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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-75
HOUSEHOLD FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-1239445
(State of Incorporation) (I.R.S. Employer Identification No.)
2700 SANDERS ROAD, 60070
PROSPECT HEIGHTS, ILLINOIS (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (708) 564-5000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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9% SENIOR SUBORDINATED NOTES, DUE SEPTEMBER 28, 2001 NEW YORK STOCK EXCHANGE
9 5/8% SENIOR SUBORDINATED NOTES, DUE JULY 15, 2000 NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
NONE
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 IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. /X/
AS OF MARCH 16, 1994, THERE WERE 1,000 SHARES OF REGISTRANT'S COMMON STOCK
OUTSTANDING, ALL OF WHICH ARE OWNED BY HOUSEHOLD INTERNATIONAL, INC.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION J(1)
(A) AND (B) OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE REDUCED
DISCLOSURE FORMAT.
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HOUSEHOLD FINANCE CORPORATION
PART I.
ITEM 1. BUSINESS.
Household Finance Corporation ("HFC" or the "Company") is a subsidiary of
Household International, Inc. ("Household International"). HFC and its
subsidiaries offer a diversified range of financial services. The principal
products of HFC's consumer financial services business is the making of cash
loans, including home equity loans secured by first and second mortgages and
unsecured credit advances (including revolving and closed-end personal loans) to
middle-income consumers in the United States and Australia. Loans are made
through branch lending offices and through direct marketing efforts. In 1992,
HFC launched a new portfolio acquisition business focusing on open-end and
closed-end home equity loan products. In 1993, HFC acquired approximately 3,800
new accounts aggregating $430 million in such receivables. In addition, in 1993
HFC acquired the right to service without recourse approximately 1.1 million
accounts aggregating approximately $2.0 billion in unsecured loans. The Company
believes that the portfolio acquisition business provides an additional source
for developing new customer relationships.
Through banking subsidiaries located in Salinas, California and Wood Dale,
Illinois, the Company issues both VISA* and Mastercard* credit cards. These
banks engage only in consumer credit card operations.
Household Retail Services ("HRS") is a revolving credit merchant
participation business. Through subsidiaries of HFC, HRS provides sales
financing and purchases, originates and services merchants' private-label
revolving charge accounts.
In conjunction with its consumer finance operations and where applicable
laws permit, HFC makes available to customers credit life, credit accident and
health, and household contents insurance. Credit life and credit accident and
health insurance are generally written directly by, or reinsured with, HFC's
insurance subsidiary, Alexander Hamilton Life Insurance Company of America
("Alexander Hamilton"). Alexander Hamilton is also engaged in the sale of
ordinary life, annuity, and specialty insurance products to the general public
through approximately 16,300 independent agents throughout the United States.
HFC also is engaged in commercial finance involving leveraged leases,
privately-placed, limited-term preferred stocks, and selected commercial
financing of equipment or property. At December 31, 1991 the Company
discontinued lending in certain commercial product lines. See "Management's
Discussion and Analysis" on pages 13 and 14 for further discussion of
discontinued commercial product lines.
ITEM 2. PROPERTIES.
Substantially all of HFC's branch office and headquarters space is rented
with the exception of its corporate headquarters in Prospect Heights, Illinois;
Alexander Hamilton's headquarters in Farmington Hills, Michigan; and
administration buildings in Northbrook, Illinois and Salinas, California.
ITEM 3. LEGAL PROCEEDINGS.
There is no litigation pending which management and counsel for the Company
consider to be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Omitted.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
All 1,000 shares of HFC's outstanding common stock are owned by Household
International. Consequently, there is no market in HFC's common stock. HFC also
has outstanding 1 million depositary shares which represent 1/3,000 share of
term cumulative preferred stock (with a liquidation value of $.3 million per
share) to institutional investors not affiliated with HFC.
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* VISA and MasterCard are registered trademarks of VISA USA, Inc. and
MasterCard International Incorporated, respectively.
1
During 1993 HFC did not pay cash dividends on its common stock. During 1992
HFC paid cash dividends on its common stock to Household International totaling
$175.3 million. In addition, HFC paid cash dividends on its preferred stock
totaling $8.7 and $10.3 million in 1993 and 1992, respectively.
ITEM 6. SELECTED FINANCIAL DATA.
Omitted.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
MANAGEMENT'S DISCUSSION AND ANALYSIS
BUSINESS SEGMENT DATA
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
The combination of the Company's consumer and continuing commercial product
lines are referred to as Finance and Banking. Assets of liquidating commercial
product lines, which are separately managed as receivables are collected or
otherwise disposed of, have been disclosed separately in the consolidated
balance sheets and as a separate business segment, referred to as Liquidating
Commercial Lines. To define and report the results of operations, the Company
refers to its Finance and Banking and Individual Life Insurance segments as its
Core Business.
YEAR ENDED DECEMBER 31
-------------------------------
1993 1992 1991
--------- --------- ---------
(ALL DOLLAR AMOUNTS ARE STATED
IN MILLIONS)
Net Income:
Finance and Banking................... $ 196.7 $ 210.1 $ 270.8
Individual Life Insurance............. 45.2 41.7 35.0
--------- --------- ---------
Core Business..................... 241.9 251.8 305.8
Liquidating Commercial Lines.......... (21.5) (12.3) (149.1)
--------- --------- ---------
Total............................. $ 220.4 $ 239.5 $ 156.7
========= ========= =========
Return on average common shareholder's
equity:
Core Business (1)(2).............. 22.38% 19.62% 24.35%
Total (1)(2)...................... 13.80 16.13 10.34
Return on average owned assets:
Core Business..................... 1.40 1.54 1.95
Total............................. 1.16 1.30 .87
--------- --------- ---------
Assets:
Finance and Banking................... $11,335.5 $10,369.0 $10,042.9
Individual Life Insurance............. 6,959.0 5,926.2 5,273.8
--------- --------- ---------
Core Business..................... 18,294.5 16,295.2 15,316.7
Liquidating Commercial Lines.......... 1,555.7 1,851.2 2,030.5
--------- --------- ---------
Total............................. $19,850.2 $18,146.4 $17,347.2
========= ========= =========
Receivables Owned:
Finance and Banking................... $ 8,959.9 $ 7,856.8 $ 7,938.1
Liquidating Commercial Lines.......... 1,189.9 1,619.0 1,826.6
--------- --------- ---------
Total............................. $10,149.8 $ 9,475.8 $ 9,764.7
========= ========= =========
Receivables Managed:
Finance and Banking................... $16,091.0 $15,803.7 $15,014.2
Liquidating Commercial Lines.......... 1,189.9 1,619.0 1,826.6
--------- --------- ---------
Total............................. $17,280.9 $17,422.7 $16,840.8
========= ========= =========
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(1) Effective December 31, 1993 the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" ("FAS No. 115") and has included unrealized holding
gains and losses on available-for-sale investments as a net amount in a
separate component of common shareholder's equity, net of income taxes
and, for certain investments of the life insurance operation, related
unrealized deferred insurance policy acquisition cost adjustments. The
1993 return on average common shareholder's equity ratio was not
materially impacted by the adoption of FAS No. 115.
(2) The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("FAS No. 109") effective January 1, 1993.
As a result of implementing FAS No. 109, retained earnings for all periods
prior to December 31, 1993 have been reduced by approximately $62 million
from the amounts previously reported.
2
CONSOLIDATED RESULTS OF OPERATIONS
Net income in 1993 was $220.4 million, down from 1992 net income of $239.5
million. Net income in 1992 was 53 percent higher than 1991 earnings of $156.7
million when the Company reported a large loss in the Liquidating Commercial
Lines segment associated with its decision to withdraw from the higher-risk
portion of its commercial business.
During 1993, net income was negatively impacted by the following:
- The enactment of new Federal tax legislation which increased the statutory
corporate income tax rate from 34 percent to 35 percent retroactive to
January 1, 1993 and decreased net income by $5.8 million.
- Implementation of Statement of Financial Accounting Standards No. 106 on
postretirement benefits, which the Company adopted effective January 1,
1993, which reduced net income by $7 million.
The following summarizes key highlights of the Company's operations during
1993:
- Domestic consumer finance earnings increased over the prior year primarily
due to wider interest spreads on variable rate products and growth in the
managed portfolio. This improvement was more than offset by lower earnings
in the Company's bankcard and continuing commercial businesses. Lower
bankcard earnings were caused by higher provisions related to the
strengthening of credit loss reserves and higher operating expenses.
Earnings from the continuing commercial business declined due to reduced
margin, lower levels of earning assets in the aircraft portfolio and lower
gains on the dispositions of assets.
- Consumer two-months-and-over contractual delinquency ("delinquency")
continued to decline throughout the year due to tighter credit standards
implemented in prior years and an improving economic environment. Total
consumer delinquency as a percent of managed consumer receivables was 4.33
percent at December 31, 1993, down significantly from 5.37 percent at
December 31, 1992 and was at the lowest level since 1988. The full year
chargeoff ratio for the managed consumer portfolio declined to 3.61
percent from 3.81 percent in 1992.
The Company increased credit loss reserves for Finance and Banking managed
receivables by $33.4 million, or 9 percent over 1992, despite a $142.4
million decrease in delinquency. The increase was due to continued caution
regarding the uncertainty of the economic outlook, continued relatively
high chargeoff levels and more conservative recognition of recourse
obligations for receivables serviced with limited recourse. Reserves, as a
percent of the managed Finance and Banking receivable portfolio, were at
their highest level since the Company adopted the contractual basis of
delinquency in 1990.
