<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 September 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
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(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 October 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>
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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 Nine Months
Ended September 30, 1997 and 1996 2
Condensed Consolidated Balance Sheets -
September 30, 1997 (Unaudited) and December 31, 1996 3
Condensed Consolidated Statements of Cash Flows
(Unaudited) - Nine Months Ended
September 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>
<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 Nine months ended
September 30, September 30,
1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Finance income $561.1 $509.4 $1,573.1 $1,371.9
Interest income from noninsurance
investment securities 4.0 5.6 20.5 30.3
Interest expense 266.0 239.8 739.0 658.2
------ ------ -------- --------
Net interest margin 299.1 275.2 854.6 744.0
Provision for credit losses on owned
receivables 194.5 114.7 622.2 373.0
------ ------ -------- --------
Net interest margin after provision for
credit losses 104.6 160.5 232.4 371.0
------ ------ -------- --------
Securitization income 267.9 178.4 733.6 529.0
Insurance revenues 45.7 42.0 131.6 124.1
Investment income 30.3 32.6 81.1 122.3
Fee income 87.6 50.0 206.6 125.9
Other income 45.8 27.8 138.8 63.1
------ ------ -------- --------
Total other revenues 477.3 330.8 1,291.7 964.4
------ ------ -------- --------
Salaries and fringe benefits 127.3 98.1 350.1 278.8
Other operating expenses 166.2 179.7 482.1 510.5
Policyholders' benefits 42.6 50.3 125.8 165.0
------ ------ -------- --------
Total costs and expenses 336.1 328.1 958.0 954.3
------ ------ -------- --------
Income before income taxes 245.8 163.2 566.1 381.1
Income taxes 89.6 57.8 205.1 122.5
------ ------ -------- --------
Net income $156.2 $105.4 $ 361.0 $ 258.6
====== ====== ======== ========
</TABLE>
See notes to interim condensed consolidated financial statements.
<PAGE>
<PAGE> 4
Household Finance Corporation and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
- -------------------------------------
In millions, except share data.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
September 30, December 31,
1997 1996
- -----------------------------------------------------------------------------
ASSETS (Unaudited)
- ------
<S> <C> <C>
Cash $ 172.7 $ 228.5
Investment securities 1,759.1 1,720.0
Receivables, net 17,309.0 16,391.7
Advances to (from) parent company and affiliates 169.2 (7.6)
Acquired intangibles and goodwill, net 1,569.7 938.2
Properties and equipment, net 246.4 268.7
Real estate owned 122.9 112.1
Other assets 950.1 928.2
--------- ---------
Total assets $22,299.1 $20,579.8
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
- ------------------------------------
Debt:
Commercial paper, bank and other borrowings $ 4,387.3 $ 5,223.5
Senior and senior subordinated debt (with
original maturities over one year) 12,097.7 10,648.3
--------- ---------
Total debt 16,485.0 15,871.8
Insurance policy and claim reserves 1,058.0 1,021.7
Other liabilities 894.9 993.5
--------- ---------
Total liabilities 18,437.9 17,887.0
--------- ---------
Preferred stock - 100.0
--------- ---------
Common shareholder's equity:
Common stock, $1.00 par value, 1,000 shares
authorized, issued and outstanding at
September 30, 1997 and December 31, 1996,
and additional paid-in capital 1,869.3 892.8
Retained earnings 2,002.9 1,721.6
Foreign currency translation adjustments (7.7) (8.9)
Unrealized loss on investments, net (3.3) (12.7)
--------- ---------
Total common shareholder's equity 3,861.2 2,592.8
--------- ---------
Total liabilities and shareholder's equity $22,299.1 $20,579.8
========= =========
</TABLE>
See notes to interim condensed consolidated financial statements.
