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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 June 30, 2002
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 July 31, 2002, 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.
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
Table of Contents
Page
----
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Income (Unaudited) -
Three and six months ended June 30, 2002 and 2001 (Restated)....... 2
Condensed Consolidated Balance Sheets - (Unaudited)
June 30, 2002 and December 31, 2001 (Restated)..................... 3
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Six months ended June 30, 2002 and 2001 (Restated)................. 4
Notes to Interim Condensed Consolidated Financial
Statements (Unaudited) ............................................ 5
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 .................................. 25
Signature .............................................................. 26
1
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Household Finance Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(In millions) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------------------
(RESTATED) (RESTATED)
Finance and other interest income $ 2,106.5 $1,857.2 $4,117.7 $3,668.3
Interest expense 753.6 777.3 1,463.4 1,602.8
- --------------------------------------------------------------------------------------------------------------------------------
Net interest margin 1,352.9 1,079.9 2,654.3 2,065.5
Provision for credit losses on owned receivables 772.1 488.6 1,588.8 1,037.4
- --------------------------------------------------------------------------------------------------------------------------------
Net interest margin after provision for credit losses 580.8 591.3 1,065.5 1,028.1
- --------------------------------------------------------------------------------------------------------------------------------
Securitization revenue 399.9 303.0 825.1 606.1
Insurance revenue 135.7 118.6 265.8 234.5
Investment income 41.6 34.2 83.4 72.5
Fee income 146.8 91.1 304.2 186.7
Other income 104.3 114.9 316.4 296.3
- --------------------------------------------------------------------------------------------------------------------------------
Total other revenues 828.3 661.8 1,794.9 1,396.1
- --------------------------------------------------------------------------------------------------------------------------------
Salaries and fringe benefits 354.7 306.6 699.2 600.9
Sales incentives 64.1 71.2 115.8 123.6
Occupancy and equipment expense 72.5 64.0 143.6 128.3
Other marketing expenses 59.8 49.5 123.8 111.8
Other servicing and administrative expense 194.6 135.2 437.0 295.1
Amortization of acquired intangibles and goodwill 12.6 35.5 32.4 72.6
Policyholders' benefits 72.8 62.6 146.6 129.3
- --------------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 831.1 724.6 1,698.4 1,461.6
- --------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 578.0 528.5 1,162.0 962.6
Income taxes 196.8 182.9 390.4 333.9
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 381.2 $ 345.6 $ 771.6 $ 628.7
================================================================================================================================
See notes to interim condensed consolidated financial statements.
2
Household Finance Corporation and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
(In millions, except share data) 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS (RESTATED)
Cash $ 353.7 $ 565.6
Investment securities 7,254.0 2,877.1
Receivables, net 67,026.9 63,062.5
Advances to parent company and affiliates 1,502.2 269.7
Acquired intangibles, net 411.8 444.3
Goodwill 869.0 854.3
Properties and equipment, net 410.4 395.6
Real estate owned 449.8 392.6
Other assets 2,279.5 1,770.2
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $80,557.3 $70,631.9
==================================================================================================================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Debt:
Commercial paper, bank and other borrowings $ 3,016.6 $ 9,075.6
Senior and senior subordinated debt (with original maturities over one year) 66,749.5 51,174.8
- ----------------------------------------------------------------------------------------------------------------------------------
Total debt 69,766.1 60,250.4
Insurance policy and claim reserves 885.8 887.3
Other liabilities 1,482.2 1,989.5
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 72,134.1 63,127.2
- ----------------------------------------------------------------------------------------------------------------------------------
Common shareholder's equity:
Common stock, $1.00 par value, 1,000 shares authorized, issued and outstanding
at June 30, 2002 and December 31, 2001, and additional paid-in capital 3,553.3 3,553.3
Retained earnings 5,185.9 4,414.2
Accumulated other comprehensive income (loss) (316.0) (462.8)
- ----------------------------------------------------------------------------------------------------------------------------------
Total common shareholder's equity 8,423.2 7,504.7
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholder's equity $80,557.3 $70,631.9
==================================================================================================================================
See notes to interim condensed consolidated financial statements.
3
Household Finance Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -------------------------------------------------------------------------------------------
Six months ended
June 30,
(In millions) 2002 2001
- -------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATIONS (RESTATED)
Net income $ 771.6 $ 628.7
Adjustments to reconcile net income to cash
provided by operations:
Provision for credit losses on owned receivables 1,588.8 1,037.4
Insurance policy and claim reserves 8.7 135.2
Depreciation and amortization 97.7 140.6
Interest-only strip receivables, net change (37.2) (15.5)
Other assets, excluding FAS No. 133 (73.3) 124.1
Other liabilities, excluding FAS No. 133 510.9 (327.4)
Other, net 103.0 (98.2)
- -------------------------------------------------------------------------------------------
Cash provided by operations 2,970.2 1,624.9
- -------------------------------------------------------------------------------------------
INVESTMENTS IN OPERATIONS
Investment securities:
Purchased (2,602.5) (888.4)
Matured 304.7 132.5
Sold 232.0 403.8
Short-term investment securities, net change (2,268.3) 629.1
Receivables:
Originations, net (4,398.9) (1,936.6)
Purchases and related premiums (19,240.6) (17,380.1)
Sold 17,941.0 14,372.6
Properties and equipment purchased (67.7) (77.3)
Properties and equipment sold - 2.2
Advances to parent company and affiliates (1,232.5) (258.3)
- -------------------------------------------------------------------------------------------
Cash decrease from investments in operations (11,332.8) (5,000.5)
- -------------------------------------------------------------------------------------------
FINANCING AND CAPITAL TRANSACTIONS
Short-term debt, net change (6,059.1) 262.6
Senior and senior subordinated debt issued 19,520.6 10,436.8
Senior and senior subordinated debt retired (5,260.3) (6,888.6)
Policyholders' benefits paid (50.5) (49.8)
Dividends paid to parent company - (500.0)
- -------------------------------------------------------------------------------------------
Cash increase from financing and capital transactions 8,150.7 3,261.0
- -------------------------------------------------------------------------------------------
Decrease in cash (211.9) (114.6)
Cash at January 1 565.6 269.5
- -------------------------------------------------------------------------------------------
Cash at June 30 $ 353.7 $ 154.9
===========================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 1,439.3 $ 1,514.3
Income taxes paid 600.2 503.9
- -------------------------------------------------------------------------------------------
See notes to interim condensed consolidated financial statements.
4
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"), a wholly owned subsidiary of Household
International, Inc., and its subsidiaries have been prepared in accordance with
accounting principles generally accepted in the United States of America for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Results for the three and six months ended June 30, 2002 should
not be considered indicative of the results for any future quarters or the year
ending December 31, 2002. HFC and its subsidiaries may also be referred to in
this Form 10-Q as "we," "us" or "our." These unaudited condensed consolidated
financial statements should be read in conjunction with the unaudited
consolidated financial statements and footnotes included in our restated Annual
Report on Form 10-K for the year ended December 31, 2001 which is included as
Exhibit 99.4 to this Form 10-Q.
RESTATEMENT
- -----------
Household Finance Corporation has restated its consolidated financial statements
for the years ended December 31, 1999, 2000 and 2001 and the first quarter ended
March 31, 2002. We believe this Form 10-Q and the exhibits included herewith
include all adjustments relating to the restatement for all such prior periods.
The restatement relates to a MasterCard/Visa affinity credit card relationship
and a marketing agreement with a third party credit card marketing company. All
were part of our Consumer segment. In consultation with our prior auditors,
Arthur Andersen LLP, we treated payments made in connection with these
agreements that were entered into between 1996 and 1999 as prepaid assets and
amortized them in accordance with the underlying economics of the agreements.
Our current auditors, KPMG LLP, have advised us that, in their view, these
payments should have either been charged against earnings at the time they were
made or amortized over a shorter period of time. There is no significant change
as a result of these adjustments on the prior period net earnings trends
previously reported. The balance of retained earnings at December 31, 2001 has
been restated from amounts previously reported to reflect a retroactive charge
of $197.2 million, after tax, for these items. The principal executive officer
and principal financial officer of HFC have certified that this quarterly report
fairly presents, in all material respects, the financial condition and results
of operations of HFC for the period ended June 30, 2002. Our independent
auditors have reviewed the unaudited June 30, 2002 financial results and have
provided us with the letter required by Statement of Auditing Standards No. 71.
This letter is also attached to this Form 10-Q as Exhibit 99-2.
