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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 March 31, 2003
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
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(Exact name of registrant as specified in its charter)
Delaware 36-1239445
-------- ----------
(State of Incorporation) (I.R.S. Employer Identification No.)
2700 Sanders Road, Prospect Heights, Illinois 60070
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(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[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes[X] No[ ]
At April 30, 2003, 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) ................................. 2
Condensed Consolidated Balance Sheets - March 31, 2003 (Unaudited) and December 31, 2002. 3
Condensed Consolidated Statements of Cash Flows (Unaudited) ............................. 4
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) ................ 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ... 13
Item 4. Controls and Procedures ................................................................. 24
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K ........................................................ 25
Signature ............................................................................................. 25
Certification of Chief Executive Officer ................................................................ 26
Certification of Principal Financial Officer ............................................................ 27
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
March 29 January 1 Three Months
through through ended
(In millions) March 31, 2003 March 28, 2003 March 31, 2002
- --------------------------------------------------------------------------------------------------------------
(Successor) (Predecessor) (Predecessor)
(Note 2) (Note 2) (Note 2)
Finance and other interest income $ 67.7 $ 2,266.9 $ 2,183.0
Interest expense 14.1 784.6 726.0
- --------------------------------------------------------------------------------------------------------------
Net interest margin 53.6 1,482.3 1,457.0
Provision for credit losses on owned receivables 31.5 920.7 834.1
- --------------------------------------------------------------------------------------------------------------
Net interest margin after provision for credit losses 22.1 561.6 622.9
- --------------------------------------------------------------------------------------------------------------
Securitization revenue 8.2 413.2 490.5
Insurance revenue 4.0 118.8 130.1
Investment income 1.2 75.8 41.9
Fee income 8.1 270.6 186.0
Other income 4.6 231.6 158.5
- --------------------------------------------------------------------------------------------------------------
Total other revenues 26.1 1,110.0 1,007.0
- --------------------------------------------------------------------------------------------------------------
Salaries and fringe benefits 12.7 378.1 369.3
Sales incentives 1.3 34.8 51.7
Occupancy and equipment expense 2.7 77.9 74.0
Other marketing expenses 4.4 127.5 128.0
Other servicing and administrative expenses 7.4 268.6 200.6
Amortization of acquired intangibles 1.8 12.3 19.8
Policyholders' benefits 2.3 71.1 73.8
- --------------------------------------------------------------------------------------------------------------
Total costs and expenses 32.6 970.3 917.2
- --------------------------------------------------------------------------------------------------------------
Income before income taxes 15.6 701.3 712.7
Income taxes 5.5 240.6 240.8
- --------------------------------------------------------------------------------------------------------------
Net income $ 10.1 $ 460.7 $ 471.9
==============================================================================================================
See notes to interim condensed consolidated financial statements.
2
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
(In millions) 2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
(Successor) (Predecessor)
(Note 2) (Note 2)
ASSETS
Cash $ 430.8 $ 667.9
Investment securities 6,115.4 6,707.6
Receivables, net 76,562.1 74,828.4
Advances to parent company and affiliates 540.4 --
Acquired intangibles, net 1,820.2 386.4
Goodwill 2,454.7 1,117.7
Properties and equipment, net 392.2 403.1
Real estate owned 441.4 423.9
Derivative financial assets 2,391.7 1,805.0
Other assets 2,450.2 2,032.9
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 93,599.1 $ 88,372.9
===================================================================================================================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Debt:
Advances from parent company and affiliates $ -- $ 86.9
Commercial paper, bank and other borrowings 3,079.7 4,143.3
Senior and senior subordinated debt (with original maturities over one year) 73,640.8 70,275.6
- -----------------------------------------------------------------------------------------------------------------------------------
Total debt 76,720.5 74,505.8
Insurance policy and claim reserves 1,195.5 890.9
Derivative related liabilities 1,407.6 1,087.5
Other liabilities 2,239.7 1,847.2
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 81,563.3 78,331.4
Common shareholder's equity:
Common stock, $1.00 par value, 1,000 shares authorized, issued and outstanding at
March 31, 2003 and December 31, 2002, and additional paid-in capital 12,076.1 3,790.8
Retained earnings 10.1 6,642.4
Accumulated other comprehensive income (loss) (50.4) (391.7)
- -----------------------------------------------------------------------------------------------------------------------------------
Total common shareholder's equity 12,035.8 10,041.5
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholder's equity $ 93,599.1 $ 88,372.9
===================================================================================================================================
See notes to interim condensed consolidated financial statements.
3
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
March 29 January 1 Three Months
through through ended
(In millions) March 31, 2003 March 28, 2003 March 31, 2002
- ----------------------------------------------------------------------------------------------------------
(Successor) (Predecessor) (Predecessor)
(Note 2) (Note 2) (Note 2)
CASH PROVIDED BY OPERATIONS
Net income $ 10.1 $ 460.7 $ 471.9
Adjustments to reconcile net income to cash
provided by operations:
Provision for credit losses on owned receivables 31.5 920.7 834.1
Insurance policy and claim reserves 2.3 65.3 24.4
Depreciation and amortization 2.0 46.1 56.2
Interest-only strip receivables, net change 5.1 32.4 (34.3)
Other, net (94.1) 46.6 (538.6)
- ----------------------------------------------------------------------------------------------------------
Cash (used in) provided by operations (43.1) 1,571.8 1,890.9
- ----------------------------------------------------------------------------------------------------------
INVESTMENTS IN OPERATIONS
Investment securities:
Purchased -- (981.4) (345.4)
Matured -- 534.5 88.2
Sold -- 768.4 190.3
Short-term investment securities, net change 457.8 (203.2) (1,165.8)
Receivables:
Originations, net (297.6) (7,758.2) (9,166.5)
Purchases and related premiums (116.8) (129.0) (1,099.1)
Initial and fill-up securitizations (154.2) 7,234.4 8,595.6
Whole loan sales -- -- 882.3
Properties and equipment purchased -- (16.0) (48.1)
Properties and equipment sold -- 0.1 --
Advances to parent company and affiliates -- (627.3) (1,170.6)
- ----------------------------------------------------------------------------------------------------------
Cash decrease from investments in operations (110.8) (1,177.7) (3,239.1)
- ----------------------------------------------------------------------------------------------------------
FINANCING AND CAPITAL TRANSACTIONS
Short-term debt net change 243.2 (1,306.8) (3,370.0)
Senior and senior subordinated debt issued -- 4,232.8 7,190.0
Senior and senior subordinated debt retired (53.6) (3,566.1) (2,727.9)
Policyholders' benefits paid (0.7) (26.8) (26.6)
Cash received from policyholders 0.6 0.1 --
- ----------------------------------------------------------------------------------------------------------
Cash increase (decrease)from financing and capital
transactions 189.5 (666.8) 1,065.5
- ----------------------------------------------------------------------------------------------------------
Increase (decrease) in cash 35.6 (272.7) (282.7)
Cash at beginning of period 395.2 667.9 553.1
- ----------------------------------------------------------------------------------------------------------
Cash at end of period $ 430.8 $ 395.2 $ 270.4
==========================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 70.8 $ 754.9 $ 650.0
Income taxes paid (refunded) -- 147.7 (14.7)
- ----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL NON-CASH FINANCING AND CAPITAL ACTIVITIES
Push-down of purchase price by Parent (Note 2) $ -- $ 12,076.1 $ --
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., ("Household International" or the "Parent Company") 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. 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 consolidated financial statements and footnotes included in
our Annual Report on Form 10-K for the year ended December 31, 2002.
The chief executive officer and principal financial officer of HFC have
certified that the information contained in this quarterly report fairly
presents, in all material respects, the financial condition and results of
operations of HFC. These certifications are included as Exhibits 99.2 and 99.3
to this Form 10-Q. The chief executive officer and principal financial officer
of HFC have also provided certifications as to the effectiveness of our
disclosure controls and procedures which are included on pages 26 and 27.
