<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, 1996
-------------
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: (847) 564-5000
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
At July 31, 1996, there were 1,000 shares of registrant's common stock
outstanding.<PAGE>
<PAGE> 2
Part 1. FINANCIAL INFORMATION
1. FINANCIAL STATEMENTS
Household Finance Corporation and Subsidiaries
STATEMENTS OF INCOME
- --------------------
In millions.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Six Months Ended Three Months Ended
June 30, June 30,
1996 1995 1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Finance income . . . . . . . . . . . . . . . . . . . . . . $862.5 $822.2 $442.9 $422.2
Interest income from noninsurance investment securities. . 24.7 19.5 18.7 10.0
Interest expense . . . . . . . . . . . . . . . . . . . . . 418.4 396.0 223.8 203.6
------------------------------------
Net interest margin. . . . . . . . . . . . . . . . . . . . 468.8 445.7 237.8 228.6
Provision for credit losses on owned receivables . . . . . 258.3 251.2 129.4 133.5
------------------------------------
Net interest margin after provision for credit losses. . . 210.5 194.5 108.4 95.1
------------------------------------
Securitization income. . . . . . . . . . . . . . . . . . . 350.6 197.7 196.0 103.1
Insurance premiums and contract revenues . . . . . . . . . 82.1 141.4 38.3 69.5
Investment income. . . . . . . . . . . . . . . . . . . . . 89.7 271.0 34.5 135.6
Fee income . . . . . . . . . . . . . . . . . . . . . . . . 75.9 51.4 39.7 27.9
Other income . . . . . . . . . . . . . . . . . . . . . . . 35.3 27.1 17.7 (.1)
------------------------------------
Total other revenues . . . . . . . . . . . . . . . . . . . 633.6 688.6 326.2 336.0
------------------------------------
Salaries and fringe benefits . . . . . . . . . . . . . . . 174.4 113.1 87.0 54.6
Other operating expenses . . . . . . . . . . . . . . . . . 337.1 328.7 193.0 163.6
Policyholders' benefits. . . . . . . . . . . . . . . . . . 114.7 271.0 47.1 137.0
------------------------------------
Total costs and expenses . . . . . . . . . . . . . . . . . 626.2 712.8 327.1 355.2
------------------------------------
Income before income taxes . . . . . . . . . . . . . . . . 217.9 170.3 107.5 75.9
Income taxes . . . . . . . . . . . . . . . . . . . . . . . 64.7 54.7 33.3 24.0
------------------------------------
Net income . . . . . . . . . . . . . . . . . . . . . . . . $153.2 $115.6 $ 74.2 $ 51.9
====================================
</TABLE>
See notes to condensed financial statements.<PAGE>
<PAGE> 3
Household Finance Corporation and Subsidiaries
BALANCE SHEETS
- --------------
In millions.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
June 30, December 31,
1996 1995
- ----------------------------------------------------------------------------
ASSETS
- ------
<S> <C> <C>
Cash . . . . . . . . . . . . . . . . . . . . . . $ 287.7 $ 154.7
Investment securities. . . . . . . . . . . . . . 2,146.2 3,233.0
Receivables, net . . . . . . . . . . . . . . . . 15,450.1 12,665.0
Advances to parent company and affiliates. . . . 93.7 119.6
Acquired intangibles . . . . . . . . . . . . . . 987.1 418.7
Properties and equipment . . . . . . . . . . . . 270.2 286.2
Real estate owned. . . . . . . . . . . . . . . . 103.5 105.6
Other assets . . . . . . . . . . . . . . . . . . 758.4 810.6
-------------------------
Total assets . . . . . . . . . . . . . . . . . . $20,096.9 $17,793.4
=========================
LIABILITIES AND SHAREHOLDER'S EQUITY
- ------------------------------------
Debt:
Commercial paper, bank and other borrowings. . $ 4,874.4 $ 4,154.2
Senior and senior subordinated debt (with
original maturities over one year) . . . . . 10,462.1 8,257.5
-------------------------
Total debt . . . . . . . . . . . . . . . . . . . 15,336.5 12,411.7
Insurance policy and claim reserves. . . . . . . 1,431.3 2,212.9
Other liabilities. . . . . . . . . . . . . . . . 1,012.3 931.7
-------------------------
Total liabilities. . . . . . . . . . . . . . . . 17,780.1 15,556.3
-------------------------
Preferred stock. . . . . . . . . . . . . . . . . 100.0 100.0
-------------------------
Common shareholder's equity:
Common stock and paid-in capital . . . . . . . 752.6 692.6
Retained earnings. . . . . . . . . . . . . . . 1,509.4 1,359.8
Foreign currency translation adjustments . . . (9.1) (9.0)
Unrealized gain (loss) on investments, net . . (36.1) 93.7
-------------------------
Total common shareholder's equity. . . . . . . . 2,216.8 2,137.1
-------------------------
Common and preferred shareholder's equity. . . . 2,316.8 2,237.1
-------------------------
Total liabilities and shareholder's equity . . . $20,096.9 $17,793.4
=========================
</TABLE>
See notes to condensed financial statements.<PAGE>
<PAGE> 4
Household Finance Corporation and Subsidiaries
STATEMENTS OF CASH FLOWS