5
2. INVESTMENT SECURITIES
Investment securities consisted of the following available-for-sale investments:
- ---------------------------------------------------------------------------------------------------------------
June 30, December 31,
2002 2001
- ---------------------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
(In millions) Cost Value Cost Value
- ---------------------------------------------------------------------------------------------------------------
Corporate debt securities $ 2,031.9 $ 2,015.2 $ 2,087.3 $ 2,051.8
Money market funds 1,806.5 1,806.5 79.7 79.7
Certificates of deposit 22.0 22.0 82.5 82.5
U.S. government and federal agency debt securities 2,372.0 2,374.2 272.5 273.3
Marketable equity securities 31.6 25.1 24.3 21.2
Other 959.6 968.5 323.8 328.7
- ---------------------------------------------------------------------------------------------------------------
Subtotal 7,223.6 7,211.5 2,870.1 2,837.2
Accrued investment income 42.5 42.5 39.9 39.9
- ---------------------------------------------------------------------------------------------------------------
Total available-for-sale investments $ 7,266.1 $ 7,254.0 $ 2,910.0 $ 2,877.1
===============================================================================================================
3. RECEIVABLES
June 30, December 31,
(In millions) 2002 2001
- ---------------------------------------------------------------------------------------
Real estate secured $ 42,303.3 $ 37,198.4
Auto finance 2,369.4 2,332.2
MasterCard*/Visa* 6,041.7 6,942.4
Private label 5,293.9 5,986.4
Personal non-credit card 11,268.4 10,558.6
Commercial and other 468.8 442.5
- ---------------------------------------------------------------------------------------
Total owned receivables 67,745.5 63,460.5
Accrued finance charges 1,384.6 1,376.9
Credit loss reserve for owned receivables (2,652.4) (2,389.5)
Unearned credit insurance premiums and claims reserves (710.0) (750.3)
Interest-only strip receivables 987.2 961.4
Amounts due and deferred from receivables sales 272.0 403.5
- ---------------------------------------------------------------------------------------
Total owned receivables, net 67,026.9 63,062.5
Receivables serviced with limited recourse 20,588.9 19,759.3
- ---------------------------------------------------------------------------------------
Total managed receivables, net $ 87,615.8 $ 82,821.8
=======================================================================================
Interest-only strip receivables are reported net of our estimate of probable
losses under the recourse provisions for receivables serviced with limited
recourse. Our estimate of the recourse obligation totaled $1,281.8 million at
June 30, 2002 and $1,062.1 million at December 31, 2001. Interest-only strip
receivables also included fair value mark-to-market adjustments which increased
the balance by $309.8 million at June 30, 2002 and $321.4 million at December
31, 2001.
The outstanding balance of receivables serviced with limited recourse consisted
of the following:
June 30, December 31,
(In millions) 2002 2001
- ------------------------------------------------------------------------------------
Real estate secured $ 575.4 $ 861.8
Auto finance 4,518.2 4,026.6
MasterCard/Visa 9,080.5 9,047.5
Private label 2,650.0 2,150.0
Personal non-credit card 3,764.8 3,673.4
- ------------------------------------------------------------------------------------
Total $ 20,588.9 $ 19,759.3
====================================================================================
6
The combination of receivables owned and receivables serviced with limited
recourse, which we consider our managed portfolio, is shown below:
June 30, December 31,
(In millions) 2002 2001
- ----------------------------------------------------------------------------------------------------------
Real estate secured $ 42,878.7 $ 38,060.2
Auto finance 6,887.6 6,358.8
MasterCard/Visa 15,122.2 15,989.9
Private label 7,943.9 8,136.4
Personal non-credit card 15,033.2 14,232.0
Commercial and other 468.8 442.5
- ---------------------------------------------------------------------------------------------------------
Managed receivables $ 88,334.4 $ 83,219.8
=========================================================================================================
*MasterCard is a registered trademark of MasterCard International, Incorporated and Visa is a registered trademark
of VISA USA, Inc.
4. CREDIT LOSS RESERVES
An analysis of credit loss reserves for the three and six months ended June 30 was as follows:
- ----------------------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(In millions) 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------------
Credit loss reserves for owned receivables:
Credit loss reserves at beginning of period $ 2,566.4 $ 1,748.3 $ 2,389.5 $ 1,603.9
Provision for credit losses 772.1 488.6 1,588.8 1,037.4
Charge-offs (756.0) (490.3) (1,471.8) (938.2)
Recoveries 55.1 37.9 106.6 77.1
Other, net 14.8 12.2 39.3 16.5
- ----------------------------------------------------------------------------------------------------------------------------------
Credit loss reserves for owned receivables
at June 30 2,652.4 1,796.7 2,652.4 1,796.7
- ----------------------------------------------------------------------------------------------------------------------------------
Credit loss reserves for receivables
serviced with limited recourse:
Credit loss reserves at beginning of period 1,196.9 980.9 1,062.1 1,001.4
Provision for credit losses 392.0 263.8 820.5 484.6
Charge-offs (339.8) (262.6) (663.6) (516.3)
Recoveries 23.6 16.3 44.3 30.3
Other, net 9.1 (1.4) 18.5 (3.0)
- ----------------------------------------------------------------------------------------------------------------------------------
Credit loss reserves for receivables serviced with
limited recourse at June 30 1,281.8 997.0 1,281.8 997.0
- ----------------------------------------------------------------------------------------------------------------------------------
Total credit loss reserves for managed receivables
at June 30 $ 3,934.2 $ 2,793.7 $ 3,934.2 $ 2,793.7
==================================================================================================================================
We maintain credit loss reserves to cover probable losses of principal, interest
and fees, including late, overlimit and annual fees. Credit loss reserves are
based on a range of estimates and intended to be adequate but not excessive. We
statistically estimate losses for consumer receivables based on delinquency and
reage status and past loss experience. In addition, we provide loss reserves on
consumer receivables to reflect our assessment of portfolio risk factors which
may not be fully reflected in the statistical calculation (which uses roll rates
and migration analysis). These risk factors include bankruptcy trends, recent
growth, product mix, economic conditions and current levels of charge-offs and
delinquencies.
5. ACQUIRED INTANGIBLES AND GOODWILL (RESTATED)
Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("FAS No. 142"). FAS
No. 142 changed the accounting for goodwill from an amortization method to an
impairment-only approach. Amortization of goodwill recorded in past business
combinations ceased upon adoption of the statement on January 1, 2002. We have
completed
7
the transitional goodwill impairment test required by FAS No. 142 and have
concluded that none of our goodwill is impaired.
We do not hold any intangible assets which are not subject to amortization.
Amortized acquired intangibles consisted of the following:
- ----------------------------------------------------------------------------------------------
June 30, December 31,
(In millions) 2002 2001
- ----------------------------------------------------------------------------------------------
Purchased credit card relationships $ 1,027.3 $ 1,027.3
Other intangibles 26.5 26.5
Accumulated amortization - purchased credit card relationship (635.3) (603.8)
Accumulated amortization - other intangibles (6.7) (5.7)
- ----------------------------------------------------------------------------------------------
Acquired intangibles, net $ 411.8 $ 444.3
==============================================================================================
Acquired intangible amortization expense totaled $12.6 million for the quarter
ended June 30, 2002, $24.2 million for the quarter ended June 30, 2001, $32.4
million for the six months ended June 30, 2002, $50.2 million for the six months
ended June 30, 2001 and $99.0 million for the twelve months ended December 31,
2001.
Estimated amortization expense associated with purchased credit card
relationships for each of the following years is as follows:
- ----------------------------------------------------------------------------------------------
(In millions)
Year ending December 31,
- ----------------------------------------------------------------------------------------------
2002 $52.7
2003 50.3
2004 47.7
2005 43.3
2006 40.9
- ----------------------------------------------------------------------------------------------
The following table discloses the impact of goodwill amortization on net income
for the periods indicated.
- -------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(In millions) 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------
Reported net income $ 381.2 $ 345.6 $ 771.6 $ 628.7
Add back: Goodwill amortization, net - 8.1 - 16.2
- -------------------------------------------------------------------------------------------------------------------
Adjusted net income $ 381.2 $ 353.7 $ 771.6 $ 644.9
===================================================================================================================
There were no significant changes to our recorded amount of goodwill, either in
total or by segment, during the current quarter.
6. INCOME TAXES (RESTATED)
Our effective tax rate was 33.6 percent for the six months ended June 30, 2002
and 34.7 percent for the first six months of 2001. The effective tax rate
differs from the statutory federal income tax rate primarily because of the
effects of state and local income taxes and tax credits.
7. TRANSACTIONS WITH PARENT COMPANY AND AFFILIATES
We periodically advance funds to Household International, Inc. and affiliates or
receive amounts in excess of our parent company's current requirements. Advances
to parent company and affiliates were $1.5 billion at June 30, 2002 compared to
$269.7 million at December 31, 2001. There were no advances
8
from parent company and affiliates at June 30, 2002 and December 31, 2001. Net
interest income on affiliated balances was $11.8 million for the quarter ended
June 30, 2002, $9.7 million for the quarter ended June 30, 2001, $18.5 million
for the six months ended June 30, 2002 and $22.5 million for the six months
ended June 30, 2001.
