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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission file number 1-75
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
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 October 31, 2000, there were 1,000 shares of the 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>
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
Table of Contents
PART I. Financial Information Page
----
Item 1. Financial Statements
Condensed Consolidated Statements of Income
(Unaudited) - Three Months and Nine Months
Ended September 30, 2000 and 1999........................ 2
Condensed Consolidated Balance Sheets -
September 30, 2000 (Unaudited) and December 31, 1999..... 3
Condensed Consolidated Statements of Cash Flows
(Unaudited) - Nine Months Ended
September 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......................... 18
Signature ......................................................... 19
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Household Finance Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
-------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
(In millions) 2000 1999 2000 1999
--------------------------------------------------------------------------------
Finance income $ 1,671.6 $ 1,321.0 $ 4,621.2 $ 3,766.1
Other interest income 13.7 18.9 38.5 52.9
Interest expense 767.3 551.5 2,043.3 1,582.1
---------- ---------- ---------- ----------
Net interest margin 918.0 788.4 2,616.4 2,236.9
Provision for credit losses on
owned receivables 363.1 372.8 1,133.3 1,030.7
---------- ---------- ---------- ----------
Net interest margin after provision
for credit losses 554.9 415.6 1,483.1 1,206.2
---------- ---------- ---------- ----------
Securitization income 210.0 211.9 611.6 559.8
Insurance revenues 104.6 88.8 287.9 269.1
Investment income 40.8 41.4 115.4 117.3
Fee income 88.2 105.6 255.2 299.5
Other income 20.0 29.7 104.3 127.0
---------- ---------- ---------- ----------
Total other revenues 463.6 477.4 1,374.4 1,372.7
---------- ---------- ---------- ----------
Salaries and fringe benefits 239.3 203.5 698.2 599.6
Sales incentives 50.7 41.0 145.9 105.1
Occupancy and equipment expense 60.3 53.7 180.1 161.7
Other marketing expenses 47.1 42.2 153.3 118.0
Other servicing and administrative
expenses 31.6 57.7 147.3 225.1
Amortization of acquired intangibles
and intangibles 35.4 35.4 111.6 107.4
Policyholders' benefits 60.5 50.8 172.6 168.3
---------- ---------- ---------- ----------
Total costs and expenses 524.9 484.3 1,609.0 1,485.2
---------- ---------- ---------- ----------
Income before income taxes 493.6 408.7 1,248.5 1,093.7
Income taxes 174.9 144.8 434.3 383.8
--------------------------------------------------------------------------------
Net income $ 318.7 $ 263.9 $ 814.2 $ 709.9
================================================================================
See notes to interim condensed consolidated financial statements.
<PAGE>
Household Finance Corporation and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------------
September 30, December 31,
(In millions, except share data) 2000 1999
-------------------------------------------------------------------------------
ASSETS (UNAUDITED)
Cash $ 132.3 $ 1,487.2
Investment securities 3,745.7 2,257.2
Receivables, net 47,386.9 38,187.6
Advances to parent company and affiliates 784.2 691.8
Acquired intangibles and goodwill, net 1,461.4 1,572.9
Properties and equipment, net 363.4 360.3
Real estate owned 331.9 266.6
Other assets 1,958.3 1,991.6
-------------------------------------------------------------------------------
Total assets $ 56,164.1 $ 46,815.2
===============================================================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Debt:
Commercial paper, bank and other borrowings $ 8,707.3 $ 8,780.2
Senior and senior subordinated debt (with original
maturities over one year) 38,047.7 30,383.6
-------- --------
Total debt 46,755.0 39,163.8
Insurance policy and claim reserves 1,070.8 1,077.2
Other liabilities 1,354.2 643.0
-------- --------
Total liabilities 49,180.0 40,884.0
-------- --------
Common shareholder's equity:
Common stock, $1.00 par value, 1,000 shares authorized,
issued and outstanding at September 30, 2000 and
December 31, 1999, and additional paid-in capital 3,504.2 2,955.5
Retained earnings 3,492.5 3,053.3
Accumulated other comprehensive income (12.6) (77.6)
-------- --------
Total common shareholder's equity 6,984.1 5,931.2
-------------------------------------------------------------------------------
Total liabilities and shareholder's equity $ 56,164.1 $ 46,815.2
===============================================================================
See notes to interim condensed consolidated financial statements.
