e10vk
UNITED STATES SECURITIES
AND
EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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(Mark One)
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x
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2007
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
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Commission file number 1-8198
HSBC FINANCE
CORPORATION
(Exact name of registrant as
specified in its charter)
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Delaware
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86-1052062
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(State of incorporation)
26525 North Riverwoods Boulevard, Mettawa, Illinois
(Address of principal executive
offices)
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(I.R.S. Employer Identification
No.)
60045
(Zip Code)
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(224) 544-2000Registrants
telephone number, including area code
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Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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8.40% Debentures Maturing at Holders Option Annually
on
December 15, Commencing in 1986 and Due May 15, 2008
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New York Stock Exchange
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Floating Rate Notes due May 21, 2008
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New York Stock Exchange
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Floating Rate Notes due September 15, 2008
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New York Stock Exchange
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Floating Rate Notes due October 21, 2009
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New York Stock Exchange
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Floating Rate Notes due October 21, 2009
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New York Stock Exchange
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Floating Rate Notes due March 12, 2010
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New York Stock Exchange
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4.625% Notes due September 15, 2010
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New York Stock Exchange
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5.25% Notes due January 14, 2011
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New York Stock Exchange
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63/4% Notes
due May 15, 2011
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New York Stock Exchange
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5.7% Notes due June 1, 2011
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New York Stock Exchange
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Floating Rate Notes due April 24, 2012
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New York Stock Exchange
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5.9% Notes due June 19, 2012
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New York Stock Exchange
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Floating Rate Notes due July 19, 2012
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New York Stock Exchange
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Floating Rate Notes due September 14, 2012
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New York Stock Exchange
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Floating Rate Notes due January 15, 2014
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New York Stock Exchange
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5.25% Notes due January 15, 2014
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New York Stock Exchange
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5.0% Notes due June 30, 2015
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New York Stock Exchange
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5.5% Notes due January 19, 2016
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New York Stock Exchange
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Floating Rate Notes due June 1, 2016
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New York Stock Exchange
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6.875% Notes due January 30, 2033
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New York Stock Exchange
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6% Notes due November 30, 2033
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New York Stock Exchange
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Depositary Shares (each representing one-fortieth share of
6.36% Non-Cumulative Preferred Stock, Series B, no par,
$1,000 liquidation preference)
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New York Stock Exchange
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Guarantee of Preferred Securities of HSBC Capital Trust IX
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes x No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes x No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. x
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelereated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the Exchange Act. (Chech one):
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Large accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer x
(Do not check if a smaller reporting company)
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Smaller reporting
company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No x
As of February 28, 2008, there were 58 shares of the
registrants common stock outstanding, all of which are
owned by HSBC Investments (North America) Inc.
DOCUMENTS
INCORPORATED BY REFERENCE
None.
TABLE OF
CONTENTS
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Part/Item No
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Page
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Part I
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Item 1.
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Business
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4
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Organization History and Acquisition by HSBC
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4
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HSBC North America Operations
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4
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HSBC Finance Corporation General
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5
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Operations
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9
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Funding
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13
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Regulation and Competition
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15
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Corporate Governance and Controls
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17
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Cautionary Statement on Forward-Looking Statements
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18
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Item 1A.
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Risk Factors
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18
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Item 1B.
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Unresolved Staff Comments
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22
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Item 2.
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Properties
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22
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Item 3.
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Legal Proceedings
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22
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Item 4.
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Submission of Matters to a Vote of Security Holders
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25
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Part II
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Item 5.
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Market for Registrants Common Equity and Related
Stockholder Matters
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Item 6.
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Selected Financial Data
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26
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Item 7.
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Managements Discussion and Analysis of Financial Condition
and Results of Operations
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29
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Executive Overview
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29
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Basis of Reporting
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40
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Critical Accounting Policies
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48
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Receivables Review
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53
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Results of Operations
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56
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Segment Results IFRS Management Basis
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65
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Credit Quality
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75
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Liquidity and Capital Resources
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91
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Off Balance Sheet Arrangements and Secured Financings
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100
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Risk Management
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103
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Glossary of Terms
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109
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Credit Quality Statistics
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112
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Analysis of Credit Loss Reserves Activity
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114
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Net Interest Margin
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116
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Reconciliations to U.S. GAAP Financial Measures
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118
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Item 7A.
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Quantitative and Qualitative Disclosures About Market Risk
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121
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Item 8.
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Financial Statements and Supplementary Data
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121
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Item 9.
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Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
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194
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Item 9A.
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Controls and Procedures
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194
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Item 9B.
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Other Information
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194
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2
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Part/Item No
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Page
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Part III
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Item 10.
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Directors, Executive Officers and Corporate Governance
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194
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Item 11.
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Executive Compensation
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202
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Item 12.
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Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
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232
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Item 13.
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Certain Relationships and Related Transactions, and Director
Independence
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233
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Item 14.
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Principal Accountant Fees and Services
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234
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Part IV
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Item 15.
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Exhibits and Financial Statement Schedules
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235
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Financial Statements
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235
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Exhibits
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235
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Signatures
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237
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3
HSBC
Finance Corporation
PART I
Item 1.
Business.
Organization
History and Acquisition by HSBC
HSBC Finance Corporation traces its origin to 1878 and operated
as a consumer finance company under the name Household Finance
Corporation (HFC) for most of its history. In 1981,
HFC shareholders approved a restructuring that resulted in the
formation of Household International, Inc.
(Household) as a publicly held holding company and
HFC became a wholly-owned subsidiary of Household. For a period,
Household diversified its operations outside the financial
services industry, but returned solely to consumer finance
operations through a series of divestitures in the 1980s
and 1990s.
On March 28, 2003, Household was acquired by HSBC Holdings
plc (HSBC) by way of merger with H2 Acquisition
Corporation (H2), a wholly owned subsidiary of HSBC,
in a purchase business combination. Following the merger, H2 was
renamed Household International, Inc. Subsequently,
HSBC transferred its ownership interest in Household to a wholly
owned subsidiary, HSBC North America Holdings Inc. (HSBC
North America), which subsequently contributed
Household to its wholly-owned subsidiary, HSBC Investments
(North America) Inc.
On December 15, 2004, Household merged with its wholly
owned subsidiary, HFC. By operation of law, following the
merger, all obligations of HFC became direct obligations of
Household. Following the merger, Household changed its name to
HSBC Finance Corporation. The name change was a continuation of
the rebranding of the Household businesses to the HSBC brand.
These actions were taken to create a stronger platform to
advance growth across all HSBC business lines.
For all reporting periods up to and including the year ended
December 31, 2004, HSBC prepared its consolidated financial
statements in accordance with U.K. Generally Accepted Accounting
Principles (U.K. GAAP). From January 1, 2005,
HSBC has prepared its consolidated financial statements in
accordance with International Financial Reporting Standards
(IFRSs) as endorsed by the European Union and
effective for HSBCs reporting for the year ended
December 31, 2005. HSBC Finance Corporation reports to HSBC
under IFRSs and, as a result, corporate goals and the individual
goals of executives are calculated in accordance with IFRSs.
HSBC
North America Operations
HSBC North America is the holding company for HSBCs
operations in the United States and Canada. The principal
subsidiaries of HSBC North America are HSBC Finance Corporation,
HSBC Bank Canada, a Federal bank chartered under the laws of
Canada, HSBC USA Inc. (HUSI), a U.S. bank
holding company, HSBC Markets (USA) Inc., a holding company for
investment banking and markets subsidiaries, and HSBC
Technology & Services (USA) Inc., a provider of
information technology services. HUSIs principal
U.S. banking subsidiary is HSBC Bank USA, National
Association (HSBC Bank USA). Under the oversight of
HSBC North America, HSBC Finance Corporation works with its
affiliates to maximize opportunities and efficiencies in
HSBCs operations in Canada and the United States. These
affiliates do so by providing each other with, among other
things, alternative sources of liquidity to fund operations and
expertise in specialized corporate functions and services. This
has been demonstrated by purchases and sales of receivables
between HSBC Bank USA and HSBC Finance Corporation, a pooling of
resources to create a new unit that provides technology services
to all HSBC North America subsidiaries and shared, but
allocated, support among the affiliates for tax, legal, risk,
compliance, accounting, insurance, strategy and internal audit
functions. In addition, clients of HSBC Bank USA and other
affiliates are investors in our debt and preferred securities,
providing significant sources of liquidity and capital to HSBC
Finance Corporation. HSBC Securities (USA) Inc., a Delaware
corporation, registered broker dealer and a subsidiary of HSBC
Markets (USA) Inc., leads or participates as underwriter of all
domestic issuances of our term corporate and asset backed
securities. While HSBC Finance Corporation does not receive
advantaged pricing, the underwriting fees and commissions
payable to HSBC Securities (USA) Inc. benefit HSBC as a whole.
4
HSBC Finance Corporation
HSBC
Finance Corporation General
HSBC Finance Corporations subsidiaries provide
middle-market consumers in the United States and Canada with
several types of loan products. We also currently offer consumer
loans in the United Kingdom and the Republic of Ireland. Prior
to November 2006, when we sold our interests to an affiliate, we
also offered consumer loans in Slovakia, the Czech Republic and
Hungary. HSBC Finance Corporation is the principal fund raising
vehicle for the operations of its subsidiaries. In this
Form 10-K,
HSBC Finance Corporation and its subsidiaries are referred to as
we, us or our.
Our lending products include real estate secured loans, auto
finance loans,
MasterCard(1),
Visa(1),
American
Express(1)
and
Discover(1)
credit card loans, private label credit card loans, personal
non-credit card loans and prior to October 2006, retail sales
contracts through our Consumer Lending branches. We also
initiate tax refund anticipation loans and other related
products in the United States and offer specialty insurance
products in the United States and Canada. The insurance
operations in the United Kingdom were sold November 1, 2007
to Aviva plc and its subsidiaries (Aviva).
Subsequent to November 1, 2007, we distribute insurance
products in the United Kingdom through our branch network which
are underwritten by Aviva. We generate cash to fund our
businesses primarily by collecting receivable balances; issuing
commercial paper, medium and long term debt; borrowing from HSBC
subsidiaries and investors; selling consumer receivables; and
borrowing under secured financing facilities. We use the cash
generated by these financing activities to invest in and
originate new receivables, to service our debt obligations and
to pay dividends to our parent and preferred stockholders. At
December 31, 2007, we had approximately
27,980 employees and over 62.5 million customers.
Consumers residing in the state of California accounted for 12%
of our domestic consumer receivables. We also have significant
concentrations of domestic consumer receivables in Florida 7%,
New York 6%, Texas 5%, Ohio 5% and Pennsylvania 5%.
Significant
Developments related to our Mortgage Services and Consumer
Lending Businesses
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Housing and Mortgage Markets. Real estate
markets in a large portion of the United States have been
affected by a general slowing in the rate of appreciation in
property values, or an actual decline in some markets such as
California, Florida and Arizona, while the period of time
available properties remain on the market continues to increase.
During the second half of 2007, there has been unprecedented
turmoil in the mortgage lending industry. The lower secondary
market demand for subprime loans resulted in reduced liquidity
for subprime mortgages. Mortgage lenders have also tightened
lending standards which impacts borrowers ability to
refinance existing mortgage loans. It is now generally believed
that the slowdown in the housing market will be deeper in terms
of its impact on housing prices and the duration will extend at
least through 2008. The combination of these factors has further
reduced the refinancing opportunities of some of our customers
as the ability to refinance and access any equity in homes is no
longer an option to many customers. This impacts both credit
performance and run-off rates and has resulted in rising
delinquency rates for real estate secured loans in our portfolio
and across the industry.
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Mortgage Services. Mortgage origination
volumes were peaking in late 2005 and early 2006, while property
values continued to increase rapidly. In the first half of 2006,
industry statistics and reports indicated that mortgage loan
originations throughout the industry from 2005 and 2006 were
performing worse than originations from prior periods. At that
time, worsening performance was attributable to the quality of
certain loan products, particularly those originated by mortgage
brokers, but generally not to declines in real property values.
Loans with particularly poor performance were stated
income loans which were underwritten based upon loan
applicants representations of annual income, not verified
by receipt of supporting documentation and
interest-only loans, for which borrowers paid only
interest accrued on their loan for a specified period of time
before their monthly payment increased to include an amount to
be applied to the principal balance of their loan. Consistent
with these trends, during the second
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(1) MasterCard
is a registered trademark of MasterCard International,
Incorporated; Visa is a registered trademark of Visa, Inc.;
American Express is a registered trademark of American Express
Company and Discover is a registered trademark of Novus Credit
Services, Inc.
5
HSBC Finance Corporation
quarter of 2006, we began to observe deterioration in the
performance of mortgage loans acquired in 2005 by our Mortgage
Services business, specifically in the second lien and portions
of the first lien portfolios. In the fourth quarter of 2006, the
deterioration of these loan types worsened considerably and
began to affect the same types of loans acquired in 2006 by
Mortgage Services. As additional information on 2005 and 2006
vintages became available, we observed increased and deeper
deterioration than originally estimated. Portfolio delinquencies
and charge-offs in the Mortgage Services portfolio were
significantly higher than forecasted.
Analysis of the performance of our second liens that were
subordinate to first lien adjustable rate mortgages
(ARMs) in late 2006 indicated a significant level of
impairment. Among other things, we observed that as housing
prices declined, little, if any, equity remained in the second
liens. Losses in the first lien ARM portfolio were also expected
to increase based on the size of the scheduled increase in
monthly payments as a result of impending interest rate resets.
The impact of a softening housing market and portfolio related
factors described above, led to a significant increase in
estimated losses inherent in the Mortgage Services portfolio, as
described herein. A significant number of our second lien
mortgages are subordinate to first lien ARMs that face repricing
in the near-term which in certain cases may also negatively
impact the probability of repayment on our second lien mortgage
loan. As the interest rate adjustments will occur in an
environment of lower home value appreciation or depreciation and
tightening credit, we expect the probability of default for
adjustable rate first mortgages subject to repricing as well as
any second lien mortgage loans that are subordinate to an
adjustable rate first lien held by another lender will be
greater than what we have historically experienced prior to late
2006. As more fully discussed in the section
Regulation Consumer under
Regulation and Competition, certain legislation and
other regulations are being proposed in the United States to
address these concerns, but we cannot currently predict the
impact of these proposals on our portfolio and financial results
in this unprecedented environment.
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In December 2006, we established common management over our
Consumer Lending and Mortgage Services businesses to enhance our
combined organizational effectiveness, drive operational
efficiency and improve overall balance sheet management
capabilities.
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Consumer Lending. Consumer Lending
experienced relatively stable performance in its portfolio
throughout 2006 and into the first half of 2007. Notwithstanding
this relatively stable performance, in late 2006 and early 2007
Consumer Lending noted weakening early stage delinquency in
certain real estate secured loans originated since 2005. This
was consistent with industry trends for retail portfolio
lenders. In addition as noted above, we observed that real
estate markets in a large portion of the United States had been
affected by a general slowing in the rate of appreciation in
property values, or an actual decline in some markets, while the
period of time properties available for sale remained on the
market had increased. In the third quarter of 2007, Consumer
Lending began to experience the impact of an industry-wide
tightening of underwriting criteria and the elimination of many
loan products previously available to consumers. This
significantly reduced the ability of consumers to refinance
their loans and to utilize equity in their homes to satisfy
outstanding debt. This combined impact of reduced financing
options and slowing appreciation or declining property values
had a significant effect on delinquency, Consumer Lendings
loss forecasts and the estimate of probable credit losses
inherent in the loan portfolio. This credit deterioration
migrated across all Consumer Lending origination vintages during
the second half of 2007, but in particular in loans which were
originated in 2006 and the first half of 2007. The deterioration
has been most severe in the first lien portions of the portfolio
in the geographic regions most impacted by the decline in home
value appreciation and rising unemployment rates, particularly
in the states of California, Florida, Arizona, Virginia,
Washington, Maryland, Minnesota, Massachusetts and New Jersey
which account for approximately 55 percent of the increase
in dollars of two-months-and-over contractual delinquency during
2007 and approximately 40 percent of Consumer
Lendings real estate secured portfolio. This worsening
trend and an outlook for increased charge-offs has resulted in a
marked increase in the provision for credit losses at our
Consumer Lending business during the second half of 2007. In
response to this deterioration, Consumer Lending
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6
HSBC Finance Corporation
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increased collection staffing, expanded the use of its
foreclosure avoidance program and took action to reduce risk in
its real estate secured and personal
non-credit
card receivable portfolios going forward.
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In the fourth quarter of 2007, an impairment charge in the
amount of $3,320 million was recorded by our Consumer
Lending business, relating to all goodwill, as well as all
tradename and customer relationship intangibles associated with
the HSBC acquisition. Additional detail regarding this
impairment is set forth below in the Other Significant
Developments Since 2004 section.
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Mortgage Services and Decision One
Closures. Prior to the first quarter 2007, the
Mortgage Services operation purchased non-conforming first and
second lien position residential mortgage loans, including
open-end home equity loans. Purchases were either
flow acquisitions (i.e., loan by loan) or
bulk acquisitions (i.e., pools of loans). Through
Decision One Mortgage Company, LLC (Decision One),
Mortgage Services also originated loans sourced by a network of
unaffiliated brokers. In March 2007, in response to all the
factors described above, we decided to discontinue correspondent
channel acquisitions by our Mortgage Services business and in
June 2007 indicated that our Decision One wholesale operation,
which closed loans sourced by brokers primarily for resale,
would continue operations, largely reselling such loans to an
HSBC affiliate. However, the turmoil in the mortgage lending
industry caused us to re-evaluate our strategy. In September
2007, we announced that we would cease operations of Decision
One. The decision to terminate the Decision One operations
coupled with our previous announcement of the discontinuation of
correspondent channel acquisitions resulted in the impairment of
goodwill allocated to the Mortgage Services business. We
recorded a non-cash impairment charge of $881 million in
the third quarter of 2007 which was disclosed in our Current
Report
Form 8-K
filed on September 21, 2007.
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Consumer Lending Risk Mitigation Branch
Closures. In response to the weakening housing
market, Consumer Lending took the following actions to reduce
risk in its real estate secured and personal non-credit card
receivable portfolios going forward including tightening of
credit score and debt-to income requirements for first lien
loans; reducing loan-to-value (LTV) ratios in first
and second lien loans; eliminating the small volume of ARM loan
originations; discontinuing the personal homeowner loan product
(a secured high loan-to-value product (PHL) that we
underwrote and serviced like an unsecured loan); tightening
underwriting criteria for all products and eliminating
guaranteed direct mail loans to new customers. These actions led
us to evaluate the appropriate scope and geographic distribution
of the Consumer Lending branch network. As a result of this new
effort, when coupled with an earlier branch network optimization
strategy, we reduced our branch network from 1,382 branches at
December 31, 2006 to approximately 1,000 branches at
December 31, 2007.
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ARM Adjustment Risk Mitigation. Numerous risk
mitigation efforts have been implemented, commencing in 2006 and
continuing throughout 2007 relating to the affected components
of the Mortgage Services portfolio. These include enhanced
segmentation and analytics to identify the higher risk portions
of the portfolio and increased collections capacity. In 2008 and
2009, approximately $3.7 billion and $4.1 billion,
respectively, of domestic ARM loans will experience their first
interest reset based on original contractual reset date and
receivable levels outstanding at December 31, 2007. As part
of a new program established in October 2006 specifically
designed to meet the needs of select customers with ARMs, we are
proactively writing and calling customers who have ARMs nearing
the first reset that we expect will be the most impacted by a
rate adjustment. As appropriate and in accordance with defined
policies, if we believe the customer has the ability to pay for
the foreseeable future under the modified terms, we have been
modifying the loans in most instances by delaying the first
interest rate adjustment. Modifications under this particular
program may be permanent, but most in 2006 and 2007 were
twelve-months in duration. In 2008, we anticipate approximately
$1.3 billion of ARM loans modified under this
modification program, which are excluded from the reset numbers
above, will experience their first reset. We are currently
developing longer term modification programs that will be based
on customers needs and their ability to pay and with a view to
maximize future cash flow. Going forward, we will be offering
our customers longer term modifications, potentially up to
5 years. At the end of the modification term, the ability
of customers to pay will be re-evaluated and, if necessary and
the customer qualifies for another modification, an additional
temporary or permanent modification may then be granted.
Additionally we have expanded a program allowing qualified
customers to refinance their ARM loan into a fixed rate mortgage
loan through our Consumer Lending
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7
HSBC Finance Corporation
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branch network if all current underwriting criteria are met. For
all our receivable portfolios, we have markedly increased our
collection capacity.
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Other
Significant Developments Since 2004
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In 2007, we initiated an ongoing in-depth analysis of the risks
and strategies of our remaining businesses and product
offerings. Additional detail regarding changes implemented in
2007 as a result of this analysis is set forth in 2007
Events section of our Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations (2007 MD&A).
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During the fourth quarter of 2007, we performed interim goodwill
and other intangible impairment tests for the businesses where
significant changes in the business climate have occurred as
required by SFAS No. 142, Goodwill and Other
Intangible Assets, (SFAS No. 142).
These tests revealed that the business climate changes,
including the subprime marketplace conditions described above,
when coupled with the changes to our product offerings and
business strategies completed through the fourth quarter of 2007
as described in 2007 Events of Item 7. of the
2007 MD&A, have resulted in an impairment of all goodwill
allocated to our Consumer Lending (which includes Solstice
Capital Group Inc.) and Auto Finance businesses, as well as all
tradename and customer relationship intangibles relating to the
HSBC acquisition allocated to our Consumer Lending business.
Therefore, we recorded an impairment charge in the fourth
quarter of 2007 of $3,320 million relating to our Consumer
Lending business (including $858 million related to
tradename and customer relationship intangibles) and a
$312 million goodwill impairment charge relating to our
Auto Finance business. These impairments represent all of the
goodwill previously allocated to these businesses and all of the
HFC and Beneficial tradenames and customer relationship
intangibles associated with the HSBC acquisition. Additionally,
the changes to product offerings and business strategies
completed through the fourth quarter of 2007 have also resulted
in an impairment of the goodwill allocated to our United Kingdom
business. As a result, an impairment charge of $378 million
was also recorded in the fourth quarter of 2007 representing all
of the goodwill previously allocated to this business.
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In 2007, we implemented ongoing in-depth cost containment
measures. This includes centralizing certain cost functions and
increasing the use of HSBC affiliates outside of the United
States to provide various support services to our operations,
including, among other areas, customer service, systems,
collections and accounting functions.
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In the third quarter of 2007, we decided to close our loan
underwriting, processing and collections center in Carmel,
Indiana (the Carmel Facility) to optimize our
facility and staffing capacity given the overall reductions in
business volume. The Carmel Facility provided loan underwriting,
processing and collection activities for the operations of our
Consumer Lending and Mortgage Services business. The collection
activities performed in the Carmel Facility have been redeployed
to other facilities in our Consumer Lending business.
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In May 2007, we decided to integrate our Retail Services and
Credit Card Services businesses. It is anticipated that the
integration of management reporting will be completed in the
first quarter of 2008 and at that time will result in the
combination of these businesses into one reporting segment in
our financial statements.
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Since our acquisition by HSBC, our debt ratings as assigned by
Fitch Investors Service (Fitch), Moodys
Investors Service (Moodys) and Standard and
Poors Corporation (S&P) have improved to
AA-, Aa3 and AA-, respectively for our senior debt, while our
Commercial Paper ratings have improved to F-1+,
P-1, and
A-1+,
respectively. In the fourth quarter of 2007, Moodys,
Standard & Poors and Fitch changed the total
outlook on our issuer default rating from positive
to stable. See Exhibit 99.1 to this Form
10-K for a
complete listing of debt ratings of HSBC Finance Corporation and
our subsidiaries.
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Effective January 1, 2007, we elected to early adopt FASB
Statement No. 157, Fair Value Measurements,
(SFAS No. 157). SFAS No. 157
establishes a single authoritative definition of value, sets out
a framework for measuring fair value, and provides a hierarchal
disclosure framework for assets and liabilities measured at fair
value. The adoption of SFAS No. 157 did not have any
impact on our financial position or results of operations.
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8
HSBC Finance Corporation
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Effective January 1, 2007, we early adopted
SFAS No. 159 which provides for a fair value option
election that allows companies to irrevocably elect fair value
as the initial and subsequent measurement attribute for certain
assets and liabilities, with changes in fair value recognized in
earnings when they occur. SFAS No. 159 permits the fair
value option election (FVO) on an instrument by
instrument basis at the initial recognition of an asset or
liability or upon an event that gives rise to a new basis of
accounting for that instrument. We elected FVO for certain
issuances of our fixed rate debt in order to align our
accounting treatment with that of HSBC under International
Financial Reporting Standards (IFRSs).
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Our Consumer Lending business purchased Solstice Capital Group
Inc. with assets of approximately $49 million in the fourth
quarter of 2006.
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In November 2006, we acquired the $2.5 billion mortgage
loan portfolio of KeyBank, N.A.s division operated as
Champion Mortgage, a retail mortgage lending company.
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In November 2006, we sold all of the capital stock of our
operations in the Czech Republic, Hungary and Slovakia to a
wholly owned subsidiary of HSBC Bank plc.
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In 2005, we expanded our presence in the domestic near-prime
credit card market and strengthened our capabilities to serve
the full spectrum of credit card customers through the
acquisition of Metris Companies, Inc. (Metris).
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Operations
Our operations are divided into three reportable segments:
Consumer, Credit Card Services and International. Our Consumer
segment includes our Consumer Lending, Mortgage Services, Retail
Services and Auto Finance businesses. Our Credit Card Services
segment includes our domestic MasterCard, Visa, American Express
and Discover credit card business. In May 2007, we decided to
integrate our Retail Services and Credit Card Services
businesses. We anticipate the integration of management
reporting will be completed in the first quarter of 2008 and at
that time will result in the combination of these businesses
into one reporting segment in our financial statements. Our
International segment includes our foreign operations in the
United Kingdom, Canada and the Republic of Ireland and prior to
November 9, 2006, operations in Slovakia, the Czech
Republic and Hungary. The insurance operations in the United
Kingdom were sold in November 2007 to Aviva. Information about
businesses or functions that fall below the segment reporting
quantitative threshold tests such as our Insurance Services,
Taxpayer Financial Services and Commercial operations, as well
as our Treasury and Corporate activities, which include fair
value adjustments related to purchase accounting and related
amortization, are included under the All Other
caption within our segment disclosure.
Corporate goals and individual goals of executives are currently
calculated in accordance with IFRSs under which HSBC prepares
its consolidated financial statements. In 2006 we initiated a
project to refine the monthly internal management reporting
process to place a greater emphasis on IFRS management basis
reporting (a
non-U.S. GAAP
financial measure) (IFRS Management Basis). As a
result, operating results are now being monitored and reviewed,
trends are being evaluated and decisions about allocating
resources, such as employees, are being made almost exclusively
on an IFRS Management Basis. IFRS Management Basis results are
IFRSs results which assume that the private label and real
estate secured receivables transferred to HSBC Bank USA have not
been sold and remain on our balance sheet. IFRS Management Basis
also assumes that all purchase accounting fair value adjustments
relating to our acquisition by HSBC have been pushed
down to HSBC Finance Corporation. Operations are monitored
and trends are evaluated on an IFRS Management Basis because the
customer loan sales to HSBC Bank USA were conducted primarily to
appropriately fund prime customer loans within HSBC and such
customer loans continue to be managed and serviced by us without
regard to ownership. Accordingly, our segment reporting is on an
IFRS Management Basis. However, we continue to monitor capital
adequacy, establish dividend policy and report to regulatory
agencies on an U.S. GAAP basis. A summary of the
significant differences between U.S. GAAP and IFRSs as they
impact our results are summarized in Note 21,
Business Segments, in the accompanying consolidated
financial statements.
9
HSBC Finance Corporation
General
We generally serve non-conforming and non-prime consumers. Such
customers are individuals who have limited credit histories,
modest incomes, high debt-to-income ratios, high loan-to-value
ratios (for auto and real estate secured products) or have
experienced credit problems caused by occasional delinquencies,
prior charge-offs, bankruptcy or other credit related actions.
These customers generally have higher delinquency and credit
loss probabilities and are charged a higher interest rate to
compensate for the additional risk of loss and the anticipated
additional collection initiatives that may have to be undertaken
over the life of the loan. In our credit card, retail services
and international businesses, we also serve prime consumers
either through co-branding, merchant relationships or direct
mailings.
On June 29, 2007, the Federal Financial Regulatory Agencies
(the Agencies) issued a final statement on subprime
mortgage lending which reiterates many of the principles
addressed in the existing guidance relating to risk management
practices and consumer protection laws involving adjustable rate
mortgage products and the underwriting process on stated income
and interest-only loans. We are fully compliant with this
statement as of December 31, 2007. The impact of this
statement will be immaterial on our operations.
We use our centralized underwriting, collection and processing
functions to adapt our credit standards and collection efforts
to national or regional market conditions. Our underwriting,
loan administration and collection functions are supported by
highly automated systems and processing facilities. Our
centralized collection systems are augmented by personalized
early collection efforts. Analytics drive our decisions in
marketing, risk pricing, operations and collections.
We service each customer with a view to understanding that
customers personal financial needs. We recognize that
individuals may not be able to meet all of their financial
obligations on a timely basis. Our goal is to assist consumers
in transitioning through financially difficult times which may
lead to their doing more business with our lending subsidiaries.
As a result, our policies and practices are designed to be
flexible to maximize the collectibility of our loans while not
incurring excessive collection expenses on loans that have a
high probability of being ultimately uncollectible. However, as
discussed above, in the current environment we have been more
proactive in modifying loans on a temporary or permanent basis
where we believe customers will be unable to continue payments.
Proactive credit management, hands-on customer care
and targeted product marketing are means we use to retain
customers and grow our business.
Consumer
Our Consumer Lending business is one of the largest subprime
home equity originators in the United States as ranked by
Inside B&C Lending. At December 31, 2007, this
business has approximately 1,000 branches located in
46 states, and approximately 2.8 million active
customer accounts, $69.4 billion in receivables and
approximately 11,100 employees. It is marketed under both
the HFC and Beneficial brand names, each of which caters to a
slightly different type of customer in the middle-market
population. Both brands offer secured and unsecured loan
products, such as first and second lien position closed-end
mortgage loans, open-end home equity loans, personal non-credit
card loans and auto finance receivables. These products are
marketed through our retail branch network, direct mail,
telemarketing, and Internet sourced applications and leads.
However, due to the worsening market, several actions were taken
in 2007 to reduce risk in its real estate secured and personal
non-credit card receivable portfolios including tightening of
credit score and debt-to income requirements for first lien
loans; reducing loan-to-value (LTV) ratios in first
and second lien loans; eliminating the small volume of ARM loan
originations; discontinuing the personal homeowner loan product
(a secured high loan-to-value product (PHL) that we
underwrote and serviced like an unsecured loan); tightening
underwriting criteria for all products and eliminating
guaranteed direct mail loans to new customers. These actions led
us to evaluate the appropriate scope and geographic distribution
of the Consumer Lending branch network. As a result of this new
effort, when coupled with an earlier branch network optimization
strategy, we have reduced our branch network from 1,382 branches
at December 31, 2006 to approximately 1,000 branches at
December 31, 2007.
Prior to the first quarter of 2007 when we ceased new purchase
activity, our Mortgage Services business purchased
non-conforming first and second lien real estate secured loans
from a network of unaffiliated third party lenders (i.e.
correspondents) based on our underwriting standards. Our
Mortgage Services business had included the operations
10
HSBC Finance Corporation
of Decision One Mortgage Company (Decision One)
which historically originated mortgage loans sourced by
independent mortgage brokers and sold such loans to secondary
market purchasers, including Mortgage Services. In June 2007, we
also limited Decision Ones activities to the origination
of loans primarily for resale to the secondary market operations
of our affiliates. Subsequently, the unprecedented developments
in the mortgage lending industry resulted in a marked reduction
in the secondary market demand for subprime loans and management
concluded that a recovery of a secondary market for subprime
loans was uncertain and could not be expected to stabilize in
the near term. As a result of the continuing deterioration in
the subprime mortgage lending industry, in September 2007, we
announced that our Decision One operations would cease. At
December 31, 2007, our Mortgage Services business has
approximately $33.9 billion in receivables and
approximately 300,000 active customer accounts. Approximately
56% of the Mortgage Services portfolio were fixed rate loans and
81% were in a first lien position.
On December 29, 2004, our domestic private label receivable
portfolio (excluding retail sales contracts at our Consumer
Lending business) of approximately $12.2 billion of
receivables was sold to HSBC Bank USA, and agreements were
entered into to sell substantially all future receivables to
HSBC Bank USA on a daily basis and to service the portfolio for
HSBC Bank USA for a fee. As a result, we now sell substantially
all domestic private label receivables (excluding retail sales
contracts) upon origination, but service the entire portfolio on
behalf of HSBC Bank USA. According to The Nilson Report,
the private label servicing portfolio is the third largest
portfolio in the U.S. Our Retail Services business has over
60 active merchant relationships and we service approximately
15.9 million active customer accounts and have over
2,200 employees. At December 31, 2007, the serviced
private label portfolio consisted of approximately 10% of
receivables in the furniture industry, 34% in the consumer
electronics industry, 31% in the power sport vehicle
(snowmobiles, personal watercraft, all terrain vehicles and
motorcycles) industry and approximately 15% in the department
store industry. Private label financing products are generated
through merchant retail locations, merchant catalog and
telephone sales, and direct mail and Internet applications.
Our Auto Finance business purchases, from approximately 9,200
active dealer relationships, retail installment contracts of
consumers who may not have access to traditional, prime-based
lending sources. We also originate and refinance auto loans
through direct mail solicitations, alliance partners, consumer
lending customers and the Internet. The alliance agreements were
terminated during 2007 and the final funding occurred in
December 2007. The termination of the alliance will not have a
material impact on our results. At December 31, 2007, this
business had approximately $12.1 billion in receivables,
approximately 820,000 active customer accounts and
2,500 employees. Approximately 34% of auto finance
receivables are secured by new vehicles. Throughout 2007, we
continued to shift the mix of new originations to a higher
credit quality by eliminating higher risk loan populations.
These actions have reduced volume in 2007 by
20-25% in
our dealer channel and are expected to continue to reduce volume
into 2008, resulting in reduced net income and narrower spreads
over time. We have also begun to shift the mix of new loan
volume in the direct-to-consumer channel to higher credit
quality. In anticipation of a continuation of the slowing of the
economy, we are implementing additional actions to reduce risk
in 2008 originations which will result in further reductions in
volume going forward.
Credit
Card Services
Our Credit Card Services business includes our MasterCard, Visa,
American Express and Discover receivables in the United States
originated under various brands, including The GM
Card®,
the AFL-CIO Union
Plus®
(UP) credit card, Household Bank, Orchard Bank, HSBC
and the Direct Merchants Bank branded credit cards. This
business has approximately $30.5 billion in receivables,
over 21 million active customer accounts and
5,700 employees. According to The Nilson Report,
this business is the fifth largest issuer of MasterCard or Visa
credit cards in the United States (based on receivables). The GM
Card®,
a co-branded credit card issued as part of our alliance with
General Motors Corporation (GM), enables customers
to earn discounts on the purchase or lease of a new GM vehicle.
The UP card program with the AFL-CIO provides benefits and
services to members of various national and international labor
unions. The Household Bank and Orchard Bank credit cards offer
specialized credit card products to consumers underserved by
traditional providers or are marketed in conjunction with
certain merchant relationships established through our Retail
Services business. The Direct Merchants Bank branded credit card
is a general purpose card marketed to non-prime customers
through direct mail and strategic partnerships. HSBC branded
cards are targeted through direct mail and Internet to the prime
market. In addition, Credit Card
11
HSBC Finance Corporation
Services services $1.1 billion of receivables held by an
affiliate, HSBC Bank USA. New receivables and accounts related
to the HSBC Bank USA portfolio are originated by HSBC Bank
Nevada, N.A., and receivables are sold daily to HSBC Bank USA.
Our Credit Card Services business is generated primarily through
direct mail, telemarketing, Internet applications, application
displays, promotional activity associated with our affinity and
co-branding relationships, mass-media advertisement (The GM
Card®)
and merchant relationships sourced through our Retail Services
business. We also cross-sell our credit cards to our existing
Consumer Lending customers as well as our Taxpayer Financial
Services and Auto Finance customers. We are considering the sale
of our GM MasterCard and Visa portfolio to HSBC Bank USA. See
Segment Results IFRS Management
Basis included in the 2007 MD&A for further
discussion.
Although our relationships with GM and the AFL-CIO enable us to
access a proprietary customer base, in accordance with our
agreements with these institutions, we own all receivables
originated under the programs and are responsible for all credit
and collection decisions as well as the funding for the
programs. These programs are not dependent upon any payments,
guarantees or credit support from these institutions. As a
result, we are not directly dependent upon GM or the AFL-CIO for
any specific earnings stream associated with these programs. In
2004 and 2005, we jointly agreed with GM and the AFL-CIO,
respectively, to extend the term of these respective
co-branded
and Affinity Card Programs. These agreements do not expire in
the near term.
International
Our United Kingdom subsidiary is a mid-market consumer lender
focusing on customer service through its branch locations, and
consumer electronics through its retail finance operations and
telemarketing. This business offers secured and unsecured lines
of credit, secured and unsecured closed-end loans, retail
finance products and insurance products. We operate in England,
Scotland, Wales, Northern Ireland and the Republic of Ireland.
In December 2005 we sold our U.K. credit card business to HSBC
Bank plc. Under agreement with HSBC Bank plc, we continue to
provide collection services and other support services,
including components of the compliance, financial reporting and
human resource functions, for this credit card portfolio.
Loans held in the United Kingdom and the Republic of Ireland are
originated through a branch network consisting of 135 Beneficial
Finance branches, merchants, direct mail, broker referrals, the
Internet and outbound telemarketing. At December 31, 2007
we had approximately $5.3 billion in receivables,
1.5 million customer accounts and 2,150 employees in
our operations in the United Kingdom and the Republic of
Ireland.
In November 2006, we sold our consumer finance operations in the
Czech Republic, Hungary and Slovakia to a wholly owned
subsidiary of HSBC Bank plc. On November 1, 2007, we sold
all of the capital stock of our United Kingdom insurance
operations to Aviva for a purchase price of approximately
$206 million in cash. At that same time, we entered into an
exclusive distribution agreement with Aviva for the future sale
of insurance products through all of our loan origination
channels.
Our Canadian business offers real estate secured and unsecured
lines of credit, real estate secured and unsecured closed-end
loans, insurance products, private label credit cards,
MasterCard credit card loans, retail finance products and auto
loans to Canadian consumers. These products are marketed through
110 branch offices in 10 provinces, through direct mail, 18
merchant relationships, 2,400 auto dealer relationships and the
Internet. At December 31, 2007, this business had
approximately $5.1 billion in receivables, 1.6 million
customer accounts and 1,500 employees.
All
Other
Our Insurance business distributes and manages the distribution
of credit life, disability and unemployment, accidental death
and disability, term life, whole life, annuities, disability,
long term care and a variety of other specialty insurance
products to our customers and the customers of affiliated
financial institutions, such as HSBC Bank USA. Such products
currently are offered throughout the United States and Canada
and are offered to customers based upon their particular needs.
Insurance distributed to our customers is directly written by or
12
HSBC Finance Corporation
reinsured with one or more of our subsidiaries. Insurance sold
to customers of HSBC Bank USA and certain other affiliates is
written primarily by unaffiliated insurance companies.
The Taxpayer Financial Services business is a U.S. provider
of tax-related financial products to consumers through about
36,000 unaffiliated professional tax preparer locations and tax
preparation software providers. Serving around 11 million
customers, this business leverages the annual U.S. income
tax filing process to provide products that offer consumers
quick and convenient access to funds in the amount of their
anticipated tax refund. Our Taxpayer Financial Services business
processes refund anticipation products that are originated by
HSBC Bank USA and HSBC Trust Company (Delaware), N.A. In
2007, this business generated a loan volume of approximately
$17.4 billion and employed 126 full-time employees.
To help ensure high standards of responsible lending, we provide
industry-leading compliance programs for our tax preparer
business partners. Key elements of our compliance efforts
include mandatory online compliance and sales-practice training,
expanded tax preparer due diligence processes, and on-going
sales practice monitoring to help ensure that our customers are
treated fairly and that they understand their financial choices.
Additionally, access to free consumer financial education
resources and a
48-hour
satisfaction guarantee are offered to customers, which further
enhances our compliance and customer service efforts. In early
2007, we began a strategic review of our Taxpayer Financial
Services (TFS) business to ensure we offer only the
most value-added financial services tax products. As a result,
in March 2007 we decided that beginning with the 2008 tax season
we will discontinue pre-season and pre-file loan products. We
have also elected not to renew contracts with certain
third-party preparers as they came up for renewal and have
negotiated early termination agreements with others. In the
fourth quarter, we also decided to stop participating in cross
collection activities with other refund anticipation loan
providers. We estimate these actions could reduce Taxpayer
Financial Services revenue by approximately $110 million in
2008.
We have less than $140 million in commercial receivables.
The commercial portfolio is being managed to eliminate the
portfolio as circumstances permit. There are no active
operations.
Funding
We fund our operations globally and domestically, using a
combination of capital market and affiliate debt, preferred
equity, sales of consumer receivables and borrowings under
secured financing facilities. We will continue to fund a large
part of our operations in the global capital markets, primarily
through the use of secured financings, commercial paper,
medium-term notes and long-term debt. We will also continue to
sell certain receivables, including our domestic private label
originations to HSBC Bank USA. Our sale of the entire domestic
private label portfolio (excluding retail sales contracts at our
Consumer Lending business) to HSBC Bank USA occurred in December
2004. We now originate and sell substantially all newly
originated private label receivables to HSBC Bank USA on a daily
basis. In 2007, these sales were a significant source of funding
as we sold $22.7 billion in receivables to HSBC Bank USA.
Additionally, during 2007 we sold $2.7 billion of loans
from our Mortgage Services loan portfolio to unaffiliated
purchasers.
Our affiliation with HSBC has improved our access to the capital
markets. In addition to providing several important sources of
direct funding, our affiliation with HSBC has also expanded our
access to a worldwide pool of potential investors. While these
new funding synergies have somewhat reduced our reliance on
traditional sources to fund our growth, we balance our use of
affiliate and third-party funding sources to minimize funding
expense while maximizing liquidity.
Our long-term debt, preferred stock and commercial paper, as
well as the long-term debt and commercial paper of our Canadian
subsidiary, have been assigned investment grade ratings by all
nationally recognized statistical rating organizations. For a
detailed listing of the ratings that have been assigned to HSBC
Finance Corporation and our significant subsidiaries as of
December 31, 2007, see Exhibit 99.1 to this
Form 10-K.
Our affiliates provided funding sources for our operations
through draws on a bank line in the U.K., investing in our debt,
acquiring credit card, private label and real estate secured
receivables, providing additional common equity
13
HSBC Finance Corporation
and underwriting sales of our debt securities to HSBC clients
and customers. In 2007, total HSBC related funding aggregated
$44.5 billion. In the first quarter of 2007, HINO made a
capital contribution of $200 million and in the last
quarter of 2007 a capital contribution of $750 million,
each in exchange for one share of common stock. On
February 12, 2008, HINO made a capital contribution of
$1.6 billion in exchange for one share of common stock. A
detailed listing of the sources of such funding can be found in
Liquidity and Capital Resources in our 2007
MD&A. We expect to continue to obtain significant funding
from HSBC related sources in the future.
Historically, securitization of consumer receivables has been a
source of funding and liquidity for HSBC Finance Corporation. In
order to align our accounting treatment with that of HSBC, in
the third quarter of 2004 we began to structure all new
collateralized funding transactions as secured financings. The
termination of sale treatment for new collateralized funding
activity reduced reported net income under U.S. GAAP, but
did not impact cash received from operations. Existing credit
card and personal non-credit card transactions that were
structured as sales to revolving trusts required the addition of
new receivables to support required cash distributions on
outstanding securities until the contractual obligation
terminated, which occurred in September of 2007.
Generally, for each securitization and secured financing we
utilize credit enhancement to obtain investment grade ratings on
the securities issued by the trust. To ensure that adequate
funds are available to pay investors their contractual return,
we may retain various forms of interests in assets securing a
funding transaction, whether structured as a securitization or a
secured financing, such as over-collateralization, subordinated
series, residual interests (in the case of securitizations) in
the receivables or we may fund cash accounts.
Over-collateralization is created by transferring receivables to
the trust issuing the securities that exceed the balance of the
securities to be issued. Subordinated interests provide
additional assurance of payment to investors holding senior
securities. Residual interests are also referred to as
interest-only strip receivables and represent rights to future
cash flows from receivables in a securitization trust after
investors receive their contractual return. Cash accounts can be
funded by an initial deposit at the time the transaction is
established
and/or from
interest payments on the receivables that exceed the
investors contractual return.
Our continued success and prospects for growth are largely
dependent upon access to the global capital markets. Numerous
factors, internal and external, may impact our access to, and
the costs associated with, these markets. These factors may
include our debt ratings, economic conditions, overall capital
markets volatility and the effectiveness of our management of
credit risks inherent in our customer base. In 2007, the capital
markets were severely disrupted and the markets continue to be
highly risk averse and reactionary. While these events increased
our 2007 interest expense, they had no impact on our ability to
fund our operations. Our funding objectives were accomplished
through the utilization of a variety of financing alternatives
and a reduction in total receivables.
Over the course of the second half of 2007, we experienced a
significant widening of credit spreads corresponding to the
primary and secondary markets in both our secured and unsecured
debt. This spread widening was consistent with widening
experienced by other financial institutions that were active in
the origination, purchase
and/or sale
of subprime consumer receivables. Additionally, the overall
volume of debt issued by finance sector participants declined
during this period as the traditional buyers of these securities
significantly reduced their purchases in favor of cash
equivalent securities and government issued debt.
The deterioration in the subprime credit described above has
also resulted in a reduction in the number of financial
institutions willing to provide direct financing for subprime
related assets. Several institutions that previously provided
both secured and unsecured credit to us either have not, or
indicated they will not, renew maturing credit facilities. For
those institutions that continue to provide credit, the
corresponding credit facilities incorporate more comprehensive
credit performance requirements and increased pricing to reflect
the perceived quality of the underlying assets. While we expect
overall credit availability will decline, 2008 financing
requirements will be satisfied through lower loan originations
in combination with funding from the sale of commercial paper,
new secured and unsecured debt issuance and HSBC sourced
liquidity.
Additional information on our sources and availability of
funding are set forth in the Liquidity and Capital
Resources and Off Balance Sheet Arrangements
sections of our 2007 MD&A.
14
HSBC Finance Corporation
We will continue to use derivative financial instruments to
hedge our currency and interest rate risk exposure. A
description of our use of derivative financial instruments,
including interest rate swaps and foreign exchange contracts and
other quantitative and qualitative information about our market
risk is set forth in Item 7. of the 2007 MD&A under
the caption Risk Management and Note 14,
Derivative Financial Instruments, of our
consolidated financial statements (2007 Financial
Statements).
Regulation
and Competition
Regulation
Consumer
Our consumer finance businesses operate in a highly regulated
environment. These businesses are subject to laws relating to
consumer protection, including, without limitation, fair
lending, use of credit reports, privacy matters, and disclosure
of credit terms and correction of billing errors. They also are
subject to certain regulations and legislation that limit
operations in certain jurisdictions. For example, limitations
may be placed on the amount of interest or fees that a loan may
bear, the amount that may be borrowed, the types of actions that
may be taken to collect or foreclose upon delinquent loans or
the information about a customer that may be shared. Our
consumer branch lending offices are generally licensed in those
jurisdictions in which they operate. Such licenses have limited
terms but are renewable, and are revocable for cause. Failure to
comply with these laws and regulations may limit the ability of
our licensed lenders to collect or enforce loan agreements made
with consumers and may cause our lending subsidiaries to be
liable for damages and penalties.
Due to the recent turmoil in the mortgage lending markets, there
has been a significant amount of legislative and regulatory
focus on this industry. On December 20, 2007, President
Bush signed into law the Mortgage Forgiveness Debt Relief
Act which exempts taxpayers from income tax on up to
$2 million in debt relief through modifications to
mortgages on a qualified principal residence. This
legislation has been considered essential to modification
initiatives, such as the HOPE NOW Alliance. Additional
information concerning the HOPE NOW Alliance and HSBC Finance
Corporations membership is provided below.
There also continues to be a significant amount of legislative
activity, nationally, locally and at the state level, aimed at
curbing lending practices deemed to be predatory,
particularly when such practices are believed to discriminate
against certain groups. In December 2007, the Federal Reserve
Board released for comment its proposed rule regarding
substantial changes to Regulation Z of the Truth in Lending
Act to protect consumers from unfair or deceptive home mortgage
lending and advertising practices. In addition, states have
sought to alter lending practices through consumer protection
actions brought by state attorneys general and other state
regulators. States are also starting to request that mortgage
lenders accept certain principles to be applied by
their companies in servicing mortgage loans. Legislative
activity in this area has targeted certain abusive practices
such as loan flipping (making a loan to refinance
another loan where there is no tangible benefit to the
borrower), steering (making loans that are more
costly than the borrowers qualifications require), fee
packing (addition of unnecessary, unwanted and
unknown fees to a borrower), equity stripping
(lending without regard to the borrowers ability to repay
or making it impossible for the borrower to refinance with
another lender), and outright fraud. The most recent legislation
addresses a vast array of mortgage lending practices.
Additionally, it is likely that state and Federal legislators
and regulatory authorities may consider actions requiring
additional loan disclosures, limiting permissible interchange
fees charged to merchants and suppliers, requiring lenders to
consider the maximum payment potentially due when reviewing loan
applications and limiting rates and fees charged on tax refund
anticipation loans. Although we have the ability to react
quickly to new laws and regulations which relate to our
businesses, it is not possible to estimate the effect, if any,
these initiatives will have on us in a particular locality or
nationally as well as whether there will be additional costs
imposed on our businesses as a result of any new legislation or
regulation.
HSBC Finance Corporation does not condone or endorse any abusive
lending practices. We continue to work with regulators and
consumer groups to create appropriate safeguards to avoid
abusive practices while allowing our borrowers to continue to
have access to credit for personal purposes, such as the
purchase of homes, automobiles
15
HSBC Finance Corporation
and consumer goods. As part of this effort we have adopted a set
of lending best practice initiatives. Also, as part of our risk
mitigation efforts relating to the affected components of the
Mortgage Services portfolio, in October 2006 we established a
program specifically designed to meet the needs of select
customers with ARMs. We are proactively writing and calling
customers who have adjustable rate mortgage loans nearing the
first reset that we expect will be the most impacted by a rate
adjustment. Through a variety of means, we are assessing their
ability to make the adjusted payment and, as appropriate and in
accordance with defined policies, are modifying the loans in
most instances by delaying the first interest rate adjustment
for twelve months, allowing time for the customer to seek
alternative financing or improve their individual situation.
Customers who continue to have affordability issues at the end
of the modification period can qualify for additional longer
term assistance. A further description of the risk mitigation
efforts of HSBC Finance Corporation may be found under the
section Significant Developments related to our Mortgage
Services and Consumer Lending Businesses. Additionally, at
the end of 2007, we agreed to participate in the HOPE NOW
Alliance, an alliance among counselors, servicers, investors and
other mortgage market participants to create a unified,
coordinated plan to maximize outreach efforts to homeowners at
risk of losing their homes. As part of the HOPE NOW Alliance,
HSBC Finance Corporation along with other national loan
servicers, has indicated its support for the ARM loan
foreclosure and loss avoidance principles coordinated by the
American Securitization Forum (ASF). The plan was
announced by President Bush on December 6, 2007.
On June 29, 2007, the Federal Financial Regulatory Agencies
(the Agencies) issued a final statement on subprime
mortgage lending which reiterates many of the principles
addressed in the existing guidance relating to risk management
practices and consumer protection laws involving adjustable rate
mortgage products and the underwriting process on stated income
and interest-only loans. As of December 31, 2007, we are
fully compliant with this statement. The impact of this
statement will be immaterial on our operations.
Banking
Institutions
Our credit card banking subsidiary, HSBC Bank Nevada, N.A.
(HSBC Bank Nevada), is a Federally chartered
credit card bank which is also a member of the
Federal Reserve System. HSBC Bank Nevada is subject to
regulation, supervision and examination by the Office of the
Comptroller of the Currency (OCC). The deposits of
HSBC Bank Nevada are insured by the Federal Deposit Insurance
Corporation (FDIC), which renders it subject to
relevant FDIC regulation.
As a result of our acquisition by HSBC, HSBC Finance Corporation
and its subsidiaries became subject to supervision, regulation
and examination by the Board of Governors of the Federal Reserve
System (the Federal Reserve Board). HSBC is a bank
holding company under the U.S. Bank Holding Company Act of
1956, as amended (the BHCA) as a result of its
ownership of HSBC Bank USA. On January 1, 2004, HSBC formed
a new company to hold all of its North America operations,
including HSBC Finance Corporation and its subsidiaries. This
company, HSBC North America is also a bank holding company under
the BHCA, by virtue of its ownership of HSBC Bank USA. HSBC and
HSBC North America are registered as financial holding companies
under the Gramm-Leach-Bliley Act amendments to the BHCA,
enabling them to offer a broad range of financial products and
services.
In December 2007, US regulators published a final rule regarding
Risk-Based Capital Standards: Advanced Capital Adequacy
Framework Basel II. This final rule represents the
U.S. adoption of the Basel II International Capital
Accord (Basel II). The final rule becomes effective
April 1, 2008, and requires large bank holding companies,
including HSBC North America, to adopt its provisions no later
than April 1, 2011. HSBC North America has established
comprehensive Basel II implementation project teams
comprised of risk management specialists representing all risk
disciplines. We anticipate that the implementation of
Basel II could impact the funding mix of HSBC Finance
Corporation but not necessarily require an increase to its
equity capital levels.
In addition, U.S. bank regulatory agencies have maintained
the leverage regulatory capital requirements that
generally require United States banks and bank holding companies
to maintain a minimum amount of capital in relation to their
balance sheet assets (measured on a non-risk-weighted basis).
HSBC Bank Nevada is subject to these capital requirements.
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HSBC Finance Corporation
In addition, HSBC North America and HSBC Finance Corporation
continue to support the HSBC implementation of the Basel II
framework, as adopted by the U.K. Financial Services Authority
(FSA). We supply data regarding credit risk,
operational risk and market risk to support HSBCs
regulatory capital and risk weighted asset calculations. Revised
FSA capital adequacy rules for HSBC became effective
January 1, 2008.
HSBC Bank Nevada, like other FDIC-insured banks, may be required
to pay assessments to the FDIC for deposit insurance under the
FDICs Bank Insurance Fund. Under the FDICs
risk-based system for setting deposit insurance assessments, an
institutions assessments vary according to its deposit
levels and other factors.
The Federal Deposit Insurance Corporation Improvement Act of
1991 provides for extensive regulation of insured depository
institutions such as HSBC Bank Nevada, including requiring
Federal banking regulators to take prompt corrective
action with respect to FDIC-insured banks that do not meet
minimum capital requirements. At December 31, 2007, HSBC
Bank Nevada was well-capitalized under applicable OCC and FDIC
regulations.
Our principal United Kingdom subsidiary (HFC Bank Limited,
formerly known as HFC Bank plc) is subject to oversight and
regulation by the FSA and the Irish Financial Services
Regulatory Authority of the Republic of Ireland. We have
indicated our intent to the FSA to maintain the regulatory
capital of this institution at specified levels.
We also maintain a trust company in Canada, which is subject to
regulatory supervision by the Office of the Superintendent of
Financial Institutions.
Insurance
Our insurance business is subject to regulatory supervision
under the laws of the states and provinces in which it operates.
Regulations vary from state to state, and province to province,
but generally cover licensing of insurance companies, premium
and loss rates, dividend restrictions, types of insurance that
may be sold, permissible investments, policy reserve
requirements, and insurance marketing practices.
Certain of our activities related to the marketing and
distribution of insurance in the United Kingdom are subject to
regulatory supervision by the FSA.
Competition
The consumer financial services industry in which we operate is
highly fragmented and intensely competitive. We generally
compete with banks, thrifts, insurance companies, credit unions,
mortgage lenders and brokers, finance companies, investment
banks, and other domestic and foreign financial institutions in
the United States, Canada and the United Kingdom. We compete by
expanding our customer base through portfolio acquisitions or
alliance and co-branding opportunities, offering a variety of
consumer loan products and maintaining a strong service
orientation. Customers are generally attracted to consumer
finance products based upon price, available credit limits,
monthly payment requirements and other product features. As a
result, customer loyalty is often limited. We believe our focus
on the specific needs of our customers, proprietary credit
scoring models and strong analytics in all aspects of our
business allow us to compete effectively for middle market
customers.
Corporate
Governance and Controls
HSBC Finance Corporation maintains a website at
www.hsbcusa.com/hsbc_finance on which we make available,
as soon as reasonably practicable after filing with or
furnishing to the SEC, our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and any amendments to these reports. Our website also contains
our Corporate Governance Standards and committee charters for
the Audit, Compensation, Executive and Nominating and Governance
Committees of our Board of Directors. We have a Statement of
Business Principles and Code of Ethics that expresses the
principles upon which we operate our businesses. Integrity is
the foundation of all our business endeavors and is the result
of continued dedication and commitment to the highest ethical
standards in our relationships with each other, with other
organizations and individuals who are our customers. You can
find our Statement of Business Principles and Code of Ethics on
our corporate website. We also
17
HSBC Finance Corporation
have a Code of Ethics for Senior Financial Officers that applies
to our finance and accounting professionals that supplements the
Statement of Business Principles. That Code of Ethics is
incorporated by reference in Exhibit 14 to this Annual
Report on
Form 10-K.
You can request printed copies of this information at no charge.
Requests should be made to HSBC Finance Corporation, 26525 North
Riverwoods Boulevard, Mettawa, Illinois 60045, Attention:
Corporate Secretary.
HSBC Finance Corporation has a Disclosure Committee that is
responsible for maintenance and evaluation of our disclosure
controls and procedures and for assessing the materiality of
information required to be disclosed in periodic reports filed
with the SEC. Among its responsibilities is the review of
quarterly certifications of business and financial officers
throughout HSBC Finance Corporation as to the integrity of our
financial reporting process, the adequacy of our internal and
disclosure control practices and the accuracy of our financial
statements.
Certifications
In addition to certifications from our Chief Executive Officer
and Chief Financial Officer pursuant to Sections 302 and
906 of the Sarbanes-Oxley Act of 2002 (attached to this report
on
Form 10-K
as Exhibits 31 and 32), we have also filed a certification
with the New York Stock Exchange (the NYSE) from our
Chief Executive Officer certifying that he is not aware of any
violation by HSBC Finance Corporation of the applicable NYSE
corporate governance listing standards in effect as of
March 3, 2008.
Cautionary
Statement on Forward-Looking Statements
Certain matters discussed throughout this
Form 10-K
constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. In addition,
we may make or approve certain statements in future filings with
the SEC, in press releases, or oral or written presentations by
representatives of HSBC Finance Corporation that are not
statements of historical fact and may also constitute
forward-looking statements. Words such as may,
will, should, would,
could, appears, believe,
intends, expects, estimates,
targeted, plans,
anticipates, goal and similar
expressions are intended to identify forward-looking statements
but should not be considered as the only means through which
these statements may be made. These matters or statements will
relate to our future financial condition, economic forecast,
results of operations, plans, objectives, performance or
business developments and will involve known and unknown risks,
uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different
from that which was expressed or implied by such forward-looking
statements. Forward-looking statements are based on our current
views and assumptions and speak only as of the date they are
made. HSBC Finance Corporation undertakes no obligation to
update any forward-looking statement to reflect subsequent
circumstances or events.
Item 1A. Risk
Factors
The following discussion provides a description of some of the
important risk factors that could affect our actual results and
could cause our results to vary materially from those expressed
in public statements or documents. However, other factors
besides those discussed below or elsewhere in other of our
reports filed or furnished with the SEC, could affect our
business or results. The reader should not consider any
description of such factors to be a complete set of all
potential risks that may face HSBC Finance Corporation.
General business, economic, political and market
conditions. Our business and earnings are affected by
general business, economic, market and political conditions in
the United States and abroad. Given the concentration of our
business activities in the United States, we are particularly
exposed to downturns in the United States economy. For example
in a poor economic environment there is greater likelihood that
more of our customers or counterparties could become delinquent
on their loans or other obligations to us, which, in turn, could
result in higher levels of provision for credit losses and
charge-offs which would adversely affect our earnings. General
business, economic and market conditions that could affect us
include short-term and long-term interest rates, inflation,
recession, monetary supply, fluctuations in both debt and equity
capital markets in which we fund our operations, market value of
consumer owned real estate throughout the United States,
consumer perception as to the availability of credit and
18
HSBC Finance Corporation
the ease of filing of bankruptcy. In 2007, a significant slow
down in the appreciation of property values was experienced
through much of the United States. Certain markets experienced
depreciation in property values, and this appears to be a
growing trend. We believe that the slowdown in the housing
market will be deeper in terms of its impact on housing prices
and the duration will extend at least through 2008. Continued or
expanded slowing of appreciation or increased depreciation can
be expected to result in higher delinquency and losses in our
real estate portfolio. In addition, certain changes to the
conditions described above could diminish demand for our
products and services, or increase the cost to provide such
products or services.
Mortgage lenders have tightened lending standards and eliminated
many affordability products that generally carry
higher risk, such as interest-only and introductory
teaser-rate ARM loans. These actions have impacted
borrowers abilities to refinance existing mortgage loans.
The ability to refinance and extract equity from their homes is
no longer an option to many of our customers. This impacts both
credit performance and run-off rates and has resulted in rising
delinquency rates for real estate secured loans in our
portfolio. This is also expected to continue. In the fourth
quarter of 2007, we have also seen unemployment rates rise in
the same markets which are experiencing the greatest home value
depreciation as well as continuing marked increases in gasoline
and heating costs. Additionally, an increasing inventory of
homes for sale combined with declining property values in many
markets is resulting in increased loss severity on homes that
are foreclosed and remarketed and is impacting the desire of
some of our customers to continue to pay on the loan.
Economy.com has recently indicated a number of U.S. market
sectors may already be in a recession. If a widespread
recessionary economy develops, additional losses are likely. If
a severe recession ensues, additional losses are likely to be
significant. It may be anticipated that market conditions may
cause a contagion effect in other types of consumer loans, such
as credit card and auto loans.
Acts or threats of war or terrorism, and actions taken by the
United States or other governments in response to such acts or
threats, as well as changes in political conditions could affect
business and economic conditions in the United States and
consequently, our earnings.
Adjustable rate mortgages. Our Mortgage Services
business acquired a significant number of ARM loans that were
originated in a period of unusually low interest rates. A
substantial majority of these loans bore a fixed rate for the
first two or three years of the loan, followed by annual
interest and payment rate resets. As interest rates have
fluctuated since June 2004, many of our customers holding ARMs
in the Mortgage Services portfolio may face monthly payment
increases following their first interest rate adjustment date.
The decreased availability of refinancing alternatives has
impacted the run-off that typically occurs as an ARM nears its
first rate reset. Interest rate adjustments on first mortgages
may also have a direct impact on a borrowers ability to
repay any underlying second lien mortgage loan on a property.
Similarly, as interest-only mortgage loans leave the
interest-only payment period, the ability of borrowers to make
the increased payments may be impacted. The Mortgage Services
portfolio also contains a significant number of second lien
loans that are subordinated to an ARM held by a third party as
well as interest-only loans. In 2008, approximately
$3.7 billion of domestic ARM loans will have their initial
payment rate reset based on the original contracted reset date.
Additionally, in 2008, we anticipate approximately
$1.3 billion of ARM loans modified under a new modification
program introduced in October 2006, which are excluded from the
reset numbers above, will experience their first reset.
Continued inability to refinance could lead to an increase in
delinquency, charge-off and losses.
Federal and state regulation. We operate in a highly
regulated environment. Changes in federal, state and local laws
and regulations affecting banking, consumer credit, bankruptcy,
privacy, consumer protection or other matters could materially
impact our performance. Specifically, attempts by local, state
and national regulatory agencies to control alleged
predatory or discriminatory lending practices and to
address perceived problems with the mortgage lending industry
through broad or targeted legislative or regulatory initiatives
aimed at lenders operations in consumer lending markets,
including non-traditional mortgage products or tax refund
anticipation loans, could affect us in substantial and
unpredictable ways, including limiting the types of consumer
loan products we can offer. With a changing political climate in
Washington, D.C, the highly publicized difficulties in the
mortgage markets and an upcoming election year, we anticipate
increased consumer protection activity at the Federal level. In
addition, new risk-based capital guidelines and reporting
instructions, including changes in response to the Basel II
Capital Accords could require a significant increase in our
capital requirements or changes
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HSBC Finance Corporation
in our funding mix, resulting in lower net income. We cannot
determine whether such legislative or regulatory initiatives
will be instituted or predict the impact such initiatives would
have on our results.
Liquidity. Our liquidity is critical to our ability
to operate our businesses, grow and be profitable. A compromise
to our liquidity could therefore have a negative effect on our
financial results. In 2007, the capital markets were severely
disrupted and the markets continue to be highly risk averse and
reactionary. Traditional providers of credit to the subprime
market are either reducing their exposure to this asset class or
markedly tightening the credit standards necessary to receive
financing for subprime assets. This has raised our cost of
funds. Potential conditions that could negatively affect our
liquidity include diminished access to capital markets,
unforeseen cash or capital requirements, an inability to sell
assets or execute secured financing transactions due to reduced
investor appetite for non-prime assets and an inability to
obtain expected funding from HSBC subsidiaries and clients.
Our credit ratings are an important part of maintaining our
liquidity, as a reduction in our credit ratings would also
negatively affect our liquidity. A credit ratings downgrade
could potentially increase borrowing costs, and depending on its
severity, limit access to capital markets, require cash payments
or collateral posting, and permit termination of certain
contracts material to us.
Management Projections. Our management is required
to use certain estimates in preparing our financial statements,
including accounting estimates to determine loan loss reserves,
reserves related to future litigation, and the fair market value
of certain assets and liabilities, among other items. In
particular, loan loss reserve estimates are influenced by
factors outside our control. HSBC Finance Corporations
statistical model for estimating inherent probable credit losses
in its loan portfolio is based upon historical data. As the
recent downturn in the performance of the mortgage portfolio was
sudden, dramatic and unprecedented, the statistical, historical
models utilized by HSBC Finance Corporation have not fully
captured inherent probable risk. As a result, judgment has
become a more significant component of the estimation of
inherent probable losses in the portfolio. To the extent
historical averages of the progression of loans into stages of
delinquency and the amount of loss realized upon charge-off are
not predictive of future losses and management is unable to
accurately evaluate the portfolio risk factors not fully
reflected in the historical model, unexpected additional losses
could result.
Lawsuits and regulatory investigations and
proceedings. HSBC Finance Corporation or one of our
subsidiaries is named as a defendant in various legal actions,
including class actions and other litigation or disputes with
third parties, as well as investigations or proceedings brought
by regulatory agencies. These or other future actions brought
against us may result in judgments, settlements, fines,
penalties or other results, including additional compliance
requirements, adverse to us which could materially adversely
affect our business, financial condition or results of
operation, or cause us serious reputational harm. We anticipate
that there will be increased litigation resulting from the
mortgage market downturn as borrowers allege they obtained
unaffordable loans or loans with terms that were unsuitable for
that borrower.
Operational risks. Our businesses are dependent on
our ability to process a large number of increasingly complex
transactions. If any of our financial, accounting, or other data
processing systems fail or have other significant shortcomings,
we could be materially adversely affected. We are similarly
dependent on our employees. We could be materially adversely
affected if an employee causes a significant operational
break-down or failure, either as a result of human error or
where an individual purposefully sabotages or fraudulently
manipulates our operations or systems. Third parties with which
we do business could also be sources of operational risk to us,
including relating to break-downs or failures of such
parties own systems or employees. Any of these occurrences
could result in diminished ability by us to operate one or more
of our businesses, potential liability to clients, reputational
damage and regulatory intervention, all of which could
materially adversely affect us.
We may also be subject to disruptions of our operating systems
arising from events that are wholly or partially beyond our
control, which may include, for example, computer viruses or
electrical or telecommunications outages or natural disasters,
such as Hurricane Katrina, or events arising from local or
regional politics, including terrorist acts. Such disruptions
may give rise to losses in service to customers, inability to
collect our receivables in affected areas and other loss or
liability to us.
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HSBC Finance Corporation
In a company as large and complex as ours, lapses or
deficiencies in internal control over financial reporting are
likely to occur from time to time, and there is no assurance
that significant deficiencies or material weaknesses in internal
controls may not occur in the future.
In addition there is the risk that our controls and procedures
as well as business continuity and data security systems prove
to be inadequate. Any such failure could affect our operations
and could materially adversely affect our results of operations
by requiring us to expend significant resources to correct the
defect, as well as by exposing us to litigation or losses not
covered by insurance.
Changes to operational practices from time to time, such as
determinations to sell receivables from our domestic private
label portfolio, structuring all new collateralized funding
transactions as secured financings, or changes to our customer
account management and risk management/collection policies and
practices could materially positively or negatively impact our
performance and results.
Risk Management. We seek to monitor and control our
risk exposure through a variety of separate but complementary
financial, credit, operational, compliance and legal reporting
systems, including models and programs that predict loan
delinquency and loss. While we employ a broad and diversified
set of risk monitoring and risk mitigation techniques, those
techniques and the judgments that accompany their application
are complex and cannot anticipate every economic and financial
outcome or the specifics and timing of such outcomes.
Accordingly, our ability to successfully identify and manage
risks facing us is an important factor that can significantly
impact our results.
Changes in accounting standards. Our accounting
policies and methods are fundamental to how we record and report
our financial condition and results of operations. From time to
time the Financial Accounting Standards Board
(FASB), the International Accounting Standards Board
(IASB), the SEC and our bank regulators, including
the Office of Comptroller of the Currency and the Board of
Governors of the Federal Reserve System, change the financial
accounting and reporting standards that govern the preparation
and disclosure of external financial statements. These changes
are beyond our control, can be hard to predict and could
materially impact how we report and disclose our financial
results and condition, including our segment results. We could
be required to apply a new or revised standard retroactively,
resulting in our restating prior period financial statements in
material amounts. We may, in certain instances, change a
business practice in order to comply with new or revised
standards.
Competition. We operate in a highly competitive
environment and while there has been significant consolidation
in the financial services industry in 2007 and continuing into
2008, as the market stabilizes we expect competitive conditions
to again intensify as the remaining players in the financial
services industry will be larger, better-capitalized and more
geographically-diverse companies. This will include lenders with
access to government sponsored organizations that are capable of
offering a wider array of consumer financial products and
services at competitive prices. In addition, the traditional
segregation of the financial services industry into prime and
non-prime segments has eroded and in the future is expected to
continue to do so, further increasing competition for our core
customer base. Such competition may impact the terms, rates,
costs and/or
profits historically included in the loan products we offer or
purchase. There can be no assurance that the significant and
increasing competition in the financial services industry will
not materially adversely affect our future results of operations.
Acquisition Integration. We have in the past and may
in the future seek to grow our business by acquiring other
businesses or loan portfolios, such as our acquisitions of
Metris Companies, Inc. (Metris) in 2005 and Solstice
Capital Group Inc. and the mortgage portfolio of Champion
Mortgage in 2006. There can be no assurance that our
acquisitions will have the anticipated positive results,
including results relating to: the total cost of integration;
anticipated cross-sell opportunities; the time required to
complete the integration; the amount of longer-term cost
savings; or the overall performance of the combined entity.
Integration of an acquired business can be complex and costly,
sometimes including combining relevant accounting and data
processing systems and management controls, as well as managing
relevant relationships with clients, suppliers and other
business partners, as well as with employees.
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HSBC Finance Corporation
There is no assurance that any business or portfolio in the
future will be successfully integrated and will result in all of
the positive benefits anticipated. If we are not able to
integrate successfully any future acquisitions, there is the
risk our results of operations could be materially and adversely
affected.
Employee Retention. Our employees are our most
important resource and, in many areas of the financial services
industry, competition for qualified personnel is intense. If we
were unable to continue to retain and attract qualified
employees to support the various functions of our business,
including the credit risk analysis, underwriting, servicing,
collection and sales, our performance, including our competitive
position, could be materially adversely affected.
Reputational Risk. Our ability to attract and retain
customers and conduct business transactions with our
counterparties could be adversely affected to the extent our
reputation, or the reputation of affiliates operating under the
HSBC brand is damaged. Our failure to address, or to appear to
fail to address, various issues that could give rise to
reputational risk could cause harm to us and our business
prospects. Reputational issues include, but are not limited to,
appropriately addressing potential conflicts of interest, legal
and regulatory requirements, ethical issues, adequacy of
anti-money laundering processes, privacy issues, record-keeping,
sales and trading practices, the proper identification of the
legal, reputational, credit, liquidity and market risks inherent
in products offered and general company performance. The failure
to address these issues appropriately could make our customers
unwilling to do business with us, which could adversely affect
our results of operations.
Item 1B. Unresolved
Staff Comments.
We have no unresolved written comments from the Securities and
Exchange Commission Staff that have been outstanding for more
than 180 days at December 31, 2007.
Item 2. Properties.
Our operations are located throughout the United States, in 10
provinces in Canada and in the United Kingdom, with principal
facilities located in Lewisville, Texas; New Castle, Delaware;
Brandon, Florida; Jacksonville, Florida; Tampa, Florida;
Maitland, Florida; Chesapeake, Virginia; Virginia Beach,
Virginia; Whitemarsh, Maryland; Hanover, Maryland; Baltimore,
Maryland; Minnetonka, Minnesota; Bridgewater, New Jersey;
Rockaway, New Jersey; Las Vegas, Nevada; Tulsa, Oklahoma;
Tigard, Oregon; Chicago, Illinois; Deerfield, Illinois;
Elmhurst, Illinois; Franklin Park, Illinois; Mount Prospect,
Illinois; Prospect Heights, Illinois; Schaumburg, Illinois;
Vernon Hills, Illinois; Wood Dale, Illinois; Pomona, California;
Salinas, California; San Diego, California; London,
Kentucky; Sioux Falls, South Dakota; Fort Mill, South
Carolina; Toronto, Ontario and Montreal, Quebec, Canada; and
Windsor, Bracknell and Birmingham, United Kingdom. In January
2006 we entered into a lease for a building in the Village of
Mettawa, Illinois. The new facility will consolidate our
Prospect Heights, Mount Prospect, Chicago and Deerfield offices.
Construction of the building began in the spring of 2006 with
the move planned for first and second quarters of 2008. The new
address of HSBC Finance Corporation is 26525 North Riverwoods
Boulevard, Mettawa, Illinois 60045.
Substantially all branch offices, divisional offices, corporate
offices, regional processing and regional servicing center
spaces are operated under lease with the exception of the office
buildings in Windsor and Birmingham, United Kingdom operations,
a credit card processing facility in Las Vegas, Nevada; a
processing center in Vernon Hills, Illinois; and servicing
facilities in Kentucky, Mt. Prospect, Illinois and Chesapeake,
Virginia. We believe that such properties are in good condition
and meet our current and reasonably anticipated needs.
Item 3. 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
22
HSBC Finance Corporation
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. However,
losses may be material to our results of operations for any
particular future period depending on our income level for that
period.
Consumer
Litigation
During the past several years, the press has widely reported
certain industry related concerns, including rising
delinquencies, the tightening of credit and more recently,
increasing litigation. Some of the litigation instituted against
lenders is being brought in the form of purported class actions
by individuals or by state or federal regulators or state
attorneys general. Like other companies in this industry, we are
involved in litigation regarding our practices. The cases
generally allege inadequate disclosure or misrepresentation
during the loan origination process. In some suits, other
parties are also named as defendants. Unspecified compensatory
and punitive damages are sought. The judicial climate in many
states is such that the outcome of these cases is unpredictable.
Although we believe we 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. Insurance carriers have been notified as appropriate.
Loan
Discrimination Litigation
Since July of 2007, HSBC Finance Corporation
and/or one
or more of its subsidiaries has been named as a defendant in
four class actions filed in the federal courts in the Northern
District of Illinois, the Central District of California and the
District of Massachusetts: Zamudio v. HSBC North America
Holdings and HSBC Finance Corporation d/b/a Beneficial,
(N.D. Ill. 07CV5413), National Association for the
Advancement of Colored People (NAACP) v.
Ameriquest Mortgage Company, et al. including HSBC Finance
Corporation (C.D. Ca.,
No. SACV07-0794AG(ANx)),
Toruno v. HSBC Finance Corporation and Decision One
Mortgage Company, LLC (C.D. Ca.,
No. CV07-05998JSL(RCx)
and Suyapa Allen v. Decision One Mortgage Company, LLC,
HSBC Finance Corporation, et al. (D. Mass., C.A.
07-11669).
Each suit alleges that the named entities racially discriminated
against their customers by using loan pricing policies and
procedures that have resulted in a disparate impact against
minority customers. Violations of various federal statutes,
including the Fair Housing Act and the Equal Credit Opportunity
Act, are claimed. At this time, we are unable to quantify the
potential impact from these actions, if any.
City
of Cleveland Litigation
On January 10, 2008, a suit captioned, City of
Cleveland v. Deutsche Bank Trust Company , et al.
(No. 1:08-CV-00139),
was filed in the Cuyahoga County Common Pleas Court against
twenty-one financial services entities. HSBC Finance Corporation
is a defendant. The City of Cleveland (City) seeks
damages it allegedly incurred relating to property foreclosures.
The alleged damages are claimed to be the result of
defendants creation of a public nuisance in the City
through their respective involvement as lenders
and/or
securitizers of sub-prime mortgages on properties located in
Cleveland. On January 16, 2008, the case was removed to the
United States District Court for the Northern District of Ohio.
On January 17, 2008, the City filed a motion seeking a
Court order remanding the case back to state Common Pleas Court.
Credit
Card Services Litigation
Since June 2005, HSBC Finance Corporation, HSBC North America,
and HSBC, as well as other banks and the Visa and Master Card
associations, were named as defendants in four class actions
filed in Connecticut and the Eastern District of New York;
Photos Etc. Corp. et al. v. Visa U.S.A., Inc., et al.
(D. Conn.
No. 3:05-CV-01007
(WWE)): National Association of Convenience Stores, et
al. v. Visa U.S.A., Inc., et al. (E.D.N.Y.
No. 05-CV
4520 (JG)); Jethro Holdings, Inc., et al. v. Visa
U.S.A., Inc. et al. (E.D.N.Y.
No. 05-CV-4521
(JG)); and American Booksellers Assn v. Visa
U.S.A., Inc. et al. (E.D.N.Y.
No. 05-CV-5391
(JG)). Numerous other complaints containing similar allegations
(in which no HSBC entity is named) were filed across the country
against Visa, MasterCard and other banks. These actions
principally allege that the imposition of a no-surcharge rule by
the
23
HSBC Finance Corporation
associations
and/or the
establishment of the interchange fee charged for credit card
transactions causes the merchant discount fee paid by retailers
to be set at supracompetitive levels in violation of the Federal
antitrust laws. In response to motions of the plaintiffs on
October 19, 2005, the Judicial Panel on Multidistrict
Litigation (the MDL Panel) issued an order
consolidating these suits and transferred all of the cases to
the Eastern District of New York. The consolidated case is:
In re Payment Card Interchange Fee and Merchant Discount
Antitrust Litigation, MDL 1720, E.D.N.Y. A consolidated,
amended complaint was filed by the plaintiffs on April 24,
2006. Discovery has begun. At this time, we are unable to
quantify the potential impact from this action, if any.
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, HSBC Finance Corporation, 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. 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. On December 3, 2004, the court signed the
parties stipulation to certify a class with respect to the
claims brought under § 10 and § 20 of the
Securities Exchange Act of 1934. The parties stipulated that
plaintiffs will not seek to certify a class with respect to the
claims brought under § 11 and § 15 of the
Securities Act of 1933 in this action or otherwise.
The amended complaint purports to assert claims under the
Federal securities laws, on behalf of all persons who purchased
or otherwise acquired our securities between October 23,
1997 and October 11, 2002, arising out of alleged false and
misleading statements in connection with our collection, 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. On February 28, 2006, the Court also dismissed
all alleged § 10 claims that arose prior to
July 30, 1999, shortening the class period by
22 months. Fact discovery is concluded. Expert discovery is
presently expected to conclude on March 16, 2008.
Separately, one of the defendants, Arthur Andersen LLP, entered
into a settlement of the claims against Arthur Andersen. This
settlement received Court approval in April, 2006. At this time
we are unable to quantify the potential impact from this action,
if any.
With respect to this securities litigation, we believe that we
have not, and our officers and directors have not, committed any
wrongdoing and there will be no finding of improper activities
that may result in a material liability to us or any of our
officers or directors.
24
HSBC Finance Corporation
Item 4. Submission
of Matters to a Vote of Security Holders.
Not applicable
PART II
Item 5. Market
for Registrants Common Equity and Related Stockholder
Matters.
Not applicable
25
HSBC Finance Corporation
Item 6. Selected
Financial Data.
On March 28, 2003, HSBC Holdings plc (HSBC)
acquired HSBC Finance Corporation (formerly Household
International, Inc.). This resulted in a new basis of accounting
reflecting the fair market value of our assets and liabilities
for the successor periods beginning March 29,
2003. Information for the predecessor period prior
to the merger is presented using our historical basis of
accounting, which impacts comparability to our
successor periods. To assist in the comparability of
our financial results, the predecessor period
(January 1 to March 28, 2003) has been combined with
the successor period (March 29 to December 31,
2003) to present combined results for the year
ended December 31, 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mar. 29
|
|
|
|
Jan. 1
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Through
|
|
|
|
Through
|
|
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
|
Dec. 31
|
|
|
|
Mar. 28,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2003
|
|
|
|
2003
|
|
|
|
|
|
(Successor)
|
|
|
(Successor)
|
|
|
(Successor)
|
|
|
(Successor)
|
|
|
(Combined)
|
|
|
(Successor)
|
|
|
|
(Predecessor)
|
|
|
|
(in millions)
|
|
Statement of Income Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and other revenues excluding the credit risk
component of fair value optioned debt-operating
basis(1)
|
|
$
|
15,334
|
|
|
$
|
15,611
|
|
|
$
|
13,347
|
|
|
$
|
12,454
|
|
|
$
|
11,672
|
|
|
$
|
8,888
|
|
|
|
$
|
2,784
|
|
Credit risk component of fair value optioned debt
|
|
|
1,616
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
Gain on bulk sale of private label
receivables(2)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
663
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
Provision for credit losses-operating
basis(1)
|
|
|
11,026
|
|
|
|
6,564
|
|
|
|
4543
|
|
|
|
4,296
|
|
|
|
3,967
|
|
|
|
2,991
|
|
|
|
|
976
|
|
Goodwill and other intangible asset impairment charges
|
|
|
4,891
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
Total costs and expenses, excluding goodwill and other
intangible asset impairment charges and nonrecurring expense
items(1)
|
|
|
6,884
|
|
|
|
6,760
|
|
|
|
6,141
|
|
|
|
5,691
|
|
|
|
5,032
|
|
|
|
3,850
|
|
|
|
|
1,182
|
|
HSBC acquisition related costs incurred by HSBC Finance
Corporation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
198
|
|
|
|
-
|
|
|
|
|
198
|
|
Adoption of FFIEC charge-off policies for domestic private label
and credit card
portfolios(1),(7)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
190
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
Income tax expense (benefit)
|
|
|
(945
|
)
|
|
|
844
|
|
|
|
891
|
|
|
|
1,000
|
|
|
|
872
|
|
|
|
690
|
|
|
|
|
182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss)(1)
|
|
$
|
(4,906
|
)
|
|
$
|
1,443
|
|
|
$
|
1,772
|
|
|
$
|
1,940
|
|
|
$
|
1,603
|
|
|
$
|
1,357
|
|
|
|
$
|
246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
2003
|
|
|
|
|
|
(Successor)
|
|
|
(Successor)
|
|
|
(Successor)
|
|
|
(Successor)
|
|
|
|
(Combined)
|
|
|
|
(in millions)
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
165,504
|
|
|
$
|
179,218
|
|
|
$
|
156,522
|
|
|
$
|
130,190
|
|
|
|
$
|
119,052
|
|
Receivables:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate secured
|
|
$
|
84,461
|
|
|
$
|
94,332
|
|
|
$
|
79,792
|
|
|
$
|
61,946
|
|
|
|
$
|
49,026
|
|
Auto finance
|
|
|
12,899
|
|
|
|
12,193
|
|
|
|
10,434
|
|
|
|
7,490
|
|
|
|
|
4,138
|
|
Credit card
|
|
|
30,091
|
|
|
|
27,499
|
|
|
|
23,963
|
|
|
|
12,371
|
|
|
|
|
9,577
|
|
Private label
|
|
|
147
|
|
|
|
289
|
|
|
|
356
|
|
|
|
341
|
|
|
|
|
9,732
|
|
Personal non-credit card
|
|
|
18,045
|
|
|
|
18,245
|
|
|
|
15,900
|
|
|
|
12,049
|
|
|
|
|
9,624
|
|
Commercial and other
|
|
|
144
|
|
|
|
181
|
|
|
|
208
|
|
|
|
315
|
|
|
|
|
399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total domestic
|
|
$
|
145,787
|
|
|
$
|
152,739
|
|
|
$
|
130,653
|
|
|
$
|
94,512
|
|
|
|
$
|
82,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
HSBC Finance Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
(Successor)
|
|
|
(Successor)
|
|
|
(Successor)
|
|
|
(Successor)
|
|
|
(Combined)
|
|
|
|
(in millions)
|
|
|
Foreign:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate secured
|
|
$
|
4,200
|
|
|
$
|
3,552
|
|
|
$
|
3,034
|
|
|
$
|
2,874
|
|
|
$
|
2,195
|
|
Auto finance
|
|
|
358
|
|
|
|
311
|
|
|
|
270
|
|
|
|
54
|
|
|
|
-
|
|
Credit card
|
|
|
299
|
|
|
|
215
|
|
|
|
147
|
|
|
|
2,264
|
|
|
|
1,605
|
|
Private label
|
|
|
2,946
|
|
|
|
2,220
|
|
|
|
2,164
|
|
|
|
3,070
|
|
|
|
2,872
|
|
Personal non-credit card
|
|
|
2,604
|
|
|
|
3,122
|
|
|
|
3,645
|
|
|
|
4,079
|
|
|
|
3,208
|
|
Commercial and other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total foreign
|
|
$
|
10,407
|
|
|
$
|
9,420
|
|
|
$
|
9,260
|
|
|
$
|
12,343
|
|
|
$
|
9,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate secured
|
|
$
|
88,661
|
|
|
$
|
97,885
|
|
|
$
|
82,826
|
|
|
$
|
64,820
|
|
|
$
|
51,221
|
|
Auto finance
|
|
|
13,257
|
|
|
|
12,504
|
|
|
|
10,704
|
|
|
|
7,544
|
|
|
|
4,138
|
|
Credit card
|
|
|
30,390
|
|
|
|
27,714
|
|
|
|
24,110
|
|
|
|
14,635
|
|
|
|
11,182
|
|
Private label
|
|
|
3,093
|
|
|
|
2,509
|
|
|
|
2,520
|
|
|
|
3,411
|
|
|
|
12,604
|
|
Personal non-credit card
|
|
|
20,649
|
|
|
|
21,367
|
|
|
|
19,545
|
|
|
|
16,128
|
|
|
|
12,832
|
|
Commercial and other
|
|
|
144
|
|
|
|
181
|
|
|
|
208
|
|
|
|
317
|
|
|
|
401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total owned receivables
|
|
$
|
156,194
|
|
|
$
|
162,160
|
|
|
$
|
139,913
|
|
|
$
|
106,855
|
|
|
$
|
92,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper, bank and other borrowings
|
|
$
|
8,424
|
|
|
$
|
11,055
|
|
|
$
|
11,454
|
|
|
$
|
9,060
|
|
|
$
|
9,354
|
|
Due to
affiliates(3)
|
|
|
14,902
|
|
|
|
15,172
|
|
|
|
15,534
|
|
|
|
13,789
|
|
|
|
7,589
|
|
Long term debt
|
|
|
123,262
|
|
|
|
127,590
|
|
|
|
105,163
|
|
|
|
85,378
|
|
|
|
79,632
|
|
Preferred
stock(4)
|
|
|
575
|
|
|
|
575
|
|
|
|
575
|
|
|
|
1,100
|
|
|
|
1,100
|
|
Common shareholders
equity(4),(5)
|
|
|
13,584
|
|
|
|
19,515
|
|
|
|
18,904
|
|
|
|
15,841
|
|
|
|
16,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
2003
|
|
|
|
|
|
(Successor)
|
|
|
(Successor)
|
|
|
(Successor)
|
|
|
(Successor)
|
|
|
|
(Combined)
|
|
Selected Financial Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average
assets(1)
|
|
|
(2.80
|
)%
|
|
|
.85
|
%
|
|
|
1.27
|
%
|
|
|
1.57
|
%
|
|
|
|
1.46
|
%
|
Return on average common shareholders
equity(1)
|
|
|
(26.59
|
)
|
|
|
7.07
|
|
|
|
9.97
|
|
|
|
10.99
|
|
|
|
|
10.89
|
|
Net interest margin
|
|
|
6.46
|
|
|
|
6.57
|
|
|
|
6.73
|
|
|
|
7.33
|
|
|
|
|
7.75
|
|
Efficiency
ratio(1)
|
|
|
68.69
|
|
|
|
41.55
|
|
|
|
44.10
|
|
|
|
42.05
|
|
|
|
|
42.97
|
|
Consumer net charge-off
ratio(1)
|
|
|
4.22
|
|
|
|
2.97
|
|
|
|
3.03
|
|
|
|
4.00
|
|
|
|
|
4.06
|
|
Consumer two-month-and-over contractual delinquency
|
|
|
7.41
|
|
|
|
4.59
|
|
|
|
3.89
|
|
|
|
4.13
|
|
|
|
|
5.40
|
|
Reserves as a percent of net
charge-offs(8)
|
|
|
162.4
|
|
|
|
145.8
|
|
|
|
123.8
|
|
|
|
89.9
|
|
|
|
|
105.7
|
|
Reserves as a percent of
receivables(9)
|
|
|
6.98
|
|
|
|
4.06
|
|
|
|
3.23
|
|
|
|
3.39
|
|
|
|
|
4.11
|
|
Reserves as a percent of nonperforming loans
|
|
|
123.4
|
|
|
|
114.8
|
|
|
|
106.9
|
|
|
|
100.9
|
|
|
|
|
92.8
|
|
Common and preferred equity to owned assets
|
|
|
8.56
|
%
|
|
|
11.21
|
%
|
|
|
12.43
|
%
|
|
|
13.01
|
%
|
|
|
|
14.69
|
%
|
Tangible shareholders(s) equity plus owned loss
reserves to tangible managed assets (TETMA + Owned
Reserves)(6)(9)
|
|
|
13.98
|
|
|
|
11.02
|
|
|
|
10.55
|
|
|
|
9.04
|
|
|
|
|
9.50
|
|
Tangible common equity to tangible managed assets
|
|
|
6.09
|
|
|
|
6.08
|
|
|
|
6.07
|
|
|
|
4.67
|
|
|
|
|
5.04
|
|
Excluding HSBC acquisition purchase accounting adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TETMA + Owned Reserves
|
|
|
14.18
|
|
|
|
11.67
|
|
|
|
11.51
|
|
|
|
10.75
|
|
|
|
|
11.42
|
|
Tangible common equity to tangible managed
assets(6)
|
|
|
6.27
|
|
|
|
6.72
|
|
|
|
7.02
|
|
|
|
6.38
|
|
|
|
|
6.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
HSBC Finance Corporation
|
|
(1) |
The following table, which contains
non-U.S.
GAAP financial information is provided for comparison of our
operating trends only and should be read in conjunction with our
U.S. GAAP financial information. For 2004, the operating trends,
percentages and ratios presented below exclude the
$121 million decrease in net income relating to the
adoption of Federal Financial Institutions Examination Council
(FFIEC) charge-off policies for our domestic private
label (excluding retail sales contracts at our Consumer Lending
business) and credit card receivables and the $423 million
(after-tax) gain on the bulk sale of domestic private label
receivables (excluding retail sales contracts at our Consumer
Lending business) to an affiliate, HSBC Bank USA, National
Association (HSBC Bank USA). For 2003, the operating
results, percentages and ratios exclude $167 million
(after-tax) of HSBC acquisition related costs and other merger
related items. See Basis of Reporting and
Reconciliations to U.S. GAAP Financial Measures
in Managements Discussion and Analysis for additional
discussion and quantitative reconciliations to the equivalent
U.S. GAAP basis financial measure.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
(Successor)
|
|
|
(Successor)
|
|
|
(Successor)
|
|
|
(Successor)
|
|
|
(Combined)
|
|
|
|
(dollars are in millions)
|
|
|
Operating net income (loss)
|
|
$
|
(4,906
|
)
|
|
$
|
1,443
|
|
|
$
|
1,772
|
|
|
$
|
1,638
|
|
|
$
|
1,770
|
|
Return on average assets
|
|
|
(2.80
|
)%
|
|
|
.85
|
%
|
|
|
1.27
|
%
|
|
|
1.32
|
%
|
|
|
1.61
|
%
|
Return on average common shareholders equity
|
|
|
(26.59
|
)
|
|
|
7.07
|
|
|
|
9.97
|
|
|
|
9.21
|
|
|
|
12.08
|
|
Consumer net charge-off ratio
|
|
|
4.22
|
|
|
|
2.97
|
|
|
|
3.03
|
|
|
|
3.84
|
|
|
|
4.06
|
|
Efficiency ratio
|
|
|
68.69
|
|
|
|
41.55
|
|
|
|
44.10
|
|
|
|
43.84
|
|
|
|
41.21
|
|
|
|
(2)
|
During 2007, we sold $2.7 billion of real estate secured
loans from the Mortgage Services loan portfolio. In November
2006, we purchased $2.5 billion of real estate secured
receivables from Champion Mortgage (Champion) and we
sold the capital stock of our operations in the Czech Republic,
Hungary and Slovakia (the European Operations) to a
wholly owned subsidiary of HSBC Bank plc (HBEU),
which included $199 million of private label and personal
non-credit card receivables. In the fourth quarter of 2006 we
purchased Solstice Capital Group Inc. (Solstice)
which included $32 million of real estate secured
receivables. In 2005, we sold our U.K. credit card business,
which included receivables of $2.5 billion, to HBEU and
acquired $5.3 billion in credit card receivables in
conjunction with our acquisition of Metris Companies, Inc.
(Metris). In 2004, we sold $.9 billion of
higher quality non-conforming real estate secured receivables
and sold our domestic private label receivable portfolio
(excluding retail sales contracts at our Consumer Lending
business) of $12.2 billion to HSBC Bank USA. In 2003, we
sold $2.8 billion of higher quality non-conforming real
estate secured receivables to HSBC Bank USA and acquired owned
basis private label portfolios totaling $1.2 billion and
credit card portfolios totaling $.9 billion.
|
|
(3)
|
We received $44.5 billion, $44.6 billion,
$44.1 billion, $35.7 billion and $14.7 billion in
HSBC related funding as of December 31, 2007, 2006, 2005,
2004 and 2003, respectively. See Liquidity and Capital Resources
for the components of this funding.
|
|
(4)
|
In conjunction with the acquisition by HSBC, our 7.625%, 7.60%,
7.50% and 8.25% preferred stock was converted into the right to
receive cash which totaled approximately $1.1 billion. In
consideration of HSBC transferring sufficient funds to make
these payments, we issued $1.1 billion Series A
preferred stock to HSBC on March 28, 2003. Also on
March 28, 2003, we called for redemption of our $4.30,
$4.50 and 5.00% preferred stock. In September 2004, HSBC North
America Holdings Inc. (HSBC North America) issued a
new series of preferred stock to HSBC in exchange for our
Series A preferred stock. In October 2004, HSBC Investments
(North America) Inc. (HINO) issued a new series of
preferred stock to HSBC North America in exchange for our
Series A preferred stock. Our Series A preferred stock
was exchanged by HINO for $1.1 billion of additional common
equity in December 2005. In June 2005, we issued
575,000 shares of 6.36 percent Non-Cumulative
Preferred Stock, Series B to third parties.
|
|
(5)
|
In 2007, we received capital contributions of $950 million
from HINO to support ongoing operations and to maintain capital
at levels we believe are prudent in the current market
conditions. In 2006, we received a capital contribution of
$163 million from HINO to fund a portion of the purchase of
our acquisition of the Champion portfolio. In 2005, we received
a capital contribution of $1.2 billion from HINO to fund a
portion of the purchase of our acquisition of Metris. Common
shareholders equity at December 31, 2007, 2006, 2005,
2004 and 2003 reflects push-down accounting adjustments
resulting from the HSBC merger.
|
|
(6)
|
TETMA + Owned Reserves and tangible common equity to tangible
managed assets excluding HSBC purchase accounting adjustments
are non-U.S.
GAAP financial ratios that are used by HSBC Finance Corporation
management or certain rating agencies as a measure 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-U.S.
GAAP financial measures and Reconciliations to U.S.
GAAP Financial Measures for quantitative
reconciliations to the equivalent U.S. GAAP basis financial
measure.
|
|
(7)
|
In December 2004, we adopted charge-off and account management
policies in accordance with the Uniform Retail Credit
Classification and Account Management Policy issued by the FFIEC
for our domestic private label (excluding retail sales contracts
at our consumer lending business) and credit card portfolios.
The adoption of the FFIEC charge-off policies resulted in a
reduction to net income of $121 million in the fourth
quarter of 2004. The domestic private label portfolio was
subsequently sold to HSBC Bank USA on December 29, 2004.
|
|
(8)
|
This ratio was positively impacted in 2007 and 2006 by markedly
higher loss estimates at our Mortgage Services business and, in
2007, at our Consumer Lending business, as the related
charge-offs will occur in future periods. In addition, the
acquisition of Metris in December 2005 has positively impacted
this ratio in 2005. Reserves as a percentage of net charge-offs
excluding Metris at December 31, 2005 was
118.2 percent. Additionally, the adoption of FFIEC
charge-off policies for our domestic private label (excluding
retail sales contracts at our consumer lending business) and
credit card portfolios and subsequent sale of the domestic
private label portfolio (excluding retail sales contracts at our
consumer lending business) in December 2004 have negatively
impacted these ratios. Reserves as a percentage of net
charge-offs excluding net charge-offs associated with the
domestic private label portfolio sold in 2004 and the impact of
adopting FFIEC charge-off policies for these portfolios was
109.2 percent.
|
|
(9)
|
This ratio was positively impacted in 2007 and 2006 by markedly
higher credit loss reserves at our Mortgage Services business
and, in 2007, at our Consumer Lending business.
|
28
HSBC Finance Corporation
Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
Executive
Overview
Organization
and Basis of Reporting
HSBC Finance Corporation (formerly Household International,
Inc.) and subsidiaries is an indirect wholly owned subsidiary of
HSBC North America Holdings Inc. (HSBC North
America) which is a wholly owned subsidiary of HSBC
Holdings plc (HSBC). HSBC Finance Corporation may
also be referred to in Managements Discussion and Analysis
of Financial Condition and Results of Operations
(MD&A) as we, us, or
our.
HSBC Finance Corporation provides middle-market consumers with
several types of loan products in the United States,
Canada, and prior to November 9, 2006, Slovakia, the Czech
Republic and Hungary (European Operations). We also
currently offer consumer loans in the United Kingdom and the
Republic of Ireland. Our lending products include real estate
secured loans, auto finance loans,
MasterCard(1)(,
Visa(1),
American
Express(1) and
Discover(1)credit
card loans (Credit Card), private label credit card
loans, including retail sales contracts and personal non-credit
card loans. We also initiate tax refund anticipation loans and
other related products in the United States and offer specialty
insurance products in the United States, Canada and prior to
November 1, 2007, the United Kingdom. Subsequent to the
sale of our United Kingdom insurance operations in November 2007
to Aviva plc and its subsidiaries (Aviva), insurance
products distributed in the United Kingdom through our branch
network are underwritten by Aviva. We generate cash to fund our
businesses primarily by collecting receivable balances, issuing
commercial paper, medium and long term debt; borrowing from HSBC
subsidiaries and customers and borrowing under secured financing
facilities. We use the cash generated to invest in and originate
new receivables, to service our debt obligations and to pay
dividends to our parent.
2007
Events
|
|
|
|
|
We continue to monitor the impact of several trends affecting
the mortgage lending industry. Industry statistics and reports
indicate that mortgage loan originations throughout the industry
from 2005, 2006 and 2007 are performing worse than originations
from prior periods. Real estate markets in a large portion of
the United States have been affected by a general slowing in the
rate of appreciation in property values, or an actual decline in
some markets such as California, Florida and Arizona, while the
period of time properties remain on the market continues to
increase. During the second half of 2007, there has been
unprecedented turmoil in the mortgage lending industry,
including rating agency downgrades of debt secured by subprime
mortgages of some issuers which resulted in a marked reduction
in secondary market demand for subprime loans. The lower demand
for subprime loans resulted in reduced liquidity in the
marketplace for subprime mortgages. Mortgage lenders have
tightened lending standards which impacts a borrowers
ability to refinance existing mortgage loans. It is now
generally believed that the slowdown in the housing market will
be deeper in terms of its impact on housing prices and the
duration will extend at least through 2008. The combination of
these factors has further reduced the refinancing opportunities
of some of our customers as the ability to refinance and access
any equity in their homes is no longer an option to many
customers. This impacts both credit performance and run-off
rates and has resulted in rising delinquency rates for real
estate secured loans in our portfolio and across the industry.
|
In the fourth quarter of 2007, we have also seen unemployment
rates rise in the same markets which are experiencing the
greatest home value depreciation, continued marked increases in
gasoline and home heating costs as well as a general slowing of
the U.S economy. Economy.com has recently indicated a number of
U.S. market sectors may already be in a recession. These
economic conditions have also impacted the ability of some
borrowers to make payments on their loans, including any
increase in their adjustable rate mortgage (ARM)
loan payment as the interest rates on their loans adjust under
their contracts. Interest rate adjustments on first mortgages
may also have a direct impact on a borrowers ability
((1) MasterCard
is a registered trademark of MasterCard International,
Incorporated; Visa is a registered trademark of Visa, Inc.;
American Express is a registered trademark of American Express
Company and Discover is a registered trademark of Novus Credit
Services, Inc.
29
HSBC Finance Corporation
to repay any underlying second lien mortgage loan on a property.
Similarly, as interest-only mortgage loans leave the
interest-only payment period, the ability of borrowers to make
the increased payments may be impacted. The increasing inventory
of homes for sale and declining property values in many markets
is resulting in increased loss severity on homes that are
foreclosed and remarketed and is impacting the desire of some of
our customers to continue to pay on their loans.
Consumer Lending experienced relatively stable performance in
its portfolio throughout 2006 and into the first half of 2007.
Notwithstanding this relatively stable performance, in late 2006
and early 2007 we reported that we were beginning to experience
weakening early stage performance in certain Consumer Lending
real estate secured loans originated since late 2005, consistent
with the industry trend. This trend worsened materially in
second half of 2007 as the weakening early stage delinquency
continued to deteriorate and migrate into later stage
delinquency, largely a result of the marketplace conditions
discussed above. Credit performance of our Consumer Lending
mortgage portfolio deteriorated across all vintages during the
second half of 2007, but in particular in loans which were
originated in 2006 and the first half of 2007. Dollars of
two-months-and-over contractual delinquency in our Consumer
Lending real estate portfolio increased $1.1 billion, or
106 percent in 2007. The deterioration has been most severe
in the first lien portions of the portfolio in the geographic
regions most impacted by the housing market downturn and rising
unemployment rates, particularly in the states of California,
Florida, Arizona, Virginia, Washington, Maryland, Minnesota,
Massachusetts and New Jersey which account for approximately
55 percent of the increase in dollars of
two-months-and-over contractual delinquency during 2007. At
December 31, 2007 40 percent of Consumer
Lendings real estate portfolio was located in these nine
states. This worsening trend and an outlook for increased
charge-offs has resulted in a marked increase in the provision
for credit losses at our Consumer Lending business in 2007.
In response to this deterioration, Consumer Lending has taken
steps to address the growing delinquency in its portfolios by
expanding the use of its foreclosure avoidance program as well
as increasing collection staffing. In addition, Consumer Lending
took the following actions in the second half of the year to
reduce risk in its real estate secured and personal non-credit
card receivable portfolios going forward:
|
|
|
|
|
Tightening of credit score and debt-to income requirements for
first lien loans
|
|
|
|
Reduction in
loan-to-value
(LTV) ratios in first and second lien loans
|
|
|
|
Elimination of the small volume of ARM loan originations
|
|
|
|
Elimination of the personal homeowner loan (PHL)
product
|
|
|
|
Tightening underwriting criteria for all products
|
|
|
|
Elimination of guaranteed direct mail loans to new customers
|
These actions resulted in lower new loan originations in the
fourth quarter of 2007 and are expected to materially reduce
origination volume in our Consumer Lending business going
forward. The scale of the reduction in business in 2008 due to
the risk reduction measures outlined above would reduce Consumer
Lendings finance and other interest income by
approximately 5 percent (approximately $400 million
based upon 2007 finance and other interest income.)
In 2006, we began a branch optimization initiative with the
objective of increasing the number of branches in better
performing markets and decreasing the number of branches in
underperforming markets. As a result of the marketplace turmoil
in the second half of 2007 discussed above, rising delinquencies
and charge-offs, the markedly lower origination volumes
projected for 2008, and a desire to achieve cost-savings, a new
effort was initiated in the fourth quarter to consider a more
aggressive approach to sizing the branch network and recorded a
restructuring charge of $25 million related to this effort.
As a result we have reduced our Consuming Lending branch network
from 1,382 branches at December 31, 2006 to approximately
1,000 branches at December 31, 2007. No further costs
resulting from this decision are anticipated. We currently
estimate that expenses could be reduced by approximately
$150 million in 2008 as a result of these actions.
30
HSBC Finance Corporation
We believe that this resized branch network will allow us to
achieve desired cost-savings as well as position us for future
growth when the market returns to normalized levels.
In 2006, we reported that we began to experience a deterioration
in the credit performance of mortgage loans acquired in 2005 and
2006 by our Mortgage Services business, particularly in the
second lien and portions of the first lien portfolio. We have
continued to experience higher than normal delinquency levels in
2007 in these portions of our Mortgage Services portfolio. In
the second half of 2007, we experienced further credit
deterioration in these portions of the Mortgage Services loan
portfolio due to the marketplace conditions discussed above and
a slowing U.S. economy. As a result, delinquency in our
Mortgage Services business increased markedly compared to the
first half of 2007. Overall, dollars of two-months-and-over
contractual delinquency in our Mortgage Services business
increased $1.7 billion or 75 percent in 2007. A
significant number of our second lien customers have underlying
adjustable rate first mortgages that face repricing in the
near-term which in certain cases also negatively impact the
probability of repayment on the related second lien mortgage
loan. As the interest rate adjustments will occur in an
environment of lower home value appreciation or depreciation and
tightening credit, we expect the probability of default for
adjustable rate first mortgages subject to repricing as well as
any second lien mortgage loans that are subordinate to an
adjustable rate first lien held by another lender will be
greater than what we have historically experienced prior to late
2006.
Numerous risk mitigation efforts have been implemented relating
to the affected components of the Mortgage Services portfolio.
These include enhanced segmentation and analytics to identify
the higher risk portions of the portfolio and increased
collections capacity. As appropriate and in accordance with
defined policies, we restructure
and/or
modify loans if we believe the customer has the ability to pay
for the foreseeable future under the restructured/modified
terms. Modifications may be permanent, but most in 2006 and 2007
were six-months or twelve-months in duration. We are currently
developing longer term modification programs that will be based
on customers needs and ensure we maximize future cash flow.
Going forward, we will be offering our customers longer term
modifications, potentially up to 5 years. At the end of a
temporary modification term, the ability of customers to pay
will be re-evaluated and, if necessary and the customer
qualifies for another modification, an additional temporary or
permanent modification may then be granted. Loans granted a
modification that equals or exceeds twelve months, including
those receiving two consecutive six-month modifications, are
reserved for as a troubled debt restructure in accordance with
SFAS No. 114, Accounting by Creditors for
Impairment of a Loan which requires a cash flow analysis
to assess impairment. We are also contacting customers who have
adjustable rate mortgage loans nearing the first reset that we
expect will be the most impacted by a rate adjustment in order
to assess their ability to make the adjusted payment and, as
appropriate, modify the loans. As a result of this specific risk
mitigation effort, we modified more than 8,500 loans with an
aggregate balance of $1.4 billion in 2007 and modified more
than 10,300 loans with an aggregate balance of $1.6 billion
since the inception of the program. Additionally in 2007, we
refinanced more than 4,000 customers of our Mortgage Services
business with adjustable rate mortgages to fixed rate loans with
an outstanding receivable balance at December 31, 2007 of
$679 million. For all our receivable portfolios, we have
markedly increased our collection capacity.
