e10vq
UNITED STATES SECURITIES
AND
EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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(Mark One)
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31,
2011
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
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Commission file number 1-8198
HSBC FINANCE
CORPORATION
(Exact name of registrant as
specified in its charter)
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Delaware
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86-1052062
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(State of
Incorporation)
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(I.R.S. Employer Identification
No.)
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26525 North Riverwoods Boulevard, Mettawa, Illinois
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60045
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(Address of principal executive offices)
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(Zip Code)
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(224) 544-2000
Registrants telephone
number, including area code
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 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
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No x
As of April 30, 2011, there were 66 shares of the
registrants common stock outstanding, all of which are
owned by HSBC Investments (North America) Inc.
HSBC
FINANCE CORPORATION
FORM 10-Q
TABLE OF CONTENTS
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Part/Item No.
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Page
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3
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4
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5
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6
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7
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52
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52
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61
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64
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67
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68
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74
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78
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92
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96
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98
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101
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102
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102
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Part II
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102
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102
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103
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105
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EX-12 |
EX-31 |
EX-32 |
2
HSBC
Finance Corporation
Part I.
FINANCIAL INFORMATION
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Three Months Ended March 31,
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2011
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2010
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(in millions)
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Finance and other interest income
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$
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1,596
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$
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1,945
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Interest expense on debt held by:
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HSBC affiliates
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38
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39
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Non-affiliates
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636
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779
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Interest expense
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674
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818
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Net interest income
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922
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1,127
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Provision for credit losses
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782
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1,864
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Net interest income (loss) after provision for credit
losses
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140
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(737
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)
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Other revenues:
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Insurance revenue
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60
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68
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Investment income
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25
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27
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Derivative related income (expense)
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34
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(102
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)
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Gain (loss) on debt designated at fair value and related
derivatives
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(29
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)
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133
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Fee income
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46
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77
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Enhancement services revenue
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104
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103
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Gain on receivable sales to HSBC affiliates
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113
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116
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Servicing and other fees from HSBC affiliates
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159
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174
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Other income
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13
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5
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Total other revenues
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525
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601
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Operating expenses:
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Salaries and employee benefits
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129
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165
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Occupancy and equipment expenses, net
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24
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28
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Other marketing expenses
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85
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55
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Real estate owned expenses
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106
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39
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Other servicing and administrative expenses
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167
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218
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Support services from HSBC affiliates
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291
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276
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Amortization of intangibles
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34
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39
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Policyholders benefits
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41
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42
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Total operating expenses
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877
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862
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Loss from continuing operations before income tax
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(212
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)
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(998
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Income tax benefit
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193
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352
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Loss from continuing operations
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(19
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)
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(646
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)
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Discontinued Operations (Note 2):
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Income (loss) from discontinued operations before income tax
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(4
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)
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66
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Income tax benefit (expense)
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2
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(23
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)
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Income (loss) from discontinued operations
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(2
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43
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Net loss
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$
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(21
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)
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$
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(603
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)
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The accompanying notes are an integral part of the consolidated
financial statements.
3
HSBC Finance Corporation
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March 31,
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December 31,
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2011
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2010
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(in millions,
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except share data)
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Assets
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Cash
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$
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169
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$
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175
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Interest bearing deposits with banks
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1,013
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1,016
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Securities purchased under agreements to resell
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5,170
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4,311
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Securities
available-for-sale
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3,399
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3,371
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Receivables, net (including $6.1 billion and
$6.3 billion at March 31, 2011 and December 31,
2010, respectively, collateralizing long-term debt)
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58,689
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61,333
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Receivables held for sale
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5
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4
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Intangible assets, net
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571
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605
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Properties and equipment, net
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194
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202
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Real estate owned
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847
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962
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Derivative financial assets
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4
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75
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Deferred income taxes, net
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2,349
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2,491
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Other assets
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2,190
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1,791
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Assets of discontinued operations
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12
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196
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Total assets
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$
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74,612
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$
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76,532
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Liabilities
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Debt:
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Due to affiliates (including $448 million and
$436 million at March 31, 2011 and December 31,
2010, respectively, carried at fair value)
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$
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8,279
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$
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8,255
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Commercial paper
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3,750
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3,156
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Long-term debt (including $19.0 billion and
$20.8 billion at March 31, 2011 and December 31,
2010 carried at fair value and $3.9 billion and
$4.1 billion at March 31, 2011 and December 31,
2010, respectively, collateralized by receivables)
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52,035
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54,616
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Total debt
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64,064
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66,027
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Insurance policy and claim reserves
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999
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982
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Derivative related liabilities
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15
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2
|
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Liability for postretirement benefits
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263
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|
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|
265
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Other liabilities
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1,537
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1,519
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Liabilities of discontinued operations
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10
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17
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Total liabilities
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66,888
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68,812
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Shareholders equity
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|
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Redeemable preferred stock:
|
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Series B (1,501,100 shares authorized, $0.01 par
value, 575,000 shares issued)
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575
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575
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Series C (1,000 shares authorized, $0.01 par
value, 1,000 shares issued)
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1,000
|
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|
1,000
|
|
Common shareholders equity:
|
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Common stock, $0.01 par value, 100 shares authorized,
65 shares issued at March 31, 2011 and
December 31, 2010
|
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-
|
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|
|
-
|
|
Additional paid-in capital
|
|
|
23,321
|
|
|
|
23,321
|
|
Accumulated deficit
|
|
|
(16,740
|
)
|
|
|
(16,685
|
)
|
Accumulated other comprehensive loss
|
|
|
(432
|
)
|
|
|
(491
|
)
|
|
|
|
|
|
|
|
|
|
Total common shareholders equity
|
|
|
6,149
|
|
|
|
6,145
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
7,724
|
|
|
|
7,720
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
74,612
|
|
|
$
|
76,532
|
|
|
|
|
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The accompanying notes are an integral part of the consolidated
financial statements.
4
HSBC Finance Corporation
|
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Three Months Ended March 31,
|
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2011
|
|
|
2010
|
|
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(in millions)
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|
|
Preferred stock
|
|
|
|
|
|
|
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|
Balance at beginning and end of period
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$
|
1,575
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$
|
575
|
|
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Common shareholders equity
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|
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Additional paid-in capital
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Balance at beginning of period
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23,321
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23,119
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Employee benefit plans, including transfers and other
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-
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|
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|
1
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Balance at end of period
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23,321
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23,120
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Accumulated deficit
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Balance at beginning of period
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(16,685
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)
|
|
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(14,732
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)
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Net loss
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(21
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)
|
|
|
(603
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)
|
Dividends:
|
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Preferred stock
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(34
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)
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|
|
(9
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)
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|
|
|
|
|
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Balance at end of period
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|
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(16,740
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)
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|
|
(15,344
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)
|
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|
|
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|
|
|
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Accumulated other comprehensive loss
|
|
|
|
|
|
|
|
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Balance at beginning of period
|
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|
(491
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)
|
|
|
(583
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)
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Net change in unrealized gains (losses), net of tax, on:
|
|
|
|
|
|
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Derivatives designated as cash flow hedges
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|
65
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|
|
|
(7
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)
|
Securities
available-for-sale,
not
other-than-temporarily
impaired
|
|
|
(11
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)
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11
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Other-than-temporarily
impaired debt securities
available-for-sale(1)
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|
-
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1
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Postretirement benefit plan adjustment, net of tax
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|
-
|
|
|
|
1
|
|
Foreign currency translation adjustments
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|
|
5
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|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax
|
|
|
59
|
|
|
|
2
|
|
|
|
|
|
|
|
|
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|
Balance at end of period
|
|
|
(432
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)
|
|
|
(581
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)
|
|
|
|
|
|
|
|
|
|
Total common shareholders equity at end of
period
|
|
$
|
6,149
|
|
|
$
|
7,195
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(21
|
)
|
|
$
|
(603
|
)
|
Other comprehensive income
|
|
|
59
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
38
|
|
|
$
|
(601
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
During both the three months ended
March 31, 2011 and 2010,
other-than-temporary
impairment (OTTI) losses on
available-for-sale
securities totaling less than $1 million were recognized in
other revenues. There were no losses in either period in the
non-credit component of such impaired securities reflected in
accumulated other comprehensive income.
|
The accompanying notes are an integral part of the consolidated
financial statements.
5
HSBC Finance Corporation
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(21
|
)
|
|
$
|
(603
|
)
|
Income (loss) from discontinued operations
|
|
|
(2
|
)
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(19
|
)
|
|
|
(646
|
)
|
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
|
|
|
|
|
|
|
|
|
Provision for credit losses
|
|
|
782
|
|
|
|
1,864
|
|
Gain on receivable sales to HSBC affiliates
|
|
|
(113
|
)
|
|
|
(116
|
)
|
Loss on sale of real estate owned, including lower of cost or
market adjustments
|
|
|
62
|
|
|
|
10
|
|
Insurance policy and claim reserves
|
|
|
(1
|
)
|
|
|
(12
|
)
|
Depreciation and amortization
|
|
|
42
|
|
|
|
44
|
|
Mark-to-market
on debt designated at fair value and related derivatives
|
|
|
194
|
|
|
|
78
|
|
Originations of loans held for sale
|
|
|
(7,906
|
)
|
|
|
(7,834
|
)
|
Sales and collections on loans held for sale
|
|
|
8,018
|
|
|
|
7,950
|
|
Foreign exchange and derivative movements on long-term debt and
net change in non-FVO related derivative assets and liabilities
|
|
|
319
|
|
|
|
(844
|
)
|
Net change in other assets
|
|
|
(248
|
)
|
|
|
1,446
|
|
Net change in other liabilities
|
|
|
17
|
|
|
|
(90
|
)
|
Other, net
|
|
|
108
|
|
|
|
167
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) operating activities-continuing
operations
|
|
|
1,255
|
|
|
|
2,017
|
|
Cash provided by (used in) operating activities-discontinued
operations
|
|
|
175
|
|
|
|
240
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
1,430
|
|
|
|
2,257
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Securities:
|
|
|
|
|
|
|
|
|
Purchased
|
|
|
(213
|
)
|
|
|
(304
|
)
|
Matured
|
|
|
87
|
|
|
|
136
|
|
Sold
|
|
|
110
|
|
|
|
74
|
|
Net change in short-term securities
available-for-sale
|
|
|
(25
|
)
|
|
|
111
|
|
Net change in securities purchased under agreements to resell
|
|
|
(859
|
)
|
|
|
(2,336
|
)
|
Net change in interest bearing deposits with banks
|
|
|
3
|
|
|
|
7
|
|
Receivables:
|
|
|
|
|
|
|
|
|
Net (originations) collections
|
|
|
1,355
|
|
|
|
1,643
|
|
Purchases and related premiums
|
|
|
(11
|
)
|
|
|
(11
|
)
|
Proceeds from sales of real estate owned
|
|
|
500
|
|
|
|
293
|
|
Properties and equipment:
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
(1
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) investing activities-continuing
operations
|
|
|
946
|
|
|
|
(392
|
)
|
Cash provided by (used in) investing activities-discontinued
operations
|
|
|
-
|
|
|
|
1,069
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
946
|
|
|
|
677
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
Net change in commercial paper
|
|
|
594
|
|
|
|
(591
|
)
|
Net change in due to affiliates
|
|
|
12
|
|
|
|
(20
|
)
|
Long-term debt issued
|
|
|
162
|
|
|
|
119
|
|
Long-term debt retired
|
|
|
(3,106
|
)
|
|
|
(2,359
|
)
|
Insurance:
|
|
|
|
|
|
|
|
|
Policyholders benefits paid
|
|
|
(24
|
)
|
|
|
(19
|
)
|
Cash received from policyholders
|
|
|
14
|
|
|
|
15
|
|
Shareholders dividends
|
|
|
(34
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities-continuing
operations
|
|
|
(2,382
|
)
|
|
|
(2,864
|
)
|
Net cash provided by (used in) financing activities-discontinued
operations
|
|
|
-
|
|
|
|
(192
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(2,382
|
)
|
|
|
(3,056
|
)
|
Net change in cash
|
|
|
(6
|
)
|
|
|
(122
|
)
|
Cash at beginning of
period(1)
|
|
|
175
|
|
|
|
311
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
169
|
|
|
$
|
189
|
|
|
|
|
|
|
|
|
|
|
Supplemental Noncash Investing and Capital Activities:
|
|
|
|
|
|
|
|
|
Fair value of properties added to real estate owned
|
|
$
|
448
|
|
|
$
|
372
|
|
|
|
|
(1) |
|
Cash at beginning of period
includes $22 million for discontinued operations as of
January 1, 2010.
|
The accompanying notes are an integral part of the consolidated
financial statements.
