Household Int. Inc 10Q Part 2
HSBC Holdings PLC
16 November 2004
Owned Nonperforming Assets
September 30, June 30, September 30,
2004 2004 2003
---------------------------------------------------------------------------------------------------
(dollars are in millions)
Nonaccrual receivables........................................ $2,891 $2,833 $3,197
Accruing consumer receivables 90 or more days delinquent...... 905 850 883
Renegotiated commercial loans................................. 1 1 2
------ ------ ------
Total nonperforming receivables............................... 3,797 3,684 4,082
Real estate owned............................................. 601 624 543
------ ------ ------
Total nonperforming assets.................................... $4,398 $4,308 $4,625
====== ====== ======
Credit loss reserves as a percent of nonperforming receivables 104.1% 103.0% 92.6%
Compared to June 30, 2004, the increase in nonaccrual receivables and total
nonperforming assets is primarily attributable to an increase in our real
estate secured portfolio due to growth. Compared to September 30, 2003, the
decrease in nonaccrual receivables and total nonperforming assets is primarily
due to improved credit quality and collection efforts partially offset by
growth. Accruing consumer receivables 90 or more days delinquent includes
domestic MasterCard and Visa and private label credit card receivables,
consistent with industry practice.
Account Management Policies and Practices
Our policies and practices for the collection of consumer receivables,
including our customer account management 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 policies and practices vary by product and are designed to
manage customer relationships, maximize collection opportunities and avoid
foreclosure or repossession if reasonably possible. If the account subsequently
experiences payment defaults, it will again become contractually delinquent.
The tables below summarize approximate restructuring statistics in our managed
basis domestic portfolio. We report our 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 previously reported, in prior periods we used
41
certain assumptions and estimates to compile our restructure statistics. We
also stated that we continue to enhance our ability to capture and segment
restructure data across all business units. In the tables that follow, the
restructure statistics presented for June 30, 2004 and September 30, 2004 have
been compiled using enhanced systemic counters and refined assumptions and
estimates. As a result of the systems enhancements, for June 30, 2004 and
subsequent periods we exclude from our reported statistics loans that had been
reported as contractually delinquent that have been reset to a current status
because we have determined that the loan should not have been considered
delinquent (e.g., payment application processing errors). Statistics reported
for all periods prior to June 30, 2004 include such loans. 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 have been
enhanced, 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 our business based solely on data or information regarding
account restructuring statistics or policies.
September 30, June 30, September 30,
2004 2004 2003
-------------------------------------------------------------------------------------------------------
(dollars are in millions)
Total Restructured by Restructure Period - Domestic Portfolio/(1)/
(Managed Basis)
Never restructured................................................ 86.5% 86.1% 84.2%
Restructured:
Restructured in the last 6 months.............................. 4.8 4.8 7.3
Restructured in the last 7-12 months........................... 3.6 4.0 3.5
Previously restructured beyond 12 months....................... 5.1 5.1 5.0
- - -
Total ever restructured/(2)/................................... 13.5 13.9 15.8
--- --- ---
Total............................................................. 100.0% 100.0% 100.0%
===== ===== =====
Total Restructured by Product - Domestic Portfolio/(1)/
(Managed Basis)
Real estate secured............................................... $ 8,895 $ 8,885 $ 9,531
Auto finance...................................................... 1,420 1,304 1,269
MasterCard/Visa................................................... 628 639 578
Private label..................................................... 756 830 1,091
Personal non-credit card.......................................... 3,688 3,727 4,136
------- ------- -------
Total............................................................. $15,387 $15,385 $16,605
======= ======= =======
(As a percent of managed receivables)
Real estate secured............................................... 15.8% 16.5% 18.7%
Auto finance...................................................... 14.4 14.0 15.1
MasterCard/Visa................................................... 3.5 3.6 3.3
Private label..................................................... 5.0 5.6 7.7
Personal non-credit card.......................................... 24.3 25.0 26.7
---- ---- ----
Total/(2)/........................................................ 13.5% 13.9% 15.8%
==== ==== ====
--------
/(1)/ Excludes foreign businesses, commercial and other.
/(2)/ Total including foreign businesses was 12.6 percent at September 30,
2004, 13.0 percent at June 30, 2004, and 14.9 percent at September 30,
2003.
The amount of domestic and foreign managed receivables in forbearance,
modification, 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 $.5 billion or .4 percent of managed receivables
at September 30, 2004, $.5 billion or .4 percent of managed receivables at June
30, 2004 and $1.1 billion or .9 percent of managed
42
receivables at September 30, 2003. For periods prior to June 30, 2004, all
credit card approved consumer credit counseling accommodations are included in
the reported statistics. As a result of our systems enhancements, we are now
able to segregate which credit card approved consumer credit counseling
accommodations included resetting the contractual delinquency status to current
after January 1, 2003. Such accounts are included in the September 30, 2004 and
June 30, 2004 restructure statistics in the table above. Credit card credit
counseling accommodations that did not include resetting contractual
delinquency status are not reported in the table above or the September 30,
2004 and June 30, 2004 statistics in this paragraph.
Liquidity and Capital Resources
The funding synergies resulting from our merger with HSBC have allowed us to
reduce our reliance on traditional sources to fund our growth. We continue to
focus on balancing our use of affiliate and third-party funding sources to
minimize funding expense while maximizing liquidity. As discussed below, we
decreased third-party debt and initial securitization funding during the nine
months ended September 30, 2004 as we used proceeds from the sale of real
estate secured receivables to HSBC Bank USA, debt issued to affiliates and
additional secured financings to assist in the funding of our businesses.
