<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
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OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-75
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HOUSEHOLD FINANCE CORPORATION
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-1239445
- ------------------------ -----------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
2700 Sanders Road, Prospect Heights, Illinois 60070
- -------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 564-5000
--------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
At July 31, 1997, there were 1,000 shares of registrant's common
stock outstanding.
The registrant meets the conditions set forth in General
Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing
this Form 10-Q with the reduced disclosure format.
<PAGE> 2
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
Table of Contents
PART I. Financial Information Page
----
Item 1. Financial Statements
Condensed Consolidated Statements of Income
(Unaudited) - Three Months and Six Months
Ended June 30, 1997 and 1996 2
Condensed Consolidated Balance Sheets -
June 30, 1997 (Unaudited) and December 31, 1996 3
Condensed Consolidated Statements of Cash Flows
(Unaudited) - Six Months Ended
June 30, 1997 and 1996 4
Financial Highlights 5
Notes to Interim Condensed Consolidated Financial
Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
<PAGE> 3
PART 1. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Household Finance Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- -------------------------------------------------------
In millions.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
1997 1996 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Finance income $510.4 $442.9 $1,012.0 $862.5
Interest income from noninsurance
investment securities 11.5 18.7 16.5 24.7
Interest expense 239.8 223.8 473.0 418.4
------ ------ -------- ------
Net interest margin 282.1 237.8 555.5 468.8
Provision for credit losses on owned
receivables 194.2 129.4 427.7 258.3
------ ------ -------- ------
Net interest margin after
provision for credit losses 87.9 108.4 127.8 210.5
------ ------ -------- ------
Securitization income 236.9 196.0 465.7 350.6
Insurance revenues 44.0 38.3 85.9 82.1
Investment income 25.5 34.5 50.8 89.7
Fee income 64.3 39.7 119.0 75.9
Other income 23.7 17.7 93.0 35.3
------ ------ -------- ------
Total other revenues 394.4 326.2 814.4 633.6
------ ------ -------- ------
Salaries and fringe benefits 115.2 90.5 222.8 180.7
Other operating expenses 144.3 189.5 315.9 330.8
Policyholders' benefits 41.1 47.1 83.2 114.7
------ ------ -------- ------
Total costs and expenses 300.6 327.1 621.9 626.2
------ ------ -------- ------
Income before income taxes 181.7 107.5 320.3 217.9
Income taxes 66.0 33.3 115.5 64.7
------ ------ -------- ------
Net income $115.7 $ 74.2 $ 204.8 $153.2
====== ====== ======== ======
</TABLE>
See notes to interim condensed consolidated financial statements.
<PAGE> 4
Household Finance Corporation and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
- -------------------------------------
In millions, except share data.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
June 30, December 31,
1997 1996
- ---------------------------------------------------------------------------
ASSETS (Unaudited)
- ------
<S> <C> <C>
Cash $ 339.1 $ 228.5
Investment securities 1,737.7 1,720.0
Receivables, net 18,349.0 16,391.7
Advances to (from) parent company and affiliates 344.2 (7.6)
Acquired intangibles and goodwill, net 1,612.7 938.2
Properties and equipment, net 255.7 268.7
Real estate owned 119.6 112.1
Other assets 801.1 928.2
--------- ---------
Total assets $23,559.1 $20,579.8
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
- ------------------------------------
Debt:
Commercial paper, bank and other borrowings $ 5,291.2 $ 5,223.5
Senior and senior subordinated debt (with
original maturities over one year) 12,481.9 10,648.3
--------- ---------
Total debt 17,773.1 15,871.8
Insurance policy and claim reserves 1,056.4 1,021.7
Other liabilities 942.9 993.5
--------- ---------
Total liabilities 19,772.4 17,887.0
--------- ---------
Preferred stock 100.0 100.0
--------- ---------
Common shareholder's equity:
Common stock, $1.00 par value, 1,000 shares
authorized, issued and outstanding at
June 30, 1997 and December 31, 1996,
and additional paid-in capital 1,869.3 892.8
Retained earnings 1,847.7 1,721.6
Foreign currency translation adjustments (7.8) (8.9)
Unrealized loss on investments, net (22.5) (12.7)
--------- ---------
Total common shareholder's equity 3,686.7 2,592.8
--------- ---------
Total liabilities and shareholder's equity $23,559.1 $20,579.8
========= =========
</TABLE>
See notes to interim condensed consolidated financial statements.