6
HSBC
Finance Corporation
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
Organization
and Basis of Presentation
|
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). The accompanying unaudited
interim consolidated financial statements of HSBC Finance
Corporation and its subsidiaries have been prepared in
accordance with accounting principles generally accepted in the
United States of America (U.S. GAAP) for
interim financial information and with the instructions to
Form 10-Q
and Article 10 of
Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
all normal and recurring adjustments considered necessary for a
fair presentation of financial position, results of operations
and cash flows for the interim periods have been made. HSBC
Finance Corporation and its subsidiaries may also be referred to
in this
Form 10-Q
as we, us or our. These
unaudited interim consolidated financial statements should be
read in conjunction with our Annual Report on
Form 10-K
for the year ended December 31, 2010 (the 2010
Form 10-K).
Certain reclassifications have been made to prior period amounts
to conform to the current period presentation.
The consolidated financial statements have been prepared on the
basis that we will continue as a going concern. Such assertion
contemplates the significant losses 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 our operations.
The preparation of financial statements in conformity with
U.S. GAAP 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 noted, information
included in these notes to the consolidated financial statements
relates to continuing operations for all periods presented. See
Note 2, Discontinued Operations, for further
details. Interim results should not be considered indicative of
results in future periods.
|
|
2.
|
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 is
reported in discontinued operations. During the fourth quarter
of 2010 we recorded closure costs of $25 million which
primarily reflect severance costs
7
HSBC Finance Corporation
and the write off of certain pre-paid assets which are included
as a component of loss from discontinued operations. At
March 31, 2011 and December 31, 2010, the liability
associated with these closure costs totaled $4 million and
$5 million, respectively.
The following summarizes the operating results of our TFS
business for the periods presented:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Net interest income and other
revenues(1)
|
|
$
|
1
|
|
|
$
|
84
|
|
Income (loss) from discontinued operations before income tax
|
|
|
(2
|
)
|
|
|
56
|
|
|
|
|
(1) |
|
Interest expense, which is included
as a component of net interest income, was 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 March 31, 2011 and December 31, 2010 which
are reported as Assets of discontinued operations and
Liabilities of discontinued operations in our consolidated
balance sheet.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Deferred income tax, net
|
|
$
|
1
|
|
|
$
|
3
|
|
Other assets
|
|
|
4
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
Assets of discontinued operations
|
|
$
|
5
|
|
|
$
|
58
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
$
|
4
|
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
Liabilities of discontinued operations
|
|
$
|
4
|
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
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
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 is reported as
discontinued operations.
8
HSBC Finance Corporation
The following summarizes the operating results of our Auto
Finance business for the periods presented:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Net interest income and other
revenues(1)
|
|
$
|
-
|
|
|
$
|
104
|
|
Income (loss) from discontinued operations before income tax
|
|
|
(2
|
)
|
|
|
10
|
|
|
|
|
(1) |
|
Interest expense, which is included
as a component of net interest income, was 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 March 31, 2011 and December 31,
2010 which are 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 reflect current income taxes receivable
on our Auto Finance business for the 2010 tax year.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Deferred income tax, net
|
|
$
|
2
|
|
|
$
|
4
|
|
Other assets
|
|
|
5
|
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
Assets of discontinued operations
|
|
$
|
7
|
|
|
$
|
138
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
$
|
6
|
|
|
$
|
7
|
|
|
|
|
|
|
|
|
|
|
Liabilities of discontinued operations
|
|
$
|
6
|
|
|
$
|
7
|
|
|
|
|
|
|
|
|
|
|
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
new significant strategic initiatives during the three months
ended March 31, 2011 or the year ended December 31,
2010 related to our continuing operations. While there were a
number of strategic actions undertaken in mid-2007, 2008 and
2009 for our continuing operations as a result of our
evaluations, at December 31, 2010, there was no remaining
restructuring liability for these strategic actions. See
Note 3, Strategic Initiatives, in our 2010
Form 10-K
for further discussion of those actions. Summarized below are
the strategic actions undertaken in 2009 for our continuing
operations as well as information regarding the remaining
restructuring liability related to these actions.
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.
|
9
HSBC Finance Corporation
The following summarizes the changes in the restructure
liability during the three months ended March 31, 2011 and
2010, respectively, relating to actions implemented during 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-Time
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination and
|
|
|
Lease Termination
|
|
|
|
|
|
|
|
|
|
Other Employee
|
|
|
and Associated
|
|
|
|
|
|
|
|
|
|
Benefits(1)
|
|
|
Costs(2)
|
|
|
Other(3)
|
|
|
Total
|
|
|
|
|
|
(in millions)
|
|
|
Three Months Ended March 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring liability at beginning of period
|
|
$
|
4
|
|
|
$
|
6
|
|
|
$
|
-
|
|
|
$
|
10
|
|
Restructuring costs recorded during the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Restructuring costs paid during the period
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
(2
|
)
|
Adjustments to the restructure liability during the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructure liability at end of period
|
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
-
|
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring liability at beginning of period
|
|
$
|
10
|
|
|
$
|
12
|
|
|
$
|
2
|
|
|
$
|
24
|
|
Restructuring costs recorded during the period
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
Restructuring costs paid during the period
|
|
|
(3
|
)
|
|
|
(5
|
)
|
|
|
-
|
|
|
|
(8
|
)
|
Adjustments to the restructure liability during the period
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructure liability at end of period
|
|
$
|
8
|
|
|
$
|
8
|
|
|
$
|
2
|
|
|
$
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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).
|
10
HSBC Finance Corporation
Securities consisted of the following
available-for-sale
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Component
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
of OTTI
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
March 31, 2011
|
|
Cost
|
|
|
Securities
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
(in millions)
|
|
|
U.S. Treasury
|
|
$
|
376
|
|
|
$
|
-
|
|
|
$
|
6
|
|
|
$
|
-
|
|
|
$
|
382
|
|
U.S. government sponsored
enterprises(1)
|
|
|
232
|
|
|
|
-
|
|
|
|
4
|
|
|
|
(1
|
)
|
|
|
235
|
|
U.S. government agency issued or guaranteed
|
|
|
9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9
|
|
Obligations of U.S. states and political subdivisions
|
|
|
32
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
33
|
|
Asset-backed
securities(2)
|
|
|
60
|
|
|
|
(7
|
)
|
|
|
2
|
|
|
|
-
|
|
|
|
55
|
|
U.S. corporate debt
securities(3)
|
|
|
1,696
|
|
|
|
-
|
|
|
|
83
|
|
|
|
(7
|
)
|
|
|
1,772
|
|
Foreign debt
securities(4)
|
|
|
481
|
|
|
|
-
|
|
|
|
17
|
|
|
|
(2
|
)
|
|
|
496
|
|
Equity securities
|
|
|
9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9
|
|
Money market funds
|
|
|
377
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
3,272
|
|
|
|
(7
|
)
|
|
|
113
|
|
|
|
(10
|
)
|
|
|
3,368
|
|
Accrued investment income
|
|
|
31
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
available-for-sale
|
|
$
|
3,303
|
|
|
$
|
(7
|
)
|
|
$
|
113
|
|
|
$
|
(10
|
)
|
|
$
|
3,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Component
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
of OTTI
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
December 31, 2010
|
|
Cost
|
|
|
Securities
|
|
|
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(4)
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $27 million and
$33 million of mortgage-backed securities issued by the
Federal National Mortgage Association and the Federal Home Loan
Mortgage Corporation as of March 31, 2011 and
December 31, 2010, respectively.
|
(2) |
|
Includes $27 and $31 million
of residential mortgage-backed securities at March 31, 2011
and December 31, 2010, respectively.
|
(3) |
|
At March 31, 2011 and
December 31, 2010, the majority of our U.S. corporate debt
securities represent investments in the financial services,
consumer products, healthcare and industrials sectors.
|
(4) |
|
There were no foreign debt
securities issued by the governments of Portugal, Ireland,
Italy, Greece or Spain at March 31, 2011 or
December 31, 2010.
|
11
HSBC Finance Corporation
A summary of gross unrealized losses and related fair values as
of March 31, 2011 and December 31, 2010, 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
|
|
March 31, 2011
|
|
Securities
|
|
|
Losses
|
|
|
Investments
|
|
|
Securities
|
|
|
Losses
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
(dollars are in millions)
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
|
1
|
|
|
$
|
-
|
|
|
$
|
20
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
U.S. government sponsored enterprises
|
|
|
9
|
|
|
|
(1
|
)
|
|
|
89
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
U.S. government agency issued or guaranteed
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Obligations of U.S. states and political subdivisions
|
|
|
7
|
|
|
|
-
|
|
|
|
9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Asset-backed securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
(7
|
)
|
|
|
15
|
|
U.S. corporate debt securities
|
|
|
142
|
|
|
|
(6
|
)
|
|
|
296
|
|
|
|
5
|
|
|
|
(1
|
)
|
|
|
18
|
|
Foreign debt securities
|
|
|
51
|
|
|
|
(2
|
)
|
|
|
116
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Equity Securities
|
|
|
1
|
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
211
|
|
|
$
|
(9
|
)
|
|
$
|
534
|
|
|
|
11
|
|
|
$
|
(8
|
)
|
|
$
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized losses increased slightly during the first
quarter of 2011 primarily due to the impact of higher 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 our reviews, OTTI
of less than $1 million was recognized in earnings on
certain debt securities during the three months ended
March 31, 2011 and 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 less than $1 million and
$1 million during the three months ended March 31,
2011 and 2010, respectively.
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.
12
HSBC Finance Corporation
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 March 31, 2011, approximately 93 percent of our
corporate debt securities are rated A- or better and
approximately 62 percent of our asset-backed securities,
which totaled $55 million are rated AAA. At
December 31, 2010, approximately 92 percent of our
corporate debt securities were rated A- or better and
approximately 66 percent of our asset-backed securities,
which totaled $60 million were rated AAA.
