UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
_________________________
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF
1934.
For the quarterly period ended September 30, 1994.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
Commission File No.1-7437
The registrant meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and is therefore filing this Form with the reduced disclosure
format.
ITT FINANCIAL CORPORATION
Incorporated in the State of Delaware 43-0815676
(I.R.S. Employer
Identification No.)
(Principal Executive Offices)
645 Maryville Centre Drive, St. Louis, Missouri 63141-5832
Telephone Number: 314-542-3636
_________________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No .
_________________________
As of November 8, 1994 there were outstanding ten (10) shares of common
stock, par value $100 per share, of the registrant, all of which are owned by
ITT Corporation.
<PAGE>
TABLE OF CONTENTS
Page No.
________
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements -
Consolidated Income - Third Quarter and Nine Months
Ended September 30, 1994 and 1993 ....................... 2
Consolidated Balance Sheets - September 30, 1994
and December 31, 1993 ................................... 3
Consolidated Cash Flows - Nine Months Ended
September 30, 1994 and 1993 ............................. 4
Notes to Financial Statements ........................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations* - Nine Months Ended
September 30, 1994 and 1993 ................................. 6
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K ................... 8
Signature ................................................... 8
Exhibit Index ............................................... 9
Exhibit 12. Computations of Ratios of Earnings to
Fixed Charges ............................................... 10
Exhibit 27. Financial Data Schedule ........................ 11
*Item prepared in accordance with General Instruction H(2)(a) of Form 10-Q.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
_____________________________
The following unaudited financial statements, in the opinion of ITT Financial
Corporation, reflect all adjustments (which include only normal recurring
adjustments) necessary for a fair presentation of the financial position, the
results of operations and cash flows for the periods presented. For a
description of accounting policies, see the Notes to Financial Statements in the
1993 annual report on Form 10-K.
ITT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
Third Quarter September 30,
____________________ ____________________
1994 1993 1994 1993
________ ________ ________ ________
<S> <C> <C> <C> <C>
Finance Charges and Fees $206,539 $236,708 $637,832 $892,434
Interest Expense 155,896 146,406 445,849 463,612
________ ________ ________ ________
Lending Spread 50,643 90,302 191,983 428,822
Insurance Premiums 38,040 38,176 126,063 118,291
Investment Income 69,630 45,299 153,277 136,945
Servicing and Other Income 50,420 56,268 127,037 89,780
________ ________ ________ ________
208,733 230,045 598,360 773,838
________ ________ ________ ________
Operating Expense 100,567 122,306 315,644 452,059
Provision for Credit Losses 35,594 22,203 98,385 66,029
Insurance Benefits 11,115 13,924 34,872 51,515
Gain on Sale of Consumer Loans
Held for Repositioning - - - (95,000)
________ ________ ________ ________
147,276 158,433 448,901 474,603
________ ________ ________ ________
Income Before Income Tax 61,457 71,612 149,459 299,235
Income Tax 16,220 13,702 46,230 91,362
________ ________ ________ ________
Net Income Before Cumulative
Effect of Accounting Change
and Extraordinary Item 45,237 57,910 103,229 207,873
Cumulative Effect of Accounting
Change, net of tax benefit
of $3,633 - - (6,747) -
Extraordinary Item-Provision for
Loss on Retirement of Debt
(less applicable income tax
benefit of $25,500) - - - (49,500)
________ ________ ________ ________
Net Income $ 45,237 $ 57,910 $ 96,482 $158,373
________ ________ ________ ________
________ ________ ________ ________
</TABLE>
2
<PAGE>
ITT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except for shares and per share)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
_____________ ____________
<S> <C> <C>
Finance Receivables (net of unearned income):
Consumer $ 3,062,002 $ 3,272,537
Commercial 4,427,741 4,233,909
___________ ___________
Total Finance Receivables 7,489,743 7,506,446
Reserve for credit losses (231,341) (220,277)
___________ ___________
Finance Receivables, net 7,258,402 7,286,169
Investment Securities 4,734,129 3,097,442
Other Assets 1,431,726 1,329,736
___________ ___________
$13,424,257 $11,713,347
___________ ___________
___________ ___________
LIABILITIES AND STOCKHOLDER EQUITY
Term Debt (including current maturities of
$1,737,403 and $1,775,673) $ 5,834,384 $ 6,247,804
Commercial Paper and Other Debt 4,604,537 2,466,315
Deposits and Certificates 517,235 558,243
Insurance Policy and Claim Reserves 173,741 228,012
Accounts Payable and Accrued Liabilities 964,746 1,098,733
Deferred Income Tax 64,060 55,136
___________ ___________
Total Liabilities 12,158,703 10,654,243
___________ ___________
Stockholder Equity:
Common stock - Authorized 1,000 shares, $100 par value;
Outstanding 10 shares held by ITT Corporation 1 1
Capital surplus 1,283,491 1,099,854
