<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, 1999
------------------
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 October 29, 1999, there were 1,000 shares of registrant's common stock
outstanding.
The registrant meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced
disclosure format.
<PAGE> 2
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
Table of Contents
<TABLE>
PART I. Financial Information Page
----
Item 1. Financial Statements
<S> <C>
Condensed Consolidated Statements of Income
(Unaudited) - Three Months and Nine Months
Ended September 30, 1999 and 1998 .................. 2
Condensed Consolidated Balance Sheets -
September 30, 1999 (Unaudited) and
December 31, 1998...................................... 3
Condensed Consolidated Statements of Cash Flows
(Unaudited) - Nine Months Ended
September 30, 1999 and 1998 ........................ 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 ...... 12
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K ................... 22
Signature ....................................................... 23
</TABLE>
1
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Household Finance Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- -----------------------------------------------------------
<TABLE>
<CAPTION>
(In millions)
- -----------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Finance income $1,321.0 $1,117.6 $3,766.1 $ 3,399.2
Other interest income 18.9 10.9 52.9 26.2
Interest expense 551.5 484.4 1,582.1 1,493.1
-------- -------- -------- ----------
Net interest margin 788.4 644.1 2,236.9 1,932.3
Provision for credit losses on owned
receivables 372.8 284.2 1,030.7 939.3
-------- -------- -------- ----------
Net interest margin after provision for
credit losses 415.6 359.9 1,206.2 993.0
-------- -------- -------- ----------
Securitization income 211.9 241.7 559.8 833.4
Insurance revenues 88.8 91.2 269.1 273.2
Investment income 41.4 38.2 117.3 111.0
Fee income 105.6 120.8 299.5 366.6
Other income 29.7 59.9 127.0 195.9
Gain on the sale of Beneficial Canada -- -- -- 189.4
-------- -------- -------- ----------
Total other revenues 477.4 551.8 1,372.7 1,969.5
-------- -------- -------- ----------
Salaries and fringe benefits 244.5 219.7 704.7 714.1
Occupancy and equipment expense 53.7 59.9 161.7 211.6
Other marketing expenses 42.2 47.5 118.0 161.7
Other servicing and administrative expenses 57.7 105.1 225.1 343.0
Amortization of acquired intangibles
and goodwill 35.4 44.8 107.4 130.7
Policyholders' benefits 50.8 48.5 168.3 154.3
Merger and integration related costs -- -- -- 1,000.0
-------- -------- -------- ----------
Total costs and expenses 484.3 525.5 1,485.2 2,715.4
-------- -------- -------- ----------
Income before income taxes 408.7 386.2 1,093.7 247.1
Income taxes 144.8 141.0 383.8 205.6
-------- -------- -------- ----------
Net income $ 263.9 $ 245.2 $ 709.9 $ 41.5*
======== ======== ======== ==========
</TABLE>
* Operating net income, which excludes merger and integration related costs
and the gain on the sale of Beneficial Canada, was $674.0 million for the
nine months ended September 30, 1998.
See notes to interim condensed consolidated financial statements.
2
<PAGE> 4
Household Finance Corporation and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------
<TABLE>
<CAPTION>
(In millions, except share data)
- -----------------------------------------------------------------------------------------
September 30, December 31,
1999 1998
- -----------------------------------------------------------------------------------------
ASSETS (UNAUDITED)
- --------
<S> <C> <C>
Cash $ 233.7 $ 428.4
Investment securities 3,175.1 2,944.4
Receivables, net 36,911.0 34,283.2
Advances to parent company and affiliates 477.7 494.0
Acquired intangibles and goodwill, net 1,608.2 1,682.7
Properties and equipment, net 378.0 376.9
Real estate owned 229.7 235.1
Other assets 1,815.7 1,918.3
----------- -----------
Total assets $ 44,829.1 $ 42,363.0
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
- ------------------------------------
Debt:
Commercial paper, bank and other borrowings $ 6,817.6 $ 7,143.1
Senior and senior subordinated debt (with
original maturities over one year) 30,503.3 27,186.1
----------- -----------
Total debt 37,320.9 34,329.2
Insurance policy and claim reserves 1,089.1 1,076.2
Other liabilities 649.7 1,147.2
----------- -----------
Total liabilities 39,059.7 36,552.6
----------- -----------
Common shareholder's equity:
Common stock, $1.00 par value, 1,000 shares
authorized, issued and outstanding at
September 30, 1999 and December 31, 1998,
and additional paid-in capital 2,966.2 2,960.3
Retained earnings 2,866.4 2,836.4
Accumulated other comprehensive income, net
of tax (63.2) 13.7
----------- -----------
Total common shareholder's equity 5,769.4 5,810.4
----------- -----------
Total liabilities and shareholder's equity $ 44,829.1 $ 42,363.0
=========== ===========
</TABLE>
See notes to interim condensed consolidated financial statements.
3
<PAGE> 5
Household Finance Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -----------------------------------------------------------
<TABLE>
<CAPTION>
(In millions)
- -------------------------------------------------------------------------------------------------
Nine months ended September 30 1999 1998
- -------------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATIONS
<S> <C> <C>
Net income $ 709.9 $ 41.5
Adjustments to reconcile net income to cash provided by
operations:
Provision for credit losses on owned receivables 1,030.7 939.3
Non-cash merger and integration related costs -- 291.0
Insurance policy and claim reserves 118.3 (9.7)
Depreciation and amortization 207.9 230.3
Net realized gains from sales of assets -- (172.5)
Other, net (111.7) (232.9)
---------- -----------
Cash provided by operations 1,955.1 1,087.0
---------- -----------
INVESTMENTS IN OPERATIONS
Investment securities:
Purchased (867.4) (1,066.8)
Matured 321.6 254.7
Sold 536.3 715.0
Short-term investment securities, net change (272.6) (727.9)
Receivables:
Originations, net (6,911.4) (11,005.3)
Purchases and related premiums (2,011.8) (2,345.9)
Sold 4,964.1 9,266.1
Acquisition of business operations (58.4) --
Transfer of foreign subsidiary to affiliate -- 340.0
Properties and equipment purchased (69.7) (58.2)
Properties and equipment sold 16.8 35.8
Advances to parent company and affiliates, net 16.3 (233.6)
---------- -----------
Cash decrease from investments in operations (4,336.2) (4,826.1)
---------- -----------
FINANCING AND CAPITAL TRANSACTIONS
Short-term debt, net change (325.4) (843.1)
Senior and senior subordinated debt issued 8,152.1 8,240.1
Senior and senior subordinated debt retired (4,894.4) (2,861.3)
Prepayment of debt -- (767.2)
Policyholders' benefits paid (87.9) (80.7)
Cash received from policyholders 22.0 63.1
Dividends paid to parent company (680.0) (350.0)
Dividends paid - pooled affiliate -- (75.4)
Capital contributions from parent company -- 200.0
---------- -----------
Cash increase from financing and
capital transactions 2,186.4 3,525.5
---------- -----------
Decrease in cash (194.7) (213.6)
Cash at January 1 428.4 545.3
---------- -----------
Cash at September 30 $ 233.7 $ 331.7
========== ===========
Supplemental cash flow information:
Interest paid $ 1,562.9 $ 1,375.0
---------- -----------
Income taxes paid 420.0 160.2
---------- -----------
</TABLE>
See notes to interim condensed consolidated financial statements.