<PAGE>
Household Finance Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-------------------------------------------------------------------------------
Nine months ended
September 30,
(In millions) 2000 1999
--------------------------------------------------------------------------------
CASH PROVIDED BY OPERATIONS
Net income $ 814.2 $ 709.9
Adjustments to reconcile net income to cash
provided by operations:
Provision for credit losses on owned receivables 1,133.3 1,030.7
Insurance policy and claim reserves 144.0 118.3
Depreciation and amortization 190.0 207.9
Other, net 624.8 (111.7)
---------- ---------
Cash provided by operations 2,906.3 1,955.1
---------- ---------
INVESTMENTS IN OPERATIONS
Investment securities:
Purchased (467.0) (867.4)
Matured 112.7 321.6
Sold 67.0 536.3
Short-term investment securities, net change (1,171.8) (272.6)
Receivables:
Originations, net (7,623.7) (6,911.4)
Purchases and related premiums (8,604.2) (2,011.8)
Sold 5,920.5 4,964.1
Acquisition of business operations - (58.4)
Properties and equipment purchased (95.2) (69.7)
Properties and equipment sold 8.0 16.8
Advances to (from) parent company and affiliates (92.4) 16.3
---------- ---------
Cash decrease from investments in operations (11,946.1) (4,336.2)
---------- ---------
FINANCING AND CAPITAL TRANSACTIONS
Short-term debt and demand deposits, net change (80.9) (325.4)
Senior and senior subordinated debt issued 13,277.0 8,152.1
Senior and senior subordinated debt retired (5,601.5) (4,894.4)
Policyholders' benefits paid (84.8) (87.9)
Cash received from policyholders 0.1 22.0
Dividends paid to parent company (375.0) (680.0)
Capital contributions from parent company 550.0 -
---------- ----------
Cash increase from financing and capital transactions 7,684.9 2,186.4
---------- ----------
Decrease in cash (1,354.9) (194.7)
Cash at January 1 1,487.2 428.4
--------------------------------------------------------------------------------
Cash at September 30 $ 132.3 $ 233.7
================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 2,134.3 $ 1,562.9
Income taxes paid 354.2 420.0
--------------------------------------------------------------------------------
See notes to interim condensed consolidated financial statements.
<PAGE>
Household Finance Corporation and Subsidiaries
FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
(Dollar amounts are in millions) 2000 1999 2000 1999
-------------------------------------------------------------------------------
Net income $ 318.7$ 263.9 $ 814.2$ 709.9
Net interest margin and other revenues(1) 1,321.1 1,215.0 3,818.2 3,441.3
Return on average common shareholder's
equity annualized 18.4 % 18.2 % 17.1% 16.3%
Return on average owned assets, annualized 2.30 2.30 2.12 2.10
Return on average managed assets, annualized 1.90 1.84 1.71 1.66
-------------------------------------------------------------------------------
-----------------------------------------------------------------------------
September 30, December 31,
(Dollar amounts are in millions) 2000 1999
-----------------------------------------------------------------------------
Total assets:
Owned $ 56,164.1 $ 46,815.2
Managed 68,740.2 59,527.0
----------- -----------
Receivables:
Owned $ 47,294.6 $ 38,250.1
Serviced with limited recourse 12,576.1 12,711.8
----------- -----------
Managed $ 59,870.7 $ 50,961.9
=========== ===========
Debt to total shareholder's equity 6.7:1 6.6:1
-------------------------------------------------------------------------------
(1) Net of policyholders' benefits.
See notes to interim condensed consolidated financial statements.
<PAGE>
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 nine months ended September 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." 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, 1999.
