<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>12
<FILENAME>dex13.txt
<DESCRIPTION>SECTIONS OF 2001 ANNUAL REPORT TO SHAREHOLDERS
<TEXT>
<PAGE>
Exhibit 13
Household International, Inc. and Subsidiaries
SELECTED FINANCIAL DATA AND STATISTICS
<TABLE>
<CAPTION>
All dollar amounts except per share data are stated in millions. 2001 2000 1999 1998(1) 1997(1)
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<S> <C> <C> <C> <C> <C>
Statement of Income Data-Year Ended December 31
Net interest margin and other revenues $ 9,741.9 $ 8,032.0 $ 6,722.5 $ 6,380.0 $ 6,036.2
Provision for credit losses on owned receivables 2,912.9 2,116.9 1,716.4 1,516.8 1,493.0
Operating expenses 3,587.9 3,042.9 2,527.3 2,672.3 2,884.8
Policyholders' benefits 302.6 261.7 258.1 238.2 255.9
Merger and integration related costs -- -- -- 1,000.0 --
Income taxes 1,015.0 909.8 734.3 428.6 462.2
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Net income $ 1,923.5 $ 1,700.7 $ 1,486.4 $ 524.1(2) $ 940.3
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Per Common Share Data
Basic earnings $ 4.13 $ 3.59 $ 3.10 $ 1.04 $ 1.97
Diluted earnings 4.08 3.55 3.07 1.03(2) 1.93
Dividends declared .85 .74 .68 .60 .54
Book value 19.47 16.88 13.79 12.88 12.81
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Average number of common and common
equivalent shares outstanding(3) 468.1 476.2 481.8 496.4 479.1
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Selected Financial Ratios
Owned Basis:
Return on average owned assets 2.34% 2.44% 2.64% 1.04%(2) 2.03%
Return on average common shareholders' equity 24.1(4) 23.4 23.5 8.1(2) 17.3
Total shareholders' equity as a percent of owned assets(5) 10.77(4) 11.46 11.51 12.78 14.13
Net interest margin 7.93 7.75 7.80 7.34 7.16
Efficiency ratio 38.0 39.2 39.1 59.8(2) 49.9
Consumer net charge-off ratio 3.32 3.18 3.67 3.76 3.39
Reserves as a percent of receivables 3.33 3.14 3.36 3.92 4.25
Reserves as a percent of net charge-offs 110.5 109.9 101.1 112.6 126.7
Reserves as a percent of nonperforming loans 91.0 90.2 87.5 100.3 113.2
Common dividend payout ratio 20.8 20.8 22.1 58.3(2) 28.0
Managed Basis:(6)
Return on average managed assets 1.89 1.93 1.99 .72(2) 1.38
Tangible shareholders' equity to tangible managed assets(7) 7.87 7.41 6.96 7.11 6.92
Total shareholders' equity as a percent of managed assets(5) 8.73(4) 9.07 8.72 9.31 9.28
Net interest margin 8.50 8.10 8.23 7.86 7.72
Efficiency ratio 34.0 34.2 33.6 50.2(2) 41.0
Consumer net charge-off ratio 3.73 3.64 4.13 4.29 3.84
Reserves as a percent of receivables 3.78 3.65 3.72 3.99 3.99
Reserves as a percent of net charge-offs 110.7 111.1 98.2 94.4 109.8
Reserves as a percent of nonperforming loans 105.0 107.0 100.1 109.5 115.5
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</TABLE>
(1) On June 30, 1998, Household merged with Beneficial Corporation
("Beneficial"), a consumer finance holding company. In connection with the
merger, Household issued approximately 168.4 million shares of its common stock
and three series of preferred stock. The transaction was accounted for as a
pooling of interests and, accordingly, the consolidated financial statements for
all periods prior to the merger have been restated to include the financial
results of Beneficial.
(2) Excluding merger and integration related costs of $751.0 million after-tax
and the $118.5 million after-tax gain on sale of Beneficial's Canadian
operations, net operating income was $1,156.6 million, diluted operating
earnings per share was $2.30, the return on average owned assets was 2.29
percent, the return on average common shareholders' equity was 18.2 percent, the
owned basis efficiency ratio was 43.5 percent, the dividend payout ratio was
26.1 percent, the return on average managed assets was 1.60 percent and the
managed basis efficiency ratio was 37.6 percent.
(3) Share repurchases pursuant to our share repurchase program totaled 17.4
million shares ($916.3 million) in 2001, 5.4 million shares ($209.3 million) in
2000 and 16.8 million shares ($712.9 million) in 1999. Shares repurchased to
fund various employee benefit programs totaled 5.0 million shares ($203.0
million) in 1999 and 10.5 million shares ($412.0 million) in 1998.
(4) On January 1, 2001, we adopted Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Financial Instruments and Hedging
Activities," which requires unrealized gains and losses on cash flow hedging
instruments to be recorded in shareholders' equity, net of tax. These unrealized
gains and losses represent timing differences and will result in no net economic
impact to our earnings. Excluding unrealized gains and losses on cash flow
hedging instruments in 2001, return on average common shareholders' equity was
22.9 percent, total shareholders' equity as a percentage of owned assets was
11.56 percent and total shareholders' equity as a percentage of managed assets
was 9.37 percent.
(5) Total shareholders' equity includes common shareholders' equity, preferred
stock and company obligated mandatorily redeemable preferred securities of
subsidiary trusts.
(6) 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 page 3 for further information on
managed basis reporting.
(7) Tangible shareholders' equity consists of total shareholders' equity,
excluding unrealized gains and losses on investments and cash flow hedging
instruments, less acquired intangibles and goodwill. Tangible managed assets
represents total managed assets less acquired intangibles and goodwill and
derivative assets.
(8) In 2001, we sold approximately $1 billion of credit card receivables as a
result of discontinuing our participation in the Goldfish credit card program
and purchased a $725 million private label portfolio. In 2000, we acquired real
estate secured portfolios totaling $3.7 billion. In 1998, we sold $1.9 billion
of non-core MasterCard and Visa receivables and also sold Beneficial's German
and Canadian operations which had net receivables of $272 million and $775
million, respectively.
1
<PAGE>
Household International, Inc. and Subsidiaries
SELECTED FINANCIAL DATA AND STATISTICS
(CONTINUED)
<TABLE>
<CAPTION>
All dollar amounts except per share data
are stated in millions. 2001 2000 1999 1998(1) 1997(1)
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<S> <C> <C> <C> <C> <C>
Owned Basis Balance Sheet Data at December 31
Total assets $ 89,416.0 $ 76,706.3 $ 60,749.4 $ 52,892.7 $ 46,817.0
Receivables:(8)
Domestic:
Real estate secured $ 42,473.8 $ 33,920.0 $ 23,571.7 $ 17,474.1 $ 12,348.5
Auto finance 2,368.9 1,850.6 1,233.5 805.0 487.5
MasterCard/Visa 6,966.7 5,846.9 4,146.6 5,327.8 5,523.4
Private label 9,853.4 8,671.5 8,546.7 8,051.0 7,457.0
Personal non-credit card 11,736.7 9,950.3 7,469.8 5,573.3 5,018.7
Commercial and other 505.2 596.3 804.5 844.0 1,249.6
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Total domestic $ 73,904.7 $ 60,835.6 $ 45,772.8 $ 38,075.2 $ 32,084.7
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Foreign:
Real estate secured $ 1,383.0 $ 1,259.7 $ 1,090.2 $ 1,218.6 $ 1,437.7
MasterCard/Visa 1,174.5 2,206.7 2,167.8 1,852.4 1,351.3
Private label 1,810.5 1,675.8 1,573.0 1,515.0 1,899.9
Personal non-credit card 1,600.3 1,377.8 1,681.8 1,535.3 1,804.4
Commercial and other 1.7 2.3 3.8 9.4 104.0
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Total foreign $ 5,970.0 $ 6,522.3 $ 6,516.6 $ 6,130.7 $ 6,597.3
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Total owned receivables:
Real estate secured $ 43,856.8 $ 35,179.7 $ 24,661.9 $ 18,692.7 $ 13,786.2
Auto finance 2,368.9 1,850.6 1,233.5 805.0 487.5
MasterCard/Visa 8,141.2 8,053.6 6,314.4 7,180.2 6,874.7
Private label 11,663.9 10,347.3 10,119.7 9,566.0 9,356.9
Personal non-credit card 13,337.0 11,328.1 9,151.6 7,108.6 6,823.1
Commercial and other 506.9 598.6 808.3 853.4 1,353.6
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Total owned receivables $ 79,874.7 $ 67,357.9 $ 52,289.4 $ 44,205.9 $ 38,682.0
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Deposits $ 6,562.3 $ 8,676.9 $ 4,980.0 $ 2,105.0 $ 2,344.2
Commercial paper, bank and other borrowings 12,024.3 10,787.9 10,777.8 9,917.9 10,666.1
Senior and senior subordinated debt 56,823.6 45,053.0 34,887.3 30,438.6 23,736.2
Company obligated mandatorily redeemable
preferred securities of subsidiary trusts 975.0 675.0 375.0 375.0 175.0
Preferred stock 455.8 164.4 164.4 164.4 264.5
Common shareholders' equity(3) 8,202.8 7,951.2 6,450.9 6,221.4 6,174.0
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Managed Basis Balance Sheet at December 31(6)
Total assets $ 110,364.0 $ 96,955.8 $ 80,188.3 $ 72,594.6 $ 71,295.5
Managed receivables:(8)
Real estate secured $ 44,718.6 $ 36,637.5 $ 26,935.5 $ 22,330.1 $ 19,824.8
Auto finance 6,395.5 4,563.3 3,039.8 1,765.3 883.4
MasterCard/Visa 17,395.2 17,583.4 15,793.1 16,610.8 19,211.7
Private label 13,813.9 11,997.3 11,269.7 10,377.5 10,381.9
Personal non-credit card 17,992.6 16,227.3 13,881.9 11,970.6 11,505.1
Commercial and other 506.9 598.6 808.3 853.4 1,353.6
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Total managed receivables $ 100,822.7 $ 87,607.4 $ 71,728.3 $ 63,907.7 $ 63,160.5
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2
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Household International, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Household International, Inc. ("Household") is principally a non-operating
holding company. Through its subsidiaries, Household provides middle-market
consumers with real estate secured loans, auto finance loans, MasterCard* and
Visa* credit cards, private label credit cards and personal non-credit card
loans. We also offer tax refund anticipation loans ("RAL's") in the United
States and credit and specialty insurance products in the United States, United
Kingdom and Canada. Household may also be referred to in Management's Discussion
and Analysis of Financial Condition and Results of Operations ("MD&A") as "we",
"us", or "our". Our operations are divided into three reportable segments:
Consumer, Credit Card Services and International. Our Consumer segment consists
of our consumer lending, mortgage services, retail services and auto finance
businesses. Our Credit Card Services segment consists of our domestic MasterCard
and Visa credit card business. Our International segment consists of our foreign
operations in the United Kingdom ("U.K.") and Canada. At December 31, 2001, our
owned receivables totaled $79.9 billion.
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 "Asset
Securitizations" on pages 23 to 24 and Notes 5, "Asset Securitizations," and 21,
"Segment Reporting," to the accompanying consolidated financial statements for
additional information related to our businesses and our securitizations.
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.
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Critical Accounting Policies
The 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 versus bank regulatory accounting pronouncements as we are not a bank
holding company. Based on the specific customer segment we serve, we believe the
policies used are appropriate and fairly present the financial position of
Household.
The significant accounting policies used in preparation of our financial
statements are more fully described in Note 1 to the consolidated financial
statements on pages 42 to 46. Certain critical accounting policies are complex
and involve significant judgment by our management, including the use of
estimates and assumptions which affect the reported amounts of assets,
liabilities, revenues and expenses. As a result, changes in these estimates and
assumptions could significantly affect our financial position or our results of
operations. We base our estimates 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 or conditions.
We believe that of our significant accounting policies, the following involve a
high degree of judgment and complexity in the preparation of our consolidated
financial statements:
*MasterCard is a registered trademark of MasterCard International, Incorporated
and Visa is a registered trademark of VISA USA, Inc.
3
<PAGE>
Provision and Credit Loss Reserves Provision for credit losses on owned
receivables is made in an amount sufficient to maintain credit loss reserves at
a level considered adequate to cover probable losses of principal, interest and
fees, including late, overlimit and annual fees, in the existing owned
portfolio. Probable losses are estimated for consumer receivables based on
contractual delinquency and historical loss experience. For commercial loans,
probable losses are calculated using estimates of amounts and timing of future
cash flows expected to be received on loans. In addition, loss reserves on
consumer receivables are maintained to reflect our judgment of portfolio risk
factors, such as economic conditions, bankruptcy trends, product mix, geographic
concentrations and other similar items. Charge-off and customer account
management policies are also considered when establishing loss reserve
requirements to ensure appropriate allowances exist for products with longer
charge-off periods and for customers benefiting from account management
decisions. Loss reserve estimates are reviewed periodically and adjustments are
reported in earnings when they become known. The use of different estimates or
assumptions could produce different provisions for credit losses.
Receivables Sold and Serviced With Limited Recourse and Securitization Revenue
Upon sale, securitized receivables are removed from the balance sheet and a gain
on sale is recognized for the difference between the carrying value of the
receivables and the adjusted sales proceeds. The adjusted sales proceeds
includes 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. These future
cash flows are recorded in the form of an interest-only strip receivable. Our
interest-only strip receivables are reported at 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 shareholders' 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. The key assumptions used to
value interest-only strip receivables represent our best estimate and the use of
different estimates or assumptions could produce different financial results.
--------------------------------------------------------------------------------
Financial Condition and Results of Operations
Operations Summary
. Our net income increased 13 percent in 2001 to $1.9 billion, compared to
$1.7 billion in 2000 and $1.5 billion in 1999. Strong revenue growth,
driven by significant receivable growth across all businesses, was the key
to our improved results in both years. Partially offsetting the revenue
growth were higher operating expenses as a result of the receivable growth,
increased investments in sales and collection personnel, and higher
technology spending. The provision for credit losses also increased in both
years as a result of portfolio growth and uncertain economic conditions.
Our diluted earnings per share increased 15 percent in 2001 to $4.08,
compared to $3.55 in 2000 and $3.07 in 1999.
. Owned receivables grew 19 percent to $79.9 billion in 2001. Growth was
strongest in our consumer lending and mortgage services businesses,
especially in our real estate secured portfolio, and in our auto finance
and private label businesses. We anticipate that owned receivable growth
for 2002, as a percentage, will be less than 2001 as we remain cautious as
a result of the current economic environment and we move to securitize
additional receivables to manage our liquidity position.
. Our return on average common shareholders' equity ("ROE") was 24.1 percent
in 2001, compared to 23.4 percent in 2000 and 23.5 percent in 1999. Our
return on average owned assets ("ROA") was 2.34 percent in 2001, compared
to 2.44 percent in 2000 and 2.64 percent in 1999. The slight decrease in
our ROA in 2001 reflects the shift in our portfolio mix to lower margin,
real estate secured receivables which historically have produced lower
losses than unsecured products.
4
<PAGE>
. Our owned net interest margin was 7.93 percent in 2001, compared to 7.75
percent in 2000 and 7.80 percent in 1999. In 2001, the increase was
primarily due to lower funding costs as a result of easing in United States
monetary policy during the year. Fed fund rates were reduced 11 times for a
total of 475 basis points during 2001. In 2000, the decrease reflects our
continuing shift to lower margin real estate secured receivables and higher
interest costs due to higher interest rates. In 2002, we expect net
interest margin as a percent of receivables to be higher on average than in
2001 as we benefit from the full-year impact of the 2001 rate reductions.
We expect some minor contraction late in the year as we believe the Federal
Reserve will raise rates.
. Our owned consumer charge-off ratio was 3.32 percent in 2001, compared to
3.18 percent in 2000 and 3.67 percent in 1999. Our delinquency ratio was
4.53 percent at December 31, 2001, compared to 4.26 percent at December 31,
2000. Both ratios were negatively affected in 2001 by the weakening
economy. We expect the economy to remain weak and total portfolio
charge-offs to increase through the first two or three quarters of 2002. We
expect the economy to recover slowly and charge-offs to decline modestly in
the latter part of the year.
. During 2001, we recorded owned loss provision greater than charge-offs of
$502.9 million, increasing our owned loss reserves to an all-time high of
$2.7 billion. Loss provision reflected our continued receivable growth,
recent increases in personal bankruptcy filings and continued uncertainty
over the impact of the weakening economy on charge-off and delinquency
trends.
. Our owned basis efficiency ratio was 38.0 percent in 2001, 39.2 percent in
2000 and 39.1 percent in 1999. The efficiency ratio is the ratio of
operating expenses to the sum of our net interest margin and other revenues
less policyholders' benefits. The ratios for both years reflect investments
in personnel, technology and marketing. In 2001, these additional costs
were offset by growth in net revenues. In 2000, the ratio included higher
e-commerce costs.
Segment Results - Managed Basis
The following summarizes operating results for our reportable operating segments
for 2001 compared to 2000 and 1999. See Note 21, "Segment Reporting," to the
accompanying consolidated financial statements for additional segment
information.
. Our Consumer segment reported net income of $1.3 billion in 2001,
compared to $1.3 billion in 2000 and $1.0 billion in 1999. Net interest
margin, fee income and other revenues increased $1.0 billion to $6.6
billion in 2001 as a resuslt of strong receivable growth. The higher
revenues were primarily offset by higher credit loss provision and
spending. Our credit loss provision rose $.6 billion to $2.6 billion as a
result of increased levels of receivables and the weakening economy. During
2001, we recorded managed loss provision greater than charge-offs of $.4
billion to increase loss reserves. Higher salary expenses, including higher
sales incentive compensation, were the result of increased receivable
levels, additional collectors, and investments in the growth of our
businesses. Managed receivables grew to $75.6 billion at year-end 2001, up
20 percent from $63.1 billion in 2000 and $49.4 billion in 1999. The
managed receivable growth was driven by solid growth in all products with
the strongest growth in our real estate secured receivables. In 2000, in
addition to strong organic growth, we took advantage of consolidation in
the home equity industry by acquiring two real estate secured portfolios
totaling $3.7 billion. Return on average managed assets ("ROMA") was 1.88
percent in 2001, compared to 2.16 percent in 2000 and 2.11 percent in 1999.
The decline in the ratios reflect higher loan loss provision and the
continued shift in our portfolio to lower margin real estate secured
receivables.
5
<PAGE>
. Our Credit Card Services segment also reported improved results as net
income increased to $367.6 million in 2001, compared to $214.7 million in
2000 and $152.8 million in 1999. These increases were due primarily to
increased net interest margin and higher fee income which increased $.5
billion to $2.7 billion from higher levels of receivables. Net interest
margin as a percent of average receivables increased sharply in 2001 as a
result of lower funding costs and pricing floors on certain variable rate
credit card products which capped rate reductions. This growth was
partially offset by higher credit loss provision which increased $.1
billion to $1.2 billion and increased operating expenses, particularly
salary expenses associated with the higher receivable levels. Marketing
expenses were also higher in 2001 as a result of increased marketing
initiatives for almost all of our credit card products. Managed receivables
grew to $17.2 billion at year-end 2001, compared to $16.0 billion in 2000
and $13.9 billion in 1999. Growth in the AFL-CIO's Union Plus/R/ ("UP")
portfolio, our affinity card relationship with the AFL-CIO labor
federation, and our nonprime portfolio, which includes both the subprime
Renaissance and the near prime Household Bank branded base portfolios,
drove the increase in loans. The increase in nonprime receivables reflects
the continued benefits of the February 2000 purchase of Renaissance
Holdings, Inc. ("Renaissance") for approximately $300 million in common
stock and cash. We did, however, deliberately slow the pace of growth in
our Renaissance portfolio in early 2001 in anticipation of the weakening
economy. Average GM Card(R) receivables increased in both 2001 and 2000 as
we continued to benefit from the March 2000 launch of the new GM Card(R).
We added over 600,000 new GM Card(R) accounts in both years. We continue to
work with GM on initiatives to promote increased card usage and enhance the
potential for future growth. Credit card growth in both years was partially
offset by attrition in our legacy undifferentiated Household Bank branded
portfolio on which we have limited marketing efforts. ROMA improved to
2.11 percent, compared to 1.33 percent in 2000 and 1.01 percent in 1999.
. Our International segment reported net income of $204.1 million in 2001,
compared to $230.1 million in 2000 and $218.7 million in 1999. Net income
in 2001 includes negative foreign exchange impacts of $8.8 million. The
decrease in 2001 net income reflects lower net interest margin as a
percentage of receivables in the U.K. and higher salaries and occupancy
costs associated with our branch expansion efforts. The decline in the net
interest margin ratio was due to lower yields on private label receivables
and a change in the portfolio mix. These decreases were partially offset by
higher insurance revenues and higher other income resulting from payment by
Centrica to discontinue our participation in the joint Goldfish credit card
program as described below. In 2000, higher revenues as a result of
receivable growth were only partially offset by higher salary expense.
Managed receivables totaled $7.2 billion at year-end 2001, compared to $7.8
billion in 2000 and $7.6 billion in 1999. In 2001, the strongest growth was
in our real estate secured and private label portfolios. This growth was
offset by reductions in our MasterCard and Visa portfolio resulting from
the discontinuation of the Goldfish program and the related sale of
approximately $1.0 billion in receivables. In 2000, the strongest growth
was in our MasterCard and Visa portfolio in the United Kingdom.
Marbles(TM), our Internet-based credit card that was launched in October
1999, was the primary contributor to the growth. ROMA was 2.36 percent in
2001, compared to 2.71 percent in 2000 and 2.57 percent in 1999.
In August 2001, we reached agreement with Centrica, our partner in
marketing the Goldfish credit card, to discontinue our participation in the
joint credit card program. As part of this agreement, in December 2001, we
sold approximately $1.0 billion in credit card receivables to Centrica and
received a payment of $72 million from the former joint venture partner
which was partially offset by $40 million in costs, including the write-off
of our investment in the joint venture as well as other capitalized costs
directly related to our exit from the program. We will continue to service
the receivables on an interim basis, for a fee, until Centrica's systems
and platforms are in place. After the conversion, which we expect in the
second half of 2002, we will receive a remaining payment of $50 million.
The settlement agreement and ongoing effects will not have a material
impact on future earnings.
6
<PAGE>
Balance Sheet Review
Owned assets totaled $89.4 billion at December 31, 2001 and $76.7 billion at
year-end 2000. Owned receivables may vary from period to period depending on the
timing and size of securitization transactions. We had initial securitizations
of $5.5 billion of receivables in 2001 and $7.0 billion in 2000. We refer to
securitized receivables that are serviced for investors and are not on our
balance sheet as our off-balance sheet portfolio.
Receivables growth has been a key contributor to our 2001 results. The strongest
growth was in our real estate secured portfolio. Growth in our owned portfolio
is shown in the following table:
<TABLE>
<CAPTION>
Increase (Decrease) Increase (Decrease)
All dollar amounts are stated in 2001/2000 in 2000/1999
in millions December 31, 2001 $ % $ %
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<S> <C> <C> <C> <C> <C>
Owned receivables:
Real estate secured $ 43,856.8 $ 8,677.1 25% $ 10,517.8 43%
Auto finance 2,368.9 518.3 28 617.1 50
MasterCard/Visa 8,141.2 87.6 1 1,739.2 28
Private label 11,663.9 1,316.6 13 227.6 2
Personal non-credit card (1) 13,337.0 2,008.9 18 2,176.5 24
Commercial and other 506.9 (91.7) (15) (209.7) (26)
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Total $ 79,874.7 $ 12,516.8 19% $ 15,068.5 29%
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</TABLE>
(1) Personal non-credit card receivables included PHL's of $4.1 billion at
December 31, 2001 and $3.0 billion at December 31, 2000.
. Real estate secured receivables increased $8.7 billion to $43.9 billion
during 2001 as a result of growth in our HFC and Beneficial branches and
mortgage services business. During 2001, we increased our branch sales
force by almost 750 account executives and increased the focus on training,
motivating and retaining our account executives. These efforts, combined
with the centralized lead management and point of sale system in our
branches, resulted in higher productivity per account executive and were a
primary driver of the receivable growth. Reduced competition also
contributed to the growth in both our branch and our mortgage service
businesses. During 2001, we also tightened underwriting and increased our
emphasis on first lien mortgages.
Our auto finance business reported strong, but controlled, growth during
2001, increasing receivables by $.5 billion to $2.4 billion at December 31,
2001, while raising cutoff scores and maintaining stringent underwriting
criteria. A strong market, larger and more efficient sales force, increased
dealer penetration and strong Internet originations also contributed to the
growth. During 2001, we also securitized $2.6 billion of auto finance
receivables as compared to $1.9 billion in 2000.
MasterCard and Visa receivables increased slightly to $8.1 billion during
2001. Our UP portfolio reported strong growth due to new accounts and
balance transfers. Our nonprime portfolio, which includes both the subprime
Renaissance and the near-prime new Household Bank branded base portfolios,
also grew. Growth was offset by the sale of the approximately $1.0 billion
Goldfish credit card portfolio in the U.K. and continued attrition, as
expected, in our legacy undifferentiated Household Bank branded base
portfolio. During 2001, we also securitized $.3 billion (excluding
replenishments) of MasterCard and Visa receivables as compared to $2.0
billion in 2000.
Private label receivables increased 13 percent to $11.7 billion during
2001. Growth was primarily due to organic growth by existing merchants, but
was also attributable to the addition of new merchants and a $725 million
portfolio acquisition in the fourth quarter. Focused marketing efforts,
including formation of dedicated marketing teams for our larger merchants,
and focused use of promotions, especially for our mid-size merchants,
contributed to the organic growth. Strong sales growth by several of our
larger merchants also contributed to the increase in receivables. During
2001 and 2000, we securitized $.5 billion (excluding replenishments) of
private label receivables.
7
<PAGE>
Personal non-credit card receivables increased 18 percent due to growth in
our domestic consumer finance branches. As mentioned earlier, in 2001, we
increased our branch sales force by almost 750 account executives and
increased our focus on training, motivating and retaining our account
executives. Our centralized lead management and point of sale system and
improved customer retention also contributed to our strong branch growth.
Personal non-credit card receivables are comprised of the following:
<TABLE>
<CAPTION>
In millions.
At December 31 2001 2000
-----------------------------------------------------------------------
<S> <C> <C>
Domestic personal unsecured $ 6,547.4 $ 6,180.8
UP personal unsecured 1,067.7 779.9
Personal homeowner loans 4,121.6 2,989.6
Foreign unsecured 1,600.3 1,377.8
-----------------------------------------------------------------------
Total $ 13,337.0 $ 11,328.1
======================================================================-
</TABLE>
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 UP 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.
During 2001, we deliberately slowed growth in the personal unsecured
product and emphasized growth in PHL's. During 2001, we also securitized
$2.1 billion of personal non-credit card receivables as compared to $2.6
billion in 2000.
. 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 20 percent in
2001. Products per customer is a measurement of the number of products held
by an individual customer whose borrowing relationship with Household is
considered in good standing. Products include all loan and insurance
products.
8
<PAGE>
From time to time we offer customers with outstanding personal non-credit
card loans 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 in nature. We
converted approximately $400 million of personal non-credit card loans into
real estate secured loans in 2001 and $350 million in 2000. It is not our
practice to re-write 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 were $3.3 billion at
December 31, 2001, a 450 percent increase over December 31, 2000. At
December 31, 2001, over 925,000 accounts were originated or serviced via
the Internet. We are currently accepting 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.
. The owned consumer two-months-and-over contractual delinquency ratio was
4.53 percent at December 31, 2001, compared to 4.26 percent at December 31,
2000. The owned consumer net charge-off ratio was 3.32 percent in 2001,
compared to 3.18 percent in 2000 and 3.67 percent in 1999. As expected,
delinquency and charge-off ratios increased during 2001. We expect
manageable increases in both delinquency and charge-off to continue during
the first two or three quarters of 2002 and then decline modestly in the
latter part of the year.
. Our owned credit loss reserves were $2.7 billion at December 31, 2001,
compared to $2.1 billion at December 31, 2000. Credit loss reserves as a
percent of owned receivables were 3.33 percent at December 31, 2001,
compared to 3.14 percent at year-end 2000.
. In connection with our share repurchase program, we repurchased 17.4
million shares of our common stock for a total of $916.3 million during
2001. Since announcing our share repurchase program in March 1999, we have
repurchased 39.6 million shares for a total of $1.8 billion. On May 9,
2001, we announced a new two-year $2 billion common stock repurchase
program. This new program went into effect on January 1, 2002 and replaced
the $2 billion stock repurchase program which expired on December 31, 2001.
. Our total shareholders' equity (including company obligated mandatorily
redeemable preferred securities of subsidiary trusts and excluding
unrealized gains and losses on cash flow hedging instruments in 2001) to
owned assets ratio was 11.56 percent at December 31, 2001, compared to
11.46 percent at December 31, 2000.
Results of Operations
Unless noted otherwise, the following discusses amounts reported in our owned
basis statements of income.
Net Interest Margin Our net interest margin on an owned basis increased to $5.8
billion in 2001, up from $4.8 billion in 2000 and $3.8 billion in 1999. Growth
in average interest-earning assets resulted in higher net interest margin
dollars in both years. In 2001, the increase was also due to lower funding
costs, partially offset by an ensuing reduction in the rates we charge to our
customers. The Federal Reserve reduced interest rates 11 times for a total of
475 basis points during 2001. In 2000, better pricing was partially offset by
higher interest costs. In 2000, the Federal Reserve raised interest rates 3
times for a total of 100 basis points. In 2002, we expect net interest margin as
a percent of receivables to be higher on average than in 2001 as we benefit from
the full-year impact of the 2001 rate reductions. We expect some minor
contraction late in the year as we believe the Fed will raise rates.
9
<PAGE>
As a percent of average interest-earning assets, net interest margin was 7.93
percent in 2001, 7.75 percent in 2000 and 7.80 percent in 1999. On a percentage
basis, net interest margin in both years was impacted by a shift in the
portfolio to lower margin real estate secured receivables. In 2001, the impact
of this shift was more than offset by lower interest costs. In 2000, higher
interest costs also contributed to the decrease in the ratio.
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
$7.9 billion in 2001, up from $6.5 billion in 2000 and $5.5 billion in 1999. As
a percent of average managed interest-earning assets, net interest margin was
8.50 percent in 2001, 8.10 percent in 2000 and 8.23 percent in 1999. Receivable
growth contributed to the dollar increases in both years. The increase in the
ratio in 2001 was primarily the result of lower interest costs. The decrease in
the ratio in 2000 reflects the continued shift in the portfolio to lower margin
real estate secured receivables and higher interest costs due to increases in
interest rates, partially offset by improved pricing in our MasterCard and Visa
portfolio.
Net interest margin as a percent of receivables on a managed basis is greater
than on an owned basis because auto finance and MasterCard and Visa receivables,
which have wider spreads, are a larger portion of the off-balance sheet
portfolio than of the owned portfolio, which primarily consists of lower margin
real estate secured loans.
We are able to adjust our pricing on many of our products, which reduces our
exposure to changes in interest rates. During 2001, we benefited from reductions
in funding costs, which were greater than the corresponding reduction in
pricing. At December 31, 2001 and 2000, we estimated that our after-tax earnings
would decline by about $77 and $81 million, respectively, following a gradual
200 basis point increase in interest rates over a twelve month period.
See the net interest margin tables on pages 33 to 35 for additional information
regarding our owned basis and managed basis net interest margin.
