Household Int. Form 10-Q Q3
HSBC Holdings PLC
19 November 2003
PART 2
Table of Contents
We are committed to maintaining at least a mid-single "A" rating and as part of
that effort will continue to review appropriate capital levels with our rating
agencies.
Commercial paper, bank and other borrowings increased $2.7 billion from year-end
2002 to $8.8 billion at September 30, 2003. The increases are due to the
previously discussed increases in commercial paper.
Senior and senior subordinated debt (with original maturities over one year) was
$76.1 billion at September 30, 2003 and $74.8 billion at December 31, 2002. The
increase reflects purchase accounting adjustments which have been "pushed down"
to record our debt at fair value. Excluding purchase accounting adjustments,
senior and senior subordinated debt decreased as maturities and retirements were
replaced with short-term funding, including funding from affiliates of HSBC.
Prior to the merger with HSBC, the majority of our fair value and cash flow
hedges qualified for shortcut accounting under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," ("SFAS No. 133"). Under the
Financial Accounting Standards Board's interpretations of SFAS No. 133, the
shortcut method of accounting is no longer allowed for interest rate swaps which
were outstanding at the time of the merger. The discontinuation of shortcut
accounting has been recorded in other income and increased net income by $3.7
million during the third quarter of 2003 and $51.0 million year-to-date. During
the third quarter, we restructured substantially all of our swap portfolio to
regain use of the shortcut method of accounting and reduce the potential
volatility of future earnings.
During the third quarter of 2003, we began utilizing an affiliate, HSBC Bank
USA, as the primary provider of new domestic derivative products. At September
30, 2003, we had derivative contracts with a notional value of approximately
$16.2 billion outstanding with this affiliate. Going forward, it is expected
that most of our existing third party derivative contracts will be assigned to
HSBC Bank USA, making them our primary counterparty in derivative transactions.
Securitizations and Secured Financings Securitizations (which are structured
to receive sale treatment under Statement of Financial Accounting Standards No.
140 ("SFAS No. 140") and secured financings (which do not receive sale treatment
under SFAS No. 140) of consumer receivables have been, and are expected to
continue to be, a source of liquidity for us. Securitizations and secured
financings are used to limit our reliance on the unsecured debt markets and
often are more cost-effective than alternative funding sources.
In a securitization, a designated pool of non-real estate consumer receivables
is removed from the balance sheet and transferred to an unaffiliated trust. This
unaffiliated trust is a qualifying special purpose entity ("QSPE") as defined by
SFAS No. 140 and, therefore, is not consolidated. The QSPE funds its receivable
purchase through the issuance of securities to investors, entitling them to
receive specified cash flows during the life of the securities. The securities
are collateralized by the underlying receivables transferred to the QSPE. At the
time of sale, an interest-only strip receivable is recorded, representing the
present value of the cash flows we expect to receive over the life of the
securitized receivables, net of estimated credit losses. Under the terms of the
securitizations, we receive annual servicing fees on the outstanding balance of
the securitized receivables and the rights to future residual cash flows on the
sold receivables after the investors receive their contractual return. Cash
flows related to the interest-only strip receivables and servicing the
receivables are collected over the life of the underlying securitized
receivables. Our securitized receivables totaled $24.1 billion at September 30,
2003, compared to $24.9 billion at December 31, 2002.
In a secured financing, a designated pool of receivables, typically real estate
secured, are conveyed to a wholly owned limited purpose subsidiary which in turn
transfers the receivables to a trust which sells interests to investors.
Repayment of the debt issued by the trust is secured by the receivables
transferred. The transactions are structured as secured financings under SFAS
No. 140. Therefore, the receivables and the underlying debt of the trust remain
on our balance sheet. We do not recognize a gain in a secured financing
transaction. Because the
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receivables and the debt remain on our balance sheet, revenues and expenses are
reported consistently with our owned balance sheet portfolio. Using this source
of funding results in similar cash flows as issuing debt through alternative
funding sources. As of September 30, 2003, closed-end real estate secured
receivables totaling $7.5 billion secured $6.4 billion of outstanding debt
related to these transactions. At December 31, 2002, closed-end real estate
secured receivables totaling $8.5 billion secured $7.5 billion of outstanding
debt related to these transactions.
We believe the market for securities backed by receivables is a reliable,
efficient and cost-effective source of funds. At September 30, 2003,
securitizations structured as sales represented 21 percent and secured
financings represented 6 percent of the funding associated with our managed
portfolio. At December 31, 2002, securitizations structured as sales represented
23 percent and secured financings represented 7 percent of the funding
associated with our managed portfolio.
Results of Operations
Unless noted otherwise, the following discusses amounts reported in our owned
basis statements of income.
Net interest margin Net interest margin on an owned basis was $2.0 billion
for the third quarter of 2003, compared to $1.9 billion in the previous quarter
and $1.7 billion in the prior-year quarter. Net interest margin on an owned
basis for the first nine months of 2003 was $5.6 billion, up from $4.9 billion
in the prior-year period. The increases over the prior year periods were
primarily due to amortization of purchase accounting adjustments. Excluding
amortization of purchase accounting adjustments, net interest margin on an owned
basis was $1.8 billion in the current quarter, $1.7 billion in the previous
quarter and $5.1 billion year-to-date. Receivables growth and lower funding
costs also contributed to the increases over all prior periods.
Net interest margin as a percent of average owned interest-earning assets,
annualized, was 8.41 percent in the quarter and 8.08 percent in the first nine
months of 2003, compared to 7.46 and 7.62 percent in the year-ago periods. The
increases were primarily attributable to lower interest expense resulting from
amortization of purchase accounting fair value adjustments which totaled $235.4
million in the quarter and $508.8 million for the first nine months of 2003.
Excluding amortization of the fair value adjustments, net interest margin as a
percent of average owned interest-earning assets was flat compared to the prior
year quarter and for the nine month period was down slightly compared to the
prior year period. Compared to the prior-year quarter, lower yields on our
receivables due to repricings and to our liquidity-related investment portfolio,
which was substantially increased during the first half of 2002 and has lower
yields than our receivable portfolio, were substantially offset by lower funding
costs. For the nine months, lower yields were partially offset by lower funding
costs.
