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 March 31, 1997
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 offices) (Zip Code)
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 May 1, 1997, the number of shares outstanding of the registrant's
common stock was 53,711,194.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BENEFICIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in millions)
March 31, December 31,
1997 1996
ASSETS
Cash and Equivalents . . . . . . . . . . . . $ 249.1 $ 279.6
Finance Receivables (Note 2). . . . . . . . . . 13,964.9 14,672.0
Receivables Held for Resale (Note 2) . . . . . . 807.8 --
Allowance for Credit Losses (Note 3) . . . . . . (494.5) (498.2)
Net Finance Receivables. . . . . . . . . . . 14,278.2 14,173.8
Investment Securities (Note 5) . . . . . . . . . 554.1 550.3
Property and Equipment. . . . . . . . . . . . 203.7 204.9
Other Assets . . . . . . . . . . . . . . . 1,728.2 1,722.6
TOTAL ASSETS . . . . . . . . . . . . . $17,013.3 $16,931.2
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-Term Debt (Note 6) . . . . . . . . . . . $ 3,942.0 $ 4,169.3
Deposits Payable. . . . . . . . . . . . . . 575.4 635.0
Long-Term Debt (Note 7) . . . . . . . . . . . 8,785.5 8,631.1
Total Interest-Bearing Debt . . . . . . . . . 13,302.9 13,435.4
Accounts Payable and Accrued Liabilities. . . . . . 695.5 534.0
Insurance Policy and Claim Reserves . . . . . . . 1,266.1 1,267.0
Total Liabilities. . . . . . . . . . . . . 15,264.5 15,236.4
Shareholders' Equity:
Preferred Stock . . . . . . . . . . . . . 114.8 114.8
Common Stock . . . . . . . . . . . . . . 53.9 54.0
Additional Capital . . . . . . . . . . . . 296.1 305.3
Net Unrealized (Loss) Gain on Investment Securities . (4.4) 2.6
Accumulated Foreign Currency Translation Adjustments . (46.0) (45.4)
Retained Earnings. . . . . . . . . . . . . 1,334.4 1,263.5
Total Shareholders' Equity . . . . . . . . . 1,748.8 1,694.8
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . . $17,013.3 $16,931.2
See Notes to Financial Statements.
BENEFICIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(in millions, except per share amounts)
Three Months Ended
March 31,
1997 1996
REVENUE
Finance Charges and Fees . . . . . . . . . . . $579.4 $545.3
Interest Expense. . . . . . . . . . . . . . 214.7 209.0
Lending Spread. . . . . . . . . . . . . . 364.7 336.3
Insurance Premiums . . . . . . . . . . . . . 45.9 40.1
Other . . . . . . . . . . . . . . . . . 147.3 165.7
Total . . . . . . . . . . . . . . . . 557.9 542.1
OPERATING EXPENSES
Salaries and Employee Benefits . . . . . . . . . 105.1 101.7
Insurance Benefits . . . . . . . . . . . . . 22.8 22.7
Provision for Credit Losses . . . . . . . . . . 93.1 81.7
Other . . . . . . . . . . . . . . . . . 174.5 151.3
Total . . . . . . . . . . . . . . . . 395.5 357.4
Income Before Income Taxes . . . . . . . . . . . 162.4 184.7
Provision for Income Taxes . . . . . . . . . . . 61.7 77.3
NET INCOME . . . . . . . . . . . . . . . . $100.7 $107.4
EARNINGS PER COMMON SHARE . . . . . . . . . . . $ 1.80 $ 1.96
DIVIDENDS PER COMMON SHARE . . . . . . . . . . . $ .52 $ .47
See Notes to Financial Statements.
BENEFICIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
Three Months Ended
March 31,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income . . . . . . . . . . . . . . . $ 100.7 $ 107.4
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Provision for Credit Losses . . . . . . . . . 93.1 81.7
Provision for Deferred Income Taxes . . . . . . (10.8) (12.4)
Depreciation and Amortization . . . . . . . . 12.9 11.9
Insurance Policy & Claim Reserves . . . . . . . (.9) 10.6
Accounts Payable & Accrued Liabilities . . . . . 161.5 285.6
Net Cash Provided by Operating Activities. . . . 356.5 484.8
CASH FLOWS FROM INVESTING ACTIVITIES
Receivables Originated or Acquired . . . . . . . (3,170.3) (2,733.8)
Receivables Collected. . . . . . . . . . . . 2,881.7 2,188.4
Other Receivables, Net Change . . . . . . . . . (3.8) (30.8)
Investment Securities Purchased . . . . . . . . (110.0) (282.9)
Investment Securities Sold . . . . . . . . . . 68.1 903.5
Investment Securities Matured . . . . . . . . . 26.2 179.6
Deposit from Reinsurer . . . . . . . . . . . -- (957.4)
Other . . . . . . . . . . . . . . . . . 16.3 41.0
Net Cash Used in Investing Activities . . . . . (291.8) (692.4)
CASH FLOWS FROM FINANCING ACTIVITIES
Short-Term Debt, Net Change. . . . . . . . . . (196.4) 145.1
Deposits Payable, Net Change . . . . . . . . . (30.6) (4.8)
Long-Term Debt Issued. . . . . . . . . . . . 1,081.8 669.2
Long-Term Debt Repaid. . . . . . . . . . . . (905.1) (454.7)
Dividends Paid . . . . . . . . . . . . . . (29.8) (26.7)
Common Stock Repurchased . . . . . . . . . . (15.1) --
Net Cash (Used in) Provided by Financing Activities. (95.2) 328.1
NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS . . . (30.5) 120.5
Cash and Equivalents at Beginning of Period. . . . . 279.6 273.1
CASH AND EQUIVALENTS AT END OF PERIOD. . . . . . .$ 249.1 $ 393.6
SUPPLEMENTAL CASH FLOW INFORMATION
Interest Paid . . . . . . . . . . . . . .$ 135.1 $ 138.4
Income Taxes Paid . . . . . . . . . . . . . .4 14.0
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 year-ended
December 31, 1996. Additionally, the Company classifies
receivables specifically identified for inclusion in
securitizations as Receivables Held for Resale. These amounts
are carried at the lower of cost or market value on an aggregated
basis. 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 1997 presentation.
Interim results are not necessarily indicative of results for a
full year.
2. FINANCE RECEIVABLES
Finance receivables consisted of the following:
March 31, December 31,
1997 1996
Receivables Owned:
Real Estate Secured. . . . . . . $ 5,526.9 $ 6,067.5
Personal Unsecured . . . . . . . 2,962.8 2,982.9
Credit Cards . . . . . . . . . 4,376.2 4,595.8
Sales Finance Contracts . . . . . 897.1 926.3
Commercial. . . . . . . . . . 201.9 99.5
Held for Resale (all real estate secured) 807.8 --
Total Owned. . . . . . . . . 14,772.7 14,672.0
Receivables Sold with Servicing Retained
(all real estate secured). . . . 1,961.9 2,189.0
Total Owned and Serviced. . . . . . $16,734.6 $16,861.0
3. ALLOWANCE FOR CREDIT LOSSES
An analysis of the allowance for credit losses follows:
1997
Balance at January 1 . . . . . . . . . . . . $498.2
Accounts Charged Off . . . . . . . . . . . . (106.1)
Recoveries on Accounts Previously Charged Off . . . . 13.2
Provision for Credit Losses . . . . . . . . . . 93.1
Other . . . . . . . . . . . . . . . . . (3.9)
Balance at March 31. . . . . . . . . . . . . $494.5
4. SERVICING ASSET
On January 1, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." For each servicing contract in
existence before January 1, 1997, previously recognized excess
servicing assets that do not exceed contractually specified
servicing fees were combined and recognized as a servicing asset.