<PAGE>
<PAGE> 5
Household Finance Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -----------------------------------------------------------
In millions.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Nine months ended September 30 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
CASH PROVIDED BY OPERATIONS
Net income $ 361.0 $ 258.6
Adjustments to reconcile net income to cash
provided by operations:
Provision for credit losses on owned receivables 622.2 373.0
Insurance policy and claim reserves 75.1 63.9
Depreciation and amortization 166.7 143.8
Net realized gains from sales of assets (74.9) (10.7)
Other, net (155.3) 15.4
--------- ---------
Cash provided by operations 994.8 844.0
--------- ---------
INVESTMENTS IN OPERATIONS
Investment securities:
Purchased (926.1) (1,362.8)
Matured 145.1 237.6
Sold 784.3 1,632.3
Short-term investment securities, net change 59.5 77.3
Receivables:
Originations, net (8,970.4) (8,622.9)
Purchased (584.7) (3,601.4)
Sold 11,014.9 8,452.5
Purchase capital stock of Transamerica Financial
Services Holding Company (1,059.6) -
Acquisition of portfolios, net - (620.1)
Properties and equipment purchased (36.7) (42.5)
Properties and equipment sold 2.6 4.5
Advances to parent company and affiliates, net (176.8) 23.5
--------- ---------
Cash increase (decrease) from investments
in operations 252.1 (3,822.0)
--------- ---------
FINANCING AND CAPITAL TRANSACTIONS
Short-term debt, net change (835.0) 769.4
Senior and senior subordinated debt issued 4,149.3 4,798.9
Senior and senior subordinated debt retired (2,698.0) (2,200.6)
Repayment of Transamerica Financial Services
Holding Company debt (2,679.7) -
Policyholders' benefits paid (93.2) (482.5)
Cash received from policyholders 57.1 37.6
Dividends on preferred stock (4.7) (5.4)
Redemption of preferred stock (100.0) -
Dividends paid to parent company (75.0) -
Capital contributions from parent company 976.5 200.0
--------- ---------
Cash increase (decrease) from financing and
capital transactions (1,302.7) 3,117.4
--------- ---------
Increase (decrease) in cash (55.8) 139.4
Cash at January 1 228.5 154.7
--------- ---------
Cash at September 30 $ 172.7 $ 294.1
========= =========
Supplemental cash flow information:
Interest paid $ 701.3 $ 659.9
--------- ---------
Income taxes paid 161.6 211.1
--------- ---------
</TABLE>
See notes to interim condensed consolidated financial statements.
<PAGE>
<PAGE> 6
Household Finance Corporation and Subsidiaries
FINANCIAL HIGHLIGHTS
- ---------------------
All dollar amounts are stated in millions.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 156.2 $105.4 $ 361.0 $ 258.6
-------- ------ -------- --------
Revenues 1,042.4 845.8 2,885.3 2,366.6
-------- ------ -------- --------
Return on average common
shareholder's equity <F1> 16.5% 18.1% 15.5% 15.4%
-------- ------ -------- --------
Return on average owned assets <F1> 2.65 2.07 2.19 1.81
-------- ------ -------- --------
</TABLE>
All dollar amounts are stated in millions.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
September 30, December 31,
1997 1996
- --------------------------------------------------------------------------
<S> <C> <C>
Total assets:
Owned $22,299.1 $20,579.8
Managed 36,271.4 33,089.2
--------- ---------
Receivables:
Owned $17,229.1 $16,086.8
Serviced with limited recourse 13,972.3 12,509.4
--------- ---------
Managed $31,201.4 $28,596.2
========= =========
Debt to total shareholder's equity 4.3:1 5.9:1
--------- ---------
Debt to common shareholder's equity 4.3:1 6.1:1
--------- ---------
</TABLE>
[FN]
<F1> Annualized.
</FN>
See notes to interim condensed consolidated financial statements.
<PAGE>
<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 nine months ended September 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. ACQUISITIONS
- -----------------
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.
