<PAGE> 1
FORM 8-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report: October 11, 1994
----------------
HOUSEHOLD INTERNATIONAL, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-8198 36-3121988
- --------------- ----------- --------------
(State or other (Commission (IRS Employer
jurisdiction of File Identification
incorporation) Number) Number)
2700 Sanders Road, Prospect Heights, Illinois 60070
- -----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (708) 564-5000
--------------
<PAGE>
<PAGE> 2
Item 5. Other Events
Set forth in the Exhibit hereto is supplementary
financial information for Household International,
Inc., as of and for the years ended December 31, 1993,
1992 and 1991.
Item 7. Financial Statements and Exhibits
(a) Financial statements of businesses acquired.
Not Applicable
(b) Pro forma financial information.
Not Applicable
(c) Exhibits.
No. Exhibit
--- -------
99 Supplementary financial information for
Household International, Inc., as of and
for the years ended December 31, 1993,
1992 and 1991.
<PAGE>
<PAGE> 3
Signature
---------
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.
HOUSEHOLD INTERNATIONAL, INC.
-----------------------------
(Registrant)
By: /s/ Charles R. Wallace
-----------------------------
Charles R. Wallace
Corporate Controller and on behalf
of Household International, Inc.
Dated: October 11, 1994
----------------
U:\WP\EMP819\EDGAR\I8K994.WP <PAGE>
<PAGE> 4
Exhibit Index
-------------
Exhibit
No. Exhibit
- ------- -------
99 Supplementary financial information for Household
International, Inc., as of and for the years ended
December 31, 1993, 1992 and 1991.
<PAGE> 1
Exhibit 99
The following is supplementary information for Household
International, Inc. (the "Company") regarding its accounting
policy for interest rate contracts, financial instruments with
off-balance sheet risk and concentrations of credit risk, and
fair value of financial instruments.
INTEREST RATE CONTRACTS - The Company enters into a variety of
interest rate contracts in the management of its interest rate
exposure and in its trading activities. Interest rate swaps are
the principal vehicle used in the management of interest rate risk,
however, interest rate futures, options, caps and floors, and
forward contracts also are utilized. The nature and composition of
the Company's assets and liabilities and off-balance sheet items
expose the Company to interest rate risk. Interest rate swaps are
designated to and effective as a synthetic alteration of specific
assets or liabilities (or specific groups of assets or liabilities)
and off-balance sheet items. The interest rate differential to be
paid or received on these contracts is accrued and included in net
interest margin in the statements of income. Interest rate
futures, options, forwards, caps and floors used in hedging the
Company's exposure to interest rate fluctuations are designated to
and effective as hedges of balance sheet items. Anticipatory
hedges are designated to and effective as hedges of identified
transactions which are probable to occur. Realized and unrealized
gains and losses from these contracts are deferred and amortized
over the life of the hedged items as adjustments to net interest
margin. Interest rate contracts that are not used in the Company's
trading activities are not recorded at market value. Realized and
unrealized gains and losses on interest rate contracts used in the
Company's trading activities are carried at market value. Changes
in market value are included in other income.
<PAGE>
<PAGE> 2
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND
CONCENTRATIONS OF CREDIT RISK
In connection with its asset/liability management program and in
the normal course of business, the Company enters into various
transactions involving off-balance sheet financial instruments.
These instruments are used to reduce the Company's exposure to
fluctuations in interest rates and foreign exchange rates, and to
a lesser extent for proprietary trading purposes, or to meet the
financing needs of its customers. The Company does not serve as a
financial intermediary to make markets in any off-balance sheet
financial instruments. These financial instruments, which include
interest rate contracts, foreign exchange rate contracts,
commitments to extend credit, financial guarantees and recourse
obligations have varying degrees of credit risk and/or market risk.
CREDIT RISK
Credit risk is the possibility that a loss may occur because the
counterparty to a transaction fails to perform according to the
terms of the contract. The Company's exposure to credit loss under
commitments to extend credit, financial guarantees and recourse
obligations is represented by the contract amount. The Company's
credit quality and collateral policies for commitments and
guarantees are the same as those for receivables that are recorded
on the balance sheet. The Company's exposure to credit loss
related to interest rate swaps, cap and floor transactions, forward
and futures contracts and options is the amount of uncollected
interest or premium related to these instruments. These interest
rate related instruments are generally expressed in terms of
notional principal or contract amounts which are much larger than
the amounts potentially at risk for nonpayment by counterparties.