- The Liquidating Commercial Lines ("LCL") segment experienced an increased
loss due to the resolution of the Company's largest problem loan in the
third quarter. The Company reached a cash settlement on a nonaccrual
equipment finance loan which resulted in a higher chargeoff than expected
and a complete disposition of the loan, with no continuing involvement on
the part of the Company. The Company anticipates that future LCL results
will improve. LCL assets totaled $1.6 billion, down $295.5 and $474.8
million from year-end 1992 and 1991, respectively. This trend is
consistent with management's strategy to dispose of these assets over
several years. Nonperforming LCL assets declined $191.6 million during the
year and reached their lowest level since June 1991. Credit loss reserves
at December 31, 1993 as a percent of both LCL receivables and
nonperforming loans increased over the year-ago period.
- Owned assets totaled $19.9 billion at December 31, 1993, up 9 percent from
year-end 1992. The increase primarily was due to a 20 percent increase in
the investment securities portfolio, principally in the Individual Life
Insurance segment, and a 14 percent increase in owned Finance and Banking
receivables. Total managed assets (owned assets plus receivables serviced
with limited recourse) were $27.0 billion, up 3 percent from year-end
1992. Household International invested an additional $70 million of
capital into HFC in 1993. As a result, the Company's debt to equity ratio
declined from 6.8 at December 31, 1992 to 6.2 at December 31, 1993.
3
- In July 1993 Standard & Poor's Corporation upgraded its credit rating
outlook for the Company, and in November 1993 Moody's Investor Services,
Inc. upgraded the Company's credit rating. These upgrades were a result of
improving trends in both capital levels and asset quality.
CONSOLIDATED CREDIT LOSS RESERVES
Total managed credit loss reserves, which include reserves for recourse
obligations for receivables serviced, were as follows:
AT DECEMBER 31
--------------
1993 1992
------ ------
(IN MILLIONS)
Finance and Banking:
Owned................................. $279.8 $220.0
Serviced with limited recourse........ 134.5 160.9
------ ------
Managed................................. 414.3 380.9
Liquidating Commercial Lines............ 172.9 203.3
------ ------
Total managed credit loss reserves...... $587.2 $584.2
====== ======
The level of reserves for credit losses is based on delinquency and
chargeoff experience by product and management's evaluation of economic
conditions, including regional considerations. See Note 1, "Summary of
Significant Accounting Policies" on pages F-7 and F-8 in the accompanying
financial statements for further description of the basis for establishing such
reserves. See Note 5, "Credit Loss Reserves" in the accompanying financial
statements for an analysis of credit loss reserves. While management allocates
reserves among the Company's various products and segments, all reserves are
considered to be available to cover total loan losses.
CONSOLIDATED CREDIT LOSS RESERVES (AS A PERCENT OF RECEIVABLES)
AT DECEMBER
31
-------------
1993 1992
----- -----
Owned
Finance and Banking................... 3.12% 2.80%
Liquidating Commercial Lines.......... 14.53 12.56
----- -----
Total owned............................. 4.46% 4.47%
===== =====
Managed
Finance and Banking................... 2.57% 2.41%
Liquidating Commercial Lines.......... 14.53 12.56
----- -----
Total managed........................... 3.40% 3.35%
===== =====
During 1993 the Company strengthened its managed credit loss reserves for
Finance and Banking receivables as described on page 3. Reserves for Liquidating
Commercial Lines decreased from year-end 1992 levels primarily due to the
continued disposition of LCL receivables, including the resolution of a large
nonaccrual equipment finance loan as described earlier. Despite the dollar
decrease in LCL reserve levels, credit loss reserves at December 31, 1993 as a
percent of both LCL receivables and nonperforming loans increased over December
31, 1992 and 1991.
CREDIT MANAGEMENT POLICIES
The Company's credit portfolios and credit management policies historically
have been divided into two distinct components -- consumer and commercial. For
consumer products, credit policies focus on product
4
type and specific portfolio risk factors. The consumer credit portfolio is
diversified by product and geographic location. The commercial credit portfolio
is monitored by individual transaction as well as being evaluated by overall
risk factors. See Note 3, "Finance and Banking Receivables" and Note 4,
"Liquidating Commercial Assets" in the accompanying financial statements for
receivables by product type.
CONSUMER
The consumer credit risk management process has four key elements:
- Computerized scoring systems to assess the risk characteristics of new
applicants and monitor the payment behavior of existing customers for
early warning signs of troubled accounts.
- A centralized credit system for past due accounts to make the collection
process more productive and provide the analytical capability to measure
the effectiveness of collection strategies.
- A chargeoff policy intended to eliminate problem loans early and improve
the quality of the remaining portfolio.
- A senior executive position of credit risk manager in each consumer
lending operation which places credit management at a high level of
priority and provides the means for the credit function to interact more
productively with other business functions.
Based on this credit risk management process, expected credit losses for
each consumer product are estimated on a statistical basis.
The Company suspends accrual of interest on all consumer receivables when
payments are three months contractually past due, except for bankcards and
private-label credit cards. On these credit card receivables, consistent with
industry practice, interest continues to accrue until the receivable is charged
off. Consumer loans are charged off when an account is contractually delinquent
for a pre-established period of time. The period of time is dependent on the
terms, collateral and credit loss experience of each consumer product category.
This period ranges from 6 to 9 months.
The Company's domestic consumer businesses lend funds nationwide, with
California accounting for 22 percent of total managed domestic consumer
receivables. It is the only state with receivables in excess of 10 percent of
domestic managed receivables. The Company's Australian operations accounted for
2 percent of managed consumer receivables at December 31, 1993. Due to its
centralized underwriting, collection and processing functions, the Company can
quickly revise underwriting standards and intensify collection efforts for
specific geographic locations.
COMMERCIAL
Commercial loans, in continued or discontinued product lines, are
underwritten based upon specific criteria by product, which include the
following items: borrower's financial strength, underlying value of collateral,
ability of the property/business to generate cash flow and pricing
considerations. For financing commitments in excess of $1 million, the loan
request must be approved by an investment committee consisting of senior
management. The financial and operating performance of all borrowers is
monitored and reported to management on an ongoing basis. Additionally, the
conclusions of this monitoring process are reported to senior management on a
quarterly basis. Substantially all commercial chargeoffs have related to the
product lines which are being liquidated.
The Company administers a classification of assets policy whereby, on a
quarterly basis, all commercial credits are reviewed and assigned a rating based
on a process similar to that used by bank regulatory authorities. The review
process specifically addresses whether any commercial loans need to be charged
off and uses the following criteria: (a) ability of the borrower to make loan
payments; (b) ability of the property or business to generate cash flow; (c)
value of collateral; (d) other debt associated with the property or business;
and (e) passage of title or in-substance possession of collateral. The quarterly
evaluation of the adequacy of the credit loss reserve is based on this review
process and management's evaluation of probable
5
future losses in the portfolio as a whole given its geographic and industry
diversification and historical loss experience. Management also evaluates the
potential impact of existing and anticipated economic conditions on the
portfolio in establishing credit loss reserves.
Commercial loans are placed on nonaccrual when they become 90 days past due,
or sooner if the Company believes that the loan has experienced significant
adverse developments that could result in a loss of interest or principal. There
are no commercial loans that are 90 days past due and on full accrual status.
Loans are disclosed as renegotiated loans or troubled debt restructurings if the
rate of interest has been reduced because of the inability of the borrower to
meet the original terms of the loan. Such loans continue to accrue interest at
the renegotiated rate, unless they become 90 days past due, because the Company
believes the borrowers will be able to meet their obligations following the
restructuring.
Commercial loans that are modified in the normal course of business, for
which additional consideration is received or significant concessions are not
made, are not reported as renegotiated loans or troubled debt restructurings.
Real estate owned is recorded at the lower of cost or fair value less estimated
costs to sell. These values are periodically reviewed and reduced, if
appropriate.
6
FINANCE AND BANKING STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
-------------------------------
1993 1992 1991
--------- --------- ---------
(ALL DOLLAR AMOUNTS ARE STATED
IN MILLIONS)
Finance income.................................... $ 1,205.0 $ 1,187.5 $ 1,423.1
Interest income from noninsurance investment
securities....................................... 40.9 34.8 35.9
Interest expense.................................. 446.9 511.0 726.2
--------- --------- ---------
Net interest margin............................... 799.0 711.3 732.8
--------- --------- ---------
Securitization and servicing fee income........... 383.4 369.2 386.0
Insurance premiums and contract revenues.......... 114.7 109.2 115.4
Investment income................................. 11.7 10.5 10.5
Fee income........................................ 58.9 49.6 45.3
Other income...................................... 56.5 59.6 59.4
--------- --------- ---------
Other revenues.................................... 625.2 598.1 616.6
--------- --------- ---------
Net interest margin and other revenues............ 1,424.2 1,309.4 1,349.4
Provision for credit losses on owned
receivables...................................... 404.4 333.0 339.2
Costs and expenses:
Operating expenses.............................. 673.0 631.1 571.4
Policyholders' benefits......................... 60.3 56.4 55.8
Income taxes.................................... 89.8 78.8 112.2
--------- --------- ---------
Net income........................................ $ 196.7 $ 210.1 $ 270.8
========= ========= =========
End-of-period receivables:
Owned........................................... $ 8,959.9 $ 7,856.8 $ 7,938.1
Serviced with limited recourse.................. 7,131.1 7,946.9 7,076.1
--------- --------- ---------
Receivables managed............................... 16,091.0 15,803.7 15,014.2
Serviced with no recourse......................... 1,649.5 370.9 804.1
--------- --------- ---------
Receivables owned or serviced..................... $17,740.5 $16,174.6 $15,818.3
========= ========= =========
Average receivables:
Owned........................................... $ 8,458.2 $ 8,136.9 $ 8,777.3
Serviced with limited recourse.................. 7,477.4 6,829.3 5,218.8
--------- --------- ---------
Average receivables managed....................... 15,935.6 14,966.2 13,996.1
Serviced with no recourse......................... 1,055.6 1,071.8 745.1
--------- --------- ---------
Average receivables owned or serviced............. $16,991.2 $16,038.0 $14,741.2
========= ========= =========
Return on average owned assets.................... 1.80% 1.96% 2.51%
--------- --------- ---------
7
OVERVIEW
Finance and Banking earnings decreased to $196.7 million from $210.1 million
in 1992. As described earlier, improved earnings in the domestic consumer
finance operations were more than offset by lower earnings in the bankcard and
continuing commercial operations.
