<PAGE> 1
FORM 10-Q
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, 1994
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------- ---------------
Commission file number 1-75
------
HOUSEHOLD FINANCE CORPORATION
- ------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-1239445
- ------------------------ ------------------------------------
(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: (708) 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, 1994, there were 1,000 shares of registrant's common stock
outstanding.
The registrant meets the conditions set forth in General Instruction
H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with
the reduced disclosure format.<PAGE>
<PAGE> 2
Part 1. FINANCIAL INFORMATION
1. FINANCIAL STATEMENTS
Household Finance Corporation and Subsidiaries
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
- --------------------
In millions.
- --------------------------------------------------------------------------------------------------
Six months ended Three months ended
June 30, June 30,
1994 1993 1994 1993
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Finance income . . . . . . . . . . . . . . . . . . . . $714.9 $649.9 $366.9 $323.7
Interest income from noninsurance investment securities 18.0 19.5 8.4 11.5
Interest expense . . . . . . . . . . . . . . . . . . . 271.9 258.5 148.4 119.2
-----------------------------------------
Net interest margin. . . . . . . . . . . . . . . . . . 461.0 410.9 226.9 216.0
Provision for credit losses on owned receivables . . . 218.0 224.9 94.1 107.1
-----------------------------------------
Net interest margin after provision for credit losses. 243.0 186.0 132.8 108.9
-----------------------------------------
Securitization and servicing fee income. . . . . . . . 172.4 187.5 86.5 87.1
Insurance premiums and contract revenues . . . . . . . 135.8 115.4 66.7 57.1
Investment income. . . . . . . . . . . . . . . . . . . 254.5 268.8 118.2 132.8
Fee income . . . . . . . . . . . . . . . . . . . . . . 36.3 26.0 18.2 14.9
Other income . . . . . . . . . . . . . . . . . . . . . 23.7 29.0 6.0 10.9
-----------------------------------------
Total other revenues . . . . . . . . . . . . . . . . . 622.7 626.7 295.6 302.8
-----------------------------------------
Net interest margin after provision for credit losses
and other revenues . . . . . . . . . . . . . . . . . 865.7 812.7 428.4 411.7
-----------------------------------------
Operating expenses . . . . . . . . . . . . . . . . . . 446.8 415.2 212.2 209.7
Policyholders' benefits. . . . . . . . . . . . . . . . 248.2 254.8 124.0 129.4
-----------------------------------------
Total costs and expenses . . . . . . . . . . . . . . . 695.0 670.0 336.2 339.1
-----------------------------------------
Income before income taxes . . . . . . . . . . . . . . 170.7 142.7 92.2 72.6
Income taxes . . . . . . . . . . . . . . . . . . . . . 55.6 43.7 30.2 21.4
-----------------------------------------
Net income . . . . . . . . . . . . . . . . . . . . . . $115.1 $ 99.0 $ 62.0 $ 51.2
=========================================
See notes to condensed financial statements.
/TABLE
<PAGE>
<PAGE> 3
Household Finance Corporation and Subsidiaries
BALANCE SHEETS
- --------------
<TABLE>
<CAPTION>
In millions.
- ----------------------------------------------------------------------------------------
June 30, December 31,
1994 1993
- ----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
- ------
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . $ 73.9 $ 27.8
Investment securities (fair value of
$7,023.6 and $7,317.8) . . . . . . . . . . . . . . . . 6,972.6 7,082.0
Finance and banking receivables. . . . . . . . . . . . . 9,798.1 9,338.4
Liquidating commercial assets. . . . . . . . . . . . . . 1,363.5 1,555.7
Advances to parent company and affiliates. . . . . . . . 465.5 361.7
Deferred insurance policy acquisition costs. . . . . . . 562.7 381.6
Acquired intangibles . . . . . . . . . . . . . . . . . . 360.0 246.7
Properties and equipment . . . . . . . . . . . . . . . . 206.7 202.2
Assets acquired through foreclosure. . . . . . . . . . . 152.7 171.9
Other assets . . . . . . . . . . . . . . . . . . . . . . 591.4 482.2
------------------------
Total assets . . . . . . . . . . . . . . . . . . . . . . $20,547.1 $19,850.2
========================
LIABILITIES AND SHAREHOLDER'S EQUITY
- ------------------------------------
Debt:
Commercial paper, bank and other borrowings. . . . . . $ 4,257.3 $ 4,321.8
Senior and senior subordinated debt (with original
maturities over one year). . . . . . . . . . . . . . 7,194.7 6,813.7
------------------------
Total debt . . . . . . . . . . . . . . . . . . . . . . . 11,452.0 11,135.5
Insurance policy and claim reserves. . . . . . . . . . . 6,344.3 5,981.5
Other liabilities. . . . . . . . . . . . . . . . . . . . 898.2 942.7
------------------------
Total liabilities. . . . . . . . . . . . . . . . . . . . 18,694.5 18,059.7
------------------------
Preferred stock. . . . . . . . . . . . . . . . . . . . . 100.0 100.0
------------------------
Common shareholder's equity:
Common stock and paid-in capital . . . . . . . . . . . 596.2 551.2
Retained earnings. . . . . . . . . . . . . . . . . . . 1,237.5 1,126.0
Foreign currency translation adjustments . . . . . . . (24.0) (21.8)
Unrealized gain (loss) on investments, net . . . . . . (57.1) 35.1
------------------------
Total common shareholder's equity. . . . . . . . . . . . 1,752.6 1,690.5
------------------------
Total liabilities and shareholder's equity . . . . . . . $20,547.1 $19,850.2
========================
See notes to condensed financial statements.
/TABLE
<PAGE>
<PAGE> 4
Household Finance Corporation and Subsidiaries
STATEMENTS OF CASH FLOWS
- ------------------------
<TABLE>
<CAPTION>
In millions.