Previously recognized servicing assets that exceed contractually
specified servicing fees were reclassified as interest-only
strips and are carried at fair value and amounted to $42.4
million at March 31, 1997. Both the servicing asset and the
interest-only strips are included in other assets on the balance
sheet.
The activity in the servicing asset is summarized as
follows:
1997
Balance at January 1 . . . . . . . . . . . . $ 8.0
Recognized during the period . . . . . . . . . -
Amortization. . . . . . . . . . . . . . . ( 0.6)
Balance at March 31 . . . . . . . . . . . . $ 7.4
The servicing asset is amortized in proportion to and over
the period of estimated net future servicing fee income. The
servicing asset and interest-only strips are periodically
reviewed for valuation impairment. This review is performed on a
disaggregated basis for the predominate risk characteristics of
the underlying loans which are loan type, term, interest rate,
prepayment rate and loss rate. The fair value of the servicing
asset and interest-only strip is determined by the present value
of the estimated net future cash flows. The weighted-average
assumptions used in the fair value calculations include:
discount rate - 14%, prepayment rate - 33%, loss rate - 1.3% and
servicing fees - 1.0%. As of March 31, 1997, fair value
approximates carrying value and therefore, no valuation allowance
is required.
5. INVESTMENT SECURITIES
Investment securities were as follows:
March 31, 1997 December 31, 1996
Carrying Market Carrying Market
Value Value Value Value
AVAILABLE-FOR-SALE
Debt Securities:
Corporate $266.2 $266.2 $275.5 $275.5
Mortgage-backed 32.0 32.0 36.1 36.1
Municipal 5.1 5.1 7.3 7.3
U.S. Government 99.3 99.3 94.3 94.3
Foreign Government 53.5 53.5 42.9 42.9
456.1 456.1 456.1 456.1
Equity Securities .7 .7 .6 .6
Total 456.8 456.8 456.7 456.7
HELD-TO-MATURITY
Debt Securities:
Corporate 48.9 47.5 48.9 48.3
Mortgage-backed 2.5 2.4 2.6 2.5
Municipal 10.5 10.7 8.5 8.7
U.S. Government 13.9 13.7 14.4 14.2
Foreign Government 1.1 1.1 1.1 1.1
Other 20.4 20.4 18.1 18.1
Total 97.3 95.8 93.6 92.9
TOTAL INVESTMENT SECURITIES $554.1 $552.6 $550.3 $549.6
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 three-month period ended March 31, 1997.
6. SHORT-TERM DEBT
Short-term debt outstanding consisted of the following:
March 31, December 31,
1997 1996
Commercial Paper. . . . . . . . . . $3,406.7 $3,695.4
Bank Borrowings . . . . . . . . . . 535.3 473.9
Total . . . . . . . . . . . $3,942.0 $4,169.3
The weighted average interest rates (including the costs of
maintaining lines of credit) on short-term borrowings during the
three months ended March 31 were as follows:
1997 1996
U.S. Dollar Borrowings. . . . . . . . 5.47% 5.58%
Other Currency Borrowings. . . . . . . 5.63 6.65
Overall. . . . . . . . . . . . . 5.49 5.80
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 three months ended
March 31 were increases as follows: .13% (annualized) and $1.4
in 1997 and .07% (annualized) and $0.8 in 1996.
7. LONG-TERM DEBT
Long-term debt is shown below in the earliest year it could
become payable:
Weighted Average
Interest Rates at March 31, December 31,
Maturity March 31, 1997 1997 1996
1997 6.60% $1,701.5 $2,610.1
1998 7.00 1,970.3 1,982.0
1999 6.63 1,766.0 1,669.7
2000 6.72 982.3 554.9
2001 7.03 707.3 632.4
2002-2006 6.67 1,438.8 984.7
2007-2023 7.65 219.3 197.3
Total 6.78 $8,785.5 $8,631.1
The weighted average interest rates (including issuance
costs) on the Company's long-term debt during the three months
ended March 31 were as follows:
1997 1996
U.S. Dollar Borrowings. . . . . . . . 6.87% 7.17%
Other Currency Borrowings. . . . . . . 6.89 7.27
Overall. . . . . . . . . . . . . 6.87 7.18
Long-term debt outstanding at March 31, 1997, and December
31, 1996, includes $3,970.9 and $3,815.7, respectively, of
variable-rate debt that reprices based on various indices. Such
variable-rate debt generally has an original maturity of one-to-
three 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 three months ended
March 31 were increases as follows: .01% (annualized) and $0.3
in 1997 and .08% (annualized) and $1.6 in 1996.
8. DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into foreign exchange forward agreements,
options and currency swaps to hedge its net investment in foreign
subsidiaries. At March 31, 1997 the Company had purchased
options to deliver British pounds in exchange for US$207.5, as
compared with December 31, 1996 when the Company owned the right
to deliver British pounds for US$166.0. Concurrently, the
Company had sold options to buy British pounds for US$209.0 at
March 31, 1997 as compared with sales of call options on British
pounds for US$166.3 at year-end 1996.
The Company's outstanding forward agreements as of March 31,
1997 consisted of forward sales of BP46.0 and DM38.0 in exchange
for US$71.6 and US$24.7, respectively. There has been no change
in forward agreements outstanding since December 31, 1996.
Currency swaps outstanding at quarter-end obligate the
Company to pay DM47.0 in exchange for US$31.1 in September 1998,
to pay C$165.0 in exchange for US$120.4 in July 1999 and to pay
C$100.0 in exchange for US$74.5 in November 2000. There has been
no change in currency swaps outstanding since December 31, 1996.
Semi-annual interest payments on the notional amounts will be
made on the swaps.
The Company accrued pretax gains of $4.1 at March 31, 1997,
and pretax losses of $18.5 at December 31, 1996 on open hedges.
These gains and losses represent a mark to spot on all open
hedges and are recognized in a separate component of equity.
There were no gains or losses recognized in net income
attributable to the above hedging programs.
The Company and its subsidiaries utilize 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 March 31, 1997,
accrued interest payable related to these interest-rate swaps
totaled $15.0, which is largely offset by $13.9 of accrued
interest receivable. Additionally, foreign subsidiaries of the
Company entered into forward rate agreements (FRA's) as hedges
against variable interest rate exposures. As of March 31, 1997,
the subsidiaries had $82.1 of such FRA's whereby they locked in a
weighted average fixed payable rate of 6.67%. These agreements
will all expire in December 1997. There were no FRA's
outstanding as of December 31, 1996. The impact of interest rate
hedging activities on the Company's weighted average borrowing
rates and on the reported interest expense for the three months
ended March 31, was an increase of .05% (annualized) and $1.6 in
1997 and .08% (annualized) and $2.4 in 1996.
The following table summarizes the interest-rate swaps
outstanding at March 31, 1997:
Weighted Average Weighted
Notional Interest Rates Average
Amount Pay Receive Maturity*
Pay fixed-rate - receive floating-rat $ 629.9 7.45% 6.33% 2.6
Pay floating-rate - receive fixed-rate
Denominated in
US$ 153.0 5.88 6.51 9.2
British pounds 132.8 6.93 7.95 2.3
Pay floating-rate - receive floating- 915.0 5.60 5.89 1.1
rate
Total $1,830.7 6.36 6.24 2.4
*Remaining term in years.