In the fourth quarter of 2007, the market conditions discussed
above have also resulted in higher than expected delinquency
levels in our domestic credit card and auto finance receivables
although the increased delinquency in our domestic auto finance
portfolio is not as severe as has been experienced elsewhere in
the industry. Dollars of two-months-and-over contractual
delinquency in our domestic credit card receivables increased
$474 million, or 37 percent in 2007 and for our
domestic auto finance receivables increased $65 million, or
16 percent. The increase in delinquency in our credit card
receivable portfolio is across all vintages, primarily in the
same markets experiencing the greatest home value depreciation.
Rising unemployment rates in these markets and a weakened
U.S. economy is also contributing to these increases. As a
result of these marketplace and broader economic conditions we
expect the increasing trend in delinquency and charge-off in
dollars and percentages to continue in all products in our
domestic receivable portfolios.
31
HSBC Finance Corporation
We expect our Mortgage Services and Consumer Lending portfolios
to remain under significant pressure in 2008 as the affected
originations season further. We expect these marketplace and
broader economic conditions will have a marked impact on our
overall delinquency and charge-off dollars and percentages in
2008 as compared to 2007, the extent of which will be based on
future economic conditions, their impact on customer payment
patterns and other factors which are beyond our control.
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In March 2007, we decided to discontinue correspondent channel
acquisitions by our Mortgage Services business and in June 2007
indicated that our Decision One wholesale operation, which
closed loans sourced by brokers primarily for resale, would
continue operations, largely reselling such loans to an HSBC
affiliate. However, the aforementioned recent turmoil in the
mortgage lending industry caused us to re-evaluate our strategy
and in September 2007, when we concluded that recovery of a
secondary market for subprime loan products was uncertain and,
at a minimum, that market could not be expected to stabilize in
the near term, we announced that we closed Decision Ones
origination operations. The decision to terminate the operations
of our Decision One business when coupled with our previous
announcement of the discontinuation of correspondent channel
acquisitions resulted in the impairment of the goodwill
allocated to the Mortgage Services business and, as such, we
recorded a non-cash impairment charge of $881 million in
the third quarter of 2007 to write-off all of the goodwill
allocated to this business. The actions described above,
combined with normal portfolio attrition including refinance and
charge-off, will continue to result in significant reductions in
the principal balance of our Mortgage Services loan portfolio in
2008.
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As the developments in the mortgage industry have continued to
unfold, in addition to the decisions related to our Mortgage
Services and Consumer Lending businesses discussed above, in
2007 we initiated an ongoing in-depth analysis of the risks and
strategies of our remaining businesses and product offerings.
The following summarizes the changes we have implemented in 2007
or intend to implement in the future:
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Credit Card Services: During the fourth quarter of
2007 we implemented certain changes related to fee and finance
charge billings as a result of continuing reviews to ensure our
practices fully reflect our brand principles. While estimates of
the potential impact of these changes are based on numerous
assumptions and take into account factors which are difficult to
predict, such as changes in customer behavior, we estimate that
these changes reduced fee and finance charge income by
approximately $55 million in 2007 and will reduce fee and
finance charge income in 2008 by up to approximately
$250 million. Also in the fourth quarter of 2007, we began
slowing receivable and account growth by tightening initial
credit line sales authorization criteria, closing inactive
accounts, decreasing credit lines and tightening underwriting
criteria for credit line increases. Additionally we have reduced
balance transfer volume and tightened cash access. In addition,
we are also considering the sale of our General Motors
(GM) MasterCard and Visa portfolio to HSBC Bank USA.
See Segment Results IFRS Management
Basis included in this MD&A for further discussion.
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Auto Finance: Throughout 2007, we continued to shift
the mix of new originations to a higher credit quality by
eliminating higher risk loan populations. These actions have
reduced volume in 2007 by
20-25 percent
in our dealer channel and are expected to continue to reduce
volume into 2008 resulting in reduced net income and narrower
spreads over time. We have also begun to shift the mix of new
loan volume in the
direct-to-consumer
channel to higher credit quality. Additionally in August 2007, a
decision was made to terminate unprofitable alliance agreements
with third parties which is not expected to have a significant
impact to origination volume going forward.
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In anticipation of a continuation of the slowing of the economy,
we are implementing additional actions to reduce risk in 2008
originations which will result in further volume reductions
going forward.
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Retail Services: We implemented numerous
credit-tightening efforts across our retail merchant base,
including the power sports industry, and reduced contingent
lines with inactive accounts.
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United Kingdom: As part of our review, we tightened
underwriting criteria for all product offerings. We discontinued
offering second lien loans with a LTV ratio greater than
100 percent through our branch network and second lien
loans with a LTV ratio greater than 90% through our broker
channel. This caused
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32
HSBC Finance Corporation
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a material reduction in origination volumes of real estate
secured loans in this business in the fourth quarter. In
December 2007, we signed a two year extension through 2009 with
our largest retail partner, the Dixon Stores Group. In November
2007, in a continued effort to simplify the business, we sold
our United Kingdom insurance operations to Aviva. See
Segment Results IFRS Management Basis
included in this MD&A for further discussion of this
disposal. We continue to evaluate the scope of our other United
Kingdom operations.
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Canada: In order to align our lending strategies in
the U.S. and Canada, we tightened underwriting criteria for
various real estate and unsecured products and eliminated PHL
product offerings in Canada which resulted in lower volumes. As
a result, we closed 29 branches in the fourth quarter of 2007.
We also decided to reduce the mortgage operations in Canada
which closed loans sourced by brokers. We are currently
reorganizing the Canadian business into two regions to optimize
management efficiencies and to reduce expenses.
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Taxpayer Financial Services: In early 2007, we began
a strategic review of our Taxpayer Financial Services
(TFS) business to ensure we offer only the most
value-added financial services tax products. As a result, in
March 2007 we decided that beginning with the 2008 tax season we
will discontinue pre-season and pre-file loan products. We have
also elected not to renew contracts with certain third-party
preparers as they came up for renewal and have negotiated early
termination agreements with others. In the fourth quarter, we
have also decided to stop participating in cross collection
activities with other refund anticipation loan providers. We
estimate these actions could reduce Taxpayer Financial Services
revenue by approximately $110 million in 2008.
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Beginning in 2007, we implemented ongoing in-depth cost
containment measures which will continue into 2008. This
includes centralizing certain cost functions and increasing the
use of HSBC affiliates outside of the United States to provide
various support services to our operations including, among
other areas, customer service, systems, collection and
accounting functions. When coupled with the resizing of the
Consumer Lending branch network discussed above, we believe we
will be appropriately positioned for future growth when market
conditions improve.
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As a result of the strategic changes discussed above, during the
fourth quarter of 2007 we performed interim goodwill and other
intangible impairment tests for the businesses where significant
changes in the business climate have occurred as required by
SFAS No. 142, Goodwill and Other Intangible
Assets, (SFAS No. 142). These tests
revealed that the business climate changes, including the
subprime marketplace conditions discussed above, when coupled
with the changes to our product offerings and business
strategies completed through the fourth quarter of 2007, have
resulted in an impairment of all goodwill allocated to our
Consumer Lending (which includes Solstice) and Auto Finance
businesses as well as all tradename and customer relationship
intangibles relating to the HSBC acquisition allocated to our
Consumer Lending business. Therefore, we recorded an impairment
charge in the fourth quarter of 2007 of $3,320 million
relating to our Consumer Lending business ($858 million
associated with the tradename and customer relationship
intangibles) and a $312 million goodwill impairment charge
relating to our Auto Finance business. These impairments
represent all of the goodwill previously allocated to these
businesses and all of HFC and Beneficial tradenames and customer
relationship intangibles associated with the HSBC acquisition
allocated to the Consumer Lending business. In addition, the
changes to product offerings and business strategies completed
through the fourth quarter of 2007 have also resulted in an
impairment of the goodwill allocated to our United Kingdom
business. As a result, an impairment charge of $378 million
was recorded in the fourth quarter of 2007 representing all of
the goodwill previously allocated to this business. For all
other businesses, the fair value of each of these reporting
units continues to exceed its carrying value including goodwill.
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33
HSBC Finance Corporation
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In May 2007, we decided to integrate our Retail Services and
Credit Card Services business. Combining Retail Services with
Credit Card Services enhances our ability to provide a single
credit card and private label solution for the market place. We
anticipate the integration of management reporting will be
completed in the first quarter of 2008 and at that time will
result in the combination of these businesses into one reporting
segment in our financial statements.
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In the third quarter of 2007, we decided to close our loan
underwriting, processing and collections center in Carmel,
Indiana (the Carmel Facility) to optimize our
facility and staffing capacity given the overall reductions in
business volumes. The Carmel Facility provided loan
underwriting, processing and collection activities for the
operations of our Consumer Lending and Mortgage Services
business. The collection activities performed in the Carmel
Facility have been redeployed to other facilities in our
Consumer Lending business.
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In the fourth quarter of 2007, Moodys,
Standard & Poors and Fitch changed the total
outlook on our issuer default rating from positive
to stable.
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We have facilities with commercial and investment banks under
which our domestic operations may issue securities backed with
auto finance, credit card and personal non-credit card
receivables which are renewable at the banks option. As a
result of the unprecedented turmoil in the marketplace, there
has been a marked reduction in secondary market demand for
subprime loans. As a result we anticipate that in 2008, certain
of these facilities will not be renewed and that others will be
renewed at higher prices. In addition, our single seller
mortgage facility was not renewed in 2007. In spite of these
actions, we believe we will continue to have adequate sources of
funds.
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In the first quarter of 2007, HSBC Investments (North America)
Inc.(HINO) made a capital contribution to us of
$200 million and in the fourth quarter of 2007 made an
additional capital contribution to us of $750 million, each
in exchange for one share of common stock. These capital
contributions were to support ongoing operations and to maintain
capital at levels that we believe are prudent in the current
market conditions. During 2007, we paid $812 million of
dividends to HINO. On February 12, 2008, HINO made a
capital contribution to us of $1.6 billion in exchange for
one share of common stock.
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Effective January 1, 2007, we early adopted
SFAS No. 159 which provides for a fair value option
election that allows companies to irrevocably elect fair value
as the initial and subsequent measurement attribute for certain
financial assets and liabilities, with changes in fair value
recognized in earnings as they occur. The adoption of
SFAS No. 159 resulted in an after-tax
cumulative-effect reduction to the January 1, 2007 opening
balance of retained earnings of $538 million. See
Note 2, Summary of Significant Accounting
Policies, and Note 13, Long Term Debt (With
Original Maturities Over One Year), to the accompanying
consolidated financial statements for further discussion of the
adoption of SFAS No. 159.
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Effective January 1, 2007, we elected to early adopt FASB
Statement No. 157, Fair Value Measurements,
(SFAS No. 157). SFAS No. 157
establishes a single authoritative definition of value, sets out
a framework for measuring fair value, and provides a hierarchal
disclosure framework for assets and liabilities measured at fair
value. The adoption of SFAS No. 157 did not have any
impact on our financial position or results of operations.
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Effective January 1, 2007, we adopted FASB Interpretation
No. 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement
No. 109 (FIN No. 48). The
adoption resulted in the reclassification of $65 million of
deferred tax liability to current tax liability to account for
uncertainty in the timing of tax benefits as well as the
reclassification of $141 million of deferred tax asset to
current tax asset to account for highly certain pending
adjustments in the timing of tax benefits. See Note 15,
Income Taxes, to the accompanying consolidated
financial statements.
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34
HSBC Finance Corporation
Performance,
Developments and Trends
The net loss was $4.9 billion in 2007 compared to net
income of $1.4 billion in 2006 and $1.8 billion in
2005. Our 2007 results were markedly impacted by goodwill
impairment charges of $3,763 million (after-tax) relating
to our Mortgage Services, Consumer Lending, Auto Finance and
United Kingdom businesses as well as by impairment charges of
$541 million (after-tax) relating to the HFC and Beneficial
tradenames and customer relationship intangibles relating to our
Consumer Lending business. This was partially offset by gains
from the change in the credit risk component of our fair value
optioned debt which resulted from our adoption of
SFAS No. 159, which increased net income by
$1,017 million (after-tax) in 2007. The combined impact of
these items was to increase our net loss by $3,287 million
in 2007. Excluding the impact of these items, the net loss in
2007 was largely due to a markedly higher provision for credit
losses and the impact of lower receivable growth. Lower
receivable growth was driven by the discontinuance of
correspondent channel acquisitions in the first quarter of 2007
and the changes in product offerings beginning in the second
half of 2007. In addition, higher other revenues and higher net
interest income were partially offset by higher costs and
expenses excluding the goodwill and other intangible asset
impairment charges.
The increase in provision for credit losses in 2007 primarily
reflects higher loss estimates in our Consumer Lending, Credit
Card Services and Mortgage Services businesses due to the
following:
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Consumer Lending experienced higher loss estimates primarily in
its real estate secured receivable portfolio due to higher
levels of charge-off and delinquency driven by an accelerated
deterioration of portions of the real estate secured receivable
portfolio in the second half of 2007. Weakening early stage
delinquency previously reported continued to worsen in 2007 and
migrate into later stage delinquency due to the marketplace
changes previously discussed. Lower receivable run-off, growth
in average receivables and portfolio seasoning also resulted in
a higher real estate secured credit loss provision. Also
contributing to the increase were higher loss estimates in
second lien loans purchased in 2004 through the third quarter of
2006. At December 31, 2007, the outstanding principal
balance of these acquired second lien loans was approximately
$1.0 billion. Additionally, higher loss estimates in
Consumer Lendings personal non-credit card portfolio
contributed to the increase due to seasoning, a deterioration of
2006 and 2007 vintages in certain geographic regions and
increased levels of personal bankruptcy filings as compared to
the exceptionally low filing levels experienced in 2006 as a
result of the new bankruptcy law in the United States which went
into effect in October 2005.
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Credit Card Services experienced higher loss estimates as a
result of higher average receivable balances, portfolio
seasoning, higher levels of non-prime receivables originated in
2006 and in the first half of 2007, as well as the increased
levels of personal bankruptcy filings discussed above.
Additionally, in the fourth quarter of 2007, Credit Card
Services began to experience increases in delinquency in all
vintages, particularly in the markets experiencing the greatest
home value depreciation. Rising unemployment rates in these
markets and a weakening U.S. economy also contributed to
the increase.
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Mortgage Services experienced higher levels of charge-offs and
delinquency as the second lien and portions of the first lien
portfolios purchased in 2005 and 2006 continued to season and
progress as expected into later stages of delinquency and
charge-off. Additionally during the second half of 2007, our
Mortgage Services portfolio also experienced higher loss
estimates as receivable run-off continued to slow and the
mortgage lending industry trends we had been experiencing
worsened.
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In addition to the factors discussed above, our provision for
credit losses in 2007 for our United Kingdom business reflects a
$93 million increase in credit loss reserves, resulting
from a refinement in the methodology used to calculate roll rate
percentages to be consistent with our other businesses and which
we believe reflects a better estimate of probable losses
currently inherent in the loan portfolio as well as higher loss
estimates for restructured loans of $68 million. These
increases to credit loss reserves were more than offset by
improvements in delinquency and charge-offs which resulted in an
overall lower credit loss provision in our United Kingdom
business.
On a consolidated basis, we recorded loss provision in excess of
net charge-offs of $4,310 million in 2007 compared to
$2,045 million in 2006. Consequently, our credit loss
reserve levels increased markedly in 2007. Reserve levels
35
HSBC Finance Corporation
for real estate secured receivables at our Mortgage Services and
Consumer Lending businesses can be further analyzed as follows:
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Consumer Lending
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Mortgage Services
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Year Ended December 31,
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2007
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2006
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2007
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2006
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(in millions)
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Credit loss reserves at beginning of period
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$
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278
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$
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295
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$
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2,085
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$
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421
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Provision for credit losses
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1,696
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351
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3,051
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2,202
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Charge-offs
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(597
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)
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(378
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)
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(1,605
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)
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(557
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)
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Recoveries
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9
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9
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63
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22
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Release of credit loss reserves related to loan sales
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-
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-
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(21
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)
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-
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Other, net
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-
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1
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-
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(3
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)
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Credit loss reserves at end of period
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$
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1,386
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$
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278
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$
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3,573
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$
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2,085
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The comparability of the provision for credit losses between
2006 and 2007 is affected by several factors in 2006, including
exceptionally low levels of personal bankruptcy filings in the
United States as a result of the new bankruptcy law which took
effect in October 2005, the impact of significant receivable
growth in 2004 and 2005 which had not yet fully seasoned and an
overall favorable credit environment in the United States.
Costs and expenses were negatively impacted by the goodwill and
other intangible asset impairment charges of $4.9 billion
related to our Mortgage Services, Consumer Lending, Auto Finance
and United Kingdom businesses as discussed above as well as by
restructuring charges totaling $106 million, primarily
related to the decisions to discontinue correspondent channel
acquisitions, cease Decision One operations, reduce our Consumer
Lending and Canadian branch networks and close the Carmel
Facility. The net impact of these decisions has been to reduce
headcount by approximately 4,100 or 13 percent in the
second half of 2007. Excluding the goodwill and other intangible
asset impairment charges and restructuring charges, costs and
expenses decreased in 2007, despite higher levels of average
receivables and added collection capacity, due to lower
marketing expenses, lower sales incentives and the impact of
entity-wide initiatives to reduce costs, partially offset by
higher collection costs and REO expenses.
The increase in net interest income in 2007 was due to higher
average receivables and an improvement in the overall yield on
the portfolio, partly offset by higher interest expense due to a
higher cost of funds. As discussed more fully below, the overall
yield improvements reflect repricing initiatives and changes in
receivable mix, partially offset by growth in non-performing
assets. Other revenues increased in 2007 due to higher fee
income as a result of higher volumes in our credit card
portfolios and the impact of adopting SFAS No. 159 as
credit spreads widened in 2007, partially offset by lower
derivative income, lower insurance revenue and lower other
income due to realized losses incurred on sales of real estate
secured receivables by our Decision One mortgage operations and
from the sale of $2.7 billion real estate secured
receivables from the Mortgage Services portfolio. The lower
derivative income was due to changes in the interest rate curve
as declining interest rates resulted in a lower value of our
interest rate swaps as compared to the prior periods. Also, as a
result of the adoption of SFAS No. 159, we eliminated
hedge accounting for essentially all fixed rate debt designated
at fair value, lowering derivative income. The fair value change
in the associated swaps, which accounted for the majority of the
derivative income in 2006, is now reported as Gain on
debt designated at fair value and related derivatives
in the consolidated statement of income (loss) along with
the
mark-to-market
on the fixed rate debt. Lower insurance revenues primarily
reflect lower insurance sales volumes in the U.K. prior to the
sale of our U.K. Insurance operations in November 2007.
Amortization of purchase accounting fair value adjustments
decreased net income by $119 million in 2007 and increased
net income by $96 million in 2006.
Net income decreased markedly in 2006 primarily due to a
substantial increase in our provision for credit losses and
higher costs and expenses, which was partially offset by higher
net interest income and higher other revenues. As discussed
above, the higher provision for credit losses was largely driven
by higher delinquency and losses at our Mortgage Services
business as loans acquired in 2005 and 2006 in the second lien
and portions of the first lien real estate secured portfolio are
experiencing markedly higher delinquency and, for loans acquired
in 2005 and early
36
HSBC Finance Corporation
2006, higher charge-offs. Also contributing to the increase in
loss provision was the impact of higher receivable levels and
portfolio seasoning including the Metris portfolio acquired in
December 2005. These increases were partially offset by lower
bankruptcy losses as a result of reduced filings following the
bankruptcy law changes in October 2005, the benefit of stable
unemployment levels in the United States and a reduction in the
estimated loss exposure resulting from Hurricane Katrina. Costs
and expenses increased to support receivables growth including
the full year impact in 2006 of our acquisition of Metris in
December 2005, as well as increases in REO expenses as a result
of higher volumes and higher losses on sale. These increases
were partially offset by lower expenses at our U.K. business
following the sale of the cards business in December 2005 and
lower intangible amortization. The increase in net interest
income was due to growth in average receivables and an
improvement in the overall yield on the portfolio, partly offset
by a higher cost of funds. Changes in receivable mix also
contributed to the increase in yield due to the impact of
increased levels of higher yielding credit card receivables due
to lower securitization levels and our acquisition of Metris
which contributed $161 million of net income in 2006. Other
revenues on an operating basis increased primarily due to higher
fee income and enhancement services revenue, as well as higher
affiliate servicing fees, partially offset by lower other
income, lower derivative income and lower securitization related
income. Fee income and enhancement services revenue were higher
in 2006 as a result of higher volumes in our credit card
portfolios, primarily resulting from our acquisition of Metris.
The increase in fee income was partially offset by the impact of
FFIEC guidance which limits certain fee billings for non-prime
credit card accounts. Affiliate servicing fees increased due to
higher levels of receivables being serviced. The decrease in
other income was primarily due to lower gains on sales of real
estate secured receivables by our Decision One mortgage
operations and an increase in the liability for estimated losses
from indemnification provisions on Decision One loans previously
sold. The decrease in derivative income was primarily due to a
rising interest rate environment and a significant reduction
during 2005 in the population of interest rate swaps which did
not qualify for hedge accounting under SFAS No. 133.
Securitization related revenue decreased due to reduced
securitization activity. Amortization of purchase accounting
fair value adjustments increased net income by $96 million
in 2006, which included $14 million relating to Metris,
compared to $102 million in 2005, which included
$1 million relating to Metris.
Our net interest margin was 6.46 percent in 2007 compared
to 6.57 percent in 2006 and 6.73 percent in 2005. As
discussed above, the decrease in 2007 was due to a higher cost
of funds, partially offset by the impact of higher average
receivables and higher overall yields. The higher interest
expense in 2007 was due to a higher cost of funds resulting from
the refinancing of maturing debt at higher current rates as well
as higher average rates for our short-term borrowings. This was
partially offset by the adoption of SFAS No. 159,
which resulted in $318 million of realized losses on swaps
which previously were accounted for as effective hedges under
SFAS No. 133 and reported as interest expense now
being reported in other revenues. Overall yields increased due
to increases in our rates on fixed and variable rate products
which reflected market movements and various other repricing
initiatives. Yields were also favorably impacted by receivable
mix with increased levels of higher yielding products such as
credit cards, due in part to reduced securitization levels and
higher levels of average personal non-credit card receivables.
Overall yield improvements were also impacted during the second
half of 2007 by a shift in mix to higher yielding Consumer
Lending real estate secured receivables resulting from attrition
in the lower yielding Mortgage Services real estate secured
receivable portfolio. Additionally, these higher yielding
Consumer Lending real estate secured receivables are remaining
on balance sheet longer due to lower run-off rates. Overall
yield improvements were negatively impacted by growth in
non-performing assets.
The decrease in net interest margin in 2006 was due to higher
funding costs, partially offset by improvements in the overall
yield on the portfolio. Overall yield increases in 2006 were due
to increases in our rates on fixed and variable rate products
which reflected market movements and various other repricing
initiatives which included reduced levels of promotional rate
balances. Yields in 2006 were also favorably impacted by
receivable mix with increased levels of higher yielding products
such as credit cards due in part to the full year benefit from
the Metris acquisition and reduced securitization levels,
increased levels of personal non-credit card receivables due to
growth and higher levels of second lien real estate secured
loans.
Our effective income tax rate was (16.2) percent in 2007,
36.9 percent in 2006 and 33.5 percent in 2005. The
effective tax rate for 2007 was significantly impacted by the
non-tax deductability of a substantial portion of the
37
HSBC Finance Corporation
goodwill impairment charges associated with our Mortgage
Services, Consumer Lending, Auto Finance and United Kingdom
businesses as well as the acceleration of tax from sales of
leveraged leases. The increase in the effective tax rate for
2006 as compared to 2005 was due to higher state income taxes
and lower tax credits as a percentage of income before taxes.
The increase in state income taxes was primarily due to an
increase in the blended statutory tax rate of our operating
companies. The effective tax rate differs from the statutory
federal income tax rate primarily because of the effects of
state and local income taxes and tax credits. See Note 15,
Income Taxes, for a reconciliation of our effective
tax rate.
Receivables decreased to $156.2 billion at
December 31, 2007, a 4 percent decrease from
December 31, 2006. While real estate secured receivables
have been a primary driver of growth in recent years, in 2007
real estate secured growth in our Consumer Lending business was
more than offset by lower receivable balances in our Mortgage
Services business resulting from the decision in March 2007 to
discontinue all loan acquisitions by our Mortgage Services
business as well as the sale of $2.7 billion of loans from
the Mortgage Services loan portfolio in 2007. As discussed
above, in the second half of 2007 we implemented risk mitigation
efforts and changes to product offerings in all remaining
businesses which when coupled with our decision to discontinue
Mortgage Services loan originations, will result in reductions
of aggregate receivable balances in future periods. Compared to
December 31, 2006, we experienced growth in our credit
card, auto finance and private label receivable portfolios,
particularly in our credit card portfolio due to strong domestic
organic growth in our General Motors, Union Privilege, Metris
and non-prime portfolios.
Our return on average common shareholders equity
(ROE) was (26.59) percent in 2007 compared to
7.07 percent in 2006 and 9.97 percent in 2005. Our
return on average owned assets (ROA) was (2.80)
percent in 2007 compared to .85 percent in 2006 and
1.27 percent in 2005. ROE and ROA were significantly
impacted in 2007 by the goodwill and other intangible asset
impairment charges discussed above which was partially offset by
the change in the credit risk component of our fair value
optioned debt. Excluding these items, ROE decreased
1,598 basis points and ROA decreased 177 basis points
as compared to 2006. The decrease was a result of the lower net
income in 2007 and for ROA also due to higher average assets.
Our efficiency ratio was 68.69 percent in 2007 compared to
41.55 percent in 2006 and 44.10 percent in 2005. Our
efficiency ratio in 2007 was markedly impacted by the goodwill
and other intangible asset impairment charges discussed above
which was partially offset by the change in the credit risk
component of our fair value optioned debt. Excluding these
items, in 2007 the efficiency ratio deteriorated 179 basis
points. This deterioration was primarily due to realized losses
on real estate secured receivable sales by our Decision One
operations, lower derivative income and higher costs and
expenses, partially offset by higher fee income and higher net
interest income due to higher levels of average receivables. Our
efficiency ratio in 2006 improved due to higher net interest
income and higher fee income and enhancement services revenues
due to higher levels of receivables, partially offset by an
increase in total costs and expenses to support receivable
growth as well as higher losses on REO properties. The
improvement in efficiency ratio in 2006 was primarily a result
of higher net interest income and higher fee income and
enhancement services revenues due to higher levels of
receivables, partially offset by an increase in total costs and
expenses to support receivable growth as well as higher losses
on REO properties.
Credit
Quality
Our two-months-and-over contractual delinquency ratio increased
to 7.41 percent at December 31, 2007 from
4.59 percent at December 31, 2006. With the exception
of our private label portfolio (which primarily consists of our
foreign private label portfolio and domestic retail sales
contracts that were not sold to HSBC Bank USA in December 2004),
all products reported higher delinquency levels due to the
impact of the weak housing and mortgage industry and rising
unemployment rates in certain markets, as discussed above, as
well as the impact of a weakening U.S. economy. The
two-months-and-over contractual delinquency ratio was also
negatively impacted by attrition in our real estate secured
receivables portfolio driven largely by the discontinuation of
new correspondent channel acquisitions as well as product
changes in our Consumer Lending portfolio which reduced the
outstanding principal balance of the real estate secured
portfolio. Our credit card portfolio reported a marked increase
in the two-months-and-over contractual delinquency ratio due to
a shift in mix to higher levels of non-prime receivables,
seasoning of a growing portfolio and higher levels of personal
bankruptcy filings as compared to the exceptionally
38
HSBC Finance Corporation
low levels experienced in 2006 following enactment of new
bankruptcy legislation in the United States as well as the
impact of marketplace conditions described above. Dollars of
delinquency at December 31, 2007 increased as compared to
December 31, 2006 across all products, with the exception
of our private label portfolio as a result of recent growth in
our foreign private label portfolios.
Net charge-offs as a percentage of average consumer receivables
for 2007 increased 125 basis points from 2006 with
increases in all products with the exception of our foreign
private label portfolio. The increase in our Mortgage Services
business reflects the higher delinquency levels discussed above
which are migrating to charge-off and the impact of lower
average receivable levels driven by the elimination of
correspondent purchases. The increase in our Consumer Lending
business reflects portfolio seasoning and higher losses in
second lien loans purchased in 2004 through the third quarter of
2006. The increase in net charge-offs as a percent of average
consumer receivables for our credit card portfolio is due to a
higher mix of non-prime receivables in our credit card
portfolio, portfolio seasoning and higher charge-off levels
resulting from increased levels of personal bankruptcy filings.
The increase in delinquency in our Consumer Lending real estate
secured portfolio and credit card portfolio resulting from the
marketplace and broader economic conditions will begin to
migrate to charge-off largely in 2008. The increase in net
charge-offs as a percent of average consumer receivables for our
personal non-credit card portfolio reflects portfolio seasoning
and deterioration of 2006 and 2007 vintages in certain
geographic regions. The improvement in the net charge-off ratio
for our private label receivables reflects higher levels of
average receivables in our foreign operations, partially offset
by portfolio seasoning.
Funding
and Capital
On February 12, 2008, HINO made a capital contribution to
us of $1.6 billion in exchange for one share of common
stock to support ongoing operations and to maintain capital at
levels we believe are prudent in the current market conditions.
The TETMA + Owned Reserves ratio was 13.98 percent at
December 31, 2007 and 11.02 percent at
December 31, 2006. The tangible common equity to tangible
managed assets ratio, excluding HSBC acquisition purchase
accounting adjustments, was 6.27 percent at
December 31, 2007 and 6.72 percent at
December 31, 2006. On a proforma basis, if the capital
contribution on February 12, 2008 of $1.6 billion had
been received on December 31, 2007, the TETMA + Owned
Reserves ratio would have been 99 basis points higher and
the tangible common equity to tangible managed assets ratio,
excluding HSBC acquisition purchase accounting adjustments would
have been 99 basis points higher. Our capital levels
reflect capital contributions of $950 million in 2007 and
$163 million in 2006 from HINO. Capital levels also reflect
common stock dividends of $812 million and
$809 million paid to our parent in 2007 and 2006,
respectively. These ratios represent
non-U.S. GAAP
financial ratios that are used by HSBC Finance Corporation
management and certain rating agencies to evaluate capital
adequacy and may be different from similarly named measures
presented by other companies. See Basis of Reporting
and Reconciliations to U.S. GAAP Financial
Measures for additional discussion and quantitative
reconciliation to the equivalent U.S. GAAP basis financial
measure.
Future
Prospects
Our continued success and prospects for growth are dependent
upon access to the global capital markets. Numerous factors,
both internal and external, may impact our access to, and the
costs associated with, these markets. These factors may include
our debt ratings, overall economic conditions, overall capital
markets volatility, the counterparty credit limits of investors
to the HSBC Group and the effectiveness of our management of
credit risks inherent in our customer base. In 2007, the capital
markets were severely disrupted and the markets continue to be
highly risk averse and reactionary. This unprecedented turmoil
in the mortgage lending industry included rating agency
downgrades of debt secured by subprime mortgages of some
issuers. Although none of our secured financings have been
downgraded and we continued to access the commercial paper
market and all other funding sources consistent with our funding
plans, this raised our cost of funding in 2007. Our affiliation
with HSBC has improved our access
39
HSBC Finance Corporation
to the capital markets. This affiliation has given us the
ability to use HSBCs liquidity to partially fund our
operations and reduce our overall reliance on the debt markets
as well as expanded our access to a worldwide pool of potential
investors.
Our results are also impacted by general economic conditions,
primarily unemployment, strength of the housing market and
property valuations and interest rates which are largely out of
our control. Because we generally lend to customers who have
limited credit histories, modest incomes and high debt-to-income
ratios or who have experienced prior credit problems, our
customers are generally more susceptible to economic slowdowns
than other consumers. When unemployment increases or changes in
the rate of home value appreciation or depreciation occurs, a
higher percentage of our customers default on their loans and
our charge-offs increase. Changes in interest rates generally
affect both the rates that we charge to our customers and the
rates that we must pay on our borrowings. In 2007, the interest
rates that we paid on our debt increased. We have experienced
higher yields on our receivables in 2007 as a result of
increased pricing on variable rate products in line with market
movements as well as other repricing initiatives. Our ability to
adjust our pricing on some of our products reduces our exposure
to an increase in interest rates. In 2007, approximately
$4.3 billion of adjustable rate mortgages experienced their
first interest rate reset. In 2008 and 2009, approximately
$3.7 billion and $4.1 billion, respectively, of our
domestic adjustable rate mortgage loans will experience their
first interest rate reset based on original contractual reset
date and receivable levels outstanding at December 31,
2007. These reset numbers do not include any loans which were
modified through a new modification program initiated in October
2006 which proactively contacted non-delinquent customers
nearing their first interest rate reset. In 2008, we anticipate
approximately $1.3 billion of loans modified under this
modification program will experience their first reset. In
addition, our analysis indicates that a significant portion of
the second lien mortgages in our Mortgage Services portfolio at
December 31, 2007 are subordinated to first lien adjustable
rate mortgages that have already experienced or will experience
their first rate reset in the next two years which could in some
cases lead to a higher monthly payment. As a result, delinquency
and charge-offs are increasing. The primary risks and
opportunities to achieving our business goals in 2008 are
largely dependent upon economic conditions, which includes a
weakened housing market, rising unemployment rates, the
likelihood of a recession in the U.S. economy and the depth
of any such recession, a weakening consumer credit cycle and the
impact of ARM resets, all of which could result in changes to
loan volume, charge-offs, net interest income and ultimately net
income.
Basis of
Reporting
Our consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United
States (U.S. GAAP). Unless noted, the
discussion of our financial condition and results of operations
included in MD&A are presented on an owned basis of
reporting. Certain reclassifications have been made to prior
year amounts to conform to the current year presentation.
In addition to the U.S. GAAP financial results reported in
our consolidated financial statements, MD&A includes
reference to the following information which is presented on a
non-U.S. GAAP
basis:
Equity Ratios Tangible
shareholders(s) equity plus owned loss reserves to
tangible managed assets (TETMA + Owned Reserves) and
tangible common equity to tangible managed assets excluding HSBC
acquisition purchase accounting adjustments are
non-U.S. GAAP
financial measures that are used by HSBC Finance Corporation
management and certain rating agencies to evaluate capital
adequacy. We and certain rating agencies monitor ratios
excluding the impact of the HSBC acquisition purchase accounting
adjustments as we believe that they represent non-cash
transactions which do not affect our business operations, cash
flows or ability to meet our debt obligations. These ratios also
exclude the equity impact of SFAS No. 115,
Accounting for Certain Investments in Debt and Equity
Securities, the equity impact of SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities, and beginning in 2007, the impact of the
adoption of SFAS No. 159 including the subsequent
changes in fair value recognized in earnings associated with
debt for which we elected the fair value option. Preferred
securities issued by certain non-consolidated trusts are also
considered equity in the TETMA + Owned Reserves calculations
because of their long-term subordinated nature and our ability
to defer dividends. Managed assets include owned assets plus
loans which we have sold and service with limited recourse.
These ratios may differ from similarly named measures presented
by other companies. The most directly comparable U.S. GAAP
financial measure is the
40
HSBC Finance Corporation
common and preferred equity to owned assets ratio. For a
quantitative reconciliation of these
non-U.S. GAAP
financial measures to our common and preferred equity to owned
assets ratio, see Reconciliations to
U.S. GAAP Financial Measures.
International Financial Reporting
Standards Because HSBC reports results in
accordance with IFRSs and IFRSs results are used in measuring
and rewarding performance of employees, our management also
separately monitors net income under IFRSs (a
non-U.S. GAAP
financial measure). All purchase accounting fair value
adjustments relating to our acquisition by HSBC have been
pushed down to HSBC Finance Corporation for both
U.S. GAAP and IFRSs consistent with our IFRS Management Basis
presentation. The following table reconciles our net income on a
U.S. GAAP basis to net income on an IFRSs basis:
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|
|
|
|
|
|
|
|
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|
Year Ended
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(in millions)
|
|
|
Net income (loss) U.S. GAAP basis
|
|
$
|
(4,906
|
)
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|
$
|
1,443
|
|
Adjustments, net of tax:
|
|
|
|
|
|
|
|
|
Securitizations
|
|
|
20
|
|
|
|
25
|
|
Derivatives and hedge accounting (including fair value
adjustments)
|
|
|
3
|
|
|
|
(171
|
)
|
Intangible assets
|
|
|
102
|
|
|
|
113
|
|
Purchase accounting adjustments
|
|
|
58
|
|
|
|
42
|
|
Loan origination
|
|
|
6
|
|
|
|
(27
|
)
|
Loan impairment
|
|
|
(6
|
)
|
|
|
36
|
|
Loans held for resale
|
|
|
(24
|
)
|
|
|
28
|
|
Interest recognition
|
|
|
52
|
|
|
|
33
|
|
Goodwill and other intangible asset impairment charges
|
|
|
(1,616
|
)
|
|
|
-
|
|
Other
|
|
|
162
|
|
|
|
162
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) IFRSs basis
|
|
$
|
(6,149
|
)
|
|
$
|
1,684
|
|
|
|
|
|
|
|
|
|
|
Significant differences between U.S. GAAP and IFRSs are as
follows:
Securitizations
IFRSs
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|
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The recognition of securitized assets is governed by a
three-step process, which may be applied to the whole asset, or
a part of an asset:
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|
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If the rights to the cash flows arising from securitized assets
have been transferred to a third party and all the risks and
rewards of the assets have been transferred, the assets
concerned are derecognized.
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|
If the rights to the cash flows are retained by HSBC but there
is a contractual obligation to pay them to another party, the
securitized assets concerned are derecognized if certain
conditions are met such as, for example, when there is no
obligation to pay amounts to the eventual recipient unless an
equivalent amount is collected from the original asset.
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|
If some significant risks and rewards of ownership have been
transferred, but some have also been retained, it must be
determined whether or not control has been retained. If control
has been retained, HSBC continues to recognize the asset to the
extent of its continuing involvement; if not, the asset is
derecognized.
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|
|
|
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The impact from securitizations resulting in higher net income
under IFRSs is due to the recognition of income on securitized
receivables under U.S. GAAP in prior periods.
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U.S. GAAP
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|
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|
SFAS 140 Accounting for Transfers and Servicing of
Finance Assets and Extinguishments of Liabilities requires
that receivables that are sold to a special purpose entity
(SPE) and securitized can only be
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41
HSBC Finance Corporation
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derecognized and a gain or loss on sale recognized if the
originator has surrendered control over the securitized assets.
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Control is surrendered over transferred assets if, and only if,
all of the following conditions are met:
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The transferred assets are put presumptively beyond the reach of
the transferor and its creditors, even in bankruptcy or other
receivership.
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Each holder of interests in the transferee (i.e. holder of
issued notes) has the right to pledge or exchange their
beneficial interests, and no condition constrains this right and
provides more than a trivial benefit to the transferor.
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The transferor does not maintain effective control over the
assets through either an agreement that obligates the transferor
to repurchase or to redeem them before their maturity or through
the ability to unilaterally cause the holder to return specific
assets, other than through a
clean-up
call.
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|
If these conditions are not met the securitized assets should
continue to be consolidated.
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When HSBC retains an interest in the securitized assets, such as
a servicing right or the right to residual cash flows from the
SPE, HSBC recognizes this interest at fair value on sale of the
assets to the SPE.
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Impact
|
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On an IFRSs basis, our securitized receivables are treated as
owned. Any gains recorded under U.S. GAAP on these
transactions are reversed. An owned loss reserve is established.
The impact from securitizations resulting in higher net income
under IFRSs is due to the recognition of income on securitized
receivables under U.S. GAAP in prior periods.
|
Derivatives
and hedge accounting
IFRSs
|
|
|
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Derivatives are recognized initially, and are subsequently
remeasured, at fair value. Fair values of exchange-traded
derivatives are obtained from quoted market prices. Fair values
of over-the-counter (OTC) derivatives are obtained
using valuation techniques, including discounted cash flow
models and option pricing models.
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In the normal course of business, the fair value of a derivative
on initial recognition is considered to be the transaction price
(that is the fair value of the consideration given or received).
However, in certain circumstances the fair value of an
instrument will be evidenced by comparison with other observable
current market transactions in the same instrument (without
modification or repackaging) or will be based on a valuation
technique whose variables include only data from observable
markets, including interest rate yield curves, option
volatilities and currency rates. When such evidence exists, HSBC
recognizes a trading gain or loss on inception of the
derivative. When unobservable market data have a significant
impact on the valuation of derivatives, the entire initial
change in fair value indicated by the valuation model is not
recognized immediately in the income statement but is recognized
over the life of the transaction on an appropriate basis or
recognized in the income statement when the inputs become
observable, or when the transaction matures or is closed out.
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Derivatives may be embedded in other financial instruments; for
example, a convertible bond has an embedded conversion option.
An embedded derivative is treated as a separate derivative when
its economic characteristics and risks are not clearly and
closely related to those of the host contract, its terms are the
same as those of a stand-alone derivative, and the combined
contract is not held for trading or designated at fair value.
These embedded derivatives are measured at fair value with
changes in fair value recognized in the income statement.
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Derivatives are classified as assets when their fair value is
positive, or as liabilities when their fair value is negative.
Derivative assets and liabilities arising from different
transactions are only netted if the transactions are with the
same counterparty, a legal right of offset exists, and the cash
flows are intended to be settled on a net basis.
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The method of recognizing the resulting fair value gains or
losses depends on whether the derivative is held for trading, or
is designated as a hedging instrument and, if so, the nature of
the risk being hedged. All gains and losses from changes in the
fair value of derivatives held for trading are recognized in the
income statement. When derivatives are designated as hedges,
HSBC classifies them as either: (i) hedges of the
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42
HSBC Finance Corporation
|
|
|
|
|
change in fair value of recognized assets or liabilities or firm
commitments (fair value hedge); (ii) hedges of
the variability in highly probable future cash flows
attributable to a recognized asset or liability, or a forecast
transaction (cash flow hedge); or (iii) hedges
of net investments in a foreign operation (net investment
hedge). Hedge accounting is applied to derivatives
designated as hedging instruments in a fair value, cash flow or
net investment hedge provided certain criteria are met.
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Hedge Accounting:
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It is HSBCs policy to document, at the inception of a
hedge, the relationship between the hedging instruments and
hedged items, as well as the risk management objective and
strategy for undertaking the hedge. The policy also requires
documentation of the assessment, both at hedge inception and on
an ongoing basis, of whether the derivatives used in the hedging
transactions are highly effective in offsetting changes in fair
values or cash flows of hedged items attributable to the hedged
risks.
|
Fair value hedge:
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Changes in the fair value of derivatives that are designated and
qualify as fair value hedging instruments are recorded in the
income statement, together with changes in the fair values of
the assets or liabilities or groups thereof that are
attributable to the hedged risks.
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If the hedging relationship no longer meets the criteria for
hedge accounting, the cumulative adjustment to the carrying
amount of a hedged item is amortized to the income statement
based on a recalculated effective interest rate over the
residual period to maturity, unless the hedged item has been
derecognized whereby it is released to the income statement
immediately.
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Cash flow hedge:
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The effective portion of changes in the fair value of
derivatives that are designated and qualify as cash flow hedges
are recognized in equity. Any gain or loss relating to an
ineffective portion is recognized immediately in the income
statement.
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Amounts accumulated in equity are recycled to the income
statement in the periods in which the hedged item will affect
the income statement. However, when the forecast transaction
that is hedged results in the recognition of a non-financial
asset or a non-financial liability, the gains and losses
previously deferred in equity are transferred from equity and
included in the initial measurement of the cost of the asset or
liability.
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When a hedging instrument expires or is sold, or when a hedge no
longer meets the criteria for hedge accounting, any cumulative
gain or loss existing in equity at that time remains in equity
until the forecast transaction is ultimately recognized in the
income statement. When a forecast transaction is no longer
expected to occur, the cumulative gain or loss that was reported
in equity is immediately transferred to the income statement.
|
Net investment hedge:
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|
|
|
|
Hedges of net investments in foreign operations are accounted
for in a similar manner to cash flow hedges. Any gain or loss on
the hedging instrument relating to the effective portion of the
hedge is recognized in equity; the gain or loss relating to the
ineffective portion is recognized immediately in the income
statement. Gains and losses accumulated in equity are included
in the income statement on the disposal of the foreign operation.
|
Hedge effectiveness testing:
|
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|
IAS 39 requires that at inception and throughout its life, each
hedge must be expected to be highly effective (prospective
effectiveness) to qualify for hedge accounting. Actual
effectiveness (retrospective effectiveness) must also be
demonstrated on an ongoing basis.
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The documentation of each hedging relationship sets out how the
effectiveness of the hedge is assessed.
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|
For prospective effectiveness, the hedging instrument must be
expected to be highly effective in achieving offsetting changes
in fair value or cash flows attributable to the hedged risk
during the period for which the hedge is designated. For
retrospective effectiveness, the changes in fair value or cash
flows must offset each other in the range of 80 per cent to
125 per cent for the hedge to be deemed effective.
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43
HSBC Finance Corporation
Derivatives that do not qualify for hedge accounting:
|
|
|
|
|
All gains and losses from changes in the fair value of any
derivatives that do not qualify for hedge accounting are
recognized immediately in the income statement.
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U.S. GAAP
|
|
|
|
|
The accounting under SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities is
generally consistent with that under IAS 39, which HSBC has
followed in its IFRSs reporting from January 1, 2005, as
described above. However, specific assumptions regarding hedge
effectiveness under U.S. GAAP are not permitted by IAS 39.
|
|
|
The requirements of SFAS No. 133 have been effective
from January 1, 2001.
|
|
|
The U.S. GAAP shortcut method permits an
assumption of zero ineffectiveness in hedges of interest rate
risk with an interest rate swap provided specific criteria have
been met. IAS 39 does not permit such an assumption, requiring a
measurement of actual ineffectiveness at each designated
effectiveness testing date. As of December 31, 2007 and
2006, we do not have any hedges accounted for under the shortcut
method.
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|
|
In addition, IFRSs allows greater flexibility in the designation
of the hedged item.
|
|
|
Under U.S. GAAP, derivatives receivable and payable with
the same counterparty may be reported net on the balance sheet
when there is an executed ISDA Master Netting Arrangement
covering enforceable jurisdictions. FASB Staff Position
No. FIN 39-1,
Amendment of FASB Interpretation No. 39, also
allows entities that are party to a master netting arrangement
to offset the receivable or payable recognized upon payment or
receipt of cash collateral against fair value amounts recognized
for derivative instruments that have been offset under the same
master netting arrangement. These contracts do not meet the
requirements for offset under IAS 32 and hence are presented
gross on the balance sheet under IFRSs.
|
Impact
|
|
|
|
|
Differences between IFRSs and U.S. GAAP as it relates
to derivatives and hedge accounting are not significant.
|
|
|
Prior to 2006, the shortcut method of hedge
effectiveness testing for certain hedging relationships was
utilized under U.S. GAAP.
|
Designation
of financial assets and liabilities at fair value through profit
and loss
IFRSs
|
|
|
|
|
Under IAS 39, a financial instrument, other than one held for
trading, is classified in this category if it meets the criteria
set out below, and is so designated by management. An entity may
designate financial instruments at fair value where the
designation:
|
|
|
|
|
|
eliminates or significantly reduces a measurement or recognition
inconsistency that would otherwise arise from measuring
financial assets or financial liabilities or recognizing the
gains and losses on them on different bases; or
|
|
|
applies to a group of financial assets, financial liabilities or
a combination of both that is managed and its performance
evaluated on a fair value basis, in accordance with a documented
risk management or investment strategy, and where information
about that group of financial instruments is provided internally
on that basis to management; or
|
|
|
relates to financial instruments containing one or more embedded
derivatives that significantly modify the cash flows resulting
from those financial instruments.
|
|
|
|
|
|
Financial assets and financial liabilities so designated are
recognized initially at fair value, with transaction costs taken
directly to the income statement, and are subsequently
remeasured at fair value. This designation, once made, is
irrevocable in respect of the financial instruments to which it
relates. Financial assets and financial liabilities are
recognized using trade date accounting.
|
|
|
Gains and losses from changes in the fair value of such assets
and liabilities are recognized in the income statement as they
arise, together with related interest income and expense and
dividends.
|
44
HSBC Finance Corporation
U.S. GAAP
|
|
|
|
|
Prior to the adoption of SFAS No. 159, generally, for
financial assets to be measured at fair value with gains and
losses recognized immediately in the income statement, they were
required to meet the definition of trading securities in
SFAS 115, Accounting for Certain Investments in Debt
and Equity Securities. Financial liabilities were usually
reported at amortized cost under U.S. GAAP.
|
|
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SFAS No. 159 was issued in February 2007, which
provides for a fair value option election that allows companies
to irrevocably elect fair value as the initial and subsequent
measurement attribute for certain financial assets and
liabilities, with changes in fair value recognized in earnings
as they occur. SFAS No. 159 permits the fair value
option election on an instrument by instrument basis at the
initial recognition of an asset or liability or upon an event
that gives rise to a new basis of accounting for that
instrument. We adopted SFAS No. 159 retroactive to
January 1, 2007.
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Impact
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We have accounted for certain fixed rate debt issuances for
IFRSs utilizing the fair value option as permitted under IAS 39.
Prior to 2007, the fair value option was not permitted under
U.S. GAAP. We elected fair value option for certain
issuance of our fixed rate debt for U.S. GAAP purposes
effective January 1, 2007 to align our accounting treatment
with that under IFRSs.
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Goodwill,
Purchase Accounting and Intangibles
IFRSs
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Prior to 1998, goodwill under U.K. GAAP was written off against
equity. HSBC did not elect to reinstate this goodwill on its
balance sheet upon transition to IFRSs. From January 1,
1998 to December 31, 2003 goodwill was capitalized and
amortized over its useful life. The carrying amount of goodwill
existing at December 31, 2003 under U.K. GAAP was carried
forward under the transition rules of IFRS 1 from
January 1, 2004, subject to certain adjustments.
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IFRS 3 Business Combinations requires that goodwill
should not be amortized but should be tested for impairment at
least annually at the reporting unit level by applying a test
based on recoverable amounts.
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Quoted securities issued as part of the purchase consideration
are fair valued for the purpose of determining the cost of
acquisition at their market price on the date the transaction is
completed.
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U.S. GAAP
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Up to June 30, 2001, goodwill acquired was capitalized and
amortized over its useful life which could not exceed
25 years. The amortization of previously acquired goodwill
ceased with effect from December 31, 2001.
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Quoted securities issued as part of the purchase consideration
are fair valued for the purpose of determining the cost of
acquisition at their average market price over a reasonable
period before and after the date on which the terms of the
acquisition are agreed and announced.
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Impact
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Goodwill levels are higher under IFRSs than U.S. GAAP as
the HSBC purchase accounting adjustments reflect higher levels
of intangible assets under U.S. GAAP. Consequently, the
amount of goodwill allocated to our Mortgage Services, Consumer
Lending, Auto Finance and United Kingdom businesses and written
off in 2007 is greater under IFRSs, but the amount of
intangibles relating to our Consumer Lending business and
written off in 2007 is lower under IFRSs. There are also
differences in the valuation of assets and liabilities under
U.K. GAAP (which were carried forward into IFRSs) and
U.S. GAAP which result in a different amortization for the
HSBC acquisition. Additionally, there are differences in the
valuation of assets and liabilities under IFRSs and
U.S. GAAP resulting from the Metris acquisition in December
2005.
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Loan
origination
IFRSs
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Certain loan fee income and incremental directly attributable
loan origination costs are amortized to the income statement
over the life of the loan as part of the effective interest
calculation under IAS 39.
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45
HSBC Finance Corporation
U.S. GAAP
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Certain loan fee income and direct but not necessarily
incremental loan origination costs, including an apportionment
of overheads, are amortized to the income statement account over
the life of the loan as an adjustment to interest income
(SFAS No. 91 Accounting for Nonrefundable Fees
and Costs Associated with Originating or Acquiring Loans and
Initial Direct Costs of Leases.)
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Impact
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More costs, such as salary expense are deferred and amortized
under U.S. GAAP, than under IFRSs. In 2007, the net costs
deferred and amortized against earnings under U.S. GAAP
exceeded the net costs deferred and amortized under IFRSs as
origination volume slowed.
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Loan
impairment
IFRSs
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Where statistical models, using historic loss rates adjusted for
economic conditions, provide evidence of impairment in
portfolios of loans, their values are written down to their net
recoverable amount. The net recoverable amount is the present
value of the estimated future recoveries discounted at the
portfolios original effective interest rate. The
calculations include a reasonable estimate of recoveries on
loans individually identified for write-off pursuant to
HSBCs credit guidelines.
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U.S. GAAP
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Where the delinquency status of loans in a portfolio is such
that there is no realistic prospect of recovery, the loans are
written off in full, or to recoverable value where collateral
exists. Delinquency depends on the number of days payment is
overdue. The delinquency status is applied consistently across
similar loan products in accordance with HSBCs credit
guidelines. When local regulators mandate the delinquency status
at which write-off must occur for different retail loan products
and these regulations reasonably reflect estimated recoveries on
individual loans, this basis of measuring loan impairment is
reflected in U.S. GAAP accounting. Cash recoveries relating
to pools of such written-off loans, if any, are reported as loan
recoveries upon collection.
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Impact
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Under both IFRSs and U.S. GAAP, HSBCs policy and
regulatory instructions mandate that individual loans evidencing
adverse credit characteristics which indicate no reasonable
likelihood of recovery are written off. When, on a portfolio
basis, cash flows can reasonably be estimated in aggregate from
these written-off loans, an asset equal to the present value of
the future cash flows is recognized under IFRSs.
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Subsequent recoveries are credited to earnings under
U.S. GAAP, but are adjusted against the recovery asset
under IFRSs, resulting in lower earnings under IFRSs.
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Net interest income is higher under IFRSs than under
U.S. GAAP due to the imputed interest on the recovery asset.
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Loans
held for resale
IFRSs
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Under IAS 39, loans held for resale are treated as trading
assets.
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As trading assets, loans held for resale are initially recorded
at fair value, with changes in fair value being recognized in
current period earnings.
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Any gains realized on sales of such loans are recognized in
current period earnings on the trade date.
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U.S. GAAP
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Under U.S. GAAP, loans held for resale are designated as
loans on the balance sheet.
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Such loans are recorded at the lower of amortized cost or market
value (LOCOM). Therefore, recorded value cannot exceed amortized
cost.
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Subsequent gains on sales of such loans are recognized in
current period earnings on the settlement date.
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46
HSBC Finance Corporation
Impact
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Because of differences between fair value and LOCOM accounting,
adjustments to the recorded value of loan pools held for resale
under IFRSs may be higher or lower than the adjustments to the
recorded value under U.S. GAAP.
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Interest
recognition
IFRSs
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The calculation and recognition of effective interest rates
under IAS 39 requires an estimate of all fees and points
paid or received between parties to the contract that are
an integral part of the effective interest rate be included.
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U.S. GAAP
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FAS 91 also generally requires all fees and costs
associated with originating a loan to be recognized as interest,
but when the interest rate increases during the term of the loan
it prohibits the recognition of interest income to the extent
that the net investment in the loan would increase to an amount
greater than the amount at which the borrower could settle the
obligation.
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Impact
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During the second quarter of 2006, we implemented a methodology
for calculating the effective interest rate for introductory
rate credit card receivables and in the fourth quarter of 2006,
we implemented a methodology for calculating the effective
interest rate for real estate secured prepayment penalties over
the expected life of the products which resulted in an increase
to interest income of $154 million ($97 million
after-tax) being recognized for introductory rate credit card
receivables and a decrease to interest income of
$120 million ($76 million after-tax) being recognized
for prepayment penalties on real estate secured loans. Of the
amounts recognized, approximately $58 million (after-tax)
related to introductory rate credit card receivables and
approximately $11 million (after-tax) related to prepayment
penalties on real estate secured loans would otherwise have been
recorded as an IFRSs opening balance sheet adjustment as at
January 1, 2005.
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IFRS Management Basis Reporting As previously
discussed, corporate goals and individual goals of executives
are currently calculated in accordance with IFRSs under which
HSBC prepares its consolidated financial statements. In 2006 we
initiated a project to refine the monthly internal management
reporting process to place a greater emphasis on IFRS management
basis reporting (a
non-U.S. GAAP
financial measure). As a result, operating results are now being
monitored and reviewed, trends are being evaluated and decisions
about allocating resources, such as employees, are being made
almost exclusively on an IFRS Management Basis. IFRS Management
Basis results are IFRSs results which assume that the private
label and real estate secured receivables transferred to HSBC
Bank USA have not been sold and remain on our balance sheet.
IFRS Management Basis also assumes that all purchase accounting
fair value adjustments relating to our acquisition by HSBC have
been pushed down to HSBC Finance Corporation.
Operations are monitored and trends are evaluated on an IFRS
Management Basis because the customer loan sales to HSBC Bank
USA were conducted primarily to appropriately fund prime
customer loans within HSBC and such customer loans continue to
be managed and serviced by us without regard to ownership.
Accordingly, our segment reporting is on an IFRS Management
Basis. However, we continue to monitor capital adequacy,
establish dividend policy and report to regulatory agencies on
an U.S. GAAP basis. A summary of the significant
differences between U.S. GAAP and IFRSs as they impact our
results are summarized in Note 21, Business
Segments.
Quantitative Reconciliations of
Non-U.S. GAAP Financial
Measures to U.S. GAAP Financial
Measures For quantitative reconciliations of
non-U.S. GAAP
financial measures presented herein to the equivalent GAAP basis
financial measures, see Reconciliations to
U.S. GAAP Financial Measures.
47
HSBC Finance Corporation
Critical
Accounting Policies
Our consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United
States. We believe our policies are appropriate and fairly
present the financial position of HSBC Finance Corporation.
The significant accounting policies used in the preparation of
our financial statements are more fully described in
Note 2, Summary of Significant Accounting
Policies, to the accompanying consolidated financial
statements. Certain critical accounting policies, which affect
the reported amounts of assets, liabilities, revenues and
expenses, are complex and involve significant judgment by our
management, including the use of estimates and assumptions. We
recognize the different inherent loss characteristics in each of
our loan products as well as the impact of operational policies
such as customer account management policies and practices and
risk management/collection practices. As a result, changes in
estimates, assumptions or operational policies could
significantly affect our financial position or our results of
operations. We base and establish our accounting estimates on
historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying
values of assets and liabilities. Actual results may differ from
these estimates under different assumptions, customer account
management policies and practices, risk management/collection
practices, or other conditions as discussed below.
We believe that of the significant accounting policies used in
the preparation of our consolidated financial statements, the
items discussed below involve critical accounting estimates and
a high degree of judgment and complexity. Our management has
discussed the development and selection of these critical
accounting policies with our external auditors and the Audit
Committee of our Board of Directors, including the underlying
estimates and assumptions, and the Audit Committee has reviewed
our disclosure relating to these accounting policies and
practices in this MD&A.
Credit Loss Reserves Because we lend money to
others, we are exposed to the risk that borrowers may not repay
amounts owed to us when they become contractually due.
Consequently, we maintain credit loss reserves at a level that
we consider adequate, but not excessive, to cover our estimate
of probable losses of principal, interest and fees, including
late, overlimit and annual fees, in the existing portfolio. Loss
reserves are set at each business unit in consultation with the
Corporate Finance and Credit Risk Management Departments. Loss
reserve estimates are reviewed periodically, and adjustments are
reflected through the provision for credit losses in the period
when they become known. We believe the accounting estimate
relating to the reserve for credit losses is a critical
accounting estimate for the following reasons:
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The provision for credit losses totaled $11.0 billion in
2007, $6.6 billion in 2006 and $4.5 billion in 2005
and changes in the provision can materially affect net income.
As a percentage of average receivables, the provision was
6.92 percent in 2007 compared to 4.31 percent in 2006
and 3.76 percent in 2005.
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Estimates related to the reserve for credit losses require us to
project future delinquency and charge-off trends which are
uncertain and require a high degree of judgment.
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The reserve for credit losses is influenced by factors outside
of our control such as customer payment patterns, economic
conditions such as national and local trends in housing markets,
interest rates, unemployment rates, loan product features such
as adjustable rate mortgage loans, bankruptcy trends and changes
in laws and regulations.
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Because our loss reserve estimate involves judgment and is
influenced by factors outside of our control, it is reasonably
possible such estimates could change. Our estimate of probable
net credit losses is inherently uncertain because it is highly
sensitive to changes in economic conditions which influence
growth, portfolio seasoning, bankruptcy trends, trends in
housing markets, the ability of customers to refinance their
adjustable rate mortgages, delinquency rates and the flow of
loans through the various stages of delinquency, or buckets, the
realizable value of any collateral and actual loss exposure.
Changes in such estimates could significantly impact our credit
loss reserves and our provision for credit losses. For example,
a 10% change in our projection of probable net credit losses on
receivables could have resulted in a change of approximately
$1.1 billion in our credit loss reserve for receivables at
48
HSBC Finance Corporation
December 31, 2007. The reserve for credit losses is a
critical accounting estimate for all three of our reportable
segments.
Credit loss reserves are based on estimates and are intended to
be adequate but not excessive. We estimate probable losses for
consumer receivables using a roll rate migration analysis that
estimates the likelihood that a loan will progress through the
various stages of delinquency, or buckets, and ultimately charge
off based upon recent historical performance experience of other
loans in our portfolio. This analysis considers delinquency
status, loss experience and severity and takes into account
whether loans are in bankruptcy, have been restructured,
rewritten, or are subject to forbearance, an external debt
management plan, hardship, modification, extension or deferment.
Our credit loss reserves also take into consideration the loss
severity expected based on the underlying collateral, if any,
for the loan in the event of default. Delinquency status may be
affected by customer account management policies and practices,
such as the restructure of accounts, forbearance agreements,
extended payment plans, modification arrangements, loan rewrites
and deferments. When customer account management policies or
changes thereto, shift loans from a higher
delinquency bucket to a lower delinquency bucket,
this will be reflected in our roll rates statistics. To the
extent that restructured accounts have a greater propensity to
roll to higher delinquency buckets, this will be captured in the
roll rates. Since the loss reserve is computed based on the
composite of all these calculations, this increase in roll rate
will be applied to receivables in all respective buckets, which
will increase the overall reserve level. In addition, loss
reserves on consumer receivables are maintained to reflect our
judgment of portfolio risk factors which may not be fully
reflected in the statistical roll rate calculation or when
historical trends are not reflective of current inherent losses
in the loan portfolio. Risk factors considered in establishing
loss reserves on consumer receivables include recent growth,
product mix, unemployment rates, bankruptcy trends, geographic
concentrations, loan product features such as adjustable rate
loans, economic conditions such as national and local trends in
housing markets and interest rates, portfolio seasoning, account
management policies and practices, current levels of charge-offs
and delinquencies, changes in laws and regulations and other
items which can affect consumer payment patterns on outstanding
receivables, such as natural disasters and global pandemics. For
commercial loans, probable losses are calculated using estimates
of amounts and timing of future cash flows expected to be
received on loans.
While our credit loss reserves are available to absorb losses in
the entire portfolio, we specifically consider the credit
quality and other risk factors for each of our products. We
recognize the different inherent loss characteristics in each of
our products as well as customer account management policies and
practices and risk management/ collection practices. Charge-off
policies are also considered when establishing loss reserve
requirements to ensure the appropriate reserves exist for
products with longer charge-off periods. We also consider key
ratios such as reserves as a percentage of nonperforming loans,
reserves as a percentage of net charge-offs and number of months
charge-off coverage in developing our loss reserve estimate. In
addition to the above procedures for the establishment of our
credit loss reserves, our Credit Risk Management and Corporate
Finance Departments independently assess and approve the
adequacy of our loss reserve levels.
We periodically re-evaluate our estimate of probable losses for
consumer receivables. Changes in our estimate are recognized in
our statement of income (loss) as provision for credit losses in
the period that the estimate is changed. Our credit loss
reserves for receivables increased $4.3 billion from
December 31, 2006 to $10.9 billion at
December 31, 2007 as a result of the higher delinquency and
loss estimates for real estate secured receivables at our
Mortgage Services and Consumer Lending businesses due to higher
levels of charge-off and delinquency, the market conditions
discussed above which result in loans staying on balance sheet
longer and generating higher losses as well as higher loss
estimates in second lien loans purchased from 2004 through the
third quarter of 2006 by our Consumer Lending business. In
addition, the higher credit loss reserve levels are the result
of higher dollars of delinquency in our other portfolios driven
by growth, portfolio seasoning, current marketplace conditions
and a weakening U.S. economy as well as increased levels of
personal bankruptcy filings as compared to the exceptionally low
levels experienced in 2006 following enactment of new bankruptcy
legislation in the United States which went into effect in
October 2005. Higher credit loss reserves at December 31,
2007 also reflect a higher mix of non-prime receivables in our
Credit Card Services business. Credit loss reserves at our U.K.
operations increased as a result of a refinement in the
methodology used to calculate roll rate percentages which we
believe reflects a better estimate of probable losses currently
inherent in the loan portfolio as well as higher loss estimates
for
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HSBC Finance Corporation
restructured loans. Our reserves as a percentage of receivables
were 6.98 percent at December 31, 2007,
4.06 percent at December 31, 2006 and
3.23 percent at December 31, 2005. Reserves as a
percentage of receivables increased compared to
December 31, 2006 primarily due to higher real estate loss
estimates as discussed above.
For more information about our charge-off and customer account
management policies and practices, see Credit
Quality Delinquency and Charge-offs and
Credit Quality Customer Account Management
Policies and Practices.
Goodwill and Intangible Assets Goodwill and
intangible assets with indefinite lives are not subject to
amortization. Intangible assets with finite lives are amortized
over their estimated useful lives. Goodwill and intangible
assets are reviewed annually on July 1 for impairment using
discounted cash flows, but impairment is reviewed earlier if
circumstances indicate that the carrying amount may not be
recoverable. We consider significant and long-term changes in
industry and economic conditions to be our primary indicator of
potential impairment.
We believe the impairment testing of our goodwill and
intangibles is a critical accounting estimate due to the level
of goodwill ($2.8 billion) and intangible assets
($1.1 billion) recorded at December 31, 2007 and the
significant judgment required in the use of discounted cash flow
models to determine fair value. Discounted cash flow models
include such variables as revenue growth rates, expense trends,
interest rates and terminal values. Based on an evaluation of
key data and market factors, managements judgment is
required to select the specific variables to be incorporated
into the models. Additionally, the estimated fair value can be
significantly impacted by the risk adjusted cost of capital used
to discount future cash flows. The risk adjusted cost of capital
percentage is generally derived from an appropriate capital
asset pricing model, which itself depends on a number of
financial and economic variables which are established on the
basis of managements judgment. Because our fair value
estimate involves judgment and is influenced by factors outside
our control, it is reasonably possible such estimates could
change. When managements judgment is that the anticipated
cash flows have decreased
and/or the
risk adjusted cost of capital has increased, the effect will be
a lower estimate of fair value. If the fair value is determined
to be lower than the carrying value, an impairment charge may be
recorded and net income will be negatively impacted.
Impairment testing of goodwill requires that the fair value of
each reporting unit be compared to its carrying amount. A
reporting unit is defined as any distinct, separately
identifiable component of an operating segment for which
complete, discrete financial information is available that
management regularly reviews. For purposes of the annual
goodwill impairment test, we assigned our goodwill to our
reporting units. As previously discussed, in the third quarter
of 2007, we recorded a goodwill impairment charge of
$881 million which represents all of the goodwill allocated
to our Mortgage Services business. With the exception of our
Mortgage Services business, at July 1, 2007, the estimated
fair value of each reporting unit exceeded its carrying value,
resulting in none of our remaining goodwill being impaired.
As a result of the strategic changes discussed above, during the
fourth quarter of 2007 we performed interim goodwill and other
intangible impairment tests for the businesses where significant
changes in the business climate have occurred as required by
SFAS No. 142, Goodwill and Other Intangible
Assets, (SFAS No. 142). These tests
revealed that the business climate changes, including the
subprime marketplace conditions discussed above, when coupled
with the changes to our product offerings and business
strategies completed through the fourth quarter of 2007, have
resulted in an impairment of all goodwill allocated to our
Consumer Lending and Auto Finance businesses. Therefore, we
recorded a goodwill impairment charge in the fourth quarter of
2007 of $2,462 million relating to our Consumer Lending
business and $312 million relating to our Auto Finance
business. In addition, the changes to our product offerings and
business strategies completed through the fourth quarter of 2007
have also resulted in an impairment of the goodwill allocated to
our United Kingdom business. As a result, an impairment charge
of $378 million was also recorded in the fourth quarter
representing all of the goodwill previously allocated to this
business. For all other businesses, the fair value of each of
these reporting units continues to exceed its carrying value
including goodwill.
To the extent additional changes in the strategy of our
remaining businesses or product offerings occur from the ongoing
strategic analysis previously discussed, we will be required by
SFAS No. 142 to perform interim goodwill
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HSBC Finance Corporation
impairment tests for the impacted businesses which could result
in additional goodwill impairment in future periods.
Impairment testing of intangible assets requires that the fair
value of the asset be compared to its carrying amount. For all
intangible assets, at July 1, 2007, the estimated fair
value of each intangible asset exceeded its carrying value and,
as such, none of our intangible assets were impaired. As a
result of the strategic changes discussed above, during the
fourth quarter of 2007 we also performed an interim impairment
test for the HFC and Beneficial tradenames and customer
relationship intangibles relating to the HSBC acquisition
allocated to our Consumer Lending business. This testing
resulted in an impairment of these tradename and customer
relationship intangibles and we recorded an impairment charge in
the fourth quarter of 2007 of $858 million representing all
of the remaining value assigned to these tradenames and customer
relationship intangibles allocated to our Consumer Lending
business.
Valuation of Derivative Instruments, Debt and Derivative
Income We regularly use derivative instruments as
part of our risk management strategy to protect the value of
certain assets and liabilities and future cash flows against
adverse interest rate and foreign exchange rate movements. All
derivatives are recognized on the balance sheet at fair value.
As of December 31, 2007, the recorded fair values of
derivative assets and liabilities were $3,842 million and
$71 million, respectively, exclusive of the related
collateral that has been received or paid which is netted
against these values for financial reporting purposes in
accordance with
FIN 39-1.
We believe the valuation of derivative instruments is a critical
accounting estimate because certain instruments are valued using
discounted cash flow modeling techniques in lieu of market value
quotes. These modeling techniques require the use of estimates
regarding the amount and timing of future cash flows, which are
also susceptible to significant change in future periods based
on changes in market rates. The assumptions used in the cash
flow projection models are based on forward yield curves which
are also susceptible to changes as market conditions change.
We utilize HSBC Bank USA to determine the fair value of
substantially all of our derivatives using these modeling
techniques. We regularly review the results of these valuations
for reasonableness by comparing to an internal determination of
fair value or third party quotes. Significant changes in the
fair value can result in equity and earnings volatility as
follows:
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Changes in the fair value of a derivative that has been
designated and qualifies as a fair value hedge, along with the
changes in the fair value of the hedged asset or liability
(including losses or gains on firm commitments), are recorded in
current period earnings.
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Changes in the fair value of a derivative that has been
designated and qualifies as a cash flow hedge are recorded in
other comprehensive income to the extent of its effectiveness,
until earnings are impacted by the variability of cash flows
from the hedged item.
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Changes in the fair value of a derivative that has not been
designated as an effective hedge is reported in current period
earnings.
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A derivative designated as an effective hedge will be tested for
effectiveness in all circumstances under the long-haul method.
For these transactions, we formally assess, both at the
inception of the hedge and on a quarterly basis, whether the
derivative used in a hedging transaction has been and is
expected to continue to be highly effective in offsetting
changes in fair values or cash flows of the hedged item. This
assessment is conducted using statistical regression analysis.
If it is determined as a result of this assessment that a
derivative is not expected to be a highly effective hedge or
that it has ceased to be a highly effective hedge, we
discontinue hedge accounting as of the beginning of the quarter
in which such determination was made. We also believe the
assessment of the effectiveness of the derivatives used in
hedging transactions is a critical accounting estimate due to
the use of statistical regression analysis in making this
determination. Similar to discounted cash flow modeling
techniques, statistical regression analysis also requires the
use of estimates regarding the amount and timing of future cash
flows, which are susceptible to significant change in future
periods based on changes in market rates. Statistical regression
analysis also involves the use of additional assumptions
including the determination of the period over which the
analysis should occur as well as selecting a convention for the
treatment of credit spreads in the analysis. The statistical
regression analysis for our derivative instruments is performed
by either HSBC Bank USA or another third party.
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HSBC Finance Corporation
The outcome of the statistical regression analysis serves as the
foundation for determining whether or not the derivative is
highly effective as a hedging instrument. This can result in
earnings volatility as the mark-to-market on derivatives which
do not qualify as effective hedges and the ineffectiveness
associated with qualifying hedges are recorded in current period
earnings. The mark-to market on derivatives which do not qualify
as effective hedges was $(7) million in 2007,
$28 million in 2006 and $156 million in 2005. The
ineffectiveness associated with qualifying hedges was
$(48) million in 2007, $169 million in 2006 and
$41 million in 2005. See Results of Operations
in Managements Discussion and Analysis of Financial
Condition and Results of Operations for a discussion of the
yearly trends.
Effective January 1, 2007, we elected the fair value option
for certain issuance of our fixed rate debt in order to align
our accounting treatment with that of HSBC under IFRS. As of
December 31, 2007, the recorded fair value of such debt was
$32.9 billion. We believe the valuation of this debt is a
critical accounting estimate because valuation estimates
obtained from third parties involve inputs other than quoted
prices to value both the interest rate component and the credit
component of the debt. Changes in such estimates, and in
particular the credit component of the valuation, can be
volatile from period to period and may markedly impact the total
mark-to-market on debt designated at fair value recorded in our
consolidated statement of income (loss). For example, a
10 percent change in the movement in the value of our debt
designated at fair value could have resulted in a change to our
reported mark-to-market of approximately $128 million.
For more information about our policies regarding the use of
derivative instruments, see Note 2, Summary of
Significant Accounting Policies, and Note 14,
Derivative Financial Instruments, to the
accompanying consolidated financial statements.
Contingent Liabilities Both we and certain of
our subsidiaries are parties to various legal proceedings
resulting from ordinary business activities relating to our
current
and/or
former operations which affect all three of our reportable
segments. Certain of these activities are or purport to be class
actions seeking damages in significant amounts. These actions
include assertions concerning 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. Also, as the ultimate resolution of these proceedings
is influenced by factors that are outside of our control, it is
reasonably possible our estimated liability under these
proceedings may change. However, based upon our current
knowledge, our defenses to these actions have merit and any
adverse decision should not materially affect our consolidated
financial condition, results of operations or cash flows.
52
HSBC Finance Corporation
Receivables
Review
The following table summarizes receivables at December 31,
2007 and increases (decreases) over prior periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases (Decreases) From
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
December 31,
|
|
|
2006
|
|
|
2005
|
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Real estate
secured(1)
|
|
$
|
88,661
|
|
|
$
|
(9,224
|
)
|
|
|
(9.4
|
)%
|
|
$
|
5,835
|
|
|
|
7.0
|
%
|
Auto finance
|
|
|
13,257
|
|
|
|
753
|
|
|
|
6.0
|
|
|
|
2,553
|
|
|
|
23.9
|
|
Credit card
|
|
|
30,390
|
|
|
|
2,676
|
|
|
|
9.7
|
|
|
|
6,280
|
|
|
|
26.0
|
|
Private label
|
|
|
3,093
|
|
|
|
584
|
|
|
|
23.3
|
|
|
|
573
|
|
|
|
22.7
|
|
Personal non-credit card
|
|
|
20,649
|
|
|
|
(718
|
)
|
|
|
(3.4
|
)
|
|
|
1,104
|
|
|
|
5.6
|
|
Commercial and other
|
|
|
144
|
|
|
|
(37
|
)
|
|
|
(20.4
|
)
|
|
|
(64
|
)
|
|
|
(30.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables
|
|
$
|
156,194
|
|
|
$
|
(5,966
|
)
|
|
|
(3.7
|
)%
|
|
$
|
16,281
|
|
|
|
11.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Real estate secured receivables are
comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases (Decreases) From
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
December 31,
|
|
|
2006
|
|
|
2005
|
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Mortgage Services
|
|
$
|
33,906
|
|
|
$
|
(14,187
|
)
|
|
|
(29.5
|
)%
|
|
$
|
(7,649
|
)
|
|
|
(18.4
|
)%
|
Consumer Lending
|
|
|
50,542
|
|
|
|
4,316
|
|
|
|
9.3
|
|
|
|
12,320
|
|
|
|
32.2
|
|
Foreign and all other
|
|
|
4,213
|
|
|
|
647
|
|
|
|
18.1
|
|
|
|
1,164
|
|
|
|
38.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
$
|
88,661
|
|
|
$
|
(9,224
|
)
|
|
|
(9.4
|
)%
|
|
$
|
5,835
|
|
|
|
7.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate secured receivables Real estate
secured receivables can be further analyzed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases (Decreases) From
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
December 31,
|
|
|
2006
|
|
|
2005
|
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
(dollars are in millions)
|
|
|
|
|
|
Real estate secured:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed-end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
71,459
|
|
|
$
|
(6,565
|
)
|
|
|
(8.4
|
)%
|
|
$
|
4,640
|
|
|
|
6.9
|
%
|
Second lien
|
|
|
13,672
|
|
|
|
(1,419
|
)
|
|
|
(9.4
|
)
|
|
|
1,857
|
|
|
|
15.7
|
|
Revolving:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
436
|
|
|
|
(120
|
)
|
|
|
(21.6
|
)
|
|
|
(190
|
)
|
|
|
(30.4
|
)
|
Second lien
|
|
|
3,094
|
|
|
|
(1,120
|
)
|
|
|
(26.6
|
)
|
|
|
(472
|
)
|
|
|
(13.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
$
|
88,661
|
|
|
$
|
(9,224
|
)
|
|
|
(9.4
|
)%
|
|
$
|
5,835
|
|
|
|
7.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
HSBC Finance Corporation
The following table summarizes various real estate secured
receivables information for our Mortgage Services and Consumer
Lending businesses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Mortgage
|
|
|
Consumer
|
|
|
Mortgage
|
|
|
Consumer
|
|
|
Mortgage
|
|
|
Consumer
|
|
|
|
Services
|
|
|
Lending
|
|
|
Services
|
|
|
Lending
|
|
|
Services
|
|
|
Lending
|
|
|
|
|
|
(in millions)
|
|
|
Fixed rate
|
|
$
|
18,379
|
(1)
|
|
$
|
47,563
|
(2)
|
|
$
|
21,857
|
(1)
|
|
$
|
42,675
|
(2)
|
|
$
|
18,876
|
(1)
|
|
$
|
36,415
|
(2)
|
Adjustable rate
|
|
|
15,527
|
|
|
|
2,979
|
|
|
|
26,235
|
|
|
|
3,551
|
|
|
|
22,679
|
|
|
|
1,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
33,906
|
|
|
$
|
50,542
|
|
|
$
|
48,092
|
|
|
$
|
46,226
|
|
|
$
|
41,555
|
|
|
$
|
38,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
27,239
|
|
|
$
|
43,645
|
|
|
$
|
38,153
|
|
|
$
|
39,684
|
|
|
$
|
33,897
|
|
|
$
|
33,017
|
|
Second lien
|
|
|
6,667
|
|
|
|
6,897
|
|
|
|
9,939
|
|
|
|
6,542
|
|
|
|
7,658
|
|
|
|
5,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
33,906
|
|
|
$
|
50,542
|
|
|
$
|
48,092
|
|
|
$
|
46,226
|
|
|
$
|
41,555
|
|
|
$
|
38,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable rate
|
|
$
|
11,904
|
|
|
$
|
2,979
|
|
|
$
|
20,108
|
|
|
$
|
3,551
|
|
|
$
|
17,826
|
|
|
$
|
1,807
|
|
Interest only
|
|
|
3,623
|
|
|
|
-
|
|
|
|
6,127
|
|
|
|
-
|
|
|
|
4,853
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustable rate
|
|
$
|
15,527
|
|
|
$
|
2,979
|
|
|
$
|
26,235
|
|
|
$
|
3,551
|
|
|
$
|
22,679
|
|
|
$
|
1,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stated income (low documentation)
|
|
$
|
7,943
|
|
|
$
|
-
|
|
|
$
|
11,772
|
|
|
$
|
-
|
|
|
$
|
7,344
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes fixed rate interest-only
loans of $411 million at December 31, 2007,
$514 million at December 31, 2006 and
$249 million at December 31, 2005.
|
|
(2) |
|
Includes fixed rate interest-only
loans of $48 million at December 31, 2007,
$46 million at December 31, 2006 and $0 million
at December 31, 2005.
|
Real estate secured receivables decreased from the year-ago
period driven by lower receivable balances in our Mortgage
Services business resulting from our decision in March 2007 to
discontinue new correspondent channel acquisitions. Also
contributing to the decrease were Mortgage Services loan
portfolio sales in 2007 which totaled $2.7 billion. These
actions have resulted in a significant reduction in the Mortgage
Services portfolio since December 31, 2006. This attrition
was partially offset by a decline in loan prepayments due to
fewer refinancing opportunities for our customers due to the
previously discussed trends impacting the mortgage lending
industry as well as the higher interest rate environment which
resulted in fewer prepayments as fewer alternatives to refinance
loans existed for some of our customers. The balance of this
portfolio will continue to decrease going forward as the loan
balances liquidate. The reduction in our Mortgage Services
portfolio was partially offset by growth in our Consumer Lending
branch business. Growth in our branch-based Consumer Lending
business improved due to higher sales volumes and the decline in
loan prepayments discussed above. However, this growth was
partially offset by the actions taken in the second half of 2007
to reduce risk going forward in our Consumer Lending business,
including eliminating the small volume of ARM loans, capping
second lien LTV ratio requirements to either 80 or
90 percent based on geography and the overall tightening of
credit score,
debt-to-income
and LTV requirements for first lien loans. These actions, when
coupled with a significant reduction in demand for subprime
loans across the industry, have resulted in loan attrition in
the fourth quarter of 2007 and will markedly limit growth of our
Consumer Lending real estate secured receivables in the
foreseeable future. Additionally, the 2006 real estate secured
receivable balances in our Consumer Lending business were
impacted by the acquisition of the $2.5 billion Champion
portfolio in November 2006.
54
HSBC Finance Corporation
The following table summarizes by lien position the Mortgage
Services real estate secured loans originated and acquired
subsequent to December 31, 2004 as a percentage of the
total portfolio which were outstanding as of the following dates:
|
|
|
|
|
|
|
|
|
Mortgage Services Receivables Originated or Acquired
after December 31, 2004 as a Percentage of Total
Portfolio
|
As of
|
|
First Lien
|
|
Second Lien
|
|
|
December 31, 2007
|
|
|
74
|
%
|
|
|
90
|
%
|
December 31, 2006
|
|
|
74
|
|
|
|
90
|
|
December 31, 2005
|
|
|
65
|
|
|
|
89
|
|
The following table summarizes by lien position the Consumer
Lending real estate secured loans originated and acquired
subsequent to December 31, 2005 as a percentage of the
total portfolio which were outstanding as of the following dates:
|
|
|
|
|
|
|
|
|
Consumer Lendings Receivables Originated or Acquired
after December 31, 2005 as a Percentage of Total
Portfolio
|
As of
|
|
First Lien
|
|
Second Lien
|
|
|
December 31, 2007
|
|
|
51
|
%
|
|
|
65
|
%
|
December 31, 2006
|
|
|
34
|
|
|
|
46
|
|
Auto finance receivables Auto finance
receivables increased over the year-ago period due to organic
growth principally in the near-prime portfolio as a result of
growth in the consumer direct loan program and lower
securitization levels. These increases were partially offset by
lower originations in the dealer network portfolio as a result
of actions taken to reduce risk in the portfolio.
Credit card receivables Credit card receivables
reflect strong domestic organic growth in our General Motors,
Union Privilege, Metris and non-prime portfolios, partially
offset by the actions taken in the fourth quarter to slow
receivable growth.
Private label receivables Private label
receivables increased in 2007 as a result of growth in our UK
and Canadian businesses and changes in the foreign exchange rate
since December 31, 2006, partially offset by the
termination of new domestic retail sales contract originations
in October 2006 by our Consumer Lending business.
Personal non-credit card receivables Personal
non-credit card receivables are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases (Decreases) From
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
December 31,
|
|
|
2006
|
|
|
2005
|
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
(dollars are in millions)
|
|
|
|
|
|
Domestic personal non-credit card
|
|
$
|
13,980
|
|
|
$
|
217
|
|
|
|
1.6
|
%
|
|
$
|
2,586
|
|
|
|
22.7
|
%
|
Union Plus personal non-credit card
|
|
|
175
|
|
|
|
(60
|
)
|
|
|
(25.5
|
)
|
|
|
(158
|
)
|
|
|
(47.4
|
)
|
Personal homeowner loans
|
|
|
3,891
|
|
|
|
(356
|
)
|
|
|
(8.4
|
)
|
|
|
(282
|
)
|
|
|
(6.8
|
)
|
Foreign personal non-credit card
|
|
|
2,603
|
|
|
|
(519
|
)
|
|
|
(16.6
|
)
|
|
|
(1,042
|
)
|
|
|
(28.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total personal non-credit card receivables
|
|
$
|
20,649
|
|
|
$
|
(718
|
)
|
|
|
(3.4
|
)%
|
|
$
|
1,104
|
|
|
|
5.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal non-credit card receivables decreased during 2007 as a
result of the actions taken in the second half of the year by
our Consumer Lending business to reduce risk going forward,
including elimination of guaranteed direct mail loans to new
customers, the discontinuance of personal homeowner loans and
tightening underwriting criteria.
Domestic and foreign personal non-credit card loans (cash loans
with no security) historically have been made to customers who
may not qualify for either a real estate secured or personal
homeowner loan (PHL). The average personal
non-credit card loan is approximately $5,900 and 40 percent
of the personal non-credit card portfolio is
55
HSBC Finance Corporation
closed-end with terms ranging from 12 to 60 months. The
Union Plus personal non-credit card loans are part of our
affinity relationship with the AFL-CIO and are underwritten
similar to other personal non-credit card loans.
In the fourth quarter of 2007 we discontinued originating
PHLs. PHLs typically have terms of 120 to
240 months and are subordinate lien, home equity loans with
high (100 percent or more) combined
loan-to-value
ratios which we underwrote, priced and service like unsecured
loans. The average PHL in portfolio at December 31, 2007 is
approximately $14,000. Because recovery upon foreclosure is
unlikely after satisfying senior liens and paying the expenses
of foreclosure, we did not consider the collateral as a source
for repayment in our underwriting. As we have discontinued
originating PHLs, this portfolio will decrease going
forward.
Distribution and Sales We reach our customers
through many different distribution channels and our growth
strategies vary across product lines. The Consumer Lending
business originates real estate and personal non-credit card
products through its retail branch network, direct mail,
telemarketing and Internet applications. As a result of the
decision to discontinue correspondent channel acquisitions and
to cease Decision Ones operations, the Mortgage Services
portfolio is currently running-off. Private label receivables
are generated through point of sale, merchant promotions,
application displays, Internet applications, direct mail and
telemarketing. Auto finance receivables are generated primarily
through dealer relationships from which installment contracts
are purchased. Additional auto finance receivables are generated
through direct lending which, includes Internet applications,
direct mail, in our Consumer Lending branches and, prior to the
fourth quarter of 2007, included alliance partner referrals.
Credit card receivables are generated primarily through direct
mail, telemarketing, Internet applications, application displays
including in our Consumer Lending retail branch network,
promotional activity associated with our co-branding and
affinity relationships, mass media advertisements and merchant
relationships sourced through our Retail Services business.
Based on certain criteria, we offer personal non-credit card
customers who meet our current underwriting standards the
opportunity to convert their loans into real estate secured
loans. This enables our customers to have access to additional
credit at lower interest rates. This also reduces our potential
loss exposure and improves our portfolio performance as
previously unsecured loans become secured. We converted
approximately $606 million of personal non-credit card
loans into real estate secured loans in 2007 and
$665 million in 2006. It is not our practice to rewrite or
reclassify delinquent secured loans (real estate or auto) into
personal non-credit card loans.
Results
of Operations
Net interest income The following table
summarizes net interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2007
|
|
|
(1)
|
|
|
2006
|
|
|
(1)
|
|
|
2005
|
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
(dollars are in millions)
|
|
|
|
|
|
Finance and other interest income
|
|
$
|
18,683
|
|
|
|
11.44
|
%
|
|
$
|
17,562
|
|
|
|
11.33
|
%
|
|
$
|
13,216
|
|
|
|
10.61
|
%
|
Interest expense
|
|
|
8,132
|
|
|
|
4.98
|
|
|
|
7,374
|
|
|
|
4.76
|
|
|
|
4,832
|
|
|
|
3.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
10,551
|
|
|
|
6.46
|
%
|
|
$
|
10,188
|
|
|
|
6.57
|
%
|
|
$
|
8,384
|
|
|
|
6.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
% Columns: comparison to average
owned interest-earning assets.
|
The increases in net interest income during 2007 were due to
higher average receivables and higher overall yields, partially
offset by higher interest expense. Overall yields increased due
to increases in our rates on fixed and variable rate products
which reflected market movements and various other repricing
initiatives. Yields were also favorably impacted by receivable
mix with increased levels of higher yielding products such as
credit cards and higher levels of average personal non-credit
card receivables. Overall yield improvements were also impacted
by a shift in mix to higher yielding Consumer Lending real
estate secured receivables resulting from attrition in the lower
yielding Mortgage Services real estate secured receivable
portfolio. Additionally, these higher yielding Consumer Lending
real estate secured receivables are remaining on the balance
sheet longer due to lower run-off rates. Overall yield
improvements were partially offset by the impact of growth in
non-performing assets. The higher interest expense in 2007 was
due to a higher cost of funds resulting from the refinancing of
maturing debt at higher current
56
HSBC Finance Corporation
rates as well as higher average rates for our short-term
borrowings. This was partially offset by the adoption of
SFAS No. 159, which resulted in $318 million of
realized losses on swaps which previously were accounted for as
effective hedges under SFAS No. 133 and reported as
interest expense now being reported in other revenues. Our
purchase accounting fair value adjustments include both
amortization of fair value adjustments to our external debt
obligations and receivables. Amortization of purchase accounting
fair value adjustments increased net interest income by
$124 million in 2007 and $418 million in 2006.
The increase in net interest income during 2006 was due to
higher average receivables and higher overall yields, partially
offset by higher interest expense. Overall yields increased due
to increases in our rates on fixed and variable rate products
which reflected market movements and various other repricing
initiatives which in 2006 included reduced levels of promotional
rate balances. Yields in 2006 were also favorably impacted by
receivable mix with increased levels of higher yielding products
such as credit cards, due in part to the full year benefit from
the Metris acquisition and reduced securitization levels; higher
levels of personal non-credit card receivables due to growth and
higher levels of second lien real estate secured loans. The
higher interest expense, which contributed to lower net interest
margin, was due to a larger balance sheet and a significantly
higher cost of funds due to a rising interest rate environment.
In addition, as part of our overall liquidity management
strategy, we continue to extend the maturity of our liability
profile which results in higher interest expense. Amortization
of purchase accounting fair value adjustments increased net
interest income by $418 million in 2006, which included
$62 million relating to Metris and $520 million in
2005, which included $4 million relating to Metris.
Net interest margin was 6.46 percent in 2007,
6.57 percent in 2006 and 6.73 percent in 2005. Net
interest margin decreased in both 2007 and 2006 as the
improvement in the overall yield on our receivable portfolio, as
discussed above, was more than offset by the higher funding
costs. The following table shows the impact of these items on
net interest margin:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Net interest margin December 31, 2006 and 2005,
respectively
|
|
|
6.57
|
%
|
|
|
6.73
|
%
|
Impact to net interest margin resulting from:
|
|
|
|
|
|
|
|
|
Receivable pricing
|
|
|
.18
|
|
|
|
.52
|
|
Receivable mix
|
|
|
.21
|
|
|
|
.20
|
|
Impact of non-performing assets
|
|
|
(.22
|
)
|
|
|
.02
|
|
Cost of funds
|
|
|
(.22
|
)
|
|
|
(.88
|
)
|
Other
|
|
|
(.06
|
)
|
|
|
(.02
|
)
|
|
|
|
|
|
|
|
|
|
Net interest margin December 31, 2007 and 2006,
respectively
|
|
|
6.46
|
%
|
|
|
6.57
|
%
|
|
|
|
|
|
|
|
|
|
The varying maturities and repricing frequencies of both our
assets and liabilities expose us to interest rate risk. When the
various risks inherent in both the asset and the debt do not
meet our desired risk profile, we use derivative financial
instruments to manage these risks to acceptable interest rate
risk levels. See Risk Management for additional
information regarding interest rate risk and derivative
financial instruments.
Provision for credit losses The provision for
credit losses includes current period net credit losses and an
amount which we believe is sufficient to maintain reserves for
losses of principal, interest and fees, including late,
overlimit and annual fees, at a level that reflects known and
inherent losses in the portfolio. Growth in receivables and
portfolio seasoning ultimately result in higher provision for
credit losses. The provision for credit losses may also vary
from year to year depending on a variety of additional factors
including product mix and the credit quality of the loans in our
portfolio including, historical delinquency roll rates, customer
account management policies and practices, risk
management/collection policies and practices related to our loan
products, economic conditions such as national and local trends
in housing markets and interest rates, changes in laws and
regulations and our analysis of performance of products
originated or acquired at various times.
57
HSBC Finance Corporation
The following table summarizes provision for owned credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
(in millions)
|
|
|
Provision for credit losses
|
|
$
|
11,026
|
|
|
$
|
6,564
|
|
|
$
|
4,543
|
|
Our provision for credit losses increased $4.5 billion in
2007 primarily reflecting higher loss estimates in our Consumer
Lending, Credit Card Services and Mortgage Services businesses
due to the following:
|
|
|
|
|
Consumer Lending experienced higher loss estimates primarily in
its real estate secured receivable portfolio due to higher
levels of charge-off and delinquency driven by an accelerated
deterioration of portions of the real estate secured receivable
portfolio in the second half of 2007. Weakening early stage
delinquency previously reported continued to worsen in 2007 and
migrate into later stage delinquency due to the marketplace
changes and a weak housing market as previously discussed. Lower
receivable run-off, growth in average receivables and portfolio
seasoning also resulted in a higher real estate secured credit
loss provision. Also contributing to the increase were higher
loss estimates in second lien loans purchased in 2004 through
the third quarter of 2006. At December 31, 2007, the
outstanding principal balance of these acquired second lien
loans was approximately $1.0 billion. Additionally, higher
loss estimates in Consumer Lendings personal non-credit
card portfolio contributed to the increase due to seasoning, a
deterioration of 2006 and 2007 vintages in certain geographic
regions and increased levels of personal bankruptcy filings as
compared to the exceptionally low filing levels experienced in
2006 as a result of a new bankruptcy law in the United States
which went into effect in October 2005.
|
|
|
|
Credit Card Services experienced higher loss estimates as a
result of higher average receivable balances, portfolio
seasoning, higher levels of non-prime receivables originated in
2006 and in the first half of 2007, as well as the increased
levels of personal bankruptcy filings discussed above.
Additionally, in the fourth quarter of 2007, Credit Card
Services began to experience increases in delinquency in all
vintages, particularly in the markets experiencing the greatest
home value depreciation. Rising unemployment rates in these
markets and a weakening U.S. economy also contributed to
the increase.
|
|
|
|
Mortgage Services experienced higher levels of charge-offs and
delinquency as portions of the portfolio purchased in 2005 and
2006 continued to season and progress as expected into later
stages of delinquency and charge-off. Additionally during the
second half of 2007, our Mortgage Services portfolio also
experienced higher loss estimates as receivable run-off
continued to slow and the mortgage lending industry trends we
had been experiencing worsened.
|
In addition, our provision for credit losses in 2007 for our
United Kingdom business reflects a $93 million increase in
credit loss reserves, resulting from a refinement in the
methodology used to calculate roll rate percentages to be
consistent with our other businesses and which we believe
reflects a better estimate of probable losses currently inherent
in the loan portfolio as well as higher loss estimates for
restructured loans of $68 million. These increases to
credit loss reserves were more than offset by improvements in
delinquency and charge-offs which resulted in an overall lower
credit loss provision in our United Kingdom business.
Net charge-off dollars for 2007 increased $2,197 million
compared to 2006. This increase was driven by the impact of the
marketplace and broader economic conditions described above in
our Mortgage Services and Consumer Lending businesses as well as
higher average receivable levels, seasoning in our credit card
and Consumer Lending portfolios and increased levels of personal
bankruptcy filings as compared to the exceptionally low filing
levels experienced in 2006, particularly in our credit card
portfolios, as a result of a new bankruptcy law in the United
States which went into effect in October 2005.
Our provision for credit losses increased $2,021 million
during 2006. The provision for credit losses in 2005 included
increased provision expense of $185 million relating to
Hurricane Katrina and $113 million in the fourth quarter
due to bankruptcy reform legislation. Excluding these
adjustments and a subsequent release of $90 million of
Hurricane Katrina reserves in 2006, the provision for credit
losses increased $2,409 million or 57 percent in 2006.
The increase in the provision for credit losses was largely
driven by deterioration in the performance of mortgage
58
HSBC Finance Corporation
loans acquired in 2005 and 2006 by our Mortgage Services
business as discussed above. Also contributing to this increase
in provision in 2006 was the impact of higher receivable levels
and normal portfolio seasoning including the Metris portfolio
acquired in December 2005. These increases were partially offset
by reduced bankruptcy filings, the benefit of stable
unemployment levels in the United States in 2006 and the sale of
the U.K. card business in December 2005. Net charge-off dollars
for 2006 increased $866 million compared to 2005 driven by
our Mortgage Services business, as discussed above. Also
contributing to the increase in net charge-off dollars was
higher credit card charge-off due to the full year impact of the
Metris portfolio, the one-time accelerations of charge-offs at
our Auto Finance business due to a change in policy, the
discontinuation of a forbearance program at our U.K. business
(see Credit Quality for further discussion) and the
impact of higher receivable levels and portfolio seasoning in
our auto finance and personal non-credit card portfolios. These
increases were partially offset by the impact of reduced
bankruptcy levels following the spike in filings and subsequent
charge-off we experienced in the fourth quarter of 2005 as a
result of the legislation which went into effect in October
2005, the benefit of stable unemployment levels in the United
States, and the sale of the U.K. card business in December 2005.
We increased our credit loss reserves in both 2007 and 2006 as
the provision for credit losses was $4,310 million greater
than net charge-offs in 2007 and $2,045 million greater
than net charge-offs in 2006. The provision as a percent of
average owned receivables was 6.92 percent in 2007,
4.31 percent in 2006 and 3.76 percent in 2005. The
increase in 2007 reflects higher loss estimates at our Consumer
Lending, Credit Card Services and Mortgage Services business as
discussed above including higher dollars of delinquency. The
increase in 2006 reflects higher loss estimates and charge-offs
at our Mortgage Services business as discussed above, as well as
higher dollars of delinquency in our other businesses driven by
growth and portfolio seasoning. Reserve levels in 2006 also
increased due to higher early stage delinquency consistent with
the industry trend in certain Consumer Lending real estate
secured loans originated since late 2005.
See Critical Accounting Policies, Credit
Quality and Analysis of Credit Loss Reserves
Activity for additional information regarding our loss
reserves. See Note 7, Credit Loss Reserves in
the accompanying consolidated financial statements for
additional analysis of loss reserves.
Other revenues The following table summarizes
other revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
(in millions)
|
|
|
Securitization related revenue
|
|
$
|
70
|
|
|
$
|
167
|
|
|
$
|
211
|
|
Insurance revenue
|
|
|
806
|
|
|
|
1,001
|
|
|
|
997
|
|
Investment income
|
|
|
145
|
|
|
|
274
|
|
|
|
134
|
|
Derivative (expense) income
|
|
|
(79
|
)
|
|
|
190
|
|
|
|
249
|
|
Gain on debt designated at fair value and related derivatives
|
|
|
1,275
|
|
|
|
-
|
|
|
|
-
|
|
Fee income
|
|
|
2,415
|
|
|
|
1,911
|
|
|
|
1,568
|
|
Enhancement services revenue
|
|
|
635
|
|
|
|
515
|
|
|
|
338
|
|
Taxpayer financial services revenue
|
|
|
247
|
|
|
|
258
|
|
|
|
277
|
|
Gain on receivable sales to HSBC affiliates
|
|
|
419
|
|
|
|
422
|
|
|
|
413
|
|
Servicing fees from HSBC affiliates
|
|
|
536
|
|
|
|
506
|
|
|
|
440
|
|
Other (expense) income
|
|
|
(70
|
)
|
|
|
179
|
|
|
|
336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other revenues
|
|
$
|
6,399
|
|
|
$
|
5,423
|
|
|
$
|
4,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
HSBC Finance Corporation
Securitization related revenue is the result of the
securitization of our receivables and includes the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
(in millions)
|
|
|
Net initial gains
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Net replenishment
gains(1)
|
|
|
24
|
|
|
|
30
|
|
|
|
154
|
|
Servicing revenue and excess spread
|
|
|
46
|
|
|
|
137
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
70
|
|
|
$
|
167
|
|
|
$
|
211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net replenishment gains reflect
inherent recourse provisions of $18 million in 2007,
$41 million in 2006 and $252 million in 2005.
|
The decline in securitization related revenue in 2007 was due to
decreases in the level of securitized receivables as a result of
our decision in the third quarter of 2004 to structure all new
collateralized funding transactions as secured financings.
Because existing public credit card transactions were structured
as sales to revolving trusts that required replenishments of
receivables to support previously issued securities, receivables
continued to be sold to these trusts until the revolving periods
ended, the last of which was in the fourth quarter of 2007.
While the termination of sale treatment on new collateralized
funding activity and the reduction of sales under replenishment
agreements reduced our reported net income, there is no impact
on cash received from operations.
See Note 2, Summary of Significant Accounting
Policies, and Note 8, Asset
Securitizations, to the accompanying consolidated
financial statements and Off Balance Sheet Arrangements
and Secured Financings for further information on asset
securitizations.
Insurance revenue decreased in 2007 primarily due to
lower insurance sales volumes in our U.K. operations, largely
due to a planned phase out of the use of our largest external
broker between January and April 2007, as well as the impact of
the sale of our U.K. insurance operations to Aviva in November
2007. As the sales agreement provides for the purchaser to
distribute insurance products through our U.K. branch network in
return for a commission, going forward we will receive insurance
commission revenue which should partially offset the loss of
insurance premium revenues. The decrease in insurance revenue
from our U.K. operations was partially offset by higher
insurance revenue in our domestic operations due to the
introduction of lender placed products in our Auto Finance
business and the negotiation of lower commission payments in
certain products offered by our Retail Services business net of
the impact of the cancellation of a significant policy effective
January 1, 2007. The increase in insurance revenue in 2006
was primarily due to higher sales volumes and new reinsurance
activity beginning in the third quarter of 2006 in our domestic
operations, partially offset by lower insurance sales volumes in
our U.K. operations.
Investment income, which includes income on securities
available for sale in our insurance business and realized gains
and losses from the sale of securities, decreased as 2006
investment income reflects a gain of $123 million on the
sale of our investment in Kanbay International, Inc.
(Kanbay). Excluding the impact of this gain in the
prior year, investment income in 2007 decreased primarily due to
higher amortization of fair value adjustments. The increase in
2006 was primarily due to the gain on the sale of our investment
in Kanbay discussed above.
Derivative (expense) income includes realized and
unrealized gains and losses on derivatives which do not qualify
as effective hedges under SFAS No. 133 as well as the
ineffectiveness on derivatives which are qualifying hedges.
Prior to the election of FVO reporting for certain fixed rate
debt, we accounted for the realized gains and losses on swaps
associated with this debt which qualified as effective hedges
under SFAS No. 133 in interest expense and any
ineffectiveness which resulted from changes in the fair value of
the swaps as compared to changes in the interest rate component
value of the debt was recorded as a component of derivative
income. With the adoption of SFAS No. 159 beginning in
January 2007, we eliminated hedge accounting on these swaps and
as a result, realized and unrealized gains and losses on these
derivatives and changes in the interest rate component value of
the aforementioned debt are now included in Gain on debt
designated at fair value and related derivatives in the
consolidated statement of income (loss) which impacts the
comparability of derivative income between periods.
60
HSBC Finance Corporation
Derivative (expense) income is summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
(in millions)
|
|
|
Net realized gains (losses)
|
|
$
|
(24
|
)
|
|
$
|
(7
|
)
|
|
$
|
52
|
|
Mark-to-market
on derivatives which do not qualify as effective hedges
|
|
|
(7
|
)
|
|
|
28
|
|
|
|
156
|
|
Ineffectiveness
|
|
|
(48
|
)
|
|
|
169
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(79
|
)
|
|
$
|
190
|
|
|
$
|
249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative income decreased in 2007 due to changes in the
interest rate curve and to the adoption of
SFAS No. 159. Changes in interest rates resulted in a
lower value of our cash flow interest rate swaps as compared to
the prior periods. The decrease in income from ineffectiveness
is due to a significantly lower number of interest rate swaps
which are accounted for under the long-haul method of accounting
as a result of the adoption of SFAS No. 159. As
discussed above, the
mark-to-market
on the swaps associated with debt we have now designated at fair
value, as well as the
mark-to-market
on the interest rate component of the debt, which accounted for
the majority of the ineffectiveness recorded in 2006, is now
reported in the consolidated income statement as Gain on debt
designated at fair value and related derivatives.
Additionally, in the second quarter of 2006, we completed the
redesignation of all remaining short cut hedge relationships as
hedges under the long-haul method of accounting. Redesignation
of swaps as effective hedges reduces the overall volatility of
reported
mark-to-market
income, although re-establishing such swaps as long-haul hedges
creates volatility as a result of hedge ineffectiveness. All
derivatives are economic hedges of the underlying debt
instruments regardless of the accounting treatment.
In 2006, derivative income decreased primarily due to a
significant reduction during 2005 in the population of interest
rate swaps which do not qualify for hedge accounting under
SFAS No. 133. In addition, during 2006 we experienced
a rising interest rate environment compared to a yield curve
that generally flattened in the comparable period of 2005. The
income from ineffectiveness in both periods resulted from the
designation during 2005 of a significant number of our
derivatives as effective hedges under the long-haul method of
accounting. These derivatives had not previously qualified for
hedge accounting under SFAS No. 133. In addition, as
discussed above all of the hedge relationships which qualified
under the shortcut method provisions of SFAS No. 133
were redesignated, substantially all of which are hedges under
the long-haul method of accounting. Redesignation of swaps as
effective hedges reduces the overall volatility of reported
mark-to-market
income, although establishing such swaps as long-haul hedges
creates volatility as a result of hedge ineffectiveness.
Net income volatility, whether based on changes in interest
rates for swaps which do not qualify for hedge accounting or
ineffectiveness recorded on our qualifying hedges under the long
haul method of accounting, impacts the comparability of our
reported results between periods. Accordingly, derivative income
for the year ended December 31, 2007 should not be
considered indicative of the results for any future periods.
Gain on debt designated at fair value and related derivatives
reflects fair value changes on our fixed rate debt accounted
for under FVO as a result of adopting SFAS No. 159
effective January 1, 2007 as well as the fair value changes
and realized gains (losses) on the related derivatives
associated with debt designated at fair value. Prior to the
election of FVO reporting for certain fixed rate debt, we
accounted for the realized gains and losses on swaps associated
with this debt which qualified as effective hedges under
SFAS No. 133 in interest expense and any
ineffectiveness which resulted from changes in the value of the
swaps as compared to changes in the interest rate component
value of the debt was recorded in derivative income. These
components are summarized in the table below:
61
HSBC Finance Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Mark-to-market
on debt designated at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate component
|
|
$
|
(994
|
)
|
|
$
|
-
|
|
|
|
|
|
Credit risk component
|
|
|
1,616
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
mark-to-market
on debt designated at fair value
|
|
|
622
|
|
|
|
-
|
|
|
|
|
|
Mark-to-market
on the related derivatives
|
|
|
971
|
|
|
|
-
|
|
|
|
|
|
Net realized gains (losses) on the related derivatives
|
|
|
(318
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,275
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The change in the fair value of the debt and the change in value
of the related derivatives reflects the following:
|
|
|
|
|
Interest rate curve Falling interest rates in
2007 caused the value of our fixed rate FVO debt to increase
thereby resulting in a loss in the interest rate component. The
value of the receive fixed/pay variable swaps rose in response
to these falling interest rates and resulted in a gain in
mark-to-market
on the related derivatives.
|
|
|
|
Credit Our credit spreads widened
significantly during 2007, resulting from the general widening
of credit spreads related to the financial and fixed income
sectors as well as the general lack of liquidity in the
secondary bond market in the second half of 2007. The fair value
benefit from the change of our own credit spreads is the result
of having historically raised debt at credit spreads which are
not available under todays market conditions.
|
FVO results are also affected by the differences in cash flows
and valuation methodologies for the debt and related derivative.
