ITEM 1. BUSINESS.
THE COMPANY
Commercial Credit Company (the "Company") is a financial services holding company engaged, through its subsidiaries, principally in consumer finance services. The Company's predecessor was founded in 1912. The Company is a wholly owned subsidiary of Travelers Group Inc. ("Travelers Group"), a financial services holding company engaged, through its subsidiaries, principally in four business segments: (i) Investment Services; (ii) Consumer Finance Services (through the Company); (iii) Property & Casualty Insurance Services; and (iv) Life Insurance Services. The periodic reports of Travelers Group provide additional business and financial information concerning that company and its consolidated subsidiaries.
On December 30, 1994, the Company sold its 50% interest in Commercial Insurance Resources, Inc., the parent of Gulf Insurance Company ("Gulf"), to an affiliate, The Travelers Indemnity Company ("Travelers Indemnity"), for $150 million. See Notes 1 and 2 of Notes to Consolidated Financial Statements. The Company's Consolidated Financial Statements do not include the results of operations of Gulf for 1996 and 1995, and Travelers Indemnity's interest in Gulf for 1994 is shown as minority interest.
The principal executive offices of the Company are located at 300 St. Paul Place, Baltimore, Maryland 21202; telephone number 410-332-3000.
CONSUMER FINANCE SERVICES
The Company's Consumer Finance Services segment includes consumer lending services conducted primarily under the name "Commercial Credit," as well as credit-related insurance and credit card services.
CONSUMER FINANCE
As of December 31, 1996, Consumer Finance Services maintained 859 loan offices in 44 states, including servicing centers for loans sold through the sales force of the Primerica Financial Services group of companies (the "PFS sales force"), which are subsidiaries of Travelers Group. The Company owns two state-chartered banks headquartered in Newark, Delaware, which generally limit their activities to offering credit card services nationwide. Total consumer finance receivables of this segment at December 31, 1996, 1995 and 1994 were approximately $8.1 billion, $7.2 billion and $6.9 billion, respectively. For an analysis
of consumer finance receivables, net of unearned finance charges ("Consumer Finance Receivables"), see Note 5 of Notes to Consolidated Financial Statements.
Loans to consumers by the Consumer Finance Services unit include real estate-secured loans, both fixed and variable rate secured and unsecured personal loans and fixed rate loans to finance consumer goods purchases. Credit card loans are discussed below. The Company's loan offices are generally located in small to medium-sized communities in suburban or rural areas, and are managed by individuals who generally have considerable consumer lending experience. The primary market for the Company's consumer loans consists of households with an annual income of $20,000 to $50,000. The number of loan customers (excluding credit card customers) was approximately 1,333,000 at December 31, 1996, as compared to approximately 1,275,000 at December 31, 1995 and approximately 1,177,000 at December 31, 1994. In 1996, the Company created an agency that performs appraisals, sells title insurance and provides other closing-related services for the Company's real-estate loans.
Two loan programs of the Company solicit applications for loans exclusively through the PFS sales force. At December 31, 1996, the total loans outstanding generated from this program were $1.524 billion, or approximately 19% of the Company's total loans outstanding, as compared to $1.258 billion, or approximately 17%, at December 31, 1995 and $1.107 billion, or approximately 16%, at December 31, 1994.
The average amount of cash advanced per real estate-secured loan made was approximately $35,800 in 1996, $26,300 in 1995 and $28,400 in 1994. The average amount of cash advanced per personal loan made was approximately $4,250 in 1996 and $4,200 in each of 1995 and 1994. The average real estate-secured loan size increased in 1996 due to marketing initiatives that attracted customers for higher balance loans, particularly in first mortgage programs. The average annual yield for loans in 1996 was 15.24%, as compared to 15.64% in 1995 and 15.41% in 1994. The average annual yield for real estate-secured loans in 1996 was 12.13%, as compared to 12.33% in 1995 and 12.20% in 1994, and for personal loans it was 19.95% in 1996, as compared to 20.23% in 1995 and 20.20% in 1994. The average yield for real estate-secured loans has been affected by the normal run-off of older, higher yielding loans and growth in lower yielding, higher quality loans, while the average yield for personal loans has been affected by the industry trends associated with rising personal bankruptcies. Consumer Finance Services' average net interest margin for loans was 8.64% in 1996, 8.79% in 1995 and 8.76% in 1994.
The Company's delinquency and charge-off rates reached historically low levels in 1994 and rose in 1995 and 1996, consistent with recent industry trends. This increase in delinquencies and charge-offs reflects a continued high level of personal bankruptcies, a national trend that shows no indication of reversing itself. See "-- Delinquent Receivables and Loss Experience."
DELINQUENT RECEIVABLES AND LOSS EXPERIENCE
Due to the nature of the finance business, some customer delinquency and loss is unavoidable. The management of the consumer finance business attempts to control customer delinquency through careful evaluation of each borrower's application and credit history at the time the loan is made or acquired, and appropriate collection activity. An account is considered delinquent for financial reporting purposes when a payment is more than 60 days past due, based on the original or extended terms of the contract. The delinquency and loss experience on real estate-secured loans is generally more favorable than on personal loans.
The following table sets forth the ratio of receivables delinquent for 60 days or more on a contractual basis (i.e., more than 60 days past due) to gross receivables outstanding:
RATIO OF RECEIVABLES DELINQUENT 60 DAYS OR MORE TO GROSS RECEIVABLES OUTSTANDING (1)
REAL ESTATE- PERSONAL SECURED CREDIT SALES TOTAL AS OF DECEMBER 31, LOANS LOANS CARDS FINANCE CONSUMER - ------------------ ----- ----- ----- ------- --------
1996 3.42% 1.50% 1.44% 2.27% 2.38% 1995 2.89% 1.42% 1.40% 2.17% 2.14% 1994 2.40% 1.48% 1.05% 1.79% 1.88%
- ---------- (1) The receivable balance used for these ratios is before the deduction of unearned finance charges and excludes accrued interest receivable. Receivables delinquent 60 days or more include, for all periods presented, accounts in the process of foreclosure.
The following table sets forth the ratio of net charge-offs to average Consumer Finance Receivables. For all periods presented, the following ratios give effect to all deferred origination costs.
RATIO OF NET CHARGE-OFFS TO AVERAGE CONSUMER FINANCE RECEIVABLES
REAL ESTATE- YEAR ENDED PERSONAL SECURED CREDIT SALES TOTAL DECEMBER 31, LOANS LOANS CARDS FINANCE CONSUMER ------------ ----- ----- ----- ------- --------
1996 5.46% 0.50% 2.75% 3.34% 2.91% 1995 4.01% 0.64% 2.04% 2.46% 2.28% 1994 3.50% 0.82% 1.83% 2.03% 2.08%
The following table sets forth information regarding the ratio of allowance for losses to Consumer Finance Receivables:
RATIO OF ALLOWANCE FOR LOSSES TO CONSUMER FINANCE RECEIVABLES
AS OF DECEMBER 31, ------------------ 1996 2.97% 1995 2.66% 1994 2.64%
CREDIT-RELATED INSURANCE
American Health and Life Insurance Company ("AHL"), a subsidiary of the Company, underwrites or arranges for credit-related insurance, which is offered to customers of the consumer finance business. AHL has an A+ (superior) rating from the A.M. Best Company, whose ratings may be revised or withdrawn at any time. At a minimum, credit life insurance covers the declining balance of unpaid indebtedness. Credit disability insurance provides monthly benefits during periods of covered disability. Credit property insurance covers the loss of property given as security for loans. Other insurance products offered or arranged for by AHL primarily include auto single interest and involuntary unemployment insurance. Most of AHL's products are single premium, which premiums are earned over the related contract period.
The following table sets forth gross written insurance premiums, net of refunds, for consumer finance customers:
CONSUMER FINANCE INSURANCE PREMIUMS WRITTEN (IN MILLIONS)
YEAR ENDED DECEMBER 31, ----------------------- 1996 1995 1994 -------- -------- -------- Premiums written by AHL and its affiliates(1) Writings for consumer finance: Credit life $ 42.7 $ 41.8 $ 43.3 Credit disability and other 63.1 61.4 66.7 Credit property and other 18.0 4.1 3.0 -------- -------- -------- Total $ 123.8 $ 107.3 $ 113.0 ======== ======== ======== Premiums written by other insurance companies(2) Credit property and other $ 42.9 $ 51.6 $ 52.8 ======== ======== ========
- ---------- (1) Premiums are written by AHL and other subsidiaries of Travelers Group. (2) Premiums are written by nonaffiliated insurers for consumer finance customers.
Net premiums written began to increase in late 1996 compared to 1995 primarily due to growth in loan receivables. Net premiums written were relatively flat in early 1996 and 1995 compared to 1994 primarily due to slower growth in loan receivables.
See Note 7 of Notes to Consolidated Financial Statements for information regarding reinsurance activities.
INVESTMENTS
The investment holdings of the insurance companies at December 31, 1996 were composed primarily of fixed income securities and short-term investments with a weighted average quality rating of A1. State insurance laws prescribe the types, quality and diversity of permissible investments for insurance companies. See Note 4 of Notes to Consolidated Financial Statements for additional information regarding the investment portfolios.
CREDIT CARD SERVICES
The Travelers Bank, a subsidiary of the Company, is a state-chartered bank located in Newark, Delaware, which provides credit card services, including upper market gold credit card services, to individuals and to affinity groups (such as nationwide professional associations and fraternal organizations). The Travelers Bank USA, another state-chartered bank subsidiary of the Company, is not subject to certain regulatory restrictions relating to cross-marketing activities to which The Travelers Bank is subject. See "-- Regulation." These banks generally limit their activities to credit card operations.
