Household Finance 1H04 10Q-P2

HSBC Holdings PLC 2 August 2004 Part 2 RESTRUCTURING POLICIES AND PRACTICES HISTORICAL RESTRUCTURING FOLLOWING CHANGES IMPLEMENTED IN THE POLICIES AND PRACTICES(1),(2) THIRD QUARTER 2003(1),(2) --------------------------------------------------------- ----------------------------------------------------- Real estate secured Real estate secured Real Estate - Overall Real Estate - Overall . An account may be restructured if we receive two . Accounts may be restructured upon receipt of qualifying payments within the 60 days two qualifying payments within the 60 days preceding the restructure; we may restructure preceding the restructure accounts in hardship, disaster or strike situations . Accounts will be limited to four restructures in with one qualifying payment or no payments a rolling 60 month period . Accounts that have filed for Chapter 7 . Accounts generally are not eligible for bankruptcy protection may be restructured upon restructure until nine months after origination receipt of a signed reaffirmation agreement . Accounts whose borrowers have filed for . Accounts subject to a Chapter 13 plan filed with Chapter 7 bankruptcy protection may be a bankruptcy court generally require one restructured upon receipt of a signed qualifying payment to be restructured reaffirmation agreement . Except for bankruptcy reaffirmation and filed . Accounts whose borrowers are subject to a Chapter 13 plans, agreed automatic payment Chapter 13 plan filed with a bankruptcy court withdrawal or hardship/disaster/strike, accounts generally may be restructured upon receipt of are generally limited to one restructure every 12 one qualifying payment months . Except for bankruptcy reaffirmation and filed . Accounts generally are not eligible for restructure Chapter 13 plans, accounts will generally not until on books for at least six months be restructured more than once in a 12 month period . Accounts whose borrowers agree to pay by automatic withdrawal are generally restructured upon receipt of one qualifying payment/(3)/ Real Estate - Consumer Lending Real Estate - Mortgage Services/(4)/ . Accounts whose borrowers agree to pay by . Accounts will generally not be eligible for automatic withdrawal are generally restructured restructure until nine months after origination upon receipt of one qualifying payment and six months after acquisition Auto finance Auto finance . Accounts may be extended if we receive one . Accounts may generally be extended upon qualifying payment within the 60 days preceding receipt of two qualifying payments within the the extension 60 days preceding the extension . Accounts may be extended no more than three . Accounts may be extended by no more than months at a time and by no more than three three months at a time months in any 12-month period . Accounts will be limited to four extensions in . Extensions are limited to six months over the a rolling 60 month period, but in no case will contractual life an account be extended more than a total of six . Accounts that have filed for Chapter 7 months over the life of the account bankruptcy protection may be restructured upon . Accounts will be limited to one extension receipt of a signed reaffirmation agreement every six months . Accounts whose borrowers are subject to a . Accounts will not be eligible for extension Chapter 13 plan may be restructured upon filing until on the books for at least six months of the plan with a bankruptcy court . Accounts whose borrowers have filed for Chapter 7 bankruptcy protection may be restructured upon receipt of a signed reaffirmation agreement . Accounts whose borrowers are subject to a Chapter 13 plan may be restructured upon filing of the plan with a bankruptcy court 32 RESTRUCTURING POLICIES AND PRACTICES HISTORICAL RESTRUCTURING FOLLOWING CHANGES IMPLEMENTED IN THE POLICIES AND PRACTICES(1),(2) THIRD QUARTER 2003(1),(2) -------------------------------------------------------- --------------------------------------------------- MasterCard and Visa MasterCard and Visa . Typically, accounts qualify for restructuring if . Typically, accounts qualify for restructuring if we receive two or three qualifying payments we receive two or three qualifying payments prior to the restructure, but accounts in approved prior to the restructure, but accounts in external debt management programs may approved external debt management programs generally be restructured upon receipt of one may generally be restructured upon receipt of qualifying payment. one qualifying payment. . Generally, accounts may be restructured once . Generally, accounts may be restructured once every six months every six months Private label Private label . An account may generally be restructured if we . Accounts originated after October 1, 2002 for receive one or more qualifying payments, certain merchants require receipt of two or depending upon the merchant three qualifying payments to be restructured, except accounts in an approved, external debt . Restructuring is limited to once every six months management program may be restructured (or longer, depending upon the merchant) for upon receipt of one qualifying payment. revolving accounts and once every 12 months for . Accounts must be on the books for nine closed-end accounts months and we must receive the equivalent of two qualifying payments within the 60 days preceding the restructure . Accounts are not eligible for subsequent restructure