Cash flows on debt are discounted using a single discount rate
from the bond yield curve while derivative cash flows are
discounted using rates at multiple points along the LIBOR yield
curve. The impacts of these differences vary as the shape of
these interest rate curves change.
Fee income, which includes revenues from fee-based
products such as credit cards, increased in 2007 and 2006 due to
higher credit card fees, particularly relating to our non-prime
credit card portfolios due to higher levels of credit card
receivables and, in 2006, due to improved interchange rates.
These increases were partially offset by the changes in fee
billings implemented during the fourth quarter of 2007 discussed
above which decreased fee income in 2007 by approximately
$55 million. Increases in 2006 were partially offset by the
impact of FFIEC guidance which limits certain fee billings for
non-prime credit card accounts and higher rewards program
expenses.
Enhancement services revenue, which consists of ancillary
credit card revenue from products such as Account Secure Plus
(debt protection) and Identity Protection Plan, was higher in
both periods primarily as a result of higher levels of credit
card receivables and higher customer acceptance levels.
Additionally, the acquisition of Metris in December 2005
contributed to higher enhancement services revenue in 2006.
Taxpayer financial services (TFS) revenue
decreased in 2007 due to higher losses attributable to
increased levels of fraud detected by the IRS in tax returns
filed in the 2007 tax season, restructured pricing, partially
offset by higher loan volume in the 2007 tax season and a change
in revenue recognition for fees on TFS unsecured product.
TFS revenue decreased in 2006 as 2005 TFS revenues reflects
gains of $24 million on the sales of certain bad debt
recovery rights to a third party. Excluding the impact of these
gains in the prior year, TFS revenue increased in 2006 due to
increased loan volume during the 2006 tax season.
Gains on receivable sales to HSBC affiliates consists
primarily of daily sales of domestic private label receivable
originations (excluding retail sales contracts) and certain
credit card account originations to HSBC Bank USA. Also included
are sales of real estate secured receivables, primarily
consisting of Decision One loan sales to HSBC Bank USA since
June 2007 and prior to our decision to cease its operations. In
2007, we sold approximately $645 million of real estate
secured receivables from our Decision One operations to HSBC
Bank USA to support the secondary market activities of our
affiliates and realized a loss of $16 million. In 2006, we
sold approximately $669 million of
62
HSBC Finance Corporation
real estate secured receivables from our Decision One operations
to HSBC Bank USA and realized a pre-tax gain of
$17 million. Excluding the gains and losses on Decision One
real estate secured receivable portfolio from both periods, in
2007 gain on receivable sales to HSBC affiliates increased
reflecting higher sales volumes of domestic private label
receivable and credit card account originations and higher
premiums on our credit card sales volumes, partially offset by
lower premiums on our domestic private label sales volumes. In
2006, the increase is due to gains on bulk sales of real estate
secured receivables to HSBC Bank USA from our Decision One
operations.
Servicing fees from HSBC affiliates represents revenue
received under service level agreements under which we service
credit card and domestic private label receivables as well as
real estate secured and auto finance receivables for HSBC
affiliates. The increases primarily relate to higher levels of
receivables being serviced on behalf of HSBC Bank USA and in
2006 the servicing fees we receive for servicing the credit card
receivables sold to HBEU in December 2005.
Other income decreased in 2007 primarily due to losses on
real estate secured receivables held for sale by our Decision
One mortgage operations of $229 million in 2007 compared to
gains on real state secured receivables held for sale of
$21 million in 2006. Loan sale volumes in our Decision One
mortgage operations decreased from $11.8 billion in 2006 to
$3.9 billion in 2007 and as of November 2007, ceased.
Additionally, other income includes a loss of $25 million
on the sale of $2.7 billion of real estate secured
receivables by our Mortgage Services business in 2007. These
decreases were partially offset by a net gain of
$115 million on the sale of a portion of our portfolio of
MasterCard Class B shares in 2007. Lower gains on
miscellaneous asset sales in 2007, including real estate
investments also contributed to the decrease in other income.
The decrease in other income in 2006 was due to lower gains on
sales of real estate secured receivables by our Decision One
mortgage operations and an increase in the liability for
estimated losses from indemnification provisions on Decision One
loans previously sold.
Costs and Expenses The following table
summarizes total costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
(in millions)
|
|
|
Salaries and employee benefits
|
|
$
|
2,342
|
|
|
$
|
2,333
|
|
|
$
|
2,072
|
|
Sales incentives
|
|
|
212
|
|
|
|
358
|
|
|
|
397
|
|
Occupancy and equipment expenses
|
|
|
379
|
|
|
|
317
|
|
|
|
334
|
|
Other marketing expenses
|
|
|
748
|
|
|
|
814
|
|
|
|
731
|
|
Other servicing and administrative expenses
|
|
|
1,337
|
|
|
|
1,115
|
|
|
|
917
|
|
Support services from HSBC affiliates
|
|
|
1,192
|
|
|
|
1,087
|
|
|
|
889
|
|
Amortization of intangibles
|
|
|
253
|
|
|
|
269
|
|
|
|
345
|
|
Policyholders benefits
|
|
|
421
|
|
|
|
467
|
|
|
|
456
|
|
Goodwill and other intangible asset impairment charges
|
|
|
4,891
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
$
|
11,775
|
|
|
$
|
6,760
|
|
|
$
|
6,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits in 2007 included
$37 million in severance costs related to the decisions to
discontinue correspondent channel acquisitions, cease Decision
One operations, reduce our Consumer Lending and Canadian branch
networks and close the Carmel Facility. Excluding these
severance costs, the net impact of these decisions, when coupled
with normal attrition, has been to reduce headcount in the
second half of 2007 by approximately 4,100 or 13 percent
and as a result, salary expense was much lower in the second
half of 2007 as compared to the first half of the year. For the
full year of 2007, we reduced headcount by approximately 5,000
or 16 percent. Salary expense in 2007 was also reduced as a
result of lower employment costs derived through the use of an
HSBC affiliate located outside the United States. Costs incurred
and charged to us by this affiliate are reflected in Support
services from HSBC affiliates. Additionally, in 2007 we
experienced lower salary expense in our Credit Card Services
business due to efficiencies from the integration of the Metris
acquisition which occurred in December 2005. These decreases
were largely offset by increased collection activities and
higher employee benefit costs. The increases in 2006 were a
result of additional staffing, primarily in our Consumer
Lending, Mortgage
63
HSBC Finance Corporation
Services, Retail Services and Canadian operations as well as in
our corporate functions to support growth. Salaries in 2006 were
also higher due to additional staffing in our Credit Card
Services operations as a result of the acquisition of Metris in
December 2005 which was partially offset by lower staffing
levels in our U.K. business as a result of the sale of the cards
business in 2005.
Effective December 20, 2005, our U.K. based technology
services employees were transferred to HBEU. As a result,
operating expenses relating to information technology, which
were previously reported as salaries and employee benefits, are
now billed to us by HBEU and reported as support services from
HSBC affiliates.
Sales incentives decreased in 2007 and 2006 due to lower
origination volumes in our correspondent operations resulting
from the decisions to reduce acquisitions including second lien
and selected higher risk products in the second half of 2006 and
the decision in March 2007 to discontinue all correspondent
channel acquisitions. The decrease in 2007 also reflects the
impact of ceasing operations of our Decision One business as
well as lower origination volumes in our Consumer Lending
business. The decreases in 2006 also reflect lower volumes in
our U.K. business partially offset by increases in our Canadian
operations.
Occupancy and equipment expenses increased in 2007
primarily due to lease termination and associated costs of
$52 million as well as fixed asset write offs of
$17 million in 2007 related to the decisions to discontinue
correspondent channel acquisitions, cease Decision One
operations, reduce our Consumer Lending and Canadian branch
networks and close the Carmel Facility. The decrease in 2006 was
a result of the sale of our U.K. credit card business in
December 2005 which included the lease associated with the
credit card call center as well as lower repairs and maintenance
costs. These decreases in 2006 were partially offset by higher
occupancy and equipment expenses resulting from our acquisition
of Metris in December 2005.
Other marketing expenses includes payments for
advertising, direct mail programs and other marketing
expenditures. The decrease in marketing expense in 2007 reflects
the decision in the second half of 2007 to reduce credit card,
co-branded credit card and personal non-credit card marketing
expenses in an effort to slow receivable growth in these
portfolios. The increase in 2006 was primarily due to increased
domestic credit card marketing expense including the Metris
portfolio acquired in December 2005, and expenses related to the
launch of a co-brand credit card in the third quarter of 2006.
Other servicing and administrative expenses increased in
2007 primarily due to higher REO expenses, a valuation
adjustment of $31 million to record our investment in the
U.K. Insurance Operations at the lower of cost or market as a
result of designating this operations as Held for
Sale in the first quarter of 2007, and the impact of lower
deferred origination costs due to lower volumes. These increases
were partially offset by lower insurance operating expenses in
our domestic operations and an increase in interest income of
approximately $69 million relating to various contingent
tax items with the taxing authority. The increase in 2006 was as
a result of higher REO expenses due to higher volumes and higher
losses and higher systems costs as well as the impact of lower
deferred origination costs at our Mortgage Services business due
to lower volumes.
Support services from HSBC affiliates, which includes
technology and other services charged to us by HTSU as well as
services charged to us by an HSBC affiliate located outside of
the United States providing operational support to our
businesses, including among other areas, customer service,
systems, collection and accounting functions. Support services
from HSBC affiliates increased in 2007 and 2006 to support
higher levels of average receivables as well as an increase in
the number of employees located outside of the United States.
Amortization of intangibles decreased in 2007 as an
individual contractual relationship became fully amortized in
the first quarter of 2006. The decrease in 2006 also reflects
lower intangible amortization related to our purchased credit
card relationships due to a contract renegotiation with one of
our co-branded credit card partners in 2005, partially offset by
amortization expense associated with the Metris cardholder
relationships.
Policyholders benefits decreased in 2007 primarily
due to lower policyholders benefits in our U.K. operations
resulting from the sale of the U.K. insurance operations in
November 2007 as previously discussed. Prior to the sale,
policyholders benefits in the U.K. had increased due to a
new reinsurance agreement, partially offset by lower sales
volumes. We also experienced lower policyholder benefits during
2007 in our domestic operations due to lower
64
HSBC Finance Corporation
disability claims in 2007 as well as a reduction in the number
of reinsurance transactions in 2007. The increases in 2006 were
due to higher sales volumes and new reinsurance activity in our
domestic operations beginning in the third quarter of 2006,
partially offset by lower amortization of fair value adjustments
relating to our insurance business.
Goodwill and other intangible asset impairment
charges reflects the impairment charges for our
Mortgage Services, Consumer Lending, Auto Finance and United
Kingdom business as previously discussed. The following table
summarizes the impairment charges for these businesses during
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
|
Consumer
|
|
|
Auto
|
|
|
United
|
|
|
|
|
|
|
Services
|
|
|
Lending
|
|
|
Finance
|
|
|
Kingdom
|
|
|
Total
|
|
|
|
|
|
(in millions)
|
|
|
Goodwill
|
|
$
|
881
|
|
|
$
|
2,462
|
|
|
$
|
312
|
|
|
$
|
378
|
|
|
$
|
4,033
|
|
Tradenames
|
|
|
-
|
|
|
|
700
|
|
|
|
-
|
|
|
|
-
|
|
|
|
700
|
|
Customer relationships
|
|
|
-
|
|
|
|
158
|
|
|
|
-
|
|
|
|
-
|
|
|
|
158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
881
|
|
|
$
|
3,320
|
|
|
$
|
312
|
|
|
$
|
378
|
|
|
$
|
4,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes our efficiency ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
U.S. GAAP basis efficiency ratio
|
|
|
68.69
|
%
|
|
|
41.55
|
%
|
|
|
44.10
|
%
|
Our efficiency ratio in 2007 was markedly impacted by the
goodwill and other intangible asset impairment charges relating
to our Mortgage Services, Consumer Lending, Auto Finance and
United Kingdom businesses which was partially offset by the
change in the credit risk component of our fair value optioned
debt. Excluding these items, in 2007 the efficiency ratio
deteriorated 179 basis points. This deterioration was
primarily due to realized losses on real estate secured
receivable sales, lower derivative income and higher costs and
expenses, partially offset by higher fee income and higher net
interest income due to higher levels of average receivables. Our
efficiency ratio in 2006 improved due to higher net interest
income and higher fee income and enhancement services revenues
due to higher levels of receivables, partially offset by an
increase in total costs and expenses to support receivable
growth as well as higher losses on REO properties.
Income taxes Our effective tax rates were as
follows:
|
|
|
|
|
Year Ended December 31,
|
|
Effective Tax Rate
|
|
|
|
|
2007
|
|
|
(16.2)
|
%
|
2006
|
|
|
36.9
|
|
2005
|
|
|
33.5
|
|
The effective tax rate for 2007 was significantly impacted by
the non-tax deductability of a substantial portion of the
goodwill impairment charges associated with our Mortgage
Services, Consumer Lending, Auto Finance and United Kingdom
businesses as well as the acceleration of tax from sales of
leveraged leases. The increase in the effective tax rate for
2006 as compared to 2005 was due to higher state income taxes
and lower tax credits as a percentage of income before taxes.
The increase in state income taxes was primarily due to an
increase in the blended statutory tax rate of our operating
companies. The effective tax rate differs from the statutory
federal income tax rate primarily because of the effects of
state and local income taxes and tax credits. See Note 15,
Income Taxes, for a reconciliation of our effective
tax rate.
Segment
Results IFRS Management Basis
We have three reportable segments: Consumer, Credit Card
Services and International. Our Consumer segment consists of our
Consumer Lending, Mortgage Services, Retail Services and Auto
Finance businesses. Our Credit
65
HSBC Finance Corporation
Card Services segment consists of our domestic MasterCard and
Visa and other credit card business. Our International segment
consists of our foreign operations in the United Kingdom,
Canada, the Republic of Ireland, and prior to November 2006 our
operations in Slovakia, the Czech Republic and Hungary. The
accounting policies of the reportable segments are described in
Note 2, Summary of Significant Accounting
Policies, to the accompanying financial statements.
There have been no changes in the basis of our segmentation or
any changes in the measurement of segment profit as compared
with the presentation in our 2006
Form 10-K.
In May 2007, we decided to integrate our Retail Services and
Credit Card Services business. Combining Retail Services with
Credit Card Services enhances our ability to provide a single
credit card and private label solution for the market place. We
anticipate the integration of management reporting will be
completed in the first quarter of 2008 and at that time will
result in the combination of these businesses into one reporting
segment in our financial statements.
Our segment results are presented on an IFRS Management Basis (a
non-U.S. GAAP
financial measure) as operating results are monitored and
reviewed, trends are evaluated and decisions about allocating
resources such as employees are made almost exclusively on an
IFRS Management Basis since we report results to our parent,
HSBC, who prepares its consolidated financial statements in
accordance with IFRSs. IFRS Management Basis results are IFRSs
results adjusted to assume that the private label and real
estate secured receivables transferred to HSBC Bank USA have not
been sold and remain on our balance sheet. IFRS Management Basis
also assumes that the purchase accounting fair value adjustments
relating to our acquisition by HSBC have been pushed
down to HSBC Finance Corporation. These fair value
adjustments including goodwill have been allocated to Corporate
which is included in the All Other caption within
our segment disclosure and thus not reflected in the reportable
segment discussions that follow. Operations are monitored and
trends are evaluated on an IFRS Management Basis because the
customer loan sales to HSBC Bank USA were conducted primarily to
appropriately fund prime customer loans within HSBC and such
customer loans continue to be managed and serviced by us without
regard to ownership. However, we continue to monitor capital
adequacy, establish dividend policy and report to regulatory
agencies on a U.S. GAAP basis. A summary of the significant
differences between U.S. GAAP and IFRSs as they impact our
results are summarized in Note 21, Business
Segments.
Consumer Segment The following table
summarizes the IFRS Management Basis results for our Consumer
segment for the years ended December 31, 2007, 2006 and
2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net income
(loss)(1)
|
|
$
|
(1,795
|
)
|
|
$
|
988
|
|
|
$
|
1,981
|
|
Net interest income
|
|
|
8,447
|
|
|
|
8,588
|
|
|
|
8,401
|
|
Other operating income
|
|
|
523
|
|
|
|
909
|
|
|
|
814
|
|
Intersegment revenues
|
|
|
265
|
|
|
|
242
|
|
|
|
108
|
|
Loan impairment charges
|
|
|
8,816
|
|
|
|
4,983
|
|
|
|
3,362
|
|
Operating expenses
|
|
|
3,027
|
|
|
|
2,998
|
|
|
|
2,757
|
|
Customer loans
|
|
|
136,739
|
|
|
|
144,697
|
|
|
|
128,095
|
|
Assets
|
|
|
132,602
|
|
|
|
146,395
|
|
|
|
130,375
|
|
Net interest margin
|
|
|
6.01
|
%
|
|
|
6.23
|
%
|
|
|
7.15
|
%
|
Return on average assets
|
|
|
(1.29
|
)
|
|
|
.71
|
|
|
|
1.68
|
|
|
|
(1) |
The Consumer Segment net income (loss) reported above includes a
net loss of $(1,828) million in 2007 for our Mortgage
Services business which is no longer generating new loan
origination volume as a result of the decisions to discontinue
correspondent channel acquisitions and cease Decision One
operations. Our Mortgage Services business reported a net loss
of $(737) million in 2006 and reported net income of
$509 million in 2005.
|
2007 net income (loss) compared to 2006 Our
Consumer segment reported a net loss in 2007 due to higher loan
impairment charges, lower net interest income and lower other
operating income, partially offset by lower operating expenses.
66
HSBC Finance Corporation
Loan impairment charges for the Consumer segment increased
markedly in 2007 reflecting higher loss estimates in our
Consumer Lending and Mortgage Services businesses due to the
following:
|
|
|
|
|
Consumer Lending experienced higher loss estimates primarily in
its real estate secured receivable portfolio due to higher
levels of charge-off and delinquency driven by an accelerated
deterioration of portions of the real estate secured receivable
portfolio in the second half of 2007. Weakening early stage
delinquency previously reported continued to worsen in 2007 and
migrate into later stage delinquency due to the marketplace
changes previously discussed. Lower receivable run-off, growth
in average receivables and portfolio seasoning also resulted in
a higher real estate secured credit loss provision. Also
contributing to the increase were higher loss estimates in
second lien loans purchased in 2004 through the third quarter of
2006. At December 31, 2007, the outstanding principal
balance of these acquired second lien loans was approximately
$1.0 billion. Additionally, higher loss estimates in
Consumer Lendings personal non-credit card portfolio
contributed to the increase due to seasoning, a deterioration of
2006 and 2007 vintages in certain geographic regions and
increased levels of personal bankruptcy filings as compared to
the exceptionally low filing levels experienced in 2006 as a
result of a new bankruptcy law in the United States which went
into effect in October 2005.
|
|
|
|
Mortgage Services experienced higher levels of charge-offs and
delinquency as portions of the portfolios purchased in 2005 and
2006 continued to season and progress as expected into later
stages of delinquency and charge-off. Additionally during the
second half of 2007, our Mortgage Services portfolio also
experienced higher loss estimates as receivable run-off
continued to slow and the mortgage lending industry trends we
had been experiencing worsened.
|
Also contributing to the increase in loan impairment charges was
a higher mix of unsecured loans such as private label and
personal non-credit card receivables, deterioration in credit
performance of portions of our Retail Services private label
portfolio, increased levels of personal bankruptcy filings as
compared to the exceptionally low filing levels experienced in
2006 as a result of the new bankruptcy law in the United States
which went into effect in October 2005 and the effect of a weak
U.S. economy. The increase in loan impairment charges in
our Retail Services business reflects higher delinquency levels
due to deterioration in credit performance, seasoning of the
co-branded credit card introduced in the third quarter of 2006,
higher bankruptcy levels and the affect from a weakening
U.S. economy. Loan impairment charges in our Retail
Services business also reflect a refinement in the methodology
used to estimate inherent losses on private label loans less
than 30 days delinquent which increased credit loss
reserves by $107 million in the fourth quarter. In 2007,
credit loss reserves for the Consumer segment increased as loan
impairment charges were $3.8 billion greater than net
charge-offs.
Net interest income decreased as higher finance and other
interest income, primarily due to higher average customer loans
and higher overall yields, was more than offset by higher
interest expense. This decrease was partially offset by a
reduction in net interest income in 2006 of $120 million
due to an adjustment to recognize prepayment penalties on real
estate secured loans over the expected life of the product.
Overall yields reflect growth in unsecured customer loans at
current market rates. The higher interest expense was due to
significantly higher cost of funds. The decrease in net interest
margin was a result of the cost of funds increasing more rapidly
than our ability to increase receivable yields. However in the
second half of 2007, net interest margin has shown improvement
due to a shift in mix to higher yielding Consumer Lending real
estate secured receivables resulting from attrition in the lower
yielding Mortgage Services real estate secured receivable
portfolio. Additionally, these higher yielding Consumer Lending
real estate secured receivables are remaining on the balance
sheet longer due to lower run-off rates. Overall yield
improvements were partially offset by the impact of growth in
non-performing assets. Other operating income decreased
primarily due to losses on loans held for sale by our Decision
One mortgage operations, losses on our real estate owned
portfolio and the loss on the bulk sales during 2007 from the
Mortgage Services portfolio, partially offset by higher late and
overlimit fees associated with our co-branded credit card
portfolio. Operating expenses were higher due to restructuring
charges of $103 million, including the write off of fixed
assets, related to the decisions to discontinue correspondent
channel acquisitions, to cease Decision One operations, to close
a loan underwriting, processing and collection facility in
Carmel, Indiana and to reduce the Consumer Lending branch
67
HSBC Finance Corporation
network as well as the write off of $46 million of goodwill
related to the acquisition of Solstice Capital Group, Inc. which
was included in the Consumer segment results. These increases
were partially offset by lower professional fees and lower
operating expenses resulting from lower mortgage origination
volumes and the termination of employees as part of the decision
to discontinue new correspondent channel acquisitions and to
cease Decision One operations.
ROA was (1.29) percent for 2007 compared to.71 percent in
2006. The decrease in the ROA ratio was primarily due to the
increase in loan impairment charges as discussed above, as well
as higher average assets.
2006 net income compared to 2005 Our Consumer
segment reported lower net income in 2006 due to higher loan
impairment charges and operating expenses, partially offset by
higher net interest income and higher other operating income.
Loan impairment charges for the Consumer segment increased
markedly during 2006. The increase in loan impairment charges
was largely driven by deterioration in the performance of
mortgage loans acquired in 2005 and 2006 by our Mortgage
Services business, particularly in the second lien and portions
of the first lien portfolios which resulted in higher
delinquency, charge-off and loss estimates in these portfolios.
These increases were partially offset by a reduction in the
estimated loss exposure resulting from Hurricane Katrina of
approximately $68 million in 2006 as well as the benefit of
low unemployment levels in the United States. In 2006, we
increased loss reserve levels as the provision for credit losses
was greater than net charge-offs by $1,597 million, which
included $1,627 million related to our Mortgage Services
business.
Operating expenses were higher in 2006 due to lower deferred
loan origination costs in our Mortgage Services business as
mortgage origination volumes declined, higher marketing expenses
due to the launch of a new co-brand credit card in our Retail
Services business, higher salary expense and higher support
services from affiliates to support growth.
Net interest income increased during 2006 primarily due to
higher average customer loans and higher overall yields,
partially offset by higher interest expense. Overall yields
reflect strong growth in real estate secured customer loans at
current market rates and a higher mix of higher yielding second
lien real estate secured loans and personal non-credit card
customer loans due to growth. These increases were partially
offset by a reduction in net interest income of
$120 million due to an adjustment to recognize prepayment
penalties on real estate secured loans over the expected life of
the product. Net interest margin decreased from the prior year
as the higher yields discussed above were offset by higher
interest expense due to a larger balance sheet and a
significantly higher cost of funds resulting from a rising
interest rate environment.
The increase in other operating income in 2006 was primarily due
to higher insurance commissions, higher late fees and a higher
fair value adjustment for our loans held for sale, partially
offset by higher REO expense due to higher volumes and losses.
In the fourth quarter of 2006, our Consumer Lending business
completed the acquisition of Solstice Capital Group Inc.
(Solstice) with assets of approximately
$49 million, in an all cash transaction for approximately
$50 million. Solstices 2007 pre-tax income did not
meet the required threshold requiring payment of additional
consideration. Solstice markets a range of mortgage and home
equity products to customers through direct mail. All of the
goodwill associated with the Solstice acquisition was written
off in the fourth quarter of 2007 as part of the Consumer
Lending goodwill impairment charge previously discussed.
ROA was .71 percent in 2006 and 1.68 percent in 2005.
The decrease in the ROA ratio in 2006 is due to the decrease in
net income discussed above as well as the growth in average
assets.
68
HSBC Finance Corporation
Customer loans for our Consumer segment can be analyzed as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases (Decreases) From
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
December 31,
|
|
|
2006
|
|
|
2005
|
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Real estate secured
|
|
$
|
86,434
|
|
|
$
|
(9,061
|
)
|
|
|
(9.5
|
)%
|
|
$
|
4,153
|
|
|
|
5.0
|
%
|
Auto finance
|
|
|
12,912
|
|
|
|
445
|
|
|
|
3.6
|
|
|
|
1,289
|
|
|
|
11.1
|
|
Private label, including co-branded cards
|
|
|
19,414
|
|
|
|
957
|
|
|
|
5.2
|
|
|
|
1,935
|
|
|
|
11.1
|
|
Personal non-credit card
|
|
|
17,979
|
|
|
|
(299
|
)
|
|
|
(1.6
|
)
|
|
|
1,267
|
|
|
|
7.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total customer loans
|
|
$
|
136,739
|
|
|
$
|
(7,958
|
)
|
|
|
(5.5
|
)%
|
|
$
|
8,644
|
|
|
|
6.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Real estate secured receivables are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases (Decreases) From
|
|
|
|
|
December 31,
|
|
December 31,
|
|
|
December 31,
|
|
2006
|
|
2005
|
|
|
2007
|
|
$
|
|
%
|
|
$
|
|
%
|
|
|
|
(dollars are in millions)
|
|
Mortgage Services
|
|
$
|
36,216
|
|
|
$
|
(13,380
|
)
|
|
|
(27.0
|
)%
|
|
$
|
(8,082
|
)
|
|
|
(18.2
|
)%
|
Consumer Lending
|
|
|
50,218
|
|
|
|
4,319
|
|
|
|
9.4
|
|
|
|
12,235
|
|
|
|
32.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
$
|
86,434
|
|
|
$
|
(9,061
|
)
|
|
|
(9.5
|
)%
|
|
$
|
4,153
|
|
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer loans decreased 6 percent at December 31,
2007 as compared to $144.7 billion at December 31,
2006. Real estate secured loans decreased markedly in 2007. The
decrease in real estate secured loans was primarily in our
Mortgage Services portfolio as a result of revisions to its
business plan beginning in the second half of 2006 and
continuing into 2007. These decisions have resulted in a
significant decrease in the Mortgage Services portfolio since
December 31, 2006. This attrition was partially offset by a
decline in loan prepayments due to fewer refinancing
opportunities for our customers as a result of the previously
discussed trends impacting the mortgage lending industry.
Attrition in this portfolio will continue going forward. The
decrease in our Mortgage Services portfolio was partially offset
by growth in our Consumer Lending branch business. Growth in our
branch-based Consumer Lending business improved due to higher
sales volumes and the decline in loan prepayments discussed
above. However, this growth was partially offset by the actions
taken in the second half of 2007 to reduce risk going forward in
our Consumer Lending business, including eliminating the small
volume of ARM loans, capping second lien LTV ratio requirements
to either 80 or 90 percent based on geography and the
overall tightening of credit score, debt-to-income and LTV
requirements for first lien loans. These actions, when coupled
with a significant reduction in demand for subprime loans across
the industry, have resulted in loan attrition in the fourth
quarter of 2007 and will markedly limit growth of our Consumer
Lending real estate secured receivables in the foreseeable
future. Growth in our auto finance portfolio reflects organic
growth principally in the near-prime portfolio as a result of
growth in our direct to consumer business, partially offset by
lower originations in the dealer network portfolio as a result
of actions taken to reduce risk in the portfolio. The increase
in our private label portfolio is due to organic growth and
growth in the co-branded card portfolio launched by our Retail
Services operations during the third quarter of 2006. Personal
non-credit card receivables decreased during 2007 as a result of
the actions taken in the second half of the year by our Consumer
Lending business to reduce risk going forward, including a
reduction in direct mail campaign offerings, the discontinuance
of personal homeowner loans and tightening underwriting criteria.
Customer loans increased 13 percent to $144.7 billion
at December 31, 2006 as compared to $128.1 billion at
December 31, 2005. Real estate growth in 2006 was strong as
a result of growth in our branch-based Consumer Lending
business. In addition, our correspondent business experienced
growth during the first six months of 2006.
69
HSBC Finance Corporation
However, as discussed above, in the second half of 2006,
management revised its business plan and began tightening
underwriting standards on loans purchased from correspondents
including reducing purchases of second lien and selected higher
risk segments resulting in lower volumes in the second half of
2006. Growth in our branch- based Consumer Lending business
reflects higher sales volumes than in 2005 as we continued to
emphasize real estate secured loans, including a near-prime
mortgage product we first introduced in 2003. Real estate
secured customer loans also increased as a result of portfolio
acquisitions, including the $2.5 billion of customer loans
related to the Champion portfolio purchased in November 2006 as
well as purchases from a portfolio acquisition program of
$.4 billion in 2006. In addition, a decline in loan
prepayments in 2006 resulted in lower run-off rates for our real
estate secured portfolio which also contributed to overall
growth. Our Auto Finance business also reported organic growth,
principally in the near-prime portfolio, from increased volume
in both the dealer network and the consumer direct loan program.
The private label portfolio increased in 2006 due to strong
growth within consumer electronics and powersports as well as
new merchant signings. Growth in our personal non-credit card
portfolio was the result of increased marketing, including
several large direct mail campaigns.
Credit Card Services Segment The following
table summarizes the IFRS Management Basis results for our
Credit Card Services segment for the years ended
December 31, 2007, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net income
|
|
$
|
1,184
|
|
|
$
|
1,386
|
|
|
$
|
813
|
|
Net interest income
|
|
|
3,430
|
|
|
|
3,151
|
|
|
|
2,150
|
|
Other operating income
|
|
|
3,078
|
|
|
|
2,360
|
|
|
|
1,892
|
|
Intersegment revenues
|
|
|
18
|
|
|
|
20
|
|
|
|
21
|
|
Loan impairment charges
|
|
|
2,752
|
|
|
|
1,500
|
|
|
|
1,453
|
|
Operating expenses
|
|
|
1,872
|
|
|
|
1,841
|
|
|
|
1,315
|
|
Customer loans
|
|
|
30,458
|
|
|
|
28,221
|
|
|
|
25,979
|
|
Assets
|
|
|
30,005
|
|
|
|
28,780
|
|
|
|
28,453
|
|
Net interest margin
|
|
|
11.77
|
%
|
|
|
11.85
|
%
|
|
|
10.42
|
%
|
Return on average assets
|
|
|
4.13
|
|
|
|
5.18
|
|
|
|
4.13
|
|
2007 net income compared to 2006 Our Credit
Card Services segment reported lower net income in 2007
primarily due to higher loan impairment charges and higher
operating expenses, partially offset by higher net interest
income and higher other operating income. Loan impairment
charges were higher due to higher delinquency levels as a result
of receivable growth, the impact of marketplace changes and the
weakening U.S. economy as discussed above, a continued
shift in mix to higher levels of non-prime receivables and
portfolio seasoning as well as an increase in bankruptcy filings
as compared to the period year which benefited from reduced
levels of personal bankruptcy filings following the enactment of
a new bankruptcy law in the United States in October 2005. In
2007, we increased loss reserves by recording loss provision
greater than net charge-off of $784 million.
Net interest income increased due to higher overall yields due
in part to higher levels of near-prime and non-prime customer
loans, partially offset by higher interest expense. Net interest
margin decreased in 2007 as net interest income during 2006
benefited from the implementation of a methodology for
calculating the effective interest rate for introductory rate
credit card customer loans under IFRSs over the expected life of
the product. Of the amount recognized, $131 million
increased net interest income in 2006 which otherwise would have
been recorded in prior periods. Excluding the impact of the
above from net interest margin, net interest margin increased
primarily due to higher overall yields due to increases in
non-prime customer loans, higher pricing on variable rate
products and other pricing initiatives, partially offset by a
higher cost of funds.
Increases in other operating income resulted from loan growth
which resulted in higher late fees and overlimit fees and higher
enhancement services revenue from products such as Account
Secure Plus (debt protection) and Identity Protection Plan.
These increases were partially offset by changes in fee billings
implemented during the fourth quarter of 2007, as discussed
below which decreased fee income in 2007 by approximately
$55 million.
70
HSBC Finance Corporation
Additionally, we recorded a gain of $113 million on the
sale of our portfolio of MasterCard Class B shares. Higher
operating expenses were also incurred to support receivable
growth including increases in marketing expenses in the first
half of 2007. Higher operating expenses were partially offset by
lower salary expense due to efficiences from the integration of
the Metris acquisition which occurred in December 2005.
Beginning in the third quarter of 2007, we decreased marketing
expenses in an effort to slow receivable growth in our credit
card portfolio. Also in the fourth quarter of 2007 to further
slow receivable growth, we slowed new account growth, tightened
initial credit line sales authorization criteria, closed
inactive accounts, decreased credit lines and tightened
underwriting criteria for credit line increases, reduced balance
transfer volume and tightened cash access.
The decrease in ROA in 2007 is due to higher average assets and
the lower net income as discussed above.
In the fourth quarter of 2007, the Credit Card Services business
initiated certain changes related to fee and finance charge
billings as a result of continuing reviews to ensure our
practices reflect our brand principles. While estimates of the
potential impact of these changes are based on numerous
assumptions and take into account factors which are difficult to
predict such as changes in customer behavior, we estimate that
these changes will reduce fee and finance charge income in 2008
by up to approximately $250 million.
We are also considering the sale of our General Motors
MasterCard and Visa portfolio to HSBC Bank USA in the future in
order to maximize the efficient use of capital and liquidity at
each entity. Any such sale will be subject to obtaining the
necessary regulatory and other approvals, including the approval
of General Motors. We would, however, maintain the customer
account relationships and, subsequent to the initial receivable
sale, additional volume would be sold to HSBC Bank USA on a
daily basis. At December 31, 2007, the GM Portfolio had an
outstanding receivable balance of approximately
$7.0 billion. If this bulk sale occurs, it is expected to
result in a significant gain upon completion. In future periods,
our net interest income, fee income and provision for credit
losses for GM credit card receivables would be reduced, while
other income would increase due to gains from continuing sales
of GM credit card receivables and receipt of servicing revenue
on the portfolio from HSBC Bank USA. We anticipate that the net
effect of these potential sales would not have a material impact
on our future results of operations.
2006 net income compared to 2005 Our Credit
Card Services segment reported higher net income in 2006. The
increase in net income was primarily due to higher net interest
income and higher other operating income, partially offset by
higher operating expenses and higher loan impairment charges.
The acquisition of Metris, which was completed in December 2005,
contributed $147 million of net income during 2006 as
compared to $4 million in 2005.
Net interest income increased in 2006 largely as a result of the
Metris acquisition, which contributed to higher overall yields
due in part to higher levels of non-prime customer loans,
partially offset by higher interest expense. As discussed above,
net interest income in 2006 also benefited from the
implementation of a methodology for calculating the effective
interest rate for introductory rate credit card customer loans
under IFRSs over the expected life of the product. Of the amount
recognized, $131 million increased net interest income in
2006 which otherwise would have been recorded in prior periods.
Net interest margin increased primarily due to higher overall
yields due to increases in non-prime customer loans, including
the customer loans acquired as part of Metris, higher pricing on
variable rate products and other repricing initiatives. These
increases were partially offset by a higher cost of funds. Net
interest margin in 2006 was also positively impacted by the
adjustments recorded for the effective interest rate for
introductory rate MasterCard/Visa customer loans discussed
above. Although our non-prime customer loans tend to have
smaller balances, they generate higher returns both in terms of
net interest margin and fee income.
Increases in other operating income resulted from portfolio
growth, including the Metris portfolio acquired in December 2005
which has resulted in higher late fees, higher interchange
revenue and higher enhancement services revenue from products
such as Account Secure Plus (debt protection) and Identity
Protection Plan. This increase in fee income was partially
offset by adverse impacts of limiting certain fee billings and
changes to the required minimum monthly payment amount on
non-prime credit card accounts in accordance with FFIEC guidance.
71
HSBC Finance Corporation
Higher operating expenses were incurred to support receivable
growth, including the Metris portfolio acquisition, and
increases in marketing expenses. The increase in marketing
expenses in 2006 was primarily due to the Metris portfolio
acquired in December 2005 and increased investment in our
non-prime portfolio.
Loan impairment charges were higher in 2006. Loan impairment
charges in 2005 were impacted by incremental credit loss
provisions relating to the spike in bankruptcy filings leading
up to October 17, 2005, which was the effective date of new
bankruptcy laws in the United States and higher provisions
relating to Hurricane Katrina. Excluding these items, provisions
in 2006 nonetheless increased, reflecting receivable growth and
portfolio seasoning, including the full year impact of the
Metris portfolio, partially offset by the impact of lower levels
of bankruptcy filings following the enactment of new bankruptcy
laws in October 2005, higher recoveries as a result of better
rates available in the non-performing asset sales market and a
reduction of our estimate of incremental credit loss exposure
related to Hurricane Katrina of approximately $26 million.
In 2006, we increased loss reserves by recording loss provision
greater than net charge-off of $328 million.
The increase in ROA in 2006 is primarily due to the higher net
income as discussed above, partially offset by higher average
assets.
Customer loans Customer loans increased
8 percent to $30.5 billion at December 31, 2007
compared to $28.2 billion at December 31, 2006. The
increase reflects strong domestic organic growth in our General
Motors, Union Privilege, Metris and non-prime portfolios.
However, as discussed above, we have implemented numerous
actions in the fourth quarter of 2007 which will limit growth in
2008.
Customer loans increased 9 percent to $28.2 billion at
December 31, 2006 compared to $26.0 billion at
December 31, 2005. The increase reflects strong domestic
organic growth in our Union Privilege as well as other non-prime
portfolios including Metris.
International Segment The following table
summarizes the IFRS Management Basis results for our
International segment for the years ended December 31,
2007, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net income (loss)
|
|
$
|
(60
|
)
|
|
$
|
42
|
|
|
$
|
481
|
|
Net interest income
|
|
|
844
|
|
|
|
826
|
|
|
|
971
|
|
Gain on sales to affiliates
|
|
|
-
|
|
|
|
29
|
|
|
|
464
|
|
Other operating income, excluding gain on sales to affiliates
|
|
|
231
|
|
|
|
254
|
|
|
|
306
|
|
Intersegment revenues
|
|
|
17
|
|
|
|
33
|
|
|
|
17
|
|
Loan impairment charges
|
|
|
610
|
|
|
|
535
|
|
|
|
620
|
|
Operating expenses
|
|
|
548
|
|
|
|
495
|
|
|
|
635
|
|
Customer loans
|
|
|
10,425
|
|
|
|
9,520
|
|
|
|
9,328
|
|
Assets
|
|
|
10,607
|
|
|
|
10,764
|
|
|
|
10,905
|
|
Net interest margin
|
|
|
8.34
|
%
|
|
|
8.22
|
%
|
|
|
7.35
|
%
|
Return on average assets
|
|
|
(.56
|
)
|
|
|
.37
|
|
|
|
3.52
|
|
2007 net income (loss) compared to 2006 Our
International segment reported a net loss in 2007 reflecting
higher loan impairment charges, higher operating expenses and
lower other operating income, partially offset by higher net
interest income. As discussed more fully below, net income in
2006 also included a $29 million gain on the sale of the
European Operations to HBEU. Applying constant currency rates,
which uses the average rate of exchange for 2006 to translate
current period net income, the net loss for 2007 would not have
been materially different.
Loan impairment charges in our Canadian operations increased due
to an increase in delinquency and charge-off due to receivable
growth. Loan impairment charges in our U.K. operations reflect a
$93 million increase in credit loss reserves, resulting
from a refinement in the methodology used to calculate roll rate
percentages to be consistent with our other business and which
we believe reflects a better estimate of probable losses
currently inherent in the
72
HSBC Finance Corporation
loan portfolio and higher loss estimates for restructured loans
which were more than offset by overall improvements in
delinquency and charge-off which resulted in an overall lower
credit loss provision in our U.K. operations. In 2007, we
increased segment loss reserves by recording loss provision
greater than net charge-off of $127 million.
Net interest income increased primarily as a result of higher
receivable levels in our Canadian operations, partially offset
by higher interest expense in our Canadian operations and lower
receivable levels in our U.K. operations. The lower receivable
levels in our U.K. subsidiary were due to decreased sales
volumes resulting from an overall challenging credit environment
in the U.K. as well as the sale of our European Operations in
November 2006. Net interest margin increased due to higher
yields on customer loans in our U.K. operations as we have
increased pricing on many of our products reflecting the rising
interest rates in the U.K., partially offset by the impact of
the sale of the European Operations in November 2006 as well as
a higher cost of funds in both our U.K. and Canadian operations.
Other operating income decreased due to lower insurance sales
volumes in our U.K. operations, largely due to a planned phase
out of the use of our largest external broker between January
and April 2007, as well as the impact of the sale of our U.K.
Insurance Operations to Aviva in November 2007. As the sales
agreement provides for the purchaser to distribute insurance
products through our U.K. branch network, going forward we will
receive insurance commission revenue which we anticipate will
significantly offset the loss of insurance premium revenues and
the related policyholder benefits. Operating expenses increased
to support receivable growth in our Canadian operations. In our
U.K. operations, operating expenses were also higher due to
higher legal fees and higher marketing expenses.
ROA was (.56) percent for 2007 compared to .37 percent in
2006. The decrease in ROA is primarily due to the increase in
loan impairment charges as discussed above, partially offset by
lower average assets.
In November 2007, we sold the capital stock of our U.K.
Insurance Operations to Aviva for an aggregate purchase price of
approximately $206 million. The International segment
recorded a gain on sale of $38 million (pre-tax) as a
result of this transaction. As the fair value adjustments
related to purchase accounting resulting from our acquisition by
HSBC and the related amortization are allocated to Corporate,
which is included in the All Other caption within
our segment disclosures, the gain recorded in the International
segment does not include the goodwill write-off resulting from
this transaction of $79 million on an IFRS Management
Basis. We continue to evaluate the scope of our other U.K.
operations.
2006 net income compared to 2005 Our
International segment reported lower net income in 2006.
However, net income in 2006 includes the $29 million gain
on the sale of the European Operations to HBEU and in 2005
includes the $464 million gain on the sale of the U.K.
credit card business to HBEU. As discussed more fully below, the
gains reported by the International segment exclude the
write-off of goodwill and intangible assets associated with
these transactions. Excluding the gain on sale from both
periods, the International segment reported higher net income in
2006 primarily due to lower loan impairment charges and lower
operating expenses, partially offset by lower net interest
income and lower other operating income. Applying constant
currency rates, which uses the average rate of exchange for 2005
to translate current period net income, the net income in 2006
would have been lower by $2 million.
Loan impairment charges decreased in 2006 primarily due to the
sale of our U.K. credit card business partially offset by
increases due to the deterioration of the financial
circumstances of our customers across the U.K. and increases at
our Canadian business due to receivable growth. We increased
loss reserves by recording loss provision greater than net
charge-offs of $3 million in 2006.
Operating expenses decreased as a result of the sale of our U.K.
credit card business in December 2005. The decrease in operating
expenses was partially offset by increased costs associated with
growth in the Canadian business.
Net interest income decreased during 2006 primarily as a result
of lower receivable levels in our U.K. subsidiary. The lower
receivable levels were due to the sale of our U.K. credit card
business in December 2005, including $2.5 billion in
customer loans, to HBEU as discussed more fully below, as well
as decreased sales volumes in the U.K. resulting from a
continuing challenging credit environment in the U.K. This was
partially offset by higher net
73
HSBC Finance Corporation
interest income in our Canadian operations due to growth in
customer loans. Net interest margin increased in 2006 primarily
due to lower cost of funds partially offset by the change in
receivable mix resulting from the sale of our U.K. credit card
business in December 2005.
Other operating income decreased in 2006, in part, due to the
aforementioned sale of the U.K. credit card business which
resulted in lower credit card fee income partially offset by
higher servicing fee income from affiliates. Other operating
income was also lower in 2006 due to lower income from our
insurance operations.
ROA was .37 percent in 2006 and 3.52 percent in 2005.
These ratios have been impacted by the gains on asset sales to
affiliates. Excluding the gain on sale from both periods, ROA
was essentially flat as ROA was .11 percent in 2006 and
.12 percent in 2005.
In November 2006, we sold the capital stock of our operations in
the Czech Republic, Hungary, and Slovakia to a wholly owned
subsidiary of HBEU, a U.K. based subsidiary of HSBC, for an
aggregate purchase price of approximately $46 million. The
International segment recorded a gain on sale of
$29 million as a result of this transaction. As the fair
value adjustments related to purchase accounting resulting from
our acquisition by HSBC and the related amortization are
allocated to Corporate, which is included in the All
Other caption within our segment disclosures, the gain
recorded in the International segment does not include the
goodwill write-off resulting from this transaction of
$15 million on an IFRS Management Basis.
In December 2005, we sold our U.K. credit card business,
including $2.5 billion of customer loans, and the
associated cardholder relationships to HBEU for an aggregate
purchase price of $3.0 billion. In 2005, the International
segment recorded a gain on sale of $464 million as a result
of this transaction. As the fair value adjustments related to
purchase accounting resulting from our acquisition by HSBC and
the related amortization are allocated to Corporate, which is
included in the All Other caption within our segment
disclosures, the gain recorded in the International segment does
not include the goodwill and intangible write-off resulting from
this transaction of $288 million.
Customer loans Customer loans for our International
segment can be further analyzed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases (Decreases) From
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
December 31,
|
|
|
2006
|
|
|
2005
|
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Real estate secured
|
|
$
|
4,202
|
|
|
$
|
650
|
|
|
|
18.3
|
%
|
|
$
|
1,168
|
|
|
|
38.5
|
%
|
Auto finance
|
|
|
359
|
|
|
|
49
|
|
|
|
15.8
|
|
|
|
89
|
|
|
|
33.0
|
|
Credit card
|
|
|
315
|
|
|
|
69
|
|
|
|
28.0
|
|
|
|
145
|
|
|
|
85.3
|
|
Private label
|
|
|
2,907
|
|
|
|
677
|
|
|
|
30.4
|
|
|
|
749
|
|
|
|
34.7
|
|
Personal non-credit card
|
|
|
2,642
|
|
|
|
(540
|
)
|
|
|
(17.0
|
)
|
|
|
(1,054
|
)
|
|
|
(28.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total customer loans
|
|
$
|
10,425
|
|
|
$
|
905
|
|
|
|
9.5
|
%
|
|
$
|
1,097
|
|
|
|
11.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer loans of $10.4 billion at December 31, 2007
increased 10 percent compared to $9.5 billion at
December 31, 2006. The increase was primarily as a result
of foreign exchange impacts. Applying constant currency rates,
customer loans at December 31, 2007 would have been
approximately $907 million lower. Excluding the positive
foreign exchange impacts, higher customer loans in our Canadian
business were offset by the impact of lower customer loans in
our U.K. operations. The increase in our Canadian business is
due to growth in the real estate secured and credit card
portfolios. Lower personal non-credit card loans in the U.K.
reflect lower volumes as the U.K. branch network has placed a
greater emphasis on secured lending. However, as discussed
above, we have implemented numerous actions in both our U.K. and
Canadian operations which will result in lower origination
volumes in 2008.
Customer loans of $9.5 billion at December 31, 2006
increased 2 percent compared to $9.3 billion at
December, 2005. Our Canadian operations experienced strong
growth in its receivable portfolios. Branch expansions, the
74
HSBC Finance Corporation
addition of 1,000 new auto dealer relationships and the
successful launch of a MasterCard credit card program in Canada
in 2005 resulted in growth in both the secured and unsecured
receivable portfolios. The increases in our Canadian portfolio
were partially offset by lower customer loans in our U.K.
operations. Our U.K. based unsecured customer loans decreased
due to continuing lower retail sales volume following a slow
down in retail consumer spending as well as the sale of
$203 million of customer loans related to our European
operations in November 2006. Applying constant currency rates,
which uses the December 31, 2005 rate of exchange to
translate current customer loan balances, customer loans would
have been lower by $708 million at December 31, 2006.
Reconciliation of Segment Results As
previously discussed, segment results are reported on an IFRS
Management Basis. See Note 21, Business
Segments, to the accompanying financial statements for a
discussion of the differences between IFRSs and U.S. GAAP.
For segment reporting purposes, intersegment transactions have
not been eliminated. We generally account for transactions
between segments as if they were with third parties. Also see
Note 21, Business Segments, in the accompanying
consolidated financial statements for a reconciliation of our
IFRS Management Basis segment results to U.S. GAAP
consolidated totals.
Credit
Quality
Delinquency and Charge-off Policies and
Practices Our delinquency and net charge-off ratios
reflect, among other factors, changes in the mix of loans in our
portfolio, the quality of our receivables, the average age of
our loans, the success of our collection and customer account
management efforts, bankruptcy trends, general economic
conditions such as national and local trends in housing markets,
interest rates, unemployment rates and significant catastrophic
events such as natural disasters and global pandemics. The
levels of personal bankruptcies also have a direct effect on the
asset quality of our overall portfolio and others in our
industry.
Our credit and portfolio management procedures focus on
risk-based pricing and effective collection and customer account
management efforts for each loan. We believe our credit and
portfolio management process gives us a reasonable basis for
predicting the credit quality of new accounts although in a
changing external environment this has become more difficult
than in the past. This process is based on our experience with
numerous marketing, credit and risk management tests. However,
in 2006 and 2007 we found consumer behavior deviated from
historical patterns due to the housing market deterioration,
creating increased difficulty in predicting credit quality. As a
result, we have enhanced our processes to emphasize more recent
experience, key drivers of performance, and a forward-view of
expectations of credit quality. We also believe that our
frequent and early contact with delinquent customers, as well as
restructuring, modification and other customer account
management techniques which are designed to optimize account
relationships, are helpful in maximizing customer collections
and has been particularly appropriate in the unstable market.
See Note 2, Summary of Significant Accounting
Policies, in the accompanying consolidated financial
statements for a description of our charge-off and nonaccrual
policies by product.
Our charge-off policies focus on maximizing the amount of cash
collected from a customer while not incurring excessive
collection expenses on a customer who will likely be ultimately
uncollectible. We believe our policies are responsive to the
specific needs of the customer segment we serve. Our real estate
and auto finance charge-off policies consider customer behavior
in that initiation of foreclosure or repossession activities
often prompts repayment of delinquent balances. Our collection
procedures and charge-off periods, however, are designed to
avoid ultimate foreclosure or repossession whenever it is
reasonably economically possible. Our credit card charge-off
policy is consistent with industry practice. Charge-off periods
for our personal non-credit card product and, prior to December
2004 when it was sold, our domestic private label credit card
product were designed to be responsive to our customer needs and
may therefore be longer than bank competitors who serve a
different market. Our policies have generally been consistently
applied in all material respects. Our loss reserve estimates
consider our charge-off policies to ensure appropriate reserves
exist. We believe our current charge-off policies are
appropriate and result in proper loss recognition.
75
HSBC Finance Corporation
Delinquency
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.
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 and becomes at least two months contractually
delinquent, it will be reported in our delinquency ratios. At
December 31, 2007 and 2006 our two-months-and-over
contractual delinquency included $4.5 billion and
$2.5 billion respectively of restructured accounts that
subsequently experienced payment defaults. See Customer
Account Management Policies and Practices for further
detail of our practices.
The following table summarizes two-months-and-over contractual
delinquency (as a percent of consumer receivables):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Dec. 31
|
|
|
Sept. 30
|
|
|
June 30
|
|
|
March 31
|
|
|
Dec. 31
|
|
|
Sept. 30
|
|
|
June 30
|
|
|
March 31
|
|
|
|
|
Real estate
secured(1)
|
|
|
7.08
|
%
|
|
|
5.50
|
%
|
|
|
4.28
|
%
|
|
|
3.73
|
%
|
|
|
3.54
|
%
|
|
|
2.98
|
%
|
|
|
2.52
|
%
|
|
|
2.46
|
%
|
Auto
finance(2)
|
|
|
3.67
|
|
|
|
3.40
|
|
|
|
2.93
|
|
|
|
2.32
|
|
|
|
3.18
|
|
|
|
3.16
|
|
|
|
2.73
|
|
|
|
2.17
|
|
Credit card
|
|
|
5.77
|
|
|
|
5.23
|
|
|
|
4.45
|
|
|
|
4.53
|
|
|
|
4.57
|
|
|
|
4.53
|
|
|
|
4.16
|
|
|
|
4.35
|
|
Private label
|
|
|
4.26
|
|
|
|
4.86
|
|
|
|
5.12
|
|
|
|
5.27
|
|
|
|
5.31
|
|
|
|
5.61
|
|
|
|
5.42
|
|
|
|
5.50
|
|
Personal non-credit card
|
|
|
14.13
|
|
|
|
11.90
|
|
|
|
10.72
|
|
|
|
10.21
|
|
|
|
10.17
|
|
|
|
9.69
|
|
|
|
8.93
|
|
|
|
8.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
consumer(2)
|
|
|
7.41
|
%
|
|
|
6.13
|
%
|
|
|
5.08
|
%
|
|
|
4.64
|
%
|
|
|
4.59
|
%
|
|
|
4.19
|
%
|
|
|
3.71
|
%
|
|
|
3.66
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Real estate secured two-months-and-over contractual delinquency
(as a percent of consumer receivables) are comprised of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Dec. 31
|
|
|
Sept. 30
|
|
|
June 30
|
|
|
March 31
|
|
|
Dec. 31
|
|
|
Sept. 30
|
|
|
June 30
|
|
|
March 31
|
|
|
|
|
Mortgage Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
10.91
|
%
|
|
|
8.27
|
%
|
|
|
6.39
|
%
|
|
|
4.96
|
%
|
|
|
4.48
|
%
|
|
|
3.80
|
%
|
|
|
3.10
|
%
|
|
|
2.94
|
%
|
Second lien
|
|
|
15.43
|
|
|
|
11.20
|
|
|
|
8.06
|
|
|
|
6.69
|
|
|
|
5.73
|
|
|
|
3.70
|
|
|
|
2.35
|
|
|
|
1.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mortgage Services
|
|
|
11.80
|
|
|
|
8.86
|
|
|
|
6.74
|
|
|
|
5.31
|
|
|
|
4.74
|
|
|
|
3.78
|
|
|
|
2.93
|
|
|
|
2.70
|
|
Consumer Lending:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
3.72
|
|
|
|
2.90
|
|
|
|
2.13
|
|
|
|
2.01
|
|
|
|
2.07
|
|
|
|
1.84
|
|
|
|
1.77
|
|
|
|
1.87
|
|
Second lien
|
|
|
6.93
|
|
|
|
5.01
|
|
|
|
3.57
|
|
|
|
3.32
|
|
|
|
3.06
|
|
|
|
2.44
|
|
|
|
2.37
|
|
|
|
2.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consumer Lending
|
|
|
4.15
|
|
|
|
3.19
|
|
|
|
2.33
|
|
|
|
2.20
|
|
|
|
2.21
|
|
|
|
1.92
|
|
|
|
1.85
|
|
|
|
1.99
|
|
Foreign and all other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
2.62
|
|
|
|
2.49
|
|
|
|
2.25
|
|
|
|
1.65
|
|
|
|
1.58
|
|
|
|
1.52
|
|
|
|
1.53
|
|
|
|
1.77
|
|
Second lien
|
|
|
4.59
|
|
|
|
4.30
|
|
|
|
4.47
|
|
|
|
5.07
|
|
|
|
5.38
|
|
|
|
5.56
|
|
|
|
5.54
|
|
|
|
5.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Foreign and all other
|
|
|
4.12
|
|
|
|
3.87
|
|
|
|
3.98
|
|
|
|
4.35
|
|
|
|
4.59
|
|
|
|
4.72
|
|
|
|
4.76
|
|
|
|
4.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
|
7.08
|
%
|
|
|
5.50
|
%
|
|
|
4.28
|
%
|
|
|
3.73
|
%
|
|
|
3.54
|
%
|
|
|
2.98
|
%
|
|
|
2.52
|
%
|
|
|
2.46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) |
In December 2006, our Auto Finance business changed its
charge-off policy to provide that the principal balance of auto
loans in excess of the estimated net realizable value will be
charged-off 30 days (previously 90 days) after the
financed vehicle has been repossessed if it remains unsold,
unless it becomes 150 days contractually delinquent, at
which time such excess will be charged off. This resulted in a
one-time acceleration of charge-off which totaled
$24 million in December 2006. In connection with this
policy change our Auto Finance business also changed its
methodology for reporting two-months-and-over contractual
delinquency to include loan balances associated with repossessed
vehicles which have not yet been written down to net realizable
value, consistent with policy. These changes resulted in an
increase of 44 basis points to the auto finance delinquency
ratio and an increase of 3 basis points to the total
consumer delinquency ratio at December 31, 2006. Prior
period amounts have been restated to conform to the current year
presentation.
|
Compared to September 30, 2007, our total consumer
delinquency increased 128 basis points at December 31,
2007 to 7.41 percent. With the exception of our private
label portfolio, we experienced higher delinquency levels across
all products. The real estate secured two-months-and-over
contractual delinquency ratio was negatively impacted by higher
delinquency levels in our Mortgage Services and Consumer Lending
businesses. This increase resulted from the weak housing and
mortgage industry, rising unemployment rates in certain markets,
the weakening
76
HSBC Finance Corporation
U.S. economy and attrition in our real estate secured
receivables portfolio driven by our strategy to discontinue new
correspondent channel acquisitions by our Mortgage Services
business which reduced the outstanding principal balance of the
Mortgage Services loan portfolio. Our credit card portfolio also
reported an increase in the two-months-and-over contractual
delinquency ratio due to the deteriorating marketplace and
broader economic conditions, a shift in mix to higher levels of
non-prime receivables, and the seasoning of a growing portfolio.
The increase in two-months-and-over contractual delinquency as a
percentage of consumer receivables in our auto finance portfolio
reflects seasoning of a growing portfolio and to a lesser extent
the deterioration of marketplace and broader economic conditions
as well as a seasonal trend for higher delinquency during the
second half of the year. The decrease in our private label
portfolio (which primarily consists of our foreign private label
portfolio and domestic retail sales contracts that were not sold
to HSBC Bank USA in December 2004) reflects receivable
growth in our foreign portfolios. The increase in delinquency in
our personal non-credit card portfolio ratio reflects maturation
of a growing domestic portfolio, and a deterioration of 2006 and
2007 vintages in certain geographic regions in our domestic
portfolio. Dollars of delinquency increased markedly compared to
the prior quarter reflecting the increases in delinquency in our
real estate secured portfolios as discussed above due in part to
lower real estate secured run-off as market conditions have
reduced refinancing and liquidation opportunities for our
customers. The increases in dollars of delinquency in other
products primarily reflect higher bankruptcy levels and
portfolio seasoning as well as deteriorating economic conditions
as well as higher levels of receivables in all products except
for personal non-credit card receivables.
Compared to December 31, 2006, our total consumer
delinquency ratio increased 282 basis points largely due to
higher real estate secured delinquency levels primarily at our
Mortgage Services and Consumer Lending businesses. As discussed
above, with the exception of our private label portfolio, we
experienced higher delinquency levels across all products. Our
credit card portfolio reported a marked increase in the
two-months-and-over contractual delinquency ratio due to a shift
in mix to higher levels of non-prime receivables, seasoning of a
growing portfolio, higher levels of personal bankruptcy filings
as compared to the exceptionally low levels experienced in 2006
following enactment of new bankruptcy legislation in the United
States in October 2005 and the deteriorating marketplace and
broader economic conditions. The increase in auto finance
portfolio ratio reflects seasoning of a growing portfolio,
receivable growth and weakening performance of certain 2006
originations. The increase in delinquency in our personal
non-credit card portfolio ratio reflects maturation of a growing
domestic portfolio, and a deterioration of 2006 and 2007
vintages as discussed above.
See Customer Account Management Policies and
Practices regarding the treatment of restructured accounts
and accounts subject to forbearance and other customer account
management tools. See Note 2, Summary of Significant
Accounting Policies, for a detail of our charge-off policy
by product.
Net
Charge-offs of Consumer Receivables
The following table summarizes net charge-off of consumer
receivables as a percent of average consumer receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Full
|
|
|
Quarter Ended (Annualized)
|
|
|
Full
|
|
|
Quarter Ended (Annualized)
|
|
|
Full
|
|
|
|
|
|
|
Year
|
|
|
Dec. 31
|
|
|
Sept. 30
|
|
|
June 30
|
|
|
Mar. 31
|
|
|
Year
|
|
|
Dec. 31
|
|
|
Sept. 30
|
|
|
June 30
|
|
|
Mar. 31
|
|
|
Year
|
|
|
|
|
|
|
|
Real estate
secured(1)
|
|
|
2.32
|
%
|
|
|
2.96
|
%
|
|
|
2.47
|
%
|
|
|
2.17
|
%
|
|
|
1.73
|
%
|
|
|
1.00
|
%
|
|
|
1.28
|
%
|
|
|
.98
|
%
|
|
|
.97
|
%
|
|
|
.75
|
%
|
|
|
.76
|
%
|
|
|
|
|
Auto
finance(2)
|
|
|
4.10
|
|
|
|
5.07
|
|
|
|
4.47
|
|
|
|
3.16
|
|
|
|
3.64
|
|
|
|
3.67
|
|
|
|
4.97
|
|
|
|
3.69
|
|
|
|
2.43
|
|
|
|
3.50
|
|
|
|
3.27
|
|
|
|
|
|
Credit card
|
|
|
7.28
|
|
|
|
8.17
|
|
|
|
7.00
|
|
|
|
6.85
|
|
|
|
7.08
|
|
|
|
5.56
|
|
|
|
6.79
|
|
|
|
5.52
|
|
|
|
5.80
|
|
|
|
4.00
|
|
|
|
7.12
|
|
|
|
|
|
Private label
|
|
|
4.73
|
|
|
|
3.71
|
|
|
|
4.74
|
|
|
|
5.30
|
|
|
|
5.30
|
|
|
|
5.80
|
|
|
|
6.68
|
|
|
|
5.65
|
|
|
|
5.29
|
|
|
|
5.62
|
|
|
|
4.83
|
|
|
|
|
|
Personal non-credit
card(2)
|
|
|
8.48
|
|
|
|
9.13
|
|
|
|
8.84
|
|
|
|
8.22
|
|
|
|
7.73
|
|
|
|
7.89
|
|
|
|
7.92
|
|
|
|
7.77
|
|
|
|
7.92
|
|
|
|
7.94
|
|
|
|
7.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
consumer(2)
|
|
|
4.22
|
%
|
|
|
4.96
|
%
|
|
|
4.37
|
%
|
|
|
3.92
|
%
|
|
|
3.64
|
%
|
|
|
2.97
|
%
|
|
|
3.45
|
%
|
|
|
2.92
|
%
|
|
|
2.88
|
%
|
|
|
2.58
|
%
|
|
|
3.03
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate charge-offs and REO expense as a percent of average
real estate secured receivables
|
|
|
2.68
|
%
|
|
|
3.79
|
%
|
|
|
2.89
|
%
|
|
|
2.26
|
%
|
|
|
1.86
|
%
|
|
|
1.19
|
%
|
|
|
1.68
|
%
|
|
|
1.11
|
%
|
|
|
1.04
|
%
|
|
|
.89
|
%
|
|
|
.87
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Real estate secured net charge-off of consumer receivables as a
percent of average consumer receivables are comprised of the
following:
|
77
HSBC Finance Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Full
|
|
|
Quarter Ended (Annualized)
|
|
|
Full
|
|
|
Quarter Ended (Annualized)
|
|
|
Full
|
|
|
|
|
|
|
Year
|
|
|
Dec. 31
|
|
|
Sept. 30
|
|
|
June 30
|
|
|
Mar. 31
|
|
|
Year
|
|
|
Dec. 31
|
|
|
Sept. 30
|
|
|
June 30
|
|
|
Mar. 31
|
|
|
Year
|
|
|
|
|
|
|
|
Mortgage Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
1.60
|
%
|
|
|
2.29
|
%
|
|
|
1.93
|
%
|
|
|
1.20
|
%
|
|
|
1.17
|
%
|
|
|
.77
|
%
|
|
|
.91
|
%
|
|
|
.75
|
%
|
|
|
.73
|
%
|
|
|
.67
|
%
|
|
|
.68
|
%
|
|
|
|
|
Second lien
|
|
|
12.15
|
|
|
|
17.42
|
|
|
|
13.90
|
|
|
|
11.82
|
|
|
|
7.97
|
|
|
|
2.38
|
|
|
|
4.40
|
|
|
|
2.11
|
|
|
|
1.72
|
|
|
|
1.15
|
|
|
|
1.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mortgage Services
|
|
|
3.77
|
|
|
|
5.30
|
|
|
|
4.36
|
|
|
|
3.32
|
|
|
|
2.55
|
|
|
|
1.12
|
|
|
|
1.66
|
|
|
|
1.06
|
|
|
|
.94
|
|
|
|
.77
|
|
|
|
.75
|
|
|
|
|
|
Consumer Lending:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
.79
|
|
|
|
1.04
|
|
|
|
.74
|
|
|
|
.56
|
|
|
|
.80
|
|
|
|
.85
|
|
|
|
.85
|
|
|
|
.84
|
|
|
|
.98
|
|
|
|
.71
|
|
|
|
.74
|
|
|
|
|
|
Second lien
|
|
|
3.78
|
|
|
|
4.21
|
|
|
|
3.58
|
|
|
|
5.37
|
|
|
|
1.93
|
|
|
|
1.12
|
|
|
|
1.02
|
|
|
|
1.22
|
|
|
|
1.25
|
|
|
|
1.01
|
|
|
|
1.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consumer Lending
|
|
|
1.20
|
|
|
|
1.47
|
|
|
|
1.13
|
|
|
|
1.22
|
|
|
|
.96
|
|
|
|
.89
|
|
|
|
.88
|
|
|
|
.90
|
|
|
|
1.02
|
|
|
|
.75
|
|
|
|
.80
|
|
|
|
|
|
Foreign and all other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
1.05
|
|
|
|
.81
|
|
|
|
.81
|
|
|
|
1.30
|
|
|
|
1.34
|
|
|
|
.54
|
|
|
|
.89
|
|
|
|
.38
|
|
|
|
.99
|
|
|
|
.24
|
|
|
|
1.04
|
|
|
|
|
|
Second lien
|
|
|
1.35
|
|
|
|
1.23
|
|
|
|
1.39
|
|
|
|
2.23
|
|
|
|
1.29
|
|
|
|
.94
|
|
|
|
1.15
|
|
|
|
.91
|
|
|
|
.81
|
|
|
|
.63
|
|
|
|
.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Foreign and all other
|
|
|
1.28
|
|
|
|
1.13
|
|
|
|
1.25
|
|
|
|
2.03
|
|
|
|
1.30
|
|
|
|
.86
|
|
|
|
1.10
|
|
|
|
.81
|
|
|
|
.85
|
|
|
|
.56
|
|
|
|
.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
|
2.32
|
%
|
|
|
2.96
|
%
|
|
|
2.47
|
%
|
|
|
2.17
|
%
|
|
|
1.73
|
%
|
|
|
1.00
|
%
|
|
|
1.28
|
%
|
|
|
.98
|
%
|
|
|
.97
|
%
|
|
|
.75
|
%
|
|
|
.76
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) |
In December 2006, our Auto Finance business changed its
charge-off policy to provide that the principal balance of auto
loans in excess of the estimated net realizable value will be
charged-off 30 days (previously 90 days) after the
financed vehicle has been repossessed if it remains unsold,
unless it becomes 150 days contractually delinquent, at
which time such excess will be charged off. This resulted in a
one-time acceleration of charge-offs in December 2006, which
totaled $24 million. Excluding the impact of this change
the auto finance net charge-off ratio would have been
4.19 percent in the quarter ended December 31, 2006
and 3.46 percent for the full year 2006. Also in the fourth
quarter of 2006, our U.K. business discontinued a forbearance
program related to unsecured loans. Under the forbearance
program, eligible delinquent accounts would not be subject to
charge-off if certain minimum payment conditions were met. The
cancellation of this program resulted in a one-time acceleration
of charge-off which totaled $89 million. Excluding the
impact of the change in the U.K. forbearance program, the
personal non-credit card net charge-off ratio would have been
6.23 percent in the quarter ended December 31, 2006
and 7.45 percent for the full year 2006. Excluding the
impact of both changes, the total consumer charge-off ratio
would have been 3.17 percent for the quarter ended
December 31, 2006 and 2.89 percent for the full year
2006.
|
Net charge-offs as a percentage of average consumer receivables
increased 125 basis points for the full year of 2007 as
compared to the full year of 2006. With the exception of our
private label portfolio, we experienced higher charge-off across
all products, in particular our real estate secured and credit
card receivable portfolios as discussed above. The increase in
our Mortgages Services business reflects the higher delinquency
levels discussed above which are migrating to charge-off and the
impact of lower average receivable levels driven by the
elimination of correspondent purchases as well as the sale of
$2.7 billion of receivables during 2007. The increase in
our Consumer Lending business reflects portfolio seasoning and
higher losses in second lien loans purchased in 2004 through the
third quarter of 2006. The marked increase in delinquency in our
Consumer Lending real estate secured portfolio experienced in
the second half of 2007 as a result of marketplace conditions
will begin to migrate to charge-off largely in 2008. The
increase in charge-offs in the credit card portfolio is due to a
higher mix of non-prime receivables in our credit card
portfolio, portfolio seasoning, increased levels of personal
bankruptcy filings as compared to the exceptionally low levels
experienced in 2006 following effectiveness of a new bankruptcy
law in the United States and higher receivable balances. The
increase in the auto finance portfolio is due to seasoning of a
growing portfolio and weakened performance of certain 2006
originations. The private label charge-off ratio decreased
compared to the prior year quarter primarily due to recent
receivable growth, partially offset by portfolio seasoning. The
personal non-credit card charge-off ratio increased reflecting
portfolio seasoning as well as deterioration of 2006 and 2007
vintages in certain geographic regions.
We experienced an increase in overall net charge-off dollars
across all products in 2007. Higher losses at our Mortgage
Services and Consumer Lending businesses as discussed above, as
well as portfolio growth and seasoning in our credit card and
auto finance portfolios were major contributing factors to this
increase. The marked increase in delinquency in our Consumer
Lending real estate secured portfolio experienced in the second
half of 2007 largely as a result of marketplace conditions will
not begin to migrate to charge-off largely until 2008.
The increase in real estate charge-offs and REO expense as a
percent of average real estate secured receivables in 2007 was
primarily due to higher charge-offs in our real estate secured
portfolio as discussed above, as well as
78
HSBC Finance Corporation
higher REO expense due to higher levels of owned properties and
higher losses on sales due to lower home value appreciation and
in some cases home value depreciation.
Net charge-offs as a percentage of average consumer receivables
decreased 6 basis points for the full year of 2006 as
compared to the full year of 2005. Decreases in personal
bankruptcy net charge-offs in our credit card portfolio
following the October 2005 bankruptcy law changes in the United
States was substantially offset by higher charge-offs in our
real estate secured portfolio and in particular at our Mortgage
Services business due to the deteriorating performance of
certain loans acquired in 2005 and 2006. The increase in the
auto finance ratio for the full year 2006 reflects seasoning of
the portfolio and the one-time acceleration of charge-off
totaling $24 million. The decrease in the credit card net
charge-off ratio reflects the decrease in personal bankruptcy
filings discussed above, as well as the positive impact of
receivable growth and higher recoveries in our credit card
portfolio as a result of increased sales volumes of recent and
older charged-off accounts. The net charge-off ratio for our
private label receivables for the full year 2006 and 2005
reflects decreased average receivables and the deterioration of
the financial circumstances of some of our customers in the U.K.
The personal non-credit card charge-off ratio was broadly flat
with the prior year as increased charge-offs in both our
domestic and U.K. businesses were offset by recent growth in our
domestic business. Charge-offs increased in our domestic
business due to seasoning of a growing portfolio. Charge-offs in
our U.K. business increased due to declining receivables and the
deterioration of the financial circumstances of some of our
customers across the U.K. as well as the one-time acceleration
of charge-offs totaling $89 million from the cancellation
of a forbearance program in the U.K. as discussed above.
We experienced an increase in overall net charge-off dollars
across all products in 2006. Higher losses at our Mortgage
Services business as discussed above, as well as portfolio
growth and seasoning in our credit card and auto finance
portfolios were major contributing factors to this increase.
The increase in real estate charge-offs and REO expense as a
percent of average real estate secured receivables in 2006 was
primarily due to higher charge-offs in our real estate secured
portfolio as discussed above, as well as higher REO expense due
to higher levels of owned properties and higher losses on sales
due to the slowing housing market, including an actual decline
in property values in some markets.
79
HSBC Finance Corporation
Nonperforming
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
(in millions)
|
|
|
Nonaccrual
receivables(1)
|
|
$
|
7,562
|
|
|
$
|
4,807
|
|
|
$
|
3,608
|
|
Accruing consumer receivables 90 or more days delinquent
|
|
|
1,277
|
|
|
|
930
|
|
|
|
623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming receivables
|
|
|
8,839
|
|
|
|
5,737
|
|
|
|
4,231
|
|
Real estate owned
|
|
|
1,023
|
|
|
|
670
|
|
|
|
510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
9,862
|
|
|
$
|
6,407
|
|
|
$
|
4,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Nonaccrual receivables are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
(in millions)
|
|
|
Real estate secured:
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed-end:
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
3,387
|
|
|
$
|
1,893
|
|
|
$
|
1,366
|
|
Second lien
|
|
|
901
|
|
|
|
482
|
|
|
|
247
|
|
Revolving:
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
20
|
|
|
|
22
|
|
|
|
31
|
|
Second lien
|
|
|
349
|
|
|
|
187
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
|
4,657
|
|
|
|
2,584
|
|
|
|
1,707
|
|
Auto finance
|
|
|
483
|
|
|
|
394
|
|
|
|
323
|
|
Private label
|
|
|
74
|
|
|
|
76
|
|
|
|
75
|
|
Personal non-credit card
|
|
|
2,348
|
|
|
|
1,753
|
|
|
|
1,498
|
|
Commercial and other
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonaccrual receivables
|
|
$
|
7,562
|
|
|
$
|
4,807
|
|
|
$
|
3,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With the exception of private label receivables, all products
reported higher levels of nonperforming assets in 2007 primarily
due to higher overall delinquency levels as discussed above.
Real estate secured nonaccrual loans included stated income
loans at our Mortgage Services business of $1,194 million
at December 31, 2007, $571 million at
December 31, 2006, and $125 million at
December 31, 2005. Consistent with industry practice,
accruing consumer receivables 90 or more days delinquent
includes domestic credit card receivables.
Credit Loss Reserves We maintain credit loss
reserves to cover probable losses of principal, interest and
fees, including late, overlimit and annual fees. Credit loss
reserves are based on a range of estimates and are intended to
be adequate but not excessive. We estimate probable losses for
consumer receivables using a roll rate migration analysis that
estimates the likelihood that a loan will progress through the
various stages of delinquency, or buckets, and ultimately
charge-off based upon recent historical performance experience
of other loans in our portfolio. This analysis considers
delinquency status, loss experience and severity and takes into
account whether loans are in bankruptcy, have been restructured
or rewritten, or are subject to forbearance, an external debt
management plan, hardship, modification, extension or deferment.
Our credit loss reserves also take into consideration the loss
severity expected based on the underlying collateral, if any,
for the loan in the event of default. Delinquency status may be
affected by customer account management policies and practices,
such as the restructure of accounts, forbearance agreements,
extended payment plans, modification arrangements, external debt
management programs, loan rewrites and deferments. When customer
account management policies or changes thereto, shift loans from
a higher delinquency bucket to a lower
delinquency bucket, this will be reflected in our roll rate
statistics. To the extent that restructured accounts have a
greater propensity to roll to higher delinquency buckets, this
will be captured in the roll rates. Since the loss reserve is
computed based on the composite of all of these calculations,
this increase in roll rate will be applied to receivables in all
respective delinquency buckets, which will increase the overall
reserve level. In addition, loss reserves on consumer
receivables are maintained to reflect our judgment of portfolio
risk factors that may not be fully reflected in the statistical
roll rate calculation or when historical trends
80
HSBC Finance Corporation
are not reflective of current inherent losses in the portfolio.
Risk factors considered in establishing loss reserves on
consumer receivables include recent growth, product mix,
unemployment rates, bankruptcy trends, geographic
concentrations, loan product features such as adjustable rate
loans, economic conditions, such as national and local trends in
housing markets and interest rates, portfolio seasoning, account
management policies and practices, current levels of charge-offs
and delinquencies, changes in laws and regulations and other
items which can affect consumer payment patterns on outstanding
receivables, such as natural disasters and global pandemics.
While our credit loss reserves are available to absorb losses in
the entire portfolio, we specifically consider the credit
quality and other risk factors for each of our products. We
recognize the different inherent loss characteristics in each of
our products as well as customer account management policies and
practices and risk management/collection practices. Charge-off
policies are also considered when establishing loss reserve
requirements to ensure the appropriate reserves exist for
products with longer charge-off periods. We also consider key
ratios such as reserves to nonperforming loans and reserves as a
percentage of net charge-offs and months coverage ratios in
developing our loss reserve estimate. Loss reserve estimates are
reviewed periodically and adjustments are reported in earnings
when they become known. As these estimates are influenced by
factors outside of our control, such as consumer payment
patterns and economic conditions, there is uncertainty inherent
in these estimates, making it reasonably possible that they
could change.
The following table sets forth credit loss reserves for the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Credit loss reserves
|
|
$
|
10,905
|
|
|
$
|
6,587
|
|
|
$
|
4,521
|
|
|
$
|
3,625
|
|
|
$
|
3,793
|
|
Reserves as a percent of receivables
|
|
|
6.98
|
%(3)
|
|
|
4.07
|
%(3)
|
|
|
3.23
|
%
|
|
|
3.39
|
%
|
|
|
4.11
|
%
|
Reserves as a percent of net charge-offs
|
|
|
162.4
|
(3)
|
|
|
145.8
|
(3)
|
|
|
123.8
|
(2)
|
|
|
89.9
|
(1)
|
|
|
105.7
|
|
Reserves as a percent of nonperforming loans
|
|
|
123.4
|
|
|
|
114.8
|
|
|
|
106.9
|
|
|
|
100.9
|
|
|
|
92.8
|
|
|
|
(1)
|
In December 2004, we adopted FFIEC charge-off policies for our
domestic private label (excluding retail sales contracts at our
Consumer Lending business) and credit card portfolios and
subsequently sold this domestic private label receivable
portfolio. These events had a significant impact on this ratio.
Reserves as a percentage of net charge-offs excluding net
charge-offs associated with the sold domestic private label
portfolio and charge-off relating to the adoption of FFIEC was
109.2% at December 31, 2004.
|
|
(2)
|
The acquisition of Metris in December 2005 positively impacted
this ratio. Reserves as a percentage of net charge-offs at
December 31, 2005, excluding Metris was 118.2 percent.
|
|
(3)
|
This ratio was positively impacted in 2007 and 2006 by markedly
higher credit loss reserves at our Mortgage Services business
and, in 2007, at our Consumer Lending business.
|
Credit loss reserves at December 31, 2007 increased as
compared to December 31, 2006 as we recorded loss provision
in excess of net charge-offs of $4,310 million. The
increase was primarily a result of the higher delinquency and
loss estimates in our domestic real estate secured receivable
portfolio, our Consumer Lending personal non-credit card
portfolio and our domestic credit card receivable portfolio as
previously discussed. In addition, the higher credit loss
reserve levels reflect higher dollars of delinquency due to
higher levels of delinquent receivables driven by portfolio
seasoning and increased levels of personal bankruptcy filings as
compared to the exceptionally low levels experienced in 2006
following enactment of new bankruptcy legislation in the
United States in October 2005, partially offset by lower
overall receivables. Higher credit loss reserves at
December 31, 2007 also reflect a higher mix of non-prime
receivables in our Credit Card Services business.
As previously discussed, we are experiencing higher delinquency
and loss estimates at our Mortgage Services and Consumer Lending
businesses as compared to the year-ago period. In establishing
reserve levels, we considered the severity of losses expected to
be incurred above our historical experience given the current
housing market trends in the United States. During the second
half of 2007, unprecedented turmoil in the mortgage lending
industry resulted in reduced liquidity in the marketplace for
subprime mortgages. In response, lenders have markedly tightened
underwriting standards and reduced the availability of subprime
mortgages. As fewer financing options currently exist in the
marketplace for subprime customers, properties are remaining on
the market for longer periods of time
81
HSBC Finance Corporation
which contributes to home price depreciation. Therefore, it is
now generally believed that the slowdown in the housing market
will be deeper in terms of its impact on housing prices and the
duration of this slowdown will extend through 2008. For some of
our customers, the ability to refinance and access equity in
their homes is no longer an option as home price appreciation
remains stagnant in many markets and depreciates in others. As a
result, the impact of these industry trends on our portfolio has
worsened, resulting in higher charge-off and loss estimates in
our Mortgage Services and Consumer Lending real estate secured
receivable portfolios. We have considered these factors in
establishing our credit loss reserve levels.
We also considered the ability of borrowers to repay their first
lien adjustable rate mortgage loans at potentially higher
contractual reset rates given fluctuations in interest rates
since origination, as well as their ability to repay any
underlying second lien mortgage outstanding. Because first lien
adjustable rate mortgage loans are generally well secured,
ultimate losses associated with such loans are dependent to a
large extent on the status of the housing market and interest
rate environment. Therefore, although it is probable that
incremental losses will occur as a result of rate resets on
first lien adjustable rate mortgage loans, such losses are
estimable and, therefore, included in our credit loss reserves
only in situations where the payment has either already reset or
will reset in the near term. Additionally, a significant portion
of our second lien Mortgage Services mortgages are subordinate
to a first lien adjustable rate loan. For customers with second
lien mortgage loans that are subordinate to a first lien
adjustable rate mortgage loan, the probability of repayment of
the second lien mortgage loan is significantly reduced. The
impact of future changes, if any, in the housing market will not
have a significant impact on the ultimate loss expected to be
incurred since these loans, based on history and other factors,
are expected to perform like unsecured loans.
Credit loss reserve levels at December 31, 2006 increased
as compared to December 31, 2005 as we recorded loss
provision in excess of net charge-offs of $2,045 million. A
significant portion of the increase in credit loss reserves
resulted from higher delinquency and loss estimates at our
Mortgage Services business as previously discussed where we
recorded provision in excess of net charge-offs of
$1,668 million. In addition, the higher credit loss reserve
levels were a result of higher levels of receivables due in part
to lower securitization levels and higher dollars of delinquency
in our other businesses driven by growth and portfolio seasoning
including the Metris portfolio acquired in December 2005.
Reserve levels also increased due to weakening early stage
performance consistent with the industry trend in certain
Consumer Lending real estate secured loans originated since late
2005. These increases were partially offset by significantly
lower personal bankruptcy levels in the United States, a
reduction in the estimated loss exposure relating to Hurricane
Katrina and the benefit of stable unemployment in the United
States.
Credit loss reserve levels at December 31, 2005 reflect the
additional reserve requirements resulting from higher levels of
owned receivables including lower securitization levels, higher
delinquency levels in our portfolios driven by growth and
portfolio seasoning, the impact of Hurricane Katrina and minimum
monthly payment changes, additional reserves resulting from the
Metris acquisition and the higher levels of personal bankruptcy
filings in both the United States and the U.K. Credit loss
reserves at December 31, 2005 also reflect the sale of our
U.K. credit card business in December 2005 which decreased
credit loss reserves by $104 million. In 2005, we recorded
loss provision greater than net charge-offs of $890 million.
In 2004, we recorded loss provision greater than net charge-offs
of $301 million. Excluding the impact of adopting FFIEC
charge-off policies for domestic private label (excluding retail
sales contracts at our Consumer Lending business) and credit
card portfolios, we recorded loss provision $421 million
greater than net charge-offs in 2004.
Reserves as a percentage of receivables at December 31,
2007 were higher than at December 31, 2006 due to the
impact of the additional reserve requirements primarily in our
Mortgage Services, Consumer Lending and Credit Card Services
businesses as discussed above. Reserves as a percentage of
receivables at December 31, 2006 were higher than at
December 31, 2005 due to the impact of the additional
reserve requirements in our Mortgage Services business,
partially offset by lower levels of personal bankruptcy filing
in the United States and a reduction in the estimated loss
exposure estimates relating to Hurricane Katrina. Reserves as a
percentage of receivables at December 31, 2005 and 2004
were lower than at December 31, 2003 as a result of
portfolio growth, partially offset in 2005 by the impact of
additional credit loss reserves relating to the impact of
Hurricane Katrina, minimum monthly payment changes and increased
bankruptcy filings.
82
HSBC Finance Corporation
Reserves as a percentage of nonperforming loans increased in
2007 as reserve levels increased at a higher rate than the
increase in nonperforming loans driven by higher loss estimates
in our Consumer Lending, Mortgage Services and Credit Card
Services portfolios due to the marketplace and broader economic
conditions. Reserves as a percentage of nonperforming loans
increased in 2006 attributable to higher reserve levels
primarily as a result of higher loss estimates in our Mortgage
Services business. Reserves as a percentage of nonperforming
loans increased in 2005. While nonperforming loans increased in
2005, reserve levels in 2005 increased at a more rapid pace due
to receivable growth, the additional reserve requirements
related to Hurricane Katrina and impact of increased bankruptcy
filings on our secured receivable and personal non-credit card
receivable portfolios which did not migrate to charge-off until
2006.
Reserves as a percentage of net charge-offs were higher in 2007
as the increase in reserve levels outpaced the increase in net
charge-off during the year primarily due to the significant
increases in reserve levels in the second half of 2007 resulting
from the marketplace conditions and rising unemployment rates as
described above. Reserves as a percentage of net charge-offs
increased in 2006 as compared to 2005 as reserve levels grew
more rapidly than charge-offs primarily due to the higher
charge-offs expected in 2007 related to the deterioration in
certain mortgage loans acquired in 2005 and 2006. Reserves as a
percentage of net charge-offs increased in 2005. The 2005 ratio
was significantly impacted by the acquisition of Metris and the
2004 ratio was significantly impacted by both the sale of our
domestic private label receivable portfolio (excluding retail
sales contracts) in December 2004 as well as the adoption of
FFEIC charge-off policies for our domestic private label
(excluding retail sales contracts) and credit card portfolios.
Excluding these items, reserves as a percentage of net
charge-offs increased 900 basis points. While both our
reserve levels at December 31, 2005 and net charge-offs in
2005 were higher than 2004, our reserve levels grew for the
reasons discussed above more rapidly than our net charge-offs.
See the Analysis of Credit Loss Reserves Activity,
Reconciliations to U.S. GAAP Financial
Measures and Note 7, Credit Loss
Reserves, to the accompanying consolidated financial
statements for additional information regarding our loss
reserves.
Customer 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 modify
the terms of loans, either temporarily or permanently,
and/or to
reset the contractual delinquency status of an account to
current, based on indicia or criteria which, in our judgment,
evidence continued payment probability. Such restructuring
policies and practices vary by product and are designed to
manage customer relationships, maximize collection opportunities
and avoid foreclosure or repossession if reasonably possible. If
the account subsequently experiences payment defaults, it will
again become contractually delinquent.
In the third quarter of 2003, we implemented certain changes to
our restructuring policies. These changes were intended to
eliminate
and/or
streamline exception provisions to our existing policies and
were generally effective for receivables originated or acquired
after January 1, 2003. Receivables originated or acquired
prior to January 1, 2003 generally are not subject to the
revised restructure and customer account management policies.
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 by
Mortgage Services had the effect of only counting restructures
occurring on or after January 1, 2003 in assessing
restructure eligibility for purposes of the limitation that no
account may be restructured more than four times in a rolling
sixty-month period. Other business units may also elect to adopt
uniform policies. The changes adopted in the third quarter of
2003 have not had a significant impact on our business model or
on our results of operations as these changes have generally
been phased in as new receivables were originated or acquired.
As described more fully in the table below, we adopted FFIEC
account management policies regarding restructuring of past due
accounts for our domestic private label credit card and credit
card portfolios in December 2004. These changes have not had a
significant impact on our business model or on our results of
operations.
Currently, approximately three-fourths of all restructured
receivables are secured products, which in general have less
loss severity exposure because of the underlying collateral.
Credit loss reserves take into account whether loans have been
restructured, rewritten or are subject to forbearance, an
external debt management plan, modification,
83
HSBC Finance Corporation
extension or deferment. Our credit loss reserves also take into
consideration the loss severity expected based on the underlying
collateral, if any, for the loan.
Our restructuring policies and practices vary by product and are
described in the table that follows and reflect the revisions
from the adoption of FFIEC charge-off and account management
policies for our domestic private label (excluding retail sales
contracts at our Consumer Lending business) and credit card
receivables in December 2004. The fact that the restructuring
criteria may be met for a particular account does not require us
to restructure that account, and the extent to which we
restructure accounts that are eligible under the criteria will
vary depending upon our view of prevailing economic conditions
and other factors which may change from period to period. In
addition, for some products, accounts may be restructured
without receipt of a payment in certain special circumstances
(e.g. upon reaffirmation of a debt owed to us in
connection with a Chapter 7 bankruptcy proceeding). We use
account restructuring as an account and customer management tool
in an effort to increase the value of our account relationships,
and accordingly, the application of this tool is subject to
complexities, variations and changes from time to time. These
policies and practices are continually under review and
assessment to assure that they meet the goals outlined above,
and accordingly, we modify or permit exceptions to these general
policies and practices from time to time. In addition,
exceptions to these policies and practices may be made in
specific situations in response to legal or regulatory
agreements or orders.
In the policies summarized below, hardship
restructures and workout restructures refer to
situations in which the payment
and/or
interest rate may be modified on a temporary or permanent basis.
In each case, the contractual delinquency status is reset to
current. External debt management plans refers to
situations in which consumers receive assistance in negotiating
or scheduling debt repayment through public or private agencies.
|
|
|
|
|
Restructuring Policies and Practices
|
Historical Restructuring Policies
|
|
Following Changes Implemented
|
and
Practices(1),(2),(3)
|
|
In the Third Quarter 2003 and in December
2004(1),(2),(3)
|
|
|
Real estate secured
|
|
Real estate secured
|
|
|
|
Real Estate Overall
|
|
Real Estate Overall(4)
|
|
|
|
An account may be restructured if we receive two qualifying payments within the 60 days preceding the restructure; we may restructure accounts in hardship, disaster or strike situations with one qualifying payment or no payments
Accounts that have filed for Chapter 7 bankruptcy protection may be restructured upon receipt of a signed reaffirmation agreement
Accounts subject to a Chapter 13 plan filed with a bankruptcy court generally require one qualifying payment to be restructured
Except for bankruptcy reaffirmation and filed Chapter 13 plans, agreed automatic payment withdrawal or hardship/disaster/strike, accounts are generally limited to one restructure every twelve-months
Accounts generally
are not eligible for restructure until they are on the books for at least six months
|
|
Accounts may be restructured prior to the end of the monthly cycle following the receipt of two qualifying payments within 60 days
Accounts generally are not eligible for restructure until nine months after origination
Accounts will be limited to four collection restructures in a rolling sixty-month period
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 filed with a bankruptcy court generally may be restructured upon receipt of one qualifying payment
Except for bankruptcy reaffirmation and filed Chapter 13 plans, accounts will generally not
be restructured more than once in a twelve-month period
Accounts whose borrowers agree to pay by automatic withdrawal are generally restructured upon receipt of one qualifying payment after initial authorization for automatic withdrawal(5)
|
|
|
|
|
|
|
84
HSBC Finance Corporation
|
|
|
|
|
Restructuring Policies and Practices
|
Historical Restructuring Policies
|
|
Following Changes Implemented
|
and
Practices(1),(2),(3)
|
|
In the Third Quarter 2003 and in December
2004(1),(2),(3)
|
|
|
|
|
|
Real Estate Consumer Lending
|
|
Real Estate Mortgage Services(6),(7)
|
|
|
|
Accounts whose borrowers agree to pay by automatic withdrawal are generally restructured upon receipt of one qualifying payment after initial authorization for automatic withdrawal
|
|
Accounts will generally not be eligible for restructure until nine months after origination
Qualifying accounts may be restructured if less than 30 days delinquent.
|
|
|
|
Auto finance
|
|
Auto finance
|
|
|
|
Accounts may be extended if we receive one qualifying payment within the 60 days preceding the extension
Accounts may be extended no more than three months at a time and by no more than three months in any twelve-month period
Extensions are limited to six months over the contractual life
Accounts that 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
|
|
Accounts may generally be extended upon receipt of two qualifying payments within the 60 days preceding the extension
Accounts may be extended by no more than three months at a time
Accounts will be limited to four extensions in a rolling sixty-month period, but in no case will an account be extended more than a total of six months over the life
of the account
Accounts will be limited to one extension every six months
Accounts will not be eligible for extension until they are on the books for at least six months
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 the bankruptcy court
|
85
HSBC Finance Corporation
|
|
|
|
|
Restructuring Policies and Practices
|
Historical Restructuring Policies
|
|
Following Changes Implemented
|
and
Practices(1),(2),(3)
|
|
In the Third Quarter 2003 and in December
2004(1),(2),(3)
|
|
|
|
|
|
Credit Card
|
|
Credit card
|
|
|
|
Typically, accounts qualify for restructuring if we receive two or three qualifying payments prior to the restructure, but accounts in approved external debt management programs may generally be restructured upon receipt of one qualifying payment
Generally, accounts may be restructured once every six months
|
|
Accounts originated between January 2003 December 2004
Accounts typically qualified for restructuring if we received two or three qualifying payments prior to the restructure, but accounts in approved external debt management programs could generally be restructured upon receipt of one qualifying payment
Generally, accounts could have been
restructured once every six months
Beginning in December 2004, all accounts regardless of origination date
Domestic accounts qualify for restructuring if we receive three consecutive minimum monthly payments or a lump sum equivalent
Domestic accounts qualify for restructuring if the account has been in existence for a minimum of nine months and the
account has not been restructured in the prior twelve months and not more than once in the prior five years
Domestic accounts entering third party debt counseling programs are limited to one restructure in a five-year period in addition to the general limits of one restructure in a twelve-month period and two restructures in a five-year period
|
|
|
|
Private
label(8)
|
|
Private
label(8)
|
|
|
|
Private Label Overall
|
|
Private Label Overall
|
|
|
|
An account may generally be restructured if we receive one or more qualifying payments, depending upon the merchant
Restructuring is limited to once every six months (or longer, depending upon the merchant) for revolving accounts and once every twelve-months for closed-end accounts
|
|
Prior to December 2004 for accounts originated after October 2002
For certain merchants, receipt of two or three qualifying payments was required, except accounts in an approved external debt management program could be restructured upon receipt of one qualifying payment
|
86
HSBC Finance Corporation
|
|
|
|
|
Restructuring Policies and Practices
|
Historical Restructuring Policies
|
|
Following Changes Implemented
|
and
Practices(1),(2),(3)
|
|
In the Third Quarter 2003 and in December
2004(1),(2),(3)
|
|
|
|
|
|
Private Label Consumer Lending Retail Sales
Contracts
|
|
Private Label Consumer Lending Retail Sales Contracts
|
|
|
|
Accounts may be restructured if we/receive one qualifying payment within the 60 days preceding the restructure; may restructure accounts in a hardship/disaster/strike situation with one qualifying payment or no payments
If an account is never more than 90 days delinquent, it may generally be restructured up to three times per year
If an account
is ever more than 90 days 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
|
|
Accounts may be restructured upon receipt of two qualifying payments within the 60 days preceding the restructure
Accounts will be limited to one restructure every six months
Accounts will be limited to four collection restructures in a rolling sixty-month period
Accounts will not be eligible for restructure until six months after
origination
|
|
|
|
Personal non-credit card
|
|
Personal non-credit card
|
|
|
|
Accounts may be restructured if we receive one qualifying payment within the 60 days preceding the restructure; may restructure accounts in a hardship/disaster/strike situation with one qualifying payment or no payments
If an account is never more than 90 days delinquent, it may generally be restructured up to three times per year
If an account
is ever more than 90 days 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
|
|
Accounts may be restructured upon receipt of two qualifying payments within the 60 days preceding the restructure
Accounts will be limited to one restructure every six months
Accounts will be limited to four collection restructures in a rolling sixty-month period
Accounts will not be eligible for restructure until six months after
origination
|
|
|
|
(1) |
|
We employ account restructuring and
other customer account management policies and practices as
flexible customer account management tools as criteria may vary
by product line. In addition to variances in criteria by
product, criteria may also vary within a product line. 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
|
87
HSBC Finance Corporation
|
|
|
|
|
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) |
|
For our United Kingdom business,
all portfolios have a consistent account restructure policy. An
account may be restructured if we receive two or more qualifying
payments within two calendar months, limited to one restructure
every 12 months, with a lifetime limit of three times.
Prior to October 1, 2007, an account in a hardship
situation could be restructured if a customer made three
consecutive qualifying monthly payments within the last three
calendar months. Only one hardship restructure is permitted in
the life of a loan. After October 1, 2007 hardship
restructures were discontinued. Pending hardship restructures
were processed through December 31, 2007.
|
|
(3) |
|
Historically, policy changes are
not applied to the entire portfolio on the date of
implementation but are applied to new, or recently originated or
acquired accounts. However, the policies adopted in the third
quarter of 2003 for the Mortgage Services business and the
fourth quarter of 2004 for the domestic private label (excluding
retail sales contracts) and credit card portfolios were applied
more broadly. The policy changes for the Mortgage Services
business which occurred in the third quarter of 2003, unless
otherwise noted, were generally applied 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.
Implementation of this uniform policy had 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. These policy changes
adopted in the third quarter of 2003 did not have a significant
impact on our business model or results of operations as the
changes are, in effect, phased in as receivables were originated
or acquired. For the adoption of FFIEC policies which occurred
in the fourth quarter of 2004, the policies were effective
immediately for all receivables in the domestic private label
credit card and the credit card portfolios. Other business units
may also elect to adopt uniform policies in future periods.
|
|
(4) |
|
In some cases, as part of the
Consumer Lending Foreclosure Avoidance Program implemented in
2003, accounts may be restructured on receipt of one qualifying
payment. In the fourth quarter of 2006, this treatment was
extended to accounts that qualified for the Mortgage Services
account modification plan, as long as it has been at least six
months since such account was originated, even if the account
had been restructured in the last twelve months. Such
restructures may be in addition to the four collection
restructures in a rolling sixty-month period. Accounts receive
these restructures after proper verification of the
customers ability to make continued payments. This
generally includes the determination and verification of the
customers financial situation. At December 31, 2007
and 2006 Consumer Lending had $981 million and
$674 million, respectively, of accounts restructured on
receipt of one qualifying payment under the Foreclosure
Avoidance Program. At December 31, 2007 and 2006 Mortgage
Services had $647 million and $134 million of accounts
restructured on receipt of one qualifying payment under the
account modification plan.
|
|
(5) |
|
Our Mortgage Services business
implemented this policy for all accounts effective March 1,
2004. Effective January 1, 2008 for real estate overall,
the program that allowed accounts whose borrowers agree to pay
by automatic withdrawal to be restructured upon receipt of one
qualifying payment after initial authorization for automatic
withdrawal was discontinued.
|
|
(6) |
|
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.
|
|
(7) |
|
Prior to August 2006, Mortgage
Services accounts could not be restructured until nine months
after origination and six months after the loan was acquired.
|
|
(8) |
|
For our Canadian business, private
label accounts are limited to one restructure every four months
and if originated or acquired after January 1, 2003, two
qualifying payments must be received, the account must be on the
books for at least six months, at least six months must have
elapsed since the last restructure, and there may be no more
than four restructures in a rolling 60 month period.
|
The tables below summarize approximate restructuring statistics
in our managed basis domestic portfolio. Managed basis assumes
that securitized receivables have not been sold and remain on
our balance sheet. 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 generally serviced and collected without regard
to ownership and result in a similar credit loss exposure for
us. As the level of our securitized receivables have fallen over
time, managed basis and owned basis results have now largely
converged. As previously reported, in prior periods we used
certain assumptions and estimates to compile our restructure
statistics. The systemic counters used to compile the
information presented below exclude from the reported statistics
loans that have been reported as contractually delinquent but
have been reset to a current status because we have determined
that the loans should not have been considered delinquent (e.g.,
payment application processing errors). 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.
88
HSBC Finance Corporation
Total
Restructured by Restructure Period Domestic
Portfolio(1)
(Managed Basis)
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2007
|
|
|
2006
|
|
|
|
|
Never restructured
|
|
|
83.6
|
%
|
|
|
89.1
|
%
|
Restructured:
|
|
|
|
|
|
|
|
|
Restructured in the last 6 months
|
|
|
7.3
|
|
|
|
4.8
|
|
Restructured in the last 7-12 months
|
|
|
4.5
|
|
|
|
2.4
|
|
Previously restructured beyond 12 months
|
|
|
4.6
|
|
|
|
3.7
|
|
|
|
|
|
|
|
|
|
|
Total ever restructured
|
|
|
16.4
|
|
|
|
10.9
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
Restructured
by Product Domestic
Portfolio(1)
(Managed Basis)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Real estate
secured(3)
|
|
$
|
16,790
|
|
|
|
19.9
|
%
|
|
$
|
10,344
|
|
|
|
11.0
|
%
|
Auto finance
|
|
|
2,145
|
|
|
|
16.6
|
|
|
|
1,881
|
|
|
|
15.1
|
|
Credit card
|
|
|
788
|
|
|
|
2.6
|
|
|
|
816
|
|
|
|
2.9
|
|
Private label
|
|
|
27
|
|
|
|
18.4
|
|
|
|
31
|
|
|
|
10.9
|
|
Personal non-credit card
|
|
|
4,098
|
|
|
|
22.7
|
|
|
|
3,600
|
|
|
|
19.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(2)
|
|
$
|
23,848
|
|
|
|
16.4
|
%
|
|
$
|
16,672
|
|
|
|
10.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
(1) | | Excludes
foreign businesses, commercial and
other. |
|
(2) | | Total
including foreign businesses was 15.8 percent at
December 31, 2007 and 10.6 percent at
December 31,
2006. |
|
(3) | | The
Mortgage Services and Consumer Lending businesses real estate
secured restructures are as shown in the following
table: |
|
| | | | | | | |
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Mortgage Services
|
|
$
|
7,682
|
|
|
$
|
3,963
|
|
Consumer Lending
|
|
|
9,108
|
|
|
|
6,381
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
$
|
16,790
|
|
|
$
|
10,344
|
|
|
|
|
|
|
|
|
|
|
The increase in restructured loans in 2007 was primarily
attributable to higher contractual delinquency due to weak loan
performing portfolio growth and seasoning, including our
Mortgage Services and Consumer Lending businesses as we continue
to work with our customers who, in our judgment, evidence
continued payment probability. Additionally, beginning in the
fourth quarter of 2006, we expanded the use of account
modification at our Mortgage Services business to modify the
rate and/or
payment on a number of qualifying delinquent loans and
restructured certain of those accounts after receipt of one
modified payment and if certain other criteria were met. Such
accounts are included in the above restructure statistics. At
December 31, 2007, we have approximately 6,900 accounts in
our Mortgage Services real estate secured portfolio and
approximately 18,300 accounts in our Consumer Lending real
estate secured portfolio which have been restructured where the
delinquency status was reset and whose loan terms were also
modified. The outstanding receivable balance of these
restructured and modified loans was $960 million in our
Mortgage Services real estate secured portfolio and
$1.9 billion in our Consumer Lending real estate secured
portfolio at December 31, 2007. At December 31, 2007
and 2006 our two-months-and-over contractual delinquency
included $4.5 billion and $2.5 billion respectively of
restructured
89
HSBC Finance Corporation
accounts that subsequently experienced payment defaults. We
anticipate this number will continue to increase as restructure
volumes increase as discussed above.
Loans included in the table above which have been granted a
permanent modification, a twelve-month modification, or two or
more consecutive six-month modifications, are considered
troubled debt restructurings for purposes of determining loss
reserve estimates under SFAS No. 114, Accounting
by Creditors for Impairment of a Loan. For additional
information related to our troubled debt restructurings, see
Note 6, Receivables, to our accompanying
consolidated financial statements.
See Credit Quality Statistics for further
information regarding owned basis delinquency, charge-offs and
nonperforming loans.
In addition to our restructuring policies and practices, we
employ other customer account management techniques 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 borrowers ability to pay the contractually
specified amount for some period of time. 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 borrowers
agreeing to pay us an additional amount with future required
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. In most cases, the
delinquency status of an account is considered to be current if
the borrower immediately begins payment under the new account
terms. We are actively using loan modifications followed by an
account restructure if the borrower makes one or more modified
payments in response to increased volumes within our delinquent
Mortgage Services portfolio. This account management practice is
designed to assist borrowers who may have purchased a home with
an expectation of continued real estate appreciation or income
that has proven unfounded.
The amount of domestic and foreign managed receivables in
forbearance, modification, rewrites, modifications or other
customer account management techniques for which we have reset
delinquency and that is not included in the restructured or
delinquency statistics was approximately $.3 billion or
.2 percent of managed receivables at December 31, 2007
and 2006.
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. Our account management
actions vary by product and are under continual review and
assessment to determine that they meet the goals outlined above.
As part of our risk mitigation efforts relating to the affected
components of the Mortgage Services portfolio, in October 2006
we established a new program specifically designed to meet the
needs of select customers with ARMs. We are proactively writing
and calling customers who have adjustable rate mortgage loans
nearing the first reset that we expect will be the most impacted
by a rate adjustment. Through a variety of means, we assess
their ability to make the adjusted payment and, as appropriate
and in accordance with defined policies, we modify the loans,
allowing time for the customer to seek alternative financing or
improve their individual situation. These loan modifications
primarily involve a twelve-month temporary interest rate relief
by either maintaining the current interest rate for the entire
twelve-month period or resetting the interest rate for the
twelve-month period to a rate lower than originally required at
the first reset date. At the end of the twelve-month period, the
interest rate on the loan will reset in accordance with the
original loan terms unless the borrower qualifies for and is
granted a new modification. In 2007, we have made more than
33,000 outbound contacts and modified more than 8,500 loans with
an aggregate balance of $1.4 billion. Since the inception
of this program we have made more than 41,000 outbound
90
HSBC Finance Corporation
contacts and modified more than 10,300 loans with an aggregate
balance of $1.6 billion. These loans are not included in
the table above, as we have not reset delinquency on these loans
as they were not contractually delinquent at the time of the
modification. However, if the loan had been restructured in the
past for other reasons, it is included in the table above. We
also continue to manage a Foreclosure Avoidance Program for
delinquent Consumer Lending customers designed to provide relief
to qualifying homeowners through either loan restructuring or
modification. We also support a variety of national and local
efforts in homeownership preservation and foreclosure avoidance.
Geographic Concentrations The following table
reflects the percentage of domestic consumer receivables by
state which individually account for 5 percent or greater
of our domestic portfolio.
|
|
|
|
|
|
|
Percent of Total
|
|
|
|
Domestic
|
|
State
|
|
Receivables
|
|
|
|
|
California
|
|
|
12
|
%
|
Florida
|
|
|
7
|
|
New York
|
|
|
6
|
|
Ohio
|
|
|
5
|
|
Pennsylvania
|
|
|
5
|
|
Texas
|
|
|
5
|
|
Because of our centralized underwriting, collections and
processing functions, we can quickly change our credit standards
and intensify collection efforts in specific locations. We
believe this lowers risks resulting from such geographic
concentrations.
Our foreign consumer operations located in the United Kingdom
and the Republic of Ireland accounted for 3 percent of
consumer receivables and Canada accounted for 3 percent of
consumer receivables at December 31, 2007.
