<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 June 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. EmployerIdentification 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 July 31, 1997, there were 106,807,865 shares of
registrant's common stock outstanding.
<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 Six Months
Ended June 30, 1997 and 1996 2
Condensed Consolidated Balance Sheets -
June 30, 1997 (Unaudited) and December 31, 1996 3
Condensed Consolidated Statements of Cash Flows
(Unaudited) - Six Months Ended
June 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 4. Submission of Matters to a Vote of
Security-Holders 21
Item 6. Exhibits and Reports on Form 8-K 21
Signature 22
<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 Six months ended
June 30, June 30,
1997 1996 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Finance income $729.9 $701.3 $1,481.5 $1,380.8
Interest income from noninsurance
investment securities 15.7 39.0 24.0 59.3
Interest expense 361.8 383.7 726.9 737.1
------ ------ -------- --------
Net interest margin 383.8 356.6 778.6 703.0
Provision for credit losses on owned
receivables 251.6 176.5 545.0 367.8
------ ------ -------- --------
Net interest margin after provision for
credit losses 132.2 180.1 233.6 335.2
------ ------ -------- --------
Securitization income 344.3 280.5 675.0 559.9
Insurance revenues 68.5 58.4 133.9 122.3
Investment income 28.9 36.3 62.1 93.2
Fee income 77.4 53.3 154.8 103.2
Other income 28.6 138.6 97.7 163.9
------ ------ -------- --------
Total other revenues 547.7 567.1 1,123.5 1,042.5
------ ------ -------- --------
Salaries and fringe benefits 156.2 135.0 303.8 271.7
Occupancy and equipment expense 50.1 62.9 104.0 115.3
Other marketing expenses 110.5 141.8 229.2 242.2
Other servicing and administrative
expenses 84.6 156.4 194.0 262.2
Policyholders' benefits 48.3 53.2 95.3 126.4
------ ------ -------- --------
Total costs and expenses 449.7 549.3 926.3 1,017.8
------ ------ -------- --------
Income before income taxes 230.2 197.9 430.8 359.9
Income taxes 79.9 73.3 149.0 124.8
------ ------ -------- --------
Net income $150.3 $124.6 $ 281.8 $ 235.1
====== ====== ======== =======
Earnings per common share:
Net income $150.3 $124.6 $ 281.8 $ 235.1
Preferred dividends (2.9) (4.2) (6.1) (8.3)
------ ------ -------- -------
Net income available to common
shareholders $147.4 $120.4 $ 275.7 $ 226.8
====== ====== ======== =======
Average common and common equivalent
shares 99.6 98.4 99.2 98.5
------ ------ -------- -------
Net income per common share $ 1.48 $ 1.22 $ 2.78 $ 2.30
------ ------ -------- -------
Dividends declared per common share .39 .34 .78 .68
------ ------ -------- -------
</TABLE>
See notes to interim condensed consolidated financial statements.
<PAGE> 4
Household International, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
- -------------------------------------
In millions, except share data.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
June 30, December 31,
1997 1996
- ---------------------------------------------------------------------------
ASSETS (Unaudited)
- ------
<S> <C> <C>
Cash $ 358.1 $ 239.2
Investment securities 2,311.1 2,282.0
Receivables, net 25,049.0 24,244.8
Acquired intangibles and goodwill, net 1,640.8 969.4
Properties and equipment, net 334.8 353.1
Real estate owned 149.4 136.6
Other assets 1,357.9 1,369.4
--------- ---------
Total assets $31,201.1 $29,594.5
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Debt:
Deposits $ 1,971.0 $ 2,365.1
Commercial paper, bank and other borrowings 6,011.2 6,428.1
Senior and senior subordinated debt (with
original maturities over one year) 15,854.2 14,802.0
--------- ---------
Total debt 23,836.4 23,595.2
Insurance policy and claim reserves 1,255.2 1,205.3
Other liabilities 1,640.9 1,472.8
--------- ---------
Total liabilities 26,732.5 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 June 30, 1997
and December 31, 1996, respectively 124.3 115.2
Additional paid-in capital 1,387.8 397.3
Retained earnings 3,273.0 3,076.8
Foreign currency translation adjustments (126.2) (126.7)
Unrealized loss on investments, net (22.7) (12.9)
Less common stock in treasury, 17,603,989 and
18,165,921 shares at June 30, 1997 and
December 31, 1996, respectively, at cost (492.6) (508.5)
--------- ---------
Total common shareholders' equity 4,143.6 2,941.2
--------- ---------
Total liabilities and shareholders' equity $31,201.1 $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> 5
Household International, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- ----------------------------------------------------------
In millions.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Six months ended June 30 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C>
CASH PROVIDED BY OPERATIONS
Net income $ 281.8 $ 235.1
Adjustments to reconcile net income to cash
provided by operations:
Provision for credit losses on owned
receivables 545.0 367.8
Insurance policy and claim reserves 46.5 50.7
Depreciation and amortization 123.1 119.7
Net realized gains from sales of assets (64.6) (119.2)
Other, net (9.2) 518.9
---------- ----------
Cash provided by operations 922.6 1,173.0
---------- ----------
INVESTMENTS IN OPERATIONS
Investment securities:
Purchased (526.0) (1,513.6)
Matured 178.4 486.7
Sold 341.7 1,994.2
Short-term investment securities, net change 9.8 (336.1)
Receivables:
Originations, net (12,786.5) (12,789.7)