The Company controls the credit risk of its off-balance sheet
financial instruments through established credit approvals, risk
control limits and ongoing monitoring procedures. The Company has
never experienced nonperformance by any counterparty.
MARKET RISK
Market risk is the possibility that a change in interest rates or
foreign exchange rates will cause a financial instrument to
decrease in value or become more costly to settle. The Company
mitigates this risk by establishing limits for positions and other
controls and by entering into counterbalancing positions.
<PAGE>
<PAGE> 3
OFF-BALANCE SHEET INTEREST RATE AND FOREIGN EXCHANGE CONTRACTS
<TABLE>
<CAPTION>
The following tables summarize the activity in off-balance sheet interest rate and foreign exchange contracts
for the years ended December 31, 1993, 1992 and 1991:
YEAR ENDED DECEMBER 31, 1993
----------------------------
Matured
Notional or Notional Fair
Amount New Expired Terminated In-Substance Amount Value
In millions. 1992 Contracts Contracts Contracts Maturities(1) 1993 1993
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
HEDGING INSTRUMENTS - EXCHANGE TRADED
Interest rate futures contracts-purchased $ 170.0 $ 6,950.7 $(2,750.0) $ (475.0) $(3,895.7) 0.0 0.0
Interest rate futures contracts-written (5.0) (4,405.7) 0.0 475.0 3,895.7 $ (40.0) $ 0.1
Options-purchased 100.0 3,019.2 (1,432.2) 0.0 (1,617.4) 69.6 0.0
Options-written (14.5) (3,267.5) 1,605.8 0.0 1,606.2 (70.0) 0.0
========= ========= ========= ========= ========= ========= ======
HEDGING INSTRUMENTS - NON-EXCHANGE TRADED
Interest rate swaps $10,418.3 $ 8,866.5 $(3,384.5) $ (920.5) 0.0 $14,979.8 $299.8
Foreign exchange rate contracts - purchased 146.4 6,929.9 (956.4) (944.2) $(5,034.8) 140.9 0.0
Foreign exchange rate contracts - written (540.0) (7,098.6) 932.5 944.2 5,036.3 (725.6) 0.1
Interest rate forward contracts - purchased 227.2 4,968.2 (1,994.5) (100.1) (2,561.0) 539.8 (0.2)
Interest rate forward contracts - written (557.9) (3,997.1) 772.9 103.6 2,819.2 (859.3) (0.9)
Other risk management instruments 435.3 1,203.1 (222.1) 0.0 0.0 1,416.3 49.3
========= ========= ========= ========= ========= ========= ======
</TABLE>
<TABLE>
<CAPTION>
Notional Notional Fair
Amount Net Amount Value
1992 Change 1993 1993
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TRADING INSTRUMENTS - EXCHANGE TRADED
Interest rate futures contracts-purchased $ 2,449.2 $(2,117.2) $ 332.0 $ 45.1
Interest rate futures contracts-written (2,847.0) 1,970.0 (877.0) (45.8)
Options-purchased 2,688.1 7,020.9 9,709.0 2.8
Options-written (10,605.6) (5,840.5) (16,446.1) (2.0)
========== ========= ========== ======
TRADING INSTRUMENTS - NON EXCHANGE TRADED
Interest rate swaps $ 100.0 0.0 $ 100.0 $ 0.6
Interest rate forward contracts - purchased 261.0 $ (250.5) 10.5 0.0
Interest rate forward contracts - written (261.0) 203.2 (57.8) 0.0
Other risk management instruments 800.0 (300.0) 500.0 0.0
========== ========= ========== ======
/TABLE
<PAGE>
<PAGE> 4
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1992
----------------------------
Matured
Notional or Notional Fair
Amount New Expired Terminated In-Substance Amount Value
In millions. 1991 Contracts Contracts Contracts Maturities(1) 1992 1992
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
HEDGING INSTRUMENTS - EXCHANGE TRADED
Interest rate futures contracts-purchased 0.0 $ 9,242.0 $(1,485.0) 0.0 $(7,587.0) $ 170.0 0.0
Interest rate futures contracts-written $ (5.0) (8,623.0) 1,036.0 0.0 7,587.0 (5.0) (0.2)
Options-purchased 87.5 1,166.1 (129.5) 0.0 (1,024.1) 100.0 (0.3)
Options-written (1.0) (1,220.1) 182.5 0.0 1,024.1 (14.5) (0.1)
========= ========= ========= ========= ========= ========= ======
HEDGING INSTRUMENTS - NON EXCHANGE TRADED