RECEIVABLES
Managed receivables at December 31, 1993 were $16.1 billion, up 2 percent
compared to December 31, 1992 and up 7 percent from year-end 1991 as all
businesses continued to apply conservative underwriting standards because of
continued economic uncertainty. In addition, domestic growth was limited by
lower market demand than seen in previous years and by additional run-off of
second mortgages from customer loan refinancings. Changes in owned receivables
and receivables serviced with limited recourse may vary from period to period
depending on the timing and significance of securitization transactions in a
particular period. The Company securitized and sold with limited recourse
approximately $1.7 billion of receivables in 1993 compared to $2.2 billion in
1992.
NET INTEREST MARGIN
Net interest margin was $799.0 million in 1993, up from $711.3 million in
1992 due to higher levels of interest-earning assets, wider spreads on variable
rate products and a shift in product mix towards higher yielding bankcard,
merchant participation and other unsecured receivables. Spreads on variable rate
products in 1993 exceeded those achieved in the prior year periods. The Company
does not anticipate that spreads in 1994 will remain at the level reached in
1993 because of overall conditions in the capital markets.
Due to the growth in securitized assets over the past several years, the
comparability of net interest margin between years may be affected by the level
and type of assets securitized. As receivables are securitized and sold rather
than held in portfolio, net interest income is shifted to securitization and
servicing fee income. Net interest margin on an owned basis as a percent of
average owned interest-earning assets was 8.9 percent, compared to 8.1 percent
in 1992 and 7.8 percent in 1991. Net interest margin on a managed basis,
assuming receivables securitized and sold were instead held in the portfolio,
increased to $1.3 billion in 1993 from $1.2 billion in 1992 and, as a percent of
average managed interest-earning assets, increased to 8.1 percent from 8.0
percent in 1992 and 7.8 percent in 1991. Net interest margin on an owned basis
was greater than on a managed basis because home equity receivables, which have
lower spreads, are a larger portion of the portfolio serviced with limited
recourse than of the owned portfolio.
OTHER REVENUES
SECURITIZATION AND SERVICING FEE INCOME consists of two components: income
associated with the securitization and sale of receivables with limited recourse
and servicing fee income related to the servicing of unsecured receivables.
Securitization income increased in 1993 as the total managed receivables
portfolio continued to grow. Securitization income as a percent of average
receivables serviced with limited recourse was 4.94 percent in 1993, compared to
5.23 percent in 1992 and 7.16 percent in 1991. This decrease primarily was due
to a shift toward home equity loans in the securitized portfolio, resulting in
narrower spreads.
Servicing fee income increased over 1992 despite little year-over-year
change in average receivables serviced with no recourse. This increase primarily
was due to a change in the composition of the serviced portfolio which occurred
in the third quarter of 1993 when the Company began servicing an unsecured
consumer loan portfolio without recourse which provided a higher servicing fee.
This portfolio totaled $1.3 billion at December 31, 1993.
INSURANCE PREMIUMS AND CONTRACT REVENUES were $114.7 million, up from $109.2
million in 1992, but down slightly from $115.4 million in 1991 due to changes in
sales volumes of specialty and credit insurance. INVESTMENT INCOME was $11.7
million, up 11 percent compared to $10.5 million in both 1992 and 1991 due to
higher gains on sales of investments from the specialty and credit insurance
portfolio. FEE INCOME includes revenues from fee-based products such as
bankcards and private-label credit cards. Fee income was $58.9 million, up from
$49.6 million in 1992 and $45.3 million in 1991 primarily due to interchange and
other fees related to growth in owned bankcard receivables. OTHER INCOME was
essentially flat compared to 1992 and 1991.
8
PROVISION FOR CREDIT LOSSES
The provision for credit losses for receivables on an owned basis totaled
$404.4 million, up 21 percent from $333.0 million in 1992 and up 19 percent from
1991's level due to continued caution regarding the uncertainty of the economic
outlook and continued relatively high chargeoff levels.
EXPENSES
Operating expenses, which the Company defines as salaries and fringe
benefits plus other operating expenses, were $673.0 million, up 7 percent over
1992. Operating expenses as a percent of average receivables owned or serviced
were 3.96 percent, up slightly from 3.93 percent in 1992 and 3.88 percent in
1991 due to higher costs associated with servicing a larger average managed
portfolio and additional expenses related to real estate owned.
The effective tax rate in 1993 was 31.3 percent compared to 27.3 percent in
1992 and 29.3 percent in 1991. The increase in the effective tax rate over 1992
primarily was due to the impact of the increase in the statutory Federal income
tax rate from 34 percent to 35 percent and a change in the treatment of purchase
accounting adjustments resulting from the adoption of FAS No. 109.
CREDIT QUALITY
The Company generally experienced improved credit quality during 1993. This
improvement was a result of better domestic economic conditions and the higher
quality of recently originated receivables. At year-end 1993 delinquency had
fallen for seven consecutive quarters. Chargeoffs in 1993 were below the prior
year.
DELINQUENCY
Delinquency levels are monitored for both receivables owned and receivables
managed. The Company looks at delinquency levels which include receivables
serviced with limited recourse because this portfolio is subjected to
underwriting standards comparable to the owned portfolio, is managed by
operating personnel without regard to portfolio ownership and results in a
similar credit loss exposure for the Company.
TWO-MONTHS-AND-OVER CONTRACTUAL DELINQUENCIES
(AS A PERCENT OF MANAGED CONSUMER RECEIVABLES)
1993 QUARTER END 1992 QUARTER END
----------------------------- -----------------------------
4 3 2 1 4 3 2 1
----- ----- ----- ----- ----- ----- ----- -----
Domestic:
Home equity...................... 3.37% 3.62% 3.44% 3.71% 4.36% 4.84% 5.16% 6.03%
Other secured.................... 2.22 3.41 6.14 5.25 5.46 7.60 6.70 7.51
Bankcard......................... 3.61 3.87 3.83 3.81 3.90 4.33 4.43 4.54
Merchant participation........... 5.01 5.43 5.73 6.36 6.34 6.81 6.45 6.46
Other unsecured.................. 7.19 7.70 8.04 8.45 8.75 9.21 9.51 10.44
----- ----- ----- ----- ----- ----- ----- -----
Total domestic................. 4.21 4.51 4.53 4.80 5.17 5.66 5.84 6.41
----- ----- ----- ----- ----- ----- ----- -----
Foreign:
Australia........................ 8.93 9.59 10.95 12.06 12.48 12.21 12.08 14.14
----- ----- ----- ----- ----- ----- ----- -----
Total.......................... 4.33% 4.63% 4.69% 4.99% 5.37% 5.87% 6.05% 6.67%
===== ===== ===== ===== ===== ===== ===== =====
Total delinquent receivables at December 31, 1993 were $142 million lower
than a year earlier despite higher receivable levels. This improvement consisted
of a $124 million decrease in the domestic operations and a $18 million decrease
in the Australian operations. Delinquency as a percent of managed consumer
receivables fell 19 percent in 1993 and was the lowest since 1988.
9
The Company currently believes the positive trend in delinquency ratios will
continue but recognizes the trend may moderate in future periods. Further
improvement will depend on the extent and timing of improvement in economic
conditions in both countries where the Company operates and the composition of
the managed receivables base.
DOMESTIC DELINQUENCY
HOME EQUITY delinquency declined during the fourth quarter of 1993 and
remained below the year-end 1992 level. Home equity delinquency was the lowest
since December 1990 and was down approximately 44 percent from the peak in the
first quarter of 1992. The improvement was a result of tighter underwriting
standards instituted at the start of the recent economic downturn and
improvements in the economy. Vintage analysis of home equity loans originated
after June 1991 continued to demonstrate the favorable performance of recently
underwritten receivables.
The delinquency level for OTHER SECURED RECEIVABLES at December 31, 1993
decreased from the prior quarter and prior year, but did not impact total
delinquency due to the small size of the portfolio.
BANKCARD delinquency declined compared to the prior quarter and was below
the December 1992 level. The improvement was due to higher quality bankcard
receivables recently underwritten, which have higher credit scores and lower
early delinquency.
MERCHANT PARTICIPATION delinquency levels continued to decline in the fourth
quarter of 1993 and were below the year-end 1992 level. The steady decline
during 1993 was the result of an improved economy coupled with tighter
underwriting standards and a greater focus on association with low delinquency
merchants.
The delinquency level for OTHER UNSECURED receivables decreased in the 1993
fourth quarter and has fallen for eight consecutive quarters. This steady
decline was due to the improvement of the quality of receivables recently
underwritten combined with improved economic conditions. Since chargeoff rates
on unsecured receivables are much higher than secured receivables, improvements
in delinquency are significant in evaluating potential future credit losses.
FOREIGN DELINQUENCY
Delinquency levels in AUSTRALIA continued to improve; however, due to the
relatively small size of the receivable portfolio, the decrease in delinquency
had a relatively small impact on total delinquencies for the Company.