Purchased (435.1) (3,675.7)
Sold 15,099.2 13,802.1
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 - (2,807.8)
Acquisition of portfolios, net - (620.1)
Properties and equipment purchased (32.8) (35.7)
Properties and equipment sold 6.1 7.1
---------- ----------
Cash increase (decrease) from investments in
operations 789.8 (5,016.3)
---------- ----------
FINANCING AND CAPITAL TRANSACTIONS
Short-term debt and demand deposits, net change (504.9) (58.3)
Time certificates, net change (267.4) 544.9
Senior and senior subordinated debt issued 3,799.7 4,875.1
Senior and senior subordinated debt retired (2,729.4) (1,577.1)
Repayment of Transamerica Financial Services
Holding Company debt (2,795.0) -
Policyholders' benefits paid (74.5) (59.1)
Cash received from policyholders 102.9 188.4
Shareholders' dividends (85.6) (74.4)
Purchase of treasury stock - (35.8)
Redemption of preferred stock (55.0) -
Issuance of common stock 1,006.6 8.0
Issuance of company obligated mandatorily
redeemable preferred securities of
subsidiary trusts - 100.0
---------- ----------
Cash increase (decrease) from financing and
capital transactions (1,602.6) 3,911.7
---------- ----------
Effect of exchange rate changes on cash 9.1 (2.1)
---------- ----------
Increase in cash 118.9 66.3
Cash at January 1 239.2 270.4
---------- ----------
Cash at June 30 $ 358.1 $ 336.7
========== ==========
Supplemental cash flow information:
Interest paid $ 717.7 $ 697.9
---------- ----------
Income taxes paid 133.5 73.5
---------- ----------
</TABLE>
See notes to interim condensed consolidated financial statements.
<PAGE> 6
Household International, Inc. and Subsidiaries
FINANCIAL HIGHLIGHTS
- --------------------
All dollar amounts are stated in millions.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 150.3 $ 124.6 $ 281.8 $ 235.1
-------- -------- -------- --------
Revenues 1,293.3 1,307.4 2,629.0 2,482.6
-------- -------- -------- --------
Return on average common
shareholders' equity <F1> 18.7% 17.9% 18.0% 16.8%
-------- -------- -------- --------
Return on average owned assets <F1> 2.09 1.71 1.93 1.62
-------- -------- -------- --------
Managed basis efficiency
ratio, normalized <F2> 36.3 43.4 37.3 42.4
-------- -------- -------- --------
</TABLE>
All dollar amounts are stated in millions.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
June 30, December 31,
1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C>
Total assets:
Owned $31,201.1 $29,594.5
Managed 51,013.7 48,120.9
--------- ---------
Receivables:
Owned $24,797.5 $24,067.0
Serviced with limited recourse 19,812.6 18,526.4
--------- ---------
Managed $44,610.1 $42,593.4
========= =========
Total shareholders' equity as a percent
of owned assets <F3> 14.32% 11.22%
--------- ---------
Total shareholders' equity as a percent
of managed assets <F3> 8.76 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 June 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> 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 six months ended June
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. ACQUISITION 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 are 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.
3. INVESTMENT SECURITIES
- --------------------------
Investment securities consisted of the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
In millions. June 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 $ 126.0 $ 126.8 $ 212.7 $ 213.1
Corporate debt securities 1,208.0 1,190.3 1,081.4 1,070.5
U.S. government and federal
agency debt securities 283.6 267.1 287.0 277.7
Other 695.9 695.8 690.5 690.5
-------- -------- -------- --------
Subtotal 2,313.5 2,280.0 2,271.6 2,251.8
Accrued investment income 31.1 31.1 30.2 30.2
-------- -------- -------- --------
Total investment securities $2,344.6 $2,311.1 $2,301.8 $2,282.0
======== ======== ======== ========
</TABLE>
<PAGE> 8
4. RECEIVABLES
- ---------------
Receivables consisted of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
June 30, December 31,
In millions. 1997 1996
- -------------------------------------------------------------------
<S> <C> <C>
First mortgage $ 510.4 $ 725.6
Home equity 7,440.3 3,647.9
Visa/MasterCard 5,721.3 8,587.7
Private label 5,316.2 5,070.0
Other unsecured 4,952.3 5,098.0
Commercial 857.0 937.8
--------- ---------
Total owned receivables 24,797.5 24,067.0
Accrued finance charges 400.4 397.6
Credit loss reserve for
owned receivables (1,051.0) (900.2)
Unearned credit insurance premiums
and claims reserves (226.9) (184.6)
Amounts due and deferred from
receivables sales 1,848.9 1,561.0
Reserve for receivables serviced with
limited recourse (719.9) (696.0)
--------- ---------
Total owned receivables, net 25,049.0 24,244.8
Receivables serviced with limited
recourse 19,812.6 18,526.4
--------- ---------
Total managed receivables, net $44,861.6 $42,771.2
========= =========
</TABLE>
The outstanding balance of receivables serviced with
limited recourse consisted of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
June 30, December 31,
In millions. 1997 1996
- -------------------------------------------------------------------
<S> <C> <C>
Home equity $ 3,726.8 $ 4,337.5
Visa/MasterCard 11,731.1 10,149.7
Private label 375.0 517.0
Other unsecured 3,979.7 3,522.2
--------- ---------
Total $19,812.6 $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>
- -------------------------------------------------------------------
June 30, December 31,
