<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 March 31, 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 April 30, 1996, 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
- --------------------
In millions.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Three months ended March 31 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Finance income . . . . . . . . . . . . . . . . . . . . . . . $419.6 $400.0
Interest income from noninsurance investment securities. . . 6.0 9.5
Interest expense . . . . . . . . . . . . . . . . . . . . . . 194.6 192.4
----------------
Net interest margin. . . . . . . . . . . . . . . . . . . . . 231.0 217.1
Provision for credit losses on owned receivables . . . . . . 128.9 117.7
----------------
Net interest margin after provision for credit losses. . . . 102.1 99.4
----------------
Securitization income. . . . . . . . . . . . . . . . . . . . 154.6 94.6
Insurance premiums and contract revenues . . . . . . . . . . 43.8 71.9
Investment income. . . . . . . . . . . . . . . . . . . . . . 55.2 135.4
Fee income . . . . . . . . . . . . . . . . . . . . . . . . . 36.2 23.5
Other income . . . . . . . . . . . . . . . . . . . . . . . . 17.6 27.2
----------------
Total other revenues . . . . . . . . . . . . . . . . . . . . 307.4 352.6
----------------
Salaries and fringe benefits . . . . . . . . . . . . . . . . 87.4 58.5
Other operating expenses . . . . . . . . . . . . . . . . . . 144.1 165.1
Policyholders' benefits. . . . . . . . . . . . . . . . . . . 67.6 134.0
----------------
Total costs and expenses . . . . . . . . . . . . . . . . . . 299.1 357.6
----------------
Income before income taxes . . . . . . . . . . . . . . . . . 110.4 94.4
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . 31.4 30.7
----------------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 79.0 $ 63.7
================
</TABLE>
See notes to condensed financial statements.<PAGE>
<PAGE> 3
Household Finance Corporation and Subsidiaries
BALANCE SHEETS
- --------------
In millions.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
March 31, December 31,
1996 1995
- ---------------------------------------------------------------------------
ASSETS
- ------
<S> <C> <C>
Cash . . . . . . . . . . . . . . . . . . . . . . $ 225.8 $ 154.7
Investment securities. . . . . . . . . . . . . . 3,059.5 3,233.0
Receivables, net . . . . . . . . . . . . . . . . 12,811.1 12,665.0
Advances to parent company and affiliates. . . . 85.8 119.6
Acquired intangibles . . . . . . . . . . . . . . 410.1 418.7
Properties and equipment . . . . . . . . . . . . 279.2 286.2
Real estate owned. . . . . . . . . . . . . . . . 96.2 105.6
Other assets . . . . . . . . . . . . . . . . . . 815.1 810.6
------------------------
Total assets . . . . . . . . . . . . . . . . . . $17,782.8 $17,793.4
========================
LIABILITIES AND SHAREHOLDER'S EQUITY
- ------------------------------------
Debt:
Commercial paper, bank and other borrowings. . $ 3,741.0 $ 4,154.2
Senior and senior subordinated debt (with
original maturities over one year) . . . . . 8,548.9 8,257.5
------------------------
Total debt . . . . . . . . . . . . . . . . . . . 12,289.9 12,411.7
Insurance policy and claim reserves. . . . . . . 2,237.7 2,212.9
Other liabilities. . . . . . . . . . . . . . . . 1,005.7 931.7
------------------------
Total liabilities. . . . . . . . . . . . . . . . 15,533.3 15,556.3
------------------------
Preferred stock. . . . . . . . . . . . . . . . . 100.0 100.0
------------------------
Common shareholder's equity:
Common stock and paid-in capital . . . . . . . 692.6 692.6
Retained earnings. . . . . . . . . . . . . . . 1,437.0 1,359.8
Foreign currency translation adjustments . . . (9.0) (9.0)
Unrealized gain on investments, net. . . . . . 28.9 93.7
------------------------
Total common shareholder's equity. . . . . . . . 2,149.5 2,137.1
------------------------
Total liabilities and shareholder's equity . . . $17,782.8 $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>
- -------------------------------------------------------------------------------------------------------
Three months ended March 31 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH PROVIDED BY OPERATIONS
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 79.0 $ 63.7
