<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 September 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 October 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
STATEMENTS OF INCOME
- --------------------
<TABLE>
<CAPTION>
In millions.
- ------------------------------------------------------------------------------------------------
Nine Months Ended Three Months Ended
September 30, September 30,
1994 1993 1994 1993
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Finance income . . . . . . . . . . . . . . . . . . . $1,096.4 $ 982.1 $381.5 $332.2
Interest income from noninsurance investment securities 28.3 30.9 10.3 11.4
Interest expense . . . . . . . . . . . . . . . . . . 435.2 381.6 163.3 123.1
---------------------------------------
Net interest margin. . . . . . . . . . . . . . . . . 689.5 631.4 228.5 220.5
Provision for credit losses on owned receivables 344.0 370.5 126.0 145.6
---------------------------------------
Net interest margin after provision for credit losses 345.5 260.9 102.5 74.9
---------------------------------------
Securitization and servicing fee income 265.3 291.2 92.9 103.7
Insurance premiums and contract revenues 157.7 182.2 21.9 66.8
Investment income. . . . . . . . . . . . . . . . . . 381.6 421.9 127.1 153.1
Fee income . . . . . . . . . . . . . . . . . . . . . 58.4 41.9 22.1 15.9
Other income . . . . . . . . . . . . . . . . . . . . 42.7 44.4 19.0 15.4
---------------------------------------
Total other revenues . . . . . . . . . . . . . . . . 905.7 981.6 283.0 354.9
---------------------------------------
Net interest margin after provision for credit losses
and other revenues . . . . . . . . . . . . . . . . 1,251.2 1,242.5 385.5 429.8
---------------------------------------
Operating expenses . . . . . . . . . . . . . . . . . 652.5 634.5 205.7 219.3
Policyholders' benefits. . . . . . . . . . . . . . . 328.9 388.5 80.7 133.7
---------------------------------------
Total costs and expenses . . . . . . . . . . . . . . 981.4 1,023.0 286.4 353.0
---------------------------------------
Income before income taxes . . . . . . . . . . . . . 269.8 219.5 99.1 76.8
Income taxes . . . . . . . . . . . . . . . . . . . . 88.2 70.3 32.6 26.6
---------------------------------------
Net income . . . . . . . . . . . . . . . . . . . . . $ 181.6 $ 149.2 $ 66.5 $ 50.2
=======================================
See notes to condensed financial statements.
/TABLE
<PAGE>
<PAGE> 3
Household Finance Corporation and Subsidiaries
BALANCE SHEETS
- --------------
<TABLE>
<CAPTION>
In millions.
- -----------------------------------------------------------------------
September 30, December 31,
1994 1993
- -----------------------------------------------------------------------
<S> <C> <C>
ASSETS
- ------
Cash . . . . . . . . . . . . . . . . . . . . $ 55.1 $ 27.8
Investment securities (fair value of $7,176.9
and $7,317.8). . . . . . . . . . . . . . . 7,099.4 7,082.0
Finance and banking receivables. . . . . . . 10,951.5 9,338.4
Liquidating commercial assets. . . . . . . . 1,301.2 1,555.7
Advances to parent company and affiliates. . 536.6 361.7
Deferred insurance policy acquisition costs. 603.3 381.6
Acquired intangibles . . . . . . . . . . . . 344.1 246.7
Properties and equipment . . . . . . . . . . 211.9 202.2
Assets acquired through foreclosure. . . . . 134.7 171.9
Other assets . . . . . . . . . . . . . . . . 660.3 482.2
-----------------------
Total assets . . . . . . . . . . . . . . . . $21,898.1 $19,850.2
=======================
LIABILITIES AND SHAREHOLDER'S EQUITY
- ------------------------------------
Debt:
Commercial paper, bank and other borrowings $ 4,496.0 $ 4,321.8
Senior and senior subordinated debt (with
original maturities over one year). . . 7,966.0 6,813.7
-----------------------
Total debt . . . . . . . . . . . . . . . . . 12,462.0 11,135.5
Insurance policy and claim reserves. . . . . 6,496.4 5,981.5
Other liabilities. . . . . . . . . . . . . . 940.1 942.7
-----------------------
Total liabilities. . . . . . . . . . . . . . 19,898.5 18,059.7
-----------------------
Preferred stock. . . . . . . . . . . . . . . 100.0 100.0
-----------------------
Common shareholder's equity:
Common stock and paid-in capital . . . . . 691.2 551.2
Retained earnings. . . . . . . . . . . . . 1,302.3 1,126.0
Foreign currency translation adjustments . (23.6) (21.8)
Unrealized gain (loss) on investments, net (70.3) 35.1
-----------------------
Total common shareholder's equity. . . . . . 1,899.6 1,690.5
-----------------------
Total liabilities and shareholder's equity . $21,898.1 $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.