- ------------------------
In millions.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Six months ended June 30 1996 1995
- ---------------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATIONS
<S> <C> <C>
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 153.2 $ 115.6
Adjustments to reconcile net income to net cash provided by operations:
Provision for credit losses on owned receivables . . . . . . . . . . 258.3 251.2
Insurance policy and claim reserves. . . . . . . . . . . . . . . . . 55.9 199.7
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . 93.2 80.5
Net realized (gains) losses from sales of assets . . . . . . . . . . (6.5) 13.4
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242.7 217.9
------------------------
Cash provided by operations. . . . . . . . . . . . . . . . . . . . . . 796.8 878.3
------------------------
INVESTMENTS IN OPERATIONS
Investment securities:
Purchased. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,076.2) (2,107.0)
Matured. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139.4 226.7
Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,445.4 1,581.9
Short-term investment securities, net change . . . . . . . . . . . . . (426.0) 323.9
Receivables, excluding Visa*/MasterCard*:
Originated or purchased. . . . . . . . . . . . . . . . . . . . . . . (4,387.3) (4,063.2)
Collected. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,922.0 1,836.7
Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,251.8 1,252.8
Visa/MasterCard receivables:
Originated or collected, net . . . . . . . . . . . . . . . . . . . . (2,929.5) (2,456.2)
Purchased. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,490.4) (6.9)
Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,535.2 1,619.3
(Acquisition) disposition of portfolios, net . . . . . . . . . . . . . (620.1) 151.3
Properties and equipment purchased . . . . . . . . . . . . . . . . . . (28.9) (13.1)
Properties and equipment sold. . . . . . . . . . . . . . . . . . . . . 3.8 .4
Advances to parent company and affiliates. . . . . . . . . . . . . . . 25.9 (40.6)
------------------------
Cash decrease from investments in operations . . . . . . . . . . . . . (3,634.9) (1,694.0)
------------------------
FINANCING AND CAPITAL TRANSACTIONS
Short-term debt, net change. . . . . . . . . . . . . . . . . . . . . . 720.2 327.6
Senior and senior subordinated debt issued . . . . . . . . . . . . . . 3,535.5 1,750.4
Senior and senior subordinated debt retired. . . . . . . . . . . . . . (1,320.8) (1,274.0)
Policyholders' benefits paid . . . . . . . . . . . . . . . . . . . . . (58.2) (432.0)
Cash received from policyholders . . . . . . . . . . . . . . . . . . . 38.0 472.3
Dividends on preferred stock . . . . . . . . . . . . . . . . . . . . . (3.6) (3.6)
Dividends paid to parent company . . . . . . . . . . . . . . . . . . . - (20.0)
Capital contributions from parent company. . . . . . . . . . . . . . . 60.0 -
------------------------
Cash increase from financing and capital transactions. . . . . . . . . 2,971.1 820.7
------------------------
Increase in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . 133.0 5.0
Cash at January 1. . . . . . . . . . . . . . . . . . . . . . . . . . . 154.7 97.3
------------------------
Cash at June 30 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 287.7 $ 102.3
========================
Supplemental cash flow information:
Interest paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 447.0 $ 315.0
------------------------
Income taxes paid (received) . . . . . . . . . . . . . . . . . . . . . 143.9 (44.9)
------------------------
</TABLE>
See notes to condensed financial statements.
*VISA and MasterCard are registered trademarks of VISA USA, Inc. and
MasterCard International, Incorporated respectively.<PAGE>
<PAGE> 5
Household Finance Corporation and Subsidiaries
FINANCIAL HIGHLIGHTS
- --------------------
All dollar amounts are stated in millions.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Six Months Ended Three Months Ended
June 30, June 30,
1996 1995 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income . . . . . . . . . . . . . . . $ 153.2 $ 115.6 $ 74.2 $ 51.9
-------------------------------------------
Revenues . . . . . . . . . . . . . . . . 1,520.8 1,530.3 787.8 768.2
-------------------------------------------
Return on average common shareholder's
equity <F1> <F2> . . . . . . . 13.9% 11.2% 13.4% 10.1%
-------------------------------------------
Return on average owned assets <F1>. . . 1.67 1.05 1.60 .94
-------------------------------------------
<FN>
<F1> Annualized
<F2> Excluding the impact of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", the
return on average common shareholder's equity was 13.3 and 14.1 percent for
the second quarter and first six months of 1996 compared to 10.0 and 11.0
percent in the respective periods of 1995.
