<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
------------------
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------- --------------
Commission file number 1-8198
------
HOUSEHOLD INTERNATIONAL, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3121988
- ------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
2700 Sanders Road, Prospect Heights, Illinois 60070
- -------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 564-5000
--------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
At November 7, 1997, there were 107,008,611 shares of registrant's
common stock outstanding.
<PAGE>
<PAGE> 2
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
Table of Contents
PART I. Financial Information Page
----
Item 1. Financial Statements
Condensed Consolidated Statements of Income
(Unaudited) - Three Months and Nine Months
Ended September 30, 1997 and 1996 2
Condensed Consolidated Balance Sheets -
September 30, 1997 (Unaudited) and December 31, 1996 3
Condensed Consolidated Statements of Cash Flows
(Unaudited) - Nine Months Ended
September 30, 1997 and 1996 4
Financial Highlights 5
Notes to Interim Condensed Consolidated Financial
Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 22
Signature 23
<PAGE>
<PAGE> 3
PART 1. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Household International, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- -------------------------------------------------------
All amounts, except per share data, are stated in millions.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Finance income $790.0 $755.6 $2,271.5 $2,136.4
Interest income from noninsurance
investment securities 6.2 12.1 30.2 71.4
Interest expense 389.2 384.7 1,116.1 1,121.8
------ ------ -------- --------
Net interest margin 407.0 383.0 1,185.6 1,086.0
Provision for credit losses on owned
receivables 257.8 169.5 802.8 537.3
------ ------ -------- --------
Net interest margin after provision for
credit losses 149.2 213.5 382.8 548.7
------ ------ -------- --------
Securitization income 366.5 282.0 1,041.5 841.9
Insurance revenues 69.6 63.6 203.5 185.9
Investment income 32.9 34.8 95.0 128.0
Fee income 108.7 62.1 263.5 165.3
Other income 48.8 31.5 146.5 195.4
------ ------ -------- --------
Total other revenues 626.5 474.0 1,750.0 1,516.5
------ ------ -------- --------
Salaries and fringe benefits 168.7 138.1 472.5 409.8
Occupancy and equipment expense 52.5 48.3 156.5 163.6
Other marketing expenses 128.9 132.3 358.1 374.5
Other servicing and administrative expenses 92.6 98.0 286.6 360.2
Policyholders' benefits 47.6 57.2 142.9 183.6
------ ------ -------- --------
Total costs and expenses 490.3 473.9 1,416.6 1,491.7
------ ------ -------- --------
Income before income taxes 285.4 213.6 716.2 573.5
Income taxes 98.2 73.7 247.2 198.5
------ ------ -------- --------
Net income $187.2 $139.9 $ 469.0 $ 375.0
====== ====== ======== ========
Earnings per common share:
Net income $187.2 $139.9 $ 469.0 $ 375.0
Preferred dividends (2.9) (4.2) (9.0) (12.5)
------ ------ -------- --------
Net income available to common
shareholders $184.3 $135.7 $ 460.0 $ 362.5
====== ====== ======== ========
Average common and common equivalent
shares 108.4 98.2 102.3 98.4
------ ------ -------- --------
Net income per common share $ 1.70 $ 1.38 $ 4.50 $ 3.68
------ ------ -------- --------
Dividends declared per common share .42 .39 1.20 1.07
------ ------ -------- --------
</TABLE>
See notes to interim condensed consolidated financial statements.
<PAGE>
<PAGE> 4
Household International, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
- -------------------------------------
In millions, except share data.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
September 30, December 31,
1997 1996
- ---------------------------------------------------------------------------------
ASSETS (Unaudited)
- ------
<S> <C> <C>
Cash $ 345.1 $ 239.2
Investment securities 2,261.5 2,282.0
Receivables, net 24,467.0 24,244.8
Acquired intangibles and goodwill, net 1,593.1 969.4
Properties and equipment, net 321.6 353.1
Real estate owned 150.5 136.6
Other assets 1,512.0 1,369.4
--------- ---------
Total assets $30,650.8 $29,594.5
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Debt:
Deposits $ 1,951.2 $ 2,365.1
Commercial paper, bank and other borrowings 6,082.3 6,428.1
Senior and senior subordinated debt (with
original maturities over one year) 15,168.0 14,802.0
--------- ---------
Total debt 23,201.5 23,595.2
Insurance policy and claim reserves 1,250.4 1,205.3
Other liabilities 1,557.8 1,472.8
--------- ---------
Total liabilities 26,009.7 26,273.3
--------- ---------
Company obligated mandatorily redeemable
preferred securities of subsidiary trusts* 175.0 175.0
--------- ---------
Preferred stock 150.0 205.0
--------- ---------
Common shareholders' equity:
Common stock, $1.00 par value, 250,000,000
shares authorized, 124,331,175 and
115,231,175 shares issued at September 30,
1997 and December 31, 1996, respectively 124.3 115.2
Additional paid-in capital 1,398.0 397.3
Retained earnings 3,412.4 3,076.8
Foreign currency translation adjustments (127.1) (126.7)
Unrealized loss on investments, net (3.4) (12.9)
Less common stock in treasury, 17,431,526 and
18,165,921 shares at September 30, 1997 and
December 31, 1996, respectively, at cost (488.1) (508.5)
--------- ---------
Total common shareholders' equity 4,316.1 2,941.2
--------- ---------
Total liabilities and shareholders' equity $30,650.8 $29,594.5
========= =========
</TABLE>
* As described in note 8 to the financial statements, the sole
asset of the two trusts are Junior Subordinated Deferrable
Interest Notes issued by Household International, Inc. in June
1996 and June 1995, bearing interest at 8.70 and 8.25 percent,
respectively, with principal balances of $103.1 and $77.3
million, respectively, and due June 30, 2036 and June 30, 2025,
respectively.
See notes to interim condensed consolidated financial statements.
<PAGE>
<PAGE> 5
Household International, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -----------------------------------------------------------
In millions.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Nine months ended September 30 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C>
CASH PROVIDED BY OPERATIONS
Net income $ 469.0 $ 375.0
Adjustments to reconcile net income to cash
provided by operations:
Provision for credit losses on owned receivables 802.8 537.3
Insurance policy and claim reserves 70.4 57.0
Depreciation and amortization 189.7 178.4
Net realized gains from sales of assets (84.6) (119.0)
Other, net (55.7) 203.9
---------- ----------
Cash provided by operations 1,391.6 1,232.6
---------- ----------
INVESTMENTS IN OPERATIONS
Investment securities:
Purchased (1,019.5) (1,880.9)
Matured 246.0 684.7
Sold 810.7 2,262.9
Short-term investment securities, net change 1.1 252.2
Receivables:
Originations, net (19,229.8) (20,017.8)
Purchased (632.9) (4,250.4)
Sold 21,861.4 20,776.8
Purchase capital stock of Transamerica Financial
Services Holding Company (1,065.0) -
Disposition of consumer banking operations:
Assets sold, net - 472.3
Deposits and other liabilities sold - (2,809.8)
Acquisition of portfolios, net - (620.1)
Properties and equipment purchased (47.4) (58.1)
Properties and equipment sold 7.3 11.4
---------- ----------
Cash increase (decrease) from investments in operations 931.9 (5,176.8)
---------- ----------
FINANCING AND CAPITAL TRANSACTIONS
Short-term debt and demand deposits, net change (412.1) (43.4)
Time certificates, net change (258.8) 299.1
Senior and senior subordinated debt issued 4,461.8 6,759.0
Senior and senior subordinated debt retired (4,060.2) (2,706.0)
Repayment of Transamerica Financial Services
Holding Company debt (2,795.0) -
Policyholders' benefits paid (95.2) (484.0)
Cash received from policyholders 93.3 192.4
Shareholders' dividends (133.4) (116.4)
Purchase of treasury stock - (48.9)
Redemption of preferred stock (55.0) -
Issuance of common stock 1,016.5 11.4
Issuance of company obligated mandatorily
redeemable preferred securities of subsidiary trusts - 100.0
---------- ----------
Cash increase (decrease) from financing and capital
transactions (2,238.1) 3,963.2
---------- ----------
Effect of exchange rate changes on cash 20.5 .2
---------- ----------
Increase in cash 105.9 19.2
Cash at January 1 239.2 270.4
---------- ----------
Cash at September 30 $ 345.1 $ 289.6
========== ==========
Supplemental cash flow information:
Interest paid $ 1,081.4 $ 1,116.8
---------- ----------
Income taxes paid 163.2 220.4
---------- ----------
</TABLE>
See notes to interim condensed consolidated financial statements.<PAGE>
<PAGE> 6
Household International, Inc. and Subsidiaries
FINANCIAL HIGHLIGHTS
- --------------------
All dollar amounts are stated in millions.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 187.2 $ 139.9 $ 469.0 $ 375.0
-------- -------- -------- --------
Revenues 1,422.7 1,241.7 4,051.7 3,724.3
-------- -------- -------- --------
Return on average common
shareholders' equity <F1> 17.4% 19.8% 17.7% 17.8%
-------- -------- -------- --------
Return on average owned assets <F1> 2.37 1.87 2.09 1.71
-------- -------- -------- --------
Managed basis efficiency
ratio, normalized <F2> 35.1 39.9 36.5 41.5
-------- -------- -------- --------
</TABLE>
All dollar amounts are stated in millions.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
September 30, December 31,
1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C>
Total assets:
Owned $30,650.8 $29,594.5
Managed 50,289.2 48,120.9
--------- ---------
Receivables:
Owned $24,445.0 $24,067.0
Serviced with limited recourse 19,638.4 18,526.4
--------- ---------
Managed $44,083.4 $42,593.4
========= =========
Total shareholders' equity as a percent
of owned assets <F3> 15.14% 11.22%
---------- ---------
Total shareholders' equity as a percent
of managed assets <F3> 9.23 6.90
---------- ---------
<FN>
<F1> Annualized.