Although OTTI of less than $1 million was recorded in
earnings during the three months ended March 31, 2011 and
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 $110 million and $74 million
during the three months ended March 31, 2011 and 2010,
respectively. We realized gross gains of $3 million during
both the three months ended March 31, 2011 and 2010. We
realized gross losses of less than $1 million during both
the three months ended March 31, 2011 and 2010.
13
HSBC Finance Corporation
Contractual maturities of 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
|
|
|
|
|
March 31, 2011
|
|
1 Year
|
|
|
5 Years
|
|
|
10 Years
|
|
|
10 Years
|
|
|
Total
|
|
|
|
|
|
|
|
|
(dollars are in millions)
|
|
|
|
|
|
U.S. Treasury:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
$
|
151
|
|
|
$
|
224
|
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
376
|
|
Fair value
|
|
|
151
|
|
|
|
230
|
|
|
|
1
|
|
|
|
-
|
|
|
|
382
|
|
Yield(1)
|
|
|
.86
|
%
|
|
|
2.21
|
%
|
|
|
4.96
|
%
|
|
|
-
|
|
|
|
1.67
|
%
|
U.S. government sponsored enterprises:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
$
|
64
|
|
|
$
|
113
|
|
|
$
|
30
|
|
|
$
|
25
|
|
|
$
|
232
|
|
Fair value
|
|
|
64
|
|
|
|
113
|
|
|
|
32
|
|
|
|
26
|
|
|
|
235
|
|
Yield(1)
|
|
|
.27
|
%
|
|
|
1.31
|
%
|
|
|
4.69
|
%
|
|
|
4.75
|
%
|
|
|
1.83
|
%
|
U.S. government agency issued or guaranteed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9
|
|
|
$
|
9
|
|
Fair value
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9
|
|
|
|
9
|
|
Yield(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4.99
|
%
|
|
|
4.99
|
%
|
Obligations of U.S. states and political subdivisions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
$
|
-
|
|
|
$
|
3
|
|
|
$
|
11
|
|
|
$
|
18
|
|
|
$
|
32
|
|
Fair value
|
|
|
-
|
|
|
|
3
|
|
|
|
12
|
|
|
|
18
|
|
|
|
33
|
|
Yield(1)
|
|
|
-
|
|
|
|
4.29
|
%
|
|
|
4.09
|
%
|
|
|
4.06
|
%
|
|
|
4.09
|
%
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
$
|
-
|
|
|
$
|
26
|
|
|
$
|
5
|
|
|
$
|
29
|
|
|
$
|
60
|
|
Fair value
|
|
|
-
|
|
|
|
28
|
|
|
|
5
|
|
|
|
22
|
|
|
|
55
|
|
Yield(1)
|
|
|
-
|
|
|
|
4.85
|
%
|
|
|
6.09
|
%
|
|
|
1.73
|
%
|
|
|
3.43
|
%
|
U.S. corporate debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
$
|
102
|
|
|
$
|
842
|
|
|
$
|
202
|
|
|
$
|
550
|
|
|
$
|
1,696
|
|
Fair value
|
|
|
104
|
|
|
|
881
|
|
|
|
214
|
|
|
|
573
|
|
|
|
1,772
|
|
Yield(1)
|
|
|
4.46
|
%
|
|
|
3.85
|
%
|
|
|
4.96
|
%
|
|
|
5.33
|
%
|
|
|
4.50
|
%
|
Foreign debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
$
|
12
|
|
|
$
|
383
|
|
|
$
|
41
|
|
|
$
|
45
|
|
|
$
|
481
|
|
Fair value
|
|
|
12
|
|
|
|
394
|
|
|
|
42
|
|
|
|
48
|
|
|
|
496
|
|
Yield(1)
|
|
|
3.07
|
%
|
|
|
3.42
|
%
|
|
|
4.17
|
%
|
|
|
6.26
|
%
|
|
|
3.74
|
%
|
|
|
(1) |
Computed by dividing annualized interest by the amortized cost
of respective investment securities.
|
14
HSBC Finance Corporation
Receivables consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Real estate secured:
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
42,066
|
|
|
$
|
43,859
|
|
Second lien
|
|
|
5,150
|
|
|
|
5,477
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
|
47,216
|
|
|
|
49,336
|
|
Credit card
|
|
|
9,249
|
|
|
|
9,897
|
|
Personal non-credit card
|
|
|
6,506
|
|
|
|
7,117
|
|
Commercial and other
|
|
|
26
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
Total receivables
|
|
|
62,997
|
|
|
|
66,383
|
|
HSBC acquisition purchase accounting fair value adjustments
|
|
|
42
|
|
|
|
43
|
|
Accrued finance income
|
|
|
1,455
|
|
|
|
1,521
|
|
Credit loss reserve for owned receivables
|
|
|
(5,710
|
)
|
|
|
(6,491
|
)
|
Unearned credit insurance premiums and claims reserves
|
|
|
(95
|
)
|
|
|
(123
|
)
|
|
|
|
|
|
|
|
|
|
Total receivables, net
|
|
$
|
58,689
|
|
|
$
|
61,333
|
|
|
|
|
|
|
|
|
|
|
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.
Deferred origination fees, excluding MasterCard and Visa annual
fees net of direct lending costs, totaled $290 million and
$304 million at March 31, 2011 and December 31,
2010, 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, totaled $136 million and $134 million at
March 31, 2011 and December 31, 2010, respectively.
At March 31, 2011 and December 31, 2010, we had a net
unamortized premium on our receivables of $220 million and
$254 million, respectively. Unearned income on personal
non-credit card receivables totaled $22 million and
$30 million at March 31, 2011 and December 31,
2010, respectively.
Collateralized funding
transactions Secured financings issued under
our current conduit credit facilities as well as secured
financings previously issued under public trusts with a balance
of $3.9 billion at March 31, 2011 are secured by
$6.1 billion of closed-end real estate secured and credit
card receivables. Secured financings issued under conduit credit
facilities as well as secured financings previously issued under
public trusts with a balance of $4.1 billion at
December 31, 2010 were secured by $6.3 billion of
closed-end real estate secured and credit card receivables.
Age Analysis of Past Due
Receivables The following tables summarize
the past due status of our receivables at March 31, 2011
and December 31, 2010. The aging of past due amounts is
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
15
HSBC Finance Corporation
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
|
|
|
Total
|
|
|
|
|
|
Total
|
|
March 31, 2011
|
|
1 29 days
|
|
|
30 89 days
|
|
|
90+ days
|
|
|
Past Due
|
|
|
Current
|
|
|
Receivables(1)
|
|
|
|
|
|
(in millions)
|
|
|
Real estate secured:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
6,496
|
|
|
$
|
3,761
|
|
|
$
|
5,441
|
|
|
$
|
15,698
|
|
|
$
|
26,368
|
|
|
$
|
42,066
|
|
Second lien
|
|
|
820
|
|
|
|
420
|
|
|
|
341
|
|
|
|
1,581
|
|
|
|
3,569
|
|
|
|
5,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
|
7,316
|
|
|
|
4,181
|
|
|
|
5,782
|
|
|
|
17,279
|
|
|
|
29,937
|
|
|
|
47,216
|
|
Credit card
|
|
|
345
|
|
|
|
272
|
|
|
|
346
|
|
|
|
963
|
|
|
|
8,286
|
|
|
|
9,249
|
|
Personal non-credit card
|
|
|
785
|
|
|
|
441
|
|
|
|
398
|
|
|
|
1,624
|
|
|
|
4,882
|
|
|
|
6,506
|
|
Commercial and other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
26
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables
|
|
$
|
8,446
|
|
|
$
|
4,894
|
|
|
$
|
6,526
|
|
|
$
|
19,866
|
|
|
$
|
43,131
|
|
|
$
|
62,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Days Past Due
|
|
|
Total
|
|
|
|
|
|
Total
|
|
December 31, 2010
|
|
1 29 days
|
|
|
30 89 days
|
|
|
90+ days
|
|
|
Past Due
|
|
|
Current
|
|
|
Receivables(1)
|
|
|
|
|
|
(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.
|
Nonaccrual receivables Nonaccrual receivables and
accruing receivables 90 or more days delinquent are summarized
in the following table.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Nonaccrual receivables:
|
|
|
|
|
|
|
|
|
Real estate
secured(1)(2)
|
|
$
|
5,744
|
|
|
$
|
6,356
|
|
Personal non-credit card
|
|
|
415
|
|
|
|
530
|
|
|
|
|
|
|
|
|
|
|
Total non-accrual receivables
|
|
|
6,159
|
|
|
|
6,886
|
|
Nonaccrual receivables held for sale
|
|
|
5
|
|
|
|
4
|
|
Accruing credit card receivables 90 or more days
delinquent(3)
|
|
|
353
|
|
|
|
447
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming receivables
|
|
$
|
6,517
|
|
|
$
|
7,337
|
|
|
|
|
|
|
|
|
|
|
Credit loss reserves as a percent of nonperforming
receivables-continuing
operations(4)
|
|
|
87.7
|
%
|
|
|
88.5
|
%
|
|
|
|
|
|
|
|
|
|
16
HSBC Finance Corporation
|
|
|
(1) |
|
At March 31, 2011 and
December 31, 2010, nonaccrual real estate secured
receivables includes $4.0 billion and $4.1 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:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
Real estate secured:
|
|
|
|
|
|
|
|
|
Closed-end:
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
5,377
|
|
|
$
|
5,906
|
|
Second lien
|
|
|
257
|
|
|
|
320
|
|
Revolving:
|
|
|
|
|
|
|
|
|
First lien
|
|
|
6
|
|
|
|
6
|
|
Second lien
|
|
|
104
|
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
$
|
5,744
|
|
|
$
|
6,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) |
|
Credit card receivables continue to
accrue interest after they become 90 or more days delinquent,
consistent with industry practice.
|
(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:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
TDR
Loans(1)(2):
|
|
|
|
|
|
|
|
|
Real estate secured:
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
8,546
|
|
|
$
|
8,697
|
|
Second lien
|
|
|
611
|
|
|
|
647
|
|
|
|
|
|
|
|
|
|
|
Total real estate
secured(3)(4)
|
|
|
9,157
|
|
|
|
9,344
|
|
Credit card
|
|
|
392
|
|
|
|
427
|
|
Personal non-credit card
|
|
|
649
|
|
|
|
704
|
|
|
|
|
|
|
|
|
|
|
Total TDR Loans
|
|
$
|
10,198
|
|
|
$
|
10,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Credit loss reserves for TDR Loans:
|
|
|
|
|
|
|
|
|
Real estate secured:
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
1,847
|
|
|
$
|
1,728
|
|
Second lien
|
|
|
249
|
|
|
|
258
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
|
2,096
|
|
|
|
1,986
|
|
Credit card
|
|
|
147
|
|
|
|
154
|
|
Personal non-credit card
|
|
|
366
|
|
|
|
395
|
|
|
|
|
|
|
|
|
|
|
Total credit loss reserves for TDR
Loans(1)(5)
|
|
$
|
2,609
|
|
|
$
|
2,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
TDR Loans are considered to be
impaired loans regardless of accrual status.
