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,
2010
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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
(State of incorporation)
26525 North Riverwoods Boulevard, Mettawa, Illinois
(Address of principal executive
offices)
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86-1052062
(I.R.S. Employer Identification
No.)
60045
(Zip Code)
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(224) 544-2000
Registrants 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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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,
$.01 par,
$1,000 liquidation preference)
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New York Stock Exchange
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Guarantee of Preferred Securities of HSBC Finance 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 whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o 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 accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check 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 þ
As of February 25, 2011, there were 66 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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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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Funding
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6
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Employees and Customers
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6
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Operations
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7
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Regulation and Competition
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9
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Corporate Governance and Controls
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13
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Cautionary Statement on Forward-Looking Statements
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14
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Item 1A.
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Risk Factors
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14
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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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22
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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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22
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Item 6.
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Selected Financial Data
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23
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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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25
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Executive Overview
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25
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Basis of Reporting
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38
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Critical Accounting Policies and Estimates
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42
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Receivables Review
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48
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Real Estate Owned
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51
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Results of Operations
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52
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Segment Results IFRS Management Basis
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63
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Credit Quality
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71
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Liquidity and Capital Resources
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96
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Off Balance Sheet Arrangements and Secured Financings
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102
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Fair Value
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103
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Risk Management
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106
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New Accounting Pronouncements to be Adopted in
Future Periods
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115
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Glossary of Terms
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116
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Credit Quality Statistics
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119
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Analysis of Credit Loss Reserves Activity
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121
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Net Interest Margin
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123
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Reconciliations to U.S. GAAP Financial Measures
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125
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Item 7A.
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Quantitative and Qualitative Disclosures About Market Risk
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127
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Item 8.
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Financial Statements and Supplementary Data
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127
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Selected Quarterly Financial Data (Unaudited)
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223
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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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224
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Item 9A.
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Controls and Procedures
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224
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Item 9B.
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Other Information
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224
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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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224
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Item 11.
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Executive Compensation
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236
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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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268
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Item 13.
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Certain Relationships and Related Transactions, and Director
Independence
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269
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Item 14.
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Principal Accountant Fees and Services
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270
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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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271
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Index
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274
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Signatures
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277
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EX-12 |
EX-21 |
EX-23 |
EX-31 |
EX-32 |
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 or HSBC Group) by way of
merger with H2 Acquisition Corporation (H2), an
indirect wholly owned subsidiary of HSBC, in a purchase business
combination. Following the acquisition, 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. (HINO).
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.
HSBC
North America Operations
HSBC North America is the holding company for HSBCs
operations in the United States. The principal subsidiaries of
HSBC North America at December 31, 2010 were HSBC Finance
Corporation, HSBC USA Inc. (HUSI), a U.S. bank
holding company, HSBC Markets (USA) Inc., a holding company for
certain global banking and markets subsidiaries and HSBC
Technology & Services (USA) Inc. (HTSU), a
provider of information technology and centralized operational
and support services including human resources, tax, finance,
compliance, legal, corporate affairs and other services shared
among the subsidiaries of HSBC North America. In late January
2010, HSBC North America sold HSBC Bank Canada, a Federal bank
chartered under the laws of Canada (HBCA), to an
affiliate as part of an internal HSBC reorganization. As a
result, HBCA is no longer a subsidiary of HSBC North America.
HUSIs principal U.S. banking subsidiary is HSBC Bank
USA, National Association (together with its subsidiaries,
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 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 and a pooling of resources
within HTSU to provide shared, allocated support functions to
all HSBC North America subsidiaries. In addition, clients of
HSBC Bank USA and other affiliates are investors in HSBC Finance
Corporations 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., has led or participated as underwriter of domestic
issuances of HSBC Finance Corporations term debt, as well
as historically, led or participated as underwriter for
issuances of asset-backed securities. While HSBC Finance
Corporation has not received advantaged pricing, 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 lending
products to middle-market consumers in the United States.
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 currently include
MasterCard(1),
Visa(1),
American
Express(1)
and
Discover(1)
credit card receivables as well as private label receivables. A
portion of new credit card and all new private label receivable
originations are sold on a daily basis to HSBC Bank USA. We also
offer specialty insurance products in the United States and
Canada. Historically, we also provided several other types of
loan products in the United States including real estate secured
, personal non-credit card and auto finance loans as well as tax
refund anticipation loans and related products, all of which we
no longer originate.
In March 2010, we sold our auto finance servicing operations,
including all related assets, as well as certain auto finance
receivables with a carrying value of $927 million to
Santander Consumer USA Inc. (SC USA). Under the
terms of the sale agreement, we also agreed to assign our auto
servicing facilities in San Diego, California and
Lewisville, Texas to SC USA. In August 2010, we sold our
remaining auto loan portfolio to SC USA with an outstanding
principal balance of $2.6 billion at the time of sale. As a
result, our Auto Finance business, which was previously
considered a non-core business, is now reported in discontinued
operations.
During the third quarter of 2010, the Internal Revenue Service
(IRS) announced it would stop providing information
regarding certain unpaid obligations of a taxpayer (the
Debt Indicator), which has historically served as a
significant part of our underwriting process in our Taxpayer
Financial Services (TFS) business. We determined
that, without use of the Debt Indicator, we could no longer
offer the product that has historically accounted for the
substantial majority of our TFS loan production and that we
might not be able to offer the remaining products available
under the program in a safe and sound manner. As a result, in
December 2010, it was determined that we would not offer any tax
refund anticipation loans or related products for the 2011 tax
season and we exited the TFS business. As a result of this
decision, our TFS business, which was previously considered a
non-core business, is now reported in discontinued operations.
For a full discussion of our discontinued Auto Finance and TFS
businesses, see the 2010 Events section of
Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations
(MD&A) and Note 3 Discontinued
Operations, in the accompanying consolidated financial
statements.
Until May 2008, when we sold our United Kingdom business to an
affiliate, we also offered consumer loans and insurance products
in the United Kingdom and the Republic of Ireland. The insurance
operations in the United Kingdom were sold November 1,
2007 to Aviva plc and its subsidiaries (Aviva) and
from that time until May 2008, we distributed our insurance
products in the United Kingdom through our branch network but
they were underwritten by Aviva. Prior to the sale of our
Canadian operations to an affiliate in November 2008, we also
provided consumers several types of loan products in Canada. For
a full discussion of the discontinued operations of the United
Kingdom and Canadian businesses, see Note 3,
Discontinued Operations in the accompanying
consolidated financial statements.
(1) MasterCard
is a registered trademark of MasterCard International
Incorporated (d/b/a MasterCard Worldwide); 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 Discover Financial Services.
5
HSBC Finance Corporation
Income (Loss) Before Income Tax Expense
Significant Trends Loss from continuing operations
before income tax expense, and various trends and activity
affecting operations, are summarized in the following table.
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Year Ended December 31,
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2010
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2009
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2008
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(in millions)
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Loss from continuing operations before income tax from prior year
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$
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(10,098
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$
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(3,695
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)
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$
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(5,376
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)
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Increase (decrease) in income from continuing operations before
income tax expense attributable to:
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Net interest income
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(873
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(2,878
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(921
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Provision for credit losses
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3,470
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2,760
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(2,480
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)
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Mark-to-market
on derivatives which do not qualify as effective hedges
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(675
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)
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792
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(310
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Gain (loss) on debt designated at fair value and related
derivatives
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2,866
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(5,285
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1,890
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Credit card fee income and enhancement services revenue
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(542
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(1,253
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(527
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)
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Gain on bulk and on-going receivable sales to HSBC affiliates
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21
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259
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(159
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Servicing and other fees from HSBC affiliates
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(82
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203
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12
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Lower of cost or market adjustment on receivables held for sale
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376
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140
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(459
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Salaries and employee benefits
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522
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475
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515
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Other marketing
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(130
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)
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166
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367
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REO expenses
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(75
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)
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143
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(9
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Goodwill and other intangible asset impairment charges
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2,308
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(1,979
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)
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3,872
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All other
activity(1)
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6
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54
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(110
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)
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7,192
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(6,403
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)
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1,681
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Loss from continuing operations before income tax for current
year
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$
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(2,906
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)
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$
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(10,098
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)
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$
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(3,695
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)
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(1) |
Reflects other activity for other revenues and operating
expenses.
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For additional discussion regarding changes in the components of
income and expense, see the caption Results of
Operations in the MD&A section of this
Form 10-K.
Funding
Our primary sources of funding in 2010 were cash generated from
operations, the sale of our remaining auto portfolio, the
issuance of retail notes, subordinated debt and Series C
preferred stock, and capital contributions from our parent.
During 2010, issuances of commercial paper continued to be lower
than our historical levels. 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.
A detailed description of our sources of funding of our
operations are set forth in the Liquidity and Capital
Resources and Off Balance Sheet Arrangements and
Secured Financings sections of the MD&A.
We use the cash generated by these funding sources to fund our
operations, service our debt obligations, originate new credit
card and private label receivables and pay dividends to our
preferred stockholders.
Employees
and Customers
At December 31, 2010, we had approximately
6,650 employees. The decrease in number of employees from
last year of 10,489 was largely due to our sale of the Auto
Finance business to SC USA, the continuing activity related to
the runoff of the Consumer Mortgage business, the centralization
of legal, compliance, tax and finance employees to HTSU and the
transfer of certain employees in our real estate receivable
servicing department to HSBC Bank USA in July 2010.
6
HSBC Finance Corporation
At December 31, 2010, we had over 34 million
customers. Some of these customers are customers of more than
one of our businesses. Consumers residing in the State of
California accounted for 10 percent of our consumer
receivables. We also have significant concentrations of domestic
consumer receivables in Florida (6 percent), New York
(7 percent), Pennsylvania (6 percent) and Ohio
(5 percent).
Operations
We have two reportable segments: Card and Retail Services and
Consumer. Our segments are managed separately and are
characterized by different middle-market consumer lending
products. Our segment results are reported on a continuing
operations basis. For additional financial information relating
to our business and our operating segments, see the section
Segment Results IFRS Management Basis in
the MD&A and Note 24, Business Segments in
the accompanying consolidated financial statements.
Our Card and Retail Services segment includes our MasterCard,
Visa, American Express and Discover credit card as well as our
private label credit card operations. The Card and Retail
Services segment offers these products throughout the United
States primarily via strategic affinity and co-branding
relationships, merchant relationships and direct mail. We also
offer products and provide customer service through the Internet.
Our Consumer segment consists of our run-off Consumer Lending
and Mortgage Services businesses. The Consumer segment provided
real estate secured and personal non-credit card loans. Loans in
our Consumer Lending business were offered with both revolving
and closed-end terms and with fixed or variable interest rates
and were originated through branch locations and direct mail.
Products were also offered and customers serviced through the
Internet. Prior to the first quarter of 2007, through our
Mortgage Services business we acquired loans from correspondent
lenders and prior to September 2007 we also originated loans
sourced through mortgage brokers. While these businesses are
operating in run-off mode, they have not been reported as
discontinued operations because we continue to generate cash
flow from the ongoing collections of the receivables, including
interest and fees.
Information about businesses or functions that fall below the
segment reporting quantitative threshold tests such as our
Insurance Services and Commercial operations, as well as our
Treasury and Corporate activities, which include certain fair
value adjustments related to purchase accounting and related
amortization, are included under the All Other
caption within our segment disclosure in the MD&A.
As discussed more fully in Note 3, Discontinued
Operations, in the accompanying consolidated financial
statements, our Auto Finance business, which was previously
reported in our Consumer segment, and our Taxpayer Financial
Services business, which was previously included in the
All Other caption, are now reported as discontinued
operations and are no longer included in our segment
presentation in the case of our Auto Finance business and under
the All Other caption in the case of our Taxpayer
Financial Services business.
Corporate goals and individual goals of executives are currently
calculated in accordance with International Financial Reporting
Standards (IFRSs) under which HSBC prepares its
consolidated financial statements. As a result, 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 (a
non-U.S. GAAP
financial measure). Accordingly, in conformity with applicable
accounting standards, 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 a U.S. GAAP basis. For additional financial
information relating to our business and operating segments as
well as a summary of the significant differences between
U.S. GAAP and IFRSs as they impact our results, see
Note 24, Business Segments in the accompanying
consolidated financial statements.
We are currently in the process of re-evaluating the financial
information used to manage our business, including the scope and
content of the financial data being reported to our Management
and our Board. To the extent we make changes to this reporting
in 2011, we will evaluate any impact such changes may have to
our segment reporting.
Card and Retail Services Our Card and Retail
Services business includes our MasterCard, Visa, American
Express and Discover receivables (Cards) in the
United States originated under various brands, including The GM
Card®,
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HSBC Finance Corporation
the Union
Plus®
(UP) credit card, Household Bank, Orchard Bank and
HSBC branded credit cards. Our Card and Retail Services
business also originates private label receivables. The private
label receivables, along with the GM and UP receivables are sold
daily to HSBC Bank USA, which we continue to service for a fee.
The Cards business has approximately $9.9 billion in
receivables at December 31, 2010 and approximately
15 million active customer accounts. According to The
Nilson Report, we are the seventh largest issuer of MasterCard
and Visa credit cards in the United States (based on managed
receivable balances).
GM, a co-branded credit card issued as part of our program
with General Motors Company, enables customers to earn discounts
on the purchase or lease of a new, eligible GM vehicle. The UP
card program 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. The
credit card portfolio of our Card and Retail 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. In January 2009, we sold our GM and UP
MasterCard and Visa portfolios with an outstanding principal
balance of $12.4 billion at the time of sale to HSBC Bank
USA. We sell all new originations under these programs to HSBC
Bank USA on a daily basis. The Card and Retail Services business
continues to service the receivables on behalf of HSBC Bank USA
for a fee. In July 2004, we purchased the account relationships
associated with certain credit card receivables from HSBC Bank
USA and sell all new receivable originations to HSBC Bank USA on
a daily basis. We continue to service this portfolio as well as
other smaller credit card receivable portfolios for HSBC Bank
USA, which have a balance at December 31, 2010 of
$2.0 billion, for a fee.
The private label credit card (PLCC) business has
approximately 14 million active customer accounts and
23 active merchant relationships. The Nilson Report lists
our private label servicing portfolio as the third largest
portfolio in the United States. At December 31, 2010, our
PLCC receivables were sourced from the following business lines:
approximately 49 percent in consumer electronics,
20 percent in power sport vehicles (snowmobiles, personal
watercraft, all terrain vehicles and motorcycles),
17 percent in department stores, and 5 percent of
receivables in furniture stores. The private label financing
products are generated through merchant retail locations,
merchant catalog and telephone sales, and direct mail and
Internet applications. On December 29, 2004, our PLCC
portfolio 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 sell all new private label
receivables upon origination, but service the entire portfolio
on behalf of HSBC Bank USA.
Consumer In late February 2009, we decided to
discontinue all originations by our Consumer Lending business.
Under the HFC and Beneficial brands and the HSBC Credit Centers,
our Consumer Lending business offered secured and unsecured loan
products, such as first and second lien position closed-end
mortgage loans, open-end home equity loans and personal
non-credit card loans. The bulk of the mortgage lending products
originated in the branch network were for refinancing and debt
consolidation rather than home purchases. We continue to service
the remaining portfolio as it runs off while helping qualifying
customers in need of assistance with appropriate loan
modifications and other account management programs. At
December 31, 2010, our Consumer Lending business had
$33.3 billion in real estate secured receivables, of which
approximately 95 percent are fixed rate loans and
90 percent are in a first lien position. Additionally, our
Consumer Lending business had $7.1 billion in personal
non-credit card receivables at December 31, 2010. In total,
our Consumer Lending business had approximately 1.2 million
active customer accounts at December 31, 2010.
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 included the operations 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. As a result of the
deterioration in the subprime mortgage lending industry, in
September 2007 we announced that Decision One originations would
cease. In 2009, we entered into agreements with several of the
largest purchasers of Decision One loans, which limits the
potential for repurchase demands from these loan purchasers. In
addition,
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HSBC Finance Corporation
the Decision One contracts had certain contractual breach,
discovery and notification requirements between Decision One and
the counterparties. These requirements strengthen our position
to defend claims. As a result, we believe repurchase exposures
in that portfolio are not significant. We continue to service
the remaining Mortgage Services portfolio as it runs off. At
December 31, 2010, our Mortgage Services business has
$16.0 billion in receivables remaining. Approximately
63 percent of the Mortgage Services portfolio is fixed rate
loans and 86 percent is in a first lien position. In total,
our Mortgage Services business had approximately 165,000 active
customer accounts at December 31, 2010.
All Other Our Insurance business designs and
distributes term life, credit life, unemployment, accidental
death and disability, whole life, annuities, disability, long
term care and a variety of other specialty protection products
to our customers and the customers of affiliated financial
institutions, such as HSBC Bank USA and HSBC Bank Canada. Such
products currently are offered throughout the United States and
Canada to customers based upon their particular needs. The
Insurance business has approximately 7.5 million customers,
which includes customers of our other businesses and of our
affiliated financial institutions. Insurance distributed to our
customers is directly written by or 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.
Regulation
and Competition
Regulation
Financial Regulatory Reform On July 21,
2010, the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank) was signed into
law. This legislation is a sweeping overhaul of the financial
regulatory system. The new law is comprehensive and includes
many provisions specifically relevant to our businesses and the
businesses of our affiliates.
For instance, over a transition period from 2013 to 2015, the
Federal Reserve Board will apply more stringent capital and risk
management requirements on bank holding companies such as HSBC
North America, which will require a minimum leverage ratio of
five percent and a minimum total risk-based capital ratio of ten
percent.
In order to preserve financial stability in the industry, the
legislation has created the Financial Stability Oversight
Council which may take certain actions, including precluding
mergers, restricting financial products offered, restricting or
terminating activities or imposing conditions on activities or
requiring the sale or transfer of assets, against any bank
holding company with assets greater than $50.0 billion that
is found to pose a grave threat to financial stability. Large
bank holding companies, such as HSBC North America, will also be
required to file resolution plans and identify how insured bank
subsidiaries are adequately protected from risk of other
affiliates. The Federal Reserve Board will also adopt a series
of increased supervisory standards to be followed by large bank
holding companies. Additionally, activities of bank holding
companies, such as the ability to acquire U.S. banks or to
engage in non-banking activities, will be more directly tied to
examination ratings of well-managed and well
capitalized. There are also provisions in Dodd-Frank that
relate to governance of executive compensation, including
disclosures evidencing the relationship between compensation and
performance and a requirement that some executive incentive
compensation is forfeitable in the event of an accounting
restatement.
In relation to requirements for bank transactions with
affiliates, the legislation which will be in effect beginning in
July 2012 extends current quantitative limits on credit
transactions to now include credit exposure related to
repurchase agreements, derivatives and securities lending
transactions. This provision may limit the use of intercompany
transactions between us and our affiliates which may impact our
current funding and hedging strategies.
The legislation has numerous provisions addressing derivatives.
There is the imposition of comprehensive regulation of
over-the-counter
(OTC) derivatives markets, including credit default
and interest rate swaps, as well as limits on FDIC-insured
banks overall OTC derivatives activities. Most of the
significant provisions are to be implemented within two to three
years of the enactment of the legislation. There is also the
requirement for the use of mandatory derivative clearing houses
and exchanges, which will significantly change the derivatives
industry.
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HSBC Finance Corporation
The legislation has created the Bureau of Consumer Financial
Protection (the CFPB). The CFPB will be a new
independent bureau within the Federal Reserve Board and will act
as a single primary Federal consumer protection supervisor to
regulate credit, savings, payment and other consumer financial
products and services and providers of those products and
services. Establishment of the CFPB is underway and the agency
expects to be operational as of July 21, 2011. The CFPB
will have the authority to issue regulations to prevent unfair,
deceptive or abusive practices in connection with consumer
financial products or services and to ensure features of any
consumer financial products or services are fully, accurately
and effectively disclosed to consumers. The CFPB will also have
authority to examine large banks, including our affiliate HSBC
Bank USA, and their affiliates, for compliance with those
regulations.
With respect to certain laws governing the provision of consumer
financial products by national banks such as our affiliate HSBC
Bank USA and our credit card banking subsidiary, HSBC Bank
Nevada, N.A. (HSBC Bank Nevada), the legislation
codifies the current judicial standard of federal preemption
with respect to national banks but adds procedural steps which
must be followed by the Office of the Comptroller of the
Currency (OCC) when considering preemption
determinations after July 21, 2011. Furthermore, the
legislation removes the ability of subsidiaries or agents of a
national bank to claim federal preemption of consumer financial
laws after July 21, 2011, although the legislation does not
purport to affect existing contracts. These limitations on
federal preemption may elevate our costs of compliance, while
increasing litigation expenses as a result of potential
Attorneys General or plaintiff challenges and the risk of courts
not giving deference to the OCC, as well as increasing
complexity due to the lack of uniformity in state law. At this
time, we are unable to determine the extent to which the
limitations on federal preemption will impact our businesses and
those of our competitors.
The legislation contains many other customer-related provisions
including provisions addressing mortgage reform. In the area of
mortgage origination, there is a requirement to apply a net
tangible benefit test for all refinancing transactions. We used
a net tangible benefits test in evaluating loan refinancings
since March 2003. There are also numerous revised servicing
requirements for mortgage loans.
The legislation will have a significant impact on the operations
of many financial institutions in the U.S., including our
affiliates. As the legislation calls for extensive regulations
to be promulgated to interpret and implement the legislation, we
are unable to determine precisely the impact that Dodd-Frank and
related regulations will have on our financial results at this
time.
Consumer Regulation Our businesses operate in
a highly regulated environment. In addition to the establishment
of the CFPB and the other consumer related provisions of
Dodd-Frank described above, our businesses are subject to laws
relating to consumer protection including, without limitation,
fair lending, fair debt collection practices, use of credit
reports, privacy matters, and disclosure of credit terms and
correction of billing errors. Local, state and national
regulatory and enforcement agencies continue efforts to address
perceived problems with the mortgage lending and credit card
industries through broad or targeted legislative or regulatory
initiatives aimed at lenders operations in consumer
lending markets. There continues to be a significant amount of
legislative activity, nationally, locally and at the state
level, designed to limit certain lending practices while
mandating servicing activities. We are also 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. For consumer loans still
being serviced by HSBC Finance Corporation, certain consumer
finance subsidiaries and affiliated entities assisting with this
servicing are generally licensed by state regulatory bodies in
the 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 entities to collect or enforce loan
agreements made with consumers and may cause these subsidiaries
to be liable for damages and penalties.
On May 22, 2009, the Credit Card Accountability
Responsibility and Disclosure Act of 2009 (the CARD
Act) was signed into law and we have implemented all of
its applicable provisions. The CARD Act has required us to make
changes to our business practices, and will require us and our
competitors to manage risk differently than has historically
been the case. Pricing, underwriting and product changes have
either been implemented or are under continuing analysis to
partially mitigate the impact of the new legislation and
implementing regulations. Although
10
HSBC Finance Corporation
implementation of the new rules has had a significant financial
impact on us, the full impact of the CARD Act remains uncertain
at this time as it will ultimately depend upon successful
implementation of our strategies, consumer behavior, and the
actions of our competitors as well as the clarifying rules by
the regulators. See Segment Results IFRSs
Management Basis with the Managements Discussion and
Analysis of Financial Condition and Results of Operations
(MD&A) within this
Form 10-K
for further discussion of the impact of the CARD Act on our
business.
Due to the turmoil in the mortgage lending markets, there has
also been a significant amount of federal and state legislative
and regulatory focus on this industry. Increased regulatory
oversight over residential mortgage lenders has occurred,
including through state and federal examinations and periodic
inquiries from state attorneys general for information. Several
regulators, legislators and other governmental bodies have
promoted particular views of appropriate or model
loan modification programs, suitable loan products and
foreclosure and loss mitigation practices. We have developed a
modification program that employs procedures which we believe
are most responsive to our customers needs and continue to
enhance and refine these practices as other programs are
announced, and we evaluate the results of our customer
assistance efforts. We continue to be active in various home
preservation initiatives through participation at local events
sponsored by public officials, community leaders and consumer
advocates.
State and federal officials are investigating the procedures
followed by mortgage servicing companies and banks, including
HSBC Finance Corporation and certain of our affiliates, relating
to foreclosures. We and our affiliates have responded to all
related inquiries and cooperated with all applicable
investigations, including a joint examination by staffs of the
Federal Reserve Board (the Federal Reserve) and the
Office of the Comptroller of the Currency (the OCC)
as part of their broad horizontal review of industry foreclosure
practices. Following the examination, the Federal Reserve issued
a supervisory letter to HSBC Finance Corporation and HSBC North
America noting certain deficiencies in the processing,
preparation and signing of affidavits and other documents
supporting foreclosures and in governance of and resources
devoted to our foreclosure processes, including the evaluation
and monitoring of third party law firms retained to effect our
foreclosures. Certain other processes were deemed adequate. The
OCC issued a similar supervisory letter to HSBC Bank USA. We
have suspended foreclosures until such time as we have
substantially addressed the noted deficiencies in our processes.
We are also reviewing foreclosures where judgment has not yet
been entered and will correct deficient documentation and
re-file affidavits where necessary. See Executive
Overview in MD&A for further discussion.
We and our affiliates are engaged in discussions with the
Federal Reserve and the OCC regarding the terms of consent cease
and desist orders, which will prescribe actions to address the
deficiencies noted in the joint examination. We expect the
consent orders will be finalized shortly after the date this
Form 10-K
is filed. While the impact of the Federal Reserve consent order
on HSBC Finance Corporation depends on the final terms, we
believe it has the potential to increase our operational,
reputational and legal risk profiles and expect implementation
of its provisions will require significant financial and
managerial resources. In addition, the consent orders will not
preclude further actions against HSBC Finance Corporation or our
affiliates by bank regulatory or other agencies, including the
imposition of fines and civil money penalties. We are unable at
this time, however, to determine the likelihood of any further
action or the amount of penalties or fines, if any, that may be
imposed by the regulators or agencies.
As a result of publicized foreclosure practices of certain
servicers, certain courts have issued new rules relating to
foreclosures and we anticipate that scrutiny of foreclosure
documentation and practices, including practices of foreclosure
law firms, will increase. In some areas, court officials are
requiring additional verification of information filed prior to
the foreclosure proceeding. If these trends continue after we
have reinstituted foreclosures, there could be additional delays
in the processing of foreclosures.
Banking Institutions In December 2007,
U.S. 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 became effective
April 1, 2008, and requires large bank holding companies,
including HSBC North America to adopt its provisions subject to
regulatory approval no later than April 1, 2011 in
accordance with current regulatory timelines. HSBC North America
has established a
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HSBC Finance Corporation
comprehensive Basel II infrastructure project. While we
will not report separately under the new rules, the composition
of our balance sheet will impact the overall HSBC
North America capital requirements. As a result, we took a
series of actions in 2010 to achieve targeted total capital
levels under these new regulations, including the exchange of
certain existing senior notes for newly issued subordinated
debt, the reopening of the subordinated debt to additional
investors and the sale of our auto finance receivable portfolio
which reduced asset levels. Further increases in regulatory
capital may be required prior to HSBC North Americas
Basel II adoption date. The exact amount of additional
capital required, however, will depend upon both our prevailing
risk profile and that of our North America affiliates under
various stress scenarios.
HSBC North America and HSBC Finance Corporation also 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.
In December 2010, the Basel Committee on Banking Supervision
(the Basel Committee) issued final rules on A
global regulatory framework for more resilient banks and banking
systems, commonly referred to as Basel III, which presents
details of a bank capital and liquidity reform program to
address both firm-specific and broader, systemic risks to the
banking sector. HSBC North America is in the process of
evaluating the Basel III framework for liquidity risk
management. Although the Basel Committee has issued guidance, we
are still awaiting formal instructions as to how the ratios will
be calculated by the U.S. regulators. The proposals include both
a Liquidity Coverage Ratio (LCR) designed to ensure
banks have sufficient high-quality liquid assets to survive a
significant stress scenario lasting 30 days and a Net
Stable Funding Ratio (NSFR) with a time horizon of
one year to ensure a sustainable maturity structure of assets
and liabilities. For both ratios, HSBC North America will be
expected to achieve a ratio of 100 percent or better. The
observation period for the ratios begins in 2012 with LCR
introduced by 2015 and NSFR by 2018. Based on the results of the
observation periods, the Basel Committee and the regulators may
make further changes by 2013 and 2016 for LCR and NSFR,
respectively. We anticipate meeting these requirements well in
advance of their formal introduction. HSBC Finance Corporation
may need to increase its liquidity profile to support HSBC North
Americas compliance with the new rules. We are unable at
this time, however, to determine the extent of changes HSBC
Finance Corporation will need to make to its liquidity position,
if any.
Our credit card banking subsidiary, HSBC Bank Nevada, is a
federally chartered credit card bank and a member of
the Federal Reserve System. HSBC Bank Nevada is subject to
regulation, supervision and examination by the OCC. Any deposits
held by HSBC Bank Nevada are insured by the Federal Deposit
Insurance Corporation (FDIC) which renders it
subject to relevant FDIC regulation.
HSBC Bank Nevada, like other FDIC-insured banks, currently is
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. Beginning in the second quarter of
2011, FDIC assessments will be based on average consolidated
total assets and risk profile. However, the fees to HSBC Bank
Nevada are anticipated to be immaterial.
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, which
require HSBC Bank Nevada to maintain approximately
$100 million in capital to maintain a 6% leverage ratio. At
December 31, 2010, capital at HSBC Bank Nevada exceeded
this requirement.
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
created a North American organization structure 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
12
HSBC Finance Corporation
holding companies under the Gramm-Leach-Bliley Act amendments to
the BHCA, enabling them to offer a broad range of financial
products and services. HSBC North America, as a financial
holding company, is supervised and examined by the Federal
Reserve Bank of Chicago. We are also regularly examined and
reviewed by the Federal Reserve Bank of Chicago. 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, 2010, HSBC Bank Nevada was
well-capitalized under applicable OCC and FDIC regulations.
Competition The credit card industry in which
we operate is highly fragmented and intensely competitive with a
broad range of institutions offering both bank cards and private
label cards. Terms such as annual percentage rates, fees, and
credit lines as well as other card benefits
and/or
features are normally what lead customers to apply for one
particular card over another. With ample competition in the
credit card industry and low costs for a customer to switch to
another card issuer, consumer loyalty in this industry tends to
be minimal. Competitive pressure, particularly in the prime
credit card market, may increase as credit card issuers increase
origination activities while the demand for credit and levels of
customer spending are expected to remain below historical levels
for the foreseeable future.
As more fully discussed in the MD&A, in the current market
conditions, lending is curtailed and is likely to continue to be
curtailed for some time. The ultimate impact on competitive
conditions of the upheaval in the marketplace, negative economic
conditions and the resulting increased regulation over our
industry generally at the Federal and state level and
specifically over the credit card industry is unclear at this
time. The ultimate impact on competition as the economy recovers
is also unclear.
Corporate
Governance and Controls
HSBC Finance Corporation maintains a website at
www.us.hsbc.com 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 and Risk, Compliance and Executive 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. Our Statement of Business Principles and Code
of Ethics can be found on our corporate website. We also 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.
Printed copies of this information can be requested at no
charge. Requests should be made to HSBC Finance Corporation,
26525 North Riverwoods Boulevard, Mettawa, Illinois
60045, Attention: Corporate Secretary.
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 also file a written affirmation
of an authorized officer with the New York Stock Exchange (the
NYSE) certifying that such officer is not aware of
any violation by HSBC Finance Corporation of the applicable NYSE
corporate governance listing standards in effect as of
February 28, 2011.
13
HSBC Finance Corporation
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. We undertake 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 we may face.
The current uncertain market and economic conditions may
continue to affect our business, results of operations and
financial condition. Our business and earnings are
affected by general business, economic and market conditions in
the United States and abroad. Given our concentration of
business activities in the United States and due to the nature
of our historical business as a consumer lender to generally
non-conforming and non-prime customers, we are particularly
exposed to any additional turmoil in the economy, housing
downturns, high unemployment, tight credit conditions and
reduced economic growth that have occurred over the past three
years and appear likely to continue in 2011. General business,
economic and market conditions that could continue to affect us
include:
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low consumer confidence and reduced consumer spending;
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a double dip recession;
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unemployment levels:
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wage income levels and declines in wealth;
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market value of real estate throughout the United States;
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inflation;
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monetary supply;
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fluctuations in both debt and equity capital markets in which we
fund our operations;
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unexpected geopolitical events;
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fluctuations in the value of the U.S. dollar;
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short-term and long-term interest rates;
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availability of liquidity;
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tight consumer credit conditions;
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HSBC Finance Corporation
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higher bankruptcy filings; and
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new laws, regulations or regulatory initiatives.
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In a challenging economic environment such as currently being
experienced in the United States, more of our customers are
likely to, and have in fact become, delinquent on their loans or
other obligations as compared to historical periods as many of
our customers are experiencing reductions in cash flow available
to service their debt. These delinquencies, in turn, have
resulted in higher levels of provision for credit losses and
charge-offs, which have adversely affected our earnings and
resulted in significant losses from the third quarter of 2007 to
date. The problems in the housing markets in the United States
in the last four years have been exacerbated by continued high
unemployment rates. If businesses remain cautious to hire,
additional losses are likely to be significant in all types of
our consumer loans, including credit cards, due to decreased
consumer income.
Although during the first half of 2010, housing prices began to
stabilize and even recover in certain markets, housing prices
started to decline again in the latter half of 2010. If housing
prices continue to decline, there may be increased delinquency
and losses in our real estate portfolio.
Mortgage lenders have substantially tightened lending standards.
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 for many
of our customers. This, in turn, impacted both credit
performance and run-off rates and has resulted in significantly
elevated delinquency rates for real estate secured loans in our
portfolio. Additionally, the high levels of inventory of homes
for sale combined with depressed property values in many markets
has resulted in higher loss severities on homes that are
foreclosed and remarketed. Despite our cessation in processing
foreclosures in December, our inventory of foreclosed properties
(real estate owned or REO) continued to increase
during 2010 and is at its highest levels since the third quarter
of 2008. Although average REO loss severities were relatively
stable in 2010 compared to 2009, the level of severities has
been increasing in the latter half of 2010. If severities
continue to increase, it could have a significant impact on
future losses.
In the event economic conditions continue to be depressed or
become further depressed and lead to a double dip
recession, there would be a significant negative impact on
delinquencies, charge-offs and losses in all loan portfolios
with a corresponding impact on our results of operations.
We may incur additional costs and expenses in ensuring that
we satisfy requirements relating to our mortgage foreclosure
processes and the industry-wide delay in processing foreclosures
may have a significant impact upon loss severity. State and
federal officials are investigating the procedures followed by
mortgage servicing companies and banks, including HSBC Finance
Corporation and certain of our affiliates, relating to
foreclosures. We and our affiliates have responded to all
related inquiries and cooperated with all applicable
investigations, including a joint examination by staffs of the
Federal Reserve and the OCC as part of their broad horizontal
review of industry foreclosure practices. Following the
examination, the Federal Reserve issued a supervisory letter to
HSBC Finance Corporation and HSBC North America noting certain
deficiencies in the processing, preparation and signing of
affidavits and other documents supporting foreclosures and in
governance of and resources devoted to our foreclosure
processes, including the evaluation and monitoring of third
party law firms retained to effect our foreclosures. Certain
other processes were deemed adequate. The OCC issued a similar
supervisory letter to HSBC Bank USA. We have suspended
foreclosures until such time as we have substantially addressed
the noted deficiencies in our processes. We are also reviewing
foreclosures where judgment has not yet been entered and will
correct deficient documentation and re-file affidavits where
necessary.
We and our affiliates are engaged in discussions with the
Federal Reserve and the OCC regarding the terms of consent cease
and desist orders, which will prescribe actions to address the
deficiencies noted in the joint examination. We expect the
consent orders will be finalized shortly after the date this
Form 10-K
is filed. While the impact of the Federal Reserve consent order
on HSBC Finance Corporation depends on the final terms, we
believe it has the potential to increase our operational,
reputational and legal risk profiles and expect implementation
of its provisions will require significant financial and
managerial resources. In addition, the consent orders will not
preclude further actions against HSBC Finance Corporation or our
affiliates by bank regulatory or other
15
HSBC Finance Corporation
agencies, including the imposition of fines and civil money
penalties. We are unable at this time, however, to determine the
likelihood of any further action or the amount of penalties or
fines, if any, that may be imposed by the regulators or agencies.
We expect to incur additional costs and expenses in connection
with the correction or affirmation of previously filed
foreclosure paperwork and the resulting delays in foreclosures,
including costs associated with the maintenance of properties
while foreclosures are delayed, legal expenses associated with
re-filing documents or, as necessary,
re-filing
foreclosure cases, and costs associated with fluctuations in
home prices while foreclosures are delayed. These costs could
increase depending on the length of the delay. In addition, we
may incur additional costs and expenses as a result of
legislative, administrative or regulatory investigations or
actions relating to our foreclosure processes or with respect to
the mortgage servicing industry in general. We may also see an
increase in private litigation concerning our practices.
However, it is not possible at this time to predict the ultimate
outcome of these matters or the impact that they will have on
our financial results.
Due to the significant slow-down in foreclosures, and in some
instances, cessation of all foreclosure processing by numerous
loan servicers, including us, for some period of time in 2011
there may be some reduction in the number of properties being
marketed following foreclosure. The impact of that decrease may
increase demand for properties currently on the market resulting
in a stabilization of home prices but could also result in a
larger number of vacant properties in communities creating
downward pressure on general property values. As a result, the
short term impact of the foreclosure processing delay is highly
uncertain. However, the longer term impact is even more
uncertain as eventually servicers will again begin to foreclose
and market properties in large numbers which is likely to create
a significant over-supply of housing inventory. This could lead
to a significant increase in loss severity on REO properties.
Recently implemented Federal and state laws and regulations
may significantly impact our operations. We operate in
a highly regulated environment. Changes in federal, state and
local laws and regulations, including changes in tax rates,
affecting banking, consumer credit, bankruptcy, privacy,
consumer protection or other matters could materially impact our
performance. Ensuring compliance with increasing regulatory
requirements and initiatives could affect operations costs and
negatively impact our overall results. Specifically, attempts by
local, state and national regulatory agencies to address
perceived problems with the credit card industry and, more
recently, to additionally address perceived problems in the
financial services industry generally through broad or targeted
legislative or regulatory initiatives aimed at lenders
operations in consumer lending markets, could affect us in
substantial and unpredictable ways, including limiting the types
of products we can offer, how these products may be originated,
the fees and charges that may be applied to accounts, and how
accounts may be collected or security interests enforced which
ultimately could negatively impact our results. There is also
significant focus on loss mitigation and foreclosure activity
for real estate loans. We cannot fully anticipate the response
by national regulatory agencies, state attorneys general, or
certain legislators, or if significant changes to our operations
and practices will be required as a result.
On July 21, 2010, the Dodd-Frank Wall Street Reform
and Consumer Protection Act, which is a sweeping overhaul
of the financial services industry, was signed into law. For a
description of the law, see the Regulation
Financial Regulatory Reform section under the
Regulation and Competition section of Item 1.
Business. The law will have significant impact on the operations
of financial institutions in the U.S., including us and our
affiliates. We are unable at this time, however, to determine
the full impact of the law due to the significant number of new
rules and regulations which will be promulgated in order to
implement the law. Also, specifically and of utmost relevance to
our Card and Retail Services and Consumer businesses, we do not
know what will be the far-reaching effect on our business of the
newly created Consumer Financial Protection Bureau
(CFPB), since the CFPB has been given broad based
authority over consumer products and services such as provided
by our Card and Retail Services and Consumer businesses.
On May 22, 2009, the Credit Card Accountability
Responsibility and Disclosure Act of 2009 was signed into law
and we have implemented all of its applicable provisions. The
CARD Act required changes to our business practices, and will
require us and our competitors to manage risk differently than
has historically been the case. Pricing, underwriting and
product changes have either been implemented or are under
continuing analysis to
16
HSBC Finance Corporation
partially mitigate the impact of the new legislation and
implementing regulations. Although implementation of the new
rules has had a significant financial impact on us, the full
impact of the CARD Act remains uncertain at this time as it will
ultimately depend upon successful implementation of our
strategies, consumer behavior and the actions of our
competitors, as well as the clarifying rules issued by the
regulators.
The transition to Basel II in 2011 may continue to
put significant pressure on regulatory capital. Subject
to regulatory approval, HSBC North America will be required to
adopt Basel II provisions no later than April 1, 2011,
in accordance with current regulatory timelines. While
Basel II does not apply directly to us, as a subsidiary of
HSBC North America, we may be required to execute certain
actions or strategies to ensure HSBC North America meets its
capital requirements. For instance, in the fourth quarter of
2010, we executed two balance sheet management strategies to
increase total capital as measured under the Basel guidelines.
First, we exchanged $1.8 billion in outstanding senior
unsecured debt for $1.9 billion of subordinated debt.
Second, we reopened the subordinated debt issuance described
above and increased the outstanding balance of this debt issue
by $1.0 billion. In both instances, interest expense
increased and net interest income declined as we replaced senior
debt positions with the higher yielding subordinated debt. The
amount of capital required prior to the Basel II adoption
date will depend on our prevailing risk profile and that of our
North America affiliates under various stress scenarios.
Adoption of the Basel II provisions must be preceded by a
parallel run period of at least four quarters, and requires the
approval of U.S. regulators. This parallel run, which was
initiated by HSBC North America in January 2010, encompasses
enhancements to a number of risk policies, processes and systems
to align with the Basel II final rule requirements. HSBC
North America will seek regulatory approval for adoption when
the program enhancements have been completed which may extend
beyond April 1, 2011.
Key employees may be difficult to retain due to contraction
of the business and limits on promotional
opportunities. Our employees are our most important
resource and, in many areas of the financial services industry,
competition for qualified personnel is intense. If we are unable
to continue to attract and retain qualified key employees to
support the various functions of our businesses, our
performance, including our competitive position, could be
materially adversely affected. The significant losses we have
recognized, reductions in variable compensation and other
benefits, reductions of the size and scope of operations and the
winding down of significant portions of the businesses could
raise concerns about key employees future compensation and
promotional opportunities. As economic conditions improve, there
will be increased risk to retain top performers and critical
skill employees. If key personnel were to leave us and equally
knowledgeable or skilled personnel are unavailable within HSBC
or could not be sourced in the market to fill these roles, our
ability to efficiently manage through the difficult economy and
transformational changes may be hindered or impaired.
Performance of modified loans in the current economic
conditions may prove less predictable and result in higher
losses. In an effort to provide assistance to our
customers who are experiencing financial difficulties in the
current weak economy, in the last four years we have agreed to
modify the terms of a significant number of our loans. While we
have a long-standing history of working with customers
experiencing financial difficulties, the number of customers
that have needed and qualified for loan modifications is
significantly higher than our historical experience. Under the
current economic conditions, the credit performance of these
modified loans may not conform to either historical experience
or our expectations. In addition, further deterioration in
housing prices and unemployment could negatively impact the
performance of the modified portfolio. While our credit loss
reserve process considers whether loans have been reaged,
re-written or are subject to modification, loss reserve
estimates are influenced by factors outside our control, such as
consumer payment patterns and economic conditions, making it
reasonably possible that they could change in either direction.
A significant rise in interest rates may significantly impact
our net interest income which may adversely impact our financial
results. Both our consumer lending and mortgage
services real estate secured receivables will continue to
remain on our balance sheet for extended durations. Reduced
mortgage prepayment rates and higher levels of loan
modifications have had the effect of extending the projected
average life of these loan portfolios. As a result, both net
interest income at risk and asset portfolio valuations have
increasingly become exposed to rising interest rates as the
average life of our liability portfolios has declined while the
average life of our asset portfolios has extended. In the event
we are not successful in fully mitigating these risks and
interest rates rise
17
HSBC Finance Corporation
significantly, net interest income, and consequently, net income
or loss, would be negatively affected. Also, with increased
risks remaining on the balance sheet, we may be called upon by
HSBC North America to raise capital or to execute certain
actions or strategies to ensure HSBC North America meets its
capital requirements.
Operational risks, such as systems disruptions or failures,
breaches of security, human error, changes in operational
practices or inadequate controls may adversely impact our
business and reputation. Operational risk is inherent
in virtually all of our activities. While we have established
and maintain an overall risk framework that is designed to
balance strong corporate oversight with well-defined independent
risk management, we continue to be subject to some degree of
operational risk. Our businesses are dependent on our ability to
process a large number of complex transactions. If any of our
financial, accounting, or other data processing and other
recordkeeping systems and management controls fail or have other
significant shortcomings, we could be materially adversely
affected. HSBC North America will continue the implementation of
several high priority systems improvements and enhancements in
2011, each of which may present increased or additional
operational risk that may not be known until their
implementation is complete. Also, in order to react quickly to
newly implemented regulatory requirements, implementation of
changes to systems and enhancements may be required to be
completed within very tight time frames, which would increase
operational risk.
We may also be subject to disruptions of our operating systems
infrastructure arising from events that are wholly or partially
beyond our control, which may include:
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computer viruses or electrical or telecommunications outages;
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natural disasters such as hurricanes and earthquakes;
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events arising from local, regional or international politics,
including terrorist acts;
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unforeseen problems encountered while implementing major new
computer systems; or
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global pandemics, which could have a significant effect on our
business operations as well as on HSBC affiliates world-wide.
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Such disruptions may give rise to losses in service to
customers, an inability to collect our receivables in affected
areas and other loss or liability to us.
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 risks 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. 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.
In recent years, instances of identity theft and fraudulent
attempts to obtain personal financial information from
individuals and from companies that maintain such information
pertaining to their customers have become more prevalent. Use of
the internet for these purposes has also increased. Such acts
can have the following possible impacts:
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threaten the assets of our customers;
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negatively impact customer credit ratings;
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impact customers ability to repay loan balances;
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increase costs for us to respond to such threats and to enhance
our processes and systems to ensure maximum security of
data; or
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damage our reputation from public knowledge of intrusion into
our systems and databases.
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18
HSBC Finance Corporation
In addition, there is the risk that our controls and procedures
as well as business continuity and data security systems could
prove to be inadequate. Any such failure could affect our
operations and could have a material adverse effect on 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 could
materially positively or negatively impact our performance and
results. Such changes may include:
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raising the minimum payment or fees to be charged on credit card
accounts;
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determinating to acquire or sell credit card, real estate
secured or other receivables;
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changes to our charge-off policies or customer account
management and risk management/collection policies and practices;
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increasing investment in technology, business infrastructure and
specialized personnel; or
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outsourcing of various operations.
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Lawsuits and regulatory investigations and proceedings may
continue and increase in the current economic and anticipated
regulatory environment. HSBC Finance Corporation and
our subsidiaries are named as defendants 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. We saw continued
litigation in 2010 resulting from the deterioration of
customers financial condition, the mortgage markets
continued downturn and general economic conditions. There is no
certainty that the litigation will decrease in the near future,
especially in the event of continued high unemployment rates, a
resurgent recession or additional regulatory investigations by
the federal and state governments or agencies. With the
increased regulatory environment, particularly in the financial
services industry, there may be additional regulatory
investigations and reviews conducted by banking regulators,
state attorneys general or state regulators which may cause
financial or reputational harm. With the increased regulatory
environment, particularly in the financial services industry,
there may be additional regulatory investigations and reviews
conducted by regulators and other enforcement agencies that, if
determined adversely, may result in judgments, settlements,
fines, penalties or other results, including additional
compliance requirements, which could materially adversely affect
our business, financial condition or results of operation, or
cause us serious reputational harm.
Our inability to meet funding requirements due to our balance
sheet attrition or ratings could impact
operations. Adequate liquidity is critical to our
ability to operate our businesses. The pace of our balance sheet
attrition has a significant impact on our liquidity and risk
management processes. Properly managing these processes is
critical to mitigating liquidity risk. Lower cash flow resulting
from declining non-core receivable balances as well as lower
cash generated from balance sheet attrition due to increased
charge-offs may not provide sufficient cash to fully cover
maturing debt over the next four to five years. If market
pricing for receivables improves, a portion of the required
funding could be generated through sales of receivable
portfolios. Additionally, HSBC Finance Corporation continues to
enjoy access to funding through issuance in the primary debt
markets. A portion of any funding gap could be covered through
the selected issuance of debt. In the event a portion of this
gap was met through issuances of term debt to either retail or
institutional investors, we anticipate these issuances would be
structured to better match the projected cash flows of the
remaining run-off portfolio and reduce reliance on direct HSBC
support.
Our credit ratings are an important part of maintaining our
liquidity. As indicated by the major credit rating agencies, our
credit ratings are directly dependent on the continued support
of HSBC. Any downgrade in credit ratings would increase
borrowing costs, impact the ability to issue commercial paper
and, depending on the severity of the downgrade, substantially
limit access to capital markets, require cash payments or
collateral posting, and permit termination of certain
significant contracts.
Our reputation has a direct impact on our financial results
and ongoing operations. Our ability to attract
customers and conduct business transactions with our
counterparties could be adversely affected to the extent our
19
HSBC Finance Corporation
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:
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appropriately addressing potential conflicts of interest;
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legal and regulatory requirements;
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ethical issues, including alleged deceptive or unfair lending or
servicing practices;
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anti-money laundering and economic sanctions programs;
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privacy issues;
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fraud issues;
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data security issues related to our customers or employees;
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record-keeping;
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sales and trading practices;
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the proper identification of the legal, reputational, credit,
liquidity and market risks inherent our businesses; and
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general company performance.
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The failure to address these issues appropriately could make our
customers unwilling to do business with us or give rise to
increased regulatory action, which could adversely affect our
results of operations.
Unanticipated risks may impact our results. We seek
to monitor and manage our risk exposure through a variety of
separate but complementary financial, credit market,
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 and prepare contingency plans in
anticipation of developments, those techniques and plans 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 all significant risks we
face is an important factor that can significantly impact our
results.
Competition in the credit card industry may have a material
adverse impact on our future results. We operate in a
highly competitive environment. Competitive conditions are
expected to continue to intensify as continued merger activity
in the financial services industry produces larger,
better-capitalized and more geographically diverse companies.
New products, customers and channels of distribution are
constantly emerging. Such competition may impact the terms,
rates, costs
and/or
profits historically included in the financial products we offer
and purchase. There is no assurance that the significant and
increasing competition within the financial services industry
will not materially adversely affect our future results.
Management projections, estimates and judgments based on
historical performance may not be indicative of our future
performance. Our management is required to use certain
estimates in preparing our financial statements, including
accounting estimates to determine loan loss reserves, reserves
related to litigation, deferred tax assets and the fair market
value of certain assets and liabilities, including goodwill and
intangibles, among other items. Certain asset and liability
valuations and, in particular, loan loss reserve estimates are
judgmental and are influenced by factors outside our control.
Judgment remains a more significant factor in the estimation of
inherent probable losses in the portfolios. 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 historical models, unexpected additional losses
could result. Alternatively, the recent historical performance
trends of high unemployment rates and home price depreciation
occurring in the last several years, may now not be reflective
of the performance of loans modified since January 2007 as a
result of recent improvements in the economic environment, so
judgment is again a more significant factor in the estimation of
losses related to modified loans.
20
HSBC Finance Corporation
Another example in which management judgment is significant is
in the evaluation of the recognition of deferred tax assets and
in the determination of whether there is a need for a related
valuation allowance. We are required to establish a valuation
allowance for deferred tax assets and record a charge to income
or shareholders equity if we determine, based on available
evidence at the time the determination is made, that it is more
likely than not that some portion or all of the deferred tax
assets will not be realized. In evaluating the need for a
valuation allowance, we estimate future taxable income based on
management approved business plans, future capital requirements
and ongoing tax planning strategies, including capital support
from HSBC as a necessary part of such plans and strategies. This
process involves significant management judgment about
assumptions that are subject to change from period to period.
The recognition of deferred tax assets requires management to
make significant judgments about future earnings, the periods in
which items will impact taxable income, and the application of
inherently complex tax laws. However, since market conditions
have created losses in HSBC North America in recent periods and
volatility on our pre-tax book income, the analysis of the
realizability of the deferred tax asset significantly discounts
any future taxable income expected from continuing operations
and relies to a greater extent on continued capital support from
our parent, HSBC, including tax planning strategies implemented
in relation to such support. Included in our forecasts are
assumptions regarding our estimate of future expected credit
losses which include assumptions about further home price
depreciation and future unemployment levels and their related
impact on credit losses. The use of different assumptions can
result in changes in the amounts of deferred tax items
recognized, which can result in equity and earnings volatility
because such changes are reported in current period earnings.
See Note 18, Income Taxes, in the accompanying
consolidated financial statements for additional discussion of
our deferred tax assets and the related valuation allowance.
Changes in accounting standards are beyond our control and
may have a material impact on how we report our financial
results and condition. 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 Federal
Reserve Board, change the financial accounting and reporting
standards, or the interpretation thereof, and guidance 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.
Significant reductions in pension assets may require
additional financial contributions from us. Effective
January 1, 2005, our previously separate qualified defined
benefit pension plan was combined with that of HSBC Bank
USAs into a single HSBC North America qualified defined
benefit plan. We are responsible for providing approximately
33 percent of the financial support required by the plan.
In 2010 and 2009, the plan had allocated assets between three
primary strategies: domestic equities, international equities
and fixed income securities. At December 31, 2010, plan
assets were lower than projected plan liabilities resulting in
an under-funded status. During 2010, domestic and international
equity indices increased between 11 percent and
17 percent while interest rates decreased. After expenses,
the combination of positive equity returns and fixed income
returns along with a $187 million contribution to the plan
by HSBC North America in 2010 resulted in an overall increase in
plan assets of 20 percent in 2010. This increase, when
combined with an increase in the projected benefit obligation
continued to result in an under-funded status. At
December 31, 2010, the defined benefit plan was frozen,
significantly reducing future benefit accruals. The projected
benefit obligation exceeded the fair value of the plan assets by
approximately $820 million. As these obligations relate to
the HSBC North America pension plan, only a portion of this
deficit should be considered our responsibility. We and other
HSBC North American affiliates with employees participating in
this plan will be required to make up this shortfall over a
number of years as specified under the Pension Protection Act.
This can be accomplished through direct contributions,
appreciation in plan assets
and/or
increases in interest rates resulting in lower liability
valuations. See Note 22, Pension and Other
Postretirement Benefits, in the accompanying consolidated
financial statements for further information concerning the HSBC
North America defined benefit plan.
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HSBC Finance Corporation
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, 2010.
Item 2. Properties
Our operations are located throughout the United States, with
principal facilities located in Washington, D.C., District
of Columbia; Brandon, Florida; Chesapeake, Virginia; Hanover,
Maryland; Las Vegas, Nevada; Tigard, Oregon; Mettawa, Illinois;
Schaumburg, Illinois; Vernon Hills, Illinois; Elmhurst,
Illinois; Salinas, California; London, Kentucky; and Sioux
Falls, South Dakota. Our principal executive offices are located
in Mettawa, Illinois. A facility in Volo, Illinois, owned by our
affiliate HTSU, provides data processing support for our
operations.
Substantially all corporate offices, regional processing and
regional servicing center spaces are operated under lease with
the exception of a credit card processing facility in Las Vegas,
Nevada; a data processing center in Vernon Hills, Illinois; and
servicing facilities in London, Kentucky and Chesapeake,
Virginia. We believe that such properties are in good condition
and meet our current and reasonably anticipated needs.
Item 3. Legal
Proceedings
See Litigation and Regulatory Matters in
Note 27, Commitments and Contingent
Liabilities, in the accompanying consolidated financial
statements beginning on page 218 for our legal proceedings,
disclosure which is incorporated herein by reference.
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
22
HSBC Finance Corporation
Item 6. Selected
Financial Data
In December 2010, we determined we could no longer offer
Taxpayer Financial Services (TFS) loans in a safe
and sound manner and, therefore, it was determined that we would
no longer offer these loans and related products going forward.
In March 2010 we sold our auto finance receivables servicing
operations and certain auto finance receivables to a third party
and in August 2010, we sold the remainder of our auto finance
receivable portfolio to a third party. In May 2008, we sold all
of the common stock of Household International Europe Limited,
the holding company for our United Kingdom business (U.K.
Operations) to HSBC Overseas Holdings (UK) Limited
(HOHU), an HSBC affiliate. In November 2008, we sold
all of the common stock of HSBC Financial Corporation Limited,
the holding company of our Canadian business (Canadian
Operations) to HSBC Bank Canada, an HSBC affiliate. As a
result, our former U.K. and Canadian Operations and our TFS and
Auto Finance businesses are now reported as discontinued
operations for all periods presented. The following selected
financial data presented below excludes the results of our
discontinued operations for all periods presented unless
otherwise noted.
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Year Ended December 31,
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2010
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2009
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2008
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2007
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2006
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(in millions)
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Statement of Income (Loss)
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Net interest income
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$
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4,185
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$
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5,058
|
(1)
|
|
$
|
7,936
|
|
|
$
|
8,857
|
|
|
$
|
8,563
|
|
Provision for credit losses
|
|
|
6,180
|
|
|
|
9,650
|
(1)
|
|
|
12,410
|
|
|
|
9,930
|
|
|
|
5,572
|
|
Other revenues excluding the change in value of fair value
optioned debt and related derivatives
|
|
|
1,826
|
|
|
|
2,837
|
|
|
|
2,791
|
|
|
|
4,330
|
|
|
|
4,376
|
|
Change in value of fair value optioned debt and related
derivatives
|
|
|
741
|
|
|
|
(2,125
|
)
|
|
|
3,160
|
|
|
|
1,270
|
|
|
|
-
|
|
Operating expenses, excluding goodwill and other intangible
asset impairment charges
|
|
|
3,478
|
|
|
|
3,910
|
|
|
|
4,843
|
|
|
|
5,702
|
|
|
|
5,499
|
|
Goodwill and other intangible asset impairment charges
|
|
|
-
|
|
|
|
2,308
|
|
|
|
329
|
|
|
|
4,201
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income tax
benefit (expense)
|
|
|
(2,906
|
)
|
|
|
(10,098
|
)
|
|
|
(3,695
|
)
|
|
|
(5,376
|
)
|
|
|
1,868
|
|
Income tax benefit (expense)
|
|
|
1,007
|
|
|
|
2,632
|
|
|
|
1,087
|
|
|
|
1,060
|
|
|
|
(674
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(1,899
|
)
|
|
|
(7,466
|
)
|
|
|
(2,608
|
)
|
|
|
(4,316
|
)
|
|
|
1,194
|
|
Income (loss) from discontinued operations, net of tax
|
|
|
(17
|
)
|
|
|
16
|
|
|
|
(175
|
)
|
|
|
(590
|
)
|
|
|
249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,916
|
)
|
|
$
|
(7,450
|
)
|
|
$
|
(2,783
|
)
|
|
$
|
(4,906
|
)
|
|
$
|
1,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(in millions)
|
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
76,336
|
|
|
$
|
89,645
|
|
|
$
|
120,118
|
|
|
$
|
141,770
|
|
|
$
|
155,279
|
|
Receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
secured(2)
|
|
$
|
49,336
|
|
|
$
|
59,535
|
|
|
$
|
71,666
|
|
|
$
|
84,381
|
|
|
$
|
92,592
|
|
Credit
card(3)
|
|
|
9,897
|
|
|
|
11,626
|
|
|
|
13,231
|
|
|
|
30,091
|
|
|
|
27,499
|
|
Private label
|
|
|
-
|
|
|
|
-
|
|
|
|
65
|
|
|
|
147
|
|
|
|
289
|
|
Personal non-credit
card(2)
|
|
|
7,117
|
|
|
|
10,486
|
|
|
|
15,568
|
|
|
|
18,045
|
|
|
|
18,244
|
|
Commercial and other
|
|
|
33
|
|
|
|
50
|
|
|
|
93
|
|
|
|
144
|
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables
|
|
$
|
66,383
|
|
|
$
|
81,697
|
|
|
$
|
100,623
|
|
|
$
|
132,808
|
|
|
$
|
138,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit loss
reserves(1)
|
|
$
|
6,491
|
|
|
$
|
9,091
|
|
|
$
|
12,030
|
|
|
$
|
10,127
|
|
|
$
|
5,980
|
|
Receivables held for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate secured
|
|
$
|
4
|
|
|
$
|
3
|
|
|
$
|
323
|
|
|
$
|
80
|
|
|
$
|
1,741
|
|
Credit card
|
|
|
-
|
|
|
|
-
|
|
|
|
13,571
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables held for
sale(4)
|
|
$
|
4
|
|
|
$
|
3
|
|
|
$
|
13,894
|
|
|
$
|
80
|
|
|
$
|
1,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate owned
|
|
$
|
962
|
|
|
$
|
592
|
|
|
$
|
885
|
|
|
$
|
1,008
|
|
|
$
|
661
|
|
Commercial paper and short-term borrowings
|
|
|
3,156
|
|
|
|
4,291
|
|
|
|
9,639
|
|
|
|
7,725
|
|
|
|
10,797
|
|
Due to
affiliates(5)
|
|
|
8,255
|
|
|
|
9,043
|
|
|
|
13,543
|
|
|
|
11,359
|
|
|
|
10,887
|
|
Long-term debt
|
|
|
54,616
|
|
|
|
68,880
|
|
|
|
88,048
|
|
|
|
115,700
|
|
|
|
120,159
|
|
Preferred stock
|
|
|
1,575
|
|
|
|
575
|
|
|
|
575
|
|
|
|
575
|
|
|
|
575
|
|
Common shareholders
equity(6)
|
|
|
6,145
|
|
|
|
7,804
|
|
|
|
12,862
|
|
|
|
13,584
|
|
|
|
19,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
HSBC Finance Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
|
Selected Financial Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets
|
|
|
(2.23
|
)%
|
|
|
(7.45
|
)%
|
|
|
(1.98
|
)%
|
|
|
(2.74
|
)%
|
|
|
.82
|
%
|
Return on average common shareholders equity
|
|
|
(27.70
|
)
|
|
|
(68.41
|
)
|
|
|
(19.76
|
)
|
|
|
(26.19
|
)
|
|
|
6.50
|
|
Net interest margin
|
|
|
5.23
|
|
|
|
5.08
|
|
|
|
6.24
|
|
|
|
6.32
|
|
|
|
6.41
|
|
Efficiency ratio
|
|
|
50.39
|
|
|
|
108.04
|
|
|
|
36.33
|
|
|
|
67.99
|
|
|
|
41.36
|
|
Consumer net charge-off ratio
|
|
|
11.98
|
(7)
|
|
|
13.59
|
(7)
|
|
|
7.90
|
|
|
|
4.23
|
|
|
|
2.72
|
|
Consumer two-month-and-over contractual delinquency
|
|
|
14.41
|
|
|
|
14.74
|
(8)
|
|
|
13.19
|
|
|
|
8.08
|
|
|
|
4.67
|
|
Reserves as a percent of net charge-offs
|
|
|
73.9
|
(7)
|
|
|
72.2
|
(7)(8)
|
|
|
136.4
|
|
|
|
175.8
|
|
|
|
168.0
|
|
Reserves as a percent of receivables
|
|
|
9.78
|
|
|
|
11.13
|
(8)
|
|
|
11.96
|
|
|
|
7.63
|
|
|
|
4.31
|
|
Reserves as a percent of nonperforming loans
|
|
|
88.5
|
|
|
|
102.4
|
(8)
|
|
|
110.0
|
|
|
|
125.3
|
|
|
|
121.6
|
|
Reserves as a percent of two-months-and-over contractual
delinquency
|
|
|
67.9
|
|
|
|
75.5
|
(8)
|
|
|
79.7
|
|
|
|
94.5
|
|
|
|
91.2
|
|
Common and preferred equity to total assets
|
|
|
10.09
|
|
|
|
8.86
|
|
|
|
10.27
|
|
|
|
8.56
|
|
|
|
11.21
|
|
Tangible common equity to tangible
assets(9)
|
|
|
7.37
|
|
|
|
7.60
|
|
|
|
6.68
|
|
|
|
6.09
|
|
|
|
6.11
|
|
|
|
(1)
|
In December 2009, we implemented changes to our charge-off
policies for real estate secured and personal non-credit card
receivables. As a result of these changes, real estate secured
receivables are written down to net realizable value less cost
to sell generally no later than the end of the month in which
the account becomes 180 days contractually delinquent and
personal non-credit card receivables are charged-off generally
no later than the end of the month in which the account becomes
180 days contractually delinquent. These changes resulted
in a reduction to net interest income of $351 million and
an increase to our provision for credit losses of
$1 million which collectively increased our loss before tax
by $352 million and our net loss by $227 million in
2009. These changes also resulted in a significant reduction in
our credit loss reserve levels. See Executive
Overview and Credit Quality in Item 7.
Managements Discussion and Analysis of Financial
Condition and Results of Operations,
(MD&A) as well as Note 8, Changes in
Charge-off Policies During 2009, in the accompanying
consolidated financial statements for additional discussion.
|
|
(2)
|
The overall trend in real estate secured and personal non-credit
card receivables reflects our decision to reduce the size of our
balance sheet and lower our risk profile beginning in 2007,
including the decision in 2007 to discontinue correspondent
channel acquisitions by our Mortgage Services business as well
as the decision in late February 2009 to discontinue new
customer account originations of all products in our Consumer
Lending business. For further discussion of the trends in our
real estate secured and personal non-credit card receivable
portfolios, see Receivables Review in MD&A.
|
|
(3)
|
The trend in credit card receivables in 2010 and 2009 reflects
the continued impact of numerous actions taken to manage risk,
reduced consumer spending and, in 2010, an increased focus and
ability on the part of consumers to reduce outstanding credit
card debt. The trend in credit card receivables in 2008 reflects
the transfer of receivables with an outstanding principal
balance of $14.7 billion at the time of transfer to
receivables held for sale. For further discussion of the trends
in our credit card receivable portfolio, see Receivables
Review in MD&A.
|
|
(4)
|
The decrease in receivables held for sale largely reflects the
sale in January 2009 of credit card receivables with an
outstanding principal balance of $12.4 billion at the time
of sale.
|
|
(5)
|
As of December 31, 2010, 2009, 2008, 2007 and 2006, we have
received a cumulative total of $46.5 billion,
$55.0 billion, $45.1 billion, $41.0 billion and
$40.3 billion, respectively, in HSBC related funding. See
Liquidity and Capital Resources in MD&A for
further discussion.
|
|
(6)
|
In 2010, 2009, 2008 and 2007, we received capital contributions
of $200 million, $2.7 billion, $3.5 billion and
$950 million, respectively, from HSBC Investments (North
America) Inc. to support ongoing operations and to maintain
capital at levels we believe are prudent in the current market
conditions.
|
|
(7)
|
The net charge-off ratio for 2010 and 2009 and the ratio of
reserves as a percentage of net charge-offs for 2009 are not
comparable to the historical periods as comparability has been
impacted by the aforementioned charge-off policy changes
implemented in December 2009 for real estate secured and
personal non-credit card receivables. Charge-off for these
receivables under the revised policy is recognized sooner for
these products beginning in 2009 than during the historical
periods. See Credit Quality in MD&A for
discussion of these ratios and related trends.
|
|
(8)
|
The aforementioned charge-off policy changes implemented in
December 2009 significantly impacted these ratios and the
comparability of such ratios to prior periods. See Credit
Quality in MD&A for discussion of these ratios and
related trends as well as the 2009 ratios excluding the impact
of the December 2009 charge-off policy changes discussed above.
Reserve ratios for all periods exclude loan portfolios which are
considered held for sale as these receivables are carried at the
lower of cost or fair value with no corresponding credit loss
reserves.
|
|
(9)
|
Tangible common equity to tangible assets is a
non-U.S.
GAAP financial ratio that is used by HSBC Finance Corporation
management, certain rating agencies and our credit providing
banks as a measure to evaluate capital adequacy and may differ
from similarly named measures presented by other companies. See
Basis of Reporting in MD&A for additional
discussion on the use of
non-U.S.
GAAP financial measures and Reconciliations to U.S.
GAAP Financial Measures in MD&A for quantitative
reconciliations to the equivalent U.S. GAAP basis financial
measure.
|
24
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 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.
We currently provide
MasterCards(1),
Visa(1),
American Express and
Discover(1)
credit cards as well as private label cards to customers in the
United States. A portion of new credit card and all new private
label receivable originations are sold on a daily basis to HSBC
Bank USA, National Association (HSBC Bank USA). We
also offer specialty insurance products in the United States and
Canada. Historically, we also provided several other types of
loan products in the United States including real estate secured
loans, personal non-credit card loans, auto finance loans and
tax refund anticipation loans and related products. Prior to
November 2008, we also offered consumer loans in Canada and
prior to May 2008 we offered loans and specialty insurance
products in the United Kingdom and the Republic of Ireland.
Prior to 2007, we also offered consumer loans in Slovakia, the
Czech Republic and Hungary (European Operations).
We generate cash to fund our businesses primarily by collecting
receivable balances, selling certain credit card and all private
label receivables to HSBC Bank USA on a daily basis, borrowing
from HSBC affiliates and customers of HSBC, and issuing
commercial paper, retail notes, long-term debt. We also receive
capital contributions as necessary from HSBC which serve as an
additional source of funding. We use the cash generated to
invest in and originate new credit card receivables, to service
our debt obligations and to pay dividends to our parent, when
possible.
The following discussion of our financial condition and results
of operations excludes the results of our discontinued
operations unless otherwise noted. See Note 3,
Discontinued Operations in the accompanying
consolidated financial statements for further discussion of
these transactions.
Current Environment During 2010, economic
conditions in the United States generally improved, although the
pace of improvement continued to be slow. Liquidity returned to
the financial markets for most sources of funding except for
mortgage securitization. Companies in the financial sector are
generally able to issue debt with credit spreads approaching
levels historically seen prior to the financial crisis, despite
the expiration of some of the U.S. governments
support programs. European sovereign debt fears first triggered
by Greece in May and again by Ireland in November continue to
pressure borrowing costs in the U.S. During the first half
of 2010, housing prices stabilized in many markets and began to
recover in others as the first-time homebuyer tax credit and low
interest rates attributable to government monetary policy
actions served as stabilizing forces improving home sales.
However, beginning in the third quarter of 2010 and continuing
to the end of the year, we again began to see home price
declines in many markets as the homebuyer tax credit ended and
housing prices remain under pressure due to elevated foreclosure
levels.
Despite positive job creation overall in 2010, the economy began
to lose jobs again in the third quarter of 2010 as job creation
in the private sector, while positive, slowed and was more than
offset by reductions in government-related jobs. While job
creation again turned positive in the fourth quarter, fear
remains as to how pronounced any economic recovery may be. Such
fear appeared to lessen, however, toward the end of 2010, as
consumer spending increased and retail sales showed signs of
improvement. U.S. unemployment rates, which have been a
major factor in the deterioration of credit quality in the U.S.,
improved, but remained high at 9.4 percent in December
2010, decreasing from a rate of 10.0 percent at December
2009. However, a significant number of U.S. residents are
no longer looking for work and, therefore, are not reflected in
the U.S. unemployment rates. Unemployment rates in
(1) MasterCard
is a registered trademark of MasterCard International
Incorporated (d/b/a MasterCard Worldwide); 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 Discover Financial Services.
25
HSBC Finance Corporation
18 states are at or above the U.S. national average.
Unemployment rates in five states are at or above
11 percent, including California and Florida, states where
we have receivable portfolios in excess of 5 percent of our
total outstanding receivables. High unemployment rates have
generally been most pronounced in the markets which had
previously experienced the highest appreciation in home values.
Unemployment has continued to have an impact on the provision
for credit losses in our loan portfolio and in loan portfolios
across the industry.
Although we noted signs of improvement in mortgage lending
industry trends during 2010, we continue to be affected by the
following:
|
|
|
|
>
|
Overall levels of delinquencies remain elevated;
|
|
|
>
|
Mortgage loan originations from 2005 to 2008 continue to perform
worse than originations from prior periods;
|
|
|
>
|
Real estate markets in a large portion of the United States
continue to be affected by stagnation or declines in property
values experienced over the last three years;
|
|
|
>
|
While home prices began to stabilize in many markets and recover
in others during the first half of 2010, we began to see a
reversal of this trend during the second half of 2010 as home
prices continue to remain under pressure due to elevated
foreclosure levels and the expiration of the homebuyer tax
credit;
|
|
|
>
|
Lower secondary market demand for subprime loans resulting in
reduced liquidity for subprime mortgages; and
|
|
|
>
|
Tighter lending standards by mortgage lenders which impacts the
ability of borrowers to refinance existing mortgage loans.
|
In our core credit card business, while consumer spending
increased in 2010, we saw continued declines in our credit card
receivable balances due to an increased focus and ability by
customers to reduce outstanding credit card debt. We also
continued to see the effect of actions previously taken to
manage risk which also contributed to the decline in outstanding
credit card receivables in 2010. While credit card marketing has
increased in 2010, marketing remains low compared to historical
levels. Credit quality continued to improve in 2010 as the
impact of the current economic environment, including high
unemployment rates, has not been as severe as originally
expected due in part to improved customer payment behavior which
has resulted in continued improvements in delinquency, including
early stage delinquency roll rates. While adoption of the new
credit card legislation resulted in reductions to revenue, the
impact was mitigated by improved credit quality for our Cards
business in 2010.
Concerns about the future of the U.S. economy, including
the pace and magnitude of recovery from the recent economic
recession, consumer confidence, volatility in energy prices,
credit market volatility and trends in corporate earnings will
continue to influence the U.S. economic recovery and the
capital markets. In particular, continued improvement in
unemployment rates and a sustained recovery of the housing
markets remain critical components of a broader
U.S. economic recovery. Further weakening in these
components as well as in consumer confidence may result in
additional deterioration in consumer payment patterns and credit
quality. Weak consumer fundamentals including declines in wage
income, consumer spending, declines in wealth and a difficult
job market continue to depress consumer confidence.
Additionally, there is uncertainty as to the future course of
monetary policy and uncertainty as to the impact on the economy
and consumer confidence when the remaining actions taken by the
government to restore faith in the capital markets and stimulate
consumer spending end, including the recent extension of
unemployment insurance benefits and the prior presidential
administrations tax cuts. These conditions in combination
with general economic weakness and the impact of recent
regulatory changes will continue to impact our results in 2011,
the degree of which is largely dependent upon the nature and
extent of the economic recovery.
As discussed in prior filings, on May 22, 2009, the Credit
Card Accountability Responsibility and Disclosure Act of 2009
(Card Act) was signed into law and became fully
effective. For a discussion of the Card Act as well as the
impact to our operations, see Segment Results
IFRS Management Basis.
26
HSBC Finance Corporation
State and federal officials are investigating the procedures
followed by mortgage servicing companies and banks, including
HSBC Finance Corporation and certain of our affiliates, relating
to foreclosures. We and our affiliates have responded to all
related inquiries and cooperated with all applicable
investigations, including a joint examination by staffs of the
Federal Reserve Board (the Federal Reserve) and the
Office of the Comptroller of the Currency (the OCC)
as part of their broad horizontal review of industry foreclosure
practices. Following the examination, the Federal Reserve issued
a supervisory letter to HSBC Finance Corporation and HSBC North
America noting certain deficiencies in the processing,
preparation and signing of affidavits and other documents
supporting foreclosures and in governance of and resources
devoted to our foreclosure processes, including the evaluation
and monitoring of third party law firms retained to effect our
foreclosures. Certain other processes were deemed adequate. The
OCC issued a similar supervisory letter to HSBC Bank USA. We
have suspended foreclosures until such time as we have
substantially addressed the noted deficiencies in our processes.
We are also reviewing foreclosures where judgment has not yet
been entered and will correct deficient documentation and
re-file affidavits where necessary.
We and our affiliates are engaged in discussions with the
Federal Reserve and the OCC regarding the terms of consent cease
and desist orders, which will prescribe actions to address the
deficiencies noted in the joint examination. We expect the
consent orders will be finalized shortly after the date this
Form 10-K
is filed. While the impact of the Federal Reserve consent order
on HSBC Finance Corporation depends on the final terms, we
believe it has the potential to increase our operational,
reputational and legal risk profiles and expect implementation
of its provisions will require significant financial and
managerial resources. In addition, the consent orders will not
preclude further actions against HSBC Finance Corporation or our
affiliates by bank regulatory or other agencies, including the
imposition of fines and civil money penalties. We are unable at
this time, however, to determine the likelihood of any further
action or the amount of penalties or fines, if any, that may be
imposed by the regulators or agencies.
Due to the significant slow-down in foreclosures, and in some
instances, cessation of all foreclosure processing by numerous
loan servicers, including us, for some period of time in 2011
there may be some reduction in the number of properties being
marketed following foreclosure. The impact of that decrease may
increase demand for properties currently on the market resulting
in a stabilization of home prices but could also result in a
larger number of vacant properties in communities creating
downward pressure on general property values. As a result, the
short term impact of the foreclosure processing delay is highly
uncertain. However, the longer term impact is even more
uncertain as eventually servicers will again begin to foreclose
and market properties in large numbers which is likely to create
a significant over-supply of housing inventory. This could lead
to a significant increase in loss severity on REO properties.
As a result of industry-wide compliance issues, certain courts
have issued new rules relating to foreclosures and we anticipate
that scrutiny of foreclosure documentation will increase. Also,
in some areas, officials are requiring additional verification
of information filed prior to the foreclosure proceeding. If
these trends continue, there could be additional delays in the
processing of foreclosures, which could have an adverse impact
upon housing prices which is likely to result in higher loss
severities and expenses for the maintenance of properties while
foreclosures are delayed.
Financial Regulatory Reform On July 21, 2010,
the Dodd-Frank Wall Street Reform and Consumer Protection
Act was signed into law and is a sweeping overhaul of the
financial regulatory system (the Dodd-Frank Act).
For a full description of the Dodd-Frank Act see
Regulation Financial Regulatory Reform
section under the Regulation and Competition section
in Item 1. Business. The Dodd-Frank Act will have a
significant impact on the operations of many financial
institutions in the U.S., including our affiliates. As the
Dodd-Frank Act calls for extensive regulations to be promulgated
to interpret and implement the legislation, it is not possible
to precisely determine the impact to operations and financial
results at this time.
Business Focus HSBC Holdings plc acquired
Household International, Inc. (Household), the
predecessor to HSBC Finance Corporation, in March 2003. In
connection with the acquisition, HSBC also announced its
expectation that funding costs for the Household businesses
would be lower as a result of the financial strength and funding
diversity of HSBC. As a result, we work with our affiliates
under the oversight of HSBC North America to maximize
opportunities and efficiencies in HSBCs operations in the
U.S., including funding efficiencies.
27
HSBC Finance Corporation
As discussed in this and prior filings, during the past few
years we have made numerous strategic decisions regarding our
operations, with the intent to lower the risk profile of our
operations as well as reduce the capital and liquidity
requirements of our operations by reducing the size of the
balance sheet. As a result of these strategic decisions, our
core lending operations currently consist of our credit card and
retail services business. Our lending products currently include
primarily MasterCard and Visa credit cards and private label
credit cards. A portion of new credit card and all new private
label receivable originations are sold on a daily basis to HSBC
Bank USA, National Association (HSBC Bank USA). Our
core credit card receivable portfolio totaled $9.9 billion
at December 31, 2010 reflecting a decrease of
15 percent since December 31, 2009. This decrease is a
continuation of the decline that began during the fourth quarter
of 2007 as the result of numerous actions we have taken to
manage risk, including reduced marketing levels as well as
during 2010, the impact of an increased focus and ability by
consumers to reduce outstanding credit card debt. Although
marketing levels have increased in 2010, they remain low
compared to historical levels prior to our risk mitigation
actions.
Our Consumer Lending and Mortgage Services businesses are not
considered central to our core operations. As a result, the real
estate secured and personal non-credit card receivable
portfolios of these non-core businesses, which totaled
$56.4 billion at December 31, 2010, are currently
running off. The timeframe in which these portfolios will
liquidate is dependent upon the rate at which receivables pay
off or charge-off prior to their maturity, which fluctuates for
a variety of reasons such as interest rates, availability of
refinancing, home values and individual borrowers credit
profile all of which are outside of our control. In light of the
current economic conditions and mortgage industry trends
described above, our loan prepayment rates have slowed when
compared to historical experience even though interest rates
remain low. Additionally, our loan modification programs which
are primarily designed to improve cash collections and avoid
foreclosure as determined to be appropriate, are contributing to
these slower loan prepayment rates.
While difficult to project both loan prepayment rates and
default rates, based on current experience we expect the
receivable portfolios of our non-core businesses to decline
between 50 percent and 60 percent over the next five
years and be comprised primarily of real estate secured
receivables at the end of this period. Attrition will not be
linear during this period. Over the near term, charge-off
related receivable run-off is expected to remain elevated due to
the economic environment. Run-off is expected to later slow as
charge-offs decline and the remaining real estate secured
receivables stay on the balance sheet longer due to the impact
of modifications
and/or the
lack of re-financing alternatives.
In December 2010, it was determined that we would not offer any
tax refund anticipation loans or other related products for the
2011 tax season and we exited the business. In August 2010, we
sold the remainder of our auto finance receivable portfolio. As
a result, our non-core Taxpayer Financial Services and Auto
Finance businesses are now reported as discontinued operations.
See Note 3, Discontinued Operations, in the
accompanying consolidated financial statements for additional
discussion.
We continue to evaluate our operations as we seek to optimize
our risk profile as well as our liquidity, capital and funding
requirements and review opportunities in the credit card
industry as the credit markets stabilize. This could result in
further strategic actions that may include changes to our legal
structure, asset levels and further alterations or refinement of
product offerings. Although nothing is currently contemplated,
we continue to evaluate additional ways to identify strategic
opportunities with HSBC Bank USA, within the regulatory
framework.
2010
Events
|
|
|
|
|
Due to the impact of the marketplace conditions described above
on the performance of our receivable portfolios, we have
incurred significant losses in 2010, 2009 and 2008. If our
forecasts hold true, we expect to continue to generate losses at
least through 2011. While our 2011 funding strategy includes a
mix of balance sheet attrition, cash generated from operations
and other actions to meet our current obligations, we will
remain dependent on capital infusions from HSBC as necessary to
fully meet our funding requirements and maintain capital at
levels we believe are prudent until we return to profitability.
HSBC has indicated it is fully committed and has the capacity to
continue to provide such support. In 2010 and 2009,
HSBC Investments (North America) Inc. (HINO)
made capital contributions to us totaling $200 million and
$2.7 billion, respectively.
|
28
HSBC Finance Corporation
|
|
|
|
|
In our real estate secured and personal non-credit card
receivable portfolios, credit quality continued to improve as
dollars of two-months-and-over contractual delinquency decreased
$1.9 billion at December 31, 2010 compared to
December 31, 2009 as a result of lower receivable levels,
seasoning and the impact of improved economic and credit
conditions since year-end 2009. As compared to December 31,
2009, the balance of delinquent accounts which have migrated to
charge-off have been replaced with lower levels of newly
delinquent loans as the portfolios continue to season. Dollars
of net charge-offs for real estate secured and personal
non-credit card receivables also decreased in 2010 reflecting
lower average receivable levels and lower delinquency levels for
both products. See Credit Quality in this MD&A
for additional discussion.
|
The credit performance of our credit card receivable portfolio
improved during 2010 as dollars of two-months-and-over
contractual delinquency decreased $599 million at
December 31, 2010 compared to December 31, 2009 as a
result of lower receivable levels due to the actions previously
taken to tighten underwriting and reduce the risk profile of the
portfolio as well as an increased focus and ability by consumers
to reduce outstanding credit card debt. Dollars of net
charge-offs also decreased during 2010 reflecting the lower
receivable levels, lower delinquency levels, lower levels of
personal bankruptcy filings and higher recoveries.
We anticipate delinquency and charge-off will remain under
pressure during 2011. While the U.S. economic environment
improved during 2010, there remains uncertainty as to the nature
and extent of the current economic recovery which could impact
our results.
|
|
|
|
|
In March 2010, we sold our auto finance receivable operations
and certain auto finance receivables to Santander Consumer USA
(SC USA). Subsequently, in August 2010, we sold our
remaining portfolio of auto finance receivables to SC USA. As a
result of these transactions, our Auto Finance business, which
was previously considered a non-core business, is now reported
in discontinued operations. See Note 3, Discontinued
Operations, for a full discussion of these transactions.
|
|
|
|
During the third quarter of 2010, the Internal Revenue Service
(IRS) announced it would stop providing information
regarding certain unpaid obligations of a taxpayer (the
Debt Indicator), which has historically served as a
significant part of our underwriting process in our Taxpayer
Financial Services (TFS) business. We determined
that, without use of the Debt Indicator, we could no longer
offer the product that has historically accounted for the
substantial majority of our TFS loan production and that we
might not be able to offer the remaining products available
under the program in a safe and sound manner. As a result, in
December 2010, it was determined that we would not offer any tax
refund anticipation loans or related products for the 2011 tax
season and we exited the TFS business. As a result of this
decision, our TFS business, which was previously considered a
non-core business, is now reported in discontinued operations.
See Note 3, Discontinued Operations, for
additional information.
|
Performance, Developments and Trends Our
operating results improved during 2010. Loss from continuing
operations was $1.9 billion in 2010 compared to
$7.5 billion in 2009 and $2.6 billion in 2008. Loss
from continuing operations before income tax was
$2.9 billion in 2010 compared to $10.1 billion in 2009
and $3.7 billion in 2008. Our results in these periods were
significantly impacted by the change in the fair value of debt
and related derivatives for which we have elected fair value
option and, during 2009 and 2008, goodwill and other intangible
asset impairment charges. Additionally, our results in 2009 were
impacted by certain policy changes relating to loans discussed
below. In order to better understand the underlying performance
trends of our business, the
29
HSBC Finance Corporation
following table summarizes the collective impact of these items
on our loss from continuing operations before income tax for all
periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(in millions)
|
|
|
Loss from continuing operations before income tax, as reported
|
|
$
|
(2,906
|
)
|
|
$
|
(10,098
|
)
|
|
$
|
(3,695
|
)
|
(Gain) loss in value of fair value option debt and related
derivatives
|
|
|
(741
|
)
|
|
|
2,125
|
|
|
|
(3,160
|
)
|
Goodwill and other intangible asset impairment charges
|
|
|
-
|
|
|
|
2,308
|
|
|
|
329
|
|
Impact of the December 2009 Charge-off Policy Change
|
|
|
-
|
|
|
|
352
|
(2)
|
|
|
-
|
|
Policy change for unrecorded interest on re-aged receivables
|
|
|
-
|
|
|
|
190
|
(3)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income tax, excluding
above
items(1)
|
|
$
|
(3,647
|
)
|
|
$
|
(5,123
|
)
|
|
$
|
(6,526
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents a
non-U.S.
GAAP financial measure.
|
|
(2)
|
In December 2009, we implemented changes to our charge-off
policies for real estate secured and personal non-credit card
receivables due to changes in customer behavior (the
December 2009 Charge-off Policy Changes). See
Credit Quality in this MD&A as well as Note 8,
Changes in Charge-off Policies During 2009, in the
accompanying consolidated financial statements for additional
discussion.
|
|
(3)
|
In December 2009, we implemented changes to our policy for
recognizing interest income on re-aged real estate secured and
certain personal non-credit card receivables. See the caption
2009 as compared to 2008 in this Executive Overview
for additional discussion.
|
Excluding the collective impact of the items in the above table,
our results for 2010 improved $1.5 billion compared to 2009
driven by a significantly lower provision for credit losses and
lower operating expenses partially offset by lower net interest
income and lower other revenues including lower derivative
related income. Our 2010 results were impacted by significantly
lower derivative related income reflecting the impact of
decreasing interest rates on the
mark-to-market
on derivatives in our non-qualifying economic hedge portfolio
which resulted in losses of $188 million during 2010 as
compared to a gain of $487 million during 2009. Our
portfolio of non-qualifying economic hedges acted as economic
hedges by lowering our overall interest rate risk through more
closely matching both the structure and duration of our
liabilities to the structure and duration of our assets even
though they did not qualify as effective hedges under hedge
accounting principles.
Net interest income decreased during 2010 primarily due to lower
average receivables as a result of receivable liquidation, risk
mitigation efforts and an increased focus and ability by
consumers to reduce outstanding credit card debt, partially
offset by higher overall receivable yields and lower interest
expense. During 2010, we experienced higher yields for all
receivable products as a result of lower levels of nonperforming
receivables, including reduced levels of nonperforming modified
real estate secured receivables, due to charge-off and declines
in new modification volumes. Higher yields in our real estate
secured receivable portfolio were partially offset by the impact
of an increase in the expected lives of receivables in payment
incentive programs since December 2009. Higher yields in our
credit card receivable portfolio were partially offset by the
implementation of certain provisions of the Card Act including
restrictions impacting repricing of delinquent accounts and
periodic re-evaluation of rate increases. We anticipate credit
card loan yields in future periods may continue to be negatively
impacted by various provisions of the Card Act which require
certain rate increases to be periodically re-evaluated. As
receivable yields vary between receivable products, overall
receivable yields were negatively impacted by a shift in
receivable mix to higher levels of lower yielding first lien
real estate secured receivables as higher yielding second lien
real estate secured and personal non-credit card receivables
have run-off at a faster pace than first lien real estate
secured receivables. The decrease in net interest income during
2010 was partially offset by higher net interest income on our
non-insurance investment portfolio reflecting higher levels of
investments held and slightly higher yields. These decreases in
interest income were partially offset by lower interest expense
due to lower average borrowings and lower average rates.
Net interest margin was 5.23 percent in 2010 and
5.08 percent in 2009. Net interest margin in 2010 increased
due to lower cost of funds as a percentage of average
interest-earning assets as well as higher overall yields on our
30
HSBC Finance Corporation
receivable portfolio. See Results of Operations in
this MD&A for additional discussion regarding net interest
income and net interest margin.
Other revenues during 2010 were impacted by changes in the value
of debt designated at fair value and related derivatives.
Excluding the gain (loss) on debt designated at fair value and
related derivatives, other revenues decreased during 2010
primarily driven by significantly lower derivative-related
income as discussed above, lower fee income, lower servicing and
other fees from HSBC affiliates and to a lesser extent, lower
enhancement services and insurance revenues, partially offset by
lower fair value write-downs on receivables held for sale. Lower
fee income reflects lower late and overlimit fees due to lower
volumes and lower delinquency levels, changes in customer
behavior and the impact from the implementation of the Card Act
which resulted in lower late and overlimit fees as well as
restrictions on fees charged to process on-line and telephone
payments. Lower servicing and other fees from HSBC affiliates
reflects lower levels of receivables being serviced. Lower
enhancement services revenue reflects the impact of lower credit
card receivable levels while lower insurance revenue reflects
the reduced size of our insurance operations. Lower fair value
markdowns reflect a smaller portfolio of held for sale
receivables than during 2009. See Results of
Operations for a more detailed discussion of other
revenues.
Our provision for credit losses decreased significantly during
2010 as discussed below.
|
|
|
|
|
Provision for credit losses for our core credit card receivable
portfolio decreased $916 million during 2010. The decrease
reflects lower receivable levels as a result of actions taken
beginning in the fourth quarter of 2007 to manage risk as well
as an increased focus and ability by consumers to reduce
outstanding credit card debt. The decrease also reflects
improvement in the underlying credit quality of the portfolio
including continuing improvements in early stage delinquency
roll rates and lower delinquency levels as customer payment
rates have been strong throughout 2010. The impact on credit
card receivable losses from the current economic environment,
including high unemployment levels, has not been as severe as
originally expected due in part to improved customer payment
behavior.
|
|
|
|
The provision for credit losses for the real estate secured
receivable portfolios in our Consumer Lending and Mortgage
Services business decreased $658 million and
$342 million, respectively, during 2010. The decrease
reflects lower receivable levels as the portfolios continue to
liquidate, lower delinquency levels, improved loss severities
and improvements in economic conditions since 2009. The decrease
also reflects lower loss estimates on troubled debt
restructurings (TDR Loans), partially offset by the
impact of continued high unemployment levels, lower receivable
prepayments, higher loss estimates on recently modified loans
and for real estate secured receivables in our Consumer Lending
business, portfolio seasoning. Improvements in loss severities
reflect an increase in the number of properties for which we
accepted a deed to the property in lieu of payment (also
referred to as
deed-in-lieu)
and an increase in the number of properties for which we agreed
to allow the borrower to sell the property for less than the
current outstanding receivable balance (also referred to as a
short sale), both of which result in lower losses
compared to loans which are subject to a formal foreclosure
process for which average loss severities in 2010 have remained
relatively flat to 2009 levels.
|
|
|
|
The provision for credit losses for our personal non-credit card
receivables decreased $1.6 billion reflecting lower
receivable levels, lower delinquency levels and improvements in
economic conditions since 2009, partially offset by higher
reserve requirements on TDR Loans.
|
See Results of Operations for a more detailed
discussion of our provision for credit losses.
In 2010, we decreased our credit loss reserves as the provision
for credit losses was $2.6 billion less than net
charge-offs. Lower credit loss reserve levels reflect lower
receivable levels, improved economic and credit conditions since
2009 including lower delinquency levels and overall improvements
in loss severities on real estate secured receivables as
discussed above. Reserve levels for real estate secured
receivables at our Mortgage Services and
31
HSBC Finance Corporation
Consumer Lending businesses as well as for receivables in our
credit card business can be further analyzed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Lending
|
|
|
Mortgage Services
|
|
|
Credit Cards
|
|
Year Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Credit loss reserves at beginning of period
|
|
$
|
3,047
|
|
|
$
|
3,392
|
|
|
$
|
2,385
|
|
|
$
|
3,726
|
|
|
$
|
1,824
|
|
|
$
|
2,258
|
|
Provision for credit losses
|
|
|
2,339
|
|
|
|
2,997
|
|
|
|
1,575
|
|
|
|
1,917
|
|
|
|
840
|
|
|
|
1,756
|
|
Charge-offs(1)
|
|
|
(3,038
|
)
|
|
|
(3,371
|
)
|
|
|
(2,230
|
)
|
|
|
(3,296
|
)
|
|
|
(1,914
|
)
|
|
|
(2,397
|
)
|
Recoveries
|
|
|
61
|
|
|
|
29
|
|
|
|
51
|
|
|
|
38
|
|
|
|
234
|
|
|
|
207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit loss reserves at end of period
|
|
$
|
2,409
|
|
|
$
|
3,047
|
|
|
$
|
1,781
|
|
|
$
|
2,385
|
|
|
$
|
984
|
|
|
$
|
1,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Charge-offs for Consumer Lending and Mortgage Services real
estate secured receivables in 2009 includes $1.4 billion
and $979 million, respectively, related to the December
2009 Charge-off Policy Changes.
|
Beginning in 2008, we significantly increased the use of loan
modifications in an effort to assist our customers who are
currently experiencing financial difficulties. As a result, a
significant portion of our receivable portfolio are considered
troubled debt restructures (TDR Loans) which are
reserved using a discounted cash flow analysis which generally
results in a higher reserve requirement for these loans.
Additionally, in December 2009, changes made to the charge-off
policy for our real estate secured receivable portfolio have
resulted in a significant portion of real estate secured
receivables in our portfolio being carried at net realizable
value less cost to sell. The following table summarizes these
receivables, which either carry higher reserves using a
discounted cash flow analysis or are carried at net realizable
value, in comparison to our entire receivable portfolio:
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Total receivable portfolio
|
|
$
|
66,383
|
|
|
$
|
81,697
|
|
|
|
|
|
|
|
|
|
|
Real estate secured receivables carried at net realizable value
less cost to sell
|
|
$
|
5,095
|
|
|
$
|
3,420
|
|
TDR Loans:
|
|
|
|
|
|
|
|
|
Credit card
|
|
|
427
|
|
|
|
461
|
|
Real estate
secured(1)
|
|
|
7,875
|
|
|
|
8,354
|
|
Personal non-credit card
|
|
|
704
|
|
|
|
726
|
|
|
|
|
|
|
|
|
|
|
TDR Loans
|
|
|
9,006
|
|
|
|
9,541
|
|
|
|
|
|
|
|
|
|
|
Receivables carried at either net realizable value or reserved
for using a discounted cash flow methodology
|
|
$
|
14,101
|
|
|
$
|
12,961
|
|
|
|
|
|
|
|
|
|
|
Real estate secured receivables carried at either net realizable
value or reserved for using a discounted cash flow methodology
as a percentage of real estate secured receivables
|
|
|
26.3
|
%
|
|
|
19.8
|
%
|
|
|
|
|
|
|
|
|
|
Receivables carried at either net realizable value or reserved
for using a discounted cash flow methodology as a percentage of
total receivables
|
|
|
21.2
|
%
|
|
|
15.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Excludes TDR Loans which are recorded at net realizable value
less cost to sell.
|
Total operating expenses during 2009 were significantly impacted
by the following items which impact comparability between
periods:
|
|
|
|
|
Restructuring charges totaling $151 million primarily
recorded during 2009, related to the decision to discontinue all
new customer account originations for our Consumer Lending
business and to close the Consumer Lending branch offices. See
Note 5, Strategic Initiatives, in the
accompanying consolidated financial statements for additional
information related to this decision;
|
32
HSBC Finance Corporation
|
|
|
|
|
Goodwill impairment charges of $2.3 billion during 2009
related to our Card and Retail Services and Insurance Services
businesses. Additionally, during 2009 impairment charges of
$14 million during the first quarter of 2009 relating to
technology, customer lists and loan related relationships
resulting from the discontinuation of originations for our
Consumer Lending business.
|
Excluding these items in 2009, total operating expenses
decreased $281 million, or 7 percent during 2010
primarily due to lower salary expense reflecting reduced
headcount reflecting the further reduced scope of our business
operations since March 2009 and continued entity-wide
initiatives to reduce costs as well as lower occupancy and
equipment expenses. These decreases were partially offset by
higher real estate owned (REO) expenses, higher
legal costs, higher marketing expenses for credit card
receivables and higher support services from HSBC affiliates.
See Results of Operations for a more detailed
discussion of operating expenses.
Our effective income tax rate for continuing operations was
(34.7) percent in 2010 and (26.1) percent in 2009. The effective
tax rate for continuing operations in 2010 was primarily
impacted by state taxes, including states where we file combined
unitary state tax returns with other HSBC affiliates and
amortization of purchase accounting adjustments on leveraged
leases that matured in December 2010.
2009 as compared to 2008 Loss from continuing
operations in 2009 was significantly impacted by the change in
fair value debt and related derivatives for which we have
elected fair value option, goodwill and other intangible asset
impairment charges and the impact of policy changes in December
2009 related to the timing of charge-off of real estate secured
and personal non-credit card receivables and policies for
unrecorded interest on re-aged receivables as discussed below.
Excluding the collective impact of these items, our results
improved to a loss of $5.1 billion in 2009 as compared to a
loss of $6.5 billion in 2008 as lower net interest income
and slightly lower other revenues were more than offset by lower
provision for credit losses and lower operating expenses.
In December 2009 as a result of changes in customer behavior and
resultant payment patterns, we elected to adopt more bank-like
charge-off policies for our real estate secured and personal
non-credit card receivables. As a result of these policy
changes, beginning in December 2009, we write down real estate
secured receivables to net realizable value less the estimated
cost to sell generally no later than the end of the month in
which the account becomes 180 days contractually
delinquent. For personal non-credit card receivables, charge-off
occurs generally no later than the end of the month in which the
account becomes 180 days contractually delinquent. As a
result of these actions, delinquent real estate secured and
personal non-credit card receivables charge-off earlier during
2009 than in the historical periods. The impact of this change
resulted in an increase to our loss before income tax of
$352 million ($227 million after-tax). For additional
information regarding this policy change, see Credit
Quality within this MD&A or see Note 8,
Change in Charge-off Policies During 2009, in the
accompanying consolidated financial statements.
As part of our decision to move to policies which more
accurately reflect the underlying performance of our real estate
secured receivable portfolio, in the fourth quarter of 2009 we
also elected to adopt a more bank-like income recognition policy
relating to unrecorded interest on real estate secured
receivables placed on non-accrual which were subsequently
re-aged under our standard criteria (the December 2009
Unrecorded Interest Policy Changes). We now recognize
unrecorded interest at an estimated collectible amount when the
customer has made the equivalent of six qualifying payments
under the terms of the loan while maintaining a current payment
status at the time of the sixth payment. Separately, as it
relates to personal homeowner loans (PHLs) which,
although technically secured by real estate were historically
underwritten, priced, serviced and reported like an unsecured
loan, we no longer follow the real estate secured policy for
income recognition upon re-age. Rather, we follow our historical
policy for other personal non-credit card loans that have been
re-aged which generally results in the recognition of interest
when collected. The combination of these changes resulted in a
decrease to finance and other interest income during the fourth
quarter of 2009 of $108 million for real estate secured
receivables and $82 million for PHL receivables compared to
what would otherwise have been recognized under the prior
practice.
Net interest income during 2009 includes the impact of the
charge-off and unrecorded interest policy changes as discussed
above which reduced net interest income by $351 million and
$190 million, respectively. Excluding the impact of these
items, net interest income remained lower in 2009 due to lower
average receivables reflecting lower
33
HSBC Finance Corporation
origination volumes due to our risk mitigation efforts,
including our decision to stop all new account originations in
our Mortgage Services and Consumer Lending businesses, as well
as lower consumer spending levels. The decrease in net interest
income also reflects lower levels of performing receivables and
lower overall yields on our receivable portfolios, partially
offset by lower interest expense. Our net interest margin
decreased to 5.08 percent in 2009 compared to
6.24 percent in 2008. The decrease was due to the lower
overall yields on our receivable portfolio, partially offset by
lower funding costs due to lower average interest rates for
short-term borrowings which reflect actions taken by the Federal
Reserve Bank resulting in lower Federal Funds Rates during 2009
as compared to 2008. For additional discussion of the decrease
in both net interest income, including a discussion of the
changes in receivable yields by product, and net interest
margin, see Results of Operations in this MD&A.
Other revenues in 2009 was significantly impacted by a loss on
debt designated at fair value and related derivatives due to a
narrowing of our credit spreads during 2009. The loss on debt
designated at fair value and related derivatives decreased other
revenues by $2.1 billion during 2009 compared to a gain
which increased other revenues by $3.2 billion in 2008.
Excluding the gain (loss) on debt designated at fair value and
related derivatives, other revenues decreased slightly during
2009 due to lower fee income and enhancement services revenue,
primarily due to lower credit card receivable levels and changes
in credit card customer behavior, partially offset by higher
derivative related income, higher gains on daily and bulk sales
of receivables to HSBC Bank USA, higher servicing and other fees
from HSBC affiliates due to higher volumes of receivables
serviced as a result of the sale of the GM and UP Portfolios as
previously discussed and lower fair value adjustments on
receivables held for sale. For additional discussion of the
changes in other revenues, see Results of Operations
in this MD&A.
Our provision for credit losses declined significantly in 2009
as discussed more fully below. The provision for credit losses
in 2009 reflects an incremental provision of $1 million as
a result of the December 2009 Charge-off Policy Changes as
discussed above.
|
|
|
|
|
The provision for credit losses in our credit card receivable
portfolio decreased significantly in 2009 due to lower
receivable levels primarily due to the impact of the transfer of
the GM and UP Portfolios to receivables held for sale in June
2008 and November 2008, respectively, as well as
$2.0 billion of non-prime credit card receivables to
receivables held for sale in June 2008. Excluding the impact of
these transferred receivables from the prior year periods as
applicable, our provision for credit losses remained
significantly lower due to lower non-prime receivable levels as
a result of lower consumer spending levels and actions taken
beginning in the fourth quarter of 2007 and continuing through
2009 to manage risk, partially offset by lower recovery rates on
defaulted receivables.
|
|
|
|
The provision for credit losses for real estate secured
receivables decreased in 2009 reflecting the continued
liquidation in these portfolios which has resulted in lower
charge-off levels. The lower provision also reflects a reduction
to provision of $192 million as a result of the December
2009 Charge-off Policy changes, which includes the reserve
impact of the policy change related to accrued interest. Accrued
interest written off as part of this policy change was reflected
as a reduction of finance and other interest income, while the
release of loss reserves associated with principal and accrued
interest was reflected in provision. The decrease in the
provision for credit losses for real estate secured receivables
was partially offset by higher provisions for first lien real
estate secured receivables in our Consumer Lending business,
lower receivable prepayments, higher loss severities relative to
2008 due to deterioration in real estate values in some markets,
higher reserve requirements for real estate secured TDR Loans
and portfolio seasoning in our Consumer Lending real estate
secured receivable portfolio.
|
|
|
|
The provision for credit losses for personal non-credit card
receivables increased during 2009, including an increase in
provision for credit losses of $193 million related to the
December 2009 Charge-off Policy Change which reflects the
reserve impact of the policy change to accrued interest as
discussed above and the charge-off of the total receivable
balance, ignoring future recoveries while the corresponding
release of credit loss reserves considered future recoveries,
unlike real estate secured receivables which are written down to
net realizable value less cost to sell. Excluding the
incremental impact of the December 2009 Charge-off Policy
Changes, our provision for credit losses in our personal
non-credit card portfolio remained
|
34
HSBC Finance Corporation
|
|
|
|
|
higher in 2009 due to higher levels of charge-off resulting from
deterioration in the 2006 and 2007 vintages which was more
pronounced in certain geographic regions, partially offset by
lower receivable levels.
|
The provision for credit losses for all products in 2009 was
negatively impacted by rising unemployment rates in an
increasing number of markets, continued deterioration in the
U.S. economy and housing markets and higher levels of
personal bankruptcy filings. For additional discussion regarding
the decrease in the provision for credit losses during 2009, see
Results of Operations in this MD&A.
During 2009, the provision for credit losses was
$2.9 billion lower than net charge-offs. Lower credit loss
reserve levels primarily reflect the impact of the December 2009
Charge-off Policy Changes as a result of the acceleration of
charge-off of $3.5 billion, a substantial portion of which
would otherwise have charged-off in future periods. Excluding
the impact of the December 2009 Charge-off Policy Changes, the
provision for credit losses was $533 million greater than
net charge-offs in 2009 compared to provision in excess of
charge-offs of $3.1 billion in 2008 reflecting a slowing in
the rate of deterioration of credit quality, lower receivable
levels and the impact of higher unemployment rates on losses not
being as severe as previously anticipated. For additional
discussion of credit loss reserves, see Credit
Quality in this MD&A.
Total operating expenses increased in 2009 and were negatively
impacted by the restructuring charges recorded during 2009
associated with the Consumer Lending closure as discussed above
as well as goodwill and intangible asset impairment charges
recorded during 2009 and 2008 previously discussed. Excluding
the impact of the restructuring charges recorded in 2009 as well
as the goodwill and intangible asset impairment charges recorded
during 2009 and 2008, total operating expenses decreased
$1.1 billion, or 28.8 percent during 2009 due to lower
salary expense, lower marketing expenses, lower branch related
expenses due to the closure of the Consumer Lending branch
offices, lower real estate owned expenses and the impact of
entity-wide initiatives to reduce costs, partially offset by
higher collection costs. For additional discussion of our
operating expenses, see Results of Operations in
this MD&A.
Our effective income tax rate for continuing operations was
(26.1) percent in 2009 and (29.4) percent in 2008. The effective
tax rate for continuing operations in 2009 was significantly
impacted by the non-tax deductible impairment of goodwill, the
relative level of pretax book loss, increase in the state and
local income tax valuation allowance which is included in the
state and local taxes, and a decrease in low income housing
credits.
Performance Ratios Our efficiency ratio from
continuing operations was 50.4 percent in 2010 compared to
108.4 percent in 2009 and 36.3 percent in 2008. Our
efficiency ratio from continuing operations during all periods
was impacted by the change in the fair value of debt and related
derivatives for which we have elected fair value option
accounting. Additionally, the efficiency ratio in 2009 and 2008
were also significantly impacted by goodwill and intangible
asset impairment charges and in 2009, the Consumer Lending
closure costs, as discussed above. Excluding these items from
the periods presented, our efficiency ratio deteriorated
significantly during 2010 reflecting significantly lower net
interest income and other revenues driven by receivable
portfolio liquidation, lower derivative-related income and lower
fee income which outpaced the decrease in operating expenses.
Excluding the items discussed above from the periods presented,
in 2009 our efficiency ratio deteriorated 216 basis points
as a result of lower net interest income and lower fee and
enhancement services revenues as a result of the sale of the GM
and UP Portfolios in January 2009, partially offset by increased
revenues associated with the bulk gain and daily sales of
receivables to HSBC Bank USA.
Our return on average common shareholders equity
(ROE) was (27.70) percent in 2010 compared to
(68.41) percent in 2009 and (19.76) percent in 2008. Our
return on average assets (ROA) was (2.23) percent in
2010 compared to (7.45) percent in 2009 and (1.98) percent in
2008. ROE and ROA in all periods were significantly impacted by
the change in the fair value of debt for which we have elected
fair value option accounting. During 2009, ROA and ROE were
impacted by the December 2009 Charge-off Policy Changes and the
Consumer Lending closure costs as discussed above. During 2009
and 2008, ROA and ROE were also significantly impacted by
goodwill and intangible asset impairment charges. Excluding
these items, ROE deteriorated 257 basis points during 2010
and ROA improved 67 basis points during 2010. The
deterioration in ROE in 2010 was driven by lower average
shareholders equity which outpaced the change in our loss
from continuing operations. The
35
HSBC Finance Corporation
improvement in ROA in 2010 was driven by the change in our loss
from continuing operations which outpaced the decrease in
average assets. Excluding these same items discussed above, ROE
improved 43 basis points during 2009 as compared to 2008
driven by the improvement in our loss from continuing operations
which outpaced the decrease in average shareholders
equity. ROA for 2009 deteriorated 19 basis points as
compared to 2008, as the decrease in average assets outpaced the
improvement in our loss from continuing operations.
Receivables Receivables decreased to
$66.4 billion at December 31, 2010, a 19 percent
decrease from December 31, 2009. The decrease in our core
credit card receivable portfolio reflects the continuing impact
of actions previously taken to mitigate risk and an increased
focus and ability of consumers to reduce outstanding credit card
debt. The decrease in our non-core receivable portfolios
reflects the continued liquidation of these portfolios which
will continue going forward. As it relates to our real estate
secured receivable portfolio, liquidation rates continue to be
impacted by declines in loan prepayments as fewer refinancing
opportunities for our customers exist and the previously
discussed trends impacting the mortgage lending industry. See
Receivables Review for a more detailed discussion of
the decreases in receivable balances.
Credit Quality Dollars of two-months-and-over
contractual delinquency as a percentage of receivables and
receivables held for sale (delinquency ratio)
decreased to 14.41 percent at December 31, 2010 as
compared 14.74 percent at December 31, 2009. Dollars
of contractual delinquency decreased for all receivable products
reflecting lower receivable levels due to lower origination
volumes in our core credit card receivable portfolio, continued
liquidation of our non-core receivable portfolios and for credit
card and personal non-credit card receivables, improved early
stage delinquency roll rates due to improvements in economic
conditions since 2009. The decrease in dollars of contractual
delinquency for real estate secured receivables was partially
offset in our Consumer Lending real estate secured receivable
portfolio by portfolio seasoning. The delinquency ratio
decreased as compared to December 31, 2009 as dollars of
delinquency decreased at a slightly faster pace than receivable
levels. See Credit Quality-Delinquency for a more
detailed discussion of our delinquency ratios.