- --------------------------------------------------------------------------------------------
Nine months ended September 30 1994 1993
- --------------------------------------------------------------------------------------------
<S> <C> <C>
CASH PROVIDED BY OPERATIONS
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 181.6 $ 149.2
Adjustments to reconcile net income to net cash provided by operations:
Provision for credit losses on owned receivables . . . . . . . . . . 344.0 370.5
Insurance policy and claim reserves. . . . . . . . . . . . . . . . . 201.2 198.3
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . 110.3 125.4
Net realized (gains) losses from sales of assets . . . . . . . . . . 36.1 (22.6)
Deferred insurance policy acquisition costs. . . . . . . . . . . . . (70.7) (63.2)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (66.9) 126.1
--------------------
Cash provided by operations. . . . . . . . . . . . . . . . . . . . . . 735.6 883.7
--------------------
INVESTMENTS IN OPERATIONS
Investment securities:
Purchased. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,241.2) (2,041.4)
Matured. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 423.5 424.8
Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,370.8 1,188.4
Short-term investment securities, net change . . . . . . . . . . . . . 70.1 38.3
Receivables, excluding bankcard:
Originated or purchased. . . . . . . . . . . . . . . . . . . . . . . (5,250.2) (4,659.1)
Collected. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,037.0 2,663.0
Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 966.8 1,224.0
Bankcard receivables:
Originated or collected, net . . . . . . . . . . . . . . . . . . . . (1,862.1) (1,942.3)
Purchased. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12.8) -
Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,376.8 1,444.8
Acquisition of credit card relationships . . . . . . . . . . . . . . . (138.1) -
Properties and equipment purchased . . . . . . . . . . . . . . . . . . (22.8) (17.6)
Properties and equipment sold. . . . . . . . . . . . . . . . . . . . . .6 2.8
Advances to parent company and affiliates. . . . . . . . . . . . . . . (174.9) 9.5
--------------------
Cash decrease from investments in operations . . . . . . . . . . . . . (2,456.5) (1,664.8)
--------------------
FINANCING AND CAPITAL TRANSACTIONS
Short-term debt, net change. . . . . . . . . . . . . . . . . . . . . . 158.1 (90.1)
Senior and senior subordinated debt issued . . . . . . . . . . . . . . 2,850.6 1,937.9
Senior and senior subordinated debt retired. . . . . . . . . . . . . . (1,709.3) (1,467.0)
Policyholders' benefits paid . . . . . . . . . . . . . . . . . . . . . (396.4) (282.9)
Cash received from policyholders . . . . . . . . . . . . . . . . . . . 710.5 630.0
Dividends on preferred stock . . . . . . . . . . . . . . . . . . . . . (5.3) (6.9)
Capital contribution from parent company . . . . . . . . . . . . . . . 140.0 70.0
--------------------
Cash increase from financing and capital transactions. . . . . . . . . 1,748.2 791.0
--------------------
Increase in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . 27.3 9.9
Cash at January 1. . . . . . . . . . . . . . . . . . . . . . . . . . . 27.8 48.7
--------------------
Cash at September 30 . . . . . . . . . . . . . . . . . . . . . . . . . $ 55.1 $ 58.6
====================
Supplemental cash flow information:
Interest paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 459.3 $ 366.5
====================
Income taxes paid. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 170.1 $ 62.7
====================
See notes to condensed financial statements.
/TABLE
<PAGE>
<PAGE> 5
Household Finance Corporation and Subsidiaries
BUSINESS SEGMENT DATA
- ---------------------
<TABLE>
<CAPTION>
In millions.
- -----------------------------------------------------------------------------------------------
Nine Months Ended Three Months Ended
September 30, September 30,
1994 1993 1994 1993
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
- --------
Finance and Banking. . . . . . . . . . . . . . . . . $1,519.1 $1,397.9 $540.6 $481.1
Individual Life Insurance. . . . . . . . . . . . . . 434.8 508.2 113.1 183.9
--------------------------------------
Core Business. . . . . . . . . . . . . . . . . . . . 1,953.9 1,906.1 653.7 665.0
Liquidating Commercial Lines . . . . . . . . . . . . 76.5 88.5 21.1 33.5
--------------------------------------
Total. . . . . . . . . . . . . . . . . . . . . . . . $2,030.4 $1,994.6 $674.8 $698.5
======================================
NET INCOME
- ----------
Finance and Banking. . . . . . . . . . . . . . . . . $ 149.4 $ 133.2 $ 50.8 $ 47.3
Individual Life Insurance. . . . . . . . . . . . . . 39.7 35.0 17.4 13.5
--------------------------------------
Core Business. . . . . . . . . . . . . . . . . . . . 189.1 168.2 68.2 60.8
Liquidating Commercial Lines . . . . . . . . . . . . (7.5) (19.0) (1.7) (10.6)
--------------------------------------
Total. . . . . . . . . . . . . . . . . . . . . . . . $ 181.6 $ 149.2 $ 66.5 $ 50.2
======================================
Return on average owned assets - Core Business (1) . 1.31% 1.30% 1.35% 1.35%
======================================
Return on average owned assets - Total (1) . . . . . 1.17% 1.05% 1.24% 1.01%
======================================
Return on average common shareholder's equity -
Core Business (1) . . . . . . . . . . . . . . . . . 19.17% 20.07% 19.42% 20.62%
======================================
Return on average common shareholder's equity - Total (1) 13.37% 12.47% 14.30% 11.76%
======================================
Efficiency ratio (2) . . . . . . . . . . . . . . . . 51.5% 51.8% 47.8% 49.6%
======================================
(1) Annualized
(2) Operating expenses as a percent of net interest margin and total other revenues less policyholders' benefits.
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Assets September 30, 1994 December 31, 1993
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Finance and Banking. . . . . . . . . . . . . . . . . $13,132.6 $11,335.5
Individual Life Insurance. . . . . . . . . . . . . . 7,464.3 6,959.0
-----------------------------
Core Business. . . . . . . . . . . . . . . . . . . . 20,596.9 18,294.5
Liquidating Commercial Lines . . . . . . . . . . . . 1,301.2 1,555.7
-----------------------------
Total. . . . . . . . . . . . . . . . . . . . . . . . $21,898.1 $19,850.2
