<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
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)
<TABLE>
<S> <C>
DELAWARE 36-1239445
(State of Incorporation) (I.R.S. Employer Identification No.)
2700 SANDERS ROAD, 60070
PROSPECT HEIGHTS, ILLINOIS (Zip Code)
(Address of principal executive offices)
</TABLE>
Registrant's telephone number, including area code: (847) 564-5000
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ------------------------------------------------------------------ ------------------------
<S> <C>
9% SENIOR SUBORDINATED NOTES, DUE SEPTEMBER 28, 2001 NEW YORK STOCK EXCHANGE
9 5/8% SENIOR SUBORDINATED NOTES, DUE JULY 15, 2000 NEW YORK STOCK EXCHANGE
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
NONE
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 / /
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. /X/
AS OF MARCH 13, 1996, THERE WERE 1,000 SHARES OF REGISTRANT'S COMMON STOCK
OUTSTANDING, ALL OF WHICH ARE OWNED BY HOUSEHOLD INTERNATIONAL, INC.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION J(1)
(A) AND (B) OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE REDUCED
DISCLOSURE FORMAT.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
HOUSEHOLD FINANCE CORPORATION
PART I.
ITEM 1. BUSINESS.
Household Finance Corporation ("HFC" or the "Company") is a subsidiary of
Household International, Inc. ("Household International"). HFC and its
subsidiaries offer a diversified range of financial services. The principal
products of HFC's consumer financial services business are cash loans, including
home equity loans secured by first and second mortgages and unsecured credit
advances (including revolving and closed-end personal loans) to middle-income
consumers in the United States. Loans are made through branch lending offices
and through direct marketing efforts.
Through banking subsidiaries, the Company issues both VISA* and MasterCard*
credit cards, including the GM Card(SM). These banks engage only in consumer
credit card operations.
Household Retail Services ("HRS") is a revolving credit merchant
participation business. Through subsidiaries of HFC, HRS provides sales
financing and purchases, originates and services merchants' private-label
revolving charge accounts.
In conjunction with its consumer finance operations and where applicable
laws permit, HFC makes available to customers credit life, credit accident,
health and household contents insurance. Credit life, credit accident and health
insurance are generally written directly by, or reinsured with Household Life
Insurance Company or its affiliates.
In October 1995, a subsidiary of HFC sold the individual life and annuity
product lines of the business segment formerly reported as the "Individual Life
Insurance" business segment, and retained the credit life insurance business.
Remaining insurance lines also include periodic payment annuities and corporate
life insurance products, which are no longer being offered by the Company's
insurance subsidiaries.
ITEM 2. PROPERTIES.
Substantially all of HFC's branch office and headquarters space is rented
with the exception of its administration building in Las Vegas, Nevada.
ITEM 3. LEGAL PROCEEDINGS.
HFC and its operating subsidiaries have developed and maintain dedicated
compliance functions to monitor the business operations of the Company and its
subsidiaries with a focus to ensure compliance with all applicable laws.
Notwithstanding, the Company and its subsidiaries are parties to various legal
proceedings resulting from ordinary business activities. Certain of these
actions are or purport to be class actions seeking damages in very large
amounts. Due to the uncertainties in litigation and other factors, no assurance
can be given that the Company or its subsidiaries will ultimately prevail in
each instance. HFC believes that it, or its subsidiary, possesses meritorious
defenses to these actions and any adverse decision should not materially affect
the financial condition of HFC.
During the past several years, the press has widely reported certain
industry related concerns which may impact HFC and its subsidiaries. One such
industry condition has been the litigation activities by the Alabama plaintiff
bar against finance and insurance companies operating in that state, the large
punitive awards obtained from juries in that state, and the failure of the state
Supreme Court to reverse many of those awards. Like other companies in this
industry, HFC and certain of its subsidiaries has litigation in Alabama. As of
March 1, 1996, there were 28 lawsuits pending against HFC or its subsidiaries in
Alabama. These cases generally allege inadequate disclosure of financing terms.
In each suit, other parties are also named as defendants. Unspecified
compensatory and punitive damages are sought. Appropriate insurance carriers
have
- ---------------
* VISA and MasterCard are registered trademarks of VISA USA, Inc. and MasterCard
International Incorporated, respectively.
1
<PAGE> 3
been notified of each claim, and reservations of rights letters have been
received. Recently, a subsidiary of HFC was dismissed from an Alabama case
through the summary judgment process,and the plaintiff has filed a notice of
appeal. The Company believes that it, and its subsidiaries, have substantive
legal defenses to these claims and are prepared to defend each case vigorously.
However, the judicial climate in Alabama is such that the outcome of all of
these cases is unpredictable.
Another industry issue relates to the exportation of fees by banks which
issue credit cards. Since October 1991, a number of lawsuits and administrative
actions have been filed in several states against national banks that issue
credit cards which challenge various fees and charges (such as late fees,
over-the-limit fees, returned check charges and annual membership fees) assessed
by the banks claiming that restrictions or prohibitions under state law are
applicable to credit card issuing banks located in other states. Two state
supreme courts (California and Colorado) and two federal appeals courts have
affirmed dismissal of these cases on the ground that individual state
prohibitions on assessing these fees or charges are preempted by federal laws.
However, in late 1995, the New Jersey Supreme Court ruled (in an action in which
neither the Company nor any of its subsidiaries were named) that state
prohibitions on late fees are not preempted. The issue is now before the United
States Supreme Court which has agreed to review the California late fee case to
resolve the conflict. Banking affiliates of HFC are involved in similar cases in
California, Wisconsin and Pennsylvania, and in one of the federal appeals court
decisions referred to above.
HFC believes that credit card issuing banks throughout the United States
have a strong case for federal preemption which is supported by interpretations
of the Office of the Comptroller of the Currency. If the United States Supreme
Court resolves the case before it adversely to the card issuing banks, the
decision could have the effect of limiting certain fees and charges that could
be assessed on credit card accounts and potentially could require other courts
to order virtually all card issuing banks, including HFC's credit card banking
subsidiaries, to pay refunds and/or civil penalties. It is not possible to
predict the effect of any adverse ruling by the United States Supreme Court to
the credit card industry as it is not possible to determine the amount of any
refunds and/or penalties that might be required to be paid. An adverse ruling
that requires any such payment potentially could have an adverse impact on the
members of the credit card industry in the United States, including HFC. The
Company believes the ultimate resolution of this matter will not affect its
relative position in the credit card industry.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Omitted.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
All 1,000 shares of HFC's outstanding common stock are owned by Household
International. Consequently, there is no market in HFC's common stock. HFC also
has outstanding 1 million depositary shares which represent 1/3,000 share of
term cumulative preferred stock (with a liquidation value of $.3 million per
share). This preferred stock is held by institutional investors not affiliated
with HFC.
HFC paid cash dividends on its common stock to Household International
totaling $155 million in 1995 and $115 million in 1994. In addition, HFC paid
cash dividends on its preferred stock totaling $7.2 million in both 1995 and
1994.
ITEM 6. SELECTED FINANCIAL DATA.
Omitted.
2
<PAGE> 4
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1995 1994 1993
--------- --------- ---------
(ALL DOLLAR AMOUNTS ARE STATED IN
MILLIONS)
<S> <C> <C> <C>
Net income................................................ $ 261.8 $ 256.4 $ 220.4
Return on average common shareholder's equity(1).......... 12.64% 13.37% 13.80%
Return on average owned assets............................ 1.22 1.22 1.16
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31
-------------------------------------
1995 1994 1993
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Assets(2)................................................. $17,793.4 $21,011.4 $19,850.2
Investments(2)............................................ 3,233.0 7,249.6 7,082.0
Receivables
Owned................................................... 12,435.5 10,151.2 10,149.8
Serviced with limited recourse.......................... 9,212.1 7,808.8 7,131.1
--------- --------- ---------
Managed receivables(3).................................. $21,647.6 $17,960.0 $17,280.9
========= ========= =========
Debt to equity ratio(1)................................... 5.5:1 5.9:1 6.2:1
--------- --------- ---------
</TABLE>
- ---------------
(1) Effective December 31, 1993 the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" ("FAS No. 115") and has included unrealized holding
gains and losses on available-for-sale investments as a net amount in a
separate component of common shareholder's equity, net of income taxes. In
1994 and 1993, for certain investments of the life insurance operation,
unrealized holding gains and losses were recorded net of related unrealized
deferred insurance policy acquisition cost adjustments. The 1995 and 1994
return on average common shareholders' equity was 12.58 and 13.12 percent,
respectively, before the market value adjustment. The 1993 return on average
common shareholders' equity was not materially impacted by the adoption of
FAS No. 115. Before the market value adjustment at December 31, 1995, 1994
and 1993, the debt to equity ratio was 5.8:1, 5.6:1 and 6.3:1, respectively.
(2) In the fourth quarter of 1995 the Company sold the individual life and
annuity product lines of the life insurance business, including
approximately $5.7 billion of investment securities.
(3) Excludes reserves, accrued finance charges, and amounts due and deferred
from sales of receivables.
OPERATIONS SUMMARY
- Net income in 1995 was $261.8 million, a slight increase over 1994 net
income of $256.4 million. Net income in 1994 was 16 percent higher than
1993 earnings.
- Earnings of the consumer finance business increased primarily due to
improved efficiency and higher net interest margin, which was driven by
wider spreads in the retail business and portfolio growth of 11 percent
versus 10 percent in 1994. The 1995 results of this business were
impacted somewhat by lower servicing income from a portfolio of unsecured
loans serviced with no recourse.
The credit card business reported lower earnings in 1995. The
private-label credit card business experienced lower earnings primarily
as a result of higher credit costs associated with discontinued merchant
programs and lower net interest margin due to spread compression
resulting from competitive pricing pressure. The Visa/MasterCard business
reported higher earnings in 1995, driven by portfolio growth of 26
percent, which generated higher finance charges and fee income, partially
offset by higher credit costs resulting from portfolio seasoning. In the
second quarter of 1994, Household International designated a subsidiary
bank of HFC as the issuer of new General Motors ("GM") Card
3
<PAGE> 5
accounts. The GM Card is the result of an alliance between General Motors
Corporation and Household International and was previously issued by an
affiliate of HFC.
Operating results of the commercial business were better than 1994 and
1993 primarily due to lower credit costs and operating expenses. This
operation also benefited from gains on the disposition of assets, as it
continued to liquidate its remaining portfolio. Partially offsetting
these improvements was lower net interest margin due to lower asset
levels.
- In October 1995, the Company sold the individual life and annuity product
lines of its individual life insurance business ("sold life insurance
business"). The Company retained the credit life insurance business.
Assets sold, principally investment securities, totaled approximately
$6.1 billion. Through September 30, 1995, the annualized return on
average common shareholders' equity of the sold life insurance business
was 8.2 percent, and the annualized return on average owned assets was
.73 percent. Remaining individual life insurance lines include periodic
payment annuities and corporate life insurance products which the Company
has discontinued. Due to the insignificance of these remaining insurance
product lines, the Company has ceased reporting separate segment results
for the former Individual Life Insurance segment.
In the second quarter of 1995, the Company sold its purchased mortgage
servicing rights to a third party. The sale did not have a material
impact on the Company's operating results.
The Company sold its Australian subsidiary in the fourth quarter of 1994
and recorded an after-tax loss of $14 million. Also in 1994, the Company
entered into an agreement to sell without recourse $398 million of
commercial loans to a joint venture. This loan sale was consummated in
the first quarter of 1995.
BALANCE SHEET REVIEW
- Owned assets totaled $17.8 billion at December 31, 1995, down 15 percent
from year-end 1994 due to the sale of approximately $6.1 billion of
insurance assets, partially offset by growth in consumer receivables.
Owned consumer receivables were $11.2 billion at December 31, 1995, up 25
percent from $8.9 billion at December 31, 1994. Changes in owned
receivables from period to period may vary depending on the timing and
significance of securitization transactions. The Company securitized and
sold with limited recourse approximately $4.1 and $2.5 billion of
receivables during 1995 and 1994, respectively.
In connection with the Company's decision to discontinue originating
other secured receivables and to manage the liquidation of this portfolio
as part of the discontinued commercial business, and due to the nature of
these receivables, the Company has combined other secured receivables
with commercial loans. To better analyze trends, selected balance sheet
and credit quality data prior to December 31, 1995 have been restated to
reflect this combination.
- Managed consumer receivables (owned and serviced with limited recourse)
grew 22 percent in 1995. The home equity receivable portfolio was flat
compared to the prior year. The Visa/MasterCard portfolio increased 39
percent, primarily due to growth in the GM Card portfolio. In addition,
the Company acquired two Visa/MasterCard portfolios totaling
approximately $570 million in the fourth quarter of 1995. Merchant
participation portfolio growth of 29 percent was driven by new merchant
programs. Other unsecured receivables increased 36 percent due to retail
originations in the consumer finance operation.
- Consumer two-months-and-over contractual delinquency ("delinquency") as a
percent of managed consumer receivables increased to 3.88 percent at
December 31, 1995 from 3.60 percent at December 31, 1994. The chargeoff
ratio for the average managed consumer portfolio was 3.25 percent
compared to 3.23 percent in 1994.
4
<PAGE> 6
- The Company continued to increase managed credit loss reserves during
1995 due to economic uncertainty and continued growth in unsecured
products. Credit loss reserves as a percent of managed receivables were
4.00 percent at year-end 1995 compared to 3.32 percent a year ago.
Reserves as a percent of nonperforming managed receivables increased to
120.5 percent from 103.5 percent at December 31, 1994.
- The Company's debt to equity ratio was 5.5 to 1 compared to 5.9 to 1 at
December 31, 1994. The significant improvement in the 1995 ratio was
primarily due to the sale of the individual life and annuity product
lines. The Company used the $525 million of cash proceeds from this sale
to repay debt pending reinvestment of the capital in its core businesses
or additional dividends to its parent. Accordingly, the Company
anticipates that its debt to equity ratio may increase in the future as
this capital is reinvested. See the Liquidity and Capital Resources
section for further discussion of the Company's capital targets and plan.
- In July 1995, Standard & Poor's Ratings Group revised its outlook on the
Company from stable to positive based on stronger reserve coverage and
expense control initiatives.
INCOME STATEMENT REVIEW
NET INTEREST MARGIN
Net interest margin was $933.9 million, up from $917.3 million in 1994. Net
interest margin as a percent of average owned interest-earning assets was 7.41
percent, down compared to 8.04 percent in 1994 and 8.16 percent in 1993. The
decrease compared to the prior year was primarily attributable to higher funding
costs and compression of fixed rate receivable spreads, partially offset by a
shift in product mix toward higher-yielding unsecured receivables.
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 $1.4 billion in 1995 and 1994. Net
interest margin on a managed basis as a percent of average managed
interest-earning assets was 7.20 percent compared to 7.57 percent in the
previous year. The net interest margin percentage on an owned basis was greater
than on a managed basis because home equity receivables, which have lower
spreads than unsecured products, were a larger proportion of the portfolio
serviced with limited recourse than of the owned portfolio.
PROVISION FOR CREDIT LOSSES
The provision for credit losses for receivables totaled $511.0 million, up
17 percent from 1994 and up 3 percent from 1993. The level of provision for
credit losses may vary from period to period, depending on the significance of
securitizations of receivables in a particular period, as provision related to
the securitized receivables is transferred to securitization income.
The increase in provision was primarily due to continued growth and
seasoning of unsecured products, which have higher chargeoff rates than secured
products. Total unsecured consumer loans, which include credit cards and other
unsecured receivables, comprised 63 percent of the managed receivable portfolio
at December 31, 1995, up from 56 percent a year ago. The provision increase was
also impacted by concern over the economy. See the Credit Quality section on
pages 9 through 10 for further discussion of factors affecting the provision for
credit losses.
OTHER REVENUES
Securitization income consists of income associated with the securitization
and sale of receivables with limited recourse, including net interest income,
fee and other income, and provision for credit losses related to those
receivables. Securitization income increased in 1995 over 1994 and 1993 due to
growth in the securitized
5
<PAGE> 7
portfolio, which generated higher net interest income, and an increase in fee
and other income from securitized credit card receivables, resulting from
greater transaction volume.
Insurance premiums and contract revenues of $251.7 million were up from
$228.3 million in 1994 and $242.6 million in 1993. The 1995 amount included nine
months of revenues from the sold individual life insurance and annuity business.
The 1994 amount reflected the 1994 sale of the whole life line of business,
which resulted in a reduction of contract revenues of $47.8 million,
representing the amount of claim reserves on the policies that were sold.
Insurance premiums and contract revenues for the business that has been
retained, primarily the specialty and credit insurance line, were $158.7 million
for 1995, up from $145.0 million in 1994. The increase was due to higher
premiums related to growth in the Company's receivable base.
Insurance premiums and contract revenues in 1994 were flat with 1993 due to
the above-mentioned 1994 sale. Excluding the impact of this sale, insurance
premiums and contract revenues were higher than 1993 due to higher life
insurance in-force and increased specialty and credit insurance premiums.
Investment income includes interest income on insurance investment
securities, as well as realized capital gains and losses. Investment income of
$453.8 million in 1995 declined compared to both 1994 and 1993 primarily due to
the sale of the individual life insurance and annuity business. Investment
income from the Company's retained business was $154.3 million in 1995 and
$141.5 million in 1994. The increase was primarily due to higher gains from
sales of available-for-sale investments and higher yields.
