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 June 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 August 10, 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.
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TABLE OF CONTENTS
Page No.
________
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements -
Consolidated Income - Second Quarter and Six Months
Ended June 30, 1994 and 1993 ............................ 2
Consolidated Balance Sheets - June 30, 1994
and December 31, 1993 ................................... 3
Consolidated Cash Flows - Six Months Ended
June 30, 1994 and 1993 .................................. 4
Notes to Financial Statements ........................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations* - Six Months Ended
June 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
*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>
Six Months Ended
Second Quarter June 30,
____________________ ____________________
1994 1993 1994 1993
________ ________ ________ ________
<S> <C> <C> <C> <C>
Finance Charges and Fees $217,134 $304,981 $431,293 $655,726
Interest Expense 149,895 155,423 289,953 317,206
________ ________ ________ ________
Lending Spread 67,239 149,558 141,340 338,520
Insurance Premiums 42,463 39,382 88,023 80,115
Investment Income 43,403 45,671 83,647 91,646
Servicing and Other Income 38,176 21,179 76,617 33,512
________ ________ ________ ________
191,281 255,790 389,627 543,793
________ ________ ________ ________
Operating Expense 104,319 161,007 215,077 329,753
Provision for Credit Losses 32,227 8,138 62,791 43,826
Insurance Benefits 7,777 18,894 23,757 37,591
Gain on Sale of Consumer Loans
Held for Repositioning - (95,000) - (95,000)
________ ________ ________ ________
144,323 93,039 301,625 316,170
________ ________ ________ ________
Income Before Income Tax 46,958 162,751 88,002 227,623
Income Tax 16,165 56,143 30,010 77,660
________ ________ ________ ________
Net Income Before Cumulative
Effect of Accounting Change
and Extraordinary Item 30,793 106,608 57,992 149,963
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) - (49,500)
________ ________ ________ ________
Net Income $ 30,793 $ 57,108 $ 51,245 $100,463
________ ________ ________ ________
________ ________ ________ ________
</TABLE>
2
<PAGE>
ITT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except for shares and per share)
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
___________ ____________
<S> <C> <C>
Finance Receivables (net of unearned income):
Consumer $ 2,994,025 $ 3,272,537
Commercial 4,288,376 4,233,909
___________ ___________
Total Finance Receivables 7,282,401 7,506,446
Reserve for credit losses (239,371) (220,277)
___________ ___________
Finance Receivables, net 7,043,030 7,286,169
Investment Securities 4,528,712 3,097,442
Other Assets 1,389,298 1,329,736
___________ ___________
$12,961,040 $11,713,347
___________ ___________
___________ ___________
LIABILITIES AND STOCKHOLDER EQUITY
Term Debt (including current maturities of
$1,608,969 and $1,775,673) $ 5,885,936 $ 6,247,804
Commercial Paper and Other Debt 4,287,625 2,466,315
Deposits and Certificates 459,904 558,243
Insurance Policy and Claim Reserves 187,790 228,012
Accounts Payable and Accrued Liabilities 876,361 1,098,733
Deferred Income Tax 59,983 55,136
___________ ___________
Total Liabilities 11,757,599 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 1,238,491 1,099,854
Unrealized (loss) gain on securities, net of tax (43,629) 1,916
Retained earnings (deficit) 8,578 (42,667)
___________ ___________
Total Stockholder Equity 1,203,441 1,059,104
___________ ___________
$12,961,040 $11,713,347
___________ ___________
___________ ___________
</TABLE>
3
<PAGE>
ITT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
__________________________
1994 1993
____________ ___________
<S> <C> <C>
Operating Activities:
Net income $ 51,245 $ 100,463
Cumulative effect of accounting change 6,747 -
Extraordinary item - 49,500
____________ ___________
Income before cumulative effect of accounting
change and extraordinary item 57,992 149,963
Adjustments to income before cumulative effect of
accounting change and extraordinary item -
Provision for credit losses 62,791 43,826
Change in accrued and deferred income taxes 54,649 136,750
Depreciation and amortization 22,335 25,297
Amortization of debt discount and premium, net 1,244 (632)
(Decrease) in accounts payable and accrued liabilities (68,584) (29,239)
Decrease in insurance policy and claim reserves (40,222) (57,139)
(Increase) decrease in finance charges earned
but not collected (4,342) 5,774
(Gain) loss on investment securities (2,519) 5,224
Gain on sale of consumer loans held for repositioning - (95,000)
Other, net (15,508) (10,508)
____________ ___________
Net cash provided from operating activities 67,836 174,316
____________ ___________
Investing Activities:
Finance receivables originated or purchased (10,908,178) (8,921,262)
Finance receivables repaid or sold 11,092,095 8,531,813
Investment securities purchased (5,847,087) (4,425,531)
Investment securities matured or sold 4,343,278 4,389,423
Proceeds from sale of consumer loans held
for repositioning - 1,479,507
Decrease (increase) in other assets 60,698 (81,490)
____________ ___________
Net cash provided (used) for investing activities (1,259,194) 972,460
____________ ___________
Financing Activities:
Issuance of term debt 416,413 1,157,642
Repayments of term debt (779,525) (1,010,194)