Because we are now a subsidiary of HSBC, our credit spreads relative to
Treasuries have tightened. We recognized cash funding expense savings,
primarily as a result of these tightened credit spreads and lower costs due to
shortening the maturity of our liabilities primarily through increased issuance
of commercial paper, in excess of $235 million during the nine months ended
September 30, 2004 and less than $70 million for the prior-year period compared
to the funding costs we would have incurred using average spreads during the
first half of 2002. It is anticipated that these tightened credit spreads and
other funding synergies will eventually enable HSBC to realize annual cash
funding expense savings, including external fee savings, in excess of $1
billion per year as our existing term debt matures over the course of the next
few years. The portion of these savings to be realized by Household will depend
in large part upon the amount and timing of the proposed domestic private label
credit card portfolio transfer to HSBC Bank USA and other initiatives between
Household and HSBC subsidiaries.
Securities totaled $6.9 billion at September 30, 2004 and $11.1 billion at
December 31, 2003. Included in the September 30, 2004 balance was $2.6 billion
dedicated to our credit card bank and $3.2 billion held by our insurance
subsidiaries. Included in the December 31, 2003 balance was $2.4 billion
dedicated to our credit card bank and $3.1 billion held by our insurance
subsidiaries. Our securities balance at December 31, 2003 was unusually high as
a result of the cash received from the $2.8 billion real estate secured loan
sale to HSBC Bank USA on December 31, 2003 as well as excess liquidity.
Commercial paper, bank and other borrowings totaled $14.5 billion at September
30, 2004 and $9.1 billion at December 31, 2003. Included in this total was
outstanding Euro commercial paper sold to customers of HSBC of $3.7 billion at
September 30, 2004 and $2.8 billion at December 31, 2003. Commercial paper,
bank and other borrowings increased significantly during the third quarter of
2004 to help give us greater flexibility in managing liquidity surrounding the
contemplated private label credit card sale to HSBC Bank USA.
43
Debt due to affiliates and other HSBC related funding are summarized in the
following table:
September 30, December 31,
2004 2003
----------------------------------------------------------------------------------------------------
(in billions)
Debt issued to HSBC subsidiaries:
Domestic short-term borrowings........................................ $ - $ 2.6
Drawings on bank lines in the U.K..................................... 6.3 3.4
Term debt............................................................. 5.4 1.3
Preferred securities issued by Household Capital Trust VIII........... .3 .3
----- -----
Total debt issued to HSBC subsidiaries................................ 12.0 7.6
----- -----
Debt issued to HSBC clients:
Euro commercial paper................................................. 3.7 2.8
Term debt............................................................. .7 .4
----- -----
Total debt issued to HSBC clients..................................... 4.4 3.2
Preferred stock issued to HNAH (issued to HSBC at December 31, 2003)..... 1.1 1.1
Real estate secured receivable activity with HSBC Bank USA:
Cash received on sales (cumulative)................................... 3.7 2.8
Direct purchases from correspondents (cumulative)..................... 2.2 -
Run-off of real estate secured receivable activity with HSBC Bank USA. (1.0) -
----- -----
Total real estate secured receivable activity with HSBC Bank USA...... 4.9 2.8
----- -----
Total HSBC related funding............................................... $22.4 $14.7
===== =====
Proceeds from the December 2003 sale of $2.8 billion of real estate secured
loans to HSBC Bank USA, which at year-end 2003 had been temporarily held as
securities available for sale, were used to pay-down domestic short-term
borrowings in the first quarter of 2004. Proceeds from the March 2004 real
estate secured receivable sale were used to pay-down commercial paper balances
which had been used as temporary funding in the first quarter of 2004 and to
fund various debt maturities.
As of September 30, 2004, we had revolving credit facilities with HSBC of $2.5
billion domestically and $7.5 billion in the U.K. There have been no draws on
the domestic line. We also had derivative contracts with a notional value of
$59.2 billion, or approximately 87 percent of total derivative contracts,
outstanding with HSBC affiliates. In July 2004, a $4.0 billion credit facility
was provided by an HSBC affiliate in Geneva to allow temporary increases in
commercial paper issuance to help give greater flexibility in managing
liquidity surrounding the contemplated private label credit card sale to HSBC
Bank USA.
Senior and senior subordinated debt (with original maturities over one year)
decreased to $78.5 billion at September 30, 2004 from $79.5 billion at December
31, 2003. Significant issuances during the nine months ended September 30, 2004
included the following:
. $4.2 billion of domestic and foreign medium-term notes
. $1.8 billion of foreign currency-denominated bonds (including $243 million
which was issued to customers of HSBC)
. $1.2 billion of InterNotes/(SM)/ (retail-oriented medium-term notes)
. $1.3 billion of global debt
. $4.0 billion of securities backed by home equity and auto finance loans.
For accounting purposes, these transactions were structured as secured
financings.