Our net interest margin on a managed basis includes finance income earned on our
owned receivables as well as on our securitized receivables. This finance income
is offset by interest expense on the debt recorded on our balance sheet as well
as the contractual rate of return on the instruments issued to investors when
the receivables were securitized. Managed basis net interest margin was $2.7
billion in both the third quarter of 2003 and the previous quarter and $2.4
billion in the year-ago quarter. For the nine months ended September 30, managed
basis net interest margin was $7.8 billion in 2003 and $6.9 billion in 2002. Net
interest margin as a percent of average managed interest-earning assets,
annualized, was 9.12 percent in the current quarter and 8.89 percent for the
first nine months of 2003, compared to 8.35 and 8.54 percent in the year-ago
periods. The increases in 2003 were attributable to lower interest expense as
explained above partially offset by lower yields on our receivables.
Net interest margin as a percent of receivables on a managed basis is greater
than on an owned basis because the managed basis portfolio includes relatively
more unsecured loans, which have higher yields.
Provision for credit losses The provision for credit losses for receivables
was $1.0 billion for both the third quarter of 2003 and the previous quarter and
$973.0 million in the prior-year quarter. The provision for the
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first nine months of 2003 was $3.1 billion, compared to $2.7 billion in the
year-ago period. The provision as a percent of average owned receivables,
annualized, was 4.42 percent in the third quarter of 2003, 4.82 percent in the
second quarter of 2003 and 4.61 percent in the third quarter of 2002.
Receivables growth, increases in personal bankruptcy filings and the weak
economy contributed to higher provision dollars compared to the prior year
periods. We recorded owned loss provision greater than charge-offs of $102.5
million in the third quarter of 2003 and $346.3 million year-to-date. We
recorded owned loss provision greater than charge-offs of $136.7 million in the
third quarter of 2002 and $426.2 million year-to-date. The provision for credit
losses may vary from quarter to quarter, depending on the product mix and credit
quality of loans in our portfolio. See Note 5, "Credit Loss Reserves" to the
accompanying condensed consolidated financial statements for further discussion
of factors affecting the provision for credit losses.
Other revenues Total other revenues were $946.2 million and $3.1 billion for
the third quarter and first nine months of 2003, compared to $1.1 and $3.3
billion for the same periods in 2002 and included the following:
(In millions) Three Three Combined Nine
months months nine months
ended ended months ended
September September ended September
30, 30, September 30,
30, 2002
2003 2002 2003
Securitization revenue $ 381.9 $ 556.3 $ 1,105.6 $ 1,598.0
Insurance revenue 192.7 180.8 553.3 528.4
Investment income 37.0 47.6 151.5 137.8
Fee income 299.5 261.7 856.3 668.5
Other income 35.1 101.8 410.4 385.1
Total other revenues $ 946.2 $ 1,148.2 $ 3,077.1 $ 3,317.8
Securitization revenue is the result of the securitization of our receivables
and included the following:
(In millions) Three Three Combined Nine
months months nine months
ended ended months ended
September September ended September
30, 30, September 30,
2003 2002 30, 2002
2003
Net initial gains(1) $ 24.5 $ 78.6 $ 92.1 $ 226.8
Net replenishment gains(1) 138.3 132.2 409.7 383.4
Servicing revenue and excess spread 219.1 345.5 603.8 987.8
Total $ 381.9 $ 556.3 $ 1,105.6 $ 1,598.0
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(1) Net of our estimate of probable credit losses under the recourse provisions
The decreases in securitization revenue were due to decreases in the level of
receivables securitized during the third quarter and first nine months of 2003
as a result of the use of alternative funding sources and lower excess spread
which included amortization of purchase accounting fair value adjustments to our
interest-only strip receivables. Under U.K. GAAP as reported by our parent,
securitizations are treated as financing transactions. Securitization levels in
the first nine months of 2002 were higher pursuant to our liquidity management
plans. Securitization revenue will vary each period based on the level and mix
of receivables securitized in that particular period (which will impact the
gross initial gains and related estimated probable credit losses under the
recourse provisions). It is also affected by the overall level and mix of
previously securitized receivables (which will impact servicing revenue and
excess spread). The estimate for probable credit losses for securitized
receivables is also impacted by the level and mix of current period
securitizations because, depending upon loss estimates and severities,
securitized receivables with longer lives may result in higher over-the-life
losses than receivables securitized with shorter lives.
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Our interest-only strip receivables, net of the related loss reserve and
excluding the mark-to-market adjustment recorded in accumulated other
comprehensive income (loss), decreased $79.6 million in the third quarter of
2003 and $313.8 million for the first nine months of 2003, compared to increases
of $51.2 million in the third quarter and $109.9 million in the first nine
months of 2002.
Insurance revenue was $192.7 and $553.3 million in the third quarter and first
nine months of 2003 compared to $180.8 and $528.4 million in the year-ago
periods. The increases reflected increased sales in our United Kingdom
subsidiary.
Investment income, which includes interest income on investment securities in
our insurance business as well as realized gains and losses from the sale of
investment securities, was $37.0 and $151.5 million in the third quarter and
first nine months of 2003 compared to $47.6 and $137.8 million in the year-ago
periods. The decrease in the quarter was primarily attributable to the
amortization of purchase accounting adjustments. Gains from security sales
totaled $49.5 million for the nine months ended September 30, 2003 and $4.6
million in the prior year period.
Fee income, which includes revenues from fee-based products such as credit
cards, was $299.5 and $856.3 million in the third quarter and first nine months
of 2003 compared to $261.7 and $668.5 million in the year-ago periods. The
increases were due to higher levels of credit card fees from both credit card
businesses. See Note 12, "Segment Reporting," to the accompanying condensed
consolidated financial statements for additional information on fee income on a
managed basis.
