UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-1177
BENEFICIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 51-0003820
(State of incorporation) (I.R.S. Employer Identification No.)
301 North Walnut Street
Wilmington, Delaware 19801
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (302) 425-2500
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 twelve months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
At July 31, 1996, the number of shares outstanding of the registrant's
common stock was 53,618,566.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BENEFICIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in millions)
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June 30, December 31,
1996 1995
ASSETS
Cash and Equivalents . . . . . . . . . . . . $ 302.7 $ 273.1
Finance Receivables (Note 2). . . . . . . . . . 13,214.5 13,416.2
Allowance for Credit Losses (Note 3) . . . . . . (437.3) (406.1)
Net Finance Receivables. . . . . . . . . . 12,777.2 13,010.1
Investment Securities (Note 4) . . . . . . . . . 563.5 1,491.4
Property and Equipment. . . . . . . . . . . . 192.4 183.1
Other Assets . . . . . . . . . . . . . . . 1,689.2 759.7
TOTAL ASSETS . . . . . . . . . . . . . $15,525.0 $15,717.4
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-Term Debt (Note 5) . . . . . . . . . . . $ 3,420.8 $ 4,023.9
Deposits Payable. . . . . . . . . . . . . . 635.5 642.5
Long-Term Debt (Note 6) . . . . . . . . . . . 8,032.9 7,792.5
Total Interest-Bearing Debt . . . . . . . . . 12,089.2 12,458.9
Accounts Payable and Accrued Liabilities. . . . . . 513.5 490.0
Insurance Policy and Claim Reserves . . . . . . . 1,283.2 1,265.5
Total Liabilities. . . . . . . . . . . . . 13,885.9 14,214.4
Shareholders' Equity:
Preferred Stock . . . . . . . . . . . . . 114.8 114.8
Common Stock . . . . . . . . . . . . . . 53.6 53.2
Additional Capital . . . . . . . . . . . . 286.8 270.0
Net Unrealized Loss (Gain) on Investment Securities . (0.1) 18.4
Accumulated Foreign Currency Translation Adjustments . (46.4) (46.4)
Retained Earnings. . . . . . . . . . . . . 1,230.4 1,093.0
Total Shareholders' Equity . . . . . . . . . 1,639.1 1,503.0
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . . $15,525.0 $15,717.4
See Notes to Financial Statements.
BENEFICIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(in millions, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
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REVENUE
Finance Charges and Fees . . . . .$519.2 $487.2 $1,064.5 $978.8
Interest Expense. . . . . . . . 198.2 198.3 407.2 410.5
Lending Spread. . . . . . . . 321.0 288.9 657.3 568.3
Insurance Premiums . . . . . . . 41.4 38.5 81.5 80.2
Other . . . . . . . . . . . 121.8 68.5 287.5 95.4
Total . . . . . . . . . . 484.2 395.9 1,026.3 743.9
OPERATING EXPENSES
Salaries and Employee Benefits . . . 99.6 94.9 201.3 194.2
Insurance Benefits . . . . . . . 19.8 22.0 42.5 48.9
Provision for Credit Losses . . . . 80.3 45.3 162.0 97.0
Other . . . . . . . . . . . 144.9 127.3 296.2 262.3
Total . . . . . . . . . . 344.6 289.5 702.0 602.4
Income Before Income Taxes . . . . . 139.6 106.4 324.3 141.5
Provision for Income Taxes . . . . . 57.2 43.6 134.5 58.0
NET INCOME . . . . . . . . . .$ 82.4 $ 62.8 $ 189.8 $ 83.5
EARNINGS PER COMMON SHARE . . . . .$ 1.50 $ 1.15 $ 3.46 $ 1.52
DIVIDENDS PER COMMON SHARE . . . . .$ .47 $ .43 $ .94 $ .86
See Notes to Financial Statements.
BENEFICIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
Six Months Ended
June 30,
1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES
Net Income . . . . . . . . . . . . . . . $ 189.8 $ 83.5
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Provision for Credit Losses . . . . . . . . . . 162.0 97.0
Provision for Deferred Income Taxes . . . . . . . (11.7) (9.7)
Depreciation and Amortization . . . . . . . . . 23.7 23.4
Insurance Policy & Claim Reserves . . . . . . . . 17.7 95.5
Accounts Payable & Accrued Liabilities . . . . . . 23.5 23.7
Net Cash Provided by Operating Activities. . . . . 405.0 313.4
CASH FLOWS FROM INVESTING ACTIVITIES
Receivables Originated or Acquired . . . . . . . (5,503.2) (4,420.5)
Receivables Collected. . . . . . . . . . . . 4,349.2 3,635.8
Receivables Securitized . . . . . . . . . . . 1,201.3 1,103.8
Investment Securities Purchased . . . . . . . . . (369.9) (175.2)
Investment Securities Sold . . . . . . . . . . . 937.5 20.6
Investment Securities Matured . . . . . . . . . . 319.3 64.2
Deposit from Reinsurer . . . . . . . . . . . . (948.9) --
Other . . . . . . . . . . . . . . . . . . 41.1 (40.3)
Net Cash Provided by Investing Activities. . . . 26.4 188.4
CASH FLOWS FROM FINANCING ACTIVITIES
Short-Term Debt, Net Change. . . . . . . . . . . (603.2) (277.8)
Deposits Payable, Net Change . . . . . . . . . . .12.3 100.4
Long-Term Debt Issued. . . . . . . . . . . . . 926.2 1,299.3
Long-Term Debt Repaid. . . . . . . . . . . . . (684.7) (1,507.4)
Dividends Paid . . . . . . . . . . . . . . . (52.4) (47.7)
Net Cash Used in Financing Activities . . . . . . (401.8) (433.2)
NET INCREASE IN CASH AND EQUIVALENTS . . . . . . . . .29.6 68.6
Cash and Equivalents at Beginning of Period. . . . . . 273.1 189.5
CASH AND EQUIVALENTS AT END OF PERIOD. . . . . . . $ 302.7 $ 258.1
SUPPLEMENTAL CASH FLOW INFORMATION
Interest Paid . . . . . . . . . . . . . . $ 413.9 $ 403.1
Income Taxes Paid . . . . . . . . . . . . . . 119.1 81.1
See Notes to Financial Statements.