=============================
- -----------------------------------------------------------------------------------------------
Receivables owned September 30, 1994 December 31, 1993
- -----------------------------------------------------------------------------------------------
Finance and Banking. . . . . . . . . . . . . . . . . $10,566.7 $ 8,959.9
Liquidating Commercial Lines . . . . . . . . . . . . 932.2 1,189.9
-----------------------------
Total. . . . . . . . . . . . . . . . . . . . . . . . $11,498.9 $10,149.8
=============================
- -----------------------------------------------------------------------------------------------
Receivables managed September 30, 1994 December 31, 1993
- -----------------------------------------------------------------------------------------------
Finance and Banking. . . . . . . . . . . . . . . . . $17,097.2 $16,091.0
Liquidating Commercial Lines . . . . . . . . . . . . 932.2 1,189.9
-----------------------------
Total. . . . . . . . . . . . . . . . . . . . . . . . $18,029.4 $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, as supplemented by the Current Report on Form
8-K, filed September 16, 1994. 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
---------------------
<TABLE>
<CAPTION>
Investment securities consisted of the following:
--------------------------------------------------------------------------------
In millions. September 30, 1994 December 31, 1993
--------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TRADING INVESTMENTS
Government securities and other. . . $ 8.6 $ 8.6 $ 11.9 $ 11.9
-----------------------------------------
AVAILABLE-FOR-SALE INVESTMENTS
Marketable equity securities:
Common stocks. . . . . . . . . . . 34.3 34.3 18.5 18.5
Preferred stocks . . . . . . . . . 49.5 49.5 57.7 57.7
Corporate securities . . . . . . . . 2,277.2 2,277.2 2,047.1 2,047.1
Government securities. . . . . . . . 203.6 203.6 326.1 326.1
Mortgage-backed securities . . . . . 841.0 841.0 1,075.5 1,075.5
Commercial paper . . . . . . . . . . 197.0 197.0 52.6 52.6
Other. . . . . . . . . . . . . . . . 87.6 87.6 244.1 244.1
-----------------------------------------
Subtotal . . . . . . . . . . . . . . 3,690.2 3,690.2 3,821.6 3,821.6
-----------------------------------------
HELD-TO-MATURITY INVESTMENTS
Corporate securities . . . . . . . . 1,801.0 1,820.6 1,739.0 1,930.7
Government securities. . . . . . . . 23.3 21.0 23.2 25.4
Mortgage-backed securities . . . . . 920.7 980.1 772.2 809.0
Mortgage loans on real estate. . . . 169.5 169.5 222.4 226.0
Policy loans . . . . . . . . . . . . 69.8 69.8 81.6 81.6
Other. . . . . . . . . . . . . . . . 303.4 304.2 310.5 312.0
-----------------------------------------
Subtotal . . . . . . . . . . . . . . 3,287.7 3,365.2 3,148.9 3,384.7
-----------------------------------------
Accrued investment income. . . . . . 112.9 112.9 99.6 99.6
-----------------------------------------
Total investment securities. . . . . $7,099.4 $7,176.9 $7,082.0 $7,317.8
=========================================
/TABLE
<PAGE>
<PAGE> 7
3.FINANCE AND BANKING RECEIVABLES
-------------------------------
<TABLE>
<CAPTION>
Finance and banking receivables consisted of the following:
-----------------------------------------------------------------------------
September 30, December 31,
In millions. 1994 1993
-----------------------------------------------------------------------------
<S> <C> <C>
Home equity. . . . . . . . . . . . . . . . . . $ 1,941.4 $ 1,557.1
Other secured. . . . . . . . . . . . . . . . . 328.2 347.1
Bankcard . . . . . . . . . . . . . . . . . . . 2,511.1 2,103.8
Merchant participation . . . . . . . . . . . . 2,393.5 2,054.4
Other unsecured. . . . . . . . . . . . . . . . 2,679.6 2,236.1
Equipment financing and other. . . . . . . . . 712.9 661.4
-----------------------
Receivables owned. . . . . . . . . . . . . . . 10,566.7 8,959.9
Accrued finance charges. . . . . . . . . . . . 174.6 167.4
Credit loss reserve for owned receivables. . . (305.6) (279.8)
Unearned credit insurance premiums and claims reserves (50.2) (49.8)
Amounts due and deferred from receivables sales 689.3 675.2
Reserve for receivables serviced with limited recourse (123.3) (134.5)
-----------------------
Total receivables owned, net . . . . . . . . . 10,951.5 9,338.4
Receivables serviced with limited recourse . . 6,530.5 7,131.1
Receivables serviced with no recourse. . . . . 1,098.8 1,649.5
-----------------------
Total receivables owned or serviced, net . . . $18,580.8 $18,119.0
=======================
</TABLE>
<TABLE>
<CAPTION>
The outstanding balance of receivables serviced with limited recourse consisted of the following:
-----------------------------------------------------------------------------
September 30, December 31,
In millions 1994 1993
-----------------------------------------------------------------------------
<S> <C> <C>
First mortgage . . . . . . . . . . . . . . . . $ 150.0 -
Home equity. . . . . . . . . . . . . . . . . . 4,592.4 $ 5,029.5
Bankcard . . . . . . . . . . . . . . . . . . . 1,633.0 1,789.0
Merchant participation . . . . . . . . . . . . 155.1 312.6
-----------------------
Total. . . . . . . . . . . . . . . . . . . . . $ 6,530.5 $ 7,131.1
=======================
</TABLE>
<TABLE>
<CAPTION>
The combination of receivables owned and receivables serviced with limited recourse, which the
company considers its managed portfolio, is shown below:
-----------------------------------------------------------------------------
September 30, December 31,
In millions. 1994 1993
-----------------------------------------------------------------------------
<S> <C> <C>
First mortgage . . . . . . . . . . . . . . . . $ 150.0 -
Home equity. . . . . . . . . . . . . . . . . . 6,533.8 $ 6,586.6
Other secured. . . . . . . . . . . . . . . . . 328.2 347.1
Bankcard . . . . . . . . . . . . . . . . . . . 4,144.1 3,892.8
Merchant participation . . . . . . . . . . . . 2,548.6 2,367.0
Other unsecured. . . . . . . . . . . . . . . . 2,679.6 2,236.1
Equipment financing and other. . . . . . . . . 712.9 661.4
-----------------------
Receivables managed. . . . . . . . . . . . . . $17,097.2 $16,091.0
=======================
</TABLE>
Receivables serviced with no recourse consisted primarily of
unsecured receivables at both September 30, 1994 and December 31,
1993. The bankcard and merchant participation managed receivable
portfolios are serviced by an affiliate of the company.