2. INVESTMENT SECURITIES
Investment securities consisted of the following available-for-sale investments:
-------------------------------------------------------------------------------
September 30, December 31,
(Dollar amounts are in millions) 2000 1999
--------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ---------- ---------- ----------
Marketable equity securities $ 25.8 $ 25.5 $ 23.8 $ 24.6
Corporate debt securities 1,920.8 1,812.7 1,777.7 1,679.6
U.S. government and federal
agency debt securities 261.2 254.5 194.3 182.3
Other 1,615.7 1,616.1 338.5 338.2
---------- ---------- ---------- ----------
Subtotal 3,823.5 3,708.8 2,334.3 2,224.7
Accrued investment income 36.9 36.9 32.5 32.5
--------------------------------------------------------------------------------
Total investment securities $ 3,860.4 $ 3,745.7 $ 2,366.8 $ 2,257.2
================================================================================
<PAGE>
3. RECEIVABLES
Receivables consisted of the following:
--------------------------------------------------------------------------------
September 30, December 31,
(In millions) 2000 1999
--------------------------------------------------------------------------------
Real estate secured $ 28,787.6 $ 21,229.7
Auto finance 1,768.4 1,225.5
MasterCard*/Visa* 2,873.4 2,956.8
Private label 4,621.9 5,347.5
Other unsecured 8,703.4 6,815.3
Commercial and other 539.9 675.3
--------------------------------------------------------------------------------
Total owned receivables 47,294.6 38,250.1
Accrued finance charges 975.2 698.0
Credit loss reserve for owned receivables (1,514.9) (1,470.7)
Unearned credit insurance premiums and claims reserves (545.1) (479.4)
Amounts due and deferred from receivables sales 1,971.7 1,927.0
Reserve for receivables serviced with limited recourse (794.6) (737.4)
--------- ----------
Total owned receivables, net 47,386.9 38,187.6
Receivables serviced with limited recourse 12,576.1 12,711.8
--------------------------------------------------------------------------------
Total managed receivables, net $ 59,963.0 $ 50,899.4
================================================================================
Receivables serviced with limited recourse consisted of the following:
-------------------------------------------------------------------------------
September 30, December 31,
(In millions) 2000 1999
--------------------------------------------------------------------------------
Real estate secured $ 1,693.7 $ 2,273.6
Auto finance 2,411.7 1,806.3
MasterCard/Visa 3,747.0 3,610.4
Private label 1,150.0 1,150.0
Other unsecured 3,573.7 3,871.5
--------------------------------------------------------------------------------
Total receivables serviced with limited recourse $ 12,576.1 $ 12,711.8
================================================================================
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) 2000 1999
--------------------------------------------------------------------------------
Real estate secured $ 30,481.3 $ 23,503.3
Auto finance 4,180.1 3,031.8
MasterCard/Visa 6,620.4 6,567.2
Private label 5,771.9 6,497.5
Other unsecured 12,277.1 10,686.8
Commercial and other 539.9 675.3
-------------------------------------------------------------------------------
Total managed receivables $ 59,870.7 $ 50,961.9
===============================================================================
* MasterCard is a registered trademark of MasterCard International,
Incorporated and Visa is a registered trademark of VISA USA, Inc.