The following table sets forth aggregate information regarding credit cards issued by The Travelers Bank and The Travelers Bank USA:
CREDIT CARDHOLDERS AND TOTAL OUTSTANDINGS (OUTSTANDINGS IN MILLIONS OF DOLLARS)
AS OF, OR FOR THE YEAR ENDED, DECEMBER 31, ------------------------------------------ 1996 1995 1994 ---- ---- ---- Approximate total credit cardholders 791,000 753,000 621,000 Approximate gold credit cardholders 642,000 615,000 519,000 Total outstandings $907.1 $761.8 $712.5 Average annual yield 11.82% 12.51% 11.88%
The primary market for the banks' credit cards consists of households with annual incomes of $40,000 and above.
The banks offer deposit-taking services (which as to The Travelers Bank USA are limited to deposits of at least $100,000 per account). At December 31, 1996, deposits of
unaffiliated entities were $81.9 million, as compared to $97.9 million at December 31, 1995 and $73.3 million at December 31, 1994. The decrease in the average annual yield in 1996 primarily resulted from the offering of promotional rates in 1996 to encourage the transfer of credit card balances to the Company's banks.
COMPETITION
The consumer finance business competes with banks, savings and loan associations, credit unions, credit card issuers and other consumer finance companies. Additionally, substantial national financial services networks have been formed by major brokerage firms, insurance companies, retailers and bank holding companies. Some competitors have substantial local market positions; others are part of large, diversified organizations. Deregulation of banking institutions has greatly expanded the consumer lending products permitted to be offered by these institutions, and because of their long-standing insured deposit base, many of them are able to offer financial services on very competitive terms. The Company believes that it is able to compete effectively with such institutions. In particular, the Company believes that the diversity and features of the products it offers, personal service, and cultivation of repeat and referral business support and strengthen its competitive position in its Consumer Finance Services businesses.
REGULATION
Most consumer finance activities are subject to extensive federal and state regulation, including examination and review by state authorities of consumer finance offices. Personal loan, real estate-secured loan and sales finance laws generally require licensing of the lender, limitations on the amount, duration and charges for various categories of loans, adequate disclosure of certain contract terms and limitations on certain collection practices and creditor remedies. Federal consumer credit statutes primarily require disclosure of credit terms in consumer finance transactions. The Company's banks, which must undergo periodic examination, are subject to additional regulations relating to capitalization, leverage, reporting, dividends and permitted asset and liability products. These banks are also covered by the Competitive Equality Banking Act of 1987 (the "Banking Act"), which, with respect to The Travelers Bank, restricts cross-marketing of products by or of certain affiliates. The Company's banks are also subject to the Community Reinvestment Act, which assesses the bank's record in helping to meet the credit needs of low and moderate income persons in such bank's delineated community, and the Fair Credit Reporting Act, which is aimed at ensuring the accuracy and fairness of the mechanism by which consumer credit and other information on consumers is assembled and evaluated. The Company believes that it complies in all material respects with applicable regulations.
The Real Estate Settlement Procedures Act of 1974 ("RESPA") covers real estate loans secured by residential real estate. Generally, RESPA requires disclosure of certain
information to customers and regulates the receipt or payment of fees or charges for services performed.
The Company's insurance subsidiaries are subject to considerable regulation and supervision by insurance departments or other authorities in each state or other jurisdiction in which they transact business. The extent of regulation varies but generally has its source in statutes that delegate regulatory, supervisory and administrative authority to a department of insurance. The purpose of such regulation and supervision is primarily to provide safeguards for policyholders, rather than to protect the interests of the insurers' stockholders. State laws also regulate transactions and dividends between an insurance company and its parent or affiliates, and require prior approval or notification of any change in control of an insurance subsidiary. In addition, under insurance holding company legislation, most states regulate affiliated groups with respect to intercompany transfers of assets, service arrangements and dividend payments from insurance subsidiaries. State insurance departments also conduct periodic examinations of the affairs of insurance companies and require the filing of annual and other reports relating to the financial condition of companies and other matters.
Proposed legislation has been introduced in Congress and in certain states that would modify certain laws and regulations affecting the financial services industry, including the provisions regarding affiliations among insurance companies, investment banks and commercial banks. The potential impact of such legislation on the Company's businesses cannot be predicted at this time.
In addition to state insurance laws, the Company's insurance subsidiaries are also subject to general business and corporation laws, state securities laws, consumer protection laws, fair credit reporting acts and other laws. The insurance industry generally is exempt from federal antitrust laws because of the application of the McCarran-Ferguson Act.
CORPORATE AND OTHER OPERATIONS
The Corporate and Other segment consists of corporate staff and treasury operations, corporate investments and certain corporate income and expenses that have not been allocated to the operating subsidiaries.
INVESTMENT IN TRAVELERS GROUP
The Company holds 2,105 shares of Cumulative Adjustable Rate Preferred Stock, Series Y, of Travelers Group, with a liquidation value of $100,000 per share, which is redeemable at the option of the holder at certain times and callable by Travelers Group at certain times. In 1994, the Company exchanged the shares of Travelers Group common stock that it had acquired in 1993 in the merger of The Travelers Corporation into Travelers Group for shares of the preferred stock, which had a value equal to the market value of the common shares at the time the exchange was agreed upon.
GENERAL BUSINESS FACTORS
In the judgment of the Company, no material part of the business of the Company and its subsidiaries is dependent upon a single customer or group of customers, the loss of any one of which would have a materially adverse effect on the Company, and no one customer or group of affiliated customers accounts for as much as 10% of the Company's consolidated revenues.
At December 31, 1996, the Company had approximately 4,700 full-time employees. The Company also employs part-time employees.
OTHER INFORMATION
SOURCE OF FUNDS
For a discussion of the Company's sources of funds and maturities of the long-term debt of the Company's subsidiaries, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources," and Note 6 of Notes to Consolidated Financial Statements.
The following table sets forth information concerning annual weighted average interest rates on the Company's borrowed funds:
ANNUAL WEIGHTED AVERAGE INTEREST RATES
YEARS ENDED DECEMBER 31, ------------------------ 1996 1995 1994 ---- ---- ---- Savings accounts, certificates and deposits 5.9% 6.4% 4.6% Short-term borrowings(1) 5.4% 6.0% 4.4% Long-term borrowings(2) 7.3% 7.6% 7.7% Total borrowings 6.9% 7.2% 6.4%
- ---------- (1) Includes all commercial paper and short-term bank loans; does not include cost of maintaining bank credit lines. (2) Includes current maturities of long-term debt and amortization of long-term debt expenses.
TAXATION
For a discussion of tax matters affecting the Company and its operations, see Notes 1 and 8 of Notes to Consolidated Financial Statements.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
For financial information regarding industry segments of the Company, see Note 3 of Notes to Consolidated Financial Statements.
ITEM 2.

ITEM 2. PROPERTIES.
The Company is engaged in the business of providing services that are generally not dependent upon their physical plant. Offices and other properties used by the Company and its subsidiaries are located throughout the United States. Most office locations and other properties are leased on terms and for durations that are reflective of commercial standards in the communities where such offices and other properties are located. A few offices are owned, none of which is material to the Company's financial condition or operations.
The Company believes its properties are adequate and suitable for its business as presently conducted and are adequately maintained. For further information concerning leases, see Note 12 of Notes to Consolidated Financial Statements.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS.
For information concerning purported class action lawsuits filed against the Company and certain of its subsidiaries alleging, inter alia, that such subsidiaries charged excessive premiums on certain lines of insurance, see the descriptions that appear in the second paragraph on page 2 of the Company's Current Report on Form 8-K dated July 13, 1994, the first paragraph on page 14 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, the fourth paragraph on page 9 of the Company's Annual Report on Form 10-K for the year ended December 31, 1995, the first paragraph on page 13 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 and the first paragraph on page 12 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, which descriptions are incorporated by reference herein. A copy of the pertinent paragraphs of such filings is included as an exhibit to this Form 10-K. In December 1996, an additional purported class action was filed in the Circuit Court of Walker County, Alabama, entitled Smith v. Commercial Credit Corporation et al., with allegations, and seeking damages, similar to those in Lawrence and McMahon.
For information concerning a number of actions filed in the Circuit Courts of Alabama, mostly in Barbour County, by individual borrowers who allege that they have been misled or induced to refinance existing loans instead of receiving a new extension of credit, see the description that appears in the paragraph that begins on page 9 and ends on page 10 of the Company's Annual Report on Form 10-K for the year ended December 31, 1995, which description is incorporated by reference herein. A copy of the pertinent paragraph of such filing is included as an exhibit to this Form 10-K. The Company has been named as a defendant in approximately ten additional actions filed in late 1996 and early 1997. For information
concerning a purported class action filed in August 1996 in the Circuit Court for Sumter County, Alabama, containing allegations substantially similar to allegations contained in certain individual actions currently pending and referred to above, see the description that appears in the second paragraph on page 13 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, which description is incorporated by reference herein. A copy of the pertinent paragraph of such filing is included as an exhibit to this Form 10-K. Anderson v. Commercial Credit Corporation was dismissed in February 1997.
In January 1997, a purported class action was filed in the Circuit Court of Marengo County, Alabama, entitled Bridges v. Commercial Credit Corporation, with allegations substantially similar to those in Anderson, and including allegations that the Company charged excessive premiums on certain lines of insurance. Plaintiff seeks unspecified monetary damages. The Company believes it has meritorious defenses to this action and intends to contest the allegations.
Because the nature of the businesses of the Company and its subsidiaries involves the collection of numerous accounts, the validity of liens, accident and other damage or loss claims under many types of insurance, and the construction and interpretation of contracts, the Company and its subsidiaries are plaintiffs and defendants in numerous legal proceedings. In the opinion of the Company's management, none of these actions is expected to have a material adverse effect on the consolidated financial condition of the Company and its subsidiaries.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Pursuant to General Instruction I of Form 10-K, the information required by Item 4 is omitted.
