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HSBC Finance Corp – ‘10-Q’ for 9/30/97

On:  Wednesday, 11/12/97   ·   As of:  11/13/97   ·   For:  9/30/97   ·   Accession #:  354964-97-26   ·   File #:  1-08198

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  As Of                Filer                Filing    For·On·As Docs:Size

11/13/97  HSBC Finance Corp                 10-Q        9/30/97    5:76K

Quarterly Report   —   Form 10-Q
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Quarterly Report                                      25    132K 
 2: EX-12       Statement re: Computation of Ratios                    1      7K 
 3: EX-21       Subsidiaries of the Registrant                         5     20K 
 4: EX-27       Financial Data Schedule (Pre-XBRL)                     2±     7K 
 5: EX-99.1     Miscellaneous Exhibit                                  1      7K 


10-Q   —   Quarterly Report
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
3Item 1. Financial Statements
13Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
20Credit Loss Reserves
21Delinquency
23Item 6. Exhibits and Reports on Form 8-K
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FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 ------------------ OR [ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------- -------------- Commission file number 1-8198 ------ HOUSEHOLD INTERNATIONAL, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 36-3121988 ------------------------ ------------------------------------ (State of Incorporation) (I.R.S. Employer Identification No.) 2700 Sanders Road, Prospect Heights, Illinois 60070 ------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (847) 564-5000 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] At November 7, 1997, there were 107,008,611 shares of registrant's common stock outstanding.
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HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES Table of Contents PART I. Financial Information Page ---- Item 1. Financial Statements Condensed Consolidated Statements of Income (Unaudited) - Three Months and Nine Months Ended September 30, 1997 and 1996 2 Condensed Consolidated Balance Sheets - September 30, 1997 (Unaudited) and December 31, 1996 3 Condensed Consolidated Statements of Cash Flows (Unaudited) - Nine Months Ended September 30, 1997 and 1996 4 Financial Highlights 5 Notes to Interim Condensed Consolidated Financial Statements (Unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 PART II. Other Information Item 6. Exhibits and Reports on Form 8-K 22 Signature 23
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PART 1. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Household International, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) ------------------------------------------------------- All amounts, except per share data, are stated in millions. [Enlarge/Download Table] --------------------------------------------------------------------------------------------------- Three months ended Nine months ended September 30, September 30, 1997 1996 1997 1996 --------------------------------------------------------------------------------------------------- Finance income $790.0 $755.6 $2,271.5 $2,136.4 Interest income from noninsurance investment securities 6.2 12.1 30.2 71.4 Interest expense 389.2 384.7 1,116.1 1,121.8 ------ ------ -------- -------- Net interest margin 407.0 383.0 1,185.6 1,086.0 Provision for credit losses on owned receivables 257.8 169.5 802.8 537.3 ------ ------ -------- -------- Net interest margin after provision for credit losses 149.2 213.5 382.8 548.7 ------ ------ -------- -------- Securitization income 366.5 282.0 1,041.5 841.9 Insurance revenues 69.6 63.6 203.5 185.9 Investment income 32.9 34.8 95.0 128.0 Fee income 108.7 62.1 263.5 165.3 Other income 48.8 31.5 146.5 195.4 ------ ------ -------- -------- Total other revenues 626.5 474.0 1,750.0 1,516.5 ------ ------ -------- -------- Salaries and fringe benefits 168.7 138.1 472.5 409.8 Occupancy and equipment expense 52.5 48.3 156.5 163.6 Other marketing expenses 128.9 132.3 358.1 374.5 Other servicing and administrative expenses 92.6 98.0 286.6 360.2 Policyholders' benefits 47.6 57.2 142.9 183.6 ------ ------ -------- -------- Total costs and expenses 490.3 473.9 1,416.6 1,491.7 ------ ------ -------- -------- Income before income taxes 285.4 213.6 716.2 573.5 Income taxes 98.2 73.7 247.2 198.5 ------ ------ -------- -------- Net income $187.2 $139.9 $ 469.0 $ 375.0 ====== ====== ======== ======== Earnings per common share: Net income $187.2 $139.9 $ 469.0 $ 375.0 Preferred dividends (2.9) (4.2) (9.0) (12.5) ------ ------ -------- -------- Net income available to common shareholders $184.3 $135.7 $ 460.0 $ 362.5 ====== ====== ======== ======== Average common and common equivalent shares 108.4 98.2 102.3 98.4 ------ ------ -------- -------- Net income per common share $ 1.70 $ 1.38 $ 4.50 $ 3.68 ------ ------ -------- -------- Dividends declared per common share .42 .39 1.20 1.07 ------ ------ -------- -------- See notes to interim condensed consolidated financial statements.
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Household International, Inc. and Subsidiaries CONDENSED CONSOLIDATED BALANCE SHEETS ------------------------------------- In millions, except share data. [Download Table] --------------------------------------------------------------------------------- September 30, December 31, 1997 1996 --------------------------------------------------------------------------------- ASSETS (Unaudited) ------ Cash $ 345.1 $ 239.2 Investment securities 2,261.5 2,282.0 Receivables, net 24,467.0 24,244.8 Acquired intangibles and goodwill, net 1,593.1 969.4 Properties and equipment, net 321.6 353.1 Real estate owned 150.5 136.6 Other assets 1,512.0 1,369.4 --------- --------- Total assets $30,650.8 $29,594.5 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Debt: Deposits $ 1,951.2 $ 2,365.1 Commercial paper, bank and other borrowings 6,082.3 6,428.1 Senior and senior subordinated debt (with original maturities over one year) 15,168.0 14,802.0 --------- --------- Total debt 23,201.5 23,595.2 Insurance policy and claim reserves 1,250.4 1,205.3 Other liabilities 1,557.8 1,472.8 --------- --------- Total liabilities 26,009.7 26,273.3 --------- --------- Company obligated mandatorily redeemable preferred securities of subsidiary trusts* 175.0 175.0 --------- --------- Preferred stock 150.0 205.0 --------- --------- Common shareholders' equity: Common stock, $1.00 par value, 250,000,000 shares authorized, 124,331,175 and 115,231,175 shares issued at September 30, 1997 and December 31, 1996, respectively 124.3 115.2 Additional paid-in capital 1,398.0 397.3 Retained earnings 3,412.4 3,076.8 Foreign currency translation adjustments (127.1) (126.7) Unrealized loss on investments, net (3.4) (12.9) Less common stock in treasury, 17,431,526 and 18,165,921 shares at September 30, 1997 and December 31, 1996, respectively, at cost (488.1) (508.5) --------- --------- Total common shareholders' equity 4,316.1 2,941.2 --------- --------- Total liabilities and shareholders' equity $30,650.8 $29,594.5 ========= ========= * As described in note 8 to the financial statements, the sole asset of the two trusts are Junior Subordinated Deferrable Interest Notes issued by Household International, Inc. in June 1996 and June 1995, bearing interest at 8.70 and 8.25 percent, respectively, with principal balances of $103.1 and $77.3 million, respectively, and due June 30, 2036 and June 30, 2025, respectively. See notes to interim condensed consolidated financial statements.