|
17
HSBC Finance Corporation
|
|
|
(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:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Real estate secured:
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
9,589
|
|
|
$
|
9,650
|
|
Second lien
|
|
|
663
|
|
|
|
709
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
|
10,252
|
|
|
|
10,359
|
|
Credit card
|
|
|
398
|
|
|
|
434
|
|
Personal non-credit card
|
|
|
651
|
|
|
|
705
|
|
|
|
|
|
|
|
|
|
|
Total TDR Loans
|
|
$
|
11,301
|
|
|
$
|
11,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) |
|
At March 31, 2011 and
December 31, 2010, TDR Loans totaling $1.6 billion and
$1.5 billion, respectively, are recorded at net realizable
value less cost to sell and, therefore, generally do not have
credit loss reserves associated with them.
|
(4) |
|
The following table summarizes real
estate secured TDR Loans for our Mortgage Services and Consumer
Lending businesses:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Mortgage Services
|
|
$
|
3,960
|
|
|
$
|
4,114
|
|
Consumer Lending
|
|
|
5,197
|
|
|
|
5,230
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
$
|
9,157
|
|
|
$
|
9,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5) |
|
Included in credit loss reserves.
|
Additional information relating to TDR Loans is presented in the
table below:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
|
|
Average balance of TDR Loans:
|
|
|
|
|
|
|
|
|
Real estate secured:
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
8,602
|
|
|
$
|
8,781
|
|
Second lien
|
|
|
628
|
|
|
|
719
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
|
9,230
|
|
|
|
9,500
|
|
Credit card
|
|
|
410
|
|
|
|
479
|
|
Personal non-credit card
|
|
|
674
|
|
|
|
741
|
|
|
|
|
|
|
|
|
|
|
Total average balance of TDR Loans
|
|
$
|
10,314
|
|
|
$
|
10,720
|
|
|
|
|
|
|
|
|
|
|
Interest income recognized on TDR Loans:
|
|
|
|
|
|
|
|
|
Real estate secured:
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
97
|
|
|
$
|
103
|
|
Second lien
|
|
|
8
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
|
105
|
|
|
|
114
|
|
Credit card
|
|
|
9
|
|
|
|
16
|
|
Personal non-credit card
|
|
|
13
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
Total interest income recognized on TDR Loans
|
|
$
|
127
|
|
|
$
|
141
|
|
|
|
|
|
|
|
|
|
|
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.
18
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
|
Dollars of
|
|
|
Delinquency
|
|
|
Dollars of
|
|
|
Delinquency
|
|
|
|
Delinquency
|
|
|
Ratio
|
|
|
Delinquency
|
|
|
Ratio
|
|
|
|
|
|
|
|
|
(dollars are in millions)
|
|
|
|
|
|
Real estate secured:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
6,537
|
|
|
|
15.54
|
%
|
|
$
|
7,504
|
|
|
|
17.11
|
%
|
Second lien
|
|
|
521
|
|
|
|
10.14
|
|
|
|
667
|
|
|
|
12.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
|
7,058
|
|
|
|
14.95
|
|
|
|
8,171
|
|
|
|
16.56
|
|
Credit card
|
|
|
481
|
|
|
|
5.20
|
|
|
|
612
|
|
|
|
6.18
|
|
Personal non-credit card
|
|
|
596
|
|
|
|
9.16
|
|
|
|
779
|
|
|
|
10.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,135
|
|
|
|
12.92
|
%
|
|
$
|
9,562
|
|
|
|
14.41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 March 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate secured
|
|
$
|
41,467
|
|
|
$
|
5,749
|
|
|
$
|
-
|
|
|
$
|
47,216
|
|
Credit cards
|
|
|
8,896
|
|
|
|
-
|
|
|
|
353
|
|
|
|
9,249
|
|
Personal non-credit card
|
|
|
6,091
|
|
|
|
415
|
|
|
|
-
|
|
|
|
6,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
56,454
|
|
|
$
|
6,164
|
|
|
$
|
353
|
|
|
$
|
62,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
Concentrations of Credit Risk 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.
|
19
HSBC Finance Corporation
|
|
|
|
|
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 March 31, 2011 and
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in billions)
|
|
|
Interest-only loans
|
|
$
|
1.2
|
|
|
$
|
1.3
|
|
ARM
loans(1)(2)
|
|
|
7.0
|
|
|
|
7.5
|
|
Stated income loans
|
|
|
2.5
|
|
|
|
2.7
|
|
|
|
|
(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 both March 31, 2011 and December 31, 2010,
interest-only, ARM and stated income loans comprised
18 percent of real estate secured receivables, including
receivables held for sale.
An analysis of credit loss reserves was as follows:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Credit loss reserves at beginning of period
|
|
$
|
6,491
|
|
|
$
|
9,091
|
|
Provision for credit losses
|
|
|
782
|
|
|
|
1,864
|
|
Charge-offs
|
|
|
(1,760
|
)
|
|
|
(2,870
|
)
|
Recoveries
|
|
|
197
|
|
|
|
180
|
|
|
|
|
|
|
|
|
|
|
Credit loss reserves at end of period
|
|
$
|
5,710
|
|
|
$
|
8,265
|
|
|
|
|
|
|
|
|
|
|
20
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 three months ended March 31, 2011 and
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Secured
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Credit
|
|
|
Personal Non-
|
|
|
Comml
|
|
|
|
|
|
|
Lien
|
|
|
Lien
|
|
|
Card
|
|
|
Credit Card
|
|
|
and Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit loss reserve balances at beginning of period
|
|
$
|
3,355
|
|
|
$
|
832
|
|
|
$
|
978
|
|
|
$
|
1,326
|
|
|
$
|
-
|
|
|
$
|
6,491
|
|
Provision for credit losses
|
|
|
585
|
|
|
|
105
|
|
|
|
74
|
|
|
|
18
|
|
|
|
-
|
|
|
|
782
|
|
Charge-offs
|
|
|
(783
|
)
|
|
|
(260
|
)
|
|
|
(343
|
)
|
|
|
(374
|
)
|
|
|
-
|
|
|
|
(1,760
|
)
|
Recoveries
|
|
|
10
|
|
|
|
17
|
|
|
|
56
|
|
|
|
114
|
|
|
|
-
|
|
|
|
197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(773
|
)
|
|
|
(243
|
)
|
|
|
(287
|
)
|
|
|
(260
|
)
|
|
|
-
|
|
|
|
(1,563
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit loss reserve balance at end of period
|
|
$
|
3,167
|
|
|
$
|
694
|
|
|
$
|
765
|
|
|
$
|
1,084
|
|
|
$
|
-
|
|
|
$
|
5,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
1,305
|
|
|
$
|
442
|
|
|
$
|
618
|
|
|
$
|
718
|
|
|
$
|
-
|
|
|
$
|
3,083
|
|
Ending balance: individually evaluated for
impairment(1)
|
|
|
1,847
|
|
|
|
249
|
|
|
|
147
|
|
|
|
366
|
|
|
|
-
|
|
|
|
2,609
|
|
Ending balance: loans acquired with deteriorated credit quality
|
|
|
15
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total credit loss reserves
|
|
$
|
3,167
|
|
|
$
|
694
|
|
|
$
|
765
|
|
|
$
|
1,084
|
|
|
$
|
-
|
|
|
$
|
5,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
29,747
|
|
|
$
|
4,440
|
|
|
$
|
8,857
|
|
|
$
|
5,857
|
|
|
$
|
26
|
|
|
$
|
48,927
|
|
Individually evaluated for
impairment(1)
|
|
|
6,986
|
|
|
|
598
|
|
|
|
392
|
|
|
|
649
|
|
|
|
-
|
|
|
|
8,625
|
|
Receivables carried at net realizable value
|
|
|
5,299
|
|
|
|
106
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,405
|
|
Receivables acquired with deteriorated credit quality
|
|
|
34
|
|
|
|
6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables
|
|
$
|
42,066
|
|
|
$
|
5,150
|
|
|
$
|
9,249
|
|
|
$
|
6,506
|
|
|
$
|
26
|
|
|
$
|
62,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit loss reserve balances at beginning of period
|
|
$
|
3,997
|
|
|
$
|
1,430
|
|
|
$
|
1,816
|
|
|
$
|
1,848
|
|
|
$
|
-
|
|
|
$
|
9,091
|
|
Provision for credit losses
|
|
|
919
|
|
|
|
126
|
|
|
|
199
|
|
|
|
620
|
|
|
|
-
|
|
|
|
1,864
|
|
Charge-offs
|
|
|
(1,046
|
)
|
|
|
(470
|
)
|
|
|
(588
|
)
|
|
|
(766
|
)
|
|
|
-
|
|
|
|
(2,870
|
)
|
Recoveries
|
|
|
9
|
|
|
|
22
|
|
|
|
61
|
|
|
|
88
|
|
|
|
-
|
|
|
|
180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(1,037
|
)
|
|
|
(448
|
)
|
|
|
(527
|
)
|
|
|
(678
|
)
|
|
|
-
|
|
|
|
(2,690
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit loss reserve balance at end of period
|
|
$
|
3,879
|
|
|
$
|
1,108
|
|
|
$
|
1,488
|
|
|
$
|
1,790
|
|
|
$
|
-
|
|
|
$
|
8,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
1,901
|
|
|
$
|
751
|
|
|
$
|
1,326
|
|
|
$
|
1,342
|
|
|
$
|
-
|
|
|
$
|
5,320
|
|
Ending balance: individually evaluated for
impairment(1)
|
|
|
1,954
|
|
|
|
352
|
|
|
|
162
|
|
|
|
448
|
|
|
|
-
|
|
|
|
2,916
|
|
Ending balance: loans acquired with deteriorated credit quality
|
|
|
24
|
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total credit loss reserves
|
|
$
|
3,879
|
|
|
$
|
1,108
|
|
|
$
|
1,488
|
|
|
$
|
1,790
|
|
|
$
|
-
|
|
|
$
|
8,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
37,689
|
|
|
$
|
6,160
|
|
|
$
|
10,123
|
|
|
$
|
8,672
|
|
|
$
|
48
|
|
|
$
|
62,692
|
|
Individually evaluated for
impairment(1)
|
|
|
7,975
|
|
|
|
754
|
|
|
|
474
|
|
|
|
751
|
|
|
|
-
|
|
|
|
9,954
|
|
Receivables carried at net realizable value
|
|
|
4,239
|
|
|
|
50
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,289
|
|
Receivables acquired with deteriorated credit quality
|
|
|
27
|
|
|
|
6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables
|
|
$
|
49,930
|
|
|
$
|
6,970
|
|
|
$
|
10,597
|
|
|
$
|
9,423
|
|
|
$
|
48
|
|
|
$
|
76,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
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.
|
21
HSBC Finance Corporation
Intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Gross
|
|
|
Charges
|
|
|
Amortization
|
|
|
Value
|
|
|
|
|
|
(in millions)
|
|
|
March 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased credit card relationships and related
programs(1)
|
|
$
|
1,736
|
|
|
$
|
-
|
|
|
$
|
1,165
|
|
|
$
|
571
|
|
Consumer loan related relationships
|
|
|
333
|
|
|
|
163
|
|
|
|
170
|
|
|
|
-
|
|
Technology, customer lists and other contracts
|
|
|
261
|
|
|
|
9
|
|
|
|
252
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,330
|
|
|
$
|
172
|
|
|
$
|
1,587
|
|
|
$
|
571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased credit card relationships and related programs
|
|
$
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Purchased credit card relationships are being amortized to their
estimated residual value of $162 million at March 31,
2011 and December 31, 2010.
|
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
|
|
|
|
8.
|
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 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
22
HSBC Finance Corporation
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 HSBC affiliate.