The amounts due and deferred from receivables sales of $689.3
million at September 30, 1994 included unamortized excess servicing
assets and funds established pursuant to the recourse provisions and
holdback reserves for certain sales totaling $604.0 million. The
amounts due and deferred also included customer payments not yet<PAGE>
<PAGE> 8
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 September 30, 1994. 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 $123.3 million at September 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
-----------------------------
<TABLE>
<CAPTION>
Liquidating commercial assets consisted of the following:
--------------------------------------------------------------
September 30, December 31,
In millions. 1994 1993
--------------------------------------------------------------
<S> <C> <C>
Receivables
Commercial real estate . . . . . . $ 245.9 $ 297.1
Acquisition finance and other. . . 686.3 892.8
----------------------
Receivables owned. . . . . . . . . . 932.2 1,189.9
Accrued finance charges. . . . . . . 9.7 9.2
Reserve for credit losses. . . . . . (158.1) (172.9)
----------------------
Total receivables owned, net . . . . 783.8 1,026.2
Real estate owned. . . . . . . . . . 241.7 256.6
Other assets . . . . . . . . . . . . 275.7 272.9
----------------------
Total liquidating commercial assets. $1,301.2 $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 page 20 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 nine months ended September 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. . . . . . . . . . . . . . . . . . . . 303.4 298.5
Liquidating Commercial Lines . . . . . . . . . . . . . . . 40.6 72.0
-----------------
Total provision for credit losses - owned receivables. . . . 344.0 370.5
-----------------
Owned receivables charged off:
Finance and Banking. . . . . . . . . . . . . . . . . . . . (334.9) (330.2)
Liquidating Commercial Lines . . . . . . . . . . . . . . . (55.9) (90.3)
-----------------
Total owned receivables charged off. . . . . . . . . . . . . (390.8) (420.5)
-----------------
Recoveries on owned receivables:
Finance and Banking. . . . . . . . . . . . . . . . . . . . 58.7 49.4
Liquidating Commercial Lines . . . . . . . . . . . . . . . .8 .9
-----------------
Total recoveries on owned receivables. . . . . . . . . . . . 59.5 50.3
-----------------
Credit loss reserves on receivables purchased, net . . . . . - .8
Other, net (1) . . . . . . . . . . . . . . . . . . . . . . . (1.7) 27.3
-----------------
TOTAL CREDIT LOSS RESERVES FOR OWNED RECEIVABLES AT SEPTEMBER 30 463.7 451.7
-----------------
Credit loss reserves for receivables serviced with
limited recourse at January 1. . . . . . . . . . . . . . . 134.5 160.9
Provision for credit losses. . . . . . . . . . . . . . . . . 92.3 133.1
Chargeoffs . . . . . . . . . . . . . . . . . . . . . . . . . (109.3) (136.5)
Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . 3.5 3.5
Other, net (1) . . . . . . . . . . . . . . . . . . . . . . . 2.3 (30.5)
-----------------
TOTAL CREDIT LOSS RESERVES FOR RECEIVABLES SERVICED WITH
LIMITED RECOURSE AT SEPTEMBER 30 . . . . . . . . . . . . . 123.3 130.5
-----------------
TOTAL CREDIT LOSS RESERVES AT SEPTEMBER 30 . . . . . . . . . $ 587.0 $ 582.2
=================
Total credit loss reserves for owned receivables at September 30:
Finance and Banking. . . . . . . . . . . . . . . . . . . . $ 305.6 $ 265.8
Liquidating Commercial Lines . . . . . . . . . . . . . . . 158.1 185.9
-----------------
TOTAL CREDIT LOSS RESERVES FOR OWNED RECEIVABLES AT SEPTEMBER 30 $ 463.7 $ 451.7
=================
Total credit loss reserves for managed receivables at September 30:
Finance and Banking. . . . . . . . . . . . . . . . . . . . $ 428.9 $ 396.3
Liquidating Commercial Lines . . . . . . . . . . . . . . . 158.1 185.9
-----------------
TOTAL CREDIT LOSS RESERVES FOR MANAGED RECEIVABLES AT SEPTEMBER 30 $ 587.0 $ 582.2
=================
(1) 1993 amounts include the transfer, from serviced with limited recourse to owned, of credit loss reserves
associated with the return of receivables to the owned portfolio upon the culmination of a securitization
transaction.
</TABLE>
<PAGE>
<PAGE> 10
6.INCOME TAXES
------------
Effective tax rates for the nine months ended September 30, 1994 and
1993 of 32.7 and 32.0 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, (e) reduction of noncurrent tax requirements and in
1993 (f) foreign loss carryforwards.
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 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
-----------------------------------------------
In September 1992, Household International entered into a strategic
alliance with General Motors Corporation to issue the General Motors
credit card ("GM Card"). Through May 31, 1994, an affiliate of the
company was designated as the issuer of the GM Card. On June 1,
1994 Household International designated a subsidiary of the company
as the issuer of GM Card accounts to customers who previously did
not have an account with the affiliate.
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 $536.6 million at September 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
September 30, 1994 and December 31, 1993. Net interest income on
these affiliated balances was $18.6 and $12.0 million for the nine
months ended September 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 third quarter and first nine months of 1994 was
$66.5 and $181.6 million, up 32 percent from $50.2 million and 22
percent from $149.2 million in 1993. The improvements in
consolidated net income for both periods primarily were due to
increased earnings in the Finance and Banking and Individual Life
segments. In addition, net income for both periods benefited from
reduced losses in the Liquidating Commercial Lines ("LCL") segment.
During the third quarter and first nine months of 1994, the
company's operations, financial position and profitability were
affected by the following:
- The domestic private-label credit card and bankcard businesses had
improved operating results in both the third quarter and first
nine months of 1994 over the year-ago periods. Private-label
credit card results 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. Domestic
consumer finance earnings for the first nine months of 1994
increased over the same 1993 period 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 which
totaled approximately $.8 billion at September 30, 1994.
- Consumer two-months-and-over contractual delinquency
("delinquency") as a percent of managed consumer receivables was
3.85 percent, down from 3.95 percent at June 30, 1994 and 4.63
percent at September 30, 1993. The annualized total consumer
managed chargeoff ratio in the third quarter of 1994 decreased to
3.02 percent compared to 3.38 percent in the second quarter and
3.56 percent in the year-ago quarter.
- Assets totaled $21.9 billion at September 30, 1994, up 10 percent
from year-end 1993. Assets of the Core Business were $20.6
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, particularly in
home equity loans and all unsecured products. Total managed
assets (owned assets plus receivables serviced with limited
recourse) were $28.4 billion at September 30, 1994, up 5 percent
from $27.0 billion at December 31, 1993.