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
All of the outstanding common stock of the Company is owned by CCC Holdings, Inc., which is a wholly owned subsidiary of Travelers Group.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
COMMERCIAL CREDIT COMPANY AND SUBSIDIARIES FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA (IN MILLIONS OF DOLLARS)
- ---------- (1) On December 30, 1994 the Company sold its remaining 50% interest in Commercial Insurance Resources, Inc., the parent of Gulf Insurance Company (Gulf), and accordingly results of operations for 1996 and 1995 do not include Gulf's results. The exclusion of Gulf's operations from 1996 and 1995 results of operations has resulted in a reduction compared to the prior periods in insurance-related revenues and expenses. (See Note 1 of Notes to Consolidated Financial Statements). (2) Included in 1993 results are $34.9 million of equity in the income of The Travelers Corporation (old Travelers) and after-tax investment portfolio gains of $30.3 million. Included in 1992 results are after-tax gains of $7.1 million from the sale of stock of subsidiaries and affiliates and $22.7 million from the sale of a common stock investment in Musicland Stores Corporation. (3) Cumulative effect of accounting changes in 1993 represent a change in accounting for postretirement benefits other than pensions and a change in accounting for postemployment benefits. Cumulative effect of accounting changes in 1992 represent a change in accounting for income taxes.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONSOLIDATED RESULTS OF OPERATIONS
Year Ended December 31, ------------------------------------------------------ ($ in millions) 1996 1995 1994 - -------------------------------------------------------------------------------- Total revenues $1,441.1 $1,392.4 $1,598.0 ================ =============== ===============
Net income $195.8 $219.9 $221.9 ================ =============== ===============
RESULTS OF OPERATIONS
The net income of Commercial Credit Company (the Company) for the year ended December 31, 1996 was $195.8 million compared to $219.9 million in 1995 and $221.9 million in 1994. Total revenues for the year ended December 31, 1996 were $1,441.1 million compared to $1,392.4 in 1995 and $1,598.0 million in 1994.
On December 30, 1994 the Company sold its remaining 50% interest in Commercial Insurance Resources, Inc., the parent of Gulf Insurance Company (Gulf), to an affiliate, The Travelers Indemnity Company, for $150 million in cash and, accordingly, results of operations for 1996 and 1995 do not include Gulf's results. The exclusion of Gulf's operations from 1996 and 1995 results of operations has resulted in a reduction compared to 1994 in insurance-related revenues and expenses. The remaining insurance-related revenues and expenses represent the credit insurance activities of the Company's other insurance subsidiaries, the operations of which are reflected in the Consumer Finance segment.
The following discussion presents in more detail each segment's performance.
CONSUMER FINANCE SERVICES
(1) Revenues and net income in 1996 includes a portion of the gain ($1.2 million and $.7 million, respectively) from the disposition of RCM Capital Management, a California Limited Partnership (RCM).
Despite strong growth in receivables during the second half of 1996, net income in 1996 was lower than 1995, as expected, driven by a higher provision for loan losses reflecting industry trends associated with personal bankruptcies. Consumer finance receivables rose to $8.071 billion at December 31, 1996, a 12% increase from year-end 1995. This growth occurred primarily in real estate loan and personal loan products generated by Commercial Credit's branch office network and through Primerica Financial Services (PFS).
Consumer Finance net income in 1995 increased by 9% over 1994, primarily reflecting a 7% increase in average receivables outstanding highlighted by an 11% increase in personal loan average receivables outstanding, which is the highest margin product line.
While total interest margin increased from the 1995 period due to the increase in the portfolio, average net interest margin declined 15 basis points in 1996 to 8.64% from 8.79% in 1995, reflecting a decline to 15.24% from 15.64% in the average yield, partially offset by a decrease in cost of funds. The decline in average yield was due to the run-off of older, higher yielding real estate loans, growth in lower yielding higher quality first mortgage real estate loans and higher levels of non-accruing personal loans. The average yield on receivables outstanding was 15.41% in 1994, and average net interest margin was 8.76%.
Consumer Finance borrows from the Company's corporate treasury operation, which raises funds externally. For fixed rate loan products, Consumer Finance is charged agreed-upon rates that generally have been set within a narrow range and approximated 7% in 1996, 1995 and 1994. For variable rate loan products, Consumer Finance is charged rates based on prevailing short-term rates. The Company's actual cost of funds may be higher or lower than rates charged to Consumer Finance, with the difference reflected in the Corporate and Other segment.
Delinquencies in excess of 60 days rose to 2.38% at December 31, 1996 compared to 2.14% at December 31, 1995, versus the historically low level of 1.88% in 1994. Correspondingly, the charge-off rate, which had been at record low levels in 1994, moved higher in 1996 and 1995 -- reaching 2.91% in 1996 and 2.28% in 1995 versus 2.08% in 1994. This increase in delinquencies and charge-offs reflects a continued high level of personal bankruptcies, a national trend that shows no indication of reversing itself.
The allowance for credit losses as a percentage of net outstandings was 2.97% at year-end 1996 compared to 2.66% at year-end 1995 and 2.64% at year-end 1994.
The total number of offices at year-end 1996 stood at 859, which includes the addition of 10 offices from the first quarter 1996 acquisition of Hawaii-based Servco Financial Corp. During the year the Company completed its conversion of 27 existing retail offices into $.M.A.R.T.-SM- Solution Centers -- devoted exclusively to servicing the segment's growing business of underwriting real estate loans for PFS.
As of, or for the Year Ended, December 31, ------------------------------------ 1996 1995 1994 ------------------------------------ Allowance for credit losses as a % of net outstandings 2.97% 2.66% 2.64% Charge-off rate for the year 2.91% 2.28% 2.08% 60 + days past due on a contractual basis as a % of gross consumer finance receivables at year end 2.38% 2.14% 1.88%
Insurance subsidiaries of the Company provide credit life, health and property insurance to Consumer Finance customers. Premiums earned were $152.4 million in 1996, $135.8 million in 1995 and $111.6 million in 1994. The increase in premiums year-over-year is the result of growth in receivables and expanded availability of certain products in additional states.
ASSET QUALITY -- Consumer Finance assets totaled approximately $9.0 billion at December 31, 1996, of which $7.9 billion, or 88%, represented the net consumer finance receivables (after accrued interest and the allowance for credit losses). These receivables were predominantly residential real estate-secured loans and personal loans. Receivable quality depends on the likelihood of repayment. The Company seeks to reduce its risks by focusing on individual lending, making a greater number of smaller loans than would be practical in commercial markets, and maintaining disciplined control over the underwriting process. The Company has a geographically diverse portfolio as described in Note 5 of Notes to Consolidated Financial Statements. The Company believes that its loss reserves on the consumer finance receivables are appropriate given current circumstances. If the charge-off and delinquency rates continue to increase, the Company would anticipate increasing its loss reserves.
Of the remaining Consumer Finance assets, approximately $755 million were investments of insurance subsidiaries, including $629 million of fixed income securities and $69 million of short-term investments with a weighted average quality rating of A1.
OUTLOOK -- The Consumer Finance results during 1996 continued to be influenced by a higher level of loan losses, as a result of a higher level of personal bankruptcies. Also, near-term earnings for Consumer Finance are expected to be affected by establishing reserves on new business and a higher level of expenses, as the Company implements additional investments in marketing, training and systems enhancements in order to capitalize on future growth opportunities. Consumer Finance is also affected by the interest rate environment and general economic conditions. Although the lower interest rate environment, should it continue, is not expected to have a material effect on Consumer Finance yields, it has resulted in modest downward pressure on interest rates charged on new receivables secured by real estate. For the Company overall, however, these trends would be offset by the lower costs of funds in such an environment. From time to time low interest rates combined with aggressive competitor pricing may increase the likelihood of prepayments of mortgage loans. This impact has been mitigated by a number of programs instituted by the Company including those designed to attract first mortgage business.
INSURANCE SERVICES
The Insurances Services segment included the operations of Gulf and as previously discussed, on December 30, 1994 the Company sold its 50% interest in the parent of Gulf to an affiliate. The revenues and net income of Gulf for the year ended December 31, 1994 were $314.7 million and $14.8 million (net of minority interest of $14.8 million), respectively.
CORPORATE AND OTHER
(1) Revenues and net income in 1996 includes a portion of the gain ($1.6 million and $1.2 million, respectively) from the disposition of RCM.
The increase in Corporate and Other net expense (before the gain on disposition of RCM) for 1996 compared to 1995 is primarily attributable to increases in interest costs borne at the corporate level.
The increase in Corporate and Other in 1995 compared to 1994 is primarily attributable to increased interest costs borne at the corporate level resulting from higher average short-term borrowing rates in 1995 when compared to 1994 as well as a shift in debt mix to higher levels of senior long-term debt over the course of 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company issues commercial paper directly to investors and maintains unused credit availability under committed revolving credit agreements at least equal to the amount of commercial paper outstanding. The Company may borrow under its revolving credit facilities at various interest rate options and compensates the banks for the facilities through commitment fees.
Travelers Group Inc. (TRV), the Company and The Travelers Insurance Company (TIC) have an agreement with a syndicate of banks to provide $1.0 billion of revolving credit, to be allocated to any of TRV, the Company or TIC. The participation of TIC in this agreement is limited to $250 million. The revolving credit facility consists of a 5-year revolving credit facility which expires in June 2001. At December 31, 1996, $250 million was allocated to TRV, $650 million was allocated to the Company and $100 million to TIC. At December 31, 1996, the Company also had committed and available revolving credit facilities on a stand-alone basis of $1.5 billion, which expire in 2001.