2. ACQUISITION OF HOUSEHOLD INTERNATIONAL
On March 28, 2003, HSBC Holdings plc ("HSBC") completed its acquisition of
Household International by way of merger with H2 Acquisition Corporation ("H2"),
a wholly owned subsidiary of HSBC, acquiring 100% of the voting equity interest
of Household International in a purchase business combination. Subsequent to the
merger, H2 was renamed "Household International, Inc." HSBC believes that the
merger offers significant opportunities to extend its business model into
countries and territories currently served by HSBC and broadens the product
range available to the enlarged customer base.
In accordance with the guidelines for accounting for business combinations, the
purchase price paid by HSBC plus related purchase accounting adjustments have
been "pushed-down" and recorded in our financial statements for the period
subsequent to March 28, 2003. This has resulted in a new basis of accounting
reflecting the fair market value of our assets and liabilities for the
"successor" period beginning March 29, 2003. Information for all "predecessor"
periods prior to the merger are presented using our historical basis of
accounting. Results for the eighty-seven day period ended March 28, 2003 and the
three-day period ended March 31, 2003 should not be considered indicative of the
results for any future quarters or the year ending December 31, 2003.
The purchase price paid by HSBC for Household International plus related
purchase accounting adjustments was valued at approximately $14.7 billion. Of
this amount, approximately $12.1 billion has been assigned to HFC and is
presented as "Additional paid-in capital" in the accompanying condensed
consolidated balance sheet.
As of the acquisition date, we recorded our assets and liabilities at their
estimated fair values. These fair value adjustments resulted in approximately
$2.5 billion of goodwill and $1.8 billion of acquired intangibles being recorded
(representing $1.3 billion of incremental goodwill and $1.4 billion of
incremental acquired intangibles). Additionally, fair value adjustments of
approximately $1.6 billion were made to increase assets and approximately $3.0
billion to increase liabilities to fair value.
5
Due to the recent timing of the acquisition, these fair value adjustments
represent preliminary estimates and are subject to further adjustment as
additional information, appraisals, or other valuation data are obtained.
Goodwill has not yet been allocated to our operating units. None of the goodwill
is expected to be deductible for tax purposes.
Approximately $1.8 billion of acquired intangibles were recorded as part of the
allocation of the purchase price. Total acquired intangibles resulting from the
merger were comprised of the following:
(In millions)
- ---------------------------------------------------------------
Trademarks, customer lists, and technology $ 200.0
Retail services merchant relationships 235.2
Purchased credit card relationships 1,386.8
- ---------------------------------------------------------------
Total acquired intangibles $ 1,822.0
===============================================================
The trademarks are not subject to amortization. The remaining acquired
intangibles are being amortized on a straight-line basis over their estimated
useful lives. These useful lives range from 5 years for technology, customer
lists and the retail services merchant relationships to approximately 9 years
for certain credit card relationships.
3. INVESTMENT SECURITIES
Investment securities consisted of the following available-for-sale investments:
March 31, December 31,
2003 2002
- --------------------------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
(In millions) Cost Value Cost Value
- --------------------------------------------------------------------------------------------------------------------
Corporate debt securities $ 2,090.2 $ 2,081.9 $ 2,030.4 $ 2,107.6
Money market funds 757.0 757.0 1,610.5 1,610.5
Certificates of deposit 12.5 12.5 9.9 9.9
U.S. government and federal agency debt securities 2,122.0 2,120.7 1,804.4 1,820.8
Marketable equity securities 18.7 19.1 28.6 19.8
Non-government mortgage backed securities 641.3 641.3 655.6 664.0
Other 439.7 438.9 412.1 424.7
- --------------------------------------------------------------------------------------------------------------------
Subtotal 6,081.4 6,071.4 6,551.5 6,657.3
Accrued investment income 44.0 44.0 50.3 50.3
- --------------------------------------------------------------------------------------------------------------------
Total available-for-sale investments $ 6,125.4 $ 6,115.4 $ 6,601.8 $ 6,707.6
====================================================================================================================
6
4. RECEIVABLES
Receivables consisted of the following:
March 31, December 31,
(In millions) 2003 2002
- -----------------------------------------------------------------------------------
Real estate secured $ 45,424.8 $ 44,052.1
Auto finance 2,161.3 2,028.1
MasterCard(1)/Visa(1) 6,856.5 7,600.2
Private label 9,191.2 9,365.2
Personal non-credit card 11,481.3 11,706.9
Commercial and other 451.5 457.2
- -----------------------------------------------------------------------------------
Total owned receivables 75,566.6 75,209.7
Purchase accounting fair value adjustments 1,706.5 --
Accrued finance charges 1,407.1 1,446.7
Credit loss reserve for owned receivables (3,296.6) (3,156.9)
Unearned credit insurance premiums and claims reserves (676.7) (632.7)
Interest-only strip receivables 1,038.5 1,083.3
Amounts due and deferred from receivable sales 816.7 878.3
- -----------------------------------------------------------------------------------
Total owned receivables, net 76,562.1 74,828.4
Receivables serviced with limited recourse 22,948.9 23,422.2
- -----------------------------------------------------------------------------------
Total managed receivables, net $ 99,511.0 $ 98,250.6
===================================================================================
(1) MasterCard is a registered trademark of MasterCard International,
Incorporated and Visa is a registered trademark of VISA USA, Inc.
Purchase accounting fair value adjustments represent preliminary adjustments
which have been "pushed down" to record our receivables at fair value at the
acquisition date and are subject to change.
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 $1,648.8 million at
March 31, 2003 and $1,638.3 million at December 31, 2002. Interest-only strip
receivables also included fair value mark-to-market adjustments of $0 at March
31, 2003 and an increase of $356.8 million at December 31, 2002.
Receivables serviced with limited recourse consisted of the following:
March 31, December 31,
(In millions) 2003 2002
- ------------------------------------------------------
Real estate secured $ 339.1 $ 456.3
Auto finance 5,226.8 5,418.6
MasterCard/Visa 9,263.0 9,272.5
Private label 3,577.1 3,577.1
Personal non-credit card 4,542.9 4,697.7
- ------------------------------------------------------
Total $ 22,948.9 $ 23,422.2
======================================================
The combination of receivables owned and receivables serviced with limited
recourse, which we consider our managed portfolio, is shown below:
March 31, December 31,
(In millions) 2003 2002
- ------------------------------------------------------
Real estate secured $ 45,763.9 $ 44,508.4
Auto finance 7,388.1 7,446.7
MasterCard/Visa 16,119.5 16,872.7
Private label 12,768.3 12,942.3
Personal non-credit card 16,024.2 16,404.6
Commercial and other 451.5 457.2
- ------------------------------------------------------
Total $ 98,515.5 $ 98,631.9
======================================================
7
5. CREDIT LOSS RESERVES
An analysis of credit loss reserves for the three months ended March 31 was as
follows:
March 31, March 31,
(In millions) 2003 2002
- -----------------------------------------------------------------------------------------
Owned receivables:
Credit loss reserves at beginning of period $ 3,156.9 $ 2,440.6
Provision for credit losses 952.2 834.1
Charge-offs (878.4) (720.1)
Recoveries 52.4 51.5
Other, net 13.5 24.5
- -----------------------------------------------------------------------------------------
Credit loss reserves for owned receivables at March 31 3,296.6 2,630.6
- -----------------------------------------------------------------------------------------
Receivables serviced with limited recourse:
Credit loss reserves at beginning of period 1,638.3 1,062.1
Provision for credit losses 379.8 428.4
Charge-offs (398.1) (323.8)
Recoveries 18.8 20.8
Other, net 10.0 9.4
- -----------------------------------------------------------------------------------------
Credit loss reserves for receivables serviced with
limited recourse at March 31 1,648.8 1,196.9
- -----------------------------------------------------------------------------------------
Total credit loss reserves for managed receivables at March 31 $ 4,945.4 $ 3,827.5
=========================================================================================
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
estimate probable losses for consumer receivables based on delinquency and
restructure status and past loss experience. Credit loss reserves take into
account whether loans have been restructured, rewritten or are subject to
forbearance, credit counseling accommodation, modification, extension or
deferment. Our credit loss reserves also take into consideration the loss
severity expected based on the underlying collateral, if any, for the loan.
Approximately two-thirds of all restructured receivables are secured products
which may have less loss severity exposure because of the underlying collateral.