4
<PAGE> 6
Household Finance Corporation and Subsidiaries
FINANCIAL HIGHLIGHTS
- --------------------
<TABLE>
<CAPTION>
(Dollar amounts are in millions)
- ------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating net income (1) $ 263.9 $ 245.2 $ 709.9 $ 674.0
Merger and integration related costs -- -- -- (751.0)
Beneficial Canada gain -- -- -- 118.5
------- ------- -------- --------
Net income 263.9 245.2 709.9 41.5
======= ======= ======== ========
Net interest margin 788.4 644.1 2,236.9 1,932.3
------- ------- -------- --------
Other revenues (2) 426.6 503.3 1,204.4 1,815.2
------- ------- -------- --------
Return on average common shareholder's
equity, annualized (1) 18.2% 16.4% 16.3% 14.6%
------- ------- -------- --------
Return on average common shareholder's
equity, annualized 18.2 16.4 16.3 .9
------- ------- -------- --------
Return on average owned assets, annualized (1) 2.30 2.40 2.10 2.17
------- ------- -------- -------
Return on average owned assets, annualized 2.30 2.40 2.10 .13
------- ------- -------- --------
Return on average managed assets, annualized (1) 1.84 1.77 1.66 1.57
------- ------- -------- --------
Return on average managed assets, annualized 1.84 1.77 1.66 .10
------- ------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
(Dollar amounts are in millions)
- ------------------------------------------------------------------------------------------------
September 30, December 31,
1999 1998
- ------------------------------------------------------------------------------------------------
Total assets:
<S> <C> <C>
Owned $ 44,829.1 $ 42,363.0
Managed 56,888.5 55,062.2
----------- -----------
Receivables:
Owned $ 37,125.3 $ 34,446.0
Serviced with limited recourse 12,059.4 12,699.2
----------- -----------
Managed $ 49,184.7 $ 47,145.2
=========== ===========
Debt to total shareholder's equity 6.5:1 5.9:1
----------- -----------
</TABLE>
(1) Excludes merger and integration related costs and the gain on the sale of
Beneficial Canada.
(2) Policyholders' benefits have been netted against other revenues.
See notes to interim condensed consolidated financial statements.
5
<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.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
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, 1999 should
not be considered indicative of the results for any future quarters or the year
ending December 31, 1999. HFC and its subsidiaries may also be referred to in
this Form 10-Q as "we," "us" or "our." These financial statements should be read
in conjunction with the consolidated financial statements and footnotes included
in our Annual Report on Form 10-K for the year ended December 31, 1998.
On December 22, 1998, BFC Insurance Agency of America ("BFCIAA"), the holding
company of Beneficial's foreign operations, was merged with and into Household
Global Funding, Inc. ("Global"), an affiliate of HFC and a wholly-owned
subsidiary of Household International. HFC received cash of approximately $340.0
million from Global equal to the net book value of the assets transferred and
liabilities assumed. In accordance with the guidance established for mergers
involving affiliates under common control, the financial statements of HFC
exclude the results of operations of BFCIAA subsequent to June 30, 1998, the
date which BFCIAA came under the control of Household International.
2. INVESTMENT SECURITIES
- -------------------------
Investment securities consisted of the following available-for-sale investments:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
(In millions) September 30, 1999 December 31, 1998
- ----------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Marketable equity securities $ 26.3 $ 27.1 $ 68.2 $ 70.8
Corporate debt securities 1,848.3 1,768.0 1,691.9 1,717.8
U.S. government and federal
agency debt securities 289.4 282.1 290.0 295.2
Other 1,063.3 1,063.3 829.6 829.6
---------- ---------- ---------- ----------
Subtotal 3,227.3 3,140.5 2,879.7 2,913.4
Accrued investment income 34.6 34.6 31.0 31.0
---------- ---------- ---------- ----------
Total investment securities $ 3,261.9 $ 3,175.1 $ 2,910.7 $ 2,944.4
========== ========== ========== ==========
</TABLE>
6
<PAGE> 8
3. RECEIVABLES
- ---------------
Receivables consisted of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
(In millions) 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Home equity $ 20,161.6 $ 17,158.7
Auto finance 1,063.1 805.0
MasterCard/Visa 2,862.1 3,805.5
Private label 5,754.0 7,041.4
Other unsecured 6,599.6 4,953.3
Commercial 684.9 682.1
----------- -----------
Total owned receivables 37,125.3 34,446.0
Accrued finance charges 608.6 470.8
Credit loss reserve for owned receivables (1,471.3) (1,448.9)
Unearned credit insurance premiums and
claims reserves (450.1) (410.6)
Amounts due and deferred from
receivables sales 1,780.4 1,882.3
Reserve for receivables serviced with
limited recourse (681.9) (656.4)
----------- ---------
Total owned receivables, net 36,911.0 34,283.2
Receivables serviced with limited recourse 12,059.4 12,699.2
----------- ---------
Total managed receivables, net $ 48,970.4 $ 46,982.4
=========== ===========
Receivables serviced with limited recourse consisted of the following:
- ----------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
(In millions) 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
Home equity $ 2,495.2 $ 3,637.4
Auto finance 1,635.5 960.3
MasterCard/Visa 3,464.4 3,397.5
Private label 650.0 811.5
Other unsecured 3,814.3 3,892.5
----------- ---------
Total receivables serviced with limited recourse $ 12,059.4 $ 12,699.2
=========== =========
The combination of owned receivables and receivables serviced with limited
recourse, which we consider our managed portfolio, consisted of the following:
- ----------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
(In millions) 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
Home equity $ 22,656.8 $ 20,796.1
Auto finance 2,698.6 1,765.3
MasterCard/Visa 6,326.5 7,203.0
Private label 6,404.0 7,852.9
Other unsecured 10,413.9 8,845.8
Commercial 684.9 682.1
----------- -----------
Total managed receivables $ 49,184.7 $ 47,145.2
=========== ===========
</TABLE>
7
<PAGE> 9
The amounts due and deferred from receivables included unamortized
securitization assets and funds set up under the recourse requirements for
certain sales totaling $1,842.1 million at September 30, 1999 and $1,802.5
million at December 31, 1998. It also included net customer payments (owed by
us) not received from the securitization trustee of $(76.1) million at September
30, 1999 and $62.3 million at December 31, 1998. The reserve for receivables
serviced with limited recourse represents our best estimate of probable losses
on these receivables.