44
Selected capital ratios are summarized in the following table:
September 30, December 31,
2004 2003
-------------------------------------------------------------------------------------
TETMA/(1)/................................................ 7.20% 7.08%
TETMA + Owned Reserves/(1)/............................... 10.12 9.94
Tangible common equity to tangible managed assets/(1)/.... 5.25 5.08
Common and preferred equity to owned assets............... 14.10 14.82
Excluding purchase accounting adjustments:
TETMA/(1)/............................................. 8.85 8.89
TETMA + Owned Reserves/(1)/............................ 11.77 11.76
Tangible common equity to tangible managed assets/(1)/. 6.92 6.93
--------
/(1)/ TETMA, TETMA + Owned Reserves and tangible common equity to tangible
managed assets represent non-GAAP financial ratios that are used by
Household management and certain rating agencies to evaluate capital
adequacy and may differ from similarly named measures presented by other
companies. See "Basis of Reporting" for additional discussion on the use
of non-GAAP financial measures and "Reconciliations to GAAP Financial
Measures" for quantitative reconciliations to the equivalent GAAP basis
financial measure.
In April 2004, Fitch Ratings revised our Rating Outlook to Positive from Stable
and raised our Support Rating to "1" from "2". In addition, in July 2004 Fitch
Ratings raised our Senior Debt Rating to "A+" from "A" and raised our Senior
Subordinated Debt Rating and our Preferred Stock Rating to "A " from "A-". 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.
On September 8, 2004, we declared a $850 million common stock dividend to our
immediate parent, HSBC Investments (North America) Inc. ("HINO"), which was
paid on September 30, 2004. In October 2004, we paid an accrued dividend of
$108 million on our preferred stock to HNAH.
Securitizations and secured financings Securitizations (which are structured to
receive sale treatment under 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,"
("SFAS No. 140")) and secured financings (which do not receive sale treatment
under SFAS No. 140) of consumer receivables 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
receivables transferred to the QSPE serve as collateral for the securities. At
the time of sale, an interest-only strip receivable is recorded, representing
the present value of the cash flows we expect to receive over the life of the
securitized receivables, net of estimated credit losses. Under the terms of the
securitizations, we receive annual servicing fees on the outstanding balance of
the securitized receivables and the rights to future residual cash flows on the
sold receivables after the investors receive their contractual return. Cash
flows related to the interest-only strip receivables and servicing the
receivables are collected over the life of the underlying securitized
receivables.
In a secured financing, a designated pool of receivables are conveyed to a
wholly owned limited purpose subsidiary which in turn transfers the receivables
to a trust which sells interests to investors. Repayment of the debt issued by
the trust is secured by the receivables transferred. The transactions are
structured as secured financings under SFAS No. 140. Therefore, the receivables
and the underlying debt of the trust remain on our balance sheet. We do not
recognize a gain in a secured financing transaction. Because the receivables
and the
45
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.
Under U.K. GAAP as reported by HSBC, securitizations are treated as secured
financings. In order to align our accounting treatment with that of HSBC under
U.K. GAAP, we began to structure all new collateralized funding transactions as
secured financings in the third quarter of 2004. However, because existing
public private label and MasterCard and Visa credit card transactions were
structured as sales to revolving trusts that require replenishments of
receivables to support previously issued securities, receivables of each of
these asset types will continue to be sold to these trusts and the resulting
replenishment gains recorded until the revolving periods end, the last of which
is expected to occur in 2007. In addition, we will continue to replenish at
reduced levels, certain non-public personal non-credit card and MasterCard/Visa
securities issued to conduits and record the resulting replenishment gains for
a period of time in order to manage liquidity. Since our securitized
receivables have varying lives, it will take several years for these
receivables to pay-off and the related interest-only strip receivables to be
reduced to zero. The termination of sale treatment on new collateralized
funding activity reduces our reported net income under U.S. GAAP. There is no
impact, however, on cash received from operations or on U.K. GAAP reported
results. Because we believe the market for securities backed by receivables is
a reliable, efficient and cost-effective source of funds, we will continue to
use secured financings of consumer receivables as a source of our funding and
liquidity.
As previously discussed, securitization levels were much lower in 2004 as a
result of the use of alternate funding sources, including funding from HSBC
subsidiaries and our decision to structure all new collateralized funding
transactions as secured financings beginning in the third quarter of 2004.
Receivables securitized (excluding replenishments of certificateholder
interests) are summarized in the following table:
Three months ended September 30 2004 2003
---------------------------------------------
(in millions)
Auto finance................ $ - $ -
MasterCard/Visa............. - 350
Private label............... - -
Personal non-credit card.... - 885
--- ------
Total....................... $ - $1,235
=== ======
Nine months ended September 30 2004 2003
--------------------------------------------
(in millions)
Auto finance............... $ - $1,007
MasterCard/Visa............ 550 670
Private label.............. 190 250
Personal non-credit card... - 1,700
---- ------
Total...................... $740 $3,627
==== ======
Our securitized receivables totaled $20.2 billion at September 30, 2004,
compared to $26.2 billion at December 31, 2003. As of September 30, 2004,
closed-end real estate secured and auto finance receivables totaling $9.3
billion secured $7.3 billion of outstanding debt related to securitization
transactions which were structured as secured financings. At December 31, 2003,
closed-end real estate secured receivables totaling $8.0 billion secured $6.7
billion of outstanding debt related to secured financing transactions.
Securitizations structured as sales represented 16 percent of the funding
associated with our managed portfolio at September 30, 2004 and 21 percent at
December 31, 2003. Secured financings represented 6 percent of the funding
associated with our managed portfolio at September 30, 2004 and 5 percent at
December 31, 2003.