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. Roll rates
and migration analysis are techniques used to estimate the likelihood that a
loan will progress through the various delinquency buckets and ultimately charge
off. Risk factors considered in establishing loss reserves on consumer
receivables include recent growth, product mix, bankruptcy trends, geographic
concentrations, economic conditions and current levels of charge-offs and
delinquencies.
HSBC intends, subject to receipt of regulatory and other approvals, to hold our
private label credit card receivables within HSBC's U.S. banking subsidiary. As
a result, HSBC anticipates regulatory accounting charge-off, loss provisioning
and account management guidelines issued by the Federal Financial Institutions
Examination Council, or FFIEC, will need to be applied to these receivables.
Implementation of such guidelines will result in private label credit card
receivables being charged-off at 6 months contractually delinquent (end of the
month 60 days after notification for receivables involving a bankruptcy) versus
the current practice of generally being charged-off the month following the
month in which the account becomes 9 months contractually delinquent (end of the
month 90 days after notification for receivables involving a bankruptcy). HSBC's
plans for ultimate collection on these receivables will therefore be
demonstrably different from the current practice and may require different
reserve requirements. As of March 31, 2003 we have not allocated any purchase
price adjustment to owned loss reserves in contemplation of this change as the
process for movement of private label card receivables to HSBC's U.S. banking
subsidiary has not been finalized and regulatory approval requests have not yet
been initiated. We currently estimate that such fair value adjustment, to the
extent we proceed with this business plan, would be an increase to owned loss
reserves for these private label credit card receivables to reflect the expected
impact of the implementation of the regulatory guidelines. We and HSBC are
evaluating whether select other products will also be held in the HSBC U.S.
banking subsidiary.
8
6. ACQUIRED INTANGIBLES
Acquired intangibles consisted of the following:
(In millions) Accumulated Carrying
March 31, 2003 Gross Amortization Value
- ----------------------------------------------------------------------------------
Trademarks, customer lists and technology $ 200.0 .2 $ 199.8
Retail services merchant relationships 235.2 $ .4 234.8
Purchased credit card relationships 1,386.8 1.2 1,385.6
- ----------------------------------------------------------------------------------
Acquired intangibles $ 1,822.0 $ 1.8 $ 1,820.2
==================================================================================
(In millions) Accumulated Carrying
December 31, 2002 Gross Amortization Value
- ----------------------------------------------------------------------------------
Purchased credit card relationships $ 1,027.3 $ 659.5 $ 367.8
Other intangibles 26.5 7.9 18.6
- ----------------------------------------------------------------------------------
Acquired intangibles $ 1,053.8 $ 667.4 $ 386.4
==================================================================================
Estimated amortization expense associated with our acquired intangibles for each
of the following years is as follows:
- -------------------------------------------------------------------
(In millions)
Year Ending December 31,
- -------------------------------------------------------------------
2003 $ 178.8
2004 235.8
2005 235.8
2006 235.8
2007 235.8
- -------------------------------------------------------------------
7. INCOME TAXES
Our effective tax rate was 35.4 percent for the three-day period ended March 31,
2003 (successor), 34.3 percent for the eighty-seven day period ended March 28,
2003 (predecessor), and 33.8 percent for the first three months of 2002
(predecessor). 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.
8. 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. Net
advances to (from) parent company and affiliates were $540.4 million at March
31, 2003 compared to ($86.9) million at December 31, 2002. Net interest
income(expense)on affiliated balances was $.1 million for the three-day period
ended March 31, 2003 (successor), ($2.3) million for the eighty-seven day period
ended March 28, 2003 (predecessor), and $12.4 million for the quarter ended
March 31, 2002.
9
9. COMPREHENSIVE INCOME
Comprehensive income (loss) was ($40.3) million for the three-day period ended
March 31, 2003 (successor) and $642.0 million for the eighty-seven day period
ended March 28, 2003 (predecessor). Comprehensive income was $797.6 million for
the quarter ended March 31, 2002 (predecessor).
The components of accumulated other comprehensive income (loss) were as follows:
March 31, December 31,
(In millions) 2003 2002
- ------------------------------------------------------------------------------------------------
Unrealized losses on cash flow hedging instruments $ (43.8) $ (685.0)
Unrealized (losses) gains on investments and
interest-only strip receivables (6.6) 292.9
Foreign currency translation adjustments -- .4
- ------------------------------------------------------------------------------------------------
Accumulated other comprehensive income (loss) $ (50.4) $ (391.7)
================================================================================================
10. NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FASB Interpretation Number 46, "Consolidation
of Variable Interest Entities" ("Interpretation No. 46"). Interpretation No. 46
clarifies the application of Accounting Research Bulletin Number 51,
"Consolidated Financial Statements" to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. Qualifying
special purpose entities as defined by FASB Statement Number 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" are excluded from the scope of Interpretation No. 46.
Interpretation No. 46 applies immediately to all variable interest entities
created after January 31, 2003 and is effective for fiscal periods beginning
after July 1, 2003 for existing variable interest entities. The adoption of
Interpretation No. 46 is currently not expected to have a material impact to our
financial position or results of operations.
On April 30, 2003, the Financial Accounting Standards Board issued Statement
Number 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" ("SFAS No. 149"). This statement amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under Statement Number 133. SFAS No.
149 is effective for contracts entered into or modified after June 30, 2003,
except as stated below and for hedging relationships designated after June 30,
2003. The guidelines are to be applied prospectively. The provisions of SFAS 149
that relate to Statement 133 implementation issues that have been effective for
fiscal quarters that began prior to June 15, 2003, should continue to be applied
in accordance with their respective effective dates. We do not expect SFAS No.
149 will have a material impact to our financial position or results of
operations.
11. SEGMENT REPORTING
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, 2002.
10
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 revenues. Income
statement information included in the table for the three months ended March 31,
2003 combines January 1 through March 28, 2003 (the "predecessor period") and
March 29 to March 31, 2003 (the "successor period") in order to present
"combined" financial results for the three month period. Fair value adjustments
related to purchase accounting and related amortization have been allocated to
Corporate, which is included in the "All Other" caption within our segment
disclosure.
11
REPORTABLE SEGMENTS - MANAGED BASIS
Managed Owned
Adjustments/ Basis Securiti- Basis
All Reconciling Consolidated zation Consolidated
(In Millions) Consumer Other Totals Items Totals Adjustments Totals
- -----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31, 2003
Net interest margin $ 2,234.8 $ (15.0) $ 2,219.8 -- $ 2,219.8 $ (683.9)(4) $ 1,535.9
Fee income 432.2 1.1 433.3 -- 433.3 (154.6)(4) 278.7
Other revenues, excluding fee income 66.3 368.8 435.1 (36.4)(1) 398.7 458.7 (4) 857.4
Intersegment revenues 34.5 1.9 36.4 (36.4)(1) -- -- --
Provision for credit losses 1,331.0 (0.3) 1,330.7 1.3 (2) 1,332.0 (379.8)(4) 952.2
Net income 349.1 146.0 495.1 (24.3) 470.8 -- 470.8
Receivables 97,576.3 939.2 98,515.5 -- 98,515.5 (22,948.9)(5) 75,566.6
Assets 103,074.4 21,723.4 124,797.8 (8,249.8)(3) 116,548.0 (22,948.9)(5) 93,599.1
- -----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31, 2002
Net interest margin $ 2,007.9 $ 63.4 $ 2,071.3 -- $ 2,071.3 $ (614.3)(4) $ 1,457.0
Fee income 338.8 2.6 341.4 -- 341.4 (155.4)(4) 186.0
Other revenues, excluding fee income 247.2 205.1 452.3 (46.4)(1) 405.9 415.1 (4) 821.0
Intersegment revenues 45.7 .7 46.4 (46.4)(1) -- -- --
Provision for credit losses 1,258.1 27.9 1,286.0 (23.5)(2) 1,262.5 (428.4)(4) 834.1
Net income 354.2 132.2 486.4 (14.5) 471.9 -- 471.9
Receivables 87,406.3 606.7 88,013.0 -- 88,013.0 (20,501.3)(5) 67,511.7
Assets 90,236.4 14,160.9 104,397.3 (8,378.0)(3) 96,019.3 (20,501.3)(5) 75,518.0
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Eliminates intersegment revenues.