<F2> Ratio of normalized operating expenses to managed net interest
margin and other revenues less policyholders' benefits.
<F3> Total shareholders' equity at September 30, 1997 and December 31,
1996 includes common shareholders' equity, preferred stock
and company obligated mandatorily redeemable preferred
securities of subsidiary trusts.
</FN>
</TABLE>
See notes to interim condensed consolidated financial statements.
<PAGE>
<PAGE> 7
Household International, Inc. and Subsidiaries
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
- --------------------------
The accompanying unaudited condensed consolidated financial
statements of Household International, Inc. and its subsidiaries
(the "company") have been prepared in accordance with generally
accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. Certain prior period amounts have
been reclassified to conform with the current period's
presentation. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the
three and nine months ended September 30, 1997 are not necessarily
indicative of the results that may be expected for the year ending
December 31, 1997. For further information, refer to the
consolidated financial statements and footnotes thereto included in
the company's annual report on Form 10-K for the year ended
December 31, 1996.
2. ACQUISITIONS AND STOCK OFFERING
- ------------------------------------
On June 23, 1997, Household International and a wholly-owned
subsidiary of Household Finance Corporation (a wholly-owned
subsidiary of Household International) acquired the capital stock
of Transamerica Financial Services Holding Company ("TFS"), the
branch-based consumer finance subsidiary of Transamerica
Corporation ("TA"). The company paid $1.1 billion for the stock of
TFS and repaid approximately $2.8 billion of TFS debt owed to
affiliates of TA. The acquisition added approximately $3.2 billion
of receivables, of which approximately $3.1 billion were home
equity loans secured primarily by home mortgages. The acquisition
of TFS was accounted for as a purchase, and accordingly, TFS'
operations have been included in the company's results of
operations from June 24, 1997. The acquisition of TFS was not
material to the company's consolidated financial statements.
In June 1997, the company completed a public underwritten offering
of 9.1 million shares of its common stock for approximately $1.0
billion. Net proceeds from the offering were used to repay certain
short-term borrowings in connection with the acquisition of TFS.
On October 21, 1997, Household International and a wholly-owned
subsidiary acquired the capital stock of ACC Consumer Finance
Corporation ("ACC"), a non-prime auto finance company. The
acquisition of ACC will be accounted for as a purchase and will not
be material to the company's consolidated financial statements.
3. INVESTMENT SECURITIES
- --------------------------
Investment securities consisted of the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
In millions. September 30, 1997 December 31, 1996
- -----------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE INVESTMENTS
Marketable equity securities $ 129.0 $ 131.4 $ 212.7 $ 213.1
Corporate debt securities 1,251.5 1,257.7 1,081.4 1,070.5
U.S. government and federal
agency debt securities 231.5 217.9 287.0 277.7
Other 623.8 623.8 690.5 690.5
-------- -------- -------- --------
Subtotal 2,235.8 2,230.8 2,271.6 2,251.8
Accrued investment income 30.7 30.7 30.2 30.2
-------- -------- -------- --------
Total investment securities $2,266.5 $2,261.5 $2,301.8 $2,282.0
======== ======== ======== ========
/TABLE
<PAGE>
<PAGE> 8
4. RECEIVABLES
- ----------------
Receivables consisted of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
September 30, December 31,
In millions. 1997 1996
- ---------------------------------------------------------------------
<S> <C> <C>
First mortgage $ 482.9 $ 725.6
Home equity 7,605.0 3,647.9
Visa/MasterCard 5,668.6 8,587.7
Private label 5,230.1 5,070.0
Other unsecured 4,622.1 5,098.0
Commercial 836.3 937.8
--------- ---------
Total owned receivables 24,445.0 24,067.0
Accrued finance charges 414.9 397.6
Credit loss reserve for
owned receivables (1,062.7) (900.2)
Unearned credit insurance premiums
and claims reserves (216.2) (184.6)
Amounts due and deferred from
receivables sales 1,632.5 1,561.0
Reserve for receivables serviced with
limited recourse (746.5) (696.0)
--------- ----------
Total owned receivables, net 24,467.0 24,244.8
Receivables serviced with limited
recourse 19,638.4 18,526.4
--------- ---------
Total managed receivables, net $44,105.4 $42,771.2
========= =========
</TABLE>
The outstanding balance of receivables serviced with limited recourse
consisted of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
September 30, December 31,
In millions. 1997 1996
- ---------------------------------------------------------------------
<S> <C> <C>
Home equity $ 3,371.8 $ 4,337.5
Visa/MasterCard 11,210.2 10,149.7
Private label 375.0 517.0
Other unsecured 4,681.4 3,522.2
--------- ---------
Total $19,638.4 $18,526.4
========= =========
</TABLE>
The combination of receivables owned and receivables serviced with limited
recourse, which the company considers its managed portfolio, is shown below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
September 30, December 31,
In millions. 1997 1996
- ---------------------------------------------------------------------
<S> <C> <C>
First mortgage $ 482.9 $ 725.6
Home equity 10,976.8 7,985.4
Visa/MasterCard 16,878.8 18,737.4
Private label 5,605.1 5,587.0
Other unsecured 9,303.5 8,620.2
Commercial 836.3 937.8
--------- ---------
Total $44,083.4 $42,593.4
========= =========
</TABLE>
<PAGE>
<PAGE> 9
At September 30, 1997 and December 31, 1996, the amounts due and
deferred from receivables sales of $1,632.5 and $1,561.0 million,
respectively, included unamortized securitization assets and funds
established pursuant to the recourse provisions for certain sales
totaling $1,522.3 and $1,235.4 million, respectively. The amounts
due and deferred also included customer payments not yet remitted
by the securitization trustee to the company of $84.6 and $310.3
million at September 30, 1997 and December 31, 1996, respectively.
In addition, the company has subordinated interests in certain
transactions, which were recorded as receivables, of $857.0 and
$485.0 million at September 30, 1997 and December 31, 1996,
respectively. The company has agreements with a "AAA"-rated third
party who will indemnify the company for up to $21.2 million in
losses relating to certain securitization transactions. The company
maintains credit loss reserves pursuant to the recourse provisions
for receivables serviced with limited recourse which are based on
estimated probable losses under such provisions. These reserves
totaled $746.5 and $696.0 million at September 30, 1997 and
December 31, 1996, respectively, and represent the company's best
estimate of possible losses on receivables serviced with limited
recourse.