<PAGE>
The amounts due and deferred from receivables sales included unamortized
securitization assets and funds set up under the recourse requirements for
certain sales totaling $2,034.2 million at September 30, 2000 and $1,992.0
million at December 31, 1999. It also included net customer payments which we
owed to the securitization trustee of $75.3 million at September 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 nine months ended
September 30 was as follows:
--------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
(In millions) 2000 1999 2000 1999
--------------------------------------------------------------------------------
Owned receivables:
Credit loss reserves at beginning
of period $ 1,525.5 $ 1,458.5 $ 1,470.7 $ 1,448.9
Provision for credit losses 363.1 372.8 1,133.3 1,030.7
Chargeoffs (422.4) (410.8) (1,288.5) (1,171.8)
Recoveries 31.9 36.9 99.5 113.1
Other, net 16.8 13.9 99.9 50.4
--------------------------------------------------------------------------------
Credit loss reserves for owned
receivables at September 30 1,514.9 1,471.3 1,514.9 1,471.3
--------------------------------------------------------------------------------
Receivables serviced with limited recourse:
Credit loss reserves at beginning of
period 781.5 631.5 737.4 656.4
Provision for credit losses 165.8 189.4 531.5 460.3
Chargeoffs (156.7) (146.4) (491.9) (466.4)
Recoveries 8.3 7.4 21.7 21.6
Other, net (4.3) - (4.1) 10.0
-------------------------------------------------------------------------------
Credit loss reserves for receivables
served with limited recourse at
September 30 794.6 681.9 794.6 681.9
-------------------------------------------------------------------------------
Total credit loss reserves for managed
receivables at September 30 $ 2,309.5 $ 2,153.2 $ 2,309.5 $2,153.2
================================================================================
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.
5. INCOME TAXES
Our effective tax rate was 34.8 percent for the nine months ended September 30,
2000 and 35.1 percent for the first nine months of 1999. The effective tax rate
differs from the statutory federal income tax rate primarily because of the
effects of state and local income taxes and leveraged lease tax benefits.
<PAGE>
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 $784.2 million at September 30, 2000
compared to $691.8 million at December 31, 1999. There were no advances from
parent company and affiliates at September 30, 2000 and December 31, 1999. Net
interest income on affiliated balances was $17.8 million for the third quarter
of 2000 and $14.4 million for the prior year quarter. In the first nine months
of 2000, net interest income on affiliated balances was $51.8 million compared
to $37.6 million for the same period last year.
7. COMPREHENSIVE INCOME
Comprehensive income was $341.2 million for the quarter ended September 30,
2000, $252.0 million for the quarter ended September 30, 1999, $879.2 million
for the nine months ended September 30, 2000 and $633.0 million for the nine
months ended September 30, 1999.
The components of accumulated other comprehensive income are as follows:
-------------------------------------------------------------------------------
September 30, December 31,
(In millions) 2000 1999
-------------------------------------------------------------------------------
Foreign currency translation adjustments $ (0.5) $ (7.1)
Unrealized gain (loss) on investments (12.1) (70.5)
-------------------------------------------------------------------------------
Accumulated other comprehensive income $ (12.6) $ (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 basis of our
segmentation or in the measurement of segment profit as compared with our Annual
Report on Form 10-K for the year ended December 31, 1999.
Information about our reportable segment for the third quarter and first nine
months of 2000 compared to the corresponding prior year periods was as follows:
-------------------------------------------------------------------------------
Three months ended Nine months ended
Owned Basis September 30, September 30,
(In millions) 2000 1999 2000 1999
--------------------------------------------------------------------------------
Net interest margin and
other revenues (1) $ 1,321.3 $ 1,219.6 $ 3,817.6 $ 3,377.9
Intersegment revenues 60.1 39.4 166.9 104.5
Net income 303.0 243.8 755.0 619.8
Total assets 49,710.6 39,446.6 49,710.6 39,446.6
Total assets - managed 62,389.4 51,534.8 62,389.4 51,534.8
--------------------------------------------------------------------------------
(1) Net interest margin and other revenues, including intersegment revenues, net
of policyholders' benefits
<PAGE>
A reconciliation of the total reportable segment's net income to consolidated
net income for the third quarter and first nine months of 2000 and 1999 is as
follows:
-------------------------------------------------------------------------------
Three months ended Nine months ended
Owned Basis September 30, September 30,
(In millions) 2000 1999 2000 1999
-------------------------------------------------------------------------------
Reportable segment net income $ 303.0 $ 243.8 $ 755.0 $ 619.8
Other operations not individually
reportable 49.4 47.5 163.8 174.6
Adjustments/eliminations (33.7) (27.4) (104.6) (84.5)
-------------------------------------------------------------------------------
Total consolidated net income $ 318.7 $ 263.9 $ 814.2 $ 709.9
===============================================================================
9. 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 estimate that
our net-of-tax cumulative-effect-type adjustment to earnings and equity as a
result of implementing FAS No. 133 will not be material.