As of December 31, 1996, the Company had unused credit availability of $2.150 billion under 5-year revolving credit facilities including the $650 million referred to above.
During 1996 and through March 4, 1997 CCC completed the following long-term debt offerings leaving $550 million available for debt offerings and $400 million available for trust preferred security offerings under its shelf registration statements:
o 5 7/8% Notes due January 15, 2003...............$200 million o 5.55% Notes due February 15, 2001...............$200 million o 6.625% Notes due November 15, 2006..............$200 million o 6.20% Notes due November 15, 2001...............$200 million
In addition to the long-term debt offerings above, in October 1996 the Company, through a private placement, issued $200 million of 6.45% Notes due October 18, 2006 which by their terms can be put to the Company at par on October 18, 1999.
The Company is limited by covenants in its revolving credit agreements as to the amount of dividends and advances that may be made to its parent or its affiliated companies. At December 31, 1996, the Company would have been able to remit $307.8 million to its parent under its most restrictive covenants or regulatory requirements.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
In June 1996, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 125, (FAS No. 125) "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" FAS No. 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. These standards are based on consistent application of a financial-components approach that focuses on control. Under that approach, after a transfer of financial assets, an entity recognizes the financial assets when control has been surrended, and derecognizes liabilities when extinguished. FAS No. 125 provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. The requirements of FAS No. 125 would be effective for transfers that are secured borrowings. The requirements of FAS No. 125 would be effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, and is to be applied prospectively. However, in December 1996 the FASB issued FAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125" which delays until January 1, 1998 the effective date for certain provisions. Earlier or retroactive application is not permitted. The adoption of the provisions of this statement effective January 1, 1997 will not have a material impact on results of operations, financial condition or liquidity and the Company is currently evaluating the impact of the provisions whose effective date has been delayed until January 1, 1998.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Consolidated Financial Statements and Schedules on page hereof. There is also incorporated by reference herein in response to this Item the Company's Consolidated Financial Statements and the notes thereto and the material under the caption "Quarterly Financial Data (Unaudited)" set forth in the Consolidated Financial Statements.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III --------
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Pursuant to General Instruction I of Form 10-K, the information required by Item 10 is omitted.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION.
Pursuant to General Instruction I of Form 10-K, the information required by Item 11 is omitted.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Pursuant to General Instruction I of Form 10-K, the information required by Item 12 is omitted.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Pursuant to General Instruction I of Form 10-K, the information required by Item 13 is omitted.
PART IV -------
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as a part of the report:
(1) Financial Statements. See Index to Consolidated Financial Statements and Schedules on page hereof.
(2) Financial Statement Schedules. See Index to Consolidated Financial Statements and Schedules on page hereof.
(3) Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K:
On October 15, 1996, the Company filed a Current Report on Form 8-K dated October 14, 1996, reporting under Item 5 thereof the results of its operations for the three months and nine months ended September 30, 1996.
On November 14, 1996, the Company filed a Current Report on Form 8-K dated November 12, 1996, filing certain exhibits under Item 7 thereof relating to the offer and sale of the Company's 6 5/8% Notes due November 15, 2006.
On November 25, 1996, the Company filed a Current Report on Form 8-K dated November 21, 1996, filing certain exhibits under Item 7 thereof relating to the offer and sale of the Company's 6.20% Notes due November 15, 2001.
No other reports on Form 8-K have been filed by the Company during the last quarter of the period covered by this report; however, on January 21, 1997, the Company filed a Current Report on Form 8-K, dated January 21, 1997, reporting under Item 5 thereof the results of its operations for the three months and year ended December 31, 1996.
EXHIBIT INDEX ------------- EXHIBIT FILING NUMBER DESCRIPTION OF EXHIBIT METHOD - ------ ---------------------- ------
3.01 Restated Certificate of Incorporation of Commercial Credit Company (the "Company"), included in Certificate of Merger of CCC Merger Company into the Company; Certificate of Ownership and Merger merging CCCH Acquisition Corporation into the Company; and Certificate of Ownership and Merger merging RDI Service Corporation into the Company, incorporated by reference to Exhibit 3.01 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (File No. 1-6594).
3.02 By-laws of the Company, as amended May 14, 1990, incorporated by reference to Exhibit 3.02.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (File No. 1-6594).
4.01.1 Indenture, dated as of December 1, 1986 (the "Indenture"), between the Company and Citibank, N.A., relating to the Company's debt securities, incorporated by reference to Exhibit 4.01 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1988 (File No. 1-6594).
4.01.2 First Supplemental Indenture, dated as of June 13, 1990, to the Indenture, incorporated by reference to Exhibit 1 to the Company's Current Report on Form 8-K dated June 13, 1990 (File No. 1-6594).
The total amount of securities authorized pursuant to any other instrument defining rights of holders of long-term debt of the Company does not exceed 10% of the total assets of the Company and its consolidated subsidiaries. The Company will furnish copies of any such instrument to the Securities and Exchange Commission upon request.
10.01.1 Five Year Credit Agreement dated as of December 16, 1994 among the Company, the Banks party thereto and Morgan Guaranty Trust Company of New York, as Agent, incorporated by reference to Exhibit 10.01 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (File No. 1-6594).
10.01.2 Amended and Restated Credit Agreement dated as of June 28, 1996 among the Company, the Banks party thereto and Morgan Guaranty Trust Company of New York, as Agent, incorporated by reference to Exhibit 10.02 to the Company's Quarterly Report on Form 10-Q for
EXHIBIT FILING NUMBER DESCRIPTION OF EXHIBIT METHOD - ------ ---------------------- ------
the fiscal quarter ended June 30, 1996 (File No. 1-6594) (the "Company's June 30, 1996 10-Q").
12.01 Computation of Ratio of Earnings to Fixed Charges. Electronic
21.01 Pursuant to General Instruction I of Form 10-K, the list of subsidiaries of the Company is omitted.
23.01 Consent of KPMG Peat Marwick LLP, Independent Electronic Certified Public Accountants.
27.01 Financial Data Schedule. Electronic
99.01 The second paragraph on page 2 of the Company's Electronic Current Report on Form 8-K dated July 13, 1994, the first paragraph on page 14 of the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1995, the fourth paragraph on page 9 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, the first paragraph on page 13 of the Company's June 30, 1996 10-Q and the first paragraph on page 12 of the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1996.
99.02 The paragraph that begins on page 9 and ends on page Electronic 10 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995.
99.03 The second paragraph on page 13 of the Company's June Electronic 30, 1996 10-Q.
Copies of any of the exhibits referred to above will be furnished at a cost of $.25 per page to security holders who make written request therefor to Patricia A. Rouzer, Corporate Communications and Investor Relations, Commercial Credit Company, 300 St. Paul Place, Baltimore, Maryland 21202.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 26th day of March, 1997.
COMMERCIAL CREDIT COMPANY (Registrant)
By: /s/ Robert B. Willumstad ------------------------------------- Robert B. Willumstad, Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on the 26th day of March, 1997.
SIGNATURE TITLE --------- -----
/s/ Robert B. Willumstad Chairman of the Board, Chief Executive Officer - ----------------------------- (Principal Executive Officer) and Director Robert B. Willumstad
/s/ William R. Hofmann Vice President and Chief Financial Officer - ----------------------------- (Principal Financial Officer) William R. Hofmann
/s/ Irwin Ettinger - ----------------------------- Executive Vice President, Chief Accounting Irwin Ettinger Officer (Principal Accounting Officer) and Director
/s/ James Dimon Director - ----------------------------- James Dimon
/s/ Robert I. Lipp Director - ----------------------------- Robert I. Lipp
COMMERCIAL CREDIT COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES*
- --------------------------------------------------------------------------------
PAGE HEREIN ------
Independent Auditors' Report
Consolidated Statement of Income for the year ended December 31, 1996, 1995 and 1994
Consolidated Statement of Financial Position at December 31, 1996 and 1995
Consolidated Statement of Changes in Stockholder's Equity for the year ended December 31, 1996, 1995 and 1994
Consolidated Statement of Cash Flows for the year ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements -
Schedules:
Schedule I - Condensed Financial Information of Registrant (Parent Company only) -
*Schedules not listed are omitted as not applicable or not required by Regulation S-X.
Independent Auditors' Report ----------------------------
The Board of Directors and Stockholder Commercial Credit Company:
We have audited the consolidated financial statements of Commercial Credit Company and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Commercial Credit Company and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP Baltimore, Maryland January 17, 1997
COMMERCIAL CREDIT COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (IN MILLIONS OF DOLLARS)
Year Ended December 31, 1996 1995 1994 - -------------------------------------------------------------------------------- REVENUES Finance related interest and other charges $1,163.2 $1,119.2 $1,029.8 Insurance premiums 152.4 135.8 387.6 Interest and dividends 54.7 49.9 75.4 Other income 70.8 87.5 105.2 - -------------------------------------------------------------------------------- Total revenues 1,441.1 1,392.4 1,598.0 - -------------------------------------------------------------------------------- EXPENSES Interest 475.5 463.5 402.8 Policyholder benefits and claims 49.5 50.0 238.1 Insurance underwriting, acquisition and operating 27.9 26.7 104.9 Non-insurance compensation and benefits 184.0 196.0 183.9 Provision for consumer finance credit losses 260.0 171.0 151.6 Other operating 147.2 151.2 152.8 - -------------------------------------------------------------------------------- Total expenses 1,144.1 1,058.4 1,234.1 - -------------------------------------------------------------------------------- Income before income taxes and minority interest 297.0 334.0 363.9 Provision for income taxes 101.2 114.1 127.2 - -------------------------------------------------------------------------------- Income before minority interest 195.8 219.9 236.7 Minority interest, net of income taxes - - (14.8) - -------------------------------------------------------------------------------- Net income $ 195.8 $ 219.9 $ 221.9 ================================================================================
See Notes to Consolidated Financial Statements.