</FN>
</TABLE>
In millions.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
June 30, December 31,
1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C>
Assets . . . . . . . . . . . . . . . . . . . . $20,096.9 $17,793.4
--------------------------------
Receivables
Owned. . . . . . . . . . . . . . . . . . . . 15,214.7 12,435.5
Serviced with limited recourse . . . . . . . 10,853.5 9,212.1
--------------------------------
Managed receivables . . . . . . . . . . . . $26,068.2 $21,647.6
================================
Debt to equity ratio . . . . . . . . . . . . . 6.6:1 5.5:1
================================
</TABLE>
See notes to condensed financial statements.
<PAGE>
<PAGE> 6
NOTES TO CONDENSED FINANCIAL STATEMENTS
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 Household Finance Corporation's (the
"company") Annual Report on Form 10-K for its fiscal year ended December 31,
1995. 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, 1996 December 31, 1995
-------------------------------------------------------------------------------
Amortized Carrying Amortized Carrying
Cost Value Cost Value
-------------------------------------------------------------------------------
AVAILABLE-FOR-SALE INVESTMENTS
<S> <C> <C> <C> <C>
Marketable equity securities . . . $ 233.6 $ 229.4 $ 318.3 $ 323.8
Corporate debt securities. . . . . 1,338.2 1,308.7 1,406.9 1,533.6
Government debt securities . . . . 102.9 102.1 97.5 99.2
Mortgage-backed securities . . . . 152.6 124.3 189.5 195.8
Policy loans . . . . . . . . . . . - - 821.4 821.4
Other. . . . . . . . . . . . . . . 344.6 354.4 221.6 222.9
-------------------------------------------
Subtotal . . . . . . . . . . . . . 2,171.9 2,118.9 3,055.2 3,196.7
-------------------------------------------
Accrued investment income. . . . . 27.3 27.3 36.3 36.3
-------------------------------------------
Total investment securities. . . . $2,199.2 $2,146.2 $3,091.5 $3,233.0
===========================================
</TABLE>
For available-for-sale investments, carrying value equals fair value, in
accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
<PAGE>
<PAGE> 7
3. RECEIVABLES
-----------
Receivables consisted of the following:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
June 30, December 31,
In millions. 1996 1995
-------------------------------------------------------------------------------------
<S> <C> <C>
Home equity. . . . . . . . . . . . . . . . . . . . . . . . $ 2,001.8 $ 2,072.1
Visa/MasterCard. . . . . . . . . . . . . . . . . . . . . . 6,392.0 3,596.7
Merchant participation . . . . . . . . . . . . . . . . . . 3,097.5 2,753.7
Other unsecured. . . . . . . . . . . . . . . . . . . . . . 2,655.4 2,786.3
Commercial . . . . . . . . . . . . . . . . . . . . . . . . 1,068.0 1,226.7
------------------------
Total owned receivables . . . . . . . . . . . . . . . . . 15,214.7 12,435.5
Accrued finance charges. . . . . . . . . . . . . . . . . . 236.1 241.0
Credit loss reserve for owned receivables. . . . . . . . . (656.4) (531.8)
Unearned credit insurance premiums and claims reserves . . (80.2) (78.4)
Amounts due and deferred from receivables sales. . . . . . 1,190.7 932.9
Reserve for receivables serviced with limited recourse . . (454.8) (334.2)
------------------------
Total owned receivables, net . . . . . . . . . . . . . . . 15,450.1 12,665.0
Receivables serviced with limited recourse . . . . . . . . 10,853.5 9,212.1
------------------------
Total managed receivables, net . . . . . . . . . . . . . . $26,303.6 $21,877.1
========================
The outstanding balance of receivables serviced with limited recourse
consisted of the following:
-------------------------------------------------------------------------------------
June 30, December 31,
In millions. 1996 1995
-------------------------------------------------------------------------------------
Home equity. . . . . . . . . . . . . . . . . . . . . . . . $ 4,609.7 $4,661.9
Visa/MasterCard. . . . . . . . . . . . . . . . . . . . . . 3,743.5 2,685.8
Merchant participation . . . . . . . . . . . . . . . . . . 691.8 750.0
Other unsecured. . . . . . . . . . . . . . . . . . . . . . 1,808.5 1,114.4
------------------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . $10,853.5 $9,212.1
========================
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. 1996 1995
-------------------------------------------------------------------------------------
Home equity. . . . . . . . . . . . . . . . . . . . . . . . $ 6,611.5 $ 6,734.0
Visa/MasterCard. . . . . . . . . . . . . . . . . . . . . . 10,135.5 6,282.5
Merchant participation . . . . . . . . . . . . . . . . . . 3,789.3 3,503.7
Other unsecured. . . . . . . . . . . . . . . . . . . . . . 4,463.9 3,900.7
Commercial . . . . . . . . . . . . . . . . . . . . . . . . 1,068.0 1,226.7
------------------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . $26,068.2 $21,647.6
========================
</TABLE>
The amounts due and deferred from receivables sales of $1,190.7 million
at June 30, 1996 included unamortized excess servicing assets and funds
established pursuant to the recourse provisions and holdback reserves for
certain sales totaling $1,170.7 million. The amounts 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 $191.8 million plus unpaid interest
and has subordinated interests in certain transactions, which are recorded
as receivables, for $117.4 million at June 30, 1996. The company has an
agreement with a "AAA"-rated third party who will indemnify the company
for up to $21.2 million in losses relating to certain securitization
transactions. The company maintains credit loss reserves pursuant to the
recourse provisions for receivables serviced with limited recourse which
are based on estimated probable losses under such provisions. These
reserves totaled $454.8 million at June 30, 1996 and represent the
company's best estimate of probable losses on receivables serviced with
limited recourse.