In September 2000, the FASB issued Statement of Financial Accounting Standards
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, a replacement of FASB Statement No. 125" ("FAS
No. 140"). FAS No. 140 revises the standards for accounting for securitizations
and requires certain disclosures, but carries over most of FASB Statement No.
125's provisions without amendment. FAS No. 140 is effective for all transfers
of financial assets occurring after March 31, 2001 and for disclosures relating
to securitization transactions for fiscal years ending after December 15, 2000.
We do not believe the adoption of the non-disclosure-related provisions of FAS
No. 140 will have a significant effect on the results of our operations.
<PAGE>
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 third quarter of 2000 increased 21 percent to $318.7
million, from $263.9 million a year ago. Net income for the first nine months of
2000 was $814.2 million, compared to $709.9 million in the year ago period.
These improved results were due to strong revenue growth which was driven by
significant receivable growth, partially offset by higher operating expenses
from the portfolio growth as well as increased technology, marketing,
e-commerce, and personnel spending.
Our annualized return on average common shareholder's equity ("ROE") was 18.4
percent for the third quarter of 2000 and 17.1 percent for the first nine months
of 2000, compared to 18.2 percent and 16.3 percent in the same periods in 1999.
Our annualized return on average owned assets ("ROA") was 2.30 percent in the
third quarter of 2000 and 2.12 percent for the first nine months of 2000,
compared to 2.30 percent and 2.10 percent in the same periods in 1999. Our
annualized return on average managed assets ("ROMA") was 1.90 percent in the
third quarter of 2000 and 1.71 percent for the first nine months of 2000,
compared to 1.84 percent and 1.66 percent in the same periods in 1999.
SEGMENT RESULTS
Our Consumer segment reported improved results over the prior year periods. The
improvement in operating results primarily was due to increased net interest
margin which was partially offset by higher salaries, sales incentives, and
marketing expenses.
Managed receivables grew to $60.3 billion at September 30, 2000, from $56.9
billion at June 30, 2000 and $49.0 billion at September 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.
During the first half of 2000, we acquired real estate secured portfolios of
$3.7 billion. 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.
ROA was 2.50 and 2.24 percent in the third quarter and first nine months of 2000
compared to 2.46 and 2.12 percent in the year-ago periods. ROMA was 2.00 and
1.76 percent in the third quarter and first nine months of 2000 compared to 1.91
and 1.63 percent in the year-ago periods.
<PAGE>
BALANCE SHEET REVIEW
Managed receivables growth was solid, increasing 22 percent from a year ago to
$59.9 billion. Excluding the $3.7 billion real estate secured loan portfolios
that we acquired this year, receivables were up 14 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 other unsecured products, which
reported total growth of 29 percent and internally-generated growth of 18
percent. 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 $1.5
billion over last year to $4.2 billion. This business continued to benefit from
favorable market conditions and an expanded 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 and
reflects our strategy to de-emphasize this low margin business. Changes in the
way private label accounts are originated resulted in decreased private label
receivables. Substantially all private label receivables generated from new
merchant relationships are now originated by an affiliate. 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 June 30, 2000, managed receivables increased 5 percent, led by 6
percent growth in our consumer finance business. Auto finance growth, at 12
percent, was also strong in the quarter.
Owned receivables were $47.3 billion at September 30, 2000, up from $44.9
billion at June 30, 2000 and $37.1 billion at September 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 4.82 percent, compared with 4.80 percent at June 30,
2000 and 5.92 percent at September 30, 1999. The annualized consumer owned
chargeoff ratio in the third quarter of 2000 was 3.38 percent, compared with
3.73 percent in the prior quarter and 4.00 percent in the year-ago quarter.