Interest rate swaps $6,837.5 $ 7,925.7 $(3,315.3) $(1,029.6) 0.0 $10,418.3 $118.0
Foreign exchange rate contracts - purchased 417.2 6,294.8 (632.1) (869.0) $(5,064.5) 146.4 3.9
Foreign exchange rate contracts - written (75.0) (7,027.4) 628.9 869.0 5,064.5 (540.0) 0.4
Interest rate forward contracts - purchased 656.3 3,236.3 (1,262.6) (310.5) (2,092.3) 227.2 (1.7)
Interest rate forward contracts - written (121.0) (4,361.2) 1,832.0 0.0 2,092.3 (557.9) (2.7)
Other risk management instruments 434.0 124.8 (123.4) (0.1) 0.0 435.3 0.9
========= ========= ========= ========= ========= ========= ======
</TABLE>
<TABLE>
<CAPTION>
Notional Notional Fair
Amount Net Amount Value
1991 Change 1992 1992
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TRADING INSTRUMENTS - EXCHANGE TRADED
Interest rate futures contracts-purchased $ 4,508.5 $(2,059.3) $ 2,449.2 $ 0.9
Interest rate futures contracts-written (3,303.0) 456.0 (2,847.0) (0.9)
Options-purchased 875.1 1,813.0 2,688.1 1.4
Options-written (5,895.2) (4,710.4) (10,605.6) (5.9)
========= ========= ========== =======
TRADING INSTRUMENTS - NON EXCHANGE TRADED
Interest rate swaps $ 100.0 0.0 $ 100.0 $ (0.3)
Interest rate forward contracts - purchased 21.0 $ 240.0 261.0 232.7
Interest rate forward contracts - written 0.0 (261.0) (261.0) (232.9)
Other risk management instruments 505.3 294.7 800.0 0.0
========= ========= ========== =======
/TABLE
<PAGE>
<PAGE> 5
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1991
----------------------------
Matured
Notional or Notional Fair
Amount New Expired Terminated In-Substance Amount Value
In millions. 1990 Contracts Contracts Contracts Maturities(1) 1991 1991
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
HEDGING INSTRUMENTS - EXCHANGE TRADED
Interest rate futures contracts-purchased 0.0 $ 1,162.9 0.0 0.0 $(1,162.9) 0.0 0.0
Interest rate futures contracts-written 0.0 (1,169.9) $ 2.0 0.0 1,162.9 $ (5.0) $(0.1)
Options - purchased $ 160.0 160.2 (184.0) 0.0 (48.7) 87.5 0.6
Options - written 0.0 (143.7) 94.0 0.0 48.7 (1.0) (0.1)
======== ========= ========= ======= ========= ======== =====
HEDGING INSTRUMENTS - NON EXCHANGE TRADED
Interest rate swaps $2,754.7 $ 5,735.3 $ (859.3) $(793.2) 0.0 $6,837.5 $89.3
Foreign exchange rate contracts - purchased 908.7 5,955.5 (46.6) (500.0) $(5,900.4) 417.2 (0.8)
Foreign exchange rate contracts - written (368.0) (5,840.5) 0.0 500.0 5,633.5 (75.0) 0.8
Interest rate forward contracts - purchased 1,625.1 1,822.0 (1,630.0) 0.0 (1,160.8) 656.3 1.4
Interest rate forward contracts - written (493.8) (2,283.6) 1,495.6 0.0 1,160.8 (121.0) (0.8)
Other risk management instruments 452.2 331.5 (349.7) 0.0 0.0 434.0 7.0
======== ========= ========= ======= ========= ======== =====
</TABLE>
<TABLE>
<CAPTION>
Notional Notional Fair
Amount Net Amount Value
1990 Change 1991 1991
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TRADING INSTRUMENTS - EXCHANGE TRADED
Interest rate futures contracts-purchased 0.0 $ 4,508.5 $ 4,508.5 $ 7.6
Interest rate futures contracts-written 0.0 (3,303.0) (3,303.0) (7.3)
Options-purchased 0.0 875.1 875.1 3.3
Options-written 0.0 (5,895.2) (5,895.2) (6.4)
======= ========= ========= =====
TRADING INSTRUMENTS - NON EXCHANGE TRADED
Interest rate swaps $ 475.0 $ (375.0) $ 100.0 0.0
Interest rate forward contracts - purchased 0.0 21.0 21.0 $21.8
Options - purchased 100.0 (100.0) 0.0 0.0
Options - written (674.5) 674.5 0.0 0.0
Other risk management instruments 0.0 505.3 505.3 (0.7)
======= ========= ========= =====
(1) Represent contracts terminated as the market execution technique of closing the transaction either (a) just prior
to maturity to avoid delivery of the underlying instrument, or (b) at the maturity of the underlying item being hedged.