In millions. 1997 1996
- -------------------------------------------------------------------
<S> <C> <C>
First mortgage $ 510.4 $ 725.6
Home equity 11,167.1 7,985.4
Visa/MasterCard 17,452.4 18,737.4
Private label 5,691.2 5,587.0
Other unsecured 8,932.0 8,620.2
Commercial 857.0 937.8
--------- ---------
Total $44,610.1 $42,593.4
========= =========
</TABLE>
<PAGE> 9
At June 30, 1997 and December 31, 1996, the amounts due and
deferred from receivables sales of $1,848.9 and $1,561.0
million, respectively, included the unamortized
securitization assets and funds established pursuant to the
recourse provisions for certain sales totaling $1,216.4 and
$1,033.1 million, respectively. The amounts due and
deferred also included customer payments not yet remitted
by the securitization trustee to the company of $623.6 and
$512.6 million at June 30, 1997 and December 31, 1996,
respectively. In addition, the company has subordinated
interests in certain transactions, which were recorded as
receivables, of $738.4 and $485.0 million at June 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 $719.9 and $696.0
million at June 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 six months ended
June 30 was as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
In millions. 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Credit loss reserves for owned
receivables at beginning
of period $ 943.9 $ 758.1 $ 900.2 $ 720.4
Provision for credit losses 251.6 176.5 545.0 367.8
Chargeoffs (253.4) (164.8) (516.6) (354.1)
Recoveries 39.4 28.6 66.8 61.0
Portfolio acquisitions, net 69.5 59.9 55.6 63.2
-------- -------- -------- --------
TOTAL CREDIT LOSS RESERVES FOR
OWNED RECEIVABLES AT JUNE 30 1,051.0 858.3 1,051.0 858.3
-------- -------- -------- --------
Credit loss reserves for
receivables serviced with
limited recourse at beginning
of period 753.3 532.7 696.0 457.0
Provision for credit losses 226.1 209.1 475.2 418.2
Chargeoffs (273.0) (156.1) (477.3) (293.6)
Recoveries 12.9 6.6 22.8 12.4
Other, net .6 .5 3.2 (1.2)
-------- -------- -------- --------
TOTAL CREDIT LOSS RESERVES FOR
RECEIVABLES SERVICED WITH
LIMITED RECOURSE AT JUNE 30 719.9 592.8 719.9 592.8
-------- -------- -------- --------
TOTAL CREDIT LOSS RESERVES FOR
MANAGED RECEIVABLES AT JUNE 30 $1,770.9 $1,451.1 $1,770.9 $1,451.1
======== ======== ======== ========
</TABLE>
6. INCOME TAXES
- -----------------
Effective tax rates for the six months ended June 30, 1997
and 1996 of 34.6 and 34.7 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> 10
7. NET INCOME PER COMMON SHARE
- --------------------------------
Computations of net income per common share for the three and six months
ended June 30 were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Three Months Ended
June 30,
1997 1996
- -----------------------------------------------------------------------------------
Fully Fully
In millions, except per share data. Primary Diluted Primary Diluted
- ----------------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Earnings:
Net income $150.3 $150.3 $124.6 $124.6
Preferred dividends (2.9) (2.9) (4.2) (4.2)
------ ------ ------ ------
Net income available to common
shareholders $147.4 $147.4 $120.4 $120.4
====== ====== ====== ======
Average shares:
Common 98.0 98.0 97.1 97.1
Common equivalents 1.4 1.6 1.2 1.3
------ ------ ------ ------
Total 99.4 99.6 98.3 98.4
====== ====== ====== ======
Net income per common share $ 1.48 $ 1.48 $ 1.22 $ 1.22
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Six Months Ended
June 30,
1997 1996
- -----------------------------------------------------------------------------------
Fully Fully
In millions, except per share data. Primary Diluted Primary Diluted
- ----------------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Earnings:
Net income $281.8 $281.8 $235.1 $235.1
Preferred dividends (6.1) (6.1) (8.3) (8.3)
------ ------ ------ ------
Net income available to common
shareholders $275.7 $275.7 $226.8 $226.8
====== ====== ====== ======
Average shares:
Common 97.6 97.6 97.2 97.2
Common equivalents 1.4 1.6 1.2 1.3
------ ------ ------ ------
Total 99.0 99.2 98.4 98.5
====== ====== ====== ======
Net income per common share $ 2.78 $ 2.78 $ 2.30 $ 2.30
====== ====== ====== ======
</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> 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 June 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 June 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> 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> 13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OPERATIONS SUMMARY
- ------------------
Net income for the second quarter and first six months of
1997 was $150.3 and $281.8 million, up 21 and 20 percent
from $124.6 and $235.1 million in the respective 1996
periods. Earnings per share was $1.48 in the second quarter
and $2.78 for the first six months of 1997, up from $1.22
and $2.30 per share in the same periods in 1996. The
company's annualized return on average common shareholders'
equity for the second quarter and first six months of 1997
was 18.7 and 18.0 percent, respectively, up from 17.9 and
16.8 percent in the respective year-ago periods, even as
the company continued to strengthen its capital ratio. The
annualized return on average owned assets improved to 2.09
and 1.93 percent in the second quarter and first six months
of 1997, respectively, up from 1.71 and 1.62 percent in the
same year-ago periods.