Liquidity
and Capital Resources
While the funding synergies resulting from our acquisition by
HSBC have allowed us to reduce our reliance on traditional
sources to fund our asset levels, our continued success is
dependent upon access to the global capital markets. Numerous
factors, internal and external, may impact our access to and the
costs associated with issuing debt in these markets. These
factors may include our debt ratings, overall capital markets
volatility and the impact of overall economic conditions on our
business. 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 supplemented
unsecured debt issuance during 2007 and 2006 with proceeds from
the continuing sale of newly originated domestic private label
receivables (excluding retail sales contracts) to HSBC Bank USA,
debt issued to affiliates, the issuance of additional common
equity to HINO and, in 2007, the sale of $2.7 billion of
loans from our Mortgage Services loan portfolio.
91
HSBC Finance Corporation
Debt due to affiliates and other HSBC related funding are
summarized in the following table:
|
|
|
|
|
|
|
|
|
December 31,
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(in billions)
|
|
|
Debt outstanding to HSBC subsidiaries:
|
|
|
|
|
|
|
|
|
Drawings on bank lines in the U.K. and Europe
|
|
$
|
3.5
|
|
|
$
|
4.3
|
|
Term debt
|
|
|
11.1
|
|
|
|
10.6
|
|
Preferred securities issued by Household Capital Trust VIII
to HSBC
|
|
|
.3
|
|
|
|
.3
|
|
|
|
|
|
|
|
|
|
|
Total debt outstanding to HSBC subsidiaries
|
|
|
14.9
|
|
|
|
15.2
|
|
|
|
|
|
|
|
|
|
|
Debt outstanding to HSBC clients:
|
|
|
|
|
|
|
|
|
Euro commercial paper
|
|
|
2.0
|
|
|
|
3.0
|
|
Term debt
|
|
|
.8
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
Total debt outstanding to HSBC clients
|
|
|
2.8
|
|
|
|
4.2
|
|
Cash received on bulk and subsequent sale of domestic private
label credit card receivables to HSBC Bank USA, net (cumulative)
|
|
|
19.2
|
|
|
|
17.9
|
|
Real estate secured receivable activity with HSBC Bank USA:
|
|
|
|
|
|
|
|
|
Cash received on sales (cumulative)
|
|
|
3.7
|
|
|
|
3.7
|
|
Direct purchases from correspondents (cumulative)
|
|
|
4.2
|
|
|
|
4.2
|
|
Reductions in real estate secured receivables sold to HSBC Bank
USA
|
|
|
(5.4
|
)
|
|
|
(4.7
|
)
|
|
|
|
|
|
|
|
|
|
Total real estate secured receivable activity with HSBC Bank USA
|
|
|
2.5
|
|
|
|
3.2
|
|
Cash received from sale of European Operations to HBEU affiliate
|
|
|
-
|
(2)
|
|
|
-
|
(2)
|
Cash received from sale of U.K. credit card business to HBEU
|
|
|
2.7
|
|
|
|
2.7
|
|
Capital contribution by HINO
|
|
|
2.4
|
(1)
|
|
|
1.4
|
(1)
|
|
|
|
|
|
|
|
|
|
Total HSBC related funding
|
|
$
|
44.5
|
|
|
$
|
44.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Capital contributions were made in
2007 to support ongoing operations and in 2006 in connection
with our acquisition of the Champion portfolio.
|
|
(2) |
|
Less than $100 million.
|
At December 31, 2007 and 2006, funding from HSBC, including
debt issuances to HSBC subsidiaries and clients, represented
13 percent of our total debt and preferred stock funding.
Cash proceeds of $2.7 billion during 2007 from the sale of
loans from our Mortgage Services loan portfolio and
$206 million from the November 2007 sale of the U.K.
Insurance Operations were used to partially pay down drawings on
bank lines from HBEU for the U.K. Cash proceeds of
$46 million from the November 2006 sale of the European
Operations and $2.7 billion from the December 2005 sale of
our U.K. credit card receivables to HBEU were used to partially
pay down drawings on bank lines from HBEU for the U.K. Proceeds
received from the bulk sale and subsequent daily sales of
domestic private label credit card receivables to HSBC Bank USA
of $19.2 billion were used to pay down short-term domestic
borrowings, including outstanding commercial paper balances.
Proceeds from each of these transactions were also used to fund
ongoing operations.
At December 31, 2007 and 2006, we had a commercial paper
back stop credit facility of $2.5 billion from HSBC
supporting domestic issuances and a revolving credit facility of
$5.7 billion from HBEU to fund our operations in the U.K.
In January 2008, the revolving credit facility from HBEU
decreased to $4.5 billion. At December 31, 2007,
$3.5 billion was outstanding under the HBEU lines for the
U.K. and no balances were outstanding under the domestic lines.
At December 31, 2006, $4.3 billion was outstanding
under the HBEU lines for the U.K. and no balances were
outstanding under the domestic lines. We had derivative
contracts with a notional value of $91.8 billion, or
approximately 97 percent of total derivative contracts,
outstanding with HSBC affiliates at
92
HSBC Finance Corporation
December 31, 2007. We had derivative contracts with a
notional value of $87.4 billion, or approximately
93 percent of total derivative contracts, outstanding with
HSBC affiliates at December 31, 2006.
Securities and other short-term
investments Securities totaled $3.2 billion at
December 31, 2007 and $4.7 billion at
December 31, 2006. Securities purchased under agreements to
resell totaled $1.5 billion at December 31, 2007 and
$171 million at December 31, 2006. Interest bearing
deposits with banks totaled $335 million at
December 31, 2007 and $424 million at
December 31, 2006. The decrease in securities and interest
bearing deposits with banks is due to the sale of the U.K.
Insurance Operations which had securities and interest bearing
deposits with banks of $441 million at the time of the sale
as well as the use of money market funds of $854 million at
December 31, 2006 to pay down secured financings during
2007. The increase in securities purchased under agreements to
resell is due to the decision to generate additional liquidity
based on current market conditions.
Commercial paper, bank and other
borrowings totaled $8.4 billion at
December 31, 2007 and $11.1 billion at
December 31, 2006. Included in this total was outstanding
Euro commercial paper sold to customers of HSBC of
$2.0 billion at December 31, 2007 and
$3.0 billion at December 31, 2006. Commercial paper
balances were lower at December 31, 2007 as a result of
lower short term funding requirements due to a reduction in the
overall size of the balance sheet. Our funding strategy requires
that committed bank credit facilities will at all times exceed
80 percent of outstanding commercial paper and that the
combination of bank credit facilities and undrawn committed
conduit facilities will, at all times, exceed 115 percent
of outstanding commercial paper.
Long term debt (with original maturities over
one year) decreased to $123.3 billion at December 31,
2007 from $127.6 billion at December 31, 2006.
Significant issuances during 2007 included the following:
|
|
|
|
|
$.4 billion of domestic and foreign medium-term notes
|
|
|
$2.4 billion of foreign currency-denominated bonds
|
|
|
$1.2 billion of
InterNotessm
(retail-oriented medium-term notes)
|
|
|
$4.0 billion of global debt
|
|
|
$10.4 billion of securities backed by real estate secured,
auto finance, credit card and personal non-credit card
receivables. For accounting purposes, these transactions were
structured as secured financings.
|
In the first quarter of 2006, we redeemed the junior
subordinated notes, issued to Household Capital Trust VI
with an outstanding principal balance of $206 million. In
the fourth quarter of 2006 we redeemed the junior subordinated
notes, issued to Household Capital Trust VII with an
outstanding principal balance of $206 million.
Preferred Shares In June 2005, we issued
575,000 shares of Series B Preferred Stock for
$575 million. Dividends on the Series B Preferred
Stock are non-cumulative and payable quarterly at a rate of
6.36 percent commencing September 15, 2005. The
Series B Preferred Stock may be redeemed at our option
after June 23, 2010. In 2007 and 2006, we paid dividends
each year totaling $37 million on the Series B
Preferred Stock.
Common Equity In the first quarter of 2007,
HINO made a capital contribution of $200 million and in the
fourth quarter of 2007 made an additional capital contribution
of $750 million, each in exchange for one share of common
stock. These capital contributions were to support ongoing
operations and to maintain capital at levels we believe are
prudent in the current market conditions. In 2006, in connection
with our purchase of the Champion portfolio, HINO made a capital
contribution of $163 million. Subsequent to
December 31, 2007, HINO made a capital contribution of
$1.6 billion in exchange for one share of common stock.
Selected capital ratios In managing capital,
we develop targets for tangible shareholders(s)
equity plus owned loss reserves to tangible managed assets
(TETMA + Owned Reserves) and tangible common equity
to tangible managed assets excluding HSBC acquisition purchase
accounting adjustments. These ratio targets are based on
discussions with HSBC and rating agencies, risks inherent in the
portfolio, the projected operating environment and related
risks, and any acquisition objectives. We and certain rating
agencies monitor ratios excluding the impact of the HSBC
acquisition purchase accounting adjustments as we believe that
they represent non-cash transactions which do not affect our
business operations, cash flows or ability to meet our debt
obligations. These ratios also exclude the equity impact of
SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities,
93
HSBC Finance Corporation
the equity impact of SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, and the
impact of the adoption of SFAS No. 159, The Fair
Value Option for Financial Assets and Liabilities,
including the subsequent changes in fair value recognized in
earnings associated with debt for which we elected the fair
value option and the related derivatives. Preferred securities
issued by certain non-consolidated trusts are also considered
equity in the TETMA + Owned Reserves calculations because of
their long-term subordinated nature and our ability to defer
dividends. Managed assets include owned assets plus loans which
we have sold and service with limited recourse. Our targets may
change from time to time to accommodate changes in the operating
environment or other considerations such as those listed above.
In the fourth quarter of 2007, Moodys,
Standard & Poors and Fitch changed the total
outlook on our issuer default rating from positive
to stable.
Selected capital ratios are summarized in the following table:
|
|
|
|
|
|
|
|
|
December 31,
|
|
2007
|
|
|
2006
|
|
|
|
|
TETMA + Owned
Reserves(1),(2)
|
|
|
13.98
|
%
|
|
|
11.02
|
%
|
Tangible common equity to tangible managed
assets(1)
|
|
|
6.09
|
|
|
|
6.08
|
|
Common and preferred equity to owned assets
|
|
|
8.56
|
|
|
|
11.21
|
|
Excluding HSBC acquisition purchase accounting adjustments:
|
|
|
|
|
|
|
|
|
TETMA + Owned
Reserves(1),
|
|
|
14.18
|
|
|
|
11.67
|
|
Tangible common equity to tangible managed
assets(1),(2)
|
|
|
6.27
|
|
|
|
6.72
|
|
|
|
|
(1)
|
|
TETMA + Owned Reserves and tangible
common equity to tangible managed assets excluding HSBC
acquisition purchase accounting adjustments represent
non-U.S.
GAAP financial ratios that are used by HSBC Finance Corporation
management and applicable 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-U.S.
GAAP financial measures and Reconciliations to U.S. GAAP
Financial Measures for quantitative reconciliations to the
equivalent U.S. GAAP basis financial measure.
|
|
(2)
|
|
On a proforma basis, if the capital
contribution on February 12, 2008 of $1.6 billion had
instead been received on December 31, 2007, our TETMA +
Owned Reserves ratio would have been 99 basis points higher
and our tangible common equity to tangible managed assets ratio,
excluding HSBC acquisition purchase accounting adjustments would
have been 99 basis points higher.
|
HSBC Finance Corporation. HSBC Finance
Corporation is an indirect wholly owned subsidiary of HSBC
Holdings plc. On March 28, 2003, HSBC acquired Household
International, Inc. by way of merger in a purchase business
combination. Effective January 1, 2004, HSBC transferred
its ownership interest in Household to a wholly owned
subsidiary, HSBC North America Holdings Inc., which subsequently
contributed Household to its wholly owned subsidiary, HINO. On
December 15, 2004, Household merged with its wholly owned
subsidiary, Household Finance Corporation, with Household as the
surviving entity. At the time of the merger, Household changed
its name to HSBC Finance Corporation.
HSBC Finance Corporation is the parent company that owns the
outstanding common stock of its subsidiaries. Our main source of
funds is cash received from operations and subsidiaries in the
form of dividends. In addition, we receive cash from third
parties and affiliates by issuing preferred stock and debt.
HSBC Finance Corporation received cash dividends from its
subsidiaries of $169 million in 2007 and $74 million
in 2006.
In conjunction with the acquisition by HSBC, we issued a series
of 6.50 percent cumulative preferred stock in the amount of
$1.1 billion (Series A Preferred Stock) to
HSBC on March 28, 2003. In September 2004, HSBC
North America issued a new series of preferred stock
totaling $1.1 billion to HSBC in exchange for our
Series A Preferred Stock. In October 2004, our immediate
parent, HINO, issued a new series of preferred stock to HSBC
North America in exchange for our Series A Preferred Stock.
On December 15, 2005, we issued 4 shares of common
stock to HINO in exchange for the $1.1 billion
Series A Preferred Stock plus the accrued and unpaid
dividends and the Series A Preferred Stock was retired.
94
HSBC Finance Corporation
In November 2005, we issued $1.0 billion of preferred
securities of Household Capital Trust IX. The interest rate
on these securities is 5.911% from the date of issuance through
November 30, 2015 and is payable semiannually beginning
May 30, 2006. After November 30, 2015, the rate
changes to the three-month LIBOR rate, plus 1.926% and is
payable quarterly beginning on February 28, 2016. In June
2005, we redeemed the junior subordinated notes issued to the
Household Capital Trust V with an outstanding principal
balance of $309 million.
In June 2005, we issued 575,000 shares of Series B
Preferred Stock for $575 million. Dividends on the
Series B Preferred Stock are non-cumulative and payable
quarterly at a rate of 6.36 percent commencing
September 15, 2005. The Series B Preferred Stock may
be redeemed at our option after June 23, 2010. In 2007 and
2006, we paid dividends each year totaling $37 million on
the Series B Preferred Stock.
HSBC Finance Corporation has a number of obligations to meet
with its available cash. It must be able to service its debt and
meet the capital needs of its subsidiaries. It also must pay
dividends on its preferred stock and may pay dividends on its
common stock. Dividends of $812 million were paid to HINO,
our immediate parent company, on our common stock in 2007 and
$809 million were paid in 2006. We anticipate paying future
dividends to HINO, but will maintain our capital at levels that
we perceive to be consistent with our current ratings either by
limiting the dividends to or through capital contributions from
our parent.
At various times, we will make capital contributions to our
subsidiaries to comply with regulatory guidance, support
receivable growth, maintain acceptable investment grade ratings
at the subsidiary level, or provide funding for long-term
facilities and technology improvements. HSBC Finance Corporation
made capital contributions to certain subsidiaries of
$.5 billion in 2007 and $1.5 billion in 2006.
Subsidiaries At December 31, 2007, HSBC
Finance Corporation had one major subsidiary, Household Global
Funding (Global Funding) which holds all
international operations. Prior to December 15, 2004, we
had two major subsidiaries: Household Finance Corporation
(HFC), which managed all domestic operations, and
Global Funding. On December 15, 2004, HFC merged with and
into Household International which changed its name to HSBC
Finance Corporation.
Domestic Operations HSBC Finance Corporation
manages all domestic operations directly and funds these
businesses primarily through the collection of receivable
balances; issuing commercial paper, medium-term debt and
long-term debt; borrowing under secured financing facilities and
selling consumer receivables. Domestically, HSBC Finance
Corporation markets its commercial paper primarily through an
in-house sales force. The vast majority of our domestic
medium-term notes and long-term debt is now marketed through
subsidiaries of HSBC. Intermediate and long-term debt may also
be marketed through unaffiliated investment banks.
At December 31, 2007, advances from subsidiaries of HSBC
for our domestic operations totaled $11.1 billion. At
December 31, 2006, advances from subsidiaries of HSBC for
our domestic operations totaled $10.6 billion. The interest
rates on funding from HSBC subsidiaries are market-based and
comparable to those available from unaffiliated parties.
Outstanding commercial paper related to our domestic operations
totaled $7.8 billion at December 31, 2007 and
$10.8 billion at December 31, 2006.
Following our acquisition by HSBC, we established a new Euro
commercial paper program, largely targeted towards HSBC clients,
which expanded our European investor base. Under the Euro
commercial paper program, commercial paper denominated in Euros,
British pounds, Swiss francs and U.S. dollars is sold to
foreign investors. Outstanding Euro commercial paper sold to
customers of HSBC totaled $2.0 billion at December 31,
2007 and $3.0 billion at December 31, 2006. The
decrease in Euro commercial paper outstanding was due to a cost
differential that made domestic commercial paper a more cost
efficient source of funding. We actively manage the level of
commercial paper outstanding to ensure availability to core
investors while maintaining excess capacity within our
internally-established targets as communicated with the rating
agencies.
95
HSBC Finance Corporation
The following table shows various debt issuances by HSBC Finance
Corporation and its domestic subsidiaries during 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(in billions)
|
|
|
Medium term notes, excluding issuances to HSBC customers and
subsidiaries of HSBC
|
|
$
|
-
|
|
|
$
|
6.0
|
|
Medium term notes issued to subsidiaries of HSBC
|
|
|
1.1
|
|
|
|
.8
|
|
Foreign currency-denominated bonds, excluding issuances to HSBC
customers and subsidiaries of HSBC
|
|
|
2.4
|
|
|
|
7.9
|
|
Global debt
|
|
|
4.0
|
|
|
|
9.3
|
|
InterNotessm
(retail-oriented medium-term notes)
|
|
|
1.2
|
|
|
|
1.8
|
|
Securities backed by real estate secured, auto finance, credit
card and personal non-credit card receivables structured as
secured financings
|
|
|
10.4
|
|
|
|
14.9
|
|
In order to eliminate future foreign exchange risk, currency
swaps were used at the time of issuance to fix in
U.S. dollars substantially all foreign-denominated notes in
2007 and 2006.
HSBC Finance Corporation issued securities backed by dedicated
receivables of $10.4 billion in 2007 and $14.9 billion
in 2006. For accounting purposes, these transactions were
structured as secured financings, therefore, the receivables and
the related debt remain on our balance sheet. At
December 31, 2007, closed-end real estate secured, auto
finance, credit card and personal non-credit card receivables
totaling $30.9 billion secured $23.2 billion of
outstanding debt. At December 31, 2006, closed-end real
estate secured, auto finance, credit card and personal
non-credit card receivables totaling $28.1 billion secured
$21.8 billion of outstanding debt.
HSBC Finance Corporation had committed
back-up
lines of credit totaling $11.7 billion at December 31,
2007 for its domestic operations. Included in the
December 31, 2007 total are $2.5 billion of revolving
credit facilities with HSBC. None of these
back-up
lines were drawn upon in 2007. The
back-up
lines expire on various dates through 2010. The most restrictive
financial covenant contained in the
back-up line
agreements that could restrict availability is an obligation to
maintain a minimum shareholders(s) equity plus the
outstanding trust preferred stock of $11.0 billion. At
December 31, 2007, minimum shareholders(s)
equity balance plus outstanding trust preferred stock was
$15.4 billion which is substantially above the required
minimum balance. In 2008, $2.9 billion of
back-up
lines from third parties are scheduled to expire. Due to the
condition of the subprime credit markets, we anticipate a
portion of these lines will not be renewed. We do not expect
this reduction will have a significant impact on the
availability of short term funding.
At December 31, 2007, we had conduit credit facilities with
commercial and investment banks under which our domestic
operations may issue securities backed with up to
$17.4 billion of receivables, including up to
$14.2 billion of auto finance, credit card and personal
non-credit card and $3.2 billion of real estate secured
receivables. Our total conduit capacity decreased by
$1.6 billion in 2007. Conduit capacity for real estate
secured receivables was decreased $.7 billion and capacity
for other products was decreased $.9 billion. These
reductions are primarily the result of decisions by the
providing institutions to reduce their overall exposure to
subprime receivables. The facilities are renewable at the
banks option. At December 31, 2007,
$11.2 billion of auto finance, credit card, personal
non-credit card and real estate secured receivables were used in
collateralized funding transactions structured either as
securitizations or secured financings under these funding
programs. The amount available under the facilities will vary
based on the timing and volume of public securitization
transactions. We also anticipate a reduction in the available
conduit credit facilities as they mature throughout 2008 due to
continuing concerns about subprime credit quality. For the
conduit credit facilities that do renew, credit performance
requirements will be more restrictive and pricing will increase
to reflect the quality of the underlying assets. Our 2008
funding plan incorporates the anticipated reductions in these
facilities.
96
HSBC Finance Corporation
Global Funding Global Funding includes our
foreign subsidiaries in the United Kingdom, the Republic of
Ireland and Canada. Global Fundings assets were
$10.8 billion at December 31, 2007 and
$10.9 billion at December 31, 2006. Consolidated
shareholders equity includes the effect of translating our
foreign subsidiaries assets, liabilities and operating
results from their local currency into U.S. dollars.
Each foreign subsidiary conducts its operations using its local
currency. While each foreign subsidiary usually borrows funds in
its local currency, both our United Kingdom and Canadian
subsidiaries have historically borrowed funds in foreign
currencies. This allowed the subsidiaries to achieve a lower
cost of funds than that available at that time in their local
markets. These borrowings were converted from foreign currencies
to their local currencies using currency swaps at the time of
issuance.
United Kingdom Our United Kingdom operation
is funded with HBEU debt and previously issued long-term debt.
The following table summarizes the funding of our United Kingdom
operation:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
(in billions)
|
|
Due to HSBC affiliates
|
|
$
|
3.5
|
|
|
$
|
4.3
|
|
Long term debt
|
|
|
.2
|
|
|
|
.2
|
|
At December 31, 2007, $.2 billion of long term debt
was guaranteed by HSBC Finance Corporation. HSBC Finance
Corporation receives a fee for providing the guarantee. In 2007
and 2006, our United Kingdom subsidiary primarily received its
funding directly from HSBC.
As previously discussed, in November 2007, we sold our U.K.
Insurance Operations to Aviva for approximately
$206 million and used the proceeds to partially pay down
amounts due to HBEU on bank lines in the U.K. Additionally, in
November 2006, our U.K. operations sold its European Operations
to a subsidiary of HBEU for total consideration of
$46 million and used the proceeds to partially pay down
amounts due to HBEU on bank lines in the U.K.
Canada Our Canadian operation is funded with
commercial paper, intermediate and long-term debt. Outstanding
commercial paper totaled $673 million at December 31,
2007 compared to $223 million at December 31, 2006.
Given disruptions in the Canadian debt markets in the second
half of 2007, we elected to increase the level of funding
generated through commercial paper issuance. We anticipate
reducing the level of Canadian commercial paper outstanding over
the first half of 2008. Intermediate and long-term debt totaled
$4.1 billion at December 31, 2007 compared to
$3.4 billion at December 31, 2006. At
December 31, 2007, $4.8 billion of the Canadian
subsidiarys debt was guaranteed by HSBC Finance
Corporation for which it receives a fee for providing the
guarantee. Committed
back-up
lines of credit for Canada were approximately $102 million
at December 31, 2007. All of these
back-up
lines are guaranteed by HSBC Finance Corporation and none were
used in 2007. In 2007, our Canadian operations declared a
dividend of $51 million to be paid to HSBC Finance
Corporation in 2008.
97
HSBC Finance Corporation
2008 Funding Strategy As discussed
previously, the acquisition by HSBC markedly improved our access
to the capital markets as well as expanded our access to a
worldwide pool of potential investors. Our current estimated
domestic funding needs and sources for 2008 are summarized in
the table that follows.
|
|
|
|
|
|
|
(in billions)
|
|
|
|
|
Funding needs:
|
|
|
|
|
Net asset growth/(attrition)
|
|
|
(18) - (10)
|
|
Commercial paper and term debt maturities
|
|
|
26 - 28
|
|
Secured financings and conduit facility maturities
|
|
|
12 - 16
|
|
Other
|
|
|
(1) - 3
|
|
|
|
|
|
|
Total funding needs
|
|
|
$19 - 37
|
|
|
|
|
|
|
Funding sources:
|
|
|
|
|
Commercial paper and term debt issuance
|
|
|
7 - 19
|
|
Secured financings and conduit facility renewals
|
|
|
12 - 16
|
|
HSBC and HSBC subsidiaries
|
|
|
0 - 2
|
|
|
|
|
|
|
Total funding sources
|
|
|
$19 - 37
|
|
|
|
|
|
|
As previously discussed, we have experienced deterioration in
the performance of mortgage loan originations in our Mortgage
Services and Consumer Lending businesses. As a result in 2007,
we decided to discontinue new correspondent channel acquisitions
and cease operations of Decision One. Additionally, we have
eliminated certain product offerings and tightened underwriting
criteria in our Consumer Lending business. These actions,
combined with normal portfolio attrition and risk mitigation
efforts, will result in a continued reduction in our aggregate
portfolio in 2008. As opportunities arise, we may also consider
the possibility of selling selected portfolios, similar to the
$2.7 billion sales of real estate secured receivables
completed in 2007. Constrained risk appetite as well as any
decisions to sell selected portfolios will result in attrition
in the balance sheet during 2008.
Commercial paper outstanding in 2008 is expected to be lower
than 2007 balances, except during the first three months of 2008
when commercial paper balances will be temporarily high due to
the seasonal activity of our TFS business. The majority of
outstanding commercial paper is expected to be directly placed,
domestic commercial paper. Euro commercial paper will continue
to be marketed predominately to HSBC clients.
Term debt issuances are expected to utilize several ongoing
programs to achieve the desired funding in 2008. Approximately
79 percent of term debt funding is expected to be achieved
through transactions including U.S. dollar global and Euro
transactions and large medium-term note (MTN)
offerings. Domestic retail note programs are expected to account
for approximately 11 percent of term debt issuances. The
remaining term debt issuances are expected to consist of smaller
domestic and foreign currency MTN offerings.
HSBC received regulatory approval in 2003 to provide the direct
funding required by our United Kingdom operations. Accordingly,
in 2004 we eliminated all
back-up
lines of credit which had previously supported our United
Kingdom subsidiary. All new funding for our United Kingdom
subsidiary is now provided directly by HSBC. Our Canadian
operation will continue to fund itself independently through
traditional third-party funding sources such as commercial paper
and medium term-notes. Canadian funding needs in 2008 are
expected to be in line with 2007 levels.
Capital Expenditures We made capital
expenditures of $135 million in 2007 which included costs
related to the new office building in the Village of Mettawa,
Illinois of $89 million. Capital expenditures in 2006 were
$102 million which included costs related to the new office
building in the Village of Mettawa, Illinois of $29 million.
98
HSBC Finance Corporation
Commitments We also enter into commitments to
meet the financing needs of our customers. In most cases, we
have the ability to reduce or eliminate these open lines of
credit. As a result, the amounts below do not necessarily
represent future cash requirements at December 31, 2007:
|
|
|
|
|
|
|
(in billions)
|
|
|
|
|
Private label, and credit cards
|
|
|
162
|
|
Other consumer lines of credit
|
|
|
9
|
|
|
|
|
|
|
Open lines of
credit(1)
|
|
$
|
171
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes an estimate for acceptance
of credit offers mailed to potential customers prior to
December 31, 2007.
|
In January 2008, we extended a line of credit to H&R Block
for up to $3.0 billion to fund the purchase of a
participation interest in refund anticipation loans. This
available credit outstanding under this line will step down to
$120 million as of March 30, 2008 and expires on
June 30, 2008. Additionally, in the event the balance
outstanding under this line of credit falls below
$60 million, the line of credit may be terminated earlier.
Contractual Cash Obligations The following
table summarizes our long-term contractual cash obligations at
December 31, 2007 by period due:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
|
|
(in millions)
|
|
|
Principal balance of debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to affiliates
|
|
$
|
3,543
|
|
|
$
|
2,031
|
|
|
$
|
1,551
|
|
|
$
|
619
|
|
|
$
|
1,250
|
|
|
$
|
5,908
|
|
|
$
|
14,902
|
|
Long term debt (including secured financings)
|
|
|
32,844
|
|
|
|
23,821
|
|
|
|
15,773
|
|
|
|
12,808
|
|
|
|
11,443
|
|
|
|
26,759
|
|
|
|
123,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
36,387
|
|
|
|
25,852
|
|
|
|
17,324
|
|
|
|
13,427
|
|
|
|
12,693
|
|
|
|
32,667
|
|
|
|
138,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum rental payments
|
|
|
161
|
|
|
|
127
|
|
|
|
94
|
|
|
|
61
|
|
|
|
34
|
|
|
|
107
|
|
|
|
584
|
|
Minimum sublease income
|
|
|
37
|
|
|
|
27
|
|
|
|
15
|
|
|
|
5
|
|
|
|
2
|
|
|
|
-
|
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating leases
|
|
|
124
|
|
|
|
100
|
|
|
|
79
|
|
|
|
56
|
|
|
|
32
|
|
|
|
107
|
|
|
|
498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations under merchant and affinity programs
|
|
|
139
|
|
|
|
126
|
|
|
|
124
|
|
|
|
119
|
|
|
|
117
|
|
|
|
339
|
|
|
|
964
|
|
Non-qualified pension and postretirement benefit
liabilities(1)
|
|
|
31
|
|
|
|
27
|
|
|
|
36
|
|
|
|
36
|
|
|
|
40
|
|
|
|
993
|
|
|
|
1,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
36,681
|
|
|
$
|
26,105
|
|
|
$
|
17,563
|
|
|
$
|
13,638
|
|
|
$
|
12,882
|
|
|
$
|
34,106
|
|
|
$
|
140,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Expected benefit payments
calculated include future service component.
|
These cash obligations could be funded primarily through cash
collections on receivables, from the issuance of new unsecured
debt or through secured financings of receivables. Our
receivables and other liquid assets generally have shorter lives
than the liabilities used to fund them.
99
HSBC Finance Corporation
In January 2006, we entered into a lease for a building in the
Village of Mettawa, Illinois. The new facility will consolidate
our Prospect Heights, Mount Prospect and Deerfield offices.
Construction of the building began in the spring of 2006 and the
relocation is planned for the first and second quarters of 2008.
The future lease payments for this building are currently
estimated as follows:
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
2008
|
|
$
|
5
|
|
2009
|
|
|
11
|
|
2010
|
|
|
11
|
|
2011
|
|
|
11
|
|
Thereafter
|
|
|
115
|
|
|
|
|
|
|
|
|
$
|
153
|
|
|
|
|
|
|
Our purchase obligations for goods and services at
December 31, 2007 were not significant.
Off
Balance Sheet Arrangements and Secured Financings
Securitizations and Secured
Financings Securitizations (collateralized funding
transactions 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
(collateralized funding transactions which do not receive sale
treatment under SFAS No. 140) of consumer
receivables have been a source of funding and liquidity for us.
Securitizations and secured financings have been used to limit
our reliance on the unsecured debt markets and can be more
cost-effective sources of alternative funds.
In a securitization, a designated pool of non-real estate
consumer receivables is removed from the balance sheet and
transferred through a limited purpose financing subsidiary 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 and debt service. 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.
Certain securitization trusts, such as credit cards, are
established at fixed levels and, due to the revolving nature of
the underlying receivables, require the sale of new receivables
into the trust to replace runoff so that the principal dollar
amount of the investors interest remains unchanged. We
refer to such activity as replenishments. Once the revolving
period ends, the amortization period begins and the trust
distributes principal payments, in addition to interest, to the
investors.
When loans are securitized in transactions structured as sales,
we receive cash proceeds from investors, net of transaction
costs and expenses. These proceeds are generally used to re-pay
other debt and corporate obligations and to fund new loans. The
investors shares of finance charges and fees received from
the securitized loans are collected each month and are primarily
used to pay investors for interest and credit losses and to pay
us for servicing fees. We retain any excess cash flow remaining
after such payments are made to investors.
Generally, for each securitization and secured financing we
utilize credit enhancement to obtain investment grade ratings on
the securities issued by the trust. To ensure that adequate
funds are available to pay investors their contractual return,
we may retain various forms of interests in assets securing a
funding transaction, whether structured as a securitization or a
secured financing, such as over-collateralization, subordinated
series, residual
100
HSBC Finance Corporation
interests in the receivables (in the case of securitizations) or
we may fund cash accounts. Over-collateralization is created by
transferring receivables to the trust issuing the securities
that exceed the balance of the securities to be issued.
Subordinated interests provide additional assurance of payment
to investors holding senior securities. Residual interests are
also referred to as interest-only strip receivables and
represent rights to future cash flows from receivables in a
securitization trust after investors receive their contractual
return. Cash accounts can be funded by an initial deposit at the
time the transaction is established
and/or from
interest payments on the receivables that exceed the
investors contractual return.
Our retained securitization interests are included in
receivables on our consolidated balance sheets. These retained
interests were comprised of the following at December 31,
2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(in millions)
|
|
|
Overcollateralization
|
|
$
|
16
|
|
|
$
|
52
|
|
Interest-only strip receivables
|
|
|
-
|
|
|
|
6
|
|
Cash spread accounts
|
|
|
2
|
|
|
|
40
|
|
Other subordinated interests
|
|
|
-
|
|
|
|
870
|
|
|
|
|
|
|
|
|
|
|
Total retained securitization interests
|
|
$
|
18
|
|
|
$
|
968
|
|
|
|
|
|
|
|
|
|
|
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
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.
Securitizations are treated as secured financings under both
IFRS and U.K. GAAP. In order to align our accounting treatment
with that of HSBC initially under U.K. GAAP and now under IFRS,
we began to structure all new collateralized funding
transactions as secured financings in the third quarter of 2004.
However, because existing public credit card transactions were
structured as sales to revolving trusts that require
replenishments of receivables to support previously issued
securities, receivables continued to be sold to these trusts and
the resulting replenishment gains recorded until the revolving
periods ended, the last of which occurred in September of 2007.
The termination of sale treatment on new collateralized funding
activity reduced our reported net income under U.S. GAAP.
There was no impact, however, on cash received from operations.
101
HSBC Finance Corporation
Replenishment securitizations and secured financings were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
(in millions)
|
|
|
Replenishment securitizations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card
|
|
$
|
1,540
|
|
|
$
|
2,469
|
|
|
$
|
8,620
|
|
Personal non-credit card
|
|
|
5
|
|
|
|
71
|
|
|
|
211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,545
|
|
|
$
|
2,540
|
|
|
$
|
8,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured financings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate secured
|
|
$
|
3,283
|
|
|
$
|
4,767
|
|
|
$
|
4,516
|
|
Auto finance
|
|
|
1,596
|
|
|
|
2,843
|
|
|
|
3,418
|
|
Credit card
|
|
|
4,168
|
|
|
|
4,745
|
|
|
|
1,785
|
|
Personal non-credit card
|
|
|
1,310
|
|
|
|
2,500
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,357
|
|
|
$
|
14,855
|
|
|
$
|
9,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additionally, as part of the Metris acquisition in 2005, we
assumed $4.6 billion of securities backed by credit card
receivables which we restructured so that they are now accounted
for as secured financings.
Outstanding securitized receivables consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(in millions)
|
|
|
Auto finance
|
|
$
|
-
|
|
|
$
|
271
|
|
Credit card
|
|
|
124
|
|
|
|
500
|
|
Personal non-credit card
|
|
|
-
|
|
|
|
178
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
124
|
|
|
$
|
949
|
|
|
|
|
|
|
|
|
|
|
Our remaining securitized receivable credit card trust began its
amortization period in October 2007 and was fully amortized in
January 2008.
The securities issued in connection with collateralized funding
transactions may pay off sooner than originally scheduled if
certain events occur. For certain auto and personal non-credit
card transactions, early payoff of securities may occur if
established delinquency or loss levels are exceeded or if
certain other events occur. For all other transactions, early
payoff of the securities begins if the annualized portfolio
yield drops below a base rate or if certain other events occur.
Presently we do not anticipate that any early payoff will take
place. If early payoff occurred, our funding requirements would
increase. These additional requirements could be met through
issuance of various types of debt or borrowings under existing
back-up
lines of credit. We believe we would continue to have adequate
sources of funds if an early payoff event occurred.
At December 31, 2007, securitizations structured as sales
represented less than 1 percent and secured financings
represented 16 percent of the funding associated with our
managed funding portfolio. At December 31, 2006,
securitizations structured as sales represented 1 percent
and secured financings represented 14 percent of the
funding associated with our managed funding portfolio.
We will continue to use secured financings of consumer
receivables as a source of our funding and liquidity. However,
if the market for securities backed by receivables were to
change, we may be unable to enter into new secured financings or
to do so at favorable pricing levels. Factors affecting our
ability to structure collateralized funding transactions as
secured financings or to do so at cost-effective rates include
the overall credit quality of our securitized loans, the
stability of the securitization markets, the securitization
markets view of our desirability as an
102
HSBC Finance Corporation
investment, and the legal, regulatory, accounting and tax
environments governing collateralized funding transactions.
At December 31, 2007, we had domestic facilities with
commercial and investment banks under which we may use up to
$17.4 billion of our receivables in collateralized funding
transactions structured either as securitizations or secured
financings. The facilities are renewable at the banks
option. The amount available under the facilities will vary
based on the timing and volume of collateralized funding
transactions. As discussed above, we anticipate some of these
facilities which expire in 2008 will not be renewed. Our 2008
funding plan incorporates the anticipated reductions in these
facilities.
For additional information related to our securitization
activities, including the amount of revenues and cash flows
resulting from these arrangements, see Note 8, Asset
Securitizations, to our accompanying consolidated
financial statements.
Risk
Management
Some degree of risk is inherent in virtually all of our
activities. Accordingly, we have comprehensive risk management
policies and practices in place to address potential financial
risks, which include credit, liquidity, market (which includes
interest rate and foreign currency exchange risks), reputational
and operational risk (which includes compliance and technology
risks). Our risk management policies are designed to identify
and analyze these risks, to set appropriate limits and controls,
and to monitor the risks and limits continually by means of
reliable and up-to-date administrative and information systems.
We continually modify and enhance our risk management policies
and systems to reflect changes in markets and products and to
better overall risk management processes. Training, individual
responsibility and accountability, together with a disciplined,
conservative and constructive culture of control, lie at the
heart of our management of risk.
Our risk management policies are primarily carried out in
accordance with practice and limits set by the HSBC Group
Management Board which consists of senior executives throughout
the HSBC organization. In addition, due to the increasingly
complex business environment and the evolution of improved risk
management tools and standards, HSBC Finance Corporation has
significantly upgraded, and continues to upgrade, its risk
management function. New practices and techniques have been
implemented to enhance data analysis, modeling, stress testing,
management information systems, risk self-assessment, and
independent oversight. Senior managers independently ensure
risks are appropriately identified, measured, reported and
managed.
Risk management oversight begins with the HSBC Finance
Corporation Board of Directors and its various committees,
principally the Audit Committee. Management oversight is
provided by corporate and business unit risk management
committees with the participation of the Chief Operating Officer
or his staff. An HSBC Finance Corporation Risk Management
Committee, chaired by the Chief Operating Officer, focuses on
credit and operational risk management strategies. In addition,
the HSBC Finance Corporation Asset Liability Committee
(ALCO) meets regularly to review risks and approve
appropriate risk management strategies within the limits
established by the HSBC Group Management Board.
Credit Risk Management Credit risk is the
risk that financial loss arises from the failure of a customer
or counterparty to meet its obligations under a contract. Our
credit risk arises primarily from lending and treasury
activities.
Day-to-day management of credit risk is administered by Chief
Credit Officers in each business line who have solid reporting
lines to both the business line Chief Executive Officer and the
Chief Retail Credit Officer. Independent oversight is provided
by the corporate Chief Retail Credit Officer who reports to our
Chief Operating Officer and indirectly to the Group Managing
Director, Head of Credit Risk for HSBC globally. The Chief
Retail Credit Officer may override business unit credit policy
decisions. An appeal process exists through the Chief Operating
Officer and Chief Executive Officer of the business to the Group
Managing Director, Head of Credit Risk. We have established
detailed policies to address the credit risk that arises from
our lending activities. Our credit and portfolio management
procedures focus on sound underwriting, effective collections
and customer account management efforts for each loan. Our
lending guidelines, which delineate the credit risk we are
willing to take and the related terms, are specific
103
HSBC Finance Corporation
not only for each product, but also take into consideration
various other factors including borrower characteristics. We
also have specific policies to ensure the establishment of
appropriate credit loss reserves on a timely basis to cover
probable losses of principal, interest and fees. See
Credit Quality for a detailed description of our
policies regarding the establishment of credit loss reserves,
our delinquency and charge-off policies and practices and our
customer account management policies and practices. Also see
Note 2, Summary of Significant Accounting
Policies, to our consolidated financial statements for
further discussion of our policies surrounding credit loss
reserves. While we develop our own policies and procedures for
all of our lending activities, they are consistent with HSBC
standards and are regularly reviewed and updated both on an HSBC
Finance Corporation and HSBC level.
Counterparty credit risk is our primary exposure on our interest
rate swap portfolio. Counterparty credit risk is the risk that
the counterparty to a transaction fails to perform according to
the terms of the contract. We control counterparty credit risk
in derivative instruments through established credit approvals,
risk control limits, collateral, and ongoing monitoring
procedures. Counterparty limits have been set and are closely
monitored as part of the overall risk management process and
control structure. We utilize an affiliate, HSBC Bank USA, as
the primary provider of domestic derivative products. We have
never suffered a loss due to counterparty failure.
Currently the majority of our existing derivative contracts are
with HSBC subsidiaries, making them our primary counterparty in
derivative transactions. Most swap agreements, both with
unaffiliated and affiliated third parties, 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. At December 31, 2007, we
provided third party swap counterparties with $51 million
collateral. At December 31, 2006, third party
counterparties had provided $158 million in collateral to
us. Beginning with the second quarter of 2006, when the fair
value of our agreements with affiliate counterparties require
the posting of collateral, it is provided in the form of cash
and recorded on the balance sheet, consistent with third party
arrangements. At December 31, 2007, the fair value of our
agreements with affiliate counterparties required the affiliate
to provide cash collateral of $3.8 billion which is offset
against the fair value amount recognized for derivative
instruments that have been offset under the same master netting
arrangement in accordance with FASB Staff Position
No. FIN 39-1,
Amendment of FASB Interpretation No. 39,
(FSP 39-1)
and recorded in our balance sheet as a component of derivative
related assets. At December 31, 2006, the fair value of our
agreements with affiliate counterparties required the affiliate
to provide cash collateral of $1.0 billion which was offset
against the fair value amount recognized for derivative
instruments that have been offset under the same master netting
arrangement in accordance with
FSP 39-1
and recorded in our balance sheet as a component of derivative
related assets.
See Note 14, Derivative Financial Instruments,
to the accompanying consolidated financial statements for
additional information related to interest rate risk management
and Note 23, Fair Value Measurements, for
information regarding the fair value of our financial
instruments.
Liquidity Risk The management of liquidity
risk is addressed in HSBC Finance Corporations funding
management policies and practices. HSBC Finance Corporation
funds itself principally through unsecured term funding in the
markets, through secured financings and through borrowings from
HSBC and HSBC clients. Generally, the lives of our assets are
shorter than the lives of the liabilities used to fund them.
This initially reduces liquidity risk by ensuring that funds are
received prior to liabilities becoming due.
Our ability to ensure continuous access to the capital markets
and maintain a diversified funding base is important in meeting
our funding needs. To manage this liquidity risk, we offer a
broad line of debt products designed to meet the needs of both
institutional and retail investors. We maintain investor
diversity by placing debt directly with customers, through
selected dealer programs and by targeted issuance of large
liquid transactions on a global basis. Through collateralized
funding transactions, we are able to access an alternative
investor base and further diversify our funding sources. We also
maintain a comprehensive, direct marketing program to ensure our
investors receive consistent and timely information regarding
our financial performance.
The measurement and management of liquidity risk is a primary
focus. Three standard analyses are utilized to accomplish this
goal. First, a rolling 60 day funding plan is updated daily
to quantify near-term needs and develop
104
HSBC Finance Corporation
the appropriate strategies to fund those needs. As part of this
process, debt maturity profiles (daily, monthly, annually) are
generated to assist in planning and limiting any potential
rollover risk (which is the risk that we will be unable to pay
our debt or borrow additional funds as it becomes due). Second,
comprehensive plans identifying monthly funding requirements for
the next twelve months are updated at least weekly and monthly
funding plans for the next two years are maintained. These plans
focus on funding projected asset growth and debt maturities and
drive both the timing and size of debt issuances. These plans
are shared on a regular basis with HSBC. And third, a Maximum
Cumulative Outflow (MCO) analysis is updated regularly to
measure liquidity risk. Cumulative comprehensive cash inflows
are subtracted from outflows to generate a net exposure that is
tracked both monthly over the next 12 month period and
annually for 5 years. Net outflow limits are reviewed by
HSBC Finance Corporations ALCO and HSBC.
We recognize the importance of being prepared for constrained
funding environments. While the potential scenarios driving this
analysis have changed due to our affiliation with HSBC,
contingency funding plans are still maintained as part of the
liquidity management process. Alternative funding strategies are
updated regularly for a rolling 12 months and assume
limited access to unsecured funding and continued access to the
collateralized funding markets. These alternative strategies are
designed to enable us to achieve monthly funding goals through
controlled growth, sales of receivables and access to committed
sources of contingent liquidity including bank lines and undrawn
securitization conduits. Although our overall liquidity
situation has improved significantly since our acquisition by
HSBC, the strategies and analyses utilized in the past to
successfully manage liquidity remain in place today. The
combination of this process with the funding provided by HSBC
subsidiaries and clients should ensure our access to diverse
markets and investor bases thereby allowing us to meet our
funding requirements.
See Liquidity and Capital Resources for further
discussion of our liquidity position.
Market Risk The objective of our market risk
management process is to manage and control market risk
exposures in order to optimize return on risk while maintaining
a market profile as a provider of financial products and
services. Market risk is the risk that movements in market risk
factors, including interest rates and foreign currency exchange
rates, will reduce our income or the value of our portfolios.
Future net interest income is affected by movements in interest
rates. Although our main operations are in the U.S., we also
have operations in Canada and the U.K. which prepare their
financial statements in their local currency. Accordingly, our
financial statements are affected by movements in exchange rates
between the functional currencies of these subsidiaries and the
U.S. dollar. We maintain an overall risk management
strategy that uses a variety of interest rate and currency
derivative financial instruments to mitigate our exposure to
fluctuations caused by changes in interest rates and currency
exchange rates. We manage our exposure to interest rate risk
primarily through the use of interest rate swaps, but also use
forwards, futures, options, and other risk management
instruments. We manage our exposure to foreign currency exchange
risk primarily through the use of currency swaps, options and
forwards. We do not use leveraged derivative financial
instruments for interest rate risk management. Since our
acquisition by HSBC, we have not entered into foreign exchange
contracts to hedge our investment in foreign subsidiaries.
Interest rate risk is defined as the impact of changes in market
interest rates on our earnings. We use simulation models to
measure the impact of anticipated changes in interest rates on
net interest income and execute appropriate risk management
actions. The key assumptions used in these models include
expected loan payoff rates, loan volumes and pricing, cash flows
from derivative financial instruments and changes in market
conditions. While these assumptions are based on our best
estimates of future conditions, we can not precisely predict our
earnings due to the uncertainty inherent in the macro economic
environment. At December 31, 2007, our net interest margin
at risk was in compliance with the guidelines defined in our
existing policy.
Customer demand for our receivable products shifts between fixed
rate and floating rate products, based on market conditions and
preferences. These shifts in loan products produce different
interest rate risk exposures. We use derivative financial
instruments, principally interest rate swaps, to manage these
exposures. Interest rate futures, interest rate forwards and
purchased options are also used on a limited basis to manage
interest rate risk.
105
HSBC Finance Corporation
We monitor the impact that an immediate hypothetical increase or
decrease in interest rates of 25 basis points applied at
the beginning of each quarter over a 12 month period would
have on our net interest income assuming for 2007 a declining
balance sheet and the current interest rate risk profile. The
following table summarizes such estimated impact:
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
2007
|
|
2006
|
|
|
|
(in millions)
|
|
Decrease in net interest income following a hypothetical
25 basis points rise in interest rates applied at the
beginning of each quarter over the next 12 months
|
|
$
|
153
|
|
|
$
|
180
|
|
Increase in net interest income following a hypothetical
25 basis points fall in interest rates applied at the
beginning of each quarter over the next 12 months
|
|
|
132
|
|
|
|
54
|
|
In the December 2006 calculation, looking forward through 2007,
a significant portion of the ARM portfolio was eligible for
repricing. At that time it was anticipated that the ARM
portfolio would prepay and therefore create less benefit to net
interest income in a falling interest rate environment. In the
December 2007 calculation, looking forward through 2008, a
greater volume of ARMs are expected to remain on the books due
to fewer refinancing options available to subprime customers. As
a result, the total benefit to net interest income has increased
in the declining rate scenario. However, we anticipate higher
levels of delinquency and loan impairment charges as these
remain on the books longer.
These estimates include the impact of debt and the corresponding
derivative instruments accounted for using the fair value option
under SFAS No. 159. 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. A
principal consideration supporting this analysis is the
projected prepayment of loan balances for a given economic
scenario. Individual loan underwriting standards in combination
with housing valuations and macroeconomic factors related to
available mortgage credit are the key assumptions driving these
prepayment projections. While we have utilized a number of
sources to refine these projections, we cannot currently project
prepayment rates with a high degree of certainty in all economic
environments given recent, significant changes in both subprime
mortgage underwriting standards and property valuations across
the country.
HSBC also has certain limits and benchmarks that serve as
guidelines in determining the 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
December 31, 2007 was $2 million, which includes the
risk associated with hedging 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 $2 million. As of December 31, 2007, we had
a PVBP position of $(1.7) million reflecting the impact of
a one basis point increase in interest rates. This increase was
primarily due to an anticipated extension in the average lives
of mortgages held in both the Consumer Lending and Mortgage
Services portfolios.
While the total PVBP position will not change as a result of the
loss of hedge accounting following our acquisition by HSBC, the
following table shows the components of PVBP:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(in millions)
|
|
|
Risk related to our portfolio of balance sheet items
marked-to-market
|
|
$
|
(.2
|
)
|
|
$
|
(1.8
|
)
|
Risk for all other remaining assets and liabilities
|
|
|
(1.5
|
)
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
Total PVBP risk
|
|
$
|
(1.7
|
)
|
|
$
|
1.1
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange risk refers to the potential changes
in current and future earnings or capital arising from movements
in foreign exchange rates. We enter into foreign exchange rate
forward contracts and currency swaps to minimize currency risk
associated with changes in the value of foreign-denominated
liabilities. Currency swaps convert principal and interest
payments on debt issued from one currency to another. For
example, we may issue Euro-denominated debt and then execute a
currency swap to convert the obligation to U.S. dollars. We
estimate that
106
HSBC Finance Corporation
a 10 percent adverse change in the British
pound/U.S. dollar and Canadian dollar/U.S. dollar
exchange rates would result in a decrease in common
shareholders equity of $160 million at
December 31, 2007 and $159 million at
December 31, 2006 and would not have a material impact on
net income.
We have issued debt in a variety of currencies and
simultaneously executed currency swaps to hedge the future
interest and principal payments. As a result of the loss of
hedge accounting on currency swaps outstanding at the time of
our acquisition, the recognition of the change in the currency
risk on these swaps is recorded differently than the
corresponding risk on the underlying foreign denominated debt.
Currency risk on the swap is now recognized immediately in the
net present value of all future swap payments. On the
corresponding debt, currency risk is recognized on the principal
outstanding which is converted at the period end spot
translation rate and on the interest accrual which is converted
at the average spot rate for the reporting period.
Operational Risk Operational risk is the risk
of loss arising through fraud, unauthorized activities, error,
omission, inefficiency, systems failure or from external events.
It is inherent in every business organization and covers a wide
spectrum of issues.
HSBC Finance Corporation has established an independent
Operational Risk Management function, headed by a Corporate
Operational Risk Coordinator reporting directly to the Chief
Operating Officer and indirectly to the Head of Operational Risk
for HSBC. The Operational Risk Coordinator provides independent
functional oversight by managing the following activities:
|
|
|
|
|
maintaining a network of business line Operational Risk
Coordinators;
|
|
|
developing scoring and risk assessment tools and databases;
|
|
|
providing training and developing awareness; and
|
|
|
independently reviewing and reporting the assessments of
operational risks.
|
An Operational Risk Management Committee is responsible for
oversight of the operational risks being taken, the analytic
tools used to monitor those risks, and reporting. Business unit
line management is responsible for managing and controlling all
risks and for communicating and implementing all control
standards. This is supported by an independent program of
periodic reviews undertaken by Internal Audit. We also monitor
external operations risk events which take place to ensure that
we remain in line with best practice and take account of lessons
learned from publicized operational failures within the
financial services industry. We also maintain and test emergency
policies and procedures to support operations and our personnel
in the event of disasters.
Compliance Risk Compliance risk is the risk
arising from failure to comply with relevant laws, regulations,
and regulatory requirements governing the conduct of specific
businesses. It is a composite risk that can result in regulatory
sanctions, financial penalties, litigation exposure and loss of
reputation. Compliance risk is inherent throughout the HSBC
Finance Corporation organization.
Consistent with HSBCs commitment to ensure adherence with
applicable regulatory requirements for all of its world-wide
affiliates, HSBC Finance Corporation has implemented a
multi-faceted Compliance Risk Management Program. This program
addresses the following priorities, among other issues:
|
|
|
|
|
anti-money laundering (AML) regulations;
|
|
|
fair lending and consumer protection laws;
|
|
|
dealings with affiliates;
|
|
|
permissible activities; and
|
|
|
conflicts of interest.
|
The independent Corporate Compliance function is headed by a
Chief Compliance Officer who reports to the Chief Operating
Officer, the Chief Compliance Officer of HSBC North America and
the Head of Compliance for HSBC. The Corporate Compliance
function is supported by various compliance teams assigned to
individual business units. The Corporate Compliance function is
responsible for the following activities:
|
|
|
|
|
advising management on compliance matters;
|
|
|
providing independent assessment and monitoring; and
|
107
HSBC Finance Corporation
|
|
|
|
|
reporting compliance issues to HSBC Finance Corporation senior
management and Board of Directors, as well as to HSBC Compliance.
|
The overall Corporate Compliance program elements include
identification, assessment, monitoring, control and mitigation
of the risk and timely resolution of the results of risk events.
These functions are generally performed by business line
management, with oversight provided by Corporate Compliance.
Controls for mitigating compliance risk are incorporated into
business operating policies and procedures. Processes are in
place to ensure controls are appropriately updated to reflect
changes in regulatory requirements as well as changes in
business practices, including new or revised products, services
and marketing programs. A wide range of compliance training is
provided to relevant staff, including mandated programs for such
areas as anti-money laundering, fair lending and privacy. A
separate Corporate Compliance Control Unit, along with Internal
Audit, tests the effectiveness of the overall Compliance Risk
Management Program through continuous monitoring and periodic
target audits.
Reputational Risk The safeguarding of our
reputation is of paramount importance to our continued
prosperity and is the responsibility of every member of our
staff. Reputational risk can arise from social, ethical or
environmental issues, or as a consequence of operations risk
events. Our good reputation depends upon the way in which we
conduct our business, but can also be affected by the way in
which customers, to whom we provide financial services, conduct
themselves.
Reputational risk is considered and assessed by the HSBC Group
Management Board, our Board of Directors and senior management
during the establishment of standards for all major aspects of
business and the formulation of policy. These policies, which
are an integral part of the internal control systems, are
communicated through manuals and statements of policy, internal
communication and training. The policies set out operational
procedures in all areas of reputational risk, including money
laundering deterrence, environmental impact, anti-corruption
measures and employee relations.
We have established a strong internal control structure to
minimize the risk of operational and financial failure and to
ensure that a full appraisal of reputational risk is made before
strategic decisions are taken. The HSBC internal audit function
monitors compliance with our policies and standards.
108
HSBC Finance Corporation
GLOSSARY
OF TERMS
Affinity Credit Card A MasterCard or Visa
account jointly sponsored by the issuer of the card and an
organization whose members share a common interest (e.g., the
AFL-CIO Union
Plus®
credit card program).
Auto Finance Loans Closed-end loans secured
by a first lien on a vehicle.
Basis point A unit that is commonly used to
calculate changes in interest rates. The relationship between
percentage changes and basis points can be summarized as a
1 percent change equals a 100 basis point change or
.01 percent equals 1 basis point.
Co-Branded Credit Card A MasterCard, Visa or
American Express account that is jointly sponsored by the issuer
of the card and another corporation (e.g., the GM
Card®).
The account holder typically receives some form of added benefit
for using the card.
Consumer Net Charge-off Ratio Net charge-offs
of consumer receivables divided by average consumer receivables
outstanding.
Contractual Delinquency A method of
determining aging of past due accounts based on the status of
payments under the loan. Delinquency status may be affected by
customer account management policies and practices such as the
restructure of accounts, forbearance agreements, extended
payment plans, modification arrangements, external debt
management plans, loan rewrites and deferments.
Efficiency Ratio Ratio of total costs and
expenses less policyholders benefits to net interest
income and other revenues less policyholders benefits.
Enhancement Services Income Ancillary credit
card revenue from products such as Account Secure (debt
protection) and Identity Protection Plan.
Fee Income Income associated with interchange
on credit cards and late and other fees from the origination,
acquisition or servicing of loans.
Foreign Exchange Contract A contract used to
minimize our exposure to changes in foreign currency exchange
rates.
Futures Contract An exchange-traded contract
to buy or sell a stated amount of a financial instrument or
index at a specified future date and price.
HBEU HSBC Bank plc, a U.K. based subsidiary
of HSBC Holdings plc.
HINO HSBC Investments (North America) Inc.,
which is the immediate parent of HSBC Finance Corporation.
HSBC North America HSBC North America
Holdings Inc. and the immediate parent of HINO.
HSBC HSBC Holdings plc.
HSBC Bank USA HSBC Bank USA, National
Association
HTSU HSBC Technology & Services (USA)
Inc., which provides information technology services to all
subsidiaries of HSBC North America and other subsidiaries of
HSBC.
Goodwill Represents the purchase price over
the fair value of identifiable assets acquired less liabilities
assumed from business combinations.
IFRS Management Basis A
non-U.S. GAAP
measure of reporting results in accordance with IFRSs and
assumes the private label and real estate secured receivables
transferred to HSBC Bank USA have not been sold and remain on
our balance sheet. IFRS Management Basis also assumes that all
purchase accounting fair value adjustments relating to our
acquisition by HSBC have been pushed down to HSBC
Finance Corporation.
109
HSBC Finance Corporation
Intangible Assets Assets (not including
financial assets) that lack physical substance. Our acquired
intangibles include purchased credit card relationships and
related programs, merchant relationships in our retail services
business, other loan related relationships, trade names,
technology, customer lists and other contracts.
Interchange Fees Fees received for processing
a credit card transaction through the MasterCard, Visa, American
Express or Discover network.
Interest-only Strip Receivables Represent our
contractual right to receive interest and other cash flows from
our securitization trusts after the investors receive their
contractual return.
Interest Rate Swap Contract between two
parties to exchange interest payments on a stated principal
amount (notional principal) for a specified period. Typically,
one party makes fixed rate payments, while the other party makes
payments using a variable rate.
LIBOR London Interbank Offered
Rate. A widely quoted market rate which is frequently
the index used to determine the rate at which we borrow funds.
Liquidity A measure of how quickly we can
convert assets to cash or raise additional cash by issuing debt.
Managed Receivables The sum of receivables on
our balance sheet and those that we service for investors as
part of our asset securitization program.
MasterCard, Visa, American Express and Discover
Receivables Receivables generated through
customer usage of MasterCard, Visa, American Express and
Discover credit cards.
Near-prime receivables A portion of our
non-prime receivable portfolio which is comprised of customers
with somewhat stronger credit scores than our other customers
that are priced at rates generally below the rates offered on
our non-prime products.
Net Interest Income Interest income from
receivables and noninsurance investment securities reduced by
interest expense.
Net Interest Margin Net interest income as a
percentage of average interest-earning assets.
Nonaccrual Loans Loans on which we no longer
accrue interest because ultimate collection is unlikely.
Non-prime receivables Receivables which have
been priced above the standard interest rates charged to prime
customers due to a higher than average risk for default as a
result of the customers credit history and the value of
collateral, if applicable.
Options A contract giving the owner the
right, but not the obligation, to buy or sell a specified item
at a fixed price for a specified period.
Owned Receivables Receivables held on our
balance sheet.
Personal Homeowner Loan (PHL) A
high loan-to-value real estate loan that has been underwritten
and priced as an unsecured loan. These loans are reported as
personal non-credit card receivables.
Personal Non-Credit Card Receivables
Unsecured lines of credit or closed-end loans made to
individuals.
Portfolio Seasoning Relates to the aging of
origination vintages. Loss patterns emerge slowly over time as
new accounts are booked.
Private Label Credit Card A line of credit
made available to customers of retail merchants evidenced by a
credit card bearing the merchants name.
Real Estate Secured Loan Closed-end loans and
revolving lines of credit secured by first or subordinate liens
on residential real estate.
Receivables Serviced with Limited Recourse
Receivables we have securitized in transactions structured as
sales and for which we have some level of potential loss if
defaults occur.
110
HSBC Finance Corporation
Return on Average Common Shareholders
Equity Net income less dividends on preferred
stock divided by average common shareholders equity.
Return on Average Assets Net income divided
by average owned assets.
Secured Financing The process where interests
in a dedicated pool of financial assets are sold to investors.
Generally, the receivables are transferred through a limited
purpose financing subsidiary to a trust that issues interests
that are sold to investors. These transactions do not receive
sale treatment under SFAS No. 140. The receivables and
related debt remain on our balance sheet.
Securitization The process where interests in
a dedicated pool of financial assets, typically credit card,
auto or personal non-credit card receivables, are sold to
investors. Generally, the receivables are sold to a trust that
issues interests that are sold to investors. These transactions
are structured to receive sale treatment under
SFAS No. 140. The receivables are then removed from
our balance sheet.
Securitization Related Revenue Includes
income associated with current and prior period securitizations
structured as sales of receivables with limited recourse. Such
income includes gains on sales, net of our estimate of probable
credit losses under the recourse provisions, servicing income
and excess spread relating to those receivables.
Stated Income (low documentation) Loans
underwritten based upon the loan applicants representation
of annual income, which is not verified by receipt of supporting
documentation.
Tangible Common Equity Common
shareholders equity (excluding unrealized gains and losses
on investments and cash flow hedging instruments, any minimum
pension liability and the impact of adoption of SFAS No. 159,
including subsequent changes in fair value recognized in
earnings associated with credit risk) less acquired intangibles
and goodwill.
Tangible Shareholders(s) Equity
Tangible common equity, preferred stock, and company obligated
mandatorily redeemable preferred securities of subsidiary trusts
(including amounts due to affiliates) adjusted for HSBC
acquisition purchase accounting adjustments.
Tangible Managed Assets Total managed assets
less acquired intangibles, goodwill and derivative financial
assets.
Taxpayer Financial Services (TFS)
Revenue Our taxpayer financial services business
provides consumer tax refund lending in the United States. This
income primarily consists of fees received from the consumer for
a short term loan which will be repaid from their Federal income
tax return refund.
Whole Loan Sales Sales of loans to third
parties without recourse. Typically, these sales are made
pursuant to our liquidity or capital management plans.
111
HSBC
FINANCE CORPORATION AND SUBSIDIARIES
CREDIT
QUALITY STATISTICS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Two-Month-and-Over Contractual Delinquency Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
secured(1)
|
|
|
7.08
|
%
|
|
|
3.54
|
%
|
|
|
2.72
|
%
|
|
|
2.96
|
%
|
|
|
4.33
|
%
|
Auto finance
|
|
|
3.67
|
|
|
|
3.18
|
|
|
|
3.04
|
|
|
|
3.03
|
|
|
|
3.39
|
|
Credit
card(2)
|
|
|
5.77
|
|
|
|
4.57
|
|
|
|
3.66
|
|
|
|
4.88
|
|
|
|
5.76
|
|
Private label
|
|
|
4.26
|
|
|
|
5.31
|
|
|
|
5.43
|
|
|
|
4.13
|
|
|
|
5.42
|
|
Personal non-credit card
|
|
|
14.13
|
|
|
|
10.17
|
|
|
|
9.40
|
|
|
|
8.69
|
|
|
|
10.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
consumer(2)
|
|
|
7.41
|
%
|
|
|
4.59
|
%
|
|
|
3.89
|
%
|
|
|
4.13
|
%
|
|
|
5.40
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of Net Charge-offs to Average Receivables for the
Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
secured(3)
|
|
|
2.32
|
%
|
|
|
1.00
|
%
|
|
|
.76
|
%
|
|
|
1.10
|
%
|
|
|
.99
|
%
|
Auto
finance(6)
|
|
|
4.10
|
|
|
|
3.67
|
|
|
|
3.27
|
|
|
|
3.43
|
|
|
|
4.91
|
|
Credit
card(4)
|
|
|
7.28
|
|
|
|
5.56
|
|
|
|
7.12
|
|
|
|
8.85
|
|
|
|
9.18
|
|
Private
label(4)
|
|
|
4.73
|
|
|
|
5.80
|
|
|
|
4.83
|
|
|
|
6.17
|
|
|
|
5.75
|
|
Personal non-credit
card(6)
|
|
|
8.48
|
|
|
|
7.89
|
|
|
|
7.88
|
|
|
|
9.75
|
|
|
|
9.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
consumer(4)(6)
|
|
|
4.22
|
|
|
|
2.97
|
|
|
|
3.03
|
|
|
|
4.00
|
|
|
|
4.06
|
|
Commercial
|
|
|
-
|
|
|
|
.43
|
|
|
|
2.60
|
|
|
|
-
|
|
|
|
.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4.21
|
%
|
|
|
2.97
|
%
|
|
|
3.03
|
%
|
|
|
3.98
|
%
|
|
|
4.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate charge-offs and REO expense as a percent of
average real estate secured receivables
|
|
|
2.68
|
%
|
|
|
1.19
|
%
|
|
|
.87
|
%
|
|
|
1.38
|
%
|
|
|
1.42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual Receivables
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
secured(5)
|
|
$
|
4,526
|
|
|
$
|
2,461
|
|
|
$
|
1,601
|
|
|
$
|
1,489
|
|
|
$
|
1,777
|
|
Auto finance
|
|
|
480
|
|
|
|
389
|
|
|
|
320
|
|
|
|
227
|
|
|
|
140
|
|
Private label
|
|
|
25
|
|
|
|
31
|
|
|
|
31
|
|
|
|
24
|
|
|
|
43
|
|
Personal non-credit card
|
|
|
2,092
|
|
|
|
1,444
|
|
|
|
1,190
|
|
|
|
908
|
|
|
|
898
|
|
Foreign
|
|
|
439
|
|
|
|
482
|
|
|
|
463
|
|
|
|
432
|
|
|
|
316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
7,562
|
|
|
|
4,807
|
|
|
|
3,605
|
|
|
|
3,080
|
|
|
|
3,174
|
|
Commercial and other
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
4
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,562
|
|
|
$
|
4,807
|
|
|
$
|
3,608
|
|
|
$
|
3,084
|
|
|
$
|
3,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing Consumer Receivables 90 or More Days Delinquent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card
|
|
$
|
1,240
|
|
|
$
|
894
|
|
|
$
|
585
|
|
|
$
|
469
|
|
|
$
|
429
|
|
Private label
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
443
|
|
Foreign
|
|
|
37
|
|
|
|
35
|
|
|
|
38
|
|
|
|
38
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,277
|
|
|
$
|
929
|
|
|
$
|
623
|
|
|
$
|
507
|
|
|
$
|
904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
1,008
|
|
|
$
|
785
|
|
|
$
|
506
|
|
|
$
|
583
|
|
|
$
|
627
|
|
Foreign
|
|
|
15
|
|
|
|
9
|
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,023
|
|
|
$
|
794
|
|
|
$
|
510
|
|
|
$
|
587
|
|
|
$
|
631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Renegotiated Commercial Loans
|
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Real estate secured two-months-and-over contractual delinquency
(as a percent of consumer receivables) are comprised of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
Mortgage Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
10.91
|
%
|
|
|
4.50
|
%
|
|
|
3.21
|
%
|
|
|
3.26
|
%
|
|
|
5.49
|
%
|
Second lien
|
|
|
15.43
|
|
|
|
5.74
|
|
|
|
1.94
|
|
|
|
2.47
|
|
|
|
4.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mortgage Services
|
|
|
11.80
|
|
|
|
4.75
|
|
|
|
2.98
|
|
|
|
3.16
|
|
|
|
5.40
|
|
Consumer Lending:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
3.72
|
|
|
|
2.07
|
|
|
|
2.14
|
|
|
|
2.69
|
|
|
|
3.40
|
|
Second lien
|
|
|
6.93
|
|
|
|
3.06
|
|
|
|
3.03
|
|
|
|
3.02
|
|
|
|
5.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consumer Lending
|
|
|
4.15
|
|
|
|
2.21
|
|
|
|
2.26
|
|
|
|
2.73
|
|
|
|
3.59
|
|
Foreign and all other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
2.62
|
|
|
|
1.58
|
|
|
|
2.11
|
|
|
|
1.95
|
|
|
|
3.14
|
|
Second lien
|
|
|
4.59
|
|
|
|
5.38
|
|
|
|
5.71
|
|
|
|
3.94
|
|
|
|
4.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Foreign and all other
|
|
|
4.12
|
|
|
|
4.59
|
|
|
|
5.09
|
|
|
|
3.66
|
|
|
|
3.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
|
7.08
|
%
|
|
|
3.54
|
%
|
|
|
2.72
|
%
|
|
|
2.96
|
%
|
|
|
4.33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112
HSBC FINANCE CORPORATION AND SUBSIDIARIES
CREDIT QUALITY STATISTICS (CONTINUED)
|
|
(2)
|
In December 2005, we completed the acquisition of Metris which
included receivables of $5.3 billion. This event had a
significant impact on this ratio. Excluding the receivables from
the Metris acquisition from this calculation, our consumer
delinquency ratio for our credit card portfolio was 4.01% and
total consumer delinquency was 3.89%.
|
|
(3)
|
Real estate secured net charge-off of consumer receivables as a
percent of average consumer receivables are comprised of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
Mortgage Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
1.60
|
%
|
|
|
.77
|
%
|
|
|
.68
|
%
|
|
|
.81
|
%
|
|
|
.54
|
%
|
Second lien
|
|
|
12.15
|
|
|
|
2.38
|
|
|
|
1.11
|
|
|
|
2.64
|
|
|
|
2.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mortgage Services
|
|
|
3.77
|
|
|
|
1.12
|
|
|
|
.75
|
|
|
|
1.05
|
|
|
|
.94
|
|
Consumer Lending:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
.79
|
|
|
|
.85
|
|
|
|
.74
|
|
|
|
1.03
|
|
|
|
.89
|
|
Second lien
|
|
|
3.78
|
|
|
|
1.12
|
|
|
|
1.21
|
|
|
|
2.77
|
|
|
|
2.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consumer Lending
|
|
|
1.20
|
|
|
|
.89
|
|
|
|
.80
|
|
|
|
1.21
|
|
|
|
1.07
|
|
Foreign and all other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
1.05
|
|
|
|
.54
|
|
|
|
1.04
|
|
|
|
.89
|
|
|
|
1.19
|
|
Second lien
|
|
|
1.35
|
|
|
|
.94
|
|
|
|
.37
|
|
|
|
.24
|
|
|
|
.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Foreign and all other
|
|
|
1.28
|
|
|
|
.86
|
|
|
|
.47
|
|
|
|
.33
|
|
|
|
.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
|
2.32
|
%
|
|
|
1.00
|
%
|
|
|
.76
|
%
|
|
|
1.10
|
%
|
|
|
.99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4)
|
The adoption of FFIEC charge-off policies for our domestic
private label (excluding retail sales contracts at our consumer
lending business) and credit card portfolios in December 2004
increased private label net charge-offs by $155 million
(119 basis points) and credit card net charge-offs by
$3 million (2 basis points) and total consumer net
charge-offs by $158 million (16 basis points) for the
year ended December 31, 2004.
|
|
(5)
|
Domestic real estate nonaccrual receivables are comprised of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
Real estate secured:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed-end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
3,367
|
|
|
$
|
1,884
|
|
|
$
|
1,359
|
|
|
$
|
1,287
|
|
|
$
|
1,437
|
|
Second lien
|
|
|
790
|
|
|
|
369
|
|
|
|
148
|
|
|
|
105
|
|
|
|
121
|
|
Revolving:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
20
|
|
|
|
22
|
|
|
|
31
|
|
|
|
40
|
|
|
|
92
|
|
Second lien
|
|
|
349
|
|
|
|
186
|
|
|
|
63
|
|
|
|
57
|
|
|
|
127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
$
|
4,526
|
|
|
$
|
2,461
|
|
|
$
|
1,601
|
|
|
$
|
1,489
|
|
|
$
|
1,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6) |
In December 2006, our Auto Finance business changed its
charge-off policy to provide that the principal balance of auto
loans in excess of the estimated net realizable value will be
charged-off 30 days (previously 90 days) after the
financed vehicle has been repossessed if it remains unsold,
unless it becomes 150 days contractually delinquent, at
which time such excess will be charged off. This resulted in a
one-time acceleration of charge-offs in December 2006, which
totaled $24 million. Excluding the impact of this change
the auto finance net charge-off ratio would have been
4.19 percent in the quarter ended December 31, 2006
and 3.46 percent for the full year 2006. Also in the fourth
quarter of 2006, our U.K. business discontinued a forbearance
program related to unsecured loans. Under the forbearance
program, eligible delinquent accounts would not be subject to
charge-off if certain minimum payment conditions were met. The
cancellation of this program resulted in a one-time acceleration
of charge-off which totaled $89 million. Excluding the
impact of the change in the U.K. forbearance program, the
personal non-credit card net charge-off ratio would have been
6.23 percent in the quarter ended December 31, 2006
and 7.45 percent for the full year 2006. Excluding the
impact of both changes, the total consumer charge-off ratio
would have been 3.17 percent for the quarter ended
December 31, 2006 and 2.89 percent for the full year
2006.
|
113
HSBC
FINANCE CORPORATION AND SUBSIDIARIES
ANALYSIS
OF CREDIT LOSS RESERVES ACTIVITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Total Credit Loss Reserves at January 1
|
|
$
|
6,587
|
|
|
$
|
4,521
|
|
|
$
|
3,625
|
|
|
$
|
3,793
|
|
|
$
|
3,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Credit Losses
|
|
|
11,026
|
|
|
|
6,564
|
|
|
|
4,543
|
|
|
|
4,334
|
|
|
|
3,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs Domestic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
secured(1)
|
|
|
(2,199
|
)
|
|
|
(931
|
)
|
|
|
(569
|
)
|
|
|
(629
|
)
|
|
|
(496
|
)
|
Auto finance
|
|
|
(595
|
)
|
|
|
(468
|
)
|
|
|
(311
|
)
|
|
|
(204
|
)
|
|
|
(148
|
)
|
Credit
card(2)
|
|
|
(2,463
|
)
|
|
|
(1,665
|
)
|
|
|
(1,339
|
)
|
|
|
(1,082
|
)
|
|
|
(936
|
)
|
Private
label(2)
|
|
|
(45
|
)
|
|
|
(43
|
)
|
|
|
(33
|
)
|
|
|
(788
|
)
|
|
|
(684
|
)
|
Personal non-credit card
|
|
|
(1,729
|
)
|
|
|
(1,455
|
)
|
|
|
(1,333
|
)
|
|
|
(1,350
|
)
|
|
|
(1,354
|
)
|
Foreign
|
|
|
(575
|
)
|
|
|
(600
|
)
|
|
|
(509
|
)
|
|
|
(355
|
)
|
|
|
(257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
(7,606
|
)
|
|
|
(5,162
|
)
|
|
|
(4,094
|
)
|
|
|
(4,408
|
)
|
|
|
(3,875
|
)
|
Commercial and other
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
(6
|
)
|
|
|
(1
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables charged off
|
|
|
(7,606
|
)
|
|
|
(5,164
|
)
|
|
|
(4,100
|
)
|
|
|
(4,409
|
)
|
|
|
(3,878
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
secured(3)
|
|
|
72
|
|
|
|
33
|
|
|
|
27
|
|
|
|
18
|
|
|
|
10
|
|
Auto finance
|
|
|
80
|
|
|
|
50
|
|
|
|
18
|
|
|
|
6
|
|
|
|
5
|
|
Credit card
|
|
|
383
|
|
|
|
274
|
|
|
|
157
|
|
|
|
103
|
|
|
|
87
|
|
Private label
|
|
|
9
|
|
|
|
13
|
|
|
|
6
|
|
|
|
79
|
|
|
|
72
|
|
Personal non-credit card
|
|
|
211
|
|
|
|
216
|
|
|
|
171
|
|
|
|
120
|
|
|
|
82
|
|
Foreign
|
|
|
135
|
|
|
|
59
|
|
|
|
68
|
|
|
|
50
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
890
|
|
|
|
645
|
|
|
|
447
|
|
|
|
376
|
|
|
|
290
|
|
Commercial and other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries on receivables
|
|
|
890
|
|
|
|
645
|
|
|
|
447
|
|
|
|
376
|
|
|
|
291
|
|
Other, net
|
|
|
8
|
|
|
|
21
|
|
|
|
6
|
|
|
|
(469
|
)
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Loss Reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate secured
|
|
|
5,119
|
|
|
|
2,365
|
|
|
|
718
|
|
|
|
645
|
|
|
|
670
|
|
Auto finance
|
|
|
254
|
|
|
|
241
|
|
|
|
222
|
|
|
|
181
|
|
|
|
172
|
|
Credit card
|
|
|
2,635
|
|
|
|
1,864
|
|
|
|
1,576
|
|
|
|
1,205
|
|
|
|
806
|
|
Private label
|
|
|
26
|
|
|
|
38
|
|
|
|
36
|
|
|
|
28
|
|
|
|
519
|
|
Personal non-credit card
|
|
|
2,378
|
|
|
|
1,732
|
|
|
|
1,652
|
|
|
|
1,237
|
|
|
|
1,348
|
|
Foreign
|
|
|
492
|
|
|
|
346
|
|
|
|
312
|
|
|
|
316
|
|
|
|
247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
10,904
|
|
|
|
6,586
|
|
|
|
4,516
|
|
|
|
3,612
|
|
|
|
3,762
|
|
Commercial and other
|
|
|
1
|
|
|
|
1
|
|
|
|
5
|
|
|
|
13
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Credit Loss Reserves at December 31
|
|
$
|
10,905
|
|
|
$
|
6,587
|
|
|
$
|
4,521
|
|
|
$
|
3,625
|
|
|
$
|
3,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of Credit Loss Reserves to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
charge-offs(6)
|
|
|
162.4
|
%
|
|
|
145.8
|
%
|
|
|
123.8
|
%(4)
|
|
|
89.9
|
%(5)
|
|
|
105.7
|
%
|
Receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer(6)
|
|
|
6.99
|
|
|
|
4.07
|
|
|
|
3.23
|
|
|
|
3.39
|
|
|
|
4.09
|
|
Commercial
|
|
|
.76
|
|
|
|
.60
|
|
|
|
2.67
|
|
|
|
8.90
|
|
|
|
6.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(6)
|
|
|
6.98
|
%
|
|
|
4.07
|
%
|
|
|
3.23
|
%
|
|
|
3.39
|
%
|
|
|
4.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
123.4
|
%
|
|
|
114.8
|
%
|
|
|
106.8
|
%
|
|
|
100.7
|
%
|
|
|
92.2
|
%
|
Commercial
|
|
|
-
|
|
|
|
100.0
|
|
|
|
166.7
|
|
|
|
260.0
|
|
|
|
620.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
123.4
|
%
|
|
|
114.8
|
%
|
|
|
106.9
|
%
|
|
|
100.9
|
%
|
|
|
92.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Domestic real estate secured charge-offs can be further analyzed
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
Closed end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
(879
|
)
|
|
$
|
(582
|
)
|
|
$
|
(421
|
)
|
|
$
|
(418
|
)
|
|
$
|
(279
|
)
|
Second lien
|
|
|
(928
|
)
|
|
|
(256
|
)
|
|
|
(105
|
)
|
|
|
(151
|
)
|
|
|
(152
|
)
|
Revolving:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
(20
|
)
|
|
|
(17
|
)
|
|
|
(22
|
)
|
|
|
(34
|
)
|
|
|
(35
|
)
|
Second lien
|
|
|
(372
|
)
|
|
|
(76
|
)
|
|
|
(21
|
)
|
|
|
(26
|
)
|
|
|
(30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(2,199
|
)
|
|
$
|
(931
|
)
|
|
$
|
(569
|
)
|
|
$
|
(629
|
)
|
|
$
|
(496
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) |
Includes $3 million of credit card and $155 million of
private label charge-off relating to the adoption of FFIEC
charge-off policies in December 2004.
|
114
HSBC FINANCE CORPORATION AND SUBSIDIARIES
ANALYSIS OF CREDIT LOSS RESERVES ACTIVITY (CONTINUED)
|
|
(3) |
Domestic real estate recoveries can be further analyzed as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
Closed end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
45
|
|
|
$
|
11
|
|
|
$
|
11
|
|
|
$
|
5
|
|
|
$
|
3
|
|
Second lien
|
|
|
20
|
|
|
|
15
|
|
|
|
10
|
|
|
|
8
|
|
|
|
5
|
|
Revolving:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
|
|
-
|
|
Second lien
|
|
|
5
|
|
|
|
5
|
|
|
|
4
|
|
|
|
3
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
72
|
|
|
$
|
33
|
|
|
$
|
27
|
|
|
$
|
18
|
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4)
|
The acquisition of Metris in December 2005 has positively
impacted this ratio. Reserves as a percentage of net charge-offs
excluding Metris was 118.2 percent.
|
|
(5)
|
In December 2004 we adopted FFIEC charge-off policies for our
domestic private label (excluding retail sales contracts at our
consumer lending business) and credit card portfolios and
subsequently sold this domestic private label receivable
portfolio. These events had a significant impact on this ratio.
Reserves as a percentage of net charge-offs excluding net
charge-offs associated with the sold domestic private label
portfolio and charge-off relating to the adoption of FFIEC was
109.2% at December 31, 2004.
|
|
(6)
|
This ratio was positively impacted in 2007 and 2006 by markedly
higher credit loss reserves at our Mortgage Services business
and, in 2007, at our Consumer Lending business.
|
115
HSBC
FINANCE CORPORATION AND SUBSIDIARIES
NET
INTEREST MARGIN 2007 COMPARED TO 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance and
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Interest Income/
|
|
|
Increase/(Decrease) Due to:
|
|
|
|
Outstanding(1)
|
|
|
Average Rate
|
|
|
Interest Expense
|
|
|
|
|
|
Volume
|
|
|
Rate
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Variance
|
|
|
Variance(2)
|
|
|
Variance(2)
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate secured
|
|
$
|
93,787
|
|
|
|
$92,351
|
|
|
|
8.5
|
%
|
|
|
8.6
|
%
|
|
$
|
7,964
|
|
|
$
|
7,912
|
|
|
$
|
52
|
|
|
$
|
122
|
|
|
$
|
(70
|
)
|
Auto finance
|
|
|
12,901
|
|
|
|
11,660
|
|
|
|
12.3
|
|
|
|
12.0
|
|
|
|
1,582
|
|
|
|
1,405
|
|
|
|
177
|
|
|
|
152
|
|
|
|
25
|
|
Credit card
|
|
|
28,646
|
|
|
|
25,065
|
|
|
|
16.5
|
|
|
|
16.3
|
|
|
|
4,723
|
|
|
|
4,086
|
|
|
|
637
|
|
|
|
590
|
|
|
|
47
|
|
Private label
|
|
|
2,646
|
|
|
|
2,492
|
|
|
|
10.5
|
|
|
|
9.6
|
|
|
|
279
|
|
|
|
238
|
|
|
|
41
|
|
|
|
15
|
|
|
|
26
|
|
Personal non-credit card
|
|
|
21,215
|
|
|
|
20,611
|
|
|
|
18.7
|
|
|
|
18.9
|
|
|
|
3,963
|
|
|
|
3,886
|
|
|
|
77
|
|
|
|
113
|
|
|
|
(36
|
)
|
Commercial and other
|
|
|
154
|
|
|
|
195
|
|
|
|
0.0
|
|
|
|
2.1
|
|
|
|
-
|
|
|
|
4
|
|
|
|
(4
|
)
|
|
|
(1
|
)
|
|
|
(3
|
)
|
Purchase accounting adjustments
|
|
|
(54
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(49
|
)
|
|
|
(124
|
)
|
|
|
75
|
|
|
|
75
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables
|
|
|
159,295
|
|
|
|
152,374
|
|
|
|
11.6
|
|
|
|
11.4
|
|
|
|
18,462
|
|
|
|
17,407
|
|
|
|
1,055
|
|
|
|
800
|
|
|
|
255
|
|
Noninsurance investments
|
|
|
4,022
|
|
|
|
2,676
|
|
|
|
5.5
|
|
|
|
5.8
|
|
|
|
221
|
|
|
|
155
|
|
|
|
66
|
|
|
|
74
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets (excluding insurance investments)
|
|
$
|
163,317
|
|
|
|
$155,050
|
|
|
|
11.4
|
%
|
|
|
11.3
|
%
|
|
$
|
18,683
|
|
|
$
|
17,562
|
|
|
$
|
1,121
|
|
|
$
|
944
|
|
|
$
|
177
|
|
Insurance investments
|
|
|
2,567
|
|
|
|
3,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
9,312
|
|
|
|
11,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
175,196
|
|
|
|
$169,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
10,987
|
|
|
|
$12,344
|
|
|
|
5.5
|
%
|
|
|
5.0
|
%
|
|
$
|
608
|
|
|
$
|
612
|
|
|
$
|
(4
|
)
|
|
$
|
(71
|
)
|
|
$
|
67
|
|
Bank and other borrowings
|
|
|
34
|
|
|
|
494
|
|
|
|
4.0
|
(6)
|
|
|
3.0
|
(6)
|
|
|
1
|
|
|
|
16
|
|
|
|
(15
|
)
|
|
|
(18
|
)
|
|
|
3
|
|
Due to affiliates
|
|
|
15,150
|
|
|
|
15,459
|
|
|
|
6.5
|
|
|
|
6.0
|
|
|
|
992
|
|
|
|
929
|
|
|
|
63
|
|
|
|
(19
|
)
|
|
|
82
|
|
Long term debt (with original maturities over one year)
|
|
|
123,254
|
|
|
|
115,583
|
|
|
|
5.3
|
|
|
|
5.0
|
|
|
|
6,531
|
|
|
|
5,817
|
|
|
|
714
|
|
|
|
404
|
|
|
|
310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
149,425
|
|
|
|
$143,880
|
|
|
|
5.4
|
%
|
|
|
5.1
|
%
|
|
$
|
8,132
|
|
|
$
|
7,374
|
|
|
$
|
758
|
|
|
$
|
291
|
|
|
$
|
467
|
|
Other liabilities
|
|
|
6,454
|
|
|
|
5,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
155,879
|
|
|
|
149,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred securities
|
|
|
575
|
|
|
|
575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shareholders equity
|
|
|
18,742
|
|
|
|
19,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
175,196
|
|
|
|
$169,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest
Margin(3)(5)
|
|
|
|
|
|
|
|
|
|
|
6.5
|
%
|
|
|
6.6
|
%
|
|
$
|
10,551
|
|
|
$
|
10,188
|
|
|
$
|
363
|
|
|
$
|
653
|
|
|
$
|
(290
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Spreads(4)
|
|
|
|
|
|
|
|
|
|
|
6.0
|
%
|
|
|
6.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Nonaccrual loans are included in average outstanding balances.
|
|
(2)
|
Rate/volume variance is allocated based on the percentage
relationship of changes in volume and changes in rate to the
total interest variance. For total receivables, total
interest-earning assets and total debt, the rate and volume
variances are calculated based on the relative weighting of the
individual components comprising these totals. These totals do
not represent an arithmetic sum of the individual components.
|
|
(3)
|
Represents net interest income as a percent of average
interest-earning assets
|
|
(4)
|
Represents the difference between the yield earned on
interest-earning assets and the cost of the debt used to fund
the assets
|
|
(5)
|
The net interest margin analysis includes the following for
foreign businesses:
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
Average interest-earning assets
|
|
$
|
10,157
|
|
|
$
|
9,657
|
|
Average interest-bearing liabilities
|
|
|
8,461
|
|
|
|
8,150
|
|
Net interest income
|
|
|
718
|
|
|
|
691
|
|
Net interest margin
|
|
|
7.1
|
%
|
|
|
7.2
|
%
|
|
|
(6) |
Average rate does not recompute from the dollar figures
presented due to rounding.
|
116
HSBC FINANCE CORPORATION AND SUBSIDIARIES
NET
INTEREST MARGIN 2006 COMPARED TO 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance and
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Interest Income/
|
|
|
Increase/(Decrease) Due to:
|
|
|
|
Outstanding(1)
|
|
|
Average Rate
|
|
|
Interest Expense
|
|
|
|
|
|
Volume
|
|
|
Rate
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Variance
|
|
|
Variance(2)
|
|
|
Variance(2)
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate secured
|
|
$
|
92,351
|
|
|
$
|
73,097
|
|
|
|
8.6
|
%
|
|
|
8.4
|
%
|
|
$
|
7,912
|
|
|
$
|
6,155
|
|
|
$
|
1,757
|
|
|
$
|
1,646
|
|
|
$
|
111
|
|
Auto finance
|
|
|
11,660
|
|
|
|
9,074
|
|
|
|
12.0
|
|
|
|
11.8
|
|
|
|
1,405
|
|
|
|
1,067
|
|
|
|
338
|
|
|
|
311
|
|
|
|
27
|
|
Credit card
|
|
|
25,065
|
|
|
|
17,823
|
|
|
|
16.3
|
|
|
|
13.9
|
|
|
|
4,086
|
|
|
|
2,479
|
|
|
|
1,607
|
|
|
|
1,129
|
|
|
|
478
|
|
Private label
|
|
|
2,492
|
|
|
|
2,948
|
|
|
|
9.6
|
|
|
|
9.4
|
|
|
|
238
|
|
|
|
278
|
|
|
|
(40
|
)
|
|
|
(44
|
)
|
|
|
4
|
|
Personal non-credit card
|
|
|
20,611
|
|
|
|
17,558
|
|
|
|
18.9
|
|
|
|
18.4
|
|
|
|
3,886
|
|
|
|
3,226
|
|
|
|
660
|
|
|
|
574
|
|
|
|
86
|
|
Commercial and other
|
|
|
195
|
|
|
|
255
|
|
|
|
2.1
|
|
|
|
2.4
|
|
|
|
4
|
|
|
|
6
|
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Purchase accounting adjustments
|
|
|
-
|
|
|
|
134
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(124
|
)
|
|
|
(139
|
)
|
|
|
15
|
|
|
|
15
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables
|
|
|
152,374
|
|
|
|
120,889
|
|
|
|
11.4
|
|
|
|
10.8
|
|
|
|
17,407
|
|
|
|
13,072
|
|
|
|
4,335
|
|
|
|
3,563
|
|
|
|
772
|
|
Noninsurance investments
|
|
|
2,676
|
|
|
|
3,694
|
|
|
|
5.8
|
|
|
|
3.9
|
|
|
|
155
|
|
|
|
144
|
|
|
|
11
|
|
|
|
(47
|
)
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets (excluding insurance investments)
|
|
$
|
155,050
|
|
|
$
|
124,583
|
|
|
|
11.3
|
%
|
|
|
10.6
|
%
|
|
$
|
17,562
|
|
|
$
|
13,216
|
|
|
$
|
4,346
|
|
|
$
|
3,403
|
|
|
$
|
943
|
|
Insurance investments
|
|
|
3,105
|
|
|
|
3,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
11,410
|
|
|
|
12,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
169,565
|
|
|
$
|
139,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
12,344
|
|
|
$
|
11,877
|
|
|
|
5.0
|
%
|
|
|
3.4
|
%
|
|
$
|
612
|
|
|
$
|
399
|
|
|
$
|
213
|
|
|
$
|
16
|
|
|
$
|
197
|
|
Bank and other borrowings
|
|
|
494
|
|
|
|
111
|
|
|
|
3.3
|
(6)
|
|
|
2.5
|
(6)
|
|
|
16
|
|
|
|
3
|
|
|
|
13
|
|
|
|
12
|
|
|
|
1
|
|
Due to affiliates
|
|
|
15,459
|
|
|
|
16,654
|
|
|
|
6.0
|
|
|
|
4.3
|
|
|
|
929
|
|
|
|
713
|
|
|
|
216
|
|
|
|
(54
|
)
|
|
|
270
|
|
Long term debt (with original maturities over one year)
|
|
|
115,583
|
|
|
|
86,207
|
|
|
|
5.0
|
|
|
|
4.3
|
|
|
|
5,817
|
|
|
|
3,717
|
|
|
|
2,100
|
|
|
|
1,416
|
|
|
|
684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
143,880
|
|
|
$
|
114,849
|
|
|
|
5.1
|
%
|
|
|
4.2
|
%
|
|
$
|
7,374
|
|
|
$
|
4,832
|
|
|
$
|
2,542
|
|
|
$
|
1,364
|
|
|
$
|
1,178
|
|
Other liabilities
|
|
|
5,231
|
|
|
|
6,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
149,111
|
|
|
|
121,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred securities
|
|
|
575
|
|
|
|
1,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shareholders equity
|
|
|
19,879
|
|
|
|
16,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
169,565
|
|
|
$
|
139,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Margin
operations(3)(5)
|
|
|
|
|
|
|
|
|
|
|
6.6
|
%
|
|
|
6.7
|
%
|
|
$
|
10,188
|
|
|
$
|
8,384
|
|
|
$
|
1,804
|
|
|
$
|
2,039
|
|
|
$
|
(235
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Spreads(4)
|
|
|
|
|
|
|
|
|
|
|
6.2
|
%
|
|
|
6.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Nonaccrual loans are included in average outstanding balances.
|
|
(2)
|
Rate/volume variance is allocated based on the percentage
relationship of changes in volume and changes in rate to the
total interest variance. For total receivables, total
interest-earning assets and total debt, the rate and volume
variances are calculated based on the relative weighting of the
individual components comprising these totals. These totals do
not represent an arithmetic sum of the individual components.
|
|
(3)
|
Represents net interest income as a percent of average
interest-earning assets
|
|
(4)
|
Represents the difference between the yield earned on
interest-earning assets and the cost of the debt used to fund
the assets
|
|
(5)
|
The net interest margin analysis includes the following for
foreign businesses:
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
|
Average interest-earning assets
|
|
$
|
9,657
|
|
|
$
|
12,098
|
|
Average interest-bearing liabilities
|
|
|
8,150
|
|
|
|
10,231
|
|
Net interest income
|
|
|
691
|
|
|
|
754
|
|
Net interest margin
|
|
|
7.2
|
%
|
|
|
6.2
|
%
|
|
|
(6) |
Average rate does not recompute from the dollar figures
presented due to rounding.
|
117
HSBC FINANCE CORPORATION AND SUBSIDIARIES
RECONCILIATIONS
TO U.S. GAAP FINANCIAL MEASURES
Our consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United
States (U.S. GAAP). In addition to the
U.S. GAAP financial results reported in our consolidated
financial statements, MD&A includes reference to the
following information which is presented on a
non-U.S. GAAP
basis:
Operating Results, Percentages and
Ratios Certain percentages and ratios have been
presented on an operating basis and have been calculated using
operating net income, a
non-U.S. GAAP
financial measure. Operating net income is net
income excluding certain nonrecurring items. These nonrecurring
items are also excluded in calculating our operating basis
efficiency ratios. We believe that excluding these items helps
readers of our financial statements to understand better the
results and trends of our underlying business.
IFRS Management Basis A
non-U.S. GAAP
measure of reporting results in accordance with IFRSs and
assumes the private label and real estate secured receivables
transferred to HSBC Bank USA have not been sold and remain on
our balance sheet. IFRS Management Basis also assumes that all
purchase accounting fair value adjustments reflecting our
acquisition by HSBC have been pushed down to HSBC
Finance Corporation.
Equity Ratios In managing capital, we develop
targets for tangible shareholders(s) equity plus
owned loss reserves to tangible managed assets (TETMA +
Owned Reserves) and tangible common equity to tangible
managed assets excluding HSBC acquisition purchase accounting
adjustments. These ratio targets are based on discussions with
HSBC and rating agencies, risks inherent in the portfolio, the
projected operating environment and related risks, and any
acquisition objectives. We and certain rating agencies monitor
ratios excluding the impact of the HSBC acquisition purchase
accounting adjustments as we believe that they represent
non-cash transactions which do not affect our business
operations, cash flows or ability to meet our debt obligations.
These ratios also exclude the equity impact of
SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities, the equity impact of
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and the impact of the
adoption of SFAS No. 159, The Fair Value Option
for Financial Assets and Liabilities, including the
subsequent changes in fair value recognized in earnings
associated with credit risk on debt for which we elected the
fair value option. Preferred securities issued by certain
non-consolidated trusts are also considered equity in the TETMA
+ Owned Reserves calculations because of their long-term
subordinated nature and our ability to defer dividends. Managed
assets include owned assets plus loans which we have sold and
service with limited recourse. Our targets may change from time
to time to accommodate changes in the operating environment or
other considerations such as those listed above. In the fourth
quarter of 2007, Moodys, Standard & Poors
and Fitch changed the total outlook on our issuer default rating
from positive to stable.
Quantitative Reconciliations of
Non-U.S. GAAP Financial
Measures to U.S. GAAP Financial
Measures For a reconciliation of IFRS Management
Basis results to the comparable owned basis amounts, see
Note 21, Business Segments, to the accompanying
consolidated financial statements. Reconciliations of selected
operating basis financial ratios and our equity ratios follow.
118
HSBC FINANCE CORPORATION AND SUBSIDIARIES
RECONCILIATIONS
TO U.S. GAAP FINANCIAL MEASURES
SELECTED FINANCIAL DATA AND STATISTICS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Return on Average Common Shareholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(4,906
|
)
|
|
$
|
1,443
|
|
|
$
|
1,772
|
|
|
$
|
1,940
|
|
|
$
|
1,603
|
|
Dividends on preferred stock
|
|
|
(37
|
)
|
|
|
(37
|
)
|
|
|
(83
|
)
|
|
|
(72
|
)
|
|
|
(76
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common shareholders
|
|
$
|
(4,943
|
)
|
|
$
|
1,406
|
|
|
$
|
1,689
|
|
|
$
|
1,868
|
|
|
$
|
1,527
|
|
Gain on bulk sale of private label receivables
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(423
|
)
|
|
|
-
|
|
Adoption of FFIEC charge-off policies for domestic private label
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(excluding retail sales contracts) and credit card portfolios
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
121
|
|
|
|
-
|
|
HSBC acquisition related costs and other merger related items
incurred by HSBC Finance Corporation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating net income (loss) available to common shareholders
|
|
$
|
(4,943
|
)
|
|
$
|
1,406
|
|
|
$
|
1,689
|
|
|
$
|
1,566
|
|
|
$
|
1,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shareholders equity
|
|
$
|
18,587
|
|
|
$
|
19,879
|
|
|
$
|
16,936
|
|
|
$
|
17,003
|
|
|
$
|
14,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average common shareholders equity
|
|
|
(26.59
|
)%
|
|
|
7.07
|
%
|
|
|
9.97
|
%
|
|
|
10.99
|
%
|
|
|
10.89
|
%
|
Return on average common shareholders equity, operating
basis
|
|
|
(26.59
|
)
|
|
|
7.07
|
|
|
|
9.97
|
|
|
|
9.21
|
|
|
|
12.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on Average Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(4,906
|
)
|
|
$
|
1,443
|
|
|
$
|
1,772
|
|
|
$
|
1,940
|
|
|
$
|
1,603
|
|
Operating net income (loss)
|
|
|
(4,906
|
)
|
|
|
1,443
|
|
|
|
1,772
|
|
|
|
1,638
|
|
|
|
1,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average owned assets
|
|
$
|
175,042
|
|
|
$
|
170,013
|
|
|
$
|
139,793
|
|
|
$
|
123,921
|
|
|
$
|
110,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets
|
|
|
(2.80
|
)%
|
|
|
.85
|
%
|
|
|
1.27
|
%
|
|
|
1.57
|
%
|
|
|
1.46
|
%
|
Return on average assets, operating basis
|
|
|
(2.80
|
)
|
|
|
.85
|
|
|
|
1.27
|
|
|
|
1.32
|
|
|
|
1.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency Ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses less policyholders benefits
|
|
$
|
11,354
|
|
|
$
|
6,293
|
|
|
$
|
5,685
|
|
|
$
|
5,279
|
|
|
$
|
4,853
|
|
HSBC acquisition related costs and other merger related items
incurred by HSBC Finance Corporation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(198
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses less policyholders benefits,
excluding nonrecurring items
|
|
$
|
11,354
|
|
|
$
|
6,293
|
|
|
$
|
5,685
|
|
|
$
|
5,279
|
|
|
$
|
4,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and other revenues less policyholders
benefits
|
|
$
|
16,529
|
|
|
$
|
15,144
|
|
|
$
|
12,891
|
|
|
$
|
12,553
|
|
|
$
|
11,295
|
|
Nonrecurring items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on bulk sale of private label receivables
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(663
|
)
|
|
|
-
|
|
Adoption of FFIEC charge-off policies for domestic private label
(excluding retail sales contracts) and credit card portfolios
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
151
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and other revenues less policyholders
benefits, excluding nonrecurring items
|
|
$
|
16,529
|
|
|
$
|
15,144
|
|
|
$
|
12,891
|
|
|
$
|
12,041
|
|
|
$
|
11,295
|
|
Efficiency ratio
|
|
|
68.69
|
%
|
|
|
41.55
|
%
|
|
|
44.10
|
%
|
|
|
42.05
|
%
|
|
|
42.97
|
%
|
Efficiency ratio, operating basis
|
|
|
68.69
|
|
|
|
41.55
|
|
|
|
44.10
|
|
|
|
43.84
|
|
|
|
41.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119
HSBC FINANCE CORPORATION AND SUBSIDIARIES
RECONCILIATIONS
TO U.S. GAAP FINANCIAL MEASURES
EQUITY RATIOS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Tangible common equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shareholders equity
|
|
$
|
13,584
|
|
|
$
|
19,515
|
|
|
$
|
18,904
|
|
|
$
|
15,841
|
|
|
$
|
16,391
|
|
Exclude:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value option adjustment
|
|
|
(545
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Unrealized (gains) losses on cash flow hedging instruments
|
|
|
718
|
|
|
|
61
|
|
|
|
(260
|
)
|
|
|
(119
|
)
|
|
|
10
|
|
Minimum pension liability
|
|
|
3
|
|
|
|
1
|
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
Unrealized gains on investments and interest-only strip
receivables
|
|
|
13
|
|
|
|
23
|
|
|
|
3
|
|
|
|
(53
|
)
|
|
|
(167
|
)
|
Intangibles assets
|
|
|
(1,107
|
)
|
|
|
(2,218
|
)
|
|
|
(2,480
|
)
|
|
|
(2,705
|
)
|
|
|
(2,856
|
)
|
Goodwill
|
|
|
(2,827
|
)
|
|
|
(7,010
|
)
|
|
|
(7,003
|
)
|
|
|
(6,856
|
)
|
|
|
(6,697
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible common equity
|
|
|
9,839
|
|
|
|
10,372
|
|
|
|
9,164
|
|
|
|
6,112
|
|
|
|
6,681
|
|
Purchase accounting adjustments
|
|
|
267
|
|
|
|
1,105
|
|
|
|
1,441
|
|
|
|
2,227
|
|
|
|
2,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible common equity, excluding HSBC acquisition purchase
accounting adjustments
|
|
$
|
10,106
|
|
|
$
|
11,477
|
|
|
$
|
10,605
|
|
|
$
|
8,339
|
|
|
$
|
9,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible shareholders(s) equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible common equity
|
|
$
|
9,839
|
|
|
$
|
10,372
|
|
|
$
|
9,164
|
|
|
$
|
6,112
|
|
|
$
|
6,681
|
|
Preferred stock
|
|
|
575
|
|
|
|
575
|
|
|
|
575
|
|
|
|
1,100
|
|
|
|
1,100
|
|
Mandatorily redeemable preferred securities of Household Capital
Trusts
|
|
|
1,275
|
|
|
|
1,275
|
|
|
|
1,679
|
|
|
|
994
|
|
|
|
1,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible shareholders(s) equity
|
|
|
11,689
|
|
|
|
12,222
|
|
|
|
11,418
|
|
|
|
8,206
|
|
|
|
8,812
|
|
HSBC acquisition purchase accounting adjustments
|
|
|
267
|
|
|
|
1,105
|
|
|
|
1,438
|
|
|
|
2,208
|
|
|
|
2,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible shareholders(s) equity, excluding purchase
accounting adjustments
|
|
$
|
11,956
|
|
|
$
|
13,327
|
|
|
$
|
12,856
|
|
|
$
|
10,414
|
|
|
$
|
11,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible shareholders(s) equity plus owned loss
reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible shareholders(s) equity
|
|
$
|
11,689
|
|
|
$
|
12,222
|
|
|
$
|
11,418
|
|
|
$
|
8,206
|
|
|
$
|
8,812
|
|
Owned loss reserves
|
|
|
10,905
|
|
|
|
6,587
|
|
|
|
4,521
|
|
|
|
3,625
|
|
|
|
3,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible shareholders(s) equity plus owned loss
reserves
|
|
|
22,594
|
|
|
|
18,809
|
|
|
|
15,939
|
|
|
|
11,831
|
|
|
|
12,605
|
|
HSBC acquisition purchase accounting adjustments
|
|
|
267
|
|
|
|
1,105
|
|
|
|
1,438
|
|
|
|
2,208
|
|
|
|
2,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible shareholders(s) equity plus owned loss
reserves, excluding purchase accounting adjustments
|
|
$
|
22,861
|
|
|
$
|
19,914
|
|
|
$
|
17,377
|
|
|
$
|
14,039
|
|
|
$
|
15,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible managed assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned assets
|
|
$
|
165,504
|
|
|
$
|
179,218
|
|
|
$
|
156,522
|
|
|
$
|
130,190
|
|
|
$
|
119,052
|
|
Receivables serviced with limited recourse
|
|
|
124
|
|
|
|
949
|
|
|
|
4,074
|
|
|
|
14,225
|
|
|
|
26,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed assets
|
|
|
165,628
|
|
|
|
180,167
|
|
|
|
160,596
|
|
|
|
144,415
|
|
|
|
145,253
|
|
Exclude:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
(1,107
|
)
|
|
|
(2,218
|
)
|
|
|
(2,480
|
)
|
|
|
(2,705
|
)
|
|
|
(2,856
|
)
|
Goodwill
|
|
|
(2,827
|
)
|
|
|
(7,010
|
)
|
|
|
(7,003
|
)
|
|
|
(6,856
|
)
|
|
|
(6,697
|
)
|
Derivative financial assets
|
|
|
(48
|
)
|
|
|
(298
|
)
|
|
|
(87
|
)
|
|
|
(4,049
|
)
|
|
|
(3,016
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible managed assets
|
|
|
161,646
|
|
|
|
170,641
|
|
|
|
151,026
|
|
|
|
130,805
|
|
|
|
132,684
|
|
HSBC acquisition purchase accounting adjustments
|
|
|
(387
|
)
|
|
|
64
|
|
|
|
(52
|
)
|
|
|
(202
|
)
|
|
|
(431
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible managed assets, excluding purchase accounting
adjustments
|
|
$
|
161,259
|
|
|
$
|
170,705
|
|
|
$
|
150,974
|
|
|
$
|
130,603
|
|
|
$
|
132,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common and preferred equity to owned assets
|
|
|
8.56
|
%
|
|
|
11.21
|
%
|
|
|
12.44
|
%
|
|
|
13.01
|
%
|
|
|
14.69
|
%
|
Tangible common equity to tangible managed assets
|
|
|
6.09
|
|
|
|
6.08
|
|
|
|
6.07
|
|
|
|
4.67
|
|
|
|
5.04
|
|
Tangible shareholders(s) equity to tangible managed
assets
|
|
|
7.23
|
|
|
|
7.16
|
|
|
|
7.56
|
|
|
|
6.27
|
|
|
|
6.64
|
|
Tangible shareholders(s) equity plus owned loss
reserves to tangible managed assets
|
|
|
13.98
|
|
|
|
11.02
|
|
|
|
10.55
|
|
|
|
9.04
|
|
|
|
9.50
|
|
Excluding HSBC acquisition purchase accounting adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible common equity to tangible managed assets
|
|
|
6.27
|
|
|
|
6.72
|
|
|
|
7.02
|
|
|
|
6.38
|
|
|
|
6.98
|
|
Tangible shareholders(s) equity to tangible managed
assets
|
|
|
7.41
|
|
|
|
7.81
|
|
|
|
8.52
|
|
|
|
7.97
|
|
|
|
8.55
|
|
Tangible shareholders(s) equity plus owned loss
reserves to tangible managed assets
|
|
|
14.18
|
|
|
|
11.67
|
|
|
|
11.51
|
|
|
|
10.75
|
|
|
|
11.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120
HSBC
Finance Corporation
Item 7A.
