<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000
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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
-------------------------------------------------------
(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)
(847) 564-5000
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Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
At July 31, 2000, 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 and Six Months
Ended June 30, 2000 and 1999 ......................... 2
Condensed Consolidated Balance Sheets -
June 30, 2000 (Unaudited) and December 31, 1999 ...... 3
Condensed Consolidated Statements of Cash Flows
(Unaudited) - Six Months Ended
June 30, 2000 and 1999 ............................... 4
Financial Highlights ................................. 5
Notes to Interim Condensed Consolidated Financial
Statements (Unaudited) ............................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ........ 11
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K ..................... 19
Signature .................................................... 20
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Household Finance Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
-------------------------------------------------------
All amounts are stated in millions.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Finance income $1,528.4 $1,264.9 $2,949.6 $2,445.1
Other interest income 13.0 17.4 24.8 34.0
Interest expense 679.8 523.9 1,276.0 1,030.6
-------- -------- -------- --------
Net interest margin 861.6 758.4 1,698.4 1,448.5
Provision for credit losses on owned
receivables 349.6 326.2 770.2 657.9
-------- -------- -------- --------
Net interest margin after provision for
credit losses 512.0 432.2 928.2 790.6
-------- -------- -------- --------
Securitization income 200.8 155.7 401.6 347.9
Insurance revenues 91.6 88.3 183.3 180.3
Investment income 38.1 38.4 74.6 75.9
Fee income 73.0 94.3 167.0 193.9
Other income 25.6 26.6 84.3 97.3
-------- -------- -------- --------
Total other revenues 429.1 403.3 910.8 895.3
-------- -------- -------- --------
Salaries and fringe benefits 287.7 238.7 554.1 460.2
Occupancy and equipment expense 59.8 54.6 119.8 108.0
Other marketing expenses 53.3 33.7 106.2 75.8
Other servicing and administrative expenses 43.2 72.5 115.7 167.4
Amortization of acquired intangibles
and goodwill 35.4 35.9 76.2 72.0
Policyholders' benefits 55.5 58.7 112.1 117.5
-------- -------- -------- --------
Total costs and expenses 534.9 494.1 1,084.1 1,000.9
-------- -------- -------- --------
Income before income taxes 406.2 341.4 754.9 685.0
Income taxes 141.2 117.2 259.4 239.0
-------- -------- -------- --------
Net income $ 265.0 $ 224.2 $ 495.5 $ 446.0
======== ======== ======== ========
</TABLE>
See notes to interim condensed consolidated financial statements.
2
<PAGE> 4
Household Finance Corporation and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
In millions, except share data.
--------------------------------------------------------------------------------
June 30, December 31,
2000 1999
--------------------------------------------------------------------------------
ASSETS (Unaudited)
Cash $ 206.7 $ 1,487.2
Investment securities 3,028.9 2,257.2
Receivables, net 44,863.2 38,187.6
Advances to parent company and affiliates 1,088.0 691.8
Acquired intangibles and goodwill, net 1,496.9 1,572.9
Properties and equipment, net 360.7 360.3
Real estate owned 318.7 266.6
Other assets 1,922.9 1,991.6
--------- ---------
Total assets $53,286.0 $46,815.2
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Debt:
Commercial paper, bank and other borrowings $ 8,946.3 $ 8,780.2
Senior and senior subordinated debt (with
original maturities over one year) 35,358.6 30,383.6
--------- ---------
Total debt 44,304.9 39,163.8
Insurance policy and claim reserves 1,071.5 1,077.2
Other liabilities 1,166.8 643.0
--------- ---------
Total liabilities 46,543.2 40,884.0
--------- ---------
Common shareholder's equity:
Common stock, $1.00 par value, 1,000 shares
authorized, issued and outstanding at
June 30, 2000 and December 31, 1999,
and additional paid-in capital 3,504.1 2,955.5
Retained earnings 3,273.8 3,053.3
Accumulated other comprehensive income (35.1) (77.6)
--------- ---------
Total common shareholder's equity 6,742.8 5,931.2
--------- ---------
Total liabilities and shareholder's equity $53,286.0 $46,815.2
========= =========
See notes to interim condensed consolidated financial statements.
3
<PAGE> 5
Household Finance Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-----------------------------------------------------------
In millions.