4. CREDIT LOSS RESERVES
- ------------------------
Changes to credit loss reserves during the three and nine months ended September
30 were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Owned receivables:
Credit loss reserves
at beginning of period $ 1,458.5 $ 1,524.9 $ 1,448.9 $ 1,417.5
Provision for credit losses 372.8 284.2 1,030.7 939.3
Chargeoffs (410.8) (351.8) (1,171.8) (1,044.9)
Recoveries 36.9 33.2 113.1 92.8
Portfolio acquisitions, net 13.9 7.8 50.4 93.6
--------- --------- --------- ---------
Credit loss reserves for owned
receivables at September 30 1,471.3 1,498.3 1,471.3 1,498.3
--------- --------- --------- ---------
Receivables serviced with limited recourse:
Credit loss reserves at
beginning of period 631.5 683.5 656.4 707.8
Provision for credit losses 189.4 233.4 460.3 590.2
Chargeoffs (146.4) (203.9) (466.4) (624.7)
Recoveries 7.4 11.3 21.6 42.1
Other, net -- 2.3 10.0 11.2
--------- --------- --------- ---------
Credit loss reserves for
receivables serviced with
limited recourse at
September 30 681.9 726.6 681.9 726.6
--------- --------- --------- ---------
Total credit loss reserves for
managed receivables at
September 30 $ 2,153.2 $ 2,224.9 $ 2,153.2 $ 2,224.9
========= ========= ========= =========
</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. Reserve levels also reflect the impact of a growing percentage of
secured loans.
8
<PAGE> 10
5. MERGER AND INTEGRATION RESERVE
- ----------------------------------
We have completed the execution of our merger and integration plan relating to
the Beneficial acquisition. The costs incurred to execute the plan were
consistent with our original estimate of $1.0 billion recorded in the second
quarter of 1998.
6. INCOME TAXES
- ----------------
The effective tax rate was 35.1 percent for the nine months ended September 30,
1999 and 36.5 percent for the first nine months of 1998 excluding merger and
integration related costs. The inclusion of this item resulted in a $249 million
net tax benefit for the first nine months of 1998. The effective tax rate
differs from the statutory federal income tax rate in these years primarily
because of the effects of (a) state and local income taxes and (b) leveraged
lease tax benefits.
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 $477.7 million at September 30, 1999
compared to $494.0 million at December 31, 1998. Advances from parent company
and affiliates, which are included in commercial paper, bank and other
borrowings, were $1.1 million at September 30, 1999. There were no advances from
parent company and affiliates at December 31, 1998. Net interest income on
affiliated balances was $14.4 million for the third quarter of 1999 and $2.6
million for the prior year quarter. In the first nine months of 1999 net
interest income on affiliated balances was $37.6 million compared to $11.8
million for the same period last year.
8. COMPREHENSIVE INCOME
- ------------------------
Comprehensive income was $252.0 million for the quarter ended September 30,
1999, $276.3 million for the quarter ended September 30, 1998, $633.0 million
for the nine months ended September 30, 1999 and $110.7 million for the nine
months ended September 30, 1998. Excluding the impact of the merger and
integration related costs as well as the gain on the sale of Beneficial Canada,
comprehensive income was $743.2 million for the nine months ended September 30,
1998.
The components of accumulated other comprehensive income, net of tax, are as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
September 30, December 31,
(In millions) 1999 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Foreign currency translation adjustments $ (7.4) $ (8.3)
Unrealized gain (loss) on investment, net (55.8) 22.0
------- -------
Accumulated other comprehensive income, net of tax $ (63.2) $ 13.7
======= =======
</TABLE>
9
<PAGE> 11
9. SEGMENT REPORTING
- ---------------------
We have one reportable segment, Consumer, which includes our branch-based
consumer finance, private label credit card, auto finance and domestic
MasterCard and Visa businesses. This differs from the basis of segmentation
presented in our Annual Report on Form 10-K for the year ended December 31, 1998
where we presented the domestic MasterCard and Visa business as a separate
reportable segment. The domestic MasterCard and Visa business is included in
Consumer because discrete financial information about HFC's domestic MasterCard
and Visa business is not regularly reviewed by the chief operating decision
maker in allocating resources and assessing performance. There has been no
change in the measurement of segment profit as compared with our Form 10-K.
Information about our reportable segment for the three and nine months ended
September 30, 1999 and 1998 was as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
Owned Basis September 30, September 30,
(In millions) 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest margin and other
revenues (1) $ 1,219.6 $ 1,108.1 $ 3,377.9 $ 3,242.3
Intersegment revenues 39.4 28.9 104.5 78.9
Net income 243.8 221.3 619.8 622.4
Total assets 39,446.6 35,571.1 39,446.6 35,571.1
Total assets - managed 51,534.8 50,272.7 51,534.8 50,272.7
------------ ------------ ------------ -----------
</TABLE>
(1) Net interest margin and other revenues, including intersegment revenues,
net of policyholders' benefits.
A reconciliation of the total reportable segment's net income to consolidated
net income for the three and nine months ended September 30, 1999 and 1998 was
as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
Owned Basis September 30, September 30,
(In millions) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Reportable segment net income $ 243.8 $ 221.3 $ 619.8 $ 622.4
Other operations not
individually reportable 47.5 54.3 174.6 (493.1)*
Adjustments/eliminations (27.4) (30.4) (84.5) (87.8)
--------- ---------- --------- ---------
Total consolidated net income $ 263.9 $ 245.2 $ 709.9 $ 41.5
========= ========== ========= =========
</TABLE>
* Includes merger and integration related costs of $751.0 million after-tax
related to the Beneficial merger and the gain on the sale of Beneficial
Canada of $118.5 million after-tax.
