HOUSEHOLD FINANCE CORP - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K

HOUSEHOLD FINANCE CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE 36-1239445
(State of incorporation) (I.R.S. Employer Identification No.)
2700 SANDERS ROAD
PROSPECT HEIGHTS, ILLINOIS 60070
(Address of principal executive offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (847) 564-5000

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

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]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]

As of March 19, 2003, there were 1,000 shares of the registrant's common
stock outstanding, all of which are owned by Household International, Inc.

THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
I(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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TABLE OF CONTENTS

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PART I

ITEM 1. BUSINESS.

INTRODUCTION

Household Finance Corporation ("HFC") is a wholly owned subsidiary of
Household International, Inc. ("Household International" or the "parent
company"). Household International has entered into a merger agreement with HSBC
Holdings plc ("HSBC") pursuant to which HSBC will acquire Household
International in 2003, subject to the terms and conditions of the merger
agreement. As a result of this merger, Household International will no longer be
a public company. However, Household International and HFC will continue to file
periodic reports with the United States Securities and Exchange Commission (the
"SEC") in a reduced disclosure format as permitted by SEC rules following the
merger as wholly owned subsidiaries of HSBC. This Form 10-K does not reflect or
assume any changes to our business as a result of the merger and does not
discuss the impact of the merger on Household International's compensation
policies or employment arrangements, or our liquidity, capital or reportable
segments. For material information regarding the merger, including its impact on
Household International, please see Household International's definitive proxy
statement for the special meeting of its shareholders to be held on March 28,
2003, which was filed with the SEC on February 26, 2003, and the supplemental
proxy materials, which were filed with the SEC on March 19, 2003.

GENERAL

HFC offers real estate secured loans, auto finance loans, MasterCard* and
Visa* credit cards, private label credit cards, tax refund anticipation loans,
retail installment sales finance loans and other types of unsecured loans to
consumers in the United States. Where applicable laws permit, we offer credit
and specialty insurance to our customers in connection with our products in the
United States and Canada. HFC and its subsidiaries may also be referred to in
this Form 10-K as "we," "us" or "our."

We have one reportable segment: Consumer, which includes our consumer
lending, mortgage services, retail services, credit card services and auto
finance businesses. Information about businesses or functions that are not
individually reportable, such as our insurance services, refund lending, direct
lending and commercial businesses, as well as our corporate and treasury
activities, are included under the "All Other" segment.

The consumer lending business originates real estate and personal
non-credit card loan volume through its retail branch network, direct mail,
telemarketing, strategic alliances and Internet applications. The mortgage
services business originates and purchases real estate secured loan volume
primarily through brokers and correspondents. Auto finance loan volume is
generated primarily through dealer relationships from which installment
contracts are purchased. Additional auto finance loan volume is generated
through direct lending which includes alliance partner referrals, Internet
applications and direct mail. MasterCard and Visa loan volume is generated
primarily through direct mail, telemarketing, Internet applications, application
displays, promotional activity associated with our affinity and co-branding
relationships and mass-media advertisement (The GM Card(R)). We also supplement
internally-generated receivable growth with portfolio acquisitions and, prior to
2003, purchases from an affiliate.

REGULATION

We are subject to ongoing regulation by the SEC, the Office of the
Comptroller of the Currency ("OCC"), the Federal Deposit Insurance Corporation
("FDIC") and other U.S. (federal and state) and foreign regulatory agencies,
which agencies have broad oversight, supervisory and enforcement powers. Within
the scope of these powers, requests have been made to Household International,
to which Household International has responded, for factual material surrounding
the consumer protection settlement with a multi-state working group of state
attorneys general and regulatory agencies, the 2002 restatement and certain

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* MasterCard is a registered trademark of MasterCard International, Incorporated
and Visa is a registered

trademark of Visa USA, Inc.
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other matters. On March 18, 2003, without admitting or denying any wrongdoing,
Household International consented to the entry of an order by the SEC pursuant
to Section 21C of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The order contains findings by the SEC relating to the sufficiency of
certain disclosures in reports Household International filed with the SEC during
2002. The SEC found that Household International's disclosures regarding its
restructure policies fail to present an accurate description of the minimum
payment requirements applicable under the various policies or to disclose its
policy of automatically restructuring numerous loans and are therefore false and
misleading. The SEC also found misleading Household International's failure to
disclose its policy of excluding forbearance arrangements in certain of its
businesses from its 60+ days contractual delinquency statistics. The SEC noted
that the 60+ days contractual delinquency rate and restructuring statistics are
key measures of financial performance because they positively correlate to
charge-off rates and loan loss reserves. The SEC findings state that these
disclosures violated Sections 10(b) and 13(a) of the Exchange Act, and Rules
10b-5, 12b-20, 13a-1 and 13a-13 under the Exchange Act. A copy of the consent
order has been filed publicly with the SEC on a Current Report on Form 8-K and
is available from Household International upon request.

The consent order requires Household International to cease and desist from
committing or causing any violations or future violations of the provisions of
and rules under the Exchange Act cited above. The order does not require it to
pay any fines or monetary damages. The SEC's order does not require any
restatement of Household International's and our financial results. Household
International has agreed to the entry of the consent order, without admitting or
denying the SEC's findings. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Credit Quality -- Account
Management Policies."

Consumer Lending. Our consumer finance businesses operate in a highly
regulated environment. These businesses are subject to laws relating to consumer
protection, discrimination in extending credit, use of credit reports, privacy
matters, disclosure of credit terms and correction of billing errors. They also
are subject to certain regulations and legislation that limit operations in
certain jurisdictions. For example, limitations may be placed on the amount of
interest or fees that a loan may bear, the amount that may be borrowed, the
types of actions that may be taken to collect or foreclose upon delinquent loans
or the information about a customer that may be shared. Our consumer branch
lending offices are generally licensed in those jurisdictions in which they
operate. Such licenses have limited terms but are renewable, and are revocable
for cause. Failure to comply with these laws and regulations may limit the
ability of our licensed lenders to collect or enforce loan agreements made with
consumers and may cause HFC to be liable for damages and penalties.

There has been a significant amount of legislative activity, nationally,
locally and at the state level, aimed at curbing lending abuses deemed to be
"predatory". In addition, states have sought to alter lending practices through
consumer protection actions brought by state attorneys general and other state
regulators. Legislative activity in this area is expected to continue targeting
certain abusive practices such as loan "flipping" (making a loan to refinance
another loan where there is no tangible benefit to the borrower), fee "packing"
(addition of unnecessary, unwanted and unknown fees to a borrower), "equity
stripping" (lending without regard to the borrower's ability to repay or making
it impossible for the borrower to refinance with another lender), and outright
fraud. HFC does not condone or endorse any of these practices. We continue to
work with regulators and consumer groups to create appropriate safeguards to
eliminate these abusive practices while allowing middle-market borrowers to
continue to have unrestricted access to credit for personal purposes, such as
the purchase of homes, automobiles and consumer goods. As part of this effort we
have adopted a set of lending best practice initiatives. These initiatives,
which may be modified from time-to-time, are discussed at our parent company's
corporate web site, www.household.com under the heading "Customer Commitment".
As part of Household International's agreement with the state attorneys general
and regulators, we also will provide simplified and improved lending disclosures
and additional compliance controls over the loan closing process.
Notwithstanding these efforts, it is possible that broad legislative initiatives
will be passed which will impose additional costs and rules on our businesses.
Although we have the ability to react quickly to new laws and regulations, it is
too early to estimate the effect, if any, these activities will have on us in a
particular locality or nationally.

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Banking Institutions. Our banking institution originates receivables in
our MasterCard, Visa, and private label credit card businesses. Historically,
our banking institutions improved operational efficiencies by offering loan
products with common characteristics across the United States. Generally, our
banking institutions sold the receivables they originated to non-banking
affiliates (also subsidiaries of HFC) so that we could manage all of our
customers with uniform policies, regardless through which legal entity a loan
was made. In addition, this structure allowed us and our parent company to
better manage the levels of regulatory capital required to be maintained at
these banking institutions. In 2002, we were advised by the Office of Thrift
Supervision, the OCC and the FDIC that in accordance with their 2001 Guidance
for Subprime Lending Programs, they would require higher capital levels for
institutions holding nonprime or subprime assets. These capital levels were
greater than the historical levels we had maintained at our subsidiary banking
institution. Household International and HFC agreed to maintain the regulatory
capital of our institutions at these specified levels. After evaluating ways to
better manage these new capital requirements, Household International combined
all of its credit card banks into a single credit card banking subsidiary of
HFC, chartered by the OCC, on July 1, 2002. Also on this date, the credit card
bank sold all of its existing receivables to non-bank HFC subsidiaries, which
also purchase new receivables on a daily basis. We believe that these actions
streamline and simplify our regulatory process and optimize capital and
liquidity management. We do not expect that any of these actions will have a
material adverse effect on our business or our financial condition.

Our credit card banking subsidiary is subject to capital requirements,
regulations and guidelines imposed by the OCC. During 2002, because deposits
held at our banking institutions were insured by the FDIC, the FDIC also had
jurisdiction over them and was actively involved in reviewing their financial
and managerial strength. This supervision continues as to our credit card bank.
For example, this institution is subject to federal regulations concerning its
general investment authority as well as its ability to acquire financial
institutions, enter into transactions with affiliates and pay dividends. Such
regulations also govern the permissible activities and investments of any
subsidiary of a bank.