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Household International, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) ----------------------------------------------------------- In millions. [Enlarge/Download Table] ------------------------------------------------------------------------------------- Nine months ended September 30 1997 1996 ------------------------------------------------------------------------------------- CASH PROVIDED BY OPERATIONS Net income $ 469.0 $ 375.0 Adjustments to reconcile net income to cash provided by operations: Provision for credit losses on owned receivables 802.8 537.3 Insurance policy and claim reserves 70.4 57.0 Depreciation and amortization 189.7 178.4 Net realized gains from sales of assets (84.6) (119.0) Other, net (55.7) 203.9 ---------- ---------- Cash provided by operations 1,391.6 1,232.6 ---------- ---------- INVESTMENTS IN OPERATIONS Investment securities: Purchased (1,019.5) (1,880.9) Matured 246.0 684.7 Sold 810.7 2,262.9 Short-term investment securities, net change 1.1 252.2 Receivables: Originations, net (19,229.8) (20,017.8) Purchased (632.9) (4,250.4) Sold 21,861.4 20,776.8 Purchase capital stock of Transamerica Financial Services Holding Company (1,065.0) - Disposition of consumer banking operations: Assets sold, net - 472.3 Deposits and other liabilities sold - (2,809.8) Acquisition of portfolios, net - (620.1) Properties and equipment purchased (47.4) (58.1) Properties and equipment sold 7.3 11.4 ---------- ---------- Cash increase (decrease) from investments in operations 931.9 (5,176.8) ---------- ---------- FINANCING AND CAPITAL TRANSACTIONS Short-term debt and demand deposits, net change (412.1) (43.4) Time certificates, net change (258.8) 299.1 Senior and senior subordinated debt issued 4,461.8 6,759.0 Senior and senior subordinated debt retired (4,060.2) (2,706.0) Repayment of Transamerica Financial Services Holding Company debt (2,795.0) - Policyholders' benefits paid (95.2) (484.0) Cash received from policyholders 93.3 192.4 Shareholders' dividends (133.4) (116.4) Purchase of treasury stock - (48.9) Redemption of preferred stock (55.0) - Issuance of common stock 1,016.5 11.4 Issuance of company obligated mandatorily redeemable preferred securities of subsidiary trusts - 100.0 ---------- ---------- Cash increase (decrease) from financing and capital transactions (2,238.1) 3,963.2 ---------- ---------- Effect of exchange rate changes on cash 20.5 .2 ---------- ---------- Increase in cash 105.9 19.2 Cash at January 1 239.2 270.4 ---------- ---------- Cash at September 30 $ 345.1 $ 289.6 ========== ========== Supplemental cash flow information: Interest paid $ 1,081.4 $ 1,116.8 ---------- ---------- Income taxes paid 163.2 220.4 ---------- ---------- See notes to interim condensed consolidated financial statements.
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Household International, Inc. and Subsidiaries FINANCIAL HIGHLIGHTS -------------------- All dollar amounts are stated in millions. [Enlarge/Download Table] -------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 -------------------------------------------------------------------------------------------- Net income $ 187.2 $ 139.9 $ 469.0 $ 375.0 -------- -------- -------- -------- Revenues 1,422.7 1,241.7 4,051.7 3,724.3 -------- -------- -------- -------- Return on average common shareholders' equity <F1> 17.4% 19.8% 17.7% 17.8% -------- -------- -------- -------- Return on average owned assets <F1> 2.37 1.87 2.09 1.71 -------- -------- -------- -------- Managed basis efficiency ratio, normalized <F2> 35.1 39.9 36.5 41.5 -------- -------- -------- -------- All dollar amounts are stated in millions. [Download Table] ---------------------------------------------------------------------------- September 30, December 31, 1997 1996 ---------------------------------------------------------------------------- Total assets: Owned $30,650.8 $29,594.5 Managed 50,289.2 48,120.9 --------- --------- Receivables: Owned $24,445.0 $24,067.0 Serviced with limited recourse 19,638.4 18,526.4 --------- --------- Managed $44,083.4 $42,593.4 ========= ========= Total shareholders' equity as a percent of owned assets <F3> 15.14% 11.22% ---------- --------- Total shareholders' equity as a percent of managed assets <F3> 9.23 6.90 ---------- --------- <FN> <F1> Annualized. <F2> Ratio of normalized operating expenses to managed net interest margin and other revenues less policyholders' benefits. <F3> Total shareholders' equity at September 30, 1997 and December 31, 1996 includes common shareholders' equity, preferred stock and company obligated mandatorily redeemable preferred securities of subsidiary trusts. </FN> See notes to interim condensed consolidated financial statements.