(2) Eliminates bad debt recovery sales and reclassifies loss reserves between
operating segments.
(3) Eliminates investments in subsidiaries and intercompany borrowings.
(4) Reclassifies net interest margin, fee income and loss provisions relating
to securitized receivables to other revenues.
(5) Represents receivables serviced with limited recourse.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
Combined Three Three Months
Months Ended Ended
March 31, March 31,
(Dollar amounts are in millions) 2003 2002
- ---------------------------------------------------------------------------------------------------
Net income $ 470.8 $ 471.9
Net interest margin 1,535.9 1,457.0
Provision for credit losses on owned receivables 952.2 834.1
OWNED BASIS RATIOS:
Return on average owned assets 2.08% 2.48%
Return on average common shareholder's equity 18.1 20.9
Net interest margin 7.55 8.44
Consumer net charge-off ratio, annualized 4.39 3.98
Reserves as a percentage of net charge-offs 99.8 98.4
Efficiency ratio (1) 35.8 35.3
MANAGED BASIS RATIOS: (2)
Return on average managed assets 1.66% 1.96%
Net interest margin 8.53 9.28
Consumer net charge-off ratio, annualized 4.92 4.45
Reserves as a percentage of net charge-offs 102.6 98.5
Efficiency ratio (1) 31.2 29.9
- ---------------------------------------------------------------------------------------------------
March 31, December 31,
(Dollar amounts are in millions) 2003 2002
- ---------------------------------------------------------------------------------------------------
OWNED BASIS:
Total assets $ 93,599.1 $ 88,372.9
Receivables 75,566.6 75,209.7
Two-month-and-over contractual delinquency ratio 5.58% 5.38%
Reserves as a percentage of receivables 4.36 4.20
Reserves as a percentage of nonperforming loans 95.4 97.6
MANAGED BASIS: (2)
Total assets $116,548.0 $ 111,795.1
Receivables 98,515.5 98,631.9
Common equity to managed assets 10.33% 8.98%
Tangible shareholder's equity to tangible managed assets (3) 7.57 8.70
Two-month-and-over contractual delinquency ratio 5.42 5.29
Reserves as a percentage of receivables 5.02 4.86
Reserves as a percentage of nonperforming loans 112.9 114.7
(1) Ratio of total costs and expenses less policyholders' benefits to net
interest margin and other revenues less policyholders' benefits.
(2) 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.
(3) Tangible shareholder's equity to tangible managed assets ("TETMA") is a
non-GAAP financial ratio that, when calculated for Household International, is
used by certain rating agencies as a measure to evaluate its capital adequacy.
This ratio may differ from similarly named measures presented by other
companies. Because it includes obligations to purchase HSBC ordinary shares in
2006, we include our Adjustable Conversion-Rate Equity Security Units as equity
in calculating TETMA. Excluding the impact of "push-down" accounting on our
assets and common shareholder's equity, TETMA would have been 9.15%. Common
equity to total managed assets, the most directly comparable GAAP financial
measure to TETMA, is also presented in our financial highlights.
13
BASIS OF REPORTING
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the consolidated financial
statements, notes and tables included elsewhere in this report and in the
Household Finance Corporation Annual Report on Form 10-K for the year ended
December 31, 2002 (the "2002 Form 10-K"). 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. For a list of important factors that may
affect our actual results, see our 2002 Form 10-K. In addition, as an indirect
subsidiary of HSBC, we may be affected by decisions made by HSBC or the
perception investors, regulators, or rating agencies have of HSBC. Such
decisions and perceptions may also affect our forward-looking statements.
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.
Management's discussion and analysis 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.
ACQUISITION OF HOUSEHOLD INTERNATIONAL
On March 28, 2003, HSBC Holdings plc ("HSBC") completed its acquisition of
Household International by way of merger with H2 Acquisition Corporation ("H2"),
a wholly-owned subsidiary of HSBC, acquiring 100% of the voting equity interest
of Household International in a purchase business combination (see Note 2).
Subsequent to the merger, H2 was renamed "Household International, Inc." In
accordance with the guidelines for accounting for business combinations, the
purchase price paid by HSBC plus related purchase accounting adjustments have
been "pushed-down" and recorded in our financial statements for periods
subsequent to March 28, 2003, resulting in a new basis of accounting for the
"successor" period beginning March 29, 2003. As of the acquisition date, we
recorded our assets and liabilities at their estimated fair value. Due to the
recent timing of the acquisition, these fair value adjustments represent
preliminary estimates and are subject to further adjustment as additional
information, appraisals, or other valuation data are obtained. Information for
all "predecessor" periods prior to the merger is presented on the historical
basis of accounting.
To assist in the comparability of our financial results and to make it easier to
discuss and understand our results of operations, the following discussion
combines the "predecessor period" (January 1 to March 28, 2003) with the
"successor period" (March 29 to March 31, 2003) to present "combined" quarterly
results for the three months ended March 31, 2003.
Our operating results for the quarter ended March 31, 2003 do not reflect or
assume any changes to our business as a result of the merger. Though we are
still in the early stages of evaluating the impact that the merger will have on
our operations, the following items have been identified as near term
priorities:
14
. Funding benefits - we currently anticipate using HSBC's available
funding to partially fund our operations. This will reduce our
reliance on the debt markets. In addition, we anticipate lower funding
costs because we are now an indirect a subsidiary of HSBC.
. Technology integration.
. Exporting and using our consumer credit business models and "best
practices" into HSBC's operations.
. Expanded business opportunities including broader consumer product
offerings and leveraging our existing business to business with HSBC's
capabilities.
. Global processing opportunities.
It is too early to quantify the financial impact, if any, these business
modifications may have with respect to HFC.
OPERATIONS SUMMARY
Our net income was $470.8 million in the first quarter of 2003 compared with
$471.9 million in the first quarter of 2002. Higher net interest margin and fee
income due to higher levels of average receivables were more than offset by
lower securitization income due to lower securitization activity in the current
quarter, higher credit loss provision due to higher charge-offs and higher
operating expenses to support receivables growth including increased legal and
compliance costs.
SEGMENT RESULTS - MANAGED BASIS
Our Consumer segment reported net income of $349.1 million in the current
quarter compared to $354.2 million in the year-ago quarter. Increases in net
interest margin and fee income due to higher receivable levels were more than
offset by significantly lower other revenues as a result of a decline in
receivables securitized during the first quarter of 2003 and the impact of
higher securitization levels in 2002 as a result of our liquidity management
plans. Net income was also negatively impacted by higher credit loss provision
due to higher charge-offs and higher operating expenses. Credit loss provision
rose $72.9 million to $1,331.0 million as a result of increased levels of
receivables and higher charge-offs. In the first quarter of 2003, we increased
managed loss reserves by recording loss provision greater than charge-offs of
$127.9 million compared with $289.0 million in the first quarter of 2002. Higher
operating expenses were the result of additional operating costs to support the
increased receivable levels and higher compliance costs. Managed receivables
grew to $97.6 billion at March 31, 2003, compared to $97.4 billion at December
31, 2002 and $87.4 billion at March 31, 2002. The managed receivable growth
related primarily to our real estate secured receivables. Consumer Lending
branch growth, however, has been well below expectations in the first quarter of
2003 due to weak sales momentum following our intentional fourth quarter
slowdown and higher run-off. Return on average managed assets ("ROMA") was 1.35
percent in the first quarter of 2003, compared to 1.57 percent in the year-ago
quarter. The decline in the ratio reflects lower securitization revenue and
higher operating expenses.
15
BALANCE SHEET REVIEW
Increase(decrease)from
------------------------------------------------------
December 31, 2002 March 31, 2002
-------------------------- --------------------------
(All Dollar Amounts are Stated March 31,
In Millions) 2003 $ % $ %
- -----------------------------------------------------------------------------------------------------
Real estate secured $ 45,424.8 $ 1,372.7 3.1% $ 6,185.6 15.8%
Auto finance 2,161.3 133.2 6.6 (449.1) (17.2)
MasterCard/(1)//Visa/(1)/ 6,856.5 (743.7) (9.8) 1,019.8 17.5
Private label 9,191.2 (174.0) (1.9) 182.7 2.0
Personal non-credit card/(2)/ 11,481.3 (225.6) (1.9) 1,143.3 11.1
Commercial and other 451.5 (5.7) (1.2) (27.4) (5.7)
- -----------------------------------------------------------------------------------------------------
Total owned receivables $ 75,566.6 $ 356.9 0.5% $ 8,054.9 11.9%
=====================================================================================================
/(1)/ MasterCard is a registered trademark of MasterCard International,
Incorporated and Visa is a registered trademark of VISA USA, Inc.