--------------------------------------------------------------------------------
Six months ended June 30 2000 1999
--------------------------------------------------------------------------------
CASH PROVIDED BY OPERATIONS
Net income $ 495.5 $ 446.0
Adjustments to reconcile net income to cash
provided by operations:
Provision for credit losses on owned receivables 770.2 657.9
Insurance policy and claim reserves 67.9 68.5
Depreciation and amortization 131.5 140.8
Other, net 537.6 (84.9)
-------- --------
Cash provided by operations 2,002.7 1,228.3
-------- --------
INVESTMENTS IN OPERATIONS
Investment securities:
Purchased (335.9) (712.0)
Matured 139.7 226.9
Sold 33.8 465.7
Short-term investment securities, net change (495.3) (639.1)
Receivables:
Originations, net (4,141.9) (4,756.9)
Purchases and related premiums (6,903.1) (1,769.3)
Sold 3,654.7 2,799.5
Properties and equipment purchased (60.1) (51.0)
Properties and equipment sold 3.6 14.9
Advances to parent company and affiliates, net (396.2) (168.8)
-------- --------
Cash decrease from investments in operations (8,500.7) (4,590.1)
-------- --------
FINANCING AND CAPITAL TRANSACTIONS
Short-term debt and deposits, net change 21.1 1,214.3
Senior and senior subordinated debt issued 8,434.8 5,659.2
Senior and senior subordinated debt retired (3,456.7) (3,205.8)
Policyholders' benefits paid (56.8) (60.8)
Cash received from policyholders 0.1 22.0
Dividends paid to parent company (275.0) (495.0)
Capital contributions from parent company 550.0 --
-------- --------
Cash increase from financing and capital transactions 5,217.5 3,133.9
-------- --------
Decrease in cash (1,280.5) (227.9)
Cash at January 1 1,487.2 428.4
-------- --------
Cash at June 30 $ 206.7 $ 200.5
======== ========
Supplemental cash flow information:
Interest paid $1,366.0 $1,029.7
-------- --------
Income taxes paid 256.3 168.9
-------- --------
See notes to interim condensed consolidated financial statements.
4
<PAGE> 6
Household Finance Corporation and Subsidiaries
FINANCIAL HIGHLIGHTS
--------------------
All dollar amounts are stated in millions.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 265.0 $ 224.2 $ 495.5 $ 446.0
Net interest margin and other revenues(1) 1,235.2 1,103.0 2,497.1 2,226.3
Return on average common shareholder's
equity, annualized 17.3% 15.6% 16.3% 15.4%
Return on average owned assets, annualized 2.07 1.99 2.01 2.00
Return on average managed assets, annualized 1.68 1.58 1.61 1.57
</TABLE>
All dollar amounts are stated in millions.
--------------------------------------------------------------------------------
June 30, December 31,
2000 1999
--------------------------------------------------------------------------------
Total assets:
Owned $53,286.0 $46,815.2
Managed 65,415.9 59,527.0
--------- ---------
Receivables:
Owned $44,851.6 $38,250.1
Serviced with limited recourse 12,129.9 12,711.8
--------- ---------
Managed $56,981.5 $50,961.9
========= =========
Debt to total shareholder's equity 6.6:1 6.6:1
--------- ---------
(1) Net of policyholders' benefits.
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 and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Results for the three and six months ended June 30, 2000 should not be
considered indicative of the results for any future quarters or the year ending
December 31, 2000. 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, 1999.