9. EARNINGS PER COMMON SHARE
Computations of primary and fully diluted earnings per common share are
as follows:
Three Months Ended
March 31,
1997 1996
PRIMARY EARNINGS
Net Income . . . . . . . . . . . . . . . . $100.7 $107.4
Dividends on Preferred Stock . . . . . . . . . . (1.3) (1.3)
Net Income Applicable to Common Stock . . . . . . . $ 99.4 $106.1
Weighted Average Shares Outstanding:
Common . . . . . . . . . . . . . . . . 53.6 52.9
Common Stock Equivalents . . . . . . . . . . 1.5 1.2
Total . . . . . . . . . . . . . . . . 55.1 54.1
Primary Earnings per Common Share . . . . . . . . . $1.80 $1.96
FULLY DILUTED EARNINGS
Net Income . . . . . . . . . . . . . . . $100.7 $107.4
Dividends on Non-Convertible Preferred Stock . . . . (1.3) (1.3)
Net Income Applicable to Common Stock . . . . . . $ 99.4 $106.1
Weighted Average Shares Outstanding:
Common . . . . . . . . . . . . . . . . 53.6 52.9
Common Stock Equivalents . . . . . . . . . . 1.7 1.6
Total. . . . . . . . . . . . . . . . 55.3 54.5
Fully Diluted Earnings per Common Share . . . . . . . .$1.80 $1.95
10. RATIO OF EARNINGS TO FIXED CHARGES
Three Months Ended
March 31,
1997 1996
Net Income. . . . . . . . . . . . . . . $100.7 $107.4
Add Provision for Income Taxes . . . . . . . . 61.7 77.3
Earnings Before Income Taxes . . . . . . . 162.4 184.7
Fixed Charges:
Interest and Debt Expense . . . . . . . . . 214.7 209.0
Interest Factor Portion of Rentals . . . . . . 6.2 5.4
Total Fixed Charges . . . . . . . . . . 220.9 214.4
Earnings Before Income Taxes and Fixed Charges . . $383.3 $399.1
Ratio of Earnings to Fixed Charges . . . . . . 1.74 1.86
Preferred Dividend Requirements. . . . . . . . $ 2.1 $ 2.1
Ratio of Earnings to Fixed Charges and Preferred
Dividend Requirements . . . . . . . . . . . 1.72 1.84
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.
Preferred dividend requirements are grossed up to their pretax
equivalent.
11. CONTINGENT LIABILITIES
In July 1992, the Internal Revenue Service (IRS) 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.
Within administrative appeals process, all but two issues
were resolved. Both of the remaining unresolved issues relate to
the 1986 and 1987 ACIC additions to loss reserves. During the
third quarter of 1996, the IRS issued a statutory Notice of
Deficiency asserting the unresolved adjustments and increased the
disallowance to $195.0.
The Company's management and independent tax advisers
continue to believe that the IRS's proposed adjustments are
unlikely to be sustained. The Company fully intends to oppose
the adjustments through litigation in the United States Tax
Court. 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.
The Company is involved in various other claims and lawsuits
incidental to its business. In the opinion of management, the
claims and suits in the aggregate will not have a material
adverse effect on the Company's consolidated financial
statements.
BENEFICIAL CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial Condition
The Company's leverage (the ratio of interest-bearing debt
to total equity) was reduced to 7.61 times at March 31, 1997,
from 7.93 times at year-end 1996. In order to maintain leverage
within targeted levels, subsidiaries of the Company sell
receivables through securitizations in the capital markets and
retain collection and administrative responsibilities as servicer
for the trust holding the receivables. During the second quarter
of 1997, subsidiaries of the Company plan to sell $808 million of
variable-rate home equity lines of credit through a
securitization that will result in lower leverage in the second
quarter. As a result, these receivables were classified as held
for resale at March 31, 1997.
Total owned finance receivables increased $101 million, or
1% during the first three months of 1997, compared with an
increase of $451 million, or 3% during the first three months of
1996. Managed receivables, which include loans sold in
securitizations but still serviced, decreased $126 million this
year compared with an increase of $332 million in the prior year.
The current year decline in managed receivables reflects the
anticipated significant pay down of certain maturing special
financing portfolio tranches at Beneficial National Bank USA (BNB
USA), the Company's private-label credit card subsidiary. BNB
USA's receivables declined $222 million during the quarter,
compared with a gain of $151 million a year earlier. Conversely,
internally generated receivables growth in the North American
consumer finance subsidiaries was $121 million during the 1997
quarter, compared with net runoff of $41 million during the first
quarter of 1996. Portfolio acquisitions added $234 million to
the 1996 quarter's total growth, while contributing only $44
million this year. Reflecting the remaining balance of
receivables serviced from prior securitizations, total
receivables sold with servicing retained were $1,962 million at
March 31, 1997, compared with $994 million at March 31, 1996.