10
<PAGE> 12
10. ACCOUNTING PRONOUNCEMENTS
- ------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS No. 133"). FAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. FAS No. 133 requires that changes in a derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's gains and
losses to offset the related results on the hedged item in the income statement,
and requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting.
In June 1999, the FASB deferred the effective date for FAS No. 133 to fiscal
years beginning after June 15, 2000. A company may also implement FAS No. 133 as
of the beginning of any fiscal quarter after issuance (that is, fiscal quarters
beginning June 16, 1998 and thereafter). FAS No. 133 cannot be applied
retroactively. FAS No. 133 must be applied to (a) derivative instruments and (b)
certain derivative instruments embedded in hybrid contracts that were issued,
acquired, or substantively modified after December 31, 1998. We expect to adopt
FAS No. 133 on January 1, 2001 and have not yet quantified its impact on our
financial statements.
11
<PAGE> 13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion should be read in conjunction with the consolidated financial
statements, notes and tables included elsewhere in this report and in the
Household Finance Corporation Annual Report on Form 10-K for the year ended
December 31, 1998 (the "1998 Form 10-K") filed with the Securities and Exchange
Commission. Management's discussion and analysis may contain certain estimates
and projections 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 the 1998 Form 10-K.
OPERATIONS SUMMARY
- ------------------
Our net income for the third quarter of 1999 increased 7.6 percent to $263.9
million compared to $245.2 million a year ago. Net income for the first nine
months of 1999 was $709.9 million compared to operating net income of $674.0
million in the year ago period. These improved results were due to strong growth
in our consumer finance business and significant declines in operating expenses
partially offset by lower revenues from our credit card businesses due to lower
average receivables. Total revenues grew 9.0 percent in the quarter, while
operating expenses fell slightly. Compared to the prior year quarter, such
revenues were up 5.8 percent, while operating expenses fell 7.8 percent. The
year-to-date results were also positively affected by higher income from our tax
refund anticipation loan ("RAL") business. Including merger and integration
related costs and the gain on the sale of Beneficial Canada, our net income was
$41.5 million for the first nine months of 1998.
Our annualized return on average common shareholders' equity was 18.2 percent
for the third quarter of 1999 and 16.3 percent year-to-date compared to 16.4
percent for the third quarter of 1998 and 14.6 percent for the first nine months
of 1998. Our annualized return on average owned assets was 2.30 percent in the
third quarter of 1999 and 2.10 percent year-to-date compared to 2.40 percent in
the third quarter of 1998 and 2.17 percent for the first nine months of 1998.
The decreases in return on owned assets reflect higher levels of average owned
assets in the current year period compared to the same periods in 1998. Our
annualized return on average managed assets was 1.84 percent in the third
quarter of 1999 and 1.66 percent year-to-date compared to 1.77 percent in the
third quarter of 1998 and 1.57 percent for the first nine months of 1998.
(Ratios for the nine months ended September 30, 1998 exclude merger and
integration related costs and the gain on the sale of Beneficial Canada.)
12
<PAGE> 14
- - Our Consumer segment's earnings were flat year-to-date, but higher in the
third quarter compared with the prior year quarter. Return on average owned
assets for the Consumer segment was 2.46 percent in the quarter and 2.12
percent year-to-date compared to prior year returns of 2.51 percent for the
quarter and 2.44 percent year-to-date. Return on average managed assets was
1.91 percent in the quarter and 1.63 percent year-to-date compared to prior
year returns of 1.77 percent for the quarter and 1.66 percent year-to-date.
The improvement in operating results for the quarter was driven by solid
managed receivable growth in our branch-based consumer finance business,
stronger pricing in our MasterCard* and Visa* and other unsecured product
lines which resulted in higher margins and lower operating expenses. These
results were partially offset by lower net income from our private label
business due to lower average receivables. The net interest margin increase
was driven by a full quarter's benefit of the repricing of the Union
Privilege ("UP") portfolio which occurred in May and June, 1999.
Year-to-date operating results were essentially flat as improved operating
results in our branch-based consumer finance business was offset by lower
net interest margin and other revenues related to our MasterCard and Visa
portfolio from prior restructuring initiatives. Average managed credit card
receivables declined from both the prior year quarter and the year-to-date
prior year period. The decline from the prior year quarter reflects
attrition associated with the sale of $1.9 billion of non-core receivables
to third parties and the impact of repricing initiatives which began late
last year. The year-to-date decline also reflects the sale of $1.9 billion
of GM Card receivables to an affiliate in the second quarter of 1998.
Average managed private label receivables also decreased for both the
quarter and year-to-date. Beginning in late 1998, an affiliate began
originating substantially all private label receivables generated from new
merchant relationships. Segment managed receivables were $49.0 billion at
September 30, 1999, compared to $48.7 billion at June 30, 1999 and $47.4
billion at September 30, 1998.
- - Year-to-date revenue from our RAL business was up substantially from the
prior year. The number of electronic filings of tax returns increased 20
percent over last year and refund processing with the Internal Revenue
Service went smoothly in 1999.
- - On December 22, 1998, BFC Insurance Agency of America ("BFCIAA"), the
holding company of Beneficial's foreign operations, was merged with and
into Household Global Funding, Inc. ("Global"), an affiliate of HFC and a
wholly-owned subsidiary of Household International. HFC received cash of
approximately $340.0 million from Global equal to the net book value of the
assets transferred and liabilities assumed. In accordance with the guidance
established for mergers involving affiliates under common control, the
financial statements of HFC exclude the results of operations of BFCIAA
subsequent to June 30, 1998, the date which BFCIAA came under the control
of Household International.
- - In August 1999, we purchased all of the outstanding capital stock of
Decision One Mortgage Company LLC ("Decision One") for $58.4 million.
Decision One originates loans through a 30 state broker network and
packages them for sale to a number of investors. As of the acquisition
date, Decision One had approximately $58 million in assets. The acquisition
of Decision One was accounted for as a purchase and therefore we have
included the results of operations of Decision One in our statement of
income from the closing date of the transaction.
* MasterCard is a registered trademark of MasterCard International,
Incorporated and Visa is a registered trademark of VISA USA, Inc.
13
<PAGE> 15
- - On June 30, 1998, Household International merged with Beneficial
Corporation ("Beneficial"), a consumer finance holding company
headquartered in Wilmington, Delaware. Upon completion of the merger,
substantially all of the net assets of Beneficial were contributed to us.