/TABLE
<PAGE>
<PAGE> 6
Interest rate swaps are contractual agreements between two
counterparties for the exchange of periodic interest payments
generally based on a notional principal amount and agreed-upon
fixed or floating rates. The Company enters into interest rate
swap transactions to either synthetically alter or hedge its
exposure to interest rate risk. These transactions are
specifically designated to a particular asset/liability, off-
balance sheet item, or anticipated transaction of a similar
characteristic. Specific assets or liabilities may consist of
groups of individually small dollar homogenous assets or
liabilities. Credit and market risk exist with respect to these
instruments. The following table reflects the items so hedged or
altered at December 31, 1993 (in millions).
Investment securities, held to maturity $ 125.0
Finance and Banking receivables
First mortgages 25.0
Home equity 605.3
Other secured 57.0
Bankcard 983.8
Merchant participation 1,000.0
Other unsecured 312.7
---------
Total receivables owned 2,983.8
Other receivables 707.0
Deposits 900.0
Commercial paper, bank and
other borrowings 916.8
Senior and subordinated debt 5,665.4
Receivables sold to investors and
serviced with limited recourse 3,681.8
---------
$14,979.8
=========
Note: In all instances, the notional amount is less than
the carrying value of the related asset/liability or
off-balance sheet item.
To protect against a potential tightening of the Prime/LIBOR
spread, the Company as of December 31, 1993 had $3.1 billion of
basis swaps which effectively lock in funding costs. Approxi-
mately 80 percent of these contracts mature in 1994 and 1995.
The remaining 20 percent mature in 1996 and 1997. These
longer duration contracts lock in a fixed Prime/LIBOR spread that
is higher than the historical level for a relatively wide band of
interest rates. If interest rates rise beyond these bands, the
locked-in spread would contract, with every one basis point
increase in rates resulting in a one basis point reduction in the
Prime/LIBOR spread protected.
<PAGE>
<PAGE> 7
The following table summarizes the maturities of interest rate
swaps outstanding at December 31, 1993:
All dollar amounts are stated in millions.
<TABLE>
<CAPTION> There-
1994 1995 1996 1997 1998 1999 after Total
-------- -------- -------- -------- ------ -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pay a fixed rate/receive a floating rate
Notional value $ 375.9 $ 234.0 $ 432.9 $ 33.9 $ 25.0 $ 20.0 $ 1,121.7
Weighted average receive rate (1) 3.72% 4.21% 3.85% 4.81% 3.48% 3.44% 3.90%
Weighted average pay rate 8.46% 9.18% 5.80% 12.32% 8.46% 9.66% 7.72%
Pay a floating rate/receive a fixed rate
Notional value 862.2 2,247.3 1,995.1 $1,232.6 687.2 1,096.4 1,450.1 9,570.9
Weighted average receive rate 6.32% 4.89% 5.88% 5.41% 4.80% 5.94% 5.99% 5.57%
Weighted average pay rate (1) 3.27% 3.06% 3.13% 3.07% 3.24% 3.12% 3.14% 3.13%
Pay a floating rate/receive a different
floating rate
Notional value 2,682.0 521.9 614.7 568.6 4,387.2
Weighted average receive rate (1) 3.42% 3.50% 3.61% 5.14% 3.68%
Weighted average pay rate (1) 3.35% 3.37% 3.40% 3.55% 3.38%
-------- -------- -------- -------- ------ -------- -------- ---------
Total notional value $3,920.1 $3,003.2 $3,042.7 $1,801.2 $721.1 $1,121.4 $1,470.1 $15,079.8
======== ======== ======== ======== ====== ======== ======== =========
Total weighted average rates on swaps:
Receive rate 4.09% 4.60% 5.14% 5.32% 4.81% 5.88% 5.95% 4.90%
======== ======== ======== ======== ====== ======== ======== =========
Pay rate 3.82% 3.59% 3.57% 3.22% 3.66% 3.24% 3.23% 3.54%
======== ======== ======== ======== ====== ======== ======== =========
(1) Floating rates to be paid or received by the Company are based on spot rates for the index contained in
each swap contract, which generally are based on LIBOR.