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Household International, Inc. and Subsidiaries NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION -------------------------- The accompanying unaudited condensed consolidated financial statements of Household International, Inc. and its subsidiaries (the "company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Certain prior period amounts have been reclassified to conform with the current period's presentation. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. For further information, refer to the consolidated financial statements and footnotes thereto included in the company's annual report on Form 10-K for the year ended December 31, 1996. 2. ACQUISITIONS AND STOCK OFFERING ------------------------------------ On June 23, 1997, Household International and a wholly-owned subsidiary of Household Finance Corporation (a wholly-owned subsidiary of Household International) acquired the capital stock of Transamerica Financial Services Holding Company ("TFS"), the branch-based consumer finance subsidiary of Transamerica Corporation ("TA"). The company paid $1.1 billion for the stock of TFS and repaid approximately $2.8 billion of TFS debt owed to affiliates of TA. The acquisition added approximately $3.2 billion of receivables, of which approximately $3.1 billion were home equity loans secured primarily by home mortgages. The acquisition of TFS was accounted for as a purchase, and accordingly, TFS' operations have been included in the company's results of operations from June 24, 1997. The acquisition of TFS was not material to the company's consolidated financial statements. In June 1997, the company completed a public underwritten offering of 9.1 million shares of its common stock for approximately $1.0 billion. Net proceeds from the offering were used to repay certain short-term borrowings in connection with the acquisition of TFS. On October 21, 1997, Household International and a wholly-owned subsidiary acquired the capital stock of ACC Consumer Finance Corporation ("ACC"), a non-prime auto finance company. The acquisition of ACC will be accounted for as a purchase and will not be material to the company's consolidated financial statements. 3. INVESTMENT SECURITIES -------------------------- Investment securities consisted of the following: [Enlarge/Download Table] ----------------------------------------------------------------------------------------- In millions. September 30, 1997 December 31, 1996 ----------------------------------------------------------------------------------------- Amortized Fair Amortized Fair Cost Value Cost Value ----------------------------------------------------------------------------------------- AVAILABLE-FOR-SALE INVESTMENTS Marketable equity securities $ 129.0 $ 131.4 $ 212.7 $ 213.1 Corporate debt securities 1,251.5 1,257.7 1,081.4 1,070.5 U.S. government and federal agency debt securities 231.5 217.9 287.0 277.7 Other 623.8 623.8 690.5 690.5 -------- -------- -------- -------- Subtotal 2,235.8 2,230.8 2,271.6 2,251.8 Accrued investment income 30.7 30.7 30.2 30.2 -------- -------- -------- -------- Total investment securities $2,266.5 $2,261.5 $2,301.8 $2,282.0 ======== ======== ======== ========
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4. RECEIVABLES ---------------- Receivables consisted of the following: [Download Table] --------------------------------------------------------------------- September 30, December 31, In millions. 1997 1996 --------------------------------------------------------------------- First mortgage $ 482.9 $ 725.6 Home equity 7,605.0 3,647.9 Visa/MasterCard 5,668.6 8,587.7 Private label 5,230.1 5,070.0 Other unsecured 4,622.1 5,098.0 Commercial 836.3 937.8 --------- --------- Total owned receivables 24,445.0 24,067.0 Accrued finance charges 414.9 397.6 Credit loss reserve for owned receivables (1,062.7) (900.2) Unearned credit insurance premiums and claims reserves (216.2) (184.6) Amounts due and deferred from receivables sales 1,632.5 1,561.0 Reserve for receivables serviced with limited recourse (746.5) (696.0) --------- ---------- Total owned receivables, net 24,467.0 24,244.8 Receivables serviced with limited recourse 19,638.4 18,526.4 --------- --------- Total managed receivables, net $44,105.4 $42,771.2 ========= ========= The outstanding balance of receivables serviced with limited recourse consisted of the following: [Download Table] --------------------------------------------------------------------- September 30, December 31, In millions. 1997 1996 --------------------------------------------------------------------- Home equity $ 3,371.8 $ 4,337.5 Visa/MasterCard 11,210.2 10,149.7 Private label 375.0 517.0 Other unsecured 4,681.4 3,522.2 --------- --------- Total $19,638.4 $18,526.4 ========= ========= The combination of receivables owned and receivables serviced with limited recourse, which the company considers its managed portfolio, is shown below: [Download Table] --------------------------------------------------------------------- September 30, December 31, In millions. 1997 1996 --------------------------------------------------------------------- First mortgage $ 482.9 $ 725.6 Home equity 10,976.8 7,985.4 Visa/MasterCard 16,878.8 18,737.4 Private label 5,605.1 5,587.0 Other unsecured 9,303.5 8,620.2 Commercial 836.3 937.8 --------- --------- Total $44,083.4 $42,593.4 ========= =========
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At September 30, 1997 and December 31, 1996, the amounts due and deferred from receivables sales of $1,632.5 and $1,561.0 million, respectively, included unamortized securitization assets and funds established pursuant to the recourse provisions for certain sales totaling $1,522.3 and $1,235.4 million, respectively. The amounts due and deferred also included customer payments not yet remitted by the securitization trustee to the company of $84.6 and $310.3 million at September 30, 1997 and December 31, 1996, respectively. In addition, the company has subordinated interests in certain transactions, which were recorded as receivables, of $857.0 and $485.0 million at September 30, 1997 and December 31, 1996, respectively. The company has agreements with a "AAA"-rated third party who will indemnify the company for up to $21.2 million in losses relating to certain securitization transactions. The company maintains credit loss reserves pursuant to the recourse provisions for receivables serviced with limited recourse which are based on estimated probable losses under such provisions. These reserves totaled $746.5 and $696.0 million at September 30, 1997 and December 31, 1996, respectively, and represent the company's best estimate of possible losses on receivables serviced with limited recourse. 5. CREDIT LOSS RESERVES ------------------------- An analysis of credit loss reserves for the three and nine months ended September 30 was as follows: [Enlarge/Download Table] -------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, In millions. 1997 1996 1997 1996 -------------------------------------------------------------------------------------------- Credit loss reserves for owned receivables at beginning of period $1,051.0 $ 858.3 $ 900.2 $ 720.4 Provision for credit losses 257.8 169.5 802.8 537.3 Chargeoffs (271.9) (207.2) (788.5) (561.3) Recoveries 32.0 30.6 98.8 91.6 Portfolio acquisitions, net (6.2) 11.3 49.4 74.5 -------- -------- -------- -------- TOTAL CREDIT LOSS RESERVES FOR OWNED RECEIVABLES AT SEPTEMBER 30 1,062.7 862.5 1,062.7 862.5 -------- -------- -------- -------- Credit loss reserves for receivables serviced with limited recourse at beginning of period 719.9 592.8 696.0 457.0 Provision for credit losses 294.6 245.0 769.8 663.2 Chargeoffs (287.4) (181.7) (764.7) (475.3) Recoveries 20.3 9.9 43.1 22.3 Other, net (.9) (.6) 2.3 (1.8) -------- -------- -------- -------- TOTAL CREDIT LOSS RESERVES FOR RECEIVABLES SERVICED WITH LIMITED RECOURSE AT SEPTEMBER 30 746.5 665.4 746.5 665.4 -------- -------- -------- -------- TOTAL CREDIT LOSS RESERVES FOR MANAGED RECEIVABLES AT SEPTEMBER 30 $1,809.2 $1,527.9 $1,809.2 $1,527.9 ======== ======== ======== ======== 6. INCOME TAXES ----------------- Effective tax rates for the nine months ended September 30, 1997 and 1996 of 34.5 and 34.6 percent, respectively, differ from the statutory federal income tax rate for the respective periods primarily because of the effects of (a) domestic and foreign loss carryforwards, (b) amortization and write-offs of intangible assets, (c) state and local income taxes, (d) reduction of noncurrent tax requirements and (e) leveraged lease tax benefits.