- ----------------------------------------------------------------------------------------
Six months ended June 30 1994 1993
- ----------------------------------------------------------------------------------------
<S> <C> <C>
CASH PROVIDED BY OPERATIONS
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 115.1 $ 99.0
Adjustments to reconcile net income to net cash provided by
operations:
Provision for credit losses on owned receivables . . . . . . 218.0 224.9
Insurance policy and claim reserves. . . . . . . . . . . . . 138.5 129.0
Depreciation and amortization. . . . . . . . . . . . . . . . 72.5 69.0
Net realized (gains) losses from sales of assets . . . . . . 18.5 (12.3)
Deferred insurance policy acquisition costs. . . . . . . . . (46.0) (40.6)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . (44.9) 76.9
-------------------------
Cash provided by operations. . . . . . . . . . . . . . . . . . 471.7 545.9
-------------------------
INVESTMENTS IN OPERATIONS
Investment securities:
Purchased. . . . . . . . . . . . . . . . . . . . . . . . . . (1,951.4) (1,084.6)
Matured. . . . . . . . . . . . . . . . . . . . . . . . . . . 339.6 302.8
Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,245.7 526.5
Short-term investment securities, net change . . . . . . . . . 178.0 20.7
Receivables, excluding bankcard:
Originated or purchased. . . . . . . . . . . . . . . . . . . (3,379.2) (3,106.0)
Collected. . . . . . . . . . . . . . . . . . . . . . . . . . 2,036.4 1,715.4
Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . 889.6 1,155.8
Bankcard receivables:
Originated or collected, net . . . . . . . . . . . . . . . . (1,006.4) (1,234.9)
Purchased. . . . . . . . . . . . . . . . . . . . . . . . . . (7.4) -
Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . 926.4 990.3
Acquisition of credit card relationships . . . . . . . . . . . (138.1) -
Properties and equipment purchased . . . . . . . . . . . . . . (9.7) (11.6)
Properties and equipment sold . . . . . . . . . . . . . .. . . .4 2.6
Advances to parent company and affiliates. . . . . . . . . . . (103.8) 61.7
-------------------------
Cash decrease from investments in operations . . . . . . . . . (979.9) (661.3)
-------------------------
FINANCING AND CAPITAL TRANSACTIONS
Short-term debt, net change. . . . . . . . . . . . . . . . . . (78.0) (445.0)
Senior and senior subordinated debt issued . . . . . . . . . . 1,539.8 1,460.2
Senior and senior subordinated debt retired. . . . . . . . . . (1,173.9) (1,175.6)
Policyholders' benefits paid . . . . . . . . . . . . . . . . . (243.8) (179.5)
Cash received from policyholders . . . . . . . . . . . . . . . 468.8 414.4
Dividends on preferred stock . . . . . . . . . . . . . . . . . (3.6) (4.8)
Capital contribution from parent company . . . . . . . . . . . 45.0 70.0
-------------------------
Cash increase from financing and capital transactions. . . . . 554.3 139.7
-------------------------
Increase in cash . . . . . . . . . . . . . . . . . . . . . . . 46.1 24.3
Cash at January 1. . . . . . . . . . . . . . . . . . . . . . . 27.8 48.7
-------------------------
Cash at June 30. . . . . . . . . . . . . . . . . . . . . . . . $ 73.9 $ 73.0
=========================
Supplemental cash flow information:
Interest paid. . . . . . . . . . . . . . . . . . . . . . . . . $ 309.3 $ 258.3
=========================
Income taxes paid. . . . . . . . . . . . . . . . . . . . . . . $ 120.8 $ 61.0
=========================
See notes to condensed financial statements.
/TABLE
<PAGE>
<PAGE> 5
Household Finance Corporation and Subsidiaries
BUSINESS SEGMENT DATA
- ---------------------
<TABLE>
<CAPTION>
In millions.
- -------------------------------------------------------------------------------------------------
Six months ended Three months ended
June 30, June 30,
1994 1993 1994 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
- --------
Finance and Banking. . . . . . . . . . . . . . . . . . $ 978.5 $ 916.8 $499.8 $450.1
Individual Life Insurance. . . . . . . . . . . . . . . 321.7 324.3 150.2 159.3
-----------------------------------------
Core Business. . . . . . . . . . . . . . . . . . . . . 1,300.2 1,241.1 650.0 609.4
Liquidating Commercial Lines . . . . . . . . . . . . . 55.4 55.0 20.9 28.6
-----------------------------------------
Total . . . . . . . . . . . . . . . . . . . . . . . $1,355.6 $1,296.1 $670.9 $638.0
=========================================
NET INCOME
- ----------
Finance and Banking. . . . . . . . . . . . . . . . . . $ 98.6 $ 85.9 $ 54.0 $ 45.5
Individual Life Insurance. . . . . . . . . . . . . . . 22.3 21.5 10.6 9.8
-----------------------------------------
Core Business. . . . . . . . . . . . . . . . . . . . . 120.9 107.4 64.6 55.3
Liquidating Commercial Lines . . . . . . . . . . . . . (5.8) (8.4) (2.6) (4.1)
-----------------------------------------
Total . . . . . . . . . . . . . . . . . . . . . . . $ 115.1 $ 99.0 $ 62.0 $ 51.2
=========================================
Return on average owned assets - Core Business (1) . . 1.28% 1.27% 1.35% 1.31%
=========================================
Return on average owned assets - Total (1) . . . . . . 1.13% 1.06% 1.20% 1.10%
=========================================
Return on average common shareholder's equity-
Core Business (1) 19.03% 19.79% 19.85% 19.41%
=========================================
Return on average common shareholder's equity-Total (1) 12.89% 12.86% 13.80% 12.83%
=========================================
(1) Annualized
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
June 30, December 31,
Assets 1994 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Finance and Banking. . . . . . . . . . . . . . . . . . . . . . . . . $11,955.4 $11,335.5
Individual Life Insurance. . . . . . . . . . . . . . . . . . . . . . 7,228.2 6,959.0
---------------------------------
Core Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,183.6 18,294.5
Liquidating Commercial Lines . . . . . . . . . . . . . . . . . . . . 1,363.5 1,555.7
---------------------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20,547.1 $19,850.2
=================================
- ----------------------------------------------------------------------------------------------------------
June 30, December 31,
Receivables owned 1994 1993
- ----------------------------------------------------------------------------------------------------------
Finance and Banking. . . . . . . . . . . . . . . . . . . . . . . . . $ 9,411.8 $ 8,959.9
Liquidating Commercial Lines . . . . . . . . . . . . . . . . . . . . 1,002.0 1,189.9
---------------------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,413.8 $10,149.8
=================================
- ----------------------------------------------------------------------------------------------------------
June 30, December 31,
Receivables managed 1994 1993
- ----------------------------------------------------------------------------------------------------------
Finance and Banking. . . . . . . . . . . . . . . . . . . . . . . . . $16,275.5 $16,091.0
Liquidating Commercial Lines . . . . . . . . . . . . . . . . . . . . 1,002.0 1,189.9
---------------------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17,277.5 $17,280.9
=================================
See notes to condensed financial statements.
/TABLE
<PAGE>
<PAGE> 6
NOTES TO CONDENSED FINANCIAL STATEMENTS
The common stock of Household Finance Corporation ("HFC" or the
"company") is wholly owned by Household International, Inc. ("Household
International" or the "parent company").
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Accounting policies used in preparation of the quarterly condensed
financial statements are consistent with accounting policies
described in the notes to financial statements contained in the
company's Annual Report on Form 10-K for its fiscal year ended
December 31, 1993. The information furnished herein reflects all
adjustments which are, in the opinion of management, necessary for a
fair statement of results for the interim periods. All such
adjustments are of a normal recurring nature. Certain prior period
amounts have been reclassified to conform with the current period's
presentation.