Quantitative and Qualitative Disclosures About Market
Risk.
Information required by this Item is included in sections of
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations on the following
pages: Liquidity and Capital Resources, pages
91- 100,
Off Balance Sheet Arrangements and Secured
Financings, pages
100-103 and
Risk Management, pages
103-108.
Item 8.
Financial Statements and Supplementary Data.
Our 2007 Financial Statements meet the requirements of
Regulation S-X.
The 2007 Financial Statements and supplementary financial
information specified by Item 302 of
Regulation S-K
are set forth below.
121
HSBC
Finance Corporation
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Shareholder
HSBC Finance Corporation:
We have audited HSBC Finance Corporations internal control
over financial reporting as of December 31, 2007, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). HSBC Finance
Corporations management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in Managements Assessment of
Internal Control over Financial Reporting. Our responsibility is
to express an opinion on HSBC Finance Corporations
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, HSBC Finance Corporation maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2007, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of HSBC Finance Corporation (a
Delaware corporation), an indirect wholly-owned subsidiary of
HSBC Holdings plc. and subsidiaries as of December 31, 2007
and 2006 and the related consolidated statements of
income(loss), changes in shareholders(s) equity, and
cash flows for each of the years in the three-year period ended
December 31, 2007, and our report dated February 29,
2008 expressed an unqualified opinion on those consolidated
financial statements.
/s/ KPMG LLP
Chicago, Illinois
February 29, 2008
122
HSBC
Finance Corporation
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholder
HSBC Finance Corporation:
We have audited the accompanying consolidated balance sheets of
HSBC Finance Corporation (a Delaware corporation), an indirect
wholly-owned subsidiary of HSBC Holdings plc, and subsidiaries
as of December 31, 2007 and 2006 and the related
consolidated statements of income (loss), changes in
shareholders(s) equity, and cash flows for each of
the years in the three-year period ended December 31, 2007.
These consolidated financial statements are the responsibility
of HSBC Finance Corporations management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the aforementioned consolidated financial
statements present fairly, in all material respects, the
financial position of HSBC Finance Corporation and subsidiaries
as of December 31, 2007 and 2006, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2007, in conformity
with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), HSBC
Finance Corporations internal control over financial
reporting as of December 31, 2007, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report
dated February 29, 2008 expressed an unqualified opinion on
the effectiveness of HSBC Financial Corporations internal
control over financing reporting.
/s/ KPMG LLP
Chicago, Illinois
February 29, 2008
123
HSBC
Finance Corporation
CONSOLIDATED
STATEMENT OF INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
(in millions)
|
|
|
Finance and other interest income
|
|
$
|
18,683
|
|
|
$
|
17,562
|
|
|
$
|
13,216
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
HSBC affiliates
|
|
|
992
|
|
|
|
929
|
|
|
|
713
|
|
Non-affiliates
|
|
|
7,140
|
|
|
|
6,445
|
|
|
|
4,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
10,551
|
|
|
|
10,188
|
|
|
|
8,384
|
|
Provision for credit losses
|
|
|
11,026
|
|
|
|
6,564
|
|
|
|
4,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provision for credit
losses
|
|
|
(475
|
)
|
|
|
3,624
|
|
|
|
3,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitization revenue
|
|
|
70
|
|
|
|
167
|
|
|
|
211
|
|
Insurance revenue
|
|
|
806
|
|
|
|
1,001
|
|
|
|
997
|
|
Investment income
|
|
|
145
|
|
|
|
274
|
|
|
|
134
|
|
Derivative (expense) income
|
|
|
(79
|
)
|
|
|
190
|
|
|
|
249
|
|
Gain on debt designated at fair value and related derivatives
|
|
|
1,275
|
|
|
|
-
|
|
|
|
-
|
|
Fee income
|
|
|
2,415
|
|
|
|
1,911
|
|
|
|
1,568
|
|
Enhancement services revenue
|
|
|
635
|
|
|
|
515
|
|
|
|
338
|
|
Taxpayer financial services revenue
|
|
|
247
|
|
|
|
258
|
|
|
|
277
|
|
Gain on receivable sales to HSBC affiliates
|
|
|
419
|
|
|
|
422
|
|
|
|
413
|
|
Servicing and other fees from HSBC affiliates
|
|
|
536
|
|
|
|
506
|
|
|
|
440
|
|
Other (expense) income
|
|
|
(70
|
)
|
|
|
179
|
|
|
|
336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other revenues
|
|
|
6,399
|
|
|
|
5,423
|
|
|
|
4,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
2,342
|
|
|
|
2,333
|
|
|
|
2,072
|
|
Sales incentives
|
|
|
212
|
|
|
|
358
|
|
|
|
397
|
|
Occupancy and equipment expenses
|
|
|
379
|
|
|
|
317
|
|
|
|
334
|
|
Other marketing expenses
|
|
|
748
|
|
|
|
814
|
|
|
|
731
|
|
Other servicing and administrative expenses
|
|
|
1,337
|
|
|
|
1,115
|
|
|
|
917
|
|
Support services from HSBC affiliates
|
|
|
1,192
|
|
|
|
1,087
|
|
|
|
889
|
|
Amortization of intangibles
|
|
|
253
|
|
|
|
269
|
|
|
|
345
|
|
Policyholders benefits
|
|
|
421
|
|
|
|
467
|
|
|
|
456
|
|
Goodwill and other intangible asset impairment charges
|
|
|
4,891
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
11,775
|
|
|
|
6,760
|
|
|
|
6,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense
|
|
|
(5,851
|
)
|
|
|
2,287
|
|
|
|
2,663
|
|
Income tax expense (benefit)
|
|
|
(945
|
)
|
|
|
844
|
|
|
|
891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(4,906
|
)
|
|
$
|
1,443
|
|
|
$
|
1,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
124
HSBC
Finance Corporation
CONSOLIDATED
BALANCE SHEET
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(in millions,
|
|
|
|
except share data)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
783
|
|
|
$
|
871
|
|
Interest bearing deposits with banks
|
|
|
335
|
|
|
|
424
|
|
Securities purchased under agreements to resell
|
|
|
1,506
|
|
|
|
171
|
|
Securities
|
|
|
3,152
|
|
|
|
4,695
|
|
Receivables, net
|
|
|
147,455
|
|
|
|
157,386
|
|
Intangible assets, net
|
|
|
1,107
|
|
|
|
2,218
|
|
Goodwill
|
|
|
2,827
|
|
|
|
7,010
|
|
Properties and equipment, net
|
|
|
415
|
|
|
|
426
|
|
Real estate owned
|
|
|
1,023
|
|
|
|
670
|
|
Derivative financial assets
|
|
|
48
|
|
|
|
298
|
|
Other assets
|
|
|
6,853
|
|
|
|
5,049
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
165,504
|
|
|
$
|
179,218
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
Commercial paper, bank and other borrowings
|
|
$
|
8,424
|
|
|
$
|
11,055
|
|
Due to affiliates
|
|
|
14,902
|
|
|
|
15,172
|
|
Long term debt (with original maturities over one year,
including $32.9 billion at December 31, 2007 and $0 at
December 31, 2006 carried at fair value)
|
|
|
123,262
|
|
|
|
127,590
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
146,588
|
|
|
|
153,817
|
|
|
|
|
|
|
|
|
|
|
Insurance policy and claim reserves
|
|
|
1,001
|
|
|
|
1,319
|
|
Derivative related liabilities
|
|
|
20
|
|
|
|
6
|
|
Liability for pension benefits
|
|
|
390
|
|
|
|
355
|
|
Other liabilities
|
|
|
3,346
|
|
|
|
3,631
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
151,345
|
|
|
|
159,128
|
|
|
|
|
|
|
|
|
|
|
Shareholders(s) equity
|
|
|
|
|
|
|
|
|
Redeemable preferred stock, 1,501,100 shares authorized,
Series B, $0.01 par value, 575,000 shares issued
|
|
|
575
|
|
|
|
575
|
|
Common shareholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 100 shares authorized;
57 shares issued
|
|
|
-
|
|
|
|
-
|
|
Additional paid-in capital
|
|
|
18,227
|
|
|
|
17,279
|
|
(Accumulated deficit) retained earnings
|
|
|
(4,423
|
)
|
|
|
1,877
|
|
Accumulated other comprehensive income (loss)
|
|
|
(220
|
)
|
|
|
359
|
|
|
|
|
|
|
|
|
|
|
Total common shareholders equity
|
|
|
13,584
|
|
|
|
19,515
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders(s)
equity
|
|
$
|
165,504
|
|
|
$
|
179,218
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
125
HSBC
Finance Corporation
CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS(S)
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
(in millions)
|
|
|
Preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
575
|
|
|
$
|
575
|
|
|
$
|
1,100
|
|
Issuance of Series B preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
575
|
|
Exchange of Series A preferred stock for common stock
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
575
|
|
|
$
|
575
|
|
|
$
|
575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shareholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Exchange of common stock for Series A preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
17,279
|
|
|
$
|
17,145
|
|
|
$
|
14,627
|
|
Premium on sale of European Operations to affiliate
|
|
|
-
|
|
|
|
13
|
|
|
|
-
|
|
Premium on sale of U.K. credit card business to affiliate
|
|
|
-
|
|
|
|
-
|
|
|
|
182
|
|
Exchange of common stock for Series A preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
1,112
|
|
Capital contribution from parent company
|
|
|
950
|
|
|
|
163
|
|
|
|
1,200
|
|
Return of capital to HSBC
|
|
|
(18
|
)
|
|
|
(49
|
)
|
|
|
(19
|
)
|
Employee benefit plans, including transfers and other
|
|
|
16
|
|
|
|
7
|
|
|
|
59
|
|
Issuance costs of Series B preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
18,227
|
|
|
$
|
17,279
|
|
|
$
|
17,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit retained earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
1,877
|
|
|
$
|
1,280
|
|
|
$
|
571
|
|
Adjustment to initially apply the fair value method of accounting
|
|
|
|
|
|
|
|
|
|
|
|
|
under FASB Statement No. 159, net of tax
|
|
|
(538
|
)
|
|
|
-
|
|
|
|
-
|
|
Net income (loss)
|
|
|
(4,906
|
)
|
|
|
1,443
|
|
|
|
1,772
|
|
Cash dividend equivalents on HSBCs Restricted Share Plan
|
|
|
(7
|
)
|
|
|
-
|
|
|
|
-
|
|
Dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
(37
|
)
|
|
|
(37
|
)
|
|
|
(83
|
)
|
Common stock
|
|
|
(812
|
)
|
|
|
(809
|
)
|
|
|
(980
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
(4,423
|
)
|
|
$
|
1,877
|
|
|
$
|
1,280
|
|
Accumulated other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
359
|
|
|
$
|
479
|
|
|
$
|
643
|
|
Net change in unrealized gains (losses) on:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives classified as cash flow hedges
|
|
|
(657
|
)
|
|
|
(321
|
)
|
|
|
141
|
|
Securities available for sale and interest-only strip receivables
|
|
|
10
|
|
|
|
(21
|
)
|
|
|
(56
|
)
|
Minimum pension liability
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
FASB Statement No. 158 adjustment, net of tax
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
-
|
|
Foreign currency translation adjustments
|
|
|
70
|
|
|
|
223
|
|
|
|
(253
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss), net of tax
|
|
|
(579
|
)
|
|
|
(119
|
)
|
|
|
(164
|
)
|
Adjustment to initially apply FASB Statement No. 158, net
of tax
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
(220
|
)
|
|
$
|
359
|
|
|
$
|
479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total common shareholders equity
|
|
$
|
13,584
|
|
|
$
|
19,515
|
|
|
$
|
18,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(4,906
|
)
|
|
$
|
1,443
|
|
|
$
|
1,772
|
|
Other comprehensive income (loss)
|
|
|
(579
|
)
|
|
|
(119
|
)
|
|
|
(164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
(5,485
|
)
|
|
$
|
1,324
|
|
|
$
|
1,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
575
|
|
|
|
575
|
|
|
|
1,100
|
|
Issuance of Series B preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
575
|
|
Exchange of Series A preferred stock to common stock
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
575
|
|
|
|
575
|
|
|
|
575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
55
|
|
|
|
55
|
|
|
|
50
|
|
Issuance of common stock to parent
|
|
|
2
|
|
|
|
-
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
57
|
|
|
|
55
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
126
HSBC
Finance Corporation
CONSOLIDATED
STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(4,906
|
)
|
|
$
|
1,443
|
|
|
$
|
1,772
|
|
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses
|
|
|
11,026
|
|
|
|
6,564
|
|
|
|
4,543
|
|
Gain on receivable sales to HSBC affiliates
|
|
|
(419
|
)
|
|
|
(422
|
)
|
|
|
(413
|
)
|
(Gain) loss on real estate receivables sales with third parties
|
|
|
22
|
|
|
|
-
|
|
|
|
-
|
|
Loss on sale of real estate owned, including lower of cost or
market adjustments
|
|
|
304
|
|
|
|
155
|
|
|
|
164
|
|
Gain on sale of investment in Kanbay International, Inc.
|
|
|
-
|
|
|
|
(123
|
)
|
|
|
-
|
|
Insurance policy and claim reserves
|
|
|
(73
|
)
|
|
|
(240
|
)
|
|
|
(222
|
)
|
Depreciation and amortization
|
|
|
345
|
|
|
|
385
|
|
|
|
457
|
|
Change in mark-to-market on debt designated at fair value and
related derivatives
|
|
|
(1,593
|
)
|
|
|
-
|
|
|
|
-
|
|
Gain on sale of MasterCard Class B shares
|
|
|
(115
|
)
|
|
|
-
|
|
|
|
-
|
|
Goodwill and other intangible asset impairment charges
|
|
|
4,891
|
|
|
|
-
|
|
|
|
-
|
|
Deferred income tax (benefit) provision
|
|
|
(1,066
|
)
|
|
|
(560
|
)
|
|
|
(366
|
)
|
Net change in other assets
|
|
|
(744
|
)
|
|
|
(1,538
|
)
|
|
|
326
|
|
Net change in other liabilities
|
|
|
(290
|
)
|
|
|
1,131
|
|
|
|
393
|
|
Net change in loans held for sale
|
|
|
1,661
|
|
|
|
78
|
|
|
|
(672
|
)
|
Foreign exchange and SFAS No. 133 movements on long term
debt and net change in non-FVO related derivative assets and
liabilities
|
|
|
3,342
|
|
|
|
884
|
|
|
|
(524
|
)
|
Excess tax benefits from share-based compensation arrangements
|
|
|
(8
|
)
|
|
|
(16
|
)
|
|
|
-
|
|
Other, net
|
|
|
281
|
|
|
|
(72
|
)
|
|
|
(177
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
12,658
|
|
|
|
7,669
|
|
|
|
5,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
|
|
|
(1,214
|
)
|
|
|
(2,071
|
)
|
|
|
(852
|
)
|
Matured
|
|
|
879
|
|
|
|
1,847
|
|
|
|
646
|
|
Sold
|
|
|
173
|
|
|
|
492
|
|
|
|
429
|
|
Net change in short-term securities available for sale
|
|
|
1,324
|
|
|
|
(606
|
)
|
|
|
(472
|
)
|
Net change in securities purchased under agreements to resell
|
|
|
(1,335
|
)
|
|
|
(93
|
)
|
|
|
2,573
|
|
Net change in interest bearing deposits with banks
|
|
|
28
|
|
|
|
(5
|
)
|
|
|
187
|
|
Receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
Originations, net of collections
|
|
|
(6,290
|
)
|
|
|
(24,511
|
)
|
|
|
(34,096
|
)
|
Purchases and related premiums
|
|
|
(220
|
)
|
|
|
(3,225
|
)
|
|
|
(1,053
|
)
|
Initial securitizations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Proceeds from sales of real estate owned
|
|
|
1,588
|
|
|
|
1,178
|
|
|
|
1,032
|
|
Net change in interest-only strip receivables
|
|
|
6
|
|
|
|
(5
|
)
|
|
|
253
|
|
Cash received in sale of mortgage receivables to third party
|
|
|
2,692
|
|
|
|
-
|
|
|
|
-
|
|
Cash received in sale of MasterCard Class B shares
|
|
|
115
|
|
|
|
-
|
|
|
|
-
|
|
Cash received in sale of European Operations
|
|
|
-
|
|
|
|
46
|
|
|
|
-
|
|
Cash received in sale of U.K. insurance operations
|
|
|
206
|
|
|
|
-
|
|
|
|
-
|
|
Cash received in sale of U.K. credit card business
|
|
|
-
|
|
|
|
90
|
|
|
|
2,627
|
|
Net cash paid for acquisition of Metris
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,572
|
)
|
Net cash paid for acquisition of Solstice
|
|
|
-
|
|
|
|
(50
|
)
|
|
|
-
|
|
Properties and equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
(135
|
)
|
|
|
(102
|
)
|
|
|
(78
|
)
|
Sales
|
|
|
38
|
|
|
|
26
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(2,145
|
)
|
|
|
(26,989
|
)
|
|
|
(30,369
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in short-term debt and deposits
|
|
|
(2,708
|
)
|
|
|
(411
|
)
|
|
|
2,381
|
|
Net change in due to affiliates
|
|
|
(362
|
)
|
|
|
(846
|
)
|
|
|
2,435
|
|
Long term debt issued
|
|
|
18,490
|
|
|
|
41,138
|
|
|
|
40,214
|
|
Long term debt retired
|
|
|
(26,063
|
)
|
|
|
(19,663
|
)
|
|
|
(20,967
|
)
|
Issuance of company obligated mandatorily redeemable preferred
securities of subsidiary trusts to HSBC
|
|
|
-
|
|
|
|
-
|
|
|
|
1,031
|
|
Redemption of company obligated mandatorily redeemable preferred
securities of subsidiary trusts
|
|
|
-
|
|
|
|
(412
|
)
|
|
|
(309
|
)
|
Insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholders benefits paid
|
|
|
(246
|
)
|
|
|
(264
|
)
|
|
|
(250
|
)
|
Cash received from policyholders
|
|
|
187
|
|
|
|
393
|
|
|
|
380
|
|
Capital contribution from parent
|
|
|
950
|
|
|
|
163
|
|
|
|
1,200
|
|
Shareholders dividends
|
|
|
(849
|
)
|
|
|
(846
|
)
|
|
|
(1,063
|
)
|
Issuance of preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
559
|
|
Excess tax benefits from share-based compensation arrangements
|
|
|
8
|
|
|
|
16
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(10,593
|
)
|
|
|
19,268
|
|
|
|
25,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(8
|
)
|
|
|
20
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
|
(88
|
)
|
|
|
(32
|
)
|
|
|
511
|
|
Cash at beginning of period
|
|
|
871
|
|
|
|
903
|
|
|
|
392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
783
|
|
|
$
|
871
|
|
|
$
|
903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
8,466
|
|
|
$
|
7,454
|
|
|
$
|
5,233
|
|
Income taxes paid
|
|
|
737
|
|
|
|
1,437
|
|
|
|
1,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Noncash Financing and Capital Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate preferred stock received in sale of U.K. credit card
business
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
261
|
|
Exchange of preferred for common stock
|
|
|
-
|
|
|
|
-
|
|
|
|
1,112
|
|
Transfer of receivables to Real Estate Owned
|
|
|
2,219
|
|
|
|
1,435
|
|
|
|
994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
127
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
HSBC Finance Corporation (formerly Household International,
Inc.) and its subsidiaries were acquired by a wholly owned
subsidiary of HSBC Holdings plc (HSBC) on
March 28, 2003 in a purchase business combination recorded
under the push-down method of accounting, which
resulted in a new basis of accounting for the
successor period beginning March 29, 2003.
HSBC Finance Corporation and subsidiaries, is an indirect wholly
owned subsidiary of HSBC North America Holdings Inc. (HSBC
North America), which is an indirect wholly-owned
subsidiary of HSBC. HSBC Finance Corporation provides
middle-market consumers with several types of loan products in
the United States, the United Kingdom, Canada, and the
Republic of Ireland. HSBC Finance Corporation may also be
referred to in these notes to the consolidated financial
statements as we, us or our.
Our lending products include real estate secured loans, auto
finance loans, MasterCard*(, Visa*, American Express* and
Discover* credit card loans (Credit Card), private
label credit card loans and personal non-credit card loans. We
also initiate tax refund anticipation loans and other related
products in the United States and offer credit and specialty
insurance in the United States, Canada, and prior to
November 1, 2007, the United Kingdom. The insurance
operations in the United Kingdom were sold on November 1,
2007 to Aviva plc and its subsidiaries (Aviva).
Subsequent to November 1, 2007, we distribute insurance
products in the United Kingdom through our branch network which
are underwritten by Aviva. We have three reportable segments:
Consumer, Credit Card Services, and International. Our Consumer
segment consists of our branch-based consumer lending, mortgage
services, retail services, and auto finance businesses. Our
Credit Card Services segment consists of our domestic credit
card business. Our International segment consists of our foreign
operations in Canada, the United Kingdom (U.K.), the
Republic of Ireland and prior to November 9, 2006 our
operations in Slovakia, the Czech Republic and Hungary.
During 2004, Household International, Inc.
(Household) rebranded the majority of its
U.S. and Canadian businesses to the HSBC brand. Businesses
previously operating under the Household name are now called
HSBC. Our consumer lending business retained the HFC and
Beneficial brands in the United States, accompanied by the HSBC
Groups endorsement signature, Member HSBC
Group. The single brand has allowed HSBC in North America
to better align its businesses, provided a stronger platform to
service customers and advanced growth. The HSBC brand also
positions us to expand the products and services offered to our
customers. As part of this initiative, Household changed its
name to HSBC Finance Corporation in December 2004.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Basis of Presentation The consolidated
financial statements include the accounts of HSBC Finance
Corporation and all subsidiaries including all variable interest
entities in which we are the primary beneficiary as defined by
Financial Accounting Standards Board Interpretation No. 46
(Revised). Unaffiliated trusts to which we have transferred
securitized receivables which are qualifying special purpose
entities (QSPEs) as defined by Statement of
Financial Accounting Standards (SFAS) No. 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, are not consolidated.
All significant intercompany accounts and transactions have been
eliminated.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates. Certain reclassifications have been made to prior
year amounts to conform to the current period presentation.
Securities purchased under agreements to
resell Securities purchased under agreements to
resell are treated as collateralized financing transactions and
are carried at the amounts at which the securities were acquired
plus accrued interest. Interest income earned on these
securities is included in net interest income.
(* MasterCard is a
registered trademark of MasterCard International, Incorporated;
VISA is a registered trademark of Visa, Inc; American Express is
a registered trademark of American Express Company and Discover
is a registered trademark of Novus Credit Services, Inc.
128
Investment Securities We maintain investment
portfolios (comprised primarily of corporate debt securities) in
both our noninsurance and insurance operations. Our entire
investment securities portfolio was classified as
available-for-sale at December 31, 2007 and 2006.
Available-for-sale investments are intended to be invested for
an indefinite period but may be sold in response to events we
expect to occur in the foreseeable future. These investments are
carried at fair value. Unrealized holding gains and losses on
available-for-sale investments are recorded as adjustments to
common shareholders equity in accumulated other
comprehensive income, net of income taxes. Any decline in the
fair value of investments which is deemed to be other than
temporary is charged against current period earnings.
Cost of investment securities sold is determined using the
specific identification method. Interest income earned on the
noninsurance investment portfolio is classified in the
statements of income in net interest income. Realized gains and
losses from the investment portfolio and investment income from
the insurance portfolio are recorded in investment income.
Accrued investment income is classified with investment
securities.
Receivables Finance receivables are carried
at amortized cost which represents the principal amount
outstanding, net of any unearned income, charge-offs,
unamortized deferred fees and costs on originated loans,
purchase accounting fair value adjustments and premiums or
discounts on purchased loans. Finance receivables are further
reduced by credit loss reserves and unearned credit insurance
premiums and claims reserves applicable to credit risks on our
consumer receivables. Receivables held for sale are carried at
the lower of aggregate cost or market value and remain presented
as receivables in the consolidated balance sheet. Finance income
is recognized using the effective yield method. Premiums and
discounts, including purchase accounting adjustments on
receivables, are recognized as adjustments to the yield of the
related receivables. Origination fees, which include points on
real estate secured loans, are deferred and generally amortized
to finance income over the estimated life of the related
receivables, except to the extent they offset directly related
lending costs. Net deferred origination fees, excluding
MasterCard and Visa, totaled $146 million at
December 31, 2007 and $128 million at
December 31, 2006. MasterCard and Visa annual fees are
netted with direct lending costs, deferred, and amortized on a
straight-line basis over one year. Deferred MasterCard and Visa
annual fees, net of direct lending costs related to these
receivables, totaled $249 million at December 31, 2007
and $233 million at December 31, 2006.
Insurance reserves and unearned premiums applicable to credit
risks on consumer receivables are treated as a reduction of
receivables in the balance sheet, since payments on such
policies generally are used to reduce outstanding receivables.
Provision and Credit Loss Reserves Provision
for credit losses on owned receivables is made in an amount
sufficient to maintain credit loss reserves at a level
considered adequate, but not excessive, to cover probable losses
of principal, interest and fees, including late, overlimit and
annual fees, in the existing loan portfolio. We estimate
probable losses for consumer receivables using a roll rate
migration analysis that estimates the likelihood that a loan
will progress through the various stages of delinquency, or
buckets, and ultimately charge-off. This analysis considers
delinquency status, loss experience and severity and takes into
account whether loans are in bankruptcy, have been restructured,
rewritten, or are subject to forbearance, an external debt
management plan, hardship, modification, extension or deferment.
Our credit loss reserves also take into consideration the loss
severity expected based on the underlying collateral, if any,
for the loan in the event of default. Delinquency status may be
affected by customer account management policies and practices,
such as the restructure of accounts, forbearance agreements,
extended payment plans, modification arrangements, loan rewrites
and deferments. When customer account management policies or
changes thereto, shift loans from a higher
delinquency bucket to a lower delinquency bucket,
this will be reflected in our roll rates statistics. To the
extent that restructured accounts have a greater propensity to
roll to higher delinquency buckets, this will be captured in the
roll rates. Since the loss reserve is computed based on the
composite of all these calculations, this increase in roll rate
will be applied to receivables in all respective buckets, which
will increase the overall reserve level. In addition, loss
reserves on consumer receivables are maintained to reflect our
judgment of portfolio risk factors which may not be fully
reflected in the statistical roll rate calculation. Risk factors
considered in establishing loss reserves on consumer receivables
include recent growth, product mix, bankruptcy trends,
geographic concentrations, unemployment rates, loan product
features such as adjustable rate loans, economic conditions such
as national and local trends in housing markets and interest
rates, portfolio seasoning, account management policies and
practices, current levels of charge-offs and delinquencies,
changes in laws and regulations and other items which can affect
consumer payment patterns on
129
outstanding receivables such as natural disasters and global
pandemics. For commercial loans, probable losses are calculated
using estimates of amounts and timing of future cash flows
expected to be received on loans.
While our credit loss reserves are available to absorb losses in
the entire portfolio, we specifically consider the credit
quality and other risk factors for each of our products. We
recognize the different inherent loss characteristics in each of
our products as well as customer account management policies and
practices and risk management/collection practices. Charge-off
policies are also considered when establishing loss reserve
requirements to ensure appropriate allowances exist for products
with longer charge-off periods. We also consider key ratios such
as reserves to nonperforming loans, reserves as a percentage of
net charge-offs and months coverage ratios in developing our
loss reserve estimate. Loss reserve estimates are reviewed
periodically and adjustments are reported in earnings when they
become known. As these estimates are influenced by factors
outside our control, such as consumer payment patterns and
economic conditions, there is uncertainty inherent in these
estimates, making it reasonably possible that they could change.
Charge-Off and Nonaccrual Policies and
Practices Our consumer charge-off and nonaccrual
policies vary by product and are summarized below:
|
|
|
|
|
Product
|
|
Charge-off Policies and Practices
|
|
Nonaccrual Policies and
Practices(1)
|
|
|
Real estate
secured(2)
|
|
Carrying values in excess of net realizable value are
charged-off at or before the time foreclosure is completed or
when settlement is reached with the borrower. If foreclosure is
not pursued (which frequently occurs on loans in the second lien
position) and there is no reasonable expectation for recovery
(insurance claim, title claim, pre-discharge bankrupt account),
generally the account will be charged-off no later than by the
end of the month in which the account becomes eight months
contractually delinquent.
|
|
Interest income accruals are suspended when principal or
interest payments are more than three months contractually past
due and resumed when the receivable becomes less than three
months contractually past due.
|
Auto
finance(3)(5)
|
|
Carrying values in excess of net realizable value are charged off at the earlier of the following:
the collateral has been repossessed and sold,
the collateral has been in our possession for more than 30 days (prior to December 2006, 90 days), or
the loan becomes 150 days contractually delinquent.
|
|
Interest income accruals are suspended and the portion of
previously accrued interest expected to be uncollectible is
written off when principal payments are more than two months
contractually past due and resumed when the receivable becomes
less than two months contractually past due.
|
Credit
card(4)
|
|
Generally charged-off by the end of the month in which the
account becomes six months contractually delinquent.
|
|
Interest generally accrues until charge-off.
|
130
|
|
|
|
|
Product
|
|
Charge-off Policies and Practices
|
|
Nonaccrual Policies and
Practices(1)
|
|
|
Private
label(4)
|
|
Our domestic private label receivable portfolio (excluding
retail sales contracts at our Consumer Lending business) was
sold to HSBC Bank USA on December 29, 2004. Prior to December
2004, receivables were generally charged-off the month following
the month in which the account became nine months contractually
delinquent. However, receivables originated through new
domestic merchant relationships beginning in the fourth quarter
of 2002 were charged off by the end of the month in which the
account became six months contractually delinquent.
|
|
Interest generally accrues until charge-off, except for retail
sales contracts at our Consumer Lending business. Interest
income accruals for retail sales contracts are suspended when
principal or interest payments are more than three months
contractually delinquent. After suspension, interest income is
generally recorded as collectible.
|
|
|
Retail sales contracts at our Consumer Lending business
generally charge-off the month following the month in which the
account becomes nine months contractually delinquent and no
payment is received in six months, but in no event to exceed
12 months contractually delinquent.
|
|
|
Personal non-credit
card(4)
|
|
Generally charged-off the month following the month in which the
account becomes nine months contractually delinquent and no
payment received in six months, but in no event to exceed
12 months contractually delinquent (except in our United
Kingdom business which does not include a recency factor and,
prior to December 31, 2006, may be longer).
|
|
Interest income accruals are suspended when principal or
interest payments are more than three months contractually
delinquent. For PHLs, interest income accruals resume if the
receivable becomes less than three months contractually past
due. For all other personal non- credit card receivables,
interest income is generally recorded as collected.
|
|
|
(1)
|
For our United Kingdom business, interest income accruals are
suspended when principal or interest payments are more than
three months contractually delinquent.
|
(2)
|
For our United Kingdom business, real estate secured carrying
values in excess of net realizable value are charged-off at the
time of sale.
|
(3)
|
Our Auto Finance charge-off policy was changed in December 2006.
Prior to December 2006, carrying values in excess of net
realizable value were charged-off at the earlier of:
a) sale; b) the collateral having been in our
possession for more than 90 days; or c) the loan
becoming 150 days contractually delinquent. Charge-offs of
$24 million were recorded in December 2006 to reflect this
policy change. Our Canada business made a similar charge in
March 2007. The impact to charge-off was not material.
|
(4)
|
For our United Kingdom business, delinquent MasterCard/Visa
accounts (prior to their sale in December 2005) were
charged-off the month following the month in which the account
becomes six months contractually delinquent. Delinquent private
label receivables in the United Kingdom are charged-off the
month following the month in which the account becomes nine
months contractually delinquent. Retail sales contracts in the
United Kingdom for which bankruptcy notification has been
received are charged off after five months of delinquency or in
the month received if greater than five months delinquent at
that time. For our Canada business, delinquent private label and
personal non credit card receivables are charged off when no
payment is received in six months but in no event is an account
to exceed 12 months contractually delinquent.
|
(5)
|
For our Canada business, interest income accruals on auto loans
are suspended and the portion of previously accrued interest
expected to be uncollectible is written off when principal
payments are more than three months contractually past due and
resumed when the receivables become less than three months
contractually past due.
|
131
Charge-off involving a bankruptcy for our domestic MasterCard
and Visa receivables occurs by the end of the month 60 days
after notification or 180 days delinquent, whichever is
sooner. For auto finance receivables, bankrupt accounts are
charged off no later than the end of the month in which the loan
becomes 210 days contractually delinquent.
Receivables Sold and Serviced with Limited Recourse and
Securitization Related Revenue Prior to July 2004,
certain auto finance, MasterCard and Visa and personal
non-credit card receivables were securitized and sold to
investors with limited recourse. We retained the servicing
rights to these receivables. Recourse is limited to our rights
to future cash flow and any subordinated interest retained. Upon
sale, these receivables were removed from the balance sheet and
a gain on sale was recognized for the difference between the
carrying value of the receivables and the adjusted sales
proceeds. The adjusted sales proceeds include cash received and
the present value estimate of future cash flows to be received
over the lives of the sold receivables. Future cash flows were
based on estimates of prepayments, the impact of interest rate
movements on yields of receivables and securities issued,
delinquency of receivables sold, servicing fees and other
factors. The resulting gain was also adjusted by a provision for
estimated probable losses under the recourse provisions. This
provision and the related reserve for receivables serviced with
limited recourse was established at the time of sale to cover
all probable credit losses over-the-life of the receivables sold
based on historical experience and estimates of expected future
performance. The reserves are reviewed periodically by
evaluating the estimated future cash flows of each securitized
pool to ensure that there is sufficient remaining cash flow to
cover estimated future credit losses. Any changes to the
estimates for the reserve for receivables serviced with limited
recourse are made in the period they become known. Gains on sale
net of recourse provisions, servicing income and excess spread
relating to securitized receivables are reported in the
accompanying consolidated statements of income as securitization
revenue.
In connection with these transactions, an interest-only strip
receivable was recorded, representing our contractual right to
receive interest and other cash flows from our securitization
trusts. Our interest-only strip receivables are reported at fair
value using discounted cash flow estimates as a separate
component of receivables net of our estimate of probable losses
under the recourse provisions. Cash flow estimates include
estimates of prepayments, the impact of interest rate movements
on yields of receivables and securities issued, delinquency of
receivables sold, servicing fees and estimated probable losses
under the recourse provisions. Unrealized gains and losses are
recorded as adjustments to common shareholders equity in
accumulated other comprehensive income, net of income taxes. Our
interest-only strip receivables are reviewed for impairment
quarterly or earlier if events indicate that the carrying value
may not be recovered. Any decline in the fair value of the
interest-only strip receivable which is deemed to be other than
temporary is charged against current earnings.
We have also, in certain cases, retained other subordinated
interests in these securitizations. Neither the interest-only
strip receivables nor the other subordinated interests are in
the form of securities.
In order to align our accounting treatment with that of HSBC
initially under U.K. GAAP and now under International Financial
Reporting Standards (IFRS), starting in the third
quarter of 2004 we began to structure all new collateralized
funding transactions as secured financings. However, because
existing public credit card transactions were structured as
sales to revolving trusts that require replenishments to support
previously issued securities, receivables continued to be sold
to these trusts until the revolving periods ended, the last of
which occurred in the fourth quarter of 2007.
Properties and Equipment, Net Properties and
equipment are recorded at cost, net of accumulated depreciation
and amortization. As a result of our acquisition by HSBC, the
amortized cost of our properties and equipment was adjusted to
fair market value and accumulated depreciation and amortization
on a predecessor basis was eliminated at the time of
the acquisition. For financial reporting purposes, depreciation
is provided on a straight-line basis over the estimated useful
lives of the assets which generally range from 3 to
40 years. Leasehold improvements are amortized over the
lesser of the economic useful life of the improvement or the
term of the lease. Maintenance and repairs are expensed as
incurred.
Repossessed Collateral Real estate owned is
valued at the lower of cost or fair value less estimated costs
to sell. These values are periodically reviewed and reduced, if
necessary. Costs of holding real estate and related gains and
losses on disposition are credited or charged to operations as
incurred as a component of operating expense.
132
Repossessed vehicles, net of loss reserves when applicable, are
recorded at the lower of the estimated fair market value or the
outstanding receivable balance.
Insurance Insurance revenues on monthly
premium insurance policies are recognized when billed. Insurance
revenues on the remaining insurance contracts are recorded as
unearned premiums and recognized into income based on the nature
and terms of the underlying contracts. Liabilities for credit
insurance policies are based upon estimated settlement amounts
for both reported and incurred but not yet reported losses.
Liabilities for future benefits on annuity contracts and
specialty and corporate owned life insurance products are based
on actuarial assumptions as to investment yields, mortality and
withdrawals.
Intangible Assets Intangible assets consist
of purchased credit card relationships and related programs,
retail services merchant relationships, other loan related
relationships, trade names, technology and customer lists. The
trade names are not subject to amortization, as we believe they
have indefinite lives. The remaining intangible assets are being
amortized over their estimated useful lives either on a
straight-line basis or in proportion to the underlying revenues
generated. These useful lives range from 5 years for retail
services merchant relationships to approximately 10 years
for certain loan related relationships. Intangible assets are
reviewed for impairment using discounted cash flows annually, or
earlier if events indicate that the carrying amounts may not be
recoverable. We consider significant and long-term changes in
industry and economic conditions to be our primary indicator of
potential impairment. Impairment charges, when required, are
calculated using discounted cash flows.
Goodwill Goodwill represents the excess
purchase price over the fair value of identifiable assets
acquired less liabilities assumed from business combinations.
Goodwill is not amortized, but is reviewed for impairment
annually using discounted cash flows but impairment may be
reviewed earlier if circumstances indicate that the carrying
amount may not be recoverable. We consider significant and
long-term changes in industry and economic conditions to be our
primary indicator of potential impairment.
Derivative Financial Instruments All
derivatives are recognized on the balance sheet at their fair
value. At the inception of a hedging relationship, we designate
the derivative as a fair value hedge, a cash flow hedge, or if
the derivative does not qualify in a hedging relationship, a
non-hedging derivative. Fair value hedges include hedges of the
fair value of a recognized asset or liability and certain
foreign currency hedges. Cash flow hedges include hedges of the
variability of cash flows to be received or paid related to a
recognized asset or liability and certain foreign currency
hedges. Changes in the fair value of derivatives designated as
fair value hedges, along with the change in fair value on the
hedged risk, are recorded in current period earnings.
Changes in the fair value of derivatives designated as cash flow
hedges, to the extent effective as a hedge, are recorded in
accumulated other comprehensive income and reclassified into
earnings in the period during which the hedged item affects
earnings. Changes in the fair value of derivative instruments
not designated as hedging instruments and ineffective portions
of changes in the fair value of hedging instruments are
recognized in other revenue as derivative income in the current
period. Realized gains and losses as well as changes in the fair
value of derivative instruments associated with fixed rate debt
we have designated at fair value are recognized in other
revenues as Gain on debt designated at fair value and related
derivatives in the current period.
For derivative instruments designated as hedges, we formally
document all relationships between hedging instruments and
hedged items. This documentation includes our risk management
objective and strategy for undertaking various hedge
transactions, as well as how hedge effectiveness and
ineffectiveness will be measured. This process includes linking
derivatives to specific assets and liabilities on the balance
sheet. We also formally assess, both at the hedges
inception and on a quarterly basis, whether the derivatives that
are used in hedging transactions are highly effective in
offsetting changes in fair values or cash flows of hedged items.
This assessment is conducted using statistical regression
analysis. When as a result of the quarterly assessment, it is
determined that a derivative is not highly effective as a hedge
or that it has ceased to be a highly effective hedge, we
discontinue hedge accounting as of the beginning of the quarter
in which such determination was made.
When hedge accounting is discontinued because it is determined
that the derivative no longer qualifies as an effective hedge,
the derivative will continue to be carried on the balance sheet
at its fair value, with changes in its fair value recognized in
current period earnings. For fair value hedges, the formerly
hedged asset or liability will no longer be adjusted for changes
in fair value and any previously recorded adjustments to the
carrying value of the
133
hedged asset or liability will be amortized in the same manner
that the hedged item affects income. For cash flow hedges,
amounts previously recorded in accumulated other comprehensive
income will be reclassified into income in the same manner that
the hedged item affects income.
If the hedging instrument is terminated early, the derivative is
removed from the balance sheet. Accounting for the adjustments
to the hedged asset or liability or adjustments to accumulated
other comprehensive income are the same as described above when
a derivative no longer qualifies as an effective hedge.
If the hedged asset or liability is sold or extinguished, the
derivative will continue to be carried on the balance sheet at
its fair value, with changes in its fair value recognized in
current period earnings. The hedged item, including previously
recorded mark-to-market adjustments, is derecognized immediately
as a component of the gain or loss upon disposition.
Foreign Currency Translation We have foreign
subsidiaries located in the United Kingdom and Canada. The
functional currency for each foreign subsidiary is its local
currency. Assets and liabilities of these subsidiaries are
translated at the rate of exchange in effect on the balance
sheet date. Translation adjustments resulting from this process
are accumulated in common shareholders equity as a
component of accumulated other comprehensive income. Income and
expenses are translated at the average rate of exchange
prevailing during the year.
Effects of foreign currency translation in the statements of
cash flows are offset against the cumulative foreign currency
adjustment, except for the impact on cash. Foreign currency
transaction gains and losses are included in income as they
occur.
Stock-Based Compensation We account for all
of our stock based compensation awards including share options,
restricted share awards and the employee stock purchase plan
using the fair value method of accounting under Statement of
Financial Accounting Standards No. 123(Revised 2004),
Share-Based Payment (SFAS 123(R)).
The fair value of the rewards granted is recognized as expense
over the vesting period, generally either three or four years
for options and three or five years for restricted share awards.
The fair value of each option granted, measured at the grant
date, is calculated using a binomial lattice methodology that is
based on the underlying assumptions of the Black-Scholes option
pricing model.
Compensation expense relating to restricted share awards is
based upon the market value of the share on the date of grant.
Income Taxes HSBC Finance Corporation is
included in HSBC North Americas consolidated federal
income tax return and in various state income tax returns. HSBC
Finance Corporation has entered into tax allocation agreements
with HSBC North America and its subsidiary entities included in
the consolidated return which govern the timing and amount of
income tax payments required by the various entities. Generally,
such agreements allocate taxes to members of the affiliated
group based on the calculation of tax on a separate return
basis, adjusted for the utilization or limitation of credits of
the consolidated group. In addition, HSBC Finance Corporation
files some unconsolidated state tax returns. Deferred tax assets
and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and
are measured using the enacted tax rates and laws that will be
in effect. Investment tax credits generated by leveraged leases
are accounted for using the deferral method. Changes in
estimates of the basis in our assets and liabilities or other
estimates recorded at the date of our acquisition by HSBC are
adjusted against goodwill.
Transactions with Related Parties In the
normal course of business, we enter into transactions with HSBC
and its subsidiaries. These transactions occur at prevailing
market rates and terms and include funding arrangements,
derivative execution, purchases and sales of receivables,
servicing arrangements, information technology services, item
processing and statement processing services, banking and other
miscellaneous services.
New
Accounting Pronouncements
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In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109
(FIN 48). FIN 48 establishes threshold and
measurement attributes for financial statement measurement and
recognition of tax positions taken or expected to be taken in a
tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
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134
periods, disclosure and transition. The adoption of FIN 48
on January 1, 2007 did not have a material impact on our
financial position or results of operations. See Note 15,
Income Taxes, for further discussion of the adoption
of FIN 48.
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In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value
Measurements (SFAS No. 157). SFAS
157 establishes a single authoritative definition of fair value,
sets out a framework for measuring fair value, and requires
additional disclosures about fair value measurements. We adopted
SFAS 157 on January 1, 2007. The adoption of
SFAS No. 157 did not have any impact on our financial
position or results of operations. See Note 23, Fair
Value Measurements, for further discussion of
SFAS No. 157.
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In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities
(SFAS No. 159), which creates an
alternative measurement method for certain financial assets and
liabilities. SFAS No. 159 permits fair value to be used for
both the initial and subsequent measurements on a
contract-by-contract
election, with changes in fair value to be recognized in
earnings as those changes occur. This election is referred to as
the fair value option. SFAS No. 159 also
requires additional disclosures to compensate for the lack of
comparability that will arise from the use of the fair value
option. Effective January 1, 2007, we early adopted
SFAS No. 159 for certain issuances of our fixed rate
debt in order to align our accounting treatment with that of
HSBC under IFRSs. Under IFRSs, an entity can only elect FVO
accounting for financial assets and liabilities that meet
certain eligibility criteria which are not present under
SFAS No. 159. When we elected FVO reporting for IFRSs,
in addition to certain fixed rate debt issuances which did not
meet the eligibility criteria, there were also certain fixed
rate debt issuances for which only a portion of the issuance met
the eligibility criteria to qualify for FVO reporting. To align
our U.S. GAAP and IFRSs accounting treatment, we have
adopted SFAS No. 159 only for the fixed rate debt
issuances which also qualify for FVO reporting under IFRSs. The
following table presents information about the eligible
instruments for which we elected FVO and for which a transition
adjustment was recorded.
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Balance Sheet
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Balance Sheet
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January 1,
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January 1,
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2007
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2007
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Prior to Adoption
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Net Gain (Loss)
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After Adoption
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of FVO
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Upon Adoption
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of FVO
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(in millions)
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Fixed rate debt designated at fair value
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$
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(30,088
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$
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(855
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$
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(30,943
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Pre-tax cumulative-effect of adoption of FVO
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(855
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Increase in deferred tax asset
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317
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After-tax cumulative-effect of adoption of FVO adjustment to
retained earnings
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$
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(538
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In April 2007, the FASB issued FASB Staff Position
No. FIN 39-1,
Amendment of FASB Interpretation No. 39
(FSP 39-1).
FSP 39-1
allows entities that are party to a master netting arrangement
to offset the receivable or payable recognized upon payment or
receipt of cash collateral against fair value amounts recognized
for derivative instruments that have been offset under the same
master netting arrangement in accordance with FASB
Interpretation No. 39. The guidance in
FSP 39-1
is effective for fiscal years beginning after November 15,
2007, with early adoption permitted. Entities are required to
recognize the effects of applying
FSP 39-1
as a change in accounting principle through retrospective
application for all financial statements presented unless it is
impracticable to do so. We adopted
FSP 39-1
during the second quarter of 2007 and retroactively applied its
requirements to all prior periods as required by
FSP 39-1.
At December 31, 2007 and December 31, 2006, the fair
value of derivatives included in derivative financial assets
have been reduced by $3,794 million and
$1,164 million, respectively, representing the payable
recognized upon receipt of cash collateral for derivative
instruments that have been offset under the same master netting
arrangement in accordance with
FSP 39-1.
At December 31, 2007 and December 31, 2006, the fair
value of derivatives included in derivative financial
liabilities have been reduced by $51 million and
$53 million, respectively, representing the receivable
recognized upon payment of cash collateral for derivative
instruments that have been offset under the same master netting
arrangement in accordance with
FSP 39-1.
The adoption of
FSP 39-1
had no impact on our results of operations or our cash flows.
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In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 141 (Revised), Business
Combinations (SFAS No. 141(R)). This
replaces the guidance in Statement 141 which required the cost
of an acquisition to be allocated to the individual assets
acquired and liabilities assumed based on their estimated fair
values. This statement requires an acquirer to recognize all the
assets acquired, liabilities assumed and any noncontrolling
interest in the acquiree at fair value as of the date of
acquisition. SFAS No. 141(R) also changes the recognition
and measurement criteria for certain assets and liabilities
including those arising from contingencies, contingent
consideration, and bargain purchases. SFAS No. 141(R) is
effective for business combinations for which the acquisition
date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008.
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In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 160, Noncontrolling
Interests in Consolidated Financial Statements
(SFAS No. 160). This Statement amends ARB
51 and provides guidance on the accounting and reporting of
noncontrolling interests in a subsidiary and for the
deconsolidation of a subsidiary. SFAS No. 160 requires
disclosure of the amounts of consolidated net income
attributable to the parent and to the noncontrolling interest on
the face of the consolidated statement of income (loss). This
Statement also requires expanded disclosures that identify and
distinguish between parent and noncontrolling interests.
SFAS No. 160 is effective from fiscal years beginning
on or after December 15, 2008. We are currently evaluating
the impact that SFAS No. 160 will have on our
financial position or results of operations.
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3. Business
Acquisitions and Divestitures
Sale of U.K. Insurance Operations On
November 1, 2007, we sold all of the capital stock of our
U.K. insurance operations (U.K. Insurance
Operations) to Aviva plc and its subsidiaries for an
aggregate purchase price of approximately $206 million in
cash. The agreement also provides for the purchaser to
distribute insurance products through our U.K. branch network
for which we will receive commission revenue. The assets
consisted primarily of investments of $441 million,
unearned credit insurance premiums and claim reserves on
consumer receivables of $(111) million and goodwill of
$73 million at November 1, 2007. The liabilities
consisted primarily of insurance reserves which totaled
$207 million at November 1, 2007. Aviva assumed all
the liabilities of the U.K. Insurance Operations as a result of
this transaction. In the first quarter of 2007, we recorded an
adjustment of $31 million as a component of total costs and
expenses to record our investment in these operations at the
lower of cost or market. In the fourth quarter of 2007 we
recorded a loss on sale of $4 million from the
true-up of
the final purchase price. As we will continue to distribute
insurance products through our U.K. branch network and receive
commission revenue, we have not reported this business as a
discontinued operation in accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. Our U.K. Insurance
Operations are reported in the International Segment.
The following summarizes the operating results of our U.K.
Insurance Operations for the periods presented:
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Period Ended
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Year Ended
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Year Ended
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November 1,
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December 31,
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December 31,
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2007
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2006
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2005
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(in millions)
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Insurance revenue
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$
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556
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$
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1,050
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$
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1,161
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Policyholders benefits
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181
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188
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202
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Income (loss) before income tax expense
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42
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(11
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(24
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Sale of European Operations On
November 9, 2006, as part of our continuing evaluation of
strategic alternatives with respect to our U.K. and European
operations, we sold all of the capital stock of our operations
in the Czech Republic, Hungary, and Slovakia (the European
Operations) to a wholly owned subsidiary of HSBC Bank plc
(HBEU), a U.K. based subsidiary of HSBC, for an
aggregate purchase price of approximately $46 million. The
assets consisted primarily of $199 million of receivables
and goodwill which totaled approximately $13 million at
November 9, 2006. The liabilities consisted primarily of
debt which totaled $179 million at November 9, 2006.
HBEU assumed all the liabilities of the European Operations as a
result of this transaction. Because the sale of this business is
between affiliates under common control, the premium received in
excess of the book value of the stock transferred of
$13 million, including the goodwill assigned to this
business, was recorded as an increase to
136
additional paid-in capital and will not be reflected in
earnings. Our European Operations are reported in the
International Segment.
Acquisition of Solstice Capital Group Inc
(Solstice) On October 4, 2006 our
Consumer Lending business purchased Solstice with assets of
approximately $49 million, in an all cash transaction for
approximately $50 million. Solstices 2007 pre-tax
income did not meet the required threshold requiring payment of
additional consideration. Solstice markets a range of mortgage
and home equity products to customers through direct mail. The
results of Solstice are included in our consolidated financial
statements beginning October 4, 2006.
Acquisition of Metris Companies Inc. On
December 1, 2005, we acquired the outstanding capital stock
of Metris Companies Inc. (Metris), a provider of
financial products and services to middle market consumers
throughout the United States, in an all-cash transaction for
$1.6 billion. HSBC Investments (North America) Inc.
(HINO) made a capital contribution of
$1.2 billion to fund a portion of the purchase price. This
acquisition expanded our presence in the near-prime credit card
market and strengthened our capabilities to serve the full
spectrum of credit card customers. The results of Metris are
included in our consolidated financial statements beginning
December 1, 2005.
The purchase price was allocated to the assets and liabilities
acquired based on their estimated fair values at the acquisition
date. These preliminary fair values were estimated, in part,
based on third party valuation data. Goodwill associated with
the Metris acquisition is not tax deductible. In the third
quarter of 2006, we made an adjustment to our estimated fair
value related to Metris following an adverse judgment in
litigation involving Metris that preceded the merger. This
adjustment resulted in a net increase to goodwill of
approximately $25 million. Since the one-year anniversary
of the Metris acquisition was completed during the fourth
quarter of 2006, no further acquisition-related adjustments to
the purchase price will occur, except for changes in estimates
for the tax basis in our assets and liabilities or other tax
estimates recorded at the date of the Metris acquisition
pursuant to Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes.
Sale of U.K. credit card business In December
2005, we sold our U.K. credit card business, including
$2.5 billion of receivables, the associated cardholder
relationships and the related retained interests in securitized
credit card receivables to HSBC Bank plc (HBEU), a
U.K. based subsidiary of HSBC, for an aggregate purchase price
of $3.0 billion. The purchase price, which was determined
based on a comparative analysis of sales of other credit card
portfolios, was paid in a combination of cash and
$261 million of preferred stock issued by a subsidiary of
HBEU with a rate of one-year Sterling LIBOR, plus
1.30 percent. In addition to the assets referred to above,
the sale also included the account origination platform,
including the marketing and credit employees associated with
this function, as well as the lease associated with the credit
card call center and the related leaseholds and call center
employees to provide customer continuity after the transfer as
well as to allow HBEU direct ownership and control of
origination and customer service. We have retained the
collection operations related to the credit card operations and
have entered into a service level agreement to provide
collection services and other support services, including
components of the compliance, financial reporting and human
resource functions, for the sold credit card operations to HBEU
for a fee. As a result of our continued involvement in this
business, we have not reported this business as a discontinued
operation in accordance with SFAS No. 144. Because the
sale of this business is between affiliates under common
control, the premium received in excess of the book value of the
assets transferred of $182 million, including the goodwill
assigned to this business, was recorded as an increase to
additional paid in capital and has not been included in
earnings. As a result of this sale, our net interest income, fee
income and provision for credit losses related to the U.K.
credit card business has been reduced, while other income has
increased by the receipt of servicing and support services
revenue from HBEU. The net effect of this sale did not result in
a material reduction of net income of our consolidated results.
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4.
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Restructuring
Activities
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We have completed several specific strategic reviews to ensure
that our operations and product offerings continue to provide
our customers with the most value-added products and maximize
risk adjusted returns to HSBC. When coupled with the
unprecedented developments in the mortgage industry in recent
months, we have taken specific actions which we believe are in
the best interests of our stakeholders and will best position us
for long-term success.
137
Mortgage Services Business Our Mortgage
Services business, which is part of our Consumer Segment, has
historically purchased non-conforming first and second lien real
estate secured loans from a network of unaffiliated third party
lenders (i.e. correspondents) based on our underwriting
standards. Our Mortgage Services business has included the
operations of Decision One Mortgage Company (Decision
One) which has historically originated mortgage loans
sourced by independent mortgage brokers and sold such loans to
secondary market purchasers, including Mortgage Services. Early
in 2007, we decided to discontinue the correspondent channel
acquisitions of our Mortgage Services business and in June 2007
decided to limit Decision Ones activities to the
origination of loans primarily for resale to the secondary
market operations of our affiliates. As a result of the decision
to discontinue correspondent channel acquisitions, we recorded
$5 million of one-time termination and other employee
benefits, which are included as a component of Salaries and
employee benefits in the consolidated statement of income
(loss). These severance costs have been fully paid to the
affected employees and no further costs resulting from this
decision are anticipated.
In the third quarter of 2007, the unprecedented developments in
the mortgage lending industry resulted in a marked reduction in
the secondary market demand for subprime loans. Management
concluded that a recovery of a secondary market for subprime
loans was uncertain and at a minimum could not be expected to
stabilize in the near term. As a result of the continuing
deterioration in the subprime mortgage lending industry, in
September 2007, we announced that our Decision One operations
would cease. Additionally, we have begun closing our Mortgage
Services business headquarter offices in Fort Mill,
South Carolina. The impact of the decision to close our Decision
One operations, when coupled with the previous decision related
to discontinuing correspondent channel acquisitions resulted in
the impairment of the goodwill allocated to the Mortgage
Services business. As a result, in the third quarter of 2007 we
recorded a goodwill impairment charge of $881 million which
represents all of the goodwill previously allocated to the
Mortgage Services business. In addition, we recorded
$14 million related to one-time termination and other
employee benefits and $25 million of lease termination and
associated costs relating to the closing of Decision One, which
is included as a component of Occupancy and equipment expense
in the consolidated statement of income (loss). The
following summarizes the restructure liability in our Mortgage
Services business at December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-Time
|
|
|
|
|
|
|
|
|
|
Termination and
|
|
|
Lease Termination
|
|
|
|
|
|
|
Other Employee
|
|
|
and Associated
|
|
|
|
|
|
|
Benefits
|
|
|
Costs
|
|
|
Total
|
|
|
|
|
|
(in millions)
|
|
|
Restructuring costs recorded in 2007
|
|
$
|
19
|
|
|
$
|
25
|
|
|
$
|
44
|
|
Restructuring costs paid during 2007
|
|
|
(13
|
)
|
|
|
(4
|
)
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructure liability at December 31, 2007
|
|
$
|
6
|
|
|
$
|
21
|
|
|
$
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We currently estimate an additional $3 million of one-time
termination and other employee benefits associated with these
activities will be recorded during 2008. Additionally in 2007,
we recorded an $11 million non-cash charge as a component
of Occupancy and equipment expense in the consolidated
statement of income (loss) relating to the write-off of certain
fixed assets of our Mortgage Services business which could not
be used elsewhere in our operations. While our Mortgage Services
business is currently operating in a run-off mode, we have not
reported this business as a discontinued operation because of
our continuing involvement.
Consumer Lending Business In the fourth
quarter of 2007, we took several actions in our Consumer Lending
business, which is part of our Consumer Segment, to reduce risk
including: the discontinuation of the Personal Homeowner Loan
product, the elimination of guaranteed direct mail loans to new
customers, reduction in loan-to-value ratios for both first and
second lien loans, tightened underwriting criteria for first
lien loans and for personal non-credit card loans and eliminated
the small volume of ARM loan originations. As these actions will
significantly reduce loan origination volumes going forward, we
began to evaluate the appropriate scope and geographic
distribution of the Consumer Lending branch network and in the
fourth quarter of 2007 we decided to reduce the size of the
Consumer Lending network to approximately 1,000 branches. The
right sizing of the branch network has also resulted in
realignment of staffing in our Consumer Lending corporate
functions. In 2007, we recorded $8 million of one-time
termination and other employee benefits and $17 million of
lease termination and associated
138
costs as a result of the branch closures. The following
summarizes the restructuring liability in our Consumer Lending
business at December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-Time
|
|
|
|
|
|
|
|
|
|
Termination and
|
|
|
Lease Termination
|
|
|
|
|
|
|
Other Employee
|
|
|
and Associated
|
|
|
|
|
|
|
Benefits
|
|
|
Costs
|
|
|
Total
|
|
|
|
|
|
(in millions)
|
|
|
Restructuring costs recorded in 2007
|
|
$
|
8
|
|
|
$
|
17
|
|
|
$
|
25
|
|
Restructuring costs paid during 2007
|
|
|
(1
|
)
|
|
|
(3
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructure liability at December 31, 2007
|
|
$
|
7
|
|
|
$
|
14
|
|
|
$
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additionally in 2007, we recorded a $6 million non-cash
charge as a component of Occupancy and equipment expense
in the consolidated statement of income (loss) relating to
the write-off of certain fixed assets in the closed Consumer
Lending branches which could not be used elsewhere in our
operations. No further costs resulting from this decision are
anticipated.
Facility in Carmel, Indiana In the third
quarter of 2007, we also decided to close our loan underwriting,
processing and collections center in Carmel, Indiana (the
Carmel Facility) to optimize our facility and
staffing capacity given the overall reductions in business
volumes. The Carmel Facility provided loan underwriting,
processing and collection activities for the operations of our
Consumer Lending and Mortgage Services business, both of which
are included in our Consumer Segment. The collection activities
performed in the Carmel Facility have been redeployed to other
facilities in our Consumer Lending business. As a result of the
decision to close the Carmel Facility, in 2007 we recorded
$5 million of one-time termination and other employee
benefits and $2 million of lease termination and associated
costs. At December 31, 2007, the outstanding restructure
liability related to the closure of the Carmel Facility was
$6 million. No further costs resulting from this decision
are anticipated.
Canadian Business During the fourth quarter of
2007, we tightened underwriting criteria for various real estate
and unsecured products in our Canadian business, which is part
of our International Segment, which resulted in lower volumes
and decided to reduce the mortgage operations in Canada which
closed loans sourced through brokers. As a result, we closed 29
branches prior to November 1, 2007. In 2007, we recorded
$5 million related to one-time termination and other
employee benefits and $8 million of lease termination and
associated costs. No further costs resulting from this decision
are anticipated. The following summarizes the restructure
liability at December 31, 2007 for our Canadian Business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-Time
|
|
|
|
|
|
|
|
|
|
Termination and
|
|
|
Lease Termination
|
|
|
|
|
|
|
Other Employee
|
|
|
and Associated
|
|
|
|
|
|
|
Benefits
|
|
|
Costs
|
|
|
Total
|
|
|
|
|
|
(in millions)
|
|
|
Restructuring costs recorded in 2007
|
|
$
|
5
|
|
|
$
|
8
|
|
|
$
|
13
|
|
Restructuring costs paid during 2007
|
|
|
(4
|
)
|
|
|
(4
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructure liability at December 31, 2007
|
|
$
|
1
|
|
|
$
|
4
|
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes for all restructuring activities
the costs recorded during 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-Time
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination and
|
|
|
Lease Termination
|
|
|
|
|
|
|
|
|
|
Other Employee
|
|
|
and Associated
|
|
|
Fixed Asset
|
|
|
|
|
|
|
Benefits
|
|
|
Costs
|
|
|
Write-off
|
|
|
Total
|
|
|
|
|
|
(in millions)
|
|
|
Restructuring costs recorded in 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Services
|
|
$
|
19
|
|
|
$
|
25
|
|
|
$
|
11
|
|
|
$
|
55
|
|
Consumer Lending
|
|
|
8
|
|
|
|
17
|
|
|
|
6
|
|
|
|
31
|
|
Carmel Facility
|
|
|
5
|
|
|
|
2
|
|
|
|
-
|
|
|
|
7
|
|
Canadian Business
|
|
|
5
|
|
|
|
8
|
|
|
|
-
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
37
|
|
|
$
|
52
|
|
|
$
|
17
|
|
|
$
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
139
Securities consisted of the following available-for-sale
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
December 31, 2007
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
(in millions)
|
|
|
Corporate debt securities
|
|
$
|
2,173
|
|
|
$
|
18
|
|
|
$
|
(28
|
)
|
|
$
|
2,163
|
|
Money market funds
|
|
|
194
|
|
|
|
-
|
|
|
|
-
|
|
|
|
194
|
|
U.S. government sponsored
enterprises(1)
|
|
|
253
|
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
253
|
|
U.S. government and Federal agency debt securities
|
|
|
37
|
|
|
|
1
|
|
|
|
-
|
|
|
|
38
|
|
Non-government mortgage backed securities
|
|
|
208
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
205
|
|
Other
|
|
|
274
|
|
|
|
1
|
|
|
|
(9
|
)
|
|
|
266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
3,139
|
|
|
|
22
|
|
|
|
(42
|
)
|
|
|
3,119
|
|
Accrued investment income
|
|
|
33
|
|
|
|
-
|
|
|
|
-
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale
|
|
$
|
3,172
|
|
|
$
|
22
|
|
|
$
|
(42
|
)
|
|
$
|
3,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
December 31, 2006
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
(in millions)
|
|
|
Corporate debt securities
|
|
$
|
2,530
|
|
|
$
|
11
|
|
|
$
|
(40
|
)
|
|
$
|
2,501
|
|
Money market funds
|
|
|
1,051
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,051
|
|
U.S. government sponsored
enterprises(1)
|
|
|
369
|
|
|
|
1
|
|
|
|
(3
|
)
|
|
|
367
|
|
U.S. government and Federal agency debt securities
|
|
|
43
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
42
|
|
Non-government mortgage backed securities
|
|
|
271
|
|
|
|
-
|
|
|
|
-
|
|
|
|
271
|
|
Other
|
|
|
428
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
4,692
|
|
|
|
12
|
|
|
|
(47
|
)
|
|
|
4,657
|
|
Accrued investment income
|
|
|
38
|
|
|
|
-
|
|
|
|
-
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale
|
|
$
|
4,730
|
|
|
$
|
12
|
|
|
$
|
(47
|
)
|
|
$
|
4,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes primarily mortgage-backed securities issued by the
Federal National Mortgage Association and the Federal Home Loan
Mortgage Corporation.
|
Proceeds from the sale of available-for-sale investments totaled
approximately $.2 billion in 2007, $.5 billion in 2006
and $.4 billion in 2005. We realized gross gains of
$1 million in 2007, $125 million in 2006 and
$12 million in 2005. We realized gross losses of
$2 million in 2007, $2 million in 2006 and
$12 million in 2005.
Money market funds at December 31, 2006 include
$854 million which is restricted for the sole purpose of
paying down certain secured financings at the established
payment date. There were no restricted money market funds at
December 31, 2007.
140
A summary of gross unrealized losses and related fair values as
of December 31, 2007 and 2006, classified as to the length
of time the losses have existed are presented in the following
tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than One Year
|
|
|
Greater Than One Year
|
|
|
|
|
|
|
Gross
|
|
|
Aggregate
|
|
|
|
|
|
Gross
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Unrealized
|
|
|
Fair Value of
|
|
|
Number of
|
|
|
Unrealized
|
|
|
Fair Value of
|
|
December 31, 2007
|
|
Securities
|
|
|
Losses
|
|
|
Investments
|
|
|
Securities
|
|
|
Losses
|
|
|
Investments
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Corporate debt securities
|
|
|
146
|
|
|
$
|
(8
|
)
|
|
$
|
445
|
|
|
|
340
|
|
|
$
|
(20
|
)
|
|
$
|
798
|
|
U.S. government sponsored enterprises
|
|
|
3
|
|
|
|
-
|
(1)
|
|
|
15
|
|
|
|
38
|
|
|
|
(2
|
)
|
|
|
75
|
|
U.S. government and Federal agency debt securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
(1)
|
|
|
9
|
|
Non-government mortgage
|
|
|
8
|
|
|
|
(1
|
)
|
|
|
52
|
|
|
|
9
|
|
|
|
(2
|
)
|
|
|
32
|
|
Other
|
|
|
46
|
|
|
|
(9
|
)
|
|
|
79
|
|
|
|
35
|
|
|
|
-
|
(1)
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than One Year
|
|
|
Greater Than One Year
|
|
|
|
|
|
|
Gross
|
|
|
Aggregate
|
|
|
|
|
|
Gross
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Unrealized
|
|
|
Fair Value of
|
|
|
Number of
|
|
|
Unrealized
|
|
|
Fair Value of
|
|
December 31, 2006
|
|
Securities
|
|
|
Losses
|
|
|
Investments
|
|
|
Securities
|
|
|
Losses
|
|
|
Investments
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Corporate debt securities
|
|
|
133
|
|
|
$
|
(6
|
)
|
|
$
|
465
|
|
|
|
511
|
|
|
$
|
(34
|
)
|
|
$
|
1,178
|
|
U.S. government sponsored enterprises
|
|
|
30
|
|
|
|
-
|
(1)
|
|
|
101
|
|
|
|
43
|
|
|
|
(3
|
)
|
|
|
149
|
|
U.S. government and Federal agency debt securities
|
|
|
8
|
|
|
|
-
|
(1)
|
|
|
21
|
|
|
|
20
|
|
|
|
(1
|
)
|
|
|
16
|
|
Non-government mortgage
|
|
|
10
|
|
|
|
-
|
(1)
|
|
|
60
|
|
|
|
9
|
|
|
|
-
|
|
|
|
7
|
|
Other
|
|
|
16
|
|
|
|
-
|
(1)
|
|
|
57
|
|
|
|
52
|
|
|
|
(3
|
)
|
|
|
173
|
|
|
|
(1) |
Less than $500 thousand.
|
The gross unrealized losses on our securities available for sale
have remained relatively stable in 2007 as decreases in interest
rates during the year were largely offset by the impact of wider
credit spreads. The contractual terms of these securities do not
permit the issuer to settle the securities at a price less than
the par value of the investment. Since substantially all of
these securities are rated A- or better, and because we have the
ability and intent to hold these investments until maturity or a
market price recovery, these securities are not considered
other-than temporarily impaired.
The amortized cost of our securities available for sale was
adjusted to fair market value at the time of the merger with
HSBC. See Note 23, Fair Value Measurements, for
further discussion of the relationship between the fair value of
our assets and liabilities.
141
Contractual maturities of and yields on investments in debt
securities for those with set maturities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007
|
|
|
|
Due
|
|
|
After 1
|
|
|
After 5
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
but Within
|
|
|
but Within
|
|
|
After
|
|
|
|
|
|
|
1 Year
|
|
|
5 Years
|
|
|
10 Years
|
|
|
10 Years
|
|
|
Total
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Corporate debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
$
|
463
|
|
|
$
|
875
|
|
|
$
|
248
|
|
|
$
|
587
|
|
|
$
|
2,173
|
|
Fair value
|
|
|
462
|
|
|
|
880
|
|
|
|
247
|
|
|
|
574
|
|
|
|
2,163
|
|
Yield(1)
|
|
|
4.90
|
%
|
|
|
4.74
|
%
|
|
|
5.07
|
%
|
|
|
5.52
|
%
|
|
|
5.02
|
%
|
U.S. government sponsored enterprises:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
$
|
15
|
|
|
$
|
10
|
|
|
$
|
55
|
|
|
$
|
173
|
|
|
$
|
253
|
|
Fair value
|
|
|
15
|
|
|
|
9
|
|
|
|
55
|
|
|
|
174
|
|
|
|
253
|
|
Yield(1)
|
|
|
3.31
|
%
|
|
|
6.17
|
%
|
|
|
5.19
|
%
|
|
|
5.06
|
%
|
|
|
5.03
|
%
|
U.S. government and Federal agency debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
$
|
11
|
|
|
$
|
3
|
|
|
$
|
12
|
|
|
$
|
11
|
|
|
$
|
37
|
|
Fair value
|
|
|
11
|
|
|
|
4
|
|
|
|
12
|
|
|
|
11
|
|
|
|
38
|
|
Yield(1)
|
|
|
3.89
|
%
|
|
|
4.86
|
%
|
|
|
4.32
|
%
|
|
|
4.69
|
%
|
|
|
4.36
|
%
|
|
|
(1) |
Computed by dividing annualized interest by the amortized cost
of respective investment securities.
|
6. Receivables
Receivables consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(in millions)
|
|
|
Real estate secured
|
|
$
|
88,661
|
|
|
$
|
97,885
|
|
Auto finance
|
|
|
13,257
|
|
|
|
12,504
|
|
Credit card
|
|
|
30,390
|
|
|
|
27,714
|
|
Private label
|
|
|
3,093
|
|
|
|
2,509
|
|
Personal non-credit card
|
|
|
20,649
|
|
|
|
21,367
|
|
Commercial and other
|
|
|
144
|
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
Total receivables
|
|
|
156,194
|
|
|
|
162,160
|
|
HSBC acquisition purchase accounting fair value adjustments
|
|
|
(76
|
)
|
|
|
(60
|
)
|
Accrued finance charges
|
|
|
2,526
|
|
|
|
2,228
|
|
Credit loss reserve for owned receivables
|
|
|
(10,905
|
)
|
|
|
(6,587
|
)
|
Unearned credit insurance premiums and claims reserves
|
|
|
(286
|
)
|
|
|
(412
|
)
|
Interest-only strip receivables
|
|
|
-
|
|
|
|
6
|
|
Amounts due and deferred from receivable sales
|
|
|
2
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
Total receivables, net
|
|
$
|
147,455
|
|
|
$
|
157,386
|
|
|
|
|
|
|
|
|
|
|
HSBC acquisition purchase accounting fair value adjustments
represent adjustments which have been pushed down to
record our receivables at fair value at the date of acquisition
by HSBC.
Loans held for sale to external parties in our Mortgage Services
business net of the underlying valuation allowance totaled
$71 million at December 31, 2007 and $1.7 billion
at December 31, 2006. Our Consumer Lending business had
loans held for sale net of the underlying valuation allowance
totaling $9 million at December 31, 2007 and
142
$32 million at December 31, 2006 relating to its
subsidiary, Solstice Capital Group Inc. (Solstice).
Loans held for sale are included in receivables and carried at
the lower of cost or market.
In November 2007, we sold our U.K. Insurance operations,
including $111 million of unearned credit insurance
premiums and claims reserves to Aviva. See Note 3,
Business Acquisitions and Divestitures, for
additional information regarding these sales.
In November 2006, we acquired $2.5 billion of real estate
secured receivables from Champion Mortgage
(Champion) a division of KeyBank, N.A. and as part
of our acquisition of Metris on December 1, 2005, we
acquired $5.3 billion of receivables. These receivables
acquired were subject to the requirements of Statement of
Position
03-3,
Accounting for Certain Loans or Debt Securities Acquired
in a Transfer
(SOP 03-3)
to the extent there was evidence of deterioration of credit
quality since origination and for which it was probable, at
acquisition, that all contractually required payments would not
be collected and that the associated line of credit had been
closed. The carrying amount of Champion real estate secured
receivables subject to the requirements of
SOP 03-3
was $73 million at December 31, 2007 and
$116 million at December 31, 2006 and is included in
the real estate secured receivables in the table above. The
outstanding contractual balance of these receivables was
$92 million at December 31, 2007 and $143 million
at December 31, 2006. At December 31, 2007, no credit
loss reserve for the acquired receivables subject to
SOP 03-3
has been established as there has been no decrease to the
expected future cash flows since the acquisition. There was a
reclassification to accretable yield from non-accretable
difference during 2007 representing an increase to the estimated
cash flows to be collected on the underlying Champion portfolio.
As part of our acquisition of Metris on December 1, 2005,
we acquired $5.3 billion of receivables. The carrying
amount of the credit card receivables which were subject to
SOP 03-3
was $105 million at December 31, 2007 and
$223 million at December 31, 2006 and is included in
the credit card receivables in the table above. The outstanding
contractual balance of these receivables was $159 million
at December 31, 2007 and $334 million at
December 31, 2006. At December 31, 2007, no credit
loss reserve for the acquired receivables subject to
SOP 03-3
has been established as there has been no decrease to the
expected future cash flows since the acquisition. There was a
reclassification to accretable yield from non-accretable
difference during 2007 and 2006. This reclassification from
non-accretable difference represents an increase to the
estimated cash flows to be collected on the underlying Metris
portfolio.
The following summarizes the accretable yield on Metris and
Champion receivables at December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(in millions)
|
|
|
Accretable yield at beginning of period
|
|
$
|
(76
|
)
|
|
$
|
(122
|
)
|
Accretable yield additions during the period
|
|
|
-
|
|
|
|
(19
|
)
|
Accretable yield amortized to interest income during the period
|
|
|
49
|
|
|
|
100
|
|
Reclassification from non-accretable difference
|
|
|
(9
|
)
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
Accretable yield at end of period
|
|
$
|
(36
|
)
|
|
$
|
(76
|
)
|
|
|
|
|
|
|
|
|
|
143
Real estate secured receivables are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(in millions)
|
|
|
Real estate secured:
|
|
|
|
|
|
|
|
|
Closed-end:
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
71,459
|
|
|
$
|
78,024
|
|
Second lien
|
|
|
13,672
|
|
|
|
15,091
|
|
Revolving:
|
|
|
|
|
|
|
|
|
First lien
|
|
|
436
|
|
|
|
556
|
|
Second lien
|
|
|
3,094
|
|
|
|
4,214
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured receivables
|
|
$
|
88,661
|
|
|
$
|
97,885
|
|
|
|
|
|
|
|
|
|
|
Foreign receivables included in receivables were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
United Kingdom and
|
|
|
|
|
|
|
the Rest of Europe
|
|
|
Canada
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
(in millions)
|
|
|
Real estate secured
|
|
$
|
1,943
|
|
|
$
|
1,786
|
|
|
$
|
1,654
|
|
|
$
|
2,257
|
|
|
$
|
1,766
|
|
|
$
|
1,380
|
|
Auto finance
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
358
|
|
|
|
311
|
|
|
|
270
|
|
Credit card
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
299
|
|
|
|
215
|
|
|
|
147
|
|
Private label
|
|
|
1,513
|
|
|
|
1,333
|
|
|
|
1,330
|
|
|
|
1,433
|
|
|
|
887
|
|
|
|
834
|
|
Personal non-credit card
|
|
|
1,804
|
|
|
|
2,425
|
|
|
|
3,038
|
|
|
|
800
|
|
|
|
697
|
|
|
|
607
|
|
Commercial and other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,260
|
|
|
$
|
5,544
|
|
|
$
|
6,022
|
|
|
$
|
5,147
|
|
|
$
|
3,876
|
|
|
$
|
3,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign receivables represented 7 percent of receivables at
December 31, 2007 and 6 percent of receivables at
December 31, 2006.
Receivables serviced with limited recourse consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(in millions)
|
|
|
Auto finance
|
|
$
|
-
|
|
|
$
|
271
|
|
Credit card
|
|
|
124
|
|
|
|
500
|
|
Personal non-credit card
|
|
|
-
|
|
|
|
178
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
124
|
|
|
$
|
949
|
|
|
|
|
|
|
|
|
|
|
We maintain facilities with third parties which provide for the
securitization or secured financing of receivables on both a
revolving and non-revolving basis totaling $17.4 billion,
of which $11.2 billion were utilized at December 31,
2007. The amount available under these facilities will vary
based on the timing and volume of public securitization or
secured financing transactions and our general liquidity plans.
144
Contractual maturities of our receivables were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
|
|
(in millions)
|
|
|
Real estate secured
|
|
$
|
718
|
|
|
$
|
515
|
|
|
$
|
464
|
|
|
$
|
517
|
|
|
$
|
731
|
|
|
$
|
85,716
|
|
|
$
|
88,661
|
|
Auto finance
|
|
|
3,287
|
|
|
|
2,960
|
|
|
|
2,616
|
|
|
|
2,163
|
|
|
|
1,501
|
|
|
|
730
|
|
|
|
13,257
|
|
Credit card
|
|
|
24,057
|
|
|
|
4,587
|
|
|
|
1,227
|
|
|
|
356
|
|
|
|
110
|
|
|
|
53
|
|
|
|
30,390
|
|
Private label
|
|
|
1,482
|
|
|
|
529
|
|
|
|
416
|
|
|
|
323
|
|
|
|
191
|
|
|
|
152
|
|
|
|
3,093
|
|
Personal non-credit card
|
|
|
2,971
|
|
|
|
1,958
|
|
|
|
2,917
|
|
|
|
4,542
|
|
|
|
4,411
|
|
|
|
3,850
|
|
|
|
20,649
|
|
Commercial and other
|
|
|
-
|
|
|
|
-
|
|
|
|
20
|
|
|
|
52
|
|
|
|
-
|
|
|
|
72
|
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
32,515
|
|
|
$
|
10,549
|
|
|
$
|
7,660
|
|
|
$
|
7,953
|
|
|
$
|
6,944
|
|
|
$
|
90,573
|
|
|
$
|
156,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A substantial portion of consumer receivables, based on our
experience, will be renewed or repaid prior to contractual
maturity. The above maturity schedule should not be regarded as
a forecast of future cash collections.
The following table summarizes contractual maturities of
receivables due after one year by repricing characteristic:
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007
|
|
|
|
Over 1
|
|
|
|
|
|
|
But Within
|
|
|
Over
|
|
|
|
5 Years
|
|
|
5 Years
|
|
|
|
|
|
(in millions)
|
|
|
Receivables at predetermined interest rates
|
|
$
|
26,877
|
|
|
$
|
70,374
|
|
Receivables at floating or adjustable rates
|
|
|
6,229
|
|
|
|
20,199
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
33,106
|
|
|
$
|
90,573
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual consumer receivables totaled $7.6 billion
(including $439 million relating to foreign operations) at
December 31, 2007 and $4.8 billion (including
$482 million relating to foreign operations) at
December 31, 2006. Interest income that would have been
recorded if such nonaccrual receivables had been current and in
accordance with contractual terms was approximately
$961 million (including $64 million relating to
foreign operations) in 2007 and $639 million (including
$72 million relating to foreign operations) in 2006.
Interest income that was included in finance and other interest
income prior to these loans being placed on nonaccrual status
was approximately $520 million (including $31 million
relating to foreign operations) in 2007 and $338 million
(including $36 million relating to foreign operations) in
2006. For an analysis of reserves for credit losses, see our
Analysis of Credit Loss Reserves Activity in
Managements Discussion and Analysis and Note 7,
Credit Loss Reserves.
145
Provision for credit losses on consumer loans for which we have
modified the terms of the loan as part of a troubled debt
restructuring (TDR Loans) are determined in
accordance with SFAS No. 114, Accounting by
Creditors for Impairment of a Loan
(SFAS No. 114). Interest income on TDR
Loans is recognized in the same manner as loans which are not
TDRs. The following table presents information about our TDR
Loans:
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(in millions)
|
|
|
TDR Loans:
|
|
|
|
|
|
|
|
|
Real estate secured:
|
|
|
|
|
|
|
|
|
Mortgage Services
|
|
$
|
1,531
|
|
|
$
|
107
|
|
Consumer Lending
|
|
|
730
|
|
|
|
634
|
|
Foreign and all other
|
|
|
95
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
|
2,356
|
|
|
|
820
|
|
Auto finance
|
|
|
144
|
|
|
|
176
|
|
Credit card
|
|
|
329
|
|
|
|
308
|
|
Private label
|
|
|
5
|
|
|
|
7
|
|
Personal non-credit card
|
|
|
862
|
|
|
|
908
|
|
Commercial and other
|
|
|
-
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Total TDR Loans
|
|
$
|
3,696
|
|
|
$
|
2,220
|
|
|
|
|
|
|
|
|
|
|
Credit loss reserves for TDR Loans:
|
|
|
|
|
|
|
|
|
Real estate secured:
|
|
|
|
|
|
|
|
|
Mortgage Services
|
|
$
|
84
|
|
|
$
|
16
|
|
Consumer Lending
|
|
|
65
|
|
|
|
55
|
|
Foreign and all other
|
|
|
28
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
|
177
|
|
|
|
95
|
|
Auto finance
|
|
|
29
|
|
|
|
41
|
|
Credit card
|
|
|
56
|
|
|
|
62
|
|
Private label
|
|
|
1
|
|
|
|
2
|
|
Personal non-credit card
|
|
|
232
|
|
|
|
282
|
|
Commercial and other
|
|
|
-
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Total credit loss reserves for TDR
Loans(1)
|
|
$
|
495
|
|
|
$
|
483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(in millions)
|
|
Average balance of TDR Loans
|
|
$
|
2,850
|
|
|
$
|
2082
|
|
|
$
|
1,992
|
|
Interest income recognized on TDR Loans
|
|
|
163
|
|
|
|
97
|
|
|
|
95
|
|
|
|
(1) |
Included in credit loss reserves.
|
Interest-only strip receivables are reported net of our estimate
of probable losses under the recourse provisions for receivables
serviced with limited recourse. Reductions to our interest-only
strip receivables in 2007 reflect the impact of reduced
securitization levels, including our decision in 2004 to
structure new collateralized funding transactions as secured
financings.
Amounts due and deferred from receivable sales include assets
established for certain receivable sales, including funds
deposited in spread accounts, and net customer payments due from
(to) the securitization trustee.
146
We issued securities backed by dedicated home equity loan
receivables of $3.3 billion in 2007 and $4.8 billion
in 2006. We issued securities backed by dedicated auto finance
loan receivables of $1.6 billion in 2007 and
$2.8 billion in 2006. We issued securities backed by
dedicated credit card receivables of $4.2 billion in 2007
and $4.8 billion in 2006. We issued securities backed by
dedicated personal non-credit card receivables of
$1.3 billion in 2007. For accounting purposes, these
transactions were structured as secured financings, therefore,
the receivables and the related debt remain on our balance
sheet. Additionally, as part of the Metris acquisition in 2005,
we assumed $4.6 billion of securities backed by credit card
receivables which were accounted for as secured financings. Real
estate secured receivables included closed-end real estate
secured receivables totaling $10.5 billion at
December 31, 2007 and $9.7 billion at
December 31, 2006 that secured the outstanding debt related
to these transactions. Auto finance receivables totaling
$4.9 billion at December 31, 2007 and
$6.0 billion at December 31, 2006 secured the
outstanding debt related to these transactions. Credit card
receivables totaling $11.5 billion at December 31,
2007 and $8.9 billion at December 31, 2006 secured the
outstanding debt related to these transactions. Personal
non-credit card receivables of $4.0 billion at
December 31, 2007 and $3.5 billion at
December 31, 2006 secured the outstanding debt related to
these transactions.
7. Credit
Loss Reserves
An analysis of credit loss reserves was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
(in millions)
|
|
|
Credit loss reserves at beginning of period
|
|
$
|
6,587
|
|
|
$
|
4,521
|
|
|
$
|
3,625
|
|
Provision for credit losses
|
|
|
11,026
|
|
|
|
6,564
|
|
|
|
4,543
|
|
Charge-offs
|
|
|
(7,606
|
)
|
|
|
(5,164
|
)
|
|
|
(4,100
|
)
|
Recoveries
|
|
|
890
|
|
|
|
645
|
|
|
|
447
|
|
Other, net
|
|
|
8
|
|
|
|
21
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit loss reserves at end of period
|
|
$
|
10,905
|
|
|
$
|
6,587
|
|
|
$
|
4,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Further analysis of credit quality and credit loss reserves is
presented in Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations
of
Form 10-K
under the caption Credit Quality.
8. Asset
Securitizations
We have sold receivables in various securitization transactions.
We continue to service and receive servicing fees on the
outstanding balance of these securitized receivables. We also
retain rights to future cash flows arising from these
receivables after the investors receive their contractual
return. We have also, in certain cases, retained other
subordinated interests in these securitizations. These
transactions result in the recording of an interest-only strip
receivable which represents the value of the future residual
cash flows from securitized receivables. The investors and the
securitization trusts have only limited recourse to our assets
for failure of debtors to pay. That recourse is limited to our
rights to future cash flow and any subordinated interest we
retain. Servicing assets and liabilities are not recognized in
conjunction with our securitizations since we receive adequate
compensation relative to current market rates to service the
receivables sold. See Note 2, Summary of Significant
Accounting Policies, for further discussion on our
accounting for interest-only strip receivables.
In the third quarter of 2004, we began to structure all new
collateralized funding transactions as secured financings.
However, because existing public credit card transactions were
structured as sales to revolving trusts that require
replenishments of receivables to support previously issued
securities, receivables continued to be sold to these trusts
until the revolving periods ended, the last of which occurred in
September of 2007. Our remaining securitized receivable credit
card trust began its amortization period in October 2007 and was
completely amortized in January 2008.
Securitization related revenue includes income associated with
the current and prior period securitization of receivables with
limited recourse structured as sales. Such income includes gains
on sales, net of our estimate of
147
probable credit losses under the recourse provisions, servicing
income and excess spread relating to those receivables.
Securitization related revenue is summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Net initial gains
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Net replenishment
gains(1)
|
|
|
24
|
|
|
|
30
|
|
|
|
154
|
|
Servicing revenue and excess spread
|
|
|
46
|
|
|
|
137
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securitization related revenue
|
|
$
|
70
|
|
|
$
|
167
|
|
|
$
|
211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Net replenishment gains reflect inherent recourse provisions of
$18 million in 2007, $41 million in 2006 and
$252 million in 2005.
|
Certain securitization trusts, such as credit cards, are
established at fixed levels and require frequent sales of new
receivables into the trust to replace receivable run-off. These
replenishments totaled $1.5 billion in 2007,
$2.5 billion in 2006 and $8.8 billion in 2005.
Cash flows received from securitization trusts were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal
|
|
|
|
|
|
|
Auto
|
|
|
Credit
|
|
|
Non-Credit
|
|
|
|
|
Year Ended December 31,
|
|
Finance
|
|
|
Card
|
|
|
Card
|
|
|
Total
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fees received
|
|
$
|
3
|
|
|
$
|
10
|
|
|
$
|
1
|
|
|
$
|
14
|
|
Other cash flow received on retained
interests(1)
|
|
|
44
|
|
|
|
50
|
|
|
|
-
|
|
|
|
94
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fees received
|
|
$
|
16
|
|
|
$
|
22
|
|
|
$
|
10
|
|
|
$
|
48
|
|
Other cash flow received on retained
interests(1)
|
|
|
97
|
|
|
|
108
|
|
|
|
18
|
|
|
|
223
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fees received
|
|
$
|
45
|
|
|
$
|
97
|
|
|
$
|
46
|
|
|
$
|
188
|
|
Other cash flow received on retained
interests(1)
|
|
|
40
|
|
|
|
243
|
|
|
|
52
|
|
|
|
335
|
|
|
|
(1) |
Other cash flows include all cash flows from interest-only strip
receivables, excluding servicing fees.
|
At December 31, 2007, the sensitivity of the current fair
value of the interest-only strip receivables to an immediate
10 percent and 20 percent unfavorable change in
assumptions used to measure the fair value would be less than
$100 thousand. These sensitivities are hypothetical and the
effect of a variation in a particular assumption on the fair
value of the residual cash flow is calculated independently from
any change in another assumption. In reality, changes in one
factor may contribute to changes in another (for example,
increases in market interest rates may result in lower
prepayments) which might magnify or counteract the sensitivities.
148
Receivables and two-month-and-over contractual delinquency for
our owned and serviced with limited recourse receivables were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Receivables
|
|
|
Delinquent
|
|
|
Receivables
|
|
|
Delinquent
|
|
|
|
Outstanding
|
|
|
Receivables
|
|
|
Outstanding
|
|
|
Receivables
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Owned receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate secured
|
|
$
|
88,661
|
|
|
|
7.08
|
%
|
|
$
|
97,885
|
|
|
|
3.54
|
%
|
Auto finance
|
|
|
13,257
|
|
|
|
3.67
|
|
|
|
12,504
|
|
|
|
3.18
|
|
Credit card
|
|
|
30,390
|
|
|
|
5.77
|
|
|
|
27,714
|
|
|
|
4.57
|
|
Private label
|
|
|
3,093
|
|
|
|
4.26
|
|
|
|
2,509
|
|
|
|
5.31
|
|
Personal non-credit card
|
|
|
20,649
|
|
|
|
14.13
|
|
|
|
21,367
|
|
|
|
10.17
|
|
Other(1)
|
|
|
13
|
|
|
|
-
|
|
|
|
15
|
|
|
|
3.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
156,063
|
|
|
|
7.41
|
|
|
|
161,994
|
|
|
|
4.59
|
|
Commercial
|
|
|
131
|
|
|
|
-
|
|
|
|
166
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total owned receivables
|
|
$
|
156,194
|
|
|
|
7.40
|
%
|
|
$
|
162,160
|
|
|
|
4.58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables serviced with limited recourse:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto finance
|
|
$
|
-
|
|
|
|
-
|
%
|
|
$
|
271
|
|
|
|
6.64
|
%
|
Credit card
|
|
|
124
|
|
|
|
2.42
|
|
|
|
500
|
|
|
|
2.00
|
|
Personal non-credit card
|
|
|
-
|
|
|
|
-
|
|
|
|
178
|
|
|
|
14.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables serviced with limited recourse
|
|
$
|
124
|
|
|
|
2.42
|
%
|
|
$
|
949
|
|
|
|
5.69
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes our liquidating legacy first and reverse mortgage
portfolios.
|
Average receivables and net charge-offs for our owned and
serviced with limited recourse receivables were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
Average
|
|
|
Net
|
|
|
Average
|
|
|
Net
|
|
|
|
Receivables
|
|
|
Charge-offs
|
|
|
Receivables
|
|
|
Charge-offs
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Owned receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate secured
|
|
$
|
93,787
|
|
|
|
2.32
|
%
|
|
$
|
92,351
|
|
|
|
1.00
|
%
|
Auto finance
|
|
|
12,901
|
|
|
|
4.10
|
|
|
|
11,660
|
|
|
|
3.67
|
|
Credit card
|
|
|
28,646
|
|
|
|
7.28
|
|
|
|
25,065
|
|
|
|
5.56
|
|
Private label
|
|
|
2,646
|
|
|
|
4.73
|
|
|
|
2,492
|
|
|
|
5.80
|
|
Personal non-credit card
|
|
|
21,215
|
|
|
|
8.48
|
|
|
|
20,611
|
|
|
|
7.89
|
|
Other(1)
|
|
|
14
|
|
|
|
1.70
|
|
|
|
18
|
|
|
|
1.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
159,209
|
|
|
|
4.22
|
|
|
|
152,197
|
|
|
|
2.97
|
|
Commercial
|
|
|
140
|
|
|
|
-
|
|
|
|
177
|
|
|
|
.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total owned receivables
|
|
$
|
159,349
|
|
|
|
4.21
|
%
|
|
$
|
152,374
|
|
|
|
2.97
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables serviced with limited recourse:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto finance
|
|
$
|
139
|
|
|
|
6.47
|
%
|
|
$
|
720
|
|
|
|
10.28
|
%
|
Credit card
|
|
|
452
|
|
|
|
3.98
|
|
|
|
974
|
|
|
|
3.49
|
|
Personal non-credit card
|
|
|
42
|
|
|
|
7.14
|
|
|
|
498
|
|
|
|
9.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables serviced with limited recourse
|
|
$
|
633
|
|
|
|
4.74
|
%
|
|
$
|
2,192
|
|
|
|
7.03
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes our liquidating legacy first and reverse mortgage
portfolios.
|
149
9. Properties
and Equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
At
|
|
|
|
|
|
December 31,
|
|
|
Depreciable
|
|
|
2007
|
|
|
2006
|
|
|
Life
|
|
|
|
(in millions)
|
|
Land
|
|
$
|
26
|
|
|
$
|
29
|
|
|
-
|
Buildings and improvements
|
|
|
269
|
|
|
|
331
|
|
|
10-40 years
|
Furniture and equipment
|
|
|
375
|
|
|
|
352
|
|
|
3-10
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
670
|
|
|
|
712
|
|
|
|
Accumulated depreciation and amortization
|
|
|
255
|
|
|
|
286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Properties and equipment, net
|
|
$
|
415
|
|
|
$
|
426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense totaled $113 million
in 2007, $115 million in 2006 and $131 million in 2005.
10. Intangible
Assets
Intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
|
|
|
Accumulated
|
|
|
Carrying
|
|
December 31, 2007
|
|
Gross
|
|
|
Charges
|
|
|
Amortization
|
|
|
Value
|
|
|
|
|
|
(in millions)
|
|
|
Purchased credit card relationships and related programs
|
|
$
|
1,736
|
|
|
|
-
|
|
|
$
|
717
|
|
|
$
|
1,019
|
|
Retail services merchant relationships
|
|
|
270
|
|
|
|
-
|
|
|
|
257
|
|
|
|
13
|
|
Other loan related relationships
|
|
|
333
|
|
|
|
158
|
|
|
|
169
|
|
|
|
6
|
|
Trade names
|
|
|
717
|
|
|
|
713
|
|
|
|
-
|
|
|
|
4
|
|
Technology, customer lists and other contracts
|
|
|
282
|
|
|
|
-
|
|
|
|
217
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,338
|
|
|
$
|
871
|
|
|
$
|
1,360
|
|
|
$
|
1,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
|
|
|
Accumulated
|
|
|
Carrying
|
|
December 31, 2006
|
|
Gross
|
|
|
Charges
|
|
|
Amortization
|
|
|
Value
|
|
|
|
|
|
(in millions)
|
|
|
Purchased credit card relationships and related programs
|
|
$
|
1,736
|
|
|
|
-
|
|
|
$
|
580
|
|
|
$
|
1,156
|
|
Retail services merchant relationships
|
|
|
270
|
|
|
|
-
|
|
|
|
203
|
|
|
|
67
|
|
Other loan related relationships
|
|
|
333
|
|
|
|
-
|
|
|
|
135
|
|
|
|
198
|
|
Trade names
|
|
|
717
|
|
|
|
13
|
|
|
|
-
|
|
|
|
704
|
|
Technology, customer lists and other contracts
|
|
|
282
|
|
|
|
-
|
|
|
|
189
|
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,338
|
|
|
$
|
13
|
|
|
$
|
1,107
|
|
|
$
|
2,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the third quarter of 2007, we completed our annual
impairment test of intangible assets. As a result of our
testing, we determined that the fair value of each intangible
asset exceeded its carrying value. Therefore we concluded that
none of our intangible assets were impaired.
As a result of the changes in the business climate, including
the subprime marketplace conditions and changes to our product
offerings and business strategies completed through the fourth
quarter of 2007, we performed an interim impairment test for the
Consumer Lending HFC and Beneficial tradenames and customer
relationships associated with the HSBC acquisition. As a result
of these tests, we concluded that the carrying value of the
tradenames and customer relationship intangibles exceeded their
fair value and recorded an impairment charge of
$858 million in the fourth quarter of 2007 representing all
of the remaining value assigned to these intangibles and
allocated to the Consumer Lending business.
150
Weighted-average amortization periods for our intangible assets
as of December 31, 2007 were as follows:
|
|
|
|
|
|
|
(in months)
|
|
|
|
|
Purchased credit card relationships and related programs
|
|
|
106
|
|
Retail services merchant relationships
|
|
|
60
|
|
Other loan related relationships
|
|
|
62
|
|
Technology, customer lists and other contracts
|
|
|
85
|
|
Intangible amortization expense totaled $253 million in
2007, $269 million in 2006 and $345 million in 2005.
The trade names are not subject to amortization as we believe
they have indefinite lives. The remaining acquired intangibles
are being amortized as applicable over their estimated useful
lives either on a straight-line basis or in proportion to the
underlying revenues generated. These useful lives range from
5 years for retail services merchant relationships to
approximately 10 years for certain loan related
relationships. Our purchased credit card relationships are being
amortized to their estimated residual values of
$162 million as of December 31, 2007.
Estimated amortization expense associated with our intangible
assets for each of the following years is as follows:
|
|
|
|
|
Year Ending December 31,
|
|
(in millions)
|
|
|
|
|
2008
|
|
$
|
181
|
|
2009
|
|
|
168
|
|
2010
|
|
|
146
|
|
2011
|
|
|
139
|
|
2012
|
|
|
136
|
|
Thereafter
|
|
|
172
|
|
11. Goodwill
Goodwill balances associated with our foreign businesses will
change from period to period due to movements in foreign
exchange. Changes in estimates of the tax basis in our assets
and liabilities or other tax estimates recorded at the date of
our acquisition by HSBC or our acquisition of Metris are
adjusted against goodwill pursuant to Statement of Financial
Accounting Standards No. 109, Accounting for Income
Taxes.
Changes in the carrying amount of goodwill are as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(in millions)
|
|
|
Balance at beginning of year
|
|
$
|
7,010
|
|
|
$
|
7,003
|
|
Adjustment to Metris purchase price
|
|
|
-
|
|
|
|
21
|
|
Acquisitions 2006 Solstice
|
|
|
-
|
|
|
|
46
|
|
Goodwill impairment related to the Mortgage Services business
|
|
|
(881
|
)
|
|
|
-
|
|
Goodwill impairment related to the Consumer Lending business
|
|
|
(2,462
|
)
|
|
|
-
|
|
Goodwill impairment related to the Auto Finance business
|
|
|
(312
|
)
|
|
|
-
|
|
Goodwill impairment related to the United Kingdom business
|
|
|
(378
|
)
|
|
|
-
|
|
Goodwill allocated to our U.K. Insurance Operations sold to a
third party
|
|
|
(73
|
)
|
|
|
-
|
|
Goodwill allocated to our European Operations sold to HBEU
|
|
|
-
|
|
|
|
(13
|
)
|
Change in estimate of the tax basis of assets and liabilities
recorded in the HSBC acquisition
|
|
|
(115
|
)
|
|
|
(89
|
)
|
Change in estimate of the tax basis of assets and liabilities
recorded in the Metris acquisition
|
|
|
-
|
|
|
|
(13
|
)
|
Impact of foreign currency translation
|
|
|
38
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
2,827
|
|
|
$
|
7,010
|
|
|
|
|
|
|
|
|
|
|
151
Goodwill established as a result of our acquisition by HSBC has
not been allocated to or included in the reported results of our
reportable segments as the acquisition by HSBC was outside of
the ongoing operational activities of our reportable segments.
This is consistent with managements view of our reportable
segment results. Goodwill relating to acquisitions, such as
Metris and Solstice are included in the reported respective
segment results as these acquisitions specifically related to
the operations and is consistent with managements view of
the segment results. See Note 21, Business
Segments, for further information on goodwill by
reportable segment.
During the third quarter of 2007, we completed our annual
impairment test of goodwill. For purposes of this test, we
assign the goodwill to our reporting units (as defined in
SFAS No. 142, Goodwill and Other Intangible
Assets (SFAS No. 142)). As discussed in
Note 4, Restructuring Activities, in the third
quarter of 2007 we recorded a goodwill impairment charge of
$881 million which represents all of the goodwill allocated
to our Mortgage Services business. With the exception of our
Mortgage Services business, the fair value of each of the
reporting units to which goodwill was assigned exceeded its
carrying value including goodwill. Therefore at the completion
of our annual goodwill impairment test, we concluded that none
of the remaining goodwill was impaired. Goodwill is reviewed for
impairment in interim periods if the circumstances indicate that
the carrying amount assigned to a reporting unit may not be
recoverable.
As a result of the strategic reviews and restructuring
activities which occurred during the fourth quarter of 2007 we
have performed interim goodwill impairment tests for the
businesses where we believe significant changes in the business
climate have occurred as required by SFAS No. 142.
These tests revealed that the business climate changes,
including changes in subprime marketplace conditions when
coupled with the changes to our product offerings and business
strategies completed through the fourth quarter of 2007, have
resulted in an impairment of all goodwill allocated to our
Consumer Lending (which includes Solstice) and Auto Finance
businesses. Therefore, we recorded an impairment charge in the
fourth quarter of 2007 of $2,462 million relating to our
Consumer Lending business and $312 million relating to our
Auto Finance business which represents all of the goodwill
allocated to these businesses. In addition, the changes to our
product offerings and business strategies completed through the
fourth quarter of 2007 have also resulted in an impairment of
the goodwill allocated to our United Kingdom business and an
impairment charge of $378 million was also recorded in the
fourth quarter of 2007 representing all of the goodwill
previously allocated to this business. For all other businesses,
the fair value of each of these reporting units continues to
exceed its carrying value including goodwill.
See Note 23, Fair Value Measurements, for a
description of the methodology used to determine the fair value
of our reporting units.
152
|
|
12.
|
Commercial
Paper, Bank and Other Borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Bank and Other
|
|
|
|
|
|
|
Paper
|
|
|
Borrowings
|
|
|
Total
|
|
|
|
|
|
(in millions)
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
$
|
8,396
|
|
|
$
|
28
|
|
|
$
|
8,424
|
|
Highest aggregate month-end balance
|
|
|
|
|
|
|
|
|
|
|
16,373
|
|
Average borrowings
|
|
|
10,987
|
|
|
|
34
|
|
|
|
11,021
|
|
Weighted-average interest rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
At year-end
|
|
|
4.8
|
%
|
|
|
1.7
|
%
|
|
|
4.7
|
%
|
Paid during year
|
|
|
5.5
|
|
|
|
4.0
|
|
|
|
5.5
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
$
|
11,012
|
|
|
$
|
43
|
|
|
$
|
11,055
|
|
Highest aggregate month-end balance
|
|
|
|
|
|
|
|
|
|
|
17,530
|
|
Average borrowings
|
|
|
12,344
|
|
|
|
494
|
|
|
|
12,838
|
|
Weighted-average interest rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
At year-end
|
|
|
5.3
|
%
|
|
|
2.8
|
%
|
|
|
5.3
|
%
|
Paid during year
|
|
|
5.0
|
|
|
|
3.3
|
|
|
|
4.9
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
$
|
11,360
|
|
|
$
|
94
|
|
|
$
|
11,454
|
|
Highest aggregate month-end balance
|
|
|
|
|
|
|
|
|
|
|
14,801
|
|
Average borrowings
|
|
|
11,877
|
|
|
|
111
|
|
|
|
11,988
|
|
Weighted-average interest rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
At year-end
|
|
|
4.2
|
%
|
|
|
3.9
|
%
|
|
|
4.2
|
%
|
Paid during year
|
|
|
3.4
|
|
|
|
2.5
|
|
|
|
3.4
|
|
Commercial paper included obligations of foreign subsidiaries of
$673 million at December 31, 2007, $223 million
at December 31, 2006 and $442 million at
December 31, 2005. Bank and other borrowings included
obligations of foreign subsidiaries of $26 million at
December 31, 2007, $35 million at December 31,
2006 and $55 million at December 31, 2005. At
December 31, 2007 deposits of $26 million, primarily
held by our U.K. business, are classified as bank and other
borrowings due to their short-term nature. At December 31,
2006 deposits of $36 million were classified as bank and
other borrowings due to their short-term nature.
Interest expense for commercial paper, bank and other borrowings
totaled $609 million in 2007, $628 million in 2006 and
$402 million in 2005.
We maintain various bank credit agreements primarily to support
commercial paper borrowings and also to provide funding in the
U.K. We had committed
back-up
lines and other bank lines of $17.5 billion at
December 31, 2007, including $8.2 billion with HSBC
and subsidiaries and $17.0 billion at December 31,
2006, including $7.7 billion with HSBC and subsidiaries.
Our U.K. subsidiary had drawn $3.5 billion at
December 31, 2007 and $4.3 billion at
December 31, 2006 on its bank lines of credit which are
included in Due to Affiliates for both periods. Formal credit
lines are reviewed annually and expire at various dates through
2010. Borrowings under these lines generally are available at a
surcharge over LIBOR. The most restrictive financial covenant
contained in the
back-up line
agreements that could restrict availability is an obligation to
maintain a minimum shareholders(s) equity plus the
outstanding trust preferred stock of $11.0 billion. At
December 31, 2007, minimum shareholders(s)
equity balance plus outstanding trust preferred stock was
$15.4 billion which is substantially above the required
minimum balance. In 2008, $3.0 billion of back-up lines
from third parties are scheduled to expire. Annual commitment
fee requirements to support availability of these lines at
December 31, 2007 and 2006 totaled $8 million and
included $1 million for the HSBC lines.
153
|
|
13.
|
Long
Term Debt (With Original Maturities Over One Year)
|
Long term debt (with original maturities over one year)
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(in millions)
|
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
Fixed rate:
|
|
|
|
|
|
|
|
|
8.875% Adjustable Conversion-Rate Equity Security Units
|
|
$
|
542
|
|
|
$
|
542
|
|
Secured financings:
|
|
|
|
|
|
|
|
|
3.00% to 3.99%; due 2008
|
|
|
100
|
|
|
|
195
|
|
4.00% to 4.99%; due 2008 to 2010
|
|
|
762
|
|
|
|
1,312
|
|
5.00% to 5.99%; due 2008 to 2012
|
|
|
3,632
|
|
|
|
3,956
|
|
Other fixed rate senior
debt(1):
|
|
|
|
|
|
|
|
|
2.40% to 3.99%; due 2008 to 2032
|
|
|
633
|
|
|
|
1,235
|
|
4.00% to 4.99%; due 2008 to 2032
|
|
|
17,405
|
|
|
|
15,516
|
|
5.00% to 5.49%; due 2008 to 2032
|
|
|
12,957
|
|
|
|
12,417
|
|
5.50% to 5.99%; due 2008 to 2024
|
|
|
10,116
|
|
|
|
11,371
|
|
6.00% to 6.49%; due 2008 to 2033
|
|
|
8,485
|
|
|
|
9,659
|
|
6.50% to 6.99%; due 2008 to 2033
|
|
|
6,299
|
|
|
|
5,555
|
|
7.00% to 7.49%; due 2008 to 2032
|
|
|
2,556
|
|
|
|
3,168
|
|
7.50% to 7.99%; due 2008 to 2032
|
|
|
2,959
|
|
|
|
4,950
|
|
8.00% to 9.00%; due 2008 to 2013
|
|
|
1,291
|
|
|
|
1,263
|
|
Variable interest rate:
|
|
|
|
|
|
|
|
|
Secured financings 4.92% to 7.38%; due 2008 to 2018
|
|
|
18,692
|
|
|
|
16,364
|
|
Other variable interest rate senior debt 2.16% to
6.99%; due 2008 to 2018
|
|
|
35,728
|
|
|
|
38,354
|
|
Junior Subordinated Notes Issued to Capital Trusts
|
|
|
1,031
|
|
|
|
1,031
|
|
Unamortized Discount
|
|
|
(150
|
)
|
|
|
(377
|
)
|
HSBC Acquisition Purchase Accounting Fair Value
Adjustments
|
|
|
224
|
|
|
|
1,079
|
|
|
|
|
|
|
|
|
|
|
Total long term debt
|
|
$
|
123,262
|
|
|
$
|
127,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $32.9 billion of
fixed rate debt carried at fair value.
|
HSBC acquisition purchase accounting fair value adjustments
represent adjustments which have been pushed down to
record our long term debt at fair value at the date of our
acquisition by HSBC.