8. COMPREHENSIVE INCOME (RESTATED)
Comprehensive income was $202.3 million for the quarter ended June 30, 2002,
$358.1 million for the quarter ended June 30, 2001, $918.4 million for the six
months ended June 30, 2002 and $376.0 million for the six months ended June 30,
2001.
The components of accumulated other comprehensive income (loss) were as follows:
- -----------------------------------------------------------------------------------------------------
June 30, December 31,
(In millions) 2002 2001
- -----------------------------------------------------------------------------------------------------
Unrealized losses on cash flow hedging instruments $ (510.0) $ (645.6)
Unrealized gains on investments and interest-only strip receivables 186.8 179.2
Foreign currency translation adjustments 7.2 3.6
- -----------------------------------------------------------------------------------------------------
Accumulated other comprehensive income (loss) $ (316.0) $ (462.8)
=====================================================================================================
9. NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("FAS No. 144"). The adoption of FAS No. 144 did not have a significant
impact on our operations.
10. SUBSEQUENT EVENT
On July 1, 2002, Household International, Inc. contributed all of the capital
stock of Household Bank (SB), N.A. ("HBSB"), a wholly owned subsidiary of
Household Bank, fsb, to HFC. HBSB, in turn, purchased all of the assets of
Beneficial Bank USA, a wholly-owned credit card banking subsidiary of HFC.
Subsequently, we merged our wholly-owned banking subsidiary, Household Bank
(Nevada) N.A. with and into HBSB with HBSB being the surviving entity. The
merger completed the consolidation of all of Household International, Inc.'s
credit card banks into one credit card banking subsidiary of HFC. We believe the
combination of the banks will streamline and simplify our regulatory reporting
process as well as optimize capital and liquidity management.
In accordance with the guidance established for mergers involving affiliates
under common control, the financial statements of HFC will include the results
of HBSB beginning in the third quarter of 2002 with prior periods restated to
include the results of HBSB, similar to a pooling of interests.
The pro forma impact of including the results of operations of HBSB in HFC for
the three and six month periods ended June 30, 2002 and 2001 would be as
follows:
Three months ended
June 30,
2002
- --------------------------------------------------------------------------------
Pro Forma
HFC Adjust- Pro-Forma
(In millions) Reported HBSB ments/(1)/ HFC
- --------------------------------------------------------------------------------
Revenue $ 2,934.8 $ 300.3 $(84.2) $3,150.9
Net income 381.2 99.4 (4.7) 475.9
================================================================================
9
Three months ended
June 30,
2001
- ------------------------------------------------------------------------------------------------------------
Pro Forma
HFC Adjust- Pro-Forma
(In millions) Reported HBSB ments/(1)/ HFC
- ------------------------------------------------------------------------------------------------------------
Revenue $ 2,519.0 $ 432.3 $ (100.5) $ 2,850.8
Net income 345.6 58.2 (11.9) 391.9
============================================================================================================
Six months ended
June 30,
2002
- ------------------------------------------------------------------------------------------------------------
Pro Forma
HFC Adjust- Pro-Forma
(In millions) Reported HBSB ments/(1)/ HFC
- ------------------------------------------------------------------------------------------------------------
Revenue $ 5,912.6 $ 595.1 $ (166.7) $ 6,341.0
Net income 771.6 178.5 (2.3) 947.8
============================================================================================================
Six months ended
June 30,
2001
- ------------------------------------------------------------------------------------------------------------
Pro Form
HFC Adjust- Pro-Forma
(In millions) Reported HBSB ments/(1)/ HFC
- ------------------------------------------------------------------------------------------------------------
Revenue $ 5,064.4 $887.8 $ (172.2) $ 5,780.0
Net income 628.7 135.9 (2.2) 762.4
============================================================================================================
/(1)/Primarily reflects the elimination of intercompany activity between HFC and
HBSB prior to the merger.
11. SEGMENT REPORTING (RESTATED)
We have one reportable segment, Consumer, which includes our consumer lending,
mortgage services, retail services, credit card services and auto finance
businesses. There has been no change in the basis of our segmentation or in the
measurement of segment profit as compared with the presentation in our Annual
Report on Form 10-K for the year ended December 31, 2001.
We allocate resources and provide information to management for decision making
on a managed basis. Therefore, an adjustment is required to reconcile the
managed financial information to our reported financial information in our
consolidated financial statements. This adjustment reclassifies net interest
margin, fee income and loss provision into securitization revenue.
10
Reportable Segments - Managed Basis
Managed
Adjustments/ Basis
All Reconciling Consolidated
(In millions) Consumer Other Totals Items Totals
- -------------------------------------------------------------------------------------------------------------
Three months ended June 30, 2002
Net interest margin $ 1,888.1 $ 33.6 $ 1,921.7 - $ 1,921.7
Fee income 278.5 1.4 279.9 - 279.9
Other revenues (1) 220.4 130.0 350.4 $ (51.5)(2) 298.9
Intersegment revenues 51.0 .5 51.5 (51.5)(2) -
Provision for credit losses 1,170.4 (8.2) 1,162.2 2.0 (3) 1,164.2
Net income 307.9 107.2 415.1 (33.9) 381.2
Receivables 87,221.6 1,112.8 88,334.4 - 88,334.4
Assets 89,930.4 19,485.6 109,416.0 (8,269.8)(4) 101,146.2
Goodwill 857.6 11.4 869.0 - 869.0
- -------------------------------------------------------------------------------------------------------------
Three months ended June 30, 2001
Net interest margin $ 1,491.1 $ 20.3 $ 1,511.4 - $ 1,511.4
Fee income 214.0 1.4 215.4 - 215.4
Other revenues (1) 174.7 107.4 282.1 $ (66.0)(2) 216.1
Intersegment revenues 65.4 .6 66.0 (66.0)(2) -
Provision for credit losses 755.1 (3.8) 751.3 1.1 (3) 752.4
Net income 309.6 78.5 388.1 (42.5) 345.6
Receivables 72,513.9 533.4 73,047.3 - 73,047.3
Assets 75,533.0 13,505.0 89,038.0 (8,292.3)(4) 80,745.7
Goodwill 864.8 11.8 876.6 - 876.6
- -------------------------------------------------------------------------------------------------------------
Six months ended June 30, 2002
Net interest margin $ 3,708.3 $ 95.4 $ 3,803.7 - $ 3,803.7
Fee income 559.7 4.1 563.8 - 563.8
Other revenues (1) 518.6 335.0 853.6 $ (97.9)(2) 755.7
Intersegment revenues 96.7 1.2 97.9 (97.9)(2) -
Provision for credit losses 2,411.2 19.8 2,431.0 (21.6)(3) 2,409.4
Net income 581.5 238.5 820.0 (48.4) 771.6
- -------------------------------------------------------------------------------------------------------------
Six months ended June 30, 2001
Net interest margin $ 2,919.6 $ 12.9 $ 2,932.5 - $ 2,932.5
Fee income 419.6 2.9 422.5 - 422.5
Other revenues (1) 288.7 294.6 583.3 $ (121.4)(2) 461.9
Intersegment revenues 120.5 .9 121.4 (121.4)(2) -
Provision for credit losses 1,520.6 (1.0) 1,519.6 2.4 (3) 1,522.0
Net income 532.1 175.1 707.2 (78.5) 628.7
- -------------------------------------------------------------------------------------------------------------
Owned
Basis
Securitization Consolidated
(In millions) Adjustments Totals
- --------------------------------------------------------------------
Three months ended June 30, 2002
Net interest margin $ (568.8)(5) $ 1,352.9
Fee income (133.1)(5) 146.8
Other revenues (1) 309.8 (5) 608.7
Intersegment revenues - -
Provision for credit losses (392.1)(5) 772.1
Net income - 381.2
Receivables (20,588.9)(6) 67,745.5
Assets (20,588.9)(6) 80,557.3
Goodwill - 869.0
- --------------------------------------------------------------------
Three months ended June 30, 2001
Net interest margin $ (431.5)(5) $ 1,079.9
Fee income (124.3)(5) 91.1
Other revenues (1) 292.0 (5) 508.1
Intersegment revenues - -
Provision for credit losses (263.8)(5) 488.6
Net income - 345.6
Receivables (18,487.4)(6) 54,559.9
Assets (18,487.4)(6) 62,258.3
Goodwill - 876.6
- --------------------------------------------------------------------
Six months ended June 30, 2002
Net interest margin $ (1,149.4)(5) $ 2,654.3
Fee income (259.6)(5) 304.2
Other revenues (1) 588.4 (5) 1,344.1
Intersegment revenues - -
Provision for credit losses (820.6)(5) 1,588.8
Net income - 771.6
- --------------------------------------------------------------------
Six months ended June 30, 2001
Net interest margin $ (867.0)(5) $ 2,065.5
Fee income (235.8)(5) 186.7
Other revenues (1) 618.2 (5) 1,080.1
Intersegment revenues - -
Provision for credit losses (484.6)(5) 1,037.4
Net income - 628.7
- --------------------------------------------------------------------
(1) Net of policyholder benefits and excluding fees.