5. CREDIT LOSS RESERVES
- -------------------------
An analysis of credit loss reserves for the three and nine months
ended September 30 was as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
In millions. 1997 1996 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Credit loss reserves for owned
receivables at beginning
of period $1,051.0 $ 858.3 $ 900.2 $ 720.4
Provision for credit losses 257.8 169.5 802.8 537.3
Chargeoffs (271.9) (207.2) (788.5) (561.3)
Recoveries 32.0 30.6 98.8 91.6
Portfolio acquisitions, net (6.2) 11.3 49.4 74.5
-------- -------- -------- --------
TOTAL CREDIT LOSS RESERVES FOR
OWNED RECEIVABLES AT SEPTEMBER 30 1,062.7 862.5 1,062.7 862.5
-------- -------- -------- --------
Credit loss reserves for
receivables serviced with
limited recourse at beginning
of period 719.9 592.8 696.0 457.0
Provision for credit losses 294.6 245.0 769.8 663.2
Chargeoffs (287.4) (181.7) (764.7) (475.3)
Recoveries 20.3 9.9 43.1 22.3
Other, net (.9) (.6) 2.3 (1.8)
-------- -------- -------- --------
TOTAL CREDIT LOSS RESERVES FOR
RECEIVABLES SERVICED WITH
LIMITED RECOURSE AT SEPTEMBER 30 746.5 665.4 746.5 665.4
-------- -------- -------- --------
TOTAL CREDIT LOSS RESERVES FOR
MANAGED RECEIVABLES AT SEPTEMBER 30 $1,809.2 $1,527.9 $1,809.2 $1,527.9
======== ======== ======== ========
</TABLE>
6. INCOME TAXES
- -----------------
Effective tax rates for the nine months ended September 30, 1997
and 1996 of 34.5 and 34.6 percent, respectively, differ from the
statutory federal income tax rate for the respective periods
primarily because of the effects of (a) domestic and foreign loss
carryforwards, (b) amortization and write-offs of intangible assets,
(c) state and local income taxes, (d) reduction of noncurrent tax
requirements and (e) leveraged lease tax benefits.
<PAGE>
<PAGE> 10
7. NET INCOME PER COMMON SHARE
- --------------------------------
Computations of net income per common share for the three and nine
months ended September 30 were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
Three Months Ended
September 30,
1997 1996
- ----------------------------------------------------------------------------
Fully Fully
In millions, except per share data. Primary Diluted Primary Diluted
- ----------------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Earnings:
Net income $187.2 $187.2 $139.9 $139.9
Preferred dividends (2.9) (2.9) (4.2) (4.2)
------ ------ ------ ------
Net income available to common
shareholders $184.3 $184.3 $135.7 $135.7
====== ====== ====== ======
Average shares:
Common 106.8 106.8 96.9 96.9
Common equivalents 1.6 1.6 1.3 1.3
------ ------ ------ ------
Total 108.4 108.4 98.2 98.2
====== ====== ====== ======
Net income per common share $ 1.70 $ 1.70 $ 1.38 $ 1.38
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
Nine Months Ended
September 30,
1997 1996
- ----------------------------------------------------------------------------
Fully Fully
In millions, except per share data. Primary Diluted Primary Diluted
- ----------------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Earnings:
Net income $469.0 $469.0 $375.0 $375.0
Preferred dividends (9.0) (9.0) (12.5) (12.5)
------ ------ ------ ------
Net income available to common
shareholders $460.0 $460.0 $362.5 $362.5
====== ====== ====== ======
Average shares:
Common 100.7 100.7 97.1 97.1
Common equivalents 1.5 1.6 1.3 1.3
------ ------ ------ ------
Total 102.2 102.3 98.4 98.4
====== ====== ====== ======
Net income per common share $ 4.50 $ 4.50 $ 3.68 $ 3.68
====== ====== ====== ======
</TABLE>
8. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUSTS
- ---------------------------------------------------------------------
In June 1996 Household Capital Trust II ("HCT II"), a wholly-owned
subsidiary of the company, issued 4 million 8.70 percent Trust
Preferred Securities ("preferred securities") at $25 per preferred
security. The sole asset of HCT II is $103.1 million of 8.70
percent Junior Subordinated Deferrable Interest Notes issued by the
company. The junior subordinated notes held by HCT II mature on
June 30, 2036 and are redeemable by the company in whole or in part
beginning on June 30, 2001, at which time the HCT II preferred
securities are callable at par value of $25 per preferred security
plus accrued and unpaid dividends. Net proceeds from the issuance
of preferred securities were used for general corporate purposes.
<PAGE>
<PAGE> 11
In 1995 Household Capital Trust I ("HCT I"), a wholly-owned
subsidiary of the company, issued 3 million 8.25 percent preferred
securities at $25 per preferred security. The sole asset of HCT I
is $77.3 million of 8.25 percent Junior Subordinated Deferrable
Interest Notes issued by the company. The junior subordinated notes
held by HCT I mature on June 30, 2025 and are redeemable by the
company in whole or in part beginning June 30, 2000, at which time
the HCT I preferred securities are callable at par value of $25 per
preferred security plus accrued and unpaid dividends. HCT I may
elect to extend the maturity of its preferred securities to June 30, 2044.
The obligations of the company with respect to the junior
subordinated notes, when considered together with certain
undertakings of the company with respect to HCT I and HCT II,
constitute full and unconditional guarantees by the company of HCT
I's and HCT II's obligations under the respective preferred
securities. The preferred securities are classified in the
company's balance sheets as company obligated mandatorily
redeemable preferred securities of subsidiary trusts (representing
the minority interest in the trusts) at their face and redemption
amount of $175 million at September 30, 1997 and December 31, 1996.
The preferred securities have a liquidation value of $25 per
preferred security. Dividends on the preferred securities are
cumulative, payable quarterly in arrears, and are deferrable at the
company's option for up to five years from date of issuance. The
company cannot pay dividends on its preferred and common stocks
during such deferments.
9. INTEREST RATE CONTRACTS
- ----------------------------
At September 30, 1997 and December 31, 1996, all of the company's
interest rate contracts qualified as hedges or synthetic
alterations.
The nature and composition of the company's assets and liabilities
and off-balance sheet items expose the company to interest rate
risk. The company enters into a variety of interest rate contracts
for managing its interest rate exposure. Interest rate swaps are
the principal vehicle used to manage interest rate risk; however,
interest rate futures, options, caps and floors, and forward
contracts also are utilized. The company also has entered into
currency swaps to convert both principal and interest payments on
debt issued from one currency to the appropriate functional currency.
Interest rate swaps are designated, and effective, as synthetic
alterations of specific assets or liabilities (or specific groups
of assets or liabilities) and off-balance sheet items. The interest
rate differential to be paid or received on these contracts is
accrued and included in net interest margin in the statements of
income. Interest rate futures, forwards, options, and caps and
floors used in hedging the company's exposure to interest rate
fluctuations are designated, and effective, as hedges of balance
sheet items.
Correlation between all interest rate contracts and the underlying
asset, liability or off-balance sheet item is direct because the
company uses interest rate contracts which mirror the underlying
item being hedged/synthetically altered. If correlation between the
hedged/synthetically altered item and related interest rate
contract would cease to exist, the interest rate contract would be
recorded at fair value and the associated unrealized gain or loss
would be included in net interest margin, with any future realized
and unrealized gains or losses recorded in other income.
Interest rate contracts are recorded at amortized cost. If interest
rate contracts are terminated early, the realized gains and losses
are deferred and amortized over the life of the hedged/synthetically
altered item as adjustments to net interest margin. These deferred
gains and losses are recorded on the accompanying balance sheets
as adjustments to the carrying value of the hedged items. In
circumstances where the underlying assets or liabilities are sold,
any remaining carrying value adjustments or cumulative change in
value on any open positions are recognized immediately as a component
of the gain or loss upon disposition. Any remaining interest rate
contracts previously designated to the sold hedged/synthetically
altered item are recorded at fair value with realized and unrealized
gains and losses included in other income.<PAGE>
<PAGE> 12
10. RECENT ACCOUNTING DEVELOPMENTS
- -----------------------------------
Effective January 1, 1997, the company adopted Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of
Liabilities" ("FAS No. 125"). FAS No. 125 provides accounting and
reporting standards for transfers and servicing of financial assets
and extinguishment of liabilities based on an approach that focuses
on control of the assets and extinguishment of the liabilities. The
statement is effective for securitization transactions occurring
subsequent to December 31, 1996. The adoption of FAS No. 125 did
not have a material impact on the company's consolidated financial
statements.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" ("FAS No. 128"), which establishes standards for computing
and presenting earnings per share ("EPS"). FAS No. 128 replaces the
presentation of primary EPS with a presentation of basic EPS. Basic
EPS excludes dilution and is computed by dividing income available
to common shareholders by the weighted-average number of common
shares outstanding for the period. FAS No. 128 also requires
presentation of diluted EPS which is computed similarly to fully
diluted EPS currently presented. The statement is effective for
financial statements issued for periods ending after December 15,
1997, including interim periods. On adoption, it will require the
restatement of all prior period EPS data. The company will adopt
FAS No. 128 in the fourth quarter of 1997. At such time, all prior
period EPS data will be restated. The company believes the adoption
of FAS No. 128 will not have a material impact on its EPS or EPS
trends and comparisons.