2. INVESTMENT SECURITIES
---------------------
Investment securities consisted of the following:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
In millions. June 30, 1994 December 31, 1993
-------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TRADING INVESTMENTS
Government securities and other. . . . . . . . . . . . . . $ 5.7 $ 5.7 $ 11.9 $ 11.9
-------------------------------------------
AVAILABLE-FOR-SALE INVESTMENTS
Marketable equity securities:
Common stocks. . . . . . . . . . . . . . . . . . . . . . 33.4 33.4 18.5 18.5
Preferred stocks . . . . . . . . . . . . . . . . . . . . 50.8 50.8 57.7 57.7
Corporate securities . . . . . . . . . . . . . . . . . . . 2,229.7 2,229.7 2,047.1 2,047.1
Government securities. . . . . . . . . . . . . . . . . . . 232.1 232.1 326.1 326.1
Mortgage-backed securities . . . . . . . . . . . . . . . . 884.8 884.8 1,075.5 1,075.5
Commercial paper . . . . . . . . . . . . . . . . . . . . . 62.4 62.4 52.6 52.6
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 108.1 108.1 244.1 244.1
-------------------------------------------
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . 3,601.3 3,601.3 3,821.6 3,821.6
-------------------------------------------
HELD-TO-MATURITY INVESTMENTS
Corporate securities . . . . . . . . . . . . . . . . . . . 1,742.7 1,782.2 1,739.0 1,930.7
Government securities. . . . . . . . . . . . . . . . . . . 31.9 32.3 23.2 25.4
Mortgage-backed securities . . . . . . . . . . . . . . . . 919.1 926.0 772.2 809.0
Mortgage loans on real estate. . . . . . . . . . . . . . . 168.5 172.0 222.4 226.0
Policy loans . . . . . . . . . . . . . . . . . . . . . . . 85.7 85.7 81.6 81.6
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 314.7 315.4 310.5 312.0
-------------------------------------------
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . 3,262.6 3,313.6 3,148.9 3,384.7
-------------------------------------------
Accrued investment income. . . . . . . . . . . . . . . . . 103.0 103.0 99.6 99.6
-------------------------------------------
Total investment securities. . . . . . . . . . . . . . . . $6,972.6 $7,023.6 $7,082.0 $7,317.8
===========================================
</TABLE> <PAGE>
<PAGE> 7
3. FINANCE AND BANKING RECEIVABLES
-------------------------------
Finance and banking receivables consisted of the following:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
June 30, December 31,
In millions. 1994 1993
----------------------------------------------------------------------------------------------
<S> <C> <C>
Home equity. . . . . . . . . . . . . . . . . . . . . . . . $ 1,639.0 $ 1,557.1
Other secured. . . . . . . . . . . . . . . . . . . . . . . 334.1 347.1
Bankcard . . . . . . . . . . . . . . . . . . . . . . . . . 2,126.7 2,103.8
Merchant participation . . . . . . . . . . . . . . . . . . 2,219.3 2,054.4
Other unsecured. . . . . . . . . . . . . . . . . . . . . . 2,382.2 2,236.1
Equipment financing and other. . . . . . . . . . . . . . . 710.5 661.4
--------------------------------
Receivables owned. . . . . . . . . . . . . . . . . . . . . 9,411.8 8,959.9
Accrued finance charges. . . . . . . . . . . . . . . . . . 181.3 167.4
Credit loss reserve for owned receivables. . . . . . . . . (274.7) (279.8)
Unearned credit insurance premiums and claims reserves . . (50.5) (49.8)
Amounts due and deferred from receivables sales. . . . . . 663.6 675.2
Reserve for receivables serviced with limited recourse . . (133.4) (134.5)
--------------------------------
Total receivables owned, net . . . . . . . . . . . . . . . 9,798.1 9,338.4
Receivables serviced with limited recourse . . . . . . . . 6,863.7 7,131.1
Receivables serviced with no recourse. . . . . . . . . . . 1,299.6 1,649.5
--------------------------------
Total receivables owned or serviced, net . . . . . . . . . $17,961.4 $18,119.0
================================
</TABLE>
<TABLE>
<CAPTION>
The outstanding balance of receivables serviced with limited recourse consisted of the following:
---------------------------------------------------------------------------------------------
June 30, December 31,
In millions. 1994 1993
---------------------------------------------------------------------------------------------
<S> <C> <C>
Home equity. . . . . . . . . . . . . . . . . . . . . . . . $ 4,900.3 $ 5,029.5
Bankcard . . . . . . . . . . . . . . . . . . . . . . . . . 1,750.0 1,789.0
Merchant participation . . . . . . . . . . . . . . . . . . 213.4 312.6
-------------------------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,863.7 $ 7,131.1
===============================
The combination of receivables owned and receivables serviced with limited recourse, which the
company considers its managed portfolio, is shown below:
---------------------------------------------------------------------------------------------
June 30, December 31,
In millions. 1994 1993
---------------------------------------------------------------------------------------------
Home equity. . . . . . . . . . . . . . . . . . . . . . . . $ 6,539.3 $ 6,586.6
Other secured. . . . . . . . . . . . . . . . . . . . . . . 334.1 347.1
Bankcard . . . . . . . . . . . . . . . . . . . . . . . . . 3,876.7 3,892.8
Merchant participation . . . . . . . . . . . . . . . . . . 2,432.7 2,367.0
Other unsecured. . . . . . . . . . . . . . . . . . . . . . 2,382.2 2,236.1
Equipment financing and other. . . . . . . . . . . . . . . 710.5 661.4
-------------------------------
Receivables managed. . . . . . . . . . . . . . . . . . . . $16,275.5 $16,091.0
===============================
</TABLE>
Receivables serviced with no recourse consisted primarily of
unsecured receivables at both June 30, 1994 and December 31, 1993.
The bankcard and merchant participation managed receivable
portfolios are serviced by an affiliate of the company.
The amount due and deferred from receivables sales of $663.6 million
at June 30, 1994 included unamortized excess servicing assets and
funds established pursuant to the recourse provisions and holdback
reserves for certain sales totaling $619.8 million. The amount due
and deferred also included customer payments not yet remitted by the
securitization trustee to the company. In addition, the company has
made guarantees relating to certain securitizations of $281.3
million plus unpaid interest and has subordinated interests in
certain transactions, which are recorded as receivables, for $83.9
million at June 30, 1994. The company maintains credit loss<PAGE>
<PAGE> 8
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 $133.4 million
at June 30, 1994 and represent the company's best estimate of
probable losses on receivables serviced with limited recourse.
See Note 5, "Credit Loss Reserves" for an analysis of credit loss
reserves for receivables. See "Management's Discussion and
Analysis" on pages 15 through 17 for additional information related
to the credit quality of Finance and Banking receivables.
4. LIQUIDATING COMMERCIAL ASSETS
-----------------------------
Liquidating commercial assets consisted of the following:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
June 30, December 31,
In millions. 1994 1993
--------------------------------------------------------------------------------------------
<S> <C> <C>
Receivables
Commercial real estate . . . . . . . . . . . . . . . . . $ 260.5 $ 297.1
Highly leveraged acquisition finance and other . . . . . 741.5 892.8
-----------------------------
Receivables owned. . . . . . . . . . . . . . . . . . . . . 1,002.0 1,189.9
Accrued finance charges. . . . . . . . . . . . . . . . . . 10.8 9.2
Reserve for credit losses. . . . . . . . . . . . . . . . . (165.0) (172.9)
-----------------------------
Total receivables owned, net . . . . . . . . . . . . . . . 847.8 1,026.2
Real estate owned. . . . . . . . . . . . . . . . . . . . . 244.2 256.6
Other assets . . . . . . . . . . . . . . . . . . . . . . . 271.5 272.9
-----------------------------
Total liquidating commercial assets. . . . . . . . . . . . $1,363.5 $1,555.7
=============================
</TABLE>
See Note 5, "Credit Loss Reserves" for an analysis of credit loss
reserves for receivables. See "Management's Discussion and
Analysis" on pages 18 and 19 for additional information related to
the credit quality of Liquidating Commercial Assets.