Our credit card banking subsidiary is also subject to the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA") and the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"). Among
other things, FDICIA creates a five-tiered system of capital measurement for
regulatory purposes, places limits on the ability of depository institutions to
acquire brokered deposits, and gives broad powers to federal banking regulators,
in particular the FDIC, to require undercapitalized institutions to adopt and
implement a capital restoration plan and to restrict or prohibit a number of
activities, including the payment of cash dividends, which may impair or
threaten the capital adequacy of the insured depository institution. Federal
banking regulators may apply corrective measures to an insured depository
institution, even if it is adequately capitalized, if such institution is
determined to be operating in an unsafe or unsound condition or engaging in an
unsafe or unsound activity. In addition, federal banking regulatory agencies
have adopted safety and soundness standards governing operational and managerial
activities of insured depository institutions and their holding companies
regarding internal controls, loan documentation, credit underwriting, interest
rate exposure, asset growth and compensation.

In January 2003, the four federal bank regulatory agencies issued final
guidance for account management and loss allowance practices for credit card
lending. We believe that implementation of the guidance should not have a
material adverse impact on our financial statements or the way we manage our
business. This guidance (as well as earlier guidance on other topics, including
criteria for resetting the delinquency status of an account to current) does not
apply to our non-bank lending operations.

Insurance. Our credit insurance business is subject to regulatory
supervision under the laws of the states in which it operates. Regulations vary
from state to state but generally cover licensing of insurance companies,
premium and loss rates, dividend restrictions, types of insurance that may be
sold, permissible investments, policy reserve requirements, and insurance
marketing practices.

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CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS

Certain matters discussed throughout this Form 10-K constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. In addition, we may make or approve certain
statements in future filings with the SEC, in press releases, or oral or written
presentations by representatives of HFC that are not statements of historical
fact and may also constitute forward-looking statements. Words such as
"believe", "expects", "estimates", "targeted", "anticipates", "goal" and similar
expressions are intended to identify forward-looking statements but should not
be considered as the only means through which these statements may be made.
These matters or statements will relate to our future financial condition,
results of operations, plans, objectives, performance or business developments
and will involve known and unknown risks, uncertainties and other factors that
may cause our actual results, performance or achievements to be materially
different from that which was expressed or implied by such forward-looking
statements. Forward-looking statements are based on our current views and
assumptions and speak only as of the date they are made. HFC undertakes no
obligation to update any forward-looking statement to reflect subsequent
circumstances or events.

The important factors, many of which are out of our control, which could
affect our actual results and could cause our results to vary materially from
those expressed in public statements or documents are:

- changes in laws and regulations, including attempts by local, state and
national regulatory agencies or legislative bodies to control alleged
"predatory" lending practices through broad initiatives aimed at lenders
operating in the nonprime or subprime consumer market;

- increased competition from well-capitalized companies or lenders with
access to government sponsored organizations for our consumer segment
which may impact the terms, rates, costs or profits historically included
in the loan products we offer or purchase;

- changes in accounting or credit policies, practices or standards, as they
may be internally modified from time to time or as required by regulatory
agencies and the Financial Accounting Standards Board;

- changes in overall economic conditions, including the interest rate
environment in which we operate, the capital markets in which we fund our
operations, the market values of consumer owned real estate throughout
the United States, recession, employment and currency fluctuations;

- consumer perception of the availability of credit, including price
competition in the market segments we target and the ramifications or
ease of filing for personal bankruptcy;

- the effectiveness of models or programs to predict loan delinquency or
loss and initiatives to improve collections in all business areas, and
changes we may make from time to time in these models, programs and
initiatives;

- continued consumer acceptance of our distribution systems and demand for
our loan or insurance products;

- changes associated with, as well as the difficulty in integrating
systems, operational functions and cultures, as applicable, of any
organization or portfolio acquired by HFC;

- a reduction of our debt ratings by any of the nationally recognized
statistical rating organizations that rate these instruments to a level
that is below our current rating;

- the costs, effects and outcomes of regulatory reviews or litigation
relating to our nonprime loan receivables or the business practices or
policies of any of our business units, including, but not limited to,
additional compliance requirements;

- increased funding costs resulting from continued or further instability
in the capital markets and risk tolerance of fixed income investors;

- the costs, effects and outcomes of any litigation matter that is
determined adversely to HFC or its businesses;

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- the ability to attract and retain qualified personnel to support the
underwriting, servicing, collection and sales functions of our
businesses;

- failure of Household International to complete the merger with HSBC in
accordance with the announced terms; and

- the inability of HFC to manage any or all of the foregoing risks as well
as anticipated.

AVAILABLE INFORMATION

Our parent company maintains a website at www.household.com on which we
make available, as soon as reasonably practicable after filing with or
furnishing to the SEC, our annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and amendments to these reports.

ITEM 2. PROPERTIES.

Substantially all branch offices, divisional offices, corporate offices,
regional processing and regional servicing center spaces are operated under
lease with the exception of a credit card processing facility in Las Vegas,
Nevada, and servicing facilities in London, Kentucky, Mt. Prospect, Illinois,
and Chesapeake, Virginia, and a hanger in Wheeling, Illinois. We believe that
such properties are in good condition and meet our current and reasonably
anticipated needs.

ITEM 3. LEGAL PROCEEDINGS.

General. We are parties to various legal proceedings resulting from
ordinary business activities relating to our current and/or former operations.
Certain of these actions are or purport to be class actions seeking damages in
very large amounts. These actions assert violations of laws and/or unfair
treatment of consumers. Due to the uncertainties in litigation and other
factors, we cannot be certain that we will ultimately prevail in each instance.
We believe that our defenses to these actions have merit and any adverse
decision should not materially affect our consolidated financial condition.

Consumer Lending Litigation. During the past several years, the press has
widely reported certain industry related concerns that may impact us. Some of
these involve the amount of litigation instituted against finance and insurance
companies operating in the states of Alabama and Mississippi and the large
awards obtained from juries in those states. Like other companies in this
industry, some of our subsidiaries are involved in a number of lawsuits pending
against them in Alabama and Mississippi. The Alabama and Mississippi cases
generally allege inadequate disclosure or misrepresentation of financing terms.
In some suits, other parties are also named as defendants. Unspecified
compensatory and punitive damages are sought. Several of these suits purport to
be class actions or have multiple plaintiffs. The judicial climate in Alabama
and Mississippi is such that the outcome of all of these cases is unpredictable.
Although our subsidiaries believe they have substantive legal defenses to these
claims and are prepared to defend each case vigorously, a number of such cases
have been settled or otherwise resolved for amounts that in the aggregate are
not material to our operations. Appropriate insurance carriers have been
notified of each claim, and a number of reservations of rights letters have been
received. Certain of the financing of merchandise claims have been partially
covered by insurance.

On October 11, 2002, Household International reached a preliminary
agreement with a multi-state working group of state attorneys general and
regulatory agencies to effect a nationwide resolution of alleged violations of
federal and/or state consumer protection, consumer financing and banking laws
and regulations with respect to secured real estate lending from our retail
branch consumer lending operations. This preliminary agreement, and related
subsequent consent decrees and similar documentation entered into with each of
the 50 states and the District of Columbia, are referred to collectively as the
"Multi-State Settlement Agreement." The Multi-State Settlement Agreement
requires Household International to establish a settlement fund and to pay
certain expenses of investigation and administration. We will also provide
greater disclosures and alternatives for customers in connection with "nonprime"
mortgage lending originated by our retail branch network. In addition, we will
unilaterally amend all branch originated real estate secured loans to

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provide that no pre-payment penalty is payable later than 24 months after
origination. No fines, penalties or punitive damages were assessed by the states
pursuant to the Multi-State Settlement Agreement. The Multi-State Agreement
became effective as of December 16, 2002.

Under the terms of the Multi-State Settlement Agreement, Household
International established a fund of $484 million to be divided among all
participating states (including the District of Columbia), with each state
receiving a proportionate share of the funds based upon the volume of the retail
branch originated real estate secured loans we made in that state during the
period of January 1, 1999 to September 30, 2002. Household International
deposited three equal installments into the fund in January, February and March
2003.

Household International has also paid $10.2 million to the states as
reimbursement for the expenses of their investigation and will pay fees and
expenses of an independent settlement fund administrator of up to $9.8 million.
At our expense, we will also retain an independent monitor to report on our
compliance with the Multi-State Settlement Agreement over the next five years.

Each borrower that receives a payment under the Multi-State Settlement
Agreement will be required to release all civil claims against Household
International and its affiliates (including us) relating to consumer lending
practices. Each state has agreed that the settlement resolves all current civil
investigations and proceedings by the attorneys general and state lending
regulators relating to the lending practices at issue.

We recorded a pre-tax charge in the third quarter of fiscal year 2002 of
$525 million reflecting the costs of the Multi-State Settlement Agreement and
related matters.