COMMERCIAL CREDIT COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION (IN MILLIONS OF DOLLARS)
December 31, 1996 1995 - -------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $ 11.4 $ 30.1 Investments: Fixed maturities: Available for sale, at market value 809.1 802.9 Equity securities at market value (cost $45.6 and $26.5) 46.4 28.4 Mortgage loans and real-estate held for sale 139.8 185.3 Short-term and other 76.9 28.6 - -------------------------------------------------------------------------------- Total investments 1,072.2 1,045.2 - -------------------------------------------------------------------------------- Consumer finance receivables 8,123.8 7,285.0 Allowance for losses (239.3) (192.5) - -------------------------------------------------------------------------------- Net consumer finance receivables 7,884.5 7,092.5 Other receivables 123.0 164.4 Deferred policy acquisition costs 9.3 16.1 Cost of acquired businesses in excess of net assets 106.6 98.2 Other assets 152.6 188.0 - -------------------------------------------------------------------------------- Total assets $9,359.6 $8,634.5 - -------------------------------------------------------------------------------- LIABILITIES Certificates of deposit $ 102.3 $ 98.3 Short-term borrowings 1,481.6 1,394.2 Long-term debt 5,750.0 5,200.0 - -------------------------------------------------------------------------------- Total debt 7,333.9 6,692.5 Insurance policy and claims reserves 402.9 392.8 Accounts payable and other liabilities 348.3 386.3 - -------------------------------------------------------------------------------- Total liabilities 8,085.1 7,471.6 - -------------------------------------------------------------------------------- STOCKHOLDER'S EQUITY Common stock ($.01 par value; authorized shares: 1,000; share issued: 1) -- -- Additional paid-in-capital 164.1 163.5 Retained earnings 1,115.2 984.4 Unrealized gain (loss) on investment securities and other, net (4.8) 15.0 - -------------------------------------------------------------------------------- Total stockholder's equity 1,274.5 1,162.9 ================================================================================ Total liabilities and stockholder's equity $9,359.6 $8,634.5 ================================================================================
See Notes to Consolidated Financial Statements.
COMMERCIAL CREDIT COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY (IN MILLIONS OF DOLLARS)
See Notes to Consolidated Financial Statements
COMMERCIAL CREDIT COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (IN MILLIONS OF DOLLARS)
See Notes to Consolidated Financial Statements.
COMMERCIAL CREDIT COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------
BASIS OF PRESENTATION
PRINCIPLES OF CONSOLIDATION - Commercial Credit Company (the Company) is a wholly owned subsidiary of CCC Holdings, Inc. which is a wholly owned subsidiary of Travelers Group Inc. (hereinafter referred to as TRV). The consolidated financial statements include the accounts of the Company and its subsidiaries.
Unconsolidated entities in which the Company has at least a 20% interest are accounted for on the equity method. The minority interest in 1994 represents The Travelers Corporation's (old Travelers) interest in Gulf Insurance Company (Gulf). Significant intercompany transactions and balances have been eliminated.
On December 30, 1994 the Company sold its remaining 50% interest in Commercial Insurance Resources, Inc., the parent of Gulf to an affiliate, The Travelers Indemnity Company, for $150 million in cash and accordingly only the results of operations for 1994 include Gulf's results. The exclusion of Gulf's operations from 1996 and 1995 results of operations has resulted in a reduction compared to the 1994 period in insurance-related revenues and expenses. The revenues and net income of Gulf for the year ended December 31, 1994 were $314.7 million and $14.8 million (net of minority interest of $14.8 million), respectively. The remaining insurance-related revenues and expenses represent the credit insurance activities of the Company's other insurance subsidiaries, the operations of which are reflected in the Consumer Finance segment.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Certain reclassifications have been made to prior years' financial statements to conform to the current year's presentation.
Notes to Consolidated Financial Statements (continued)
CHANGES IN ACCOUNTING PRINCIPLES
FAS 121. Effective January 1, 1996 the Company adopted Statement of Financial Accounting Standards (FAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement establishes accounting standards for the impairment of long-lived assets and certain identifiable intangibles to be disposed of. This statement requires a write down to fair value when long-lived assets to be disposed of (e.g. real estate held for sale) be carried at the lower of cost of fair value less cost to sell, and does not allow such assets to be depreciated. The adoption of this standard did not have a material impact on the Company's financial condition, results of operations or liquidity.
FAS 123. In October 1995, the Financial Accounting Standards Board (FASB) issued FAS No. 123, "Accounting for Stock-Based Compensation." FAS No. 123 establishes financial accounting and reporting standards for stock-based employee compensation plans as well as transactions in which an entity issues its equity instruments to acquire goods or services from non-employees. This statement defines a fair value-based method of accounting for employee stock options or similar equity instruments, and encourages all entities to adopt this method of accounting for all employee stock compensation plans. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (Opinion 25). Entities electing to remain with the accounting method prescribed in Opinion 25 must make pro forma disclosures of net income and earnings per share, as if the fair value-based method of accounting defined by FAS No. 123 had been applied. FAS No. 123 is applicable to fiscal years beginning after December 15, 1995. The Company along with affiliated companies participates in stock option and other stock-based incentive plans sponsored by TRV. The Company has elected to continue to account for its stock-based compensation plans using the accounting method prescribed by Opinion 25 and has included in the Notes to Consolidated Financial Statements the pro forma disclosures required by FAS No. 123. (See Note 10).
ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS include cash on hand and short-term highly liquid investments with original maturities of three months or less, other than those held for sale in the ordinary course of business. These short-term investments are carried at cost plus accrued interest, which approximates market value.
INVESTMENTS are owned principally by the insurance subsidiaries. Fixed maturities include bonds, notes and redeemable preferred stocks. Equity securities include common and non-redeemable preferred stocks. Fixed maturity securities classified as "available for sale" and equity securities are carried at market values that are based primarily on quoted market prices or if quoted market prices are not available, discounted expected cash flows using market rates commensurate with the credit quality and maturity of the investment. The difference between amortized cost and market values of such securities net of applicable income taxes is reflected as a component of stockholder's equity. Provisions are made to write down the value of fixed
Notes to Consolidated Financial Statements (continued)
maturity securities for declines in value that are other than temporary. Mortgage loans and real-estate held for sale, and short-term investments are carried at cost, which approximates fair value. Realized gains and losses on sales of investments and unrealized losses considered to be other than temporary, determined on a specific identification basis, are included in other income.
THE COST OF ACQUIRED BUSINESSES IN EXCESS OF NET ASSETS (goodwill) is being amortized on a straight-line basis principally over a 40-year period. The carrying amount is regularly reviewed for indicators of impairment in value, which in the view of management are other than temporary. Impairments would be recognized in operating results if a permanent diminution in value is deemed to have occurred.
INCOME TAXES have been provided for in accordance with the provisions of FAS No. 109, "Accounting for Income Taxes". The Company and its wholly owned domestic non-life insurance subsidiaries file a consolidated federal income tax return with TRV. A life insurance subsidiary files a separate federal income tax return. Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and their recorded amounts for financial reporting purposes.
Income taxes are not provided for on the Company's life insurance subsidiary's retained earnings designated as "policyholders' surplus," because such taxes will become payable only to the extent such retained earnings are distributed as a dividend or exceed limits prescribed by federal law. Distributions are not contemplated from this portion of the life insurance companies' retained earnings, which aggregated $39.5 million (subject to a tax effect of $13.8 million) at December 31, 1996.
FINANCE RELATED INTEREST AND OTHER CHARGES are recognized as income using the constant yield method. Allowances for losses are established by direct charges to income in amounts sufficient to maintain the allowance at a level management determines to be adequate to cover losses in the portfolio. The allowance fluctuates based upon continual review of the loan portfolio and current economic conditions. For financial reporting purposes, finance receivables are considered delinquent when they are 60 days or more contractually past due. Income stops accruing on finance receivables when they are 90 days contractually past due. If payments are made on a finance receivable that is not accruing income, and the receivable is no longer 90 days contractually past due, the accrual of income resumes. Finance receivables are charged against the allowance for losses when considered uncollectible. Personal loans are considered uncollectible when payments are six months contractually past due and six months past due on a recency of payment basis. Loans that are twelve months contractually past due regardless of recency of payment are charged off. Recoveries on losses previously charged to the allowance are credited to the allowance at the time of recovery. Consideration of whether to proceed with foreclosure on loans secured by real estate begins when a loan is 60 days past due on a contractual basis. Real estate credit losses are recognized when the title to the property is obtained.
Notes to Consolidated Financial Statements (continued)
Fees received and direct costs incurred for the origination of loans are deferred and amortized over the contractual lives of the loans as part of interest income. The remaining unamortized balances are reflected in interest income at the time that the loans are paid in full, renewed or charged off.
PREMIUMS from short-duration insurance contracts are earned over the related contract period. Short-duration contracts include primarily property and casualty, credit life and accident and health credit policies. Benefits and expenses are associated with premiums by means of the provision for future policy benefits, unearned premiums and the deferral and amortization of policy acquisition costs.
DEFERRED POLICY ACQUISITION COSTS represent the costs of acquiring new business, principally commissions, certain underwriting and agency expenses and the cost of issuing policies. Acquisition costs of the life insurance subsidiary are amortized over the premium-paying periods of the related policies, in proportion to the ratio of the annual premium revenue to the total anticipated premium revenue. For certain property and casualty lines, acquisition costs (commissions and premium taxes) have been deferred to the extent recoverable from future earned premiums and anticipated investment income and are amortized ratably over the terms of the related policies. Deferred policy acquisition costs are reviewed to determine if they are recoverable from future income, including investment income, and if not recoverable are charged to expense. All other acquisition expenses are charged to operations as incurred.