<PAGE>
<PAGE> 13
Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OPERATIONS SUMMARY
- ------------------
Net income for the third quarter and first nine months of 1997 was
$187.2 and $469.0 million, up 34 and 25 percent from $139.9 and
$375.0 million in the respective 1996 periods. Earnings per share
was $1.70 for the third quarter and $4.50 for the first nine months
of 1997, up 23 and 22 percent from $1.38 and $3.68 per share in the
same periods in 1996. The difference between the percentage
increases in net income and earnings per share for the third
quarter was due to the company's issuance of approximately nine
million common shares in late June 1997. The company's annualized
return on average common shareholders' equity for the third quarter
and first nine months of 1997 was 17.4 and 17.7 percent,
respectively, down from 19.8 and 17.8 percent in the respective
year-ago periods, reflecting the increase in average equity from
the June common stock offering. The annualized return on average
owned assets improved to 2.37 and 2.09 percent in the third quarter
and first nine months of 1997, respectively, up from 1.87 and 1.71
percent in the same year-ago periods.
- - The following is a summary of the operating results of the
company's key businesses for the third quarter and first nine
months of 1997 compared to the corresponding prior year periods:
Net interest margin in the domestic consumer finance business
continued to expand in the third quarter and first nine months
of 1997 due to improved pricing and higher levels of managed
receivables, but was partially offset by increased credit losses
primarily due to higher levels of personal bankruptcies.
In the third quarter, the Visa/MasterCard* business achieved
higher fee income and improved efficiency, which was offset by
higher credit losses resulting primarily from increased personal
bankruptcy filings. During the first nine months of 1997, the
Visa/MasterCard business realized higher net interest margin and
fee income, and improved efficiency, which more than offset
higher credit losses resulting primarily from increased personal
bankruptcy filings. The company has continued its program to
improve the profitability of its credit card portfolios by
selling non-strategic portfolios, refining pricing strategies,
increasing fees and systematically eliminating unprofitable
accounts. Results for this business continued to benefit from
the company's co-branding and affinity relationship strategies,
in particular the association with the General Motors credit
card ("GM Card") program and the Union Privilege Visa/MasterCard
portfolio acquired in June 1996.
The private-label credit card business reported higher credit
losses reflecting the maturing of promotional balances and
increased personal bankruptcy filings in the third quarter and
first nine months of 1997, which were partially offset by higher
net interest margin.
The United Kingdom operation realized higher net interest
margin, interchange income and insurance premiums, due to
receivables growth. During the quarter, United Kingdom credit
card accounts grew 7 percent and credit card receivables grew to
nearly $750 million. The Goldfish Card, issued in alliance with
British Gas, contributed significantly to the growth in credit
card receivables during the quarter.
* VISA and MasterCard are registered trademarks of VISA USA, Inc.
and MasterCard International, Incorporated, respectively.
<PAGE>
<PAGE> 14
- - On June 23, 1997, Household International and a wholly-owned
subsidiary of Household Finance Corporation acquired the capital
stock of Transamerica Financial Services Holding Company
("TFS"), the branch-based consumer finance subsidiary of
Transamerica Corporation ("TA"). The company paid $1.1 billion
for the stock of TFS and repaid approximately $2.8 billion of
TFS debt owed to affiliates of TA. The acquisition added
approximately $3.2 billion of receivables, of which
approximately $3.1 billion were home equity loans secured
primarily by home mortgages. The acquisition of TFS strengthened
the company's core consumer finance operations by expanding its
branch network by 92 branches, adding new customer accounts, and
increasing the secured loan portion of the company's receivables
portfolio. As of September 30, 1997, the company has essentially
completed the integration of TFS. The company has closed all
redundant branches and has completely integrated all back-office
functions.
In connection with the acquisition, in June 1997, the company
completed a public underwritten offering of 9.1 million shares
of its common stock for approximately $1.0 billion. Net proceeds
from the offering were used to repay certain short-term
borrowings in connection with the acquisition.
- - The company's normalized managed basis efficiency ratio
improved to 35.1 and 36.5 percent for the third quarter and first
nine months of 1997, respectively, compared to 39.9 and 41.5
percent in 1996. The improvement resulted from a 21 and 18 percent
growth in normalized managed net revenues over the third quarter
and first nine months of 1996, respectively, compared to a 6 and 4
percent increase, respectively, in normalized operating expenses.
- - The company continues to maintain its credit loss reserve
position due to uncertainty over consumer payment patterns and
seasoning of unsecured loan products. The company increased its
credit loss reserves during the first nine months of 1997 by
providing reserves in excess of net chargeoffs for owned
receivables of $113 million.
- - On October 21, 1997, Household International and a wholly-
owned subsidiary acquired the capital stock of ACC Consumer Finance
Corporation ("ACC"), a non-prime auto finance company. The
acquisition of ACC will be accounted for as a purchase and will not
be material to the company's consolidated financial statements.
BALANCE SHEET REVIEW
- --------------------
- - Managed consumer receivables (owned and serviced with limited
recourse) were $43.2 billion at September 30, 1997, compared to
$43.8 billion at June 30, 1997 and $40.5 billion at September 30,
1996. The increase from the prior year was primarily due to the
acquisition of TFS in June 1997. Core products, which exclude first
mortgages and commercial receivables, increased 10 percent from a
year ago. Private label and other unsecured product lines grew
approximately 11 and 13 percent, respectively, over prior year
levels. Home equity loans rose 27 percent year over year.
Visa/MasterCard receivables were flat with the level of a year ago.
- - Compared to the second quarter, core receivables were down one
percent. Home equity receivables fell slightly during the quarter
as the company's sales force focused on the conversion and
retention of TFS customers. Although successful in the retention of
TFS customers, the company experienced some attrition in the base
portfolio as new volume did not keep pace with runoff. The
Visa/MasterCard portfolio was also down due to the sale and planned
runoff of non-strategic and less profitable receivables during the
third quarter.
- - Owned consumer receivables were $23.6 billion at September 30,
1997, compared to $23.9 billion at June 30, 1997 and $23.1 billion
at September 30, 1996. Changes in owned receivables from period to
period may vary depending on the timing and significance of
securitization transactions.
<PAGE>
<PAGE> 15
- - The company's managed credit loss reserves were $1,809.2 million at
September 30, 1997, up from $1,770.9 million at June 30, 1997 and
$1,527.9 million at September 30, 1996. Credit loss reserves as a
percent of managed receivables were 4.10 percent, compared to 3.97
percent at June 30, 1997 and 3.67 percent at September 30, 1996.
Reserves as a percent of nonperforming managed receivables were
117.3 percent, compared to 118.5 percent at June 30, 1997 and 126.6
percent at September 30, 1996. Consumer two-months-and-over
contractual delinquency ("delinquency") as a percent of managed
consumer receivables was 4.62 percent, compared to 4.32 percent at
June 30, 1997 and 3.83 percent at September 30, 1996. The
annualized total consumer managed chargeoff ratio in the third
quarter of 1997 was 4.63 percent, compared to 4.58 percent in the
prior quarter and 3.52 percent in the year-ago quarter.
- - The ratio of total shareholders' equity (including trust
originated securities) to total owned assets was 15.14 percent,
compared to 11.22 percent at December 31, 1996. The ratio of total
shareholders' equity to managed assets was 9.23 percent, compared
to 6.90 percent at December 31, 1996. The increase in the ratios
from the year-end 1996 levels was primarily due to the issuance of
9.1 million shares of common stock in June 1997.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The major use of cash by the company's subsidiaries is the
origination or purchase of receivables or investment securities.
The main sources of cash are the collection and sales of receivable
balances; maturities or sales of investment securities; proceeds
from the issuance of debt and deposits; and cash provided by
operations.
The following describes major changes in the company's funding base
from December 31, 1996 to September 30, 1997:
- - On January 23, 1997, the company redeemed, at par, all
outstanding shares of its 9.50% Preferred Stock, Series 1991-A, for
$10 per depositary share plus accrued and unpaid dividends.