The decrease in 1994 compared to 1993 was primarily due to lower gains on
sales of available-for-sale investments. These investments were sold consistent
with preestablished interest rate strategies. This decrease was also the result
of lower yields on investments, as higher-yielding securities were sold, called
or matured in 1993 and replaced with lower-yielding investments prior to the
rise in interest rates which commenced in early 1994, partially offset by a
larger investment portfolio.
Fee income includes revenues from fee-based products such as credit cards.
Fee income was $125.2 million, up from $83.1 million in 1994 and $60.7 million
in 1993. The increase was due to higher interchange and other fees related to
growth in owned credit card receivables and greater transaction volume.
Other income includes gains and losses from the disposition of assets and
businesses, income from servicing receivable portfolios without recourse, and in
1994 and 1993, trading gains and losses. Other income increased in 1995 due to
the gain on the sale of the individual life and annuity lines of business in the
fourth quarter, compared to a loss on the sale of the Australian subsidiary in
1994.
Excluding the impact of the gains and losses from the sales of businesses
in 1995 and 1994, other income was $50.0 million in 1995 and $114.5 million in
1994. The decrease was primarily due to lower servicing income related to a
portfolio of unsecured loans serviced with no recourse for a third party.
Other income in 1994 was below the 1993 level due to the loss on the sale
of the Company's Australian subsidiary in 1994 and trading losses in 1994
compared to gains in 1993.
EXPENSES
Salaries and fringe benefits and other operating expenses were $888.9
million, up 2 percent from 1994 and 8 percent from 1993. The increases were
attributable to higher expenses associated with growth in the company's managed
receivable portfolio. Average managed receivables grew 11 and 12 percent in 1995
compared to 1994 and 1993, respectively.
Policyholders' benefits in 1995 were higher than 1994 but were below 1993
levels. The 1995 amount included nine months of activity for the sold individual
life insurance and annuity business. Policyholders' benefits in 1994 were
reduced by $47.8 million due to the sale of the whole life business.
Policyholders' benefits of the retained insurance business, on a pro forma
basis, were $189.2 million in 1995, up from $179.8 million in 1994. The increase
was primarily due to growth in specialty and credit insurance.
Excluding the impact of the 1994 sale, policyholders' benefits in 1994 were
lower than 1993 primarily due to lower interest credited to individual life
insurance policyholders.
6
<PAGE> 8
Income taxes. The 1995 effective tax rate was 40.1 percent compared to 28.8
percent in 1994 and 32.8 percent in 1993. The 1995 rate was impacted by
additional taxes on the sale of the insurance business. Excluding the impact of
additional taxes related to this disposition, the effective tax rate for 1995
would have been 33.1 percent.
The 1994 effective tax rate reflected the favorable resolution of several
prior year state tax issues and the recognition of U.S. tax benefits of
accumulated losses of the Australian subsidiary upon its sale. Excluding the
impact of accumulated losses recognized upon this sale, the effective tax rate
would have been 32.1 percent for 1994.
CREDIT MANAGEMENT POLICIES
The Company's receivable portfolios and credit management policies
historically have 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.
CONSUMER
The consumer credit risk management process has the following elements:
- Computerized scoring systems to assess the risk characteristics of new
applicants and monitor the payment behavior of existing customers for
early warning signs of troubled accounts.
- A centralized collection system for past due accounts to make the
collection process more productive and provide the analytical capability
to measure the effectiveness of collection strategies. This centralized
collection system is augmented by early collection efforts in the
consumer finance branch network.
- A senior executive position of credit risk manager in each consumer
lending operation which places credit management at a high level of
priority and provides the means for the credit function to interact more
productively with other business functions.
Based on this credit risk management process, expected credit losses for
each consumer product are estimated statistically based on payment patterns, as
well as delinquency and chargeoff experience. Credit loss reserves are based on
these statistical estimates and additional reserves to reflect management's
judgment of portfolio risk factors. These risk factors include overall economic
conditions, regional considerations and current trends in growth, underwriting
or collection practices and changes in product mix which might not be
appropriately considered in historical statistical experience.
The Company suspends accrual of interest on all consumer receivables when
payments are three months contractually past due, except for Visa/MasterCard and
private-label credit cards. On these credit card receivables, consistent with
industry practice, interest continues to accrue until the receivable is charged
off. In the third quarter of 1995, the Company changed its procedure regarding
chargeoffs of bankrupt Visa/MasterCard accounts. Prior to the third quarter,
when the Company received notification that a Visa/MasterCard customer had filed
bankruptcy, the Company established a reserve equal to the full balance of the
customer's receivable. If not paid, the receivable balance would be charged off
in accordance with the Company's normal chargeoff policy. Beginning in the third
quarter of 1995, the Company implemented a new procedure, to more closely
conform with credit card industry practice, to charge off accounts on a timely
basis after receipt of notification of bankruptcy filing. Accordingly, the
Company accelerated the chargeoff of bankrupt Visa/MasterCard accounts that had
not yet been charged off under the prior policy. The chargeoff ratios presented
on page 10 have been normalized to exclude the effect of the nonrecurring
change. Consumer loans, excluding bankrupt Visa/MasterCard accounts, are charged
off when an account is six to nine months
7
<PAGE> 9
contractually delinquent. The period of time is dependent on applicable
regulatory requirements as well as the terms, collateral and credit loss
experience of each consumer product category.
Effective January 1, 1996 the Company adopted a policy whereby other
unsecured consumer finance receivables will be charged off if an account is nine
months contractually delinquent, and essentially no payment has been received in
six months. No change has been made for Visa/MasterCard, merchant participation
or secured loans. The combined recency and contractual chargeoff methodology
more closely conforms to consumer finance industry practice and allows for more
flexibility in addressing individual borrower circumstances. Delinquency
statistics will continue to be reported on a contractual basis.
The Company's consumer businesses lend funds nationwide, with California
accounting for 23 percent of total managed consumer receivables. It is the only
state with greater than 10 percent of the Company's domestic managed
receivables. Due to its centralized underwriting, collection and processing
functions, the Company is able to quickly revise underwriting standards and
intensify collection efforts for specific geographic locations.
COMMERCIAL
The Company no longer originates commercial loans. The Company's ongoing
credit monitoring process for existing loans evaluates the financial and
operating performance of all borrowers. As part of this process, the Company
administers an asset classification policy which requires all assets to be
formally reviewed and assigned a rating on a regular basis. This policy utilizes
a process similar to that used by banking regulatory authorities and
specifically addresses the need for chargeoffs.
The adequacy of the credit loss reserves is evaluated quarterly based upon
the ongoing credit monitoring process and evaluation of the probability of
future losses in the portfolio as a whole given its geographic and industry
diversification, historical loss experience and the potential impact on the
portfolio of existing and future economic conditions.
Commercial loans are placed on nonaccrual when they become 90 days past
due, or sooner if the Company believes that the loan has experienced significant
adverse developments that could result in a loss of interest or principal. There
are no commercial loans that are 90 days past due and on full accrual status.
Loans are disclosed as renegotiated loans or troubled debt restructurings if the
rate of interest has been reduced because of the inability of the borrower to
meet the original terms of the loan. Such loans continue to accrue interest at
the renegotiated rate, unless they become 90 days past due, because the Company
believes the borrowers will be able to meet their obligations following the
restructuring.
Commercial loans that are modified in the normal course of business, for
which additional consideration is received or significant concessions are not
made, are not reported as renegotiated loans or troubled debt restructurings.
Real estate owned is recorded at the lower of cost or fair value less estimated
costs to sell. These values are periodically reviewed and, if appropriate,
reduced.
LOSS RESERVES
The level of reserves for credit losses is maintained in accordance with
the above-mentioned credit risk policy. See Note 1, "Summary of Significant
Accounting Policies" on pages F-6 and F-7 in the accompanying financial
statements for further description of the basis for establishing such reserves.
See Note 3, "Receivables" for an analysis of credit loss reserves. While
management allocates reserves, including those in excess of statistical
requirements, among the Company's various products, all credit loss reserves are
considered to be available to cover total loan losses.
8
<PAGE> 10
CREDIT LOSS RESERVES
<TABLE>
<CAPTION>
AT DECEMBER 31
-----------------
1995 1994
------ ------
(IN MILLIONS)
<S> <C> <C>
Owned...................................................................... $531.8 $413.7
Serviced with limited recourse............................................. 334.2 181.7
------ ------
Total managed credit loss reserves............................... $866.0 $595.4
====== ======
</TABLE>
CREDIT LOSS RESERVES (AS A PERCENT OF RECEIVABLES)
<TABLE>
<CAPTION>
AT DECEMBER 31
--------------
1995 1994
---- ----
<S> <C> <C>
Owned........................................................................ 4.28% 4.08%
Managed...................................................................... 4.00 3.32
</TABLE>
The Company's total managed credit loss reserves increased 45 percent to
$866.0 million from $595.4 million at December 31, 1994. The ratio of credit
loss reserves to total managed receivables was 4.00 percent, up from 3.32
percent at December 31, 1994. The Company has continually increased credit loss
reserves over the past year in anticipation of growth and seasoning of unsecured
products, coupled with uncertainty over the strength of the economy and its
impact on consumer behavior. The ratio of total credit loss reserves to total
managed nonperforming loans increased to 120.5 percent from 103.5 percent at
December 31, 1994.
CREDIT QUALITY
During 1995, the Company experienced increases in delinquency, while
chargeoff levels remained relatively flat compared to the prior year.
Nonperforming assets also increased during the year, due primarily to an
increase in nonaccrual loans. Delinquency and chargeoff statistics continued to
be impacted by the ongoing shift in the Company's product mix toward unsecured
receivables. Because other unsecured, merchant participation and Visa/MasterCard
receivables have higher delinquency and chargeoff rates than real estate secured
loans, this shift in product mix has the effect of increasing the overall
delinquency and chargeoff statistics of the portfolio. At December 31, 1995,
unsecured loans accounted for 67 percent of the managed consumer receivable
portfolio compared to 60 percent a year ago. In addition, chargeoff statistics
were impacted by continued seasoning of the GM Card portfolio.
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.
TWO-MONTHS-AND-OVER CONTRACTUAL DELINQUENCY
(AS A PERCENT OF MANAGED CONSUMER RECEIVABLES)
<TABLE>
<CAPTION>
1995 QUARTER END 1994 QUARTER END
---------------------------- ----------------------------
4 3 2 1 4 3 2 1
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Home equity............................. 3.42% 3.27% 2.87% 2.81% 2.80% 2.83% 2.97% 3.32%
Visa/MasterCard......................... 2.37 2.64 2.64 2.71 2.88 3.18 3.40 3.52
Merchant participation.................. 4.75 4.34 4.07 4.67 4.87 5.02 4.55 5.03
Other unsecured......................... 6.31 5.84 6.19 5.34 5.40 6.27 6.76 7.28
---- ---- ---- ---- ---- ---- ---- ----
Total......................... 3.88% 3.76% 3.60% 3.53% 3.60% 3.84% 3.92% 4.24%
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
Delinquency as a percent of managed consumer receivables increased from the
prior quarter and from a year ago, driven by higher delinquency of other
unsecured receivables, as the portfolio continued to season. The Visa/MasterCard
delinquency ratio continued to benefit from portfolio growth and acquisitions,
which was partially offset by seasoning of the GM Card portfolio. Home equity
delinquency was higher than a year earlier primarily due to the seasoning of
portfolios acquired through the wholesale network.
9
<PAGE> 11
NET CHARGEOFFS OF CONSUMER RECEIVABLES
(AS A PERCENT OF AVERAGE MANAGED CONSUMER RECEIVABLES)
<TABLE>
<CAPTION>
1995 QUARTER ANNUALIZED 1994 QUARTER ANNUALIZED
FULL YEAR ------------------------- FULL YEAR -------------------------- FULL YEAR
1995 4 3 2 1 1994 4 3 2 1 1993
--------- ---- ---- ---- ---- --------- ---- ---- ----- ---- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Home equity............. .99% .93% 1.15% 1.04% .82% 1.16% .93% 1.02% 1.42% 1.27% 1.04%
Visa/MasterCard*........ 4.66 4.88 4.65 4.34 4.73 5.15 4.89 4.78 5.26 5.74 5.99
Merchant participation 5.28 5.80 5.05 5.30 4.85 3.96 4.26 3.87 3.81 3.87 4.30
Other unsecured......... 3.89 4.15 4.06 3.76 3.54 4.96 4.11 4.76 5.57 5.60 6.37
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total......... 3.25% 3.53% 3.32% 3.11% 2.99% 3.23% 3.04% 3.04% 3.41% 3.47% 3.56%
==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
- ---------------
* Normalized to exclude the acceleration of bankrupt accounts in the third
quarter of 1995. Including these accelerated chargeoffs, Visa/MasterCard and
total chargeoffs were 5.05 and 3.36 percent, respectively, for 1995.
Net chargeoffs as a percent of average managed consumer receivables were
3.25 percent, essentially unchanged compared to 3.23 percent in 1994, as
seasoning of unsecured products was offset by their continued growth.
The Visa/MasterCard chargeoff ratio for the year decreased compared to the
prior year, as continued maturation of the GM Card portfolio was offset by
improvement in the non-GM Card portfolio. Merchant participation chargeoffs
increased over the 1994 level primarily due to programs the Company has exited.
The other unsecured chargeoff ratio for the year was lower than 1994, but it
increased in the fourth quarter due to continued 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
<TABLE>
<CAPTION>
DEC. 31, SEPT. 30, DEC. 31, DEC. 31,
1995 1995 1994 1993
-------- --------- -------- --------
(ALL DOLLAR AMOUNTS ARE STATED IN MILLIONS)
<S> <C> <C> <C> <C>
Nonaccrual managed receivables............................ $547.9 $ 470.4 $395.5 $ 569.6
Accruing managed consumer receivables 90 or more days
delinquent.............................................. 149.7 134.3 138.2 148.8
Renegotiated commercial loans............................. 21.2 22.0 41.8 28.7
------ ------ ------ ------
Total nonperforming managed receivables................. 718.8 626.7 575.5 747.1
Real estate owned......................................... 105.6 108.7 124.6 345.6
------ ------ ------ ------
Total nonperforming assets.............................. $824.4 $ 735.4 $700.1 $1,092.7
====== ====== ====== ======
Managed credit loss reserves as a percent of nonperforming
managed receivables..................................... 120.5% 114.0% 103.5% 78.6%
</TABLE>
Nonperforming managed receivables increased over the prior year primarily
due to increased nonaccrual receivables in the consumer finance business.
LIQUIDITY AND CAPITAL RESOURCES
The Company generally is funded independently. Cash flows, liquidity and
capital are monitored at both the Company and Household International levels.
The decision to invest in or to withdraw capital from specific businesses is
based on their profitability, growth potential and target capital structure.
Household
10
<PAGE> 12
International invested $140 million of additional capital in HFC in 1994 to
strengthen the Company's capital position and to fund asset growth. HFC paid
cash dividends to Household International of $155 million in 1995 and $115
million in 1994.
The Company employs an integrated and comprehensive program to manage
liquidity and capital resources. In managing capital, the Company develops
targets for each of its key capital ratios based on discussions with rating
agencies, regulatory requirements, competitor analysis and projected changes in
the operating environment. These targets include both on-balance sheet assets
and receivables securitized with limited recourse. As a result of management's
decision to improve capital levels, the Company has set increasingly restrictive
targets in each of the last several years.
The major use of cash by the Company is the origination or purchase of
receivables or investment securities. The main sources of cash for the Company
are the collection and sales of receivable balances; maturities or sales of
investment securities; proceeds from the issuance of debt; cash provided by
operations; and cash received from policyholders.
The Company obtains a majority of its funding through the issuance of
commercial paper, medium- and long-term debt and through securitizations and
sales of consumer receivables. At December 31, 1995 HFC's outstanding commercial
paper totaled $4.0 billion compared to $3.3 billion at December 31, 1994. HFC
markets its commercial paper through an in-house sales force, directly reaching
more than 300 investors. HFC also markets medium-term notes through investment
banks and its in-house sales force and issued a total of $1.3 billion in 1995.
During 1995 HFC also issued $1.2 billion of intermediate- and long-term debt to
the public through investment banks and brokerage houses. To facilitate
liquidity, HFC had committed back-up lines of credit totaling $3.9 billion at
December 31, 1995, $400 million of which was limited by the amount utilized by
Household International. None of the back-up lines contained a material adverse
change clause which could restrict availability. HFC's debt to equity ratio was
5.5 to 1 at December 31, 1995 compared to 5.9 to 1 at December 31, 1994.
Securitizations and sales of consumer receivables have been, and will
continue to be, an important source of liquidity for HFC. During 1995 the
Company securitized and sold approximately $4.1 billion of home equity,
Visa/MasterCard, merchant participation and other unsecured receivables compared
to $2.5 billion in 1994. HFC has committed agreements with commercial banks to
securitize up to $500 million of merchant participation receivables and, along
with its affiliate, Household Bank, f.s.b., $1 billion of Visa/MasterCard
receivables, if desired. At December 31, 1995 $650 million of Visa/MasterCard
receivables were securitized under these programs.