46
2004 funding strategy Our current estimated domestic funding needs and sources
for 2004 are summarized in the table that follows. Because we cannot predict
with any degree of certainty the timing as to when or if approval will be
received for our proposed transfer of our domestic private label credit card
receivables to HSBC Bank USA, such transfer is not contemplated in the
following 2004 funding plan. If the proposed transfer does occur, our external
funding needs will decrease.
Actual Estimated
Jan. 1 October 1
through through Estimated
September 30, Dec. 31, full year
2004 2004 2004
-----------------------------------------------------------------------------------------------
(in billions)
Funding needs:
Net asset growth.......................................... $ 7 $5 - 6 $12 - 13
Commercial paper, term debt and securitization maturities. 23 4 - 5 27 - 28
Other..................................................... 1 0 - 1 1 - 2
--- ------- --------
Total funding needs, including growth..................... $31 $9 - 12 $40 - 43
=== ======= ========
Funding sources:
External funding, including HSBC clients.................. $27 $7 - 9 $34 - 36
HSBC and HSBC subsidiaries................................ 4 2 - 3 6 - 7
--- ------- --------
Total funding sources..................................... $31 $9 - 12 $40 - 43
=== ======= ========
47
Risk Management
Liquidity Risk There have been no significant changes in our approach to
liquidity risk since December 31, 2003.
Interest Rate and Currency Risk HSBC has certain limits and benchmarks that
serve as guidelines in determining appropriate levels of interest rate risk.
One such limit is expressed in terms of the Present Value of a Basis Point
("PVBP"), which reflects the change in value of the balance sheet for a one
basis point movement in all interest rates. Our PVBP limit as of September 30,
2004 was $3 million, which includes risk associated with financial instruments.
Thus, for a one basis point change in interest rates, the policy dictates that
the value of the balance sheet shall not increase or decrease by more than $3
million. As of September 30, 2004, we had a PVBP position of less than $.1
million reflecting the impact of a one basis point increase in interest rates.
Our PVBP position was $.7 million at December 31, 2003.
We also monitor the impact that an immediate hypothetical 100 basis points
parallel increase or decrease in interest rates would have on our pre-tax
earnings. The following table summarizes such estimated impact:
September 30, December 31,
2004 2003
-------------------------------------------------------------------------------------------
(In millions)
Decrease in pre-tax earnings following an immediate hypothetical
100 basis points parallel rise in interest rates.............. $316 $406
Increase in pre-tax earnings following an immediate hypothetical
100 basis points parallel fall in interest rates.............. $337 $385
These estimates include the impact of the derivative positions we have entered
into. These estimates also assume we would not take any corrective actions in
response to interest rate movements and, therefore, exceed what most likely
would occur if rates were to change by the amount indicated.
There have been no significant changes in our approach to managing currency
risk since December 31, 2003.
Counterparty Credit Risk At September 30, 2004, we had derivative contracts
with a notional value of approximately $68.2 billion, including $59.2 billion
outstanding with HSBC affiliates. Most swap agreements, both with third parties
and affiliates, require that payments be made to, or received from, the
counterparty when the fair value of the agreement reaches a certain level.
Generally, third-party swap counterparties provide collateral in the form of
cash which is recorded in our balance sheet as other assets or derivative
related liabilities and totaled $.3 billion at September 30, 2004. Affiliate
swap counterparties generally provide collateral in the form of securities
which are not recorded on our balance sheet and totaled $1.5 billion at
September 30, 2004.
There have been no significant changes in our approach to managing counterparty
credit risk since December 31, 2003.
48
Reconciliations to GAAP Financial Measures
Three months ended Nine months ended
--------------------------- ---------------------------
---------------------------- ---------------------------
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
-------------------------------------------------------------------------------------------------------------
(dollars are in millions)
Return on Average Assets:
Net income....................................... $ 322 $ 472 $ 1,198 $ 1,091
HSBC acquisition related costs and other merger
related items incurred by Household, after-tax. - - - 167
-------- -------- - -------- --------
Operating net income............................. $ 322 $ 472 $ 1,198 $ 1,258
======== ======== = ======== ========
Average assets:
Owned basis................................... $124,531 $112,095 $120,506 $107,632
Serviced with limited recourse................ 21,542 23,719 23,462 23,985
-------- -------- - -------- --------
Managed basis................................. $146,073 $135,814 $143,968 $131,617
======== ======== = ======== ========
Return on average owned assets................... 1.03% 1.68% 1.33% 1.35%
Return on average owned assets, operating basis.. 1.03 1.68 1.33 1.56
Return on average managed assets................. .88 1.39 1.11 1.11
Return on average managed assets, operating basis .88 1.39 1.11 1.27
Return on Average Common Shareholder's Equity:
Net income....................................... $ 322 $ 472 $ 1,198 $ 1,091
Dividends on preferred stock..................... (18) (18) (54) (58)
-------- -------- - -------- --------
Net income available to common shareholders...... 304 454 1,144 1,033
HSBC acquisition related costs and other merger
related items incurred by Household............ - - - 167
-------- -------- - -------- --------
Operating net income available to common
shareholders................................... $ 304 $ 454 $ 1,144 $ 1,200
======== ======== = ======== ========
Average common shareholder's equity.............. $ 17,573 $ 15,434 $ 17,239 $ 13,266