- - In June 1997, the company entered into a $1.0 billion back-up
line for its commercial paper program and established a $1.0
billion asset-backed conduit. Products that may be sold into the
conduit include credit card receivables and unsecured consumer
loans. The company subsequently terminated the $1.0 billion back-
up line and, in August 1997, replaced it with a $1.3 billion back-
up line for its commercial paper program.
- - In June 1997, the company completed a public underwritten
offering of 9.1 million shares of common stock at $110.50 per
share. Net proceeds from the offering of approximately $1.0 billion
were used to repay certain short-term borrowings in connection with
the acquisition of the capital stock of TFS.
- - On August 15, 1997, the company redeemed, at par, all
outstanding shares of its 7.25% term cumulative preferred Series
1992-A, for $100 per depositary share plus accrued and unpaid
dividends.
- - The funding requirements of the company increased by $.9
billion primarily due to the acquisition of TFS in June 1997,
partially offset by lower receivable levels in the company's
existing businesses.
- - The company had securitized home equity, Visa/MasterCard,
private label and other unsecured receivables outstanding of $19.6
and $18.5 billion at September 30, 1997 and December 31, 1996,
respectively. During the three months and nine months ended
September 30, 1997, the company securitized, excluding
replenishments of certificate holder interests, $1.0 and $4.1
billion, respectively, of Visa/MasterCard and other unsecured
receivables.
<PAGE>
<PAGE> 16
The composition of these securitizations by type is as follows
(in billions):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Three months ened Nine months ended
September 30, September 30,
1997 1997
- -----------------------------------------------------------------
<S> <C> <C>
Visa/MasterCard $ .1 $2.4
Other unsecured .9 1.7
---- ----
Total $1.0 $4.1
==== ====
</TABLE>
The market for securities backed by receivables is a reliable,
efficient and cost-effective source of funds, which the company
plans to continue to utilize in the future.
PRO FORMA MANAGED STATEMENTS OF INCOME
- --------------------------------------
Securitizations of consumer receivables have been, and will
continue to be, an important source of liquidity for the company.
The company continues to service the securitized receivables after
such receivables have been sold and retains a limited recourse
obligation. Securitizations impact the classification of revenues
and expenses in the statements of income. Amounts related to
receivables serviced, including net interest margin, fee and other
income, and provision for credit losses on receivables serviced
with limited recourse are reported as a net amount in
securitization income in the company's statements of income.
Management monitors the company's operations on a managed basis as
well as on the historical owned basis reflected in its statements
of income. The managed basis assumes that the receivables
securitized are held in the portfolio. Pro forma statements of
income on a managed basis for the third quarter and nine months
ended September 30, 1997 and 1996 are presented below. For purposes
of this analysis, the results do not reflect the differences
between the company's accounting policies for owned receivables and
receivables serviced with limited recourse. Accordingly, net income
on a pro forma managed basis equals net income on an owned basis.
<PAGE>
<PAGE> 17
Pro Forma Managed Statements of Income
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
All dollar amounts are September 30, September 30,
stated in millions. 1997 * 1996 * 1997 * 1996 *
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Finance income $ 1,532.8 13.71% $ 1,360.1 13.30% $ 4,376.4 13.63% $ 3,829.6 13.24%
Interest income from
noninsurance investment
securities 6.2 6.65 12.1 5.84 30.2 5.92 71.4 5.70
Interest expense 689.9 6.14 639.2 6.13 1,987.7 6.09 1,831.1 6.07
--------- ----- --------- ----- --------- ----- --------- -----
Net interest margin 849.1 7.56 733.0 7.03 2,418.9 7.44<F1> 2,069.9 6.99<F1>
Provision for credit losses 552.4 414.5 1,572.6 1,200.5
--------- --------- --------- ---------
Net interest margin after
provision for credit losses 296.7 318.5 846.3 869.4
--------- --------- --------- ---------
Insurance revenues 69.6 63.6 203.5 185.9
Investment income 32.9 34.8 95.0 128.0
Fee income 327.7 239.1 841.5 686.5
Other income 48.8 31.5 146.5 195.4
--------- --------- --------- ---------
Total other revenues 479.0 369.0 1,286.5 1,195.8
--------- --------- --------- ---------
Salaries and fringe
benefits 168.7 138.1 472.5 409.8
Occupancy and equipment
expense 52.5 48.3 156.5 163.6
Other marketing expenses 128.9 132.3 358.1 374.5
Other servicing and
administrative expenses 92.6 98.0 286.6 360.2
Policyholders' benefits 47.6 57.2 142.9 183.6
--------- --------- --------- ---------
Total costs and expenses 490.3 473.9 1,416.6 1,491.7
--------- --------- --------- ---------
Income before taxes 285.4 213.6 716.2 573.5
Income taxes 98.2 73.7 247.2 198.5
--------- --------- --------- ---------
Net income $ 187.2 $ 139.9 $ 469.0 $ 375.0
========= ========= ========= =========
Average managed receivables $44,554.6 $40,896.6 $42,857.1 $38,577.4
Average noninsurance
investments 372.7 829.3 679.9 1,670.2
--------- --------- --------- ---------
Average managed interest-
earning assets $44,927.3 $41,725.9 $43,537.0 $40,247.6
========= ========= ========= =========
* As a percent, annualized, of appropriate earning assets.
<FN>
<F1> Managed net interest margin as a percent of average managed
interest-earning assets for the nine months of 1997 and 1996
excludes temporary investments that were used for pre-funding
acquisitions in the second quarter of each year, and, in the second
quarter of 1996, for the sale of the company's remaining consumer
banking operations. Including the impact of these temporary
investments, managed net interest margin was 7.41 and 6.86 percent
for the nine months ended September 30, 1997 and 1996, respectively.
</FN>
</TABLE>
<PAGE>
<PAGE> 18
Unless noted, the following discussion on revenues and provision
for credit losses includes comparisons to amounts reported on the
company's historical statements of income ("Owned Basis") as well
as on the above pro forma statements of income ("Managed Basis").
Net interest margin
- -------------------
Net interest margin on an Owned Basis was $407.0 and $1,185.6
million for the third quarter and first nine months of 1997, up
from $383.0 and $1,086.0 million in the prior year periods. The
increase was primarily due to an increase in average owned home
equity loans, as a result of the acquisition of TFS, and growth in
private label receivables.
Net interest margin on a Managed Basis was $849.1 and $2,418.9
million for the third quarter and first nine months of 1997, up 16
and 17 percent, respectively, compared to $733.0 and $2,069.9
million in the same year-ago periods, primarily due to managed
receivable growth and improved pricing. Net interest margin as a
percent of average managed interest-earning assets, annualized, was
7.56 percent compared to 7.41 percent in the previous quarter and
7.03 percent in the year-ago quarter. The net interest margin
percentage on a Managed Basis in the second quarter of 1997
excludes the impact of temporary investments that were used to pre-
fund the acquisition of TFS. Including the impact of these
temporary investments, net interest margin as a percent of average
managed interest-earning assets, annualized, was 7.31 percent in
the second quarter of 1997. The improvement over the year-ago
quarter was primarily due to improved pricing, the continuing
change in product mix and lower leverage.
Provision for credit losses
- ---------------------------
The provision for credit losses for receivables on an Owned Basis
for the third quarter and first nine months of 1997 totaled $257.8
and $802.8 million, up 52 and 49 percent from $169.5 and $537.3
million in the comparable prior year periods. The provision as a
percent of average owned receivables, annualized, was 4.07 percent
in the third quarter of 1997 compared to 2.84 percent in the third
quarter of 1996. In view of uncertainty regarding consumer payment
patterns, the continued high levels of personal bankruptcies and
seasoning of unsecured loan products, the company continued to
increase its credit loss reserves in excess of current period
chargeoffs. Provision in excess of net chargeoffs related to owned
receivables was $18 million for the three months ended September
30, 1997 compared to net chargeoffs in excess of provision of $7
million for the same period in 1996. For the nine months ended
September 30, 1997 and 1996, provision in excess of net chargeoffs
related to owned receivables was $113 and $68 million,
respectively. The provision for credit losses on an Owned Basis may
vary from quarter to quarter, depending on the amount of
securitizations in a particular period.