(2) Eliminates intersegment revenues.
(3) Eliminates bad debt recovery sales and reclassifies loss reserves between
operating segments.
(4) Eliminates investments in subsidiaries and intercompany borrowings.
(5) Reclassifies net interest margin, fee income and loss provisions relating
to securitized receivables to other revenues.
(6) Represents receivables serviced with limited recourse.
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Household Finance Corporation and Subsidiaries
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(Dollar amounts are in millions) 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------
(RESTATED) (RESTATED)
Net income $ 381.2 $ 345.6 $ 771.6 $ 628.7
Net interest margin and other revenues (1) 2,108.4 1,679.1 4,302.6 3,332.3
Owned Basis Ratios:
Return on average owned assets 1.99% 2.26% 2.08% 2.08%
Return on average common
shareholder's equity 18.3 19.6 19.1 17.9
Net interest margin 7.85 7.94 7.92 7.72
Consumer net charge-off ratio, annualized 4.26 3.43 4.23 3.33
Reserves as a percentage of net charge-offs 94.6 99.3 97.1 104.3
Efficiency ratio (2) 36.0 39.4 36.1 40.0
Managed Basis Ratios:(3)
Return on average managed assets 1.58% 1.75% 1.63% 1.60%
Net interest margin 8.64 8.35 8.72 8.19
Consumer net charge-off ratio, annualized 4.74 3.95 4.68 3.86
Reserves as a percentage of net charge-offs 96.7 100.0 99.1 103.7
Efficiency ratio (2) 25.3 26.9 25.5 27.2
- -------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Owned Basis Managed Basis (3)
------------------------- -----------------------------
June 30, December 31, June 30, December 31,
(Dollar amounts are in millions) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------
(RESTATED) (RESTATED)
Total assets $ 80,557.3 $ 70,631.9 $ 101,146.2 $ 90,391.2
Receivables 67,745.5 63,460.5 88,334.3 83,219.8
Debt to equity ratio 8.3:1% 8.0:1% 8.3:1% 8.0:1%
Tangible equity to tangible managed
assets (4) n/a n/a 7.51 7.49
Two-month-and-over contractual
delinquency ratio 5.03 5.22 4.87 4.96
Reserves as a percentage of receivables 3.92 3.77 4.45 4.15
Reserves as a percentage of
nonperforming loans 95.4 89.8 112.1 104.1
- --------------------------------------------------------------------------------------------------------------------
(1) Net of policyholder benefits.
(2) Ratio of operating expenses to net interest margin and other revenues less
policyholders' benefits.
(3) We monitor our operations and evaluate trends on both an owned basis as
shown in our financial statements and on a managed basis. Managed basis
reporting adjustments assume that securitized receivables have not been
sold and are still on our balance sheet. Managed basis information is
intended to supplement, and should not be considered a substitute for,
owned basis reporting and should be read in conjunction with reported owned
basis results.
(4) The ratio of tangible equity to tangible managed assets is a non-GAAP ratio
that is used by rating agencies as a measure to evaluate capital adequacy.
This ratio may differ from similarly named measures presented by other
companies. Tangible shareholder's equity includes common shareholder's
equity, excluding unrealized gains and losses on investments and cash flow
hedging instruments, less acquired intangibles and goodwill. Tangible
managed assets represents total managed assets less acquired intangibles,
goodwill and derivative assets.
12
RESTATEMENT
Household Finance Corporation has restated its consolidated financial statements
for the years ended December 31, 1999, 2000 and 2001 and the first quarter ended
March 31, 2002. We believe this Form 10-Q and the exhibits included herewith
include all adjustments relating to the restatement for all such prior periods.
The restatement relates to a MasterCard/Visa affinity credit card relationship
and a marketing agreement with a third party credit card marketing company. In
consultation with our prior auditors, Arthur Andersen, LLP, we treated payments
made in connection with these agreements that were entered into between 1996 and
1999 as prepaid assets and amortized them in accordance with the underlying
economics of the agreements. Our current auditors, KPMG LLP, have advised us
that, in their view, these payments should have either been charged against
earnings at the time they were made or amortized over a shorter period of time.
We believe this is a good faith difference of opinion but we are following the
advice of our current auditors. There is no significant change as a result of
these adjustments on the prior period net earnings trends previously reported.
The balance of retained earnings at December 31, 2001 has been restated from
amounts previously reported to reflect a retroactive charge of $197.2 million,
after tax, for these items. The principal executive officer and principal
financial officer of HFC have certified that this quarterly report fairly
presents, in all material respects, the financial condition and results of
operations of HFC for the period ended June 30, 2002. Our independent auditors
have reviewed the June 30, 2002 financial results and have provided us with the
letter required by Statement of Auditing Standards No. 71. This letter is also
attached to this Form 10-Q as Exhibit 99-2.
The cumulative restatement relates to the following periods:
Restatements to Reported Income % Change from Prior Period Net Income
- --------------------------------------------------------------------------------------------------------------------------------
% Change
(Dollars in millions) Pre-Tax Tax Effect After Tax to Reported As Reported As Restated
- --------------------------------------------------------------------------------------------------------------------------------
Q2 2002 $ (2.5) $ 0.9 $ (1.6) (0.4)% 9.0% 10.3%
Q1 2002 (16.9) 6.2 (10.7) (2.7) 33.2 37.9
------------------------------------------------------------------------------------------------------------
6 months (19.4) 7.1 (12.3) (1.6) 20.2 22.7
2001 (58.3) 21.5 (36.8) (2.5) 22.1 22.8
2000 (57.9) 21.3 (36.6) (3.1) 16.2 18.9
1999 (84.7) 31.1 (53.6) (5.3) 8.8 5.5
1994-1998 (111.1) 40.9 (70.2)
- --------------------------------------------------------------------------------------------------------------------------------
BASIS OF REPORTING
This discussion should be read in conjunction with the unaudited condensed
consolidated financial statements, notes and tables included elsewhere in this
report and in the restated Household Finance Corporation Annual Report on Form
10-K for the year ended December 31, 2001 (the "2001 Form 10-K") which contains
unaudited financial information for Household Finance Corporation and is
included as an exhibit to this Form 10-Q. We expect that we will file with the
Securities and Exchange Commission an amended Form 10-K/A with audited
financial information on or about August 31, 2002. Management's discussion and
analysis may contain certain statements that may be forward-looking in nature
within the meaning of the Private Securities Litigation Reform Act of 1995. Our
results may differ materially from those noted in the forward-looking
statements. Forward-looking statements are typically identified by words or
phrases such as "believe", "expect", "anticipate", "intend", "may", "will",
"should", "would" and "could". Forward-looking statements involve risks and
uncertainties and are based on current views and assumptions. The factors that
may affect our actual results are as follows:
. changes in laws and regulations, including attempts by local, state
and national regulatory agencies or legislative bodies to control
alleged "predatory" lending practices through broad initiatives aimed
at lenders operating in the nonprime or subprime consumer market;
. increased competition from well-capitalized companies or lenders with
access to government sponsored organizations for our consumer segment
which may impact the terms, rates, costs or profits historically
included in the loan products we offer or purchase;
13
. changes in accounting policies practices or standards, as they may be
adopted by regulatory agencies and the Financial Accounting Standards
Board;
. changes in overall economic conditions, including the interest rate
environment in which we operate, the capital markets in which we fund
our operations, the market values of consumer owned real estate
throughout the United States, recession, employment and currency
fluctuations;
. consumer perception of the availability of credit, including price
competition in the market segments we target and the ramifications or
ease of filing for personal bankruptcy;
. the effectiveness of models or programs to predict loan delinquency or
loss and initiatives to improve collections in all business areas;
. continued consumer acceptance of our distribution systems and demand
for our loan or insurance products;
. changes associated with, as well as the difficulty in integrating
systems, operational functions and cultures, as applicable, of any
organization or portfolio acquired by Household;
. a reduction of our short-term debt ratings by any of the nationally
recognized statistical rating organizations that rate these
instruments to a level that is below our current rating;
. the costs, effects and outcomes of regulatory reviews or litigation
relating to our nonprime loan receivables or the business practices of
any of our business units, including, but not limited to, additional
compliance requirements;
. the costs, effects and outcomes of any litigation matter that is
determined adversely to HFC or its businesses;
. the ability to attract and retain qualified personnel to support the
underwriting, servicing, collection and sales functions of our
businesses;
. uncertainty with respect to the completion of the above referenced
reaudit of the consolidated financial information of HFC within the
time period expected, including whether any further adjustments may be
required;
. acceptance of the market place of our debt and equity to fund our
businesses during the period prior to the issuance of the restated
audited financial information and thereafter; and
. the inability of HFC to manage any or all of the foregoing risks
as well as anticipated.