BENEFICIAL CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(in millions, except per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting policies used in the preparation of the unaudited
quarterly financial statements are consistent with accounting
policies described in the notes to financial statements contained in
the Company's Annual Report on Form 10-K for the fiscal year-ended
December 31, 1995. In the opinion of management, all adjustments,
consisting of normal recurring adjustments, necessary for a fair
presentation have been reflected. Certain prior period amounts have
been reclassified to conform with the 1996 presentation. Interim
results are not necessarily indicative of results for a full year.
2. FINANCE RECEIVABLES
Finance receivables consisted of the following:
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June 30, December 31,
1996 1995
Receivables Owned:
Real Estate Secured. . . . . . . . $ 6,081.6 $ 6,636.6
Personal Unsecured . . . . . . . . 2,780.6 2,756.1
Credit Cards . . . . . . . . . . 3,410.4 3,084.0
Sales Finance Contracts . . . . . . 840.5 836.6
Commercial. . . . . . . . . . . 101.4 102.9
Total Owned 13,214.5 13,416.2
Receivables Sold with Servicing Retained
(all real estate secured) . . . . . 1,965.7 1,113.5
Total Owned and Serviced . . . . . . . $15,180.2 $14,529.7
3. ALLOWANCE FOR CREDIT LOSSES
An analysis of the allowance for credit losses follows:
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1996
Balance at January 1 . . . . . . . . . . . . . $406.1
Accounts Charged Off . . . . . . . . . . . . . (160.4)
Recoveries on Accounts Previously Charged Off . . . . . 23.1
Provision for Credit Losses . . . . . . . . . . . 162.0
Other . . . . . . . . . . . . . . . . . . 6.5
Balance at June 30 . . . . . . . . . . . . . . $437.3
4. INVESTMENT SECURITIES
Investment securities were as follows:
June 30, 1996 December 31, 1995
Carrying Market Carrying Market
Value Value Value Value
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AVAILABLE-FOR-SALE
Debt Securities:
Corporate $298.9 $298.9 $ 807.5 $ 807.5
Mortgage-backed 40.8 40.8 335.5 335.5
Municipal 7.5 7.5 20.2 20.2
U.S. Government 63.4 63.4 176.3 176.3
Foreign Government 53.6 53.6 59.4 59.4
465.2 464.2 1,398.9 1,398.9
Equity Securities .6 .6 6.3 6.3
Total $464.8 $464.8 $1,405.2 $1,405.2
HELD-TO-MATURITY
Debt Securities:
Corporate $ 46.0 $ 44.6 $ 41.2 $ 41.5
Mortgage-backed 2.4 2.3 2.6 2.7
Municipal 7.9 8.1 7.9 8.3
U.S. Government 23.7 23.4 17.5 17.5
Foreign Government 1.1 1.1 1.1 1.1
Other 17.6 17.6 15.9 15.9
Total $ 98.7 $ 97.1 $ 86.2 $ 87.0
TOTAL INVESTMENT SECURITIES $563.5 $561.9 $1,491.4 $1,492.2
Effective March 31, 1996, the Company effectively sold its
annuity portfolio through a co-insurance agreement. Although
the risk of ownership was substantially transferred by the co-
insurance agreement, the acquirer is in the process of legally
assuming the policies. Therefore, the policy reserves remain
on the balance sheet, and a similar amount of assets
(investments and cash) have been transferred to the acquirer
as a deposit supporting the annuity contracts.
There were no investments transferred from Held-To-Maturity
to Available-For-Sale, nor were there any sales of Held-To-
Maturity investments during the six-month period ended June 30,
1996.