Return on average common shareholder's equity.... 6.9% 11.8% 8.8% 10.4%
Return on average common shareholder's equity,
operating basis................................ 6.9 11.8 8.8 12.1
Net Interest Income:
Net Interest Income:
Owned basis................................... $ 2,035 $ 2,014 $ 5,924 $ 5,589
Serviced with limited recourse................ 582 715 1,986 2,162
-------- -------- - -------- --------
Managed basis................................. $ 2,617 $ 2,729 $ 7,910 $ 7,751
======== ======== = ======== ========
Average interest-earning assets:
Owned basis................................... $107,955 $ 95,999 $102,957 $ 92,320
Serviced with limited recourse................ 21,542 23,719 23,462 23,985
-------- -------- - -------- --------
Managed basis................................. $129,497 $119,718 $126,419 $116,305
======== ======== = ======== ========
Owned basis net interest margin.................. 7.54% 8.39% 7.67% 8.07%
Managed basis net interest margin................ 8.08 9.12 8.34 8.89
Managed Basis Risk Adjusted Revenue:
Net interest income.............................. $ 2,617 $ 2,729 $ 7,910 $ 7,751
Other revenues, excluding securitization revenue. 897 756 2,774 2,485
Less: Net charge-offs............................ (1,363) (1,334) (4,172) (3,950)
-------- -------- - -------- --------
Risk adjusted revenue............................ $ 2,151 $ 2,151 $ 6,512 $ 6,286
======== ======== = ======== ========
Average interest-earning assets.................. $129,497 $119,718 $126,419 $116,305
Managed basis risk adjusted revenue.............. 6.64% 7.19% 6.87% 7.21%
49
Reconciliations to GAAP Financial Measures (continued)
Three months ended Nine months ended
------------------------------------ --------------------------
September 30, June 30, September 30, September 30, September 30,
2004 2004 2003 2004 2003
-------------------------------------------------------------------------------------------------------------
(dollars are in millions)
Consumer Net Charge-off Ratio:
Consumer net charge-offs:
Owned basis............................. $ 969 $ 966 $ 897 $ 2,905 $ 2,702
Serviced with limited recourse.......... 394 401 435 1,267 1,246
-------- -------- -------- -------- --------
Managed basis........................... $ 1,363 $ 1,367 $ 1,332 $ 4,172 $ 3,948
======== ======== ======== ======== ========
Average consumer receivables:
Owned basis............................. $102,821 $ 96,189 $ 90,172 $ 97,328 $ 86,269
Serviced with limited recourse.......... 21,542 23,568 23,719 23,462 23,985
-------- -------- -------- -------- --------
Managed basis........................... $124,363 $119,757 $113,891 $120,790 $110,254
======== ======== ======== ======== ========
Owned basis consumer net charge-off
ratio.................................... 3.77% 4.02% 3.98% 3.98% 4.17%
Managed basis consumer net charge-off
ratio.................................... 4.38 4.57 4.68 4.61 4.77
Reserves as a Percent of Net Charge-offs
Loss reserves:
Owned basis............................. $ 3,953 $ 3,795 $ 3,779 $ 3,953 $ 3,779
Serviced with limited recourse.......... 1,246 1904 1,954 1,246 1,954
-------- -------- -------- -------- --------
Managed basis........................... $ 5,199 $ 5,699 $ 5,733 $ 5,199 $ 5,733
======== ======== ======== ======== ========
Net charge-offs:
Owned basis............................. $ 969 $ 966 $ 899 $ 2,905 $ 2,704
Serviced with limited recourse.......... 394 401 435 1,267 1,246
-------- -------- -------- -------- --------
Managed basis........................... $ 1,363 $ 1,367 $ 1,334 $ 4,172 $ 3,950
======== ======== ======== ======== ========
Owned basis reserves as a percent of net
charge-offs.............................. 102.0% 98.2% 105.1% 102.1% 104.8%
Managed basis reserves as a percent of net
charge-offs.............................. 95.4 104.2 107.4 93.5 108.9
Efficiency Ratio:
Total costs and expenses less
policyholders' benefits.................. $ 1,315 $ 1,229 $ 1,157 $ 3,842 $ 3,635
HSBC acquisition related costs incurred by
Household................................ - - - - 198
-------- -------- -------- -------- --------
Total costs and expenses less
policyholders' benefits, excluding
nonrecurring items....................... $ 1,315 $ 1,229 $ 1,157 $ 3,842 $ 3,437
======== ======== ======== ======== ========
Net interest income and other revenues less
policyholders' benefits:
Owned basis............................. $ 2,911 $ 2,831 $ 2,870 $ 8,689 $ 8,387
Serviced with limited recourse.......... (232) 148 420 169 1,444
-------- -------- -------- -------- --------
Managed basis........................... $ 2,679 $ 2,979 $ 3,290 $ 8,858 $ 9,831
======== ======== ======== ======== ========
Owned basis efficiency ratio............... 45.2% 43.4% 40.3% 44.2% 43.3%
Owned basis efficiency ratio, operating
basis.................................... 45.2 43.4 40.3 44.2 41.0
Managed basis efficiency ratio............. 49.1 41.3 35.2 43.4 37.0
Managed basis efficiency ratio, operating
basis.................................... 49.1 41.3 35.2 43.4 35.0
50
Reconciliations to GAAP Financial Measures (continued)
September 30, June 30, September 30,
2004 2004 2003
-------------------------------------------------------------------------------------------
(dollars are in millions)
Two-Months-and-Over-Contractual Delinquency:
Consumer two-months-and-over-contractual delinquency:
Owned basis....................................... $ 4,702 $ 4,534 $ 4,966
Serviced with limited recourse.................... 1,092 1,194 1,289
-------- -------- --------
Managed basis..................................... $ 5,794 $ 5,728 $ 6,255
======== ======== ========
Consumer receivables:
Owned basis....................................... $106,130 $ 99,115 $ 92,656
Serviced with limited recourse.................... 20,175 22,836 24,109
-------- -------- --------
Managed basis..................................... $126,305 $121,951 $116,765
======== ======== ========
Consumer two-months-and-over-contractual delinquency:
Owned basis....................................... 4.43% 4.57% 5.36%
Managed basis..................................... 4.59 4.70 5.36
Reserves as a Percent of Receivables:
Loss reserves:
Owned basis....................................... $ 3,953 $ 3,795 $ 3,779
Serviced with limited recourse.................... 1,246 1,904 1,954