NONPERFORMING ASSETS
The following table details the components of nonperforming assets for the
Finance and Banking segment:
DEC. 31, SEPT. 30, DEC. 31, DEC. 31,
1993 1993 1992 1991
-------- --------- -------- --------
(ALL DOLLAR AMOUNTS ARE STATED IN
MILLIONS)
Nonaccrual managed receivables.......... $340.9 $ 365.5 $439.2 $467.2
Accruing managed receivables 90 or more
days delinquent........................ 148.8 154.9 196.3 180.0
Renegotiated commercial loans........... -- -- .5 --
-------- --------- -------- --------
Total nonperforming managed
receivables........................ 489.7 520.4 636.0 647.2
-------- --------- -------- --------
Real estate owned....................... 89.0 92.4 88.7 53.7
Other assets acquired through
foreclosure............................ 82.9 84.4 102.6 21.5
-------- --------- -------- --------
Total nonperforming assets.......... $661.6 $ 697.2 $827.3 $722.4
======== ========= ======== ========
Credit loss reserves for managed
receivables as a percent of
nonperforming managed receivables...... 84.6% 76.2% 59.9% 55.9%
-------- --------- -------- --------
10
The decrease in nonaccrual managed receivables during 1993 primarily was due
to improvements in the domestic consumer finance operations. Consumer real
estate owned was essentially flat compared to both the 1992 year-end level and
third quarter level.
As part of continuing commercial activities, the Company held at December
31, 1993 approximately $83 million of aircraft acquired through foreclosure of
loans and leases. The Company is actively marketing these aircraft for sale or
lease. However, due to the current economic condition of the airline industry,
the Company is uncertain about the timing of the disposition of these aircraft.
These aircraft were recorded at date of acquisition at the lower of cost or fair
value, with such values subsequently being depreciated over their estimated
remaining useful lives.
CHARGEOFFS
Chargeoffs decreased in 1993 as a result of improved delinquency trends and
better domestic economic conditions.
The following table presents chargeoffs on a full year and quarterly basis,
by product:
NET CHARGEOFFS OF CONSUMER RECEIVABLES
(AS A PERCENT OF AVERAGE CONSUMER RECEIVABLES MANAGED)
1993 QUARTER ANNUALIZED 1992 QUARTER ANNUALIZED
FULL YEAR -------------------------- FULL YEAR ------------------------- FULL YEAR
1993 4 3 2 1 1992 4 3 2 1 1991
--------- ---- ---- ----- ---- --------- ---- ---- ---- ---- ---------
Domestic:
Home equity................. 1.05% 1.26% .89% 1.03% 1.01% .93% 1.20% .91% .77% .80% .71%
Other secured............... 5.46 1.02 9.72 10.94 (.02) 2.04 5.18 .44 .40 2.27 .60
Bankcard.................... 5.99 5.90 6.01 5.74 6.31 6.18 6.43 6.88 6.22 5.18 5.06
Merchant participation...... 4.32 4.26 4.44 4.02 4.57 4.49 4.60 4.30 4.69 4.37 4.11
Other unsecured............. 6.52 5.89 6.36 7.09 6.76 7.57 6.41 7.94 8.10 7.84 7.10
--------- ---- ---- ----- ---- --------- ---- ---- ---- ---- ---------
Total domestic.............. 3.60 3.54 3.58 3.60 3.68 3.83 3.85 3.98 3.89 3.60 3.23
--------- ---- ---- ----- ---- --------- ---- ---- ---- ---- ---------
Foreign:
Australia................... 3.77 3.77 2.61 3.38 5.21 3.33 3.48 3.17 2.64 4.05 2.49
--------- ---- ---- ----- ---- --------- ---- ---- ---- ---- ---------
Total....................... 3.61% 3.55% 3.56% 3.60% 3.72% 3.81% 3.84% 3.95% 3.85% 3.61% 3.20%
========= ==== ==== ===== ==== ========= ==== ==== ==== ==== =========
Net chargeoffs as a percent of average consumer receivables managed were
3.61 percent, down from 3.81 percent in 1992, primarily due to improvements in
the unsecured portfolios.
Chargeoffs are a lagging indicator of credit quality and generally reflect
prior delinquency trends. As previously discussed, overall delinquency levels
have continued to decline. The decline has been a result of improved economic
conditions and the effect of the Company's strategy to improve overall credit
quality by tightened underwriting standards. The Company expects that chargeoff
trends will continue to follow the downward trend in consumer delinquency.
However, future improvement in net chargeoffs may be impacted by factors such as
product mix, economic conditions and the impact of personal bankruptcies.
Consequently, the extent and timing of an overall improved chargeoff trend
remains uncertain.
Domestic net chargeoffs were 3.60 percent for the year, down from 3.83
percent a year ago, due to improvements in the unsecured portfolios. HOME EQUITY
chargeoffs increased slightly on both a year-over-year basis and in the fourth
quarter as this portfolio continued to be impacted by weak economic conditions
in the western region. Net chargeoffs for OTHER SECURED receivables did not
significantly impact total chargeoffs as these receivables represented
approximately 2 percent of total managed receivables at year end.
In the domestic unsecured portfolios, BANKCARD net chargeoffs declined in
1993 compared to the prior year due to improved economic conditions and a
decrease in personal bankruptcies. Net chargeoffs of MERCHANT PARTICIPATION and
OTHER UNSECURED receivables were below both the 1992 level and the prior
quarter.
11
These improvements were consistent with the downward trend in delinquency in
these portfolios. Chargeoffs in AUSTRALIA increased year-over-year and during
the fourth quarter. However, due to the size of the receivable portfolio,
Australia's chargeoffs did not significantly impact the overall chargeoff level
of the Company.
INDIVIDUAL LIFE INSURANCE
Individual Life Insurance net income was $45.2 million, up 8 percent from
1992 due to higher investment income resulting from gains on the sale of
available-for-sale investments, a larger investment portfolio and higher levels
of contract revenues from individual life and annuity contracts.
STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
---------------------------------
1993 1992 1991
--------- --------- ---------
(ALL DOLLAR AMOUNTS ARE STATED IN
MILLIONS)
Investment and other income............. $ 540.4 $ 481.7 $ 421.9
Contract revenues....................... 127.9 111.3 98.7
--------- --------- ---------
Total revenues.......................... 668.3 593.0 520.6
Costs and expenses:
Policyholders' benefits............... 456.9 427.7 377.8
Operating expenses.................... 140.2 102.1 95.2
Income taxes.......................... 26.0 21.5 12.6
--------- --------- ---------
Net income.............................. $ 45.2 $ 41.7 $ 35.0
========= ========= =========
Sales................................... $ 652.2 $ 736.3 $ 655.6
--------- --------- ---------
Life insurance in force................. $32,371.6 $28,390.4 $25,280.8
--------- --------- ---------
Return on average assets................ .72% .73% .71%
--------- --------- ---------
Investment securities for the Individual Life Insurance segment totaled $6.4
billion, up from $5.3 billion at December 31, 1992. This portfolio represented
90 percent of the Company's total investment portfolio at December 31, 1993.
During 1993 the Company continued to emphasize conservative investment
strategies. Higher-risk securities, which include non-investment grade bonds,
common and preferred stocks, commercial mortgage loans and real estate,
represented 7 percent of the insurance investment portfolio at December 31,
1993, compared to 9 percent at December 31, 1992. Commercial real estate loans
totaled less than 2 percent of Individual Life Insurance segment investments at
December 31, 1993. At December 31, 1993 there were no significant nonaccrual or
renegotiated loans in this portfolio. Commercial real estate acquired through
foreclosure, which is included in the investment portfolio, totaled $12.4
million. Underwriting standards and credit monitoring procedures for these
residential and commercial real estate loans are similar to those described in
the credit management policy section on pages 5 and 6.
At December 31, 1993 the market value of the insurance held-to-maturity
investment portfolio was 108 percent of the amortized cost. Reductions in market
value which are determined to be other than temporary are charged to income as
realized losses. There were no unrealized losses in the insurance investment
portfolio at December 31, 1993 which would materially impact current or future
earnings or the capital position of the Company.
Investment and other income was $540.4 million in 1993, a 12 percent
increase over 1992. The improvement was primarily due to higher gains on sales
of available-for-sale investments. These investments were sold consistent with
pre-established interest rate and exchange rate policies. A substantially larger
investment portfolio, partially offset by lower yields on investments, also
contributed to the increase in investment income. Contract revenues also
increased in 1993 due to higher levels of insurance in force.
12
Policyholders' benefits were $456.9 million, a 7 percent increase over 1992
due to increased life insurance and annuity contracts.
Operating expenses for 1993 were $140.2 million compared with $102.1 and
$95.2 million in 1992 and 1991, respectively. Both the 1993 and 1992 increases
were due to higher amortization of deferred insurance policy acquisition costs
("DAC"). The higher levels of DAC amortization resulted from increased gross
profits on universal life and deferred annuity products. Amortization rates are
based on estimated lifetime gross profits and are periodically adjusted as
required by generally accepted accounting principles. Unamortized insurance
policy acquisition costs totaled $381.6 million at December 31, 1993. In the
event of policy surrender, the write-off of unamortized insurance policy
acquisition costs would be offset by surrender charges to the policyholder.
Surrender charges on policies for which acquisition costs have been capitalized
approximated $490 million at December 31, 1993.
The effective income tax rate for 1993 was 36.5 percent compared to 34.0 and
26.5 percent in 1992 and 1991, respectively. The 1993 effective tax rate
included the impact of the retroactive increase to January 1, 1993 in the
statutory Federal corporate income tax rate from 34 percent to 35 percent. The
1991 income tax rate was favorably impacted as a result of the resolution of
prior years' tax matters.