</TABLE>
Forwards and futures are contracts for delivery at a future date in
which the buyer agrees to take delivery of a specified instrument
or cash at a specified price. The Company has both interest rate
and foreign exchange rate forward contracts and interest rate
futures contracts. Foreign exchange contracts are utilized by the
Company to reduce exposure in its foreign operations to
fluctuations in exchange rates. Interest rate forward and futures
contracts are used to mitigate basis risk which arises due to the
difference in movement of market rate indices (prime and LIBOR) on
which a large portion of the Company's assets and liabilities are
priced. Interest rate forward and interest rate futures contracts
are also used in the Company's proprietary trading activities.
For futures, the Company's exposure to credit risk is limited as
these contracts are traded on organized exchanges and are settled
on a daily basis with the exchanges. In contrast, forward
contracts have credit risk relating to the performance of the
counterparty. These instruments also are subject to market risk.
Options grant the purchaser the right to either purchase or sell a
financial instrument at a specified price within a specified
period. The Company primarily uses options, both written and
purchased, for its proprietary trading activities. Gains and
losses from the Company's trading activities were immaterial to the
financial results of the Company for the years ended December 31,
1993, 1992 and 1991. For written options, the Company is
exposed to market risk but generally not credit risk. The
credit risk and market risk associated with purchased options is
limited to the premium paid which is recorded on the balance sheet.
Other risk management instruments consist of caps and floors and
foreign currency swaps. Caps and floors written expose the Company
to market risk but not to credit risk. Credit and market risk
associated with caps and floors purchased is limited to the premium
paid which is recorded on the balance sheet.
Deferred gains of $10.2 and $15.4 million and deferred losses of
$22.5 and $16.4 million were recorded on the balance sheet from
interest rate risk management instruments at December 31, 1993 and
1992, respectively. The weighted average amortization period
associated with the deferred gains was 3.8 years at both December
31, 1993 and 1992. The weighted average amortization periods for
the deferred losses were 4.0 and 2.2 years at December 31, 1993 and
1992, respectively.<PAGE>
<PAGE> 8
Interest margin was increased by $207.0, $110.8 and $36.1 million
in 1993, 1992 and 1991, respectively, through the use of off-
balance sheet interest rate risk management instruments.
At December 31, 1993 the accrued interest, unamortized premium and
other assets recorded for agreements which would be written off
should all related counterparties fail to meet the terms of their
contracts was $78.3 million.
COMMITMENTS AND GUARANTEES
The Company enters into various commitments and guarantees to meet
the financing needs of its customers. However, the Company expects
a substantial portion of these agreements to expire unexercised.
The Company's significant commitments and guarantees consisted of
the following:
In millions.
At December 31 1993 1992
- -------------- --------- ---------
Bank and private-label credit cards $43,164.0 $29,151.0
Other consumer lines of credit 2,771.8 2,586.1
Other loan commitments and guarantees 3,121.1 2,142.3
Commitments to extend credit to consumers represent the unused
credit limits on bank and private-label credit cards and on other
lines of credit. Commitments on bank and private-label credit
cards are cancelable at any time. The Company does not require
collateral to secure credit card agreements. Other consumer lines
of credit include home equity lines of credit, which are secured by
residential real estate, and other unsecured lines of credit.