The company's debt to equity ratio was 6.23 at September 30, 1994
compared to 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
nine months of the year resulted in a net unrealized loss of $70.3
million at September 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 should 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 6.02 at
September 30, 1994, compared to 6.34 at December 31, 1993.<PAGE>
<PAGE> 12
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>
-------------------------------------------------------------------------------------
September 30, June 30, December 31, September 30,
1994 1994 1993 1993
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Finance and Banking:
Owned. . . . . . . . . . . . . . $305.6 $274.7 $279.8 $265.8
Serviced with limited recourse . 123.3 133.4 134.5 130.5
------------------------------------------------
Managed. . . . . . . . . . . . . 428.9 408.1 414.3 396.3
Liquidating Commercial Lines . . . 158.1 165.0 172.9 185.9
------------------------------------------------
Total. . . . . . . . . . . . . . . $587.0 $573.1 $587.2 $582.2
================================================
</TABLE>
Consumer credit loss reserves as a percent of managed delinquency
were 65.5 percent at September 30, 1994, up from 63.9 percent at
June 30, 1994 and 54.6 percent at September 30, 1993. Despite the
decline in consumer delinquencies in the quarter, the company
continued to strengthen its consumer credit loss reserves due to
growth in unsecured products, which due to their nature, have higher
risk.
Reserves for LCL receivables were down slightly during the quarter
due to improvements in the portfolio. LCL credit loss reserves at
September 30, 1994 as a percent of both LCL receivables and
nonperforming loans increased over December 31, 1993 and September
30, 1993 levels.
Total owned and managed credit loss reserves as a percent of
receivables were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
September 30, June 30, December 31, September 30,
1994 1994 1993 1993
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Owned:
Finance and Banking. . . . . . 2.89% 2.92% 3.12% 3.01%
Liquidating Commercial Lines . 16.96 16.47 14.53 13.90
------------------------------------------------
Total owned. . . . . . . . . . . 4.03% 4.22% 4.46% 4.44%
================================================
Managed:
Finance and Banking. . . . . . 2.51% 2.51% 2.57% 2.49%
Liquidating Commercial Lines . 16.96 16.47 14.53 13.90
------------------------------------------------
Total managed. . . . . . . . . . 3.26% 3.32% 3.40% 3.37%
================================================
</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 management'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
<PAGE>
<PAGE> 13
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.
FINANCE AND BANKING
-------------------
Statements of Income
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
Nine Months Ended Three Months Ended
September 30, September 30,
All dollar amounts are stated in millions. 1994 1993 1994 1993
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Finance income . . . . . . . . . . . . . . . . . . . . $ 1,035.1 $ 893.6 $ 363.1 $ 302.6
Interest income from noninsurance investment securities 28.3 30.9 10.3 11.4
Interest expense . . . . . . . . . . . . . . . . . . . 395.5 331.8 149.7 113.8
------------------------------------------
Net interest margin. . . . . . . . . . . . . . . . . . 667.9 592.7 223.7 200.2
------------------------------------------
Securitization and servicing fee income. . . . . . . . 265.3 291.2 92.9 103.7
Insurance premiums and contract revenues . . . . . . . 95.0 87.4 33.3 33.2
Investment income. . . . . . . . . . . . . . . . . . . 9.5 8.5 2.6 2.8
Fee income . . . . . . . . . . . . . . . . . . . . . . 57.3 40.6 21.8 15.5
Other income . . . . . . . . . . . . . . . . . . . . . 28.6 45.7 16.6 11.9
------------------------------------------
Other revenues . . . . . . . . . . . . . . . . . . . . 455.7 473.4 167.2 167.1
------------------------------------------
Net interest margin and other revenues . . . . . . . . 1,123.6 1,066.1 390.9 367.3
------------------------------------------
Provision for credit losses on owned receivables . . . 303.4 298.5 117.9 101.7
------------------------------------------
Costs and expenses:
Operating expenses . . . . . . . . . . . . . . . . . 558.9 528.3 183.3 176.7
Policyholders' benefits. . . . . . . . . . . . . . . 43.6 47.2 15.2 18.7
Income taxes . . . . . . . . . . . . . . . . . . . . 68.3 58.9 23.7 22.9
------------------------------------------
Net income . . . . . . . . . . . . . . . . . . . . . . $ 149.4 $ 133.2 $ 50.8 $ 47.3
==========================================
Average receivables:
Owned. . . . . . . . . . . . . . . . . . . . . . . . $ 9,601.5 $ 8,314.3 $10,000.8 $ 8,411.2
Serviced with limited recourse . . . . . . . . . . . 6,657.9 7,615.4 6,656.6 7,448.7
------------------------------------------
Average receivables managed. . . . . . . . . . . . . . 16,259.4 15,929.7 16,657.4 15,859.9
Serviced with no recourse. . . . . . . . . . . . . . . 1,406.9 779.8 1,215.7 1,576.2
------------------------------------------
Average receivables owned or serviced. . . . . . . . . $17,666.3 $16,709.5 $17,873.1 $17,436.1
==========================================
Return on average owned assets - annualized. . . . . . 1.63% 1.61% 1.57% 1.62%
==========================================
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
September 30, December 31,
1994 1993
---------------------------------------------------------------------------------------------------
<S> <C> <C>
End-of-period receivables:
Owned. . . . . . . . . . . . . . . . . . . . . . . . $10,566.7 $ 8,959.9
Serviced with limited recourse . . . . . . . . . . . 6,530.5 7,131.1
-------------------------------
Receivables managed. . . . . . . . . . . . . . . . . . 17,097.2 16,091.0
Serviced with no recourse. . . . . . . . . . . . . . . 1,098.8 1,649.5
-------------------------------
Receivables owned or serviced. . . . . . . . . . . . . $18,196.0 $17,740.5
===============================
/TABLE
<PAGE>
<PAGE> 14
Overview
--------
Finance and Banking earnings for the third quarter and first nine
months of 1994 increased to $50.8 and $149.4 million, up from $47.3
and $133.2 million in the year-ago periods primarily due to improved
operating results in the private-label credit card and bankcard
businesses as discussed earlier. Earnings for the domestic consumer
finance business were up for the first nine months of 1994 compared
to the same 1993 period but were down slightly in the 1994 third
quarter compared to 1993.
Receivables
-----------
Receivables owned totaled $10.6 billion at September 30, 1994, up 18
percent from December 31, 1993 and up 20 percent from September 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 first nine months of
1994, the company completed securitizations and sales of
approximately $730 million of home equity receivables. In the third
quarter of 1994, the company entered into an agreement to underwrite
first mortgage receivables and service them with limited recourse.