Unrealized (loss) gain on securities, net of tax (71,753) 1,916
Retained earnings (deficit) 53,815 (42,667)
___________ ___________
Total Stockholder Equity 1,265,554 1,059,104
___________ ___________
$13,424,257 $11,713,347
___________ ___________
___________ ___________
</TABLE>
3
<PAGE>
ITT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
___________________________
1994 1993
____________ ____________
<S> <C> <C>
Operating Activities:
Net income $ 96,482 $ 158,373
Cumulative effect of accounting change 6,747 -
Extraordinary item - 49,500
____________ ____________
Income before cumulative effect of accounting
change and extraordinary item 103,229 207,873
Adjustments to income before cumulative effect of
accounting change and extraordinary item -
Provision for credit losses 98,385 66,029
Change in accrued and deferred income taxes 57,042 141,126
Depreciation and amortization 30,656 37,957
Decrease in finance charges earned but not collected 6,625 11,269
Amortization of debt discount and premium, net 1,804 (533)
(Decrease) in accounts payable and accrued liabilities (63,425) (74,907)
(Decrease) in insurance policy and claim reserves (54,271) (79,939)
(Gain) loss on investment securities (7,734) 4,721
Gain on sale of consumer loans held for repositioning - (95,000)
Other, net (23,000) (12,754)
____________ ____________
Net cash provided from operating activities 149,311 205,842
____________ ____________
Investing Activities:
Finance receivables originated or purchased (16,273,148) (13,682,873)
Finance receivables repaid or sold 16,303,163 12,973,602
Investment securities purchased (7,166,194) (6,467,580)
Investment securities matured or sold 5,421,807 6,416,724
Proceeds from sale of consumer loans held
for repositioning - 1,479,507
Decrease (increase) in other assets 64,196 (102,930)
____________ ____________
Net cash provided (used) for investing activities (1,650,176) 616,450
____________ ____________
Financing Activities:
Issuance of term debt 416,413 2,034,632
Repayments of term debt (831,637) (1,987,423)
Increase (decrease) in commercial paper and other debt 2,110,092 (668,065)
Deposits 2,487,302 1,633,324
Withdrawals (2,528,310) (1,687,698)
Capital contributions 68,149 291,835
Dividends paid (221,134) (439,057)
____________ ____________
Net cash provided (used) for financing activities 1,500,875 (822,452)
____________ ____________
Change in cash 10 (160)
Cash-beginning of year 101 263
____________ ____________
Cash-end of period $ 111 $ 103
____________ ____________
____________ ____________
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest $ 438,403 $ 492,242
Income tax (refund), net $ (14,462) $ (47,681)
</TABLE>
4
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Finance Receivables
___________________
On June 3, 1993, ITT Financial and its subsidiaries ("Financial") completed the
sale of its domestic unsecured consumer small loan portfolio (consumer loans
held for repositioning). Accordingly, Financial recognized a pre-tax gain of
$95 million in the second quarter of 1993, based on recorded values as of the
closing of the sale and certain costs and restructuring expenses incurred by
Financial as part of the transaction. Financial acquired a 15% equity interest
in the purchasing group at a cost of approximately $29 million.
Finance receivables consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
_____________ ____________
(In thousands)
<S> <C> <C>
Finance Receivables
Consumer:
Real estate $2,105,368 $2,362,975
Unsecured small loans 1,281,615 1,221,133
Sales finance 36,755 36,448
Accrued interest 17,543 26,082
__________ __________
Total 3,441,281 3,646,638
__________ __________
Commercial:
Inventory financing 2,054,724 1,766,791
Equipment and other loans 1,435,268 1,327,162
Real estate 1,147,109 1,321,578
Accrued interest 8,924 10,727
__________ __________
Total 4,646,025 4,426,258
__________ __________
Finance receivables, gross 8,087,306 8,072,896
Unearned income (597,563) (566,450)
Reserve for credit losses (231,341) (220,277)
__________ __________
Total Finance Receivables, net $7,258,402 $7,286,169
__________ __________
__________ __________
</TABLE>
Change in Accounting Principle:
______________________________
During the 1994 first quarter, Financial adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". The new standard requires, among other things,
that securities be classified as "held-to-maturity", "available-for-sale" or
"trading" based on Financial's intentions with respect to the ultimate
disposition of the security and its ability to effect those intentions. The
classification determines the appropriate accounting carrying value (cost basis
or fair value) and, in the case of fair value, whether the adjustment impacts
Stockholder Equity directly or is reflected in Consolidated Income. Investments
in equity securities had previously been recorded at fair value with the
corresponding impact included in Stockholder Equity. Under SFAS No. 115,
5
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
Financial's portfolios are classified as "available-for-sale" and accordingly,
investments are reflected at fair value with the corresponding impact included
as a component of Stockholder Equity designated "Unrealized gain on securities,
net of tax". At September 30, 1994, the unrealized loss on securities, net of
tax, was $71.8 million.