Dollars of net charge-offs during 2010 decreased for all our
receivable portfolios primarily due to lower delinquency levels
as a result of lower average receivables, improvements in
economic conditions since year-end 2009 and as it relates to
credit card receivables, higher recoveries. A portion of the
decrease in dollars of net charge-offs for our non-core
receivable portfolio reflects charge-off activity during 2009
that would have been recorded in prior periods had the changes
made to the charge-off policy in December 2009 for real estate
secured and personal non-credit card receivables been effective
prior to 2009. Dollars of net charge-offs for real estate
secured receivables during 2010 also reflect improvements in
total loss severities as a result of an increase in the number
of properties for which we accepted a
deed-in-lieu
and an increase in the number of short sales, both of which
result in lower losses compared to loans which are subject to a
formal foreclosure process for which average loss severities in
2010 have remained relatively flat to 2009 levels. The net
charge-off ratio for full year 2010 decreased 161 basis
points as compared to full year 2009 as the decline in dollars
of net charge-off as discussed above outpaced the decrease in
average receivables.
Funding and Capital During 2010, HINO made a
capital contribution to us totaling $200 million to support
ongoing operations and to maintain capital above the minimum
levels we believe are prudent. Until we return to profitability,
HSBCs continued support is required to properly manage our
business operations and maintain appropriate levels of capital.
HSBC has provided significant capital in support of our
operations in the last few years and has indicated that it is
fully committed and has the capacity and willingness to continue
that support.
During the fourth quarter of 2010, our Board of Directors
approved the issuance of up to 1,000 shares of
Series C preferred stock. As a result, in November 2010 we
replaced $1.0 billion in loans from HSBC North America,
which had been scheduled to mature between 2022 and 2025 with
the issuance of the Series C preferred stock. This
transaction enhanced our total capital level as well as both our
common and preferred equity to total assets and tangible
shareholders equity to tangible assets ratios. It did not,
however, impact our tangible common equity to tangible assets
ratio.
Additionally, during the fourth quarter of 2010, as part of an
initiative to enhance the total regulatory capital levels for
HSBC North America, we offered noteholders of certain series of
our senior debt the ability to exchange their existing senior
notes for newly issued subordinated debt. As a result, we issued
$1.9 billion in new
10-year
fixed rate
36
HSBC Finance Corporation
subordinated debt in exchange for tendered debt totaling
$1.8 billion. In December 2010, we issued an additional
$1.0 billion of
10-year
fixed rate subordinated debt to institutional investors.
During 2010, we retired $16.5 billion of term debt as it
matured or was redeemed, including $1.8 billion of senior
debt exchanged for $1.9 billion in new subordinated debt as
discussed above. The maturing and redeemed debt cash
requirements were met through planned balance sheet attrition,
cash generated from operations, asset sales, capital
contributions from HSBC, the issuance of subordinated debt and
cost effective retail debt and the issuance of debt secured by
credit card receivables. The balance sheet and credit dynamics
described above continue to have an impact on our liquidity and
risk management processes. Continued success in reducing the
size of our non-core receivable portfolio coupled with the
stabilization in our core credit card receivable portfolio will
be the primary driver of our liquidity management process going
forward. Lower cash flow, as a result of declining receivable
balances as well as lower cash generated from balance sheet
attrition due to increased charge-offs, may not provide
sufficient cash to fully cover maturing debt over the next four
to five years. The required incremental funding will be
generated through the execution of alternative liquidity
management strategies, including selected debt issuances. In the
event a portion of our incremental funding need is met through
issuances of unsecured term debt, we anticipate these issuances
would be structured to better match the projected cash flows of
the remaining run-off portfolio and reduce reliance on direct
HSBC support. HSBC has indicated it remains fully committed and
has the capacity to continue to provide such support.
In the current market environment, market pricing continues to
value the cash flows associated with our receivables at amounts
which are significantly lower than what we believe will
ultimately be realized and we do not expect a return of pricing
that would typically be seen under more normal marketplace
conditions for the foreseeable future. Therefore, we have
decided to hold our receivable portfolios for investment
purposes. However, should market pricing improve in the future
or if HSBC North America calls upon us to execute certain
strategies in order to address capital considerations, it could
result in the reclassification of a portion of our receivable
portfolio into receivables held for sale.
The tangible common equity to tangible assets ratio was
7.37 percent and 7.60 percent at December 31,
2010 and 2009, respectively. This ratio represents a
non-U.S. GAAP
financial ratio that is used by HSBC Finance Corporation
management, certain rating agencies and our credit providing
banks 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.
Subject to regulatory approval, HSBC North America will be
required to implement Basel II no later than April 1,
2011 in accordance with current regulatory timelines. While we
will not report separately under the new rules, the composition
of our balance sheet will impact the overall HSBC North America
regulatory capital requirement. Based on a comprehensive
analysis of the HSBC North America balance sheet, we have taken
a series of actions in accordance with the overall HSBC North
Americas objective to achieve targeted total regulatory
capital levels under these new regulations, including the
exchange of senior debt for subordinated debt discussed above
which occurred during the fourth quarter of 2010. Adoption of
the Basel II provisions must be preceded by a parallel run
period of at least four quarters, and requires the approval of
U.S. regulators. This parallel run, which was initiated by
HSBC North America in January 2010, encompasses enhancements to
a number of risk policies, processes and systems to align with
the Basel II final rule requirements. HSBC North America
will seek regulatory approval for adoption when the program
enhancements have been completed which may extend beyond
April 1, 2011.
Future Prospects Our on-going operations are
limited to our Card and Retail Services and Insurance Services
businesses. The receivables of our Consumer Lending and Mortgage
Services businesses will continue to run-off over several years.
Funding of our operations will continue to be dependent on
balance sheet attrition, capital contributions from our parent
and, to a lesser extent, 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 the success of our efforts to restructure
the risk profile of our operations, our debt ratings, overall
economic conditions, overall capital
37
HSBC Finance Corporation
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.
Our results are also impacted by general economic conditions,
including unemployment, housing market conditions, property
valuations, interest rates and legislative and regulatory
changes, all of which are out of our control. Because our
Consumer Lending and Mortgage Services businesses and our
non-prime credit card operations have historically lent to
customers who have limited credit histories, modest incomes and
high
debt-to-income
ratios or who have experienced prior credit problems, overall
our customers are more susceptible to economic slowdowns than
other consumers. When unemployment increases or changes in the
rate of home value appreciation or depreciation occur, 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 2010, the interest rates
that we paid on our short-term debt decreased. During 2010, we
experienced higher overall yields on our receivable portfolio
primarily due to lower levels of nonperforming receivables,
including reduced levels of nonperforming modified real estate
secured receivables, due to charge-off and declines in new
modification volumes. The higher yields on our receivable
portfolio were partially offset by a shift in receivable mix to
higher levels of lower yielding first lien real estate secured
receivables as higher yielding second lien real estate secured
and personal non-credit card receivables have run-off at a
faster pace than first lien real estate secured receivables. See
Results of Operations in this MD&A for
additional discussion on receivable yields. The primary risks to
our performance in 2011 are largely dependent upon
macro-economic conditions which include a weak housing market,
high unemployment rates, the nature and extent of the economic
recovery, the performance of modified loans, consumer spending
and consumer confidence, all of which could impact loan volume,
delinquencies, charge-offs, net interest income and ultimately
our results of operations.
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 a continuing operations
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 common equity to
tangible assets is a
non-U.S. GAAP
financial measure that is used by HSBC Finance Corporation
management, certain rating agencies and our credit providing
banks to evaluate capital adequacy. This ratio excludes from
equity the impact of unrealized gains (losses) on cash flow
hedging instruments, postretirement benefit plan adjustments,
unrealized gains (losses) on investments, intangible assets as
well as subsequent changes in fair value recognized in earnings
associated with debt for which we elected the fair value option
and the related derivatives. This ratio may differ from
similarly named measures presented by other companies. The most
directly comparable U.S. GAAP financial measure is the
common and preferred equity to total assets ratio. For a
quantitative reconciliation of these
non-U.S. GAAP
financial measures to our common and preferred equity to total
assets ratio, see Reconciliations to
U.S. GAAP Financial Measures.
International Financial Reporting
Standards Because HSBC reports results in
accordance with International Financial Reporting Standards
(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
38
HSBC Finance Corporation
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 loss on a
U.S. GAAP basis to net loss on an IFRSs basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(in millions)
|
|
|
Net loss U.S. GAAP basis
|
|
$
|
(1,916
|
)
|
|
$
|
(7,450
|
)
|
|
$
|
(2,783
|
)
|
Adjustments, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives and hedge accounting (including fair value
adjustments)
|
|
|
(16
|
)
|
|
|
2
|
|
|
|
1
|
|
Intangible assets
|
|
|
35
|
|
|
|
43
|
|
|
|
58
|
|
Loan origination
|
|
|
17
|
|
|
|
76
|
|
|
|
65
|
|
Loan impairment
|
|
|
(95
|
)
|
|
|
199
|
|
|
|
28
|
|
Loans held for sale
|
|
|
(51
|
)
|
|
|
(98
|
)
|
|
|
173
|
|
Interest recognition
|
|
|
2
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Other-than-temporary
impairments on
available-for-sale
securities
|
|
|
3
|
|
|
|
2
|
|
|
|
(9
|
)
|
Securities
|
|
|
17
|
|
|
|
(63
|
)
|
|
|
(64
|
)
|
Extinguishment of debt
|
|
|
22
|
|
|
|
-
|
|
|
|
-
|
|
Present value of long term insurance business
|
|
|
7
|
|
|
|
54
|
|
|
|
-
|
|
Loss on sale of auto finance receivables and other related assets
|
|
|
(47
|
)
|
|
|
-
|
|
|
|
-
|
|
Loss on sale of U.K. and Canadian businesses to affiliates
|
|
|
-
|
|
|
|
-
|
|
|
|
(598
|
)
|
Pension and other postretirement benefit costs
|
|
|
55
|
|
|
|
32
|
|
|
|
25
|
|
Goodwill and other intangible asset impairment charges
|
|
|
-
|
|
|
|
(615
|
)
|
|
|
(509
|
)
|
Other
|
|
|
22
|
|
|
|
(67
|
)
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss IFRSs basis
|
|
|
(1,945
|
)
|
|
|
(7,886
|
)
|
|
|
(3,573
|
)
|
Tax benefit IFRSs basis
|
|
|
1,085
|
|
|
|
2,443
|
|
|
|
977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before tax IFRSs basis
|
|
$
|
(3,030
|
)
|
|
$
|
(10,329
|
)
|
|
$
|
(4,550
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the significant differences between U.S. GAAP
and IFRSs as they impact our results are presented below:
Derivatives and hedge accounting (including fair value
adjustments) The historical use of the
shortcut and long haul hedge accounting
methods for U.S. GAAP resulted in different cumulative
adjustments to the hedged item for both fair value and cash flow
hedges. These differences are recognized in earnings over the
remaining term of the hedged items. All of the hedged
relationships which previously qualified under the shortcut
method provisions of derivative accounting principles have been
redesignated and are now either hedges under the long-haul
method of hedge accounting or included in the fair value option
election.
Intangible assets Intangible assets under
IFRSs are significantly lower than those under U.S. GAAP as
the newly created intangibles associated with our acquisition by
HSBC were reflected in goodwill for IFRSs. As a result,
amortization of intangible assets is lower under IFRSs.
Deferred loan origination costs and fees
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
recognized on either a contractual or expected life basis. As a
result, in years with lower levels of receivable originations,
net income is lower under U.S. GAAP as the higher costs
deferred in prior periods are amortized into income without the
benefit of similar levels of cost deferrals for current period
originations.
Loan 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 a recovery asset
is recorded. Subsequent recoveries are recorded to earnings
under U.S. GAAP, but are adjusted
39
HSBC Finance Corporation
against the recovery asset under IFRSs. As a result, the impact
of the December 2009 Charge-off Policy Changes was lower on an
IFRSs basis as a portion of the impact under IFRSs was offset by
the establishment of the recovery asset. Interest is recorded
based on collectibility under IFRSs.
Loans held for sale IFRSs requires loans
designated as held for sale at the time of origination to be
treated as trading assets and recorded at their fair market
value. Under U.S. GAAP, loans designated as held for sale
are reflected as loans and recorded at the lower of amortized
cost or fair value. Under U.S. GAAP, the income and
expenses related to receivables held for sale are reported
similarly to loans held for investment. Under IFRSs, the income
and expenses related to receivables held for sale are reported
in other operating income.
For receivables transferred to held for sale subsequent to
origination, IFRSs requires these receivables to be reported
separately on the balance sheet but does not change the
recognition and measurement criteria. Accordingly for IFRSs
purposes, such loans continue to be accounted for in accordance
with IAS 39, Financial Instruments: Recognition and
Measurement (IAS 39), with any gain or loss
recorded at the time of sale. U.S. GAAP requires loans that
meet the held for sale classification requirements be
transferred to a held for sale category at the lower of cost or
fair value.
Certain receivables that were previously classified as held for
sale under U.S. GAAP have now been transferred to held for
investment as we now intend to hold for the foreseeable future.
Under U.S. GAAP, these receivables were subject to lower of
amortized cost or fair value (LOCOM) adjustments
while classified as held for sale and have been transferred to
held for investment at LOCOM. Under IFRSs, these receivables
were always reported within loans and the measurement criteria
did not change. As a result, loan impairment charges are now
being recorded under IFRSs which were essentially included as a
component of the lower of cost or fair value adjustments under
U.S. GAAP.
Interest recognition The calculation of
effective interest rates under IAS 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. U.S. GAAP generally prohibits
recognition of interest income to the extent the net investment
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-than-temporary
impairment on
available-for-sale
securities Under U.S. GAAP we are allowed
to evaluate perpetual preferred securities for potential
other-than-temporary
impairment similar to a debt security provided there has been no
evidence of deterioration in the credit of the issuer and record
the unrealized losses as a component of other comprehensive
income. There are no similar provisions under IFRSs as all
perpetual preferred securities are evaluated for
other-than-temporary
impairment as equity securities. Under IFRSs all impairments are
reported in other operating income.
Effective January 1, 2009 under U.S. GAAP, the credit
loss component of an
other-than-temporary
impairment of a debt security is recognized in earnings while
the remaining portion of the impairment loss is recognized in
other comprehensive income provided a company concludes it
neither intends to sell the security nor concludes that it is
more-likely-than-not that it will have to sell the security
prior to recovery. Under IFRSs, there is no bifurcation of
other-than-temporary
impairment and the entire decline in value is recognized in
earnings.
Securities Under IFRSs, securities include
HSBC shares held for stock plans at fair value. These shares are
recorded at fair value through other comprehensive income and
subsequently recognized in profit and loss as the shares vest.
If it is determined these shares have become impaired, the fair
value loss is recognized in profit and loss and any fair value
loss recorded in other comprehensive income is reversed. There
is no similar requirement under U.S. GAAP.
During the second quarter of 2009, under IFRSs we recorded
income for the value of additional shares attributed to HSBC
shares held for stock plans as a result of HSBCs rights
offering earlier in 2009. During 2010, under IFRSs we recorded
additional gains as these shares vest. The additional shares are
not recorded under U.S. GAAP.
Extinguishment of debt During the fourth
quarter of 2010, we exchanged $1.8 billion in senior debt
for $1.9 billion in new fixed rate subordinated debt. Under
IFRSs, the population of debt exchanged which qualified for
40
HSBC Finance Corporation
extinguishment treatment was larger than under U.S. GAAP
which resulted in a gain on extinguishment of debt under IFRSs
compared to a small loss under U.S. GAAP.
Present value of long-term insurance
contracts Under IFRSs, the present value of an
in-force (PVIF) long-term insurance contracts is
determined by discounting future cash flows expected to emerge
from business currently in force using appropriate assumptions
plus a margin in assessing factors such as future mortality,
lapse rates and levels of expenses, and a discount rate that
reflects the risk free rate plus a margin for operational risk.
Movements in the PVIF of long-term insurance contracts are
included in other operating income. Under U.S. GAAP,
revenue is recognized over the life insurance policy term.
During the second quarter of 2009, we refined the income
recognition methodology in respect to long-term insurance
contracts. This resulted in the recognition of a revenue item on
an IFRSs basis of $66 million ($43 million after-tax).
Approximately $43 million ($28 million after-tax)
would have been recorded prior to January 1, 2009 if the
refinement in respect of income recognition had been applied at
that date.
Loss on sale of auto finance receivables and other related
assets The differences in the loss on sale of
the auto finance receivables between IFRSs and U.S. GAAP
primarily reflect the differences in loan impairment
provisioning between IFRSs and U.S. GAAP as discussed
above. These differences resulted in a higher loss under IFRSs,
as future recoveries are accrued for on a discounted basis.
Loss on sale of U.K. and Canadian business to
affiliates IFRSs require that operations be
transferred to held for sale and carried at the lower of cost or
fair value with adjustments recorded through earnings when the
decision has been made to dispose of the operations regardless
of whether the sale will be to a third party or related party.
Under U.S. GAAP, when the transfer of net assets will be
between affiliates under common control, it is generally
reflected as a capital transaction in the period in which the
transaction occurs and carried at historical cost until that
time. However, because the transfer price of our Canadian
operations was lower than the book value, including goodwill, a
goodwill impairment charge was recorded under U.S. GAAP
through earnings. As the Canadian Operations has a higher
carrying value under IFRSs, the write down through earnings is
higher under IFRSs.
Pension and other postretirement benefit costs
Net income under U.S. GAAP is lower than under IFRSs as
a result of the amortization of the amount by which actuarial
losses exceed gains beyond the 10 percent
corridor. Furthermore in 2010 changes to future
accruals for legacy participants under the HSBC North America
Pension Plan were accounted for as a plan curtailment under
IFRSs, which resulted in immediate income recognition. Under US
GAAP, these changes were considered to be a negative plan
amendment which resulted in no immediate income recognition.
During the first quarter of 2009, the curtailment gain related
to postretirement benefits and also resulted in lower net income
under U.S. GAAP than IFRSs.
Goodwill and other intangible asset impairment
charges Goodwill levels established as a result
of our acquisition by HSBC were higher under IFRSs than
U.S. GAAP as the HSBC purchase accounting adjustments
reflected higher levels of intangibles under U.S. GAAP.
Consequently, the amount of goodwill allocated to our Card and
Retail Services and Insurance Services businesses and written
off during 2009 was greater under IFRSs. Additionally, the
intangible assets allocated to our Consumer Lending business and
written off during the first quarter of 2009 were higher under
U.S. GAAP. There are also differences in the valuation of
assets and liabilities under IFRSs and U.S. GAAP resulting
from the Metris acquisition in December 2005.
Other There are other differences between
IFRSs and U.S. GAAP including purchase accounting and other
miscellaneous items.
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. As a
result, operating results are 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 GM and UP Portfolios and the
private label and real estate secured receivables transferred to
HSBC Bank USA have not been sold and remain on our balance sheet
and the revenues and expenses related to these receivables
remain on our
41
HSBC Finance Corporation
income statement. Additionally, IFRS Management Basis 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 receivable
sales to HSBC Bank USA were conducted primarily to appropriately
fund prime customer loans more efficiently through bank deposits
and such receivables continue to be managed by us. 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
legal entity basis. A summary of the significant differences
between U.S. GAAP and IFRSs as they impact our results are
also summarized in Note 24, Business Segments,
in the accompanying consolidated financial statements.
We are currently in the process of re-evaluating the financial
information used to manage our business, including the scope and
content of the financial data being reported to our Management
and our Board. To the extent we make changes to this reporting
in 2011, we will evaluate any impact such changes may have to
our segment reporting.
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.
Critical
Accounting Policies and Estimates
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
and New Accounting Pronouncements, 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. 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,
observable market data, inputs derived from or corroborated by
observable market data by correlation or other means, and on
various other assumptions including those based on unobservable
inputs that we believe to be reasonable under the circumstances,
the results of which form the basis for making judgments about
the carrying values of assets and liabilities. In addition, to
the extent we use certain modeling techniques to assist us in
measuring the fair value of a particular asset or liability, we
strive to use such techniques which are consistent with those
used by other market participants. Actual results may differ
from these estimates due to the levels of subjectivity and
judgment necessary to account for highly uncertain matters or
the susceptibility of such matters to change. The impact of
estimates and assumptions on the financial condition or
operating performance may be material.
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 these critical accounting policies with the Audit and
Risk Committee of our Board of Directors, including certain
underlying estimates and assumptions, and the Audit and Risk
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 incurred losses of principal, interest and fees,
including late, over-limit and annual fees, in the existing
portfolio. Loss reserves are set at each business unit in
consultation with the Finance and Risk 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
42
HSBC Finance Corporation
the accounting estimate relating to the reserve for credit
losses is a critical accounting estimate for the
following reasons:
|
|
|
|
|
Changes in the provision can materially affect our financial
results;
|
|
|
|
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; and
|
|
|
|
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, bankruptcy trends and
changes in laws and regulations.
|
Because our loss reserve estimates involve judgment and are
influenced by factors outside of our control, there is
uncertainty inherent in these estimates, making it 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, the performance of modified loans,
unemployment levels, delinquency rates and the flow of loans
through the various stages of delinquency, 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 percent change in our projection of probable net credit
losses on receivables would have resulted in a change of
approximately $618 million in our credit loss reserves for
receivables at December 31, 2010. The reserve for credit
losses is a critical accounting estimate for both our Consumer
and Card and Retail Services segments.
We maintain credit loss reserves to cover probable inherent
losses of principal, accrued interest and fees, including late,
overlimit and annual fees. 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 be charged-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 re-aged, or are subject to forbearance,
an external debt management plan, hardship, modification,
extension or deferment. Our credit loss reserves also take into
consideration the expected loss severity 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 re-age of
accounts, forbearance agreements, extended payment plans,
modification arrangements 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 re-aged or modified 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 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 unemployment, 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.
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 and for certain products their vintages, 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. We also
consider key ratios such as reserves as a percentage of
nonperforming loans, reserves as a percentage of net
charge-offs, reserves as a percentage of two-months-and-over
contractual delinquency, and
43
HSBC Finance Corporation
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 Risk Strategy and
Finance Departments independently assess and approve the
adequacy of our loss reserve levels.
For more information about our charge-off and customer account
management policies and practices, see Credit
Quality Delinquency and Charge-off Policies and
Practices, Credit Quality Changes to
Real Estate Secured and Personal Non-Credit Card Receivable
Charge-off Policies 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. Intangible assets and
goodwill recorded on our balance sheet are reviewed annually on
July 1 for impairment using discounted cash flows, but
impairment may also be reviewed at other interim dates 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 indicators of
potential impairment due to their impact on expected future cash
flows. In addition, shorter-term changes may impact the discount
rate applied to such cash flows based on changes in investor
requirements or market uncertainties.
The impairment testing of our goodwill and intangibles has
historically been a critical accounting estimate due to the
level of goodwill and intangible assets recorded 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
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 that
used by market participants, which involves management 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 and any interim test which may be
required, we assign our goodwill to our reporting units. As a
result of the continuing deterioration of economic conditions
throughout 2008 and into 2009 as well as the adverse impact to
our Insurance Services business which resulted from the closure
of all of our Consumer Lending branches, we wrote off all of our
remaining goodwill balance during 2009.
Impairment testing of intangible assets requires that the fair
value of the asset be compared to its carrying amount. At
July 1, 2010, the estimated fair value of each intangible
asset exceeded its carrying value and, as such, none of our
intangible assets were impaired.
Valuation of Financial Instruments A control
framework has been established which is designed to ensure that
fair values are either determined or validated by a function
independent of the risk-taker. To that end, the ultimate
responsibility for the determination of fair values rests with
the HSBC Finance Valuation Committee. The HSBC Finance
Valuation Committee establishes policies and procedures to
ensure appropriate valuations.
Where available, we use quoted market prices to determine fair
value. If quoted market prices are not available, fair value is
determined using internally developed valuation models based on
inputs that are either directly observable or derived from and
corroborated by market data. Where neither quoted market prices
nor observable market parameters are available, fair value is
determined using valuation models that feature one or more
significant unobservable inputs based on managements
expectation that market participants would use in determining
the fair value of the asset or liability. However, these
unobservable inputs must incorporate market participants
44
HSBC Finance Corporation
assumptions about risks in the asset or liability and the risk
premium required by market participants in order to bear the
risks. The determination of appropriate unobservable inputs
requires exercise of management judgment. A significant majority
of our assets and liabilities that are reported at fair value
are measured based on quoted market prices and observable
market-based or independently-sourced inputs.
We review and update our fair value hierarchy classifications
quarterly. Changes from one quarter to the next related to the
observability of inputs to a fair value measurement may result
in a reclassification between hierarchy levels. While we believe
our valuation methods are appropriate, the use of different
methodologies or assumptions to determine the fair value of
certain financial assets and liabilities could result in a
different estimate of fair value at the reporting date.
Significant assets and liabilities recorded at fair value
include the following:
Derivative financial assets and liabilities
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. Related
collateral that has been received or paid is netted against fair
value for financial reporting purposes where a master netting
arrangement with the counterparty exists that provides for the
net settlement of all contracts through a single payment in a
single currency in the event of default or termination on any
one contract. 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 observable market value quotes for identical or similar
assets or liabilities in active and inactive markets. These
modeling techniques require the use of estimates regarding the
amount and timing of future cash flows and utilize
independently-sourced market parameters, including interest rate
yield curves, option volatilities, and currency rates, where
available. Where market data is not available, fair value may be
affected by the choice of valuation model and the underlying
assumptions about the timing of cash flows and credit spreads.
These estimates are susceptible to significant changes in future
periods as market conditions evolve.
We may adjust certain fair value estimates determined using
valuation models to ensure that those estimates appropriately
represent fair value. These adjustments, which are applied
consistently over time, are generally required to reflect
factors such as market liquidity and counterparty credit risk.
Assessing the appropriate level of liquidity adjustment requires
management judgment and is often affected by the product type,
transaction-specific terms and the level of liquidity for the
product in the market. In assessing the credit risk relating to
derivative assets and liabilities, we take into account the
impact of risk mitigants including, but not limited to, master
netting and collateral arrangements. We also consider the effect
of our own non-performance credit risk on fair values.
Imprecision in estimating these factors can impact the amount of
revenue or loss recorded for a particular position.
We utilize HSBC Bank USA to determine the fair value of
substantially all of our derivatives using these modeling
techniques. Significant changes in the fair value can result in
equity and earnings volatility as follows:
|
|
|
|
|
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.
|
|
|
|
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, net of tax, to the extent of its
effectiveness, until earnings are impacted by the variability of
cash flows from the hedged item.
|
|
|
|
Changes in the fair value of a derivative that has not been
designated as an effective hedge are reported in current period
earnings.
|
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
45
HSBC Finance Corporation
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
primarily by HSBC Bank USA.
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. For example, a 10 percent
adverse change in the value of our derivatives which do not
qualify as effective hedges would have reduced revenue by
approximately $141 million at December 31, 2010.
For more information about our policies regarding the use of
derivative instruments, see Note 2, Summary of
Significant Accounting Policies and New Accounting
Pronouncements, and Note 17, Derivative
Financial Instruments, to the accompanying consolidated
financial statements.
Long-term debt carried at fair value We have
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. 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. In many cases, management can obtain
quoted prices for identical or similar liabilities but the
markets are not active, the prices are not current, or such
price quotations vary substantially either over time or among
market makers. 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 value of our debt designated at fair value could
have resulted in a change to our reported
mark-to-market
of approximately $2.1 billion at December 31, 2010.
Debt securities Debt securities, which
include mortgage-backed securities and other asset-backed
securities, are measured at fair value based on a third party
valuation source using quoted market prices and if not
available, based on observable quotes for similar securities or
other valuation techniques (e.g., matrix pricing). Otherwise,
for non-callable corporate securities, a credit spread scale is
created for each issuer and these spreads are then added to the
equivalent maturity U.S. Treasury yield to determine
current pricing. The fair value measurements for mortgage-backed
securities and other asset-backed securities are primarily
obtained from independent pricing sources taking into account
differences in the characteristics and the performance of the
underlying collateral, such as prepayments and defaults. A
determination will be made as to whether adjustments to the
observable inputs are necessary as a result of investigations
and inquiries about the reasonableness of the inputs used and
the methodologies employed by the independent pricing sources.
Receivables held for sale Receivables held
for sale are carried at the lower of amortized cost or fair
value. Accordingly, fair value for such receivables must be
estimated to determine any required write down to fair value
when the amortized cost of the receivables exceeds their current
fair value. Where available, quoted market prices are used to
estimate the fair value of these receivables. Where market
quotes are not available, fair value is estimated using
observable market prices of similar instruments with similar
characteristics.
46
HSBC Finance Corporation
Where quoted market prices and observable market parameters are
not available, the fair value of receivables held for sale is
based on contractual cash flows adjusted for managements
estimates of prepayments, defaults, and recoveries, discounted
at managements estimate of the rate of return that would
be required by investors in the current market given the
specific characteristics and inherent credit risk of the
receivables. Management attempts to corroborate its estimates of
prepayments, defaults, and recoveries using observable data by
correlation or other means. Reduced liquidity in credit markets
has resulted in a decrease in the availability of observable
market data, which has in turn resulted in an increased level of
management judgment required to estimate fair value for
receivables held for sale. In certain cases, an independent
third party is utilized to substantiate managements
estimate of fair value.
Deferred Tax Assets We recognize deferred tax
assets and liabilities for the future tax consequences related
to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax
bases and for tax credits and state net operating losses. Our
deferred tax assets, net of valuation allowances, totaled
$3.4 billion and $4.2 billion as of December 31,
2010 and 2009, respectively. We evaluate our deferred tax assets
for recoverability using a consistent approach which considers
the relative impact of negative and positive evidence, including
our historical financial performance, projections of future
taxable income, future reversals of existing taxable temporary
differences and any carryback available. We are required to
establish a valuation allowance for deferred tax assets and
record a charge to income or shareholders equity if we
determine, based on available evidence at the time the
determination is made, that it is more-likely-than-not that some
portion or all of the deferred tax assets will not be realized.
In evaluating the need for a valuation allowance, we estimate
future taxable income based on management approved business
plans, future capital requirements and ongoing tax planning
strategies, including capital support from HSBC necessary as
part of such plans and strategies. This process involves
significant management judgment about assumptions that are
subject to change from period to period. Because the recognition
of deferred tax assets requires management to make significant
judgments about future earnings, the periods in which items will
impact taxable income and the application of inherently complex
tax laws, we have included the assessment of deferred tax assets
and the need for any related valuation allowance as a critical
accounting estimate.
Since recent market conditions have created significant downward
pressure on our near-term pretax book income, our analysis of
the realizability of deferred tax assets significantly discounts
any future taxable income expected from continuing operations
and relies to a greater extent on continued liquidity and
capital support from our parent, HSBC, including tax planning
strategies implemented in relation to such support. We are
included in HSBC North Americas consolidated
Federal income tax return and in various combined state tax
returns. As we have entered into tax allocation agreements with
HSBC North America and its subsidiary entities included in the
consolidated return which govern the current amount of taxes to
be paid or received by the various entities, we look at HSBC
North America and its affiliates, together with the tax planning
strategies identified, in reaching conclusions on
recoverability. Absent capital support from HSBC and
implementation of the related tax planning strategies, we would
be required to record a valuation allowance against our deferred
tax assets.
The use of different estimates can result in changes in the
amounts of deferred tax items recognized, which can result in
equity and earnings volatility because such changes are reported
in current period earnings. Furthermore, if future events differ
from our current forecasts, valuation allowances may need to be
established or adjusted, which could have a material adverse
effect on our results of operations, financial condition and
capital position. We will continue to update our assumptions and
forecasts of future taxable income and assess the need for a
valuation allowance.
Additional detail on our assumptions with respect to the
judgments made in evaluating the realizability of our deferred
tax assets and on the components of our deferred tax assets and
deferred tax liabilities as of December 31, 2010 and 2009
can be found in Note 18, Income Taxes of this
Form 10-K.
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. 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.
47
HSBC Finance Corporation
Litigation exposure represents a key area of judgment and is
subject to uncertainty and certain factors outside of our
control. Due to the uncertainties in litigation and other
factors, we cannot be certain that we will ultimately prevail in
each instance. Such uncertainties impact our ability to
determine whether it is probable that a liability exists and
whether the amount can be reasonably estimated. 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.
Receivables
Review
The table below summarizes receivables at December 31, 2010
and increases (decreases) over prior periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases (Decreases) From
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
December 31,
|
|
|
2009
|
|
|
2008
|
|
|
|
2010
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core receivable portfolios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
card(1)
|
|
$
|
9,897
|
|
|
$
|
(1,729
|
)
|
|
|
(14.9
|
)%
|
|
$
|
(3,334
|
)
|
|
|
(25.2
|
)%
|
Non-core receivable portfolios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
secured(2)(3)
|
|
|
49,336
|
|
|
|
(10,199
|
)
|
|
|
(17.1
|
)
|
|
|
(22,330
|
)
|
|
|
(31.2
|
)
|
Private
label(4)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(65
|
)
|
|
|
(100.0
|
)
|
Personal non-credit card
|
|
|
7,117
|
|
|
|
(3,369
|
)
|
|
|
(32.1
|
)
|
|
|
(8,451
|
)
|
|
|
(54.3
|
)
|
Commercial and other
|
|
|
33
|
|
|
|
(17
|
)
|
|
|
(34.0
|
)
|
|
|
(60
|
)
|
|
|
(64.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-core receivable portfolios
|
|
|
56,486
|
|
|
|
(13,585
|
)
|
|
|
(19.4
|
)
|
|
|
(30,906
|
)
|
|
|
(35.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables
|
|
$
|
66,383
|
|
|
$
|
(15,314
|
)
|
|
|
(18.7
|
)%
|
|
$
|
(34,240
|
)
|
|
|
(34.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
During 2009, $1.1 billion of credit card receivables held
for sale were reclassified to held for investment.
|
|
(2)
|
Real estate secured receivables are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases (Decreases) From
|
|
|
|
December 31,
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
2010
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Mortgage Services
|
|
$
|
15,982
|
|
|
$
|
(3,959
|
)
|
|
|
(19.9
|
)%
|
|
$
|
(9,472
|
)
|
|
|
(37.2
|
)%
|
Consumer Lending
|
|
|
33,347
|
|
|
|
(6,239
|
)
|
|
|
(15.8
|
)
|
|
|
(12,855
|
)
|
|
|
(27.8
|
)
|
All other
|
|
|
7
|
|
|
|
(1
|
)
|
|
|
(12.5
|
)
|
|
|
(3
|
)
|
|
|
(30.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
$
|
49,336
|
|
|
$
|
(10,199
|
)
|
|
|
(17.1
|
)%
|
|
$
|
(22,330
|
)
|
|
|
(31.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) |
|
At December 31, 2010 and 2009,
real estate secured receivables includes outstanding principal
balances of $5.1 billion and $3.4 billion,
respectively, of receivables that have been written down to
their net realizable value less cost to sell in accordance with
our existing charge-off policy.
|
|
(4) |
|
Private label receivables consist
primarily of the liquidating retail sales contracts in our
Consumer Lending business with a receivable balance of
$3 million, $12 million and $51 million at
December 31, 2010, 2009 and 2008, respectively. Beginning
in 2009, we began reporting this liquidating portfolio
prospectively within our personal non-credit card portfolio.
|
Core Credit Card Receivables Credit card
receivables have decreased as a result of actions taken
beginning in the fourth quarter of 2007 to manage risk including
tightening initial credit lines and sales authorization
criteria, closing inactive accounts, decreasing credit lines,
tightening underwriting criteria, tightening cash access and
reducing
48
HSBC Finance Corporation
marketing levels, as well as an increased focus and ability on
the part of consumers to reduce outstanding credit card debt. In
2008, we identified certain segments of our credit card
portfolio which have been the most impacted by the housing and
economic conditions and we stopped all new account originations
in those market segments. Based on performance trends which
began in the second half of 2009, we have increased direct
marketing mailings and new customer account originations for
portions of our non-prime credit card receivable portfolio which
will likely result in lower run-off of credit card receivables
during 2011.
Non-Core
Receivable Portfolios
Real estate secured receivables Real estate
secured receivables can be further analyzed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases (Decreases) From
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
December 31,
|
|
|
2009
|
|
|
2008
|
|
|
|
2010
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Real estate
secured(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed-end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
43,672
|
|
|
$
|
(8,105
|
)
|
|
|
(15.7
|
)%
|
|
$
|
(17,578
|
)
|
|
|
(28.7
|
)%
|
Second lien
|
|
|
4,260
|
|
|
|
(1,605
|
)
|
|
|
(27.4
|
)
|
|
|
(3,620
|
)
|
|
|
(45.9
|
)
|
Revolving:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
187
|
|
|
|
(24
|
)
|
|
|
(11.4
|
)
|
|
|
(52
|
)
|
|
|
(21.8
|
)
|
Second lien
|
|
|
1,217
|
|
|
|
(465
|
)
|
|
|
(27.6
|
)
|
|
|
(1,080
|
)
|
|
|
(47.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate
secured(2)
|
|
$
|
49,336
|
|
|
$
|
(10,199
|
)
|
|
|
(17.1
|
)%
|
|
$
|
(22,330
|
)
|
|
|
(31.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Receivable classification between closed-end and revolving
receivables is based on the classification at the time of
receivable origination and does not reflect any changes in the
classification that may have occurred as a result of any loan
modifications.
|
|
(2)
|
Excludes receivables held for sale. Real estate secured
receivables held for sale included $4 million,
$3 million and $323 million primarily of closed-end,
first lien receivables at December 31, 2010, 2009 and 2008,
respectively.
|
As previously discussed, real estate markets in a large portion
of the United States have been and continue to be affected by
stagnation or declines in property values. As such, the
loan-to-value
(LTV) ratios for our real estate secured receivable
portfolios have generally deteriorated since origination.
Receivables which have an LTV greater than 100 percent have
historically had a greater likelihood of becoming delinquent,
resulting in higher credit losses for us. Refreshed
loan-to-value
ratios for our real estate secured receivable portfolios are
presented in the table below as of December 31, 2010 and
2009. The overall improvement in average refreshed LTVs in our
first lien real estate secured receivable portfolio reflects the
increase in receivables carried at their net realizable value
less cost to sell since December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refreshed
LTVs(1)(2)
|
|
Refreshed
LTVs(1)(2)
|
|
|
at December 31, 2010
|
|
at December 31, 2009
|
|
|
|
|
|
|
|
Consumer
Lending(3)
|
|
Mortgage Services
|
|
Consumer
Lending(3)
|
|
Mortgage Services
|
|
|
First
|
|
Second
|
|
First
|
|
Second
|
|
First
|
|
Second
|
|
First
|
|
Second
|
|
|
Lien
|
|
Lien
|
|
Lien
|
|
Lien
|
|
Lien
|
|
Lien
|
|
Lien
|
|
Lien
|
|
|
LTV<80%
|
|
|
39
|
%
|
|
|
18
|
%
|
|
|
34
|
%
|
|
|
8
|
%
|
|
|
35
|
%
|
|
|
18
|
%
|
|
|
30
|
%
|
|
|
8
|
%
|
80%£LTV<90%
|
|
|
18
|
|
|
|
13
|
|
|
|
18
|
|
|
|
11
|
|
|
|
18
|
|
|
|
12
|
|
|
|
18
|
|
|
|
12
|
|
90%£LTV<100%
|
|
|
17
|
|
|
|
20
|
|
|
|
21
|
|
|
|
19
|
|
|
|
19
|
|
|
|
22
|
|
|
|
23
|
|
|
|
20
|
|
LTV³100%
|
|
|
26
|
|
|
|
49
|
|
|
|
27
|
|
|
|
62
|
|
|
|
28
|
|
|
|
48
|
|
|
|
29
|
|
|
|
60
|
|
Average LTV for portfolio
|
|
|
87
|
|
|
|
100
|
|
|
|
89
|
|
|
|
109
|
|
|
|
88
|
|
|
|
100
|
|
|
|
91
|
|
|
|
109
|
|
|
|
(1) |
Refreshed LTVs for first liens are calculated using the
receivable balance as of the reporting date (including any
charge-offs recorded to reduce receivables to their net
realizable value less cost to sell in accordance with our
existing charge-off policies). Refreshed LTVs for
|
49
HSBC Finance Corporation
|
|
|
second liens are calculated using
the receivable balance as of the reporting date (including any
charge-offs recorded to reduce receivables to their net
realizable value less cost to sell in accordance with our
existing charge-off policies) plus the senior lien amount at
origination. For purposes of this disclosure, current estimated
property values are derived from the propertys appraised
value at the time of receivable origination updated by the
change in the Office of Federal Housing Enterprise
Oversights house pricing index (HPI) at either
a Core Based Statistical Area (CBSA) or state level.
The estimated value of the homes could vary from actual fair
values due to changes in condition of the underlying property,
variations in housing price changes within metropolitan
statistical areas and other factors. As a result, actual
property values associated with loans which end in foreclosure
may be significantly lower than the estimated values used for
purposes of this disclosure.
|
|
|
(2)
|
For purposes of this disclosure, current estimated property
values are calculated using the most current HPIs
available and applied on an individual loan basis, which results
in an approximately three month delay in the production of
reportable statistics for the current period. Therefore, the
December 31, 2010 and 2009 information in the table above
reflects current estimated property values using HPIs as of
September 30, 2010 and 2009, respectively. Given the recent
declines in property values in certain markets, the refreshed
LTVs of our portfolio may, in fact, be lower than reflected in
the table.
|
|
(3)
|
Excludes the purchased receivable portfolios of our Consumer
Lending business which totaled $1.2 billion and
$1.5 billion at December 31, 2010 and 2009,
respectively.
|
The following table summarizes various real estate secured
receivables information (excluding receivables held for sale)
for our Mortgage Services and Consumer Lending businesses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
Mortgage
|
|
|
Consumer
|
|
|
Mortgage
|
|
|
Consumer
|
|
|
Mortgage
|
|
|
Consumer
|
|
|
|
Services
|
|
|
Lending
|
|
|
Services
|
|
|
Lending
|
|
|
Services
|
|
|
Lending
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Fixed
rate(3)
|
|
$
|
10,014
|
(1)
|
|
$
|
31,827
|
(2)
|
|
$
|
11,962
|
(1)
|
|
$
|
37,717
|
(2)
|
|
$
|
14,340
|
(1)
|
|
$
|
43,882
|
(2)
|
Adjustable
rate(3)
|
|
|
5,968
|
|
|
|
1,520
|
|
|
|
7,979
|
|
|
|
1,869
|
|
|
|
11,114
|
|
|
|
2,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,982
|
|
|
$
|
33,347
|
|
|
$
|
19,941
|
|
|
$
|
39,586
|
|
|
$
|
25,454
|
|
|
$
|
46,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
13,821
|
|
|
$
|
30,042
|
|
|
$
|
16,979
|
|
|
$
|
35,014
|
|
|
$
|
21,198
|
|
|
$
|
40,297
|
|
Second lien
|
|
|
2,161
|
|
|
|
3,305
|
|
|
|
2,962
|
|
|
|
4,572
|
|
|
|
4,256
|
|
|
|
5,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,982
|
|
|
$
|
33,347
|
|
|
$
|
19,941
|
|
|
$
|
39,586
|
|
|
$
|
25,454
|
|
|
$
|
46,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable
rate(3)
|
|
$
|
4,898
|
|
|
$
|
1,520
|
|
|
$
|
6,471
|
|
|
$
|
1,869
|
|
|
$
|
8,860
|
|
|
$
|
2,320
|
|
Interest
only(3)
|
|
|
1,070
|
|
|
|
-
|
|
|
|
1,508
|
|
|
|
-
|
|
|
|
2,254
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustable
rate(3)
|
|
$
|
5,968
|
|
|
$
|
1,520
|
|
|
$
|
7,979
|
|
|
$
|
1,869
|
|
|
$
|
11,114
|
|
|
$
|
2,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stated income
|
|
$
|
2,703
|
|
|
$
|
-
|
|
|
$
|
3,677
|
|
|
$
|
-
|
|
|
$
|
5,237
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes fixed rate interest-only receivables of
$235 million, $282 million and $344 million at
December 31, 2010, 2009 and 2008, respectively.
|
|
(2)
|
Includes fixed rate interest-only receivables of
$27 million, $36 million and $44 million at
December 31, 2010, 2009 and 2008, respectively.
|
|
(3)
|
Receivable classification between fixed rate, adjustable rate,
and interest-only receivables is based on the classification at
the time of receivable origination and does not reflect any
changes in the classification that may have occurred as a result
of any loan modifications.
|
The decrease in our real estate secured receivable balances
since December 31, 2009 and 2008 reflect the continuing
liquidation of this portfolio which will continue going forward.
The liquidation rates in our real estate secured receivable
portfolios continue to be impacted by declines in loan
prepayments as fewer refinancing opportunities for our customers
exist and by the trends impacting the mortgage lending industry
as discussed above.
50
HSBC Finance Corporation
Personal non-credit card receivables Personal
non-credit card receivables are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases (Decreases) From
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
December 31,
|
|
|
2009
|
|
|
2008
|
|
|
|
2010
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Personal non-credit card
|
|
$
|
5,295
|
|
|
$
|
(2,801
|
)
|
|
|
(34.6
|
)%
|
|
$
|
(7,199
|
)
|
|
|
(57.6
|
)%
|
Personal homeowner loans (PHLs)
|
|
|
1,822
|
|
|
|
(568
|
)
|
|
|
(23.8
|
)
|
|
|
(1,252
|
)
|
|
|
(40.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total personal non-credit card receivables
|
|
$
|
7,117
|
|
|
$
|
(3,369
|
)
|
|
|
(32.1
|
)%
|
|
$
|
(8,451
|
)
|
|
|
(54.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in personal non-credit card receivables since
December 31, 2009 and 2008 reflect the continuing
liquidation of this portfolio which will continue going forward.
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 principal balance in our portfolio at
December 31, 2010 is approximately $18,000. Because
recovery upon foreclosure is unlikely after satisfying senior
liens and paying the expenses of foreclosure, we do not consider
the collateral as a source for repayment in our underwriting or
in the establishment of credit loss reserves.
Distribution and Sales As discussed above,
our current product offering primarily consists of credit card
and private label receivables. Credit card receivables are
generated primarily through direct mail, telemarketing, Internet
applications, promotional activity associated with our
co-branding and affinity relationships, mass media
advertisements and merchant relationships. A portion of our new
credit card receivables are sold on a daily basis to HSBC Bank
USA and do not remain on our balance sheet. Private label
receivables are generated through point of sale, merchant
promotions, application displays, Internet applications, direct
mail and telemarketing. All new private label originations are
sold on a daily basis to HSBC Bank USA and do not remain on our
balance sheet.
Real
Estate Owned
We obtain real estate by taking possession of the collateral
pledged as security for real estate secured receivables. REO
properties are made available for sale in an orderly fashion
with the proceeds used to reduce or repay the outstanding
receivable balance. The following table provides quarterly
information regarding our REO properties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Full Year
|
|
Dec. 31,
|
|
Sept. 30,
|
|
June 30,
|
|
Mar. 30,
|
|
Full Year
|
|
|
2010
|
|
2010
|
|
2010
|
|
2010
|
|
2010
|
|
2009
|
|
|
Number of REO properties at end of period
|
|
|
10,749
|
|
|
|
10,749
|
|
|
|
9,629
|
|
|
|
8,249
|
|
|
|
6,826
|
|
|
|
6,060
|
|
Number of properties added to REO inventory in the period
|
|
|
20,112
|
|
|
|
5,657
|
|
|
|
5,316
|
|
|
|
4,996
|
|
|
|
4,143
|
|
|
|
14,476
|
|
Average loss on sale of REO
properties(1)
|
|
|
8.9
|
%
|
|
|
15.3
|
%
|
|
|
10.1
|
%
|
|
|
4.2
|
%
|
|
|
3.9
|
%
|
|
|
11.6
|
%
|
Average total loss on foreclosed
properties(2)
|
|
|
51.1
|
%
|
|
|
53.6
|
%
|
|
|
52.1
|
%
|
|
|
48.9
|
%
|
|
|
49.0
|
%
|
|
|
51.6
|
%
|
Average time to sell REO properties (in days)
|
|
|
161
|
|
|
|
165
|
|
|
|
158
|
|
|
|
156
|
|
|
|
170
|
|
|
|
193
|
|
|
|
|
(1) |
|
Property acquired through
foreclosure is initially recognized at its fair value less
estimated costs to sell (Initial REO Carrying
Value). The average loss on sale of REO properties is
calculated as cash proceeds less the Initial REO Carrying Value
divided by the Initial REO Carrying Value.
|
|
(2) |
|
The average total loss on
foreclosed properties sold each quarter includes both the loss
on sale of the REO property as discussed above and the
cumulative write-downs recognized on the loans up to the time we
took title to the property. This calculation of the average
total loss on foreclosed properties uses the unpaid loan
principal balance prior to write-down plus any other ancillary
amounts owed (e.g., real estate tax advances) which were
incurred prior to our taking title to the property.
|
51
HSBC Finance Corporation
The number of REO properties at December 31, 2010 increased
as compared to December 31, 2009 due to improved processing
of foreclosures following backlogs in foreclosure proceedings
and actions by local governments and certain states that
lengthened the foreclosure process beginning in 2008. However,
in the first half of 2011, we anticipate the number of REO
properties will decrease as foreclosures are again delayed as a
result of our suspension of foreclosures while we enhance
foreclosure documentation and processes for foreclosures and
re-file affidavits where necessary. Local governments and states
may also require additional processes in the future which could
slow the foreclosure process once resumed, again leading to a
slowdown in growth of REO properties.
While the average total loss on foreclosed properties for full
year 2010 was essentially flat as compared to full year 2009,
home price stabilization in many markets and recovery in other
markets which occurred during the first half of the year was
offset by home price declines in the second half of the year.
The decline in home prices in the second half of the year
resulted from the continued elevated levels of foreclosed
properties and the expiration of the homebuyer tax credit. The
average loss on sale of REO properties also began to increase
again during the second half of 2010 reflecting declines in home
prices as discussed above as this ratio is negatively impacted
by declines in home prices between the time we take title to the
property and when the property is ultimately sold. The impact of
the recent publicized foreclosure practices of certain servicers
could ultimately result in increased severity of loss upon sale
as there will likely be a dramatic and significant increase in
the number of properties on the market once the industry
implements the required changes.
Results
of Operations
Unless noted otherwise, the following discusses amounts from
continuing operations as reported in our consolidated statement
of income.
Net Interest Income The following table summarizes
net interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2010
|
|
|
%(1)
|
|
|
2009
|
|
|
%(1)
|
|
|
2008
|
|
|
%(1)
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Finance and other interest income
|
|
$
|
7,208
|
|
|
|
9.00
|
%
|
|
$
|
8,887
|
|
|
|
8.93
|
%
|
|
$
|
13,616
|
|
|
|
10.70
|
%
|
Interest expense
|
|
|
3,023
|
|
|
|
3.77
|
|
|
|
3,829
|
|
|
|
3.85
|
|
|
|
5,680
|
|
|
|
4.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
4,185
|
|
|
|
5.23
|
%
|
|
$
|
5,058
|
|
|
|
5.08
|
%
|
|
$
|
7,936
|
|
|
|
6.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
% Columns: comparison to average
interest-earning assets.
|
Net interest income decreased during 2010 primarily due to lower
average receivables as a result of receivable liquidation, risk
mitigation efforts and an increased focus and ability by
consumers to reduce outstanding credit card debt, partially
offset by higher overall receivable yields and lower interest
expense. During 2010, we experienced higher yields for all
receivable products as a result of lower levels of nonperforming
receivables, including reduced levels of nonperforming modified
real estate secured receivables, due to charge-off and declines
in new modification volumes. Higher yields in our real estate
secured receivable portfolio were partially offset by the impact
of an increase in the expected lives of receivables in payment
incentive programs. Higher yields in our credit card receivable
portfolio were partially offset by the implementation of certain
provisions of the Card Act including restrictions impacting
repricing of delinquent accounts and periodic re-evaluation of
rate increases. We anticipate credit card loan yields in future
periods may continue to be negatively impacted by various
provisions of the Card Act which require certain rate increases
to be periodically re-evaluated. As receivable yields vary
between receivable products, overall receivable yields were
negatively impacted by a shift in receivable mix to higher
levels of lower yielding first lien real estate secured
receivables as higher yielding second lien real estate secured
and personal non-credit card receivables have run-off at a
faster pace than first lien real estate secured receivables. The
decrease in net interest income during 2010 was partially offset
by higher net interest income on our non-insurance investment
portfolio reflecting higher levels of investments held and
slightly higher yields. These decreases were partially offset by
lower interest expense due to lower average borrowings and lower
average rates.
52
HSBC Finance Corporation
Net interest income during 2009 includes the impact of the
December 2009 Charge-off Policy Changes and the impact of the
adoption of a more bank-like income recognition policy relating
to unrecorded interest on re-aged real estate secured
receivables and PHLs both of which occurred in the fourth
quarter of 2009 which reduced net interest income by
$351 million and $190 million, respectively, as
previously discussed. Excluding the impact of these items, net
interest income remained lower in 2009 due to lower average
receivables reflecting lower origination volumes due to our risk
mitigation efforts, including our decisions to stop all new
account originations in our Mortgage Services and Consumer
Lending businesses, as well as lower consumer spending levels.
The decrease in net interest income also reflects lower levels
of performing receivables and lower overall yields on our
receivable portfolio, partially offset by lower interest
expense. Overall receivable yields were negatively impacted by a
shift in mix to higher levels of real estate secured receivables
as a result of the sale of $12.4 billion of credit card
receivables, respectively, in January 2009 as credit card
receivables generally have higher yields than real estate
secured receivables.
Our real estate secured and personal non-credit card receivable
portfolios reported lower yields during 2009, while our credit
card receivable portfolio reported higher yields. Lower yields
in our real estate secured and personal non-credit card
receivable portfolios reflect high volumes of loan
modifications, the impact of deterioration in credit quality,
including the impact of lower levels of performing receivables,
lower amortization of net deferred fee income due to lower loan
prepayments and lower loan origination volumes. The higher
yields on our credit card receivable portfolio during 2009 were
due to a significant shift in mix to higher levels of non-prime
receivables which carry higher rates as a result of the sale of
GM and UP Portfolios. The higher credit card yields also reflect
the impact of interest rate floors in portions of our credit
card receivable portfolio which have now been removed, partially
offset by decreases in rates on variable rate products which
reflect market rate movements. We also experienced lower yields
on our non-insurance investment portfolio held for liquidity
management purposes. These investments are short term in nature
and the lower yields reflect decreasing rates on overnight
investments. The lower interest expense was due to lower average
rates for floating rate borrowings on lower average borrowings.
The lower average rates for floating rate borrowings reflect
actions taken by the Federal Reserve Bank resulting in daily
average Federal Fund Rates being 184 basis points
lower during 2009 as compared to 2008.
Net interest margin was 5.23 percent in 2010,
5.08 percent in 2009 and 6.24 percent in 2008. Net
interest margin in 2010 increased due to lower cost of funds as
a percentage of average interest-earning assets and higher
overall yields on our receivable portfolio as discussed above.
Net interest margin in 2009 was negatively impacted by the
December 2009 Charge-off Policy Change as well as the adoption
of more bank-like income recognition policies related to
unrecorded interest on re-aged receivables as previously
discussed. Excluding these items, net interest margin remained
lower in 2009 due to lower overall yields on our receivable
portfolio as discussed above, partially
53
HSBC Finance Corporation
offset by lower funding costs as a percentage of average
interest earning assets. The following table shows the impact of
these items on net interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010(1)
|
|
|
2009
|
|
|
|
|
Net interest income/net interest margin from prior year
|
|
$
|
5,058
|
|
|
|
5.08
|
%
|
|
$
|
7,936
|
|
|
|
6.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact to net interest income resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lower receivable levels
|
|
|
(913
|
)
|
|
|
|
|
|
|
(1,730
|
)
|
|
|
|
|
Receivable yields:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivable pricing
|
|
|
-
|
|
|
|
|
|
|
|
683
|
|
|
|
|
|
Impact of nonperforming assets
|
|
|
223
|
|
|
|
|
|
|
|
(538
|
)
|
|
|
|
|
Impact of loan modifications
|
|
|
65
|
|
|
|
|
|
|
|
(363
|
)
|
|
|
|
|
Receivable mix
|
|
|
(313
|
)
|
|
|
|
|
|
|
(850
|
)
|
|
|
|
|
December 2009 Charge-off Policy Changes
|
|
|
-
|
|
|
|
|
|
|
|
(351
|
)
|
|
|
|
|
Policy change for unrecorded interest
|
|
|
-
|
|
|
|
|
|
|
|
(190
|
)
|
|
|
|
|
Non-insurance investment income
|
|
|
6
|
|
|
|
|
|
|
|
(132
|
)
|
|
|
|
|
Cost of funds
|
|
|
66
|
|
|
|
|
|
|
|
596
|
|
|
|
|
|
Other
|
|
|
(7
|
)
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/net interest margin for current year
|
|
$
|
4,185
|
|
|
|
5.23
|
%
|
|
$
|
5,058
|
|
|
|
5.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The presentation of net interest
income for 2010 assumes that the December 2009 Charge-off Policy
Changes and the policy change for unrecorded interest were in
effect for both the full year of 2010 and 2009.
|
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, accrued interest and fees, including late,
overlimit and annual fees, at a level that reflects estimated
inherent losses in the portfolio. The provision for credit
losses may vary from year to year depending on a variety of
factors including product mix and the credit quality of the
loans in our portfolio including historical delinquency roll
rates, portfolio seasoning, 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.
The following table summarizes provision for credit losses by
business:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(in millions)
|
|
|
Provision for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card
|
|
$
|
840
|
|
|
$
|
1,756
|
|
|
$
|
3,346
|
|
Mortgage Services
|
|
|
1,575
|
|
|
|
1,917
|
|
|
|
3,399
|
|
Consumer Lending:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate secured
|
|
|
2,339
|
|
|
|
2,997
|
|
|
|
3,264
|
|
Personal non-credit card
|
|
|
1,426
|
|
|
|
2,980
|
|
|
|
2,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consumer Lending
|
|
|
3,765
|
|
|
|
5,977
|
|
|
|
5,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,180
|
|
|
$
|
9,650
|
|
|
$
|
12,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
HSBC Finance Corporation
Our provision for credit losses decreased significantly during
2010 as discussed below.
|
|
|
|
|
Provision for credit losses for our core credit card receivable
portfolio decreased $916 million during 2010. The decrease
reflects lower receivable levels as a result of actions taken
beginning in the fourth quarter of 2007 to manage risk as well
as an increased focus and ability by consumers to reduce
outstanding credit card debt. The decrease also reflects
improvement in the underlying credit quality of the portfolio
including continuing improvements in early stage delinquency
roll rates and lower delinquency levels as customer payment
rates have been strong throughout 2010. The impact on credit
card receivable losses from the current economic environment,
including high unemployment levels, has not been as severe as
originally expected due in part to improved customer payment
behavior.
|
|
|
|
The provision for credit losses for the real estate secured
receivable portfolios in our Consumer Lending and Mortgage
Services business decreased $658 million and
$342 million, respectively, during 2010. The decrease
reflects lower receivable levels as the portfolios continue to
liquidate, lower delinquency levels, improved loss severities
and improvements in economic conditions since 2009. The decrease
also reflects lower loss estimates on TDR Loans, partially
offset by the impact of continued high unemployment levels,
lower receivable prepayments, higher loss estimates on recently
modified loans and for real estate secured receivables in our
Consumer Lending business, portfolio seasoning. Improvements in
loss severities reflect an increase in the number of properties
for which we accepted a
deed-in-lieu
and an increase in the number of short sales, both of which
result in lower losses compared to loans which are subject to a
formal foreclosure process for which average loss severities in
2010 have remained relatively flat to 2009 levels.
|
|
|
|
The provision for credit losses for our personal non-credit card
receivables decreased $1.6 billion reflecting lower
receivable levels, lower delinquency levels and improvements in
economic conditions since 2009, partially offset by higher
reserve requirements on TDR Loans.
|
Net charge-off dollars totaled $8.8 billion during 2010
compared to $12.6 billion in 2009 driven by lower
delinquency levels as a result of lower average receivable
levels, improvements in the U.S. economic conditions since
year-end 2009 and as it relates to credit card receivables,
higher recoveries. See Credit Quality for further
discussion of our net charge-offs.
In 2010, we decreased our credit loss reserves as the provision
for credit losses was $2.6 billion less than net
charge-offs. Lower credit loss reserve levels reflect lower
receivable levels, improved economic and credit conditions since
2009 including lower delinquency levels and overall improvements
in loss severities as discussed above. The provision as a
percent of average receivables was 8.43 percent in 2010 and
10.28 percent in 2009.
We anticipate delinquency and charge-off levels will remain
under pressure during 2011 as the U.S. economic environment
continues to impact our businesses and as foreclosures are again
delayed as a result of our suspension of foreclosure while we
enhance our foreclosure documentation and processes for
foreclosures and re-file affidavits where necessary. The
magnitude of these trends will largely be dependent on the
nature and extent of the economic recovery, including
unemployment rates and a recovery in the housing markets, which
to some extent will be offset by the impact of actions we have
already taken to reduce risk in these portfolios.
Our provision for credit losses declined significantly in 2009
compared to 2008 as discussed more fully below. The provision
for credit losses in 2009 reflects an incremental provision of
$1 million as a result of the December 2009 Charge-off
Policy Changes.
|
|
|
|
|
Provision for credit losses in our credit card receivable
portfolio decreased significantly in 2009 due to lower
receivable levels primarily due to the impact of the transfer of
the GM and UP Portfolios to receivables held for sale in June
2008 and November 2008, respectively, as well as
$2.0 billion of non-prime credit card receivables to
receivables held for sale in June 2008. Excluding the impact of
these transferred receivables from the prior year periods as
applicable, our provision for credit losses remained
significantly lower due to lower non-prime receivable levels as
a result of lower consumer spending levels and actions taken
beginning in the fourth quarter of 2007 and continuing through
2009 to manage risk. In addition, an improved outlook on future
loss estimates as the impact of higher unemployment rates on
losses has not been as severe as
|
55
HSBC Finance Corporation
|
|
|
|
|
previously anticipated due in part to lower gas prices and
improved cash flow from government stimulus activities that
meaningfully benefit our non-prime customers. These lower credit
loss estimates have been partially offset by lower recovery
rates on defaulted receivables.
|
|
|
|
|
|
The provision for credit losses for real estate secured
receivables decreased in 2009 reflecting a lower provision for
real estate secured receivables in our Mortgage Services
business and for second lien real estate secured receivables in
our Consumer Lending business, partially offset by higher
provisions for first lien real estate secured receivables in our
Consumer Lending business. The overall decrease in the provision
for real estate secured receivables reflects the continued
liquidation in these portfolios which has resulted in lower
charge-off levels. The lower provision also reflects a reduction
to provision of $192 million as a result of the December
2009 Charge-off Policy changes, which includes the reserve
impact of the policy change related to accrued interest. Accrued
interest written off as part of this policy change was reflected
as a reduction of finance and other interest income, while the
release of loss reserves associated with principal and accrued
interest was reflected in provision. Additionally, for real
estate secured receivables in our Consumer Lending business, the
lower overall provisions for real estate secured receivables
reflect a reduction in portfolio risk factors, principally an
improved outlook on current inherent losses for first lien real
estate secured receivables originated in 2005 and earlier as the
current trends for deterioration in delinquencies and
charge-offs in these vintages began to stabilize during 2009.
The decrease in the provision for credit losses for real estate
secured receivables was partially offset by lower receivable
prepayments, higher loss severities relative to 2008 due to
deterioration in real estate values in some markets, higher
reserve requirements for real estate secured TDR Loans and
portfolio seasoning in our Consumer Lending real estate secured
receivable portfolio.
|
|
|
|
The provision for credit losses for personal non-credit card
receivables increased during 2009, including an increase in
provision for credit losses of $193 million related to the
December 2009 Charge-off Policy Change which reflects the
reserve impact of the policy change to accrued interest as
discussed above and the charge-off of the total receivable
balance, ignoring future recoveries while the corresponding
release of credit loss reserves considered future recoveries,
unlike real estate secured receivables which are written down to
net realizable value less cost to sell. Excluding the
incremental impact of the December 2009 Charge-off Policy
Changes, our provision for credit losses in our personal
non-credit card portfolio remained higher in 2009 due to higher
levels of charge-off resulting from deterioration in the 2006
and 2007 vintages which was more pronounced in certain
geographic regions, partially offset by lower receivable levels.
|
The provision for credit losses for all products in 2009 was
negatively impacted by rising unemployment rates in an
increasing number of markets, continued deterioration in the
U.S. economy and housing markets and higher levels of
personal bankruptcy filings.
Net charge-off dollars totaled $12.6 billion during 2009,
including incremental charge-offs of $3.5 billion related
to the December 2009 Charge-off Policy Changes as previously
discussed, compared to $9.3 billion in 2008. Excluding
these incremental charge-offs, dollars of net charge-offs
decreased to $9.1 billion due to the impact of lower
receivable levels and local government delays in processing
foreclosures, which were partially offset by the continued
deterioration in the U.S. economy and housing markets,
rising unemployment rates, higher levels of personal bankruptcy
filings and portfolio seasoning. We continued to experience
delays in processing foreclosures as a result of backlogs in
foreclosure proceedings and actions by local governments and
certain states that have lengthened the foreclosure process
resulting in higher levels of late stage delinquency. The impact
of these delays on charge-off trends has been minimized as a
result of the aforementioned charge-off policy changes. See
Credit Quality for further discussion of our net
charge-offs.
For further discussion of the changes to our charge-off policies
implemented in December 2009, see Credit Quality in
this MD&A as well as Note 8, Changes in
Charge-off Policies During 2009, in the accompanying
consolidated financial statements.
In 2009, we decreased our credit loss reserves as the provision
for credit losses was $2.9 billion less than net
charge-offs primarily as a result of the December 2009
Charge-off Policies Changes discussed above. Excluding the
impact
56
HSBC Finance Corporation
of the December 2009 Charge-off Policies Changes, credit loss
reserves increased to $12.6 billion at December 31,
2009 from $12.0 billion at December 31, 2008 as the
provision for credit losses during 2009 was $533 million in
excess of net charge-offs. This increase in credit loss reserves
in 2009 was driven by increased levels of troubled debt
restructures and the higher reserve requirements associated with
these receivables as well as higher dollars of delinquency
driven by our Consumer Lending real estate secured receivables.
These increases were partially offset by lower receivable levels
for all products due to lower origination volumes, lower
consumer spending levels, an improved outlook for future loss
estimates on credit card receivables as the impact of higher
unemployment rates was not as severe as previously anticipated
as well as an improved outlook on current inherent losses for
first lien real estate secured receivables originated in 2005
and earlier as current trends in delinquencies and charge-offs
in these vintages began to stabilize. The provision as a percent
of average receivables was 10.28 percent in 2009 and
10.05 percent in 2008.
See Critical Accounting Policies, Credit
Quality and Analysis of Credit Loss Reserves
Activity for additional information regarding our loss
reserves. See Note 9, 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,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(in millions)
|
|
|
Insurance revenue
|
|
$
|
274
|
|
|
$
|
334
|
|
|
$
|
417
|
|
Investment income
|
|
|
99
|
|
|
|
109
|
|
|
|
124
|
|
Net
other-than-temporary
impairment losses
|
|
|
-
|
|
|
|
(25
|
)
|
|
|
(54
|
)
|
Derivative related income (expense)
|
|
|
(379
|
)
|
|
|
300
|
|
|
|
(306
|
)
|
Gain (loss) on debt designated at fair value and related
derivatives
|
|
|
741
|
|
|
|
(2,125
|
)
|
|
|
3,160
|
|
Fee income
|
|
|
188
|
|
|
|
650
|
|
|
|
1,687
|
|
Enhancement services revenue
|
|
|
404
|
|
|
|
484
|
|
|
|
700
|
|
Gain on bulk sale of receivables to HSBC affiliate
|
|
|
-
|
|
|
|
50
|
|
|
|
-
|
|
Gain on receivable sales to HSBC affiliates
|
|
|
540
|
|
|
|
469
|
|
|
|
260
|
|
Servicing and other fees from HSBC affiliates
|
|
|
666
|
|
|
|
748
|
|
|
|
545
|
|
Lower of cost or fair value adjustment on receivables held for
sale
|
|
|
2
|
|
|
|
(374
|
)
|
|
|
(514
|
)
|
Other income (expense)
|
|
|
32
|
|
|
|
92
|
|
|
|
(68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other revenues
|
|
$
|
2,567
|
|
|
$
|
712
|
|
|
$
|
5,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance revenue decreased in 2010 and 2009 as a result
of lower credit related premiums due largely to the decision in
late February 2009 to discontinue all new customer account
originations in our Consumer Lending business. As a result of
this decision, we no longer issue credit insurance policies in
this business segment. However, we continue to collect premiums
on existing policies as well as issue specialty insurance
products in Canada.
Investment income includes interest income on securities
available-for-sale
as well as realized gains and losses from the sale of
securities. Investment income decreased in 2010 due to lower
gains on sales of securities and lower yields on money market
funds as well as lower average investment balances. In 2009, the
decrease reflects the impact of lower yields and lower average
investment balances, partially offset by higher gains on sales
of securities.
Net other-than temporary impairment (OTTI) losses
During 2010, OTTI on securities
available-for-sale
were less than $1 million. In 2009, OTTI reflects
$20 million of OTTI recorded during the first quarter of
2009 on our portfolio of perpetual preferred securities which
was subsequently sold during the second quarter of 2009.
Additionally, during the fourth quarter of 2009,
$16 million of gross
other-than-temporary
impairment (OTTI) losses on securities
available-for-sale
were recognized, of which $5 million was recorded as a
component of other revenues in the consolidated income statement
and $11 million was recognized in accumulated other
comprehensive income (loss) (AOCI). For further
information regarding
57
HSBC Finance Corporation
other-than-temporary
impairment losses, see Note 6, Securities, in
the accompanying consolidated financial statements.
Derivative related income (expense) includes realized and
unrealized gains and losses on derivatives which do not qualify
as effective hedges under hedge accounting principles as well as
the ineffectiveness on derivatives which are qualifying hedges.
Designation of swaps as effective hedges reduces the volatility
that would otherwise result from
mark-to-market
accounting. All derivatives are economic hedges of the
underlying debt instruments regardless of the accounting
treatment. Derivative related income (expense) is summarized in
the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(in millions)
|
|
|
Net realized gains (losses)
|
|
$
|
(206
|
)
|
|
$
|
(290
|
)
|
|
$
|
(31
|
)
|
Mark-to-market
on derivatives which do not qualify as effective hedges
|
|
|
(188
|
)
|
|
|
487
|
|
|
|
(305
|
)
|
Ineffectiveness
|
|
|
15
|
|
|
|
103
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(379
|
)
|
|
$
|
300
|
|
|
$
|
(306
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative related income decreased significantly during 2010.
As previously discussed, the deterioration in marketplace and
economic conditions has resulted in our Consumer Lending and
Mortgage Services real estate secured receivables remaining on
the balance sheet longer due to lower prepayment rates. At
December 31, 2010, we had $11.3 billion of interest
rate swaps outstanding for the purpose of offsetting the
increase in the duration of these receivables and the
corresponding increase in interest rate risk as measured by the
present value of a basis point (PVBP). While these
positions acted as economic hedges by lowering our overall
interest rate risk by more closely matching both the structure
and duration of our liabilities to the structure and duration of
our assets, they did not qualify as effective hedges under hedge
accounting principles. As a result, these positions are carried
at fair value and are
marked-to-market
through income while the item being hedged is not carried at
fair value and no offsetting fair value adjustment is recorded.
Of these non-qualifying hedges, $6.3 billion were
longer-dated pay fixed/receive variable interest rate swaps,
which represented an increase of $1.1 billion during 2010,
and $5.0 billion were shorter-dated receive fixed/pay
variable interest rate swaps. Market value movements for these
non-qualifying hedges may be volatile during periods in which
long term interest rates fluctuate, but they effectively lock in
fixed interest rates for a set period of time which results in
funding that is better aligned with longer term assets. Falling
long-term interest rates during 2010 had a significant negative
impact on the
mark-to-market
on this portfolio of swaps. Should interest rates continue to
decline, we will incur additional losses, although losses could
reverse if interest rates increase. Over time, we may elect to
further reduce our exposure to rising interest rates through the
execution of additional pay fixed/receive variable interest rate
swaps Net realized losses were lower during 2010 as a result of
lower losses on terminations of non-qualifying hedges due to
changes in rates during 2010 as well as changes in the timing of
the non-qualifying hedge terminations. During 2010,
ineffectiveness was largely due to the impact of falling
U.S. long term rates on our cross currency cash flow
hedges, partially offset by falling long-term foreign interest
rates, while during 2009, long term U.S. rates and
long-term foreign interest rates increased.
The increase in derivative related income in 2009 primarily
reflects the impact of rising long term U.S. interest rates
on a larger portfolio of non-qualifying hedges during 2009 as
discussed above. During 2009 an average of $5.6 billion of
interest rate swaps were outstanding of which $5.1 billion
relates to longer dated pay fixed/receive variable interest rate
swaps and $407 million relates to shorter dated receive
fixed, pay variable interest rate swaps. Net realized losses
increased significantly in 2009 as a result of the termination
of $2.6 billion in notional of non-qualifying hedges in a
loss position and losses resulting from falling short-term
interest rates. These terminated positions were replaced with
longer duration pay fixed swaps to offset the risk created by
the increase in duration realized in our real estate secured
receivable portfolio. The favorable
mark-to-market
results reflected above are attributable to these positions in
combination with a rise in intermediate and long term interest
rates during the latter half of 2009. Ineffectiveness income was
primarily driven by changes in the market value of our cross
currency cash flow hedges due to the increase in long term
U.S. and foreign interest rates throughout 2009.
58
HSBC Finance Corporation
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
related income for the year ended December 31, 2010 should
not be considered indicative of the results for any future
periods.
Gain (loss) on debt designated at fair value and related
derivatives reflects fair value changes on our fixed rate
debt accounted for under FVO as well as the fair value changes
and realized gains (losses) on the related derivatives
associated with debt designated at fair value. The gain on debt
designated at fair value and related derivatives during 2010
primarily reflects a widening of our credit spreads and falling
long-term interest rates during the year. In 2009, the loss on
debt designated at fair value and related derivatives reflects
rising long-term U.S. interest rates as well as a
tightening of our credit spreads during 2009. See Note 16,
Fair Value Option, in the accompanying consolidated
financial statements for additional information, including a
break out of the components of the gain (loss) on debt
designated at fair value and related derivatives.
Fee income, which includes revenues from fee-based
products such as credit cards, decreased in 2010 as a result of
lower late, overlimit and interchange fees due to lower volumes
and lower delinquency levels, changes in customer behavior and
impacts from changes required by the Card Act. The Card Act has
resulted in significant decreases in late fees due to limits on
fees that can be assessed and overlimit fees as customers must
now opt-in for such overlimit fees as well as restrictions on
fees charged to process on-line and telephone payments. The
decrease in 2009 was primarily a result of the sale of the GM
and UP Portfolios in January 2009 to HSBC Bank USA, higher fee
charge-offs due to increased loan defaults and lower late,
overlimit and interchange fees due to lower volumes and customer
behavior changes.
Enhancement services revenue, which consists of ancillary
credit card revenue from products such as Account Secure Plus
(debt protection) and Identity Protection Plan, decreased in
2010 as a result of the impact of lower new origination volumes
and lower receivable levels. The decrease in 2009 was driven by
the sale of the GM and UP Portfolios as previously
discussed as well as the impact of lower new origination volumes.
We are currently considering making changes to our pricing
policies for the credit card products discussed above. In the
event we make material changes to our pricing policies,
enhancement services revenue in future periods may decrease
significantly.
Gain on bulk sale of receivables to HSBC Bank USA during
2009 reflects gains on the January 2009 sales of the GM and
UP Portfolios, with an outstanding receivable balance of
$12.4 billion at the time of sale. These gains were
partially offset by a loss recorded on the termination of cash
flow swaps associated with $6.1 billion of indebtedness
transferred to HSBC Bank USA as part of these transactions. No
similar transaction occurred during 2010.
Gains on receivable sales to HSBC affiliates consists
primarily of daily sales of private label receivable
originations and certain credit card account originations to
HSBC Bank USA. The increase in 2010 reflects higher overall
premiums partially offset by lower overall origination volumes.
The higher overall premium reflects the impact of contract
renegotiation with certain merchants, repricing initiatives in
certain portfolios as well as the impact of improving credit
quality during 2010, partially offset by the impact of the Card
Act. The increase in 2009 is primarily a result of higher sales
volumes as a result of the sales of new receivable originations
in the GM and UP Portfolios beginning in January 2009 and higher
premiums on co-brand credit card accounts.
Servicing and other fees from HSBC affiliates represents
revenue received under service level agreements under which we
service real estate secured, credit card and private label
receivables as well as rental revenue from HSBC
Technology & Services (USA) Inc. (HTSU)
for certain office and administrative costs. The decrease in
2010 reflects lower levels of receivables being serviced for
HSBC Bank USA as well as the transfer to HTSU of certain
services we previously provided to other HSBC affiliates. The
increases in 2009 primarily relate to higher levels of
receivables being serviced on behalf of HSBC Bank USA as a
result of the sale of the GM and UP Portfolios to HSBC Bank USA
in January 2009 which we continue to service.
Lower of cost or fair value adjustment on receivables held
for sale includes the non-credit portion of the lower of
cost or fair value adjustment recorded on receivables at the
date they are transferred to held for sale as well as the
59
HSBC Finance Corporation
credit and non-credit portion of all lower of cost or fair value
adjustments recorded on receivables held for sale subsequent to
the transfer. During 2009, we had higher levels of receivables
held for sale and the lower of cost or fair value adjustments on
receivables held for sale reflects the impact of the current
market conditions on pricing at that time.
Other income decreased during 2010 but increased during
2009. The following table summarizes significant components of
other income for the years presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(in millions)
|
|
|
Gains (loss) on real estate secured receivable sales
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(13
|
)
|
Gains on miscellaneous asset sales, including real estate
investments
|
|
|
22
|
|
|
|
38
|
|
|
|
65
|
|
Gain on sale of Low Income Housing Tax Credit Investment Funds
to HSBC Bank USA
|
|
|
-
|
|
|
|
20
|
|
|
|
-
|
|
Gain on sale of Visa Class B shares
|
|
|
-
|
|
|
|
-
|
|
|
|
11
|
|
Other, net
|
|
|
10
|
|
|
|
34
|
|
|
|
(131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32
|
|
|
$
|
92
|
|
|
$
|
(68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in other income during 2010 reflects lower gains on
miscellaneous asset sales. Additionally, other income in 2009
included a $20 million gain on the sale of Low Income
Housing Tax Credit Investment Funds to HSBC Bank USA with no
similar transaction in 2010. The increase in other income during
2009 reflects the gain on sale of the Low Income Housing Tax
Credit Investment Funds discussed above as well as a reduction
in losses from low income housing tax credits as a result of
this sale which is included as a component of other, net. This
was partially offset by lower gains on miscellaneous asset sales
during 2009. Other, net in 2008 includes a $82 million
translation loss on affiliate preferred stock received in the
sale of the U.K. credit card business which is denominated in
pounds sterling.
Operating Expenses The following table
summarizes operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(in millions)
|
|
|
Salaries and employee benefits
|
|
$
|
597
|
|
|
$
|
1,119
|
|
|
$
|
1,594
|
|
Occupancy and equipment expenses
|
|
|
92
|
|
|
|
182
|
|
|
|
238
|
|
Other marketing expenses
|
|
|
314
|
|
|
|
184
|
|
|
|
350
|
|
Real estate owned expenses
|
|
|
274
|
|
|
|
199
|
|
|
|
342
|
|
Other servicing and administrative expenses
|
|
|
814
|
|
|
|
947
|
|
|
|
1,020
|
|
Support services from HSBC affiliates
|
|
|
1,092
|
|
|
|
925
|
|
|
|
922
|
|
Amortization of intangibles
|
|
|
143
|
|
|
|
157
|
|
|
|
178
|
|
Policyholders benefits
|
|
|
152
|
|
|
|
197
|
|
|
|
199
|
|
Goodwill and other intangible asset impairment charges
|
|
|
-
|
|
|
|
2,308
|
|
|
|
329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
$
|
3,478
|
|
|
$
|
6,218
|
|
|
$
|
5,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits were lower during 2010 and
2009 as a result of the reduced scope of our business
operations, including the change in the number of employees from
the strategic decisions implemented, the impact of entity-wide
initiatives to reduce costs, and the centralization of
additional shared services in North America, including, among
other things, legal, compliance, tax and finance. The decrease
in 2010 also reflects the impact of the transfer of certain
employees to a subsidiary of HSBC Bank USA during the third
quarter of 2010 although this decrease was offset by an increase
in support services from HSBC affiliates. Salaries and employee
benefits during 2009 included severance costs of
$73 million, primarily related to our decision in February
2009 to discontinue new account originations for all products in
our Consumer Lending business and close all branch offices. See
Note 5,
60
HSBC Finance Corporation
Strategic Initiatives, in the accompanying
consolidated financial statements for a complete description of
the decisions made in each year.
Occupancy and equipment expenses in both 2010 and 2009
reflect the impact of strategic initiatives. During 2010,
occupancy and equipment expenses were reduced by
$14 million as a result of a reduction in the lease
liability associated with an office of our Mortgage Services
business which has now been fully subleased. During 2009,
occupancy and equipment expenses included $53 million
related to the decision to close the Consumer Lending branch
offices. Excluding the impact of the items discussed above,
occupancy and equipment expenses remained lower in 2010 and 2009
as a result of the reduction of the scope of our business
operations since mid-2007.
Other marketing expenses include payments for
advertising, direct mail programs and other marketing
expenditures. Other marketing expenses increased during 2010 as
we have increased direct marketing mailings and new customer
account originations for portions of our non-prime credit card
receivable portfolio based on recent performance trends in this
portfolio as well as increased compliance mailings in the second
quarter of 2010 of $35 million related to the
implementation of the Card Act. Although marketing expenses have
increased, overall marketing levels remain low as compared to
historical levels. Current marketing levels should not be
considered indicative of marketing expenses for any future
periods. The decrease in 2009 reflects the decision to reduce
credit card and personal non-credit card receivable marketing
expenses in an effort to manage risk in these portfolios as well
as the decision in late February 2009 to discontinue
originations of personal non-credit card receivables.
Real estate owned expenses increased in 2010 as a result
of higher average number of REO properties held during 2010,
higher overall expenses on REO properties held and higher losses
on REO properties as home prices began to decline during the
second half of 2010. During periods in which home prices
deteriorate, the reduction in value between the date we take
title to the property and when the property is ultimately sold
results in higher losses. REO expenses decreased in 2009 as a
result of lower levels of real estate owned due to backlogs in
foreclosures proceedings and actions taken by local governments
and certain states that lengthen the foreclosure process. The
decrease in 2009 also reflects lower losses on sales of REO
properties during 2009 as home prices began to stabilize during
the second half of 2009.
Other servicing and administrative expenses decreased
during 2010 as a result of the reduction of the scope of our
business operations since March 2009 as well as the impact of
entity wide initiatives to reduce costs, partially offset by
higher legal costs. The decrease in 2009 reflects the reduction
of the scope of our business operations. These decreases were
partially offset by lower origination cost deferrals due to
lower origination volumes, fixed asset write-downs of
$29 million during 2009 related to the decision to close
the Consumer Lending branch offices and the write-off of
miscellaneous assets related to the decision in late February
2009 to close substantially all of the Consumer Lending branch
offices.
Support services from HSBC affiliates increased during
2010 as beginning in January 2010 additional shared services
were charged to us by HTSU, including legal, compliance, tax and
finance, which were previously recorded in salaries and employee
benefits. Additionally, the increase in 2010 reflects the impact
of the transfer of certain employees to a subsidiary of HSBC
Bank USA in July 2010 as discussed above. Support services from
HSBC affiliates also includes services charged to us by an HSBC
affiliate located outside of the United States which provides
operational support to our businesses, including among other
areas, customer service, systems, collection and accounting
functions. Support services from HSBC affiliates was essentially
flat during 2009 as the reduction in the scope of our business
operations discussed above was largely offset by human
resources, corporate affairs and other shared services which
began being provided by HTSU in January 2009.
Amortization of intangibles decreased in both 2010 and
2009 due to lower amortization for technology and customer lists
due to the write off of a portion of these intangibles during
the first quarter of 2009 as a result of the decision to
discontinue all new account originations in our Consumer Lending
business, with the remainder becoming fully amortized during the
first quarter of 2010.
Policyholders benefits decreased during 2010 due to
lower claims on credit insurance policies since we are no longer
issuing these policies in relation to Consumer Lending loans and
there are fewer such policies in place. Policyholders
benefits were essentially flat in 2009 as declines in life and
disability claims on credit insurance
61
HSBC Finance Corporation
policies as discussed above were largely offset by both higher
unemployment claims due to rising unemployment rates and higher
claims on a new term life product due to growth in this product
offering since its introduction in 2007.
Goodwill and other intangible asset impairment charges
The following table summarizes the impairment charges for
our Mortgage Services, Consumer Lending, Card and Retail
Services and Insurance businesses in 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
|
|
|
|
|
|
|
Goodwill
|
|
|
Assets
|
|
|
Total
|
|
|
|
|
|
(in millions)
|
|
|
Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Card and Retail Services
|
|
$
|
2,034
|
|
|
$
|
-
|
|
|
$
|
2,034
|
|
Insurance Services
|
|
|
260
|
|
|
|
-
|
|
|
|
260
|
|
Consumer Lending
|
|
|
-
|
|
|
|
14
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,294
|
|
|
$
|
14
|
|
|
$
|
2,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Card and Retail Services
|
|
$
|
329
|
|
|
$
|
-
|
|
|
$
|
329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All goodwill was written off during 2009. See Critical
Accounting Policies and Estimates in this MD&A and
Note 13, Goodwill, and Note 12,
Intangible Assets, in the accompanying consolidated
financial statement for additional information.
Efficiency Ratio Our efficiency ratio from continuing
operations was 50.4 percent in 2010 compared to
108.0 percent in 2009 and 36.3 percent in 2008. Our
efficiency ratio from continuing operations during all periods
was impacted by the change in the fair value of debt for which
we have elected fair value option accounting. Additionally, the
efficiency ratio in 2009 and 2008 were also significantly
impacted by goodwill and intangible asset impairment charges and
in 2009, the Consumer Lending closure costs, as discussed above.
Excluding these items from the periods presented, our efficiency
ratio deteriorated significantly during 2010 reflecting
significantly lower net interest income and other revenues
driven by receivable portfolio liquidation, lower
derivative-related income and lower fee income which outpaced
the decrease in operating expenses. Excluding the items
discussed above from the periods presented, in 2009 our
efficiency ratio deteriorated 216 basis points as a result
of lower net interest income and lower fee and enhancement
services revenues as a result of the sale of the GM and UP
Portfolios in January 2009, partially offset by increased
revenues associated with the bulk gain and daily sales of
receivables to HSBC Bank USA.
Income taxes Our effective tax rates for
continuing operations were as follows:
|
|
|
|
|
Year Ended December 31,
|
|
Effective Tax Rate
|
|
|
2010
|
|
|
(34.7)
|
%
|
2009
|
|
|
(26.1)
|
|
2008
|
|
|
(29.4)
|
|
The effective tax rate for continuing operations in 2010 was
primarily impacted by state taxes, including states where we
file combined unitary state tax returns with other HSBC
affiliates and amortization of purchase accounting adjustments
on leveraged leases that matured in December 2010. The effective
tax rate for continuing operations in 2009 was significantly
impacted by the non-tax deductible impairment of goodwill, the
relative level of pretax book loss, increase in the state and
local income tax valuation allowance which is included in the
state and local taxes, and a decrease in low income housing
credits. See Note 18, Income Taxes, for a
reconciliation of our effective tax rate.
62
HSBC Finance Corporation
Segment
Results IFRS Management Basis
We have two reportable segments: Card and Retail Services and
Consumer. Our segments are managed separately and are
characterized by different middle-market consumer lending
products, origination processes and locations. Our segment
results are reported on a continuing operations basis.
Our Card and Retail Services segment includes our MasterCard,
Visa, private label and other credit card operations. The Card
and Retail Services segment offers these products throughout the
United States primarily via strategic affinity and co-branding
relationships, merchant relationships and direct mail. We also
offer products and provide customer service through the Internet.
Our Consumer segment consists of our run-off Consumer Lending
and Mortgage Services businesses. The Consumer segment provided
real estate secured and personal non-credit card loans. Loans
were offered with both revolving and closed-end terms and with
fixed or variable interest rates. Loans were originated through
branch locations and direct mail. Products were also offered and
customers serviced through the Internet. Prior to the first
quarter of 2007, we acquired loans through correspondent
channels and prior to September 2007 we also originated loans
sourced through mortgage brokers. While these businesses are
operating in run-off mode, they have not been reported as
discontinued operations because we continue to generate cash
flow from the ongoing collections of the receivables, including
interest and fees.
The All Other caption includes our Insurance
business. It also includes our Commercial business which is no
longer considered core to our operations. Each of these
businesses fall below the quantitative threshold tests under
segment reporting rules for determining reportable segments. The
All Other caption also includes our corporate and
treasury activities, which includes the impact of FVO debt.
Certain fair value adjustments related to purchase accounting
resulting from our acquisition by HSBC and related amortization
have been allocated to corporate, which is included in the
All Other caption within our segment disclosure.
Goodwill which was established as a result of our acquisition by
HSBC was not 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, consistent with managements view of our
reportable segment results. During 2009, the remainder of this
goodwill totaling $2.4 billion was impaired. Goodwill
relating to acquisitions subsequent to our acquisition by HSBC
were included in the reported respective segment results as
those acquisitions specifically related to the business,
consistent with managements view of the segment results.
As discussed in Note 3, Discontinued
Operations, in the accompanying consolidated financial
statements, our Auto Finance business, which was previously
reported in our Consumer segment, and our Taxpayer Financial
Services business which was previously included in the All
Other caption, are now reported as discontinued operations
and are no longer included in our segment presentation.
There have been no significant changes in our measurement of
segment profit (loss) and no changes in the basis of
segmentation as compared with the presentation in our 2009
Form 10-K.
We report results to our parent, HSBC, in accordance with its
reporting basis, IFRSs. 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. Accordingly, our segment reporting is on
an IFRS Management Basis. IFRS Management Basis results are
IFRSs results which assume that the GM and UP credit card
portfolios and the private label and real estate secured
receivables transferred to HSBC Bank USA have not been sold and
remain on our balance sheet and the revenues and expenses
related to these receivables remain on our income statement.
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 receivable sales to HSBC Bank USA
were conducted primarily to fund prime customer loans more
efficiently through bank deposits and such receivables continue
to be managed by us. However, we continue to monitor capital
adequacy, establish dividend policy and report to regulatory
agencies on a U.S. GAAP legal entity basis. A summary of
the significant differences between U.S. GAAP and IFRSs as
they
63
HSBC Finance Corporation
impact our results are summarized in Note 24,
Business Segments, in the accompanying consolidated
financial statements.
We are currently in the process of re-evaluating the financial
information used to manage our business, including the scope and
content of the financial data being reported to our Management
and our Board. To the extent we make changes to this reporting
in 2011, we will evaluate any impact such changes may have to
our segment reporting.
Card and Retail Services Segment The following
table summarizes the IFRS Management Basis results for our Card
and Retail Services segment for the years ended
December 31, 2010, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
4,739
|
|
|
$
|
5,201
|
|
|
$
|
5,083
|
|
Other operating income
|
|
|
1,392
|
|
|
|
2,367
|
|
|
|
3,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
6,131
|
|
|
|
7,568
|
|
|
|
8,268
|
|
Loan impairment charges
|
|
|
2,180
|
|
|
|
5,064
|
|
|
|
5,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,951
|
|
|
|
2,504
|
|
|
|
2,976
|
|
Operating expenses, excluding goodwill impairment charges
|
|
|
1,912
|
|
|
|
1,863
|
|
|
|
2,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit before tax and goodwill impairment charges
|
|
|
2,039
|
|
|
|
641
|
|
|
|
837
|
|
Goodwill impairment
charges(1)
|
|
|
-
|
|
|
|
530
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit before
tax(1)
|
|
$
|
2,039
|
|
|
$
|
111
|
|
|
$
|
837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
13.87
|
%
|
|
|
12.49
|
%
|
|
|
10.74
|
%
|
Efficiency ratio
|
|
|
31.19
|
|
|
|
31.62
|
|
|
|
25.87
|
|
Return (after-tax) on average assets
|
|
|
4.05
|
|
|
|
(.37
|
)
|
|
|
1.15
|
|
Balances at end of period:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer loans
|
|
$
|
32,991
|
|
|
$
|
38,873
|
|
|
$
|
46,730
|
|
Assets
|
|
|
31,178
|
|
|
|
37,178
|
|
|
|
44,160
|
|
|
|
|
(1) |
|
Goodwill impairment charges of
$530 million recorded in 2009 were not deductible for tax
purposes which resulted in a net loss of $148 million
during 2009.
|
2010 profit before tax compared to 2009 Our Card and
Retail Services segment reported a higher profit before tax
during 2010 driven by lower loan impairment charges and lower
goodwill impairment charges, partially offset by lower other
operating income, lower net interest income and higher operating
expenses, excluding goodwill impairment charges.
On May 22, 2009, the Credit Card Accountability
Responsibility and Disclosure Act of 2009 was signed into law
and we have implemented all of its applicable provisions. The
Card Act has required us to make changes to our business
practices, and will likely require us and our competitors to
manage risk differently than has historically been the case.
Pricing, underwriting and product changes have either been
implemented or are under continuing analysis to partially
mitigate the impact of the new legislation and implementing
regulations. Although implementation of the new rules has had a
significant financial impact on us, the full impact of the Card
Act remains uncertain at this time as it will ultimately depend
upon successful implementation of our strategies, consumer
behavior and the actions of our competitors. We estimate that
the impact of the Card Act including the mitigating actions
referred to above resulted in a reduction in revenue net of
credit loss provision of approximately $200 million during
2010.
Loan impairment charges decreased during 2010 reflecting lower
loan levels as a result of actions taken beginning in the fourth
quarter of 2007 to manage risk, fewer active customer accounts
and an increased focus and ability by consumers to reduce
outstanding credit card debt. The decrease also reflects the
impact of improvement in the
64
HSBC Finance Corporation
underlying credit quality of the portfolio including continuing
improvements in early stage delinquency roll rates and lower
delinquency levels as customer payment rates have been strong
throughout 2010 and higher recoveries on defaulted loans. The
impact on credit card loan losses from the current economic
environment, including high unemployment levels, has not been as
severe as originally expected due in part to improved customer
payment behavior. During 2010, we decreased credit loss reserves
to $2.2 billion as loan impairment charges were
$1.8 billion lower than net charge-offs.
Net interest income decreased during 2010 due to lower overall
loan levels as discussed above, partially offset by higher
yields on our loan portfolio and lower interest expense due to
lower average borrowings and lower average rates. Loan yields
increased during 2010 as a result of lower levels of
nonperforming receivables and higher yields on private label
loans driven by the benefits from contract renegotiation with
certain merchants which were partially offset by the
implementation of certain provisions of the Card Act including
restrictions impacting repricing of delinquent accounts and
periodic re-evaluation of rate increases. We anticipate credit
card loan yields in future periods may continue to be negatively
impacted by various provisions of the Card Act which require
certain rate increases to be periodically re-evaluated. Net
interest margin increased in 2010 due to higher loan yields as
discussed above and a lower cost of funds.
The decrease in other operating income was primarily due to
lower late, overlimit and interchange fees due to lower volumes,
lower delinquency levels, changes in customer behavior and
impacts from changes required by Card Act. The Card Act has
resulted in significant decreases in late fees due to limits on
fees that can be assessed and overlimit fees as customers must
now opt-in for such overlimit fees as well as restrictions on
fees charged to process on-line and telephone payments.
Additionally, other operating income reflects lower enhancement
services revenue due to lower new origination volumes and lower
loan levels.
Excluding the goodwill impairment charges in the prior year
period which is discussed more fully below, operating expenses
increased during 2010 due to higher marketing expenses, higher
third party collection costs and higher support services from
affiliates, partially offset by lower salary expenses and lower
pension expenses driven by a curtailment gain. While marketing
expenses were higher as compared to the prior year, overall
marketing levels continue to remain low as compared to
historical levels.
The efficiency ratio for 2009 was significantly impacted by the
goodwill impairment recorded in the prior year. Excluding the
impact of the goodwill impairment in the prior year period, the
efficiency ratio deteriorated 657 basis points during 2010
driven by the decrease in other operating income, primarily due
to lower fee income as a result of the Card Act and lower
delinquency levels, as well as the impact of lower net interest
income and higher operating expenses as previously discussed.
ROA during 2009 was significantly impacted by the goodwill
impairment recorded during the prior year. Excluding the impact
of the goodwill impairment in the prior year period, ROA
improved 309 basis points during 2010 primarily due to the
impact of the higher profit before tax in 2010, driven by the
lower loan impairment charges as well as the impact of lower
average loan levels as discussed below.
2009 profit before tax compared to 2008 Our Card and
Retail Services segment reported a lower profit before tax
during 2009 due to lower other operating income and higher
goodwill impairment charges, partially offset by lower loan
impairment charges, lower operating expenses and higher net
interest income.
Loan impairment charges decreased during 2009 due to lower loan
levels and more stable credit conditions as well as an improved
outlook on future loss estimates as the impact of higher
unemployment rates on losses has not been as severe as
previously anticipated due in part to lower gas prices and
improved cash flow from government stimulus activities that
meaningfully benefit our non-prime customers. Lower loan levels
reflect lower consumer spending and actions taken beginning in
the fourth quarter of 2007 and continuing through 2009 to manage
risk. These decreases in loan impairment charges were partially
offset by portfolio seasoning, continued deterioration in the
U.S. economy including higher unemployment rates, higher
levels of personal bankruptcy filings and lower recovery rates
on defaulted loans. In 2009, we decreased credit loss reserves
to $4.0 billion as loan impairment charges were
$361 million lower than net charge-offs.
65
HSBC Finance Corporation
Net interest income increased due to lower interest expense,
partially offset by lower interest income. The lower interest
income reflects the impact of lower overall loan levels,
partially offset by higher loan yields. Loan yields during 2009
were positively impacted by repricing initiatives, interest rate
floors and lower levels of promotional balances, partially
offset by the impact of deterioration in credit quality. Net
interest margin increased primarily due to a lower cost of
funds, repricing initiatives, the impact of interest rate floors
in portions of the loan portfolio which have now been removed
and lower levels of promotional balances, partially offset by
the impact of deterioration in credit quality. The decrease in
other operating income was primarily due to lower cash advance,
interchange fees, late and overlimit fees and enhancement
services revenue due to lower volumes and changes in customer
behavior. Operating expenses decreased due to lower marketing
expenses in our effort to manage risk in our credit card loan
portfolio as well as lower salary expenses. These decreases were
partially offset by restructuring costs in 2009 and 2008 of
$4 million and $15 million, respectively. Goodwill
impairment charges in 2009 reflect the impairment of all
remaining goodwill recorded at the segment level in the first
half of the year as a result of continual deterioration of
economic and credit conditions in the United States. See
Note 5, Strategic Initiatives, in the
accompanying consolidated financial statements for additional
information on the restructuring activities in 2009 and 2008.
The efficiency ratio for 2009 was impacted by the goodwill
impairment charges. Excluding the goodwill impairment charges,
the efficiency ratio improved as the decrease in operating
expenses and the higher net interest income more than offset the
impact of lower other revenues.
The deterioration in the ROA ratio during 2009 was primarily a
result of the goodwill impairment charge and lower total
operating income, partially offset by the impact of lower loan
impairment charges and lower average assets.
Customer loans Customer loans for our Card and Retail
Services segment can be analyzed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases (Decreases) From
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
December 31,
|
|
|
2009
|
|
|
2008
|
|
|
|
2010
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Credit card
|
|
$
|
19,277
|
|
|
$
|
(3,867
|
)
|
|
|
(16.7
|
)%
|
|
$
|
(9,369
|
)
|
|
|
(32.7
|
)%
|
Private label
|
|
|
13,639
|
|
|
|
(1,986
|
)
|
|
|
(12.7
|
)
|
|
|
(4,302
|
)
|
|
|
(24.0
|
)
|
Other
|
|
|
75
|
|
|
|
(29
|
)
|
|
|
(27.9
|
)
|
|
|
(68
|
)
|
|
|
(47.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
32,991
|
|
|
$
|
(5,882
|
)
|
|
|
(15.1
|
)%
|
|
$
|
(13,739
|
)
|
|
|
(29.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer loans decreased 15 percent to $33.0 billion
at December 31, 2010 as compared to $38.9 billion at
December 31, 2009 reflecting fewer active customer
accounts, primarily in our prime credit card and private label
loan portfolios and the impact of actions previously taken to
manage risk. The decrease also reflects an increased focus and
ability by consumers to reduce outstanding credit card debt. In
2008, we identified certain segments of our credit card
portfolio which have been the most impacted by the housing and
economic conditions and we stopped all new account originations
in those market segments. In the second half of 2009, we began
increasing direct marketing mailings and new customer account
originations for portions of our non-prime credit card portfolio
which will likely result in lower run-off of credit card loans
during 2011. However, we expect a certain level of attrition
will continue as credit card loans at December 31, 2010
include $4.3 billion associated with certain segments of
our portfolio for which we no longer originate new accounts and
private label loans include $911 million associated with
merchants for which we no longer finance new purchases.
Customer loans decreased to $38.9 billion at
December 31, 2009 compared to $46.7 billion at
December 31, 2008 reflecting the aforementioned actions
taken beginning in the fourth quarter of 2007 to manage risk.
Lower private label loan levels also reflect the termination of
certain unprofitable retail partners.
See Receivables Review in this MD&A for
additional discussion of the decreases in our receivable
portfolios.
Performance trends The following is additional key
performance data related to our Card and Retail Services
portfolios. The information is based on IFRS Management Basis
results.
66
HSBC Finance Corporation
Our Cards and Retail Services portfolios consist of three key
segments. The non-prime portfolios are primarily originated
through direct mail channels (the Non-prime
Portfolio). The prime portfolio consists primarily of
General Motors, Union Privilege and Retail Services loans (the
Prime Portfolio). These loans are primarily
considered prime at origination, however the credit profile of
some customers will subsequently change due to changes in
customer circumstances. The other portfolio is comprised of
several run-off portfolios and loans originated under
alternative marketing programs such as third party turndown
programs (the Other Portfolio). The Other Portfolio
includes certain adjustments not allocated to either the
Non-prime or Prime Portfolios. The Other Portfolio contains both
prime and non-prime loans.
The following table includes key financial metrics for our Card
and Retail Services business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change between
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec. 31, 2010
|
|
|
|
Quarter Ended
|
|
|
and
|
|
|
|
Dec. 31, 2010
|
|
|
Sept. 30, 2010
|
|
|
June 30, 2010
|
|
|
Mar. 31, 2010
|
|
|
Dec. 31, 2009
|
|
|
Dec. 31, 2009
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-prime
|
|
$
|
8,070
|
|
|
$
|
8,056
|
|
|
$
|
8,235
|
|
|
$
|
8,632
|
|
|
$
|
9,462
|
|
|
|
(14.7
|
)%
|
Prime
|
|
|
22,850
|
|
|
|
22,079
|
|
|
|
22,831
|
|
|
|
24,068
|
|
|
|
26,806
|
|
|
|
(14.8
|
)
|
Other
|
|
|
2,071
|
|
|
|
2,089
|
|
|
|
2,171
|
|
|
|
2,287
|
|
|
|
2,605
|
|
|
|
(20.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
32,991
|
|
|
$
|
32,224
|
|
|
$
|
33,237
|
|
|
$
|
34,987
|
|
|
$
|
38,873
|
|
|
|
(15.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-prime
|
|
|
20.74
|
%
|
|
|
20.81
|
%
|
|
|
20.03
|
%
|
|
|
21.04
|
%
|
|
|
20.18
|
%
|
|
|
2.8
|
%
|
Prime
|
|
|
10.91
|
|
|
|
10.84
|
|
|
|
10.49
|
|
|
|
10.84
|
|
|
|
9.67
|
|
|
|
12.8
|
|
Other
|
|
|
18.53
|
|
|
|
20.04
|
|
|
|
24.44
|
|
|
|
20.15
|
|
|
|
17.68
|
|
|
|
4.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
13.85
|
%
|
|
|
13.93
|
%
|
|
|
13.77
|
%
|
|
|
13.97
|
%
|
|
|
12.85
|
%
|
|
|
7.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquency Dollars:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-prime
|
|
$
|
493
|
|
|
$
|
539
|
|
|
$
|
603
|
|
|
$
|
787
|
|
|
$
|
975
|
|
|
|
(49.4
|
)%
|
Prime
|
|
|
730
|
|
|
|
819
|
|
|
|
921
|
|
|
|
1,027
|
|
|
|
1,222
|
|
|
|
(40.3
|
)
|
Other
|
|
|
122
|
|
|
|
138
|
|
|
|
152
|
|
|
|
195
|
|
|
|
241
|
|
|
|
(49.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,345
|
|
|
$
|
1,496
|
|
|
$
|
1,676
|
|
|
$
|
2,009
|
|
|
$
|
2,438
|
|
|
|
(44.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously discussed, customer loans have decreased by
15 percent as compared to December 31, 2009. During
the fourth quarter of 2010, however, the Prime Portfolio
increased reflecting seasonal trends as a result of higher
spending levels.
Net interest margin for both the Non-prime and Prime Portfolios
continues to remain strong as compared to the prior year as a
result of the impact of lower levels of nonperforming loans,
partially offset by the implementation of certain provisions of
the Card Act. While the increase in net interest margin for both
portfolios has been impacted by the implementation of certain
provisions of the Card Act, including restrictions on the
repricing of delinquent accounts and periodic re-evaluation of
rate increases, the impact of these restrictions has been more
pronounced in the Non-prime Portfolio as a greater proportion of
account holders in this portfolio have benefited from these
restrictions.
While we have seen improvements in credit performance across the
Cards and Retail Services segment during 2010, the Non-prime
Portfolio credit performance has shown improvements to a greater
degree relative to our Prime Portfolio for the last couple of
years. Dollars of delinquency and net charge-off dollars in the
Non-prime Portfolio have improved at a faster rate than in our
Prime Portfolio as non-prime customers typically have lower home
ownership and smaller credit lines which have lower minimum
payment requirements.
67
HSBC Finance Corporation
The trends discussed above are at a point in time. Given the
volatile economic conditions, there can be no certainty such
trends will continue in the future.
Consumer Segment The following table
summarizes the IFRS Management Basis results for our Consumer
segment for the years ended December 31, 2010, 2009 and
2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
2,338
|
|
|
$
|
2,594
|
|
|
$
|
4,585
|
|
Other operating income
|
|
|
(39
|
)
|
|
|
64
|
|
|
|
(99
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
2,299
|
|
|
|
2,658
|
|
|
|
4,486
|
|
Loan impairment charges
|
|
|
5,714
|
|
|
|
8,002
|
|
|
|
9,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,415
|
)
|
|
|
(5,344
|
)
|
|
|
(4,726
|
)
|
Operating expenses
|
|
|
883
|
|
|
|
1,280
|
|
|
|
1,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before tax
|
|
$
|
(4,298
|
)
|
|
$
|
(6,624
|
)
|
|
$
|
(6,289
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
3.61
|
%
|
|
|
3.15
|
%
|
|
|
4.73
|
%
|
Efficiency ratio
|
|
|
38.41
|
|
|
|
48.16
|
|
|
|
34.84
|
|
Return (after-tax) on average assets
|
|
|
(4.29
|
)
|
|
|
(5.41
|
)
|
|
|
(4.84
|
)
|
Balances at end of period:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer loans
|
|
$
|
58,179
|
|
|
$
|
71,971
|
|
|
$
|
89,475
|
|
Assets
|
|
|
58,990
|
|
|
|
73,042
|
|
|
|
83,044
|
|
2010 loss before tax compared to 2009 Our Consumer
segment reported a lower loss before tax during 2010 due to
lower loan impairment charges and lower operating expenses,
partially offset by lower net interest income and lower other
operating income.
Loan impairment charges decreased significantly during 2010 as
discussed below.
|
|
|
|
|
Loan impairment charges for the real estate secured loan
portfolios in our Consumer Lending and Mortgage Services
business decreased during 2010. The decrease reflects lower loan
levels as the portfolios continue to liquidate, lower
delinquency levels, improved loss severities and improvements in
economic conditions since 2009. The decrease also reflects lower
loss estimates on TDR Loans, partially offset by the impact of
continued high unemployment levels, lower loan prepayments,
higher loss estimates on recently modified loans and for real
estate secured loans in our Consumer Lending business, portfolio
seasoning. Improvements in loss severities reflect an increase
in the number of properties for which we accepted a
deed-in-lieu
and an increase in the number of short sales, both of which
result in lower losses compared to loans which are subject to a
formal foreclosure process for which average loss severities in
2010 remained relatively flat to 2009 levels.
|
|
|
|
Loan impairment charges for our personal non-credit card loan
portfolio reflects lower loan levels, lower delinquency levels
and improvements in economic conditions since 2009, partially
offset by higher reserve requirements on TDR Loans.
|
During 2010, credit loss reserves decreased to $5.6 billion
as loan impairment charges were $1.6 billion lower than net
charge-offs reflecting lower loan levels and lower delinquency
levels as discussed above as well as lower reserve requirements
on real estate secured TDR Loans, partially offset by higher
reserve requirements on personal non-credit card TDR Loans.
Net interest income decreased in 2010 due to lower average loans
as a result of liquidation, risk mitigation efforts, partially
offset by lower interest expense and higher overall loan yields.
During 2010, we experienced higher overall yields for all
products as a result of lower levels of nonperforming
receivables and reduced levels of nonperforming modified loans
due to charge-off and declines in new modification volumes.
Higher yields in our real estate secured loan portfolio were
partially offset by a shift in loan mix to higher levels of
lower yielding first lien real estate secured loans as higher
yielding second lien real estate secured and personal non-credit
card loans have run-off at a
68
HSBC Finance Corporation
faster pace than first lien real estate secured loans. Net
interest margin increased in 2010 as compared to 2009 reflecting
the higher loan yields as discussed above.