We monitor our operations and evaluate trends on a managed basis which assumes
that securitized receivables have not been sold and are still on our balance
sheet. We manage our operations on a managed basis because the receivables that
we securitize are subjected to underwriting standards comparable to our owned
portfolio, are serviced by operating personnel without regard to ownership and
result in a similar credit loss exposure for us. In addition, we fund our
operations, review our operating results and make decisions about allocating
resources such as employees and capital on a managed basis. See Note 11,
"Segment Reporting," to the accompanying condensed consolidated financial
statements for additional information related to our results on a managed basis.
The following discussion of our financial condition and results of operations is
presented on an owned basis of reporting unless specifically noted. On an owned
basis of reporting, net interest margin, provision for credit losses and fee
income resulting from securitized receivables are included as components of
securitization revenue.
OPERATIONS SUMMARY AND TRENDS
.. Our net income for the second quarter of 2002 increased 10 percent to
$381.2 million, from $345.6 million a year ago. Net income for the first
six months of 2002 was $771.6 million, compared to $628.7 million in the
year-ago period. Our improved results were due to significant receivable
and revenue growth. Partially offsetting the revenue growth were higher
operating expenses as a result of portfolio growth and higher credit loss
provision due to the economic environment. We anticipate that our cost of
funds may increase during any period where we cannot fully access the
global capital markets due to our lack of audited financial statements.
14
Our credit loss provision was greater than charge-offs by $71.2 million in
the current quarter and $223.6 million year-to-date. In addition, our
year-to-date earnings included higher revenues from our tax refund lending
business.
.. In the first half of the year, we took a number of steps as part of our
liquidity management plans which reduced our reliance on short-term debt
and strengthened our position against market induced volatility. These
steps included establishing a $4.3 billion investment security liquidity
portfolio, issuing long-term debt which lengthened the term of our funding,
establishing $6 billion in incremental conduit capacity and issuing
securities backed by dedicated home equity loan receivables of $2.8
billion. We intend to maintain, and may grow, our investment security
liquidity portfolio to protect us from any liquidity concerns. This action
may adversely impact our net earnings due to the lower return generated by
these assets.
As we will not have audited financial statements until on or about August
31, 2002, our access to traditional funding sources through registered
public offerings will be limited until September. Pending the completion of
the audit, we will suspend the issuance of unsecured debt securities under
our applicable shelf registrations, In any case, no significant issuances
had been planned until September, 2002. We believe we have adequate sources
of liquidity to continue to operate until audited financial statements have
been prepared.
.. The regulatory environment in which we operate has been very challenging.
As a result of the agitation of consumer activists, state regulators,
including attorney generals, have requested information with respect to the
policies, procedures and practices used by our consumer lending business in
the origination of loans. We are in regular contact with these governmental
agencies providing support for our business and responding to customer
complaints. We believe state authorities will continue to target the
nonprime and subprime credit market with new laws and regulations. We
believe compliance with these new laws may increase our expenses and may
reduce revenues. However, we do not expect that such compliance will have a
material adverse affect on our business operations.
.. On July 22, 2002, the four federal bank regulatory agencies issued draft
guidance for account management and loss allowance practices for credit
card lending. The agencies have indicated that they intend to issue final
guidance on August 16, 2002. As such, we do not yet know what the final
form of the guidance will be. Based on the current draft, however, we do
not expect the guidance to have a material adverse impact on our financial
statements or the way we manage our business.
.. The United States Congress is expected to consider the passage of a new
bankruptcy bill. Although it should provide a more rational approach to
the consumer bankruptcy practice, if the bill is passed, we expect an
increase in the number of personal bankruptcy filings during the period
immediately prior to the effective date of the law. This action may cause
our delinquency and charge-off ratios, foreclosures and related expenses to
increase until the full effects of the legislation can be achieved.
SEGMENT RESULTS--MANAGED BASIS
15
Our Consumer segment reported net income of $307.9 million for the second
quarter compared to $309.6 million in the year-ago quarter. Year-to-date, net
income increased to $581.5 million compared to $532.1 million for the first six
months of 2001. Net interest margin, fee income and other revenues increased
$507.2 million, to $2.4 billion in the quarter and $1.2 billion, to $4.8 billion
year-to-date. Strong receivable growth and higher securitization activity,
pursuant to our liquidity management plans, drove the increases. The higher
revenues were offset by substantially higher credit loss provision and higher
expenses. Our credit loss provision rose $415.3 million, to $1.2 billion in the
quarter and $890.6 million, to $2.4 billion year-to-date as a result of
increased levels of receivables and the continued weak economy. We increased
managed loss reserves by recording provision greater than charge-offs of $156.8
million in the quarter and $432.7 million year-to-date. Higher salary and
operating expenses were the result of additional employees and operating costs
to support the increased receivable levels, additional collectors and
investments in the growth of our businesses. Managed receivables grew to $87.2
billion at June 30, 2002, compared to $83.6 billion at March 31, 2002 and $72.5
billion at June 30, 2001. The managed receivable growth was driven by growth in
all products with the strongest growth in our real estate secured receivables
and compared to the prior year, in our MasterCard and Visa receivables. Real
estate receivables growth was strong in both our branches and in our mortgage
services business. Growth in MasterCard and Visa receivables reflects growth in
our Union Privilege(R)("UP") portfolio, our affinity relationship with AFL-CIO
labor federation, and the fourth quarter 2001 $1.6 billion Renaissance portfolio
acquisition from an affiliate.
Return on average managed assets ("ROMA") was 1.39 and 1.33 percent in the
second quarter and first six months of 2002 compared to 1.68 and 1.46 percent in
the year-ago periods. The decline in the ratio reflects higher credit loss
provision.
BALANCE SHEET REVIEW
Increase (decrease) Increase (decrease)
from prior year from prior quarter
June 30, ----------------------------------------------------
(All dollar amounts are stated in millions) 2002 $ % $ %
- -------------------------------------------------------------------------------------------------------------------------
Real estate secured $42,303.3 $ 9,607.0 29% $3,064.1 8%
Auto finance 2,369.4 475.4 25 (241.0) (9)
MasterCard*/Visa* 6,041.7 1,679.6 39 263.5 5
Private label 5,293.9 (190.7) (3) (12.7) -
Personal non-credit card (1) 11,268.4 1,627.9 17 930.4 9
Commercial and other 468.8 (13.6) (3) (10.1) (2)
- -------------------------------------------------------------------------------------------------------------------------
Total owned receivables $67,745.5 13,185.6 24% $3,994.2 6%
=========================================================================================================================
.. MasterCard is a registered trademark of MasterCard International,
Incorporated and Visa is a registered trademark of VISA USA, Inc.
(1) Personal non-credit card receivables are comprised of the following:
June 30, March 31, June 30,
(In millions) 2002 2002 2001
- ------------------------------------------------------------------------------------------------------------------------
Personal unsecured $ 6,730.7 $ 6,104.5 $5,815.5
Union Plus personal unsecured 144.5 178.5 134.1
Personal homeowner loans 4,393.2 4,055.0 3,690.9
- ------------------------------------------------------------------------------------------------------------------------
Total personal non-credit card $11,268.4 $10,338.0 $9,640.5
========================================================================================================================
Receivables growth was a key contributor to our improved results. To support
capital levels to maintain acceptable debt ratings we expect to control
receivable growth with portfolio sales for the remainder of 2002. In this
manner, we do not anticipate our business operations will be adversely affected.
Compared to June 30, 2001, owned receivables increased $13.2 billion, or 24
percent, to $67.7 billion. Receivable growth in dollars was strongest in our
real estate secured portfolio, which increased 29 percent over the June 2001
level and was balanced between our branch-based consumer lending business and
our mortgage services businesses. This growth was partially offset by the sale
of approximately $900 million in whole loans by our mortgage services business
in March 2002 pursuant to our liquidity management plans. Our auto
16
finance business increased receivables $475.4 million, or 25 percent while
maintaining consistent underwriting criteria. A strong and rational market,
larger sales force, increased dealer penetration and strong Internet
originations contributed to the growth in auto finance receivables. Growth in
our MasterCard and Visa portfolio reflects the $1.6 billion fourth quarter 2001
Renaissance acquisition from an affiliate. Our Union Privilege portfolio and
near-prime new Household Bank branded base portfolios also reported
year-over-year growth. Private label receivables decreased 3 percent to $5.3
billion as a result of securitization activity which more than offset organic
growth from existing merchants and a $560 million portfolio acquisition in the
fourth quarter of 2001. Personal non-credit card receivables increased 17
percent to $11.3 billion. Our branches generated strong growth, especially in
our personal homeowner loan portfolio which increased 19 percent. In addition,
receivable growth was partially offset by securitization activity. During the
twelve months ended June 30, 2002, we securitized $7.0 billion of receivables
including $3.0 billion of auto finance receivables, $.7 billion of MasterCard
and Visa receivables, $1.0 billion of private label receivables and $2.3 billion
of personal non-credit card receivables.