On October 21, 1997, Household International and a wholly-owned
subsidiary acquired the capital stock of ACC Consumer Finance
Corporation ("ACC"), a non-prime auto finance company. The
acquisition of ACC will be accounted for as a purchase. Upon the
consummation of this transaction, Household International
contributed the investment in ACC to Household Finance Corporation.
The financial position and results of operations of ACC will not be
material to the company's consolidated financial statements.
<PAGE>
<PAGE> 8
3. INVESTMENT SECURITIES
- --------------------------
Investment securities consisted of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
In millions. September 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 $ 129.0 $ 131.4 $ 212.7 $ 213.1
Corporate debt securities 1,245.2 1,251.4 1,069.5 1,058.5
U.S. government and federal
agency debt securities 221.2 207.5 252.6 243.7
Other 143.4 143.4 180.5 180.5
-------- -------- -------- --------
Subtotal 1,738.8 1,733.7 1,715.3 1,695.8
Accrued investment income 25.4 25.4 24.2 24.2
-------- -------- -------- --------
Total investment securities $1,764.2 $1,759.1 $1,739.5 $1,720.0
======== ======== ======== ========
</TABLE>
4. RECEIVABLES
- ----------------
Receivables consisted of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
September 30, December 31,
In millions. 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C>
Home equity $ 6,573.3 $ 2,513.9
Visa/MasterCard 3,849.5 6,308.9
Private label 3,972.2 3,807.0
Other unsecured 2,026.1 2,564.4
Commercial 808.0 892.6
--------- ----------
Total owned receivables 17,229.1 16,086.8
Accrued finance charges 234.7 215.8
Credit loss reserve for owned receivables (834.6) (671.5)
Unearned credit insurance premiums
and claims reserves (110.1) (82.6)
Amounts due and deferred from
receivables sales 1,395.7 1,404.8
Reserve for receivables serviced with
limited recourse (605.8) (561.6)
--------- ---------
Total owned receivables, net 17,309.0 16,391.7
Receivables serviced with limited
recourse 13,972.3 12,509.4
--------- ---------
Total managed receivables, net $31,281.3 $28,901.1
========= =========
</TABLE>
The outstanding balance of receivables serviced with limited recourse consisted
of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
September 30, December 31,
In millions. 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C>
Home equity $ 3,371.8 $ 4,337.5
Visa/MasterCard 6,395.8 5,043.5
Private label 375.0 517.0
Other unsecured 3,829.7 2,611.4
--------- ---------
Total $13,972.3 $12,509.4
========= =========
/TABLE
<PAGE>
<PAGE> 9
The combination of receivables owned and receivables serviced with
limited recourse, which the company considers its managed
portfolio, is shown below:
<TABLE>
<CAPTION>
- ----------------------------------------------------------
September 30, December 31,
In millions. 1997 1996
- ----------------------------------------------------------
<S> <C> <C>
Home equity $ 9,945.1 $6,851.4
Visa/MasterCard 10,245.3 11,352.4
Private label 4,347.2 4,324.0
Other unsecured 5,855.8 5,175.8
Commercial 808.0 892.6
---------- ---------
Total $31,201.4 $28,596.2
========= ==========
</TABLE>
At September 30, 1997 and December 31, 1996, the amounts due and
deferred from receivables sales of $1,395.7 and $1,404.8 million,
respectively, included unamortized securitization assets and funds
established pursuant to the recourse provisions for certain sales
totaling $1,293.0 and $1,096.5 million, respectively. The amounts
due and deferred also included customer payments not yet remitted
by the securitization trustee to the company of $78.0 and $275.7
million at September 30, 1997 and December 31, 1996, respectively.
In addition, the company has subordinated interests in certain
transactions, which were recorded as receivables, of $730.0 and
$388.5 million at September 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 $605.8 and $561.6 million at September 30, 1997 and
December 31, 1996, respectively, and represent the company's best
estimate of possible losses on receivables serviced with limited
recourse.