2. INVESTMENT SECURITIES
--------------------------
Investment securities consisted of the following available-for-sale investments:
-------------------------------------------------------------------------------
In millions. June 30, 2000 December 31, 1999
-------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-------- -------- -------- --------
Marketable equity securities $ 25.6 $ 25.2 $ 23.8 $ 24.6
Corporate debt securities 1,911.2 1,789.8 1,777.7 1,679.6
U.S. government and federal
agency debt securities 582.1 573.6 194.3 182.3
Other 604.2 604.2 338.5 338.2
-------- -------- -------- --------
Subtotal 3,123.1 2,992.8 2,334.3 2,224.7
Accrued investment income 36.1 36.1 32.5 32.5
-------- -------- -------- --------
Total investment securities $3,159.2 $3,028.9 $2,366.8 $2,257.2
======== ======== ======== ========
6
<PAGE> 8
3. RECEIVABLES
--------------
Receivables consisted of the following:
-------------------------------------------------------------------------------
June 30, December 31,
In millions. 2000 1999
-------------------------------------------------------------------------------
Real estate secured $27,171.0 $21,229.7
Auto finance 1,638.2 1,225.5
MasterCard/Visa 3,016.8 2,956.8
Private label 4,715.2 5,347.5
Other unsecured 7,729.8 6,815.3
Commercial and other 580.6 675.3
--------- ---------
Total owned receivables 44,851.6 38,250.1
Accrued finance charges 887.5 698.0
Credit loss reserve for owned receivables (1,525.5) (1,470.7)
Unearned credit insurance premiums and
claims reserves (496.3) (479.4)
Amounts due and deferred from
receivables sales 1,927.4 1,927.0
Reserve for receivables serviced with
limited recourse (781.5) (737.4)
--------- ---------
Total owned receivables, net 44,863.2 38,187.6
Receivables serviced with limited recourse 12,129.9 12,711.8
--------- ---------
Total managed receivables, net $56,993.1 $50,899.4
========= =========
The outstanding balance of receivables serviced with limited recourse consisted
of the following:
-------------------------------------------------------------------------------
June 30, December 31,
In millions. 2000 1999
-------------------------------------------------------------------------------
Real estate secured $ 1,796.2 $ 2,273.6
Auto finance 2,097.2 1,806.3
MasterCard/Visa 3,402.1 3,610.4
Private label 1,150.0 1,150.0
Other unsecured 3,684.4 3,871.5
--------- ---------
Total $12,129.9 $12,711.8
========= =========
The combination of receivables owned and receivables serviced with limited
recourse, which we consider our managed portfolio, is shown below:
-------------------------------------------------------------------------------
June 30, December 31,
In millions. 2000 1999
-------------------------------------------------------------------------------
Real estate secured $28,967.2 $23,503.3
Auto finance 3,735.4 3,031.8
MasterCard/Visa 6,418.9 6,567.2
Private label 5,865.2 6,497.5
Other unsecured 11,414.2 10,686.8
Commercial and other 580.6 675.3
--------- ---------
Total $56,981.5 $50,961.9
========= =========
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 $2,015.2 million at June 30, 2000 and $1,992.0 million at
December 31, 1999. It also included net customer payments which are owed to the
securitization trustee of $100.9 million at June 30, 2000 and $78.6 million at
December 31, 1999.
The reserve for receivables serviced with limited recourse represents our best
estimate of probable losses on these receivables.
4. CREDIT LOSS RESERVES
-------------------------
An analysis of credit loss reserves for the three and six months ended June 30
was as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
In millions. 2000 1999 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Owned receivables:
Credit loss reserves at
beginning of period $1,532.5 $1,448.8 $1,470.7 $1,448.9
Provision for credit losses 349.6 326.2 770.2 657.9
Chargeoffs (427.5) (371.2) (866.1) (761.0)
Recoveries 36.0 40.7 67.6 76.2
Portfolio acquisitions, net 34.9 14.0 83.1 36.5
-------- -------- -------- --------
Total credit loss reserves for
owned receivables at June 30 1,525.5 1,458.5 1,525.5 1,458.5
-------- -------- -------- --------
Receivables serviced with limited
Recourse:
Credit loss reserves at
beginning of period 774.7 658.8 737.4 656.4
Provision for credit losses 166.1 125.0 365.6 270.9
Chargeoffs (167.2) (159.7) (335.2) (320.0)
Recoveries 7.8 7.3 13.5 14.2
Other, net .1 .1 .2 10.0
-------- -------- -------- --------
Total credit loss reserves for
receivables serviced with
limited recourse at June 30 781.5 631.5 781.5 631.5
-------- -------- -------- --------
Total credit loss reserves for
managed receivables at June 30 $2,307.0 $2,090.0 $2,307.0 $2,090.0
======== ======== ======== ========
</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. INCOME TAXES
---------------
The effective tax rate was 34.4 percent for the six months ended June 30, 2000
and 34.9 percent for the first six months of 1999. The effective tax rate
differs from the statutory federal income tax rate in these years primarily
because of the effects of state and local income taxes and leveraged lease tax
benefits.
6. 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 $1,088.0 million at June 30, 2000 compared
to $691.8 million at December 31, 1999. There were no advances from parent
company and affiliates at June 30, 2000 and December 31, 1999. Net interest
income on affiliated balances was $17.1 million for the second quarter of 2000
and $11.3 million for the prior year quarter. In the first six months of 2000,
net interest income on affiliated balances was $34.0 million compared to $23.2
million for the same period last year.