5. SHORT-TERM DEBT
Short-term debt outstanding consisted of the following:
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June 30, December 31,
1996 1995
Commercial Paper. . . . . . . . . . $3,098.2 $3,506.2
Bank Borrowings . . . . . . . . . . 322.6 517.7
Total . . . . . . . . . . . $3,420.8 $4,023.9
The weighted average interest rates (including the costs of
maintaining lines of credit) on short-term borrowings during the six
months ended June 30 were as follows:
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1996 1995
U.S. Dollar Borrowings. . . . . . . . 5.52% 6.25%
Other Currency Borrowings. . . . . . . 6.45 7.38
Overall. . . . . . . . . . . . . 5.72% 6.50%
The impact of interest rate hedging activities on the Company's
weighted average short-term borrowing rates and on the reported
short-term interest expense for the six months ended June 30 was an
increase of .1% (annualized) and $1.9 in 1996 and .05% (annualized)
and $0.8 in 1995.
6. LONG-TERM DEBT
Long-term debt is shown below in the earliest year it could
become payable:
Weighted Average
Interest Rates at June 30, December 31,
Maturity June 30, 1996 1996 1995
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1996 6.51% $1,374.6 $2,063.5
1997 6.47 2,535.0 2,164.5
1998 7.22 1,648.4 1,189.9
1999 7.43 966.8 891.2
2000 8.03 422.5 422.8
2001-2005 7.63 888.3 863.3
2006-2023 7.64 197.3 197.3
Total 6.98% $8,032.9 $7,792.5
The weighted average interest rates (including issuance costs)
on the Company's long-term debt during the six months ended June 30
were as follows:
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1996 1995
U.S. Dollar Borrowings. . . . . . . 7.11% 7.65%
Other Currency Borrowings. . . . . . 7.15 7.34
Overall. . . . . . . . . . . . 7.12% 7.63%
Long-term debt outstanding at June 30, 1996, and December 31,
1995, includes $3,323.9 million and $2,817.4 million, respectively,
of variable-rate debt that reprices based on various indices. Such
variable-rate debt generally has an original maturity of one-to-two
years.
The impact of interest rate hedging activities on the Company's
weighted average long-term borrowing rates and on the reported long-
term interest expense for the six months ended June 30 was an
increase of .07% (annualized) and $2.8 in 1996 and .06% (annualized)
and $2.2 in 1995.
7. DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into foreign exchange forward agreements and
options to hedge its net investment in foreign subsidiaries. At
June 30, 1996, and December 31, 1995, the Company had purchased
options to deliver British pounds and Canadian dollars in exchange
for US$293.1 and US$391.5, respectively. Concurrently, the Company
had sold options to buy British pounds and Canadian dollars in
exchange for US$294.4 and US$393.3 in 1996 and 1995, respectively.
The Company's outstanding forward agreements as of June 30, 1996
consisted of sales of C$176.0 and DM48.0 in exchange for US$128.6
and US$32.6, respectively. This compares to forward sales of
DM107.0 for US$75.5 at year-end 1995.
The Company accrued pretax losses of $4.6 at June 30, 1996, and
pretax gains of $1.2 at December 31, 1995, on open hedges. All
hedge gains and losses, including the mark to spot on open options
and forwards, are recognized in a separate component of equity.
There were no gains or losses recognized in net income attributable
to the above hedging activities.
The Company utilizes interest-rate swaps to allow it to match
fund its variable- and fixed-rate receivables and to manage basis
risk. The amounts to be paid or received under the agreements are
accrued in interest expense consistent with the terms of the
agreements. At June 30, 1996, accrued interest payable related to
these interest-rate swaps totaled $19.6, which is largely offset by
$16.9 of accrued interest receivable. The impact of interest rate
hedging activities on the Company's weighted average borrowing rates
and on the reported interest expense for the six months ended June
30, was an increase of .08% (annualized) and $4.7 in 1996 and .06%
(annualized) and $3.0 in 1995.
The following table summarizes the interest-rate swaps
outstanding at June 30, 1996:
Weighted Average Weighted
Notional Interest Rates Average
Amount Pay Receive Maturity*
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Pay fixed-rate - receive floating-rate $ 715.8 7.45% 5.85% 1.9
Pay floating-rate - receive fixed-rate 256.0 6.28 7.24 6.8
Pay floating-rate - receive floating rate 1,545.0 5.51 5.39 0.8
Total $2,516.8 6.14% 5.71% 1.7
*Remaining term in years.