Managed consumer two-months-and-over contractual delinquency as a percent of
managed consumer receivables was 4.75 percent, compared with 4.72 percent at
June 30, 2000 and 5.57 percent at September 30, 1999. The annualized consumer
managed chargeoff ratio in the third quarter of 2000 was 3.71 percent, compared
with 4.07 percent in the prior quarter and 4.21 percent in the year-ago quarter.
Our debt to total shareholder's equity ratio was 6.7 to 1 at September 30, 2000
and 6.6 to 1 at December 31, 1999.
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.
We paid dividends of $100 million to our parent company during the third quarter
of 2000 and $375.0 million during the first nine months of 2000. During the
third quarter, we received no capital contributions from our parent. Capital
contributions from our parent totaled $550 million during the first nine months
of 2000.
Commercial paper, bank and other borrowings decreased to $8.7 billion at
September 30, 2000 from $8.8 billion at year-end. Senior and senior subordinated
debt (with original maturities over one year) increased to $38.0 billion at
September 30, 2000 from $30.4 billion at year-end.
* MasterCard is a registered trademark of MasterCard International,
Incorporated and Visa is a registered trademark of VISA USA, Inc.
<PAGE>
Our securitized receivable portfolio totaled $12.6 billion at September 30,
2000, compared to $12.7 billion at December 31, 1999.
We securitized (excluding replenishments of certificate holder interests) the
following receivables:
--------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
(In billions) 2000 1999 2000 1999
--------------------------------------------------------------------------------
Auto finance $ .6 $ .5 $ 1.4 $ 1.1
MasterCard/Visa .5 .1 .7 .3
Other unsecured .4 .7 1.3 1.0
--------------------------------------------------------------------------------
Total $ 1.5 $ 1.3 $ 3.4 $ 2.4
================================================================================
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, 2000, 21 percent of our managed portfolio had been securitized
compared to 25 percent a year ago.
INCOME STATEMENT REVIEW
Net interest margin
Net interest margin was $918.0 and $2,616.4 million for the third quarter and
first nine months of 2000, compared to $788.4 and $2,236.9 million in the year
ago periods. Net interest margin on a managed basis, assuming receivables
securitized were held in our portfolio, was $1,288.4 and $3,557.9 million for
the third quarter and first nine months of 2000, compared to $1,077.7 and
$3,119.4 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 8.21 percent, compared to 8.45 percent in the previous quarter
and 8.50 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.
Provision for credit losses
The provision for credit losses for receivables was $363.1 and $1,133.3 million
for the third quarter and first nine months of 2000, compared to $372.8 and
$1,030.7 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 $210.0 and $611.6 million for the third quarter and
the first nine months of 2000, compared to $211.9 and $559.8 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 year-to-date increase is primarily due to increases in
average securitized receivables and changes in portfolio mix.
Insurance revenues were $104.6 and $287.9 million in the third quarter and first
nine months of 2000 compared to $88.8 and $269.1 million in the year-ago
periods. The increases reflected increased sales on a larger portfolio.
Fee income, which includes revenues from fee-based products such as credit
cards, was $88.2 and $255.2 million in the third quarter and first nine months
of 2000, compared to $105.6 and $299.5 million in the year-ago periods. The
decreases are primarily due to decreases in credit card fees resulting from
lower average receivables.
<PAGE>
Other income was $20.0 and $104.3 million in the third quarter and first nine
months of 2000 compared to $29.7 and $127.0 million in the prior year periods.
The overall decrease is primarily due to lower commercial income.
Expenses
Total costs and expenses for the third quarter and first nine months of 2000
were $524.9 and $1,609.0 million compared to $484.3 and $1,485.2 million in the
comparable prior year periods. Higher expenses were driven by higher receivable
levels and increased technology, marketing, e-commerce, and personnel spending.
Significant fluctuations were as follows:
Salaries and fringe benefits for the third quarter and first nine months of 2000
were $239.3 and $698.2 million compared to $203.5 and $599.6 million in the
comparable prior year periods. The increases were primarily due to additional
staffing to support growth in the consumer finance business and the impact of
acquisitions.