Secured financings of $23.2 billion at December 31,
2007 are secured by $30.9 billion of real estate secured,
auto finance, credit card and personal non-credit card
receivables. Secured financings of $21.8 billion at
December 31, 2006 are secured by $28.1 billion of real
estate secured, auto finance, credit card and personal
non-credit card receivables.
At December 31, 2007, long term debt included carrying
value adjustments relating to derivative financial instruments
which decreased the debt balance by $.1 billion and a
foreign currency translation adjustment relating to our foreign
denominated debt which increased the debt balance by
$4.4 billion. At December 31, 2006, long term debt
included carrying value adjustments relating to derivative
financial instruments which decreased the debt balance by
$1.3 billion and a foreign currency translation adjustment
relating to our foreign denominated debt which increased the
debt balance by $2.4 billion.
Long term debt (with original maturities over one year) at
December 31, 2007 includes $32.9 billion of fixed rate
debt accounted for under FVO. We have not elected FVO for
$34.3 billion of fixed rate debt currently carried on our
balance sheet within long term debt. Fixed rate debt accounted
for under FVO at December 31, 2007 has an aggregate unpaid
principal balance of $33.2 billion which includes a foreign
currency translation adjustment relating to our foreign
denominated FVO debt which increased the debt balance by
$.5 billion. The fair value of the fixed rate debt
accounted for under FVO is determined by a third party and
includes the full market price (credit and interest rate impact)
based on observable market data. See Note 23, Fair
Value Measurements, for a description of the methods and
significant assumptions used to estimate the fair value of our
fixed rate debt accounted for under
154
FVO. The adoption of FVO has impacted the way we report realized
gains and losses on the swaps associated with this debt which
previously qualified as effective hedges under
SFAS No. 133. Upon the adoption of
SFAS No. 159 for certain fixed rate debt, we
eliminated hedge accounting on these swaps and, as a result,
realized gains and losses are no longer reported in interest
expense but instead are reported as Gain on debt
designated at fair value and related derivatives within
other revenues.
In 2007, we recorded a net gain from fair value changes on our
fixed rate debt accounted for under FVO of $622 million
which is included in Gain on debt designated at fair value
and related derivatives as a component of other revenues
in the consolidated statement of income (loss). Gain on
debt designated at fair value and related derivatives in
the consolidated statement of income (loss) also includes the
mark-to-market adjustment on derivatives related to the debt
designated at fair value as well as net realized gains or losses
on these derivatives. The components of Gain on debt
designated at fair value and related derivatives are as
follows:
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
|
|
Interest rate component
|
|
$
|
(994
|
)
|
Credit risk component
|
|
|
1,616
|
|
|
|
|
|
|
Total mark-to-market on debt designated at fair value
|
|
|
622
|
|
Mark-to-market on the related derivatives
|
|
|
971
|
|
Net realized losses on the related derivatives
|
|
|
(318
|
)
|
|
|
|
|
|
Gain on debt designated at fair value and related derivatives
|
|
$
|
1,275
|
|
|
|
|
|
|
The movement in the fair value reflected in Gain on debt
designated at fair value and related derivatives includes
the effect of credit spread changes and interest rate changes,
including any ineffectiveness in the relationship between the
related swaps and our debt. As credit spreads narrow, accounting
losses are booked and the reverse is true if credit spreads
widen. Differences arise between the movement in the fair value
of our debt and the fair value of the related swap due to the
different credit characteristics. The size and direction of the
accounting consequences of such changes can be volatile from
period to period but do not alter the cash flows intended as
part of the documented interest rate management strategy.
The changes in the interest rate component reflect a decrease in
the LIBOR curve since January 1, 2007. Changes in the
credit risk component of the debt were significant during 2007
due to a general widening of credit spreads across all domestic
bond market sectors as well as the general lack of liquidity in
the secondary bond market in the second half of 2007.
Weighted-average interest rates on long term debt were
5.2 percent at December 31, 2007 and 5.5 percent
at December 31, 2006 (excluding HSBC acquisition purchase
accounting adjustments). Interest expense for long term debt was
$6.5 billion in 2007, $5.8 billion in 2006 and
$3.7 billion in 2005. The most restrictive financial
covenant contained in the
back-up line
agreements that could restrict availability is an obligation to
maintain a minimum shareholders(s) equity plus the
outstanding trust preferred stock of $11.0 billion. At
December 31, 2007, minimum shareholders(s)
equity balance plus outstanding trust preferred stock was
$15.4 billion which is substantially above the required
minimum balance. Debt denominated in a foreign currency is
included in the applicable rate category based on the effective
U.S. dollar equivalent rate as summarized in Note 14,
Derivative Financial Instruments.
In 2002, we issued $541 million of
8.875 percent Adjustable Conversion-Rate Equity
Security Units. Each Adjustable Conversion-Rate Equity Security
Unit consisted initially of a contract to purchase, for $25, a
number of shares of HSBC Finance Corporation (formerly known as
Household International, Inc.) common stock on February 15,
2006 and a senior note issued by our then wholly owned
subsidiary, Household Finance Corporation, with a principal
amount of $25. In November 2005 we remarketed the notes and
reset the rate. All remaining stock purchase contracts matured
on February 15, 2006 and HSBC issued ordinary shares for
the remaining stock purchase contracts on that date.
155
The following table summarizes our junior subordinated notes
issued to capital trusts (Junior Subordinated Notes)
and the related company obligated mandatorily redeemable
preferred securities (Preferred Securities):
|
|
|
|
|
|
|
Household Capital
|
|
|
|
Trust IX
|
|
|
|
(HCT IX)
|
|
|
|
|
|
(dollars are
|
|
|
|
in millions)
|
|
|
Junior Subordinated Notes:
|
|
|
|
|
Principal balance
|
|
$
|
1,031
|
|
Interest rate
|
|
|
5.91
|
%
|
Redeemable by issuer
|
|
|
November 2015
|
|
Stated maturity
|
|
|
November 2035
|
|
Preferred Securities:
|
|
|
|
|
Rate
|
|
|
5.91
|
%
|
Face value
|
|
$
|
1,000
|
|
Issue date
|
|
|
November 2005
|
|
In the first quarter of 2006, we redeemed the junior
subordinated notes issued to Household Capital Trust VI
with an outstanding principal balance of $206 million. In
the fourth quarter of 2006, we redeemed the junior subordinated
notes issued to Household Capital Trust VII with an
outstanding principal balance of $206 million.
The Preferred Securities must be redeemed when the Junior
Subordinated Notes are paid. The Junior Subordinated Notes have
a stated maturity date, but are redeemable by us, in whole or in
part, beginning on the dates indicated above at which time the
Preferred Securities are callable at par ($25 per Preferred
Security) plus accrued and unpaid dividends. Dividends on the
Preferred Securities are cumulative, payable quarterly in
arrears, and are deferrable at our option for up to five years.
We cannot pay dividends on our preferred and common stocks
during such deferments. The Preferred Securities have a
liquidation value of $25 per preferred security. Our obligations
with respect to the Junior Subordinated Notes, when considered
together with certain undertakings of HSBC Finance Corporation
with respect to the Trusts, constitute full and unconditional
guarantees by us of the Trusts obligations under the
respective Preferred Securities.
Maturities of long term debt at December 31, 2007,
including secured financings and conduit facility renewals, were
as follows:
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
2008
|
|
$
|
32,844
|
|
2009
|
|
|
23,821
|
|
2010
|
|
|
15,756
|
|
2011
|
|
|
12,767
|
|
2012
|
|
|
11,365
|
|
Thereafter
|
|
|
26,709
|
|
|
|
|
|
|
Total
|
|
$
|
123,262
|
|
|
|
|
|
|
Certain components of our long term debt may be redeemed prior
to its stated maturity.
|
|
14.
|
Derivative
Financial Instruments
|
Our business activities involve analysis, evaluation, acceptance
and management of some degree of risk or combination of risks.
Accordingly, we have comprehensive risk management policies to
address potential financial risks, which include credit risk
(which includes counterparty credit risk), liquidity risk,
market risk, and operational risks. Our risk management policy
is designed to identify and analyze these risks, to set
appropriate limits and controls, and to monitor the risks and
limits continually by means of reliable and up-to-date
administrative and information systems. Our risk management
policies are primarily carried out in accordance with practice
and limits set by the HSBC Group Management Board. The HSBC
Finance Corporation Asset Liability Committee (ALCO)
meets regularly to review risks and approve appropriate risk
management strategies within the limits established by
156
the HSBC Group Management Board. Additionally, our Audit
Committee receives regular reports on our liquidity positions in
relation to the established limits. In accordance with the
policies and strategies established by ALCO, in the normal
course of business, we enter into various transactions involving
derivative financial instruments. These derivative financial
instruments primarily are used to manage our market risk. For
further information on our strategies for managing interest rate
and foreign exchange rate risk, see the Risk
Management section within our Managements Discussion
and Analysis of Financial Condition and Results of Operations.
Objectives for Holding Derivative Financial
Instruments Market risk (which includes interest
rate and foreign currency exchange risks) is the possibility
that a change in interest rates or foreign exchange rates will
cause a financial instrument to decrease in value or become more
costly to settle. Customer demand for our receivable products
shifts between fixed rate and floating rate products, based on
market conditions and preferences. These shifts in loan products
result in different funding strategies and produce different
interest rate risk exposures. We maintain an overall risk
management strategy that uses a variety of interest rate and
currency derivative financial instruments to mitigate our
exposure to fluctuations caused by changes in interest rates and
currency exchange rates. We manage our exposure to interest rate
risk primarily through the use of interest rate swaps, but also
use forwards, futures, options, and other risk management
instruments. We manage our exposure to foreign currency exchange
risk primarily through the use of currency swaps, options and
forwards. We do not use leveraged derivative financial
instruments for interest rate risk management.
Interest rate swaps are contractual agreements between two
counterparties for the exchange of periodic interest payments
generally based on a notional principal amount and
agreed-upon
fixed or floating rates. The majority of our interest rate swaps
are used to manage our exposure to changes in interest rates by
converting floating rate debt to fixed rate or by converting
fixed rate debt to floating rate. We have also entered into
currency swaps to convert both principal and interest payments
on debt issued from one currency to the appropriate functional
currency.
Forwards are agreements between two parties, committing one to
sell and the other to buy a specific quantity of an instrument
on some future date. The parties agree to buy or sell at a
specified price in the future, and their profit or loss is
determined by the difference between the arranged price and the
level of the spot price when the contract is settled. We have
used both interest rate and foreign exchange rate forward
contracts. We use foreign exchange rate forward contracts to
reduce our exposure to foreign currency exchange risk. Interest
rate forward contracts are used to hedge resets of interest
rates on our floating rate assets and liabilities. Cash
requirements for forward contracts include the receipt or
payment of cash upon the sale or purchase of the instrument.
Purchased options grant the purchaser the right, but not the
obligation, to either purchase or sell a financial instrument at
a specified price within a specified period. The seller of the
option has written a contract which creates an obligation to
either sell or purchase the financial instrument at the
agreed-upon
price if, and when, the purchaser exercises the option. We use
caps to limit the risk associated with an increase in rates and
floors to limit the risk associated with a decrease in rates.
Credit Risk By utilizing derivative financial
instruments, we are exposed to counterparty credit risk.
Counterparty credit risk is our primary exposure on our interest
rate swap portfolio. Counterparty credit risk is the risk that
the counterparty to a transaction fails to perform according to
the terms of the contract. We control the counterparty credit
(or repayment) risk in derivative instruments through
established credit approvals, risk control limits, collateral,
and ongoing monitoring procedures. Our exposure to credit risk
for futures is limited as these contracts are traded on
organized exchanges. Each day, changes in futures contract
values are settled in cash. In contrast, swap agreements and
forward contracts have credit risk relating to the performance
of the counterparty. We utilize an affiliate, HSBC Bank USA, as
the primary provider of domestic derivative products. We have
never suffered a loss due to counterparty failure.
At December 31, 2007, most of our existing derivative
contracts are with HSBC subsidiaries, making them our primary
counterparty in derivative transactions. Most swap agreements
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.
At December 31, 2007, we provided third party swap
counterparties with $51 million collateral. At
December 31, 2006, third party counterparties had provided
$158 million in collateral to us. Beginning with the second
quarter of 2006, when the fair value of our agreements with
affiliate counterparties
157
requires the posting of collateral by the affiliate, it is
provided in the form of cash and recorded on the balance sheet,
consistent with third party arrangements. At December 31,
2007, the fair value of our agreements with affiliate
counterparties required the affiliate to provide cash collateral
of $3.8 billion which is offset against the fair value
amount recognized for derivative instruments that have been
offset under the same master netting arrangement and recorded in
our balance sheet as a component of derivative related assets.
At December 31, 2006, the fair value of our agreements with
affiliate counterparties required the affiliate to provide cash
collateral of $1.0 billion which is offset against the fair
value amount recognized for derivative instruments that have
been offset under the same master netting arrangement and
recorded in our balance sheet as a component of derivative
related assets. These collateral offsets have been recorded in
accordance with
FIN 39-1.
At December 31, 2007, we had derivative contracts with a
notional value of approximately $94.7 billion, including
$88.7 billion outstanding with HSBC Bank USA and
$3.1 billion with other HSBC affiliates. Derivative
financial instruments are generally expressed in terms of
notional principal or contract amounts which are much larger
than the amounts potentially at risk for nonpayment by
counterparties.
Fair Value and Cash Flow Hedges To manage our
exposure to changes in interest rates, we enter into interest
rate swap agreements and currency swaps which have been
designated as fair value or cash flow hedges under
SFAS No. 133. Prior to the acquisition by HSBC, the
majority of our fair value and cash flow hedges were effective
hedges which qualified for the shortcut method of accounting.
Under the Financial Accounting Standards Boards
interpretations of SFAS No. 133, the shortcut method
of accounting was no longer allowed for interest rate swaps
which were outstanding at the time of the acquisition by HSBC.
As a result of the acquisition, we were required to reestablish
and formally document the hedging relationship associated with
all of our fair value and cash flow hedging instruments and
assess the effectiveness of each hedging relationship, both at
inception of the hedge relationship and on an ongoing basis. Due
to deficiencies in our contemporaneous hedge documentation at
the time of acquisition, we lost the ability to apply hedge
accounting to our entire cash flow and fair value hedging
portfolio that existed at the time of acquisition by HSBC.
During 2005, we reestablished hedge treatment under the long
haul method of accounting for a significant number of the
derivatives in this portfolio. We currently utilize the
long-haul method to test effectiveness of all derivatives
designated as hedges.
Fair value hedges include interest rate swaps which convert our
fixed rate debt to variable rate debt and currency swaps which
convert debt issued from one currency into pay variable debt of
the appropriate functional currency. As discussed more fully
below, during 2007 we substantially reduced the amount of
hedging relationships outstanding as a result of adopting
SFAS No. 159. Hedge ineffectiveness associated with
fair value hedges is recorded in other revenues as derivative
income and was a gain of $7 million ($4 million after
tax) in 2007, a gain of $252 million ($159 million
after tax) in 2006 and a gain of $117 million
($75 million after tax) in 2005. All of our fair value
hedges were associated with debt during 2007, 2006 and 2005. We
recorded fair value adjustments for unexpired fair value hedges
which increased the carrying value of our debt by
$28 million at December 31, 2007 and decreased the
varying value of our debt by $292 million at
December 31, 2006.
Cash flow hedges include interest rate swaps which convert our
variable rate debt to fixed rate debt and currency swaps which
convert debt issued from one currency into pay fixed debt of the
appropriate functional currency. Gains and (losses) on unexpired
derivative instruments designated as cash flow hedges (net of
tax) are reported in accumulated other comprehensive income and
totaled a loss of $834 million ($525 million after
tax) at December 31, 2007 and a gain of $256 million
($161 million after tax) at December 31, 2006. We
expect $27 million ($17 million after tax) of
currently unrealized net losses will be reclassified to earnings
within one year, however, these unrealized losses will be offset
by decreased interest expense associated with the variable cash
flows of the hedged items and will result in no significant net
economic impact to our earnings. Hedge ineffectiveness
associated with cash flow hedges recorded in other revenues as
derivative income was a loss of $56 million
($35 million after tax) in 2007, a loss of $83 million
($53 million after tax) in 2006 and a loss of
$76 million ($49 million after tax) in 2005.
At December 31, 2007, $3,842 million of derivative
instruments, at fair value, were included as derivative
financial assets and $71 million as derivative related
liabilities. At December 31, 2006, $1,461 million of
derivative instruments, at fair value, were included as
derivative financial assets and $58 million as derivative
related liabilities.
158
Information related to deferred gains and losses before taxes on
terminated derivatives was as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(in millions)
|
|
|
Deferred gains
|
|
$
|
42
|
|
|
$
|
156
|
|
Deferred losses
|
|
|
50
|
|
|
|
176
|
|
Weighted-average amortization period:
|
|
|
|
|
|
|
|
|
Deferred gains
|
|
|
4 years
|
|
|
|
7 years
|
|
Deferred losses
|
|
|
9 years
|
|
|
|
6 years
|
|
Increases (decreases) to carrying values resulting from net
deferred gains and losses:
|
|
|
|
|
|
|
|
|
Long term debt
|
|
$
|
(22
|
)
|
|
$
|
(47
|
)
|
Accumulated other comprehensive income
|
|
|
14
|
|
|
|
27
|
|
Information related to deferred gains and losses before taxes on
discontinued hedges was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(In millions)
|
|
|
Deferred gains
|
|
$
|
135
|
|
|
$
|
269
|
|
Deferred losses
|
|
|
555
|
|
|
|
1,052
|
|
Weighted-average amortization period:
|
|
|
|
|
|
|
|
|
Deferred gains
|
|
|
5 years
|
|
|
|
5 years
|
|
Deferred losses
|
|
|
5 years
|
|
|
|
5 years
|
|
Increases (decreases) to carrying values resulting from net
deferred gains and losses:
|
|
|
|
|
|
|
|
|
Long term debt
|
|
$
|
(109
|
)
|
|
$
|
(941
|
)
|
Accumulated other comprehensive income
|
|
|
(311
|
)
|
|
|
158
|
|
Amortization of net deferred gains (losses) totaled
$(9) million in 2007, ($80) million in 2006 and
($12) million in 2005.
Non-Qualifying Hedging Activities We may use
forward rate agreements, interest rate caps, exchange traded
options, and interest rate and currency swaps which are not
designated as hedges under SFAS No. 133, either
because they do not qualify as effective hedges or because we
lost the ability to apply hedge accounting following our
acquisition by HSBC as discussed above. These financial
instruments are economic hedges but do not qualify for hedge
accounting and are primarily used to minimize our exposure to
changes in interest rates and currency exchange rates.
Unrealized and realized gains (losses) on derivatives which were
not designated as hedges are reported in other revenues as
derivative income and totaled $(31) million
($(19) million after tax) in 2007, $21 million
($14 million after tax) in 2006 and $208 million
($133 million after tax) in 2005.
Derivatives Associated with Debt Carried at Fair
Value Effective January 1, 2007, we elected
the fair value option for certain issuances of our fixed rate
debt in order to align our accounting treatment with that of
HSBC under IFRSs. As a result, we discontinued fair value hedge
accounting for all interest rate and currency swaps associated
with this debt. As of December 31, 2007, the recorded fair
value of such interest rate and currency swaps was
$588 million. During 2007, realized losses of
$318 million and unrealized gains of $971 million on
the derivatives related to debt designated at fair value were
recorded as a component of Gain on debt designated at fair value
and related derivatives in the consolidated statement of income
(loss).
Derivative Income Derivative income as
discussed above includes realized and unrealized gains and
losses on derivatives which do not qualify as effective hedges
under SFAS No. 133 as well as the ineffectiveness on
derivatives which are qualifying hedges. Prior to the election
of FVO reporting for certain fixed rate debt, we accounted for
the realized gains and losses on swaps associated with this debt
which qualified as effective hedges under SFAS No. 133
in interest expense and any ineffectiveness which resulted from
changes in the fair value of the swaps as compared to changes in
the interest rate component value of the debt was recorded as a
component of derivative income. With the adoption of
SFAS No. 159 beginning in January 2007, we eliminated
hedge accounting on these swaps and as a result, realized and
unrealized gains and losses on these derivatives and changes in
the
159
interest rate component value of the aforementioned debt are now
included in Gain on debt designated at fair value and related
derivatives in the consolidated statement of income (loss)
which impacts the comparability of derivative income between
periods. Derivative income is summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
(in millions)
|
|
|
Net realized gains (losses)
|
|
$
|
(24
|
)
|
|
$
|
(7
|
)
|
|
$
|
52
|
|
Mark-to-market on derivatives which do not qualify as effective
hedges
|
|
|
(7
|
)
|
|
|
28
|
|
|
|
156
|
|
Ineffectiveness
|
|
|
(48
|
)
|
|
|
169
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(79
|
)
|
|
$
|
190
|
|
|
$
|
249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income volatility, whether based on changes in interest
rates for swaps which do not qualify for hedge accounting or
ineffectiveness recorded on our qualifying hedges under the
long-haul method of accounting, impacts the comparability of our
reported results between periods. Accordingly, derivative income
for the year ended December 31, 2007 should not be
considered indicative of the results for any future periods.
Derivative Financial Instruments The
following table summarizes derivative financial instrument
activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange
|
|
|
Non-Exchange Traded
|
|
|
|
Traded
|
|
|
Interest
|
|
|
|
|
|
Foreign Exchange
|
|
|
Interest Rate
|
|
|
Caps
|
|
|
|
|
|
|
Options
|
|
|
Rate
|
|
|
Currency
|
|
|
Rate Contracts
|
|
|
Forward Contracts
|
|
|
and
|
|
|
|
|
|
|
Purchased
|
|
|
Swaps
|
|
|
Swaps
|
|
|
Purchased
|
|
|
Sold
|
|
|
Purchased
|
|
|
Sold
|
|
|
Floors
|
|
|
Total
|
|
|
|
|
|
(in millions)
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount, 2006
|
|
$
|
4,600
|
|
|
$
|
57,000
|
|
|
$
|
24,841
|
|
|
$
|
1,074
|
|
|
$
|
583
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,260
|
|
|
$
|
94,358
|
|
New contracts
|
|
|
6,651
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,651
|
|
New contracts purchased from subsidiaries of HSBC
|
|
|
-
|
|
|
|
25,331
|
|
|
|
2,877
|
|
|
|
8,509
|
|
|
|
6,122
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
42,839
|
|
Matured or expired contracts
|
|
|
(11,251
|
)
|
|
|
(7,887
|
)
|
|
|
(1,961
|
)
|
|
|
(9,038
|
)
|
|
|
(6,155
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,475
|
)
|
|
|
(38,767
|
)
|
Terminated contracts
|
|
|
-
|
|
|
|
(9,728
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(846
|
)
|
|
|
(10,574
|
)
|
Change in Notional amount
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Change in foreign exchange rate
|
|
|
-
|
|
|
|
215
|
|
|
|
-
|
|
|
|
(16
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount, 2007
|
|
$
|
-
|
|
|
$
|
64,931
|
|
|
$
|
25,757
|
|
|
$
|
529
|
|
|
$
|
550
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,939
|
|
|
$
|
94,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value,
2007(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value hedges
|
|
$
|
-
|
|
|
$
|
13
|
|
|
$
|
120
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
133
|
|
Cash flow hedges
|
|
|
-
|
|
|
|
(440
|
)
|
|
|
3,375
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,935
|
|
Fair value option related derivatives
|
|
|
-
|
|
|
|
261
|
|
|
|
327
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
588
|
|
Non-hedging derivatives
|
|
|
-
|
|
|
|
(50
|
)
|
|
|
167
|
|
|
|
3
|
|
|
|
(5
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
-
|
|
|
$
|
(216
|
)
|
|
$
|
3,989
|
|
|
$
|
3
|
|
|
$
|
(5
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount, 2005
|
|
$
|
4,870
|
|
|
$
|
49,468
|
|
|
$
|
21,719
|
|
|
$
|
1,633
|
|
|
$
|
465
|
|
|
$
|
172
|
|
|
$
|
-
|
|
|
$
|
10,700
|
|
|
$
|
89,027
|
|
New contracts
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-(used in
|
)
|
New contracts purchased from subsidiaries of HSBC
|
|
|
20,205
|
|
|
|
61,205
|
|
|
|
8,687
|
|
|
|
2,071
|
|
|
|
5,694
|
|
|
|
1,344
|
|
|
|
-
|
|
|
|
65
|
|
|
|
99,271
|
|
Matured or expired contracts
|
|
|
(17,675
|
)
|
|
|
(5,319
|
)
|
|
|
(4,291
|
)
|
|
|
(2,851
|
)
|
|
|
(5,710
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,505
|
)
|
|
|
(40,351
|
)
|
Terminated contracts
|
|
|
(2,800
|
)
|
|
|
(49,571
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,516
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(53,887
|
)
|
Change in Notional amount
|
|
|
-
|
|
|
|
1,217
|
|
|
|
(1,274
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(57
|
)
|
Change in foreign exchange rate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
221
|
|
|
|
134
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount, 2006
|
|
$
|
4,600
|
|
|
$
|
57,000
|
|
|
$
|
24,841
|
|
|
$
|
1,074
|
|
|
$
|
583
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,260
|
|
|
$
|
94,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange
|
|
|
Non-Exchange Traded
|
|
|
|
Traded
|
|
|
Interest
|
|
|
|
|
|
Foreign Exchange
|
|
|
Interest Rate
|
|
|
Caps
|
|
|
|
|
|
|
Options
|
|
|
Rate
|
|
|
Currency
|
|
|
Rate Contracts
|
|
|
Forward Contracts
|
|
|
and
|
|
|
|
|
|
|
Purchased
|
|
|
Swaps
|
|
|
Swaps
|
|
|
Purchased
|
|
|
Sold
|
|
|
Purchased
|
|
|
Sold
|
|
|
Floors
|
|
|
Total
|
|
|
|
|
|
(in millions)
|
|
|
Fair value,
2006(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value hedges
|
|
$
|
-
|
|
|
$
|
(740
|
)
|
|
$
|
(26
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(766
|
)
|
Cash flow hedges
|
|
|
-
|
|
|
|
14
|
|
|
|
1,976
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,990
|
|
Non-hedging derivatives
|
|
|
-
|
|
|
|
(64
|
)
|
|
|
244
|
|
|
|
4
|
|
|
|
(6
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
-
|
|
|
$
|
(790
|
)
|
|
$
|
2,194
|
|
|
$
|
4
|
|
|
$
|
(6
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
1,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount, 2004
|
|
$
|
1,691
|
|
|
$
|
45,253
|
|
|
$
|
18,150
|
|
|
$
|
1,146
|
|
|
$
|
614
|
|
|
$
|
374
|
|
|
$
|
-
|
|
|
$
|
4,380
|
|
|
$
|
71,608
|
|
New contracts
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30
|
|
|
|
31
|
|
New contracts purchased from subsidiaries of HSBC
|
|
|
5,570
|
|
|
|
25,373
|
|
|
|
6,824
|
|
|
|
1,113
|
|
|
|
4,860
|
|
|
|
1,707
|
|
|
|
-
|
|
|
|
8,433
|
|
|
|
53,880
|
|
Matured or expired contracts
|
|
|
(2,391
|
)
|
|
|
(5,657
|
)
|
|
|
(3,255
|
)
|
|
|
(482
|
)
|
|
|
(4,762
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,894
|
)
|
|
|
(18,441
|
)
|
Terminated contracts
|
|
|
-
|
|
|
|
(15,502
|
)
|
|
|
-
|
|
|
|
(144
|
)
|
|
|
(247
|
)
|
|
|
(1,909
|
)
|
|
|
-
|
|
|
|
(249
|
)
|
|
|
(18,051
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount, 2005
|
|
$
|
4,870
|
|
|
$
|
49,468
|
|
|
$
|
21,719
|
|
|
$
|
1,633
|
|
|
$
|
465
|
|
|
$
|
172
|
|
|
$
|
-
|
|
|
$
|
10,700
|
|
|
$
|
89,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value,
2005(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value hedges
|
|
$
|
-
|
|
|
$
|
(612
|
)
|
|
$
|
(178
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(790
|
)
|
Cash flow hedges
|
|
|
-
|
|
|
|
103
|
|
|
|
658
|
|
|
|
(22
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
739
|
|
Non-hedging derivatives
|
|
|
-
|
|
|
|
(31
|
)
|
|
|
24
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
-
|
|
|
$
|
(540
|
)
|
|
$
|
504
|
|
|
$
|
(22
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
(Bracketed) unbracketed amounts
represent amounts to be (paid) received by us had these
positions been closed out at the respective balance sheet date.
Bracketed amounts do not necessarily represent risk of loss as
the fair value of the derivative financial instrument and the
items being hedged must be evaluated together. See Note 23,
Fair Value Measurements, for further discussion of
the relationship between the fair value of our assets and
liabilities.
|
161
We operate in three functional currencies, the U.S. dollar,
the British pound and the Canadian dollar. The U.S. dollar
is the functional currency for exchange-traded interest rate
futures contracts and options. Non-exchange traded instruments
are restated in U.S. dollars by country as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward
|
|
|
Other Risk
|
|
|
|
Interest Rate
|
|
|
Currency
|
|
|
Foreign Exchange Rate Contracts
|
|
|
Contracts
|
|
|
Management
|
|
|
|
Swaps
|
|
|
Swaps
|
|
|
Purchased
|
|
|
Sold
|
|
|
Purchased
|
|
|
Instruments
|
|
|
|
|
|
(in millions)
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
61,822
|
|
|
$
|
25,757
|
|
|
$
|
522
|
|
|
$
|
540
|
|
|
$
|
-
|
|
|
$
|
2,939
|
|
Canada
|
|
|
1,705
|
|
|
|
-
|
|
|
|
7
|
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
United Kingdom
|
|
|
1,404
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
64,931
|
|
|
$
|
25,757
|
|
|
$
|
529
|
|
|
$
|
550
|
|
|
$
|
-
|
|
|
$
|
2,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
54,703
|
|
|
$
|
24,841
|
|
|
$
|
1,068
|
|
|
$
|
571
|
|
|
$
|
-
|
|
|
$
|
6,260
|
|
Canada
|
|
|
1,207
|
|
|
|
-
|
|
|
|
6
|
|
|
|
12
|
|
|
|
-
|
|
|
|
-
|
|
United Kingdom
|
|
|
1,090
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
57,000
|
|
|
$
|
24,841
|
|
|
$
|
1,074
|
|
|
$
|
583
|
|
|
$
|
-
|
|
|
$
|
6,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
47,693
|
|
|
$
|
21,175
|
|
|
$
|
1,622
|
|
|
$
|
465
|
|
|
$
|
-
|
|
|
$
|
10,700
|
|
Canada
|
|
|
855
|
|
|
|
-
|
|
|
|
11
|
|
|
|
-
|
|
|
|
172
|
|
|
|
-
|
|
United Kingdom
|
|
|
920
|
|
|
|
544
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
49,468
|
|
|
$
|
21,719
|
|
|
$
|
1,633
|
|
|
$
|
465
|
|
|
$
|
172
|
|
|
$
|
10,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long term debt hedged using derivative financial instruments
which qualify for hedge accounting at December 31, 2007
included debt of $28.4 billion hedged by interest rate
swaps and debt of $21.0 billion hedged by currency swaps.
The significant terms of the derivative financial instruments
have been designed to match those of the related asset or
liability. Additionally, long term debt designated at fair value
under the fair value option at December 31, 2007, included
debt of $29.4 billion with $29.0 billion notional of
related interest rate swaps and debt of $3.5 billion with
$3.5 billion of notional of related currency swaps.
Movements in the fair value of the debt and related derivatives
is recorded as a component of the revenues in Gain on debt
designated at fair value and related derivatives.
162
The following table summarizes the maturities and related
weighted-average receive/pay rates of interest rate swaps
outstanding at December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Pay a fixed rate/receive a floating rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional value
|
|
$
|
13,176
|
|
|
$
|
12,191
|
|
|
$
|
5,584
|
|
|
$
|
153
|
|
|
$
|
1,015
|
|
|
$
|
390
|
|
|
$
|
1,597
|
|
|
$
|
34,106
|
|
Weighted-average receive rate
|
|
|
5.05
|
%
|
|
|
4.89
|
%
|
|
|
4.84
|
%
|
|
|
1.50
|
%
|
|
|
4.66
|
%
|
|
|
1.50
|
%
|
|
|
4.61
|
%
|
|
|
4.87
|
%
|
Weighted-average pay rate
|
|
|
5.01
|
|
|
|
5.14
|
|
|
|
4.99
|
|
|
|
4.35
|
|
|
|
4.25
|
|
|
|
5.02
|
|
|
|
4.69
|
|
|
|
5.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay a floating rate/receive a fixed rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional value
|
|
$
|
2,610
|
|
|
$
|
5,727
|
|
|
$
|
3,145
|
|
|
$
|
5,564
|
|
|
$
|
4,159
|
|
|
$
|
1,286
|
|
|
$
|
8,334
|
|
|
$
|
30,825
|
|
Weighted-average receive rate
|
|
|
3.71
|
%
|
|
|
4.19
|
%
|
|
|
4.27
|
%
|
|
|
4.55
|
%
|
|
|
4.80
|
%
|
|
|
4.09
|
%
|
|
|
5.34
|
%
|
|
|
4.61
|
%
|
Weighted-average pay rate
|
|
|
4.80
|
|
|
|
4.92
|
|
|
|
5.31
|
|
|
|
5.11
|
|
|
|
4.83
|
|
|
|
5.38
|
|
|
|
5.06
|
|
|
|
5.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notional value
|
|
$
|
15,786
|
|
|
$
|
17,918
|
|
|
$
|
8,729
|
|
|
$
|
5,717
|
|
|
$
|
5,174
|
|
|
$
|
1,676
|
|
|
$
|
9,931
|
|
|
$
|
64,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted-average rates on swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive rate
|
|
|
4.83
|
%
|
|
|
4.67
|
%
|
|
|
4.64
|
%
|
|
|
4.46
|
%
|
|
|
4.77
|
%
|
|
|
3.48
|
%
|
|
|
5.22
|
%
|
|
|
4.75
|
%
|
Pay rate
|
|
|
4.98
|
|
|
|
5.07
|
|
|
|
5.10
|
|
|
|
5.09
|
|
|
|
4.72
|
|
|
|
5.29
|
|
|
|
5.00
|
|
|
|
5.02
|
|
The floating rates that we pay or receive are based on spot
rates from independent market sources for the index contained in
each interest rate swap contract, which generally are based on
either 1, 3 or
6-month
LIBOR. These current floating rates are different than the
floating rates in effect when the contracts were initiated.
Changes in spot rates impact the variable rate information
disclosed above. However, these changes in spot rates also
impact the interest rate on the underlying assets or liabilities.
In addition to the information included in the tables above, we
historically had unused commitments to extend credit related to
real estate secured loans. As of December 31, 2007, we had
no outstanding unused commitments to extend credit related to
real estate secured loans. As of December 31, 2006, we had
$1.4 billion in outstanding unused commitments to extend
credit related to real estate secured loans. Commitments to
extend credit are agreements, with fixed expiration dates, to
lend to a customer as long as there is no violation of any
condition established in the agreement. These commitments are
considered derivative instruments in accordance with
SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities
(SFAS No. 149) and, as a result, are
recorded on our balance sheet at fair market value which
resulted in a liability of $2.7 million at
December 31, 2006.
As of December 31, 2007, we had no outstanding forward sale
commitments related to real estate secured loans. As of
December 31, 2006, we had outstanding forward sales
commitments related to real estate secured loans totaling
$607 million. Forward sales commitments are considered
derivative instruments under SFAS No. 149 and, as a
result, are recorded on our balance sheet at fair market value
which resulted in an asset of $1.4 million at
December 31, 2006.
163
15. Income
Taxes
Effective January 1, 2007, we adopted FASB Interpretation
No. 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement
No. 109. The adoption resulted in the
reclassification of $65 million of deferred tax liability
to current tax liability to account for uncertainty in the
timing of tax benefits as well as the reclassification of
$141 million of deferred tax asset to current tax asset to
account for highly certain pending adjustments in the timing of
tax benefits. A reconciliation of the beginning and ending
amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
Balance at January 1, 2007
|
|
$
|
273
|
|
Additions based on tax positions related to the current year
|
|
|
26
|
|
Additions for tax positions of prior years
|
|
|
28
|
|
Reductions for tax positions of prior years
|
|
|
(70
|
)
|
Settlements
|
|
|
(28
|
)
|
Reductions for lapse of statute of limitations
|
|
|
-
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
229
|
|
|
|
|
|
|
The state tax portion of these amounts is reflected gross and
not reduced by the federal tax effect. The total amount of
unrecognized tax benefits that, if recognized, would affect the
effective tax rate was $70 million at January 1, 2007
and $98 million at December 31, 2007.
We remain subject to Federal income tax examination for years
1998 and forward and State income tax examinations for years
1996 and forward. The Company does not anticipate that any
significant tax positions have a reasonable possibility of being
effectively settled within the next twelve months.
It is our policy to recognize accrued interest and penalties
related to unrecognized tax benefits as a component of other
servicing and administrative expenses in the consolidated income
statement. As of January 1, 2007, we had accrued
$67 million for the payment of interest and penalties
associated with uncertain tax positions. During the twelve
months ended December 31, 2007, we increased our accrual
for the payment of interest and penalties associated with
uncertain tax positions by $5 million.
Total income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
(in millions)
|
|
|
Provision for income taxes related to operations
|
|
$
|
(945
|
)
|
|
$
|
844
|
|
|
$
|
891
|
|
Income taxes related to adjustments included in common
shareholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on investments and interest-only strip
receivables, net
|
|
|
6
|
|
|
|
(11
|
)
|
|
|
(29
|
)
|
Unrealized gains (losses) on cash flow hedging instruments
|
|
|
(385
|
)
|
|
|
(192
|
)
|
|
|
74
|
|
Minimum pension liability
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
Changes in funded status of pension and post retirement benefit
plans
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
-
|
|
Foreign currency translation adjustments
|
|
|
40
|
|
|
|
3
|
|
|
|
(5
|
)
|
Exercise of stock based compensation
|
|
|
(11
|
)
|
|
|
(21
|
)
|
|
|
(9
|
)
|
Tax on sale of European Operations to affiliate
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
Tax on sale of U.K. credit card business to affiliate
|
|
|
-
|
|
|
|
-
|
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(1,296
|
)
|
|
$
|
627
|
|
|
$
|
903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
164
Provisions for income taxes related to operations were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
(in millions)
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
161
|
|
|
$
|
1,396
|
|
|
$
|
1,253
|
|
Foreign
|
|
|
(40
|
)
|
|
|
8
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
121
|
|
|
|
1,404
|
|
|
|
1,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
(1,077
|
)
|
|
|
(541
|
)
|
|
|
(396
|
)
|
Foreign
|
|
|
11
|
|
|
|
(19
|
)
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
(1,066
|
)
|
|
|
(560
|
)
|
|
|
(366
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income taxes
|
|
$
|
(945
|
)
|
|
$
|
844
|
|
|
$
|
891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The significant components of deferred provisions attributable
to income from operations were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
(in millions)
|
|
|
Deferred income tax (benefit) provision (excluding the effects
of other components)
|
|
$
|
(1,092
|
)
|
|
$
|
(566
|
)
|
|
$
|
(342
|
)
|
Adjustment of valuation allowance
|
|
|
25
|
|
|
|
2
|
|
|
|
(2
|
)
|
Change in operating loss carryforwards
|
|
|
(1
|
)
|
|
|
8
|
|
|
|
(12
|
)
|
Adjustment to statutory tax rate
|
|
|
2
|
|
|
|
(4
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax provision
|
|
$
|
(1,066
|
)
|
|
$
|
(560
|
)
|
|
$
|
(366
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
(in millions)
|
|
|
United States
|
|
$
|
(5,746
|
)
|
|
$
|
2,361
|
|
|
$
|
2,560
|
|
Foreign
|
|
|
(105
|
)
|
|
|
(74
|
)
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income before income taxes
|
|
$
|
(5,851
|
)
|
|
$
|
2,287
|
|
|
$
|
2,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of income tax expense (benefit) compared with
the amounts at the U.S. federal statutory rates was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Tax (benefit) at the U.S. federal statutory income tax rate
|
|
$
|
(2,048
|
)
|
|
|
(35.0
|
)%
|
|
$
|
800
|
|
|
|
35.0
|
%
|
|
$
|
932
|
|
|
|
35.0
|
%
|
Increase (decrease) in rate resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local taxes, net of Federal benefit
|
|
|
(55
|
)
|
|
|
(.9
|
)
|
|
|
94
|
|
|
|
4.1
|
|
|
|
24
|
|
|
|
.9
|
|
Non-deductible goodwill
|
|
|
1,182
|
|
|
|
20.2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Low income housing and other tax credits
|
|
|
(64
|
)
|
|
|
(1.1
|
)
|
|
|
(79
|
)
|
|
|
(3.5
|
)
|
|
|
(87
|
)
|
|
|
(3.2
|
)
|
Other
|
|
|
40
|
|
|
|
.6
|
|
|
|
29
|
|
|
|
1.3
|
|
|
|
22
|
|
|
|
.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
(945
|
)
|
|
|
(16.2
|
)%
|
|
$
|
844
|
|
|
|
36.9
|
%
|
|
$
|
891
|
|
|
|
33.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
165
Temporary differences which gave rise to a significant portion
of deferred tax assets and liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(in millions)
|
|
|
Deferred Tax Assets
|
|
|
|
|
|
|
|
|
Credit loss reserves
|
|
$
|
3,431
|
|
|
$
|
2,053
|
|
Market value adjustment
|
|
|
360
|
|
|
|
311
|
|
Deferred compensation
|
|
|
183
|
|
|
|
144
|
|
Other
|
|
|
638
|
|
|
|
489
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
4,612
|
|
|
|
2,997
|
|
Valuation allowance
|
|
|
(50
|
)
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets net of valuation allowance
|
|
|
4,562
|
|
|
|
2,972
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities
|
|
|
|
|
|
|
|
|
Intangibles
|
|
|
177
|
|
|
|
838
|
|
Fee income
|
|
|
742
|
|
|
|
568
|
|
Deferred loan origination costs
|
|
|
367
|
|
|
|
312
|
|
Debt
|
|
|
138
|
|
|
|
75
|
|
Receivables sold
|
|
|
133
|
|
|
|
13
|
|
Other
|
|
|
210
|
|
|
|
190
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
1,767
|
|
|
|
1,996
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
2,795
|
|
|
$
|
976
|
|
|
|
|
|
|
|
|
|
|
Based upon the level of historical taxable income, the reversal
of the deferred tax liabilities over the periods over which the
deferred tax assets are deductible, the ability to carryback
future reversals of deductible temporary differences to 2006 and
2007 and projections of future taxable income, management
believes that it is more likely than not we would realize the
benefits of these deductible differences net of the valuation
allowance noted above, which primarily relates to certain state
tax benefits and foreign tax credit carry forwards.
The American Jobs Creation Act of 2004 (the AJCA)
included provisions to allow a deduction of 85% of certain
foreign earnings that are repatriated in 2004 or 2005. We
elected to apply this provision to a $489 million
distribution in December 2005 by our U.K. subsidiary. Tax of
$26 million related to this distribution is included as
part of the current 2005 U.S. tax expense shown above.
At December 31, 2007, we had net operating loss
carryforwards of $880 million for state tax purposes which
expire as follows: $161 million in
2008-2012;
$204 million in
2013-2017;
$238 million in
2018-2022
and $277 million in 2023 and forward.
At December 31, 2007, we had foreign tax credit
carryforwards of $10 million for federal income tax
purposes which expire as follows: $3 million in 2016 and
$7 million in 2017.
16. Redeemable
Preferred Stock
On December 15, 2005, we issued four shares of common stock
to HINO in exchange for the Series A Preferred Stock. See
Note 18, Related Party Transactions, for
further discussion.
In June 2005, we issued 575,000 shares of
6.36 percent Non-Cumulative
Preferred Stock, Series B (Series B Preferred
Stock). Dividends on the Series B Preferred Stock are
non-cumulative and payable quarterly at a rate of
6.36 percent commencing September 15, 2005. The
Series B Preferred Stock may be redeemed at our option
after June 23, 2010 at $1,000 per share, plus accrued
dividends. The redemption and liquidation value is $1,000 per
share plus accrued and unpaid dividends. The holders of
Series B Preferred Stock are entitled to payment before any
capital distribution is made to the common shareholder and have
no voting rights except for the right to elect two additional
members to the board of directors in the event that dividends
have not been declared and paid for six quarters, or as
otherwise provided by law. Additionally, as long as any shares
of the Series B Preferred Stock are outstanding, the
authorization, creation or issuance of any class or series of
stock which would rank prior to the Series B Preferred
Stock with respect to dividends or amounts payable upon
liquidation or dissolution of HSBC
166
Finance Corporation must be approved by the holders of at least
two-thirds of the shares of Series B Preferred Stock
outstanding at that time. Related issuance costs of
$16 million have been recorded as a reduction of additional
paid-in capital. In 2007 and 2006, we declared dividends
totaling $37 million on the Series B Preferred Stock
which were paid prior to December 31, 2007 and 2006.
17. Accumulated
Other Comprehensive Income
Accumulated other comprehensive income includes certain items
that are reported directly within a separate component of
shareholders equity. The following table presents changes
in accumulated other comprehensive income balances.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
(in millions)
|
|
Unrealized gains (losses) on investments and interest-only strip
receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
(23
|
)
|
|
$
|
(2
|
)
|
|
$
|
54
|
|
Other comprehensive income for period:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized holding gains (losses) arising during period, net
of tax of $6 million, $34 million and
$(29) million, respectively
|
|
|
10
|
|
|
|
57
|
|
|
|
(56
|
)
|
Reclassification adjustment for gains realized in net income,
net of tax of $- million, $(45) million and $- million,
respectively
|
|
|
-
|
|
|
|
(78
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income for period
|
|
|
10
|
|
|
|
(21
|
)
|
|
|
(56
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
(13
|
)
|
|
|
(23
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
(61
|
)
|
|
|
260
|
|
|
|
119
|
|
Other comprehensive income for period:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gains (losses) arising during period, net of tax of
$(372) million, $(124) million and $92 million,
respectively
|
|
|
(635
|
)
|
|
|
(204
|
)
|
|
|
173
|
|
Reclassification adjustment for gains (losses) realized in net
income, net of tax of $(13) million, $(68) million and
$(18) million, respectively
|
|
|
(22
|
)
|
|
|
(117
|
)
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income for period
|
|
|
(657
|
)
|
|
|
(321
|
)
|
|
|
141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
(718
|
)
|
|
|
(61
|
)
|
|
|
260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
(4
|
)
|
Other comprehensive income for period:
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability, net of tax of $- million,
$- million and $2 million, respectively
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
FASB Statement No. 158 adjustment, net of tax of
$(1) million, $- million and $- million, respectively
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income for period
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
4
|
|
Adjustment to initially apply FASB Statement No. 158, net
of tax of $- million, $1 million and $- million,
respectively
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
(3
|
)
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
444
|
|
|
|
221
|
|
|
|
474
|
|
Other comprehensive income for period:
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation gains (losses), net of tax of $40 million,
$3 million and $(5) million, respectively
|
|
|
70
|
|
|
|
223
|
|
|
|
(253
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income for period
|
|
|
70
|
|
|
|
223
|
|
|
|
(253
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
514
|
|
|
|
444
|
|
|
|
221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income (loss) at end of
period
|
|
$
|
(220
|
)
|
|
$
|
359
|
|
|
$
|
479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
167
18. Related
Party Transactions
In the normal course of business, we conduct transactions with
HSBC and its subsidiaries. These transactions occur at
prevailing market rates and terms and include funding
arrangements, derivative execution, purchases and sales of
receivables, servicing arrangements, information technology
services, item and statement processing services, banking and
other miscellaneous services. The following tables present
related party balances and the income and (expense) generated by
related party transactions:
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(in millions)
|
|
|
Assets, (Liabilities) and Equity:
|
|
|
|
|
|
|
|
|
Derivative financial assets (liability), net
|
|
$
|
29
|
|
|
$
|
234
|
|
Affiliate preferred stock received in sale of U.K. credit card
business(1)
|
|
|
301
|
|
|
|
294
|
|
Other assets
|
|
|
631
|
|
|
|
528
|
|
Due to affiliates
|
|
|
(14,902
|
)
|
|
|
(15,172
|
)
|
Other liabilities
|
|
|
(528
|
)
|
|
|
(506
|
)
|
Premium on sale of European Operations to affiliates recorded as
an increase to additional paid in capital
|
|
|
-
|
|
|
|
13
|
|
|
|
|
(1)
|
|
Balance will fluctuate due to
foreign currency exchange rate impact.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Income/(Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense on borrowings from HSBC and subsidiaries
|
|
$
|
(992
|
)
|
|
$
|
(929
|
)
|
|
$
|
(713
|
)
|
Interest income from HSBC affiliates
|
|
|
43
|
|
|
|
26
|
|
|
|
38
|
|
Dividend income from affiliate preferred stock
|
|
|
21
|
|
|
|
18
|
|
|
|
-
|
|
HSBC Bank USA:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate secured servicing, sourcing, underwriting and
pricing revenues
|
|
|
9
|
|
|
|
12
|
|
|
|
19
|
|
Gain on daily sale of domestic private label receivable
originations
|
|
|
374
|
|
|
|
367
|
|
|
|
379
|
|
Gain on daily sale of credit card receivables
|
|
|
61
|
|
|
|
38
|
|
|
|
34
|
|
Loss on sale of real estate secured receivables
|
|
|
(16
|
)
|
|
|
-
|
|
|
|
-
|
|
Gain on bulk sales of real estate secured receivables
|
|
|
-
|
|
|
|
17
|
|
|
|
-
|
|
Taxpayer financial services loan origination and other fees
|
|
|
(19
|
)
|
|
|
(18
|
)
|
|
|
(15
|
)
|
Domestic private label receivable servicing and related fees
|
|
|
406
|
|
|
|
393
|
|
|
|
368
|
|
Other servicing, processing, origination and support revenues
|
|
|
93
|
|
|
|
73
|
|
|
|
28
|
|
Support services from HSBC affiliates
|
|
|
(1,192
|
)
|
|
|
(1,087
|
)
|
|
|
(889
|
)
|
HSBC Technology & Services (USA) Inc. (HTSU):
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental revenue
|
|
|
48
|
|
|
|
45
|
|
|
|
42
|
|
Administrative services revenue
|
|
|
13
|
|
|
|
12
|
|
|
|
14
|
|
Servicing and other fees from other HSBC affiliates
|
|
|
15
|
|
|
|
16
|
|
|
|
11
|
|
Stock based compensation expense with HSBC
|
|
|
(102
|
)
|
|
|
(100
|
)
|
|
|
(66
|
)
|
The notional value of derivative contracts outstanding with HSBC
subsidiaries totaled $91.8 billion at December 31,
2007 and $87.4 billion at December 31, 2006. When the
fair value of our agreements with affiliate counterparties
requires the posting of collateral by the affiliate, it is
provided in the form of cash and recorded on our balance sheet,
consistent with third party arrangements. The level of the fair
value of our agreements with affiliate counterparties above
which collateral is required to be posted is $75 million.
At December 31, 2007, the fair value of our agreements with
affiliate counterparties required the affiliate to provide cash
collateral of $3.8 billion which is offset against the fair
value amount recognized for derivative instruments that have
been offset under the same master netting arrangement and
recorded in our balance sheet as a component of derivative
related assets. At
168
December 31, 2006, the fair value of our agreements with
affiliate counterparties required the affiliate to provide cash
collateral of $1.0 billion which is offset against the fair
value amount recognized for derivative instruments that have
been offset under the same master netting arrangement and
recorded in our balance sheet as a component of derivative
related assets.
We extended a line of credit of $2 billion to HSBC USA Inc.
There were no balances outstanding under this line of credit at
December 31, 2006. This line expired in July of 2006 and
was not renewed.
We extended a revolving line of credit of $.5 billion to
HTSU on June 28, 2005, which was increased to
$.8 billion on October 25, 2007. The balance
outstanding under this line of credit was $.6 billion and
$.5 billion at December 31, 2007 and 2006,
respectively, and is included in other assets. Interest income
associated with this line of credit is recorded in interest
income and reflected as Interest income from HSBC affiliates
in the table above.
We have extended revolving lines of credit to subsidiaries of
HSBC Bank USA for an aggregate total of $1.0 billion. There
are no balances outstanding under any of these lines of credit
at either December 31, 2007 or 2006.
Due to affiliates includes amounts owed to subsidiaries
of HSBC as a result of direct debt issuances (other than
preferred stock).
We purchase from HSBC Securities, Inc. (HSI)
securities under agreement to resell. Outstanding balances
totaled $415 million at December 31, 2007 and
$70 million at December 31, 2006. Interest income
recognized on these securities totaled $11 million in 2007
and $1 million in 2006 and 2005, respectively, and are
reflected as Interest income from HSBC affiliates in the
table above.
At December 31, 2007 and 2006, we had a commercial paper
back stop credit facility of $2.5 billion from HSBC
supporting domestic issuances and a revolving credit facility of
$5.7 billion from HBEU to fund our operations in the U.K.
In January 2008, the revolving credit facility from HBEU
decreased to $4.5 billion. At December 31, 2007,
$3.5 billion was outstanding under the HBEU lines for the
U.K. and no balances were outstanding under the domestic lines.
As of December 31, 2006, $4.3 billion was outstanding
under the U.K. lines and no balances were outstanding on the
domestic lines. Annual commitment fee requirements to support
availability of these lines totaled $1 million in 2007 and
2006 and are included as a component of Interest expense on
borrowings from HSBC and subsidiaries.
In 2007, we sold approximately $645 million of real estate
secured receivables originated by our subsidiary, Decision One,
to HSBC Bank USA and recorded a pre-tax loss on these sales of
$16 million. In the fourth quarter of 2006, we sold
approximately $669 million of real estate secured
receivables originated by our subsidiary, Decision One, to HSBC
Bank USA and recorded a pre-tax gain of $17 million on the
sale. Each of these sales was effected as part of our then
current strategy to originate loans through Decision One for
sale and securitization through the secondary mortgage market
operations of our affiliates. Decision One has since ceased
origination operations.
In the second quarter of 2007, we sold $2.2 billion of
loans from the Mortgage Services portfolio to third parties.
HSBC Markets (USA) Inc., a related HSBC entity, assisted in the
transaction by soliciting interest and placing the loans with
interested third parties. Fees paid for these services totaled
$4 million and were included as a component of the
approximately $20 million loss realized on the sale of this
loan portfolio.
In the third quarter of 2007, we sold a portion of our
MasterCard Class B share portfolio to third parties. HSBC
Bank USA assisted with one of the transactions by placing shares
with interested third parties. Fees paid to HSBC Bank USA
related to this sale were $2 million and were included as a
component of the approximately $115 million net gain
realized on the sale of these shares.
On November 9, 2006, as part of our continuing evaluation
of strategic alternatives with respect to our U.K. and European
operations, we sold all of the capital stock of our operations
in the Czech Republic, Hungary, and Slovakia (the European
Operations) to a wholly owned subsidiary of HBEU for an
aggregate purchase price of approximately $46 million.
Because the sale of this business is between affiliates under
common control, the premium received in excess of the book value
of the stock transferred was recorded as an increase to
additional paid-in capital and was not reflected in earnings.
The assets consisted primarily of $199 million of
receivables and goodwill which totaled approximately
$13 million. The liabilities consisted primarily of debt
which totaled $179 million. HBEU assumed all the
liabilities of the European Operations as a result of this
transaction.
169
In December 2005, we sold our U.K. credit card business,
including $2.5 billion of receivables, the associated
cardholder relationships and the related retained interests in
securitized credit card receivables to HBEU for an aggregate
purchase price of $3.0 billion. The purchase price, which
was determined based on a comparative analysis of sales of other
credit card portfolios, was paid in a combination of cash and
$261 million of preferred stock issued by a subsidiary of
HBEU with a rate of one-year Sterling LIBOR, plus
1.30 percent. In addition to the assets referred to above,
the sale also included the account origination platform,
including the marketing and credit employees associated with
this function, as well as the lease associated with the credit
card call center and related leaseholds and call center
employees to provide customer continuity after the transfer as
well as to allow HBEU direct ownership and control of
origination and customer service. We have retained the
collection operations related to the credit card operations and
have entered into a service level agreement to provide
collection services and other support services, including
components of the compliance, financial reporting and human
resource functions, for the sold credit card operations to HBEU
for a fee. We received $32 million in 2007 and
$30 million in 2006 under this service level agreement.
Because the sale of this business is between affiliates under
common control, the premium received in excess of the book value
of the assets transferred of $182 million, including the
goodwill assigned to this business, was recorded as an increase
to additional paid in capital and has not been included in
earnings.
In December 2004, we sold our domestic private label receivable
portfolio (excluding retail sales contracts at our Consumer
Lending business), including the retained interests associated
with our securitized domestic private label receivables to HSBC
Bank USA for $12.4 billion. We continue to service the sold
private label receivables and receive servicing and related fee
income from HSBC Bank USA for these services. As of
December 31, 2007, we were servicing $19.2 billion of
domestic private label receivables for HSBC Bank USA and as of
December 31, 2006, we were servicing $18.1 billion of
domestic private label receivables for HSBC Bank USA. We
received servicing and related fee income from HSBC Bank USA of
$406 million in 2007 and $393 million in 2006.
Servicing and related fee income is reflected as Domestic
private label receivable servicing and related fees in the
table above. We continue to maintain the related customer
account relationships and, therefore, sell substantially all new
domestic private label receivable originations (excluding retail
sales contracts) to HSBC Bank USA on a daily basis. We sold
$22.7 billion of private label receivables to HSBC Bank USA
during 2007 and $21.6 billion during 2006. The gains
associated with the sale of these receivables are reflected as
Gain on daily sale of domestic private label receivable
originations in the table above.
In 2003 and 2004, we sold a total of approximately
$3.7 billion of real estate secured receivables from our
Mortgage Services business to HSBC Bank USA. Under a separate
servicing agreement, we service all real estate secured
receivables sold to HSBC Bank USA including loans purchased from
correspondent lenders prior to September 1, 2005. As of
December 31, 2007, we were servicing $2.5 billion of
real estate secured receivables for HSBC Bank USA. The fee
revenue associated with these receivables is recorded in
servicing fees from HSBC affiliates and is reflected as Real
estate secured servicing, sourcing, underwriting and pricing
revenues in the above table.
Under multiple service level agreements, we also provide various
services to HSBC Bank USA. These services include credit card
servicing and processing activities through our Credit Card
Services business, loan servicing through our Auto Finance
business and other operational and administrative support. Fees
received for these services are reported as servicing fees from
HSBC affiliates and are reflected as Other servicing,
processing, origination and support revenues in the table
above. Additionally, HSBC Bank USA services certain real estate
secured loans on our behalf. Fees paid for these services are
reported as support services from HSBC affiliates and are
reflected as Support services from HSBC affiliates, in
the table above.
We currently use an HSBC affiliate located outside of the United
States to provide various support services to our operations
including among other areas, customer service, systems,
collection and accounting functions. We incurred costs related
to these services of $151 million in 2007 and
$100 million in 2006. The expenses related to these
services are included as a component of Support services from
HSBC affiliates in the table above.
170
During 2003, Household Capital Trust VIII issued
$275 million in mandatorily redeemable preferred securities
to HSBC. The terms of this issuance were as follows:
|
|
|
|
|
(dollars are in millions)
|
|
|
Junior Subordinated Notes:
|
|
|
Principal balance
|
|
$284
|
Redeemable by issuer
|
|
September 26, 2008
|
Stated maturity
|
|
November 15, 2033
|
Preferred Securities:
|
|
|
Rate
|
|
6.375%
|
Face value
|
|
$275
|
Issue date
|
|
September 2003
|
Interest expense recorded on the underlying junior subordinated
notes totaled $18 million in 2007, 2006 and 2005. The
interest expense for the Household Capital Trust VIII is
included in interest expense HSBC affiliates in the
consolidated statement of income (loss) and is reflected as a
component of Interest expense on borrowings from HSBC and
subsidiaries in the table above.
Our Canadian business originates and services auto loans for an
HSBC affiliate in Canada. Fees received for these services are
included in other income and are reflected in Servicing and
other fees from other HSBC affiliates in the above table.
Since October 1, 2004, HSBC Bank USA became the originating
lender for loans initiated by our taxpayer financial services
business for clients of various third party tax preparers.
Starting on January 1, 2007, HSBC Trust Company
(Delaware) N.A. (HTCD) also began to serve as an
originating lender for these loans. We purchase the loans
originated by HSBC Bank USA and HTCD daily for a fee.
Origination fees paid for these loans totaled $19 million
in 2007 and $18 million in 2006. These origination fees are
included as an offset to taxpayer financial services revenue and
are reflected as Taxpayer financial services loan origination
and other fees in the above table.
On July 1, 2004, HSBC Bank Nevada, National Association
(HBNV), formerly known as Household Bank (SB), N.A.,
purchased the account relationships associated with
$970 million of credit card receivables from HSBC Bank USA
for approximately $99 million, which are included in
intangible assets. The receivables continue to be owned by HSBC
Bank USA. We service these receivables for HSBC Bank USA and
receive servicing and related fee income from HSBC Bank USA. As
of December 31, 2007 and 2006, we were servicing
$1.1 billion of credit card receivables for HSBC Bank USA.
Originations of new accounts and receivables are made by HBNV
and new receivables are sold daily to HSBC Bank USA. We sold
$2.8 billion of credit card receivables to HSBC Bank USA in
2007, $2.3 billion in 2006 and $2.1 billion in 2005.
The gains associated with the sale of these receivables are
reflected in the table above and are recorded in Gain on
daily sale of credit card receivables.
Effective January 1, 2004, our technology services
employees, as well as technology services employees from other
HSBC entities in North America, were transferred to HTSU. In
addition, technology related assets and software purchased
subsequent to January 1, 2004 are generally purchased and
owned by HTSU. Technology related assets owned by HSBC Finance
Corporation prior to January 1, 2004 currently remain in
place and were not transferred to HTSU. In addition to
information technology services, HTSU also provides certain item
processing and statement processing activities to us pursuant to
a master service level agreement. Support services from HSBC
affiliates includes services provided by HTSU as well as
banking services and other miscellaneous services provided by
HSBC Bank USA and other subsidiaries of HSBC. We also receive
revenue from HTSU for rent on certain office space, which has
been recorded as a reduction of occupancy and equipment
expenses, and for certain administrative costs, which has been
recorded as other income.
In a separate transaction in December 2005, we transferred our
information technology services employees in the U.K. to a
subsidiary of HBEU. Subsequent to the transfer, operating
expenses relating to information technology, which have
previously been reported as salaries and fringe benefits or
other servicing and administrative expenses, are now billed to
us by HBEU and reported as Support services from HSBC
affiliates. Additionally, during the first
171
quarter of 2006, the information technology equipment in the
U.K. was sold to HBEU for a purchase price equal to the book
value of these assets of $8 million.
In addition, we utilize HSBC Markets (USA) Inc., a related HSBC
entity, to lead manage the underwriting of a majority of our
ongoing debt issuances. Fees paid for such services totaled
approximately $14 million in 2007, $48 million in 2006
and $59 million in 2005. For debt not accounted for under
the fair value option, these fees are amortized over the life of
the related debt.
Domestic employees of HSBC Finance Corporation participate in a
defined benefit pension plan sponsored by HSBC North America.
See Note 20, Pension and Other Postretirement
Benefits, for additional information on this pension plan.
Employees of HSBC Finance Corporation participate in one or more
stock compensation plans sponsored by HSBC. Our share of the
expense of these plans was $102 million in 2007,
$100 million in 2006 and $66 million in 2005. These
expenses are recorded in salary and employee benefits and are
reflected in the above table as Stock based compensation
expense with HSBC.
19. Stock
Option Plans
Stock Option Plans The HSBC Holdings Group
Share Option Plan (the Group Share Option Plan),
which replaced the former Household stock option plans, was a
long-term incentive compensation plan available to certain
employees prior to 2005. Grants were usually made annually. At
the 2005 HSBC Annual Meeting of Stockholders, HSBC adopted and
the shareholders approved the HSBC Share Plan (Group
Share Plan) to replace this plan. Since 2004, no further
options have been granted to employees although stock option
grants from previous years remain in effect subject to the same
conditions as before. In lieu of options, these employees
received grants of shares of HSBC stock subject to certain
vesting conditions as discussed further below. If the
performance conditions are not met by year 5, the options will
be forfeited. Options granted to employees in 2004 vest
100 percent upon the attainment of certain company
performance conditions and expire ten years from the date of
grant. Such options were granted at market value. Compensation
expense related to the Group Share Option Plan, which is
recognized over the vesting period, totaled $3 million in
2007, $6 million in 2006 and $6 million in 2005.
Information with respect to the Group Share Option Plan is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
HSBC
|
|
|
Average
|
|
|
HSBC
|
|
|
Average
|
|
|
HSBC
|
|
|
Average
|
|
|
|
Ordinary
|
|
|
Price per
|
|
|
Ordinary
|
|
|
Price per
|
|
|
Ordinary
|
|
|
Price per
|
|
|
|
Shares
|
|
|
Share
|
|
|
Shares
|
|
|
Share
|
|
|
Shares
|
|
|
Share
|
|
|
|
|
Outstanding at beginning of year
|
|
|
6,060,800
|
|
|
$
|
14.97
|
|
|
|
6,100,800
|
|
|
$
|
14.97
|
|
|
|
6,245,800
|
|
|
$
|
14.96
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Transferred
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(105,000
|
)
|
|
|
14.64
|
|
Expired or canceled
|
|
|
-
|
|
|
|
-
|
|
|
|
(40,000
|
)
|
|
|
14.37
|
|
|
|
(40,000
|
)
|
|
|
14.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
6,060,800
|
|
|
|
14.97
|
|
|
|
6,060,800
|
|
|
|
14.97
|
|
|
|
6,100,800
|
|
|
|
14.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
3,879,800
|
|
|
$
|
15.31
|
|
|
|
2,909,850
|
|
|
$
|
15.31
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average fair value of options granted
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The transfers in 2005 shown above primarily relate to certain of
our U.K. employees who were transferred to HBEU as part of the
sale of our U.K. credit card business in December 2005.
172
The following table summarizes information about stock options
outstanding under the Group Share Option Plan at
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Range of
|
|
Number
|
|
|
Remaining
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Exercise Prices
|
|
Outstanding
|
|
|
Life
|
|
|
Price
|
|
|
Outstanding
|
|
|
Price
|
|
|
|
|
$12.51 15.00
|
|
|
2,181,000
|
|
|
|
6.34
|
|
|
|
14.37
|
|
|
|
-
|
|
|
$
|
-
|
|
$15.01 17.50
|
|
|
3,879,800
|
|
|
|
5.85
|
|
|
|
15.31
|
|
|
|
3,879,800
|
|
|
$
|
15.31
|
|
Prior to our acquisition by HSBC, certain employees were
eligible to participate in the former Household stock option
plan. Employee stock options generally vested equally over four
years and expired 10 years from the date of grant. Upon
completion of our acquisition by HSBC, all options granted prior
to November 2002 vested and became outstanding options to
purchase HSBC ordinary shares. Options granted under the former
Household plan subsequent to October 2002 were converted into
options to purchase ordinary shares of HSBC, but did not vest
under the change in control. Compensation expense related to the
former Household plan totaled $2 million in 2007,
$3 million in 2006 and $6 million in 2005. All shares
under the former Household plan are now fully vested.
Information with respect to stock options granted under the
former Household plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
HSBC
|
|
|
Average
|
|
|
HSBC
|
|
|
Average
|
|
|
HSBC
|
|
|
Average
|
|
|
|
Ordinary
|
|
|
Price per
|
|
|
Ordinary
|
|
|
Price per
|
|
|
Ordinary
|
|
|
Price per
|
|
|
|
Shares
|
|
|
Share
|
|
|
Shares
|
|
|
Share
|
|
|
Shares
|
|
|
Share
|
|
|
|
|
Outstanding at beginning of year
|
|
|
25,995,589
|
|
|
$
|
17.34
|
|
|
|
36,032,006
|
|
|
$
|
16.09
|
|
|
|
38,865,993
|
|
|
$
|
15.71
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(4,877,586
|
)
|
|
|
14.51
|
|
|
|
(9,825,954
|
)
|
|
|
12.73
|
|
|
|
(2,609,665
|
)
|
|
|
10.92
|
|
Transferred in/(out)
|
|
|
172,976
|
|
|
|
18.66
|
|
|
|
47,580
|
|
|
|
8.62
|
|
|
|
(142,292
|
)
|
|
|
12.15
|
|
Expired or canceled
|
|
|
(131,068
|
)
|
|
|
10.24
|
|
|
|
(258,043
|
)
|
|
|
16.78
|
|
|
|
(82,030
|
)
|
|
|
7.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
21,159,911
|
|
|
$
|
18.04
|
|
|
|
25,995,589
|
|
|
$
|
17.34
|
|
|
|
36,032,006
|
|
|
$
|
16.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
21,159,911
|
|
|
$
|
18.04
|
|
|
|
25,995,589
|
|
|
$
|
17.34
|
|
|
|
34,479,337
|
|
|
$
|
16.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The transfers shown above primarily relate to employees who have
transferred between HTSU and us during each year and to certain
of our U.K. employees who were transferred to HBEU as part of
the sale of our U.K. credit card business in December 2005.
The following table summarizes information about the number of
HSBC ordinary shares subject to outstanding stock options under
the former Household plan, at December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Range of
|
|
Number
|
|
|
Remaining
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Exercise Prices
|
|
Outstanding
|
|
|
Life
|
|
|
Price
|
|
|
Outstanding
|
|
|
Price
|
|
|
|
|
$ 1.00 $ 5.00
|
|
|
7,251
|
|
|
|
.78
|
|
|
|
1.99
|
|
|
|
7,251
|
|
|
|
1.99
|
|
$10.01 $12.50
|
|
|
2,307,172
|
|
|
|
4.90
|
|
|
|
10.66
|
|
|
|
2,307,172
|
|
|
|
10.66
|
|
$12.51 $15.00
|
|
|
1,142,504
|
|
|
|
1.15
|
|
|
|
13.75
|
|
|
|
1,142,504
|
|
|
|
13.75
|
|
$15.01 $17.50
|
|
|
4,518,173
|
|
|
|
1.83
|
|
|
|
16.95
|
|
|
|
4,518,173
|
|
|
|
16.95
|
|
$17.51 $20.00
|
|
|
5,720,489
|
|
|
|
2.84
|
|
|
|
18.41
|
|
|
|
5,720,489
|
|
|
|
18.41
|
|
$20.01 $25.00
|
|
|
7,464,322
|
|
|
|
3.87
|
|
|
|
21.37
|
|
|
|
7,464,322
|
|
|
|
21.37
|
|
173
Restricted Share Plans Subsequent to
our acquisition by HSBC, key employees have been provided awards
in the form of restricted shares (RSRs) under
HSBCs Restricted Share Plan prior to 2005 and under the
Group Share Plan beginning in 2005. These shares have been
granted as both time vested (3 year vesting)
and/or
performance contingent (3 and 4 year vesting) awards. We
also issue a small number of off-cycle grants each year for
recruitment and retention. These RSR awards vest over a varying
period of time depending on the nature of the award, the longest
of which vests over a five year period. Annual awards to
employees in 2004 vest over five years contingent upon the
achievement of certain company performance targets.
Information with respect to RSRs awarded under HSBCs
Restricted Share Plan/Group Share Plan, all of which are in HSBC
ordinary shares, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
RSRs awarded
|
|
|
4,028,913
|
|
|
|
4,959,838
|
|
|
|
6,669,152
|
|
Weighted-average fair market value per share
|
|
$
|
17.67
|
|
|
$
|
16.96
|
|
|
$
|
15.86
|
|
RSRs outstanding at December 31
|
|
|
15,312,635
|
|
|
|
14,326,693
|
|
|
|
11,787,706
|
|
Compensation cost: (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
|
|
$
|
92
|
|
|
$
|
82
|
|
|
$
|
42
|
|
After-tax
|
|
|
58
|
|
|
|
52
|
|
|
|
27
|
|
Prior to the merger, Households executive compensation
plans also provided for issuance of RSRs which entitled an
employee to receive a stated number of shares of Household
common stock if the employee satisfied the conditions set by the
Compensation Committee for the award. Upon completion of the
merger with HSBC, all RSRs granted under the former Household
plan prior to November 2002 vested and became outstanding shares
of HSBC. RSRs granted under the former Household plan subsequent
to October 2002 were converted into rights to receive HSBC
ordinary shares. Upon vesting, the employee can elect to receive
either HSBC ordinary shares or American depository shares.
Information with respect to RSRs awarded under the pre-merger
Household plan, all of which are in HSBC ordinary shares, is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
RSRs awarded
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Weighted-average fair market value per share
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
RSRs outstanding at December 31
|
|
|
55,612
|
|
|
|
653,900
|
|
|
|
1,309,073
|
|
Compensation cost: (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
|
|
$
|
5
|
|
|
$
|
4
|
|
|
$
|
6
|
|
After-tax
|
|
|
3
|
|
|
|
2
|
|
|
|
4
|
|
Employee Stock Purchase Plans The HSBC
Holdings Savings-Related Share Option Plan (the HSBC
Sharesave Plan), which replaced the former Household
employee stock purchase plan, allows eligible employees to enter
into savings contracts to save up to approximately $500 per
month, with the option to use the savings to acquire ordinary
shares of HSBC at the end of the contract period. There are
currently three types of plans offered which allow the
participant to select saving contracts of a 1, 3 or 5 year
length. The 1 year contract period was offered for the
first time in 2006. The options for the 1 year plan are
automatically exercised if the current share price is at or
above the strike price, which is at a 15 percent discount
to the fair market value of the shares on grant date. If the
current share price is below the strike price, the participants
have the ability to exercise the option during the six months
following the maturity date if the share price rises. The
options under the 3 and 5 year plans are exercisable within
six months following the third or fifth year, respectively, of
the commencement of the related savings contract, at a
20 percent
174
discount for options granted in 2007, 2006 and 2005. HSBC
ordinary shares granted and the related fair value of the
options for 2007, 2006 and 2005 are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
HSBC
|
|
|
Fair Value
|
|
|
HSBC
|
|
|
Fair Value
|
|
|
HSBC
|
|
|
Fair Value
|
|
|
|
Ordinary
|
|
|
Per Share of
|
|
|
Ordinary
|
|
|
Per Share of
|
|
|
Ordinary
|
|
|
Per Share of
|
|
|
|
Shares
|
|
|
Shares
|
|
|
Shares
|
|
|
Shares
|
|
|
Shares
|
|
|
Shares
|
|
|
|
Granted
|
|
|
Granted
|
|
|
Granted
|
|
|
Granted
|
|
|
Granted
|
|
|
Granted
|
|
|
|
|
1 year vesting period
|
|
|
389,066
|
|
|
$
|
3.71
|
|
|
|
296,410
|
|
|
$
|
2.60
|
|
|
|
-
|
|
|
|
-
|
|
3 year vesting period
|
|
|
894,149
|
|
|
|
4.25
|
|
|
|
598,814
|
|
|
|
3.43
|
|
|
|
1,064,168
|
|
|
$
|
3.73
|
|
5 year vesting period
|
|
|
214,600
|
|
|
|
4.09
|
|
|
|
124,563
|
|
|
|
3.49
|
|
|
|
236,782
|
|
|
|
3.78
|
|
Compensation expense related to the grants under the HSBC
Sharesave Plan totaled $7 million in 2007, $5 million
in 2006 and $6 million in 2005.
The fair value of each option granted under the HSBC Sharesave
Plan was estimated as of the date of grant using a third party
option pricing model. The significant assumptions used to
estimate the fair value of the options granted by year are as
follows:
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
Risk-free interest rate
|
|
4.55% - 4.90%
|
|
4.99% - 5.01%
|
|
4.3%
|
Expected life
|
|
1, 3 or 5 years
|
|
1, 3 or 5 years
|
|
3 or 5 years
|
Expected volatility
|
|
17.0%
|
|
17.0%
|
|
20.0%
|
20. Pension
and Other Postretirement Benefits
Defined Benefit Pension Plans In November
2004, sponsorship of the domestic defined benefit pension plan
of HSBC Finance Corporation and the domestic defined benefit
pension plan of HSBC Bank USA were transferred to HSBC North
America. Effective January 1, 2005, the two separate plans
were combined into a single HSBC North America defined benefit
pension plan which facilitates the development of a unified
employee benefit policy and unified employee benefit plan
administration for HSBC companies operating in the United
States. As a result, the pension liability relating to our
domestic defined benefit plan was transferred to HSBC North
America as a capital transaction in the first quarter of 2005.
The components of pension expense for the domestic defined
benefit plan reflected in our consolidated statement of income
(loss) are shown in the table below. Pension expense reflects
the portion of the pension expense of the combined HSBC North
America pension plan which has been allocated to HSBC Finance
Corporation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
(in millions)
|
|
|
Service cost benefits earned during the period
|
|
$
|
55
|
|
|
$
|
48
|
|
|
$
|
46
|
|
Interest cost on projected benefit obligation
|
|
|
66
|
|
|
|
60
|
|
|
|
54
|
|
Expected return on assets
|
|
|
(83
|
)
|
|
|
(77
|
)
|
|
|
(78
|
)
|
Amortization of prior service cost
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Recognized losses (gains)
|
|
|
9
|
|
|
|
15
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension expense
|
|
$
|
47
|
|
|
$
|
46
|
|
|
$
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The assumptions used in determining pension expense of the
domestic defined benefit plan are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Discount rate
|
|
|
5.90
|
%
|
|
|
5.70
|
%
|
|
|
6.00
|
%
|
Salary increase assumption
|
|
|
3.75
|
|
|
|
3.75
|
|
|
|
3.75
|
|
Expected long-term rate of return on plan assets
|
|
|
8.00
|
|
|
|
8.00
|
|
|
|
8.33
|
|
175
HSBC North America retains both an unrelated third party as well
as an affiliate to provide investment consulting services. Given
the plans current allocation of equity and fixed income
securities and using investment return assumptions which are
based on long term historical data, the long term expected
return for plan assets is reasonable. The funded status of the
post-merger HSBC North America pension plan and not the
interests of HSBC Finance Corporation at December 31, 2007
was a liability of $130 million.
A reconciliation of beginning and ending balances of the fair
value of plan assets associated with the domestic defined
benefit pension plan is shown below. The activity shown below
reflects the activity of the merged HSBC North America plan.
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(in millions)
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
2,567
|
|
|
$
|
2,383
|
|
Actual return on plan assets
|
|
|
186
|
|
|
|
246
|
|
Employer contributions
|
|
|
-
|
|
|
|
-
|
|
Benefits paid
|
|
|
(136
|
)
|
|
|
(62
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
2,617
|
|
|
$
|
2,567
|
|
|
|
|
|
|
|
|
|
|
It is currently not anticipated that employer contributions to
the domestic defined benefit plan will be made in 2008.
The allocation of the domestic pension plan assets at
December 31, 2007 and 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
Plan Assets at
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Equity securities
|
|
|
68
|
%
|
|
|
69
|
%
|
Debt securities
|
|
|
31
|
|
|
|
30
|
|
Other
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
There were no investments in HSBC ordinary shares or American
depository shares at December 31, 2007 or 2006.
The primary objective of the defined benefit pension plan is to
provide eligible employees with regular pension benefits. Since
the domestic plans are governed by the Employee Retirement
Income Security Act of 1974 (ERISA), ERISA
regulations serve as guidance for the management of plan assets.
Consistent with prudent standards of preservation of capital and
maintenance of liquidity, the goals of the plans are to earn the
highest possible rate of return consistent with the tolerance
for risk as determined by the investment committee in its role
as a fiduciary. In carrying out these objectives, short-term
fluctuations in the value of plan assets are considered
secondary to long-term investment results. Both a third party
and an affiliate are used to provide investment consulting
services such as recommendations on the type of funds to be
invested in and monitoring the performance of fund managers. In
order to achieve the return objectives of the plans, the plans
are diversified to ensure that adverse results from one security
or security class will not have an unduly detrimental effect on
the entire investment portfolio. Assets are diversified by type,
characteristic and number of investments as well as by
investment style of management organization. Equity securities
are invested in large, mid and small capitalization domestic
stocks as well as international stocks.
A reconciliation of beginning and ending balances of the
projected benefit obligation of the domestic defined benefit
pension plan is shown below and reflects the projected benefit
obligation of the merged HSBC North America plan.
176
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(in millions)
|
|
|
Projected benefit obligation at beginning of year
|
|
$
|
2,698
|
|
|
$
|
2,530
|
|
Service cost
|
|
|
111
|
|
|
|
102
|
|
Interest cost
|
|
|
159
|
|
|
|
145
|
|
Actuarial (gains) losses
|
|
|
(85
|
)
|
|
|
(17
|
)
|
Benefits paid
|
|
|
(136
|
)
|
|
|
(62
|
)
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at end of year
|
|
$
|
2,747
|
|
|
$
|
2,698
|
|
|
|
|
|
|
|
|
|
|
Our share of the projected benefit obligation was approximately
$1.1 billion at December 31, 2007 and 2006. The
accumulated benefit obligation for the post-merger domestic HSBC
North America defined benefit pension plan was $2.4 billion
at December 31, 2007 and 2006. Our share of the accumulated
benefit obligation was approximately $1.0 billion at
December 31, 2007 and 2006.
Estimated future benefit payments for the HSBC North America
domestic defined benefit plan and HSBC Finance
Corporations share of those payments are as follows:
|
|
|
|
|
|
|
|
|
|
|
HSBC
|
|
|
HSBC Finance
|
|
|
|
North
|
|
|
Corporations
|
|
|
|
America
|
|
|
Share
|
|
|
|
|
|
(in millions)
|
|
|
2008
|
|
$
|
133
|
|
|
$
|
65
|
|
2009
|
|
|
142
|
|
|
|
69
|
|
2010
|
|
|
151
|
|
|
|
73
|
|
2011
|
|
|
163
|
|
|
|
79
|
|
2012
|
|
|
181
|
|
|
|
89
|
|
2013-2017
|
|
|
1,027
|
|
|
|
463
|
|
The assumptions used in determining the projected benefit
obligation of the domestic defined benefit plans at December 31
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
Discount rate
|
|
|
6.55
|
%
|
|
|
5.90
|
%
|
|
|
5.70
|
%
|
Salary increase assumption
|
|
|
3.75
|
|
|
|
3.75
|
|
|
|
3.75
|
|
Foreign Defined Benefit Pension Plans We
sponsor additional defined benefit pension plans for our foreign
based employees. Pension expense for our foreign defined benefit
pension plans was $3 million in 2007 and $2 million in
2006 and 2005. For our foreign defined benefit pension plans,
the fair value of plan assets was $183 million at
December 31, 2007 and $160 million at
December 31, 2006. The projected benefit obligation for our
foreign defined benefit pension plans was $206 million at
December 31, 2007 and $191 million at
December 31, 2006.
Supplemental Retirement Plan A non-qualified
supplemental retirement plan is also provided. This plan, which
is currently unfunded, provides eligible employees defined
pension benefits outside the qualified retirement plan. Benefits
are based on average earnings, years of service and age at
retirement. The projected benefit obligation was
$136 million at December 31, 2007 and $92 million
at December 31, 2006. Pension expense related to the
supplemental retirement plan was $30 million in 2007 and
$11 million in 2006 and 2005.
Defined Contribution Plans Various 401(k)
savings plans and profit sharing plans exist for employees
meeting certain eligibility requirements. Under these plans,
each participants contribution is matched by the company
up to a maximum of 6 percent of the participants
compensation. Company contributions are in the form of cash.
Total expense for these plans for HSBC Finance Corporation was
$79 million in 2007, $98 million in 2006 and
$91 million in 2005.
177
Effective January 1, 2005, HSBC Finance Corporations
401(k) savings plans merged with the HSBC Bank USAs 401(k)
savings plan under HSBC North America.
Postretirement Plans Other Than Pensions Our
employees also participate in plans which provide medical,
dental and life insurance benefits to retirees and eligible
dependents. These plans cover substantially all employees who
meet certain age and vested service requirements. We have
instituted dollar limits on our payments under the plans to
control the cost of future medical benefits.
The net postretirement benefit cost included the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
(in millions)
|
|
|
Service cost benefits earned during the period
|
|
$
|
5
|
|
|
$
|
6
|
|
|
$
|
5
|
|
Interest cost
|
|
|
14
|
|
|
|
14
|
|
|
|
15
|
|
Expected return on assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Amortization of prior service cost
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Recognized (gains) losses
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic postretirement benefit cost
|
|
$
|
18
|
|
|
$
|
20
|
|
|
$
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The assumptions used in determining the net periodic
postretirement benefit cost for our domestic postretirement
benefit plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
Discount rate
|
|
|
5.90
|
%
|
|
|
5.70
|
%
|
|
|
6.00
|
%
|
Salary increase assumption
|
|
|
3.75
|
|
|
|
3.75
|
|
|
|
3.75
|
|
A reconciliation of the beginning and ending balances of the
accumulated postretirement benefit obligation is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(in millions)
|
|
|
Accumulated benefit obligation at beginning of year
|
|
$
|
232
|
|
|
$
|
242
|
|
Service cost
|
|
|
5
|
|
|
|
6
|
|
Interest cost
|
|
|
14
|
|
|
|
14
|
|
Foreign currency exchange rate changes
|
|
|
4
|
|
|
|
-
|
|
Actuarial gains
|
|
|
(3
|
)
|
|
|
(8
|
)
|
Benefits paid
|
|
|
(21
|
)
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation at end of year
|
|
$
|
231
|
|
|
$
|
232
|
|
|
|
|
|
|
|
|
|
|
Our postretirement benefit plans are funded on a pay-as-you-go
basis. We currently estimate that we will pay benefits of
approximately $16 million relating to our postretirement
benefit plans in 2008. The funded status of our postretirement
benefit plans was a liability of $231 million at
December 31, 2007.
178
Estimated future benefit payments for our domestic plans are as
follows:
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
2008
|
|
$
|
16
|
|
2009
|
|
|
17
|
|
2010
|
|
|
17
|
|
2011
|
|
|
17
|
|
2012
|
|
|
18
|
|
2013-2017
|
|
|
89
|
|
The assumptions used in determining the benefit obligation of
our domestic postretirement benefit plans at December 31 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
Discount rate
|
|
|
6.55
|
%
|
|
|
5.90
|
%
|
|
|
5.70
|
%
|
Salary increase assumption
|
|
|
3.75
|
|
|
|
3.75
|
|
|
|
3.75
|
|
A 9.6 percent annual rate of increase in the gross cost of
covered health care benefits was assumed for 2007. This rate of
increase is assumed to decline gradually to 5.0 percent in
2014.
Assumed health care cost trend rates have an effect on the
amounts reported for health care plans. A one-percentage point
change in assumed health care cost trend rates would increase
(decrease) service and interest costs and the postretirement
benefit obligation as follows:
|
|
|
|
|
|
|
|
|
|
|
One Percent
|
|
One Percent
|
|
|
Increase
|
|
Decrease
|
|
|
|
(in millions)
|
|
Effect on total of service and interest cost components
|
|
$
|
.6
|
|
|
$
|
(.5
|
)
|
Effect on postretirement benefit obligation
|
|
|
7
|
|
|
|
(7
|
)
|
21. Business
Segments
We have three reportable segments: Consumer, Credit Card
Services, and International. Our segments are managed separately
and are characterized by different middle-market consumer
lending products, origination processes, and locations. Our
Consumer segment consists of our Consumer Lending, Mortgage
Services, Retail Services, and Auto Finance businesses. Our
Credit Card Services segment consists of our domestic
MasterCard, Visa, American Express and Discover and other credit
card business. Our International segment consists of our foreign
operations in Canada, the United Kingdom, the Republic of
Ireland and prior to November 9, 2006, our operations in
Slovakia, the Czech Republic and Hungary. The Consumer segment
provides real estate secured, automobile secured, personal
non-credit card and private label loans. Loans are offered with
both revolving and closed-end terms and with fixed or variable
interest rates. Loans are originated through branch locations,
direct mail, telemarketing, independent merchants or automobile
dealers. Prior to the first quarter of 2007, we acquired loans
through correspondent channels and prior to September 2007 we
originated loans through mortgage brokers. The Credit Card
Services segment offers MasterCard, Visa, American Express and
Discover and other credit card loans throughout the United
States primarily via strategic affinity and co-branding
relationships, direct mail, and our branch network to non-prime
customers. We also cross sell our credit cards to existing real
estate secured, private label, auto finance and tax services
customers. The International segment offers secured and
unsecured lines of credit and secured and unsecured closed-end
loans primarily in the United Kingdom, Canada and the Republic
of Ireland. The insurance operations in the United Kingdom were
sold on November 1, 2007 to Aviva. Subsequent to
November 1, 2007, we distribute insurance products in the
United Kingdom through our branch network which are underwritten
by Aviva. All segments offer products and service customers
through the Internet. The All Other caption includes our
insurance and taxpayer financial services and commercial
businesses, each of which falls below the quantitative threshold
tests under Statement of Financial Accounting Standard
No. 131, Disclosures about Segments of an Enterprise
and Related Information
(SFAS No. 131), for determining reportable
segments, as well as our corporate and treasury activities. Fair
value adjustments related to purchase accounting resulting from
179
our acquisition by HSBC and related amortization have been
allocated to Corporate, which is included in the All
Other caption within our segment disclosure.
In May 2007, we decided to integrate our Retail Services and
Credit Card Services businesses. Combining Retail Services with
Credit Card Services enhances our ability to provide a single
credit card and private label solution for the market place. We
anticipate the integration of management reporting will be
completed in the first quarter of 2008 and at that time will
result in the combination of these businesses into one reporting
segment in our financial statements. There have been no changes
in the basis of our segmentation or any changes in the
measurement of segment profit as compared with the presentation
in our 2006
Form 10-K.
Our segment results are presented on an IFRS Management Basis (a
non-U.S. GAAP
financial measure) as operating results are monitored and
reviewed, trends are evaluated and decisions about allocating
resources such as employees are made almost exclusively on an
IFRS Management Basis since we report results to our parent,
HSBC, who prepares its consolidated financial statements in
accordance with IFRSs. IFRS Management Basis results are IFRSs
results adjusted to assume that the private label and real
estate secured receivables transferred to HSBC Bank USA have not
been sold and remain on our balance sheet. IFRS Management Basis
also assumes that the purchase accounting fair value adjustments
relating to our acquisition by HSBC have been pushed
down to HSBC Finance Corporation. Operations are monitored
and trends are evaluated on an IFRS Management Basis because the
customer loan sales to HSBC Bank USA were conducted primarily to
appropriately fund prime customer loans within HSBC and such
customer loans continue to be managed and serviced by us without
regard to ownership. However, we continue to monitor capital
adequacy, establish dividend policy and report to regulatory
agencies on a U.S. GAAP basis. A summary of the significant
differences between U.S. GAAP and IFRSs as they impact our
results are summarized below:
Securitizations On an IFRSs basis,
securitized receivables are treated as owned. Any gains recorded
under U.S. GAAP on these transactions are reversed. An
owned loss reserve is established. The impact from
securitizations resulting in higher net income under IFRSs is
due to the recognition of income on securitized receivables
under U.S. GAAP in prior periods.
Derivatives and hedge accounting (including fair value
adjustments) The IFRSs derivative accounting
model is similar to U.S. GAAP requirements. Prior to
January 1, 2007, the differences between U.S. GAAP and
IFRSs related primarily to the fact that a different population
of derivatives qualified for hedge accounting under IFRSs than
U.S. GAAP and that HSBC Finance Corporation had elected the
fair value option under IFRSs on a significant portion of its
fixed rate debt which was being hedged by receive fixed swaps.
Prior to the issuance of FASB Statement No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities, (SFAS No. 159) in
February 2007, U.S. GAAP did not permit the use of the fair
value option. As a result of our early adoption of
SFAS No. 159 which is more fully discussed in Note 12,
Fair Value Option, effective January 1, 2007,
we utilize fair value option reporting for the same fixed rate
debt issuances under both U.S. GAAP and IFRSs.
Intangible assets and goodwill Intangible
assets under IFRSs are significantly lower than those under
U.S. GAAP as the newly created intangibles associated with
our acquisition by HSBC are reflected in goodwill for IFRSs
which results in a higher goodwill balance under IFRSs. As a
result, amortization of intangible assets is lower under IFRSs
and the amount of goodwill allocated to our Mortgage Services,
Consumer Lending, Auto Finance and United Kingdom businesses and
written off during 2007 is greater under IFRSs.
Purchase accounting adjustments There are
differences in the valuation of assets and liabilities under
U.K. GAAP (which were carried forward into IFRSs) and
U.S. GAAP which result in a different amortization for the
HSBC acquisition. Additionally there are differences in the
valuation of assets and liabilities under IFRSs and
U.S. GAAP resulting from the Metris acquisition in December
2005.
Deferred loan origination costs and premiums
Under IFRSs, loan origination cost deferrals are more stringent
and result in lower costs being deferred than permitted under
U.S. GAAP. In addition, all deferred loan origination fees,
costs and loan premiums must be recognized based on the expected
life of the receivables under IFRSs as part of the effective
interest calculation while under U.S. GAAP they may be
amortized on either a contractual or expected life basis.
180
Credit loss impairment provisioning IFRSs
requires a discounted cash flow methodology for estimating
impairment on pools of homogeneous customer loans which requires
the incorporation of the time value of money relating to
recovery estimates. Also under IFRSs, future recoveries on
charged-off loans are accrued for on a discounted basis and
interest is recorded based on collectibility.
Loans held for resale IFRSs requires loans
held for resale to be treated as trading assets and recorded at
their fair market value. Under U.S. GAAP, loans held for
resale are designated as loans on the balance sheet and recorded
at the lower of amortized cost or market. Under U.S. GAAP,
the income and expenses related to loans held for sale are
reported similarly to loans held for investment. Under IFRSs,
the income and expenses related to loans held for sale are
reported in other operating income.
Interest recognition The calculation of
effective interest rates under IFRS 39 requires an estimate of
all fees and points paid or recovered between parties to
the contract that are an integral part of the effective
interest rate be included. In June 2006, we implemented a
methodology for calculating the effective interest rate for
introductory rate credit card receivables under IFRSs over the
expected life of the product. In December 2006, we implemented a
methodology to include prepayment penalties as part of the
effective interest rate and recognized such penalties over the
expected life of the receivables. U.S. GAAP generally
prohibits recognition of interest income to the extent the net
interest in the loan would increase to an amount greater than
the amount at which the borrower could settle the obligation.
Also under U.S. GAAP, prepayment penalties are generally
recognized as received.
Other There are other less significant
differences between IFRSs and U.S. GAAP relating to pension
expense, severance and closure costs, changes in tax estimates
and other miscellaneous items.
See Basis of Reporting in Item 7.
Managements Discussion and Analysis of Financial Condition
and results of Operations in this 2006
Form 10-K
for a more complete discussion of differences between
U.S. GAAP and IFRSs.
For segment reporting purposes, intersegment transactions have
not been eliminated. We generally account for transactions
between segments as if they were with third parties.
181
Reconciliation of our IFRS Management Basis segment results to
the U.S. GAAP consolidated totals are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IFRS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
|
|
|
|
|
|
|
|
|
Adjustments/
|
|
|
Basis
|
|
|
Management
|
|
|
|
|
|
IFRS
|
|
|
U.S. GAAP
|
|
|
|
|
|
|
Card
|
|
|
Inter-
|
|
|
All
|
|
|
Reconciling
|
|
|
Consolidated
|
|
|
Basis
|
|
|
IFRS
|
|
|
Reclass-
|
|
|
Consolidated
|
|
|
|
Consumer
|
|
|
Services
|
|
|
national
|
|
|
Other
|
|
|
Items
|
|
|
Totals
|
|
|
Adjustments(6)
|
|
|
Adjustments(5)
|
|
|
ifications(8)
|
|
|
Totals
|
|
|
|
|
|
(in millions)
|
|
|
Year Ended December 31, 2007
|
Net interest income
|
|
$
|
8,447
|
|
|
$
|
3,430
|
|
|
$
|
844
|
|
|
$
|
(771
|
)
|
|
$
|
-
|
|
|
$
|
11,950
|
|
|
$
|
(1,404
|
)
|
|
$
|
92
|
|
|
$
|
(87
|
)
|
|
$
|
10,551
|
|
Other operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Total other revenues)
|
|
|
523
|
|
|
|
3,078
|
|
|
|
231
|
|
|
|
2,050
|
|
|
|
(294
|
)(1)
|
|
|
5,588
|
|
|
|
95
|
|
|
|
(202
|
)
|
|
|
918
|
|
|
|
6,399
|
|
Loan impairment charges (Provision for credit losses)
|
|
|
8,816
|
|
|
|
2,752
|
|
|
|
610
|
|
|
|
(1
|
)
|
|
|
3
|
(2)
|
|
|
12,180
|
|
|
|
(1,220
|
)
|
|
|
73
|
|
|
|
(7
|
)
|
|
|
11,026
|
|
Operating expenses (Total costs and expenses)
|
|
|
3,027
|
|
|
|
1,872
|
|
|
|
548
|
|
|
|
6,503
|
|
|
|
-
|
|
|
|
11,950
|
|
|
|
11
|
|
|
|
(1,024
|
)
|
|
|
838
|
|
|
|
11,775
|
|
Income tax expense (benefit)
|
|
|
(1,078
|
)
|
|
|
700
|
|
|
|
(23
|
)
|
|
|
(21
|
)
|
|
|
(110
|
)(3)
|
|
|
(532
|
)
|
|
|
(19
|
)
|
|
|
(394
|
)
|
|
|
-
|
|
|
|
(945
|
)
|
Net income (loss)
|
|
|
(1,795
|
)
|
|
|
1,184
|
|
|
|
(60
|
)
|
|
|
(5,202
|
)
|
|
|
(187
|
)
|
|
|
(6,060
|
)
|
|
|
(81
|
)
|
|
|
1,235
|
|
|
|
-
|
|
|
|
(4,906
|
)
|
Customer loans (Receivables)
|
|
|
136,739
|
|
|
|
30,458
|
|
|
|
10,425
|
|
|
|
158
|
|
|
|
-
|
|
|
|
177,780
|
|
|
|
(21,719
|
)
|
|
|
133
|
|
|
|
-
|
|
|
|
156,194
|
|
Assets
|
|
|
132,602
|
|
|
|
30,005
|
|
|
|
10,607
|
|
|
|
27,631
|
|
|
|
(8,091
|
)(4)
|
|
|
192,754
|
|
|
|
(20,948
|
)
|
|
|
(5,892
|
)
|
|
|
(410
|
)
|
|
|
165,504
|
|
Intersegment revenues
|
|
|
265
|
|
|
|
18
|
|
|
|
17
|
|
|
|
(6
|
)
|
|
|
(294
|
)(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Depreciation and amortization
|
|
|
55
|
|
|
|
63
|
|
|
|
19
|
|
|
|
98
|
|
|
|
-
|
|
|
|
235
|
|
|
|
-
|
|
|
|
162
|
|
|
|
(52
|
)
|
|
|
345
|
|
Goodwill
|
|
|
-
|
|
|
|
530
|
|
|
|
13
|
|
|
|
3,543
|
|
|
|
-
|
|
|
|
4,086
|
|
|
|
-
|
|
|
|
(1,259
|
)
|
|
|
-
|
|
|
|
2,827
|
|
Expenditures for long-lived
assets(7)
|
|
|
16
|
|
|
|
-
|
|
|
|
16
|
|
|
|
103
|
|
|
|
-
|
|
|
|
135
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
Net interest income
|
|
$
|
8,588
|
|
|
$
|
3,151
|
|
|
$
|
826
|
|
|
$
|
(768
|
)(9)
|
|
$
|
-
|
|
|
$
|
11,797
|
|
|
$
|
(1,254
|
)
|
|
$
|
(228
|
)
|
|
$
|
(127
|
)
|
|
$
|
10,188
|
|
Other operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Total other revenues)
|
|
|
909
|
|
|
|
2,360
|
|
|
|
283
|
|
|
|
705
|
|
|
|
(291
|
)(1)
|
|
|
3,966
|
|
|
|
299
|
|
|
|
180
|
|
|
|
978
|
|
|
|
5,423
|
|
Loan impairment charges (Provision for credit losses)
|
|
|
4,983
|
|
|
|
1,500
|
|
|
|
535
|
|
|
|
(2
|
)
|
|
|
6
|
(2)
|
|
|
7,022
|
|
|
|
(646
|
)
|
|
|
225
|
|
|
|
(37
|
)
|
|
|
6,564
|
|
Operating expenses (Total costs and expenses)
|
|
|
2,998
|
|
|
|
1,841
|
|
|
|
495
|
|
|
|
588
|
|
|
|
-
|
|
|
|
5,922
|
|
|
|
(22
|
)
|
|
|
(28
|
)
|
|
|
888
|
|
|
|
6,760
|
|
Income tax expense (benefit)
|
|
|
528
|
|
|
|
784
|
|
|
|
37
|
|
|
|
(326
|
)
|
|
|
(110
|
)(3)
|
|
|
913
|
|
|
|
(89
|
)
|
|
|
20
|
|
|
|
-
|
|
|
|
844
|
|
Net income (loss)
|
|
|
988
|
|
|
|
1,386
|
|
|
|
42
|
|
|
|
(323
|
)
|
|
|
(187
|
)
|
|
|
1,906
|
|
|
|
(198
|
)
|
|
|
(265
|
)
|
|
|
-
|
|
|
|
1,443
|
|
Customer loans (Receivables)
|
|
|
144,697
|
|
|
|
28,221
|
|
|
|
9,520
|
|
|
|
199
|
|
|
|
-
|
|
|
|
182,637
|
|
|
|
(21,372
|
)
|
|
|
895
|
|
|
|
-
|
|
|
|
162,160
|
|
Assets
|
|
|
146,395
|
|
|
|
28,780
|
|
|
|
10,764
|
|
|
|
29,931
|
|
|
|
(8,197
|
)(4)
|
|
|
207,673
|
|
|
|
(21,933
|
)
|
|
|
(6,110
|
)
|
|
|
(412
|
)
|
|
|
179,218
|
|
Intersegment revenues
|
|
|
242
|
|
|
|
20
|
|
|
|
33
|
|
|
|
(4
|
)
|
|
|
(291
|
)(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Depreciation and amortization
|
|
|
34
|
|
|
|
67
|
|
|
|
17
|
|
|
|
120
|
|
|
|
-
|
|
|
|
238
|
|
|
|
-
|
|
|
|
179
|
|
|
|
(32
|
)
|
|
|
385
|
|
Goodwill
|
|
|
46
|
|
|
|
530
|
|
|
|
11
|
|
|
|
9,510
|
|
|
|
-
|
|
|
|
10,097
|
|
|
|
-
|
|
|
|
(3,087
|
)
|
|
|
-
|
|
|
|
7,010
|
|
Expenditures for long-lived
assets(7)
|
|
|
76
|
|
|
|
1
|
|
|
|
13
|
|
|
|
58
|
|
|
|
-
|
|
|
|
148
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
Net interest income
|
|
$
|
8,401
|
|
|
$
|
2,150
|
|
|
$
|
971
|
|
|
$
|
(834
|
)
|
|
$
|
-
|
|
|
$
|
10,688
|
|
|
$
|
(1,438
|
)
|
|
$
|
(734
|
)
|
|
$
|
(132
|
)
|
|
$
|
8,384
|
|
Other operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Total other revenues)
|
|
|
814
|
|
|
|
1,892
|
|
|
|
770
|
|
|
|
602
|
|
|
|
(140
|
)(1)
|
|
|
3,938
|
|
|
|
500
|
|
|
|
(443
|
)
|
|
|
968
|
|
|
|
4,963
|
|
Loan impairment charges (Provision for credit losses)
|
|
|
3,362
|
|
|
|
1,453
|
|
|
|
620
|
|
|
|
(41
|
)
|
|
|
9
|
(2)
|
|
|
5,403
|
|
|
|
(629
|
)
|
|
|
(291
|
)
|
|
|
60
|
|
|
|
4,543
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Total costs and expenses)
|
|
|
2,757
|
|
|
|
1,315
|
|
|
|
635
|
|
|
|
574
|
|
|
|
-
|
|
|
|
5,281
|
|
|
|
(23
|
)
|
|
|
107
|
|
|
|
776
|
|
|
|
6,141
|
|
Income tax expense (benefit)
|
|
|
1,115
|
|
|
|
461
|
|
|
|
5
|
|
|
|
(364
|
)
|
|
|
(54
|
)(3)
|
|
|
1,163
|
|
|
|
(94
|
)
|
|
|
(178
|
)
|
|
|
-
|
|
|
|
891
|
|
Net income (loss)
|
|
|
1,981
|
|
|
|
813
|
|
|
|
481
|
|
|
|
(401
|
)
|
|
|
(95
|
)
|
|
|
2,779
|
|
|
|
(192
|
)
|
|
|
(815
|
)
|
|
|
-
|
|
|
|
1,772
|
|
Customer loans (Receivables)
|
|
|
128,095
|
|
|
|
25,979
|
|
|
|
9,328
|
|
|
|
211
|
|
|
|
-
|
|
|
|
163,613
|
|
|
|
(20,306
|
)
|
|
|
(3,394
|
)
|
|
|
-
|
|
|
|
139,913
|
|
Assets
|
|
|
130,375
|
|
|
|
28,453
|
|
|
|
10,905
|
|
|
|
26,634
|
|
|
|
(8,220
|
)(4)
|
|
|
188,147
|
|
|
|
(20,247
|
)
|
|
|
(10,872
|
)
|
|
|
(506
|
)
|
|
|
156,522
|
|
Intersegment revenues
|
|
|
108
|
|
|
|
21
|
|
|
|
17
|
|
|
|
(6
|
)
|
|
|
(140
|
)(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Depreciation and amortization
|
|
|
44
|
|
|
|
26
|
|
|
|
30
|
|
|
|
143
|
|
|
|
-
|
|
|
|
243
|
|
|
|
-
|
|
|
|
275
|
|
|
|
(61
|
)
|
|
|
457
|
|
Goodwill
|
|
|
-
|
|
|
|
521
|
|
|
|
11
|
|
|
|
9,464
|
|
|
|
-
|
|
|
|
9,996
|
|
|
|
-
|
|
|
|
(2,993
|
)
|
|
|
-
|
|
|
|
7,003
|
|
Expenditures for long-lived
assets(7)
|
|
|
24
|
|
|
|
525
|
|
|
|
32
|
|
|
|
28
|
|
|
|
-
|
|
|
|
609
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Eliminates intersegment revenues.
|
|
(2)
|
Eliminates bad debt recovery sales between operating segments.
|
|
(3)
|
Tax benefit associated with items comprising
adjustments/reconciling items.
|
|
(4)
|
Eliminates investments in subsidiaries and intercompany
borrowings.
|
|
(5)
|
IFRS Adjustments, which have been described more fully above,
consist of the following:
|
182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
|
|
|
Total
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
For
|
|
|
Costs
|
|
|
Tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
Other
|
|
|
Credit
|
|
|
and
|
|
|
Expense
|
|
|
Net
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Income
|
|
|
Revenues
|
|
|
Losses
|
|
|
Expenses
|
|
|
(Benefit)
|
|
|
Income
|
|
|
Receivables
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitizations
|
|
$
|
(63
|
)
|
|
$
|
35
|
|
|
$
|
11
|
|
|
$
|
-
|
|
|
$
|
(15
|
)
|
|
$
|
(24
|
)
|
|
$
|
(244
|
)
|
|
$
|
(495
|
)
|
|
|
|
|
|
|
|
|
Derivatives and hedge accounting
|
|
|
280
|
|
|
|
(283
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
(4,501
|
)
|
|
|
|
|
|
|
|
|
Goodwill and intangible assets
|
|
|
-
|
|
|
|
37
|
|
|
|
-
|
|
|
|
(875
|
)
|
|
|
(602
|
)
|
|
|
1,514
|
|
|
|
-
|
|
|
|
(113
|
)
|
|
|
|
|
|
|
|
|
Purchase accounting
|
|
|
51
|
|
|
|
25
|
|
|
|
66
|
|
|
|
(40
|
)
|
|
|
101
|
|
|
|
(51
|
)
|
|
|
32
|
|
|
|
(1,652
|
)
|
|
|
|
|
|
|
|
|
Deferred loan origination costs and premiums
|
|
|
(160
|
)
|
|
|
(6
|
)
|
|
|
-
|
|
|
|
(156
|
)
|
|
|
(4
|
)
|
|
|
(6
|
)
|
|
|
388
|
|
|
|
388
|
|
|
|
|
|
|
|
|
|
Credit loss impairment provisioning
|
|
|
15
|
|
|
|
13
|
|
|
|
(5
|
)
|
|
|
36
|
|
|
|
(5
|
)
|
|
|
2
|
|
|
|
(258
|
)
|
|
|
(304
|
)
|
|
|
|
|
|
|
|
|
Loans held for resale
|
|
|
56
|
|
|
|
(15
|
)
|
|
|
-
|
|
|
|
3
|
|
|
|
14
|
|
|
|
24
|
|
|
|
86
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
Interest recognition
|
|
|
(79
|
)
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(25
|
)
|
|
|
(53
|
)
|
|
|
(26
|
)
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
Other
|
|
|
(8
|
)
|
|
|
(9
|
)
|
|
|
1
|
|
|
|
8
|
|
|
|
142
|
|
|
|
(168
|
)
|
|
|
155
|
|
|
|
815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
92
|
|
|
$
|
(202
|
)
|
|
$
|
73
|
|
|
$
|
(1,024
|
)
|
|
$
|
(394
|
)
|
|
$
|
1,235
|
|
|
$
|
133
|
|
|
$
|
(5,892
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitizations
|
|
$
|
(244
|
)
|
|
$
|
89
|
|
|
$
|
25
|
|
|
$
|
-
|
|
|
$
|
(62
|
)
|
|
$
|
(118
|
)
|
|
$
|
(948
|
)
|
|
$
|
(1,232
|
)
|
|
|
|
|
|
|
|
|
Derivatives and hedge accounting
|
|
|
(31
|
)
|
|
|
277
|
|
|
|
-
|
|
|
|
-
|
|
|
|
91
|
|
|
|
155
|
|
|
|
-
|
|
|
|
(4,181
|
)
|
|
|
|
|
|
|
|
|
Goodwill and intangible assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
179
|
|
|
|
(66
|
)
|
|
|
(113
|
)
|
|
|
-
|
|
|
|
(1,494
|
)
|
|
|
|
|
|
|
|
|
Purchase accounting
|
|
|
202
|
|
|
|
64
|
|
|
|
195
|
|
|
|
(4
|
)
|
|
|
25
|
|
|
|
50
|
|
|
|
118
|
|
|
|
(38
|
)
|
|
|
|
|
|
|
|
|
Deferred loan origination costs and premiums
|
|
|
(156
|
)
|
|
|
2
|
|
|
|
-
|
|
|
|
(199
|
)
|
|
|
16
|
|
|
|
29
|
|
|
|
457
|
|
|
|
457
|
|
|
|
|
|
|
|
|
|
Credit loss impairment provisioning
|
|
|
(39
|
)
|
|
|
(3
|
)
|
|
|
12
|
|
|
|
-
|
|
|
|
(20
|
)
|
|
|
(34
|
)
|
|
|
(295
|
)
|
|
|
(298
|
)
|
|
|
|
|
|
|
|
|
Loans held for resale
|
|
|
125
|
|
|
|
(202
|
)
|
|
|
-
|
|
|
|
(32
|
)
|
|
|
(17
|
)
|
|
|
(28
|
)
|
|
|
1,584
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
Interest recognition
|
|
|
(38
|
)
|
|
|
(16
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(20
|
)
|
|
|
(34
|
)
|
|
|
(53
|
)
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
Other
|
|
|
(47
|
)
|
|
|
(31
|
)
|
|
|
(7
|
)
|
|
|
28
|
|
|
|
73
|
|
|
|
(172
|
)
|
|
|
32
|
|
|
|
691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(228
|
)
|
|
$
|
180
|
|
|
$
|
225
|
|
|
$
|
(28
|
)
|
|
$
|
20
|
|
|
$
|
(265
|
)
|
|
$
|
895
|
|
|
$
|
(6,110
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitizations
|
|
$
|
(900
|
)
|
|
$
|
(137
|
)
|
|
$
|
(315
|
)
|
|
$
|
-
|
|
|
$
|
(265
|
)
|
|
$
|
(457
|
)
|
|
$
|
(5,415
|
)
|
|
$
|
(7,251
|
)
|
|
|
|
|
|
|
|
|
Derivatives and hedge accounting
|
|
|
(41
|
)
|
|
|
(60
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(43
|
)
|
|
|
(58
|
)
|
|
|
-
|
|
|
|
(2,866
|
)
|
|
|
|
|
|
|
|
|
Goodwill and intangible assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
272
|
|
|
|
(100
|
)
|
|
|
(172
|
)
|
|
|
-
|
|
|
|
(1,222
|
)
|
|
|
|
|
|
|
|
|
Purchase accounting
|
|
|
314
|
|
|
|
240
|
|
|
|
51
|
|
|
|
(15
|
)
|
|
|
138
|
|
|
|
380
|
|
|
|
162
|
|
|
|
(114
|
)
|
|
|
|
|
|
|
|
|
Deferred loan origination costs and premiums
|
|
|
(197
|
)
|
|
|
2
|
|
|
|
-
|
|
|
|
(187
|
)
|
|
|
(2
|
)
|
|
|
(6
|
)
|
|
|
430
|
|
|
|
430
|
|
|
|
|
|
|
|
|
|
Credit loss impairment provisioning
|
|
|
(55
|
)
|
|
|
34
|
|
|
|
(42
|
)
|
|
|
-
|
|
|
|
10
|
|
|
|
11
|
|
|
|
(280
|
)
|
|
|
(232
|
)
|
|
|
|
|
|
|
|
|
Loans held for resale
|
|
|
126
|
|
|
|
(79
|
)
|
|
|
-
|
|
|
|
44
|
|
|
|
1
|
|
|
|
2
|
|
|
|
1,723
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Interest recognition
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
19
|
|
|
|
(443
|
)
|
|
|
15
|
|
|
|
(7
|
)
|
|
|
83
|
|
|
|
(515
|
)
|
|
|
(14
|
)
|
|
|
383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(734
|
)
|
|
$
|
(443
|
)
|
|
$
|
(291
|
)
|
|
$
|
107
|
|
|
$
|
(178
|
)
|
|
$
|
(815
|
)
|
|
$
|
(3,394
|
)
|
|
$
|
(10,872
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
183
|
|
(6) |
Management Basis Adjustments, which represent the private label
and real estate secured receivables transferred to HBUS, consist
of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
|
|
|
Total
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
For
|
|
|
Costs
|
|
|
Tax
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
Other
|
|
|
Credit
|
|
|
and
|
|
|
Expense
|
|
|
Net
|
|
|
|
|
|
Total
|
|
|
|
Income
|
|
|
Revenues
|
|
|
Losses
|
|
|
Expenses
|
|
|
(Benefit)
|
|
|
Income
|
|
|
Receivables
|
|
|
Assets
|
|
|
|
|
|
(in millions)
|
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private label receivables
|
|
$
|
(1,349
|
)
|
|
$
|
86
|
|
|
$
|
(1,154
|
)
|
|
$
|
15
|
|
|
$
|
(29
|
)
|
|
$
|
(95
|
)
|
|
$
|
(19,234
|
)
|
|
$
|
(18,625
|
)
|
Real estate secured receivables
|
|
|
(57
|
)
|
|
|
9
|
|
|
|
(66
|
)
|
|
|
(4
|
)
|
|
|
8
|
|
|
|
14
|
|
|
|
(2,485
|
)
|
|
|
(2,477
|
)
|
Other
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(1,404
|
)
|
|
$
|
95
|
|
|
$
|
(1,220
|
)
|
|
$
|
11
|
|
|
$
|
(19
|
)
|
|
$
|
(81
|
)
|
|
$
|
(21,719
|
)
|
|
$
|
(20,948
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private label receivables
|
|
$
|
(1,175
|
)
|
|
$
|
287
|
|
|
$
|
(623
|
)
|
|
$
|
(17
|
)
|
|
$
|
(75
|
)
|
|
$
|
(173
|
)
|
|
$
|
(18,125
|
)
|
|
$
|
(18,653
|
)
|
Real estate secured receivables
|
|
|
(99
|
)
|
|
|
12
|
|
|
|
(23
|
)
|
|
|
(5
|
)
|
|
|
(21
|
)
|
|
|
(38
|
)
|
|
|
(3,247
|
)
|
|
|
(3,278
|
)
|
Other
|
|
|
20
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
|
|
|
13
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(1,254
|
)
|
|
$
|
299
|
|
|
$
|
(646
|
)
|
|
$
|
(22
|
)
|
|
$
|
(89
|
)
|
|
$
|
(198
|
)
|
|
$
|
(21,372
|
)
|
|
$
|
(21,933
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private label receivables
|
|
$
|
(1,310
|
)
|
|
$
|
483
|
|
|
$
|
(594
|
)
|
|
$
|
(22
|
)
|
|
$
|
(66
|
)
|
|
$
|
(145
|
)
|
|
$
|
(15,762
|
)
|
|
$
|
(15,673
|
)
|
Real estate secured receivables
|
|
|
(159
|
)
|
|
|
17
|
|
|
|
(35
|
)
|
|
|
(1
|
)
|
|
|
(39
|
)
|
|
|
(67
|
)
|
|
|
(4,544
|
)
|
|
|
(4,571
|
)
|
Other
|
|
|
31
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11
|
|
|
|
20
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(1,438
|
)
|
|
$
|
500
|
|
|
$
|
(629
|
)
|
|
$
|
(23
|
)
|
|
$
|
(94
|
)
|
|
$
|
(192
|
)
|
|
$
|
(20,306
|
)
|
|
$
|
(20,247
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7)
|
Includes goodwill associated with purchase business combinations
other than the HSBC merger as well as capital expenditures.
|
|
(8)
|
Represents differences in balance sheet and income statement
presentation between IFRS and U.S. GAAP.
|
|
|
(9) |
In 2006, the All Other caption includes a cumulative
adjustment to net interest income of approximately
$207 million, largely to correct the amortization of
purchase accounting adjustments related to certain debt that was
not included in the fair value option adjustments under IFRSs in
2005. A portion of the amount recognized would otherwise have
been recorded for the year ended December 31, 2005.
|
22. Commitments
and Contingent Liabilities
Lease Obligations: We lease certain offices,
buildings and equipment for periods which generally do not
exceed 25 years. The leases have various renewal options.