Commitments on these lines of credit generally are cancelable by
the Company when a determination is made that a borrower may not be
able to meet the terms of the credit agreement.
Other loan commitments include commitments to originate and
purchase mortgage loans, commitments to fund commercial loans and
letters of credit and guarantees for the payment of principal and
interest on municipal industrial development bonds.
Commitments to orginate or purchase approved consumer mortgages and
commitments to purchase mortgage-backed securities totaled
approximately $1.7 and $1.3 billion at December 31, 1993 and 1992,
respectively. The company also had commitments to sell loans and
mortgage-backed securities of approximately $1.0 and $.5 billion at
December 31, 1993 and 1992, respectively.
Commercial loan commitments, primarily related to the Liquidating
Commercial Lines segment, including working capital lines and
letters of credit, totaled $153 and $169 million at December 31,
1993 and 1992, respectively. These commitments are collateralized
to varying extents by inventory, receivables, property and
equipment and other assets of the borrowers. These commitments
were entered into prior to the Company's decision to exit these
product lines.
The Company has issued guarantees of $146 million at both December
31, 1993 and 1992 for the payment of principal and interest on
municipal industrial development bonds. The guarantees expire from
1994 through 1997. The Company has security interests in
underlying properties for these guarantees, with an average
collateral value of 112 and 111 percent of the guarantees at
December 31, 1993 and 1992, respectively.
OTHER FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Certain receivables securitized and serviced with limited recourse
include floating interest rate provisions whereby the underlying
receivables pay a fixed (floating) rate and the pass-through rate
to the investor is floating (fixed). Further, in other
transactions the underlying receivables reprice based on one index
while the pass-through rate reprices on another index. The Company
manages its exposure to interest rate risk on these financial
instruments primarily through the use of interest rate swaps. See
Note 3, "Finance and Banking Receivables" of the Company's Annual
Financial Statements (page 62 of the 1993 Annual Report to
Shareholders) for additional information on securitizations and
sales of receivables.<PAGE>
<PAGE> 9
CONCENTRATIONS OF CREDIT RISK
A concentration of credit risk is defined as a significant credit
exposure with an individual or group engaged in similar activities
or affected similarly by economic conditions.
Because the Company primarily lends to consumers, it does not have
receivables from any industry group that equal or exceed 10 percent
of total managed receivables at December 31, 1993 and 1992. The
Company lends nationwide; the following geographic areas comprised
more than 10 percent of total managed domestic receivables at
December 31, 1993: California - 22 percent, Midwest (IL, IN, IA,
KS, MI, MN, MO, NE, ND, OH, SD, WI) - 25 percent, Middle Atlantic
(DE, DC, MD, NJ, PA, VA, WV) - 16 percent, Northeast (CT, ME, MA,
NH, NY, RI, VT) - 13 percent and Southeast (AL, FL, GA, KY, MS, NC,
SC, TN) - 13 percent.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has estimated the fair value of its financial
instruments in accordance with Statement of Financial Accounting
Standards No. 107, "Disclosures About Fair Value of Financial
Instruments" ("FAS No. 107"). The estimates were made as of
December 31, 1993 and 1992 based on relevant market information.
Financial instruments include cash, receivables, investments,
liquidating commercial assets, debt, certain insurance reserves and
off-balance sheet financial instruments. Accordingly, a number of
other assets recorded on the balance sheet (such as core deposit
intangibles and acquired credit card relationships) and other
intangible assets not recorded on the balance sheet (such as the
value of consumer lending relationships for originated receivables
and the franchise values of the Company's business units) are not
required to be valued for purposes of this disclosure. The Company
believes there is substantial value associated with these assets
based on current market conditions and historical experience. The
Company has estimated the value of its core deposits as discussed
more fully below.
Approximately 25 percent in 1993 and 30 percent in 1992 of the fair
value of financial instruments disclosed were determined using
quoted market prices. Because no actively traded market exists,
however, for a significant portion of the Company's financial
instruments, fair values for items lacking a quoted market price
were estimated by discounting estimated future cash flows at
estimated current market discount rates. Assumptions used to
estimate future cash flows are consistent with management's
assessments regarding ultimate collectability of assets and related
interest and with estimates of product lives and repricing
characteristics used in the Company's asset/liability management
process. All assumptions are based on historical experience
adjusted for future expectations. Assumptions used to determine
fair values for financial instruments for which no active market
exists are inherently judgmental and changes in these assumptions
could significantly affect fair value calculations.
