<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 March 31, 1998
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OR
[ ] TRANSITION 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
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
At April 30, 1998, 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.
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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
Ended March 31, 1998 and 1997 2
Condensed Consolidated Balance Sheets -
March 31, 1998 (Unaudited) and December 31, 1997 3
Condensed Consolidated Statements of Cash Flows
(Unaudited) - Three Months Ended
March 31, 1998 and 1997 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 10
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
<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 March 31 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Finance income $573.4 $501.6
Other interest income 5.7 5.0
Interest expense 276.6 233.2
------ ------
Net interest margin 302.5 273.4
Provision for credit losses on owned receivables 208.8 233.5
------ ------
Net interest margin after provision for credit losses 93.7 39.9
------ ------
Securitization income 281.8 228.8
Insurance revenues 46.4 41.9
Investment income 26.9 25.3
Fee income 78.0 54.7
Other income 13.6 69.3
------ ------
Total other revenues 446.7 420.0
------ ------
Salaries and fringe benefits 123.5 107.6
Other operating expenses 126.9 138.5
Amortization of acquired intangibles and goodwill 41.2 33.1
Policyholders' benefits 41.6 42.1
------ ------
Total costs and expenses 333.2 321.3
------ ------
Income before income taxes 207.2 138.6
Income taxes 70.2 49.5
------ ------
Net income $137.0 $ 89.1
====== ======
</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>
- -----------------------------------------------------------------------------------
March 31, December 31,
1998 1997
- -----------------------------------------------------------------------------------
ASSETS (Unaudited)
- ------
<S> <C> <C>
Cash $ 369.3 $ 291.4
Investment securities 1,673.5 1,723.8
Receivables, net 19,804.3 17,677.8
Advances to parent company and affiliates 67.5 10.5
Acquired intangibles and goodwill, net 1,877.4 1,734.2
Properties and equipment, net 204.4 235.5
Real estate owned 113.0 102.3
Other assets 1,487.3 1,159.2
--------- ---------
Total assets $25,596.7 $22,934.7
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
- ------------------------------------
Debt:
Commercial paper, bank and other borrowings $ 5,966.4 $ 4,962.0
Senior and senior subordinated debt (with
original maturities over one year) 13,456.0 12,022.0
--------- ---------
Total debt 19,422.4 16,984.0
Insurance policy and claim reserves 937.4 1,057.1
Other liabilities 938.9 862.2
--------- ---------
Total liabilities 21,298.7 18,903.3
--------- ---------
Common shareholder's equity:
Common stock, $1.00 par value, 1,000
shares authorized, issued and outstanding
at March 31, 1998 and December 31, 1997,
and additional paid-in capital 2,256.3 2,056.3
Retained earnings 2,042.4 1,980.4
Foreign currency translation adjustments (8.2) (8.3)
Unrealized gain on investments, net 7.5 3.0
--------- ---------
Total common shareholder's equity 4,298.0 4,031.4
--------- ---------
Total liabilities and shareholder's equity $25,596.7 $22,934.7
========= =========
</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>
- ----------------------------------------------------------------------------------
Three months ended March 31 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C>
CASH PROVIDED BY OPERATIONS
Net income $ 137.0 $ 89.1
Adjustments to reconcile net income to cash
provided by operations:
Provision for credit losses on owned receivables 208.8 233.5
Insurance policy and claim reserves (109.1) 22.8
Depreciation and amortization 61.2 53.3
Net realized gains from sales of assets - (50.6)
Other, net (215.4) 70.0
--------- ---------
Cash provided by operations 82.5 418.1
--------- ---------
INVESTMENTS IN OPERATIONS
Investment securities:
Purchased (272.5) (377.2)
Matured 34.7 43.9
Sold 167.6 210.6
Short-term investment securities, net change 128.6 159.1
Receivables:
Originations, net (3,596.9) (2,750.6)
Purchases and related premiums (2,120.5) (310.3)
Sold 3,153.8 3,564.6
Properties and equipment purchased (9.2) (10.3)
Properties and equipment sold 20.1 .9
Advances to parent company and affiliates, net (57.0) (349.3)
--------- ---------
Cash increase (decrease) from investments in
operations (2,551.3) 181.4
--------- ---------
FINANCING AND CAPITAL TRANSACTIONS
Short-term debt, net change 1,004.4 (551.5)
Senior and senior subordinated debt issued 2,437.5 772.3
Senior and senior subordinated debt retired (1,015.4) (718.6)
Policyholders' benefits paid (26.8) (37.7)
Cash received from policyholders 22.0 57.7
Dividends on preferred stock - (1.8)
Dividends paid to parent company (75.0) (75.0)
Capital contribution from parent company 200.0 -
--------- ---------
Cash increase (decrease) from financing and
capital transactions 2,546.7 (554.6)
--------- ---------
Increase in cash 77.9 44.9
Cash at January 1 291.4 228.5
--------- ---------
Cash at March 31 $ 369.3 $ 273.4
========= =========
Supplemental cash flow information:
Interest paid $ 257.8 $ 204.5
--------- ---------
Income taxes received (30.7) (22.6)
--------- ---------
</TABLE>
See notes to interim condensed consolidated financial statements.