<PAGE>
<PABE> 8
See Note 4, "Credit Loss Reserves" for an analysis of credit loss reserves
for receivables. See "Management's Discussion and Analysis" on pages 13
and 14 for additional information related to the credit quality of
receivables.
Effective January 1, 1996, other unsecured receivables in the consumer
finance operation are charged off if an account is nine months
contractually delinquent and minimum payments have not been received in
six months. In any event, these receivables are charged off when the
accounts are 18 months contractually delinquent. Previously, such
accounts were charged off when they were nine months contractually
delinquent. Delinquency statistics will continue to be reported on a
contractual basis for these receivables. Procedures for secured and
credit card receivables were unaffected. The implementation of this
new procedure did not have a material impact on the company's financial
statements for the second quarter of 1996.
4. CREDIT LOSS RESERVES
--------------------
An analysis of credit loss reserves for the six months ended June 30 was
as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
In millions. 1996 1995
---------------------------------------------------------------------------------------
<S> <C> <C>
Credit loss reserves for owned receivables at January 1. . . . . $ 531.8 $ 413.7
Provision for credit losses - owned receivables. . . . . . . . . 258.3 251.2
Owned receivables charged off. . . . . . . . . . . . . . . . . . (234.6) (233.8)
Recoveries on owned receivables. . . . . . . . . . . . . . . . . 38.1 39.9
Credit loss reserves on receivables purchased, net . . . . . . . 69.1 4.5
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . (6.3) 8.7
-------------------
TOTAL CREDIT LOSS RESERVES FOR OWNED RECEIVABLES AT JUNE 30. . . 656.4 484.2
-------------------
Credit loss reserves for receivables serviced with
limited recourse at January 1. . . . . . . . . . . . . . . . . 334.2 181.7
Provision for credit losses. . . . . . . . . . . . . . . . . . . 264.4 44.9
Chargeoffs . . . . . . . . . . . . . . . . . . . . . . . . . . . (147.7) (84.5)
Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 4.1
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.3) 2.7
-------------------
TOTAL CREDIT LOSS RESERVES FOR RECEIVABLES SERVICED WITH
LIMITED RECOURSE AT JUNE 30. . . . . . . . . . . . . . . . . . 454.8 148.9
-------------------
TOTAL CREDIT LOSS RESERVES FOR MANAGED RECEIVABLES AT JUNE 30. . $1,111.2 $ 633.1
===================
</TABLE>
5. INCOME TAXES
------------
Effective tax rates for the six months ended June 30, 1996 and 1995 of
29.7 and 32.1 percent, respectively, differ from the statutory federal
income tax rate for the respective periods primarily because of the
effects of (a)leveraged lease tax benefits, (b) dividends received
deduction applicable to term preferred stock, (c) amortization of
intangible assets, (d) state and local income taxes, and (e) United
States loss carry forwards in 1996.
6. 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 $93.7 million at June 30,
1996 compared to $119.6 million at December 31, 1995. There were no
advances from parent company and affiliates at June 30, 1996 and
December 31, 1995. Net interest income on affiliated balances was $2.2
and $14.0 million for the six months ended June 30, 1996 and 1995,
respectively.<PAGE>
<PAGE> 9
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OPERATIONS SUMMARY
------------------
Net income for the second quarter and first six months of 1996 was $74.2
and $153.2 million, an increase of 43 and 32 percent, respectively,
compared to $51.9 and $115.6 million in the comparable 1995 periods.
Earnings growth in the company's core businesses exceeded these rates of
increase, as 1995 net income included earnings from the individual life
and annuity product lines that were sold in late 1995. The company's
annualized return on average common shareholder's equity for the second
quarter and first six months of 1996 was 13.4 and 13.9 percent,
respectively, compared to 10.1 and 11.2 percent in the year-ago periods.
The annualized return on average owned assets improved to 1.60 and 1.67
percent in the second quarter and first six months of 1996, respectively,
up from .94 and 1.05 percent a year ago. Operating results for 1995
included a write-down related to the servicing of a portfolio of unsecured
loans, which was based on a normal, periodic review occuring in the second
quarter of 1995.
The following is a summary of the operating results of the company's
businesses for the second quarter and first six months of 1996 compared
to the corresponding prior year periods:
- The consumer finance business increased earnings in the second quarter
and first six months of 1996 due to improved efficiency and higher net
interest margin, driven by managed receivable growth and wider spreads.