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7. NET INCOME PER COMMON SHARE -------------------------------- Computations of net income per common share for the three and nine months ended September 30 were as follows: [Download Table] ---------------------------------------------------------------------------- Three Months Ended September 30, 1997 1996 ---------------------------------------------------------------------------- Fully Fully In millions, except per share data. Primary Diluted Primary Diluted ----------------------------------- ------- ------- ------- ------- Earnings: Net income $187.2 $187.2 $139.9 $139.9 Preferred dividends (2.9) (2.9) (4.2) (4.2) ------ ------ ------ ------ Net income available to common shareholders $184.3 $184.3 $135.7 $135.7 ====== ====== ====== ====== Average shares: Common 106.8 106.8 96.9 96.9 Common equivalents 1.6 1.6 1.3 1.3 ------ ------ ------ ------ Total 108.4 108.4 98.2 98.2 ====== ====== ====== ====== Net income per common share $ 1.70 $ 1.70 $ 1.38 $ 1.38 ====== ====== ====== ====== [Download Table] ---------------------------------------------------------------------------- Nine Months Ended September 30, 1997 1996 ---------------------------------------------------------------------------- Fully Fully In millions, except per share data. Primary Diluted Primary Diluted ----------------------------------- ------- ------- ------- ------- Earnings: Net income $469.0 $469.0 $375.0 $375.0 Preferred dividends (9.0) (9.0) (12.5) (12.5) ------ ------ ------ ------ Net income available to common shareholders $460.0 $460.0 $362.5 $362.5 ====== ====== ====== ====== Average shares: Common 100.7 100.7 97.1 97.1 Common equivalents 1.5 1.6 1.3 1.3 ------ ------ ------ ------ Total 102.2 102.3 98.4 98.4 ====== ====== ====== ====== Net income per common share $ 4.50 $ 4.50 $ 3.68 $ 3.68 ====== ====== ====== ====== 8. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS --------------------------------------------------------------------- In June 1996 Household Capital Trust II ("HCT II"), a wholly-owned subsidiary of the company, issued 4 million 8.70 percent Trust Preferred Securities ("preferred securities") at $25 per preferred security. The sole asset of HCT II is $103.1 million of 8.70 percent Junior Subordinated Deferrable Interest Notes issued by the company. The junior subordinated notes held by HCT II mature on June 30, 2036 and are redeemable by the company in whole or in part beginning on June 30, 2001, at which time the HCT II preferred securities are callable at par value of $25 per preferred security plus accrued and unpaid dividends. Net proceeds from the issuance of preferred securities were used for general corporate purposes.
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In 1995 Household Capital Trust I ("HCT I"), a wholly-owned subsidiary of the company, issued 3 million 8.25 percent preferred securities at $25 per preferred security. The sole asset of HCT I is $77.3 million of 8.25 percent Junior Subordinated Deferrable Interest Notes issued by the company. The junior subordinated notes held by HCT I mature on June 30, 2025 and are redeemable by the company in whole or in part beginning June 30, 2000, at which time the HCT I preferred securities are callable at par value of $25 per preferred security plus accrued and unpaid dividends. HCT I may elect to extend the maturity of its preferred securities to June 30, 2044. The obligations of the company with respect to the junior subordinated notes, when considered together with certain undertakings of the company with respect to HCT I and HCT II, constitute full and unconditional guarantees by the company of HCT I's and HCT II's obligations under the respective preferred securities. The preferred securities are classified in the company's balance sheets as company obligated mandatorily redeemable preferred securities of subsidiary trusts (representing the minority interest in the trusts) at their face and redemption amount of $175 million at September 30, 1997 and December 31, 1996. The preferred securities have a liquidation value of $25 per preferred security. Dividends on the preferred securities are cumulative, payable quarterly in arrears, and are deferrable at the company's option for up to five years from date of issuance. The company cannot pay dividends on its preferred and common stocks during such deferments. 9. INTEREST RATE CONTRACTS ---------------------------- At September 30, 1997 and December 31, 1996, all of the company's interest rate contracts qualified as hedges or synthetic alterations. The nature and composition of the company's assets and liabilities and off-balance sheet items expose the company to interest rate risk. The company enters into a variety of interest rate contracts for managing its interest rate exposure. Interest rate swaps are the principal vehicle used to manage interest rate risk; however, interest rate futures, options, caps and floors, and forward contracts also are utilized. The company also has entered into currency swaps to convert both principal and interest payments on debt issued from one currency to the appropriate functional currency. Interest rate swaps are designated, and effective, as synthetic alterations of specific assets or liabilities (or specific groups of assets or liabilities) and off-balance sheet items. The interest rate differential to be paid or received on these contracts is accrued and included in net interest margin in the statements of income. Interest rate futures, forwards, options, and caps and floors used in hedging the company's exposure to interest rate fluctuations are designated, and effective, as hedges of balance sheet items. Correlation between all interest rate contracts and the underlying asset, liability or off-balance sheet item is direct because the company uses interest rate contracts which mirror the underlying item being hedged/synthetically altered. If correlation between the hedged/synthetically altered item and related interest rate contract would cease to exist, the interest rate contract would be recorded at fair value and the associated unrealized gain or loss would be included in net interest margin, with any future realized and unrealized gains or losses recorded in other income. Interest rate contracts are recorded at amortized cost. If interest rate contracts are terminated early, the realized gains and losses are deferred and amortized over the life of the hedged/synthetically altered item as adjustments to net interest margin. These deferred gains and losses are recorded on the accompanying balance sheets as adjustments to the carrying value of the hedged items. In circumstances where the underlying assets or liabilities are sold, any remaining carrying value adjustments or cumulative change in value on any open positions are recognized immediately as a component of the gain or loss upon disposition. Any remaining interest rate contracts previously designated to the sold hedged/synthetically altered item are recorded at fair value with realized and unrealized gains and losses included in other income.
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10. RECENT ACCOUNTING DEVELOPMENTS ----------------------------------- Effective January 1, 1997, the company adopted Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("FAS No. 125"). FAS No. 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities based on an approach that focuses on control of the assets and extinguishment of the liabilities. The statement is effective for securitization transactions occurring subsequent to December 31, 1996. The adoption of FAS No. 125 did not have a material impact on the company's consolidated financial statements. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS No. 128"), which establishes standards for computing and presenting earnings per share ("EPS"). FAS No. 128 replaces the presentation of primary EPS with a presentation of basic EPS. Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. FAS No. 128 also requires presentation of diluted EPS which is computed similarly to fully diluted EPS currently presented. The statement is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. On adoption, it will require the restatement of all prior period EPS data. The company will adopt FAS No. 128 in the fourth quarter of 1997. At such time, all prior period EPS data will be restated. The company believes the adoption of FAS No. 128 will not have a material impact on its EPS or EPS trends and comparisons.