7. COMPREHENSIVE INCOME
-----------------------
Comprehensive income was $254.0 million for the quarter ended June 30, 2000,
$182.2 million for the quarter ended June 30, 1999, $538.0 million for the six
months ended June 30, 2000 and $381.0 million for the six months ended June 30,
1999.
The components of accumulated other comprehensive income are as follows:
--------------------------------------------------------------------------------
June 30, December 31,
In millions. 2000 1999
--------------------------------------------------------------------------------
Foreign currency translation adjustments $ (3.3) $ (7.1)
Unrealized gain (loss) on investments, net (31.8) (70.5)
------ ------
Accumulated other comprehensive income $(35.1) $(77.6)
====== ======
8. SEGMENT REPORTING
--------------------
We have one reportable segment, Consumer, which includes our branch-based and
correspondent consumer finance, private label credit card, auto finance and
MasterCard and Visa businesses. There has been no change in the measurement of
segment profit or the basis of segmentation as compared with our Form 10-K.
9
<PAGE> 11
Information about our reportable segment for the second quarter and first six
months of 2000 compared to the corresponding prior year periods was as follows:
------------------------------------------------------------------------------
Three Months Ended Six Months Ended
Owned Basis June 30, June 30,
In millions. 2000 1999 2000 1999
------------------------------------------------------------------------------
Net interest margin and other
revenues (1) $ 1,263.8 $ 1,095.8 $ 2,496.2 $ 2,158.3
Intersegment revenues 60.7 31.0 106.8 65.1
Segment net income 265.7 198.5 452.0 376.0
Total segment assets 46,736.8 39,389.6 46,736.8 39,389.6
Total segment assets - managed 59,023.5 51,075.2 59,023.5 51,075.2
--------- --------- --------- ---------
(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 second quarter and first six months of 2000 and 1999 is as
follows:
------------------------------------------------------------------------------
Three Months Ended Six Months Ended
Owned Basis June 30, June 30,
In millions. 2000 1999 2000 1999
------------------------------------------------------------------------------
Reportable segment net income $265.7 $198.5 $452.0 $376.0
Other operations not
individually reportable 39.6 54.1 114.4 127.1
Adjustments/eliminations (40.3) (28.4) (70.9) (57.1)
------ ------ ------ ------
Total consolidated net income $265.0 $224.2 $495.5 $446.0
====== ====== ====== ======
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.
FASB statement No. 137 deferred our required adoption of FAS No. 133 to January
1, 2001. FASB Statement No. 138, which addressed a limited number of issues
causing implementation difficulties, was issued in June 2000. We have not yet
quantified the impact of these pronouncements on our financial statements.
10
<PAGE> 12
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, 1999 (the "1999 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 1999 Form 10-K.
OPERATIONS SUMMARY
------------------
Our net income for the second quarter of 2000 increased 18 percent to $265.0
million, from $224.2 million a year ago. Net income for the first six months of
2000 was $495.5 million, compared to $446.0 million in the year ago period.
These improved results were due to strong revenue growth driven by significant
receivable growth, partially offset by higher operating expenses from the
portfolio growth, increased technology, marketing and e-commerce spending, and
lower revenues from our private label business due to changes in the portfolio.
In addition, our year-to-date earnings included higher net income in the first
quarter from our tax refund anticipation loan ("RAL") business.
Our annualized return on average common shareholder's equity ("ROE")was 17.3
percent for the second quarter of 2000 and 16.3 percent for the first six months
of 2000, compared to 15.6 percent and 15.4 percent in the same periods in 1999.
Our annualized return on average owned assets ("ROA") was 2.07 percent in the
second quarter of 2000 and 2.01 percent for the first six months of 2000,
compared to 1.99 percent and 2.00 percent in the same periods in 1999. Our
annualized return on average managed assets ("ROMA") was 1.68 percent in the
second quarter of 2000 and 1.61 percent for the first six months of 2000,
compared to 1.58 percent and 1.57 percent in the same periods in 1999.
SEGMENT RESULTS
---------------
Our Consumer segment reported improved results over the prior year periods.
Managed receivables grew to $56.9 billion at June 30, 2000, from $53.4 billion
at March 31, 2000 and $48.7 billion at June 30, 1999. The managed receivable
growth during the quarter and year-over-year was driven by solid growth in real
estate secured, other unsecured and auto finance receivables. In 2000, we
acquired real estate secured portfolios of $3.7 billion, including a $1.5
billion portfolio in June 2000. Our private label portfolio declined over both
the prior and year-ago quarters as an affiliate now originates substantially all
receivables generated from new merchant relationships. Compared with the prior
year quarter, strong receivables growth in the Union Privilege ("UP") portfolio
was partially offset by attrition in our legacy undifferentiated Household Bank
branded portfolio on which we have limited marketing efforts.