<PAGE>
<PAGE> 9
5. CREDIT LOSS RESERVES
--------------------
<TABLE>
<CAPTION>
An analysis of credit loss reserves for the six months ended June 30 is as follows:
---------------------------------------------------------------------------------------------
In millions. 1994 1993
---------------------------------------------------------------------------------------------
<S> <C> <C>
Credit loss reserves for owned receivables at January 1. . . . . . $452.7 $423.3
----------------------
Provision for credit losses - owned receivables:
Finance and Banking. . . . . . . . . . . . . . . . . . . . . . . 185.6 196.8
Liquidating Commercial Lines . . . . . . . . . . . . . . . . . . 32.4 28.1
----------------------
Total provision for credit losses - owned receivables. . . . . . . 218.0 224.9
----------------------
Owned receivables charged off:
Finance and Banking. . . . . . . . . . . . . . . . . . . . . . . (226.4) (216.2)
Liquidating Commercial Lines . . . . . . . . . . . . . . . . . . (40.7) (43.1)
----------------------
Total owned receivables charged off. . . . . . . . . . . . . . . . (267.1) (259.3)
----------------------
Recoveries on owned receivables:
Finance and Banking. . . . . . . . . . . . . . . . . . . . . . . 36.7 32.3
Liquidating Commercial Lines . . . . . . . . . . . . . . . . . . .7 .6
----------------------
Total recoveries on owned receivables. . . . . . . . . . . . . . . 37.4 32.9
----------------------
Credit loss reserves on receivables purchased, net . . . . . . . . - 1.8
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.3) (3.6)
----------------------
TOTAL CREDIT LOSS RESERVES FOR OWNED RECEIVABLES AT JUNE 30. . . . 439.7 420.0
----------------------
Credit loss reserves for receivables serviced with
limited recourse at January 1. . . . . . . . . . . . . . . . . . 134.5 160.9
Provision for credit losses. . . . . . . . . . . . . . . . . . . . 71.9 105.9
Chargeoffs . . . . . . . . . . . . . . . . . . . . . . . . . . . . (74.1) (97.8)
Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 2.6
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.1) 2.5
----------------------
TOTAL CREDIT LOSS RESERVES FOR RECEIVABLES SERVICED WITH
LIMITED RECOURSE AT JUNE 30. . . . . . . . . . . . . . . . . . . 133.4 174.1
----------------------
TOTAL CREDIT LOSS RESERVES AT JUNE 30. . . . . . . . . . . . . . . $573.1 $594.1
======================
Total credit loss reserves for owned receivables at June 30:
Finance and Banking. . . . . . . . . . . . . . . . . . . . . . . $274.7 $231.1
Liquidating Commercial Lines . . . . . . . . . . . . . . . . . . 165.0 188.9
----------------------
TOTAL CREDIT LOSS RESERVES FOR OWNED RECEIVABLES AT JUNE 30. . . . $439.7 $420.0
======================
Total credit loss reserves for managed receivables at June 30:
Finance and Banking. . . . . . . . . . . . . . . . . . . . . . . $408.1 $405.2
Liquidating Commercial Lines . . . . . . . . . . . . . . . . . . 165.0 188.9
----------------------
TOTAL CREDIT LOSS RESERVES FOR MANAGED RECEIVABLES AT JUNE 30. . . $573.1 $594.1
======================
/TABLE
<PAGE>
<PAGE> 10
6. INCOME TAXES
------------
Effective tax rates for the six months ended June 30, 1994 and 1993
of 32.6 and 30.6 percent, respectively, differ from the statutory
federal income tax rate for the respective periods primarily because
of the effects of (a) amortization of intangible assets, (b) state
and local income taxes, (c) dividends received deduction applicable
to term preferred stocks, (d) leveraged lease tax benefits, and in
1993, (e) foreign loss carryforwards and (f) reduction of noncurrent
tax requirements.
In the third quarter of 1993, new Federal tax legislation was
enacted which resulted in the statutory income tax rate being
increased from 34 percent to 35 percent retroactive to January 1,
1993. The effect of the new tax legislation is not reflected in the
effective tax rate at June 30, 1993 as the increase in income tax
expense was recorded as a year-to-date adjustment at September 30,
1993.
7. LEASES AND OTHER SIMILAR ARRANGEMENTS
-------------------------------------
In the fourth quarter of 1991, the company purchased credit card
receivables of approximately $1 billion from CoreStates Financial
Corporation. In connection with that purchase, an unaffiliated
third party acquired the rights to the account relationships
associated with the receivables and entered into an agreement to
license these rights to the company. In the second quarter of 1994,
the company terminated the license agreement and acquired these
account relationships resulting in an increase of approximately $140
million in acquired intangibles.
8. TRANSACTIONS WITH PARENT COMPANY AND AFFILIATES
-----------------------------------------------
HFC periodically advances funds to Household International and
affiliates or receives amounts in excess of the parent company's
current requirements. Advances to parent company and affiliates
were $465.5 million at June 30, 1994 compared to $361.7 million at
December 31, 1993. Advances from parent company and affiliates,
which are included in other liabilities, were $2.0 million at both
June 30, 1994 and December 31, 1993. Net interest income on these
affiliated balances was $9.4 and $8.6 million for the six months
ended June 30, 1994 and 1993, respectively.<PAGE>
<PAGE> 11
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Consolidated Results of Operations
----------------------------------
Net income for the second quarter and first six months of 1994 was
$62.0 and $115.1 million, up 21 percent from $51.2 million and 16
percent from $99.0 million in 1993. The improvements in
consolidated net income for both periods primarily were due to
increased earnings in the Finance and Banking segment. Earnings in
the Individual Life Insurance segment also improved for both the
second quarter and first six months of 1994 compared to the prior
year. In addition, net income for both periods also benefited from
reduced losses in the Liquidating Commercial Lines segment ("LCL").
During the second quarter and first six months of 1994, the
company's operations, financial position and profitability were
affected by the following:
- The domestic consumer finance, private-label credit card and
bankcard businesses increased earnings in both the second quarter
and first six months of 1994 over the year-ago periods. Domestic
consumer finance earnings increased primarily due to higher net
interest margin, increased servicing fee income and lower credit
costs. In the third quarter of 1993, the company began servicing
without recourse an unsecured consumer loan portfolio totaling
approximately $1.0 billion at quarter end. Private-label credit
card earnings increased primarily due to growth in the managed
portfolio. Bankcard operating results were better than the year-
ago periods primarily due to higher provisions in 1993 related to
the strengthening of credit loss reserves.
- Consumer two-months-and-over contractual delinquency
("delinquency") as a percent of managed consumer receivables was
3.95 percent, down from 4.24 percent at March 31, 1994 and 4.69
percent at June 30, 1993. Total delinquent receivables fell $35.9
million during the second quarter. The total consumer managed
chargeoff ratio decreased compared to both the first quarter and
the year-ago quarter.
- Credit loss reserves as a percent of Finance and Banking managed
receivables were 2.51 percent, down from 2.58 percent at March 31,
1994 and 2.56 percent at June 30, 1993. Consumer credit loss
reserves as a percent of managed delinquency was 63.9 percent at
June 30, 1994, up from 61.3 percent at March 31, 1994 and 55.6
percent at June 30, 1993. Reserves for LCL receivables were
essentially unchanged during the quarter and for the first six
months of the year despite a $187.9 million decrease in
receivables since December 31, 1993, including $40.0 million in net
chargeoffs. Credit loss reserves at June 30, 1994 as a percent of
both LCL receivables and nonperforming loans increased over
December 31, 1993 and June 30, 1993 levels.