<PAGE>
<PAGE> 10
The following is a summary of the carrying value and estimated fair
value of the Company's financial instruments:
<TABLE>
<CAPTION>
1993 1992
------------------------------------- -------------------------------------
Estimated Estimated
In millions. Carrying Fair Carrying Fair
At December 31 Value Value Difference Value Value Difference
- -------------- -------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Cash $ 317 $ 317 - $ 256 $ 256 -
Investment securities 8,795 9,046 $ 251 7,390 7,633 $ 243
Finance and banking receivables 19,563 20,202 639 18,960 19,302 342
Liquidating commercial assets 1,556 1,441 (115) 1,851 1,677 (174)
-------- -------- ----- -------- -------- -----
Subtotal 30,231 31,006 775 28,457 28,868 411
-------- -------- ----- -------- -------- -----
Deposits (7,516) (7,638) (122) (8,030) (8,161) (131)
Commercial paper, bank and other
borrowings (5,642) (5,642) - (5,253) (5,253) -
Senior and senior subordinated debt (9,114) (9,574) (460) (9,014) (9,333) (319)
Insurance reserves (6,064) (6,434) (370) (5,326) (5,526) (200)
-------- -------- ----- -------- -------- -----
Subtotal (28,336) (29,288) (952) (27,623) (28,273) (650)
-------- -------- ----- -------- -------- -----
Interest rate and foreign
exchange contracts 78 349 271 43 148 105
Commitments to extend credit
and guarantees - 36 36 - 20 20
-------- -------- ----- -------- -------- -----
Subtotal 78 385 307 43 168 125
-------- -------- ----- -------- -------- -----
Total $ 1,973 $ 2,103 $ 130 $ 877 $ 763 $(114)
======== ======== ===== ======== ======== =====
</TABLE>
The estimated fair value in excess of carrying value of the
Company's financial instruments was $130 million at December 31,
1993, an increase of $244 million from year-end 1992. The
relationship between the decline in the overall interest rate
environment from December 31, 1992 to December 31, 1993 and the
repricing characteristics of the Company's assets and liabilities
was the most significant factor in causing increases in the excess
of fair value over carrying value (the "Difference"). The adoption
of FAS No. 115 on December 31, 1993 reduced the Difference
associated with investment securities as available-for-sale
investment securities are now carried at estimated fair value.
Excluding the impact of FAS No. 115, the Difference for investment
securities at December 31, 1993 would have been approximately $403
million. The excess of carrying value over estimated fair value of
liquidating commercial assets declined in 1993, as discussed more
fully below.
Recently adopted generally accepted accounting principles (FAS No.
115) require recognition of the difference between fair market and
carrying values of certain debt and equity securities. As
previously disclosed, the differential increased shareholders'
equity by $40.5 million after partially offsetting adjustments for
the impact of income taxes and deferred insurance policy
acquisition costs. The Company believes it is not meaningful to
evaluate the difference between fair market and carrying values for
assets without evaluating similar differences for all liabilities
and off-balance sheet financial instruments utilized in the
Company's asset/liability management process. As market interest
rates change, application of this new accounting principle will
result in volatility of the reported capital base that is
inconsistent with economic value. The analysis presented above
presents a more complete view of the differences between fair
market and carrying values of both assets and liabilities.
Although the disclosed pretax excess of fair value over carrying
value of $130 million covers a substantial portion of the elements
of the Company's financial position, it excludes the substantial
value associated with core deposit and other intangible values
described earlier. Core deposits provide stable, low cost funding
compared to alternative sources of funds. The estimated value
associated with the Company's core deposits at December 31, 1993
was $156 million. In addition, the disclosures presented<PAGE>
<PAGE> 11
previously exclude fair market valuation of certain insurance
reserves and leases as prescribed by generally accepted accounting
principles. Both the analysis of the fair value information
presented previously, as well as the adjustments required by FAS
No. 115, therefore have inherent limitations.
The following methods and assumptions were used to estimate the
fair value of the Company's financial instruments:
Cash: The carrying value approximates fair value for this
instrument due to its liquid nature.