<PAGE>
<PAGE> 10
5. CREDIT LOSS RESERVES
- -------------------------
An analysis of credit loss reserves for the three and nine months
ended September 30 was as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
In millions. 1997 1996 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Credit loss reserves for owned
receivables at beginning
of period $ 825.4 $ 656.4 $ 671.5 $ 531.8
Provision for credit losses 194.5 114.7 622.2 373.0
Chargeoffs (204.1) (146.4) (572.7) (381.0)
Recoveries 21.1 19.6 61.9 57.7
Portfolio acquisitions, net (2.3) (9.7) 51.7 53.1
-------- -------- -------- --------
TOTAL CREDIT LOSS RESERVES FOR
OWNED RECEIVABLES AT
SEPTEMBER 30 834.6 634.6 834.6 634.6
-------- -------- -------- --------
Credit loss reserves for
receivables serviced with
limited recourse at beginning
of period 557.1 454.8 561.6 334.2
Provision for credit losses 222.5 167.7 499.4 432.1
Chargeoffs (186.6) (94.0) (484.5) (241.7)
Recoveries 12.9 5.0 27.0 10.2
Other, net (.1) (.6) 2.3 (1.9)
-------- -------- -------- ---------
TOTAL CREDIT LOSS RESERVES FOR
RECEIVABLES SERVICED WITH
LIMITED RECOURSE AT
SEPTEMBER 30 605.8 532.9 605.8 532.9
-------- -------- -------- ---------
TOTAL CREDIT LOSS RESERVES FOR
MANAGED RECEIVABLES AT
SEPTEMBER 30 $1,440.4 $1,167.5 $1,440.4 $1,167.5
======== ======== ======== ========
</TABLE>
6. INCOME TAXES
- -----------------
Effective tax rates for the nine months ended September 30, 1997
and 1996 of 36.2 and 32.1 percent, respectively, differ from the
statutory federal income tax rate for the respective periods
primarily because of the effects of (a) leveraged lease tax benefits,
(b) dividends received deduction applicable to term preferred stock,
(c) amortization of intangible assets, (d) state and local income
taxes and (e) United States loss carry forwards in 1996.
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 $169.2 million at September 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 $74.1 and $15.0 million at September 30,
1997 and December 31, 1996, respectively. Net interest income on
affiliated balances for the third quarter and first nine months of
1997 was $4.8 and $15.5 million, respectively, compared to $3.4 and
$5.6 million, respectively, for the same 1996 periods.
<PAGE>
<PAGE> 11
8. INTEREST RATE CONTRACTS
- ----------------------------
At September 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.
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>
<PAGE> 12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OPERATIONS SUMMARY
- ------------------
Net income for the third quarter and first nine months of 1997 was
$156.2 and $361.0 million, an increase of 48 and 40 percent,
respectively, compared to $105.4 and $258.6 million in the
comparable 1996 periods. The company's annualized return on average
common shareholder's equity for the third quarter and first nine
months of 1997 was 16.5 and 15.5 percent, respectively, compared to
18.1 and 15.4 percent in the respective year-ago periods. The
annualized return on average owned assets improved to 2.65 and 2.19
percent in the third quarter and first nine months of 1997,
respectively, up from 2.07 and 1.81 percent in the same year-ago
periods.
- - The following is a summary of the operating results of the
company's key businesses for the third quarter and first nine
months of 1997 compared to the corresponding prior year periods:
Net interest margin in the consumer finance business continued
to expand in the third quarter and first nine months of 1997 due
to improved pricing and higher levels of managed receivables,
but was partially offset by increased credit losses primarily
due to higher levels of personal bankruptcies.
In the third quarter, the Visa/MasterCard* business achieved
higher fee income and improved efficiency, which was offset by
higher credit losses resulting primarily from increased personal
bankruptcy filings. During the first nine months of 1997, the
Visa/MasterCard business realized 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
selling non-strategic portfolios, refining pricing strategies,
increasing fees and systematically eliminating unprofitable
accounts. Results for this business continued to benefit from
the company's co-branding and affinity relationship strategies,
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 reflecting the maturing of promotional balances and
increased personal bankruptcy filings in the third quarter and
first nine months of 1997, which were partially offset by higher
net interest margin.