- Net interest margin on a managed basis as a percent of average
managed interest-earning assets was 7.87 percent in the second
quarter compared to 8.37 percent in the previous quarter and 8.48
percent in the year-ago quarter. The decline in the second
quarter was primarily due to increased interest costs on variable
rate liabilities, which repriced more quickly than the company's
variable rate receivables in the rising interest rate environment.
The impact on margin was consistent with the company's
expectations given the interest rate environment and the company's
asset/liability management strategy.
- Assets totaled $20.5 billion at June 30, 1994, up 4 percent from
year-end 1993. Assets of the Core Business were $19.2 billion at
quarter end, up from the year-end 1993 level of $18.3 billion.
The increase was primarily attributable to growth in the owned
Finance and Banking receivable portfolio, specifically merchant
participation and other unsecured loans. Total managed assets
(owned assets plus receivables serviced with limited recourse)
were $27.4 billion at June 30, 1994, up slightly from $27.0
billion at December 31, 1993. The company's debt to equity ratio
declined to 6.18 from 6.22 at December 31, 1993. These ratios
were affected by the adoption of Statement of Financial Accounting
Standards No. 115 ("FAS No. 115") which requires that unrealized
gains or losses in certain debt and equity securities be recorded
as an adjustment to shareholder's equity. The rise in interest
rates in the first half of the year resulted in a net unrealized<PAGE>
<PAGE> 12
loss of $57.1 million at June 30, 1994 in the company's available-
for-sale investment portfolio and a corresponding reduction in
shareholder's equity. While FAS No. 115 provides for the
adjustment of certain debt and equity securities to fair value, it
does not allow for a corresponding adjustment for a change in
related liabilities. Therefore, the unrealized loss does not
reflect the change in the economic value of shareholder's equity
due to higher interest rates. The company believes that the
change in fair value of liabilities would offset a significant
amount of the reduction in the fair value of its investment
portfolio. Excluding the effect of the FAS No. 115 component of
shareholder's equity, the debt to equity ratio was 6.00 at June
30, 1994, compared to 6.34 at December 31, 1993.
Consolidated Credit Loss Reserves
---------------------------------
The company's credit portfolios and credit management policies have
historically been divided into two distinct components - consumer
and commercial. For consumer products, credit policies require
effective portfolio management focusing on product type and specific
portfolio risk factors. The consumer credit portfolio is
diversified by product and geographic location. The commercial
credit portfolio is monitored by individual transaction as well as
being evaluated by overall risk factors. See Note 3, "Finance and
Banking Receivables" and Note 4, "Liquidating Commercial Assets" 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,
1994 1994 1993 1993
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Finance and Banking:
Owned. . . . . . . . . . . . . . . . . . $274.7 $284.3 $279.8 $231.1
Serviced with limited recourse . . . . . 133.4 129.4 134.5 174.1
------------------------------------------------------------
Managed. . . . . . . . . . . . . . . . . 408.1 413.7 414.3 405.2
Liquidating Commercial Lines . . . . . . . 165.0 170.8 172.9 188.9
------------------------------------------------------------
Total. . . . . . . . . . . . . . . . . . . $573.1 $584.5 $587.2 $594.1
============================================================
Total owned and managed credit loss reserves as a percent of
receivables were as follows:
-----------------------------------------------------------------------------------------------------------
June 30, March 31, December 31, June 30,
1994 1994 1993 1993
-----------------------------------------------------------------------------------------------------------
Owned:
Finance and Banking. . . . . . . . . . . 2.92% 3.03% 3.12% 2.89%
Liquidating Commercial Lines . . . . . . 16.47 15.44 14.53 13.06
------------------------------------------------------------
Total owned. . . . . . . . . . . . . . . . 4.22% 4.33% 4.46% 4.45%
============================================================
Managed:
Finance and Banking. . . . . . . . . . . 2.51% 2.58% 2.57% 2.56%
Liquidating Commercial Lines . . . . . . 16.47 15.44 14.53 13.06
------------------------------------------------------------
Total managed. . . . . . . . . . . . . . . 3.32% 3.42% 3.40% 3.44%
============================================================
</TABLE>
The level of reserves for consumer credit losses is based on delinquency and
chargeoff experience by product, and judgmental factors when there is not
clear experience. The level of reserves for commercial credit losses is
based on a quarterly review process for all commercial credits and manage-
ment's evaluation of probable future losses in the portfolio as a whole
given its geographic and industry diversification and historical loss
experience. 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 significantly all reserves among the company's various
products and segments, 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.<PAGE>
<PAGE> 13
FINANCE AND BANKING
-------------------
Statements of Income
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
Six months ended Three months ended
June 30, June 30,
All dollar amounts are stated in millions. 1994 1993 1994 1993
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Finance income . . . . . . . . . . . . . . . . . . . . . $ 672.0 $ 591.0 $ 346.7 $ 296.5
Interest income from noninsurance investment securities. 18.0 19.5 8.4 11.5
Interest expense . . . . . . . . . . . . . . . . . . . . 245.8 218.0 135.4 100.8
---------------------------------------------
Net interest margin. . . . . . . . . . . . . . . . . . . 444.2 392.5 219.7 207.2
---------------------------------------------
Securitization and servicing fee income. . . . . . . . . 172.4 187.5 86.5 87.1
Insurance premiums and contract revenues . . . . . . . . 61.7 54.2 31.4 27.4
Investment income. . . . . . . . . . . . . . . . . . . . 6.9 5.7 3.3 3.2
Fee income . . . . . . . . . . . . . . . . . . . . . . . 35.5 25.1 17.8 14.2
Other income . . . . . . . . . . . . . . . . . . . . . . 12.0 33.8 5.7 10.2
---------------------------------------------
Other revenues . . . . . . . . . . . . . . . . . . . . . 288.5 306.3 144.7 142.1
---------------------------------------------
Net interest margin and other revenues . . . . . . . . . 732.7 698.8 364.4 349.3
---------------------------------------------
Provision for credit losses on owned receivables . . . . 185.5 196.8 85.9 93.3
---------------------------------------------
Costs and expenses:
Operating expenses . . . . . . . . . . . . . . . . . . 375.6 351.6 185.7 177.6
Policyholders' benefits. . . . . . . . . . . . . . . . 28.4 28.5 14.1 15.2
Income taxes . . . . . . . . . . . . . . . . . . . . . 44.6 36.0 24.7 17.7
---------------------------------------------
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 98.6 $ 85.9 $ 54.0 $ 45.5
=============================================
Average receivables:
Owned. . . . . . . . . . . . . . . . . . . . . . . . . $ 9,401.9 $ 8,265.7 $ 9,642.5 $ 8,146.8
Serviced with limited recourse . . . . . . . . . . . . 6,658.5 7,698.8 6,470.2 7,733.0
---------------------------------------------
Average receivables managed. . . . . . . . . . . . . . . 16,060.4 15,964.5 16,112.7 15,879.8
Serviced with no recourse. . . . . . . . . . . . . . . . 1,502.5 377.1 1,405.1 376.6
---------------------------------------------
Average receivables owned or serviced. . . . . . . . . . $17,562.9 $16,341.6 $17,517.8 $16,256.4
=============================================
Return on average owned assets - annualized. . . . . . . 1.66% 1.58% 1.79% 1.69%
=============================================
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
June 30, December 31,
1994 1993
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
End-of-period receivables:
Owned. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,411.8 $ 8,959.9
Serviced with limited recourse . . . . . . . . . . . . . . . . . 6,863.7 7,131.1
----------------------------------
Receivables managed. . . . . . . . . . . . . . . . . . . . . . . . 16,275.5 16,091.0
Serviced with no recourse. . . . . . . . . . . . . . . . . . . . . 1,299.6 1,649.5
----------------------------------
Receivables owned or serviced. . . . . . . . . . . . . . . . . . . $17,575.1 $17,740.5
==================================
/TABLE
<PAGE>
<PAGE> 14
Overview
--------
Finance and Banking earnings for the second quarter and first six
months of 1994 increased to $54.0 and $98.6 million, up from $45.5
and $85.9 million in the year-ago periods primarily due to improved
operating results in the domestic consumer finance, private-label
credit card and bankcard businesses as discussed earlier.