The provision for credit losses for receivables on a Managed Basis
totaled $552.4 and $1,572.6 million in the third quarter and first
nine months of 1997, up 33 percent from $414.5 million and 31
percent from $1,200.5 million in the comparable periods of 1996. As
a percent of average managed receivables, annualized, the provision
increased to 4.96 percent from 4.05 percent in the third quarter of
1996. As noted above, the company increased credit loss reserves
during the quarter due to seasoning of unsecured loan products and
uncertainty over consumer payment patterns. In addition, the
Managed Basis provision includes the over-the-life reserve
requirement on securitized receivables. These provisions are
impacted by the type and amount of receivables securitized in a
given period and substantially offset the income recorded on the
securitization transactions. In the third quarter of 1997, the
company securitized approximately $1.0 billion of other unsecured
and Visa/MasterCard receivables, compared to approximately $1.4
billion of other unsecured receivables a year ago. For the first
nine months of 1997, the company securitized approximately $4.1
billion of other unsecured and Visa/MasterCard receivables compared
to approximately $4.8 billion of home equity, other unsecured and
Visa/MasterCard receivables in 1996. See the credit quality section
for further discussion of factors affecting the provision for
credit losses.
<PAGE>
<PAGE> 19
Other revenues
- --------------
Securitization income on an Owned Basis was $366.5 and $1,041.5
million for the third quarter and first nine months of 1997, up
from $282.0 and $841.9 million in the year-ago periods.
Securitization income consists of income associated with the
securitization and sale of receivables with limited recourse,
including net interest income, fee and other income and provision
for credit losses related to those receivables. The 30 and 24
percent increases in securitization income on an Owned Basis
compared to the third quarter and first nine months of 1996,
respectively, were primarily due to the increase in average
securitized receivables. The components of securitization income
are reclassified to the appropriate lines in the statements of
income on a Managed Basis.
Fee income on an Owned Basis includes revenues from fee-based
products such as credit cards and, in 1996, fees related to
consumer banking deposits. Fee income was $108.7 and $263.5 million
in the third quarter and first nine months of 1997, up from $62.1
and $165.3 million in the comparable periods of the prior year. The
increase over the prior year quarter reflected higher late fees as
a result of increased average owned credit card receivables
compared to 1996. The increase over the prior year-to-date amount
also reflected higher late fees, coupled with higher interchange
income.
Fee income on a Managed Basis, which in addition to the items
discussed above includes fees and other income related to
receivables serviced with limited recourse, increased to $327.7 and
$841.5 million in the third quarter and first nine months of 1997
from $239.1 and $686.5 million in the same periods in 1996. The
increase was primarily attributable to higher fees in the domestic
Visa/MasterCard business, as well as increases in interchange
income.
Other income was $48.8 and $146.5 million compared to $31.5 and
$195.4 million in the third quarter and first nine months of 1996.
The increase compared to the third quarter of 1996 was the result
of nonrecurring gains recognized on the sales of Visa/MasterCard
receivables from the company's non co-branded portfolio. Other
income in the first nine months of 1997 compared to the year-ago
period decreased as the 1996 amount included a $116.3 million
premium received on the sale of the company's banking operations in
Illinois in June 1996. Additionally, other income for the first
nine months of 1997 included nonrecurring gains of $50 million
related to the sale of certain non-strategic assets during the
first quarter.
Expenses
- --------
Operating expenses for the third quarter and first nine months of
1997 were $442.7 and $1,273.7 million, respectively, compared to
$416.7 and $1,308.1 million, respectively, in the comparable prior
year periods. The prior year-to-date amount included $78 million in
nonrecurring charges, as discussed below.
Salaries and fringe benefits were $168.7 and $472.5 million
compared to $138.1 and $409.8 million in the third quarter and
first nine months of 1996. The higher expense was primarily due to
an increase in sales force in the domestic consumer finance
business resulting from the acquisition of TFS in June 1997.
Occupancy and equipment expense for the third quarter and first
nine months of 1997 totaled $52.5 and $156.5 million, as compared
to $48.3 and $163.6 million in the prior year periods. In the
second quarter of 1996, the company recorded nonrecurring costs of
approximately $14 million related to the rationalization of office
space.
<PAGE>
<PAGE> 20
Other marketing expenses for the third quarter and first nine
months of 1997 totaled $128.9 and $358.1 million, down from $132.3
and $374.5 million in the comparable prior year periods. The 1997
third quarter expense reflected decreased marketing spending on the
company's credit card programs, partially offset by increased
goodwill amortization resulting from the TFS acquisition in June
1997. The decrease in year-to-date marketing spending for the
domestic credit card programs reflects the deferral of major
mailings during the first six months of 1997 as the company worked
on marketing plans with the individual AFL/CIO unions in the Union
Privilege program.
Other servicing and administrative expenses for the third quarter
and first nine months of 1997 totaled $92.6 and $286.6 million,
down from $98.0 and $360.2 million in the comparable periods. The
decrease in the year-to-date amount was primarily due to $64
million of nonrecurring charges included in 1996, as well as lower
expenses in 1997 as the result of the 1996 sale of the company's
Illinois banking operations.
CREDIT LOSS RESERVES
- --------------------
The company's consumer credit management policies focus on product
type and specific portfolio risk factors. The consumer credit
portfolio is diversified by product and geographic location. See
Note 4, "Receivables" in the accompanying financial statements for
receivables by product type.
Total managed credit loss reserves, which include reserves for recourse
obligations for receivables sold, were as follows (in millions):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
September 30, June 30, December 31, September 30,
1997 1997 1996 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Owned $1,062.7 $1,051.0 $ 900.2 $ 862.5
Serviced with limited
recourse 746.5 719.9 696.0 665.4
-------- -------- -------- --------
Total $1,809.2 $1,770.9 $1,596.2 $1,527.9
======== ======== ======== ========
</TABLE>
Credit loss reserves have increased due to seasoning of unsecured
products and increased personal bankruptcies. Managed credit loss
reserves as a percent of nonperforming managed receivables were
117.3 percent, compared to 118.5 percent at June 30, 1997 and 126.6
percent at September 30, 1996.
Total owned and managed credit loss reserves as a percent of
receivables were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
September 30, June 30, December 31, September 30,
1997 1997 1996 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Owned 4.35% 4.24% 3.74% 3.57%
Managed 4.10 3.97 3.75 3.67
---- ---- ---- ----
</TABLE>
The level of reserves for consumer credit losses is based on
delinquency and chargeoff experience by product and judgmental
factors. Management also evaluates the potential impact of existing
and anticipated national and regional economic conditions on the
managed receivable portfolio when establishing credit loss
reserves. See Note 5, "Credit Loss Reserves" in the accompanying
financial statements for analyses of reserves.
<PAGE>
<PAGE> 21
CREDIT QUALITY
- --------------
Delinquency and chargeoff levels in the consumer portfolio were
higher compared to the prior and year-ago quarters. Delinquency and
chargeoff levels are monitored on a managed basis since all of the
receivables are originated using comparable underwriting standards,
are managed by operating personnel without regard to portfolio
ownership and result in a similar credit loss exposure.
Delinquency
- -----------
Two-Months-and-Over Contractual Delinquency (as a percent of
managed consumer receivables):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
9/30/97 6/30/97 3/31/97 12/31/96 9/30/96
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
First mortgage 9.27% 10.27% 8.19% 9.49% 3.82%
Home equity 3.41 3.18 3.85 3.96 3.55
Visa/MasterCard 3.17 3.10 3.13 2.71 2.54
Private label 6.54 5.89 5.52 5.50 5.43
Other unsecured 7.28 6.77 6.68 6.13 5.79
---- ---- ---- ---- ----
Total 4.62% 4.32% 4.45% 4.15% 3.83%
==== ==== ==== ==== ====
</TABLE>
Delinquency as a percent of managed consumer receivables increased
from the prior quarter and the prior year. The increase in
delinquency from the second quarter was primarily due to seasoning
of the other unsecured portfolio, as well as seasoning of
promotional business in the private label portfolio. Home equity
delinquency was up due to the normal maturation of the TFS
acquisition. Visa/MasterCard delinquency was moderately flat in the
quarter. Dollars of delinquency in the first mortgage portfolio
were down from June as this portfolio continues to liquidate.
The increase in the delinquency ratio compared to a year ago was
primarily due to seasoning of the portfolios and the company's
continued shift in portfolio mix away from traditional first
mortgages and toward unsecured products.