Adjustments to reconcile net income to net cash provided by operations:
Provision for credit losses on owned receivables . . . . . . . . . . . . 128.9 117.7
Insurance policy and claim reserves. . . . . . . . . . . . . . . . . . . 13.3 112.1
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . 40.4 42.2
Net realized (gains) losses from sales of assets . . . . . . . . . . . . (4.1) 4.9
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156.1 79.3
-------------------------
Cash provided by operations. . . . . . . . . . . . . . . . . . . . . . . . 413.6 419.9
-------------------------
INVESTMENTS IN OPERATIONS
Investment securities:
Purchased. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (824.3) (384.2)
Matured. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.5 85.8
Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 829.6 105.7
Short-term investment securities, net change . . . . . . . . . . . . . . . 56.2 260.6
Receivables, excluding Visa*/MasterCard*:
Originated or purchased. . . . . . . . . . . . . . . . . . . . . . . . . (2,036.3) (1,748.9)
Collected. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 904.4 1,042.1
Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,120.9 604.8
Visa/MasterCard receivables:
Originated or collected, net . . . . . . . . . . . . . . . . . . . . . . (1,434.6) (953.1)
Purchased. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (101.1) (3.3)
Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,237.5 542.7
Acquisition of other businesses. . . . . . . . . . . . . . . . . . . . . . (13.4) -
Properties and equipment purchased . . . . . . . . . . . . . . . . . . . . (12.0) (9.1)
Properties and equipment sold. . . . . . . . . . . . . . . . . . . . . . . 1.5 .1
Advances to parent company and affiliates. . . . . . . . . . . . . . . . . 33.8 14.5
-------------------------
Cash decrease from investments in operations . . . . . . . . . . . . . . . (229.3) (442.3)
-------------------------
FINANCING AND CAPITAL TRANSACTIONS
Short-term debt, net change. . . . . . . . . . . . . . . . . . . . . . . . (413.2) 559.9
Senior and senior subordinated debt issued . . . . . . . . . . . . . . . . 676.0 585.5
Senior and senior subordinated debt retired. . . . . . . . . . . . . . . . (386.1) (1,109.4)
Policyholders' benefits paid . . . . . . . . . . . . . . . . . . . . . . . (11.1) (195.5)
Cash received from policyholders . . . . . . . . . . . . . . . . . . . . . 23.0 216.4
Dividends on preferred stock . . . . . . . . . . . . . . . . . . . . . . . (1.8) (1.8)
Dividends paid to parent company . . . . . . . . . . . . . . . . . . . . . - (20.0)
-------------------------
Cash increase (decrease) from financing and capital transactions . . . . . (113.2) 35.1
-------------------------
Increase in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71.1 12.7
Cash at January 1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154.7 97.3
-------------------------
Cash at March 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 225.8 $ 110.0
=========================
Supplemental cash flow information:
Interest paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 199.7 $ 161.0
-------------------------
Income taxes paid (received) . . . . . . . . . . . . . . . . . . . . . . . 44.7 (75.7)
-------------------------
</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>
- ------------------------------------------------------------------------------
Three months ended March 31 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 79.0 $ 63.7
------------------
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . 733.0 762.1
------------------
Return on average common shareholders' equity <F1> <F2>. . 14.4% 12.4%
------------------
Return on average owned assets <F1>. . . . . . . . . . . . 1.74 1.18
------------------
<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
14.9 percent in the first quarter of 1996 and 12.0 percent in the
first quarter of 1995.
</FN>
</TABLE>
In millions.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
March 31, December 31,
1996 1995
- ------------------------------------------------------------------
<S> <C> <C>
Assets . . . . . . . . . . . . . . . $17,782.8 $17,793.4
------------------------
Receivables. . . . . . . . . . . . .