<PAGE> 5
Household Finance Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -----------------------------------------------------------
In millions.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Six months ended June 30 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C>
CASH PROVIDED BY OPERATIONS
Net income $ 204.8 $ 153.2
Adjustments to reconcile net income to cash
provided by operations:
Provision for credit losses on owned receivables 427.7 258.3
Insurance policy and claim reserves 61.6 55.9
Depreciation and amortization 107.5 93.2
Net realized gains from sales of assets (54.9) (6.5)
Other, net (124.1) 242.7
--------- ---------
Cash provided by operations 622.6 796.8
--------- ---------
INVESTMENTS IN OPERATIONS
Investment securities:
Purchased (471.7) (1,076.2)
Matured 107.0 139.4
Sold 315.3 1,445.4
Short-term investment securities, net change 88.5 (426.0)
Receivables:
Originations, net (5,862.4) (5,326.4)
Purchased (387.4) (3,558.8)
Sold 7,026.8 5,787.0
Purchase capital stock of Transamerica Financial
Services Holding Company (1,059.6) -
Acquisition of portfolios, net - (620.1)
Properties and equipment purchased (24.9) (28.9)
Properties and equipment sold 1.5 3.8
Advances to parent company and affiliates, net (351.8) 25.9
--------- ---------
Cash decrease from investments in operations (618.7) (3,634.9)
--------- ---------
FINANCING AND CAPITAL TRANSACTIONS
Short-term debt, net change 67.8 720.2
Senior and senior subordinated debt issued 3,592.6 3,535.5
Senior and senior subordinated debt retired (1,758.2) (1,320.8)
Repayment of Transamerica Financial Services
Holding Company debt (2,679.7) -
Policyholders' benefits paid (72.5) (58.2)
Cash received from policyholders 58.9 38.0
Dividends on preferred stock (3.7) (3.6)
Dividends paid to parent company (75.0) -
Capital contributions from parent company 976.5 60.0
--------- ---------
Cash increase from financing and capital
transactions 106.7 2,971.1
--------- ---------
Increase in cash 110.6 133.0
Cash at January 1 228.5 154.7
--------- ---------
Cash at June 30 $ 339.1 $ 287.7
========= =========
Supplemental cash flow information:
Interest paid $ 458.6 $ 447.0
--------- ---------
Income taxes paid 163.5 143.9
--------- ---------
</TABLE>
See notes to interim condensed consolidated financial statements.
<PAGE> 6
Household Finance Corporation and Subsidiaries
FINANCIAL HIGHLIGHTS
- --------------------
All dollar amounts are stated in millions.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $115.7 $ 74.2 $ 204.8 $ 153.2
------ ------ -------- --------
Revenues 916.3 787.8 1,842.9 1,520.8
------ ------ -------- --------
Return on average common
shareholder's equity <F1> 16.3% 13.4% 14.9% 13.9%
------ ------ -------- --------
Return on average owned assets <F1> 2.21 1.60 1.95 1.67
------ ------ -------- --------
</TABLE>
All dollar amounts are stated in millions.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
June 30, December 31,
1997 1996
- ----------------------------------------------------------------------
<S> <C> <C>
Total assets:
Owned $23,559.1 $20,579.8
Managed 37,007.9 33,089.2
--------- ---------
Receivables:
Owned $18,006.7 $16,086.8
Serviced with limited recourse 13,448.8 12,509.4
--------- ---------
Managed $31,455.5 $28,596.2
========= =========
Debt to total shareholder's equity 4.7:1 5.9:1
--------- ---------
Debt to common shareholder's equity 4.8:1 6.1:1
--------- ---------
<FN>
<F1> Annualized.
</FN>
</TABLE>
See notes to interim condensed consolidated financial statements.
<PAGE> 7
Household Finance Corporation and Subsidiaries
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
- --------------------------
The accompanying unaudited condensed consolidated financial
statements of Household Finance Corporation and its subsidiaries
(the "company") have been prepared in accordance with generally
accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. Certain prior period amounts have
been reclassified to conform with the current period's
presentation. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the
three and six months ended June 30, 1997 are not necessarily
indicative of the results that may be expected for the year ending
December 31, 1997. For further information, refer to the
consolidated financial statements and footnotes thereto included in
the company's annual report on Form 10-K for the year ended
December 31, 1996.
2. ACQUISITION
- ----------------
On June 23, 1997, Household International, Inc. and a wholly-owned
subsidiary of Household Finance Corporation (a wholly-owned
subsidiary of Household International, Inc.) acquired the capital
stock of Transamerica Financial Services Holding Company ("TFS"),
the branch-based consumer finance subsidiary of Transamerica
Corporation ("TA"). The company paid $1.1 billion for the stock of
TFS and repaid approximately $2.7 billion of TFS debt owed to
affiliates of TA. The company added approximately $3.1 billion of
real estate secured receivables as a result of the acquisition. The
acquisition of TFS was accounted for as a purchase, and
accordingly, TFS' operations have been included in the company's
results of operations from June 24, 1997. The acquisition of TFS
was not material to the company's consolidated financial
statements.
In June 1997, the company received a capital contribution from
Household International, Inc. of $976.5 million which was used to
repay certain short-term borrowings in connection with the purchase
of TFS.