Other operating income decreased during 2010 due to lower credit
insurance commissions and higher losses on REO properties
reflecting an increase in the number of REO properties sold and
declines in home prices during the second half of 2010.
Operating expenses decreased during 2010 due to the reductions
in the scope of our business operations as well as other cost
containment measures and lower pension expense driven by a
curtailment gain, partially offset by higher collection costs
and higher REO expense as a result of a higher average number of
REO properties held during the year and higher overall expenses
on the REO properties held. Operating expenses during 2009
included $133 million of costs related to the decision to
discontinue new originations for all products in our Consumer
Lending business and closure of the Consumer Lending branch
offices. In addition, we were required to perform an interim
intangible asset impairment test for our remaining Consumer
Lending intangible asset which resulted in an impairment charge
of $5 million during 2009. See Note 5, Strategic
Initiatives, in the accompanying consolidated financial
statements for additional information regarding this decision.
The efficiency ratio during 2009 was impacted by the
$133 million in restructuring and impairment charges
discussed above. Excluding the impact of the restructuring
charges from the prior year, the efficiency ratio improved
474 basis points during 2010 as the decrease in operating
expenses outpaced the decrease in net interest income due to
lower loan levels and lower yields.
ROA improved during 2010 primarily due to a lower net loss as
discussed above and the impact of lower average assets.
2009 loss before tax compared to 2008 Our Consumer
segment reported a higher loss before tax during 2009 due to
lower net interest income, partially offset by lower loan
impairment charges, lower operating expenses and higher other
operating income. As previously discussed, in December 2009 we
changed our charge-off policies for our real estate secured and
personal non-credit card loans. On an IFRSs Management Basis the
impact of these policy changes was not material to net interest
income, loan impairment charges or loss before tax.
Loan impairment charges decreased significantly in 2009 as
discussed below:
|
|
|
|
|
Loan impairment charges for real estate secured loans decreased
in 2009 reflecting a lower provision for real estate secured
loans in our Mortgage Services business and for second lien real
estate secured loans in our Consumer Lending business, partially
offset by higher provisions for first lien real estate secured
receivables in our Consumer Lending business. The overall
decrease in loan impairment charges for real estate secured
loans reflects the continued liquidation in these portfolios
which has resulted in lower charge-off levels. Additionally, for
real estate secured receivables in our Consumer Lending
business, the lower overall provisions for real estate secured
receivables reflect a reduction in portfolio risk factors,
principally an improved outlook on current inherent losses.
|
|
|
|
Loan impairment charges for personal non-credit card loans
increased during 2009 due to higher levels of charge-off
resulting from deterioration in the 2006 and 2007 vintages which
was more pronounced in certain geographic regions, partially
offset by lower receivable levels.
|
Loan impairment charges for all products in 2009 were negatively
impacted by rising unemployment rates in an increasing number of
markets, continued deterioration in the U.S. economy and
housing markets, higher levels of personal bankruptcy filings
and portfolio seasoning. On an IFRS Management Basis, the impact
of the December 2009 Charge-off Policy Changes was not material.
Excluding the impact of the December 2009 Charge-off Policy
Changes, credit loss reserves increased during 2009 as loan
impairment charges were $798 million greater than net
charge-offs reflecting higher reserve requirements in our
Consumer Lending real estate secured loan portfolio including
higher levels of troubled debt restructurings in both Consumer
Lending and Mortgage Services, partially offset by lower loan
levels as discussed below.
69
HSBC Finance Corporation
Net interest income decreased due to lower average customer
loans, lower origination volumes, lower levels of performing
receivables, the impact of changes in the income recognition
policy related to unrecorded interest on re-aged real estate
secured and personal non-credit card receivables as discussed
previously and lower overall yields partially offset by lower
interest expense. Overall yields decreased due to increased
levels of loan modifications, the impact of deterioration in
credit quality and lower amortization of net deferred fee income
due to lower loan prepayments and lower loan origination
volumes. The decrease in net interest margin was primarily a
result of lower overall yields as discussed above.
Other operating income increased primarily due to lower losses
on sales of REO properties, partially offset by lower credit
insurance commissions. Lower losses on sales during 2009 reflect
a stabilization of home prices during the second half of 2009
which resulted in less deterioration in value between the date
we take title to the property and when the property is
ultimately sold.
Operating expenses in 2009 included $133 million of costs,
net of a curtailment gain of $34 million related to other
post-retirement benefits, related to the decision to discontinue
new originations for all products in our Consumer Lending
business and close the Consumer Lending branch offices. See
Note 5, Strategic Initiatives, in the
accompanying consolidated financial statements for additional
information. In addition, we were required to perform an interim
intangible asset impairment test for our remaining Consumer
Lending intangible asset which resulted in an impairment charge
of $5 million during 2009. Excluding these items, operating
expenses decreased by 27 percent due to the reductions in
the scope of our business operations as well as other cost
containment measures, and lower REO expenses.
The efficiency ratio in 2009 was impacted by $133 million
in restructuring charges related to the decision to cease new
account originations and close the Consumer Lending branch
network. Excluding the impact of the restructuring charges, the
efficiency ratio deteriorated 831 basis points due to the
decrease in total operating income during the year as discussed
above.
ROA deteriorated during 2009 primarily due to lower net interest
income, partially offset by lower loan impairment charges and
lower average assets.
Customer loans Customer loans for our Consumer segment
can be analyzed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases (Decreases) From
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
December 31,
|
|
|
2009
|
|
|
2008
|
|
|
|
2010
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Real estate
secured(1)
|
|
$
|
50,838
|
|
|
$
|
(10,423
|
)
|
|
|
(17.0
|
)%
|
|
$
|
(22,981
|
)
|
|
|
(31.1
|
)%
|
Private label
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(51
|
)
|
|
|
(100.0
|
)
|
Personal non-credit card
|
|
|
7,341
|
|
|
|
(3,369
|
)
|
|
|
(31.5
|
)
|
|
|
(8,264
|
)
|
|
|
(53.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total customer loans
|
|
$
|
58,179
|
|
|
$
|
(13,792
|
)
|
|
|
(19.2
|
)%
|
|
$
|
(31,296
|
)
|
|
|
(35.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Real estate secured receivables are
comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases (Decreases) From
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
December 31,
|
|
|
2009
|
|
|
2008
|
|
|
|
2010
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Mortgage Services
|
|
$
|
17,569
|
|
|
$
|
(4,195
|
)
|
|
|
(19.3
|
)%
|
|
$
|
(10,058
|
)
|
|
|
(36.4
|
)%
|
Consumer Lending
|
|
|
33,269
|
|
|
|
(6,228
|
)
|
|
|
(15.8
|
)
|
|
|
(12,923
|
)
|
|
|
(28.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
$
|
50,838
|
|
|
$
|
(10,423
|
)
|
|
|
(17.0
|
)%
|
|
$
|
(22,981
|
)
|
|
|
(31.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
HSBC Finance Corporation
Customer loans decreased 19 percent to $58.2 billion
at December 31, 2010 reflecting the continued liquidation
of these portfolios which will continue to decline going
forward. The liquidation rates in our real estate secured loan
portfolio continues to be impacted by declines in loan
prepayments as fewer refinancing opportunities for our customers
exist and the trends impacting the mortgage lending industry as
previously discussed.
Customer loans decreased to $72.0 billion at
December 31, 2009 as compared to $89.5 billion at
December 31, 2008. Real estate secured and personal
non-credit card receivables decreased for the reasons discussed
above as well as the impact of the December 2009 Charge-off
Policy Changes previously discussed which resulted in an
incremental $2.4 billion and $914 million of
delinquent real estate secured and personal non-credit card
loans, respectively, being charged-off.
See Receivables Review for a more detail discussion
of the decreases in our receivable portfolios.
Reconciliation of Segment Results As
previously discussed, segment results are reported on an IFRS
Management Basis. See Note 24, Business
Segments, in the accompanying consolidated 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 24, 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
Credit Loss Reserves We maintain credit loss
reserves to cover probable incurred losses of principal, accrued
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
re-aged, or are subject to forbearance, an external debt
management plan, hardship, modification, extension or deferment.
Our credit loss reserves take into consideration the expected
loss severity based on the underlying collateral, if any, for
the loan in the event of default based on recent trends.
Delinquency status may be affected by customer account
management policies and practices, such as the re-age of
accounts, forbearance agreements, extended payment plans,
modification arrangements, external debt management programs 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
re-aged or modified 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 are not reflective of current inherent losses
in the portfolio. Portfolio risk factors considered in
establishing loss reserves on consumer receivables include
product mix, unemployment rates, bankruptcy trends, the credit
performance of modified loans, 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 factors
which can affect consumer payment patterns on outstanding
receivables, such as natural disasters.
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. We also
consider key ratios in developing our overall loss reserve
estimate, including reserves to nonperforming loans, reserves as
a percentage of net charge-offs, reserves as a percentage of
two-months-and-
71
HSBC Finance Corporation
over contractual delinquency and months coverage ratios. 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.
In establishing reserve levels, given the general decline in
home prices that have occurred over the past three years in the
U.S., we anticipate that losses in our real estate secured
receivable portfolios will continue to be incurred with greater
frequency and severity than experienced prior to 2007. There is
currently little secondary market liquidity for subprime
mortgages. As a result of these conditions, lenders have
significantly tightened underwriting standards, substantially
limiting the availability of alternative and subprime mortgages.
As fewer financing options currently exist in the marketplace
for home buyers, properties in certain markets are remaining on
the market for longer periods of time which contributes to home
price depreciation. For many of our customers, the ability to
refinance and access equity in their homes is no longer an
option as home prices remain stagnant in many markets and have
depreciated in others. These housing market trends were
exacerbated by the recent economic downturn, including high
levels of unemployment, and these industry trends continue to
impact our portfolio. While we have noted signs of improvement
or stability in some of these trends during 2010 as previously
discussed, it is impossible to predict whether such will
continue in future periods. It is generally believed that a
sustained recovery of the housing market, as well as
unemployment conditions, is not expected to begin to occur at
the earliest until late 2011. We have considered these factors
in establishing our credit loss reserve levels, as appropriate.
The following table sets forth credit loss reserves for our
continuing operations for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2010
|
|
2009(3)
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
(dollars are in millions)
|
|
Credit loss reserves
|
|
$
|
6,491
|
|
|
$
|
9,091
|
|
|
$
|
12,030
|
|
|
$
|
10,127
|
|
|
$
|
5,980
|
|
|
|
|
|
Reserves as a percentage of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables(2)
|
|
|
9.78
|
%
|
|
|
11.13
|
%
|
|
|
11.96
|
%
|
|
|
7.63
|
%
|
|
|
4.31
|
%
|
|
|
|
|
Net
charge-offs(1)
|
|
|
73.9
|
|
|
|
72.2
|
|
|
|
136.4
|
|
|
|
175.8
|
|
|
|
168.0
|
|
|
|
|
|
Nonperforming
receivables(1)(2)
|
|
|
88.5
|
|
|
|
102.4
|
|
|
|
110.0
|
|
|
|
125.3
|
|
|
|
121.6
|
|
|
|
|
|
Two-months-and-over contractual
delinquency(2)
|
|
|
67.9
|
|
|
|
75.5
|
|
|
|
79.7
|
|
|
|
94.5
|
|
|
|
91.2
|
|
|
|
|
|
|
|
|
(1) |
|
Ratio excludes nonperforming
receivables and charge-offs associated with receivable
portfolios which are considered held for sale as these
receivables are carried at the lower of cost or fair value with
no corresponding credit loss reserves. Reserves as a percentage
of net charge-off includes any charge-off recorded on
receivables prior to the transfer to receivables held for sale.
|
|
(2) |
|
The ratios for 2010 and 2009 have
been significantly impacted by the increase in the level of real
estate secured receivables which have been written down to the
lower of cost or net realizable value less cost to sell as a
result of our adoption of new charge-off policies in December
2009 as discussed more fully below. Real estate secured
receivables which have been written down to net realizable value
less cost to sell typically do not require credit loss reserves.
The following table shows these ratios excluding the receivables
written down to net realizable value less cost to sell:
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2010
|
|
2009
|
|
|
Reserves as a percentage of:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
10.60
|
%
|
|
|
11.62
|
%
|
Nonperforming loans
|
|
|
198.6
|
|
|
|
161.6
|
|
Two-months-and-over contractual delinquency
|
|
|
121.0
|
|
|
|
103.8
|
|
72
HSBC Finance Corporation
|
|
|
(3) |
|
The December 2009 Charge-off Policy
Changes as discussed above, have resulted in an acceleration of
charge-off for certain real estate secured and personal
non-credit card receivables. Had these charge-offs not been
accelerated, credit loss reserves and the related ratios would
have been as follows:
|
|
|
|
|
|
|
|
|
|
|
|
As
|
|
Excluding
|
December 31, 2009
|
|
Reported
|
|
Policy Change
|
|
|
Credit loss reserves
|
|
$
|
9,091
|
|
|
$
|
12,563
|
|
Reserves as a percentage of:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
11.13
|
%
|
|
|
14.75
|
%
|
Net charge-offs
|
|
|
72.2
|
|
|
|
137.8
|
|
Nonperforming loans
|
|
|
102.4
|
|
|
|
101.7
|
|
Two-months-and-over contractual delinquency
|
|
|
75.5
|
|
|
|
81.0
|
|
Credit loss reserves at December 31, 2010 decreased as we
recorded provision for credit losses less than net charge-offs
of $2.6 billion during 2010. Credit loss reserves were
lower for all products as discussed below.
|
|
|
|
|
The decrease in credit loss reserves in our core credit card
receivable portfolio reflects lower loss estimates due to lower
receivable levels as a result of the actions previously taken to
reduce risk which has led to improved credit quality including
lower delinquency levels. In addition, there has been an
increased focus and ability by consumers to reduce outstanding
credit card debt. The decrease in credit loss reserves also
reflects continuing improvements in early stage delinquency roll
rates.
|
|
|
|
The decrease in credit loss reserve levels in our real estate
secured receivable portfolio reflects lower receivable levels as
the portfolio continues to liquidate and as compared to
December 31, 2009, improvements in total loss severities
largely as a result of an increase in the number of properties
for which we accepted a
deed-in-lieu
and an increase in the number of short sales, both of which
result in lower losses compared to loans which are subject to a
formal foreclosure process for which average loss severities in
2010 have remained relatively flat to 2009 levels. The decrease
also reflects the impact of an increase of $1.7 billion
during 2010 of real estate secured receivables which have been
written down to net realizable value less cost to sell and,
therefore, generally do not have credit loss reserves associated
with them. Real estate secured receivables which have been
written down to net realizable value less cost to sell are
generally in the process of foreclosure and will remain in our
delinquency totals until we obtain title to the property. Credit
loss reserves also reflect lower delinquency levels as the
delinquent balances migrate to charge-off and are replaced by
lower levels of newly delinquent loans as the portfolio seasons,
partially offset by higher loss estimates on recently modified
loans. Additionally, reserve requirements for real estate
secured TDR Loans decreased as compared to December 31,
2009 due to lower new TDR Loan volumes and lower expected loss
rates as a larger percentage of our real estate TDR Loans are
performing due to an increase in charge-off of non-performing
real estate secured TDR Loans.
|
|
|
|
Credit loss reserve levels in our personal non-credit card
portfolio decreased as a result of lower receivable levels
including lower delinquency levels, partially offset by slightly
higher reserve requirements on personal non-credit card TDR
Loans due to increases in expected loss rates, partially offset
by lower new TDR Loan volumes.
|
At December 31, 2010, approximately $5.1 billion, or
10 percent of our real estate secured receivable portfolio
has been written down to net realizable value less cost to sell
and, therefore, typically do not have credit loss reserves
associated with them. In addition, approximately
$7.9 billion of real estate secured receivables which have
not been written down to net realizable value less cost to sell
are considered TDR Loans and $1.1 billion of credit card
and personal non-credit card receivables are considered TDR
Loans, which are reserved using a discounted cash flow analysis
which generally results in a higher reserve requirement. As a
result, 26 percent of our real estate secured receivable
portfolio and 21 percent of our total receivable portfolio
have either been written down to net realizable value less cost
to sell or are reserved for using the TDR Loan discounted cash
flow analysis.
Credit loss estimates for our core credit card receivable
portfolio relate primarily to our non-prime credit card
receivable portfolio. Our non-prime credit card receivable
product is structured for customers with low credit scores. The
products have lower credit lines and are priced for higher risk.
The deterioration of the housing markets
73
HSBC Finance Corporation
in the U.S. over the past few years has affected the credit
performance of our entire credit card portfolio, particularly in
states which previously had experienced the greatest home price
appreciation. Our non-prime credit card receivable portfolio
concentration in these states is approximately proportional to
the U.S. population, but a substantial majority of our
non-prime customers are renters who have, on the whole,
demonstrated a better payment history on their loans during the
recent economic downturn than homeowners in the portfolio as a
whole. Furthermore, our lower credit scoring customers within
our non-prime portfolio, which have an even lower home ownership
rate, have shown the least deterioration through this stage of
the economic cycle. Through December 31, 2010, our
non-prime credit card portfolios have shown less credit
deterioration as a result of the continuing high unemployment
levels than in our prime credit card portfolios. Should these
trends continue, credit loss reserves for our credit card
receivables will continue to decrease. However, there can be no
certainty that these trends will continue.
Credit loss reserves decreased significantly in 2009, largely as
a result of the December 2009 Charge-off Policy Changes which
reduced loss reserve levels by $3.5 billion. Excluding the
impact of this policy change, reserve levels would have
increased modestly to $12.6 billion in 2009, driven by
higher loss estimates for Consumer Lending real estate secured
receivables driven by higher delinquency levels and the impact
of higher real estate secured troubled debt restructurings and
higher reserve requirements associated with these receivables at
both Consumer Lending and Mortgage Services. Excluding the
impact of the December 2009 Charge-off Policy Changes, we
recorded provision in excess of charge-off of $533 million
in 2009. Excluding the impact of the December 2009 Charge-off
Policy Changes, with the exception of our Consumer Lending real
estate secured receivable portfolio, credit loss reserves were
lower for all products as compared to December 31, 2008
reflecting lower dollars of delinquency and lower receivable
levels in our Mortgage Services real estate secured, credit card
and personal non-credit card receivable portfolios as discussed
more fully below. The decrease in credit loss reserves also
reflects lower loss estimates in our credit card receivable
portfolio due to more stable credit conditions and an improved
outlook for future losses as the impact of higher unemployment
levels on losses has not been as severe as previously
anticipated due in part to lower gas prices and improved cash
flow from government stimulus activities that meaningfully
benefit our non-prime customers. The decrease also reflects
lower loss estimates in our Mortgage Services portfolio as this
portfolio, which ceased all receivable originations in 2007,
continues to liquidate and contains a higher percentage of first
lien receivables. These decreases were partially offset by
higher credit loss reserves in our Consumer Lending real estate
secured receivable portfolio during 2009 due to the continued
deterioration in the U.S. economy and housing markets,
significantly higher unemployment rates, portfolio seasoning,
higher loss severities and delays in processing foreclosures for
real estate secured receivables as a result of backlogs in
foreclosure proceedings and actions by local governments and
certain states that have lengthened the foreclosure process.
Prior to the acceleration of charge-offs in December 2009,
delays in processing foreclosures for real estate secured
receivables resulted in significantly higher late stage
delinquency than at December 31, 2008. This was partially
offset by an improved outlook for current inherent losses for
first lien real estate secured receivables originated in 2005
and earlier as the current trends for deterioration in
delinquencies and charge-offs in these vintages began to
stabilize.
Credit loss reserve levels in 2009 reflect higher loss estimates
related to TDR Loans. We use certain assumptions and estimates
to compile our TDR balances and future cash flow estimates. In
the fourth quarter of 2009, we received updated performance data
on loan modifications which included activity associated with
the recent increases in volume since late 2008 through mid-2009.
Based on this data, we completed an update of the assumptions
reflected in the cash flow models used to estimate credit losses
associated with TDR Loans, including payment speeds and default
rates. The update of these assumptions resulted in an increase
to the provision for credit losses and an increase in the
component of credit loss reserves specifically related to TDR of
approximately $400 million net of reclassifications from
other components of credit loss reserves.
Credit loss reserves at December 31, 2008 increased
significantly as compared to December 31, 2007 as we
recorded loss provision in excess of net charge-offs of
$2.9 billion (excluding additional provision recorded as
part of the lower of cost or fair value adjustment recorded on
receivables transferred to held for sale). The increase was
primarily as a result of higher delinquency and credit loss
estimates in all of our receivable portfolios, the continued
deterioration of the U.S. economy and housing markets during
2008, significantly higher unemployment rates,
74
HSBC Finance Corporation
portfolio seasoning, higher personal bankruptcy filings; and
delays in foreclosure activity as discussed above. Increases in
credit loss reserves levels at December 31, 2008 were
partially offset by the reclassification of $1.4 billion in
credit loss reserves associated with the transfer of receivables
to held for sale as well as the impact of lower overall
receivables.
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 $4.2 billion. The increase
was primarily a result of the higher delinquency and loss
estimates in all of our receivable portfolios. In addition, the
higher credit loss reserve levels reflected higher dollars of
delinquency 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 reflected a higher
mix of non-prime credit card receivables.
Credit loss reserve levels at December 31, 2006 reflect
higher delinquency and loss estimates at our Mortgage Services
business as previously discussed where we recorded provision in
excess of net charge-offs of $1.7 billion. In addition,
credit loss reserve levels also reflect 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 credit card
receivable portfolio acquired in December 2005. Reserve levels
also increased due to weakening early stage performance 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.
Reserve ratios Following is a discussion of changes in
the reserve ratios we consider in establishing reserve levels.
The reserve ratios for the year ended December 31, 2009
were significantly impacted by the December 2009 Charge-off
Policy changes described above. When noted, the discussion of
the change between years excludes the impact of the adoption of
these new charge-off policies on the ratios at December 31,
2009.
Reserves as a percentage of receivables were lower at
December 31, 2010 as compared to December 31, 2009
driven by significantly lower dollars of delinquency for all
products as discussed more fully below which resulted in
decreases in our credit loss reserves outpacing the decreases in
receivable levels. This ratio was also impacted by increases in
the level of real estate secured receivables which have been
written down to net realizable value less cost to sell and
typically do not require corresponding credit loss reserves.
These written down receivables increased by $1.7 billion as
compared to December 31, 2009. Additionally, the decrease
also reflects a shift in mix in our receivable portfolio to
higher levels of first lien real estate secured receivables
which generally carry lower reserve requirements as second lien
real estate secured and personal non-credit card receivables
have run-off or charged-off at a faster pace. Reserves as a
percentage of receivables at December 31, 2009 (excluding
the impact of the December 2009 Charge-off Policy Changes)
increased as compared to December 31, 2008 due to the lower
receivable levels in 2009 as well as the impact of additional
reserve requirements in our Consumer Lending business due to
higher delinquency levels in our real estate secured receivable
portfolios resulting from the economic conditions in 2009 and
backlogs in foreclosure proceedings and actions by local
governments and certain states which resulted in delays in
processing foreclosures. Also contributing to the increase was
the impact of higher real estate secured TDR Loans including
higher reserve requirements associated with these receivables at
both Consumer Lending and Mortgage Services. Additionally, for
2009 as compared to 2008, reserves as a percentage of
receivables were higher as a result of a shift in mix to higher
levels of non-prime credit card receivables which carry a higher
reserve requirement than prime credit card receivables. Reserves
as a percentage of receivables at December 31, 2008 were
higher than at December 31, 2007 due to the impact of
additional reserve requirements as discussed above.
Additionally, reserves as a percentage of receivables for 2008
was impacted by the transfer of receivables, with an outstanding
principal balance of $16.6 billion at the time of transfer,
to receivables held for sale as these were primarily current
receivables with lower associated reserves at the time of
transfer. Reserves as a percentage of receivables at
December 31, 2007 were higher than at December 31,
2006 due to the impact of additional reserve requirements for
all our receivable products as a result of the deterioration of
the marketplace conditions in 2007.
75
HSBC Finance Corporation
Reserves as a percentage of net charge-offs at December 31,
2010 increased slightly as compared to December 31, 2009 as
dollars of net charge-offs decreased at a faster pace than
reserves largely due to higher reserve requirements on modified
loans. Reserves as a percentage of net charge-offs for
December 31, 2009 (excluding the impact of the December
2009 Charge-off Policy Changes) increased as compared to
December 31, 2008 as the increase in reserve requirements
in our Consumer Lending business outpaced the increase in
charge-offs in our Consumer Lending real estate secured
receivable portfolio largely due to the delays and backlogs in
foreclosure proceedings discussed above. Reserves as a
percentage of net charge-offs were lower in 2008 than 2007 as
the increase in charge-offs outpaced the increase in reserve
levels. This is primarily due to a significant increase in
reserves during 2007 due to growing delinquency in our Consumer
Lending and Mortgage Services real estate secured portfolios
which migrated to charge-off in 2008. This decrease in 2008 was
further impacted by the transfer of $1.2 billion of credit
loss reserves to receivables held for sale as previously
discussed. 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 2007 as discussed
above.
Reserves as a percentage of nonperforming loans (excluding
nonperforming loans held for sale) decreased as compared to
December 31, 2009 reflecting higher levels of nonperforming
real estate secured receivables carried at net realizable value
less cost to sell which typically do not require corresponding
credit loss reserves. Excluding receivables carried at net
realizable value less cost to sell from this ratio for both
periods, reserves as a percentage of nonperforming loans
increased during 2010 due to nonperforming personal non-credit
card receivables decreasing at a faster pace than reserve levels
due to higher loss estimates on bankrupt and TDR Loans as well
as higher loss estimates for all products on recently modified
loans. Reserves as a percentage of nonperforming loans at
December 31, 2009 (excluding the impact of the December
2009 Charge-off Policy Changes) were lower as compared to
December 31, 2008 as the majority of the increase in
non-performing loans was in the first lien portion of Consumer
Lendings real estate secured receivable portfolio. First
lien real estate secured receivables typically carry lower
reserve requirements than second lien real estate secured and
unsecured receivables. The decrease also reflects the impact of
lower levels of nonperforming credit card receivables as a
result of the sale of the GM and UP Portfolios to HSBC Bank
USA in January 2009. Reserves as a percentage of nonperforming
loans decreased in 2008 as compared to 2007 as the majority of
the increase in nonperforming loans was from the first lien real
estate secured receivable portfolios in our Consumer Lending and
Mortgage Services businesses which typically carry lower reserve
requirements than second lien real estate secured and unsecured
receivables. 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 and Mortgage Services business
and in our credit card receivable portfolios due to the
marketplace and broader economic conditions.
Reserves as a percentage of two-months-and-over contractual
delinquency (excluding delinquency on receivables held for sale
which do not have any associated reserves) decreased as compared
to December 31, 2009. This ratio has been significantly
impacted by the increase in the level of real estate secured
receivables which are carried at net realizable value less cost
to sell and typically do not require corresponding credit loss
reserves. Excluding receivables carried at net realizable value
less cost to sell from this ratio for both periods, reserves as
a percentage of two-months-and-over contractual delinquency
totaled 121.0 percent at December 31, 2010 as compared
to 103.8 percent at December 2009 as dollars of delinquency
decreased at a faster pace than reserve levels. This increase
was largely driven by dollars of delinquency for personal
non-credit card receivables decreasing at a faster pace than
reserve levels due to higher loss estimates on bankrupt and TDR
Loans as well as higher loss estimates for all products on
recently modified loans. Reserves as a percentage of
two-months-and-over contractual delinquency at December 31,
2009 (excluding the impact of the December 2009 Charge-off
Policy Changes) as compared to December 31, 2008 increased
130 basis points due the increase in reserve requirements
in our Consumer Lending business discussed above, partially
offset by the lower dollars of delinquency for Mortgage Services
real estate secured, credit card, and personal non-credit card
receivables. Reserves as a percentage of two-months-and-over
contractual delinquency were 79.7 percent and
94.5 percent at December 31, 2008 and 2007,
respectively. The decrease in 2008 reflects the shift to
significantly higher levels of contractually delinquent first
lien real estate secured receivables which typically carry lower
reserve requirements than second lien real estate secured and
unsecured receivables.
76
HSBC Finance Corporation
The following table summarizes the changes in credit loss
reserves for continuing operations by product during the years
ended December 31, 2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Secured
|
|
|
|
|
|
|
|
|
Personal
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Credit
|
|
|
Private
|
|
|
Non-Credit
|
|
|
Comml
|
|
|
|
|
|
|
Lien
|
|
|
Lien
|
|
|
Card
|
|
|
Label
|
|
|
Card
|
|
|
and Other
|
|
|
Total
|
|
|
|
|
|
(in millions)
|
|
|
Year ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at beginning of period
|
|
$
|
3,997
|
|
|
$
|
1,430
|
|
|
$
|
1,816
|
|
|
$
|
-
|
|
|
$
|
1,848
|
|
|
$
|
-
|
|
|
$
|
9,091
|
|
Provision for credit losses
|
|
|
3,126
|
|
|
|
789
|
|
|
|
834
|
|
|
|
-
|
|
|
|
1,431
|
|
|
|
-
|
|
|
|
6,180
|
|
Charge-offs
|
|
|
(3,811
|
)
|
|
|
(1,456
|
)
|
|
|
(1,905
|
)
|
|
|
-
|
|
|
|
(2,328
|
)
|
|
|
-
|
|
|
|
(9,500
|
)
|
Recoveries
|
|
|
43
|
|
|
|
69
|
|
|
|
233
|
|
|
|
-
|
|
|
|
375
|
|
|
|
-
|
|
|
|
720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(3,768
|
)
|
|
|
(1,387
|
)
|
|
|
(1,672
|
)
|
|
|
-
|
|
|
|
(1,953
|
)
|
|
|
-
|
|
|
|
(8,780
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
3,355
|
|
|
$
|
832
|
|
|
$
|
978
|
|
|
$
|
-
|
|
|
$
|
1,326
|
|
|
$
|
-
|
|
|
$
|
6,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at beginning of period
|
|
$
|
4,998
|
|
|
$
|
2,115
|
|
|
$
|
2,249
|
|
|
$
|
-
|
|
|
$
|
2,668
|
|
|
$
|
-
|
|
|
$
|
12,030
|
|
Provision for credit losses
|
|
|
3,354
|
|
|
|
1,558
|
|
|
|
1,746
|
|
|
|
-
|
|
|
|
2,992
|
|
|
|
-
|
|
|
|
9,650
|
|
Charge-offs(1)
|
|
|
(4,381
|
)
|
|
|
(2,282
|
)
|
|
|
(2,385
|
)
|
|
|
-
|
|
|
|
(4,039
|
)
|
|
|
-
|
|
|
|
(13,087
|
)
|
Recoveries
|
|
|
26
|
|
|
|
39
|
|
|
|
206
|
|
|
|
-
|
|
|
|
227
|
|
|
|
-
|
|
|
|
498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(4,355
|
)
|
|
|
(2,243
|
)
|
|
|
(2,179
|
)
|
|
|
-
|
|
|
|
(3,812
|
)
|
|
|
-
|
|
|
|
(12,589
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables transferred to held for sale
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
3,997
|
|
|
$
|
1,430
|
|
|
$
|
1,816
|
|
|
$
|
-
|
|
|
$
|
1,848
|
|
|
$
|
-
|
|
|
$
|
9,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
2,350
|
|
|
$
|
2,604
|
|
|
$
|
2,635
|
|
|
$
|
26
|
|
|
$
|
2,511
|
|
|
$
|
1
|
|
|
$
|
10,127
|
|
Provision for credit losses
|
|
|
4,684
|
|
|
|
1,978
|
|
|
|
3,333
|
|
|
|
19
|
|
|
|
2,396
|
|
|
|
-
|
|
|
|
12,410
|
|
Charge-offs
|
|
|
(1,956
|
)
|
|
|
(2,362
|
)
|
|
|
(3,147
|
)
|
|
|
(35
|
)
|
|
|
(2,474
|
)
|
|
|
(1
|
)
|
|
|
(9,975
|
)
|
Recoveries
|
|
|
10
|
|
|
|
39
|
|
|
|
369
|
|
|
|
6
|
|
|
|
222
|
|
|
|
-
|
|
|
|
646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(1,946
|
)
|
|
|
(2,323
|
)
|
|
|
(2,778
|
)
|
|
|
(29
|
)
|
|
|
(2,252
|
)
|
|
|
(1
|
)
|
|
|
(9,329
|
)
|
Receivables transferred to held for sale
|
|
|
(80
|
)
|
|
|
(144
|
)
|
|
|
(944
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,168
|
)
|
Release of credit loss reserves related to loan sales
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
4,998
|
|
|
$
|
2,115
|
|
|
$
|
2,246
|
|
|
$
|
16
|
(2)
|
|
$
|
2,655
|
|
|
$
|
-
|
|
|
$
|
12,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $2.0 billion for
first lien real estate secured receivables, $434 million
for second lien real estate secured receivables and
$1.1 billion for personal non-credit card receivables
related to the December 2009 Charge-off Policy Changes.
|
(2) |
|
As discussed above, in the first
quarter of 2009, we began reporting our liquidating private
label receivable portfolio, which consists primarily of the
liquidating retail sales contracts in our Consumer Lending
business, prospectively within our personal non-credit card
portfolio. Accordingly, beginning in the first quarter of 2009,
we have also begun reporting the associated credit loss reserves
for these receivables with the appropriate receivable product,
primarily personal non-credit card receivables. As a result, we
increased credit loss reserves for personal non-credit card
receivables by $13 million and increased credit loss
reserves for credit card receivables by $3 million
effective January 1, 2009.
|
See the Analysis of Credit Loss Reserves Activity,
Reconciliations to U.S. GAAP Financial
Measures and Note 9, Credit Loss
Reserves, to the accompanying consolidated financial
statements for additional information regarding our loss
reserves.
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, general economic conditions such as national
and local trends in housing markets, interest rates,
unemployment rates, changes to our charge-off policies in 2009
and significant catastrophic events such as natural disasters
and global pandemics. 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 ethical and effective collection and
customer account management efforts for each loan. Our credit
and portfolio management process is designed to give us a
reasonable basis for predicting the credit quality of 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
77
HSBC Finance Corporation
marketing, credit and risk management tests. However, beginning
in 2007 and continuing through 2010 we found consumer behavior
has deviated from historical patterns due to the housing market
deterioration, high unemployment levels and pressures from the
economic conditions, 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 re-aging, modification and other customer
account management techniques which are designed to optimize
account relationships and home preservation, are helpful in
maximizing customer collections on a cash flow basis and have
been particularly appropriate in the unstable market. See
Note 2, Summary of Significant Accounting Policies
and New Accounting Pronouncements, in the accompanying
consolidated financial statements for a description of our
charge-off and nonaccrual policies by product.
Changes to Real Estate Secured and Personal Non-credit
Card Receivable Charge-off Policies In December
2009 as a result of changes in customer behavior and resultant
payment patterns, we elected to adopt more bank-like charge-off
policies for our real estate secured and personal non-credit
card receivables. As a result, real estate secured receivables
are written down to net realizable value less cost to sell
generally no later than the end of the month in which the
account becomes 180 days contractually delinquent. For
personal non-credit card receivables, charge-off occurs
generally no later than the end of the month in which the
account becomes 180 days contractually delinquent.
The impact of the December 2009 Charge-off Policy Changes
resulted in an increase to our net loss in 2009 of
$227 million as summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
|
Personal
|
|
|
|
|
|
|
Secured
|
|
|
Non-Credit Card
|
|
|
Total
|
|
|
|
|
|
(in millions)
|
|
|
Net interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of accrued interest income on charged-off
accounts(1)
|
|
$
|
246
|
|
|
$
|
105
|
|
|
$
|
351
|
|
Provision for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs to comply with charge-off policy changes
|
|
|
2,402
|
|
|
|
1,071
|
|
|
|
3,473
|
|
Release of credit loss reserves associated with principal and
accrued interest income
|
|
|
(2,594
|
)
|
|
|
(878
|
)
|
|
|
(3,472
|
)
|
Tax benefit
|
|
|
(19
|
)
|
|
|
(106
|
)
|
|
|
(125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase to net loss
|
|
$
|
35
|
|
|
$
|
192
|
|
|
$
|
227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Accrued interest income is reversed
against finance and other interest income.
|
Delinquency 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 (a
modification),
and/or to
reset the contractual delinquency status of an account that is
contractually delinquent to current (a re-age),
based on indicia or criteria which, in our judgment, evidence
continued payment probability. Such policies and practices vary
by product and are designed to manage customer relationships,
improve collection opportunities and avoid foreclosure or
repossession as determined to be appropriate. If a re-aged
account subsequently experiences payment defaults, it will again
become contractually delinquent and be included in our
delinquency ratios.
78
HSBC Finance Corporation
The following table summarizes dollars of two-months-and-over
contractual delinquency and two-months-and-over contractual
delinquency as a percent of consumer receivables and receivables
held for sale (delinquency ratio):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Dec. 31
|
|
|
Sept. 30
|
|
|
June 30
|
|
|
Mar. 31
|
|
|
Dec. 31
|
|
|
Sept. 30
|
|
|
June 30
|
|
|
Mar. 31
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Dollars of contractual delinquency:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card
|
|
$
|
612
|
|
|
$
|
673
|
|
|
$
|
752
|
|
|
$
|
979
|
|
|
$
|
1,211
|
|
|
$
|
1,242
|
|
|
$
|
1,280
|
|
|
$
|
1,503
|
|
Non-core receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
secured(1)(2)(3)(4)
|
|
|
8,171
|
|
|
|
8,494
|
|
|
|
8,237
|
|
|
|
8,622
|
|
|
|
9,395
|
|
|
|
11,290
|
|
|
|
10,694
|
|
|
|
10,658
|
|
Personal non-credit
card(3)
|
|
|
779
|
|
|
|
921
|
|
|
|
954
|
|
|
|
1,159
|
|
|
|
1,432
|
|
|
|
2,641
|
|
|
|
2,675
|
|
|
|
2,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-core receivables
|
|
|
8,950
|
|
|
|
9,415
|
|
|
|
9,191
|
|
|
|
9,781
|
|
|
|
10,827
|
|
|
|
13,931
|
|
|
|
13,369
|
|
|
|
13,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer continuing
operations(3)
|
|
|
9,562
|
|
|
|
10,088
|
|
|
|
9,943
|
|
|
|
10,760
|
|
|
|
12,038
|
|
|
|
15,173
|
|
|
|
14,649
|
|
|
|
14,977
|
|
Discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
125
|
|
|
|
161
|
|
|
|
252
|
|
|
|
281
|
|
|
|
298
|
|
|
|
245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
$
|
9,562
|
|
|
$
|
10,088
|
|
|
$
|
10,068
|
|
|
$
|
10,921
|
|
|
$
|
12,290
|
|
|
$
|
15,454
|
|
|
$
|
14,947
|
|
|
$
|
15,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquency ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card
|
|
|
6.18
|
%
|
|
|
6.81
|
%
|
|
|
7.44
|
%
|
|
|
9.24
|
%
|
|
|
10.41
|
%
|
|
|
10.33
|
%
|
|
|
10.20
|
%
|
|
|
11.22
|
%
|
Non-core receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
secured(1)(2)(3)
|
|
|
16.56
|
|
|
|
16.45
|
|
|
|
15.23
|
|
|
|
15.15
|
|
|
|
15.78
|
|
|
|
17.50
|
|
|
|
15.94
|
|
|
|
15.31
|
|
Personal non-credit
card(3)
|
|
|
10.94
|
|
|
|
11.78
|
|
|
|
11.19
|
|
|
|
12.29
|
|
|
|
13.65
|
|
|
|
21.04
|
|
|
|
19.61
|
|
|
|
19.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-core receivables
|
|
|
15.85
|
|
|
|
15.84
|
|
|
|
14.68
|
|
|
|
14.75
|
|
|
|
15.46
|
|
|
|
18.07
|
|
|
|
16.56
|
|
|
|
15.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer continuing
operations(3)
|
|
|
14.41
|
|
|
|
14.55
|
|
|
|
13.67
|
|
|
|
13.99
|
|
|
|
14.74
|
|
|
|
17.03
|
|
|
|
15.70
|
|
|
|
15.31
|
|
Discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
4.31
|
|
|
|
4.82
|
|
|
|
5.62
|
|
|
|
5.46
|
|
|
|
5.11
|
|
|
|
3.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
14.41
|
%
|
|
|
14.55
|
%
|
|
|
13.31
|
%
|
|
|
13.60
|
%
|
|
|
14.27
|
%
|
|
|
16.40
|
%
|
|
|
15.08
|
%
|
|
|
14.58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Real estate secured
two-months-and-over contractual delinquency dollars and as a
percent of consumer receivables and receivables held for sale
for our Mortgage Services and Consumer Lending businesses are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec. 31
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
Before Policy
|
|
|
As
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec. 31
|
|
|
Sept. 30
|
|
|
June 30
|
|
|
Mar. 31
|
|
|
Change
|
|
|
Reported
|
|
|
Sept. 30
|
|
|
June 30
|
|
|
Mar. 31
|
|
|
|
|
Dollars of contractual delinquency:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
2,643
|
|
|
$
|
2,734
|
|
|
$
|
2,682
|
|
|
$
|
2,824
|
|
|
$
|
3,799
|
|
|
$
|
2,992
|
|
|
$
|
3,599
|
|
|
$
|
3,567
|
|
|
$
|
3,747
|
|
Second lien
|
|
|
243
|
|
|
|
266
|
|
|
|
276
|
|
|
|
305
|
|
|
|
553
|
|
|
|
381
|
|
|
|
560
|
|
|
|
612
|
|
|
|
707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mortgage Services
|
|
$
|
2,886
|
|
|
$
|
3,000
|
|
|
$
|
2,958
|
|
|
$
|
3,129
|
|
|
$
|
4,352
|
|
|
$
|
3,373
|
|
|
$
|
4,159
|
|
|
$
|
4,179
|
|
|
$
|
4,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Lending:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
4,861
|
|
|
$
|
5,021
|
|
|
$
|
4,796
|
|
|
$
|
4,970
|
|
|
$
|
6,541
|
|
|
$
|
5,380
|
|
|
$
|
6,241
|
|
|
$
|
5,641
|
|
|
$
|
5,323
|
|
Second lien
|
|
|
424
|
|
|
|
473
|
|
|
|
483
|
|
|
|
523
|
|
|
|
904
|
|
|
|
642
|
|
|
|
890
|
|
|
|
874
|
|
|
|
881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consumer Lending
|
|
$
|
5,285
|
|
|
$
|
5,494
|
|
|
$
|
5,279
|
|
|
$
|
5,493
|
|
|
$
|
7,445
|
|
|
$
|
6,022
|
|
|
$
|
7,131
|
|
|
$
|
6,515
|
|
|
$
|
6,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquency ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
19.12
|
%
|
|
|
18.80
|
%
|
|
|
17.51
|
%
|
|
|
17.40
|
%
|
|
|
21.36
|
%
|
|
|
17.62
|
%
|
|
|
19.35
|
%
|
|
|
18.34
|
%
|
|
|
18.46
|
%
|
Second lien
|
|
|
11.23
|
|
|
|
11.38
|
|
|
|
11.01
|
|
|
|
11.22
|
|
|
|
17.65
|
|
|
|
12.87
|
|
|
|
16.54
|
|
|
|
16.59
|
|
|
|
17.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mortgage Services
|
|
|
18.05
|
%
|
|
|
17.77
|
%
|
|
|
16.59
|
%
|
|
|
16.51
|
%
|
|
|
20.80
|
%
|
|
|
16.91
|
%
|
|
|
18.92
|
%
|
|
|
18.05
|
%
|
|
|
18.33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Lending:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
16.18
|
%
|
|
|
16.11
|
%
|
|
|
14.80
|
%
|
|
|
14.75
|
%
|
|
|
18.08
|
%
|
|
|
15.37
|
%
|
|
|
16.68
|
%
|
|
|
14.65
|
%
|
|
|
13.45
|
%
|
Second lien
|
|
|
12.81
|
|
|
|
13.23
|
|
|
|
12.53
|
|
|
|
12.32
|
|
|
|
18.70
|
|
|
|
14.03
|
|
|
|
17.37
|
|
|
|
16.06
|
|
|
|
15.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consumer Lending
|
|
|
15.85
|
%
|
|
|
15.81
|
%
|
|
|
14.56
|
%
|
|
|
14.47
|
%
|
|
|
18.15
|
%
|
|
|
15.21
|
%
|
|
|
16.76
|
%
|
|
|
14.82
|
%
|
|
|
13.69
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
HSBC Finance Corporation
|
|
|
(2) |
|
The following reflects dollars of
contractual delinquency and the Delinquency Ratio for
interest-only loans, ARM loans and stated income real estate
secured receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Dec. 31
|
|
|
|
|
|
|
|
|
2010
|
|
Before Policy
|
|
As
|
|
|
|
|
|
|
|
|
Dec. 31
|
|
Sept. 30
|
|
June 30
|
|
Mar. 31
|
|
Change
|
|
Reported
|
|
Sept. 30
|
|
June 30
|
|
Mar. 31
|
|
|
Dollars of contractual delinquency:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-only loans
|
|
$
|
423
|
|
|
$
|
412
|
|
|
$
|
394
|
|
|
$
|
436
|
|
|
$
|
611
|
|
|
$
|
447
|
|
|
$
|
643
|
|
|
$
|
673
|
|
|
$
|
734
|
|
ARM loans
|
|
|
1,987
|
|
|
|
2,130
|
|
|
|
2,174
|
|
|
|
2,369
|
|
|
|
3,321
|
|
|
|
2,536
|
|
|
|
3,224
|
|
|
|
3,216
|
|
|
|
3,388
|
|
Stated income loans
|
|
|
683
|
|
|
|
722
|
|
|
|
737
|
|
|
|
820
|
|
|
|
861
|
|
|
|
861
|
|
|
|
1,170
|
|
|
|
1,246
|
|
|
|
1,398
|
|
Delinquency ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-only loans
|
|
|
31.76
|
%
|
|
|
28.50
|
%
|
|
|
25.28
|
%
|
|
|
25.54
|
%
|
|
|
38.24
|
%
|
|
|
24.47
|
%
|
|
|
29.96
|
%
|
|
|
29.34
|
%
|
|
|
30.06
|
%
|
ARM loans
|
|
|
26.54
|
|
|
|
26.66
|
|
|
|
25.38
|
|
|
|
25.61
|
|
|
|
31.23
|
|
|
|
25.76
|
|
|
|
28.59
|
|
|
|
26.94
|
|
|
|
26.84
|
|
Stated income loans
|
|
|
25.28
|
|
|
|
24.77
|
|
|
|
23.46
|
|
|
|
24.03
|
|
|
|
23.42
|
|
|
|
23.42
|
|
|
|
27.35
|
|
|
|
26.94
|
|
|
|
26.18
|
|
|
|
|
(3) |
|
The December 2009 Charge-off Policy
Changes as discussed above, have resulted in an acceleration of
charge-off for certain real estate secured and personal
non-credit card receivables which impacted dollars of
delinquency and delinquency ratio at December 31, 2009. Had
these policy changes not occurred, real estate secured, personal
non-credit card and total consumer dollars of delinquency and
the delinquency ratio would have been as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
As
|
|
Excluding Policy
|
|
|
Reported
|
|
Changes
|
|
|
|
(dollars are in millions)
|
|
Dollars of contractual delinquency:
|
|
|
|
|
|
|
|
|
Real estate secured
|
|
$
|
9,395
|
|
|
$
|
11,797
|
|
Personal non-credit card
|
|
|
1,432
|
|
|
|
2,503
|
|
Total consumer-continuing operations
|
|
|
12,038
|
|
|
|
15,511
|
|
Delinquency ratio:
|
|
|
|
|
|
|
|
|
Real estate secured
|
|
|
15.78
|
%
|
|
|
19.05
|
%
|
Personal non-credit card
|
|
|
13.65
|
|
|
|
21.66
|
|
Total consumer-continuing operations
|
|
|
14.74
|
|
|
|
18.22
|
|
|
|
|
(4) |
|
At December 31, 2010 and 2009,
dollars of real estate secured delinquency includes
$4.2 billion and $3.3 billion of receivables that are
carried at the lower of cost or net realizable value.
|
Core credit card receivables Dollars of delinquency for
our core credit card receivables decreased as compared to
September 30, 2010 and December 31, 2009 due to lower
receivable levels due to the actions previously taken to tighten
underwriting and reduce the risk profile of the portfolio. In
addition, customer payment rates continue to be strong resulting
from an increased focus and ability by consumers to reduce
outstanding credit card debt. The lower delinquency levels also
reflect the impact of improved delinquency roll rates. As
compared to September 30, 2010, the decrease was partially
offset by seasonal trends for higher delinquency during the
second half of the year.
The delinquency ratio for our credit card receivable portfolio
at December 31, 2010 decreased 63 basis points as
compared to September 30, 2010 and 423 basis points as
compared to December 31, 2009 driven by the factors
discussed above as dollars of credit card delinquency decreased
at a faster pace than receivable levels.
Non-core receivable portfolios Dollars of delinquency for
our non-core receivable portfolios decreased $465 million
since September 30, 2010 reflecting lower receivable levels
and lower dollars of delinquency for all receivable products.
The decrease in dollars of delinquency for real estate secured
receivables during the fourth quarter reflects an increase in
the volume of accounts re-aged during the fourth quarter due to
timing and improvements in receivable performance driven by
continued improvements in economic conditions and improvements
in customer payment patterns during the quarter, partially
offset by portfolio seasoning and seasonal trends for higher
delinquency during the second half of the year. Lower
delinquency levels in our personal non-credit card receivable
portfolio as compared to September 30, 2010 also reflect
lower receivable levels as delinquent balances continue to
migrate to charge-off, partially offset by seasonal trends for
higher delinquency during the second half of the year.
80
HSBC Finance Corporation
Since December 31, 2009, dollars of delinquency have
decreased $1.9 billion for our non-core receivable
portfolio reflecting lower receivable levels as discussed above
and the impact of improved economic conditions since year-end
2009. Dollars of delinquency for real estate secured receivables
also reflects an increase in receivables carried at net
realizable value less cost to sell as discussed above. As
compared to December 31, 2009, delinquent accounts which
have migrated to charge-off have been replaced with lower levels
of new delinquency volume as the portfolios continue to season.
We believe the decrease in dollars of delinquency in our
non-core receivable portfolios also reflects the impact of the
risk mitigation actions we have taken since 2007 to tighten
underwriting and reduce the risk profile of these portfolios,
partially offset by the impact of continuing high unemployment
levels.
The delinquency ratio for real estate secured receivables
increased as compared to September 30, 2010 and
December 31, 2009 reflecting the continued liquidation of
the portfolio although the increase since September 30,
2010 was less significant as dollars of delinquency and
receivable levels decreased at similar rates. Our personal
non-credit card receivable portfolio reported lower delinquency
ratios as compared to September 30, 2010 and
December 31, 2009 reflecting the lower delinquency levels
as discussed above which has declined at a faster pace than
receivable levels.
See Customer Account Management Policies and
Practices regarding the delinquency treatment of re-aged
accounts and accounts subject to forbearance and other customer
account management tools.
Net Charge-offs of Consumer Receivables The
following table summarizes net charge-off of consumer
receivables both in dollars and as a percent of average consumer
receivables (net charge-off ratio). During a quarter
that receivables are transferred to receivables held for sale,
those receivables continue to be included in the average
consumer receivable balances prior to such transfer and any
charge-offs related to those receivables prior to such transfer
remain in our net charge-off totals. However, for periods
following the transfer to the held for sale classification, the
receivables are no longer included in average consumer
receivable balance as such loans are carried at the lower of
cost or fair value and there are no longer any charge-offs
reported associated with these receivables.
The dollars of net charge-offs and the net charge-off ratios for
the quarterly periods of 2010 are not comparable to historical
quarterly periods as comparability has been impacted by the
December 2009 Charge-off Policy Changes for real estate secured
and personal non-credit card receivables as charge-off for these
receivables is recognized sooner for these products than during
the historical quarterly periods. Additionally, dollars of net
charge-off and the net charge-off ratio for the fourth quarter
of 2009 and for the year ended December 31, 2009 are not
comparable to the historical periods as a result of the adoption
of the revised policy during the period as discussed above.
81
HSBC Finance Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Full
|
|
|
|
|
|
|
Full
|
|
|
Quarter
Ended(5)
|
|
|
Full
|
|
|
Quarter
Ended(5)
|
|
|
2008
|
|
|
|
|
|
|
Year
|
|
|
Dec. 31
|
|
|
Sept. 30
|
|
|
June 30
|
|
|
Mar. 31
|
|
|
Year
|
|
|
Dec. 31
|
|
|
Sept. 30
|
|
|
June 30
|
|
|
Mar. 31
|
|
|
Year
|
|
|
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net charge-off dollars:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
card(3)
|
|
$
|
1,672
|
|
|
$
|
312
|
|
|
$
|
359
|
|
|
$
|
474
|
|
|
$
|
527
|
|
|
$
|
2,179
|
|
|
$
|
536
|
|
|
$
|
532
|
|
|
$
|
612
|
|
|
$
|
499
|
|
|
$
|
2,778
|
|
|
|
|
|
Non-core receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
secured(1)(2)(6)
|
|
|
5,155
|
|
|
|
1,022
|
|
|
|
1,196
|
|
|
|
1,452
|
|
|
|
1,485
|
|
|
|
6,598
|
|
|
|
3,485
|
|
|
|
1,053
|
|
|
|
1,081
|
|
|
|
979
|
|
|
|
4,270
|
|
|
|
|
|
Private
label(4)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
29
|
|
|
|
|
|
Personal non-credit
card(6)
|
|
|
1,953
|
|
|
|
355
|
|
|
|
381
|
|
|
|
539
|
|
|
|
678
|
|
|
|
3,812
|
|
|
|
1,723
|
|
|
|
703
|
|
|
|
723
|
|
|
|
663
|
|
|
|
2,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-core
receivables(6)
|
|
|
7,108
|
|
|
|
1,377
|
|
|
|
1,577
|
|
|
|
1,991
|
|
|
|
2,163
|
|
|
|
10,410
|
|
|
|
5,208
|
|
|
|
1,756
|
|
|
|
1,804
|
|
|
|
1,642
|
|
|
|
6,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer continuing
operations(3)(6)
|
|
|
8,780
|
|
|
|
1,689
|
|
|
|
1,936
|
|
|
|
2,465
|
|
|
|
2,690
|
|
|
|
12,589
|
|
|
|
5,744
|
|
|
|
2,288
|
|
|
|
2,416
|
|
|
|
2,141
|
|
|
|
9,330
|
|
|
|
|
|
Discontinued operations
|
|
|
113
|
|
|
|
|
|
|
|
-
|
|
|
|
37
|
|
|
|
76
|
|
|
|
563
|
|
|
|
102
|
|
|
|
112
|
|
|
|
102
|
|
|
|
247
|
|
|
|
945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
$
|
8,893
|
|
|
$
|
1,689
|
|
|
$
|
1,936
|
|
|
$
|
2,502
|
|
|
$
|
2,766
|
|
|
$
|
13,152
|
|
|
$
|
5,846
|
|
|
$
|
2,400
|
|
|
$
|
2,518
|
|
|
$
|
2,388
|
|
|
$
|
10,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-off ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
card(3)
|
|
|
16.05
|
%
|
|
|
12.60
|
%
|
|
|
14.26
|
%
|
|
|
18.14
|
%
|
|
|
18.73
|
%
|
|
|
18.20
|
%
|
|
|
18.84
|
%
|
|
|
17.95
|
%
|
|
|
20.77
|
%
|
|
|
15.48
|
%
|
|
|
12.00
|
%
|
|
|
|
|
Non-core receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
secured(1)(2)(6)
|
|
|
9.50
|
|
|
|
8.12
|
|
|
|
9.05
|
|
|
|
10.47
|
|
|
|
10.17
|
|
|
|
9.85
|
|
|
|
22.09
|
|
|
|
6.40
|
|
|
|
6.33
|
|
|
|
5.54
|
|
|
|
5.47
|
|
|
|
|
|
Private
label(4)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
29.61
|
|
|
|
|
|
Personal non-credit
card(6)
|
|
|
22.65
|
|
|
|
19.13
|
|
|
|
18.60
|
|
|
|
24.03
|
|
|
|
27.32
|
|
|
|
27.96
|
|
|
|
57.54
|
|
|
|
21.46
|
|
|
|
20.35
|
|
|
|
17.37
|
|
|
|
13.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-core
receivables(6)
|
|
|
11.30
|
|
|
|
9.54
|
|
|
|
10.32
|
|
|
|
12.36
|
|
|
|
12.66
|
|
|
|
12.91
|
|
|
|
27.75
|
|
|
|
8.90
|
|
|
|
8.73
|
|
|
|
7.65
|
|
|
|
6.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer continuing
operations(3)(6)
|
|
|
11.98
|
|
|
|
9.98
|
|
|
|
10.88
|
|
|
|
13.16
|
|
|
|
13.52
|
|
|
|
13.59
|
|
|
|
26.57
|
|
|
|
10.08
|
|
|
|
10.24
|
|
|
|
8.67
|
|
|
|
7.90
|
|
|
|
|
|
Discontinued operations
|
|
|
5.34
|
|
|
|
-
|
|
|
|
.03
|
|
|
|
4.79
|
|
|
|
8.22
|
|
|
|
9.90
|
|
|
|
9.37
|
|
|
|
8.87
|
|
|
|
6.51
|
|
|
|
13.88
|
|
|
|
5.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
11.79
|
%
|
|
|
9.98
|
%
|
|
|
10.63
|
%
|
|
|
12.83
|
%
|
|
|
13.28
|
%
|
|
|
13.38
|
%
|
|
|
25.75
|
%
|
|
|
10.02
|
%
|
|
|
10.01
|
%
|
|
|
9.02
|
%
|
|
|
7.58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate charge-offs and REO expense as a percent of average
real estate secured receivables continuing
operations(6)
|
|
|
10.01
|
%
|
|
|
9.07
|
%
|
|
|
9.61
|
%
|
|
|
10.76
|
%
|
|
|
10.43
|
%
|
|
|
10.14
|
%
|
|
|
22.24
|
%
|
|
|
6.58
|
%
|
|
|
6.56
|
%
|
|
|
6.14
|
%
|
|
|
5.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Real estate secured net charge-off
of consumer receivables as a percent of average consumer
receivables for our Mortgage Services and Consumer Lending
businesses are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Full
|
|
|
|
Full
|
|
|
Quarter Ended
|
|
|
Full
|
|
|
Quarter Ended
|
|
|
2008
|
|
|
|
Year
|
|
|
Dec. 31
|
|
|
Sept. 30
|
|
|
June 30
|
|
|
Mar. 31
|
|
|
Year
|
|
|
Dec. 31
|
|
|
Sept. 30
|
|
|
June 30
|
|
|
Mar. 31
|
|
|
Year
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net charge-off dollars:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
1,558
|
|
|
$
|
305
|
|
|
$
|
360
|
|
|
$
|
452
|
|
|
$
|
441
|
|
|
$
|
2,204
|
|
|
$
|
1,126
|
|
|
$
|
331
|
|
|
$
|
355
|
|
|
$
|
392
|
|
|
$
|
1,391
|
|
Second lien
|
|
|
619
|
|
|
|
132
|
|
|
|
134
|
|
|
|
157
|
|
|
|
196
|
|
|
|
1,052
|
|
|
|
353
|
|
|
|
247
|
|
|
|
259
|
|
|
|
193
|
|
|
|
1,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mortgage Services
|
|
$
|
2,177
|
|
|
$
|
437
|
|
|
$
|
494
|
|
|
$
|
609
|
|
|
$
|
637
|
|
|
$
|
3,256
|
|
|
$
|
1,479
|
|
|
$
|
578
|
|
|
$
|
614
|
|
|
$
|
585
|
|
|
$
|
3,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Lending:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
2,210
|
|
|
$
|
433
|
|
|
$
|
537
|
|
|
$
|
643
|
|
|
$
|
597
|
|
|
$
|
2,152
|
|
|
$
|
1,500
|
|
|
$
|
233
|
|
|
$
|
234
|
|
|
$
|
185
|
|
|
$
|
555
|
|
Second lien
|
|
|
768
|
|
|
|
152
|
|
|
|
165
|
|
|
|
200
|
|
|
|
251
|
|
|
|
1,190
|
|
|
|
506
|
|
|
|
242
|
|
|
|
233
|
|
|
|
209
|
|
|
|
671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consumer Lending
|
|
$
|
2,978
|
|
|
$
|
585
|
|
|
$
|
702
|
|
|
$
|
843
|
|
|
$
|
848
|
|
|
$
|
3,342
|
|
|
$
|
2,006
|
|
|
$
|
475
|
|
|
$
|
467
|
|
|
$
|
394
|
|
|
$
|
1,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-off ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
10.13
|
%
|
|
|
8.66
|
%
|
|
|
9.62
|
%
|
|
|
11.45
|
%
|
|
|
10.56
|
%
|
|
|
11.35
|
%
|
|
|
24.89
|
%
|
|
|
6.96
|
%
|
|
|
7.16
|
%
|
|
|
7.56
|
%
|
|
|
5.82
|
%
|
Second lien
|
|
|
24.52
|
|
|
|
23.52
|
|
|
|
22.16
|
|
|
|
24.25
|
|
|
|
27.46
|
|
|
|
28.72
|
|
|
|
43.84
|
|
|
|
28.09
|
|
|
|
27.02
|
|
|
|
18.83
|
|
|
|
30.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mortgage Services
|
|
|
12.16
|
%
|
|
|
10.68
|
%
|
|
|
11.36
|
%
|
|
|
13.26
|
%
|
|
|
13.04
|
%
|
|
|
14.11
|
%
|
|
|
27.75
|
%
|
|
|
10.27
|
%
|
|
|
10.38
|
%
|
|
|
9.42
|
%
|
|
|
10.38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Lending:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
6.81
|
%
|
|
|
5.68
|
%
|
|
|
6.75
|
%
|
|
|
7.78
|
%
|
|
|
6.93
|
%
|
|
|
5.60
|
%
|
|
|
16.33
|
%
|
|
|
2.46
|
%
|
|
|
2.39
|
%
|
|
|
1.85
|
%
|
|
|
1.31
|
%
|
Second lien
|
|
|
19.62
|
|
|
|
17.54
|
|
|
|
17.80
|
|
|
|
19.73
|
|
|
|
22.61
|
|
|
|
21.93
|
|
|
|
40.61
|
|
|
|
18.20
|
|
|
|
16.59
|
|
|
|
14.45
|
|
|
|
10.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consumer Lending
|
|
|
8.19
|
%
|
|
|
6.88
|
%
|
|
|
7.91
|
%
|
|
|
9.09
|
%
|
|
|
8.73
|
%
|
|
|
7.62
|
%
|
|
|
19.23
|
%
|
|
|
4.39
|
%
|
|
|
4.18
|
%
|
|
|
3.44
|
%
|
|
|
2.52
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
HSBC Finance Corporation
As previously discussed, the December 2009 Charge-off Policy
Changes as discussed above, has significantly impacted these
ratios. Had these charge-offs not been accelerated, net
charge-off dollars and ratio for the quarter ended
December 31, 2009 and for the full year 2009 would have
been as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Reported
|
|
|
Excluding Policy Changes
|
|
|
|
|
|
|
Qtr Ended
|
|
|
|
|
|
Qtr Ended
|
|
|
|
Full year 2009
|
|
|
Dec. 31, 2009
|
|
|
Full year 2009
|
|
|
Dec. 31, 2009
|
|
|
|
|
Net charge-off dollars:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
2,204
|
|
|
$
|
1,126
|
|
|
$
|
1,397
|
|
|
$
|
319
|
|
Second lien
|
|
|
1,052
|
|
|
|
353
|
|
|
|
880
|
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mortgage Services
|
|
$
|
3,256
|
|
|
$
|
1,479
|
|
|
$
|
2,277
|
|
|
$
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Lending:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
2,152
|
|
|
$
|
1,500
|
|
|
$
|
991
|
|
|
$
|
339
|
|
Second lien
|
|
|
1,190
|
|
|
|
506
|
|
|
|
928
|
|
|
|
244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consumer Lending
|
|
$
|
3,342
|
|
|
$
|
2,006
|
|
|
$
|
1,919
|
|
|
$
|
583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-off ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
11.35
|
%
|
|
|
24.89
|
%
|
|
|
7.19
|
%
|
|
|
7.05
|
%
|
Second lien
|
|
|
28.72
|
|
|
|
43.84
|
|
|
|
24.02
|
|
|
|
22.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mortgage Services
|
|
|
14.11
|
%
|
|
|
27.75
|
%
|
|
|
9.86
|
%
|
|
|
9.38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Lending:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
5.60
|
%
|
|
|
16.33
|
%
|
|
|
2.58
|
%
|
|
|
3.69
|
%
|
Second lien
|
|
|
21.93
|
|
|
|
40.61
|
|
|
|
17.10
|
|
|
|
19.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consumer Lending
|
|
|
7.62
|
%
|
|
|
19.23
|
%
|
|
|
4.38
|
%
|
|
|
5.59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) |
|
Net charge off dollars and the net
charge-off ratio for ARM loans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
Full
|
|
Quarter Ended
|
|
Full
|
|
Quarter Ended
|
|
Full
|
|
|
Year
|
|
Dec. 31
|
|
Sept. 30
|
|
June 30
|
|
Mar. 31
|
|
Year
|
|
Dec. 31
|
|
Sept. 30
|
|
June 30
|
|
Mar. 31
|
|
Year
|
|
|
|
(dollars are in millions)
|
|
Net charge-off dollars ARM Loans
|
|
$
|
1,166
|
|
|
$
|
233
|
|
|
$
|
282
|
|
|
$
|
325
|
|
|
$
|
326
|
|
|
$
|
2,114
|
|
|
$
|
1,070
|
|
|
$
|
311
|
|
|
$
|
341
|
|
|
$
|
392
|
|
|
$
|
1,705
|
|
Net charge-off ratio ARM Loans
|
|
|
14.01
|
%
|
|
|
12.04
|
%
|
|
|
13.63
|
%
|
|
|
14.59
|
%
|
|
|
13.67
|
%
|
|
|
18.51
|
%
|
|
|
40.52
|
%
|
|
|
10.73
|
%
|
|
|
11.10
|
%
|
|
|
12.03
|
%
|
|
|
11.29
|
%
|
|
|
|
|
|
As previously discussed, the
December 2009 Charge-off Policy Changes has significantly
impacted these ratios. Had these policy changes not occurred,
net charge-off dollars and ratio for ARM loans would have been
$285 million and 10.79 percent for the quarter ended
December 31, 2009 and $1,329 million and
11.64 percent for the full year 2009.
|
|
(3) |
|
The trend in net charge-off dollars
and ratios for our credit card receivable portfolio was
significantly impacted by the sale of our GM and
UP Portfolios to HSBC Bank USA in January 2009. Excluding
these receivables from the 2008 totals, net charge-off dollars
for our credit card receivable portfolio and for total consumer
receivables-continuing operations would have been
$2,267 million and $8,818 million, respectively.
Excluding these receivables from the 2008 totals, the net
charge-off ratio for our credit card receivable portfolio and
for total consumer receivables-continuing operations would have
been 15.51 percent and 8.06 percent, respectively.
|
|
(4) |
|
On a continuing operations basis,
private label receivables consist primarily of the sales retail
contracts in our Consumer Lending business which are
liquidating. In the first quarter of 2009, we began reporting
this liquidating portfolio on a prospective basis within our
personal non-credit card portfolio.
|
|
(5) |
|
The net charge-off ratio for all
quarterly periods presented is net charge-offs for the quarter,
annualized, as a percentage of average consumer receivables for
the quarter.
|
83
HSBC Finance Corporation
|
|
|
(6) |
|
The December 2009 Charge-off Policy
Changes as discussed above, have resulted in an acceleration of
charge-off for certain real estate secured and personal
non-credit card receivables during December 2009. Had these
charge-offs not been accelerated, net charge-off dollars, the
net charge-off ratio and real estate charge-offs and REO expense
as a percentage of average real estate secured receivables would
have been as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Reported
|
|
Excluding Policy Changes
|
|
|
Full year
|
|
Qtr Ended
|
|
Full year
|
|
Qtr Ended
|
|
|
2009
|
|
Dec. 31, 2009
|
|
2009
|
|
Dec. 31, 2009
|
|
|
Net charge-off dollars:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate secured
|
|
$
|
6,598
|
|
|
$
|
3,485
|
|
|
$
|
4,196
|
|
|
$
|
1,083
|
|
Personal non-credit card
|
|
|
3,812
|
|
|
|
1,723
|
|
|
|
2,741
|
|
|
|
652
|
|
Total non-core receivables
|
|
|
10,410
|
|
|
|
5,208
|
|
|
|
6,937
|
|
|
|
1,735
|
|
Total consumer continuing operations
|
|
|
12,589
|
|
|
|
5,744
|
|
|
|
9,116
|
|
|
|
2,271
|
|
Net charge-off ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate secured
|
|
|
9.85
|
%
|
|
|
22.09
|
%
|
|
|
6.26
|
%
|
|
|
6.87
|
%
|
Personal non-credit card
|
|
|
27.96
|
|
|
|
57.54
|
|
|
|
20.11
|
|
|
|
21.82
|
|
Total non-core receivables
|
|
|
12.91
|
|
|
|
27.75
|
|
|
|
8.60
|
|
|
|
9.25
|
|
Total consumer continuing operations
|
|
|
13.59
|
|
|
|
26.57
|
|
|
|
9.84
|
|
|
|
10.51
|
|
Real estate charge-offs and REO expense as a percentage of
average real estate secured receivables continuing
operations
|
|
|
10.14
|
%
|
|
|
22.24
|
%
|
|
|
6.56
|
%
|
|
|
7.02
|
%
|
Full
Year 2010 compared to Full Year 2009:
Core credit card receivables Dollars of net charge-offs
for our core credit card receivables decreased for the full year
2010 as compared to full year 2009 reflecting lower delinquency
levels as a result of lower average receivable levels as
previously discussed, lower levels of personal bankruptcy
filings and higher recoveries, partially offset by the impact of
continued high unemployment levels. Lower dollars of net
charge-offs also reflect improvements in economic conditions
since year-end 2009.
The net charge-off ratio for our credit card receivable
portfolio decreased 215 basis points for the full year 2010
as compared to the full year 2009 as the decrease in dollars of
net charge-offs outpaced the decrease in average receivables.
Non-core receivable portfolios Dollars of net charge-offs
for our non-core receivable portfolio decreased for the full
year of 2010 for all products as compared to the full year 2009,
reflecting lower delinquency levels as a result of lower average
receivable levels, improvements in economic conditions since
year-end 2009 and lower levels of personal bankruptcy filings
during 2010, partially offset by the impact of continued high
unemployment levels and as it relates to first lien real estate
secured receivables in our Consumer Lending business, portfolio
seasoning. Additionally, a portion of the decrease in dollars of
net charge-offs reflects charge-off activity during 2009 that
would have been recorded in prior periods had the changes made
to the charge-off policy in December 2009 for real estate
secured and personal non-credit card receivables been effective
prior to 2009. Dollars of net charge-offs for real estate
secured receivables for full year 2010 also reflect improvements
in total loss severities as a result of an increase in the
number of properties for which we accepted a
deed-in-lieu
and an increase in the number of short sales, both of which
result in lower losses compared to loans which are subject to a
formal foreclosure process for which average loss severities in
2010 have remained relatively flat to 2009 levels.
The net charge-off ratio for our non-core receivable portfolio
decreased 161 basis points as the decrease in dollars of
net charge-offs as discussed above out paced the decrease in
average receivables. The net charge-off ratio was also impacted
by the December 2009 Charge-off Policy Changes as dollars of net
charge-off in 2009 reflects charge-off activity that would have
been recorded in prior periods had the changes been made to the
charge-off policy in December 2009 been effective prior to 2009.
Real estate charge-offs and REO expenses as a percentage of
average real estate secured receivables decreased during 2010 as
a result of the decrease in dollars of net charge-offs as
discussed above, partially offset by the impact of higher REO
expense and lower average receivable levels. Higher REO expense
during 2010 reflects a higher loss
84
HSBC Finance Corporation
on sale of REO properties as home prices declined during the
second half of 2010 as well as higher overall expenses for REO
properties.
Full
Year 2009 compared to Full Year 2008:
Core credit card receivables Lower dollars of charge-off
in our credit card receivable portfolio reflect the impact of
lower receivable levels as previously discussed, partially
offset by lower recovery rates on defaulted receivables. Net
charge-off dollars and ratios for our credit card receivable
portfolio were also impacted by the transfer of the GM and UP
Portfolios to receivables held for sale in June 2008 and
November 2008, respectively, as discussed in Note 3 to the
table above. These decreases were also partially offset by the
weakness in the U.S. economy, higher unemployment rates,
higher levels of personal bankruptcy filings and portfolio
seasoning. The impact of these items on our credit card
portfolio has been the highest for customers who are also
homeowners and typically carry higher balances.
The net charge-off ratio for credit card receivables increased
for the full year 2009 compared to the full year 2008 due to
lower average receivables, including the impact of the transfer
of the GM and UP Portfolios to receivables held for sale during
2008 as discussed above, partially offset by lower overall
dollars of net charge-offs as receivables declined at a faster
rate than dollars of net charge-offs.
Non-core receivable portfolios Excluding the incremental
charge-offs associated with the December 2009 Charge-off Policy
Changes, real estate secured receivables reported lower dollars
of net charge-offs for full year 2009 compared to full year 2008
while personal non-credit card receivables reported higher
dollars of net charge-offs. Lower dollars of real estate
receivable net charge-off was driven by our Mortgage Services
business as the portfolio continues to liquidate. This decrease
was partially offset by higher dollars of net charge-offs for
Consumer Lending real estate secured receivables due to the
continued weakness in the U.S. economy and higher loss
severities. Dollars of net charge-offs of real estate secured
receivables in both our Mortgage Services and Consumer Lending
businesses were impacted by the volume of receivable re-ages and
modifications, as well as delays in processing foreclosures
during 2009, partially offset by higher loss severities. Higher
dollars of net charge-offs for personal non-credit card
receivables (excluding the impact of the December 2009
Charge-off Policy Changes) reflects higher levels of bankruptcy
filings as well as the impact of the higher delinquency levels
we experienced in late 2008 that have migrated to charge-off
during 2009, partially offset by lower receivable levels as the
portfolio continues to liquidate. Both real estate secured and
personal non-credit card receivables were negatively impacted by
continued weakness in the U.S. economy and housing markets,
higher unemployment rates, higher levels of personal bankruptcy
filings; and portfolio seasoning.
Our net charge-off ratio for our non-core receivable portfolio
for the full year 2009 was significantly impacted by the
December 2009 Charge-off Policy Changes as discussed above,
Excluding the impact of these policy changes, the net charge of
ratio for our non-core receivable portfolio remained higher,
increasing 169 basis points for the full year of 2009 as
compared to the full year of 2008 due to lower average consumer
receivables, partially offset by lower overall dollars of net
charge-offs as receivables declined at a faster rate than
dollars of net charge-offs. Lower average consumer receivables
reflect lower origination volumes due to changes in our product
offerings, including the cessation of all Consumer Lending
originations, partially offset by a decline in loan prepayments
for our real estate secured receivables.
Excluding the incremental charge-offs during 2009 associated
with the December 2009 Charge-off Policy Changes, real estate
charge-offs and REO expense as a percent of average real estate
secured receivables in 2009 remained higher largely due to real
estate secured receivables decreasing at a faster pace than
charge-offs, as discussed above, partially offset by the impact
of lower REO expense during 2009 due to lower levels of owned
REO properties as a result of the backlogs and delays in
foreclosure proceedings as well as lower losses on sales of REO
properties reflecting the stabilization of home prices which
occurred during the second half of 2009.
85
HSBC Finance Corporation
Nonperforming Assets Nonperforming assets are
summarized in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Core receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card (accruing receivables 90 or more days
delinquent)(1)
|
|
$
|
447
|
|
|
$
|
890
|
|
|
$
|
829
|
|
Credit card receivables held for sale (accruing receivables 90
or more days
delinquent)(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
504
|
|
Non-core nonaccrual receivable portfolios (nonaccrual
receivables)(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
secured(3)(4)
|
|
|
6,360
|
|
|
|
6,995
|
|
|
|
7,705
|
|
Private label
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
Personal non-credit card
|
|
|
530
|
|
|
|
998
|
(5)
|
|
|
2,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming receivables
|
|
|
7,337
|
|
|
|
8,883
|
|
|
|
11,470
|
|
Real estate owned
|
|
|
962
|
|
|
|
592
|
|
|
|
885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets continuing operations
|
|
|
8,299
|
|
|
|
9,475
|
|
|
|
12,355
|
|
Discontinued operations
|
|
|
-
|
|
|
|
252
|
|
|
|
537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
8,299
|
|
|
$
|
9,727
|
(6)
|
|
$
|
12,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit loss reserves as a percent of nonperforming
receivables continuing
operations(7)
|
|
|
88.5
|
%
|
|
|
102.4
|
%(8)
|
|
|
110.0
|
%
|
|
|
|
(1) |
|
Credit card receivables continue to
accrue interest after they become 90 or more days delinquent,
consistent with industry practice.
|
|
(2) |
|
Nonaccrual receivables reflect all
loans which are 90 or more days contractually delinquent.
Nonaccrual receivables do not include receivables which have
made qualifying payments and have been re-aged and the
contractual delinquency status reset to current as such
activity, in our judgment, evidences continued payment
probability. If a re-aged loan subsequently experiences payment
default and becomes 90 or more days contractually delinquent, it
will be reported as nonaccrual.
|
|
(3) |
|
Nonaccrual real estate secured
receivables, including held for sale, are presented in the table
below. Additionally, for 2009 it includes nonaccrual real estate
secured receivables before the December 2009 Charge-off Policy
Changes and As Reported.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
As
|
|
|
Before Policy
|
|
|
|
|
At December 31,
|
|
2010
|
|
|
Reported
|
|
|
Change
|
|
|
2008
|
|
|
|
|
Real estate secured:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed-end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
5,910
|
|
|
$
|
6,304
|
|
|
$
|
8,269
|
|
|
$
|
6,453
|
|
Second lien
|
|
|
320
|
|
|
|
510
|
|
|
|
840
|
|
|
|
931
|
|
Revolving:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
6
|
|
|
|
2
|
|
|
|
5
|
|
|
|
7
|
|
Second lien
|
|
|
124
|
|
|
|
179
|
|
|
|
283
|
|
|
|
314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
$
|
6,360
|
|
|
$
|
6,995
|
|
|
$
|
9,397
|
|
|
$
|
7,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4) |
|
At December 31, 2010 and 2009,
non-accrual real estate secured receivables include
$4.1 billion and $3.3 billion, respectively, of
receivables that are carried at net realizable value less cost
to sell.
|
|
(5) |
|
Excluding the impact of the
December 2009 Charge-off Policy Changes, nonaccrual personal
non-credit card receivables would have been $2.1 billion at
December 31, 2009.
|
|
(6) |
|
Total nonperforming assets were
impacted by the increase in charge-offs resulting from the
December 2009 Charge-off Policy Changes for real estate secured
and personal non-credit cards. Excluding these incremental
charge-offs, total nonperforming assets for continuing
operations would have been $12.9 billion at
December 31, 2009.
|
|
(7) |
|
Ratio excludes nonperforming loans
associated with receivable portfolios which are considered held
for sale as these receivables are carried at the lower of cost
or fair value with no corresponding credit loss reserves.
|
|
(8) |
|
Excluding the impact of the
December 2009 Charge-off Policy Changes, credit loss reserves as
a percentage of nonperforming receivables continuing
operations would have been 101.7 percent at
December 31, 2009.
|
86
HSBC Finance Corporation
Total nonperforming receivables decreased at December 31,
2010 as a result of the lower delinquency levels during 2010 as
well as the impact of lower receivable levels. Higher levels of
real estate owned at December 31, 2010 reflects
improvements in processing foreclosure activities following
backlogs throughout 2009 in foreclosure proceedings and actions
by local governments and certain states that have lengthened the
foreclosure process. In the first half of 2011, we anticipate
the number of REO properties will decrease as foreclosures are
again delayed as we enhance our foreclosure documentation and
processes for foreclosures and we re-file affidavits where
necessary. Real estate secured nonaccrual loans includes stated
income loans at our Mortgage Services business of
$557 million, $683 million and $1.3 billion at
December 31, 2010, 2009 and 2008, respectively.
As discussed more fully below, we have numerous account
management policies and practices to assist our customers in
accordance with their individual needs, including either
temporarily or permanently modifying loan terms. Loans which
have been granted a permanent modification, a twelve-month or
longer modification, or two or more consecutive six-month
modifications are considered troubled debt restructurings for
purposes of determining loss reserve estimates.
The following table summarizes TDR Loans which are shown as
nonperforming receivables in the table above:
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2010
|
|
|
2009(1)
|
|
|
2008
|
|
|
|
|
|
(in millions)
|
|
|
Real estate secured
|
|
$
|
1,825
|
|
|
$
|
1,607
|
|
|
$
|
848
|
|
Credit card
|
|
|
20
|
|
|
|
36
|
|
|
|
-
|
|
Personal non-credit card
|
|
|
90
|
|
|
|
106
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,935
|
|
|
$
|
1,749
|
|
|
$
|
859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Non-accrual TDR Loans reported in
2009 reflect the impact of the December 2009 Charge-off Policy
Changes as well as enhanced tracking capabilities under which
certain loans previously not reported as TDR Loans are now
reported as such.
|
See Note 7, Receivables, to our accompanying
consolidated financial statements for further details regarding
TDR Loan balances.
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 take
extraordinary action with respect to delinquent or troubled
accounts based on criteria which, in our judgment, evidence
continued payment probability as well as in the case of real
estate secured receivables, a continuing of desire for borrowers
to stay in their homes. The policies and practices are designed
to manage customer relationships, improve collection
opportunities and avoid foreclosure as determined to be
appropriate. From time to time we re-evaluate these policies and
procedures and make changes as deemed appropriate.
In October 2010, the FASB issued a Proposed Accounting Standards
Update which provides additional guidance to assist creditors in
determining whether a restructuring of a receivable meets the
criteria to be considered a troubled debt restructuring. If this
Proposed Accounting Standards Update were to be approved in its
current form, it could result in changes in our customer account
management policies and practices in future periods. See
New Accounting Pronouncements to be Adopted in Future
Periods for further discussion.
Currently, we utilize the following account management actions:
|
|
|
|
|
Modification Management action that results
in a change to the terms and conditions of the loan either
temporarily or permanently without changing the delinquency
status of the loan. Modifications may include changes to one or
more terms of the loan including, but not limited to, a change
in interest rate, extension of the amortization period,
reduction in payment amount and partial forgiveness or deferment
of principal.
|
|
|
|
Collection Re-age Management action that
results in the resetting of the contractual delinquency status
of an account to current but does not involve any changes to the
original terms and conditions of the loan. If an account which
has been re-aged subsequently experiences a payment default, it
will again become contractually delinquent. We use collection
re-aging as an account and customer management tool in an
|
87
HSBC Finance Corporation
|
|
|
|
|
effort to increase the cash flow from our account relationships,
and accordingly, the application of this tool is subject to
complexities, variations and changes from time to time.
|
|
|
|
|
|
Modification Re-age Management action that
results in a change to the terms and conditions of the loan,
either temporarily or permanently, and also resets the
contractual delinquency status of an account to current as
discussed above. If an account which has been re-aged
subsequently experiences a payment default, it will again become
contractually delinquent.
|
Our policies and practices for managing accounts are continually
reviewed and assessed to assure that they meet the goals
outlined above, and accordingly, we make 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 agreements, regulatory
agreements or orders.
As a result of our on-going review, we have implemented changes
to our policies and procedures in 2010 to establish uniform
criteria for account modifications actions for all products
regardless of whether the action was a modification or a re-age.
Effective during the second quarter of 2010, we implemented
changes to our policies and procedures for the non-core real
estate secured and personal non-credit card receivable
portfolios in our Consumer Lending and Mortgage Services
businesses. These revised policies and procedures were applied
to receivables in these portfolios. The adoption of these
policies and procedures did not have a material impact on our
financial position or results of operations.
The following table summarizes the general policies and
procedures for account management actions for all real estate
secured and personal non-credit card receivables in our Consumer
Lending and Mortgage Services businesses which were implemented
during the second quarter of 2010.
|
|
|
|
|
|
|
Real
Estate(1)
|
|
Personal Non-Credit
Card(1)
|
|
|
Minimum time since prior
account management action
|
|
6 or 12 months depending on
type of account management
action
|
|
6 months
|
Minimum time since account opened
|
|
9 months
|
|
9 months
|
Minimum qualifying monthly
payments required
|
|
2 in 60 days after approval
|
|
2 in 60 days after approval
|
Maximum number of account
management actions
|
|
5 in 5 years
|
|
5 in 5 years
|
|
|
|
(1) |
|
We employ account modification,
re-aging and other customer account management policies and
practices as flexible customer account management tools and the
specific 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 modification and re-aging criteria and, as such, they
are subject to revision or exceptions from time to time.
Accordingly, the description of our account modification and
re-aging policies or practices provided in this table should be
taken only as general guidance to the modification and re-aging
approach taken within each product line, and not as assurance
that accounts not meeting these criteria will never be modified
or re-aged, that every account meeting these criteria will in
fact be modified or re-aged or that these criteria will not
change or that exceptions will not be made in individual cases.
In addition, in an effort to determine optimal customer account
management strategies, management may run 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.
|
With regard to real estate secured loans involving a bankruptcy,
accounts whose borrowers are subject to a Chapter 13 plan
filed with a bankruptcy court generally may be re-aged upon
receipt of one qualifying payment. Accounts whose borrowers have
filed for Chapter 7 bankruptcy protection may be re-aged
upon receipt of a signed reaffirmation agreement. In addition,
for some products, accounts may be re-aged without receipt of a
payment in certain special circumstances (e.g. in the
event of a natural disaster or a hardship program).
The following summarizes our customer account management
policies and practices for our core credit card receivable
portfolio.
88
HSBC Finance Corporation
Credit
Card Re-aging Policies and
Practices(1)
|
|
|
|
|
Accounts qualify for re-aging if we receive three consecutive
minimum monthly payments or a lump sum equivalent
|
|
|
|
Accounts qualify for re-aging if the account has been in
existence for a minimum of nine months and the account has not
been re-aged in the prior twelve months and not more than once
in the prior five years
|
|
|
|
Accounts entering third party debt counseling programs are
limited to one re-age in a five-year period in addition to the
general limits of one re-age in a twelve-month period and two
re-ages in a five-year period
|
|
|
|
(1) |
|
We employ account re-aging 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 re-aging
criteria and they are subject to modification or exceptions from
time to time. Accordingly, the description of our account
re-aging policies or practices provided in this table should be
taken only as general guidance to the re-aging approach taken
within each product line, and not as assurance that accounts not
meeting these criteria will never be re-aged, that every account
meeting these criteria will in fact be re-aged or that these
criteria will not change or that exceptions will not be made in
individual cases. In addition, in an effort to determine optimal
customer account management strategies, management may run more
conservative tests on some or all accounts in a product line for
fixed periods of time in order to evaluate the impact of
alternative policies and practices.
|
As discussed above, we are continuing to review our policies and
procedures to increase consistency in our policies for all
products. We currently anticipate that we will adopt new
policies and procedures for our core credit card receivables
during the second half of 2011.
As a result of the expansion of our modification and re-age
programs in response to the marketplace conditions previously
described, modification and re-age volumes since January 2007
for real estate secured receivables have increased. Since
January 2007, we have cumulatively modified
and/or
re-aged approximately 353,600 real estate secured loans with an
aggregate outstanding principal balance of $41.6 billion at
the time of modification
and/or
re-age under our foreclosure avoidance programs and a proactive
ARM reset modification program described below. These totals
include approximately 73,100 real estate secured loans with an
outstanding principal balance of $11.1 billion that
received two or more modifications since January 2007 and,
therefore, may be classified as TDR Loans. The following
provides information about the subsequent performance of all
real estate secured loans granted a modification
and/or
re-age since January 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Receivable
|
|
|
|
|
|
|
Balance at Time of
|
|
|
|
Number
|
|
|
Account Modification
|
|
Status as of December 31, 2010
|
|
of Loans
|
|
|
Action
|
|
|
|
|
Current or less than
30-days
delinquent
|
|
|
41
|
%
|
|
|
40
|
%
|
30- to
59-days
delinquent
|
|
|
8
|
|
|
|
8
|
|
60-days or
more delinquent
|
|
|
18
|
|
|
|
22
|
|
Paid-in-full
|
|
|
7
|
|
|
|
7
|
|
Charged-off, transferred to real estate owned or sold
|
|
|
26
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
89
HSBC Finance Corporation
The following table shows the number of real estate secured
accounts remaining in our portfolio as well as the outstanding
receivable balance of these accounts as of the period indicated
for loans that we have taken an account management action by the
type of action taken:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Receivable
|
|
|
|
Number of
Accounts(1)
|
|
|
Balance(1)(4)
|
|
|
|
Consumer
|
|
|
Mortgage
|
|
|
Consumer
|
|
|
Mortgage
|
|
|
|
Lending
|
|
|
Services
|
|
|
Lending
|
|
|
Services
|
|
|
|
|
|
(accounts are in thousands)
|
|
|
(dollars are in millions)
|
|
|
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collection re-age only
|
|
|
90.0
|
|
|
|
32.0
|
|
|
$
|
7,707
|
|
|
$
|
2,843
|
|
Modification
only(2)
|
|
|
11.8
|
|
|
|
7.6
|
|
|
|
1,340
|
|
|
|
868
|
|
Modification re-age
|
|
|
67.2
|
|
|
|
46.8
|
|
|
|
8,222
|
|
|
|
5,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans modified and/or
re-aged(3)
|
|
|
169.0
|
|
|
|
86.4
|
|
|
$
|
17,269
|
|
|
$
|
9,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collection re-age only
|
|
|
91.3
|
|
|
|
36.5
|
|
|
$
|
7,779
|
|
|
$
|
3,331
|
|
Modification
only(2)
|
|
|
16.6
|
|
|
|
10.6
|
|
|
|
2,096
|
|
|
|
1,274
|
|
Modification re-age
|
|
|
67.5
|
|
|
|
53.1
|
|
|
|
8,805
|
|
|
|
6,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans modified and/or
re-aged(3)
|
|
|
175.4
|
|
|
|
100.2
|
|
|
$
|
18,680
|
|
|
$
|
11,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collection re-age only
|
|
|
78.7
|
|
|
|
46.4
|
|
|
$
|
6,955
|
|
|
$
|
4,697
|
|
Modification
only(2)
|
|
|
12.3
|
|
|
|
13.8
|
|
|
|
1,686
|
|
|
|
2,031
|
|
Modification re-age
|
|
|
43.8
|
|
|
|
33.8
|
|
|
|
5,876
|
|
|
|
4,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans modified and/or
re-aged(3)
|
|
|
134.8
|
|
|
|
94.0
|
|
|
$
|
14,517
|
|
|
$
|
11,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Loans which have been granted a permanent modification, a
twelve-month or longer modification, or two or more consecutive
six-month modifications are considered troubled debt
restructurings for purposes of determining loss reserves. For
additional information related to our troubled debt
restructurings, see Note 7, Receivables, in the
accompanying consolidated financial statements.
|
|
(2)
|
Includes loans that have been modified under a proactive ARM
reset modification program described below.
|
90
HSBC Finance Corporation
|
|
(3) |
The following table provides information regarding the
delinquency status of loans remaining in the portfolio that were
granted modifications of loan terms and/or re-aged:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Receivable
|
|
|
Number of Accounts
|
|
Balance
|
|
|
Consumer
|
|
Mortgage
|
|
Consumer
|
|
Mortgage
|
|
|
Lending
|
|
Services
|
|
Lending
|
|
Services
|
|
|
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current or less than
30-days
delinquent
|
|
|
65
|
%
|
|
|
63
|
%
|
|
|
62
|
%
|
|
|
63
|
%
|
30- to
59-days
delinquent
|
|
|
11
|
|
|
|
10
|
|
|
|
12
|
|
|
|
11
|
|
60-days or
more delinquent
|
|
|
24
|
|
|
|
27
|
|
|
|
26
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current or less than
30-days
delinquent
|
|
|
62
|
%
|
|
|
64
|
%
|
|
|
59
|
%
|
|
|
65
|
%
|
30- to
59-days
delinquent
|
|
|
13
|
|
|
|
11
|
|
|
|
14
|
|
|
|
11
|
|
60-days or
more delinquent
|
|
|
25
|
|
|
|
25
|
|
|
|
27
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current or less than
30-days
delinquent
|
|
|
66
|
%
|
|
|
64
|
%
|
|
|
60
|
%
|
|
|
63
|
%
|
30- to
59-days
delinquent
|
|
|
13
|
|
|
|
11
|
|
|
|
14
|
|
|
|
10
|
|
60-days or
more delinquent
|
|
|
21
|
|
|
|
25
|
|
|
|
26
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4) |
The outstanding receivable balance included in this table
reflects the principal amount outstanding on the loan excluding
any basis adjustments to the loan such as unearned income,
unamortized deferred fees and costs on originated loans,
purchase accounting fair value adjustments and premiums or
discounts on purchased loans.
|
Another account management technique that we employ in respect
of delinquent accounts is forbearance which may also be
considered a modification. 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 agreement to pay an additional amount with
future required payments. We typically use forbearance 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 a period of time.
Additionally, in the past we also used loan rewrites to assist
our customers which involved an extension of a new loan. We
currently no longer offer loan rewrites. The amount of
receivables subject to forbearance or rewrites is not
significant.
In addition to the account management techniques discussed
above, we have also increased the use of
deed-in-lieu
and short sales in 2010 to assist our real estate secured
receivable customers. In a
deed-in-lieu,
the borrower agrees to surrender the deed to the property
without going through foreclosure proceedings and we release the
borrower from further obligation. In a short sale, the property
is offered for sale to potential buyers at a price which has
been pre-negotiated between us and the borrower. This
pre-negotiated price is based on updated property valuations and
probability of default. Short sales also release the borrower
from further obligation. From our perspective, loss severities
on
deed-in-lieu
and short sales are generally lower than losses from foreclosed
loans, or for loans where we have previously decided not to
pursue foreclosure, and provide resolution to the delinquent
receivable over a shorter period of time. We currently
anticipate the use of
deed-in-lieu
and short sales will continue to increase in future periods as
we continue to work with our customers.
Modification programs As a result of the marketplace
conditions previously described, in the fourth quarter of 2006
we began performing extensive reviews of our account management
policies and practices particularly in light of the current
needs of our customers. As a result of these reviews, beginning
in the fourth quarter of 2006, we significantly increased our
use of modifications in response to what we expected would be a
longer term need of assistance by our customers due to the weak
housing market and U.S. economy. In these instances, our
Mortgage Services and Consumer Lending businesses actively use
account modifications to reduce the rate
and/or
payment on
91
HSBC Finance Corporation
a number of qualifying loans and generally re-age certain of
these accounts upon receipt of two or more modified payments and
other criteria being met. This account management practice is
designed to assist borrowers who may have purchased a home with
an expectation of continued real estate appreciation or whose
income has subsequently declined. Additionally, our loan
modification programs are designed to improve cash collections
and avoid foreclosure as determined to be appropriate.
Based on the economic environment and expected slow recovery of
housing values, during 2008 we developed additional analytical
review tools leveraging best practices to assist us in
identifying customers who are willing to pay, but are expected
to have longer term disruptions in their ability to pay. Using
these analytical review tools, we expanded our foreclosure
avoidance programs to assist customers who did not qualify for
assistance under prior program requirements or who required
greater assistance than available under the programs. The
expanded program required certain documentation as well as
receipt of two qualifying payments before the account may be
re-aged. Prior to July 2008, for our Consumer Lending customers,
receipt of one qualifying payment was required for a modified
account before the account would be re-aged. We also increased
the use of longer term modifications to provide assistance in
accordance with the needs of our customers which may result in
higher credit loss reserve requirements. For selected customer
segments, this expanded program lowers the interest rate on
fixed rate loans and for ARM loans the expanded program modifies
the loan to a lower interest rate than scheduled at the first
interest rate reset date. The eligibility requirements for this
expanded program allow more customers to qualify for payment
relief and in certain cases can result in a lower interest rate
than allowed under other existing programs. During the third
quarter of 2009, in order to increase the long-term success rate
of our modification programs we increased certain documentation
requirements for participation in these programs. By late 2009
and continuing into 2010, the volume of loans that qualified for
a new modification had fallen significantly. We expect the
volume of new modifications to continue to decline as we believe
a smaller percentage of our customers with unmodified loans will
benefit from loan modification in a way that will not ultimately
result in a repeat default on their loans. Additionally, volumes
of new loan modifications are expected to decrease due to the
impact of improvements in economic conditions, the continued
seasoning of a liquidating portfolio and, beginning in the
second quarter of 2010, the requirement to receive two payments
in 60 days before an account will be modified. Modification
volumes will also be lower going forward as we are no longer
originating real estate secured receivables. We will continue to
evaluate our consumer relief programs as well as all aspects of
our account management practices to ensure our programs benefit
our customers in accordance with their financial needs in ways
that are economically viable for both our customers and our
stakeholders. We have elected not to participate in the
U.S. Treasury sponsored programs as we believe our
long-standing home preservation programs provide more meaningful
assistance to our customers.
Loans modified under these programs are only included in the
re-aging statistics table (Re-age Table) that
is included in our discussion of our re-age programs if the
delinquency status of a loan was reset as a part of the
modification or was re-aged in the past for other reasons. Not
all loans modified under these programs have the delinquency
status reset and, therefore, are not considered to have been
re-aged.
The following table summarizes loans modified during 2010 and
2009, some of which may have also been re-aged:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Receivable
|
|
|
|
Number of
|
|
|
Balance at Time of
|
|
|
|
Accounts Modified
|
|
|
Modification
|
|
|
|
Consumer
|
|
|
Mortgage
|
|
|
Consumer
|
|
|
Mortgage
|
|
|
|
Lending
|
|
|
Services
|
|
|
Lending
|
|
|
Services
|
|
|
|
|
|
|
|
|
|
|
|
(dollars are in billions)
|
|
|
Foreclosure avoidance
programs(1)(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2010
|
|
|
24,900
|
|
|
|
17,600
|
|
|
$
|
3.6
|
|
|
$
|
2.4
|
|
Year ended December 31, 2009
|
|
|
55,900
|
|
|
|
48,400
|
|
|
$
|
8.0
|
|
|
$
|
6.6
|
|
|
|
(1) |
Includes all loans modified during the years ended
December 31, 2010 and 2009 regardless of whether the loan
was also re-aged.
|
92
HSBC Finance Corporation
|
|
(2) |
If qualification criteria are met, loan modification may occur
on more than one occasion for the same account. For purposes of
the table above, an account is only included in the modification
totals once in an annual period and not for each separate
modification in an annual period.
|
A primary tool used during account modification, involves
modifying the monthly payment through lowering the rate on the
loan on either a temporary or permanent basis. The following
table summarizes the weighted-average contractual rate
reductions and the average amount of payment relief provided to
customers that entered an account modification for the first
time during the quarter indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
Dec. 31,
|
|
Sept. 30,
|
|
June 30,
|
|
Mar. 31,
|
|
|
2010
|
|
2010
|
|
2010
|
|
2010
|
|
|
Weighted-average contractual rate reduction in basis points on
account modifications during the
period(1)(2)
|
|
|
333
|
|
|
|
341
|
|
|
|
339
|
|
|
|
329
|
|
Average payment relief provided on account modifications as a
percentage of total payment prior to
modification(2)
|
|
|
25.4
|
%
|
|
|
27.6
|
%
|
|
|
27.3
|
%
|
|
|
26.5
|
%
|
|
|
(1)
|
The weighted-average rate reduction was determined based on the
rate in effect immediately prior to the modification, which for
ARMs may be lower than the rate on the loan at the time of
origination.
|
|
(2)
|
Excludes any modifications on purchased receivable portfolios of
our Consumer Lending business which totaled $1.2 billion,
$1.2 billion, $1.3 billion and 1.4 billion as of
December 31, 2010, September 30, 2010, June 30,
2010 and March 31, 2010, respectively.
|
In addition to the foreclosure avoidance programs described
above, beginning in October 2006 we also established a program
specifically designed to meet the needs of select customers with
ARMs nearing their first interest rate reset and payment reset
that we expected to be negatively impacted by the rate
adjustment. Under a proactive ARM reset modification program, we
proactively contacted these customers and, as appropriate and in
accordance with defined policies, we modified the loans allowing
time for the customer to seek alternative financing or improve
their individual situation. At the end of the modification
period, we re-evaluated the loan to determine if an extension of
the modification term was warranted. If the loan was less than
30-days
delinquent and had not received assistance under any other risk
mitigation program, typically the modification could be extended
for an additional twelve-month period at a time provided the
customer demonstrated an ongoing need for assistance. A loan
that was modified under the proactive ARM reset modification
program for twelve-months or longer was generally considered a
TDR Loan. Loans modified as part of this specific risk
mitigation effort were not considered to have been re-aged as
these loans were not contractually delinquent at the time of the
modification. However, if the loan had been re-aged in the past
for other reasons or qualified for a re-age subsequent to the
modification, it was included in the Re-age Table. As the
majority of our existing ARM loan portfolio passed the
loans initial reset date, the volume of new modifications
under the proactive ARM reset modification program decreased and
the modification program ended during the fourth quarter of
2009. In total, we modified approximately 13,200 loans through
the proactive ARM reset modification program with an aggregate
outstanding principal balance of $2.2 billion at the time
of the modification.
Re-age programs Our policies and practices include
various criteria for an account to qualify for re-aging,
however, that does not require us to re-age the account. The
extent to which we re-age accounts that are eligible under our
existing policies will vary depending upon our view of
prevailing economic conditions and other factors which may
change from period to period. In addition, exceptions to our
policies and practices may be made in specific situations in
response to legal or regulatory agreements or orders.
We continue to monitor and track information related to accounts
that have been re-aged. Currently, approximately 89 percent
of all re-aged receivables are real estate secured products,
which in general have less loss severity exposure because of the
underlying collateral. Credit loss reserves, including reserves
on TDR Loans, take into account whether loans have been re-aged
or are subject to forbearance, an external debt management plan,
modification, extension or deferment. Our credit loss reserves,
including reserves on TDR Loans, also take into consideration
the expected loss severity based on the underlying collateral,
if any, for the loan.
93
HSBC Finance Corporation
We used certain assumptions and estimates to compile our
re-aging 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 re-aging
statistics from different periods, the fact that our re-age
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.
Re-age Table(1)(2)(3)(4)
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2010
|
|
|
|
2009
|
|
|
|
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
|
|
Never re-aged
|
|
|
59.3
|
|
%
|
|
|
61.9
|
|
%
|
Re-aged:
|
|
|
|
|
|
|
|
|
|
|
Re-aged in the last 6 months
|
|
|
10.5
|
|
|
|
|
12.3
|
|
|
Re-aged in the last 7-12 months
|
|
|
10.0
|
|
|
|
|
13.6
|
|
|
Previously re-aged beyond 12 months
|
|
|
20.2
|
|
|
|
|
12.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ever re-aged
|
|
|
40.7
|
|
|
|
|
38.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total continuing operations:
|
|
|
100.0
|
|
%
|
|
|
100.0
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
Never re-aged
|
|
|
-
|
|
|
|
|
55.0
|
|
|
Re-aged
|
|
|
-
|
|
|
|
|
45.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total discontinued operations
|
|
|
-
|
|
%
|
|
|
100.0
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Re-aged
by
Product(1)(2)(3)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2010
|
|
|
|
2009
|
|
|
|
|
|
|
|
(dollars are in millions)
|
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
secured(5)
|
|
$
|
24,125
|
|
|
|
|
48.9
|
|
%
|
|
$
|
27,036
|
|
|
|
|
45.4
|
|
%
|
Credit card
|
|
|
412
|
|
|
|
|
4.2
|
|
|
|
|
527
|
|
|
|
|
4.5
|
|
|
Personal non-credit card
|
|
|
2,565
|
|
|
|
|
36.0
|
|
|
|
|
3,678
|
|
|
|
|
35.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total continuing operations
|
|
|
27,102
|
|
|
|
|
40.7
|
|
|
|
|
31,241
|
|
|
|
|
38.1
|
|
|
Discontinued operations
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
2,021
|
|
|
|
|
45.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
27,102
|
|
|
|
|
40.7
|
|
%
|
|
$
|
33,262
|
|
|
|
|
38.4
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The tables above includes both
Collection Re-ages and Modification Re-ages, as discussed above.
|
|
(2) |
|
The outstanding receivable balance
included in this table reflects the principal amount outstanding
on the loan net of unearned income, unamortized deferred fees
and costs on originated loans, purchase accounting fair value
adjustments and premiums or discounts on purchased loans.
|
|
(3) |
|
Excludes commercial and other.
|
|
(4) |
|
The tables above exclude any
accounts re-aged without receipt of a payment which only occurs
under special circumstances, such as re-ages associated with
disaster or in connection with a bankruptcy filing. At
December 31, 2010 and 2009, the unpaid principal balance of
re-ages without receipt of a payment totaled $737 million
and $605 million, respectively.
|
94
HSBC Finance Corporation
|
|
|
(5) |
|
The Mortgage Services and Consumer
Lending businesses real estate secured re-ages are as shown in
the following table:
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Mortgage Services
|
|
$
|
8,914
|
|
|
$
|
10,699
|
|
Consumer Lending
|
|
|
15,211
|
|
|
|
16,337
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
$
|
24,125
|
|
|
$
|
27,036
|
|
|
|
|
|
|
|
|
|
|
The overall decrease in dollars of re-aged loans during 2010
reflects the lower delinquency and receivable levels as
discussed above. At December 31, 2010 and 2009,
$7.1 billion (26 percent of total re-aged loans in the
Re-age Table)
and $7.9 billion (25 percent of total re-aged loans in
the Re-age Table), respectively, of re-aged accounts have
subsequently experienced payment defaults and are included in
our two-months-and-over contractual delinquency at the period
indicated.
We continue to work with advocacy groups in select markets to
assist in encouraging our customers with financial needs to
contact us. We have also implemented new training programs to
ensure that our customer service representatives are focused on
helping the customer through difficulties, are knowledgeable
about the available re-aging and modification programs and are
able to advise each customer of the best solutions for their
individual circumstance.
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 receivables and receivables held for
sale by state which individually account for 5 percent or
greater of our portfolio as of December 31, 2010 and 2009
as well as the unemployment rate for these states for December
2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Portfolio
|
|
|
|
|
|
|
|
|
Receivables at
|
|
Percent of
|
|
|
|
|
December 31, 2010
|
|
Total Receivables
|
|
Unemployment
|
|
|
Credit
|
|
Real Estate
|
|
|
|
December 31,
|
|
December 31,
|
|
Rates for
|
|
|
Cards
|
|
Secured
|
|
Other
|
|
2010
|
|
2009
|
|
December
2010(1)
|
|
|
California
|
|
|
10.6
|
%
|
|
|
9.9
|
%
|
|
|
5.8
|
%
|
|
|
9.6
|
%
|
|
|
10.4
|
%
|
|
|
12.5
|
%
|
New York
|
|
|
7.4
|
|
|
|
7.0
|
|
|
|
6.8
|
|
|
|
7.0
|
|
|
|
6.8
|
|
|
|
8.2
|
|
Florida
|
|
|
6.9
|
|
|
|
6.3
|
|
|
|
5.7
|
|
|
|
6.3
|
|
|
|
6.6
|
|
|
|
12.0
|
|
Pennsylvania
|
|
|
4.2
|
|
|
|
5.9
|
|
|
|
6.4
|
|
|
|
5.7
|
|
|
|
5.5
|
|
|
|
8.5
|
|
Ohio
|
|
|
4.2
|
|
|
|
5.5
|
|
|
|
6.0
|
|
|
|
5.4
|
|
|
|
5.2
|
|
|
|
9.6
|
|
|
|
(1) |
The U.S. national unemployment rate for December 2010 was
9.4 percent.
|
Because our underwriting, collections and processing functions
are centralized, we can quickly change our credit standards and
intensify collection efforts in specific locations. We believe
this lowers risks resulting from such geographic concentrations.
95
HSBC Finance Corporation
Liquidity
and Capital Resources
During 2010, liquidity returned to the financial markets for
most sources of funding except for mortgage securitization.
Companies are generally able to issue debt with credit spreads
approaching levels historically seen prior to the financial
crisis, despite the expiration of some of the
U.S. governments support programs. European sovereign
debt fears first triggered by Greece in May and again by Ireland
in November continue to put pressure on borrowing costs in the
U.S.
HSBC Finance Corporation HSBC Finance
Corporation, an indirect wholly owned subsidiary of HSBC
Holdings plc., 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 2010 and 2009, HSBC Finance Corporation received
cash dividends from its subsidiaries of $64 million and
$156 million, respectively.
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. With the exception of the
dividends we paid to our immediate parent, HINO, related to the
capital associated with the sale of the credit card and auto
finance receivables to HSBC Bank USA in January 2009, we did not
pay any dividends on our common stock to HINO in 2010 or 2009.
We will maintain our capital at levels that we perceive to be
consistent with our current credit ratings either by limiting
the dividends to or through capital contributions from our
parent.
HSBC Finance Corporation manages all of its operations directly
and in 2010, funded these businesses primarily through the cash
generated from operations, issuances of commercial paper, retail
focused medium-term debt and institutionally placed subordinated
debt, borrowings under secured financing facilities, sales of
consumer receivables, issuances of preferred stock and capital
contributions from our parent. HSBC Finance Corporation markets
its commercial paper primarily through an in-house sales force.
Our term debt is generally marketed through subsidiaries of
HSBC. Medium-term and long-term debt may also be marketed
through unaffiliated investment banks.
Debt due to HSBC subsidiaries totaled $8.3 billion and
$9.0 billion at December 31, 2010 and 2009,
respectively. The interest rates on funding from HSBC
subsidiaries are market-based and comparable to those available
from unaffiliated parties.
At various times, we will make capital contributions to our
subsidiaries to comply with regulatory guidance, support
operations or provide funding for long-term facilities and
technological improvements. During 2010 and 2009, capital
contributions to certain subsidiaries were more than offset by
dividends paid to HSBC Finance Corporation. This resulted in a
net return of capital to HSBC Finance Corporation from certain
subsidiaries of $630 million and $2.2 billion in 2010
and 2009, respectively.