/(2)/ Personal non-credit card receivables are comprised of the following:
March 31, December 31, March 31,
(In Millions) 2003 2002 2002
----------------------------------------------------------------------------
Domestic personal unsecured $ 6,529.5 $ 6,468.0 $ 6,104.5
Union Plus personal unsecured 977.6 1,095.4 178.5
Personal homeowner loans 3,974.2 4,143.5 4,055.0
----------------------------------------------------------------------------
Total personal non-credit
card $ 11,481.3 $ 11,706.9 $ 10,338.0
============================================================================
Owned receivables of $75.6 billion at March 31, 2003 increased $8.1 billion from
a year ago. Growth in dollars of receivables was strongest in our real estate
secured portfolio, which increased 16 percent over the year-ago period, despite
whole loan sales of $1.8 billion in the second half of 2002. Auto finance
receivables decreased $449.1 million to $2.2 billion at March 31, 2003. A strong
market driven by a favorable interest rate environment contributed to higher
auto finance originations, however, these originations were more than offset by
increased securitization activity in 2002. MasterCard and Visa receivables
increased $1.0 billion to $6.9 billion at March 31, 2003 despite increased
securitization activity in 2002. MasterCard and Visa growth was strongest in our
domestic subprime and direct mail portfolios. Private label receivables
increased $182.7 million to $9.2 billion as organic growth by existing
merchants, strong sales growth by several of our larger merchants and a $.5
billion portfolio acquisition were largely offset by increased securitization
activity in 2002. Growth in our branches contributed to the growth in personal
non-credit card receivables, but was partially offset through increased
securitization activity in 2002.
Compared to December 31, 2002, growth in our real estate secured portfolio due
to higher secondary market mortgage originations and in our auto finance
portfolio due to lower securitization levels were partially offset by seasonal
run-off in our MasterCard and Visa and private label credit card portfolios.
Owned consumer two-months-and-over contractual delinquency as a percent of owned
consumer receivables was 5.58 percent at March 31, 2003, compared with 5.38
percent at December 31, 2002 and 4.96 percent at March 31, 2002. The annualized
consumer owned charge-off ratio in the first quarter of 2003 was 4.39 percent,
compared with 4.15 percent in the prior quarter and 3.98 percent in the year-ago
quarter. See "Credit Loss Reserves" and "Credit Quality" for further discussion.
LIQUIDITY AND CAPITAL RESOURCES
The merger with HSBC has improved our access to the capital markets and
decreased our funding costs. Following completion of the merger with HSBC,
Standard & Poor's upgraded our long-term debt rating to "A" and our short-term
debt rating to "A-1"; Moody's Investors Service placed our long-term debt
ratings on review for possible upgrade and Fitch Ratings confirmed our debt
ratings and removed us from "Ratings Watch Evolving."
16
Significant liquidity and capital transactions during the first quarter of 2003,
included the following:
. We reduced our outstanding commercial paper balance. Outstanding
commercial paper at March 31, 2003 was $3.1 billion, a $1.1 billion
reduction from December 31, 2002.
. We reduced our investment security liquidity portfolio from $3.9
billion at December 31, 2002, including $2.2 billion which was
dedicated to our credit card bank, to $3.4 billion at March 31, 2003,
of which $1.9 billion was dedicated to our credit card bank. As the
maintenance of this portfolio adversely impacts our net interest
margin and net income due to the lower return generated by these
assets, we plan to reduce the non-bank portion of this portfolio given
the increased available liquidity arising from HSBC affiliates and
clients. Our insurance subsidiaries held $2.7 billion of investment
securities at March 31, 2003 and December 31, 2002.
. We issued $350.0 million of domestic medium-term notes, $1.6 billion
in foreign currency-denominated bonds and $2.05 billion of global
debt.
. We issued $271.2 million of InterNotes(SM)(retail-oriented
medium-term notes).
. In the first quarter of 2002, we accelerated securitizations which
were planned for later in 2002. As a result, initial securitizations
in the first quarter of 2003 were lower than prior year levels. The
composition of receivables securitized (excluding replenishments of
certificateholder interests) was as follows:
Three Months Ended
March 31,
(In millions) 2003 2002
------------------------------------------------------------------------
MasterCard/Visa $ 320.0 $ 600.0
Auto finance 410.8 425.0
Private label -- 500.0
Personal non-credit card 510.0 902.7
------------------------------------------------------------------------
Total $ 1,240.8 $ 2,427.7
========================================================================
Our ratio of tangible shareholders' equity to tangible managed assets ("TETMA")
was 7.57 percent at March 31, 2003 compared to 8.70 percent at December 31,
2002. This ratio represents a non-GAAP financial ratio, that when calculated for
Household International, is used by certain rating agencies to evaluate its
capital adequacy and may differ from similarly named measures presented by other
companies. This ratio was negatively impacted by the preliminary purchase
accounting adjustments which were "pushed down" to HFC which increased goodwill
by approximately $1.3 billion and increased acquired intangibles by
approximately $1.4 billion, while increasing common equity by approximately $1.4
billion. Excluding the impact of "push-down" accounting on our assets and common
shareholder's equity, TETMA would have been 9.15%. We are committed to
maintaining at least a mid single "A" rating and will be reviewing appropriate
capital levels with our rating agencies. Because they include obligations to
purchase HSBC ordinary shares in 2006, we include our Adjustable Conversion-Rate
Equity Security Units as equity in calculating TETMA.
Commercial paper, bank and other borrowings decreased to $3.1 billion at March
31, 2003 from $4.1 billion at year-end. Senior and senior subordinated debt
(with original maturities over one year) was $73.6 billion at March 31, 2003 and
$70.3 billion at December 31, 2002. Approximately $2.4 billion of the increase
was due to preliminary purchase accounting adjustments which have been "pushed
down" to record our debt at fair value.
Our banking subsidiary is subject to the supervision of the Office of the
Comptroller of the Currency ("OCC") and the Federal Deposit Insurance
Corporation ("FDIC") and is well capitalized at March 31, 2003.
Securitizations and Secured Financings Securitizations (which are structured to
receive sale treatment under Statement of Financial Accounting Standards No. 140
("SFAS No. 140") and secured financings (which do not receive sale treatment
under SFAS No. 140) of consumer receivables have been, and will continue to be,
a source of liquidity for us. Securitizations and secured financings are used to
limit our reliance on the unsecured debt markets, and often are more
cost-effective than alternative funding sources.
17
In a securitization, a designated pool of non-real estate consumer receivables
is removed from the balance sheet and transferred to an unaffiliated trust. This
unaffiliated trust is a qualifying special purpose entity ("QSPE") as defined by
SFAS No. 140 and, therefore, is not consolidated. The QSPE funds its receivable
purchase through the issuance of securities to investors, entitling them to
receive specified cash flows during the life of the securities. The securities
are collateralized by the underlying receivables transferred to the QSPE. At the
time of sale, an interest-only strip receivable is recorded, representing the
present value of the cash flows we expect to receive over the life of the
securitized receivables, net of estimated credit losses. 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. Cash
flows related to the interest-only strip receivables and servicing the
receivables are collected over the life of the underlying securitized
receivables.
In a secured financing, a designated pool of receivables, typically real estate
secured, are conveyed to a wholly owned limited purpose subsidiary which in turn
transfers 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. We do not recognize a gain in a secured financing
transaction. Because the receivables and the debt remain on our balance sheet,
revenues and expenses are reported consistently with our owned balance sheet
portfolio. Using this source of funding results in similar cash flows as issuing
debt through alternative funding sources. As of March 31, 2003, closed-end real
estate secured receivables totaling $7.8 billion secured $6.7 billion of
outstanding debt related to these transactions. At December 31, 2002, closed-end
real estate secured receivables totaling $8.5 billion secured $7.5 billion of
outstanding debt related to these transactions.