Compared to March 31, 2002, receivables grew $4.0 billion or an annualized 25
percent. Growth in real estate secured and personal non-credit card receivables
was the result of good consumer demand which generated strong volume in our
branch-based consumer lending and mortgage services businesses. In our auto
finance portfolio, receivable growth was more than offset by higher
securitization levels. During the second quarter, we securitized $1.4 billion of
receivables including $925.0 million of auto finance receivables and $450.0
million of personal non-credit card receivables.
Owned consumer two-months-and-over contractual delinquency as a percent of owned
consumer receivables was 5.03 percent at June 30, 2002, compared with 5.40
percent at March 31, 2002 and 5.01 percent at June 30, 2001. The annualized
consumer owned charge-off ratio in the second quarter of 2002 was 4.26 percent,
compared with 4.19 percent in the prior quarter and 3.43 percent in the year-ago
quarter.
Our debt to equity ratio was 8.3:1 at June 30, 2002 compared to 8.0:1 at
December 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
No dividends were paid to our parent in the first six months of 2002. In 2001,
we paid dividends to our parent company of $225 million in the second quarter
and $275 million in the first quarter. During the first six months of 2002 and
2001, we received no capital contributions from our parent. As a result of our
restatement and its impact on our capital position, we have committed to
increase our capital levels by December 31, 2002. Initiatives will include
portfolio sales to continue growth and capital contributions from our parent as
necessary. We do not believe this capital plan will materially impact our
business operations or future prospects.
We accessed the debt capital markets in accordance with our customary funding
plans with a goal to reduce dependence on the potentially volatile commercial
paper markets. Commercial paper, bank and other borrowings decreased $2.7
billion from March 31, 2002 and $6.1 billion from year-end 2001 to $3.0 billion
as we took advantage of the current low interest rate environment for long-term
debt. We expect outstanding commercial paper to increase in future quarters.
Senior and senior subordinated debt (with original maturities over one year)
increased to $66.7 billion from $51.2 billion at year-end. Pending the
completion of the audit, we will suspend the issuance of unsecured securities
under our applicable shelf registrations. In any case, no significant issuances
had been planned until September, 2002. We believe we have adequate sources of
liquidity which are available to support the temporary loss of this funding.
17
In the first half of the year, we took a number of steps to reduce our reliance
on short-term debt to strengthen our protection against market induced
volatility. These steps included the following:
. At June 30, 2002, our investment security liquidity portfolio totaled
$4.3 billion, a $3.3 billion increase over March 31, 2002.
. We issued senior debt with original maturities greater than 5 years of
$3.6 billion in the quarter and $6.8 billion year-to-date. These
issuances reduced our reliance on short-term debt in the currently
volatile debt markets. During the current quarter, we issued (euro)3
billion in Euro bonds and $2.5 billion in U.S. dollar-denominated
global debt. During the first quarter of 2002, we issued (pound)500
million of 10-year debt to investors in the U.K. and $2.5 billion in
U.S. dollar-denominated global debt.
. We continued to actively access the securitization market as part of
liquidity management actions to limit reliance on short-term unsecured
debt in potentially volatile markets. The composition of receivables
securitized (excluding replenishments of certificateholder interests)
was as follows:
Three months ended Six months ended
June 30, June 30,
(In millions) 2002 2001 2002 2001
-----------------------------------------------------------------------------------------------------------
Auto finance $ 925.0 $ 595.0 $1,350.0 $ 973.8
Mastercard/Visa - 78.0 600.0 151.2
Private label - - 500.0 -
Personal non-credit card 450.0 550.0 1,352.7 1,000.0
-----------------------------------------------------------------------------------------------------------
Total $1,375.0 $1,223.0 $3,802.7 $2,125.0
===========================================================================================================
. We established $6 billion in incremental conduit capacity (including
$1 billion established in the second quarter) for our real estate
secured product. Consistent with previous transactions, draws on these
facilities are structured as secured financings for accounting
purposes. At June 30, 2002, our undrawn conduit lines totaled $6.7
billion and included $5.5 billion of undrawn capacity on the real
estate lines put in place in 2002.
. We issued securities backed by dedicated home equity loan receivables
of $1.3 billion in the second quarter of 2002 and $2.8 billion
year-to-date. For accounting purposes, these transactions were
structured as secured financings. Therefore, the receivables and the
related debt remain on our balance sheet. As of June 30, 2002,
closed-end real estate secured receivables totaling $4.3 billion
secured $3.8 billion of outstanding debt related to these
transactions. At December 31, 2001, closed-end real estate secured
receivables totaling $1.7 billion secured $1.5 billion of outstanding
debt related to these transactions.
. We sold approximately $900 million in real estate secured loans that
were held by our mortgage services business during the first quarter
of 2002.
Securitizations and secured financings of consumer receivables have been, and
will continue to be, a source of liquidity for us. In a securitization, a
designated pool of consumer receivables, typically MasterCard or Visa credit
card, private label credit card, personal non-credit card or auto finance, is
removed from the balance sheet and transferred to an unaffiliated trust that is
a qualifying special purpose entity ("QSPE") as defined by Statement of
Financial Accounting Standards No. 140 ("SFAS No. 140") and therefore is not
consolidated. Under the terms of the securitizations, we receive annual
servicing fees on the outstanding balance of the securitized receivables and the
rights to future residual cash flows on the sold receivables after the investors
receive their contractual return. The estimated present value of these rights to
future residual cash flows are recorded on our balance sheet at the time of sale
as interest-only strip receivables, net of our recourse obligation to investors
for failure of debtors to pay. Cash flows related to the interest-only strip
receivables and servicing the receivables are collected over the life of the
underlying securitized receivables.
18
In a secured financing, a designated pool of receivables, typically real estate
secured, are transferred to a wholly-owned special purpose subsidiary which
assigns the receivables to a trust which sells interests to investors. Repayment
of the debt issued by the trust is secured by the receivables transferred. The
transactions are structured as secured financings under SFAS No. 140. Therefore,
the receivables and the underlying debt of the trust remain on our balance
sheet. Using this source of funding results in similar operating results and
cash flows as issuing debt through alternative funding sources.
Our securitized receivables totaled $20.6 billion at June 30, 2002, compared to
$19.8 billion at December 31, 2001. We believe the market for securities backed
by receivables is a reliable, efficient and cost-effective source of funds. At
June 30, 2002, securitizations represented 23 percent of the funding associated
with our managed portfolio compared to 26 percent a year earlier. We believe we
will be able to continue to access this market throughout 2002.
Regulatory Matters
Our banking subsidiaries are subject to the capital adequacy guidelines adopted
by the Office of the Comptroller of the Currency ("OCC") and the Federal Deposit
Insurance Corporation ("FDIC") and are well capitalized. In the first quarter of
2002, we made capital contributions to our banking subsidiaries of approximately
$250 million in response to the 2001 Guidance for Subprime Lending Programs
issued by the Office of Thrift Supervision, OCC and FDIC. We currently do not
anticipate the need for significant additional capital contributions to our
banking subsidiaries.
On July 1, 2002, Household International, Inc. contributed all of the capital
stock of Household Bank (SB), N.A. ("HBSB"), a wholly owned subsidiary of
Household Bank, fsb, to HFC. HBSB, in turn, purchased all of the assets of
Beneficial Bank USA, a wholly-owned credit card banking subsidiary of HFC.
Subsequently, we merged our wholly-owned banking subsidiary, Household Bank
(Nevada) N.A. with and into HBSB with HBSB being the surviving entity. The
merger completed the consolidation of all of Household International, Inc.'s
credit card banks into one credit card banking subsidiary of HFC. We believe the
combination of the banks will streamline and simplify our regulatory reporting
process as well as optimize capital and liquidity management. As part of this
combination, we confirmed our financial support for our credit card bank and
have designated approximately half of our $4.3 billion investment security
liquidity portfolio to enhance liquidity in this subsidiary.
State regulatory agencies, including the attorney generals of certain states,
have been focusing on the origination policies, procedures and practices of our
consumer lending business. We have responded to all customer complaints brought
to us by these authorities and believe most are without merit. Those complaints
that may be valid have been limited to isolated situations. We expect that these
complaints, which are part of an organized effort by certain consumer activists,
will continue to be a focus for regulatory authorities as long as consumer
activists target our business in an effort to cause industry-wide changes in
certain practices that are common in the non prime consumer lending
industry. These practices include the imposition of prepayment penalties and
mandatory arbitration clauses. We intend to continue to support these practices
as they are a justifiable and reasonable business practice.