Owned. . . . . . . . . . . . . . . $12,464.9 $12,435.5
Serviced with limited recourse . . 9,504.9 9,212.1
------------------------
Managed receivables. . . . . . . . $21,969.8 $21,647.6
========================
Debt to equity ratio . . . . . . . . 5.5:1 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. March 31, 1996 December 31, 1995
--------------------------------------------------------------------------------
Amortized Carrying Amortized Carrying
Cost Value Cost Value
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE INVESTMENTS
Marketable equity securities . . . . $ 274.1 $ 272.9 $ 318.3 $ 323.8
Corporate debt securities. . . . . . 1,572.4 1,621.0 1,406.9 1,533.6
Government debt securities . . . . . 127.7 124.3 97.5 99.2
Mortgage-backed securities . . . . . 2.0 2.1 189.5 195.8
Policy loans . . . . . . . . . . . . 809.0 809.0 821.4 821.4
Other. . . . . . . . . . . . . . . . 192.1 193.0 221.6 222.9
------------------------------------------
Subtotal . . . . . . . . . . . . . . 2,977.3 3,022.3 3,055.2 3,196.7
------------------------------------------
Accrued investment income. . . . . . 37.2 37.2 36.3 36.3
------------------------------------------
Total investment securities. . . . . $3,014.5 $3,059.5 $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".
3. RECEIVABLES
-----------
Receivables consisted of the following:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
March 31, December 31,
In millions. 1996 1995
-----------------------------------------------------------------------------------------
<S> <C> <C>
Home equity. . . . . . . . . . . . . . . . . . . . . . . . . $ 2,538.5 $ 2,072.1
Visa/MasterCard. . . . . . . . . . . . . . . . . . . . . . . 3,762.5 3,596.7
Merchant participation . . . . . . . . . . . . . . . . . . . 2,794.8 2,753.7
Other unsecured. . . . . . . . . . . . . . . . . . . . . . . 2,251.4 2,786.3
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . 1,117.7 1,226.7
--------------------------
Total receivables owned. . . . . . . . . . . . . . . . . . . 12,464.9 12,435.5
Accrued finance charges. . . . . . . . . . . . . . . . . . . 217.1 241.0
Credit loss reserve for owned receivables. . . . . . . . . . (557.0) (531.8)
Unearned credit insurance premiums and claims reserves . . . (78.9) (78.4)
Amounts due and deferred from receivables sales. . . . . . . 1,153.8 932.9
Reserve for receivables serviced with limited recourse . . . (388.8) (334.2)
---------------------------
Total receivables owned, net . . . . . . . . . . . . . . . . 12,811.1 12,665.0
Receivables serviced with limited recourse . . . . . . . . . 9,504.9 9,212.1
---------------------------
Total managed receivables, net . . . . . . . . . . . . . . . $22,316.0 $21,877.1
===========================
</TABLE>
<PAGE>
<PAGE> 7
The outstanding balance of receivables serviced with limited recourse
consisted of the following:
<TABLE>
<CAPTION>
--------------------------------------------------------------
March 31, December 31,
In millions. 1996 1995
--------------------------------------------------------------
<S> <C> <C>
Home equity. . . . . . . . . . . . . $ 4,169.2 $ 4,661.9
Visa/MasterCard. . . . . . . . . . . 2,734.6 2,685.8
Merchant participation . . . . . . . 750.0 750.0
Other unsecured. . . . . . . . . . . 1,851.1 1,114.4
------------------------
Total. . . . . . . . . . . . . . . . $ 9,504.9 $ 9,212.1
========================
The combination of receivables owned and receivables serviced with
limited recourse, which the company considers its managed portfolio,
is shown below:
--------------------------------------------------------------
March 31, December 31,
In millions. 1996 1995
--------------------------------------------------------------
Home equity. . . . . . . . . . . . . $ 6,707.7 $ 6,734.0
Visa/MasterCard. . . . . . . . . . . 6,497.1 6,282.5
Merchant participation . . . . . . . 3,544.8 3,503.7
Other unsecured. . . . . . . . . . . 4,102.5 3,900.7
Commercial . . . . . . . . . . . . . 1,117.7 1,226.7
------------------------
Total. . . . . . . . . . . . . . . . $21,969.8 $21,647.6
========================
</TABLE>
The amounts due and deferred from receivables sales of $1,153.8
million at March 31, 1996 included unamortized excess servicing
assets and funds established pursuant to the recourse provisions
and holdback reserves for certain sales totaling $1,052.9 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 $428.1 million at March 31, 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 $388.8 million at
March 31, 1996 and represent the company's best estimate of probable
losses on receivables serviced with limited recourse.