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 March 31, 2011 and December 31, 2010, 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 March 31, 2011 and December 31, 2010,
we provided third party swap counterparties with
$28 million and $33 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 March 31, 2011 and
December 31, 2010, the fair value of our agreements with
affiliate counterparties required the affiliate to provide
collateral of $2.9 billion and $2.5 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 financial asset or derivative related
liabilities. At March 31, 2011, we had derivative contracts
with a notional value of approximately $49.1 billion,
including $48.6 billion outstanding with HSBC Bank USA. 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. Derivative
financial instruments are generally
23
HSBC Finance Corporation
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 rate 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 $23 million and
$51 million at March 31, 2011 and December 31,
2010, 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
|
|
|
|
Balance Sheet
|
|
March 31,
|
|
|
December 31,
|
|
|
Balance Sheet
|
|
March 31,
|
|
|
December 31,
|
|
|
|
Location
|
|
2011
|
|
|
2010
|
|
|
Location
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
(in millions)
|
|
|
Interest rate swaps
|
|
Derivative financial assets
|
|
$
|
(9
|
)
|
|
$
|
(4
|
)
|
|
Derivative related liabilities
|
|
$
|
21
|
|
|
$
|
18
|
|
Currency swaps
|
|
Derivative financial assets
|
|
|
188
|
|
|
|
124
|
|
|
Derivative related liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
179
|
|
|
$
|
120
|
|
|
|
|
$
|
21
|
|
|
$
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss)
|
|
|
Amount of Gain (Loss)
|
|
|
|
|
|
|
|
|
|
Recognized in Income
|
|
|
Recognized in Income
|
|
|
|
|
|
Location of Gain
|
|
Location of Gain
|
|
on the
|
|
|
on the
|
|
|
|
|
|
(Loss) Recognized
|
|
(Loss) Recognized
|
|
Derivative
|
|
|
Hedged Items
|
|
|
|
|
|
in Income on
|
|
in Income on Hedged
|
|
Three Months Ended March 31,
|
|
|
|
Hedged Item
|
|
Derivative
|
|
Item
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Interest rate swaps
|
|
Fixed rate borrowings
|
|
Derivative related income
|
|
Derivative related income
|
|
$
|
(8
|
)
|
|
$
|
2
|
|
|
$
|
10
|
|
|
$
|
(6
|
)
|
Currency swaps
|
|
Fixed rate borrowings
|
|
Derivative related income
|
|
Derivative related income
|
|
|
(20
|
)
|
|
|
11
|
|
|
|
16
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
$
|
(28
|
)
|
|
$
|
13
|
|
|
$
|
26
|
|
|
$
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Hedges Cash flow hedges include
interest rate swaps to convert our variable rate debt to fixed
rate debt and by fixing 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
$439 million and $492 million at March 31, 2011
and December 31, 2010, respectively. We expect
$395 million ($255 million after-tax) of currently
unrealized net losses will be reclassified to earnings within
one year. However, these reclassed unrealized losses will be
offset by decreased interest expense associated with the
24
HSBC Finance Corporation
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
|
|
|
|
Balance Sheet
|
|
March 31,
|
|
|
December 31,
|
|
|
Balance Sheet
|
|
March 31,
|
|
|
December 31,
|
|
|
|
Location
|
|
2011
|
|
|
2010
|
|
|
Location
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
(in millions)
|
|
|
Interest rate swaps
|
|
Derivative financial assets
|
|
$
|
(376
|
)
|
|
$
|
(437
|
)
|
|
Derivative related liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
Currency swaps
|
|
Derivative financial assets
|
|
|
1,160
|
|
|
|
985
|
|
|
Derivative related liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
784
|
|
|
$
|
548
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides the gain or loss recorded on our
cash flow hedging relationships.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassed
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
|
|
|
|
|
from
|
|
|
|
|
Gain (Loss)
|
|
|
|
Recognized
|
|
|
|
|
Accumulated
|
|
|
|
|
Recognized
|
|
|
|
in OCI on
|
|
|
Location of Gain
|
|
OCI into
|
|
|
Location of Gain
|
|
in Income
|
|
|
|
Derivative
|
|
|
(Loss) Reclassified
|
|
Income
|
|
|
(Loss) Recognized
|
|
on Derivative
|
|
|
|
(Effective
|
|
|
from Accumulated
|
|
(Effective
|
|
|
in Income
|
|
(Ineffective
|
|
Three Months Ended
|
|
Portion)
|
|
|
OCI into Income
|
|
Portion)
|
|
|
on the Derivative
|
|
Portion)
|
|
March 31,
|
|
2011
|
|
|
2010
|
|
|
(Effective Portion)
|
|
2011
|
|
|
2010
|
|
|
(Ineffective Portion)
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
55
|
|
|
$
|
(28
|
)
|
|
Interest expense
|
|
$
|
(11
|
)
|
|
$
|
(19
|
)
|
|
Derivative related income
|
|
$
|
2
|
|
|
$
|
-
|
|
Currency swaps
|
|
|
28
|
|
|
|
(7
|
)
|
|
Interest expense
|
|
|
(7
|
)
|
|
|
(9
|
)
|
|
Derivative related income
|
|
|
(9
|
)
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
83
|
|
|
$
|
(35
|
)
|
|
|
|
$
|
(18
|
)
|
|
$
|
(28
|
)
|
|
|
|
$
|
(7
|
)
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
Balance Sheet
|
|
March 31,
|
|
|
December 31,
|
|
|
Balance Sheet
|
|
March 31,
|
|
|
December 31,
|
|
|
|
Location
|
|
2011
|
|
|
2010
|
|
|
Location
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
(in millions)
|
|
|
Interest rate swaps
|
|
Derivative financial assets
|
|
$
|
230
|
|
|
$
|
165
|
|
|
Derivative related liabilities
|
|
$
|
6
|
|
|
$
|
5
|
|
Currency swaps
|
|
Derivative financial assets
|
|
|
101
|
|
|
|
67
|
|
|
Derivative related liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
331
|
|
|
$
|
232
|
|
|
|
|
$
|
6
|
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
HSBC Finance Corporation
The following table provides detail of the gain or loss recorded
on our non-qualifying hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss)
|
|
|
|
|
|
Recognized in Income On Derivative
|
|
|
|
|
|
During
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Location of Gain (Loss)
|
|
March 31,
|
|
|
|
Recognized in Income on Derivative
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Interest rate contracts
|
|
Derivative related income
|
|
$
|
43
|
|
|
$
|
(102
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
43
|
|
|
$
|
(102
|
)
|
|
|
|
|
|
|
|
|
|
|
|
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 9,
Fair Value Option, for further discussion.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives Fair Value
|
|
|
Liability Derivatives Fair Value
|
|
|
|
Balance Sheet
|
|
March 31,
|
|
|
December 31,
|
|
|
Balance Sheet
|
|
March 31,
|
|
|
December 31,
|
|
|
|
Location
|
|
2011
|
|
|
2010
|
|
|
Location
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
(in millions)
|
|
|
Interest rate swaps
|
|
Derivative financial assets
|
|
$
|
771
|
|
|
$
|
907
|
|
|
Derivative related liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
Currency swaps
|
|
Derivative financial assets
|
|
|
810
|
|
|
|
739
|
|
|
Derivative related liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
1,581
|
|
|
$
|
1,646
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Income On Derivative
|
|
|
|
|
|
During
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Location of Gain (Loss)
|
|
March 31,
|
|
|
|
Recognized in Income on Derivative
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Interest rate swaps
|
|
Gain on debt designated at fair value and related derivatives
|
|
$
|
(1
|
)
|
|
$
|
233
|
|
Currency swaps
|
|
Gain on debt designated at fair value and related derivatives
|
|
|
(74
|
)
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
(75
|
)
|
|
$
|
311
|
|
|
|
|
|
|
|
|
|
|
|
|
26
HSBC Finance Corporation
Notional Value of Derivative Contracts The
following table summarizes the notional values of derivative
contracts:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
9,962
|
|
|
$
|
8,917
|
|
Currency swaps
|
|
|
9,458
|
|
|
|
10,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,420
|
|
|
|
18,935
|
|
|
|
|
|
|
|
|
|
|
Non-qualifying economic hedges:
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Interest rate:
|
|
|
|
|
|
|
|
|
Swaps
|
|
|
11,314
|
|
|
|
11,449
|
|
Purchased caps
|
|
|
78
|
|
|
|
173
|
|
Foreign exchange:
|
|
|
|
|
|
|
|
|
Swaps
|
|
|
1,221
|
|
|
|
1,221
|
|
Forwards
|
|
|
118
|
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,731
|
|
|
|
12,966
|
|
|
|
|
|
|
|
|
|
|
Derivatives associated with debt carried at fair value:
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
13,577
|
|
|
|
15,212
|
|
Currency swaps
|
|
|
3,376
|
|
|
|
3,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,953
|
|
|
|
18,588
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
49,104
|
|
|
$
|
50,489
|
|
|
|
|
|
|
|
|
|
|
We have elected FVO reporting for certain of our fixed rate debt
issuances. At March 31, 2011, fixed rate debt accounted for
under FVO totaled $19.5 billion, of which
$19.0 billion is included as a component of long-term debt
and $448 million is included as a component of due to
affiliates. At March 31, 2011, we had not elected FVO for
$16.3 billion of fixed rate long-term debt carried on our
balance sheet. Fixed rate debt accounted for under FVO at
March 31, 2011 has an aggregate unpaid principal balance of
$18.6 billion which included a foreign currency translation
adjustment relating to our foreign denominated FVO debt which
increased the debt balance by $581 million.
At December 31, 2010, fixed rate debt accounted for under
FVO totaled $21.3 billion, of which $20.8 billion was
included as a component of long-term debt and $436 million
was 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 had 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.
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 15, 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.