-------- -------- --------
Managed basis..................................... $ 5,199 $ 5,699 $ 5,733
======== ======== ========
Receivables:
Owned basis....................................... $106,437 $ 99,432 $ 93,028
Serviced with limited recourse.................... 20,175 22,836 24,109
-------- -------- --------
Managed basis..................................... $126,612 $122,268 $117,137
======== ======== ========
Reserves as a percent of receivables:
Owned basis....................................... 3.71% 3.82% 4.06%
Managed basis..................................... 4.11 4.66 4.89
Reserves as a Percent of Nonperforming Loans:
Loss reserves:
Owned basis....................................... $ 3,953 $ 3,795 $ 3,779
Serviced with limited recourse.................... 1,246 1,904 1,954
-------- -------- --------
Managed basis..................................... $ 5,199 $ 5,699 $ 5,733
======== ======== ========
Nonperforming loans:
Owned basis....................................... $ 3,797 $ 3,684 $ 4,082
Serviced with limited recourse.................... 881 958 1,052
-------- -------- --------
Managed basis..................................... $ 4,678 $ 4,642 $ 5,134
======== ======== ========
Reserves as a percent of nonperforming loans:
Owned basis....................................... 104.1% 103.0% 92.6
Managed basis..................................... 111.1 122.8 111.7
51
Reconciliations to GAAP Financial Measures (continued)
September 30, December 31,
2004 2003
--------------------------------------------------------------------------------------------------------------------
(dollars are in millions)
Equity Ratios
Tangible common equity:
Common shareholder's equity.............................................................. $ 16,912 $ 16,561
Exclude:
Unrealized gains (losses) on:
Derivatives classified as cash flow hedges........................................ (186) (97)
Securities available for sale and interest-only strip receivables................. (129) (167)
Intangible assets, net............................................................... (2,684) (2,856)
Goodwill............................................................................. (6,811) (6,697)
-------- --------
Tangible common equity................................................................... 7,102 6,744
Purchase accounting adjustments.......................................................... 2,249 2,426
-------- --------
Tangible common equity, excluding purchase accounting adjustments........................ $ 9,351 $ 9,170
======== ========
Tangible shareholder's equity:
Tangible common equity................................................................... $ 7,102 $ 6,744
Preferred stock.......................................................................... 1,100 1,100
Mandatorily redeemable preferred securities of Household Capital Trusts.................. 1,026 1,031
Adjustable Conversion-Rate Equity Security Units......................................... 527 519
-------- --------
Tangible shareholder's equity............................................................ 9,755 9,394
Purchase accounting adjustments.......................................................... 2,199 2,370
-------- --------
Tangible shareholder's equity, excluding purchase accounting adjustments................. $ 11,954 $ 11,764
======== ========
Tangible shareholder's equity plus owned loss reserves:
Tangible shareholder's equity............................................................ $ 9,755 $ 9,394
Owned loss reserves...................................................................... 3,953 3,793
-------- --------
Tangible shareholder's equity plus owned loss reserves................................... 13,708 13,187
Purchase accounting adjustments.......................................................... 2,199 2,370
-------- --------
Tangible shareholder's equity plus owned loss reserves, excluding purchase accounting
adjustments............................................................................. $ 15,907 $ 15,557
======== ========
Tangible managed assets:
Owned assets............................................................................. $127,760 $119,154
Receivables serviced with limited recourse............................................... 20,175 26,200
-------- --------
Managed assets........................................................................... 147,935 145,354
Exclude:
Intangible assets, net............................................................... (2,684) (2,856)
Goodwill............................................................................. (6,811) (6,697)
Derivative financial assets.......................................................... (3,033) (3,118)
-------- --------
Tangible managed assets.................................................................. 135,407 132,683
Purchase accounting adjustments.......................................................... (277) (431)
-------- --------
Tangible managed assets, excluding purchase accounting adjustments....................... $135,130 $132,252
======== ========
Equity ratios:
Common and preferred equity to owned assets.............................................. 14.10% 14.82%
Tangible common equity to tangible managed assets........................................ 5.25 5.08
Tangible shareholder's equity to tangible managed assets ("TETMA")....................... 7.20 7.08
Tangible shareholder's equity plus owned loss reserves to tangible managed assets ("TETMA
+ Owned Reserves")...................................................................... 10.12 9.94
Excluding purchase accounting adjustments:
Tangible common equity to tangible managed assets.................................... 6.92 6.93
TETMA................................................................................ 8.85 8.89
TETMA + Owned Reserves............................................................... 11.77 11.76
52
Item 4. Controls and Procedures
Internal Controls There have not been any changes in our internal control over
financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act of 1934) during the fiscal quarter to which
this report relates that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.
