such as First USA FSB. 16 Banc One Corporation, 82 Federal Reserve Bulletin (1997)(Order dated April 28, 1997) ("Banc One/Liberty Order"). The Board has carefully reviewed additional contentions by Commenters that Banc One's 1996 HMDA data show: (1) disparities in denial rates to minorities compared to the denial rates for nonminority borrowers; (2) significant HMDA reporting errors by Banc One, particularly Banc One Financial Services ("BOFS"); and (3) misrepresentations of Banc One's referral program among its affiliates, including loan purchases by BOFS. The Board has reviewed the 1996 HMDA data and Banc One's overall CRA performance record in light of these allegations and the limitations noted in the Banc One/Liberty Order that make HMDA data an inadequate basis, absent other information, for concluding that an institution has engaged in illegal lending discrimination. The Board also has considered Commenters' allegations about the accuracy of Banc One's HMDA data, particularly data from BOFS. The Board notes that BOFS accounts for less than 1 percent of Banc One's consolidated net income, and that the Board has sufficient supervisory authority to address inaccuracies in HMDA reporting by BOFS or other Banc One nonbank affiliates if the reports are found to contain inaccuracies. The Board also has considered the contention that alleged HMDA inaccuracies would constitute a misrepresentation of Banc One's referral program in light of Banc One's managerial record and the Board's long experience with supervising the organization. Accordingly, and as explained in the Banc One/Liberty Order, Banc One's overall performance records under the CRA and fair lending laws, including the most recent CRA performance examination ratings of its subsidiary banks, and Banc One's history of addressing areas of weakness in its performance, are consistent with the Board's approving an application under the BHC Act. 17 As noted, the Board has also considered these allegations and Banc One's record of performance in evaluating managerial factors. 18 A customer of First USA Bank contends that the bank breached its credit card agreement and has violated Truth in Lending Act requirements. The FDIC, the primary supervisor of First USA Bank, is addressing the customer's complaint. The Delaware Community Reinvestment Action Council contends First USA Bank's most recent CRA evaluation reflects substantial assistance from First USA FSB. Banc One responds that, after the merger of First USA FSB into Columbus Bank, First USA Bank would continue to assist in meeting the credit needs of its communities through qualified investments or through the assistance of Banc One affiliates such as Banc One Community Development Corporation. 19 Commenters requested additional time in which to comment on 1996 data filed by Banc One under the Home Mortgage Disclosure Act (12 U.S.C. § 2801 et seq.)("HMDA"). Based on all the facts of record, including the fact that Commenters did not request the 1996 HMDA data from Banc One, and that Banc One voluntarily provided the information to Commenters, the Board concludes that Commenters' request for additional time to file comments was properly denied. See, e.g., the Board's Regulation C (12 C.F.R. Part 203) on disclosure of HMDA data. The Board also notes that Commenters have provided substantial submissions on the 1996 HMDA data that have been considered as part of this proposal. 20 Commenters also have requested that the Board delay action on the proposal and investigate its allegations against Banc One and its nonbanking subsidiaries through an on-site examination. Based on all the facts of record, and for the reasons discussed in the Banc One/Liberty Order which, as noted, have been specifically incorporated herein, the Board concludes that delay or denial of the proposal until the Board investigates Commenters' allegations or completes its examination of BOMC is not warranted. 21 Voting for this action: Vice Chair Rivlin and Governors Kelley, Phillips, and Meyer. Absent and not voting: Chairman Greenspan. 22 Banc One also proposes to acquire the inactive subsidiaries of First USA, however, Banc One has committed not to engage in any activities through these inactive subsidiaries without the prior approval of the Board or the Federal Reserve Bank of Cleveland.

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1997 Orders on banking applications