3. INVESTMENT SECURITIES
- --------------------------
Investment securities consisted of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
In millions. June 30, 1997 December 31, 1996
- ---------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
INVESTMENTS
Marketable equity securities $ 126.0 $ 126.8 $ 212.7 $ 213.1
Corporate debt securities 1,201.5 1,183.8 1,069.5 1,058.5
U.S. government and federal
agency debt securities 272.4 255.7 252.6 243.7
Other 145.1 145.1 180.5 180.5
-------- -------- -------- --------
Subtotal 1,745.0 1,711.4 1,715.3 1,695.8
Accrued investment income 26.3 26.3 24.2 24.2
-------- -------- -------- --------
Total investment securities $1,771.3 $1,737.7 $1,739.5 $1,720.0
======== ======== ======== ========
</TABLE>
<PAGE> 8
4. RECEIVABLES
- ----------------
Receivables consisted of the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
June 30, December 31,
In millions. 1997 1996
- ------------------------------------------------------------------------
<S> <C> <C>
Home equity $ 6,300.7 $ 2,513.9
Visa/MasterCard 4,392.0 6,308.9
Private label 4,040.5 3,807.0
Other unsecured 2,446.3 2,564.4
Commercial 827.2 892.6
--------- ---------
Total owned receivables 18,006.7 16,086.8
Accrued finance charges 235.0 215.8
Credit loss reserve for
owned receivables (825.4) (671.5)
Unearned credit insurance premiums
and claims reserves (120.7) (82.6)
Amounts due and deferred from
receivables sales 1,610.5 1,404.8
Reserve for receivables serviced with
limited recourse (557.1) (561.6)
--------- ---------
Total owned receivables, net 18,349.0 16,391.7
Receivables serviced with limited
recourse 13,448.8 12,509.4
--------- ---------
Total managed receivables, net $31,797.8 $28,901.1
========= =========
</TABLE>
The outstanding balance of receivables serviced with limited recourse
consisted of the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
June 30, December 31,
In millions. 1997 1996
- ------------------------------------------------------------------------
<S> <C> <C>
Home equity $ 3,726.7 $ 4,337.5
Visa/MasterCard 6,247.3 5,043.5
Private label 375.0 517.0
Other unsecured 3,099.8 2,611.4
--------- ---------
Total $13,448.8 $12,509.4
========= =========
</TABLE>
The combination of receivables owned and receivables serviced with limited
recourse, which the company considers its managed portfolio, is shown below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
June 30, December 31,
In millions. 1997 1996
- ------------------------------------------------------------------------
<S> <C> <C>
Home equity $10,027.4 $ 6,851.4
Visa/MasterCard 10,639.3 11,352.4
Private label 4,415.5 4,324.0
Other unsecured 5,546.1 5,175.8
Commercial 827.2 892.6
--------- ---------
Total $31,455.5 $28,596.2
========= =========
</TABLE>
<PAGE> 9
At June 30, 1997 and December 31, 1996, the amounts due and
deferred from receivables sales of $1,610.5 and $1,404.8 million,
respectively, included the unamortized securitization assets and
funds established pursuant to the recourse provisions for certain
sales totaling $996.7 and $894.2 million, respectively. The amounts
due and deferred also included customer payments not yet remitted
by the securitization trustee to the company of $585.7 and $478.0
million at June 30, 1997 and December 31, 1996, respectively. In
addition, the company has subordinated interests in certain
transactions, which were recorded as receivables, of $595.0 and
$388.5 million at June 30, 1997 and December 31, 1996,
respectively. The company has agreements with a "AAA"-rated third
party who will indemnify the company for up to $21.2 million in
losses relating to certain securitization transactions. The company
maintains credit loss reserves pursuant to the recourse provisions
for receivables serviced with limited recourse which are based on
estimated probable losses under such provisions. These reserves
totaled $557.1 and $561.6 million at June 30, 1997 and December 31,
1996, respectively, and represent the company's best estimate of
possible losses on receivables serviced with limited recourse.
5. CREDIT LOSS RESERVES
- -------------------------
An analysis of credit loss reserves for the three and six months
ended June 30 was as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
In millions. 1997 1996 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Credit loss reserves for owned
receivables at beginning
of period $ 724.1 $ 557.0 $ 671.5 $ 531.8
Provision for credit losses 194.2 129.4 427.7 258.3
Chargeoffs (179.9) (105.8) (368.6) (234.6)
Recoveries 24.4 16.7 40.8 38.1
Portfolio acquisitions, net 62.6 59.1 54.0 62.8
-------- -------- -------- --------
TOTAL CREDIT LOSS RESERVES FOR
OWNED RECEIVABLES AT JUNE 30 825.4 656.4 825.4 656.4
-------- -------- -------- --------
Credit loss reserves for
receivables serviced with
limited recourse at beginning
of period 594.4 388.8 561.6 334.2
Provision for credit losses 120.3 136.6 276.9 264.4
Chargeoffs (165.6) (73.7) (297.9) (147.7)
Recoveries 7.9 3.1 14.1 5.2
Other, net .1 - 2.4 (1.3)
-------- -------- -------- --------
TOTAL CREDIT LOSS RESERVES FOR
RECEIVABLES SERVICED WITH
LIMITED RECOURSE AT JUNE 30 557.1 454.8 557.1 454.8
-------- -------- -------- --------
TOTAL CREDIT LOSS RESERVES FOR
MANAGED RECEIVABLES AT JUNE 30 $1,382.5 $1,111.2 $1,382.5 $1,111.2
======== ======== ======== ========
</TABLE>
6. INCOME TAXES
- -----------------
Effective tax rates for the six months ended June 30, 1997 and 1996
of 36.1 and 29.7 percent, respectively, differ from the statutory
federal income tax rate for the respective periods primarily
because of the effects of (a) leveraged lease tax benefits,
(b) dividends received deduction applicable to term preferred stock,
(c) amortization of intangible assets, (d) state and local income
taxes and (e) United States loss carry forwards in 1996.