We have also been named in purported class actions by individuals and
consumer groups directly or supporting individuals in the United States (such as
the AARP and the "Association of Community Organizations for Reform Now")
claiming that our loan products or lending policies and practices are unfair or
misleading to consumers. Judicial certification of a class is required before
any claim can proceed on behalf of a purported class and, to date, none of the
purported class action claims has been certified. Although the Multi-State
Settlement Agreement does not cause the immediate dismissal of these purported
class actions, we believe it substantially reduces our risk of any material
liability that may result since every consumer who receives payments as a result
of the Multi-State Settlement Agreement must release us from any liability for
such claims generally as alleged by these individuals and groups. We intend to
seek resolution of these related legal actions provided it is financially
prudent to do so. Otherwise, we intend to defend vigorously against the
allegations. Regardless of the approach taken with respect to these purported
class actions, we believe that any liability that may result will not have a
material financial impact. We expect, however, that consumer groups will
continue to target us in the media, with regulators, with legislators and with
legal actions to pressure us and the nonprime lending industry into accepting
concessions that would more heavily regulate the nonprime lending industry. (See
"Regulation" above.)

Securities Litigation. As reported in our Annual Report on Form 10-K/A for
the year ended December 31, 2001, which was filed with the United States
Securities and Exchange Commission on August 27, 2002 and subsequently amended
on March 20, 2003, we restated our previously reported consolidated financial
statements. The restatement relates to a MasterCard and Visa affinity credit
card relationship and a third party marketing agreement, which were entered into
between 1996 and 1999. All were part of our credit card services business. In
consultation with our prior auditors, Arthur Andersen LLP, we treated payments
made in connection with these agreements as prepaid assets and amortized them in
accordance with the underlying economics of the agreements. Our current
auditors, KPMG LLP, advised us that, in their view, these payments should have
either been charged against earnings at the time they were made or amortized
over a shorter period of time. There was no significant change as a result of
these adjustments on the prior periods net earnings trends previously reported.
The restatement resulted in a $70.2 million, after-tax, retroactive reduction to
retained earnings at December 31, 1998. As a result of the restatement,
Household International, and its directors, certain officers and former
auditors, have been involved in various legal proceedings, some of which purport
to be class actions. A number of these actions allege violations of federal
securities laws, were filed between August and October 2002, and seek to recover
damages in respect of allegedly false and misleading statements about our stock.
To date, none of the class
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claims has been certified. These legal actions have been consolidated into a
single purported class action, Jaffe v. Household International, Inc., et all.,
No. 02 C 5893 (N.D. Ill. filed August 19, 2002), and a consolidated and amended
complaint was filed on March 7, 2003. The amended complaint purports to assert
claims under the federal securities laws, on behalf of all persons who purchased
or otherwise acquired Household International securities between October 23,
1997 and October 11, 2002, arising out of alleged false and misleading
statements in connection with our sales and lending practices, the preliminary
agreement with a multi-state working group of state attorneys general, the
restatement and the merger of Household International with HSBC. The Amended
Complaint, which also names as defendants Arthur Andersen LLP, Goldman, Sachs &
Co., and Merrill Lynch, Pierce, Fenner & Smith, Inc., fails to specify the
amount of damages sought.

Merger Litigation. Several lawsuits have been filed alleging violations of
law with respect to the pending merger of Household International with HSBC.
While the lawsuits are in their preliminary stages, we believe that the claims
lack merit and the defendants deny the substantive allegations of the lawsuits.
These lawsuits are described below.

The operative complaints in two lawsuits pending in the Circuit Court of
Cook County, Illinois, Chancery Division, McLaughlin v. Aldinger et al. (filed
on November 15, 2002), No. 02 CH 20683, and Pace v. Aldinger et al. (filed on
October 24, 2002 and amended on November 15, 2002), No. 02 CH 19270 , assert
purported derivative claims arising out of the restatement of Household
International's consolidated financial statements, the preliminary agreement
with a multi-state working group of state attorneys general, and other
accounting matters. Both actions seek unspecified damages and the complaint in
Pace also seeks to enjoin the pending merger with HSBC. A third lawsuit relating
to the merger with HSBC, Williamson v. Aldinger et al. (filed on January 15,
2003), is pending in the United States District Court for the Northern District
of Illinois, and claims that certain of Household International's officers and
directors breached their fiduciary duties and committed corporate waste by
agreeing to the pending merger with HSBC and allegedly failing to take
appropriate steps to maximize the value of a merger transaction. This complaint
also seeks to enjoin the pending merger with HSBC.

Plaintiffs in the three actions have asserted that the proxy materials
provided to the parent company's stockholders are deficient in failing to
disclose or sufficiently emphasize the following, which plaintiffs consider
important to the parent company's stockholders' decision with respect to the
pending merger with HSBC, including: that Household International or its
financial advisor failed to obtain internal projections of HSBC of its expected
future performance; that, as has been alleged, Household International failed to
take adequate steps to "shop" the company before agreeing to the merger
agreement with HSBC and that the magnitude of the termination fee payable to
HSBC under the merger agreement in certain circumstances constitutes an
unreasonable impediment to a competing transaction; and that, also as has been
alleged, the senior management of Household International and its Board of
Directors were motivated to approve and recommend the merger with HSBC allegedly
in order to insulate themselves from personal liability for claims arising out
of the restatement of Household International's consolidated financial
statements, the preliminary agreement with a multi-state working group of state
attorneys general, and other accounting matters.

On March 18, 2003, the plaintiffs in the three actions (together with the
plaintiff in another related action pending in the Circuit Court of Cook County,
Illinois, Chancery Division (Bailey v. Aldinger et al., No. 02 CH 16476 (filed
August 27, 2002)) agreed in principle to a settlement of the actions based on,
among other things, the additional disclosures above relating to their
allegations and HSBC's agreement to waive $55 million of the termination fee
otherwise payable to HSBC from Household International under the merger
agreement in certain circumstances. That agreement in principle is subject to
customary conditions including definitive documentation of the settlement,
additional confirmatory discovery by the plaintiffs and approval by the Courts
following notice to the stockholders and a hearing. A hearing will be scheduled
at which the Court will consider the fairness, reasonableness and adequacy of
the settlement which, if finally approved by the Court, will resolve all of the
claims that were or could have been brought in the actions being settled,
including all claims relating to the merger.

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Other actions arising out of the restatement, which purport to assert
claims under ERISA on behalf of participants in Household International's Tax
Reduction Investment Plan, have been consolidated into a single purported class
action, In re Household International, Inc. ERISA Litigation, Master File No. 02
C 7921 (N.D. Ill); a consolidated and amended complaint is to be filed by March
31, 2003. Since the complaint has not yet been filed, it is not possible to
state what the claims may be or what damages may be sought.

We believe that we have not, Household International has not and our
respective officers and directors have not, committed any wrongdoing and in each
instance there will be no finding of improper activities that may result in a
material liability to us or any of our officers or directors.

Regulatory Proceedings. In order to complete the merger, HSBC must obtain
the approval of the OCC for the change in control of Household Bank (SB), N.A.
(the "Bank" or "HBSB"), our credit card banking subsidiary. Concurrently with
the application process, HFC and the OCC have endeavored to resolve any
outstanding regulatory issues with respect to the Bank. In this regard, the Bank
has executed an agreement with the OCC relating to the resolution of issues
involving a credit card program for customers of Hispanic Air Conditioning and
Heating ("Hispanic Air") conducted by the Bank from 1997 to 1999. During that
period, the Bank provided financing for Hispanic Air's sales of heating,
ventilation and air conditioning ("HVAC") systems under a private label credit
card program established with manufacturers of HVAC equipment for who Hispanic
Air was an authorized dealer. In 1999, the attorney general of the State of
Texas filed suit against Hispanic Air, accusing Hispanic Air of deceptive and
wrongful practices in the marketing, sale and installation of HVAC systems. In
September 2000, the Texas attorney general added the Bank and certain of its
affiliates as defendants. During this time, the Bank voluntarily put in place a
comprehensive remediation program to resolve the complaints of customers of
Hispanic Air. The Bank was dismissed from the Texas action in 2002.

In June 2000, the attorney general for the State of Arizona, who had also
filed suit against Hispanic Air, added the Bank and an affiliate as defendants.
In connection with this proceeding, the Bank requested that the OCC, as the
agency with exclusive visitorial powers over the Bank, intervene and the OCC
commenced an investigation. The Bank has provided information to the OCC from
time to time in connection with this investigation. As part of our efforts to
resolve any open regulatory issues with the OCC, the Bank has executed an
agreement with the OCC, under which the Bank will be required to take certain
additional actions to supplement its prior remediation program. These actions
will involve providing additional notification to all eligible consumers of the
availability of remediation, providing inspection and repair or replacement of
equipment, providing reimbursement to customers who have incurred expenses to
repair equipment, providing reductions to principal and interest of consumer
credit card balances, providing reimbursement for warranties and late fees and
developing an action plan to enhance the administration of the Bank's private
label credit card programs. We estimate that the pre-tax cost of taking these
additional remedial actions will be less than $1,000,000. Language in the
written agreement confirms our position that the OCC has exclusive jurisdiction
over the matters complained of by the State of Arizona. The written agreement
makes it clear that the Bank neither admits nor denies that it has engaged in
any unsafe or unsound banking practices or violated any law or regulation.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Omitted.

PART II

ITEM 5. MARKET FOR 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 public market in HFC's common stock.