Second quarter 1995 operating results of this business were impacted by
the previously-mentioned write-down related to the servicing of a
portfolio of unsecured loans.
- Net income for the credit card business for the second quarter and first
six months increased over the prior year periods due to higher earnings
in both the Visa*/MasterCard* and private-label credit card businesses.
The Visa/MasterCard business reported higher net interest margin and
fee income, driven by portfolio growth, which were partially offset by
higher credit costs primarily resulting from increased personal
bankruptcy filings. This business continued to benefit from the
company's association with the General Motors credit card ("GM Card")
program. The company acquired the $3.4 billion Union Privilege
Visa/MasterCard receivable portfolio in June 1996. This program did
not yet contribute to earnings. The private-label credit card business
reported higher earnings in the second quarter and first six months
compared to the year-ago periods due primarily to portfolio growth,
which generated higher fee income.
- The commercial business reported higher earnings in the second quarter
and first six months compared to last year primarily due to lower
credit costs and utilization of tax loss carryforwards.
BALANCE SHEET REVIEW
--------------------
- As previously discussed, the company acquired the AFL-CIO's $3.4 billion
Union Privilege Visa/MasterCard portfolio in June 1996. This portfolio
has 2.2 million cardholders. The company recorded approximately $600
million of acquired intangibles in connection with this purchase.
- Owned consumer receivables were $14.1 billion at June 30, 1996, up from
$11.3 billion at March 31, 1996 and $11.1 billion at June 30, 1995. The
increase from the prior periods was due to the previously-mentioned
portfolio acquisition. Also in the second quarter of 1996, the company
securitized and sold, excluding replenishment of certificate holder
interests, approximately $2.0 billion of Visa/MasterCard and home equity
receivables.
*VISA and MasterCard are registered trademarks of VISA USA, Inc. and
MasterCard International, Incorporated respectively.<PAGE>
<PAGE> 10
- Managed consumer receivables (owned and serviced with limited recourse)
increased 80 percent, annualized, in the second quarter. Excluding the
acquisition of the Union Privilege Visa/MasterCard portfolio, managed
consumer receivables were up 15 percent, and credit card receivables
grew 20 percent, annualized, in the quarter. On an annualized basis,
other unsecured receivables increased 35 percent in the quarter. The
home equity receivable portfolio was essentially unchanged in the
quarter, as increased loan volume was offset by high levels of
prepayments.
Managed consumer receivables increased 36 percent over the prior year.
Excluding the Union Privilege Visa/MasterCard portfolio, managed
consumer receivables grew 18 percent and credit cards were up 29 percent
from a year ago. Other unsecured receivables increased 38 percent, and
home equity receivables were down 5 percent from the year-ago levels.
- Credit loss reserves as a percent of managed receivables were 4.26
percent, compared to 4.31 percent at March 31, 1996 and 3.24 percent
at June 30, 1995. Reserves as a percent of nonperforming managed
receivables increased to 151.0 percent from 136.7 percent at March 31,
1996 and 106.7 percent at June 30, 1995. Consumer two-months-and-over
contractual delinquency ("delinquency") as a percent of managed consumer
receivables was 3.60 percent, down from 4.01 percent at March 31, 1996
and unchanged from 3.60 percent at June 30, 1995. The annualized total
consumer managed chargeoff ratio in the second quarter of 1996 was 3.29
percent, compared to 3.50 percent in the prior quarter and 3.11 percent
in the year-ago quarter.
- The company's debt to equity ratio was 6.6 to 1 at June 30, 1996
compared to 5.5 to 1 at December 31, 1995. The increase in the ratio
was due to the acquisition of the $3.4 billion AFL-CIO Visa/MasterCard
portfolio and was consistent with the company's intent to grow its core
businesses, following the disposition of the individual life and annuity
product lines in late 1995.
<PAGE>
<PAGE> 11
INCOME STATEMENT REVIEW
-----------------------
Net interest margin
-------------------
Net interest margin was $237.8 and $468.8 million for the second quarter
and first six months of 1996, up 4 percent compared to the second quarter
of 1995 and up 5 percent from the first six months of 1995. Net interest
margin as a percent of average owned interest-earning assets, annualized,
was 6.30 percent, down compared to 7.12 percent in the prior quarter and
7.57 percent in the second quarter of 1995. The net interest margin
percentage in the second quarter of 1996 was adversely impacted by
temporary investments used to fund the acquisition of the AFL-CIO
Visa/MasterCard portfolio. Excluding the impact of these temporary
investments, net interest margin as a percent of average owned interest-
earning assets was 6.91 percent in the second quarter of 1996. The
decrease in the net interest margin percentage was due to the increase
in the amount of unsecured products that were securitized compared to
the prior year. These receivables carry wider spreads compared to the
company's other products. Net interest margin on securitized receivables
is transferred to securitization income upon sale.