- - 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 strengthened the company's core
consumer finance operations by expanding its branch network by 92
branches, adding new customer accounts, and increasing the secured
loan portion of the company's receivables portfolio. As of
September 30, 1997, the company has essentially completed the
integration of TFS. The company has closed all redundant branches
and has completely integrated all back-office functions.
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.
* VISA and MasterCard are registered trademarks of VISA USA, Inc.
and MasterCard International, Incorporated, respectively.
<PAGE>
<PAGE> 13
- - The company continues to maintain its 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 nine months of 1997 by
providing reserves in excess of net chargeoffs for owned
receivables of $111 million.
- - On October 21, 1997, Household International and a wholly-
owned subsidiary acquired the capital stock of ACC Consumer Finance
Corporation ("ACC"), a non-prime auto finance company. The
acquisition of ACC will be accounted for as a purchase. Upon the
consummation of this transaction, Household International
contributed the investment in ACC to Household Finance Corporation.
The financial position and results of operations of ACC will not be
material to the company's consolidated financial statements.
BALANCE SHEET REVIEW
- --------------------
- - Managed consumer receivables (owned and serviced with limited
recourse) were $30.4 billion at September 30, 1997, compared to
$30.6 billion at June 30, 1997 and $25.7 billion at September 30,
1996. The increase from the prior year was primarily due to the
acquisition of TFS in June 1997. Private label and other unsecured
product lines grew approximately 7 and 22 percent, respectively,
over prior year levels. Home equity loans rose 48 percent year over
year. Visa/MasterCard receivables were flat with the level of a
year ago.
- - Compared to the second quarter, managed consumer receivables
were down one percent. Home equity receivables fell slightly during
the quarter as the company's sales force focused on the conversion
and retention of TFS customers. Although successful in the
retention of TFS customers, the company experienced some attrition
in the base portfolio as new volume did not keep pace with runoff.
The Visa/MasterCard portfolio was also down due to the sale and
planned runoff of non-strategic and less profitable receivables
during the third quarter.
- - Owned consumer receivables were $16.4 billion at September 30,
1997, compared to $17.2 billion at June 30, 1997 and $14.6 billion
at September 30, 1996. 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 $1,440.4
million at September 30, 1997, up from $1,382.5 million at June 30,
1997 and $1,167.5 million at September 30, 1996. Credit loss
reserves as a percent of managed receivables were 4.62 percent,
compared to 4.40 percent at June 30, 1997 and 4.37 percent at
September 30, 1996. Reserves as a percent of nonperforming managed
receivables were 126.5 percent, compared to 127.6 percent at June
30, 1997 and 140.7 percent at September 30, 1996. Consumer two-
months-and-over contractual delinquency ("delinquency") as a
percent of managed consumer receivables was 4.84 percent, compared
to 4.46 percent at June 30, 1997 and 4.14 percent at September 30,
1996. The annualized total consumer managed chargeoff ratio in the
third quarter of 1997 was 4.65 percent, compared to 4.51 percent in
the prior quarter and 3.45 percent in the year-ago quarter.
- - The company's debt to total shareholder's equity was 4.3 to 1
at September 30, 1997 compared to 5.9 to 1 at December 31, 1996.
Debt to common shareholder's equity was 4.3 to 1 at September 30,
1997 compared to 6.1 to 1 at December 31, 1996. The decrease in the
ratios from year end is primarily attributable to the capital
contribution from the parent company in June 1997 to fund the TFS
acquisition.
<PAGE>
<PAGE> 14
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 September 30, 1997:
- - The company paid $75.0 million of dividends to its parent
company during the first quarter of 1997.