<PAGE>
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Household Finance Corporation and Subsidiaries
FINANCIAL HIGHLIGHTS
- ---------------------
All dollar amounts are stated in millions.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Three months ended March 31 1998 1997
- -----------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 137.0 $ 89.1
--------- ---------
Net interest margin and other revenues <F1> 707.6 651.3
--------- ---------
Return on average common shareholder's
equity <F2> 13.4% 13.4%
--------- ---------
Return on average owned assets <F2> 2.24 1.69
--------- ---------
All dollar amounts are stated in millions.
- -----------------------------------------------------------------------------------
March 31, December 31,
1998 1997
- -----------------------------------------------------------------------------------
Total assets:
Owned $25,596.7 $22,934.7
Managed 40,265.8 38,065.0
--------- ---------
Receivables:
Owned $19,683.7 $17,512.3
Serviced with limited recourse 14,669.1 15,130.3
--------- ---------
Managed $34,352.8 $32,642.6
========= =========
Debt to total shareholder's equity 4.5:1 4.2:1
--------- ---------
<FN>
<F1> Policyholders' benefits have been netted against other revenues.
<F2> Annualized.
</FN>
</TABLE>
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 ("HFC") and its
subsidiaries have been prepared in accordance with generally
accepted accounting principles for interim financial information.
Additionally, these financial statements have been prepared in
accordance with the instructions to Form 10-Q and Article 10 of
Regulation S-X. 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 months ended March 31, 1998 should not be considered
indicative of the results for any future quarters or the year
ending December 31, 1998. HFC and its subsidiaries may also be
referred to in this Form 10-Q as "we," "us" or "our." For further
information, refer to the consolidated financial statements and
footnotes included in our annual report on Form 10-K for the year
ended December 31, 1997.
2. PENDING MERGER
- -------------------
On April 7, 1998, Household International, Inc., our parent
company, announced that it entered into a definitive agreement to
combine with Beneficial Corporation ("Beneficial"), a consumer
finance holding company headquartered in Wilmington, Delaware. The
merger, which is expected to close in the third quarter of 1998, is
subject to the approval of both companies' shareholders, as well as
certain regulatory authorities. Under the terms of the agreement,
Household International will issue 1.0222 shares of its common
stock for each outstanding share of Beneficial common stock. The
merger will be accounted for as a pooling of interests. On March
31, 1998, Beneficial's total assets were $16.6 billion and
shareholders' equity was $2.0 billion.
In connection with the merger, Household International expects to
incur pre-tax merger and integration related costs of approximately
$1 billion. These costs include lease exit costs and related fixed
assets impairment, severance and change in control payments, asset
write downs to reflect modified business plans, legal and
investment banking fees, and prepayment premiums related to debt.