See Note 4, "Credit Loss Reserves" for an analysis of credit loss
reserves for receivables. See "Management's Discussion and Analysis"
on pages 11 and 12 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 first quarter of 1996.
<PAGE>
<PAGE> 8
4. CREDIT LOSS RESERVES
--------------------
An analysis of credit loss reserves for the three months ended March 31
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 . . . . . . . . . . 128.9 117.7
Owned receivables charged off. . . . . . . . . . . . . . . . . . . . (128.8) (115.0)
Recoveries on owned receivables . . . . . . . . . . . . . . . . . . 21.4 20.5
Credit loss reserves on receivables purchased, net . . . . . . . . . 10.1 -
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6.4) 9.3
-----------------
TOTAL CREDIT LOSS RESERVES FOR OWNED RECEIVABLES AT MARCH 31 . . . . 557.0 446.2
-----------------
Credit loss reserves for receivables serviced with
limited recourse at January 1 . . . . . . . . . . . . . . . . . . 334.2 181.7
Provision for credit losses . . . . . . . . . . . . . . . . . . . . 127.8 14.9
Chargeoffs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (74.0) (42.7)
Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 1.9
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.3) 3.6
-----------------
TOTAL CREDIT LOSS RESERVES FOR RECEIVABLES SERVICED WITH
LIMITED RECOURSE AT MARCH 31 . . . . . . . . . . . . . . . . . . . 388.8 159.4
-----------------
TOTAL CREDIT LOSS RESERVES FOR MANAGED RECEIVABLES AT MARCH 31 . . . $ 945.8 $ 605.6
=================
</TABLE>
5. INCOME TAXES
------------
Effective tax rates for the three months ended March 31, 1996 and 1995
of 28.4 and 32.5 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 carryforwards 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
$85.8 million at March 31, 1996 compared to $119.6 million at
December 31, 1995. Advances from parent company and affiliates, which
are included in commercial paper, bank and other borrowings, were
$189.7 million at March 31, 1996. There were no advances from parent
company and affiliates at December 31, 1995. Net interest income on
these affiliated balances was $.8 and $8.0 million for the three months
ended March 31, 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 first quarter of 1996 was $79.0 million, up 24
percent from $63.7 million in 1995. The company's annualized return
on average common shareholder's equity for the first quarter of 1996
was 14.4 percent compared to 12.4 percent in the year-ago period.
The annualized return on average owned assets improved to 1.74 percent
in the 1996 first quarter, up from 1.18 percent a year ago.
The following is a summary of the operating results of the company's
businesses for the first quarter of 1996 compared to the prior year
period:
- The consumer finance business reported increased earnings in the
first quarter of 1996 primarily due to portfolio growth, wider
spreads, and improved efficiency.
- The credit card business reported higher earnings as increased
earnings in the Visa*/MasterCard* business offset lower earnings
in the private-label credit card business. The Visa/MasterCard
business reported higher net interest margin and fee income
resulting from portfolio growth, partially offset by higher credit
costs resulting from portfolio seasoning and increased bankruptcy
filings. This business continued to benefit from the company's
association with the General Motors credit card ("GM Card") program.
The private-label credit card business experienced narrower spreads
due to competitive pricing pressure and higher credit costs,
primarily due to discontinued merchant programs.
- The commercial business reported higher earnings than a year ago
primarily due to gains on the sales of assets, utilization of tax
carryforwards, and lower credit costs, as it continued to liquidate
its portfolio.
BALANCE SHEET REVIEW
--------------------
- Owned consumer receivables were $11.3 billion at March 31, 1996,
flat compared to $11.2 billion at December 31, 1995 and up from
$9.9 billion at March 31, 1995. Changes in owned receivables from
period to period may vary depending on the timing and significance
of securitization transactions. In the first quarter of 1996, the
company securitized and sold $1.1 billion of Visa/MasterCard and
other unsecured receivables.