HSBC Related Funding In connection with our
acquisition by HSBC, funding costs for the HSBC Finance
Corporation businesses were expected to be lower as a result of
the funding diversity provided by HSBC. We work with our
affiliates under the oversight of HSBC North America to maximize
funding opportunities and efficiencies in HSBCs operations
in the U.S.
96
HSBC Finance Corporation
Debt due to affiliates and other HSBC related funding are
summarized in the following table:
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in billions)
|
|
|
Debt issued to HSBC subsidiaries:
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
8.3
|
(1)
|
|
$
|
9.0
|
|
|
|
|
|
|
|
|
|
|
Debt outstanding to HSBC clients:
|
|
|
|
|
|
|
|
|
Euro commercial paper
|
|
|
.4
|
|
|
|
.7
|
|
Term debt
|
|
|
.3
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
Total debt outstanding to HSBC clients
|
|
|
.7
|
|
|
|
2.5
|
|
Cash received on bulk and subsequent sales of credit card
receivables to HSBC Bank USA, net (cumulative)
|
|
|
8.4
|
|
|
|
10.3
|
|
Cash received on bulk sale of auto finance receivables to HSBC
Bank USA, net
|
|
|
-
|
|
|
|
2.8
|
|
Cash received on bulk and subsequent sales of private label
credit card receivables to HSBC Bank USA, net (cumulative)
|
|
|
14.4
|
|
|
|
16.6
|
|
Real estate secured receivable activity with HSBC Bank USA
(cumulative):
|
|
|
|
|
|
|
|
|
Cash received on sales
|
|
|
3.7
|
|
|
|
3.7
|
|
Direct purchases from correspondents
|
|
|
4.2
|
|
|
|
4.2
|
|
Reductions in real estate secured receivables sold to HSBC Bank
USA
|
|
|
(6.4
|
)
|
|
|
(6.1
|
)
|
|
|
|
|
|
|
|
|
|
Total real estate secured receivable activity with HSBC Bank USA
(cumulative)
|
|
|
1.5
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
Cash received from sale of U.K. and Canadian operations to HSBC
affiliates
|
|
|
3.4
|
|
|
|
3.4
|
|
Capital contributions by HINO (cumulative)
|
|
|
8.8
|
|
|
|
8.6
|
|
Issuance of Series C Preferred Stock to HINO
|
|
|
1.0
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total HSBC related funding
|
|
$
|
46.5
|
|
|
$
|
55.0
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
At December 31, 2010, debt due to affiliates includes
$436 million carried at fair value.
|
At December 31, 2010 and 2009, funding from HSBC, including
debt issuances to HSBC subsidiaries and clients, represented
16 percent and 15 percent of our total debt and
preferred stock funding, respectively.
Cash proceeds received from the sale of our U.K. and Canadian
operations to HSBC affiliates were used to pay down short-term
domestic borrowings, including outstanding commercial paper
balances, and draws on bank lines from HSBC Bank plc
(HBEU). Proceeds received from the bulk sale and
subsequent daily sales of private label and credit card
receivables to HSBC Bank USA and the proceeds from the bulk sale
of certain auto finance receivables were used to pay down
maturing long-term debt and short-term borrowings, including
outstanding commercial paper balances. Proceeds from each of
these transactions as well as the ongoing daily sales were also
used to fund ongoing operations.
We have a $1.5 billion uncommitted secured credit facility
and a $1.0 billion committed unsecured credit facility from
HSBC Bank USA. At December 31, 2010 and 2009, there were no
balances outstanding under either of these facilities.
Additionally, at December 31, 2010 and 2009 we have
committed
back-up
lines of credit totaling $2.0 billion and
$2.5 billion, respectively, with an HSBC affiliate. At
December 31, 2010 and 2009, there were no balances
outstanding under either of these
back-up
lines of credit.
We have derivative contracts with a notional value of
$49.9 billion, or approximately 99 percent of total
derivative contracts, outstanding with HSBC affiliates at
December 31, 2010 and $58.6 billion, or approximately
98 percent at December 31, 2009.
Interest Bearing Deposits with Banks and Other Short-Term
Investments Interest bearing deposits with banks
totaled $1.0 billion and $17 million at
December 31, 2010 and 2009, respectively. Securities
purchased under
97
HSBC Finance Corporation
agreements to resell totaled $4.3 billion and
$2.9 billion at December 31, 2010 and 2009,
respectively. The increase in the amount of short-term
investments is due primarily to the generation of additional
liquidity as a result of the run-off of our liquidating
receivable portfolios, the sale of REO properties, the receipt
of tax related payments, issuances of medium-term retail notes
and subordinated debt as well as an increase in collateral
required from counterparties under our derivative contracts.
Commercial Paper totaled $3.2 billion
and $4.3 billion at December 31, 2010 and 2009,
respectively. Included in this total was outstanding Euro
commercial paper sold to customers of HSBC of $450 million
and $664 million at December 31, 2010 and 2009,
respectively. Commercial paper balances were lower during 2010
as a result of our higher short-term liquid investment portfolio
as discussed above. Our short-term funding strategies are
structured such that committeed bank credit facilities exceed
100 percent of outstanding commercial paper.
We had committed
back-up
lines of credit totaling $6.3 billion and $7.8 billion
at December 31, 2010 and 2009, respectively. At
December 31, 2009, one of these facilities totaling
$2.5 billion was with an HSBC affiliate to support our
issuance of commercial paper. This $2.5 billion credit
facility was renewed in September 2010 as a new
$2.0 billion
back-up
credit facility, split evenly between 364 day and two year
tenors. Given the overall reduction in our balance sheet, the
lower level of
back-up
lines in support of our current commercial paper issuance
program is consistent with our reduced funding requirements
going forward.
Long-Term Debt decreased to
$54.6 billion at December 31, 2010 from
$68.9 billion at December 31, 2009. The following
table summarizes issuances and repayments of long-term debt for
continuing operations during 2010 and 2009:
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Long-term debt issued
|
|
$
|
1,714
|
(1)
|
|
$
|
4,078
|
|
Repayments of long-term debt
|
|
|
(14,734
|
)(1)
|
|
|
(19,312
|
)(2)
|
|
|
|
|
|
|
|
|
|
Net long-term debt retired from continuing operations
|
|
$
|
(13,020
|
)
|
|
$
|
(15,234
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
In addition to the amounts of debt issued and repaid in the
table above, during 2010 we also exchanged $1.8 billion of
senior debt for $1.9 billion of subordinated debt.
|
|
(2)
|
In addition to the amount of debt repaid in the table above,
during the first quarter of 2009, long-term debt of
$6.1 billion was assumed by HSBC Bank USA in connection
with their purchase of the GM and UP Portfolios.
|
Issuances of long-term debt during 2010 included the following:
|
|
|
|
|
$2.9 billion of subordinated debt, of which
$1.9 billion was issued in connection with the exchange
offering discussed below;
|
|
|
$564 million of
InterNotessm
(retail-oriented medium-term notes); and
|
|
|
$195 million of securities backed by credit card
receivables. For accounting purposes, these transactions were
structured as secured financings.
|
During the fourth quarter of 2010, we offered noteholders of
certain series of our debt the ability to exchange their
existing senior notes for newly issued subordinated debt. As a
result of this exchange offer, we issued $1.9 billion in
new 10-year
fixed rate subordinated debt in exchange for $1.8 billion
in tendered senior debt. In December 2010, we issued an
additional $1.0 billion of
10-year
fixed rate subordinated debt to institutional investors.
During 2010, we redeemed $1.0 billion of retail medium-term
notes in four phases of approximately $250 million each.
These redemptions were funded through a new $1.0 billion
364-day
uncommitted revolving credit agreement with HSBC North America
which was also executed during the third quarter of 2010 and
allowed for borrowings with maturities of up to 15 years.
During 2010, we borrowed $1.0 billion under this credit
agreement with scheduled maturities between 2022 and 2025. We
replaced the loan to HSBC North America with the issuance of
1,000 shares of Series C preferred stock to HINO for
$1.0 billion.
In order to eliminate future foreign exchange risk, currency
swaps are used at the time of issuance to fix in
U.S. dollars substantially all foreign-denominated notes
issued.
98
HSBC Finance Corporation
Secured Financings We have secured conduit
credit facilities with commercial banks which provide for
secured financings of receivables on a revolving basis totaling
$650 million and $400 million at December 31,
2010 and 2009, respectively. At December 31, 2010 and 2009,
$455 million and $400 million, respectively, were
available under these facilities. These facilities will mature
in the second quarter of 2011 and are renewable at the
banks option.
During 2010 and 2009, we issued secured financings of
$195 million and $300 million, respectively,
collateralized by credit card receivables under the secured
conduit credit facilities discussed above. Additionally during
2009, we issued secured financings of $1.6 billion
collateralized by personal non-credit card receivables under
credit facilities available at that time but which expired
during 2009.
Secured financings issued under our current conduit credit
facilities as well as secured financings previously issued under
public trusts of $4.1 billion at December 31, 2010 are
secured by $6.3 billion of closed-end real estate secured
and credit card receivables. Secured financings of
$4.7 billion at December 31, 2009 are secured by
$6.8 billion of closed-end real estate secured receivables.
The following table shows by product type the receivables which
secure our secured financings:
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in billions)
|
|
|
Real estate secured
|
|
$
|
5.9
|
|
|
$
|
6.8
|
|
Credit card
|
|
|
.4
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6.3
|
|
|
$
|
6.8
|
|
|
|
|
|
|
|
|
|
|
As it relates to our discontinued Auto Finance business, at
December 31, 2009 we had secured financings of
$778 million collateralized by $1.2 billion of auto
finance receivables. These secured financings were assumed by SC
USA as part of the sale of the remainder of our auto finance
receivable portfolio in August 2010. See Note 3,
Discontinued Operations, in the accompanying
consolidated financial statements for further discussion of this
transaction.
Preferred Shares During the fourth quarter of
2010, our Board of Directors approved the issuance of up to
1,000 shares of Series C preferred stock. As a result,
in November 2010, we issued 1,000 shares of Series C
preferred stock to HINO for $1.0 billion. Dividends on the
Series C Preferred Stock are non-cumulative and payable
quarterly at a rate of 8.625 percent. The Series C
preferred stock may be redeemed at our option after
November 30, 2025. Dividend payments will begin during the
first quarter of 2011. This transaction also enhanced both our
common and preferred equity to total assets and tangible
shareholders equity to tangible assets ratios. It did not,
however, impact our tangible common equity to tangible assets
ratio.
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. The Series B
preferred stock may be redeemed at our option after
June 23, 2010. In 2010 and 2009, we paid dividends each
year totaling $37 million on the Series B Preferred
Stock.
Common Equity In 2010, HINO made a capital
contribution to us totaling $200 million in exchange for
one share of common stock. In 2009, HINO made four capital
contributions to us totaling $2.4 billion, each 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. Until we return to profitability, we
are dependent upon the continued capital support of HSBC to
continue our business operations and maintain selected capital
ratios. HSBC has provided significant capital in support of our
operations in the last few years and has indicated that they
remain fully committed and has the capacity to continue that
support.
Selected capital ratios In managing capital,
we develop a target for tangible common equity to tangible
assets. This ratio target is based on discussions with HSBC and
rating agencies, risks inherent in the portfolio and the
projected operating environment and related risks. Additionally,
we are required by our credit providing banks to maintain a
99
HSBC Finance Corporation
minimum tangible common equity to tangible assets ratio of
6.75 percent. Our targets may change from time to time to
accommodate changes in the operating environment or other
considerations such as those listed above.
Selected capital ratios are summarized in the following table:
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2010
|
|
2009
|
|
|
Tangible common equity to tangible
assets(1)
|
|
|
7.37
|
%
|
|
|
7.60
|
%
|
Common and preferred equity to total assets
|
|
|
10.09
|
|
|
|
8.86
|
|
|
|
(1) |
Tangible common equity to tangible assets represents a
non-U.S.
GAAP financial ratio that is 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.
|
Subject to regulatory approval, HSBC North America will be
required to implement Basel II no later than April 1,
2011 in accordance with current regulatory timelines. While we
will not report separately under the new rules, the composition
of our balance sheet will impact the overall HSBC North America
regulatory capital requirement. Based on a comprehensive
analysis of the HSBC North America balance sheet, we have taken
a series of actions to achieve targeted total regulatory capital
levels under these new regulations. Such actions include the
issuance of new subordinated debt in exchange for tendered
senior debt as discussed above.
2011 Funding Strategy Our current range of
estimates for funding needs and sources for 2011 are summarized
in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in billions)
|
|
|
|
|
Funding needs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset
growth/(attrition)(1)
|
|
$
|
(4
|
)
|
|
|
-
|
|
|
|
(2
|
)
|
Commercial paper maturities
|
|
|
3
|
|
|
|
-
|
|
|
|
3
|
|
Term debt maturities
|
|
|
13
|
|
|
|
-
|
|
|
|
14
|
|
Other
|
|
|
1
|
|
|
|
-
|
|
|
|
2
|
|
|
|
|
|
|
|
Total funding needs
|
|
$
|
13
|
|
|
|
-
|
|
|
|
17
|
|
|
|
|
|
|
|
Funding sources:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper issuances
|
|
$
|
5
|
|
|
|
-
|
|
|
|
6
|
|
Short term investment
|
|
|
4
|
|
|
|
-
|
|
|
|
4
|
|
Term debt issuance
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
Secured financings, including conduit facility renewals
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
HSBC and HSBC subsidiaries, including capital infusions
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
Other(2)
|
|
|
3
|
|
|
|
-
|
|
|
|
4
|
|
|
|
|
|
|
|
Total funding sources
|
|
$
|
13
|
|
|
|
-
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
(1)
|
Net of receivable charge-off.
|
|
(2)
|
Primarily reflects cash provided by operating activities and
sales of REO properties.
|
For 2011, portfolio attrition will again provide a key source of
liquidity. The combination of attrition, cash generated from
operations, potential asset sales should market pricing for
receivables improve and selected retail note issuances will
generate the liquidity necessary to meet our maturing debt
obligations. If necessary, these sources of liquidity may be
supplemented with institutionally placed debt.
During 2010, our commercial paper balances outstanding have been
lower than historical levels as a result of additional liquidity
generated as a result of the run-off of our liquidating
receivable portfolios, the sale of REO properties, the
receipt of tax related payments and collateral received under
derivative contracts which have resulted in an increase in our
short-term liquid investment portfolio. We anticipate commercial
paper outstanding will be higher in 2011 than during 2010 as it
serves as a cost effective source of funding in the current rate
100
HSBC Finance Corporation
environment. The majority of outstanding commercial paper in
2011 is expected to be directly placed, domestic commercial
paper. Euro commercial paper will continue to be marketed
predominately to HSBC clients.
Capital Expenditures We made capital
expenditures of $15 million and $51 million during
2010 and 2009, respectively. In addition to these amounts,
during 2010 and 2009, we capitalized $104 million and
$41 million, respectively, relating to the building of
several new servicing platforms as part of an initiative to
build common platforms across HSBC. We will begin rolling out
certain of these platforms in 2011. We currently expect to
capitalize approximately $65 million to $75 million of
additional costs on these servicing platforms during 2011.
Excluding the costs related to the new servicing platforms,
capital expenditures in 2011 are not expected to be significant.
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, 2010:
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in billions)
|
|
|
Private label and credit
cards(1)(2)
|
|
$
|
99
|
|
|
$
|
96
|
|
Other consumer lines of credit
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Open lines of credit
|
|
$
|
100
|
|
|
$
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
These totals include open lines of credit related to private
label credit cards and the GM and UP Portfolios for which we
sell all new receivable originations to HSBC Bank USA on a daily
basis.
|
|
(2)
|
Includes an estimate for acceptance of credit offers mailed to
potential customers prior to December 31, 2010 and 2009.
|
Contractual Cash Obligations The following
table summarizes our long-term contractual cash obligations at
December 31, 2010 by period due:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
|
|
(in millions)
|
|
|
Principal balance of debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to affiliates
|
|
$
|
600
|
|
|
$
|
1,250
|
|
|
$
|
1,325
|
|
|
$
|
1,805
|
|
|
$
|
2,005
|
|
|
$
|
1,231
|
|
|
$
|
8,216
|
|
Long-term debt (including secured financings)
|
|
|
12,780
|
|
|
|
11,028
|
|
|
|
6,912
|
|
|
|
2,890
|
|
|
|
5,157
|
|
|
|
15,002
|
|
|
|
53,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
13,380
|
|
|
|
12,278
|
|
|
|
8,237
|
|
|
|
4,695
|
|
|
|
7,162
|
|
|
|
16,233
|
|
|
|
61,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum rental payments
|
|
|
36
|
|
|
|
25
|
|
|
|
20
|
|
|
|
20
|
|
|
|
18
|
|
|
|
76
|
|
|
|
195
|
|
Minimum sublease income
|
|
|
(4
|
)
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
(4
|
)
|
|
|
(4
|
)
|
|
|
(3
|
)
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating leases
|
|
|
32
|
|
|
|
22
|
|
|
|
17
|
|
|
|
16
|
|
|
|
14
|
|
|
|
73
|
|
|
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations under merchant and affinity programs
|
|
|
45
|
|
|
|
45
|
|
|
|
36
|
|
|
|
17
|
|
|
|
4
|
|
|
|
-
|
|
|
|
147
|
|
Obligation to the HSBC North America Pension
Plan(1)
|
|
|
168
|
|
|
|
31
|
|
|
|
45
|
|
|
|
42
|
|
|
|
22
|
|
|
|
-
|
|
|
|
308
|
|
Non-qualified postretirement benefit
liability(2)
|
|
|
27
|
|
|
|
26
|
|
|
|
24
|
|
|
|
24
|
|
|
|
23
|
|
|
|
358
|
|
|
|
482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
13,652
|
|
|
$
|
12,402
|
|
|
$
|
8,359
|
|
|
$
|
4,794
|
|
|
$
|
7,225
|
|
|
$
|
16,664
|
|
|
$
|
63,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Our contractual cash obligation to
the HSBC North America Pension Plan included in the table above
is based on the Pension Funding Policy which was revised during
the fourth quarter of 2010 and establishes required annual
contributions by HSBC North America through 2015. The amounts
included in the table above, reflect an estimate of our portion
of those annual contributions based on plan participants at
|
101
HSBC Finance Corporation
|
|
|
|
|
December 31, 2010. See
Note 22, Pension and Other Postretirement
Benefits, in the accompanying consolidated financial
statements for further information about the HSBC North America
Pension Plan.
|
|
(2) |
|
Expected benefit payments
calculated include future service component.
|
These cash obligations could be funded primarily through cash
generated from operations, capital infusions from HSBC, the
issuance of new unsecured debt or through secured financings of
receivables.
Our purchase obligations for goods and services at
December 31, 2010 were not significant.
Off
Balance Sheet Arrangements and Secured Financings
Securitizations and Secured
Financings Collateralized funding transactions,
which include securitizations (collateralized funding
transactions structured to receive sale treatment) and secured
financings (collateralized funding transactions which do not
receive sale treatment) of consumer receivables, have
historically been a source of funding and liquidity for us.
Collateralized funding transactions have been used to limit our
reliance on the unsecured debt markets and have been a more
cost-effective source of alternative funds. As of the third
quarter of 2004, we began to structure all new collateralized
funding transactions as secured financings. In February 2008, we
repaid the remaining securitized credit card receivable trust
and, as a result, we no longer have any outstanding
securitizations.
In a secured financing, a designated pool of receivables is
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. 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.
Additionally, we also have secured conduit credit facilities
with commercial banks which provide for secured financings of
receivables on a revolving basis totaling $650 million and
$400 million at December 31, 2010 and 2009,
respectively. The amount available under these facilities will
vary based on the timing and volume of secured financing
transactions and as part of our ongoing liquidity management
plans.
Secured financings for continuing operations issued under either
our conduit credit facilities or under public trusts during the
years ended December 31, 2010, 2009 and 2008 are summarized
in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(in millions)
|
|
|
Credit card
|
|
$
|
195
|
|
|
$
|
300
|
|
|
$
|
1,350
|
|
Personal non-credit card
|
|
|
-
|
|
|
|
1,600
|
|
|
|
775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
195
|
|
|
$
|
1,900
|
|
|
$
|
2,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102
HSBC Finance Corporation
Secured financings for continuing operations issued under our
current conduit credit facilities as well as secured financings
previously issued under public trusts of $4.1 billion at
December 31, 2010 are secured by $6.3 billion of
closed-end real estate secured and credit card receivables.
Secured financings of $4.7 billion at December 31,
2009 are secured by $6.8 billion of closed-end real estate
secured receivables. The following table shows by product type
the receivables which secure our secured financings:
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in billions)
|
|
|
Real estate secured
|
|
$
|
5.9
|
|
|
$
|
6.8
|
|
Credit card
|
|
|
.4
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6.3
|
|
|
$
|
6.8
|
|
|
|
|
|
|
|
|
|
|
The securities issued in connection with collateralized funding
transactions may pay off sooner than originally scheduled if
certain events occur. For certain personal non-credit card
transactions, early payoff of securities may also 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 an increase in our
commercial paper program. We believe we would continue to have
adequate sources of funds if an early payoff event occurred.
We may use secured financings of consumer receivables as a
source of funding and liquidity should markets return. However,
if the market for securities backed by receivables does not
change, we will 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 investment, and the
legal, regulatory, accounting and tax environments governing
collateralized funding transactions.
Fair
Value
Net income volatility arising from changes in either interest
rate or credit components of the
mark-to-market
on debt designated at fair value and related derivatives affects
the comparability of reported results between periods.
Accordingly, gain on debt designated at fair value and related
derivatives for 2010 should not be considered indicative of the
results for any future period.
Control Over Valuation Process and
Procedures A control framework has been established
which is designed to ensure that fair values are either
determined or validated by a function independent of the
risk-taker. To that end, the ultimate responsibility for the
determination of fair values rests with the HSBC Finance
Valuation Committee. The HSBC Finance Valuation Committee
establishes policies and procedures to ensure appropriate
valuations. Fair values for debt securities and long-term debt
for which we have elected fair value option are determined by a
third-party valuation source (pricing service) by reference to
external quotations on the identical or similar instruments. An
independent price validation process is also utilized. For price
validation purposes, we obtain quotations from at least one
other independent pricing source for each financial instrument,
where possible. We consider the following factors in determining
fair values:
|
|
|
|
|
similarities between the asset or the liability under
consideration and the asset or liability for which quotation is
received;
|
|
|
whether the security is traded in an active or inactive market;
|
|
|
consistency among different pricing sources;
|
|
|
the valuation approach and the methodologies used by the
independent pricing sources in determining fair value;
|
103
HSBC Finance Corporation
|
|
|
|
|
the elapsed time between the date to which the market data
relates and the measurement date; and
|
|
|
the manner in which the fair value information is sourced.
|
Greater weight is given to quotations of instruments with recent
market transactions, pricing quotes from dealers who stand ready
to transact, quotations provided by market-makers who originally
underwrote such instruments, and market consensus pricing based
on inputs from a large number of participants. Any significant
discrepancies among the external quotations are reviewed by
management and adjustments to fair values are recorded where
appropriate.
Fair values for derivatives are determined by management using
valuation techniques, valuation models and inputs that are
developed, reviewed, validated and approved by the Quantitative
Risk and Valuation Group of an affiliate, HSBC Bank USA. These
valuation models utilize discounted cash flows or an option
pricing model adjusted for counterparty credit risk and market
liquidity. The models used apply appropriate control processes
and procedures to ensure that the derived inputs are used to
value only those instruments that share similar risk to the
relevant benchmark indexes and therefore demonstrate a similar
response to market factors. In addition, a validation process is
followed which includes participation in peer group consensus
pricing surveys, to ensure that valuation inputs incorporate
market participants risk expectations and risk premium.
We have various controls over our valuation process and
procedures for receivables held for sale. As these fair values
are generally determined using modeling techniques, the controls
may include independent development or validation of the logic
within the valuation models, the inputs to those models, and
adjustments required to outside valuation models. The inputs and
adjustments to valuation models are reviewed with management and
reconciled to inputs and assumptions used in other internal
valuation processes. In addition, from time to time, certain
portfolios are valued by independent third parties, primarily
for related party transactions, which are used to validate our
internal models.
Fair Value Hierarchy Accounting principles
related to fair value measurements establish a fair value
hierarchy structure that prioritizes the inputs to valuation
techniques used to determine the fair value of an asset or
liability (the Fair Value Framework). The Fair Value
Framework distinguishes between inputs that are based on
observed market data and unobservable inputs that reflect market
participants assumptions. It emphasizes the use of
valuation methodologies that maximize market inputs. For
financial instruments carried at fair value, the best evidence
of fair value is a quoted price in an actively traded market
(Level 1). Where the market for a financial instrument is
not active, valuation techniques are used. The majority of
valuation techniques use market inputs that are either
observable or indirectly derived from and corroborated by
observable market data for substantially the full term of the
financial instrument (Level 2). Because Level 1 and
Level 2 instruments are determined by observable inputs,
less judgment is applied in determining their fair values. In
the absence of observable market inputs, the financial
instrument is valued based on valuation techniques that feature
one or more significant unobservable inputs (Level 3). The
determination of the level of fair value hierarchy within which
the fair value measurement of an asset or a liability is
classified often requires judgment. We consider the following
factors in developing the fair value hierarchy:
|
|
|
|
|
whether the pricing quotations vary substantially among
independent pricing services;
|
|
|
whether the asset or liability is transacted in an active market
with a quoted market price that is readily available;
|
|
|
the size of transactions occurring in an active market;
|
|
|
the level of bid-ask spreads;
|
|
|
a lack of pricing transparency due to, among other things, the
complexity of the product structure and market liquidity;
|
|
|
whether only a few transactions are observed over a significant
period of time;
|
|
|
whether the inputs to the valuation techniques can be derived
from or corroborated with market data; and
|
|
|
whether significant adjustments are made to the observed pricing
information or model output to determine the fair value.
|
104
HSBC Finance Corporation
Level 1 inputs are unadjusted quoted prices in active
markets that the reporting entity has the ability to access for
the identical assets or liabilities. A financial instrument is
classified as a Level 1 measurement if it is listed on an
exchange or is an instrument actively traded in the OTC market
where transactions occur with sufficient frequency and volume.
We regard financial instruments that are listed on the primary
exchanges of a country, such as equity securities and derivative
contracts, to be actively traded. Non-exchange-traded
instruments classified as Level 1 assets include securities
issued by the U.S. Treasury.
Level 2 inputs are inputs that are observable either
directly or indirectly but do not qualify as Level 1
inputs. We generally classify derivative contracts, corporate
debt including asset-backed securities as well as our own debt
issuance for which we have elected fair value option which are
not traded in active markets, as Level 2 measurements.
Currently, substantially all such items qualify as Level 2
measurements. These valuations are typically obtained from a
third party valuation source which, in the case of derivatives,
includes valuations provided by an affiliate, HSBC Bank USA.
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. Level 3 inputs
incorporate market participants assumptions about risk and
the risk premium required by market participants in order to
bear that risk. We develop Level 3 inputs based on the best
information available in the circumstances. As of
December 31, 2010 and 2009, our Level 3 instruments
recorded at fair value on a recurring basis include
$24 million and $49 million, respectively, primarily
U.S. corporate debt securities and asset-backed securities.
As of December 31, 2010 and 2009, our Level 3 assets
recorded at fair value on a non-recurring basis included
receivables held for sale totaling $4 million and
$3 million, respectively.
Transfers between leveling categories are recognized at the end
of each reporting period.
Transfers Between Level 1 and Level 2
Measurements Transfers from Level 1 to
Level 2 during 2010 totaled $59 million and transfers
from Level 2 to Level 1 during 2010 totaled
$9 million as a result of reclassifications in certain
product groupings. There were no transfers between Level 1
and Level 2 during 2009.
Transfers Between Level 2 and Level 3
Measurements Assets recorded at fair value on a
recurring basis at December 31, 2010 and 2009 which have
been classified as using Level 3 measurements include
certain U.S. corporate debt securities and mortgage-backed
securities. Securities are classified as using Level 3
measurements when one or both of the following conditions are
met:
|
|
|
|
|
An asset-backed security is downgraded below a AAA credit
rating; or
|
|
|
An individual security fails the quarterly pricing comparison
test, which is described more fully in Note 26, Fair
Value Measurements, in the accompanying consolidated
financial statements, with a variance greater than
5 percent.
|
Transfers into or out of Level 3 classifications, net,
represents changes in the mix of individual securities that meet
one or both of the above conditions. During 2010, we transferred
$27 million of U.S. government sponsored enterprises
and corporate debt securities, from Level 3 to Level 2
as they no longer met one or both of the conditions described
above, which was partially offset by the transfer of
$12 million from Level 2 to Level 3 of
U.S. government sponsored enterprises, corporate debt
securities and asset-backed securities which met one or both of
the conditions described above.
During 2009, we transferred $213 million of individual
securities, primarily asset-backed securities and corporate debt
securities, from Level 3 to Level 2 as they no longer
met one or both of the conditions described above, which was
partially offset by the transfer of $138 million from
Level 2 to Level 3 of individual securities, primarily
corporate debt securities and asset-backed securities which met
one or both of the conditions described above.
We reported a total of $24 million and $49 million of
available-for-sale
securities, or approximately 1 percent and 2 percent
of our securities portfolio as Level 3 at December 31,
2010 and 2009, respectively. At December 31, 2010 and 2009,
total Level 3 assets as a percentage of total assets
measured at fair value on a recurring basis were 1 percent
and 2 percent, respectively.
105
HSBC Finance Corporation
See Note 26, Fair Value Measurements in the
accompanying consolidated financial statements for further
details including our valuation techniques as well as the
classification hierarchy associated with assets and liabilities
measured at fair value.
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 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 our lending and treasury activities;
|
|
|
Liquidity risk is the potential that an institution will
be unable to meet its obligations as they become due or fund its
customers because of inadequate cash flow or the inability to
liquidate assets or obtaining funding itself;
|
|
|
Market risk is the potential for losses in net interest
income and
mark-to-market
positions due to movements in money, foreign exchange, equity or
other markets and includes both interest rate risk and foreign
currency exchange risk;
|
|
|
Operational risk is the risk of loss resulting from
inadequate or failed internal processes, people or systems or
from external events (including legal risk but excluding
strategic and reputational risk);
|
|
|
Compliance risk is the risk of loss resulting from
failure to comply with relevant laws, regulations and regulatory
requirements governing the conduct of specific businesses;
|
|
|
Reputational risk involves the safeguarding of our
reputation and can arise from social, ethical or environmental
issues, or as a consequence of operational and other risk
events; and
|
|
|
Strategic risk is the risk to earnings or capital arising
from adverse business decisions or improper implementation of
those decisions.
|
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 align 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. Senior managers within an independent,
central risk organization under the leadership of the HSBC North
America Chief Risk Officer ensure risks are appropriately
identified, measured, reported and managed.
Senior managers within an independent central risk organization
under the leadership of HSBC North America Chief Risk Officer
ensure risks are appropriately identified, measured, reported
and managed. For all risk types, there are independent risk
specialists that set standards, develop new risk methodologies,
maintain central risk databases and conduct reviews and
analysis. For instance, the Chief Risk Officer and the Chief
Compliance Officer provide
day-to-day
oversight of these types of risk management activities within
their respective areas and work closely with internal audit and
other senior risk specialists at HSBC North America and HSBC.
Market risk is managed by the HSBC North America Head of Market
Risk. Operational risk is decentralized and is the
responsibility of each business and support unit under the
direction of the HSBC North America Head of Operational Risk.
Compliance risk is managed both on a decentralized basis, with
staff who are aligned with and advise each business segment, as
well as with an increasing level of centralized compliance
services. During 2010, the compliance function began reporting
to the Chief Executive Officer of HSBC North America as well as
functionally to the HSBC Head of Group Compliance. In January
2011 a permanent Head of HSBC Compliance, North America was
appointed who reports to the Chief Executive Officer of HSBC
North America and the HSBC Head of Group Compliance. Previously,
this formal independent compliance function was under the
direction of the HSBC North America Head of Legal and Compliance.
106
HSBC Finance Corporation
Historically, our approach toward risk management has emphasized
a culture of business line responsibility combined with central
requirements for diversification of customers and businesses.
In the course of our regular risk management activities, we use
simulation models to help quantify the risk we are taking. The
output from some of these models is included in this section of
our filing. By their nature, models are based on various
assumptions and relationships. We believe that the assumptions
used in these models are reasonable, but events may unfold
differently than what is assumed in the models. In actual
stressed market conditions, these assumptions and relationships
may no longer hold, causing actual experience to differ
significantly from the results predicted in the model.
Consequently, model results may be considered reasonable
estimates, with the understanding that actual results may vary
significantly from model projections.
Risk management oversight begins with the HSBC Finance
Corporation Board of Directors and its Audit and Risk Committee
and Compliance Committee. An HSBC Finance Corporation Risk
Management Committee, chaired by the Chief Executive Officer,
focuses on governance, emerging issues, and risk management
strategies.
In addition, the HSBC Finance Corporation Asset Liability
Committee (ALCO) meets regularly to review liquidity
and market risks and approve appropriate risk management
strategies within the limits established by the HSBC Group
Management Board and approved by our Audit and Risk Committee.
Further oversight is provided by a network of specialized
subcommittees which function under the HSBC North America
Risk Management Committee. These subcommittees are chaired by
the Chief Risk Officer and his staff and include the Operational
Risk and Internal Control Committee, the Credit Risk Analytics
Oversight Committee, a Capital Management Review Meeting, and
Stress Testing and Scenario Oversight Committee.
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 the HSBC North
America Chief Retail Credit Officer who reports to the HSBC
North America Chief Risk Officer. The HSBC North America Chief
Risk Officer reports to the HSBC North America Chief Executive
Officer and to the Group Managing Director and Chief Risk
Officer of HSBC. 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 not only for each product, but also take
into consideration various other factors including borrower
characteristics, return on equity, capital deployment and our
overall risk appetite. 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. Our customer account management policies and practices are
described under the caption Credit Quality
Customer Account Management Policies and Practices in
MD&A. Also see Note 2, Summary of Significant
Accounting Policies and New Accounting Pronouncements, in
the accompanying consolidated financial statements for further
discussion of our policies surrounding credit loss reserves. Our
policies and procedures are consistent with HSBC standards and
are regularly reviewed and updated both on an HSBC Finance
Corporation and HSBC level. The credit risk function continues
to refine early warning indicators and reporting,
including stress testing scenarios on the basis of current
experience. These risk management tools are embedded within our
business planning process.
A Credit Review and Risk Identification (CRRI)
function is also in place in HSBC North America to identify and
assess credit risk. The CRRI function consists of a Wholesale
and Retail Credit Review function as well as functions
responsible for the independent assessment of Wholesale and
Retail models. The Credit Review function provides an ongoing
independent assessment of credit risk, the quality of credit
risk management and in the case of wholesale credit risk, the
accuracy of individual credit risk ratings. The Credit Review
functions independently and holistically assess the business
units and risk management functions to ensure the business is
operating in a manner that is consistent with HSBC Group
strategy and appropriate local and HSBC Group credit policies,
procedures and applicable regulatory guidelines. The Credit Risk
Review functions examine asset quality, credit processes and
procedures, as well as the risk management infra-structures in
each commercial and retail lending
107
HSBC Finance Corporation
unit. Selective capital markets based functions are included
within this scope. CRRI also independently assesses the retail
and wholesale credit risk and reserving models to determine if
they are fit for purpose and consistent with regulatory
requirements and HSBC Group Policy.
Credit risk is also inherent in our investment securities
portfolio, particularly in relation to the corporate debt
securities we hold in our investment securities portfolio. Prior
to acquiring any investment securities, individual securities
are subjected to our investment policies and to the requirements
in our co-insurance agreements for securities purchased by our
Insurance Services business. Our investment policies specify
minimum rating levels as well as limitations on the total amount
of investment in a particular industry or entity. For investment
securities that have been acquired and have experienced an
unrealized loss since the date of acquisition, we have
established the Investment Impairment Assessment Committee to
assess whether there have been any events or changes in economic
circumstances to indicate that the investment security is
impaired on an
other-than-temporary
basis. The Investment Impairment Assessment Committee, which
meets on a quarterly basis or more frequently if warranted,
includes individuals from a variety of areas of our operations,
including investment portfolio management, treasury and
corporate finance. The committee determines which securities in
an unrealized loss position should be reviewed, performs an
analysis of these investment securities on an individual basis,
forms a conclusion as to whether an
other-than-temporary
impairment has occurred and, if so, recommends the impairment
amount to be recorded. The committee considers many factors in
their analysis including the severity and duration of the
impairment; our intent and ability to hold the security for a
period of time sufficient for recovery in value; recent events
specific to the issuer or industry; and for corporate debt
securities, external credit ratings and recent downgrades. For
securities not deemed
other-than-temporarily
impaired, the committee verifies that we neither intend to nor
expect to be required to sell the securities prior to recovery,
even if that equates to holding securities until their
individual maturities.
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. 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 derivative financial assets or derivative
related liabilities. We provided third party swap counterparties
with collateral totaling $33 million and $46 million
at December 31, 2010 and 2009, respectively. The fair value
of our agreements with affiliate counterparties required the
affiliate to provide cash collateral of $2.5 billion and
$3.4 billion at December 31, 2010 and 2009,
respectively. These amounts are offset against the fair value
amount recognized for derivative instruments that have been
offset under the same master netting arrangement.
See Note 17, Derivative Financial Instruments,
in the accompanying consolidated financial statements for
additional information related to interest rate risk management
and Note 26, Fair Value Measurements, for
information regarding the fair value of our financial
instruments.
Liquidity Risk The balance sheet and credit
dynamics described above have had a significant impact on our
liquidity risk management processes. Continued success in
reducing the size of our non-core receivable portfolio coupled
with stabilization in our core credit card portfolio will be the
primary driver of our liquidity management process going
forward. Lower cash flow as a result of declining receivable
balances as well as lower cash generated from attrition due to
elevated charge-offs, may not provide sufficient cash to fully
cover maturing debt over the next four to five years. The
required incremental funding will be generated through the
execution of alternative liquidity management strategies. In
addition to select debt issuances, should market pricing for
receivables improve in future years, our intent may change and a
portion of this required funding could be generated through
selected receivable portfolio sales. Domestic debt markets have
reopened to financial institutions during 2010 and we were able
to successfully generate $1.0 billion in funding in
December through the issuance of new
10-year
fixed rate subordinated debt. In the event a portion of our
future incremental funding need is met through issuances of
unsecured term debt, we anticipate these issuances would be
structured to better match the projected cash flows of
108
HSBC Finance Corporation
the remaining run-off portfolio and reduce reliance on direct
HSBC support. HSBC has indicated it remains fully committed and
has the capacity and willingness to continue to provide such
support.
Maintaining our credit ratings is an important part of
maintaining our overall liquidity profile. As indicated by the
major rating agencies, our credit ratings are directly dependent
upon the continued support of HSBC. A credit ratings downgrade
would increase borrowing costs, and depending on its severity,
substantially limit access to capital markets, require cash
payments or collateral posting and permit termination of certain
contracts material to us.
The following summarizes our credit ratings at December 31,
2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard &
|
|
|
Moodys
|
|
|
|
|
|
|
Poors
|
|
|
Investors
|
|
|
|
|
|
|
Corporation
|
|
|
Service
|
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|
Fitch, Inc.
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As of December 31, 2010:
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Senior debt
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A
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|
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A3
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AA-
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|
Senior subordinated debt
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BBB+
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Baa1
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A+
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Commercial paper
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A-1
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P-1
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F-1+
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Series B preferred stock
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BBB-
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Baa2
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A+
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As of December 31, 2009:
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Senior debt
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A
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A3
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AA-
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|
Commercial paper
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A-1
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P-1
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F-1+
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Series B preferred stock
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BBB
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Baa2
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A+
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|
As of December 31, 2010, there were no pending actions in
terms of changes to ratings for HSBC Finance Corporation from
any of the rating agencies listed above.
Other conditions that could negatively affect our liquidity
include unforeseen capital requirements, a strengthening of the
U.S. dollar, a slowdown in the rate of attrition of our
balance sheet and an inability to obtain expected funding from
HSBC, its subsidiaries and clients.
The measurement and management of liquidity risk is a primary
focus for us. Three standard analyses are utilized to accomplish
this goal. First, a rolling 90 day funding plan is updated
several times each week to quantify near-term needs and develop
the appropriate strategies to fund those needs. As part of this
process, debt maturity profiles (daily, monthly, annual) 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 calendar years are maintained.
These plans compare funding inflows from projected balance sheet
attrition and cash generated from operations with debt
maturities and determine both the timing and size of potential
funding requirements. Lastly, contingency funding plans are
maintained as part of the liquidity management process. Multiple
funding scenarios are regularly evaluated for a variety of time
horizons and assume limited or no access to secured and
unsecured sources of liquidity. These alternative scenarios are
designed to enable us to identify funding shortfalls well in
advance of their occurrence and execute alternate liquidity
management strategies to fund these shortfalls. The results of
these analyses are presented to both our Asset/Liability
Management Committee and HSBCs risk management function at
least monthly.
Consistent with the experience of most other financial sector
issuers, the quoted spreads on our primary and secondary market
debt which widened in the first half of 2010 began to tighten
during the second half of 2010. Additionally, demand for our
debt from investors increased and we selectively issued new debt
to meet this demand. Should our 2011 funding plans change and we
elect to issue institutionally-placed senior debt, we anticipate
a reduction in the total amount of debt that could be issued
when compared to historical issuances.
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
109
HSBC Finance Corporation
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.
The Regional Head of Market Risk oversees the management of
market risk.
Our exposure to interest rate risk is also changing as the
balance sheet declines and a growing percentage of our remaining
real estate receivables are modified
and/or
re-aged. Prior to the credit crisis, our real estate portfolio
was assumed to have a duration (average life) of approximately
3 years. While the loans had original maturities of
30 years, active customer refinancing resulted in the
shorter duration assumption used in the risk management process.
Debt was typically issued in intermediate and longer term
maturities to maximize the liquidity benefit. The interest rate
risk created by combining short duration assets with long
duration liabilities was reduced by entering into hedge
positions that reduced the duration of the liabilities portfolio.
The progression of the credit crisis over the last 3 years
is impacting this risk profile. Originally modeled as
3 years, the duration assumption for our fixed rate real
estate portfolio was increased to 5.8 years in 2010 to
reflect the impact of a higher percentage of loans staying on
our balance sheet longer due to the impact of modification
programs
and/or lack
of refinancing alternatives. At the same time, the duration of
our liability portfolio continues to decline due to the passage
of time and the absence of new term debt issuance. As our
receivable portfolio becomes smaller, our ability to more
accurately project exposure will increase as well as our ability
to manage that risk.
We maintain an overall risk management strategy that primarily
uses standard interest rate and currency derivative financial
instruments to mitigate our exposure to fluctuations caused by
changes in interest rates and currency exchange rates. We
managed our exposure to interest rate risk primarily through the
use of interest rate swaps, but have used forwards, futures,
options, and other risk management instruments. We do not use
leveraged derivative financial instruments.
We manage our exposure to foreign currency exchange risk
primarily through the use of currency swaps, options and
forwards. We currently offer specialty insurance products in
Canada. Accordingly, our financial statements are affected by
movements in exchange rates between the Canadian dollar and the
U.S. dollar. Prior to the sale of our foreign subsidiaries
in 2008, we did not enter into foreign exchange contracts to
hedge our investment in foreign subsidiaries. We do not
currently have any 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
projected balance sheet attrition, reductions in loan yields due
to loan modifications, 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. We use
derivative financial instruments, principally interest rate
swaps, to manage these exposures.
HSBC has certain limits and benchmarks that serve as additional
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, which reflects the change in value of
the balance sheet for a one basis point movement in all interest
rates without considering other correlation factors or
assumptions. At December 31, 2010 and 2009, our absolute
PVBP limit was $8.20 million and $8.95 million,
respectively, which included the risk associated with the
hedging instruments we employed. Thus, for a one basis point
change in interest rates, the policy at December 31, 2010
and 2009 dictated that the value of the balance sheet could not
increase or decrease by more than $8.20 million and
$8.95 million, respectively. The reduction in our PVBP
limit coincides with the previously discussed actions we have
taken to lower overall market risk through the execution of
additional non-qualifying hedge positions as well as attrition
in our receivable portfolios. Over time we anticipate further
reductions in our exposure to interest rate risk through the
execution of additional non-qualifying hedges.
110
HSBC Finance Corporation
The following table shows the components of our absolute PVBP
position at December 31, 2010 and 2009 broken down by
currency risk:
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At December 31,
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2010
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2009
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(in millions)
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USD
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$
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6.351
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$
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6.657
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JPY
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.132
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|
.099
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Absolute PVBP risk
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$
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6.483
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$
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6.756
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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.
We also 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 2010
and 2009 a declining balance sheet and the current interest rate
risk profile. These estimates include the impact on net interest
income of debt and related derivatives carried at fair value and
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. The following table summarizes such estimated impact:
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At December 31,
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2010
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2009
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(in millions)
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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
|
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$
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38
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$
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66
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|
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
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43
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70
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A principal consideration supporting both of the PVBP and margin
at risk analyses is the projected prepayment of loan balances
for a given economic scenario. Individual loan underwriting
standards in combination with housing valuations, loan
modification program 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
precise 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.
Operational Risk Operational risk is the risk
of loss resulting from inadequate or failed internal processes,
people and systems or from external events, including legal
risk, but excluding strategic and reputation risk. Operational
risk is inherent in all of our business activities and, as with
other types of risk, is managed through our overall framework
designed to balance strong corporate oversight with well defined
independent risk management.
We employ an independent, Executive Vice President level, Head
of Operational Risk and Control reporting directly to the HSBC
North America Chief Risk Officer and functionally to the Global
Head of Operational Risk Management for HSBC. The North America
Operational Risk and Internal Control Committee, chaired by the
HSBC North America Chief Risk Officer, is responsible for
oversight of operational risk management, including internal
controls to mitigate risk exposure and comprehensive reporting.
Results from this Committee are communicated to the Risk
Management Committee and subsequently to the Audit and Risk
Committee of the Board of Directors. Business unit line
management is responsible for managing and controlling all risks
and for
111
HSBC Finance Corporation
communicating and implementing all control standards. A central
Operational Risk and Internal Control function provides
functional oversight by coordinating the following activities:
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developing Operational Risk Management polices and procedures;
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developing and managing operational risk identification, scoring
and assessment tools and databases;
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providing firm-wide operational risk and control reporting and
facilitating resulting action plan development;
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assessing emerging risk areas and monitoring operational risk
internal controls to reduce loss exposure;
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perform root-cause analysis on large operational risk losses;
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providing general
and/or
specific operational risk training and awareness programs for
employees throughout the firm;
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maintaining a network of business line operational risk
coordinators;
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independently reviewing and reporting the assessments of
operational risks; and
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modeling operational risk losses and scenarios for capital
management purposes.
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Business unit line management is responsible for identifying,
managing and controlling all risks and for communicating and
implementing all control standards.
Management practices include standard monthly reporting to
business line managers, senior management and the Operational
Risk and Internal Control Committee of high risks, control
deficiencies, risk mitigation action plans, losses and key risk
indicators. We also monitor external operational risk events
which take place to ensure that the firm remains in line with
best practice and takes into account lessons learned from
publicized operational failures within the financial services
industry. Operational Risk management is an integral part of the
product development process and the employee performance
measurement process. An online certification process, attesting
to the completeness and accuracy of operational risk, is
completed by senior business management on an annual basis.
Internal audits provide an important independent check on
controls and test institutional compliance with the operational
risk management framework. Internal audit utilizes a risk-based
approach to determine its audit coverage in order to provide an
independent assessment of the design and effectiveness of key
controls over our operations, regulatory compliance and
reporting. This includes reviews of the operational risk
framework, the effectiveness and accuracy of the risk assessment
process and the loss data collection and reporting activities.
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 our
organization.
Prior to the second quarter of 2010, compliance risk reported to
the HSBC North America Head of Legal and Compliance. Beginning
in the second quarter of 2010, the Compliance and Legal
functions were separated and the Compliance function reported to
the CEO of HSBC North America as well as functionally to the
HSBC Head of Group Compliance. In January 2011 a permanent Head
of HSBC Compliance, North America was appointed who reports to
the Chief Executive Officer of HSBC North America and the HSBC
Head of Group Compliance. Additional steps were taken in 2010 to
further strengthen our compliance risk management approach,
including increased investment in people, systems and advisory
services; strategic actions to streamline our business; and the
strengthening of the Anti-Money Laundering (AML)
Office with responsibility for the guidance and oversight of AML
risk management activities within HSBC North America and its
subsidiaries, including HSBC Finance Corporation. Efforts to
strengthen the Compliance function will continue.
112
HSBC Finance Corporation
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:
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|
AML regulations;
|
|
|
|
fair lending and consumer protection laws;
|
|
|
|
dealings with affiliates;
|
|
|
|
permissible activities; and
|
|
|
|
conflicts of interest.
|
Oversight of the Compliance Risk Management Program is provided
by the Compliance Committee of the Board of Directors through
the Risk Management Committee, which is advised of significant
potential issues, strategic policy-making decisions and
reputational risk matters. Internal audit, through continuous
monitoring and periodic audits, tests the effectiveness of the
overall Compliance Risk Management Program.
The independent Corporate Compliance function is headed by a
Chief Compliance Officer who reports to the Chief Executive
Officer and the Regional Compliance Officer of HSBC North
America. 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
|
|
|
|
reporting compliance issues to HSBC Finance Corporation senior
management, Compliance Committee and Board of Directors, as well
as to HSBC Compliance.
|
The overall Corporate Compliance program includes
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 business and 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 information security/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 and products. 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.
113
HSBC Finance Corporation
Strategic Risk Strategic risk is the risk to
earnings or capital arising from adverse business decisions or
improper implementation of those decisions. This risk is a
function of the compatibility of an organizations
strategic goals, the business strategies developed to achieve
those goals, the resources deployed against those goals and the
quality of implementation. The resources needed to carry out
business strategies are both tangible and intangible. They
include communication channels, operating systems, delivery
networks and managerial capacities and capabilities.
Strategic risk focuses on more than an analysis of the written
strategic plan. It focuses on how plans, systems and
implementation affect our value. It also incorporates how we
analyze external factors that impact our strategic direction.
We have established a strong internal control structure to
minimize the impact of strategic risk to our earnings and
capital. All changes in strategy as well as the process in which
new strategies are implemented are subject to detailed reviews
and approvals at business line, functional, regional, board and
HSBC Group levels. This process is monitored by the Strategic
Initiatives Group to ensure compliance with our policies and
standards.
Business Continuity Planning We are committed
to the protection of employees, customers and shareholders by a
quick response to all threats to the organization, whether they
are of a physical or financial nature. We are governed by the
HSBC North America Crisis Management Framework, which provides
an enterprise-wide response and communication approach for
managing major business continuity events or incidents. It is
designed to be flexible and is scaled to the scope and magnitude
of the event or incident.
The Crisis Management Framework works in tandem with the HSBC
North America Corporate Contingency Planning Policy, business
continuity plans and key business continuity committees to
manage events. The North American Crisis Management Committee, a
24/7 standing committee, is activated to manage the Crisis
Management process in concert with our senior management. This
committee provides critical strategic management of business
continuity crisis issues, risk management, communication,
coordination and recovery management. In particular, the HSBC
North America Crisis Management Committee has implemented an
enterprise-wide plan, response and communication approach for
pandemic preparedness. Tactical management of business
continuity issues is handled by the Corporate and Local Incident
Response Teams in place at each major site. We have also
designated an Institutional Manager for Business Continuity who
plays a key role on the Crisis Management Committee. All major
business and support functions have a senior representative
assigned to our Business Continuity Planning Committee, which is
chaired by the Institutional Manager.
We test business continuity and disaster recovery resiliency and
capability through routine contingency tests and actual events.
Business continuity and disaster recovery programs have been
strengthened in numerous areas as a result of these tests or
actual events. There is a continuing effort to enhance the
program well beyond the traditional business resumption and
disaster recovery model.
114
HSBC Finance Corporation
New
Accounting Pronouncements to be Adopted in Future
Periods
Accounting for Costs Associated with Acquiring or Renewing
Insurance Contracts In October 2010, the FASB
issued guidance which amends the accounting rules that define
which costs associated with acquiring or renewing insurance
contracts qualify as deferrable acquisition costs by insurance
entities. The guidance is effective for fiscal years, and
interim periods within those fiscal years, beginning after
December 15, 2011. Early adoption is permitted, but must be
applied as of the beginning of an entitys annual reporting
period. The adoption of this guidance is not expected to have a
material impact on our financial position or results of
operations.
Clarifications to Accounting for Troubled Debt
Restructurings by Creditors In October 2010, the
FASB issued a Proposed Accounting Standards Update which
provides additional guidance to assist creditors in determining
whether a restructuring of a receivable meets the criteria to be
considered a troubled debt restructuring, for purposes of the
identification and disclosure of troubled debt restructurings,
as well as for recording impairment. For purposes of identifying
and disclosing troubled debt restructurings, the proposed
clarifications would be effective for interim and annual
reporting periods ending after June 15, 2011, and would be
applied retrospectively to restructurings occurring on or after
the beginning of the earliest period presented. For purposes of
measuring impairment of a receivable restructured in a troubled
debt restructuring, the proposed clarifications would be
effective on a prospective basis for interim and annual periods
ending after June 15, 2011, with retrospective application
permitted. If an entity applies the proposed clarifications
prospectively for impairment measurement, it must disclose the
total amount of receivables and the allowance for credit losses
as of the end of the period of adoption related to those
receivables that are newly considered to be impaired as a result
of these clarifications. We are currently evaluating the
potential impact of adopting this Proposed Accounting Standards
Update which could result in changes in our future reserve
requirements or changes to our existing customer account
management policies and practices in the event this proposal
were to be approved in its current form.
115
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
Union
Plus®
credit card program).
Auto Finance Receivables 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 change 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.
Collateralized Funding Transaction A
transaction in which we use a pool of our consumer receivables
as a source of funding and liquidity through either a Secured
Financing or Securitization. Collateralized funding transactions
allow us to limit our reliance on unsecured debt markets and can
be a more cost-effective source of funding.
Contractual Delinquency A method of
determining aging of past due accounts based on the status of
payments under the loan. An account is generally considered to
be contractually delinquent when payments have not been made in
accordance with the loan terms. 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.
Delinquency Ratio Two-months-and-over
contractual delinquency expressed as a percentage of receivables
and receivables held for sale at a given date.
Effective Hedge or Qualifying Hedge A hedging
relationship which qualifies for fair value or cash flow hedge
accounting treatment.
Efficiency Ratio Total operating expenses
less policyholders benefits expressed as a percentage of
the sum of 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.
Federal Reserve The Federal Reserve Board,
the principal regulator of HSBC North America.
Fee Income Income associated with interchange
on credit cards and late and other fees from the origination,
acquisition or servicing of loans.
Forbearance The act of refraining from taking
legal actions against a borrower despite the fact that the
borrower is in arrears and is usually only granted when a
borrower makes satisfactory arrangements to pay the amounts
owed. Depending on state law, the borrower may be required to
execute an agreement.
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.
GM Portfolio Our General Motors MasterCard
receivable portfolio that was sold to HSBC Bank USA in January
2009 with new General Motors MasterCard receivable originations
sold to HSBC Bank USA on a daily basis.
Goodwill The excess of purchase price over
the fair value of identifiable net assets acquired, reduced by
liabilities assumed in a business combination.
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.
HMUS HSBC Markets (USA) Inc.; an indirect
wholly-owned subsidiary of HSBC North America and a holding
company for investment banking and markets subsidiaries in the
U.S.
HSBC or HSBC Group HSBC Holdings plc.;
HSBC North Americas U.K. parent company.
116
HSBC Finance Corporation
HSBC Affiliate Any direct or indirect
subsidiary of HSBC outside of our consolidated group of entities.
HSBC Bank USA HSBC Bank USA, National
Association and its subsidiaries; the principal banking
subsidiary of HSBC North America.
HSBC North America HSBC North America
Holdings Inc., a wholly-owned subsidiary of HSBC. HSBCs
top-tier bank holding company in North America and the immediate
parent of HINO.
HOHU HSBC Overseas Holdings (UK) Limited, a
U.K. based subsidiary of HSBC.
HTCD HSBC Trust Company (Delaware); a
wholly-owned banking subsidiary of HSBC USA Inc.
HTSU HSBC Technology & Services
(USA) Inc., an indirect wholly-owned subsidiary of HSBC North
America which provides information technology and centralized
operational services, such as human resources, tax, finance,
compliance, legal, corporate affairs and other services shared
among HSBC Affiliates, primarily in North America.
IFRS Management Basis A
non-U.S. GAAP
measure of reporting results in accordance with IFRSs and
assumes that the GM and UP Portfolios and the private label and
real estate secured receivables transferred to HSBC Bank USA
have not been sold and remain on our balance sheet and the
revenues and expenses related to these receivables remain in our
income statement. 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.
Intangible Assets Assets (excluding financial
assets) which lack physical substance. Our acquired intangibles
include purchased credit card relationships and related
programs, other loan related relationships, technology and
customer lists.
Interchange Fees Fees received for processing
a credit card transaction through the MasterCard, Visa, American
Express or Discover network.
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.
Loan-to-Value
(LTV) Ratio The loan balance at time
of origination expressed as a percentage of the appraised
property value at the time of origination.
MasterCard, Visa, American Express and Discover
Receivables Receivables generated through
customer usage of MasterCard, Visa, American Express and
Discover networks.
Net Charge-off Ratio Net charge-offs of
consumer receivables expressed as a percentage of average
consumer receivables outstanding for a given period.
Net Interest Income Interest income from
receivables and noninsurance investment securities reduced by
interest expense.
Net Interest Margin Net interest income
expressed as a percentage of average interest-earning assets.
Nonaccrual Receivables Receivables which are
90 or more days contractually delinquent. Nonaccrual receivables
do not include receivables which have made qualifying payments
and have been re-aged and the contractual delinquency status
reset to current as such activity, in our judgment, evidences
continued payment probability. If a re-aged loan subsequently
experiences payment default and becomes 90 or more days
contractually delinquent, it will be reported as nonaccrual.
Nonaccrual receivables also do not include credit card
receivables which, consistent with industry practice, continue
to accrue until charge-off.
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.
117
HSBC Finance Corporation
Non-qualifying hedge A hedging relationship
that does not qualify for hedge accounting treatment but which
may be an effective economic hedge.
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 included as a component of
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.
Refreshed
Loan-to-Value
For first liens, the current loan balance expressed as a
percentage of the current property value. For second liens, the
current loan balance plus the senior lien amount at origination
expressed as a percentage of the current property value. Current
property values are derived from the propertys appraised
value at the time of loan origination updated by the change in
the Office of Federal Housing Enterprise Oversights house
pricing index (HPI) at either a Core Based
Statistical Area or state level. The estimated current value of
the home could vary from actual fair values due to changes in
condition of the underlying property, variations in housing
price changes within metropolitan statistical areas and other
factors.
Return on Average Assets Net income as a
percentage of average assets.
Return on Average Common Shareholders
Equity Net income less dividends on preferred
stock as a percentage of average common shareholders
equity.
SEC The Securities and Exchange Commission.
Secured Financing A type of Collateralized
Funding Transaction in which the interests in a dedicated pool
of consumer receivables, typically real estate secured, credit
card, auto finance or personal non-credit card receivables, are
sold to investors. Generally, the pool of consumer receivables
are sold to a special purpose entity which then issues
securities that are sold to investors. Secured Financings do not
receive sale treatment for accounting purposes and, as a result,
the receivables and related debt remain on our balance sheet.
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 Assets Total assets less intangible
assets, goodwill and derivative financial assets.
Tangible Common Equity Common
shareholders equity excluding unrealized gains and losses
on cash flow hedging instruments, postretirement benefit plan
adjustments and unrealized gains and losses on investments and
interest-only strip receivables, as well as subsequent changes
in fair value recognized in earnings associated with debt and
related derivatives for which we elected fair value option
accounting, less intangible assets and goodwill.
Tangible Shareholders Equity Tangible
common equity plus preferred stock and company obligated
mandatorily redeemable preferred securities of subsidiary trusts
(including amounts due to affiliates).
Taxpayer Financial Services (TFS)
Revenue Our taxpayer financial services business
provided consumer tax refund lending in the United States. This
income primarily consisted of fees received from the consumer
for a short term loan which will be repaid from their Federal
income tax return refund. During the fourth quarter of 2010, we
discontinued the operations of our TFS business and it is now
reported in discontinued operations.
UP Portfolio A Union Plus MasterCard/Visa
receivable portfolio that was sold to HSBC Bank USA in January
2009 with new Union Plus MasterCard/Visa receivable originations
sold to HSBC Bank USA on a daily basis.
118
HSBC Finance Corporation
CREDIT
QUALITY STATISTICS CONTINUING
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Two-Month-and-Over Contractual Delinquency Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
secured(1)
|
|
|
16.56
|
%
|
|
|
15.78
|
%(5)
|
|
|
14.17
|
%
|
|
|
7.49
|
%
|
|
|
3.65
|
%
|
Credit card
|
|
|
6.18
|
|
|
|
10.41
|
|
|
|
7.12
|
|
|
|
5.81
|
|
|
|
4.60
|
|
Private
label(4)
|
|
|
-
|
|
|
|
-
|
|
|
|
24.71
|
|
|
|
20.05
|
|
|
|
13.19
|
|
Personal non-credit card
|
|
|
10.94
|
|
|
|
13.65
|
(5)
|
|
|
19.06
|
|
|
|
14.48
|
|
|
|
9.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer continuing operations
|
|
|
14.41
|
|
|
|
14.74
|
(5)
|
|
|
13.19
|
|
|
|
8.08
|
|
|
|
4.67
|
|
Discontinued operations
|
|
|
-
|
|
|
|
5.62
|
|
|
|
5.16
|
|
|
|
4.60
|
|
|
|
4.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
14.41
|
|
|
|
14.27
|
%
|
|
|
12.52
|
%
|
|
|
7.56
|
%
|
|
|
4.68
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of Net Charge-offs to Average Receivables for the
Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
secured(2)
|
|
|
9.50
|
|
|
|
9.85
|
%(5)
|
|
|
5.47
|
%
|
|
|
2.37
|
%
|
|
|
1.01
|
%
|
Credit card
|
|
|
16.05
|
|
|
|
18.20
|
|
|
|
12.00
|
|
|
|
7.32
|
|
|
|
5.59
|
|
Private
label(4)
|
|
|
-
|
|
|
|
-
|
|
|
|
29.61
|
|
|
|
16.56
|
|
|
|
8.67
|
|
Personal non-credit card
|
|
|
22.65
|
|
|
|
27.96
|
(5)
|
|
|
13.46
|
|
|
|
8.28
|
|
|
|
7.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer continuing operations
|
|
|
11.98
|
|
|
|
13.59
|
(5)
|
|
|
7.90
|
|
|
|
4.23
|
|
|
|
2.72
|
|
Discontinued operations
|
|
|
5.34
|
|
|
|
9.90
|
|
|
|
5.41
|
|
|
|
4.17
|
|
|
|
4.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
11.79
|
|
|
|
13.38
|
%
|
|
|
7.58
|
%
|
|
|
4.22
|
%
|
|
|
2.97
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate charge-offs and REO expense as a percent of
average real estate secured receivables
|
|
|
10.01
|
|
|
|
10.14
|
%(5)
|
|
|
5.91
|
%
|
|
|
2.74
|
%
|
|
|
1.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual Receivables (Including Nonaccrual Receivables Held
For Sale)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
secured(3)
|
|
$
|
6,360
|
|
|
$
|
6,995
|
(5)
|
|
$
|
7,705
|
|
|
$
|
4,752
|
|
|
$
|
2,604
|
|
Private
label(4)
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
|
|
25
|
|
|
|
31
|
|
Personal non-credit card
|
|
|
530
|
|
|
|
998
|
(5)
|
|
|
2,420
|
|
|
|
2,092
|
|
|
|
1,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer continuing operations
|
|
|
6,890
|
|
|
|
7,993
|
(5)
|
|
|
10,137
|
|
|
|
6,869
|
|
|
|
4,079
|
|
Commercial and other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Discontinued operations
|
|
|
-
|
|
|
|
252
|
|
|
|
537
|
|
|
|
919
|
|
|
|
871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,890
|
|
|
$
|
8,245
|
|
|
$
|
10,674
|
|
|
$
|
7,788
|
|
|
$
|
4,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing Consumer Receivables 90 or More Days Delinquent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Card continuing operations
|
|
$
|
447
|
|
|
$
|
890
|
|
|
$
|
1,333
|
|
|
$
|
1,240
|
|
|
$
|
894
|
|
Discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
37
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
447
|
|
|
$
|
890
|
|
|
$
|
1,333
|
|
|
$
|
1,277
|
|
|
$
|
929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
962
|
|
|
$
|
592
|
|
|
$
|
885
|
|
|
$
|
1,008
|
|
|
$
|
661
|
|
Discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
962
|
|
|
$
|
592
|
|
|
$
|
885
|
|
|
$
|
1,023
|
|
|
$
|
670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Renegotiated Commercial Loans
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Real estate secured
two-months-and-over contractual delinquency ratios for our
Mortgage Services and Consumer Lending businesses are below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Mortgage Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
19.12
|
%
|
|
|
17.62
|
%
|
|
|
18.07
|
%
|
|
|
11.70
|
%
|
|
|
4.50
|
%
|
Second lien
|
|
|
11.23
|
|
|
|
12.87
|
|
|
|
18.37
|
|
|
|
15.61
|
|
|
|
5.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mortgage Services
|
|
|
18.05
|
%
|
|
|
16.91
|
%
|
|
|
18.11
|
%
|
|
|
12.47
|
%
|
|
|
4.75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Lending:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
16.18
|
|
|
|
15.37
|
|
|
|
11.64
|
|
|
|
3.72
|
|
|
|
2.07
|
|
Second lien
|
|
|
12.81
|
|
|
|
14.03
|
|
|
|
14.45
|
|
|
|
6.93
|
|
|
|
3.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consumer Lending
|
|
|
15.85
|
%
|
|
|
15.21
|
%
|
|
|
12.00
|
%
|
|
|
4.15
|
%
|
|
|
2.21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119
HSBC Finance Corporation
CREDIT
QUALITY STATISTICS (CONTINUED)
|
|
|
(2) |
|
Real estate secured net charge-off
ratios for our Mortgage Services and Consumer Lending businesses
are below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Mortgage Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
10.13
|
%
|
|
|
11.35
|
%
|
|
|
5.82
|
%
|
|
|
1.60
|
%
|
|
|
.77
|
%
|
Second lien
|
|
|
24.52
|
|
|
|
28.72
|
|
|
|
30.52
|
|
|
|
12.15
|
|
|
|
2.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mortgage Services
|
|
|
12.16
|
%
|
|
|
14.11
|
%
|
|
|
10.38
|
%
|
|
|
3.77
|
%
|
|
|
1.12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Lending:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
6.81
|
|
|
|
5.60
|
|
|
|
1.31
|
|
|
|
.79
|
|
|
|
.85
|
|
Second lien
|
|
|
19.62
|
|
|
|
21.93
|
|
|
|
10.41
|
|
|
|
3.79
|
|
|
|
1.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consumer Lending
|
|
|
8.19
|
%
|
|
|
7.62
|
%
|
|
|
2.52
|
%
|
|
|
1.20
|
%
|
|
|
.89
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) |
|
Real estate nonaccrual receivables
are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Real estate secured:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed-end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
5,910
|
|
|
$
|
6,304
|
|
|
$
|
6,452
|
|
|
$
|
3,583
|
|
|
$
|
2,023
|
|
Second lien
|
|
|
320
|
|
|
|
510
|
|
|
|
931
|
|
|
|
801
|
|
|
|
535
|
|
Revolving:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
6
|
|
|
|
2
|
|
|
|
8
|
|
|
|
19
|
|
|
|
22
|
|
Second lien
|
|
|
124
|
|
|
|
179
|
|
|
|
314
|
|
|
|
349
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
$
|
6,360
|
|
|
$
|
6,995
|
|
|
$
|
7,705
|
|
|
$
|
4,752
|
|
|
$
|
2,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(See Credit Quality in this MD&A for components
of real estate nonaccrual receivables assuming the December 2009
Charge-off Policy Changes had not occurred.)
|
|
|
(4) |
|
Private label receivables consist
primarily of the sales retail contracts in our Consumer Lending
business which are liquidating. Due to the small size of this
portfolio, slight changes in dollars of delinquency, the
outstanding principal balance of the portfolio, net charge-off
dollars or the average principal balance of the portfolio can
result in significant changes in these ratios. In 2009, we began
reporting this liquidating portfolio prospectively within our
personal non-credit card portfolio.
|
|
(5) |
|
In December 2009 we changed our
charge-off policy for real estate secured and personal
non-credit card receivables. See Note 8, Changes in
Charge-off Policies During 2009, in the accompanying
consolidated financial statements for detailed discussion of
these changes. This resulted in incremental charge-offs in
December 2009 of $2.4 billion and $1.1 billion for
real estate secured and personal non-credit card receivables,
respectively. The following table presents credit quality
statistics as reported as well as assuming the charge-off policy
changes had not occurred:
|
|
|
|
|
|
|
|
|
|
|
|
As Reported
|
|
Excluding Policy Change
|
|
|
|
(dollars are in millions)
|
|
Contractual Delinquency Ratios:
|
|
|
|
|
|
|
|
|
Real estate secured
|
|
|
15.78
|
%
|
|
|
19.05
|
%
|
Personal non-credit card
|
|
|
13.65
|
|
|
|
21.66
|
|
Total consumer continuing operations
|
|
|
14.74
|
|
|
|
18.22
|
|
Net Charge-off Ratios:
|
|
|
|
|
|
|
|
|
Real estate secured
|
|
|
9.85
|
%
|
|
|
6.26
|
%
|
Personal non-credit card
|
|
|
27.96
|
|
|
|
20.11
|
|
Total consumer continuing operations
|
|
|
13.59
|
|
|
|
9.84
|
|
Nonaccrual Receivables (Including Nonaccrual Receivables Held
For Sale):
|
|
|
|
|
|
|
|
|
Real estate secured
|
|
$
|
6,995
|
|
|
$
|
9,397
|
|
Personal non-credit card
|
|
|
998
|
|
|
|
2,069
|
|
Total consumer continuing operations
|
|
|
7,993
|
|
|
|
11,466
|
|
Real estate charge-offs and REO expenses as a percentage of
average real estate secured receivables
|
|
|
10.14
|
%
|
|
|
6.56
|
%
|
120
HSBC Finance Corporation
ANALYSIS
OF CREDIT LOSS RESERVES ACTIVITY CONTINUING OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Total Credit Loss Reserves at January 1
|
|
$
|
9,091
|
|
|
$
|
12,030
|
|
|
$
|
10,127
|
|
|
$
|
5,980
|
|
|
$
|
3,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Credit Losses
|
|
|
6,180
|
|
|
|
9,650
|
|
|
|
12,410
|
|
|
|
9,930
|
|
|
|
5,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs(4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
secured(1)
|
|
|
(5,267
|
)
|
|
|
(6,663
|
)
|
|
|
(4,318
|
)
|
|
|
(2,199
|
)
|
|
|
(931
|
)
|
Credit card
|
|
|
(1,905
|
)
|
|
|
(2,385
|
)
|
|
|
(3,147
|
)
|
|
|
(2,463
|
)
|
|
|
(1,665
|
)
|
Private label
|
|
|
-
|
|
|
|
-
|
|
|
|
(35
|
)
|
|
|
(45
|
)
|
|
|
(43
|
)
|
Personal non-credit card
|
|
|
(2,328
|
)
|
|
|
(4,039
|
)
|
|
|
(2,474
|
)
|
|
|
(1,729
|
)
|
|
|
(1,455
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
(9,500
|
)
|
|
|
(13,087
|
)
|
|
|
(9,974
|
)
|
|
|
(6,436
|
)
|
|
|
(4,094
|
)
|
Commercial and other
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables charged off
|
|
|
(9,500
|
)
|
|
|
(13,087
|
)
|
|
|
(9,975
|
)
|
|
|
(6,436
|
)
|
|
|
(4,096
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
secured(2)
|
|
|
112
|
|
|
|
65
|
|
|
|
49
|
|
|
|
72
|
|
|
|
33
|
|
Credit card
|
|
|
233
|
|
|
|
206
|
|
|
|
369
|
|
|
|
383
|
|
|
|
274
|
|
Private label
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
9
|
|
|
|
13
|
|
Personal non-credit card
|
|
|
375
|
|
|
|
227
|
|
|
|
222
|
|
|
|
211
|
|
|
|
216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
720
|
|
|
|
498
|
|
|
|
646
|
|
|
|
675
|
|
|
|
536
|
|
Commercial and other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries on receivables
|
|
|
720
|
|
|
|
498
|
|
|
|
646
|
|
|
|
675
|
|
|
|
536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves on Receivables Transferred to Held For Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate secured
|
|
|
-
|
|
|
|
-
|
|
|
|
(224
|
)
|
|
|
-
|
|
|
|
-
|
|
Credit card
|
|
|
-
|
|
|
|
-
|
|
|
|
(944
|
)
|
|
|
-
|
|
|
|
-
|
|
Personal non-credit card
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,168
|
)
|
|
|
-
|
|
|
|
-
|
|
Commercial and other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reserves on receivables transferred to held for sale
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,168
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
-
|
|
|
|
-
|
|
|
|
(10
|
)
|
|
|
(22
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Loss
Reserves(4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate secured
|
|
|
4,187
|
|
|
|
5,427
|
|
|
|
7,113
|
|
|
|
4,954
|
|
|
|
2,365
|
|
Credit card
|
|
|
978
|
|
|
|
1,816
|
|
|
|
2,246
|
|
|
|
2,635
|
|
|
|
1,864
|
|
Private label
|
|
|
-
|
|
|
|
-
|
|
|
|
16
|
|
|
|
26
|
|
|
|
38
|
|
Personal non-credit card
|
|
|
1,326
|
|
|
|
1,848
|
|
|
|
2,655
|
|
|
|
2,511
|
|
|
|
1,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
6,491
|
|
|
|
9,091
|
|
|
|
12,030
|
|
|
|
10,126
|
|
|
|
5,979
|
|
Commercial and other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Credit Loss Reserves at December 31
|
|
$
|
6,491
|
|
|
$
|
9,091
|
|
|
$
|
12,030
|
|
|
$
|
10,127
|
|
|
$
|
5,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of Credit Loss Reserves to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
charge-offs(3)(4)
|
|
|
73.9
|
%
|
|
|
72.2
|
%
|
|
|
136.4
|
%
|
|
|
175.8
|
%
|
|
|
168.0
|
|
Receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer(3)(4)
|
|
|
9.78
|
|
|
|
11.13
|
|
|
|
11.97
|
|
|
|
7.63
|
|
|
|
4.31
|
|
Commercial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
.69
|
|
|
|
.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(3)
|
|
|
9.78
|
%
|
|
|
11.13
|
%
|
|
|
11.96
|
%
|
|
|
7.63
|
%
|
|
|
4.31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer(3)(4)
|
|
|
88.5
|
%
|
|
|
102.4
|
%
|
|
|
110.0
|
%
|
|
|
125.3
|
%
|
|
|
121.6
|
%
|
Commercial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(3)
|
|
|
88.5
|
%
|
|
|
102.4
|
%
|
|
|
110.0
|
%
|
|
|
125.3
|
%
|
|
|
121.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Real estate secured charge-offs can
be further analyzed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Closed end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
(3,804
|
)
|
|
$
|
(4,373
|
)
|
|
$
|
(1,942
|
)
|
|
$
|
(879
|
)
|
|
$
|
(582
|
)
|
Second lien
|
|
|
(1,146
|
)
|
|
|
(1,787
|
)
|
|
|
(1,822
|
)
|
|
|
(928
|
)
|
|
|
(256
|
)
|
Revolving:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
(7
|
)
|
|
|
(8
|
)
|
|
|
(14
|
)
|
|
|
(20
|
)
|
|
|
(17
|
)
|
Second lien
|
|
|
(310
|
)
|
|
|
(495
|
)
|
|
|
(540
|
)
|
|
|
(372
|
)
|
|
|
(76
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(5,267
|
)
|
|
$
|
(6,663
|
)
|
|
$
|
(4,318
|
)
|
|
$
|
(2,199
|
)
|
|
$
|
(931
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121
HSBC Finance Corporation
ANALYSIS
OF CREDIT LOSS RESERVES ACTIVITY CONTINUING OPERATIONS
(CONTINUED)
|
|
|
(2) |
|
Real estate recoveries can be
further analyzed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Closed end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
37
|
|
|
$
|
22
|
|
|
$
|
10
|
|
|
$
|
45
|
|
|
$
|
11
|
|
Second lien
|
|
|
58
|
|
|
|
30
|
|
|
|
30
|
|
|
|
20
|
|
|
|
15
|
|
Revolving:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
6
|
|
|
|
3
|
|
|
|
1
|
|
|
|
2
|
|
|
|
2
|
|
Second lien
|
|
|
11
|
|
|
|
10
|
|
|
|
8
|
|
|
|
5
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
112
|
|
|
$
|
65
|
|
|
$
|
49
|
|
|
$
|
72
|
|
|
$
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) |
|
Ratio excludes nonperforming loans
and charge-offs associated with loan portfolios which are
considered held for sale as these receivables are carried at the
lower of cost or fair value with no corresponding credit loss
reserves.
|
|
(4) |
|
In December 2009 we changed our
charge-off policy for real estate secured and personal
non-credit card receivables. See Note 8, Changes in
Charge-off Policies During 2009, in the accompanying
consolidated financial statements for detailed discussion of
these changes. This resulted in incremental charge-offs in
December 2009 of $2.4 billion and $1.1 billion for
real estate secured and personal non-credit card receivables,
respectively. See Credit Quality in this MD&A
for further discussion of ratios and trends including 2009
ratios excluding the impact of the December 2009 Charge-off
Policy Changes.
|
122
HSBC Finance Corporation
NET
INTEREST MARGIN CONTINUING OPERATIONS 2010
COMPARED TO 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance and
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Interest Income/
|
|
|
Increase/(Decrease) Due to:
|
|
|
|
Outstanding(1)
|
|
|
Average
Rate(6)
|
|
|
Interest Expense
|
|
|
Total
|
|
|
Volume
|
|
|
Rate
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Variance
|
|
|
Variance(2)
|
|
|
Variance(2)
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate secured
|
|
$
|
54,264
|
|
|
|
$67,083
|
|
|
|
6.48
|
%
|
|
|
6.25
|
%
|
|
$
|
3,517
|
|
|
$
|
4,196
|
|
|
$
|
(679
|
)
|
|
$
|
(826
|
)
|
|
$
|
147
|
|
Credit card
|
|
|
10,415
|
|
|
|
13,183
|
|
|
|
21.25
|
|
|
|
20.84
|
|
|
|
2,213
|
|
|
|
2,748
|
|
|
|
(535
|
)
|
|
|
(588
|
)
|
|
|
53
|
|
Personal non-credit card
|
|
|
8,623
|
|
|
|
13,634
|
|
|
|
15.91
|
|
|
|
14.02
|
|
|
|
1,372
|
|
|
|
1,912
|
|
|
|
(540
|
)
|
|
|
(772
|
)
|
|
|
232
|
|
Commercial and
other(5)
|
|
|
46
|
|
|
|
(28
|
)
|
|
|
113.04
|
|
|
|
36.71
|
|
|
|
52
|
|
|
|
(10
|
)
|
|
|
62
|
|
|
|
59
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables
|
|
|
73,348
|
|
|
|
93,872
|
|
|
|
9.75
|
|
|
|
9.42
|
|
|
|
7,154
|
|
|
|
8,846
|
|
|
|
(1,692
|
)
|
|
|
(1,992
|
)
|
|
|
300
|
|
Noninsurance investments
|
|
|
6,745
|
|
|
|
5,637
|
|
|
|
.80
|
|
|
|
.73
|
|
|
|
54
|
|
|
|
41
|
|
|
|
13
|
|
|
|
9
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets (excluding insurance investments)
|
|
$
|
80,093
|
|
|
|
$99,509
|
|
|
|
9.00
|
%
|
|
|
8.93
|
%
|
|
$
|
7,208
|
|
|
$
|
8,887
|
|
|
$
|
(1,679
|
)
|
|
$
|
(1,747
|
)
|
|
$
|
68
|
|
Insurance investments
|
|
|
2,107
|
|
|
|
2,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
2,991
|
|
|
|
(1,308
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
85,191
|
|
|
|
$100,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
3,732
|
|
|
|
$5,412
|
|
|
|
.30
|
%
|
|
|
.90
|
%
|
|
$
|
11
|
|
|
$
|
49
|
|
|
$
|
(38
|
)
|
|
$
|
(12
|
)
|
|
$
|
(26
|
)
|
Due to related party
|
|
|
8,473
|
|
|
|
10,942
|
|
|
|
1.73
|
|
|
|
2.25
|
|
|
|
147
|
|
|
|
246
|
|
|
|
(99
|
)
|
|
|
(49
|
)
|
|
|
(50
|
)
|
Long-term debt
|
|
|
62,462
|
|
|
|
74,210
|
|
|
|
4.59
|
|
|
|
4.76
|
|
|
|
2,865
|
|
|
|
3,534
|
|
|
|
(669
|
)
|
|
|
(542
|
)
|
|
|
(127
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
74,667
|
|
|
|
$90,564
|
|
|
|
4.05
|
%
|
|
|
4.23
|
%
|
|
$
|
3,023
|
|
|
$
|
3,829
|
|
|
$
|
(806
|
)
|
|
$
|
(648
|
)
|
|
$
|
(158
|
)
|
Other liabilities
|
|
|
2,871
|
|
|
|
(1,844
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
77,538
|
|
|
|
88,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred securities
|
|
|
663
|
|
|
|
575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shareholders equity
|
|
|
6,990
|
|
|
|
10,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
85,191
|
|
|
|
$100,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest
Margin(3)
|
|
|
|
|
|
|
|
|
|
|
5.23
|
%
|
|
|
5.08
|
%
|
|
$
|
4,185
|
|
|
$
|
5,058
|
|
|
$
|
(873
|
)
|
|
$
|
(1,099
|
)
|
|
$
|
226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Spreads(4)
|
|
|
|
|
|
|
|
|
|
|
4.95
|
|
|
|
4.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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) |
|
Includes commercial receivables as
well as purchase accounting adjustments.
|
|
(6) |
|
Average rate may not recompute
from the dollar figures presented due to rounding.
|
123
HSBC Finance Corporation
NET
INTEREST MARGIN CONTINUING OPERATIONS 2009
COMPARED TO 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance and
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Interest Income/
|
|
|
Increase/(Decrease) Due to:
|
|
|
|
Outstanding(1)
|
|
|
Average
Rate(6)
|
|
|
Interest Expense
|
|
|
|
|
|
Volume
|
|
|
Rate
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Variance
|
|
|
Variance(2)
|
|
|
Variance(2)
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate secured
|
|
$
|
67,083
|
|
|
|
$78,280
|
|
|
|
6.25
|
%
|
|
|
7.66
|
%
|
|
$
|
4,196
|
|
|
$
|
5,994
|
|
|
$
|
(1,798
|
)
|
|
$
|
(788
|
)
|
|
$
|
(1,010
|
)
|
Credit card
|
|
|
13,183
|
|
|
|
28,243
|
|
|
|
20.84
|
|
|
|
16.19
|
|
|
|
2,748
|
|
|
|
4,572
|
|
|
|
(1,824
|
)
|
|
|
(2,893
|
)
|
|
|
1,069
|
|
Private label
|
|
|
-
|
|
|
|
97
|
|
|
|
-
|
|
|
|
20.62
|
|
|
|
-
|
|
|
|
20
|
|
|
|
(20
|
)
|
|
|
(20
|
)
|
|
|
-
|
|
Personal non-credit card
|
|
|
13,634
|
|
|
|
16,735
|
|
|
|
14.02
|
|
|
|
17.32
|
|
|
|
1,912
|
|
|
|
2,898
|
|
|
|
(986
|
)
|
|
|
(486
|
)
|
|
|
(500
|
)
|
Commercial and
other(5)
|
|
|
(28
|
)
|
|
|
63
|
|
|
|
36.17
|
|
|
|
12.69
|
|
|
|
(10
|
)
|
|
|
8
|
|
|
|
(18
|
)
|
|
|
(21
|
)
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables
|
|
|
93,872
|
|
|
|
123,418
|
|
|
|
9.42
|
|
|
|
10.93
|
|
|
|
8,846
|
|
|
|
13,492
|
|
|
|
(4,646
|
)
|
|
|
(2,946
|
)
|
|
|
(1,700
|
)
|
Noninsurance investments
|
|
|
5,637
|
|
|
|
3,859
|
|
|
|
.73
|
|
|
|
3.21
|
|
|
|
41
|
|
|
|
124
|
|
|
|
(83
|
)
|
|
|
41
|
|
|
|
(124
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets (excluding insurance investments)
|
|
$
|
99,509
|
|
|
|
$127,277
|
|
|
|
8.93
|
%
|
|
|
10.70
|
%
|
|
$
|
8,887
|
|
|
$
|
13,616
|
|
|
$
|
(4,729
|
)
|
|
$
|
(2,690
|
)
|
|
$
|
(2,039
|
)
|
Insurance investments
|
|
|
2,062
|
|
|
|
2,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
(1,308
|
)
|
|
|
2,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
100,263
|
|
|
|
$131,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
5,412
|
|
|
|
$7,853
|
|
|
|
.90
|
%
|
|
|
2.64
|
%
|
|
$
|
49
|
|
|
$
|
207
|
|
|
$
|
(158
|
)
|
|
$
|
(51
|
)
|
|
$
|
(107
|
)
|
Due to related party
|
|
|
10,942
|
|
|
|
11,946
|
|
|
|
2.25
|
|
|
|
4.18
|
|
|
|
246
|
|
|
|
499
|
|
|
|
(253
|
)
|
|
|
(39
|
)
|
|
|
(214
|
)
|
Long-term debt
|
|
|
74,210
|
|
|
|
105,306
|
|
|
|
4.76
|
|
|
|
4.72
|
|
|
|
3,534
|
|
|
|
4,974
|
|
|
|
(1,440
|
)
|
|
|
(1,482
|
)
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
90,564
|
|
|
|
$125,105
|
|
|
|
4.23
|
%
|
|
|
4.54
|
%
|
|
$
|
3,829
|
|
|
$
|
5,680
|
|
|
$
|
(1,851
|
)
|
|
$
|
(1,483
|
)
|
|
$
|
(368
|
)
|
Other liabilities
|
|
|
(1,844
|
)
|
|
|
(7,467
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
88,720
|
|
|
|
117,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred securities
|
|
|
575
|
|
|
|
575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shareholders equity
|
|
|
10,968
|
|
|
|
13,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
100,263
|
|
|
|
$131,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest
Margin(3)
|
|
|
|
|
|
|
|
|
|
|
5.08
|
%
|
|
|
6.24
|
%
|
|
$
|
5,058
|
|
|
$
|
7,936
|
|
|
$
|
(2,878
|
)
|
|
$
|
(1,207
|
)
|
|
$
|
(1,671
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Spreads(4)
|
|
|
|
|
|
|
|
|
|
|
4.70
|
|
|
|
6.16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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) |
|
Includes commercial receivables as
well as purchase accounting adjustments.
|
|
(6) |
|
Average rate may not recompute from
the dollar figures presented due to rounding.
|
124
HSBC Finance Corporation
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:
IFRS Management Basis A
non-U.S. GAAP
measure of reporting results in accordance with IFRSs and that
assumes GM and UP credit card portfolios as well as the private
label and real estate secured receivables transferred to HSBC
Bank USA have not been sold and remain on our balance sheet and
the revenues and expenses related to these receivables remain on
our income statement. 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. For a reconciliation of IFRS Management
Basis results to the comparable owned basis amounts, see
Note 24, Business Segments, to the accompanying
consolidated financial statements.
Equity Ratios In managing capital, we develop
targets for tangible common equity to tangible assets. This
ratio target is 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, certain rating agencies and our credit providing
banks monitor ratios excluding the equity impact of unrealized
gains losses on cash flow hedging instruments, postretirement
benefit plan adjustments and unrealized gains on investments as
well as subsequent changes in fair value recognized in earnings
associated with debt and the related derivatives for which we
elected the fair value option. Our targets may change from time
to time to accommodate changes in the operating environment or
other considerations such as those listed above.
Quantitative Reconciliations of
Non-U.S. GAAP Financial
Measures to U.S. GAAP Financial Measures
Reconciliations of selected equity ratios follow.
125
HSBC Finance Corporation
RECONCILIATIONS
TO U.S. GAAP FINANCIAL MEASURES
EQUITY RATIOS CONTINUING OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Tangible common equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shareholders equity
|
|
$
|
6,145
|
|
|
$
|
7,804
|
|
|
$
|
12,862
|
|
|
$
|
13,584
|
|
|
$
|
19,515
|
|
Exclude:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value option adjustment
|
|
|
(453
|
)
|
|
|
(518
|
)
|
|
|
(2,494
|
)
|
|
|
(545
|
)
|
|
|
-
|
|
Unrealized (gains) losses on cash flow hedging instruments
|
|
|
575
|
|
|
|
633
|
|
|
|
1,316
|
|
|
|
718
|
|
|
|
61
|
|
Postretirement benefit plan adjustments, net of tax
|
|
|
-
|
|
|
|
(8
|
)
|
|
|
(4
|
)
|
|
|
3
|
|
|
|
1
|
|
Unrealized (gains) losses on investments and interest-only strip
receivables
|
|
|
(74
|
)
|
|
|
(31
|
)
|
|
|
55
|
|
|
|
13
|
|
|
|
23
|
|
Intangible assets
|
|
|
(605
|
)
|
|
|
(748
|
)
|
|
|
(922
|
)
|
|
|
(1,107
|
)
|
|
|
(2,218
|
)
|
Goodwill
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,294
|
)
|
|
|
(2,827
|
)
|
|
|
(7,010
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible common equity
|
|
$
|
5,588
|
|
|
$
|
7,132
|
|
|
$
|
8,519
|
|
|
$
|
9,839
|
|
|
$
|
10,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible shareholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible common equity
|
|
$
|
5,588
|
|
|
$
|
7,132
|
|
|
$
|
8,519
|
|
|
$
|
9,839
|
|
|
$
|
10,372
|
|
Preferred stock
|
|
|
1,575
|
|
|
|
575
|
|
|
|
575
|
|
|
|
575
|
|
|
|
575
|
|
Mandatorily redeemable preferred securities of Household Capital
Trusts
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
1,275
|
|
|
|
1,275
|
|
|
|
1,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible shareholders equity
|
|
$
|
8,163
|
|
|
$
|
8,707
|
|
|
$
|
10,369
|
|
|
$
|
11,689
|
|
|
$
|
12,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
76,532
|
|
|
$
|
94,553
|
|
|
$
|
130,830
|
|
|
$
|
165,504
|
|
|
$
|
179,218
|
|
Exclude:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
(605
|
)
|
|
|
(748
|
)
|
|
|
(922
|
)
|
|
|
(1,107
|
)
|
|
|
(2,218
|
)
|
Goodwill
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,294
|
)
|
|
|
(2,827
|
)
|
|
|
(7,010
|
)
|
Derivative financial assets
|
|
|
(75
|
)
|
|
|
-
|
|
|
|
(8
|
)
|
|
|
(48
|
)
|
|
|
(298
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible assets
|
|
$
|
75,852
|
|
|
$
|
93,805
|
|
|
$
|
127,606
|
|
|
$
|
161,522
|
|
|
$
|
169,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common and preferred equity to total assets
|
|
|
10.09
|
%
|
|
|
8.86
|
%
|
|
|
10.27
|
%
|
|
|
8.56
|
%
|
|
|
11.21
|
%
|
Tangible common equity to tangible
assets(1)
|
|
|
7.37
|
|
|
|
7.60
|
|
|
|
6.68
|
|
|
|
6.09
|
|
|
|
6.11
|
|
Tangible shareholders equity to tangible
assets(1)
|
|
|
10.76
|
|
|
|
9.28
|
|
|
|
8.13
|
|
|
|
7.24
|
|
|
|
7.20
|
|
|
|
|
(1) |
|
Prior to 2008, this calculation was
performed using managed assets. Managed assets included owned
assets plus loans which we sold and serviced with limited
recourse. As previously disclosed, beginning in the third
quarter of 2004, we began to structure all new collateralized
funding transactions as secured financings which results in the
receivables and related debt remaining on our balance sheet.
Receivables serviced with limited recourse were reduced to zero
during the first quarter of 2008 and, as a result, tangible
managed assets and owned assets converged. The following table
shows the tangible managed asset balances prior to 2008 as well
as the ratios above calculated using total managed assets:
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Total owned assets
|
|
$
|
165,504
|
|
|
$
|
179,218
|
|
Receivables serviced with limited recourse
|
|
|
124
|
|
|
|
949
|
|
|
|
|
|
|
|
|
|
|
Total managed assets
|
|
|
165,628
|
|
|
|
180,167
|
|
Exclude:
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
(1,107
|
)
|
|
|
(2,218
|
)
|
Goodwill
|
|
|
(2,827
|
)
|
|
|
(7,010
|
)
|
Derivative financial assets
|
|
|
(48
|
)
|
|
|
(298
|
)
|
|
|
|
|
|
|
|
|
|
Tangible managed assets
|
|
$
|
161,646
|
|
|
$
|
170,641
|
|
|
|
|
|
|
|
|
|
|
Equity ratios:
|
|
|
|
|
|
|
|
|
Tangible common equity to tangible managed assets
|
|
|
6.09
|
|
|
|
6.08
|
|
Tangible shareholders(s) equity to tangible managed
assets
|
|
|
7.23
|
|
|
|
7.16
|
|
|
|
|
|
|
|
|
|
|
126
HSBC
Finance Corporation
Item 7A.
Quantitative and Qualitative Disclosures About Market
Risk.
Information required by this Item is included in the following
sections of Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations:
Liquidity and Capital Resources, Off Balance
Sheet Arrangements and Secured Financings and Risk
Management.
Item 8.
Financial Statements and Supplementary Data.
Our 2010 Financial Statements meet the requirements of
Regulation S-X.
The 2010 Financial Statements and supplementary financial
information specified by Item 302 of
Regulation S-K
are set forth below.
127
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, an indirect wholly-owned subsidiary of
HSBC Holdings plc, and subsidiaries as of December 31, 2010
and 2009 and the related consolidated statements of income
(loss), changes in shareholders equity, and cash flows for
each of the years in the three-year period ended
December 31, 2010. 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 consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of HSBC Finance Corporation and subsidiaries as of
December 31, 2010 and 2009, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2010 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, 2010, 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 28, 2011 expressed an unqualified opinion on
the effectiveness of HSBC Finance Corporations internal
control over financial reporting.
/s/ KPMG LLP
Chicago, Illinois
February 28, 2011
128
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, 2010, 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, 2010, 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, an
indirect wholly-owned subsidiary of HSBC Holdings plc, and
subsidiaries as of December 31, 2010 and 2009, and the
related consolidated statements of income (loss), changes in
shareholders equity, and cash flows for each of the years
in the three-year period ended December 31, 2010, and our
report dated February 28, 2011 expressed an unqualified
opinion on those consolidated financial statements.
/s/ KPMG LLP
Chicago, Illinois
February 28, 2011
129
HSBC
Finance Corporation
CONSOLIDATED
STATEMENT OF INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(in millions)
|
|
|
Finance and other interest income
|
|
$
|
7,208
|
|
|
$
|
8,887
|
|
|
$
|
13,616
|
|
Interest expense on debt held by:
|
|
|
|
|
|
|
|
|
|
|
|
|
HSBC affiliates
|
|
|
147
|
|
|
|
246
|
|
|
|
499
|
|
Non-affiliates
|
|
|
2,876
|
|
|
|
3,583
|
|
|
|
5,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
4,185
|
|
|
|
5,058
|
|
|
|
7,936
|
|
Provision for credit losses
|
|
|
6,180
|
|
|
|
9,650
|
|
|
|
12,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provision for credit
losses
|
|
|
(1,995
|
)
|
|
|
(4,592
|
)
|
|
|
(4,474
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance revenue
|
|
|
274
|
|
|
|
334
|
|
|
|
417
|
|
Investment income
|
|
|
99
|
|
|
|
109
|
|
|
|
124
|
|
Net
other-than-temporary
impairment
losses(1)
|
|
|
-
|
|
|
|
(25
|
)
|
|
|
(54
|
)
|
Derivative related income (expense)
|
|
|
(379
|
)
|
|
|
300
|
|
|
|
(306
|
)
|
Gain (loss) on debt designated at fair value and related
derivatives
|
|
|
741
|
|
|
|
(2,125
|
)
|
|
|
3,160
|
|
Fee income
|
|
|
188
|
|
|
|
650
|
|
|
|
1,687
|
|
Enhancement services revenue
|
|
|
404
|
|
|
|
484
|
|
|
|
700
|
|
Gain on bulk receivable sales to HSBC affiliates
|
|
|
-
|
|
|
|
50
|
|
|
|
-
|
|
Gain on receivable sales to HSBC affiliates
|
|
|
540
|
|
|
|
469
|
|
|
|
260
|
|
Servicing and other fees from HSBC affiliates
|
|
|
666
|
|
|
|
748
|
|
|
|
545
|
|
Lower of cost or fair value adjustment on receivables held for
sale
|
|
|
2
|
|
|
|
(374
|
)
|
|
|
(514
|
)
|
Other income (expense)
|
|
|
32
|
|
|
|
92
|
|
|
|
(68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other revenues
|
|
|
2,567
|
|
|
|
712
|
|
|
|
5,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
597
|
|
|
|
1,119
|
|
|
|
1,594
|
|
Occupancy and equipment expenses, net
|
|
|
92
|
|
|
|
182
|
|
|
|
238
|
|
Other marketing expenses
|
|
|
314
|
|
|
|
184
|
|
|
|
350
|
|
Real estate owned expenses
|
|
|
274
|
|
|
|
199
|
|
|
|
342
|
|
Other servicing and administrative expenses
|
|
|
814
|
|
|
|
947
|
|
|
|
1,020
|
|
Support services from HSBC affiliates
|
|
|
1,092
|
|
|
|
925
|
|
|
|
922
|
|
Amortization of intangibles
|
|
|
143
|
|
|
|
157
|
|
|
|
178
|
|
Goodwill and other intangible asset impairment charges
|
|
|
-
|
|
|
|
2,308
|
|
|
|
329
|
|
Policyholders benefits
|
|
|
152
|
|
|
|
197
|
|
|
|
199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
3,478
|
|
|
|
6,218
|
|
|
|
5,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income tax benefit
|
|
|
(2,906
|
)
|
|
|
(10,098
|
)
|
|
|
(3,695
|
)
|
Income tax benefit
|
|
|
1,007
|
|
|
|
2,632
|
|
|
|
1,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(1,899
|
)
|
|
|
(7,466
|
)
|
|
|
(2,608
|
)
|
Discontinued Operations (Note 3);
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) gain from discontinued operations before income tax
|
|
|
(26
|
)
|
|
|
29
|
|
|
|
(227
|
)
|
Income tax benefit (expense)
|
|
|
9
|
|
|
|
(13
|
)
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations
|
|
|
(17
|
)
|
|
|
16
|
|
|
|
(175
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,916
|
)
|
|
$
|
(7,450
|
)
|
|
$
|
(2,783
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
During 2009, $36 million of
gross
other-than-temporary
impairment losses on securities
available-for-sale
were recognized, of which $11 million was recognized in
accumulated other comprehensive income (loss) (AOCI).
|
The accompanying notes are an integral part of the consolidated
financial statements.
130
HSBC
Finance Corporation
CONSOLIDATED
BALANCE SHEET
|
|
|
|
|
|
|
|
|
December 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions,
|
|
|
|
except share data)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
175
|
|
|
$
|
289
|
|
Interest bearing deposits with banks
|
|
|
1,016
|
|
|
|
17
|
|
Securities purchased under agreements to resell
|
|
|
4,311
|
|
|
|
2,850
|
|
Securities
available-for-sale
|
|
|
3,371
|
|
|
|
3,187
|
|
Receivables, net (including $6.3 billion and
$6.8 billion at December 31, 2010 and 2009,
respectively, collateralizing long-term debt)
|
|
|
61,333
|
|
|
|
74,308
|
|
Receivables held for sale
|
|
|
4
|
|
|
|
3
|
|
Intangible assets, net
|
|
|
605
|
|
|
|
748
|
|
Properties and equipment, net
|
|
|
202
|
|
|
|
201
|
|
Real estate owned
|
|
|
962
|
|
|
|
592
|
|
Derivative financial assets
|
|
|
75
|
|
|
|
-
|
|
Deferred income taxes, net
|
|
|
2,491
|
|
|
|
2,887
|
|
Other assets
|
|
|
1,791
|
|
|
|
4,563
|
|
Assets of discontinued operations
|
|
|
196
|
|
|
|
4,908
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
76,532
|
|
|
$
|
94,553
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
Due to affiliates (including $436 million at
December 31, 2010 carried at fair value)
|
|
$
|
8,255
|
|
|
$
|
9,043
|
|
Commercial paper
|
|
|
3,156
|
|
|
|
4,291
|
|
Long-term debt (including $20.8 billion and
$26.7 billion at December 31, 2010 and 2009,
respectively, carried at fair value and $4.1 billion and
$4.7 billion at December 31, 2010 and 2009,
respectively, collateralized by receivables)
|
|
|
54,616
|
|
|
|
68,880
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
66,027
|
|
|
|
82,214
|
|
|
|
|
|
|
|
|
|
|
Insurance policy and claim reserves
|
|
|
982
|
|
|
|
996
|
|
Derivative related liabilities
|
|
|
2
|
|
|
|
60
|
|
Liability for postretirement benefits
|
|
|
265
|
|
|
|
268
|
|
Other liabilities
|
|
|
1,519
|
|
|
|
1,822
|
|
Liabilities of discontinued operations
|
|
|
17
|
|
|
|
814
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
68,812
|
|
|
|
86,174
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
Redeemable preferred stock:
|
|
|
|
|
|
|
|
|
Series B (1,501,100 shares authorized, $0.01 par
value, 575,000 shares issued)
|
|
|
575
|
|
|
|
575
|
|
Series C (1,000 shares authorized, $0.01 par
value, 1,000 shares issued)
|
|
|
1,000
|
|
|
|
-
|
|
Common shareholders equity:
|
|
|
|
|
|
|
|
|
Common stock ($0.01 par value, 100 shares authorized;
66 shares and 65 shares issued at December 31,
2010 and 2009, respectively)
|
|
|
-
|
|
|
|
-
|
|
Additional paid-in capital
|
|
|
23,321
|
|
|
|
23,119
|
|
Accumulated deficit
|
|
|
(16,685
|
)
|
|
|
(14,732
|
)
|
Accumulated other comprehensive loss
|
|
|
(491
|
)
|
|
|
(583
|
)
|
|
|
|
|
|
|
|
|
|
Total common shareholders equity
|
|
|
6,145
|
|
|
|
7,804
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
76,532
|
|
|
$
|
94,553
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
131
HSBC
Finance Corporation
CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the beginning of period
|
|
|
575
|
|
|
|
575
|
|
|
|
575
|
|
Issuance of Series C preferred stock
|
|
|
1,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of period
|
|
$
|
1,575
|
|
|
$
|
575
|
|
|
$
|
575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shareholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning and end of period
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
23,119
|
|
|
$
|
21,485
|
|
|
$
|
18,227
|
|
Excess of book value over consideration received on sale of U.K.
Operations to an HSBC affiliate
|
|
|
-
|
|
|
|
-
|
|
|
|
(196
|
)
|
Excess of book value over consideration received on sale of
Canadian Operations to an HSBC affiliate
|
|
|
-
|
|
|
|
-
|
|
|
|
(46
|
)
|
Capital contribution from parent
|
|
|
200
|
|
|
|
2,685
|
|
|
|
3,500
|
|
Return of capital to parent
|
|
|
-
|
|
|
|
(1,043
|
)
|
|
|
-
|
|
Employee benefit plans, including transfers and other
|
|
|
2
|
|
|
|
(8
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
23,321
|
|
|
$
|
23,119
|
|
|
$
|
21,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Accumulated deficit) retained earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
(14,732
|
)
|
|
$
|
(7,245
|
)
|
|
$
|
(4,423
|
)
|
Net loss
|
|
|
(1,916
|
)
|
|
|
(7,450
|
)
|
|
|
(2,783
|
)
|
Dividend equivalents on HSBCs Restricted Share Plan
|
|
|
-
|
|
|
|
-
|
|
|
|
(2
|
)
|
Dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
(37
|
)
|
|
|
(37
|
)
|
|
|
(37
|
)
|
Common stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
(16,685
|
)
|
|
$
|
(14,732
|
)
|
|
$
|
(7,245
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
(583
|
)
|
|
$
|
(1,378
|
)
|
|
$
|
(220
|
)
|
Net change in unrealized gains (losses), net of tax, on:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives classified as cash flow hedges
|
|
|
57
|
|
|
|
684
|
|
|
|
(610
|
)
|
Securities
available-for-sale,
not other-than temporarily impaired
|
|
|
40
|
|
|
|
92
|
|
|
|
(53
|
)
|
Other-than-temporarily
impaired debt securities
available-for-sale(1)
|
|
|
3
|
|
|
|
(7
|
)
|
|
|
-
|
|
Postretirement benefit plan adjustment, net of tax
|
|
|
(8
|
)
|
|
|
4
|
|
|
|
(1
|
)
|
Foreign currency translation adjustments, net of tax
|
|
|
-
|
|
|
|
22
|
|
|
|
(120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax
|
|
|
92
|
|
|
|
795
|
|
|
|
(784
|
)
|
Reclassification of foreign currency translation and pension
adjustments to additional paid-in capital resulting from sale of
U.K. Operations
|
|
|
-
|
|
|
|
-
|
|
|
|
(380
|
)
|
Reclassification of foreign currency translation and pension
adjustments to additional paid-in capital resulting from sale of
Canadian Operations
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
(491
|
)
|
|
$
|
(583
|
)
|
|
$
|
(1,378
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total common shareholders equity
|
|
$
|
6,145
|
|
|
$
|
7,804
|
|
|
$
|
12,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income ( loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,916
|
)
|
|
$
|
(7,450
|
)
|
|
$
|
(2,783
|
)
|
Other comprehensive income (loss)
|
|
|
92
|
|
|
|
795
|
|
|
|
(784
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
(1,824
|
)
|
|
$
|
(6,655
|
)
|
|
$
|
(3,567
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares at beginning of period
|
|
|
575,000
|
|
|
|
575,000
|
|
|
|
575,000
|
|
Number of shares of Series C preferred stock issued
|
|
|
1,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares at the end of period
|
|
|
576,000
|
|
|
|
575,000
|
|
|
|
575,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares at beginning of period
|
|
|
65
|
|
|
|
60
|
|
|
|
57
|
|
Number of shares of common stock issued to parent
|
|
|
1
|
|
|
|
5
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares at end of period
|
|
|
66
|
|
|
|
65
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
During 2010, gross
other-than-temporary
impairment (OTTI) recoveries on
available-for-sale
securities totaled $4 million, all relating to the
non-credit component of OTTI previously recorded in accumulated
other comprehensive income (AOCI). During 2009,
$36 million of gross OTTI losses on securities
available-for-sale
were recognized, of which $11 million were recognized in
AOCI.
|
The accompanying notes are an integral part of the consolidated
financial statements.