Sales incentives for the third quarter and first nine months of 2000 were $50.7
and $145.9 million compared to $41.0 and $105.1 million in the comparable prior
year periods. The increases were primarily due to higher sales volumes in our
branches.
Occupancy and equipment expense for the third quarter and first nine months of
2000 was $60.3 and $180.1 million compared to $53.7 and $161.7 million in the
comparable prior year periods. The increases were primarily due to support
facility growth associated with our Tampa, Florida collections center and
facilities acquired with acquisitions in the first half of the year.
Other marketing expenses for the third quarter and first nine months of 2000
were $47.1 and $153.3 million compared to $42.2 and $118.0 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 third quarter and first nine
months of 2000 were $31.6 and $147.3 million compared to $57.7 and $225.1
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
portfolio acquisitions in the first half of the year.
Amortization of acquired intangibles and goodwill for the third quarter of 2000
and 1999 was $35.4 million and $111.6 for the first nine months of 2000 compared
to $107.4 million for the first nine months of 1999. The year-to-date increase
reflects higher amortization of purchased credit card relationships.
CREDIT LOSS RESERVES
Our consumer credit management policies focus on product type and specific
portfolio risk factors. Our 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:
--------------------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(in millions) 2000 2000 2000 1999 1999
--------------------------------------------------------------------------------
Owned $ 1,514.9 $ 1,525.5 $ 1,532.5 $ 1,470.7 $ 1,471.3
Serviced with limited
recourse 794.6 781.5 774.7 737.4 681.9
--------------------------------------------------------------------------------
Total managed $ 2,309.5 $ 2,307.0 $ 2,307.2 $ 2,208.1 $ 2,153.2
================================================================================
Managed credit loss reserves as a percent of nonperforming managed receivables
were 101.0 percent, compared to 108.2 percent at June 30, 2000 and 101.3 percent
at September 30, 1999.
<PAGE>
Total owned and managed credit loss reserves as a percent of receivables were as
follows:
--------------------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
2000 2000 2000 1999 1999
--------------------------------------------------------------------------------
Owned 3.20 % 3.40 % 3.75 % 3.84 % 3.96 %
Managed 3.86 4.05 4.31 4.33 4.38
--------------------------------------------------------------------------------
Reserve ratios at September 30, 2000 reflect improved credit quality and
underwriting and the impact of a growing percentage of secured loans which have
lower loss rates than unsecured loans. Real estate secured receivables represent
51 percent of our total managed receivables at September 30, 2000 and June 30,
2000, compared to 46 percent at September 30, 1999.
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):
--------------------------------------------------------------------------------
9/30/00 6/30/00 3/31/00 12/31/99 9/30/99
--------------------------------------------------------------------------------
Managed:
Real estate secured 2.95 % 2.90 % 3.16 % 3.34 % 3.42 %
Auto finance 2.25 2.05 1.53 2.44 2.26
MasterCard/Visa 3.28 2.98 3.17 3.46 3.90
Private label 9.95 9.66 9.66 9.30 9.69
Other unsecured 8.41 8.66 9.52 9.83 9.58
--------------------------------------------------------------------------------
Total managed 4.75 % 4.72 % 5.09 % 5.45 % 5.57 %
--------------------------------------------------------------------------------
Owned 4.82 % 4.80 % 5.24 % 5.58 % 5.92 %
================================================================================
Managed delinquency as a percent of managed consumer receivables increased
slightly during the quarter and was down 82 basis points from the prior year
quarter. The modest sequential increase in delinquency is due to normal aging of
our portfolios and seasonality in our auto finance portfolio.
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. In our real estate secured portfolio, we continue to
benefit from the growing percentage of loans on which we hold a first lien
position. The 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. Additional collection staff in our other unsecured business has
resulted in decreased delinquency. The increase in private label delinquency was
attributable to reductions in the portfolio balance as more originations are
booked by our affiliate.
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.