Our securitized receivables totaled $22.9 billion at March 31, 2003, compared to
$23.4 billion at December 31, 2002. We believe the market for securities backed
by receivables is a reliable, efficient and cost-effective source of funds. At
March 31, 2003, securitizations structured as sales represented 23 percent and
secured financings represented 7 percent of the funding associated with our
managed portfolio. At December 31, 2002, securitizations structured as sales
represented 24 percent and secured financings represented 8 percent of the
funding associated with our managed portfolio.
RESULTS OF OPERATIONS
Unless noted otherwise, the following discusses amounts reported in our owned
basis statements of income.
Net interest margin on an owned basis increased 5 percent from the prior-year
quarter to $1.5 billion in the first quarter of 2003. The increase was primarily
due to receivables growth and lower funding costs.
Net interest margin as a percent of average interest-earning assets, annualized,
was 7.55 percent in the first quarter of 2003 and 8.44 percent in the year-ago
quarter. The decrease in 2003 was attributable to lower yields on our
receivables due to repricings and to our liquidity-related investment portfolio
which was substantially increased after the first quarter of 2002 and has lower
yields than our receivable portfolio. This decrease was partially offset by
lower funding costs.
18
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 7
percent from the prior-year quarter to $2.2 billion in the first quarter of 2003
due to higher receivable levels and lower funding costs. Net interest margin as
a percent of average managed interest-earning assets, annualized, was 8.53
percent in the current quarter, compared to 9.28 percent in the year-ago
quarter. The decrease in 2003 was attributable to lower yields on our
receivables due to repricings and to our liquidity-related investment portfolio
which was substantially increased after the first quarter of 2002 and has lower
yields than our receivable portfolio. This decrease was partially offset by
lower fundings costs.
Net interest margin as a percent of receivables on a managed basis is greater
than on an owned basis because the managed basis portfolio includes relatively
more unsecured loans, which have higher yields.
The provision for credit losses for receivables totaled $952.2 million for the
first quarter of 2003, compared to $834.1 million in the prior-year quarter. The
provision as a percent of average owned receivables, annualized, was 5.03
percent in the first quarter of 2003, compared to 4.93 percent in the first
quarter of 2002. Receivables growth, increases in personal bankruptcy filings,
higher delinquencies and the weak economy contributed to the higher provision.
We recorded owned loss provision greater than charge-offs of $126.2 million
during the first quarter. 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 5, "Credit Loss Reserves" to the accompanying condensed
consolidated financial statements for further discussion of factors affecting
the provision for credit losses.
Total other revenues on an owned basis were $1.1 billion in the first quarter of
2003 and $1.0 billion in the first quarter of 2002 and included the following:
Combined
Three Months Three Months
Ended Ended
March 31, March 31,
(In millions) 2003 2002
- -------------------------------------------------------
Securitization revenue $ 421.4 $ 490.5
Insurance revenue 122.8 130.1
Investment income 77.0 41.9
Fee income 278.7 186.0
Other income 236.2 158.5
- -------------------------------------------------------
Total other revenues $ 1,136.1 $ 1,007.0
=======================================================
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 $421.4 million in the
first quarter of 2003, compared to $490.5 million in the prior-year quarter. The
decrease was due to decreases in the level of receivables securitized during the
first quarter of 2003 and lower excess spread. Securitization levels in the
first quarter of 2002 were higher as a result of our decision to accelerate the
timing of securitization activity planned for later in 2002. Securitization
revenue will vary each period based on the level and mix of receivables
securitized in that particular period (which 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.
19
Securitization revenue included the following:
Combined
Three Months Three Months
Ended Ended
March 31, March 31,
(In millions) 2003 2002
- -----------------------------------------------------
Net initial gains $ 35.3 $ 74.4
Net replenishment gains 128.8 148.6
Servicing revenue and
excess spread 257.3 267.5
- -----------------------------------------------------
Total $ 421.4 $ 490.5
=====================================================
Our interest-only strip receivables, net of the related loss reserve and
excluding the mark-to-market adjustment recorded in accumulated other
comprehensive income (loss), decreased $37.5 million in the first quarter of
2003 and increased $34.3 million in the year-ago period.
Insurance revenue was $122.8 million in the first quarter of 2003 compared to
$130.1 million in the year-ago period. The decrease reflected decreased sales.
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 $77.0 million in the first quarter of 2003, compared
to $41.9 million in the year-ago period. The increase was primarily due to
higher realized gains from securities sales. Gains from security sales totaled
$38.0 million in the first quarter of 2003 compared with $1.1 million in the
year-ago period.
Fee income, which includes revenues from fee-based products such as credit
cards, was $278.7 million in the first quarter of 2003 compared to $186.0
million in the year-ago period. The increase was due to higher levels of credit
card fees from both 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
$236.2 million in the first quarter of 2003, compared to $158.5 million in the
prior-year period. Higher revenues from our seasonal tax refund lending business
and our mortgage operations drove the increase in other income.
Total costs and expenses for the first quarter of 2003 were $1.0 billion
compared to $.9 billion in the comparable prior-year period. Our owned basis
efficiency ratio was 35.8 percent in the first quarter of 2003 compared to 35.3
percent in the comparable prior-year period.
Total costs and expenses included the following:
Combined
Three Months Three Months
Ended Ended
March 31, March 31,
(In millions) 2003 2002
- -------------------------------------------------------------------------
Salaries and fringe benefits $ 390.8 $ 369.3
Sales incentives 36.1 51.7
Occupancy and equipment expense 80.6 74.0
Other marketing expenses 131.9 128.0
Other servicing and administrative expenses 276.0 200.6
Amortization of acquired intangibles 14.1 19.8
Policyholders' benefits 73.4 73.8
- -------------------------------------------------------------------------
Total costs and expenses $ 1,002.9 $ 917.2
=========================================================================
20
Salaries and fringe benefits for the first quarter of 2003 were $390.8 million
compared to $369.3 million in the first quarter of 2002. The increase was
primarily due to additional staffing at our businesses as well as higher
employee benefit expenses.
Sales incentives for the first quarter of 2003 were $36.1 million compared to
$51.7 million in the comparable prior-year period. The decrease was due to lower
new loan volume in our branches and a reduction in the number of account
executives.
Occupancy and equipment expense for the first quarter of 2003 was $80.6 million
compared to $74.0 million in the comparable prior-year period. The increase was
primarily the result of higher repairs and occupancy maintenance costs.
Other marketing expenses of $131.9 million for the first quarter of 2003 were
comparable to $128.0 million in the same prior-year period.
Other servicing and administrative expenses for the first quarter of 2003 were
$276.0 million compared to $200.6 million in the comparable prior-year period.
The increase was primarily due to higher legal and compliance costs. Higher
collection expenses also contributed to the increase.
Amortization of acquired intangibles for the first quarter of 2003 was $14.1
million compared to $19.8 million in the comparable prior-year period. The
decrease was primarily attributable to acquired intangibles which were fully
amortized in 2002.
Policyholders' benefits for the first quarter of 2003 were $73.4 million and
were comparable to $73.8 million in the same prior-year period.
CREDIT LOSS RESERVES
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
estimate probable losses for consumer receivables based on delinquency and
restructure status and past loss experience. Credit loss reserves take into
account whether loans have been restructured, re-written or are subject to
forbearance, credit counseling accommodation, modification, extension, or
deferment. Our credit loss reserves also take into consideration the loss
severity expected based on the underlying collateral, if any, for the loan. 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 4, "Receivables" in the accompanying condensed
consolidated financial statements for receivables by product type and Note 5,
"Credit Loss Reserves," for our credit loss reserve methodology and an analysis
of changes in the credit loss reserves for the current and prior year quarter.
The following table sets forth owned basis credit loss reserves for the periods
indicated:
March 31, December 31, March 31,
(All dollar amounts are stated in millions) 2003 2002 2002
- -------------------------------------------------------------------------------------
Owned credit loss reserves $ 3,296.6 $ 3,156.9 $ 2,630.6
Reserves as a percent of:
Receivables 4.36% 4.20% 3.90%
Net charge-offs/(1)/ 99.8 109.0 98.4
Nonperforming loans 95.4 97.6 95.2
=====================================================================================
/(1)/ Quarter-to-date, annualized
Reserves as a percentage of receivables at March 31, 2003 reflect the impact of
the weak economy, higher delinquency levels, and the continuing uncertainty as
to the ultimate impact the weakened economy will have on charge-off and
delinquency levels.