<PAGE> 10
7. 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 (from) parent company and
affiliates were $344.2 million at June 30, 1997 compared to $(7.6)
million at December 31, 1996. Advances from parent company and
affiliates, which are included in commercial paper, bank and other
borrowings, were $348.6 and $15.0 million at June 30, 1997 and
December 31, 1996, respectively. Net interest income on affiliated
balances for the second quarter and first six months of 1997 was
$4.6 and $10.7 million, respectively, compared to $1.4 and $2.2
million, respectively, for the same 1996 periods.
8. INTEREST RATE CONTRACTS
- ----------------------------
At June 30, 1997 and December 31, 1996, all of the company's
interest rate contracts qualified as hedges or synthetic
alterations.
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
for managing its interest rate exposure. 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. The company also has entered into
currency swaps to convert both principal and interest payments on
debt issued from one currency to the appropriate functional
currency.
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. Interest rate futures, forwards, options, and caps and
floors used in hedging the company's exposure to interest rate
fluctuations are designated, and effective, as hedges of balance
sheet items.
Correlation between all interest rate contracts and the underlying
asset, liability or off-balance sheet item is direct because the
company uses interest rate contracts which mirror the underlying
item being hedged/synthetically altered. If correlation between the
hedged/synthetically altered item and related interest rate
contract would cease to exist, the interest rate contract would be
recorded at fair value and the associated unrealized gain or loss
would be included in net interest margin, with any future realized
and unrealized gains or losses recorded in other income.
Interest rate contracts are recorded at amortized cost. If interest
rate contracts are terminated early, the realized gains and losses
are deferred and amortized over the life of the
hedged/synthetically altered item as adjustments to net interest
margin. These deferred gains and losses are recorded on the
accompanying balance sheets as adjustments to the carrying value of
the hedged items. In circumstances where the underlying assets or
liabilities are sold, any remaining carrying value adjustments or
cumulative change in value on any open positions are recognized
immediately as a component of the gain or loss upon disposition.
Any remaining interest rate contracts previously designated to the
sold hedged/synthetically altered item are recorded at fair value
with realized and unrealized gains and losses included in other
income.
<PAGE> 11
9. RECENT ACCOUNTING DEVELOPMENTS
- -----------------------------------
Effective January 1, 1997, the company adopted Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of
Liabilities" ("FAS No. 125"). FAS No. 125 provides accounting and
reporting standards for transfers and servicing of financial assets
and extinguishment of liabilities based on an approach that focuses
on control of the assets and extinguishment of the liabilities. The
statement is effective for securitization transactions occurring
subsequent to December 31, 1996. The adoption of FAS No. 125 did
not have a material impact on the company's consolidated financial
statements.
<PAGE> 12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OPERATIONS SUMMARY
- ------------------
Net income for the second quarter and first six months of 1997 was
$115.7 and $204.8 million, an increase of 56 and 34 percent,
respectively, compared to $74.2 and $153.2 million in the
comparable 1996 periods. The company's annualized return on average
common shareholder's equity for the second quarter and first six
months of 1997 was 16.3 and 14.9 percent, respectively, up from
13.4 and 13.9 percent in the respective year-ago periods, even as
the company continued to strengthen its capital ratio. The
annualized return on average owned assets improved to 2.21 and 1.95
percent in the second quarter and first six months of 1997,
respectively, up from 1.60 and 1.67 percent in the same year-ago
periods.
- - On June 23, 1997, Household International, Inc. and a wholly-
owned subsidiary of Household Finance Corporation acquired the
capital stock of Transamerica Financial Services Holding Company
("TFS"), the branch-based consumer finance subsidiary of
Transamerica Corporation ("TA"). The company paid $1.1 billion for
the stock of TFS and repaid approximately $2.7 billion of TFS debt
owed to affiliates of TA. The company added approximately $3.1
billion of real estate secured receivables as a result of the
acquisition. The acquisition of TFS strengthens the company's core
consumer finance operations by expanding its branch network in many
new and existing markets, adding new customer accounts, and
increases the secured loan portion of the company's receivables
portfolio.
In June 1997, the company received a capital contribution from
Household International, Inc. of $976.5 million which was used
to repay certain short-term borrowings in connection with the
purchase of TFS.