INSURANCE POLICY AND CLAIMS RESERVES represent liabilities for future insurance policy benefits. Reserves for losses of the life insurance company are based on claims experience, actual claims reported and estimates of claims incurred but not reported. Assumptions are based on historical company experience, adjusted to provide for possible adverse deviation. These estimates are periodically reviewed and compared with actual experience and industry standards, and may be revised if it is determined that future experience will differ substantially from that previously assumed. Policy and contract claims include provisions for reported and unreported losses. Reserves for property and casualty insurance losses represent the estimated ultimate unpaid cost of all incurred property and casualty claims. Since the reserves are based on estimates, the ultimate liability may be more or less than such reserves. The effects of changes in such estimated reserves are included in the results of operations in the period in which the estimates are changed.
FINANCIAL INSTRUMENTS - DISCLOSURES ABOUT FAIR VALUE - Included in the Notes to Consolidated Financial Statements are various disclosures relating to the methods and assumptions used to estimate fair value of each material type of financial instrument. The carrying value of short-term financial instruments approximates fair value because of the relatively short period of time between the origination of the instruments and their expected realization. The carrying value of receivables and payables arising in the ordinary course of business approximates fair market
Notes to Consolidated Financial Statements (continued)
value. The fair value assumptions were based upon subjective estimates of market conditions and perceived risks of the financial instruments at a certain point in time. Disclosed fair values for financial instruments do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Potential taxes and other expenses that would be incurred in an actual sale or settlement are not reflected in amounts disclosed.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
In June 1996, the FASB issued FAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." FAS No. 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. These standards are based on consistent application of a financial-components approach that focuses on control. Under that approach, after a transfer of financial assets, an entity recognizes the financial assets when control has been surrended, and derecognizes liabilities when extinguished. FAS No. 125 provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. The requirements of FAS No. 125 would be effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, and is to be applied prospectively. However, in December 1996 the FASB issued FAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125" which delays until January 1, 1998 the effective date for certain provisions. Earlier or retroactive application is not permitted. The adoption of the provisions of this statement effective January 1, 1997 will not have a material impact on results of operations, financial condition or liquidity and the Company is currently evaluating the impact of the provisions whose effective date has been delayed until January 1, 1998.
2. SALES OF STOCK OF SUBSIDIARIES AND AFFILIATES ---------------------------------------------
As discussed in Note 1, on December 30, 1994 the Company sold its 50% interest in Commercial Insurance Resources, Inc. (CIRI), the parent of Gulf to an affiliate for $150 million. This amount exceeded the Company's investment by $10.2 million and such excess was treated as an adjustment to additional-paid-in capital.
On December 31, 1993, TRV acquired the approximately 73% it did not already own of The Travelers Corporation (old Travelers), by means of a merger of old Travelers into TRV. As a result of the merger, the Company's investment in the common stock of old Travelers, which through that date had been carried on the equity basis of accounting, was exchanged for shares of common stock of TRV. During 1994, all of the Company's shares of the TRV common stock were exchanged for 2,655 shares of Cumulative Adjustable Rate Preferred Stock Series Y of TRV, with a liquidation value of $100,000 per share, which is redeemable at the option of the Company at certain times and callable by TRV at certain times. The preferred stock had a value equal to the market value of the common shares at the time the exchange was agreed upon. The market value exceeded the Company's carrying value by $58.6 million and such
Notes to Consolidated Financial Statements (continued)
excess was treated as an adjustment to additional-paid-in capital. Subsequently 550 shares of preferred stock were distributed to TRV as a dividend. At December 31, 1996 and 1995, this investment is included in "fixed maturities - available for sale" and is reflected at a carrying amount of $210.5 million. During 1996, 1995 and 1994, the Company recorded $10.2 million, $10.2 million and $8.7 million, respectively, of dividend income from this investment in common and preferred stock.
3. BUSINESS SEGMENT INFORMATION ----------------------------
The Company, through its subsidiaries, is primarily engaged in the following businesses: Consumer Finance Services and prior to 1995, Insurance Services.
(millions) 1996 1995 1994 ---------- ---------- ---------- REVENUES Consumer Finance Services $ 1,408.9 $ 1,351.3 $ 1,236.2 Insurance Services -- -- 314.7 Corporate and Other 32.2 41.1 47.1 ---------- ---------- ---------- $ 1,441.1 $ 1,392.4 $ 1,598.0 ========== ========== ==========
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST Consumer Finance Services $ 340.5 $ 376.2 $ 354.1 Insurance Services -- -- 40.0 Corporate and Other (43.5) (42.2) (30.2) ---------- ---------- ---------- $ 297.0 $ 334.0 $ 363.9 ========== ========== ========== NET INCOME Consumer Finance Services $ 221.8 $ 245.2 $ 225.6 Insurance Services (after minority interest of $14.8 in 1994) -- -- 14.8 Corporate and Other (26.0) (25.3) (18.5) ---------- ---------- ---------- $ 195.8 $ 219.9 $ 221.9 ========== ========== ========== IDENTIFIABLE ASSETS Consumer Finance Services $ 8,951.8 $ 8,110.4 $ 7,640.2 Corporate and Other 407.8 524.1 586.6 ---------- ---------- ---------- $ 9,359.6 $ 8,634.5 $ 8,226.8 ========== ========== ==========
The Consumer Finance Services segment includes consumer lending (including secured and unsecured personal loans, real estate-secured loans and consumer goods financing) and credit cards. Also included in this segment are credit-related insurance services provided through American Health and Life Insurance Company (AHL) and its affiliates.
Notes to Consolidated Financial Statements (continued)
Insurance Services includes the operations of Gulf through its sale on December 30, 1994 (see Note 2). Gulf provides property-casualty insurance (automobile liability and physical damage, workers' compensation, other liability, fire and related homeowners' insurance and commercial multiple peril insurance) as well as directors' and officers' and errors and omissions policies.
Corporate and Other consists of corporate staff and treasury operations, a hotel investment included in real-estate held for sale, the Company's investment in TRV's securities and certain corporate income and expenses that have not been allocated to the operating subsidiaries. Also included in the segment is the non-affiliated insurance business of AHL.
Cumulative effect of accounting changes, and capital expenditures for property, plant and equipment and related depreciation expense are not material to any of the business segments. Intersegment sales and international operations are not significant.
For gains and special charges included in each segment, see "Results of Operations" discussion in Management's Discussion and Analysis of Financial Condition and Results of Operations.
4. INVESTMENTS -----------
Fair values of investments in fixed maturities are based on quoted market prices or dealer quotes or, if quoted market prices are not available, discounted expected cash flows using market rates commensurate with the credit quality and maturity of the investment.
Notes to Consolidated Financial Statements (continued)
The amortized cost and estimated market values of investments in fixed maturities classified as available for sale were as follows:
Notes to Consolidated Financial Statements (continued)
The amortized cost and estimated market value at December 31, 1996 by contractual maturity are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or pre-payment penalties.
(millions) Estimated Amortized Market Cost Value ------------ ------------ Due in one year or less $ 30.7 $ 30.8 Due after one year through five years 81.5 81.6 Due after five years through ten years 143.2 140.8 Due after ten years 149.7 147.2 ------------ ------------ 405.1 400.4 Mortgage-backed securities 201.2 198.2 Investment in Series Y Preferred Stock of TRV 210.5 210.5 ------------ ------------ $816.8 $809.1 ============ ============
Realized gains and losses on fixed maturities for the year ended December 31, were as follows:
(millions) 1996 1995 1994 ----------- ------------ ----------- REALIZED GAINS Pre-tax $9.0 $9.5 $3.1 ----------- ------------ ----------- After-tax $5.8 $6.2 $2.0 ----------- ------------ -----------
REALIZED LOSSES Pre-tax -- $1.4 $0.4 ----------- ------------ ----------- After-tax -- $0.9 $0.3 ----------- ------------ -----------
5. CONSUMER FINANCE RECEIVABLES ----------------------------
Consumer finance receivables, net of unearned finance charges of $635.3 million and $690.2 million at December 31, 1996 and 1995, respectively, consisted of the following:
Notes to Consolidated Financial Statements (continued)
An analysis of the allowance for credit losses on consumer finance receivables at December 31, was as follows:
Contractual maturities of receivables before deducting unearned finance charges and excluding accrued interest were as follows:
Notes to Consolidated Financial Statements (continued)
Contractual terms average 16 years on real estate-secured loans (excluding call provisions) and 4 years on personal loans. Experience has shown that a substantial amount of the receivables will be renewed or repaid prior to contractual maturity dates. Accordingly, the foregoing tabulation should not be regarded as a forecast of future cash collections.
The Company has a geographically diverse consumer finance loan portfolio. At December 31, the distribution by state was as follows:
1996 1995 ----------- -----------
Ohio 11% 12% North Carolina 9% 10% Pennsylvania 6% 7% California 6% 5% South Carolina 6% 6% Texas 5% 5% Tennessee 5% 5% All other states* 52% 50% ----------- ----------- Total 100% 100% =========== ===========
* None of the remaining states individually accounts for more than 5% of total consumer finance receivables.