- - 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 are home
equity loans secured primarily by home mortgages. The
acquisition of TFS strengthens the company's core
consumer finance operations by expanding its branch network
in many new and existing markets, adding new customer
accounts, and increases the secured loan portion of the
company's receivables portfolio.
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.
After goodwill amortization and the additional shares
issued in connection with the financing of the
acquisition, the company expects that the acquisition
will be slightly accretive to earnings per share in 1997
and accretive in 1998.
- - The following is a summary of the operating results of
the company's key businesses for the second quarter and
first six months of 1997 compared to the corresponding
prior year periods:
Net interest margin in the domestic consumer finance
business continued to expand in the second quarter and
first six months of 1997 due to improved pricing and a
relative shift in the portfolio to unsecured loans, but
was partially offset by higher credit losses primarily
due to increased bankruptcies.
The Visa/MasterCard* business experienced 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 refining
pricing strategies, increasing fees and systematically
eliminating unprofitable accounts. Results for this
business continued to benefit from the company's co-branding
strategy, 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 from increased personal bankruptcy filings
in the second quarter and first six months of 1997, which
were partially offset by higher net interest margin.
* VISA and MasterCard are registered trademarks of VISA
USA, Inc. and MasterCard International, Incorporated,
respectively.
<PAGE> 14
The United Kingdom operation experienced improved
efficiency, as well as higher net interest margin,
interchange income and insurance premiums, due to
receivables growth. During the quarter, United Kingdom
credit card accounts grew 12 percent and credit card
receivables grew to over $700 million.
- - The company's normalized managed basis efficiency ratio
improved to 36.3 and 37.3 percent for the second quarter
and first six months of 1997, respectively, compared to
43.4 and 42.4 percent in 1996. The improvement in the
managed ratio in 1997 resulted from a 15 and 16 percent
growth in normalized managed net revenues over the second
quarter and first six months of 1996, respectively,
compared to a 4 percent decrease and a 2 percent
increase, respectively, in normalized operating expenses.
- - The company continues to maintain a strong 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
six months of 1997 by providing reserves in excess of
net chargeoffs for owned receivables of $95 million.
BALANCE SHEET REVIEW
- --------------------
- - Managed consumer receivables (owned and serviced with
limited recourse) were $43.8 billion at June 30, 1997, up
from $40.7 billion at March 31, 1997 and $39.3 billion at
June 30, 1996 reflecting the impact of the TFS acquisition.
Core products, which exclude first mortgages and commercial
receivables, increased 15 percent from a year ago.
Excluding the $3.2 billion in home equity and other
unsecured consumer loans in the TFS acquisition, core
consumer receivables grew 7 percent from a year ago.
Private label and other unsecured product lines each grew
approximately 20 percent over prior year levels. Home
equity loan production in the retail branch network was up
9 percent year over year and the wholesale portfolio was
down 24 percent, as this portfolio continues to run off
following the decision to de-emphasize this product.
Visa/MasterCard receivables were flat with the level of a
year ago. With the integration of the Union Privilege
portfolio completed, the company initiated mailings for
this portfolio in late April and early July.
- - Compared to the first quarter, core receivables were
flat, excluding the acquisition of TFS. The retail branch
network had solid growth in the quarter while the
Visa/MasterCard portfolio was down slightly due to the
company's account profitability programs and deferred
mailings, as well as somewhat higher than normal account
paydowns.
- - Owned consumer receivables were $23.9 billion at June
30, 1997, compared to $21.5 billion at March 31, 1997 and
$22.5 billion at June 30, 1996. The increase from the prior
periods was primarily due to the acquisition of TFS.
Changes in owned receivables from period to period may vary
depending on the timing and significance of securitization
transactions.
- - The company's managed credit loss reserves were
$1,770.9 million at June 30, 1997, up from $1,697.2 million
at March 31, 1997 and $1,451.1 million at June 30, 1996.
Credit loss reserves as a percent of managed receivables
were 3.97 percent, compared to 4.08 percent at March 31,
1997 and 3.59 percent at June 30, 1996. Reserves as a
percent of nonperforming managed receivables were 118.5
percent, compared to 118.6 percent at March 31, 1997 and
133.4 percent at June 30, 1996. Consumer two-months-and-
over contractual delinquency ("delinquency") as a percent
of managed consumer receivables was 4.32 percent, compared
to 4.45 percent at March 31, 1997 and 3.49 percent at June
30, 1996. The annualized total consumer managed chargeoff
ratio in the second quarter of 1997 was 4.58 percent,
compared to 4.15 percent in the prior quarter and 3.33
percent in the year-ago quarter.