27
HSBC Finance Corporation
The components of gain (loss) on debt designated at fair value
and related derivatives are as follows:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Mark-to-market
on debt designated at fair
value(1):
|
|
|
|
|
|
|
|
|
Interest rate component
|
|
$
|
219
|
|
|
$
|
(143
|
)
|
Credit risk component
|
|
|
(173
|
)
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
Total
mark-to-market
on debt designated at fair value
|
|
|
46
|
|
|
|
(178
|
)
|
Mark-to-market
on the related
derivatives(1)
|
|
|
(240
|
)
|
|
|
100
|
|
Net realized gains on the related derivatives
|
|
|
165
|
|
|
|
211
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on debt designated at fair value and related
derivatives
|
|
$
|
(29
|
)
|
|
$
|
133
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 loss of $176 million
and a gain of $227 million for the three months ended
March 31, 2011 and 2010, respectively. Offsetting gains
(losses) recorded in derivative related income associated with
the related derivatives was a gain of $176 million and a
loss of $227 million for the three months ended
March 31, 2011 and 2010, respectively.
|
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 narrow accounting losses are booked and the
reverse is true if credit spreads widen. Differences arise
between the movement in the fair value of our debt and the fair
value of the related swap due to the different credit
characteristics 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 $827 million and
$873 million at March 31, 2011 and December 31,
2010, 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 An increase in long-term
U.S. interest rates during the first quarter of 2011 resulted in
a gain on the interest rate component on the
mark-to-market
of the debt and a loss on the
mark-to-market
of the related derivative. During the first quarter of 2010 a
decrease in long-term U.S. interest rates resulted in
losses in the interest rate component on the
mark-to-market
of the debt and gain 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 along an interest rate yield 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
6 percent of our FVO debt does not have a corresponding
derivative at March 31, 2011.
|
|
|
|
Credit Our secondary market credit spreads
tightened throughout the first quarter of 2011 due to continued
improvement in marketplace liquidity resulting in a loss in the
credit component of the debt recorded at fair value. During the
same period in 2010 our credit spreads also tightened due to
continued increase in market confidence and improvement in
marketplace liquidity.
|
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.
28
HSBC Finance Corporation
Effective tax rates are analyzed as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Tax expense (benefit) at the U.S. Federal statutory income tax
rate
|
|
$
|
(74
|
)
|
|
|
(35.0
|
)%
|
|
$
|
(349
|
)
|
|
|
(35.0
|
)%
|
Increase (decrease) in rate resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to valuation allowance on deferred tax assets
|
|
|
(109
|
)
|
|
|
(51.4
|
)
|
|
|
1
|
|
|
|
.1
|
|
State and local taxes, net of Federal benefit
|
|
|
(8
|
)
|
|
|
(3.7
|
)
|
|
|
(4
|
)
|
|
|
(.4
|
)
|
Other
|
|
|
(2
|
)
|
|
|
(.9
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
(193
|
)
|
|
|
(91.0
|
)%
|
|
$
|
(352
|
)
|
|
|
(35.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effective tax rate for the three months ended March 31,
2011 was significantly impacted by a release of valuation
allowance previously established on foreign tax credits. The
effective tax rate for both the three months ended
March 31, 2011 and 2010 was also impacted by state taxes,
including states where we file combined unitary state tax
returns with other HSBC affiliates.
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.
29
HSBC Finance Corporation
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.
During the first quarter of 2011, the HNAH Group identified an
additional tax planning strategy that provides support for the
realization of the deferred tax assets recorded on its foreign
tax credits and certain state related deferred tax assets. The
use of foreign tax credits is limited by the HNAH Groups
U.S. tax liability and the availability of foreign source
income. The tax planning strategy includes the purchase of
foreign bonds and REMIC residual interests. These purchases are
expected to generate sufficient taxable foreign source income
that will allow for the utilization of the foreign tax credits
before the credits expire unused and recognition of certain
state deferred tax assets.
Notwithstanding the above, the HNAH Group has valuation
allowances against certain state deferred tax assets and certain
tax loss carryforwards for which the aforementioned tax planning
strategies do not provide appropriate support.
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 tax planning strategies were to change, a
valuation allowance against some or all of 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 $2.3 billion and $2.5 billion as of
March 31, 2011 and December 31, 2010, respectively.
We remain subject to Federal income tax examination for years
1998 and forward and state income tax examinations for years
1998 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.
30
HSBC Finance Corporation
|
|
11.
|
Pension
and Other Postretirement Benefits
|
The components of pension expense for the defined benefit
pension plan reflected in our consolidated statement of income
(loss) are shown in the table below and reflect the portion of
the pension expense of the combined HSBC North America Pension
Plan (either the HSBC North America Pension Plan or the
Plan) which has been allocated to HSBC Finance
Corporation:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Service cost benefits earned during the period
|
|
$
|
2
|
|
|
$
|
6
|
|
Interest cost on projected benefit obligation
|
|
|
16
|
|
|
|
14
|
|
Expected return on assets
|
|
|
(17
|
)
|
|
|
(13
|
)
|
Recognized losses
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Amortization of prior service cost
|
|
|
8
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
Pension expense
|
|
$
|
8
|
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
|
Pension expense declined in 2011 due to higher returns on Plan
assets reflecting higher asset levels including additional
contributions to the Plan as well as lower service cost and
interest cost as a result of a decrease in the number of active
participants in the Plan.
Components of the net periodic benefit cost for our
postretirement medical plan benefits other than pensions are as
follows:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Service cost benefits earned during the period
|
|
$
|
-
|
|
|
$
|
1
|
|
Interest cost
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Net periodic postretirement benefit cost
|
|
$
|
2
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
12.
|
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:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
167
|
|
|
$
|
168
|
|
Interest bearing deposits with banks
|
|
|
1,005
|
|
|
|
1,009
|
|
Securities purchased under agreements to resell
|
|
|
2,870
|
|
|
|
2,060
|
|
Derivative related assets
|
|
|
3
|
|
|
|
64
|
|
Other assets
|
|
|
336
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,381
|
|
|
$
|
3,427
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Due to affiliates (includes $448 million and
$436 million at March 31, 2011 and December 31,
2010, respectively, carried at fair value)
|
|
$
|
8,279
|
|
|
$
|
8,255
|
|
Derivative related liability
|
|
|
15
|
|
|
|
2
|
|
Other liabilities
|
|
|
73
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
8,367
|
|
|
$
|
8,327
|
|
|
|
|
|
|
|
|
|
|
31
HSBC Finance Corporation
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(In millions)
|
|
|
Income/(Expense):
|
|
|
|
|
|
|
|
|
Interest income from HSBC affiliates
|
|
$
|
2
|
|
|
$
|
1
|
|
Interest expense paid to HSBC
affiliates(1)
|
|
|
(153
|
)
|
|
|
(220
|
)
|
|
|
|
|
|
|
|
|
|
Net interest income (loss)
|
|
|
(151
|
)
|
|
|
(219
|
)
|
|
|
|
|
|
|
|
|
|
Gain/(loss) on FVO debt with affiliate
|
|
|
(12
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
HSBC affiliate income:
|
|
|
|
|
|
|
|
|
Gain on receivable sales to HSBC affiliates:
|
|
|
|
|
|
|
|
|
Daily sales of private label receivable originations
|
|
|
39
|
|
|
|
38
|
|
Daily sales of credit card receivables
|
|
|
74
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
Total gain on receivable sales to HSBC affiliates
|
|
|
113
|
|
|
|
116
|
|
|
|
|
|
|
|
|
|
|
Servicing and other fees from HSBC affiliates:
|
|
|
|
|
|
|
|
|
HSBC Bank USA:
|
|
|
|
|
|
|
|
|
Real estate secured servicing and related fees
|
|
|
3
|
|
|
|
3
|
|
Private label and card receivable servicing and related fees
|
|
|
149
|
|
|
|
153
|
|
Other servicing, processing, origination and support revenues
from HSBC Bank USA and other HSBC affiliates
|
|
|
5
|
|
|
|
4
|
|
HSBC Technology and Services (USA) Inc. (HTSU)
administrative fees and rental
revenue(2)
|
|
|
2
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
Total servicing and other fees from HSBC affiliates
|
|
|
159
|
|
|
|
174
|
|
|
|
|
|
|
|
|
|
|
Support services from HSBC affiliates
|
|
|
(291
|
)
|
|
|
(276
|
)
|
|
|
|
|
|
|
|
|
|
Stock based compensation expense with HSBC
|
|
|
(4
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
Insurance commission paid to HSBC Bank Canada
|
|
|
(4
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(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) |
|
Rental revenue from HTSU totaled
$1 million and $12 million during the three months
ended March 31, 2011 and 2010, 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
|
32
HSBC Finance Corporation
|
|
|
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.
|
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 March 31,
2011 and December 31, 2010 as well as the cumulative amount
of receivables sold on a daily basis during the three months
ended March 31, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Cards
|
|
|
|
|
|
|
|
|
|
Private
|
|
|
General
|
|
|
Union
|
|
|
|
|
|
Real Estate
|
|
|
|
|
|
|
Label
|
|
|
Motors
|
|
|
Privilege
|
|
|
Other
|
|
|
Secured
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
(in billions)
|
|
|
|
|
|
|
|
|
Receivables serviced for HSBC Bank USA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
$
|
12.2
|
|
|
$
|
4.1
|
|
|
$
|
3.8
|
|
|
$
|
1.8
|
|
|
$
|
1.5
|
|
|
$
|
23.4
|
|
December 31, 2010
|
|
|
13.5
|
|
|
|
4.5
|
|
|
|
4.1
|
|
|
|
2.0
|
|
|
|
1.5
|
|
|
|
25.6
|
|
Total of receivables sold on a daily basis to HSBC Bank USA
during:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2011
|
|
$
|
3.2
|
|
|
$
|
3.1
|
|
|
$
|
.7
|
|
|
$
|
.9
|
|
|
$
|
-
|
|
|
$
|
7.9
|
|
Three months ended March 31, 2010
|
|
|
3.0
|
|
|
|
3.1
|
|
|
|
.7
|
|
|
|
1.0
|
|
|
|
-
|
|
|
|
7.8
|
|
Fees received for servicing these loan portfolios totaled
$150 million and $155 million during the three months
ended March 31, 2011 and 2010, 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.
|
|
|
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.
|
|
|
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 the three months
ended March 31, 2011, we paid $2 million for services
we received from HSBC Bank USA and received $2 million for
services we provided. During the three months ended
March 31, 2010, we paid $2 million for services we
received from HSBC Bank USA and received $1 million for
services we provided.
|
|
|
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. During the three months ended
March 31, 2011, we paid $17 million for services we
received from HSBC Bank USA.
|
33
HSBC Finance Corporation
|
|
|
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 March 31, 2011 or December 31, 2010.
|
|
|
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
March 31, 2011 or December 31, 2010.
|
|
|
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 March 31, 2011 or
December 31, 2010.
|
|
|
As it relates to our discontinued TFS operations, 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. During 2010, we purchased
a portion of the loans originated by HSBC Bank USA and HTDC
daily for a fee. A portion of the loans which were originated
were retained by HSBC Bank USA and held on its 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 had assumed
all credit risk associated with this program. During the three
months ended March 31, 2010, we received a fee from HSBC
Bank USA for both servicing the loans and assuming the credit
risk associated with these loans which totaled $56 million
and is included as a component of loss from discontinued
operations. For the loans which we purchased from HTCD during
the three months ended March 31, 2010, we received taxpayer
financial services revenue and paid an origination fee to HTCD
of $4 million which is included as a component of loss from
discontinued operations.
|
|
|
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.
|
Transactions
with HSBC Holdings plc:
|
|
|
A commercial paper back-stop credit facility of
$2.0 billion from HSBC at March 31, 2011 and
December 31, 2010 supported our domestic issuances of
commercial paper. No balances were outstanding under this credit
facility at March 31, 2011 or December 31, 2010. 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).
|
|
|
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.