The office space leases generally require us to pay certain
operating expenses. Net rental expense under operating leases
was $195 million in 2007, $134 million in 2006 and
$132 million in 2005.
We have lease obligations on certain office space which has been
subleased through the end of the lease period. Under these
agreements, the sublessee has assumed future rental obligations
on the lease.
Future net minimum lease commitments under noncancelable
operating lease arrangements were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
|
Minimum
|
|
|
|
|
|
|
Rental
|
|
|
Sublease
|
|
|
|
|
Year Ending December 31,
|
|
Payments
|
|
|
Income
|
|
|
Net
|
|
|
|
|
|
(in millions)
|
|
|
2008
|
|
$
|
161
|
|
|
$
|
37
|
|
|
$
|
124
|
|
2009
|
|
|
127
|
|
|
|
27
|
|
|
|
100
|
|
2010
|
|
|
94
|
|
|
|
15
|
|
|
|
79
|
|
2011
|
|
|
61
|
|
|
|
5
|
|
|
|
56
|
|
2012
|
|
|
34
|
|
|
|
2
|
|
|
|
32
|
|
Thereafter
|
|
|
107
|
|
|
|
|
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net minimum lease commitments
|
|
$
|
584
|
|
|
$
|
86
|
|
|
$
|
498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
184
In January 2006 we entered into a lease for a building in the
Village of Mettawa, Illinois. The new facility will consolidate
our Prospect Heights, Mount Prospect and Deerfield offices.
Construction of the building began in the spring of 2006 and the
relocation is planned for the first and second quarters of 2008.
The future lease payments for this building are currently
estimated as follows:
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
2008
|
|
$
|
5
|
|
2009
|
|
|
11
|
|
2010
|
|
|
11
|
|
2011
|
|
|
11
|
|
2012
|
|
|
11
|
|
Thereafter
|
|
|
104
|
|
|
|
|
|
|
|
|
$
|
153
|
|
|
|
|
|
|
Litigation: Both we and certain of our
subsidiaries are parties to various legal proceedings resulting
from ordinary business activities relating to our current
and/or
former operations which affect all three of our reportable
segments. Certain of these activities are or purport to be class
actions seeking damages in significant amounts. These actions
include assertions concerning 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. Also, as the ultimate resolution of these proceedings
is influenced by factors that are outside of our control, it is
reasonably possible our estimated liability under these
proceedings may change. However, based upon our current
knowledge, our defenses to these actions have merit and any
adverse decision should not materially affect our consolidated
financial condition, results of operations or cash flows.
Other Commitments: At December 31, 2006,
we had a commitment to lend up to $3.0 billion to H&R
Block to fund the purchase of a participation interest in refund
anticipation loans. H&R Block borrowed funds under this
commitment during the 2007 tax season. All outstanding balances
were paid in full and the commitment expired during the second
quarter of 2007. In January 2008, we extended another line of
credit to lend up to $3.0 billion to H&R Block to fund
the purchase of a participation interest in refund anticipation
loans.
23. Fair
Value Measurements
Effective January 1, 2007, we elected to early adopt FASB
Statement No. 157, Fair Value Measurements,
(SFAS No. 157). SFAS No. 157
establishes a single authoritative definition of value, sets out
a framework for measuring fair value, and provides a hierarchal
disclosure framework for assets and liabilities measured at fair
value. The adoption of SFAS No. 157 did not have any
impact on our financial position or results of operations.
Presented below is information about assets and liabilities
recorded in our consolidated balance sheet at fair value on a
recurring basis, assets and liabilities recorded in our
consolidated balance sheet at fair value on a nonrecurring basis
and disclosures about the fair value of our financial
instruments as required by FASB Statement No. 107,
Disclosures about Fair Value of Financial
Instruments, (SFAS No. 107).
185
Assets and Liabilities Recorded at Fair Value on a
Recurring Basis The following table presents
information about our assets and liabilities recorded in our
consolidated balance sheet at their fair value on a recurring
basis as of December 31, 2007, and indicates the fair value
hierarchy of the valuation techniques utilized to determine such
fair value. In general, fair values determined by Level 1
inputs use quoted prices (unadjusted) in active markets for
identical assets or liabilities that we have the ability to
access. Fair values determined by Level 2 inputs use inputs
other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly or
indirectly. Level 2 inputs include quoted prices for
similar assets and liabilities in active markets, quoted prices
for identical or similar assets or liabilities in markets where
there are few transactions and inputs other than quoted prices
that are observable for the asset or liability, such as interest
rates and yield curves that are observable at commonly quoted
intervals. Level 3 inputs are unobservable inputs for the
asset or liability and include situations where there is little,
if any, market activity for the asset or liability.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
(Liabilities)
|
|
|
|
|
|
|
|
|
|
|
|
|
Measured at
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
Fair Value at
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
December 31,
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
|
|
2007
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
(in millions)
|
|
|
Risk management related derivatives,
net(1)
|
|
$
|
3,771
|
|
|
$
|
-
|
|
|
$
|
3,771
|
|
|
$
|
-
|
|
Securities purchased under agreements to resell
|
|
|
1,506
|
|
|
|
1,506
|
|
|
|
-
|
|
|
|
-
|
|
Available for sale securities
|
|
|
3,152
|
|
|
|
267
|
|
|
|
2,885
|
|
|
|
-
|
|
Real estate
owned(2)
|
|
|
1,151
|
|
|
|
-
|
|
|
|
1,151
|
|
|
|
-
|
|
Repossessed
vehicles(2)
|
|
|
83
|
|
|
|
-
|
|
|
|
83
|
|
|
|
-
|
|
Long term debt carried at fair value
|
|
|
32,896
|
|
|
|
-
|
|
|
|
32,896
|
|
|
|
-
|
|
|
|
(1)
|
The fair value disclosed excludes swap collateral that we either
receive or deposit with our interest rate swap counterparties.
Such swap collateral is recorded on our balance sheet at an
amount which approximates fair value as discussed in
FASB Staff Position No. FIN
39-1,
Amendment of FASB Interpretation No. 39 and is
netted on the balance sheet with the fair value amount
recognized for derivative instruments.
|
|
(2)
|
The fair value disclosed is unadjusted for transaction costs as
required by SFAS No. 157. The amounts recorded in the
consolidated balance sheet are recorded net of transaction costs
as required by FASB Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets.
|
The following summarizes the valuation techniques for assets
recorded in our consolidated balance sheet at their fair value
on a recurring basis:
Risk management related derivative,
net Where practical, quoted market prices
will be used to determine fair value of these instruments. For
non-exchange traded contracts, fair value is determined using
discounted cash flow modeling techniques in lieu of market value
quotes. At December 31, 2007, none of our risk management
related derivatives have been valued using quoted market prices.
Securities purchased under agreements to
resell The fair value of securities purchased
under agreements to resell generally approximates carrying value
due to their short-term maturity.
Available for sale securities Fair value is
determined by a third party valuation source. For U.S. Treasury
securities, pricing is provided by market makers and
inter-dealer brokers. For non-callable corporate securities, a
credit spread scale is created for each issuer for maturities
out to forty years. These spreads are then added to the
equivalent maturity U.S. Treasury yield to determine current
pricing. Credit spreads are obtained from the new issue market,
secondary trading levels and dealer quotes. For securities with
early redemption features, an option adjusted spread (OAS) model
is incorporated to adjust the spreads determined above.
Real estate owned Fair value is determined
based on third party appraisals obtained at the time we take
title to the property and, if less than the carrying value of
the loan, the carrying value of the loan is adjusted to the
186
fair value. After three months on the market, the carrying value
is further reduced, if necessary, to reflect observable local
market data, including local area sales data.
Repossessed vehicles Fair value is determined
based on current Black Book values, which represent current
observable prices in the auto auction market.
Long term debt carried at fair value Fair
value, including the credit and interest risk components, are
determined by a third party using discounted cash flow models
which take into consideration changes in interest rates as well
as relevant trade data.
Assets and Liabilities Recorded at Fair Value on a
Non-recurring Basis On a non-recurring basis, loans
held for sale are recorded in our consolidated balance sheet at
the lower of aggregate cost or fair value. At December 31,
2007, loans held for sale which have been recorded at fair value
totaled $71 million, excluding $9 million of loans
held for sale for which the fair value exceeds our carrying
value. Fair value is generally determined by estimating a gross
premium or discount. The estimated gross premium or discount is
derived from loan sales data over the last three months and
pricing currently observable in the market, the weighted average
coupon of the loans relative to market interest rates as well as
market liquidity and loan related credit characteristics. Loans
held for sale are considered to be Level 2 in the fair
value hierarchy of valuation techniques. At December 31,
2007, loans held for sale with a carrying value of
$129 million were written down to their current fair value
resulting in an impairment charge of $58 million.
In accordance with the provisions of SFAS No. 142, goodwill
with a carrying amount of $881 million allocated to our
Mortgage Services business was written down to its implied fair
value of $0 during the third quarter of 2007. Additionally,
goodwill with a carrying amount of $3,152 million allocated
to our Consumer Lending, Auto Finance and United Kingdom
businesses was written down to its implied fair value of $0
during the fourth quarter of 2007. For purposes of testing
goodwill for impairment, we estimate the fair value of our
reporting units using discounted cash flow models, which include
such variables as revenue growth rates, expense trends, interest
rates and terminal values which are based on evaluation of key
data and market factors. The risk adjusted cost of capital,
which is used to discount future cash flows, is generally
derived from an appropriate capital asset pricing model, which
itself depends on a number of financial and economic variables.
Goodwill is considered to be Level 3 in the fair value
hierarchy of valuation techniques.
Additionally, in accordance with SFAS No. 142,
tradenames with a carrying amount of $700 million and
customer relationships with a carrying amount of
$158 million relating to our Consumer Lending business were
written down to their implied fair value of $0 during the fourth
quarter of 2007. We estimate the fair value of tradenames using
discounted cash flow models, which include assumptions regarding
revenue growth rates based on evaluation of key data and market
factors as well as the risk adjusted cost of capital as
discussed above. We estimate the fair value of our customer
relationships using discounted cash flow models which include
assumptions regarding receivable growth rates, receivable
run-off rates and return on assets as well as the risk adjusted
cost of capital. Intangible assets are considered to be Level 3
in the fair value hierarchy of valuation techniques.
Fair Value of Financial Instruments In
accordance with SFAS No. 107, we have also estimated
the fair value of all financial instruments in our consolidated
balance sheet, including those financial instruments carried at
cost, as presented in the table below. The fair value estimates,
methods and assumptions set forth below for our financial
instruments are made solely to comply with the requirements of
SFAS No. 107 and should be read in conjunction with
the financial statements and notes in this Annual Report.
The methodology we have historically utilized to estimate the
fair value of our receivables, was not consistent with the
framework for measuring fair value as outlined by
SFAS No. 157. SFAS No. 157 has defined fair
value as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction
between market participants at the measurement date.
Accordingly, we have determined the fair value of our
receivables in accordance with this new framework. The
historical methodologies used to determine the fair value of all
other financial instruments shown below is generally consistent
with the framework for measuring fair value as outlined by
SFAS No. 157.
187
The following is a summary of the carrying value and estimated
fair value of our financial instruments at December 31,
2007:
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
Value(1)
|
|
|
Fair Value
|
|
|
|
|
|
(in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
783
|
|
|
$
|
783
|
|
Interest bearing deposits with banks
|
|
|
335
|
|
|
|
335
|
|
Securities purchased under agreements to resell
|
|
|
1,506
|
|
|
|
1,506
|
|
Securities
|
|
|
3,152
|
|
|
|
3,152
|
|
Consumer receivables:
|
|
|
|
|
|
|
|
|
Mortgage Services:
|
|
|
|
|
|
|
|
|
First lien
|
|
|
25,712
|
|
|
|
19,339
|
|
Second lien
|
|
|
4,649
|
|
|
|
2,609
|
|
|
|
|
|
|
|
|
|
|
Total Mortgage Services
|
|
|
30,361
|
|
|
|
21,948
|
|
Consumer Lending:
|
|
|
|
|
|
|
|
|
First lien
|
|
|
42,870
|
|
|
|
30,890
|
|
Second lien
|
|
|
6,292
|
|
|
|
3,229
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
|
49,162
|
|
|
|
34,119
|
|
Non-real estate secured
|
|
|
16,277
|
|
|
|
10,351
|
|
|
|
|
|
|
|
|
|
|
Total Consumer Lending
|
|
|
65,439
|
|
|
|
44,470
|
|
Credit card
|
|
|
27,637
|
|
|
|
31,196
|
|
Auto Finance
|
|
|
11,797
|
|
|
|
10,998
|
|
International receivables
|
|
|
9,917
|
|
|
|
9,857
|
|
|
|
|
|
|
|
|
|
|
Total consumer receivables
|
|
|
145,151
|
|
|
|
118,469
|
|
Due from affiliates
|
|
|
631
|
|
|
|
631
|
|
Derivative financial assets
|
|
|
48
|
|
|
|
48
|
|
|
Liabilities:
|
Commercial paper, bank and other borrowings
|
|
|
8,424
|
|
|
|
8,424
|
|
Due to affiliates
|
|
|
14,902
|
|
|
|
14,487
|
|
Long term debt carried at fair value
|
|
|
32,896
|
|
|
|
32,896
|
|
Long term debt not carried at fair value
|
|
|
90,366
|
|
|
|
88,408
|
|
Insurance policy and claim reserves
|
|
|
1,001
|
|
|
|
989
|
|
Derivative financial liabilities
|
|
|
20
|
|
|
|
20
|
|
|
|
(1) |
The carrying values for receivables reflect receivables less
credit loss reserves. See Note 6, Receivables,
for a complete description of the other components which
comprise receivables, net which is reported on the consolidated
balance sheet.
|
Receivable values presented in the table above were determined
using the framework for measuring fair value as prescribed by
SFAS No. 157, which is based on our best estimate of
the amount within a range of value we believe would be received
in a sale as of the balance sheet date (i.e. exit price). In
recent months, the unprecedented developments in the mortgage
lending industry have resulted in a marked reduction in the
secondary market demand for subprime loans. The estimated fair
values at December 31, 2007 for our receivables reflect
this marketplace turmoil which implicitly assumes a
significantly higher charge-off level than what we, as the
servicer of these receivables, believe will ultimately be the
case. This creates a value that is markedly lower than would
otherwise be reported under more normal marketplace conditions.
Accordingly, we do not believe the amounts reported above
accurately reflect the true underlying long-term value of our
receivables.
188
As required under generally accepted accounting principles, a
number of other assets recorded on the balance sheets (such as
acquired credit card relationships, the value of consumer
lending relationships for originated receivables and the
franchise values of our business units) are not considered
financial instruments and, accordingly, are not valued for
purposes of this disclosure. We believe there continues to be
substantial value associated with these assets based on current
market conditions and historical experience. Accordingly, the
estimated fair value of financial instruments, as disclosed,
does not fully represent our entire value, nor the changes in
our entire value.
The following table summarizes the estimated fair values for
financial instruments at December 31, 2006 which were
determined in accordance with the previous framework for
determining fair value as required by SFAS No. 107.
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
Value
|
|
|
Fair Value
|
|
|
|
|
|
(in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
871
|
|
|
$
|
871
|
|
Interest bearing deposits with banks
|
|
|
424
|
|
|
|
424
|
|
Securities purchased under agreements to resell
|
|
|
171
|
|
|
|
171
|
|
Securities
|
|
|
4,695
|
|
|
|
4,695
|
|
Receivables
|
|
|
157,386
|
|
|
|
154,982
|
|
Due from affiliates
|
|
|
528
|
|
|
|
528
|
|
Derivative financial assets
|
|
|
298
|
|
|
|
298
|
|
|
Liabilities:
|
Commercial paper, bank and other borrowings
|
|
|
11,055
|
|
|
|
11,055
|
|
Due to affiliates
|
|
|
15,172
|
|
|
|
15,308
|
|
Long term debt
|
|
|
127,590
|
|
|
|
129,008
|
|
Insurance policy and claim reserves
|
|
|
1,319
|
|
|
|
1,362
|
|
Derivative financial liabilities
|
|
|
6
|
|
|
|
6
|
|
The following summarizes the valuation methodology used to
determine the estimated fair values for financial instruments.
Cash: Carrying value approximates fair value
due to cashs liquid nature.
Interest bearing deposits with
banks: Carrying value approximates fair value due
to the assets liquid nature.
Securities purchased under agreements to
resell: The fair value of securities purchased
under agreements to resell approximates carrying value due to
their short-term maturity.
Securities: Securities are classified as
available-for-sale and are carried at fair value on the balance
sheets. Fair value is determined by a third party valuation
source. For U.S. Treasury securities, pricing is provided by
market makers and inter-dealer brokers. For non-callable
corporate securities, a credit spread scale is created for each
issuer for maturities out to forty years. These spreads are then
added to the equivalent maturity U.S. Treasury yield to
determine current pricing. Credit spreads are obtained from the
new issue market, secondary trading levels and dealer quotes.
For bonds with early redemption features, an option adjusted
spread (OAS) model is incorporated to adjust the spreads
determined above.
Receivables: For December 31, 2007, as
determined in accordance with the framework for measuring fair
value as outlined by SFAS No. 157, the estimated fair
value of our real estate secured and auto finance receivables
was determined by an HSBC affiliate using various sources of
information which reflects current estimated rating agency
credit tranching levels with the associated benchmark credit
spreads, and trading input which includes observed primary and
secondary trades and general discussions with investors. The
remainder of our receivable portfolios were valued using a
forward looking discounted cash flow methodology using
assumptions we believe are consistent with those which would be
used by market participants in valuing such receivables.
For December 31, 2006 as determined in accordance with the
previous framework for determining fair value as required by
SFAS No. 107, the estimated fair value of adjustable
rate receivables generally approximated carrying value because
interest rates on these receivables adjust with changing market
interest rates. The fair value of fixed rate consumer
receivables was estimated by discounting future expected cash
flows at interest rates which
189
approximate the current interest rates that would achieve a
similar return on assets with comparable risk characteristics.
Receivables also includes our interest-only strip receivables.
The interest-only strip receivables are carried at fair value on
our balance sheets. Fair value is based on an estimate of the
present value of future cash flows associated with
securitizations of certain real estate secured, auto finance,
credit card, private label and personal non-credit card
receivables.
Due from affiliates: Carrying value
approximates fair value because the interest rates on these
receivables adjust with changing market interest rates.
Commercial paper, bank and other
borrowings: The fair value of these instruments
approximates existing carrying value because interest rates on
these instruments adjust with changes in market interest rates
due to their short-term maturity or repricing characteristics.
Due to affiliates: The estimated fair value
of our debt instruments due to affiliates was determined by
discounting future expected cash flows at current interest rates
offered for similar types of debt instruments. Carrying value is
typically used to estimate the fair value of floating rate debt.
Long term debt carried at fair value: Fair
value of FVO debt is determined by a third party using
discounted cash flow models which take into consideration
changes in interest rates as well as relevant trade data.
Long term debt not carried at fair value: The
estimated fair value of our fixed rate and floating rate debt
instruments not carried at fair value was determined using
either quoted market prices or by discounting future expected
cash flows at current interest rates and credit spreads offered
for similar types of debt instruments.
Insurance policy and claim reserves: The fair
value of insurance reserves for periodic payment annuities was
estimated by discounting future expected cash flows at estimated
market interest rates.
Derivative financial assets and
liabilities: All derivative financial assets and
liabilities, which exclude amounts receivable from or payable to
swap counterparties, are carried at fair value on the balance
sheet. Where practical, quoted market prices were used to
determine fair value of these instruments. For non-exchange
traded contracts, fair value was determined using discounted
cash flow modeling techniques in lieu of market value quotes. We
enter into foreign exchange contracts to hedge our exposure to
currency risk on foreign denominated debt. We also enter into
interest rate contracts to hedge our exposure to interest rate
risk on assets and liabilities, including debt. As a result,
decreases/increases in the fair value of derivative financial
instruments which have been designated as effective hedges are
offset by a corresponding increase/decrease in the fair value of
the individual asset or liability being hedged. See
Note 14, Derivative Financial Instruments, for
additional discussion of the nature of these item
24. Concentration
of Credit Risk
A concentration of credit risk is defined as a significant
credit exposure with an individual or group engaged in similar
activities or having similar economic characteristics that would
cause their ability to meet contractual obligations to be
similarly affected by changes in economic or other conditions.
We generally serve non-conforming and non-prime consumers. Such
customers are individuals who have limited credit histories,
modest incomes, high debt-to-income ratios or have experienced
credit problems caused by occasional delinquencies, prior
charge-offs, bankruptcy or other credit related actions. As a
result, the majority of our secured receivables have a high
loan-to-value ratio. Prior to our decision to cease operations,
our Decision One mortgage operation offered, among other
products, interest-only loans largely for resale, which
beginning in June 2007 were primarily to HSBC Bank USA to
support the secondary market activities of our affiliates.
Interest-only loans historically originated by our Consumer
Lending business or acquired by our correspondent channel are no
longer offered. Our Solstice subsidiary also offers
interest-only loans for resale to third parties. Interest-only
loans allow customers to pay the interest only portion of the
monthly payment for a period of time which results in lower
payments during the initial loan period. However, subsequent
events affecting a customers financial position could
affect the ability of customers to repay the loan in the future
when the principal payments are required. At December 31, 2007,
the outstanding balance of our interest-only loans was
$4.1 billion, or 3 percent of receivables. At
December 31, 2006, the outstanding balance of our
interest-only loans was $6.7 billion, or 4 percent of
receivables.
190
Through the third quarter of 2007, we also offered adjustable
rate mortgage (ARM) loans under which pricing
adjusts on the receivable in line with market movements, in some
cases, following an introductory fixed rate period. At
December 31, 2007, we had approximately $18.5 billion
in adjustable rate mortgage loans at our Consumer Lending and
Mortgage Services businesses. At December 31, 2006, we had
approximately $29.8 billion in adjustable rate mortgage
loans at our Consumer Lending and Mortgage Services businesses.
The majority of our adjustable rate mortgages were acquired from
correspondent lenders of our Mortgage Services business. In the
first quarter of 2007, we discontinued correspondent channel
acquisitions subject to fulfilling earlier commitments and in
the fourth quarter of 2007 we eliminated the small volume of ARM
originations in our Consumer Lending business. Consequently, the
percentage of adjustable rate real estate secured receivables
will decrease significantly over time. In 2008, approximately
$3.7 billion of our adjustable rate mortgage loans will
experience their first interest rate reset based on receivable
levels outstanding at December 31, 2007. In addition, our
analysis indicates that a significant portion of the second lien
mortgages in our Mortgage Services portfolio at
December 31, 2007 are subordinated to first lien adjustable
rate mortgages that will face a rate reset between now and 2009.
As interest rates have fluctuated over the last three years,
certain adjustable rate loans may require a higher monthly
payment following their first adjustment. A customers
financial situation at the time of the interest rate reset could
affect our customers ability to repay the loan after the
adjustment.
As part of our risk mitigation efforts relating to the affected
components of the Mortgage Services portfolio, in October 2006
we established a new program specifically designed to meet the
needs of select customers with ARMs. We are proactively writing
and calling customers who have adjustable rate mortgage loans
nearing the first reset that we expect will be the most impacted
by a rate adjustment. Through a variety of means, we are
assessing their ability to make the adjusted payment and, as
appropriate and in accordance with defined policies, are
modifying the loans in most instances by delaying the first
interest rate adjustment for twelve months, allowing time for
the customer to seek alternative financing or improve their
individual situation. In 2007, we have made more than 33,000
outbound customer contacts and modified more than 8,500 loans
with an aggregate balance of $1.4 billion. Since the
inception of this program we have made more than 41,000 outbound
contacts and modified more than 10,300 loans with an aggregate
balance of $1.6 billion. These loans are not reflected in
the interest rate reset volumes discussed in the preceding
paragraph. Unless these customers who have benefited from a loan
modification are able to obtain other financing, these loans
will also be subject to an interest rate reset at the end of the
modification period.
During 2006 and 2005 we increased our portfolio of stated income
loans. Stated income loans are underwritten based on the loan
applicants representation of annual income which is not
verified by receipt of supporting documentation and,
accordingly, carry a higher risk of default if the customer has
not accurately reported their income. Prior to our decision to
cease operations of Decision One, it offered stated income loans
which, beginning in June 2007, were sold primarily to HSBC Bank
USA to support the secondary market activities of our
affiliates. The outstanding balance of stated income loans in
our real estate secured portfolio was $7.9 billion at
December 31, 2007 and $11.8 billion at
December 31, 2006.
Because we primarily lend to consumers, we do not have
receivables from any industry group that equal or exceed
10 percent of total receivables at December 31, 2007
and 2006. We lend nationwide and our receivables are distributed
as follows at December 31, 2007:
|
|
|
|
|
|
|
Percent of Total
|
|
|
|
Domestic
|
|
State/Region
|
|
Receivables
|
|
|
|
|
California
|
|
|
12
|
%
|
Midwest (IL, IN, IA, KS, MI, MN, MO, NE, ND, OH, SD, WI)
|
|
|
23
|
|
Southeast (AL, FL, GA, KY, MS, NC, SC, TN)
|
|
|
20
|
|
Middle Atlantic (DE, DC, MD, NJ, PA, VA, WV)
|
|
|
15
|
|
Southwest (AZ, AR, LA, NM, OK, TX)
|
|
|
11
|
|
Northeast (CT, ME, MA, NH, NY, RI, VT)
|
|
|
11
|
|
West (AK, CO, HI, ID, MT, NV, OR, UT, WA, WY)
|
|
|
8
|
|
191
The following table reflects the percentage of domestic consumer
receivables by state which individually account for
5 percent or greater of our domestic portfolio.
|
|
|
|
|
|
|
Percent of Total
|
|
|
|
Domestic
|
|
State
|
|
Receivables
|
|
|
|
California
|
|
|
12
|
%
|
Florida
|
|
|
7
|
|
New York
|
|
|
6
|
|
Ohio
|
|
|
5
|
|
Pennsylvania
|
|
|
5
|
|
Texas
|
|
|
5
|
|
25. Geographic
Data
The tables below summarize our owned basis assets, revenues and
income before income taxes by material country. Purchase
accounting adjustments are reported within the appropriate
country.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
Identifiable Assets
|
|
|
Long-Lived
Assets(1)
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
(in millions)
|
|
United States
|
|
$
|
154,739
|
|
|
$
|
168,356
|
|
|
$
|
145,808
|
|
|
$
|
4,086
|
|
|
$
|
9,046
|
|
|
$
|
9,382
|
|
United Kingdom
|
|
|
5,180
|
|
|
|
6,592
|
|
|
|
7,006
|
|
|
|
70
|
|
|
|
452
|
|
|
|
403
|
|
Canada
|
|
|
5,502
|
|
|
|
4,181
|
|
|
|
3,479
|
|
|
|
193
|
|
|
|
157
|
|
|
|
153
|
|
Europe
|
|
|
83
|
|
|
|
89
|
|
|
|
229
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
165,504
|
|
|
$
|
179,218
|
|
|
$
|
156,522
|
|
|
$
|
4,349
|
|
|
$
|
9,655
|
|
|
$
|
9,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes properties and equipment,
goodwill and acquired intangibles.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
Revenues
|
|
|
Income Before Income Taxes
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
(in millions)
|
|
United States
|
|
$
|
23,406
|
|
|
$
|
21,130
|
|
|
$
|
15,961
|
|
|
$
|
(5,288
|
)
|
|
$
|
2,330
|
|
|
$
|
2,609
|
|
United Kingdom
|
|
|
937
|
|
|
|
1,222
|
|
|
|
1,737
|
|
|
|
(709
|
)
|
|
|
(170
|
)
|
|
|
(37
|
)
|
Canada
|
|
|
739
|
|
|
|
601
|
|
|
|
450
|
|
|
|
141
|
|
|
|
129
|
|
|
|
96
|
|
Europe
|
|
|
-
|
|
|
|
32
|
|
|
|
31
|
|
|
|
5
|
|
|
|
(2
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
25,082
|
|
|
$
|
22,985
|
|
|
$
|
18,179
|
|
|
$
|
(5,851
|
)
|
|
$
|
2,287
|
|
|
$
|
2,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
192
HSBC
Finance Corporation
SELECTED
QUARTERLY FINANCIAL DATA (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
|
|
|
Three
|
|
|
Three
|
|
|
Three
|
|
|
Three
|
|
|
Three
|
|
|
Three
|
|
|
Three
|
|
|
|
Months
|
|
|
Months
|
|
|
Months
|
|
|
Months
|
|
|
Months
|
|
|
Months
|
|
|
Months
|
|
|
Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
Dec. 31,
|
|
|
Sept. 30,
|
|
|
June 30,
|
|
|
Mar. 31,
|
|
|
Dec. 31,
|
|
|
Sept. 30,
|
|
|
June 30,
|
|
|
Mar. 31,
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
|
|
|
(in millions)
|
|
|
Finance and other interest income
|
|
$
|
4,616
|
|
|
$
|
4,702
|
|
|
$
|
4,669
|
|
|
$
|
4,696
|
|
|
$
|
4,629
|
|
|
$
|
4,535
|
|
|
$
|
4,311
|
|
|
$
|
4,087
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HSBC affiliates
|
|
|
264
|
|
|
|
247
|
|
|
|
236
|
|
|
|
245
|
|
|
|
320
|
|
|
|
283
|
|
|
|
173
|
|
|
|
153
|
|
Non-affiliates
|
|
|
1,737
|
|
|
|
1,785
|
|
|
|
1,792
|
|
|
|
1,826
|
|
|
|
1,736
|
|
|
|
1,650
|
|
|
|
1,589
|
|
|
|
1,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
2,615
|
|
|
|
2,670
|
|
|
|
2,641
|
|
|
|
2,625
|
|
|
|
2,573
|
|
|
|
2,602
|
|
|
|
2,549
|
|
|
|
2,464
|
|
Provision for credit losses on owned receivables
|
|
|
4,222
|
|
|
|
3,189
|
|
|
|
1,931
|
|
|
|
1,684
|
|
|
|
3,066
|
|
|
|
1,384
|
|
|
|
1,248
|
|
|
|
866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for credit losses
|
|
|
(1,607
|
)
|
|
|
(519
|
)
|
|
|
710
|
|
|
|
941
|
|
|
|
(493
|
)
|
|
|
1,218
|
|
|
|
1,301
|
|
|
|
1,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitization related revenue
|
|
|
12
|
|
|
|
15
|
|
|
|
22
|
|
|
|
21
|
|
|
|
21
|
|
|
|
24
|
|
|
|
51
|
|
|
|
71
|
|
Insurance revenue
|
|
|
139
|
|
|
|
244
|
|
|
|
193
|
|
|
|
230
|
|
|
|
251
|
|
|
|
280
|
|
|
|
226
|
|
|
|
244
|
|
Investment income
|
|
|
53
|
|
|
|
34
|
|
|
|
32
|
|
|
|
26
|
|
|
|
175
|
|
|
|
31
|
|
|
|
34
|
|
|
|
34
|
|
Derivative income (expense)
|
|
|
(29
|
)
|
|
|
(4
|
)
|
|
|
(39
|
)
|
|
|
(7
|
)
|
|
|
72
|
|
|
|
68
|
|
|
|
(7
|
)
|
|
|
57
|
|
Gain (loss) on debt designated at fair value and related
derivatives
|
|
|
742
|
|
|
|
519
|
|
|
|
(130
|
)
|
|
|
144
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Fee income
|
|
|
553
|
|
|
|
660
|
|
|
|
629
|
|
|
|
573
|
|
|
|
558
|
|
|
|
542
|
|
|
|
429
|
|
|
|
382
|
|
Enhancement services revenue
|
|
|
170
|
|
|
|
167
|
|
|
|
150
|
|
|
|
148
|
|
|
|
133
|
|
|
|
129
|
|
|
|
130
|
|
|
|
123
|
|
Taxpayer financial services income
|
|
|
31
|
|
|
|
(27
|
)
|
|
|
4
|
|
|
|
239
|
|
|
|
-
|
|
|
|
4
|
|
|
|
20
|
|
|
|
234
|
|
Gain on receivable sales to HSBC affiliates
|
|
|
121
|
|
|
|
94
|
|
|
|
109
|
|
|
|
95
|
|
|
|
139
|
|
|
|
101
|
|
|
|
97
|
|
|
|
85
|
|
Servicing and other fees from HSBC affiliates
|
|
|
138
|
|
|
|
133
|
|
|
|
132
|
|
|
|
133
|
|
|
|
151
|
|
|
|
121
|
|
|
|
116
|
|
|
|
118
|
|
Other income
|
|
|
(5
|
)
|
|
|
(17
|
)
|
|
|
(88
|
)
|
|
|
40
|
|
|
|
(7
|
)
|
|
|
34
|
|
|
|
79
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other revenues
|
|
|
1,925
|
|
|
|
1,818
|
|
|
|
1,014
|
|
|
|
1,642
|
|
|
|
1,493
|
|
|
|
1,334
|
|
|
|
1,175
|
|
|
|
1,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and fringe benefits
|
|
|
563
|
|
|
|
582
|
|
|
|
587
|
|
|
|
610
|
|
|
|
617
|
|
|
|
572
|
|
|
|
562
|
|
|
|
582
|
|
Sales incentives
|
|
|
28
|
|
|
|
54
|
|
|
|
62
|
|
|
|
68
|
|
|
|
86
|
|
|
|
94
|
|
|
|
98
|
|
|
|
80
|
|
Occupancy and equipment expense
|
|
|
139
|
|
|
|
77
|
|
|
|
85
|
|
|
|
78
|
|
|
|
77
|
|
|
|
78
|
|
|
|
79
|
|
|
|
83
|
|
Other marketing expenses
|
|
|
146
|
|
|
|
162
|
|
|
|
220
|
|
|
|
220
|
|
|
|
268
|
|
|
|
197
|
|
|
|
176
|
|
|
|
173
|
|
Other servicing and administrative expenses
|
|
|
514
|
|
|
|
319
|
|
|
|
242
|
|
|
|
262
|
|
|
|
353
|
|
|
|
286
|
|
|
|
224
|
|
|
|
252
|
|
Support services from HSBC affiliates
|
|
|
308
|
|
|
|
300
|
|
|
|
299
|
|
|
|
285
|
|
|
|
304
|
|
|
|
261
|
|
|
|
270
|
|
|
|
252
|
|
Amortization of acquired intangibles
|
|
|
64
|
|
|
|
63
|
|
|
|
63
|
|
|
|
63
|
|
|
|
63
|
|
|
|
63
|
|
|
|
63
|
|
|
|
80
|
|
Policyholders benefits
|
|
|
65
|
|
|
|
142
|
|
|
|
90
|
|
|
|
124
|
|
|
|
119
|
|
|
|
123
|
|
|
|
107
|
|
|
|
118
|
|
Goodwill and other intangible asset impairment charges
|
|
|
4,010
|
|
|
|
881
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
5,837
|
|
|
|
2,580
|
|
|
|
1,648
|
|
|
|
1,710
|
|
|
|
1,887
|
|
|
|
1,674
|
|
|
|
1,579
|
|
|
|
1,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
(5,519
|
)
|
|
|
(1,281
|
)
|
|
|
76
|
|
|
|
873
|
|
|
|
(887
|
)
|
|
|
878
|
|
|
|
897
|
|
|
|
1,399
|
|
Income tax expense (benefit)
|
|
|
(1,111
|
)
|
|
|
(179
|
)
|
|
|
13
|
|
|
|
332
|
|
|
|
(323
|
)
|
|
|
327
|
|
|
|
329
|
|
|
|
511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
(4,408
|
)
|
|
$
|
(1,102
|
)
|
|
$
|
63
|
|
|
$
|
541
|
|
|
$
|
(564
|
)
|
|
$
|
551
|
|
|
$
|
568
|
|
|
$
|
888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
193
Item 9. Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There were no disagreements on accounting and financial
disclosure matters between HSBC Finance Corporation and its
independent accountants during 2007.
Item 9A. Controls
and Procedures.
Evaluation
of Disclosure Controls and Procedures
We maintain a system of internal and disclosure controls and
procedures designed to ensure that information required to be
disclosed by HSBC Finance Corporation in the reports we file or
submit under the Securities Exchange Act of 1934, as amended,
(the Exchange Act), is recorded, processed,
summarized and reported on a timely basis. Our Board of
Directors, operating through its audit committee, which is
composed entirely of independent outside directors, provides
oversight to our financial reporting process.
We conducted an evaluation, with the participation of the Chief
Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures as of
the end of the period covered by this report. Based upon that
evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures
were effective as of the end of the period covered by this
report so as to alert them in a timely fashion to material
information required to be disclosed in reports we file under
the Exchange Act.
There have been no significant changes in our internal and
disclosure controls or in other factors which could
significantly affect internal and disclosure controls subsequent
to the date that we carried out our evaluation.
Managements
Assessment of Internal Control over Financial
Reporting
Management is responsible for establishing and maintaining
adequate internal control structure and procedures over
financial reporting as defined in
Rule 13a-15(f)
of the Securities and Exchange Act of 1934, and has completed an
assessment of the effectiveness of HSBC Finance
Corporations internal control over financial reporting as
of December 31, 2007. In making this assessment, management
used the criteria related to internal control over financial
reporting described in Internal Control
Integrated Framework established by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
Based on the assessment performed, management concluded that as
of December 31, 2007, HSBC Finance Corporations
internal control over financial reporting was effective.
The effectiveness of HSBC Finance Corporations internal
control over financial reporting as of December 31, 2007
has been audited by HSBC Finance Corporations independent
registered public accounting firm, KPMG LLP, as stated in their
report appearing on page 122, which expressed an
unqualified opinion on the effectiveness of HSBC Finance
Corporations internal control over financial reporting as
of December 31, 2007.
Item 9B. Other
Information.
None.
PART III
Item 10. Directors,
Executive Officers and Corporate Governance.
Directors
Set forth below is certain biographical information relating to
the members of HSBC Finance Corporations Board of
Directors. Each director is elected annually. There are no
family relationships among the directors.
Niall S. K. Booker, age 49, joined HSBC Finance
Corporations Board in August 2007. Mr. Booker also
serves as Chief Executive Officer of HSBC Finance Corporation
and Chief Operating Officer of HSBC North America Holdings Inc.
since February 2008. From April 2007 to February 2008 he was
Chief Operating Officer of HSBC Finance Corporation and Group
Executive of HSBC North America Holdings Inc. Mr. Booker
was Deputy
194
Chairman and Chief Executive Officer of HSBC Bank Middle East
Limited from May 2006 to May 2007 and has served as Group
General Manager to HSBC since January 2004. Mr. Booker
joined the HSBC Group in 1981 as an International Manager and
has held several positions within the HSBC organization since.
Mr. Booker has gained extensive international experience
and skills by building different businesses within various
positions in the HSBC Group. Over the years, he has worked in
retail banking in Brunei and the UK, syndicated loans and
specialized finance in Hong Kong, banking operations in Abu
Dhabi and Trade Finance and corporate banking in Japan. He led
HSBCs business in Thailand after the 1997 financial crises
in Asia and in three tenures in the United States.
Mr. Booker worked in Treasury, was responsible for the work
out of assets for Concord Leasing and lastly, was CEO,
International Private Banking, Americas. He went to India in
July 2002 as Deputy Chief Executive Officer of The Hongkong and
Shanghai Banking Corporation and took over as Chief Executive
Officer and Country Head for HSBC in India, in November 2002.
Mr. Booker is a member of the Executive Committee.
William R. P. Dalton, age 64, joined HSBC Finance
Corporations Board in April 2003. Mr. Dalton retired
in May 2004 as an Executive Director of HSBC Holdings plc,
a position he held from April 1998. He also served HSBC as
Global Head of Personal Financial Services from August 2000 to
May 2004. From April 1998 to January 2004 he was Chief Executive
of HSBC Bank plc. Mr. Dalton held positions with various
HSBC entities for 25 years.
Mr. Dalton is a member of the Compensation, the Executive
and the Audit Committees.
J. Dudley Fishburn, age 61, joined HSBC Finance
Corporations Board in September 1995. Mr. Fishburn
became Chairman of the Board of HFC Bank Ltd. (HSBC Finance
Corporations primary subsidiary in the
United Kingdom) in 1998. He is also on the Board of HSBC
Bank (UK) Ltd. He previously served as the Conservative Member
of Parliament for Kensington in London from 1988 to 1997. Prior
to entering Parliament, Mr. Fishburn was Executive Editor
for The Economist Newspaper Ltd. from 1979 to 1988. He is also a
Director of Altria Inc., Henderson Smaller Companies Investment
Trust plc and Beazley Group plc. He is a trustee of the
Foundation for Liver Research, The Peabody Trust and Reading
University.
Mr. Fishburn is a member of the Nominating &
Governance Committee.
Douglas J. Flint, age 52, joined HSBC Finance
Corporations Board in February 2007. Mr. Flint serves
as Group Finance Director with responsibility for investor
relations, finance and tax at HSBC. He joined HSBC as an
Executive Director in 1995. Mr. Flint chaired the Financial
Reporting Councils review of the Turnbull Guidance on
Internal Control, served on the Accounting Standards Board and
the Standards Advisory Council of the International Accounting
Standards Board from 2001 to 2004 and is a former partner of
KPMG. He is a non-executive Director of BP plc since January
2005.
Mr. Flint is the Non-Executive Chairman of the Board and an
ex-officio (non-voting) member of the Audit Committee.
Cyrus F. Freidheim, Jr., age 72, joined HSBC
Finance Corporations Board in September 1992. He currently
serves as Chief Executive Officer of Sun-Times Media Group Inc.,
and is a member of its Board of Directors since October 2005.
Mr. Freidheim served as Chairman of the Board and Chief
Executive Officer of Chiquita Brands International, Inc. from
March 2002 to January 2004 and Chairman until May 2004. In March
2002, he retired as Vice Chairman of Booz, Allen &
Hamilton, Inc. (a management consulting firm), with which he had
been affiliated since 1966. He is also a Director of both
Allegheny Energy, Inc. and Virgin America Inc. He is a Trustee
for The Brookings Institution, Rush University Medical Center,
Chicago Council on Global Affairs and the Chicago Symphony
Orchestra. Mr. Freidheim is a Member of the Advisory
Council of the Mendosa School of Business at the University of
Notre Dame, The Economic Club of Chicago and The Commercial Club
of Chicago, Council of Foreign Relations.
Mr. Freidheim is the Lead Director and as such is Chair of
the Executive Committee and an ex-officio (non-voting) member of
both the Audit and the Nominating & Governance
Committees. He is also a member of the Compensation Committee.
Robert K. Herdman, age 59, joined HSBC Finance
Corporations Board in January 2004. Since March 2005, he
has served as a member of the Board of Directors of HSBC North
America Holdings, Inc. Mr. Herdman is also on
195
the Board of Directors of Cummins Inc. since February 2008.
Since January 2004, Mr. Herdman has been a Managing
Director of Kalorama Partners LLC, a Washington, D.C.
consulting firm. Mr. Herdman was the Chief Accountant of
the U.S. Securities and Exchange Commission
(SEC) from October 2001 to November 2002. The Chief
Accountant serves as the principal advisor to the SEC on
accounting and auditing matters, and is responsible for
formulating and administering the accounting program and
policies of the SEC. Prior to joining the SEC, Mr. Herdman
was Ernst & Youngs Vice Chairman of Professional
Practice for its Assurance and Advisory Business Services (AABS)
practice in the Americas and the Global Director of AABS
Professional Practice for Ernst & Young International.
Mr. Herdman was the senior Ernst & Young partner
responsible for the firms relationships with the SEC,
Financial Accounting Standards Board (FASB) and American
Institute of Certified Public Accountants (AICPA). He served on
the AICPAs SEC Practice Section Executive Committee
from 1995 to 2001 and as a member of the AICPAs Board of
Directors from 2000 to 2001.
Mr. Herdman is Chair of the Audit Committee.
Louis Hernandez, Jr., age 41, joined HSBC
Finance Corporations Board in April 2007.
Mr. Hernandez serves as Chief Executive Officer of Open
Solutions Inc., a provider of software and services to financial
institutions, since 1999. He also became Chairman of Open
Solutions Inc. in 2000. Previously, he served Rowecom, Inc., an
electronics commerce software provider, as its Chief Financial
Officer from 1997 to 1999 and also as an Executive Vice
President from 1998. Mr. Hernandez held several positions
in the Business and Advisory Services Group of Price Waterhouse
LLP from 1990 though 1996. In addition to Open Solutions, he
served on the Board of Mobius Management System, Inc. which was
sold during 2007.
Mr. Hernandez is a member of the Audit Committee.
George A. Lorch, age 66, joined HSBC Finance
Corporations Board in September 1994. He also serves as a
member of the Board of Directors of HSBC North America Holdings
Inc. From May 2000 until August 2000, Mr. Lorch served as
Chairman, President and Chief Executive Officer of Armstrong
Holdings, Inc. (the parent of Armstrong World Industries, Inc.).
Mr. Lorch served as Chairman of the Board, Chief Executive
Officer and President of Armstrong World Industries, Inc. (a
manufacturer of interior finishes) from 1994 and President and
Chief Executive Officer from 1993 until May 1994. Mr. Lorch
is a Director of The Williams Companies, Inc., Autoliv, Inc. and
Pfizer Inc.
Mr. Lorch is Chair of the Compensation Committee and a
member of the Nominating & Governance Committee.
Brendan P. McDonagh, age 49, joined HSBC Finance
Corporations Board in August 2007. Mr. McDonagh
serves as Chief Executive Officer of HSBC North America Holdings
Inc. since February 2008. From February 2007 to February 2008
Mr. McDonagh served as Chief Executive Officer of HSBC
Finance Corporation and Chief Operating Officer of HSBC North
America Holdings Inc.. Mr. McDonagh served as Chief
Operating Officer of HSBC Finance Corporation prior to his
appointment as Chief Executive Officer in February 2007. From
September 2006 to February 2007, Mr. McDonagh held the
title of Group Executive of HSBC Finance Corporation. From
October 2004 to December 2006 he served as Chief Operating
Officer of HSBC Bank USA. He is also a Group General Manager of
HSBC Holdings plc having been appointed as such in August 2005.
An international manager for the HSBC Group for more than twenty
five years, Mr. McDonagh began his career with HSBC in
1979, completing various assignments throughout the world. In
September 2002, he transferred to the United States to run the
retail and commercial banking operations of HSBC Bank USA.
Mr. McDonagh is active in several US and Ireland
organizations including the Chicago Regional Board of the
American Ireland Fund and USA Board of Co-operation Ireland.
Mr. McDonagh is Chairman of the Consumer Bankers
Association.
Larree M. Renda, age 49, joined HSBC Finance
Corporations Board in September 2001. Ms. Renda has
been employed by Safeway Inc. since 1974. She became Executive
Vice President, Chief Strategist and Administrative Officer of
Safeway Inc. in November 2005. Prior to her current position she
served as Executive Vice President for Retail Operations, Human
Resources, Public Affairs, Labor and Government Relations since
1999. Prior to this position, she was a Senior Vice President
from 1994 to 1999, and a Vice President from 1991 to 1994. She
is also a director and Chairwoman of the Board of The Safeway
Foundation and serves on the Board of Directors for Casa Ley,
S.A. de C.V. Ms. Renda is a member of the Retailing
Initiative Advisory Board of the Wharton School of Business and
serves as a Trustee on the National Joint Labor Management
Committee. Additionally she serves on
196
the Board of Directors for both the California and
U.S. Chamber of Commerce and also serves as a National Vice
President of the Muscular Dystrophy Association.
Ms. Renda is Chair of the Nominating & Governance
Committee and a member of the Executive and the Audit Committees.
Executive
Officers
Information regarding the executive officers of HSBC Finance
Corporation as of March 3, 2008 is presented in the
following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
|
Name
|
|
Age
|
|
|
Appointed
|
|
|
Present Position
|
|
|
Niall S. K. Booker
|
|
|
49
|
|
|
|
2008
|
|
|
Chief Executive Officer
|
Andrew C. Armishaw
|
|
|
45
|
|
|
|
2008
|
|
|
Chief Information Officer North America
|
James E. C. Binyon
|
|
|
44
|
|
|
|
2008
|
|
|
Executive Vice President and Chief Accounting Officer
|
Patrick J. Burke
|
|
|
46
|
|
|
|
2008
|
|
|
Senior Executive Vice President and Chief Operating
Officer Card and Retail Services
|
Jon N. Couture
|
|
|
42
|
|
|
|
2007
|
|
|
Senior Executive Vice President Human Resources
|
Patrick A. Cozza
|
|
|
52
|
|
|
|
2008
|
|
|
Senior Executive Vice President Insurance
|
Curt A. Cunningham
|
|
|
44
|
|
|
|
2008
|
|
|
Executive Vice President General Compliance
|
Thomas M. Detelich
|
|
|
51
|
|
|
|
2008
|
|
|
President Consumer & Mortgage Lending
|
Gary R. Esposito
|
|
|
47
|
|
|
|
2008
|
|
|
Executive Vice President and Head of Consumer & Mortgage
Lending Distribution
|
Bruce A. Fletcher
|
|
|
48
|
|
|
|
2008
|
|
|
Senior Executive Vice President Chief Retail Credit
Officer
|
John J. Haines
|
|
|
44
|
|
|
|
2008
|
|
|
Senior Executive Vice President Auto Finance
|
Susan B. Jewell
|
|
|
52
|
|
|
|
2008
|
|
|
Executive Vice President and General Counsel
|
William H. Kesler
|
|
|
56
|
|
|
|
2008
|
|
|
Executive Vice President and Treasurer
|
Thomas M. Kimble
|
|
|
59
|
|
|
|
2008
|
|
|
Executive Vice President Global Projects and
Operations
|
Iain J. Mackay
|
|
|
46
|
|
|
|
2008
|
|
|
Senior Executive Vice President
|
Mark A. Melas
|
|
|
51
|
|
|
|
2007
|
|
|
Executive Vice President Corporate Real Estate
|
Walter G. Menezes
|
|
|
62
|
|
|
|
2008
|
|
|
President Card & Retail Services and Auto
Finance
|
Anthony J. Murphy
|
|
|
48
|
|
|
|
2007
|
|
|
Senior Executive Vice President Portfolio Management
|
Faye M. Polayes
|
|
|
56
|
|
|
|
2008
|
|
|
Executive Vice President and Head of Corporate Tax
|
Patrick D. Schwartz
|
|
|
50
|
|
|
|
2008
|
|
|
Executive Vice President, Deputy General Counsel and Corporate
Secretary
|
Beverley A. Sibblies
|
|
|
46
|
|
|
|
2008
|
|
|
Executive Vice President and Chief Financial Officer
|
Lisa M. Sodeika
|
|
|
44
|
|
|
|
2005
|
|
|
Executive Vice President Corporate Affairs
|
|
|
Niall S. K. Booker, Director and Chief Executive Officer
of HSBC Finance Corporation and Chief Operating Officer of HSBC
North America Holdings Inc. See Directors for
Mr. Bookers biography.
Andrew C. Armishaw, Chief Information Officer-North
America of HSBC Finance Corporation and of HSBC North America
Holdings Inc. since February 2008. From January 2004 to February
2008 he was Group Executive and Chief Information Officer of
HSBC Finance Corporation and of HSBC North America Holdings Inc.
From January 2001 to December 2003 Mr. Armishaw was Head of
Global Resourcing for HSBC and from 1994 to 1999 was Chief
Executive Officer of First Direct (a subsidiary of HSBC) and
Chief Information Officer of First Direct.
James E. C. Binyon, Executive Vice President and Chief
Accounting Officer of HSBC Finance Corporation since February
2008. From February 2006 to February 2008, Mr. Binyon was
Vice President and Chief Accounting Officer of HSBC Finance
Corporation. From September 2004 to February 2006 he was Vice
President and
197
Controller of HSBC Finance Corporation. From November 2001 to
August 2004 he served as Finance Director of First Direct, and
from February 1995 to October 2001 was Senior Area Accounting
Manager, and Manager Balance Sheet Management for
HSBC Hong Kong. Mr. Binyon was Manager-Asset
Management & Funding, and Manager Treasury
Audit Department between 1992 and 1995. Prior to joining HSBC,
Mr. Binyon spent five years at KPMG.
Patrick J. Burke, Senior Executive Vice President and
Chief Operating Officer Card & Retail
Services of HSBC Finance Corporation since February 2008. From
December 2007 to February 2008 he was Managing
Director Card and Retail Services of HSBC Finance
Corporation. He was Managing Director Card Services
from July 2006 to December 2007. He was appointed President and
Chief Executive Officer of HSBC Financial Limited Canada in
January 2003 until July 2006. Patrick was appointed Chief
Financial Officer with HFC Bank Limited from 2000 until 2003.
From the start of his career with HSBC in 1989, Mr. Burke
has served the company in many roles including Deputy Director
of Mergers and Acquisitions and Vice President of Strategy and
Development.
Jon N. Couture, Senior Executive Vice President-Human
Resources of HSBC Finance Corporation since December 2007 and
Senior Executive Vice President-Human Resources of HSBC North
America Holdings Inc. since February 2008. Mr. Couture
joined HSBC in December 2007 as Executive Vice President and
Head of Human Resources of HSBC North America Holdings Inc.
Mr. Couture was formerly with National City Corporation
where he was Executive Vice President, Human Resources and
Corporate Senior Vice President from May 2004 to December 2007.
Prior to that Mr. Couture was with Siemens Business
Services, Inc. from 1998 until May 2004 where he held the
position of Senior Vice President, Human Resources.
Mr. Couture has been a member of the Board of Directors of
Banking Administration Institute since 2006.
Patrick A. Cozza, Senior Executive Vice
President Insurance of HSBC Finance Corporation
since February 2008. From April 2004 to February 2008 he was
Group Executive of HSBC Finance Corporation. Mr. Cozza
became President Refund Lending and Insurance
Services in 2002 and Managing Director and Chief Executive
Officer Refund Lending in 2000. He also serves on
the board of directors of Junior Achievement in New Jersey,
Cancer Hope Network, Somerset Business Partnership and American
Council of Life Insurers PAC. Mr. Cozza serves as board
member and officer of Household Life Insurance Company, First
Central National Life Insurance Company and HSBC Insurance
Company of Delaware, all subsidiaries of HSBC Finance
Corporation.
Curt A. Cunningham, Executive Vice President-General
Compliance of HSBC Finance Corporation since February 2008. From
January 2007 to February 2008 Mr. Cunningham was Chief
Compliance Officer of HSBC Finance Corporation. Prior to that
Mr. Cunningham was Assistant Vice President Corporate
Compliance responsible for Compliance oversight for non-bank
finance company businesses. Mr. Cunningham served in a
variety of Compliance roles, including Local Compliance Officer
for the Mortgage Services division between September 1997
through February 2003. Mr. Cunningham joined HSBC in 1988
and has held a variety of management positions in Operations,
Training, Learning and Development and Compliance.
Thomas M. Detelich, President-Consumer &
Mortgage Lending of HSBC Finance Corporation and of HSBC North
America Holdings Inc. since February 2008. From August 2006 to
February 2008 he was Group Executive of HSBC Finance Corporation
and of HSBC North America Holdings Inc. He became Group
Executive, Consumer Lending in July 2002. Mr. Detelich also
held the positions of Managing Director at Beneficial
Corporation from March 2000 to July 2002 and Managing Director
of Household Finance Corporation from January 1999 to July 2002
and regional general manager of consumer lending in 1998.
Mr. Detelich was formerly with Transamerica for
21 years, becoming Executive Vice President of Branch
Operations in 1997.
Gary R. Esposito, Executive Vice President and Head of
Consumer & Mortgage Lending Distribution of HSBC
Finance Corporation since February 2008. From September 2005 to
February 2008 he was Managing Director Mortgage
Services of HSBC Finance Corporation. From 2002 to 2005,
Mr. Esposito held the positions of Managing
Director U.S. branch operations for the
Consumer Lending business and was the President, Chief Executive
Officer and Chairman for HSBC Canada from October 2000 to
November 2003. He was also National Director, branch and retail
operations from 1998 through 2000. He has been with HSBC Finance
Corporation since 1982.
Bruce A. Fletcher, Senior Executive Vice President-Chief
Retail Credit Officer of HSBC Finance Corporation and of HSBC
North America Holdings Inc. since February 2008.
Mr. Fletcher has been a Vice President of HSBC Bank
198
Nevada, N.A. since May 2006, and an Executive Vice President,
Retail Credit of HSBC Bank USA, Inc. since April 2005. From
April 2005 to February 2008 Mr. Fletcher was Senior Vice
President-Chief Retail Credit Officer of HSBC Finance
Corporation and of HSBC North America Holdings Inc. Prior to
that Mr. Fletcher was Managing Director and Senior Credit
Officer of Citigroup, Inc. His employment with Citigroup began
with subsidiary Citibank, N.A. where he was employed beginning
in June 1988.
John J. Haines, Senior Executive Vice
President Auto Finance of HSBC Finance Corporation
since February 2008. From August 2004 to February 2008 he was
Managing Director Auto Finance of HSBC Finance
Corporation. From May 1989 to August 2004 Mr. Haines worked
for General Electric where most recently he was Senior Vice
President Products and Services for General Electric
Fleet Services and Senior Vice President North
American Operations for General Electric Fleet Services.
Susan B. Jewell, Executive Vice President and General
Counsel of HSBC Finance Corporation since February 2008. From
December 2007 to February 2008 Ms. Jewell was General
Counsel of HSBC Finance Corporation. In this role, she manages
the legal function for the organization, which encompasses
HSBCs non-bank financial operations in the United States
and Canada. Ms. Jewell has also been the Vice President,
General Counsel and Secretary of HSBC Bank Nevada, N.A. since
March 2004. Ms. Jewell joined HSBC in 1983 and has held a
variety of positions providing or managing legal support of the
HSBC businesses.
William H. Kesler, Executive Vice President and Treasurer
of HSBC Finance Corporation since February 2008 and Executive
Vice President Asset and Liability Management of
HSBC North America Holdings Inc. since April 1, 2006. From
April 2006 to February 2008 he was Senior Vice
President Treasurer of HSBC Finance Corporation.
From May 2005 to April 2006 he was Vice President and Assistant
Treasurer for HSBC Finance Corporation. Mr. Kesler joined
HSBC Finance Corporation in 1992 and since that time has held
various treasury management positions. He is a trustee of the
Hospice of Northeastern Illinois Foundation and serves on the
Foundations executive committee.
Thomas M. Kimble, Executive Vice President-Global
Projects and Operations of HSBC Finance Corporation and of HSBC
North America Holdings Inc. since February 2008. From February
2007 to February 2008 he was Managing Director-Strategic Cost
Initiative and Global Resourcing of HSBC Finance Corporation and
of HSBC North America Holdings Inc. Prior to his appointment to
that position, since July 2006 Mr. Kimble served as the
Managing Director Global Projects and Operations for
HSBC North America Holdings Inc. and prior to that, Managing
Director of Operations for Household/HSBC Card Services for
eight years. Mr. Kimble has been active in the Salinas
Valley Chamber of Commerce and is a past president of the
Chamber. He is also a past president of Shelter Outreach Plus, a
domestic violence shelter.
Iain J. Mackay, Senior Executive Vice President of HSBC
Finance Corporation and Senior Executive Vice President and
Chief Financial Officer of HSBC North America Holdings Inc.
since February 2008. From July 2007 to February 2008 he was
Executive Vice President of HSBC Finance Corporation and
Executive Vice President and Chief Financial Officer of HSBC
North America Holdings Inc. Prior to joining HSBC,
Mr. Mackay was Vice President and Chief Financial Officer
of General Electrics Healthcare Global Diagnostics Imaging
Business since 2004. Mr. Mackay joined General Electric
Company in 1996 where he held various positions until 2007.
Mark A. Melas, Executive Vice President
Corporate Real Estate of HSBC Finance Corporation and of HSBC
North America Holdings Inc. since 2000. Prior to that,
Mr. Melas held the position of Senior Vice President from
April 1995. From 1978 through March 1995 he was employed at New
York Telephone as an Area Operations Manager in Corporate Real
Estate.
Walter G. Menezes, President Card &
Retail Services and Auto Finance of HSBC Finance Corporation and
of HSBC North America Holdings Inc. since February 2008. From
April 2004 to February 2008 he was Group Executive of HSBC
Finance Corporation and of HSBC North America Holdings Inc.
Mr. Menezes is also a Group General Manager for HSBC since
October 1, 2006 and is responsible for managing Group
Cards. Mr. Menezes held the title of President and Chief
Executive Officer for Auto Finance from 2002 to August 2004 and
Managing Director and Chief Credit Officer of Credit Card
Services from 1998 to 2002. He joined HSBC Finance Corporation
in 1996 as National Director Collections Credit Card
Services.
199
Anthony J. Murphy, Senior Executive Vice
President Portfolio Management of HSBC Finance
Corporation and of HSBC North America Holdings Inc. since
February 2007. Prior to his appointment to this position,
Mr. Murphy was President and Chief Executive Officer of
HSBC Securities (USA) Inc. and Chief Operating Officer of CIBM
Americas. He was also Co-Head of Corporate, Investment Banking
and Markets (CIBM Americas) since November 2004. Mr. Murphy
has been with the HSBC Group since 1990. Prior to his
appointment as Chief Executive Officer of HSBC Securities (USA)
Inc. in April 2003, Mr. Murphy served as Chief Strategic
Officer of CIBM Americas from 2000. Prior to that assignment, he
was Head of Market Risk Management for HSBC Bank plc and HSBC
Investment Bank in London from 1996.
Faye M. Polayes, Executive Vice President and Head of
Corporate Tax of HSBC Finance Corporation and of HSBC North
America Holdings Inc. since February 2008. Ms. Polayes has
been Vice President of HSBC Bank Nevada, National Association
since January 2004. From June 2004 to February 2008
Ms. Polayes was Vice President of HSBC Card Services Inc.
From February 2004 to February 2008 Ms. Polayes was Senior
Vice President Taxes of HSBC Finance Corporation and
from September 2003 to February 2008 was Executive Vice
President Tax of HSBC North America Holdings Inc.
and of HSBC Bank USA, N.A. Prior to that Ms. Polayes was
Executive Vice President and Tax Director of HSBC Bank USA, N.A.
from January 2000 to September 2003.
Patrick D. Schwartz, Executive Vice President, Deputy
General Counsel and Corporate Secretary of HSBC Finance
Corporation and of HSBC North America Holdings Inc. since
February 2008. From August 2007 to February 2008 Mr. Schwartz
was Vice President, Deputy General Counsel Corporate
and Corporate Secretary of HSBC Finance Corporation, Senior Vice
President and Secretary of HSBC USA Inc. and Assistant General
Counsel Corporate, Chief Governance Officer and
Corporate Secretary of HSBC North America Holdings Inc.
Mr. Schwartz counsels management and the Board of Directors
of HSBC Finance Corporation, HSBC USA Inc. and HSBC North
America Holdings Inc. with respect to corporate transactions,
securities issuance and compliance, and corporate governance
matters. He manages the HSBC-North America legal team that
provides legal support in these areas. Since joining HSBC in
1993, Mr. Schwartz has held various positions providing or
managing legal support of securities law, asset-backed funding,
public financial reporting and corporate governance, as well as
serving as General Counsel to the Mortgage Services operations
from 2000 2001.
Beverley A. Sibblies, Executive Vice President and Chief
Financial Officer of HSBC Finance Corporation since February
2008 and Executive Vice President Finance of HSBC
North America Holdings Inc. since October 2005. From October
2005 to February 2008 she was Senior Vice President
Chief Financial Officer of HSBC Finance Corporation.
Ms. Sibblies joined HSBC Finance Corporation in November
2004 as the Senior Vice President and Chief Accounting Officer.
Prior to joining HSBC Finance Corporation, she served as
Executive Vice President and Chief Financial Officer for EMC
Mortgage from June 2000 to February 2004. Prior to that, she
served as a partner in the financial services practice of
Deloitte & Touche, LLP from July 1997 to June 2000.
Lisa M. Sodeika, Executive Vice President
Corporate Affairs of HSBC Finance Corporation since July 2005
and of HSBC North America Holdings Inc. since June 2005.
Ms. Sodeika directs HSBC North Americas public
affairs, employee communications, government relations, consumer
affairs, community development and philanthropic activities.
From January 2003 to June 2005 Ms. Sodeika was Senior Vice
President Corporate Affairs and Vice
President Consumer Affairs. Since joining HSBC
Finance Corporation, Ms. Sodeika has held management
positions in the consumer finance and retail services businesses
including marketing, collections, quality assurance and
compliance, underwriting and human resources. Ms. Sodeika
served as member, vice chair, and then chairperson of the
Federal Reserve Boards Consumer Advisory Council from
2005-2007.
Corporate
Governance
Board
of Directors Committees and Charters
The Board of Directors of HSBC Finance Corporation has four
standing committees: the Audit Committee, the Compensation
Committee, the Nominating & Governance Committee and
the Executive Committee. The charters of the above-mentioned
committees, as well as our Corporate Governance Standards, are
available on our website at www.hsbcusa.com or upon
written request made to HSBC Finance Corporation,
26525 N. Riverwoods Boulevard, Mettawa, Illinois
60045, Attention: Corporate Secretary.
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Audit
Committee
The primary purpose of the Audit Committee is to assist the
Board of Directors in fulfilling its oversight responsibilities
relating to HSBC Finance Corporations system of internal
controls over financial reporting and its accounting, auditing
and financial reporting practices. The Audit Committee is
currently comprised of the following independent Directors (as
defined by HSBC Finance Corporations Corporate Governance
Standards which are based upon the rules of the New York Stock
Exchange): Robert K. Herdman (Chair), William R. P. Dalton,
Louis Hernandez, Jr. and Larree M. Renda. In addition,
Cyrus F. Freidheim, Jr., Lead Director, and Douglas J.
Flint, Group Finance Director of HSBC, are non-voting members of
the Audit Committee. The Board has determined that each of these
individuals is financially literate. The Board of Directors has
determined that Robert K. Herdman qualifies as an Audit
Committee financial expert.
Compensation
Committee
The primary purpose of the Compensation Committee is to assist
the Board of Directors in discharging its responsibilities
related to the compensation of the Chief Executive Officer of
HSBC Finance Corporation and the officers that are direct
reports to the Chief Executive Officer and such other officers
as may be designated by the Board of Directors. The Compensation
Committee is currently comprised of the following directors:
George A. Lorch (Chair), William R. P. Dalton and Cyrus F.
Freidheim, Jr. All members of the Compensation Committee
are independent directors under HSBC Finance Corporations
Corporate Governance Standards.
The Charter of the Compensation Committee lists the primary
responsibilities, powers and authorities of the Compensation
Committee. The listed items include (i) review and approve
corporate goals and performance objectives relevant to the
compensation of the Chief Executive Officer and executive
officers, evaluate the performance of the Chief Executive
Officer and executive officers in light of those goals and
objectives, and review its findings with the Board of Directors
in executive session, (ii) submit recommendations
concerning base salary, performance-based cash and long term
equity-based incentive awards for the Chief Executive Officer
and executive officers to the Remuneration Committee of HSBC
(REMCO) for approval, (iii) recommend to REMCO
equity incentives under HSBC plans to all employees, except
those awards that the Chief Executive Officer may determine
based upon a delegation of authority by REMCO, (iv) review
and approve benefits and perquisites of the Chief Executive
Officer and executive officers to the extent such benefits are
not available to all employees, (v) recommend to the Board
of Directors and REMCO the creation or amendment of any welfare,
or tax qualified employee benefit plan or program of HSBC
Finance Corporation, or any long-term executive compensation
plan or program of HSBC Finance Corporation whose participants
include the Chief Executive Officer or executive officers,
(vi) review and recommend to REMCO any employment and
severance contracts for the Chief Executive Officer and
executive officers, as well as any severance payouts to such
officers, (vii) review and consider best
practices of peer companies with respect to compensation
philosophies, policies and practices, (viii) review
managements Compensation Discussion and Analysis
(CD&A) to be included in HSBC Finance
Corporations Annual Report on
Form 10-K,
discuss the CD&As content with management, prepare
the Compensation Committee Report concerning the CD&A and
recommend to the Board of Directors that the CD&A be
included in the annual report on
Form 10-K
and (ix) engage in an annual self assessment with the goal
for continuing improvement, and to review and assess the
adequacy of this charter at least annually and recommend any
proposed changes to the Board of Directors for approval. The
Compensation Committee may in its discretion retain and
discharge consultants to assist the Compensation Committee in
evaluating director, Chief Executive Officer or executive
officer compensation and to determine the appropriate terms of
engagement and the fees to be paid to such consultants.
In establishing executive compensation packages for 2007, in
December 2006 the Compensation Committee provided advisory
recommendations to HSBCs Group General Manager for
submission to the HSBC CEO with respect to 2007 compensation for
the Chief Executive Officer and certain other executive
officers. The package included advisory recommendations for 2007
base salary, long-term incentive share awards and cash awards
relating to 2006 performance. Final determination of
compensation, including performance-based cash awards relating
to 2007 performance, was proposed by the HSBC CEO and endorsed
by REMCO. The Chief Executive Officer is given full authority,
which may be delegated, to establish the compensation and salary
ranges for all other employees of HSBC Finance Corporation and
its subsidiaries whose salaries are not subject to review by
the
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Compensation Committee and approval by REMCO. For more
information about the compensation policy of HSBC Finance
Corporation please see Item 11. Executive
Compensation Compensation Discussion and
Analysis.
Nominating &
Governance Committee
The primary purpose of the Nominating & Governance
Committee is to assist the Board of Directors of HSBC Finance
Corporation in discharging its responsibilities related to
identifying and nominating members of the Board of Directors to
the Board, recommending the composition of each committee of the
Board of Directors and the Chair of each committee, establishing
and reviewing HSBC Finance Corporations corporate
governance and making recommendations to the Board of Directors
regarding compensation for service of the non-executive Board
members. The Nominating & Governance Committee ensures
that HSBC Finance Corporation maintains best
practices with respect to corporate governance in order to
ensure effective representation of its stakeholders.
The Nominating & Governance Committee is currently
comprised of the following directors: Larree M. Renda (Chair),
J. Dudley Fishburn, Cyrus F. Freidheim, Jr. (ex-officio
member) and George A. Lorch. With the exception of
Mr. Fishburn, all members of the Nominating &
Governance Committee are independent directors under HSBC
Finance Corporations Corporate Governance Standards.
Executive
Committee
The Executive Committee may exercise the powers and authority of
the Board of Directors in the management of the business and
affairs of the corporation during the intervals between meetings
of the Board of Directors. Cyrus F. Freidheim, Jr. (Chair),
Niall S. K. Booker, William R. P. Dalton and Larree M.
Renda are members of the Executive Committee.
Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act, as amended, requires
certain of our Directors, executive officers and any persons who
own more than ten percent of a registered class of our equity
securities to report their initial ownership and any subsequent
change to the SEC and the New York Stock Exchange
(NYSE). With respect to the 6.36% Series B
Preferred Stock of HSBC Finance Corporation, we reviewed copies
of all reports furnished to us and obtained written
representations from our Directors and executive officers that
no other reports were required. Based solely on a review of
copies of such forms furnished to us and written representations
from the applicable Directors and executive officers, all
required reports of changes in beneficial ownership were filed
on a timely basis for the 2007 fiscal year.
Code
of Ethics
HSBC Finance Corporations Board of Directors has adopted a
Code of Ethics for Senior Financial Officers. That Code of
Ethics is incorporated by reference in Exhibit 14 to this
Annual Report on
Form 10-K.
HSBC Finance Corporation also has a general code of ethics
applicable to all employees that is referred to as its Statement
of Business Principles and Code of Ethics. That document is
available on our website at www.hsbcusa.com or upon
written request made to HSBC Finance Corporation,
26525 N. Riverwoods Boulevard, Mettawa, Illinois
60045, Attention: Corporate Secretary.
Item 11. Executive
Compensation.
Compensation
Discussion and Analysis
The following compensation discussion and analysis (the
2007 CD&A) summarizes the principles,
objectives and factors considered in evaluating and determining
the compensation of HSBC Finance Corporations executive
officers in 2007. Specific compensation information relating to
our 2007 Chief Executive and Chief Financial Officers, our
former Chief Executive Officer who left HSBC in February 2007
and our next three most highly compensated executives is
contained in this portion of the
Form 10-K.
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Oversight
of Compensation Decisions
Role of
HSBC Holdings plcs Remuneration Committee and HSBC
CEO
HSBC Finance Corporation is a wholly owned subsidiary of HSBC
Holdings plc (HSBC). The Board of Directors of HSBC
has the authority to delegate any of its powers, authorities and
judgments to any committee consisting of one or more directors,
and has established a Remuneration Committee (REMCO)
for the purpose of setting the remuneration policy for HSBC and
remuneration of the more senior executives whose appointment
requires HSBC Board of Directors approval.
Compensation packages (including base salary, incentive awards
and any long-term incentive awards) for certain senior
executives whose appointment requires HSBC Board of Directors
approval, are initially determined by Mr. Michael F.
Geoghegan, the HSBC Group Chief Executive (the HSBC
CEO). The HSBC CEO then forwards his determinations to
REMCO which reviews the determinations to ensure they are in
line with the remuneration policy for HSBC and if they are, it
endorses those determinations.
In November 2006, REMCO delegated its authority for endorsement
of base salaries and annual cash incentive awards relating to
certain classes of executives to the HSBC CEO. However, REMCO
retained exclusive authority to endorse base salaries and annual
cash incentive award recommendations for the more senior
executives within HSBC and its subsidiaries. REMCO also has
exclusive authority with respect to all long-term incentive
plans involving interests in HSBC ordinary shares. As a result,
REMCO had final authority over the compensation recommendations
made by the HSBC CEO in respect of Messrs. McDonagh, Mehta,
Detelich, Menezes and Booker in 2007.
The members of REMCO in 2007 were Sir Mark Moody-Stuart
(Chairman), William K. L. Fung (until May 2007), Sharon Hintze
(until May 2007), Gwyn Morgan (as of May 2007) and J.D.
Coombe, all of whom were or are non-executive directors of HSBC.
REMCO has retained the services of Mercer Limited as advisers on
matters of corporate governance, and Towers Perrin, a human
resource consulting firm, to provide independent advice on
global executive compensation issues.
Role of
HSBC Finance Corporations Compensation Committee and Human
Resources Executives
The Compensation Committee of the Board of Directors of HSBC
Finance Corporation (the Compensation Committee)
generally seeks to ensure that our compensation policies and
practices support the objectives of HSBC Finance
Corporations compensation program, which are based upon
the compensation strategy established by REMCO. As described
below, in establishing executive compensation packages for 2007,
other than for Ms. Sibblies whose compensation is proposed
by the Chief Financial Officer of HSBC North America Holdings
Inc. and approved by the Chief Executive Officer of HSBC Finance
Corporation, the Compensation Committee provided advisory
recommendations to HSBCs Group General Manager of Human
Resources for submission to the HSBC CEO, the HSBC CEO further
recommended final remuneration under each element of
compensation to REMCO, including base salary and cash incentive
awards, and REMCO endorsed the awards. Additional information
with regard to the Compensation Committee, including a
description of its responsibilities under its charter, is
contained in the section of this
Form 10-K
entitled Item 10. Directors, Executive Officers and
Corporate Governance Corporate Governance.
For purposes of proposing 2007 executive compensation packages
to the HSBC CEO, the Compensation Committee retained the
services of Strategic Apex Group, an executive compensation
consulting firm, in December 2006, to provide comparator data
and to assist in the development of competitive compensation
packages for our executives. In addition, our Human Resources
executives worked with the Compensation Committee to prepare a
comprehensive annual compensation package for our Chief
Executive Officer and each executive officer that reported to
him in 2007.
2007
Executive Officer Compensation Decision Process
With respect to the executive officers reported in this 2007
CD&A, in December 2006, Mr. Mehta, the Chief Executive
Officer of HSBC Finance Corporation at that time, made proposals
to the Compensation Committee regarding 2007 base salary,
long-term incentive share awards and cash awards relating to
2006 performance for each of his direct reports.
Mr. Mehtas recommendations concerning his direct
reports, the Compensation
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Committees recommendation with respect to
Mr. Mehtas salary, and its endorsement of
Mr. Mehtas compensation recommendations as to his
direct reports, were forwarded to HSBCs Group General
Manager of Human Resources for submission to the HSBC CEO.
Comparator and market data provided by Strategic Apex Group was
referenced by the Compensation Committee to evaluate the
competitiveness of proposed executive compensation. The HSBC CEO
reviewed the 2007 compensation recommendations provided by the
Compensation Committee, including incentive awards relating to
2006 performance, and forwarded the recommendations to REMCO for
endorsement. The HSBC CEO was provided with comparator
information from Towers Perrin based on the following peer
group: American Express Company, Bank of America Corporation,
Barclays, BNP Paribas, Capital One Financial, Citigroup,
Inc. Countrywide Financial Corporation, FifthThird Bancorp,
Deutsche Bank, National City Corporation, Royal Bank of
Scotland, JP Morgan Chase, Santander, UBS, Royal Bank of
Canada, US Bancorp, Wachovia Corporation, and Wells
Fargo &Company (collectively, the Comparator
Group). Comparator and market data was referenced by the
HSBC CEO to evaluate the competitiveness of proposed executive
compensation. REMCO reviewed and endorsed these final
recommendations.
In July 2007, Mr. McDonagh proposed the performance
objectives relating to the performance-based cash awards made to
executive officers participating in the Management Incentive
Program and submitted these goals to the HSBC CEO. As the
performance-based cash awards were dependent upon satisfaction
of objectives that could not be evaluated until the end of the
performance measurement year (i.e., 2007), the final
determination of this component of compensation was not made
until the HSBC CEO received reports from management concerning
satisfaction of corporate, business unit and individual
objectives in January 2008. REMCO reviewed and endorsed the HSBC
CEOs recommendations.
Objectives
of HSBC Finance Corporations Compensation
Program
Our compensation program is designed to support the successful
recruitment, development and retention of high performing
executive talent and to provide incentive to those executives to
achieve HSBC Finance Corporations short-term business
objectives and to optimize its long-term financial returns. We
focus on total compensation rather than individual elements of
pay. Our compensation program is designed to be competitive with
the benchmark financial institutions included in the Comparator
Group which is comprised of
U.S.-based
organizations that compete with us for business, customers and
executive talent. While most of these organizations are
publicly-held
companies, our operations are of comparable scale and
complexity. Accordingly, our compensation program is designed to
provide the flexibility to offer compensation that is
competitive with the Comparator Group so that we may attract and
retain the highest performing executives.
The philosophy underlying our executive compensation program
which is designed to promote the compensation strategy of our
parent, HSBC, is discussed below. Across businesses, individual
compensation recommendations reflect HSBCs strong stance
with respect to diversity and equal opportunity for all
employees within the context of meritocracy and performance.
Link to
Company Performance
We seek to offer competitive base salaries with a significant
portion of variable compensation components determined by
measuring performance of the executive, his or her respective
business unit, HSBC Finance Corporation and HSBC. The
performance-based cash compensation plans, which are more fully
described under Elements of Compensation Annual
Performance-Based Awards, emphasize revenue and expense
growth, profits and other key performance measures. Other
considerations taken into account in setting compensation
policies and making compensation decisions include demonstrated
leadership, future potential, adherence to HSBCs ethical
standards and the ability to leverage capabilities across
businesses. Corporate, business unit
and/or
individual goals are established at the beginning of each year.
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Compensation plans motivate our executives to improve the
overall performance and profitability of HSBC as well as the
specific region, unit, or function to which they are assigned.
Each executives individual performance and contribution is
considered in making salary adjustments and determining the
amount of annual performance bonus paid and the value of HSBC
equity-based awards granted each year.
In 2005, HSBC began to award long-term incentive share awards
called Restricted Shares which vest on a specified
date if the executive remains employed through that date, and
Performance Shares which require continued
employment and satisfaction of corporate performance conditions
designed to reinforce a long-term focus on HSBCs business
strategy and delivering value to its shareholders. Performance
Share awards may be granted to the most senior executives whose
business units have the ability to have a direct impact on
HSBCs consolidated results. Restricted Share awards may be
granted to other high performing executives.
Competitive
Compensation Levels and Marketplace Research
We endeavor to maintain a compensation program that is
competitive. We operate in a highly competitive business
environment, in which our Comparator Group and other financial
services companies continuously look to gain market share and
competitive advantage by hiring top executive talent. On an
annual basis, and as needed when recruiting, we compare the
compensation for our executive officers to that of executives
with similar responsibilities for companies of similar industry,
size and complexity.
We research the types of compensation programs provided by other
companies, compensation levels for executives, details of
certain compensation programs, marketplace compensation trends,
marketplace practices regarding compensation mix, stock vesting
terms, equity ownership levels, the amount of compensation that
is derived from equity incentives and the benefits provided to
executives. We also research different aspects of performance,
including the relationship between performance and compensation,
a comparison of HSBC Finance Corporations historical
performance to our Comparator Group, and types of performance
measures that are used by other companies for their annual and
long-term incentive programs. Research data is gathered from
several different sources, including general surveys of the
marketplace and through retained compensation consultants
including Towers Perrin and Strategic Apex Group.
Our 2007 compensation program generally provided executives with
the opportunity to earn a base salary that was targeted near the
median of the market. We believe this represented a competitive
base salary for meeting general business objectives. Total
compensation, which includes incentive awards, was also targeted
to be in the 50th percentile if we, HSBC and the executive
met established performance goals, with the possibility of
reaching the 75th percentile if we, HSBC and the executive
exceeded established performance goals. This provided greater
incentive to achieve higher performance standards and the
specific compensation strategy established by REMCO. The level
of compensation paid to an executive from year to year will
differ based on performance. This year-to-year difference stems
mainly from HSBC Finance Corporations
and/or an
individual business units performance results and, for
individuals eligible for performance-based equity awards, awards
may vary based upon HSBCs performance results.
Compensation levels will also increase or decrease based on the
executives individual performance and level of
responsibility.
Repricing
of Stock Options and Timing of Option Grants
The exercise price of stock options under historical Household
International, Inc. option plans was based upon the stock price
on the date the option grant was approved. For HSBC
discretionary option plans, the exercise price of awards made in
2003 and 2004 was the higher of the average market value for
HSBC ordinary shares on the five business days preceding the
grant date or the market value on the date of the grant.
HSBC also offers employees a plan in which options to acquire
HSBC ordinary shares are awarded when an employee commits to
contribute up to 250 GBP (or the equivalent) each month for one,
three or five years. At the end of the term, the accumulated
amount, plus interest, may be used to purchase shares under the
option, if the employee chooses to do so. The exercise price for
such options is the average market value of HSBC ordinary shares
on the five business days preceding the date of the invitation
to participate, less a 15 to 20 percent discount (depending
on the term).
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We do not, and our parent, HSBC, does not reprice stock option
grants. In addition, neither HSBC Finance Corporation nor HSBC
has ever engaged in the practice known as
back-dating of stock option grants, nor have we
attempted to time the granting of historical stock options in
order to gain a lower exercise price.
Dilution
from Equity-Based Compensation
While dilution is not a primary factor in determining award
amounts, there are limits to the number of shares that can be
issued under HSBCs equity-based compensation programs.
These limits were established by vote of HSBC shareholders in
2005.
Perquisites
It is our philosophy to provide few perquisites to executives.
The perquisites we provide are intended to help executives be
more productive and efficient or to protect HSBC Finance
Corporation and its executives from certain business risks and
potential threats. Our review of competitive market data
indicates that the perquisites provided to executives are
reasonable and within market practice. See the Summary
Compensation Table below for further information on
perquisites awarded to our executives.
Retirement
Benefits
HSBC North America Holdings Inc. offers a pension retirement
plan in which HSBC Finance Corporation executives may
participate that provides a benefit equal to that provided to
all eligible employees of HSBC Finance Corporation with like
dates of hire. However, both qualified and non-qualified defined
benefit plans are maintained so that this level of pension
benefit can be continued without regard to certain Internal
Revenue Service limits. Executives and certain other highly
compensated employees can elect to participate in a nonqualified
deferred compensation plan, where such employees can elect to
defer the receipt of earned compensation to a future date. We
also maintain a qualified 401(k) plan with company matching
contributions. Another nonqualified deferred compensation plan
provides executives and certain other highly compensated
employees with a benefit measured by the company matching
contribution that could not be allocated to the 401(k) plan
because of certain Internal Revenue Service limits. We do not
pay any above-market or preferential interest in connection with
deferred amounts. As international managers, Mr. McDonagh
and Mr. Booker are accruing pension benefits under a
foreign-based defined benefit plan that includes member
contributions. Additional information concerning this plan is
contained below in this 2007 CD&A in the table entitled
Pension Benefits.
Employment
Contracts and Severance Protection
There are no employment agreements between our executive
officers and HSBC Finance Corporation. However, Mr. Menezes
has entered into an agreement that only provides additional
severance benefits upon a change of control of HSBC Finance
Corporation. The terms of Mr. Menezes agreement is
contained in the description of his compensation under the
heading Compensation of Officers Reported in the Summary
Compensation Table.
Accounting
Considerations
We adopted the fair value method of accounting under Statement
of Financial Accounting Standards No. 123 (revised 2004),
Share Based Payment (SFAS 123(R))
effective January 1, 2006. SFAS 123(R) applies to all
equity instruments granted to employees beginning
January 1, 2006 and does not apply to awards granted in
prior periods before the effective date, except to the extent
that prior periods awards are modified, repurchased or
cancelled after the required effective date. Prior to 2006, we
adopted the fair value method of accounting prospectively in
2002 for all new equity instruments granted to employees as
provided under Statement of Financial Accounting Standards
No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure (an amendment
of FASB Statement No. 123). The Board of Directors
believes that this treatment reflects greater accuracy and
transparency of the cost of these incentives and promotes better
corporate governance.
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Tax
Considerations
Limitations on the deductibility of compensation paid to
executive officers under Section 162(m) of the Internal
Revenue Code are not applicable to HSBC Finance Corporation, as
it is not a public corporation as defined by
Section 162(m). As such, all compensation to our executive
officers is deductible for federal income tax purposes, unless
there are excess golden parachute payments under
Section 4999 of the Internal Revenue Code following a
change in control.
Elements
of Compensation
The primary elements of executive compensation are base salary,
annual non-equity performance-based awards, and long-term
equity-based incentives. In limited circumstances, discretionary
bonuses may also be awarded. While the base salary is generally
fixed and not subject to fluctuation, the size of the cash
incentive and amount of equity compensation an individual
receives is discretionary. HSBC conducts an internal comparison
of its executives globally, and then compares business
performance relative to the market. In addition, executives are
eligible to receive company funded retirement benefits that are
offered to employees at all levels who meet the eligibility
requirements. Perquisites are not a significant component of
compensation. As discussed above in the section entitled
Oversight of Compensation Decisions, in establishing
executive compensation packages for 2007, other than for Ms.
Sibblies whose compensation is proposed by the Chief Financial
Officer of HSBC North America Holdings Inc. and approved by the
Chief Executive Officer of HSBC Finance Corporation, the
Compensation Committee provided advisory recommendations to
HSBCs Group General Manager of Human Resources for
submission to the HSBC CEO, the HSBC CEO further recommended
final remuneration under each element of compensation to REMCO
and REMCO endorsed the awards. The HSBC CEO based his decision
on what he considered was an appropriate balance between
performance-based compensation and other forms of compensation,
the level of responsibility and individual contribution of the
executive and competitive practice in the marketplace for
executives from companies of similar industry, size, and
complexity as HSBC Finance Corporation.
HSBCs philosophy is to focus on total compensation versus
the individual elements of pay. HSBC has adopted a market-driven
orientation that strives to leverage variable pay to motivate
outstanding business results. We have implemented a process that
aids in determining final total individual pay based on an
evaluation of business performance against goals, individual
performance against goals, and a comparison against the
marketplace. Individual total compensation for each of our
executives is targeted at the 50th percentile, and adjusted
upward or downward based on performance.
Base
Salary
Base salary is reviewed annually and increases, if any, are
based on individual performance and market position. When
establishing base salaries for executives, consideration is
given to compensation paid for similar positions at companies
included in compensation surveys and our Comparator Group,
targeting the 50th percentile, which, when combined with
significant performance-based compensation opportunities,
enables HSBC Finance Corporation to attract and retain high
performing executives. In addition, other factors such as
individual and corporate performance, potential for future
advancement, specific job responsibilities, length of time in
current position, individual pay history, and comparison to
comparable internal positions (internal equity) influences the
final base salary recommendations for individual executives.
Annual
Performance-Based Awards
Annual non-equity performance-based awards are paid in cash upon
satisfaction of individual, business unit, corporate financial
and operational goals. Superior performance is encouraged by
placing a significant part of the executives total
compensation at risk. In the event certain quantitative or
qualitative performance goals are not met, annual non-equity
performance awards may be less than the maximum permitted.
Performance goals are set based on prior years
performance, expectations for the upcoming year, our annual
business plan, HSBCs business strategies, and objectives
related to building value for HSBC shareholders. This is
consistent with our strategy of targeting individual total
compensation for each of our executives at the 50th percentile,
and adjusting it upward or downward based on the factors
mentioned above.
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In support of our pay-for performance philosophy, we have an
annual non-equity performance-based award program entitled the
Management Incentive Program. The Management Incentive Program
is an annual cash incentive plan that uses quantitative and
qualitative goals to motivate employees who have a significant
role in the corporation. The quantitative objectives may include
meeting revenue
and/or
receivable targeted growth, a targeted loss reserve ratio, a
targeted equity to managed assets ratio, a targeted earnings per
share, reduction in expenses and charge-offs by specified
percentages, specified net income and operating efficiency
ratios for HSBC Finance Corporation
and/or the
executives respective business unit, and an increase in
the number of our products used by each customer. Qualitative
objectives may include key strategic business initiatives or
projects for the executives respective business unit. The
qualitative objective goals may also include cross-business
initiatives that create revenue, leverage talent across
businesses and share and support execution of best
practices
and/or adopt
another business best practice. Award
opportunity and payouts have historically been determined as a
percentage of base salary and are based on comparison to other
internal comparable positions (internal equity) and external
market practices. Cash incentive awards under the Management
Incentive Program are paid in February of the year following the
measurement year.
The specific objectives for Ms. Sibblies and
Messrs. Detelich and Menezes are described below in the
discussions of their compensation awards.
Long-term
Incentives
Long-term incentive compensation is awarded through grants of
HSBC equity instruments. The purpose of equity-based incentives
is to help HSBC attract and retain outstanding employees and to
promote the growth and success of HSBC Finance
Corporations business over a period of time by aligning
the financial interests of these employees with those of
HSBCs shareholders.
Historically, equity incentives were awarded through stock
options and restricted share grants. All stock options granted
prior to November 2002 vested in full upon the merger of HSBC
Finance Corporation and HSBC, and options granted in November
2002 have subsequently vested in full. From the time of the
merger in March 2003 to 2005, options on HSBC ordinary shares
were granted to certain executives and restricted shares to
others. Awarded options have an exercise price equal to the
greater of the average market value of HSBC ordinary shares on
the five business days prior to the grant of the option and the
market value of HSBC ordinary shares on the grant date. Options
without a performance condition typically vest in three, four or
five equal installments subject to continued employment, and
expire ten years from the grant date. However, certain options
awarded to key executives had a total shareholder
return performance vesting condition and only vest if and
when the condition is satisfied. No stock options were granted
to executive officers in 2005, 2006 or 2007 as HSBC shifted to
Restricted Share and Performance Share grants for equity based
compensation.
Awarding restricted shares is another form of long-term
incentive compensation utilized to compensate and provide an
incentive to our employees. When restricted shares are granted
to an executive officer, the underlying shares are held in a
trust for the benefit of the employee and are released only
after the defined vesting conditions are met at the end of the
holding period. While in such trust, dividend equivalents are
paid on all underlying shares of restricted stock at the same
rate paid to ordinary shareholders. The dividend equivalents are
paid in the form of additional shares for awards made after 2004
and in cash paid to the executive for all prior awards.
There are two types of long-term incentive share awards used by
HSBC: (i) those with a time vesting condition awarded to
recognize significant contribution to HSBC Finance Corporation
(Restricted Shares) and (ii) those with time
and corporate performance-based vesting conditions
(Performance Shares). Restricted Shares are awarded
to key executives as part of the annual pay review process in
recognition of past performance and to further motivate and
retain executives. Restricted Share awards comprise a number of
shares to which the employee will become entitled, normally
after three years, subject to the individual remaining in
employment. The level of 2007 grants to most HSBC Group General
Managers and other senior executives reflect the fact that these
awards do not carry the uncertainty of performance conditions
for future vesting. The amount granted is based on general
guidelines endorsed by REMCO addressing individual performance,
goal achievement and potential for growth as part of an
individual executives total compensation package. In March
2007, certain HSBC Finance Corporation executives received
Restricted Share awards for 2006 performance. In January 2008,
certain HSBC Finance
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Corporation executives were awarded Restricted Shares for 2007
performance. No Performance Shares were awarded to executive
officers for 2007 performance.
Performance Shares which were awarded in 2005 and 2006 to key
executives, were awarded based on achievement of defined levels
of future performance of HSBC. Performance Shares were divided
into two equal parts subject to distinct performance conditions
measured over a three year period. A total shareholder return
award, which accounts for 50 percent of each Performance
Share award, will vest in whole or in part (based on a sliding
scale of 0 percent to 100 percent) depending upon how
the growth in HSBCs share value, plus declared dividends,
compares to the average shareholder return of a defined
competitor group comprised of 28 major banking institutions
including: ABN AMRO Holding N.V., Banco Bilbao Vizcaya
Argentaria, S.A., Banco Santander Central Hispano S.A., Bank of
America Corporation, The Bank of New York Mellon Company, Inc.,
Barclays PLC, BNP Paribas S.A., Citigroup, Inc., Credit Agricole
SA, Credit Suisse Group, Deutsche Bank AG, HBOS plc, JP Morgan
Chase, Lloyds TSB Group plc, Mitsubishi Tokyo Financial Group
Inc., Mizuho Financial Group Inc., Morgan Stanley, National
Australia Bank Limited, Royal Bank of Canada, The Royal Bank of
Scotland Group plc, Société Générale,
Standard Chartered PLC, UBS AG, Unicredito Italiano,
US Bancorp, Wachovia Corporation, Wells Fargo &
Company and Westpac Banking Corporation.
The earnings per share award accounts for 50 percent of
each Performance Share award and is measured using a defined
formula based on HSBCs earnings per share growth over the
three-year period as compared to the base-year earnings per
share, which is earnings per share for the year prior to the
year the Performance Shares are granted. None of the earnings
per share Performance Shares will vest unless a minimum earnings
per share is reached at the end of three years.
REMCO maintains discretion to determine that a Performance Share
award will not vest unless satisfied that HSBCs financial
performance has shown sustained improvement since the date of
the award. REMCO may also waive, amend or relax performance
conditions if it believes the performance conditions have become
unfair or impractical and believes it appropriate to do so. Due
to the probability of one or both of the performance conditions
not being met in part or in full, grants of Performance Shares
are for a greater number of shares than Restricted Share grants.
The expected value of Performance Shares is equal to
44 percent of the face value.
Compensation
of Officers Reported in the Summary Compensation
Table
Below is a summary of the factors that affected the compensation
earned in 2007 by the executive officers listed in the Summary
Compensation Table. In determining the compensation of each of
our executives, management, the Compensation Committee and the
HSBC CEO evaluated competitive levels of compensation for
executives managing operations or functions of similar size and
complexity and the importance of retaining executives with the
required strategic, leadership and financial skills to ensure
our continued growth and success and their potential for
assumption of additional responsibilities. The HSBC CEO then
forwarded his recommendations to REMCO and REMCO endorsed the
final awards.
Compensation
of Brendan P. McDonagh
Mr. McDonagh served as Chief Executive Officer of HSBC
Finance Corporation and as Chief Operating Officer of HSBC North
America Holdings Inc. until his appointment as Chief Executive
Officer of HSBC North America Holdings Inc. in February 2008.
Prior to his appointment as Chief Executive Officer of HSBC
Finance Corporation, Mr. McDonagh served as Chief Operating
Officer of HSBC Finance Corporation. From September 2006 to
February 2007, Mr. McDonagh served as Group Executive of
HSBC Finance Corporation and of HSBC North America Holdings Inc.
Mr. McDonagh participates in general benefits available to
executives of HSBC Finance Corporation and certain additional
benefits available to HSBCs international staff
executives. Compensation packages for international staff
executives are compared as a total package, consisting of base
salary, cash incentive awards, stock awards and perquisites,
against the Comparator Group as well as internal peers on a
global basis and are awarded on a discretionary basis. In
addition, in determining Mr. McDonaghs total
compensation, the HSBC CEO considered his individual
performance, the performance of HSBC Finance Corporation
measured against its annual operating plan and
Mr. McDonaghs leadership of HSBC Finance Corporation
through a very difficult U.S. business environment. For 2007,
Mr. McDonaghs goals included implementing the annual
operating plan of HSBC Finance Corporation,
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improving collaboration across the HSBC North America business
entities, achieving a targeted net income goal, executing cost
containment initiatives to achieve profit before tax target,
managing reputational risk and developing talent and creating
strong talent pools and succession plans.
Mr. McDonaghs cash compensation for 2007 was
determined by REMCO on the recommendation of the HSBC CEO who
consulted with HSBC Human Resources executives.
Mr. McDonaghs base salary for 2007 was $643,287. In
determining Mr. McDonaghs base salary, the HSBC CEO
reviewed the salary levels of Mr. McDonaghs internal
peers on a global basis and found Mr. McDonaghs
salary to be slightly below the 50th percentile among
internal peers of equivalent experience level. As a result, a
recommendation was made to REMCO and REMCO endorsed a base
salary increase of three percent to $643,287. No salary
adjustment was made on Mr. McDonaghs appointment as
Chief Executive Officer of HSBC Finance Corporation. This
approach is in line with the HSBC reward strategy where the
focus is on using variable compensation to reward performance
with base salary being positioned around the
50th percentile of the market rate.