Due to the securitization of assets over the past several years, the
comparability of net interest margin between years may be affected by the
level and type of assets securitized. As receivables are securitized and
sold rather than held in portfolio, net interest income is shifted to
securitization income. Net interest margin on a managed basis, assuming
receivables securitized and sold were instead held in the portfolio, was
$450.0 and $869.5 million for the second quarter and first six months of
1996, up 29 and 25 percent, respectively, compared to $349.5 and $698.1
million in the same year-ago periods. Net interest margin on a managed
basis as a percent of average managed interest-earning assets, annualized,
was 7.21 percent compared to 7.63 percent in the previous quarter and 7.26
percent in the year-ago quarter. The net interest margin percentage on a
managed basis was also adversely impacted by the previously-mentioned
portfolio of temporary investments. Excluding the impact of these
temporary investments, the net interest margin percentage on a managed
basis was 7.62 percent in the second quarter of 1996. The net interest
margin percentage on a managed basis was greater than on an owned basis
because of the increased proportion of other unsecured and Visa/MasterCard
receivables in the securitized portfolio.
Provision for credit losses
---------------------------
The provision for credit losses for receivables on an owned basis for the
second quarter and first six months of 1996 totaled $129.4 and $258.3
million, essentially unchanged compared to $133.5 and $251.2 million,
respectively, in the comparable prior year periods. The level of provision
for credit losses may vary from quarter to quarter, depending on the amount
of securitizations and sales of receivables in a particular period. The
company recorded a loss provision of approximately $40 million in excess
of chargeoffs in the second quarter of 1996 due to uncertainty over
consumer payment patterns and increased levels of personal bankruptcies,
as well as growth and seasoning of unsecured products. See the credit
quality section for further discussion of factors affecting the provision
for credit losses.
Other revenues
--------------
Securitization income consists of income associated with the securitizations
and sales of receivables with limited recourse, including net interest
income, fee income and provision for credit losses related to those
receivables. Securitization income increased 90 and 77 percent,
respectively, over the second quarter and first six months of 1995. The
increase was partially due to the increase in average securitized
receivables, which grew 37 and 27 percent, respectively, in the second
quarter and first six months of 1996. The remainder of the increase was
primarily due to wider spreads on unsecured products, which comprised over
half of the average securitized portfolio in 1996, compared to approximately
one-third a year ago.
Insurance premiums and contract revenues decreased from the second quarter
and first six months of 1995 due to the sale of the individual life and
annuity lines of business in the fourth quarter of 1995. Insurance premiums
and contract revenues of the specialty and credit business improved from the
second quarter and first six months of 1995 due to growth in the company's
receivable base.
<PAGE>
<PAGE> 12
Investment income in the second quarter and first six months of 1996 was
below the year-ago periods due to the sale of the individual life and
annuity lines of business in the fourth quarter of 1995.
Fee income includes revenues from fee-based products such as Visa/MasterCard
and private-label credit cards. Fee income was $39.7 and $75.9 million in
the second quarter and first six months of 1996, up from $27.9 and $51.4
million in the comparable periods of the prior year primarily due to
interchange and other fees related to growth in owned credit card
receivables.
Other income increased compared to the second quarter and first six months
of 1995 primarily due to a write-down in the 1995 second quarter related to
the servicing of a portfolio of unsecured loans serviced with no recourse.
Expenses
--------
Salaries and fringe benefits and other operating expenses were $280.0 and
$511.5 million, up compared to $218.2 and $441.8 million in the second
quarter and first six months of 1995. The increase was primarily due to
higher marketing expenses related to the Visa/MasterCard receivable
portfolio, as well as non-recurring charges totaling approximately $19
million related to the rationalization of certain office space, the
settlement of litigation and other similar matters.
Policyholders' benefits were lower than the prior year periods due to the
sale of the individual life and annuity lines of business in the fourth
quarter of 1995. Policyholders' benefits of the retained specialty and
credit business were essentially flat compared to the year-ago periods.
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 focus 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 on an individual transaction basis and is also
evaluated based on overall risk factors. See Note 3, "Receivables" in the
accompanying financial statements for receivables by product type.
Total managed credit loss reserves, which include reserves for recourse
obligations for receivables sold, were as follows (in millions):
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
June 30, March 31, December 31, June 30,
1996 1996 1995 1995
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Owned. . . . . . . . . . . . . . . . $ 656.4 $557.0 $531.8 $484.2
Serviced with limited recourse . . . 454.8 388.8 334.2 148.9
----------------------------------------------
Total. . . . . . . . . . . . . . . . $1,111.2 $945.8 $866.0 $633.1
==============================================
</TABLE>
Managed credit loss reserves were up 17 percent from March 31, 1996 and up
76 percent from June 30, 1995. The company recorded purchased reserves
totaling approximately $60 million in connection with the acquisition of
the AFL-CIO Visa/MasterCard portfolio in June 1996. Managed credit loss
reserves as a percent of nonperforming managed receivables were 151.0
percent, up from 136.7 percent at March 31, 1996 and 106.7 percent at
June 30, 1995.