|
Transactions
with other HSBC affiliates:
|
|
|
HSBC North Americas technology and certain centralized
support services including human resources, corporate affairs,
risk management, legal, compliance, tax, finance and other
shared services 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.
|
34
HSBC Finance Corporation
|
|
|
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 $27 million and
$32 million during the three months ended March 31,
2011 and 2010, respectively, are included as a component of
Support services from HSBC affiliates in the table above. During
2010 and through February 2011, the expenses for these services
for all HSBC North America operations were billed directly to
HTSU who then billed these services to the appropriate HSBC
affiliate who benefited from the services. Beginning in March
2011, HSBC Global Resourcing (UK) Ltd began billing us directly
for the services we receive from them.
|
|
|
The notional value of derivative contracts outstanding with HSBC
subsidiaries totaled $48.6 billion and $49.9 billion
at March 31, 2011 and December 31, 2010, 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
$2.9 billion and $2.5 billion at March 31, 2011
and December 31, 2010, 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.
|
|
|
Due to affiliates includes amounts owed to subsidiaries of HSBC
as a result of direct debt issuances. At March 31, 2011 and
December 31, 2010, due to affiliates includes
$448 million and $436 million, respectively, carried
at fair value under FVO reporting. During the three months ended
March 31, 2011, loss on debt designated at fair value and
related derivatives includes $12 million related to these
debt issuances. During the three months ended March 31,
2010, due to affiliates did not include any amounts carried at
fair value under FVO reporting.
|
|
|
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 from HSBC North America by repaying the loan
and issuing 1,000 shares of Series C preferred stock
to HINO for $1.0 billion. Dividends paid on the
Series C preferred stock totaled $25 million during
the three months ended March 31, 2011.
|
|
|
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 totaled
$1 million during the three months ended March 31,
2011, is included in interest income from HSBC affiliates in the
table above.
|
|
|
We purchase from HSBC Securities (USA) Inc. (HSI)
securities under an agreement to resell. Interest income
recognized on these securities totaled $1 million during
both of the three months ended March 31, 2011 and 2010 and
is reflected as interest income from HSBC affiliates in the
table above.
|
|
|
Support services from HSBC affiliates also includes banking
services and other miscellaneous services provided by other
subsidiaries of HSBC, including HSBC Bank USA.
|
|
|
Domestic employees of HSBC Finance Corporation participate in a
defined benefit pension plan and other postretirement benefit
plans sponsored by HSBC North America. See Note 11,
Pension and Other Postretirement Benefits, for
additional information on this pension plan.
|
|
|
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 the fourth quarter of 2010. During the three months ended
March 31, 2011 and 2010, there were no fees paid to HMUS
for such services. For debt not accounted for under the fair
value option, these fees would be amortized over the life of the
related debt and included as a component of interest expense.
|
|
|
We continue to guarantee the long-term and medium-term notes
issued by our Canadian business prior to its sale to HSBC Bank
Canada. During both of the three months ended March 31,
2011 and 2010, we recorded fees of $1 million for providing
this guarantee. As of March 31, 2011, the outstanding
balance of the guaranteed notes was $1.5 billion and the
latest scheduled maturity of the notes is May 2012. As part of
the sale of our Canadian
|
35
HSBC Finance Corporation
|
|
|
business to HSBC Bank Canada, the sale agreement 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
$4 million and $5 million during the three months
ended March 31, 2011 and 2010, respectively, and are
included in Insurance Commission paid to HSBC Bank Canada in the
table above.
|
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 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 and Commercial
businesses. 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.
During 2010, changes were made to the management structure
within HSBC North America which has resulted in the alignment of
our Management to be focused on the legal entity results of our
stand-alone business operations. During the first quarter of
2011, we re-evaluated and made changes to the financial
information used to manage our business, including the scope and
content of the financial data being reported to our Management,
consistent with this more legal entity focus of our Management.
As a result, beginning in the first quarter of 2011, our
operating results are now monitored and reviewed and trends are
evaluated on a legal entity basis in accordance with
International Financial Reporting Standards (IFRSs),
which is the basis on which we report results to our parent,
HSBC. Prior to the first quarter of 2011, we reported our
results on an IFRS Management Basis which were IFRSs results
which assumed that the GM and UP Portfolios and the private
label and real estate secured receivables transferred to HSBC
Bank USA had not been sold and remained on our balance sheet and
the revenues and expenses related to these receivables remained
on our income statement. As a result of the changes discussed
above, in the first quarter of 2011, we changed the composition
of segment profit (loss) from an IFRS Management Basis of
reporting to an IFRS legal entity basis (IFRS Basis)
of reporting in order to align with our revised internal
reporting structure. However we continue to monitor capital
adequacy, establish dividend policy and report to regulatory
agencies on an U.S. GAAP basis. For comparability purposes,
we have restated segment results for the three months ended
March 31, 2010 to be on an IFRS Basis. There have been no
other changes in measurement or composition of our segment
reporting as compared with the presentation in our 2010
Form 10-K.
For segment reporting purposes, intersegment transactions have
not been eliminated. We generally account for transactions
between segments as if they were with third parties.
36
HSBC Finance Corporation
Reconciliation of our IFRS Basis segment results to the
U.S. GAAP consolidated totals are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Card and
|
|
|
|
|
|
|
|
|
Adjustments/
|
|
|
IFRS Basis
|
|
|
|
|
|
|
|
|
U.S. GAAP
|
|
|
|
Retail
|
|
|
|
|
|
All
|
|
|
Reconciling
|
|
|
Consolidated
|
|
|
IFRS
|
|
|
IFRS
|
|
|
Consolidated
|
|
|
|
Services
|
|
|
Consumer
|
|
|
Other
|
|
|
Items
|
|
|
Totals
|
|
|
Adjustments(2)
|
|
|
Reclassifications(3)
|
|
|
Totals
|
|
|
|
|
|
(in millions)
|
|
|
Three months ended March 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
489
|
|
|
$
|
655
|
|
|
$
|
107
|
|
|
$
|
-
|
|
|
$
|
1,251
|
|
|
$
|
(145
|
)
|
|
$
|
(184
|
)
|
|
$
|
922
|
|
Other operating income (Total other revenues)
|
|
|
414
|
|
|
|
(32
|
)
|
|
|
(124
|
)
|
|
|
(6
|
)(1)
|
|
|
252
|
|
|
|
(29
|
)
|
|
|
302
|
|
|
|
525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income (loss)
|
|
|
903
|
|
|
|
623
|
|
|
|
(17
|
)
|
|
|
(6
|
)
|
|
|
1,503
|
|
|
|
(174
|
)
|
|
|
118
|
|
|
|
1,447
|
|
Loan impairment charges (Provision for credit losses)
|
|
|
119
|
|
|
|
1,276
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
1,394
|
|
|
|
(612
|
)
|
|
|
-
|
|
|
|
782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
784
|
|
|
|
(653
|
)
|
|
|
(16
|
)
|
|
|
(6
|
)
|
|
|
109
|
|
|
|
438
|
|
|
|
118
|
|
|
|
665
|
|
Operating expenses
|
|
|
478
|
|
|
|
233
|
|
|
|
36
|
|
|
|
(6
|
)
|
|
|
741
|
|
|
|
18
|
|
|
|
118
|
|
|
|
877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax
|
|
$
|
306
|
|
|
$
|
(886
|
)
|
|
$
|
(52
|
)
|
|
$
|
-
|
|
|
$
|
(632
|
)
|
|
$
|
420
|
|
|
$
|
-
|
|
|
$
|
(212
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment revenues
|
|
|
7
|
|
|
|
14
|
|
|
|
(15
|
)
|
|
|
(6
|
)(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balances at end of period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer loans (Receivables)
|
|
$
|
9,457
|
|
|
$
|
54,087
|
|
|
$
|
2,342
|
|
|
$
|
-
|
|
|
$
|
65,886
|
|
|
$
|
(594
|
)
|
|
$
|
(2,295
|
)
|
|
$
|
62,997
|
|
Assets
|
|
|
9,363
|
|
|
|
52,946
|
|
|
|
15,687
|
|
|
|
-
|
|
|
|
77,996
|
|
|
|
(3,283
|
)
|
|
|
(113
|
)
|
|
|
74,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
587
|
|
|
$
|
579
|
|
|
$
|
286
|
|
|
$
|
-
|
|
|
$
|
1,452
|
|
|
$
|
(94
|
)
|
|
$
|
(231
|
)
|
|
$
|
1,127
|
|
Other operating income (Total other revenues)
|
|
|
452
|
|
|
|
5
|
|
|
|
(138
|
)
|
|
|
(7
|
)(1)
|
|
|
312
|
|
|
|
(14
|
)
|
|
|
303
|
|
|
|
601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income (loss)
|
|
|
1,039
|
|
|
|
584
|
|
|
|
148
|
|
|
|
(7
|
)
|
|
|
1,764
|
|
|
|
(108
|
)
|
|
|
72
|
|
|
|
1,728
|
|
Loan impairment charges (Provision for credit losses)
|
|
|
235
|
|
|
|
1,699
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
1,933
|
|
|
|
(69
|
)
|
|
|
-
|
|
|
|
1,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
804
|
|
|
|
(1,115
|
)
|
|
|
149
|
|
|
|
(7
|
)
|
|
|
(169
|
)
|
|
|
(39
|
)
|
|
|
72
|
|
|
|
(136
|
)
|
Operating expenses
|
|
|
445
|
|
|
|
227
|
|
|
|
56
|
|
|
|
(7
|
)
|
|
|
721
|
|
|
|
69
|
|
|
|
72
|
|
|
|
862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax
|
|
$
|
359
|
|
|
$
|
(1,342
|
)
|
|
$
|
93
|
|
|
$
|
-
|
|
|
$
|
(890
|
)
|
|
$
|
(108
|
)
|
|
$
|
-
|
|
|
$
|
(998
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment revenues
|
|
|
3
|
|
|
|
18
|
|
|
|
(14
|
)
|
|
|
(7
|
)(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Balances at end of period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer loans (Receivables)
|
|
$
|
10,950
|
|
|
$
|
66,529
|
|
|
$
|
1,745
|
|
|
$
|
-
|
|
|
$
|
79,224
|
|
|
$
|
(556
|
)
|
|
$
|
(1,700
|
)
|
|
$
|
76,968
|
|
Assets
|
|
|
10,129
|
|
|
|
64,999
|
|
|
|
14,810
|
|
|
|
-
|
|
|
|
89,938
|
|
|
|
(3,363
|
)
|
|
|
(136
|
)
|
|
|
86,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Eliminates intersegment revenues.
|
(2) |
|
IFRS Adjustments consist of the
accounting differences between U.S. GAAP and IFRSs which have
been described more fully below.
|
(3) |
|
Represents differences in balance
sheet and income statement presentation between IFRSs and U.S.
GAAP.
|
A summary of the significant differences between U.S. GAAP
and IFRSs as they impact our results are presented 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 changes in estimated
contractual cash flows, including 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.
37
HSBC Finance Corporation
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.
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.
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.
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 2011 and 2010, under IFRSs we
recorded additional gains as these shares vest. The additional
shares are not recorded under U.S. GAAP.