This portfolio totaled $150 million at September 30, 1994.
Managed Finance and Banking receivables (owned receivables plus
those serviced with limited recourse) of the company's consumer
businesses totaled $16.4 billion, up 6 percent from year end and 8
percent from third quarter 1993 levels. Growth in the first nine
months of 1994 was impacted by higher than anticipated prepayment
activity in the home equity portfolio.
Net interest margin
-------------------
Net interest margin was $223.7 and $667.9 million for the third
quarter and first nine months of 1994, up from $200.2 and $592.7
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, private-label credit card and other unsecured
receivables. This improvement, however, was partially offset by
higher funding costs.
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 third quarter on an owned basis as a percent
of average owned interest-earning assets, annualized, was 8.48
percent compared with 8.67 percent in the prior quarter and 9.01
percent in the third quarter of 1993. Net interest margin on a
managed basis, assuming receivables securitized and sold were
instead held in portfolio, was $334.8 and $1,007.2 million for the
third quarter and first nine months of 1994, compared to $324.9 and
$1,008.0 million in the same periods of 1993, and as a percent of
average managed interest-earning assets, annualized, was 7.78
percent in the third quarter of 1994 compared with 7.87 percent in
the prior quarter and 7.96 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 third quarter and first
nine 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 4.46 and 4.33 percent in the
third quarter and first nine months of 1994, compared to 5.06 and
5.02 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.
<PAGE>
<PAGE> 15
Servicing fee income increased in the third quarter and first nine
months of 1994 despite a decrease in average receivables serviced
with no recourse to $1.2 billion in the third quarter of 1994 from
$1.6 million in the same period in 1993. The increase in servicing
fee income was due to a change in the composition of the serviced
portfolio. In the third quarter of 1993, the company began
servicing an unsecured consumer loan portfolio without recourse
which provided a higher servicing fee. This portfolio totaled $.8
billion at September 30, 1994. Servicing fee income also benefited
from the acquisition of purchased mortgage servicing rights from an
affiliate in the fourth quarter of 1993.
Insurance premiums and contract revenues increased from the first
nine 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 $21.8 and
$57.3 million for the third quarter and first nine months of 1994,
up from $15.5 and $40.6 million in the same periods in the prior
year primarily due to interchange and other fees related to growth
in owned bankcard and private-label credit card receivables.
Expenses
--------
Operating expenses, which the company defines as salaries and fringe
benefits plus other operating expenses, were $183.3 and $558.9
million for the third quarter and first nine months of 1994, up from
$176.7 and $528.3 million in the same periods of 1993. Operating
expenses in the 1994 third quarter were slightly below both the
first and second quarters of 1994. The increases in 1994 over the
comparable 1993 periods were primarily due to increased costs
associated with servicing a larger owned or serviced receivables
portfolio.
The effective tax rate for the Finance and Banking segment was 31.8
and 31.4 percent, compared to 32.6 and 30.7 percent in the third
quarter and first nine months of 1993. The 1993 effective tax rates
both included the impact of a retroactive year to date increase in
the Federal statutory tax rate from 34 percent to 35 percent.
Credit Quality
--------------
Overall credit quality statistics of the Finance and Banking
portfolio improved in the third 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.<PAGE>
<PAGE> 16
<TABLE>
<CAPTION>
Two-Months-and-Over Contractual Delinquency (as a percent of managed consumer receivables):
----------------------------------------------------------------------
9/30/94 6/30/94 3/31/94 12/31/93 9/30/93
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic:
Home equity. . . . . . 2.84% 2.98% 3.32% 3.37% 3.62%
Other secured. . . . . 1.18 3.22 1.25 2.22 3.41
Bankcard . . . . . . . 3.18 3.40 3.52 3.61 3.87
Merchant participation 5.03 4.53 5.02 5.01 5.43
Other unsecured. . . . 6.00 6.42 6.97 7.19 7.70
-----------------------------------------
Total domestic . . . . . 3.77 3.85 4.14 4.21 4.51
-----------------------------------------
Foreign:
Australia. . . . . . . 6.84 7.43 7.98 8.93 9.59
-----------------------------------------
Total. . . . . . . . . . 3.85% 3.95% 4.24% 4.33% 4.63%
=========================================
</TABLE>
Delinquency as a percent of managed consumer receivables decreased
from both the prior quarter and prior year levels. The decline in
the delinquency ratio was driven by improvements in the home equity
and other unsecured products, which were partially offset by an
increase in merchant participation delinquencies. These
improvements were primarily due to growth of higher quality
receivables which were recently underwritten, resulting from tighter
underwriting standards instituted in the early 1990's. The bankcard
delinquency ratio benefited from the issuance of the GM Card since
June 1994, as new accounts were added to the receivables base but
had not yet contributed to delinquency. Excluding the impact of the
GM Card program, bankcard delinquencies were 3.37 percent compared
to 3.41 percent in the prior quarter.