In adopting SFAS No. 115, Emerging Issues Task Force ("EITF") Issue No. 93-18
prescribes specific accounting treatment with respect to mortgage-backed
interest-only investments. EITF No. 93-18 reached the conclusion that the
measure of impairment of these instruments should be changed from undiscounted
cash flows to fair value. Accordingly, the amortized cost basis of such
instruments that were determined to have other-than-temporary impairment losses
at the time of the initial adoption of SFAS No. 115 have been written down to
fair value and reflected as a cumulative effect of accounting change as of
January 1, 1994. The writedown totalled $6.7 million after tax.
Extraordinary Item
__________________
In conjunction with the sale of the domestic unsecured consumer small loan
portfolio, Financial decided to retire a portion of its fixed rate term debt.
Fixed rate term debt was issued to finance this portfolio. In anticipation of
these retirements and the related premiums, Financial recognized an
extraordinary pre-tax loss at June 30, 1993, of $75 million ($49.5 million
after-tax). Financial purchased, during the third quarter of 1993, $528.3
million principal amount of securities with interest rates ranging from 7% to
11%. The funds for the retirements were obtained from operations and from the
issuance of other debt.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
________________________________________________________________________________
of Operations
_____________
On September 16, 1994, ITT Corporation announced plans to seek offers for the
purchase of its Finance business segment, comprised primarily of ITT Financial
Corporation. No definitive agreements have been reached through November 8,
1994.
NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993
The term "finance receivables" as used under this item includes receivables
relative to ITT Financial's continuing businesses (inventory finance, equipment
finance and leasing, small business finance, commercial real estate, consumer
residential real estate lending and consumer lending in the Caribbean).
Operations
__________
Finance charges and fees were earned as follows:
<TABLE>
<CAPTION>
1994 1993
________ ________
<C> <S> <S>
Continuing businesses $637,832 $697,570
Consumer loans held for repositioning
(sold June, 1993) - 194,864
________ ________
$637,832 $892,434
________ ________
________ ________
</TABLE>
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
________________________________________________________________________________
of Operations (continued)
_________________________
Finance charges and fees on finance receivables decreased 9% in the nine months
ended September 30, 1994 compared with the same period in 1993 due to asset
securitizations and a lower average portfolio yield, the result of a change in
portfolio mix and the shift to a higher credit quality portfolio, partially
offset by the impact of a higher level of average consumer finance receivables.
However, the absence of finance charges relative to consumer loans held for
repositioning, due to the liquidation of the portfolio, resulted in an overall
decline in finance charges of 29%. Reference is made to the Notes to Financial
Statements for further information concerning the portfolio sale. Similarly,
operating expense decreased 30% for the nine months ended September 30, 1994
compared with the same period in 1993 principally due to exiting the domestic
unsecured loan business in 1993 and cost efficiency programs, partially offset
by growth in volume and assets in the continuing businesses.
Interest expense decreased 4% in the nine months ended September 30, 1994
compared with the same period in 1993 due to lower interest rates.
Insurance premiums increased 7% in the nine months ended September 30, 1994
compared with the same period in 1993 due to increased premiums from non-captive
insurance activities, partially offset by a lower number of captive policies in
force as a result of exiting the domestic unsecured loan business in 1993.
However, insurance benefits decreased 32% in the nine months ended September 30,
1994 compared with the same period in 1993 as a result of a reduction in captive
insurance activities and favorable non-captive loss experience, partially offset
by increased non-captive insurance activities.
Investment income increased 12% in the nine months ended September 30, 1994
compared with the same period in 1993 due to a higher level of investments and
gains on investment securities, partially offset by a lower portfolio yield
primarily the result of a change in portfolio mix. The increase in the level
of investments and the change in portfolio mix is partially the result of the
securitization of consumer real estate receivables. The sale of subordinated
mortgage-backed securities to ITT Corporation ("ITT") in December, 1993, also
contributed to the change in the portfolio mix (see "Servicing and other
income", below).