Investment securities: Quoted market prices were used to determine
fair value for investment securities.
Finance and banking receivables: Quoted market prices were used to
determine fair value for domestic first mortgages. The fair value
of adjustable rate consumer receivables was determined to
approximate existing carrying value because interest rates on these
receivables adjust with changing market interest rates. The fair
value of fixed rate consumer receivables was estimated by
discounting future expected cash flows at interest rates
approximating those offered by the Company on such products at the
respective valuation dates. This approach to estimating fair value
for fixed rate consumer receivables results in a disclosed fair
value that is less than amounts the Company believes could be
currently realizable on a sale of these receivables. These
receivables are relatively insensitive to changes in overall market
interest rates and therefore have additional value compared to
alternative uses of funds in a low interest rate environment.
The fair value of consumer receivables included an estimate, on a
present value basis, of future excess servicing cash flows
associated with securitizations and sales of certain home equity,
bankcard and merchant participation receivables.
Liquidating Commercial Assets: The fair value of liquidating
commercial assets was determined by discounting estimated future
cash flows at an estimated market interest rate. The assumptions
used in the estimate were consistent with the Company's intention
to manage this portfolio of assets separately from the Core
Business and to dispose of the assets in the normal course of
business. The estimated fair value for liquidating commercial
assets was below carrying value due to increases in current market
discount rates, adjusted for changes in overall market rates, from
rates in effect when assets were originated. This change in
discount rates impacts all assets regardless of whether any
uncertainty exists over collectability of future principal and
interest payments. The Company believes the relative increase in
current market discount rates is due to economic conditions and
market perceptions towards the types of commercial assets which the
Company decided to discontinue in 1991. While these market
perceptions improved slightly during 1993, they still remain
unfavorable, which has resulted in illiquid and sluggish markets
for these assets. Because of these current market conditions, the
Company currently intends to collect or otherwise dispose of its
liquidating commercial assets over several years. The decrease in
the difference between estimated fair value and carrying value in
1993 compared to 1992 reflects the belief that current market
conditions, while depressed, have improved and will continue to
improve over the next several years. Accordingly, the Company does
not believe that the differential between estimated fair and
carrying values for liquidating commercial assets represents a
permanent impairment of value.
Deposits: The fair value of the Company's savings and demand
accounts equaled the carrying amount as stipulated in FAS No. 107.
The fair value of fixed rate time certificates was estimated by
discounting future expected cash flows at interest rates offered by
the Company on such products at the respective valuation dates.
Commercial paper, bank and other borrowings: The fair value of
these instruments was determined to approximate existing carrying
value because interest rates on these instruments adjust with
changes in market interest rates due to their short-term maturity
or repricing characteristics.
<PAGE>
<PAGE> 12
Senior and senior subordinated debt: Quoted market prices where
available were used to determine fair value. For those instruments
for which quoted market prices were not available, the estimated
fair value was computed by discounting future expected cash flows
at interest rates offered for similar types of debt instruments.
Insurance reserves: The fair value of insurance reserves for
periodic payment annuities and guaranteed investment contracts was
estimated by discounting future expected cash flows at interest
rates offered by the Company on such products at December 31, 1993
and 1992. The fair value of other insurance reserves is not
required to be determined in accordance with FAS No. 107. The
Company believes the fair value of such reserves approximates
existing carrying value because interest rates on these instruments
adjust with changes in market interest rates due to their short-
term maturity or repricing characteristics.
Interest rate and foreign exchange contracts: Where practical,
quoted market prices were used to determine fair value of these
instruments. For non-exchange traded contracts, fair value was
determined through the use of accepted and established valuation
methods (including input from independent third parties) which
consider the terms of the contracts and market expectations on the
valuation date for forward interest rates (for interest rate
contracts) or forward foreign currency exchange rates (for foreign
exchange contracts). See Note 8, "Financial Instruments with Off-
Balance Sheet Risk and Concentrations of Credit Risk" of the
Company's Annual Financial Statements (page 66 of the 1993 Annual
Report to Shareholders) for a discussion of the nature of these
items.
Commitments to extend credit and guarantees: These commitments
were valued by considering the Company's relationship with the
counterparty, the creditworthiness of the counterparty and the
difference between committed and current interest rates.