* MasterCard is a registered trademark of MasterCard International,
Incorporated and Visa is a registered trademark of VISA USA, Inc.
11
<PAGE> 13
ROA was 2.38 and 2.10 percent in the second quarter and first six months of 2000
compared to 2.04 and 1.95 percent in the year-ago periods. ROMA was 1.86 and
1.63 percent in the second quarter and first six months of 2000 compared to 1.57
and 1.49 percent in the year-ago periods. The improvement in operating results
reflect higher dollars of net interest margin, partially offset by higher
salaries and marketing expense, including sales incentive compensation, and
higher credit loss provision reflecting the increased levels of receivables.
BALANCE SHEET REVIEW
--------------------
Managed receivables growth was solid, increasing 17 percent from a year ago to
$57.0 billion. Excluding the $3.7 billion real estate secured loan portfolios
that we acquired this year, receivables were up 9 percent from a year ago. The
strongest contributor to the growth was our U.S. consumer finance business,
which includes our real estate secured and unsecured products. The consumer
finance growth is the result of favorable competitor and market conditions,
improved customer retention rates, and increased productivity from our branch
sales force who continue to benefit from our centralized lead management and
point-of-sale system. Auto finance receivables increased $1.4 billion over last
year to $3.7 billion. This business continued to benefit from favorable market
conditions and an expanded collection and sales force. In our MasterCard and
Visa portfolio, solid growth in our UP portfolio was substantially offset by
attrition in our legacy undifferentiated Household Bank branded portfolio on
which we have limited marketing efforts. Changes in the way private label
accounts are originated resulted in decreased private label receivables.
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 portfolio.
Compared to March 31, 2000, managed receivables increased 6 percent. Excluding
the $1.5 billion real estate secured portfolio we acquired in June 2000, total
managed receivables increased 3 percent and receivables in our consumer finance
business increased 4 percent. Auto finance growth was also strong in the
quarter. This growth was offset by continued attrition in our private label
portfolio due to the change in originations discussed above. MasterCard and Visa
receivables grew modestly during the quarter as growth in our UP portfolio was
offset by attrition in our Household Bank branded portfolio as discussed above.
Owned receivables were $44.9 billion at June 30, 2000, up from $40.8 billion at
March 31, 2000 and $37.3 billion at June 30, 1999. The level of our owned
receivables may vary from period to period depending on the timing and size of
securitization transactions.
Owned consumer two-months-and-over contractual delinquency as a percent of owned
consumer receivables was 4.80 percent, compared with 5.24 percent at March 31,
2000 and 5.28 percent at June 30, 1999. The annualized total consumer owned
chargeoff ratio in the second quarter of 2000 was 3.73 percent, compared with
4.09 percent in the prior quarter and 3.68 percent in the year-ago quarter.
Managed consumer two-months-and-over contractual delinquency as a percent of
managed consumer receivables was 4.72 percent, compared with 5.09 percent at
March 31, 2000 and 5.14 percent at June 30, 1999. The annualized total consumer
managed chargeoff ratio in the second quarter of 2000 was 4.07 percent, compared
with 4.37 percent in the prior quarter and 4.05 percent in the year-ago quarter.
Our debt to total shareholder's equity ratio was 6.6 to 1 at both June 30, 2000
and December 31, 1999.
12
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Our main uses of cash are the origination or purchase of receivables and
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 liquidity and interest rate risk strategy continues
to be conservative.
We paid no dividends to our parent company during the second quarter of 2000. A
total of $275.0 million of dividends were paid to our parent company during the
first six months of 2000. During the second quarter, we received a capital
contribution of $550 million from our parent.
Commercial paper, bank and other borrowings increased to $8.9 billion at June
30, 2000 from $8.8 billion at year-end. Senior and senior subordinated debt
(with original maturities over one year) increased to $35.4 billion at June 30,
2000 from $30.4 billion at year-end.
Our securitized portfolio of real estate secured, auto finance, MasterCard and
Visa, private label and other unsecured receivables totaled $12.1 billion at
June 30, 2000, compared with $12.7 billion at December 31, 1999.