3. INVESTMENT SECURITIES
- --------------------------
Investment securities consisted of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
In millions. March 31, 1998 December 31, 1997
- -------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE INVESTMENTS
Marketable equity securities $ 127.8 $ 129.9 $ 128.4 $ 131.9
Corporate debt securities 1,187.4 1,198.0 1,231.9 1,245.1
U.S. government and federal
agency debt securities 189.5 188.5 222.0 209.9
Other 132.4 132.4 113.5 113.5
-------- -------- -------- --------
Subtotal 1,637.1 1,648.8 1,695.8 1,700.4
Accrued investment income 24.7 24.7 23.4 23.4
-------- -------- -------- --------
Total investment securities $1,661.8 $1,673.5 $1,719.2 $1,723.8
======== ======== ======== ========
</TABLE>
<PAGE>
<PAGE> 8
4. RECEIVABLES
- ----------------
Receivables consisted of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
March 31, December 31,
In millions. 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Home equity $ 7,690.0 $ 6,953.1
Auto finance 654.4 476.5
MasterCard/Visa 4,905.2 4,105.0
Private label 3,374.1 3,365.2
Other unsecured 2,391.2 1,857.5
Commercial 668.8 755.0
--------- ---------
Total owned receivables 19,683.7 17,512.3
Accrued finance charges 261.7 240.9
Credit loss reserve for
owned receivables (955.7) (857.6)
Unearned credit insurance premiums
and claims reserves (125.9) (120.1)
Amounts due and deferred from
receivables sales 1,606.9 1,591.5
Reserve for receivables serviced with
limited recourse (666.4) (689.2)
--------- ---------
Total owned receivables, net 19,804.3 17,677.8
Receivables serviced with limited
recourse 14,669.1 15,130.3
--------- ---------
Total managed receivables, net $34,473.4 $32,808.1
========= =========
</TABLE>
The outstanding balance of receivables serviced with limited recourse
consisted of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
March 31, December 31,
In millions. 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Home equity $ 2,825.4 $ 3,125.9
Auto finance 348.0 395.9
MasterCard/Visa 6,633.0 6,775.7
Private label 986.1 1,025.0
Other unsecured 3,876.6 3,807.8
--------- ---------
Total $14,669.1 $15,130.3
========= =========
</TABLE>
The combination of receivables owned and receivables serviced with limited
recourse, which we consider our managed portfolio, is shown below:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
March 31, December 31,
In millions. 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Home equity $10,515.4 $10,079.0
Auto finance 1,002.4 872.4
MasterCard/Visa 11,538.2 10,880.7
Private label 4,360.2 4,390.2
Other unsecured 6,267.8 5,665.3
Commercial 668.8 755.0
--------- ---------
Total $34,352.8 $32,642.6
========= =========
</TABLE>
<PAGE>
<PAGE> 9
The amounts due and deferred from receivables sales were $1,606.9
million at March 31, 1998 and $1,591.5 million at December 31,
1997. The amounts due and deferred included unamortized
securitization assets and funds set up under the recourse
requirements for certain sales totaling $1,513.5 million at March
31, 1998 and $1,480.3 million at December 31, 1997. It also
included customer payments not yet sent to us by the securitization
trustee of $73.3 million at March 31, 1998 and $90.7 million at
December 31, 1997. In addition, we have subordinated interests in
certain transactions, which were recorded as receivables, of $898.5
million at March 31, 1998 and $888.7 million at December 31, 1997.
We have agreements with a "AAA"-rated third party who will insure
us for up to $21.2 million in losses relating to certain
securitization transactions. We maintain credit loss reserves under
the recourse requirements for receivables serviced with limited
recourse which are based on estimated probable losses under those
requirements. The reserves totaled $666.4 million at March 31, 1998
and $689.2 million at December 31, 1997 and represents our best
estimate of probable losses on receivables serviced with limited
recourse.
5. CREDIT LOSS RESERVES
- -------------------------
An analysis of credit loss reserves for the three months ended
March 31 was as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
In millions. 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Credit loss reserves for owned receivables
at January 1 $ 857.6 $ 671.5
Provision for credit losses 208.8 233.5
Chargeoffs (215.7) (188.7)
Recoveries 16.9 16.4
Portfolio acquisitions, net 88.1 (8.6)
-------- --------
TOTAL CREDIT LOSS RESERVES FOR OWNED RECEIVABLES
AT MARCH 31 955.7 724.1
-------- --------
Credit loss reserves for receivables serviced with
limited recourse at January 1 689.2 561.6
Provision for credit losses 179.6 156.6
Chargeoffs (215.8) (132.3)
Recoveries 13.5 6.2
Other, net (.1) 2.3
-------- --------
TOTAL CREDIT LOSS RESERVES FOR RECEIVABLES SERVICED
WITH LIMITED RECOURSE AT MARCH 31 666.4 594.4
-------- --------
TOTAL CREDIT LOSS RESERVES FOR MANAGED RECEIVABLES
AT MARCH 31 $1,622.1 $1,318.5
======== ========
</TABLE>
6. INCOME TAXES
- -----------------
The effective tax rate was 33.9 percent for the three months ended
March 31, 1998 and 35.7 percent in the year-ago period. The
effective tax rate differs from the statutory federal income tax
rate in these years 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 and (d) state and local income taxes.