The estimated fair value of the consumer finance receivables portfolio depends on the methodology selected to value such portfolio (i.e., exit value versus entry value). Exit value represents a valuation of the portfolio based upon sales of comparable portfolios which takes into account the value of customer relationships and the current level of funding costs. Under the exit value methodology, the estimated fair value of the receivables portfolio at December 31, 1996 is approximately $671 million above the recorded carrying value. Entry value is determined by comparing the portfolio yields to the yield at which new loans are being originated. Under the entry value methodology, the estimated fair value of the receivables portfolio at December 31, 1996 is approximately equal to the aggregate carrying value due to the increase in variable rate receivables whose rates are periodically reset and the fact that the average yield on fixed rate receivables is approximately equal to that on new fixed rate loans made at year-end 1996. Fair values included in Note 11 are based on the exit value methodology.
Notes to Consolidated Financial Statements (continued)
6. DEBT ----
Short-term borrowings
At December 31, short-term borrowings and weighted average interest rates consisted of:
1996 1995 -------------------------- -------------------------- (millions) OUTSTANDING INTEREST RATE Outstanding Interest Rate ----------- ------------- ----------- ------------- Commercial paper $1,481.6 5.55% $1,394.2 5.86%
The Company issues commercial paper directly to investors and maintains unused credit availability under its bank lines of credit at least equal to the amount of its outstanding commercial paper. The Company may borrow under its revolving credit facilities at various interest rate options and compensates the banks for the facilities through commitment fees.
TRV, the Company and The Travelers Insurance Company (TIC) have an agreement with a syndicate of banks to provide $1.0 billion of revolving credit, to be allocated to any of the TRV, the Company or TIC. The participation of TIC in this agreement is limited to $250 million. The revolving credit facility consists of a 5-year revolving credit facility which expires in June 2001. At December 31, 1996, $250 million was allocated to TRV, $650 million was allocated to the Company and $100 million was allocated to TIC. At December 31, 1996 there were no borrowings outstanding under this facility.
At December 31, 1996, the Company also had committed and available revolving credit facilities on a stand-alone basis of $1.5 billion, which expire in 2001.
The carrying value of short-term borrowings approximates fair value.
Long-term debt
Long-term debt, including its current portion, and final maturity dates were as follows at December 31:
(millions) 1996 1995 ---- ----
6 3/8% Notes due 1996 -- 200.0 7 3/8% Notes due 1996 -- 150.0 8% Notes due 1996 -- 100.0 6 3/4% Notes due 1997 200.0 200.0 8 1/8% Notes due 1997 150.0 150.0 5.70% Notes due 1998 100.0 100.0 5 1/2% Notes due 1998 100.0 100.0 8 1/2% Notes due 1998 100.0 100.0
Notes to Consolidated Financial Statements (continued)
6.70% Notes due 1999 150.0 150.0 10% Notes due 1999 100.0 100.0 9.6% Notes due 1999 100.0 100.0 6% Notes due 2000 100.0 100.0 5 3/4% Notes due 2000 200.0 200.0 6 1/8% Notes due 2000 100.0 100.0 6% Notes due 2000 150.0 150.0 6 3/4% Notes due 2000 200.0 200.0 5.55% Notes due 2001 200.0 -- 6.20% Notes due 2001 200.0 -- 8 1/4% Notes due 2001 300.0 300.0 6 3/8% Notes due 2002 200.0 200.0 6 7/8% Notes due 2002 200.0 200.0 7 3/8% Notes due 2002 200.0 200.0 5 7/8% Notes due 2003 200.0 -- 5.9% Notes due 2003 200.0 200.0 7 7/8% Notes due 2004 200.0 200.0 6 1/8% Notes due 2005 200.0 200.0 6 1/2% Notes due 2005 200.0 200.0 7 3/8% Notes due 2005 200.0 200.0 7 3/4% Notes due 2005 200.0 200.0 6.45% Notes due 2006 (a) 200.0 -- 6 5/8% Notes due 2006 200.0 -- 10% Notes due 2008 150.0 150.0 10% Debentures due 2009 100.0 100.0 8.7% Debentures due 2009 (b) 150.0 150.0 8.7% Debentures due 2010 (c) 100.0 100.0 6 5/8% Notes due 2015 (d) 200.0 200.0 7 7/8% Notes due 2025 (e) 200.0 200.0 --------- -------- $5,750.0 $5,200.0 ========= ========
(a) Redeemable at option of holder on October 18, 1999 at face amount. (b) Redeemable at option of holder on June 15, 1999 at face amount (c) Redeemable at option of holder on June 15 of each of 1999, 2002 or 2005 at face amount. (d) Redeemable at option of holder on June 1, 2002 at face amount. (e) Redeemable at option of holder on February 1, 2005 at face amount.
Notes to Consolidated Financial Statements (continued)
Aggregate annual maturities for the next five years on long-term debt obligations (based on final maturity dates) are as follows:
(millions) 1997 $350 1998 $300 1999 $350 2000 $750 2001 $700
The fair value of the Company's long-term debt is estimated based on the quoted market price for the same or similar issues or on current rates offered to the Company for debt of the same remaining maturities. At December 31, 1996 the aggregate fair value of the Company's long-term debt was approximately $5,888 million.
7. REINSURANCE -----------
The Company's insurance subsidiaries participate in reinsurance in order to limit losses, to reduce exposure on large risks and to provide additional capacity for future growth. This is accomplished through various plans of reinsurance, primarily coinsurance, modified coinsurance and yearly renewable term. Reinsurance ceded arrangements do not discharge the insurance subsidiaries or the Company as the primary insurer. Reinsurance amounts included in the Consolidated Statement of Income were as follows:
CEDED TO GROSS OTHER NET (millions) AMOUNT COMPANIES AMOUNT -------- --------- --------
Year ended December 31, 1996 ---------------------------- Premiums Credit life insurance $ 38.5 $ -- $ 38.5 Credit accident and health insurance 57.4 -- 57.4 Credit property and other 84.0 (27.5) 56.5 -------- -------- -------- $ 179.9 $ (27.5) $ 152.4 ======== ======== ======== Claims incurred $ 52.3 $ (2.8) $ 49.5 ======== ======== ========
Notes to Consolidated Financial Statements (continued)
Ceded to Gross Other Net (millions) Amount Companies Amount -------- --------- --------
Year ended December 31, 1995 ---------------------------- Premiums Credit life insurance $ 45.5 $ (5.8) $ 39.7 Credit accident and health insurance 62.7 (6.8) 55.9 Credit property and other 135.5 (95.3) 40.2 -------- -------- -------- $ 243.7 $ (107.9) $ 135.8 ======== ======== ======== Claims incurred $ 64.3 $ (14.3) $ 50.0 ======== ======== ========
Year ended December 31, 1994 ---------------------------- Premiums Credit life insurance $ 45.7 $ (7.6) $ 38.1 Credit accident and health insurance 97.8 (48.9) 48.9 Property and casualty insurance 596.4 (295.8) 300.6 -------- -------- -------- $ 739.9 $ (352.3) $ 387.6 ======== ======== ======== Claims incurred $ 374.1 $ (136.0) $ 238.1 ======== ======== ========
8. INCOME TAXES ------------
The provision for income taxes (before minority interest) for the year ended December 31, was as follows:
(millions) 1996 1995 1994 ----------- ----------- ------------
CURRENT: Federal $103.4 $116.6 $121.4 Foreign - 3.3 4.6 State 7.9 8.8 8.9 ----------- ----------- ------------ 111.3 128.7 134.9 ----------- ----------- ------------
DEFERRED: Federal (9.2) (10.9) (2.4) Foreign - (3.3) (4.4) State (0.9) (0.4) (0.9) ----------- ----------- ------------ (10.1) (14.6) (7.7) ----------- ----------- ------------ Total $101.2 $114.1 $127.2 =========== =========== ============
Notes to Consolidated Financial Statements (continued)
The reconciliation of the federal statutory income tax rate to the Company's effective income tax rate for the year ended December 31, was as follows:
1996 1995 1994 ----------- ------------- -----------
Federal statutory rate 35.0% 35.0% 35.0% Other, net (0.9) (0.8) (0.1) ----------- ----------- ------------ Effective income tax rate 34.1% 34.2% 34.9% =========== ============= ===========
Deferred income taxes at December 31, related to the following:
(millions)
1996 1995 ------------- ------------ DEFERRED TAX ASSETS: Bad debt reserves $84.3 $69.4 Differences in computing policy reserves 13.9 15.2 Employee benefits 7.2 9.0 Other deferred tax assets 30.6 23.0 ------------- ------------ 136.0 116.6 ------------- ------------ DEFERRED TAX LIABILITIES: Fixed asset depreciation (15.1) (13.7) Deferred policy acquisition costs (1.1) (3.6) Other deferred tax liabilities (23.2) (27.7) ------------- ------------ (39.4) (45.0) ============= ============ Total $96.6 $ 71.6 ============= ============
The Company and its wholly owned domestic non-life insurance subsidiaries join with TRV in filing a consolidated federal income tax return. Under a tax sharing agreement with TRV, the Company is entitled to a current tax benefit if it incurs losses which are utilized in the Parent's consolidated return. TRV's consolidated tax return group has reported large amounts of taxable income in recent years and can, more likely than not, expect to have significant taxable income in the future thereby enabling utilization of the Company's deferred tax asset.
9. STOCKHOLDER'S EQUITY --------------------
Certain long-term loan credit agreements restrict the payment of dividends with such restrictions based on cumulative net earnings, as defined. Additionally, a minimum net worth restriction, as defined, contained in such agreements, imposes an additional constraint on dividends. At December 31, 1996 the Company would be able to remit $307.8 million in dividends to its parent under the most restrictive debt covenants.
Notes to Consolidated Financial Statements (continued)
The combined insurance subsidiaries' statutory stockholder's equity at December 31, 1996 and 1995 was $180.9 million and $159.8 million, respectively, and is subject to certain restrictions imposed by state insurance departments as to the transfer of funds and payment of dividends. The combined insurance subsidiaries' net income determined in accordance with statutory accounting practices (after minority interest in 1994) for the years ended December 31, 1996, 1995 and 1994 was $66.6 million, $49.6 million and $58.0 million, respectively.