During 1995 Standard & Poor's Ratings Group upgraded the credit rating
outlook for the Company from stable to positive, based on stronger reserve
coverage and expense control initiatives. At December 31, 1995 the long-term
debt of the Company had been assigned an "investment grade" rating by four
nationally recognized statistical rating organizations. Furthermore, these
agencies included the commercial paper of HFC in their highest rating category.
With these ratings, back-up lines of credit and securitization programs, the
Company believes it has sufficient capacity to raise capital to refinance
maturing obligations and fund business growth.
The Company's remaining credit and individual life insurance subsidiaries
plan for capital needs using targets based on statutory or contractual
requirements. At the end of 1995 the estimated risk-based capital ratios of
these companies, as defined statutorily, were consistent with their targets. The
Company believes that the future capital needs of these subsidiaries will be
funded through their own operations.
RISK MANAGEMENT
Household International has a comprehensive program which addresses the
management and diversification of financial risk, such as interest rate,
funding, liquidity, counterparty and currency risk, at all of its entities.
Acceptable limits for each of these risks are established by the Finance
Committee of Household International's Board of Directors on an annual basis and
reviewed semi-annually. Household International manages these risks for the
Company through an asset/liability management committee ("ALCO"), which is
11
<PAGE> 13
composed of senior management, who use these limits to manage these risks both
domestically and internationally. Interest rate risk is the exposure of earnings
to changes in interest rates. The ALCO sets and monitors policy so that the
potential impact on earnings from future changes in interest rates is managed
within approved limits. Simulation models are utilized to measure the impact on
net interest margin of changes in interest rates. By policy, no more than 25
percent of the Company's expected full year earnings can be at risk to an
immediate 200 basis point increase or decrease in interest rates for 12 months,
assuming no additional interest rate risk management actions are taken.
Positions that create a risk beyond 15 percent of earnings require specific
approval of the chief executive officer of Household International. Limits also
apply beyond the initial 12-month period. Historically, the Company has managed
its interest rate risk to levels substantially below those allowed by this
policy.
The Company, whenever possible, funds its assets with liability instruments
of similar interest rate sensitivity, thereby reducing structural interest rate
risk. Over time, customer demand for the Company's receivable products shifts
from fixed rate to floating rate, and vice versa, based on market conditions and
consumer preferences. These shifts result in different funding strategies and
produce different interest rate risk exposures. To manage these exposures, as
well as its liquidity position, the Company may use derivatives to synthetically
alter the terms of assets or liabilities. The Company does not use any exotic or
leveraged derivatives. The Company does not serve as a financial intermediary to
make markets in any off-balance sheet financial instruments.
At December 31, 1995 the Company managed approximately $15 billion of
domestic receivables with variable interest rates, including floating rate
credit card, home equity and other unsecured products. To manage liquidity to
acceptable levels, these receivables have been funded with $4.2 billion of
short-term debt, with the remainder funded by longer-duration liabilities. This
situation exposes the Company to interest rate risk. The Company utilizes
derivatives, primarily interest rate swaps, to synthetically alter its exposure
to interest rate risk while still controlling liquidity risk. Interest rate
swaps are also used to synthetically alter the Company's exposure to basis risk,
or the risk due to the difference in movement of market rate indices on which
assets and liabilities are priced (primarily prime and LIBOR, respectively).
Synthetic alteration and hedge transactions are specifically designated to
particular assets/liabilities or off-balance sheet items of a similar
characteristic. Specific assets or liabilities synthetically altered/hedged may
consist of groups of individually small dollar homogeneous items.
The economic exposure underlying the Company's interest rate swap portfolio
is minimal. The notional amount is used to determine the fixed or variable rate
interest payment due by each counterparty but does not result in an exchange of
principal payments. The Company's primary exposure on its interest rate swap
portfolio is counterparty risk, or the risk that a counterparty may default on a
contract when the Company is owed money. The potential for economic loss is the
interest rate differential determined by reference to the notional amount.
Certain interest rate swap agreements entered into by the Company require that
payments be made to or received from the counterparty when the market value of
the agreement reaches a predetermined level. This serves to minimize the
Company's counterparty risk. Counterparty limits have been established and are
closely monitored as part of the overall risk management process. These limits
ensure that the Company does not have significant exposure to any individual
counterparty. Based on estimated peak exposure at December 31, 1995, 96 percent
of the Company's derivative instrument counterparties were rated A- or better,
and 87 percent were rated AA- or better. The Company has never suffered a loss
due to counterparty failure.
The Company also utilizes exchange traded U.S. dollar interest rate futures
and purchased put and call options to hedge the resets of interest rates on the
Company's variable rate assets and liabilities. For example, short-term
borrowings expose the Company to interest rate risk. The hedges used reduce that
risk, and at the inception of the contract the Company designates these futures
and options as hedges. The contracts are held until the applicable variable rate
asset or liability reset occurs, at which time the contracts are terminated.
These terminations are necessary to close out the contract, as the date the rate
resets usually does not coincide with the exchange's contract expiration date.
12
<PAGE> 14
In late 1994 the Company discontinued its trading activities. Income or
loss from trading activities was not material to the Company.
See Note 6, "Derivative Financial Instruments and Other Financial
Instruments With Off-Balance Sheet Risk" for additional information related to
interest rate risk management.
In the accompanying financial statements, Note 8, "Fair Value of Financial
Instruments" provides information regarding the fair value of certain financial
instruments.
During 1995 the Company invested $45.5 million in capital expenditures,
down compared to the prior year level of $61.0 million. In 1994 the Company
incurred expenditures to develop a comprehensive customer service computer
system for the domestic consumer finance business.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to the list of financial statements under Item 14(a)
herein for the financial statements required by this Item.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Inapplicable.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Omitted.
ITEM 11. EXECUTIVE COMPENSATION.
Omitted.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Omitted.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Omitted.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
<TABLE>
<S> <C>
(a) Financial Statements.
Report of Independent Public Accountants.
Statements of Income for the Three Years Ended December 31, 1995.
Balance Sheets, December 31, 1995 and 1994.
Statements of Cash Flows for the Three Years Ended December 31, 1995.
Statements of Changes in Preferred Stock and Common Shareholder's Equity for the Three
Years Ended December 31, 1995.
Notes to Financial Statements.
Selected Quarterly Financial Data (Unaudited).
</TABLE>
13
<PAGE> 15
<TABLE>
<S> <C>
(b) Reports on Form 8-K
During the three months ended December 31, 1995, HFC filed a Current Report on Form 8-K
with the Securities and Exchange Commission disclosing supplementary financial
information for HFC for the nine months ended September 30, 1995, as a result of the sale
as of October 1, 1995 by Household Group, Inc., a wholly-owned subsidiary of Household
Finance Corporation, of Alexander Hamilton
Life Insurance Company of America to Jefferson-Pilot Corporation.
(c) Exhibits.
2 Stock Purchase Agreement by and among Household Group, Inc., Household
International, Inc., Alexander Hamilton Life Insurance Company of America and
Jefferson-Pilot Corporation dated August 9, 1995 (incorporated by reference to
Exhibit 2 of HFC's Current Report on Form 8-K dated August 9, 1995).
3(i) Restated Certificate of Incorporation of Household Finance Corporation ("HFC"), as
amended (incorporated by reference to Exhibit 3(a) of HFC's Annual Report on Form
10-K for the fiscal year ended December 31, 1992).
3(ii) Bylaws of Household Finance Corporation (incorporated by reference to Exhibit 3(b)
of HFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1992).
4(a) Indenture dated as of May 15, 1989, between HFC and Bankers Trust Company, as
Trustee (incorporated by reference to Exhibit 4 to HFC's Current Report on Form 8-K
dated August 3, 1989), as supplemented by a First Supplemental Indenture dated as
of June 15, 1989 (incorporated by reference to Exhibit 4 of HFC's Current Report on
Form 8-K dated June 15, 1989), as amended by Amendment No. 1 dated October 18, 1990
to the First Supplemental Indenture dated as of June 15, 1989 (incorporated by
reference to Exhibit 4 of HFC's Current Report on Form 8-K dated October 18, 1990).
4(b) Standard Multiple-Series Indenture Provisions for Senior Debt Securities dated as
of June 1, 1992 (incorporated by reference to Exhibit 4(b) to HFC's Registration
Statement on Form S-3, No. 33-48854).
4(c) Indenture dated as of December 1, 1993 for Senior Debt Securities between HFC and
The Chase Manhattan Bank (National Association), as Trustee (incorporated by
reference to Exhibit 4(b) to HFC's Registration Statement on Form S-3, No.
33-55561).
4(d) The principal amount of debt outstanding under each other instrument defining the
rights of holders of long-term debt of HFC and its subsidiaries does not exceed 10
percent of the total assets of HFC and its subsidiaries on a consolidated basis.
HFC agrees to furnish to the Securities and Exchange Commission, upon request, a
copy of each instrument defining the rights of holders of long-term debt of HFC and
its subsidiaries.
12 Statement of Computation of Ratios of Earnings to Fixed Charges and to Combined
Fixed Charges and Preferred Stock Dividends.
23 Consent of Arthur Andersen LLP, Certified Public Accountants.
27 Financial Data Schedule.
(d) Schedules.
Household Finance Corporation and Subsidiaries:
VIII Valuation and Qualifying Accounts.
X Supplementary Income Statement Information.
</TABLE>
14
<PAGE> 16
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, HOUSEHOLD FINANCE CORPORATION HAS DULY CAUSED THIS REPORT
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
HOUSEHOLD FINANCE CORPORATION
Dated: March 27, 1996
By: /s/ R. F. ELLIOTT
----------------------------------
R. F. Elliott, President and
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF HOUSEHOLD
FINANCE CORPORATION AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- -------------------------
<C> <S> <C>
President and Chief
/s/ R. F. ELLIOTT Executive Officer,
- --------------------------------------------- Director
R. F. Elliott
Vice President, Chief
/s/ D. A. SCHOENHOLZ Accounting Officer and Dated: March 27, 1996
- --------------------------------------------- Chief Financial Officer,
D. A. Schoenholz Director
/s/ W. F. ALDINGER Director
- ---------------------------------------------
W. F. Aldinger
/s/ D. C. CLARK Director
- ---------------------------------------------
D. C. Clark
</TABLE>
<PAGE> 17
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
HOUSEHOLD FINANCE CORPORATION:
We have audited the accompanying balance sheets of Household Finance
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1995
and 1994, and the related statements of income, changes in preferred stock and
common shareholder's equity and cash flows for each of the three years in the
period ended December 31, 1995. These financial statements and the schedules
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Household Finance
Corporation and subsidiaries as of December 31, 1995 and 1994, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995 in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedules listed in Item
14(d) are presented for the purposes of complying with the Securities and
Exchange Commission's rules and are not a required part of the basic financial
statements. These schedules have been subjected to the auditing procedures
applied in the audits of the basic financial statements and, in our opinion,
fairly state in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 24, 1996
F-1
<PAGE> 18
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1995 1994 1993
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Finance income............................................... $1,724.6 $1,496.8 $1,318.1
Interest income from noninsurance investment securities...... 33.9 38.7 40.9
Interest expense............................................. 824.6 618.2 510.2
-------- -------- --------
Net interest margin.......................................... 933.9 917.3 848.8
Provision for credit losses on owned receivables............. 511.0 435.9 494.5
-------- -------- --------
Net interest margin after provision for credit losses........ 422.9 481.4 354.3
-------- -------- --------
Securitization income........................................ 424.6 301.9 355.3
Insurance premiums and contract revenues..................... 251.7 228.3 242.6
Investment income............................................ 453.8 505.8 552.1
Fee income................................................... 125.2 83.1 60.7
Other income................................................. 100.2 74.3 105.6
-------- -------- --------
Total other revenues......................................... 1,355.5 1,193.4 1,316.3
-------- -------- --------
Salaries and fringe benefits................................. 289.3 236.7 221.9
Other operating expenses..................................... 599.6 633.4 603.7
Policyholders' benefits...................................... 452.3 444.7 517.2
-------- -------- --------
Total costs and expenses..................................... 1,341.2 1,314.8 1,342.8
-------- -------- --------
Income before income taxes................................... 437.2 360.0 327.8
Income taxes................................................. 175.4 103.6 107.4
-------- -------- --------
Net income................................................... $ 261.8 $ 256.4 $ 220.4
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE> 19
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
BALANCE SHEETS
<TABLE>
<CAPTION>
AT DECEMBER 31
-----------------------
1995 1994
--------- ---------
(IN MILLIONS)
<S> <C> <C>
ASSETS
Cash.................................................................. $ 154.7 $ 97.3
Investment securities (fair value of $3,233.0 and $7,205.7)........... 3,233.0 7,249.6
Receivables, net...................................................... 12,665.0 10,476.3
Assets pending sale................................................... -- 398.3
Advances to parent company and affiliates............................. 119.6 482.3
Deferred insurance policy acquisition costs........................... 5.6 621.4
Acquired intangibles.................................................. 418.7 357.2
Properties and equipment.............................................. 286.2 211.5
Real estate owned..................................................... 105.6 124.6
Other assets.......................................................... 805.0 992.9
--------- ---------
Total assets.......................................................... $17,793.4 $21,011.4
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Debt:
Commercial paper, bank and other borrowings......................... $ 4,154.2 $ 3,800.6
Senior and senior subordinated debt (with original maturities over
one year)........................................................ 8,257.5 7,728.3
--------- ---------
Total debt.................................................. 12,411.7 11,528.9
Insurance policy and claim reserves................................... 2,212.9 6,643.4
Other liabilities..................................................... 931.7 880.0
--------- ---------
Total liabilities........................................... 15,556.3 19,052.3
Preferred stock....................................................... 100.0 100.0
Common shareholder's equity*.......................................... 2,137.1 1,859.1
--------- ---------
Total liabilities and shareholder's equity.................. $17,793.4 $21,011.4
========= =========
</TABLE>
- ---------------
* See the Statements of Changes in Preferred Stock and Common Shareholder's
Equity on page F-5 for number of shares issued and outstanding.
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 20
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1995 1994 1993
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
CASH PROVIDED BY OPERATIONS
Net income.......................................................... $ 261.8 $ 256.4 $ 220.4
Adjustments to reconcile net income to net cash provided by
operations:
Provision for credit losses on owned receivables.................. 511.0 435.9 494.5
Insurance policy and claim reserves............................... 408.2 259.8 226.4
Depreciation and amortization..................................... 176.8 146.8 158.1
Net realized (gains) losses from sales of assets.................. (36.4) 29.2 (1.4)
Deferred insurance policy acquisition costs....................... (58.5) (94.7) (86.6)
Deferred income tax provision..................................... 26.8 4.4 1.0
Other, net........................................................ 190.7 (106.7) 289.5
--------- --------- ---------
Cash provided by operations......................................... 1,480.4 931.1 1,301.9
--------- --------- ---------
INVESTMENTS IN OPERATIONS
Investment securities available-for-sale:
Purchased......................................................... (3,176.8) (1,749.1) (180.3)
Matured........................................................... 116.9 122.9 54.3
Sold.............................................................. 2,428.4 1,460.7 448.3
Investment securities held-to-maturity:
Purchased......................................................... (341.8) (674.8) (2,811.7)
Matured........................................................... 242.7 396.1 1,118.6
Sold.............................................................. 31.9 -- 756.9
Short-term investment securities, net change........................ 273.6 (73.5) (224.1)
Receivables, excluding Visa/MasterCard receivables
Originated or purchased........................................... (8,428.7) (7,281.3) (6,288.3)
Collected......................................................... 3,739.0 4,168.7 3,772.5
Sold.............................................................. 3,452.4 2,520.9 1,934.4
Visa/MasterCard receivables:
Originated or collected, net...................................... (5,241.3) (2,885.7) (2,629.3)
Purchased......................................................... (585.2) (16.9) (32.7)
Sold.............................................................. 4,755.8 2,222.8 1,912.8
Disposition of product lines of life insurance business............. 575.0 -- --
Acquisition of other businesses, net................................ (135.0) (145.6) --
Properties and equipment purchased.................................. (45.5) (61.0) (30.5)
Properties and equipment sold....................................... 3.4 .6 4.6
Advances to parent company and affiliates, net...................... 362.7 (120.6) 31.6
--------- --------- ---------
Cash decrease from investments in operations........................ (1,972.5) (2,115.8) (2,162.9)
--------- --------- ---------
FINANCING AND CAPITAL TRANSACTIONS
Short-term debt, net change......................................... 353.6 (210.3) 107.1
Senior and senior subordinated debt issued.......................... 2,493.7 3,840.5 2,289.9
Senior and senior subordinated debt retired......................... (2,047.9) (2,792.0) (2,084.3)
Policyholders' benefits paid........................................ (741.7) (558.3) (332.8)
Cash received from policyholders.................................... 652.6 956.5 848.9
Dividends on preferred stock........................................ (7.2) (7.2) (8.7)
Repurchase of preferred stock....................................... -- -- (50.0)
Dividends paid to parent company.................................... (155.0) (115.0) --
Capital contributions from parent company........................... 1.4 140.0 70.0
--------- --------- ---------
Cash increase from financing and capital transactions............... 549.5 1,254.2 840.1
--------- --------- ---------
Increase (decrease) in cash......................................... 57.4 69.5 (20.9)
Cash at January 1................................................... 97.3 27.8 48.7
--------- --------- ---------
Cash at December 31................................................. $ 154.7 $ 97.3 $ 27.8
========= ========= =========
Supplemental cash flow information:
Interest paid....................................................... $ 740.4 $ 656.4 $ 510.5
--------- --------- ---------
Income taxes paid (received)........................................ (110.3) 230.0 49.4
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 21
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
STATEMENTS OF CHANGES IN PREFERRED STOCK
AND COMMON SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON SHAREHOLDER'S EQUITY
----------------------------------------------------
COMMON TOTAL
STOCK AND COMMON
PREFERRED PAID-IN RETAINED SHAREHOLDER'S
STOCK CAPITAL(1) EARNINGS OTHER(2) EQUITY
--------- ---------- -------- --------- -------------
(ALL DOLLAR AMOUNTS ARE STATED IN MILLIONS)
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992............... $ 150.0 $481.2 $ 914.3 $ (18.2) $ 1,377.3
Net income............................... 220.4 220.4
Dividends on preferred stock............. (8.7) (8.7)
Contribution of capital from parent
company............................... 70.0 70.0
Foreign currency translation
adjustments........................... (5.0) (5.0)
Repurchase of preferred stock............ (50.0) --
Unrealized gain on investments, net...... 36.5 36.5
--------- ---------- -------- --------- -------------
BALANCE AT DECEMBER 31, 1993............... 100.0 551.2 1,126.0 13.3 1,690.5
Net income............................... 256.4 256.4
Dividends to parent company.............. (115.0) (115.0)
Dividends on preferred stock............. (7.2) (7.2)
Contribution of capital from parent
company............................... 140.0 140.0
Foreign currency translation
adjustments........................... 12.9 12.9
Unrealized loss on investments, net...... (118.5) (118.5)
--------- ---------- -------- --------- -------------
BALANCE AT DECEMBER 31, 1994............... 100.0 691.2 1,260.2 (92.3) 1,859.1
Net income............................... 261.8 261.8
Dividends to parent company.............. (155.0) (155.0)
Dividends on preferred stock............. (7.2) (7.2)
Contribution of capital from parent
company............................... 1.4 1.4
Foreign currency translation
adjustments........................... (.1) (.1)
Unrealized gain on investments, net...... 177.1 177.1
--------- ---------- -------- --------- -------------
BALANCE AT DECEMBER 31, 1995............... $ 100.0 $692.6 $1,359.8 $ 84.7 $ 2,137.1
======= ======== ======= ======= ==========
</TABLE>
- ---------------
(1) At December 31, 1995 and 1994, the Company had authorized, issued and
outstanding 1,000 shares of common stock, all of which are owned by
Household International, Inc.