In connection with the merger, we incurred pre-tax merger and integration
related costs of approximately $1 billion ($751 million after-tax) in the
third quarter of 1998.
- - During the first quarter of 1998, we completed the sale of Beneficial's
Canadian operations and recorded a gain of $189.4 million ($118.5 million
after-tax). In April 1998, the sale of Beneficial's German operations was
also completed. In 1997, Beneficial announced its intent to sell the German
operations and recorded a loss of $58.8 million ($27.8 million after-tax).
BALANCE SHEET REVIEW
- --------------------
- - Managed consumer receivables (receivables on our balance sheet plus
receivables serviced with limited recourse) increased $1.4 billion from the
year ago level to $48.5 billion. Solid growth in our consumer finance and
auto finance businesses was substantially offset by decreases in our
MasterCard/Visa and private label portfolios. The strongest growth was in
consumer finance, which includes our home equity and unsecured products.
The combination of our focused sales force, integrated systems and loan
products led to this growth. In addition, the decline in the number of
monoline lenders has also had a positive impact on pricing, originations
and retention in this business. Auto finance receivables increased from the
prior year quarter as this business continued to benefit from less
competition and an expanded sales force. The restructuring of our
MasterCard and Visa portfolio in 1998, which included the sale of $1.9
billion of non-core receivables to third parties, and the impact of
repricing initiatives which began late last year resulted in decreases in
our MasterCard/Visa portfolio. Beginning in late 1998, an affiliate began
originating substantially all private label receivables generated from new
merchant relationships. Although we subsequently purchase a portion of
these receivables from the affiliate, this change has resulted in an
overall decrease in our private label receivables.
- - Managed consumer receivables were $48.5 billion at September 30, 1999, up
slightly from $48.3 billion at June 30, 1999. The strongest growth came in
our home equity, unsecured, and auto finance receivables. Strong momentum
in our branches resulted in record branch receivable growth in the third
quarter. Auto finance receivables grew from the prior quarter due to
continued weakened competition in the industry and an expanded sales force.
Approximately 40 percent of auto finance originations are attributable to
our new Millennium product. We believe this product enables us to target
higher quality customers at competitive rates and to balance our non-prime
and subprime segments which should have a positive impact on our loss
characteristics over time. This growth was substantially offset by a
decline in private label receivables due to the affiliate originations
discussed above. Our MasterCard/Visa portfolio was up slightly in the
quarter due to growth in the UP portfolio, substantially offset by
continued attrition in the Household Bank branded portfolio.
- - Owned consumer receivables were $36.4 billion at September 30, 1999,
compared to $36.6 billion at June 30, 1999 and $32.5 billion at September
30, 1998. Owned receivables may vary from period to period depending on the
timing and size of securitization transactions.
14
<PAGE> 16
- - Owned consumer two-months-and-over contractual delinquency as a percent of
owned consumer receivables was 5.92 percent at September 30, 1999, compared
with 5.28 percent at June 30, 1999 and 5.50 percent at September 30, 1998.
The annualized total consumer owned chargeoff ratio was 4.00 percent in the
third quarter of 1999, compared with 3.68 percent in the prior quarter and
3.94 percent in the year-ago quarter.
- - Managed consumer two-months-and-over contractual delinquency as a percent
of managed consumer receivables was 5.57 percent at September 30, 1999,
compared with 5.14 percent at June 30, 1999 and 5.39 percent at September
30, 1998. The annualized total consumer managed chargeoff ratio was 4.21
percent in the third quarter of 1999, compared with 4.05 percent in the
prior quarter and 4.36 percent in the year-ago quarter.
- - Our debt to total shareholder's equity ratio was 6.5 to 1 compared with 5.9
to 1 at December 31, 1998. The increase was due to higher debt levels
primarily attributable to higher average owned receivables at September 30,
1999.
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. Our funding strategy continues to be very conservative
and we are largely unaffected by changes in rates.
The following describes major changes in our funding base from December 31, 1998
to September 30, 1999:
- - We paid $185 million of dividends to our parent company during the third
quarter of 1999. A total of $680 million of dividends were paid to our
parent company during the first nine months of 1999.
- - Commercial paper, bank and other borrowings decreased to $6.8 billion from
$7.1 billion. Senior and senior subordinated debt (with original maturities
over one year) increased 12.1 percent to $30.5 billion from $27.2 billion.
The increase in debt levels from year end is consistent with the increase
in owned receivables. During the first nine months of 1999 we issued
approximately $5.0 billion of five year-and-over debt to lengthen
maturities on our funding in order to reduce reliance on commercial paper
and securitizations as well as to preserve liquidity.
- - Our securitized portfolio of home equity, auto finance, MasterCard and
Visa, private label and other unsecured receivables totaled $12.1 billion
at September 30, 1999, compared with $12.7 billion at December 31, 1998.
The composition of receivables securitized (excluding replenishments of
certificate holder interests) during the quarter and year-to-date is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
(In billions) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Auto finance $ .5 $ .3 $ 1.1 $ .7
MasterCard/Visa .1 -- .3 .8
Other unsecured .7 .4 1.0 .7
------ ----- ------ ------
Total $ 1.3 $ .7 $ 2.4 $ 2.2
====== ===== ====== ======
</TABLE>
15
<PAGE> 17
We believe the market for securities backed by receivables is a reliable,
efficient and cost-effective source of funds. Although our securitized portfolio
currently represents a smaller portion of our total funding mix, we plan to
continue utilizing securitizations as a source of funding in the future. At
September 30, 1999, securitizations represented 24.5 percent of the funding
associated with our managed portfolio compared to 30.7 percent a year ago.
INCOME STATEMENT REVIEW
- -----------------------
Net interest margin
- --------------------
Net interest margin was $788.4 million for the third quarter of 1999, up 22.4
percent compared to the prior year quarter. Net interest margin for the first
nine months of 1999 was $2,236.9 million, up 15.8 percent compared to the prior
year. Owned margin improved due to better pricing and receivables growth. Net
interest margin as a percent of average owned interest-earning assets,
annualized, expanded to 7.94 percent, up from 7.85 percent in the previous
quarter, and 7.59 percent in the year-ago quarter. The improvement over the
prior periods reflected better pricing partially offset by higher funding costs
and as compared with the prior year period, lower funding costs.