At March 31, 1997, the allowance for credit losses was
$494.5 million or 3.35% as a percentage of owned finance
receivables compared with $498.2 million or 3.40% at December 31,
1996, and $423.2 million or 3.05% at March 31, 1996. This
reduction in the allowance from 1996 year-end corresponded
directly to the BNB USA runoff discussed above. At the March 31,
1997 level, the reserve covered annualized net chargeoffs 1.33
times, compared with 1.57 times at December 31, 1996. As a
percentage of average owned receivables, annualized net
chargeoffs were 2.53%, compared with 1.98% in the first three
months of 1996, reflecting a higher proportion of credit card and
personal loans in the receivables portfolio, coupled with an
increase in the chargeoff rate on these portfolios.
As disclosed in the table that follows, all owned
receivables delinquent two months and greater on a contractual
basis increased to 3.70% of total outstandings at March 31 1997,
from 3.16% a year earlier and 3.38% at the end of 1996. The
increase reflects somewhat higher delinquency rates on unsecured
portfolios. On a managed basis, delinquency increased to 3.58%
at March 31, from 3.15% a year earlier and 3.20% at December 31,
1996. The table that follows details delinquency by product type
on both an owned and managed basis.
Delinquency % Product Type Delinquency %
Managed Basis Owned Basis
March 31, Dec. 31, March 31, March 31, Dec. 31, March 31,
1997 1996 1996 1997 1996 1996
2.58% 2.13% 2.42% Real Estate Secured 2.56% 2.17% 2.35%
6.08 5.81 5.66 Personal Unsecured 6.08 5.81 5.66
3.67 3.23 2.74 Credit Card 3.67 3.23 2.74
3.70 3.62 2.92 Sales Finance 3.70 3.62 2.92
3.58 3.20 3.15 Overall 3.70 3.38 3.16
During the quarter, 220 thousand common shares were
repurchased by the Company at an average price of $69.80 and
placed in treasury as part of the 1.2 million share repurchase
program approved by the Board of Directors in November, 1996.
These repurchases were the primary cause of the reduction in
additional capital during the quarter.
Results of Operations
First quarter 1997 net income decreased to $100.7 million
from $107.4 million in the first quarter of 1996. The 1996
quarter benefited from $80.5 million in pretax profits or $48.3
million in aftertax profits from the tax refund anticipation loan
(RAL) business, while the 1997 quarter included RAL pretax
profits of $70.1 million or $42.1 million aftertax. RAL
operations for the 1997 quarter benefited from $24.1 million in
prior year bad debt collections, versus $41.9 million in 1996.
The 1996 recoveries were primarily 1995 earned income tax credit
refunds released to the customers by the Internal Revenue Service
rather than to the Company's banking subsidiary. RAL earnings
comparisons with the prior year were further dampened as 1997
marked the initial year of the revenue sharing agreement with H&R
Block. In addition, the 1996 quarter benefited from a $8.4
million net aftertax gain related to the sale of an annuity block
of business by the Company's life insurance subsidiary. Removing
the annuity-related gain and the total RAL-related profits from
both years, earnings increased 16% as compared with the 1996
quarter, driven by a strong recovery in earnings at BNB USA due
to favorable results in the special financing portfolio and
increased late fee revenue. Additionally during the quarter,
BNB USA re-negotiated its agreement with PriceCostco Inc. (a
large national merchant), which represented approximately 6% of
outstandings at March 31, 1997. This program incurred
considerable start-up costs and had been experiencing a high
level of convenience usage (customers paying off balances within
grace periods before finance charges accrue.) As a result of
this re-negotiation, costs of the program will be significantly
reduced, but the program will be terminated by the end of 1997.