HFC paid cash dividends to Household International of $300 million in 2002,
$650 million in 2001 and $425 million in 2000. Household Bank (SB), N.A., a
wholly owned subsidiary, also paid cash dividends of $225 million to an
affiliate in 2001.

9

ITEM 6. SELECTED FINANCIAL DATA.

- ---------------

(1) The following information, including operating results for 2002 which are
presented on a non-GAAP basis, is provided for comparison of our operating
trends only and should be read in conjunction with our owned basis GAAP
financial information. For 2002, the operating results, percentages and
ratios presented below exclude the $333.2 million (after-tax) settlement
charge and related expenses.

10

(2) In 2002, we sold $2.7 billion of real estate secured whole loans from our
consumer lending and mortgage services businesses and purchased a $.5
billion private label portfolio. In 2001, we purchased a $.7 billion private
label portfolio.

(3) We monitor our operations and evaluate trends on both an owned basis as
shown in our historical financial statements and on a managed basis. Managed
basis reporting adjustments assume that securitized receivables have not
been sold and are still on our balance sheet. See below for further
information on managed basis reporting.

(4) The ratio of tangible shareholder's equity to tangible managed assets is a
non-GAAP financial ratio that, when calculated for Household International,
is used by certain rating agencies as a measure to evaluate its capital
adequacy. This ratio may differ from similarly named measures presented by
other companies. Because they include obligations to purchase Household
International common stock in 2006, our Adjustable Conversion-Rate Equity
Security Units are also considered equity in calculating this ratio. Common
equity to total managed assets, the most directly comparable GAAP financial
measure, is also presented in our selected financial ratios.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

BASIS OF REPORTING

Acquisition of Household International. On November 14, 2002, our parent,
Household International, Inc. ("Household International"), and HSBC Holdings plc
("HSBC"), announced that they had entered into a definitive merger agreement
under which Household International will be merged into a wholly owned
subsidiary of HSBC, subject to the terms and conditions contained in the merger
agreement. Household International has agreed that except with HSBC's prior
written consent, it will conduct its business in the ordinary course consistent
with past practices during the period from the signing of the merger agreement
until the completion of the merger. Household International also agreed to use
reasonable best efforts to preserve its present business organizations, to keep
available the services of its current officers and key employees and preserve
existing relationships and goodwill with persons with whom it does business.
Consummation of the merger is subject to regulatory approvals, the approval of
the stockholders of both Household International and HSBC and other customary
conditions.

Segments. We have one reportable segment, Consumer, which consists of our
consumer lending, mortgage services, retail services, credit card services and
auto finance businesses. At December 31, 2002, our owned receivables totaled
$75.2 billion.

Basis of Reporting. We monitor our operations and evaluate trends on a
managed basis which assumes that securitized receivables have not been sold and
are still on our balance sheet. We manage our operations on a managed basis
because the receivables that we securitize are subjected to underwriting
standards comparable to our owned portfolio, are serviced by operating personnel
without regard to ownership and result in a similar credit loss exposure for us.
In addition, we fund our operations, review our operating results and make
decisions about allocating resources such as employees and capital on a managed
basis. See "Securitizations and Secured Financings" on pages 35 to 37 and Note
5, "Asset Securitizations," and Note 18, "Segment Reporting," to the
accompanying consolidated financial statements for additional information
related to the securitizations and secured financings of our businesses.

The following discussion of our financial condition and results of
operations is presented on an owned basis of reporting. On an owned basis of
reporting, net interest margin, provision for credit losses and fee income
resulting from securitized receivables are included as components of
securitization revenue.

11

APPLICATION OF CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States. We follow
accounting guidance promulgated by the AICPA Accounting and Audit Guide for
Finance Companies rather than bank regulatory accounting pronouncements as we
are not a bank holding company. Based on the specific customer segment we serve,
we believe our policies are appropriate and fairly present the financial
position of HFC.

The significant accounting policies used in the preparation of our
financial statements are more fully described in Note 1 to the accompanying
consolidated financial statements. Certain critical accounting policies are
complex and involve significant judgment by our management, including the use of
estimates and assumptions or the application of account management policies and
practices which affect the reported amounts of assets, liabilities, revenues and
expenses. As a result, changes in these estimates, assumptions or account
management policies and practices could significantly affect our financial
position or our results of operations. We base and establish our account
management policies and practices on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities. Actual results may differ from these estimates under
different assumptions, account management policies and practices or conditions
as discussed below.

We believe that of the significant accounting policies used in the
preparation of our consolidated financial statements, the items discussed below
involve critical accounting estimates and a high degree of judgment and
complexity. Our management has discussed the development and selection of these
critical accounting policies with the audit committee of Household
International's Board of Directors, including the underlying estimates,
assumptions and account management policies and practices.

Credit Loss Reserves. Because we lend money to others, we are exposed to
the risk that borrowers may not repay amounts owed to us when they become
contractually due. Consequently, we maintain credit loss reserves at a level
that we consider adequate to cover our estimate of probable losses of principal,
interest and fees, including late, overlimit and annual fees, in the existing
owned portfolio. Loss reserve estimates are reviewed periodically, and
adjustments are reflected through the provision for credit losses on owned
receivables in the period when they become known. We believe the accounting
estimate relating to the reserve for credit losses is a "critical accounting
estimate" because (a) the provision for credit losses totaled $3.5 billion in
2002, $2.6 billion in 2001 and $1.9 billion in 2000 and changes in the provision
can materially affect net income, (b) it requires us to forecast future
delinquency and charge-off trends which are uncertain and require a high degree
of judgment and (c) it is influenced by factors outside of our control such as
customer payment patterns and economic conditions. Because our loss reserve
estimate involves judgement and is influenced by factors outside of our control,
it is reasonably possible such estimates could change.

Credit loss reserves are based on a range of estimates and are intended to
be adequate but not excessive. We estimate probable losses for consumer
receivables based on delinquency and restructure status and past loss
experience. Credit loss reserves take into account whether loans have been
restructured, rewritten or are subject to forbearance, credit counseling
accommodation, modification, extension or deferment. Our credit loss reserves
also take into consideration the loss severity expected based on the underlying
collateral, if any, for the loan. In addition, loss reserves on consumer
receivables are maintained to reflect our assessment of portfolio risk factors
which may not be reflected in the statistical calculation which uses roll rates
and migration analysis. Roll rates and migration analysis are techniques used to
estimate the likelihood that a loan will progress through the various
delinquency buckets and ultimately charge-off. Risk factors considered in
establishing loss reserves on consumer receivables include recent growth,
product mix, bankruptcy trends, geographic concentrations, economic conditions
and current levels in charge-off and delinquency. While our credit loss reserves
are available to absorb losses in the entire portfolio, we specifically consider
the credit quality and other risk factors for each of our products in
establishing credit loss reserves due to the different inherent loss
characteristics for each of our products. Charge-off policies are also
considered when establishing loss reserve requirements to ensure appropriate
allowances exist for products with longer charge-off periods.

12

We also consider key ratios such as reserves to nonperforming loans and reserves
as a percentage of net charge-offs in developing our loss reserve estimate.

Each quarter, we re-evaluate our estimate of probable losses for consumer
receivables. Changes in our estimate are recognized in our statement of income
as provision for credit losses on owned receivables in the period that the
estimate is changed. During 2002 and 2001, our reserves as a percentage of
receivables increased, reflecting the impact of a weakened economy, increased
industry bankruptcy filings, higher levels of delinquency and charge-off,
customer account management policies and practices and the continuing
uncertainty as to the ultimate impact the weakened economy will have on
delinquency and charge-off levels.

Our policies and practices for the collection of consumer receivables,
including restructuring policies and practices, permit us to reset the
contractual delinquency status of an account to current, based on indicia or
criteria which, in our judgment, evidence continued payment probability. Such
restructuring policies and practices vary by product and are designed to manage
customer relationships, maximize collections and avoid foreclosure or
repossession if reasonably possible. Approximately two-thirds of all
restructured receivables are secured products which may have less loss severity
exposure because of the underlying collateral.

The main criteria for our restructuring policies and practices vary by
product. The fact that the restructuring criteria may be met for a particular
account does not require us to restructure that account, and the extent to which
we restructure accounts that are eligible under the criteria will vary depending
upon our view of prevailing economic conditions and other factors which may
change from period to period. In addition, for some products, accounts may be
restructured without receipt of a payment in certain special circumstances (e.g.
upon reaffirmation of a debt owed to us in connection with a Chapter 7
bankruptcy proceeding). As indicated, our account management policies and
practices are designed to manage customer relationships and to help maximize
collection opportunities. We use account restructuring as an account and
customer management tool in an effort to increase the value of our account
relationships, and accordingly, the application of this tool is subject to
complexities, variations and changes from time to time. These policies and
practices are continually under review and assessment to assure that they meet
the goals outlined above, and accordingly, we modify or permit exceptions to
these general policies and practices from time to time. This should be taken
into account when comparing restructuring statistics from different periods.
Further, to the best of our knowledge, most of our competitors do not disclose
account restructuring, reaging, loan rewriting, forbearance, modification,
deferment or extended payment information comparable to the information we
disclose. The lack of such disclosure by other lenders may limit the ability to
draw meaningful conclusions about us and our business based solely on data or
information regarding account restructuring statistics or policies.