Receivables
-----------
Receivables owned totaled $9.4 billion at June 30, 1994, up 5
percent from December 31, 1993 and up 18 percent from June 30, 1993.
The level of owned receivables from quarter to quarter may vary
depending on the timing and significance of securitization
transactions in a particular period. In the second quarter of 1994,
the company completed securitizations and sales of approximately
$730 million of receivables.
Managed Finance and Banking receivables (owned receivables plus
those serviced with limited recourse) of the company's consumer
businesses totaled $16.3 billion, up slightly from year end and 3
percent from second quarter 1993 levels. Growth in the first half
of 1994 was impacted by higher than anticipated prepayment activity
in the home equity portfolio.
Net interest margin
-------------------
Net interest margin was $219.7 and $444.2 million for the second
quarter and first six months of 1994, up from $207.2 and $392.5
million in the same year-ago periods due to higher levels of
interest-earning assets and a shift in product mix towards higher-
yielding bankcard and merchant participation receivables. This
improvement, however, was partially offset by increased interest
costs on variable rate liabilities, which repriced more quickly than
the company's variable rate receivables in the rising interest rate
environment.
Due to growth in securitized assets over the past several years, the
comparability of net interest margin between periods may be affected
by the level and type of assets securitized. As receivables are
securitized and sold rather than held in the portfolio, net interest
income is shifted to securitization and servicing fee income. Net
interest margin in the second quarter on an owned basis as a percent
of average owned interest-earning assets, annualized, was 8.67
percent compared with 9.29 percent in the prior quarter and 9.56
percent in the second quarter of 1993. Net interest margin on a
managed basis, assuming receivables securitized and sold were
instead held in portfolio, was $326.8 and $672.4 million for the
second quarter and first six months of 1994, down from $347.6 and
$683.1 million in the same periods of 1993, and as a percent of
average managed interest-earning assets, annualized, was 7.87
percent in the second quarter of 1994 compared with 8.37 percent in
the prior quarter and 8.48 percent in the same year-ago quarter.
Net interest margin on an owned basis was greater than on a managed
basis because home equity receivables, which have lower spreads,
were a larger proportion of the portfolio serviced with limited
recourse than of the owned portfolio.
Other revenues
--------------
Securitization and servicing fee income consists of two components:
income associated with the securitization and sale of receivables
and servicing fee income related to the servicing of unsecured
receivables. Securitization income for the second quarter and first
six months of 1994 decreased compared to the same year-ago periods
due to a lower level of securitized receivables outstanding.
Securitization income as a percent of average receivables serviced
with limited recourse, annualized, was 4.06 and 4.44 percent in the
second quarter and first six months of 1994, compared to 4.54 and
4.91 percent in the same periods in 1993. This decrease was
primarily due to a shift in the mix of the serviced with limited
recourse portfolio towards lower-yielding home equity receivables.
Servicing fee income increased in the second quarter and first six
months of 1994, consistent with the serviced receivable portfolio
growth. Average receivables serviced with no recourse increased to
$1.4 billion for the second quarter of 1994, up from $377 million in
the same period in 1993. This increase was due to a change in the
composition of the serviced portfolio which occurred in the third<PAGE>
<PAGE> 15
quarter of 1993 when the company began servicing an unsecured
consumer loan portfolio without recourse which provided a higher
servicing fee. This portfolio totaled $1.0 billion at June 30,
1994.
Insurance premiums and contract revenues increased from the second
quarter and first six months of 1993 due to higher sales of
specialty and credit insurance.
Fee income includes revenues from fee-based products such as
bankcards and private-label credit cards. Fee income was $17.8 and
$35.5 million for the second quarter and first six months of 1994,
up from $14.2 and $25.1 million in the same periods in the prior
year primarily due to interchange and other fees related to growth
in owned bankcard receivables.
Expenses
--------
Operating expenses, which the company defines as salaries and fringe
benefits plus other operating expenses, were $185.7 and $375.6
million for the second quarter and first six months of 1994, up from
$177.6 and $351.6 million in the same periods of 1993 primarily due
to increased costs associated with servicing a larger owned or
serviced receivables portfolio. Operating expenses as a percent of
average receivables owned or serviced, annualized, decreased to 4.24
percent in the second quarter of 1994 compared to 4.31 percent in
the prior quarter and 4.37 percent in the second quarter of 1993.
The effective tax rate for the Finance and Banking segment was 31.4
and 31.1 percent, compared to 28.0 and 29.5 percent in the second
quarter and first six months of 1993.
Credit Quality
--------------
Overall credit quality statistics of the Finance and Banking
portfolio improved in the second quarter of 1994, as delinquency and
chargeoff levels continued to decline.
Delinquency
-----------
Delinquency levels are monitored for both receivables owned and
receivables managed. The company looks at delinquency levels which
include receivables serviced with limited recourse because this
portfolio is subjected to underwriting standards comparable to the
owned portfolio, is managed by operating personnel without regard to
portfolio ownership and results in a similar credit loss exposure
for the company.
<TABLE>
<CAPTION>
Two-Months-and-Over Contractual Delinquency (as a percent of managed consumer receivables):
----------------------------------------------------------------------------------------------
6/30/94 3/31/94 12/31/93 9/30/93 6/30/93
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic:
Home equity. . . . . . . . . . . . . 2.98% 3.32% 3.37% 3.62% 3.44%
Other secured. . . . . . . . . . . . 3.22 1.25 2.22 3.41 6.14
Bankcard . . . . . . . . . . . . . . 3.40 3.52 3.61 3.87 3.83
Merchant participation . . . . . . . 4.53 5.02 5.01 5.43 5.73
Other unsecured. . . . . . . . . . . 6.42 6.97 7.19 7.70 8.04
---------------------------------------------------
Total domestic . . . . . . . . . . . . 3.85 4.14 4.21 4.51 4.53
---------------------------------------------------
Foreign:
Australia. . . . . . . . . . . . . . 7.43 7.98 8.93 9.59 10.95
---------------------------------------------------
Total. . . . . . . . . . . . . . . . . 3.95% 4.24% 4.33% 4.63% 4.69%
===================================================
</TABLE>
Delinquency as a percent of managed consumer receivables decreased
from both the prior quarter and prior year levels, representing a
$35.9 million decline in the amount of delinquent receivables since
March 31, 1994. The decline in delinquent receivables was driven by
improvements in the home equity, merchant participation and other
unsecured products. These improvement were primarily due to tighter
underwriting standards instituted in the early 1990's, resulting in
a higher quality of receivables underwritten.