- - The following is a summary of the operating results of the
company's key businesses for the second quarter and first six
months of 1997 compared to the corresponding prior year periods:
Net interest margin in the consumer finance business continued
to expand in the second quarter and first six months of 1997 due
to improved pricing and a relative shift in the portfolio to
unsecured loans, but was partially offset by higher credit
losses primarily due to increased bankruptcies.
The Visa/MasterCard* business experienced higher net interest
margin and fee income, and improved efficiency, which more than
offset higher credit losses resulting primarily from increased
personal bankruptcy filings. The company has continued its
program to improve the profitability of its credit card
portfolios by refining pricing strategies, increasing fees and
systematically eliminating unprofitable accounts. Results for
this business continued to benefit from the company's co-
branding strategy, in particular the association with the
General Motors credit card ("GM Card") program and the Union
Privilege Visa/MasterCard portfolio acquired in June 1996.
The private-label credit card business reported higher credit
losses from increased personal bankruptcy filings in the second
quarter and first six months of 1997, which were partially
offset by higher net interest margin.
- - The company continues to maintain a strong credit loss reserve
position due to uncertainty over consumer payment patterns and
seasoning of unsecured loan products. The company increased its
credit loss reserves during the first six months of 1997 by
providing reserves in excess of net chargeoffs for owned receivables
of $100 million.
* VISA and MasterCard are registered trademarks of VISA USA, Inc.
and MasterCard International, Incorporated, respectively.
<PAGE> 13
BALANCE SHEET REVIEW
- --------------------
- - Managed consumer receivables (owned and serviced with limited
recourse) were $30.6 billion at June 30, 1997, compared to $27.4
billion at March 31, 1997 and $25.0 billion at June 30, 1996
reflecting the impact of the TFS acquisition. Excluding the $3.1
billion in home equity loans from the TFS acquisition, managed
consumer receivables grew 10 percent from a year ago. Home equity
loan production in the retail branch network was up 13 percent year
over year and the wholesale portfolio was down 19 percent, as this
portfolio continues to run off following the decision to de-
emphasize this product. Private label and other unsecured product
lines grew approximately 17 and 24 percent, respectively, over
prior year levels. Visa/MasterCard receivables were up 5 percent
with the level of a year ago. With the integration of the Union
Privilege portfolio completed, the company initiated mailings for
this portfolio in late April and early July.
- - Compared to the first quarter, managed consumer receivables
were flat, excluding the acquisition of TFS. The retail branch
network had solid growth in the quarter while the Visa/MasterCard
portfolio was down slightly due to the company's account
profitability programs and deferred mailings, as well as
somewhat higher than normal account paydowns.
- - Owned consumer receivables were $17.2 billion at June 30,
1997, compared to $14.5 billion at March 31, 1997 and $14.1 billion
at June 30, 1996 reflecting the impact of the TFS acquisition.
Changes in owned receivables from period to period may vary
depending on the timing and significance of securitization
transactions.
- - The company's managed credit loss reserves were $1,382.5
million at June 30, 1997, up from $1,318.5 million at March 31,
1997 and $1,111.2 million at June 30, 1996. Credit loss reserves as
a percent of managed receivables were 4.40 percent, compared to
4.66 percent at March 31, 1997 and 4.26 percent at June 30, 1996.
Reserves as a percent of nonperforming managed receivables were
127.6 percent, compared to 131.4 percent at March 31, 1997 and
151.0 percent at June 30, 1996. Consumer two-months-and-over
contractual delinquency ("delinquency") as a percent of managed
consumer receivables was 4.46 percent, compared to 4.62 percent at
March 31, 1997 and 3.70 percent at June 30, 1996. The annualized
total consumer managed chargeoff ratio in the second quarter of
1997 was 4.51 percent, compared to 4.31 percent in the prior
quarter and 3.29 percent in the year-ago quarter.
- - The company's debt to total shareholder's equity was 4.7 to 1
at June 30, 1997 compared to 5.9 to 1 at December 31, 1996. Debt to
common shareholder's equity was 4.8 to 1 at June 30, 1997 compared
to 6.1 to 1 at December 31, 1996. The decrease in the ratios from
year end is attributable to the capital contribution from the
parent company in June 1997 to fund the TFS acquisition.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
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; and cash provided by operations.
The following describes major changes in the company's funding base
from December 31, 1996 to June 30, 1997:
- - The company paid $75.0 million of dividends to its parent
company during the first quarter of 1997.
<PAGE> 14
- - The funding requirements of the company increased by $3.0 billion
due to the acquisition of TFS, partially offset by lower receivable
levels in the company's existing businesses.
- - In June 1997, to enhance liquidity, the company entered into a
$1.0 billion back-up line for its commercial paper program and
established a $1.0 billion asset-backed conduit. Products that may
be sold into this conduit include credit card receivables and
unsecured consumer loans.
- - In June 1997, the company received a capital contribution from
its parent company of $976.5 million which was used to repay
certain short-term borrowings in connection with the acquisition of
the capital stock of TFS.