(2) At December 31, 1995, 1994, 1993 and 1992 items in the other column include
cumulative adjustments for unrealized gains (losses) on marketable equity
securities and available-for-sale investments of $93.7, $(83.4), $35.1 and
$(1.4) million, respectively. Effective December 31, 1993 the Company
adopted Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("FAS No. 115"). As a
result of implementing FAS No. 115, the gross unrealized gain (loss) on
available-for-sale investments at December 31, 1995, 1994 and 1993 of
$141.5, $(259.5) and $144.9 million, respectively, is recorded net of income
taxes (benefit) of $47.8, $(44.8) and $19.6 million, respectively. At
December 31, 1994 and 1993, the unrealized gain (loss) on certain
available-for-sale investments of the life insurance operation were recorded
net of related unrealized deferred insurance policy acquisition cost
adjustments of $(131.3) and $90.2 million, respectively.
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 22
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Household Finance Corporation ("HFC" or the "Company") is a subsidiary of
Household International, Inc. ("Household International" or the "parent
company"). The Company is primarily engaged in the business of consumer lending
in the United States and, prior to December 1994, Australia. The Company makes
the following types of loans to "middle-market" customers: home equity,
Visa/MasterCard, merchant participation and other unsecured. The Company's
receivable portfolio also includes commercial loans and leases, including
discontinued commercial product lines.
The Company also offers credit and specialty insurance in the United States
and Canada. In October 1995 the Company sold the individual life and annuity
product lines of the Individual Life Insurance segment. Remaining insurance
lines include periodic payment annuities and corporate owned life insurance
products. These products are no longer being offered by the Company and are
being liquidated. Due to the insignificance of the remaining insurance product
lines, the Company will now report results for the former Finance and Banking
segment and the remaining insurance product lines on a combined basis.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The financial statements include the accounts of
the Company and all subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. Certain prior period amounts
have been reclassified to conform with the current year's presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investment Securities. The Company maintains investment portfolios in both
its noninsurance and insurance operations. These portfolios are comprised
primarily of debt securities. The insurance portfolio also includes policy
loans. In accordance with FAS No. 115, investment securities may be classified
in three separate categories: trading, available-for-sale or held-to-maturity.
Trading investments are bought and held principally for the purpose of selling
them in the near term and are carried at fair value. Adjustments to the carrying
value of trading investments are included in current earnings. The Company had
no trading investments at December 31, 1995. Investments which the Company has
the positive intent and ability to hold to maturity are defined as
held-to-maturity and carried at amortized cost. Available-for-sale investments
are intended to be invested for an indefinite period but may be sold in response
to events reasonably expected in the foreseeable future. These investments are
carried at fair value. As discussed on page F-9, the Company reclassified its
entire held-to-maturity investment portfolio to available-for-sale in the fourth
quarter of 1995.
Unrealized holding gains and losses on available-for-sale investments are
recorded as adjustments to common shareholder's equity, net of income taxes.
Prior to the sale of the individual life and annuity lines of business of the
insurance operation, unrealized holding gains and losses on certain
available-for-sale investments were also recorded net of related unrealized
deferred insurance policy acquisition cost adjustments. Any decline in the fair
value of investments which is deemed to be other than temporary is charged
against current earnings. Cost of investment securities sold by the insurance
operation generally is determined using the first-in, first-out ("FIFO") method,
and cost of noninsurance investment securities sold is determined by specific
identification. Interest income earned on the noninsurance investment portfolio
is classified in the statements of income in net interest margin. Realized gains
and losses from the noninsurance portfolio and investment income from the
insurance portfolio are recorded in investment income. Accrued investment income
is classified with investment securities.
Receivables. Receivables are carried at amortized cost. The Company
periodically sells receivables from its home equity, Visa/MasterCard, merchant
participation and other unsecured portfolios. Because these
F-6
<PAGE> 23
receivables were originated with variable rates of interest or rates comparable
to those currently offered by the Company for such receivables, carrying value
approximates fair value.
Finance income is recognized using the effective yield method and
classified on the balance sheets, to the extent not collected, with the related
receivables. Origination fees are deferred and amortized to finance income over
the estimated life of the related receivables, except to the extent they offset
directly related lending costs. Annual fees on Visa/MasterCard receivables are
netted with direct lending costs associated with the issuance of the cards. The
net amount is deferred and amortized on a straight-line basis over one year. Net
deferred direct lending costs/(income) related to Visa/MasterCard receivables
totaled $(3.4) and $.9 million at December 31, 1995 and 1994, respectively.
Insurance reserves applicable to credit risks on consumer receivables are
treated as a reduction of receivables in the balance sheets, since payments on
such policies generally are used to reduce outstanding receivables. Provisions
for credit losses are made in amounts sufficient to maintain reserves at a level
considered adequate to cover probable losses of principal and earned interest in
the existing portfolio of owned receivables. Probable losses are estimated for
consumer receivables based on contractual delinquency status and historical loss
experience. For commercial loans, probable losses are calculated using estimates
of amounts and timing of future cash flows expected to be received on loans for
which the collection of principal and interest is not probable, as well as
management's assessment of general reserve requirements. These estimates are
reviewed periodically and adjustments are reported in earnings when they become
known. As these estimates are influenced by factors outside the Company's
control, such as economic conditions in the regions where the Company operates,
there is uncertainty inherent in these estimates, making it reasonably possible
that they could change. The Company's chargeoff policy for all consumer
receivables, except bankrupt Visa/MasterCard accounts, is based on contractual
delinquency over periods ranging from 6 to 9 months. Bankrupt Visa/MasterCard
accounts are charged off on a timely basis after receipt of bankruptcy
notification. Commercial loans are written off when it becomes apparent that an
account is uncollectible.
Nonaccrual Loans. Nonaccrual loans are loans on which accrual of interest
has been suspended. Interest income is suspended on all consumer and commercial
loans when principal or interest payments are more than three months
contractually past due, except for Visa/MasterCard receivables and private-label
credit cards, which are included in the merchant participation product line. On
these credit card receivables, interest continues to accrue until the receivable
is charged off. There were no commercial loans at December 31, 1995 which were
90 days or more contractually past due which remained on accrual status. Accrual
of income on nonaccrual consumer receivables is not resumed until such
receivables become less than three months contractually past due. Accrual of
income on nonaccrual commercial loans is not resumed until such loans become
contractually current. Cash payments received on nonaccrual commercial loans are
either applied against principal or reported as interest income, according to
management's judgment as to the collectibility of principal.
Receivables Sold and Serviced with Limited Recourse and Securitization
Income. Certain home equity, Visa/MasterCard, merchant participation and other
unsecured receivables have been securitized and sold to investors with limited
recourse. The servicing rights to these receivables have been retained by the
Company. Upon sale, the receivables are removed from the balance sheet, and a
gain on sale is recognized for the difference between the carrying value of the
receivables and the adjusted sales proceeds. The adjusted sales proceeds are
based on a present value estimate of future cash flows to be received over the
lives of the receivables. Future cash flows are based on estimates of
prepayments, the impact of interest rate movements on yields of receivables sold
and securities issued, delinquency of receivables sold, normal servicing fees,
operating expenses and other factors. The resulting gain is reduced by
establishing a reserve for estimated probable losses under the recourse
provisions. Gains on sale, recourse provisions and servicing cash flows on
receivables sold are reported in the accompanying statements of income as
securitization income.
Properties and Equipment. Properties and equipment are recorded at cost
and depreciated over their estimated useful lives principally using the
straight-line method for financial reporting purposes and accelerated methods
for tax purposes.
F-7
<PAGE> 24
Real Estate Owned. Real estate owned is valued at the lower of cost or
fair value less estimated costs to sell. Costs of holding this real estate, and
related gains and losses on disposition, are credited or charged to operations
as incurred. These values are periodically reviewed and reduced, if appropriate.
Insurance. Premiums for specialty and credit insurance are recognized over
the period at risk in relationship to anticipated claims. Premiums received on
universal life and annuity policies ("interest-sensitive policies") are
considered insurance deposits. Revenues on interest-sensitive policies consist
of contract charges against policyholders' accounts and are reported in the
period assessed. Costs associated with acquisition of insurance risks are
deferred and generally amortized in relation to premium revenues on ordinary and
credit insurance and in relation to gross profits on interest-sensitive
policies.
The liability for future contract benefits on interest-sensitive policies
is computed in accordance with the retrospective deposit method using interest
rates which vary with rates credited to policyholders' accounts. Liabilities for
future policy benefits on specialty insurance products are computed using the
net level premium method, based upon estimated future investment yields,
mortality, and withdrawals appropriate when the policies were issued. Mortality
and withdrawal assumptions principally are based on industry tables. Policy and
contract claim reserves are based on estimated settlement amounts for both
reported and incurred but not reported losses.
Acquired Intangibles. Acquired intangibles primarily consist of acquired
credit card relationships. Acquired credit card relationships are amortized on a
straight-line basis over their estimated remaining lives, not to exceed 10
years. The average amortization period for acquired intangibles was
approximately 6 years in 1995, 1994 and 1993.
Interest Rate Contracts. The nature and composition of the Company's
assets and liabilities and off-balance sheet items expose the Company to
interest rate risk. The Company enters into a variety of interest rate contracts
in the management of its interest rate exposure and, prior to December 31, 1994,
in its trading activities. Interest rate swaps are the principal vehicle used to
manage interest rate risk; however, interest rate futures, options, caps and
floors, and forward contracts also are utilized.
Interest rate swaps are designated, and effective, as synthetic alterations
of specific assets or liabilities (or specific groups of assets or liabilities)
and off-balance sheet items. The interest rate differential to be paid or
received on these contracts is accrued and included in net interest margin in
the statements of income. The related accrual is classified as other liabilities
on the accompanying balance sheets.
Interest rate futures, forwards, options, caps and floors used in hedging
the Company's exposure to interest rate fluctuations are designated, and
effective, as hedges of balance sheet items. Anticipatory hedges are designated,
and effective, as hedges of identified transactions which are probable to occur.
During 1995, 1994 and 1993 the Company's use of anticipatory hedges was
insignificant. If interest rate contracts are terminated early, the realized
gains and losses are deferred and amortized over the life of the hedged items as
adjustments to net interest margin in the statements of income. These deferred
gains and losses are recorded on the accompanying balance sheets as adjustments
of the carrying amount of the hedged items. Interest rate contracts not used in
the Company's trading activities are recorded at amortized cost.
In late 1994, the Company discontinued its trading activities. Prior to
that, interest rate contracts used in the Company's trading activities were
carried at fair value. Changes in fair value were included in other income.
Income Taxes. The Company and its eligible subsidiaries are included in
Household International's consolidated Federal income tax return and in various
consolidated state income tax returns. In addition, the Company files some
unconsolidated state tax returns. Under the tax-sharing agreement with Household
International, the Company's Federal and consolidated state tax provisions are
determined based on the Company's effect on Household International's
consolidated return. Tax benefits are paid to the Company as they are utilized
in Household International's consolidated return. Investment tax credits
generated by leveraged leases are accounted for using the deferral method.
F-8
<PAGE> 25
2. INVESTMENT SECURITIES
<TABLE>
<CAPTION>
AT DECEMBER 31
-----------------------------------------
1995 1994
------------------- -------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
TRADING INVESTMENTS
Government securities and other......................... $ 2.9 $ 2.9
-------- -------- -------- --------
AVAILABLE-FOR-SALE INVESTMENTS
Marketable equity securities............................ $ 323.8 $ 323.8 53.9 53.9
Corporate debt securities............................... 1,533.6 1,533.6 2,545.9 2,545.9
Government debt securities.............................. 99.2 99.2 211.3 211.3
Mortgage-backed securities.............................. 195.8 195.8 817.9 817.9
Policy loans............................................ 821.4 821.4 -- --
Other................................................... 222.9 222.9 62.5 62.5
-------- -------- -------- --------
Subtotal...................................... 3,196.7 3,196.7 3,691.5 3,691.5
-------- -------- -------- --------
HELD-TO-MATURITY INVESTMENTS
Corporate debt securities............................... 1,827.4 1,818.3
Government debt securities.............................. 23.1 20.6
Mortgage-backed securities.............................. 1,063.1 1,041.9
Mortgage loans on real estate........................... 161.9 158.5
Policy loans............................................ 72.7 72.7
Other................................................... 298.1 290.4
-------- -------- -------- --------
Subtotal...................................... 3,446.3 3,402.4
-------- -------- -------- --------
Accrued investment income............................... 36.3 36.3 108.9 108.9
-------- -------- -------- --------
Total investment securities................... $3,233.0 $3,233.0 $7,249.6 $7,205.7
======== ======== ======== ========
</TABLE>
The Company's insurance subsidiaries held $2.8 and $6.8 billion of the
investment securities at December 31, 1995 and 1994, respectively. Policy loans
held by the Company's insurance subsidiaries are classified as investment
securities, consistent with insurance industry practice.
There were no changes in net unrealized holding gains or losses in 1995 and
1994 from trading investments. Included in the Company's earnings for 1993 were
changes in net unrealized holding gains of $.7 million from trading investments.
Proceeds from the sales of available-for-sale investments totaled $2,428.4,
$1,460.7 and $448.3 million in 1995, 1994 and 1993, respectively. Gross gains of
$6.8, $34.8 and $35.8 million were realized on sales of available-for-sale
investments in 1995, 1994 and 1993, respectively. There were no gross losses on
sales of available-for-sale investments in 1995. Gross losses of $25.4 and $7.5
million in 1994 and 1993, respectively, were realized on those sales. The sales
in 1995 were exclusive of the sale of investment securities in connection with
the disposition of the individual life and annuity lines of business.
During 1995 the Company sold $31.4 million of held-to-maturity investment
securities due to the significant deterioration in the creditworthiness of the
issuers of the securities. Because of the disposition of the individual life and
annuity product lines, and the Company's decision to discontinue its remaining
insurance product lines, the Company reassessed the classification of the
remaining held-to-maturity portfolio and reclassified the entire
held-to-maturity investment portfolio to available-for-sale in the fourth
quarter of 1995. There were no investments transferred from held-to-maturity to
available-for-sale in 1994. The amortized cost of held-to-maturity investments
transferred to available-for-sale in 1993 was $2.8 billion. There were no sales
of held-to-maturity investments in 1994. Proceeds from sales of held-to-maturity
investments were $756.9 million in 1993. Sales and transfers of held-to-maturity
investments in 1993 were due to the
F-9
<PAGE> 26
restructuring of the investment security portfolio in anticipation of the
adoption of FAS No. 115 on December 31, 1993. Gross gains of $.5 and $46.5
million were realized on sales of held-to-maturity investments in 1995 and 1993,
respectively. There were no gross losses on sales of held-to-maturity
investments in 1995. Gross losses of $9.6 million were realized on sales of
held-to-maturity investments in 1993.