RESULTS OF OPERATIONS
- ---------------------
Unless noted otherwise, the following discusses amounts reported in our owned
basis statements of income.
Net interest margin: Net interest margin on an owned basis was $1.4 billion for
the second quarter of 2002, up 25 percent from $1.1 billion for the prior-year
quarter. Net interest margin on an owned basis for the first six months of 2002
was $2.7 billion, up from $2.1 billion in the prior-year period. The increases
were primarily due to receivables growth and lower funding costs resulting from
easing in United States monetary policy in 2001.
19
Net interest margin as a percent of average owned interest-earning assets,
annualized, was 7.85 percent in the quarter and 7.92 percent in the first six
months of 2002, compared to 7.94 and 7.72 percent in the year-ago periods. The
decrease in the quarter was due to an increase in the percentage of real estate
secured receivables in our portfolio as well as a larger liquidity-related
investment portfolio. Both real estate secured receivables and the
liquidity-related investment portfolio have lower margins than our other
products. These reductions were partially offset by lower funding costs.
Our net interest margin on a managed basis includes finance income earned on our
owned receivables as well as on our securitized receivables. This finance income
is offset by interest expense on the debt recorded on our balance sheet as well
as the contractual rate of return on the instruments issued to investors when
the receivables were securitized. Managed basis net interest margin increased
$410 million, to $1.9 billion in the second quarter of 2002 and $871 million, to
$3.8 billion year-to-date primarily due to higher receivable levels and an
expanded margin.
Net interest margin as a percent of average managed interest-earning assets,
annualized, was 8.64 percent in the current quarter and 8.72 percent in the
first six months of 2002, compared to 8.35 and 8.19 percent in the year-ago
periods. The net interest margin on a managed basis is greater than on an owned
basis because the managed basis portfolio includes more auto finance, MasterCard
and Visa and personal non-credit card receivables, which have higher yields.
Lower funding costs were the primary driver of the increased margin.
Provision for credit losses The provision for credit losses for receivables for
the second quarter of 2002 totaled $772.1 million, compared to $488.6 million in
the prior-year quarter. The provision for the first six months of 2002 was $1.6
billion, compared to $1.0 billion in the year-ago period. The provision as a
percent of average owned receivables, annualized, was 4.65 percent in the second
quarter of 2002, compared to 3.67 percent in the second quarter of 2001. We
recorded owned loss provision greater than charge-offs of $71.2 million during
the second quarter and $223.6 million during the first six months of 2002.
Receivables growth, increases in personal bankruptcy filings and uncertainty as
to the timing and extent of an economic recovery contributed to a higher
provision. The provision for credit losses may vary from quarter to quarter,
depending on the product mix and credit quality of loans in our portfolio. See
Note 4, "Credit Loss Reserves" to the accompanying condensed consolidated
financial statements for further discussion of factors affecting the provision
for credit losses.
Other revenues Total other revenues were $828.3 million and $1.8 billion for
the second quarter and first six months of 2002, compared to $661.8 million and
$1.4 billion for the same periods in 2001 and included the following:
Three months ended Six months ended
June 30, June 30,
(In millions) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------
(RESTATED) (RESTATED)
Securitization revenue $ 399.9 $ 303.0 $ 825.1 $ 606.1
Insurance revenue 135.7 118.6 265.8 234.5
Investment income 41.6 34.2 83.4 72.5
Fee income 146.8 91.1 304.2 186.7
Other income 104.3 114.9 316.4 296.3
- --------------------------------------------------------------------------------------------------------------------
Total other revenues $ 828.3 $ 661.8 $ 1,794.9 $1,396.1
====================================================================================================================
Securitization revenue is the result of the securitization of our receivables
and includes initial and replenishment gains on sale, net of our estimate of
probable credit losses under the recourse provisions, as well as servicing
revenue and excess spread. Securitization revenue was $399.9 and $825.1 million
for the second quarter and first six months of 2002, compared to $303.0 and
$606.1 million for the same periods in 2001. The increase was due to higher
average securitized receivables as well as increases in the level of receivables
securitized during both the quarter and year-to-date. Securitization revenue
will vary each period based on the level and mix of receivables securitized in
that particular period (which
20
will impact the gross initial gains and related estimated probable credit losses
under the recourse provisions). It is also affected by the overall level and mix
of previously securitized receivables (which will impact servicing revenue and
excess spread). The estimate for probable credit losses for securitized
receivables is also impacted by the level and mix of current period
securitizations because, depending upon loss estimates and severities,
securitized receivables with longer lives may result in higher over-the-life
losses than receivables securitized with shorter lives.
Securitization revenue included the following:
Three months ended Six months ended
June 30, June 30,
(In millions) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------
(RESTATED) (RESTATED)
Net initial gains $ 49.2 $ 30.5 $ 123.6 $ 57.9
Net replenishment gains 153.8 128.6 302.4 255.5
Servicing revenue and excess spread 196.9 143.9 399.1 292.7
- --------------------------------------------------------------------------------------------------------------------
Total $ 399.9 $ 303.0 $ 825.1 $ 606.1
====================================================================================================================
Our interest-only strip receivables increased $5.7 and $37.3 million in the
second quarter and first six months of 2002 compared to $14.0 and $15.5 million
in the year-ago periods. These increases are net of the related loss reserve and
exclude the mark-to-market adjustment recorded in accumulated other
comprehensive income.
Insurance revenue was $135.7 and $265.8 million in the second quarter and first
six months of 2002 compared to $118.6 and $234.5 million in the year-ago
periods. The increase reflected increased sales on a larger receivable
portfolio.
Investment income, which includes interest income on investment securities in
the insurance business as well as realized gains and losses from the sale of
investment securities, was $41.6 and $83.4 million in the second quarter and
first six months of 2002 compared to $34.2 and $72.5 million in the year-ago
periods. The increases were primarily due to higher interest income, primarily
resulting from higher average investment balances, partially offset by lower
yields.
Fee income, which includes revenues from fee-based products such as credit
cards, was $146.8 and $304.2 million in the second quarter and first six months
of 2002, compared to $91.1 and $186.7 million in the year-ago periods. The
increases were primarily due to higher average MasterCard and Visa receivables
largely due to the purchase of the Renaissance portfolio in the fourth quarter
of 2001, partially offset by lower late fees as a result of improvements in
early stage delinquencies in our credit card businesses.
See Note 11, "Segment Reporting," to the accompanying condensed consolidated
financial statements for additional information on fee income on a managed
basis.
Other income, which includes revenue from our tax refund lending business, was
$104.3 and $316.4 million in the second quarter and first six months of 2002
compared to $114.9 and $296.3 million in the prior-year periods. Our seasonal
tax refund lending and mortgage banking subsidiary reported higher revenues in
both the quarter and year-to-date. In the quarter, these increases were more
than offset by lower servicing fees for servicing receivables of affiliates.
Expenses Total costs and expenses for the second quarter and first six months
of 2002 were $831.1 million and $1.7 billion compared to $724.6 million and $1.5
billion in the comparable prior-year periods. The increases were driven by
higher compensation and other expenses to support our growing portfolio. Our
owned basis efficiency ratio was 36.0 and 36.1 percent in the second quarter and
first six months of 2002 compared to 39.4 and 40.0 percent in the comparable
prior-year periods.
21
Total costs and expenses included the following:
Three months ended Six months ended
June 30, June 30,
(In millions) 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
(RESTATED) (RESTATED)
Salaries and fringe benefits $354.7 $306.6 $ 699.2 $ 600.9
Sales incentives 64.1 71.2 115.8 123.6
Occupancy and equipment expense 72.5 64.0 143.6 128.3
Other marketing expenses 59.8 49.5 123.8 111.8
Other servicing and administrative expenses 194.6 135.2 437.0 295.1
Amortization of acquired intangibles and goodwill 12.6 35.5 32.4 72.6
Policyholders' benefits 72.8 62.6 146.6 129.3
- ----------------------------------------------------------------------------------------------------------------------------
Total costs and expenses $831.1 $724.6 $1,698.4 $1,461.6
============================================================================================================================
Salaries and fringe benefits for the second quarter and first six months of 2002
were $354.7 and $699.2 million compared to $306.6 and $600.9 million in the
second quarter and first six months of 2001. The increases were primarily due to
additional staffing at all businesses to support growth including sales,
collections and service quality.
Sales incentives for the second quarter and first six months of 2002 were $64.1
and $115.8 million compared to $71.2 and $123.6 million in the comparable
prior-year periods. The decreases were due to the implementation of 2002
incentive plans in our branches which, generally, have higher volume
requirements than the prior-year plans.