- Managed consumer receivables (owned and serviced with limited
recourse) increased 13 percent, annualized, in the first quarter,
after adjusting for seasonal runoff of holiday balances in the
Visa/MasterCard business. On an annualized basis, credit cards
were up 20 percent, seasonally adjusted, and other unsecured
receivables increased 21 percent during the first quarter. Home
equity receivables were flat compared to December 31, 1995.
Managed consumer receivables increased 21 percent over the prior year.
Other unsecured receivables were 33 percent above year-ago levels, and
credit card receivables increased 36 percent. In the fourth quarter
of 1995, the company acquired two Visa/MasterCard portfolios totaling
approximately $570 million. The home equity portfolio was essentially
unchanged compared to a year ago.
- Credit loss reserves as a percent of managed receivables were 4.31
percent, compared to 4.00 percent at December 31, 1995 and 3.28
percent at March 31, 1995. Reserves as a percent of nonperforming
managed receivables were 136.7 percent compared to 120.5 percent at
December 31, 1995 and 105.7 percent at March 31, 1995. Consumer
*VISA and MasterCard are registered trademarks of VISA USA, Inc. and
MasterCard International, Incorporated, respectively.<PAGE>
<PAGE> 10
two-months-and-over contractual delinquency ("delinquency") as a
percent of managed consumer receivables was 4.01 percent, up from
3.88 percent at December 31, 1995 and 3.53 percent at March 31,
1995. The annualized total consumer managed charge-off ratio in
the first quarter of 1996 was 3.50 percent, compared to 3.53 percent
in the prior quarter and 2.99 percent in the year-ago quarter.
- The company's debt to equity ratio was 5.5 to 1 at March 31, 1996,
unchanged from December 31, 1995.
INCOME STATEMENT REVIEW
-----------------------
Net interest margin
-------------------
Net interest margin was $231.0 million for the first quarter of 1996,
up from $217.1 million in the prior year. Net interest margin as a
percent of average owned interest-earning assets, annualized, was 7.12
percent, compared to 6.96 percent in the prior quarter and down from
7.59 percent in the year-ago quarter. The decrease compared to the
prior year period was primarily attributable to a shift in the owned
product mix to home equity and merchant participation receivables,
which carry lower yields compared to the company's other consumer
products, partially offset by lower short-term funding costs.
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
$419.4 million for the first quarter of 1996, compared to $348.6 million
in the same year-ago period. Net interest margin on a managed basis as a
percent of average managed interest-earning assets, annualized, was 7.63
percent compared to 7.02 percent in the previous quarter and 7.30 percent
in the year-ago quarter. Net interest margin on a managed basis was
greater than on an owned basis for the first quarter of 1996 because of
the increase in the amount of Visa/MasterCard and other unsecured
receivables in the securitized portfolio. These receivables carry wider
spreads.
Provision for credit losses
---------------------------
The provision for credit losses for receivables on an Owned Basis for the
first quarter of 1996 totaled $128.9 million, up 10 percent from $117.7
million in the prior year period. The level of provision for credit
losses on an Owned Basis may vary from quarter to quarter, depending on
the amount of securitizations and sales of receivables in a particular
period.
The company increased credit loss reserves due to continued growth and
seasoning of unsecured products, uncertainty over the economy and consumer
payment patterns, and the change in the chargeoff policy related to other
unsecured receivables. 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 and other income and provision
for credit losses related to those receivables. Securitization income
increased over the prior year due to growth in securitized receivables,
particularly unsecured products, which carry wider spreads.
<PAGE>
<PAGE> 11
Insurance premiums and contract revenues were lower than a year ago 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, which the company retained, increased 12
percent over the prior year due to growth in the company's receivable
base.
Investment income of $55.2 million was below the year ago amount of
$135.4 million due to the sale of the individual life and annuity lines
of business, including $5.7 billion of investments, in the fourth quarter
of 1995.
Fee income includes revenues from fee-based products such as credit cards.
Fee income was $36.2 million in the first quarter of 1996, up from $23.5
million in the comparable period of the prior year. Interchange and other
credit card fee income was higher in the first quarter of 1996 as a result
of the increase in the amount of credit card receivables compared to the
prior year, as well as greater transaction volume.
Other income decreased compared to the first quarter of 1995 primarily due
to lower servicing income from unsecured loans serviced with no recourse
for a third party.