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Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OPERATIONS SUMMARY ------------------ Net income for the third quarter and first nine months of 1997 was $187.2 and $469.0 million, up 34 and 25 percent from $139.9 and $375.0 million in the respective 1996 periods. Earnings per share was $1.70 for the third quarter and $4.50 for the first nine months of 1997, up 23 and 22 percent from $1.38 and $3.68 per share in the same periods in 1996. The difference between the percentage increases in net income and earnings per share for the third quarter was due to the company's issuance of approximately nine million common shares in late June 1997. The company's annualized return on average common shareholders' equity for the third quarter and first nine months of 1997 was 17.4 and 17.7 percent, respectively, down from 19.8 and 17.8 percent in the respective year-ago periods, reflecting the increase in average equity from the June common stock offering. The annualized return on average owned assets improved to 2.37 and 2.09 percent in the third quarter and first nine months of 1997, respectively, up from 1.87 and 1.71 percent in the same year-ago periods. - The following is a summary of the operating results of the company's key businesses for the third quarter and first nine months of 1997 compared to the corresponding prior year periods: Net interest margin in the domestic consumer finance business continued to expand in the third quarter and first nine months of 1997 due to improved pricing and higher levels of managed receivables, but was partially offset by increased credit losses primarily due to higher levels of personal bankruptcies. In the third quarter, the Visa/MasterCard* business achieved higher fee income and improved efficiency, which was offset by higher credit losses resulting primarily from increased personal bankruptcy filings. During the first nine months of 1997, the Visa/MasterCard business realized higher net interest margin and fee income, and improved efficiency, which more than offset higher credit losses resulting primarily from increased personal bankruptcy filings. The company has continued its program to improve the profitability of its credit card portfolios by selling non-strategic portfolios, refining pricing strategies, increasing fees and systematically eliminating unprofitable accounts. Results for this business continued to benefit from the company's co-branding and affinity relationship strategies, in particular the association with the General Motors credit card ("GM Card") program and the Union Privilege Visa/MasterCard portfolio acquired in June 1996. The private-label credit card business reported higher credit losses reflecting the maturing of promotional balances and increased personal bankruptcy filings in the third quarter and first nine months of 1997, which were partially offset by higher net interest margin. The United Kingdom operation realized higher net interest margin, interchange income and insurance premiums, due to receivables growth. During the quarter, United Kingdom credit card accounts grew 7 percent and credit card receivables grew to nearly $750 million. The Goldfish Card, issued in alliance with British Gas, contributed significantly to the growth in credit card receivables during the quarter. * VISA and MasterCard are registered trademarks of VISA USA, Inc. and MasterCard International, Incorporated, respectively.
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- On June 23, 1997, Household International and a wholly-owned subsidiary of Household Finance Corporation acquired the capital stock of Transamerica Financial Services Holding Company ("TFS"), the branch-based consumer finance subsidiary of Transamerica Corporation ("TA"). The company paid $1.1 billion for the stock of TFS and repaid approximately $2.8 billion of TFS debt owed to affiliates of TA. The acquisition added approximately $3.2 billion of receivables, of which approximately $3.1 billion were home equity loans secured primarily by home mortgages. The acquisition of TFS strengthened the company's core consumer finance operations by expanding its branch network by 92 branches, adding new customer accounts, and increasing the secured loan portion of the company's receivables portfolio. As of September 30, 1997, the company has essentially completed the integration of TFS. The company has closed all redundant branches and has completely integrated all back-office functions. In connection with the acquisition, in June 1997, the company completed a public underwritten offering of 9.1 million shares of its common stock for approximately $1.0 billion. Net proceeds from the offering were used to repay certain short-term borrowings in connection with the acquisition. - The company's normalized managed basis efficiency ratio improved to 35.1 and 36.5 percent for the third quarter and first nine months of 1997, respectively, compared to 39.9 and 41.5 percent in 1996. The improvement resulted from a 21 and 18 percent growth in normalized managed net revenues over the third quarter and first nine months of 1996, respectively, compared to a 6 and 4 percent increase, respectively, in normalized operating expenses. - The company continues to maintain its credit loss reserve position due to uncertainty over consumer payment patterns and seasoning of unsecured loan products. The company increased its credit loss reserves during the first nine months of 1997 by providing reserves in excess of net chargeoffs for owned receivables of $113 million. - On October 21, 1997, Household International and a wholly- owned subsidiary acquired the capital stock of ACC Consumer Finance Corporation ("ACC"), a non-prime auto finance company. The acquisition of ACC will be accounted for as a purchase and will not be material to the company's consolidated financial statements. BALANCE SHEET REVIEW -------------------- - Managed consumer receivables (owned and serviced with limited recourse) were $43.2 billion at September 30, 1997, compared to $43.8 billion at June 30, 1997 and $40.5 billion at September 30, 1996. The increase from the prior year was primarily due to the acquisition of TFS in June 1997. Core products, which exclude first mortgages and commercial receivables, increased 10 percent from a year ago. Private label and other unsecured product lines grew approximately 11 and 13 percent, respectively, over prior year levels. Home equity loans rose 27 percent year over year. Visa/MasterCard receivables were flat with the level of a year ago. - Compared to the second quarter, core receivables were down one percent. Home equity receivables fell slightly during the quarter as the company's sales force focused on the conversion and retention of TFS customers. Although successful in the retention of TFS customers, the company experienced some attrition in the base portfolio as new volume did not keep pace with runoff. The Visa/MasterCard portfolio was also down due to the sale and planned runoff of non-strategic and less profitable receivables during the third quarter. - Owned consumer receivables were $23.6 billion at September 30, 1997, compared to $23.9 billion at June 30, 1997 and $23.1 billion at September 30, 1996. Changes in owned receivables from period to period may vary depending on the timing and significance of securitization transactions.