We securitized (excluding replenishments of certificate holder interests) the
following receivables:
------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
In billions. 2000 1999 2000 1999
------------------------------------------------------------------------------
Auto finance $ .3 $ .3 $ .8 $ .6
MasterCard/Visa -- -- .2 .2
Other unsecured .3 -- .9 .3
---- ---- ---- ----
Total $ .6 $ .3 $1.9 $1.1
==== ==== ==== ====
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 June
30, 2000, 21 percent of our managed portfolio had been securitized, compared to
24 percent a year ago.
13
<PAGE> 15
INCOME STATEMENT REVIEW
-----------------------
Net interest margin
Net interest margin was $861.6 and $1,698.4 million for the second quarter and
first six months of 2000, compared to $758.4 and $1,448.5 million in the year
ago periods. Net interest margin on a managed basis, assuming receivables
securitized were held in our portfolio, was $1,185.7 and $2,329.5 million for
the second quarter and first six months of 2000, compared to $1,053.5 and
$2,041.7 million for the same periods in 1999. The increases were primarily due
to better pricing and receivable growth, which were partially offset by higher
funding costs.
Net interest margin as a percent of average managed interest-earning assets,
annualized, was 8.45 percent, compared to 8.71 percent in the previous quarter
and 8.43 percent in the year-ago quarter. The trends reflect the continued shift
in the portfolio to lower margin real estate secured receivables and higher
funding costs due to increases in interest rates, partially offset by better
pricing in our consumer finance portfolio. Compared to the prior year, the
margin also reflects improved pricing in our MasterCard and Visa portfolio.
Provision for credit losses
The provision for credit losses for receivables was $349.6 and $770.2 million
for the second quarter and first six months of 2000, compared to $326.2 and
$657.9 million for the same periods in 1999. 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 $200.8 and $401.6 million for the second quarter and
the first six months of 2000, compared to $155.7 and $347.9 million for the same
periods in 1999. Securitization income consists of income associated with the
securitization and sale of receivables with limited recourse, including net
interest income, fee and other income and provision for credit losses related to
those receivables. The increases are primarily due to changes in average
securitized receivables and mix.
Insurance revenues were $91.6 and $183.3 million in the second quarter and first
six months of 2000 compared to $88.3 and $180.3 million in the year-ago periods.
The increases are due to increased sales on higher receivable balances.
Fee income, which includes revenues from fee-based products such as credit
cards, was $73.0 and $167.0 million in the second quarter and first six months
of 2000, compared to $94.3 and $193.9 million in the year-ago periods. The
decreases are primarily due to decreases in credit card fees resulting from
lower average MasterCard and Visa and private label receivables.
Other income was $25.6 and $84.3 million in the second quarter and first six
months of 2000 compared to $26.6 and $97.3 million in the prior year periods.
The overall decrease is primarily due to lower commercial income partially
offset by higher income in our tax refund anticipation loan business where
increases in both the number of refund anticipation loans and the average
balance of such loans was partially offset by reduced pricing.
14
<PAGE> 16
Expenses
Total costs and expenses for the second quarter and first six months of 2000
were $534.9 and $1,084.1 million compared to $494.1 and $1,000.9 million in the
comparable prior year periods. Higher expenses were driven by higher receivable
levels and increased technology, marketing and e-commerce spending. Significant
fluctuations were as follows:
Salaries and fringe benefits for the second quarter and first six months of 2000
were $287.7 and $554.1 million compared to $238.7 and $460.2 million in the
second quarter and first six months of 1999. The increases were primarily due to
higher sales incentive compensation and additional staffing to support growth in
the consumer finance business.
Occupancy and equipment expense for the second quarter and first six months of
2000 was $59.8 and $119.8 million compared to $54.6 and $108.0 million in the
comparable prior year periods. The increases were primarily due to support
facility growth associated with our Tampa, Florida collections center and branch
facilities acquired with the first quarter real estate secured portfolio
acquisition.
Other marketing expenses for the second quarter and first six months of 2000
were $53.3 and $106.2 million compared to $33.7 and $75.8 million in the
comparable prior year periods. The increases were primarily due to increased
credit card marketing initiatives.
Other servicing and administrative expenses for the second quarter and first six
months of 2000 were $43.2 and $115.7 million compared to $72.5 and $167.4
million in the comparable prior year periods. The decreases were primarily due
to increased fees earned for servicing receivables of affiliates, partially
offset by increased e-commerce initiatives and increased costs resulting from
the first quarter real estate secured portfolio acquisition.