8. EARNINGS PER COMMON SHARE
Computations of primary and fully diluted earnings per common
share are as follows:
Three Months Ended Six Months Ended
June 30 June 30
1996 1995 1996 1995
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PRIMARY EARNINGS
Net Income. . . . . . . . . . $82.4 $62.8 $189.8 $83.5
Dividends on Preferred Stock. . . . (1.3) (1.3) (2.6) (2.6)
Net Income Applicable to Common Stock. $81.1 $61.5 $187.2 $80.9
Weighted Average Shares Outstanding:
Common . . . . . . . . . . . 53.1 52.5 52.9 52.3
Common Stock Equivalents . . . . . 1.3 .9 1.3 .9
Total . . . . . . . . . . . 54.4 53.4 54.2 53.2
Primary Earnings per Common Share. . . .$1.50 $1.15 $3.46 $1.52
FULLY DILUTED EARNINGS
Net Income. . . . . . . . . . .$82.4 $62.8 $189.8 $83.5
Dividends on Non-Convertible
Preferred Stock . . . . . . . . (1.2) (1.2) (2.5) (2.5)
Net Income Applicable to Common Stock. .$81.2 $61.6 $187.3 $81.0
Weighted Average Shares Outstanding:
Common . . . . . . . . . . . 53.1 52.5 52.9 52.3
Common Stock Equivalents . . . . . 1.5 1.2 1.6 1.3
Total . . . . . . . . . . . 54.6 53.7 54.5 53.6
Fully Diluted Earnings per Common Share. $1.49 $1.15 $3.44 $1.51
9. RATIO OF EARNINGS TO FIXED CHARGES
Six Months Ended
June 30,
1996 1995
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Net Income. . . . . . . . . . . . . $189.8 $ 83.5
Add Provision for Income Taxes . . . . . . 134.5 58.0
Earnings Before Income Taxes . . . . . 324.3 141.5
Fixed Charges:
Interest and Debt Expense . . . . . . . 407.2 410.5
Interest Factor Portion of Rentals . . . . 11.2 11.2
Preferred Stock Dividend Requirement . . . 2.6 2.6
Total Fixed Charges . . . . . . . . 421.0 424.3
Earnings Before Income Taxes and Fixed Charges $745.3 $565.8
Ratio of Earnings to Fixed Charges . . . . 1.77 1.33
In computing the ratio of earnings to fixed charges, earnings
consist of net income to which has been added income taxes and fixed
charges. Fixed charges consist principally of interest on all
indebtedness and that portion of rentals considered to represent an
appropriate interest factor.
10. CONTINGENT LIABILITIES
In July 1992, the Internal Revenue Service completed its
examination of the Company's federal income tax returns for 1984
through 1987 and proposed certain adjustments that relate
principally to activities of the Company's former subsidiary,
American Centennial Insurance Company (ACIC), prior to its sale.
The Company sold its entire interest in ACIC in May 1987. The IRS
has proposed, among other items, $142.0 in adjustments relating to
1986 and 1987 ACIC additions to loss reserves. In order to limit
the further accrual of interest on the proposed adjustments, the
Company paid $105.5 of tax and interest during the third quarter of
1992.
The Company's management and independent tax advisers believe
that certain of the IRS's proposed adjustments are without merit and
that in other instances the IRS's position is unlikely to be
sustained in the amounts proposed. The Company is in the process of
contesting the proposed adjustments within the administrative
appeals process of the IRS and is prepared to litigate if necessary.
While the conclusion of this matter cannot be predicted with
certainty, management does not anticipate the ultimate resolution to
differ materially from amounts accrued. Resolution is not expected
to occur within one year.
BENEFICIAL CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Financial Condition
Reflecting the sale of $1.2 billion of variable-rate home
equity loans through a securitization in the capital markets in
April 1996, the Company's leverage (the ratio of interest-bearing
debt to total equity) was reduced to 7.38 times at June 30, 1996,
from 8.11 times at March 31, 1996 and 8.29 times at year-end 1995.
Impacted largely by the securitization, owned finance
receivables declined $202 million during the first half of 1996,
compared to a decline of $327 million during the first half of 1995,
which reflected a $1.1 billion securitization of home equity loans
in March of 1995. Managed receivables gains, including loans sold
in securitizations, but still serviced, were $651 million this year
versus $477 million in the prior year. Removing the foreign
exchange translation impact in both years, managed gains were $676
million in this year's first half compared to a gain of $399 million
in the comparable prior year period. This year's receivables growth
benefited from $325 million in acquisitions, versus $118 million in
purchases during the first six months of 1995, as well as strong
growth from Beneficial National Bank USA (BNB USA), the Company's
private-label credit card bank. Reflecting this year's
securitization, as well as the remaining balance of receivables
serviced from previous securitizations, total receivables sold with
servicing retained were $1,966 million at June 30, 1996, compared to
$994 million at March 31, 1996, and $1,114 million at the end of
1995.
On March 31, 1996, the Company effectively sold the $957
million annuity portfolio of the Central National Life Insurance
Company of Omaha, a subsidiary of the Beneficial Insurance Group, to
SunAmerica Life Insurance Company through a co-insurance agreement.
Accordingly, roughly $900 million of investment securities were sold
or transferred to SunAmerica as part of this transaction, which
resulted in capital gains on disposition of investments of $8.4
million after consideration of related taxes. Although the risks of
ownership have been substantially transferred to SunAmerica by the
co-insurance agreement, SunAmerica has not yet legally assumed the
policies. Therefore, the remaining $948 million in policy reserves
related to the annuity portfolio and an offsetting deposit in other
assets will be reduced as SunAmerica legally assumes or rewrites the
policies. These policy reserves declined $9 million during the
second quarter.
At June 30, 1996, the allowance for credit losses as a
percentage of owned finance receivables was 3.31%, compared to 3.05%
at March 31, 1996, and 3.03% at December 31, 1995. During the first
half, the balance of the reserve increased $31.2 million to $437.3
million. At June 30, 1996, the reserve covered annualized first
half net chargeoffs 1.6 times, up from 1.5 times at March 31, 1996.