LIQUIDATING COMMERCIAL LINES
The 1993 net loss for the Liquidating Commercial Lines segment was $21.5
million, compared to a loss of $12.3 million in 1992. The net loss was higher
primarily due to the previously described resolution of the Company's largest
problem loan. The Company expects future results of operations for this segment
to improve.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31
-------------------------
1993 1992 1991
------ ------ -------
(IN MILLIONS)
Interest margin......................... $ 59.1 $ 37.9 $ 65.0
Other revenues.......................... 22.8 11.8 (4.5)
------ ------ -------
Interest margin and other revenues...... 81.9 49.7 60.5
Provision for credit losses............. 90.1 35.3 260.0
Operating expenses...................... 21.7 34.7 41.9
------ ------ -------
Loss before income taxes................ (29.9) (20.3) (241.4)
Income tax benefit...................... (8.4) (8.0) (92.3)
------ ------ -------
Net loss................................ $(21.5) $(12.3) $(149.1)
====== ====== =======
Interest margin increased over 1992 primarily due to wider spreads and gains
on terminating debt and related hedges associated with assets which have been
liquidated. Other revenues increased due to the Company's 25 percent equity
investment in a commercial joint venture of liquidating assets made in 1993. See
pages 5 and 6 for a discussion of factors impacting the determination of
provision for credit losses. Operating expenses declined 37 percent due to lower
write-downs and net expenses for real estate owned and other expenses.
Loans decreased 27 percent in 1993 to $1.2 billion. Commercial real estate
and highly leveraged acquisition finance and other loans declined during the
year.
Highly leveraged acquisition finance receivables at December 31, 1993
totaled $717.3 million and consisted of 27 individual credit extensions. The
average credit extension was $27 million and the largest credit extension was
$50 million. The Company defines highly leveraged acquisition finance
receivables as corporate loans to finance the buyout, acquisition or
recapitalization of an existing business, in which the debt and equity
subordinated to the Company's claims in a borrower are less than 25 percent of
the
13
borrower's total assets. The Company had unfunded secured working capital lines
and letters of credit related to these acquisition finance borrowers of $98
million at December 31, 1993. Lending for highly leveraged acquisition finance
loans was discontinued in 1991.
COMMERCIAL NONPERFORMING LOANS AND REAL ESTATE OWNED
DEC. 31, SEPT. 30, DEC. 31, DEC. 31,
1993 1993 1992 1991
-------- --------- -------- --------
(ALL DOLLAR AMOUNTS ARE STATED IN MILLIONS)
Real estate nonaccrual............................ $ 54.8 $ 79.6 $ 80.7 $ 98.6
Other nonaccrual.................................. 173.9 164.1 178.5 159.0
-------- --------- -------- --------
Total nonaccrual................................ 228.7 243.7 259.2 257.6
Renegotiated...................................... 28.7 17.3 196.8 202.6
-------- --------- -------- --------
Total nonperforming loans....................... 257.4 261.0 456.0 460.2
Real estate owned................................. 256.6 262.2 249.6 228.2
-------- --------- -------- --------
Total........................................... $514.0 $ 523.2 $705.6 $688.4
======== ========= ======== ========
Credit loss reserves as a percent of nonperforming
loans............................................ 67.2% 71.2% 44.6% 47.6%
-------- --------- -------- --------
Nonperforming commercial assets decreased 27 percent during 1993 to $514.0
million. Nonaccrual loans at December 31, 1993 were down 12 percent compared to
the December 31, 1992 level, while renegotiated loans declined by $168.1 million
during the year. The previously mentioned problem equipment finance loan was
transferred during the year from renegotiated loan status to nonaccrual loan
status prior to being resolved. Despite the resolution of this credit, the ratio
of reserves to nonperforming loans increased to 67.2 percent at December 31,
1993 from 44.6 percent at December 31, 1992. Real estate owned was flat with the
prior year.
The Company expects the longer term downward trend in nonperforming assets
to continue, although it may stabilize in the near future before decreasing. The
future level of nonperforming assets will depend, in part, on the timing and
extent of economic recovery. In addition, comparisons between periods may be
impacted by individual transactions which mask the overall trend. The Company
continues to estimate its ultimate loss exposure for nonperforming assets based
upon performance and specific reviews of individual loans and its outlook for
economic conditions. Because the portfolio consists of a number of loans with
relatively large balances, changes in individual borrower circumstances which
currently are unforeseen have the potential to change the estimate of ultimate
loss exposure in the future. There were no significant potential problem loans
not classified as nonperforming assets at December 31, 1993.
Management believes that commercial real estate markets began to stabilize
in the second half of 1993. The level of future write-downs will continue to
depend heavily on changes in overall market conditions as well as circumstances
surrounding individual properties. To preserve value in liquidating the real
estate portfolio over time, the Company has segregated its portfolio into two
categories. Properties in weak markets or with poor cash flow will be divested
in an expeditious, orderly fashion. These properties, which have been written
down an average of 51 percent, represent 19 percent of the commercial real
estate owned portfolio at December 31, 1993. The average carrying value of a
property in this portfolio at December 31, 1993 was $2 million. Properties with
positive and/or improved cash flows and in markets which, the Company believes,
have potential for improvement are being held for sale at prices which reflect
this value and may, therefore, take longer to divest. Net operating income on
all commercial real estate properties in 1993 was $17.7 million, up from $8.5
million in 1992. Commercial real estate write-downs and carrying costs on all
commercial real estate properties were $30.8 million in 1993, compared to $23.3
million in 1992.
14
LIQUIDITY AND CAPITAL RESOURCES
The Company generally is funded independently with cash flows, liquidity and
capital resources monitored at both the Company and Household International
levels. The decision to invest in or to withdraw capital from specific business
segments is based on their profitability, growth potential and target capital
structure. Household International invested additional capital in HFC of
approximately $70 million in 1993 to strengthen the Company's capital position
and to fund asset growth. The Company received no capital contributions from
Household International in 1992. HFC paid cash dividends to Household
International of $175.3 and $63.0 million in 1992 and 1991, respectively. The
Company paid no cash dividends to Household International in 1993.
The Company employs an integrated and comprehensive program to manage
liquidity and capital resources. The major usage of cash by the Company is the
origination or purchase of receivables or investment securities. During 1993 and
1992 the Company purchased $430 and $364 million of home equity loan portfolios,
respectively. During 1993 and 1992 the Company purchased $33 and $437 million,
respectively, of bankcard portfolios. The main sources of cash for the Company
are the collection and sales of receivable balances, maturities or sales of
investment securities, proceeds from the issuance of debt, cash received from
policyholders and cash provided from operations.
The Company obtains a majority of its funding through the issuance of
commercial paper and long-term debt as well as through the securitizations and
sales of consumer receivables. At December 31, 1993 outstanding commercial paper
of the Company was $3.7 billion compared to $3.2 billion at December 31, 1992.
HFC markets its commercial paper through an in-house sales force, directly
reaching more than 165 investors. HFC also markets medium-term notes through its
in-house sales force and investment banks and issued a total of $1.6 billion in
1993. During 1993 HFC also issued $626 million of intermediate and long-term
debt to the public through investment banks and brokerage houses. To facilitate
liquidity, HFC had committed back-up lines of credit totaling $3.5 billion at
December 31, 1993, 76 percent of which did not contain a material adverse change
clause which could restrict availability.
Securitizations and sales of consumer receivables have been, and will
continue to be, an important source of liquidity for HFC. During 1993 the
Company securitized and sold, including replenishments of certificate holder
interests, approximately $3.8 billion of home equity, merchant participation and
bankcard receivables compared to $4.8 billion in 1992.
Household International has a comprehensive program which addresses the
management and diversification of financial risk, such as interest rate,
funding, liquidity and currency risk. Household International manages these
risks for the Company through an asset/liability management committee ("ALCO")
composed of senior management. Interest rate risk is the exposure of earnings to
changes in interest rates. The ALCO sets and monitors policy so that the
potential impact on earnings from future changes in interest rates is managed
within approved limits. Simulation models are utilized to measure the impact on
net interest margin of changes in interest rates.
The Company, whenever possible, funds its assets with liability instruments
of similar interest rate sensitivity, thereby reducing structural interest rate
risk. To manage its liquidity position, the Company may synthetically create
liabilities with similar characteristics to its assets.
As a result of changing market conditions over the last few years, the
Company's balance sheet composition has changed dramatically. This shift
primarily has been driven by the conversion of fixed rate credit card
receivables to a floating rate and the success of variable rate home equity loan
products. At December 31, 1993 the Company owned approximately $6.0 billion of
domestic receivables with variable interest rates based on the prime rate. To
manage liquidity to acceptable levels, these receivables have been funded with
$4.0 billion of short-term debt with the remainder funded by longer duration
liabilities creating an asset-sensitive position. Through the use of
derivatives, primarily interest rate swaps, the Company has been able to offset
the asset sensitivity of its balance sheet and achieve a cost of funds based on
shorter-term interest rates, thereby reducing interest rate risk while also
preserving liquidity. As a result of this strategy and the change in the pricing
characteristics of the receivable portfolio, the Company's portfolio of off-
15
balance sheet risk instruments increased significantly during the year. These
instruments also are used to manage basis risk or the risk due to the difference
in movement of market rate indices on which assets and liabilities are priced
(primarily prime and LIBOR, respectively). The Company does not serve as a
financial intermediary to make markets in any off-balance sheet financial
instruments.
While the notional amount of the Company's synthetic portfolio is large, the
economic exposure underlying these instruments is substantially less. The
notional amount is used to determine the fixed or variable rate interest payment
due by each counterparty but does not result in an exchange of principal
payments. The Company's exposure on its synthetic portfolio is counterparty
risk, or the risk that a counterparty may default on a contract when the Company
is owed money. The potential for economic loss is the present value of the
interest rate differential determined by reference to the notional amount,
discounted using current interest rates. Counterparty limits have been
established and are closely monitored as part of the overall risk management
process. At December 31, 1993 approximately 99 percent of the Company's
derivative instrument counterparties were rated A-or better, and 56 percent were
rated AA-or better. The Company has never suffered a loss due to counterparty
failure.