Servicing and other income increased by 41% in the nine months ended September
30, 1994 over the comparable period in 1993 primarily due to an increase in
portfolio servicing activities resulting from the securitization and sale of
inventory finance receivables with servicing retained and interest on the note
receivable from ITT related to its purchase of subordinated mortgage-backed
securities, partially offset by the absence, in 1994, of the temporary servicing
fees relative to the consumer loans sold.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
________________________________________________________________________________
of Operations (continued)
_________________________
The provision for credit losses increased by $32 million in the nine months
ended September 30, 1994 compared with the same period in 1993 as a result of
an increased loss provision of $40 million related to the California commercial
real estate portfolio. This increase reflects earthquake damage and other
portfolio deterioration. While the Company's commercial real estate portfolio
is showing improvement in many geographic regions, the California portfolio is
showing signs of continued stress due to the economic climate in that state.
Management continues to monitor and aggressively manage this portfolio. The
loss provision for the rest of the portfolios was down by $8 million.
Gain on Sale of Consumer Loans Held for Repositioning
_____________________________________________________
On June 3, 1993, the sale of the domestic unsecured consumer small loan
portfolio (consumer loans held for repositioning) was completed. As a result,
a pre-tax gain of $95 million was recognized in the second quarter of 1993.
Reference is made to the Notes to Financial Statements for further information
concerning the sale.
Income Tax
__________
Income tax on income before cumulative effect of accounting change and
extraordinary item decreased 49% for the nine months ended September 30, 1994
compared with the same period in 1993 primarily due to a decrease in pre-tax
income.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) See Exhibit Index.
(b) ITT Financial Corporation did not file any report on Form 8-K during
the quarter covered by this report.
________________________________________________________________________________
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 thereunto duly authorized.
ITT FINANCIAL CORPORATION
(Registrant)
Dated: November 8, 1994 By: /s/ Terence L. Payne
_______________________________
Terence L. Payne
Senior Vice President and Controller
(Chief Accounting Officer)
8
<PAGE>
EXHIBIT INDEX
______________
Exhibit
No. Description Location
_______ ___________ _______________
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession -
(4) Instruments defining the rights of security
holders, including indentures Not required
to be filed.*
(10) Material contracts -
(11) Statement re computation of per share earnings -
(12) Statements re computation of ratios Filed herewith.
(15) Letter re unaudited interim financial information -
(18) Letter re change in accounting principles -
(19) Report furnished to security holders -
(22) Published report regarding matters submitted to
vote of security holders -
(23) Consents of experts and counsel -
(24) Power of attorney -
(27) Financial Data Schedule Filed herewith.
(99) Additional exhibits -
_____________
* The Registrant hereby agrees to file with the Commission a copy of any
instrument defining the rights of holders of the Registrant's term debt upon
request of the Commission.
9
<PAGE>
Exhibit 12.
ITT FINANCIAL CORPORATION AND SUBSIDIARIES
COMPUTATIONS OF RATIOS OF EARNINGS TO FIXED CHARGES
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
____________________
1994 1993
________ ________
<S> <C> <C>
Earnings:
Income before cumulative effect of accounting
change and extraordinary item $103,229 $207,873
Add income tax 46,230 91,362
________ ________
149,459 299,235
________ ________
Add fixed charges:
Interest expense 445,849 463,612
Interest factor attributable to rentals* 4,273 6,265
________ ________
450,122 469,877
________ ________
Income as adjusted, before cumulative effect
of accounting change and extraordinary item $599,581 $769,112
________ ________
________ ________
Ratios:
Income as adjusted, before cumulative effect
of accounting change and extraordinary item
to fixed charges 1.33 1.64
________ ________
________ ________
</TABLE>
__________
*The interest factor attributable to rentals was computed by applying to the
estimated present value of all long-term rental commitments the approximate
weighted average interest rate inherent in the lease obligations, and adding
thereto the interest element assumed in short-term cancellable rentals excluded
from the commitment data but included in rental expense.
10
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> 111
<SECURITIES> 4734129
<RECEIVABLES> 7489743
<ALLOWANCES> 231341
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 85976
<DEPRECIATION> 46075
<TOTAL-ASSETS> 13424257
<CURRENT-LIABILITIES> 0
<BONDS> 10438921
<COMMON> 1
0
0
<OTHER-SE> 1265553
<TOTAL-LIABILITY-AND-EQUITY> 13424257
<SALES> 0
<TOTAL-REVENUES> 1044209
<CGS> 0
<TOTAL-COSTS> 894750
<OTHER-EXPENSES> 350516
<LOSS-PROVISION> 98385
<INTEREST-EXPENSE> 445849
<INCOME-PRETAX> 149459
<INCOME-TAX> 46230
<INCOME-CONTINUING> 103229
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 6747
<NET-INCOME> 96482
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