As a percentage of average owned receivables, annualized first half
net chargeoffs were 1.98%, compared to 1.36% in the first half of
1995, reflecting a higher proportion of credit card and personal
loans in the loan portfolio, coupled with some increase in the
chargeoff rate on these portfolios.
All owned receivables delinquent two months and greater on a
contractual basis increased to 3.50% of total outstandings at June
30, 1996, from 2.89% a year earlier and 3.16% at March 31 of this
year. The higher proportion of, and increased delinquency in, the
credit card and personal unsecured portfolios, were the primary
causes of the increase. On a managed basis, delinquency increased
to 3.30% at June 30, from 2.81% a year earlier and 3.15% at March 31
of this year.
Results of Operations
Second quarter 1996 net income increased to $82.4 million from
$62.8 million reported in the 1995 second quarter. Accordingly, net
income for the first six months of 1996 increased to $189.8 million
from $83.5 million during the first half of 1995. Similar to last
quarter, the earnings improvement stemmed primarily from the
turnaround of the Refund Anticipation Loan (RAL) business, as 1996
RAL pretax earnings were $30.2 million ($18.1 million after tax) and
$110.7 million ($66.4 million after tax) for the second quarter and
the first half, respectively, compared to pretax losses of $1.3
million and $66.3 million ($.8 million and $39.8 million after tax,
respectively) for the comparable prior year periods. The 1995 loss
was the result of the IRS releasing payment of the earned income tax
credit portion on thousands of refunds directly to the taxpayers who
had already received these refunds through the RAL program, rather
than to the Company's banking subsidiary to repay the loan as
directed by the taxpayer. Conversely, the 1996 RAL results
benefited from $4.4 million and $46.3 million in prior year bad debt
collections for the second quarter and the first six months,
respectively, as well as smooth and efficient processing of tax
refunds by the IRS. The volume of returns processed for the 1996
season was essentially flat with the prior year.
Lending spread increased from 1995 by $32.1 million or 11% for
the second quarter, and by $89.0 million or 16% for the first half.
As a percentage of average owned receivables, the second quarter
lending spread dropped to 9.72% from 9.78% in the prior year.
However, for the first six months, the lending spread increased to
9.85% in 1996 from 9.40% in 1995. The drop in the lending spread
during the second quarter reflected some spread pressure in the
North American Loan office subsidiaries and lower margins at BNB USA
due to the increased level of special financing programs. The
improvement from 1995 for the half resulted from the continued shift
away from real estate secured products to higher yielding credit
card and unsecured loan products and reduced RAL funding
requirements.
During the second quarter, other revenue increased $53.3
million, or 78%, to $121.8 million from 1995. In addition to the
previously mentioned RAL turnaround, second quarter other revenue
comparisons with 1995 benefited from a $24.6 million pretax gain
corresponding to the $1.2 billion sale of variable-rate home equity
loans through the aforementioned securitization. The gain relating
to the prior year securitization was for essentially the same
amount; however, the 1995 securitization occurred during the first
quarter. Accordingly, the first half increase in other revenue of
$192.1 million or 201% was largely due to the fluctuation in the RAL
earnings and the previously mentioned annuity-related capital gains.
Second quarter insurance pretax earnings increased 10% to $20.9
million from $19.0 million in the prior year quarter. Excluding the
impact of the annuity-related capital gains, insurance pretax
earnings for the six months were $37.6 million, versus $36.7 million
in 1995. The insurance profit trend reflects the continuation of
strong credit insurance production and a return to more normal
claims experience, following unusually high loss ratios during the
prior quarter. A decision has been made to discontinue marketing
credit insurance through non-affiliated independent credit
providers. The customer base of this business is primarily
commercial banks and thrift institutions in the Northeast. This
decision will not materially effect either the Company's financial
condition or 1996 results of operations.
Reflecting the significant increase in net chargeoffs as a
percentage of average receivables, and the increase in the average
receivable base, the provision for credit losses increased 77% to
$80.3 million in the second quarter and 67% to $162.0 million in the
first half in comparison with the same periods in 1995. As an
annualized percentage of average receivables owned, first half net
chargeoffs rose to 1.98% of the portfolio from 1.36% in 1995.
Though the chargeoff rate increased considerably from 1995, the
percentage was unchanged from last quarter and was an improvement
from the fourth quarter of 1995. From a product line perspective,
the increase in chargeoff rates from 1995 were most evident in
personal unsecured loans, which increased to 4.30% during the first
half of 1996 from 3.51% a year earlier, and in the credit card
portfolio, which rose to 3.46% from 2.10% during the first half of
1995. Both trends reflect a higher level of consumer bankruptcy in
North America this year. The more significant increase in the
credit card chargeoff rate also reflects the maturing of BNB USA's
private-label credit card portfolio, which continues to mature
within expectations. Management expects this trend in credit card
chargeoffs to continue as the portfolio matures, while the personal
unsecured chargeoff rates will continue to reflect the economic
health of the North American consumer.
Salaries and other operating expenses were up 10% and 9%,
respectively, in the second quarter and first half of this year
compared to 1995. Relating these operating expenses to average
owned receivables generates an operating expense ratio of 7.46% in
the first half compared to 7.55% in the 1995 first half. As a
percentage of average managed receivables, the first half operating
expense ratio was 6.72% compared to 6.91% a year earlier.