Occupancy and equipment expense for the second quarter and first six months of
2002 was $72.5 and $143.6 million compared to $64.0 and $128.3 million in the
comparable prior-year periods. The increases were primarily the result of higher
repairs and maintenance costs.
Other marketing expenses for the second quarter and first six months of 2002
were $59.8 and $123.8 million compared to $49.5 and $111.8 million in the
comparable prior-year periods. The increases were primarily due to increased
credit card marketing initiatives.
Other servicing and administrative expenses for the second quarter and first six
months of 2002 were $194.6 and $437.0 million compared to $135.2 and $295.1
million in the comparable prior-year periods. The increases were primarily due
to servicing fees on the Renaissance portfolio which was acquired in the fourth
quarter of 2001. Higher collection, REO, legal and consulting expenses also
contributed to the increases.
Amortization of acquired intangibles and goodwill for the second quarter and
first six months of 2002 was $12.6 and $32.4 million compared to $35.5 and $72.6
million in the comparable prior-year periods. The decreases were primarily
attributable to the adoption of Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets", on January 1, 2002. Amortization of
goodwill recorded in past business combinations ceased upon adoption of the new
accounting statement.
Policyholders' benefits for the second quarter and first six months of 2002 were
$72.8 and $146.6 million compared to $62.6 and $129.3 million in the comparable
prior-year periods. The increases are consistent with the increase in insurance
revenues resulting from the increased policy sales.
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 condensed
consolidated 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.
22
The following table sets forth owned basis credit loss reserves for the periods
indicated:
June 30, March 31, June 30,
(All dollar amounts are stated in millions) 2002 2002 2001
- -----------------------------------------------------------------------------------------------------------------
Owned credit loss reserves $2,652.4 $2,566.4 $1,796.7
Reserves as a percent of:
Receivables 3.92% 4.03% 3.29%
Net charge-offs (1) 94.6 96.6 99.3
Previous 12 months' net charge-offs 107.4 115.6 108.7
Nonperforming loans 95.4% 90.7% 80.8%
=================================================================================================================
(1) Quarter-to-date, annualized
Reserves as a percentage of receivables at June 30, 2002 reflect the fourth
quarter 2001 Renaissance portfolio acquisition and the continuing uncertainty as
to the ultimate impact the weakened economy will have on charge-off and
delinquency levels. Compared to March 31, 2002, reserve levels also reflect
lower delinquency.
For securitized receivables, we also record a provision for estimated probable
losses that we expect to incur under the recourse provisions. The following
table sets forth managed credit loss reserves for the periods indicated:
June 30, March 31, June 30,
(All dollar amounts are stated in millions) 2002 2002 2001
- -----------------------------------------------------------------------------------------------------------------
Managed credit loss reserves $3,934.2 $3,763.3 $2,793.7
Reserves as a percent of:
Receivables 4.45% 4.47% 3.82%
Net charge-offs (1) 96.7 97.3 100.0
Previous 12 months' net charge-offs 109.3 114.7 111.2
Nonperforming loans 112.1 107.3 102.9
==================================================================================================================
(1) Quarter-to-date, annualized
Managed basis reserve ratios are somewhat higher than comparable owned basis
ratios because our managed portfolio includes a lower percentage of real estate
secured receivables, which historically have had lower credit losses than our
other products.
CREDIT QUALITY
Delinquency - Owned Basis
Two-Months-and-Over Contractual Delinquency (as a percent of consumer
receivables):
June 30, March 31, June 30,
2002 2002 2001
- --------------------------------------------------------------------------------------------------------------------
Real estate secured 2.85% 3.09% 2.83%
Auto finance 2.98 2.03 2.43
MasterCard/Visa 5.95 6.85 3.65
Private label 11.18 11.33 10.95
Personal non-credit card 10.27 11.13 10.16
- --------------------------------------------------------------------------------------------------------------------
Total Owned 5.03% 5.40% 5.01%
====================================================================================================================
Compared to the previous quarter, all products except auto finance reported
lower delinquencies which was well within our expectations. The biggest
improvement was in our MasterCard and Visa portfolio
especially in the subprime portfolio. The sequential increase in auto finance
delinquency is consistent with historical seasonal trends.
23
Compared to a year ago, the weakened economy contributed to higher delinquency
rates in all products. These increases were partially offset in our real estate
secured, private label and personal non-credit card portfolios by improved
collections. The improved collections were a direct result of increasing the
size of our collection staff, especially in our branch network. In our
MasterCard and Visa portfolio, the December 2001 Renaissance portfolio
acquisition also contributed to higher delinquency rates.
Net Charge-offs of Consumer Receivables - Owned Basis
Net Charge-offs of Consumer Receivables (as a percent, annualized, of average
consumer receivables):
June 30, March 31, June 30,
2002 2002 2001
- ------------------------------------------------------------------------------------------
Real estate secured .94% .73% .52%
Auto finance 4.78 5.66 3.27
MasterCard/Visa 10.89 10.35 6.85
Private label 10.03 10.71 9.80
Personal non-credit card 9.97 9.35 8.18
- ------------------------------------------------------------------------------------------
Total Owned 4.26% 4.19% 3.43%
==========================================================================================
Real estate charge-offs and REO expense as a percent of
average real estate secured receivables 1.38% 1.20% .88%
==========================================================================================
The weak economy drove the increase in charge-off ratios over both the previous
and prior year quarters. These increases were consistent with our expectations.
Higher bankruptcy charge-offs, contributed to increases in the charge-off ratios
for our real estate secured, MasterCard and Visa and personal non-credit card
portfolios in the quarter. Charge-offs in our personal non-credit card portfolio
increased more than our other products because our typical personal non-credit
card customer is less resilient and, therefore, more exposed to the recent
economic downturn. Improvements in our auto finance and private label portfolios
during the quarter were primarily attributable to reductions in bankruptcy
charge-offs. The auto finance ratio also reflects positive seasonal trends.
Compared to the prior-year quarter, our net charge-off ratio increased 83 basis
points, primarily due to the weak economy. These increases were partially offset
by improved collections in our real estate secured, private label and personal
non-credit card portfolios as a direct result of increasing the size of our
collection staff, especially in our branch network. The increase in the
MasterCard and Visa charge-off ratio also reflects the December 2001 Renaissance
portfolio acquisition.
The increases in real estate charge-offs and REO expense as a percent of average
real estate secured receivables were the result of the seasoning of our
portfolios, higher loss severities, especially in second lien mortgages, and
higher bankruptcy filings.
OWNED NONPERFORMING ASSETS
June 30, March 31, June 30,
(in millions) 2002 2002 2001
- ----------------------------------------------------------------------------------
Nonaccrual receivables $ 2,069.5 $ 2,027.6 $ 1,621.8
Accruing consumer receivables
90 or more days delinquent 711.7 800.9 590.9
Renegotiated commercial loans - - 12.3
- ----------------------------------------------------------------------------------
Total nonperforming receivable 2,781.2 2,828.5 2,225.0
Real estate owned 449.8 454.7 360.0
- ----------------------------------------------------------------------------------
Total nonperforming assets $ 3,231.0 $ 3,283.2 $ 2,585.0
==================================================================================
Credit loss reserves as a percent of
nonperforming receivables 95.4% 90.7% 80.8%
==================================================================================
24
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
12 Statement of Computation of Ratio of Earnings to Fixed Charges.
99.1 Debt Securities Ratings.
99.2 Letter from KPMG LLP re: Statement of Auditing Standards
Number 71.
99.3 Certification of Chief Executive and Principal Financial
Officer.
99.4 Restated Form 10-K of Household Finance Corporation for the
year ended December 31, 2001, which contains unaudited
consolidated financial information and will amend and
supplement the Form 10-K of Household Finance Corporation for
the year ended December 31, 2001 that was filed with the
Securities and Exchange Commission on March 21, 2002.
(b) Report on Form 8-K
During the second quarter of 2002, we filed a Current Report on
Form 8-K on April 25, 2002 pertaining to our financial results for
the three months ended March 31, 2002.
25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOUSEHOLD FINANCE CORPORATION
-----------------------------
(Registrant)
Date: August 14, 2002 By: /s/ David A. Schoenholz
--------------- ---------------------------
David A. Schoenholz
President and
Chief Executive Officer (as
principal financial officer)
and on behalf of
Household Finance Corporation
26
Exhibit Index
12 Statement of Computation of Ratio of Earnings to Fixed Charges.
99.1 Debt Securities Ratings.
99.2 Letter from KPMG LLP re: Statement of Auditing Standards
Number 71.
99.3 Certification of Chief Executive and Principal Financial
Officer.
99.4 Restated Form 10-K of Household Finance Corporation for the
year ended December 31, 2001, which contains unaudited
consolidated financial information and will amend and
supplement the Form 10-K of Household Finance Corporation for
the year ended December 31, 2001 that was filed with the
Securities and Exchange Commission on March 21, 2002.
27