until 12 months after a prior restructure and upon our receipt of three qualifying payments within the 90 days preceding the restructure Personal non-credit card Personal non-credit card . Accounts may be restructured if we receive one . Accounts may be restructured upon receipt of qualifying payment within the 60 days preceding two qualifying payments within the 60 days the restructure; may restructure accounts in a preceding the restructure hardship/disaster/strike situation with one . Accounts will be limited to one restructure qualifying payment or no payments every six months . If an account has never been more than 90 days . Accounts will be limited to four restructures in delinquent, it may be generally restructured up to a rolling 60 month period three times per year . Accounts will not be eligible for restructure . If an account has ever been more than 90 days until six months after origination delinquent, generally it may be restructured with one qualifying payment no more than four times over its life; however, generally the account may thereafter be restructured if two qualifying payments are received . Accounts subject to programs for hardship or strike may require only the receipt of reduced payments in order to be restructured; disaster may be restructured with no payments 33 -------- (1)We employ account restructuring and other customer account management policies and practices as flexible customer account management tools. In addition to variances in criteria by product, criteria may also vary within a product line (for example, in our private label credit card business, criteria may vary from merchant to merchant). Also, we continually review our product lines and assess restructuring criteria and they are subject to modification or exceptions from time to time. Accordingly, the description of our account restructuring policies or practices provided in this table should be taken only as general guidance to the restructuring approach taken within each product line, and not as assurance that accounts not meeting these criteria will never be restructured, that every account meeting these criteria will in fact be restructured or that these criteria will not change or that exceptions will not be made in individual cases. In addition, in an effort to determine optimal customer account management strategies, management may run more conservative tests on some or all accounts in a product line for fixed periods of time in order to evaluate the impact of alternative policies and practices. (2)Generally, policy changes will not be applied to the entire portfolio on the date of implementation and may be applied to new, or recently originated or acquired accounts. However, for ease of administration, in the third quarter of 2003 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 the purpose of the limitation that no account may be restructured more than four times in a rolling 60 month period. Resetting these counters will not impact the ability of mortgage services to report historical restructure statistics. Other business units may also elect to adopt uniform policies. Unless otherwise noted, the revisions to the restructure policies and practices implemented in the third quarter 2003 will generally be applied only to accounts originated or acquired after January 1, 2003 and the historical restructuring policies and practices are effective for all accounts originated or acquired prior to January 1, 2003. The changes have not had, and are not expected to have a significant impact on our business model or results of operations as these changes are generally being phased in as receivables are originated or acquired. (3)Our mortgage services business implemented this policy for all accounts effective March 1, 2004. (4)Prior to January 1, 2003, accounts that had made at least six qualifying payments during the life of the loan and that agreed to pay by automatic withdrawal were generally restructured with one qualifying payment. In addition to our restructuring policies and practices, we employ other customer account management techniques, which we typically use on a more limited basis, that are similarly designed to manage customer relationships, maximize collection opportunities and avoid foreclosure or repossession if reasonably possible. These additional customer account management techniques include, at our discretion, actions such as extended payment arrangements, approved external debt management plans, forbearance, modifications, loan rewrites and/ or deferment pending a change in circumstances. We typically use these customer account management techniques with individual borrowers in transitional situations, usually involving borrower hardship circumstances or temporary setbacks that are expected to affect the borrower's ability to pay the contractually specified amount for some period of time. These actions vary by product and are under continual review and assessment to determine that they meet the goals outlined above. For example, under a forbearance agreement, we may agree not to take certain collection or credit agency reporting actions with respect to missed payments, often in return for the borrower's agreeing to pay us an extra amount in connection with making future payments. In some cases, these additional customer account management techniques may involve us agreeing to lower the contractual payment amount and/or reduce the periodic interest rate. When we use a customer account management technique, we may treat the account as being contractually current and will not reflect it as a delinquent account in our delinquency statistics. However, if the account subsequently experiences payment defaults, it will again become contractually delinquent. We generally consider loan rewrites to involve an extension of a new loan, and such new loans are not reflected in our delinquency or restructuring statistics. 