The full rollout of the private-label credit card pilot program
with Kmart Corporation, which was announced in the first quarter,
is continuing. Although management expects long-term profitability
from the relationship between Kmart and BNB USA, the 1996 results
of operations will reflect considerable start-up losses during the
second half of the year.
In June, BNB USA also announced the launch of a private-label
credit card program with PriceCostco, Inc., one of the leaders in
the membership warehouse club industry with 245 locations and 15
million members throughout North America. The PriceCostco card will
double as a membership card, and will be available to all eligible
PriceCostco members by October 1996.
On July 22, 1996, Beneficial National Bank (BNB) announced the
signing of a 10-year agreement with H&R Block that gives BNB the
exclusive right to offer RAL's through all of Block's company-owned
offices. Prior agreements called for the renegotiation of a
contract every three years. In return for the longer-term
exclusivity given to BNB, H&R Block will share in the revenue of
RALs originated by H&R Block company-owned offices. The agreement
also calls for H&R Block to bear a portion of the related credit
risk.
Changes in Cash Flow and Liquidity
The principal sources of cash are collections of finance
receivables, proceeds from the issuance of short and long-term debt,
and cash provided through operations, including maturities and
repayments of its receivables. The monthly collections of cash
principal as a percentage of average receivables averaged 5.44% in
the first half of 1996, compared to 5.01% in the first half of 1995.
Substantial additional liquidity is available through committed
bank lines that the Company maintains in support of its commercial
paper borrowings and through long-term borrowings through both
private and public debt offerings. Also, subsidiaries of the
Company sell, from time to time, home equity loans through
securitizations in the capital markets.
The principal uses of cash are loans to customers, repayments
of maturing debt, dividends to shareholders, and general operating
needs.
New Accounting Standards
The Financial Accounting Standards Board (FASB) has issued
Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation" effective for transactions
entered into after December 15, 1995. The Company expects to
disclose the pro forma charge to earnings at year-end 1996 for the
valuation of the non-qualified stock option plan.
In June, the FASB issued SFAS 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities"
effective for transactions occurring after December 31, 1996. The
Company's accounting and reporting for securitizations does not
differ materially from the requirements of SFAS 125.
The consolidated financial statements and related notes should
be read in conjunction with the preceding review.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company's private-label credit card issuer, Beneficial
National Bank USA (BNB USA) located in Delaware, was a defendant in
a putative class action filed in State Court, Denver County,
Colorado on December 16, 1994, alleging that the $10 late charge
assessed by BNB USA on delinquent Colorado cardholders violated
Colorado law. By stipulation of the parties, a stay of all
proceedings in the case was ordered on March 10, 1995 pending final
disposition by the Colorado Supreme Court of identical litigation
involving other out of state card issuers. Subsequently, in those
related cases, the Colorado Supreme Court held that Section 85 of
the National Bank Act and Section 27 of the Federal Deposit
Insurance Act preempt claims challenging the legality of late fees
assessed by out-of-state card issuers in conformity with the laws of
their home states. Shortly thereafter, the Colorado Supreme Court
granted summary judgment in favor of BNB USA on similar grounds. By
stipulation, the Court's decision was stayed pending the outcome of
similar cases before the U.S. Supreme Court.
On January 19, 1996, the U.S. Supreme Court granted certiorari
in a case involving the same legal issues as in Colorado in an
appeal of a California Supreme Court decision in favor of Citibank
(South Dakota), N.A. In May, 1996, the U.S. Supreme Court
unanimously affirmed the California Supreme Court's decision. As a
result, the Colorado Supreme Court dismissed the appeal with
prejudice against the plaintiffs.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its annual meeting of stockholders on May 23, 1996.
The matters voted on at the meeting were: (1) the election of
directors and (2) the ratification of the selection of Deloitte &
Touche LLP as independent auditors of the Company for 1996.
All of the nominees for director were elected and the results were
as follows:
VOTES VOTES AGAINST ABSTENTIONS AND
FOR OR WITHHELD BROKER NON-VOTES
Bower, Charles W. 49,428,961 155,614 0
Callander, Robert J. 49,443,545 141,030 0
Caspersen, Finn M.W. 49,434,200 150,375 0
Coleman, Leonard S., Jr. 49,446,859 137,716 0
Farris, David J. 49,442,223 142,352 0
Gilliam, James H., Jr. 49,449,546 135,029 0
Halvorsen, Andrew 49,443,781 140,794 0
Hernandez, Roland A. 49,448,747 135,828 0
Hillier, J. Robert 49,439,184 145,391 0
Holm, Gerald L. 49,432,120 152,455 0
Kean, Thomas H. 49,447,721 136,854 0
Muller, Steven 49,446,123 138,452 0
Ross, Susan Julia 49,447,909 136,666 0
Tucker, Robert A. 49,438,843 145,732 0
Wachter, Susan M. 49,448,049 136,526 0
Watts, Charles H., II 49,442,894 141,681 0
On the ratification of the selection of Deloitte & Touche LLP, the
results were as follows:
Votes for: 49,477,700
Votes against or withheld: 46,695
Abstentions: 60,180
Broker Non-Votes: 0
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits -
Exhibit
Number Exhibit
3.1 Copy of the Company's Restated Certificate of
Incorporation, as amended, is incorporated by
reference to Exhibit 3.1 of the Annual Report on Form
10-K for the year ended December 31, 1994.