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
--------------------
<TABLE>
<CAPTION>
Nonperforming assets consisted of the following:
-----------------------------------------------------------------------------------------
In millions. 9/30/94 6/30/94 3/31/94 12/31/93 9/30/93
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual managed receivables $301.6 $306.2 $335.7 $340.9 $365.5
Accruing managed receivables 90 or more
days delinquent. . . . 135.3 133.5 140.1 148.8 154.9
-----------------------------------------------
Total nonperforming managed receivables 436.9 439.7 475.8 489.7 520.4
-----------------------------------------------
Real estate owned. . . . 76.6 72.8 78.0 89.0 92.4
Other assets acquired through
foreclosure. . . . . . 58.1 79.8 81.3 82.9 84.4
-----------------------------------------------
Total nonperforming assets $571.6 $592.3 $635.1 $661.6 $697.2
===============================================
Credit loss reserves for managed
receivables as a percent of
nonperforming managed receivables 98.2% 92.8% 86.9% 84.6% 76.2%
Nonperforming managed receivables
as a percent of total managed
receivables. . . . . . 2.6 2.7 3.0 3.0 3.3
----------------------------------------------
</TABLE>
Total nonperforming managed Finance and Banking assets declined from
the prior quarter due to the reduction in other assets acquired
through foreclosure as a result of a cash settlement received from a
previous borrower.<PAGE>
<PAGE> 17
Net Chargeoffs of Consumer Receivables
--------------------------------------
<TABLE>
<CAPTION>
Net Chargeoffs of Consumer Receivables (as a percent, annualized, of average consumer receivables managed):
-------------------------------------------------------------------------
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
1994 1994 1994 1993 1993
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic:
Home equity. . . . . . 1.03% 1.43% 1.29% 1.26% .89%
Other secured. . . . . .82 .13 - 1.02 9.72
Bankcard . . . . . . . 4.78 5.26 5.74 5.90 6.01
Merchant participation 3.91 3.83 3.91 4.26 4.44
Other unsecured. . . . 4.81 5.52 5.65 5.89 6.36
--------------------------------------------
Total domestic . . . . . 3.04 3.37 3.44 3.54 3.58
--------------------------------------------
Foreign:
Australia. . . . . . . 2.24 3.72 2.74 3.77 2.61
--------------------------------------------
Total. . . . . . . . . . 3.02% 3.38% 3.42% 3.55% 3.56%
============================================
</TABLE>
Net chargeoffs as a percent of average managed consumer receivables
for the 1994 third quarter decreased compared to both the second
quarter and the year-ago quarter. Net chargeoffs on a dollar basis
in the third quarter were $120.3 million, compared to $130.3 million
in the second quarter of 1994. Improvements in home equity,
bankcard and other unsecured portfolios were due to the favorable
performance of recently underwritten receivables. The bankcard
chargeoff ratio also benefited from the GM Card receivables as new
accounts were added to the receivables base but had not yet
contributed to chargeoffs. Excluding the impact of the GM Card
program, bankcard and overall chargeoffs for the quarter would have
been 4.94 and 3.04 percent, respectively.
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
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 improvements in the chargeoff trend remains uncertain.
<PAGE>
<PAGE> 18
INDIVIDUAL LIFE INSURANCE
-------------------------
Individual Life Insurance net income was $17.4 and $39.7 million in
the third quarter and first nine months of 1994, up from $13.5 and
$35.0 million in the prior year periods.
Statements of Income
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Nine Months Ended Three Months Ended
September 30, September 30,
All dollar amounts are stated in millions. 1994 1993 1994 1993
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income. . . . . . . . . . . . . $372.1 $413.4 $124.5 $150.3
Contract revenues. . . . . . . . . . . . . 62.7 94.8 (11.4) 33.6
----------------------------------
Total revenues . . . . . . . . . . . . . . 434.8 508.2 113.1 183.9
Costs and expenses:
Policyholders' benefits. . . . . . . . . 285.3 341.3 65.5 115.0
Operating expenses . . . . . . . . . . . 87.6 111.5 20.4 46.4
Income taxes . . . . . . . . . . . . . . 22.2 20.4 9.8 9.0
----------------------------------
Net income . . . . . . . . . . . . . . . . $ 39.7 $ 35.0 $ 17.4 $ 13.5
==================================
Return on average assets - annualized. . . .75% .75% .97% .87%
==================================
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
September 30, December 31,
1994 1993
--------------------------------------------------------------------------------
<S> <C> <C>
Investment securities. . . . . . . . . . . $ 6,578.3 $ 6,358.0
Life insurance in-force. . . . . . . . . . 34,882.8 32,371.6
============================
</TABLE>
Investment securities for the Individual Life Insurance segment
totaled $6.6 billion, up from both the June 30, 1994 and December
31, 1993 levels. The Individual Life Insurance portfolio
represented approximately 93 percent of the company's total
investment portfolio at September 30, 1994. Higher-risk securities,
which include non-investment grade bonds, common and preferred
stocks, commercial mortgage loans and real estate, represented 7.3
percent of the insurance investment portfolio at September 30,
1994,compared to 6.9 percent at June 30, 1994 and 7.0 percent at
December 31, 1993.
At September 30, 1994 the market value for the insurance held-to-
maturity investment portfolio was 103 percent of the carrying value
compared to 102 percent at June 30, 1994 and 108 percent at December
31, 1993. The decrease in market value over book value during the
first nine months 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 may sell securities in an
attempt to maximize its capital position.
Investment income in the third quarter and first nine months of 1994
was $124.5 and $372.1 million, down compared with the year-ago
periods due to lower yields on investment securities and lower gains
resulting from fewer sales of available-for-sale investment
securities in 1994.
In the third quarter of 1994, the company ceded a line of life
insurance business under an assumption agreement, and as a result,
both contract revenues and policyholders' benefits were reduced by
$47.8 million. This represented the amount of claim reserves on the
ceded policies which were transferred to the new insurer. Excluding
the impact of this transaction, contract revenues in both periods
increased due to higher levels of insurance in-force, and
policyholders' benefits for both periods decreased due to lower
interest credited to policyholders caused by lower yields on
investment securities.
<PAGE>
<PAGE> 19
Operating expense in the third quarter and first nine months was
down compared to the year-ago periods due to lower amortization of
deferred insurance policy acquisition costs ("DAC") resulting from
lower investment income and from the periodic reevaluation of the
asset carrying value.
The effective tax rate was 36.0 and 35.9 percent for the third
quarter and first nine months of 1994, respectively, compared to
40.0 and 36.8 percent in the respective periods of 1993. The 1993
effective tax rates included a retroactive, year to date adjustment
in the Federal statutory tax rate from 34 percent to 35 percent.
LIQUIDATING COMMERCIAL LINES
----------------------------
The net loss for the Liquidating Commercial Lines segment was $1.7
and $7.5 million in the third quarter and first nine months of 1994
compared to a net loss of $10.6 and $19.0 million in the same period
in 1993.