In addition to our restructuring policies and practices, we employ other
account management techniques, which we typically use on a more limited basis,
that are similarly designed to manage customer relationships and maximize
collections. These can include, at our discretion, actions such as extended
payment arrangements, Credit Card Services consumer credit counseling
accommodations, forbearance, modifications, loan rewrites and/or deferments
pending a change in circumstances. We typically enter into forbearance
agreements, extended payment and modification arrangements or deferments with
individual borrowers in transitional situations, usually involving borrower
hardship circumstances or temporary setbacks that are expected to affect the
borrower's ability to pay the contractually specified amount for some period or
time. These actions vary by product and are under continual review and
assessment to determine that they meet the goals outlined above. For example,
under a forbearance agreement, we may agree not to take certain collection or
credit agency reporting actions with respect to missed payments, often in return
for the borrower's agreeing to pay us an extra amount in connection with making
future payments. In some cases, a forbearance agreement, as well as extended
payment or modification arrangements, deferments, consumer credit counseling
accommodations, or loan rewrites may involve us agreeing to lower the
contractual payment amount or reduce the periodic interest rate. In most cases,
the delinquency status of an account is considered to be current if the borrower
immediately begins payment under the new account terms, although if the agreed
terms are not adhered to by the customer, the account status may be reversed and
collection actions resumed. When we use one of these account management
techniques, we may treat the account as being contractually current and will not
reflect it as a delinquent account in our delinquency statistics. We generally
consider loan
13

rewrites to involve an extension of a new loan, and such new loans are not
reflected in our delinquency or restructuring statistics.

For more information about our charge-off and customer account management
policies and practices, see "-- Credit Quality -- Delinquency and Charge-offs"
and "-- Credit Quality -- Account Management Policies."

Receivables Sold and Serviced With Limited Recourse and Securitization
Revenue. We use a variety of sources to fund our operations. One of these
sources is the securitization of receivables. For securitizations which qualify
as sales, the receivables are removed from the balance sheet and a gain on sale
and interest-only strip receivable are recognized. Determination of both the
gain on sale and the interest-only strip receivable include estimates of future
cash flows to be received over the lives of the sold receivables. We believe the
accounting estimates relating to gains on sale and the value of the
interest-only strip recorded are "critical accounting estimates" because (a)
changes in them may materially affect net income, (b) their values may be
influenced by factors outside of our control such as customer prepayment
patterns and economic conditions which impact charge-off and delinquency and (c)
they require us to forecast cash flows which are uncertain and require a high
degree of judgment. It should be noted, however, that the life of the
receivables that we securitize and which qualify as sales, are relatively short.
We have not structured any real estate secured receivable securitization
transactions to receive sale treatment since 1997. As a result, the real estate
secured receivables, which generally have longer lives than our other
receivables, and related debt remain on our balance sheet. Securitizing
receivables with shorter lives reduces the period of time for which cash flows
must be forecasted and, therefore, reduces the potential volatility of these
projections. However, because our securitization accounting involves judgment
and is influenced by factors outside of our control, it is reasonably possible
such projections could change.

A gain on sale is recognized for the difference between the carrying value
of the receivables securitized and the adjusted sales proceeds. The adjusted
sales proceeds include cash received and the present value estimate of future
cash flows to be received over the lives of the sold receivables. Future cash
flows are based on estimates of prepayments, the impact of interest rate
movements on yields of receivables and securities issued, delinquency of
receivables sold, servicing fees and estimated probable losses under the
recourse provisions based on historical experience and estimates of expected
future performance. Gains on sale, net of recourse provisions, are reported as
securitization revenue in our consolidated statements of income.

Securitizations structured as sales transactions also involve the recording
of an interest-only receivable which represents our contractual right to receive
interest and other cash flows from the securitization trust. Our interest-only
strip receivables are reported at estimated fair value using discounted cash
flow estimates as a separate component of receivables, net of our estimate of
probable losses under the recourse provisions. Cash flow estimates include
estimates of prepayments, the impact of interest rate movements on yields of
receivables and securities issued, delinquency of receivables sold, servicing
fees and estimated probable losses under the recourse provisions. Unrealized
gains and losses are recorded as adjustments to common shareholder's equity in
accumulated other comprehensive income, net of income taxes. Any decline in the
value of our interest-only strip receivable, which is deemed to be other than
temporary, is charged against current earnings.

Assumptions used in estimating gains on sales of receivables are evaluated
with each securitization transaction. Assumptions used in valuing interest-only
strip receivables are re-evaluated each quarter based on experience and
expectations of future performances. During 2002 and 2001, we experienced lower
interest rates on both the receivables sold and securities issued as well as
higher delinquency and charge-off levels on the underlying receivables sold as a
result of the weak economy. These factors impacted both the gains recorded and
the values of our interest-only strip receivables.

The sensitivity of our interest-only strip receivable to various adverse
changes in assumptions are disclosed in Note 5, "Asset Securitizations," to the
accompanying consolidated financial statements.

Contingent Liabilities. Both we and certain of our subsidiaries are
parties to various legal proceedings resulting from ordinary business activities
relating to our current and/or former operations. Certain of these

14

activities are or purport to be class actions seeking damages in significant
amounts. These actions include assertions concerning violations of laws and/or
unfair treatment of consumers.

Due to the uncertainties in litigation and other factors, we cannot be
certain that we will ultimately prevail in each instance. Also, as the ultimate
resolution of these proceedings is influenced by factors that are outside of our
control, it is reasonably possible our estimated liability under these
proceedings may change. However, based upon our current knowledge, our defenses
to these actions have merit and any adverse decision should not materially
affect our consolidated financial condition, results of operations or cash
flows.

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

DEVELOPMENTS AND TRENDS

- Our net income was $1.6 billion in 2002, $1.7 billion in 2001 and $1.4
billion in 2000. Our operating net income (a non-GAAP financial
measurement of net income excluding the settlement charge and related
expenses of $333.2 million, after-tax) was $2.0 billion in 2002, a 14
percent increase over 2001 net income. Operating net income is an
important measure in evaluating trends for comparative purposes.

Our improved operating net income was due to receivable and revenue
growth. Receivable growth was partially offset by higher securitization
levels and asset sales of $2.7 billion. Revenue growth was partially
offset by higher operating expenses to support portfolio growth and
higher credit loss provision due to the larger portfolio and uncertain
economic environment.

On October 11, 2002, Household International reached a preliminary
agreement with a multi-state working group of state attorneys general and
regulatory agencies to effect a nationwide resolution of alleged
violations of federal and state consumer protection, consumer financing
and banking laws and regulations with respect to secured real estate
lending from its retail branch consumer lending operations. This
agreement became effective on December 16, 2002, with the filing of
related consent decrees or similar documentation in 41 states and the
District of Columbia. Consent decrees or similar documentation have now
been filed in all 50 states and the District of Columbia. We recorded a
pre-tax charge of $525.0 million ($333.2 million after-tax) which
reflects the costs of this settlement agreement and related matters and
has been reflected in the statement of income in total costs and
expenses.

- Owned receivables grew 12 percent to $75.2 billion in 2002. In our real
estate secured portfolio, strong growth was partially offset by whole
loan sales of $2.7 billion pursuant to our liquidity management plans.
Strong growth in our auto finance, MasterCard and Visa, private label and
personal non-credit card portfolios was offset by higher securitization
levels pursuant to our liquidity management plans.

- Our return on average common shareholder's equity ("ROE") was 16.9
percent in 2002, compared to 20.8 percent in 2001 and 19.1 percent in
2000. Our return on average owned assets ("ROA") was 1.99 percent in
2002, compared to 2.56 percent in 2001 and 2.42 percent in 2000.
Excluding the settlement charge, ROE was 20.2 percent and ROA was 2.40
percent in 2002.

- Our owned net interest margin was 8.24 percent in 2002, compared to 8.59
percent in 2001 and 8.23 percent in 2000. The decrease in 2002 was
attributable to our liquidity-related investment portfolio which was
established in 2002 and has lower yields than our receivable portfolio.
This decrease was partially offset by lower funding costs. The increase
in 2001 was primarily attributable to lower funding costs.

- Our owned consumer charge-off ratio was 4.10 percent in 2002, compared to
3.72 percent in 2001 and 3.51 percent in 2000. Our delinquency ratio was
5.63 percent at December 31, 2002, compared to 4.93 percent at December
31, 2001. Both ratios were negatively affected by the weak economy and
higher industry bankruptcy filings.

15

- During 2002, we recorded owned loss provision greater than charge-offs of
$568.6 million, increasing our owned loss reserves to $3.2 billion.
Receivables growth, increases in personal bankruptcy filings, higher
delinquencies and the weak economy contributed to the higher provision.

- Our owned basis efficiency ratio was 39.4 percent in 2002, 37.1 percent
in 2001 and 38.9 percent in 2000. The 2002 ratio reflects the settlement
charge. Excluding this item, our owned basis efficiency ratio was 34.1
percent in 2002 and reflects higher revenues, partially offset by higher
operating expenses to support growth.