3.2 Copy of the Company's By-Laws, as amended, is
incorporated by reference to Exhibit 3.2 of the Annual
Report on Form 10-K for the year ended December 31,
1990.
10 Copy of Amended and Restated Directors' Annuity Plan
dated May 23, 1996 between Beneficial Corporation and
its directors and directors emeriti.
27 Financial Data Schedule (in EDGAR filing only).
b) The Company filed the following report on Form 8-K
during the period covered by this Form 10-Q:
1) A report on Form 8-K, dated April 22, 1996, was
filed relating to the Company's first-quarter
earnings, which were announced on April 22, 1996.
BENEFICIAL CORPORATION AND SUBSIDIARIES
SIGNATURES
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.
Date August 8, 1996 /s/ Ronald E. Bombolis
Ronald E. Bombolis
Sr. Vice President
and Controller
(Chief Accounting
Officer)
Date August 8, 1996 /s/ Andrew C. Halvorsen
Andrew C. Halvorsen
Member ofthe Office
of the President and
Director (Chief
Financial Officer)
EXHIBIT INDEX
Exhibit
Number Exhibit
3.1 Copy of the Company's Restated Certificate of
Incorporation, as amended, is incorporated by
reference to Exhibit 3.1 of the Annual Report on
Form 10-K for the year ended December 31, 1994
3.2 Copy of the Company's By-Laws, as amended, is
incorporated by reference to Exhibit 3.2 of the
Annual Report on Form 10-K for the year ended
December 31, 1990.
10 Copy of Amended and Restated Directors' Annuity
Plan dated May 23, 1996 between Beneficial
Corporation and its directors and directors
emeriti.
27 Financial Data Schedule (in EDGAR filing only).
Exhibit 10
5/23/96
Amended and Restated Beneficial Corporation
Directors' Annuity Plan
WHEREAS, On December 4, 1986 the Board of Directors adopted a
Directors' Annuity Plan with the intent that the program cover all
then current directors emeriti, all those who might become a
director emeritus in the future and active members of the Board at
the time of a change of control; and
WHEREAS, It has come to the Board's attention that due to a
ministerial error, the language of that resolution may not fully
accomplish that intent; and
WHEREAS, It is the intention of the Board to clarify that
language to ensure that its original intent be given effect;
NOW, THEREFORE, BE IT
RESOLVED, That the Directors' Annuity Plan, as adopted by the
Board of Directors on December 4, 1986 and amended on April 5, 1996
shall be, and hereby is, amended and restated effective as of May
23, 1996 (new language underlined):
RESOLVED, That in the event of a change in control (as
defined below) of the Company:
(i) any or each retired outside Director designated as a
Director Emeritus prior to the change in control, pursuant to
the resolution of the Board adopted on February 14, 1985, shall
continue to have such status and the benefits and obligations
relating thereto in accordance with such resolution; and
(ii) any or each outside director with five or more years of
service to the Board as of the date of such change in control
shall, upon ceasing to be a member of the Board for any reason
(other than removal for cause), become a Director Emeritus and
be entitled to the compensation and other benefits afforded
under the Board resolution of February 14, 1985 subject to the
provisions of such resolution relating to being available for
advice and consultation on a continuing basis.
RESOLVED, That any or each outside director with less than
five years service to the Board as of the date of such change in
control shall, upon ceasing to be a member of the Board for any
reason (other than removal for cause), become a Director
Emeritus and be entitled to one-half of the compensation and
other benefits afforded under the Board resolution of February
14, 1985 subject to the provisions of such resolution relating
to being available for advice and consultation on a continuing
basis.
RESOLVED, That any or each outside director who has served
as a General Director for more than five years as of the date of
such change in control
Directors' Annuity Plan
Page 2
shall be designated as General Director Emeritus and shall be
entitled to the compensation and other benefits afforded under
the Board resolution of February 14, 1985 provided, however,
that such person's quarterly compensation shall be $12,500,
payable in advance.
RESOLVED, That upon such change in control, the Company
shall purchase an annuity to be held in an appropriate trust
arrangement for each Director Emeritus, each General Director
Emeritus and each person who may thereafter become a Director
Emeritus or General Director Emeritus in accordance with the
foregoing resolutions, to pay such compensation until the death
of such person.
RESOLVED, That upon a change in control, the provision in
the February 14, 1985 resolution relating to the Board's rights
to increase or decrease the amount of compensation or to limit
the term of a Director Emeritus or General Director Emeritus
shall be rescinded and be of no further force or effect.