<PAGE>
<PAGE> 10
7. TRANSACTIONS WITH PARENT COMPANY AND AFFILIATES
- ----------------------------------------------------
We periodically advance funds to Household International and
affiliates or receive amounts in excess of our parent company's
current requirements. Advances to parent company and affiliates
were $67.5 million at March 31, 1998 compared to $10.5 million at
December 31, 1997. Advances from parent company and affiliates,
which are included in commercial paper, bank and other borrowings,
were $450.0 million at March 31, 1998 and $250.0 million at
December 31, 1997. Net interest income on affiliated balances was
$1.8 million for the three months ended March 31, 1998 and $6.1
million for the three months ended March 31, 1997.
8. COMPREHENSIVE INCOME
- -------------------------
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("FAS No. 130"), effective for fiscal years
beginning after December 15, 1997. This statement establishes
standards for the reporting and presentation of comprehensive
income. Comprehensive income, in addition to traditional net
income, includes the mark-to-market adjustments on available-for-
sale securities, cumulative translation adjustments and other items
which represent a change in equity from "nonowner" sources. FAS No.
130 does not change existing requirements for certain items to be
reported as a separate component of shareholder's equity. In
accordance with the interim reporting guidelines of FAS No. 130,
comprehensive income was $141.6 million for the quarter ended March
31, 1998 and $65.2 million for the quarter ended March 31, 1997.
<PAGE>
<PAGE> 11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Form 10-Q contains certain estimates and projections regarding
our parent company, Household International, Inc., and its proposed
merger with Beneficial Corporation, that may be forward-looking in
nature, as defined by the Private Securities Litigation Reform Act
of 1995. A variety of factors may cause actual results to differ
materially from the results discussed in these forward-looking
statements. Factors that might cause such a difference are
discussed herein and in Household International's Form 10-Q for the
quarter ended March 31, 1998, and in Household International's and
Beneficial Corporation's Annual Reports on Forms 10-K, for the year
ended December 31, 1997, all filed with the Securities and Exchange
Commission.
OPERATIONS SUMMARY
- ------------------
Our net income for the first quarter of 1998 was $137.0 million, up
54 percent from $89.1 million in 1997. Our annualized return on
average common shareholder's equity for the first quarter of 1998
was 13.4 percent, unchanged from the year-ago period. Our
annualized return on average owned assets improved to 2.24 percent
in the 1998 first quarter from 1.69 percent a year ago.
- - The following summarizes our operating results for our key
businesses for the first quarter of 1998 compared to the prior
year period:
Results for our consumer finance business improved from the
prior year period reflecting higher net interest margin and fee
income due mainly to higher levels of average managed
receivables. These improvements were partially offset by higher
credit losses resulting primarily from increased personal
bankruptcy filings.
Our MasterCard* and Visa* credit card business reported lower
net interest margin partially offset by higher fee income and
improved operating efficiency. This business includes our co-
branding and affinity relationship strategies, in particular our
alliance with General Motors Corporation ("GM") to issue the GM
Card, a co-branded credit card, and the AFL-CIO's Union
Privilege affinity relationship.
Our private label credit card business reported higher credit
losses, partially offset by higher net interest margin and fee
income, and improved efficiency. Higher credit losses reflected
higher personal bankruptcies as well as the maturing of
promotional balances in the first quarter of 1998.
- - We continued to increase our credit loss reserves during the
first three months of 1998 due to the maturing of our unsecured
loan portfolios and continued high levels of personal bankruptcies.
- - On April 7, 1998, Household International, our parent company,
announced that it entered into a definitive agreement to combine
with Beneficial Corporation ("Beneficial"), a consumer finance
holding company headquartered in Wilmington, Delaware. The
merger, which is expected to close in the third quarter of 1998,
is subject to the approval of both companies' shareholders, as
well as certain regulatory authorities. Under the terms of the
agreement, Household International will issue 1.0222 shares of
its common stock for each outstanding share of Beneficial common
stock. The merger will be accounted for as a pooling of
interests. On March 31, 1998, Beneficial's total assets were
$16.6 billion and shareholders' equity was $2.0 billion.
* MasterCard is a registered trademark of MasterCard
International, Incorporated and Visa is a registered
trademark of VISA USA, Inc.