Total owned and managed credit loss reserves as a percent of receivables
were as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
June 30, March 31, December 31, June 30,
1996 1996 1995 1995
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Owned. . . . . . . . . 4.31% 4.47% 4.28% 3.96%
Managed. . . . . . . . 4.26 4.31 4.00 3.24
------------------------------------------
</TABLE>
<PAGE>
<PAGE> 13
The level of reserves for consumer credit losses is based on delinquency
and chargeoff experience by product and judgmental factors. 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 when establishing
consumer and commercial credit loss reserves. While management allocates
all reserves among the company's various products, all reserves are
considered to be available to cover total loan losses. See Note 4, "Credit
Loss Reserves" in the accompanying financial statements for analyses of
reserves.
CREDIT QUALITY
--------------
Delinquency levels in the consumer portfolio were lower compared to the
prior quarter, but were flat compared to a year-ago. Chargeoffs decreased
compared to the previous quarter, but were up compared to the year-ago
period.
Delinquency and chargeoff levels are monitored on a managed basis which
includes both receivables owned and receivables serviced with limited
recourse. The latter portfolio is included since it 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.
In the second quarter of 1996, the company standardized the chargeoff
policy for all components of the merchant participation portfolio by
transferring all merchant participation receivables that were originated
and serviced by one of the company's credit card subsidiaries to another
subsidiary. As a result of this transfer, all private-label credit card
accounts are now charged off at 9 months contractually past due, instead
of 6 months. This change was made to gain efficiencies in administering
one chargeoff policy and to be more responsive to the needs of the
company's private-label credit card customers. For comparability of
quarterly trends, the impact of the change was excluded from reported
credit quality statistics.
Delinquency
-----------
Two-Months-and-Over Contractual Delinquency (as a percent of managed
consumer receivables):
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
6/30/96 3/31/96 12/31/95 9/30/95 6/30/95
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Home equity. . . . . . . . 3.47% 3.36% 3.42% 3.27% 2.87%
Visa/MasterCard. . . . . . 1.99 2.61 2.37 2.64 2.64
Merchant participation*. . 4.62 4.93 4.75 4.34 4.07
Other unsecured. . . . . . 6.59 6.50 6.31 5.84 6.19
---------------------------------------------
Total* . . . . . . . . . . 3.60% 4.01% 3.88% 3.76% 3.60%
=============================================
</TABLE>
*In the second quarter of 1996, the chargeoff policy for different
components of the merchant participation portfolio was standardized.
For comparability of quarterly trends, second quarter 1996 amounts
exclude the impact of this change. Including the impact of this change,
merchant participation and total delinquency was 5.25 and 3.70 percent,
respectively, for the second quarter of 1996.
Delinquency as a percent of managed consumer receivables declined from
the prior quarter but were flat compared to a year ago. The delinquency
ratio in the second quarter of 1996 benefited from the acquisition of the
AFL-CIO Visa/MasterCard portfolio in June 1996, as new accounts were added
to the receivable base but had not yet contributed significantly to
delinquency. Excluding the impact of this portfolio acquisition, the
Visa/MasterCard delinquency ratio was 2.73 percent, and the total
delinquency ratio was 4.09 percent for the second quarter of 1996. The
increase in the delinquency ratio, excluding the effect of the portfolio
acquisition, compared to a year ago was primarily due to the seasoning of
unsecured products.
<PAGE>
<PAGE> 14
Net Chargeoffs of Consumer Receivables
--------------------------------------
Net Chargeoffs of Consumer Receivables (as a percent, annualized, of
average managed consumer receivables):
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
1996 1996 1995 1995 1995
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Home equity. . . . . . . . .91% .85% .93% 1.15% 1.04%
Visa/MasterCard. . . . . . 4.40 4.67 4.88 4.65 4.34
Merchant participation*. . 4.08 5.05 5.80 5.05 5.30
Other unsecured. . . . . . 4.31 4.85 4.15 4.06 3.76
--------------------------------------------
Total* . . . . . . . . . . 3.29% 3.50% 3.53% 3.32% 3.11%
============================================
</TABLE>
*In the second quarter of 1996, the chargeoff policy for different
components of the merchant participation portfolio was standardized.
For comparability of quarterly trends, second quarter 1996 amounts
exclude the impact of this change. Including the impact of this
change, merchant participation and total net chargeoffs were 1.39 and
2.86 percent, respectively, for the second quarter of 1996.
Net chargeoffs as a percent of average managed consumer receivables for
the second quarter of 1996 decreased compared to the prior quarter, but
were up slightly compared to the year-ago period. The chargeoff ratio
for the second quarter of 1996 was positively impacted by the acquisition
of the AFL-CIO Visa/MasterCard portfolio, as previously discussed.
Excluding the impact of this portfolio acquisition, the Visa/MasterCard
and total net chargeoff ratio for the second quarter of 1996 were 5.15
and 3.47 percent, respectively. The Visa/MasterCard chargeoff ratio
continued to be impacted by high levels of personal bankruptcy filings.