<PAGE> 15
- - The ratio of total shareholders' equity (including trust
originated securities) to total owned assets was 14.32
percent, compared to 11.22 percent at December 31, 1996.
The ratio of total shareholders' equity to managed assets
was 8.76 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 June 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.
- - The funding requirements of the company increased by $1.4
billion due to the acquisition of TFS, partially offset
by lower receivable levels in the company's existing businesses.
- - In June 1997, to enhance liquidity, 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 this conduit include credit
card receivables and unsecured consumer loans.
- - 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.
- - The company had securitized home equity,
Visa/MasterCard, private label and other unsecured
receivables outstanding of $19.8 and $18.5 billion at June
30, 1997 and December 31, 1996, respectively. During the
three months and six months ended June 30, 1997, the
company securitized, excluding replenishments of
certificate holder interests, $1.1 and $3.1 billion,
respectively, of Visa/MasterCard and other unsecured
receivables.
The composition of these securitizations by type is as
follows (in billions):
<TABLE>
<CAPTION>
- -----------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
1997 1997
- -----------------------------------------------------------
<S> <C> <C>
Visa/MasterCard $ 1.1 $ 2.3
Other unsecured - .8
------- -------
Total $ 1.1 $ 3.1
======= =======
</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.
<PAGE> 16
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
second quarter and six months ended June 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.
Pro Forma Managed Statements of Income
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
All dollar amounts are June 30, June 30,
stated in millions. 1997 * 1996 * 1997 * 1996 *
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Finance income $ 1,428.9 13.67% $ 1,258.5 13.19% $ 2,843.6 13.59% $ 2,469.5 13.20%
Interest income from
noninsurance investment
securities 15.7 5.76 39.0 5.43 24.0 5.76 59.3 5.67
Interest expense 659.7 6.14 616.2 6.00 1,297.8 6.06 1,191.9 6.03
--------- ----- --------- ----- --------- ----- --------- -----
Net interest margin 784.9 7.41<F1> 681.3 7.04<F1> 1,569.8 7.38<F1> 1,336.9 6.98<F1>
Provision for credit losses 477.7 385.6 1,020.2 786.0
--------- --------- --------- ---------
Net interest margin after
provision for credit losses 307.2 295.7 549.6 550.9
--------- --------- --------- ---------
Insurance revenues 68.5 58.4 133.9 122.3
Investment income 28.9 36.3 62.1 93.2
Fee income 246.7 218.2 513.8 447.4
Other income 28.6 138.6 97.7 163.9
--------- --------- --------- ---------
Total other revenues 372.7 451.5 807.5 826.8
--------- --------- --------- ---------
Salaries and fringe
benefits 156.2 135.0 303.8 271.7
Occupancy and equipment
expense 50.1 62.9 104.0 115.3
Other marketing expenses 110.5 141.8 229.2 242.2
Other servicing and
administrative expenses 84.6 156.4 194.0 262.2
Policyholders' benefits 48.3 53.2 95.3 126.4
--------- --------- --------- ---------
Total costs and expenses 449.7 549.3 926.3 1,017.8
--------- --------- --------- ---------
Income before taxes 230.2 197.9 430.8 359.9
Income taxes 79.9 73.3 149.0 124.8
--------- --------- --------- ---------
Net income $ 150.3 $ 124.6 $ 281.8 $ 235.1
========= ========= ========= =========
Average managed
receivables $41,862.3 $38,177.1 $42,008.4 $37,420.9
Average noninsurance
investments 1,090.4 2,874.3 833.6 2,090.8
--------- --------- --------- ---------
Average managed interest-
earning assets $42,952.7 $41,051.4 $42,842.0 $39,511.7
========= ========= ========= =========
* 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 second quarter and six months of 1997 and 1996 excludes
temporary investments that were used for pre-funding acquisitions in both
quarters and, in 1996, for the sale of the company's remaining consumer banking
operations. Including the impact of these temporary investments, managed net
interest margin was 7.31 and 6.64 percent for the second quarter of 1997 and
1996, respectively, and 7.33 and 6.77 percent for the six months ended June 30,
1997 and 1996, respectively.
</FN>
</TABLE>
<PAGE> 17
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 $383.8 and $778.6
million for the second quarter and first six months of
1997, up from $356.6 and $703.0 million in the prior year
periods. The increase was primarily due to growth in
average owned Visa/MasterCard and private label
receivables.
Net interest margin on a Managed Basis was $784.9 and
$1,569.8 million for the second quarter and first six
months of 1997, up 15 and 17 percent, respectively,
compared to $681.3 and $1,336.9 million in the same year-
ago periods, primarily due to managed receivable growth and
higher spreads. The net interest margin percentages on a
Managed Basis in the second quarter of 1997 and 1996 were
adversely affected by temporary investments that were used
to pre-fund acquisitions in both years, as well as the
disposition of retail banking deposits in 1996. Excluding
the impact of these temporary investments, net interest
margin as a percent of average managed interest-earning
assets, annualized, was 7.41 and 7.04 percent in the second
quarter of 1997 and 1996, respectively. Including the
impact of these temporary investments, net interest margin
as a percent of average managed interest-earning assets,
annualized, was 7.31 percent compared to 6.64 percent in
the year-ago quarter. The improvement over the year-ago
quarter was primarily due to the continuing change in
product mix to higher-yielding unsecured products and
improved pricing.