<PAGE>
<PAGE> 12
In connection with the merger, Household International expects
to incur pre-tax merger and integration related costs of
approximately $1 billion. These costs include lease exit costs
and related fixed assets impairment, severance and change in
control payments, asset write downs to reflect modified business
plans, legal and investment banking fees, and prepayment
premiums related to debt.
BALANCE SHEET REVIEW
- --------------------
- - Managed consumer receivables (receivables on our balance sheet
plus receivables serviced with limited recourse) grew 23 percent
over the prior year. Growth in home equity loans and auto finance
receivables reflect the acquisitions of Transamerica Financial
Services Holding Company ("TFS") in June 1997 and ACC Consumer
Finance Corporation ("ACC") in October 1997. Additionally, new loan
originations in our retail branch network were up 30 percent from
the prior year. However, the higher level of refinancings continued
to impact home equity loan growth. MasterCard and Visa receivables
were up from a year ago due to the purchase of a $925 million
portfolio late in the quarter. This growth was offset by the non-
strategic portfolio sales which occurred in the second half of
1997. Other unsecured receivables were up compared to the prior
year reflecting the purchase of an $850 million portfolio in the
quarter. In addition, other unsecured growth was affected by our
slowed origination of new unsecured business because of the
uncertain credit environment.
- - Compared to the fourth quarter of 1997, managed consumer
receivables were up primarily due to the acquisitions discussed
above. This growth was partially offset, however, due to the
normal, seasonal runoff experienced in the MasterCard and Visa
portfolio and the slowing of new originations of other unsecured
receivables as discussed above. New loan originations in our retail
branch network were up 7 percent in the quarter. However, the
higher level of refinancings continued to impact home equity loan
growth.
- - Consumer receivables on our balance sheet were $19.0 billion
at March 31, 1998, up from $16.8 billion at December 31, 1997 and
$14.5 billion at March 31, 1997. Changes in these owned receivables
from period to period may vary depending on the timing and
significance of securitization transactions.
- - Our managed credit loss reserves were $1,622.1 million at
March 31, 1998, up from $1,546.8 million at December 31, 1997 and
$1,318.5 million at March 31, 1997. Credit loss reserves as a
percent of managed receivables were 4.72 percent, compared to 4.74
percent at December 31, 1997 and 4.66 percent at March 31, 1997.
Reserves as a percent of nonperforming managed receivables were
120.4 percent, compared to 124.2 percent at December 31, 1997 and
131.4 percent at March 31, 1997. Consumer two-months-and-over
contractual delinquency ("delinquency") as a percent of managed
consumer receivables was 5.05 percent, compared to 5.09 percent at
December 31, 1997 and 4.62 percent at March 31, 1997. The
annualized total consumer managed chargeoff ratio in the first
quarter of 1998 was 4.85 percent, compared to 4.55 percent in the
prior quarter and 4.31 percent in the year-ago quarter.
- - Our debt to total shareholder's equity ratio was 4.5 to 1
compared to 4.2 to 1 at December 31, 1997. The increase was due to
higher debt levels primarily attributable to higher average owned
receivables at March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Our major use of cash is the origination or purchase of receivables
or purchases of investment securities. Our main sources of cash are
the collection of receivable balances, maturities or sales of
investment securities, proceeds from the issuance of debt and
securitization of consumer receivables, and cash provided by
operations.
<PAGE>
<PAGE> 13
The following describes major changes in our funding base from
December 31, 1997 to March 31, 1998:
- - We paid $75.0 million of dividends to our parent company
during the quarter.
- - Commercial paper, bank and other borrowings increased 20
percent from $5.0 billion to $6.0 billion. Senior and senior
subordinated debt (with original maturities over one year)
increased 13 percent from $12.0 billion to $13.5 billion. The
increase in debt levels from year end is primarily attributable to
the increase in owned receivables.
- - In March 1998, we received a capital contribution from our
parent company of $200 million in connection with the acquisition
of a credit card portfolio during the quarter.
- - Our securitized portfolio of home equity, auto finance,
MasterCard and Visa, private label and other unsecured receivables
totaled $14.7 billion at March 31, 1998, compared to $15.1 billion
at December 31, 1997. In the first quarter of 1998, we securitized,
excluding replenishments of certificate holder interests, $.3
billion of other unsecured receivables, compared to $1.1 billion of
MasterCard and Visa and other unsecured receivables a year ago.