- On August 14, 2002, we announced a restatement of our prior period
financial results relating to our Consumer segment. The restatement
related to a MasterCard and Visa affinity credit card relationship and a
marketing agreement with a third party credit card marketing company. The
restatement resulted in a $70.2 million, after-tax, retroactive reduction
to retained earnings at December 31, 1998.

- On July 1, 2002, Household International contributed all of the capital
stock of Household Bank (SB), N.A. ("HBSB"), a wholly owned subsidiary of
Household Bank, f.s.b., to HFC. HBSB, in turn, purchased all of the
assets of Beneficial Bank USA, a wholly owned credit card banking
subsidiary of HFC. Subsequently, we merged our wholly owned banking
subsidiary, Household Bank (Nevada), N.A. with and into HBSB with HBSB
being the surviving entity. The merger completed the consolidation of all
of Household International's credit card banks into one credit card
banking subsidiary of HFC. We believe the combination of the banks
streamlines and simplifies our regulatory reporting process as well as
optimizes capital and liquidity management. In accordance with the
guidance established for mergers involving affiliates under common
control, the financial statements of HFC include the results of HBSB for
all periods presented similar to a pooling of interests.

- In January 2003, the four federal bank regulatory agencies issued final
guidance for account management and loss allowance practices for credit
card lending. We believe that implementation of the guidance should not
have a material adverse impact on our financial statements or the way we
manage our business.

SEGMENT RESULTS -- MANAGED BASIS

Our Consumer segment reported net income of $1.4 billion in 2002. Operating
net income (a non-GAAP financial measurement of net income excluding the
settlement charge and related expenses of $333.2 million, after-tax) was $1.7
billion in 2002, compared to net income of $1.5 billion in 2001 and $1.4 billion
in 2000. Operating net income is an important measure in evaluating trends for
comparative purposes.

The improved operating results were driven by higher net interest margin
dollars and total other revenues which increased $2.1 billion, or 23 percent, in
2002 and $1.2 billion, or 16 percent in 2001. Growth in average receivables
drove the increases in both years. In 2002, higher securitization activity,
pursuant to our liquidity management plans, also contributed to the increases.
The higher revenues were partially offset by substantially higher credit loss
provision and higher expenses. Our credit loss provision rose $1.6 billion, or
44 percent, in 2002 and $609.2 million, or 20 percent, in 2001 as a result of
increased levels of receivables and the continued weak economy. We increased
managed loss reserves by recording loss provision greater than charge-offs of
$1.1 billion in 2002 and $.4 billion in 2001. Higher salary and operating
expenses were the result of additional employees, increased operating costs to
support higher receivable levels, increased legal and professional expenses
related primarily to our compliance initiatives and investments in the growth of
our business.

Managed receivables grew to $97.4 billion at year-end 2002, up 13 percent
from $86.6 billion in 2001 and $74.0 billion in 2000. The managed receivable
growth was driven by solid growth in all products with the strongest growth in
our real estate secured receivables. In 2002, this growth was partially offset
by whole loan sales in our mortgage services and consumer lending business of
$2.7 billion pursuant to our liquidity management plans. Return on average
managed assets ("ROMA") was 1.45 percent in 2002, compared to 1.89 percent in
2001 and 1.95 percent in 2000. Excluding the settlement charge, ROMA was 1.80
percent in 2002. The declines in the ratio in both years reflects higher credit
loss provision. A higher percentage of lower margin real estate secured
receivables also contributed to the decrease in 2001.

16

See Note 18, "Segment Reporting," to the accompanying consolidated
financial statements for additional segment information.

BALANCE SHEET REVIEW

Owned assets totaled $88.4 billion at December 31, 2002 and $74.5 billion
at December 31, 2001. Owned receivables may vary from period to period depending
on the timing and size of securitization transactions. We had initial
securitizations of $9.5 billion in 2002 and $5.3 billion of receivables in 2001.
We refer to securitized receivables that are serviced for investors and are not
on our balance sheet as our serviced with limited recourse portfolio.

Receivables growth has been a key contributor to our 2002 results. This
growth, however, was partially offset by real estate secured whole loan sales
and higher securitization levels pursuant to our liquidity management plans.
Owned receivables and increases (decreases) over prior years are shown in the
following table:

- Real estate secured receivables increased $6.9 billion to $44.1 billion
during 2002. Growth in our branches was partially offset by whole loan
sales of $2.7 billion by our mortgage services and consumer lending
businesses pursuant to our liquidity management plans. During 2002,
strong demand for debt consolidation loans and refinancing due to
favorable interest rates contributed to growth in our branches. We
intentionally slowed this growth in the fourth quarter of 2002, however,
to improve our capital ratios.

Auto finance receivables decreased $304.1 million to $2.0 billion during
2002. A strong market driven by a favorable interest rate environment
contributed to higher originations in 2002. The higher originations were
more than offset by increased securitization activity. We had initial
securitizations of auto finance receivables of $3.3 billion in 2002
compared to $2.6 billion in 2001.

MasterCard and Visa receivables increased $638.2 million to $7.6 billion
during 2002 despite increased securitization activity. Our partner
programs, which include both our GM and Union Plus portfolios, reported
growth as a result of new account originations. For GM, this growth was
offset by attrition. Our GM portfolio, which consists primarily of prime
customers and accounts for almost a quarter of our owned MasterCard and
Visa portfolio, continues to produce stable, predictable and profitable
results. Our subprime direct mail and Household Bank branded portfolios
also reported growth as the result of new originations. We continue to
control the growth in our subprime portfolio by limiting credit lines,
especially for new customers. We had initial securitizations of
MasterCard and Visa receivables of $.9 billion in 2002 compared to $.3
billion in 2001.

Private label receivables decreased $482.7 million to $9.4 billion during
2002. Organic growth by existing merchants, expansion of the Best Buy
program, strong sales growth by several of our larger merchants and a $.5
billion portfolio acquisition were more than offset by increased
securitization activity. We had initial securitizations of private label
receivables of $1.7 billion in 2002 compared to

17

$.5 billion in 2001. In 2001, we developed focused marketing efforts and
promotions for our core merchant portfolio. These initiatives included
formation of dedicated marketing teams for our larger merchants and
development of promotions primarily for our mid-size merchants. These
efforts contributed strongly to the organic growth in 2002, which was
partially offset by the liquidation of certain merchant portfolios.

Personal non-credit card receivables increased $1.1 billion to $11.7
billion during 2002 despite increased securitization activity. We had
initial securitizations of personal non-credit card receivables of $3.6
billion in 2002 compared to $2.0 billion in 2001. The increase in Union
Plus personal unsecured loans is attributable to receivables purchased
from Household Bank, f.s.b. as a result of Household International's
decision to dispose of the assets of this affiliate.

Personal non-credit card receivables are comprised of the following:

Personal unsecured loans (cash loans with no security) are made to
customers who do not qualify for a real estate secured or personal
homeowner loan ("PHL"). The average personal unsecured loan is
approximately $5,000 and 80 percent of the portfolio is closed-end with
terms ranging from 12 to 60 months. The Union Plus personal unsecured
loans are part of our affinity relationship with the AFL-CIO and are
underwritten similar to other personal unsecured loans. The average PHL
is approximately $15,000. PHL's typically have terms of 120 or 180 months
and are subordinate lien, home equity loans with high (100 percent or
more) combined loan-to-value ratios which we underwrite, price and
classify as unsecured loans. Because recovery upon foreclosure is
unlikely after satisfying senior liens and paying the expenses of
foreclosure, we do not consider the collateral as a source for repayment
in our underwriting. Historically, these loans have performed better from
a credit loss perspective than traditional unsecured loans as consumers
are more likely to pay secured loans than unsecured loans in times of
financial distress.

- We reach our customers through many different distribution channels and
our growth strategies vary across product lines. The consumer lending
business originates real estate and personal non-credit card products
through its retail branch network, direct mail, telemarketing, strategic
alliances and Internet applications. The mortgage services business
originates and purchases real estate secured volume primarily through
brokers and correspondents. Private label credit card volume is generated
through merchant promotions, application displays, Internet applications,
direct mail and telemarketing. Auto finance loan volume is generated
primarily through dealer relationships from which installment contracts
are purchased. Additional auto finance volume is generated through direct
lending which includes alliance partner referrals, Internet applications
and direct mail. MasterCard and Visa loan volume is generated primarily
through direct mail, telemarketing, Internet applications, application
displays, promotional activity associated with our co-branding and
affinity relationships, mass media advertisements (GM Card(R)) and
merchant relationships sourced through our retail services business. We
also supplement internally-generated receivable growth with portfolio
acquisitions.

We also are active in cross-selling more products to our existing
customers. This opportunity for receivable growth results from our broad
product array, recognized brand names, varied distribution channels, and
large, diverse customer base. As a result of these cross-selling
initiatives, we increased our products per customer by almost 5 percent
in 2002. Products per customer is a measurement of the number of products
held by an individual customer whose borrowing relationship with us is
considered in good standing. Products include all loan, insurance and
related products.

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Based on certain criteria, we offer personal non-credit card customers
who meet our current underwriting standards the opportunity to convert
their loans into real estate secured loans. This enables our customers to
have access to additional credit at lower interest rates. This also
reduces our potential loss exposure and improves our portfolio
performance as previously unsecured loans become secured. We converted
approximately $350 million of personal non-credit card loans into real
estate secured loans in 2002 and $400 million in 2001. It is not our
practice to rewrite or reclassify any delinquent secured loans (real
estate or auto) into personal non-credit card loans.