10. EMPLOYEE BENEFIT PLANS ----------------------
PENSION PLANS
The Company, along with affiliated companies, participates in a noncontributory defined benefit pension plan sponsored by TRV (the Plan) covering the majority of U.S. employees. Benefits are based on an account balance formula. Under this formula, each employee's accrued benefit can be expressed as an account that is credited with amounts based upon the employee's pay, length of service and a specified interest rate, all subject to a minimum benefit level. The Plan is funded in accordance with the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code. Pension costs allocated to the Company from the Plan were $1.3 million, $2.6 million and $2.7 million in 1996, 1995 and 1994, respectively.
The Company also has an unfunded noncontributory supplemental retirement plan that covers certain executives and key employees. Pension costs related to this plan were $0.6 million, $1.4 million and $1.0 million in 1996, 1995 and 1994, respectively.
STOCK OPTION PLAN
The Company participates in a stock option plan sponsored by TRV that provides for the granting of stock options in TRV common stock to officers and key employees. The Company applies Opinion 25 and related interpretations in accounting for stock options. Since stock options are issued at fair market value on the date of award, no compensation cost has been recognized for these awards. In October 1995, the FASB issued FAS No. 123, "Accounting for Stock-based Compensation". This statement provides an alternative to Opinion 25 whereby fair values may be ascribed to options using a valuation model and amortized to compensation cost over the vesting period of the options. Had the Company applied FAS No. 123 in accounting for stock options, net income would have been reduced by $2.1 million and $0.7 million in 1996 and 1995, respectively.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS -----------------------------------
The following table summarizes the fair value and carrying amount of the Company's financial instruments at December 31, 1996 and 1995. The fair value assumptions were based upon subjective estimates of market conditions and perceived risks of the financial instruments at a certain point in time as disclosed further in various notes to the consolidated financial statements. Disclosed fair values for financial instruments do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a
Notes to Consolidated Financial Statements (continued)
particular financial instrument. Potential taxes and other expenses that would be incurred in an actual sale or settlement are not reflected in amounts disclosed.
12. LEASE COMMITMENTS AND OTHER FINANCIAL INSTRUMENTS -------------------------------------------------
RENTALS
Rental expense (principally for offices and computer equipment) was $28.1 million, $28.8 million and $32.8 million for the years ended December 31, 1996, 1995 and 1994, respectively.
At December 31, 1996, future minimum annual rentals under noncancellable operating leases were as follows:
(millions) 1997 $18.6 1998 13.8 1999 9.6 2000 6.1 2001 3.7 Thereafter 0.5 ========= $52.3 =========
CREDIT CARDS
The Company provides bank and private label credit card services through its subsidiaries. These services are provided to individuals and to affinity groups nationwide. At December 31, 1996 and 1995 total credit lines available to credit cardholders were $6,622 million and $5,870 million, respectively.
Notes to Consolidated Financial Statements (continued)
13. RELATED PARTY TRANSACTIONS --------------------------
To facilitate cash management the Company has entered into an agreement with TRV under which the Company or TRV may borrow from the other party at any time an amount up to the greater of $50.0 million or 1% of the Company's consolidated assets up to a maximum of $100.0 million. The agreement may be terminated by either party at any time. The interest rate to be charged on borrowings outstanding will be equivalent to an appropriate market rate.
14. CONTINGENCIES -------------
In the ordinary course of business the Company and/or its subsidiaries are defendants or co-defendants in various litigation matters. Although there can be no assurances, the Company believes, based on information currently available, that the ultimate resolution of these legal proceedings would not be likely to have a material adverse effect on its results of operations, financial condition or liquidity.
Notes to Consolidated Financial Statements (continued)
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) ---------------------------------------------
SCHEDULE 1
COMMERCIAL CREDIT COMPANY (Parent Company Only) Condensed Financial Information of Registrant (In millions of dollars) CONDENSED STATEMENT OF INCOME
Year Ended December 31, 1996 1995 1994 - -------------------------------------------------------------------------------- REVENUES $439.0 $429.7 $396.8 - --------------------------------------------------------------------------------
EXPENSES Interest 471.5 460.5 407.3 Other 9.9 16.2 22.1 - -------------------------------------------------------------------------------- Total 481.4 476.7 429.4 - -------------------------------------------------------------------------------- Pre-tax loss (42.4) (47.0) (32.6) Income tax benefit 17.6 18.5 12.2 - -------------------------------------------------------------------------------- Loss before equity in net income of subsidiaries (24.8) (28.5) (20.4) Equity in net income of subsidiaries 220.6 248.4 242.3 - -------------------------------------------------------------------------------- NET INCOME $195.8 $219.9 $221.9 ================================================================================
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto.
SCHEDULE 1
COMMERCIAL CREDIT COMPANY (Parent Company Only) Condensed Financial Information of Registrant (In millions of dollars except per share amounts) CONDENSED STATEMENT OF FINANCIAL POSITION
December 31, 1996 1995 - -------------------------------------------------------------------------------- ASSETS Investment in securities of TRV $ 179.2 $ 179.2 Mortgage loans and real-estate held for sale 129.3 174.8 Notes and accounts receivable from subsidiaries- eliminated in consolidation 7,422.6 6,715.6 Investment in subsidiaries at cost plus equity in net earnings-eliminated in consolidation 853.3 802.2 Other 70.1 88.4 - -------------------------------------------------------------------------------- Total assets $8,654.5 $7,960.2 ================================================================================ LIABILITIES Short-term borrowings $1,481.6 $1,394.2 Long-term debt 5,750.0 5,200.0 Accrued expenses and other liabilities 148.4 203.1 - -------------------------------------------------------------------------------- Total liabilities 7,380.0 6,797.3 - -------------------------------------------------------------------------------- STOCKHOLDER'S EQUITY Common stock ($.01 par value; authorized shares: 1,000; share issued: 1) -- -- Additional paid-in capital 164.1 163.5 Retained earnings 1,115.2 984.4 Unrealized gain (loss) on investment securities and other, net (4.8) 15.0 - -------------------------------------------------------------------------------- Total stockholder's equity 1,274.5 1,162.9 - -------------------------------------------------------------------------------- Total liabilities and stockholder's equity $8,654.5 $7,960.2 ================================================================================
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto.
SCHEDULE 1
COMMERCIAL CREDIT COMPANY (Parent Company Only) Condensed Financial Information of Registrant (In millions of dollars) CONDENSED STATEMENT OF CASH FLOWS
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto.
EXHIBIT INDEX ------------- EXHIBIT FILING NUMBER DESCRIPTION OF EXHIBIT METHOD - ------ ---------------------- ------
3.01 Restated Certificate of Incorporation of Commercial Credit Company (the "Company"), included in Certificate of Merger of CCC Merger Company into the Company; Certificate of Ownership and Merger merging CCCH Acquisition Corporation into the Company; and Certificate of Ownership and Merger merging RDI Service Corporation into the Company, incorporated by reference to Exhibit 3.01 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (File No. 1-6594).
3.02 By-laws of the Company, as amended May 14, 1990, incorporated by reference to Exhibit 3.02.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (File No. 1-6594).
4.01.1 Indenture, dated as of December 1, 1986 (the "Indenture"), between the Company and Citibank, N.A., relating to the Company's debt securities, incorporated by reference to Exhibit 4.01 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1988 (File No. 1-6594).
4.01.2 First Supplemental Indenture, dated as of June 13, 1990, to the Indenture, incorporated by reference to Exhibit 1 to the Company's Current Report on Form 8-K dated June 13, 1990 (File No. 1-6594).
The total amount of securities authorized pursuant to any other instrument defining rights of holders of long-term debt of the Company does not exceed 10% of the total assets of the Company and its consolidated subsidiaries. The Company will furnish copies of any such instrument to the Securities and Exchange Commission upon request.
10.01.1 Five Year Credit Agreement dated as of December 16, 1994 among the Company, the Banks party thereto and Morgan Guaranty Trust Company of New York, as Agent, incorporated by reference to Exhibit 10.01 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (File No. 1-6594).
10.01.2 Amended and Restated Credit Agreement dated as of June 28, 1996 among the Company, the Banks party thereto and Morgan Guaranty Trust Company of New York, as Agent, incorporated by reference to Exhibit 10.02 to the Company's Quarterly Report on Form 10-Q for
EXHIBIT FILING NUMBER DESCRIPTION OF EXHIBIT METHOD - ------ ---------------------- ------
the fiscal quarter ended June 30, 1996 (File No. 1-6594) (the "Company's June 30, 1996 10-Q").
12.01 Computation of Ratio of Earnings to Fixed Charges. Electronic
21.01 Pursuant to General Instruction I of Form 10-K, the list of subsidiaries of the Company is omitted.
23.01 Consent of KPMG Peat Marwick LLP, Independent Electronic Certified Public Accountants.
27.01 Financial Data Schedule. Electronic
99.01 The second paragraph on page 2 of the Company's Electronic Current Report on Form 8-K dated July 13, 1994, the first paragraph on page 14 of the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1995, the fourth paragraph on page 9 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, the first paragraph on page 13 of the Company's June 30, 1996 10-Q and the first paragraph on page 12 of the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1996.
99.02 The paragraph that begins on page 9 and ends on page Electronic 10 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995.
99.03 The second paragraph on page 13 of the Company's June Electronic 30, 1996 10-Q.
Copies of any of the exhibits referred to above will be furnished at a cost of $.25 per page to security holders who make written request therefor to Patricia A. Rouzer, Corporate Communications and Investor Relations, Commercial Credit Company, 300 St. Paul Place, Baltimore, Maryland 21202.