The composition of these securitizations by type is as follows
(in billions):
<TABLE>
<CAPTION>
- ------------------------------------------------------------
March 31, March 31,
Three months ended 1998 1997
- ------------------------------------------------------------
<S> <C> <C>
MasterCard/Visa $ - $ .3
Other unsecured .3 .8
---- ----
Total $ .3 $1.1
==== ====
</TABLE>
The market for securities backed by receivables is a reliable,
efficient and cost-effective source of funds, which we plan to
continue to utilize in the future.
INCOME STATEMENT REVIEW
- -----------------------
Net interest margin
- -------------------
Net interest margin was $302.5 million for the first quarter of
1998, up from $273.4 million in the prior year. Net interest margin
as a percent of average owned interest-earning assets, annualized,
was 6.18 percent in the first quarter of 1998 compared to 6.65
percent in the year-ago quarter. The decrease in the net interest
margin percentage in 1998 was the result of the change in product
mix in the owned portfolio due to asset securitizations, as
discussed below. The dollar increase was primarily due to an
increase in average owned home equity loans, as a result of the
acquisition of TFS in 1997, but was partially offset by a decrease
in average owned credit card receivables.
<PAGE>
<PAGE> 14
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 rather than held in our portfolio, net
interest income is reclassified to securitization income. Net
interest margin on a managed basis, assuming receivables
securitized were held in our portfolio, was $669.6 million for the
first quarter of 1998, compared to $555.7 million in the same year-
ago period. Net interest margin on a managed basis as a percent of
average managed interest-earning assets, annualized, was 7.79
percent compared to 7.69 percent in the year-ago quarter. The
improvement over the year-ago quarter was primarily due to the
continuing change in product mix, improved pricing and lower
leverage.
Provision for credit losses
- ---------------------------
The provision for credit losses for receivables on an owned basis
for the first quarter of 1998 totaled $208.8 million, compared to
$233.5 million in the prior year period. Owned provision in excess
of owned chargeoffs was $10 million for the three months ended
March 31, 1998 and $61 million for the three months ended March 31,
1997. We continued to record a provision for credit losses in
excess of current period chargeoffs because of continued
uncertainty regarding consumer payment patterns, the continued high
levels of personal bankruptcies and the maturing of our unsecured
loan products. The maturing or seasoning of a product is the effect
of a growing portfolio reaching expected levels of chargeoffs as
loans age. 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 was $281.8 million for the three months ended
March 31, 1998 and $228.8 million for the same period in 1997.
Securitization income consists of income associated with the
securitization and sale of receivables with limited recourse,
including net interest margin, fee and other income and provision
for credit losses related to those receivables. The 23 percent
increase in securitization income compared to the first quarter of
1997 was primarily due to the increase in average securitized
receivables.
Fee income on an owned basis includes revenues from fee-based
products such as credit cards. Fee income was $78.0 million in the
first quarter of 1998, up from $54.7 million in the comparable
period of the prior year. The increase in fee income in 1998
reflected higher credit card fees compared to the prior year.
Other income was $13.6 million in the first quarter of 1998, down
from $69.3 million in 1997. Other income in 1997 included
approximately $50 million of non-recurring gains on the sales of
certain non-strategic assets during the prior year quarter.
Expenses
- --------
Salaries and fringe benefits and other operating expenses were
$250.4 million compared to $246.1 million in the first quarter of
1997. Salaries and fringe benefits expense was higher due to an
increase in employees in our consumer finance and auto finance
businesses in connection with our acquisitions of TFS in June 1997
and ACC in October 1997. Other operating expenses decreased
reflecting our overall expense control efforts.
Amortization of acquired intangibles and goodwill was $41.2 million
in the first quarter of 1998, up from $33.1 million in the prior
year period. The increase reflects our acquisitions of TFS and ACC
in 1997.
<PAGE>
<PAGE> 15
CREDIT LOSS RESERVES
- --------------------
Our 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
established on the off-balance sheet portfolio when receivables are
securitized, were as follows (in millions):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
March 31, December 31, March 31,
1998 1997 1997
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Owned $ 955.7 $ 857.6 $ 724.1
Serviced with limited recourse 666.4 689.2 594.4
-------- -------- --------
Total $1,622.1 $1,546.8 $1,318.5
======== ======== ========
</TABLE>
We have increased total managed credit loss reserves from the prior
quarters due to seasoning of unsecured loan portfolios and
uncertainty resulting from continued high levels of personal
bankruptcies. Managed credit loss reserves as a percent of
nonperforming managed receivables were 120.4 percent, compared to
124.2 percent at December 31, 1997 and 131.4 percent at March 31,
1997.