21
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:
March 31, December 31, March 31,
(All dollar amounts are stated in millions) 2003 2002 2002
- -----------------------------------------------------------------------------------------------
Managed credit loss reserves $ 4,945.4 $ 4,795.2 $ 3,827.5
Reserves as a percent of:
Receivables 5.02% 4.86% 4.35%
Net charge-offs/(1)/ 102.6 114.3 98.5
Nonperforming loans 112.9 114.7 108.8
===============================================================================================
/(1)/ Quarter-to-date, annualized
CREDIT QUALITY
HSBC intends, subject to receipt of regulatory and other approvals, to hold our
private label credit card receivables within HSBC's U.S. banking subsidiary. As
a result, HSBC anticipates regulatory accounting charge-off, loss provisioning
and account management guidelines issued by the Federal Financial Institutions
Examination Council, or FFIEC, will need to be applied to these receivables.
Implementation of such guidelines will result in private label credit card
receivables being charged-off at 6 months contractually delinquent (end of the
month 60 days after notification for receivables involving a bankruptcy) versus
the current practice of being charged-off the month following the month in which
the account becomes 9 months contractually delinquent (the end of month 90 days
after notification for receivables involving a bankruptcy). HSBC's plans for
ultimate collection on these receivables will therefore be demonstrably
different from the current practice and may require different reserve
requirements. As of March 31, 2003 we have not allocated any purchase price
adjustment to owned loss reserves in contemplation of this change as the process
for movement of private label card receivables to HSBC's U.S. banking subsidiary
has not been finalized and regulatory approval requests have not yet been
initiated. We currently estimate that such fair value adjustment, to the extent
we proceed with this business plan, would be an increase to owned loss reserves
for these private label credit card receivables to reflect the expected impact
of the implementation of the regulatory guidelines. We and HSBC are evaluating
whether select other products will also be held in the HSBC U.S. banking
subsidiaries.
DELINQUENCY - OWNED BASIS
Two-Months-and-Over Contractual Delinquency (as a percent of consumer
receivables):
March 31, December 31, March 31,
2003 2002(1) 2002(1)
- ------------------------------------------------------------------------
Real estate secured 4.13% 3.88% 3.09%
Auto finance 2.74 3.95 2.03
MasterCard/Visa 7.71 6.37 7.02
Private label 6.55 6.90 6.67
Personal non-credit card 9.78 9.42 10.08
- ------------------------------------------------------------------------
Total Owned 5.58% 5.38% 4.96%
========================================================================
Total owned delinquency increased compared to the prior quarter. The increase in
our real estate secured portfolio reflects the seasoning and maturation of the
portfolio, the impact of first payment default repurchases from prior loan sales
and higher levels of receivables in the process of foreclosure. The increase in
MasterCard and Visa delinquency reflects lower levels of receivables due to
normal seasonal run-off. These increases were partially offset by lower auto
finance delinquency consistent with historical seasonal trends and lower private
label delinquency.
Compared to a year ago, higher levels of new bankruptcy filings and continued
softness of the economy, including higher unemployment, caused the overall rise
in the delinquency ratio. A major contributor to the higher real estate secured
delinquency ratio was reduced growth in the portfolio due to loan sales and
reduced originations, especially in the fourth quarter of 2002.
(1) Owned two-months-and-over contractual delinquency for personal non-credit
card in prior periods was overstated due to a calculation error. The
correct percentages are included in the table above. The managed
two-months-and-over contractual delinquency ratios reported for prior
periods were correct.
The tables below set out the previously reported and actual owned
two-months-and-over contractual delinquency ratio for total owned
receivables, including personal non-credit card, for each of the specified
dates:
December 31, 2002 September 30, 2002 June 30, 2002 March 31, 2002
- ------------------------------------------------------------------------------------------------------------------
As As As As
previously previously previously previously
reported Actual reported Actual reported Actual reported Actual
- ------------------------------------------------------------------------------------------------------------------
Real estate secured 3.88% 3.88% 3.22% 3.22% 2.85% 2.85% 3.09% 3.09%
Auto finance 3.95 3.95 3.32 3.32 2.98 2.98 2.03 2.03
MasterCard/Visa 6.37 6.37 6.69 6.69 6.06 6.06 7.02 7.02
Private label 6.90 6.90 7.29 7.29 6.51 6.51 6.67 6.67
Personal non-credit card 11.04 9.42 10.38 9.35 10.27 9.74 11.13 10.08
- ------------------------------------------------------------------------------------------------------------------
Total Owned 5.63% 5.38% 5.17% 5.00% 4.77% 4.69% 5.12% 4.96%
==================================================================================================================
Total Managed 5.29% 5.29% 4.93% 4.93% 4.68% 4.68% 4.87% 4.87%
==================================================================================================================
December 31, 2001 September 30, 2001 June 30, 2001 March 31, 2001
- ------------------------------------------------------------------------------------------------------------------
As As As As
previously previously previously previously
reported Actual reported Actual reported Actual reported Actual
- ------------------------------------------------------------------------------------------------------------------
Real estate secured 2.89% 2.89% 3.00% 3.00% 2.83% 2.83% 2.78% 2.78%
Auto finance 2.90 2.90 2.39 2.39 2.43 2.43 1.77 1.77
MasterCard/Visa 6.26 6.26 6.31 6.31 5.75 5.75 6.19 6.19
Private label 6.30 6.30 6.99 6.99 7.09 7.09 6.01 6.01
Personal non-credit card 10.43 9.66 10.34 9.86 10.16 9.75 10.02 9.63
- ------------------------------------------------------------------------------------------------------------------
Total Owned 4.93% 4.81% 5.08% 5.00% 4.93% 4.86% 4.77% 4.69%
==================================================================================================================
Total Managed 4.75% 4.75% 4.78% 4.78% 4.58% 4.58% 4.54% 4.54%
==================================================================================================================
22
NET CHARGE-OFFS OF CONSUMER RECEIVABLES - OWNED BASIS
Net Charge-offs of Consumer Receivables (as a percent, annualized, of average
consumer receivables):
March 31, December 31, March 31,
2003 2002 2002
- -----------------------------------------------------------------------------------------------
Real estate secured 1.14% 1.14% .73%
Auto finance 7.69 8.47 5.66
MasterCard/Visa 10.84 10.05 10.47
Private label 6.82 6.85 6.44
Personal non-credit card 10.06 9.06 9.35
- -----------------------------------------------------------------------------------------------
Total Owned 4.39% 4.15% 3.98%
===============================================================================================
Real estate charge-offs and REO expense as
a percent of average real estate secured
receivables 1.56% 1.54% 1.20%
===============================================================================================
The weakened economy drove the increase in charge-off ratios over both the
previous and prior year quarters. Compared to the previous quarter, the decrease
in auto finance charge-offs reflects improved delinquency in certain older
vintages.
Compared to the prior year quarter, the increase in the charge-off ratio was
primarily attributable to the weakened economy and higher bankruptcy filings.
Charge-offs in our personal non-credit card portfolio increased more than most
other products because our typical personal non-credit card customer is less
resilient and, therefore, more exposed to the recent economic downturn.
OWNED NONPERFORMING ASSETS
March 31, December 31, March 31,
2003 2002(1) 2002(1)
- -----------------------------------------------------------------------------------------------
Nonaccrual receivables $ 2,607.2 $ 2,401.8 $ 1,951.6
Accruing consumer receivables
90 or more days delinquent 850.2 833.2 810.9
- -----------------------------------------------------------------------------------------------
Total nonperforming receivables 3,457.4 3,235.0 2,762.5
Real estate owned 441.4 423.9 454.7
- -----------------------------------------------------------------------------------------------
Total nonperforming assets $ 3,898.8 $ 3,658.9 $ 3,217.2
===============================================================================================
Credit loss reserves as a percent of 95.4% 97.6% 95.2%
nonperforming receivables
===============================================================================================
(1) Nonaccrual receivables, total nonperforming receivables and total
nonperforming assets for personal non-credit card in prior periods were
overstated due to a calculation error. As a result, credit loss reserves
as a percentage of nonperforming receivables was understated in those
periods. The correct amounts are included in the table above. The managed
nonperforming assets statistics reported for prior periods were correct.