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- The company's managed credit loss reserves were $1,809.2 million at September 30, 1997, up from $1,770.9 million at June 30, 1997 and $1,527.9 million at September 30, 1996. Credit loss reserves as a percent of managed receivables were 4.10 percent, compared to 3.97 percent at June 30, 1997 and 3.67 percent at September 30, 1996. Reserves as a percent of nonperforming managed receivables were 117.3 percent, compared to 118.5 percent at June 30, 1997 and 126.6 percent at September 30, 1996. Consumer two-months-and-over contractual delinquency ("delinquency") as a percent of managed consumer receivables was 4.62 percent, compared to 4.32 percent at June 30, 1997 and 3.83 percent at September 30, 1996. The annualized total consumer managed chargeoff ratio in the third quarter of 1997 was 4.63 percent, compared to 4.58 percent in the prior quarter and 3.52 percent in the year-ago quarter. - The ratio of total shareholders' equity (including trust originated securities) to total owned assets was 15.14 percent, compared to 11.22 percent at December 31, 1996. The ratio of total shareholders' equity to managed assets was 9.23 percent, compared to 6.90 percent at December 31, 1996. The increase in the ratios from the year-end 1996 levels was primarily due to the issuance of 9.1 million shares of common stock in June 1997. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- The major use of cash by the company's subsidiaries is the origination or purchase of receivables or investment securities. The main sources of cash are the collection and sales of receivable balances; maturities or sales of investment securities; proceeds from the issuance of debt and deposits; and cash provided by operations. The following describes major changes in the company's funding base from December 31, 1996 to September 30, 1997: - On January 23, 1997, the company redeemed, at par, all outstanding shares of its 9.50% Preferred Stock, Series 1991-A, for $10 per depositary share plus accrued and unpaid dividends. - In June 1997, the company entered into a $1.0 billion back-up line for its commercial paper program and established a $1.0 billion asset-backed conduit. Products that may be sold into the conduit include credit card receivables and unsecured consumer loans. The company subsequently terminated the $1.0 billion back- up line and, in August 1997, replaced it with a $1.3 billion back- up line for its commercial paper program. - In June 1997, the company completed a public underwritten offering of 9.1 million shares of common stock at $110.50 per share. Net proceeds from the offering of approximately $1.0 billion were used to repay certain short-term borrowings in connection with the acquisition of the capital stock of TFS. - On August 15, 1997, the company redeemed, at par, all outstanding shares of its 7.25% term cumulative preferred Series 1992-A, for $100 per depositary share plus accrued and unpaid dividends. - The funding requirements of the company increased by $.9 billion primarily due to the acquisition of TFS in June 1997, partially offset by lower receivable levels in the company's existing businesses. - The company had securitized home equity, Visa/MasterCard, private label and other unsecured receivables outstanding of $19.6 and $18.5 billion at September 30, 1997 and December 31, 1996, respectively. During the three months and nine months ended September 30, 1997, the company securitized, excluding replenishments of certificate holder interests, $1.0 and $4.1 billion, respectively, of Visa/MasterCard and other unsecured receivables.
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The composition of these securitizations by type is as follows (in billions): [Download Table] ----------------------------------------------------------------- Three months ened Nine months ended September 30, September 30, 1997 1997 ----------------------------------------------------------------- Visa/MasterCard $ .1 $2.4 Other unsecured .9 1.7 ---- ---- Total $1.0 $4.1 ==== ==== The market for securities backed by receivables is a reliable, efficient and cost-effective source of funds, which the company plans to continue to utilize in the future. PRO FORMA MANAGED STATEMENTS OF INCOME -------------------------------------- Securitizations of consumer receivables have been, and will continue to be, an important source of liquidity for the company. The company continues to service the securitized receivables after such receivables have been sold and retains a limited recourse obligation. Securitizations impact the classification of revenues and expenses in the statements of income. Amounts related to receivables serviced, including net interest margin, fee and other income, and provision for credit losses on receivables serviced with limited recourse are reported as a net amount in securitization income in the company's statements of income. Management monitors the company's operations on a managed basis as well as on the historical owned basis reflected in its statements of income. The managed basis assumes that the receivables securitized are held in the portfolio. Pro forma statements of income on a managed basis for the third quarter and nine months ended September 30, 1997 and 1996 are presented below. For purposes of this analysis, the results do not reflect the differences between the company's accounting policies for owned receivables and receivables serviced with limited recourse. Accordingly, net income on a pro forma managed basis equals net income on an owned basis.
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Pro Forma Managed Statements of Income [Enlarge/Download Table] ------------------------------------------------------------------------------------------------------------------------ Three Months Ended Nine Months Ended All dollar amounts are September 30, September 30, stated in millions. 1997 * 1996 * 1997 * 1996 * ------------------------------------------------------------------------------------------------------------------------ Finance income $ 1,532.8 13.71% $ 1,360.1 13.30% $ 4,376.4 13.63% $ 3,829.6 13.24% Interest income from noninsurance investment securities 6.2 6.65 12.1 5.84 30.2 5.92 71.4 5.70 Interest expense 689.9 6.14 639.2 6.13 1,987.7 6.09 1,831.1 6.07 --------- ----- --------- ----- --------- ----- --------- ----- Net interest margin 849.1 7.56 733.0 7.03 2,418.9 7.44<F1> 2,069.9 6.99<F1> Provision for credit losses 552.4 414.5 1,572.6 1,200.5 --------- --------- --------- --------- Net interest margin after provision for credit losses 296.7 318.5 846.3 869.4 --------- --------- --------- --------- Insurance revenues 69.6 63.6 203.5 185.9 Investment income 32.9 34.8 95.0 128.0 Fee income 327.7 239.1 841.5 686.5 Other income 48.8 31.5 146.5 195.4 --------- --------- --------- --------- Total other revenues 479.0 369.0 1,286.5 1,195.8 --------- --------- --------- --------- Salaries and fringe benefits 168.7 138.1 472.5 409.8 Occupancy and equipment expense 52.5 48.3 156.5 163.6 Other marketing expenses 128.9 132.3 358.1 374.5 Other servicing and administrative expenses 92.6 98.0 286.6 360.2 Policyholders' benefits 47.6 57.2 142.9 183.6 --------- --------- --------- --------- Total costs and expenses 490.3 473.9 1,416.6 1,491.7 --------- --------- --------- --------- Income before taxes 285.4 213.6 716.2 573.5 Income taxes 98.2 73.7 247.2 198.5 --------- --------- --------- --------- Net income $ 187.2 $ 139.9 $ 469.0 $ 375.0 ========= ========= ========= ========= Average managed receivables $44,554.6 $40,896.6 $42,857.1 $38,577.4 Average noninsurance investments 372.7 829.3 679.9 1,670.2 --------- --------- --------- --------- Average managed interest- earning assets $44,927.3 $41,725.9 $43,537.0 $40,247.6 ========= ========= ========= ========= * As a percent, annualized, of appropriate earning assets. <FN> <F1> Managed net interest margin as a percent of average managed interest-earning assets for the nine months of 1997 and 1996 excludes temporary investments that were used for pre-funding acquisitions in the second quarter of each year, and, in the second quarter of 1996, for the sale of the company's remaining consumer banking operations. Including the impact of these temporary investments, managed net interest margin was 7.41 and 6.86 percent for the nine months ended September 30, 1997 and 1996, respectively. </FN>
