<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: September 16, 1994
------------------
HOUSEHOLD FINANCE CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-75 36-1239445
- --------------- ----------- --------------
(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
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<PAGE>
<PAGE> 2
Item 5. Other Events
Set forth in the Exhibit hereto is supplementary
financial information for Household Finance Corporation
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 Finance Corporation 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 FINANCE CORPORATION
-----------------------------
(Registrant)
By:
-----------------------------
David A. Schoenholz
Vice President-Chief Accounting
Officer and Chief Financial
Officer, Director and on behalf
of Household Finance Corporation
Dated: September 16, 1994
------------------
U:\WP\EMP819\EDGAR\F8K994.WP <PAGE>
<PAGE> 4
Exhibit Index
-------------
Exhibit
No. Exhibit
- ------- -------
99 Supplementary financial information for Household
Finance Corporation as of and for the years ended
December 31, 1993, 1992 and 1991.
<PAGE> 1
Exhibit 99
The following is supplementary information for Household Finance
Corporation 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, 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
8. 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
The accompanying tables summarize the activity in off-balance sheet interest
rate and foreign exchange contracts for the years ended December 31, 1993,
1992 and 1991:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
- --------------------------------------------------------------------------------------------------------------------------
Notional Matured 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 $ 5,780.5 $(2,750.0) $(475.0) $(2,725.5) $0.0 $0.0
Interest rate futures contracts-written 0.0 (3,200.5) 0.0 475.0 2,725.5 0.0 0.0
Options-purchased 0.0 2,084.7 (1,236.2) 0.0 (818.9) 29.6 0.0
Options-written 0.0 (2,363.5) 1,515.9 0.0 807.6 (40.0) 0.0
====== ========= ========= ======= ========= ===== ====
HEDGING INSTRUMENTS - NON EXCHANGE TRADED
Interest rate swaps $8,292.6 $8,453.5 $(2,756.5) $(275.0) $0.0 $13,714.6 $220.8
Foreign exchange rate contracts-purchased 27.5 881.0 (37.7) (60.0) (807.4) 3.4 0.0
Foreign exchange rate contracts-written (108.5) (882.4) 31.8 60.0 807.4 (91.7) 0.1
Other risk management instruments 419.9 893.9 (115.0) 0.0 0.0 1,198.8 57.7
======== ======== ========= ======= ===== ========= ======
</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 (261.0) 0.0 0.0
Interest rate forward contracts-written (261.0) 261.0 0.0 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
- --------------------------------------------------------------------------------------------------------------------------
Notional Matured 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 $8,071.0 $(1,485.0) $0.0 $(6,416.0) $170.0 $0.0
Interest rate futures contracts-written 0.0 (7,452.0) 1,036.0 0.0 6,416.0 0.0 0.0
Options-purchased 0.0 370.9 0.0 0.0 (370.9) 0.0 0.0
Options-written 0.0 (370.9) 0.0 0.0 370.9 0.0 0.0
==== ======== ========= ==== ========= ====== ====
HEDGING INSTRUMENTS - NON EXCHANGE TRADED
Interest rate swaps $5,089.9 $6,434.2 $(2,646.5) $(585.0) $ 0.0 $8,292.6 $115.9
Foreign exchange rate contracts-purchased 32.2 904.4 (25.3) (205.0) (678.8) 27.5 0.0
Foreign exchange rate contracts-written (75.0) (917.8) 0.5 205.0 678.8 (108.5) 0.4
Other risk management instruments 302.5 117.4 0.0 0.0 0.0 419.9 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
- --------------------------------------------------------------------------------------------------------------------------
Notional Matured 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 $425.0 $0.0 $0.0 $(425.0) $0.0 $0.0
Interest rate futures contracts-written 0.0 (425.0) 0.0 0.0 425.0 0.0 0.0
==== ====== ==== ==== ======= ==== ====
HEDGING INSTRUMENTS - NON EXCHANGE TRADED
Interest rate swaps $2,003.5 $4,057.1 $(459.1) $(511.6) $0.0 $5,089.9 $86.9
Foreign exchange rate contracts-purchased 358.7 731.5 (46.6) (70.0) (941.4) 32.2 (0.1)
Foreign exchange rate contracts-written (65.0) (754.5) 0.0 70.0 674.5 (75.0) 0.8
Interest rate forward contracts-purchased 100.4 39.8 (140.2) 0.0 0.0 0.0 0.0
Other risk management instruments 153.9 200.0 (51.4) 0.0 0.0 302.5 (0.7)
======== ======== ======= ======= ======= ======== =====
</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 homogeneous 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
Home equity 1,405.3
Other secured 37.0
Bankcard 983.8
Merchant participation 1,000.0
Other unsecured 1,112.7
---------
Total receivables owned 4,538.8
Other receivables 707.0
Senior and subordinated debt 5,012.0
Receivables sold to investors and
serviced with limited recourse 3,331.8
---------
$13,714.6
=========
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 has $3.1 billion of
basis swaps which effectively lock in appropriate funding costs.