34 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 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 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. June 30, March 31, June 30, 2004 2004 2003 ---------------------------------------------------------------------------------------------- (dollars are in millions) Total Restructured by Restructure Period - Managed Basis/(1)/ Never restructured........................................... 86.1% 84.7% 83.7% Restructured: Restructured in the last 6 months......................... 4.8 6.2 7.2 Restructured in the last 7-12 months...................... 4.0 3.9 3.8 Previously restructured beyond 12 months.................. 5.1 5.2 5.3 --------- --------- --------- Total ever restructured................................... 13.9 15.3 16.3 --------- --------- --------- Total........................................................ 100.0% 100.0% 100.0% ========= ========= ========= Total Restructured by Product - Managed Basis/(1)/ Real estate secured.......................................... $ 8,884.8 $ 9,506.0 $ 9,225.0 Auto finance................................................. 1,304.3 1,255.0 1,360.1 MasterCard/Visa.............................................. 639.4 504.6 579.6 Private label................................................ 830.2 990.0 1,146.3 Personal non-credit card..................................... 3,726.6 3,913.3 4,202.3 --------- --------- --------- Total........................................................ $15,385.3 $16,168.9 $16,513.3 ========= ========= ========= (As a percent of managed receivables) Real estate secured.......................................... 16.5% 18.9% 19.2% Auto finance................................................. 14.0 13.9 17.3 MasterCard/Visa.............................................. 3.6 2.8 3.5 Private label................................................ 5.6 7.0 8.3 Personal non-credit card..................................... 25.0 26.3 26.8 --------- --------- --------- Total........................................................ 13.9% 15.3% 16.3% ========= ========= ========= -------- /(1)/Excludes commercial and other. 35 The amount of 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 $.4 billion or 0.3 percent of managed receivables at June 30, 2004, $.9 billion or .8 percent of managed receivables at March 31, 2004 and $1.1 billion or 1.0 percent of managed receivables at June 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 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 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 levels during the first six months of 2004 as we used proceeds from the sale of real estate secured receivables to HSBC Bank USA 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 $140 million for the first six months of 2004 and less than $30 million for the prior-year period compared to the funding costs we would have incurred using average spreads from 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 HFC will depend in large part upon the amount and timing of the proposed private label credit card portfolio transfer to HSBC Bank USA and other initiatives between HFC and HSBC subsidiaries. Securities totaled $6.4 billion at June 30, 2004 and $10.5 billion at December 31, 2003. Included in the June 30, 2004 balance was $2.6 billion dedicated to our credit card bank and $2.6 billion held by our insurance subsidiaries. Included in the December 31, 2003 balance was $2.4 billion dedicated to our credit card bank and $2.6 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 $10.0 billion at June 30, 2004 and $8.0 billion at December 31, 2003. Included in this total was outstanding Euro commercial paper sold to customers of HSBC of $3.4 billion at June 30, 2004 and $2.8 billion at December 31, 2003. 36 Due to HSBC affiliates and other HSBC related funding are summarized in the following table: June 30, December 31, 2004 2003 ------------------------------------------------------------------------------------------ (In billions) Debt issued to HSBC subsidiaries: Short-term borrowings............................................ $ - $2.6 Term debt........................................................ 3.8 1.3 ----- ---- Total debt issued to HSBC subsidiaries........................... 3.8 3.9 ----- ---- Debt issued to HSBC clients: Euro commercial paper............................................ 3.4 2.8 Term debt........................................................ .7 .4 ----- ---- Total debt issued to HSBC clients................................ 4.1 3.2 Real estate secured receivable activity with HSBC Bank USA: Cash received on sales (cumulative).............................. 3.7 2.8 Direct purchases from correspondents (cumulative)................ 