Disclosure Controls As of the end of the period covered by this report, with
the participation of our Chief Executive Officer and Chief Financial Officer,
we evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) of the Securities
Exchange Act of 1934). Based upon that evaluation, our Chief Executive Officer
and our Chief Financial Officer concluded that as of the end of such period,
our disclosure controls and procedures are effective in timely alerting them to
material information relating to Household International, Inc. required to be
included in our periodic reports with the Securities and Exchange Commission.
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.
Consumer Lending Litigation During the past several years, the press has widely
reported certain industry related concerns that may impact us. Some of these
involve the amount of litigation instituted against finance and insurance
companies operating in certain states and the large awards obtained from juries
in those states (Alabama and Mississippi are illustrative). Like other
companies in this industry, some of our subsidiaries are involved in a number
of lawsuits pending against them in these states. The Alabama and Mississippi
cases, in particular, generally allege inadequate disclosure or
misrepresentation of financing terms. In some suits, other parties are also
named as defendants. Unspecified compensatory and punitive damages are sought.
Several of these suits purport to be class actions or have multiple plaintiffs.
The judicial climate in these states is such that the outcome of all of these
cases is unpredictable. Although our subsidiaries believe they have substantive
legal defenses to these claims and are prepared to defend each case vigorously,
a number of such cases have been settled or otherwise resolved for amounts that
in the aggregate are not material to our operations. Appropriate insurance
carriers have been notified of each claim, and a number of reservations of
rights letters have been received. Certain of the financing of merchandise
claims have been partially covered by insurance.
In a case decided on March 31, 2004 and published on May 13, the Appellate
Court of Illinois, First District (Cook County), ruled in U.S. Bank National
Association v. Clark, et al., that certain lenders (which did not include any
subsidiaries of Household) violated the Illinois Interest Act by imposing
points and finance charge fees in excess of 3% of the principal amount on loans
with an interest rate in excess of 8%. The Appellate Court held for the first
time that when the Illinois legislature made amendments to the late fee
provisions of the Interest Act in 1992, Illinois opted out of the Federal
Depository Institutions Deregulation and Monetary Control Act of 1980
("DIDMCA") and, in "certain instances," the Federal Alternative Mortgage
Transaction Parity Act of 1982 ("AMPTA"). DIDMCA and AMPTA each contain
provisions that preempt certain state laws unless state legislatures took
affirmative action to "opt-out" of the federal preemptions within specified
time frames. The Court found that as a result of 1992 legislative action, the
State's 3% restriction on points and finance charge fees are now enforceable in
Illinois. The Appellate Court's ruling reversed the trial court's decision,
which had relied on previous opinions of the Illinois Attorney General, the
Illinois Office of Banks and Real Estate, and other
53
courts. Should the decision stand and be applied retroactively throughout
Illinois, lenders would be required to make refunds to customers who had a
closed-end real estate secured first mortgage loan of double the interest paid
or contracted for, whichever is greater. The plaintiffs in the Clark case have
filed a notice of appeal with the Illinois Supreme Court. Three cases have been
filed against subsidiaries of Household based upon the Clark decision: Wilkes
v. Household Finance Corporation III, et al., Circuit Court of Cook County,
Illinois, Chancery Division, filed on June 18, 2004 (purported class action);
Aslam v. Accredited Home Lenders, Inc., et al., Circuit Court of Cook County,
Illinois, Chancery Division, filed on June 11, 2004 (purported class action);
and Morris, et al. v. Household Mortgage Services, Inc., U.S. District Court
for the Northern District of Illinois, filed on June 22, 2004. On our motion,
the Wilkes case was removed to Bankruptcy Court, however, plaintiffs have filed
a motion to return the case to the U.S. District Court. We also served an
arbitration demand on plaintiff's counsel as permitted under the loan documents
and filed a motion to stay or dismiss the case pending arbitration. The Aslam
case was settled for an immaterial amount and was dismissed on October 28,
2004. The portion of the Morris case alleging violations of the Illinois
Interest Act was settled for an immaterial amount. At this time, we are unable
to quantify the potential impact of the Clark decision should it receive
retroactive application.
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 auditor, KPMG LLP,
advised us that, in its view, these payments should have either been charged
against earnings at the time they were made or amortized over a shorter period
of time. 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 2002 settlement
with 50 states and the District of Columbia relating to real estate lending
practices, 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 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 2002 state settlement agreement referred to above,
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, and other defendants, filed a motion to dismiss the complaint. On
March 19, 2004, the Court granted in part, and denied in part the defendants'
motion to dismiss the complaint. The Court dismissed all claims against Merrill
Lynch, Pierce, Fenner & Smith, Inc. and Goldman Sachs & Co. The Court also
dismissed certain claims alleging strict liability for alleged
misrepresentation of material facts based on statute of limitations grounds.
The claims that remain against some or all of the defendants essentially allege
the defendants knowingly made a false statement of a material fact in
conjunction with the purchase or sale of securities, that the plaintiffs
justifiably relied on such statement, the false statement(s) caused the
plaintiffs' damages, and that some or all of the defendants should be liable
for those alleged statements. The Court has ordered that all factual discovery
must be completed by January 13, 2006 and expert witness discovery must be
completed by July 24, 2006.