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.
At December 31, 2001, our owned loss reserve was at an all-time high, despite a
continued shift in our portfolio mix to real estate secured loans. During 2001,
we recorded owned loss provision $502.9 million greater than charge-offs. Loss
provision in 2001 reflected our continued receivable growth, recent increases in
personal bankruptcy filings, and continued uncertainty over the impact of the
weakening economy on charge-off and delinquency trends. Additionally, growth in
our receivables and portfolio seasoning ultimately result in a higher dollar
loss reserve requirement. Loss provision was $195.5 million greater than
charge-offs in 2000, primarily due to receivable growth. Loss provisions are
based on an estimate of inherent losses in our loan portfolio. See "Credit Loss
Reserves" for further discussion and overall methodology for determining loss
provision and loss reserves.
The provision for credit losses totaled $2.9 billion in 2001, compared to $2.1
billion in 2000 and $1.7 billion in 1999. Receivables growth in both years and a
weakened economy in 2001 contributed to a higher provision. The provision for
credit losses may vary from year to year, depending on a variety of factors
including the amount of securitizations in a particular period, economic
conditions and historical delinquency roll-rates of our loan products and our
product vintage analyses.
10
<PAGE>
As a percent of average owned receivables, the provision was 4.00 percent,
compared to 3.50 percent in 2000 and 3.59 percent in 1999. In 2001, the increase
in this ratio reflects higher charge-offs, including bankruptcy charge-offs, and
additions to loss reserves, both resulting from the weakening economy. In 2000,
the decline in this ratio reflects improved credit quality as secured loans,
which have a lower loss experience, represented a larger percentage of our owned
portfolio. This decline came in spite of an increase in overall charge-off
dollars as a result of receivable growth in the prior year. Run-off of our
legacy undifferentiated Household Bank branded MasterCard and Visa portfolio,
which had higher loss rates, also contributed to the decline in 2000.
See the "Analysis of Credit Loss Reserves Activity" on pages 31 and 32 for
additional information regarding our owned basis and managed basis loss
reserves.
Other Revenues Total other revenues on an owned basis were $3.9 billion in
2001, $3.3 billion in 2000 and $2.9 billion in 1999 and included the following:
<TABLE>
<CAPTION>
In millions.
Year ended December 31 2001 2000 1999
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Securitization revenue $ 1,775.6 $ 1,476.6 $ 1,393.5
Insurance revenue 662.4 561.2 534.6
Investment income 167.7 174.2 168.8
Fee income 966.9 825.8 595.5
Other Income 322.5 228.8 223.8
--------------------------------------------------------------------------------
Total other revenues $ 3,895.1 $ 3,266.6 $ 2,916.2
================================================================================
</TABLE>
Securitization revenue is the result of the securitization of our receivables
and includes initial and replenishment gains on sale, net of our estimate of
probable credit losses under the recourse provisions, as well as servicing
revenue and excess spread. Securitization revenue was $1.8 billion in 2001,
compared to $1.5 billion in 2000 and $1.4 billion in 1999. The increases were
due to higher average securitized receivables and changes in the mix of
receivables included in these transactions. Securitization revenue will vary
each year based on the level and mix of receivables securitized in that
particular year (which will impact the gross initial gains and 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.
Securitization revenue included the following:
<TABLE>
<CAPTION>
In millions.
Year ended December 31 2001 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Net initial gains $ 165.7 $ 170.1 $ 111.1
Net replenishment gains 407.5 328.4 254.1
Servicing revenue and excess spread 1,202.4 978.1 1,028.3
--------------------------------------------------------------------------------
Total $ 1,775.6 $ 1,476.6 $ 1,393.5
================================================================================
</TABLE>
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.
The change in our interest-only strip receivables, net of the related loss
reserve and excluding the mark-to-market adjustment recorded in accumulated
other comprehensive income, was $100.6 million in 2001, $59.0 million in 2000
and $34.0 million in 1999.
See Note 1, "Summary of Significant Accounting Policies," and Note 5 "Asset
Securitizations," to the consolidated financial statements for further
information on asset securitizations.
Insurance revenue was $662.4 million in 2001, $561.2 million in 2000 and $534.6
million in 1999. The increases reflect increased sales on a larger loan
portfolio and improved customer acceptance and retention rates. During 2001, we
announced that we will discontinue 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 substantially completed in the first quarter of 2002.
This change is not expected to have a material impact on our results of
operations for 2002.
11
<PAGE>
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 $167.7 million in 2001, $174.2
million in 2000 and $168.8 million in 1999. In 2001, the decrease was primarily
due to lower interest income, primarily resulting from lower yields, partially
offset by higher average investment balances. In 2000, the increase was
primarily due to higher interest income, primarily resulting from higher average
investment balances and higher yields.
Fee income includes revenues from fee-based products such as credit cards. Fee
income was $966.9 million in 2001, $825.8 million in 2000 and $595.5 million in
1999. 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 21, "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
$322.5 million in 2001, $228.8 million in 2000 and $223.8 million in 1999. RAL
income was $198.3 million in 2001, $132.7 million in 2000 and $130.6 million in
1999. The increase in 2001 also reflects income of $32 million, net of costs
directly related to our exit from the Goldfish credit card program, in
connection with the agreement with Centrica to discontinue our participation in
the program.
Costs and Expenses Total costs and expenses increased 18 percent to $3.9
billion in 2001, compared to $3.3 billion in 2000 and $2.8 billion in 1999.
Expenses on an owned basis are the same as expenses on a managed basis.
Higher expenses were the result of higher receivable levels and increased
operating, technology, marketing, and personnel spending directly related to
the receivable growth. Acquisitions during the first half of 2000 also
contributed to increased expenses over the prior years. Our efficiency ratio
was 38.0 percent in 2001, compared to 39.2 percent in 2000 and 39.1 percent
in 1999.
Total costs and expenses included the following:
<TABLE>
<CAPTION>
In millions.
Year ended December 31 2001 2000 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries and fringe benefits $ 1,597.2 $ 1,312.1 $ 1,048.7
Sales incentives 273.2 203.6 145.9
Occupancy and equipment expense 337.4 306.6 270.9
Other marketing expenses 519.3 470.9 370.0
Other servicing and administrative expenses 709.6 589.7 547.9
Amortization of acquired intangibles and goodwill 151.2 160.0 143.9
Policyholders' benefits 302.6 261.7 258.1
--------------------------------------------------------------------------------------------------
Total costs and expenses $ 3,890.5 $ 3,304.6 $ 2,785.4
==================================================================================================
</TABLE>
Salaries and fringe benefits were $1.6 billion in 2001, $1.3 billion in 2000 and
$1.0 billion in 1999. The increases were primarily due to additional staffing at
all businesses, including the impact of acquisitions. In 2001, we increased
sales, collection, customer service and technology staffing levels at all
businesses to support our growth. Branch expansion efforts in the United Kingdom
and Canada also contributed to the increase in 2001. In 2000, additional
staffing to support growth and collection efforts in our consumer lending
business, which contributed to increased recoveries and collections and improved
the portfolio performance of our receivables, also contributed to the increase
over the prior year. Growth in our credit card business, including the impact of
acquisitions, also contributed to the increase in 2000.
Sales incentives were $273.2 million in 2001, $203.6 million in 2000 and $145.9
million in 1999. The increases were primarily due to higher sales volumes in our
branches.
Occupancy and equipment expense was $337.4 million in 2001, $306.6 million in
2000 and $270.9 million in 1999. The increases were primarily due to growth in
our support facilities. In 2001, we also added new branches in the United
Kingdom and Canada. In 2000, we opened a new call center in Tampa, Florida and
acquired other facilities in the first half of the year. These facilities have
supported our receivable growth.
12
<PAGE>
Other marketing expenses include payments for advertising, direct mail programs
and other marketing expenditures. These expenses were $519.3 million in 2001,
$470.9 million in 2000 and $370.0 million in 1999. The increases were primarily
due to increased credit card marketing initiatives, largely in the U.S.
MasterCard and Visa portfolio.
Other servicing and administrative expenses were $709.6 million in 2001, $589.7
million in 2000 and $547.9 million in 1999. In 2001, the increase was primarily
due to higher collection and consulting expenses, REO and fraud losses, and
costs associated with privacy mailings to comply with new legislation. In 2000,
the increase was primarily due to e-commerce initiatives and increased costs
resulting from the acquisition of Renaissance and two real estate secured loan
portfolios.
Amortization of acquired intangibles and goodwill was $151.2 million in 2001,
$160.0 million in 2000 and $143.9 million in 1999. In 2001, the decrease was
attributable to reductions in acquired intangibles. In 2000, the increase was
attributable to higher goodwill amortization resulting from the Renaissance
acquisition. Upon adoption of Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" on January 1, 2002, amortization of
goodwill recorded in past business combinations ceased. The adoption is expected
to increase net income by approximately $45 million, or $.10 per share,
annually.
Policyholders' benefits were $302.6 million in 2001, $261.7 million in 2000 and
$258.1 million in 1999. The increases are consistent with the increase in
insurance revenues resulting from increased policy sales.
Income taxes. The effective tax rate was 34.5 percent in 2001, 34.9 percent in
2000 and 33.1 percent in 1999.
--------------------------------------------------------------------------------
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
efforts, bankruptcy trends and general economic conditions. Real estate secured
receivables, which have a significantly lower charge-off rate than unsecured
receivables, represented 55 percent of our total owned receivables at December
31, 2001 and 52 percent at December 31, 2000. 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 efforts for each loan. We have a process which we believe
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 policies designed to manage customer
relationships, such as reaging delinquent accounts to current in specific
situations, are helpful in maximizing customer collections.
We have been preparing for an economic slowdown since late 1999. Throughout 2000
and 2001, we emphasized real estate secured loans which historically have a
lower loss rate as compared to our other loan products, grew sensibly, tightened
underwriting policies, reduced unused credit lines, strengthened risk model
capabilities and invested heavily in collections capability by adding over 2,500
collectors. As a result, 2001 charge-off and delinquency performance has been
well within our expectations.
13
<PAGE>
Our consumer charge-off and nonaccrual policies vary by product as follows:
<TABLE>
<CAPTION>
Product Charge-off Policy Nonaccrual Policy
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Real estate Carrying values in excess of net realizable value Interest income accruals are suspended when
secured are charged off at the time of foreclosure or when principal or interest payments are more than 3
settlement is reached with the borrower. months contractually past due and resumed when
the receivable becomes less than 3 months
contractually past due.
Auto finance Carrying values in excess of net realizable value Interest income accruals are suspended when
are charged off at the earlier of the following: principal or interest payments are more than 2
. the collateral has been repossessed and sold, months contractually past due and resumed when
. the collateral has been in our possession the receivable becomes less than 2 months
for more than 90 days, or contractually past due.
. the loan becomes 150 days contractually
delinquent.
MasterCard Charged off at 6 months contractually delinquent. Interest accrues until charge-off.
and Visa
Private label Charged off at 9 months contractually delinquent. Interest accrues until charge-off.
Personal non- Charged off at 9 months contractually delinquent Interest income accruals are suspended when
credit card and no payment received in 6 months, but in no principal or interest payments are more than 3
event to exceed 12 months. months contractually delinquent. For PHL's,
interest income accruals resume if the receivable
becomes less than three months contractually
past due. For all other personal non-credit card
receivables, interest income is recorded as
collected.
</TABLE>
Charge-offs may occur sooner for certain consumer receivables involving a
bankruptcy.
--------------------------------------------------------------------------------
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. Our MasterCard and Visa charge-off policy is 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 been consistently applied and there have been no
significant changes to any of our policies during any of the periods reported.
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.
Our policies for consumer receivables permit reset of the contractual
delinquency status of an account to current, subject to certain limits, if a
predetermined number of consecutive payments has been received and there is
evidence that the reason for the delinquency has been cured. Such reaging
policies vary by product and are designed to manage customer relationships and
maximize collections.
See "Credit Quality Statistics" on pages 29 and 30 for further information
regarding owned basis and managed basis delinquency, charge-offs and
nonperforming loans.
14
<PAGE>
Consumer Two-Month-and-Over Contractual Delinquency Ratios - Owned Basis
<TABLE>
<CAPTION>
2001 Quarter End 2000 Quarter End
-------------------------------- -----------------------------------
4 3 2 1 4 3 2 1
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate secured 2.63% 2.71% 2.59% 2.55% 2.58% 2.71% 2.64% 2.90%
Auto finance 2.92 2.43 2.35 1.74 2.46 1.96 1.84 1.90
MasterCard/Visa 5.67 5.22 4.80 5.02 4.90 4.89 4.30 4.17
Private label 5.99 6.57 6.54 5.62 5.60 5.64 5.81 6.03
Personal non-credit card 9.04 8.75 8.79 8.79 7.99 7.77 8.23 9.10
------------------------------------------------------------------------------------------------
Total Owned 4.53% 4.58% 4.48% 4.36% 4.26% 4.29% 4.25% 4.58%
================================================================================================
</TABLE>
See "Credit Quality Statistics - Managed Basis" on page 30 for additional
information regarding our managed basis credit quality.
Our consumer delinquency ratios at year-end remained stable compared to the
third quarter and increased modestly compared to the prior year. These increases
were within our expectations. All products were negatively affected by the
weakening economy during the fourth quarter. The increase in auto finance
delinquency also reflects historical seasonal trends. These increases were
partially offset by decreases in real estate secured delinquency due to improved
collections. The sequential quarter comparison benefited from seasonal
receivable growth in MasterCard and Visa and private label receivables, as well
as a private label portfolio acquisition in the quarter. Additionally, our
MasterCard and Visa portfolio was negatively impacted by the December removal of
the Goldfish accounts, which had very low delinquency.
Compared to a year ago, the weakening economy contributed to higher delinquency
ratios in all products. In our real estate secured portfolio, these increases
were partially offset by benefits from the growing percentage of loans on which
we hold a first lien position as these loans have lower delinquency rates than
other loans. Though delinquency in our total MasterCard and Visa portfolio
increased over the prior year due in part to the removal of the Goldfish
accounts, delinquency in our subprime portfolio improved. During 2001, we
improved underwriting selection criteria in our subprime MasterCard and Visa
portfolio by building systems which better exclude certain high-risk customers
from solicitations.
Consumer Net Charge-off Ratios - Owned Basis
<TABLE>
<CAPTION>
2001 Quarter Annualized 2000 Quarter Annualized
Full Year --------------------------- Full Year ------------------------------ Full Year
2001 4 3 2 1 2000 4 3 2 1 1999
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate secured .52% .64% .51% .48% .43% .42% .39% .39% .44% .48% .51%
Auto finance 4.00 4.91 3.72 3.26 3.93 3.29 3.90 2.88 2.90 3.42 3.42
MasterCard/Visa 8.17 7.90 8.28 8.33 8.17 6.55 7.36 5.99 6.32 6.48 7.95
Private label 5.59 6.12 5.94 5.25 5.02 5.34 5.03 5.18 5.46 5.70 5.60
Personal non-credit card 6.81 6.97 7.27 6.84 6.12 7.02 5.82 7.05 7.85 7.64 6.50
-----------------------------------------------------------------------------------------------------------------------------
Total Owned 3.32% 3.43% 3.43% 3.26% 3.12% 3.18% 2.98% 3.01% 3.27% 3.53% 3.67%
=============================================================================================================================
</TABLE>
See "Credit Quality Statistics - Managed Basis" on page 30 for additional
information regarding our managed basis credit quality.
During the fourth quarter, our net charge-off ratios continued to be impacted by
the weakening economy. Higher loss severities on repossessed vehicles due to a
weak market for used cars and historical seasonal trends also contributed to the
increases in our auto finance portfolio. We expect improvement in the used car
market in 2002. However, we expect the economy to remain weak and total
portfolio charge-offs to increase through the first two or three quarters of
2002. We expect the economy to recover slowly and charge-offs to decline
modestly in the latter part of the year.
15
<PAGE>
The increases in charge-off ratios for the year also reflect the weakening
economy. These increases were partially offset by improved collections in our
real estate secured, private label and personal non-credit card portfolios as a
direct result of increasing the size of our collection staff, especially in our
branch network. The increase in the auto finance ratio was due in part to higher
loss severities on repossessed vehicles. The increase in the MasterCard and Visa
ratio reflects a higher percentage of subprime receivables in the portfolio.
Though subprime charge-off rates declined throughout 2001, these receivables
continue to have higher loss rates than other MasterCard and Visa receivables.
Our total 2001 net charge-off ratios reflected the positive impact of the
growing percentage of real estate secured receivables, which have a lower
charge-off ratio than other products, in our portfolio. Assuming 1999 product
mix, net charge-offs would have been approximately 45 basis points higher in
2001 and 30 basis points higher in 2000.
In 2000, all products, except personal non-credit card loans, reported improved
charge-off ratios compared to 1999. Our MasterCard and Visa portfolio reported
the strongest improvement in 2000 as a result of significant decreases in
charge-off dollars in our legacy undifferentiated Household Bank and GM
portfolios and in bankruptcy charge-offs. Charge-off dollars for all products
were up in 2000.
In February, 1999, the four federal banking regulatory agencies revised their
guidelines for classification of credit based on delinquency status and mandated
specified timeframes for recognizing losses in consumer loan portfolios. These
regulatory policy changes, which apply only to products within our banking
subsidiaries and became effective October 1, 2000, did not result in a
significant modification to any of our established reaging or charge-off
policies. Therefore, the application of the new rules did not have a material
impact on our financial statements or the way we manage our businesses.
Credit Loss Reserves We maintain credit loss reserves to cover probable losses
of principal, interest and fees, including late, overlimit and annual fees.
Credit loss reserves are based on a range of estimates and intended to be
adequate but not excessive. We estimate losses for consumer receivables based on
delinquency status and past loss experience. In addition, we provide loss
reserves on consumer receivables to reflect our assessment of portfolio risk
factors which may not be fully reflected in the statistical calculation which
uses roll rates and migration analysis. These risk factors include bankruptcy
trends, recent growth, product mix, economic conditions, and current levels 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, which include real
estate secured, auto finance, Master Card and Visa and private label credit
cards and personal non-credit cards. We recognize the different inherent loss
characteristics and risk management/collection practices in each of these
products. Charge-off and customer account management policies are also
considered when establishing loss reserve requirements to ensure the appropriate
reserves exist for products with longer charge-off periods and for customers
benefiting from account management decisions. We also consider key ratios such
as reserves to nonperforming loans and reserves as a percentage of charge-offs
in developing our loss reserve estimate. Loss reserve estimates are reviewed
periodically and adjustments are reported in earnings when they become known.
These estimates are influenced by factors outside of our control, such as
economic conditions and consumer payment patterns. As a result, there is
uncertainty inherent in these estimates, making it reasonably possible that they
could change.
At December 31, 2001, our owned loss reserve was at an all-time high, despite a
continued shift in our portfolio mix to secured loans. During 2001, we recorded
owned loss provision $502.9 million greater than charge-offs. Loss provision in
2001 reflected our continued receivable growth, recent increases in personal
bankruptcy filings, and continued uncertainty over the impact of the weakening
economy on charge-off and delinquency trends. Additionally, growth in our
receivables and portfolio seasoning ultimately result in a higher loss reserve
requirement. Loss provision was $195.5 million greater than charge-offs in 2000,
primarily due to receivable growth. Loss provisions are based on an estimate of
inherent losses in our loan portfolio.
16
<PAGE>
The following table sets forth owned basis credit loss reserves for the periods
indicated:
<TABLE>
<CAPTION>
All dollar amounts are stated in millions.
At December 31 2001 2000 1999 1998 1997
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Owned credit loss reserves $ 2,663.1 $ 2,111.9 $ 1,757.0 $ 1,734.2 $ 1,642.1
Reserves as a percent of receivables 3.33% 3.14% 3.36% 3.92% 4.25%
Reserves as a percent of net charge-offs 110.5 109.9 101.1 112.6 126.7
Reserves as a percent of nonperforming loans 91.0 90.2 87.5 100.3 113.2
=========================================================================================================================
</TABLE>
Reserves as a percentage of receivables in 2001 reflect the impact of the
weakened economy, higher levels of delinquency and charge-off, and the
continuing uncertainty as to the ultimate impact the weakened economy will have
on delinquency and charge-off levels. We began to see evidence of a weakening
economy in the first half of the year as delinquencies began to rise and
bankruptcy filings increased. This resulted in higher charge-offs beginning in
the second quarter. The combination of these risk factors, partially offset by a
higher mix of real estate secured receivables, which have lower credit losses,
resulted in higher loss provisions in 2001.
Over the past five years, our loan portfolio has experienced a dramatic shift in
product mix to real estate secured receivables. The trend in reserves as a
percentage of receivables from 1997 through 2000 reflects the impact of a
growing percentage of secured loans which have lower loss rates than unsecured
loans and, beginning in 1999 and continuing into 2000, improving credit quality
trends. This trend also benefited in 1999 and 2000 from the continued run-off of
our undifferentiated Household Bank branded MasterCard and Visa portfolio. Real
estate secured receivables represented 55 percent of our receivables at
December 31, 2001 compared to 36 percent at December 31, 1997. The impact of
this shift to real estate secured receivables is significant. Holding average
receivable mix constant to 1997 levels would have resulted in approximately a
$980 million increase in charge-off during 2001 based on 2001 owned charge-off
ratios.
For securitized receivables, we also record a provision for estimated probable
losses that we expect to incur under the recourse provisions. The following
table sets forth managed credit loss reserves for the periods indicated:
<TABLE>
<CAPTION>
All dollar amounts are stated in millions.
At December 31 2001 2000 1999 1998 1997
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Managed credit loss reserves $ 3,811.4 $ 3,194.2 $ 2,666.6 $ 2,548.1 $ 2,523.0
Reserves as a percent of managed receivables 3.78% 3.65% 3.72% 3.99% 3.99%
Reserves as a percent of managed net charge-offs 110.7 111.1 98.2 94.4 109.8
Reserves as a percent of nonperforming loans 105.0 107.0 100.1 109.5 115.5
==========================================================================================================================
</TABLE>
See the "Analysis of Credit Loss Reserves Activity" on pages 31 and 32 for
additional information regarding our owned basis and managed basis loss
reserves.
Geographic Concentrations The state of California accounts for 15 percent of
our managed domestic consumer portfolio and is the only state with more than 10
percent of this portfolio. Because of our centralized underwriting collections
and processing functions, we can quickly change our credit standards and
intensify collection efforts in specific locations. We believe this lowers risks
resulting from such geographic concentrations.
Our foreign consumer operations located in the United Kingdom and Canada
accounted for 6 percent and 1 percent, respectively, of managed consumer
receivables at December 31, 2001.
17
<PAGE>
Owned Nonperforming Assets
<TABLE>
<CAPTION>
All dollar amounts are stated in millions.
At December 31 2001 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual receivables $ 2,079.5 $ 1,678.7 $ 1,444.6
Accruing consumer receivables 90 or
more days delinquent 844.1 649.4 550.4
Renegotiated commercial loans 2.1 12.3 12.3
--------------------------------------------------------------------------------
Total nonperforming receivables 2,925.7 2,340.4 2,007.3
Real estate owned 398.9 337.1 271.5
--------------------------------------------------------------------------------
Total nonperforming assets $ 3,324.6 $ 2,677.5 $ 2,278.8
================================================================================
</TABLE>
The increase in nonaccrual receivables is attributable to increases in our real
estate secured, auto finance and personal non-credit card portfolios. Accruing
receivables 90 or more days delinquent includes MasterCard and Visa and private
label credit card receivables, consistent with industry practice. The increase
in total nonperforming assets is consistent with and attributable to growth in
our owned portfolio.
--------------------------------------------------------------------------------
Liquidity and Capital Resources
Our subsidiaries use cash to originate loans, purchase loans or investment
securities and acquire businesses. Their sources of cash include the collection
of receivable balances; maturities or sales of investment securities; proceeds
from the issuance of debt and deposits and from the securitization of consumer
receivables; and cash provided by operations.
The following table summarizes our contractual cash obligations by period due:
<TABLE>
<CAPTION>
In millions.
At December 31, 2001 2002 2003 2004 2005 2006 Thereafter Total
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term debt:
Time certificates of deposit $ 2,025.5 $ 1,307.3 $1,528.2 $ 837.3 $ 208.1 $ 410.3 $ 6,316.7
Senior and senior subordinated
Debt 10,492.5 9,980.0 5,800.9 5,970.0 6,652.0 17,928.2 56,823.6
-----------------------------------------------------------------------------------------------------------------------
Total long-term debt 12,518.0 11,287.3 7,329.1 6,807.3 6,860.1 18,338.5 63,140.3
-----------------------------------------------------------------------------------------------------------------------
Operating leases:
Minimum rental payments 150.9 128.6 110.7 92.8 82.6 330.0 895.6
Minimum sublease income (21.4) (21.6) (22.0) (22.3) (22.2) (77.7) (187.2)
-----------------------------------------------------------------------------------------------------------------------
Total operating leases 129.5 107.0 88.7 70.5 60.4 252.3 708.4
-----------------------------------------------------------------------------------------------------------------------
Other Long-Term Obligations:
Company obligated mandatorily
redeemable preferred securities
of subsidiary trust - - - - - 975.0 975.0
-----------------------------------------------------------------------------------------------------------------------
Total Contractual Obligations $12,647.5 $11,394.3 $7,417.8 $6,877.8 $6,920.5 $19,565.8 $64,823.7
=======================================================================================================================
</TABLE>
We also enter into commitments to meet the financing needs of our customers. In
most cases, we have the ability to reduce or eliminate these open lines of
credit. As a result, the amounts below do not necessarily represent future cash
requirements:
<TABLE>
<CAPTION>
In billions.
At December 31 2001
--------------------------------------------------------------------------------
<S> <C>
MasterCard and Visa and private label credit cards $ 99.4
Other consumer lines of credit 4.7
--------------------------------------------------------------------------------
Open lines of credit $ 104.1
================================================================================
</TABLE>
At December 31, 2001, our mortgage services business had commitments with
numerous correspondents to purchase up to $1.1 billion of real estate secured
receivables, subject to availability based on underwriting guidelines specified
by our mortgage services business. These commitments have terms of up to one
year and can be renewed upon mutual agreement.
18
<PAGE>
In managing capital, we develop targets for the ratio of equity to managed
assets based on discussions with rating agencies, reviews of regulatory
requirements and competitor capital positions, credit loss reserve strength,
risks inherent in the portfolio and projected operating environment, and
acquisition objectives. We also specifically consider the level of intangibles
arising from completed acquisitions. A primary objective of our capital
management is to maintain investment grade ratings from rating agencies in order
to have acceptable funding costs as well as greater access to a variety of
funding sources. Targets include capital levels against both owned and managed
assets. Our targets may change from time to time to accommodate changes in the
operating environment or any of the other considerations listed above.
Consolidated capital ratios at year end 2001 and 2000 were consistent with our
targets. Those ratios, as well as our 2002 target for tangible shareholders'
equity to tangible managed assets, are as follows:
<TABLE>
<CAPTION>
At December 31 2001 2000 2002 Targets
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tangible shareholders' equity to tangible managed assets 7.87% 7.41% 8.00-8.25%
Total shareholders' equity as a percent of owned assets 11.56(1) 11.46
Total shareholders' equity as a percent of managed assets 9.37(1) 9.07
---------------------------------------------------------------------------------------------------------
(1) Excluding the impact of FAS No. 133.
</TABLE>
Parent Company Household International, Inc. is the holding or parent company
that owns the outstanding stock of its subsidiaries. The parent company's main
source of funds is cash received from its subsidiaries in the form of dividends
and intercompany borrowings. The parent company received dividends from its
subsidiaries of $673 million in 2001 and $648 million in 2000. Dividends from
subsidiaries are managed to ensure subsidiaries are adequately capitalized. In
addition, the parent company receives cash from third parties by issuing debt,
preferred stock and common stock.
At December 31, 2001, the parent company had $400 million in committed back-up
lines of credit that it can use on short notice. These lines are available
either to the parent company or its subsidiary, Household Finance Corporation
("HFC"). None of these back-up lines were drawn upon in 2001. These lines of
credit expire in 2003 and do not contain financial material adverse change
clauses that could restrict availability. The only financial covenant contained
in the terms of the parent company's credit agreements is the maintenance of
minimum shareholders' equity of $2.0 billion.
The parent company has a number of obligations to meet with its available cash.
It must be able to service its debt and meet the capital needs of its
subsidiaries. It also must pay dividends on its preferred stock and may pay
dividends to its common stockholders. The parent company paid $406.6 million in
common and preferred dividends to shareholders in 2001 and $358.9 million in
2000. The parent company anticipates its common stock dividend payout ratio in
2002 to be comparable to prior years.
At various times, the parent company will make capital contributions to its
subsidiaries to comply with regulatory guidance, support receivable growth,
maintain acceptable investment grade ratings at the subsidiary level, or provide
funding for long-term facilities and technology improvements. In 2001, the
parent company made capital contributions of $50 million to subsidiaries,
compared to $550 million in 2000. The primary reasons for the larger
contribution in 2000 were to support receivable growth and maintain acceptable
investment grade ratings. We expect our subsidiaries will continue to need
additional capital contributions in 2002. We anticipate that these amounts will
exceed the amounts contributed in prior years. We have been advised by the
Office of Thrift Supervision ("OTS"), Office of the Comptroller of the Currency
("OCC") and the Federal Deposit Insurance Corporation ("FDIC") that in
accordance with their 2001 Guidance for Subprime Lending Programs, they will
impose additional capital requirements on institutions which hold nonprime or
subprime assets which we expect will be greater than the historical levels we
have maintained at these subsidiary institutions. We do not believe the
additional capital needs of any subsidiary will have a material adverse impact
on our financial position or our business operations.
19
<PAGE>
In August 2001, the parent company issued zero-coupon convertible debt
securities. The convertible debt securities are due 2021, have a 1 percent yield
to maturity and have a principal amount at maturity of approximately $1.2
billion. We must pay contingent interest on the securities beginning in 2006 if
our common stock price reaches certain levels. The holders of the securities
have the right to require us to repurchase the securities on various dates
beginning in August 2002 and ending in August 2016 or if certain "fundamental
changes" as described in the prospectus supplement occur. "Fundamental changes"
include, among other things, an exchange offer, liquidation, merger and
recapitalization. The holders of the securities may convert each $1,000 of
securities, subject to adjustment, into 9.022 shares of Household common stock
if our stock price reaches $99.87 for 20 trading days in a consecutive 30
trading day period. We may redeem the securities, in whole or in part, at any
time after August 1, 2006.
In September 2001, the parent company issued $300 million of 7.50 percent
cumulative preferred stock. In addition, we issued company obligated mandatorily
redeemable preferred securities (representing the minority interest in the
trust) ("trust preferred securities") of $400 million in 2001 and $300 million
in 2000. In December 2001, $100 million of 8.70 percent trust preferred
securities were redeemed.
During 2001, we repurchased 17.4 million shares of our common stock for a total
of $916.3 million. During 2000, 5.4 million shares were repurchased for a total
of $209.3 million. On May 9, 2001, we announced a new common stock repurchase
program. This new program enables us to repurchase up to an additional $2
billion of our outstanding common shares. This new program went into effect on
January 1, 2002 and replaced the $2 billion stock repurchase program which
expired on December 31, 2001. Pursuant to these programs, repurchases are made
from time to time in the open market depending upon market conditions, other
investment opportunities for growth and capital targets.
At December 31, 2001, we had agreements to purchase, on a forward basis,
approximately 6.5 million shares of our common stock at a weighted-average
forward price of $59.14 per share. The agreements have terms of up to one year.