- - In June 1997, 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 the
conduit include credit card receivables and unsecured consumer
loans. The company subsequently terminated the $1.0 billion back-up
line and, in August 1997, replaced it with a $1.3 billion back-up
line for its commercial paper program.
- - 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.
- - On August 15, 1997, the company redeemed, at par, all
outstanding shares of its 7.25% term cumulative preferred Series
1992-A, for $100 per depositary share plus accrued and unpaid
dividends.
- - The funding requirements of the company increased by $1.7
billion due to the acquisition of TFS in June 1997, partially
offset by lower receivable levels in the company's existing
businesses.
- - The company had securitized home equity, Visa/MasterCard,
private label and other unsecured receivables outstanding of $14.0
and $12.5 billion at September 30, 1997 and December 31, 1996,
respectively. During the three months and nine months ended
September 30, 1997, the company securitized, excluding
replenishments of certificate holder interests, $1.0 and $3.2
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 Nine months ended
September 30, September 30,
1997 1997
- ---------------------------------------------------------------
<S> <C> <C>
Visa/MasterCard $ .1 $1.5
Other unsecured .9 1.7
---- ---
Total $1.0 $3.2
==== ====
</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.
<PAGE>
<PAGE> 15
INCOME STATEMENT REVIEW
- -----------------------
Net interest margin
- -------------------
Net interest margin was $299.1 and $854.6 million for the third
quarter and first nine months of 1997, up from $275.2 and $744.0
million in the prior year periods. Net interest margin as a percent
of average owned interest-earning assets, annualized, was 6.80
percent compared to 7.03 percent in the previous quarter and 6.91
percent in the year-ago quarter. The net interest margin percentage
in the second quarter of 1997 excludes the impact of temporary
investments that were used to pre-fund the acquisition of TFS.
Including the impact of these temporary investments, net interest
margin as a percent of average owned interest-earning assets,
annualized, was 6.78 percent in the second quarter of 1997. The
decrease in the net interest margin percentage in the third quarter
was the result of the change in product mix in the owned portfolio
due to asset securitizations, as discussed below. The dollar
increase in 1997 was primarily due to an increase in average owned
home equity loans and growth in private label 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 $624.6
and $1,746.4 million for the third quarter and first nine months of
1997, up 24 and 27 percent, respectively, compared to $502.0 and
$1,371.5 million in the same year-ago periods. Net interest margin
on a managed basis as a percent of average managed interest-earning
assets, annualized, was 7.88 percent compared to 7.86 percent in
the previous quarter and 7.48 percent in the year-ago quarter. The
net interest margin percentage on a managed basis for the second
quarter was also adversely impacted by the previously-mentioned
portfolio of temporary investments. Including the impact of these
temporary investments, the net interest margin percentage on a
managed basis was 7.71 percent in the second quarter of 1997. The
improvement over the year-ago quarter was primarily due to improved
pricing and the continuing change in product mix.
Provision for credit losses
- ---------------------------
The provision for credit losses for receivables on an owned basis
for the third quarter and first nine months of 1997 totaled $194.5
and $622.2 million, up 70 and 67 percent from $114.7 and $373.0
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 net chargeoffs related to owned receivables was $12
million for the three months ended September 30, 1997 compared to
net chargeoffs in excess of provision of $12 million for the same
period in 1996. For the nine months ended September 30, 1997 and
1996, provision in excess of net chargeoffs related to owned
receivables was $111 and $50 million, 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 $267.9 and $733.6 million in the third
quarter and first nine months of 1997, compared to $178.4 and
$529.0 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 50 and 39 percent increases in securitization
income compared to the third quarter and first nine months of 1996,
respectively, were primarily due to the higher levels of
securitized receivables outstanding in 1997.
<PAGE>
<PAGE> 16
Fee income includes revenues from fee-based products such as Visa/MasterCard
and private-label credit cards. Fee income was $87.6 and $206.6 million in
the third quarter and first nine months of 1997, up from $50.0 and $125.9
million in the comparable periods of the prior year. The increase reflected
higher late fees as a result of increased average owned credit card
receivables compared to the prior year.