Approximately 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:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
There-
All dollar amounts are stated in millions. 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 $573.4 $182.2 $425.0 $300.0 $183.9 $225.0 $1,889.5
Weighted average receive rate (1) 3.41% 3.83% 3.42% 3.50% 3.74% 3.31% 3.49%
Weighted average pay rate 7.51% 8.98% 5.75% 6.31% 6.78% 4.23% 6.60%
Pay a floating rate/receive a fixed rate
Notional value 775.0 1,452.2 1,467.1 1,059.9 462.2 1,321.4 $1,000.1 7,537.9
Weighted average receive rate 6.70% 5.49% 6.24% 5.94% 5.06% 6.18% 6.56% 6.06%
Weighted average pay rate (1) 3.49% 3.38% 3.47% 3.46% 3.43% 3.44% 3.43% 3.42%
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 $4,030.4 $2,156.3 $2,506.8 $1,928.5 $646.1 $1,546.4 $1,000.1 $13,814.6
======== ======== ======== ======== ====== ======== ======== =========
Total weighted average rates on swaps:
Receive rate 4.05% 4.87% 5.12% 5.33% 4.69% 5.76% 6.56% 4.95%
===== ===== ===== ===== ===== ===== ===== =====
Pay rate 3.97% 3.85% 3.84% 3.93% 4.38% 3.55% 3.43% 3.84%
===== ===== ===== ===== ===== ===== ===== =====
(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 Australian
operation to fluctuations in exchange rates. Interest rate
forward and interest rate futures contracts primarily are used in
the Company's proprietary trading activities. Interest rate
forward and futures contracts also 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. 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 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 $9.7 and $14.2 million and deferred losses of
$7.8 and $11.1 million were recorded on the balance sheet from
interest rate risk management instruments at December 31, 1993
and 1992, respectively. The weighted average amortization<PAGE>
<PAGE> 8
periods were 3.8 and 4.0 years associated with the deferred gains
and 4.2 and 2.4 years associated with the deferred losses at
December 31, 1993 and 1992, respectively.
Interest margin was increased by $166.7, $101.4 and $37.9 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 $50.7 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 contracts 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 $20,956.6 $19,273.0
Other consumer lines of credit 1,264.8 1,371.5
Other loan commitments and guarantees 390.3 753.5
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 fund commercial
loans and letters of credit and guarantees for the payment of
principal and interest on municipal industrial development bonds.
Commercial loan commitments, primarily related to the Liquidating
Commercial Lines segment, including working capital lines and
letters of credit, totaled $150.7 and $168.9 million at December
31, 1993 and 1992, respectively. These commitments are
collateralized to varying extent by inventory, receivables,
property and equipment and other assets of the borrowers and were
entered into prior to the Company's decision to exit these
product lines.
The Company has issued guarantees of $136 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 101 percent of the guarantees
at both December 31, 1993 and 1992. The Company also has
guaranteed payment of all debt obligations issued prior to 1989,
excluding deposits, of Household Financial Corporation Limited
("HFCL"), a Canadian affiliate. The amount of guaranteed debt
issued by HFCL prior to 1989 and still outstanding was
approximately $113 million.
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<PAGE>
<PAGE> 9
swaps. See Note 3, "Finance and Banking Receivables" for
additional information on securitizations and sales of
receivables.
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) - 23
percent, Middle Atlantic (DE, DC, MD, NJ, PA, VA, WV) - 15
percent, Northeast (CT, ME, MA, NH, NY, RI, VT) - 14 percent and
Southeast (AL, FL, GA, KY, MS, NC, SC, TN) - 13 percent.
10. 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 instruments. Accordingly, a number of
other assets recorded on the balance sheet (such as 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.
Approximately 30 percent in 1993 and 35 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>
<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 $ 28 $ 28 - $ 49 $ 49 -
Investment securities 7,082 7,318 $ 236 5,903 6,125 $ 222
Finance and banking receivables 9,338 9,605 267 8,460 8,665 205
Liquidating commercial assets 1,556 1,441 (115) 1,851 1,677 (174)
-------- -------- ----- -------- -------- -----
Subtotal 18,004 18,392 388 16,263 16,516 253
-------- -------- ----- -------- -------- -----
Commercial paper, bank and other
borrowings (4,322) (4,322) - (4,218) (4,218) -
Senior and senior subordinated debt (6,814) (7,077) (263) (6,602) (6,781) (179)
Insurance reserves (5,982) (6,352) (370) (5,243) (5,443) (200)
-------- -------- ----- -------- -------- -----
Subtotal (17,118) (17,751) (633) (16,063) (16,442) (379)
-------- -------- ----- -------- -------- -----
Interest rate and foreign
exchange contracts 51 279 228 33 152 119
Commitments to extend credit
and guarantees - 36 36 - 20 20
-------- -------- ----- -------- -------- -----
Subtotal 51 315 264 33 172 139
-------- -------- ----- -------- -------- -----
Total $ 937 $ 956 $ 19 $ 233 $ 246 $ 13
======== ======== ===== ======== ======== =====
</TABLE>
The estimated fair value in excess of carrying value (the
"Difference") of the Company's financial instruments was $19
million at December 31, 1993 an increase of $6 million from year-
end 1992. 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 $381 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 common
shareholder's equity by $35.1 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
on the previous page 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 $19 million at December 31,
1993 covers a substantial portion of the elements of the
Company's financial position, it excludes the substantial value
associated with other intangible values described earlier. In
addition, the disclosures presented 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:
<PAGE>
<PAGE> 11
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: 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.
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.
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.<PAGE>
<PAGE> 12
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"
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.
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