Other income, which includes revenue from our tax refund lending business, was
$35.1 and $410.4 million in the third quarter and first nine months of 2003
compared to $101.8 and $385.1 million in the year-ago periods. The decrease in
the quarter reflects lower revenues from our tax refund lending business and
lower gains on whole loan sales, partially offset by higher revenues from our
mortgage operations. For the nine months, lower revenues from our tax refund
lending business and lower gains on whole loan sales were more than offset by
higher revenues from our mortgage operations and higher SFAS No. 133 income.
SFAS No. 133 income due to our discontinuation of the shortcut method of
accounting totaled $5.4 million for the quarter and $79.8 million year-to-date.
Expenses Total costs and expenses were $1.3 billion for the third quarter of
2003, $1.2 billion in the previous quarter and $1.6 billion in the year-ago
quarter. Year-to-date, total costs and expenses were $3.9 billion in 2003 and
$3.7 billion in 2002.
Our owned basis efficiency ratio was 40.3 percent for the third quarter of 2003,
42.0 percent for the previous quarter and 53.8 percent for the year-ago quarter.
Year-to-date, our owned basis efficiency ratio was 43.3 percent in 2003 and 43.0
percent in 2002. Excluding HSBC acquisition related costs and the settlement
charge and related expenses, our owned basis efficiency ratio was 40.3 percent
for the third quarter of 2003 and 41.0 percent year-to-date compared to 34.7
percent in the third quarter of 2002 and 36.4 percent in the first nine months
of 2002. See "Reconciliation to GAAP Financial Measures" for quantitative
reconciliation of our operating efficiency ratio to our owned basis GAAP
efficiency ratio.
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Total costs and expenses included the following:
(In millions) Three Three Combined Nine
months months nine months
ended ended months ended
Sept. 30, Sept. 30, ended Sept. 30,
2003 2002 Sept. 30, 2002
2003
Salaries and fringe benefits $ 493.3 $ 456.6 $ 1,490.5 $ 1,354.9
Sales incentives 76.6 60.6 198.8 182.3
Occupancy and equipment expense 95.0 94.1 296.2 279.6
Other marketing expenses 128.1 135.4 406.8 409.3
Other servicing and administrative expenses 282.3 199.3 869.0 635.1
Amortization of acquired intangibles 82.4 12.7 175.0 45.1
HSBC acquisition related costs incurred by - - 198.2 -
Household
Policyholders' benefits 95.0 101.2 287.4 272.6
Settlement charge and related expenses - 525.0 - 525.0
Total costs and expenses $ 1,252.7 $ 1,584.9 $ 3,921.9 $ 3,703.9
Salaries and fringe benefits for the third quarter and first nine months of 2003
were $493.3 million and $1.5 billion compared to $456.6 million and $1.4 billion
in the third quarter and first nine months of 2002. The increases were primarily
due to additional staffing as well as higher employee benefit expenses.
Sales incentives for the third quarter and first nine months of 2003 were $76.6
and $198.8 million compared to $60.6 and $182.3 million in the comparable
prior-year periods. The increases were primarily due to increases in our
mortgage services business. For the year-to-date period, these increases were
partially offset by lower new loan volume in our branches and in our auto
finance business.
Occupancy and equipment expense for the third quarter and first nine months of
2003 were $95.0 and $296.2 million compared to $94.1 and $279.6 million in the
comparable prior-year periods. The increases were primarily the result of higher
repairs and occupancy maintenance costs.
Other marketing expenses for the third quarter and first nine months of 2003 of
$128.1 and $406.8 million were comparable to $135.4 and $409.3 million in the
same prior-year periods.
Other servicing and administrative expenses for the third quarter and first nine
months of 2003 were $282.3 and $869.0 million compared to $199.3 and $635.1
million in the comparable prior-year periods. The increases were primarily due
to receivable growth as well as higher legal and compliance costs. Higher
collection expenses also contributed to the increases.
Amortization of acquired intangibles for the third quarter and first nine months
of 2003 were $82.4 and $175.0 million compared to $12.7 and $45.1 million in the
comparable prior-year periods. The increases were primarily attributable to
acquired intangibles established in conjunction with the HSBC merger.
HSBC acquisition related costs incurred by Household in the first quarter of
2003 were $198.2 million. HSBC acquisition related costs include payments to
executives under existing employment contracts and investment banking, legal and
other costs relating to our acquisition by HSBC.
Policyholders' benefits for the third quarter and first nine months of 2003 were
$95.0 and $287.4 million compared to $101.2 and $272.6 million in the comparable
prior-year periods. Both current year periods reflect amortization of fair value
adjustments relating to our insurance business as well as higher sales in our
United Kingdom subsidiary. For the quarter, these increases were more than
offset by lower expense associated with our discontinued insurance business and
lower sales in our domestic business.
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Settlement charge and related expenses were $525.0 million in both the third
quarter and first nine months of 2002. The charges were the result of an
agreement with a multi-state group of state attorneys general and regulatory
agencies to effect a nationwide resolution of alleged violations of federal and
state consumer protection, consumer finance and banking laws and regulations
relating to real estate secured lending in our retail branch consumer lending
operations as operated under the HFC and Beneficial brand names.
Credit Loss Reserves
We maintain credit loss reserves to cover probable losses of principal, interest
and fees, including late, overlimit and annual fees. Credit loss reserves are
based on a range of estimates and intended to be adequate but not excessive. We
estimate probable losses for consumer receivables based on delinquency and
restructure status and past loss experience. Credit loss reserves take into
account whether loans have been restructured, rewritten or are subject to
forbearance, an external debt management plan, modification, extension, or
deferment. Our credit loss reserves also take into consideration the loss
severity expected based on the underlying collateral, if any, for the loan. Our
consumer credit management policies focus on product type and specific portfolio
risk factors. Our consumer credit portfolio is diversified by product and
geographic location. See Note 4, "Receivables," in the accompanying condensed
consolidated financial statements for receivables by product type and Note 5, "
Credit Loss Reserves," for our credit loss reserve methodology and an analysis
of changes in the credit loss reserves for the third quarter and first nine
months of 2003 and 2002.