Total owned and managed credit loss reserves as a percent of
receivables were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------
March 31, December 31, March 31,
1998 1997 1997
- ---------------------------------------------------------
<S> <C> <C> <C>
Owned 4.86% 4.90% 4.70%
Managed 4.72 4.74 4.66
----- ---- ----
</TABLE>
The level of reserves for consumer credit losses is based on
delinquency and chargeoff experience by product and judgmental
factors. We also evaluate 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.
CREDIT QUALITY
- --------------
Delinquency and chargeoff statistics reflect the impact of the
portfolio acquisitions during the quarter. Delinquency levels in
the consumer portfolio were down slightly compared to the prior
quarter, but were higher than the first quarter of 1997. Chargeoffs
were up compared to the prior and year-ago quarters. We track
delinquency and chargeoff levels on a managed basis. We include the
off-balance sheet portfolio since we apply the same credit and
portfolio management procedures as on our owned portfolio. This
results in a similar credit loss exposure for us.
<PAGE>
<PAGE> 16
Delinquency
- -----------
Two-Months-and-Over Contractual Delinquency (as a percent of
managed consumer receivables):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
3/31/98 12/31/97 9/30/97 6/30/97 3/31/97
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Home equity 3.92% 4.03% 3.20% 2.94% 3.53%
Auto finance <F1> 1.84 1.97 - - -
MasterCard/Visa 3.21 3.22 3.39 3.36 3.32
Private label 7.50 7.45 7.06 6.31 5.81
Other unsecured 9.12 9.22 8.52 7.85 7.68
---- ---- ---- ---- ----
Total 5.05% 5.09% 4.84% 4.46% 4.62%
==== ==== ==== ==== ====
<FN>
<F1> Prior to the fourth quarter of 1997, delinquency statistics for
auto finance receivables were not significant. For prior
periods, delinquency data for these receivables were included
in other unsecured receivables.
</FN>
</TABLE>
Delinquency as a percent of managed consumer receivables decreased
from the prior quarter but increased from the prior year quarter.
The decrease from the prior quarter was primarily due to a decrease
in dollars of delinquencies in the private label portfolio.
The increase in the managed delinquency ratio from a year ago was
due to seasoning of the home equity and other unsecured portfolios
and the maturing of certain special promotional balances in our
private label portfolio.
Net Chargeoffs of Consumer Receivables
- --------------------------------------
Net Chargeoffs of Consumer Receivables (as a percent, annualized,
of average managed consumer receivables):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
1998 1997 1997 1997 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Home equity .88% .75% .69% 1.09% 1.35%
Auto finance <F1> 5.95 5.33 - - -
MasterCard/Visa 5.93 5.74 6.57 5.38 4.76
Private label 7.23 6.03 5.52 5.13 5.36
Other unsecured 7.60 7.78 7.36 6.78 6.34
---- ---- ---- ---- ----
Total 4.85% 4.55% 4.65% 4.51% 4.31%
==== ==== ==== ==== ====
<FN>
<F1> Prior to the fourth quarter of 1997, chargeoff statistics for auto
finance receivables were not significant and were included in other
unsecured receivables.
</FN>
</TABLE>
<PAGE>
<PAGE> 17
Net chargeoffs as a percent of average managed consumer receivables for
the first quarter of 1998 increased compared to both the prior and
year-ago periods. The increase in chargeoffs in the auto finance
portfolio was primarily due to seasonality in the auto industry. The
MasterCard and Visa net chargeoff ratio increased from the prior quarter
due to lower recoveries. Beginning in the first quarter of 1998, a
greater number of charged off receivables are being collected internally
rather than sold to an external third party. Because these accounts are
retained by us, recoveries will be recorded when the cash is actually
collected. Gross chargeoff dollars in our MasterCard and Visa portfolio
were essentially flat in the quarter, and chargeoff dollars due to
bankruptcies declined compared to the fourth quarter level. Chargeoffs
in the private label portfolio increased due to higher levels of
personal bankruptcies as well as the maturing of certain special
promotional balances. These balances were mainly associated with
longer-term promotional programs which we have de-emphasized.