While attempting to eliminate structural interest rate risk, the Company
also strives to take advantage of the profit opportunities available in
short-term interest rate movements principally using exchange-traded options.
Limits have been established for each instrument based on potential daily
changes in market values due to interest rate movements, volatility and market
liquidity. Positions are monitored daily to ensure compliance with established
policies and limits. Income from these trading activities has not been, nor is
anticipated to be, material to the Company.
See Note 8, "Financial Instruments With Off-Balance Sheet Risk and
Concentrations of Credit Risk" for additional information related to interest
rate risk management.
During 1993, the Company's credit rating was upgraded by one nationally
recognized rating agency and its credit rating outlook was upgraded by another.
At December 31, 1993, the long-term debt of the Company had been assigned an
investment grade rating by four "nationally recognized" rating agencies.
Furthermore, these agencies included the commercial paper of HFC in their
highest rating category. With these ratings the Company believes it has
substantial capacity to raise capital from wholesale sources to refinance
maturing obligations and fund business growth.
Total assets of Australia were $419.6 million at year-end 1993. The Company
enters into foreign exchange contracts to partially hedge its investment in
Australia. Foreign currency translation adjustments, net of gains and losses on
contracts used to hedge foreign currency fluctuations, totaled $5.0 and $10.3
million in net losses in 1993 and 1992, respectively, and are included as a
component of common shareholder's equity. The functional currency for Australia
is its local currency, and the Australian operation borrows funds in local
currency. The Company's net realized gains and losses in foreign currency
transactions were not material to results of operations or financial position in
1993 or 1992.
The Company's life insurance subsidiary, Alexander Hamilton Life Insurance
Company ("Alexander Hamilton"), plans for capital needs based on target leverage
ratios determined in consultation with key rating agencies. The target leverage
ratios are based on Alexander Hamilton's statutory financial position. At the
end of 1993 Alexander Hamilton's operating leverage ratio, as defined
statutorily, was consistent with its target. Alexander Hamilton has an A+
(Superior) rating from A.M. Best and has an "AA" claims-paying ability rating
from Standard & Poor's Corporation, Duff and Phelps Credit Rating Co. and Fitch
Investors Services, Inc. The Company believes that future growth of Alexander
Hamilton can be funded through its own operations.
During 1993, the Company invested $30.5 million in capital expenditures,
compared to the prior year level of $37.5 million.
In the accompanying financial statements, Note 10 provides information
regarding the fair value of certain financial instruments.
16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to the list of financial statements under Item 14(a)
herein for the financial statements required by this Item.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Inapplicable.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Omitted.
ITEM 11. EXECUTIVE COMPENSATION.
Omitted.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Omitted.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Omitted.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Financial Statements.
Report of Independent Public Accountants.
Statements of Income for the Three Years Ended December 31, 1993.
Balance Sheets, December 31, 1993 and 1992.
Statements of Cash Flows for the Three Years Ended December 31, 1993.
Statements of Changes in Preferred Stock and Common Shareholder's Equity
for the Three Years Ended December 31, 1993.
Business Segment Data for the Three Years Ended December 31, 1993.
Notes to Financial Statements.
Selected Quarterly Financial Data (Unaudited).
(b) Reports on Form 8-K
During the three months ended December 31, 1993, HFC did not file with the
Securities and Exchange Commission any Current Report on Form 8-K.
(c) Exhibits.
3(i) Restated Certificate of Incorporation of Household Finance
Corporation ("HFC"), as amended (incorporated by reference to
Exhibit 3(a) of HFC's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992).
3(ii) Bylaws of Household Finance Corporation (incorporated by
reference to Exhibit 3(b) of HFC's Annual Report on Form
10-K for the fiscal year ended December 31, 1992).
4(a) Indenture dated as of May 15, 1989, between HFC and Bankers
Trust Company, as Trustee (incorporated by reference to
Exhibit 4 to HFC's Current Report on Form 8-K dated August 3,
1989), as supplemented by a First Supplemental Indenture
dated as of June 15, 1989 (incorporated by reference to
Exhibit 4 of HFC's Current Report on Form 8-K dated June 15,
1989), as amended by Amendment No. 1 dated October 18, 1990
to the First Supplemental Indenture dated as of June 15, 1989
(incorporated by reference to Exhibit 4 of HFC's Current
Report on Form 8-K dated October 18, 1990).
17
4(b) The principal amount of debt outstanding under each other
instrument defining the rights of holders of long-term debt
of HFC and its subsidiaries does not exceed 10 percent of the
total assets of HFC and its subsidiaries on a consolidated
basis. HFC agrees to furnish to the Securities and Exchange
Commission, upon request, a copy of each instrument defining
the rights of holders of long-term debt of HFC and its
subsidiaries.
12 Statement of Computation of Ratios of Earnings to Fixed
Charges and to Combined Fixed Charges and Preferred Stock
Dividends.
23 Consent of Arthur Andersen & Co. Certified Public Accountants.
(d) Schedules.
Household Finance Corporation and Subsidiaries:
VIII Valuation and Qualifying Accounts.
X Supplementary Income Statement Information.
18
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, HOUSEHOLD FINANCE CORPORATION HAS DULY CAUSED THIS REPORT
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
HOUSEHOLD FINANCE CORPORATION
Dated: March 29, 1994
By: R. F. ELLIOTT
---------------------------------
R. F. Elliott, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF HOUSEHOLD
FINANCE CORPORATION AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE
- ------------------------------------------------------ -----------------------------
R. F. ELLIOTT
------------------------------------------- President and Chief Executive
R. F. Elliott Officer, Director
D. A. SCHOENHOLZ Vice President, Chief
------------------------------------------- Accounting Officer and Chief Dated: March 29, 1994
D. A. Schoenholz Financial Officer, Director
D. C. CLARK
------------------------------------------- Director
D. C. Clark
19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
HOUSEHOLD FINANCE CORPORATION:
We have audited the accompanying balance sheets of Household Finance
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1993
and 1992, and the related statements of income, changes in preferred stock and
common shareholder's equity and cash flows for each of the three years in the
period ended December 31, 1993. These financial statements and the schedules
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Household Finance
Corporation and subsidiaries as of December 31, 1993 and 1992, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1993 in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedules listed in Item
14(d) are presented for purposes of complying with the Securities and Exchange
Commission's rules and are not a required part of the basic financial
statements. These schedules have been subjected to the auditing procedures
applied in the audits of the basic financial statements and, in our opinion,
fairly state in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN & CO.
Chicago, Illinois
February 1, 1994
F-1
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
-------------------------------
1993 1992 1991
--------- --------- ---------
(IN MILLIONS)
Finance income........................................................ $ 1,318.1 $ 1,334.6 $ 1,638.9
Interest income from noninsurance investment securities............... 40.9 34.9 43.4
Interest expense...................................................... 510.2 633.2 896.6
--------- --------- ---------
Net interest margin................................................... 848.8 736.3 785.7
Provision for credit losses on owned receivables...................... 494.5 368.3 599.2
--------- --------- ---------
Net interest margin after provision for credit losses................. 354.3 368.0 186.5
--------- --------- ---------
Securitization and servicing fee income............................... 383.4 369.2 386.0
Insurance premiums and contract revenues.............................. 242.6 220.5 214.1
Investment income..................................................... 552.1 492.2 432.4
Fee income............................................................ 60.7 50.5 46.2
Other income.......................................................... 77.5 63.5 60.4
--------- --------- ---------
Total other revenues.................................................. 1,316.3 1,195.9 1,139.1
--------- --------- ---------
Net interest margin after provision for credit losses and other
revenues............................................................ 1,670.6 1,563.9 1,325.6
--------- --------- ---------
Salaries and fringe benefits.......................................... 221.9 234.7 230.2
Other operating expenses.............................................. 603.7 513.3 472.6
Policyholders' benefits............................................... 517.2 484.1 433.6
--------- --------- ---------
Total costs and expenses.............................................. 1,342.8 1,232.1 1,136.4
--------- --------- ---------
Income before income taxes............................................ 327.8 331.8 189.2
Income taxes.......................................................... 107.4 92.3 32.5
--------- --------- ---------
Net income............................................................ $ 220.4 $ 239.5 $ 156.7
========= ========= =========
The accompanying notes are an integral part of these financial statements.
F-2
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
BALANCE SHEETS
DECEMBER 31
----------------------
1993 1992
---------- ----------
(IN MILLIONS)
ASSETS
Cash................................................................................. $ 27.8 $ 48.7
Investment securities (fair value of $7,317.8 and $6,124.7).......................... 7,082.0 5,902.5
Finance and banking receivables...................................................... 9,338.4 8,459.7
Liquidating commercial assets........................................................ 1,555.7 1,851.2
Advances to parent company and affiliates............................................ 361.7 393.3
Deferred insurance policy acquisition costs.......................................... 381.6 453.4
Acquired intangibles................................................................. 246.7 293.8
Properties and equipment............................................................. 202.2 177.8
Assets acquired through foreclosure.................................................. 171.9 191.3
Other assets......................................................................... 482.2 374.7
---------- ----------
Total assets............................................................... $ 19,850.2 $ 18,146.4
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Debt:
Commercial paper, bank and other borrowings........................................ $ 4,321.8 $ 4,217.9
Senior and senior subordinated debt (with original maturities
over one year).................................................................... 6,813.7 6,601.5
---------- ----------
Total debt................................................................. 11,135.5 10,819.4
Insurance policy and claim reserves.................................................. 5,981.5 5,243.3
Other liabilities.................................................................... 942.7 556.4
---------- ----------
Total liabilities.......................................................... 18,059.7 16,619.1
Preferred stock...................................................................... 100.0 150.0
Common shareholder's equity*......................................................... 1,690.5 1,377.3
---------- ----------
Total liabilities and shareholder's equity*................................ $ 19,850.2 $ 18,146.4
========== ==========
- ------------
* See the Statements of Changes in Preferred Stock and Common Shareholder's
Equity on page F-5 for the number of shares authorized, issued and
outstanding.