The following table sets forth owned basis credit loss reserves for the periods
indicated:
(All dollar amounts are stated in millions) September June 30, September
30, 2003 30,
2003 2002
Owned credit loss reserves $ 3,779.2 $ 3,658.6 $ 3,127.3
Reserves as a percent of:
Receivables 4.06% 4.14% 3.72%
Net charge-offs(1) 105.1 98.2 93.5
Nonperforming loans 92.6 94.6 94.5
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(1) Quarter-to-date, annualized
We recorded owned loss provision greater than charge-offs of $102.5 million in
the third quarter of 2003. Reserves as a percentage of receivables at September
30, 2003 reflect the impact of the weak economy and the continuing uncertainty
as to the timing and extent of an economic recovery in the United States.
Reserve levels at September 30, 2003 also reflect consideration of key ratios
such as reserves as a percentage of net charge-offs and reserves as a percentage
of nonperforming loans.
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:
(All dollar amounts are stated in millions) September June 30, September
30, 2003 30,
2003 2002
Managed credit loss reserves $ 5,733.2 $ 5,638.9 $ 4,688.8
Reserves as a percent of:
Receivables 4.89% 5.01 % 4.36 %
Net charge-offs(1) 107.4 104.9 100.1
Nonperforming loans 111.7 116.4 113.1
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(1) Quarter-to-date, annualized
See "Reconciliation to GAAP Financial Measures" for quantitative reconciliations
of the non-GAAP financial measures to the comparable GAAP basis financial
measure.
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Credit Quality
Subject to receipt of regulatory and other approvals, HSBC currently intends to
hold our domestic private label credit card receivables within HSBC's U.S.
banking subsidiary. HSBC anticipates regulatory accounting charge-off, loss
provisioning and account management guidelines issued by the Federal Financial
Institutions Examination Council, or FFIEC, will need to be applied to these
receivables. Implementation of such guidelines would result in private label
credit card receivables being charged off at 6 months contractually delinquent
(end of the month 60 days after notification for receivables involving a
bankruptcy) versus the current practice of generally being charged off the month
following the month in which the account becomes 9 months contractually
delinquent (end of the month 90 days after notification for receivables
involving a bankruptcy). HSBC's plans for ultimate collection on these
receivables would therefore be different from the current practice and would
require different reserve requirements. We and HSBC are also evaluating whether
select other products will also be held in the HSBC U.S. banking subsidiary,
including certain real estate secured loans and certain MasterCard and Visa
receivables. The process for obtaining regulatory approval requests is still
ongoing. We do not anticipate that we will allocate any purchase price
adjustment to owned loss reserves as the regulatory guidelines are implemented.
Delinquency-Owned Basis
Two-Months-and-Over Contractual Delinquency (as a percent of consumer
receivables):
September June September
30, 30, 30,
2003 2003 2002(1)
Real estate secured 4.20% 4.27% 3.22%
Auto finance 2.14 2.49 3.33
MasterCard/Visa 5.99 5.97 6.36
Private label 5.59 5.45 6.84
Personal non-credit card 9.96 9.39 8.38
Total 5.36% 5.38% 4.87%
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(1) As discussed in our quarterly report on Form 10-Q for the quarter ended March 31, 2003, owned
two-months-and-over contractual delinquency for personal non-credit card was overstated due to a calculation
error. The correct percentages are included in the table above. The managed two-months-and-over contractual
delinquency ratios reported for prior periods were correct.
Total owned delinquency decreased 2 basis points compared to the prior quarter.
The decrease in our real estate secured portfolio reflects receivables growth
partially offset by the seasoning and maturation of the portfolio and higher
levels of receivables in the process of foreclosure. The decrease in auto
finance delinquency reflects the positive impact of acquisitions from strategic
alliances and lower securitization levels during the quarter. The increase in
private label delinquency was primarily due to maturation of the portfolio. The
increase in personal non-credit card delinquency was primarily due to higher
bankruptcies and continued maturation of accounts booked in the second quarter
of 2002.
Compared to a year ago, higher levels of new bankruptcy filings and continued
softness of the economy, including higher unemployment, caused the overall rise
in the delinquency ratio. A major contributor to the higher real estate secured
delinquency ratio was reduced growth in the portfolio due to loan sales and
reduced originations, especially in the fourth quarter of 2002 as well as the
impact of first payment default repurchases from previous loan sales. Tightened
underwriting contributed to the improvements in both our auto finance and
private label portfolios. Our auto finance portfolio also reflects the positive
impact of lower securitization levels.
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Net Charge-offs of Consumer Receivables-Owned Basis
Net Charge-offs of Consumer Receivables (as a percent, annualized, of average
consumer receivables):
September June September
30, 30, 30,
2003 2003 2002
Real estate secured .91% 1.03% 1.03%
Auto finance 4.62 5.30 5.50
MasterCard/Visa 8.61 10.43 9.21
Private label 5.35 6.41 6.65
Personal non-credit card 10.55 9.87 8.96
Total 3.98% 4.34% 3.98%
Real estate charge-offs and REO expense as a 1.35% 1.46% 1.38%
percent of average real estate secured
receivables
Net charge-offs decreased 36 basis points compared to the prior quarter. Net
charge-off dollars also decreased $34.7 million compared to the prior quarter.
Compared to the previous quarter, the decrease in auto finance charge-offs
reflects improved seasonal trends, tightened credit standards on new
originations and purchases over the last several months as well as reduced
securitization activity during the current quarter. The decrease in our
MasterCard/Visa portfolio reflects both seasonal trends as well as the timing
and mix of securitization transactions. The decrease in private label
charge-offs is primarily attributable to improvements in collections and higher
recoveries. Increases in our personal non-credit card portfolio are primarily
the result of higher bankruptcies.
Net charge-offs were flat with the prior year despite the weakened economy and
higher bankruptcy filings. Charge-offs in our personal non-credit card portfolio
increased more than most other products because our typical personal non-credit
card customer is less resilient and, therefore, more exposed to the recent
economic downturn.