Increase (decrease) in commercial paper and other debt 1,805,800 (1,052,557)
Deposits 1,270,074 922,096
Withdrawals (1,368,413) (994,998)
Capital contributions 68,149 235,335
Dividends paid (221,134) (404,138)
____________ ___________
Net cash provided (used) for financing activities 1,191,364 (1,146,814)
____________ ___________
Change in cash 6 (38)
Cash-beginning of year 101 263
____________ ___________
Cash-end of period $ 107 $ 225
____________ ___________
____________ ___________
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest $ 300,761 $ 342,003
Income tax (refund), net $ (28,286) $ (56,128)
</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>
June 30, December 31,
1994 1993
__________ ____________
(In thousands)
<S> <C> <C>
Finance Receivables
Consumer:
Real estate $2,042,693 $2,362,975
Unsecured small loans 1,263,141 1,221,133
Sales finance 37,150 36,448
Accrued interest 24,926 26,082
__________ __________
Total 3,367,910 3,646,638
__________ __________
Commercial:
Inventory financing 1,875,667 1,766,791
Equipment and other loans 1,378,943 1,327,162
Real estate 1,227,670 1,321,578
Accrued interest 10,255 10,727
__________ __________
Total 4,492,535 4,426,258
__________ __________
Finance receivables, gross 7,860,445 8,072,896
Unearned income (578,044) (566,450)
Reserve for credit losses (239,371) (220,277)
__________ __________
Total Finance Receivables, net $7,043,030 $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 June 30, 1994, the unrealized loss on securities, net of tax,
was $43.6 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
_____________
SIX MONTHS ENDED JUNE 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
________ ________
<S> <C> <C>
Continuing businesses $431,293 $460,862
Consumer loans held for repositioning
(sold June, 1993) - 194,864
________ ________
$431,293 $655,726
________ ________
________ ________
</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 6% in the six months
ended June 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 34%. Reference is made to the Notes to Financial
Statements for further information concerning the portfolio sale. Similarly,
operating expense decreased 35% for the six months ended June 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 9% in the six months ended June 30, 1994 compared
with the same period in 1993 due to lower interest rates and a decrease in
average borrowings.
Insurance premiums increased 10% in the six months ended June 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 37% in the six months ended June 30, 1994
compared with the same period in 1993 as a result of a reduction in captive
insurance activities and favorable captive and non-captive loss experience,
partially offset by increased non-captive insurance activities.
Investment income decreased 9% in the six months ended June 30, 1994 compared
with the same period in 1993 due to a lower portfolio yield primarily the result
of a change in portfolio mix, partially offset by gains on investment securities
and a higher level of investments. The change in portfolio mix and the increase
in the level of investments is partially the result of the securitization of
consumer real estate receivables and the sale of subordinated mortgage-backed
securities to ITT Corporation ("ITT") in December, 1993 (see "Servicing and
other income", below).
Servicing and other income increased by 129% in the six months ended June 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 $19 million in the six months ended
June 30, 1994 compared with the same period in 1993 as a result of an increased
loss provision of $29 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 $10 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 61% for the six months ended June 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 filed the following report on Form 8-K
during the quarter covered by this report:
- Dated May 3, 1994, reporting Item #5 - "Other Events."
________________________________________________________________________________
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: August 10, 1994 By: /s/ Terence L. Payne
_______________________________
Terence L. Payne
Senior Vice President and Controller
(Chief Accounting Officer)
8
<PAGE>
EXHIBIT INDEX
______________
<TABLE>
<CAPTION>
Exhibit
No. Description Location
_______ ___________ _______________
<S> <C> <C>
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession -
(4) Instruments defining the rights of security Not required
holders, including indentures 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 -
(99) Additional exhibits -
</TABLE>
_____________
* 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>
Six Months Ended
June 30,
____________________
1994 1993
________ ________
<S> <C> <C>
Earnings:
Income before cumulative effect of accounting
change and extraordinary item $ 57,992 $149,963
Add income tax 30,010 77,660
________ ________
88,002 227,623
________ ________
Add fixed charges:
Interest expense 289,953 317,206
Interest factor attributable to rentals* 2,816 4,493
________ ________
292,769 321,699
________ ________
Income as adjusted, before cumulative effect
of accounting change and extraordinary item $380,771 $549,322
________ ________
________ ________
Ratios:
Income as adjusted, before cumulative effect
of accounting change and extraordinary item
to fixed charges 1.30 1.71
________ ________
________ ________
</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>