Other income was $45.8 and $138.8 million in the third quarter and first
nine months of 1997, up from $27.8 and $63.1 million in the same periods
in 1996. The increase compared to the third quarter of 1996 was the result
of nonrecurring gains recognized on the sales of Visa/MasterCard receivables
from the company's non co-branded portfolio. The year-to-date 1997 amount
included nonrecurring gains of $50 million related to the sale of certain
non-strategic assets during the first quarter.
Expenses
- --------
Salaries and fringe benefits and other operating expenses were
$293.5 and $832.2 million compared to $277.8 and $789.3 million in
the third quarter and first nine 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 third quarter and first nine months of 1997 was
primarily due to an increase in sales force in the consumer finance
business, resulting from the acquisition of TFS in June 1997.
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>
- ------------------------------------------------------------------------------------
September 30, June 30, December 31, September 30,
1997 1997 1996 1996
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Owned $ 834.6 $ 825.4 $ 671.5 $ 634.6
Serviced with limited
recourse 605.8 557.1 561.6 532.9
-------- -------- -------- --------
Total $1,440.4 $1,382.5 $1,233.1 $1,167.5
======== ======== ======== ========
</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
126.5 percent, compared to 127.6 percent at June 30, 1997 and 140.7
percent at September 30, 1996.
Total owned and managed credit loss reserves as a percent of
receivables were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
September 30, June 30, December 31, September 30,
1997 1997 1996 1996
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Owned 4.84% 4.58% 4.17% 4.06%
Managed 4.62 4.40 4.31 4.37
---- ---- ---- ----
</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. See Note 5, "Credit Loss Reserves" in the accompanying
financial statements for analyses of reserves.
<PAGE>
<PAGE> 17
CREDIT QUALITY
- --------------
Delinquency and chargeoff levels in the consumer portfolio were
higher compared to the prior and year-ago quarters. 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>
- -----------------------------------------------------------------------------------------
9/30/97 6/30/97 3/31/97 12/31/96 9/30/96
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Home equity 3.20% 2.94% 3.53% 3.62% 3.59%
Visa/MasterCard 3.39 3.36 3.32 2.90 2.64
Private label 7.06 6.31 5.81 5.95 5.68
Other unsecured 8.52 7.85 7.68 7.04 6.79
---- ---- ---- ---- ----
Total 4.84% 4.46% 4.62% 4.33% 4.14%
==== ==== ==== ==== ====
</TABLE>
Delinquency as a percent of managed consumer receivables increased from
the prior quarter and the prior year. The increase in delinquency from
the second quarter was primarily due to seasoning of the other unsecured
portfolio, as well as seasoning of promotional business in the private
label portfolio. Home equity delinquency was up due to the normal maturation
of the TFS acquisition. Visa/MasterCard delinquency was moderately flat in
the quarter.
The increase in the delinquency ratio compared to a year ago was
primarily due to seasoning of the portfolios and the company's
continued shift in portfolio mix toward unsecured products.
Net Chargeoffs of Consumer Receivables
- --------------------------------------
Net Chargeoffs of Consumer Receivables (as a percent, annualized,
of average managed consumer receivables):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
1997 1997 1997 1996 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Home equity .69% 1.09% 1.35% 1.22% .96%
Visa/MasterCard 6.57 5.38 4.76 3.90 3.99
Private label 5.52 5.13 5.36 3.78 3.78
Other unsecured 7.36 6.78 6.34 5.53 5.57
---- ---- ---- ---- ----
Total 4.65% 4.51% 4.31% 3.51% 3.45%
==== ==== ==== ==== ====
</TABLE>
Net chargeoffs as a percent of average managed consumer receivables
for the third quarter of 1997 increased compared to both the prior
and year-ago periods. The increase in Visa/MasterCard chargeoffs in
the quarter was primarily due to the maturation of the portfolio
purchased from Barnett Banks, Inc. in the fourth quarter of 1996.