Owned Nonperforming Assets
(In millions) September June 30, September
30, 2003 30,
2003 2002(1)
Nonaccrual receivables $ 3,197.1 $ 3,021.2 $ 2,484.5
Accruing consumer receivables 90 or more 883.1 843.8 824.2
days delinquent
Renegotiated commercial loans 1.5 1.5 1.3
Total nonperforming receivables 4,081.7 3,866.5 3,310.0
Real estate owned 543.0 486.3 451.1
Total nonperforming assets $ 4,624.7 $ 4,352.8 $ 3,761.1
Credit loss reserves as a percent of 92.6% 94.6% 94.5%
nonperforming receivables
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(1) As discussed in our quarterly report on Form 10-Q for the quarter ended March 31, 2003, nonaccrual receivables,
total nonperforming receivables and total nonperforming assets for personal non-credit card receivables were
overstated due to a calculation error. As a result, credit loss reserves as a percentage of nonperforming
receivables was understated in those periods. The correct amounts are included in the table above. The managed
nonperforming asset statistics reported for prior periods were correct.
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The increase in nonaccrual receivables is primarily attributable to increases in
our real estate secured and personal non-credit card portfolios. Accruing
consumer receivables 90 or more days delinquent includes domestic MasterCard and
Visa and private label credit card receivables, consistent with industry
practice. The increase in total nonperforming assets is attributable to growth
in our owned portfolio as well as the weak economy.
Account Management Policies and Practices
Our policies and practices for the collection of consumer receivables, including
our restructuring policies and practices, permit us to reset the contractual
delinquency status of an account to current, based on indicia or criteria which,
in our judgment, evidence continued payment probability. Such restructuring
policies and practices vary by product and are designed to manage customer
relationships, maximize collections and avoid foreclosure or repossession if
reasonably possible.
We monitor restructuring statistics on a managed basis only because the
receivables that we securitize are subject to underwriting standards comparable
to our owned portfolio, are serviced and collected without regard to ownership
and result in a similar credit loss exposure for us.
As discussed in our Form 10-Q for the quarter ended June 30, 2003, we
implemented certain changes to our restructuring policies in the third quarter
of 2003. These changes are intended to eliminate and/or streamline exception
provisions to our existing policies and generally are effective for receivables
originated or acquired after January 1, 2003. Receivables originated or acquired
prior to January 1, 2003 generally are subject to the restructure and account
management policies described in our 2002 Form 10-K. However, for ease of
administration, in the third quarter our mortgage services business elected to
adopt uniform policies for all products regardless of the date an account was
originated or acquired. Implementation of the uniform policy has the effect of
only counting restructures occurring on or after January 1, 2003 in assessing
restructure eligibility for purposes of the limitation that no account may be
restructured more than four times in a rolling 60 month period. However,
mortgage services will continue to have the ability to report historical
restructure statistics as set forth in the table below. Other business units may
also elect to adopt uniform policies. Though we anticipate that these changes
may result in some short term increase in delinquency which may lead to higher
charge-offs, we do not expect the changes to have a significant impact on our
business model or on our results of operations as currently most of these
changes are generally expected to be phased in as new receivables are originated
or acquired.
The tables below summarize approximate restructuring statistics in our managed
basis domestic portfolio. Our restructure statistics are compiled using certain
assumptions and estimates and we continue to enhance our ability to capture
restructure data across all business units. When comparing restructuring
statistics from different periods the fact that our restructure policies and
practices will change over time, that exceptions are made to those policies and
practices, and that our data capture methodologies will be enhanced over time,
should be taken into account. Further, to the best of our knowledge, most of our
competitors do not disclose account restructuring, reaging, loan rewriting,
forbearance, modification, deferment or extended payment information comparable
to the information we have disclosed, and the lack of such disclosure by other
lenders may limit the ability to draw meaningful conclusions about us and our
business based solely on data or information regarding account restructuring
statistics or policies.
Total Restructured by Restructure Period-Domestic September June September
Portfolio(1) 30, 30, 30,
2003 2003 2002
(Managed Basis)
Never restructured 84.2% 83.7% 83.9%
Restructured:
Restructured in the last 6 months 7.3 7.2 6.6
Restructured in the last 7-12 months 3.5 3.8 4.9
Previously restructured beyond 12 months 5.0 5.3 4.6
Total ever restructured(2) 15.8 16.3 16.1
Total 100.0% 100.0% 100.0%
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Total Restructured by Product-Domestic Portfolio(1) September June 30, September
30, 2003 30,
(Managed Basis) 2003 2002
(In millions)
Real estate secured $ 9,531.5 $ 9,225.0 $ 8,778.2
Auto finance 1,268.5 1,360.1 1,189.2
MasterCard/Visa 578.1 579.6 535.4
Private label 1,090.7 1,146.3 1,237.5
Personal non-credit card 4,136.4 4,202.3 4,195.2
Total $ 16,605.2 $ 16,513.3 $ 15,935.5
(As a percent of managed receivables) September June 30, September
30, 2003 30,
2003 2002
Real estate secured 18.7% 19.2% 18.5%
Auto finance 15.1 17.3 16.2
MasterCard/Visa 3.3 3.5 3.4
Private label 7.7 8.3 10.4
Personal non-credit card 26.7 26.8 25.3
Total(2) 15.8% 16.3% 16.1%
--------
(1) Excludes foreign businesses and commercial and other. Amounts also include accounts as to which the delinquency
status has been reset to current for reasons other than restructuring (e.g. correcting the misapplication of a
timely payment).
(2) Total including foreign businesses was 14.9 percent at September 30, 2003, 15.3 percent at June 30, 2003 and
15.3 percent at September 30, 2002.
The amount of managed receivables in forbearance, modification, Credit Card
Services approved external debt management plans, rewrites or other account
management techniques for which we have reset delinquency and that is not
included in the restructured or delinquency statistics was approximately $1.1
billion or .9 percent of managed receivables at September 30, 2003, $1.1 billion
or 1.0 percent of managed receivables at June 30, 2003 and approximately $.8
billion or .8 percent of managed receivables at September 30, 2002.