132
HSBC
Finance Corporation
CONSOLIDATED
STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(in millions)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,916
|
)
|
|
$
|
(7,450
|
)
|
|
$
|
(2,783
|
)
|
Loss from discontinued operations
|
|
|
(17
|
)
|
|
|
16
|
|
|
|
(175
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(1,899
|
)
|
|
|
(7,466
|
)
|
|
|
(2,608
|
)
|
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses
|
|
|
6,180
|
|
|
|
9,650
|
|
|
|
12,410
|
|
Gain on bulk sale of receivables to HSBC Bank USA, National
Association (HSBC Bank USA)
|
|
|
-
|
|
|
|
(50
|
)
|
|
|
-
|
|
Gain on receivable sales to HSBC affiliates
|
|
|
(540
|
)
|
|
|
(469
|
)
|
|
|
(260
|
)
|
Goodwill and other intangible impairment charges
|
|
|
-
|
|
|
|
2,308
|
|
|
|
329
|
|
Loss on sale of real estate owned, including lower of cost or
market adjustments
|
|
|
128
|
|
|
|
101
|
|
|
|
229
|
|
Insurance policy and claim reserves
|
|
|
(53
|
)
|
|
|
(18
|
)
|
|
|
(41
|
)
|
Depreciation and amortization
|
|
|
179
|
|
|
|
202
|
|
|
|
243
|
|
Mark-to-market
on debt designated at fair value and related derivatives
|
|
|
48
|
|
|
|
2,880
|
|
|
|
(2,924
|
)
|
Gain on sale of Visa Class B shares
|
|
|
-
|
|
|
|
-
|
|
|
|
(11
|
)
|
Deferred income tax (benefit) provision
|
|
|
315
|
|
|
|
(247
|
)
|
|
|
(13
|
)
|
Net change in other assets
|
|
|
2,813
|
|
|
|
(754
|
)
|
|
|
(206
|
)
|
Net change in other liabilities
|
|
|
(306
|
)
|
|
|
(584
|
)
|
|
|
(804
|
)
|
Originations of loans held for sale
|
|
|
(33,799
|
)
|
|
|
(38,089
|
)
|
|
|
(24,884
|
)
|
Sales and collections on loans held for sale
|
|
|
34,343
|
|
|
|
38,786
|
|
|
|
25,114
|
|
Foreign exchange and derivative movements on long-term debt and
net change in non-FVO related derivative assets and liabilities
|
|
|
(630
|
)
|
|
|
(594
|
)
|
|
|
(161
|
)
|
Change in accrued finance income related to December 2009
charge-off policy changes and nonaccrual policy change for
re-aged loans
|
|
|
-
|
|
|
|
541
|
|
|
|
-
|
|
Other-than-temporary
impairment on securities
|
|
|
-
|
|
|
|
25
|
|
|
|
54
|
|
Lower of cost or fair value adjustments on receivables held for
sale
|
|
|
(2
|
)
|
|
|
374
|
|
|
|
514
|
|
Other, net
|
|
|
438
|
|
|
|
185
|
|
|
|
148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities continuing
operations
|
|
|
7,215
|
|
|
|
6,781
|
|
|
|
7,129
|
|
Cash provided by operating activities discontinued
operations
|
|
|
609
|
|
|
|
593
|
|
|
|
1,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
7,824
|
|
|
|
7,374
|
|
|
|
8,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
|
|
|
(1,051
|
)
|
|
|
(536
|
)
|
|
|
(452
|
)
|
Matured
|
|
|
452
|
|
|
|
363
|
|
|
|
538
|
|
Sold
|
|
|
216
|
|
|
|
166
|
|
|
|
175
|
|
Net change in short-term securities
available-for-sale
|
|
|
274
|
|
|
|
52
|
|
|
|
(510
|
)
|
Net change in securities purchased under agreements to resell
|
|
|
(1,461
|
)
|
|
|
(1,825
|
)
|
|
|
481
|
|
Net change in interest bearing deposits with banks
|
|
|
(999
|
)
|
|
|
8
|
|
|
|
251
|
|
Proceeds from sale of affiliate preferred shares to HSBC
Holdings Plc
|
|
|
-
|
|
|
|
242
|
|
|
|
-
|
|
Proceeds from sale of Low Income Housing Tax Credit Investment
Funds to HSBC Bank USA
|
|
|
-
|
|
|
|
106
|
|
|
|
-
|
|
Proceeds from sale of Visa Class B shares
|
|
|
-
|
|
|
|
-
|
|
|
|
11
|
|
Receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (originations) collections
|
|
|
4,623
|
|
|
|
6,170
|
|
|
|
4,452
|
|
Purchases and related premiums
|
|
|
(45
|
)
|
|
|
(43
|
)
|
|
|
(48
|
)
|
Proceeds from sales of real estate owned
|
|
|
1,338
|
|
|
|
1,467
|
|
|
|
1,591
|
|
Proceeds from bulk sale of receivables to HSBC Bank USA
|
|
|
-
|
|
|
|
6,045
|
|
|
|
-
|
|
Proceeds from sales of real estate secured receivables held in
portfolio to a third party
|
|
|
-
|
|
|
|
-
|
|
|
|
1,116
|
|
Properties and equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
(15
|
)
|
|
|
(51
|
)
|
|
|
(77
|
)
|
Sales
|
|
|
-
|
|
|
|
-
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) investing activities
continuing operations
|
|
|
3,332
|
|
|
|
12,164
|
|
|
|
7,578
|
|
Cash provided by (used in) investing activities
discontinued operations
|
|
|
3,613
|
|
|
|
5,227
|
|
|
|
2,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
6,945
|
|
|
|
17,391
|
|
|
|
10,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
133
HSBC
Finance Corporation
CONSOLIDATED
STATEMENT OF CASH FLOWS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(in millions)
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in short-term debt
|
|
|
(1,135
|
)
|
|
|
(5,348
|
)
|
|
|
1,914
|
|
Net change in due to affiliates
|
|
|
(1,553
|
)
|
|
|
(4,225
|
)
|
|
|
2,184
|
|
Long-term debt issued
|
|
|
1,714
|
|
|
|
4,078
|
|
|
|
4,075
|
|
Long-term debt retired
|
|
|
(14,734
|
)
|
|
|
(19,312
|
)
|
|
|
(29,029
|
)
|
Issuance of preferred stocks
|
|
|
1,000
|
|
|
|
-
|
|
|
|
-
|
|
Insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholders benefits paid
|
|
|
(80
|
)
|
|
|
(95
|
)
|
|
|
(95
|
)
|
Cash received from policyholders
|
|
|
66
|
|
|
|
58
|
|
|
|
54
|
|
Capital contribution from parent
|
|
|
200
|
|
|
|
2,410
|
|
|
|
3,500
|
|
Return of capital to parent
|
|
|
-
|
|
|
|
(1,043
|
)
|
|
|
-
|
|
Shareholders dividends
|
|
|
(37
|
)
|
|
|
(37
|
)
|
|
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) financing activities
continuing operations
|
|
|
(14,559
|
)
|
|
|
(23,514
|
)
|
|
|
(17,434
|
)
|
Cash provided by (used in) financing activities
discontinued operations
|
|
|
(346
|
)
|
|
|
(1,195
|
)
|
|
|
(1,893
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(14,905
|
)
|
|
|
(24,709
|
)
|
|
|
(19,327
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
-
|
|
|
|
-
|
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
|
(136
|
)
|
|
|
56
|
|
|
|
(528
|
)
|
Cash at beginning of
period(1)
|
|
|
311
|
|
|
|
255
|
|
|
|
783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of
period(2)
|
|
$
|
175
|
|
|
$
|
311
|
|
|
$
|
255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
3,222
|
|
|
$
|
4,183
|
|
|
$
|
6,069
|
|
Income taxes paid during period
|
|
|
26
|
|
|
|
98
|
|
|
|
46
|
|
Income taxes refunded during period
|
|
|
4,135
|
|
|
|
1,030
|
|
|
|
264
|
|
Supplemental Noncash Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of properties added to real estate owned
|
|
$
|
1,834
|
|
|
$
|
1,275
|
|
|
$
|
2,137
|
|
Transfer of receivables to held for sale
|
|
|
2,910
|
|
|
|
609
|
|
|
|
19,335
|
|
Transfer of receivables to held for investment
|
|
|
-
|
|
|
|
1,294
|
|
|
|
-
|
|
Extinguishment of indebtedness related to bulk receivable sale
|
|
|
(431
|
)
|
|
|
(6,077
|
)
|
|
|
-
|
|
Issuance of subordinated debt exchanged for senior debt
|
|
|
1,939
|
|
|
|
-
|
|
|
|
-
|
|
Extinguishment of senior debt exchanged for subordinated debt
|
|
|
(1,797
|
)
|
|
|
-
|
|
|
|
-
|
|
Redemption of junior subordinated notes underlying the
mandatorily redeemable preferred securities of the Household
Capital Trust VIII for common stock
|
|
|
-
|
|
|
|
(275
|
)
|
|
|
-
|
|
|
|
|
(1) |
|
Cash at beginning of period
includes $22 million, $17 million and
$204 million for discontinued operations as of
December 31, 2010, 2009 and 2008, respectively.
|
|
(2) |
|
Cash at end of period includes
$22 million and $17 million for discontinued
operations as of December 31, 2009 and 2008, respectively.
|
The accompanying notes are an integral part of the consolidated
financial statements.
134
HSBC
Finance Corporation
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
HSBC Finance Corporation is an indirect wholly owned subsidiary
of HSBC North America Holdings Inc. (HSBC North
America), which is an indirect wholly-owned subsidiary of
HSBC Holdings plc (HSBC). HSBC Finance Corporation
and its subsidiaries may also be referred to in these notes to
the consolidated financial statements as we,
us or our. HSBC Finance Corporation
provides middle-market consumers with several types of loan
products in the United States. Our lending products currently
include MasterCard, Visa, American Express and Discover credit
card receivables (Credit Card) as well as private
label receivables. A portion of new credit card and all new
private label originations are sold on a daily basis to HSBC
Bank USA, National Association (HSBC Bank USA). We
also offer specialty insurance products in the United States and
Canada. Historically, our lending products have also included
real estate secured, auto finance and personal non-credit card
receivables in the United States, the United Kingdom and
Canada and tax refund anticipation loans and related products in
the United States. Additionally, we also previously offered
credit and specialty insurance in the United Kingdom. We have
two reportable segments: Card and Retail Services and Consumer.
Our Card and Retail Services segment includes our credit card
operations, including private label credit cards. Our Consumer
segment consists of our run-off Consumer Lending and Mortgage
Services businesses.
|
|
2.
|
Summary
of Significant Accounting Policies and New Accounting
Pronouncements
|
Summary
of Significant Accounting Policies
Basis of Presentation The consolidated
financial statements have been prepared on the basis that we
will continue as a going concern. Such assertion contemplates
the significant loss recognized in recent years and the
challenges we anticipate with respect to a near-term return to
profitability under prevailing and forecasted economic
conditions. HSBC continues to be fully committed and has the
capacity to continue to provide the necessary capital and
liquidity to fund continuing operations.
The consolidated financial statements include the accounts of
HSBC Finance Corporation and all subsidiaries including all
variable interest entities (VIEs) in which we are
the primary beneficiary. HSBC Finance Corporation
135
HSBC Finance Corporation
and its subsidiaries may also be referred to in these notes to
consolidated financial statements as we,
us, or our.
On January 1, 2010, we adopted new guidance issued by the
Financial Accounting Standards Board in June 2009 related to
VIEs. The new guidance eliminated the concept of qualifying
special purpose entities (QSPEs) that were
previously exempt from consolidation and changed the approach
for determining the primary beneficiary of a VIE, which is
required to consolidate the VIE, from a quantitative approach
focusing on risk and reward to a qualitative approach focusing
on (a) the power to direct the activities of the VIE and
(b) the obligation to absorb losses
and/or the
right to receive benefits that could be significant to the VIE.
We assess whether an entity is a VIE and, if so, whether we are
its primary beneficiary at the time of initial involvement with
the entity and on an ongoing basis. A VIE must be consolidated
by its primary beneficiary, which is the entity with the power
to direct the activities of a VIE that most significantly impact
its economic performance and the obligation to absorb losses of,
or the right to receive benefits from, the VIE that could
potentially be significant to the VIE. We are involved with VIEs
primarily in connection with our collateralized funding
transactions. See Note 15, Long-Term Debt, for
additional discussion of those activities and the use of VIEs.
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. Unless otherwise indicated,
information included in these notes to consolidated financial
statements relates to continuing operations for all periods
presented. In 2010, we completed the sale of our auto finance
receivable servicing operations and auto finance receivables
portfolio to Santander Consumer USA and we exited the Taxpayer
Financial Services business. As a result, both of these
businesses are now reported as discontinued operations. See
Note 3, Discontinued Operations, for further
details. Certain reclassifications have been made to prior
period amounts to conform to the current year 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.
Securities We maintain investment portfolios
of debt securities (comprised primarily of corporate debt
securities) in both our noninsurance and insurance operations.
Our entire investment securities portfolio is classified as
available-for-sale.
Available-for-sale
investment securities 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 with changes in fair value recorded as
adjustments to common shareholders equity in other
comprehensive income (loss), net of income taxes.
When the fair value of a security has declined below its
amortized cost basis, we evaluate the decline to assess if it is
considered
other-than-temporary.
To the extent that such a decline is deemed to be
other-than-temporary,
an
other-than-temporary
impairment loss is recognized in earnings equal to the
difference between the securitys cost and its fair value
except that beginning in 2009, only the credit loss component of
such a decline is recognized in earnings for a debt security
that we do not intend to sell and for which it is not
more-likely-than-not that we will be required to sell prior to
recovery of its amortized cost basis. A new cost basis is
established for the security that reflects the amount of the
other-than-temporary
impairment loss recognized in earnings.
Cost of investment securities sold is determined using the
specific identification method. Realized gains and losses from
the investment portfolio are recorded in investment income.
Interest income earned on the noninsurance investment portfolio
is classified in the statements of income in net interest
income, while investment income from the insurance portfolio is
recorded in investment income. Accrued investment income is
classified with investment securities.
For cash flow presentation purposes, we consider
available-for-sale
securities with original maturities less than 90 days as
short term, and thus any purchases, sales and maturities are
presented on a net basis.
136
HSBC Finance Corporation
Receivables Held for Sale Receivables are
classified as held for sale when management does not have the
intent to hold the receivable for the foreseeable future. Such
receivables are carried at the lower of aggregate cost or fair
value with any subsequent write downs or recoveries charged to
other income. Unearned income, unamortized deferred fees and
costs on originated receivables, and discounts on purchased
receivables are recorded as an adjustment of the cost of the
receivable and are not reflected in earnings until the
receivables are sold.
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 risk on our
consumer receivables. Finance income, which includes interest
income, unamortized deferred fees and costs on originated
receivables and premiums or discounts on purchased receivables,
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.
Provision and Credit Loss Reserves Provision
for credit losses on receivables is made in an amount sufficient
to maintain credit loss reserves at a level considered adequate,
but not excessive, to cover probable incurred losses of
principal, accrued interest and fees, including late, over limit
and annual fees, in the existing loan portfolio. We estimate
probable incurred 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 and
ultimately charge-off. This analysis considers delinquency
status, loss experience and severity and takes into account
whether loans are in bankruptcy, have been re-aged, 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 based on historical and recent trends.
Delinquency status may be affected by customer account
management policies and practices, such as the re-age of
accounts, forbearance agreements, extended payment plans,
modification arrangements, 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 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 product mix, bankruptcy
trends, geographic concentrations, loan product features such as
adjustable rate loans, economic conditions such as national and
local trends in unemployment, 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, and for certain products their vintages, 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. We also
consider key ratios such as reserves to nonperforming loans,
reserves as a percentage of net charge-offs, reserves as a
percentage of two-months-and-over contractual delinquency 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.
137
HSBC Finance Corporation
Provisions 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 using a
discounted cash flow impairment analysis. Loans which have been
granted a permanent modification, a twelve-month or longer
modification, or two or more consecutive six-month modifications
are considered TDR Loans as it is generally believed that the
borrower is experiencing financial difficulty and a concession
has been granted. Modifications may include changes to one or
more terms of the loan, including but not limited to, a change
in interest rate, an extension of the amortization period, a
reduction in payment amount and partial forgiveness or deferment
of principal. TDR Loans are considered to be impaired loans.
Interest income on TDR Loans is recognized in the same manner as
loans which are not TDRs. Once a loan is classified as a TDR, it
continues to be reported as such until it is paid off or
charged-off.
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)
|
|
Beginning in December 2009, carrying value in excess of net
realizable value less cost to sell are generally charged-off at
or before the time foreclosure is completed or settlement is
reached with the borrower but, in any event, generally no later
than the end of the month in which the account becomes six
months contractually delinquent. 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), the account
is generally charged-off no later than the end of the month in
which the account becomes six months contractually delinquent.
|
|
Interest income accruals are suspended when principal or
interest payments are more than three months contractually past
due. Beginning in October 2009, interest accruals are resumed
and suspended interest is recognized when the customer makes the
equivalent of six qualifying payments under the terms of the
loan, while maintaining a current payment status at the point of
the sixth payment. If the re-aged receivable again becomes more
than three months contractually delinquent, any interest accrued
beyond three months delinquency is reversed.
|
|
|
Prior to December 2009, carrying values in excess of net
realizable value were charged-off at or before the time
foreclosure was completed or when settlement was reached with
the borrower. If foreclosure was not pursued and there was no
reasonable expectation for recovery, generally the account was
charged-off no later than by the end of the month in which the
account became eight months contractually delinquent.
|
|
Prior to October 2009, upon re-age interest accruals were
resumed and all suspended interest was recognized. For Consumer
Lending, if the re-aged receivable again became more than three
months contractually delinquent, any interest accrued beyond
three months delinquency was reversed.
|
138
HSBC Finance Corporation
|
|
|
|
|
Product
|
|
Charge-off Policies and Practices
|
|
Nonaccrual Policies and
Practices(1)
|
|
|
Auto
finance(3)
|
|
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, or
the loan becomes 120 days contractually
delinquent (prior to January 2009, 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
|
|
Generally charged-off by the end of the month in which the
account becomes six months contractually delinquent.
|
|
Interest generally accrues until charge-off.
|
Personal non-credit
card(4)
|
|
Beginning in December 2009, accounts are generally charged-off
by the end of the month in which the account becomes six months
contractually delinquent.
Prior to December 2009, accounts were generally charged-off the
month following the month in which the account became nine
months contractually delinquent and no payment was received in
six months, but in no event exceeded 12 months
contractually delinquent (except in our discontinued United
Kingdom business which did not include a recency factor).
|
|
Interest income accruals are suspended when principal or
interest payments are more than three months contractually past
due. Interest subsequently received is generally recorded as
collected and accruals are not resumed upon a re-age when the
receivable becomes less than three months contractually
delinquent.
For PHLs prior to October 2009 upon re-age, interest
accruals were resumed and suspended interest accruals were
recognized. If the receivable again becomes more than three
months contractually delinquent, any interest accrued beyond
three months delinquency is reversed.
|
|
|
(1)
|
For our discontinued United Kingdom business, interest income
accruals were suspended when principal or interest payments were
more than three months contractually delinquent.
|
(2)
|
For our discontinued United Kingdom business, real estate
secured carrying values in excess of net realizable value were
charged-off at the time of sale.
|
(3)
|
Our Auto Finance business is now reported as discontinued
operations as a result of the sale of our auto finance
receivable servicing operations and auto finance receivables
during 2010. See Note 3, Discontinued
Operations, for additional information. For our
discontinued Canadian business, interest income accruals on auto
loans were suspended and the portion of previously accrued
interest expected to be uncollectible was 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.
|
(4)
|
For our discontinued Canadian business, delinquent personal
non-credit card receivables were charged off when no payment is
received in six months but in no event is an account to exceed
12 months contractually delinquent.
|
Charge-off involving a bankruptcy for our credit card
receivables occurs by the end of the month at the earlier of
60 days after notification or 180 days delinquent. For
auto finance receivables, bankrupt accounts were charged off at
the earlier of (i) 60 days past due and 60 days
after notification, or (ii) the end of the month in which
the account
139
HSBC Finance Corporation
becomes 120 days contractually delinquent. Prior to January
2009, auto finance accounts involving a bankruptcy were
charged-off no later than the end of the month in which the loan
became 210 days contractually delinquent.
Delinquency status for loans is determined using the contractual
method which is based on the status of payments under the loan.
An account is generally considered to be contractually
delinquent when payments have not been made in accordance with
the loan terms. Delinquency status may be affected by customer
account management policies and practices such as the
restructure, re-age or modification of accounts.
Payments applied to nonaccrual loans are generally applied first
to reduce the current interest on the earliest payment due with
any remainder applied to reduce the principal balance associated
with that payment due.
Transfers of Financial Assets and
Securitizations Transfers of financial assets in
which we have surrendered control over the transferred assets
are accounted for as sales. In assessing whether control has
been surrendered, we consider whether the transferee would be a
consolidated affiliate, the existence and extent of any
continuing involvement in the transferred financial assets and
the impact of all arrangements or agreements made
contemporaneously with, or in contemplation of, the transfer,
even if they were not entered into at the time of transfer.
Control is generally considered to have been surrendered when
(i) the transferred assets have been legally isolated from
us and our consolidated affiliates, even in bankruptcy or other
receivership, (ii) the transferee (or, if the transferee is
an entity whose sole purpose is to engage in securitization or
asset-backed financing that is constrained from pledging or
exchanging the assets it receives, each third-party holder of
its beneficial interests) has the right to pledge or exchange
the assets (or beneficial interests) it received without any
constraints that provide more than a trivial benefit to us, and
(iii) neither we nor our consolidated affiliates and agents
have (a) both the right and obligation under any agreement
to repurchase or redeem the transferred assets before their
maturity, (b) the unilateral ability to cause the holder to
return specific financial assets that also provides us with a
more-than-trivial
benefit (other than through a cleanup call) and (c) an
agreement that permits the transferee to require us to
repurchase the transferred assets at a price so favorable that
it is probable that it will require us to repurchase them.
If the sale criteria are met, the transferred financial assets
are removed from our balance sheet and a gain or loss on sale is
recognized. If the sale criteria are not met, the transfer is
recorded as a secured borrowing in which the assets remain on
our balance sheet and the proceeds from the transaction are
recognized as a liability (a secured financing). For
the majority of financial asset transfers, it is clear whether
or not we have surrendered control. For other transfers, such as
in connection with complex transactions or where we have
continuing involvement such as servicing responsibilities, we
generally obtain a legal opinion as to whether the transfer
results in a true sale by law.
We have used collateral funding transactions for certain real
estate secured, credit card and personal non-credit card
receivables where it provides an attractive source of funding.
All collateralized funding transactions remaining on our balance
sheet have been structured as secured financings.
Properties and Equipment, Net Properties and
equipment are recorded at cost, net of accumulated depreciation
and amortization. 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 useful life of the improvement or the term of the
lease. Maintenance and repairs are expensed as incurred.
Repossessed Collateral Collateral acquired in
satisfaction of a loan is initially recognized at the lower of
amortized cost or its fair value less estimated costs to sell
and reported as either real estate owned or within other assets
depending on the collateral. A valuation allowance is created to
recognize any subsequent declines in fair value less estimated
costs to sell. These values are periodically reviewed and
adjusted against the valuation allowance but not in excess of
cumulative losses previously recognized subsequent to the date
of repossession. Adjustments to the valuation allowance, costs
of holding repossessed collateral, and any gain or loss on
disposition are credited or charged to operating expense.
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
140
HSBC Finance Corporation
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 currently
consist of purchased credit card relationships and related
programs, other loan related relationships, technology and
customer lists. Intangible assets are amortized over their
estimated useful lives on a straight-line basis. These useful
lives range from 7 years for certain technology and other
loan related relationships to approximately 10 years for
certain purchased credit card relationships and related
programs. 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 flow models, using inputs and assumptions
consistent with those used by market participants.
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 a discounted cash flow methodology. This
methodology utilizes cash flow estimates based on internal
forecasts updated to reflect current economic conditions and
revised economic projections at the review date and discount
rates that we believe adequately reflect the risk and
uncertainty in our internal forecasts and are appropriate based
on the implicit market rates in current comparable transactions.
Impairment may be reviewed as of an interim date 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.
The goodwill impairment analysis is a two step process. The
first step, used to identify potential impairment, involves
comparing each reporting units fair value to its carrying
value, including goodwill. If the fair value of a reporting unit
exceeds its carrying value, including allocated goodwill, there
is no indication of impairment and no further procedures are
required. If the carrying value including allocated goodwill
exceeds fair value, the second step is performed to quantify the
impairment amount, if any. If the implied fair value of
goodwill, as determined using the same methodology as used in a
business combination, is less than the carrying value of
goodwill, an impairment charge is recorded for the excess. An
impairment recognized cannot exceed the amount of goodwill
assigned to a reporting unit. Subsequent reversals of goodwill
impairment are not permitted. As of December 31, 2009, all
of the goodwill previously recorded has been written off.
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 as derivative related income (expense) in the
current period. 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
(loss) and reclassified into net interest margin 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 related income (expense) 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 (loss) on debt designated at fair value and related
derivatives in the current period.
For derivative instruments designated as qualifying 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
141
HSBC Finance Corporation
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 expected to continue to be 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 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 (loss) 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 (loss) 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
until termination 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 Effects of
foreign currency translation in the statements of cash flows,
primarily a result of the specialty insurance products we offer
in Canada, were offset against the cumulative foreign currency
adjustment within accumulated other comprehensive income, except
for the impact on cash. Foreign currency transaction gains and
losses are included in income as they occur.
Prior to the sale of our U.K. and Canadian Operations in 2008,
the functional currency for each of these foreign subsidiaries
was its local currency. Assets and liabilities of these
subsidiaries were translated at the rate of exchange in effect
on the balance sheet date. Translation adjustments resulting
from this process were accumulated in common shareholders
equity as a component of accumulated other comprehensive income
(loss). Income and expenses were translated at the average rate
of exchange prevailing during the year.
Share-Based Compensation We account for all
awards of HSBC stock granted to employees under various share
option, restricted share, restricted stock units and employee
stock purchase plans using the fair value based measurement
method of accounting. The fair value of the rewards granted is
recognized as expense over the requisite service period (e.g.,
vesting period), generally one, three or five years for options
and three years for restricted share awards. The fair value of
each option granted, measured at the grant date, is calculated
using a 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 fair value of the shares on the date of grant.
Pension and Other Postretirement Benefits We
recognize the funded status of our postretirement benefit plans
on the consolidated balance sheets with the offset to
accumulated other comprehensive income (loss), net of tax. Net
postretirement benefit cost charged to current earnings related
to these plans is based on various actuarial assumptions
regarding expected future experience.
Certain of our employees are participants in various defined
contribution and other non-qualified supplemental retirement
plans. Our contributions to these plans are charged to current
earnings.
Through various subsidiaries, we maintain various 401(k) plans
covering substantially all employees. Employer contributions to
the plan, which are charged to current earnings, are based on
employee contributions.
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HSBC Finance Corporation
Income Taxes HSBC Finance Corporation is
included in HSBC North Americas consolidated federal
income tax return and in various combined state income tax
returns. As such, we have entered into a tax allocation
agreement with HSBC North America and its subsidiary entities
(the HNAH Group) included in the consolidated
returns which governs the current amount of taxes to be paid or
received by the various entities included in the consolidated
return filings. Generally, such agreements allocate taxes to
members of the HNAH Group based on the calculation of tax on a
separate return basis, adjusted for the utilization or
limitation of tax credits of the consolidated group. To the
extent all the tax attributes available cannot be currently
utilized by the consolidated group, the proportionate share of
the utilized attribute is allocated based on each
affiliates percentage of the available attribute computed
in a manner that is consistent with the taxing
jurisdictions laws and regulations regarding the ordering
of utilization. In addition, we file some unconsolidated state
tax returns.
We recognize deferred tax assets and liabilities for the future
tax consequences related to differences between the financial
statement carrying amounts of existing assets and liabilities
and their respective tax bases, and for tax credits and net
operating and other losses. Deferred tax assets and liabilities
are measured using the enacted tax rates and laws that will be
in effect when the deferred tax items are expected to be
realized. If applicable, valuation allowances are recorded to
reduce deferred tax assets to the amounts we conclude are
more-likely-than-not to be realized. Since we are included in
HSBC North Americas consolidated federal tax return and
various combined state tax returns, the related evaluation of
the recoverability of the deferred tax assets is performed at
the HSBC North America legal entity level. We look at the HNAH
Groups consolidated deferred tax assets and various
sources of taxable income, including the impact of HSBC and HNAH
Group tax planning strategies, in reaching conclusions on
recoverability of deferred tax assets. The HNAH Group evaluates
deferred tax assets for recoverability using a consistent
approach which considers the relative impact of negative and
positive evidence, including historical financial performance,
projections of future taxable income, future reversals of
existing taxable temporary differences, tax planning strategies
and any available carryback capacity. In evaluating the need for
a valuation allowance, the HNAH Group estimates future taxable
income based on management approved business plans, future
capital requirements and ongoing tax planning strategies,
including capital support from HSBC necessary as part of such
plans and strategies. This process involves significant
management judgment about assumptions that are subject to change
from period to period. Only those tax planning strategies that
are both prudent and feasible, and for which management has the
ability and intent to implement, are incorporated into our
analysis and assessment.
Where a valuation allowance is determined to be necessary at the
HNAH consolidated level, such allowance is allocated to
principal subsidiaries within the HNAH Group in a manner that is
systematic, rational and consistent with the broad principles of
accounting for income taxes. The methodology allocates the
valuation allowance to the principal subsidiaries based
primarily on the entitys relative contribution to the
growth of the HNAH consolidated deferred tax asset against which
the valuation allowance is being recorded.
Further evaluation is performed at the HSBC Finance Corporation
legal entity level to evaluate the need for a valuation
allowance where we file separate company state income tax
returns. 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
recorded through earnings. Prior to the adoption on
January 1, 2009 of guidance issued by the FASB with respect
to business combinations, these changes in estimates were
adjusted against goodwill when it was determined that the
difference pertained to a balance originating prior to our
acquisition by HSBC.
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, sales
of businesses, servicing arrangements, information technology
services, item processing and statement processing services,
banking and other miscellaneous services, human resources,
corporate affairs and other shared services in North America and
beginning in 2010 also included tax, finance, compliance and
legal.
143
HSBC Finance Corporation
New
Accounting Pronouncements Adopted
Accounting for Transfers of Financial
Assets In June 2009, the FASB issued guidance which
amended the accounting for transfers of financial assets by
eliminating the concept of a qualifying special-purpose entity
(QSPE) and provided additional guidance with regard
to the accounting for transfers of financial assets. The
guidance became effective for all interim and annual periods
beginning after November 15, 2009. The adoption of this
guidance on January 1, 2010 did not have any impact on our
financial position or results of operations.
Accounting for Consolidation of Variable Interest
Entities In June 2009, the FASB issued guidance
which amended the accounting rules related to the consolidation
of variable interest entities (VIE). The guidance
changed the approach for determining the primary beneficiary of
a VIE from a quantitative risk and reward model to a qualitative
model, based on control and economics. The guidance became
effective for all interim and annual periods beginning after
November 15, 2009. The adoption of this guidance on
January 1, 2010 did not have an impact on our financial
position or results of operations. See Note 25,
Variable Interest Entities, in these consolidated
financial statements for additional information.
Improving Disclosures about Fair Value
Measurements In January 2010, the FASB issued
guidance to improve disclosures about fair value measurements.
The guidance requires entities to disclose separately the
amounts of significant transfers in and out of Level 1 and
Level 2 fair measurements and describe the reasons for
those transfers. It also requires the Level 3
reconciliation to be presented on a gross basis, while
disclosing purchases, sales, issuances and settlements
separately. The guidance became effective for interim and annual
financial periods beginning after December 15, 2009 except
for the requirement to present the Level 3 reconciliation
on a gross basis, which is effective for interim and annual
periods beginning after December 15, 2010. We adopted the
new disclosure requirements in their entirety effective
January 1, 2010. See Note 26, Fair Value
Measurements in these consolidated financial statements.
Subsequent Events In February 2010, the FASB
amended certain recognition and disclosure requirements for
subsequent events. The guidance clarified that an entity that
either (a) is an SEC filer, or (b) is a conduit bond
obligor for conduit debt securities that are traded in a public
market is required to evaluate subsequent events through the
date the financial statements are issued and in all other cases
through the date the financial statements are available to be
issued. The guidance eliminated the requirement to disclose the
date through which subsequent events are evaluated for an SEC
filer. The guidance was effective upon issuance. Adoption did
not have an impact on our financial position or results of
operations.
Derivatives and Hedging In March 2010, the
FASB issued a clarification on the scope exception for embedded
credit derivatives. The guidance eliminated the scope exception
for credit derivatives embedded in interests in securitized
financial assets, unless the credit derivative is created solely
by subordination of one financial debt instrument to another.
The guidance became effective beginning in the third quarter of
2010. Adoption did not have any impact to our financial position
or results of operations.
Loan Modifications In April 2010, the FASB
issued guidance affecting the accounting for loan modifications
for those loans that are acquired with deteriorated credit
quality and are accounted for on a pool basis. It clarified that
the modifications of such loans do not result in the removal of
those loans from the pool even if the modification of those
loans would otherwise be considered a troubled debt
restructuring. An entity will continue to be required to
consider whether the pool of assets in which the loan is
included is impaired if expected cash flows of the pool change.
The new guidance became effective prospectively for
modifications to loans acquired with deteriorating credit
quality and accounted for on a pool basis occurring in the first
interim or annual period ending on or after July 15, 2010.
Adoption did not have any impact on our financial position or
results of operations.
Credit Quality and Allowance for Credit Losses
Disclosures In July 2010, the FASB issued guidance
to provide more transparency about an entitys allowance
for credit losses and the credit quality of its financing
receivables. The guidance amends the existing disclosure
requirements by requiring an entity to provide a greater level
of disaggregated information to assist financial statement users
in assessing its credit risk exposures and evaluating the
adequacy of its allowance for credit losses. Additionally, the
update requires an entity to disclose credit quality indicators,
past due information, and modification of its financing
receivables. The amendment is effective
144
HSBC Finance Corporation
beginning interim and annual reporting periods ending on or
after December 15, 2010. However, in January 2011, the FASB
delayed the disclosure requirements regarding troubled debt
restructurings. The new disclosures about troubled debt
restructurings are anticipated to be effective for interim and
annual periods ending after June 15, 2011. We adopted the
new disclosures in the amendment, excluding the disclosures
related to troubled debt restructurings which have been delayed,
during the year ended December 31, 2010. For purposes of
our credit quality and allowance for credit losses disclosures,
we have determined we have one portfolio segment (consumer
receivables) and our products within this portfolio segment
represent our receivable classes. See Note 7,
Receivables, and Note 9, Credit Loss
Reserves, in these consolidated financial statements for
the expanded disclosure.
|
|
3.
|
Discontinued
Operations
|
2010
Discontinued Operations:
Taxpayer Financial Services During the third quarter of
2010, the Internal Revenue Service (IRS) announced
it would stop providing information regarding certain unpaid
obligations of a taxpayer (the Debt Indicator),
which has historically served as a significant part of our
underwriting process in our Taxpayer Financial Services
(TFS) business. We determined that, without use of
the Debt Indicator, we could no longer offer the product that
has historically accounted for the substantial majority of our
TFS loan production and that we might not be able to offer the
remaining products available under the program in a safe and
sound manner. As a result, in December 2010, it was determined
that we would not offer any tax refund anticipation loans or
related products for the 2011 tax season and we exited the TFS
business. As a result of this decision, our TFS business, which
was previously considered a non-core business, is now reported
in discontinued operations. During the fourth quarter of 2010 we
recorded closure costs of $25 million which primarily
reflect severance costs and the write off of certain pre-paid
assets which are included as a component of loss from
discontinued operations. As a result of this transaction, our
TFS business, previously included in the All Other
caption within our segment reporting, is now reported as
discontinued operations.
The following summarizes the operating results of our TFS
business for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2010
|
|
2009
|
|
2008
|
|
|
|
(in millions)
|
|
Net interest income and other
revenues(1)
|
|
$
|
68
|
|
|
$
|
106
|
|
|
$
|
158
|
|
Income from discontinued operations before income tax
|
|
|
20
|
|
|
|
62
|
|
|
|
103
|
|
|
|
(1) |
Interest expense, which is included as a component of net
interest income, has been allocated to discontinued operations
in accordance with our existing internal transfer pricing
policy. This policy uses match funding based on the expected
lives of the assets and liabilities of the business at the time
of origination, subject to periodic review, as demonstrated by
the expected cash flows and re-pricing characteristics of the
underlying assets.
|
The following summarizes the assets and liabilities of our TFS
business at December 31, 2010 and 2009 which are now
reported as Assets of discontinued operations and Liabilities of
discontinued operations in our consolidated balance sheet.
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Deferred income tax, net
|
|
$
|
3
|
|
|
$
|
4
|
|
Other assets
|
|
|
55
|
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
Assets of discontinued operations
|
|
$
|
58
|
|
|
$
|
80
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
$
|
10
|
|
|
$
|
7
|
|
|
|
|
|
|
|
|
|
|
Liabilities of discontinued operations
|
|
$
|
10
|
|
|
$
|
7
|
|
|
|
|
|
|
|
|
|
|
Auto Finance In March 2010, we sold our auto finance
receivable servicing operations as well as auto finance
receivables with a carrying value of $927 million, of which
$379 million was purchased at estimated fair value from
145
HSBC Finance Corporation
HSBC Bank USA immediately prior to the sale, to Santander
Consumer USA Inc. (SC USA) for $930 million in
cash. Under the terms of the agreement, our auto finance
servicing facilities in San Diego, California and
Lewisville, Texas were assigned to SC USA at the time of close
and the majority of the employees from those locations were
offered the opportunity to transfer to SC USA. SC USA then
serviced the remainder of our auto finance receivable portfolio.
As the receivables sold were previously classified as held for
sale and written down to fair value, we recorded a gain of
$5 million ($3 million after-tax) during the first
quarter of 2010 which primarily related to the sale of the auto
servicing platform and reversal of certain accruals related to
leases assumed by SC USA.
In August 2010, we sold the remainder of our auto finance
receivable portfolio with an outstanding principal balance of
$2.6 billion at the time of sale and other related assets
to SC USA. The aggregate sales price for the auto finance
receivables and other related assets was $2.5 billion which
included the transfer of $431 million of indebtedness
secured by auto finance receivables, resulting in net cash
proceeds of $2.1 billion. We recorded a net loss as a
result of this transaction of $43 million ($28 million
after-tax) during the third quarter of 2010. This net loss is
included as a component of loss from discontinued operations.
Severance costs recorded as a result of this transaction were
less than $1 million and are included as a component of
loss from discontinued operations. As a result of this
transaction, our Auto Finance business, previously included in
our Consumer Segment, is now reported as discontinued operations.
The following summarizes the operating results of our Auto
Finance business for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2010
|
|
2009
|
|
2008
|
|
|
|
(In millions)
|
|
Net interest income and other
revenues(1)
|
|
$
|
219
|
|
|
$
|
548
|
|
|
$
|
960
|
|
Loss from discontinued operations before income tax
|
|
|
(46
|
)
|
|
|
(33
|
)
|
|
|
(324
|
)
|
|
|
(1) |
Interest expense, which is included as a component of net
interest income, has been allocated to discontinued operations
in accordance with our existing internal transfer pricing
policy. This policy uses match funding based on the expected
lives of the assets and liabilities of the business at the time
of origination, subject to periodic review, as demonstrated by
the expected cash flows and re-pricing characteristics of the
underlying assets.
|
The following summarizes the assets and liabilities of our Auto
Finance business at December 31, 2010 and 2009 which are
now reported as Assets of discontinued operations and
Liabilities of discontinued operations in our consolidated
balance sheet. Other assets of discontinued operations at
December 31, 2010 reflects current income taxes receivable
on our Auto Finance business for the 2010 tax year.
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Cash
|
|
$
|
-
|
|
|
$
|
22
|
|
Receivables, net of credit loss reserves of $172 million at
December 31, 2009
|
|
|
-
|
|
|
|
3,823
|
|
Receivables held for sale
|
|
|
-
|
|
|
|
533
|
|
Deferred income tax, net
|
|
|
4
|
|
|
|
123
|
|
Other assets
|
|
|
134
|
|
|
|
327
|
|
|
|
|
|
|
|
|
|
|
Assets of discontinued operations
|
|
$
|
138
|
|
|
$
|
4,828
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
-
|
|
|
$
|
778
|
|
Other liabilities
|
|
|
7
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
Liabilities of discontinued operations
|
|
$
|
7
|
|
|
$
|
807
|
|
|
|
|
|
|
|
|
|
|
Prior to the sale of our remaining auto finance receivable
portfolio as discussed above, in January 2009, we sold certain
auto finance receivables with an aggregate outstanding principal
balance of $3.0 billion to HSBC Bank USA for an aggregate
sales price of $2.8 billion. The sales price was based on
an independent valuation opinion based on the fair values of the
receivable in September 2008, the date the transaction terms
were agreed upon. As a result, in the first quarter of 2009 we
recorded a gain of $7 million ($4 million after-tax)
on the sale of these auto finance receivables which is now
reflected as a component of loss from discontinued operations.
We continued to service
146
HSBC Finance Corporation
these auto finance receivables for HSBC Bank USA for a fee until
the sale of our auto finance servicing operations in March 2010.
2008
Discontinued Operations:
United Kingdom In May 2008, we sold all of the
common stock of Household International Europe, the holding
company for our United Kingdom operations (U.K.
Operations) to HSBC Overseas Holdings (UK) Limited
(HOHU), a subsidiary of HSBC. The sales price was
GBP 181 million (equivalent to approximately
$359 million at the time of sale). At the time of the sale,
the assets of the U.K. Operations consisted primarily of net
receivables of $4.6 billion and the liabilities consisted
primarily of amounts due to HSBC affiliates of
$3.6 billion. As a result of this transaction, HOHU assumed
the liabilities of our U.K. Operations outstanding at the time
of the sale. Because the sale was between affiliates under
common control, the book value of the investment in our U.K.
Operations in excess of the consideration received at the time
of sale which totaled $576 million was recorded as a
decrease to common shareholders equity. Of this amount,
$196 million was reflected as a decrease to additional
paid-in-capital
and $380 million was reflected as a decrease to other
comprehensive income (loss), primarily related to foreign
currency translation adjustments. There was no tax benefit
recorded as a result of this transaction. Our U.K. Operations
were previously reported in the International Segment.
Prior to the sale of our entire U.K. operations in May 2008, we
had disposed of our U.K. insurance operations in November 2007
and our European operations in November 2006 which were part of
our U.K. Operations as well as our U.K. credit card business in
December 2005. None of these individual transactions previously
qualified for discontinued operations presentation. However, as
a result of reclassifying our entire remaining U.K. Operations
as discontinued, the results of these previous dispositions are
now included in our discontinued operation results for all
historical periods.
The following summarizes the operating results of our U.K.
Operations for the periods presented:
|
|
|
|
|
Year Ended December 31,
|
|
2008
|
|
|
|
(in millions)
|
|
Net interest income and other revenues
|
|
$
|
190
|
|
Loss from discontinued operations before income tax
|
|
|
(14
|
)
|
Canada On November 30, 2008, we sold the common
stock of HSBC Financial Corporation Limited, the holding company
for our Canadian business (Canadian Operations) to
HSBC Bank Canada. The sales price was approximately
$279 million (based on the exchange rate on the date of
sale). At the time of the sale, the assets of the Canadian
Operations consisted primarily of net receivables of
$3.1 billion,
available-for-sale
securities of $98 million and goodwill of $65 million.
Liabilities at the time of the sale consisted primarily of
long-term debt of $3.1 billion. As a result of this
transaction, HSBC Bank Canada assumed the liabilities of our
Canadian Operations outstanding at the time of the sale.
However, we continue to guarantee the long-term and medium-term
notes issued by our Canadian business prior to the sale. As of
December 31, 2010, the outstanding balance of the
guaranteed notes was $1.5 billion and the latest scheduled
maturity of the notes is May 2012. Because the sale was between
affiliates under common control, the book value of the
investment in our Canadian Operations in excess of the
consideration received at the time of sale which totaled
$40 million was recorded as a decrease to common
shareholders equity. Of this amount, $46 million was
reflected as a decrease to additional
paid-in-capital
and $6 million was reflected as an increase to other
comprehensive income (loss), primarily related to foreign
currency translation adjustments. There was no tax benefit
recorded as a result of this transaction. Our Canadian
Operations were previously reported in the International Segment.
The following summarizes the operating results of our Canadian
Operations for the periods presented:
|
|
|
|
|
Year Ended December 31,
|
|
2008
|
|
|
|
(in millions)
|
|
Net interest income and other revenues
|
|
$
|
486
|
|
Income from discontinued operations before income tax
|
|
|
8
|
|
147
HSBC Finance Corporation
|
|
4.
|
Receivable
Portfolio Sales to HSBC Bank USA
|
In January 2009, we sold our General Motors MasterCard
receivable portfolio (GM Portfolio) and our Union
Plus MasterCard/Visa receivable portfolio (UP
Portfolio) with an aggregate outstanding principal balance
of $6.3 billion and $6.1 billion, respectively, to
HSBC Bank USA. The aggregate sales price for the GM and UP
Portfolios was $12.2 billion which included the transfer of
approximately $6.1 billion of indebtedness, resulting in
net cash proceeds of $6.1 billion. The sales price was
determined based on independent valuation opinions based on the
fair values of the pool of receivables in late November and
early December 2008, the dates the transaction terms were agreed
upon, respectively. As a result, during the first quarter of
2009 we recorded a gain of $130 million ($84 million
after-tax) on the sale of the GM and UP Portfolios. This gain
was partially offset by a loss of $(80) million
($(51) million after-tax) recorded on the termination of
cash flow hedges associated with the $6.1 billion of
indebtedness transferred to HSBC Bank USA as part of these
transactions. We retained the customer account relationships and
by agreement we sell additional receivable originations
generated under existing and future accounts to HSBC Bank USA on
a daily basis at a sales price for each type of portfolio
determined using a fair value which is calculated semi-annually.
We continue to service the receivables sold to HSBC Bank USA for
a fee.
As it relates to our discontinued auto finance operations, in
January 2009, we sold certain auto finance receivables with an
aggregate outstanding principal balance of $3.0 billion to
HSBC Bank USA for an aggregate sales price of $2.8 billion.
See Note 3, Discontinued Operations, for
additional information.
See Note 23, Related Party Transactions, for
further discussion of the daily receivable sales to HSBC Bank
USA and how fair value is determined.
As discussed in prior filings, in prior years we performed
several comprehensive evaluations of the strategies and
opportunities of our operations. As a result of these various
evaluations, we discontinued all new customer account
originations except in our credit card business. There were no
strategic initiatives during 2010 related to our continuing
operations. Summarized below are a number of strategic actions
which were undertaken in mid-2007, 2008 and 2009 for our
continuing operations as a result of our evaluations:
2009
Strategic Initiatives
During 2009, we undertook a number of actions including the
following:
|
|
|
|
>
|
Throughout 2009, we decided to exit certain lease arrangements
and consolidate a variety of locations across the United States.
The process of closing and consolidating these facilities, which
began during the second quarter of 2009, was completed during
the fourth quarter of 2010. As a result, we have exited certain
facilities
and/or
significantly reduced our occupancy space in the following
locations: Bridgewater, New Jersey; Minnetonka, Minnesota; Wood
Dale, Illinois; Elmhurst, Illinois; Sioux Falls, South Dakota
and Tampa, Florida. Additionally, we have consolidated our
operations in Virginia Beach, Virginia into our Chesapeake,
Virginia facility and consolidated certain servicing functions
previously performed in Brandon, Florida to facilities in
Buffalo, New York and Elmhurst, Illinois.
|
|
|
>
|
In late February 2009, we decided to discontinue new customer
account originations for all products by our Consumer Lending
business and close all branch offices.
|
148
HSBC Finance Corporation
Summary of restructuring liability related to 2009
strategic initiatives The following summarizes the
changes in the restructure liability during the year ended
December 31, 2010 and 2009, respectively, relating to
actions implemented during 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-Time
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination and
|
|
|
Lease Termination
|
|
|
|
|
|
|
|
|
|
Other Employee
|
|
|
and Associated
|
|
|
|
|
|
|
|
|
|
Benefits
|
|
|
Costs
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
(in millions)
|
|
|
Year ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring liability at January 1, 2010
|
|
$
|
10
|
|
|
$
|
12
|
|
|
$
|
2
|
|
|
$
|
24
|
|
Restructuring costs recorded during the period
|
|
|
1
|
|
|
|
5
|
|
|
|
-
|
|
|
|
6
|
|
Restructuring costs paid during the period
|
|
|
(7
|
)
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
(17
|
)
|
Adjustments to the restructure liability during the period
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructure liability at December 31, 2010
|
|
$
|
4
|
|
|
$
|
6
|
|
|
$
|
-
|
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring liability at January 1, 2009
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Restructuring costs recorded during the period
|
|
|
79
|
|
|
|
57
|
|
|
|
11
|
|
|
|
147
|
|
Restructuring costs paid during the period
|
|
|
(69
|
)
|
|
|
(45
|
)
|
|
|
(9
|
)
|
|
|
(123
|
)
|
Adjustments to the restructure liability during the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructure liability at December 31, 2009
|
|
$
|
10
|
|
|
$
|
12
|
|
|
$
|
2
|
|
|
$
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Strategic
During 2008, we undertook a number of actions including the
following:
|
|
|
|
>
|
During the third quarter of 2008, closed servicing facilities
located in Jacksonville, Florida and White Marsh, Maryland in
our Card and Retail Services business and redeployed these
activities to other facilities in our Card and Retail Services
business.
|
|
|
>
|
Reduced headcount in our Card and Retail Services business
during the fourth quarter of 2008; and
|
|
|
>
|
Ceased operations of Solstice Capital Group, Inc, a subsidiary
of our Consumer Lending business which originated real estate
secured receivables for resale.
|
149
HSBC Finance Corporation
Summary of Restructuring Liability Related to 2008
Strategic Initiatives The following summarizes the
changes in the restructure liability during the years ended
December 31, 2010, 2009 and 2008 relating to the actions
implemented during 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-Time
|
|
|
|
|
|
|
|
|
|
Termination and
|
|
|
Lease Termination
|
|
|
|
|
|
|
Other Employee
|
|
|
and Associated
|
|
|
|
|
|
|
Benefits
|
|
|
Costs
|
|
|
Total
|
|
|
|
|
|
(in millions)
|
|
|
Year ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructure liability at January 1, 2010
|
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Restructuring costs paid during the period
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructure liability at December 31, 2010
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructure liability at January 1, 2009
|
|
$
|
6
|
|
|
$
|
4
|
|
|
$
|
10
|
|
Restructuring costs paid during the period
|
|
|
(6
|
)
|
|
|
(1
|
)
|
|
|
(7
|
)
|
Adjustments to the restructuring liability during the period
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructure liability at December 31, 2009
|
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructure liability at January 1, 2008
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Restructuring costs recorded during the period
|
|
|
10
|
|
|
|
6
|
|
|
|
16
|
|
Restructuring costs paid during the period
|
|
|
(4
|
)
|
|
|
(2
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructure liability at December 31, 2008
|
|
$
|
6
|
|
|
$
|
4
|
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
Strategic Initiatives
Beginning in mid-2007 we undertook a number of actions including
the following:
> Discontinued correspondent channel acquisitions of our
Mortgage Services business;
> Ceased operations of Decision One Mortgage Company;
> Reduced Consumer Lending branch network to approximately
1,000 branches at December 31, 2007; and
> Closed our loan underwriting, processing and collections
center in Carmel, Indiana.
150
HSBC Finance Corporation
Summary of Restructuring Liability Related to 2007
Strategic Initiatives The following summarizes the
changes in the restructure liability during the years ended
December 31, 2010, 2009 and 2008 relating to the actions
implemented during 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-Time
|
|
|
|
|
|
|
|
|
|
Termination and
|
|
|
Lease Termination
|
|
|
|
|
|
|
Other Employee
|
|
|
and Associated
|
|
|
|
|
|
|
Benefits
|
|
|
Costs
|
|
|
Total
|
|
|
|
|
|
(in millions)
|
|
|
Year ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructure liability at January 1, 2010
|
|
$
|
-
|
|
|
$
|
14
|
|
|
$
|
14
|
|
Adjustments to the restructure liability during the period
|
|
|
-
|
|
|
|
(14
|
)
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructure liability at December 31, 2010
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructure liability at January 1, 2009
|
|
$
|
1
|
|
|
$
|
17
|
|
|
$
|
18
|
|
Restructuring costs paid during the period
|
|
|
(1
|
)
|
|
|
(3
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructure liability at December 31, 2009
|
|
$
|
-
|
|
|
$
|
14
|
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructure liability at January 1, 2008
|
|
$
|
17
|
|
|
$
|
37
|
|
|
$
|
54
|
|
Restructuring costs recorded during the period
|
|
|
-
|
|
|
|
4
|
|
|
|
4
|
|
Restructuring costs paid during the period
|
|
|
(9
|
)
|
|
|
(21
|
)
|
|
|
(30
|
)
|
Adjustments to the restructure liability during the period
|
|
|
(7
|
)
|
|
|
(3
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructure liability at December 31, 2008
|
|
$
|
1
|
|
|
$
|
17
|
|
|
$
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
151
HSBC Finance Corporation
Summary of Strategic Initiatives The
following table summarizes the net cash and non-cash expenses
recorded for all restructuring activities during the years ended
December 31, 2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-Time
|
|
|
|
|
|
|
|
|
Fixed Assets
|
|
|
|
|
|
|
Termination and
|
|
|
Lease Termination
|
|
|
|
|
|
and Other
|
|
|
|
|
|
|
Other Employee
|
|
|
and Associated
|
|
|
|
|
|
Non-Cash
|
|
|
|
|
|
|
Benefits(1)
|
|
|
Costs(2)
|
|
|
Other(3)
|
|
|
Adjustments(4)
|
|
|
Total
|
|
|
|
|
|
(In millions)
|
|
|
Year ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Facility Closures
|
|
$
|
-
|
|
|
$
|
5
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5
|
|
2009 Consumer Lending Closure
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
(2
|
)
|
2007 Mortgage Services initiatives
|
|
|
-
|
|
|
|
(14
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expense (expense release)
|
|
$
|
1
|
|
|
$
|
(10
|
)
|
|
$
|
(2
|
)
|
|
$
|
-
|
|
|
$
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Facility Closures
|
|
$
|
6
|
|
|
$
|
4
|
|
|
$
|
-
|
|
|
$
|
3
|
|
|
$
|
13
|
|
2009 Consumer Lending
Closure(5)
|
|
|
73
|
|
|
|
53
|
|
|
|
11
|
|
|
|
14
|
|
|
|
151
|
|
2008 Card and Retail Services initiatives
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expense (expense release)
|
|
$
|
79
|
|
|
$
|
55
|
|
|
$
|
11
|
|
|
$
|
17
|
|
|
$
|
162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Card and Retail Services initiatives
|
|
$
|
9
|
|
|
$
|
6
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
15
|
|
2008 Solstice Closure
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
2007 Mortgage Services initiatives
|
|
|
(4
|
)
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2
|
)
|
2007 Consumer Lending initiatives
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(2
|
)
|
2007 Carmel Facility closure
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expense (expense release)
|
|
$
|
3
|
|
|
$
|
7
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
One-time termination and other employee benefits are included as
a component of Salaries and employee benefits in the
consolidated statement of income (loss).
|
(2)
|
Lease termination and associated costs are included as a
component of Occupancy and equipment expenses in the
consolidated statement of income (loss).
|
(3)
|
The other expenses are included as a component of Other
servicing and administrative expenses in the consolidated
statement of income (loss).
|
(4)
|
Includes $32 million fixed asset write-offs during 2009,
which were recorded as a component of Other servicing and
administrative expenses in the consolidated statement of income
(loss). Other expenses during 2009 also includes $3 million
relating to stock based compensation and other benefits, a
curtailment gain of $16 million and a reduction of pension
expense of $2 million which were recorded as a component of
Salaries and employee benefits in the consolidated statement of
income (loss).
|
(5)
|
Excludes intangible asset impairment charges of $14 million
recorded during 2009.
|
152
HSBC Finance Corporation
Securities consisted of the following
available-for-sale
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Component
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
of OTTI
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
December 31, 2010
|
|
Cost
|
|
|
Securities(4)
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
(in millions)
|
|
|
U.S. Treasury
|
|
$
|
341
|
|
|
$
|
-
|
|
|
$
|
8
|
|
|
$
|
-
|
|
|
$
|
349
|
|
U.S. government sponsored
enterprises(1)
|
|
|
282
|
|
|
|
-
|
|
|
|
4
|
|
|
|
(1
|
)
|
|
|
285
|
|
U.S. government agency issued or guaranteed
|
|
|
10
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
11
|
|
Obligations of U.S. states and political subdivisions
|
|
|
29
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
30
|
|
Asset-backed
securities(2)
|
|
|
65
|
|
|
|
(7
|
)
|
|
|
2
|
|
|
|
-
|
|
|
|
60
|
|
U.S. corporate debt
securities(3)
|
|
|
1,714
|
|
|
|
-
|
|
|
|
94
|
|
|
|
(6
|
)
|
|
|
1,802
|
|
Foreign debt
securities(5)
|
|
|
424
|
|
|
|
-
|
|
|
|
19
|
|
|
|
(1
|
)
|
|
|
442
|
|
Equity securities
|
|
|
9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9
|
|
Money market funds
|
|
|
353
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
3,227
|
|
|
|
(7
|
)
|
|
|
129
|
|
|
|
(8
|
)
|
|
|
3,341
|
|
Accrued investment income
|
|
|
30
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
available-for-sale
|
|
$
|
3,257
|
|
|
$
|
(7
|
)
|
|
$
|
129
|
|
|
$
|
(8
|
)
|
|
$
|
3,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Component
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
of OTTI
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
December 31, 2009
|
|
Cost
|
|
|
Securities(4)
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
(in millions)
|
|
|
U.S. Treasury
|
|
$
|
196
|
|
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
(1
|
)
|
|
$
|
196
|
|
U.S. government sponsored
enterprises(1)
|
|
|
95
|
|
|
|
-
|
|
|
|
3
|
|
|
|
(1
|
)
|
|
|
97
|
|
U.S. government agency issued or guaranteed
|
|
|
20
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
21
|
|
Obligations of U.S. states and political subdivisions
|
|
|
31
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
32
|
|
Asset-backed
securities(2)
|
|
|
94
|
|
|
|
(11
|
)
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
83
|
|
U.S. corporate debt
securities(3)
|
|
|
1,684
|
|
|
|
-
|
|
|
|
60
|
|
|
|
(20
|
)
|
|
|
1,724
|
|
Foreign debt
securities(5)
|
|
|
351
|
|
|
|
-
|
|
|
|
15
|
|
|
|
-
|
|
|
|
366
|
|
Equity securities
|
|
|
12
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
Money market funds
|
|
|
627
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
3,110
|
|
|
|
(11
|
)
|
|
|
83
|
|
|
|
(24
|
)
|
|
|
3,158
|
|
Accrued investment income
|
|
|
29
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
available-for-sale
|
|
$
|
3,139
|
|
|
$
|
(11
|
)
|
|
$
|
83
|
|
|
$
|
(24
|
)
|
|
$
|
3,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes $33 million and $65 million of
mortgage-backed securities issued by the Federal National
Mortgage Association and the Federal Home Loan Mortgage
Corporation as of December 31, 2010 and 2009, respectively.
|
(2)
|
At December 31, 2010 and 2009, the majority of our
asset-backed securities are residential mortgage-backed
securities.
|
(3)
|
At December 31, 2010 and 2009, the majority of our U.S.
corporate debt securities represent investments in the financial
services, consumer products, healthcare and industrials sectors.
|
153
HSBC Finance Corporation
|
|
(4)
|
For
available-for-sale
debt securities which are
other-than-temporarily
impaired, the non-credit loss component of
other-than-temporary
impairment is recorded in accumulated other comprehensive income
beginning in 2009.
|
(5)
|
There were no foreign debt securities issued by the governments
of Portugal, Ireland, Italy, Greece or Spain at
December 31, 2010 or 2009.
|
A summary of gross unrealized losses and related fair values as
of December 31, 2010 and 2009, classified as to the length
of time the losses have existed follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2010
|
|
Securities
|
|
|
Losses
|
|
|
Investments
|
|
|
Securities
|
|
|
Losses
|
|
|
Investments
|
|
|
|
|
|
(dollars are in millions)
|
|
|
U.S. Treasury
|
|
|
1
|
|
|
$
|
-
|
|
|
$
|
25
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
U.S. government sponsored enterprises
|
|
|
13
|
|
|
|
(1
|
)
|
|
|
139
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
U.S. government agency issued or guaranteed
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Obligations of U.S. states and political subdivisions
|
|
|
4
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Asset-backed securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8
|
|
|
|
(7
|
)
|
|
|
18
|
|
U.S. corporate debt securities
|
|
|
100
|
|
|
|
(5
|
)
|
|
|
209
|
|
|
|
6
|
|
|
|
(1
|
)
|
|
|
23
|
|
Foreign debt securities
|
|
|
24
|
|
|
|
(1
|
)
|
|
|
56
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Equity Securities
|
|
|
1
|
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
143
|
|
|
$
|
(7
|
)
|
|
$
|
438
|
|
|
|
14
|
|
|
$
|
(8
|
)
|
|
$
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2009
|
|
Securities
|
|
|
Losses
|
|
|
Investments
|
|
|
Securities
|
|
|
Losses
|
|
|
Investments
|
|
|
|
|
|
(dollars are in millions)
|
|
|
U.S. Treasury
|
|
|
17
|
|
|
$
|
(1
|
)
|
|
$
|
97
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
U.S. government sponsored enterprises
|
|
|
1
|
|
|
|
-
|
|
|
|
5
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
4
|
|
U.S. government agency issued or guaranteed
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Obligations of U.S. states and political subdivisions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
Asset-backed securities
|
|
|
7
|
|
|
|
(1
|
)
|
|
|
10
|
|
|
|
18
|
|
|
|
(12
|
)
|
|
|
34
|
|
U.S. corporate debt securities
|
|
|
59
|
|
|
|
(3
|
)
|
|
|
170
|
|
|
|
50
|
|
|
|
(17
|
)
|
|
|
150
|
|
Foreign debt securities
|
|
|
12
|
|
|
|
-
|
|
|
|
33
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96
|
|
|
$
|
(5
|
)
|
|
$
|
315
|
|
|
|
70
|
|
|
$
|
(30
|
)
|
|
$
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized losses decreased during 2010 primarily due to
the impact of lower interest rates. We have reviewed our
securities for which there is an unrealized loss in accordance
with our accounting policies for
other-than-temporary
impairment (OTTI). As a result of this review, OTTI
of less than $1 million was recognized in earnings on
certain debt securities during 2010. In addition, we recognized
a recovery in accumulated other comprehensive income relating to
the non-credit component of
other-than-temporary
impairment previously recognized in accumulated other
comprehensive income totaling $4 million during 2010.
Our decision in the first quarter of 2009 to discontinue new
customer account originations in our Consumer Lending business
adversely impacted certain insurance subsidiaries that held
perpetual preferred securities. Therefore,
154
HSBC Finance Corporation
during the first quarter of 2009 we determined it was
more-likely-than-not that we would be required to sell the
portfolio of perpetual preferred securities prior to recovery of
amortized cost and, therefore, these securities were deemed to
be
other-than-temporarily
impaired. We subsequently sold our entire portfolio of perpetual
preferred securities during the second quarter of 2009. During
2009, we recorded $20 million of impairment losses related
to these perpetual preferred securities as a component of
investment income. The entire unrealized loss was recorded in
earnings in accordance with new accounting guidance which we
early adopted effective January 1, 2009 related to the
recognition of
other-than-temporary
impairment and is described more fully below, as we determined
it was more-likely-than-not that we would be required to sell
the portfolio of perpetual preferred securities prior to
recovery of amortized cost. Additionally, during the fourth
quarter of 2009, certain asset-backed securities were determined
to be
other-than-temporarily
impaired which resulted in an
other-than-temporary
impairment of $16 million being recognized on these
investments. The credit loss component of the impairment on
these debt securities which totaled $5 million was recorded
as a component of OTTI losses in the consolidated statement of
income (loss), while the remaining non-credit portion of the
OTTI loss which totaled $11 million was recognized in other
comprehensive income (loss).
We do not consider any other securities to be
other-than-temporarily
impaired because we expect to recover the entire amortized cost
basis of the securities and we neither intend to nor expect to
be required to sell the securities prior to recovery, even if
that equates to holding securities until their individual
maturities. However, additional
other-than-temporary
impairments may occur in future periods if the credit quality of
the securities deteriorates.
On-Going
Assessment for
Other-Than-Temporary
Impairment
On a quarterly basis, we perform an assessment to determine
whether there have been any events or economic circumstances to
indicate that a security with an unrealized loss has suffered
other-than-temporary
impairment. A debt security is considered impaired if the fair
value is less than its amortized cost basis at the reporting
date. If impaired, we then assess whether the unrealized loss is
other-than-temporary.
An unrealized loss is generally deemed to be
other-than-temporary
and a credit loss is deemed to exist if the present value of the
expected future cash flows is less than the amortized cost basis
of the debt security. As a result, the credit loss component of
an
other-than-temporary
impairment write-down for debt securities is recorded in
earnings while the remaining portion of the impairment loss is
recognized net of tax in other comprehensive income (loss)
provided we do not intend to sell the underlying debt security
and it is more-likely-than-not that we would not have to sell
the debt security prior to recovery.
For all our debt securities, as of the reporting date we do not
have the intention to sell these securities and believe we will
not be required to sell these securities for contractual,
regulatory or liquidity reasons.
We consider the following factors in determining whether a
credit loss exists and the period over which the debt security
is expected to recover:
|
|
|
|
|
The length of time and the extent to which the fair value has
been less than the amortized cost basis;
|
|
|
|
The level of credit enhancement provided by the structure which
includes, but is not limited to, credit subordination positions,
overcollateralization, protective triggers and financial
guarantees provided by monoline wraps;
|
|
|
|
Changes in the near term prospects of the issuer or underlying
collateral of a security, such as changes in default rates, loss
severities given default and significant changes in prepayment
assumptions;
|
|
|
|
The level of excess cash flows generated from the underlying
collateral supporting the principal and interest payments of the
debt securities; and
|
|
|
|
Any adverse change to the credit conditions of the issuer or the
security such as credit downgrades by the rating agencies.
|
At December 31, 2010, approximately 92 percent of our
corporate debt securities are rated A- or better and
approximately 66 percent of our asset-backed securities,
which totaled $60 million are rated AAA.
Although
155
HSBC Finance Corporation
OTTI of less than $1 million was recorded in earnings
during 2010, without a sustained economic recovery, additional
other-than-temporary
impairments may occur in future periods.
Proceeds from the sale, call or redemption of
available-for-sale
investments totaled $216 million, $171 million and
$229 million during 2010, 2009 and 2008, respectively. We
realized gross gains of $7 million, $13 million and
$5 million during 2010, 2009 and 2008, respectively. We
realized gross losses of less than $1 million,
$3 million and $14 million during during 2010, 2009
and 2008, respectively.
Contractual maturities and yields on investments in debt
securities for those with set maturities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
|
|
|
After 1
|
|
|
After 5
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
but Within
|
|
|
but Within
|
|
|
After
|
|
|
|
|
December 31, 2010
|
|
1 Year
|
|
|
5 Years
|
|
|
10 Years
|
|
|
10 Years
|
|
|
Total
|
|
|
|
|
|
(dollars are in millions)
|
|
|
U.S. Treasury:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
$
|
108
|
|
|
$
|
232
|
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
341
|
|
Fair value
|
|
|
109
|
|
|
|
239
|
|
|
|
1
|
|
|
|
-
|
|
|
|
349
|
|
Yield(1)
|
|
|
.81
|
%
|
|
|
2.19
|
%
|
|
|
4.96
|
%
|
|
|
-
|
|
|
|
1.76
|
%
|
U.S. government sponsored enterprises:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
$
|
109
|
|
|
$
|
114
|
|
|
$
|
32
|
|
|
$
|
27
|
|
|
$
|
282
|
|
Fair value
|
|
|
109
|
|
|
|
113
|
|
|
|
35
|
|
|
|
28
|
|
|
|
285
|
|
Yield(1)
|
|
|
.26
|
%
|
|
|
1.34
|
%
|
|
|
4.71
|
%
|
|
|
4.80
|
%
|
|
|
1.64
|
%
|
U.S. government agency issued or guaranteed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
10
|
|
|
$
|
10
|
|
Fair value
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11
|
|
|
|
11
|
|
Yield(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5.01
|
%
|
|
|
5.01
|
%
|
Obligations of U.S. states and political subdivisions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
11
|
|
|
$
|
18
|
|
|
$
|
29
|
|
Fair value
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
|
|
18
|
|
|
|
30
|
|
Yield(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
4.09
|
%
|
|
|
4.06
|
%
|
|
|
4.07
|
%
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
$
|
-
|
|
|
$
|
27
|
|
|
$
|
5
|
|
|
$
|
33
|
|
|
$
|
65
|
|
Fair value
|
|
|
-
|
|
|
|
29
|
|
|
|
5
|
|
|
|
26
|
|
|
|
60
|
|
Yield(1)
|
|
|
-
|
|
|
|
4.86
|
%
|
|
|
6.06
|
%
|
|
|
2.12
|
%
|
|
|
3.56
|
%
|
U.S. corporate debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
$
|
112
|
|
|
$
|
834
|
|
|
$
|
212
|
|
|
$
|
556
|
|
|
$
|
1,714
|
|
Fair value
|
|
|
114
|
|
|
|
879
|
|
|
|
224
|
|
|
|
585
|
|
|
|
1,802
|
|
Yield(1)
|
|
|
4.58
|
%
|
|
|
4.12
|
%
|
|
|
4.56
|
%
|
|
|
5.35
|
%
|
|
|
4.61
|
%
|
Foreign debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
$
|
18
|
|
|
$
|
319
|
|
|
$
|
42
|
|
|
$
|
45
|
|
|
$
|
424
|
|
Fair value
|
|
|
18
|
|
|
|
332
|
|
|
|
43
|
|
|
|
49
|
|
|
|
442
|
|
Yield(1)
|
|
|
3.09
|
%
|
|
|
3.73
|
%
|
|
|
3.97
|
%
|
|
|
6.26
|
%
|
|
|
4.00
|
%
|
|
|
(1) |
Computed by dividing annualized interest by the amortized cost
of respective investment securities.
|
156
HSBC Finance Corporation
Receivables consisted of the following:
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Real estate secured:
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
43,859
|
|
|
$
|
51,988
|
|
Second lien
|
|
|
5,477
|
|
|
|
7,547
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
|
49,336
|
|
|
|
59,535
|
|
Credit card
|
|
|
9,897
|
|
|
|
11,626
|
|
Personal non-credit card
|
|
|
7,117
|
|
|
|
10,486
|
|
Commercial and other
|
|
|
33
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
Total receivables
|
|
|
66,383
|
|
|
|
81,697
|
|
HSBC acquisition purchase accounting fair value adjustments
|
|
|
43
|
|
|
|
(11
|
)
|
Accrued finance income
|
|
|
1,521
|
|
|
|
1,895
|
|
Credit loss reserve for owned receivables
|
|
|
(6,491
|
)
|
|
|
(9,091
|
)
|
Unearned credit insurance premiums and claims reserves
|
|
|
(123
|
)
|
|
|
(182
|
)
|
|
|
|
|
|
|
|
|
|
Total receivables, net
|
|
$
|
61,333
|
|
|
$
|
74,308
|
|
|
|
|
|
|
|
|
|
|
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.
Net deferred origination fees, excluding MasterCard and Visa,
totaled $277 million and $359 million at
December 31, 2010 and 2009, respectively. 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, for continuing operations totaled
$161 million and $140 million at December 31,
2010 and 2009, respectfully.
At December 31, 2010 and 2009, we had a net unamortized
premium on our receivables of $254 million and
$369 million, respectively. Unearned income on personal
non-credit card receivables totaled $30 million and
$96 million at December 31, 2010 and 2009,
respectively.
Purchased Receivable Portfolios In
November 2006, we acquired $2.5 billion of real estate
secured receivables from Champion Mortgage
(Champion) a division of KeyBank, N.A. Receivables
purchased for which at the time of acquisition there was
evidence of deterioration in credit quality since origination,
for which it was probable that all contractually required
payments would not be collected and for which the associated
line of credit had been closed, if applicable, were recorded at
an amount dependent upon the cash flows expected to be collected
at the time of acquisition (Purchased Credit-Impaired
Receivables). The carrying amount of Champion real estate
secured receivables subject to these accounting requirements was
$48 million and $36 million at December 31, 2010
and 2009, respectively, and is included in the real estate
secured receivables in the table above. The remaining accretable
yield for the Champion real estate secured receivables subject
to these accounting requirements was $17 million and
$13 million at December 31, 2010 and 2009,
respectively.
Collateralized Funding Transactions We
currently have secured conduit credit facilities with commercial
banks which provide for secured financings of receivables on a
revolving basis totaling $650 million and $400 million
at December 31, 2010 and 2009, respectively. At
December 31, 2010 and 2009, $455 million and
$400 million, respectively, were available under these
facilities. These facilities mature in the second quarter of
2011 and are renewable at the banks option. The amount
available under these facilities will vary based on the timing
and volume of secured financing transactions and as part of our
ongoing liquidity management plans.
157
HSBC Finance Corporation
Secured financings issued under our current conduit credit
facilities as well as secured financings previously issued under
public trusts of $4.1 billion at December 31, 2010 are
secured by $6.3 billion of closed-end real estate secured
and credit card receivables. Secured financings of
$4.7 billion at December 31, 2009 are secured by
$6.8 billion of closed-end real estate secured receivables.
Age Analysis of Past Due
Receivables The following table summarizes
the past due status of our receivables at December 31,
2010. The aging of past due amounts are determined based on the
contractual delinquency status of payments made under the
receivable. An account is generally considered to be
contractually delinquent when payments have not been made in
accordance with the loan terms. Delinquency status may be
affected by customer account management policies and practices
such as re-age or modification. Additionally, delinquency status
is also impacted by payment percentage requirements which vary
between servicing platforms.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Days Past
Due(1)
|
|
|
Total
|
|
|
|
|
|
Total
|
|
|
|
1 29 days
|
|
|
30 89 days
|
|
|
>90 days
|
|
|
Past
Due(1)
|
|
|
Current
|
|
|
Receivables
|
|
|
|
|
|
(in millions)
|
|
|
Real estate secured:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
7,024
|
|
|
$
|
4,909
|
|
|
$
|
5,977
|
|
|
$
|
17,910
|
|
|
$
|
25,949
|
|
|
$
|
43,859
|
|
Second lien
|
|
|
935
|
|
|
|
568
|
|
|
|
421
|
|
|
|
1,924
|
|
|
|
3,553
|
|
|
|
5,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
|
7,959
|
|
|
|
5,477
|
|
|
|
6,398
|
|
|
|
19,834
|
|
|
|
29,502
|
|
|
|
49,336
|
|
Credit card
|
|
|
473
|
|
|
|
363
|
|
|
|
437
|
|
|
|
1,273
|
|
|
|
8,624
|
|
|
|
9,897
|
|
Personal non-credit card
|
|
|
968
|
|
|
|
604
|
|
|
|
507
|
|
|
|
2,079
|
|
|
|
5,038
|
|
|
|
7,117
|
|
Commercial and other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
33
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables
|
|
$
|
9,400
|
|
|
$
|
6,444
|
|
|
$
|
7,342
|
|
|
$
|
23,186
|
|
|
$
|
43,197
|
|
|
$
|
66,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The receivable balances included in this table reflects the
principal amount outstanding on the loan and various basis
adjustments to the loan such as deferred fees and costs on
originated loans, purchase accounting fair value adjustments and
premiums or discounts on purchased loans. However, these basis
adjustments to the loans are excluded in other presentations
regarding delinquent account balances.
|
Contractual maturities Contractual maturities
of our receivables were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
|
|
(in millions)
|
|
|
Real estate secured
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
117
|
|
|
$
|
33
|
|
|
$
|
55
|
|
|
$
|
100
|
|
|
$
|
118
|
|
|
$
|
43,436
|
|
|
$
|
43,859
|
|
Second lien
|
|
|
76
|
|
|
|
23
|
|
|
|
36
|
|
|
|
45
|
|
|
|
34
|
|
|
|
5,263
|
|
|
|
5,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
|
193
|
|
|
|
56
|
|
|
|
91
|
|
|
|
145
|
|
|
|
152
|
|
|
|
48,699
|
|
|
|
49,336
|
|
Credit
card(1)
|
|
|
5,236
|
|
|
|
1,974
|
|
|
|
1,009
|
|
|
|
568
|
|
|
|
346
|
|
|
|
764
|
|
|
|
9,897
|
|
Personal non-credit card
|
|
|
278
|
|
|
|
190
|
|
|
|
188
|
|
|
|
95
|
|
|
|
59
|
|
|
|
6,307
|
|
|
|
7,117
|
|
Commercial and other
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,717
|
|
|
$
|
2,220
|
|
|
$
|
1,288
|
|
|
$
|
808
|
|
|
$
|
557
|
|
|
$
|
55,793
|
|
|
$
|
66,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
As credit card receivables do not have stated contractual
maturities, the table reflects estimates based on historical
repayment patterns.
|
As 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.
158
HSBC Finance Corporation
The following table summarizes contractual maturities of
receivables due after one year by repricing characteristic:
|
|
|
|
|
|
|
|
|
|
|
Over 1
|
|
|
|
|
|
|
But Within
|
|
|
Over
|
|
At December 31, 2010
|
|
5 Years
|
|
|
5 Years
|
|
|
|
|
|
(in millions)
|
|
|
Receivables at predetermined interest rates
|
|
$
|
1,641
|
|
|
$
|
47,121
|
|
Receivables at floating or adjustable rates
|
|
|
3,225
|
|
|
|
8,679
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,866
|
|
|
$
|
55,800
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual receivables Nonaccrual consumer
receivables reflect all non-credit card receivables which are 90
or more days contractually delinquent and totaled
$6.9 billion and $8.0 billion at December 31,
2010 and 2009, respectively. Nonaccrual receivables do not
include receivables which have made qualifying payments and have
been re-aged and the contractual delinquency status reset to
current as such activity, in our judgment, evidences continued
payment probability. If a re-aged loan subsequently experiences
payment default and becomes 90 or more days contractually
delinquent, it will be reported as nonaccrual. Nonaccrual
receivable also do not include credit card receivables which,
consistent with industry practice, continue to accrue until
charge-off. Interest income that was not recorded but would have
been recorded if such nonaccrual receivables had been current
and in accordance with contractual terms was approximately
$339 million in 2010 and $302 million in 2009.
Interest income that was included in finance and other interest
income prior to these loans being placed on nonaccrual status
was approximately $489 million in 2010 and
$620 million in 2009 of which portions have been
written-off. For an analysis of reserves for credit losses, see
Note 9, Credit Loss Reserves.
Nonaccrual receivables and accruing receivables 90 or more days
delinquent are summarized in the following table.
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Nonaccrual receivables:
|
|
|
|
|
|
|
|
|
Real estate
secured(1)(2)
|
|
$
|
6,356
|
|
|
$
|
6,989
|
|
Personal non-credit card
|
|
|
530
|
|
|
|
998
|
|
|
|
|
|
|
|
|
|
|
Total non-accrual receivables
|
|
|
6,886
|
|
|
|
7,987
|
|
Nonaccrual receivables held for sale
|
|
|
4
|
|
|
|
6
|
|
Accruing credit card receivables 90 or more days
delinquent(3)
|
|
|
447
|
|
|
|
890
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming receivables
|
|
$
|
7,337
|
|
|
$
|
8,883
|
|
|
|
|
|
|
|
|
|
|
Credit loss reserves as a percent of nonperforming
receivables-continuing
operations(4)
|
|
|
88.5
|
%
|
|
|
102.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
At December 31, 2010 and 2009, non-accrual real estate
secured receivables includes $4.1 billion and
$3.3 billion, respectively, of receivables that are carried
at the lower of cost or net realizable value.
|
(2)
|
Nonaccrual real estate secured receivables, excluding
receivables held for sale, are comprised of the following:
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
Real estate secured:
|
|
|
|
|
|
|
|
|
Closed-end:
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
5,906
|
|
|
$
|
6,298
|
|
Second lien
|
|
|
320
|
|
|
|
510
|
|
Revolving:
|
|
|
|
|
|
|
|
|
First lien
|
|
|
6
|
|
|
|
2
|
|
Second lien
|
|
|
124
|
|
|
|
179
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
$
|
6,356
|
|
|
$
|
6,989
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) |
Credit card receivables continue to accrue interest after they
become 90 or more days delinquent, consistent with industry
practice.
|
159
HSBC Finance Corporation
|
|
(4) |
Ratio represents credit loss reserves divided by the
corresponding outstanding balance of total nonperforming
receivables. Nonperforming receivables include accruing loans
contractually past due 90 days or more, but excludes
nonperforming receivables associated with receivable portfolios
which are considered held for sale as these receivables are
carried at the lower of cost or fair value with no corresponding
credit loss reserves.
|
Troubled
Debt
Restructurings The
following table presents information about our TDR Loans:
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
TDR
Loans(1)(2):
|
|
|
|
|
|
|
|
|
Real estate secured:
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
8,697
|
|
|
$
|
8,379
|
|
Second lien
|
|
|
647
|
|
|
|
747
|
|
|
|
|
|
|
|
|
|
|
Total real estate
secured(3)(4)
|
|
|
9,344
|
|
|
|
9,126
|
|
Credit card
|
|
|
427
|
|
|
|
461
|
|
Personal non-credit card
|
|
|
704
|
|
|
|
726
|
|
|
|
|
|
|
|
|
|
|
Total TDR Loans
|
|
$
|
10,475
|
|
|
$
|
10,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Credit loss reserves for TDR Loans:
|
|
|
|
|
|
|
|
|
Real estate secured:
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
1,728
|
|
|
$
|
1,766
|
|
Second lien
|
|
|
258
|
|
|
|
373
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
|
1,986
|
|
|
|
2,139
|
|
Credit card
|
|
|
154
|
|
|
|
158
|
|
Personal non-credit card
|
|
|
395
|
|
|
|
353
|
|
|
|
|
|
|
|
|
|
|
Total credit loss reserves for TDR
Loans(1)(5)
|
|
$
|
2,535
|
|
|
$
|
2,650
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
TDR Loans are considered to be impaired loans regardless of
accrual status. We use certain assumptions and estimates to
compile our TDR balances and future cash flow estimates relating
to these loans.
|
(2)
|
The TDR Loan balances included in the table above reflect the
current carrying amount of TDR Loans and includes all basis
adjustments on the loan, such as unearned income, unamortized
deferred fees and costs on originated loans and premiums or
discounts on purchased loans. The following table reflects the
unpaid principal balance of TDR Loans:
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Real estate secured:
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
9,650
|
|
|
$
|
8,915
|
|
Second lien
|
|
|
709
|
|
|
|
767
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
|
10,359
|
|
|
|
9,682
|
|
Credit card
|
|
|
434
|
|
|
|
473
|
|
Personal non-credit card
|
|
|
705
|
|
|
|
726
|
|
|
|
|
|
|
|
|
|
|
Total TDR Loans
|
|
$
|
11,498
|
|
|
$
|
10,881
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) |
At December 31, 2010 and 2009, TDR Loans totaling
$1.5 billion and $773 million, respectively, are
recorded at net realizable value less cost to sell and,
therefore, generally do not have credit loss reserves associated
with them.
|
160
HSBC Finance Corporation
|
|
(4) |
The following table summarizes real estate secured TDR Loans for
our Mortgage Services and Consumer Lending businesses:
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Mortgage Services
|
|
$
|
4,114
|
|
|
$
|
4,350
|
|
Consumer Lending
|
|
|
5,230
|
|
|
|
4,776
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
$
|
9,344
|
|
|
$
|
9,126
|
|
|
|
|
|
|
|
|
|
|
|
|
(5) |
Included in credit loss reserves.
|
Additional information relating to TDR Loans is presented in the
table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(in millions)
|
|
|
Average balance of TDR
Loans(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate secured
|
|
$
|
9,534
|
(2)
|
|
$
|
5,743
|
|
|
$
|
3,521
|
|
Credit card
|
|
|
467
|
|
|
|
287
|
|
|
|
398
|
|
Personal non-credit card
|
|
|
736
|
|
|
|
731
|
|
|
|
530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average balance of TDR Loans
|
|
$
|
10,737
|
|
|
$
|
6,761
|
|
|
$
|
4,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income recognized on TDR Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate secured:
|
|
$
|
446
|
(2)
|
|
$
|
323
|
|
|
$
|
266
|
|
Credit card
|
|
|
50
|
|
|
|
23
|
|
|
|
25
|
|
Personal non-credit card
|
|
|
47
|
|
|
|
53
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income recognized on TDR Loans
|
|
$
|
543
|
|
|
$
|
399
|
|
|
$
|
332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
As previously disclosed in our 2009
Form 10-K,
modified loans which otherwise qualified as a TDR have
historically continued to be reported as a TDR until such loans
left a qualifying modification status. This was the result of
our financial accounting systems not having the ability to track
and report modified real estate secured loans which previously
had been considered a TDR once they left a qualifying
modification status. During the second half of 2009, we
developed enhanced tracking capabilities which enabled us to
identify and report certain modified customer loans which had
qualified as a TDR, but did not remain in compliance with the
modified loan terms and were subsequently removed from
modification status. Additionally, during the fourth quarter of
2009 we also discovered that certain loans which should have
been identified and reported as TDRs prior to the fourth quarter
of 2009 were not being captured in our disclosure. The impact of
these system changes resulted in an increase in real estate
secured and personal non-credit card TDR Loans reported during
the second half of 2009 and impacts the comparability of the
average balance of TDR Loans between the periods reported above.
|
(2)
|
The following summarizes the average balance of real estate
secured TDR Loans and interest income recognized on real estate
secured TDR Loans split between first and second lien loans for
the year ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
Second
|
|
Total Real
|
|
|
Lien
|
|
Lien
|
|
Estate Secured
|
|
|
|
(in millions)
|
|
Average balance of real estate secured TDR Loans
|
|
$
|
8,832
|
|
|
$
|
702
|
|
|
$
|
9,534
|
|
Interest income recognized on real estate secured TDR Loans
|
|
|
407
|
|
|
|
39
|
|
|
|
446
|
|
Consumer Receivable Credit Quality
Indicators Credit quality indicators used for
consumer receivables include a loans delinquency status,
whether the loan is performing and whether the loan is
considered a TDR Loan.
161
HSBC Finance Corporation
Delinquency The following table summarizes dollars
of two-months-and-over contractual delinquency and as a percent
of total receivables and receivables held for sale
(delinquency ratio) for our loan portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Dollars of
|
|
|
Delinquency
|
|
|
Dollars of
|
|
|
Delinquency
|
|
|
|
Delinquency
|
|
|
Ratio
|
|
|
Delinquency
|
|
|
Ratio
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Real estate secured:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
7,504
|
|
|
|
17.11
|
%
|
|
$
|
8,372
|
|
|
|
16.10
|
%
|
Second lien
|
|
|
667
|
|
|
|
12.18
|
|
|
|
1,023
|
|
|
|
13.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
|
8,171
|
|
|
|
16.56
|
|
|
|
9,395
|
|
|
|
15.78
|
|
Credit card receivables
|
|
|
612
|
|
|
|
6.18
|
|
|
|
1,211
|
|
|
|
10.41
|
|
Personal non-credit card
|
|
|
779
|
|
|
|
10.94
|
|
|
|
1,432
|
|
|
|
13.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,562
|
|
|
|
14.41
|
%
|
|
$
|
12,038
|
|
|
|
14.74
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming The status of our consumer receivable
portfolio are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractually Past
|
|
|
|
|
|
|
Performing
|
|
|
Nonaccrual
|
|
|
Due 90 days or
|
|
|
|
|
|
|
Loans
|
|
|
Loans
|
|
|
More(1)
|
|
|
Total
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
At December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate secured
|
|
$
|
42,976
|
|
|
$
|
6,360
|
|
|
$
|
-
|
|
|
$
|
49,336
|
|
Credit Cards
|
|
|
9,450
|
|
|
|
-
|
|
|
|
447
|
|
|
|
9,897
|
|
Personal non-credit card
|
|
|
6,587
|
|
|
|
530
|
|
|
|
-
|
|
|
|
7,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
59,013
|
|
|
$
|
6,890
|
|
|
$
|
447
|
|
|
$
|
66,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate secured
|
|
$
|
52,540
|
|
|
$
|
6,995
|
|
|
$
|
-
|
|
|
$
|
59,535
|
|
Credit Cards
|
|
|
10,736
|
|
|
|
-
|
|
|
|
890
|
|
|
|
11,626
|
|
Personal non-credit card
|
|
|
9,488
|
|
|
|
998
|
|
|
|
-
|
|
|
|
10,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
72,764
|
|
|
$
|
7,993
|
|
|
$
|
890
|
|
|
$
|
81,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Credit card receivables continue to accrue interest after they
become 90 days or more delinquent, consistent with industry
practice.
|
Troubled debt restructurings See discussion of TDR
Loans above for further details on this credit quality indicator.
|
|
8.
|
Changes
in Charge-off Policies During 2009
|
We have historically maintained charge-off policies within our
Consumer Lending and Mortgage Services businesses that were
developed in consideration of the historical consumer finance
customer profile. As such, these policies focused on maximizing
the amount of cash collected while avoiding excessive collection
expenses on loans which would likely become uncollectible. Our
historical real estate secured charge-off policies reflected
consideration of customer behavior in that initiation of
foreclosure or repossession activities often served to prompt
repayment of delinquent balances and, therefore, were designed
to avoid ultimate foreclosure or repossession whenever it was
economically reasonable. Charge-off policies for our personal
non-credit card receivables were designed to be responsive to
customer needs and collection experience which justified a
longer collection and work out period for the consumer finance
customer. Therefore, the charge-off policies for these products
were historically longer than bank competitors who served a
different market.
The impact of the economic turmoil which began in 2007 resulted
in a change to the customer behavior patterns described above
and it became clear in 2009 that the historical behavior
patterns will not be re-established for the foreseeable future,
if at all. As a result of these changes in customer behavior and
resultant payment patterns, in
162
HSBC Finance Corporation
December 2009 we elected to adopt more bank-like charge-off
policies for our real estate secured and personal non-credit
card receivables. As a result, real estate secured receivables
are now written down to net realizable value less cost to sell
generally no later than the end of the month in which the
account becomes 180 days contractually delinquent. For
personal non-credit card receivables, charge-off now occurs
generally no later than the end of the month in which the
account becomes 180 days contractually delinquent.
The impact of the changes in our charge-off policies adopted
during the fourth quarter of 2009 resulted in an increase to our
net loss of $227 million as summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal
|
|
|
|
|
|
|
Real Estate
|
|
|
Non-Credit
|
|
|
|
|
|
|
Secured
|
|
|
Card
|
|
|
Total
|
|
|
|
|
|
(in millions)
|
|
|
Net interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of accrued interest income on charged-off
accounts(1)
|
|
$
|
246
|
|
|
$
|
105
|
|
|
$
|
351
|
|
Provision for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs to comply with charge-off policy changes
|
|
|
2,402
|
|
|
|
1,071
|
|
|
|
3,473
|
|
Release of credit loss reserves associated with principal and
accrued interest income
|
|
|
(2,594
|
)
|
|
|
(878
|
)
|
|
|
(3,472
|
)
|
Tax benefit
|
|
|
(19
|
)
|
|
|
(106
|
)
|
|
|
(125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reductions to net income
|
|
$
|
35
|
|
|
$
|
192
|
|
|
$
|
227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Accrued interest income is reversed against finance and other
interest income.
|
An analysis of credit loss reserves for continuing operations
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Credit loss reserves at beginning of period
|
|
$
|
9,091
|
|
|
$
|
12,030
|
|
|
$
|
10,127
|
|
Provision for credit losses
|
|
|
6,180
|
|
|
|
9,650
|
|
|
|
12,410
|
(1)
|
Charge-offs
|
|
|
(9,500
|
)
|
|
|
(13,087
|
)(2)
|
|
|
(9,975
|
)
|
Recoveries
|
|
|
720
|
|
|
|
498
|
|
|
|
646
|
|
Reserves on receivables transferred to held for sale
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,168
|
)
|
Other, net
|
|
|
-
|
|
|
|
-
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit loss reserves at end of period
|
|
$
|
6,491
|
|
|
$
|
9,091
|
|
|
$
|
12,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes $191 million in 2008 related to the lower of cost
or fair value adjustment attributable to credit for receivables
transferred to held for sale. See Note 10,
Receivables Held for Sale, for further discussion.
|
|
|
(2) |
Includes $3.5 billion related to the changes in charge-off
polices for real estate secured and personal non-credit card
receivables in December 2009. See Note 8, Changes to
Charge-off Policies During 2009, for additional
information.
|
163
HSBC Finance Corporation
The following table summarizes the changes in credit loss
reserves by product/class and the related receivable balance by
product during the years ended December 31, 2010, 2009 and
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Secured
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Credit
|
|
|
|
|
|
Personal Non-
|
|
|
Comml
|
|
|
|
|
|
|
Lien
|
|
|
Lien
|
|
|
Card
|
|
|
Private Label
|
|
|
Credit Card
|
|
|
and Other
|
|
|
Total
|
|
|
|
|
Year ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit loss reserve balances at beginning of period
|
|
$
|
3,997
|
|
|
$
|
1,430
|
|
|
$
|
1,816
|
|
|
$
|
-
|
|
|
$
|
1,848
|
|
|
$
|
-
|
|
|
$
|
9,091
|
|
Provision for credit losses
|
|
|
3,126
|
|
|
|
789
|
|
|
|
834
|
|
|
|
-
|
|
|
|
1,431
|
|
|
|
-
|
|
|
|
6,180
|
|
Charge-offs
|
|
|
(3,811
|
)
|
|
|
(1,456
|
)
|
|
|
(1,905
|
)
|
|
|
-
|
|
|
|
(2,328
|
)
|
|
|
-
|
|
|
|
(9,500
|
)
|
Recoveries
|
|
|
43
|
|
|
|
69
|
|
|
|
233
|
|
|
|
-
|
|
|
|
375
|
|
|
|
-
|
|
|
|
720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(3,768
|
)
|
|
|
(1,387
|
)
|
|
|
(1,672
|
)
|
|
|
-
|
|
|
|
(1,953
|
)
|
|
|
-
|
|
|
|
(8,780
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit loss reserve balance at end of period
|
|
$
|
3,355
|
|
|
$
|
832
|
|
|
$
|
978
|
|
|
$
|
-
|
|
|
$
|
1,326
|
|
|
$
|
-
|
|
|
$
|
6,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
1,611
|
|
|
$
|
571
|
|
|
$
|
824
|
|
|
$
|
-
|
|
|
$
|
931
|
|
|
$
|
-
|
|
|
$
|
3,937
|
|
Ending balance: individually evaluated for
impairment(3)
|
|
|
1,728
|
|
|
|
258
|
|
|
|
154
|
|
|
|
-
|
|
|
|
395
|
|
|
|
-
|
|
|
|
2,535
|
|
Ending balance: loans acquired with deteriorated credit quality
|
|
|
16
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total credit loss reserves
|
|
$
|
3,355
|
|
|
$
|
832
|
|
|
$
|
978
|
|
|
$
|
-
|
|
|
$
|
1,326
|
|
|
$
|
-
|
|
|
$
|
6,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
31,556
|
|
|
$
|
4,762
|
|
|
$
|
9,470
|
|
|
$
|
-
|
|
|
$
|
6,413
|
|
|
$
|
33
|
|
|
$
|
52,234
|
|
Individually evaluated for
impairment(3)
|
|
|
7,240
|
|
|
|
635
|
|
|
|
427
|
|
|
|
-
|
|
|
|
704
|
|
|
|
-
|
|
|
|
9,006
|
|
Receivables carried at net realizable value
|
|
|
5,022
|
|
|
|
73
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,095
|
|
Receivables acquired with deteriorated credit quality
|
|
|
41
|
|
|
|
7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables
|
|
$
|
43,859
|
|
|
$
|
5,477
|
|
|
$
|
9,897
|
|
|
$
|
-
|
|
|
$
|
7,117
|
|
|
$
|
33
|
|
|
$
|
66,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit loss reserve balances at beginning of period
|
|
$
|
4,998
|
|
|
$
|
2,115
|
|
|
$
|
2,249
|
|
|
$
|
-
|
|
|
$
|
2,668
|
|
|
$
|
-
|
|
|
$
|
12,030
|
|
Provision for credit losses
|
|
|
3,354
|
|
|
|
1,558
|
|
|
|
1,746
|
|
|
|
-
|
|
|
|
2,992
|
|
|
|
-
|
|
|
|
9,650
|
|
Charge-offs(1)
|
|
|
(4,381
|
)
|
|
|
(2,282
|
)
|
|
|
(2,385
|
)
|
|
|
-
|
|
|
|
(4,039
|
)
|
|
|
-
|
|
|
|
(13,087
|
)
|
Recoveries
|
|
|
26
|
|
|
|
39
|
|
|
|
206
|
|
|
|
-
|
|
|
|
227
|
|
|
|
-
|
|
|
|
498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(4,355
|
)
|
|
|
(2,243
|
)
|
|
|
(2,179
|
)
|
|
|
-
|
|
|
|
(3,812
|
)
|
|
|
-
|
|
|
|
(12,589
|
)
|
Receivables transferred to held for sale
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit loss reserve balance at end of period
|
|
$
|
3,997
|
|
|
$
|
1,430
|
|
|
$
|
1,816
|
|
|
$
|
-
|
|
|
$
|
1,848
|
|
|
$
|
-
|
|
|
$
|
9,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
2,206
|
|
|
$
|
1,051
|
|
|
$
|
1,658
|
|
|
$
|
-
|
|
|
$
|
1,495
|
|
|
$
|
-
|
|
|
$
|
6,410
|
|
Ending balance: individually evaluated for
impairment(3)
|
|
|
1,766
|
|
|
|
373
|
|
|
|
158
|
|
|
|
-
|
|
|
|
353
|
|
|
|
-
|
|
|
|
2,650
|
|
Ending balance: loans acquired with deteriorated credit quality
|
|
|
25
|
|
|
|
6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total credit loss reserves
|
|
$
|
3,997
|
|
|
$
|
1,430
|
|
|
$
|
1,816
|
|
|
$
|
-
|
|
|
$
|
1,848
|
|
|
$
|
-
|
|
|
$
|
9,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
40,972
|
|
|
$
|
6,753
|
|
|
$
|
11,165
|
|
|
$
|
-
|
|
|
$
|
9,760
|
|
|
$
|
50
|
|
|
$
|
68,700
|
|
Individually evaluated for
impairment(3)
|
|
|
7,613
|
|
|
|
741
|
|
|
|
461
|
|
|
|
-
|
|
|
|
726
|
|
|
|
-
|
|
|
|
9,541
|
|
Receivables carried at net realizable value
|
|
|
3,374
|
|
|
|
46
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,420
|
|
Receivables acquired with deteriorated credit quality
|
|
|
29
|
|
|
|
7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables
|
|
$
|
51,988
|
|
|
$
|
7,547
|
|
|
$
|
11,626
|
|
|
$
|
-
|
|
|
$
|
10,486
|
|
|
$
|
50
|
|
|
$
|
81,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
2,350
|
|
|
$
|
2,604
|
|
|
$
|
2,635
|
|
|
$
|
26
|
|
|
$
|
2,511
|
|
|
$
|
1
|
|
|
$
|
10,127
|
|
Provision for credit losses
|
|
|
4,684
|
|
|
|
1,978
|
|
|
|
3,333
|
|
|
|
19
|
|
|
|
2,396
|
|
|
|
-
|
|
|
|
12,410
|
|
Charge-offs
|
|
|
(1,956
|
)
|
|
|
(2,362
|
)
|
|
|
(3,147
|
)
|
|
|
(35
|
)
|
|
|
(2,474
|
)
|
|
|
(1
|
)
|
|
|
(9,975
|
)
|
Recoveries
|
|
|
10
|
|
|
|
39
|
|
|
|
369
|
|
|
|
6
|
|
|
|
222
|
|
|
|
-
|
|
|
|
646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(1,946
|
)
|
|
|
(2,323
|
)
|
|
|
(2,778
|
)
|
|
|
(29
|
)
|
|
|
(2,252
|
)
|
|
|
(1
|
)
|
|
|
(9,329
|
)
|
Receivables transferred to held for sale
|
|
|
(80
|
)
|
|
|
(144
|
)
|
|
|
(944
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,168
|
)
|
Release of credit loss reserves related to loan sales
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
4,998
|
|
|
$
|
2,115
|
|
|
$
|
2,246
|
|
|
$
|
16(2
|
)
|
|
$
|
2,655
|
|
|
$
|
-
|
|
|
$
|
12,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
164
HSBC Finance Corporation
|
|
(1)
|
Includes $2.0 billion for first lien real estate secured
receivables, $434 million for second lien real estate
secured receivables and $1.1 billion for personal
non-credit card receivables related to the December 2009
Charge-off Policy Changes.
|
(2)
|
In the first quarter of 2009, we began reporting our liquidating
private label receivable portfolio, which consists primarily of
the liquidating retail sales contracts in our Consumer Lending
business prospectively within our personal non-credit card
receivable portfolio. Accordingly, beginning in the first
quarter of 2009, we have also begun reporting the associated
credit loss reserves for these receivables with the appropriate
receivable product, primarily personal non-credit card
receivables.
|
(3)
|
These amounts represent TDR Loans for which we evaluate reserves
using a discounted cash flow methodology. Each loan is
individually identified as a TDR Loan and then grouped together
with other TDR Loans with similar characteristics. The
discounted cash flow impairment analysis is then applied to
these groups of TDR Loans.
|
Credit loss reserves at December 31, 2009 were
significantly impacted by changes in our charge-off policies for
real estate secured, personal non-credit card and auto finance
receivables. See Note 8, Changes in Charge-off
Policies During 2009, for further discussion.
|
|
10.
|
Receivables
Held for Sale
|
Receivables held for sale, which are carried at the lower of
cost or fair value, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Real estate secured receivables held for
sale(1)
|
|
$
|
4
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
These receivables were originated with the intent to sell.
|
The following table shows the activity in receivables held for
sale during 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Receivables held for sale at beginning of period
|
|
$
|
3
|
|
|
$
|
13,894
|
|
Receivable sales
|
|
|
-
|
|
|
|
(12,112
|
)
|
Additional lower of cost or fair value adjustment subsequent to
transfer to receivables held for sale
|
|
|
2
|
|
|
|
(374
|
)
|
Transfer into receivables held for investment at the lower of
cost or fair value:
|
|
|
|
|
|
|
|
|
Real estate secured
|
|
|
-
|
|
|
|
(216
|
)
|
Credit card
|
|
|
-
|
|
|
|
(1,078
|
)
|
Net change in receivable balance
|
|
|
(1
|
)
|
|
|
(111
|
)
|
|
|
|
|
|
|
|
|
|
Receivables held for sale at end of period
|
|
$
|
4
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
In January 2009, we sold our GM and UP Portfolios to HSBC Bank
USA. See Note 4, Receivable Portfolio Sales to HSBC
Bank USA, and Note 23, Related Party
Transactions, for details of these transactions.
In March and September 2009, we transferred real estate secured
receivables previously classified as receivables held for sale
to receivables held for investment as we now intend to hold
these receivables for the foreseeable future, generally twelve
months for real estate secured receivables. These receivables
were transferred at their current fair market value of
$216 million.
In June and December 2009, we transferred credit card
receivables previously classified as receivables held for sale
to receivables held for investment as we now intend to hold
these receivables for the foreseeable future. These receivables
were transferred at their current fair market value of
$1.1 billion.
165
HSBC Finance Corporation
The following table summarizes the components of the lower of
cost or fair value adjustments recorded at the date of transfer
to receivables held for sale during 2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(in millions)
|
|
|
Provision for credit
losses(1)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
191
|
|
Lower of cost or fair value adjustment recorded as a component
of other
income(2)
|
|
|
-
|
|
|
|
-
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total lower of cost or fair value adjustment
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The portion of the lower of cost or fair value adjustment
attributable to credit was recorded as a provision for credit
losses. This was determined by giving consideration to the
impact of
over-the-life
credit loss estimates as compared to the existing credit loss
reserves prior to our decision to transfer to receivables held
for sale.
|
(2)
|
Reflects the impact on value caused by current marketplace
conditions including changes in interest rates and illiquidity.
|
The valuation allowance on receivables held for sale was
$3 million and $7 million at December 31, 2010
and 2009, respectively.
As it relates to our discontinued auto finance operations, in
June and September 2009, we transferred auto finance receivables
with a combined fair value of $533 million to receivables
held for sale and recorded a lower of cost or fair value
adjustment of $44 million during 2009 attributable to
credit and marketplace conditions and is included as a component
loss from discontinued operations. These receivables were sold
to SC USA during March 2010. Additionally, in July 2010, we
transferred auto finance receivables to held for sale with an
outstanding principal balance of $2.9 billion at the time
of transfer and recorded a lower of cost or fair value
adjustment of $87 million attributable to credit which was
included as a component of loss from discontinued operations.
These receivables were sold to SC USA in August 2010. See
Note 3, Discontinued Operations, for additional
information on these transactions.
|
|
11.
|
Properties
and Equipment
|
Property and Equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciable
|
At December 31,
|
|
2010
|
|
|
2009
|
|
|
Life
|
|
|
|
(dollars are in millions)
|
|
Land
|
|
$
|
13
|
|
|
$
|
13
|
|
|
-
|
Buildings and improvements
|
|
|
257
|
|
|
|
233
|
|
|
10-40 years
|
Furniture and equipment
|
|
|
43
|
|
|
|
47
|
|
|
3-10
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
313
|
|
|
|
293
|
|
|
|
Accumulated depreciation and amortization
|
|
|
(111
|
)
|
|
|
(92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Properties and equipment, net
|
|
$
|
202
|
|
|
$
|
201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense for continuing operations
totaled $29 million, $38 million and $56 million
in 2010, 2009 and 2008, respectively.
166
HSBC Finance Corporation
Intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
|
|
|
Accumulated
|
|
|
Carrying
|
|
At December 31, 2010
|
|
Gross
|
|
|
Charges
|
|
|
Amortization
|
|
|
Value
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Purchased credit card relationships and related
programs(1)
|
|
$
|
1,736
|
|
|
$
|
-
|
|
|
$
|
1,131
|
|
|
$
|
605
|
|
Consumer loan related relationships
|
|
|
333
|
|
|
|
163
|
|
|
|
170
|
|
|
|
-
|
|
Technology, customer lists and other contracts
|
|
|
261
|
|
|
|
9
|
|
|
|
252
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,330
|
|
|
$
|
172
|
|
|
$
|
1,553
|
|
|
$
|
605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
|
|
|
Accumulated
|
|
|
Carrying
|
|
December 31, 2009
|
|
Gross
|
|
|
Charges
|
|
|
Amortization
|
|
|
Value
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Purchased credit card relationships and related
programs(1)
|
|
$
|
1,736
|
|
|
$
|
-
|
|
|
$
|
992
|
|
|
$
|
744
|
|
Consumer loan related relationships
|
|
|
333
|
|
|
|
163
|
|
|
|
170
|
|
|
|
-
|
|
Technology, customer lists and other contracts
|
|
|
261
|
|
|
|
9
|
|
|
|
248
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,330
|
|
|
$
|
172
|
|
|
$
|
1,410
|
|
|
$
|
748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Purchased credit card relationships are being amortized to their
estimated residual value of $162 million at
December 31, 2010 and 2009.
|
During the third quarter of 2010, we completed our annual
impairment testing of intangible assets. As a result of this
testing, we determined that the fair value of each remaining
intangible asset exceeded its carrying value. Therefore, we
concluded that none of our intangible assets were impaired.
The weighted-average amortization period for our purchased
credit card relationships and related programs as of
December 31, 2010 was 106 months.
Intangible amortization expense totaled totaled
$143 million, $157 million and $178 million in
2010, 2009 and 2008, respectively. Estimated amortization
expense associated with our intangible assets for each of the
following years is as follows:
|
|
|
|
|
Year Ending December 31,
|
|
(in millions)
|
|
|
|
|
2011
|
|
$
|
138
|
|
2012
|
|
|
135
|
|
2013
|
|
|
99
|
|
2014
|
|
|
71
|
|
13. Goodwill
Changes in the carrying amount of goodwill for continuing
operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Balance at beginning of year
|
|
$
|
-
|
|
|
$
|
2,294
|
|
Goodwill impairment related to the Insurance Services business
|
|
|
-
|
|
|
|
(260
|
)
|
Goodwill impairment related to the Card and Retail Services
business
|
|
|
-
|
|
|
|
(2,034
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
-
|
(1)
|
|
$
|
-
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
At December 31, 2010 and 2009, accumulated impairment
losses on goodwill totaled $6.0 billion.
|
167
HSBC Finance Corporation
As a result of the continuing deterioration of economic
conditions throughout 2008 and into 2009 as well as the adverse
impact to our Insurance Services business which resulted from
the closure of all of our Consumer Lending branches, we wrote
off all of our remaining goodwill balance during the first half
of 2009.
|
|
|
|
|
|
|
Commercial
|
|
|
|
Paper
|
|
|
|
|
|
(in millions)
|
|
|
December 31, 2010
|
|
|
|
|
Balance
|
|
$
|
3,156
|
|
Highest aggregate month-end balance
|
|
|
4,864
|
|
Average borrowings
|
|
|
3,732
|
|
Weighted-average interest rate:
|
|
|
|
|
At year-end
|
|
|
.3
|
%
|
Paid during year
|
|
|
.3
|
|
December 31, 2009
|
|
|
|
|
Balance
|
|
$
|
4,291
|
|
Highest aggregate month-end balance
|
|
|
6,973
|
|
Average borrowings
|
|
|
5,412
|
|
Weighted-average interest rate:
|
|
|
|
|
At year-end
|
|
|
.4
|
%
|
Paid during year
|
|
|
.9
|
|
December 31, 2008
|
|
|
|
|
Balance
|
|
$
|
9,639
|
|
Highest aggregate month-end balance
|
|
|
11,901
|
|
Average borrowings
|
|
|
7,853
|
|
Weighted-average interest rate:
|
|
|
|
|
At year-end
|
|
|
1.0
|
%
|
Paid during year
|
|
|
2.6
|
|
Interest expense for commercial paper totaled $11 million
in 2010, $49 million in 2009 and $207 million in 2008.
We maintain various bank credit agreements primarily to support
commercial paper borrowings. We had committed
back-up
lines of credit totaling $6.3 billion and $7.8 billion
at December 31, 2010 and 2009, respectively. At
December 31, 2009, one of these facilities totaling
$2.5 billion was with an HSBC affiliate to support our
issuance of commercial paper. This $2.5 billion credit
facility was renewed in September 2010 as a new
$2.0 billion
back-up
credit facility, split evenly between 364 day and two year
tenors. Credit lines expire at various dates through 2012.
Borrowings under these lines generally are available at a spread
over LIBOR.
Our third party
back-up line
agreements contain a financial covenant which requires us to
maintain a minimum tangible common equity to tangible assets
ratio of 6.75 percent. Additionally, we are required to
maintain a minimum of $6.0 billion of debt extended to us
from affiliates through June 30, 2011 and $5.0 billion
thereafter. At December 31, 2010, we were in compliance
with all applicable financial covenants.
Annual commitment fee expenses to support availability of these
lines during 2010, 2009 and 2008 totaled $33 million,
$18 million and $8 million, respectively, and included
$16 million, $9 million and $2 million,
respectively, for the HSBC lines.
168
HSBC Finance Corporation
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Senior debt:
|
|
|
|
|
|
|
|
|
Fixed rate:
|
|
|
|
|
|
|
|
|
Secured financings:
|
|
|
|
|
|
|
|
|
5.00% to 5.99%; due 2019 to 2021
|
|
|
373
|
|
|
|
488
|
|
Other fixed rate senior debt:
|
|
|
|
|
|
|
|
|
1.00% to 1.99%; due 2013
|
|
|
3
|
|
|
|
-
|
|
2.00% to 2.99%; due 2010 to 2032
|
|
|
697
|
|
|
|
1,269
|
|
3.00% to 3.99%; due 2010 to 2015
|
|
|
440
|
|
|
|
152
|
|
4.00% to 4.99%; due 2010 to 2023
|
|
|
4,069
|
|
|
|
6,442
|
|
5.00% to 5.49%; due 2010 to 2021
|
|
|
11,613
|
|
|
|
13,226
|
|
5.50% to 5.99%; due 2010 to 2020
|
|
|
6,281
|
|
|
|
8,972
|
|
6.00% to 6.49%; due 2010 to 2033
|
|
|
6,165
|
|
|
|
7,261
|
|
6.50% to 6.99%; due 2010 to 2033
|
|
|
2,111
|
|
|
|
2,162
|
|
7.00% to 7.49%; due 2011 to 2032
|
|
|
1,864
|
|
|
|
2,109
|
|
7.50% to 7.99%; due 2012 to 2032
|
|
|
1,075
|
|
|
|
1,646
|
|
8.00% to 9.00%; due 2010
|
|
|
-
|
|
|
|
1,178
|
|
Variable interest rate:
|
|
|
|
|
|
|
|
|
Secured financings .32% to 2.76%; due 2010 to 2023
|
|
|
3,704
|
|
|
|
4,190
|
|
Other variable interest rate senior debt .33% to
5.89%; due 2010 to 2016
|
|
|
13,004
|
|
|
|
18,719
|
|
Subordinated debt
|
|
|
2,208
|
|
|
|
-
|
|
Junior subordinated notes issued to capital trusts
|
|
|
1,031
|
|
|
|
1,031
|
|
Unamortized discount
|
|
|
(89
|
)
|
|
|
(99
|
)
|
Obligation under capital lease
|
|
|
17
|
|
|
|
18
|
|
HSBC acquisition purchase accounting fair value
adjustments
|
|
|
50
|
|
|
|
116
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
54,616
|
|
|
$
|
68,880
|
|
|
|
|
|
|
|
|
|
|
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.