- - The company had securitized home equity, Visa/MasterCard,
private label and other unsecured receivables outstanding of $13.4
and $12.5 billion at June 30, 1997 and December 31, 1996,
respectively. During the three months and six months ended June 30,
1997, the company securitized, excluding replenishments of
certificate holder interests, $1.1 and $2.2 billion, respectively,
of Visa/MasterCard and other unsecured receivables.
The composition of these securitizations by type is as follows
(in billions):
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
1997 1997
- ------------------------------------------------------------
<S> <C> <C>
Visa/MasterCard $ 1.1 $ 1.4
Other unsecured - .8
------- -------
Total $ 1.1 $ 2.2
======= =======
</TABLE>
The market for securities backed by receivables is a reliable,
efficient and cost-effective source of funds, which the company
plans to continue to utilize in the future.
INCOME STATEMENT REVIEW
- -----------------------
Net interest margin
- -------------------
Net interest margin was $282.1 and $555.5 million for the second
quarter and first six months of 1997, up from $237.8 and $468.8
million in the prior year periods. The net interest margin
percentages in the second quarter of 1997 and 1996 were adversely
affected by temporary investments that were used to pre-fund
acquisitions in both years. Excluding the impact of these temporary
investments, net interest margin as a percent of average owned
interest-earning assets, annualized, was 7.03 and 6.91 percent in
the second quarter of 1997 and 1996, respectively. Including the
impact of these temporary investments, net interest margin as a
percent of average owned interest-earning assets, annualized, was
6.78 percent, up compared to 6.30 percent in the year-ago quarter.
The increase in 1997 was primarily due to growth in average owned
Visa/MasterCard and private label receivables.
<PAGE> 15
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 $566.1
and $1,121.8 million for the second quarter and first six months of
1997, up 26 and 29 percent, respectively, compared to $450.0 and
$869.5 million in the same year-ago periods. The net interest
margin percentages on a managed basis were also adversely impacted
by the previously-mentioned portfolio of temporary investments.
Excluding the impact of these temporary investments, the net
interest margin percentages on a managed basis were 7.86 and 7.62
percent in the second quarter of 1997 and 1996, respectively.
Including the impact of these temporary investments, net interest
margin on a managed basis as a percent of average managed interest-
earning assets, annualized, was 7.71 percent compared to 7.21
percent in the year-ago quarter. The improvement over the year-ago
quarter was primarily due to the continuing change in product mix
to higher-yielding unsecured products and improved pricing.
Provision for credit losses
- ---------------------------
The provision for credit losses for receivables on an owned basis
for the second quarter and first six months of 1997 totaled $194.2
and $427.7 million, up 50 and 66 percent from $129.4 and $258.3
million in the comparable prior year periods. In view of
uncertainty regarding consumer payment patterns, the continued high
levels of personal bankruptcies and seasoning of unsecured loan
products, the company continued to increase its credit loss
reserves in excess of current period chargeoffs. Provision in
excess of chargeoffs related to owned receivables was $39 and $40
million for the three months ended June 30, 1997 and 1996,
respectively, and $100 and $62 million for the six months ended
June 30, 1997 and 1996, respectively. The provision for credit
losses may vary from quarter to quarter, depending on the amount of
securitizations in a particular period.
Other revenues
- --------------
Securitization income of $236.9 and $465.7 million in the second
quarter and first six months of 1997, compared to $196.0 and $350.6
million in the same 1996 periods, 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. The 21
and 33 percent increase in securitization income compared to the
second quarter and first six months of 1996, respectively, was
primarily due to the higher levels of securitized receivables
outstanding in 1997.
Fee income includes revenues from fee-based products such as
Visa/MasterCard and private-label credit cards. Fee income was
$64.3 and $119.0 million in the second quarter and first six months
of 1997, up from $39.7 and $75.9 million in the comparable periods
of the prior year, primarily due to higher late fees and
interchange income as a result of the increase in the amount of
average owned credit card receivables compared to the prior year.
Other income increased from $17.7 and $35.3 million in the second
quarter and first six months of 1996 to $23.7 and $93.0 million in
the same periods in 1997. The year-to-date 1997 amount includes
nonrecurring gains of $50 million related to the sale of certain
non-strategic assets during the first quarter.
<PAGE> 16
Expenses
- --------
Salaries and fringe benefits and other operating expenses were
$259.5 and $538.7 million compared to $280.0 and $511.5 million in
the second quarter and first six months of 1996. In the second
quarter of 1996, the company recorded $19 million of nonrecurring
charges related to the rationalization of certain office space, the
settlement of litigation and other similar matters. The higher
expense for the first six months of 1997 was primarily due to an
increase in sales force in the consumer finance business, as well
as the addition of collectors in all the company's businesses, as
compared to the prior year.
CREDIT LOSS RESERVES
- --------------------
The company's consumer credit management policies focus on product
type and specific portfolio risk factors. The consumer credit
portfolio is diversified by product and geographic location. See
Note 4, "Receivables" in the accompanying financial statements for
receivables by product type.