Lending spread increased $28.4 million or 8% for the first
quarter of 1997 as compared with the first quarter of 1996. As a
percentage of average owned receivables, the lending spread of
9.95% in the first quarter of 1997 increased from 9.89% in the
prior year first quarter. The gross yield as a percentage of
average owned receivables fell slightly to 15.80% from 16.04% a
year earlier, however, interest expense fell moderately to 5.85%
from 6.15%. The increase in the lending spread is the result of
higher margins at BNB USA offset by reduced yields in the other
North American consumer finance subsidiaries.
During the first quarter, other revenue decreased $18.4
million or 11% to $147.3 million from 1996, reflecting the
reduction in RAL income and the annuity-related gain recorded in
1996.
Removing the impact of the $24 million annuity-related
capital gain, first quarter 1997 insurance pretax earnings
increased 37% to $22.7 million from $16.6 million in the prior
year quarter. These results reflect strong premium revenues and
lower loss ratios, corresponding to the improved internal growth
in the consumer finance subsidiaries. The Company continues to
runoff the non-affiliated independent credit business. Further,
the sale of an ordinary life block is expected during the second
quarter. Neither of these items is expected to have a material
effect on the Company's financial condition or results of
operations.
Subsidiaries outside the United States contributed $10.7
million in pretax earnings in the first quarter of 1997, a
decrease of $3.1 million or 22% from the first quarter of 1996.
The unfavorable earning comparisons with 1996 were driven by the
Canadian and German operations. The combined United Kingdom and
Ireland operations' earnings improved moderately. The German
operation reported a $1.9 million loss for the quarter.
Reflecting the significant increase in net chargeoffs as a
percentage of average owned receivables, and the increase in the
average receivable base, the provision for credit losses
increased 14% to $93.1 million in the first quarter in comparison
with the same period in 1996. As an annualized percentage of
average owned receivables, first three months net chargeoffs rose
to 2.53% of the portfolio from 1.98% in the first quarter of
1996. From a product line perspective, the increase in chargeoff
rates were most evident in personal unsecured loans, which
increased to 5.46% during the first three months of 1997 from
4.47% a year earlier, and in the credit card portfolio, which
rose to 3.93% from 3.40% during the first three months of 1996.
Both trends reflect the continued high levels of consumer
bankruptcy in North America. The increase in the credit card
chargeoff rate also reflects the maturing of BNB USA's private-
label credit card portfolio, which is within expectations.
Management expects chargeoffs in the credit card portfolio to
continue to increase as the portfolio matures. In addition, the
personal unsecured chargeoff rates, as well as the credit card
chargeoff rates, will continue to reflect the economic cycle and
the economic health of the consumer.
Salaries and other operating expenses in total increased
10.5% in the first quarter of this year compared with the 1996
quarter. Increased marketing expenses and new business
development initiatives account for the majority of the increase
in operating expenses. Relating these operating expenses to
average owned receivables generates an operating expense ratio of
7.63% in first three months compared with 7.44% in 1996. As a
percentage of average managed receivables, the first three months
operating expense ratio declined to 6.73% from 6.91% a year
earlier.
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
6.55% in the first three months of 1997, compared with 5.36% in
the first three months of 1996.
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.
Recent Accounting Pronouncements
The Financial Accounting Standards Board has issued
Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share." SFAS No. 128 simplifies the computation of
earnings per share (EPS) and requires dual presentation of basic
and diluted EPS by entities with complex capital structures. The
statement is effective for financial statements issued for
periods ending after December 15, 1997. The Company does not
expect the diluted EPS presentation to differ significantly from
the current primary EPS.
The consolidated financial statements and related notes
should be read in conjunction with the preceding review.