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, were 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
54
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. A
motion to dismiss the complaint was filed in June 2003. On March 30, 2004, the
Court granted in part, and denied in part, the defendants' motion to dismiss
the complaint. The Court dismissed all claims alleging that some or all of the
defendants breached their co-fiduciary obligations; misrepresented the prudence
of investing in Household stock; failed to disclose nonpublic information
regarding alleged accounting and lending improprieties; and failed to provide
other defendants with non-public information. The claims that remained
essentially alleged that some or all of the defendants failed to prudently
manage plan assets by continuing to invest in, or provide matching
contributions of, Household stock. On October 8, 2004, the parties entered into
a settlement agreement and documents have been filed with the Court seeking
preliminary approval of the settlement. Preliminary approval was granted on
October 13, 2004. Notice of the proposed terms were published and mailed to
applicable Plan participants in October and the Court will hold a fairness
hearing on November 22, 2004. If approved by the Court and not appealed, the
settlement will become final at that time. The settlement provides for a
payment of $46.5 million which will be paid into Plan accounts after deduction
of plaintiffs' legal fees and costs. The entire settlement will be funded by
insurance proceeds.
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 Household, 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. Pursuant to the merger agreement with
Beneficial Corporation, we assumed the defense of this litigation. In September
of 2003, the defendants filed a motion to dismiss which was granted on June 15,
2004 based upon a lack of personal jurisdiction over the defendants. The
plaintiffs have appealed this decision. In addition, on June 30, 2004, a case
entitled, Employer-Teamsters Local Nos. 175 & 505 Pension Trust Fund v.
Caspersen, et al., was filed in the Superior Court of New Jersey, Law Division,
Somerset County as Case Number L9479-04. Other than the change in plaintiff,
the suit is substantially identical to the above West Virginia Laborer's
Pension Trust Fund case, and is brought by the same principal law firm which
brought that suit. The defendants have filed a motion to dismiss this case.
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.
Item 5. Other Information
As approved by the Audit Committee of the Board of Directors, we have engaged
KPMG to perform certain non-audit services during the year. Those services
include language translation services relating to debt offerings of
subsidiaries, preparation of SAS70 reports relating to services performed for
contractual counterparties, reporting on an annual report for the pension plan
for our UK operations, and certain tax services including account analysis,
advice regarding certain transactions and preparation of returns for
securitization trusts.
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.
55
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 quarter ended September 30, 2004, the Registrant filed a
Current Report on Form 8-K on August 2, 2004 with respect to the financial
supplement pertaining to the financial results of Household International,
Inc. for the quarter ended June 30, 2004.
56
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 12, 2004 /s/ Simon C. Penney
-----------------------------------
Simon C. Penney
Senior Executive Vice President and
Chief Financial Officer
57
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.
58
Exhibit 12
Computation of Ratio of Earnings to Fixed Charges and to Combined
Fixed Charges and Preferred Stock Dividends
Nine months March 29 January 1
ended through through
September 30, September 30, March 28,
2004 2003 2003
----------------------------------------------------------------------------------------------------------
(Successor) (Successor) (Predecessor)
(in millions)
Net income..................................................... $1,198 $ 845 $ 246
Income tax expense............................................. 601 429 182
------ ------ ------
Income before income tax expense............................... 1,799 1,274 428
------ ------ ------
Fixed charges:
Interest expense/(1)/....................................... 2,021 1,133 898
Interest portion of rentals/(2)/............................ 39 26 18
------ ------ ------
Total fixed charges............................................ 2,060 1,159 916
------ ------ ------
Total earnings as defined...................................... $3,859 $2,433 $1,344
====== ====== ======
Ratio of earnings to fixed charges............................. 1.87 2.10 1.47/(4)/
Preferred stock dividends/(3)/................................. 81 59 33
Ratio of earnings to combined fixed charges and preferred stock
dividends.................................................... 1.80 2.00 1.42/(4)/
--------
(1) For financial statement purposes for the periods January 1 through March
28, 2003 and March 29 through September 30, 2003, these amounts are reduced
for income earned on temporary investment of excess funds, generally
resulting from over-subscriptions of commercial paper issuances.
(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 have been
negatively impacted by $167.3 million (after-tax) of HSBC acquisition
related costs and other merger related items incurred by Household.
Excluding these charges, 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.
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 and procedures, 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; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of 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 controls 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 12, 2004
/s/ William F. Aldinger
-----------------------------
William F. Aldinger
Chairman and Chief Executive
Officer
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 and procedures, 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; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of 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 controls 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 12, 2004
/s/ Simon C. Penney
------------------------------
Simon C. Penney
Senior Executive Vice
President and
Chief Financial Officer
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, 2004 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.
/s/ William F. Aldinger
------------------------------
William F. Aldinger
Chairman and Chief Executive
Officer
November 12, 2004
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, 2004 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.
/s/ Simon C. Penney
------------------------------
Simon C. Penney
Senior Executive Vice
President and
Chief Financial Officer
November 12, 2004
This certification accompanies each Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.
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.
Exhibit 99.1
Debt and Preferred Stock Securities Ratings
Standard Moody's
& Poor's Investors
At September 30, 2004 Corporation Service Fitch, Inc.
---------------------------------------------------------------
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 Limited
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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