Household International reported third quarter net income of $221 million, or $.45 per diluted share. These results reflect a settlement charge and related expenses of $333 million, after tax. Excluding this charge, operating net income was $554 million, or $1.17 per diluted share. The company reported net income of $486 million, or $1.03 per diluted share, in the third quarter of 2001.
“Household’s operating results this year have been strong, even as the economic environment remains challenging,” said William F. Aldinger, chairman and chief executive officer. “In the third quarter, receivable and revenue growth were solid, credit performance was within our expectations and we further strengthened our reserves in the face of the prolonged weakness in the U.S. economy.”
At September 30, 2002, the company’s managed basis portfolio, which includes loans that the company has securitized, totaled $107.6 billion, a 12 percent increase from the prior-year level. Growth was strongest in real estate secured receivables, coming from both the U. S. consumer lending branch and mortgage services businesses.
Compared to the second quarter, managed basis receivables grew 8 percent on an annualized basis. During the quarter, the company sold $1.6 billion of real estate loans. Excluding the loan sales, the portfolio grew an annualized 14 percent.
The company’s owned basis portfolio totaled $84.2 billion at September 30th, 11 percent higher than the level of a year ago due to growth in the real estate and personal non-credit card portfolios. The owned basis portfolio was 1 percent higher than at June 30th due to growth in MasterCard/Visa and personal non-credit card loans.
Net revenues for the company’s owned basis portfolio grew $424 million, or 17 percent, from the year ago quarter.
Household’s owned basis net interest margin for the third quarter was $1.7 billion, an increase of $225 million, or 15 percent. The increase resulted from growth in the loan portfolio partially offset by a decline in the company’s owned basis net interest margin percent to 7.46 percent from 7.94 percent a year ago. This decline was due to the impact of the company’s liquidity-related investment portfolio, which was not a factor in last year’s third quarter.
Managed basis net revenues grew $678 million, or 25 percent, from a year ago due to increased fee income and higher receivable volume.
Compared to a year ago, Household’s managed basis net interest margin grew $379 million, or 19 percent, to $2.4 billion. The company’s managed basis net interest margin percentage equaled 8.35 percent, a decline from 8.51 percent in the year-ago quarter. Net interest margin on a managed basis is greater than on an owned basis because the managed basis portfolio includes relatively more unsecured loans, which have higher yields.
Fee income, on both an owned and managed basis, increased compared to the third quarter of 2001 due to higher levels of credit card fees from both card businesses.
Securitization revenue, on an owned basis, increased $105 million, or 23 percent, from the prior year. The company continued to actively access the asset backed securities market as part of its liquidity management plans to limit dependence on short-term unsecured debt in this time of volatile markets. Average receivables securitized were $22.6 billion during the quarter, compared to $19.6 billion in the year-ago quarter.
Other income, on both an owned and managed basis, increased $50 million from the prior-year quarter. Higher revenues from the company’s mortgage operations and higher servicing fees contributed to the increase.
For the third quarter, the company’s operating expenses totaled $1.6 billion, including a $525 million charge reflecting the costs of a settlement agreement and related expenses. The company announced on October 11th a preliminary agreement with a multi-state group of state attorneys general and regulatory agencies. Operating expenses, excluding the settlement charge and related expenses, increased 8 percent from a year ago, due to higher marketing and personnel costs. Household’s managed basis efficiency ratio, excluding the settlement charge and related expenses, was 29.4 percent in the third quarter, compared to 34.6 percent a year ago.
Credit Quality and Loss Reserves
The company monitors credit quality trends on a managed basis because the loans that it securitizes are subjected to underwriting standards comparable to the owned basis portfolio, are serviced by operating personnel without regard to ownership and result in similar credit exposure for the company.
At September 30th, the managed basis delinquency ratio (60+days) was 4.82 percent, compared to 4.53 percent in the second quarter and 4.43 percent a year ago. Higher delinquency in the credit card and real estate secured portfolios drove the increase. The annualized managed basis net charge-off ratio for the third quarter was 4.39 percent, up from 4.26 percent for the second quarter and 3.74 percent for the year-ago quarter.
The owned basis delinquency ratio at September 30th was 5.01 percent, compared to 4.61 percent at June 30th and 4.58 percent a year ago. The annualized owned basis net charge-off ratio for the third quarter was 3.98 percent compared to 3.76 for the second quarter and 3.43 percent in the year- ago quarter.
Managed basis credit loss reserves totaled $4.7 billion at the end of the third quarter. At June 30th, managed basis credit loss reserves were $4.4 billion and totaled $3.6 billion at the end of the third quarter of 2001. The managed basis ratio of credit loss reserves to managed receivables equaled 4.36 percent at September 30th, compared to 4.14 percent at June 30th and 3.72 percent a year earlier. Managed basis reserves-to-nonperforming loans were 113.1 percent at September 30th, compared to 112.4 percent at June 30th and 103.9 percent a year ago.
Owned basis credit loss reserves totaled $3.1 billion at September 30th, an increase of $144 million from June 30th and up from $2.5 billion a year earlier. The ratio of owned basis reserves-to-owned receivables totaled 3.72 percent, an increase from 3.59 percent at June 30th and 3.28 percent a year earlier. Owned basis reserve ratios are somewhat lower than comparable managed basis ratios because there is a greater mix of real estate secured loans, which have lower credit losses than unsecured products, in the owned portfolio.
Liquidity and Capital
During the quarter, Household issued $350 million in perpetual preferred stock and continued to access the debt capital markets to fund its operations. The company also actively accessed the asset backed securities market, completing $3.4 billion in real estate secured financings and securitizing $2.5 billion in other receivables.
The company’s tangible equity to tangible managed assets ratio was 7.95 percent at September 30th. Excluding the settlement charge and related expenses, this ratio would have been 8.22 percent. A year ago, the company’s tangible managed capital ratio was 7.52 percent.
Household’s businesses are leading providers of consumer loan, credit cards, auto finance and credit insurance products in the United States, United Kingdom and Canada. In the United States, Household’s largest business, founded in 1878, operates under the two oldest and most recognized names in consumer finance – HFC and Beneficial. Household is also one of the nation’s largest issuers of private label and general purpose credit cards, including The GM Card(R) and the AFL-CIO’s Union Plus(R) card.
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