Item 4. Controls and Procedures
We maintain a system of internal controls and procedures designed to provide
reasonable assurance as to the reliability of our published financial statements
and other disclosures included in this report. Our Board of Directors, operating
through its audit committee which, with one exception, is composed entirely of
independent directors, provides oversight to our financial reporting process.
Within the 90-day period prior to the date of this report, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. Based
upon that evaluation, our Chief Executive Officer and our Chief Financial
Officer concluded that our disclosure controls and procedures are effective in
timely alerting them to material information relating to Household
International, Inc. (including its consolidated subsidiaries) required to be
included in this quarterly report on Form 10-Q.
There have been no significant changes in our internal controls or in other
factors which could significantly affect internal controls subsequent to the
date that we carried out our evaluation.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
General We are parties to various legal proceedings resulting from ordinary
business activities relating to our current and/or former operations. Certain of
these actions are or purport to be class actions seeking damages in very large
amounts. These actions assert violations of laws and/or unfair treatment of
consumers. Due to the uncertainties in litigation and other factors, we cannot
be certain that we will ultimately prevail in each instance. We believe that our
defenses to these actions have merit and any adverse decision should not
materially affect our consolidated financial condition.
Merger Litigation Several lawsuits were filed alleging violations of law with
respect to the merger with HSBC. While the lawsuits are in their preliminary
stages, we believe that the claims lack merit and the defendants deny the
substantive allegations of the lawsuits. These lawsuits are described below.
Two of the lawsuits are pending in the Circuit Court of Cook County, Illinois,
Chancery Division. One, McLaughlin v. Aldinger et al., No. 02 CH 20683 (filed on
November 15, 2002), asserts claims on behalf of a purported class of holders of
Household common stock against Household and certain of its officers and
directors for breach of fiduciary duty in connection with the then pending
merger with HSBC on the grounds that the defendants allegedly failed to take
appropriate steps to maximize the value of a merger transaction for holders of
Household common stock. While the complaint contends that plaintiffs would
suffer irreparable harm unless the merger with HSBC was enjoined, it seeks only
unspecified damages. The other, Pace v. Aldinger et al., No. 02 CH 19270 (filed
on October 24, 2002 and amended on November 15, 2002), is both a purported
derivative lawsuit on behalf of Household and a purported class action on behalf
of holders of Household common stock. This lawsuit was filed prior to the
announcement of the merger with HSBC and originally asserted claims relating to
the restatement of our consolidated financial statements, the preliminary
agreement with a multi-state working group of state attorneys general and
regulators, and other accounting matters. It was amended to allege that
Household and certain of its officers and directors breached their fiduciary
duties in connection with the merger with HSBC and sought to enjoin the merger
with HSBC, as well as unspecified damages allegedly stemming both from the
merger and the original claims described above.
A third lawsuit relating to the merger with HSBC, Williamson v. Aldinger et al.,
No. 03 CO0331 (filed on January 15, 2003), is pending in the United States
District Court for the Northern District of Illinois. This derivative lawsuit on
behalf of Household claims that certain of Household's officers and directors
breached their fiduciary duties and committed corporate waste by agreeing to the
merger with HSBC and allegedly failing to take appropriate steps to maximize the
value of a merger transaction. The complaint sought to enjoin the then pending
merger with HSBC.
On March 18, 2003, the plaintiffs in the three actions (together with the
plaintiff in another related action pending in the Circuit Court of Cook County,
Illinois, Chancery Division (Bailey v. Aldinger et al., No. 02 CH 16476 (filed
August 27, 2002)) agreed in principle to a settlement of the actions based on,
among other things, the additional disclosures above relating to their
allegations and HSBC's agreement to waive $55 million of the termination fee
otherwise payable to HSBC from Household under the merger agreement in certain
circumstances. That agreement in principle is subject to customary conditions
including definitive documentation of the settlement, additional confirmatory
discovery by the plaintiffs and approval by the Courts following notice to the
stockholders and a hearing. The confirmatory discovery has been completed and
the Court has preliminarily approved the settlement. Notices of the settlement
were sent to shareholders in October, 2003. A hearing is scheduled for December
1, 2003, at which the Court will consider the fairness, reasonableness and
adequacy of the settlement which, if approved, will resolve all of the claims
that have or could have been brought in the actions, including all claims
relating to the merger.
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Consumer Lending Regulatory Settlement On October 11, 2002, we reached a
preliminary agreement with a multi-state working group of state attorneys
general and regulatory agencies to effect a nationwide resolution of alleged
violations of federal and/or state consumer protection, consumer financing and
banking laws and regulations with respect to secured real estate lending from
Household Finance Corporation and Beneficial Corporation and their subsidiaries
conducting retail branch consumer lending operations. This preliminary
agreement, and related subsequent consent decrees and similar documentation
entered into with each of the 50 states and the District of Columbia, are
referred to collectively as the "Multi-State Settlement Agreement", which became
effective on December 16, 2002. Pursuant to the Multi-State Settlement
Agreement, we funded a $484 million settlement fund that was divided among the
states (and the District of Columbia), with each state receiving a proportionate
share of the funds based upon the volume of the retail branch originated real
estate secured loans we made in that state during the period of January 1, 1999
to September 30, 2002. No fines, penalties or punitive damages were assessed by
the states pursuant to the Multi-State Settlement Agreement.
In August 2003, notices of a claims procedure were distributed to holders of
591,000 accounts identified as having potential claims. As of November 12, 2003,
approximately 80 percent of affected customers had accepted funds in settlement
and had executed a release of all civil claims against us relating to the
specified consumer lending practices. (Rhode Island has yet to mail its claim
packages.) Each state has agreed that the settlement resolves all current civil
investigations and proceedings by the attorneys general and state lending
regulators relating to the lending practices at issue.