At December 31, 2010, long-term debt included carrying
value adjustments relating to derivative financial instruments
which increased the debt balance by $34 million and a
foreign currency translation adjustment relating to our foreign
denominated debt which increased the debt balance by
$2.1 billion. At December 31, 2009, long-term debt
included carrying value adjustments relating to derivative
financial instruments which increased the debt balance by
$55 million and a foreign currency translation adjustment
relating to our foreign denominated debt which increased the
debt balance by $2.3 billion.
At December 31, 2010 and 2009, we have elected fair value
option accounting for certain of our fixed rate debt issuances.
See Note 16, Fair Value Option, for further
details. At December 31, 2010 and 2009, long-term debt
totaling $20.8 billion and $26.7 billion,
respectively, was carried at fair value.
Weighted-average interest rates on long-term debt were
4.6 percent and 4.1 percent at December 31, 2010
and 2009, respectively (excluding HSBC acquisition purchase
accounting adjustments). Interest expense for long-term debt was
$2.9 billion in 2010, $3.5 billion in 2009 and
$5.0 billion in 2008. There are no restrictive financial
covenants in any of our long-term debt agreements. 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 17, Derivative Financial
Instruments.
During the fourth quarter of 2010, we offered noteholders of
certain series of our debt the ability to exchange their
existing senior notes for newly issued subordinated debt. As a
result, we issued $1.9 billion in new
10-year
fixed rate subordinated debt in exchange for tendered debt
totaling $1.8 billion. Of the newly issued subordinated
debt,
169
HSBC Finance Corporation
$1.2 billion was recorded in long-term debt and
$731 million was recorded in due to affiliates. In December
2010, we issued an additional $1.0 billion of
10-year
fixed rate subordinated debt to institutional investors.
During 2010, we redeemed $1.0 billion of retail medium-term
notes in four phases of approximately $250 million each.
These redemptions were funded through a new $1.0 billion
364-day
uncommitted revolving credit agreement with HSBC North America
which was also executed during the third quarter of 2010 and
allowed for borrowings with maturities of up to 15 years.
During 2010, we borrowed $1.0 billion under this credit
agreement with scheduled maturities between 2022 and 2025. In
November 2010, we replaced the $1.0 billion outstanding
under this loan through the issuance of preferred stock to HSBC
Investments (North America) Inc. (HINO). See
Note 19, Redeemable Preferred Stock, for
additional information regarding this issuance of preferred
stock.
Receivables we have sold in collateralized funding transactions
structured as secured financings remain on our balance sheet.
The entities used in these transactions are VIEs and we are
deemed to be their primary beneficiary because we hold
beneficial interests that expose us to the majority of their
expected losses. Accordingly, we consolidate these entities and
report the debt securities issued by them as secured financings
in long-term debt. Secured financings previously issued under
public trusts of $3.9 billion at December 31, 2010 are
secured by $5.9 billion of closed-end real estate secured
receivables, which are reported as receivables in the
consolidated balance sheet. Secured financings previously issued
under public trusts of $4.7 billion at December 31,
2009 are secured by $6.8 billion of closed-end real estate
secured receivables. The holders of debt instruments issued by
consolidated VIEs have recourse only to the receivables securing
those instruments and have no recourse to our general credit.
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):
|
|
|
|
|
|
|
HSBC Finance Capital
|
|
|
|
Trust IX
|
|
|
|
(HFCT 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
|
|
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 HFCT IX, constitute full and unconditional
guarantees by us of HFCT IXs obligations under the
Preferred Securities.
170
HSBC Finance Corporation
Maturities of long-term debt at December 31, 2010,
including secured financings, conduit facility renewals and
capital lease obligations were as follows:
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
2011(1)
|
|
$
|
12,904
|
|
2012
|
|
|
11,373
|
|
2013
|
|
|
6,981
|
|
2014
|
|
|
2,931
|
|
2015
|
|
|
5,291
|
|
Thereafter
|
|
|
15,136
|
|
|
|
|
|
|
Total
|
|
$
|
54,616
|
|
|
|
|
|
|
|
|
(1) |
Weighted average interest rate on long-term debt maturing in
2011 is 5.1%.
|
Certain components of our long-term debt may be redeemed prior
to its stated maturity.
We have elected FVO reporting for certain of our fixed rate debt
issuances. At December 31, 2010, fixed rate debt accounted
for under FVO totaled $21.3 billion, of which
$20.8 billion is included as a component of long-term debt
and $436 million is included as a component of due to
affiliates. At December 31, 2010, we had not elected FVO
for $16.8 billion of fixed rate long-term debt carried on
our balance sheet. Fixed rate debt accounted for under FVO at
December 31, 2010 has an aggregate unpaid principal balance
of $20.4 billion which included a foreign currency
translation adjustment relating to our foreign denominated FVO
debt which increased the debt balance by $404 million.
Long-term debt at December 31, 2009 includes
$26.7 billion of fixed rate debt accounted for under FVO.
At December 31, 2009, we did not elect FVO for
$18.2 billion of fixed rate long-term debt currently
carried on our balance sheet. Fixed rate debt accounted for
under FVO at December 31, 2009 had an aggregate unpaid
principal balance of $25.9 billion which includes a foreign
currency translation adjustment relating to our foreign
denominated FVO debt which increased the debt balance by
$488 million.
We determine the fair value of the fixed rate debt accounted for
under FVO through the use of a third party pricing service. Such
fair value represents the full market price (credit and interest
rate impact) based on observable market data for the same or
similar debt instruments. See Note 26, 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 FVO.
The components of gain (loss) on debt designated at fair value
and related derivatives are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(in millions)
|
|
|
Mark-to-market
on debt designated at fair
value(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate component
|
|
$
|
(269
|
)
|
|
$
|
1,063
|
|
|
$
|
(1,957
|
)
|
Credit risk component
|
|
|
109
|
|
|
|
(3,334
|
)
|
|
|
3,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
mark-to-market
on debt designated at fair value
|
|
|
(160
|
)
|
|
|
(2,271
|
)
|
|
|
1,149
|
|
Mark-to-market
on the related
derivatives(1)
|
|
|
112
|
|
|
|
(609
|
)
|
|
|
1,775
|
|
Net realized gains on the related derivatives
|
|
|
789
|
|
|
|
755
|
|
|
|
236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on debt designated at fair value and related
derivatives
|
|
$
|
741
|
|
|
$
|
(2,125
|
)
|
|
$
|
3,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Mark-to-market
on debt designated at fair value and related derivatives
excludes market value changes due to fluctuations in foreign
currency exchange rates. Foreign currency translation gains
(losses) recorded in derivative related income associated with
debt designated at fair value was a gain of $84 million
during 2010 compared to a loss of $75 million during 2009.
Offsetting gains (losses) recorded in derivative related income
associated with the related derivatives was a loss of
$84 million during 2010 compared to a gain of
$75 million during 2009.
|
171
HSBC Finance Corporation
The movement in the fair value reflected in gain (loss) on debt
designated at fair value and related derivatives includes the
effect of credit spread changes and interest rate changes,
including any economic ineffectiveness in the relationship
between the related swaps and our debt and any realized gains or
losses on those swaps. With respect to the credit component, as
credit spreads widen accounting gains are booked and the reverse
is true if credit spreads narrow. 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 and
differences in the calculation of fair value for debt and
derivatives. 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. On a cumulative
basis, we have recorded fair value option adjustments which
increased the value of our debt by $873 million and
$842 million at December 31, 2010 and 2009,
respectively.
The change in the fair value of the debt and the change in value
of the related derivatives reflects the following:
|
|
|
Interest rate curve Interest rates in the
U.S. decreased during 2010 resulting in a loss in the
interest rate component on the
mark-to-market
of the debt and a gain on the
mark-to-market
of the related derivative. An increase in long-term
U.S. interest rates during 2009 resulted in gains in the
interest rate component on the
mark-to-market
of the debt and losses on the
mark-to-market
of the related derivative. Changes in the value of the interest
rate component of the debt as compared to the related derivative
are also affected by differences in cash flows and valuation
methodologies for the debt and the derivatives. Cash flows on
debt are discounted using a single discount rate from the bond
yield curve for each bonds applicable maturity while
derivative cash flows are discounted using rates at multiple
points and multiple rates along an interest rate curve. The
impacts of these differences vary as short-term and long-term
interest rates shift and time passes. Furthermore, certain
derivatives have been called by the counterparty resulting in
certain FVO debt having no related derivatives. As a result,
approximately 7 percent of our FVO debt does not have a
corresponding derivative at both December 31, 2010 and
2009, respectively. Income from net realized gains increased
during 2010 due to reduced short-term U.S. interest rates.
|
|
|
Credit During 2010 we experienced an overall
gain in the credit component of our debt primarily resulting
from widening of credit spreads in our longer-dated debt, which
was partially offset by the tightening of credit spreads in our
shorter-dated debt. During 2009, our credit spreads tightened
due to increased market confidence and improvements in
marketplace liquidity resulting in a loss in the credit
component of debt recorded at fair value.
|
Net income volatility, whether based on changes in the interest
rate or credit risk components of the
mark-to-market
on debt designated at fair value and the related derivatives,
impacts the comparability of our reported results between
periods. Accordingly, gain (loss) on debt designated at fair
value and related derivatives for 2010 should not be considered
indicative of the results for any future periods.
|
|
17.
|
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,
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 the HSBC
Group Management Board. Additionally, our Audit and Risk
Committee receives regular reports on our interest rate and
liquidity risk 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 as economic
hedges to manage risk.
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
172
HSBC Finance Corporation
financial instrument to decrease in value or become more costly
to settle. Prior to our ceasing originations in our Consumer
Lending business and ceasing purchase activities in our Mortgage
Services business, customer demand for our loan products shifted
between fixed rate and floating rate products, based on market
conditions and preferences. These shifts in loan products
resulted in different funding strategies and produced different
interest rate risk exposures. Additionally, the mix of
receivables on our balance sheet and the corresponding market
risk is changing as we manage the liquidation of several of our
receivable portfolios. We maintain an overall risk management
strategy that utilizes interest rate and currency derivative
financial instruments to mitigate our exposure to fluctuations
caused by changes in interest rates and currency exchange rates
related to our debt liabilities. We manage our exposure to
interest rate risk primarily through the use of interest rate
swaps with the main objective of better matching the duration of
our liabilities to the duration of our assets. We manage our
exposure to foreign currency exchange risk primarily through the
use of cross currency interest rate swaps. We do not use
leveraged derivative financial instruments.
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.
We do not manage credit risk or the changes in fair value due to
the changes in credit risk by entering into derivative financial
instruments such as credit derivatives or credit default swaps.
Control Over Valuation Process and
Procedures A control framework has been established
which is designed to ensure that fair values are either
determined or validated by a function independent of the
risk-taker. To that end, the ultimate responsibility for the
determination of fair values rests with the HSBC Finance
Valuation Committee. The HSBC Finance Valuation Committee
establishes policies and procedures to ensure appropriate
valuations. Fair values for derivatives are determined by
management using valuation techniques, valuation models and
inputs that are developed, reviewed, validated and approved by
the Quantitative Risk and Valuation Group of an affiliate, HSBC
Bank USA. These valuation models utilize discounted cash flows
or an option pricing model adjusted for counterparty credit risk
and market liquidity. The models used apply appropriate control
processes and procedures to ensure that the derived inputs are
used to value only those instruments that share similar risk to
the relevant benchmark indexes and therefore demonstrate a
similar response to market factors. In addition, a validation
process is followed which includes participation in peer group
consensus pricing surveys, to ensure that valuation inputs
incorporate market participants risk expectations and risk
premium.
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 manage the counterparty credit (or
repayment) risk in derivative instruments through established
credit approvals, risk control limits, collateral, and ongoing
monitoring procedures. 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, 2010 and 2009, substantially all 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 derivative related liabilities.
At December 31, 2010 and 2009, we provided third party swap
counterparties with $33 million and $46 million of
collateral, respectively, in the form of cash. When the fair
value of our agreements with affiliate counterparties requires
the posting of collateral, it is provided in either the form of
cash and recorded on the balance sheet, consistent with third
party arrangements, or in the form of securities which are not
recorded on our balance sheet. At December 31, 2010 and
2009, the fair value of our agreements with affiliate
counterparties required the affiliate to provide collateral of
$2.5 billion and $3.4 billion, respectively, all of
which was provided in cash. These amounts are 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
173
HSBC Finance Corporation
financial asset or derivative related liabilities. At
December 31, 2010, we had derivative contracts with a
notional value of $50.5 billion, including
$49.9 billion outstanding with HSBC Bank USA. At
December 31, 2009, we had derivative contracts with a
notional value of approximately $59.7 billion, including
$58.6 billion outstanding with HSBC Bank USA. 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.
To manage our exposure to changes in interest rates, we entered
into interest rate swap agreements and currency swaps which have
been designated as fair value or cash flow hedges under
derivative accounting principles or are treated as
non-qualifying hedges. We currently utilize the long-haul method
to assess effectiveness of all derivatives designated as hedges.
In the tables that follow below, the fair value disclosed does
not include 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 and is netted on the balance sheet with the fair
value amount recognized for derivative instruments.
Fair Value Hedges Fair value hedges include
interest rate swaps to convert our fixed rate debt to variable
rate debt and currency swaps to convert debt issued from one
currency into U.S. dollar variable debt. All of our fair
value hedges are associated with debt. We recorded fair value
adjustments for fair value hedges which increased the carrying
value of our debt by $51 million and $85 million at
December 31, 2010 and 2009, respectively. The following
table provides information related to the location of derivative
fair values in the consolidated balance sheet for our fair value
hedges.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives Fair Value
|
|
|
Liability Derivatives Fair Value
|
|
|
|
as of December 31,
|
|
|
as of December 31,
|
|
|
|
Balance Sheet
|
|
|
|
|
|
|
|
Balance Sheet
|
|
|
|
|
|
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
(in millions)
|
|
|
Interest rate swaps
|
|
Derivative
financial assets
|
|
$
|
(4
|
)
|
|
$
|
-
|
|
|
Derivative
related liabilities
|
|
$
|
18
|
|
|
$
|
39
|
|
Currency swaps
|
|
Derivative
financial assets
|
|
|
124
|
|
|
|
312
|
|
|
Derivative
related liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value hedges
|
|
|
|
$
|
120
|
|
|
$
|
312
|
|
|
|
|
$
|
18
|
|
|
$
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents fair value hedging information,
including the gain (loss) recorded on the derivative and where
that gain (loss) is recorded in the consolidated statement of
income (loss) as well as the offsetting gain (loss) on the
hedged item that is recognized in current earnings, the net of
which represents hedge ineffectiveness.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain
|
|
Amount of Gain (Loss)
|
|
|
Amount of Gain (Loss)
|
|
|
|
|
|
(Loss) Recognized
|
|
Recognized in Income
|
|
|
Recognized in Income
|
|
|
|
|
|
in Income on Hedged
|
|
on the Derivative
|
|
|
on Hedged Item
|
|
|
|
Hedged Item
|
|
Item and Derivative
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Fixed rate
borrowings
|
|
Derivative related
income
|
|
$
|
17
|
|
|
$
|
(13
|
)
|
|
$
|
35
|
|
|
$
|
7
|
|
|
$
|
21
|
|
|
$
|
(47
|
)
|
Currency swaps
|
|
Fixed rate
borrowings
|
|
Derivative related
income
|
|
|
(13
|
)
|
|
|
35
|
|
|
|
112
|
|
|
|
12
|
|
|
|
(34
|
)
|
|
|
(88
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
4
|
|
|
$
|
22
|
|
|
$
|
147
|
|
|
$
|
19
|
|
|
$
|
(13
|
)
|
|
$
|
(135
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Hedges Cash flow hedges include
interest rate swaps to convert our variable rate debt to fixed
rate debt and to fix future interest rate resets of floating
rate debt as well as currency swaps to convert debt issued from
one currency into U.S. dollar fixed rate debt. Gains and
losses on unexpired derivative instruments designated as cash
flow hedges are reported in accumulated other comprehensive
income (loss) (OCI) net of tax and totaled a loss of
$492 million and $490 million at December 31,
2010 and 2009, respectively. We expect $408 million
($264 million after-tax) of currently unrealized net losses
will be reclassified to earnings within one year. However, these
174
HSBC Finance Corporation
reclassed 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. The following table provides information related
to the location of derivative fair values in the consolidated
balance sheet for our cash flow hedges.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives Fair Value
|
|
|
Liability Derivatives Fair Value
|
|
|
|
as of December 31,
|
|
|
as of December 31,
|
|
|
|
Balance Sheet
|
|
|
|
|
|
|
|
Balance Sheet
|
|
|
|
|
|
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
(in millions)
|
|
|
Interest rate swaps
|
|
Derivative
financial assets
|
|
$
|
(437
|
)
|
|
$
|
(358
|
)
|
|
Derivative
related liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
Currency swaps
|
|
Derivative
financial assets
|
|
|
985
|
|
|
|
1,362
|
|
|
Derivative
related liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash flow hedges
|
|
|
|
$
|
548
|
|
|
$
|
1,004
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides the gain or loss recorded on our
cash flow hedging relationships.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
|
|
|
Location of Gain
|
|
Gain (Loss) Reclassed
|
|
|
Location of Gain
|
|
Gain (Loss)
|
|
|
|
Recognized in OCI
|
|
|
(Loss) Reclassified
|
|
From AOCI
|
|
|
(Loss) Recognized
|
|
Recognized In Income
|
|
|
|
on Derivative (Effective
|
|
|
from AOCI into
|
|
into Income
|
|
|
in Income
|
|
on Derivative
|
|
|
|
Portion)
|
|
|
Income
|
|
(Effective Portion)
|
|
|
on the Derivative
|
|
(Ineffective Portion)
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
(Effective Portion)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
(Ineffective Portion)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Interest rate swaps
|
|
$
|
(65
|
)
|
|
$
|
473
|
|
|
$
|
(567
|
)
|
|
Interest expense
|
|
$
|
(62
|
)
|
|
$
|
(24
|
)
|
|
$
|
(12
|
)
|
|
Derivative related
income
|
|
$
|
(1
|
)
|
|
$
|
12
|
|
|
$
|
(4
|
)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Gain on bulk
receivable sale to
HSBC affiliates
Interest expense
|
|
|
-
|
|
|
|
(80
|
)
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Currency swaps
|
|
|
70
|
|
|
|
441
|
|
|
|
(478
|
)
|
|
Interest expense
|
|
|
(34
|
)
|
|
|
(51
|
)
|
|
|
(89
|
)
|
|
Derivative related
income
|
|
|
(7
|
)
|
|
|
82
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5
|
|
|
$
|
914
|
|
|
$
|
(1,045
|
)
|
|
|
|
$
|
(96
|
)
|
|
$
|
(155
|
)
|
|
$
|
(101
|
)
|
|
|
|
$
|
(8
|
)
|
|
$
|
94
|
|
|
$
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Qualifying Hedging Activities We may
enter into interest rate and currency swaps which are not
designated as hedges under derivative accounting principles.
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 through more closely matching both the structure and
projected duration of our liabilities to the structure and
duration of our assets. The following table provides information
related to the location and derivative fair values in the
consolidated balance sheet for our non-qualifying hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives Fair Value
|
|
|
Liability Derivatives Fair Value
|
|
|
|
as of December 31,
|
|
|
as of December 31,
|
|
|
|
Balance Sheet
|
|
|
|
|
|
|
|
Balance Sheet
|
|
|
|
|
|
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
(in millions)
|
|
|
Interest rate swaps
|
|
Derivative
financial assets
|
|
$
|
165
|
|
|
$
|
188
|
|
|
Derivative
related liabilities
|
|
$
|
5
|
|
|
$
|
12
|
|
Currency swaps
|
|
Derivative
financial assets
|
|
|
67
|
|
|
|
72
|
|
|
Derivative
related liabilities
|
|
|
-
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
232
|
|
|
$
|
260
|
|
|
|
|
$
|
5
|
|
|
$
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175
HSBC Finance Corporation
The following table provides detail of the realized and
unrealized gain or loss recorded on our non-qualifying hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss)
|
|
|
|
|
|
Recognized
|
|
|
|
Location of Gain (Loss)
|
|
in Derivative Related Income
|
|
|
|
Recognized in
|
|
(Expense)
|
|
|
|
Income on Derivative
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Interest rate contracts
|
|
Derivative related income
|
|
$
|
(394
|
)
|
|
$
|
200
|
|
|
$
|
(361
|
)
|
Currency contracts
|
|
Derivative related income
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
(394
|
)
|
|
$
|
197
|
|
|
$
|
(336
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have elected the fair value option for certain issuances of
our fixed rate debt and have entered into interest rate and
currency swaps related to debt carried at fair value. The
interest rate and currency swaps associated with this debt are
non-qualifying hedges but are considered economic hedges and
realized gains and losses are reported as Gain (loss) on
debt designated at fair value and related derivatives
within other revenues. The derivatives related to fair value
option debt are included in the tables below. See Note 16,
Fair Value Option, for further discussion.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives Fair Value
|
|
|
Liability Derivatives Fair Value
|
|
|
|
as of December 31,
|
|
|
as of December 31,
|
|
|
|
Balance Sheet
|
|
|
|
|
|
|
|
Balance Sheet
|
|
|
|
|
|
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
(in millions)
|
|
|
Interest rate swaps
|
|
Derivative
financial assets
|
|
$
|
907
|
|
|
$
|
1,034
|
|
|
Derivative
related liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
Currency swaps
|
|
Derivative
financial assets
|
|
|
739
|
|
|
|
752
|
|
|
Derivative
related liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
1,646
|
|
|
$
|
1,786
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides the gain or loss recorded on the
derivatives related to fair value option debt primarily due to
changes in interest rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss)
|
|
|
|
|
|
Recognized
|
|
|
|
|
|
in Derivative Related Income
|
|
|
|
Location of Gain (Loss)
|
|
(Expense)
|
|
|
|
Recognized in Income on Derivative
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Interest rate contracts
|
|
Gain (loss) on debt designated at fair value and related
derivatives
|
|
$
|
719
|
|
|
$
|
(39
|
)
|
|
$
|
1,703
|
|
Currency contracts
|
|
Gain (loss) on debt designated at fair value and related
derivatives
|
|
|
182
|
|
|
|
185
|
|
|
|
308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
901
|
|
|
$
|
146
|
|
|
$
|
2,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
176
HSBC Finance Corporation
Notional Value of Derivative Contracts The
following table summarizes the notional values of derivative
contracts:
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
8,917
|
|
|
$
|
11,585
|
|
Currency swaps
|
|
|
10,018
|
|
|
|
15,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,935
|
|
|
|
26,958
|
|
|
|
|
|
|
|
|
|
|
Non-qualifying economic hedges:
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Interest rate:
|
|
|
|
|
|
|
|
|
Swaps
|
|
|
11,449
|
|
|
|
7,081
|
|
Purchased caps
|
|
|
173
|
|
|
|
682
|
|
Foreign exchange:
|
|
|
|
|
|
|
|
|
Swaps
|
|
|
1,221
|
|
|
|
1,291
|
|
Forwards
|
|
|
123
|
|
|
|
349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,966
|
|
|
|
9,403
|
|
|
|
|
|
|
|
|
|
|
Derivatives associated with debt carried at fair value:
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
15,212
|
|
|
|
19,169
|
|
Currency swaps
|
|
|
3,376
|
|
|
|
4,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,588
|
|
|
|
23,291
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
50,489
|
|
|
$
|
59,652
|
|
|
|
|
|
|
|
|
|
|
Total income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(in millions)
|
|
|
Provision (benefit) for income taxes related to continuing
operations
|
|
$
|
(1,007
|
)
|
|
$
|
(2,632
|
)
|
|
$
|
(1,087
|
)
|
Income taxes related to adjustments included in common
shareholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on securities
available-for-sale,
not
other-than-temporarily
impaired, net
|
|
|
22
|
|
|
|
51
|
|
|
|
(31
|
)
|
Unrealized gains (losses) on
other-than-temporarily
impaired debt securities
available-for-sale
|
|
|
1
|
|
|
|
(4
|
)
|
|
|
-
|
|
Unrealized gains (losses) on cash flow hedging instruments
|
|
|
43
|
|
|
|
387
|
|
|
|
(370
|
)
|
Changes in funded status of pension and post retirement benefit
plans
|
|
|
(5
|
)
|
|
|
2
|
|
|
|
(4
|
)
|
Foreign currency translation adjustments
|
|
|
2
|
|
|
|
8
|
|
|
|
(46
|
)
|
Exercise of stock based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
Valuation allowance
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(944
|
)
|
|
$
|
(2,190
|
)
|
|
$
|
(1,506
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
177
HSBC Finance Corporation
Provisions for income taxes related to our continuing operations
were:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(in millions)
|
|
|
Current provision (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
(1,322
|
)
|
|
$
|
(2,386
|
)
|
|
$
|
(1,085
|
)
|
Foreign
|
|
|
-
|
|
|
|
1
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current provision (benefit)
|
|
|
(1,322
|
)
|
|
|
(2,385
|
)
|
|
|
(1,074
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred provision (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
315
|
|
|
|
(247
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred provision (benefit)
|
|
|
315
|
|
|
|
(247
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income provision (benefit)
|
|
$
|
(1,007
|
)
|
|
$
|
(2,632
|
)
|
|
$
|
(1,087
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The significant components of deferred provisions attributable
to income from continuing operations were:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(in millions)
|
|
|
Deferred income tax (benefit) provision (excluding the effects
of other components)
|
|
$
|
274
|
|
|
$
|
(204
|
)
|
|
$
|
(291
|
)
|
Increase in valuation allowance
|
|
|
49
|
|
|
|
209
|
|
|
|
316
|
|
Change in operating loss carryforwards
|
|
|
(8
|
)
|
|
|
(282
|
)
|
|
|
(107
|
)
|
Adjustment to statutory tax rate
|
|
|
-
|
|
|
|
30
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax provision
|
|
$
|
315
|
|
|
$
|
(247
|
)
|
|
$
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of income tax expense (benefit) compared with
the amounts at the U.S. federal statutory rates was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Tax benefit at the U.S. federal statutory income tax rate
|
|
$
|
(1,017
|
)
|
|
|
(35.0
|
)%
|
|
$
|
(3,534
|
)
|
|
|
(35.0
|
)%
|
|
$
|
(1,293
|
)
|
|
|
(35.0
|
)%
|
Increase (decrease) in rate resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local taxes, net of Federal benefit
|
|
|
(15
|
)
|
|
|
(.5
|
)
|
|
|
28
|
|
|
|
.3
|
|
|
|
(52
|
)
|
|
|
(1.4
|
)
|
State rate change effect on net deferred taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
34
|
|
|
|
.3
|
|
|
|
70
|
|
|
|
1.9
|
|
Non-deductible goodwill
|
|
|
-
|
|
|
|
-
|
|
|
|
798
|
|
|
|
7.9
|
|
|
|
115
|
|
|
|
3.1
|
|
Low income housing and other tax credits
|
|
|
-
|
|
|
|
-
|
|
|
|
(19
|
)
|
|
|
(.2
|
)
|
|
|
(50
|
)
|
|
|
(1.4
|
)
|
Leveraged leases
|
|
|
48
|
|
|
|
1.7
|
|
|
|
20
|
|
|
|
.2
|
|
|
|
34
|
|
|
|
.9
|
|
Other
|
|
|
(23
|
)
|
|
|
(.9
|
)
|
|
|
41
|
|
|
|
.4
|
|
|
|
89
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax benefit
|
|
$
|
(1,007
|
)
|
|
|
(34.7
|
)%
|
|
$
|
(2,632
|
)
|
|
|
(26.1
|
)%
|
|
$
|
(1,087
|
)
|
|
|
(29.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effective tax rate for continuing operations in 2010 was
primarily impacted by state taxes, including states where we
file combined unitary state tax returns with other HSBC
affiliates and amortization of purchase accounting adjustments
on leveraged leases that matured in December 2010. The effective
tax rate for continuing operations in 2009 was significantly
impacted by the non-tax deductible impairment of goodwill, the
relative level of pretax book loss, increase in the state and
local income tax valuation allowance, and a decrease in low
income housing credits. The effective tax in 2008 was
significantly impacted by the non-deductible goodwill
impairment, an increase in the state and local income tax
valuation allowance as well as a change in estimate in the state
tax rate for jurisdictions where we file combined unitary state
tax returns with other HSBC affiliates.
178
HSBC Finance Corporation
Temporary differences which gave rise to a significant portion
of deferred tax assets and liabilities were as follows:
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Deferred Tax Assets
|
|
|
|
|
|
|
|
|
Credit loss reserves
|
|
$
|
2,497
|
|
|
$
|
2,837
|
|
Unused tax benefit carryforwards
|
|
|
796
|
|
|
|
790
|
|
Market value adjustment
|
|
|
318
|
|
|
|
586
|
|
Other
|
|
|
516
|
|
|
|
658
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
4,127
|
|
|
|
4,871
|
|
Valuation allowance
|
|
|
(720
|
)
|
|
|
(671
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets net of valuation allowance
|
|
|
3,407
|
|
|
|
4,200
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities
|
|
|
|
|
|
|
|
|
Fee income
|
|
|
412
|
|
|
|
626
|
|
Deferred loan origination costs
|
|
|
290
|
|
|
|
306
|
|
Intangibles
|
|
|
-
|
|
|
|
185
|
|
Receivables sold
|
|
|
99
|
|
|
|
-
|
|
Leveraged leases
|
|
|
-
|
|
|
|
73
|
|
Other
|
|
|
115
|
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
916
|
|
|
|
1,313
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
2,491
|
|
|
$
|
2,887
|
|
|
|
|
|
|
|
|
|
|
The decrease in the credit loss reserves component of the
deferred tax asset in 2010 reflects increased levels of
charge-offs recorded during the year.
The deferred tax valuation allowance is attributed to the
following deferred tax assets that based on the available
evidence it is more-likely-than-not that the deferred tax asset
will not be realized:
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
State tax benefit loss limitations
|
|
$
|
537
|
|
|
$
|
480
|
|
Deferred capital loss on sale to affiliates
|
|
|
49
|
|
|
|
49
|
|
Foreign tax credit carryforward
|
|
|
127
|
|
|
|
127
|
|
Other
|
|
|
7
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
720
|
|
|
$
|
671
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Balance at beginning of year
|
|
$
|
196
|
|
|
$
|
199
|
|
Additions based on tax positions related to the current year
|
|
|
13
|
|
|
|
6
|
|
Additions for tax positions of prior years
|
|
|
25
|
|
|
|
33
|
|
Reductions for tax positions of prior years
|
|
|
(27
|
)
|
|
|
(21
|
)
|
Settlements
|
|
|
(33
|
)
|
|
|
(17
|
)
|
Reductions for lapse of statute of limitations
|
|
|
(5
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
169
|
|
|
$
|
196
|
|
|
|
|
|
|
|
|
|
|
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 $96 million and $110 million at
December 31, 2010 and 2009, respectively.
It is our policy to recognize accrued interest related to
unrecognized tax benefits in interest expense in the
consolidated statement of income (loss) and to recognize
penalties related to unrecognized tax benefits as a
179
HSBC Finance Corporation
component of other servicing and administrative expenses in the
consolidated statement of income (loss). We had accruals for the
payment of interest and penalties associated with uncertain tax
positions of $76 million and $78 million at
December 31, 2010 and 2009, respectively. We decreased our
accrual for the payment of interest and penalties associated
with uncertain tax positions by $2 million and
$1 million during 2010 and 2009, respectively.
HSBC North America Consolidated Income
Taxes We are included in HSBC North Americas
consolidated Federal income tax return and in various combined
state income tax returns. As such, we have entered into a tax
allocation agreement with HSBC North America and its subsidiary
entities (the HNAH Group) included in the
consolidated returns which govern the current amount of taxes to
be paid or received by the various entities included in the
consolidated return filings. As a result, we have looked at the
HNAH Groups consolidated deferred tax assets and various
sources of taxable income, including the impact of HSBC and HNAH
Group tax planning strategies, in reaching conclusions on
recoverability of deferred tax assets. Where a valuation
allowance is determined to be necessary at the HSBC North
America consolidated level, such allowance is allocated to the
principal subsidiaries within the HNAH Group as described below
in a manner that is systematic, rational and consistent with the
broad principles of accounting for income taxes.
The HNAH Group evaluates deferred tax assets for recoverability
using a consistent approach which considers the relative impact
of negative and positive evidence, including historical
financial performance, projections of future taxable income,
future reversals of existing taxable temporary differences, tax
planning strategies and any available carryback capacity.
In evaluating the need for a valuation allowance, the HNAH Group
estimates future taxable income based on management approved
business plans, future capital requirements and ongoing tax
planning strategies, including capital support from HSBC
necessary as part of such plans and strategies. The HNAH Group
has continued to consider the impact of the economic environment
on the North American businesses and the expected growth of the
deferred tax assets. This evaluation process involves
significant management judgment about assumptions that are
subject to change from period to period.
In conjunction with the HNAH Group deferred tax evaluation
process, based on our forecasts of future taxable income, which
include assumptions about the depth and severity of home price
depreciation and the U.S. economic downturn, including
unemployment levels and their related impact on credit losses,
we currently anticipate that our results of future operations
will generate sufficient taxable income to allow us to realize
our deferred tax assets. However, since these market conditions
have created losses in the HNAH Group in recent periods and
volatility on our pre-tax book income, our analysis of the
realizability of the deferred tax assets significantly discounts
any future taxable income expected from continuing operations
and relies to a greater extent on continued capital support from
our parent, HSBC, including tax planning strategies implemented
in relation to such support. HSBC has indicated they remain
fully committed and have the capacity and willingness to provide
capital as needed to run operations, maintain sufficient
regulatory capital, and fund certain tax planning strategies.
Only those tax planning strategies that are both prudent and
feasible, and which management has the ability and intent to
implement, are incorporated into our analysis and assessment.
The primary and most significant strategy is HSBCs
commitment to reinvest excess HNAH Group capital to reduce debt
funding or otherwise invest in assets to ensure that it is more
likely than not that the deferred tax assets will be utilized.
Currently, it has been determined that the HNAH Groups
primary tax planning strategy, in combination with other tax
planning strategies, provides support for the realization of the
net deferred tax assets recorded for the HNAH Group. Such
determination is based on HSBCs business forecasts and
assessment as to the most efficient and effective deployment of
HSBC capital, most importantly including the length of time such
capital will need to be maintained in the U.S. for purposes
of the tax planning strategy.
Notwithstanding the above, the HNAH Group has valuation
allowances against certain specific tax attributes such as
foreign tax credits, certain state related deferred tax assets
and certain tax loss carryforwards for which the aforementioned
tax planning strategies do not provide appropriate support.
180
HSBC Finance Corporation
HNAH Group valuation allowances are allocated to the principal
subsidiaries, including us. The methodology allocates the
valuation allowance to the principal subsidiaries based
primarily on the entitys relative contribution to the
growth of the HSBC North America consolidated deferred tax asset
against which the valuation allowance is being recorded.
If future results differ from the HNAH Groups current
forecasts or the primary tax planning strategy were to change, a
valuation allowance against the remaining net deferred tax
assets may need to be established which could have a material
adverse effect on our results of operations, financial condition
and capital position. The HNAH Group will continue to update its
assumptions and forecasts of future taxable income, including
relevant tax planning strategies, and assess the need for such
incremental valuation allowances.
Absent the capital support from HSBC and implementation of the
related tax planning strategies, the HNAH Group, including us,
would be required to record a valuation allowance against the
remaining deferred tax assets.
HSBC Finance Corporation Income Taxes We
recognize deferred tax assets and liabilities for the future tax
consequences related to differences between the financial
statement carrying amounts of existing assets and liabilities
and their respective tax bases, and for tax credits and net
operating and other losses. Our net deferred tax assets,
including deferred tax liabilities and valuation allowances,
totaled $2.5 billion and $2.9 billion as of
December 31, 2010 and 2009, respectively.
We remain subject to Federal income tax examination for years
1998 and forward and state income tax examinations for years
1996 and forward. It is reasonably possible that there could be
a change in the amount of our unrecognized tax benefits within
the next 12 months due to settlements or statutory
expirations in various tax jurisdictions.
In November 2009, President Obama signed into law The
Worker, Homeownership, and Business Assistance Act of 2009
which allows for an extended carryback period for certain
federal tax net operating losses. Our deferred tax asset related
to such losses was reduced by $1.6 billion as a result of
this legislation during 2009.
In May 2008, we sold all of the common stock of Household
International Europe, the holding company for our U.K.
Operations to HSBC Overseas Holdings (UK) Limited for a loss. No
tax benefit was recognized on the loss on sale because the sale
was between affiliates under common control, the capital loss
was deferred and a valuation allowance was established on the
$49 million deferred tax asset relating to the future
realization of the deferred tax capital loss. The deferred tax
capital loss could be recognized if the stock of Household
International Europe is sold to an unaffiliated third party.
Capital losses may only be offset by capital gains and have a
five-year carryforward period. In November 2008, we transferred
the common stock of HSBC Financial Corporation Limited, the
holding company for our Canadian Operations to HSBC Bank Canada
(HBCA). No tax benefit was recognized on the
transfer due to loss disallowance rules.
At December 31, 2010, we had net operating loss
carryforwards of $10.1 billion for state tax purposes which
expire as follows: $151 million in
2011-2015;
$356 million in
2016-2020;
$1.9 billion in
2021-2025;
and $7.7 billion in 2026 and forward.
At December 31, 2010, we had foreign tax credit
carryforwards of $127 million for federal income tax
purposes which expire as follows: $43 million in 2015;
$36 million in 2016; and $21 million in 2017; and
$27 million in 2018.
At December 31, 2010, we had general business tax credit
carryforwards of $87 million for federal income tax
purposes which expire as follows: $18 million in 2026;
$50 million in 2028; and $19 million in 2029.
|
|
19.
|
Redeemable
Preferred Stock
|
In November 2010, we issued 1,000 shares of
8.625 percent Non-Cumulative Preferred Stock, Series C
(Series C Preferred Stock) to our parent, HINO,
for a cash purchase price of $1.0 billion. Dividends on the
Series C Preferred Stock are non-cumulative and payable
quarterly at a rate of 8.625 percent. The Series C
Preferred Stock may be redeemed at our option after
November 30, 2025 at $1,000,000 per share, plus accrued
dividends. The redemption and liquidation value is $1,000,000
per share plus accrued and unpaid dividends. The holders of
Series C Preferred
181
HSBC Finance Corporation
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 C
Preferred Stock are outstanding, the authorization, creation or
issuance of any class or series of stock that would rank prior
to the Series C Preferred Stock with respect to dividends
or amounts payable upon liquidation or dissolution of HSBC
Finance Corporation must be approved by the holders of at least
two-thirds of the shares of Series C Preferred Stock
outstanding at that time. Dividend payments will begin during
the first quarter of 2011.
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. 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 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. In 2010
and 2009, we declared dividends totaling $37 million on the
Series B Preferred Stock which were paid prior to
December 31, 2010 and 2009.
|
|
20.
|
Accumulated
Other Comprehensive Income (Loss)
|
Accumulated other comprehensive income (loss) (AOCI)
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 December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(in millions)
|
|
|
Unrealized gains (losses) on cash flow hedging
instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
(632
|
)
|
|
$
|
(1,316
|
)
|
|
$
|
(718
|
)
|
Other comprehensive income for period:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gains (losses) arising during period, net of tax of
$41 million, $329 million and $(381) million,
respectively
|
|
|
54
|
|
|
|
585
|
|
|
|
(675
|
)
|
Reclassification adjustment for (gains) losses realized in net
income, net of tax of $2 million, $56 million and
$36 million, respectively
|
|
|
3
|
|
|
|
99
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income for period
|
|
|
57
|
|
|
|
684
|
|
|
|
(610
|
)
|
Reclassification adjustment due to sale of Canadian Operations
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
(575
|
)
|
|
|
(632
|
)
|
|
|
(1,316
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on securities
available-for-sale,
not other-than temporarily impaired:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
38
|
|
|
$
|
(54
|
)
|
|
$
|
(13
|
)
|
Other comprehensive income for period:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized holding gains (losses) arising during period, net
of tax of $25 million, $48 million and
$(31) million, respectively
|
|
|
44
|
|
|
|
85
|
|
|
|
(59
|
)
|
Reclassification adjustment for (gains) losses realized in net
income, net of tax of $(3) million, $3 million and
$2 million, respectively
|
|
|
(4
|
)
|
|
|
7
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income for period
|
|
|
40
|
|
|
|
92
|
|
|
|
(53
|
)
|
Reclassification adjustment due to sale of Canadian Operations
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
78
|
|
|
|
38
|
|
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
182
HSBC Finance Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(in millions)
|
|
|
Unrealized gains (losses) on
other-than-temporarily
impaired debt securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
(7
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
Other comprehensive income for period:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary
impairment on debt securities
available-for-sale
recognized in other comprehensive income, net of tax of
$1 million, $(6) million and $- million, respectively
|
|
|
3
|
|
|
|
(10
|
)
|
|
|
-
|
|
Reclassification adjustment for (gains) losses realized in net
income, net of tax of $- million, $2 million and $-
million, respectively
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive loss for period
|
|
|
3
|
|
|
|
(7
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
(4
|
)
|
|
|
(7
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
8
|
|
|
|
4
|
|
|
|
(3
|
)
|
Other comprehensive income for period:
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement benefit plan adjustment, net of tax of
$(5) million, $2 million and $(4) million,
respectively
|
|
|
(8
|
)
|
|
|
4
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income for period
|
|
|
(8
|
)
|
|
|
4
|
|
|
|
(1
|
)
|
Reclassification adjustment due to sale of U.K. Operations
|
|
|
-
|
|
|
|
-
|
|
|
|
(10
|
)
|
Reclassification adjustment due to sale of Canadian Operations
|
|
|
-
|
|
|
|
-
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
-
|
|
|
|
8
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
10
|
|
|
|
(12
|
)
|
|
|
514
|
|
Other comprehensive loss for period:
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation gains (losses), net of tax of $2 million,
$8 million and $(43) million, respectively
|
|
|
-
|
|
|
|
22
|
|
|
|
(120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income for period
|
|
|
-
|
|
|
|
22
|
|
|
|
(120
|
)
|
Reclassification adjustment due to sale of U.K. Operations
|
|
|
-
|
|
|
|
-
|
|
|
|
(370
|
)
|
Reclassification adjustment due to sale of Canadian Operations
|
|
|
-
|
|
|
|
-
|
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
10
|
|
|
|
10
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive loss at end of period
|
|
$
|
(491
|
)
|
|
$
|
(583
|
)
|
|
$
|
(1,378
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
183
HSBC Finance Corporation
21. Share-Based
Plans
Restricted Share Plans Subsequent to our
acquisition by HSBC, key employees have been provided awards in
the form of restricted shares (RSRs) and restricted
stock units (RSUs) under the Group Share Plan. 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 vested over five years contingent upon the
achievement of certain company performance targets.
Information with respect to RSR and RSUs awarded under
HSBCs Restricted Share Plan/Group Share Plan, all of which
are in HSBC ordinary shares, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
RSR and RSUs awarded
|
|
|
964,927
|
|
|
|
4,618,923
|
|
|
|
3,566,510
|
|
Weighted-average fair market value per share
|
|
$
|
10.36
|
|
|
$
|
8.78
|
|
|
$
|
16.45
|
|
RSR and RSUs outstanding at December 31
|
|
|
4,038,870
|
|
|
|
9,559,886
|
|
|
|
12,102,259
|
|
Compensation cost: (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
|
|
$
|
14
|
|
|
$
|
27
|
|
|
$
|
37
|
|
After-tax
|
|
|
9
|
|
|
|
18
|
|
|
|
24
|
|
Employee Stock Purchase Plans The HSBC
Holdings Savings-Related Share Option Plan (the HSBC
Sharesave Plan), allows eligible employees to enter into
savings contracts to save up to the equivalent of 250 pounds
sterling 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 savings contracts of 1, 3 or
5 year length. 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 three 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 discount for options granted. HSBC ordinary
shares granted and the related fair value of the options for
2010, 2009 and 2008 are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
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
|
|
|
115,205
|
|
|
$
|
2.00
|
|
|
|
425,259
|
|
|
$
|
2.07
|
|
|
|
305,147
|
|
|
$
|
3.10
|
|
3 year vesting period
|
|
|
120,591
|
|
|
|
2.57
|
|
|
|
738,859
|
|
|
|
2.41
|
|
|
|
660,727
|
|
|
|
3.93
|
|
5 year vesting period
|
|
|
31,276
|
|
|
|
2.76
|
|
|
|
379,170
|
|
|
|
2.19
|
|
|
|
208,019
|
|
|
|
4.18
|
|
Compensation expense related to the grants under the HSBC
Sharesave Plan totaled $1 million in 2010, $3 million
in 2009 and $3 million in 2008. As of December 31,
2010, future compensation cost related to grants which have not
yet fully vested is approximately $9 million. This amount
is expected to be recognized over a weighted-average period of
0.94 years.
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:
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
Risk-free interest rate
|
|
.47 - 2.63%
|
|
.52 - 2.10%
|
|
1.85 - 3.03%
|
Expected life
|
|
1, 3 or 5 years
|
|
1, 3 or 5 years
|
|
1, 3 or 5 years
|
Expected volatility
|
|
30%
|
|
50%, 35%, 30%
|
|
25%
|
184
HSBC Finance Corporation
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, the shareholders
approved and HSBC adopted 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 above. 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 which were met in 2009
and expire ten years from the date of grant. Such options were
granted at market value. There was no compensation expense
related to the Group Share Option Plan during 2010 or 2009.
Information with respect to the Group Share Option Plan is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
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
|
|
|
6,633,653
|
|
|
$
|
13.05
|
|
|
|
5,780,800
|
|
|
$
|
14.96
|
|
|
|
6,060,800
|
|
|
$
|
14.97
|
|
Options granted due to HSBC plc rights
issuance(1)
|
|
|
-
|
|
|
|
|
|
|
|
852,853
|
|
|
|
13.05
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Transferred
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(175,000
|
)
|
|
|
15.31
|
|
Expired or canceled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(105,000
|
)
|
|
|
14.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
6,633,653
|
|
|
|
13.05
|
|
|
|
6,633,653
|
|
|
|
13.05
|
|
|
|
5,780,800
|
|
|
|
14.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
6,633,653
|
|
|
$
|
13.05
|
|
|
|
6,633,653
|
|
|
$
|
13.05
|
|
|
|
3,654,800
|
|
|
$
|
15.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
As a result of the HSBC plc share rights offering, existing
holders of share options were granted additional options of a
value such that the rights offering would not be dilutive to
their individual positions.
|
The following table summarizes information about stock options
outstanding under the Group Share Option Plan at
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
6,633,653
|
|
|
|
2.98
|
|
|
$
|
13.05
|
|
|
|
6,633,653
|
|
|
$
|
13.05
|
|
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. No compensation expense related to
the former Household plan was recorded in 2010, 2009 or 2008 as
all shares under the former Household plan are fully vested.
185
HSBC Finance Corporation
Information with respect to stock options granted under the
former Household plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
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
|
|
|
17,101,975
|
|
|
$
|
16.28
|
|
|
|
19,525,710
|
|
|
$
|
18.23
|
|
|
|
21,159,911
|
|
|
$
|
18.04
|
|
Options granted due to HSBC plc rights
issuance(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
2,880,667
|
|
|
|
15.88
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(306,964
|
)
|
|
|
9.29
|
|
|
|
(20,000
|
)
|
|
|
10.66
|
|
|
|
(262,437
|
)
|
|
|
13.35
|
|
Transferred in/(out)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(719,846
|
)
|
|
|
18.29
|
|
Expired or canceled
|
|
|
(6,052,842
|
)
|
|
|
16.10
|
|
|
|
(5,284,402
|
)
|
|
|
14.61
|
|
|
|
(651,918
|
)
|
|
|
14.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
10,742,169
|
|
|
$
|
16.58
|
|
|
|
17,101,975
|
|
|
$
|
16.28
|
|
|
|
19,525,710
|
|
|
$
|
18.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
10,742,169
|
|
|
$
|
16.58
|
|
|
|
17,101,975
|
|
|
$
|
16.28
|
|
|
|
19,525,710
|
|
|
$
|
18.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
As a result of the HSBC plc share rights offering, existing
holders of share options were granted additional options of a
value such that the rights offering would not be dilutive to
their individual positions.
|
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, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Range of
|
|
Number
|
|
|
Remaining
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Exercise Prices
|
|
Outstanding
|
|
|
Life
|
|
|
Price
|
|
|
Outstanding
|
|
|
Price
|
|
|
|
|
$ 9.01 $12.50
|
|
|
2,345,452
|
|
|
|
1.87
|
|
|
$
|
9.29
|
|
|
|
2,345,452
|
|
|
$
|
9.29
|
|
$17.51 $20.00
|
|
|
8,396,717
|
|
|
|
.87
|
|
|
|
18.62
|
|
|
|
8,396,717
|
|
|
|
18.62
|
|
22. Pension
and Other Postretirement Benefits
Defined Benefit Pension Plan Effective
January 1, 2005, our previously separate qualified defined
benefit pension plan was combined with that of HSBC Bank
USAs into a single HSBC North America qualified defined
benefit pension plan (either the HSBC North America
Pension Plan or the Plan) which facilitates
the development of a unified employee benefit policy and unified
employee benefit plan administration for HSBC companies
operating in the U.S.
The table below reflects the portion of pension expense and its
related components of the HSBC North America Pension Plan which
has been allocated to us and is recorded in our consolidated
statement of income (loss).
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(in millions)
|
|
|
Service cost benefits earned during the period
|
|
$
|
18
|
|
|
$
|
27
|
|
|
$
|
46
|
|
Interest cost on projected benefit obligation
|
|
|
58
|
|
|
|
64
|
|
|
|
66
|
|
Expected return on assets
|
|
|
(57
|
)
|
|
|
(45
|
)
|
|
|
(77
|
)
|
Partial plan
termination(1)
|
|
|
-
|
|
|
|
9
|
|
|
|
-
|
|
Recognized losses
|
|
|
35
|
|
|
|
33
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension expense
|
|
$
|
54
|
|
|
$
|
88
|
|
|
$
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Effective September 30, 2009, HSBC North America
voluntarily chose to allow all plan participants whose
employment was terminated as a result of the strategic
restructuring of its businesses between 2007 and 2009 to become
fully vested in their accrued pension benefit, resulting
|
186
HSBC Finance Corporation
|
|
|
in a partial termination of the
plan. In accordance with interpretations of the Internal Revenue
Service relating to partial plan terminations, plan participants
who voluntarily left the employment of HSBC North America or its
subsidiaries during this period were also deemed to have vested
in their accrued pension benefit through the date their
employment ended. As a result, incremental pension expense of
$9 million, representing our share of the partial plan
termination cost, was recognized during 2009.
|
Pension expense declined during 2010 due to lower service cost
and interest cost as a result of reduced headcount. Also
contributing to lower pension expense was an increase in the
expected return of plan assets primarily due to higher asset
levels.
During the first quarter of 2010, we announced that the Board of
Directors of HSBC North America had approved a plan to cease all
future benefit accruals for legacy participants under the final
average pay formula components of the HSBC North America Pension
Plan effective January 1, 2011. Future accruals to legacy
participants under the Plan will thereafter be provided under
the cash balance based formula which is now used to calculate
benefits for employees hired after December 31, 1999.
Furthermore, all future benefit accruals under the Supplemental
Retirement Income Plan will also cease effective January 1,
2011.
The aforementioned changes to the Plan have been accounted for
as a negative plan amendment and, therefore, the reduction in
our share of HSBC North Americas projected benefit
obligation as a result of this decision will be amortized to net
periodic pension cost over the future service periods of the
affected employees. The changes to the Supplemental Retirement
Income Plan have been accounted for as a plan curtailment, which
resulted in no significant immediate recognition of income or
expense.
The assumptions used in determining pension expense of the HSBC
North America Pension Plan are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Discount rate
|
|
|
5.60
|
%
|
|
|
7.15
|
%
|
|
|
6.55
|
%
|
Salary increase assumption
|
|
|
2.90
|
|
|
|
3.50
|
|
|
|
3.75
|
|
Expected long-term rate of return on Plan assets
|
|
|
7.70
|
|
|
|
8.00
|
|
|
|
8.00
|
|
Long-term historical rates of return in conjunction with our
current outlook of return rates over the term of the pension
obligation are considered in determining an appropriate
long-term rate of return on Plan assets. In this regard, a
best estimate range of expected rates of return on
Plan assets is established by actuaries based on a portfolio of
passive investments considering asset mix upon which a
distribution of compound average returns for such portfolio is
calculated over a 20 year horizon. This approach, however,
ignores the characteristics and performance of the specific
investments the pension plan is invested in, their historical
returns and their performance against industry benchmarks. In
evaluating the range of potential outcomes, a best
estimate range is established between the 25th and
75th percentile. In addition to this analysis, we also seek
the input of the firm which provides us pension advisory
services. This firm performs an analysis similar to that done by
our actuaries, but instead uses real investment types and
considers historical fund manager performance. In this regard,
we also focus on the range of possible outcomes between the
25th and 75th percentile, with a focus on the
50th percentile. The combination of these analyses creates
a range of potential long-term rate of return assumptions from
which we determine an appropriate rate.
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.
Investment Strategy for Plan Assets The
primary objective of the HSBC North America Pension Plan is to
provide eligible employees with regular pension benefits. Since
the plan is governed by the Employee Retirement Security Act of
1974 (ERISA), ERISA regulations serve as guidance
for the management of plan assets. In this regard, an Investment
Committee (the Committee) for the Plan has been
established and its members have been appointed by the Chief
Executive Officer as authorized by the Board of Directors of
HSBC North America. The Committee is responsible for
establishing the funding policy and investment objectives
supporting the Plan including allocating the assets of the Plan,
monitoring the diversification of the Plans investments
and investment performance, assuring the Plan does not violate
any provisions of ERISA and the appointment, removal and
monitoring of investment advisers and the trustee. Consistent
with prudent standards for preservation of capital and
maintenance of liquidity,
187
HSBC Finance Corporation
the goal of the Plan is to earn the highest possible total rate
of return consistent with the Plans tolerance for risk as
periodically determined by the Committee. A key factor shaping
the Committees attitude towards risk is the generally long
term nature of the underlying benefit obligations. The asset
allocation decision reflects this long term horizon as well as
the ability and willingness to accept some short-term
variability in the performance of the portfolio in exchange for
the expectation of competitive long-term investment results for
its participants.
The Plans investment committee utilizes a proactive
approach to managing the Plans overall investment
strategy. During the past year, this resulted in the Committee
conducting four quarterly meetings including two strategic
reviews and two in-depth manager performance reviews. These
quarterly meetings are supplemented by the pension support staff
tracking actual investment manager performance versus the
relevant benchmark and absolute return expectations on a monthly
basis. The pension support staff also monitors adherence to
individual investment manager guidelines via a quarterly
compliance certification process. A
sub-committee
consisting of the pension support staff and two members of the
investment committee, including the chairman, are delegated
responsibility for conducting in-depth reviews of managers
performing below expectation. This
sub-committee
also provides replacement recommendations to the Committee when
manager performance fails to meet expectations for an extended
period. During the two strategic reviews in 2010, the Committee
re-examined the Plans asset allocation levels, interest
rate hedging strategy and investment menu options. In October
2010, the Committee unanimously agreed to maintain the
Plans target asset allocation mix in 2010 at
60 percent equity securities, 39 percent fixed income
securities and 1 percent cash. Further, the Committee
agreed to gradually shift to 40 percent equity securities,
59 percent fixed income securities and 1 percent cash
over a 24 month period. Should interest rates rise faster
than currently projected by the Committee, the shift to a higher
percentage of fixed income securities will be accelerated.
In order to achieve the return objectives of the Plan,
investment diversification is employed to ensure that adverse
results from one security or security class will not have an
unduly detrimental effect on the entire portfolio.
Diversification is interpreted to include diversification by
type, characteristic, and number of investments as well as
investment style of investment managers and number of investment
managers for a particular investment style. Equity securities
are invested in large, mid and small capitalization domestic
stocks as well as international, global and emerging market
stocks. Fixed income securities are invested in
U.S. Treasuries (including Treasury Inflation Protected
Securities), agencies, corporate bonds, and mortgage and other
asset backed securities. Without sacrificing returns or
increasing risk, the Committee prefers a limited number of
investment manager relationships which improves efficiency of
administration while providing economies of scale with respect
to fees.
Prior to 2009, both third party and affiliate investment
consultants were used to provide investment consulting services
such as recommendations on the type of funds to be utilized,
appropriate fund managers, and the monitoring of the performance
of those fund managers. In 2009, the Committee approved the use
of a third party investment consultant exclusively. Fund
performance is measured against absolute and relative return
objectives. Results are reviewed from both a short-term (less
than 1 year) and intermediate term (three to five year i.e.
a full market cycle) perspective. Separate account fund managers
are prohibited from investing in all HSBC Securities, restricted
stock (except Rule 144(a) securities which are not
prohibited investments), short-sale contracts, non-financial
commodities, investments in private companies, leveraged
investments and any futures or options (unless used for hedging
purposes and approved by the Committee). Commingled account and
limited partnership fund managers however are allowed to invest
in the preceding to the extent allowed in each of their offering
memoranda. As a result of the current low interest rate
environment and expectation that interest rates will rise in the
future, the Committee mandated the suspension of its previously
approved interest rate hedging strategy in June 2009. Outside of
the approved interest rate hedging strategy, the use of
derivative strategies by investment managers must be explicitly
authorized by the Committee. Such derivatives may be used only
to hedge an accounts investment risk or to replicate an
investment that would otherwise be made directly in the cash
market.
The Committee expects total investment performance to exceed the
following long-term performance objectives:
|
|
|
|
|
A long-term return of 7.25 percent;
|
188
HSBC Finance Corporation
|
|
|
|
|
A passive, blended index comprised of 19.5 percent S&P
500, 12 percent Russell 2000, 11 percent EAFE,
8 percent MSCI AC World Free Index, 2 percent
S&P/Citigroup Extended Market World Ex-US, 7.5 percent
MSCI Emerging Markets, 29 percent Barclays Long Gov/Credit,
10 percent Barclays Treasury Inflation Protected Securities
and 1 percent
90-day
T-Bills; and
|
|
|
|
Above median performance of peer corporate pension plans.
|
HSBC North Americas overall investment strategy for Plan
assets is to achieve a mix of at least 95 percent of
investments for long-term growth and up to 5 percent for
near-term benefit payments with a wide diversification of asset
types, fund strategies, and fund managers. The target sector
allocations of Plan assets at December 31, 2010 are as
follows:
|
|
|
|
|
|
|
Percentage of
|
|
|
|
Plan Assets at
|
|
|
|
December 31, 2010
|
|
|
|
|
Domestic Large/Mid-Cap Equity
|
|
|
17.9
|
%
|
Domestic Small Cap Equity
|
|
|
11.0
|
|
International Equity
|
|
|
11.9
|
|
Global Equity
|
|
|
7.3
|
|
Emerging Market Equity
|
|
|
6.9
|
|
Fixed Income Securities
|
|
|
44.0
|
|
Cash or Cash Equivalents
|
|
|
1.0
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
|
|
|
Plan Assets A reconciliation of beginning and
ending balances of the fair value of net assets associated with
the HSBC North America Pension Plan is shown below.
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Fair value of net Plan assets at beginning of year
|
|
$
|
2,141
|
|
|
$
|
1,978
|
|
Cash contributions by HSBC North America
|
|
|
187
|
|
|
|
241
|
|
Actual return on Plan assets
|
|
|
397
|
|
|
|
129
|
|
Benefits paid
|
|
|
(161
|
)
|
|
|
(207
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of net Plan assets at end of year
|
|
$
|
2,564
|
|
|
$
|
2,141
|
|
|
|
|
|
|
|
|
|
|
As a result of the capital markets improving since December
2009, as well as the $187 million contribution to the Plan
during 2010, the fair value of Plan assets at December 31,
2010 increased approximately 20 percent compared to 2009.
The Pension Protection Act of 2006 requires companies to meet
certain pension funding requirements by January 1, 2015. As
a result, during the third quarter of 2009, the Committee
revised the Pension Funding Policy to better reflect current
marketplace conditions and ensure the Plans ability to
continue to make lump some payments to retiring participants.
The revised Pension Funding Policy requires HSBC North America
to annually contribute the greater of:
|
|
|
|
|
The minimum contribution required under ERISA guidelines;
|
|
|
|
An amount necessary to ensure the ratio of the Plans
assets at the end of the year as compared to the Plans
accrued benefit obligation is equal to or greater than
90 percent;
|
|
|
|
Pension expense for the year as determined under current
accounting guidance; or
|
|
|
|
$100 million which approximates the actuarial present value
of benefits earned by Plan participants on an annual basis.
|
189
HSBC Finance Corporation
As a result, during 2010 HSBC North America made a contribution
to the Plan of $187 million. Additional contributions
during 2011 are anticipated.
Accounting principles related to fair value measurements provide
a framework for measuring fair value and focuses on an exit
price in the principal (or alternatively, the most advantageous)
market accessible in an orderly transaction between willing
market participants (the Fair Value Framework). The
Fair Value Framework establishes a three-tiered fair value
hierarchy with Level 1 representing quoted prices
(unadjusted) in active markets for identical assets or
liabilities. Fair values determined by Level 2 inputs are
inputs that are observable for the identical asset or liability,
either directly or indirectly. Level 2 inputs include
quoted prices for similar assets or liabilities in active
markets, quoted prices for identical or similar assets or
liabilities in markets that are inactive, 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. Transfers between leveling categories are recognized
at the end of each reporting period.
The following table presents the fair values associated with the
major categories of Plan assets and indicates the fair value
hierarchy of the valuation techniques utilized to determine such
fair values as of December 31, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at December 31, 2010
|
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Investments at Fair Value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and short term investments
|
|
$
|
128
|
|
|
$
|
128
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Large-cap
Growth(1)
|
|
|
485
|
|
|
|
478
|
|
|
|
7
|
|
|
|
-
|
|
U.S. Small-cap
Growth(2)
|
|
|
295
|
|
|
|
215
|
|
|
|
80
|
|
|
|
-
|
|
International
Equity(3)
|
|
|
280
|
|
|
|
119
|
|
|
|
161
|
|
|
|
-
|
|
Global Equity
|
|
|
203
|
|
|
|
84
|
|
|
|
119
|
|
|
|
-
|
|
Emerging Market Equity
|
|
|
203
|
|
|
|
-
|
|
|
|
203
|
|
|
|
-
|
|
U.S. Treasury
|
|
|
519
|
|
|
|
519
|
|
|
|
-
|
|
|
|
-
|
|
U.S. Government agency issued or guaranteed
|
|
|
35
|
|
|
|
4
|
|
|
|
31
|
|
|
|
-
|
|
Obligations of U.S. states and political subdivisions
|
|
|
30
|
|
|
|
-
|
|
|
|
30
|
|
|
|
-
|
|
Asset-backed securities
|
|
|
34
|
|
|
|
-
|
|
|
|
6
|
|
|
|
28
|
|
U.S. corporate debt
securities(4)
|
|
|
287
|
|
|
|
-
|
|
|
|
287
|
|
|
|
-
|
|
Corporate stocks preferred
|
|
|
6
|
|
|
|
5
|
|
|
|
1
|
|
|
|
-
|
|
Foreign debt securities
|
|
|
116
|
|
|
|
-
|
|
|
|
99
|
|
|
|
17
|
|
Other Investments
|
|
|
59
|
|
|
|
-
|
|
|
|
59
|
|
|
|
-
|
|
Accrued interest
|
|
|
13
|
|
|
|
5
|
|
|
|
8
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
2,693
|
|
|
|
1,557
|
|
|
|
1,091
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables from sale of investments in process of settlement
|
|
|
36
|
|
|
|
36
|
|
|
|
-
|
|
|
|
-
|
|
Derivative financial
asset(5)
|
|
|
17
|
|
|
|
-
|
|
|
|
17
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables
|
|
|
53
|
|
|
|
36
|
|
|
|
17
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
2,746
|
|
|
|
1,593
|
|
|
|
1,108
|
|
|
|
45
|
|
Liabilities
|
|
|
(182
|
)
|
|
|
(80
|
)
|
|
|
(102
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Assets
|
|
$
|
2,564
|
|
|
$
|
1,513
|
|
|
$
|
1,006
|
|
|
$
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
190
HSBC Finance Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at December 31, 2009
|
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
(in millions)
|
|
|
Investments at Fair Value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and short term investments
|
|
$
|
78
|
|
|
$
|
78
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
U.S. Large-cap
Growth(1)
|
|
|
518
|
|
|
|
510
|
|
|
|
8
|
|
|
|
-
|
|
U.S. Small-cap
Growth(2)
|
|
|
317
|
|
|
|
205
|
|
|
|
112
|
|
|
|
-
|
|
International
Equity(3)
|
|
|
287
|
|
|
|
158
|
|
|
|
129
|
|
|
|
-
|
|
Global Equity
|
|
|
180
|
|
|
|
166
|
|
|
|
14
|
|
|
|
-
|
|
Emerging Market Equity
|
|
|
46
|
|
|
|
-
|
|
|
|
46
|
|
|
|
-
|
|
U.S. Treasury
|
|
|
382
|
|
|
|
382
|
|
|
|
-
|
|
|
|
-
|
|
U.S. Government agency issued or guaranteed
|
|
|
41
|
|
|
|
2
|
|
|
|
39
|
|
|
|
-
|
|
Obligations of U.S. states and political subdivisions
|
|
|
13
|
|
|
|
-
|
|
|
|
11
|
|
|
|
2
|
|
Asset-backed securities
|
|
|
28
|
|
|
|
-
|
|
|
|
11
|
|
|
|
17
|
|
U.S. corporate debt
securities(4)
|
|
|
274
|
|
|
|
-
|
|
|
|
273
|
|
|
|
1
|
|
Corporate stocks preferred
|
|
|
3
|
|
|
|
2
|
|
|
|
1
|
|
|
|
-
|
|
Foreign debt securities
|
|
|
96
|
|
|
|
-
|
|
|
|
95
|
|
|
|
1
|
|
Accrued interest
|
|
|
13
|
|
|
|
5
|
|
|
|
8
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
2,276
|
|
|
|
1,508
|
|
|
|
747
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables from sale of investments in process of settlement
|
|
|
20
|
|
|
|
20
|
|
|
|
-
|
|
|
|
-
|
|
Derivative financial
asset(5)
|
|
|
21
|
|
|
|
-
|
|
|
|
21
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables
|
|
|
41
|
|
|
|
20
|
|
|
|
21
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
2,317
|
|
|
|
1,528
|
|
|
|
768
|
|
|
|
21
|
|
Liabilities
|
|
|
(176
|
)
|
|
|
(22
|
)
|
|
|
(154
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Assets
|
|
$
|
2,141
|
|
|
$
|
1,506
|
|
|
$
|
614
|
|
|
$
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
This category comprises actively managed enhanced index
investments that track the S&P 500 and actively managed
U.S. investments that track the Russell 1000.
|
|
(2)
|
This category comprises actively managed U.S. investments that
track the Russell 2000.
|
|
(3)
|
This category comprises actively managed equity investments in
non-U.S. and
Canada developed markets that generally track the MSCI EAFE
index. MSCI EAFE is an equity market index of 22 developed
market countries in Europe, Australia, Asia and the Far East
including Australia, Austria, Belgium, Denmark, Finland, France,
Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the
Netherlands, New Zealand, Norway, Portugal, Singapore, Spain,
Sweden, Switzerland, and the United Kingdom.
|
|
(4)
|
This category represents predominantly investment grade bonds of
U.S. issuers from diverse industries.
|
|
(5)
|
This category is comprised completely of interest rate swaps.
|
The following table provides additional detail regarding the
rating of our U.S. corporate debt securities at
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
(in millions)
|
|
|
AAA to
AA(1)
|
|
$
|
23
|
|
|
$
|
-
|
|
|
$
|
23
|
|
A+ to
A-(1)
|
|
|
106
|
|
|
|
-
|
|
|
|
106
|
|
BBB+ to
Unrated(1)
|
|
|
158
|
|
|
|
-
|
|
|
|
158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
287
|
|
|
|
-
|
|
|
$
|
287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
We obtain ratings on our U.S. corporate debt securities from
both Moodys Investor Services and Standard and Poors
Corporation. In the event the ratings we obtain from these
agencies differ, we utilize the lower of the two ratings.
|
191
HSBC Finance Corporation
Significant Transfers Between Level 1 and Level 2
There were no significant transfers between Levels 1
and 2 during 2010.
Information on Level 3 Assets and
Liabilities The following table summarizes additional
information about changes in the fair value of Level 3
assets during 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gains and (Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Period
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
Transfers
|
|
|
Transfers
|
|
|
|
|
|
Plan
|
|
|
|
Jan 1,
|
|
|
|
|
|
Comp.
|
|
|
|
|
|
|
|
|
Into
|
|
|
Out of
|
|
|
Dec. 31,
|
|
|
Unrealized
|
|
|
|
2010
|
|
|
Income
|
|
|
Income
|
|
|
Purchases
|
|
|
Settlement
|
|
|
Level 3
|
|
|
Level 3
|
|
|
2010
|
|
|
Gains (Losses)
|
|
|
|
|
|
(in millions)
|
|
|
Obligations of U.S. states and political subdivisions
|
|
$
|
2
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(2
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
Asset-backed securities
|
|
|
18
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
9
|
|
|
|
-
|
|
|
|
28
|
|
|
|
6
|
|
Foreign debt securities
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
21
|
|
|
$
|
-
|
|
|
$
|
2
|
|
|
$
|
16
|
|
|
$
|
(1
|
)
|
|
$
|
9
|
|
|
$
|
(2
|
)
|
|
$
|
45
|
|
|
$
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gains and (Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Period
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
Transfers
|
|
|
Transfers
|
|
|
|
|
|
Plan
|
|
|
|
Jan 1,
|
|
|
|
|
|
Comp.
|
|
|
|
|
|
|
|
|
Into
|
|
|
Out of
|
|
|
Dec. 31,
|
|
|
Unrealized
|
|
|
|
2009
|
|
|
Income
|
|
|
Income
|
|
|
Purchases
|
|
|
Settlement
|
|
|
Level 3
|
|
|
Level 3
|
|
|
2009
|
|
|
Gains (Losses)
|
|
|
|
|
|
(in millions)
|
|
|
International equity
|
|
$
|
12
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(2
|
)
|
|
$
|
-
|
|
|
$
|
(10
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
Global equity
|
|
|
18
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
(15
|
)
|
|
|
-
|
|
|
|
-
|
|
U.S. Treasury
|
|
|
13
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
(12
|
)
|
|
|
-
|
|
|
|
-
|
|
U.S. governmental agency issued or guaranteed
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
-
|
|
Obligations of U.S. states and political subdivisions
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
2
|
|
|
|
-
|
|
Asset-backed securities
|
|
|
9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
|
|
|
(1
|
)
|
|
|
8
|
|
|
|
(5
|
)
|
|
|
18
|
|
|
|
3
|
|
U.S. corporate debt securities
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Foreign debt securities
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
67
|
|
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
9
|
|
|
$
|
(18
|
)
|
|
$
|
8
|
|
|
$
|
(46
|
)
|
|
$
|
21
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation Techniques for Plan Assets Following is a
description of valuation methodologies used for significant
categories of Plan assets recorded at fair value.
Securities: Fair value of securities is
generally determined by a third party valuation source. The
pricing services generally source fair value measurements from
quoted market prices and if not available, the security is
valued based on quotes from similar securities using broker
quotes and other information obtained from dealers and market
participants. For securities which do not trade in active
markets, such as fixed income securities, the pricing services
generally utilize various pricing applications, including
models, to measure fair value. The pricing applications are
based on market convention and use inputs that are derived
principally from or corroborated by observable market data by
correlation or other means. The following summarizes the
valuation methodology used for the major security types of our
pension plan assets:
|
|
|
|
|
Equity securities Since most of our securities are
transacted in active markets, fair value measurements are
determined based on quoted prices for the identical security.
Equity securities and derivative contracts that are non-exchange
traded are primarily investments in common stock funds. The
funds permit investors to redeem the ownership interests back to
the issuer at
end-of-day
for the net asset value (NAV) per share and there
are no significant redemption restrictions. Thus the
end-of-day
NAV is considered observable.
|
|
|
|
U.S. Treasury, U.S. government agency issued or
guaranteed and Obligations of U.S. States and political
subdivisions As these securities transact in an
active market, the pricing services source fair value
measurements from quoted prices for the identical security or
quoted prices for similar securities with adjustments as
necessary made using observable inputs which are market
corroborated.
|
|
|
|
U.S. government sponsored enterprises For
certain government sponsored mortgage-backed securities which
transact in an active market, the pricing services source fair
value measurements from quoted prices for the
|
192
HSBC Finance Corporation
|
|
|
|
|
identical security or quoted prices for similar securities with
adjustments as necessary made using observable inputs which are
market corroborated. For government sponsored mortgage-backed
securities which do not transact in an active market, fair value
is determined using discounted cash flow models and inputs
related to interest rates, prepayment speeds, loss curves and
market discount rates that would be required by investors in the
current market given the specific characteristics and inherent
credit risk of the underlying collateral.
|
|
|
|
|
|
Asset-backed securities Fair value is determined
using discounted cash flow models and inputs related to interest
rates, prepayment speeds, loss curves and market discount rates
that would be required by investors in the current market given
the specific characteristics and inherent credit risk of the
underlying collateral.
|
|
|
|
U.S. corporate and foreign debt securities For
non-callable corporate securities, a credit spread scale is
created for each issuer. 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. Additionally, the pricing services
will survey the broker/dealer community to obtain relevant trade
data including benchmark quotes and updated spreads.
|
|
|
|
Corporate stocks preferred In general,
fair value for preferred securities is calculated using an
appropriate spread over a comparable U.S. Treasury security
for each issue. These spreads represent the additional yield
required to account for risk including credit, refunding and
liquidity. The inputs are derived principally from or
corroborated by observable market data.
|
|
|
|
Derivatives Derivatives are recorded at fair value.
Asset and liability positions in individual derivatives that are
covered by legally enforceable master netting agreements,
including cash collateral are offset and presented net in
accordance accounting principles which allow the offsetting of
amounts relating to certain contracts. Derivatives traded on an
exchange are valued using quoted prices. OTC derivatives, which
comprise a majority of derivative contract positions, are valued
using valuation techniques. The fair value for the majority of
our derivative instruments are determined based on internally
developed models that utilize independently-sourced market
parameters, including interest rate yield curves, option
volatilities, and currency rates. For complex or long-dated
derivative products where market data is not available, fair
value may be affected by the choice of valuation model and the
underlying assumptions about, among other things, the timing of
cash flows and credit spreads. The fair values of certain
structured derivative products are sensitive to unobservable
inputs such as default correlations and volatilities. These
estimates are susceptible to significant change in future
periods as market conditions change.
|
Projected Benefit Obligation A reconciliation of
beginning and ending balances of the projected benefit
obligation of the defined benefit pension plan is shown below
and reflects the projected benefit obligation of the merged HSBC
North American plan.
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Projected benefit obligation at beginning of year
|
|
$
|
3,113
|
|
|
$
|
3,018
|
|
Service cost
|
|
|
76
|
|
|
|
83
|
|
Interest cost
|
|
|
174
|
|
|
|
182
|
|
Gain on curtailment
|
|
|
-
|
|
|
|
(24
|
)
|
Actuarial losses
|
|
|
326
|
|
|
|
43
|
|
Special termination benefits
|
|
|
-
|
|
|
|
18
|
|
Plan
amendment(1)
|
|
|
(144
|
)
|
|
|
-
|
|
Benefits paid
|
|
|
(161
|
)
|
|
|
(207
|
)
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at end of year
|
|
$
|
3,384
|
|
|
$
|
3,113
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The Plan amendment relates to the approval in the first quarter
of 2010 to cease all future benefit accruals for legacy
participants under the final average pay formula as previously
discussed.
|
193
HSBC Finance Corporation
The accumulated benefit obligation for the HSBC North America
Pension Plan was $3.4 billion and $2.9 billion at
December 31, 2010 and 2009, respectively. As the projected
benefit obligation and the accumulated benefit obligation relate
to the HSBC North America Pension Plan, only a portion of this
deficit should be considered our responsibility.
The curtailment gain recognized in 2009 resulted from our
decision to discontinue new customer account originations by our
Consumer Lending business and to close the Consumer Lending
branch offices.
The assumptions used in determining the projected benefit
obligation of the HSBC North America Pension Plan at December 31
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
Discount rate
|
|
|
5.45
|
%
|
|
|
5.95
|
%
|
|
|
6.05
|
%
|
Salary increase assumption
|
|
|
2.75
|
|
|
|
3.50
|
|
|
|
3.50
|
|
Estimated future benefit payments for the HSBC North America
Pension Plan are as follows:
|
|
|
|
|
|
|
HSBC
|
|
|
North America
|
|
|
|
(in millions)
|
|
2011
|
|
$
|
167
|
|
2012
|
|
|
175
|
|
2013
|
|
|
182
|
|
2014
|
|
|
189
|
|
2015
|
|
|
195
|
|
2016-2020
|
|
|
1,053
|
|
Supplemental Retirement Plan We also offer a
non-qualified supplemental retirement plan. 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
$81 million and 79 million at December 31, 2010
and 2009, respectively. Pension expense related to the
supplemental retirement plan was $12 million in 2010,
$10 million in 2009 and $25 million in 2008.
Foreign Defined Benefit Pension Plans Prior
to the sale of our U.K. and Canadian operations, we sponsored
defined benefit pension plans for our foreign based employees.
Pension expense for our foreign operations was $3 million
in 2008 and is reflected as a component of Loss from
discontinued operations in our consolidated statement of
income (loss). These plans were transferred as part of the sale
of our U.K. and Canadian operations.
Defined Contribution Plans We participate in
the HSBC North America 401(k) savings plan and profit sharing
plan which exist for employees meeting certain eligibility
requirements. Under these plans, each participants
contribution is matched up to a maximum of 6 percent of the
participants compensation. Contributions are in the form
of cash. Total expense for these plans for HSBC Finance
Corporation was $17 million in 2010, $32 million in
2009 and $52 million in 2008.
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.
194
HSBC Finance Corporation
The net postretirement benefit cost included the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(in millions)
|
|
|
Service cost benefits earned during the period
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
2
|
|
Interest cost
|
|
|
10
|
|
|
|
11
|
|
|
|
12
|
|
Gain on curtailment
|
|
|
-
|
|
|
|
(16
|
)
|
|
|
(4
|
)
|
Recognized gains
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic postretirement benefit cost (income)
|
|
$
|
11
|
|
|
$
|
(6
|
)
|
|
$
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2009, we recorded a curtailment gain of $16 million
due to a reduction in the benefits to be provided by the
postretirement benefit plan as a result of the decision to
discontinue new customer account originations by our Consumer
Lending business and to close the Consumer Lending branch
offices.
The assumptions used in determining the net periodic
postretirement benefit cost for our postretirement benefit plans
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
Discount rate
|
|
|
5.20
|
%
|
|
|
7.15
|
%
|
|
|
5.90
|
%
|
Salary increase assumption
|
|
|
2.90
|
|
|
|
3.50
|
|
|
|
3.75
|
|
A reconciliation of the beginning and ending balances of the
accumulated postretirement benefit obligation is as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Accumulated benefit obligation at beginning of year
|
|
$
|
189
|
|
|
$
|
207
|
|
Service cost
|
|
|
1
|
|
|
|
2
|
|
Interest cost
|
|
|
9
|
|
|
|
11
|
|
Transferred to HSBC Technology and Services (USA) Inc.
(HTSU)(1)
|
|
|
(5
|
)
|
|
|
(4
|
)
|
Actuarial losses
|
|
|
5
|
|
|
|
3
|
|
Gain on curtailment
|
|
|
-
|
|
|
|
(16
|
)
|
Benefits paid, net
|
|
|
(15
|
)
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation at end of year
|
|
$
|
184
|
|
|
$
|
189
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Reflects the impact of the transfer of certain support functions
to HTSU. See Note 23, Related Party
Transactions, for additional information on the
centralization of support functions within HTSU.
|
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 2011. The funded status of our postretirement
benefit plans was a liability of $184 million and
$189 million at December 31, 2010 and 2009,
respectively.
195
HSBC Finance Corporation
Estimated future benefit payments for our postretirement benefit
plans are as follows:
|
|
|
|
|
|
|
(in millions)
|
|
|
2011
|
|
$
|
16
|
|
2012
|
|
|
16
|
|
2013
|
|
|
16
|
|
2014
|
|
|
16
|
|
2015
|
|
|
16
|
|
2016-2020
|
|
|
71
|
|
The assumptions used in determining the benefit obligation of
our postretirement benefit plans at December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
Discount rate
|
|
|
4.95
|
%
|
|
|
5.60
|
%
|
|
|
6.05
|
%
|
Salary increase assumption
|
|
|
2.75
|
|
|
|
3.50
|
|
|
|
3.50
|
|
A 7.7 percent annual rate of increase in the gross cost of
covered health care benefits for participants under the age of
65 and a 7.2 percent annual rate for participants over the
age of 65 was assumed for 2010. This rate of increase is assumed
to decline gradually to 4.50 percent in 2027.
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
|
|
$
|
.1
|
|
|
$
|
(.1
|
)
|
Effect on postretirement benefit obligation
|
|
|
3
|
|
|
|
(2
|
)
|
196
HSBC Finance Corporation
23. 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 and
some centralized support 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 for
continuing operations:
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
168
|
|
|
$
|
273
|
|
Interest bearing deposits with banks
|
|
|
1,009
|
|
|
|
5
|
|
Securities purchased under agreements to resell
|
|
|
2,060
|
|
|
|
1,550
|
|
Derivative related assets
|
|
|
64
|
|
|
|
-
|
|
Other assets
|
|
|
126
|
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,427
|
|
|
$
|
1,951
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Due to affiliates (includes $436 million at
December 31, 2010 carried at fair value)
|
|
$
|
8,255
|
|
|
$
|
9,043
|
|
Derivative related liability
|
|
|
2
|
|
|
|
56
|
|
Other liabilities
|
|
|
70
|
|
|
|
186
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
8,327
|
|
|
$
|
9,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Income/(Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income from HSBC affiliates
|
|
$
|
7
|
|
|
$
|
7
|
|
|
$
|
33
|
|
Interest expense paid to HSBC
affiliates(1)
|
|
|
(764
|
)
|
|
|
(1,103
|
)
|
|
|
(1,024
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest income (loss)
|
|
|
(757
|
)
|
|
|
(1,096
|
)
|
|
|
(991
|
)
|
Net gain on bulk sale of receivables to HSBC Bank USA
|
|
|
-
|
|
|
|
50
|
|
|
|
-
|
|
Gain/(loss) on FVO debt with affiliate
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
-
|
|
Dividend income from affiliate preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
17
|
|
HSBC affiliate income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on receivable sales to HSBC affiliates:
|
|
|
|
|
|
|
|
|
|
|
|
|
Daily sales of private label receivable originations
|
|
|
197
|
|
|
|
90
|
|
|
|
115
|
|
Daily sales of credit card receivables
|
|
|
343
|
|
|
|
377
|
|
|
|
142
|
|
Sales of real estate secured receivables
|
|
|
-
|
|
|
|
2
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gain on receivable sales to HSBC affiliates
|
|
|
540
|
|
|
|
469
|
|
|
|
260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) on sale of other assets to HSBC affiliates
|
|
|
-
|
|
|
|
20
|
|
|
|
-
|
|
Loss on sale of affiliate preferred stock
|
|
|
-
|
|
|
|
(6
|
)
|
|
|
-
|
|
Servicing and other fees from HSBC affiliates:
|
|
|
|
|
|
|
|
|
|
|
|
|
197
HSBC Finance Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
HSBC Bank USA:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate secured servicing and related fees
|
|
|
12
|
|
|
|
7
|
|
|
|
6
|
|
Private label and card receivable servicing and related fees
|
|
|
625
|
|
|
|
635
|
|
|
|
436
|
|
Other servicing, processing, origination and support revenues
from HSBC Bank USA and other HSBC affiliates
|
|
|
18
|
|
|
|
47
|
|
|
|
40
|
|
HSBC Technology and Services (USA) Inc. (HTSU)
administrative fees and rental
revenue(2)
|
|
|
11
|
|
|
|
59
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total servicing and other fees from HSBC affiliates
|
|
|
666
|
|
|
|
748
|
|
|
|
545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Support services from HSBC affiliates
|
|
|
(1,092
|
)
|
|
|
(925
|
)
|
|
|
(922
|
)
|
Stock based compensation expense with HSBC
|
|
|
(14
|
)
|
|
|
(29
|
)
|
|
|
(36
|
)
|
Insurance commission paid to HSBC Bank Canada
|
|
|
(33
|
)
|
|
|
(18
|
)
|
|
|
(7
|
)
|
|
|
(1)
|
Includes interest expense paid to HSBC affiliates for debt held
by HSBC affiliates as well as net interest paid to or received
from HSBC affiliates on risk management positions related to
non-affiliated debt.
|
(2)
|
During 2010, changes were made in the methodology used to
allocate rental expense between us and HTSU. Rental revenue from
HTSU totaled $3 million during 2010, $47 million
during 2009 and 2008, respectively.
|
Transactions with HSBC Bank USA:
|
|
|
In January 2009, we sold our GM and UP Portfolios to HSBC Bank
USA with an outstanding principal balance of $12.4 billion
at the time of sale and recorded a gain on the bulk sale of
these receivables of $130 million. This gain was partially
offset by a loss of $80 million recorded on the termination
of cash flow hedges associated with the $6.1 billion of
indebtedness transferred to HSBC Bank USA as part of these
transactions. We retained the customer account relationships and
by agreement sell on a daily basis all new credit card
receivable originations for the GM and UP Portfolios to HSBC
Bank USA. We continue to service the GM and UP receivables for
HSBC Bank USA for a fee. Information regarding these receivables
is summarized in the table below.
|
|
|
In July 2004 we purchased the account relationships associated
with $970 million of credit card receivables from HSBC Bank
USA and on a daily basis, we sell new receivable originations on
these credit card accounts to HSBC Bank USA. We continue to
service these loans for a fee. Information regarding these
receivables is summarized in the table below.
|
|
|
In December 2004, we sold to HSBC Bank USA our private label
receivable portfolio (excluding retail sales contracts at our
Consumer Lending business). We continue to service the sold
private label and credit card receivables and receive servicing
and related fee income from HSBC Bank USA. We retained the
customer account relationships and by agreement sell on a daily
basis all new private label receivable originations and new
receivable originations on these credit card accounts to HSBC
Bank USA. Information regarding these receivables is summarized
in the table below.
|
|
|
In 2003 and 2004, we sold approximately $3.7 billion of
real estate secured receivables to HSBC Bank USA. We continue to
service these receivables for a fee. Information regarding these
receivables is summarized in the table below.
|
198
HSBC Finance Corporation
The following table summarizes the private label, credit card
(including the GM and UP Portfolios) and real estate secured
receivables we are servicing for HSBC Bank USA at
December 31, 2010 and 2009 as well as the receivables sold
on a daily basis during 2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Cards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
|
|
|
General
|
|
|
Union
|
|
|
|
|
|
Real Estate
|
|
|
|
|
|
|
|
|
|
Label
|
|
|
Motors
|
|
|
Privilege
|
|
|
Other
|
|
|
Secured
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in billions)
|
|
|
|
|
|
|
|
|
|
|
|
Receivables serviced for HSBC Bank USA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
$
|
13.5
|
|
|
$
|
4.5
|
|
|
$
|
4.1
|
|
|
$
|
2.0
|
|
|
$
|
1.5
|
|
|
$
|
25.6
|
|
|
|
|
|
December 31, 2009
|
|
|
15.6
|
|
|
|
5.4
|
|
|
|
5.3
|
|
|
|
2.1
|
|
|
|
1.8
|
|
|
|
30.2
|
|
|
|
|
|
Total of receivables sold on a daily basis to HSBC Bank USA
during:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
$
|
14.6
|
|
|
$
|
13.5
|
|
|
$
|
3.2
|
|
|
$
|
4.1
|
|
|
$
|
-
|
|
|
$
|
35.4
|
|
|
|
|
|
2009
|
|
|
15.7
|
|
|
|
14.5
|
|
|
|
3.5
|
|
|
|
4.3
|
|
|
|
-
|
|
|
|
38.0
|
|
|
|
|
|
2008
|
|
|
19.6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4.8
|
|
|
|
-
|
|
|
|
24.4
|
|
|
|
|
|
Fees received for servicing these loan portfolios totaled
$630 million, $641 million and $442 million
during 2010, 2009 and 2008, respectively.
|
|
|
The GM and UP credit card receivables as well as the private
label receivables are sold to HSBC Bank USA on a daily basis at
a sales price for each type of portfolio determined using a fair
value calculated semi-annually in April and October by an
independent third party based on the projected future cash flows
of the receivables. The projected future cash flows are
developed using various assumptions reflecting the historical
performance of the receivables and adjusted for key factors such
as the anticipated economic and regulatory environment. The
independent third party uses these projected future cash flows
and a discount rate to determine a range of fair values. We use
the mid-point of this range as the sales price.
|
|
|
In the second quarter of 2008, our Consumer Lending business
launched a new program with HSBC Bank USA to sell real estate
secured receivables to the Federal Home Loan Mortgage
Corporation (Freddie Mac). Our Consumer Lending
business originated the loans in accordance with Freddie
Macs underwriting criteria. The loans were then sold to
HSBC Bank USA, generally within 30 days. HSBC Bank USA
repackaged the loans and sold them to Freddie Mac under their
existing Freddie Mac program. During the three months ended
March 31, 2009, we sold $51 million of real estate
secured loans to HSBC Bank USA for a gain on sale of
$2 million. This program was discontinued in late February
2009 as a result of our decision to discontinue new customer
account originations in our Consumer Lending business.
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HSBC Bank USA serviced a portfolio of real estate secured
receivables for us with an outstanding principal balance of
$1.5 billion at December 31, 2009. During 2010,
servicing of these receivables was transferred back to us. Fees
paid relating to the servicing of this portfolio totaled
$1 million during 2010 prior to the transfer of servicing
to us compared to $6 million and $12 million during
2009 and 2008, respectively. These fees are reported in Support
services from HSBC affiliates. The decrease during 2010 reflects
a renegotiation of servicing fees for this portfolio.
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In the third quarter of 2009, we sold $86 million of Low
Income Housing Tax Credit Investment Funds to HSBC Bank USA for
a loss on sale of $15 million (after-tax).
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Under multiple service level agreements, we also provide various
services to HSBC Bank USA, including real estate and credit card
servicing and processing activities and other operational and
administrative support. Fees received for these services are
reported as Servicing and other fees from HSBC affiliates. Fees
received for auto finance loan servicing are included as a
component of Loss from discontinued Auto operations.
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HSBC Finance Corporation
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In the fourth quarter of 2009, an initiative was begun to
streamline the servicing of real estate secured receivables
across North America. As a result, certain functions that we had
previously performed for our mortgage customers are now being
performed by HSBC Bank USA for all North America mortgage
customers, including our mortgage customers. Additionally, we
are currently performing certain functions for all North America
mortgage customers where these functions had been previously
provided separately by each entity. During 2010 and 2009, we
paid $8 million and $5 million for services we
received from HSBC Bank USA and received $7 million and
$1 million for services we provided.
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In July 2010, we transferred certain employees in our real
estate secured receivable servicing department to a subsidiary
of HSBC Bank USA. These employees continue to service our real
estate secured receivable portfolio and we pay a fee to HSBC
Bank USA for these services.
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We have extended revolving lines of credit to subsidiaries of
HSBC Bank USA for an aggregate total of $1.0 billion. No
balances were outstanding under any of these lines of credit at
either December 31, 2010 or 2009.
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HSBC Bank USA extended a secured $1.5 billion uncommitted
credit facility to certain of our subsidiaries in December 2008.
This is a 364 day credit facility which was renewed in
November 2010. There were no balances outstanding at
December 31, 2010 or 2009.
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HSBC Bank USA extended a $1.0 billion committed unsecured
credit facility to HSBC Bank Nevada (HOBN), a
subsidiary of HSBC Finance Corporation, in December 2008. This
364 day credit facility was renewed in December 2010. There
were no balances outstanding at December 31, 2010 or 2009.
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As it relates to our TFS operations, which terminated in the
fourth quarter of 2010, HSBC Bank USA and HSBC
Trust Company (Delaware) (HTCD) originated the
loans on behalf of our TFS business for clients of a single
third party tax preparer. We historically purchased the loans
originated by HSBC Bank USA and HTCD daily for a fee. During the
first quarter of 2010, we began purchasing a smaller portion of
these loans. The loans which we previously purchased were
retained by HSBC Bank USAs balance sheet. In the event any
of the loans which HSBC Bank USA continued to hold on its
balance sheet reached a defined delinquency status, we purchased
the delinquent loans at par value as we assumed all credit risk
associated with this program. We received a fee from HSBC Bank
USA for both servicing the loans and assuming the credit risk
associated with these loans which totaled $58 million
during 2010 and is included as a component of loss from
discontinued operations. For the loans which we continued to
purchase from HTCD, we received taxpayer financial services
revenue and paid an origination fee to HTCD. Fees paid for
originations totaled $4 million in 2010, $11 million
in 2009 and $13 million in 2008 and are included as a
component of loss from discontinued operations.
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As it relates to our discontinued auto finance operations, in
January 2009, we sold certain auto finance receivables with an
outstanding principal balance of $3.0 billion at the time
of sale to HSBC Bank USA and recorded a gain on the bulk sale of
these receivables of $7 million which is included as a
component of Loss from discontinued auto operations for 2009. In
March 2010, we repurchased $379 million of these auto
finance receivables from HSBC Bank USA and immediately sold them
to SC USA. Prior to the sale of our receivable servicing
operations to SC USA in March 2010, we serviced these auto
finance receivables for HSBC Bank USA for a fee, which is
included as a component of Loss from discontinued auto
operations. In August 2010, we sold the remainder of our auto
finance receivable portfolio to SC USA.
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Transactions with HSBC Holdings plc:
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A commercial paper back-stop credit facility of
$2.0 billion and $2.5 billion from HSBC at
December 31, 2010 and 2009, respectively, supported our
domestic issuances of commercial paper. No balances were
outstanding under this credit facility at December 31, 2010
or 2009. The annual commitment fee requirement to support
availability of this line is included as a component of Interest
expense HSBC affiliates in the consolidated
statement of income (loss).
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During the second quarter of 2009, we sold to HSBC
$248 million of affiliate preferred stock which we had
received on the sale of our U.K. credit card business. As a
result, we recorded a loss on sale of $6 million which is
included as a component of other income during 2009.
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HSBC Finance Corporation
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In late February 2009, we effectively converted
$275 million of mandatorily redeemable preferred securities
of the Household Capital Trust VIII which had been issued
during 2003 to common stock by redeeming the junior subordinated
notes underlying the preferred securities and then issuing
common stock to HSBC Investments (North America) Inc.
(HINO). Interest expense recorded on the underlying
junior subordinated notes totaled $3 million in 2009 and
$18 million in 2008. This interest expense is included in
Interest expense HSBC affiliates in the consolidated
statement of income (loss).
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Employees of HSBC Finance Corporation participate in one or more
stock compensation plans sponsored by HSBC. These expenses are
recorded in Salary and employee benefits and are reflected in
the above table as Stock based compensation expense with HSBC.
As of December 31, 2010, our share of future compensation
cost related to grants which have not yet fully vested is
approximately $9 million. This amount is expected to be
recognized over a weighted-average period of 0.94 years.
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Transactions with other HSBC affiliates:
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HSBC North Americas technology and certain centralized
support services including human resources, corporate affairs,
risk management and other shared services and beginning in
January 2010, legal, compliance, tax and finance are centralized
within HTSU. Technology related assets are generally capitalized
and recorded on our consolidated balance sheet. HTSU also
provides certain item processing and statement processing
activities to us. The fees we pay HTSU for the centralized
support services and processing activities are included in
support services from HSBC affiliates. We also receive fees from
HTSU for providing them certain administrative services, such as
internal audit, as well as receiving rental revenue from HTSU
for certain office space. The fees and rental revenue we receive
from HTSU are recorded as a component of servicing and other
fees from HSBC affiliates.
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We use HSBC Global Resourcing (UK) Ltd., 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. The
expenses related to these services of $125 million in 2010,
$161 million in 2009 and $159 million in 2008 are
included as a component of Support services from HSBC affiliates
in the table above. Beginning in 2010, the expenses for these
services for all HSBC North America operations are billed
directly to HTSU who is providing oversight and review of the
majority of all of our intercompany transactions and then bills
these services to the appropriate HSBC affiliate who benefited
from the services.
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During the fourth quarter of 2008, we sold miscellaneous assets
to HTSU for a purchase price equal to the book value of these
assets of $41 million.
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The notional value of derivative contracts outstanding with HSBC
subsidiaries totaled $49.9 billion and $58.6 billion
at December 31, 2010 and 2009, respectively. When the fair
value of our agreements with affiliate counterparties requires
the posting of collateral, it is provided in either the form of
cash and recorded on the balance sheet or in the form of
securities which are not recorded on our balance sheet. The fair
value of our agreements with affiliate counterparties required
the affiliate to provide collateral of $2.5 billion and
$3.4 billion at December 31, 2010 and 2009,
respectively, all of which was received in cash. These amounts
are offset against the fair value amount recognized for
derivative instruments that have been offset under the same
master netting arrangement.
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Due to affiliates includes amounts owed to subsidiaries of HSBC
as a result of direct debt issuances. At December 31, 2010,
due to affiliates includes $436 million carried at fair
value under FVO reporting. During 2010, loss on debt designated
at fair value and related derivatives includes $4 million
related to these debt issuances.
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During 2010, we executed a $1.0 billion
364-day
uncommitted revolving credit agreement with HSBC North America
which allowed for borrowings with maturities of up to
15 years, and borrowed the full amount available under this
agreement during 2010. During the fourth quarter of 2010, we
replaced this loan to HSBC North America with the issuance of
1,000 shares of Series C preferred stock to HINO for
$1.0 billion. See Note 19, Redeemable Preferred
Stock, for further discussion of the Series C
preferred stock.
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201
HSBC Finance Corporation
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In December 2010, we made a deposit totaling $1.0 billion
with HSBC Bank plc (HBEU) at current market rates.
The deposit can be withdrawn anytime after June 3, 2011
with 185 days notice, and matures on March 1, 2012.
Interest income earned on this deposit, which was immaterial
during 2010, is included in interest income from HSBC affiliates
in the table above.
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In September 2008, we borrowed $1.0 billion from an
existing uncommitted credit facility with HBEU. The borrowing
was for 60 days and matured in November 2008. We renewed
this borrowing for an additional 95 days. The borrowing
matured in February 2009 and we chose not to renew it at that
time. Interest expense on this borrowing totaled $5 million
in 2009 and $11 million in 2008.
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In October 2008, we borrowed $1.2 billion from an
uncommitted money market facility with a subsidiary of HSBC Asia
Pacific (HBAP). The borrowing was for six months,
matured in April 2009 and we chose not to renew it at that time.
Interest expense on this borrowing totaled $19 million in
2009 and $16 million in 2008.
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We purchase from HSBC Securities (USA) Inc. (HSI)
securities under an agreement to resell. Interest income
recognized on these securities totaled $6 million in 2010,
$5 million in 2009 and $16 million in 2008 and is
reflected as Interest income from HSBC affiliates in the table
above.
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Support services from HSBC affiliates also includes banking
services and other miscellaneous services provided by other
subsidiaries of HSBC, including HSBC Bank USA.
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Domestic employees of HSBC Finance Corporation participate in a
defined benefit pension plan and other post-retirement benefit
plans sponsored by HSBC North America. See Note 22,
Pension and Other Post-retirement Benefits, for
additional information on this pension plan.
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We have utilized HSBC Markets (USA) Inc, (HMUS) to
lead manage the underwriting of a majority of our ongoing debt
issuances as well as manage the debt exchange which occurred
during 2010. During 2010, fees paid to HMUS for such services
totaled $13 million. There were no fees paid to HMUS for
such services during 2009 or 2008. For debt not accounted for
under the fair value option, these fees are amortized over the
life of the related debt and included as a component of interest
expense.
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As previously discussed in Note 3, Discontinued
Operations, in May 2008 we sold all of the common stock of
the holding company of our U.K. Operations to HOHU for GBP
181 million (equivalent to approximately
$359 million). The results of operations for our U.K.
Operations have been reclassified as income from discontinued
operations for all periods presented.
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As previously discussed in Note 3, Discontinued
Operations, in November 2008 we sold all of the common
stock of the holding company of our Canadian Operations to HSBC
Bank Canada for approximately $279 million (based on the
exchange rate on the date of sale). While HSBC Bank Canada
assumed the liabilities of our Canadian Operations as a result
of this transaction, we continue to guarantee the external
long-term and medium-term notes issued by our Canadian business
prior to the sale for a fee. We recorded $5 million in
2010, $6 million in 2009 and $10 million in 2008 for
providing this guarantee. As of December 31, 2010, the
outstanding balance of the guaranteed notes was
$1.5 billion and the latest scheduled maturity of the notes
is May 2012. The sale agreement with HSBC Bank Canada allows us
to continue to distribute various insurance products through the
branch network for a fee. Fees paid to HSBC Bank Canada for
distributing insurance products through this network totaled
$33 million in 2010, $18 million in 2009 and
$7 million in 2008 and are included in Insurance Commission
paid to HSBC Bank Canada. The results of operations for our
Canadian Operations have been reclassified as Income from
discontinued operations for all periods presented.
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202
HSBC Finance Corporation
24. Business
Segments
We have two reportable segments: Card and Retail Services and
Consumer. Our segments are managed separately and are
characterized by different middle-market consumer lending
products, origination processes, and locations. Our segment
results are reported on a continuing operations basis.
Our Card and Retail Services segment comprises our core
operations and includes our MasterCard, Visa, private label and
other credit card operations. The Card and Retail Services
segment offers these products throughout the United States
primarily via strategic affinity and co-branding relationships,
merchant relationships and direct mail. We also offer products
and provide customer service through the Internet.
Our Consumer segment consists of our run-off Consumer Lending
and Mortgage Services businesses which are no longer considered
central to our core operations. The Consumer segment provided
real estate secured and personal non-credit card loans with both
revolving and closed-end terms and with fixed or variable
interest rates. Loans were originated through branch locations
and direct mail. Products were also offered and customers
serviced through the Internet. Prior to the first quarter of
2007, we acquired loans from correspondent lenders and prior to
September 2007 we also originated loans sourced through mortgage
brokers. While these businesses are operating in run-off mode,
they have not been reported as discontinued operations because
we continue to generate cash flow from the ongoing collections
of the receivables, including interest and fees.
The All Other caption includes our Insurance business. It also
includes our Commercial businesses which is no longer considered
core to our operations. Each of these businesses falls below the
quantitative threshold tests under segment reporting accounting
principles for determining reportable segments. The All
Other caption also includes our corporate and treasury
activities, which includes the impact of FVO debt. Certain fair
value adjustments related to purchase accounting resulting from
our acquisition by HSBC and related amortization have been
allocated to corporate, which is included in the All
Other caption within our segment disclosure including
goodwill arising from our acquisition by HSBC.
As discussed in Note 3, Discontinued
Operations, our Auto Finance business, which was
previously reported in our Consumer segment, and our TFS
business which was previously included in the All
Other caption, are now reported as discontinued operations
and are no longer included in our segment presentation.
There have been no significant changes in our measurement of
segment profit (loss) and no changes in the basis of
segmentation as compared with the presentation in our 2009
Form 10-K.
We report results to our parent, HSBC, in accordance with its
reporting basis, International Financial Reporting Standards
(IFRSs). 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. IFRS Management Basis results are IFRSs
results which assume that the GM and UP credit card, private
label and real estate secured receivables transferred to HSBC
Bank USA have not been sold and remain on our balance sheet and
the revenues and expenses related to these receivables remain on
our income statement. 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 receivable
sales to HSBC Bank USA were conducted primarily to fund prime
customer loans more efficiently through bank deposits and such
receivables continue to be managed by us. However, we continue
to monitor capital adequacy, establish dividend policy and
report to regulatory agencies on a U.S. GAAP legal entity
basis.
203
HSBC Finance Corporation
We are currently in the process of re-evaluating the financial
information used to manage our business, including the scope and
content of the financial data being reported to our Management
and our Board. To the extent we make changes to this reporting
in 2011, we will evaluate any impact such changes may have to
our segment reporting.
For segment reporting purposes, intersegment transactions have
not been eliminated. We generally account for transactions
between segments as if they were with third parties.
A summary of the significant differences between U.S. GAAP
and IFRSs as they impact our results are summarized below:
Net
Interest Income
Effective interest rate The calculation of
effective interest rates under IAS 39, Financial
Instruments: Recognition and Measurement (IAS 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.
U.S. GAAP generally prohibits recognition of interest
income to the extent the net investment in the loan would
increase to an amount greater than the amount at which the
borrower could settle the obligation. Under U.S. GAAP,
prepayment penalties are generally recognized as received.
U.S. GAAP also includes interest income on loans originated
as held for sale which is included in other revenues for IFRSs.
Deferred loan origination costs and fees Loan
origination cost deferrals under IFRSs 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
recognized on either a contractual or expected life basis.
Net interest income Under IFRSs, net interest
income includes the interest element for derivatives which
correspond to debt designated at fair value. For U.S. GAAP,
this is included in Gain (loss) on debt designated at fair value
and related derivatives which is a component of other revenues.
Additionally, under IFRSs, insurance investment income is
included in net interest income instead of as a component of
other revenues under U.S. GAAP.
Other
Operating Income (Total Other Revenues)
Present value of long-term insurance
contracts Under IFRSs, the present value of an
in-force (PVIF) long-term insurance contract is
determined by discounting future cash flows expected to emerge
from business currently in force using appropriate assumptions
plus a margin in assessing factors such as future mortality,
lapse rates and levels of expenses, and a discount rate that
reflects the risk free rate plus a margin for operational risk.
Movements in the PVIF of long-term insurance contracts are
included in other operating income. Under U.S. GAAP,
revenue is recognized over the life insurance policy term.
During the second quarter of 2009, we refined the income
recognition methodology in respect to long-term insurance
contracts. This resulted in the recognition of a revenue item on
an IFRSs basis of $66 million ($43 million after-tax).
Approximately $43 million ($28 million after-tax)
would have been recorded prior to January 1, 2009 if the
refinement in respect of income recognition had been applied at
that date.
Policyholder benefits Other revenues under
IFRSs include policyholder benefits expense which is classified
as other expense under U.S. GAAP.
Loans held for sale IFRSs requires loans
designated as held for sale at the time of origination to be
treated as trading assets and recorded at their fair value.
Under U.S. GAAP, loans designated as held for sale are
reflected as loans and recorded at the lower of amortized cost
or fair value. Under IFRSs, the income and expenses related to
receivables held for sale are reported in other operating
income. Under U.S. GAAP, the income and expenses related to
receivables held for sale are reported similarly to loans held
for investment.
204
HSBC Finance Corporation
For receivables transferred to held for sale subsequent to
origination, IFRSs requires these receivables to be reported
separately on the balance sheet but does not change the
recognition and measurement criteria. Accordingly, for IFRSs
purposes such loans continue to be accounted for in accordance
with IAS 39 with any gain or loss recorded at the time of sale.
U.S. GAAP requires loans that meet the held for sale
classification requirements be transferred to a held for sale
category at the lower of amortized cost or fair value. Under
U.S. GAAP, the component of the lower of amortized cost or
fair value adjustment related to credit risk is recorded in the
statement of income (loss) as provision for credit losses while
the component related to interest rates and liquidity factors is
reported in the statement of income (loss) in other revenues.
Certain receivables that were previously classified as held for
sale under U.S. GAAP have now been transferred to held for
investment as we now intend to hold for the foreseeable future.
Under U.S. GAAP, these receivables were subject to lower of
amortized cost or fair value adjustments while held for sale and
have been transferred to held for investment at the lower of
amortized cost or fair value. Since these receivables were not
classified as held for sale under IFRSs, these receivables were
always reported within loans and the measurement criteria did
not change. As a result, loan impairment charges are now being
recorded under IFRSs which were essentially included as a
component of the lower of cost or fair value adjustments under
U.S. GAAP.
Extinguishment of debt During the fourth
quarter of 2010, we exchanged $1.8 billion in senior debt
for $1.9 billion in new fixed rate subordinated debt. Under
IFRSs, the population of debt exchanged which qualified for
extinguishment treatment was larger than under U.S. GAAP
which resulted in a gain on extinguishment of debt under IFRSs
compared to a small loss under U.S. GAAP.
Securities Under IFRSs, securities include
HSBC shares held for stock plans at fair value. These shares are
recorded at fair value through other comprehensive income. If it
is determined these shares have become impaired, the fair value
loss is recognized in profit and loss and any fair value loss
recorded in other comprehensive income is reversed. There is no
similar requirement under U.S. GAAP.
During the second quarter of 2009, under IFRSs we recorded
income for the value of additional shares attributed to HSBC
shares held for stock plans as a result of HSBCs rights
offering earlier in 2009. During 2010, under IFRSs we recorded
additional gains as these shares vest. The additional shares are
not recorded under U.S. GAAP.
Other-than-temporary
impairments Under U.S. GAAP we are allowed
to evaluate perpetual preferred securities for potential
other-than-temporary
impairment similar to a debt security provided there has been no
evidence of deterioration in the credit of the issuer and record
the unrealized losses as a component of other comprehensive
income. There are no similar provisions under IFRSs as all
perpetual preferred securities are evaluated for
other-than-temporary
impairment as equity securities.
Effective January 1, 2009 under U.S. GAAP, the credit
loss component of an
other-than-temporary
impairment of a debt security is recognized in earnings while
the remaining portion of the impairment loss is recognized in
other comprehensive income provided a company concludes it
neither intends to sell the security nor concludes that it is
more-likely-than-not that it will have to sell the security
prior to recovery. Under IFRSs, there is no bifurcation of
other-than-temporary
impairment and the entire decline in value is recognized in
earnings.