Total managed credit loss reserves, which include reserves for recourse
obligations for receivables sold, were as follows (in millions):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
June 30, March 31, December 31, June 30,
1997 1997 1996 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Owned $ 825.4 $ 724.1 $ 671.5 $ 656.4
Serviced with limited recourse 557.1 594.4 561.6 454.8
-------- -------- -------- --------
Total $1,382.5 $1,318.5 $1,233.1 $1,111.2
======== ======== ======== ========
</TABLE>
Credit loss reserves have increased due to seasoning of unsecured
products and increased personal bankruptcies. Managed credit loss
reserves as a percent of nonperforming managed receivables were
127.6 percent, compared to 131.4 percent at March 31, 1997 and
151.0 percent at June 30, 1996.
Total owned and managed credit loss reserves as a percent of
receivables were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
June 30, March 31, December 31, June 30,
1997 1997 1996 1996
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Owned 4.58% 4.70% 4.17% 4.31%
Managed 4.40 4.66 4.31 4.26
---- ---- ---- ----
</TABLE>
The level of reserves for consumer credit losses is based on
delinquency and chargeoff experience by product and judgmental
factors. Management also evaluates the potential impact of existing
and anticipated national and regional economic conditions on the
managed receivable portfolio when establishing credit loss
reserves. While management allocates reserves among the company's
various products, all reserves are considered to be available to
cover total loan losses. See Note 5, "Credit Loss Reserves" in the
accompanying financial statements for analyses of reserves.
<PAGE> 17
CREDIT QUALITY
- --------------
Delinquency levels in the consumer portfolio were lower than the
prior quarter but increased compared to a year ago. Chargeoffs
increased compared to both the previous and year-ago periods. The
acquisition of TFS in June 1997 benefited the second quarter
delinquency ratio but had no impact on the quarter's chargeoff
ratio.
Delinquency and chargeoff levels are monitored on a managed basis
since all of the receivables are originated using comparable
underwriting standards, are managed by operating personnel without
regard to portfolio ownership and result in a similar credit loss
exposure.
Delinquency
- -----------
Two-Months-and-Over Contractual Delinquency (as a percent of
managed consumer receivables):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
6/30/97 3/31/97 12/31/96 9/30/96 6/30/96
- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Home equity 2.94% 3.53% 3.62% 3.59% 3.47%
Visa/MasterCard 3.36 3.32 2.90 2.64 1.99
Private label 6.31 5.81 5.95 5.68 5.25
Other unsecured 7.85 7.68 7.04 6.79 6.59
---- ---- ---- ---- ----
Total 4.46% 4.62% 4.33% 4.14% 3.70%
==== ==== ==== ==== ====
</TABLE>
Delinquency as a percent of managed consumer receivables declined
from the prior quarter but increased compared to a year ago.
Excluding the impact of the acquisition of TFS, the home equity
delinquency ratio was 3.61 percent, and the total delinquency ratio
was 4.80 percent for the second quarter of 1997. The increase in
the private label and other unsecured delinquency ratios from the
first quarter was primarily due to the seasoning of these
portfolios.
The increase in the delinquency ratio compared to a year ago was
primarily due to seasoning of the portfolios, the company's
continued shift in portfolio mix toward unsecured products, and a
slower consumer payment pattern.
Net Chargeoffs of Consumer Receivables
- --------------------------------------
Net Chargeoffs of Consumer Receivables (as a percent, annualized,
of average managed consumer receivables):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
1997 1997 1996 1996 1996
- -------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Home equity 1.09% 1.35% 1.22% .96% .91%
Visa/MasterCard 5.38 4.76 3.90 3.99 4.40
Private label 5.13 5.36 3.78 3.78 4.08
Other unsecured 6.78 6.34 5.53 5.57 4.31
---- ---- ---- ---- ----
Total 4.51% 4.31% 3.51% 3.45% 3.29%
==== ==== ==== ==== ====
</TABLE>
Net chargeoffs as a percent of average managed consumer receivables
for the second quarter of 1997 increased compared to both the prior
and year-ago periods. Approximately 75 percent of the 20 basis
point increase in the total chargeoff ratio from the first quarter
of 1997 was due to higher personal bankruptcies in the domestic
Visa/MasterCard portfolio. For the Visa/MasterCard product, higher
bankruptcy chargeoffs accounted for 90 percent of the increase in
the second quarter's ratio. The remaining increase in the total
chargeoff ratio was primarily attributable to the continued
seasoning of the other unsecured portfolio.
<PAGE> 18
The increase in the chargeoff ratio compared to a year ago was
primarily due to increased bankruptcy filings in the
Visa/MasterCard portfolio and continued seasoning of the private
label and other unsecured portfolios. The increase in net
chargeoffs is consistent with the company's outlook given overall
industry conditions.