The Internet is also an increasingly important distribution channel and
is enabling us to expand into new customer segments, improve delivery in
indirect distribution and serve current customers in a more
cost-effective manner. Receivables originated via the Internet doubled in
2002. At December 31, 2002, we had $6 billion in receivables and over 1.7
million accounts which were originated via the Internet. We currently
accept loan applications via the Internet for all of our products and
have the ability to serve our customers entirely on-line or in
combination with our other distribution channels.

- Our owned consumer two-months-and-over contractual delinquency ratio was
5.63 percent at December 31, 2002, compared to 4.93 percent at December
31, 2001. Our owned consumer net charge-off ratio was 4.10 percent in
2002, compared to 3.72 percent in 2001 and 3.51 percent in 2000.

- Our owned credit loss reserves were $3.2 billion at December 31, 2002,
compared to $2.4 billion at December 31, 2001. Credit loss reserves as a
percent of owned receivables were 4.20 at December 31, 2002, compared to
3.62 percent at December 31, 2001.

- Our debt to equity ratio was 7.4 to 1 at December 31, 2002, compared to
7.3 to 1 at December 31, 2001.

- On October 11, 2002, in response to the attorneys general settlement and
Household International's announced disposition of Household Bank,
f.s.b., Standard & Poor's ("S&P") announced that it had revised its
ratings for our long-term and commercial paper debt as well as those of
our parent, Household International. S&P's ratings were revised as
follows: long-term senior debt from "A" to "A-" and short-term debt from
"A-1" to "A-2". Also on October 11, 2002, Fitch Ratings announced that it
had placed the long-term and commercial paper debt ratings of Household
International and each of its subsidiaries, including HFC, on "Ratings
Watch Negative," while Moody's Investors Service affirmed all ratings for
Household International and HFC. These actions contributed to additional
volatility in the trading of our debt securities and reduced our access
to and increased our costs in the commercial paper market.

In response to Household International's announced merger with HSBC, S&P
placed our ratings on "Positive" credit watch, Fitch gave our ratings an
"Evolving" rating watch and Moody's placed our ratings on "Watch for
Upgrade." These actions resulted in reduced volatility in the trading of
our securities and enabled us to access the unsecured debt markets at
more attractive rates subsequent to the announcement. Our ratings are
well within the investment grade rating categories at all rating agencies
for all of our debt securities.

- During 2002, we took a number of steps as part of our liquidity
management plans which reduced our reliance on short-term debt and
strengthened our position against market-induced volatility. These steps
included issuing long-term debt which lengthened the term of our funding,
establishing $6.25 billion in incremental real estate secured conduit
capacity, completing real estate secured whole loan sales of $2.7
billion, issuing debt which includes purchase contracts on Household
International common stock in 2006, issuing securities backed by
dedicated home equity loan receivables of $7.5 billion and establishing
an investment security liquidity portfolio which totaled $3.9 billion at
December 31, 2002, including $2.2 billion which is dedicated to our
credit card bank. We intend to maintain an investment security portfolio
for the near future to protect us from liquidity concerns. This action
will continue to adversely impact our net interest margin and net income
due to the lower return generated by these assets. Our insurance
subsidiaries also held an additional $2.7 billion in investment
securities at December 31, 2002.

19

RESULTS OF OPERATIONS

Unless noted otherwise, the following discusses amounts reported in our
owned basis statements of income.

Net Interest Margin. Our owned net interest margin on an owned basis
increased to $6.2 billion in 2002, up from $5.2 billion in 2001 and $4.2 billion
in 2000. The increases were primarily due to growth in average receivables and
lower funding costs.

As a percent of average interest-earning assets, net interest margin was
8.24 percent in 2002, 8.59 percent in 2001 and 8.23 percent in 2000. The
decrease in 2002 was attributable to our liquidity-related investment portfolio
which was established in 2002 and has lower yields than our receivable
portfolio. This decrease was partially offset by lower funding costs. The
increase in 2001 was primarily attributable to lower funding costs.

Our net interest margin on a managed basis includes finance income earned
on our owned receivables as well as on our securitized receivables. This finance
income is offset by interest expense on the debt recorded on our balance sheet
as well as the contractual rate of return on the instruments issued to investors
when the receivables were securitized. Managed basis net interest margin
increased to $8.7 billion in 2002, up from $7.2 billion in 2001 and $5.8 billion
in 2000. Receivable growth contributed to the dollar increases in both years. As
a percent of average managed interest-earning assets, net interest margin was
9.07 percent in 2002, 9.05 percent in 2001 and 8.47 percent in 2000. Lower
funding costs were the primary driver of the increased margin in both years. In
2002, these increases were substantially offset by the liquidity-related
investment portfolio. This portfolio was established in 2002 and has lower
yields than our receivables.

Net interest margin as a percent of receivables on a managed basis is
greater than on an owned basis because the managed portfolio includes relatively
more unsecured loans, which have higher yields.

We are able to adjust our pricing on many of our products, which reduces
our exposure to changes in interest rates. During 2002 and 2001, we benefited
from reductions in funding costs, which were greater than the corresponding
reductions in pricing. These benefits, however, were offset by lower returns on
our liquidity-related investment portfolio. We estimate that our after-tax
earnings would decline by about $48 million at December 31, 2002 and $41 million
at December 31, 2001, following a gradual 100 basis point increase in interest
rates over a twelve month period.

Provision for Credit Losses. The provision for credit losses includes
current period net credit losses and an amount which we believe is sufficient to
maintain reserves for losses of principal, interest and fees, including late,
overlimit and annual fees, at a level that reflects known and inherent losses in
the portfolio.

The provision for credit losses totaled $3.5 billion in 2002, compared to
$2.6 billion in 2001 and $1.9 billion in 2000. Receivables growth, increases in
personal bankruptcy filings and the impact of the continuing weak economy on
charge-off and delinquency trends contributed to a higher provision in both
years. The provision for credit losses may vary from year to year, depending on
a variety of factors including historical delinquency roll-rates and account
management policies and practices (such as, restructure, rewrite, reage,
forbearance and modification activity) of our loan products, the amount of
securitizations in a particular period, economic conditions, and our product
vintage analyses.

As a percent of average owned receivables, the provision was 4.87 percent
in 2002, compared to 4.34 percent in 2001 and 3.88 percent in 2000. The
increases in this ratio reflect higher charge-offs, including bankruptcy
charge-offs, and additions to loss reserves, both resulting from the weak
economy.

Despite a continued shift in our portfolio mix to real estate secured
loans, we recorded owned loss provision greater than charge-offs of $568.6
million in 2002 and $377.6 million in 2001. Growth in our receivables and
portfolio seasoning also ultimately result in a higher dollar loss reserve
requirement. Loss provisions are based on an estimate of inherent losses in our
loan portfolio.

See "Application of Critical Accounting Policies" on pages 12 to 15 and
"Credit Loss Reserves" on pages 30 to 32 for additional information regarding
our owned basis and managed basis loss reserves.

20

Other Revenues. Total other revenues on an owned basis were $4.0 billion
in 2002, $3.4 billion in 2001 and $2.7 billion in 2000 and included the
following:

Securitization revenue is the result of the securitization of receivables
structured as sales and includes initial and replenishment gains on sale, net of
our estimate of probable credit losses under the recourse provisions, as well as
servicing revenue and excess spread. Certain securitization trusts, such as
credit cards, are established at fixed levels and require frequent sales of new
receivables into the trust to replace receivable run-off.

Securitization revenue included the following:

The increases were due to increases in the levels of receivables
securitized during the year, higher average securitized receivables and changes
in the mix of receivables included in these transactions. In 2002, we actively
accessed the asset-backed securities market as part of our liquidity management
plans to limit dependence on the more volatile unsecured term debt market.
Securitization revenue will vary each year based on the level and mix of
receivables securitized in that particular year (which will impact net initial
and replenishment gains, including the related estimated probable credit losses
under the recourse provisions) as well as the overall level and mix of
previously securitized receivables (which will impact servicing revenue and
excess spread). The estimate for probable credit losses for securitized
receivables is impacted by the level and mix of current year securitizations
because securitized receivables with longer lives may require a higher over-
the-life loss provision than receivables securitized with shorter lives
depending upon loss estimates and severities.

Our interest-only strip receivables, net of the related loss reserve and
excluding the mark-to-market adjustment recorded in accumulated other
comprehensive income, increased $123.9 million in 2002, $118.1 million in 2001
and $44.9 million in 2000.

See Note 1, "Summary of Significant Accounting Policies," and Note 5,
"Asset Securitizations," to the accompanying consolidated financial statements,
"Application of Critical Accounting Policies" on pages 12 to 15 and
"Securitizations and Secured Financings" on pages 35 to 37 for further
information on asset securitizations.

Insurance revenue was $526.4 million in 2002, $489.2 million in 2001 and
$394.8 million in 2000. The increases reflect increased sales on a larger
receivable portfolio. During 2001, we discontinued the sale of single premium
credit insurance on real estate secured receivables in favor of offering a fixed
monthly premium insurance product. The rollout of this insurance product began
in the fourth quarter of 2001 and was

21

substantially completed in the first quarter of 2002. This change did not have a
material impact on our results of operations for 2002.