REO expense Other revenues under IFRSs
includes losses on sale and the lower of amortized cost or fair
value adjustments on REO properties which are classified as
other expense under U.S. GAAP.
Loan
Impairment Charges (Provision for Credit Losses)
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 a
recovery asset is recorded. Subsequent recoveries are recorded
to earnings under U.S. GAAP, but are adjusted against the
recovery asset under IFRSs. Interest is recorded based on
collectibility under IFRSs.
205
HSBC Finance Corporation
As discussed above, under U.S. GAAP the credit risk
component of the lower of amortized cost or fair value
adjustment related to the transfer of receivables to held for
sale is recorded in the statement of income (loss) as provision
for credit losses. There is no similar requirement under IFRSs.
Operating
Expenses
Goodwill impairments Goodwill impairment
under IFRSs was higher than that under U.S. GAAP due to
higher levels of goodwill established under IFRSs as well as
differences in how impairment is measured as U.S. GAAP
requires a two-step impairment test which requires the fair
value of goodwill to be determined in the same manner as the
amount of goodwill recognized in a business combination.
Policyholder benefits Operating expenses
under IFRSs are lower as policyholder benefits expenses are
reported as an offset to other revenues as discussed above.
Pension costs Net income under U.S. GAAP
is lower than under IFRSs as a result of the amortization of the
amount by which actuarial losses exceed gains beyond the
10 percent corridor. Furthermore, in 2010
changes to future accruals for legacy participants under the
HSBC North America Pension Plan were accounted for as a plan
curtailment under IFRSs, which resulted in immediate income
recognition. Under U.S. GAAP, these changes were considered
to be a negative plan amendment which resulted in no immediate
income recognition.
Assets
Customer loans (Receivables) On an IFRSs
basis, loans designated as held for sale at the time of
origination and accrued interest are classified as trading
assets. However, the accounting requirements governing when
receivables previously held for investment are transferred to a
held for sale category are more stringent under IFRSs than under
U.S. GAAP. Unearned insurance premiums are reported as a
reduction to receivables on a U.S. GAAP basis but are
reported as insurance reserves for IFRSs.
Other In addition to the differences
discussed above, derivative financial assets are higher under
IFRSs than under U.S. GAAP as U.S. GAAP permits the
netting of certain items. No similar requirement exists under
IFRSs.
206
HSBC Finance Corporation
Reconciliation of our IFRS Management Basis segment results to
the U.S. GAAP consolidated totals are as follows:
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IFRS
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Management
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Card and
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Adjustments/
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Basis
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Management
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IFRS
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U.S. GAAP
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Retail
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All
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Reconciling
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Consolidated
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Basis
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IFRS
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Reclass-
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Consolidated
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Services
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Consumer
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Other
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Items
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Totals
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Adjustments(3)
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Adjustments(2)
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ifications(5)
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Totals
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(in millions)
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Year Ended December 31, 2010
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
4,739
|
|
|
$
|
2,338
|
|
|
$
|
832
|
|
|
$
|
-
|
|
|
$
|
7,909
|
|
|
$
|
(2,576
|
)
|
|
$
|
(284
|
)
|
|
$
|
(864
|
)
|
|
$
|
4,185
|
|
Other operating income (Total other revenues)
|
|
|
1,392
|
|
|
|
(39
|
)
|
|
|
(305
|
)
|
|
|
(25
|
)(1)
|
|
|
1,023
|
|
|
|
379
|
|
|
|
(73
|
)
|
|
|
1,238
|
|
|
|
2,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income (loss)
|
|
|
6,131
|
|
|
|
2,299
|
|
|
|
527
|
|
|
|
(25
|
)
|
|
|
8,932
|
|
|
|
(2,197
|
)
|
|
|
(357
|
)
|
|
|
374
|
|
|
|
6,752
|
|
Loan impairment charges (Provision for credit losses)
|
|
|
2,180
|
|
|
|
5,714
|
|
|
|
(5
|
)
|
|
|
-
|
|
|
|
7,889
|
|
|
|
(1,206
|
)
|
|
|
(500
|
)
|
|
|
(3
|
)
|
|
|
6,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,951
|
|
|
|
(3,415
|
)
|
|
|
532
|
|
|
|
(25
|
)
|
|
|
1,043
|
|
|
|
(991
|
)
|
|
|
143
|
|
|
|
377
|
|
|
|
572
|
|
Operating expenses
|
|
|
1,912
|
|
|
|
883
|
|
|
|
225
|
|
|
|
(25
|
)
|
|
|
2,995
|
|
|
|
(26
|
)
|
|
|
132
|
|
|
|
377
|
|
|
|
3,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax
|
|
$
|
2,039
|
|
|
$
|
(4,298
|
)
|
|
$
|
307
|
|
|
$
|
-
|
(1)
|
|
$
|
(1,952
|
)
|
|
$
|
(965
|
)
|
|
$
|
11
|
|
|
$
|
-
|
|
|
$
|
(2,906
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment revenues
|
|
|
28
|
|
|
|
73
|
|
|
|
(76
|
)
|
|
|
(25
|
)(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Depreciation and amortization
|
|
|
68
|
|
|
|
2
|
|
|
|
62
|
|
|
|
-
|
|
|
|
132
|
|
|
|
-
|
|
|
|
54
|
|
|
|
(7
|
)
|
|
|
179
|
|
Expenditures for long-lived
assets(4)
|
|
|
-
|
|
|
|
-
|
|
|
|
15
|
|
|
|
-
|
|
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15
|
|
Balances at end of period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer loans (Receivables)
|
|
$
|
32,991
|
|
|
$
|
58,179
|
|
|
$
|
2,303
|
|
|
$
|
-
|
|
|
$
|
93,473
|
|
|
$
|
(24,375
|
)
|
|
$
|
(491
|
)
|
|
$
|
(2,224
|
)
|
|
$
|
66,383
|
|
Assets
|
|
|
31,178
|
|
|
|
58,990
|
|
|
|
13,016
|
|
|
|
-
|
|
|
|
103,184
|
|
|
|
(23,360
|
)
|
|
|
(3,364
|
)
|
|
|
(124
|
)
|
|
|
76,336
|
|
Goodwill
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
5,201
|
|
|
$
|
2,594
|
|
|
$
|
1,029
|
|
|
$
|
2
|
|
|
$
|
8,826
|
|
|
$
|
(2,661
|
)
|
|
$
|
(367
|
)
|
|
$
|
(740
|
)
|
|
$
|
5,058
|
|
Other operating income (Total other revenues)
|
|
|
2,367
|
|
|
|
64
|
|
|
|
(2,374
|
)
|
|
|
(26
|
)(1)
|
|
|
31
|
|
|
|
269
|
|
|
|
(714
|
)
|
|
|
1,126
|
|
|
|
712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income (loss)
|
|
|
7,568
|
|
|
|
2,658
|
|
|
|
(1,345
|
)
|
|
|
(24
|
)
|
|
|
8,857
|
|
|
|
(2,392
|
)
|
|
|
(1,081
|
)
|
|
|
386
|
|
|
|
5,770
|
|
Loan impairment charges (Provision for credit losses)
|
|
|
5,064
|
|
|
|
8,002
|
|
|
|
15
|
|
|
|
-
|
|
|
|
13,081
|
|
|
|
(2,784
|
)
|
|
|
(642
|
)
|
|
|
(5
|
)
|
|
|
9,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,504
|
|
|
|
(5,344
|
)
|
|
|
(1,360
|
)
|
|
|
(24
|
)
|
|
|
(4,224
|
)
|
|
|
392
|
|
|
|
(439
|
)
|
|
|
391
|
|
|
|
(3,880
|
)
|
Operating expenses
|
|
|
2,393
|
|
|
|
1,280
|
|
|
|
2,630
|
(6)
|
|
|
(27
|
)
|
|
|
6,276
|
|
|
|
14
|
|
|
|
(463
|
)
|
|
|
391
|
|
|
|
6,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax
|
|
$
|
111
|
|
|
$
|
(6,624
|
)
|
|
$
|
(3,990
|
)
|
|
$
|
3
|
(1)
|
|
$
|
(10,500
|
)
|
|
$
|
378
|
|
|
$
|
24
|
|
|
$
|
-
|
|
|
$
|
(10,098
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment revenues
|
|
|
5
|
|
|
|
127
|
|
|
|
(106
|
)
|
|
|
(26
|
)(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Depreciation and amortization
|
|
|
69
|
|
|
|
30
|
|
|
|
64
|
|
|
|
-
|
|
|
|
163
|
|
|
|
-
|
|
|
|
71
|
|
|
|
(32
|
)
|
|
|
202
|
|
Expenditures for long-lived
assets(4)
|
|
|
-
|
|
|
|
-
|
|
|
|
51
|
|
|
|
-
|
|
|
|
51
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
51
|
|
Balances at end of period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer loans (Receivables)
|
|
$
|
38,873
|
|
|
$
|
71,971
|
|
|
$
|
1,346
|
|
|
$
|
-
|
|
|
$
|
112,190
|
|
|
$
|
(28,599
|
)
|
|
$
|
(594
|
)
|
|
$
|
(1,300
|
)
|
|
$
|
81,697
|
|
Assets
|
|
|
37,178
|
|
|
|
73,042
|
|
|
|
11,610
|
|
|
|
(1
|
)
|
|
|
121,829
|
|
|
|
(27,891
|
)
|
|
|
(4,143
|
)
|
|
|
(150
|
)
|
|
|
89,645
|
|
Goodwill
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
5,083
|
|
|
$
|
4,585
|
|
|
$
|
220
|
|
|
$
|
-
|
|
|
$
|
9,888
|
|
|
$
|
(1,419
|
)
|
|
$
|
(221
|
)
|
|
$
|
(312
|
)
|
|
$
|
7,936
|
|
Other operating income (Total other revenues)
|
|
|
3,185
|
|
|
|
(99
|
)
|
|
|
2,524
|
|
|
|
(21
|
)(1)
|
|
|
5,589
|
|
|
|
(88
|
)
|
|
|
(323
|
)
|
|
|
773
|
|
|
|
5,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income (loss)
|
|
|
8,268
|
|
|
|
4,486
|
|
|
|
2,744
|
|
|
|
(21
|
)
|
|
|
15,477
|
|
|
|
(1,507
|
)
|
|
|
(544
|
)
|
|
|
461
|
|
|
|
13,887
|
|
Loan impairment charges (Provision for credit losses)
|
|
|
5,292
|
|
|
|
9,212
|
|
|
|
37
|
|
|
|
-
|
|
|
|
14,541
|
|
|
|
(1,650
|
)
|
|
|
(443
|
)
|
|
|
(38
|
)
|
|
|
12,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,976
|
|
|
|
(4,726
|
)
|
|
|
2,707
|
|
|
|
(21
|
)
|
|
|
936
|
|
|
|
143
|
|
|
|
(101
|
)
|
|
|
499
|
|
|
|
1,477
|
|
Operating expenses
|
|
|
2,139
|
|
|
|
1,563
|
|
|
|
1,406
|
(6)
|
|
|
-
|
|
|
|
5,108
|
|
|
|
51
|
|
|
|
(486
|
)
|
|
|
499
|
|
|
|
5,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax
|
|
$
|
837
|
|
|
$
|
(6,289
|
)
|
|
$
|
1,301
|
|
|
$
|
(21
|
)(1)
|
|
$
|
(4,172
|
)
|
|
$
|
92
|
|
|
$
|
385
|
|
|
$
|
-
|
|
|
$
|
(3,695
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment revenues
|
|
|
35
|
|
|
|
183
|
|
|
|
(214
|
)
|
|
|
(4
|
)(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Depreciation and amortization
|
|
|
65
|
|
|
|
28
|
|
|
|
76
|
|
|
|
-
|
|
|
|
169
|
|
|
|
-
|
|
|
|
90
|
|
|
|
(16
|
)
|
|
|
243
|
|
Expenditures for long-lived
assets(4)
|
|
|
-
|
|
|
|
2
|
|
|
|
75
|
|
|
|
-
|
|
|
|
77
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
77
|
|
Balances at end of period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer loans (Receivables)
|
|
$
|
46,730
|
|
|
$
|
89,475
|
|
|
$
|
81
|
|
|
$
|
-
|
|
|
$
|
136,286
|
|
|
$
|
(33,470
|
)
|
|
$
|
(497
|
)
|
|
$
|
(1,696
|
)
|
|
$
|
100,623
|
|
Assets
|
|
|
44,160
|
|
|
|
83,044
|
|
|
|
17,555
|
|
|
|
-
|
|
|
|
144,759
|
|
|
|
(19,682
|
)
|
|
|
(4,720
|
)
|
|
|
(239
|
)
|
|
|
120,118
|
|
Goodwill
|
|
|
530
|
|
|
|
-
|
|
|
|
2,385
|
|
|
|
-
|
|
|
|
2,915
|
|
|
|
-
|
|
|
|
(621
|
)
|
|
|
-
|
|
|
|
2,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Eliminates intersegment revenues.
|
207
HSBC Finance Corporation
|
|
(2) |
IFRS Adjustments, which have been described more fully above,
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
|
|
|
Total
|
|
|
Profit
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
For
|
|
|
Costs
|
|
|
(Loss)
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
Other
|
|
|
Credit
|
|
|
and
|
|
|
Before
|
|
|
|
|
|
Total
|
|
|
|
Income
|
|
|
Revenues
|
|
|
Losses
|
|
|
Expenses
|
|
|
Tax
|
|
|
Receivables
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives and hedge accounting
|
|
$
|
12
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
12
|
|
|
$
|
-
|
|
|
$
|
(3,453
|
)
|
Goodwill and intangible assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
54
|
|
|
|
(54
|
)
|
|
|
-
|
|
|
|
223
|
|
Purchase accounting
|
|
|
2
|
|
|
|
(10
|
)
|
|
|
23
|
|
|
|
-
|
|
|
|
(31
|
)
|
|
|
74
|
|
|
|
48
|
|
Deferred loan origination costs and premiums
|
|
|
(40
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(14
|
)
|
|
|
(26
|
)
|
|
|
108
|
|
|
|
70
|
|
Credit loss impairment provisioning
|
|
|
(322
|
)
|
|
|
-
|
|
|
|
(452
|
)
|
|
|
-
|
|
|
|
130
|
|
|
|
(580
|
)
|
|
|
(232
|
)
|
Loans held for resale
|
|
|
9
|
|
|
|
(6
|
)
|
|
|
(75
|
)
|
|
|
-
|
|
|
|
78
|
|
|
|
(73
|
)
|
|
|
(50
|
)
|
Interest recognition
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
|
|
(4
|
)
|
|
|
13
|
|
|
|
(7
|
)
|
Other
|
|
|
54
|
|
|
|
(57
|
)
|
|
|
4
|
|
|
|
87
|
|
|
|
(94
|
)
|
|
|
(33
|
)
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(284
|
)
|
|
$
|
(73
|
)
|
|
$
|
(500
|
)
|
|
$
|
132
|
|
|
$
|
11
|
|
|
$
|
(491
|
)
|
|
$
|
(3,364
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives and hedge accounting
|
|
$
|
6
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6
|
|
|
$
|
-
|
|
|
$
|
(4,113
|
)
|
Goodwill and intangible assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(541
|
)
|
|
|
541
|
|
|
|
-
|
|
|
|
258
|
|
Purchase accounting
|
|
|
8
|
|
|
|
(10
|
)
|
|
|
(83
|
)
|
|
|
-
|
|
|
|
81
|
|
|
|
105
|
|
|
|
68
|
|
Deferred loan origination costs and premiums
|
|
|
(137
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(15
|
)
|
|
|
(122
|
)
|
|
|
154
|
|
|
|
87
|
|
Credit loss impairment provisioning
|
|
|
(261
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
49
|
|
|
|
(310
|
)
|
|
|
(748
|
)
|
|
|
(348
|
)
|
Loans held for resale
|
|
|
21
|
|
|
|
(637
|
)
|
|
|
(548
|
)
|
|
|
-
|
|
|
|
(68
|
)
|
|
|
(141
|
)
|
|
|
(88
|
)
|
Interest recognition
|
|
|
(6
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6
|
)
|
|
|
36
|
|
|
|
23
|
|
Other
|
|
|
2
|
|
|
|
(67
|
)
|
|
|
(11
|
)
|
|
|
44
|
|
|
|
(98
|
)
|
|
|
-
|
|
|
|
(30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(367
|
)
|
|
$
|
(714
|
)
|
|
$
|
(642
|
)
|
|
$
|
(463
|
)
|
|
$
|
24
|
|
|
$
|
(594
|
)
|
|
$
|
(4,143
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitizations
|
|
$
|
(6
|
)
|
|
$
|
5
|
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
(2
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
Derivatives and hedge accounting
|
|
|
(30
|
)
|
|
|
30
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,426
|
)
|
Goodwill and intangible assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(481
|
)
|
|
|
481
|
|
|
|
-
|
|
|
|
(140
|
)
|
Purchase accounting
|
|
|
26
|
|
|
|
13
|
|
|
|
56
|
|
|
|
-
|
|
|
|
(17
|
)
|
|
|
22
|
|
|
|
22
|
|
Deferred loan origination costs and premiums
|
|
|
(165
|
)
|
|
|
1
|
|
|
|
-
|
|
|
|
(71
|
)
|
|
|
(93
|
)
|
|
|
279
|
|
|
|
260
|
|
Credit loss impairment provisioning
|
|
|
(71
|
)
|
|
|
-
|
|
|
|
(65
|
)
|
|
|
43
|
|
|
|
(49
|
)
|
|
|
(518
|
)
|
|
|
(246
|
)
|
Loans held for resale
|
|
|
(2
|
)
|
|
|
(453
|
)
|
|
|
(435
|
)
|
|
|
-
|
|
|
|
(20
|
)
|
|
|
(230
|
)
|
|
|
(103
|
)
|
Interest recognition
|
|
|
27
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27
|
|
|
|
(50
|
)
|
|
|
(50
|
)
|
Other
|
|
|
-
|
|
|
|
81
|
|
|
|
-
|
|
|
|
23
|
|
|
|
58
|
|
|
|
-
|
|
|
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(221
|
)
|
|
$
|
(323
|
)
|
|
$
|
(443
|
)
|
|
$
|
(486
|
)
|
|
$
|
385
|
|
|
$
|
(497
|
)
|
|
$
|
(4,720
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
208
HSBC Finance Corporation
|
|
(3) |
Management Basis Adjustments, which represent the private label
and real estate secured receivables transferred to HBUS, consist
of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
|
|
|
Total
|
|
|
Profit
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
For
|
|
|
Costs
|
|
|
(Loss)
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
Other
|
|
|
Credit
|
|
|
and
|
|
|
Before
|
|
|
|
|
|
Total
|
|
|
|
Income
|
|
|
Revenues
|
|
|
Losses
|
|
|
Expenses
|
|
|
Tax
|
|
|
Receivables
|
|
|
Assets
|
|
|
|
|
|
(in millions)
|
|
|
Year Ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card receivables
|
|
$
|
(1,270
|
)
|
|
$
|
155
|
|
|
$
|
(612
|
)
|
|
$
|
(11
|
)
|
|
$
|
(492
|
)
|
|
$
|
(9,211
|
)
|
|
$
|
(8,497
|
)
|
Private label receivables
|
|
|
(1,285
|
)
|
|
|
216
|
|
|
|
(566
|
)
|
|
|
(14
|
)
|
|
|
(489
|
)
|
|
|
(13,635
|
)
|
|
|
(12,969
|
)
|
Real estate secured receivables
|
|
|
(21
|
)
|
|
|
8
|
|
|
|
(28
|
)
|
|
|
(1
|
)
|
|
|
16
|
|
|
|
(1,529
|
)
|
|
|
(1,530
|
)
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(364
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(2,576
|
)
|
|
$
|
379
|
|
|
$
|
(1,206
|
)
|
|
$
|
(26
|
)
|
|
$
|
(965
|
)
|
|
$
|
(24,375
|
)
|
|
$
|
(23,360
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card receivables
|
|
$
|
(1,228
|
)
|
|
$
|
331
|
|
|
$
|
(1,358
|
)
|
|
$
|
6
|
|
|
$
|
455
|
|
|
$
|
(11,213
|
)
|
|
$
|
(10,712
|
)
|
Private label receivables
|
|
|
(1,383
|
)
|
|
|
(69
|
)
|
|
|
(1,351
|
)
|
|
|
9
|
|
|
|
(110
|
)
|
|
|
(15,618
|
)
|
|
|
(15,435
|
)
|
Real estate secured receivables
|
|
|
(50
|
)
|
|
|
7
|
|
|
|
(75
|
)
|
|
|
(1
|
)
|
|
|
33
|
|
|
|
(1,768
|
)
|
|
|
(1,744
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(2,661
|
)
|
|
$
|
269
|
|
|
$
|
(2,784
|
)
|
|
$
|
14
|
|
|
$
|
378
|
|
|
$
|
(28,599
|
)
|
|
$
|
(27,891
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card receivables
|
|
$
|
28
|
|
|
$
|
(16
|
)
|
|
$
|
(128
|
)
|
|
$
|
8
|
|
|
$
|
132
|
|
|
$
|
(13,465
|
)
|
|
$
|
(736
|
)
|
Private label receivables
|
|
|
(1,400
|
)
|
|
|
(86
|
)
|
|
|
(1,395
|
)
|
|
|
44
|
|
|
|
(135
|
)
|
|
|
(17,934
|
)
|
|
|
(17,102
|
)
|
Real estate secured receivables
|
|
|
(45
|
)
|
|
|
14
|
|
|
|
(127
|
)
|
|
|
(1
|
)
|
|
|
97
|
|
|
|
(2,071
|
)
|
|
|
(2,011
|
)
|
Other
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(1,419
|
)
|
|
$
|
(88
|
)
|
|
$
|
(1,650
|
)
|
|
$
|
51
|
|
|
$
|
92
|
|
|
$
|
(33,470
|
)
|
|
$
|
(19,682
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4)
|
Includes goodwill associated with purchase business combinations
other than the HSBC merger as well as capital expenditures.
|
|
(5)
|
Represents differences in balance sheet and income statement
presentation between IFRS and U.S. GAAP.
|
|
(6)
|
In the first half of 2009, we recorded a goodwill impairment
charge on an IFRSs basis of $2.4 billion which represents
the entire remaining balance of goodwill. In the fourth quarter
of 2008, we recorded a goodwill impairment charge on an IFRSs
basis of $900 million which represents a portion of the
goodwill allocated to our Credit and Retail Services business.
|
25. Variable
Interest Entities
On January 1, 2010, we adopted the new guidance which
amends the accounting for the consolidation of variable interest
entities. The new guidance changed the approach for determining
the primary beneficiary of a VIE from a quantitative approach
focusing on risk and reward to a qualitative approach focusing
on the power to direct the activities of the VIE and the
obligation to absorb losses
and/or the
right to receive benefits of the VIE. The adoption of the new
guidance has not resulted in any changes to consolidated
entities for us.
Variable Interest Entities We consolidate
VIEs in which we are deemed to be the primary beneficiary
through our holding of a variable interest which is determined
as a controlling financial interest. The controlling financial
interest is evidenced by the power to direct the activities of a
VIE that most significantly impact its economic performance and
obligations to absorb losses of, or the right to receive
benefits from, the VIE that could be potentially significant to
the VIE. We take into account all of our involvements in a VIE
in identifying (explicit or implicit) variable interests that
individually or in the aggregate could be significant enough to
warrant our designation as the primary beneficiary and hence
require us to consolidate the VIE or otherwise require us to
make appropriate disclosures. We consider our involvement to be
significant where we, among other things, (i) provide
liquidity facilities to support the VIEs debt issuances,
(ii) enter into derivative contracts to absorb the risks
and benefits from the VIE or from the assets held by the VIE,
(iii) provide a financial guarantee that covers assets held
or liabilities issued, (iv) design, organize and structure
the transaction and (v) retain a financial or servicing
interest in the VIE.
We are required to evaluate whether to consolidate a VIE when we
first become involved and on an ongoing basis. In almost all
cases, a qualitative analysis of our involvement in the entity
provides sufficient evidence to determine
209
HSBC Finance Corporation
whether we are the primary beneficiary. In rare cases, a more
detailed analysis to quantify the extent of variability to be
absorbed by each variable interest holder is required to
determine the primary beneficiary.
Consolidated VIEs In the ordinary course of
business, we have organized special purpose entities
(SPEs) primarily to meet our own funding needs
through collateralized funding transactions. We transfer certain
receivables to these trusts which in turn issue debt instruments
collateralized by the transferred receivables. The entities used
in these transactions are VIEs and we are deemed to be their
primary beneficiary because we hold beneficial interests that
expose us to the majority of their expected losses. Accordingly,
we consolidate these entities and report the debt securities
issued by them as secured financings in long-term debt. This has
not changed as a result of the new accounting guidance effective
January 1, 2010. As a result, all receivables transferred
in these secured financings have remained and continue to remain
on our balance sheet and the debt securities issued by them have
remained and continue to be included in long-term debt.
The following table summarizes the assets and liabilities of
these consolidated secured financing VIEs as of
December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Consolidated
|
|
|
Consolidated
|
|
|
Consolidated
|
|
|
Consolidated
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
|
|
Liabilities
|
|
|
|
|
|
(in millions)
|
|
|
Real estate collateralized funding vehicles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables, net
|
|
$
|
5,354
|
|
|
$
|
-
|
|
|
$
|
6,404
|
|
|
$
|
-
|
|
Available-for-sale
investments
|
|
|
104
|
|
|
|
-
|
|
|
|
13
|
|
|
|
-
|
|
Long-term debt
|
|
|
-
|
|
|
|
3,882
|
|
|
|
-
|
|
|
|
4,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
5,458
|
|
|
|
3,882
|
|
|
|
6,417
|
|
|
|
4,678
|
|
Credit card collateralized funding vehicles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables, net
|
|
|
1,970
|
|
|
|
-
|
|
|
|
1,821
|
|
|
|
-
|
|
Long-term debt
|
|
|
-
|
|
|
|
195
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
1,970
|
|
|
|
195
|
|
|
|
1,821
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,428
|
|
|
$
|
4,077
|
|
|
$
|
8,238
|
|
|
$
|
4,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The assets of the consolidated VIEs serve as collateral for the
obligations of the VIEs. The holders of the debt securities
issued by these vehicles have no recourse to our general assets.
Prior to December 31, 2010, we disclosed as part of our
unconsolidated VIEs, a leverage lease which matured on
December 31, 2010. At December 31, 2010, the only
remaining asset of this leverage lease owned by the VIE was a
building. At December 31, 2010 we have now consolidated
this building with a carrying value of $16 million which is
included as a component of properties and equipment, net in our
consolidated balance sheet. At December 31, 2010, the fair
market value of this building is $19 million.
210
HSBC Finance Corporation
Unconsolidated VIEs We are involved with VIEs
related to low income housing partnerships, leveraged leases and
investments in community partnerships that were not consolidated
at December 31, 2010 or 2009 because we are not the primary
beneficiary. At December 31, 2010, we have assets totaling
$9 million on our consolidated balance sheet which
represents our maximum exposure to loss for these VIEs.
Additionally, we are involved with other VIEs which currently
provide funding to HSBC Bank USA through collateralized funding
transactions. We have not consolidated these VIEs at
December 31, 2010 or 2009 because we are not the primary
beneficiary as our relationship with these VIEs is limited to
servicing certain credit card and private label receivables of
the related trusts.
Accounting principles related to fair value measurements provide
a framework for measuring fair value and focuses on an exit
price in the principal (or alternatively, the most advantageous)
market accessible in an orderly transaction between willing
market participants (the Fair Value Framework). The
Fair Value Framework establishes a three-tiered fair value
hierarchy with Level 1 representing quoted prices
(unadjusted) in active markets for identical assets or
liabilities. Fair values determined by Level 2 inputs are
inputs that are observable for the identical asset or liability,
either directly or indirectly. Level 2 inputs include
quoted prices for similar assets or liabilities in active
markets, quoted prices for identical or similar assets or
liabilities in markets that are inactive, 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. Transfers between leveling categories are recognized
at the end of each reporting period.
Fair Value of Financial Instruments The fair
value estimates, methods and assumptions set forth below for our
financial instruments, including those financial instruments
carried at cost, are made solely to comply with disclosures
required by generally accepted accounting principles in the
United States and should be read in conjunction with the
financial statements and notes included in this quarterly
report. The following table summarizes the carrying values and
estimated fair value of our financial instruments at
December 31, 2010 and 2009.
211
HSBC Finance Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
Value
|
|
|
Fair Value
|
|
|
Value
|
|
|
Fair Value
|
|
|
|
|
|
(in millions)
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
175
|
|
|
$
|
175
|
|
|
$
|
289
|
|
|
$
|
289
|
|
Interest bearing deposits with banks
|
|
|
1,016
|
|
|
|
1,016
|
|
|
|
17
|
|
|
|
17
|
|
Securities purchased under agreements to resell
|
|
|
4,311
|
|
|
|
4,311
|
|
|
|
2,850
|
|
|
|
2,850
|
|
Securities
|
|
|
3,371
|
|
|
|
3,371
|
|
|
|
3,187
|
|
|
|
3,187
|
|
Consumer receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
12,425
|
|
|
|
8,810
|
|
|
|
15,244
|
|
|
|
8,824
|
|
Second lien
|
|
|
1,791
|
|
|
|
492
|
|
|
|
2,331
|
|
|
|
672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mortgage Services
|
|
|
14,216
|
|
|
|
9,302
|
|
|
|
17,575
|
|
|
|
9,496
|
|
Consumer Lending:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
28,083
|
|
|
|
20,589
|
|
|
|
32,751
|
|
|
|
20,918
|
|
Second lien
|
|
|
2,859
|
|
|
|
691
|
|
|
|
3,791
|
|
|
|
1,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consumer Lending real estate secured receivables
|
|
|
30,942
|
|
|
|
21,280
|
|
|
|
36,542
|
|
|
|
22,067
|
|
Non-real estate secured receivables
|
|
|
5,720
|
|
|
|
4,409
|
|
|
|
8,543
|
|
|
|
5,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consumer Lending
|
|
|
36,662
|
|
|
|
25,689
|
|
|
|
45,085
|
|
|
|
27,687
|
|
Credit card
|
|
|
8,988
|
|
|
|
8,963
|
|
|
|
9,905
|
|
|
|
9,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer receivables
|
|
|
59,866
|
|
|
|
43,954
|
|
|
|
72,565
|
|
|
|
46,541
|
|
Receivables held for sale
|
|
|
4
|
|
|
|
4
|
|
|
|
3
|
|
|
|
3
|
|
Due from affiliates
|
|
|
126
|
|
|
|
126
|
|
|
|
123
|
|
|
|
123
|
|
Derivative financial assets
|
|
|
75
|
|
|
|
75
|
|
|
|
-
|
|
|
|
-
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
|
3,156
|
|
|
|
3,156
|
|
|
|
4,291
|
|
|
|
4,291
|
|
Due to affiliates carried at fair value
|
|
|
436
|
|
|
|
436
|
|
|
|
-
|
|
|
|
-
|
|
Due to affiliates
|
|
|
7,819
|
|
|
|
7,518
|
|
|
|
9,043
|
|
|
|
9,259
|
|
Long-term debt carried at fair value
|
|
|
20,844
|
|
|
|
20,844
|
|
|
|
26,745
|
|
|
|
26,745
|
|
Long-term debt not carried at fair value
|
|
|
33,772
|
|
|
|
32,924
|
|
|
|
42,135
|
|
|
|
40,346
|
|
Insurance policy and claim reserves
|
|
|
982
|
|
|
|
1,184
|
|
|
|
996
|
|
|
|
1,092
|
|
Derivative financial liabilities
|
|
|
2
|
|
|
|
2
|
|
|
|
60
|
|
|
|
60
|
|
Receivable values presented in the table above were determined
using the Fair Value Framework for measuring fair value, which
is based on our best estimate of the amount within a range of
values we believe would be received in a sale as of the balance
sheet date (i.e. exit price). The secondary market demand and
estimated value for our receivables has been heavily influenced
by the deteriorating economic conditions during the past few
years, including house price depreciation, rising unemployment,
changes in consumer behavior, changes in discount rates and the
lack of financing options available to support the purchase of
receivables. Many investors are non-bank financial institutions
or hedge funds with high equity levels and a high cost of debt.
For certain consumer receivables, investors incorporate numerous
assumptions in predicting cash flows, such as higher charge-off
levels
and/or
slower voluntary prepayment speeds than we, as the servicer of
these receivables, believe will ultimately be the case. The
investor discount rates reflect this difference in overall cost
of capital as well as the potential volatility in the underlying
cash flow assumptions, the combination of which may yield a
significant pricing discount from our intrinsic value. The
estimated fair values at December 31, 2010 and 2009 reflect
these market conditions.
212
HSBC Finance Corporation
Assets and Liabilities Recorded at Fair Value on a
Recurring Basis The following table presents
information about our assets and liabilities measured at fair
value on a recurring basis as of December 31, 2010 and
2009, and indicates the fair value hierarchy of the valuation
techniques utilized to determine such fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total of
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
(Liabilities)
|
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
|
|
|
|
Measured at
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Netting(1)
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
-
|
|
|
$
|
1,220
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,220
|
|
Currency swaps
|
|
|
-
|
|
|
|
2,067
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,067
|
|
Derivative netting
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,212
|
)
|
|
|
(3,212
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative financial assets
|
|
|
-
|
|
|
|
3,287
|
|
|
|
-
|
|
|
|
(3,212
|
)
|
|
|
75
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
|
349
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
349
|
|
U.S. government sponsored enterprises
|
|
|
-
|
|
|
|
284
|
|
|
|
1
|
|
|
|
-
|
|
|
|
285
|
|
U.S. government agency issued or guaranteed
|
|
|
-
|
|
|
|
11
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11
|
|
Obligations of U.S. states and political subdivisions
|
|
|
-
|
|
|
|
30
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30
|
|
Asset-backed securities
|
|
|
-
|
|
|
|
40
|
|
|
|
20
|
|
|
|
-
|
|
|
|
60
|
|
U.S. corporate debt securities
|
|
|
-
|
|
|
|
1,799
|
|
|
|
3
|
|
|
|
-
|
|
|
|
1,802
|
|
Foreign debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
|
|
|
14
|
|
|
|
84
|
|
|
|
-
|
|
|
|
-
|
|
|
|
98
|
|
Corporate
|
|
|
-
|
|
|
|
344
|
|
|
|
-
|
|
|
|
-
|
|
|
|
344
|
|
Equity securities
|
|
|
9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9
|
|
Money market funds
|
|
|
353
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
353
|
|
Accrued interest
|
|
|
1
|
|
|
|
29
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
securities
|
|
|
726
|
|
|
|
2,621
|
|
|
|
24
|
|
|
|
-
|
|
|
|
3,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
726
|
|
|
$
|
5,908
|
|
|
$
|
24
|
|
|
$
|
(3,212
|
)
|
|
$
|
3,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt carried at fair value
|
|
$
|
-
|
|
|
$
|
(21,281
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(21,281
|
)
|
Derivative related liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
-
|
|
|
|
(611
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(611
|
)
|
Currency swaps
|
|
|
-
|
|
|
|
(151
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(151
|
)
|
Foreign Exchange Forward
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3
|
)
|
Derivative netting
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
763
|
|
|
|
763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative related liabilities
|
|
|
-
|
|
|
|
(765
|
)
|
|
|
-
|
|
|
|
763
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
(22,046
|
)
|
|
$
|
-
|
|
|
$
|
763
|
|
|
$
|
(21,283
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
-
|
|
|
$
|
1,288
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,288
|
|
Currency swaps
|
|
|
-
|
|
|
|
2,616
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,616
|
|
Derivative netting
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,904
|
)
|
|
|
(3,904
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative financial assets
|
|
|
-
|
|
|
|
3,904
|
|
|
|
-
|
|
|
|
(3,904
|
)
|
|
|
-
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
|
196
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
196
|
|
U.S. government sponsored enterprises
|
|
|
21
|
|
|
|
74
|
|
|
|
2
|
|
|
|
-
|
|
|
|
97
|
|
U.S. government agency issued or guaranteed
|
|
|
-
|
|
|
|
21
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21
|
|
Obligations of U.S. states and political subdivisions
|
|
|
-
|
|
|
|
31
|
|
|
|
1
|
|
|
|
-
|
|
|
|
32
|
|
Asset-backed securities
|
|
|
-
|
|
|
|
57
|
|
|
|
26
|
|
|
|
-
|
|
|
|
83
|
|
U.S. corporate debt securities
|
|
|
-
|
|
|
|
1,704
|
|
|
|
20
|
|
|
|
-
|
|
|
|
1,724
|
|
Foreign debt securities
|
|
|
10
|
|
|
|
356
|
|
|
|
-
|
|
|
|
-
|
|
|
|
366
|
|
Equity securities
|
|
|
-
|
|
|
|
12
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
Money market funds
|
|
|
627
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
627
|
|
Accrued interest
|
|
|
1
|
|
|
|
28
|
|
|
|
-
|
|
|
|
-
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
securities
|
|
|
855
|
|
|
|
2,283
|
|
|
|
49
|
|
|
|
-
|
|
|
|
3,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
855
|
|
|
$
|
6,187
|
|
|
$
|
49
|
|
|
$
|
(3,904
|
)
|
|
$
|
3,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt carried at fair value
|
|
$
|
-
|
|
|
$
|
(26,745
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(26,745
|
)
|
Derivative related liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
-
|
|
|
|
(473
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(473
|
)
|
Currency swaps
|
|
|
-
|
|
|
|
(117
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(117
|
)
|
Foreign Exchange Forward
|
|
|
-
|
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(10
|
)
|
Derivative netting
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
540
|
|
|
|
540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative related liabilities
|
|
|
-
|
|
|
|
(600
|
)
|
|
|
-
|
|
|
|
540
|
|
|
|
(60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
(27,345
|
)
|
|
$
|
-
|
|
|
$
|
540
|
|
|
$
|
(26,805
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Represents counterparty and swap collateral netting which allow
the offsetting of amounts relating to certain contracts when
certain conditions are met.
|
213
HSBC Finance Corporation
The following table provides additional detail regarding the
rating of our U.S. corporate debt securities at
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
(in millions)
|
|
|
AAA to
AA(1)
|
|
$
|
381
|
|
|
$
|
-
|
|
|
$
|
381
|
|
A+ to
A-(1)
|
|
|
1,280
|
|
|
|
-
|
|
|
|
1,280
|
|
BBB+ to
Unrated(1)
|
|
|
139
|
|
|
|
3
|
|
|
|
142
|
|
|
|
(1) |
We obtain ratings on our U.S. corporate debt securities from
both Moodys Investor Services and Standard and Poors
Corporation. In the event the ratings we obtain from these
agencies differ, we utilize the lower of the two ratings.
|
Significant Transfers Between Level 1 and
Level 2 Transfers from Level 1 (quoted
unadjusted prices in active markets for identical assets or
liabilities) to Level 2 (using inputs that are observable
for the identical asset or liability, either directly or
indirectly) totaled $59 million during 2010 and transfers
from Level 2 to Level 1 totaled $9 million during
2010 as a result of reclassifications in certain product
groupings. There were no transfers between Level 1 and
Level 2 during 2009 and 2008.
Information on Level 3 Assets and
Liabilities The table below reconciles the beginning
and ending balances for assets recorded at fair value using
significant unobservable inputs (Level 3) during 2010
and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gains and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Losses)
|
|
|
|
|
|
|
|
|
|
|
|
Transfers
|
|
|
Transfers
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in
|
|
|
|
|
|
|
|
|
|
|
|
Out of
|
|
|
Out of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
Current Period
|
|
|
|
Jan. 1,
|
|
|
|
|
|
Comp.
|
|
|
|
|
|
|
|
|
|
|
|
and Into
|
|
|
and Into
|
|
|
December 31,
|
|
|
Unrealized
|
|
|
|
2010
|
|
|
Income
|
|
|
Income
|
|
|
Purchases
|
|
|
Issuances
|
|
|
Settlement
|
|
|
Level 3
|
|
|
Level 2
|
|
|
2010
|
|
|
Gains (Losses)
|
|
|
|
|
|
(in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government sponsored enterprises
|
|
$
|
2
|
|
|
$
|
-
|
|
|
$
|
(1
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2
|
|
|
$
|
(2
|
)
|
|
$
|
1
|
|
|
$
|
-
|
|
Obligations of U.S. states and political subdivisions
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Asset-backed securities
|
|
|
26
|
|
|
|
-
|
|
|
|
(8
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
20
|
|
|
|
5
|
|
U.S. corporate debt securities
|
|
|
20
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8
|
|
|
|
(25
|
)
|
|
|
3
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
49
|
|
|
$
|
-
|
|
|
$
|
(9
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(1
|
)
|
|
$
|
12
|
|
|
$
|
(27
|
)
|
|
$
|
24
|
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gains and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Transfers
|
|
|
Transfers
|
|
|
|
|
|
Current Period
|
|
|
|
|
|
|
Jan. 1,
|
|
|
|
|
|
Comp.
|
|
|
|
|
|
|
|
|
|
|
|
Into
|
|
|
Out of
|
|
|
December 31,
|
|
|
Unrealized
|
|
|
|
|
|
|
2009
|
|
|
Income
|
|
|
Income
|
|
|
Purchases
|
|
|
Issuances
|
|
|
Settlement
|
|
|
Level 3
|
|
|
Level 3
|
|
|
2009
|
|
|
Gains (Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government sponsored enterprises
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4
|
|
|
$
|
(2
|
)
|
|
$
|
2
|
|
|
$
|
-
|
|
|
|
|
|
Obligations of U.S. states and political subdivisions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
|
|
Asset-backed securities
|
|
|
38
|
|
|
|
2
|
|
|
|
(8
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
26
|
|
|
|
(32
|
)
|
|
|
26
|
|
|
|
13
|
|
|
|
|
|
U.S. corporate debt securities
|
|
|
84
|
|
|
|
-
|
|
|
|
1
|
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
102
|
|
|
|
(172
|
)
|
|
|
20
|
|
|
|
-
|
|
|
|
|
|
Foreign debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
|
|
(6
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Equity Securities
|
|
|
51
|
|
|
|
(7
|
)
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
|
|
(49
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Accrued interest
|
|
|
2
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
175
|
|
|
$
|
(5
|
)
|
|
$
|
(7
|
)
|
|
$
|
10
|
|
|
$
|
-
|
|
|
$
|
(49
|
)
|
|
$
|
138
|
|
|
$
|
(213
|
)
|
|
$
|
49
|
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
214
HSBC Finance Corporation
Assets and Liabilities Recorded at Fair Value on a
Non-recurring Basis The following table presents
information about our assets and liabilities measured at fair
value on a non-recurring basis as of December 31, 2010 and
2009, and indicates the fair value hierarchy of the valuation
techniques utilized to determine such fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gains
|
|
|
|
|
|
|
(Losses) for the
|
|
|
|
Non-Recurring Fair Value Measurements as of
|
|
|
Year Ended
|
|
|
|
December 31, 2010
|
|
|
December 31,
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Real estate secured receivables held for sale at fair value
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
owned(1)
|
|
$
|
-
|
|
|
$
|
1,056
|
|
|
$
|
-
|
|
|
$
|
1,056
|
|
|
$
|
(224
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gains
|
|
|
|
|
|
|
(Losses) for the
|
|
|
|
Non-Recurring Fair Value Measurements as of
|
|
|
Year Ended
|
|
|
|
December 31, 2009
|
|
|
December 31,
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Real estate secured
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
(9
|
)
|
Credit cards
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(367
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables held for sale at fair value
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
(376
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
owned(1)
|
|
$
|
-
|
|
|
$
|
688
|
|
|
$
|
-
|
|
|
$
|
688
|
|
|
$
|
(222
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill(2)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(2,294
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets(2)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Real estate owned is required to be reported on the balance
sheet net of transactions costs. The real estate owned amounts
in the table above reflect the fair value of the underlying
asset unadjusted for transaction costs.
|
|
(2)
|
During 2009, goodwill with a carrying amount of
$260 million allocated to our Insurance Services business
and $2,034 million allocated to our Card and Retail
Services businesses was written down to its implied fair value
of $0 million. Additionally, during 2009 technology,
customer lists and customer loan related relationship intangible
assets totaling $34 million were written down to their
implied fair value of $20 million.
|
Valuation Techniques The following summarizes the
valuation methodologies used for assets and liabilities recorded
at fair value and for estimating fair value for financial
instruments not recorded at fair value but for which fair value
disclosures are required.
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 the short-term maturity of
the agreements.
Securities: Fair value for our
available-for-sale
securities is generally determined by a third party valuation
source. The pricing services generally source fair value
measurements from quoted market prices and if not available, the
security is valued based on quotes from similar securities using
broker quotes and other information obtained from dealers and
market participants. For securities which do not trade in active
markets, such as fixed income securities, the pricing services
generally utilize various pricing applications, including
models, to measure fair value. The pricing applications are
based on market convention and use inputs that are derived
principally from or corroborated
215
HSBC Finance Corporation
by observable market data by correlation or other means. The
following summarizes the valuation methodology used for our
major security types:
|
|
|
|
|
U.S. Treasury, U.S. government agency issued or
guaranteed and Obligations of U.S. States and political
subdivisions As these securities transact in an
active market, the pricing services source fair value
measurements from quoted prices for the identical security or
quoted prices for similar securities with adjustments as
necessary made using observable inputs which are market
corroborated.
|
|
|
|
U.S. government sponsored enterprises For
certain government sponsored mortgage-backed securities which
transact in an active market, the pricing services source fair
value measurements from quoted prices for the identical security
or quoted prices for similar securities with adjustments as
necessary made using observable inputs which are market
corroborated. For government sponsored mortgage-backed
securities which do not transact in an active market, fair value
is determined using discounted cash flow models and inputs
related to interest rates, prepayment speeds, loss curves and
market discount rates that would be required by investors in the
current market given the specific characteristics and inherent
credit risk of the underlying collateral.
|
|
|
|
Asset-backed securities Fair value is determined
using discounted cash flow models and inputs related to interest
rates, prepayment speeds, loss curves and market discount rates
that would be required by investors in the current market given
the specific characteristics and inherent credit risk of the
underlying collateral.
|
|
|
|
U.S. corporate and foreign debt securities For
non-callable corporate securities, a credit spread scale is
created for each issuer. 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. Additionally, the pricing services
will survey the broker/dealer community to obtain relevant trade
data including benchmark quotes and updated spreads.
|
|
|
|
Preferred equity securities In general, for
perpetual preferred securities, fair value is calculated using
an appropriate spread over a comparable U.S. Treasury
security for each issue. These spreads represent the additional
yield required to account for risk including credit, refunding
and liquidity. The inputs are derived principally from or
corroborated by observable market data.
|
|
|
|
Money market funds Carrying value approximates fair
value due to the assets liquid nature.
|
Significant inputs used in the valuation of our investment
securities include selection of an appropriate risk-free rate,
forward yield curve and credit spread which establish the
ultimate discount rate used to determine the net present value
of estimated cash flows. For asset-backed securities, selection
of appropriate prepayment rates, default rates and loss
severities also serve as significant inputs in determining fair
value. We perform validations of the fair values sourced from
the independent pricing services at least quarterly. Such
validation principally includes sourcing security prices from
other independent pricing services or broker quotes. The
validation process provides us with information as to whether
the volume and level of activity for a security has
significantly decreased and assists in identifying transactions
that are not orderly. Depending on the results of the
validation, additional information may be gathered from other
market participants to support the fair value measurements. A
determination will be made as to whether adjustments to the
observable inputs are necessary as a result of investigations
and inquiries about the reasonableness of the inputs used and
the methodologies employed by the independent pricing services.
Receivables and receivables held for sale: The
estimated fair value of our receivables was determined by
developing an approximate range of value from a mix of various
sources as appropriate for the respective pool of assets. These
sources include, among other items, value estimates from an HSBC
affiliate which reflect
over-the-counter
trading activity; forward looking discounted cash flow models
using assumptions we believe are consistent with those which
would be used by market participants in valuing such
receivables; trading input from other market participants which
includes observed primary and secondary trades; where
appropriate, the impact of
216
HSBC Finance Corporation
current estimated rating agency credit tranching levels with the
associated benchmark credit spreads; and general discussions
held directly with potential investors.
Model inputs include estimates of future interest rates,
prepayment speeds, default and loss curves, and market discount
rates reflecting managements estimate of the rate of
return that would be required by investors in the current market
given the specific characteristics and inherent credit risk of
the receivables. Some of these inputs are influenced by home
price changes and unemployment rates. To the extent available,
such inputs are derived principally from or corroborated by
observable market data by correlation and other means. We
perform periodic validations of our valuation methodologies and
assumptions based on the results of actual sales of such
receivables. In addition, from time to time, we will engage a
third party valuation specialist to measure the fair value of a
pool of receivables. Portfolio risk management personnel provide
further validation through discussions with third party brokers.
Since an active market for these receivables does not exist, the
fair value measurement process uses unobservable significant
inputs which are specific to the performance characteristics of
the various receivable portfolios.
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 fair value. The
carrying value is further reduced, if necessary, on a quarterly
basis to reflect observable local market data, including local
area sales data.
Due from affiliates: Carrying value approximates
fair value because the interest rates on these receivables
adjust with changing market interest rates.
Commercial paper: 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
fixed rate and floating rate debt due to affiliates was
determined using discounted future expected cash flows at
current interest rates and credit spreads offered for similar
types of debt instruments.
Long-term debt: Fair value was primarily determined
by a third party valuation source. The pricing services source
fair value from quoted market prices and, if not available,
expected cash flows are discounted using the appropriate
interest rate for the applicable duration of the instrument
adjusted for our own credit risk (spread). The credit spreads
applied to these instruments were derived from the spreads
recognized in the secondary market for similar debt as of the
measurement date. Where available, relevant trade data is also
considered as part of our validation process.
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: Derivative values are defined as the
amount we would receive or pay to extinguish the contract using
a market participant as of the reporting date. The values are
determined by management using a pricing system maintained by
HSBC Bank USA. In determining these values, HSBC Bank USA uses
quoted market prices, when available, principally for
exchange-traded options. For non-exchange traded contracts, such
as interest rate swaps, fair value is determined using
discounted cash flow modeling techniques. Valuation models
calculate the present value of expected future cash flows based
on models that utilize independently-sourced market parameters,
including interest rate yield curves, option volatilities, and
currency rates. Valuations may be adjusted in order to ensure
that those values represent appropriate estimates of fair value.
These adjustments are generally required to reflect factors such
as market liquidity and counterparty credit risk that can affect
prices in arms-length transactions with unrelated third parties.
Finally, other transaction specific factors such as the variety
of valuation models available, the range of unobservable model
inputs and other model assumptions can affect estimates of fair
value. Imprecision in estimating these factors can impact the
amount of revenue or loss recorded for a particular position.
217
HSBC Finance Corporation
Counterparty credit risk is considered in determining the fair
value of a financial asset. The Fair Value Framework specifies
that the fair value of a liability should reflect the
entitys non-performance risk and accordingly, the effect
of our own credit risk (spread) has been factored into the
determination of the fair value of our financial liabilities,
including derivative instruments. In estimating the credit risk
adjustment to the derivative assets and liabilities, we take
into account the impact of netting
and/or
collateral arrangements that are designed to mitigate
counterparty credit risk.
27. 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 $32 million in 2010, $96 million in 2009 and
$96 million in 2008. During 2010, changes were made in the
methodology used to allocate rental expense between us and HTSU.
See Note 23, Related Party Transactions, for
additional information.
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)
|
|
|
2011
|
|
$
|
36
|
|
|
$
|
(4
|
)
|
|
$
|
32
|
|
2012
|
|
|
25
|
|
|
|
(3
|
)
|
|
|
22
|
|
2013
|
|
|
20
|
|
|
|
(3
|
)
|
|
|
17
|
|
2014
|
|
|
20
|
|
|
|
(4
|
)
|
|
|
16
|
|
2015
|
|
|
18
|
|
|
|
(4
|
)
|
|
|
14
|
|
Thereafter
|
|
|
76
|
|
|
|
(3
|
)
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net minimum lease commitments
|
|
$
|
195
|
|
|
$
|
(21
|
)
|
|
$
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a result of the strategic actions undertaken since mid-2007
and continuing in to 2009, we have recorded a liability of
$6 million at December 31, 2010 related to certain
noncancelable leases for which are no longer using the
properties. See Note 5, Strategic Initiatives,
for further discussion of the various actions as well as the
total restructuring liabilities outstanding.
Litigation and Regulatory Matters In addition to the
matters described below, in the ordinary course of business, we
are routinely named as defendants in, or as parties to, various
legal actions and proceedings relating to activities of our
current
and/or
former operations. These actual or threatened legal actions and
proceedings may include claims for substantial or indeterminate
compensatory or punitive damages, or for injunctive relief. In
the ordinary course of business, we also are subject to
governmental and regulatory examinations, information-gathering
requests, investigations and proceedings (both formal and
informal), certain of which may result in adverse judgments,
settlements, fines, penalties, injunctions or other relief. In
connection with formal and informal inquiries by these
regulators, we receive numerous requests, subpoenas and orders
seeking documents, testimony and other information in connection
with various aspects of our regulated activities.
In view of the inherent unpredictability of litigation and
regulatory matters, particularly where the damages sought are
substantial or indeterminate or the proceedings or
investigations are in the early stages, we cannot determine with
any degree of certainty the timing or ultimate resolution of
litigation and regulatory matters or the eventual loss, fines,
penalties or business impact, if any, that may result. We
establish reserves for litigation and regulatory matters when
those matters present loss contingencies that are both probable
and can be reasonably estimated. The
218
HSBC Finance Corporation
actual costs of resolving litigation and regulatory matters,
however, may be substantially higher or lower than the amounts
reserved for those matters.
We believe that the eventual outcome of litigation and
regulatory matters, unless otherwise noted below, would not be
likely to have a material adverse effect on our consolidated
financial condition. However, given the substantial or
indeterminate amounts sought in certain of these matters, and
the inherent unpredictability of such matters, an adverse
outcome in certain of these matters could have a material
adverse effect on our consolidated results of operations or cash
flows in particular quarterly or annual periods.
Litigation
Card Services Litigation Since June 2005, HSBC
Finance Corporation, HSBC North America, and HSBC, as well as
other banks and Visa Inc. and Master Card Incorporated, 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 Inc., MasterCard Incorporated and other banks.
These actions principally allege that the imposition of a
no-surcharge rule by the 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. These suits have been consolidated and
transferred 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.
(MDL 1720). A consolidated, amended complaint was
filed by the plaintiffs on April 24, 2006 and a second
consolidated amended complaint was filed on January 29,
2009. The parties are engaged in discovery, motion practice and
mediation. On February 7, 2011, MasterCard Incorporated,
Visa Inc., the other defendants, including HSBC Finance
Corporation, and certain affiliates of the defendants entered
into settlement and judgment sharing agreements (the
Agreements) that provide for the apportionment of
certain defined costs and liabilities that the defendants,
including HSBC Finance Corporation and our affiliates, may
incur, jointly
and/or
severally, in the event of an adverse judgment or global
settlement of one or all of these actions. The Agreements also
cover any other potential or future actions that are transferred
for coordinated pre-trial proceedings with MDL 1720. We continue
to defend the claims in this action vigorously and our entry
into the Agreements in no way serves as an admission as to the
validity of the allegations in the complaints. Similarly, the
Agreements have had no impact on our ability to quantify the
potential impact from this action, if any, and we are unable to
do so at this time.
Securities Litigation As a result of an August 2002
restatement of previously reported consolidated financial
statements and other corporate events, including the 2002
settlement with 46 states and the District of Columbia
relating to real estate lending practices, Household
International and certain former officers were named as
defendants in a class action lawsuit, Jaffe v. Household
International, Inc., et al., No. 02 C 5893 (N.D. Ill.,
filed August 19, 2002). The complaint asserted claims under
§ 10 and § 20 of the Securities Exchange Act
of 1934, on behalf of all persons who acquired and disposed of
Household International common stock between July 30, 1999
and October 11, 2002. The claims alleged that the
defendants knowingly or recklessly made false and misleading
statements of material fact relating to Households
Consumer Lending operations, including collections, sales and
lending practices, some of which ultimately led to the
2002 state settlement agreement, and facts relating to
accounting practices evidenced by the restatement. A jury trial
concluded on April 30, 2009 and the jury rendered a verdict
on May 7 partially in favor of the plaintiffs with respect to
Household International and three former officers. A second
phase of the case was to proceed to determine the actual
damages, if any, due to the plaintiff class and issues of
reliance. On November 22, 2010 the Court issued a ruling on
the second phase of the case. On the issue of reliance, the
Court ruled that claim forms will be mailed to class members.
Class members who file claims will be asked to check a
YES or NO box to a question that asks
whether they would have purchased Household stock had they known
false and misleading statements inflated the stock price. As for
damages, the Court set out a method for calculating damages for
class members who file claims. The defendants filed a motion for
reconsideration from the Courts November 22 ruling. On
January 14, 2011, the Court partially granted that motion:
slightly modifying
219
HSBC Finance Corporation
the claim form; allowing defendants to take certain discovery on
the issue of reliance; and reserving on the issue whether the
defendants would ultimately be entitled to a jury trial on the
issues of reliance and damages. On January 31, 2011, the
Court issued another ruling further modifying the decision on
the scope of discovery. Plaintiffs have mailed the claim forms
with the modified language and class members will have until May
24 to file claims.
Given the complexity and uncertainties associated with the
actual determination of damages, including, but not limited to
the number of class members that may file valid claims, the
number of claims that can be substantiated by class members by
providing adequate documentation, the reduction of trading
losses by any trading gains made over the relevant period, the
determination of reliance by class members on the financial
statements, and whether any given class member was the
beneficial owner of the shares, we are unable at this time to
reasonably estimate the amount of any damages award, or range of
possible awards, that could arise as a result of the ruling and
the ultimate resolution of this matter. In filings with the
Court, plaintiffs lawyers have estimated that damages
could range somewhere between $2.4-$3.2 billion to
class members, before pre-judgment interest. Although it
is not reasonably possible to estimate the financial impact of
the ultimate resolution of this matter, the financial impact
could be material.
The date on which the court may enter a final judgment is not
known at this time. When a final judgment is entered by the
District Court, the parties have 30 days in which to appeal
the verdict to the Seventh Circuit Court of Appeals. Based on
our discussions with outside counsel, we continue to believe
that neither Household nor its former officers committed or
engaged in any wrongdoing and we have meritorious grounds for
appeal of one or more of the rulings in the case.
Governmental
and Regulatory Matters
State and federal officials are investigating the procedures
followed by mortgage servicing companies and banks, including
HSBC Finance Corporation and certain of our affiliates, relating
to foreclosures. We and our affiliates have responded to all
related inquiries and cooperated with all applicable
investigations, including a joint examination by staffs of the
Federal Reserve Board (the Federal Reserve) and the
Office of the Comptroller of the Currency (the OCC)
as part of their broad horizontal review of industry foreclosure
practices. Following the examination, the Federal Reserve issued
a supervisory letter to HSBC Finance and HSBC North America
noting certain deficiencies in the processing, preparation and
signing of affidavits and other documents supporting
foreclosures and in governance of and resources devoted to our
foreclosure processes, including the evaluation and mentoring of
third party law firms retained to effect our foreclosures.
Certain other processes were deemed adequate. The OCC issued a
similar supervisory letter to HSBC Bank USA. We have suspended
foreclosures until such time as we have substantially addressed
the noted deficiencies in our processes. We are also reviewing
foreclosures where judgment has not yet been entered and will
correct deficient documentation and re-file affidavits where
necessary.
We and our affiliates are engaged in discussions with the
Federal Reserve and the OCC regarding the terms of consent cease
and desist orders, which will prescribe actions to address the
deficiencies noted in the joint examination. We expect the
consent orders will be finalized shortly after the date this
Form 10-K
is filed. While the impact of the Federal Reserve consent order
on HSBC Finance Corporation depends on the final terms, we
believe it has the potential to increase our operational,
reputational and legal risk profiles and expect implementation
of its provisions will require significant financial and
managerial resources. In addition, the consent orders will not
preclude further actions against HSBC Finance Corporation or our
affiliates by bank regulatory or other agencies, including the
imposition of fines and civil money penalties. We are unable at
this time, however, to determine the likelihood of any further
action or the amount of penalties or fines, if any, that may be
imposed by the regulators or agencies.
220
HSBC Finance Corporation
28. 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 have historically served 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. The majority of our secured receivables and
receivables held for sale have high
loan-to-value
ratios. Our receivables and receivables held for sale portfolios
include the following types of loans:
|
|
|
|
|
Interest-only loans A loan which allows a customer
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 their ability to
repay the loan in the future when the principal payments are
required.
|
|
|
|
ARM loans A loan which allows the lender to adjust
pricing on the loan in line with interest rate movements. A
customers financial situation and the general interest
rate environment at the time of the interest rate reset could
affect the customers ability to repay or refinance the
loan after adjustment.
|
|
|
|
Stated income loans Loans underwritten based upon
the loan applicants representation of annual income, which
is not verified by receipt of supporting documentation.
|
The following table summarizes the outstanding balances of
interest-only loans, ARM loans and stated income loans in our
receivable portfolios at December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in billions)
|
|
|
Interest-only loans
|
|
$
|
1.3
|
|
|
$
|
1.8
|
|
ARM
loans(1)(2)
|
|
|
7.5
|
|
|
|
9.8
|
|
Stated income loans
|
|
|
2.7
|
|
|
|
3.7
|
|
|
|
(1)
|
Receivable classification as ARM loans is based on the
classification at the time of receivable origination and does
not reflect any changes in the classification that may have
occurred as a result of any loan modification.
|
|
(2)
|
We do not have any option ARM loans in our portfolio.
|
At December 31, 2010 and 2009, interest-only, ARM and
stated income loans comprise 18 percent and 20 percent
of real estate secured receivables, including receivables held
for sale, respectively.
221
HSBC Finance Corporation
Because we primarily lend to individual consumers, we do not
have receivables from any industry group that equal or exceed
10 percent of total receivables at December 31, 2010
and 2009. We lend nationwide and our receivables, including
receivables held for sale, are distributed as follows at
December 31, 2010:
|
|
|
|
|
|
|
Percent of Total
|
|
State/Region
|
|
Receivables
|
|
|
|
|
California
|
|
|
10
|
%
|
Midwest (IL, IN, IA, KS, MI, MN, MO, NE, ND, OH, SD, WI)
|
|
|
23
|
|
Southeast (AL, FL, GA, KY, MS, NC, SC, TN)
|
|
|
21
|
|
West (AK, CO, HI, ID, MT, NV, OR, UT, WA, WY)
|
|
|
8
|
|
Middle Atlantic (DE, DC, MD, NJ, PA, VA, WV)
|
|
|
17
|
|
Southwest (AZ, AR, LA, NM, OK, TX)
|
|
|
9
|
|
Northeast (CT, ME, MA, NH, NY, RI, VT)
|
|
|
12
|
|
The following table reflects the percentage of consumer
receivables by state, including receivables held for sale, which
individually account for 5 percent or greater of our
portfolio.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
|
Percentage of Portfolio Receivables
|
|
|
Total
|
|
|
|
|
|
|
at December 31, 2010
|
|
|
Receivables
|
|
|
Unemployment
|
|
|
|
Credit
|
|
|
Real Estate
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
Rates for
|
|
|
|
Cards
|
|
|
Secured
|
|
|
Other
|
|
|
2010
|
|
|
2009
|
|
|
Dec.
2010(1)
|
|
|
|
|
California
|
|
|
10.6
|
%
|
|
|
9.9
|
%
|
|
|
5.8
|
%
|
|
|
9.6
|
%
|
|
|
10.4
|
%
|
|
|
12.5
|
%
|
New York
|
|
|
7.4
|
|
|
|
7.0
|
|
|
|
6.8
|
|
|
|
7.0
|
|
|
|
6.8
|
|
|
|
8.2
|
|
Florida
|
|
|
6.9
|
|
|
|
6.3
|
|
|
|
5.7
|
|
|
|
6.3
|
|
|
|
6.6
|
|
|
|
12.0
|
|
Pennsylvania
|
|
|
4.2
|
|
|
|
5.9
|
|
|
|
6.4
|
|
|
|
5.7
|
|
|
|
5.5
|
|
|
|
8.5
|
|
Ohio
|
|
|
4.2
|
|
|
|
5.5
|
|
|
|
6.0
|
|
|
|
5.4
|
|
|
|
5.2
|
|
|
|
9.6
|
|
|
|
(1) |
The U.S. national unemployment rate for December 2010 was
9.4 percent.
|
222
HSBC Finance Corporation
SELECTED
QUARTERLY FINANCIAL DATA (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
1,006
|
|
|
$
|
1,060
|
|
|
$
|
992
|
|
|
$
|
1,127
|
|
|
$
|
732
|
|
|
$
|
1,357
|
|
|
$
|
1,413
|
|
|
$
|
1,556
|
|
Provision for credit losses
|
|
|
1,210
|
|
|
|
1,509
|
|
|
|
1,597
|
|
|
|
1,864
|
|
|
|
2,484
|
|
|
|
2,117
|
|
|
|
2,270
|
|
|
|
2,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest loss after provision for credit losses
|
|
|
(204
|
)
|
|
|
(449
|
)
|
|
|
(605
|
)
|
|
|
(737
|
)
|
|
|
(1,752
|
)
|
|
|
(760
|
)
|
|
|
(857
|
)
|
|
|
(1,223
|
)
|
Other revenues
|
|
|
1,241
|
|
|
|
199
|
|
|
|
526
|
|
|
|
601
|
|
|
|
666
|
|
|
|
(741
|
)
|
|
|
(4,052
|
)
|
|
|
4,839
|
|
Operating expenses
|
|
|
983
|
|
|
|
846
|
|
|
|
787
|
|
|
|
862
|
|
|
|
972
|
|
|
|
835
|
|
|
|
2,495
|
|
|
|
1,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income tax
benefit (expense)
|
|
|
54
|
|
|
|
(1,096
|
)
|
|
|
(866
|
)
|
|
|
(998
|
)
|
|
|
(2,058
|
)
|
|
|
(2,336
|
)
|
|
|
(7,404
|
)
|
|
|
1,700
|
|
Income tax benefit (expense)
|
|
|
(73
|
)
|
|
|
391
|
|
|
|
337
|
|
|
|
352
|
|
|
|
1,220
|
|
|
|
1,112
|
|
|
|
1,143
|
|
|
|
(843
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(19
|
)
|
|
|
(705
|
)
|
|
|
(529
|
)
|
|
|
(646
|
)
|
|
|
(838
|
)
|
|
|
(1,224
|
)
|
|
|
(6,261
|
)
|
|
|
857
|
|
Income (loss) from discontinued operations
|
|
|
(22
|
)
|
|
|
(46
|
)
|
|
|
8
|
|
|
|
43
|
|
|
|
31
|
|
|
|
43
|
|
|
|
(73
|
)
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(41
|
)
|
|
$
|
(751
|
)
|
|
$
|
(521
|
)
|
|
$
|
(603
|
)
|
|
$
|
(807
|
)
|
|
$
|
(1,181
|
)
|
|
$
|
(6,334
|
)
|
|
$
|
872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
223
HSBC Finance Corporation
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 2010.
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
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.
Changes in Internal Control Over Financial
Reporting There has been no change in our internal
control over financial reporting that occurred during the
quarter ended December 31, 2010 that has materially
affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
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, 2010. 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.
Based on the assessment performed, management concluded that as
of December 31, 2010, 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, 2010
has been audited by HSBC Finance Corporations independent
registered public accounting firm, KPMG LLP, as stated in their
report appearing on page 129, which expressed an
unqualified opinion on the effectiveness of HSBC Finance
Corporations internal control over financial reporting as
of December 31, 2010.
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, descriptions of the
specific experience, qualifications, attributes and skills
224
HSBC Finance Corporation
that support such persons service as a Director of HSBC
Finance Corporation. We have also set forth below the minimum
director qualifications reviewed by HSBC and the Board in
choosing Board members.
All of our Directors are or have been either chief executive
officers or senior executives in specific functional areas at
other companies or firms, with significant general and specific
corporate experience and knowledge that promotes the successful
implementation of the strategic plans of HSBC Finance
Corporation and its parent HSBC North America, for which each of
our Directors also serve as a Director. Our Directors also have
high levels of personal and professional integrity and
unquestionable ethical character. Each possesses the ability to
be collaborative but also assertive in expressing his or her
views and opinions to the Board and management. Based upon his
or her management experience each Director has demonstrated
sound judgment and the ability to function in an oversight role.
Each director is elected annually. There are no family
relationships among the directors.
Niall S. K. Booker, age 52, joined HSBC Finance
Corporations Board in August 2007 and was appointed
Chairman of the Board in July 2010. Since July 2010, he has also
served as Chairman of the Board of HUSI. Mr. Booker served
as Chief Executive Officer of HSBC Finance Corporation from
February 2008 to July 2010. He has been a Director of HSBC North
America Holdings Inc. since February 2008 and Chief Executive
Officer of HSBC North America Holdings Inc. since
August 2010. Prior to that, he was Deputy Chief Executive
Officer from February 2008 to July 2010 and Chief Operating
Officer of HSBC North America Holdings Inc. from April 2007
to February 2008 of HSBC North America Holdings Inc. 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 Chairman and Chief
Executive Officer of HSBC Bank Middle East Limited from May 2006
to May 2007 and has served as a Group General Manager of 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.
Mr. Booker is Chair of the Executive Committee and a member
of the Compliance Committee.
Mr. Booker is the former Chief Executive Officer of HSBC
Finance Corporation and Deputy Chief Executive Officer of its
parent, HSBC North America. In those capacities, Mr. Booker
brings particular knowledge and insight into both HSBC Finance
Corporations and HSBC North Americas strategies and
operations as part of the global HSBC organization.
Mr. Booker has held several roles with HSBC. His extensive
global experience with HSBC and his role as a senior executive
of HSBC and HSBC North America are essential to the coordination
of the core businesses of HSBC Finance Corporation which are
part of HSBCs global strategic operation.
Robert K. Herdman, age 62, 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. and as Chair of its Audit and Risk
Committee. Since May 2010, he has also been a member of the
Board of HUSI as well as Chair of its Audit and Risk Committee.
Mr. Herdman is also a member of and the Chair of the HSBC
Finance Corporation and HUSI Compliance Committees since their
formation in 2010. Mr. Herdman has also served on the Board
of Directors of Cummins Inc. since February 2008 and is Chair of
its Audit Committee. Since January 2004, Mr. Herdman has
been a Managing Director of Kalorama Partners LLC, a
Washington, D.C. consulting firm specializing in providing
advice regarding corporate governance, risk assessment, crisis
management and related matters. 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. He also served as a director of Westwood One, Inc. from
2005 to 2006.
Mr. Herdman is Chair of the Audit and Risk Committee and
the Compliance Committee.
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HSBC Finance Corporation
Mr. Herdmans membership on the Board is supported by
his financial background. His experience with the SEC and in the
public accounting profession provided Mr. Herdman with
broad insight into the business operations and financial
performance of a significant number of public and private
companies.
George A. Lorch, age 69, joined HSBC Finance
Corporations Board in September 1994 and served as the
Chair of its Compensation Committee until the committee was
disbanded in 2008. 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., Pfizer Inc. and
Masonite Inc., a privately held company. Mr. Lorch was
appointed Chairman of the Board of Pfizer Inc. as of December
2010.
Mr. Lorch is a member of the Executive, Audit and Risk and
Compliance Committees.
Mr. Lorch served as an executive officer with Armstrong
Holdings Inc. and Armstrong Industries, a subsidiary, for
17 years. He served as Chief Executive Officer of Armstrong
World Industries, Inc. for over 7 years. In addition, he
has been Chairman of the Board at these companies. In these
roles, Mr. Lorch was responsible for aspects of the
operations of a public company, affording him experience in
developing and executing strategic plans and motivating and
managing the performance of his management team and the
organization as a whole. Additionally, Mr. Lorch has served
on the Board of Directors for HSBC Finance Corporation, which
was previously Household International, since September 1994,
and, as a result, he is able to provide a historical perspective
to the Board of the HSBC Finance Corporation.
Samuel Minzberg, age 61, joined HSBC Finance
Corporations Board in May 2008. He has been a Director of
HSBC North America Holdings Inc. since March 2005 and has served
on its Audit and Risk Committee since 2005. Mr. Minzberg is
a partner with the law firm of Davies Ward Phillips &
Vineberg, in Montreal. From January 1, 1998 to
December 31, 2002, he was President and Chief Executive
Officer of Claridge Inc., a management and holding company.
Until December 31, 1997, Mr. Minzberg was a partner at
the Montreal predecessor firm to Davies Ward
Phillips & Vineberg LLP. Mr. Minzberg is
currently also Chairman of HSBC Bank Canada and Chairman of its
Audit Committee, a Director of Reitmans (Canada) Limited,
Quebecor Media Inc., and a Director and past President of the
Sir Mortimer B. Davis Jewish General Hospital Centre
Board.
Mr. Minzberg is a member of the Audit and Risk Committee.
Mr. Minzbergs experience as a tax attorney provides a
unique expertise in evaluating and advising HSBC Finance
Corporation on tax strategies and particularly with respect to
transactional matters. As a partner with a firm with a diverse
client base, he has had experience with a number of industries
with varied considerations in effecting business and tax
strategies. As a Canadian, he brings diverse perspectives and
knowledge to the Boardroom, which is also relevant for
understanding the prior cross-border operations of HSBC Finance
Corporation and the continuing broader context of HSBCs
global operations, as well as the potential tax and other
considerations of potential cross-border initiatives of HSBC
Finance Corporation and its affiliates.
Beatriz R. Perez, age 41, joined HSBC Finance
Corporations Board in May 2008. She has served on the
Board of HSBC North America Holdings Inc. since April 2007.
Ms. Perez has been employed by
Coca-Cola
since 1994. She became Chief Marketing Officer as of April 2010
for the North America Division of
Coca-Cola.
Prior to her current position, Ms. Perez held the positions
of Senior Vice President, Integrated Marketing for the North
America Division of
Coca-Cola
from May 2007 to April 2010 and Vice President, Media, Sports
and Entertainment Marketing from 2005 to 2007. From 1996 to 2005
Ms. Perez was Associate Brand Manager, Classic Coke. From
1996 to 2005, she held the positions Associate Brand Manager,
Classic Coke, Sports Marketing and NASCAR Manager, Vice
President of Sports, and Vice President Sports and
Entertainment. Ms. Perez is active in the
not-for-profit
world. Ms. Perez is a member of the Foundation Board of
Childrens Healthcare of Atlanta and of the Victory
Junction Group board. Ms. Perez is also the Chairman of the
Grammy Foundation.
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HSBC Finance Corporation
Ms. Perez is a member of the Audit and Risk Committee.
Ms. Perezs leadership roles in the marketing
functions at
Coca-Cola
bring a particular knowledge of mass and targeted marketing
programs that are of value in HSBCs efforts to promote its
brand image and in its general product marketing efforts.
Larree M. Renda, age 52, joined HSBC Finance
Corporations Board in September 2001. Since May 2008, she
has served as a member of the Board of Directors of HSBC North
America Holdings Inc. Ms. Renda has been employed by
Safeway Inc. since 1974. In August 2010, Ms. Renda was
appointed as Executive Vice President, President of Safeway
Health Company. Prior to her current position, she was Executive
Vice President, Chief Strategist and Administrative Officer of
Safeway Inc. since November 2005. From 1999 to November 2005,
she served as Executive Vice President for Retail Operations,
Human Resources, Public Affairs, Labor and Government Relations.
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 serves as a Trustee on the National
Joint Labor Management Committee. In addition, she serves on the
Board of Directors for the California Chamber of Commerce and
serves as a National Vice President of the Muscular Dystrophy
Association. Ms. Renda is also on the Board of Regents for
the University of Portland.
Ms. Renda is a member of the Executive and Audit and Risk
Committees.
Ms. Renda has 17 years of experience as an executive
officer at Safeway Inc. where she has held several roles
critical to its operations. Ms. Rendas
responsibilities at Safeway Inc. included public affairs, human
resources, government relations, strategy, labor relations,
philanthropy, cost reduction, re-engineering, health initiatives
and communications. Ms. Renda has served on the Board of
Directors for HSBC Finance Corporation, which was previously
Household International, since September 2001, and, as a result,
she is able to provide a historical perspective to the Board of
HSBC Finance Corporation.
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HSBC Finance Corporation
Executive
Officers Information
regarding the executive officers of HSBC Finance Corporation as
of February 28, 2011 is presented in the following table.
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Year
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Name
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Age
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Appointed
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Present Position
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Patrick J. Burke
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49
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2010
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Chief Executive Officer
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Michael A. Reeves
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48
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2010
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Executive Vice President and Chief Financial Officer
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Andrew C. Armishaw
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48
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2008
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Senior Executive Vice President and Chief Technology and
Services Officer
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Jon N. Couture
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45
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2007
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Senior Executive Vice President Human Resources
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Patrick A. Cozza
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55
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2008
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Senior Executive Vice President Insurance
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C. Mark Gunton
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54
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2009
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Senior Executive Vice President, Chief Risk Officer
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Susan E. Artmann
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56
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2008
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Executive Vice President, Taxpayer Financial Services
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Eric K. Ferren
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37
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2010
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Executive Vice President and Chief Accounting Officer
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Brian D. Hughes
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43
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2010
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Executive Vice President and Head of Card and Retail Services
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William H. Kesler
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59
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2008
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Executive Vice President and Treasurer
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Loren C. Klug
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50
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2008
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Executive Vice President Strategy & Planning
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Kathryn Madison
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49
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2009
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Executive Vice President and Chief Servicing Officer, Consumer
and Mortgage Lending
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Satyabama S. Ravi
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43
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2009
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Executive Vice President and Chief Auditor
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Patrick D. Schwartz
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53
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2009
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Executive Vice President, General Counsel and Corporate Secretary
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Lisa M. Sodeika
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47
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2005
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Executive Vice President Corporate Affairs
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Patrick J. Burke, Chief Executive Officer of HSBC Finance
Corporation as of July 2010 Prior to his current position, he
was Senior Executive Vice President and Chief Executive Officer,
Card and Retail Services of HSBC Finance Corporation since June
2009. From February 2008 to June 2009, he was Senior Executive
Vice President and Chief Operating Officer
Card & Retail Services of HSBC Finance Corporation.
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. Mr. Burke 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.
Michael A. Reeves, Executive Vice President and Chief
Financial Officer of HSBC Finance Corporation since May 2010.
Prior to his current position, he was Executive Vice President,
Chief Financial Officer of HSBC Consumer Finance since July
2009. From May 2008 to July 2009, he was Executive Vice
President and Chief Financial Officer of HSBC Card and Retail
Services, and from May 2005 to May 2008, he was Managing
Director and Chief Financial Officer of Credit Card Services.
Mr. Reeves joined HSBC in 1993 and has held a succession of
management positions in Accounting, Finance and Treasury. Prior
to joining HSBC, Mr. Reeves was an Audit Manager with
Deloitte & Touche, LLP and practiced in its
San Jose and London offices.
Andrew C. Armishaw, Senior Executive Vice President and
Chief Technology and Services Officer of HSBC Finance
Corporation and of HSBC North America Holdings Inc. since May
2008. He was Chief Information Officer-North America of HSBC
Finance Corporation and of HSBC North America Holdings Inc. from
February 2008 to May 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
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HSBC Finance Corporation
First Direct (a subsidiary of HSBC) and Chief Information
Officer of First Direct. Mr. Armishaw is on the Board of
the Chicago Horticultural Society.
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 and
Regional Head Insurance of HSBC Finance Corporation
since February 2008. Since July 2010, Mr. Cozza has also
been Senior Executive Vice President and Regional Head-
Insurance of HSBC USA, Inc. and HSBC Bank USA. From May 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.
Mr. Cozza serves as a board member and Chairman, Chief
Executive Officer of Household Life Insurance Company, First
Central National Life Insurance Company of New York and HSBC
Insurance Company of Delaware, all subsidiaries of HSBC Finance
Corporation. He serves on the board of directors of Junior
Achievement in New Jersey (Chairman), Cancer Hope Network,
Hudson County Chamber of Commerce, The American Council of Life
Insurers and The American Bankers Insurance Association.
C. Mark Gunton, Senior Executive Vice President,
Chief Risk Officer of HSBC Finance Corporation and HSBC North
America Holdings Inc. since January 2009. He is responsible for
all Risk functions in North America, including Credit Risk,
Operational Risk and Market Risk, as well as the enterprise-wide
implementation of Basel II. Prior to January 2009, he served as
Chief Risk Officer, HSBC Latin America. Mr. Gunton joined
HSBC in 1977 and held numerous HSBC risk management positions
including: Director of International Credit for Trinkaus and
Burkhardt; General Manager of Credit and Risk for Saudi British
Bank; and Chief Risk Officer, HSBC Mexico. He also managed a
number of risk related projects for HSBC, including the
implementation of the Group Basel II risk framework.
Susan E. Artmann, Executive Vice President, Taxpayer
Financial Services of HSBC Finance Corporation since November
2008. Since September 2008, Ms. Artmann has been the
President of HSBC Taxpayer Financial Services Inc. and from
September 2000 to September 2008 she was Chief Financial Officer
(including Chief Credit Policy Officer from September 2000 to
December 2005) of HSBC Taxpayer Financial Services Inc.
Prior to that Ms. Artmann was National Director of Product
Pricing and Profitability, Credit Risk Management and Credit
Operations Retail Services for Household
International from July 1998 to August 2000. Ms. Artmann
has held various positions within HSBC since joining HSBC in
February 1985. Prior to joining HSBC, Ms. Artmann was an
Auditor for Coopers & Lybrand. Since November 2007,
Ms. Artmann has been on the Board of Directors of HSBC
Trust Company (Delaware), N.A. Ms. Artmann sits on the
Board of Trustees for the New Jersey Council for the Humanities,
as well as the North District Board of Junior Achievement of New
Jersey.
Eric K. Ferren, Executive Vice President and Chief
Accounting Officer of HSBC Finance Corporation since
July 2010. Mr. Ferren has also served as Executive
Vice President and Chief Accounting Officer of
HSBC North America Holdings Inc. since July 2010.
Prior to Mr. Ferrens appointment as Chief Accounting
Officer, Mr. Ferren was responsible for several accounting
areas across HSBC North America Holdings Inc. and its
subsidiaries. Prior to joining HSBC, Mr. Ferren was the
Controller for UBSs North American Asset Management
business from May 2005 to June 2006. Prior to that,
Mr. Ferren was the Controller for Washington Mutuals
Home Loans Capital Markets business and several finance
roles within the Servicing business from January 2002 through
May 2005. Prior to January 2002, Mr. Ferren was a Senior
Manager at Ernst & Young LLP in Chicago where he
focused on global banking, commercial banking, and
securitizations. He is a Certified Public Accountant registered
in the United States of America and a member of the American
Institute of Certified Public Accountants.
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HSBC Finance Corporation
Brian D. Hughes, Executive Vice President and Head of
Card and Retail Services of HSBC Finance Corporation since July
2010. Mr. Hughes joined HSBC in 2004 and held a number of
leadership positions in Marketing, with his most recent position
being Executive Vice President, Marketing for Card and Retail
Services, where he was responsible for the strategic direction
and
day-day-operation
of the Retail Services business. Prior to joining HSBC, Hughes
spent ten years in management consulting, focusing on growth
strategy and marketing effectiveness. He was a Principal with
Booz Allen Hamilton.
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 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 member of the Board of
Directors of the Hospice of Northeastern Illinois and serves on
its finance committee.
Loren C. Klug, Executive Vice President
Strategy & Planning of HSBC Finance Corporation and of
HSBC North America Holdings Inc. since February 2008. From March
2004 to January 2008, he was Managing Director
Strategy and Development, and concurrently from January 2005 to
November 2007 he was responsible for strategy development and
customer group oversight for HSBC Group plcs global
consumer finance activities. Mr. Klug joined HSBC Finance
Corporation in 1989, and since that time has held a variety of
commercial finance and strategy positions. Prior to such time he
held positions in commercial real estate and banking.
Kathryn Madison, Executive Vice President and Chief
Servicing Officer, Consumer and Mortgage Lending of HSBC Finance
Corporation since July 2009. From August 2005 through December
2008, she was Executive Vice President of originations for
Consumer and Mortgage Lending. From 2003 through July 2005,
Ms. Madison was the Managing Director of Strategic Planning
and Development for the Consumer Lending business. Prior to such
time, she held various leadership positions in the consumer and
direct lending businesses. Ms. Madison joined HSBC Finance
Corporation in 1988 as a Manager of Strategic Planning for
Consumer Lending.
Satyabama S. Ravi, Executive Vice President and Chief
Auditor of HSBC Finance Corporation since November 2009. Prior
to November 2009 and since joining HSBC Finance Corporation in
February 2004, Ms. Ravi has held various positions of
increasing responsibility, including a rotation as Head of
Professional Practices for HSBC North America. Prior to February
2004, Ms. Ravi was with PricewaterhouseCoopers in the
Financial Services Practice for six years. She began her career
with Citigroup in India and was in various management positions
in the areas of Credit, Loan Operations, Branch Banking and
Audit located in India and the U.S. Ms. Ravi is also a
C.P.A.
Patrick D. Schwartz, Executive Vice President, General
Counsel and Corporate Secretary of HSBC Finance Corporation
since June 2009. From February 2008 to June 2009, he was
Executive Vice President, Deputy General Counsel
Corporate and Corporate Secretary of HSBC Finance Corporation.
He has also held that position with HSBC North America Holdings
Inc. since February 2008. He has served as a senior legal
advisor of HSBC Finance Corporation and HSBC North America
Holdings Inc. since 2004 and as Corporate Secretary of each
entity since 2007. Mr. Schwartz has also been the Executive
Vice President, Deputy General Counsel-Corporate and Secretary
of HSBC USA Inc. since May 2010. From May 2008 to May 2010, he
was Executive Vice President and Secretary of HSBC USA Inc., and
from September 2007 to May 2008, he was the Senior Vice
President and Secretary of HSBC USA 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.
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, internal communications, public policy and community
engagement activities. Since joining HSBC Finance Corporation,
Ms. Sodeika has held management positions in the personal
financial services businesses including marketing, collections,
quality assurance and compliance, underwriting and human
resources. Ms. Sodeika served as member and chairperson of
the Federal Reserve Boards Consumer Advisory Council from
2005 to 2007.
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HSBC Finance Corporation
Ms. Sodeika is also a board member of Junior Achievement
USA and Big Brothers Big Sisters of Metropolitan Chicago.
Corporate
Governance
Board of Directors Board
Structure The business of HSBC Finance Corporation
is managed under the direction of the Board of Directors, whose
principal responsibility is to enhance the long-term value of
HSBC Finance Corporation to HSBC. The affairs of HSBC Finance
Corporation are governed by the Board of Directors, in
conformity with the Corporate Governance Standards, in the
following ways:
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providing input and endorsing business strategy formulated by
management and HSBC;
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providing input and approving the annual operating, funding and
capital plans prepared by management;
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monitoring the implementation of strategy by management and HSBC
Finance Corporations performance relative to approved
operating, funding and capital plans;
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reviewing and advising as to the adequacy of the succession
plans for the Chief Executive Officer and senior executive
management;
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reviewing and providing input to HSBC concerning evaluation of
the Chief Executive Officers performance;
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reviewing and approving the Corporate Governance Standards and
monitoring compliance with the standards;
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assessing and monitoring the major risks facing HSBC Finance
Corporation consistent with the Board of Directors
responsibilities to HSBC; and
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monitoring the risk management structure designed by management
to ensure compliance with HSBC policies, ethical standards and
business strategies.
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The Board of Directors has determined that it is in the best
interest of HSBC Finance Corporation for the roles of the
Chairman and Chief Executive Officer to be separated, and these
positions are held by Messrs. Booker and Burke,
respectively. As Chief Executive Officer and member of the Board
of Directors of HSBC North America and a Group Managing Director
of HSBC, Mr. Booker provides not only an HSBC North America
perspective and guidance to the Board of Directors, but also a
global strategic perspective to HSBC Finance Corporation. These
perspectives promote the broader global nature of HSBC Finance
Corporations core businesses within HSBC and HSBCs
particular strategic initiatives within North America. As Chief
Executive Officer, Mr. Burke provides in-depth knowledge of
the specific operational strengths and challenges of HSBC
Finance Corporation.
Board of Directors Committees and
Charters The Board of Directors of HSBC Finance
Corporation has three standing committees: the Audit and Risk
Committee, the Compliance Committee and the Executive Committee.
The charters of the Audit and Risk Committee, the Compliance
Committee and the Executive Committee, as well as our Corporate
Governance Standards, are available on our website at
www.us.hsbc.com or upon written request made to HSBC
Finance Corporation, 26525 North Riverwoods Boulevard, Mettawa,
Illinois 60045, Attention: Corporate Secretary.
Audit and Risk Committee The Audit and Risk
Committee is responsible, on behalf of the Board of Directors,
for oversight and advice to the Board of Directors with respect
to:
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the integrity of HSBC Finance Corporations financial
reporting processes and systems of internal controls over
financial reporting;
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compliance with legal and regulatory requirements that may have
a material impact on our financial statements;
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the qualifications, independence, performance and remuneration
of the independent auditors;
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HSBC Finance Corporations risk appetite, tolerance and
strategy;
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HSBC Finance Corporation
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our systems of management, internal control and compliance to
identify, measure, aggregate, control and report risk;
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management of capital levels and regulatory ratios, related
targets, limits and thresholds and the composition of our
capital;
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alignment of strategy with our risk appetite, as defined by the
Board of Directors;
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maintenance and development of a supportive risk management
culture that is appropriately embedded through procedures,
training and leadership actions so that all employees are alert
to the wider impact on the whole organization of their actions
and decisions.
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The Audit and Risk Committee is currently comprised of the
following independent directors (as defined by our Corporate
Governance Standards which are based upon the rules of the New
York Stock Exchange): Robert K. Herdman (Chair), George A.
Lorch, Beatriz R. Perez and Larree M. Renda. The Board of
Directors has determined that each of these individuals is
financially literate. The Board of Directors has also determined
that Mr. Herdman qualifies as an audit committee
financial expert.
Compliance Committee The Compliance Committee was
established in December 2010 in connection with revisions to the
Audit and Risk Committee charter to enhance oversight of the
Compliance function. By decision of the Board of Directors,
oversight of all compliance-related matters was delegated to the
Compliance Committee. Pursuant to this delegated oversight, the
Compliance Committee has the additional responsibilities,
powers, direction and authorities to:
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receive regular reports from the Chief Compliance Officer that
enable the Committee to assess major compliance exposures and
the steps management has taken to monitor and control such
exposures, including the manner in which the regulatory and
legal requirements of pertinent jurisdictions are evaluated and
addressed;
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approve the appointment and replacement of the Chief Compliance
Officer and other statutory compliance officers and review and
approve the annual key objectives and performance review of the
Chief Compliance Officer;
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review the budget, plan, changes in plan, activities,
organization and qualifications of the Compliance Department as
necessary or advisable in the Committees judgment;
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review and monitor the effectiveness of the Compliance
Department and the Compliance Program, including testing and
monitoring functions, and obtain assurances that the Compliance
Department, including testing and monitoring functions, is
appropriately resourced, has appropriate standing within the
organization and is free from management or other restrictions;
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seek such assurance as it may deem appropriate that the Chief
Compliance Officer participates in the risk management and
oversight process at the highest level on an enterprise-wide
basis; has total independence from individual business units;
reports to the Compliance Committee and has internal functional
reporting lines to the HSBC Head of Group Compliance; and has
direct access to the Chairman of the Compliance Committee, as
needed; and
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upon request of the Board or the Audit and Risk Committee,
provide the Board or the Audit and Risk Committee with negative
assurance as to such regulatory and legal requirements as the
Compliance Committee deems possible.
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Robert K Herdman (Chair), Niall S. K. Booker and George A. Lorch
are members of the Compliance Committee.
Executive Committee The Executive Committee may
exercise the powers and authority of the Board of Directors in
the management of HSBC Finance Corporations business and
affairs during the intervals between meetings of the Board of
Directors. Niall S. K. Booker (Chair), George A. Lorch and
Larree M. Renda are members of the Executive Committee.
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HSBC Finance Corporation
Board of Directors Director
Qualifications HSBC and the Board of Directors
believe a Board comprised of members from diverse professional
and personal backgrounds who provide a broad spectrum of
experience in different fields and expertise best promotes the
strategic objectives of HSBC Finance Corporation. HSBC and the
Board of Directors evaluate the skills and characteristics of
prospective Board members in the context of the current makeup
of the Board of Directors. This assessment includes an
examination of whether a candidate is independent, as well as
consideration of diversity, skills and experience in the context
of the needs of the Board of Directors, including experience as
a chief executive officer or other senior executive or in fields
such financial services, finance, technology, communications and
marketing, and an understanding of and experience in a global
business. Although there is no formal written diversity policy,
the Board considers a broad range of attributes, including
experience, professional and personal backgrounds and skills, to
ensure there is a diverse Board. A majority of the non-executive
Directors are expected to be active or retired senior executives
of large companies, educational institutions, governmental
agencies, service providers or non-profit organizations. Advice
and recommendations from others, such as executive search firms,
may be considered, as the Board of Directors deems appropriate.
The Board of Directors reviews all of these factors, and others
considered pertinent by HSBC and the Board of Directors, in the
context of an assessment of the perceived needs of the Board of
Directors at particular points in time. Consideration of new
Board candidates typically involves a series of internal
discussions, development of a potential candidate list, review
of information concerning candidates, and interviews with
selected candidates. Under our Corporate Governance Standards,
in the event of a major change in a Directors career
position or status, including a change in employer or a
significant change in job responsibilities or a change in the
Directors status as an independent director,
the Director is expected to offer to resign. The Chairman of the
Board, in consultation with the Chief Executive Officer and
senior executive management, will determine whether to present
the resignation to the Board of Directors. If presented, the
Board of Directors has discretion after consultation with
management to either accept or reject the resignation. In
addition, the Board of Directors discusses the effectiveness of
the Board and its committees on an annual basis, which
discussion includes a review of the composition of the Board.
As set forth in our Corporate Governance Standards, while
representing the best interests of HSBC and HSBC Finance
Corporation, each Director is expected to:
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promote HSBCs brand values and standards in performing
their responsibilities;
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have the ability to spend the necessary time required to
function effectively as a Director;
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develop and maintain a sound understanding of the strategies,
business and senior executive succession planning of HSBC
Finance Corporation;
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carefully study all Board materials and provide active,
objective and constructive participation at meetings of the
Board and its committees;
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assist in affirmatively representing HSBC to the world;
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be available to advise and consult on key organizational changes
and to counsel on corporate issues;
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develop and maintain a good understanding of global economic
issues and trends; and
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seek clarification from experts retained by HSBC Finance
Corporation (including employees of HSBC Finance Corporation) to
better understand legal, financial or business issues affecting
HSBC Finance Corporation.
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Under the Corporate Governance Standards, Directors have full
access to senior management and other employees of HSBC Finance
Corporation. Additionally, the Board and its committees have the
right at any time to retain independent outside financial, legal
and other advisors, at the expense of HSBC Finance Corporation.
Board of Directors Risk Oversight by
Board HSBC Finance Corporation has a comprehensive
risk management framework designed to ensure all risks,
including credit, liquidity, interest rate, market, operational,
reputational and strategic risk, are appropriately identified,
measured, monitored, controlled and reported. The risk
management
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HSBC Finance Corporation
function oversees, directs and integrates the various
risk-related functions, processes, policies, initiatives and
information systems into a coherent and consistent risk
management framework. Our risk management policies are primarily
implemented in accordance with the practices and limits by the
HSBC Group Management Board. Oversight of all risks specific to
HSBC Finance Corporation commences with the Board of Directors,
which has delegated principal responsibility for a number of
these matters to the Audit and Risk and Compliance Committees.
Audit and Risk Committee As set forth in our
Audit and Risk Committee charter, the Audit and Risk Committee
has the responsibility, power, direction and authority to:
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receive regular reports from the Chief Risk Officer that enable
the Audit and Risk Committee to assess the risks involved in the
business and how risks are monitored and controlled by
management;
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review and discuss with the Chief Risk Officer the adequacy and
effectiveness of our risk management framework and related
reporting;
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advise the Board of Directors on all high-level risks;
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approve with HSBC the appointment and replacement of the Chief
Risk Officer (who also serves as the North America Regional
Chief Risk Officer for HSBC);
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review and approval the annual key objectives and performance
review of the Chief Risk Officer;
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seek appropriate assurance as to the Chief Risk Officers
authority, access, independence and reporting lines;
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review the effectiveness of our internal control and risk
management framework in relation to our core strategic
objectives;
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consider the risks associated with proposed strategic
acquisitions or dispositions;
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meet periodically with representatives of HSBC Finance
Corporations Asset Liability Management Committee
(ALCO) to discuss major financial risk exposures and
the steps management has taken to monitor and control such
exposures;
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review with senior management the process for identifying
material tax issues, uncertain tax positions and the adequacy of
related reserves; and
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review with senior management guidelines and policies to govern
the process for assessing and managing various risk topics,
including regulatory compliance risk, litigation risk and
reputation risk.
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At each quarterly Audit and Risk Committee meeting, the Chief
Risk Officer makes a presentation to the committee describing
key risks for HSBC Finance Corporation, including operational
and internal controls, market, credit, information security,
capital management, liquidity and litigation. In addition the
head of each Risk functional area is available to provide the
Audit and Risk Committee a review of particular potential risks
to HSBC Finance Corporation and managements plan for
mitigating these risks.
HSBC Finance Corporation maintains a Risk Management Committee
that provides strategic and tactical direction to risk
management functions throughout HSBC Finance Corporation,
focusing on: credit, funding and liquidity, capital, market,
operational, security, fraud, reputational and compliance risks.
The Risk Management Committee is comprised of the function heads
of each of these areas, as well as other control functions
within the organization. Patrick J. Burke, the Chief Executive
Officer, is the Chair of this committee. On an annual basis, the
Board reviews the Risk Management Committees charter and
framework. ALCO, the Operational Risk & Internal
Control Committee (the ORIC Committee) and the HSBC
Finance Corporation Disclosure Committee report to the Risk
Management Committee and, together, define the risk appetite,
policies and limits; monitor excessive exposures, trends and
effectiveness of risk management; and promulgate a suitable risk
management culture, focused within the parameters of their
specific areas of risk.
ALCO provides oversight and strategic guidance concerning the
composition of the balance sheet and pricing as it affects net
interest income. It establishes limits of acceptable risk and
oversees maintenance and improvement of the management tools and
framework used to identify, report, assess and mitigate market,
interest rate and liquidity risks.
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HSBC Finance Corporation
The ORIC Committee is responsible for oversight of the
identification, assessment, monitoring, appetite for, and
proactive management and control of, operational risk for HSBC
Finance Corporation, which is defined as the risk of loss
resulting from inadequate or failed internal processes, people
and systems, or from external events. The ORIC Committee is
designed to ensure that senior management fully considers and
effectively manages our operational risk in a cost-effective
manner so as to reduce the level of operational risk losses and
to protect the organization from foreseeable future operational
losses.
The HSBC Finance Corporation Disclosure Committee 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.
Compliance Committee The responsibilities, powers,
direction and authorities of the Compliance Committee are set
forth above under Board of Directors
Committees and Charters Compliance Committee.
In support of these responsibilities, HSBC Finance Corporation
maintains an Executive Compliance Steering Committee, which is a
management committee established to provide overall strategic
direction and oversight to significant HSBC Finance Corporation
compliance issues. Patrick Burke, the Chief Executive Officer,
is the Chair of this committee, the membership of which also
includes the heads of our business segments and senior
management of our Compliance, Legal and other control functions.
The Executive Compliance Steering Committee reports to both the
Compliance Committee of the Board of Directors and the HSBC
North America Holdings Inc. Executive Compliance Steering
Committee, which serves a similar role for HSBC North America.
The Executive Compliance Steering Committee is supported by the
HSBC North America Project Management Office. This committee
defines deliverables, provides ongoing direction to project
teams, approves all regulatory submissions and prepares
materials for presentation to the Board of Directors. The
Project Steering Committee also provides oversight to individual
project managers, compliance subject matter experts, and
external consultants to ensure any regulatory requested
deliverables are met.
For further discussion of risk management generally, see the
Risk Management section of the MD&A.
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
10 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 issue of HSBC Finance Corporation preferred
stock outstanding, 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 2010
fiscal year.
Code of Ethics HSBC Finance Corporation has
adopted a Code of Ethics that is applicable to its chief
executive officer, chief financial officer, chief accounting
officer and controller, which 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, which is referred to as its
Statement of Business Principles and Code of Ethics. That
document is available on our website at www.us.hsbc.com
or upon written request made to HSBC Finance Corporation, 26525
North Riverwoods Boulevard, Mettawa, Illinois 60045, Attention:
Corporate Secretary.
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HSBC Finance Corporation
Item 11. Executive
Compensation
Compensation
Discussion and Analysis
The following compensation discussion and analysis (the
2010 CD&A) summarizes the principles,
objectives and factors considered in evaluating and determining
the compensation of HSBC Finance Corporations executive
officers in 2010. Specific compensation information relating to
those who held the positions of HSBC Finance Corporations
Chief Executive Officer (the HSBC Finance Corporation
CEO), Chief Financial Officer, and the next three most
highly compensated executives is contained in this portion of
the
Form 10-K
(these officers are referred to collectively as the Named
Executive Officers).
Oversight of Compensation Decisions The Board of
Directors of HSBC Finance Corporation did not play a role in
establishing remuneration policy or determining executive
officer compensation for 2010 or any of the comparative periods
discussed in this 2010 CD&A.
Role of HSBCS Remuneration Committee and HSBC CEO
The Board of Directors of HSBC Holdings plc
(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) which meets regularly to consider
Human Resources issues, particularly terms and conditions of
employment, remuneration and retirement benefits. Within the
authority delegated by the HSBC Board, REMCO is responsible for
approving the remuneration policy of HSBC, including the terms
of bonus plans, share plans and other long-term incentive plans
and the individual remuneration packages for the most senior
HSBC executives, generally those having an impact on the
Groups risk profile (senior executives).
As an indirect wholly owned subsidiary of HSBC, HSBC Finance
Corporation is subject to the remuneration policy established by
HSBC and the HSBC Finance Corporation CEO is one of the senior
executives whose compensation is reviewed and endorsed by REMCO.
Mr. Patrick J. Burke is the HSBC Finance Corporation CEO
(Mr. Burke).
Unless an executive is a senior executive as
described above, REMCO delegates its authority for endorsement
of base salaries and annual cash incentive awards to Stuart T.
Gulliver, the HSBC Group Chief Executive
(Mr. Gulliver). Pursuant to a further
delegation of authority from Mr. Gulliver, Niall S.K.
Booker (Mr. Booker) as Chief Executive Officer
of HSBC North America, has oversight and recommendation
responsibility for HSBC North America and its subsidiaries,
including HSBC Finance Corporation.
The members of REMCO are J.L. Thornton (Chairman), J.D.
Coombe, W.S.H. Laidlaw, and G. Morgan. All REMCO members are
non-executive directors of HSBC. REMCO received independent
advice on executive compensation issues from Deloitte LLP and
compensation data from Towers Watson during the year.
Role of HSBC Finance Corporations Senior Management
In February 2010, Mr. Brendan McDonagh
(Mr. McDonagh), the former Chief Executive
Officer HSBC North America, reviewed the 2009 total compensation
recommendations (base salaries for 2010, performance-based cash
awards, and equity based long term incentives) from
Mr. Booker with respect to Messrs. Burke, Cozza,
Armishaw, and Gunton. Due to his additional role as Chief
Financial Officer of HSBC North America, and as Chief Financial
Officer of Hong Kong Shanghai Banking Corporation during part of
2009, total compensation recommendation for Mr. Ancona were
made by Mr. McDonagh and Mr. Douglas Flint, the former
HSBC Group Chief Financial Officer. The recommendations were
submitted to HSBCs Group Managing Director of Human
Resources in London for submission to Mr. Michael F.
Geoghegan, as former HSBC Group Chief Executive. In the case of
Mr. Booker, Mr. Geoghegan recommended the final
remuneration to REMCO and REMCO approved the recommendations.
In February 2011, Mr. Gulliver reviewed recommendation for
total 2010 compensation for Mr. Burke as provided by
Mr. Booker in consultation with the HSBCs Group
Managing Director of Human Resources. The recommendation
included variable pay awards relating to 2010 performance and
was then submitted to REMCO for endorsement. In addition,
Mr. Booker reviewed the 2010 total compensation packages
with respect to Messrs. Ancona, Cozza, Armishaw, and
Gunton. Mr. Booker then forwarded the compensation
proposals for these Named Executives Officers to
Mr. Gulliver for review and approval. In addition,
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HSBC Finance Corporation
Mr. Booker reviewed the 2010 total compensation
recommendations from Mr. Ancona as Chief Financial Officer
of HSBC North America, in respect to Mr. Reeves.
The total compensation review included
year-over-year
comparison for individual executives, together with comparative
competitor information. For the Named Executive Officers,
excluding Mr. Reeves, comparative competitor information
was provided by Towers Watson based on a Comparator
Group which is comprised of both
U.S.-based
organizations and our global peers with comparable business
operations located within U.S. borders. Most of these
organizations are publicly held companies that compete with us
for business, customers and executive talent.
The Comparator Group is reviewed annually with the assistance of
Towers Watson. 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 Comparator Group
for 2010 consisted of:
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Global Peers
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U.S.-Based Organizations
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Bank of America
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American Express
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Barclays
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Capital One Financial
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BNP Paribas
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Fifth Third Bancorp
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Citigroup
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PNC Bank
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Deutsche Bank
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Regions Bank
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JPMorgan Chase
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Suntrust
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Santander
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US Bancorp
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Standard Chartered
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Wells Fargo
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UBS
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The total compensation review for Mr. Reeves includes
comparative competitor information based on broader financial
services industry data and general industry data. This data was
compiled from compensation surveys prepared by third-party
consulting firms Hewitt, McLagan, Mercer and Towers Watson.
Comparator Group market data was provided to
Messrs. Gulliver and Booker to evaluate the competitiveness
of proposed executive compensation. As the determination of the
variable pay awards relative to 2010 performance considered the
overall satisfaction of objectives that could not be evaluated
until the end of 2010, the final determination on total 2010
compensation was not made until February 2011. Common objectives
for the Named Executive Officers included: improvement in cost
efficiency; decrease in operational losses; implementation of
the OneHSBC system platform; increase in customer
recommendations; and increase in employee engagement. Each Named
Executive Officer also had other financial, process, customer
focus and employee related objectives. To make that evaluation,
Messrs. Gulliver and Booker received reports from
management concerning satisfaction of 2010 corporate, business
unit and individual objectives, as more fully described below.
REMCO, Mr. Gulliver or Mr. Booker, as appropriate,
approved or revised the original recommendations.
Role of Compensation and Performance Management Governance
Sub-Committee
In 2010, HSBC North America established the Compensation and
Performance Management Governance
Sub-Committee
(CPMG Sub-Committee) under the existing HSBC North
America Human Resources Steering Committee. The CPMG
Sub-Committee was created to provide a more systematic approach
to incentive compensation governance and ensure the involvement
of the appropriate levels of leadership, while providing a
comprehensive view of compensation practices and associated
risks. The CPMG
Sub-Committee
is comprised of senior executive representatives from HSBC North
Americas control functions, consisting of Risk,
Compliance, Legal, Finance, Audit and Human Resources. The CPMG
Sub-Committee
has responsibility for oversight of compensation for covered
populations (those employees identified as being capable of
exposing HSBC Finance Corporation to excessive risk taking);
compensation related regulatory and audit findings and
recommendations related to such findings; incentive plan review;
review of guaranteed bonuses, sign-on bonuses and equity grants,
including any exceptions to established policies; and
recommendations to REMCO of clawback of previous grants of
incentive compensation based on actual results and risk
outcomes. Additionally, compensation
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HSBC Finance Corporation
processes are evaluated by the CPMG
Sub-Committee
to ensure adequate controls are in place, while reinforcing the
distinct performance expectation for employees. The CPMG
Sub-Committee
makes recommendations to REMCO based on reviews of the total
compensation for employees. The CPMG
Sub-Committee
held two formal meetings and one informal meeting in 2010, as
well as one formal meeting in February 2011.
Role of Compensation Consultants In 2010 REMCO retained
Towers Watson to perform executive compensation services with
regard to the highest level executives in HSBC Group, including
the Named Executive Officers (with exception of
Mr. Reeves). Specifically, Towers Watson was requested to
provide REMCO with market trend information for use during the
annual pay review process and advise REMCO as to the competitive
position of HSBCs total direct compensation levels in
relation to its peers. The aggregate fee paid to Towers Watson
for services provided was $475,000. While the fee for services
provided was paid by HSBC, the amount that may be apportioned to
HSBC Finance Corporation is approximately $19,450.
Separately, the management of HSBC North America retained Towers
Watson to perform non-executive compensation consulting
services. The aggregate fee paid to Towers Watson in 2010 by
HSBC North America for these other services was $642,284.
Objectives of HSBC Finance Corporations Compensation
Program HSBC Finance Corporations compensation
program is based upon the specific direction of HSBC management
and REMCO in support of the implementation of an HSBC uniform
compensation philosophy, by employing common standards and
practices throughout HSBCs global operation. A global
reward strategy for HSBC was approved by REMCO in November 2007.
This strategy provides a framework for REMCO in carrying out its
responsibilities and includes the following elements as applied
to HSBC Finance Corporation:
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A focus on total compensation (salary, cash bonus and the value
of equity based deferral) with the level of variable pay (namely
cash bonus and the value of long-term equity incentives)
differentiated by performance;
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An assessment of reward with reference to clear and relevant
objectives set within a balanced scorecard framework. This
framework facilitates a rounded approach to objective setting.
Under this framework, objectives are established under four
categories financial, process (including risk
mitigation), customer and people. The individual financial
objectives are established considering prior years
business performance, expectations for the upcoming year for
business and individual goals, HSBC Finance Corporations
annual business plan, HSBCs business strategies, and
objectives related to building value for HSBC shareholders.
Process objectives include consideration of risk mitigation and
cost efficiencies. Customer objectives include standards for
superior service and enhancement of HSBCs brand. People
objectives include employee engagement measures and development
of skills and knowledge of our teams to sustain HSBC over the
short and medium term. Certain objectives have quantitative
standards that may include meeting designated financial
performance targets for the company or the executives
respective business unit, increasing employee engagement and
achieving risk management objectives. Qualitative objectives may
include key strategic business initiatives or projects for the
executives respective business unit. For 2010, HSBC
Finance Corporations qualitative objectives included
process enhancements and improvements to customer experience.