Expenses
--------
Salaries and fringe benefits and other operating expenses were $231.5
million, up 3.5 percent from $223.6 million a year ago, as the increase
in salaries and fringe benefits was partially offset by the decrease in
other operating expenses. In the third quarter of 1995, the company
acquired an affiliated entity that services receivable portfolios. This
acquisition resulted in a shift of servicing-related expenses from other
operating expenses to salaries and fringe benefits. As a result, salaries
and fringe benefits and other operating expenses must be evaluated in the
aggregate when comparing to the year-ago period. The year-over-year
increase in the aggregate was primarily due to increased marketing
expenses in the credit card business.
Policyholders' benefits of $67.6 million were below the first quarter of
1995 amount due to the sale of the individual life and annuity lines of
business. Policyholders' benefits of the retained specialty and credit
business were essentially flat compared to a year ago.
CREDIT LOSS RESERVES
--------------------
The company's credit portfolios and credit management policies are 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>
-------------------------------------------------------------------------
March 31, December 31, March 31,
1996 1995 1995
-------------------------------------------------------------------------
<S> <C> <C> <C>
Owned. . . . . . . . . . . . . . . . $557.0 $531.8 $446.2
Serviced with limited recourse . . . 388.8 334.2 159.4
-----------------------------------
Total. . . . . . . . . . . . . . . . $945.8 $866.0 $605.6
===================================
</TABLE>
<PAGE>
<PAGE> 12
Managed credit loss reserves were up 9 percent from December 31, 1995
and up 56 percent from March 31, 1995. Managed credit loss reserves as
a percent of nonperforming managed receivables were 136.7 percent, up
compared to 120.5 percent at December 31, 1995 and 105.7 percent at
March 31, 1995. Total owned and managed credit loss reserves as a
percent of receivables were as follows:
-------------------------------------------------------------------
March 31, December 31, March 31,
1996 1995 1995
-------------------------------------------------------------------
Owned. . . . . . . . . . 4.47% 4.28% 4.02%
Managed. . . . . . . . . 4.31 4.00 3.28
----------------------------------
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 regular 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 up compared to the prior
and year-ago quarters. Chargeoffs were essentially unchanged compared to
the fourth quarter of 1995 but were higher than the first quarter of 1995.
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.
Effective January 1, 1996, other unsecured consumer finance receivables
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 application of the new procedure did not have a
significant impact on the company's delinquency statistics in the first
quarter of 1996, but positively impacted the first quarter chargeoff
ratio by 14 basis points.
Delinquency
-----------
Two-Months-and-Over Contractual Delinquency (as a percent of managed
consumer receivables):
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
3/31/96 12/31/95 9/30/95 6/30/95 3/31/95
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Home equity. . . . . . . . 3.36% 3.42% 3.27% 2.87% 2.81%
Visa/MasterCard. . . . . . 2.61 2.37 2.64 2.64 2.71
Merchant participation . . 4.93 4.75 4.34 4.07 4.67
Other unsecured. . . . . . 6.50 6.31 5.84 6.19 5.34
---------------------------------------------
Total. . . . . . . . . . . 4.01% 3.88% 3.76% 3.60% 3.53%
=============================================
</TABLE>
<PAGE>
<PAGE> 13
Delinquency as a percent of managed consumer receivables increased from
the prior and year ago quarters, due to higher delinquencies in credit
cards and other unsecured receivables resulting from portfolio seasoning.
The merchant participation delinquency ratio was also impacted by
merchant programs the company has exited.
Net Chargeoffs of Consumer Receivables
--------------------------------------
Net Chargeoffs of Consumer Receivables (as a percent, annualized, of
average managed consumer receivables):
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
1996 1995 1995 1995 1995
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Home equity. . . . . . . . .85% .93% 1.15% 1.04% .82%
Visa/MasterCard. . . . . . 4.67 4.88 4.65 4.34 4.73
Merchant participation . . 5.05 5.80 5.05 5.30 4.85
Other unsecured. . . . . . 4.85 4.15 4.06 3.76 3.54
--------------------------------------------
Total. . . . . . . . . . . 3.50% 3.53% 3.32% 3.11% 2.99%
============================================
</TABLE>
Net chargeoffs as a percent of average managed consumer receivables
for the first quarter of 1996 were flat compared to the fourth quarter
of 1995 but were up from the prior year first quarter. Merchant
participation chargeoffs were below the previous quarter but were higher
than a year ago primarily due to merchant programs the company has exited.