Nonperforming Assets
- --------------------
Nonperforming assets consisted of the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
In millions. 6/30/97 3/31/97 12/31/96 9/30/96 6/30/96
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual managed
receivables $ 616.3 $ 558.4 $ 519.9 $500.0 $487.1
Accruing managed consumer
receivables 90 or more days
delinquent 454.4 432.2 405.7 310.0 229.1
Renegotiated commercial
loans 12.9 12.9 12.9 19.9 19.9
-------- -------- -------- ------ ------
Total nonperforming managed
receivables 1,083.6 1,003.5 938.5 829.9 736.1
Real estate owned 119.6 125.6 112.1 107.4 103.5
-------- -------- -------- ------ ------
Total nonperforming assets $1,203.2 $1,129.1 $1,050.6 $937.3 $839.6
======== ======== ======== ====== ======
Managed credit loss reserves as
a percent of nonperforming
managed receivables 127.6% 131.4% 131.4% 140.7% 151.0%
-------- -------- -------- ------ ------
</TABLE>
<PAGE> 19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
12 Statement of Computation of Ratio of Earnings
to Fixed Charges and to Combined Fixed Charges and
Preferred Stock Dividends.
27 Financial Data Schedule.
99.1 Debt and Preferred Stock Securities Ratings.
(b) Reports on Form 8-K
During the second quarter of 1997, the Registrant filed
a Current Report on Form 8-K dated May 23, 1997 announcing
the intent to purchase Transamerica's Consumer Finance
Business, and a Current Report on Form 8-K dated June 23,
1997 announcing the completion of the acquisition of
Transamerica's Consumer Finance Business.
<PAGE> 20
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
HOUSEHOLD FINANCE CORPORATION
-----------------------------
(Registrant)
Date: August 13, 1997 By: /s/ David A. Schoenholz
--------------- ---------------------------
David A. Schoenholz
Vice President, Chief Accounting
Officer and Chief Financial Officer,
Director and on behalf of
Household Finance Corporation
<PAGE> 21
Exhibit Index
-------------
12 Statement of Computation of Ratio of Earnings
to Fixed Charges and to Combined Fixed Charges and
Preferred Stock Dividends.
27 Financial Data Schedule.
99.1 Debt and Preferred Stock Securities Ratings.
EXHIBIT 12
----------
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND TO COMBINED FIXED
CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
All dollar amounts are stated in millions.
Six months ended June 30 1997 1996
- --------------------------------------------------------------------
<S> <C> <C>
Net income $204.8 $153.2
Income taxes 115.5 64.7
------ ------
Income before income taxes 320.3 217.9
------ ------
Fixed charges:
Interest expense <F1> 499.0 426.0
Interest portion of rentals <F2> 10.3 9.8
------ ------
Total fixed charges 509.3 435.8
------ ------
Total earnings as defined $829.6 $653.7
====== ======
Ratio of earnings to fixed charges 1.63 1.50
====== ======
Preferred stock dividends <F3> $ 5.6 $ 5.1
====== ======
Ratio of earnings to combined fixed charges
and preferred stock dividends 1.61 1.48
====== ======
<FN>
<F1> For financial statement purposes, interest expense includes income
earned on temporary investment of excess funds, generally resulting
from over-subscriptions of commercial paper.
<F2> Represents one-third of rentals, which approximates the portion
representing interest.
<F3> Preferred stock dividends are grossed up to their pretax equivalent
based upon an effective tax rate of 36.1 and 29.7 percent for the
six months ended June 30, 1997 and 1996, respectively.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FOLLOWING SUMMARY FINANCIAL INFORMATION OF THE COMPANY AND ITS
SUBSIDIARIES IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION
AND FINANCIAL STATEMENTS PREVIOUSLY FILED WITH THE SECURITIES &
EXCHANGE COMMISSION.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 339,100
<SECURITIES> 1,737,700
<RECEIVABLES> 18,006,700
<ALLOWANCES> 1,382,500
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 554,600
<DEPRECIATION> 298,900
<TOTAL-ASSETS> 23,559,100
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 12,481,900
0
100,000
<COMMON> 1
<OTHER-SE> 3,686,700
<TOTAL-LIABILITY-AND-EQUITY> 23,559,100
<SALES> 0
<TOTAL-REVENUES> 1,842,900
<CGS> 0
<TOTAL-COSTS> 621,900
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 427,700
<INTEREST-EXPENSE> 473,000
<INCOME-PRETAX> 320,300
<INCOME-TAX> 115,500
<INCOME-CONTINUING> 204,800
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 204,800
<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>
EXHIBIT 99.1
-------------
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
DEBT AND PREFERRED STOCK SECURITIES RATINGS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Standard Moody's Fitch Duff & Phelps
& Poor's Investors Investors Credit Thomson
Corporation Service Services Rating Co. BankWatch
- ------------------------------------------------------------------------------------------------------------
At June 30, 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Household Finance Corporation
Senior debt A A2 A+ A+ A+
Senior subordinated debt A- A3 A A A
Commercial paper A-1 P-1 F-1 Duff 1+ TBW-1
Preferred stock A- a3 A A- A-
------ ------ ------ ------- ------
Household Bank (Nevada), N.A.
Senior debt A A2 A+ A+ NR
- ------------------------------------------------------------------------------------------------------------
</TABLE>