Each Named Executive Officer was evaluated against his or her
respective individual objectives in each of these areas.
Quantitative and qualitative objectives only provide some
guidance with respect to 2010 compensation. Furthermore, in
keeping with HSBCs compensation strategy, discretion
played a considerable role in establishing the variable pay
awards for HSBC Finance Corporations senior executives;
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The use of considered discretion to assess the extent to which
performance has been achieved rather than applying a formulaic
approach which, by its nature, may encourage inappropriate risk
taking and cannot consider results not necessarily attributable
to the executive officer and is inherently incapable of
considering all factors affecting results. In addition,
environmental factors and strategic organizational goals that
would otherwise not be considered by applying absolute financial
metrics may be taken into
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HSBC Finance Corporation
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consideration. While there are specific quantitative goals as
outlined above, achievement of one or all of the objectives are
just considerations in the final reward decision;
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Delivery of a significant proportion of variable pay in deferred
HSBC shares to align recipient interests to the future
performance of HSBC, and to retain key talent; and
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A total remuneration package (salary, bonus, long-term incentive
awards and other benefits) which is competitive in relation to
comparable organizations in each of the markets in which HSBC
operates.
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REMCO also takes into account environmental, social and
governance aspects when determining executive officers
remuneration and oversees senior management incentive structures
to ensure that such structures take into account possible
inadvertent consequences from these aspects.
Internal Equity HSBC Finance Corporations executive
officer compensation is analyzed internally at the direction of
HSBCs Group Managing Director of Human Resources with a
view to align treatment globally across countries, business
lines and functions, taking into consideration individual
responsibilities, size and scale of the businesses the
executives lead and contributions of each executive, along with
geography and local labor markets. These factors are then
calibrated for business and individual performance within the
context of their business environment against their respective
comparator group.
Link to Company Performance HSBCs compensation
plans are designed to motivate its 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 determining the amount of discretionary variable
pay to be paid in cash and in long-term equity incentive awards
each year.
HSBC seeks to offer competitive base salaries with a significant
portion of variable compensation components determined by
measuring overall performance of the executive, his or her
respective business unit, legal entity and HSBC. The
discretionary variable pay awards are based on individual and
business performance, as more fully described under Elements
of Compensation Annual Discretionary Variable Cash
Awards and Elements of Compensation Long-term
Equity Incentive Awards, emphasizing efficiency, profits and
key financial and non-financial performance measures.
Competitive Compensation Levels and Benchmarking HSBC
Finance Corporation endeavors to maintain a compensation program
that is competitive but utilizes the complete range of total
compensation received by similarly-situated executives in our
Comparator Group. Executives may be rewarded with higher levels
of compensation for differentiated performance.
When making compensation decisions, HSBC looks at the
compensation paid to similarly-situated executives in our
Comparator Group, a practice referred to as
benchmarking. Benchmarking provides a point of
reference for measurement, but does not replace analyses of
internal pay equity and individual performance of the executive
officers that HSBC considers when making compensation decisions.
The comparative compensation information is just one of several
data points used. Messrs. Booker and Burke also exercise
judgment and discretion in recommending executive compensation
packages. We have a strong orientation to pay for performance
through variable pay. Consequently, variable pay makes up a
significant proportion of total compensation while maintaining
an appropriate balance between fixed and variable elements.
Actual compensation paid will increase or decrease based on the
executives individual performance and business results.
Elements of Compensation The primary elements of
executive compensation, which are described in further detail
below are base salary (fixed pay) and annual
discretionary awards (variable pay) paid in cash and
as long-term equity-based awards that vest based upon continued
employment.
In addition, executives are eligible to receive company funded
retirement benefits that are offered to employees at all levels
who meet the eligibility requirements of such qualified and
non-qualified plans. Although perquisites are provided to
certain executives, they typically are not a significant
component of compensation.
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HSBC Finance Corporation
Base Salary Base salary helps HSBC attract and retain
executive talent. It provides a degree of financial certainty,
and is subject to less risk than most other pay elements. In
establishing individual executive salary levels, consideration
is given to market pay, as well as specific responsibilities and
experience of the Named Executive Officer. Base salary is
reviewed annually and may be adjusted based on performance and
changes in the competitive market. When establishing base
salaries for executives, consideration is given to compensation
paid for similar positions at companies included in the
Comparator Group, targeting the 50th percentile. Other
factors such as 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. Additionally,
consideration is given to maintaining an appropriate ratio
between fixed pay and variable pay as components of total
compensation.
Annual Discretionary Variable Cash Award Annual
discretionary cash awards vary from year to year and are offered
as part of the total compensation package to Named Executive
Officers to motivate and reward strong performance. In limited
circumstances, annual discretionary variable cash awards may be
granted in the form of deferred cash, which the employee will
become entitled to after graded vesting over three years.
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, cash awards may be reduced or not paid at all.
Long-term Equity Awards Long-term awards are made in the
form of equity-based compensation, including stock options,
restricted shares, and restricted share units. The purpose of
equity-based compensation is to help HSBC attract and retain
outstanding employees and to promote the growth and success of
HSBC Finance Corporation business over a period of time by
aligning the financial interests of these employees with those
of HSBCs shareholders.
Historically (prior to the merger with HSBC in 2003), Household
equity awards were primarily made in the form of stock options
and restricted stock rights. The stock options typically vested
in three, four or five equal installments, subject to continued
employment and expire ten years form the grant date. No stock
options have been granted to executive officers after 2004.
In 2005, HSBC shifted it equity-based compensation awards to
restricted shares (Restricted Shares) with a time
vesting condition, in lieu of stock options. Dividend
equivalents are paid or accrue on all underlying share or share
unit awards at the same rate paid to ordinary shareholders.
Starting in 2009, units of Restricted Shares (Restricted
Share Units) have been awarded as the long-term incentive
or deferred compensation component of variable discretionary
pay. These carry rights over dividend equivalents.
Restricted Share awards comprise a number of shares to which the
employee will become fully entitled, generally after three
years, subject to the individual remaining in employment. The
amount granted is based on general guidelines reviewed each year
by Mr. Gulliver and endorsed by REMCO and in consideration
of the individual executives total compensation package,
individual performance, goal achievement and potential for
growth.
Reduction or Cancellation of Restricted Share Units and
Deferred Cash Awards, including Clawbacks
Restricted Share Units awards granted after January 1, 2010
and deferred cash granted after January 1, 2011, may be
amended, reduced or cancelled by REMCO at any time at its sole
discretion, before an award has vested. Amendments may include
amending any performance conditions associated with the award or
imposing additional conditions on the award. Further, the number
of shares or the amount of deferred cash awarded may be reduced
or the entire award of shares or cash may be cancelled outright.
Circumstances which may prompt such action by REMCO include, but
are not limited to: participant conduct considered to be
detrimental or bringing the business into disrepute; evidence
that past performance was materially worse than originally
understood; prior financial statements are materially restated,
corrected or amended; or evidence that the employee or the
employees business unit engaged in improper or inadequate
risk analysis or failed to raise related concerns.
240
HSBC Finance Corporation
Additionally, all employees with unvested share awards or awards
subject to a retention period will be required to certify
annually that they have not used personal hedging strategies or
remuneration contracts of insurance to mitigate the risk
alignment of the unvested awards.
Perquisites HSBC Finance Corporations philosophy is
to provide perquisites that 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. Perquisites are generally
not a significant component of compensation, except as described
below.
Messrs. Booker and Gunton participate in general benefits
available to executives of HSBC Finance Corporation and certain
additional benefits and perquisites available to executives on
international assignments. Compensation packages for
international managers are modeled to be competitive globally
and within the country of assignment, and attractive to the
executive in relation to the significant commitment must be made
in connection with a global posting. The additional benefits and
perquisites that were significant when compared to other
compensation received by other executive officers of HSBC
Finance Corporation consist of housing expenses, childrens
education costs, car allowance, travel expenses and tax
equalization. These benefits and perquisites are, however,
consistent with those paid to similarly-situated HSBC
international managers who are subject to appointment to HSBC
locations globally as deemed appropriate by HSBC senior
management. The additional perquisites and benefits are further
described in the Summary Compensation Table.
Retirement Benefits HSBC North America offers a defined
benefit 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 similar dates of hire. At present, both
qualified and non-qualified defined benefit plans are maintained
so that the level of pension benefit may be continued without
regard to certain Internal Revenue Service limits. We also
maintain a qualified defined contribution plan with a 401(k)
feature and company matching contributions. At present, HSBC
Finance Corporation also provides its executives and other
highly compensated employees with the opportunity to participate
in a defined contribution non-qualified deferred compensation
plan that provides a benefit measured by a company contribution
on certain compensation exceeding Internal Revenue Code limits.
Executives and certain other highly compensated employees can
elect to participate in a non-qualified deferred compensation
plan, in which such employees can elect to defer the receipt of
earned compensation to a future date. HSBC Finance Corporation
does not pay any above-market or preferential interest in
connection with deferred amounts. As an international manager,
Messrs. Booker and Gunton 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 2010 CD&A in the table entitled
Pension Benefits.
Mix of Elements of Compensation HSBC and its
subsidiary HSBC Finance Corporation aim to have a compensation
policy that adheres to governance initiatives of relevant
regulatory bodies and appropriately considers the risks
associated with elements of total compensation. As such,
multiple efforts were made in 2010 to ensure that the total
compensation of the Named Executive Officers reflected an
appropriate ratio between fixed pay and variable pay as elements
of total compensation.
Salary increases proposed by senior management are generally
prioritized towards high performing employees and those who have
demonstrated rapid development. In 2010, salaries were reviewed
and management determined that in most instances the market did
not warrant adjustments to the salaries of our Named Executive
Officers except for Mr. Burke and Mr. Booker.
Mr. Burke received a base salary increase from $480,000 to
$530,000 effective July 12, 2010, upon his appointment as
Chief Executive Officer HSBC Finance Corporation.
Mr. Booker received a base salary increase effective
August 1, 2010 upon his appointment as Group Managing
Director and Chief Executive Officer HSBC North America (further
described in paragraph below).
During 2010, HSBC completed a rebalancing of total compensation
for certain executives. The goal of rebalancing was to shift a
portion of total compensation from variable pay to fixed pay,
which has the effect of decreasing the degree of leverage
inherent to the delivery of total compensation. Rebalance
adjustments were effective June 28, 2010, and pro-rated
portions of the rebalance adjustments are reflected in the Base
Salary column in the Summary
241
HSBC Finance Corporation
Compensation Table. As a result of this rebalance activity,
Mr. Booker received an increase in his annual base salary
from $543,084 to $700,005 effective June 28, 2010.
Effective August 1, 2010 and upon his appointment to the
position of Chief Executive Officer, HSBC North America,
Mr. Bookers annual base salary increased to $999,988
(notionally equivalent to $582,228 pre-rebalance).
Further, variable pay awarded to most employees in respect of
2010 performance is subject to deferral requirements under the
2010 HSBC Minimum Deferral Policy, which require 0% to 50% of
variable pay to be awarded in the form of Restricted Share Units
for HSBC Finance Corporation that are subject to a three year
graded vesting schedule. The deferral percentage increases in a
graduated manner in relation to the total variable pay award.
Amounts not deferred are paid as a cash bonus following the
conclusion of the performance year. Generally, amounts paid in
respect of the rebalancing activity to employees during 2010 are
regarded as fixed pay (i.e. base salary) and are not taken into
account for the purposes of applying the deferral rates for the
2010 performance year.
Some executives, however, are subject to a different set of
deferral requirements because they are designated as Code Staff,
as defined by the United Kingdoms Financial Services
Authority (FSA) Remuneration Code (the
Code). HSBC Finance Corporation, as a subsidiary of HSBC,
must have remuneration practices for executive officers which
comply with the Code. The Code requires firms to identify
Code Staff employees. Code Staff are all
employees who have a material impact on the firms risk
profile, including a person who performs a significant influence
function for a firm, a senior manager and risk takers. Of the
Named Executive Officers Mr. Booker is determined to be
Code Staff.
Variable pay awarded to Code Staff in respect of 2010
performance is subject to different deferral rates under the
2010 HSBC Group Minimum Deferral Policy than other employees.
Variable pay awards in excess of $750,000 are subject to a 60%
deferral rate. For HSBC Finance Corporation, the deferrals are
split equally between a Deferred Cash Award and Restricted Share
Units. Thirty-three percent (33%) of the deferred cash and
Restricted Shares Units vest on the first anniversary of
the grant date, thirty-three percent (33%) on the second
anniversary, and the thirty-four percent (34%) on the third
anniversary of the grant date. The deferred cash is credited
with a notional return, basis and rate as approved by REMCO.
Share-based awards are subject to an additional six-month
retention period following vest, with provision made for the
release of shares as required to meet associated income tax
obligations. For HSBC Finance Corporation, amounts not deferred
are also split equally between non-deferred cash and shares.
Non-deferred shares awards granted are immediately vested,
although subject to a six-month retention period with a
provision made for the release of shares as required to meet
associated tax obligations. Non-deferred cash awarded for 2010
performance will be paid on March 25, 2011. Deferred cash
and deferred Restricted Share Units will be granted on
March 15, 2011. Amounts paid in respect of the rebalancing
exercise to Code Staff employees during 2010 are regarded as
variable pay and are included in the application of the deferral
rates appropriate for Code Staff for the 2010 performance year.
During 2010, Mr. Booker was identified as Code Staff and
had his total compensation rebalanced. As a result of the
rebalancing Mr. Booker received an incremental amount of
$187,143 for the latter half of 2010. This incremental amount
consists of one-twelfth of the difference between the pre- and
post-rebalance rates in effect June 28, 2010 (i.e. $13,077)
and five-twelfths of the difference between the pre- and
post-rebalance rates in effect August 1, 2010 (i.e.
$174,066). Mr. Booker also earned a variable pay award of
$2,980,629 for performance in 2010. The 60% deferral rate was
applied to the sum of: Mr. Bookers variable pay
award, the one-twelfth differential, and four-fifths of the
five-twelfths differential. Therefore, $939,888 was granted in
the form of deferred cash, and $939,888 was deferred in the form
of Restricted Share Units. The remaining 40% of
Mr. Bookers variable pay award was delivered in equal
parts non-deferred cash $626,592 and immediately vested shares
$626,592. Of the $626,592 non-deferred cash to be paid
currently, $152,330 is regarded as having been delivered in
conjunction with the rebalancing in 2010 and only the
$474,262 net non-deferred cash will be paid in 2011.
Although HSBC Finance Corporation continues to face difficult
business conditions, financial performance for 2010 was strong.
We believe the strength of our strategic objectives and the
direction of our executive officers are united to support and
protect HSBC Groups interests and that of HSBC
Groups shareholders. Therefore, bonuses were recommended
at levels slightly higher than those awarded for 2009, and were
approved to be awarded to Mr. Burke and Mr. Booker and
each of the other Named Executive Officers.
242
HSBC Finance Corporation
Employment Contracts and Severance Protection
There are no employment agreements between HSBC Finance
Corporation and its executive officers. However,
Messrs. Ancona, Burke and Cozza each has an agreement that
only provides additional severance benefits upon a change in
control of HSBC Finance Corporation. The terms of these
agreements, which are identical, are as follows:
The employment protection agreement states that if, during the
18 month period following a change in control of HSBC
Finance Corporation and employment is terminated due to a
qualifying termination (which includes a termination
other than for cause or disability, or resignation
by such person 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, each of Messrs. Ancona, Burke and Cozza will each
be entitled to continue 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 such person 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.
The HSBC-North America (U.S.) Severance Pay Plan and the
HSBC-North America (U.S.) Supplemental Severance Pay Plan
provide any eligible employees with severance pay for a
specified period of time in the event that his or her employment
is involuntarily terminated for certain reasons, including
displacement or lack of work or rearrangement of work. Regular
U.S. full-time or part-time employees who are scheduled to
work 20 or more hours per week are eligible. Employees are
required to sign an employment release as a condition for
receiving severance benefits. Benefit amounts vary according to
position; however, the benefit is limited for all employees to a
52-week maximum.
Repricing of Stock Options and Timing of Option Grants
The exercise price of stock options under historical
Household option plans (awarded prior to 2003) 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 all employees a stock purchase plan in which
options to acquire HSBC ordinary shares are awarded when an
employee commits to contribute up to 250 GBP (or approximately
$400) each month for one, three or five years under its
Sharesave Plan. At the end of the term, the accumulated amount,
plus interest (if any), may be used to purchase shares under the
option, if the employee chooses to do so. The exercise price for
each such option 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).
HSBC Finance Corporation does 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 HSBC equity-based compensation programs. These limits,
more fully described in the various HSBC Share Plans, were
established by vote of HSBCs shareholders.
243
HSBC Finance Corporation
Accounting Considerations We account for all of
our stock-based compensation awards including share options,
Restricted Share and Restricted Share Unit awards and the
employee stock purchase plan, using the fair value method of
accounting under Financial Accounting Standards Boards
Accounting Standards Codification 718 (FASB
ASC 718).
The fair value of the rewards granted is recognized as expense
over the vesting period. 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 and Restricted
Share Unit awards is based upon the market value of the share on
the date of grant.
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.
244
HSBC Finance Corporation
Compensation of Officers Reported in the Summary
Compensation Table In determining compensation for each
of our executives, senior management, Mr. Gulliver and
REMCO carefully considered the individual contributions of each
executive to promote HSBCs interests and those of its
shareholders. The relevant comparisons considered for each
executive were
year-over-year
company performance relative to
year-over-year
total compensation, individual performance against balanced
score card objectives, and current trends in the market place.
Another consideration was the current positioning of the
executive and the role he or she would be expected to fulfill in
the current challenging business environment. We believe
incentives and rewards play a critical role, and that
outstanding leadership as evidenced by positive results must be
recognized. Consequently, variable pay recommendations were
submitted for our executives to reward strong performance by
HSBC Finance Corporation relative to plan and in effectively
managing risk in the challenging economic environment.
VARIABLE
COMPENSATION
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Year
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Discretionary
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Long Term Equity
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over
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Base
Salary(1)
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Annual Bonus
(2)
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Award(3)
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Total Compensation
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Year %
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2009
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2010
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2009
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2010
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2009
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2010
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2009
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2010
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Change
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Patrick J. Burke
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$
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498,462
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$
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503,077
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$
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387,500
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$
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750,000
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$
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387,500
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$
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750,000
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$
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1,273,462
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$
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2,003,077
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57
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%
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Chief Executive Officer
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Niall S.K.
Booker(4)
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$
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664,986
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$
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746,537
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$
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720,000
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$
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1,414,149
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$
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1,080,000
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$
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1,566,480
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$
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2,464,986
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$
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3,727,166
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51
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%
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(Former) Chief Executive Officer
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Michael A Reeves
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N/A
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$
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330,008
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N/A
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$
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264,000
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N/A
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$
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66,000
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N/A
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$
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660,008
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%
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Executive Vice President and Chief Financial Officer
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Edgar D.
Ancona(5)
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$
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145,385
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$
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450,000
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$
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440,000
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$
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550,000
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$
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660,000
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$
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550,000
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$
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1,245,385
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$
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1,550,000
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24
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%
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(Former) Senior Executive Vice President & Chief
Financial Officer
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C. Mark
Gunton(6)
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N/A
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$
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514,157
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N/A
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$
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422,500
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N/A
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$
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227,500
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N/A
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$
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1,164,157
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%
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Senior Executive Vice President & Chief Risk Officer
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Andrew C.
Armishaw(6)
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$
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467,308
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$
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450,000
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$
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387,500
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$
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465,000
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$
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387,500
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$
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310,000
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$
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1,242,308
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$
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1,225,000
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(1
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)%
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Senior Executive Vice President & Chief Technology and
Services Officer
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Patrick A.
Cozza(7)
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$
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467,308
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$
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450,000
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$
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387,500
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$
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465,000
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$
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387,500
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$
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310,000
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$
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1,242,308
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$
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1,225,000
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(1
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)%
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Senior Executive Vice President & Regional Head
-Insurance
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(1) |
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No base salaries were decreased for
2010. However, since HSBC Finance Corporation administered
twenty-seven (27) pay periods during 2009, base salary
amounts disclosed above reflect cash paid during the year for
the additional pay period. Amounts for 2010 are reflective of
rebalance adjustments, effective on June 28, 2010.
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(2) |
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Discretionary Non-Deferred Award
amount pertains to the performance year indicated and is paid in
the first quarter of the subsequent calendar year. It includes
non deferred cash and share awards for Code Staff and cash
awards for non Code Staff.
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(3)
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Long-term Equity Award amount
disclosed above pertains to the performance year indicated and
is awarded in the first quarter of the subsequent calendar year.
For example, the Long-Term Equity Award indicated above for 2010
is earned in performance year 2010 but will be granted in March
2011. Further for 2010, the amount includes deferred cash and
share awards for Code Staff. However, as required in the
Summary Compensation Table, the grant date fair market
value of equity granted in 2010 is disclosed for the 2010 fiscal
year under the column of Stock Awards in that table.
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(4)
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Mr. Booker was Chief Executive
Officer of HSBC Finance Corporation until July 12, 2010.
Commencing on July 31, 2010, Mr. Booker served as
chief Executive Officer of HSBC North America and his 2010
compensation includes compensation he received in his new role.
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(5)
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Mr. Ancona was compensated by
Hong Kong Shanghai Banking Corporation Limited as Chief
Financial Officer of that company from January 1, 2009 to
September 1, 2009. Mr. Ancona was Chief Financial
Officer of HSBC Finance Corporation through May 13, 2010.
Mr. Ancona has served as chief Financial Officer of HSBC
North America since September 1, 2009.
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(6)
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In his role as Chief Risk Officer,
Mr. Gunton has risk oversight over HSBC Finance
Corporation, as well as HSBC USA and HSBC North America.
Similarly, Mr. Armishaw serves as Chief Technology and
Services Officer for HSBC Finance Corporation, HSBC USA and HSBC
North America. Amounts discussed within the 2010 CD&A and
the accompanying executive compensation tables represent the
full compensation paid to Messrs. Gunton and Armishaw for
their respective roles for all three companies. Mr. Gunton
has also been disclosed as a Named Executive Officer in the HSBC
USA
Form 10-K
for year ended December 31, 2010.
|
|
(7)
|
|
Mr. Cozza is also the Senior
Executive Vice President, Regional Head Insurance
for HSBC USA. The compensation reported in this 2010 CD&A
and accompanying tables represents the compensation he received
for his positions at both companies.
|
245
HSBC Finance Corporation
Compensation Committee Interlocks and Insider
Participation As described in the 2010 CD&A, HSBC
Finance Corporation is subject to the remuneration policy
established by REMCO and the delegations of authority with
respect to executive officer compensation described under
Oversight of Compensation Discussions.
Compensation Committee Report HSBC Finance
Corporation does not have a Compensation Committee. The Board of
Directors did not play a role in establishing remuneration
policy or determining executive officer compensation for 2010.
We, the members of the Board of Directors of HSBC Finance
Corporation, have reviewed the 2010 CD&A and discussed it
with management, and have been advised that management of HSBC
has reviewed the 2010 CD&A and believes it accurately
reflects the policies and practices applicable to HSBC Finance
Corporation executive compensation in 2010. HSBC Finance
Corporation senior management has advised us that they believe
the 2010 CD&A should be included in this Annual Report on
Form 10-K.
Based upon the information available to us, we have no reason to
believe that the 2010 CD&A should not be included in this
Annual Report on
Form 10-K
and therefore recommend that it should be included.
Board of Directors of HSBC Finance
Corporation
Niall S.K. Booker
Robert K. Herdman
George A. Lorch
Samuel Minzberg
Beatriz R. Perez
Larree M. Renda
246
HSBC Finance Corporation
Executive Compensation The following tables and
narrative text discuss the compensation awarded to, earned by or
paid as of December 31, 2010 to (i) Mr. Patrick
J. Burke, who has served as our Chief Executive Officer since
July 12, 2010, (ii) Mr. Niall S. K. Booker, who
served as our Chief Executive Officer until July 12, 2010,
(iii) Mr. Michael A. Reeves, who has served as
Executive Vice President and Chief Financial Officer since
May 13, 2010, (iv) Mr. Edgar D. Ancona who served
as Senior Executive Vice President and Chief Financial Officer
through May 13, 2010, and (v) our three other most
highly compensated executive officers who served as executive
officers.
Summary
Compensation Table
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Change in
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Pension
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Value and
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Non-Equity
|
|
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Non-Qualified
|
|
|
|
|
|
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|
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|
|
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|
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|
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|
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Incentive
|
|
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Deferred
|
|
|
All
|
|
|
|
|
Name and
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Option
|
|
|
Plan
|
|
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Compensation
|
|
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Other
|
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|
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Principal Position
|
|
Year
|
|
|
Salary
|
|
|
Bonus(2)
|
|
|
Awards(3)
|
|
|
Awards
|
|
|
Compensation
|
|
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Earnings(4)
|
|
|
Compensation(5)
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Total
|
|
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|
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Patrick J.
Burke(6)
|
|
|
2010
|
|
|
$
|
503,077
|
|
|
$
|
750,000
|
|
|
$
|
387,500
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
381,761
|
|
|
$
|
88,245
|
|
|
$
|
2,110,583
|
|
Chief Executive Officer
|
|
|
2009
|
|
|
$
|
498,462
|
|
|
$
|
387,500
|
|
|
$
|
442,500
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
431,340
|
|
|
$
|
39,069
|
|
|
$
|
1,798,871
|
|
Niall S. K.
Booker(1)
|
|
|
2010
|
|
|
$
|
746,537
|
(9)
|
|
$
|
1,414,149
|
|
|
$
|
1,080,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
557,678
|
|
|
$
|
827,018
|
|
|
$
|
4,630,810
|
|
(Former) Chief Executive Officer
|
|
|
2009
|
|
|
$
|
664,986
|
|
|
$
|
720,000
|
|
|
$
|
777,200
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
771,311
|
|
|
$
|
427,127
|
|
|
$
|
3,360,624
|
|
|
|
|
2008
|
|
|
$
|
720,011
|
|
|
$
|
431,800
|
|
|
$
|
1,209,666
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
468,678
|
|
|
$
|
2,830,155
|
|
Michael A.
Reeves(6)
|
|
|
2010
|
|
|
$
|
330,008
|
|
|
$
|
264,000
|
|
|
$
|
75,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
295,614
|
|
|
$
|
15,600
|
|
|
$
|
980,222
|
|
Executive Vice President and Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
|
|
|
|
|
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|
|
Edgar D.
Ancona(6)(7)
|
|
|
2010
|
|
|
$
|
450,000
|
|
|
$
|
550,000
|
|
|
$
|
660,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
468,843
|
|
|
$
|
326,967
|
|
|
$
|
2,445,810
|
|
(Former) Senior Executive Vice President and Chief Financial
Officer
|
|
|
2009
|
|
|
$
|
145,385
|
|
|
$
|
440,000
|
|
|
$
|
470,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
357,810
|
|
|
$
|
103,615
|
|
|
$
|
1,516,810
|
|
C. Mark
Gunton(6)(10)
|
|
|
2010
|
|
|
$
|
514,157
|
|
|
$
|
422,500
|
|
|
$
|
300,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
159,083
|
|
|
$
|
797,513
|
|
|
$
|
2,193,253
|
|
Senior Executive Vice President, Chief Risk Officer
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
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|
Patrick A.
Cozza(6)(8)(10)
|
|
|
2010
|
|
|
$
|
450,000
|
|
|
$
|
465,000
|
|
|
$
|
387,500
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
935,302
|
|
|
$
|
54,409
|
|
|
$
|
2,292,161
|
|
Senior Executive Vice President,
|
|
|
2009
|
|
|
$
|
467,308
|
|
|
$
|
387,500
|
|
|
$
|
375,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,057,871
|
|
|
$
|
18,155
|
|
|
$
|
2,305,834
|
|
Regional Head Insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Andrew C.
Armishaw(8)(10)
|
|
|
2010
|
|
|
$
|
450,000
|
|
|
$
|
465,000
|
|
|
$
|
387,500
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
21,364
|
|
|
$
|
62,741
|
|
|
$
|
1,386,605
|
|
Senior Executive Vice President, Chief Technology and Services
|
|
|
2009
|
|
|
$
|
467,308
|
|
|
$
|
387,500
|
|
|
$
|
372,500
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
21,028
|
|
|
$
|
54,120
|
|
|
$
|
1,302,456
|
|
Officer
|
|
|
2008
|
|
|
$
|
450,000
|
|
|
$
|
372,500
|
|
|
$
|
500,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
30,461
|
|
|
$
|
85,229
|
|
|
$
|
1,438,190
|
|
|
|
|
(1) |
|
Mr. Bookers compensation
is tied to an international notional standard denominated in
Special Drawing Rights (SDRs). The average SDR to USD conversion
rate in effect for 2009 was lower than that for 2008. As such,
it appears Mr. Booker incurred a decrease in base salary
from 2008 to 2009, when in fact his annual rate denominated in
SDR remained constant. Mr. Booker was Chief Executive
Officer of HSBC Finance Corporation until July 12, 2010.
Commencing on July 31, 2010, Mr. Booker served as
chief Executive Officer of HSBC North America and his 2010
compensation includes compensation he received in his new role.
|
|
(2) |
|
The amounts disclosed represent the
discretionary variable pay in form of cash relating to 2010
performance but delivered/granted in March 2011. In the case of
Mr. Booker, bonus amount includes portion granted in the
form of deferred cash as disclosed under Mix of Elements of
Compensation. Mr. Booker will become fully entitled to
the deferred cash over a three year vesting period, and during
the period, the deferred cash will be credited with a notional
return, basis and rate as approved by REMCO.
|
|
(3) |
|
Reflects the aggregate grant date
fair value of awards granted during the year. The grants are
subject to various time vesting conditions as disclosed in the
footnotes to the Outstanding Equity Awards at Fiscal Year End
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 percent of the face value on the date of the award.
Dividend equivalents, in the form of additional shares, are paid
on all underlying shares of restricted stock at the same rate as
paid to ordinary share shareholders.
|
|
(4) |
|
The HSBC North America
(U.S.) Pension Plan (Pension Plan), the
HSBC North America Non-Qualified Deferred
Compensation Plan (NQDCP), the Supplemental HSBC
Finance Corporation Retirement Income Plan (SRIP)
and the HSBC International Staff Retirement Benefit Scheme
(Jersey) (ISRBS) are described under Savings and
Pension Plans. Increase in values by plan for each participant
are: Mr. Booker $557,678 (ISRBS, net of
mandatory 2010 contributions); Mr. Ancona
$123,365 (Pension Plan), $345,478 (SRIP);
Mr. Burke $80,204 (Pension Plan), $301,557
(SRIP); Mr. Cozza $108,146 (Pension Plan),
$366,350 (SRIP), $460,806 (NQDCP); Mr. Armishaw
$5,905 (Pension Plan), $15,459 (SRIP);
Mr. Reeves $80,606 (Pension Plan), $141,720
(SRIP), $73,288 (NQDCP); and Mr. Gunton
$159,083 (ISRBS).
|
247
HSBC Finance Corporation
|
|
|
(5) |
|
Components of All Other
Compensation are disclosed in the aggregate. All Other
Compensation includes perquisites and other personal benefits
received by each named executive officer, such as financial
planning services, physical exams, club dues and membership
fees, expatriate benefits and car allowance, to the extent such
perquisites and other personal benefits exceeded $10,000 in
2010. The value of perquisites provided to Mr. Cozza did
not exceed $10,000. The following itemizes perquisites and other
benefits for each named executive officer who received
perquisites and other benefits in excess of $10,000:
Executive Tax Services and/or Financial Planning for
Messrs. Booker, Ancona, Gunton and Armishaw were $856,
$567, $567, $4,000 respectively; Executive Physical and
Medical Expenses for Messrs. Booker, Armishaw and
Gunton were $3,980, $2,041 and $6,723, respectively; Club
Dues and Membership fees for Messrs. Booker, Armishaw
and Gunton were $11,733, $6,500 and $7,250, respectively;
Foreign Housing Allowance and Utilities for
Messrs. Booker and Gunton were $255,930 and $123,051,
respectively; Rent and Soft Furnishing Allowance for
Mr. Booker in amount of $176,813; Mortgage Subsidies
for Mr. Gunton in amount of $8,488; Childrens
Education Allowances for Messrs. Booker and Gunton were
$82,717 and $60,831, respectively; Car Allowances were
paid to Mr. Booker in the amount of $16,567; Executive
Travel Allowances, for Messrs. Booker and Gunton were
$72,970 and $55,857, respectively; Car and Driver Services
for Messrs. Booker and Ancona in the amounts of $3,320
and $241, respectively; Tax Equalization for
Messrs. Booker, Ancona and Gunton were $166,581, $272,760
and $482,273 respectively; Additional Compensation for
Messrs. Booker, Burke and Gunton in the amounts of $21,100,
$14,986 and $35,178 respectively; Relocation Assistance
for Messrs. Booker and Burke in the amounts of $14,453
and $19,824, respectively.
|
|
|
|
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)
in 2010, as follows: Messrs. Ancona, Armishaw, Burke and
Cozza each had a contribution of $14,700. In addition, the
following had a company contribution in the Supplemental HSBC
Finance Corporation Tax Reduction Investment Plan
(STRIP): Mr. Ancona $38,700; Mr. Reeves
$15,600; Mr. Burke $38,735; and Messrs. Cozza and
Armishaw each $35,550 in 2010. In addition Mr. Gunton had a
company contribution in the HSBC International Retirement
Benefit Plan (IRBP) in amount of $43,862. TRIP,
STRIP and IRBP are described under Savings and Pension Plans
Deferred Compensation Plans.
|
|
(6) |
|
This table reflects only those
officers who were Named Executive Officers for the particular
referenced years above. Accordingly, Messrs. Burke, Ancona
and Cozza were not Named Executive Officers for fiscal year 2008
so the table only reflects compensation for fiscal years 2009
and 2010. Similarly, Messrs. Reeves and Gunton were not
Named Executive Officers for the years 2008 and 2009, so the
table only reflects their compensation for fiscal year 2010.
|
|
(7) |
|
Mr. Ancona was compensated by
Hong Kong Shanghai Banking Corporation Limited as Chief
Financial Officer of this company from January 1, 2009 to
September 1, 2009. Mr. Ancona was Chief Financial
Officer of HSBC Finance Corporation through May 13, 2010.
Mr. Ancona has served as Chief Financial Officer of HSBC
North America since September 1, 2009.
|
|
(8) |
|
Messrs. Cozza and Armishaw
base salary remained constant in 2010. However, since HSBC
Finance Corporation administered twenty-seven (27) pay
periods during 2009, the base salary amount reflects increased
cash flow paid during 2009.
|
|
(9) |
|
Includes the incremental amount of
$187,143 for Mr. Booker that was paid for the latter half
of 2010 in the rebalancing effort. The HSBC rebalancing activity
is further described in narrative under Mix of Elements of
Compensation.
|
|
(10) |
|
Amounts shown for
Messrs. Gunton and Armishaw represent compensation earned
for their respective service to HSBC Finance Corporation, as
well as for HSBC USA and HSBC North America. Amount showed for
Mr. Cozza represents the compensation earned to his
respective service to HSBC Finance Corporation, as well as for
HSBC USA. Mr. Gunton has also been disclosed as a Named
Executive Officer in the HSBC USA
Form 10-K
for year ended 2010. Mr. Cozza is also the Senior Executive
Vice President and Regional Head Insurance for HSBC
USA. The compensation reported in this 2010 CD&A and
accompanying tables represents the compensation he received for
his positions at both companies.
|
248
HSBC Finance Corporation
Grants Of
Plan-Based Awards Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Option
|
|
|
|
|
|
Grant Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
|
Awards:
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
Estimated Future Payouts
|
|
|
Estimated Future Payouts
|
|
|
Number of
|
|
|
Number of
|
|
|
Exercise or
|
|
|
of Stock
|
|
|
|
|
|
|
Under Non-Equity
|
|
|
Under Equity
|
|
|
Shares of
|
|
|
Securities
|
|
|
Base Price
|
|
|
and
|
|
|
|
|
|
|
Incentive Plan Awards
|
|
|
Incentive Plan Awards
|
|
|
Stock or
|
|
|
Underlying
|
|
|
of Option
|
|
|
Option
|
|
|
|
Grant
|
|
|
Threshold
|
|
|
Target
|
|
|
Maximum
|
|
|
Threshold
|
|
|
Target
|
|
|
Maximum
|
|
|
Units
|
|
|
Options
|
|
|
Awards
|
|
|
Awards
|
|
Name
|
|
Date
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
(#)
|
|
|
(#)
|
|
|
(#)
|
|
|
(#)
|
|
|
(#)
|
|
|
($/Sh)
|
|
|
($)(1)
|
|
|
|
|
Patrick J. Burke
|
|
|
03/01/2010
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
37,321
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
387,500
|
|
Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Niall S. K. Booker
|
|
|
03/01/2010
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
104,018
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
1,080,000
|
|
(Former) Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael A. Reeves
|
|
|
03/01/2010
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
7,223
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
75,000
|
|
Executive Vice President and Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Edgar D. Ancona
|
|
|
03/01/2010
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
63,566
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
660,000
|
|
(Former) Senior Executive Vice President and Chief Financial
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C. Mark Gunton
|
|
|
03/01/2010
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
28,894
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
300,000
|
|
Senior Executive Vice President, Chief Risk Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patrick A. Cozza
|
|
|
03/01/2010
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
37,321
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
387,500
|
|
Senior Executive Vice President, Regional Head
Insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Andrew C. Armishaw
|
|
|
03/01/2010
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
37,321
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
387,500
|
|
Senior Executive Vice President Chief Technology and Services
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The total grant date fair value
reflected is based on 100% of the fair market value of the
underlying HSBC ordinary shares on March 1, 2010 (the date of
grant) of GBP 6.82 and converted into U.S. dollars using the GBP
exchange rate as of the date of grant which was 1.5224.
|
249
HSBC Finance Corporation
Outstanding
Equity Awards At Fiscal Year-End Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Stock Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive Plan
|
|
|
Incentive Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
|
Awards:
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Market or
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
|
|
|
|
|
|
|
|
|
|
Market
|
|
|
of Unearned
|
|
|
Payout Value
|
|
|
|
|
|
|
|
|
|
Plan Awards:
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Value of
|
|
|
Shares,
|
|
|
of Unearned
|
|
|
|
Number of
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
Shares or
|
|
|
Shares or
|
|
|
Units or
|
|
|
Shares,
|
|
|
|
Securities
|
|
|
Securities
|
|
|
Securities
|
|
|
|
|
|
|
|
|
Units of
|
|
|
Units of
|
|
|
Other
|
|
|
Units or
|
|
|
|
Underlying
|
|
|
Underlying
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
Stock That
|
|
|
Stock That
|
|
|
Rights
|
|
|
Other Rights
|
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Option
|
|
|
Option
|
|
|
Have Not
|
|
|
Have Not
|
|
|
That Have
|
|
|
That Have
|
|
|
|
Options (#)
|
|
|
Options (#)
|
|
|
Unearned
|
|
|
Exercise
|
|
|
Expiration
|
|
|
Vested
|
|
|
Vested
|
|
|
Not Vested
|
|
|
Not Vested
|
|
Name
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Options (#)
|
|
|
Price
|
|
|
Date
|
|
|
(#)(1)
|
|
|
($)(2)
|
|
|
(#)(1)
|
|
|
($)(2)
|
|
|
|
|
Patrick J. Burke
|
|
|
46,044
|
(7)
|
|
|
-
|
|
|
|
-
|
|
|
$
|
18.6226
|
|
|
|
11/12/2011
|
|
|
|
46,606
|
(4)
|
|
$
|
473,749
|
|
|
|
-
|
|
|
|
-
|
|
Chief Executive Officer
|
|
|
23,023
|
(7)
|
|
|
-
|
|
|
|
-
|
|
|
$
|
9.2895
|
|
|
|
11/20/2012
|
|
|
|
73,567
|
(5)
|
|
$
|
747,807
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
68,852
|
(7)
|
|
|
-
|
|
|
|
-
|
|
|
|
GBP7.9606
|
|
|
|
11/03/2013
|
|
|
|
12,602
|
(8)
|
|
$
|
128,099
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
68,852
|
(7)
|
|
|
-
|
|
|
|
-
|
|
|
|
GBP7.2181
|
|
|
|
04/30/2014
|
|
|
|
38,624
|
(3)
|
|
$
|
392,612
|
|
|
|
-
|
|
|
|
-
|
|
Niall S. K. Booker
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
102,958
|
(4)
|
|
$
|
1,046,565
|
|
|
|
-
|
|
|
|
-
|
|
(Former) Chief Executive Officer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
167,141
|
(5)
|
|
$
|
1,698,984
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
107,650
|
(3)
|
|
$
|
1,094,259
|
|
|
|
-
|
|
|
|
-
|
|
Michael A. Reeves
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,535
|
(4)
|
|
$
|
157,913
|
|
|
|
-
|
|
|
|
-
|
|
Executive Vice President
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,475
|
(3)
|
|
$
|
75,983
|
|
|
|
-
|
|
|
|
-
|
|
and Chief Financial Officer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23,794
|
(5)
|
|
$
|
241,865
|
|
|
|
-
|
|
|
|
-
|
|
Edgar D. Ancona
|
|
|
107,437
|
(7)
|
|
|
-
|
|
|
|
-
|
|
|
$
|
18.6226
|
|
|
|
11/12/2011
|
|
|
|
42,836
|
(4)
|
|
$
|
435,427
|
|
|
|
-
|
|
|
|
-
|
|
(Former) Senior
Executive Vice
|
|
|
153,482
|
(7)
|
|
|
-
|
|
|
|
-
|
|
|
$
|
9.2895
|
|
|
|
11/20/2012
|
|
|
|
101,076
|
(5)
|
|
$
|
1,027,435
|
|
|
|
-
|
|
|
|
-
|
|
President and Chief
|
|
|
117,048
|
(7)
|
|
|
-
|
|
|
|
-
|
|
|
|
GBP7.9606
|
|
|
|
11/03/2013
|
|
|
|
65,786
|
(3)
|
|
$
|
668,713
|
|
|
|
-
|
|
|
|
-
|
|
Financial Officer
|
|
|
58,524
|
(7)
|
|
|
-
|
|
|
|
-
|
|
|
|
GBP7.2181
|
|
|
|
04/30/2014
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
C. Mark Gunton
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23,120
|
(4)
|
|
$
|
235,014
|
|
|
|
-
|
|
|
|
-
|
|
Senior Executive Vice
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17,107
|
(5)
|
|
$
|
173,892
|
|
|
|
-
|
|
|
|
-
|
|
President, Chief Risk Officer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
29,903
|
(3)
|
|
$
|
303,963
|
|
|
|
-
|
|
|
|
-
|
|
Patrick A. Cozza
|
|
|
61,392
|
(7)
|
|
|
-
|
|
|
|
-
|
|
|
$
|
18.6226
|
|
|
|
11/12/2011
|
|
|
|
42,722
|
(4)
|
|
$
|
434,268
|
|
|
|
-
|
|
|
|
-
|
|
Senior Executive Vice
|
|
|
92,089
|
(7)
|
|
|
-
|
|
|
|
-
|
|
|
$
|
9.2895
|
|
|
|
11/20/2012
|
|
|
|
80,646
|
(5)
|
|
$
|
819,764
|
|
|
|
-
|
|
|
|
-
|
|
President, Regional Head Insurance
|
|
|
143,442
|
(7)
|
|
|
-
|
|
|
|
-
|
|
|
|
GBP7.9606
|
|
|
|
11/03/2013
|
|
|
|
38,624
|
(3)
|
|
$
|
392,612
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
143,422
|
(7)
|
|
|
-
|
|
|
|
-
|
|
|
|
GBP7.2181
|
|
|
|
04/30/2014
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Andrew C. Armishaw
|
|
|
117,048
|
(7)
|
|
|
-
|
|
|
|
-
|
|
|
|
GBP7.2181
|
|
|
|
04/30/2014
|
|
|
|
27,186
|
(4)
|
|
$
|
276,345
|
|
|
|
-
|
|
|
|
-
|
|
Senior Executive
Vice President,
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,280
|
(6)
|
|
$
|
114,661
|
|
|
|
-
|
|
|
|
-
|
|
Chief Technology and
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
80,108
|
(5)
|
|
$
|
814,296
|
|
|
|
-
|
|
|
|
-
|
|
Services Officer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
38,624
|
(3)
|
|
$
|
392,612
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
(1) |
|
Share amounts include additional
awards accumulated over the vesting periods, including any
adjustments for the HSBC share rights issue completed in April
2009. During the rights issue, HSBC raised capital by offering
the opportunity to purchase new shares at a fixed price to all
qualifying shareholders on the basis of five new shares for
every twelve existing shares. The number of unvested Restricted
Shares and Restricted Share Units held by employees was
automatically increased, without any action required on the part
of employees, in an effort to not disadvantage employees by the
rights issue. Similarly, the number of unexercised stock
options held by employees was automatically increased and a
corresponding decrease was made in the option exercise price,
without any action required on the part of employees, such that
the employee will pay the same total amount to exercise the
adjusted stock option award as before the rights issue.
|
|
(2) |
|
The HSBC ordinary share market
value on December 31, 2010, was GBP 6.511 per share and the
exchange rate from GBP to U.S. dollars was 1.5612.
|
|
(3) |
|
Thirty three percent of this award
vested on February 28, 2011. Next thirty three percent will vest
on February 27, 2012. Thirty four percent of this award will
vest on February 25, 2013.
|
|
(4) |
|
This award will vest in full on
March 31, 2011.
|
|
(5) |
|
This award will vest in full on
March 5, 2012.
|
|
(6) |
|
This award will vest in full on
March 30, 2011.
|
|
(7) |
|
Reflects fully vested options
adjusted for the HSBC share rights issue completed in April 2009.
|
|
(8) |
|
This award will vest in full on
June 30, 2012.
|
250
HSBC Finance Corporation
Option
Exercises and Stock Vested Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Stock Awards
|
|
|
|
Number of
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Shares
|
|
|
Value
|
|
|
Shares
|
|
|
Value
|
|
|
|
Acquired
|
|
|
Realized
|
|
|
Acquired
|
|
|
Realized
|
|
|
|
on Exercise
|
|
|
on Exercise
|
|
|
on Vesting
|
|
|
on Vesting
|
|
Name
|
|
(#)
|
|
|
($)(1)
|
|
|
(#)(2)
|
|
|
($)(1)
|
|
|
|
|
Patrick J. Burke
|
|
|
-
|
|
|
|
-
|
|
|
|
34,015
|
(3)
|
|
$
|
353,199
|
|
Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Niall S. K. Booker
|
|
|
-
|
|
|
|
-
|
|
|
|
26,108
|
(4)
|
|
$
|
271,096
|
|
(Former) Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael A. Reeves
|
|
|
-
|
|
|
|
-
|
|
|
|
13,228
|
(5)
|
|
$
|
137,355
|
|
Executive Vice President and Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Edgar D. Ancona
|
|
|
-
|
|
|
|
-
|
|
|
|
41,573
|
(6)
|
|
$
|
431,679
|
|
(Former) Senior Executive Vice President and Chief Financial
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C. Mark Gunton
|
|
|
-
|
|
|
|
-
|
|
|
|
14,834
|
(7)
|
|
$
|
154,031
|
|
Senior Executive Vice President, Chief Risk Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patrick A. Cozza
|
|
|
-
|
|
|
|
-
|
|
|
|
12,471
|
(8)
|
|
$
|
129,494
|
|
Senior Executive Vice President, Regional Head
Insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Andrew C. Armishaw
|
|
|
-
|
|
|
|
-
|
|
|
|
17,763
|
(9)
|
|
$
|
184,444
|
|
Senior Executive Vice President, Chief Technology and Services
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 USD on the date of
settlement.
|
|
(2) |
|
Includes the release of additional
awards accumulated over the vesting period and resulting from
the HSBC share rights issue completed in April 2009.
|
|
(3) |
|
Includes the release of
29,991 shares granted on March 30, 2007.
|
|
(4) |
|
Includes the release of
22,958 shares granted on March 30, 2007.
|
|
(5) |
|
Includes the release of
11,632 shares granted on March 30, 2007.
|
|
(6) |
|
Includes the release of
36,558 shares granted on March 30, 2007.
|
|
(7) |
|
Includes the release of
13,045 shares granted on March 30, 2007.
|
|
(8) |
|
Includes the release of 10,967
shares granted on March 30, 2007.
|
|
(9) |
|
Includes the release of
15,620 shares granted on March 30, 2007.
|
251
HSBC Finance Corporation
Pension
Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Present Value
|
|
|
Payments
|
|
|
|
|
|
|
Years Credited
|
|
|
of Accumulated
|
|
|
During Last
|
|
|
|
|
|
|
Service
|
|
|
Benefit
|
|
|
Fiscal Year
|
|
Name
|
|
Plan
Name(1)
|
|
|
(#)
|
|
|
($)
|
|
|
($)
|
|
|
|
|
Patrick J. Burke
|
|
|
Pension Plan-Household
|
|
|
|
21.8
|
|
|
$
|
410,211
|
|
|
$
|
-
|
|
Chief Executive Officer
|
|
|
SRIP-Household
|
|
|
|
21.8
|
|
|
$
|
1,435,650
|
|
|
$
|
-
|
|
Niall S.K.
Booker(2)
|
|
|
ISRBS
|
|
|
|
28.8
|
|
|
$
|
3,881,028
|
(5)
|
|
$
|
-
|
|
(Former) Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael A. Reeves
|
|
|
Pension Plan- Household
|
|
|
|
17.7
|
|
|
$
|
344,936
|
|
|
$
|
-
|
|
Executive Vice President and Chief Financial Officer
|
|
|
SRIP - Household
|
|
|
|
17.7
|
|
|
$
|
379,215
|
|
|
$
|
-
|
|
Edgar D.
Ancona(3)
|
|
|
Pension Plan-Household
|
|
|
|
16.8
|
|
|
$
|
640,426
|
|
|
$
|
-
|
|
(Former) Senior Executive Vice President and Chief Financial
Officer
|
|
|
SRIP-Household
|
|
|
|
16.8
|
|
|
$
|
2,117,713
|
|
|
$
|
-
|
|
C. Mark Gunton
|
|
|
ISRBS
|
|
|
|
32
|
|
|
|
3,297,078
|
(5)
|
|
$
|
-
|
|
Senior Executive Vice President, Chief Risk Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patrick A.
Cozza(4)
|
|
|
Pension Plan-Household
|
|
|
|
12.5
|
|
|
$
|
546,025
|
|
|
$
|
-
|
|
Senior Executive Vice President, Regional Head -
|
|
|
SRIP-Household
|
|
|
|
12.5
|
|
|
$
|
1,612,115
|
|
|
$
|
-
|
|
Insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Andrew C. Armishaw
|
|
|
Pension Plan-Account Based
|
|
|
|
7.0
|
|
|
$
|
35,461
|
|
|
$
|
-
|
|
Senior Executive Vice President, Chief
|
|
|
SRIP-Account Based
|
|
|
|
7.0
|
|
|
$
|
121,618
|
|
|
$
|
-
|
|
Technology and Services Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Plan described under Savings and
Pension Plans.
|
|
(2) |
|
Value of age 53 benefit.
Participant is also eligible for an immediate early retirement
benefit with a value of $3,983,698.
|
|
(3) |
|
Value of age 65 benefit.
Participant is also eligible for an immediate early retirement
benefit with a value of $792,090 (Pension Plan) and $2,641,589
(SRIP).
|
|
(4) |
|
Value of age 65 benefit.
Participant is also eligible for an immediate early retirement
benefit with a value of $775,817 (Pension Plan) and $2,152,026
(SRIP). The 12.5 years of credited service are for those
years attributable to Household following its acquisition of
Beneficial Corp.
|
|
(5) |
|
The amounts were converted into USD
from GBP utilizing the exchange rate of 1.5612 at
December 31, 2010.
|
252
HSBC Finance Corporation
Savings
and Pension Plans
Pension Plan The HSBC North America (U.S.)
Pension Plan (Pension Plan), formerly known as the
HSBC North America (U.S.) Retirement Income Plan, 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
Supplemental HSBC Finance Corporation Retirement Income Plan
(SRIP) is a non-qualified defined benefit plan that
is designed to provide benefits that are precluded from being
paid to legacy Household employees by the Pension Plan due to
legal constraints applicable to all qualified plans. For
example, the maximum amount of compensation during 2010 that can
be used to determine a qualified plan benefit is $245,000, and
the maximum annual benefit commencing at age 65 in 2010 is
$195,000. SRIP benefits are calculated without regard to these
limits but are reduced after January 1, 2008, for
compensation deferred to the HSBC North America
Non-Qualified Deferred Compensation Plan (NQDCP).
The resulting benefit is then reduced by the value of qualified
benefits payable by the Pension Plan so that there is no
duplication of payments. Benefits are paid in a lump sum to
executives covered by a Household or Account Based Formula
between July and December in the calendar year following the
year of termination. No additional benefits will accrue under
SRIP after December 31, 2010.
Formulas
for Calculating Benefits
Household 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 compensation in
excess of the integration amount. For this purpose, compensation
includes total base wages and bonuses (as earned); provided,
effective January 1, 2008, compensation is reduced by any
amount deferred under the NQDCP, and is averaged over the 48
highest consecutive months selected from the 120 consecutive
months preceding date of retirement. 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 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. As further described in
Note 22, Pension and Other Postretirement
Benefits in the accompanying consolidated financial
statements, effective January 1, 2011, the Account Based
Formula will replace this formula and impact the calculation of
these benefits as of January 1, 2011.
Account Based Formula: Applies to executives
who were hired by Household after December 31, 1999. It
also applies to executives who were hired by HSBC Bank USA after
December 31, 1996 and became participants in the Pension
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 compensation for each calendar
year of employment. For this purpose, compensation includes
total base wages and cash incentive payments (as paid);
provided, effective January 1, 2008, compensation is
reduced by any amount deferred under the NQDCP. 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 compensation used to determine benefits is subject to
an annual maximum that varies by calendar year. The limit for
2010 is $245,000. The limit for years after 2010 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
253
HSBC Finance Corporation
value if paid over an average lifetime. Retired executives
covered by a Household or Account Based Formula may elect a lump
sum form of payment (spousal consent is required for married
executives).
HSBC International Staff Retirement Benefits Scheme (Jersey)
(ISRBS) The HSBC International Staff Retirement Benefits
Scheme (Jersey) (ISRBS) is a defined benefit plan
maintained for certain international managers. Each member must
contribute five percent of his salary to the plan during his
service, 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 0.25 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.
If a member dies before age 53 while he is still accruing
benefits in the ISRBS then both a lump sum and a widows
pension will be payable immediately.
The lump sum payable would be the cash sum equivalent of the
members Anticipated Pension, where the Anticipated Pension
is the notional pension to which the member would have been
entitled if he had continued in service until age 53,
computed on the assumption that his Final Salary remains
unaltered. In addition, where applicable, the members
voluntary contributions fund will be paid as a lump sum.
In general, the widows pension payable would be equal to
one half of the members Anticipated Pension. As well as
this, where applicable, a childrens allowance is payable
on the death of the Member equal to 25% of the amount of the
widows pension.
If the member retires before age 53 on the grounds of
infirmity he will be entitled to a pension as from the date of
his leaving service equal to his Anticipated Pension, where
Anticipated Pension has the same definition as in the previous
section.
Present
Value of Accumulated Benefits
For the Account Based formula: The value of
the notional account balances currently available on
December 31, 2010.
For other formulas: The present value of the
benefit payable at assumed retirement using interest and
mortality assumptions consistent with those used for financial
reporting purposes under SFAS 87 with respect to the
companys audited financial statements for the period
ending December 31, 2010. 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, 2010.
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 (after-tax contributions are limited
to employees classified as non-highly compensated), up to
40 percent of the participants cash compensation
(subject
254
HSBC Finance Corporation
to a maximum annual pre-tax contribution by a participant of
$16,500 (plus an additional $5,500
catch-up
contribution for participants age 50 and over), 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.
If the employee has been employed for at least one year, HSBC
Finance Corporation contributes three percent of compensation
each pay period on behalf of each participant who contributes
one percent and matches any additional participant contributions
up to four percent of compensation. However, matching
contributions will not exceed six percent of a
participants compensation if the participant contributes
four percent or more of compensation. The plan provides for
immediate vesting of all contributions. With certain exceptions,
a participants after-tax contributions that 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 that 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 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 maintained the
Supplemental HSBC Finance Corporation Tax Reduction Investment
Plan (STRIP), which is was unfunded plan for
eligible employees of HSBC Finance Corporation and its
participating subsidiaries who are legacy Household employees
and whose compensation exceeded limits imposed by the Internal
Revenue Code. Beginning January 1, 2008, STRIP participants
received a 6% contribution for such excess compensation, reduced
by any amount deferred under the NQDCP, 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. Contributions to this plan
ended on December 31, 2010.
Non-Qualified Deferred Compensation
Plan: HSBC North America maintains
the HSBC North America Non-Qualified Deferred
Compensation Plan (NQDCP) for the highly compensated
employees in the organization, including executives of HSBC
Finance Corporation. Certain named executive officers are
eligible to contribute up to 80 percent of their salary
and/or cash
bonus compensation in any plan year. Participants are required
to make an irrevocable election with regard to the 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 over 10 years of service, 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. 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 Retirement Benefit Plan
(IRBP): The HSBC International Retirement
Benefit Plan (IRBP) is a defined contribution
retirement savings plan maintained for certain international
managers who have attained the maximum number of years of
service for participation in other plans covering international
managers, including the ISRBS. Participants receive an employer
paid contribution equal to 15% of base salary and may elect to
contribute 2.5% of base salary as non-mandatory employee
contributions, which contributions are matched by employer
contributions. Additionally, participants can make unlimited
additional voluntary contributions of base salary. The plan
provides for participant direction of account balances in a wide
range of investment funds and immediate vesting of all
contributions.
255
HSBC Finance Corporation
Non-Qualified
Defined Contribution And Other Non-Qualified Deferred
Compensation Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Qualified
|
|
|
Supplemental
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
Tax Reduction
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan(1)
|
|
|
Plan(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive
|
|
|
Registrant
|
|
|
Aggregate
|
|
|
Aggregate
|
|
|
Aggregate
|
|
|
|
Contributions
|
|
|
Contributions
|
|
|
Earnings
|
|
|
Withdrawals/
|
|
|
Balance at
|
|
Name
|
|
in 2010
|
|
|
in 2010
|
|
|
in 2010
|
|
|
Distributions
|
|
|
12/31/2010
|
|
|
|
|
Patrick J. Burke
|
|
$
|
-
|
|
|
$
|
38,735
|
|
|
$
|
38,157
|
|
|
$
|
-
|
|
|
$
|
323,778
|
|
Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Niall S. K. Booker
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
(Former) Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael A. Reeves
|
|
$
|
-
|
|
|
$
|
15,600
|
|
|
$
|
77,485
|
|
|
$
|
-
|
|
|
$
|
560,964
|
|
Executive Vice President and Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Edgar D. Ancona
|
|
|
N/A
|
|
|
$
|
38,700
|
|
|
$
|
47,726
|
|
|
$
|
-
|
|
|
$
|
504,607
|
|
(Former) Senior Executive Vice President and Chief Financial
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C. Mark Gunton
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Senior Executive Vice President, Chief Risk Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patrick A. Cozza
|
|
$
|
-
|
|
|
$
|
35,550
|
|
|
$
|
506,751
|
|
|
$
|
-
|
|
|
$
|
3,972,020
|
|
Senior Executive Vice President, Regional Head - Insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Andrew C. Armishaw
|
|
|
N/A
|
|
|
$
|
35,550
|
|
|
$
|
17,462
|
|
|
$
|
-
|
|
|
$
|
370,490
|
|
Senior Executive Vice President, Chief Technology and Services
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The HSBC North America
Non-Qualified Deferred Compensation Plan (NQDCP) is
described under Savings and Pension Plans.
|
|
(2) |
|
The Supplemental HSBC Finance
Corporation Tax Reduction Investment Plan (STRIP) is
described under Savings and Pension Plans. 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. Distributions are made in a lump sum upon
termination of employment. These figures are also included in
the Change in Pension Value and Non-Qualified Deferred
Compensation Earnings column of the Summary
Compensation Table.
|
256
HSBC Finance Corporation
Potential
Payments Upon Termination Or
Change-In-Control
The following tables describe the payments that HSBC Finance
Corporation would be required to make as of December 31,
2010 to each of Messrs. Burke, Booker, Reeves, Ancona,
Gunton, Armishaw and Cozza as a result of their termination,
retirement, disability or death or a change in control of the
company as of that date. The amounts and terms of such payments
are defined by HSBCs employment and severance policies,
employment protection agreements, and the particular terms of
any equity-based awards.
Patrick
J. Burke
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not for
|
|
|
|
|
|
Voluntary for
|
|
|
|
|
|
Change in
|
|
Executive Benefits and
|
|
Voluntary
|
|
|
|
|
|
Normal
|
|
|
Cause
|
|
|
For Cause
|
|
|
Good Reason
|
|
|
|
|
|
Control
|
|
Payments Upon Termination
|
|
Termination
|
|
|
Disability
|
|
|
Retirement
|
|
|
Termination
|
|
|
Termination
|
|
|
Termination
|
|
|
Death
|
|
|
Termination
|
|
|
|
|
Cash Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base Salary
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
428,077
|
(3)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
795,000
|
(4)
|
Bonus
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
1,400,000
|
(4)
|
Long Term Award
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
|
-
|
|
|
$
|
434,270
|
(1)
|
|
$
|
434,270
|
(1)
|
|
$
|
434,270
|
(1)
|
|
|
-
|
|
|
$
|
434,270
|
(1)
|
|
$
|
473,749
|
(2)
|
|
$
|
473,749
|
(2)
|
Restricted Stock/Units
|
|
|
-
|
|
|
$
|
1,269,432
|
(2)
|
|
$
|
1,269,432
|
(2)
|
|
$
|
1,269,432
|
(2)
|
|
|
-
|
|
|
$
|
1,269,432
|
(2)
|
|
$
|
1,269,432
|
(2)
|
|
$
|
1,269,432
|
(2)
|
Benefits and Perquisites
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Contribution Retirement Benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
80,153
|
(5)
|
Welfare Benefit Coverage
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
19,433
|
(6)
|
Defined Benefit Retirement Benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
3,821,070
|
(7)
|
Outplacement Services
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
9,000
|
|
|
|
|
(1) |
|
This amount represents accelerated
vesting of a pro-rata portion of the outstanding restricted
shares assuming good leaver status is granted by
REMCO, a termination date of December 31, 2010, and are
calculated using the closing price of HSBC ordinary shares and
exchange rate on December 31, 2010.
|
|
(2) |
|
This amount represents a full
vesting of the outstanding restricted shares assuming good
leaver status is granted by REMCO a termination date of
December 31, 2010, and are calculated using the closing
price of HSBC ordinary shares and exchange rate on
December 31, 2010.
|
|
(3) |
|
Under the terms of the
HSBC North America (U.S.) Severance Pay Plan,
Mr. Burke would receive 42 weeks of his current salary
upon separation from the company.
|
|
(4) |
|
Refer to the description of
Mr. Burkes employment protection agreement.
Mr. Burke will be entitled to receive 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; and a payment equal to 1.5
times the sum of the applicable base salary and highest annual
bonus.
|
|
(5) |
|
Mr. Burkes employment
protection agreement provides 18 months of additional
employer contributions under HSBC North Americas
tax-qualified and supplemental defined contribution plans.
|
|
(6) |
|
Mr. Burkes employment
protection agreement provides continued welfare benefit coverage
for 18 months after the date of termination. The value of
this coverage is calculated based on the COBRA rates applicable
to Mr. Burkes current coverage election and assumes
termination due to change in control occurred on
December 31, 2010.
|
|
(7) |
|
Mr. Burkes employment
protection agreement provides an additional 18 months of
age and service credit under HSBC North Americas
supplemental defined benefit retirement plan. The present value
of this benefit was determined by HSBC Finance
Corporations actuaries to be $3,821,070.
|
257
HSBC Finance Corporation
Niall S.
K. Booker
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not for
|
|
|
|
|
|
Voluntary for
|
|
|
|
|
|
Change in
|
|
Executive Benefits and
|
|
Voluntary
|
|
|
|
|
|
Normal
|
|
|
Cause
|
|
|
For Cause
|
|
|
Good Reason
|
|
|
|
|
|
Control
|
|
Payments Upon Termination
|
|
Termination
|
|
|
Disability
|
|
|
Retirement
|
|
|
Termination
|
|
|
Termination
|
|
|
Termination
|
|
|
Death
|
|
|
Termination
|
|
|
|
|
Cash Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base Salary
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Bonus
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Long Term Award
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Restricted Stock/Units
|
|
|
-
|
|
|
$
|
3,839,808
|
(1)
|
|
$
|
3,839,808
|
(1)
|
|
$
|
3,839,808
|
(1)
|
|
|
-
|
|
|
$
|
3,839,808
|
(1)
|
|
$
|
3,839,808
|
(1)
|
|
$
|
3,839,808
|
(1)
|
|
|
|
(1) |
|
This amount represents a full
vesting of the outstanding restricted shares assuming good
leaver status is granted by REMCO a termination date of
December 31, 2010, and are calculated using the closing
price of HSBC ordinary shares and exchange rate on
December 31, 2010.
|
258
HSBC Finance Corporation
Michael
A. Reeves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not for
|
|
|
|
|
|
Voluntary for
|
|
|
|
|
|
Change in
|
|
Executive Benefits and
|
|
Voluntary
|
|
|
|
|
|
Normal
|
|
|
Cause
|
|
|
For Cause
|
|
|
Good Reason
|
|
|
|
|
|
Control
|
|
Payments Upon Termination
|
|
Termination
|
|
|
Disability
|
|
|
Retirement
|
|
|
Termination
|
|
|
Termination
|
|
|
Termination
|
|
|
Death
|
|
|
Termination
|
|
|
|
|
Cash Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base Salary
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
215,774
|
(3)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Bonus
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Long Term Award
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
|
-
|
|
|
$
|
144,753
|
(1)
|
|
$
|
144,753
|
(1)
|
|
$
|
144,753
|
(1)
|
|
|
-
|
|
|
$
|
144,753
|
(1)
|
|
$
|
157,913
|
(2)
|
|
$
|
157,913
|
(2)
|
Restricted Stock/Units
|
|
|
-
|
|
|
$
|
317,849
|
(2)
|
|
$
|
317,849
|
(2)
|
|
$
|
317,849
|
(2)
|
|
|
-
|
|
|
$
|
317,849
|
(2)
|
|
$
|
317,849
|
(2)
|
|
$
|
317,849
|
(2)
|
|
|
|
(1) |
|
This amount represents accelerated
vesting of a pro-rata portion of the outstanding restricted
shares assuming good leaver status is granted by
REMCO, a termination date of December 31, 2010, and are
calculated using the closing price of HSBC ordinary shares and
exchange rate on December 31, 2010.
|
|
(2) |
|
This amount represents a full
vesting of the outstanding restricted shares assuming good
leaver status is granted by REMCO a termination date of
December 31, 2010, and are calculated using the closing
price of HSBC ordinary shares and exchange rate on
December 31, 2010.
|
|
(3) |
|
Under the terms of the
HSBC North America (U.S.) Severance Pay Plan,
Mr. Reeves would receive 34 weeks of his current
salary upon separation from the company.
|
259
HSBC Finance Corporation
Edgar D.
Ancona
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not for
|
|
|
|
|
|
Voluntary for
|
|
|
|
|
|
Change in
|
|
Executive Benefits and
|
|
Voluntary
|
|
|
|
|
|
Normal
|
|
|
Cause
|
|
|
For Cause
|
|
|
Good Reason
|
|
|
|
|
|
Control
|
|
Payments Upon Termination
|
|
Termination
|
|
|
Disability
|
|
|
Retirement
|
|
|
Termination
|
|
|
Termination
|
|
|
Termination
|
|
|
Death
|
|
|
Termination
|
|
|
|
|
Cash Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base Salary
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
276,923
|
(3)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
675,000
|
(4)
|
Bonus
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
1,875,000
|
(4)
|
Long Term Award
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
|
-
|
|
|
$
|
399,141
|
(1)
|
|
$
|
399,141
|
(1)
|
|
$
|
399,141
|
(1)
|
|
|
-
|
|
|
$
|
399,141
|
(1)
|
|
$
|
435,427
|
(2)
|
|
$
|
435,427
|
(2)
|
Restricted Stock/Units
|
|
|
-
|
|
|
$
|
1,601,654
|
(2)
|
|
$
|
1,601,654
|
(2)
|
|
$
|
1,601,654
|
(2)
|
|
|
-
|
|
|
$
|
1,601,654
|
(2)
|
|
$
|
1,601,654
|
(2)
|
|
$
|
1,601,654
|
(2)
|
Benefits and Perquisites
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Contribution Retirement Benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
81,000
|
(5)
|
Welfare Benefit Coverage
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
6,339
|
(6)
|
Defined Benefit Retirement Benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
566,619
|
(7)
|
Outplacement Services
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
9,000
|
|
|
|
|
(1) |
|
This amount represents accelerated
vesting of a pro-rata portion of the outstanding restricted
shares assuming good leaver status is granted by
REMCO, a termination date of December 31, 2010, and are
calculated using the closing price of HSBC ordinary shares and
exchange rate on December 31, 2010.
|
|
(2) |
|
This amount represents a full
vesting of the outstanding restricted shares assuming good
leaver status is granted by REMCO a termination date of
December 31, 2010, and are calculated using the closing
price of HSBC ordinary shares and exchange rate on
December 31, 2010.
|
|
(3) |
|
Under the terms of the
HSBC North America (U.S.) Severance Pay Plan,
Mr. Ancona would receive 32 weeks of his current
salary upon separation from the company.
|
|
(4) |
|
Refer to the description of
Mr. Anconas employment protection agreement.
Mr. Ancona will be entitled to receive 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; and a payment equal to 1.5
times the sum of the applicable base salary and highest annual
bonus.
|
|
(5) |
|
Mr. Anconas employment
protection agreement provides 18 months of additional
employer contributions under HSBC North Americas
tax-qualified and supplemental defined contribution plans.
|
|
(6) |
|
Mr. Anconas employment
protection agreement provides continued welfare benefit coverage
for 18 months after the date of termination. The value of
this coverage is calculated based on the COBRA rates applicable
to Mr. Anconas current coverage election and assumes
termination due to change in control occurred on
December 31, 2010.
|
|
(7) |
|
Mr. Anconas employment
protection agreement provides an additional 18 months of
age and service credit under HSBC North Americas
supplemental defined benefit retirement plan. The present value
of this benefit was determined by HSBC Finance
Corporations actuaries to be $566,619.
|
260
HSBC Finance Corporation
C. Mark
Gunton
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not for
|
|
|
|
|
|
Voluntary for
|
|
|
|
|
|
Change in
|
|
Executive Benefits and
|
|
Voluntary
|
|
|
|
|
|
Normal
|
|
|
Cause
|
|
|
For Cause
|
|
|
Good Reason
|
|
|
|
|
|
Control
|
|
Payments Upon Termination
|
|
Termination
|
|
|
Disability
|
|
|
Retirement
|
|
|
Termination
|
|
|
Termination
|
|
|
Termination
|
|
|
Death
|
|
|
Termination
|
|
|
|
|
Cash Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base Salary
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Bonus
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Long Term Award
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
|
-
|
|
|
$
|
215,430
|
(1)
|
|
$
|
215,430
|
(1)
|
|
$
|
215,430
|
(1)
|
|
|
-
|
|
|
$
|
215,430
|
(1)
|
|
$
|
235,014
|
(2)
|
|
$
|
235,014
|
(2)
|
Restricted Stock/Units
|
|
|
-
|
|
|
$
|
477,855
|
(2)
|
|
$
|
477,855
|
(2)
|
|
$
|
477,855
|
(2)
|
|
|
-
|
|
|
$
|
477,855
|
(2)
|
|
$
|
477,855
|
(2)
|
|
$
|
477,855
|
(2)
|
|
|
|
(1) |
|
This amount represents accelerated
vesting of a pro-rata portion of the outstanding restricted
shares assuming good leaver status is granted by
REMCO, a termination date of December 31, 2010, and are
calculated using the closing price of HSBC ordinary shares and
exchange rate on December 31, 2010.
|
|
(2) |
|
This amount represents a full
vesting of the outstanding restricted shares assuming good
leaver status is granted by REMCO a termination date of
December 31, 2010, and are calculated using the closing
price of HSBC ordinary shares and exchange rate on
December 31, 2010.
|
261
HSBC Finance Corporation
Patrick
A. Cozza
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not for
|
|
|
|
|
|
Voluntary for
|
|
|
|
|
|
Change in
|
|
Executive Benefits and
|
|
Voluntary
|
|
|
|
|
|
Normal
|
|
|
Cause
|
|
|
For Cause
|
|
|
Good Reason
|
|
|
|
|
|
Control
|
|
Payments Upon Termination
|
|
Termination
|
|
|
Disability
|
|
|
Retirement
|
|
|
Termination
|
|
|
Termination
|
|
|
Termination
|
|
|
Death
|
|
|
Termination
|
|
|
|
|
Cash Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base Salary
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
432,692
|
(3)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
675,000
|
(4)
|
Bonus
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
1,750,000
|
(4)
|
Long Term Award
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
|
-
|
|
|
$
|
398,079
|
(1)
|
|
$
|
398,079
|
(1)
|
|
$
|
398,079
|
(1)
|
|
|
-
|
|
|
$
|
398,079
|
(1)
|
|
$
|
434,268
|
(2)
|
|
$
|
434,268
|
(2)
|
Restricted Stock/Units
|
|
|
-
|
|
|
$
|
1,212,376
|
(2)
|
|
$
|
1,212,376
|
(2)
|
|
$
|
1,212,376
|
(2)
|
|
|
-
|
|
|
$
|
1,212,376
|
(2)
|
|
$
|
1,212,376
|
(2)
|
|
$
|
1,212,376
|
(2)
|
Benefits and Perquisites
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Contribution Retirement Benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
75,300
|
(5)
|
Welfare Benefit Coverage
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
11,734
|
(6)
|
Defined Benefit Retirement Benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
566,766
|
(7)
|
Outplacement Services
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
9,000
|
|
|
|
|
(1) |
|
This amount represents accelerated
vesting of a pro-rata portion of the outstanding restricted
shares assuming good leaver status is granted by
REMCO, a termination date of December 31, 2010, and are
calculated using the closing price of HSBC ordinary shares and
exchange rate on December 31, 2010.
|
|
(2) |
|
This amount represents a full
vesting of the outstanding restricted shares assuming good
leaver status is granted by REMCO a termination date of
December 31, 2010, and are calculated using the closing
price of HSBC ordinary shares and exchange rate on
December 31, 2010.
|
|
(3) |
|
Under the terms of the
HSBC North America (U.S.) Severance Pay Plan,
Mr. Cozza would receive 50 weeks of his current salary
upon separation from the company.
|
|
(4) |
|
Refer to the description of
Mr. Cozzas employment protection agreement.
Mr. Cozza will be entitled to receive 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; and a payment equal to 1.5
times the sum of the applicable base salary and highest annual
bonus.
|
|
(5) |
|
Mr. Cozzas employment
protection agreement provides 18 months of additional
employer contributions under HSBC North Americas
tax-qualified and supplemental defined contribution plans.
|
|
(6) |
|
Mr. Cozzas employment
protection agreement provides continued welfare benefit coverage
for 18 months after the date of termination. The value of
this coverage is calculated based on the COBRA rates applicable
to Mr. Cozzas current coverage election and assumes
termination due to change in control occurred on
December 31, 2010.
|
|
(7) |
|
Mr. Cozzas employment
protection agreement provides an additional 18 months of
age and service credit under HSBC North Americas
supplemental defined benefit retirement plan. The present value
of this benefit was determined by HSBC Finance
Corporations actuaries to be $566,766.
|
262
HSBC Finance Corporation
Andrew C.
Armishaw
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not for
|
|
|
|
|
|
Voluntary for
|
|
|
|
|
|
Change in
|
|
Executive Benefits and
|
|
Voluntary
|
|
|
|
|
|
Normal
|
|
|
Cause
|
|
|
For Cause
|
|
|
Good Reason
|
|
|
|
|
|
Control
|
|
Payments Upon Termination
|
|
Termination
|
|
|
Disability
|
|
|
Retirement
|
|
|
Termination
|
|
|
Termination
|
|
|
Termination
|
|
|
Death
|
|
|
Termination
|
|
|
|
|
Cash Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base Salary
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
259,615
|
(3)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Bonus
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Long Term Award
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
|
-
|
|
|
$
|
253,316
|
(1)
|
|
$
|
253,316
|
(1)
|
|
$
|
253,316
|
(1)
|
|
|
-
|
|
|
$
|
253,316(1
|
)
|
|
$
|
276,345
|
(2)
|
|
$
|
276,345
|
(2)
|
Restricted Stock/Units
|
|
|
-
|
|
|
$
|
1,321,568
|
(2)
|
|
$
|
1,321,568
|
(2)
|
|
$
|
1,321,568
|
(2)
|
|
|
-
|
|
|
$
|
1,321,568
|
(2)
|
|
$
|
1,321,568
|
(2)
|
|
$
|
1,321,568
|
(2)
|
|
|
|
(1) |
|
This amount represents accelerated
vesting of a pro-rata portion of the outstanding restricted
shares assuming good leaver status is granted by
REMCO, a termination date of December 31, 2010, and are
calculated using the closing price of HSBC ordinary shares and
exchange rate on December 31, 2010.
|
|
(2) |
|
This amount represents a full
vesting of the outstanding restricted shares assuming
good leaver status is granted by REMCO a termination
date of December 31, 2010, and are calculated using the closing
price of HSBC ordinary shares and exchange rate on December 31,
2010.
|
|
(3) |
|
Under the terms of the HSBC --
North America (U.S.) Severance Pay Plan, Mr. Armishaw would
receive 30 weeks of his current salary upon separation from
the company.
|
263
HSBC Finance Corporation
Director Compensation The following table and
narrative footnotes discuss the compensation awarded to, earned
by or paid to our Non-Executive Directors in 2010.
Mr. Booker, as an Executive Director, receives no
additional compensation for his service on the Board of
Directors. Additionally, former Executive Director
Mr. McDonagh received no additional compensation for his
service on the Board of Directors during 2010.
Mr. McDonaghs service on the Board of Directors
concluded July 31, 2010.
Director
Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and Non-Qualified
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
Fees Earned
|
|
|
Stock
|
|
|
Option
|
|
|
Compensation
|
|
|
All Other
|
|
|
|
|
|
|
or Paid in
|
|
|
Awards
|
|
|
Awards
|
|
|
Earnings ($)
|
|
|
Compensation
|
|
|
Total
|
|
Name
|
|
Cash
($)(1)
|
|
|
($)(2)
|
|
|
($)(3)
|
|
|
(4)
|
|
|
($)(5)
|
|
|
($)
|
|
|
|
|
Robert K. Herdman
|
|
$
|
305,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
309
|
|
|
$
|
305,309
|
|
George A. Lorch
|
|
$
|
340,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(34,935
|
)
|
|
$
|
1,991
|
|
|
$
|
307,056
|
|
Samuel Minzberg
|
|
$
|
225,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,991
|
|
|
$
|
226,991
|
|
Beatriz R. Perez
|
|
$
|
225,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,991
|
|
|
$
|
226,991
|
|
Larree M. Renda
|
|
$
|
225,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(101
|
)
|
|
$
|
1,991
|
|
|
$
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226,890
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(1) |
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The Non-Executive Directors of HSBC
Finance Corporation receive an annual cash retainer of $210,000
for board membership on HSBC Finance Corporation and HSBC North
America. Mr. Herdman receives $55,000 as chair of the HSBC
Finance Corporation Audit and Risk Committee.
Mr. Herdmans compensation is grandfathered at an
amount equal to his 2007 Board and Committee compensation; he
received an additional $40,000 accordingly.
Mr. Lorchs compensation is grandfathered at an amount
equal to his 2007 Board and Committee compensation; he received
an additional $115,000 accordingly. Mr. Lorch,
Mr. Minzberg, Ms. Perez and Ms. Renda each
receives $15,000 for their service on the HSBC Finance
Corporation Audit and Risk 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 any additional compensation related to
their Board service.
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Mr. Herdman receives
compensation of $85,000 for serving as Chair of the HSBC North
America Audit and Risk Committee. Mr. Herdman received an
additional $40,625 for serving as Chair of the HSBC USA Audit
and Risk Committee, which represents a pro-rated amount, since
his membership did not commence until May 13, 2010.
Mr. Minzberg also receives compensation of $15,000 for
service on the HSBC North America Audit and Risk Committee.
Mr. Lorch received an additional $7,500 for membership on
the HSBC North America Audit and Risk Committee, which
represents a pro-rated amount, since his membership did not
commence until July 7, 2010.
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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 on the Board of
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 or quarterly installments.
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(2) |
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HSBC Finance Corporation does not
grant stock awards to its Non-Executive Directors nor do any
portion of Executive Directors stock awards reflect
services related to the Board. Prior to the merger with HSBC,
Non-Executive 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, 2010, 25,193 American Depository Shares
were held in the deferred compensation plan account for
Directors. Of the current Non-Executive Directors,
Mr. Lorch held 8,444 American Depository Shares and
Ms. Renda held 26 American Depository Shares.
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(3) |
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HSBC Finance Corporation does not
grant stock option awards to its Non-Executive Directors. As
referenced in Footnote 2 above, as of December 31, 2010,
93,624 Stock Options were outstanding which were granted
pursuant to the historical Directors Deferred Fee Plan. On
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264
HSBC Finance Corporation
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December 31, 2010,
Mr. Lorch held options to purchase 47,580 HSBC ordinary
shares and Ms. Renda held options to purchase 46,044 HSBC
ordinary shares.
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(4) |
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The HSBC North America Directors
Non-Qualified Deferred Compensation Plan allows Non-Executive
Directors to elect to defer their cash fees in any plan year.
Participants are required to make an election with regard to the
percentage of compensation to be deferred and the timing and
manner of future payout. Amounts shown for Mr. Lorch and
Ms. Renda reflect the gains or losses calculated by
reference to the actual earnings of the investment choices.
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(5) |
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Components of All Other
Compensation are disclosed in the aggregate. We provide each
Director with $250,000 of accidental death and dismemberment
(AD&D) insurance and a
$10,000,000 personal excess liability insurance policy for
which the company paid an aggregate premium of $1,991 per annum
for each participating Director. Mr. Herdman declined the
personal excess liability insurance policy; the amount shown
pertains to the annual premium for AD&D insurance
exclusively. Under HSBCs Matching Gift Program, for all
Non-Executive 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), including eligible non-profit organizations which promote
neighborhood revitalization or economic development for low and
moderate income populations, with a double match for the first
$500 donated to higher education institutions (both public and
private). Additionally, each current Non-Executive Director, who
was a member of the Board in 2006 and continues to be on the
Board, may ask us to contribute up to $10,000 annually to
charities of the Directors choice which qualify under our
philanthropic program.
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Compensation
Policies and Practices Related to Risk Management
All HSBC Finance Corporation employees are eligible for some
form of incentive compensation; however, those who actually
receive payments are a subset of eligible employees, based on
positions held and individual and business performance.
Employees participate in either the annual discretionary award
plan, the primary incentive compensation plan for all employees,
or in formulaic plans, which are maintained for specific groups
of employees who are typically involved in production/call
center or direct sales environments.
A key feature of HSBCs compensation policy is that it is
risk informed, seeking to ensure that risk based returns on
capital are factored into the determination of variable
compensation and that bonus pools are calculated only after
appropriate risk based return has accrued on shareholders
capital. We apply Economic Profit (defined as the
average annual difference between return on invested capital and
HSBCs benchmark cost of capital) and other metrics to
develop variable compensation levels and target a 15% to 19%
return on shareholder funds. These requirements are built into
the balanced scorecard of the senior HSBC executives and are
incorporated in regional and business scorecards in an aligned
manner, thereby ensuring that return, risk, and efficient
capital usage shape reward considerations. The HSBC Group Chief
Risk Officer and the Global Risk Function of HSBC provide input
into the balanced scorecard, ensuring that key risk measures are
included.
The use of a balanced scorecard framework ensures an aligned set
of objectives and impacts the level of individual compensation
received, as achievement of objectives is considered when
determining the level of variable compensation awarded under the
annual discretionary cash award plan. Objectives are set under
four categories; financial, process (including risk mitigation),
customer, and people. Financial objectives, as well as other
objectives relating to efficiency and risk mitigation, customer
development and the productivity of human capital are measures
of performance that may influence reward levels.
In 2010, building upon the combined strengths of our balanced
scorecard and risk management processes, outside consultants
were engaged to assist in the development of a formal incentive
compensation risk management framework. Commencing with the 2011
objectives-setting process, standard risk performance measures
and targets will be established and monitored for employees who
have been identified as having the potential to expose the
organization to material risks, or who are responsible for
controlling those risks.
Also in 2010, HSBC North America established the Compensation
and Performance Management Governance
Sub-Committee
(CPMG
Sub-Committee)
within the existing HSBC North America Human Resources Steering
Committee. The CPMG
Sub-Committee
was created to provide a more systematic approach to incentive
compensation governance and ensure the involvement of the
appropriate levels of leadership, while providing a
comprehensive view of compensation practices and associated
risks. The CPMG
Sub-Committee
is comprised of senior executive representatives from HSBC North
Americas control functions, consisting of Risk,
Compliance, Legal, Finance, Audit and Human Resources. The CPMG
Sub-Committee
has responsibility for oversight of
265
HSBC Finance Corporation
compensation for covered populations (those employees identified
as being capable of exposing HSBC Finance Corporation to
excessive risk taking); compensation related regulatory and
audit findings and recommendations related to such findings;
incentive plan review; review of guaranteed bonuses, sign-on
bonuses and equity grants, including any exceptions to
established policies; and recommendation to REMCO of clawback of
previous grants of incentive compensation based on actual
results and risk outcomes. Additionally, compensation processes
are evaluated by the CPMG
Sub-Committee
to ensure adequate controls are in place, while reinforcing the
distinct performance expectation for employees. The CPMG
Sub-Committee
makes recommendations to REMCO based on reviews of the total
compensation for employees.
Risk oversight of formulaic plans is ensured through formal
policies of HSBC requiring that the HSBC North America Office of
Operational Risk Management approve all plans relating to the
sale of credit, which are those plans that impact
employees selling loan products such as credit cards.
Incentive compensation awards are also impacted by controls
established under a comprehensive risk management framework that
provides the necessary controls, limits, and approvals for risk
taking initiatives on a
day-to-day
basis (Risk Management Framework). Business
management cannot bypass these risk controls to achieve
scorecard targets or performance measures. As such, the Risk
Management Framework is the foundation for ensuring excessive
risk taking is avoided. The Risk Management Framework is
governed by a defined risk committee structure, which oversees
the development, implementation, and monitoring of the risk
appetite process for HSBC Finance Corporation. Risk Appetite is
annually reviewed and approved by the HSBC North America Risk
Management Committee and HSBC North America Board Audit
Committee.
Risk Adjustment of Incentive Compensation HSBC Finance
Corporation uses a number of techniques to ensure that the
amount of incentive compensation received by an employee
appropriately reflects risk and risk outcomes, including risk
adjustment of awards, deferral of payment, appropriate
performance periods, and reducing sensitivity to short-term
performance. The techniques used vary depending on whether the
incentive compensation is paid under the general discretionary
cash award plan or a formulaic plan.
The discretionary plan is designed to allow managers to exercise
judgment in making variable pay award recommendations, subject
to appropriate oversight. Performance against the objectives
established in the balanced scorecard is considered when making
award recommendations for an employee participating in the
discretionary plan. Where objectives have been established with
respect to risk and risk outcomes, managers will consider
performance against these objectives when making variable pay
award recommendations.
Participants in the discretionary plan are subject to minimum
2010 HSBC Minimum Deferral Policy for variable pay awards.
Deferral rates applicable to compensation earned in performance
year 2010, range from 0 to 60% and increase relative to the
level of variable compensation earned, and in respect to
employees classification under the Code of FSA, as further
described under the section Mix of Elements of
Compensation under 2010 CD&A. Variable pay is
deferred in the form of cash
and/or
through the use of Restricted Share Units. The deferred
Restricted Share Units have a three-year graded vesting, while
cash deferrals are credited with notional return, basis and rate
as approved by REMCO. The economic value of pay deferred in the
form of Restricted Share Units will ultimately be determined by
the ordinary share price and foreign exchange rate in effect
when each tranche of shares awarded is released. Employees who
terminate employment as bad leavers forfeit all
unvested equity awards. A clawback provision has been added to
variable compensation awards, as further described under the
section Reduction or Cancellation of Long-Term Equity
Awards under 2010 CD&A. Additionally, all employees
with unvested share awards or awards subject to a retention
period are required to certify annually that they have not used
personal hedging strategies or remuneration contracts of
insurance to mitigate the risk alignment of the unvested awards.
Employees in formulaic plans are held to performance standards
that may result in a loss of incentive compensation when quality
standards are not met. For example, participants in these plans
may be subject to a reduction in future commission payments if
they commit a reportable event (e.g., an error or
omission resulting in a loss or expense to the company) or fail
to follow required regulations, procedures, policies,
and/or
associated training. Participants may be altogether disqualified
from participation in the plans for unethical acts, breach of
company policy, or any
266
HSBC Finance Corporation
other conduct that, in the opinion of HSBC Finance Corporation,
is sufficient reason for disqualification or subject to a
recapture provision if it is determined that commissions were
paid in excess of the amount that should have been paid. Some
formulaic incentive plans include limits or caps on the
financial measures that are considered in the determination of
incentive award amounts.
Performance periods for the formulaic plans are often one month
or one quarter, with features that may reserve or hold back a
portion of the incentive award earned until year-end. This
design is a conscious effort to align the reward cycle to the
successful performance of job responsibilities, as longer
performance periods may fail to adequately reinforce the desired
behaviors on the part of formulaic plan participants.
Incentive Compensation Monitoring HSBC North America
monitors and evaluates the performance of its incentive
compensation arrangements, both the discretionary and formulaic
plans, to ensure adequate focus and control.
The nature of the discretionary plan allows for compensation
decisions to reflect individual and business performance based
on balanced scorecard achievements. Payments under the
discretionary plan are not tied to formula, which enables
payments to be adjusted as appropriate based on individual
performance, business performance and risk assessment. Balance
scorecards may also be updated as needed by leadership during
the performance year to reflect significant changes in the
operating plan, risk, or business strategy of HSBC Finance
Corporation. Additionally, the discretionary plan is reviewed
annually by REMCO to ensure that it is meeting the desired
objectives. The review includes a comparison of actual payouts
against the targets established, a cost/benefit analysis, the
ratio of payout to overall business performance, and a review of
any unintended consequences (e.g., deteriorating service
standards).
Formulaic programs are reviewed and revised annually by HSBC
North America Human Resources using an incentive plan review
template, which highlights basic identifiers for overall plan
performance. The review includes: an examination of overall plan
expenditures versus actual business performance versus planned
expenditures; an examination of individual pay out levels within
plans; a determination of whether payment levels align with
expected performance levels and market indicators; and a
determination of whether the compensation mix is appropriate for
the role utilizing market practice and business philosophy.
In addition to the annual review, plan performance is monitored
regularly by the business management and periodically by HSBC
North America Human Resources, which tracks plan expenditures
and plan performance to ensure that plan payouts are consistent
with expectations. Calculations for plans are performed
systematically based on plan measurement factors to ensure
accurate calculation of incentives and all performance payouts
are subject to the review of the designated plan administrator
to ensure payment and performance of the plan are tracking in
line with expectations. Plan inventories are refreshed during
the course of the year to identify plans to be eliminated,
consolidated, or restructured based on relevant business and
commercial factors. Finally, all plans contain provisions that
enable modification of the plan if necessary to meet business
objectives.
267
HSBC Finance Corporation
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, 2011, of HSBC ordinary shares or interests in
ordinary shares and Series B Preferred Stock of HSBC
Finance Corporation held by each director and each executive
officer named in the Summary Compensation Table, 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 one percent of the ordinary
shares of HSBC and the Series B Preferred Stock of HSBC
Finance Corporation.
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Number of
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HSBC Shares
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HSBC
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Shares
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That May Be
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Restricted
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Series B
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Beneficially
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Acquired Within
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Shares
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Number of
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Total
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Preferred of
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Owned of
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60 Days By
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Released
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Ordinary
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HSBC
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HSBC
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HSBC
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Exercise of
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Within
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Share
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Ordinary
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Finance
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Holdings
plc(1)(2)
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Options(3)
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60
Days(4)
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Equivalents(5)
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Shares(2)
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Corporation
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Directors
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Niall S.K.
Booker(6)
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69,325
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-
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138,483
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-
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207,808
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-
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Robert K. Herdman
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82
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-
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-
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-
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82
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-
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George A. Lorch
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2,730
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47,580
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-
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8,444
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58,754
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-
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Samuel Minzberg
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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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Beatriz R. Perez
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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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Larree M. Renda
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1,650
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46,044
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-
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26
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47,720
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10
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(7)
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Named Executive Officers
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Patrick J. Burke
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4,516
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206,771
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59,352
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-
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270,639
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-
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Michael A. Reeves
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1,056
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-
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18,002
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-
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19,058
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-
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Edgar D. Ancona
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251,025
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436,491
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64,545
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-
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752,061
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-
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Andrew C. Armishaw
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28,844
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117,048
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39,932
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-
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185,824
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-
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Patrick A. Cozza
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-
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440,365
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55,468
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-
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495,833
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-
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C. Mark Gunton
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-
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-
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32,988
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-
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32,988
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-
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All directors and executive officers as a group
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441,293
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1,796,454
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569,798
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9,159
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2,816,704
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10
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(1)
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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. Lorch,
2,409 held in American Depository Shares and Mr. Booker,
26,625 and Directors and executive officers as a group, 29,034.
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(2)
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Some of the shares included in the table above were held in
American Depository Shares, each of which represents five HSBC
ordinary shares, including the shares listed above in the first
column for Messrs. Herdman, Lorch, Ancona (35,843 of the
shares listed above) and Reeves and Ms. Renda.
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(3)
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Represents the number of ordinary shares that may be acquired by
HSBC Finance Corporations Directors and executive officers
through April 1, 2011 pursuant to the exercise of stock
options.
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(4)
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Represents the number of ordinary shares that may be acquired by
HSBC Finance Corporations Directors and executive officers
through April 1, 2011 pursuant to the satisfaction of
certain conditions.
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(5)
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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 HSBC North America Directors Non-Qualified
Deferred Compensation Plan. The shares included in the table
above were held in American Depository Shares, each of which
represents five HSBC ordinary shares.
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(6)
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Also a Named Executive Officer.
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(7)
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Represents 400 Depositary Shares, each representing one-fortieth
of a share of 6.36% Non-Cumulative Preferred Stock,
Series B.
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268
HSBC Finance Corporation
Item 13. Certain
Relationships and Related Transactions, and Director
Independence.
Transactions with Related Persons During the
fiscal year ended December 31, 2010, 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. Ancona, Burke and Cozza 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:
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compensation paid to directors and executive officers reportable
under rules and regulations promulgated by the Securities and
Exchange Commission;
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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;
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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;
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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;
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transactions where the rates or charges involved are determined
by competitive bids; and
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transactions involving services as a bank depositary of funds,
transfer agent, registrar, trustee under a trust indenture or
similar services.
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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 Board of
Directors. The Board of Directors 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 Board of
Directors is required for the approval or ratification of any
Transaction with a Related Person. The Board of Directors may
approve or ratify a Transaction with a Related Person if the
Board of Directors 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 Board of Directors 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 to an unaffiliated third-party under
the same or similar
269
HSBC Finance Corporation
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 Board of Directors 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.us.hsbc.com
or upon written request made to HSBC Finance Corporation, 26525
North Riverwoods Boulevard, Mettawa, Illinois 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 and Risk Committee
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Chair and all voting members
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Compliance Committee
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A majority of all members
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Executive Committee
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100% independent directors, the Chairman and Chief Executive
Officer
|
Messrs. Herdman, Lorch, Minzberg, Ms. Perez and
Ms. Renda are considered to be independent directors.
Mr. Booker served as Chief Executive Officer of HSBC
Finance Corporation until July 12, 2010 and, since
July 31, 2010, has served as Chief Executive Officer of
HSBC North America. Because of the positions held by
Mr. Booker, he is not considered to be an independent
director. Brendan P. McDonagh was a director until July 2010. He
was also a director of HSBC North America and a Group Managing
Director at HSBC. Because of the positions held by
Mr. McDonagh, he was not considered to be an independent
director.
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, 2010 and 2009
was $4,396,000 and $5,357,000, 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, 2010
and 2009 was $248,000 and $383,000, respectively. Audit related
services include employee benefit plan audits, and audit or
attestation services not required by statute or regulation.
Tax Fees. There were no fees billed by KPMG
LLP for tax related services for the fiscal years ended
December 31, 2010 and 2009. 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 over assessment of
interest
and/or
penalties.
270
HSBC Finance Corporation
All Other Fees. 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, 2010 and December 31, 2009.
All of the fees described above were approved by HSBC Finance
Corporations Audit and Risk Committee.
The Audit and Risk Committee has a written policy that requires
pre-approval of all services to be provided by KPMG LLP,
including audit, audit-related, tax and all other services.
Pursuant to the policy, the Audit and Risk Committee annually
pre-approves the audit fee and terms of the audit services
engagement. The Audit and Risk Committee also approves a
specified list of audit, audit-related, tax and permissible
non-audit services deemed to be routine and recurring services.
Any service not included on this list must be submitted to the
Audit and Risk Committee for pre-approval. On an interim basis,
any proposed engagement that does not fit within the definition
of a pre-approved service may be presented to the Chair of the
Audit and Risk Committee for approval and to the full Audit and
Risk Committee at its next regular meeting.
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 28, 2011 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 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, Exhibit 3.1(b) of HSBC Finance
Corporations Current Report on
Form 8-K
filed December 19, 2005 and Exhibit 3.1 of HSBC
Finance Corporations Current Report on
Form 8-K
filed November 30, 2010).
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3
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(ii)
|
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Bylaws of HSBC Finance Corporation, as amended May 13, 2010
(incorporated by reference to Exhibit 3.1 of HSBC Finance
Corporations Current Report on
Form 8-K
filed on May 17, 2010).
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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).
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271
HSBC Finance Corporation
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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 (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
|
.3
|
|
Amended and Restated Indenture for Senior Debt Securities dated
as of December 15, 2004 between HSBC Finance (successor to
Household Finance Corporation) and The Bank of New York Mellon
Trust Company, N.A. (formerly 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
|
.4
|
|
Amended and Restated Indenture for Senior Debt Securities dated
as of December 15, 2004 between HSBC Finance (successor to
Household Finance Corporation) and The Bank of New York Mellon
Trust Company, N.A. (as successor to 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
|
.5
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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
|
.6
|
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Indenture for Senior Subordinated Debt Securities dated
December 17, 2008 between HSBC Finance and The Bank of New
York Mellon Trust Company, N.A., as Trustee, as amended and
supplemented (incorporated by reference to Exhibit 4.2 to
the companys Registration Statement on
Form S-3,
Registration
No. 333-156219
and Exhibit 4.3 to the companys Current Report on
Form 8-K
dated December 3, 2010 and filed with the Securities and
Exchange Commission on December 9, 2010).
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4
|
.7
|
|
Amended and Restated Indenture for Senior Debt Securities dated
as of December 15, 2004 between HSBC Finance Corporation
(successor to Household Finance Corporation) and The Bank of New
York Mellon Trust Company, N.A., as Trustee, amended and
restating the Indenture for Senior Debt Securities dated
December 1, 1993 between Household Finance Corporation and
The Bank of New York Mellon Trust Company, N.A. (as
successor to JPMorgan Chase Bank, N.A., as successor to The
Chase Manhattan Bank (National Association)), as Trustee
(incorporated by reference to Exhibit 4.2 to Amendment
No. 1 to the Companys Registration Statement on
Form S-3,
Registration
No. 333-120495).
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272
HSBC Finance Corporation
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4
|
.8
|
|
Amended and Restated Indenture for Senior Debt Securities dated
as of December 15, 2004 between HSBC Finance Corporation
(successor to Household Finance Corporation) and The Bank of New
York Mellon Trust Company, N.A., as Trustee, amended and
restating the Indenture for Senior Debt Securities dated
March 1, 2001 and amended and restated April 30, 2003,
between Household Finance Corporation and The Bank of New York
Mellon Trust Company, N.A. (as successor to JPMorgan Chase
Bank, N.A., formerly known as The Chase Manhattan Bank), as
Trustee (incorporated by reference to Exhibit 4.2 to
Amendment No. 1 to the Companys Registration
Statement on
Form S-3,
Registration
No. 333-120496).
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4
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.9
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The principal amount of debt outstanding under each other
instrument defining of 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 the signature page 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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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.
273
HSBC Finance Corporation
Index
Accounting:
new pronouncements 115, 144
policies (critical) 42
policies (significant) 135
Account management policies and practices 87
Assets:
by business segment 207
fair value of financial assets 212
fair value measurements 211
nonperforming 86, 159
Audit and risk committee 106, 234
Auditors report:
financial statement opinion 128
internal control opinion 129
Balance sheet (consolidated) 131
Basel II 11, 17, 37
Basel III 12
Basis of reporting 38, 135
Business:
consolidated performance review 29
focus 27
operations 7
organization history 4
Capital:
2011 funding strategy 100
common equity movements 99
consolidated statement of changes 132
selected capital ratios 100
Cards and Retail Services business segment 7, 64, 203
Cash flow (consolidated) 133
Cautionary statement regarding forward-looking statements 13
Committees 231
Competition 13
Compliance risk 112
Consumer business segment 8, 68, 203
Contingent liabilities:
critical accounting policy 47
litigation 218
Controls and procedures 224
Corporate governance and controls 13, 231
Customers 7
Credit quality 36, 71
Credit risk:
accounting policy 137
concentration 95, 221
critical accounting policy 42
management 107
Critical accounting policies and estimates 42
Current environment 25
Deferred tax assets 47, 179
Derivatives:
accounting policy 141
cash flow hedges 174
critical accounting policy 45
fair value hedges 174
income (expense) 58
non-qualifying hedges 175
notional value 177
Directors:
biographies 224
board of directors 224
executive 228
compensation (executives) 247
responsibilities 231
Discontinued operations 145
Employees:
compensation and benefits 247
number of 6
Equity:
consolidated statement of changes 132
ratios 100
Equity securities
available-for-sale
153
274
HSBC Finance Corporation
Estimates and assumptions 42, 136
Executive overview 25
Fair value measurements:
assets and liabilities recorded at fair value on a
recurring basis 213
assets and liabilities recorded at fair value on a
non-recurring basis 215
control over valuation process 103
financial instruments 211
hierarchy 104
transfers into/out of level one and two 105, 214
transfers into/out of level two and three 105, 214
valuation techniques 215
Fee income 59
Financial highlights metrics 23
Financial liabilities:
designated at fair value 171
fair value of financial liabilities 213
Forward looking statements 14
Funding 6, 36, 96
Future prospects 37
Gain (loss) from financial instruments designated at
fair value 59, 171
Geographic concentration of receivables 95, 221
Goodwill:
accounting policy 141
critical accounting policy 44
Impairment:
accounting policy 141
available-for-sale
securities 153
credit losses 31, 54, 163
critical accounting policy 44
nonperforming receivables 86, 159
Income taxes:
accounting policy 143
critical accounting policy deferred taxes 47
expense 177
Insurance:
policyholders benefits expense 61
revenue 57
Intangible assets:
accounting policy 141
critical accounting policy 44
Internal control 224
Interest income:
net interest income 52
sensitivity 111
Key performance indicators 23
Legal proceedings 22, 218
Liabilities:
commercial paper 98, 168
commitments, lines of credit 98, 168
financial liabilities designated at fair value 171
long-term debt 98, 169
Lease commitments 101, 218
Liquidity and capital resources 96
Liquidity risk 108
Litigation 22, 218
Loans and advances see Receivables
Loan impairment charges see Provision for
credit losses
Market risk 109
Mortgage lending products 48, 157
Net interest income 52
New accounting pronouncements adopted 144
New accounting pronouncements to be adopted in
future periods 115
Off balance sheet arrangements 102
Operating expenses 60
Operational risk 111
Other revenues 57
Pension and other postretirement benefits:
accounting policy 142
Performance, developments and trends 29
275
HSBC Finance Corporation
Profit (loss) before tax:
by segment IFRSs management basis 207
consolidated 130
Properties 22
Property, plant and equipment:
accounting policy 140
Provision for credit losses 31, 54
Ratios:
capital 100
charge-off (net) 82
credit loss reserve related 72
earnings to fixed charges Exhibit 12
efficiency 35, 62
financial 23
Re-aged receivables 94
Real estate owned 51
Receivables:
by category 48, 157
by charge-off (net) 82
by delinquency 79
geographic concentration 95, 221
held for sale 165
modified
and/or
re-aged 90
nonperforming 86, 159
overall review 48
portfolio sales to HSBC Bank USA 198
risk concentration 95, 221
troubled debt restructures 32, 87, 160
Reconciliation to U.S. GAAP financial measures 125
Reconciliation of U.S. GAAP results to IFRSs 39
Refreshed
loan-to-value
49
Regulation 9
Related party transactions 197
Reputational risk 113
Results of operations 52
Risks and uncertainties 14
Risk elements in the loan portfolio by product 221
Risk factors 14
Risk management:
credit 107
compliance 112
liquidity 108
market 109
operational 111
reputational 113
strategic 114
Securities:
fair value 153, 213
maturity analysis 156
Segment results IFRSs management basis:
card and retail services 64, 203
consumer 68, 203
All Other grouping 203
overall summary 63, 203
Selected financial data 23
Senior management:
biographies 228
Sensitivity:
projected net interest income 111
Share-based payments:
accounting policy 142
Statement of changes in shareholders equity 132
Statement of changes in comprehensive income (loss) 132
Statement of income (loss) 130
Strategic initiatives and focus 27, 148
Strategic risk 114
Table of contents 2
Tangible common equity to tangible managed assets 100, 126
Tax expense 177
Troubled debt restructures 32, 87, 160
Unresolved staff comments 22
Variable interest entities 209
276
HSBC Finance Corporation
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
28th day of February, 2011.
HSBC FINANCE CORPORATION
Patrick J. Burke
Chief Executive Officer
Each person whose signature appears below constitutes and
appoints P. D. Schwartz and M. J. Forde as
his/her true
and lawful attorneys-in-fact and agents, 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 attorneys-in-fact and agents 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 28th day of February, 2011.
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Signature
|
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Title
|
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/s/ (P.
J. BURKE)
(P.
J. Burke)
|
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Chief Executive Officer
(as Principal Executive Officer)
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/s/ (R.
K. HERDMAN)
(R.
K. Herdman)
|
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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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|
/s/ (N.
S. K. BOOKER)
(N.
S. K. Booker)
|
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Chairman and Director
|
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/s/ (S.
MINZBERG)
(S.
Minzberg)
|
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Director
|
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|
/s/ (B.
R. PEREZ)
(B.
R. Perez)
|
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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/ (M.
A. REEVES)
(M.
A. Reeves)
|
|
Executive Vice President and Chief Financial Officer
(as Principal Financial Officer)
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/s/ (E.
K. FERREN)
(E.
K. Ferren)
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Executive Vice President and Chief Accounting Officer
(as Principal Accounting Officer)
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277
Exhibit Index
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3
|
(i)
|
|
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, Exhibit 3.1(b) of HSBC Finance
Corporations Current Report on
Form 8-K
filed December 19, 2005 and Exhibit 3.1 of HSBC
Finance Corporations Current Report on
Form 8-K
filed November 30, 2010).
|
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3
|
(ii)
|
|
Bylaws of HSBC Finance Corporation, as amended May 13, 2010
(incorporated by reference to Exhibit 3.1 of HSBC Finance
Corporations Current Report on
Form 8-K
filed on May 17, 2010).
|
|
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 (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
|
.3
|
|
Amended and Restated Indenture for Senior Debt Securities dated
as of December 15, 2004 between HSBC Finance (successor to
Household Finance Corporation) and The Bank of New York Mellon
Trust Company, N.A. (formerly 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
|
.4
|
|
Amended and Restated Indenture for Senior Debt Securities dated
as of December 15, 2004 between HSBC Finance (successor to
Household Finance Corporation) and The Bank of New York Mellon
Trust Company, N.A. (as successor to 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
|
.5
|
|
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
|
.6
|
|
Indenture for Senior Subordinated Debt Securities dated
December 17, 2008 between HSBC Finance and The Bank of New
York Mellon Trust Company, N.A., as Trustee, as amended and
supplemented (incorporated by reference to Exhibit 4.2 to
the companys Registration Statement on
Form S-3,
Registration
No. 333-156219
and Exhibit 4.3 to the companys Current Report on
Form 8-K
dated December 3, 2010 and filed with the Securities and
Exchange Commission on December 9, 2010).
|
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4
|
.7
|
|
Amended and Restated Indenture for Senior Debt Securities dated
as of December 15, 2004 between HSBC Finance Corporation
(successor to Household Finance Corporation) and The Bank of New
York Mellon Trust Company, N.A., as Trustee, amended and
restating the Indenture for Senior Debt Securities dated
December 1, 1993 between Household Finance Corporation and
The Bank of New York Mellon Trust Company, N.A. (as
successor to JPMorgan Chase Bank, N.A., as successor to The
Chase Manhattan Bank (National Association)), as Trustee
(incorporated by reference to Exhibit 4.2 to Amendment
No. 1 to the Companys Registration Statement on
Form S-3,
Registration
No. 333-120495).
|
|
4
|
.8
|
|
Amended and Restated Indenture for Senior Debt Securities dated
as of December 15, 2004 between HSBC Finance Corporation
(successor to Household Finance Corporation) and The Bank of New
York Mellon Trust Company, N.A., as Trustee, amended and
restating the Indenture for Senior Debt Securities dated
March 1, 2001 and amended and restated April 30, 2003,
between Household Finance Corporation and The Bank of New York
Mellon Trust Company, N.A. (as successor to JPMorgan Chase
Bank, N.A., formerly known as The Chase Manhattan Bank), as
Trustee (incorporated by reference to Exhibit 4.2 to
Amendment No. 1 to the Companys Registration
Statement on
Form S-3,
Registration
No. 333-120496).
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278
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|
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4
|
.9
|
|
The principal amount of debt outstanding under each other
instrument defining of 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
|
|
|
Consent of KPMG LLP, Independent Registered Public Accounting
Firm.
|
|
24
|
|
|
Power of Attorney (included on the signature page 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.
|
279