Amortization of acquired intangibles and goodwill for the second quarter and
first six months of 2000 was $35.4 and $76.2 million compared to $35.9 and $72.0
million in the comparable prior year periods. The increases reflect higher
amortization of purchased credit card relationships.
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
loss reserves for the quarter.
Total managed credit loss reserves, which include reserves established on the
off-balance sheet portfolio when receivables are securitized, were as follows
(in millions):
--------------------------------------------------------------------------------
June 30, March 31, December 31, June 30,
2000 2000 1999 1999
--------------------------------------------------------------------------------
Owned $1,525.5 $1,532.5 $1,470.7 $1,458.5
Serviced with limited recourse 781.5 774.7 737.4 631.5
-------- -------- -------- --------
Total $2,307.0 $2,307.2 $2,208.1 $2,090.0
======== ======== ======== ========
Managed credit loss reserves as a percent of nonperforming managed receivables
were 108.2 percent at June 30, 2000, compared to 103.3 percent at March 31, 2000
and 105.1 percent at June 30, 1999.
15
<PAGE> 17
Total owned and managed credit loss reserves as a percent of receivables were as
follows:
-------------------------------------------------------------------------------
June 30, March 31, December 31, June 30,
2000 2000 1999 1999
-------------------------------------------------------------------------------
Owned 3.40% 3.75% 3.84% 3.91%
Managed 4.05 4.31 4.33 4.27
---- ---- ---- ----
Reserve ratios at June 30, 2000 reflect improved credit quality and the impact
of a growing percentage of secured loans. Real estate secured receivables
represent 51 percent of our total managed receivables at June 30, 2000, compared
to 49 percent at March 31, 2000 and 46 percent at June 30, 1999. MasterCard and
Visa receivables were 11 percent at quarter end, down from 12 percent at March
31, 2000 and 13 percent at June 30, 1999. This continued shift in portfolio mix
to secured products is important, as the loss severity for real estate secured
loans is significantly less than for unsecured products such as credit cards.
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 Delinquency (as a percent of consumer
receivables):
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
6/30/00 3/31/00 12/31/99 9/30/99 6/30/99
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Managed:
Real estate secured 2.90% 3.16% 3.34% 3.42% 3.09%
Auto finance 2.05 1.53 2.44 2.26 1.87
MasterCard/Visa 2.98 3.17 3.46 3.90 3.73
Private label 9.66 9.66 9.30 9.69 8.46
Other unsecured 8.66 9.52 9.83 9.58 9.12
---- ---- ---- ---- ----
Total 4.72% 5.09% 5.45% 5.57% 5.14%
==== ==== ==== ==== ====
Owned 4.80% 5.24% 5.58% 5.92% 5.28%
==== ==== ==== ==== ====
</TABLE>
Managed delinquency as a percent of managed consumer receivables improved for
the third straight quarter and was substantially lower than both the prior
quarter and the prior year quarter. Dollars of delinquency were also down
compared with the prior quarter.
On a sequential quarter basis, real estate secured delinquency continued to
benefit from the growing percentage of loans in our portfolio on which we hold a
first lien position. The increase in auto finance delinquency was due to
seasonality. The continued decrease in our MasterCard and Visa delinquency was
attributable to run-off associated with our undifferentiated Household Bank
branded portfolio, tightened credit extension policies and re-engineered
collection efforts. The decrease in our unsecured portfolio reflected the impact
of adding additional collection staff.
The decrease in managed delinquency from the prior year quarter was primarily
driven by improvements in our real estate secured, MasterCard and Visa, and
other unsecured portfolios for the reasons discussed above. The increase in
private label delinquency was attributable to reductions in the portfolio
balance as more originations are booked by our affiliate.
16
<PAGE> 18
The trends impacting owned consumer delinquency as a percent of owned
receivables are generally consistent with those described above for our managed
portfolio. Owned delinquency for MasterCard and Visa, private label and other
unsecured receivables are greater than managed delinquency due to the retention
of receivables on balance sheet that do not meet the eligibility requirements
for securitization. Owned delinquency for real estate secured and auto
receivables are comparable to managed delinquency.