The chargeoff ratio for the other unsecured portfolio increased compared
to the prior and year-ago quarters, due to portfolio seasoning.
Chargeoffs are a lagging indicator of credit quality and generally reflect
prior delinquency trends. However, chargeoffs in any given quarter may be
affected by events such as changes in regional economic conditions and
increases in personal bankruptcies. Future chargeoff levels may also be
impacted by the continuing shift in the company's product mix to credit
card and other unsecured receivables, which have higher chargeoff rates
than home equity loans.
Nonperforming Assets
--------------------
Nonperforming assets consisted of the following:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
In millions. 3/31/96 12/31/95 9/30/95 6/30/95 3/31/95
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual managed receivables . . . . . $511.8 $547.9 $470.4 $404.6 $355.6
Accruing managed consumer receivables
90 or more days delinquent . . . . . . 159.8 149.7 134.3 147.1 131.7
Renegotiated commercial loans. . . . . . 20.4 21.2 22.0 41.8 85.9
-----------------------------------------------
Total nonperforming managed receivables 692.0 718.8 626.7 593.5 573.2
Real estate owned. . . . . . . . . . . . 96.2 105.6 108.7 103.9 129.3
-----------------------------------------------
Total nonperforming assets . . . . . . . $788.2 $824.4 $735.4 $697.4 $702.5
===============================================
Managed credit loss reserves as a percent
of nonperforming managed receivables 136.7% 120.5% 114.0% 106.7% 105.7%
-----------------------------------------------
</TABLE>
<PAGE>
<PAGE> 14
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 first quarter of 1996, the Registrant filed two
Current Reports on Form 8-K dated February 14, 1996. One
report disclosed the financial results of Household Finance
Corporation for the quarter and year ended December 31, 1995,
and the other report disclosed supplementary financial
information for Household Finance Corporation for the year ended
December 31, 1995, as a result of the October 1, 1995, sale by
Household Group, Inc., a wholly-owned subsidiary of Household
Finance Corporation, of Alexander Hamilton Life Insurance Company
of America to Jefferson-Pilot Corporation.<PAGE>
<PAGE> 15
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: May 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> 16
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.
Three months ended March 31 1996 1995
- ----------------------------------------------------------------------
<S> <C> <C>
Net income $ 79.0 $ 63.7
- ----------------------------------------------------------------------
Income taxes 31.4 30.7
- ----------------------------------------------------------------------
Fixed charges:
Interest expense <F1> 200.3 208.6
Interest portion of rentals <F2> 5.2 2.2
- ----------------------------------------------------------------------
Total fixed charges 205.5 210.8
- ----------------------------------------------------------------------
Total earnings as defined $315.9 $305.2
======================================================================
Ratio of earnings to fixed charges 1.54 1.45
- ----------------------------------------------------------------------
Preferred stock dividends (3) $ 2.5 $ 2.7
- ----------------------------------------------------------------------
Ratio of earnings to combined fixed charges
and preferred stock dividends 1.52 1.43
- ----------------------------------------------------------------------
<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 28.4 and 32.5 percent for the
three months ended March 31, 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> 3-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 225,800
<SECURITIES> 3,059,500
<RECEIVABLES> 12,464,900
<ALLOWANCES> 945,800
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 654,000
<DEPRECIATION> 374,800
<TOTAL-ASSETS> 17,782,800
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 8,548,900
<COMMON> 1
0
100,000
<OTHER-SE> 2,149,499
<TOTAL-LIABILITY-AND-EQUITY> 17,782,800
<SALES> 0
<TOTAL-REVENUES> 733,000
<CGS> 0
<TOTAL-COSTS> 299,100
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 128,900
<INTEREST-EXPENSE> 194,600
<INCOME-PRETAX> 110,400
<INCOME-TAX> 31,400
<INCOME-CONTINUING> 79,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 79,000
<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>