The gross unrealized gains (losses) of investment securities were as
follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995 AT DECEMBER 31, 1994
---------------------------------------------- ----------------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
--------- ---------- ---------- -------- --------- ---------- ---------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
INVESTMENTS
Marketable equity
securities................. $ 318.3 $ 7.3 $ (1.8) $ 323.8 $ 55.4 $ 1.7 $ (3.2) $ 53.9
Corporate debt securities.... 1,406.9 130.9 (4.2) 1,533.6 2,721.6 3.7 (179.4) 2,545.9
Government debt securities... 97.5 2.0 (.3) 99.2 226.2 .2 (15.1) 211.3
Mortgage-backed securities... 189.5 10.9 (4.6) 195.8 885.2 4.3 (71.6) 817.9
Policy loans................. 821.4 -- -- 821.4 -- -- -- --
Other........................ 221.6 1.3 -- 222.9 62.7 -- (.2) 62.5
--------- ---------- ---------- -------- --------- ---------- ---------- --------
Total
available-for-sale
investments....... $ 3,055.2 $152.4 $(10.9) $3,196.7 $ 3,951.1 $ 9.9 $ (269.5) $3,691.5
======== ======== ======== ======== ======== ======== ======== ========
HELD-TO-MATURITY INVESTMENTS
Corporate debt securities.... $ 1,827.4 $ 33.6 $ (42.7) $1,818.3
Government debt securities... 23.1 .1 (2.6) 20.6
Mortgage-backed securities... 1,063.1 13.4 (34.6) 1,041.9
Mortgage loans on real
estate..................... 161.9 1.8 (5.2) 158.5
Policy loans................. 72.7 -- -- 72.7
Other........................ 298.1 .3 (8.0) 290.4
--------- ---------- ---------- -------- --------- ---------- ---------- --------
Total
held-to-maturity
investments....... -- -- -- -- $ 3,446.3 $ 49.2 $ (93.1) $3,402.4
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
See Note 8, "Fair Value of Financial Instruments" for further discussion of
the relationship between the fair value of the Company's assets, liabilities and
off-balance sheet financial instruments.
As of December 31, 1995 the Company did not hold any debt or equity
securities from a single issuer that exceeded 10 percent of the Company's total
shareholder's equity.
Contractual maturities and yields of investments in debt securities were as
follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
----------------------------------------------------------------------------------------------
CORPORATE SECURITIES GOVERNMENT SECURITIES ALL OTHER DEBT SECURITIES
------------------------------- ---------------------------- -----------------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE YIELD* COST VALUE YIELD* COST VALUE YIELD*
--------- -------- -------- --------- ----- -------- --------- ------ --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Due within 1 year............. $ 119.1 $ 119.1 5.81% $ 3.5 $ 3.5 7.39% $ 1.2 $ .2 9.47%
After 1 but within 5 years.... 124.9 133.2 8.11 6.8 7.0 6.30 47.6 48.9 7.76
After 5 but within 10 years... 226.0 241.2 8.20 57.2 57.9 5.75 44.2 45.3 7.23
After 10 years................ 936.9 1,040.1 8.26 30.0 30.8 6.45 108.6 114.9 8.20
-------- -------- ---- ----- ----- ---- ------ ------ ----
Total................ $ 1,406.9 $1,533.6 8.03% $97.5 $99.2 6.06% $ 201.6 $209.3 7.90%
======== ======== ==== ===== ===== ==== ====== ====== ====
</TABLE>
- ---------------
* Computed by dividing annualized interest by the amortized cost of the
respective investment securities.
F-10
<PAGE> 27
3. RECEIVABLES
<TABLE>
<CAPTION>
AT DECEMBER 31
----------------------
1995 1994
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Home equity.................................................... $ 2,072.1 $ 1,570.4
Visa/MasterCard................................................ 3,596.7 2,663.0
Merchant participation......................................... 2,753.7 1,843.4
Other unsecured................................................ 2,786.3 2,865.9
Commercial..................................................... 1,226.7 1,208.5
--------- ---------
Total owned receivables.............................. 12,435.5 10,151.2
Accrued finance charges........................................ 241.0 176.5
Credit loss reserve for owned receivables...................... (531.8) (413.7)
Unearned credit insurance premiums and claims reserves......... (78.4) (45.9)
Amounts due and deferred from receivables sales................ 932.9 789.9
Reserve for receivables serviced with limited recourse......... (334.2) (181.7)
--------- ---------
Total owned receivables, net......................... 12,665.0 10,476.3
Receivables serviced with limited recourse..................... 9,212.1 7,808.8
--------- ---------
Total managed receivables, net....................... $21,877.1 $18,285.1
========= =========
</TABLE>
The Company has securitized and sold certain receivables which it services
with limited recourse. Securitizations and sales of receivables, including
replenishments of certificate holder interests, were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1995 1994 1993
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Home equity............................................ $1,135.2 $1,418.6 $1,667.5
Visa/MasterCard........................................ 4,755.8 2,222.8 1,881.8
Merchant participation................................. 644.0 1,093.6 213.6
Other unsecured........................................ 1,074.8 -- --
-------- -------- --------
Total........................................ $7,609.8 $4,735.0 $3,762.9
======== ======== ========
</TABLE>
The outstanding balance of receivables serviced with limited recourse
consisted of the following:
<TABLE>
<CAPTION>
AT DECEMBER 31
--------------------
1995 1994
-------- --------
(IN MILLIONS)
<S> <C> <C>
Home equity...................................................... $4,661.9 $5,074.6
Visa/MasterCard.................................................. 2,685.8 1,866.0
Merchant participation........................................... 750.0 868.2
Other unsecured.................................................. 1,114.4 --
-------- --------
Total.................................................. $9,212.1 $7,808.8
======== ========
</TABLE>
F-11
<PAGE> 28
The combination of receivables owned and receivables serviced with limited
recourse, which the Company considers its managed portfolio, is shown below:
<TABLE>
<CAPTION>
AT DECEMBER 31
----------------------
1995 1994
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Home equity.................................................... $ 6,734.0 $ 6,645.0
Visa/MasterCard................................................ 6,282.5 4,529.0
Merchant participation......................................... 3,503.7 2,711.6
Other unsecured................................................ 3,900.7 2,865.9
Commercial..................................................... 1,226.7 1,208.5
--------- ---------
Managed receivables.................................. $21,647.6 $17,960.0
========= =========
</TABLE>
For certain securitizations, wholly-owned subsidiaries were created (HFC
Revolving Corporation, HRSI Funding, Inc., HFS Funding Corporation, Household
Finance Receivables Corporation II, Household Receivables Funding Corporation,
Household Receivables Funding Corporation II, HFC Funding Corporation, Household
Receivables Funding, Inc., Household Consumer Loan Corporation and Household
Card Funding Corporation) for the limited purpose of consummating such
transactions.
The amount due and deferred from receivables sales of $932.9 million at
December 31, 1995 included unamortized excess servicing assets and funds
established pursuant to the recourse provisions and holdback reserves for
certain sales totaling $891.5 million. The amount due and deferred also included
customer payments not yet remitted by the securitization trustee to the Company.
In addition, the Company has made guarantees relating to certain securitizations
of $265.1 million plus unpaid interest and has subordinated interests in certain
transactions, which are recorded as receivables, for $358.5 million at December
31, 1995. The Company has an agreement with a "AAA"-rated third party who will
indemnify the Company for up to $21.2 million in losses related 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 $334.2 million at December 31, 1995 and represent the Company's best
estimate of probable losses on receivables serviced with limited recourse.
Contractual maturities of owned receivables were as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
---------------------------------------------------------------------------------
1996 1997 1998 1999 2000 THEREAFTER TOTAL
-------- -------- -------- -------- ------ ---------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Home equity............... $ 326.3 $ 246.5 $ 194.7 $ 163.1 $144.9 $ 996.6 $ 2,072.1
Visa/MasterCard........... 323.3 294.6 268.1 244.0 222.0 2,244.7 3,596.7
Merchant participation.... 258.8 247.6 247.1 239.3 158.5 1,602.4 2,753.7
Other unsecured........... 788.5 493.4 347.9 254.1 191.0 711.4 2,786.3
Commercial................ 260.8 119.6 123.4 106.8 42.1 574.0 1,226.7
-------- -------- -------- -------- ------ -------- ---------
Total........... $1,957.7 $1,401.7 $1,181.2 $1,007.3 $758.5 $6,129.1 $12,435.5
======== ======== ======== ======== ====== ======== =========
</TABLE>
A substantial portion of all consumer receivables, based on the Company's
experience, will be paid prior to contractual maturity. This tabulation,
therefore, is not to be regarded as a forecast of future cash collections. The
ratio of annual cash collections of principal to average principal balances,
excluding Visa/MasterCard receivables, approximated 44 and 47 percent in 1995
and 1994, respectively.
F-12
<PAGE> 29
The following table summarizes contractual maturities of owned receivables
due after one year by repricing characteristic:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
-------------------------
OVER 1 BUT
WITHIN 5 OVER 5
YEARS YEARS
----------- --------
(IN MILLIONS)
<S> <C> <C>
Receivables at predetermined interest rates.......................... $ 2,088.1 $2,406.3
Receivables at floating or adjustable rates.......................... 2,260.6 3,722.8
-------- --------
Total...................................................... $ 4,348.7 $6,129.1
======== ========
</TABLE>
Nonaccrual owned consumer receivables totaled $253.0 million at December
31, 1995. Interest income that would have been recorded in 1995 if such
nonaccrual receivables had been current and in accordance with contractual terms
was approximately $41 million. Interest income that was included in net income
for 1995, prior to these loans being placed on nonaccrual status, was
approximately $22 million.
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards ("FAS") No. 114, "Accounting by Creditors for Impairment of
a Loan," as amended by FAS No. 118, "Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures," which requires that a loan be
recognized as impaired when it is probable that all contractual amounts due will
not be repaid. FAS No. 114 specifically excludes groups of small dollar,
homogeneous loans where collectibility is evaluated collectively, such as the
Company's consumer loan portfolio. At December 31, 1995 impaired commercial
loans totaled $139.3 million (consisting of $118.1 million nonaccrual and $21.2
million renegotiated commercial loans). Impaired commercial loans of $109.8
million required related credit loss reserves totaling $41 million at December
31, 1995. The remaining $29.5 million did not require credit loss reserves. The
average recorded investment in impaired commercial loans during 1995 was
approximately $142.0 million. The Company recorded $4.1 million of interest
income on impaired commercial loans in 1995. Had the loans been performing in
accordance with their original terms, interest income in 1995 would have been
$12.9 million higher. There were no commitments at December 31, 1995 to lend
additional funds to borrowers whose loans were renegotiated.
At December 31, 1994 the Company had nonaccrual commercial loans of $100.2
million and renegotiated commercial loans of $41.8 million. The Company recorded
$1.5 million of interest income on such loans in 1994. Interest income that
would have been recorded in 1994 had these loans been performing in accordance
with their original terms was $16.9 million. At December 31, 1994 there were $.5
million of commitments to lend additional funds to borrowers whose loans were
renegotiated.
For further information on nonperforming assets, see page 10 of
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
F-13
<PAGE> 30
A rollforward of the Company's credit loss reserves for the years ended
December 31, 1995, 1994 and 1993 is shown below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------
1995 1994 1993
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Credit loss reserves for owned receivables at January 1.......... $ 413.7 $ 452.7 $ 423.3
Provision for credit losses-owned receivables.................... 511.0 435.9 494.5
Owned receivables charged off.................................... (555.3) (517.8) (567.7)
Recoveries on owned receivables.................................. 82.0 78.1 68.7
Credit loss reserves on receivables purchased, net............... 75.0 (30.6) 1.9
Other, net (1)................................................... 5.4 (4.6) 32.0
------- ------- -------
Total credit loss reserves for owned receivables at December
31........................................................ 531.8 413.7 452.7
------- ------- -------
Credit loss reserves for receivables serviced with limited
recourse at January 1.......................................... 181.7 134.5 160.9
Provision for credit losses-receivables serviced with limited
recourse....................................................... 322.3 187.9 176.0
Receivables charged off.......................................... (181.1) (150.0) (176.3)
Recoveries....................................................... 8.5 5.6 4.7
Other, net (1)................................................... 2.8 3.7 (30.8)
------- ------- -------
Total credit loss reserves for receivables serviced with
limited recourse at December 31........................... 334.2 181.7 134.5
------- ------- -------
Total credit loss reserves for managed receivables at
December 31............................................... $ 866.0 $ 595.4 $ 587.2
======= ======= =======
</TABLE>
- ---------------
(1) The 1993 amount includes the transfer, from serviced with limited recourse
to owned, of credit loss reserves associated with the return of receivables
to the owned portfolio upon the culmination of a securitization
transaction.
F-14
<PAGE> 31
4. COMMERCIAL PAPER, BANK AND OTHER BORROWINGS
<TABLE>
<CAPTION>
AT DECEMBER 31
--------------------------------------
BANK AND
COMMERCIAL OTHER
PAPER BORROWINGS TOTAL
---------- ---------- --------
(ALL DOLLAR AMOUNTS ARE STATED IN
MILLIONS)
<S> <C> <C> <C>
1995
Balance............................................ $4,042.4 $ 111.8 $4,154.2
Highest aggregate month-end balance................ -- -- 4,733.8
Average borrowings................................. 4,244.2 126.5 4,370.7
Weighted average interest rate:
At year end...................................... 5.8% 6.0% 5.8%
Paid during year................................. 5.9 6.0 5.9
1994
Balance............................................ $3,268.4 $ 532.2 $3,800.6
Highest aggregate month-end balance................ -- -- 5,053.2
Average borrowings................................. 3,964.4 487.1 4,451.5
Weighted average interest rate:
At year end...................................... 6.2% 6.0% 6.2%
Paid during year................................. 4.4 6.9 4.6
1993
Balance............................................ $3,731.7 $ 590.1 $4,321.8
Highest aggregate month-end balance................ -- -- 4,789.6
Average borrowings................................. 3,459.5 598.7 4,058.2
Weighted average interest rate:
At year end...................................... 3.5% 4.0% 3.6%
Paid during year................................. 3.5 4.8 3.7
</TABLE>
Interest expense for commercial paper, bank and other borrowings totaled
$259.6, $206.4 and $151.0 million for 1995, 1994 and 1993, respectively.
The Company maintains various bank credit agreements primarily to support
commercial paper borrowings. At December 31, 1995 the Company had total bank
credit agreements of $3.9 billion, all of which were unused. Formal credit lines
are reviewed annually, and revolving credit agreements expire at various dates
from 1996 to 2000. Borrowings under credit agreements generally are available at
the prime rate or at a surcharge over the London Interbank Offered Rate (LIBOR).
Annual commitment fee requirements to support availability of credit agreements
at December 31, 1995 totaled $3.3 million.
F-15
<PAGE> 32
5. SENIOR AND SENIOR SUBORDINATED DEBT (WITH ORIGINAL MATURITIES OVER ONE YEAR)
<TABLE>
<CAPTION>
AT DECEMBER 31
---------------------
1995 1994
-------- --------
(ALL DOLLAR AMOUNTS
ARE STATED IN
MILLIONS)
<S> <C> <C>
SENIOR DEBT
4.00% to 7.49%; due 1996 to 2009.............................. $2,315.7 $1,365.5
7.50% to 7.99%; due 1996 to 2007.............................. 1,709.2 1,324.1
8.00% to 8.99%; due 1996 to 2005.............................. 1,294.1 1,085.6
9.00% to 9.99%; due 1996 to 2001.............................. 282.3 608.8
10.00% and greater; due 1996 to 2001.......................... 38.3 38.3
Variable interest rate debt; 3.26% to 7.00%; due 1996 to
2015....................................................... 2,111.5 2,870.5
SENIOR SUBORDINATED DEBT
9.00% to 9.63%; due 2000 to 2001.............................. 400.0 400.0
10.13%; due 1996.............................................. 100.0 100.0
Unamortized premium (discount).................................. 6.4 (64.5)
-------- --------
Total senior and senior subordinated debt.................. $8,257.5 $7,728.3
======= =======
</TABLE>
Weighted average interest rates, excluding the impact of interest rate swap
agreements, were 7.2 percent at December 31, 1995 and 7.1 percent at both
December 31, 1994 and 1993. Interest expense for senior and senior subordinated
debt, including the impact of interest rate swap agreements, was $565.0, $411.8
and $359.2 million for 1995, 1994 and 1993, respectively.
Maturities of senior and senior subordinated debt were:
<TABLE>
<CAPTION>
AT DECEMBER 31,
1995
---------------
(IN MILLIONS)
<S> <C>
1996........................................ $ 2,044.1
1997........................................ 1,244.8
1998........................................ 847.3
1999........................................ 784.9
2000........................................ 778.7
Thereafter.................................. 2,557.7
--------
Total..................................... $ 8,257.5
========
</TABLE>
At December 31, 1995 there were no significant restrictions on retained
earnings in any of HFC's various indentures and agreements. Cash dividends or
advances to HFC by certain of its subsidiaries are limited by government or
statutory regulation. At December 31, 1995 approximately $.7 billion of
consolidated net assets were so restricted.