Provision for credit losses
- ---------------------------
The provision for credit losses for receivables on an Owned
Basis for the second quarter and first six months of 1997
totaled $251.6 and $545.0 million, up 43 and 48 percent
from $176.5 and $367.8 million in the comparable prior year
periods. The provision as a percent of average owned
receivables, annualized, was 4.42 percent in the second
quarter of 1997 compared to 3.16 percent in the second
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
chargeoffs related to owned receivables was $38 and $40
million for the three months ended June 30, 1997 and 1996,
respectively, and $95 and $75 million for the six months
ended June 30, 1997 and 1996, 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 $477.7 and $1,020.2 million in the
second quarter and first six months of 1997, up 24 percent
from $385.6 million and 30 percent from $786.0 million in
the comparable periods of 1996. As a percent of average
managed receivables, annualized, the provision increased to
4.56 percent from 4.04 percent in the second 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 second quarter of 1997,
the company securitized approximately $1.1 billion of
Visa/MasterCard receivables, compared to approximately $2.0
billion of Visa/MasterCard and home equity receivables a
year ago. For the first six months of 1997, the company
securitized approximately $3.1 billion of other unsecured
and Visa/MasterCard receivables compared to approximately
$3.4 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> 18
Other revenues
- --------------
Securitization income on an Owned Basis was $344.3 and
$675.0 million for the second quarter and first six months
of 1997, up from $280.5 and $559.9 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 23 percent increase in
securitization income on an Owned Basis compared to the
second quarter of 1996 was primarily due to the increase
in average securitized receivables. Securitization
income for the first six months of 1997 increased 21
percent compared to a year ago also 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 $77.4
and $154.8 million in the second quarter and first six
months of 1997, up from $53.3 and $103.2 million in the
comparable periods of the prior year, primarily due to
higher late fees and interchange income as a result of the
increase in the amount of average owned credit card
receivables compared to the prior year.
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 $246.7 and $513.8 million in the second
quarter and first six months of 1997 from $218.2 and $447.4
million in the same periods in 1996. The increase was
primarily attributable to higher late fees and interchange
income from the company's credit card businesses.
Other income decreased from $138.6 and $163.9 million in
the second quarter and first six months of 1996 to $28.6
and $97.7 million in the same periods in 1997 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 six
months of 1997 includes nonrecurring gains of $50 million
related to the sale of certain non-strategic assets during
the first quarter.
Expenses
- --------
Operating expenses for the second quarter and first six
months of 1997 were $401.4 and $831.0 million,
respectively, compared to $496.1 and $891.4 million,
respectively, in the comparable prior year periods. The
prior year amounts include $78 million in nonrecurring
charges, as discussed below.
Salaries and fringe benefits were $156.2 and $303.8 million
compared to $135.0 and $271.7 million in the second quarter
and first six months of 1996. The higher expense was
primarily due to an increase in sales force in the domestic
consumer finance business, as well as the addition of
collectors in all the company's businesses, as compared to
the prior year.
Occupancy and equipment expense for the second quarter and
first six months of 1997 totaled $50.1 and $104.0 million,
as compared to $62.9 and $115.3 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.
Other marketing expenses for the second quarter and first
six months of 1997 totaled $110.5 and $229.2 million, down
from $141.8 and $242.2 million in the comparable prior year
periods. The decrease in marketing spending for the
domestic credit card programs reflects the deferral of
major mailings as the company worked on marketing
plans with the individual AFL/CIO unions in the Union
Privilege program.
<PAGE> 19
Other servicing and administrative expenses for the second
quarter and first six months of 1997 totaled $84.6 and
$194.0 million, down from $156.4 and $262.2 million in the
comparable periods. Although the 1996 amounts include $64
million of nonrecurring charges, expenses in 1997 were
still down from the prior year after excluding these
charges. The decrease was due to lower systems costs in the
credit card business and lower real estate owned expenses.
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>
- -------------------------------------------------------------------------------------
June 30, March 31, December 31, June 30,
1997 1997 1996 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Owned $1,051.0 $ 943.9 $ 900.2 $ 858.3
Serviced with limited recourse 719.9 753.3 696.0 592.8
-------- -------- -------- --------
Total $1,770.9 $1,697.2 $1,596.2 $1,451.1
======== ======== ======== ========
</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 118.5 percent, compared to 118.6
percent at March 31, 1997 and 133.4 percent at June 30,
1996.
Total owned and managed credit loss reserves as a percent
of receivables were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
June 30, March 31, December 31, June 30,
1997 1997 1996 1996
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Owned 4.24% 4.21% 3.74% 3.64%
Managed 3.97 4.08 3.75 3.59
---- ---- ---- ----
</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. While management
allocates reserves among the company's various products,
all reserves are considered to be available to cover total
loan losses. See Note 5, "Credit Loss Reserves" in the
accompanying financial statements for analyses of reserves.
CREDIT QUALITY
- --------------
Delinquency levels in the consumer portfolio were lower
than the prior quarter but increased compared to a year
ago. Chargeoffs increased compared to both the previous and
year-ago periods. The acquisition of TFS in June 1997
benefited the second quarter delinquency ratio but had no
impact on the quarter's chargeoff ratio.