<PAGE>
<PAGE> 16
The company believes that, although further reductions are possible,
the overall declining delinquency trend will begin to stabilize.
Future changes in delinquency will depend on economic conditions in
the two countries and various regional areas where the company
operates and the composition of the managed receivables base.
Nonperforming Assets
--------------------
Nonperforming assets consisted of the following:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
In millions. 6/30/94 3/31/94 12/31/93 9/30/93 6/30/93
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual managed receivables . . . . $306.2 $335.7 $340.9 $365.5 $368.3
Accruing managed receivables 90 or more
days delinquent. . . . . . . . . . . 133.5 140.1 148.8 154.9 163.9
----------------------------------------------------
Total nonperforming managed receivables 439.7 475.8 489.7 520.4 532.2
----------------------------------------------------
Real estate owned. . . . . . . . . . . 72.8 78.0 89.0 92.4 92.3
Other assets acquired through
foreclosure. . . . . . . . . . . . . 79.8 81.3 82.9 84.4 85.9
----------------------------------------------------
Total nonperforming assets . . . . . . $592.3 $635.1 $661.6 $697.2 $710.4
====================================================
Credit loss reserves for managed
receivables as a percent of
nonperforming managed receivables. . 92.8% 86.9% 84.6% 76.2% 76.1%
----------------------------------------------------
</TABLE>
Nonaccrual managed Finance and Banking receivables declined
primarily due to continued improvement in the domestic consumer
finance operation.
Net Chargeoffs of Consumer Receivables
--------------------------------------
<TABLE>
<CAPTION>
Net Chargeoffs of Consumer Receivables (as a percent, annualized, of average consumer receivables managed):
----------------------------------------------------------------------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
1994 1994 1993 1993 1993
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic:
Home equity. . . . . . . . . . . . . 1.43% 1.29% 1.26% .89% 1.03%
Other secured. . . . . . . . . . . . .13 - 1.02 9.72 10.94
Bankcard . . . . . . . . . . . . . . 5.26 5.74 5.90 6.01 5.74
Merchant participation . . . . . . . 3.83 3.91 4.26 4.44 4.02
Other unsecured. . . . . . . . . . . 5.52 5.65 5.89 6.36 7.09
---------------------------------------------------
Total domestic . . . . . . . . . . . . 3.37 3.44 3.54 3.58 3.60
---------------------------------------------------
Foreign:
Australia. . . . . . . . . . . . . . 3.72 2.74 3.77 2.61 3.38
---------------------------------------------------
Total. . . . . . . . . . . . . . . . . 3.38% 3.42% 3.55% 3.56% 3.60%
===================================================
</TABLE>
Net chargeoffs as a percent of average managed consumer receivables
for the 1994 second quarter decreased compared to both the first
quarter and the year-ago quarter. Net chargeoffs on a dollar basis
in the second quarter were $130.3 million, compared to $131.4
million in the first quarter of 1994. Improvement in the bankcard
portfolio in the second quarter was partially offset by increased
chargeoffs in the home equity portfolio. Home equity loan
chargeoffs continue to be impacted by weak economic conditions in
the western region. The improvement in all the unsecured portfolios
was due to the favorable performance of recently underwritten
receivables.
Chargeoffs are a lagging indicator of credit quality and generally
reflect prior delinquency trends. As previously discussed, overall
delinquency levels have continued to decline. The decline has been
a result of better economic conditions and the effect of the
company's strategy to improve overall credit quality by tightened<PAGE>
<PAGE> 17
underwriting standards. The company expects that chargeoff trends
will continue to follow the downward trend in consumer delinquency.
However, future improvement in chargeoff trends may be impacted by
factors such as a shift in product mix, economic conditions and the
impact of personal bankruptcies. Consequently, the extent and
timing of an overall improved chargeoff trend remains uncertain.
INDIVIDUAL LIFE INSURANCE
-------------------------
Individual Life Insurance net income was $10.6 and $22.3 million in
the second quarter and first six months of 1994, up from $9.8 and
$21.5 million in the prior year periods.
<TABLE>
<CAPTION>
Statements of Income
-----------------------------------------------------------------------------------
Six months ended Three months ended
June 30, June 30,
All dollar amounts are stated in millions. 1994 1993 1994 1993
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income. . . . . . . . . . . $247.6 $263.1 $114.9 $129.6
Contract revenues. . . . . . . . . . . 74.1 61.2 35.3 29.7
-----------------------------------------
Total revenues . . . . . . . . . . . . 321.7 324.3 150.2 159.3
Costs and expenses:
Policyholders' benefits. . . . . . . 219.8 226.3 109.9 114.2
Operating expenses . . . . . . . . . 67.2 65.1 23.9 30.1
Income taxes . . . . . . . . . . . . 12.4 11.4 5.8 5.2
-----------------------------------------
Net income . . . . . . . . . . . . . . $ 22.3 $ 21.5 $ 10.6 $ 9.8
=========================================
Return on average assets - annualized. .65% .71% .60% .64%
=========================================
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
June 30, December 31,
1994 1993
-----------------------------------------------------------------------------------
<S> <C> <C>
Investment securities. . . . . . . . . . . . $ 6,426.6 $ 6,358.0
Life insurance in-force. . . . . . . . . . . 34,918.0 32,371.6
================================
</TABLE>
Investment securities for the Individual Life Insurance segment
totaled $6.4 billion, flat with both the March 31, 1994 and December
31, 1993 levels. The Individual Life Insurance portfolio
represented approximately 92 percent of the company's total
investment portfolio at June 30, 1994. Higher-risk securities,
which include non-investment grade bonds, common and preferred
stocks, commercial mortgage loans and real estate, represented 6.9
percent of the insurance investment portfolio at June 30, 1994,
compared to 7.1 percent at March 31, 1994 and 7.0 percent at
December 31, 1993.
At June 30, 1994 the market value for the insurance held-to-maturity
investment portfolio was 102 percent of the carrying value compared
to 104 percent at March 31, 1994 and 108 percent at December 31,
1993. The decrease in market value over book value during the first
half of 1994 was mainly the result of the rising interest rate
environment. The company continuously monitors the fair value of
its available-for-sale investment portfolio in light of market
interest rate conditions and sells securities at pre-established
levels to maximize its capital position.
Investment income in the second quarter and first six months of 1994
was $114.9 and $247.6 million, down compared with the year-ago
periods as higher levels of investment securities were offset by
lower yields. Contract revenues in both periods increased due to
higher levels of insurance in-force.