BENEFICIAL CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
As widely reported in the media, there are industry
related circumstances which may impact the Company and its
subsidiaries. These circumstances involve (1) the substantial
volume of litigation brought by the Alabama plaintiffs' bar
against banking, consumer finance and insurance companies
operating in that state, (2) the large punitive awards
obtained from juries in that state, and (3) the failure of the
Alabama Supreme Court to reverse many of those awards. Like
other companies in these industries, a subsidiary of the Company
is involved in a number of lawsuits in Alabama, most of which
relate to the financing of satellite television broadcast
receiver dishes, a business the Company's subsidiary discontinued
in 1995. These cases generally allege inadequate
disclosure of financing terms. In nearly all cases, other
parties are also named as defendants or have been brought in as
defendants pursuant to cross-claims. Unspecified
compensatory and punitive damages are sought. The judicial
climate in Alabama is such that the outcomes of each of
these cases are unpredictable. Certain of these cases have been
settled for nominal amounts that in the aggregate are not
material to the Company. With respect to the pending cases,
the Company and its subsidiary believe the subsidiary has
substantive legal defenses to the claims asserted and is
defending each case vigorously.
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.
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 January 28, 1997,
relating to the Company's fourth-quarter earnings,
which were announced on January 28, 1997.
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 May 8, 1997 /s/Ronald E. Bombolis
Ronald E. Bombolis
Sr. Vice President
and Controller
(Chief Accounting
Officer)
Date May 8, 1997 /s/Andrew C. Halvorsen
Andrew C. Halvorsen
Member of the 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.
27 Financial Data Schedule (in EDGAR filing only).
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE BALANCE SHEET AND STATEMENT OF INCOME (BOTH DATED 3/31/97) AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 249
<SECURITIES> 0<F1>
<RECEIVABLES> 14773
<ALLOWANCES> 495
<INVENTORY> 0
<CURRENT-ASSETS> 0<F2>
<PP&E> 516<F3>
<DEPRECIATION> 312<F3>
<TOTAL-ASSETS> 17013
<CURRENT-LIABILITIES> 0<F2>
<BONDS> 8786<F4>
0
115
<COMMON> 54
<OTHER-SE> 1580<F5>
<TOTAL-LIABILITY-AND-EQUITY> 17013
<SALES> 0
<TOTAL-REVENUES> 773<F6>
<CGS> 0
<TOTAL-COSTS> 215<F7>
<OTHER-EXPENSES> 302<F8>
<LOSS-PROVISION> 93
<INTEREST-EXPENSE> 0<F9>
<INCOME-PRETAX> 162
<INCOME-TAX> 61
<INCOME-CONTINUING> 101
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 101
<EPS-PRIMARY> 1.80
<EPS-DILUTED> 1.80
<FN>
<F1>CURRENT MARKETABLE EQUITY SECURITIES ARE NOT SEPARATELY STATED.
<F2>DO NOT PREPARE CLASSIFIED BALANCE SHEET.
<F3>PP&E PER BALANCE SHEET (203.7) IS SHOWN NET OF DEPRECIATION.
<F4>LONG-TERM DEBT PER BALANCE SHEET.
<F5>INCLUDES ADDITIONAL CAPITAL (296.1), NET UNREALIZED LOSS ON INVESTMENTS
(-4.4), FOREIGN CURRENCY TRANSLATION ADJ (-46.0), AND RETAINED EARNINGS
(1334.4) PER BALANCE SHEET = 1580.1
<F6>INCLUDES FINANCE CHARGES AND FEES (579.4), INSURANCE PREMIUMS (45.9) AND
OTHER REVENUE (147.3) PER INCOME STATEMENT = 772.6
<F7>INTEREST EXPENSE PER INCOME STATEMENT.
<F8>INCLUDES SALARIES AND BENEFITS (105.1), INSURANCE BENEFITS (22.8) AND
OTHER (174.5) PER INCOME STATEMENT = 302.4
<F9>COMPANY'S PRIMARY COST OF GENERATING REVENUE IS INTEREST EXPENSE WHICH IS
INCLUDED IN TOTAL COSTS (ABOVE).
</FN>
</TABLE>