1.5 - ----- ---- Total real estate secured receivable activity with HSBC Bank USA. 5.2 2.8 ----- ---- Total HSBC related funding.......................................... $13.1 $9.9 ===== ==== 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 June 30, 2004, we had revolving credit facilities with HSBC of $2.5 billion. There have been no draws on this line. We also had derivative contracts with a notional value of $56.7 billion, or approximately 86 percent of total derivative contracts, outstanding with HSBC affiliates. In July, an additional $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. Senior and senior subordinated debt (with original maturities over one year) decreased to $73.0 billion at June 30, 2004 from $74.6 billion at December 31, 2003. Significant issuances during the first six months of 2004 included the following: . $2.3 billion of domestic medium-term notes . $1.3 billion of foreign currency-denominated bonds (including $.3 billion which was issued to customers of HSBC) . $.7 million of InterNotes/(SM)/ (retail-oriented medium-term notes) . $1.3 billion of global debt . $1.7 billion of securities backed by home equity loans. For accounting purposes, these transactions were structured as secured financing. Selected capital ratios are summarized in the following table: June 30, December 31, 2004 2003 -------------------------------------------------------------------------- TETMA/(1)/.......................................... 8.59% 7.69% Common equity to owned assets....................... 14.35 13.33 TETMA excluding purchase accounting adjustments/(1)/ 10.32 9.37 -------- /(1)/TETMA represents a non-GAAP financial ratio that is used by HFC management 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. 37 In April 2004, Fitch Ratings revised our Rating Outlook to Positive from Stable and raised our Support Rating to "1" from "2". In addition, Fitch affirmed our "A" senior long-term and "F1" commercial paper ratings. 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. 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, 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 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. Receivables securitized (excluding replenishments of certificateholder interests) are summarized in the following table: Three months ended June 30 2004 2003 -------------------------------------------- (in millions) Auto finance............. $ 300.0 $ 596.3 MasterCard/Visa.......... 500.0 - Private label............ 190.0 250.0 Personal non-credit card. - 305.0 -------- -------- Total.................... $ 990.0 $1,151.3 ======== ======== Six months ended June 30 2004 2003 -------------------------------------------- (in millions) Auto finance............. $ 300.0 $1,007.1 MasterCard/Visa.......... 550.0 320.0 Private label............ 190.0 250.0 Personal non-credit card. - 815.0 -------- -------- Total.................... $1,040.0 $2,392.1 ======== ======== 38 Securitization levels were much lower in the first half of 2004 as we used funding from HSBC, including proceeds from receivable sales to HSBC Bank USA, to assist in the funding of our operations. Our securitized receivables totaled $21.8 billion at June 30, 2004, compared to $25.1 billion at December 31, 2003. As of June 30, 2004, closed-end real estate secured receivables totaling $7.9 billion secured $6.0 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 21 percent of the funding associated with our managed portfolio at June 30, 2004 and 23 percent at December 31, 2003. Secured financings represented 6 percent of the funding associated with our managed portfolio at June 30, 2004 and 6 percent at December 31, 2003. We believe the market for securities backed by receivables is a reliable, efficient and cost-effective source of funds. Securitizations and secured financings of consumer receivables have been, and will continue to be, a source of our funding and liquidity. Under U.K. GAAP as reported by HSBC, our securitizations are treated as secured financings. In order to align our accounting treatment with that of HSBC under U.K. GAAP, we intend to structure all new funding utilizing receivables as collateral as secured financings beginning 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 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 may 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 short 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 will reduce our reported net income under U.S. GAAP. There will be no impact, however, on cash received from operations or on U.K. GAAP reported results. 2004 funding strategy Our current estimated 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 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 July 1 Estimated through through full year June 30, 2004 Dec. 31, 2004 2004 --------------------------------------------------------------------------------------------------- (in billions) Funding needs: Net asset growth.......................................... $ 4 $ 9 - 10 $13 - 14 Commercial paper, term debt and securitization maturities. 17 11 - 12 28 - 29 Other..................................................... - 2 - 3 2 - 3 --- -------- -------- Total funding needs, including growth..................... $21 $22 - 25 $43 - 46 === ======== ======== Funding sources: External funding, including HSBC clients.................. $18 $20 - 22 $38 - 40 HSBC and HSBC subsidiaries................................ 