Policyholders' benefits in the second quarter and first half of 1994
were $109.9 and $219.8 million, down 4 and 3 percent over the same
periods in 1993 due to lower interest credited to policyholders
caused by lower yields on investment securities.<PAGE>
<PAGE> 18
Despite higher commission expense, operating expense in the second
quarter was down compared to the year-ago period due to lower levels
of deferred insurance policy acquisition cost amortization ("DAC")
associated with lower investment income. Operating expense for the
first six months was up slightly compared to the prior year period
due to higher commission expense and higher levels of DAC resulting
from increased gross profits from universal life and annuity
contracts.
The effective tax rate was 35.4 and 35.7 percent for the second
quarter and first half of 1994 compared to 34.7 percent in both
respective periods of 1993.
LIQUIDATING COMMERCIAL LINES
----------------------------
The net loss for the Liquidating Commercial Lines segment was $2.6
and $5.8 million in the second quarter and first six months of 1994
compared to a net loss of $4.1 and $8.4 million in the same period
in 1993.
<TABLE>
<CAPTION>
Statements of Operations
----------------------------------------------------------------------------------
Six months ended Three months ended
June 30, June 30,
In millions. 1994 1993 1994 1993
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest margin. . . . . . . . . $ 19.0 $ 23.0 $ 8.3 $ 11.1
Other revenues . . . . . . . . . . . 12.5 2.7 .7 2.8
--------------------------------------------
Net interest margin and other revenues 31.5 25.7 9.0 13.9
Provision for credit losses. . . . . 32.5 28.1 8.2 13.8
Operating expenses . . . . . . . . . 6.2 9.7 3.7 5.7
Income tax benefit . . . . . . . . . (1.4) (3.7) (.3) (1.5)
--------------------------------------------
Net loss . . . . . . . . . . . . . . $ (5.8) $ (8.4) $ (2.6) $ (4.1)
============================================
Average receivables owned . . . . . $1,105.2 $1,511.8 $1,053.1 $1,476.0
============================================
</TABLE>
Net interest margin for the second quarter and first six months of
1994 decreased compared to the prior year periods as the effect of
lower asset levels was only partially offset by wider spreads.
Increased other revenues primarily related to the company's 25
percent equity investment in a liquidating commercial joint venture
made in June 1993 and fees received upon prepayment of several
loans. Provision for credit losses was $8.2 and $32.5 million, down
from $13.8 million in the second quarter of 1993 and up from $28.1
million in the first six months of 1993. See page 12 in
Management's Discussion and Analysis on Consolidated Credit Loss
Reserves for factors impacting overall loss reserve levels.
Operating expenses were $3.7 and $6.2 million in the second quarter
and first six months of 1994, respectively, down from $5.7 and $9.7
million in the year-ago periods principally due to lower write-downs
and net expenses for real estate owned.
<TABLE>
<CAPTION>
Commercial Nonperforming Loans and Real Estate Owned:
----------------------------------------------------------------------------------------------
In millions. 6/30/94 3/31/94 12/31/93 9/30/93 6/30/93
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real estate nonaccrual . . . . . . . . $ 47.7 $ 49.3 $ 54.8 $ 79.6 $ 90.6
Other nonaccrual . . . . . . . . . . . 114.8 151.1 173.9 164.1 246.9
-----------------------------------------------------
Total nonaccrual . . . . . . . . . . . 162.5 200.4 228.7 243.7 337.5
Renegotiated . . . . . . . . . . . . . 28.5 29.2 28.7 17.3 34.9
-----------------------------------------------------
Total nonperforming loans. . . . . . . 191.0 229.6 257.4 261.0 372.4
Real estate owned. . . . . . . . . . . 244.2 249.7 256.6 262.2 258.1
-----------------------------------------------------
Total. . . . . . . . . . . . . . . . . $435.2 $479.3 $514.0 $523.2 $630.5
=====================================================
Credit loss reserves as a percent of
nonperforming loans. . . . . . . . . 86.4% 74.4% 67.2% 71.2% 50.7%
-----------------------------------------------------
/TABLE
<PAGE>
<PAGE> 19
The company expects the longer term downward trend in nonperforming
assets to continue, although it may stabilize in the near future
before decreasing. In addition, comparisons between periods may be
impacted by individual transactions which mask the overall trend.
The company continues to estimate its ultimate loss exposure on
nonperforming assets based on performance and specific reviews of
individual loans and its outlook for economic conditions. Because
the portfolio consists of a number of loans with relatively large
balances, changes in individual borrower circumstances which
currently are unforeseen have the potential to change the estimate
of ultimate loss exposure in the future.
Management believes that commercial real estate markets began to
stabilize in the second half of 1993. The level of future potential
write-downs will depend heavily on changes in overall market
conditions as well as circumstances surrounding individual
properties. To preserve value in liquidating the real estate owned
portfolio over time, the company has segregated its portfolio into
two categories. Properties in weak markets or with poor cash flow
will be divested in an expeditious, orderly fashion. These
properties, which have been written down an average of 50 percent,
represented 17 percent of the commercial real estate owned portfolio
at June 30, 1994. The average carrying value of a property in this
portfolio at June 30, 1994 was approximately $3 million. Properties
with positive and/or improved cash flows and in markets which, the
company believes, have potential for improvement are being held for
sale at prices which reflect this value. Revenues on all commercial
real estate properties, net of write-downs and carrying costs, were
$.8 million in the second quarter of 1994 compared to net write-
downs and carrying costs of $2.7 million in the same period in 1993.<PAGE>
<PAGE> 20
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.
<PAGE>
<PAGE> 21
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 FINANCE CORPORATION
-----------------------------
(Registrant)
Date: August 12, 1994 By: /s/ David A. Schoenholz
--------------- ----------------------------
David A. Schoenholz,
Vice President, Chief Accounting
Officer and Chief Financial
Officer, Director and on behalf of
Household Finance Corporation
<PAGE>
<PAGE> 22
Exhibit Index
-------------
12 Statement of Computation of Ratio of Earnings to Fixed
Charges and to Combined Fixed Charges and Preferred Stock
Dividends.
<PAGE> 1
EXHIBIT 12
Household Finance Corporation and Subsidiaries
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND TO COMBINED
FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
- -----------------------------------------------------------------
All dollar amounts are stated in millions.
Six months ended June 30 1994 1993
- -----------------------------------------------------------------
Net income $115.1 $ 99.0
- -----------------------------------------------------------------
Income taxes 55.6 43.7
- -----------------------------------------------------------------
Fixed charges:
Interest expense (1) 284.9 269.9
Interest portion of rentals (2) 4.1 2.6
- -----------------------------------------------------------------
Total fixed charges 289.0 272.5
- -----------------------------------------------------------------
Total earnings as defined $459.7 $415.2
- -----------------------------------------------------------------
Ratio of earnings to fixed charges 1.59 1.52
=================================================================
Preferred stock dividends (3) $ 5.3 $ 6.8
=================================================================
Ratio of earnings to combined fixed charges
and preferred stock dividends 1.56 1.49
=================================================================
(1) For financial statement purposes, interest expense includes
income earned on temporary investment of excess funds, generally
resulting from over-subscriptions of commercial paper.
(2) Represents one-third of rentals, which approximates the portion
representing interest.
(3) Preferred stock dividends are grossed up to their pretax
equivalent based upon an effective tax rate of 32.6 and 30.6
percent for June 30, 1994 and 1993, respectively.
U:\WP\EMP819\EDGAR\FQ63012.AS1