Net Chargeoffs of Consumer Receivables
- --------------------------------------
Net Chargeoffs of Consumer Receivables (as a percent, annualized,
of average managed consumer receivables):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
1997 1997 1997 1996 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
First mortgage 1.21% .87% .94% .30% .50%
Home equity .77 1.17 1.38 1.18 .98
Visa/MasterCard 6.42 5.84 4.90 4.66 4.71
Private label 4.99 4.63 4.85 3.70 3.54
Other unsecured 5.93 5.41 4.97 4.18 4.35
---- ---- ---- ---- ----
Total 4.63% 4.58% 4.15% 3.59% 3.52%
==== ==== ==== ==== ====
</TABLE>
<PAGE>
<PAGE> 22
Net chargeoffs as a percent of average managed consumer receivables
for the third quarter of 1997 increased compared to both the prior
and year-ago periods. The increase in Visa/MasterCard chargeoffs in
the quarter was primarily due to the maturation of the portfolio
purchased from Barnett Banks, Inc. in the fourth quarter of 1996.
The Visa/MasterCard chargeoff ratio was also negatively affected by
lower average receivables compared to the prior quarter. Chargeoffs
in the private label portfolio also increased due to the maturing
of promotional balances and high levels of personal bankruptcies.
The remaining increase in the total chargeoff ratio was primarily
attributable to the continued seasoning of the other unsecured
portfolio, also coupled with high levels of personal bankruptcies.
The increase in the chargeoff ratio compared to a year ago was
primarily due to increased bankruptcy filings in the
Visa/MasterCard portfolio and continued seasoning of the private
label and other unsecured portfolios.
Nonperforming Assets
- --------------------
Nonperforming assets consisted of the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
In millions. 9/30/97 6/30/97 3/31/97 12/31/96 9/30/96
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual managed
receivables $ 894.3 $ 865.0 $ 820.1 $ 778.5 $ 741.1
Accruing managed consumer
receivables 90 or more days
delinquent 634.7 616.3 598.5 549.0 446.1
Renegotiated commercial
loans 12.9 12.9 12.9 12.9 19.9
-------- -------- -------- -------- --------
Total nonperforming managed
receivables 1,541.9 1,494.2 1,431.5 1,340.4 1,207.1
Real estate owned 150.5 149.4 152.6 136.6 137.6
-------- -------- -------- -------- --------
Total nonperforming assets $1,692.4 $1,643.6 $1,584.1 $1,477.0 $1,344.7
======== ======== ======== ======== ========
Managed credit loss reserves as
a percent of nonperforming
managed receivables 117.3% 118.5% 118.6% 119.1% 126.6%
-------- -------- -------- -------- --------
</TABLE>
<PAGE>
<PAGE> 23
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
12 Statement of Computation of Ratio of Earnings
to Fixed Charges and to Combined Fixed Charges and
Preferred Stock Dividends.
21 List of Household International subsidiaries.
27 Financial Data Schedule.
99.1 Debt and Preferred Stock Securities Ratings.
(b) Reports on Form 8-K
No Form 8-K reports were filed during the third quarter of 1997.
<PAGE>
<PAGE> 24
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
HOUSEHOLD INTERNATIONAL, INC.
-----------------------------
(Registrant)
Date: November 13, 1997 By: /s/ David A. Schoenholz
----------------- -----------------------------
David A. Schoenholz
Executive Vice President -
Chief Financial Officer
and on behalf of
Household International, Inc.
<PAGE>
<PAGE> 25
Exhibit Index
-------------
12 Statement of Computation of Ratio of Earnings
to Fixed Charges and to Combined Fixed Charges and
Preferred Stock Dividends.
21 List of Household International subsidiaries.
27 Financial Data Schedule.
99.1 Debt and Preferred Stock Securities Ratings.
<PAGE> 1
EXHIBIT 12
----------
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND TO COMBINED
FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
All dollar amounts are stated in millions.
Nine months ended September 30 1997 1996
- ------------------------------------------------------------------
<S> <C> <C>
Net income $ 469.0 $ 375.0
Income taxes 247.2 198.5
-------- --------
Income before income taxes 716.2 573.5
-------- --------
Fixed charges:
Interest expense <F1> 1,121.5 1,124.7
Interest portion of rentals <F2> 20.7 21.3
-------- --------
Total fixed charges 1,142.2 1,146.0
-------- --------
Total earnings as defined $1,858.4 $1,719.5
======== ========
Ratio of earnings to fixed charges 1.63 1.50
======== ========
Preferred stock dividends <F3> $ 13.7 $ 19.2
======== ========
Ratio of earnings to combined fixed charges
and preferred stock dividends 1.61 1.48
======== ========
<FN>
<F1> For financial statement purposes, interest expense includes
income earned on temporary investment of excess funds,
generally resulting from over-subscriptions of commercial
paper.
<F2> Represents one-third of rentals, which approximates the
portion representing interest.
<F3> Preferred stock dividends are grossed up to their pretax
equivalent based upon an effective tax rate of 34.5 and 34.6
percent for the nine months ended September 30, 1997 and 1996,
respectively.
</FN>
</TABLE>
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF HOUSEHOLD INTERNATIONAL, INC.
- ---------------------------------------------
As of September 30, 1997, the following subsidiaries were
directly or indirectly owned by the Registrant. Certain
subsidiaries which in the aggregate do not constitute significant
subsidiaries may be omitted.
%
Voting
Stock
Organized Owned
Under By
Names of Subsidiaries Laws of: Parent
- --------------------- --------- ------
Hamilton Investments, Inc. Delaware 100%
Craig-Hallum Corporation Delaware 100%
Household Auto Corporation Delaware 100%
Household Bank, f.s.b U.S. 100%
HHTS, Inc. Illinois 100%
Household Bank (SB), N.A. U.S. 100%
Household Affinity Funding Corporation Delaware 100%
Household Service Corporation
of Illinois, Inc. Illinois 100%
Household Insurance Services, Inc. Illinois 100%
Housekey Financial Corporation Illinois 100%
Household Mortgage Services, Inc. Delaware 100%
Household Capital Corporation Delaware 100%
Household Commercial Canada Inc. Canada 100%
Household Finance Corporation Delaware 100%
HFC Auto Credit Corp. Delaware 100%
HFC Card Funding Corporation Delaware 100%
HFC Funding Corporation Delaware 100%
HFC Revolving Corporation Delaware 100%
HFS Funding Corporation Delaware 100%
Household Acquisition Corporation Delaware 100%
HFTA Corporation Delaware 100%
First Credit Corporation Delaware 100%
HFTA Consumer Discount Company Pennsylvania 100%
HFTA First Financial Corporation California 100%
HFTA Second Corporation Alabama 100%
HFTA Third Corporation Delaware 100%
HFTA Fourth Corporation Minnesota 100%
HFTA Fifth Corporation Nevada 100%
HFTA Sixth Corporation Nevada 100%
HFTA Seventh Corporation New Jersey 100%
HFTA Eighth Corporation Ohio 100%
HFTA Ninth Corporation West Virginia 100%
HFTA Tenth Corporation Washington 100%
<PAGE>
<PAGE> 2
%
Voting
Stock
Organized Owned
Under By
Names of Subsidiaries Laws of: Parent
- --------------------- --------- ------
Household Auto Corporation Delaware 100%
Household Finance Corporation of Hawaii Hawaii 100%
Household Realty Corporation (1997)
Limited B.C. 100%
Pacific Finance Loans California 100%
Household Bank (Nevada), N.A. U.S. 100%
Household Card Funding Corporation Delaware 100%
Household Receivables Funding Corporation Nevada 100%
Household Receivables Funding Delaware 100%
Corporation II
Household Receivables Funding, Inc. Delaware 100%
Household Capital Markets, Inc. Delaware 100%
Household Card Services, Inc. Nevada 100%
Household Bank (Illinois), N.A. U.S. 100%
Household Consumer Loan Corporation Nevada 100%
Household Corporation Delaware 100%
Household Credit Services, Inc. Delaware 100%
Household Credit Services of Mexico, Inc. Delaware 100%
Household Finance Receivables Corporation IIDelaware 100%
Household Financial Services, Inc. Delaware 100%
Household Group, Inc. Delaware 100%
AHLIC Investment Holdings Corporation Delaware 100%
Arcadia General Insurance Company Arizona 100%
Arcadia Insurance Administrators, Inc. Delaware 100%
Arcadia National Life Insurance Company Arizona 100%
Cal-Pacific Services, Inc. California 100%
Household Insurance Agency, Inc. Michigan 100%
Household Insurance Company Michigan 100%
Household Life Insurance Co. of Arizona Arizona 100%
Household Life Insurance Company Michigan 100%
Household Business Services, Inc. Delaware 100%
Household Commercial Financial Delaware 100%
Services, Inc.