Net interest margin is also 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 $1,077.7 million for the third quarter of 1999 compared to $976.0
million in the prior year quarter. Managed basis net interest margin for the
first nine months of 1999 was $3,119.4 million compared to $3,037.9 million in
the prior year. The increases were primarily due to receivable growth.
Net interest margin as a percent of average managed interest-earning assets,
annualized, was 8.50 percent, up from 8.43 percent in the previous quarter and
8.03 percent in the prior year. The sequential quarterly expansion reflected
stronger pricing in our MasterCard/Visa and other unsecured product lines,
partially offset by higher funding costs. We enjoyed a full quarter's benefit of
the repricing of the UP portfolio, which occurred in May and June. The
year-over-year improvement resulted from lower funding costs and better pricing.
Provision for credit losses
- ---------------------------
The provision for credit losses for receivables on an Owned Basis for the third
quarter of 1999 totaled $372.8 million, compared to $284.2 million in the prior
year quarter. The provision for the first nine months of 1999 was $1,030.7
million, compared to $939.3 million in the year-ago period. The provision for
credit losses on an Owned Basis may vary from quarter to quarter, depending on
the amount of securitizations in a particular period.
16
<PAGE> 18
Other revenues
- --------------
Total other revenues on an Owned Basis decreased 13.5 percent over the third
quarter of 1998 to $477.4 million. Excluding the pretax gain of $189.4 million
from the sale of Beneficial's Canadian operations during 1998, year-to-date
other revenues decreased 22.9 percent to $1,372.7 million. Significant
fluctuations were as follows:
- - Securitization income, which consists of income associated with the
securitization and sale of receivables with limited recourse, decreased
12.3 percent to $211.9 million for the quarter and 32.8 percent to $559.8
million year-to-date. The decreases were primarily due to the decrease in
average securitized receivables. When reporting on a Managed Basis, the
components of securitization income (net interest income, provision for
credit losses, fee income, and securitization related income related to
those receivables) are reclassified to the appropriate caption in the
statements of income.
- - Fee income on an Owned Basis, which includes revenues from fee-based
products such as credit cards, decreased 12.6 percent to $105.6 million for
the quarter and 18.3 percent to $299.5 million year-to-date. The decreases
for both periods is primarily due to higher account program fees paid to
our UP credit card affinity partner and to lower credit card and
interchange fees due to the sale of $1.9 billion of non-core receivables in
the second half of 1998. Year-to-date results also reflect lower credit
card and interchange fees due to the sale of $1.9 billion of our GM Card
receivables to an affiliate in the second quarter of 1998.
- - Other income decreased 50.4 percent to $29.7 million for the quarter and
35.2 percent to $127.0 million year-to-date. The decreases are attributable
to reductions in non-recurring gains recognized in 1998 on sales of
non-strategic assets. These decreases were partially offset by higher RAL
income.
Expenses
- --------
Total costs and expenses (excluding merger and integration related costs of $1.0
billion during 1998) decreased 7.8 percent to $484.3 million over the third
quarter of 1998 and 13.4 percent to $1,485.2 million year-to-date. The decreases
reflect salaries and fringe benefit, occupancy and equipment, and other cost
savings from the Beneficial integration, as well as continued cost control
efforts. We have fully achieved our previously stated cost savings target from
the integration with Beneficial Corporation. Significant fluctuations were as
follows:
- - Salaries and fringe benefits increased 11.3 percent to $244.5 million for
the quarter and decreased 1.3 percent to $704.7 million year-to-date. For
the quarter, efficiencies from the Beneficial merger were more than offset
by higher sales and non-sales related compensation directly related to
growth in the consumer finance business. Year-to-date, the Beneficial
merger efficiencies were only partially offset by the higher sales and
non-sales related compensation expense.
- - Occupancy and equipment expense decreased 10.4 percent to $53.7 million for
the quarter and 23.6 percent to $161.7 million year-to-date. The decreases
were primarily due to the elimination of duplicate branch offices and
operating centers as a result of the Beneficial merger. The decrease in the
year-to-date period also reflects cost reductions associated with the
sublease of the Beneficial office complex in Peapack, New Jersey.
17
<PAGE> 19
- - Other marketing expenses decreased 11.2 percent to $42.2 million for the
quarter and 27.0 percent to $118.0 million year-to-date due to lower
spending on marketing programs in our Household Bank branded MasterCard and
Visa portfolio and our consumer finance business. Year-to-date results also
reflect lower marketing expenses due to the sale of $1.9 billion of GM Card
receivables to an affiliate in the second quarter of 1998.
- - Other servicing and administrative expenses decreased 45.1 percent to $57.7
million for the quarter and 34.4 percent to $225.1 million year-to-date.
The decreases were primarily due to the consolidation of Beneficial's
operations which provided cost savings in systems. These savings were
partially offset during the first nine months by increases in real estate
owned expenses.
- - Amortization of acquired intangibles and goodwill decreased 21.0 percent to
$35.4 million for the quarter and 17.8 percent to $107.4 million
year-to-date. The decreases reflect the write-off of intangible assets in
conjunction with portfolio sales in 1998. These sales were a part of the
repositioning of our bank subsidiary's credit card portfolio.
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 3, "Receivables" in the accompanying financial
statements for receivables by product type and Note 4, "Credit Loss Reserves",
for our credit loss reserve methodology and an analysis of changes in the credit
losses for the quarter and year-to-date.
Total managed credit loss reserves, which include reserves established on the
off-balance sheet portfolio when receivables are securitized, were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(In millions) 1999 1999 1999 1998 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Owned $1,471.3 $1,458.5 $1,448.8 $1,448.9 $1,498.3
Serviced with limited
recourse 681.9 631.5 658.8 656.4 726.6
-------- -------- -------- ------- -------
Total $2,153.2 $2,090.0 $2,107.6 $2,105.3 $2,224.9
======== ======== ======== ======== ========
</TABLE>
Managed credit loss reserves as a percent of nonperforming managed receivables
were 101.3 percent, compared to 105.1 percent at June 30, 1999 and 119.3 percent
at September 30, 1998.
Total owned and managed credit loss reserves as a percent of receivables were as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
1999 1999 1999 1998 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Owned 3.96% 3.91% 4.07% 4.21% 4.52%
Managed 4.38 4.27 4.37 4.47 4.66
---- ---- ---- ---- ----
</TABLE>
18
<PAGE> 20
The decreasing trends in the ratios compared to the prior year reflect the
impact of a growing percentage of secured loans. Home equity receivables, which
have a significantly lower charge-off rate than credit card receivables,
represent 47 percent of our total managed receivables at September 30, 1999,
compared to 42 percent a year ago. MasterCard/Visa products were 13 percent at
quarter end, down from 20 percent a year ago. This change in portfolio mix is
important, as the loss severity for home equity loans is significantly less than
for unsecured products, such as credit cards.