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.
<PAGE> 20
Delinquency
- -----------
Two-Months-and-Over Contractual Delinquency (as a percent
of managed consumer receivables):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
6/30/97 3/31/97 12/31/96 9/30/96 6/30/96
- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
First mortgage 10.27% 8.19% 9.49% 3.82% 3.64%
Home equity 3.18 3.85 3.96 3.55 3.35
Visa/MasterCard 3.10 3.13 2.71 2.54 2.05
Private label 5.89 5.52 5.50 5.43 5.04
Other unsecured 6.77 6.68 6.13 5.79 5.95
----- ---- ---- ---- ----
Total 4.32% 4.45% 4.15% 3.83% 3.49%
===== ==== ==== ==== ====
</TABLE>
Delinquency as a percent of managed consumer receivables
declined from the prior quarter but increased compared to a
year ago. Excluding the impact of the acquisition of TFS,
the home equity delinquency ratio was 3.81 percent, and the
total delinquency ratio was 4.53 percent for the second
quarter of 1997. The increase in the private label and
other unsecured delinquency ratios from the first quarter
was primarily due to the seasoning of these portfolios. The
first mortgage delinquency ratio increased, despite lower
dollars of delinquency from the first quarter, 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, the
company's continued shift in portfolio mix away from
traditional first mortgages and toward unsecured products,
and a slower consumer payment pattern.
Net Chargeoffs of Consumer Receivables
- --------------------------------------
Net Chargeoffs of Consumer Receivables (as a percent,
annualized, of average managed consumer receivables):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
1997 1997 1996 1996 1996
- -------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
First mortgage .87% .94% .30% .50% .46%
Home equity 1.17 1.38 1.18 .98 .89
Visa/MasterCard 5.84 4.90 4.66 4.71 4.86
Private label 4.63 4.85 3.70 3.54 3.82
Other unsecured 5.41 4.97 4.18 4.35 3.58
---- ---- ---- ---- ----
Total 4.58% 4.15% 3.59% 3.52% 3.33%
==== ==== ==== ==== ====
</TABLE>
Net chargeoffs as a percent of average managed consumer
receivables for the second quarter of 1997 increased
compared to both the prior and year-ago periods.
Approximately 75 percent of the 43 basis point increase in
the total chargeoff ratio from the first quarter of 1997
was due to higher personal bankruptcies in the domestic
Visa/MasterCard portfolio. For the Visa/MasterCard product,
higher bankruptcy chargeoffs accounted for 85 percent of
the increase in the second quarter's ratio. The remaining
increase in the total chargeoff ratio was primarily
attributable to the continued seasoning of the other
unsecured portfolio.
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. The increase
in net chargeoffs is consistent with the company's outlook
given overall industry conditions.
<PAGE> 21
Nonperforming Assets
- --------------------
Nonperforming assets consisted of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
In millions. 6/30/97 3/31/97 12/31/96 9/30/96 6/30/96
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual managed
receivables $ 865.0 $ 820.1 $ 778.5 $ 741.1 $ 713.9
Accruing managed consumer
receivables 90 or more days
delinquent 616.3 598.5 549.0 446.1 353.6
Renegotiated commercial
loans 12.9 12.9 12.9 19.9 19.9
-------- -------- -------- -------- --------
Total nonperforming managed
receivables 1,494.2 1,431.5 1,340.4 1,207.1 1,087.4
Real estate owned 149.4 152.6 136.6 137.6 131.9
-------- -------- -------- -------- --------
Total nonperforming assets $1,643.6 $1,584.1 $1,477.0 $1,344.7 $1,219.3
======== ======== ======== ======== ========
Managed credit loss reserves as
a percent of nonperforming
managed receivables 118.5% 118.6% 119.1% 126.6% 133.4%
-------- -------- -------- -------- --------
</TABLE>
<PAGE> 22
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders
The Annual Meeting of Stockholders of Household
International was held on Wednesday, May 14, 1997, for the
purpose of (1) electing directors; (2) approving an
increase in the authorized shares of Household Common Stock
from 150 to 250 million shares; and (3) ratifying the
appointment of Arthur Andersen LLP as the independent
auditors for Household. The voting results were as follows:
Each of the following persons received the number of votes
set out after his or her name and were elected directors to
hold office for the ensuing year and until their successors
shall be elected and shall qualify:
FOR WITHHELD
---------- ---------
W. F. Aldinger 83,420,909 6,507,726
R. J. Darnall 83,465,327 6,463,307
G. G. Dillon 83,458,848 6,469,786
J. A. Edwardson 83,450,196 6,478,439
M. J. Evans 83,455,473 6,473,162
D. Fishburn 83,465,880 6,462,755
C. F. Freidheim, Jr. 83,454,187 6,474,448
L. E. Levy 83,467,344 6,461,290
G. A. Lorch 83,461,906 6,466,729
J. D. Nichols 83,462,715 6,465,919
J. B. Pitblado 83,469,005 6,459,630
S. J. Stewart 83,463,215 6,465,420
L. W. Sullivan, M.D. 83,452,220 6,476,415
Proposal to increase the authorized shares of Household
Common Stock from 150 million to 250 million:
FOR AGAINST ABSTAIN BROKER NON-VOTE
- ---------- --------- ------- ---------------
83,080,594 6,513,489 334,549 2
Ratification of the appointment of Arthur Andersen LLP as
the Corporation's auditors for the year 1997:
FOR AGAINST ABSTAIN BROKER NON-VOTE
- ---------- ------- ------- ---------------
89,635,796 123,161 169,676 1
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
During the second quarter of 1997, the
Registrant filed a Current Report on Form 8-K dated
May 23, 1997 announcing the intent to purchase
Transamerica's Consumer Finance Business, a
Current Report on Form 8-K dated June 20, 1997
announcing the offering of 9.1 million shares of
common stock at a price of $110.50 per share and a
Current Report on Form 8-K dated June 23, 1997
announcing the completion of the acquisition of
Transamerica's Consumer Finance Business.