6. DERIVATIVE FINANCIAL INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK
In connection with its asset/liability management program and in the normal
course of business, the Company enters into various transactions involving
derivative and other off-balance sheet financial instruments. These instruments
are primarily used to manage the Company's exposure to fluctuations in interest
rates and foreign exchange rates. The Company does not serve as a financial
intermediary to make markets in any derivative financial instruments. For
further information on the Company's strategies for managing interest rate and
foreign exchange rate risk, see Liquidity and Capital Resources on pages 11 and
12.
The financial instruments used by the Company, which include interest rate
contracts and foreign exchange rate contracts, as well as off-balance sheet
financial instruments such as commitments to extend credit, financial guarantees
and recourse obligations, have varying degrees of credit risk and/or market
risk.
F-16
<PAGE> 33
Credit Risk. Credit risk is the possibility that a loss may occur because
the counterparty to a transaction fails to perform according to the terms of the
contract. The Company's exposure to credit risk related to interest rate swaps,
cap and floor transactions, forward and futures contracts and options is the
amount of uncollected interest or premium related to these instruments. These
interest rate related instruments are generally expressed in terms of notional
principal or contract amounts which are much larger than the amounts potentially
at risk for nonpayment by counterparties. The Company controls the credit risk
of its off-balance sheet financial instruments through established credit
approvals, risk control limits and ongoing monitoring procedures. The Company
has never experienced nonperformance by any derivative instrument counterparty.
The Company's exposure to credit loss under commitments to extend credit,
financial guarantees and recourse obligations is represented by the contract
amount. The Company's credit quality and collateral policies for commitments and
guarantees are the same as those for receivables that are recorded on the
balance sheet.
Market Risk. Market risk is the possibility that a change in interest
rates or foreign exchange rates will cause a financial instrument to decrease in
value or become more costly to settle. The Company mitigates this risk by
establishing limits for positions and other controls.
INTEREST RATE AND FOREIGN EXCHANGE CONTRACTS
The following tables summarize the activity in interest rate and foreign
exchange contracts for the years 1995, 1994 and 1993:
HEDGING/SYNTHETIC ALTERATION INSTRUMENTS
<TABLE>
<CAPTION>
NON EXCHANGE TRADED
EXCHANGE TRADED --------------------------------------------------------
--------------------------------------------- INTEREST
RATE
INTEREST RATE FOREIGN EXCHANGE FORWARD
FUTURES CONTRACTS OPTIONS INTEREST RATE CONTRACTS CONTRACTS OTHER RISK
--------------------- --------------------- RATE ------------------- --------- MANAGEMENT
PURCHASED SOLD PURCHASED WRITTEN SWAPS PURCHASED SOLD PURCHASED INSTRUMENTS
--------- --------- --------- --------- --------- --------- ------- --------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Notional amount, 1992... $ 170.0 -- -- -- $ 8,292.6 $ 27.5 $(108.5) -- $ 419.9
New contracts........... 5,780.5 $(3,200.5) $ 2,084.7 $(2,363.5) 8,453.5 881.0 (882.4) -- 893.9
Matured or expired
contracts............. (2,750.0) -- (1,236.2) 1,515.9 (2,756.5) (37.7) 31.8 -- (115.0)
Terminated contracts.... (475.0) 475.0 -- -- (275.0) (60.0) 60.0 -- --
In-substance maturities
(1)................... (2,725.5) 2,725.5 (818.9) 807.6 -- (807.4) 807.4 -- --
--------- --------- --------- --------- --------- --------- ------- --------- ----------
Notional amount, 1993... -- -- $ 29.6 $ (40.0) $13,714.6 $ 3.4 $ (91.7) -- $ 1,198.8
======== ======== ======== ======== ======== ======== ======= ======== ==========
Fair value, 1993 (2).... -- -- -- -- $ 220.8 -- $ .1 -- $ 57.7
--------- --------- --------- --------- --------- --------- ------- --------- ----------
Notional amount, 1993... -- -- $ 29.6 $ (40.0) $13,714.6 $ 3.4 $ (91.7) -- $ 1,198.8
New contracts........... $ 8,009.9 $(8,799.2) 8,867.9 (5,707.5) 7,916.3 1,026.6 (949.3) $ 180.0 372.9
Matured or expired
contracts............. -- -- (3,150.0) -- (5,481.1) -- -- -- (1,043.9)
Terminated contracts.... (63.5) 759.8 -- -- (2,075.0) (46.5) 43.9 -- (130.5)
In-substance maturities
(1)................... (7,946.4) 7,946.4 (5,747.5) 5,747.5 -- (983.5) 928.1 -- --
--------- --------- --------- --------- --------- --------- ------- --------- ----------
Notional amount, 1994... -- $ (93.0) -- -- $14,074.8 -- $ (69.0) $ 180.0 $ 397.3
======== ======== ======== ======== ======== ======== ======= ======== ==========
Fair value, 1994 (2).... -- $ .8 -- -- $ (341.5) -- -- $ .1 $ 90.0
--------- --------- --------- --------- --------- --------- ------- --------- ----------
Notional amount, 1994... -- $ (93.0) -- -- $14,074.8 -- $ (69.0) $ 180.0 $ 397.3
New contracts........... $ 2,003.0 (1,850.0) $ 300.0 $ (300.0) 790.0 $ 809.9 (885.2) -- --
Matured or expired
contracts............. -- 290.0 -- -- (4,932.8) (36.7) 40.9 -- --
Terminated contracts.... -- -- -- -- (4,275.3) -- -- (180.0) --
In-substance maturities
(1)................... (1,653.0) 1,653.0 (300.0) 300.0 -- (773.2) 913.3 -- --
--------- --------- --------- --------- --------- --------- ------- --------- ----------
Notional amount, 1995... $ 350.0 -- -- -- $ 5,656.7 -- -- -- $ 397.3
======== ======== ======== ======== ======== ======== ======= ======== ==========
Fair value, 1995 (2).... $ .1 -- -- -- $ 136.6 -- -- -- $ 81.0
--------- --------- --------- --------- --------- --------- ------- --------- ----------
</TABLE>
F-17
<PAGE> 34
TRADING INSTRUMENTS (3)
<TABLE>
<CAPTION>
EXCHANGE TRADED
---------------------------------------------- NON EXCHANGE TRADED
-------------------------------------------
INTEREST RATE INTEREST RATE
FUTURES CONTRACTS OPTIONS FORWARD CONTRACTS OTHER RISK
--------------------- ---------------------- INTEREST ------------------- MANAGEMENT
PURCHASED SOLD PURCHASED WRITTEN RATE SWAPS PURCHASED SOLD INSTRUMENTS
--------- --------- --------- ---------- ---------- --------- ------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Notional amount, 1992... $ 2,449.2 $(2,847.0) $ 2,688.1 $(10,605.6) $ 100.0 $ 261.0 $(261.0) $ 800.0
Net change.............. (2,117.2) 1,970.0 7,020.9 (5,840.5) -- (261.0) 261.0 (300.0)
--------- --------- --------- ---------- ------- ------- ------- -------
Notional amount, 1993... $ 332.0 $ (877.0) $ 9,709.0 $(16,446.1) $ 100.0 -- -- $ 500.0
========= ========= ========= ========== ======= ======= ======= =======
Fair value, 1993 (2).... $ 45.1 $ (45.8) $ 2.8 $ (2.0) $ 0.6 -- -- --
--------- --------- --------- ---------- ------- ------- ------- -------
Notional amount, 1993... $ 332.0 $ (877.0) $ 9,709.0 $(16,446.1) $ 100.0 -- -- $ 500.0
Net change.............. 2,660.0 257.0 (9,709.0) 15,981.1 (100.0) -- -- (700.0)
--------- --------- --------- ---------- ------- ------- ------- -------
Notional amount, 1994... $ 2,992.0 $ (620.0) -- $ (465.0) -- -- -- $ (200.0)
========= ========= ========= ========== ======= ======= ======= =======
Fair value, 1994 (2).... $ (2.2) $ 1.1 -- $ 1.4 -- -- -- $ (.3)
--------- --------- --------- ---------- ------- ------- ------- -------
Average fair value,
1994.................. (2.8) 2.7 $ 2.8 (2.5) $ (1.0) -- -- (.1)
--------- --------- --------- ---------- ------- ------- ------- -------
Notional amount, 1994... $ 2,992.0 $ (620.0) -- $ (465.0) -- -- -- (200.0)
Net change.............. (2,992.0) 620.0 -- 465.0 -- -- -- 200.0
--------- --------- --------- ---------- ------- ------- ------- -------
Notional amount, 1995... -- -- -- -- -- -- -- --
========= ========= ========= ========== ======= ======= ======= =======
Fair value, 1995 (2).... -- -- -- -- -- -- -- --
--------- --------- --------- ---------- ------- ------- ------- -------
Average fair value,
1995.................. -- -- -- -- -- -- -- --
--------- --------- --------- ---------- ------- ------- ------- -------
</TABLE>
- ---------------
(1) Represent contracts terminated as the market execution technique of closing
the transaction either (a) just prior to maturity to avoid delivery of the
underlying instrument, or (b) at the maturity of the underlying item being
hedged.
(2) (Bracketed) unbracketed amounts represent amounts to be (paid) received by
the Company had these positions been closed out at the respective balance
sheet date. Bracketed amounts do not necessarily represent risk of loss for
hedging instruments, as the fair value of the hedging instrument and the
items being hedged must be evaluated together. See Note 8, "Fair Value of
Financial Instruments" for further discussion of the relationship between
the fair value of the Company's assets, liabilities and off-balance sheet
financial instruments.
(3) The results of trading activities were immaterial to the financial results
of the Company for 1995, 1994 and 1993. In late 1994, the Company
discontinued its trading activities.
Interest rate swaps are contractual agreements between two counterparties
for the exchange of periodic interest payments generally based on a notional
principal amount and agreed-upon fixed or floating rates. The Company primarily
enters into interest rate swap transactions to synthetically alter balance sheet
items. These transactions are specifically designated to a particular
asset/liability, off-balance sheet item or anticipated transaction of a similar
characteristic. Specific assets or liabilities may consist of groups of
individually small
F-18
<PAGE> 35
dollar homogeneous assets or liabilities of similar economic characteristics.
Credit and market risk exists with respect to these instruments. The following
table reflects the items so altered at December 31, 1995:
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
Investment securities................................................... $ 60.0
Receivables:
Home equity........................................................... 300.0
Visa/MasterCard....................................................... 800.0
Merchant participation................................................ 250.0
Other unsecured....................................................... 125.0
--------
Total owned receivables.......................................... 1,475.0
Commercial paper, bank and other borrowings............................. 879.2
Senior and senior subordinated debt..................................... 2,930.6
Receivables serviced with limited recourse.............................. 311.9
--------
Total items synthetically altered with interest rate swaps....... $ 5,656.7
========
</TABLE>
- ---------------
Note: In all instances, the notional amount is not greater than the carrying
value of the related asset/liability or off-balance sheet item.
The Company manages its exposure to interest rate risk primarily through
the use of interest rate swaps. These swaps synthetically alter the interest
rate risk inherent in balance sheet assets, liabilities or off-balance sheet
items. The majority of the Company's interest rate swaps are used to convert
floating rate assets to fixed rate, fixed rate debt to floating rate, or
floating rate assets or debt from one floating rate index to another.
Occasionally, interest rate swaps are used to convert fixed rate assets to a
floating rate, or floating rate debt to fixed rate. Interest rate swaps are also
used to synthetically alter interest rate characteristics on certain receivables
that are sold and serviced with limited recourse. These off-balance sheet items
expose the Company to the same interest rate risk as on-balance sheet items.
Interest rate swaps are used to synthetically alter the interest rate provisions
of the securitization transaction whereby the underlying receivables pay a fixed
(floating) rate and the pass-through rate to the investor is floating (fixed).
Further, in other transactions the underlying receivables reprice on one index
while the pass-through rate reprices on another index. See Note 3, "Receivables"
for additional information on securitizations and sales of receivables.
F-19
<PAGE> 36
The following table summarizes the maturities and related weighted average
receive/pay rates of interest rate swaps outstanding at December 31, 1995:
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000 2001 THEREAFTER TOTAL
-------- -------- ------ -------- ------ ------ ---------- --------
(ALL DOLLAR AMOUNTS ARE STATED IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pay a fixed rate/receive a
floating rate:
Notional value............. $ 50.0 -- -- -- -- -- -- $ 50.0
Weighted average receive
rate..................... 5.88% -- -- -- -- -- -- 5.88%
Weighted average pay
rate..................... 6.90 -- -- -- -- -- -- 6.90
Pay a floating rate/receive a
fixed rate:
Notional value............. $ 577.3 $ 793.6 $182.4 $1,083.0 $160.0 $195.0 $1,070.0 $4,061.3
Weighted average receive
rate..................... 5.65% 6.15% 4.91% 6.92% 6.53% 6.89% 6.90% 6.48%
Weighted average pay
rate..................... 5.53 5.78 5.83 5.80 5.70 5.80 5.87 5.77
Pay a floating rate/receive a
different floating rate:
Notional value............. $ 546.7 $ 348.7 $ 15.0 $ 635.0 -- -- -- $1,545.4
Weighted average receive
rate..................... 5.49% 5.63% 5.72% 6.49% -- -- -- 5.94%
Weighted average pay
rate..................... 6.15 5.93 6.06 6.19 -- -- -- 6.12
-------- -------- ------ -------- ------ ------ -------- --------
Total notional value......... $1,174.0 $1,142.3 $197.4 $1,718.0 $160.0 $195.0 $1,070.0 $5,656.7
======== ======== ====== ======== ====== ====== ======== ========
Total weighted average rates
on swaps:
Receive rate................. 5.59% 5.99% 4.98% 6.76% 6.53% 6.89% 6.90% 6.32%
Pay rate..................... 5.88 5.83 5.85 5.94 5.70 5.80 5.87 5.88
</TABLE>
The floating rates paid or received by the Company are based on spot rates
from independent market sources for the index contained in each interest rate
swap contract, which generally are based on either 1-, 3-or 6-month LIBOR. These
current floating rates are different than the floating rates in effect when the
contracts were initiated. Changes in spot rates impact the variable rate
information disclosed above. However, these changes in spot rates also impact
the interest rate on the underlying assets or liabilities. Hedging/synthetic
alteration instruments are used by the Company to manage the volatility of net
interest margin resulting from changes in interest rates on the underlying
hedged/synthetically altered items. These instruments had a negligible impact on
net interest margin in 1995. Net interest margin would have declined by 71 and
160 basis points in 1994 and 1993, respectively, had these instruments not been
utilized.
Forwards and futures are agreements between two parties, committing one to
sell and the other to buy a specific quantity of an instrument on some future
date. The parties agree to buy or sell at a specified price in the future, and
their profit or loss is determined by the difference between the arranged price
and the level of the spot price when the contract is settled. The Company has
both interest rate and foreign exchange forward contracts and interest rate
futures contracts. Foreign exchange rate contracts are utilized by the Company
to reduce exposure in its foreign operations to fluctuations in exchange rates.
Interest rate forward and futures contracts are used to hedge resets of interest
rates on the Company's floating rate assets and liabilities. The Company's
exposure to credit risk for futures is limited, as these contracts are traded on
organized exchanges. Each day, changes in contract values are settled in cash.
In contrast, forward contracts have credit risk relating to the performance of
the counterparty. These instruments also are subject to market risk. Cash
requirements for forward contracts include the receipt or payment of cash for
the sale or purchase of the instrument.
Purchased options grant the purchaser the right, but not the obligation, to
either purchase or sell a financial instrument at a specified price within a
specified period. The seller of the option has written a contract which creates
an obligation to either sell or purchase the financial instrument at the
agreed-upon price if, and when, the purchaser exercises the option.
Other risk management instruments consist of caps and floors and foreign
currency swaps. Caps and floors written expose the Company to market risk but
not to credit risk. Credit and market risk associated with
F-20
<PAGE> 37
caps and floors purchased are limited to the premium paid which is recorded on
the balance sheets in other assets.
Deferred gains of $65.9 and $8.5 million and deferred losses of $26.8 and
$53.0 million from hedging/synthetic alteration instruments were recorded on the
balance sheets at December 31, 1995 and 1994, respectively. The weighted average
amortization period associated with the deferred gains was 7.6 and 3.4 years at
December 31, 1995 and 1994, respectively. The weighted average amortization
period for the deferred losses was 1.8 and 3.4 years at December 31, 1995 and
1994, respectively.
At December 31, 1995 the accrued interest, unamortized premium and other
assets recorded for agreements which would be written off should all related
counterparties fail to meet the terms of their contracts was $34.4 million.
COMMITMENTS AND GUARANTEES
The Company enters into various commitments and guarantees to meet the
financing needs of its customers. However, the Company expects a substantial
portion of these agreements to expire unexercised, and as a result, the amounts
below do not necessarily represent future cash requirements.
The Company's significant commitments and guarantees consisted of the
following:
<TABLE>
<CAPTION>
AT DECEMBER 31
------------------------
1995 1994
---------- ----------
(IN MILLIONS)
<S> <C> <C>
Visa/MasterCard and private-label credit cards........ $ 44,063.5 $ 31,336.1
Other consumer lines of credit........................ 1,281.0 2,544.2
Other loan commitments and guarantees................. 116.6 76.5
</TABLE>
Commitments to extend credit to consumers represent the unused credit
limits on Visa/MasterCard and private-label credit cards and on other lines of
credit. Commitments on Visa/MasterCard and private-label credit cards are
cancelable at any time. The Company does not require collateral to secure credit
card agreements. Other consumer lines of credit include home equity lines of
credit, which are secured by residential real estate, and other unsecured lines
of credit. Commitments on these lines of credit generally are cancelable by the
Company when a determination is made that a borrower may not be able to meet the
terms of the credit agreement.