The modest increase in the reserve ratio compared to the previous quarter is
primarily due to increased reserves as a percentage of private label
receivables. We purchase all private label receivables from our bank affiliate
once they become 60 days contractually past due.
CREDIT QUALITY
- --------------
We track delinquency and chargeoff levels on a managed basis and we apply the
same credit and portfolio management procedures as on our owned portfolio.
Delinquency
- ------------
Two-Months-and-Over Contractual Managed Delinquency (as a percent of managed
consumer receivables):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
9/30/99 6/30/99 3/31/99 12/31/98 9/30/98
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Home equity 3.42% 3.09% 3.36% 3.55% 3.59%
Auto finance 2.26 1.87 1.74 2.29 2.05
MasterCard/Visa 3.90 3.73 4.69 5.19 4.67
Private label 9.69 8.46 8.00 7.38 7.32
Other unsecured 9.58 9.12 8.62 8.86 9.15
---- ---- ---- ---- ----
Total 5.57% 5.14% 5.22% 5.41% 5.39%
==== ==== ==== ==== ====
</TABLE>
The increase in total managed delinquency as a percent of managed consumer
receivables compared to the previous quarter and the prior year quarter was
primarily due to the seasoning of our Beneficial home equity and other unsecured
portfolio. The significant increase in private label delinquency is due to
seasoning of the portfolio associated with the purchase of 60 day delinquent
receivables from an affiliate and reductions in the portfolio balance as more
originations are booked by our affiliate.
Owned consumer delinquency as a percent of owned receivables was 5.92 percent at
September 30, 1999; 5.28 percent at June 30, 1999; 5.34 percent at March 31,
1999; 5.49 percent at December 31, 1998; and 5.50 percent at September 30, 1998.
The trends impacting these results are consistent with those described above for
our managed portfolio. Owned delinquency by product is comparable to managed
except for MasterCard/Visa and other unsecured whose owned delinquency is
greater due to the retention of receivables on balance sheet that do not meet
the eligibility criteria for securitization.
19
<PAGE> 21
Net Chargeoffs of Consumer Receivables
- ---------------------------------------
Managed 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
1999 1999 1999 1998 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Home equity .58% .62% .48% .65% .68%
Auto finance 4.55 4.41 5.45 5.63 4.89
MasterCard/Visa 7.04 9.24 9.60 7.66 6.98
Private label 7.63 7.24 6.66 6.22 5.46
Other unsecured 8.19 6.27 7.16 7.89 8.66
---- ---- ---- ---- ----
Total 4.21% 4.05% 4.30% 4.35% 4.36%
==== ==== ==== ==== ====
</TABLE>
Managed net chargeoffs as a percent of average managed consumer receivables for
the third quarter of 1999 increased slightly over the previous quarter. In the
quarter, we continued to see improvement in our MasterCard and Visa portfolio.
This improvement was more than offset by seasoning in the other unsecured
portfolio, mostly related to Beneficial receivables that were underwritten prior
to the merger.
The improved managed chargeoff ratio compared to a year ago was primarily due to
lower chargeoffs in our home equity and other unsecured portfolio.
Owned net chargeoffs as a percent of average owned consumer receivables was 4.00
percent at September 30, 1999; 3.68 percent at June 30, 1999; 4.07 percent at
March 31, 1999; 4.06 percent at December 31, 1998; and 3.94 percent at September
30, 1998. The trends impacting these results compared to the previous quarter
are generally consistent with those described above for our managed portfolio.
The slight increase in owned chargeoffs compared to the prior year quarter was
due to increased chargeoffs in our owned MasterCard/Visa and other unsecured
portfolios. Owned chargeoff by product is comparable to managed except for
MasterCard/Visa and auto finance. Chargeoffs for MasterCard/Visa on an overall
basis are higher due to the difference in credit quality and seasoning of the
receivables which remain on our balance sheet. Chargeoffs on owned auto finance
receivables are lower due to the predominantly unseasoned nature of the
receivables which remain on balance sheet.
20
<PAGE> 22
Nonperforming Assets
- --------------------
Nonperforming assets consisted of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
(In millions) 9/30/99 6/30/99 3/31/99 12/31/98 9/30/98
- -------------------------------------------------------------------------------------------------------------
Owned assets:
<S> <C> <C> <C> <C> <C>
Nonaccrual receivables $1,162.2 $1,014.5 $ 935.9 $ 822.7 $ 806.6
Accruing consumer
receivables 90 or more days
delinquent 527.9 519.4 553.0 602.6 527.1
Renegotiated commercial loans 12.3 12.3 12.3 12.3 12.3
-------- -------- -------- -------- --------
Total nonperforming
receivables 1,702.4 1,546.2 1,501.2 1,437.6 1,346.0
Real estate owned 229.7 238.6 229.9 235.1 212.9
-------- -------- -------- -------- --------
Total nonperforming assets $1,932.1 $1,784.8 $1,731.1 $1,672.7 $1,558.9
======== ======== ======== ======== ========
Credit loss reserves as a
percent of nonperforming
receivables 86.4% 94.3% 96.5% 100.8% 111.3%
-------- -------- -------- -------- --------
Managed assets:
Nonaccrual receivables $1,502.6 $1,372.8 $1,307.1 $1,165.5 $1,168.5
Accruing consumer receivables
90 or more days
delinquent 611.7 602.7 663.9 707.7 683.8
Renegotiated commercial
loans 12.3 12.3 12.3 12.3 12.3
-------- -------- -------- -------- --------
Total nonperforming
receivables 2,126.6 1,987.8 1,983.3 1,885.5 1,864.6
Real estate owned 229.7 238.6 229.9 235.1 212.9
-------- -------- -------- -------- --------
Total nonperforming assets $2,356.3 $2,226.4 $2,213.2 $2,120.6 $2,077.5
======== ======== ======== ======== ========
Credit loss reserves as
a percent of nonperforming
receivables 101.3% 105.1% 106.3% 111.7% 119.3%
-------- -------- -------- -------- --------
</TABLE>
Year 2000
- ---------
Household is Year 2000 compliant. We have completed the conversion, testing and
implementation of all internally developed and non-internally developed systems.