The accompanying notes are an integral part of these financial statements.
F-3
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
----------------------------------
1993 1992 1991
---------- ---------- ----------
(IN MILLIONS)
CASH PROVIDED BY OPERATIONS
Net income.................................................................. $ 220.4 $ 239.5 $ 156.7
Adjustments to reconcile net income to net cash provided by operations:
Provision for credit losses on owned receivables.......................... 494.5 368.3 599.2
Insurance policy and claim reserves....................................... 226.4 171.3 218.9
Depreciation and amortization............................................. 158.1 107.4 112.0
Net realized gains from sales of assets................................... (1.4) (33.4) (59.7)
Deferred insurance policy acquisition costs............................... (86.6) (85.2) (81.2)
Deferred income tax provision............................................. 1.0 14.4 (83.0)
Other, net................................................................ 289.5 (86.0) (7.5)
---------- ---------- ----------
Cash provided by operations................................................. 1,301.9 696.3 855.4
---------- ---------- ----------
INVESTMENTS IN OPERATIONS
Investment securities:
Purchased................................................................. (2,992.0) (2,733.5) (2,218.1)
Matured................................................................... 1,172.9 841.7 261.0
Sold...................................................................... 1,205.2 1,209.2 1,372.8
Short-term investment securities, net change................................ (224.1) 98.0 (165.6)
Receivables, excluding bankcard:
Originated or purchased................................................... (6,288.3) (6,148.9) (6,201.8)
Collected................................................................. 3,772.5 3,390.5 3,554.3
Sold...................................................................... 1,934.4 3,086.4 4,049.2
Bankcard receivables:
Originated or collected, net.............................................. (2,629.3) (2,766.2) (1,451.8)
Purchased................................................................. (32.7) (437.4) (1,580.2)
Sold...................................................................... 1,912.8 2,389.2 1,509.8
Properties and equipment purchased.......................................... (30.5) (37.5) (76.0)
Properties and equipment sold............................................... 4.6 .4 6.3
Advances to parent company and affiliates................................... 31.6 (196.2) 41.6
---------- ---------- ----------
Cash decrease from investments in operations................................ (2,162.9) (1,304.3) (898.5)
---------- ---------- ----------
FINANCING AND CAPITAL TRANSACTIONS
Short-term debt, net change................................................. 107.1 1,189.8 (609.4)
Senior and senior subordinated debt issued.................................. 2,289.9 2,260.3 3,298.3
Senior and senior subordinated debt retired................................. (2,084.3) (3,291.5) (2,974.3)
Policyholders' benefits paid................................................ (332.8) (330.6) (311.7)
Cash received from policyholders............................................ 848.9 882.4 797.1
Dividends on preferred stock................................................ (8.7) (10.3) (11.4)
Issuance of preferred stock................................................. -- 99.1 --
Repurchase of preferred stock............................................... (50.0) (100.0) --
Dividends paid to parent company............................................ -- (175.3) (63.0)
Capital contributions from parent company................................... 70.0 -- 3.6
---------- ---------- ----------
Cash increase from financing and capital transactions....................... 840.1 523.9 129.2
---------- ---------- ----------
Effect of exchange rate changes on cash..................................... -- (.1) --
---------- ---------- ----------
Increase (decrease) in cash................................................. (20.9) (84.2) 86.1
Cash at January 1........................................................... 48.7 132.9 46.8
---------- ---------- ----------
Cash at December 31......................................................... $ 27.8 $ 48.7 $ 132.9
========== ========== ==========
Supplemental cash flow information:
Interest paid............................................................... $ 510.5 $ 697.1 $ 901.8
========== ========== ==========
Income taxes paid........................................................... $ 49.4 $ 95.7 $ 106.9
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-4
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
STATEMENTS OF CHANGES IN PREFERRED STOCK
AND COMMON SHAREHOLDER'S EQUITY
COMMON SHAREHOLDER'S EQUITY
-----------------------------------------------------
COMMON
STOCK AND TOTAL COMMON
PREFERRED PAID-IN RETAINED SHAREHOLDER'S
STOCK CAPITAL (1) EARNINGS (2) OTHER (3) EQUITY
----------- ----------- ------------ ----------- -------------
(IN MILLIONS)
BALANCE AT DECEMBER 31, 1990...................... $ 150.0 $ 478.5 $ 778.1 $ (15.4) $ 1,241.2
Net income...................................... 156.7 156.7
Dividends to parent company..................... (63.0) (63.0)
Dividends on preferred stock.................... (11.4) (11.4)
Contribution of capital from parent company..... 3.6 3.6
Foreign currency translation adjustments (4).... (1.0) (1.0)
Unrealized gain on marketable equity securities
(5)............................................ 6.8 6.8
----------- ----------- ------------ ----------- -------------
BALANCE AT DECEMBER 31, 1991...................... 150.0 482.1 860.4 (9.6) 1,332.9
Net income...................................... 239.5 239.5
Dividends to parent company..................... (175.3) (175.3)
Dividends on preferred stock.................... (10.3) (10.3)
Foreign currency translation adjustments (4).... (10.3) (10.3)
Issuance of preferred stock..................... 100.0 (.9) (.9)
Repurchase of preferred stock................... (100.0) --
Unrealized gain on investments, net (5)......... 1.7 1.7
----------- ----------- ------------ ----------- -------------
BALANCE AT DECEMBER 31, 1992...................... 150.0 481.2 914.3 $ (18.2) 1,377.3
Net income...................................... 220.4 220.4
Dividends on preferred stock.................... (8.7) (8.7)
Contribution of capital from parent company..... 70.0 70.0
Foreign currency translation adjustments (4).... (5.0) (5.0)
Repurchase of preferred stock................... (50.0) --
Unrealized gain on investments, net (5),(6)..... 36.5 36.5
----------- ----------- ------------ ----------- -------------
BALANCE AT DECEMBER 31, 1993...................... $ 100.0 $ 551.2 $ 1,126.0 $ 13.3 $ 1,690.5
========== =========== ============ =========== =============
- ------------
(1) At December 31, 1993 and 1992 the Company had authorized, issued and
outstanding 1,000 shares of common stock, all of which are owned by
Household International.
(2) The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("FAS No. 109") effective January 1, 1993.
As a result of implementing FAS No. 109, retained earnings for all periods
presented prior to December 31, 1993 have been reduced by approximately
$62 million from the amounts previously reported.
(3) At December 31, 1993, 1992, 1991 and 1990 items in the other column
include cumulative adjustments for: foreign currency translation
adjustments of $(21.8), $(16.8), $(6.5) and $(5.5) million, respectively,
and unrealized gains (losses) on marketable equity securities and
available-for-sale investments of $35.1, $(1.4), $(3.1) and $(9.9)
million, respectively.
(4) Net of $.2, $.7 and $(.7) million of income tax expense (benefit) in 1993,
1992 and 1991, respectively.
(5) Net of $19.6, $.8 and $3.6 million of income taxes in 1993, 1992 and 1991,
respectively.
(6) Effective December 31, 1993 the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" ("FAS No. 115"). As a result of implementing FAS
No. 115, the gross unrealized gain on available-for-sale investments of
$144.9 million is recorded net of income taxes of $19.6 million and, for
certain available-for-sale investments of the life insurance operation,
related unrealized deferred insurance policy acquisition cost adjustments
of $90.2 million at December 31, 1993.
The accompanying notes are an integral part of these financial statements.
F-5
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
REVENUES OPERATING PROFIT INCOME
--------------------------------- --------------------------- ---------------------------
BUSINESS SEGMENT DATA 1993 1992 1991 1993 1992 1991 1993 1992 1991
- -------------------------------- --------- --------- --------- ------- ------- ------- ------- ------- -------
(IN MILLIONS)
Finance and Banking............. $ 1,871.1 $ 1,820.4 $ 2,075.6 $ 286.5 $ 288.9 $ 383.0 $ 196.7 $ 210.1 $ 270.8
Individual Life Insurance....... 668.3 593.0 520.6 71.2 63.2 47.6 45.2 41.7 35.0
--------- --------- --------- ------- ------- ------- ------- ------- -------
Core Business................... 2,539.4 2,413.4 2,596.2 357.7 352.1 430.6 241.9 251.8 305.8
Liquidating Commercial Lines.... 135.9 152.0 225.2 (29.9) (20.3) (241.4) (21.5) (12.3) (149.1)
--------- --------- --------- ------- ------- ------- ------- ------- -------
Total........................... $ 2,675.3 $ 2,565.4 $ 2,821.4 $ 327.8 $ 331.8 $ 189.2 $ 220.4 $ 239.5 $ 156.7
========= ========= ========= ======= ======= ======= ======= ======= =======
PRESENTATION OF INCOME DATA
The combination of the Company's consumer and continuing commercial product
lines are referred to as Finance and Banking. Assets of the liquidating
commercial product lines, which are separately managed as receivables are
collected or otherwise disposed of, have been disclosed separately in the
consolidated balance sheets and as a separate business segment, referred to as
Liquidating Commercial Lines. To better define and report the results of
operations, the Company refers to its Finance and Banking and Individual Life
Insurance segments as its Core Business.