3 2 - 3 5 - 6 --- -------- -------- Total funding sources..................................... $21 $22 - 25 $43 - 46 === ======== ======== 39 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. Household's PVBP limit as of June 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 $3.0 million. As of June 30, 2004, Household had a PVBP position of $.2 million reflecting the impact of a one basis point increase in interest rates. Household's 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: June 30, December 31, 2004 2003 ------------------------------------------------------------------------------------------------------- (in millions) Decrease in pre-tax earnings following an immediate hypothetical 100 basis points parallel rise in interest rates................................................ $ 338.0 $ 358.0 Increase in pre-tax earnings following an immediate hypothetical 100 basis points parallel fall in interest rates................................................ $ 351.0 $ 369.0 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 June 30, 2004, we had derivative contracts with a notional value of approximately $66.0 billion, including $56.7 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 are recorded in our balance sheet as other assets or derivative related liabilities and totaled $.3 billion at June 30, 2004. Affiliate swap counterparties generally provide collateral in the form of securities which are not recorded on our balance sheet and totaled $.4 billion at June 30, 2004. There have been no significant changes in our approach to managing counterparty credit risk since December 31, 2003. 40 Reconciliations to GAAP Financial Measures -------------------------------------------------------------------------------- Three months ended Six months ended ---------------------- ---------------------- June 30, June 30, June 30, June 30, 2004 2003 2004 2003 ---------------------------------------------------------------------------------------------------------- (dollars are in millions) Return on Average Assets: Net income................................................ $ 440.1 $ 384.7 $ 992.3 $ 855.5 Average assets: Owned basis............................................ $101,419.9 $ 96,375.7 $102,639.9 $ 93,511.4 Serviced with limited recourse......................... 22,545.2 22,751.7 23,354.0 22,714.4 ---------- ---------- ---------- ---------- Managed basis.......................................... $123,965.1 $119,127.4 $125,993.9 $116,225.8 ========== ========== ========== ========== Return on average owned assets............................ 1.74 % 1.60 % 1.93 % 1.83 % Return on average managed assets.......................... 1.42 1.29 1.58 1.47 Net Interest Income: Net Interest Income: Owned basis............................................ $ 1,888.1 $ 1,838.7 $ 3,662.5 $ 3,374.6 Serviced with limited recourse......................... 612.9 681.4 1,325.3 1,365.6 ---------- ---------- ---------- ---------- Managed basis.......................................... $ 2,501.0 $ 2,520.1 $ 4,987.8 $ 4,740.2 ========== ========== ========== ========== Average interest-earning assets: Owned basis............................................ $ 90,943.8 $ 82,704.4 $ 90,151.5 $ 82,059.8 Serviced with limited recourse......................... 22,545.2 22,751.7 23,354.0 22,714.4 ---------- ---------- ---------- ---------- Managed basis.......................................... $113,489.0 $105,456.1 $113,505.5 $104,774.2 ========== ========== ========== ========== Owned basis net interest margin........................... 8.30 % 8.89 % 8.13 % 8.22 % Managed basis net interest margin......................... 8.81 9.56 8.79 9.05 Efficiency Ratio: Total costs and expenses less policyholders' benefits..... $ 1,037.2 $ 986.2 $ 2,111.4 $ 1,915.6 Net interest income and other revenues less policyholders' benefits: Owned basis............................................ $ 2,619.7 $ 2,551.0 $ 5,380.9 $ 5,149.5 Serviced with limited recourse......................... 127.3 591.6 364.7 971.4 ---------- ---------- ---------- ---------- Managed basis.......................................... $ 2,747.0 $ 3,142.6 $ 5,745.6 $ 6,120.9 ========== ========== ========== ========== Owned basis efficiency ratio.............................. 39.6 % 38.7 % 39.2 % 37.2 % Managed basis efficiency ratio............................ 37.8 31.4 36.7 31.3 Three months ended Six months ended ----------------------------------- --------------------- June 30, December 31, June 30, June 30, June 30, (Dollars are in millions) 2004 2003 2003 2004 2003 --------------------------------------------------------------------------------------------------------------------- Consumer Net Charge-off Ratio: Consumer net charge-offs: Owned basis........................................... $ 896.9 $ 824.9 $ 875.0 $ 1,801.4 $ 1,701.0 Serviced with limited recourse........................ 385.6 404.7 395.7 841.4 775.0 ---------- ---------- ---------- ---------- --------- Managed basis......................................... $ 1,282.5 $ 1,229.6 $ 1,270.7 $ 2,642.8 $ 2,476.0 ========== ========== ========== ========== ========= Average consumer receivables: Owned basis........................................... $ 85,994.3 $ 84,746.9 $ 77,555.1 $ 84,366.4 $76,437.9 Serviced with limited recourse........................ 22,545.2 23,456.4 22,751.7 23,354.0 22,714.4 ---------- ---------- ---------- ---------- --------- Managed basis......................................... $108,539.5 $108,203.3 $100,306.8 $107,720.4 $99,152.3 ========== ========== ========== ========== ========= Owned basis consumer net charge-off ratio................ 