These agreements may be settled either physically or on a net basis in shares of
our common stock, at our option.
Subsidiaries We have three major subsidiaries: HFC, Household Bank, f.s.b.
("the Bank"), and Household Global Funding ("Global"). These subsidiaries use
cash to originate loans, purchase loans or investment securities or acquire
businesses. Their sources of cash include the collection of receivable balances,
maturities or sales of investment securities, proceeds from the issuance of debt
and deposits and from the securitization of receivables, capital contributions
from the parent company, and cash provided by operations.
HFC HFC funds its operations by collecting receivable balances; issuing
commercial paper, medium-term debt, and long-term debt primarily to wholesale
investors; securitizing consumer receivables; and receiving capital
contributions from its parent.
HFC domestically markets its commercial paper primarily through an in-house
sales force. HFC's outstanding commercial paper totaled $8.8 billion at December
31, 2001 and $8.7 billion at December 31, 2000. HFC actively manages the level
of commercial paper outstanding to ensure availability to core investors and
proper use of any excess capacity within internally-established targets.
HFC markets domestic medium-term notes through investment banks and its in-house
sales force. A total of $8.0 billion of domestic medium-term notes were issued
in 2001, including $788 million of InterNotesSM, a retail-oriented medium-term
note program. In 2000, $9.9 billion of domestic medium-term notes were issued.
During 2001, HFC also issued $7.0 billion of U.S. dollar, global long-term debt
with a weighted-average original maturity of 8.14 years. Long-term debt
issuances in 2000 totaled $4.8 billion and had a weighted-average original
maturity of 6.98 years. These long-term issuances lengthened the term of HFC's
funding, reduced reliance on commercial paper and securitizations, and preserved
liquidity.
20
<PAGE>
We issued securities backed by dedicated home equity loan receivables of $1.6
billion in 2001 and $.5 billion in 2000. For accounting purposes, these
transactions were structured as secured financings, therefore the receivables
and the related debt remain on our balance sheet. At December 31, 2001,
closed-end real estate secured receivables totaling $1.7 billion secured $1.5
billion of outstanding debt related to these transactions. At December 31, 2000,
closed-end real estate secured receivables totaling $.4 billion secured $.4
billion of outstanding debt.
To obtain a broader investment base, HFC periodically issues debt in foreign
markets. During 2001, $2.0 billion in notes were issued in these foreign
markets, including Euro, Japanese yen and Australian dollar denominated
issuances, compared to $2.1 billion in 2000. In order to eliminate future
foreign exchange risk, currency swaps were used to convert the notes to U.S.
dollars at the time of issuance.
HFC had committed back-up lines of credit totaling $10.1 billion at December 31,
2001, of which $400 million was also available to its parent company. None of
these back-up lines were drawn upon in 2001. In addition, none of these lines
contained a financial material adverse change clause which could restrict
availability. HFC's back-up lines expire on various dates through 2005. The most
restrictive financial covenant contained in the terms of HFC's credit agreements
is the maintenance of minimum shareholder's equity of $3.6 billion.
At December 31, 2001, HFC had facilities with commercial and investment banks
under which it may securitize up to $12.6 billion of receivables. The conduit
facilities are renewable on an annual basis at the banks' option. At December
31, 2001, $10.3 billion of receivables were securitized under these programs.
The amount available under the facilities will vary based on the timing and
volume of public securitization transactions. We expect to significantly
increase the amounts available under these conduit programs in 2002 to protect
our ability to operate efficiently in a cautionary capital market. Through
existing bank lines, conduit facilities and new debt issuances, we believe we
would continue to have more than adequate sources of funds if one or more of
these facilities were unable to be renewed.
The Bank The Bank funds its operations through collection of receivable
balances, contributions of capital and various wholesale funding sources
including federal funds borrowings and bank notes. The Bank has also used retail
certificates of deposit, domestic and Euro medium-term notes and underwritten
senior debt. Additionally, the Bank has historically funded the RAL program
under its agreement with HFC.
During 2001, the Bank began selling bank notes through an in-house sales force.
Bank notes outstanding at year-end were $831 million. The Bank also issued $115
million in retail certificates of deposit in 2001 and $3.2 billion in 2000. The
Bank's outstanding deposits totaled $6.8 billion at December 31, 2001 and $7.4
billion at December 31, 2000.
The Bank is subject to the capital adequacy guidelines adopted by the OTS and is
well capitalized. Although we have utilized the Bank in the past as a means of
providing deposit funding to support our operations, due to recent regulatory
requirements for additional capital to support nonprime and subprime lending
activities, it is doubtful that such sources will be actively utilized in the
near term. We have been advised by the OTS, OCC and the FDIC that in accordance
with their 2001 Guidance for Subprime Lending Programs, they will impose
additional capital requirements on institutions which hold nonprime or subprime
assets which we expect will be greater than the historical levels we have
maintained at these subsidiary institutions. We have agreed with the OTS to
maintain the regulatory capital of the Bank at these levels. We expect to reduce
the size of the Bank to better manage the capital requirements for the Bank. We
do not expect that any of these actions will have a material adverse effect on
our operations, our ability to timely fund our operations, or will materially
increase the costs associated with our funding.
Global Global includes our foreign subsidiaries in the United Kingdom and
Canada. Global's assets were $7.3 billion at year-end 2001 and $7.8 billion at
year-end 2000. Consolidated shareholders' equity includes the effect of
translating our foreign subsidiaries' assets, liabilities and operating results
from their local currency into U.S. dollars. We periodically enter into foreign
exchange contracts to hedge portions of our investment in foreign subsidiaries.
21
<PAGE>
Each foreign subsidiary conducts its operations using its local currency. While
each foreign subsidiary usually borrows funds in its local currency, both our
United Kingdom and Canadian subsidiaries have borrowed funds directly in the
United States capital markets. This allowed the subsidiaries to achieve a lower
cost of funds than that available at that time in their local markets. These
borrowings were converted from U.S. dollars to their local currencies using
currency swaps at the time of issuance. Net realized gains and losses in foreign
currency swap transactions were not material to our results of operations or
financial position in any of the years presented.
Our United Kingdom operation is funded with wholesale deposits, short and
intermediate-term bank lines of credit, long-term debt and securitizations of
receivables. Deposits were $490.7 million at December 31, 2001 and $1.7 billion
at December 31, 2000. Short-term borrowings at year-end 2001 were $717.4 million
compared to $722.3 million a year ago. Long-term debt at year-end 2001 was $2.8
billion compared to $2.4 billion a year earlier.
At December 31, 2001, $2.1 billion of the United Kingdom's total debt was
guaranteed by the parent company and $1.9 billion was guaranteed by HFC. HFC
receives a fee for providing the guarantee. Committed back-up lines of credit
for the United Kingdom were approximately $3.1 billion at December 31, 2001 of
which $.8 billion was used. These lines have varying maturities through 2007.
At December 31, 2001, the UK had facilities with commercial banks under which it
may securitize up to $.3 billion of receivables. The conduit facilities are
renewable on an annual basis at the banks' option. At December 31, 2001, $.3
billion of receivables were securitized under these programs. The amount
available under the facilities will vary based on the timing and volume of
public securitization transactions. Through existing bank lines and new debt
issuances, we believe we would continue to have more than adequate sources of
funds if one or more of these facilities were unable to be renewed.
Our Canadian operation is funded with commercial paper, intermediate debt and
long-term debt. Intermediate and long-term debt totaled $851.1 million at
year-end 2001 compared to $749.2 million a year ago. Committed back-up lines of
credit for Canada were approximately $436 million at December 31, 2001. None of
these back-up lines were used in 2001. At December 31, 2001, approximately $35
million of the Canadian subsidiary's total debt was guaranteed by the parent
company and $1.2 billion was guaranteed by HFC. Both the parent company and HFC
receive a fee for providing the guarantees.
Investment Ratings As a financial services organization, we must have access to
funds at competitive rates, terms and conditions to be successful. At December
31, 2001, the long-term debt of the parent company, HFC, Beneficial and our
Canadian and U.K. subsidiaries and the preferred stock of the parent company
have been assigned investment grade ratings by all nationally recognized
statistical rating organizations that rate such instruments. These organizations
have also rated the commercial paper of HFC in their highest rating category.
Although one nationally recognized statistical rating organization recently
downgraded the long-term debt of HFC to the corresponding levels of the other
agencies, we believe this downgrade will not have any meaningful impact on our
ability to fund our operations. With our back-up lines of credit and
securitization programs, we believe we have sufficient funding capacity to
refinance maturing debts and fund our growth.
Capital Expenditures We made capital expenditures of $175 million in 2001 and
$174 million in 2000.
22
<PAGE>
--------------------------------------------------------------------------------
Asset Securitizations
From time to time, we securitize consumer receivables. In a securitization, a
designated pool of receivables is removed from the balance sheet and transferred
to an unaffiliated trust that is a qualifying special purpose entity ("QSPE")
under Statement of Financial Accounting Standards No. 125 and/or 140, as
applicable. The QSPE funds its receivable purchase through the issuance of
securities to investors, entitling them to receive specified cash flows during
the life of the securities. The securities are collateralized by the underlying
receivables transferred to the QSPE. Under the terms of the securitizations, we
receive annual servicing fees on the outstanding balance of the securitized
receivables and the rights to future residual cash flows arising after the
investors receive their contractual return. These rights to further residual
cash flows are recorded on our balance sheet as interest-only strip receivables,
net of our recourse obligation to investors for failure of debtors to pay. Our
recourse is limited to our rights to future cash flows and any subordinated
interests that we may retain.
Securitizations and secured financings of consumer receivables have been, and
will continue to be, a source of liquidity for us. We believe the market for
securities issued by an investment grade issuer and backed by receivables is a
reliable and cost-effective source of funds. Securitizations represented 22
percent of the funding associated with our managed portfolio at December 31,
2001, compared to 24 percent at December 31, 2000 and 28 percent at December 31,
1999.
The following table summarizes the composition of receivables securitized
(excluding replenishments of certificateholder interests) during the year:
<TABLE>
<CAPTION>
In billions. 2001 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C> <C>
MasterCard/Visa $.3 $2.0 $1.8
Auto finance 2.6 1.9 1.4
Private label .5 .5 .5
Personal non-credit card 2.1 2.6 1.5
--------------------------------------------------------------------------------
Total $5.5 7.0 $5.2
================================================================================
</TABLE>
Certain securitization trusts, such as credit cards, are established at fixed
levels and due to the revolving nature of the underlying receivables require the
sale of new receivables into the trust to replace receivable runoff. These
replenishments totaled $24.7 billion in 2001, $21.0 billion in 2000 and $20.3
billion in 1999.
The following table summarizes the expected amortization of our securitizations
by type:
<TABLE>
<CAPTION>
In millions.
At December 31, 2001 2002 2003 2004 2005 2006 Thereafter Total
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate secured $ 295.1 $ 304.8 $ 217.9 $ 44.0 - - $ 861.8
Auto finance 1,256.4 1,211.4 712.4 846.4 - - 4,026.6
MasterCard/Visa 4,449.9 1,314.2 1,392.9 2,007.1 $ 89.9 - 9,254.0
Private label 336.5 1,001.8 811.7 - - - 2,150.0
Personal non-credit card 2,238.0 1,219.9 707.0 247.4 136.6 $ 106.7 4,655.6
--------------------------------------------------------------------------------------------------------------------------
Total $ 8,575.9 $ 5,052.1 $ 3,841.9 $ 3,144.9 $ 226.5 $ 106.7 $ 20,948.0
==========================================================================================================================
</TABLE>
At December 31, 2001, the expected weighted-average remaining life of these
transactions was 1.7 years.
We issued securities backed by dedicated home equity loan receivables of $1.6
billion in 2001 and $.5 billion in 2000. For accounting purposes, these
transactions were structured as secured financings, therefore, the receivables
and the related debt remain on our balance sheet. Real estate secured
receivables included closed-end real estate secured receivables totaling $1.7
billion at December 31, 2001 and $.4 billion at December 31, 2000 which secured
the outstanding debt related to these transactions.
23
<PAGE>
The securities issued with our securitizations may payoff sooner than originally
scheduled if certain events occur. For MasterCard and Visa, private label, real
estate secured and personal non-credit card securitizations, early payoff of the
securities begins if the annualized portfolio yield drops below a base rate or
if certain other events occur. For certain auto securitizations, early payoff of
securities may occur if established delinquency or loss levels are exceeded. We
do not presently believe that any early payoff will take place. If early payoff
occurred, our funding requirements would increase. These additional requirements
could be met through new securitizations, issuance of various types of debt or
borrowings under existing back-up lines of credit. We believe we would continue
to have more than adequate sources of funds if an early payoff event occurred.
At December 31, 2001, HFC and the U.K. had facilities with commercial and
investment banks under which they may securitize up to $12.9 billion of
receivables. The facilities are renewable on an annual basis at the banks'
option. At December 31, 2001, $10.6 billion of receivables were securitized
under these programs. The amount available under the facilities will vary based
on the timing and volume of public securitization transactions. Through existing
bank lines and new debt issuances, we believe we would continue to have more
than adequate sources of funds if one or more of these facilities were unable to
be renewed.
--------------------------------------------------------------------------------
Risk Management
We have a comprehensive program to address potential financial risks, such as
liquidity, interest rate, currency and credit risk. The Finance Committee of the
Board of Directors sets acceptable limits for each of these risks annually and
reviews the limits semi-annually. We maintain an overall risk management
strategy that uses a variety of interest rate and currency derivative financial
instruments to mitigate our exposure to fluctuations caused by changes in
interest rates and currency exchange rates. We manage our exposure to interest
rate risk primarily through the use of interest rate swaps, but also use
forwards, futures, options, and other risk management instruments. We manage our
exposure to currency risk primarily through the use of currency swaps. We do not
speculate on interest rate or foreign currency market exposure and we do not use
exotic or leveraged derivative financial instruments.
Because we are predominantly capital markets funded, our ability to ensure
continuous access to these markets and maintain a diversified funding base is
important in meeting our funding needs. We have never experienced funding
difficulties. Over the past two years, we have worked with a number of
investment banks to identify and implement the strategic initiatives required to
enhance future market access. Our ability to issue debt at competitive prices is
influenced by rating agencies' views of our credit quality, liquidity, capital
and earnings. As a result, we maintain close working relationships with each
rating agency to secure the highest possible rating on our debt and asset backed
securities. Additionally, access to capital markets is dependent upon a
well-informed investor base. We maintain a comprehensive, direct marketing
program to ensure our investors receive consistent and timely information
regarding our financial performance. The ability to fund our operations,
however, can be influenced by factors outside of our control such as the events
of September 11, 2001 and the Russian financial crisis that occurred in the fall
of 1998. In both of these situations, we adjusted our debt issuance plans as the
debt markets changed and readily achieved our funding goals. Our contingency
funding plans contemplate short and long-term market interruptions resulting
from both general market events and Household specific events. Any shortfalls
created by these interruptions could be mitigated through access to alternative
sources of secured funding, asset sales and/or reductions in receivable growth
rates. We currently are not aware of any trends or events that will result in or
that are reasonably likely to result in a material change in our liquidity.
24
<PAGE>
Interest rate risk is defined as the impact of changes in market interest rates
on our earnings. We use simulation models to measure the impact of changes in
interest rates on net interest margin. The key assumptions used in these models
include expected loan payoff rates, loan volumes and pricing, cash flows from
derivative financial instruments and changes in market conditions. These
assumptions are based on our best estimates of actual conditions. The models
cannot precisely predict the actual impact of changes in interest rates on our
earnings because these assumptions are highly uncertain. We validate the
accuracy of our models by comparing actual results to those previously predicted
by the model. At December 31, 2001, our interest rate risk levels were
substantially below those allowed by our existing policy.
We estimate that our after-tax earnings would decline by about $77 million at
December 31, 2001 and $81 million at December 31, 2000 following a gradual 200
basis point increase in interest rates over a twelve month period and would
increase by about $72 million at December 31, 2001 and $78 million at December
31, 2000 following a gradual 200 basis point decrease in interest rates. These
estimates include the impact of the derivative positions we have entered into.
As a result, the decline in our earnings following a gradual 200 basis point
increase would be higher had those derivative positions not been entered into.
These estimates also assume we would not take any corrective action to lessen
the impact and, therefore, exceed what most likely would occur if rates were to
change.
We generally fund our assets with liabilities that have similar interest rate
features. This initially reduces interest rate risk. Over time, however,
customer demand for our receivable products shifts between fixed rate and
floating rate products, based on market conditions and preferences. These shifts
result in different funding strategies and produce different interest rate risk
exposures. We use derivative financial instruments, principally swaps, to manage
these exposures, as well as our liquidity position. Generally, we use
derivatives that are either effective hedges, of which 92 percent qualify for
the short-cut method of accounting under FAS No. 133, or are short-term (less
than one year) economic hedges which offset the economic risk inherent in our
balance sheet. As a result, we do not believe that using these derivatives will
result in a material mark-to-market income adjustment in any period.
The primary exposure on our interest rate swap portfolio is credit risk. Credit
risk is the risk that the counterparty to a transaction fails to perform
according to the terms of the contract. We control the credit (or repayment)
risk in derivative instruments through established credit approvals, risk
control limits and ongoing monitoring procedures. Counterparty limits have been
set and are closely monitored as part of the overall risk management process.
These limits ensure that we do not have significant exposure to any individual
counterparty. Based on peak exposure at December 31, 2001, substantially all of
our derivative counterparties were rated AA- or better. Certain swap agreements
require that payments be made to, or received from, the counterparty when the
fair value of the agreement reaches a certain level. We have never suffered a
loss due to counterparty failure.
We also use interest rate futures, interest rate forwards and purchased options
to reduce interest rate risk. We use these instruments to hedge interest rate
changes on our variable rate assets and liabilities. For example, short-term
borrowings expose us to interest rate risk because the interest rate we must pay
to others may change faster than the rate we receive from borrowers on the
assets our borrowings are funding. Futures, forwards and options are used to fix
our interest cost on these borrowings at a desired rate and are held until the
interest rate on the variable rate asset or liability changes. We then
terminate, or close out, the derivative financial instrument. These terminations
are necessary because the date the interest rate changes is usually not the same
as the expiration date of the derivative contracts.
25
<PAGE>
Foreign currency exchange risk refers to the potential changes in current and
future earnings or capital arising from movements in foreign exchange rates. We
enter into foreign exchange rate forward contracts and currency swaps to
minimize currency risk associated with changes in the value of
foreign-denominated assets or liabilities. Currency swaps convert principal and
interest payments on debt issued from one currency to another. For example, we
may issue Euro-denominated debt and then execute a currency swap to convert the
obligation to U.S. dollars. We also have foreign subsidiaries located in the
United Kingdom and Canada. Our foreign currency exchange risk on these
investments is limited to the unhedged portion of the net investment in our
foreign subsidiaries. We periodically enter into foreign exchange contracts to
hedge portions of our investments in foreign subsidiaries. At December 31, 2001,
we estimate we would experience a decrease in common shareholders' equity, net
of tax, of approximately $45.7 million compared to a decrease of approximately
$56.8 million, net of tax, at December 31, 2000 as a result of a 10 percent
depreciation in our unhedged capital exposure in foreign subsidiaries to the
U.S. dollar position. Additionally, we believe that the potential loss in net
income associated with a 10 percent adverse change in the British pound/U.S.
dollar or Canadian dollar/U.S. dollar exchange rate would not be material to us.
See Note 10 to the accompanying consolidated financial statements, "Derivative
Financial Instruments and Concentrations of Credit Risk," for additional
information related to interest rate risk management and Note 14, "Fair Value of
Financial Instruments," for information regarding the fair value of certain
financial instruments.
26
<PAGE>
Household International, Inc.
Glossary of Terms
Acquired Intangibles and Goodwill - Intangible assets represent the market value
premium attributable to our credit card accounts in excess of the aggregate
outstanding managed credit card loans acquired. Goodwill represents the purchase
price over the fair value of identifiable assets acquired less liabilities
assumed from business combinations.
Affinity Credit Card - A MasterCard or Visa account jointly sponsored by the
issuer of the card and an organization whose members share a common interest
(e.g., the AFL-CIO Union Plus (UP) Credit Card Program).
Auto Finance Loans - Closed-end loans secured by a first lien on a vehicle.
Co-Branded Credit Card - A MasterCard or Visa account that is jointly sponsored
by the issuer of the card and another corporation (e.g., the GM Card(R)). The
account holder typically receives some form of added benefit for using the card.
Common Dividend Payout Ratio - Dividends declared per common share divided by
net income per share.
Consumer Net Charge-off Ratio - Net charge-offs of consumer receivables divided
by average consumer receivables outstanding.
Contractual Delinquency - A method of determining aging of past due accounts
based on the status of payments under the loan.
Efficiency Ratio - Ratio of operating expenses to net interest margin and other
revenues less policyholders' benefits.
Fee Income - Income associated with interchange on credit cards and late and
other fees from the origination or acquisition of loans.
Foreign Exchange Contract - A contract used to minimize our exposure to changes
in foreign currency exchange rates.
Futures Contract - An exchange-traded contract to buy or sell a stated amount of
a financial instrument or index at a specified future date and price.
Interchange Fees - Fees received for processing a credit card transaction
through the MasterCard or Visa network.
Interest-only Strip Receivables - Represent our contractual right to receive
interest and other cash flows from our securitization trusts after the investors
receive their contractual return.
Interest Rate Swap - Contract between two parties to exchange interest payments
on a stated principal amount (notional principal) for a specified period.
Typically, one party makes fixed rate payments, while the other party makes
payments using a variable rate.
LIBOR - London Interbank Offered Rate. A widely quoted market rate which is
frequently the index used to determine the rate at which we borrow funds.
Liquidity - A measure of how quickly we can convert assets to cash or raise
additional cash by issuing debt.
Managed Basis - Method of reporting whereby net interest margin, other revenues
and credit losses on securitized receivables are reported as if those
receivables were still held on our balance sheet.
Managed Receivables - The sum of receivables on our balance sheet and those that
we service for investors as part of our asset securitization program.
MasterCard and Visa Receivables - Receivables generated through customer usage
of MasterCard and Visa credit cards.
Net Interest Margin - Interest income from receivables and noninsurance
investment securities reduced by interest expense.
Nonaccrual Loans - Loans on which we no longer accrue interest because ultimate
collection is unlikely.
Nonprime Accounts - Accounts held by individuals who have limited credit
histories, modest income, high debt-to-income ratios or have experienced credit
problems caused by occasional delinquencies, prior charge-offs or other credit
related actions. These customers generally have higher delinquency and credit
loss probabilities and are charged a higher interest rate to compensate us for
the additional risk.
27
<PAGE>
Options - A contract giving the owner the right, but not the obligation, to buy
or sell a specified item at a fixed price for a specified period.
Owned Receivables - Receivables held on our balance sheet.
Personal Homeowner Loan ("PHL") - A real estate loan that has been underwritten
and priced as an unsecured loan. These loans are reported as personal non-credit
card receivables.
Personal Non-Credit Card Receivables - Unsecured lines of credit or closed-end
loans made to individuals.
Private Label Credit Card - A line of credit made available to customers of
retail merchants evidenced by a credit card bearing the merchant's name.
Products Per Customer - A measurement of the number of products held by an
individual customer whose borrowing relationship with Household is considered in
good standing. Products include all loan and insurance products.
Real Estate Secured Loan - Closed-end loans and revolving lines of credit
secured by first or second liens on residential real estate.
Receivables Serviced with Limited Recourse - Receivables we have securitized and
for which we have some level of potential loss if defaults occur.
Refund Anticipation Loan ("RAL") Program - A cooperative program with H&R Block
Tax Services, Inc. and certain of its franchises, along with other independent
tax preparers, to provide loans to customers entitled to tax refunds and who
electronically file their returns with the Internal Revenue Service.
Return on Average Common Shareholders' Equity - Net income less dividends on
preferred stock divided by average common shareholders' equity.
Return on Average Managed Assets - Net income divided by average managed assets.
Return on Average Owned Assets - Net income divided by average owned assets.
Risk Adjusted Revenue - Managed net interest margin plus other revenues less
managed securitization revenue and managed net charge-offs divided by average
managed interest-earning assets.
Secured Financing - The process where interests in a dedicated pool of financial
assets, such as real estate secured receivables, are sold to investors.
Typically, the receivables are transferred to a trust that issues interests that
are sold to investors. The receivables and related debt remain on our balance
sheet.
Securitization - The process where interests in a dedicated pool of financial
assets, such as credit card, auto or personal non-credit card receivables, are
sold to investors. Typically, the receivables are sold to a trust that issues
interests that are sold to investors. The receivables are then removed from our
owned basis balance sheet.
Securitization Revenue - Includes income associated with the current and prior
period securitizations and sales of receivables with limited recourse. Such
income includes gains on sales, net of our estimate of probable credit losses
under the recourse provisions, servicing income and excess spread relating to
those receivables.
Tangible Equity to Tangible Managed Assets (TETMA) - Tangible shareholders'
equity consists of total shareholders' equity, excluding unrealized gains and
losses on investments and cash flow hedging instruments, less acquired
intangibles and goodwill. Tangible managed assets represents total managed
assets less acquired intangibles and goodwill and derivative assets.
Total Shareholders' Equity - Includes company obligated mandatorily redeemable
preferred securities of subsidiary trusts, preferred stock and common
shareholders' equity.
28
<PAGE>
Household International, Inc. and Subsidiaries
CREDIT QUALITY STATISTICS - OWNED BASIS
<TABLE>
<CAPTION>
All dollar amounts are stated in millions.
At December 31, unless otherwise indicated. 2001 2000 1999 1998 1997
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Owned Two-Month-and-Over Contractual Delinquency Ratios
Real estate secured 2.63% 2.58% 3.10% 3.95% 3.66%
Auto finance 2.92 2.46 2.02 2.90 1.48
MasterCard/Visa 5.67 4.90 3.59 5.09 3.55
Private label 5.99 5.60 6.09 6.03 5.60
Personal non-credit card 9.04 7.99 9.06 8.24 7.55
---------------------------------------------------------------------------------------------------------
Total consumer 4.53% 4.26% 4.82% 5.31% 4.87%
=========================================================================================================
Ratio of Owned Net Charge-offs to Average Owned Receivables for the Year
Real estate secured .52% .42% .51% .60% .49%
Auto finance 4.00 3.29 3.42 4.11 2.99
MasterCard/Visa 8.17 6.55 7.95 5.90 4.99
Private label 5.59 5.34 5.60 5.52 4.56
Personal non-credit card 6.81 7.02 6.50 6.52 4.88
---------------------------------------------------------------------------------------------------------
Total consumer 3.32 3.18 3.67 3.76 3.39
Commercial 2.10 2.69 .93 .52 1.66
---------------------------------------------------------------------------------------------------------
Total 3.31% 3.18% 3.63% 3.69% 3.34%
=========================================================================================================
Nonaccrual Owned Receivables
Domestic:
Real estate secured $ 906.8 $ 685.6 $ 532.5 $ 486.5 $378.4
Auto finance 69.2 45.5 24.9 23.3 -
Private label 38.6 47.6 58.1 29.0 25.0
Personal non-credit card 834.4 632.0 545.8 297.9 283.6
Foreign 215.3 226.0 236.7 178.3 189.1
---------------------------------------------------------------------------------------------------------
Total consumer 2,064.3 1,636.7 1,398.0 1,015.0 876.1
Commercial and other 15.2 42.0 46.6 49.1 62.9
---------------------------------------------------------------------------------------------------------
Total $2,079.5 $1,678.7 $1,444.6 $1,064.1 $939.0
=========================================================================================================
Accruing Owned Receivables 90 or More Days Delinquent
Domestic:
MasterCard/Visa $ 352.4 $ 272.0 $ 140.2 $ 264.0 $148.7
Private label 462.2 355.1 386.7 366.6 319.6
Foreign 29.5 22.3 23.5 21.8 31.3
---------------------------------------------------------------------------------------------------------
Total $ 844.1 $ 649.4 $ 550.4 $ 652.4 $499.6
=========================================================================================================
Real Estate Owned
Domestic $ 394.7 $ 333.5 $ 268.1 $ 249.5 $200.0
Foreign 4.2 3.6 3.4 4.4 12.8
---------------------------------------------------------------------------------------------------------
Total $ 398.9 $ 337.1 $ 271.5 $ 253.9 $212.8
=========================================================================================================
Renegotiated Commercial Loans $ 2.1 $ 12.3 $ 12.3 $ 12.3 $ 12.4
=========================================================================================================
</TABLE>
29
<PAGE>
Household International, Inc. and Subsidiaries
CREDIT QUALITY STATISTICS--MANAGED BASIS
<TABLE>
All dollar amounts are stated in millions.