We are completing retirements of no longer used systems and ensuring that
systems remain Year 2000 compliant through subsequent modifications. Consistent
with previous disclosures, the costs for Year 2000 compliance have not been, and
are not expected to be, material to our operations. Household International
currently estimates that the aggregate cost of the Year 2000 effort remains at
$20 million after-tax, of which approximately $19 million has been incurred as
of September 30, 1999.
Year 2000 readiness is dependent on external entities and is not limited to
operating risk. We are working extensively with external entities to ensure that
their systems will be Year 2000 compliant; however, we could be adversely
affected if outside parties, such as customers, vendors, utilities and
government agencies, do not appropriately address Year 2000 readiness issues.
Contingency planning is an integral part of our Year 2000 readiness project. We
have developed contingency plans for each of our businesses, which detail the
processes necessary to maintain critical business functions should a critical
system fail. These contingency plans generally include the repair of existing
systems and, in some cases, the use of alternative procedures or systems which
have been tested and are Year 2000 compliant. We will continue to review and
validate the scope and control of our contingency plans throughout 1999.
21
<PAGE> 23
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.
27 Financial Data Schedule.
27.1 Restated Financial Data Schedule
99.1 Debt Securities Ratings.
(b) Reports on Form 8-K
During the third quarter of 1999, the Registrant filed Current
Reports on Form 8-K dated August 2, 1999 and September 3, 1999,
with respect to a Prospectus Supplement dated June 11, 1999, to a
Prospectus dated March 3, 1999 in connection with the offering of
Euro 750,000,000 5 1/8% Notes due June 24, 2009.
22
<PAGE> 24
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 12, 1999 By: /s/ David A. Schoenholz
----------------- -----------------------------
David A. Schoenholz
Executive Vice President and
Chief Financial Officer, Director
and on behalf of
Household Finance Corporation
23
<PAGE> 25
Exhibit Index
--------------
12 Statement of Computation of Ratio of Earnings to Fixed
Charges.
27 Financial Data Schedule.
27.1 Restated Financial Data Schedule
99.1 Debt Securities Ratings.
<PAGE> 1
EXHIBIT 12
-----------
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
(Dollar amounts are in millions)
Nine months ended September 30 1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 709.9 $ 41.5
Income taxes 383.8 205.6
---------- -----------
Income before income taxes 1,093.7 247.1
---------- -----------
Fixed charges:
Interest expense (1) 1,584.4 1,504.8
Interest portion of rentals (2) 27.6 42.1
---------- -----------
Total fixed charges 1,612.0 1,546.9
---------- -----------
Total earnings as defined $ 2,705.7 $ 1,794.0
========== ===========
Ratio of earnings to fixed charges (3) 1.68 1.16
========== ===========
Ratio of earnings to fixed charges, excluding
merger and integration related costs 1.68 1.81
========== ===========
</TABLE>
(1) For financial statement purposes, interest expense includes income earned
on temporary investment of excess funds, generally resulting from
over-subscriptions of commercial paper.
(2) Represents one-third of rentals, which approximates the portion
representing interest.
(3) The 1998 ratios have been negatively impacted by the one-time merger and
integration related costs associated with our merger with Beneficial
Corporation. As a result, ratios excluding these costs have also been
presented for comparative purposes.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Household
Financial Corporation's Form 10-Q for the nine months ended September 30, 1999
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 233,700
<SECURITIES> 3,175,100
<RECEIVABLES> 37,125,300
<ALLOWANCES> (2,153,200)
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 1,095,700
<DEPRECIATION> (717,700)
<TOTAL-ASSETS> 44,829,100
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 30,503,300
0
0
<COMMON> 1
<OTHER-SE> 5,769,400
<TOTAL-LIABILITY-AND-EQUITY> 44,829,100
<SALES> 0
<TOTAL-REVENUES> 5,191,700
<CGS> 0
<TOTAL-COSTS> 1,485,200
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,030,700
<INTEREST-EXPENSE> 1,582,100
<INCOME-PRETAX> 1,093,700
<INCOME-TAX> 383,800
<INCOME-CONTINUING> 709,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 709,900
<EPS-BASIC> 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>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998<F1>
<PERIOD-END> SEP-30-1998
<CASH> 331,700
<SECURITIES> 3,035,000
<RECEIVABLES> 33,118,100
<ALLOWANCES> (2,224,900)
<INVENTORY> 0
<CURRENT-ASSETS> 0<F2>
<PP&E> 994,300
<DEPRECIATION> (634,800)
<TOTAL-ASSETS> 41,208,500
<CURRENT-LIABILITIES> 0<F2>
<BONDS> 24,806,500
0
0
<COMMON> 1
<OTHER-SE> 5,854,600
<TOTAL-LIABILITY-AND-EQUITY> 41,208,500
<SALES> 0
<TOTAL-REVENUES> 5,394,900
<CGS> 0
<TOTAL-COSTS> 2,715,400
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 939,300
<INTEREST-EXPENSE> 1,493,100
<INCOME-PRETAX> 247,100
<INCOME-TAX> 205,600
<INCOME-CONTINUING> 41,500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41,500
<EPS-BASIC> 0
<EPS-DILUTED> 0
<FN>
<F1>AMOUNTS HAVE BEEN RESTATED TO REFLECT THE TRANSFER OF A SUBSIDIARY WITHIN
HOUSEHOLD INTERNATIONAL, INC. IN DECEMBER 1998. IN ACCORDANCE WITH GUIDANCE
ESTABLISHED FOR MERGERS INVOLVING AFFILIATES UNDER COMMON CONTROL, THE RESULTS
OF OPERATIONS OF THE SUBSIDIARY HAVE BEEN EXCLUDED FROM HOUSEHOLD FINANCIAL
CORPORATION SUBSEQUENT TO JUNE 30, 1998, THE DATE WHICH THE SUBSIDIARY CAME
UNDER THE CONTROL OF HOUSEHOLD INTERNATIONAL, INC.
<F2>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 SECURITIES RATINGS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Standard Moody's Duff & Phelps
& Poor's Investors Fitch Credit Thomson
Corporation Service IBCA Rating Co. BankWatch
- ---------------------------------------------------------------------------------------------------------------------
At June 30, 1999
- ---------------------------------------------------------------------------------------------------------------------
Household Finance Corporation
<S> <C> <C> <C> <C> <C>
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+ TBA-1
------ ------- ------ --------- ------
Household Bank (Nevada) N.A.
Senior debt A A2 A+ A+ A+
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