Other loan commitments include commitments to fund commercial loans and
letters of credit, and guarantees for the payment of principal and interest on
municipal industrial development bonds. Other loan commitments at December 31,
1995 also included commitments to sell home equity loans to an affiliated bank.
CONCENTRATIONS OF CREDIT RISK
A concentration of credit risk is defined as a significant credit exposure
with an individual or group engaged in similar activities or affected similarly
by economic conditions.
Because the Company primarily lends to consumers, it does not have
receivables from any industry group that equal or exceed 10 percent of total
managed receivables at December 31, 1995 and 1994. The Company lends nationwide;
the following geographic areas comprised more than 10 percent of total managed
domestic receivables at December 31, 1995: California--23 percent; Midwest (IL,
IN, IA, KS, MI, MN, MO, NE, ND, OH, SD, WI)--22 percent; Middle Atlantic (DE,
DC, MD, NJ, PA, VA, WV)--15 percent; Northeast (CT, ME, MA, NH, NY, RI, VT)--12
percent; and Southeast (AL, FL, GA, KY, MS, NC, SC, TN)--14 percent.
F-21
<PAGE> 38
7. PREFERRED STOCK
<TABLE>
<CAPTION>
AT DECEMBER 31
----------------
1995 1994
------ ------
(ALL DOLLAR
AMOUNTS ARE
STATED IN
MILLIONS)
<S> <C> <C>
7.25% term cumulative preferred, Series 1992-A,
1,000,000 depositary shares (1)........................................... $100.0 $100.0
</TABLE>
- ---------------
(1) Depositary share represents 1/3,000 share of preferred stock.
The term cumulative preferred stock is non-voting and has a dividend rate
of 7.25 percent, is not redeemable at the option of the Company prior to the
mandatory redemption date of August 15, 1997, and has a liquidation value of
$300,000 per share.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has estimated the fair value of its financial instruments in
accordance with Statement of Financial Accounting Standards No. 107,
"Disclosures About Fair Value of Financial Instruments" ("FAS No. 107").
Financial instruments include cash, receivables, investments, debt, insurance
reserves related to periodic payment annuities and off-balance sheet financial
instruments. Financial instruments specifically exclude leases and other
insurance reserves, as required by FAS No. 107. Additionally, a number of other
assets recorded on the balance sheets (such as acquired credit card
relationships) and other intangible assets not recorded on the balance sheet
(such as the value of consumer lending relationships for originated receivables
and the franchise values of the Company's business units) are not considered
financial instruments and, accordingly, are not valued for purposes of this
disclosure. The Company believes there is substantial value associated with
these assets based on current market conditions and historical experience.
Accordingly, the estimated fair value of financial instruments, as disclosed,
does not fully represent the entire value, nor the changes in the entire value,
of the Company.
Approximately 38 percent in 1995 and 30 percent in 1994 of the fair value
of financial instruments disclosed was determined using quoted market prices.
Because no actively traded market exists, however, for a significant portion of
the Company's financial instruments, fair values for items lacking a quoted
market price were estimated by discounting estimated future cash flows at
estimated current market discount rates. Assumptions used to estimate future
cash flows are consistent with management's assessments regarding ultimate
collectibility of assets and related interest and with estimates of product
lives and repricing characteristics used in the Company's asset/liability
management process. All assumptions are based on historical experience adjusted
for future expectations. Assumptions used to determine fair values for financial
instruments for which no active market exists are inherently judgmental, and
changes in these assumptions could significantly affect fair value calculations.
F-22
<PAGE> 39
The following is a summary of the carrying value and estimated fair value
of the Company's financial instruments:
<TABLE>
<CAPTION>
AT DECEMBER 31
--------------------------------------------------------------------------
1995 1994
----------------------------------- -----------------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
VALUE VALUE DIFFERENCE VALUE VALUE DIFFERENCE
-------- --------- ---------- -------- --------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Cash........................... $ 155 $ 155 -- $ 97 $ 97 --
Investment securities.......... 3,233 3,233 -- 7,250 7,206 $ (44)
Receivables.................... 12,665 13,009 $ 344 10,476 10,730 254
Assets pending sale............ -- -- -- 398 398 --
--------- --------- ------ --------- --------- ------
Subtotal..................... 16,053 16,397 344 18,221 18,431 210
--------- --------- ------ --------- --------- ------
Commercial paper, bank and
other borrowings............. (4,154) (4,154) -- (3,801) (3,801) --
Senior and senior subordinated
debt......................... (8,258) (8,770) (512) (7,728) (7,665) 63
Insurance reserves............. (2,213) (2,346) (133) (6,643) (6,683) (40)
--------- --------- ------ --------- --------- ------
Subtotal..................... (14,625) (15,270) (645) (18,172) (18,149) 23
--------- --------- ------ --------- --------- ------
Interest rate and foreign
exchange contracts........... 21 218 197 51 (251) (302)
Commitments to extend credit
and guarantees............... -- 40 40 -- 35 35
--------- --------- ------ --------- --------- ------
Subtotal..................... 21 258 237 51 (216) (267)
--------- --------- ------ --------- --------- ------
Total........................ $ 1,449 $ 1,385 $ (64) $ 100 $ 66 $ (34)
========= ========= ====== ========= ========= ======
</TABLE>
The following methods and assumptions were used to estimate the fair value
of the Company's financial instruments:
Cash: The carrying value approximates fair value for this instrument due to
its liquid nature.
Investment securities: Quoted market prices were used to determine fair
value for investment securities.
Receivables: The fair value of adjustable rate consumer receivables was
determined to approximate existing carrying value because interest rates on
these receivables adjust with changing market interest rates. The fair value of
fixed rate consumer receivables was estimated by discounting future expected
cash flows at interest rates approximating those offered by the Company on such
products at the respective valuation dates. This approach to estimating fair
value for fixed rate receivables results in a disclosed fair value that is less
than amounts the Company believes could be currently realizable on a sale of
these receivables. These receivables are relatively insensitive to changes in
overall market interest rates and therefore have additional value compared to
alternative uses of funds. The fair value of commercial receivables was
determined by discounting estimated future cash flows at estimated market
interest rates.
The fair value of consumer receivables included an estimate, on a present
value basis, of future excess servicing cash flows associated with
securitizations and sales of certain home equity, Visa/MasterCard, merchant
participation and other unsecured receivables.
Assets pending sale: In the fourth quarter of 1994 the Company entered into
an agreement to sell these assets at net book value to a third party.
Accordingly, estimated fair value was the carrying value at December 31, 1994.
Commercial paper, bank and other borrowings: The fair value of these
instruments was determined to approximate existing carrying value because
interest rates on these instruments adjust with changes in market interest rates
due to their short-term maturity or repricing characteristics.
F-23
<PAGE> 40
Senior and senior subordinated debt: Quoted market prices where available
were used to determine fair value. For those instruments for which quoted market
prices were not available, the estimated fair value was computed by discounting
future expected cash flows at interest rates offered for similar types of debt
instruments.
Insurance reserves: The fair value of insurance reserves for periodic
payment annuities was estimated by discounting future expected cash flows at
estimated market interest rates at December 31, 1995 and 1994. The fair value of
other insurance reserves is not required to be determined in accordance with FAS
No. 107.
Interest rate and foreign exchange contracts: Where practical, quoted
market prices were used to determine fair value of these instruments. For non
exchange traded contracts, fair value was determined through the use of accepted
and established valuation methods (including input from independent third
parties) which consider the terms of the contracts and market expectations on
the valuation date for forward interest rates (for interest rate contracts) or
forward foreign currency exchange rates (for foreign exchange contracts). See
Note 6, "Derivative Financial Instruments and Other Financial Instruments with
Off-Balance Sheet Risk" for a discussion of the nature of these items.
Commitments to extend credit and guarantees: These commitments were valued
by considering the Company's relationship with the counterparty, the
creditworthiness of the counterparty and the difference between committed and
current interest rates.
9. LEASES
The Company leases certain offices, buildings and equipment for periods of
up to 28 years with various renewal options. The majority of such leases are
noncancelable operating leases. Net rental expense under operating leases was
$36.4, $19.2 and $26.6 million for 1995, 1994 and 1993, respectively.
Future net minimum lease commitments under noncancelable operating lease
arrangements were:
<TABLE>
<CAPTION>
AT DECEMBER 31,
1995
---------------
(IN MILLIONS)
<S> <C>
1996........................................................... $ 36.5
1997........................................................... 30.6
1998........................................................... 24.8
1999........................................................... 17.1
2000........................................................... 11.9
Thereafter..................................................... 70.4
------
Net minimum lease commitments.................................. $ 191.3
======
</TABLE>
10. EMPLOYEE BENEFIT PLANS
The Company and its U.S. subsidiaries participate in Household
International's Retirement Income Plan ("RIP"), which covers substantially all
U.S. full-time employees. No separate actuarial valuation has been made for the
Company's participation in RIP. The fair value of plan assets in RIP exceeded
Household International's projected benefit obligation by $239.1 and $199.3
million at December 31, 1995 and 1994, respectively. The 1995 and 1994 projected
benefit obligations for RIP were determined using an assumed weighted average
discount rate of 7.25 and 8.25 percent, respectively; an assumed compensation
increase of 3.75 and 4.75 percent, respectively; and an assumed weighted average
long-term rate of return on plan assets of 10.00 percent. At December 31, 1995
and 1994, the Company's estimated share of prepaid pension cost was $121.3 and
$121.2 million, respectively. Plan benefits are based primarily on years of
service. The Company's share of total pension income due to the overfunded
status of RIP was $8.2, $8.0 and $11.4 million for 1995, 1994 and 1993,
respectively.
F-24
<PAGE> 41
The Company participates in Household International's defined contribution
plan where each participant's contribution is matched by the Company up to a
maximum of 6 percent of the participant's compensation. For 1995, 1994 and 1993
the Company's costs totaled $6.4, $9.6 and $9.2 million, respectively.
The Company also participates in Household International's plans which
provide medical, dental and life insurance benefits to retirees and eligible
dependents. The plans are funded on a pay-as-you-go basis and cover
substantially all employees who meet certain age and vested service
requirements. Household International has instituted dollar limits on its
payments under the plans to control the cost of future medical benefits.
Effective January 1, 1993 Household International adopted Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" ("FAS No. 106"). FAS No. 106
requires the recognition of the expected postretirement costs on an accrual
basis, similar to pension accounting. The expected cost of postretirement
benefits is required to be recognized over the employees' years of service with
the Company instead of the period in which the benefits are paid. Household
International is recognizing the transition obligation, which represents the
unfunded and unrecognized accumulated postretirement benefit obligation at that
date, over 20 years.
While no separate actuarial valuation has been made for the Company's
participation in Household International's plans for postretirement medical,
dental and life benefits, its share of the liability and expense has been
estimated. Household International's accumulated postretirement benefit
obligation was $102.1 and $123.7 million at December 31, 1995 and 1994,
respectively. The Company's estimated share of Household International's accrued
postretirement benefit obligation was $37.8 and $25.7 million at December 31,
1995 and 1994, respectively. In addition, the Company's estimated share of
postretirement benefit expense recognized in 1995 and 1994 was $14.0 and $15.8
million, respectively.
In 1994, the Company established a special purpose corporation to hold
certain investments designated as available to satisfy its postretirement
benefit obligations. These assets, with a carrying value of $64.3 and $63.0
million at December 31, 1995 and 1994, respectively, remain general assets of
the Company and have not been used to reduce the accumulated postretirement
benefit obligation.
Household International's accumulated postretirement benefit obligation at
December 31, 1995 and 1994 was determined using an assumed weighted average
discount rate of 7.25 and 8.50 percent, respectively, and an assumed annual
compensation increase of 3.75 and 4.75 percent, respectively. A 12.0 and 14.2
percent annual rate of increase in the gross cost of covered health care
benefits is assumed for 1996 and 1995. This rate of increase is assumed to
decline by 1 percent in each year after 1996.
The health care cost trend rate assumption has an effect on the amounts
reported. To illustrate, increasing the assumed health care cost trend rate by 1
percent would have increased the Company's share of the 1995 and 1994 net
periodic postretirement benefit cost by $.6 and $.7 million, respectively, and
its share of the accumulated postretirement benefit obligation at December 31,
1995 and 1994 by $6.4 and $6.5 million, respectively. A 1 percentage point
increase would have increased Household International's accumulated
postretirement benefit obligation at December 31, 1995 and 1994 by $7.3 and $8.5
million, respectively.
11. INCOME TAXES
Total income taxes were allocated as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1995 1994 1993
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Provision for income taxes related to operations.................. $175.4 $103.6 $107.4
Income taxes related to adjustments included in common
shareholder's equity:
Unrealized gain (loss) on investments, net...................... 92.6 (64.4) 19.6
Foreign currency translation adjustments........................ -- (4.4) .2
------ ------ ------
Total........................................................ $268.0 $ 34.8 $127.2
====== ====== ======
</TABLE>
F-25
<PAGE> 42
Provisions for income taxes related to operations were:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1995 1994 1993
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
CURRENT
United States................................................... $147.6 $ 97.9 $105.8
Foreign......................................................... 1.0 1.3 .6
------ ------ ------
Total current................................................ 148.6 99.2 106.4
------ ------ ------
DEFERRED
United States................................................... 26.8 2.8 10.3
Foreign......................................................... -- 1.6 (9.3)
------ ------ ------
Total deferred............................................... 26.8 4.4 1.0
------ ------ ------
Total income taxes........................................... $175.4 $103.6 $107.4
====== ====== ======
</TABLE>
The significant components of deferred income tax provisions attributable
to income from operations were:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
1995 1994 1993
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Deferred income tax provision (exclusive of the effects of other
components
listed below)........................................................ $26.8 $(2.4) $ 3.6
Adjustment of deferred tax assets and liabilities for enacted changes
in tax rates......................................................... -- -- 4.4
Operating loss carryforwards........................................... -- 6.4 1.2
Investment tax credits................................................. -- .4 .5
Adjustment of valuation allowance...................................... -- -- (8.7)
----- ----- -----
Deferred income tax provision..................................... $26.8 $ 4.4 $ 1.0
===== ===== =====
</TABLE>
Income before income taxes from foreign operations was $2.7, $7.8 and $1.0
million in 1995, 1994 and 1993, respectively.
Effective tax rates are analyzed as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate........................ 35.0% 35.0% 35.0%
Increase (decrease) in rate resulting from:
Recapture of life insurance policyholders' surplus
account balance..................................... 6.7 -- --
State and local taxes, net of federal benefit.......... 2.5 1.4 1.7
Amortization of intangible assets...................... 1.4 2.0 .3
Leveraged lease tax benefits........................... (3.3) (4.3) (4.2)
Noncurrent tax requirement............................. (.6) (1.3) 2.0
Foreign loss carryforwards............................. -- (.4) (1.8)
Dividends received deduction applicable to term
preferred stocks.................................... (1.1) (1.5) (1.9)
Sale of foreign subsidiary............................. -- (2.5) --
Other.................................................. (.5) .4 1.7
---- ---- ----
Effective tax rate.................................. 40.1% 28.8% 32.8%
==== ==== ====
</TABLE>
F-26
<PAGE> 43
Temporary differences which gave rise to a significant portion of deferred
tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31
-------------------
1995 1994
------ ------
(IN MILLIONS)
<S> <C> <C>
DEFERRED TAX LIABILITIES
Leveraged lease transactions, net............................ $405.6 $395.8
Receivables sold............................................. 158.8 65.7
Market value adjustments..................................... 59.6 --
Pension plan assets.......................................... 48.7 46.8
Deferred loan origination costs.............................. 37.5 38.0
Insurance policy acquisition costs........................... -- 126.9
Other........................................................ 57.3 84.9
------ ------
Total deferred tax liabilities............................ 767.5 758.1
------ ------
DEFERRED TAX ASSETS
Credit loss reserves......................................... 306.7 263.9
Insurance reserves........................................... -- 165.4
Other........................................................ 133.1 118.3
------ ------
Total deferred tax assets................................. 439.8 547.6
------ ------
Net deferred tax liability at end of year................. $327.7 $210.5
====== ======
</TABLE>
12. 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 consisted of the following:
<TABLE>
<CAPTION>
AT DECEMBER 31
----------------
1995 1994
------ ------
(IN MILLIONS)
<S> <C> <C>
Parent company and other subsidiaries............................... $ 35.5 $444.7
Household Bank, f.s.b............................................... 81.3 35.1
Household Global Funding, Inc....................................... 2.8 2.5
------ ------
Advances to parent company and affiliates...................... $119.6 $482.3
====== ======
</TABLE>
These advances bear interest at various market interest rates. Interest
income on advances to parent company and affiliates is reported with interest
expense on the statements of income and includes the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
1995 1994 1993
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Parent company and other subsidiaries......................... $26.6 $30.6 $12.7
Household Bank, f.s.b......................................... 3.0 .2 .2
Household Global Funding, Inc................................. -- -- 3.8
----- ----- -----
Interest income on advances to parent company and
affiliates............................................. $29.6 $30.8 $16.7
===== ===== =====
</TABLE>
Throughout 1995, 1994 and 1993 certain wholly-owned bank subsidiaries of
the Company borrowed monies from Household Bank f.s.b. ("the Bank") at arm's
length interest rates. The borrowings were repaid during 1995. The balance at
December 31, 1994 was $350 million and was included in commercial paper, bank
and other borrowings for financial statement purposes. Interest expense on these
borrowings totaled
F-27
<PAGE> 44
$13.9, $1.7 and $2.6 million during 1995, 1994 and 1993, respectively. Average
borrowings totaled $204.4, $26.4 and $41.6 million in 1995, 1994 and 1993,
respectively.