At December 31, unless otherwise indicated. 2001 2000 1999 1998 1997
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Managed Two-Month-and-Over Contractual Delinquency Ratios
Real estate secured 2.68% 2.63% 3.27% 3.67% 3.69%
Auto finance 3.16 2.55 2.43 2.29 2.09
MasterCard/Visa 4.10 3.49 2.78 3.75 3.10
Private label 5.48 5.48 5.97 6.20 5.81
Personal non-credit card 8.87 7.97 8.81 7.94 7.81
---------------------------------------------------------------------------------------------------------------------
Total consumer 4.46% 4.20% 4.66% 4.90% 4.64%
=====================================================================================================================
Ratio of Managed Net Charge-offs to Average Managed Receivables for the Year
Real estate secured .53% .45% .58% .63% .64%
Auto finance 5.31 4.80 4.96 5.39 4.60
MasterCard/Visa 6.63 5.58 6.66 5.95 5.55
Private label 5.18 5.35 5.65 5.65 4.62
Personal non-credit card 6.79 6.97 6.52 6.97 5.48
---------------------------------------------------------------------------------------------------------------------
Total consumer 3.73 3.64 4.13 4.29 3.84
Commercial 2.10 2.69 .93 .52 1.66
---------------------------------------------------------------------------------------------------------------------
Total 3.72% 3.63% 4.09% 4.24% 3.80%
=====================================================================================================================
Nonaccrual Managed Receivables
Domestic:
Real estate secured $ 940.8 $ 734.1 $ 626.9 $ 550.8 $ 492.1
Auto finance 201.8 116.2 73.9 40.3 -
Private label 38.6 47.6 58.1 29.0 25.0
Personal non-credit card 1,106.3 902.0 828.8 559.5 565.2
Foreign 263.5 270.4 278.3 210.5 219.7
---------------------------------------------------------------------------------------------------------------------
Total consumer 2,551.0 2,070.3 1,866.0 1,390.1 1,302.0
Commercial and other 15.2 42.0 46.6 49.1 62.9
---------------------------------------------------------------------------------------------------------------------
Total $ 2,566.2 $ 2,112.3 $ 1,912.6 $ 1,439.2 $ 1,364.9
=====================================================================================================================
Accruing Managed Receivables 90 or More Days Delinquent
Domestic:
MasterCard/Visa $ 527.4 $ 420.3 $ 286.4 $ 436.2 $ 401.5
Private label 503.2 417.2 430.0 416.6 375.0
Foreign 29.5 22.3 23.5 21.8 31.3
---------------------------------------------------------------------------------------------------------------------
Total $ 1,060.1 $ 859.8 $ 739.9 $ 874.6 $ 807.8
=====================================================================================================================
</TABLE>
30
<PAGE>
Household International, Inc. and Subsidiaries
ANALYSIS OF CREDIT LOSS RESERVES ACTIVITY - OWNED RECEIVABLES
<TABLE>
<CAPTION>
All dollar amounts are stated in millions. 2001 2000 1999 1998 1997
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Owned Credit Loss Reserves at January 1 $ 2,111.9 $ 1,757.0 $ 1,734.2 $ 1,642.1 $ 1,398.4
------------------------------------------------------------------------------------------------------------
Provision for Credit Losses 2,912.9 2,116.9 1,716.4 1,516.8 1,493.0
------------------------------------------------------------------------------------------------------------
Charge-offs
Domestic:
Real estate secured (194.0) (123.2) (103.8) (82.8) (46.3)
Auto finance (94.3) (61.3) (39.4) (29.7) (6.4)
MasterCard/Visa (645.4) (432.1) (477.8) (454.1) (415.8)
Private label (590.9) (536.9) (547.7) (471.4) (407.9)
Personal non-credit card (893.2) (723.5) (534.6) (464.4) (384.6)
Foreign (237.0) (232.7) (233.9) (206.4) (197.6)
------------------------------------------------------------------------------------------------------------
Total consumer (2,654.8) (2,109.7) (1,937.2) (1,708.8) (1,458.6)
Commercial and other (12.2) (17.1) (10.1) (7.5) (26.8)
------------------------------------------------------------------------------------------------------------
Total owned receivables charged off (2,667.0) (2,126.8) (1,947.3) (1,716.3) (1,485.4)
------------------------------------------------------------------------------------------------------------
Recoveries
Domestic:
Real estate secured 4.4 4.7 7.5 2.6 3.0
Auto finance 1.5 1.5 1.2 .8 .3
MasterCard/Visa 52.0 24.9 34.7 33.3 46.9
Private label 60.6 54.0 74.3 56.8 47.4
Personal non-credit card 75.6 62.4 45.3 36.7 38.0
Foreign 62.5 57.5 46.6 43.2 50.9
------------------------------------------------------------------------------------------------------------
Total consumer 256.6 205.0 209.6 173.4 186.5
Commercial and other .4 .4 .3 2.2 3.3
------------------------------------------------------------------------------------------------------------
Total recoveries on owned receivables 257.0 205.4 209.9 175.6 189.8
Other, net 48.3 159.4 43.8 116.0 46.3
------------------------------------------------------------------------------------------------------------
Owned Credit Loss Reserves
Domestic:
Real estate secured 284.4 172.9 149.2 185.3 172.4
Auto finance 77.3 51.0 39.1 27.8 14.6
MasterCard/Visa 593.4 540.8 304.4 387.7 290.4
Private label 499.4 425.2 487.2 472.5 396.2
Personal non-credit card 1,031.9 734.2 568.9 457.6 499.4
Foreign 137.1 141.6 143.1 142.7 179.2
------------------------------------------------------------------------------------------------------------
Total consumer 2,623.5 2,065.7 1,691.9 1,673.6 1,552.2
Commercial and other 39.6 46.2 65.1 60.6 89.9
------------------------------------------------------------------------------------------------------------
Total Owned Credit Loss Reserves at December 31 $ 2,663.1 $ 2,111.9 $ 1,757.0 $ 1,734.2 $ 1,642.1
============================================================================================================
Ratio of Owned Credit Loss Reserves to:
Net charge-offs 110.5% 109.9% 101.1% 112.6% 126.7%
Receivables:
Consumer 3.31 3.10 3.30 3.85 4.12
Commercial 7.12 7.43 7.70 8.34 9.14
------------------------------------------------------------------------------------------------------------
Total 3.33% 3.14% 3.36% 3.92% 4.25%
============================================================================================================
Nonperforming Loans:
Consumer 90.3% 90.3% 86.9% 99.3% 110.5%
Commercial 278.7 85.4 116.8 139.0 200.7
------------------------------------------------------------------------------------------------------------
Total 91.0% 90.2% 87.5% 100.3% 113.2%
============================================================================================================
</TABLE>
31
<PAGE>
Household International, Inc. and Subsidiaries
ANALYSIS OF CREDIT LOSS RESERVES ACTIVITY - MANAGED RECEIVABLES
<TABLE>
<CAPTION>
All dollar amounts are stated in millions. 2001 2000 1999 1998 1997
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Managed Credit Loss Reserves at January 1 $ 3,194.2 $ 2,666.6 $ 2,548.1 $ 2,523.0 $ 2,109.0
--------------------------------------------------------------------------------------------------------------------
Provision for Credit Losses 4,018.4 3,252.4 2,781.8 2,716.0 2,620.6
--------------------------------------------------------------------------------------------------------------------
Charge-Offs
Domestic:
Real estate secured (202.4) (139.9) (134.1) (118.8) (106.3)
Auto finance (286.7) (188.4) (120.4) (70.0) (13.6)
MasterCard/Visa (1,147.9) (880.7) (1,020.8) (1,166.2) (1,106.7)
Private label (640.2) (605.6) (598.3) (544.3) (436.0)
Personal non-credit card (1,196.2) (1,030.6) (821.6) (797.9) (639.8)
Foreign (282.2) (275.8) (281.4) (250.0) (225.8)
--------------------------------------------------------------------------------------------------------------------
Total consumer (3,755.6) (3,121.0) (2,976.6) (2,947.2) (2,528.2)
Commercial and other (12.2) (17.0) (10.0) (7.5) (26.8)
--------------------------------------------------------------------------------------------------------------------
Total managed receivables charged off (3,767.8) (3,138.0) (2,986.6) (2,954.7) (2,555.0)
--------------------------------------------------------------------------------------------------------------------
Recoveries
Domestic:
Real estate secured 4.4 4.7 7.5 4.4 5.8
Auto finance 4.0 4.0 2.8 2.1 .6
MasterCard/Visa 81.1 49.8 68.4 82.0 94.8
Private label 62.3 57.0 77.0 65.0 50.0
Personal non-credit card 100.9 79.2 61.2 51.6 50.3
Foreign 71.9 69.0 54.1 47.2 52.8
--------------------------------------------------------------------------------------------------------------------
Total consumer 324.6 263.7 271.0 252.3 254.3
Commercial and other .4 .3 .3 2.2 3.3
--------------------------------------------------------------------------------------------------------------------
Total recoveries on managed receivables 325.0 264.0 271.3 254.5 257.6
Other, net 41.6 149.2 52.0 9.3 90.8
--------------------------------------------------------------------------------------------------------------------
Managed Credit Loss Reserves
Domestic:
Real estate secured 303.8 195.9 172.8 244.1 235.7
Auto finance 448.8 323.8 242.4 133.2 49.7
MasterCard/Visa 901.5 849.0 612.6 689.9 704.9
Private label 630.9 599.4 603.7 541.5 462.1
Personal non-credit card 1,263.6 957.5 761.6 685.5 759.6
Foreign 223.2 222.4 208.4 193.3 221.1
--------------------------------------------------------------------------------------------------------------------
Total consumer 3,771.8 3,148.0 2,601.5 2,487.5 2,433.1
Commercial and other 39.6 46.2 65.1 60.6 89.9
--------------------------------------------------------------------------------------------------------------------
Total Managed Credit Loss Reserves at December 31 $ 3,811.4 $ 3,194.2 $ 2,666.6 $ 2,548.1 $ 2,523.0
====================================================================================================================
Ratio of Managed Credit Loss Reserves to:
Net charge-offs 110.7% 111.1% 98.2% 94.4% 109.8%
Receivables:
Consumer 3.77 3.62 3.68 3.94 3.92
Commercial 7.12 7.43 7.70 8.34 9.14
--------------------------------------------------------------------------------------------------------------------
Total 3.78% 3.65% 3.72% 3.99% 3.99%
====================================================================================================================
Nonperforming Loans:
Consumer 104.5% 107.4% 98.8% 109.0% 113.7%
Commercial 278.7 85.4 116.8 139.0 200.7
--------------------------------------------------------------------------------------------------------------------
Total 105.0% 107.0% 100.1% 109.5% 115.5%
====================================================================================================================
</TABLE>
32
<PAGE>
Household International, Inc. and Subsidiaries
NET INTEREST MARGIN - 2001 COMPARED TO 2000 (OWNED BASIS)
<TABLE>
<CAPTION>
Finance and
Interest Income/ Increase/(Decrease) Due to:
Average Outstanding (1) Average Rate Interest Expense ------------------------------------
All dollar amounts ----------------------- ------------ ------------------ Volume Rate
are stated in millions. 2001 2000 2001 2000 2001 2000 Variance Variance (2) Variance (2)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Receivables:
Real estate secured $38,850.4 $30,682.5 11.6% 12.0% $ 4,516.1 $3,684.3 $ 831.8 $ 952.8 $ (121.0)
Auto finance 2,319.1 1,818.9 15.3 16.7 354.0 303.6 50.4 78.0 (27.6)
MasterCard/Visa 8,138.3 7,126.5 14.5 14.9 1,180.6 1,064.8 115.8 147.5 (31.7)
Private label 10,516.4 9,981.7 13.4 14.3 1,405.3 1,432.2 (26.9) 74.4 (101.3)
Personal non-credit card 12,486.0 10,194.7 20.2 21.0 2,525.1 2,140.7 384.4 465.9 (81.5)
Commercial and other 554.8 693.5 2.3 5.0 13.0 34.7 (21.7) (5.9) (15.8)
------------------------------------------------------------------------------------------------------------------------------------
Total receivables 72,865.0 60,497.8 13.7 14.3 9,994.1 8,660.3 1,333.8 1,712.8 (379.0)
Noninsurance investments 894.1 973.4 3.0 3.5 26.5 34.0 (7.5) (2.6) (4.9)
------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets
(excluding insurance
investments) $73,759.1 $61,471.2 13.6% 14.1% $10,020.6 $8,694.3 $1,326.3 $1,680.7 $ (354.4)
Insurance investments 3,006.2 2,733.6
Other assets 5,278.4 5,507.9
------------------------------------------------------------------------------------------------------------------------------------
Total Assets $82,043.7 $69,712.7
====================================================================================================================================
Debt:
Deposits $ 7,953.2 $ 7,757.5 6.3% 6.2% $ 498.6 $ 484.0 $ 14.6 $ 12.3 $ 2.3
Commercial paper 9,221.1 9,828.7 4.1 6.3 376.3 621.2 (244.9) (36.4) (208.5)
Bank and other borrowings 2,240.1 2,099.7 3.9 5.5 86.9 116.5 (29.6) 7.4 (37.0)
Senior and senior
subordinated debt with
original maturities
over one year 50,018.2 39,387.9 6.4 6.9 3,212.0 2,707.2 504.8 692.0 (187.2)
------------------------------------------------------------------------------------------------------------------------------------
Total debt $69,432.6 $59,073.8 6.0% 6.7% $4,173.8 $3,928.9 $ 244.9 $ 675.3 $ (430.4)
Other liabilities 2,423.8 2,699.8
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 71,856.4 61,773.6
Preferred securities 1,136.9 701.9
Common shareholders' equity 9,050.4 7,237.2
------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $82,043.7 $69,712.7
====================================================================================================================================
Net Interest Margin -
Owned Basis (3)(5) 7.9% 7.8% $5,846.8 $4,765.4 $1,081.4 $ 1,005.4 $ 76.0
====================================================================================================================================
Interest Spread - Owned Basis (4) 7.6% 7.5%
====================================================================================================================================
</TABLE>
(1) Nonaccrual loans are included in average outstanding balances.
(2) Rate/volume variance is allocated based on the percentage relationship of
changes in volume and changes in rate to the total interest variance. For
total receivables, total interest-earning assets and total debt, the rate
and volume variances are calculated based on the relative weighting of the
individual components comprising these totals. These totals do not
represent an arithmetic sum of the individual components.
(3) Represents net interest margin as a percent of average interest-earning
assets.
(4) Represents the difference between the yield earned on interest-earning
assets and the cost of the debt used to fund the assets.
(5) The net interest margin analysis includes the following for foreign
businesses:
2001 2000 1999
------------------------------------------------------------------------------
Average interest-earning assets $ 6,988.7 $ 6,639.1 $ 6,433.3
Average interest-bearing liabilities 5,973.3 5,765.5 5,138.5
Net interest margin 431.2 467.7 494.9
Net interest margin percentage 6.2% 7.0% 7.7%
------------------------------------------------------------------------------
33
<PAGE>
Household International, Inc. and Subsidiaries
NET INTEREST MARGIN - 2000 COMPARED TO 1999 (OWNED BASIS)
<TABLE>
<CAPTION>
Finance and
Interest Income/ Increase/(Decrease) Due to:
Average Outstanding (1) Average Rate Interest Expense --------------------------------------
All dollar amounts ----------------------- ------------ ------------------- Volume Rate
are stated in millions. 2000 1999 2000 1999 2000 1999 Variance Variance (2) Variance (2)
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Receivables:
Real estate secured $30,682.5 $21,679.1 12.0% 11.6% $3,684.3 $2,513.1 $1,171.2 $ 1,043.7 $ 12.0
Auto finance 1,818.9 1,119.8 16.7 18.6 303.6 207.8 95.8 129.7 (33.9)
MasterCard/Visa 7,126.5 6,270.8 14.9 12.3 1,064.8 768.3 296.5 104.8 191.7
Private label 9,981.7 9,486.2 14.3 13.6 1,432.2 1,289.8 142.4 67.4 75.0
Personal non-credit card 10,194.7 8,434.9 21.0 20.2 2,140.7 1,705.4 435.3 355.8 79.5
Commercial and other 693.5 809.6 5.0 8.0 34.7 65.1 (30.4) (9.3) (21.1)
-----------------------------------------------------------------------------------------------------------------------------------
Total receivables 60,497.8 47,800.4 14.3 13.7 8,660.3 6,549.5 2,110.8 1,692.1 303.2
Noninsurance investments 973.4 975.0 3.5 3.4 34.0 33.4 .6 (.1) .7
-----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets
(excluding insurance
investments) $61,471.2 $48,775.4 14.1% 13.5% $8,694.3 $6,582.9 $2,111.4 $ 1,713.5 $397.9
Insurance investments 2,733.6 2,596.9
Other assets 5,507.9 4,938.1
-----------------------------------------------------------------------------------------------------------------------------------
Total Assets $69,712.7 $56,310.4
===================================================================================================================================
Debt:
Deposits $7,757.5 $ 3,037.3 6.2% 5.5% $ 484.0 $ 168.4 $ 315.6 $ 261.7 $ 53.9
Commercial paper 9,828.7 8,620.3 6.3 5.2 621.2 451.7 169.5 63.3 106.2
Bank and other borrowings 2,099.7 1,426.7 5.5 5.0 116.5 70.8 45.7 33.4 12.3
Senior and senior
subordinated debt
with original
maturities over
one year 39,387.9 32,954.1 6.9 6.3 2,707.2 2,085.7 621.5 407.2 214.3
-----------------------------------------------------------------------------------------------------------------------------------
Total debt $59,073.8 $46,038.4 6.7% 6.0% $3,928.9 $2,776.6 $1,152.3 $ 765.6 $386.7
Other liabilities 2,699.8 3,453.3
-----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 61,773.6 49,491.7
Preferred securities 701.9 539.4
Common shareholders' equity 7,237.2 6,279.3
-----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $69,712.7 $56,310.4
===================================================================================================================================
Net Interest Margin -
Owned Basis (3)(5) 7.8% 7.8% $4,765.4 $3,806.3 $ 959.1 $ 947.9 $ 11.2
===================================================================================================================================
Interest Spread -
Owned Basis (4) 7.5% 7.5%
===================================================================================================================================
</TABLE>
34
<PAGE>
Household International, Inc. and Subsidiaries
NET INTEREST MARGIN - 2001 COMPARED TO 2000 AND 1999 (MANAGED BASIS)
Net Interest Margin on a Managed Basis As receivables are securitized rather
than held in our portfolio, net interest margin is reclassified to
securitization revenue. We retain a substantial portion of the profit inherent
in the receivables while increasing liquidity. The comparability of net interest
margin between periods may be impacted by the level and type of receivables
securitized. Net interest margin on a Managed Basis includes finance income
earned on our owned receivables as well 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.
<TABLE>
<CAPTION>
Finance and Interest
Average Outstanding(1) Average Rate Income/Interest Expense
All dollar amounts are ------------------------------ ------------------ -------------------------------
stated in millions. 2001 2000 1999 2001 2000 1999 2001 2000 1999
---------------------- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Receivables:
Real estate secured $40,049.6 $32,530.2 $24,574.5 11.6% 12.0% 11.6% $ 4,650.2 $ 3,906.5 $ 2,847.5
Auto finance 5,323.5 3,842.3 2,370.4 17.5 18.3 19.0 929.5 702.5 449.6
MasterCard/Visa 17,282.8 16,111.2 15,295.7 14.3 14.8 13.2 2,470.6 2,392.0 2,025.7
Private label 12,260.6 11,194.2 10,255.9 13.5 14.4 13.6 1,655.8 1,613.5 1,398.7
Personal non-credit card 17,013.8 14,760.8 13,008.6 20.0 20.5 19.6 3,407.8 3,019.5 2,555.8
Commercial and other 554.9 693.5 809.6 2.3 5.0 8.0 13.0 34.7 65.0
--------------------------------------------------------------------------------------------------------------
Total receivables 92,485.2 79,132.2 66,314.7 14.2 14.7 14.1 13,126.9 11,668.7 9,342.3
Noninsurance investments 894.1 973.4 975.0 3.0 3.5 3.4 26.5 34.0 33.4
----------------------------------------------------------------------------------------------------------------
Total interest-earning assets
(excluding insurance
investments) $93,379.3 $80,105.6 $67,289.7 14.1% 14.6% 13.9% $13,153.4 $11,702.7 $ 9,375.7
----------------------------------------------------------------------------------------------------------------
Total debt $89,052.8 $71,274.4 $64,552.7 5.9% 7.3% 5.9% $ 5,212.8 $ 5,212.7 $ 3,836.5
----------------------------------------------------------------------------------------------------------------
Net Interest Margin - 8.5% 8.1% 8.2% $ 7,940.6 $ 6,490.0 $ 5,539.2
Managed Basis (3)
================================================================================================================
Interest Spread - Managed Basis (4) 8.2% 7.3% 8.0%
================================================================================================================
<CAPTION>
Increase/(Decrease) Due to:
------------------------------------------------------------------------
2001 Compared to 2000 2000 Compared to 1999
---------------------------------- ------------------------------------
Volume Rate Volume Rate
Variance Variance(2) Variance(2) Variance Variance(2) Variance(2)
---------------------------------- ------------------------------------
Receivables:
Real estate secured $ 743.7 $ 876.8 $ (133.1) $ 1,059.0 $ 955.4 $103.6
Auto finance 227.0 259.9 (32.9) 252.9 269.1 (16.2)
MasterCard/Visa 78.6 169.7 (91.1) 366.3 121.1 245.2
Private label 42.3 147.9 (105.6) 214.8 135.3 79.5
Personal non-credit card 388.3 452.4 (64.1) 463.7 358.4 105.3
Commercial and other (21.7) (5.9) (15.8) (30.3) (8.4) (21.9)
-----------------------------------------------------------------------------------------------------------
Total receivables 1,458.2 1,900.8 (442.6) 2,326.4 1,873.6 452.8
Noninsurance investments (7.5) (2.6) (4.9) .6 (.1) .7
-------------------------------------------------------------------------------------------------------------
Total interest-earning assets
(excluding insurance
investments) $1,450.7 $ 1,882.1 $ (431.4) $ 2,327.0 $ 1,872.3 $454.7
-------------------------------------------------------------------------------------------------------------
Total debt $ .1 $ 1,156.1 $(1,156.0) $ 1,376.2 $ 834.0 $542.2
-------------------------------------------------------------------------------------------------------------
Net Interest Margin - $1,450.6 $ 726.0 $ 724.6 $ 950.8 $ 1,038.3 $(87.5)
Managed Basis (3)
=============================================================================================================
Interest Spread - Managed Basis(4)
=============================================================================================================
</TABLE>
(1) Nonaccrual loans are included in average outstanding balances.
(2) Rate/volume variance is allocated based on the percentage relationship of
changes in volume and changes in rate to the total interest variance. For
total receivables, total interest-earning assets and total debt, the rate
and volume variances are calculated based on the relative weighting of the
individual components comprising these totals. These totals do not
represent an arithmetic sum of the individual components.
(3) Represents net interest margin as a percent of average interest-earning
assets.
(4) Represents the difference between the yield earned on interest-earning
assets and cost of the debt used to fund the assets.
35
<PAGE>
Household International, Inc. and Subsidiaries
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
2001 - Three Months Ended 2000 - Three Months Ended
All dollar amounts except per share -------------------------------------------------------------------------------------
data are stated in millions. Dec. Sept. June March Dec. Sept. June March
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Finance and other interest income $2,602.5 $2,536.6 $2,451.2 $2,430.3 $2,415.6 $2,270.4 $2,083.4 $1,924.9
Interest expense 983.4 1,035.2 1,048.4 1,106.8 1,117.0 1,057.2 933.0 821.7
-------------------------------------------------------------------------------------------------------------------------------
Net interest margin 1,619.1 1,501.4 1,402.8 1,323.5 1,298.6 1,213.2 1,150.4 1,103.2
Provision for credit losses on owned
receivables 829.3 722.9 657.1 703.6 574.8 524.4 495.6 522.1
-------------------------------------------------------------------------------------------------------------------------------
Net interest margin after provision for
credit losses 789.8 778.5 745.7 619.9 723.8 688.8 654.8 581.1
-------------------------------------------------------------------------------------------------------------------------------
Securitization revenue 514.4 454.3 400.6 406.3 394.7 379.9 355.6 346.4
Insurance revenue 175.3 169.2 159.3 158.6 147.7 146.7 131.8 135.0
Investment income 45.8 42.3 37.8 41.8 47.0 43.9 42.5 40.8
Fee income 245.7 250.6 232.7 237.9 234.4 216.2 195.9 179.3
Other income 59.9 51.5 49.4 161.7 33.5 30.1 31.9 133.3
-------------------------------------------------------------------------------------------------------------------------------
Total other revenues 1,041.1 967.9 879.8 1,006.3 857.3 816.8 757.7 834.8
-------------------------------------------------------------------------------------------------------------------------------
Salaries and fringe benefits 424.1 408.3 387.2 377.6 355.5 333.0 321.5 302.1
Sales incentives 71.0 74.1 73.6 54.5 50.3 53.1 57.4 42.8
Occupancy and equipment expense 84.1 86.1 83.7 83.5 77.1 78.4 75.6 75.5
Other marketing expenses 128.0 127.1 129.0 135.2 104.3 108.2 125.3 133.1
Other servicing and administrative
expenses 172.2 172.3 171.7 193.4 122.8 136.0 144.1 186.8
Amortization of acquired intangibles and
goodwill 37.4 37.4 37.5 38.9 38.9 39.0 38.9 43.2
Policyholders' benefits 74.5 77.5 73.1 77.5 63.4 67.1 64.3 66.9
-------------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 991.3 982.8 955.8 960.6 812.3 814.8 827.1 850.4
-------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 839.6 763.6 669.7 665.6 768.8 690.8 585.4 565.5
Income taxes 290.7 259.8 230.7 233.8 276.1 239.6 201.5 192.6
-------------------------------------------------------------------------------------------------------------------------------
Net income $ 548.9 $ 503.8 $ 439.0 $ 431.8 $ 492.7 $ 451.2 $ 383.9 $ 372.9
===============================================================================================================================
Basic earnings per common share $ 1.18 $ 1.09 $ .94 $ .92 $ 1.05 $ .95 $ .80 $ .79
Diluted earnings per common share 1.17 1.07 .93 .91 1.03 .94 .80 .78
Dividends declared .22 .22 .22 .19 .19 .19 .19 .17
Weighted average common and common
equivalent shares outstanding 463.2 467.7 469.6 472.0 476.1 477.6 477.0 474.0
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE>
Household International, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
In millions, except per share data.
Year ended December 31 2001 2000 1999
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Finance and other interest income $ 10,020.6 $ 8,694.3 $ 6,582.9
Interest expense 4,173.8 3,928.9 2,776.6
-------------------------------------------------------------------------------------------------
Net interest margin 5,846.8 4,765.4 3,806.3
Provision for credit losses on owned receivables 2,912.9 2,116.9 1,716.4
-------------------------------------------------------------------------------------------------
Net interest margin after provision for credit losses 2,933.9 2,648.5 2,089.9
-------------------------------------------------------------------------------------------------
Securitization revenue 1,775.6 1,476.6 1,393.5
Insurance revenue 662.4 561.2 534.6
Investment income 167.7 174.2 168.8
Fee income 966.9 825.8 595.5
Other income 322.5 228.8 223.8
-------------------------------------------------------------------------------------------------
Total other revenues 3,895.1 3,266.6 2,916.2
-------------------------------------------------------------------------------------------------
Salaries and fringe benefits 1,597.2 1,312.1 1,048.7
Sales incentives 273.2 203.6 145.9
Occupancy and equipment expense 337.4 306.6 270.9
Other marketing expenses 519.3 470.9 370.0
Other servicing and administrative expenses 709.6 589.7 547.9
Amortization of acquired intangibles and goodwill 151.2 160.0 143.9
Policyholders' benefits 302.6 261.7 258.1
-------------------------------------------------------------------------------------------------
Total costs and expenses 3,890.5 3,304.6 2,785.4
-------------------------------------------------------------------------------------------------
Income before income taxes 2,938.5 2,610.5 2,220.7
Income taxes 1,015.0 909.8 734.3
-------------------------------------------------------------------------------------------------
Net income $ 1,923.5 $ 1,700.7 $ 1,486.4
=================================================================================================
Earnings Per Common Share
Net income $ 1,923.5 $ 1,700.7 $ 1,486.4
Preferred dividends (15.5) (9.2) (9.2)
-------------------------------------------------------------------------------------------------
Earnings available to common shareholders $ 1,908.0 $ 1,691.5 $ 1,477.2
=================================================================================================
Average common shares 462.0 471.8 477.0
Average common and common equivalent shares 468.1 476.2 481.8
-------------------------------------------------------------------------------------------------
Basic earnings per common share $ 4.13 $ 3.59 $ 3.10
=================================================================================================
Diluted earnings per common share $ 4.08 $ 3.55 $ 3.07
=================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
37
<PAGE>
Household International, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
In millions, except share data.
At December 31 2001 2000
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash $ 543.6 $ 490.2
Investment securities 3,580.5 3,259.0
Receivables, net 79,263.5 67,161.7
Acquired intangibles and goodwill, net 1,555.3 1,705.7
Properties and equipment, net 531.1 517.6
Real estate owned 398.9 337.1
Other assets 3,543.1 3,235.0
---------------------------------------------------------------------------------------------------
Total assets $ 89,416.0 $ 76,706.3
===================================================================================================
Liabilities and Shareholders' Equity
Debt:
Deposits $ 6,562.3 $ 8,676.9
Commercial paper, bank and other borrowings 12,024.3 10,787.9
Senior and senior subordinated debt (with original
maturities over one year) 56,823.6 45,053.0
---------------------------------------------------------------------------------------------------
Total debt 75,410.2 64,517.8
Insurance policy and claim reserves 1,094.5 1,106.6
Other liabilities 3,277.7 2,291.3
---------------------------------------------------------------------------------------------------
Total liabilities 79,782.4 67,915.7
Company obligated mandatorily redeemable preferred
securities of subsidiary trusts* 975.0 675.0
Preferred stock 455.8 164.4
Common shareholders' equity:
Common stock, $1.00 par value, 750,000,000 shares authorized;
551,684,740 and 551,100,165 shares issued at December 31,
2001 and 2000, respectively 551.7 551.1
Additional paid-in capital 2,030.0 1,926.0
Retained earnings 9,197.4 7,680.5
Accumulated other comprehensive income (732.4) (214.7)
Less common stock in treasury, 94,560,437 and 80,080,506
shares at December 31, 2001 and 2000, respectively, at cost (2,843.9) (1,991.7)
---------------------------------------------------------------------------------------------------
Total common shareholders' equity 8,202.8 7,951.2
---------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 89,416.0 $ 76,706.3
===================================================================================================
</TABLE>
* The sole assets of the trusts are Junior Subordinated Deferrable Interest
Notes issued by Household International, Inc. in November 2001, January
2001, June 2000, March 1998 and June 1995, bearing interest at 7.50, 8.25,
10.00, 7.25 and 8.25 percent, respectively, with principal balances of
$206.2, $206.2, $309.3, $206.2 and $77.3 million, respectively, and due
November 15, 2031, January 30, 2031, June 30, 2030, December 31, 2037, and
June 30, 2025, respectively. The $103.1 million Junior Subordinated
Deferrable Interest Notes issued in June 1996 were redeemed in December
2001.
The accompanying notes are an integral part of these consolidated financial
statements.
38
<PAGE>
Household International, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
In millions.