<PAGE> 23
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: August 13, 1997 By: /s/ David A. Schoenholz
---------------- ----------------------------
David A. Schoenholz
Executive Vice President -
Chief Financial Officer
and on behalf of
Household International, Inc.
<PAGE> 24
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.
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.
Six months ended June 30 1997 1996
- ------------------------------------------------------------------
<S> <C> <C>
Net income $ 281.8 $ 235.1
Income taxes 149.0 124.8
-------- --------
Income before income taxes 430.8 359.9
-------- --------
Fixed charges:
Interest expense <F1> 737.2 738.8
Interest portion of rentals <F2> 13.8 14.5
-------- --------
Total fixed charges 751.0 753.3
-------- --------
Total earnings as defined $1,181.8 $1,113.2
======== ========
Ratio of earnings to fixed charges 1.57 1.48
======== ========
Preferred stock dividends <F3> $ 9.3 $ 12.7
======== ========
Ratio of earnings to combined fixed charges
and preferred stock dividends 1.55 1.45
======== ========
<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 34.6 and 34.7
percent for the six months ended June 30, 1997 and 1996,
respectively.
</FN>
</TABLE>
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF HOUSEHOLD INTERNATIONAL, INC.
- ---------------------------------------------
As of June 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 Bank, f.s.b U.S. 100%
HHTS, Inc. Illinois 100%
Household Bank (SB), N.A. U.S. 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%
Security Investment Corporation Maryland 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%
Transamerica Financial Services
Holding Company Delaware 100%
Arcadia General Insurance Company Arizona 100%
Arcadia National Life Insurance Company Arizona 100%
First Credit Corporation Delaware 100%
Household Finance Corporation of Hawaii Hawaii 100%
Pacific Agency Inc. Nevada 100%
Pacific Finance Loans California 100%
Transamerica Acceptance Corporation Delaware 100%
Transamerica Credit Corporation Nevada 100%
Transamerica Credit Corporation Washington 100%
Transamerica Financial Consumer
Discount Company Pennsylvania 100%<PAGE>
<PAGE> 2
%
Voting
Stock
Organized Owned
Under By
Names of Subsidiaries Laws of: Parent
- --------------------- --------- ------
Transamerica Financial Corporation Nevada 100%
Transamerica Financial Services California 100%
Transamerica Financial Services Company Ohio 100%
Transamerica Financial Services, Inc. Alabama 100%
Transamerica Financial Services, Inc. B.C. 100%
Transamerica Financial Services Inc. Minnesota 100%
Transamerica Financial Services, Inc. New Jersey 100%
Transamerica Financial Services, Inc. West Virginia 100%
Transamerica Insurance
Administrators, Inc. Delaware 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%
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%
Cal-Pacific Services, Inc. California 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%<PAGE>
<PAGE> 3
%
Voting
Stock
Organized Owned
Under By
Names of Subsidiaries Laws of: Parent
- --------------------- --------- ------
Household OPEB I, Inc. Illinois 100%
Land of Lincoln Builders, Inc. Illinois 100%
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%<PAGE>
<PAGE> 4
%
Voting
Stock
Organized Owned
Under By
Names of Subsidiaries Laws of: Parent
- --------------------- --------- ------
Household Finance Industrial Loan Company Washington 100%
Household Finance Industrial Loan Company Iowa 100%
of Iowa
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%
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 (7/29/97)
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 358,100
<SECURITIES> 2,311,100
<RECEIVABLES> 24,797,500
<ALLOWANCES> 1,770,900
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 723,200
<DEPRECIATION> 388,400
<TOTAL-ASSETS> 31,201,100
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 15,854,200
0
150,000
<COMMON> 124,300
<OTHER-SE> 4,194,300
<TOTAL-LIABILITY-AND-EQUITY> 31,201,100
<SALES> 0
<TOTAL-REVENUES> 2,629,000
<CGS> 0
<TOTAL-COSTS> 926,300
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 545,000
<INTEREST-EXPENSE> 726,900
<INCOME-PRETAX> 430,800
<INCOME-TAX> 149,000
<INCOME-CONTINUING> 281,800
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 281,800
<EPS-PRIMARY> 2.78
<EPS-DILUTED> 2.78
<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>
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 June 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
Preferred stock A- a3 A A- A-
----------- --------- --------- ------------- ---------
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>