Operating profits represent income before income taxes but include interest
expense, as financing costs are integral to the Company's operations. Income by
segment assumes each business services its own debt. The segments generally
provide for income taxes as if separate tax returns were filed subject to
certain consolidated return limitations and benefits. Equity is allocated to the
business segments based on the underlying regulatory and business requirements.
IDENTIFIABLE ASSETS
------------------------------------
1993 1992 1991
---------- ---------- ----------
(IN MILLIONS)
Finance and Banking.............................................................. $ 11,335.5 $ 10,369.0 $ 10,042.9
Individual Life Insurance........................................................ 6,959.0 5,926.2 5,273.8
---------- ---------- ----------
Core Business.................................................................... 18,294.5 16,295.2 15,316.7
Liquidating Commercial Lines..................................................... 1,555.7 1,851.2 2,030.5
---------- ---------- ----------
Total............................................................................ $ 19,850.2 $ 18,146.4 $ 17,347.2
========== ========== ==========
PRESENTATION OF BUSINESS SEGMENT DATA
The Finance and Banking segment markets home equity receivables, other
secured consumer receivables, bankcards, merchant participation receivables,
other unsecured consumer receivables, equipment and other secured commercial
loans and leases, and credit and specialty insurance. The Individual Life
Insurance segment provides ordinary life, universal life and annuity insurance
products. The Liquidating Commercial Lines segment manages the discontinued
product lines which consist of commercial real estate, acquisition finance and
other loans and other commercial assets being liquidated.
IDENTIFIABLE ASSETS REVENUES OPERATING PROFIT
---------------------------------- --------------------------------- ---------------------------------
GEOGRAPHIC DATA 1993 1992 1991 1993 1992 1991 1993 1992 1991
- ------------------- ---------- ---------- ---------- --------- --------- --------- --------- --------- ---------
(IN MILLIONS)
United States...... $ 19,430.6 $ 17,691.5 $ 16,816.7 $ 2,603.8 $ 2,476.4 $ 2,720.9 $ 328.4 $ 329.5 $ 197.0
Australia.......... 419.6 454.9 530.5 71.5 89.0 100.5 (.6) 2.3 (7.8)
---------- ---------- ---------- --------- --------- --------- --------- --------- ---------
Total.............. $ 19,850.2 $ 18,146.4 $ 17,347.2 $ 2,675.3 $ 2,565.4 $ 2,821.4 $ 327.8 $ 331.8 $ 189.2
========== ========== ========== ========= ========= ========= ========= ========= =========
F-6
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Household Finance Corporation ("HFC" or the "Company") is a subsidiary of
Household International, Inc. ("Household International" or the "parent
company").
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The financial statements include the accounts of the
Company and all subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. Certain prior year amounts
have been reclassified to conform with the current year's presentation.
INVESTMENT SECURITIES. The Company maintains investment portfolios in both
its noninsurance and insurance operations. These portfolios are comprised
primarily of debt securities. The insurance portfolio also includes mortgage and
policyholder loans and other real estate investments. Effective December 31,
1993 the Company adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("FAS No.
115"). In accordance with FAS No. 115, investment securities in both the
noninsurance and insurance operations are classified in three separate
categories: trading, available-for-sale or held-to-maturity. Trading investments
are bought and held principally for the purpose of selling them in the near term
and are carried at fair value. Adjustments to the carrying value of trading
investments are included in current earnings. Investments which the Company has
the positive intent and ability to hold to maturity are classified as
held-to-maturity and carried at amortized cost. Investments not classified as
trading or held-to-maturity are classified as available-for-sale. They are
intended to be invested for an indefinite period but may be sold in response to
events reasonably expected in the foreseeable future. These investments are
carried at fair value. Unrealized holding gains and losses on available-for-sale
investments are recorded as adjustments to common shareholder's equity, net of
income taxes and, for certain investments in the insurance operation, related
unrealized deferred insurance policy acquisition cost adjustments (see
'Insurance' accounting policies on pages F-8 and F-9). Prior to the adoption of
FAS No. 115, available-for-sale investments were carried at the lower of
aggregate amortized cost or fair value, and any adjustments to carrying value
for the noninsurance operations were included in earnings, while any adjustments
to carrying value for the insurance operation were included in common
shareholder's equity. Any decline in the fair value of available-for-sale or
held-to-maturity investments which is deemed to be other than temporary is
charged against current earnings.
Cost of investment securities sold by the insurance operation generally is
determined using the first-in, first-out ("FIFO") method, and cost of
noninsurance investment securities sold is determined by specific
identification. Interest income earned on the noninsurance investment portfolio
is classified in the statements of income in net interest margin. Realized gains
and losses from the noninsurance portfolio and investment income from the
insurance portfolio are recorded in investment income. Gains and losses on
trading investments are recorded in other income. Accrued investment income is
classified with investment securities.
RECEIVABLES. Receivables are carried at amortized cost. The Company
periodically sells receivables from its home equity, bankcard and merchant
participation portfolios. Because these receivables were originated with
variable rates of interest or rates comparable to those currently offered by the
Company for such receivables, carrying value approximates market value.
Finance income is earned using the effective yield method and classified on
the balance sheets, to the extent not collected, with the related receivables.
Origination fees are deferred and amortized to finance income over the estimated
life of the related receivables, except to the extent they offset directly
related lending costs. Annual fees on bankcards are netted with direct lending
costs associated with the issuance of the cards. The net amount is deferred and
amortized on a straight-line basis over one year. Net deferred direct lending
costs related to bankcard receivables totaled $7 and $8 million at December 31,
1993 and 1992, respectively.
Insurance reserves applicable to credit risks on consumer receivables are
treated as a reduction of receivables in the balance sheets since payments on
such policies generally are used to reduce outstanding receivables. Provisions
for credit losses are made in amounts sufficient to maintain reserves at a level
considered adequate to cover probable losses of principal and earned interest in
the existing portfolio of
F-7
owned receivables. Probable losses are estimated for consumer receivables based
on contractual delinquency status and historical loss experience and, for
commercial loans, based on a specific loan review process as well as
management's assessment of general reserve requirements. These estimates are
reviewed periodically, and adjustments are reported in earnings in the periods
in which they become known. The Company's chargeoff policy for all consumer
receivables is based on contractual delinquency over periods ranging from 6 to 9
months. Commercial loans are written off when it becomes apparent that an
account is uncollectible.
LIQUIDATING COMMERCIAL ASSETS. The Company has discontinued selected,
high-risk commercial product lines. These assets are managed separately from the
continuing core businesses and therefore have been presented separately for
financial reporting purposes. Liquidating commercial assets are recorded in the
accompanying balance sheets at amortized cost net of reserves for credit losses.
The carrying value recorded does not exceed amounts estimated to be recoverable,
which is consistent with the current intent to hold these assets and collect or
otherwise dispose of them in the normal course of business. These assets are
accounted for consistent with accounting policies discussed herein.
NONACCRUAL LOANS. Nonaccrual loans are loans on which accrual of interest
has been suspended. Interest income is suspended on all consumer and commercial
loans when principal or interest payments are more than three months
contractually past due, except for bankcards and private-label credit cards,
which are included in the merchant participation product line. On these credit
card receivables, interest continues to accrue until the receivable is charged
off. There were no commercial loans at December 31, 1993 which were 90 days or
more past due which remained on accrual status. Accrual of income on nonaccrual
consumer receivables is not resumed until such receivables become less than
three months contractually past due. Accrual of income on nonaccrual commercial
loans is not resumed until such loans become contractually current.
RECEIVABLES SOLD AND SERVICED WITH LIMITED RECOURSE AND SECURITIZATION
INCOME. Certain home equity, bankcard and merchant participation receivables
have been securitized and sold to investors with limited recourse. The servicing
rights to these receivables have been retained by the Company. Upon sale, the
receivables are removed from the balance sheet, and a gain on sale is recognized
for the difference between the carrying value of the receivables and the
adjusted sales proceeds. The adjusted sales proceeds are based on a present
value estimate of future cash flows to be recognized over the life of the
receivables. Future cash flows are based on estimates of prepayments, the impact
of interest rate movements on yields of receivables sold and securities issued,
delinquency of receivables sold, normal servicing fees, operating expenses and
other factors. The resulting gain is reduced by establishing a reserve for
estimated probable losses under the recourse provisions. Gains on sale, recourse
provisions and servicing cash flows on receivables sold are reported in the
accompanying statements of income as securitization and servicing fee income.
PURCHASED MORTGAGE SERVICING RIGHTS. In 1993, the Company acquired
purchased mortgage servicing rights ("PMSR") from an affiliate (see Note 14,
"Transactions With Parent Company and Affiliates" for a description of the
transaction). PMSR are amortized in a manner which corresponds to the estimated
net servicing revenue stream over their estimated useful life not to exceed 15
years. The Company periodically evaluates the carrying value of its PMSR in
light of the actual repayment experience of the underlying loans and makes
adjustments to reduce the carrying value where appropriate. Servicing income and
amortization of PMSR are included in securitization and servicing fee income in
the statements of income.
PROPERTIES AND EQUIPMENT. Properties and equipment are recorded at cost and
depreciated over their estimated useful lives principally using the
straight-line method for financial reporting purposes and accelerated methods
for tax purposes.
REAL ESTATE OWNED. Real estate owned, which is included in assets acquired
through foreclosure on the accompanying balance sheets, is valued at the lower
of cost or fair value less estimated costs to sell. Costs of holding this real
estate, and related gains and losses on disposition, are credited or charged to
operations as incurred. These values are periodically reviewed and reduced, if
appropriate.
INSURANCE. Premiums for ordinary life policies are recognized when due.
Premiums for credit insurance are recognized over the period at risk in
relationship to anticipate