Year ended December 31 2001 2000 1999
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Provided by Operations
Net income $ 1,923.5 $ 1,700.7 $ 1,486.4
Adjustments to reconcile net income to net cash
provided by operations:
Provision for credit losses on owned receivables 2,912.9 2,116.9 1,716.4
Insurance policy and claim reserves 204.2 36.6 76.1
Depreciation and amortization 308.3 301.7 292.1
Deferred income tax provision 38.1 87.0 33.1
Interest-only strip receivables, net change (100.6) (59.0) (34.0)
Other, net 231.1 3.7 (316.1)
-----------------------------------------------------------------------------------------------------------
Cash provided by operations 5,517.5 4,187.6 3,254.0
----------------------------------------------------------------------------------------------------------------
Investments in Operations
Investment securities:
Purchased (1,744.2) (804.4) (1,431.7)
Matured 481.9 451.5 792.5
Sold 686.3 238.4 732.5
Short-term investment securities, net change 255.9 (47.8) (111.1)
Receivables:
Originations, net (46,324.7) (39,930.6) (32,888.1)
Purchases and related premiums (1,577.4) (4,162.8) (2,571.6)
Sold 32,293.6 26,919.2 25,249.8
Acquisition of business operations - (87.1) (43.4)
Properties and equipment purchased (175.2) (173.8) (139.8)
Properties and equipment sold 20.3 16.3 29.1
-----------------------------------------------------------------------------------------------------------
Cash decrease from investments in operations (16,083.5) (17,581.1) (10,381.8)
----------------------------------------------------------------------------------------------------------------
Financing and Capital Transactions
Short-term debt and demand deposits, net change 1,300.9 182.0 839.1
Time certificates, net change (2,118.6) 3,219.7 2,961.6
Senior and senior subordinated debt issued 21,172.0 21,608.3 11,281.3
Senior and senior subordinated debt retired (9,107.0) (11,152.0) (6,870.6)
Policyholders' benefits paid (85.7) (117.6) (126.9)
Cash received from policyholders 60.4 60.2 63.0
Shareholders' dividends (406.6) (358.9) (332.1)
Issuance of company obligated mandatorily redeemable
preferred securities of subsidiary trusts 400.0 300.0 -
Redemption of company obligated mandatorily redeemable
preferred securities of subsidiary trusts (100.0) - -
Issuance of preferred stock 291.4 - -
Purchase of treasury stock (916.3) (209.3) (915.9)
Issuance of common stock 121.8 64.4 45.0
-----------------------------------------------------------------------------------------------------------
Cash increase from financing and capital transactions 10,612.3 13,596.8 6,944.5
-----------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 7.1 16.3 (3.5)
-----------------------------------------------------------------------------------------------------------
Increase (decrease) in cash 53.4 219.6 (186.8)
Cash at January 1 490.2 270.6 457.4
-----------------------------------------------------------------------------------------------------------
Cash at December 31 $ 543.6 $ 490.2 $ 270.6
===========================================================================================================
Supplemental Cash Flow Information:
Interest paid $ 4,511.2 $ 3,920.6 $ 2,757.6
Income taxes paid 979.5 689.9 337.6
-----------------------------------------------------------------------------------------------------------
Supplemental Noncash Investing and Financing Activities:
Common stock issued for acquisition $ - $ 209.4 $ 15.0
===========================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
39
<PAGE>
Household International, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN PREFERRED STOCK
AND COMMON SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Shareholders' Equity
-----------------------------------------------------------------------------
Accumulated
Additional Other Common Total Common
All amounts except per share data are stated Preferred Common Paid-in Retained Comprehensive Stock in Shareholders'
in millions. Stock Stock Capital Earnings Income(1) Treasury Equity
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $ 164.4 $ 544.1 $1,652.5 $5,184.4 $ (145.1) $(1,014.5) $ 6,221.4
-----------------------------------------------------------------------------------------------------------------------------------
Net income 1,486.4 1,486.4
Other comprehensive income, net of tax:
Unrealized losses on investments and
interest-only strip receivables, net of
reclassification adjustment (93.7) (93.7)
Foreign currency translation adjustments (18.1) (18.1)
-----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 1,374.6
Cash dividends:
Preferred at stated rates (9.2) (9.2)
Common, $.68 per share (322.9) (322.9)
Exercise of stock options 6.1 103.0 (51.2) 57.9
Issuance of common stock .2 25.3 19.5 45.0
Purchase of treasury stock (915.9) (915.9)
-----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 164.4 550.4 1,780.8 6,338.7 (256.9) (1,962.1) 6,450.9
-----------------------------------------------------------------------------------------------------------------------------------
Net income 1,700.7 1,700.7
Other comprehensive income, net of tax:
Unrealized gains on investments and
interest-only strip receivables, net of
reclassification adjustment 95.1 95.1
Foreign currency translation adjustments (52.9) (52.9)
-----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 1,742.9
Cash dividends:
Preferred at stated rates (9.2) (9.2)
Common, $.74 per share (349.7) (349.7)
Exercise of stock options .5 20.7 30.6 51.8
Issuance of common stock .2 124.5 149.1 273.8
Purchase of treasury stock (209.3) (209.3)
-----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 164.4 551.1 1,926.0 7,680.5 (214.7) (1,991.7) 7,951.2
-----------------------------------------------------------------------------------------------------------------------------------
Net income 1,923.5 1,923.5
Other comprehensive income, net of tax:
Cumulative effect of change in accounting
principle (FAS No. 133) (241.4) (241.4)
Unrealized losses on cash flow hedging instruments,
net of reclassification adjustment (457.7) (457.7)
Unrealized gains on investments and
interest-only strip receivables, net of
reclassification adjustment 199.5 199.5
Foreign currency translation adjustments (18.1) (18.1)
-----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 1,405.8
Cash dividends:
Preferred at stated rates (15.5) (15.5)
Common, $.85 per share (391.1) (391.1)
Issuance of preferred stock 291.4 -
Exercise of stock options .5 31.2 15.2 46.9
Issuance of common stock .1 72.8 48.9 121.8
Purchase of treasury stock (916.3) (916.3)
-----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $ 455.8 $ 551.7 $2,030.0 $9,197.4 $ (732.4) $(2,843.9) $ 8,202.8
===================================================================================================================================
</TABLE>
(1) Accumulated other comprehensive income includes the following:
<TABLE>
<CAPTION>
In millions. At December 31 2001 2000 1999 1998
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Unrealized losses on cash flow hedging instruments $ (699.1) - - -
Unrealized gains (losses) on investments and
interest-only strip receivables:
Gross unrealized gains (losses) 351.7 $ 41.6 $ (109.8) $ 34.0
Income tax expense (benefit) 128.4 17.8 (38.5) 11.6
--------------------------------------
Net unrealized gains (losses) 223.3 23.8 (71.3) 22.4
Cumulative adjustments for foreign currency translation
adjustments (256.6) (238.5) (185.6) (167.5)
--------------------------------------
Total $ (732.4) $(214.7) $ (256.9) $ (145.1)
======================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
40
<PAGE>
Household International, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN PREFERRED STOCK
AND COMMON SHAREHOLDERS' EQUITY (Continued)
<TABLE>
<CAPTION>
Common Stock
Preferred ----------------------------------------------
Shares Outstanding Stock Issued In Treasury Net Outstanding
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1998 1,398,279 544,124,170 (60,986,431) 483,137,739
Exercise of common stock options 6,083,549 (791,681) 5,291,868
Issuance of common stock 223,338 1,055,566 1,278,904
Purchase of treasury stock (21,797,066) (21,797,066)
---------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 1,398,279 550,431,057 (82,519,612) 467,911,445
Exercise of common stock options 516,823 1,531,458 2,048,281
Issuance of common stock 152,285 6,321,263 6,473,548
Purchase of treasury stock (5,413,615) (5,413,615)
---------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 1,398,279 551,100,165 (80,080,506) 471,019,659
Issuance of preferred stock 300,000
Exercise of common stock options 548,744 1,466,979 2,015,723
Issuance of common stock 35,831 1,450,484 1,486,315
Purchase of treasury stock (17,397,394) (17,397,394)
---------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 1,698,279 551,684,740 (94,560,437) 457,124,303
=========================================================================================================
</TABLE>
Comprehensive Income
We adopted FAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," on January 1, 2001. The adoption was accounted for as a cumulative
effect of a change in accounting principle. The table below discloses
reclassification adjustments and the related tax effects allocated to each
component of other comprehensive income (expense) including the adoption of FAS
No. 133 and unrealized gains (losses) on cash flow hedging instruments in 2001,
unrealized gains (losses) on investments and interest-only strip receivables
and foreign currency translation adjustments.
<TABLE>
<CAPTION>
In millions. Tax
(Expense)
Year ended December 31 Before-Tax Benefit Net-of-Tax
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1999
Unrealized gains (losses) on investments and interest-only strip
receivables:
Net unrealized holding losses arising during the period $(134.4) $ 46.8 $ (87.6)
Less: Reclassification adjustment for gains realized in net income (9.4) 3.3 (6.1)
---------------------------------------------------------------------------------------------------------
Net unrealized losses on investments and interest-only strip (143.8) 50.1 (93.7)
receivables
Foreign currency translation adjustments (23.4) 5.3 (18.1)
------------------------------------------------------------------------------------------------------------
Other comprehensive expense $(167.2) $ 55.4 $(111.8)
------------------------------------------------------------------------------------------------------------
2000
Unrealized gains (losses) on investments and interest-only strip receivables:
Net unrealized holding gains arising during the period $ 152.2 $ (56.6) $ 95.6
Less: Reclassification adjustment for gains realized in net income (.8) .3 (.5)
---------------------------------------------------------------------------------------------------------
Net unrealized gains on investments and interest-only strip receivables 151.4 (56.3) 95.1
Foreign currency translation adjustments (75.3) 22.4 (52.9)
------------------------------------------------------------------------------------------------------------
Other comprehensive income $ 76.1 $ (33.9) $ 42.2
------------------------------------------------------------------------------------------------------------
2001
Unrealized gains (losses) on cash flow hedging instruments:
Cumulative effect of change in accounting principle (FAS No. 133) $ (376.6) $ 135.2 $(241.4)
Net losses arising during the period (1,137.0) 408.2 (728.8)
Less: Reclassification adjustment for losses realized in net income 422.9 (151.8) 271.1
---------------------------------------------------------------------------------------------------------
Net losses on cash flow hedging instruments (1,090.7) 391.6 (699.1)
---------------------------------------------------------------------------------------------------------
Unrealized gains (losses) on investments and interest-only strip receivables:
Net unrealized holding gains arising during the period 321.3 (114.5) 206.8
Less: Reclassification adjustment for gains realized in net income (11.2) 3.9 (7.3)
---------------------------------------------------------------------------------------------------------
Net unrealized gains on investments and interest-only strip receivables 310.1 (110.6) 199.5
---------------------------------------------------------------------------------------------------------
Foreign currency translation adjustments (28.2) 10.1 (18.1)
------------------------------------------------------------------------------------------------------------
Other comprehensive expense $ (808.8) $ 291.1 $(517.7)
============================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Household International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Household International, Inc. and subsidiaries ("Household") is a leading
provider of consumer lending products to middle-market consumers in the United
States, United Kingdom and Canada. Household may also be referred to in these
notes to the consolidated financial statements as "we," "us" or "our." Our
lending products include real estate secured loans, auto finance loans,
MasterCard* and Visa* credit cards, private label credit cards and personal
non-credit card loans. We also offer tax refund anticipation loans in the United
States and credit and specialty insurance in the United States, the United
Kingdom and Canada. We have three reportable segments: Consumer, Credit Card
Services, and International. Our Consumer segment consists of our branch-based
consumer lending, mortgage services, retail services, and auto finance
businesses. Our Credit Card Services segment consists of our domestic MasterCard
and Visa credit card business. Our International segment consists of our foreign
operations in the United Kingdom ("U.K.") and Canada.
1. Summary of Significant Accounting Policies
Basis of Presentation The consolidated financial statements include the
accounts of Household International, Inc. and all subsidiaries. All significant
intercompany accounts and transactions have been eliminated. Certain prior year
amounts have been reclassified to conform with the current year's presentation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Investment Securities We maintain investment portfolios (comprised primarily of
debt securities) in both our noninsurance and insurance operations. Our entire
investment securities portfolio was classified as available-for-sale at December
31, 2001 and 2000. Available-for-sale investments are intended to be invested
for an indefinite period but may be sold in response to events we expect to
occur in the foreseeable future. These investments are carried at fair value.
Unrealized holding gains and losses on available-for-sale investments are
recorded as adjustments to common shareholders' equity in accumulated other
comprehensive income, net of income taxes. Any decline in the fair value of
investments which is deemed to be other than temporary is charged against
current earnings.
Cost of investment securities sold is determined using the specific
identification method. Interest income earned on the noninsurance investment
portfolio is classified in the statements of income in net interest margin.
Realized gains and losses from the investment portfolio and investment income
from the insurance portfolio are recorded in investment income. Accrued
investment income is classified with investment securities.
Receivables Receivables are carried at amortized cost. Finance income is
recognized using the effective yield method. Premiums and discounts on purchased
receivables are recognized as adjustments to the yield of the related
receivables. Origination fees are deferred and amortized to finance income over
the estimated life of the related receivables, except to the extent they offset
directly related lending costs. MasterCard and Visa annual fees are netted with
direct lending costs, deferred, and amortized on a straight-line basis over one
year. Net deferred annual fees related to these receivables totaled $90.3
million at December 31, 2001 and $63.4 million at December 31, 2000.
Insurance reserves and unearned premiums applicable to credit risks on consumer
receivables are treated as a reduction of receivables in the balance sheets,
since payments on such policies generally are used to reduce outstanding
receivables.
42
<PAGE>
Provision and Credit Loss Reserves Provision for credit losses on owned
receivables is made in an amount sufficient to maintain credit loss reserves at
a level considered adequate to cover probable losses of principal, interest and
fees, including late, overlimit and annual fees, in the existing owned
portfolio. Probable losses are estimated for consumer receivables based on
contractual delinquency status and historical loss experience. For commercial
loans, probable losses are calculated using estimates of amounts and timing of
future cash flows expected to be received on loans. In addition, loss reserves
on consumer receivables are maintained to reflect our judgment of portfolio risk
factors, such as economic conditions, bankruptcy trends, product mix, geographic
concentrations and other similar items. Charge-off and customer account
management policies are also considered when establishing loss reserve
requirements to ensure appropriate allowances exist for products with longer
charge-off periods and for customers benefiting from account management
decisions. Loss reserve estimates are reviewed periodically and adjustments are
reported in earnings when they become known. As these estimates are influenced
by factors outside our control, such as consumer payment patterns and economic
conditions, there is uncertainty inherent in these estimates, making it
reasonably possible that they could change.
Our charge-off policy for consumer receivables varies by product. Unsecured
receivables are written off at the following stages of contractual delinquency:
MasterCard and Visa-6 months; private label-9 months; and personal non-credit
card-9 months and no payment received in 6 months, but in no event to exceed 12
months. For real estate secured receivables, carrying values in excess of net
realizable value are charged off at the time of foreclosure or when settlement
is reached with the borrower. For loans secured by automobiles, carrying values
in excess of net realizable value are charged off at the earlier of repossession
and sale of the collateral, the collateral being in our possession for more than
90 days, or the loan becoming 150 days contractually delinquent. Charge-offs may
occur sooner for certain consumer receivables involving a bankruptcy. Our
policies for consumer loans permit reset of the contractual delinquency status
of an account to current, subject to certain limits, if a predetermined number
of consecutive payments has been received and there is evidence that the reason
for the delinquency has been cured. Such reaging policies vary by product and
are designed to manage customer relationships and ensure maximum collections.
Commercial receivables are written off when it becomes apparent that an account
is uncollectible.
Nonaccrual Loans Nonaccrual loans are loans on which accrual of interest has
been suspended. Interest income is suspended on real estate secured, personal
non-credit card and commercial loans when principal or interest payments are
more than three months contractually past due. For MasterCard and Visa and
private label credit card receivables, interest continues to accrue until the
receivable is charged off. For auto finance receivables, accrual of interest
income is discontinued when payments are more than two months contractually past
due. Accrual of income on nonaccrual real estate secured and personal homeowner
loans ("PHL's") is resumed if the receivable becomes less than three months
contractually delinquent and on auto finance loans when the loan becomes less
than two months contractually delinquent. Interest on nonaccrual personal
non-credit card receivables other than PHL's is recorded as collected. Accrual
of income on nonaccrual commercial loans is resumed if the loan becomes
contractually current. Cash payments received on nonaccrual commercial loans are
either applied against principal or reported as interest income, according to
our judgment as to the collectibility of principal.
Receivables Sold and Serviced with Limited Recourse and Securitization Revenue
Certain real estate secured, auto finance, MasterCard and Visa, private label
and personal non-credit card receivables have been securitized and sold to
investors with limited recourse. We have retained the servicing rights to these
receivables. Recourse is limited to our rights to future cash flow and any
subordinated interest that we may retain. Upon sale, the receivables are removed
from the balance sheet and a gain on sale is recognized for the difference
between the carrying value of the receivables and the adjusted sales proceeds.
The adjusted sales proceeds 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 other factors. The resulting gain is also
adjusted by a provision for estimated probable losses under the recourse
provisions based on historical experience and estimates of expected future
performance. Gains on sale net of recourse provisions, servicing income and
excess spread relating to securitized receivables are reported in the
accompanying consolidated statements of income as securitization revenue.
43
<PAGE>
In connection with these transactions, we record an interest-only strip
receivable, representing our contractual right to receive interest and other
cash flows from our securitization trusts. Our interest-only strip receivables
are reported at 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 shareholders' equity in accumulated other comprehensive
income, net of income taxes. Our interest-only strip receivables are reviewed
for impairment quarterly or earlier if events indicate that the carrying value
may not be recovered. Any decline in the fair value of the interest-only strip
receivable which is deemed to be other than temporary is charged against current
earnings.
In September 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, a
Replacement of FASB Statement No. 125" ("FAS No. 140"). FAS No. 140 revised the
standards for accounting for securitizations and requires certain disclosures.
We adopted the nondisclosure related provisions of FAS No. 140 as required on
April 1, 2001. The adoption did not have a significant effect on our operations.
Properties and Equipment, Net Properties and equipment are recorded at cost,
net of accumulated depreciation and amortization. For financial reporting
purposes, depreciation is provided on a straight-line basis over the estimated
useful lives of the assets which generally range from 3 to 40 years. Leasehold
improvements are amortized over the lesser of the economic useful life of the
improvement or the term of the lease. Maintenance and repairs are expensed as
incurred.
Repossessed Collateral Real estate owned is valued at the lower of cost or fair
value less estimated costs to sell. These values are periodically reviewed and
reduced, if necessary. Costs of holding real estate, and related gains and
losses on disposition, are credited or charged to operations as incurred as a
component of operating expense. Repossessed vehicles, net of loss reserves when
applicable, are recorded at the lower of the estimated fair market value or the
outstanding receivable balance.
Insurance Insurance revenues on revolving credit insurance policies are
recognized when billed. Insurance revenues on the remaining insurance contracts
are recorded as unearned premiums and recognized into income based on the nature
and terms of the underlying contracts. Liabilities for credit insurance policies
are based upon estimated settlement amounts for both reported and incurred but
not yet reported losses. Liabilities for future benefits on annuity contracts
and specialty and corporate owned life insurance products are based on actuarial
assumptions as to investment yields, mortality and withdrawals.
Acquired Intangibles and Goodwill Acquired intangibles consist of acquired
credit card relationships which are amortized on a straight-line basis over
their estimated useful lives. These lives vary by portfolio and initially ranged
from 4 to 15 years. Goodwill represents the purchase price over the fair value
of identifiable assets acquired less liabilities assumed from business
combinations and was amortized on a straight-line basis over periods not
exceeding 25 years through December 31, 2001. Acquired intangibles are reviewed
for impairment using discounted cash flows and goodwill using undiscounted cash
flows whenever events indicate that the carrying amounts may not be recoverable.
We consider significant and long-term changes in industry and economic
conditions to be our primary indicator of potential impairment. Impairment
charges, when required, are calculated using discounted cash flows.
44
<PAGE>
In July 2001, the FASB issued Statements of Financial Accounting Standards No.
141, "Business Combinations" ("FAS No. 141") and No. 142, "Goodwill and Other
Intangible Assets" ("FAS No. 142"). FAS No. 141 eliminated the pooling of
interests method of accounting and requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
We had no acquisitions during 2001 which were affected by FAS No. 141. FAS No.
142 changed the accounting for goodwill from an amortization method to an
impairment-only approach. Amortization of goodwill recorded in past business
combinations ceased upon adoption of the statement on January 1, 2002. The
adoption is expected to increase net income by approximately $45 million, or
$.10 per share, annually.
Treasury Stock We account for repurchases of common stock using the cost method
with common stock in treasury classified in the balance sheets as a reduction of
common shareholders' equity. Treasury stock is reissued at average cost.
Derivative Financial Instruments Effective January 1, 2001, we adopted
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS No. 133"), as amended. Under FAS No.
133, all derivatives are recognized on the balance sheet at their fair value. On
the date the derivative contract is entered into, we designate the derivative as
a fair value hedge, a cash flow hedge, a hedge of a net investment in a foreign
operation, or a non-hedging derivative. Fair value hedges include hedges of the
fair value of a recognized asset or liability and certain foreign currency
hedges. Cash flow hedges include hedges of the variability of cash flows to be
received or paid related to a recognized asset or liability and certain foreign
currency hedges. Changes in the fair value of derivatives designated as fair
value hedges, along with the change in fair value on the hedged asset or
liability that is attributable to the hedged risk, are recorded in current
period earnings. Changes in the fair value of derivatives designated as cash
flow hedges, to the extent effective as a hedge, are recorded in accumulated
other comprehensive income and reclassified into earnings in the period during
which the hedged item affects earnings. Changes in the fair value of derivatives
used to hedge our net investment in foreign subsidiaries, to the extent
effective as a hedge, are recorded in common shareholders' equity as a component
of the cumulative translation adjustment account within accumulated other
comprehensive income. Changes in the fair value of derivative instruments not
designated as hedging instruments and ineffective portions of changes in the
fair value of hedging instruments are recognized in other income in the current
period.
We formally document all relationships between hedging instruments and hedged
items. This documentation includes our risk management objective and strategy
for undertaking various hedge transactions, as well as how hedge effectiveness
and ineffectiveness will be measured. This process includes linking derivatives
to specific assets and liabilities on the balance sheet. We also formally
assess, both at the hedge's inception and on an ongoing basis, whether the
derivatives that are used in hedging transactions are highly effective in
offsetting changes in fair values or cash flows of hedged items. When it is
determined that a derivative is not highly effective as a hedge or that it has
ceased to be a highly effective hedge, we discontinue hedge accounting
prospectively.
When hedge accounting is discontinued because it is determined that the
derivative no longer qualifies as an effective hedge, the derivative will
continue to be carried on the balance sheet at its fair value, with changes in
its fair value recognized in current period earnings. For fair value hedges, the
formerly hedged asset or liability will no longer be adjusted for changes in
fair value and any previously recorded adjustments to the carrying value of the
hedged asset or liability will be amortized in the same manner that the hedged
item affects income. For cash flow hedges, amounts previously recorded in
accumulated other comprehensive income will be reclassified into income as
earnings are impacted by the variability in the cash flows of the hedged item.
If the hedging instrument is terminated early, the derivative is removed from
the balance sheet. Accounting for the adjustments to the hedged asset or
liability or adjustments to accumulated other comprehensive income are the same
as described above when a derivative no longer qualifies as an effective hedge.
45
<PAGE>
If the hedged asset or liability is sold or extinguished, the derivative will
continue to be carried on the balance sheet at its fair value, with changes in
its fair value recognized in current period earnings. The hedged item, including
previously recorded mark-to-market adjustments, is derecognized immediately as a
component of the gain or loss upon disposition.
The adoption of FAS No. 133 on January 1, 2001 was accounted for as a cumulative
effect of a change in accounting principle. The impact of the adoption was not
material to earnings and reduced common shareholders' equity by $241.4 million.
The adjustment to common shareholders' equity was recorded as a component of
accumulated other comprehensive income and was made to recognize at fair value
all derivatives that were designated as cash flow hedging instruments. During
2001, approximately $119 million in derivative losses associated with the
transition adjustment were reclassified into earnings. These losses were offset
by decreased interest expense associated with the variable cash flows of the
hedged items and resulted in no economic impact to our earnings. Derivative
gains associated with the transition adjustment reclassified into earnings
during 2001 were not material.
Foreign Currency Translation We have foreign subsidiaries located in the United
Kingdom and Canada. The functional currency for each foreign subsidiary is its
local currency. Assets and liabilities of these subsidiaries are translated at
the rate of exchange in effect on the balance sheet date; income and expenses
are translated at the average rate of exchange prevailing during the year.
Resulting translation adjustments are accumulated in common shareholders' equity
as a component of accumulated other comprehensive income.
We periodically enter into forward exchange contracts to hedge our investment in
foreign subsidiaries. After-tax gains and losses on contracts to hedge foreign
currency fluctuations are accumulated in common shareholders' equity as a
component of accumulated other comprehensive income. Effects of foreign currency
translation in the statements of cash flows are offset against the cumulative
foreign currency adjustment, except for the impact on cash. Foreign currency
transaction gains and losses are included in income as they occur.
Stock-Based Compensation We account for stock option and stock purchase plans
in accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"). In accordance with APB 25, no
compensation expense is recognized for stock options issued.
Income Taxes Federal income taxes are accounted for utilizing the liability
method. Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Investment tax credits generated by
leveraged leases are accounted for using the deferral method.
2. Business Combinations, Acquisitions and Divestitures
On February 7, 2000, we purchased all of the outstanding capital stock of
Renaissance Holdings, Inc. ("Renaissance"), a privately held issuer of secured
and unsecured credit cards to subprime customers, for approximately $300 million
of our common stock and cash. The acquisition provided us with an established
platform for growing the subprime credit card business and expanding our product
offerings to customers and prospects in our other businesses. The acquisition
was accounted for as a purchase and, accordingly, Renaissance's operations have
been included in our results of operations since February 7, 2000.
In August 1999, we acquired all of the outstanding capital stock of Decision One
Mortgage Company LLC ("Decision One") for approximately $60 million in common
stock and cash. Decision One originates loans through a 30-state broker network
and packages them for sale to investors. The acquisition was accounted for as a
purchase and, accordingly, earnings from Decision One have been included in our
results of operations subsequent to the acquisition date.
46
<PAGE>
3. Investment Securities
<TABLE>
<CAPTION>
In millions.
At December 31 2001 2000
--------------------------------------------------------------------------------
<S> <C> <C>
Available-For-Sale Investments
Corporate debt securities $ 2,054.0 $ 1,873.5
Money market funds 342.3 436.6
Certificates of deposit 259.8 319.2
U.S. government and federal agency debt securities 217.8 173.5
Marketable equity securities 21.2 24.9
Other 638.9 390.3
--------------------------------------------------------------------------------
Subtotal 3,534.0 3,218.0
Accrued investment income 46.5 41.0
--------------------------------------------------------------------------------
Total investment securities $ 3,580.5 $ 3,259.0
================================================================================
</TABLE>
Proceeds from the sale of available-for-sale investments totaled approximately
$.7 billion in 2001, $.2 billion in 2000 and $.7 billion in 1999. Gross gains of
$12.9 million in 2001, $2.2 million in 2000 and $12.1 million in 1999 and gross
losses of $1.7 million in 2001, $1.4 million in 2000 and $2.7 million in 1999
were realized on those sales.
The gross unrealized gains (losses) on available-for-sale investment securities
were as follows:
<TABLE>
<CAPTION>
2001 2000
----------------------------------------------- ---------------------------------------------
Gross Gross Gross Gross
In millions. Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
At December 31 Cost Gains Losses Value Cost Gains Losses Value
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Corporate debt securities $ 2,089.5 $ 31.3 $ (66.8) $ 2,054.0 $ 1,948.5 $ 17.4 $ (92.4) $ 1,873.5
Money market funds 342.3 - - 342.3 436.6 - - 436.6
Certificates of deposit 246.1 13.7 - 259.8 319.2 - - 319.2
U.S. government and
Federal agency debt
Securities 217.0 2.0 (1.2) 217.8 173.7 1.6 (1.8) 173.5
Marketable equity
Securities 24.4 - (3.2) 21.2 25.8 - (.9) 24.9
Other 611.6 28.6 (1.3) 638.9 390.1 .6 (.4) 390.3
--------------------------------------------------------------------------------------------------------------------------
Total available-for-sale
Investments $ 3,530.9 $ 75.6 $ (72.5) $ 3,534.0 $ 3,293.9 $ 19.6 $ (95.5) $ 3,218.0
==========================================================================================================================
</TABLE>
See Note 14, "Fair Value of Financial Instruments," for further discussion of
the relationship between the fair value of our assets, liabilities and
off-balance sheet financial instruments.
Contractual maturities of and yields on investments in debt securities were as
follows:
<TABLE>
<CAPTION>
U.S. Government and Federal
Corporate Debt Securities Agency Debt Securities
All dollar amounts are ----------------------------------- ---------------------------------
Stated in millions. Amortized Fair Amortized Fair
At December 31, 2001 Cost Value Yield(1) Cost Value Yield(1)
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Due within 1 year $ 49.8 $ 50.5 5.1% $ 44.6 $ 44.7 7.6%
After 1 but within 5 years 806.7 817.3 5.7 84.6 85.6 5.7
After 5 but within 10 years 392.6 394.2 6.5 64.7 64.7 5.1
After 10 years 840.4 792.0 7.0 23.1 22.8 6.0
---------------------------------------------------------------------------------------------------------
Total $ 2,089.5 $ 2,054.0 6.4% $ 217.0 $217.8 5.9%
=========================================================================================================
</TABLE>
(1) Computed by dividing annualized interest by the amortized cost of respective
investment securities.
47
<PAGE>
4. Receivables
<TABLE>
<CAPTION>
In millions.
At December 31 2001 2000
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Real estate secured $ 43,856.8 $ 35,179.7
Auto finance 2,368.9 1,850.6
MasterCard/Visa 8,141.2 8,053.6
Private label 11,663.9 10,347.3
Personal non-credit card 13,337.0 11,328.1
Commercial and other 506.9 598.6
-----------------------------------------------------------------------------------------------
Total owned receivables 79,874.7 67,357.9
Accrued finance charges 1,559.8 1,302.6
Credit loss reserve for owned receivables (2,663.1) (2,111.9)
Unearned credit insurance premiums and claims reserves (895.8) (725.2)
Interest-only strip receivables 968.2 636.5
Amounts due and deferred from receivable sales 419.7 701.8
-----------------------------------------------------------------------------------------------
Total owned receivables, net 79,263.5 67,161.7
Receivables serviced with limited recourse 20,948.0 20,249.5
-----------------------------------------------------------------------------------------------
Total managed receivables, net $100,211.5 $ 87,411.2
===============================================================================================
</TABLE>
Foreign receivables included in owned receivables were as follows:
<TABLE>
<CAPTION>
United Kingdom Canada
In millions. --------------------------------------- ----------------------------------------
At December 31 2001 2000 1999 2001 2000 1999
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real estate secured $ 924.6 $ 857.1 $ 751.0 $ 458.4 $ 402.6 $ 339.2
MasterCard/Visa 1,174.5 2,206.7 2,167.8 - - -
Private label 1,284.8 1,234.6 1,145.6 525.7 441.2 427.4
Personal non-credit
Card 1,217.5 1,000.3 1,310.8 382.8 377.5 371.0
Commercial and other .3 .8 1.1 1.4 1.5 2.7
-----------------------------------------------------------------------------------------------------------------
Total $ 4,601.7 $ 5,299.5 $ 5,376.3 $ 1,368.3 $ 1,222.8 $ 1,140.3
=================================================================================================================
</TABLE>
Foreign managed receivables represented 7 and 9 percent of total managed
receivables at December 31, 2001 and 2000, respectively.
The outstanding balance of receivables serviced with limited recourse consisted
of the following:
<TABLE>
<CAPTION>
In millions.
At December 31 2001 2000
------------------------------------------------------------------------------------------------
<S> <C> <C>
Real estate secured $ 861.8 $ 1,457.8
Auto finance 4,026.6 2,712.7
MasterCard/Visa 9,254.0 9,529.8
Private label 2,150.0 1,650.0
Personal non-credit card 4,655.6 4,899.2
------------------------------------------------------------------------------------------------
Total $ 20,948.0 $ 20,249.5
================================================================================================
</TABLE>
The combination of receivables owned and receivables serviced with limited
recourse, which we consider our managed portfolio, is shown below:
<TABLE>
<CAPTION>
In millions.
At December 31 2001 2000
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Real estate secured $ 44,718.6 $ 36,637.5
Auto finance 6,395.5 4,563.3
MasterCard/Visa 17,395.2 17,583.4
Private label 13,813.9 11,997.3
Personal non-credit card 17,992.6 16,227.3
Commercial and other 506.9 598.6
------------------------------------------------------------------------------------------------
Total $100,822.7 $ 87,607.4
================================================================================================
</TABLE>
48
<PAGE>
We maintain facilities with third parties which provide for the securitization
of receivables on a revolving basis totaling $12.9 billion, of which $10.6
billion were utilized at December 31, 2001. The amount available under these
facilities will vary based on the timing and volume of public securitization
transactions.
Contractual maturities of owned receivables were as follows:
<TABLE>
<CAPTION>
In millions. There-
At December 31, 2001 2002 2003 2004 2005 2006 after Total
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate secured $ 11,951.9 $ 8,588.8 $ 6,260.9 $ 4,530.3 $ 3,376.7 $ 9,148.2 $ 43,856.8
Auto finance 38.3 74.5 233.2 559.1 1,039.9 423.9 2,368.9
MasterCard/Visa 939.9 830.1 701.8 639.3 544.3 4,485.8 8,141.2
Private label 5,782.3 2,280.3 701.3 414.2 276.2 2,209.6 11,663.9
Personal non-credit
card 3,336.1 2,392.9 1,930.9 1,506.7 1,178.9 2,991.5 13,337.0
Commercial and other 43.6 44.8 58.2 39.9 35.4 285.0 506.9
---------------------------------------------------------------------------------------------------------------------
Total $ 22,092.1 $ 14,211.4 $ 9,886.3 $ 7,689.5 $ 6,451.4 $ 19,544.0 $ 79,874.7
=====================================================================================================================
</TABLE>
A substantial portion of consumer receivables, based on our experience, will be
renewed or repaid prior to contractual maturity. The above maturity schedule
should not be regarded as a forecast of future cash collections. The ratio of
annual cash collections of principal to average principal balances, excluding
credit card receivables, approximated 55 percent in 2001 and 58 percent in 2000.