RESOLVED, That for purposes of the foregoing resolutions,
the term "change in control" shall include any situation in
which:
(i) any Person (as defined below) is or becomes the
Beneficial Owner (as defined below), directly or indirectly, of
securities of the Company (not including in the securities
beneficially owned by such Person any securities acquired
directly from the Company or its affiliates) representing 20% or
more of the combined voting power of the Company's then
outstanding securities, excluding any Person who becomes such a
Beneficial Owner in connection with a transaction described in
clause (A) of paragraph (iii); or
(ii) the following individuals cease for any reason to
constitute a majority of the members of the Board then serving:
individuals who, on the date hereof, constitute the Board and
any new directors (other than a director whose initial
assumption of office is in connection with an actual or
threatened election contest, including but not limited to a
consent solicitation, relating to the election of directors of
the Company) whose appointment or election by the Board or
nomination for election by the Company's stockholders was
approved by a vote of at least two-thirds (2/3) of the directors
then still in office who either were directors on the date
hereof or whose appointment, election or nomination for election
was previously so approved; or
(iii) there is consummated a merger or consolidation of the
Company or a direct or indirect subsidiary of the Company with
any other corporation,
Directors' Annuity Plan
Page 3
other than (A) a merger or consolidation which would result in
the voting securities of the Company outstanding immediately
prior to such merger or consolidation continuing to represent
(either by remaining outstanding or by being converted into
voting securities of the surviving entity or any parent
thereof), in combination with the ownership of any trustee or
other fiduciary holding securities under an employee benefit
plan of the Company, at least 80% of the combined voting power
of the securities of the Company or such surviving entity or any
parent thereof outstanding immediately after such merger or
consolidation, or (B) a merger or consolidation effected to
implement a recapitalization of the Company (or similar
transaction) in which no Person is or becomes the Beneficial
Owner, directly or indirectly, of securities of the Company
(not including in the securities Beneficially Owned by such
Person any securities acquired directly from the Company or its
subsidiaries) representing 20% or more of either the then
outstanding shares of common stock of the Company or the
combined voting power of the Company's then outstanding
securities; or
(iv) the stockholders of the Company approve a plan of
complete liquidation or dissolution of the Company or there is
consummated an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets,
other than a sale or disposition by the Company of all or
substantially all of the Company's assets to an entity, at least
80% of the combined voting power of the voting securities of
which are owned by stockholders of the Company in substantially
the same proportions as their ownership of the Company
immediately prior to such sale.
For these purposes, the term "Person" shall have the meaning
given in Section 3(a)(9) of the Exchange Act, as modified and
used in Sections 13(d) and 14(d) thereof, except that such term
shall not include (i) the Company or any of its subsidiaries,
(ii) a trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any of its affiliates,
(iii) an underwriter temporarily holding securities pursuant to
an offering of such securities, or (iv) a corporation owned,
directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock
of the Company, and the term "Beneficial Owner" shall have the
meaning set forth in Rule 13d-3 under the Exchange Act.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF INCOME (BOTH DATED 6/30/96) AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 303
<SECURITIES> 0<F1>
<RECEIVABLES> 13215
<ALLOWANCES> 437
<INVENTORY> 0
<CURRENT-ASSETS> 0<F2>
<PP&E> 475<F3>
<DEPRECIATION> 283<F3>
<TOTAL-ASSETS> 15525
<CURRENT-LIABILITIES> 0<F2>
<BONDS> 8033<F4>
0
115
<COMMON> 54
<OTHER-SE> 1471<F5>
<TOTAL-LIABILITY-AND-EQUITY> 15525
<SALES> 0
<TOTAL-REVENUES> 1434<F6>
<CGS> 0
<TOTAL-COSTS> 407<F7>
<OTHER-EXPENSES> 540<F8>
<LOSS-PROVISION> 162
<INTEREST-EXPENSE> 0<F9>
<INCOME-PRETAX> 324
<INCOME-TAX> 134
<INCOME-CONTINUING> 190
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 190
<EPS-PRIMARY> 3.46
<EPS-DILUTED> 3.44
<FN>
<F1>CURRENT MARKETABLE EQUITY SECURITIES ARE NOT SEPARATELY STATED.
<F2>DO NOT PREPARE CLASSIFIED BALANCE SHEET.
<F3>PP&E PER BALANCE SHEET (192.4) IS SHOWN NET OF DEPRECIATION.
<F4>LONG-TERM DEBT PER BALANCE SHEET.
<F5>INCLUDES ADDITIONAL CAPITAL (286.8), NET UNREALIZED LOSS ON INVESTMENT
(-0.1), FOREIGN CURRENCY TRANSLATION ADJ (-46.6), & RETAINED EARNINGS (1230.4)
PER BALANCE SHEET = 1470.7.
<F6>INCLUDES FINANCE CHARGES AND FEES (1064.5), INSURANCE PREMIUMS (81.5) AND
OTHER REVENUE (287.5) PER INCOME STATEMENT = 1433.5.
<F7>INTEREST EXPENSE PER INCOME STATEMENT.
<F8>INCLUDES SALARIES AND BENEFITS (201.3), INSURANCE BENEFITS (42.5) AND OTHER
(296.2) PER INCOME STATEMENT = 540.0
<F9>COMPANY'S PRIMARY COST OF GENERATING REVENUE IS INTEREST EXPENSE WHICH IS
INCLUDED IN TOTAL COSTS (ABOVE).
</FN>
</TABLE>