The Visa/MasterCard chargeoff ratio was also negatively affected by
lower average receivables compared to the prior quarter. Chargeoffs
in the private label portfolio also increased due to the maturing
of promotional balances and high levels of personal bankruptcies.
The remaining increase in the total chargeoff ratio was primarily
attributable to the continued seasoning of the other unsecured
portfolio, also coupled with high levels of personal bankruptcies.
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.<PAGE>
<PAGE> 18
Nonperforming Assets
- --------------------
Nonperforming assets consisted of the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
In millions. 9/30/97 6/30/97 3/31/97 12/31/96 9/30/96
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual managed
receivables $ 654.7 $ 616.3 $ 558.4 $ 519.9 $500.0
Accruing managed consumer
receivables 90 or more days
delinquent 470.9 454.4 432.2 405.7 310.0
Renegotiated commercial
loans 12.9 12.9 12.9 12.9 19.9
-------- -------- -------- -------- ------
Total nonperforming managed
receivables 1,138.5 1,083.6 1,003.5 938.5 829.9
Real estate owned 122.9 119.6 125.6 112.1 107.4
-------- -------- -------- -------- ------
Total nonperforming assets $1,261.4 $1,203.2 $1,129.1 $1,050.6 $937.3
======== ======== ======== ======== ======
Managed credit loss reserves as
a percent of nonperforming
managed receivables 126.5% 127.6% 131.4% 131.4% 140.7%
-------- -------- -------- -------- ------
</TABLE>
<PAGE>
<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
No Form 8-K reports were filed during the third quarter of 1997.
<PAGE>
<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: November 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>
<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.
<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
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
All dollar amounts are stated in millions.
Nine months ended September 30 1997 1996
- --------------------------------------------------------------------
<S> <C> <C>
Net income $ 361.0 $ 258.6
Income taxes 205.1 122.5
-------- --------
Income before income taxes 566.1 381.1
-------- --------
Fixed charges:
Interest expense <F1> 765.6 670.5
Interest portion of rentals <F2> 15.4 15.0
-------- --------
Total fixed charges 781.0 685.5
-------- --------
Total earnings as defined $1,347.1 $1,066.6
======== ========
Ratio of earnings to fixed charges 1.72 1.56
======== ========
Preferred stock dividends <F3> $ 7.2 $ 8.0
======== ========
Ratio of earnings to combined fixed charges
and preferred stock dividends 1.71 1.54
======== ========
<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 36.2 and 32.1 percent for the
nine months ended September 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 172,700
<SECURITIES> 1,759,100
<RECEIVABLES> 17,229,100
<ALLOWANCES> 1,440,400
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 563,600
<DEPRECIATION> 317,200
<TOTAL-ASSETS> 22,299,100
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 12,097,700
0
0
<COMMON> 1
<OTHER-SE> 3,861,200
<TOTAL-LIABILITY-AND-EQUITY> 22,299,100
<SALES> 0
<TOTAL-REVENUES> 2,885,300
<CGS> 0
<TOTAL-COSTS> 958,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 622,200
<INTEREST-EXPENSE> 739,000
<INCOME-PRETAX> 566,100
<INCOME-TAX> 205,100
<INCOME-CONTINUING> 361,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 361,000
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>FINANCIAL STATEMENTS OF THE COMPANY WERE PREPARED IN ACCORDANCE WITH
FINANCIAL INSTITUTION INDUSTRY STANDARDS. ACCORDINGLY, THE COMPANY'S
BALANCE SHEETS WERE NON-CLASSIFIED.
</FN>
</TABLE>
<PAGE> 1
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 September 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
------ ------ ------ ------- ------
Household Bank (Nevada), N.A.
Senior debt A A2 A+ A+ A+
- ------------------------------------------------------------------------------------------------------------
</TABLE>