4.17 % 3.89 % 4.51 % 4.27 % 4.45 % Managed basis consumer net charge-off ratio.............. 4.73 4.55 5.07 4.91 4.99 Reserves as a Percentage of Net Charge-offs Loss reserves: Owned basis........................................... $ 3,528.0 $ 3,542.9 $ 3,449.2 $ 3,528.0 $ 3,449.2 Serviced with limited recourse........................ 1,769.5 2,246.3 1,854.8 1,769.5 1,854.8 ---------- ---------- ---------- ---------- --------- Managed basis......................................... $ 5,297.5 $ 5,789.2 $ 5,304.0 $ 5,297.5 $ 5,304.0 ========== ========== ========== ========== ========= Net charge-offs: Owned basis........................................... $ 896.9 $ 824.4 $ 875.0 $ 1,801.4 $ 1,701.0 Serviced with limited recourse........................ 385.6 404.7 395.7 841.4 775.0 ---------- ---------- ---------- ---------- --------- Managed basis......................................... $ 1,282.5 $ 1,229.1 $ 1,270.7 $ 2,642.8 $ 2,476.0 ========== ========== ========== ========== ========= Owned basis reserves as a percentage of net charge-offs.. 98.3 % 107.4 % 98.5 % 97.9 % 101.4 % Managed basis reserves as a percentage of net charge-offs 103.3 117.8 104.4 100.2 107.1 41 Reconciliations to GAAP Financial Measures (continued) -------------------------------------------------------------------------------- June 30, March 31, June 30, 2004 2004 2003 ----------------------------------------------------------------------------------------- (dollars are in millions) Two-Months-and-Over-Contractual Delinquency: Consumer two-months-and-over-contractual delinquency: Owned basis....................................... $ 4,047.5 $ 4,196.0 $ 4,347.3 Serviced with limited recourse.................... 1,135.5 1,217.0 1,144.9 ---------- ---------- ---------- Managed basis..................................... $ 5,183.0 $ 5,413.0 $ 5,492.2 ========== ========== ========== Consumer receivables: Owned basis....................................... $ 88,663.3 $ 83,040.4 $ 78,910.5 Serviced with limited recourse.................... 21,837.8 23,286.7 23,019.8 ---------- ---------- ---------- Managed basis..................................... $110,501.1 $106,327.1 $101,930.3 ========== ========== ========== Consumer two-months-and-over-contractual delinquency: Owned basis....................................... 4.57 % 5.05 % 5.51 % Managed basis..................................... 4.69 5.09 5.39 Reserves as a Percent of Receivables: Loss reserves: Owned basis....................................... $ 3,528.0 $ 3,486.6 $ 3,449.2 Serviced with limited recourse.................... 1,769.5 2,027.9 1,854.8 ---------- ---------- ---------- Managed basis..................................... $ 5,297.5 $ 5,514.5 $ 5,304.0 ========== ========== ========== Receivables: Owned basis....................................... $ 88,979.0 $ 83,390.1 $ 79,300.7 Serviced with limited recourse.................... 21,837.8 23,286.7 23,019.8 ---------- ---------- ---------- Managed basis..................................... $110,816.8 $106,676.8 $102,320.5 ========== ========== ========== Reserves as a percent of receivables: Owned basis....................................... 3.96 % 4.18 % 4.35 % Managed basis..................................... 4.78 5.17 5.18 Reserves as a Percent of Nonperforming Loans: Loss reserves: Owned basis....................................... $ 3,528.0 $ 3,486.6 $ 3,449.2 Serviced with limited recourse.................... 1,769.5 2,027.9 1,854.8 ---------- ---------- ---------- Managed basis..................................... $ 5,297.5 $ 5,514.5 $ 5,304.0 ========== ========== ========== Nonperforming loans: Owned basis....................................... $ 3,293.0 $ 3,499.8 $ 3,554.1 Serviced with limited recourse.................... 909.9 1,003.0 924.0 ---------- ---------- ---------- Managed basis..................................... $ 4,202.9 $ 4,502.8 $ 4,478.1 ========== ========== ========== Reserves as a percent of nonperforming loans: Owned basis....................................... 107.1 % 99.6 % 97.0 % Managed basis..................................... 126.0 122.5 118.4 42 Reconciliations to GAAP Financial Measures (continued) -------------------------------------------------------------------------------- June 30, December 31, 2004 2003 ------------------------------------------------------------------------------------------------------- (dollars are in millions) Equity Ratios Tangible shareholder's equity: Common shareholder's equity.................................................. $ 14,895.5 $ 13,727.5 Exclude: Unrealized gains (losses) on: Derivatives classified as cash flow hedges............................ (274.4) (88.8) Securities available for sale and interest-only strip receivables..... (157.8) (164.5) Intangible assets, net.................................................... (2,451.8) (2,627.3) Goodwill.................................................................. (2,326.9) (2,107.7) Adjustable Conversion-Rate Equity Security Units.......................... 524.5 519.1 ---------- ---------- Tangible shareholder's equity................................................ 10,209.1 9,258.3 Purchase accounting adjustments.............................................. 