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Unless noted, the following discussion on revenues and provision for credit losses includes comparisons to amounts reported on the company's historical statements of income ("Owned Basis") as well as on the above pro forma statements of income ("Managed Basis"). Net interest margin ------------------- Net interest margin on an Owned Basis was $407.0 and $1,185.6 million for the third quarter and first nine months of 1997, up from $383.0 and $1,086.0 million in the prior year periods. The increase was primarily due to an increase in average owned home equity loans, as a result of the acquisition of TFS, and growth in private label receivables. Net interest margin on a Managed Basis was $849.1 and $2,418.9 million for the third quarter and first nine months of 1997, up 16 and 17 percent, respectively, compared to $733.0 and $2,069.9 million in the same year-ago periods, primarily due to managed receivable growth and improved pricing. Net interest margin as a percent of average managed interest-earning assets, annualized, was 7.56 percent compared to 7.41 percent in the previous quarter and 7.03 percent in the year-ago quarter. The net interest margin percentage on a Managed Basis in the second quarter of 1997 excludes the impact of temporary investments that were used to pre- fund the acquisition of TFS. Including the impact of these temporary investments, net interest margin as a percent of average managed interest-earning assets, annualized, was 7.31 percent in the second quarter of 1997. The improvement over the year-ago quarter was primarily due to improved pricing, the continuing change in product mix and lower leverage. Provision for credit losses --------------------------- The provision for credit losses for receivables on an Owned Basis for the third quarter and first nine months of 1997 totaled $257.8 and $802.8 million, up 52 and 49 percent from $169.5 and $537.3 million in the comparable prior year periods. The provision as a percent of average owned receivables, annualized, was 4.07 percent in the third quarter of 1997 compared to 2.84 percent in the third quarter of 1996. In view of uncertainty regarding consumer payment patterns, the continued high levels of personal bankruptcies and seasoning of unsecured loan products, the company continued to increase its credit loss reserves in excess of current period chargeoffs. Provision in excess of net chargeoffs related to owned receivables was $18 million for the three months ended September 30, 1997 compared to net chargeoffs in excess of provision of $7 million for the same period in 1996. For the nine months ended September 30, 1997 and 1996, provision in excess of net chargeoffs related to owned receivables was $113 and $68 million, respectively. The provision for credit losses on an Owned Basis may vary from quarter to quarter, depending on the amount of securitizations in a particular period. The provision for credit losses for receivables on a Managed Basis totaled $552.4 and $1,572.6 million in the third quarter and first nine months of 1997, up 33 percent from $414.5 million and 31 percent from $1,200.5 million in the comparable periods of 1996. As a percent of average managed receivables, annualized, the provision increased to 4.96 percent from 4.05 percent in the third quarter of 1996. As noted above, the company increased credit loss reserves during the quarter due to seasoning of unsecured loan products and uncertainty over consumer payment patterns. In addition, the Managed Basis provision includes the over-the-life reserve requirement on securitized receivables. These provisions are impacted by the type and amount of receivables securitized in a given period and substantially offset the income recorded on the securitization transactions. In the third quarter of 1997, the company securitized approximately $1.0 billion of other unsecured and Visa/MasterCard receivables, compared to approximately $1.4 billion of other unsecured receivables a year ago. For the first nine months of 1997, the company securitized approximately $4.1 billion of other unsecured and Visa/MasterCard receivables compared to approximately $4.8 billion of home equity, other unsecured and Visa/MasterCard receivables in 1996. See the credit quality section for further discussion of factors affecting the provision for credit losses.
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Other revenues -------------- Securitization income on an Owned Basis was $366.5 and $1,041.5 million for the third quarter and first nine months of 1997, up from $282.0 and $841.9 million in the year-ago periods. 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 30 and 24 percent increases in securitization income on an Owned Basis compared to the third quarter and first nine months of 1996, respectively, were primarily due to the increase in average securitized receivables. The components of securitization income are reclassified to the appropriate lines in the statements of income on a Managed Basis. Fee income on an Owned Basis includes revenues from fee-based products such as credit cards and, in 1996, fees related to consumer banking deposits. Fee income was $108.7 and $263.5 million in the third quarter and first nine months of 1997, up from $62.1 and $165.3 million in the comparable periods of the prior year. The increase over the prior year quarter reflected higher late fees as a result of increased average owned credit card receivables compared to 1996. The increase over the prior year-to-date amount also reflected higher late fees, coupled with higher interchange income. Fee income on a Managed Basis, which in addition to the items discussed above includes fees and other income related to receivables serviced with limited recourse, increased to $327.7 and $841.5 million in the third quarter and first nine months of 1997 from $239.1 and $686.5 million in the same periods in 1996. The increase was primarily attributable to higher fees in the domestic Visa/MasterCard business, as well as increases in interchange income. Other income was $48.8 and $146.5 million compared to $31.5 and $195.4 million in the third quarter and first nine months of 1996. The increase compared to the third quarter of 1996 was the result of nonrecurring gains recognized on the sales of Visa/MasterCard receivables from the company's non co-branded portfolio. Other income in the first nine months of 1997 compared to the year-ago period decreased as the 1996 amount included a $116.3 million premium received on the sale of the company's banking operations in Illinois in June 1996. Additionally, other income for the first nine months of 1997 included nonrecurring gains of $50 million related to the sale of certain non-strategic assets during the first quarter. Expenses -------- Operating expenses for the third quarter and first nine months of 1997 were $442.7 and $1,273.7 million, respectively, compared to $416.7 and $1,308.1 million, respectively, in the comparable prior year periods. The prior year-to-date amount included $78 million in nonrecurring charges, as discussed below. Salaries and fringe benefits were $168.7 and $472.5 million compared to $138.1 and $409.8 million in the third quarter and first nine months of 1996. The higher expense was primarily due to an increase in sales force in the domestic consumer finance business resulting from the acquisition of TFS in June 1997. Occupancy and equipment expense for the third quarter and first nine months of 1997 totaled $52.5 and $156.5 million, as compared to $48.3 and $163.6 million in the prior year periods. In the second quarter of 1996, the company recorded nonrecurring costs of approximately $14 million related to the rationalization of office space.
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Other marketing expenses for the third quarter and first nine months of 1997 totaled $128.9 and $358.1 million, down from $132.3 and $374.5 million in the comparable prior year periods. The 1997 third quarter expense reflected decreased marketing spending on the company's credit card programs, partially offset by increased goodwill amortization resulting from the TFS acquisition in June 1997. The decrease in year-to-date marketing spending for the domestic credit card programs reflects the deferral of major mailings during the first six months of 1997 as the company worked on marketing plans with the individual AFL/CIO unions in the Union Privilege program. Other servicing and administrative expenses for the third quarter and first nine months of 1997 totaled $92.6 and $286.6 million, down from $98.0 and $360.2 million in the comparable periods. The decrease in the year-to-date amount was primarily due to $64 million of nonrecurring charges included in 1996, as well as lower expenses in 1997 as the result of the 1996 sale of the company's Illinois banking operations. CREDIT LOSS RESERVES -------------------- The company's consumer credit management policies focus on product type and specific portfolio risk factors. The consumer credit portfolio is diversified by product and geographic location. See Note 4, "Receivables" in the accompanying financial statements for receivables by product type. Total managed credit loss reserves, which include reserves for recourse obligations for receivables sold, were as follows (in millions): [Download Table] ----------------------------------------------------------------------------------- September 30, June 30, December 31, September 30, 1997 1997 1996 1996 ----------------------------------------------------------------------------------- Owned $1,062.7 $1,051.0 $ 900.2 $ 862.5 Serviced with limited recourse 746.5 719.9 696.0 665.4 -------- -------- -------- -------- Total $1,809.2 $1,770.9 $1,596.2 $1,527.9 ======== ======== ======== ======== Credit loss reserves have increased due to seasoning of unsecured products and increased personal bankruptcies. Managed credit loss reserves as a percent of nonperforming managed receivables were 117.3 percent, compared to 118.5 percent at June 30, 1997 and 126.6 percent at September 30, 1996. Total owned and managed credit loss reserves as a percent of receivables were as follows: [Download Table] ----------------------------------------------------------------------------------- September 30, June 30, December 31, September 30, 1997 1997 1996 1996 ----------------------------------------------------------------------------------- Owned 4.35% 4.24% 3.74% 3.57% Managed 4.10 3.97 3.75 3.67 ---- ---- ---- ---- The level of reserves for consumer credit losses is based on delinquency and chargeoff experience by product and judgmental factors. Management also evaluates the potential impact of existing and anticipated national and regional economic conditions on the managed receivable portfolio when establishing credit loss reserves. See Note 5, "Credit Loss Reserves" in the accompanying financial statements for analyses of reserves.