The following table summarizes contractual maturities of owned receivables due
after one year by repricing characteristic:
<TABLE>
Over 1
In millions. But Within Over
At December 31, 2001 5 years 5 years
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Receivables at predetermined interest rates $ 27,241.4 $ 9,985.6
Receivables at floating or adjustable rates 10,997.2 9,558.4
---------------------------------------------------------------------------------------------------------------------
Total $ 38,238.6 $ 19,544.0
=====================================================================================================================
</TABLE>
Nonaccrual owned consumer receivables totaled $2,064.3 million and $1,636.7
million at December 31, 2001 and 2000, respectively, including $215.3 million
and $226.0 million, respectively, relating to foreign operations. Interest
income that would have been recorded in 2001 and 2000 if such nonaccrual
receivables had been current and in accordance with contractual terms was
approximately $315.8 million and $260.4 million, respectively, including $34.6
million and $38.2 million, respectively, relating to foreign operations.
Interest income that was included in net income for 2001 and 2000, prior to
these loans being placed on nonaccrual status, was approximately $173.5 million
and $143.9 million, respectively, including $16.4 million and $19.9 million,
respectively, relating to foreign operations. For an analysis of reserves for
credit losses, see our "Analysis of Credit Loss Reserves Activity" on pages 31
and 32 on an owned and managed basis.
Interest-only strip receivables are reported net of our estimate of probable
losses under the recourse provisions for receivables serviced with limited
recourse. Our estimate of the recourse obligation totaled $1,148.3 million at
December 31, 2001 and $1,082.3 million at December 31, 2000. Interest-only strip
receivables also included fair value mark-to-market adjustments of $348.6
million at year-end 2001 and $117.5 million at year-end 2000.
Amounts due and deferred from receivable sales include certain assets
established under the recourse provisions for certain receivable sales,
including funds deposited in spread accounts, offset by net customer payments
owed to the securitization trustee. Net customer payments owed to the
securitization trustee totaled $27.0 million at December 31, 2001 and $61.2
million at December 31, 2000.
49
<PAGE>
5. Asset Securitizations
We sell auto finance, MasterCard and Visa, private label and personal non-credit
card receivables in various securitization transactions. We continue to service
and receive servicing fees on the outstanding balance of securitized
receivables. We also retain rights to future cash flows arising from the
receivables after the investors receive their contractual return. We have also,
in certain cases, retained other subordinated interests in these
securitizations. These transactions typically result in the recording of an
interest-only strip receivable which represents the value of the future residual
cash flows from securitized receivables. The investors and the securitization
trusts have only limited recourse to our assets for failure of debtors to pay.
That recourse is limited to our rights to future cash flow and any subordinated
interest we retain. Servicing assets and liabilities are not recognized in
conjunction with our securitizations since we receive adequate compensation
relative to current market rates to service the receivables sold. See Note 1,
"Summary of Significant Accounting Policies," for further discussion on our
accounting for interest-only strip receivables.
Securitization revenue includes income associated with the current and prior
period securitization and sale of receivables with limited recourse. Such income
includes gains on sales, net of our estimate of probable credit losses under the
recourse provisions, servicing income and excess spread relating to those
receivables.
Net initial gains, which represent gross initial gains net of our estimate of
probable credit losses under the recourse provisions, and the key economic
assumptions used in measuring the net initial gains from securitizations
completed during the years ended December 31, 2001 and 2000 were as follows:
<TABLE>
<CAPTION>
MasterCard/ Personal Non- Private Auto
Visa Credit Card Label Finance Total
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2001
Net initial gains (in millions) $ 7.3 $ 36.0 $ 13.1 $ 109.3 $ 165.7
Key economic assumptions:(1)
Weighted-average life (in years) .38 1.23 .85 2.20
Payment speed 93.59% 52.33% 67.06% 34.20%
Expected credit losses (annual rate) 5.08 7.34 5.49 4.79
Discount rate on cash flows 9.00 11.00 10.00 10.00
Cost of funds 6.15 4.24 5.73 4.54
2000
Net initial gains (in millions) $ 43.7 $ 37.5 $ 8.5 $ 80.4 $ 170.1
Key economic assumptions:(1)
Weighted-average life (in years) .41 1.28 .93 2.06
Payment speed 92.62% 52.01% 63.97% 35.98%
Expected credit losses (annual rate) 5.48 6.87 6.60 5.38
Discount rate on cash flows 9.00 11.00 10.00 10.00
Cost of funds 5.88 6.67 6.36 7.12
-----------------------------------------------------------------------------------------------------
</TABLE>
(1) Weighted-average annual rates for securitizations entered into during the
period for securitizations of loans with similar characteristics.
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. These replenishments totaled $24.7 billion in 2001 and $21.0
billion in 2000. Net gains (gross gains less estimated credit losses under the
recourse provisions) related to these replenishments were calculated using
weighted-average assumptions consistent with those used for calculating gains on
initial securitizations and totaled $407.5 million in 2001 and $328.4 million in
2000.
50
<PAGE>
Cash flows received from securitization trusts were as follows:
<TABLE>
<CAPTION>
In millions. MasterCard/ Personal Non- Private Auto Real Estate
Year ended December 31 Visa Credit Card Label Finance Secured Total
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
2001
Proceeds from initial securitizations $ 261.1 $2,123.6 $ 500.0 $2,573.9 - $ 5,458.6
Servicing fees received 182.9 90.6 34.9 84.9 $ 12.0 405.3
Other cash flow received on
retained interests (1) 789.0 181.1 157.9 111.9 67.5 1,307.4
2000
Proceeds from initial securitizations $1,925.0 $2,637.4 $ 500.0 $1,912.6 - $ 6,975.0
Servicing fees received 179.7 91.3 24.2 60.7 $ 18.5 374.4
Other cash flow received on
retained interests (1) 645.5 177.4 57.4 80.4 81.5 1,042.2
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Other cash flows include all cash flows from interest-only strip
receivables, excluding servicing fees.
Our interest-only strip receivables are reported at fair value using discounted
cash flow estimates.
At December 31, 2001, the sensitivity of the current fair value of the
interest-only strip receivables to an immediate 10 percent and 20 percent
unfavorable change in assumptions are presented in the table below. These
sensitivities are based on assumptions used to value our interest-only strip
receivables at December 31, 2001.
<TABLE>
<CAPTION>
MasterCard/ Personal Non- Private Auto Real Estate
Dollar amounts are stated in millions. Visa Credit Card Label Finance Secured
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Carrying value (fair value) of interest-only strip
Receivables $ 267.2 $ 335.4 $ 55.1 $ 285.7 $ 24.8
Weighted-average life (in years) .57 1.19 .79 1.87 1.53
Payment speed assumption (annual rate) 83.82% 45.62% 69.66% 38.90% 25.95%
Impact on fair value of 10% adverse change $ (22.2) $ (23.2) $ (5.4) $ (26.2) $ (1.4)
Impact on fair value of 20% adverse change (41.6) (45.7) (9.2) (59.9) (2.8)
Expected credit losses (annual rate) 5.21% 7.41% 5.49% 6.83% 1.55%
Impact on fair value of 10% adverse change $ (23.0) $ (36.5) $ (8.4) $ (25.1) $ (1.4)
Impact on fair value of 20% adverse change (46.0) (72.9) (16.9) (50.1) (2.7)
Discount rate on residual cash flows (annual rate) 9.00% 11.00% 10.00% 10.00% 13.00%
Impact on fair value of 10% adverse change $ (3.0) $ (3.0) $ (0.3) $ (6.9) $ (0.5)
Impact on fair value of 20% adverse change (6.1) (6.0) (0.7) (13.6) (1.0)
Variable returns to investors (annual rate) 5.09% 3.53% 4.62% 5.42% 3.58%
Impact on fair value of 10% adverse change $ (23.3) $ (19.3) $ (7.5) $ (0.2) $ (3.3)
Impact on fair value of 20% adverse change (46.6) (38.1) (14.9) (0.3) (6.5)
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
These sensitivities are hypothetical and should not be considered to be
predictive of future performance. As the figures indicate, the change in fair
value based on a 10 percent variation in assumptions cannot necessarily be
extrapolated because the relationship of the change in assumption to the change
in fair value may not be linear. Also, in this table, the effect of a variation
in a particular assumption on the fair value of the residual cash flow is
calculated independently from any change in another assumption. In reality,
changes in one factor may contribute to changes in another (for example,
increases in market interest rates may result in lower prepayments) which might
magnify or counteract the sensitivities. Furthermore, the estimated fair values
as disclosed should not be considered indicative of future earnings on these
assets.
Static pool credit losses are calculated by summing actual and projected future
credit losses and dividing them by the original balance of each pool of asset.
Due to the short term revolving nature of MasterCard and Visa, personal
non-credit card and private label receivables, the weighted-average percentage
of static pool credit losses is not considered to be materially different from
the weighted-average charge-off assumptions used in determining the fair value
of our interest-only strip receivables in the table above. At December 31, 2001,
static pool credit losses for auto finance loans securitized in 2001 were
estimated to be 10.0 percent and for auto finance loans securitized in 2000 were
estimated to be 11.0 percent.
51
<PAGE>
Receivables information by product including delinquency and net charge-offs for
our managed and serviced with limited recourse portfolios were as follows:
<TABLE>
<CAPTION>
2001 2000
------------------------------- -----------------------------
In millions Receivables Delinquent Receivables Delinquent
At December 31 Outstanding Receivables Outstanding Receivables
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Managed receivables:
Real estate secured $ 44,718.6 2.68% $ 36,637.5 2.63%
Auto finance 6,395.5 3.16 4,563.3 2.55
MasterCard/Visa 17,395.2 4.10 17,583.4 3.49
Private label 13,813.9 5.48 11,997.3 5.48
Personal non-credit card 17,992.6 8.87 16,227.3 7.97
--------------------------------------------------------------------------------------------------------------------
Total consumer 100,315.8 4.46 87,008.8 4.20
Commercial and other 506.9 1.58 598.6 2.10
--------------------------------------------------------------------------------------------------------------------
Total managed receivables $100,822.7 4.44% $ 87,607.4 4.18%
--------------------------------------------------------------------------------------------------------------------
Receivables serviced with limited recourse:
Real estate secured $ (861.8) 5.00% $ (1,457.8) 4.01%
Auto finance (4,026.6) 3.29 (2,712.7) 2.61
MasterCard/Visa (9,254.0) 2.73 (9,529.8) 2.30
Private label (2,150.0) 2.69 (1,650.0) 4.72
Personal non-credit card (4,655.6) 8.36 (4,899.2) 7.90
--------------------------------------------------------------------------------------------------------------------
Total receivables serviced with limited
recourse (20,948.0) 4.18 (20,249.5) 4.02
--------------------------------------------------------------------------------------------------------------------
Owned consumer receivables $ 79,874.7 4.53% $ 67,357.9 4.26%
====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
2001 2000
--------------------------------- -------------------------------
In millions Average Net Average Net
At December 31 Receivables Charge-offs Receivables Charge-offs
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Managed receivables:
Real estate secured $ 40,049.6 .53% $ 32,530.2 .45%
Auto finance 5,323.5 5.31 3,842.3 4.80
MasterCard/Visa 17,282.8 6.63 16,111.2 5.58
Private label 12,260.6 5.18 11,194.2 5.35
Personal non-credit card 17,013.8 6.79 14,760.8 6.97
--------------------------------------------------------------------------------------------------------------------
Total consumer 91,930.3 3.73 78,438.7 3.64
Commercial and other 554.9 2.10 693.5 2.69
--------------------------------------------------------------------------------------------------------------------
Total managed receivables $ 92,485.2 3.72% $ 79,132.2 3.63%
--------------------------------------------------------------------------------------------------------------------
Receivables serviced with limited recourse:
Real estate secured $ (1,199.2) .70% $ (1,847.6) .90%
Auto finance (3,004.4) 6.32 (2,023.5) 6.16
MasterCard/Visa (9,144.6) 5.27 (8,984.7) 4.81
Private label (1,744.2) 2.72 (1,212.5) 5.42
Personal non-credit card (4,527.8) 6.74 (4,566.1) 6.86
--------------------------------------------------------------------------------------------------------------------
Total receivables serviced with limited
recourse (19,620.2) 5.26 (18,634.4) 5.11
--------------------------------------------------------------------------------------------------------------------
Owned consumer receivables $ 72,865.0 3.32% $ 60,497.8 3.18%
====================================================================================================================
</TABLE>
We issued securities backed by dedicated home equity loan receivables of $1.6
billion in 2001 and $.5 billion in 2000. For accounting purposes, these
transactions were structured as secured financings, therefore, the receivables
and the related debt remain on our balance sheet. Real estate receivables
included closed-end real estate secured receivables totaling $1.7 billion at
December 31, 2001 and $.4 billion at December 31, 2000 which secured the
outstanding debt related to these transactions.
6. Properties and Equipment, Net
<TABLE>
<CAPTION>
In millions. Depreciable
At December 31 2001 2000 Life
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Land $ 8.1 $ 8.1 -
Buildings and improvements 574.7 519.6 10 - 40 years
Furniture and equipment 878.4 844.5 3 - 10
--------------------------------------------------------------------------------------------------------------------
Total 1,461.2 1,372.2
Accumulated depreciation and amortization 930.1 854.6
--------------------------------------------------------------------------------------------------------------------
Properties and equipment, net $ 531.1 $ 517.6
====================================================================================================================
</TABLE>
52
<PAGE>
Depreciation and amortization expense totaled $139.7 million in 2001, $135.8
million in 2000 and $130.4 million in 1999.
7. Deposits
<TABLE>
<CAPTION>
2001 2000
---------------------------------- ---------------------------
Weighted- Weighted-
All dollar amounts are stated in millions. Average Average
At December 31 Amount Rate Amount Rate
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Domestic
Time certificates $ 6,000.7 6.8% $ 6,925.3 6.7%
Savings accounts 33.7 2.1 25.0 2.9
Demand accounts 36.3 .4 14.6 2.1
-------------------------------------------------------------------------------------------------------------------
Total domestic deposits 6,070.7 6.7 6,964.9 6.7
-------------------------------------------------------------------------------------------------------------------
Foreign
Time certificates 316.0 5.7 1,529.5 6.1
Savings accounts 54.1 3.1 56.2 3.2
Demand accounts 121.5 3.9 126.3 5.1
-------------------------------------------------------------------------------------------------------------------
Total foreign deposits 491.6 5.0 1,712.0 5.9
-------------------------------------------------------------------------------------------------------------------
Total deposits $ 6,562.3 6.6% $ 8,676.9 6.5%
===================================================================================================================
</TABLE>
At December 31, 2001, domestic time certificates included carrying value
adjustments totaling $24.7 million relating to derivative financial instruments.
Average deposits and related weighted-average interest rates were as follows:
<TABLE>
<CAPTION>
2001 2000 1999
------------------------ ---------------------- ------------------------
All dollar amounts are Weighted- Weighted- Weighted-
stated in millions. Average Average Average Average Average Average
Year ended December 31 Deposits Rate Deposits Rate Deposits Rate
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Domestic
Time certificates $ 6,468.5 6.5% $ 6,278.4 6.7% $1,857.0 6.1%
Savings and demand accounts 119.7 .6 53.2 1.5 12.1 1.4
------------------------------------------------------------------------------------------------------------------------
Total domestic deposits 6,588.2 6.4 6,331.6 6.6 1,869.1 6.1
------------------------------------------------------------------------------------------------------------------------
Foreign
Time certificates 1,172.8 5.7 1,243.7 4.5 967.7 4.8
Savings and demand accounts 192.2 4.5 182.2 4.5 200.5 4.4
------------------------------------------------------------------------------------------------------------------------
Total foreign deposits 1,365.0 5.5 1,425.9 4.5 1,168.2 4.7
------------------------------------------------------------------------------------------------------------------------
Total deposits $ 7,953.2 6.3% $ 7,757.5 6.2% $3,037.3 5.5%
========================================================================================================================
</TABLE>
Interest expense on total deposits was $498.6 million in 2001, $484.0 million in
2000 and $168.4 million in 1999. Interest expense on domestic deposits was
$423.7 million in 2001, $419.7 million in 2000 and $113.4 million in 1999.
Maturities of time certificates in amounts of $100,000 or more were:
<TABLE>
<CAPTION>
All dollar amounts are stated in millions.
At December 31, 2001 Domestic Foreign Total
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
3 months or less $ 29.0 $ 211.0 $ 240.0
Over 3 months through 6 months 17.9 30.2 48.1
Over 6 months through 12 months 41.9 39.3 81.2
Over 12 months 143.3 35.4 178.7
--------------------------------------------------------------------------------------------------------------------
Total $ 232.1 $ 315.9 $ 548.0
====================================================================================================================
</TABLE>
Contractual maturities of time certificates within each interest rate range were
as follows:
<TABLE>
<CAPTION>
All dollar amounts are stated in millions. There-
At December 31, 2001 2002 2003 2004 2005 2006 after Total
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Rate
Less-than 4.00% $ 71.8 $ 28.7 - - - - $ 100.5
4.00% - 5.99% 427.9 187.9 $ 123.4 $ 16.5 $ 18.5 $ 46.8 821.0
6.00% - 7.99% 1,525.8 1,090.7 1,404.8 820.8 189.6 363.5 5,395.2
--------------------------------------------------------------------------------------------------------------------
Total $ 2,025.5 $ 1,307.3 $ 1,528.2 $ 837.3 $ 208.1 $ 410.3 $ 6,316.7
====================================================================================================================
</TABLE>
53
<PAGE>
8. Commercial Paper, Bank and Other Borrowings
<TABLE>
<CAPTION>
Bank and
All dollar amounts are stated in millions. Commercial Other
At December 31 Paper Borrowings Total
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2001
Balance $ 9,141.2 $ 2,883.1 $ 12,024.3
Highest aggregate month-end balance 13,926.4
Average borrowings 9,221.1 2,240.1 11,461.2
Weighted-average interest rate:
At year-end 2.0% 2.6% 2.2%
Paid during year 4.1 3.9 4.0
----------------------------------------------------------------------------------------------------------------------
2000
Balance $ 9,371.5 $ 1,416.4 $ 10,787.9
Highest aggregate month-end balance 12,581.6
Average borrowings 9,828.7 2,099.7 11,928.4
Weighted-average interest rate:
At year-end 6.6% 6.6% 6.6%
Paid during year 6.3 5.5 6.2
-----------------------------------------------------------------------------------------------------------------------
1999
Balance $ 8,822.2 $ 1,955.6 $ 10,777.8
Highest aggregate month-end balance 11,454.6
Average borrowings 8,620.3 1,426.7 10,047.0
Weighted-average interest rate:
At year-end 5.6% 5.6% 5.6%
Paid during year 5.2 5.0 5.2
----------------------------------------------------------------------------------------------------------------------
</TABLE>
Outstanding balances at December 31, 2001, 2000 and 1999 included commercial
paper obligations of foreign subsidiaries of $374.7 million, $360.9 million and
$359.4 million, respectively, and bank and other borrowings of $713.6 million,
$722.3 million and $903.1 million, respectively.
Interest expense for commercial paper, bank and other borrowings totaled $463.2
million, $737.7 million and $522.5 million for 2001, 2000 and 1999,
respectively.
We maintain various bank credit agreements primarily to support commercial paper
borrowings. At December 31, 2001 and 2000, we had committed back-up lines and
other bank lines of $13.6 billion and $13.0 billion, respectively, of which
$12.8 billion and $12.3 billion, respectively, were unused. Formal credit lines
are reviewed annually and expire at various dates from 2002 to 2006. Borrowings
under these lines generally are available at a surcharge over LIBOR. None of
these lines contain material adverse change clauses which could restrict
availability. Annual commitment fee requirements to support availability of
these lines at December 31, 2001 totaled $10.7 million.
9. Senior and Senior Subordinated Debt (With Original Maturities Over One Year)
<TABLE>
<CAPTION> <C> <C>
All dollar amounts are stated in millions.
At December 31 2001 2000
----------------------------------------------------------------------------------------------------------------------
<S>
Senior Debt
Zero-coupon convertible debt securities; due 2021 $ 1,004.2 -
3.50% to 4.99%; due 2002 to 2009 1,679.4 $ 11.5
5.00% to 6.49%; due 2002 to 2013 13,223.6 10,169.2
6.50% to 6.99%; due 2002 to 2013 8,368.1 4,203.6
7.00% to 7.49%; due 2002 to 2023 4,679.5 4,959.3
7.50% to 7.99%; due 2002 to 2019 4,695.3 4,173.5
8.00% to 8.99%; due 2002 to 2010 3,711.9 3,892.5
9.00% and greater; due 2001 - 253.3
Variable interest rate debt; 1.89% to 3.53%;
due 2002 to 2034 19,383.1 17,244.2
Senior Subordinated Debt
6.50% to 8.45%; due 2002 to 2003 179.1 259.7
Unamortized discount (100.6) (113.8)
----------------------------------------------------------------------------------------------------------------------
Total senior and senior subordinated debt $ 56,823.6 $ 45,053.0
======================================================================================================================
</TABLE>
Senior and senior subordinated debt included $1.5 billion of debt secured by
$1.7 billion of real estate secured receivables at December 31, 2001. At
December 31, 2000, senior and senior subordinated debt included $.4 billion of
debt secured by $.4 billion of real estate secured receivables.
54
<PAGE>
At December 31, 2001, senior and senior subordinated debt also included carrying
value adjustments totaling $391.1 million relating to derivative financial
instruments and a foreign currency translation adjustment of $(356.6) million
relating to our foreign denominated debt.
Weighted-average interest rates were 5.1 and 6.9 percent at December 31, 2001
and 2000, respectively. Interest expense for senior and senior subordinated debt
was $3,212.0 million, $2,707.2 million and $2,085.7 million for 2001, 2000 and
1999, respectively. The most restrictive financial covenant contained in the
terms of our debt agreements are the maintenance of a minimum shareholders'
equity of $2.0 billion for Household International, Inc., and the maintenance of
a minimum shareholder's equity of $3.6 billion for Household Finance Corporation
("HFC"), a wholly owned subsidiary of Household. Debt denominated in a foreign
currency is included in the applicable rate category based on the effective U.S.
dollar equivalent rate as summarized in Note 10.
In August 2001, the parent company issued zero-coupon convertible debt
securities. The convertible debt securities are due 2021, have a 1 percent yield
to maturity and have a principal amount at maturity of approximately $1.2
billion. We must pay contingent interest on the securities beginning in 2006 if
our common stock price reaches certain levels. The holders of the securities
have the right to require us to repurchase the securities on various dates
beginning in August 2002 and ending in August 2016 or if certain "fundamental
changes" as described in the prospectus supplement occur. "Fundamental changes"
include, among other things, an exchange offer, liquidation, merger and
recapitalization. The holders of the securities may convert each $1,000 of
securities, subject to adjustment, into 9.022 shares of Household common stock
if our stock price reaches $99.87 for 20 trading days in a consecutive 30
trading day period. We may redeem the securities, in whole or in part, at any
time after August 1, 2006.
Maturities of senior and senior subordinated debt were:
<TABLE>
In millions.
At December 31, 2001
--------------------------------------------------------------------------------
<S> <C>
2002 $ 10,492.5
2003 9,980.0
2004 5,800.9
2005 5,970.0
2006 6,652.0
Thereafter 17,928.2
--------------------------------------------------------------------------------
Total $ 56,823.6
================================================================================
</TABLE>
10. Derivative Financial Instruments and Concentrations of Credit Risk
In the normal course of business and in connection with our asset/liability
management program, we enter into various transactions involving derivative
financial instruments. These instruments primarily are used to manage our
exposure to fluctuations in interest rates and currency exchange rates. We do
not serve as a financial intermediary to make markets in any derivative
financial instruments. We have a comprehensive program to address potential
financial risks such as liquidity, interest rate, currency and credit risk. The
Finance Committee of the Board of Directors sets acceptable limits for each of
these risks annually and reviews the limits semiannually. For further
information on our strategies for managing interest rate and foreign exchange
rate risk, see the "Risk Management" section within our Management's Discussion
and Analysis of Financial Condition and Results of Operations.
55
<PAGE>
Objectives for Holding Derivative Financial Instruments We generally fund our
assets with liabilities that have similar interest rate features. Over time,
however, customer demand for our receivable products shifts between fixed rate
and floating rate products, based on market conditions and preferences. These
shifts result in different funding strategies and produce different interest
rate risk exposures. We maintain an overall risk management strategy that uses a
variety of interest rate and currency derivative financial instruments to
mitigate our exposure to fluctuations caused by changes in interest rates and
currency exchange rates. We manage our exposure to interest rate risk primarily
through the use of interest rate swaps, but also use forwards, futures, options,
and other risk management instruments. We manage our exposure to currency risk
primarily through the use of currency swaps. We do not speculate on interest
rate or foreign currency market exposure and we do not use exotic or leveraged
derivative financial instruments.
Interest rate swaps are contractual agreements between two counterparties for
the exchange of periodic interest payments generally based on a notional
principal amount and agreed-upon fixed or floating rates. The majority of our
interest rate swaps are used to manage our exposure to changes in interest rates
by converting floating rate assets or debt to fixed rate or by converting fixed
rate assets or debt to floating rate. We have also entered into currency swaps
to convert both principal and interest payments on debt issued from one currency
to the appropriate functional currency.
Forwards and futures are agreements between two parties, committing one to sell
and the other to buy a specific quantity of an instrument on some future date.
The parties agree to buy or sell at a specified price in the future, and their
profit or loss is determined by the difference between the arranged price and
the level of the spot price when the contract is settled. We have both interest
rate and foreign exchange rate forward contracts and interest rate futures
contracts. We use foreign exchange rate forward contracts to reduce our exposure
to foreign currency exchange risk. Interest rate forward and futures contracts
are used to hedge resets of interest rates on our floating rate assets and
liabilities. Cash requirements for forward contracts include the receipt or
payment of cash upon the sale or purchase of the instrument.
Purchased options grant the purchaser the right, but not the obligation, to
either purchase or sell a financial instrument at a specified price within a
specified period. The seller of the option has written a contract which creates
an obligation to either sell or purchase the financial instrument at the
agreed-upon price if, and when, the purchaser exercises the option. We use caps
to limit the risk associated with an increase in rates and floors to limit the
risk associated with a decrease in rates.
Market and Credit Risk By utilizing derivative financial instruments, we are
exposed to varying degrees of credit and market risk.
Market risk is the possibility that a change in interest rates or foreign
exchange rates will cause a financial instrument to decrease in value or become
more costly to settle. We mitigate this risk by establishing limits for
positions and other controls.
Credit risk is the possibility that a loss may occur because the counterparty to
a transaction fails to perform according to the terms of the contract. We
control the credit (or repayment) risk in derivative instruments through
established credit approvals, risk control limits and ongoing monitoring
procedures. Our exposure to credit risk for futures is limited as these
contracts are traded on organized exchanges. Each day, changes in futures
contract values are settled in cash. In contrast, swap agreements and forward
contracts have credit risk relating to the performance of the counterparty.
Additionally, certain swap agreements require that payments be made to, or
received from, the counterparty when the fair value of the agreement reaches a
certain level. Derivative financial instruments are generally expressed in terms
of notional principal or contract amounts which are much larger than the amounts
potentially at risk for nonpayment by counterparties. We have never suffered a
loss due to counterparty failure.
56
<PAGE>
Fair Value and Cash Flow Hedges To manage our exposure to changes in interest
rates, we enter into interest rate swap agreements and currency swaps which have
been designated as fair value or cash flow hedges under FAS No. 133. The
critical terms of interest rate swaps are designed to match those of the hedged
items, enabling the application of the shortcut method of accounting as defined
by FAS No. 133 for 92 percent of the notional amounts of such interest rate
swaps. To the extent that the critical terms of the hedged item and the
derivative are not identical, hedge ineffectiveness is reported in earnings
during the current period as a component of other income. Although the critical
terms of currency swaps are designed to match those of the hedged items, FAS No.
133 does not allow shortcut method accounting for this type of hedge. Therefore,
there may be minimal ineffectiveness which is reported in current period
earnings.
Fair value hedges include interest rate swaps which convert our fixed rate debt
or assets to variable rate debt or assets and currency swaps which convert debt
issued from one currency into pay variable debt of the appropriate functional
currency. Hedge ineffectiveness associated with fair value hedges was a gain of
$.1 million, net of tax, in 2001 and was recorded as other income. During 2001,
all of our fair value hedges were associated with debt. At December 31, 2001, we
had recorded fair value adjustments for open fair value hedges which decreased
the carrying value of our debt by $85.7 million.
Cash flow hedges include interest rate swaps which convert our variable rate
debt or assets to fixed rate debt or assets and currency swaps which convert
debt issued from one currency into pay fixed debt of the appropriate functional
currency. At December 31, 2001, we had $699.1 million of losses on derivative
instruments designated as cash flow hedges, net of taxes, in accumulated other
comprehensive income. We expect $392 million of currently unrealized net losses,
after taxes, will be reclassified to earnings within one year, however, these
unrealized losses will be offset by decreased interest expense associated with
the variable cash flows of the hedged items and will result in no net economic
impact to our earnings. Hedge ineffectiveness associated with cash flow hedges
reported in 2001 in the other income line was immaterial.
At December 31, 2001, $97.2 million of derivative instruments, at fair value,
were recorded in other assets and $1,615.4 million in other liabilities.
Deferred gains resulting from termination of derivatives were $551.7 million and
$44.1 million and deferred losses from termination of derivatives were $72.1
million and $63.0 million at December 31, 2001 and 2000, respectively.
Amortization of net deferred gains totaled $43.6 million in 2001 and $14.8
million in 2000. The weighted-average amortization period associated with the
deferred gains was 6.2 years and 5.1 years at December 31, 2001 and 2000,
respectively. The weighted-average amortization period for the deferred losses
was 5.3 years and 5.8 years at December 31, 2001 and 2000, respectively. At
December 31, 2001, net deferred gains and losses increased the carrying value of
our deposits and senior and senior subordinated debt by $24.7 million and $476.8
million, respectively, and decreased accumulated other comprehensive income by
$21.9 million.
Hedges of Net Investments in Foreign Operations We use forward-exchange
contracts to hedge our net investments in foreign operations. The purpose of
these hedges is to protect against adverse movements in exchange rates. For the
year ended December 31, 2001, $8.9 million of net gains, net of tax, related to
these derivatives were included in accumulated other comprehensive income.
Non-Qualifying Hedging Activities We use forward rate agreements, interest rate
caps, exchange traded futures, and some interest rate swaps which were not
designated as hedges under FAS No. 133. These financial instruments are economic
hedges that are not linked to specific assets and liabilities that appear on our
balance sheet and do not qualify for hedge accounting. The primary purpose of
these derivatives is to minimize our exposure to changes in interest rates.
During 2001, we recognized $.2 million, net of tax, in net fair value losses on
derivatives which were not designated as hedges. These losses were reported as
other income.