The majority of the increase in the Visa/MasterCard chargeoff ratio over
the prior and year-ago quarters was due to increased bankruptcy filings.
Approximately 32 basis points, or roughly 90 percent, of the year-over-
year increase in the total chargeoff ratio was due to increased personal
bankruptcy filings.
Nonperforming Assets
--------------------
Nonperforming assets consisted of the following:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
In millions. 6/30/96 3/31/96 12/31/95 9/30/95 6/30/95
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual managed receivables. . . . . . . $487.1 $511.8 $547.9 $470.4 $404.6
Accruing managed consumer receivables
90 or more days delinquent* . . . . . . . 229.1 159.8 149.7 134.3 147.1
Renegotiated commercial loans . . . . . . . 19.9 20.4 21.2 22.0 41.8
-----------------------------------------------
Total nonperforming managed receivables . . 736.1 692.0 718.8 626.7 593.5
Real estate owned . . . . . . . . . . . . . 103.5 96.2 105.6 108.7 103.9
-----------------------------------------------
Total nonperforming assets. . . . . . . . . $839.6 $788.2 $824.4 $735.4 $697.4
===============================================
Managed credit loss reserves as a percent
of nonperforming managed receivables. . . 151.0% 136.7% 120.5% 114.0% 106.7%
-----------------------------------------------
</TABLE>
*In the second quarter of 1996, the chargeoff policy for different
components of the merchant participation portfolio was standardized.
For comparability of quarterly trends, second quarter 1996 amounts
exclude the impact of this change. Including the impact of this change,
accruing managed consumer receivables 90 or more days delinquent were
$254.0 million at June 30, 1996. Managed credit loss reserves as a
percent of nonperforming managed receivables, including the impact of
this change, was 146.0 percent.
<PAGE>
<PAGE> 15
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
On June 3, 1996 the United States Supreme Court concluded that federal
law preempts state law prohibitions relating to fees and charges
assessed by a national bank on the holder of a credit card account.
As a result actions pending against banking subsidiaries of the
company have been dismissed by courts in Wisconsin and Pennsylvania.
The company believes that the resolution of the remaining cases in
California and Pennsylvania will not have a material adverse effect
on the financial condition of the company.
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 second quarter of 1996, the Registrant filed a Current
Report on Form 8-K dated June 25, 1996 which disclosed supplementary
financial information for Household Finance Corporation as of and for
the years ended December 31, 1995 and 1994, and as of March 31, 1996
and 1995.<PAGE>
<PAGE> 16
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 13, 1996 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> 17
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
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
All dollar amounts are stated in millions.
Six months ended June 30 1996 1995
- ----------------------------------------------------------------------
<S> <C> <C>
Net income $153.2 $115.6
- ----------------------------------------------------------------------
Income taxes 64.7 54.7
- ----------------------------------------------------------------------
Fixed charges:
Interest expense <F1> 426.0 424.2
Interest portion of rentals <F2> 9.8 4.1
- ----------------------------------------------------------------------
Total fixed charges 435.8 428.3
- ----------------------------------------------------------------------
Total earnings as defined $653.7 $598.6
======================================================================
Ratio of earnings to fixed charges 1.50 1.40
- ----------------------------------------------------------------------
Preferred stock dividends <F3> $ 5.1 $ 5.3
- ----------------------------------------------------------------------
Ratio of earnings to combined fixed charges
and preferred stock dividends 1.48 1.38
- ----------------------------------------------------------------------
<FN>
<F1> For financial statement purposes, interest expense includes income
earned on temporary investment of excess funds, generally resulting
from over-subscriptions of commercial paper.
<F2> Represents one-third of rentals, which approximates the portion
representing interest.
<F3> Preferred stock dividends are grossed up to their pretax equivalent
based upon an effective tax rate of 29.7 and 32.1 percent for the
six months ended June 30, 1996 and 1995, respectively.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FOLLOWING SUMMARY FINANCIAL INFORMATION OF THE COMPANY AND ITS
SUBSIDIARIES IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION
AND FINANCIAL STATEMENTS PREVIOUSLY FILED WITH THE SECURITIES &
EXCHANGE COMMISSION.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 287,700
<SECURITIES> 2,146,200
<RECEIVABLES> 15,214,700
<ALLOWANCES> 1,111,200
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 598,700
<DEPRECIATION> 328,500
<TOTAL-ASSETS> 20,096,900
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 10,462,100
<COMMON> 1
0
100,000
<OTHER-SE> 2,216,799
<TOTAL-LIABILITY-AND-EQUITY> 20,096,900
<SALES> 0
<TOTAL-REVENUES> 1,520,800
<CGS> 0
<TOTAL-COSTS> 626,200
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 258,300
<INTEREST-EXPENSE> 418,400
<INCOME-PRETAX> 217,900
<INCOME-TAX> 64,700
<INCOME-CONTINUING> 153,200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 153,200
<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>