<PAGE>
Net Chargeoffs of Consumer Receivables
Net Chargeoffs of Consumer Receivables (as a percent, annualized, of average
consumer receivables):
CHARGEOFFS:
-------------------------------------------------------------------------------
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
2000 2000 2000 1999 1999
-------------------------------------------------------------------------------
Managed:
Real estate secured .44 % .51 % .55 % .56 % .58 %
Auto finance 4.56 4.37 5.27 5.44 4.55
MasterCard/Visa 5.07 5.85 6.24 6.13 7.04
Private label 9.16 8.99 8.93 8.60 7.63
Other unsecured 8.17 9.01 8.80 8.29 8.19
-------------------------------------------------------------------------------
Total 3.71 % 4.07 % 4.37 % 4.25 % 4.21 %
-------------------------------------------------------------------------------
Owned 3.38 % 3.73 % 4.09 % 4.17 % 4.00 %
===============================================================================
Managed net chargeoffs as a percent of average managed consumer receivables for
the third quarter of 2000 decreased from both the prior quarter and the prior
year quarter. Dollars of chargeoff have declined for the second consecutive
quarter.
Compared to the second quarter, improvements in our real estate secured,
MasterCard and Visa, and other unsecured portfolios were partially offset by
increases in our auto and private label portfolios. Our MasterCard and Visa
portfolio continues to benefit from lower bankruptcy rates and higher
recoveries. Our other unsecured portfolio reflects the benefits of improved
collections resulting from the addition of collection staff. The increase in our
auto finance portfolio is attributable to increased volume and seasonality.
Private label chargeoffs have been negatively impacted by reductions in the
portfolio balance as more originations are booked by our affiliate.
Compared to the prior year quarter, significant reductions in our MasterCard and
Visa portfolio were partially offset by increases in our private label
portfolio. The reasons for the trends are consistent with those discussed above.
Run-off in our undifferentiated Household Bank branded portfolio also
contributed to the reduced chargeoff rate.
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.
<PAGE>
<TABLE>
<CAPTION>
NONPERFORMING ASSETS
------------------------------------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(In millions) 2000 2000 2000 1999 1999
<S> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------
Owned assets:
Nonaccrual receivables $ 1,352.0 $ 1,223.7 $ 1,250.1 $ 1,183.7 $ 1,162.2
Accruing consumer receivables
90 or more days delinquent 465.2 462.4 484.1 508.4 527.9
Renegotiated commercial loans 12.3 12.3 12.3 12.3 12.3
--------- -------- -------- --------- ---------
Total nonperforming receivables 1,829.5 1,698.4 1,746.5 1,704.4 1,702.4
Real estate owned 331.9 318.7 295.6 266.6 229.7
-----------------------------------------------------------------------------------------------
Total nonperforming assets $ 2,161.4 $ 2,017.1 $ 2,042.1 $ 1,971.0 $ 1,932.1
-----------------------------------------------------------------------------------------------
Credit loss reserves as a
percent of nonperforming
receivables 82.8% 89.8% 87.7% 86.3% 86.4%
-----------------------------------------------------------------------------------------------
Managed assets:
Nonaccrual receivables $ 1,700.3 $ 1,563.7 $ 1,638.7 $ 1,610.1 $ 1,502.6
Accruing consumer receivables
90 or more days delinquent 574.0 556.2 582.5 605.8 611.7
Renegotiated commercial loans 12.3 12.3 12.3 12.3 12.3
---------- --------- --------- --------- ----------
Total nonperforming
receivables 2,286.6 2,132.2 2,233.5 2,228.2 2,126.6
Real estate owned 331.9 318.7 295.6 266.6 229.7
----------------------------------------------------------------------------------------------
Total nonperforming assets $ 2,618.5 $ 2,450.9 $ 2,529.1 $ 2,494.8 $ 2,356.3
----------------------------------------------------------------------------------------------
Credit loss reserves as
a percent of nonperforming
receivables 101.0% 108.2% 103.3% 99.1% 101.3%
----------------------------------------------------------------------------------------------
</TABLE>