The tables below set out the previously reported and actual owned
nonperforming assets statistics for total owned receivables including
personal non-credit card, for each of the specified dates:
(In millions) December 31, 2002 September 30, 2002 June 30, 2002 March 31, 2002
- -------------------------------------------------------------------------------------------------------------------------------
As As As As
Previously Previously Previously Previously
Reported Actual Reported Actual Reported Actual Reported Actual
- -------------------------------------------------------------------------------------------------------------------------------
Nonaccrual receivables $2,547.8 $2,401.8 $2,205.7 $2,120.7 $2,069.5 $2,029.5 $2,027.6 $1,951.6
Accruing consumer receivables
90 or more days delinquent 833.2 833.2 796.8 796.8 723.0 723.0 810.9 810.9
- -------------------------------------------------------------------------------------------------------------------------------
Total nonperforming receivables 3,381.0 3,235.0 3,002.5 2,917.5 2,792.5 2,752.5 2,838.5 2,762.5
Real estate owned 423.9 423.9 437.0 437.0 449.8 449.8 454.7 454.7
- -------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $3,804.9 $3,658.9 $3,439.5 $3,354.5 $3,242.3 $3,202.3 $3,293.2 $3,217.2
===============================================================================================================================
Credit loss reserves as a percent
of nonperforming receivables 93.4% 97.6% 95.3% 98.1% 97.1% 98.5% 92.7% 95.2%
===============================================================================================================================
(In millions) December 31, 2001 September 30, 2001 June 30, 2001 March 31, 2001
- -------------------------------------------------------------------------------------------------------------------------------
As As As As
Previously Previously Previously Previously
Reported Actual Reported Actual Reported Actual Reported Actual
- -------------------------------------------------------------------------------------------------------------------------------
Nonaccrual receivables $1,853.5 $1,801.5 $1,765.0 $1,735.0 $1,621.8 $1,598.8 $1,581.3 $1,559.3
Accruing consumer receivables
90 or more days delinquent 814.1 814.1 773.5 773.5 714.7 714.7 649.9 649.9
Renegotiated commercial loans -- -- -- -- 12.3 12.3 12.3 12.3
- -------------------------------------------------------------------------------------------------------------------------------
Total nonperforming receivables 2,667.6 2,615.6 2,538.5 2,508.5 2,348.8 2,325.8 2,243.5 2,221.5
Real estate owned 392.6 392.6 357.8 357.8 360.0 360.0 344.6 344.6
- -------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $3,060.2 $3,008.2 $2,896.3 $2,866.3 $2,708.8 $2,685.8 $2,588.1 $2,566.1
===============================================================================================================================
Credit loss reserves as a percent
of nonperforming receivables 91.5% 93.3% 89.2% 90.2% 92.7% 93.6% 93.2% 94.1%
===============================================================================================================================
RESTRUCTURE STATISTICS - MANAGED BASIS
The tables below summarize restructure statistics in HFC's managed basis
portfolio as of March 31, 2003 and December 31, 2002 and in Household
International's domestic managed basis portfolio as of March 31, 2002. HFC did
not track separate restructure statistics for its portfolio for any period prior
to the year ended December 31, 2002.
23
TOTAL RESTRUCTURED BY RESTRUCTURE PERIOD/(1)/ March 31, December 31, March 31,
(Managed Basis) 2003 2002 2002
- ----------------------------------------------------------------------------------------------------------
Never restructured 83.3% 84.4% 82.8%
Restructured:
Restructured in the last 6 months 7.5 6.5 8.6
Restructured in the last 7-12 months 3.6 4.1 4.6
Previously Restructured 5.6 5.0 4.0
- ----------------------------------------------------------------------------------------------------------
Total ever Restructured 16.7 15.6 17.2
- ----------------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0%
==========================================================================================================
TOTAL RESTRUCTURED BY PRODUCT/(1)/ March 31, December 31, March 31,
(Managed Basis) 2003 2002 2002
- ----------------------------------------------------------------------------------------------------------
(In millions)
Real estate secured $ 9,163.4 $ 8,473.2 $ 8,880.6
Auto finance 1,247.7 1,242.9 1,005.6
MasterCard/Visa 549.2 540.8 526.3
Private label 1,225.8 1,255.4 1,269.2
Personal non-credit card 4,127.5 3,768.1 4,288.6
- ----------------------------------------------------------------------------------------------------------
Total $ 16,313.6 $ 15,280.4 $ 15,970.3
==========================================================================================================
(As a percent of managed receivables)
Real estate secured 20.0% 19.0% 19.8%
Auto finance 16.9 16.7 15.2
MasterCard/Visa 3.4 3.2 3.5
Private label 9.6 9.7 10.9
Personal non-credit card 25.8 23.0 27.6
- ----------------------------------------------------------------------------------------------------------
Total 16.7% 15.6% 17.2%
==========================================================================================================
/(1)/ Excludes commercial and other. Amounts also include accounts as to which
the delinquency status has been reset to current for reasons other than
restructuring (e.g. correcting the misapplication of a timely payment).
The amount of managed receivables in forbearance, modification, Credit Card
Services consumer credit counseling accommodations, rewrites or other account
management techniques for which we have reset delinquency and that is not
included in the restructured statistics above was approximately $1.0 billion or
..93 percent of managed receivables at March 31, 2003, $900 million or .84
percent of managed receivables at December 31, 2002 and for Household
International's domestic restructured statistics, approximately $600 million or
..59 percent of managed receivables at March 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
We maintain a system of internal controls and procedures designed to provide
reasonable assurance as to the reliability of our published financial statements
and other disclosures included in this report. Our Board of Directors, operating
through its audit committee which is composed entirely of independent outside
directors, provides oversight to our financial reporting process.
Within the 90-day period prior to the date of this report, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. Based
upon that evaluation, our Chief Executive Officer and our Principal Financial
Officer concluded that our disclosure controls and procedures are effective in
timely alerting them to material information relating to Household
International, Inc. (including its consolidated subsidiaries) required to be
included in this quarterly report on Form 10-Q.
There have been no significant changes in our internal controls or in other
factors which could significantly affect internal controls subsequent to the
date that we carried out our evaluation.
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 Selected Debt Securities Ratings.
99.2 Certification of Chief Executive Officer.
99.3 Certification of Principal Financial Officer.
(b) Reports on Form 8-K
During the first quarter of 2003, the Registrant filed the
following Current Reports on Form 8-K:
. Report filed January 21, 2003 with respect to the
computation of ratio of earnings to fixed charges and
selected consolidated financial statements and selected
financial information of Household Finance Corporation.
. Report filed March 19, 2003 with respect to a press
release announcing Household International, Inc had
agreed to the entry by the Securities and Exchange
Commission ("SEC") of a cease-and-desist order relating
to certain of Household's disclosures about its
restructuring and other account management policies.
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: May 15, 2003 By: /s/ Steven L. McDonald
--------------------------
Steven L. McDonald
Executive Vice President and Chief
Accounting Officer and Controller
(as principal financial officer)
25
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, David A. Schoenholz, Chairman and Chief Executive Officer of Household
Finance Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Household Finance
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: May 15, 2003
/s/ David A. Schoenholz
--------------------------
David A. Schoenholz
Chairman and Chief Executive Officer
26
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Steven L. McDonald, Executive Vice President and Chief Accounting Officer and
Controller (as Principal Financial Officer) of Household Finance Corporation,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Household Finance
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: May 15, 2003
/s/ Steven L. McDonald
----------------------------------------
Steven L. McDonald
Executive Vice President and
Chief Accounting Officer and Controller
27
EXHIBIT INDEX
12 Statement of Computation of Ratio of Earnings to Fixed Charges.
99.1 Selected Debt Securities Ratings.
99.2 Certification of Chief Executive Officer.
99.3 Certification of Principal Financial Officer.
28