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CREDIT QUALITY -------------- Delinquency and chargeoff levels in the consumer portfolio were higher compared to the prior and year-ago quarters. Delinquency and chargeoff levels are monitored on a managed basis since all of the receivables are originated using comparable underwriting standards, are managed by operating personnel without regard to portfolio ownership and result in a similar credit loss exposure. Delinquency ----------- Two-Months-and-Over Contractual Delinquency (as a percent of managed consumer receivables): [Download Table] ------------------------------------------------------------------------------ 9/30/97 6/30/97 3/31/97 12/31/96 9/30/96 ------------------------------------------------------------------------------ First mortgage 9.27% 10.27% 8.19% 9.49% 3.82% Home equity 3.41 3.18 3.85 3.96 3.55 Visa/MasterCard 3.17 3.10 3.13 2.71 2.54 Private label 6.54 5.89 5.52 5.50 5.43 Other unsecured 7.28 6.77 6.68 6.13 5.79 ---- ---- ---- ---- ---- Total 4.62% 4.32% 4.45% 4.15% 3.83% ==== ==== ==== ==== ==== Delinquency as a percent of managed consumer receivables increased from the prior quarter and the prior year. The increase in delinquency from the second quarter was primarily due to seasoning of the other unsecured portfolio, as well as seasoning of promotional business in the private label portfolio. Home equity delinquency was up due to the normal maturation of the TFS acquisition. Visa/MasterCard delinquency was moderately flat in the quarter. Dollars of delinquency in the first mortgage portfolio were down from June as this portfolio continues to liquidate. The increase in the delinquency ratio compared to a year ago was primarily due to seasoning of the portfolios and the company's continued shift in portfolio mix away from traditional first mortgages and toward unsecured products. Net Chargeoffs of Consumer Receivables -------------------------------------- Net Chargeoffs of Consumer Receivables (as a percent, annualized, of average managed consumer receivables): [Download Table] ------------------------------------------------------------------------- Third Second First Fourth Third Quarter Quarter Quarter Quarter Quarter 1997 1997 1997 1996 1996 ------------------------------------------------------------------------- First mortgage 1.21% .87% .94% .30% .50% Home equity .77 1.17 1.38 1.18 .98 Visa/MasterCard 6.42 5.84 4.90 4.66 4.71 Private label 4.99 4.63 4.85 3.70 3.54 Other unsecured 5.93 5.41 4.97 4.18 4.35 ---- ---- ---- ---- ---- Total 4.63% 4.58% 4.15% 3.59% 3.52% ==== ==== ==== ==== ====
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Net chargeoffs as a percent of average managed consumer receivables for the third quarter of 1997 increased compared to both the prior and year-ago periods. The increase in Visa/MasterCard chargeoffs in the quarter was primarily due to the maturation of the portfolio purchased from Barnett Banks, Inc. in the fourth quarter of 1996. The Visa/MasterCard chargeoff ratio was also negatively affected by lower average receivables compared to the prior quarter. Chargeoffs in the private label portfolio also increased due to the maturing of promotional balances and high levels of personal bankruptcies. The remaining increase in the total chargeoff ratio was primarily attributable to the continued seasoning of the other unsecured portfolio, also coupled with high levels of personal bankruptcies. The increase in the chargeoff ratio compared to a year ago was primarily due to increased bankruptcy filings in the Visa/MasterCard portfolio and continued seasoning of the private label and other unsecured portfolios. Nonperforming Assets -------------------- Nonperforming assets consisted of the following: [Enlarge/Download Table] ------------------------------------------------------------------------------------------------ In millions. 9/30/97 6/30/97 3/31/97 12/31/96 9/30/96 ------------------------------------------------------------------------------------------------ Nonaccrual managed receivables $ 894.3 $ 865.0 $ 820.1 $ 778.5 $ 741.1 Accruing managed consumer receivables 90 or more days delinquent 634.7 616.3 598.5 549.0 446.1 Renegotiated commercial loans 12.9 12.9 12.9 12.9 19.9 -------- -------- -------- -------- -------- Total nonperforming managed receivables 1,541.9 1,494.2 1,431.5 1,340.4 1,207.1 Real estate owned 150.5 149.4 152.6 136.6 137.6 -------- -------- -------- -------- -------- Total nonperforming assets $1,692.4 $1,643.6 $1,584.1 $1,477.0 $1,344.7 ======== ======== ======== ======== ======== Managed credit loss reserves as a percent of nonperforming managed receivables 117.3% 118.5% 118.6% 119.1% 126.6% -------- -------- -------- -------- --------
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PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 12 Statement of Computation of Ratio of Earnings to Fixed Charges and to Combined Fixed Charges and Preferred Stock Dividends. 21 List of Household International subsidiaries. 27 Financial Data Schedule. 99.1 Debt and Preferred Stock Securities Ratings. (b) Reports on Form 8-K No Form 8-K reports were filed during the third quarter of 1997.
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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 INTERNATIONAL, INC. ----------------------------- (Registrant) Date: November 13, 1997 By: /s/ David A. Schoenholz ----------------- ----------------------------- David A. Schoenholz Executive Vice President - Chief Financial Officer and on behalf of Household International, Inc.
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Exhibit Index ------------- 12 Statement of Computation of Ratio of Earnings to Fixed Charges and to Combined Fixed Charges and Preferred Stock Dividends. 21 List of Household International subsidiaries. 27 Financial Data Schedule. 99.1 Debt and Preferred Stock Securities Ratings.

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Filed on:11/12/97
11/7/971
10/21/97714
For Period End:9/30/97118
8/15/9715
6/30/97142010-Q
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