57
<PAGE>
Derivative Financial Instruments The following table summarizes derivative
financial instrument activity in 2001, 2000 and 1999:
<TABLE>
<CAPTION>
Exchange Traded Non-Exchange Traded
----------------------------------------------------- -------------------------
Interest Rate
Futures Contracts Options
--------------------------- ------------------------ Interest Currency
In millions. Purchased Sold Purchased Written Rate Swaps Swaps
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1999
Notional amount, 1998 $ 70.0 - $ 544.0 - $ 13,715.6 $ 4,406.3
New contracts 5,743.0 $ (4,725.0) 1,158.0 $ (50.0) 18,734.2 2,070.2
Matured or expired contracts (1,013.0) 25.0 (949.0) - (2,894.5) (723.8)
Terminated contracts - - - - (1,796.4) (80.0)
In-substance maturities (1) (4,700.0) 4,700.0 (50.0) 50.0 - -
--------------------------------------------------------------------------------------------------------------
Notional amount, 1999 $ 100.0 $ - $ 703.0 $ - $ 27,758.9 $ 5,672.7
==============================================================================================================
Fair value, 1999 (2) $ (.1) $ - $ - $ - $ (125.3) $ (319.2)
--------------------------------------------------------------------------------------------------------------
2000
Notional amount, 1999 $ 100.0 - $ 703.0 - $ 27,758.9 $ 5,672.7
New contracts 21,715.0 $(20,321.0) 1,300.0 $ (300.0) 15,451.0 3,047.4
Matured or expired contracts (1,494.0) - (1,403.0) - (13,733.0) (767.2)
Terminated contracts - - (600.0) 300.0 (3,768.6) (655.0)
In-substance maturities (1) (20,321.0) 20,321.0 - - - -
--------------------------------------------------------------------------------------------------------------
Notional amount, 2000 $ - $ - $ - $ - $ 25,708.3 $ 7,297.9
==============================================================================================================
Fair value, 2000 (2) $ - $ - $ - $ - $ 258.8 $ (532.9)
--------------------------------------------------------------------------------------------------------------
2001
Notional amount, 2000 - - - - $ 25,708.3 $ 7,297.9
New contracts $ 36,675.0 $(22,706.0) $ 4,750.0 - 22,259.0 2,481.6
Matured or expired contracts (21,850.0) 300.0 - - (7,651.3) (919.5)
Terminated contracts - - (2,750.0) - (9,832.7) (165.6)
In-substance maturities (1) (13,406.0) 13,406.0 - - - -
--------------------------------------------------------------------------------------------------------------
Notional amount, 2001 $ 1,419.0 $ (9,000.0) $ 2,000.0 $ - $ 30,483.3 $ 8,694.4
==============================================================================================================
Fair value, 2001 (2):
Fair value hedges - - - - $ (152.9) $ 67.2
Cash flow hedges - - - - (348.1) (1,084.6)
Non-hedging derivatives $ .4 $ (3.4) $ .4 - 3.4 -
--------------------------------------------------------------------------------------------------------------
Total $ .4 $ (3.4) $ .4 $ - $ (497.6) $(1,017.4)
==============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Non-Exchange Traded
-----------------------------------------------------------------
Foreign Exchange Interest Rate
Rate Contracts Forward Contracts
------------------------ ------------------------ Caps and
In millions. Purchased Sold Purchased Sold Floors
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
Notional amount, 1998 $ 9.8 $ (1,249.9) $ 2,261.9 $ (87.0) $ 3,037.8
New contracts 2,089.9 (1,479.3) 6,946.7 (1,242.0) 2,089.4
Matured or expired contracts (116.6) 171.5 (5,759.4) 666.4 (442.1)
Terminated contracts (18.8) 13.8 (207.7) 593.4 (1,231.1)
In-substance maturities (1) (1,846.2) 1,846.2 - - -
------------------------------------------------------------------------------------------------
Notional amount, 1999 $ 118.1 $ (697.7) $ 3,241.5 $ (69.2) $ 3,454.0
================================================================================================
Fair value, 1999 (2) $ .5 $ 4.9 $ 6.4 $ - $ 4.8
------------------------------------------------------------------------------------------------
2000
Notional amount, 1999 $ 118.1 $ (697.7) $ 3,241.5 $ (69.2) $ 3,454.0
New contracts 1,828.9 (1,798.3) 4,158.3 (163.1) 2,550.6
Matured or expired contracts (85.6) 398.6 (6,818.5) 232.3 (3,019.7)
Terminated contracts - - (133.4) - (309.4)
In-substance maturities (1) (1,852.3) 1,852.3 - - -
------------------------------------------------------------------------------------------------
Notional amount, 2000 $ 9.1 $ (245.1) $ 447.9 $ - $ 2,675.5
================================================================================================
Fair value, 2000 (2) $ .3 $ (2.8) $ (.3) $ - $ (2.7)
------------------------------------------------------------------------------------------------
2001
Notional amount, 2000 $ 9.1 $ (245.1) $ 447.9 - $ 2,675.5
New contracts 9,347.4 (10,325.0) 2,074.5 - 3,481.8
Matured or expired contracts (51.3) 172.5 (1,991.4) - (2,297.7)
Terminated contracts - - (31.4) - (847.0)
In-substance maturities (1) (9,196.1) 9,196.1 - - -
------------------------------------------------------------------------------------------------
Notional amount, 2001 $ 109.1 $ (1,201.5) $ 499.6 $ - $ 3,012.6
================================================================================================
Fair value, 2001 (2):
Fair value hedges - - - - -
Cash flow hedges $ 2.5 $ (1.3) - - -
Non-hedging derivatives - - $ (1.6) - $ (.2)
------------------------------------------------------------------------------------------------
Total $ 2.5 $ (1.3) $ (1.6) $ - $ (.2)
================================================================================================
</TABLE>
(1) Represent contracts terminated as the market execution technique of closing
the transaction either (a) just prior to maturity to avoid delivery of the
underlying instrument or (b) at the maturity of the underlying items being
hedged.
(2) (Bracketed) unbracketed amounts represent amounts to be (paid) received by
us had these positions been closed out at the respective balance sheet
date. Bracketed amounts do not necessarily represent risk of loss as the
fair value of the derivative financial instrument and the items being
hedged must be evaluated together. See Note 14, "Fair Value of Financial
Instruments," for further discussion of the relationship between the fair
value of our assets and liabilities.
58
<PAGE>
We operate in three functional currencies, the U.S. dollar, the British pound
and the Canadian dollar. The U.S. dollar is the functional currency for
exchange-traded interest rate futures contracts and options. Non-exchange traded
instruments are restated in U.S. dollars by country as follows:
<TABLE>
<CAPTION>
Foreign Exchange Interest Rate
Interest Rate Contracts Forward Contracts Other Risk
Rate Currency ---------------------------- ----------------------- Management
In millions. Swaps Swaps Purchased Sold Purchased Sold Instruments
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1999
United States $ 25,916.7 $ 4,258.2 $ 113.0 $ (697.7) - - $ 2,701.5
Canada 374.1 223.0 5.1 - $ 245.5 $(67.6) -
United Kingdom 1,468.1 1,191.5 - - 2,996.0 (1.6) 752.5
-----------------------------------------------------------------------------------------------------------------------------
$ 27,758.9 $ 5,672.7 $ 118.1 $ (697.7) $ 3,241.5 $(69.2) $ 3,454.0
=============================================================================================================================
2000
United States $ 23,734.5 $ 5,751.6 $ 6.7 $ (245.1) - - $ 2,352.9
Canada 274.8 121.0 2.4 - $ 313.5 - -
United Kingdom 1,699.0 1,425.3 - - 134.4 - 322.6
-----------------------------------------------------------------------------------------------------------------------------
$ 25,708.3 $ 7,297.9 $ 9.1 $ (245.1) $ 447.9 - $ 2,675.5
=============================================================================================================================
2001
United States $ 28,405.2 $ 7,259.8 $ 109.1 $ (1,199.5) - - $ 2,989.9
Canada 287.5 - - (2.0) $ 499.6 - -
United Kingdom 1,790.6 1,434.6 - - - - 22.7
-----------------------------------------------------------------------------------------------------------------------------
$ 30,483.3 $ 8,694.4 $ 109.1 $ (1,201.5) $ 499.6 - $ 3,012.6
=============================================================================================================================
</TABLE>
The table below reflects the items hedged using interest rate swaps at December
31, 2001. The critical terms of the interest rate swap have been designed to
match those of the related asset or liability.
<TABLE>
<CAPTION>
In millions.
-----------------------------------------------------------------------------------------------------------------------
<S> <C>
Investment securities $ 16.8
Commercial paper, bank and other borrowings 618.2
Senior and senior subordinated debt 29,848.3
-----------------------------------------------------------------------------------------------------------------------
Total items hedged using interest rate swaps $ 30,483.3
=======================================================================================================================
</TABLE>
The following table summarizes the maturities and related weighted-average
receive/pay rates of interest rate swaps outstanding at December 31, 2001:
<TABLE>
<CAPTION>
All dollar amounts are
stated in millions. 2002 2003 2004 2005 2006 2007 Thereafter Total
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pay a fixed rate/receive a
floating rate:
Notional value $ 9,955.7 $ 8,228.7 $ 763.1 $1,040.2 $ - $ - $ - $19,987.7
Weighted-average receive rate 2.18% 2.44% 2.91% 3.62% - - - 2.39%
Weighted-average pay rate 5.47 4.99 5.20 6.02 - - - 5.29
Pay a floating rate/receive
a fixed rate:
Notional value $ 95.7 - $ 10.2 $ 247.5 $ 140.5 $1,479.2 $8,522.5 $10,495.6
Weighted-average receive rate 6.69% - 4.96% 5.91% 5.88% 7.45% 6.67% 6.75%
Weighted-average pay rate 2.09 - 2.04 2.60 2.18 3.92 3.32 3.36
--------------------------------------------------------------------------------------------------------------------------------
Total notional value $10,051.4 $ 8,228.7 $ 773.3 $1,287.7 $ 140.5 $1,479.2 $8,522.5 $30,483.3
================================================================================================================================
Total weighted-average rates
on swaps:
Receive rate 2.23% 2.44% 2.93% 4.06% 5.88% 7.45% 6.67% 3.89%
Pay rate 5.44 4.99 5.15 5.37 2.18 3.92 3.32 4.63
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The floating rates that we pay or receive are based on spot rates from
independent market sources for the index contained in each interest rate swap
contract, which generally are based on either 1-, 3- or 6-month LIBOR. These
current floating rates are different than the floating rates in effect when the
contracts were initiated. Changes in spot rates impact the variable rate
information disclosed above. However, these changes in spot rates also impact
the interest rate on the underlying assets or liabilities. We use derivative
financial instruments to hedge the interest rate inherent in balance sheet
assets and liabilities, which manages the volatility of net interest margin
resulting from changes in interest rates on the underlying hedged items. Had we
not utilized these instruments, owned net interest margin would have increased
by 13 basis points in 2001, decreased by 5 basis points in 2000 and increased by
1 basis point in 1999.
59
<PAGE>
Concentrations of Credit Risk A concentration of credit risk is defined as a
significant credit exposure with an individual or group engaged in similar
activities or affected similarly by economic conditions.
Because we primarily lend to consumers, we do not have receivables from any
industry group that equal or exceed 10 percent of total managed receivables at
December 31, 2001 and 2000. We lend nationwide, with the following geographic
areas comprising more than 10 percent of total managed domestic receivables at
December 31, 2001: California-15 percent; Southwest (AZ, AR, LA, NM, OK, TX)-11
percent; Midwest (IL, IN, IA, KS, MI, MN, MO, NE, ND, OH, SD, WI)-22 percent;
Middle Atlantic (DE, DC, MD, NJ, PA, VA, WV)-14 percent; Northeast (CT, ME, MA,
NH, NY, RI, VT)-11 percent; and Southeast (AL, FL, GA, KY, MS, NC, SC, TN)-18
percent.
11. Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary
Trusts
The following table summarizes our company obligated mandatorily redeemable
preferred securities of subsidiary trusts ("Preferred Securities") and the
related Junior Subordinated Notes:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Household Capital Household Capital Household Capital Household Capital Household Capital
All dollar amounts Trust VII Trust VI Trust V Trust IV Trust I
are stated in millions. ("HCT VII") ("HCT VI") ("HCT V") ("HCT IV") ("HCT I")
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Preferred Securities:
Interest rate 7.50% 8.25% 10.00% 7.25% 8.25%
Face value $200 $200 $300 $200 $75
Issue date November 2001 January 2001 June 2000 March 1998 June 1995
Junior Subordinated
Notes:
Principal balance $206.2 $206.2 $309.3 $206.2 $77.3
Redeemable by
Issuer November 8, 2006 January 30, 2006 June 8, 2005 March 19, 2003 June 30, 2000
Stated maturity November 15, 2031 January 30, 2031 June 30, 2030 December 31, 2037 June 30, 2025
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Preferred Securities are classified in our balance sheet as company
obligated mandatorily redeemable preferred securities of subsidiary trusts
(representing the minority interests in the trusts) at their face and redemption
amount of $975 million at December 31, 2001 and $675 million at December 31,
2000. Household Capital Trust II was redeemed for $100 million in December 2001.
The Preferred Securities must be redeemed when the Junior Subordinated Notes are
paid. The Junior Subordinated Notes have a stated maturity date, but are
redeemable by Household, in whole or in part, beginning on the dates indicated
above at which time the Preferred Securities are callable at par ($25 per
Preferred Security) plus accrued and unpaid dividends. Dividends on the
Preferred Securities are cumulative, payable quarterly in arrears, and are
deferrable at Household's option for up to five years. Household cannot pay
dividends on its preferred and common stocks during such deferments. The
Preferred Securities have a liquidation value of $25 per preferred security.
HCT I, HCT IV, HCT V, HCT VI and HCT VII (collectively, "the Trusts") are wholly
owned subsidiaries of Household. Household's obligations with respect to the
Junior Subordinated Notes, when considered together with certain undertakings of
Household with respect to the Trusts, constitute full and unconditional
guarantees by Household of the Trust's obligations under the respective
Preferred Securities.
12. Preferred Stock
<TABLE>
<CAPTION>
All dollar amounts are stated in millions.
At December 31
2001 2000
--------------------------------------------------------------------------------------------------
<S> <C> <C>
7.50% Preferred Stock, 12,000,000 depositary shares (1) $ 291.4 -
$4.30 Preferred Stock, 836,585 shares 83.6 $ 83.6
$4.50 Preferred Stock, 103,976 shares 10.4 10.4
5.00% Preferred Stock, 407,718 shares 20.4 20.4
8.25% Preferred Stock, Series 1992-A, 2,000,000 depositary shares (1) 50.0 50.0
--------------------------------------------------------------------------------------------------
Total preferred stock $ 455.8 $ 164.4
==================================================================================================
(1) Depositary share represents 1/40 share of preferred stock.
</TABLE>
60
<PAGE>
Dividends on the 7.50 percent preferred stock are cumulative and payable
quarterly. We may, at our option, redeem in whole or in part the 7.50 percent
preferred stock on any date after September 26, 2006, for $25 per depositary
share plus accrued and unpaid dividends. This stock has a liquidation value of
$25 per depositary share.
Dividends on the $4.30 preferred stock are cumulative and payable semiannually.
We may, at our option, redeem in whole or in part the $4.30 preferred stock for
$100 per share plus accrued and unpaid dividends. This stock has a liquidation
value of $100 per share plus accrued and unpaid dividends in the event of an
involuntary liquidation or $100 in the event of a voluntary liquidation.
Dividends on the $4.50 preferred stock are cumulative and payable semiannually.
We may, at our option, redeem in whole or in part the $4.50 preferred stock for
$103 per share plus accrued and unpaid dividends. This stock has a liquidation
value of $100 per share.
Dividends on the 5.00 percent preferred stock are cumulative and payable
semiannually. We may, at our option, redeem in whole or in part the 5.00 percent
preferred stock for $50 per share plus accrued and unpaid dividends. This stock
has a liquidation value of $50 per share.
Dividends on the 8.25 percent preferred stock, Series 1992-A, are cumulative and
payable quarterly. We may, at our option, redeem in whole or in part the 8.25
percent preferred stock, Series 1992-A, on any date after October 15, 2002, for
$25 per depositary share plus accrued and unpaid dividends. This stock has a
liquidation value of $25 per depositary share.
Holders of all issues of preferred stock are entitled to payment before any
capital distribution is made to common shareholders. The holders of the $4.30,
$4.50 and 5.00 percent preferred stocks will be entitled to vote with the
holders of our common stock on all matters. Each issue of preferred stock is
also entitled to vote, as a class separate from our common stock, to elect two
directors if dividends for a specified period shall be in arrears, until the
dividends in arrears are paid in full.
Household's Board of Directors has adopted a resolution creating an Offering
Committee of the Board with the power to authorize the issuance and sale of one
or more series of preferred stock. The Offering Committee has the authority to
determine the particular designations, powers, preferences and relative,
participating, optional or other special rights (other than voting rights which
shall be fixed by the Board of Directors) and qualifications, limitations or
restrictions of such issuance. At December 31, 2001, up to 8.2 million shares of
preferred stock were authorized for issuance.
13. Forward Purchase Agreements and Junior Preferred Share Purchase Rights
At December 31, 2001, we had agreements to purchase, on a forward basis,
approximately 6.5 million shares of our common stock at a weighted-average
forward price of $59.14 per share. The agreements have terms of up to one year.
These agreements may be settled either physically or on a net basis in shares of
our common stock, at our option. We account for these agreements in accordance
with EITF 00-19, "Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled In, a Company's Own Stock". As a result, we initially
measure these forward contracts at fair value and report them as permanent
equity. Subsequent changes in their fair value are not recognized.
61
<PAGE>
In 1996, Household issued one preferred share purchase right (a "Right") for
each outstanding share of common stock of the company. Under certain conditions,
each Right may be exercised to purchase one three-thousandth of a share of a new
series of junior participating preferred stock at an exercise price of $100 per
one three-thousandth of a share, subject to further adjustment. The Rights may
be exercised only after the earlier of: (a) a public announcement that a party
or an associated group acquired 15 percent or more of Household's common stock
and (b) ten business days (or later date as determined by the Board of Directors
of Household) after a party or an associated group initiates or announces its
intention to make an offer to acquire 15 percent or more of Household's common
stock. The Rights, which cannot vote or receive dividends, expire on July 31,
2006, and may be redeemed by Household at a price of $.0033 per Right at any
time prior to expiration or acquisition of 15 percent of Household's common
stock.
14. Fair Value of Financial Instruments
We have estimated the fair value of our financial instruments in accordance with
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments" ("FAS No. 107"). Fair value estimates, methods
and assumptions set forth below for our financial instruments are made solely to
comply with the requirements of FAS No. 107 and should be read in conjunction
with the financial statements and notes in this Annual Report.
A significant portion of our financial instruments do not have a quoted market
price. For these items, fair values were estimated by discounting estimated
future cash flows at estimated current market discount rates. Assumptions used
to estimate future cash flows are consistent with management's assessments
regarding ultimate collectibility of assets and related interest and with
estimates of product lives and repricing characteristics used in our
asset/liability management process. All assumptions are based on historical
experience adjusted for future expectations. Assumptions used to determine fair
values for financial instruments for which no active market exists are
inherently judgmental and changes in these assumptions could significantly
affect fair value calculations.
As required under generally accepted accounting principles, a number of other
assets recorded on the balance sheets (such as acquired credit card
relationships) and other intangible assets not recorded on the balance sheets
(such as the value of consumer lending relationships for originated receivables
and the franchise values of our business units) are not considered financial
instruments and, accordingly, are not valued for purposes of this disclosure. We
believe there is substantial value associated with these assets based on current
market conditions and historical experience. Accordingly, the estimated fair
value of financial instruments, as disclosed, does not fully represent our
entire value, nor the changes in our entire value.
The following is a summary of the carrying value and estimated fair value of our
financial instruments:
<TABLE>
<CAPTION>
2001 2000
------------------------------------ -----------------------------------
Estimated Estimated
In millions. Carrying Fair Carrying Fair
At December 31 Value Value Difference Value Value Difference
---------------------------------------------- ----------- ----------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash $ 543.6 $ 543.6 - $ 490.2 $ 490.2 -
Investment securities 3,580.5 3,580.5 - 3,259.0 3,259.0 -
Receivables 79,263.5 81,219.0 $ 1,955.5 67,161.7 67,672.4 $ 510.7
-----------------------------------------------------------------------------------------------------------------------
Total 83,387.6 85,343.1 1,955.5 70,910.9 71,421.6 510.7
-----------------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits (6,562.3) (6,838.9) (276.6) (8,676.9) (8,691.9) (15.0)
Commercial paper, bank and other borrowings (12,024.3) (12,024.3) - (10,787.9) (10,787.9) -
Senior and senior subordinated debt (56,823.6) (58,326.9) (1,503.3) (45,053.0) (44,637.8) 415.2
Insurance reserves (1,094.5) (1,345.9) (251.4) (1,106.6) (1,336.8) (230.2)
-----------------------------------------------------------------------------------------------------------------------
Total (76,504.7) (78,536.0) (2,031.3) (65,624.4) (65,454.4) 170.0
-----------------------------------------------------------------------------------------------------------------------
Other:
Derivative financial instruments (1,518.2) (1,518.2) - 80.1 (279.6) (359.7)
Commitments to extend credit and guarantees - 51.6 51.6 - 48.9 48.9
-----------------------------------------------------------------------------------------------------------------------
Total (1,518.2) (1,466.6) 51.6 80.1 (230.7) (310.8)
-----------------------------------------------------------------------------------------------------------------------
Total $ 5,364.7 $ 5,340.5 $ (24.2) $ 5,366.6 $ 5,736.5 $ 369.9
=======================================================================================================================
</TABLE>
62
<PAGE>
Cash: Carrying value approximates fair value due to cash's liquid nature.
Investment securities: Investment securities are classified as available-for-
sale and are carried at fair value on the balance sheets. Fair values are based
on quoted market prices or dealer quotes. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
securities.
Receivables: The fair value of adjustable rate receivables approximates carrying
value because interest rates on these receivables adjust with changing market
interest rates. The fair value of fixed rate consumer receivables was estimated
by discounting future expected cash flows at interest rates which approximate
the rates that would achieve a similar return on assets with comparable risk
characteristics.
Receivables also includes our interest-only strip receivables. The interest-only
strip receivables are carried at fair value on our balance sheets. Fair value is
based on an estimate of the present value of future cash flows associated with
securitizations of certain real estate secured, auto finance, MasterCard and
Visa, private label and personal non-credit card receivables.
Deposits: The fair value of our savings and demand accounts equaled the carrying
amount as stipulated in FAS No. 107. The fair value of gross fixed rate time
certificates was estimated by discounting future expected cash flows at interest
rates that we offer on such products at the respective valuation dates.
Commercial paper, bank and other borrowings: The fair value of these instruments
approximates existing carrying value because interest rates on these instruments
adjust with changes in market interest rates due to their short-term maturity or
repricing characteristics.
Senior and senior subordinated debt: The estimated fair value of our gross fixed
rate debt instruments was determined using either quoted market prices or by
discounting future expected cash flows at interest rates offered for similar
types of debt instruments. Carrying value is typically used to estimate the fair
value of floating rate debt.
Insurance reserves: The fair value of insurance reserves for periodic payment
annuities was estimated by discounting future expected cash flows at estimated
market interest rates at December 31, 2001 and 2000. The fair value of other
insurance reserves is not required to be determined in accordance with FAS No.
107.
Derivative financial instruments: As of January 1, 2001, all derivative
financial instruments are carried at fair value on the balance sheet. Where
practical, quoted market prices were used to determine fair value of these
instruments. For non-exchange traded contracts, fair value was determined using
accepted and established valuation methods (including input from independent
third parties) which consider the terms of the contracts and market expectations
on the valuation date for forward interest rates (for interest rate contracts)
or forward foreign currency exchange rates (for foreign exchange contracts). We
enter into foreign exchange contracts to hedge our exposure to currency risk on
foreign denominated debt. We also enter into interest rate contracts to hedge
our exposure to interest rate risk on assets and liabilities, including debt. As
a result, decreases/increases in the fair value of derivative financial
instruments which have been designated as effective hedges are offset by a
corresponding increase/decrease in the fair value of the individual asset or
liability being hedged. See Note 10, "Derivative Financial Instruments and
Concentrations of Credit Risk," for additional discussion of the nature of these
items.
Commitments to extend credit and guarantees: These commitments were valued by
considering our relationship with the counterparty, the creditworthiness of the
counterparty and the difference between committed and current interest rates.
63
<PAGE>
15. Leases
We lease certain offices, buildings and equipment for periods of up to 25 years.
The leases expire at various dates through 2019 and have various renewal
options. The office space leases generally require us to pay certain operating
expenses. Net rental expense under operating leases was $124.9 million in 2001,
$107.6 million in 2000 and $89.4 million in 1999.
We have a lease obligation on a former office complex which has been subleased
through 2010, the end of the lease period. The sublessee has assumed our future
rental obligations on this lease.
Future net minimum lease commitments under noncancelable operating lease
arrangements were:
<TABLE>
<CAPTION>
Minimum Minimum
In millions. Rental Sublease
At December 31, 2001 Payments Income Net
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
2002 $ 150.9 $ 21.4 $ 129.5
2003 128.6 21.6 107.0
2004 110.7 22.0 88.7
2005 92.8 22.3 70.5
2006 82.6 22.2 60.4
Thereafter 330.0 77.7 252.3
-----------------------------------------------------------------------------------------
Net minimum lease commitments $ 895.6 $ 187.2 $ 708.4
=========================================================================================
</TABLE>
16. Incentive Compensation and Stock Option Plans
Household's executive compensation plans provide for issuance of nonqualified
stock options and restricted stock rights ("RSR's"). Stock options permit the
holder to purchase, under certain limitations, Household's common stock at the
market value of the stock on the date the option is granted. Employee stock
options generally vest equally over four years and expire 10 years from the date
of grant. RSR's entitle an employee to receive a stated number of shares of
Household's common stock if the employee satisfies the conditions set by the
Compensation Committee for the award. A total of 4.3 million and 4.0 million
RSR's were outstanding at December 31, 2001 and 2000, respectively. Total
compensation cost recognized for RSR's was $45.4 million, $24.4 million and
$12.4 million in 2001, 2000 and 1999, respectively. Shares of our common stock
reserved for stock plans were 34.9 million at December 31, 2001 and 38.9 million
at December 31, 2000.
Non-employee directors annually receive options to purchase shares of
Household's common stock at the stock's fair market value on the day the option
is granted. Director options have a term of ten years and one day, fully vest
six months from the date granted, and once vested are exercisable at any time
during the option term.
Common stock data for the stock option plans is summarized as follows:
<TABLE>
<CAPTION>
2001 2000 1999
----------------------------------------------------------- ------------------------------- ---------------------------
Weighted- Weighted- Weighted-
Average Average Average
Price per Price per Price per
Shares Share Shares Share Shares Share
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
Of year 16,687,142 $ 31.09 16,068,326 $ 26.30 21,600,569 $ 21.14
Granted 3,080,400 57.16 2,812,469 48.80 2,311,500 44.78
Exercised (2,015,723) 17.26 (2,056,064) 12.89 (7,805,549) 17.48
Expired or canceled (1,535) 28.22 (137,589) 36.84 (38,194) 31.45
-----------------------------------------------------------------------------------------------------------------------
Outstanding at end
Of year 17,750,284 $ 37.19 16,687,142 $ 31.09 16,068,326 $ 26.30
=======================================================================================================================
Exercisable at end of year 11,502,384 $ 29.44 11,134,642 $ 24.10 11,023,619 $ 19.64
=======================================================================================================================
Weighted-average fair value
of options granted $ 18.25 $ 19.65 $ 19.65
=======================================================================================================================
</TABLE>
64
<PAGE>
The following table summarizes information about stock options outstanding at
December 31, 2001:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- ----------------------------------------
Range of Number Weighted-Average Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Remaining Life Exercise Price Outstanding Exercise Price
------------------------ ------------ ---------------- ---------------- ---------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
$ 6.65 - $ 10.00 303,089 .54 years $ 8.25 303,089 $ 8.25
$ 10.01 - $ 20.00 4,000,974 2.85 years 14.28 4,000,225 14.27
$ 20.01 - $ 30.00 491,185 5.46 years 24.02 489,959 24.01
$ 30.01 - $ 40.00 4,887,188 6.13 years 36.12 4,367,938 36.07
$ 40.01 - $ 50.00 4,957,448 8.28 years 47.33 2,318,673 46.83
$ 50.01 - $ 57.16 3,110,400 9.84 years 57.10 22,500 51.38
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
Household maintains an Employee Stock Purchase Plan (the "ESPP"). The ESPP
provides a means for employees to purchase shares of Household's common stock at
85 percent of the lesser of its market price at the beginning or end of a
one-year subscription period.
We account for options and shares issued under the ESPP in accordance with APB
25, pursuant to which no compensation cost has been recognized. Had compensation
cost been determined consistent with FAS No. 123, "Accounting for Stock-Based
Compensation," our net income and earnings per share, on a pro forma basis,
would have been as follows:
<TABLE>
<CAPTION>
2001 2000 1999
In millions, except per share data. ----------------------------- ------------------------- -----------------------
Year ended December 31 Diluted Basic Diluted Basic Diluted Basic
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings available to common shareholders:
As reported $ 1,908.0 $ 1,908.0 $1,691.5 $1,691.5 $ 1,477.2 $ 1,477.2
Pro forma 1,880.1 1,880.1 1,670.5 1,670.5 1,460.7 1,460.7
Earnings per share:
As reported $ 4.08 $ 4.13 $ 3.55 $ 3.59 $ 3.07 $ 3.10
Pro forma 4.02 4.07 3.51 3.54 3.03 3.06
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
The pro forma compensation expense included in the table above may not be
representative of the actual effects on net income for future years.
The fair value of each option granted was estimated as of the date of grant
using the Black-Scholes option pricing model and the following weighted-average
assumptions:
<TABLE>
<CAPTION>
2001 2000 1999
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rate 3.62% 5.74% 5.84%
Expected dividend yield 1.44 1.49 1.65
Expected life 5 years 5 years 5 years
Expected volatility 34.3% 42.8% 46.9%
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Black-Scholes model uses different assumptions that can significantly effect
the fair value of the options. As a result, the derived fair value estimates
cannot be substantiated by comparison to independent markets.
17. Employee Benefit Plans
Household sponsors several defined benefit pension plans covering substantially
all of its U.S. and non-U.S. employees. At December 31, 2001, plan assets
included an investment in 1,112,546 shares of Household's common stock with a
fair value of $64.5 million.
65
<PAGE>
Pension income for defined benefit plans, primarily due to the overfunded status
of the domestic plan, included the following components:
<TABLE>
<CAPTION>
In millions.
Year ended December 31 2001 2000 1999
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned during the period $(26.9) $(22.6) $(28.7)
Interest cost on projected benefit obligation (37.4) (33.2) (31.0)
Expected return on assets 101.6 87.9 80.4
Amortization of transition asset .9 1.4 1.2
Recognized gains (losses) - (.2) 4.1
---------------------------------------------------------------------------------------------
Pension income $ 38.2 $ 33.3 $ 26.0
=============================================================================================
</TABLE>
The assumptions used in determining the benefit obligation and pension income of
the domestic defined benefit plans at December 31 are as follows:
<TABLE>
<CAPTION>
2001 2000 1999
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.5% 8.25% 8.0%
Salary increase assumption 4.0 4.0 4.0
Expected long-term rate of return on plan assets 10.0 10.0 10.0
------------------------------------------------------------------------------------------
</TABLE>
A reconciliation of beginning and ending balances of the projected benefit
obligation of the defined benefit pension plans is as follows:
In millions.