Net Chargeoffs of Consumer Receivables
Net Chargeoffs of Consumer Receivables (as a percent, annualized, of average
consumer receivables):
------------------------------------------------------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
2000 2000 1999 1999 1999
------------------------------------------------------------------------------
Real estate secured .51% .55% .56% .58% .62%
Auto finance 4.37 5.27 5.44 4.55 4.41
MasterCard/Visa 5.85 6.24 6.13 7.04 9.24
Private label 8.99 8.93 8.60 7.63 7.24
Other unsecured 9.01 8.80 8.29 8.19 6.27
---- ---- ---- ---- ----
Total 4.07% 4.37% 4.25% 4.21% 4.05%
==== ==== ==== ==== ====
3.73% 4.09% 4.17% 4.00% 3.68%
==== ==== ==== ==== ====
Managed net chargeoffs as a percent of average managed consumer receivables for
the second quarter of 2000 decreased from the prior quarter, but increased
slightly over the prior year quarter. Dollars of chargeoff also declined on a
sequential quarter basis.
During the quarter, managed chargeoffs improved in all products except private
label and other unsecured. Private label chargeoffs have been negatively
impacted by reductions in the portfolio balance as more originations are booked
by our affiliate. The increase in other unsecured chargeoffs was driven largely
by certain older Beneficial vintages.
Compared to the prior year, improvements in the managed chargeoff ratios in our
real estate secured, auto and MasterCard and Visa portfolios, were more than
offset by increases in our private label and other unsecured portfolios.
MasterCard and Visa chargeoffs were down sharply over the prior year due to the
run-off associated with our undifferentiated Household Bank branded portfolio.
The increases in private label and other unsecured chargeoffs were attributable
to the previously discussed reductions in the private label portfolio and
Beneficial other unsecured portfolio.
The trends impacting owned net chargeoffs as a percent of owned receivables are
generally consistent with those described above for our managed portfolio. Owned
chargeoffs for MasterCard and Visa, private label, and other unsecured are
higher than managed chargeoffs due to the difference in credit quality and
seasoning of the receivables that remain on our balance sheet. Chargeoffs on
owned auto finance receivables are lower than managed chargeoffs due to the
predominantly unseasoned nature of the receivables which remain on our balance
sheet.
17
<PAGE> 19
Nonperforming Assets
Nonperforming assets consisted of the following:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
In millions. 6/30/00 3/31/00 12/31/99 9/30/99 6/30/99
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual owned receivables $1,223.7 $1,250.1 $1,183.7 $1,162.2 $1,014.5
Accruing owned consumer
receivables 90 or more days
delinquent 462.4 484.1 508.4 527.9 519.4
Renegotiated commercial loans 12.3 12.3 12.3 12.3 12.3
-------- -------- -------- -------- --------
Total nonperforming owned
receivables 1,698.4 1,746.5 1,704.4 1,702.4 1,546.2
Real estate owned 318.7 295.6 266.6 229.7 238.6
-------- -------- -------- -------- --------
Total nonperforming owned assets $2,017.1 $2,042.1 $1,971.0 $1,932.1 $1,784.8
======== ======== ======== ======== ========
Owned credit loss reserves as
a percent of nonperforming
owned receivables 89.8% 87.7% 86.3% 86.4% 94.3%
-------- -------- -------- -------- --------
Nonaccrual managed receivables $1,563.7 $1,638.7 $1,610.1 $1,502.6 $1,372.8
Accruing managed consumer
receivables 90 or more days
delinquent 556.2 582.5 605.8 611.7 602.7
Renegotiated commercial
loans 12.3 12.3 12.3 12.3 12.3
-------- -------- -------- -------- --------
Total nonperforming managed
receivables 2,132.2 2,233.5 2,228.2 2,126.6 1,987.8
Real estate owned 318.7 295.6 266.6 229.7 238.6
-------- -------- -------- -------- --------
Total nonperforming assets $2,450.9 $2,529.1 $2,494.8 $2,356.3 $2,226.4
======== ======== ======== ======== ========
Managed credit loss reserves as
a percent of nonperforming
managed receivables 108.2% 103.3% 99.1% 101.3% 105.1%
-------- -------- -------- -------- --------
</TABLE>
18
<PAGE> 20
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.
99.1 Debt Securities Ratings.
(b) Reports on Form 8-K
During the second quarter of 2000, the Registrant filed no Current
Reports on Form 8-K.
19
<PAGE> 21
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOUSEHOLD FINANCE CORPORATION
-----------------------------
(Registrant)
Date: August 10, 2000 By: /s/ David A. Schoenholz
---------------- -----------------------------
David A. Schoenholz
Executive Vice President and
Chief Financial Officer
and on behalf of
Household Finance Corporation
20
<PAGE> 22
Exhibit Index
--------------
12 Statement of Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule.
99.1 Debt Securities Ratings.