The increase in the chargeoff ratio compared to a year ago was
primarily due to increased bankruptcy filings in the MasterCard and
Visa portfolio and lower recoveries in this portfolio as discussed
above. Also contributing to the increase in the chargeoff ratio was
the continued seasoning of the private label and other unsecured
portfolios.
Nonperforming Assets
- --------------------
Nonperforming assets consisted of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
In millions. 3/31/98 12/31/97 9/30/97 6/30/97 3/31/97
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual managed
receivables $ 806.9 $ 729.9 $ 654.7 $ 616.3 $ 558.4
Accruing managed consumer
receivables 90 or more days
delinquent 527.8 503.3 470.9 454.4 432.2
Renegotiated commercial
loans 12.3 12.4 12.9 12.9 12.9
-------- -------- -------- -------- --------
Total nonperforming managed
receivables 1,347.0 1,245.6 1,138.5 1,083.6 1,003.5
Real estate owned 113.0 102.3 122.9 119.6 125.6
-------- -------- -------- -------- --------
Total nonperforming assets $1,460.0 $1,347.9 $1,261.4 $1,203.2 $1,129.1
======== ======== ======== ======== ========
Managed credit loss reserves as
a percent of nonperforming
managed receivables 120.4% 124.2% 126.5% 127.6% 131.4%
-------- -------- -------- -------- --------
</TABLE>
<PAGE>
<PAGE> 18
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 Securities Ratings.
(b) Reports on Form 8-K
During the first quarter of 1998, the Registrant filed
a Current Report on Form 8-K dated February 12, 1998 with
respect to the consolidated financial statements of
Household Finance Corporation as of and for the years ended
December 31, 1997 and 1996.
<PAGE>
<PAGE> 19
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
HOUSEHOLD FINANCE CORPORATION
-----------------------------
(Registrant)
Date: May 12, 1998 By: /s/ David A. Schoenholz
------------ ---------------------------
David A. Schoenholz
Executive Vice President
and Chief Financial Officer,
Director and on behalf of
Household Finance Corporation
<PAGE>
<PAGE> 20
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 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.
Three months ended March 31 1998 1997
- --------------------------------------------------------------------
<S> <C> <C>
Net income $137.0 $ 89.1
Income taxes 70.2 49.5
------ ------
Income before income taxes 207.2 138.6
------ ------
Fixed charges:
Interest expense <F1> 278.6 240.2
Interest portion of rentals <F2> 5.3 5.3
------ ------
Total fixed charges 283.9 245.5
------ ------
Total earnings as defined $491.1 $384.1
====== ======
Ratio of earnings to fixed charges 1.73 1.56
====== ======
Preferred stock dividends <F3> $ - $ 2.8
====== ======
Ratio of earnings to combined fixed charges
and preferred stock dividends 1.73 1.55
====== ======
<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 35.7 percent for the three
months ended March 31, 1997.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FOLLOWING SUMMARY FINANCIAL INFORMATION OF THE COMPANY AND ITS
SUBSIDIARIES IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION
AND FINANCIAL STATEMENTS PREVIOUSLY FILED WITH THE SECURITIES &
EXCHANGE COMMISSION.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 369,300
<SECURITIES> 1,673,500
<RECEIVABLES> 19,683,700
<ALLOWANCES> (1,622,100)
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 481,100
<DEPRECIATION> (276,700)
<TOTAL-ASSETS> 25,596,700
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 13,456,000
0
0
<COMMON> 1
<OTHER-SE> 4,298,000
<TOTAL-LIABILITY-AND-EQUITY> 25,596,700
<SALES> 0
<TOTAL-REVENUES> 1,025,800
<CGS> 0
<TOTAL-COSTS> 333,200
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 208,800
<INTEREST-EXPENSE> 276,600
<INCOME-PRETAX> 207,200
<INCOME-TAX> 70,200
<INCOME-CONTINUING> 137,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 137,000
<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>
EXHIBIT 99.1
------------
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
DEBT SECURITIES RATINGS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Standard Moody's Fitch Duff & Phelps
& Poor's Investors Investors Credit Thomson
Corporation Service Services Rating Co. BankWatch
- ------------------------------------------------------------------------------------------------------------
At March 31, 1998
- ------------------------------------------------------------------------------------------------------------
<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>