In March 2007, the HSBC CEO proposed and REMCO endorsed an award
to Mr. McDonagh of Restricted Shares with a grant date
value of $630,240. The award was made in recognition of
Mr. McDonaghs 2006 performance. In January 2008, the
HSBC CEO proposed and REMCO endorsed an award to
Mr. McDonagh of Restricted Shares with a grant date value
of $1,701,288. The January 2008 discretionary equity award,
which is to be awarded in March 2008 in recognition of
Mr. McDonaghs 2007 performance, reflects the HSBC
CEOs view of the value of Mr. McDonaghs
long-term contribution to and leadership within HSBC, including
HSBC Finance Corporation and HSBC North America Holdings Inc.,
and HSBCs desire to retain Mr. McDonagh and to
motivate and reward his outstanding performance. The 2008
Restricted Share award is also consistent with maintaining
Mr. McDonaghs total compensation at a competitive
market pay level in respect of his performance and long term
value to the HSBC Group. The awards are each subject to a
three-year vesting schedule.
In January 2008, the HSBC CEO proposed and REMCO endorsed a
discretionary cash bonus award to Mr. McDonagh of
$1,701,288. The HSBC CEO proposed the award in recognition of
Mr. McDonaghs performance in his role as Chief
Executive Officer of HSBC Finance Corporation in 2007. In
considering Mr. McDonaghs bonus award, the HSBC CEO
considered Mr. McDonaghs personal contribution to the
achievement of the business objectives of HSBC Finance
Corporation as set out in the annual operating plan of HSBC
Finance Corporation and his personal leadership of HSBC Finance
Corporation through a very difficult business environment. The
discretionary cash bonus award was considered as part of the
overall assessment of Mr. McDonaghs total
compensation which was based on his 2007 performance and
benchmarked against HSBC Finance Corporations Comparator
Group.
In conformance with HSBCs total compensation philosophy,
Mr. McDonagh also received perquisites relating to housing,
education, travel and tax equalization, that were significant
when compared to other compensation received by other executive
officers within HSBC Finance Corporation. These amounts are
consistent, however, with perquisites paid to similarly-placed
HSBC international staff executives, who are subject to
appointment to HSBC locations globally as deemed appropriate by
HSBC senior management. The additional perquisites and benefits
available to HSBC international staff executives, as described
below in the Summary Compensation Table, are intended to
compensate executives for the significant cost and expense
incurred in connection with global postings.
Compensation
of Siddharth N. Mehta
On February 15, 2007, Mr. Mehta resigned as the Chief
Executive Officer of HSBC Finance Corporation. Until that time,
he participated in the same programs and generally received
compensation based on the same factors as the other executive
officers. However, Mr. Mehtas overall compensation
level reflected his greater degree of policy-and decision-making
authority, his higher level of responsibility with respect to
the strategic direction of HSBC Finance Corporation and his
ultimate responsibility for our financial and operational
results.
Mr. Mehta had an employment agreement pursuant to which
Mr. Mehta was to serve as Chairman and Chief Executive
Officer of HSBC Finance Corporation and also Chief Executive
Officer of HSBC North America Holdings Inc. until March 28,
2008. However, upon Mr. Mehtas resignation, the
employment agreement was
210
terminated and replaced with a separation agreement entered into
on February 15, 2007 between Mr. Mehta and HSBC
Finance Corporation.
Pursuant to the separation agreement, Mr. Mehta received
$115,385, representing all base salary earned but unpaid as of
February 15, 2007, and $71,795 in respect of vacation
earned but not taken prior to his departure. In addition,
Mr. Mehta was entitled to receive $2,271,372 on the first
day of September 2007, reflecting, in substantial part, a bonus
pursuant to the 2006 executive bonus pool to which he was
entitled in accordance with the terms of his employment
agreement but did not receive. In addition, Mr. Mehta
continues to receive his base salary, at a rate of $1,000,000
per annum through March 28, 2008. On January 2, 2008
he received payments for guaranteed bonuses in the amounts of
$1,875,000 for the period January 1, 2007 through
December 31, 2007 and $468,750 for the period
January 1, 2008 through March 28, 2008. Mr. Mehta
is also to receive interest on all payments to which he is
entitled to but has not received at a rate of seven percent from
the date they would be due until the date each such payment is
made.
Pursuant to the separation agreement, Mr. Mehta was
entitled to the payment of premiums for medical and dental
insurance, continued coverage in HSBC Finance Corporations
life insurance plan and allowances for umbrella liability
insurance, automobile and financial counseling until the earlier
of such time as Mr. Mehta becomes eligible to participate
in similar plans or policies of another employer and
March 28, 2008. Due to his subsequent employment, such
benefits terminated on November 1, 2007. All options to
purchase shares granted to Mr. Mehta prior to
November 20, 2002 pursuant to the Household International
1996 Long-Term Executive Incentive Compensation Plan are fully
vested and remain exercisable for the full ten-year and
one-day
term. All options to purchase shares granted on and after
November 20, 2002 pursuant to the 1996 plan are fully
vested and exercisable for the full ten-year and
one-day term.
Mr. Mehtas separation agreement included a
non-competition provision for the three-month period following
his termination. In addition, the agreement contained a
non-solicitation provision that stated that, subject to some
exceptions, during the one-year period starting
February 15, 2007, Mr. Mehta would not directly or
indirectly induce any employee of HSBC Finance Corporation or
its affiliates to terminate employment with any such entity, and
would not, directly or indirectly, hire, employ or offer
employment or assist in hiring, employing or offering
employment, to any person who is or was employed by HSBC Finance
Corporation or an affiliate.
Compensation
of Beverley A. Sibblies
The Chief Financial Officer of HSBC Finance Corporation,
Ms. Beverley A. Sibblies, participates in general benefits
available to officers of the corporation and the Management
Incentive Program. Her base salary for 2007 was determined in
December 2006 by Mr. Mehta, the former Chief Executive
Officer, upon recommendation of the Chief Financial Officer of
HSBC North America Holdings Inc. in consultation with Human
Resources executives. Management Incentive Plan awards earned by
Ms. Sibblies in 2007 and paid in February 2008 and
Restricted Share awards were recommended by the Chief Financial
Officer of HSBC North America Holdings Inc. and approved by
Mr. McDonagh.
Ms. Sibblies 2007 compensation was determined as a
total compensation package which included base salary, a cash
incentive award, stock awards and perquisites. In determining
her 2007 compensation, the Chief Financial Officer of HSBC North
America Holdings Inc. reviewed Ms. Sibblies
performance objectives, including corporate, individual and
departmental goals further described below. In addition, he
reviewed Ms. Sibblies performance against the
performance objectives, her expertise and contribution to the
organization. The package was compared against the Comparator
Group data as well as internal peers.
Ms. Sibblies base salary in 2007 was $400,000 of
which $396,154 was received in 2007. This was a $25,000 increase
from her 2006 base salary. To determine Ms. Sibblies
base salary, Human Resources executives reviewed competitive
compensation levels and found Ms. Sibblies then
current base salary level to be below the 50th percentile
among similarly-placed executives reported in salary survey data
as well as internal peers on a global basis. The Compensation
Committee recommended the $25,000 increase and the HSBC CEO
approved the Compensation Committees proposal.
In March 2007, Ms. Sibblies was granted Restricted Shares
(formerly referred to as Achievement Shares), with a grant date
value of $550,000. The grant was made in recognition of
Ms. Sibblies 2006 performance. In January 2008,
Ms. Sibblies was awarded Restricted Shares with a grant
date value of $300,000. The awards are each subject
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to a three-year vesting schedule. The January 2008 discretionary
equity award, which is to be awarded in March 2008, reflects
managements recognition of the value of
Ms. Sibblies contribution to and leadership of HSBC
Finance Corporation, HSBCs desire to retain
Ms. Sibblies and to motivate and reward outstanding
performance. This award is also consistent with maintaining
Ms. Sibblies compensation level at a competitive
market pay level.
Ms. Sibblies cash incentive compensation under the
Management Incentive Program of $304,000 earned in 2007 and paid
in February 2008 was determined based upon satisfaction of
quantitative and qualitative objectives that provide for a
target cash award equal to 150 percent of her base salary,
with a maximum of two times that amount. Ms. Sibblies
cash incentive compensation required satisfaction of objectives
that included the following: (i) individual objectives such
as facilitating collaboration among the chief financial officers
for HSBC Finance Corporation and its subsidiaries, developing
talent management and succession planning for all critical
finance functions within HSBC Finance Corporation, establishing
a process that ensures our accounting policies are consistent
and properly applied, enhancing the planning and forecasting
functions within the corporate finance department, developing
and supporting a strategy to mitigate control gaps, working with
the treasury department to allocate transaction costs,
continuing to provide leadership and guidance with respect to
Sarbanes-Oxley reporting and disclosure controls and supporting
HSBC with the implementation of a Basel Committee on Banking
Supervision framework, (ii) common goal objectives such as
achieving a targeted net income goal, improving employee
engagement, meeting internal audit and operational risk goals
and (iii) business unit goals such as increasing diversity,
maintaining collaboration among HSBC North America management,
meeting expense controls, establishing a process that ensures
that HSBCs accounting policies are consistently applied,
leading process improvement programs, overseeing development of
an economic capital model and providing support to the Chief
Executive Officer.
The Chief Financial Officer of HSBC North America Holdings Inc.,
in consultation with Human Resources executives, assessed
Ms. Sibblies and HSBC Finance Corporations
performance against the above-mentioned objectives and found
that there was complete or substantial satisfaction of the
majority of the goals. It was deemed that
Ms. Sibblies most significant accomplishments in 2007
included establishing a process to ensure HSBC Group accounting
policies were applied, preparing and submitting an annual
operating plan in accordance with significant revised HSBC
requirements, and establishing process improvement programs that
positively impact the timeliness and accuracy of the month-end
closing process. Ms. Sibblies was therefore awarded cash
incentive compensation equal to seventy-six percent of her base
salary, or $304,000, which was paid to her in February 2008.
Other compensation paid to Ms. Sibblies, including
perquisites such as an executive physical examination, is
consistent with perquisites paid to similarly-placed executive
officers within and outside of HSBC.
Compensation
of Mr. Thomas M. Detelich
Mr. Detelichs 2007 compensation was determined as a
total compensation package which included base salary, a cash
incentive award, stock awards and perquisites. In recommending
Mr. Detelichs 2007 compensation to REMCO, the HSBC
CEO reviewed Mr. Detelichs performance objectives,
including corporate, individual and departmental goals further
described below. In addition, he reviewed
Mr. Detelichs performance against the performance
objectives, his expertise and contribution to the organization.
The package was compared against the Comparator Group data as
well as internal peers.
In 2007, Mr. Detelichs base salary remained the same
as 2006, at $650,000. In December 2006, the Compensation
Committee reviewed competitive compensation levels and found
Mr. Detelichs then current base salary level was
above the 50th percentile among similarly-placed executives
reported in salary survey data as well as internal peers on a
global basis. In keeping with the goal of maintaining executive
base salaries in the 50th percentile, it did not recommend
an increase to his salary. The HSBC CEO recommended and REMCO
endorsed the Compensation Committees assessment.
In March 2007, the HSBC CEO proposed and REMCO endorsed an award
to Mr. Detelich of Restricted Shares with a grant date
value of $440,000. The award was made in recognition of
Mr. Detelichs 2006 performance. The award is subject
to a three-year vesting schedule.
Mr. Detelichs cash incentive compensation under the
Management Incentive Program of $520,000 earned in 2007 and paid
in February 2008 was determined based upon satisfaction of
certain quantitative and qualitative objectives
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that provide for a target cash award equal to 150 percent
of his base salary, with a maximum of two times that amount.
Mr. Detelichs cash incentive compensation required
satisfaction of objectives that included: (i) individual
objectives such as improving collaboration across the HSBC North
America business entities, developing talent and creating strong
talent pools and succession plans, ensuring Consumer and
Mortgage Lending is focused on customer values, executing
marketing, cost containment, credit quality and compliance
initiatives to achieve profit before tax target and managing
reputational risk, (ii) common goal objectives such as
achieving a targeted net income goal, improving employee
engagement, meeting internal audit and operational risk goals
and (iii) business unit goals such as supporting HSBC North
Americas diversity goals, achieving the overall senior
management committee goals, achieving expense budgets, achieving
profits before tax targets, achieving delinquency and charge-off
targets.
The HSBC CEO assessed Mr. Detelichs, the Consumer
Lending and Mortgage Services businesses and HSBC Finance
Corporations performance against the above-mentioned
objectives and found that Mr. Detelich did not attain the
majority of the goals. However, Mr. Detelichs
accomplishments in 2007 included proven leadership skills
through a very difficult business environment resulting in a
high score on an employee engagement study of the Consumer
Lending and Mortgage Services businesses, exceeding the plan for
charge-off and expense reduction and leading his business unit
through the closure of the Mortgage Services and Decision One
businesses and the significant restructuring within HSBC.
Therefore, despite not meeting all of his goals, the HSBC CEO
recommended and REMCO endorsed a cash incentive award equal to
eighty percent of his base salary, or $520,000, which was paid
to him in February 2008.
Other compensation paid to Mr. Detelich, including
perquisites such as an executive physical examination, is
consistent with perquisites paid to similarly-placed executive
officers within and outside of HSBC.
Compensation
of Mr. Walter G. Menezes
Mr. Menezes 2007 compensation was determined as a
total compensation package which included base salary, a cash
incentive award, stock awards and perquisites. In recommending
Mr. Menezes 2007 compensation to REMCO, the HSBC CEO
reviewed Mr. Menezes performance objectives,
including corporate, individual and departmental goals further
described below. In addition, he reviewed Mr. Menezes
performance against the performance objectives, his expertise
and contribution to the organization. The package was compared
against the Comparator Group data as well as internal peers.
In 2007, Mr. Menezes base salary remained the same as
2006, at $650,000. In December 2006, the Compensation Committee
reviewed competitive compensation levels and found
Mr. Menezes then current base salary level was above
the 50th percentile among similarly-placed executives
reported in salary survey data as well as internal peers on a
global basis. In keeping with the goal of maintaining executive
base salaries in the 50th percentile, it did not recommend
an increase to his salary. The Compensation Committee also
considered that Mr. Menezes base salary was equal to
Mr. Detelichs who the Compensation Committee deemed
to have comparable responsibilities. The HSBC CEO recommended
and REMCO endorsed the Compensation Committees assessment.
In March 2007, the HSBC CEO proposed and REMCO endorsed an award
to Mr. Menezes of Restricted Shares with a grant date value
of $440,000. The award was made in recognition of
Mr. Menezes 2006 performance. In January 2008, the
HSBC CEO proposed and REMCO endorsed an award to
Mr. Menezes of Restricted Shares with a grant date value of
$900,000. The January 2008 discretionary equity award, which is
to be awarded in March 2008 in recognition of
Mr. Menezes 2007 performance, reflects the HSBC
CEOs view of the value of Mr. Menezes expected
long-term contribution to and leadership of HSBC North America,
and HSBCs desire to retain Mr. Menezes and to
motivate and reward exceptional performance. This award is also
consistent with maintaining Mr. Menezes compensation
at a competitive market pay level in respect of his performance
and long term value to the HSBC Group. The awards are each
subject to a three-year vesting schedule.
Mr. Menezes cash incentive compensation under the
Management Incentive Program of $940,000 earned in 2007 and paid
in February 2008 was determined based upon satisfaction of
certain quantitative and qualitative objectives that provide for
a target cash award equal to 150 percent of his base
salary, with a maximum of two times that amount.
Mr. Menezes cash incentive compensation required
satisfaction of objectives that included: (i) individual
objectives such as promoting cross-selling opportunities between
Card Services and Retail Services units,
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developing talent and creating strong talent pools and
succession plans, ensuring delivery of extraordinary customer
care, increasing revenue, managing expenses and mitigating
losses, supporting HSBCs global reach with focus on
distribution of profitable credit card products across certain
regions and managing reputational risk, (ii) common goal
objectives such as achieving a targeted net income goal,
improving employee engagement, meeting internal audit and
operational risk goals and (iii) business unit goals such
as supporting HSBC North Americas diversity goals,
achieving the overall senior management committee goals,
achieving expense budgets, achieving profits before tax targets,
achieving delinquency and charge-off targets.
The HSBC CEO assessed Mr. Menezes, the Credit Card
Services, Retail Services and Auto Finance businesses and HSBC
Finance Corporations performance against the
above-mentioned objectives and found that Mr. Menezes
attained approximately half of the goals. In addition,
Mr. Menezes accomplishments in 2007 included
developing the global card strategy and starting its
implementation, reduction of future exposure on deterioration of
credit quality attributable to the U.S. economic
environment and solid results for the U.S. domestic card
business. Therefore, the HSBC CEO recommended and REMCO endorsed
a cash incentive award equal to one hundred forty-four percent
of his base salary, or $940,000, which was paid to him in
February 2008.
Other compensation paid to Mr. Menezes, including
perquisites such as an executive physical examination, is
consistent with perquisites paid to similarly-placed executive
officers within and outside of HSBC.
Mr. Menezes, has an employment protection agreement
pursuant to which if, during the 18 month period following
a change in control of HSBC Finance Corporation,
Mr. Menezes employment is terminated due to a
qualifying termination (which includes a termination
other than for cause or disability, or resignation
by Mr. Menezes for good reason), he will be
entitled to receive a cash payment consisting of:
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A pro rata annual bonus through the date of termination, based
on the highest of the annual bonuses payable during the three
years preceding the year in which the termination occurs;
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A payment equal to 1.5 times the sum of the applicable base
salary and highest annual bonus; and
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A payment equal to the value of 18 months of additional
employer contributions under HSBC North Americas
tax-qualified and supplemental defined contribution plans.
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In addition, upon a qualifying termination following a change in
control, Mr. Menezes will be entitled to continued welfare
benefit coverage for 18 months after the date of
termination, 18 months of additional age and service credit
under HSBC North Americas tax-qualified and supplemental
defined benefit retirement plans, and outplacement services. If
any amounts or benefits received under the employment protection
agreement or otherwise are subject to the excise tax imposed
under section 4999 of the Internal Revenue Code, an
additional payment will be made to restore Mr. Menezes to
the after-tax position in which he would have been if the excise
tax had not been imposed. However, if a small reduction in the
amount payable would render the excise tax inapplicable, then
this reduction will be made instead.
Compensation
of Niall S. K. Booker
Mr. Booker served as Chief Operating Officer of HSBC
Finance Corporation until his appointment as Chief Executive
Officer of HSBC Finance Corporation in February 2008.
Mr. Booker participates in general benefits available to
executives of HSBC Finance Corporation and certain additional
benefits available to HSBCs international staff
executives. Compensation packages for international staff
executives are compared as a total package, consisting of base
salary, cash incentive awards, stock awards and perquisites,
against the Comparator Group as well as internal peers on a
global basis and are awarded on a discretionary basis. In
addition, in determining Mr. Bookers total
compensation, the HSBC CEO considered his individual performance
and the performance of HSBC Finance Corporation measured against
its annual operating plan. For 2007, Mr. Bookers
goals included supporting the implementation of the annual
operating plan of HSBC Finance Corporation, improving
collaboration across the HSBC North America business entities,
meeting internal audit, credit and operational risk goals,
enhancing the planning and forecasting functions at HSBC Finance
Corporation, executing cost containment initiatives to achieve
profit before tax target, managing reputational risk and
developing talent and creating strong talent pools and
succession plans. Mr. Bookers cash compensation for
2007 was determined by REMCO on the recommendation of the HSBC
CEO who consulted with HSBC Human Resources executives.
214
Mr. Bookers base salary for 2007 was $561,080, of
which $374,053 was earned from April 30, 2007, the
effective date of his appointment as Chief Operating Officer of
HSBC Finance Corporation. In determining Mr. Bookers
base salary, the HSBC CEO reviewed competitive compensation
levels and found Mr. Bookers current compensation
level was above the 50th percentile among similarly-placed
executives at HSBC Finance Corporations Comparator Group
as well as internal peers on a global basis. On appointment as
Chief Operating Officer of HSBC Finance Corporation,
Mr. Bookers base salary remained unchanged. This
approach is in line with the HSBC reward strategy where the
focus is on using variable compensation to reward performance
with base salary being positioned around the
50th percentile of the market rate.
In January 2008, the HSBC CEO proposed and REMCO endorsed
an award to Mr. Booker of Restricted Shares with a grant
date value of $1,209,666. The January 2008 discretionary
equity award, which is to be awarded in March 2008 in
recognition of Mr. Bookers 2007 performance, reflects
the HSBC CEOs view of the value of Mr. Bookers
long-term contribution to and leadership within HSBC, including
HSBC Finance Corporation and HSBC North America Holdings Inc.,
and HSBCs desire to retain Mr. Booker and to motivate
and reward his outstanding performance. The 2008 Restricted
Share award is also consistent with maintaining
Mr. Bookers total compensation at a competitive
market pay level in respect of his performance and long term
value to the HSBC Group. The award is subject to a three-year
vesting schedule.
In January 2008, the HSBC CEO proposed and REMCO endorsed a
discretionary cash bonus award to Mr. Booker of $1,209,666.
The HSBC CEO proposed the award in recognition of
Mr. Bookers performance in his role as Chief
Operating Officer of HSBC Finance Corporation in 2007. In
considering Mr. Bookers bonus award, the HSBC CEO
considered Mr. Bookers personal contribution to the
achievement of the business objectives of HSBC Finance
Corporation as set out in the annual operating plan of HSBC
Finance Corporation and his personal leadership skills through a
very difficult business environment. The discretionary cash
bonus award was considered as part of the overall assessment
Mr. Bookers total compensation which was based on his
2007 performance and benchmarked against HSBC Finance
Corporations Comparator Group.
In conformance with HSBCs total compensation philosophy,
Mr. Booker also received perquisites relating to housing,
education and tax equalization, that was significant when
compared to other compensation received by other executive
officers within HSBC Finance Corporation. These amounts are
consistent, however, with perquisites paid to similarly-placed
HSBC international staff executives, who are subject to
appointment to HSBC locations globally as deemed appropriate by
HSBC senior management. The additional perquisites and benefits
available to HSBC international staff executives, as described
below in the Summary Compensation Table, are intended to
compensate executives for the significant cost and expense
incurred in connection with global postings.
Compensation
Committee Interlocks and Insider Participation
The primary purpose of the Compensation Committee is to assist
the Board of Directors in discharging its responsibilities
related to the compensation of the Chief Executive Officer of
HSBC Finance Corporation and the officers that are direct
reports to the Chief Executive Officer and such other officers
as may be designated by the Board of Directors. The Compensation
Committee is comprised of the following directors: George A.
Lorch (Chair), William R. P. Dalton and Cyrus F.
Freidheim, Jr. All members of the Compensation Committee
are independent directors under HSBC Finance Corporations
Corporate Governance Standards. Additional information with
regard to the Compensation Committee is contained in the section
of this
Form 10-K
entitled Item 10. Directors, Executive Officers and
Corporate Governance Corporate Governance.
215
Compensation
Committee Report
The Compensation Committee has reviewed and discussed the
Compensation Discussion and Analysis (2007
CD&A) with management. Based on such review and
discussion, the Compensation Committee has recommended to the
Board of Directors that the 2007 CD&A be included in this
Annual Report on
Form 10-K.
Compensation Committee
George A. Lorch (Chair)
William R.P. Dalton
Cyrus F. Freidheim, Jr.
216
Executive
Compensation
The following tables and narrative text discuss the compensation
awarded to, earned by or paid to (i) Mr. Brendan P.
McDonagh, who served as our Chief Executive Officer from
February 2007 through February 21, 2008,
(ii) Mr. Siddharth N. Mehta, who served as Chief
Executive Officer until February 2007,
(iii) Ms. Beverley A. Sibblies, who served as our
Chief Financial Officer during 2007 and (iv) our three
other most highly compensated executive officers who served as
executive officers, all as of December 31, 2007.
SUMMARY
COMPENSATION TABLE
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Change in
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Pension Value
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and
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Non-equity
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Nonqualified
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Incentive
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Deferred
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Stock
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Option
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Plan
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Compensation
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All Other
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Name and
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Salary
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Bonus
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Awards
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Awards
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Compensation
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Earnings
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Compensation
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Total
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principal position
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Year
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($)
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($)(2)
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($)(3)
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($)(4)
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($)(5)
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($)(6)
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($)(7)
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($)
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Brendan P.
McDonagh(1)
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2007
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$
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643,287
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$
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1,701,288
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$
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938,756
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$
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-
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$
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-
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$
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479,374
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$
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924,943
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$
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4,687,648
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Chief Executive Officer
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2006
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$
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676,553
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$
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-
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$
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272,515
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|
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$
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-
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$
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710,444
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$
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488,925
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|
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$
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635,401
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$
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2,783,838
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Siddharth N.
Mehta(1)
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2007
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$
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115,385
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$
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-
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$
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-
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$
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-
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$
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-
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$
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191,774
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$
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5,846,248
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$
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6,153,407
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Former Chairman & Chief Executive Officer
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2006
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$
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984,615
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$
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-
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$
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3,684,906
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$
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1,575,292
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$
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-
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$
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351,288
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$
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290,962
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$
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6,887,063
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Beverley A. Sibblies
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2007
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$
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396,154
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$
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-
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$
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498,259
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$
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-
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$
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304,000
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$
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20,376
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$
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60,493
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$
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1,279,282
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Executive Vice President and Chief Financial Officer
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2006
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$
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375,000
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$
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-
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$
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216,824
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$
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-
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$
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543,750
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$
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17,269
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$
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54,303
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$
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1,207,146
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Thomas M. Detelich
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2007
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$
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650,000
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$
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-
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$
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2,775,965
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$
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247,265
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$
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520,000
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$
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321,566
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$
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174,906
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$
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4,689,702
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President Consumer & Mortgage Lending
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2006
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$
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650,000
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$
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2,000,000
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$
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2,069,519
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$
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787,646
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$
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-
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$
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1,158,293
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$
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162,774
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$
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6,828,232
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Walter G.
Menezes(9)
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2007
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$
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650,000
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$
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-
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$
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1,965,709
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$
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204,326
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$
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940,000
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$
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994,560
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$
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162,386
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$
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4,916,981
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President Card & Retail Services and Auto
Finance
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2006
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$
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642,308
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$
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2,000,000
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$
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1,476,173
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$
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394,302
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$
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-
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$
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1,311,749
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$
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151,568
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$
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5,976,100
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Niall S.
Booker(8)
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2007
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$
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374,053
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$
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1,209,666
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$
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869,941
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|
$
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-
|
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|
$
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-
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$
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579,077
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$
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346,700
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$
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3,379,437
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Chief Operating Officer
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(1) |
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Brendan P. McDonagh was appointed
Chief Executive Officer as of February 26, 2007.
Mr. McDonaghs compensation is tied to an
international reserve asset denominated in Special Drawing
Rights (SDRs). Because the value of the U.S. dollar
increased against the SDR in 2007, due to the exchange, it
appears as though his salary was reduced when he actually
received an increase of three percent. Mr McDonagh
succeeded Siddharth N. Mehta who resigned as of
February 15, 2007. The salary amount shown for
Mr. Mehta is the prorated portion of his annual base salary
of $1,000,000.
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(2) |
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The amounts disclosed for
Messrs. McDonagh and Booker represent the discretionary
incentive bonuses relating to 2007 performance paid in February
2008. The amounts disclosed for Messrs. Detelich and
Menezes represent the discretionary incentive bonus relating to
2006 performance paid in February 2007.
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(3) |
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The values reflected in the table
above are the amounts of compensation expense amortized in 2007
for accounting purposes under FAS 123R for outstanding
restricted stock grants made in the years 2003, 2004, 2005, 2006
and 2007. A portion of the expense reflected for
Messrs. McDonagh, Detelich and Menezes relates to
Performance Shares granted in 2005 and 2006 that will vest in
whole or in part three years from the date of grant if all or
some of the performance conditions are met as follows: 50% of
the award is subject to a total shareholder return measure
(TSR) against a comparator group. HSBC Finance
Corporations comparator group is comprised of
U.S.-based
organizations that compete with us for business, customers, and
executive talent. The Performance Share comparator group
includes: ABN AMRO Holding N.V., Banco Santander Central Hispano
S.A., Banco Bilbao Vizcaya Argentina, S.A., Bank of America
Corporation, The Bank of New York Mellon Corporation, Barclays
PLC, BNP Paribas S.A., Citigroup, Inc., Credit Agricole SA,
Credit Suisse Group, Deutsche Bank AG, HBOS plc, JP Morgan
Chase, Lloyds TSB Group plc, Mitsubishi Tokyo Financial Group
Inc., Mizuho Financial Group Inc., Morgan Stanley, National
Australia Bank Limited, Royal Bank of Canada, The Royal Bank of
Scotland Group plc, Société Générale,
Standard Chartered PLC, UBS AG, Unicredito Italiano, US Bancorp,
Wachovia Corporation, Wells Fargo & Company and
Westpac Banking Corporation. Depending on HSBCs ranking
against the comparator group at the end of the performance
period, the TSR portion of the grant may vest on a sliding scale
from 100% to 0%. The remaining 50% of the award is subject to
satisfaction of an earnings per share measure (EPS)
and may vest based on an incremental EPS percentage in
accordance with a defined formula. If the aggregate incremental
EPS is less than 24%, the EPS portion will be forfeited and if
it is 52% or more, the EPS component will vest in full. We have
reduced the amount of expense related to the Performance Shares
that would have been recorded by 50% due to the probability of a
0% vest on the TSR portion and a 100% vest on the EPS portion
for both years 2005 and 2006. HSBC Finance Corporation records
expense over the three year period based on the fair value which
is 100% of the face value on the date of the award. The
remaining grants are non- performance-based awards and are
subject to various time vesting conditions as disclosed in the
footnotes to the Outstanding Equity Awards at Fiscal Year End
|
217
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Table and will be released as long
as the named executive officer is still in the employ of HSBC
Finance Corporation at the time of vesting. HSBC Finance
Corporation records expense based on the fair value over the
vesting period which is 100% of the face value on the date of
the award. Dividend equivalents, in the form of cash or
additional shares, are paid on all underlying shares of
restricted stock at the same rate as paid to ordinary share
shareholders.
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(4) |
|
HSBC and HSBC Finance
Corporations current philosophy is to reward executive
officers with restricted shares, called Restricted
Shares or Performance Shares. HSBC last issued
stock options to HSBC Finance Corporations named executive
officers in 2004. The amounts reflected above are the amounts of
compensation expense amortized in 2007 for accounting purposes
under FAS 123R for outstanding stock option grants made in
2003. The methodology of the valuation of these options was
based on a Black-Scholes model. The stock option grant made to
certain named executive officers in 2004 is performance-based
with 100% of the condition tested on Total Shareholder Return.
The performance condition was not met in 2007, and will be
subject to a re-test in 2008, and again in 2009, and must be
satisfied in order for the options to vest.
|
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(5) |
|
The amounts disclosed represent the
incentive bonuses earned in 2007 but paid in February 2008 under
the Management Incentive Program.
|
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(6) |
|
The HSBC-North America (U.S.)
Retirement Income Plan (RIP), the Household
Supplemental Retirement Income Plan (SRIP), the HSBC
International Staff Retirement Benefit Scheme (Jersey)
(ISRBS), the NonQualified Deferred Compensation Plan
and the Supplemental Tax Reduction Investment Plan are described
under Savings and Pension Plans on page 223.
Increase in retirement plan values for each participant are:
Mr. Mehta $18,634 (RIP), $202,721 (SRIP);
Ms. Sibblies $5,088 (RIP), $15,085 (SRIP);
Mr. Detelich $20,123 (RIP), $78,546 (SRIP);
Mr. Menezes $68,992 (RIP), $822,536 (SRIP); and
Mr. McDonagh $479,374 and Mr. Booker $579,077 (both in
ISRBS, net of mandatory 2007 contribution). Changes in values
under the deferred compensation plans for each participant are:
Mr. Mehta $(29,581); Ms. Sibblies $203;
Mr. Detelich $222,897, and Mr. Menezes $103,032.
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(7) |
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Components of All Other
Compensation are disclosed in the aggregate. All Other
Compensation includes such items as financial planning services,
physical exams, club initiation fees, expatriate benefits and
car allowances. The following itemizes benefits that
individually or in the aggregate for each executive officer
exceeds $10,000: Club initiation fees and dues for
Messrs. McDonagh $15,112 and Booker $8,766; physical exams
for each named executive officer as follows: Mr. McDonagh
$709; Ms. Sibblies $3,795; Mr. Detelich $12,276;
Mr. Menezes $1,766; and Mr. Booker $584; car
allowances for Messrs. McDonagh $15,808, Mehta $11,000, and
Booker $7,845; personal use of aircraft by Mr. McDonagh
$1,678; executive umbrella liability insurance coverage in the
amount of $10 million for Mr. Mehta at a cost of
$1,750, and Messrs. Detelich and Menezes each at cost of
$583; childrens educational allowances for
Mr. McDonagh $33,492, and Mr. Booker $48,198; housing
and furniture allowances for Mr. McDonagh $172,310 and
Mr. Booker $146,261; loan subsidy for Mr. McDonagh of
$30,179 as additional income; medical expenses for
Mr. McDonagh $7,225; relocation expense for Mr. Booker
$16,644; international travel plan costs of $56,105 for
Mr. McDonagh; and expatriate benefits for Mr. McDonagh
were $592,325 and for Mr. Booker were $118,403.
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The total in the All Other
Compensation column also includes HSBC Finance
Corporations contribution for the named executive
officers participation in the HSBC-North America (U.S.)
Tax Reduction Investment Plan (TRIP) and the
Supplemental Household International Tax Reduction Investment
Plan (STRIP) in 2007 as follows: Mr. Mehta,
$11,966; Mr. Detelich, $158,547; Mr. Menezes, $160,037
and Ms. Sibblies, $56,698. In addition, under the terms of
his severance agreement, Mr. Mehta received the balance of
his salary for 2007 in the amount of $884,615, pay for vacation
earned but not taken in the amount of $71,795, $2,271,372
reflecting in part a bonus pursuant to the 2006 executive bonus
pool to which he was entitled in accordance with the terms of
his employment agreement but did not receive, $250,000 covering
salary to be received in 2008 along with a prorated 2008 bonus
of $468,750.
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TRIP and STRIP are described under
Savings and Pension Plans Deferred Compensation
Plans on page 223.
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(8) |
|
Niall S. Booker joined HSBC Finance
Corporation and was appointed Chief Operating Officer as of
April 30, 2007. His base salary reflects amounts earned by
Mr. Booker after that date but his cash bonus and stock
awards reflect the awards for the entire year as they were
primarily based on his performance with HSBC Finance Corporation.
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(9) |
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In February 2006,
Mr. Menezes base salary was increased to $650,000.
The amount shown for 2006 is what Mr. Menezes actually
received during 2006.
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218
GRANTS OF
PLAN-BASED AWARDS TABLE
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All Other
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All Other
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Stock Awards:
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Option Awards:
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Grant Date
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Estimated Future Payouts
|
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Estimated Future Payouts
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Number of
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Number of
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Fair Value
|
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Under Non-Equity
|
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Under Equity
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Shares of
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Securities
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of Stock
|
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|
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Incentive Plan Awards(1)
|
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Incentive Plan
Awards(2)
|
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Stock or
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Underlying
|
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and Option
|
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|
|
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Threshold
|
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Target
|
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Maximum
|
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Threshold
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Target
|
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Maximum
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Units
|
|
|
Options
|
|
|
Awards
|
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Name
|
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Grant Date
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
(#)(4)
|
|
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(#)
|
|
|
(#)
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|
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(#)
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|
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(#)
|
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($)(3)(4)
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brendan P. McDonagh
|
|
|
03/30/07
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
36,054
|
|
|
|
N/A
|
|
|
$
|
630,240
|
|
Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Siddharth N. Mehta
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Former Chairman & Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beverley A. Sibblies
|
|
|
03/30/07
|
|
|
$
|
-
|
|
|
$
|
300,000
|
|
|
$
|
600,000
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
31,464
|
|
|
|
N/A
|
|
|
$
|
550,000
|
|
Executive Vice President and Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas M. Detelich
|
|
|
03/30/07
|
|
|
$
|
-
|
|
|
$
|
975,000
|
|
|
$
|
1,950,000
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
25,171
|
|
|
|
N/A
|
|
|
$
|
440,000
|
|
President Consumer & Mortgage Lending
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Walter G. Menezes
|
|
|
03/30/07
|
|
|
$
|
-
|
|
|
$
|
975,000
|
|
|
$
|
1,950,000
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
25,171
|
|
|
|
N/A
|
|
|
$
|
440,000
|
|
President Card & Retail Services and Auto
Finance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Niall S. Booker
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Chief Operating Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As discussed in the 2007 CD&A,
the Management Incentive Program is an annual cash incentive
plan that is comprised of both quantitative and qualitative
individual, business unit or company objectives which are
determined at the beginning of the year with each objective
being assigned a target and maximum payout based upon a
percentage of base salary. The percentage of target and maximum
payout is determined by the market data for the position the
executive officer holds and will not change unless the executive
officer changes into a position which has a different target and
maximum payout. Typically the maximum payout is a 1x or 2x
multiplier of target. Actual 2007 awards are reported in the
Summary Compensation Table on page 217.
|
|
(2) |
|
As discussed in the 2007 CD&A,
no Performance Shares were awarded in 2007.
|
|
(3) |
|
The total grant date fair value
reflected for Messrs. McDonagh, Detelich and Menezes and
Ms. Sibblies is based on 100% of the fair market value of
the underlying HSBC ordinary shares on March 30, 2007 (the
date of grant) of GBP 8.25 and converted into U.S. dollars
using the GBP exchange rate as of the time of funding the grant
(1.96254). These amounts reflect the awards of Restricted Shares
which consist of shares of restricted stock that vest in full at
the end of a three year period from the date of grant. The award
amount of Restricted Shares is based on the executive
officers position within the organization, base salary,
performance rating and scope for growth. At the executive level,
officers eligible to receive Restricted Shares are eligible for
awards ranging from 50% up to 300% of base salary.
|
|
(4) |
|
In January 2008, Restricted Shares
were approved to be awarded to Messrs. McDonagh, Menezes
and Booker and to Ms. Sibblies. The awards are expected to
be made in March 2008.
|
219
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END TABLE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
Stock Awards
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
Equity Incentive
|
|
Equity Incentive
|
|
|
|
|
|
|
Incentive
|
|
|
|
|
|
|
|
|
|
Plan Awards:
|
|
Plan Awards:
|
|
|
|
|
|
|
Plan Awards:
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Market or
|
|
|
Number of
|
|
Number of
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Unearned
|
|
Payout Value
|
|
|
Securities
|
|
Securities
|
|
Securities
|
|
|
|
|
|
Number of
|
|
Market Value
|
|
Shares, Units
|
|
of Unearned
|
|
|
Underlying
|
|
Underlying
|
|
Underlying
|
|
Option
|
|
|
|
Shares or
|
|
of Shares or
|
|
or Other
|
|
Shares, Units or
|
|
|
Unexercised
|
|
Unexercised
|
|
Unexercised
|
|
Exercise
|
|
Option
|
|
Units of Stock
|
|
Units of Stock
|
|
Rights That
|
|
Other Rights
|
|
|
Options (#)
|
|
Options (#)
|
|
Unearned
|
|
Price
|
|
Expiration
|
|
That Have Not
|
|
That Have Not
|
|
Have Not
|
|
That Have Not
|
Name
|
|
Exercisable
|
|
Unexercisable
|
|
Options (#)
|
|
($)/(GBP)
|
|
Date
|
|
Vested (#)
|
|
Vested
($)(1)
|
|
Vested (#)
|
|
Vested
($)(1)
|
|
|
Brendan P. McDonagh
|
|
|
18,900
|
(2)
|
|
|
|
|
|
|
|
|
|
GBP6.3754
|
|
|
03/29/09
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
Chief Executive Officer
|
|
|
9,000
|
(2)
|
|
|
|
|
|
|
|
|
|
GBP6.2767
|
|
|
03/16/08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,054
|
(3)
|
|
$
|
602,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,612
|
(4)
|
|
$
|
244,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,734
|
(5)
|
|
$
|
396,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,319
|
(6)
|
|
$
|
590,103
|
|
|
|
Siddharth N. Mehta
|
|
|
535,000
|
(2)
|
|
|
|
|
|
|
|
|
|
$21.37
|
|
|
11/12/11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Former Chairman &
|
|
|
408,000
|
(2)
|
|
|
|
|
|
|
|
|
|
GBP9.1350
|
|
|
11/03/13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
204,000
|
(7)
|
|
GBP8.2930
|
|
|
04/30/14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beverley A. Sibblies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,464
|
(3)
|
|
$
|
525,694
|
|
|
|
|
|
|
|
|
|
Executive Vice President and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,513
|
(8)
|
|
$
|
493,097
|
|
|
|
|
|
|
|
|
|
Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,957
|
(9)
|
|
$
|
333,438
|
|
|
|
|
|
|
|
|
|
|
|
Thomas M. Detelich
|
|
|
60,188
|
(2)
|
|
|
|
|
|
|
|
|
|
$16.96
|
|
|
11/08/09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
President Consumer &
|
|
|
66,875
|
(2)
|
|
|
|
|
|
|
|
|
|
$18.40
|
|
|
11/13/10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Lending
|
|
|
93,625
|
(2)
|
|
|
|
|
|
|
|
|
|
$21.37
|
|
|
11/12/11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
267,500
|
(2)
|
|
|
|
|
|
|
|
|
|
$10.66
|
|
|
11/20/12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
204,000
|
(2)
|
|
|
|
|
|
|
|
|
|
GBP9.1350
|
|
|
11/03/13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102,000
|
(7)
|
|
GBP8.2830
|
|
|
04/30/14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,171
|
(3)
|
|
$
|
420,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,711
|
(10)
|
|
$
|
1,181,425
|
|
|
|
95,040
|
(5)
|
|
$
|
1,587,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
151,240
|
(11)
|
|
$
|
2,526,888
|
|
|
|
100,848
|
(6)
|
|
$
|
1,684,948
|
|
|
|
Walter G. Menezes
|
|
|
48,150
|
(2)
|
|
|
|
|
|
|
|
|
|
$13.71
|
|
|
11/09/08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
President Card & Retail
|
|
|
66,875
|
(2)
|
|
|
|
|
|
|
|
|
|
$16.96
|
|
|
11/08/09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services and Auto Finance
|
|
|
74,900
|
(2)
|
|
|
|
|
|
|
|
|
|
$18.40
|
|
|
11/13/10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107,000
|
(2)
|
|
|
|
|
|
|
|
|
|
$21.37
|
|
|
11/12/11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107,000
|
(2)
|
|
|
|
|
|
|
|
|
|
$10.66
|
|
|
11/20/12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
(2)
|
|
|
|
|
|
|
|
|
|
GBP9.1350
|
|
|
11/03/13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
(7)
|
|
GBP8.2830
|
|
|
04/30/14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,171
|
(3)
|
|
$
|
420,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,292
|
(10)
|
|
$
|
372,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
151,240
|
(11)
|
|
$
|
2,526,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95,040
|
(5)
|
|
$
|
1,587,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,848
|
(6)
|
|
$
|
1,684,948
|
|
|
|
Niall S. Booker
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,759
|
(3)
|
|
$
|
330,129
|
|
|
|
|
|
|
|
|
|
Chief Operating Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,765
|
(4)
|
|
$
|
229,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,791
|
(12)
|
|
$
|
681,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,365
|
(13)
|
|
$
|
674,410
|
|
|
|
|
|
|
(1) |
|
The market value of the shares on
December 31, 2007 was GBP8.42 and the exchange rate from
GBP to U.S. dollars was 1.9843, which equates to a U.S. dollars
share price of $16.7078 per share.
|
|
(2) |
|
Reflects fully vested options.
|
|
(3) |
|
These awards will vest in full on
March 30, 2010.
|
|
(4) |
|
This award will vest in full on
April 2, 2008 if the performance conditions are met.
|
|
(5) |
|
These awards vest in part or in
full on March 31, 2008 if performance conditions are met.
|
|
(6) |
|
These awards vest in part or in
full on March 31, 2009 if performance conditions are met.
|
|
(7) |
|
These awards will vest in full
subject to satisfaction of performance conditions on the fourth
and fifth anniversaries of the date of grant, April 30,
2004. If the performance conditions are not met on the fifth
anniversary of the date of grant, the options will be forfeited.
|
|
(8) |
|
This award will vest in full on
March 31, 2009.
|
|
(9) |
|
One-third of this award vested on
November 30, 2007. The next one-third will vest on
November 30, 2008, and the final third will vest on
November 30, 2009.
|
|
(10) |
|
Twenty percent of this award vested
on each of March 31, 2004, March 31, 2005,
March 31, 2006 and March 30, 2007. The final twenty
percent will vest March 31, 2008.
|
|
(11) |
|
Twenty percent of this award vested
on May 26, 2006 and on May 25, 2007. Twenty percent of
this award will vest on each of May 26, 2008, May 26,
2009, and May 26, 2010.
|
|
(12) |
|
This award will vest in full on
May 27, 2008 if performance conditions are met.
|
|
(13) |
|
This award will vest in full on
March 6, 2009 if performance conditions are met.
|
220
OPTION
EXERCISES AND STOCK VESTED TABLE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Stock Awards
|
|
|
|
Number of
|
|
|
Value
|
|
|
Number of
|
|
|
Value
|
|
|
|
Shares Acquired
|
|
|
Realized
|
|
|
Shares Acquired
|
|
|
Realized
|
|
|
|
on Exercise
|
|
|
on Exercise
|
|
|
on Vesting
|
|
|
on Vesting
|
|
Name
|
|
(#)
|
|
|
($)(1)
|
|
|
(#)(2)
|
|
|
($)(1)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brendan P. McDonagh
|
|
|
-
|
|
|
$
|
-
|
|
|
|
14,216(3
|
)
|
|
$
|
261,924
|
|
Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Siddharth N. Mehta
|
|
|
2,428,900
|
(4)
|
|
$
|
7,823,587
|
|
|
|
644,162(5
|
)
|
|
$
|
11,177,548
|
|
Former Chairman &
Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beverley A. Sibblies
|
|
|
-
|
|
|
$
|
-
|
|
|
|
11,308(6
|
)
|
|
$
|
189,203
|
|
Executive Vice President and
Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas M. Detelich
|
|
|
53,500
|
(7)
|
|
$
|
295,930
|
|
|
|
141,980(8
|
)
|
|
$
|
2,540,050
|
|
President - Consumer &
Mortgage Lending
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Walter G. Menezes
|
|
|
-
|
|
|
$
|
-
|
|
|
|
78,923(9
|
)
|
|
$
|
1,425,523
|
|
President - Card & Retail
Services and Auto Finance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Niall S. Booker
|
|
|
-
|
|
|
$
|
-
|
|
|
|
14,216(3
|
)
|
|
$
|
261,924
|
|
Chief Operating Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Value realized on exercise or vesting uses the GBP fair market
value on the date of exercise/release and the exchange rate from
GBP to U.S. dollars on the date of settlement.
|
|
(2)
|
Includes the release of additional awards accumulated over
vesting period.
|
|
(3)
|
Includes the release of 11,392 shares granted on
April 15, 2002, together with additional shares accumulated
over the vesting period as reinvested dividends.
|
|
(4)
|
Includes the exercise of 802,500 shares granted
June 15, 1998, 358,450 shares granted November 9,
1998, 331,700 shares granted November 8, 1999,
401,250 shares granted November 13, 2000 and
535,000 shares granted November 20, 2002.
|
|
(5)
|
Includes the release of 215,825 shares granted
April 15, 2003 and 428,337 shares granted May 26,
2005.
|
|
(6)
|
Includes the release of 9,879 shares granted
December 7, 2004. Remaining shares are release of
additional awards accumulated over the vesting period.
|
|
(7)
|
Represents the exercise of shares granted November 9, 1998.
|
|
(8)
|
Includes the release of 70,710 shares granted
April 15, 2003 and 50,413 shares granted May 26,
2005. Remaining shares are release of additional awards
accumulated over the vesting period.
|
|
(9)
|
Includes the release of 22,292 shares granted
February 14, 2003 and 50,413 shares granted
May 26, 2005. Remaining shares are release of additional
awards accumulated over the vesting period.
|
221
PENSION
BENEFITS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Present Value of
|
|
|
Payments
|
|
|
|
|
|
Years
|
|
|
Accumulated
|
|
|
During Last
|
|
|
|
|
|
Credited
|
|
|
Benefit
|
|
|
Fiscal Year
|
|
Name
|
|
Plan Name
|
|
Service
|
|
|
($)
|
|
|
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brendan P. McDonagh
|
|
ISRBS
|
|
|
27.0
|
|
|
$
|
3,138,240
|
(1)
|
|
$
|
-
|
|
Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Siddharth N. Mehta
|
|
RIP-Household New
|
|
|
9.5
|
|
|
$
|
151,796
|
|
|
$
|
-
|
|
Former Chairman &
Chief Executive Officer
|
|
SRIP-Household New
|
|
|
9.5
|
|
|
$
|
1,931,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beverley A. Sibblies
|
|
RIP-Account Based
|
|
|
3.2
|
|
|
$
|
17,541
|
|
|
$
|
-
|
|
Executive Vice President and
Chief Financial Officer
|
|
SRIP-Account Based
|
|
|
3.2
|
|
|
$
|
31,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas M. Detelich
|
|
RIP-Household New
|
|
|
31.4
|
|
|
$
|
421,331
|
|
|
$
|
-
|
|
President Consumer &
Mortgage Lending
|
|
SRIP-Household New
|
|
|
31.4
|
|
|
$
|
3,791,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Walter G. Menezes
|
|
RIP-Household New
|
|
|
11.2
|
|
|
$
|
432,470
|
|
|
$
|
-
|
|
President Card & Retail
Services and Auto Finance
|
|
SRIP-Household New
|
|
|
11.2
|
|
|
$
|
3,542,614
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Niall S. Booker
|
|
ISRBS
|
|
|
25.9
|
|
|
$
|
2,923,163
|
(3)
|
|
$
|
-
|
|
Chief Operating Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Value of age 53 benefit. Participant is also eligible for
an immediate early retirement benefit at a value of $3,764,246.
|
Plans described under Savings and Pension Plans on
page 223.
|
|
(2)
|
Value of age 65 benefit. Participant is also eligible for an
immediate early retirement benefit at a value of $484,452 (RIP)
and $3,983,921 (SRIP). Plans are described under Saving and
Pension Plans on page 223.
|
|
(3)
|
Value of age 53 benefit. Participant is also eligible for an
immediate early retirement benefit at a value of $3,530,447.
Plans are described under Savings and Pension Plans on
page 223.
|
222
Savings
and Pension Plans
Retirement
Income Plan (RIP)
The HSBC-North America (U.S.) Retirement Income Plan
(RIP) is a non-contributory, defined benefit pension
plan for employees of HSBC North America and its
U.S. subsidiaries who are at least 21 years of age
with one year of service and not part of a collective bargaining
unit. Benefits are determined under a number of different
formulas that vary based on year of hire and employer.
Supplemental
Retirement Income Plan (SRIP)
The Household Supplemental Retirement Income Plan
(SRIP) is a non-qualified retirement plan that is
designed to provide benefits that are precluded from being paid
to legacy Household employees by the RIP due to legal
constraints applicable to all qualified plans. For example, the
maximum amount of compensation during 2007 that can be used to
determine a qualified plan benefit is $225,000, and the maximum
annual benefit commencing at age 65 in 2007 is $180,000.
SRIP benefits are calculated without regard to these limits. The
resulting benefit is then reduced by the value of qualified
benefits payable by RIP so that there is no duplication of
payments. Benefits are paid in a lump sum for retired executives
covered by a Household Old, Household New, or Account Based
Formula.
Formulas
for Calculating Benefits
Household Old Formula: Applies to executives who
were hired prior to January 1, 1990 by Household
International, Inc. The benefit at age 65 is determined
under whichever formula, A or B below, provides the higher
amount.
|
|
A.
|
The normal retirement benefit at age 65 is the sum of
(i) 51% of average salary that does not exceed the
integration amount and (ii) 57% of average salary in excess
of the integration amount. For this purpose, the integration
amount is an average of the Social Security taxable wage bases
for the 35 year period ending with the year of retirement.
The benefit is reduced pro rata for executives who retire with
less than 15 years of service. If an executive has more
than 30 years of service, the benefit percentages in the
formula, (the 51% and 57%) are increased
1/24
of 1 percentage point for each month of service in excess
of 30 years, but not more than 5 percentage points.
The benefit percentages are reduced for retirement prior to
age 65.
|
|
B.
|
The normal retirement benefit at age 65 is determined under
(a) below, limited to a maximum amount determined in (b):
|
|
|
|
|
a.
|
55% of average salary, reduced pro rata for less than
15 years of service, and increased
1/24
of 1 percentage point for each month in excess of
30 years, but not more than 5 percentage points; the
benefit percentage of 55% is reduced for retirement prior to
age 65.
|
|
|
|
|
b.
|
The amount determined in (a) is reduced as needed so that
when added to 50% of the primary Social Security benefit, the
total does not exceed 65% of the average salary. This maximum is
applied for payments following the age at which full Social
Security benefits are available.
|
Both formulas use an average of salaries for the 48 highest
consecutive months selected from the 120 consecutive months
preceding date of retirement; for this purpose, salary includes
total base wages and bonuses.
For executives who were participants on January 1, 1978,
had attained age 35 and had at least 10 years of
employment, the minimum normal retirement benefit is 55% of
final average salary. For this purpose, salary does not include
bonuses and the average is based on 60 consecutive months,
rather than 48.
Executives who are at least age 50 with 15 years of
service or at least age 55 with 10 years of service
may retire before age 65, in which case the benefits are
reduced.
Household New Formula: Applies to executives who
were hired after December 31, 1989, but prior to
January 1, 2000, by Household International, Inc. The
normal retirement benefit at age 65 is the sum of
(i) 51% of average salary that does not exceed the
integration amount and (ii) 57% of average salary in excess
of the integration amount. For this purpose, salaries include
total base wages and bonuses and are averaged over the 48
highest consecutive months selected from the 120 consecutive
months preceding date of retirement. The integration amount
223
is an average of the Social Security taxable wage bases for the
35 year period ending with the year of retirement. The
benefit is reduced pro rata for executives who retire with less
than 30 years of service. If an executive has more than
30 years of service, the percentages in the formula, (the
51% and 57%) are increased
1/24
of 1 percentage point for each month of service in excess
of 30 years, but not more than 5 percentage points.
Executives who are at least age 55 with 10 or more years of
service may retire before age 65 in which case the benefit
percentages (51% and 57%) are reduced.
Account Based Formula: Applies to executives who
were hired by Household International Inc. after
December 31, 1999. It also applies to executives who were
hired by HSBC Bank USA, National Association after
December 31, 1996 and became participants in the Retirement
Income Plan on January 1, 2005, or were hired by HSBC after
March 28, 2003. The formula provides for a notional account
that accumulates 2% of annual salary for each calendar year of
employment. For this purpose, salary includes total base wages
and bonuses. At the end of each calendar year, interest is
credited on the notional account using the value of the account
at the beginning of the year. The interest rate is based on the
lesser of average yields for
10-year and
30-year
Treasury bonds during September of the preceding calendar year.
The notional account is payable at termination of employment for
any reason after three years of service although payment may be
deferred to age 65.
Provisions Applicable to All Formulas: The amount of
salary used to determine benefits is subject to an annual
maximum that varies by calendar year. The limit for 2007 is
$225,000. The limit for years after 2007 will increase from
time-to-time as specified by IRS regulations. Benefits are
payable as a life annuity, or for married participants, a
reduced life annuity with 50% continued to a surviving spouse.
Participants (with spousal consent, if married) may choose from
a variety of other optional forms of payment, which are all
designed to be equivalent in value if paid over an average
lifetime. Retired executives covered by a Household Old,
Household New or Account Based Formula may elect a lump sum form
of payment (spousal consent is needed for married executives).
Present
Value of Accumulated Benefits
For the Account Based formula: The value of the notional account
balances currently available on December 31, 2007.
For other formulas: The present value of benefit
payable at assumed retirement using interest and mortality
assumptions consistent with those used for financial reporting
purposes under SFAS 87 with respect to HSBC Finance
Corporations audited financial statements for the period
ending December 31, 2007. However, no discount has been
assumed for separation prior to retirement due to death,
disability or termination of employment. Further, the amount of
the benefit so valued is the portion of the benefit at assumed
retirement that has accrued in proportion to service earned on
December 31, 2007.
Deferred
Compensation Plans
Tax Reduction Investment Plan HSBC North America
maintains the HSBC-North America (U.S.) Tax Reduction Investment
Plan (TRIP), which is a deferred profit-sharing and
savings plan for its eligible employees. With certain
exceptions, a U.S. employee who has been employed for
30 days and who is not part of a collective bargaining unit
may contribute into TRIP, on a pre-tax and after-tax basis, up
to 40% (15% if highly compensated) of the participants
cash compensation (subject to a maximum annual pre-tax
contribution by a participant of $15,500, as adjusted for cost
of living increases, and certain other limitations imposed by
the Internal Revenue Code) and invest such contributions in
separate equity or income funds. Employees who will be
age 50 or older on or before December 31 of the plan year
may also elect to contribute an additional $5,000 in
catch-up
contributions.
If the employee has been employed for at least one year, HSBC
Finance Corporation contributes 3% of compensation each payroll
period on behalf of each participant who contributes 1% and
matches any additional participant contributions up to 4% of
compensation. However, matching contributions will not exceed 6%
of a participants compensation if the participant
contributes 4% or more of compensation. The plan provides for
immediate vesting of all contributions. With certain exceptions,
a participants after-tax contributions which have not been
matched by us can be withdrawn at any time. Both our matching
contributions made prior to 1999 and the participants
after-tax contributions which have been matched may be withdrawn
after five years of participation in the plan. A
participants pre-tax contributions and our matching
contributions after 1998 may not be withdrawn
224
except for an immediate financial hardship, upon termination of
employment, or after attaining
age 591/2.
Participants may borrow from their TRIP accounts under certain
circumstances.
Supplemental Tax Reduction Investment Plan HSBC
North America also maintains the Supplemental Household
International Tax Reduction Investment Plan (STRIP)
which is an unfunded plan for eligible employees of HSBC Finance
Corporation and its participating subsidiaries whose
participation in TRIP is limited by the Internal Revenue Code.
Only matching contributions required to be made by us pursuant
to the basic TRIP formula are invested in STRIP through a credit
to a bookkeeping account maintained by us which deems such
contributions to be invested in equity or income funds selected
by the participant.
Non-Qualified Deferred Compensation Plan HSBC North
America Holdings Inc. maintains a Non-Qualified Deferred
Compensation Plan for the highly compensated employees in the
organization, including executives of HSBC Finance Corporation.
The named executive officers are eligible to contribute up to
80% of their salary
and/or cash
bonus compensation in any plan year. Participants are required
to make an irrevocable election with regard to an amount or
percentage of compensation to be deferred and the timing and
manner of future payout. Two types of distributions are
permitted under the plan, either a scheduled in-service
withdrawal which must be scheduled at least 2 years after
the end of the plan year in which the deferral is made, or
payment upon termination of employment. For either the scheduled
in-service withdrawal or payment upon termination, the
participant may elect either a lump sum payment or if the
participant has made at least $25,000 of contributions and has
over 10 years of service, he may request installment
payments over 10 years. Due to the unfunded nature of the
plan, participant elections are deemed investments whose gains
or losses are calculated by reference to actual earnings of the
investment choices. The deemed investment choices are reviewed
on a periodic basis by the Investment Committee for the Plan
which consists of members chosen by the Board or Directors or
Chief Executive Officer of HSBC North America Holdings Inc. and
are chosen based on a conservative mix of funds. In order to
provide the participants with the maximum amount of protection
under an unfunded plan, a Rabbi Trust has been established where
the participant contributions are segregated from the general
assets of HSBC Finance Corporation. The Investment Committee for
the plan endeavors to invest the contributions in a manner
consistent with the participants deemed elections reducing
the likelihood of an underfunded plan.
HSBC
International Staff Retirement Benefits Scheme
The HSBC International Staff Retirement Benefits Scheme (Jersey)
(ISRBS) is a defined benefit plan maintained for
certain international managers. Each member during his service
must contribute five percent of his salary to the plan but each
member who has completed 20 years of service or who enters
the senior management or general management sections during his
service shall contribute
62/3 percent
of his salary. In addition, a member may make voluntary
contributions, but the total of voluntary and mandatory
contributions cannot exceed 15 percent of his total
compensation. Upon leaving service, the value of the
members voluntary contribution fund, if any, shall be
commuted for a retirement benefit.
The annual pension payable at normal retirement is
1/480
of the members final salary for each completed month in
the executive section, 1.25/480 of his final salary for each
completed month in the senior management section, and 1.50/480
of his final salary for each completed month in the general
management section. A members normal retirement date is
the first day of the month coincident with or next following his
53rd birthday. Payments may be deferred or suspended but
not beyond age 75.
If a member leaves before normal retirement with at least
15 years of service, he will receive a pension which is
reduced by .25 percent for each complete month by which
termination precedes normal retirement. If he terminates with at
least 5 years of service, he will receive an immediate lump
sum equivalent of his reduced pension.
225
NONQUALIFIED
DEFINED CONTRIBUTION
AND OTHER
NONQUALIFIED DEFERRED COMPENSATION PLANS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
|
|
|
|
|
|
|
|
|
|
|
|
|
NonQualified
|
|
|
Tax
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
Reduction
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan(1)
|
|
|
Plan(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive
|
|
|
Registrant
|
|
|
Aggregate
|
|
|
Aggregate
|
|
|
Aggregate
|
|
|
|
Contributions
|
|
|
Contributions
|
|
|
Earnings
|
|
|
Withdrawals/
|
|
|
Balance at
|
|
Name
|
|
in 2007 ($)
|
|
|
in 2007 ($)
|
|
|
in 2007 ($)
|
|
|
Distributions ($)
|
|
|
12/31/2007 ($)
|
|
|
|
|
Brendan P.
McDonagh(4)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Siddharth N. Mehta
|
|
$
|
-
|
|
|
$
|
1,812
|
|
|
$
|
(29,581
|
)
|
|
$
|
-
|
|
|
$
|
2,371,877
|
|
Former Chairman &
Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beverley A. Sibblies
|
|
$
|
19,856
|
|
|
$
|
43,198
|
|
|
$
|
203
|
|
|
$
|
-
|
|
|
$
|
110,129
|
|
Executive Vice President and
Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas M. Detelich
|
|
$
|
-
|
|
|
$
|
145,047
|
|
|
$
|
222,897
|
|
|
$
|
193,424
|
(3)
|
|
$
|
3,301,746
|
|
President Consumer &
Mortgage Lending
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Walter G. Menezes
|
|
$
|
-
|
|
|
$
|
146,537
|
|
|
$
|
103,032
|
|
|
$
|
-
|
|
|
$
|
2,011,364
|
|
President Card & Retail
Services and Auto Finance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Niall S.
Booker(4)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Chief Operating Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The NonQualified Deferred Compensation Plan is described under
Savings and Pension Plans on page 223.
|
|
(2)
|
The Supplemental Tax Reduction Investment Plan (STRIP) is
described under Savings and Pension Plans on
page 223. Company contributions are invested in STRIP
through a credit to a bookkeeping account, which deems such
contributions to be invested in equity or income mutual funds
selected by the participant. For this purpose, compensation
includes amounts that would be compensation but for the fact
they were deferred under the terms of the HSBC North America
Non-Qualified Deferred Compensation Plan. Distributions are made
in a lump sum upon termination of employment.
|
|
(3)
|
Amount represents a scheduled in-service withdrawal from the
HSBC Non-Qualified Deferred Compensation Plan.
|
|
(4)
|
Messrs. McDonagh and Booker are not eligible to participate in
the NonQualified Deferred Compensation Plan and STRIP.
|
226
POTENTIAL
PAYMENTS UPON TERMINATION OR
CHANGE-IN-CONTROL
Brendan
P. McDonagh
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary
|
|
|
|
|
|
Voluntary for
|
|
|
|
|
|
Change in
|
|
|
|
Voluntary
|
|
|
|
|
|
Normal
|
|
|
Not for Cause
|
|
|
For Cause
|
|
|
Good Reason
|
|
|
|
|
|
Control
|
|
Executive Benefits and Payments Upon Termination
|
|
Termination
|
|
|
Disability
|
|
|
Retirement
|
|
|
Termination
|
|
|
Termination
|
|
|
Termination
|
|
|
Death
|
|
|
Termination
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base Salary
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short Term Incentive
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
1,701,288
|
(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Term Incentive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Shares
|
|
|
-
|
|
|
$
|
1,078,856
|
(2)
|
|
$
|
1,078,856
|
(2)
|
|
$
|
1,078,856
|
(2)
|
|
|
-
|
|
|
$
|
1,078,856
|
(2)
|
|
$
|
1,392,516
|
(4)
|
|
$
|
1,078,856
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested and Accelerated
|
|
|
-
|
|
|
$
|
153,453
|
(3)
|
|
$
|
153,453
|
(3)
|
|
$
|
153,453
|
(3)
|
|
|
-
|
|
|
$
|
153,453
|
(3)
|
|
$
|
613,811
|
(4)
|
|
$
|
153,453
|
(3)
|
|
|
(1)
|
Assumes a termination date of December 31, 2007, and
represents the 2007 cash incentive awarded but not paid until
2008.
|
|
(2)
|
Assumes performance conditions have been met. Value based on
prorated number of shares at an assumed retirement date of
December 31, 2007, and calculated using the closing price
of HSBC ordinary shares and exchange rate on that date.
|
|
(3)
|
This amount represents accelerated vesting of a pro-rata portion
of the outstanding restricted shares assuming a termination date
of December 31, 2007, and are calculated using the closing
price of HSBC ordinary shares and exchange rate on
December 31, 2007.
|
|
(4)
|
This amount represents a full vesting of the outstanding
restricted shares assuming a termination date of
December 31, 2007, and is calculated using the closing
price of HSBC ordinary shares and exchange rate on
December 31, 2007.
|
Beverley
A. Sibblies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary
|
|
|
|
|
|
Voluntary for
|
|
|
|
|
|
Change in
|
|
Executive Benefits and
|
|
Voluntary
|
|
|
|
|
|
Normal
|
|
|
Not for Cause
|
|
|
For Cause
|
|
|
Good Reason
|
|
|
|
|
|
Control
|
|
Payments Upon Termination
|
|
Termination
|
|
|
Disability
|
|
|
Retirement
|
|
|
Termination
|
|
|
Termination
|
|
|
Termination
|
|
|
Death
|
|
|
Termination
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base Salary
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
200,000
|
(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short Term Incentive
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
600,000
|
(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Term Incentive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested and Accelerated
|
|
|
-
|
|
|
$
|
460,367
|
(2)
|
|
$
|
460,367
|
(2)
|
|
$
|
460,367
|
(2)
|
|
|
-
|
|
|
$
|
460,367
|
(2)
|
|
$
|
1,444,920
|
(3)
|
|
$
|
460,367
|
(2)
|
|
|
(1)
|
Under the terms of the HSBC
Severance Policy, Ms. Sibblies would receive 26 weeks
of her current salary upon separation from HSBC and a pro-rata
amount of her earned bonus. The figures above represent the
bonus payment at maximum assuming a termination date of
December 31, 2007.
|
|
(2)
|
This amount represents accelerated
vesting of a pro-rata portion of the outstanding restricted
shares assuming a termination date of December 31, 2007,
and are calculated using the closing price of HSBC ordinary
shares and exchange rate on December 31, 2007.
|
|
(3)
|
This amount represents a full
vesting of the outstanding restricted shares assuming a
termination date of December 31, 2007, and is calculated
using the closing price of HSBC ordinary shares and exchange
rate on December 31, 2007.
|
Thomas M.
Detelich
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary
|
|
|
|
|
|
Voluntary for
|
|
|
|
|
|
Change in
|
|
Executive Benefits and
|
|
Voluntary
|
|
|
|
|
|
Normal
|
|
|
Not for Cause
|
|
|
For Cause
|
|
|
Good Reason
|
|
|
|
|
|
Control
|
|
Payments Upon Termination
|
|
Termination
|
|
|
Disability
|
|
|
Retirement
|
|
|
Termination
|
|
|
Termination
|
|
|
Termination
|
|
|
Death
|
|
|
Termination
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base Salary
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
650,000
|
(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short Term Incentive
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
1,950,000
|
(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Term Incentive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Shares
|
|
|
-
|
|
|
$
|
2,647,832
|
(2)
|
|
$
|
2,647,832
|
(2)
|
|
$
|
2,647,832
|
(2)
|
|
|
-
|
|
|
$
|
2,647,832
|
(2)
|
|
$
|
3,601,663
|
(3)
|
|
$
|
2,647,832
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested and Accelerated
|
|
|
-
|
|
|
$
|
27,729
|
(4)
|
|
$
|
27,729
|
(4)
|
|
$
|
27,729
|
(4)
|
|
|
-
|
|
|
$
|
27,729
|
(4)
|
|
$
|
27,729
|
(4)
|
|
$
|
27,729
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested and Accelerated
|
|
|
-
|
|
|
$
|
3,886,336
|
(5)
|
|
$
|
3,886,336
|
(5)
|
|
$
|
3,886,336
|
(5)
|
|
|
-
|
|
|
$
|
3,886,336
|
(5)
|
|
$
|
4,595,793
|
(6)
|
|
$
|
3,886,336
|
(5)
|
|
|
(1)
|
Under the terms of the HSBC
Severance Policy, Mr. Detelich would receive 52 weeks
of his current salary upon separation from the company and a
pro-rata amount of his earned bonus. The figures represent the
bonus payment at maximum assuming a termination date of
December 31, 2007.
|
|
(2)
|
Assumes performance conditions have
been met. This amount represents accelerated vesting of a
pro-rata portion of the outstanding restricted shares assuming a
termination date of December 31, 2007, and are calculated
using the closing price of HSBC ordinary shares and exchange
rate on December 31, 2007.
|
227
|
|
(3)
|
Assumes performance conditions have
been met. This amount represents a full vesting of the
outstanding restricted shares assuming a termination date of
December 31, 2007, and is calculated using the closing
price of HSBC ordinary shares and exchange rate on
December 31, 2007.
|
|
(4)
|
Assumes performance conditions have
been met. This amount represents accelerated vesting of 100% of
the outstanding, unvested stock options, the value of which has
been calculated based on the spread between the strike price and
the fair market value of HSBC ordinary shares on
December 31, 2007.
|
|
(5)
|
This amount represents accelerated
vesting of a pro-rata portion of the outstanding restricted
shares assuming a termination date of December 31, 2007,
and are calculated using the closing price of HSBC ordinary
shares and exchange rate on December 31, 2007.
|
|
(6)
|
This amount represents a full
vesting of the outstanding restricted shares assuming a
termination date of December 31, 2007, and is calculated
using the closing price of HSBC ordinary shares and exchange
rate on December 31, 2007.
|
Walter G.
Menezes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Early
|
|
|
|
|
|
Involuntary
|
|
|
|
|
|
Voluntary
|
|
|
|
|
|
Change in
|
|
|
|
Voluntary
|
|
|
Retirement/
|
|
|
Normal
|
|
|
Not for Cause
|
|
|
For Cause
|
|
|
Good Reason
|
|
|
|
|
|
Control
|
|
Executive Benefits and Payments Upon Termination
|
|
Termination
|
|
|
Disability
|
|
|
Retirement
|
|
|
Termination
|
|
|
Termination
|
|
|
Termination
|
|
|
Death
|
|
|
Termination
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base Salary
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
450,000
|
(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
975,000
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short Term Incentive
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
1,950,000
|
(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
3,000,000
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Term Incentive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Shares
|
|
|
-
|
|
|
$
|
2,647,832
|
(2)
|
|
$
|
2,647,832
|
(2)
|
|
$
|
2,647,832
|
(2)
|
|
|
-
|
|
|
$
|
2,647,832
|
(2)
|
|
$
|
3,601,663
|
(3)
|
|
$
|
2,647,832
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested and Accelerated
|
|
|
-
|
|
|
$
|
27,729
|
(4)
|
|
$
|
27,729
|
(4)
|
|
$
|
27,729
|
(4)
|
|
|
-
|
|
|
$
|
27,729
|
(4)
|
|
$
|
27,729
|
(4)
|
|
$
|
27,729
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested and Accelerated
|
|
|
-
|
|
|
$
|
3,886,336
|
(5)
|
|
$
|
3,886,336
|
(5)
|
|
$
|
3,886,336
|
(5)
|
|
|
-
|
|
|
$
|
3,886,336
|
(5)
|
|
$
|
4,595,793
|
(6)
|
|
$
|
3,886,336
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and Perks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental Retirement Benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
893,660
|
(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
21,479
|
(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Insurance
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
105,120
|
(9)
|
|
|
(1)
|
See the description of
Mr. Menezes Employment Protection Agreement on
page 214. Under the terms of the HSBC Severance Policy,
Mr. Menezes would receive 36 weeks of his current
salary upon separation from the company and a pro-rata amount of
his earned bonus. The figures represent the bonus payment at
maximum assuming a termination date of December 31, 2007.
|
|
(2)
|
Assumes performance conditions have
been met. This amount represents accelerated vesting of a
pro-rata portion of the outstanding restricted shares assuming a
termination date of December 31, 2007, and are calculated
using the closing price of HSBC ordinary shares and exchange
rate on December 31, 2007.
|
|
(3)
|
Assumes performance conditions have
been met. This amount represents a full vesting of the
outstanding restricted shares assuming a termination date of
December 31, 2007, and is calculated using the closing
price of HSBC ordinary shares and exchange rate on
December 31, 2007.
|
|
(4)
|
Assuming performance conditions are
met, represents accelerated vesting of 100% of the outstanding,
unvested stock options, the value of which has been calculated
based on the spread between the strike price and the fair market
value of HSBC ordinary shares on December 31, 2007.
|
|
(5)
|
This amount represents accelerated
vesting of a pro-rata portion of the outstanding restricted
shares assuming a termination date of December 31, 2007,
and are calculated using the closing price of HSBC ordinary
shares and exchange rate on December 31, 2007.
|
|
(6)
|
This amount represents a full
vesting of the outstanding restricted shares assuming a
termination date of December 31, 2007, and is calculated
using the closing price of HSBC ordinary shares and exchange
rate on December 31, 2007.
|
|
(7)
|
Mr. Menezes has an employment
agreement providing an additional 18 months of service and
pay toward his retirement benefit. He would be entitled to an
additional $6,137 per month if a termination due to a change in
control occurred on December 31, 2007. The present value of
this benefit was determined by HSBC Finance Corporations
actuaries to be $893,660.
|
|
(8)
|
Mr. Menezes has an employment
agreement providing an additional 18 months of healthcare
coverage for himself and his family with a total value of
$16,179 if a termination due to a change in control occurred on
December 31, 2007. The value of this healthcare is
calculated based on the medical plans COBRA rates. In
addition, Mr. Menezes agreement provides for annual
physicals at the companys expense throughout the
18 month period. The value of two physicals is $5,300. This
value is based on a rate negotiated through HSBC Finance
Corporations executive physical program.
|
|
(9)
|
Mr. Menezes employment
agreement provides for $2 million of life insurance
coverage for himself for 18 months, if a termination due to
a change in control occurred on December 31, 2007, with a
total value of $105,120. This value is based on the cost to
convert the company-provided group life insurance to an
individual policy for 18 months.
|
228
Niall S.
Booker
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Early
|
|
|
|
|
|
Involuntary
|
|
|
|
|
|
Voluntary for
|
|
|
|
|
|
Change in
|
|
Executive Benefits and
|
|
Voluntary
|
|
|
Retirement/
|
|
|
Normal
|
|
|
Not for Cause
|
|
|
For Cause
|
|
|
Good Reason
|
|
|
|
|
|
Control
|
|
Payments Upon Termination
|
|
Termination
|
|
|
Disability
|
|
|
Retirement
|
|
|
Termination
|
|
|
Termination
|
|
|
Termination
|
|
|
Death
|
|
|
Termination
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base Salary
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short Term Incentive
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
1,209,666
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Term Incentive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Shares
|
|
|
-
|
|
|
$
|
1,394,235
|
(2)
|
|
$
|
1,394,235
|
(2)
|
|
$
|
1,394,235
|
(2)
|
|
|
-
|
|
|
$
|
1,394,235
|
(2)
|
|
$
|
1,788,402
|
(3)
|
|
$
|
1,394,235
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested and Accelerated
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested and Accelerated
|
|
|
-
|
|
|
$
|
84,099
|
(4)
|
|
$
|
84,099
|
(4)
|
|
$
|
84,099
|
(4)
|
|
|
-
|
|
|
$
|
84,099(4
|
)
|
|
$
|
336,395(5
|
)
|
|
$
|
84,099
|
(4)
|
|
|
(1)
|
Assumes a termination date of December 1, 2007, and
represents the 2007 cash incentive awarded but not paid until
2008.
|
|
(2)
|
Assumes performance conditions have been met. This amount
represents accelerated vesting of a pro-rata portion of the
outstanding restricted shares assuming a termination date of
December 31, 2007, and are calculated using the closing
price of HSBC ordinary shares and exchange rate on
December 31, 2007.
|
|
(3)
|
Assumes performance conditions have been met. This amount
represents a full vesting of the outstanding restricted shares
assuming a termination date of December 31, 2007, and is
calculated using the closing price of HSBC ordinary shares and
exchange rate on December 31, 2007.
|
|
(4)
|
This amount represents accelerated vesting of a pro-rata portion
of the outstanding restricted shares assuming a termination date
of December 31, 2007, and are calculated using the closing
price of HSBC ordinary shares and exchange rate on
December 31, 2007.
|
|
(5)
|
This amount represents a full vesting of the outstanding
restricted shares assuming a termination date of
December 31, 2007, and is calculated using the closing
price of HSBC ordinary shares and exchange rate on
December 31, 2007.
|
229
Director
Compensation
The following table and narrative text discusses the
compensation awarded to, earned by or paid to our Directors
in 2007.
DIRECTOR
COMPENSATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and Nonqualified
|
|
|
|
|
|
|
|
|
|
Fees Earned
|
|
|
Stock
|
|
|
Option
|
|
|
Deferred
|
|
|
All Other
|
|
|
|
|
|
|
or Paid in
|
|
|
Awards
|
|
|
Awards
|
|
|
Compensation
|
|
|
Compensation
|
|
|
Total
|
|
Name
|
|
Cash(1)
|
|
|
($)(2)
|
|
|
($)(3)
|
|
|
Earnings
|
|
|
($)(4)
|
|
|
($)
|
|
|
|
|
Niall S.K.
Booker(5)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
William R. P. Dalton
|
|
$
|
178,750
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
1,750
|
|
|
$
|
180,500
|
|
J. Dudley Fishburn
|
|
$
|
170,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,276
|
)
|
|
$
|
-
|
|
|
$
|
167,724
|
|
Douglas J. Flint
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Cyrus F. Freidheim, Jr
|
|
$
|
270,689
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,576
|
)
|
|
$
|
1,750
|
|
|
$
|
263,863
|
|
Robert K. Herdman
|
|
$
|
195,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
195,000
|
|
Louis Hernandez, Jr.
|
|
$
|
127,444
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
1,750
|
|
|
$
|
129,194
|
|
George A. Lorch
|
|
$
|
185,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(16,988
|
)
|
|
$
|
1,750
|
|
|
$
|
169,762
|
|
Brendan P.
McDonagh(5)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Larree M. Renda
|
|
$
|
200,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(69
|
)
|
|
$
|
1,750
|
|
|
$
|
201,681
|
|
|
|
(1) |
In 2007, the non-management Directors of HSBC Finance
Corporation received an annual cash retainer of $170,000 (with
the exception of Mr. Freidheim, who as Chair of the
Executive Committee receives a retainer of $182,000). HSBC
Finance Corporation pays additional compensation to committee
chairs and audit committee members. In addition to the Board
retainer, Mr. Dalton received an additional $11,250 for his
membership in the Audit Committee since April 2007,
Mr. Freidheim received an additional $50,000 as the Lead
Director and Chair of the Executive Committee, Mr. Herdman
received an additional $25,000 as Chair of the Audit Committee,
Mr. Hernandez received and additional $11,250 for his
membership in the Audit Committee since April 2007,
Mr. Lorch received an additional $15,000 as Chair of the
Compensation Committee, Ms. Renda received an additional
$15,000 as Chair of the Nominating & Governance
Committee, and an additional $15,000 for her membership on the
Audit Committee. HSBC Finance Corporation does not pay meeting
attendance fees to its Directors. Directors who are employees of
HSBC Finance Corporation or any of its affiliates do not receive
additional compensation related to their Board service. In
February 2006, the Board reviewed its directors
compensation scheme relative to other same sized financial and
professional service organizations and determined to make no
changes to the current compensation structure.
|
Directors have the ability to defer
up to 100% of their annual retainers and/or fees into the
HSBC-North America Directors Non-Qualified Deferred Compensation
Plan. Under this plan, pre-tax dollars may be deferred with the
choice of receiving payouts while still serving HSBC Finance
Corporation according to a schedule established by the Director
at the time of deferral or a distribution after leaving the
Board in either lump sum, quarterly or annual installments.
|
|
(2) |
HSBC Finance Corporation does not grant stock awards to its
non-management directors nor do any portion of employee
directors stock awards reflect services related to the Board.
Prior to the merger with HSBC, non-management Directors could
elect to receive all or a portion of their cash compensation in
shares of common stock of Household International, Inc., defer
it under the Deferred Fee Plan for Directors or purchase options
to acquire common stock (as reflected in Footnote 3 below).
Under the Deferred Fee Plan, Directors were permitted to invest
their deferred compensation in either units of phantom shares of
the common stock of HSBC Finance Corporation (then called
Household International, Inc.), with dividends credited toward
additional stock units, or cash, with interest credited at a
market rate set under the plan. Prior to 1995, HSBC Finance
Corporation offered a Directors Retirement Income Plan
where the present value of each Directors accrued benefit
was deposited into the Deferred Phantom Stock Plan for
Directors. Under the Deferred Phantom Stock Plan, Directors with
less than ten years of service received 750 phantom shares of
common stock of Household International, Inc. annually during
the first ten years of service as a Director. In January 1997,
the Board eliminated this and all future Director retirement
benefits. All payouts to Directors earned under the Deferred
Phantom Stock Plan will be made only when a Director leaves the
Board due to death, retirement or resignation and will be paid
in HSBC ordinary shares either in a lump sum or in installments
as selected by the Director. Following the acquisition, all
rights to receive common stock of Household International, Inc.
under both plans described above were converted into rights to
receive HSBC ordinary shares. In May 2004, when the plans were
rolled into a non-qualified deferred compensation plan for
Directors, those rights were revised into rights to receive
American Depository Shares in HSBC ordinary shares, each of
which represents five ordinary shares. No new shares may be
issued under the plans. As of December 31, 2007, 17,911
American Depository Shares were held in the deferred
compensation plan account for Directors. Specifically, Messrs.
Fishburn, Freidheim Jr. and Lorch held 810, 3,459 and 6,038
American Depository Shares, respectively, and Ms. Renda
held 26 American Depository Shares.
|
230
|
|
(3)
|
HSBC Finance Corporation does not grant stock option awards to
its non-management directors. As referenced in Footnote 2 above,
as of December 31, 2007, 417,426 Stock Options were
outstanding which were granted pursuant to the historical
Directors Deferred Fee Plan. Specifically,
Messrs. Fishburn, Freidheim and Lorch held options to
purchase 90,950, 111,138 and 105,663 HSBC ordinary shares
respectively, and Ms. Renda held options to purchase 40,125
HSBC ordinary shares.
|
|
(4)
|
Components of All Other Compensation are disclosed in the
aggregate. We provide each Director with $250,000 of accidental
death and dismemberment insurance and a
$10,000,000 personal excess liability insurance policy for
which the company paid premium is $1,750 per annum for each
participating director. Under HSBC Finance Corporations
Matching Gift Program, for all directors who were members of the
Board in 2006 and continue to be on the Board, we match
charitable gifts to qualified organizations (subject to a
maximum of $10,000 per year), with a double match for the first
$500 donated to higher education institutions (both public and
private) and eligible non-profit organizations which promote
neighborhood revitalization or economic development for low and
moderate income populations. Each current independent Director,
other than Mr. Hernandez who joined the Board in 2007, may
ask us to contribute up to $10,000 annually to charities of the
Directors choice which qualify under our philanthropic
program.
|
|
(5)
|
Employee Directors do not derive any compensation from their
Board service.
|
231
Item 12. Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
Security
Ownership of Certain Beneficial Owners
HSBC Finance Corporations common stock is 100% owned by
HSBC Investments (North America) Inc. (HINO). HINO
is an indirect wholly owned subsidiary of HSBC.
Security
Ownership by Management
The following table lists the beneficial ownership, as of
January 31, 2008, of HSBC ordinary shares or interests in
ordinary shares and Series B Preferred Stock of HSBC
Finance Corporation held by each director and the executive
officers named in the Summary Compensation Table on
page 217, individually, and the directors and executive
officers as a group. Each of the individuals listed below and
all directors and executive officers as a group own less than 1%
of the ordinary shares of HSBC and the Series B Preferred
Stock of HSBC Finance Corporation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
HSBC Shares
|
|
|
HSBC
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
That May Be
|
|
|
Restricted
|
|
|
|
|
|
|
|
|
Series B
|
|
|
|
Beneficially
|
|
|
Acquired Within
|
|
|
Shares
|
|
|
Number of
|
|
|
Total
|
|
|
Preferred of
|
|
|
|
Owned of
|
|
|
60 Days By
|
|
|
Released
|
|
|
Ordinary
|
|
|
HSBC
|
|
|
HSBC
|
|
|
|
HSBC
|
|
|
Exercise of
|
|
|
Within
|
|
|
Share
|
|
|
Ordinary
|
|
|
Finance
|
|
|
|
Holdings
plc(1)(2)
|
|
|
Options(4)
|
|
|
60
Days(5)
|
|
|
Equivalents(6)
|
|
|
Shares
|
|
|
Corporation
|
|
|
|
|
Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Niall S.K. Booker
|
|
|
40,929
|
|
|
|
|
|
|
|
16,860
|
|
|
|
|
|
|
|
57,789
|
|
|
|
-
|
|
William R. P. Dalton
|
|
|
61,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,104
|
|
|
|
-
|
|
J. Dudley Fishburn
|
|
|
15,678
|
|
|
|
90,950
|
|
|
|
|
|
|
|
810
|
|
|
|
107,438
|
|
|
|
-
|
|
Douglas J. Flint
|
|
|
113,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113,943
|
|
|
|
-
|
|
Cyrus F. Freidheim, Jr
|
|
|
|
|
|
|
111,138
|
|
|
|
|
|
|
|
3,459
|
|
|
|
114,597
|
|
|
|
-
|
|
Robert K. Herdman
|
|
|
690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
690
|
|
|
|
-
|
|
Louis Hernandez, Jr.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
George A. Lorch
|
|
|
13,605
|
|
|
|
105,663
|
|
|
|
|
|
|
|
6,038
|
|
|
|
125,306
|
|
|
|
-
|
|
Brendan P. McDonagh
|
|
|
78,139
|
|
|
|
27,900
|
|
|
|
17,898
|
|
|
|
|
|
|
|
123,937
|
|
|
|
-
|
|
Larree M. Renda
|
|
|
1,650
|
|
|
|
40,125
|
|
|
|
|
|
|
|
26
|
|
|
|
41,801
|
|
|
|
50
|
(3)
|
Named Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Siddharth N. Mehta
|
|
|
|
|
|
|
943,000
|
|
|
|
|
|
|
|
10,678
|
|
|
|
953,678
|
|
|
|
-
|
|
Beverley A. Sibblies
|
|
|
7,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,978
|
|
|
|
-
|
|
Thomas M. Detelich
|
|
|
|
|
|
|
692,188
|
|
|
|
82,194
|
|
|
|
81
|
|
|
|
774,463
|
|
|
|
-
|
|
Walter G. Menezes
|
|
|
128,108
|
|
|
|
553,925
|
|
|
|
22,292
|
|
|
|
|
|
|
|
704,325
|
|
|
|
-
|
|
All directors and executive officers as a group
|
|
|
762,229
|
|
|
|
3,538,902
|
|
|
|
376,378
|
|
|
|
22,982
|
|
|
|
4,700,491
|
|
|
|
50
|
|
|
|
(1)
|
Directors and executive officers have sole voting and investment
power over the shares listed above, except that the number of
ordinary shares held by spouses, children and charitable or
family foundations in which voting and investment power is
shared (or presumed to be shared) is as follows: Mr. Dalton,
49,149; Mr. Lorch, 13,605; Mr. Flint, 29,610 and Mr. Booker,
30,000; and Directors and executive officers as a group, 123,864.
|
|
(2)
|
Some of the shares included in the table above were held in
American Depository Shares, each of which represents five HSBC
ordinary shares.
|
|
(3)
|
Represents 2000 Depositary Shares, each representing
one-fortieth of a share of 6.36% Non-Cumulative Preferred Stock,
Series B.
|
|
(4)
|
Represents the number of ordinary shares that may be acquired by
HSBC Finance Corporations Directors and executive officers
through April 1, 2008 pursuant to the exercise of stock
options.
|
|
(5)
|
Represents the number of ordinary shares that may be acquired by
HSBC Finance Corporations Directors and executive officers
through April 1, 2008 pursuant to the satisfaction of
certain conditions.
|
|
(6)
|
Represents the number of ordinary share equivalents owned by
executive officers under the HSBC-North America (U.S.) Tax
Reduction Investment Plan (TRIP) and the HSBC North America
Employee Non-Qualified Deferred Compensation Plan and by
Directors under the
|
232
|
|
|
HSBC North America Directors
Non-Qualified Deferred Compensation Plan. Some of the shares
included in the table above were held in American Depository
Shares, each of which represents five HSBC ordinary shares.
|
Item 13. Certain
Relationships and Related Transactions, and Director
Independence.
Transactions
with Related Persons
During our fiscal year ended December 31, 2007, HSBC
Finance Corporation was not a participant in any transaction,
and there is currently no proposed transaction, in which the
amount involved exceeded or will exceed $120,000, and in which a
director or an executive officer, or a member of the immediate
family of a director or an executive officer, had or will have a
direct or indirect material interest, other than the agreements
with Messrs. Mehta and Menezes described in
Item 11. Executive Compensation Compensation
Discussion and Analysis Compensation of Officers
Reported in the Summary Compensation Table.
HSBC Finance Corporation maintains a written Policy for the
Review, Approval or Ratification of Transactions with Related
Persons which provides that any Transaction with a Related
Person must be reviewed and approved or ratified in
accordance with specified procedures. The term Transaction
with a Related Person includes any transaction,
arrangement or relationship, or series of similar transactions,
arrangements or relationships, in which (1) the aggregate
dollar amount involved will or may be expected to exceed
$120,000 in any calendar year, (2) HSBC Finance Corporation
or any of its subsidiaries is, or is proposed to be, a
participant, and (3) a director or an executive officer, or
a member of the immediate family of a director or an executive
officer, has or will have a direct or indirect material interest
(other than solely as a result of being a director or a less
than 10 percent beneficial owner of another entity). The
following are specifically excluded from the definition of
Transaction with a Related Person:
|
|
|
|
|
compensation paid to directors and executive officers reportable
under rules and regulations promulgated by the Securities and
Exchange Commission;
|
|
|
transactions with other companies if the only relationship of
the director, executive officer or family member to the other
company is as an employee (other than an executive officer),
director or beneficial owner of less than 10 percent of
such other companys equity securities;
|
|
|
charitable contributions, grants or endowments by HSBC Finance
Corporation or any of its subsidiaries to charitable
organizations, foundations or universities if the only
relationship of the director, executive officer or family member
to the organization, foundation or university is as an employee
(other than an executive officer) or a director;
|
|
|
transactions where the interest of the director, executive
officer or family member arises solely from the ownership of
HSBC Finance Corporations equity securities and all
holders of such securities received or will receive the same
benefit on a pro rata basis;
|
|
|
transactions where the rates or charges involved are determined
by competitive bids; and
|
|
|
|
transactions involving services as a bank depositary of funds,
transfer agent, registrar, trustee under a trust indenture or
similar services.
|
The policy requires each director and executive officer to
notify the Office of the General Counsel in writing of any
Transaction with a Related Person in which the director,
executive officer or an immediate family member has or will have
an interest and to provide specified details of the transaction.
The Office of the General Counsel, through the Corporate
Secretary, will deliver a copy of the notice to the Chair of the
Nominating and Governance Committee of the Board of Directors.
The Nominating and Governance Committee will review the material
facts of each proposed Transaction with a Related Person at each
regularly scheduled committee meeting and approve, ratify or
disapprove the transaction.
The vote of a majority of disinterested members of the
Nominating and Governance Committee is required for the approval
or ratification of any Transaction with a Related Person. The
Nominating and Governance Committee may approve or ratify a
Transaction with a Related Person if the committee determines,
in its business judgment, based on the review of all available
information, that the transaction is fair and reasonable to, and
consistent with the best interests of, HSBC Finance Corporation
and its subsidiaries. In making this determination, the
Nominating and Governance Committee will consider, among other
things, (i) the business purpose of the transaction,
(ii) whether the transaction is entered into on an
arms-length basis and on terms no less favorable than terms
generally available
233
to an unaffiliated third-party under the same or similar
circumstances, (iii) whether the interest of the director,
executive officer or family member in the transaction is
material and (iv) whether the transaction would violate any
provision of the HSBC North America Holdings Inc. Statement of
Business Principles and Code of Ethics, the HSBC Finance
Corporation Code of Ethics for Senior Financial Officers or the
HSBC Finance Corporation Corporate Governance Standards, as
applicable.
In any case where the Nominating and Governance Committee
determines not to approve or ratify a Transaction with a Related
Person, the matter will be referred to the Office of the General
Counsel for review and consultation regarding the appropriate
disposition of such transaction including, but not limited to,
termination of the transaction, rescission of the transaction or
modification of the transaction in a manner that would permit it
to be ratified and approved.
Director
Independence
The HSBC Finance Corporation Corporate Governance Standards,
together with the charters of committees of the Board of
Directors, provide the framework for our corporate governance.
Director independence is defined in the HSBC Finance Corporation
Corporate Governance Standards which are based upon the rules of
the New York Stock Exchange. The HSBC Finance Corporation
Corporate Governance Standards are available on our website at
www.hsbcusa.com or upon written request made to HSBC
Finance Corporation, 26525 N. Riverwoods Boulevard,
Mettawa, IL 60045, Attention: Corporate Secretary.
According to the HSBC Finance Corporation Corporate Governance
Standards, a majority of the members of the Board of Directors
must be independent. The composition requirement for each
committee of the Board of Directors is as follows:
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Committee
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Independence/Member Requirements
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Audit Committee
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Chair and all voting members
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Compensation Committee
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Chair and a majority of members
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Nominating and Governance Committee
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Chair and a majority of members
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Executive Committee
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100% independent directors and the Chairman and Chief Executive
Officer
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Messrs. Dalton, Freidheim, Herdman, Hernandez, Lorch and
Ms. Renda are considered to be independent directors.
Mr. McDonagh served as Chief Executive Officer until
February 21, 2008 and currently serves as Chief Executive
Officer of HSBC North America Holdings Inc. Mr. Booker
served as Chief Operating Officer of HSBC Finance Corporation
until February 21, 2008 and currently serves as Chief
Executive Officer of HSBC Finance Corporation. Mr. Fishburn
serves as chairman of the board of HFC Bank Ltd. and is a member
of the board of HSBC Bank (UK) Ltd. and Mr. Flint serves as
Group Finance Director at HSBC. Because of the positions held by
Messrs. McDonagh, Booker, Fishburn and Flint, they are not
considered to be independent directors. Mr. Michael R.P.
Smith was a director until June 2007. During his directorship
Mr. Smith was the President and Chief Executive Officer of
the Hongkong and Shanghai Banking Corporation and was not
considered to be an independent director. Mr. Gary G.
Dillon served as a member of the Compensation, Executive and
Audit Committees and was considered to be an independent
director until his retirement in April 2007.
See Item 10. Directors, Executive Officers and Corporate
Governance Corporate Governance Board of
Directors Committees and Charters for more
information about our Board of Directors and its committees.
Item 14. Principal
Accountant Fees and Services.
Audit Fees. The aggregate amount billed by
our principal accountant, KPMG LLP, for audit services performed
during the fiscal years ended December 31, 2007 and 2006
was $7,134,000 and $7,278,000, respectively. Audit services
include the auditing of financial statements, quarterly reviews,
statutory audits, and the preparation of comfort letters,
consents and review of registration statements.
Audit Related Fees. The aggregate amount
billed by KPMG LLP in connection with audit related services
performed during the fiscal years ended December 31, 2007
and 2006 was $2,139,000 and $1,453,000, respectively.
234
Audit related services include employee benefit plan audits, and
audit or attestation services not required by statute or
regulation.
Tax Fees. Total fees billed by KPMG LLP for
tax related services for the fiscal years ended
December 31, 2007 and 2006 were $7,800 and $127,000,
respectively. These services include tax related research,
general tax services in connection with transactions and
legislation and tax services for review of Federal and state tax
accounts for possible overassessment of interest
and/or
penalties.
All Other. Other than those fees described
above, there were no other fees billed for services performed by
KPMG LLP during the fiscal years ended December 31, 2007
and December 31, 2006.
All of the fees described above were approved by HSBC Finance
Corporations audit committee.
PART IV
Item 15. Exhibits
and Financial Statement Schedules.
(a)(1) Financial Statements.
The consolidated financial statements listed below, together
with an opinion of KPMG LLP dated February 29, 2008 with
respect thereto, are included in this
Form 10-K
pursuant to Item 8. Financial Statements and Supplementary
Data of this
Form 10-K.
HSBC Finance Corporation and Subsidiaries:
Report of Independent Registered Public Accounting Firm
Consolidated Statement of Income (Loss)
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Changes in Shareholders(s)
Equity
Notes to Consolidated Financial Statements
Selected Quarterly Financial Data (Unaudited)
(a)(2) Not applicable
(a)(3) Exhibits.
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3
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(i)
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Amended and Restated Certificate of Incorporation of HSBC
Finance Corporation effective as of December 15, 2004, as
amended (incorporated by reference to Exhibit 3.1 of HSBC
Finance Corporations Current Report on
Form 8-K
filed June 22, 2005 and Exhibit 3.1(b) of HSBC Finance
Corporations Current Report on
Form 8-K
filed December 19, 2005).
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3
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(ii)
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Bylaws of HSBC Finance Corporation, as amended February 21,
2008 (incorporated by reference to Exhibit 3.2 of HSBC
Finance Corporations Current Report on
Form 8-K
filed on February 22, 2008).
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4
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.1
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Amended and Restated Standard Multiple-Series Indenture
Provisions for Senior Debt Securities of HSBC Finance
Corporation dated as of December 15, 2004 (incorporated by
reference to Exhibit 4.1 of Amendment No. 1 to HSBC
Finance Corporations Registration Statements on
Form S-3
Nos.
333-120494,
333-120495
and
333-120496
filed December 16, 2004).
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4
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.2
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Amended and Restated Indenture for Senior Debt Securities dated
as of December 15, 2004 between HSBC Finance Corporation
and The Bank of New York Trust Company, N.A.
(successor to JPMorgan Chase Bank, N.A.), as Trustee
(incorporated by reference to Exhibit 4.2 of Amendment
No. 1 to HSBC Finance Corporations Registration
Statements on
Form S-3
Nos.
333-120495
and
333-120496
filed December 16, 2004).
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235
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4
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.3
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Amended and Restated Indenture for Senior Debt Securities dated
as of December 15, 2004 between HSBC Finance (successor to
Household Finance Corporation) and U.S. Bank National
Association (formerly known as First Trust of Illinois, National
Association, successor in interest to Bank of America Illinois,
formerly known as Continental Bank, National Association), as
Trustee, amending and restating the Indenture dated as of
October 1, 1992 between Household Finance Corporation and
the Trustee (incorporated by reference to Exhibit 4.3 to
Amendment No. 1 to the Companys Registration
Statement on
Form S-3,
Registration
No. 333-120494).
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4
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.4
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Amended and Restated Indenture for Senior Debt Securities dated
as of December 15, 2004 between HSBC Finance (successor to
Household Finance Corporation) and BNY Midwest
Trust Company (formerly Harris Trust and Savings Bank), as
Trustee, amending and restating the Indenture dated as of
December 19, 2003 between Household Finance Corporation and
the Trustee (incorporated by reference to Exhibit 4.4 to
Amendment No. 1 to the Companys Registration
Statement on
Form S-3,
Registration
No. 333-120494).
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4
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.5
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Amended and Restated Indenture for Senior Debt Securities dated
as of December 15, 2004 between HSBC Finance (successor to
Household Finance Corporation) and J.P. Morgan
Trust Company, National Association (as successor in
interest to Bank One, National Association, formerly known as
the First National Bank of Chicago), as Trustee, amending and
restating the Indenture dated as of April 1, 1995 between
Household Finance Corporation and the Trustee (incorporated by
reference to Exhibit 4.5 to Amendment No. 1 to the
Companys Registration Statement on
Form S-3,
Registration
No. 333-120494).
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4
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.6
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Indenture for Senior Debt Securities dated as of March 7,
2007 between HSBC Finance and Wells Fargo Bank, National
Association (incorporated by reference to Exhibit 4.12 to
the Companys Registration Statement on
Form S-3,
Registration
No. 333-130580).
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4
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.7
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The principal amount of debt outstanding under each other
instrument defining the rights of Holders of our long-term
senior and senior subordinated debt does not exceed
10 percent of our total assets. HSBC Finance Corporation
agrees to furnish to the Securities and Exchange Commission,
upon request, a copy of each instrument defining the rights of
holders of our long-term senior and senior subordinated debt.
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12
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Statement of Computation of Ratio of Earnings to Fixed Charges
and to Combined Fixed Charges and Preferred Stock Dividends.
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14
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Code of Ethics for Senior Financial Officers (incorporated by
reference to Exhibit 14 of HSBC Finance Corporations
Annual Report on
Form 10-K
for the year ended December 31, 2004 filed
February 28, 2005).
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21
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Subsidiaries of HSBC Finance Corporation.
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23
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Consent of KPMG LLP, Independent Registered Public Accounting
Firm.
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24
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Power of Attorney (included on page 237 of this
Form 10-K).
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31
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Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
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32
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Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
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99
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.1
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Ratings of HSBC Finance Corporation and its significant
subsidiaries.
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Upon receiving a written request, we will furnish copies of the
exhibits referred to above free of charge. Requests should be
made to HSBC Finance Corporation, 26525 North Riverwoods
Boulevard, Mettawa, Illinois 60045, Attention: Corporate
Secretary.
236
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, HSBC Finance Corporation has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on this, the 3rd day
of March, 2008.
HSBC FINANCE CORPORATION
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By:
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/s/ Niall
S. K. Booker
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Niall S. K. Booker
Chief Executive Officer
Each person whose signature appears below constitutes and
appoints P.D. Schwartz as
his/her true
and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him/her in
his/her
name, place and stead, in any and all capacities, to sign and
file, with the Securities and Exchange Commission, this
Form 10-K
and any and all amendments and exhibits thereto, and all
documents in connection therewith, granting unto each such
attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to
be done, as fully to all intents and purposes as
he/she might
or could do in person, hereby ratifying and confirming all that
such attorney-in-fact and agent or their substitutes may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of HSBC Finance Corporation and in the capacities
indicated on the 3rd day of March, 2008.
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Signature
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Title
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/s/ (N.
S. K. BOOKER)
(N.
S. K. Booker)
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Chief Executive Officer and Director
(as Principal Executive Officer)
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/s/ (D.
J. FLINT)
(D.
J. Flint)
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Chairman and Director
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/s/ (W.
R. P. DALTON)
(W.
R. P. Dalton)
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Director
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/s/ (J.
D. FISHBURN)
(J.
D. Fishburn)
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Director
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/s/ (C.
F. FREIDHEIM, Jr.)
(C.
F. Freidheim, Jr.)
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Director
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/s/ (R.
K. HERDMAN)
(R.
K. Herdman)
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Director
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/s/ (L.
HERNANDEZ, Jr.)
(L.
Hernandez, Jr.)
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Director
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/s/ (G.
A. LORCH)
(G.
A. Lorch)
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Director
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237
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Signature
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Title
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/s/ (B.
P. McDONAGH)
(B.
P. McDonagh)
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Director
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/s/ (L.
M. RENDA)
(L.
M. Renda)
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Director
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/s/ (B.
A. SIBBLIES)
(B.
A. Sibblies)
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Executive Vice President and Chief Financial Officer
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/s/ (J.
E. BINYON)
(J.
E. Binyon)
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Executive Vice President and Chief Accounting Officer
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238
Exhibit Index
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3
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(i)
|
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Amended and Restated Certificate of Incorporation of HSBC
Finance Corporation effective as of December 15, 2004, as
amended (incorporated by reference to Exhibit 3.1 of HSBC
Finance Corporations Current Report on
Form 8-K
filed June 22, 2005 and Exhibit 3.1(b) of HSBC Finance
Corporations Current Report on
Form 8-K
filed December 19, 2005).
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3
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(ii)
|
|
Bylaws of HSBC Finance Corporation, as amended February 21,
2008 (incorporated by reference to Exhibit 3.2 of HSBC
Finance Corporations Current Report on
Form 8-K
filed on February 22, 2008).
|
|
4
|
.1
|
|
Amended and Restated Standard Multiple-Series Indenture
Provisions for Senior Debt Securities of HSBC Finance
Corporation dated as of December 15, 2004 (incorporated by
reference to Exhibit 4.1 of Amendment No. 1 to HSBC
Finance Corporations Registration Statements on
Form S-3
Nos.
333-120494,
333-120495
and
333-120496
filed December 16, 2004).
|
|
4
|
.2
|
|
Amended and Restated Indenture for Senior Debt Securities dated
as of December 15, 2004 between HSBC Finance Corporation
and The Bank of New York Trust Company, N.A. (successor to
JPMorgan Chase Bank, N.A.), as Trustee (incorporated by
reference to Exhibit 4.2 of Amendment No. 1 to HSBC
Finance Corporations Registration Statements on
Form S-3
Nos.
333-120495
and
333-120496
filed December 16, 2004).
|
|
4
|
.3
|
|
Amended and Restated Indenture for Senior Debt Securities dated
as of December 15, 2004 between HSBC Finance (successor to
Household Finance Corporation) and U.S. Bank National
Association (formerly known as First Trust of Illinois, National
Association, successor in interest to Bank of America Illinois,
formerly known as Continental Bank, National Association), as
Trustee, amending and restating the Indenture dated as of
October 1, 1992 between Household Finance Corporation and
the Trustee (incorporated by reference to Exhibit 4.3 to
Amendment No. 1 to the Companys Registration
Statement on
Form S-3,
Registration
No. 333-120494).
|
|
4
|
.4
|
|
Amended and Restated Indenture for Senior Debt Securities dated
as of December 15, 2004 between HSBC Finance (successor to
Household Finance Corporation) and BNY Midwest
Trust Company (formerly Harris Trust and Savings Bank), as
Trustee, amending and restating the Indenture dated as of
December 19, 2003 between Household Finance Corporation and
the Trustee (incorporated by reference to Exhibit 4.4 to
Amendment No. 1 to the Companys Registration
Statement on
Form S-3,
Registration
No. 333-120494).
|
|
4
|
.5
|
|
Amended and Restated Indenture for Senior Debt Securities dated
as of December 15, 2004 between HSBC Finance (successor to
Household Finance Corporation) and J.P. Morgan
Trust Company, National Association (as successor in
interest to Bank One, National Association, formerly known as
the First National Bank of Chicago), as Trustee, amending and
restating the Indenture dated as of April 1, 1995 between
Household Finance Corporation and the Trustee (incorporated by
reference to Exhibit 4.5 to Amendment No. 1 to the
Companys Registration Statement on
Form S-3,
Registration
No. 333-120494).
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4
|
.6
|
|
Indenture for Senior Debt Securities dated as of March 7,
2007 between HSBC Finance and Wells Fargo Bank, National
Association (incorporated by reference to Exhibit 4.12 to
the Companys Registration Statement on
Form S-3,
Registration
No. 333-130580).
|
|
4
|
.7
|
|
The principal amount of debt outstanding under each other
instrument defining the rights of Holders of our long-term
senior and senior subordinated debt does not exceed
10 percent of our total assets. HSBC Finance Corporation
agrees to furnish to the Securities and Exchange Commission,
upon request, a copy of each instrument defining the rights of
holders of our long-term senior and senior subordinated debt.
|
|
12
|
|
|
Statement of Computation of Ratio of Earnings to Fixed Charges
and to Combined Fixed Charges and Preferred Stock Dividends.
|
|
14
|
|
|
Code of Ethics for Senior Financial Officers (incorporated by
reference to Exhibit 14 of HSBC Finance Corporations
Annual Report on
Form 10-K
for the year ended December 31, 2004 filed
February 28, 2005).
|
|
21
|
|
|
Subsidiaries of HSBC Finance Corporation.
|
|
23
|
|
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Consent of KPMG LLP, Independent Registered Public Accounting
Firm.
|
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24
|
|
|
Power of Attorney (included on page 237 of this
Form 10-K).
|
|
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
|
|
Ratings of HSBC Finance Corporation and its significant
subsidiaries.
|
239