Year ended December 31 2001 2000
-------------------------------------------------------------------------------
Benefit obligation at beginning of year $555.1 $547.9
Service cost 26.9 22.6
Interest cost 37.4 33.2
Actuarial losses 112.0 14.9
Foreign currency exchange rate changes (3.2) (4.4)
Plan amendments 9.2 .2
Benefits paid (59.6) (59.3)
-------------------------------------------------------------------------------
Benefit obligation at end of year $677.8 $555.1
===============================================================================
A reconciliation of beginning and ending balances of the fair value of plan
assets associated with the defined benefit pension plans is as follows:
In millions.
Year ended December 31 2001 2000
-------------------------------------------------------------------------------
Fair value of plan assets at beginning of year $1,058.8 $ 926.5
Actual return on plan assets (136.6) 195.4
Foreign currency exchange rate changes (3.5) (4.8)
Employer contributions .7 1.0
Benefits paid (59.6) (59.3)
-------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 859.8 $1,058.8
===============================================================================
The funded status of defined benefit pension plans was as follows:
In millions.
At December 31 2001 2000
-------------------------------------------------------------------------------
Funded status $ 182.0 $ 503.7
Unrecognized net actuarial loss (gain) 257.5 (98.1)
Unamortized prior service cost 3.7 (6.1)
-------------------------------------------------------------------------------
Prepaid pension cost $ 443.2 $ 399.5
===============================================================================
We also sponsor a non-qualified supplemental retirement plan. This plan, which
is unfunded, provides eligible employees defined pension benefits outside the
qualified retirement plan based on average earnings, years of service and age at
retirement. At December 31, 2001 and 2000, the projected benefit obligation was
$41.5 million and $28.6 million, respectively. Pension expense related to the
supplemental retirement plan was $10.0 million, $5.1 million and $7.2 million in
2001, 2000 and 1999, respectively.
66
<PAGE>
We also sponsor various 401(k) savings plans and profit sharing plans for
employees meeting certain eligibility requirements. Under these plans, each
participant's contribution is matched by the company in Household common stock
up to a maximum of 6 percent of the participant's compensation. For 2001, 2000
and 1999, total expense for these plans was $56.7 million, $47.0 million and
$39.1 million, respectively.
We have several plans which provide medical, dental and life insurance benefits
to retirees and eligible dependents. These plans cover substantially all
employees who meet certain age and vested service requirements. We have
instituted dollar limits on our payments under the plans to control the cost of
future medical benefits.
The net postretirement benefit cost included the following:
<TABLE>
<CAPTION>
In millions.
Year ended December 31 2001 2000 1999
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned during the period $ (3.2) $ (3.4) $ (4.3)
Interest cost on accumulated postretirement benefit obligation (11.1) (10.3) (9.4)
Amortization of transition obligation (6.6) (6.7) (6.3)
Amortization of prior service cost 1.7 1.4 1.7
Recognized actuarial gain 3.1 2.8 1.2
----------------------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ (16.1) $ (16.2) $ (17.1)
================================================================================================================
</TABLE>
A reconciliation of the beginning and ending balances of the accumulated
postretirement benefit obligation is as follows:
<TABLE>
<CAPTION>
In millions.
Year ended December 31 2001 2000
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Benefit obligation at beginning of year $ 161.0 $ 160.5
Service cost 3.2 3.4
Interest cost 11.1 10.3
Foreign currency exchange rate changes (.4) -
Actuarial losses (gains) 29.4 (9.1)
Plan amendments - 4.7
Benefits paid (7.5) (8.8)
-------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 196.8 $ 161.0
===================================================================================================================
</TABLE>
Our postretirement benefit plans are funded on a pay-as-you-go basis. A
reconciliation of the components of the accrued postretirement benefit
obligation is as follows:
<TABLE>
<CAPTION>
In millions.
At December 31 2001 2000
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Funded status $ 196.8 $ 161.0
Unamortized prior service cost 17.2 18.1
Unrecognized net actuarial gain 31.4 72.1
Unamortized transition obligation (75.0) (80.6)
-------------------------------------------------------------------------------------------------------------------
Accrued postretirement benefit obligation $ 170.4 $ 170.6
===================================================================================================================
</TABLE>
The assumptions used in determining the benefit obligation and cost of such
plans at December 31 are as follows:
<TABLE>
<CAPTION>
2001 2000 1999
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.5% 8.25% 8.0%
Salary increase assumption 4.0 4.0 4.0
------------------------------------------------------------------------------------------------------------------
</TABLE>
A 9.8 percent annual rate of increase in the gross cost of covered health care
benefits was assumed for 2002. This rate of increase is assumed to decline
gradually to 5.35 percent in 2008.
67
<PAGE>
Assumed health care cost trend rates have an effect on the amounts reported for
health care plans. A one-percentage point change in assumed health care cost
trend rates would increase (decrease) service and interest costs and the
postretirement benefit obligation as follows:
<TABLE>
<CAPTION>
One Percent One Percent
In millions. Increase Decrease
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Effect on total of service and interest cost components $ .6 $ (.6)
Effect on postretirement benefit obligation 8.1 (7.6)
=============================================================================================================================
</TABLE>
18. Income Taxes
Total income taxes were:
<TABLE>
<CAPTION>
In millions.
Year ended December 31 2001 2000 1999
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for income taxes related to operations $1,015.0 $ 909.8 $ 734.3
Income taxes related to adjustments included in common shareholders'
equity:
Unrealized gain (loss) on investments, net 110.6 56.3 (50.1)
Unrealized losses on cash flow hedging instruments (391.6) - -
Foreign currency translation adjustments (10.1) (22.4) (5.3)
Exercise of stock based compensation (35.5) (23.5) (89.1)
-----------------------------------------------------------------------------------------------------------------------------
Total $ 688.4 $ 920.2 $ 589.8
=============================================================================================================================
</TABLE>
Provisions for income taxes related to operations were:
<TABLE>
<CAPTION>
In millions.
Year ended December 31 2001 2000 1999
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
United States $ 907.1 $ 710.8 $ 633.8
Foreign 69.8 112.0 67.4
-----------------------------------------------------------------------------------------------------------------------------
Total current 976.9 822.8 701.2
-----------------------------------------------------------------------------------------------------------------------------
Deferred
United States 40.3 93.4 32.3
Foreign (2.2) (6.4) .8
-----------------------------------------------------------------------------------------------------------------------------
Total deferred 38.1 87.0 33.1
-----------------------------------------------------------------------------------------------------------------------------
Total income taxes $1,015.0 $ 909.8 $ 734.3
=============================================================================================================================
</TABLE>
The significant components of deferred income tax provisions attributable to
income from operations were:
<TABLE>
<CAPTION>
In millions.
Year ended December 31 2001 2000 1999
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred income tax provision $ 33.1 $ 89.6 $ 17.3
Adjustment of valuation allowance (11.8) (8.4) 20.7
Change in operating loss carryforwards 16.8 5.8 (4.9)
-----------------------------------------------------------------------------------------------------------------------------
Deferred income tax provision $ 38.1 $ 87.0 $ 33.1
=============================================================================================================================
</TABLE>
Income before income taxes were:
<TABLE>
<CAPTION>
In millions.
Year ended December 31 2001 2000 1999
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
United States $2,660.6 $2,273.8 $1,930.7
Foreign 277.9 336.7 290.0
-----------------------------------------------------------------------------------------------------------------------------
Total income before income taxes $2,938.5 $2,610.5 $2,220.7
=============================================================================================================================
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
Effective tax rates are analyzed as follows:
Year ended December 31 2001 2000 1999
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
Increase (decrease) in rate resulting from:
State and local taxes, net of federal benefit 2.8 2.6 2.4
Tax credits (2.5) (1.5) (.9)
Other (.8) (1.2) (3.4)
---------------------------------------------------------------------------------------------------------------------
Effective tax rate 34.5% 34.9% 33.1%
=====================================================================================================================
</TABLE>
Provision for U.S. income taxes had not been made at December 31, 2001 and 2000
on $267.5 million and $300.6 million, respectively, of undistributed earnings of
foreign subsidiaries. Determination of the amount of unrecognized deferred tax
liability related to investments in foreign subsidiaries is not practicable.
In addition, provision for U.S. income taxes had not been made at December 31,
2001 on $80.1 million of undistributed earnings of life insurance subsidiaries
accumulated as policyholders' surplus under tax laws in effect prior to 1984. If
this amount were distributed, the additional income tax payable would be
approximately $28 million.
Our U.S. savings and loan subsidiary has credit loss reserves for tax purposes
that arose in years beginning before December 31, 1987 in the amount of $55.3
million. The amount of deferred tax liability on the aforementioned credit loss
reserves not recognized totaled $20.5 million at December 31, 2001. Because
these amounts would become taxable only in the event of certain circumstances
which we do not expect to occur within the foreseeable future, no deferred tax
liability has been established for these items.
At December 31, 2001, we had net operating loss carryforwards for tax purposes
of $11.3 million, of which $1.7 million expire in 2004; $2.4 million expire in
2005; $2.1 million expire in 2006; and $5.1 million expire in 2019. We also had
foreign tax credit carryforwards of $.5 million which expire in 2004.
Temporary differences which gave rise to a significant portion of deferred tax
assets and liabilities were as follows:
<TABLE>
<CAPTION>
In millions.
At December 31 2001 2000
-------------------------------------------------------------------------------------------------------------
Deferred Tax Liabilities
<S> <C> <C>
Receivables sold $ 837.7 $ 822.2
Leveraged lease transactions, net 393.9 385.4
Deferred loan origination costs 172.4 93.4
Pension plan assets 154.2 142.5
Fee income 147.3 78.3
Other 222.0 237.9
-------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities $ 1,927.5 $ 1,759.7
-------------------------------------------------------------------------------------------------------------
Deferred Tax Assets
Credit loss reserves $ 1,208.8 $ 1,128.3
Market value adjustments 277.4 -
Other 389.6 337.9
-------------------------------------------------------------------------------------------------------------
Total deferred tax assets 1,875.8 1,466.2
Valuation allowance (.5) (12.3)
-------------------------------------------------------------------------------------------------------------
Total deferred tax assets net of valuation allowance 1,875.3 1,453.9
-------------------------------------------------------------------------------------------------------------
Net deferred tax liability $ 52.2 $ 305.8
=============================================================================================================
</TABLE>
The deferred tax asset valuation allowance relates entirely to foreign tax
credit carryforwards. Due to the limited carryforward period and limitations
under U.S. tax laws with respect to foreign tax credit utilization, management
believes it is more likely than not that the deferred tax asset will not be
realized. The current period net change in the valuation allowance reflects the
current utilization of prior carryforwards. A 100 percent valuation allowance
has been established relating to the remaining carryforwards available.
69
<PAGE>
19. Earnings Per Common Share
<TABLE>
<CAPTION>
2001 2000 1999
In millions, except per share data. ----------------------- ------------------------- ------------------------
Year ended December 31 Diluted Basic Diluted Basic Diluted Basic
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings
Net income $ 1,923.5 $ 1,923.5 $ 1,700.7 $ 1,700.7 $ 1,486.4 $ 1,486.4
Preferred dividends (15.5) (15.5) (9.2) (9.2) (9.2) (9.2)
----------------------------------------------------------------------------------------------------------------------------
Earnings available to
Common shareholders $ 1,908.0 $ 1,908.0 $ 1,691.5 $ 1,691.5 $ 1,477.2 $ 1,477.2
============================================================================================================================
Average Shares
Common 462.0 462.0 471.8 471.8 477.0 477.0
Common equivalents 6.1 - 4.4 - 4.8 -
----------------------------------------------------------------------------------------------------------------------------
Total 468.1 462.0 476.2 471.8 481.8 477.0
============================================================================================================================
Earnings per common share $ 4.08 $ 4.13 $ 3.55 $ 3.59 $ 3.07 $ 3.10
============================================================================================================================
</TABLE>
20. Commitments and Contingent Liabilities
In the ordinary course of business there are various legal proceedings pending
against us. Management believes the aggregate liability, if any, resulting from
such actions would not have a material adverse effect on our consolidated
financial position, results of operations or cash flows. However, 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.
See Note 15 for discussion of lease commitments.
21. Segment Reporting
We have three reportable segments: Consumer, Credit Card Services, and
International. Our segments are managed separately and are characterized by
different middle-market consumer lending products, origination processes, and
locations. Our Consumer segment consists of our consumer lending, mortgage
services, retail services, and auto finance businesses. Our Credit Card Services
segment consists of our domestic MasterCard and Visa credit card business. Our
International segment consists of our foreign operations in the United Kingdom
("U.K.") and Canada. The Consumer segment provides real estate secured,
automobile secured and personal non-credit card loans. Loans are offered with
both revolving and closed-end terms and with fixed or variable interest rates.
Loans are originated through branch locations, correspondents, mortgage brokers,
direct mail, telemarketing, independent merchants or automobile dealers. The
Credit Card Services segment offers MasterCard and Visa credit cards throughout
the United States primarily via strategic affinity and co-branding
relationships, direct mail, and our branch network to subprime customers. The
International segment offers secured and unsecured lines of credit and secured
and unsecured closed-end loans primarily in the United Kingdom and Canada. In
addition, the United Kingdom operation offers MasterCard and Visa credit cards
and credit insurance in connection with all loan products. We also cross sell
our credit cards to existing real estate secured, private label and tax services
customers. All segments offer products and service customers through the
Internet. The All Other caption includes our insurance and tax services and
commercial businesses, as well as our corporate and treasury activities, each of
which falls below the quantitative threshold tests under Statement of Financial
Accounting Standards No. 131 for determining reportable segments.
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies. For segment
reporting purposes, intersegment transactions have not been eliminated. We
generally account for transactions between segments as if they were with third
parties. We evaluate performance and allocate resources based on income from
operations after income taxes and returns on equity and managed assets.
We allocate resources and provide information to management for decision making
on a managed basis. Therefore, an adjustment is required to reconcile the
managed financial information to our reported financial information in our
consolidated financial statements. This adjustment reclassifies net interest
margin, fee income and loss provision into securitization revenue. Certain
segment information previously presented on an owned basis has been restated to
a managed basis.
70
<PAGE>
Reportable Segments - Managed Basis
<TABLE>
<CAPTION>
In millions. Credit Card
Managed Basis Consumer Services International All Other Totals
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the year ended December 31, 2001:
Net interest margin $ 5,829.0 $ 1,556.1 $ 592.5 $ (37.0) $ 7,940.6
Fee income 368.5 1,182.8 60.5 6.7 1,618.5
Other revenues (1) 357.5 99.4 209.5 553.6 1,220.0
Intersegment revenues 190.4 38.2 8.4 (2.7) 234.3
Provision for credit losses 2,550.3 1,167.3 226.9 72.3 4,016.7
Depreciation and amortization 64.5 110.8 23.7 109.3 308.3
Income tax expense (benefit) 840.5 232.6 65.2 (36.8) 1,101.5
Segment net income (loss) 1,327.7 367.6 204.1 173.7 2,073.1
Receivables 75,640.8 17,178.5 7,157.5 845.9 100,822.7
Total segment assets 78,698.8 18,875.3 8,375.2 14,116.7 120,066.0
Expenditures for long-lived assets (7) 17.0 4.5 27.8 125.9 175.2
-------------------------------------------------------------------------------------------------------------
For the year ended December 31, 2000:
Net interest margin $ 4,851.6 $ 1,222.8 $ 594.1 $ (178.5) $ 6,490.0
Fee income 348.6 1,055.2 61.0 5.6 1,470.4
Other revenues (1) 401.7 114.3 244.6 414.7 1,175.3
Intersegment revenues 192.0 32.7 5.2 - 229.9
Provision for credit losses 1,978.4 1,066.2 233.6 (27.4) 3,250.8
Depreciation and amortization 78.4 123.5 20.2 79.6 301.7
Income tax expense (benefit) 796.5 142.6 98.6 (43.1) 994.6
Segment net income (loss) 1,271.3 214.7 230.1 131.3 1,847.4
Receivables 63,067.0 15,977.3 7,847.0 716.1 87,604.4
Total segment assets 65,822.3 17,713.9 9,017.5 14,164.3 106,718.0
Expenditures for long-lived assets (7) 29.1 283.1 37.7 100.5 450.4
-------------------------------------------------------------------------------------------------------------
For the year ended December 31, 1999:
Net interest margin $ 4,043.3 $ 1,020.4 $ 614.0 $ (138.5) $ 5,539.2
Fee income 350.6 797.5 54.1 3.3 1,205.5
Other revenues (1) 207.4 63.8 184.0 474.5 929.7
Intersegment revenues 124.0 17.2 3.4 - 144.6
Provision for credit losses 1,598.6 912.4 247.7 (.4) 2,758.3
Depreciation and amortization 80.8 108.4 17.5 67.7 274.4
Income tax expense (benefit) 625.6 100.2 59.4 10.6 795.8
Segment net income (loss) 991.5 152.8 218.7 230.0 1,593.0
Receivables 49,399.0 13,854.8 7,618.8 855.7 71,728.3
Total segment assets 51,840.1 15,489.7 8,846.0 14,000.7 90,176.5
Expenditures for long-lived assets (7) 78.9 5.8 45.6 64.4 194.7
-------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Managed Owned
Adjustments/ Basis Basis
In millions. Reconciling Consolidated Securitization Consolidated
Managed Basis Items Totals Adjustments Totals
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
For the year ended December 31, 2001:
Net interest margin - $ 7,940.6 $ (2,093.8) (6) $ 5,846.8
Fee income - 1,618.5 (651.6) (6) 966.9
Other revenues (1) $ (234.3) (2) 985.7 1,639.9 (6) 2,625.6
Intersegment revenues (234.3) (2) - - -
Provision for credit losses 1.7 (3) 4,018.4 (1,105.5) (6) 2,912.9
Depreciation and amortization - 308.3 - 308.3
Income tax expense (benefit) (86.5) (4) 1,015.0 - 1,015.0
Segment net income (loss) (149.6) 1,923.5 - 1,923.5
Receivables - 100,822.7 (20,948.0) (8) 79,874.7
Total segment assets (9,702.0) (5) 110,364.0 (20,948.0) (8) 89,416.0
Expenditures for long-lived assets (7) - 175.2 - 175.2
--------------------------------------------------------------------------------------------------------
For the year ended December 31, 2000:
Net interest margin - $ 6,490.0 $ (1,724.6) (6) $ 4,765.4
Fee income - 1,470.4 (644.6) (6) 825.8
Other revenues (1) $ (229.9) (2) 945.4 1,233.7 (6) 2,179.1
Intersegment revenues (229.9) (2) - - -
Provision for credit losses 1.6 (3) 3,252.4 (1,135.5) (6) 2,116.9
Depreciation and amortization - 301.7 - 301.7
Income tax expense (benefit) (84.8) (4) 909.8 - 909.8
Segment net income (loss) (146.7) 1,700.7 - 1,700.7
Receivables - 87,607.4 (20,249.5) (8) 67,357.9
Total segment assets (9,762.2) (5) 96,955.8 (20,249.5) (8) 76,706.3
Expenditures for long-lived assets (7) - 450.4 - 450.4
--------------------------------------------------------------------------------------------------------
For the year ended December 31, 1999:
Net interest margin - $ 5,539.2 $ (1,732.9) (6) $ 3,806.3
Fee income - 1,205.5 (610.0) (6) 595.5
Other revenues (1) $ (144.6) (2) 785.1 1,277.5 (6) 2,062.6
Intersegment revenues (144.6) (2) - - -
Provision for credit losses 23.5 (3) 2,781.8 (1,065.4) (6) 1,716.4
Depreciation and amortization - 274.4 - 274.4
Income tax expense (benefit) (61.5) (4) 734.3 - 734.3
Segment net income (loss) (106.6) 1,486.4 - 1,486.4
Receivables - 71,728.3 (19,438.9) (8) 52,289.4
Total segment assets (9,988.2) (5) 80,188.3 (19,438.9) (8) 60,749.4
Expenditures for long-lived assets (7) - 194.7 - 194.7
--------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net of policyholder benefits and excluding fees.
(2) Eliminates intersegment revenues.
(3) Eliminates bad debt recovery sales between operating segments.
(4) Tax benefit associated with items comprising adjustments/reconciling items.
(5) Eliminates investments in subsidiaries and intercompany borrowings.
(6) Reclassifies net interest margin fee income and loss provisions relating to
securitized receivables to other revenues.
(7) Includes goodwill associated with purchase business combinations and
capital expenditures.
(8) Represents receivables serviced with limited recourse.
71
<PAGE>
Managed Receivables
The following summarizes our managed receivables, which includes both our owned
receivables and receivables serviced with limited recourse.
<TABLE>
<CAPTION>
In millions.
At December 31 2001 2000 1999
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Real estate secured $ 44,718.6 $ 36,637.5 $ 26,935.5
Auto finance 6,395.5 4,563.3 3,039.8
MasterCard/Visa 17,395.2 17,583.4 15,793.1
Private label 13,813.9 11,997.3 11,269.7
Personal non-credit card 17,992.6 16,227.3 13,881.9
Commercial and other 506.9 598.6 808.3
------------------------------------------------------------------------------------------------------------
Total $ 100,822.7 $ 87,607.4 $ 71,728.3
============================================================================================================
</TABLE>
Geographic Data
The following summarizes our owned basis assets, revenues and income before
income taxes by material country:
<TABLE>
<CAPTION>
Identifiable Assets Long-Lived Assets (1)
---------------------------------------- ---------------------------------
In millions. 2001 2000 1999 2001 2000 1999
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States $82,221.0 $68,917.7 $52,886.9 $1,988.1 $2,107.2 $1,310.2
United Kingdom 5,709.6 6,401.3 6,486.6 93.1 109.6 91.7
Canada 1,379.4 1,246.6 1,188.2 5.2 6.5 5.8
Other 106.0 140.7 187.7 - - .2
----------------------------------------------------------------------------------------------
Total $89,416.0 $76,706.3 $60,749.4 $2,086.4 $2,223.3 $1,407.9
==============================================================================================
</TABLE>
(1) Includes properties and equipment, net of accumulated depreciation, and
goodwill, net of accumulated amortization.
<TABLE>
<CAPTION>
Revenues Income Before Income Taxes
--------------------------------------- -----------------------------------
In millions. 2001 2000 1999 2001 2000 1999
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States $12,661.4 $10,683.5 $8,290.5 $2,660.6 $2,273.1 $1,930.7
United Kingdom 1,014.4 1,059.9 995.0 206.4 274.1 223.9
Canada 220.2 194.4 178.2 48.4 41.3 39.4
Other 19.7 23.1 35.4 23.1 22.0 26.7
----------------------------------------------------------------------------------------------
Total $13,915.7 $11,960.9 $9,499.1 $2,938.5 $2,610.5 $2,220.7
==============================================================================================
</TABLE>
72
<PAGE>
Management's Report
To the Shareholders of Household International, Inc.
Household International's management is responsible for the preparation,
integrity and fair presentation of its published financial statements. The
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and, as such, include amounts based on
judgments and estimates made by management. Management also prepared other
information included in the annual report and is responsible for its accuracy
and consistency with the financial statements.
The consolidated financial statements have been audited by an independent
accounting firm, Arthur Andersen LLP, which has been given unrestricted access
to all financial records and related data, including minutes of all meetings of
shareholders, the Board of Directors and committees of the board. Management
believes that representations made to the independent auditors during their
audit were valid and appropriate.
Management maintains a system of internal controls over the preparation of its
published financial statements. These controls are designed to provide
reasonable assurance to the company's Board of Directors and officers that the
financial statements have been fairly presented in accordance with generally
accepted accounting principles. The Board, operating through its audit committee
which is composed entirely of non-executive directors, provides oversight to the
financial reporting process.
Internal auditors monitor the operation of the internal control system and
actions are taken by management to respond to deficiencies as they are
identified. Even effective internal controls, no matter how well designed, have
inherent limitations, such as the possibility of human error or of circumvention
or overriding of controls, and the consideration of cost in relation to benefit
of a control. Further, the effectiveness of an internal control can change with
circumstances.
Household International's management periodically assesses the internal controls
for adequacy. Based upon these assessments, Household International's management
believes that, in all material respects, its internal controls relating to
preparation of consolidated financial statements as of December 31, 2001
functioned effectively during the year ended December 31, 2001.
Management has long recognized its responsibility for conducting the company's
affairs in a manner which is responsive to the interest of employees,
shareholders, investors and society in general. This responsibility is included
in the statement of policy on ethical standards which provides that the company
will fully comply with laws, rules and regulations of every community in which
it operates and adhere to the highest ethical standards. Officers, employees and
agents of the company are expected and directed to manage the business of the
company with complete honesty, candor and integrity.
/s/ William F. Aldinger /s/ David A. Schoenholz
William F. Aldinger David A. Schoenholz
Chairman and Vice Chairman -
Chief Executive Officer Chief Financial Officer
January 14, 2002
73
<PAGE>
Report of Independent Public Accountants
To the Shareholders of Household International, Inc.
We have audited the accompanying consolidated balance sheets of Household
International, Inc. (a Delaware corporation) and subsidiaries as of December 31,
2001 and 2000, and the related consolidated statements of income, changes in
preferred stock and common shareholders' equity and cash flows for each of the
three years in the period ended December 31, 2001. These financial statements
are the responsibility of Household International Inc.'s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Household International, Inc. and subsidiaries as of December 31, 2001 and 2000,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States.
Arthur Andersen LLP
/s/ Arthur Andersen LLP
Chicago, Illinois
January 14, 2002
74
<PAGE>
Household International, Inc.
and Subsidiaries
Common and Preferred Stock Information
Household International common stock is listed on the New York and Chicago stock
exchanges. We also have unlisted trading privileges on the Boston, Pacific and
Philadelphia stock exchanges. Call and put options are traded on the American
Stock Exchange, Pacific Stock Exchange and Chicago Board of Options Exchange.
<TABLE>
<CAPTION>
Dividends Declared
------------------
Stock Ticker Symbol 2001 2000 Features Redemption Features
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Common HI $ .85 $ .74 Quarterly dividend N/A
rate increased to $.22
effective 7/15/01
------------------------------------------------------------------------------------------------------------------------
5% Cumulative Preferred HI + PRM $2.50 $2.50 Nonconvertible Redeemable at our option
------------------------------------------------------------------------------------------------------------------------
$4.50 Cumulative Preferred HI + PRN $4.50 $4.50 Nonconvertible Redeemable at our option
------------------------------------------------------------------------------------------------------------------------
$4.30 Cumulative Preferred HI + PRO $4.30 $4.30 Nonconvertible Redeemable at our option
------------------------------------------------------------------------------------------------------------------------
8 1/4% Cumulative Preferred,
Series 1992-A HI + PRZ $2.0625 $2.0625 Nonconvertible Cannot be redeemed prior to
Depositary Shares 10/16/2002. Redeemable at our
representing 1/40 share option after 10/15/2002 in
of 8 1/4% Cumulative whole or in part at $25.00
Preferred Stock, per depositary share plus
Series 1992-A accrued and unpaid dividends.
------------------------------------------------------------------------------------------------------------------------
7.50% Cumulative Preferred,
Series 2001-A HI + PRS $0.4896 N/A Nonconvertible Cannot be redeemed prior to
Depositary Shares 9/27/2006. Redeemable at our
representing 1/40 share option after 9/26/2006 in
of 7.50% Cumulative whole or in part at $25.00
Preferred Stock, per depositary share plus accrued
Series 2001-A/1/ and unpaid dividends.
------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Net Shares Outstanding Shareholders of Record 2001 Market Price 2000 Market Price
------------------------- ---------------------- ------------------ -------------------
Stock 2001 2000 2001 2000 High Low High Low
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Common 457,124,303 471,019,659 19,226 19,468 $69.98 $48.00 $57.44 $29.50
5% Cumulative Preferred 407,718 407,718 1,183 1,254 41.50 30.00 37.00 29.00
$4.50 Cumulative Preferred 103,976 103,976 242 269 66.20 56.75 65.25 50.00
$4.30 Cumulative Preferred 836,585 836,585 513 542 63.00 53.25 62.63 50.00
8 1/4% Cumulative Preferred,
Series 1992-A 2,000,000 2,000,000 201 228 27.50 24.50 26.63 25.25
7.50% Cumulative Preferred,
Series 2001-A/1/ 12,000,000 N/A 15 N/A 25.87 23.00 - -
--------------------------------------------------------------------------------------------------------------------------
/1/Issued September 27, 2001.
</TABLE>
75
<PAGE>
Household International, Inc.
and Subsidiaries
Common and Preferred Stock Information (continued)
<TABLE>
<CAPTION>
Year ended December 31, unless otherwise indicated 2001 2000 1999 1998 1997
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Market Value Share of Common Stock (High-Low prices on NYSE)
First Quarter 62.00-52.00 39.19-29.50 46.69-38.69 47.79-37.71 36.08-28.33
Second Quarter 69.98-57.45 48.19-37.63 52.31-42.00 52.56-41.67 39.15-26.21
Third Quarter 69.49-48.00 57.44-41.00 50.19-36.19 53.69-35.25 43.33-36.15
Fourth Quarter 61.40-51.29 56.94-43.88 48.00-35.81 40.50-23.00 43.21-36.13
Yearly range 69.98-48.00 57.44-29.50 52.31-35.81 53.69-23.00 43.33-26.21
Year-end close 57.94 55.00 37.25 39.63 42.54
Composite common shares traded 563,070,100 408,751,400 390,575,200 454,878,500 302,551,200
Average daily volume 2,270,444 1,622,029 1,549,902 1,805,073 1,195,854
------------------------------------------------------------------------------------------------------------------------------------
Shares Outstanding at December 31
Common 457,124,303 471,019,659 467,911,445 483,137,739 485,351,517
5% Cumulative Preferred/2/ 407,718 407,718 407,718 407,718 -
$4.50 Cumulative Preferred/2/ 103,976 103,976 103,976 103,976 -
$4.30 Cumulative Preferred/2/ 836,585 836,585 836,585 836,585 -
8 1/4% Cumulative Preferred,
Series 1992-A/1/ 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000
7.50% Cumulative Preferred,
Series 2001-A/1, 3/ 12,000,000 - - - -
7.35% Preferred, Series 1993-A/1/ - - - - 4,000,000
------------------------------------------------------------------------------------------------------------------------------------
Shareholders of Record at December 31
Common 19,226 19,468 19,991 20,584 10,239
5% Cumulative Preferred/2/ 1,183 1,254 1,363 1,329 -
$4.50 Cumulative Preferred/2/ 242 269 288 283 -
$4.30 Cumulative Preferred/2/ 513 542 592 380 -
8 1/4% Cumulative Preferred,
Series 1992-A/1/ 201 228 258 309 356
7.50% Cumulative Preferred,
Series 2001-A/1, 3/ 15 - - - -
7.35% Preferred, Series 1993-A/1/ - - - - 247
------------------------------------------------------------------------------------------------------------------------------------
Total 21,380 21,761 22,492 22,885 10,842
====================================================================================================================================
</TABLE>
/1/ Per depositary share.
/2/ The 5%, $4.50 and $4.30 Cumulative Preferred Stock was issued by Household
to replace Beneficial preferred stock outstanding at the time of the
merger. The information presented for these preferred shares is for the
period subsequent to the merger.
/3/ Issued September 27, 2001.
76
</TEXT>
</DOCUMENT>