2,018.8 1,988.8 ---------- ---------- Tangible shareholder's equity, excluding purchase accounting adjustments..... $ 12,227.9 $ 11,247.1 ========== ========== Tangible managed assets: Owned assets................................................................. $103,820.7 $102,959.9 Receivables serviced with limited recourse................................... 21,837.8 25,078.2 ---------- ---------- Managed assets............................................................... 125,658.5 128,038.1 Exclude: Intangible assets, net.................................................... (2,451.8) (2,627.3) Goodwill.................................................................. (2,326.9) (2,107.7) Derivative financial assets............................................... (2,088.8) (2,939.7) ---------- ---------- Tangible managed assets...................................................... 118,791.0 120,363.4 Purchase accounting adjustments.............................................. (313.0) (370.8) ---------- ---------- Tangible managed assets, excluding purchase accounting adjustments........... $118,478.0 $119,992.6 ========== ========== Equity ratios: Common equity to owned assets................................................ 14.35 % 13.33 % Tangible shareholder's equity to tangible managed assets ("TETMA")........... 8.59 7.69 Tangible shareholder's equity to tangible managed assets ("TETMA"), excluding purchase accounting adjustments............................................ 10.32 9.37 43 Item 4. Controls and Procedures -------------------------------------------------------------------------------- Internal Controls In our quarterly report on Form 10-Q for the period ended March 31, 2004, we reported that management had undertaken certain measures to strengthen the corporation's internal controls relating to certain accounting processes. During the second quarter, management and the Household International Audit Committee determined that the corporation's internal control over financial reporting would benefit from a restructuring of responsibilities for certain functions in the corporation's accounting department. Additional management is in the process of being transferred from other parts of the HSBC group and is expected to assume responsibilities in the third quarter. 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 Finance Corporation 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. Merger Litigation Several lawsuits were filed alleging violations of law with respect to Household's merger with HSBC. We believe that the claims lack merit and the defendants deny the substantive allegations of the lawsuits. These lawsuits are described below. Between August 27, 2002 and January 15, 2003, derivative lawsuits on behalf of the company and class actions on behalf of Household common stockholders were filed against Household and certain of its officers and directors. See Bailey v. Aldinger, et al., No 02 CH 16476 (Circuit Court, Cook County, Illinois, Chancery Division); McLaughlin v. Aldinger, et al., No. 02 CH 20683 (Circuit Court, Cook County, Illinois, Chancery Division); Pace v. Aldinger, et al., No. 02 CH 19270 (Circuit Court, Cook County, Illinois, Chancery Division); Williamson v. Aldinger, et al., No. 03 600331 (United States District Court for the Northern District of Illinois). The lawsuits principally asserted claims for breach of fiduciary duty in connection with our restatement of earnings announced on August 14, 2002, the allegedly improper lending practices by Household's subsidiaries and the alleged failure by certain Household officers to take appropriate steps to maximize the value of the merger transaction between Household and HSBC Holdings plc announced on November 14, 2002. On March 18, 2003, a memorandum of understanding was signed by the parties containing the essential terms of the settlement of all four lawsuits. Those settlement terms included a $55 million reduction in the termination fee for the Household-HSBC merger, a supplemental disclosure to Household shareholders in the supplemental Household proxy statement, a confirmation from Goldman Sachs stating that as of the date of the confirmation it was aware of nothing that would cause it to withdraw its November 14, 2002 opinion about the fairness of the Household-HSBC merger to Household's common shareholders and payment by the defendants of plaintiff's costs relating to notice to stockholders as well as $2.0 million in attorneys fees for plaintiffs' counsel. A stipulation reflecting the settlement was signed by the parties on September 22, 2003 and the Circuit Court, Cook County, Illinois, Chancery Division preliminarily approved the settlement of the Bailey, McLaughlin and Pace lawsuits on September 29, 2003 and directed that notice be provided to Household stockholders and class 44 members. Following the distribution of the notice, the Circuit Court, Cook County, Illinois, Chancery Division held a settlement fairness hearing on December 23, 2003. The final order dismissing the state court cases (Pace, McLaughlin and Bailey) was entered on June 7, 2004. The final order dismissing the Williamson case was entered by the United States District Court for the Northern District of Illinois on July 23, 2004. 