We have also been named in purported class actions by individuals and consumer
groups directly or supporting individuals in the United States (such as AARP and
the "Association of Community Organizations for Reform Now") claiming that
various loan products or lending policies and practices are unfair or misleading
to consumers. Judicial certification of a class is required before any claim can
proceed on behalf of a purported class and, to date, only one purported class
claim has been certified. The certification ruling in that case will be appealed
and discovery has commenced. Although the Multi-State Settlement Agreement does
not cause the immediate dismissal of these purported class actions, we believe
it substantially reduces our risk of any material liability that may result
since every consumer who receives payments as a result of the Multi-State
Settlement Agreement must release us from any liability for such claims
generally as alleged by these individuals and groups. We intend to seek
resolution of these related legal actions provided it is financially prudent to
do so. Otherwise, we intend to defend vigorously against the allegations.
Regardless of the approach taken with respect to these purported class actions,
we believe that any liability that may result will not have a material financial
impact. We expect, however, that consumer groups and plaintiffs lawyers will
continue to target us in the media, with regulators, with legislators and with
legal actions to pressure us and the nonprime lending industry into accepting
concessions that would more heavily regulate the nonprime lending industry.
Securities Litigation In August 2002, we restated previously reported
consolidated financial statements. The restatement related to certain MasterCard
and Visa co-branding and affinity credit card relationships and a third party
marketing agreement, which were entered into between 1992 and 1999. All were
part of our Credit Card Services segment. In consultation with our prior
auditors, Arthur Andersen LLP, we treated payments made in connection with these
agreements as prepaid assets and amortized them in accordance with the
underlying economics of the agreements. Our current auditors, KPMG LLP, advised
us that, in their view, these payments should have either been charged against
earnings at the time they were made or amortized over a shorter period of time.
There was no significant change as a result of these adjustments on the prior
periods net earnings trends previously reported. The restatement resulted in a
$155.8 million, after-tax, retroactive reduction to retained earnings at
December 31, 1998. As a result of the restatement, and other corporate events,
including, e.g., the Multi-State Settlement Agreement, Household, and its
directors, certain officers and former auditors, have been involved in various
legal proceedings, some of which purport to be class actions. A number of these
actions allege violations of federal securities laws, were filed between August
and October 2002, and seek to recover damages in respect of allegedly false and
misleading statements about our common stock. To date, none of the class claims
has been certified. These legal actions have been consolidated into a single
purported class action, Jaffe v. Household International, Inc., et al., No. 02 C
5893 (N.D. Ill., filed August 19, 2002), and a consolidated
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and amended complaint was filed on March 7, 2003. The amended complaint purports
to assert claims under the federal securities laws, on behalf of all persons who
purchased or otherwise acquired Household securities between October 23, 1997
and October 11, 2002, arising out of alleged false and misleading statements in
connection with Household's sales and lending practices, the Multi-State
Settlement Agreement, the restatement and the HSBC merger. The amended
complaint, which also names as defendants Arthur Andersen LLP, Goldman, Sachs &
Co., and Merrill Lynch, Pierce, Fenner & Smith, Inc., fails to specify the
amount of damages sought. In May 2003, we filed a motion to dismiss the
complaint. The parties are awaiting a ruling on the motion.
Other actions arising out of the restatement, which purport to assert claims
under ERISA on behalf of participants in Household's Tax Reduction Investment
Plan, have been consolidated into a single purported class action, In re
Household International, Inc. ERISA Litigation, Master File No. 02 C 7921 (N.D.
Ill). A consolidated and amended complaint was filed against Household, William
Aldinger and individuals on the Administrative Investment Committee of the plan.
The consolidated complaint purports to assert claims under ERISA that are
similar to the claims in the Jaffe case. Essentially, the plaintiffs allege that
the defendants breached their fiduciary duties to the plan by investing in
Household stock and failing to disclose information to Plan participants. We
filed a motion to dismiss the complaint in June 2003. The parties are awaiting a
ruling on the motion.
On June 27, 2003, a case entitled, West Virginia Laborers Pension Trust Fund v.
Caspersen, et al., was filed in the Chancery Division of the Circuit Court of
Cook County, Illinois as case number 03CH10808. This purported class action
names as defendants the directors of Beneficial Corporation at the time of the
1998 merger of Beneficial Corporation into a subsidiary of the Company, and
claims that those directors' due diligence of the Company at the time they
considered the merger was inadequate. The Complaint claims that as a result of
some of the securities law and other violations alleged in the Jaffe case, the
Company's common shares lost value. Under the merger agreement with Beneficial
Corporation, we assumed the defense of this litigation. In September of 2003,
the defendants filed a motion to dismiss. The insurance carriers for Beneficial
Corporation have been notified of the action.
With respect to these securities litigation matters, we believe that we have
not, and our officers and directors have not, committed any wrongdoing and in
each instance there will be no finding of improper activities that may result in
a material liability to us or any of our officers or directors.
Regulatory Proceedings In June 2000, the attorney general for the State of
Arizona added Household Bank (SB), N.A. (the "Bank") and an affiliate as
defendants in the State's lawsuit against Hispanic Air Conditioning and Heating
("Hispanic Air"). From 1997 to 1999, the Bank provided financing for Hispanic
Air's sales of heating, ventilation and air conditioning ("HVAC") systems under
a private label credit card program established with manufacturers of HVAC
equipment for whom Hispanic Air was an authorized dealer. In September, 2003,
the court entered judgment in the Bank's favor and the State elected to not
appeal the decision. In connection with the Arizona lawsuit, the Bank requested
that the OCC, as the agency with exclusive visitorial powers over the Bank,
intervene and the OCC commenced an investigation. The Bank has provided
information to the OCC from time to time in connection with this investigation.
As part of our efforts to resolve any open regulatory issues with the OCC prior
to the HSBC merger, the Bank executed an agreement with the OCC, under which the
Bank is required to take certain additional actions to supplement its prior
remediation program. These actions involve providing additional notification to
all eligible consumers of the availability of remediation, providing inspection
and repair or replacement of equipment, providing reimbursement to customers who
have incurred expenses to repair equipment, providing reductions to principal
and interest of consumer credit card balances, providing reimbursement for
warranties and late fees and developing an action plan to enhance the
administration of the Bank's private label credit card programs. This program is
now underway and the cost of such remedial actions is not expected to be
material. The written agreement makes it clear that the Bank neither admits nor
denies that it has engaged in any unsafe or unsound banking practices or
violated any law or regulation.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
12 Statement of Computation of Ratio of Earnings to Fixed Charges and to Combined Fixed Charges and
Preferred Stock Dividends.