On June 1, 1994 Household International designated a wholly-owned bank
subsidiary of the Company as the issuer of the GM Card. These accounts were
previously issued by the Bank. The Company pays a monthly fee, at fair market
value, to Household International for this designation. These fees totaled $19.1
and $3.1 million in 1995 and 1994, respectively.
In November 1993 the Company purchased approximately $133 million of
purchased mortgage servicing rights ("PMSRs") from the Bank. The Bank continued
to act as a subservicer for the Company and was paid a subservicing fee until
the sale of these PMSRs in the second quarter of 1995. During 1995 and 1994 the
Company paid $2.6 and $7.6 million in subservicing fees to the Bank.
The Company has an agreement with the Bank to originate loans using the
Bank's lending criteria. These loans are originated via direct mail programs and
sold to the Bank at fair value. During 1995 this program was expanded to include
originations via the Company's retail consumer finance branches. The Company
receives an arm's-length fee, which totaled $6.2 million in 1995, for
originating loans under this new program. In 1995 and 1994, the Company
originated approximately $230 and $51 million, respectively, of loans for the
Bank under these programs. Loans included in these programs are also serviced by
the Company for an arm's length fee. The Company received approximately $4
million in 1995 and 1994 from the Bank for servicing these loans.
Household International has entered into a Regulatory Capital
Maintenance/Dividend Agreement with the Office of Thrift Supervision. Under this
agreement, as amended, as long as Household International is the parent company
of the Bank, Household International and the Company agree to maintain the
capital of the Bank at the levels currently required or any subsequent
regulatory capital requirements. The agreement also requires that any capital
deficiency be cured by Household International and/or the Company within thirty
days. There were no cash capital contributions made by Household International
to the Bank in 1995. Household International made cash capital contributions of
$30 million in both 1994 and 1993 to maintain the regulatory capital of the Bank
at levels consistent with management's objectives.
In July 1995 the Company acquired approximately $166 million of other
unsecured receivables from Household International at net book value. Because
these receivables were carried at variable interest rates, net book value
approximated fair value at the sale date. In October 1995 the Company acquired
from the Bank approximately $311 million of commercial loans and real estate
owned at net book value, which approximated fair value.
In July 1995 the Company acquired from Household International an
affiliated entity that provides certain support services, such as item
processing, collections and billings, accounts payable and payroll processing,
primarily for Household International's domestic credit card portfolio. The
Company acquired this servicing subsidiary, including approximately $125 million
of property and equipment, at net book value.
The Company was allocated and/or billed for costs incurred on its behalf by
Household International for administrative expenses, including insurance,
credit, and legal and other fees. In addition, through June 30, 1995, the
Company was also charged for servicing performed by the previously-mentioned
affiliated servicing entity. These servicing and administrative expenses were
recorded in other operating expenses and totaled approximately $210, $288 and
$261 million in 1995, 1994 and 1993, respectively.
13. COMMITMENTS AND CONTINGENT LIABILITIES
In the ordinary course of business there are various legal proceedings
pending against the Company. Management considers that the aggregate
liabilities, if any, resulting from such actions would not have a material
adverse effect on the consolidated financial position of the Company. However,
as the ultimate resolution of these proceedings is influenced by factors that
are outside of the Company's control, it is reasonably possible the Company's
estimated liability under these proceedings may change. See Note 6, "Derivative
Financial Instruments and Other Financial Instruments with Off-Balance Sheet
Risk" for a discussion regarding commitments and contingent liabilities related
to off-balance sheet financial instruments. See Note 9, "Leases" for discussion
of lease commitments.
F-28
<PAGE> 45
14. SALE OF PRODUCT LINES
In October 1995 the Company sold the individual life and annuity product
lines of the Individual Life Insurance segment for $525 million in cash and $50
million of preferred stock of the purchaser. Assets sold related to these
product lines totaled approximately $6.1 billion and consisted primarily of
investment securities. For the first nine months of 1995, these sold product
lines generated approximately $400 million of revenues and earned approximately
$35 million of net income. The Company estimates that net interest margin would
have increased by approximately $18 million after tax had the Company reinvested
the proceeds from the sale to repay debt assuming the sale had occurred as of
the beginning of the year.
F-29
<PAGE> 46
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1995--THREE MONTHS ENDED 1994--THREE MONTHS ENDED
------------------------------------ ------------------------------------
DEC. SEPT. JUNE MAR. DEC. SEPT. JUNE MAR.
------ ------ ------ ------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Finance income................................ $444.5 $457.9 $422.2 $400.0 $400.4 $381.5 $366.9 $348.0
Interest income from noninsurance investment
securities.................................. 5.2 9.2 10.0 9.5 10.4 10.3 8.4 9.6
Interest expense.............................. 213.9 214.7 203.6 192.4 183.0 163.3 148.4 123.5
------ ------ ------ ------ ------ ------ ------ ------
Net interest margin........................... 235.8 252.4 228.6 217.1 227.8 228.5 226.9 234.1
Provision for credit losses on owned
receivables................................. 124.5 135.3 133.5 117.7 91.9 126.0 94.1 123.9
------ ------ ------ ------ ------ ------ ------ ------
Net interest margin after provision for credit
losses...................................... 111.3 117.1 95.1 99.4 135.9 102.5 132.8 110.2
------ ------ ------ ------ ------ ------ ------ ------
Securitization income......................... 126.0 100.9 103.1 94.6 86.0 74.3 62.8 78.8
Insurance premiums and contract revenues...... 40.8 69.5 69.5 71.9 70.6 21.9 66.7 69.1
Investment income............................. 39.8 143.0 135.6 135.4 124.2 127.1 118.2 136.3
Fee income.................................... 40.9 32.9 27.9 23.5 24.7 22.1 18.2 18.1
Other income.................................. 60.3 12.8 (.1) 27.2 (17.8) 37.6 29.7 24.8
------ ------ ------ ------ ------ ------ ------ ------
Total other revenues.......................... 307.8 359.1 336.0 352.6 287.7 283.0 295.6 327.1
------ ------ ------ ------ ------ ------ ------ ------
Salaries and fringe benefits.................. 87.0 89.2 54.6 58.5 57.5 60.0 61.5 57.7
Other operating expenses...................... 128.6 142.3 163.6 165.1 160.1 145.7 150.7 176.9
Policyholders' benefits....................... 53.3 128.0 137.0 134.0 115.8 80.7 124.0 124.2
------ ------ ------ ------ ------ ------ ------ ------
Total costs and expenses...................... 268.9 359.5 355.2 357.6 333.4 286.4 336.2 358.8
------ ------ ------ ------ ------ ------ ------ ------
Income before income taxes.................... 150.2 116.7 75.9 94.4 90.2 99.1 92.2 78.5
Income taxes.................................. 79.1 41.6 24.0 30.7 15.4 32.6 30.2 25.4
------ ------ ------ ------ ------ ------ ------ ------
Net income.................................... $ 71.1 $ 75.1 $ 51.9 $ 63.7 $ 74.8 $ 66.5 $ 62.0 $ 53.1
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
FOURTH QUARTER RESULTS
Net income for the fourth quarter of 1995 was $71.1 million, down slightly
compared to the third quarter of 1995 and the fourth quarter of 1994. As
previously discussed, the company sold the individual life and annuity product
lines of its life insurance business in the fourth quarter of 1995. The decrease
in net income for the quarter was primarily related to these sold operations,
coupled with lower servicing fee income resulting from a smaller portfolio of
unsecured loans serviced without recourse. This decrease was partially offset by
increased fee income from the company's credit card operations.
Net interest margin for the current quarter was essentially flat compared
to the year-ago quarter and was down compared to the previous quarter, due to
the securitization and sale of $637 million of home equity receivables in
November 1995. The provision for credit losses increased 35 percent compared to
the year-ago quarter due to increased chargeoffs of unsecured products as a
result of growth and seasoning of these products. Securitization income was $40
million higher than the fourth quarter of 1994 primarily due to the
securitization of approximately $1 billion of other unsecured receivables in
September 1995, which carry wider spreads. Insurance premiums and contract
revenues and investment income were lower than prior periods because of the sale
of the life insurance business. Fee income increased due to higher interchange
and other fee income attributable to greater credit card transaction volume.
Other income for the 1995 fourth quarter was higher than the prior year quarter
primarily due to the pretax gain on the sale of the life insurance business.
Other income in the fourth quarter of 1994 included the pretax loss on the sale
of the company's Australian subsidiary, which reduced other income by
approximately $40 million. Excluding the impact of the gain and loss from the
sales of businesses, other income in the fourth quarter of 1995 was lower than a
year ago due to lower servicing income related to a smaller portfolio of
unsecured loans serviced without recourse.
Salaries and fringe benefits and other operating expenses decreased 7
percent from the third quarter due to the sale of the individual life and
annuity product lines of the life insurance business in early October. The
effective tax rate in the quarter was 52.7 percent, up substantially from 35.7
percent in the third quarter and 17.1 percent in the 1994 fourth quarter. The
fourth quarter 1995 rate was impacted by additional taxes
F-30
<PAGE> 47
associated with the sale of the life insurance business, while the 1994 amount
reflected the recognition of U.S. tax benefits of accumulated losses of the
Australian operation. Excluding these one-time events, the 1995 fourth quarter
effective rate would have been 32.1 percent and the fourth quarter 1994 rate
would have been 30.4 percent.
F-31
<PAGE> 48
SCHEDULE VIII
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
1995 1994 1993
------ ------- ------
(IN MILLIONS)
<S> <C> <C> <C>
Insurance reserves applicable to finance receivables:
Policy:
Balance at January 1.......................................... $ 5.3 $ 6.8 $ 9.6
Earned premiums............................................... (1.7) (103.6) (93.6)
Net premiums written and reinsurance assumed.................. 1.8 103.0 91.7
Other items................................................... 31.5 (.9) (.9)
------ ------- ------
Balance at December 31........................................ 36.9 5.3 6.8
------ ------- ------
Claims:
Balance at January 1.......................................... 40.6 43.0 36.1
Provision for claims.......................................... 51.7 49.3 53.0
Benefits paid................................................. (48.5) (47.0) (46.1)
Other items................................................... (2.3) (4.7) --
------ ------- ------
Balance at December 31........................................ 41.5 40.6 43.0
------ ------- ------
Total insurance reserves at December 31.......................... $ 78.4 $ 45.9 $ 49.8
====== ======= ======
</TABLE>
F-32
<PAGE> 49
SCHEDULE X
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INCOME STATEMENT INFORMATION
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
COLUMN A COLUMN B
- -------------------------------------------------------------------- --------------------------
CHARGED TO
COSTS AND EXPENSES
--------------------------
ITEM 1995 1994 1993
- -------------------------------------------------------------------- ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Depreciation and amortization of intangible assets and similar
deferrals:
Amortization of insurance policy acquisition costs................ $ 53.4 $ 47.8 $ 67.8
Amortization of acquired intangibles.............................. 70.5 56.1 48.0
------ ------ ------
Total.......................................................... $123.9 $103.9 $115.8
====== ====== ======
</TABLE>
F-33
<PAGE> 50
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. PAGES
- ----------- ------------
<C> <S> <C>
2 Stock Purchase Agreement by and among Household Group, Inc., Household
International, Inc., Alexander Hamilton Life Insurance Company of
America and Jefferson-Pilot Corporation dated August 9, 1995
(incorporated by reference to Exhibit 2 of HFC's Current Report on Form
8-K dated August 9, 1995).
3(i ) Restated Certificate of Incorporation of Household Finance Corporation
("HFC"), as amended (incorporated by reference to Exhibit 3(a) of HFC's
Annual Report on Form 10-K for the fiscal year ended December 31, 1992).
3(ii) Bylaws of Household Finance Corporation (incorporated by reference to
Exhibit 3(b) of HFC's Annual Report on Form 10-K for the fiscal year
ended December 31, 1992).
4(a ) Indenture dated as of May 15, 1989, between HFC and Bankers Trust
Company, as Trustee (incorporated by reference to Exhibit 4 to HFC's
Current Report on Form 8-K dated August 3, 1989), as supplemented by a
First Supplemental Indenture dated as of June 15, 1989 (incorporated by
reference to Exhibit 4 of HFC's Current Report on Form 8-K dated June
15, 1989), as amended by Amendment No. 1 dated October 18, 1990 to the
First Supplemental Indenture dated as of June 15, 1989 (incorporated by
reference to Exhibit 4 of HFC's Current Report on Form 8-K dated October
18, 1990).
4(b ) Standard Multiple-Series Indenture Provisions for Senior Debt Securities
dated as of June 1, 1992 (incorporated by reference to Exhibit 4(b) to
HFC's Registration Statement on Form S-3, No. 33-48854).
4(c ) Indenture dated as of December 1, 1993 for Senior Debt Securities
between HFC and The Chase Manhattan Bank (National Association), as
Trustee (incorporated by reference to Exhibit 4(b) to HFC's Registration
Statement on Form S-3, No. 33-55561).
4(d ) The principal amount of debt outstanding under each other instrument
defining the rights of holders of long-term debt of HFC and its
subsidiaries does not exceed 10 percent of the total assets of HFC and
its subsidiaries on a consolidated basis. HFC agrees to furnish to the
Securities and Exchange Commission, upon request, a copy of each
instrument defining the rights of holders of long-term debt of HFC and
its subsidiaries.
12 Statement of Computation of Ratios of Earnings to Fixed Charges and to
Combined Fixed Charges and Preferred Stock Dividends.
23 Consent of Arthur Andersen LLP, Certified Public Accountants.
27 Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 12
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND
TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(All dollar amounts are stated in millions.)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Year ended December 31 1995 1994 1993 1992 1991
- ------------------------------------------- -------- -------- ------ -------- --------
<S> <C> <C> <C> <C> <C>
Income from continuing operations $ 261.8 $ 256.4 $220.4 $ 239.5 $ 156.7
Income taxes 175.4 103.6 107.4 92.3 32.5
- ------------------------------------------- -------- -------- ------ -------- --------
Fixed charges:
Interest expense (1) 859.7 656.6 532.9 665.8 930.6
Interest portion of rentals (2) 14.8 8.6 4.9 9.5 12.5
- ------------------------------------------- -------- -------- ------ -------- --------
Total fixed charges 874.5 665.2 537.8 675.3 943.1
- ------------------------------------------- -------- -------- ------ -------- --------
Total earnings as defined $1,311.7 $1,025.2 $865.6 $1,007.1 $1,132.3
=========================================== ======== ======== ====== ======== ========
Ratio of earnings to fixed charges 1.50 1.54 1.61 1.49 1.20
=========================================== ======== ======== ====== ======== ========
Preferred stock dividends (3) $ 12.0 $ 10.1 $ 12.9 $ 14.2 $ 13.7
=========================================== ======== ======== ====== ======== ========
Ratio of earnings to combined fixed charges
and preferred stock dividends 1.48 1.52 1.57 1.46 1.18
=========================================== ======== ======== ====== ======== ========
</TABLE>
(1) For financial statement purposes, interest expense includes income
earned on temporary investment of excess funds (resulting from
oversubscriptions of commercial paper), gains (losses) on purchases
of sinking fund debentures, and interest earned on advances to parent
company and affiliates.
(2) Represents one-third of rentals which approximates the portion
representing interest.
(3) Preferred stock dividends are grossed up to their pre-tax
equivalents based on effective tax rates of 40.1, 28.8, 32.8, 27.8
and 17.2 percent for the years ended December 31, 1995, 1994, 1993,
1992 and 1991, respectively.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
Household Finance Corporation:
As independent public accountants, we hereby consent to the incorporation of
our report dated January 24, 1996, included in this annual report on Form 10-K
of Household Finance Corporation for the year ended December 31, 1995, into the
Company's previously filed Registration Statements No. 33-55043, No. 33-55561
and No. 33-64175 on Form S-3.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 27, 1996
<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 AND EXCHANGE COMMISSION.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 154,700
<SECURITIES> 3,233,000
<RECEIVABLES> 12,435,500
<ALLOWANCES> 866,000
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 639,800
<DEPRECIATION> 353,600
<TOTAL-ASSETS> 17,793,400
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 8,257,500
0
100,000
<COMMON> 1
<OTHER-SE> 2,137,099
<TOTAL-LIABILITY-AND-EQUITY> 17,793,400
<SALES> 0
<TOTAL-REVENUES> 3,114,000
<CGS> 0
<TOTAL-COSTS> 1,341,200
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 511,000
<INTEREST-EXPENSE> 824,600
<INCOME-PRETAX> 437,200
<INCOME-TAX> 175,400
<INCOME-CONTINUING> 261,800
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 261,800
<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>