Investment income includes interest income on investment securities in the
insurance business as well as realized gains and losses from the sale of
investment securities. Investment income was $167.1 million in 2002, $153.4
million in 2001 and $159.0 million in 2000. Interest income was the primary
driver of the increase in 2002 and the decrease in 2001. In 2002, higher average
investment balances were partially offset by lower yields. In 2001, higher
average investment balances were more than offset by lower yields.

Fee income includes fee-based revenues from products such as MasterCard and
Visa and private label credit cards. Fee income was $868.8 million in 2002,
$827.7 million in 2001 and $748.8 million in 2000. The increases were primarily
due to higher credit card fees. Fee income will also vary from year to year
depending upon the amount of securitizations in a particular period.

See Note 18, "Segment Reporting," to the accompanying consolidated
financial statements for additional information on fee income on a managed
basis.

Other income, which includes revenue from our refund lending business, was
$387.0 million in 2002, $293.5 million in 2001 and $183.9 million in 2000.
Higher revenues from our refund lending business contributed to the increases in
both years. In 2002, higher revenues from our mortgage operations also
contributed to the increase.

Costs and Expenses. Total costs and expenses, including the $525.0 million
settlement charge and related expenses, were $4.2 billion in 2002, $3.4 billion
in 2001 and $2.8 billion in 2000. Excluding the settlement charge, costs and
expenses were $3.7 billion in 2002. The increases were driven by higher
compensation and other expenses to support our growing portfolio and increased
legal and professional expenses related principally to our compliance
initiatives. Our owned basis efficiency ratio was 39.4 percent in 2002, 37.1
percent in 2001 and 38.9 percent in 2000. Excluding the settlement charge, our
owned basis efficiency ratio was 34.1 percent in 2002.

Total costs and expenses included the following:

Salaries and fringe benefits were $1.5 billion in 2002, $1.3 billion in
2001 and $1.1 billion in 2000. The increases were primarily due to additional
staffing at all businesses to support growth including sales, collections and
service quality.

Sales incentives were $244.2 million in 2002, $262.9 million in 2001 and
$193.6 million in 2000. In 2002, the decrease was due to terms of our 2002
branch incentive plans which, generally, had higher volume requirements than the
prior-year plans. In 2001, the increase was primarily due to higher sales
volumes in our branches.

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Occupancy and equipment expense was $297.1 million in 2002, $270.5 million
in 2001 and $250.3 million in 2000. In 2002, the increase was primarily due to
higher rental and other expenses. In 2001, the increase was primarily due to
growth in our support facilities.

Other marketing expenses include payments for advertising, direct mail
programs and other marketing expenditures. These expenses were $491.0 million in
2002, $467.2 million in 2001 and $450.1 million in 2000. The increases were
primarily due to increased credit card marketing initiatives in the MasterCard
and Visa portfolio.

Other servicing and administrative expenses were $769.4 million in 2002,
$621.5 million in 2001 and $454.7 million in 2000. Higher collection and
consulting expenses and higher REO expenses contributed to the increases in both
years. In 2002, the increase also reflects higher legal and compliance costs. In
2001, costs associated with privacy mailings to comply with new legislation also
contributed to the increase.

Amortization of acquired intangibles and goodwill was $57.8 million in
2002, $157.4 million in 2001 and $166.0 million in 2000. In 2002, the decrease
was primarily attributable to the adoption of Statement of Financial Accounting
Standard No. 142, ("SFAS No. 142") "Goodwill and Other Intangible Assets," on
January 1, 2002. Amortization of goodwill recorded in past business combinations
ceased upon adoption of this new accounting standard. We have completed the
transitional goodwill impairment test required by SFAS No. 142 and have
concluded that none of our goodwill is impaired. In 2001, the decrease was
attributable to reductions in acquired intangibles.

Policyholders' benefits were $305.2 million in 2002, $268.1 million in 2001
and $231.7 million in 2000. The increases were primarily due to and consistent
with the increase in insurance revenues resulting from increased policy sales.

Settlement charge and related expenses were $525.0 million in 2002. The
charges are the result of an agreement with a multi-state working group of state
attorneys general and regulatory agencies to effect a nationwide resolution of
alleged violations of federal and state consumer protection, consumer finance
and banking laws and regulations relating to real estate secured lending in our
retail branch consumer lending operations as operated under the HFC and
Beneficial brand names.

Income taxes The effective tax rate was 34.2 percent in 2002, 35.5 percent
in 2001 and 35.6 percent in 2000. Excluding the settlement charge, the effective
tax rate was 34.6 percent in 2002. The decrease in the effective tax rate is
largely attributable to lower state and local taxes and a reduction in
noncurrent tax requirements.

CREDIT QUALITY

Delinquency and Charge-offs. Our delinquency and net charge-off ratios
reflect, among other factors, changes in the mix of loans in our portfolio, the
quality of our receivables, the average age of our loans, the success of our
collection and account management efforts, bankruptcy trends and general
economic conditions. The levels of personal bankruptcies also have a direct
effect on the asset quality of our overall portfolio and others in our industry.

Our credit and portfolio management procedures focus on risk-based pricing
and effective collection and account management efforts for each loan. We
believe our credit and portfolio management process gives us a reasonable basis
for predicting the credit quality of new accounts. This process is based on our
experience with numerous marketing, credit and risk management tests. We also
believe that our frequent and early contact with delinquent customers, as well
as account management policies and practices designed to optimize account
relationships, such as restructuring, loan rewrites, forbearance, credit
counseling accommodation, modification, extension or deferment of delinquent
accounts to current in specific situations, are helpful in maximizing customer
collections.

We have been preparing for an economic slowdown since late 1999. Since
1999, we have emphasized real estate secured loans, which historically have had
a lower loss rate than our other loan products, grown sensibly,

23

tightened underwriting policies, reduced unused credit lines, strengthened risk
model capabilities and invested heavily in collections capability by adding
collectors.

Charge-Off and Nonaccrual Policies

Charge-off involving a bankruptcy for MasterCard and Visa receivables
occurs by the end of the month 60 days after notification and, for private label
receivables, by the end of the month 90 days after notification. For auto
finance receivables, bankrupt accounts are charged off no later than by the end
of the month in which the loan becomes 210 days contractually delinquent.

24

Our charge-off policies focus on maximizing the amount of cash collected
from a customer while not incurring excessive collection expenses on a customer
who will likely be ultimately uncollectible. We believe our policies are
responsive to the specific needs of the customer segment we serve. Our real
estate and auto finance charge-off policies consider customer behavior in that
initiation of foreclosure or repossession activities often prompts repayment of
delinquent balances. Our collection procedures and charge-off periods, however,
are designed to avoid ultimate foreclosure or repossession whenever it is
reasonably economically possible. With certain minor variations, our MasterCard
and Visa charge-off policy is generally consistent with credit card industry
practice. Charge-off periods for our personal non-credit card and private label
products were designed to be responsive to our customer needs and may be longer
than bank competitors who serve a different market. Our policies have generally
been consistently applied in all material respects. Our loss reserve estimates
consider our charge-off policies to ensure appropriate reserves exist for
products with longer charge-off lives. We believe our charge-off policies are
appropriate and result in proper loss recognition.

Account Management Policies and Practices Our policies and practices for
the collection of consumer receivables, including our restructuring policies and
practices, permit us to reset the contractual delinquency status of an account
to current, based on indicia or criteria which, in our judgment, evidence
continued payment probability. Such restructuring policies and practices vary by
product and are designed to manage customer relationships, maximize collections
and avoid foreclosure or repossession if reasonably possible. Approximately
two-thirds of all restructured receivables are secured products which may have
less loss severity exposure because of the underlying collateral. Credit loss
reserves take into account whether loans have been restructured, rewritten or
are subject to forbearance, credit counseling accommodation, modification,
extension or deferment. Our credit loss reserves also take into consideration
the loss severity expected based on the underlying collateral, if any, for the
loan.

The following information generally summarizes the main criteria for our
restructuring policies and practices by product. The main criteria for our
restructuring policies and practices vary by product. The fact that the
restructuring criteria may be met for a particular account does not require us
to restructure that account, and the extent to which we restructure accounts
that are eligible under the criteria will vary depending upon our view of
prevailing economic conditions and other factors which may change from period to
period. In addition, for some products, accounts may be restructured without
receipt of a payment in certain special circumstances (e.g. upon reaffirmation
of a debt owed to us in connection with a Chapter 7 bankruptcy proceeding). As
indicated, our account management policies and practices are designed to manage
customer relationships and to help maximize collection opportunities. We use
account restructuring as an account and customer management tool in an effort to
increase the value of our account relationships, and accordingly, the
application of this tool is subject to complexities, variations and changes from
time to time. These policies and practices are continually under review and
assessment to assure that they meet the goals outlined above, and accordingly,
we modify or permit exceptions to these general policies and practices from time
to time. This should be taken into account when comparing restructuring
statistics from different periods. Further, to the best of our knowledge, most
of our competitors do not disclose account restructuring, reaging, loan
rewriting, forbearance, modification, deferment or extended payment information
comparable to the information we have disclosed, and the lack of such disclosure