31 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.1 Debt and Preferred Stock Securities Ratings.
(b) Reports on Form 8-K
During the third quarter of 2003, the Registrant filed the following Current
Reports on Form 8-K:
• Report filed on August 4, 2003 with respect to the financial supplement pertaining to the financial
results of Household International, Inc. for the quarter and six months ended June 30, 2003
• Report filed on September 19, 2003 with respect to a presentation to investors at the headquarters of
HSBC Holdings plc in London, England on September 19, 2003
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOUSEHOLD INTERNATIONAL, INC.
(Registrant)
Date: November 14, 2003
By: /s/ SIMON C. PENNEY
Simon C. Penney
Senior Executive Vice President and
Chief Financial Officer
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EXHIBIT INDEX
12 Statement of Computation of Ratio of Earnings to Fixed Charges and to Combined Fixed Charges and Preferred
Stock Dividends.
31 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.1 Debt and Preferred Stock Securities Ratings.
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EXHIBIT 12
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND TO
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(In millions) March 29 January 1 Nine months
through through ended
Sept. 30, March 28, Sept. 30,
2003 2003 2002
(Successor) (Predecessor) (Predecessor)
Net income $ 845.2 $ 245.7 $ 1,219.6
Income taxes 429.6 181.8 585.2
Income before income taxes 1,274.8 427.5 1,804.8
Fixed charges:
Interest expense(1) 1,132.9 898.1 2,914.2
Interest portion of rentals(2) 25.7 18.2 50.9
Total fixed charges 1,158.6 916.3 2,965.1
Total earnings as defined $ 2,433.4 $ 1,343.8 $ 4,769.9
Ratio of earnings to fixed charges 2.10 1.47(4) 1.61(5)
Preferred stock dividends(3) $ 59.0 $ 32.3 $ 60.1
Ratio of earnings to combined fixed charges and 2.00 1.42(4) 1.58(5)
preferred stock dividends
--------
(1) Excludes interest income earned on temporary investment of excess funds, generally resulting from
over-subscriptions of commercial paper.
(2) Represents one-third of rentals, which approximates the portion representing interest.
(3) Preferred stock dividends are grossed up to their pretax equivalents.
(4) The ratios for the period January 1 through March 28, 2003 (predecessor), have been negatively impacted by
$167.3 million (after-tax) of HSBC acquisition related costs incurred by Household. Excluding this item, our
ratio of earnings to fixed charges would have been 1.69 percent and our ratio of earnings to combined fixed
charges and preferred stock dividends would have been 1.63 percent. These non-GAAP financial ratios are provided
for comparison of our operating trends only.
(5) The 2002 ratios have been negatively impacted by the settlement charge and related expenses associated with our
preliminary agreement with a multi-state working group of attorneys general and regulatory agencies to effect a
nationwide resolution of alleged violations of consumer protection, consumer lending and banking laws and
regulations in our retail branch consumer lending operations. Excluding the settlement charge and related
expenses of $333.2 million (after-tax), our ratio of earnings to fixed charges would have been 1.79 percent and
our ratio of earnings to combined fixed charges and preferred stock dividends would have been 1.75 percent.
These non-GAAP financial ratios are provided for comparison of our operating trends only.
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EXHIBIT 31
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Certification of Chief Executive Officer
I, William F. Aldinger, Chairman and Chief Executive Officer of Household
International, Inc., certify that:
1. I have reviewed this report on Form 10-Q of Household International, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and we have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls, as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the registrant's internal control over
financial reporting;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal control over financial reporting.
Date: November 14, 2003 /s/ WILLIAM F. ALDINGER
William F. Aldinger
Chairman and Chief Executive Officer
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Certification of Chief Financial Officer
I, Simon C. Penney, Senior Executive Vice President and Chief Financial Officer
of Household International, Inc., certify that:
1. I have reviewed this report on Form 10-Q of Household International, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and we have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls, as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the registrant's internal control over
financial reporting;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal control over financial reporting.
Date: November 14, 2003 /s/ SIMON C. PENNEY
Simon C. Penney
Senior Executive Vice President and
Chief Financial Officer
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EXHIBIT 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Household International, Inc. (the "
Company") on Form 10-Q for the period ending September 30, 2003 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
William F. Aldinger, Chairman and Chief Executive Officer of the Company,
certify, pursuant to 18. U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
November 14, 2003 /s/ WILLIAM F. ALDINGER
William F. Aldinger
Chairman and Chief Executive Officer
Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Household International, Inc. (the "
Company") on Form 10-Q for the period ending September 30, 2003 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Simon C. Penney, Senior Executive Vice President and Chief Financial Officer, of
the Company, certify, pursuant to 18. U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
November 14, 2003 /s/ SIMON C. PENNEY
Simon C. Penney
Senior Executive Vice President and
Chief Financial Officer
Signed originals of these written statements required by Section 906 of the
Sarbanes-Oxley Act of 2002 have been provided to Household International, Inc.
and will be retained by Household International, Inc. and furnished to the
Securities and Exchange Commission or its staff upon request.
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EXHIBIT 99.1
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
DEBT AND PREFERRED STOCK SECURITIES RATINGS
Standard & Moody's Fitch,
Poor's Investors Inc.
Corporation Service
At September 30, 2003
Household International, Inc.
Senior debt A A2 A
Preferred stock BBB+ Baa1 A-
Household Finance Corporation
Senior debt A A1 A
Senior subordinated debt A- A2 A-
Commercial paper A-1 P-1 F-1
HFC Bank plc
Senior debt A A1 A
Commercial paper A-1 P-1 F-1
Household Bank (SB), N.A.
Senior debt A A1 A
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