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 HFC) violated the Illinois Interest Act by imposing settlement 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 contained provisions that preempted state law 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 were 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 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. At this time, we are unable to quantify the potential impact of this decision should it receive retroactive application. Securities Litigation In August 2002, we restated previously reported consolidated financial statements. The restatement related to a MasterCard and Visa affinity credit card relationship and a third party marketing agreement, which were entered into between 1996 and 1999. All were part of our credit card services business. In consultation with our prior auditors, Arthur Andersen LLP, we treated payments made in connection with these agreements as prepaid assets and amortized them in accordance with the underlying economics of the agreements. Our current 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 $70.2 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 45 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, 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. 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 remain essentially allege 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. The Court has ordered that all discovery, including class certification issues, must be completed by September 17, 2004 and dispositive motions and responses must be filed by November 8, 2004. 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 jurisidiction over the defendants. The plaintiffs have filed notice of their intent to appeal. 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. 46 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 6. Exhibits and Reports on Form 8-K -------------------------------------------------------------------------------- (a) Exhibits 12 Statement of Computation of Ratio of Earnings to Fixed Charges. 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 Ratings. (b) Reports on Form 8-K No Current Reports on Form 8-K were filed by the Registrant during the second quarter of 2004. 47 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 FINANCE CORPORATION (Registrant) Date: August 2, 2004 /s/ Simon C. Penney ------------------------------- Simon C. Penney Chief Financial Officer 48 Exhibit Index -------------------------------------------------------------------------------- 12 Statement of Computation of Ratio of Earnings to Fixed Charges. 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 Ratings. 49 Exhibit 12 Computation of Ratio of Earnings to Fixed Charges -------------------------------------------------------------------------------- Six months March 29 January 1 ended through through June 30, June 30, March 28, 2004 2003 2003 ------------------------------------------------------------------------- (Successor) (Successor) (Predecessor) (in millions) Net income......................... $ 992.3 $ 394.8 $ 460.7 Income tax expense................. 503.6 206.1 240.6 -------- -------- -------- Income before income tax expense... 1,495.9 600.9 701.3 -------- -------- -------- Fixed charges: Interest expense (1)............ 1,021.0 472.7 785.3 Interest portion of rentals (2). 21.9 9.9 15.3 -------- -------- -------- Total fixed charges................ 1,042.9 482.6 800.6 -------- -------- -------- Total earnings as defined.......... $2,538.8 $1,083.5 $1,501.9 ======== ======== ======== Ratio of earnings to fixed charges. 2.43 2.25 1.88 -------- (1)For financial statement purposes for the periods January 1 through March 28, 2003 and March 29 through June 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. 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, Chief Executive Officer of Household Finance Corporation, certify that: 1. I have reviewed this report on Form 10-Q of Household Finance Corporation; 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: August 2, 2004 /s/ William F. Aldinger ----------------------------- William F. Aldinger Chief Executive Officer Certification of Chief Financial Officer I, Simon C. Penney, Chief Financial Officer of Household Finance Corporation, certify that: 1. I have reviewed this report on Form 10-Q of Household Finance Corporation; 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: August 2, 2004 /s/ Simon C. Penney ----------------------------- Simon C. Penney 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 Finance Corporation (the "Company") on Form 10-Q for the period ending June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, William F. Aldinger, 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 Chief Executive Officer August 2, 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 Finance Corporation (the "Company") on Form 10-Q for the period ending June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Simon C. Penney, 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 Chief Financial Officer August 2, 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 Finance Corporation and will be retained by Household Finance Corporation 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 June 30, 2004 Corporation Service Fitch, Inc. --------------------------------------------------------------- Household Finance Corporation Senior debt............... A A1 A Senior subordinated debt.. A- A2 A- Commercial paper.......... A-1 P-1 F-1 Household Bank (SB), N.A. Senior debt............... A A1 A --------------------------------------------------------------- : This information is provided by RNS The company news service from the London Stock Exchange

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