Business Realty Inc. Delaware 100%
Business Lakeview, Inc. Delaware 100%
Capital Graphics, Inc. Delaware 100%
Color Prelude Inc. Delaware 100%
HCFS Business Equipment Corporation Delaware 100%
HFC Commercial Realty, Inc. Delaware 100%
G.C. Center, Inc. Delaware 100%
Com Realty, Inc. Delaware 100%
Lighthouse Property Corporation Delaware 100%
Household OPEB I, Inc. Illinois 100%
Land of Lincoln Builders, Inc. Illinois 100%
<PAGE>
<PAGE> 3
Voting
Stock
Organized Owned
Under By
Names of Subsidiaries Laws of: Parent
- --------------------- --------- ------
PPSG Corporation Delaware 100%
Steward's Glenn Corporation Delaware 100%
HFC Leasing, Inc. Delaware 100%
First HFC Leasing Corporation Delaware 100%
Second HFC Leasing Corporation Delaware 100%
Valley Properties Corporation Tennessee 100%
Fifth HFC Leasing Corporation Delaware 100%
Sixth HFC Leasing Corporation Delaware 100%
Seventh HFC Leasing Corporation Delaware 100%
Eighth HFC Leasing Corporation Delaware 100%
Tenth HFC Leasing Corporation Delaware 100%
Eleventh HFC Leasing Corporation Delaware 100%
Thirteenth HFC Leasing Corporation Delaware 100%
Fourteenth HFC Leasing Corporation Delaware 100%
Seventeenth HFC Leasing Corporation Delaware 100%
Nineteenth HFC Leasing Corporation Delaware 100%
Twenty-second HFC Leasing Corporation Delaware 100%
Twenty-sixth HFC Leasing Corporation Delaware 100%
Beaver Valley, Inc. Delaware 100%
Hull 752 Corporation Delaware 100%
Hull 753 Corporation Delaware 100%
Third HFC Leasing Corporation Delaware 100%
Macray Corporation California 100%
Fourth HFC Leasing Corporation Delaware 100%
Pargen Corporation California 100%
Fifteenth HFC Leasing Corporation Delaware 100%
Hull Fifty Corporation Delaware 100%
Household Capital Investment Corporation Delaware 100%
B&K Corporation Michigan 94%
Household Commercial of California, Inc. California 100%
OLC, Inc. Rhode Island 100%
OPI, Inc. Virginia 100%
Household Finance Consumer Discount CompanyPennsylvania 100%
Overseas Leasing Two FSC, Ltd. Bermuda 99%
Household Finance Corporation II Delaware 100%
Household Finance Corporation of Alabama Alabama 100%
Household Finance Corporation of CaliforniaDelaware 100%
Household Finance Corporation of Nevada Delaware 100%
Household Finance Realty Corporation of Delaware 100%
New York
Household Finance Corporation of
West Virginia West Virginia 100%
Household Finance Industrial Loan Company Washington 100%
Household Finance Industrial Loan Company Iowa 100%
of Iowa<PAGE>
<PAGE> 4
%
Voting
Stock
Organized Owned
Under By
Names of Subsidiaries Laws of: Parent
- --------------------- --------- ------
Household Finance Realty Corporation of Delaware 100%
Nevada
Household Finance Corporation III Delaware 100%
Amstelveen FSC, Ltd. Bermuda 99%
HFC Agency of Connecticut, Inc. Connecticut 100%
HFC Agency of Michigan, Inc. Michigan 100%
HFC Agency of Missouri, Inc. Missouri 100%
Night Watch FSC, Ltd. Bermuda 99%
Household Realty Corporation Delaware 100%
Overseas Leasing One FSC, Ltd. Bermuda 100%
Overseas Leasing Four FSC, Ltd. Bermuda 99%
Overseas Leasing Five FSC, Ltd. Bermuda 99%
Household Retail Services, Inc. Delaware 100%
HRSI Funding, Inc. Nevada 100%
Household Financial Center Inc. Tennessee 100%
Household Industrial Finance Company Minnesota 100%
Household Industrial Loan Co. of Kentucky Kentucky 100%
Household Insurance Agency, Inc. Nevada 100%
Household Recovery Services Corporation Delaware 100%
Household Relocation Management, Inc. Illinois 100%
Mortgage One Corporation Delaware 100%
Mortgage Two Corporation Delaware 100%
Pacific Agency Inc. Nevada 100%
Sixty-First HFC Leasing Corporation Delaware 100%
Household Pooling Corporation Nevada 100%
Household Receivables Acquisition Company Delaware 100%
Household Financial Group, Ltd. Delaware 100%
Household Global Funding, Inc. Delaware 100%
Household International (U.K.) Limited England 100%
D.L.R.S. Limited Cheshire 100%
HFC Bank plc England 100%
Hamilton Financial Planning Services
Limited England 100%
Hamilton Insurance Company Limited England 100%
Hamilton Life Assurance Co. Limited England 100%
HFC Pension Plan Limited England 100%
Household Funding Limited England 100%
Household Investments Limited England/Wales 100%
Household Leasing Limited England 100%
Household Management Corporation Limited England/Wales 100%
Household Overseas Limited England 100%
Household International Netherlands, B.V. Netherlands 100%
<PAGE>
<PAGE> 5
%
Voting
Stock
Organized Owned
Under By
Names of Subsidiaries Laws of: Parent
- --------------------- --------- ------
Household Financial Corporation Limited Ontario 100%
Household Finance Corporation of Canada Canada 100%
Household Realty Corporation Limited Ontario 100%
Household Trust Company Canada 100%
Merchant Retail Services Limited Ontario 100%
Household Reinsurance Ltd. Bermuda 100%
U:\LAW\EDGAR\IEX21.WP (11/03/97)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FOLLOWING SUMMARY FINANCIAL INFORMATION OF THE COMPANY AND
ITS SUBSIDIARIES IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED
INFORMATION AND FINANCIAL STATEMENTS PREVIOUSLY FILED WITH THE
SECURITIES & EXCHANGE COMMISSION.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 345,100
<SECURITIES> 2,261,500
<RECEIVABLES> 24,445,000
<ALLOWANCES> 1,809,200
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 730,800
<DEPRECIATION> 409,200
<TOTAL-ASSETS> 30,650,800
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 15,168,000
0
150,000
<COMMON> 124,300
<OTHER-SE> 4,366,800
<TOTAL-LIABILITY-AND-EQUITY> 30,650,800
<SALES> 0
<TOTAL-REVENUES> 4,051,700
<CGS> 0
<TOTAL-COSTS> 1,416,600
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 802,800
<INTEREST-EXPENSE> 1,116,100
<INCOME-PRETAX> 716,200
<INCOME-TAX> 247,200
<INCOME-CONTINUING> 469,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 469,000
<EPS-PRIMARY> 4.50
<EPS-DILUTED> 4.50
<FN>
<F1>FINANCIAL STATEMENTS OF THE COMPANY WERE PREPARED IN ACCORDANCE
WITH FINANCIAL INSTITUTION INDUSTRY STANDARDS. ACCORDINGLY, THE
COMPANY'S BALANCE SHEETS WERE NON-CLASSIFIED.
</FN>
</TABLE>
<PAGE> 1
EXHIBIT 99.1
------------
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
DEBT AND PREFERRED STOCK SECURITIES RATINGS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Standard Moody's Fitch Duff & Phelps
& Poor's Investors Investors Credit Thomson
Corporation Service Services Rating Co. BankWatch
- ------------------------------------------------------------------------------------------------------
At September 30, 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Household International, Inc.
Senior debt A A3 A A A
Commercial paper A-1 P-2 F-1 Duff 1 TBW-1
Preferred stock A- baa1 A- A- BBB+
----------- --------- --------- ------------- ---------
Household Finance Corporation
Senior debt A A2 A+ A+ A+
Senior subordinated debt A- A3 A A A
Commercial paper A-1 P-1 F-1 Duff 1+ TBW-1
----------- --------- --------- ------------- ---------
Household Bank, f.s.b.
Senior debt A A2 A A NR
Subordinated debt A- A3 A- A- A
Certificates of deposit
(long/short-term) A/A-1 A2/P-1 A/F-1 A/Duff 1 TBW-1
Thrift notes A-1 P-1 F-1 Duff 1 TBW-1
- ------------------------------------------------------------------------------------------------------
</TABLE>