<TABLE>
<CAPTION>
Statements of Operations
----------------------------------------------------------------------------
Nine Months Ended Three Months Ended
September 30, September 30,
In millions. 1994 1993 1994 1993
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest margin. . . . . . . . $ 24.9 $ 45.6 $ 5.9 $ 22.6
Other revenues . . . . . . . . . . 15.2 9.7 2.7 7.0
----------------------------------------
Net interest margin and other revenues 40.1 55.3 8.6 29.6
Provision for credit losses. . . . 40.6 72.0 8.1 43.9
Operating expenses . . . . . . . . 9.3 11.3 3.1 1.6
Income tax benefit . . . . . . . . (2.3) (9.0) (.9) (5.3)
----------------------------------------
Net loss . . . . . . . . . . . . . $ (7.5) $ (19.0) $ (1.7) $ (10.6)
========================================
Average receivables owned. . . . . $1,056.3 $1,474.7 $958.5 $1,400.8
========================================
</TABLE>
Net interest margin for the third quarter and first nine months of
1994 decreased compared to the prior year periods primarily due to
lower asset levels. The 1993 third quarter and nine month amounts
included gains on terminating debt and related hedges associated
with assets which were liquidated. Increased other revenues in the
first nine months of 1994 primarily related to the company's 25
percent equity investment in a commercial joint venture. Other
revenues for the 1994 third quarter were lower than the prior year
primarily due to lower revenues resulting from lower asset levels in
this joint venture. Provisions for credit losses were $8.1 and
$40.6 million, down from $43.9 and $72.0 million in both respective
periods of 1993. The 1993 quarter and year-to-date provisions
reflected chargeoffs of $37 million taken during the 1993 third
quarter in connection with a cash settlement on the company's
largest credit exposure at that time. See pages 12 and 13 in
Management's Discussion and Analysis on Consolidated Credit Loss
Reserves for factors impacting overall loss reserve levels.
Operating expenses were $3.1 and $9.3 million in the third quarter
and first nine months of 1994, respectively, up from $1.6 million
but down from $11.3 million in the year-ago periods. The decrease
from the prior year nine month amount was principally due to lower
write-downs and net expenses for real estate owned.
<PAGE>
<PAGE> 20
<TABLE>
<CAPTION>
Commercial Nonperforming Loans and Real Estate Owned:
-------------------------------------------------------------------------------------
In millions. 9/30/94 6/30/94 3/31/94 12/31/93 9/30/93
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real estate nonaccrual . . . . . . . . $ 48.5 $ 47.7 $ 49.3 $ 54.8 $ 79.6
Other nonaccrual . . . . . . . . . . . 74.4 114.8 151.1 173.9 164.1
-------------------------------------------
Total nonaccrual . . . . . . . . . . . 122.9 162.5 200.4 228.7 243.7
Renegotiated . . . . . . . . . . . . . 44.9 28.5 29.2 28.7 17.3
-------------------------------------------
Total nonperforming loans. . . . . . . 167.8 191.0 229.6 257.4 261.0
Real estate owned. . . . . . . . . . . 241.7 244.2 249.7 256.6 262.2
-------------------------------------------
Total. . . . . . . . . . . . . . . . . $409.5 $435.2 $479.3 $514.0 $523.2
===========================================
Credit loss reserves as a percent of
nonperforming loans. . . . . . . . . 94.2% 86.4% 74.4% 67.2% 71.2%
-------------------------------------------
</TABLE>
The company expects the longer term downward trend in nonperforming
loans 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 loans 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.
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 flows,
which have been written down an average of 50 percent, represented
17 percent of the commercial real estate owned portfolio at
September 30, 1994. 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. Subsequent to September 30, 1994, the company sold, for
cash, several real estate owned properties with a net book value of
$37 million to a joint venture in which the company will maintain a
50 percent ownership interest. The properties were sold to the
joint venture without recourse. In addition, the company also sold
to a third party, for cash, another real estate owned property with
a net book value of $19.4 million. The company will have no
continuing interest in this property. These sales will have no
impact on the operating results of this segment. Revenues on all
commercial real estate properties, net of write-downs and carrying
costs, were $.9 million in the third quarter of 1994 compared to
$1.6 million in the same period in 1993.<PAGE>
<PAGE> 21
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.
27 Financial Data Schedule.
(b) Reports on Form 8-K
During the third quarter of 1994, the Registrant filed a
Current Report on Form 8-K dated September 16, 1994, reporting
pursuant to Item 5, "Other Events" supplementary financial
information for Household Finance Corporation as of and for the
years ended December 31, 1993, 1992, and 1991.
<PAGE>
<PAGE> 22
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: November 14, 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> 23
Exhibit Index
-------------
12 Statement of Computation of Ratio of Earnings to Fixed
Charges and to Combined Fixed Charges and Preferred Stock
Dividends.
27 Financial Data Schedule.
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.
Nine months ended September 30 1994 1993
- -----------------------------------------------------------------
Net income $181.6 $149.2
- -----------------------------------------------------------------
Income taxes 88.2 70.3
- -----------------------------------------------------------------
Fixed charges:
Interest expense (1) 458.6 397.8
Interest portion of rentals (2) 6.3 3.8
- -----------------------------------------------------------------
Total fixed charges 464.9 401.6
- -----------------------------------------------------------------
Total earnings as defined $734.7 $621.1
- -----------------------------------------------------------------
Ratio of earnings to fixed charges 1.58 1.55
=================================================================
Preferred stock dividends (3) $ 7.9 $ 10.1
=================================================================
Ratio of earnings to combined fixed charges
and preferred stock dividends 1.55 1.51
=================================================================
(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 32.7 and 32.0
percent for September 30, 1994 and 1993, respectively.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FOLLOWING SUMMARY FINANCIAL INFORMATION OF THE COMPANY AND ITS
SUBSIDIARIES IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION
AND FINANCIAL STATEMENTS PREVIOUSLY FILED WITH THE SECURITIES &
EXCHANGE COMMISSION.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> 55,100
<SECURITIES> 7,099,400
<RECEIVABLES> 11,498,900
<ALLOWANCES> 587,000
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 459,300
<DEPRECIATION> 247,400
<TOTAL-ASSETS> 21,898,100
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 7,966,000
<COMMON> 1
0
100,000
<OTHER-SE> 1,899,599
<TOTAL-LIABILITY-AND-EQUITY> 21,898,100
<SALES> 0
<TOTAL-REVENUES> 2,030,400
<CGS> 0
<TOTAL-COSTS> 981,400
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 344,000
<INTEREST-EXPENSE> 435,200
<INCOME-PRETAX> 269,800
<INCOME-TAX> 88,200
<INCOME-CONTINUING> 181,600
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 181,600
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<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>