38
HSBC Finance Corporation
Other-than-temporary
impairments 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 discounting of cash flows including recovery estimates at
the original effective interest rate of the pool of customer
loans. The amount of impairment relating to the discounting of
future cash flows unwinds with the passage of time, and is
recognized in interest income. Also under IFRSs, if the
recognition of a write-down to net realizable value on secured
loans decreases because collateral values have improved and the
improvement can be related objectively to an event occurring
after recognition of the write-down, such write-down can be
reversed, which is not permitted under U.S. GAAP.
Additionally under IFRSs, future recoveries on charged-off loans
or loans written down to net realizable value less cost to
obtain title and sell 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. Under IFRSs, interest on impaired
loans is recorded at the effective interest rate on the customer
loans balance net of impairment allowances, and therefore
reflects the collectibility of the loans.
As discussed above, under U.S. GAAP the credit risk
component of the initial 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
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 exceeded the higher of the
projected benefit obligation or fair value of plan assets 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.
Share-based bonus arrangements Under IFRSs,
the recognition of compensation expense related to share-based
bonuses begins on January 1 of the current year for awards
expected to be granted in the first quarter of the following
year. Under U.S. GAAP, the recognition of compensation
expense related to share-based bonuses does not begin until the
date the awards are granted.
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. IFRSs also allows for
reversals of write-downs to net realizable value on secured
loans when collateral values have improved which is not
permitted under U.S. GAAP.
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.
39
HSBC Finance Corporation
|
|
14.
|
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 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. 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 March 31,
2011 and December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
|
Consolidated
|
|
|
Consolidated
|
|
|
Consolidated
|
|
|
Consolidated
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
|
|
Liabilities
|
|
|
|
|
|
(in millions)
|
|
|
Real estate collateralized funding vehicles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables, net
|
|
$
|
5,188
|
|
|
$
|
-
|
|
|
$
|
5,354
|
|
|
$
|
-
|
|
Available-for-sale
investments
|
|
|
5
|
|
|
|
-
|
|
|
|
104
|
|
|
|
-
|
|
Long-term debt
|
|
|
-
|
|
|
|
3,715
|
|
|
|
-
|
|
|
|
3,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
5,193
|
|
|
|
3,715
|
|
|
|
5,458
|
|
|
|
3,882
|
|
Credit card collateralized funding vehicles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables, net
|
|
|
1,976
|
|
|
|
-
|
|
|
|
1,970
|
|
|
|
-
|
|
Long-term debt
|
|
|
-
|
|
|
|
195
|
|
|
|
-
|
|
|
|
195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
1,976
|
|
|
|
195
|
|
|
|
1,970
|
|
|
|
195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,169
|
|
|
$
|
3,910
|
|
|
$
|
7,428
|
|
|
$
|
4,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
Additionally, at March 31, 2011 and December 31, 2010,
we have consolidated on our balance sheet a leverage lease which
matured on December 31, 2010. The only asset of this VIE at
the time of maturity was a building which we
40
HSBC Finance Corporation
now own. The building has a carrying value of $16 million
at both March 31, 2011 and December 31, 2010 which is
included as a component of properties and equipment, net in our
consolidated balance sheet.
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 March 31, 2011 or December 31, 2010 because we are
not the primary beneficiary. At March 31, 2011 and
December 31, 2010, we have assets totaling $1 million
and $9 million, respectively, on our consolidated balance
sheet, which represents our maximum exposure to loss for these
VIEs.
Additionally, we are involved with other VIEs which provided
funding to HSBC Bank USA through collateralized funding
transactions. These VIEs are not consolidated at March 31,
2011 or December 31, 2010 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. In April 2011, the collateralized
funding facilities were terminated by HSBC Bank USA.
|
|
15.
|
Fair
Value Measurements
|
Accounting principles related to fair value measurements provide
a framework for measuring fair value and focus 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
41
HSBC Finance Corporation
summarizes the carrying values and estimated fair value of our
financial instruments at March 31, 2011 and
December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
Value
|
|
|
Fair Value
|
|
|
Value
|
|
|
Fair Value
|
|
|
|
|
|
(in millions)
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
169
|
|
|
$
|
169
|
|
|
$
|
175
|
|
|
$
|
175
|
|
Interest bearing deposits with banks
|
|
|
1,013
|
|
|
|
1,013
|
|
|
|
1,016
|
|
|
|
1,016
|
|
Securities purchased under agreements to resell
|
|
|
5,170
|
|
|
|
5,170
|
|
|
|
4,311
|
|
|
|
4,311
|
|
Securities
|
|
|
3,399
|
|
|
|
3,399
|
|
|
|
3,371
|
|
|
|
3,371
|
|
Consumer receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
11,855
|
|
|
|
8,482
|
|
|
|
12,425
|
|
|
|
8,810
|
|
Second lien
|
|
|
1,711
|
|
|
|
493
|
|
|
|
1,791
|
|
|
|
492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mortgage Services
|
|
|
13,566
|
|
|
|
8,975
|
|
|
|
14,216
|
|
|
|
9,302
|
|
Consumer Lending:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
27,048
|
|
|
|
19,903
|
|
|
|
28,083
|
|
|
|
20,589
|
|
Second lien
|
|
|
2,749
|
|
|
|
695
|
|
|
|
2,859
|
|
|
|
691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consumer Lending real estate secured receivables
|
|
|
29,797
|
|
|
|
20,598
|
|
|
|
30,942
|
|
|
|
21,280
|
|
Non-real estate secured receivables
|
|
|
5,358
|
|
|
|
4,058
|
|
|
|
5,720
|
|
|
|
4,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consumer Lending
|
|
|
35,155
|
|
|
|
24,656
|
|
|
|
36,662
|
|
|
|
25,689
|
|
Credit card
|
|
|
8,547
|
|
|
|
8,411
|
|
|
|
8,988
|
|
|
|
8,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer receivables
|
|
|
57,268
|
|
|
|
42,042
|
|
|
|
59,866
|
|
|
|
43,954
|
|
Receivables held for sale
|
|
|
5
|
|
|
|
5
|
|
|
|
4
|
|
|
|
4
|
|
Due from affiliates
|
|
|
161
|
|
|
|
161
|
|
|
|
126
|
|
|
|
126
|
|
Derivative financial assets
|
|
|
4
|
|
|
|
4
|
|
|
|
75
|
|
|
|
75
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
|
3,750
|
|
|
|
3,750
|
|
|
|
3,156
|
|
|
|
3,156
|
|
Due to affiliates carried at fair value
|
|
|
448
|
|
|
|
448
|
|
|
|
436
|
|
|
|
436
|
|
Due to affiliates
|
|
|
7,831
|
|
|
|
7,619
|
|
|
|
7,819
|
|
|
|
7,518
|
|
Long-term debt carried at fair value
|
|
|
19,014
|
|
|
|
19,014
|
|
|
|
20,844
|
|
|
|
20,844
|
|
Long-term debt not carried at fair value
|
|
|
33,021
|
|
|
|
32,481
|
|
|
|
33,772
|
|
|
|
32,924
|
|
Insurance policy and claim reserves
|
|
|
999
|
|
|
|
1,092
|
|
|
|
982
|
|
|
|
1,184
|
|
Derivative financial liabilities
|
|
|
15
|
|
|
|
15
|
|
|
|
2
|
|
|
|
2
|
|
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 challenging 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 March 31, 2011 and
December 31, 2010 reflect these market conditions.
42
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 March 31, 2011 and
December 31, 2010, 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)
|
|
|
March 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
-
|
|
|
$
|
1,094
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,094
|
|
Currency swaps
|
|
|
-
|
|
|
|
2,315
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,315
|
|
Foreign exchange forward
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
Derivative netting
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,408
|
)
|
|
|
(3,408
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative financial assets
|
|
|
-
|
|
|
|
3,412
|
|
|
|
-
|
|
|
|
(3,408
|
)
|
|
|
4
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
|
382
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
382
|
|
U.S. government sponsored enterprises
|
|
|
-
|
|
|
|
234
|
|
|
|
1
|
|
|
|
-
|
|
|
|
235
|
|
U.S. government agency issued or guaranteed
|
|
|
-
|
|
|
|
9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9
|
|
Obligations of U.S. states and political subdivisions
|
|
|
-
|
|
|
|
33
|
|
|
|
-
|
|
|
|
-
|
|
|
|
33
|
|
Asset-backed securities
|
|
|
-
|
|
|
|
34
|
|
|
|
21
|
|
|
|
-
|
|
|
|
55
|
|
U.S. corporate debt securities
|
|
|
-
|
|
|
|
1,770
|
|
|
|
2
|
|
|
|
-
|
|
|
|
1,772
|
|
Foreign debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
|
|
|
21
|
|
|
|
85
|
|
|
|
-
|
|
|
|
-
|
|
|
|
106
|
|
Corporate
|
|
|
-
|
|
|
|
390
|
|
|
|
-
|
|
|
|
-
|
|
|
|
390
|
|
Equity securities
|
|
|
9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9
|
|
Money market funds
|
|
|
377
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
377
|
|
Accrued interest
|
|
|
1
|
|
|
|
30
|
|
|
|
-
|
|
|
|
-
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
securities
|
|
|
790
|
|
|
|
2,585
|
|
|
|
24
|
|
|
|
-
|
|
|
|
3,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
790
|
|
|
$
|
5,997
|
|
|
$
|
24
|
|
|
$
|
(3,408
|
)
|
|
$
|
3,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to affiliates carried at fair value
|
|
$
|
-
|
|
|
$
|
(448
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(448
|
)
|
Long-term debt carried at fair value
|
|
|
-
|
|
|
|
(19,014
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(19,014
|
)
|
Derivative related liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
-
|
|
|
|
(505
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(505
|
)
|
Currency swaps
|
|
|
-
|
|
|
|
(59
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(59
|
)
|
Foreign Exchange Forward
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Derivative netting
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
549
|
|
|
|
549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative related liabilities
|
|
|
-
|
|
|
|
(564
|
)
|
|
|
-
|
|
|
|
549
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
(20,026
|
)
|
|
$
|
-
|
|
|
$
|
549
|
|
|
$
|
(19,477
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to affiliates carried at fair value
|
|
$
|
-
|
|
|
$
|
(436
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(436
|
)
|
Long-term debt carried at fair value
|
|
|
-
|
|
|
|
(20,844
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(20,844
|
)
|
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
|
|
$
|
-
|
|
|
$
|
(22,045
|
)
|
|
$
|
-
|
|
|
$
|
763
|
|
|
$
|
(21,282
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Represents counterparty and swap collateral netting which allow
the offsetting of amounts relating to certain contracts when
certain conditions are met.
|
43
HSBC Finance Corporation
The following table provides additional detail regarding the
rating of our U.S. corporate debt securities at
March 31, 2011 and December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
(in millions)
|
|
|
March 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA to
AA(1)
|
|
$
|
392
|
|
|
$
|
-
|
|
|
$
|
392
|
|
A+ to
A-(1)
|
|
|
1,250
|
|
|
|
-
|
|
|
|
1,250
|
|
BBB+ to
Unrated(1)
|
|
|
128
|
|
|
|
2
|
|
|
|
130
|
|
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA to
AA(1)
|
|
$
|
381
|
|
|
$
|
-
|
|
|
$
|
381
|
|
A+ to
A-(1)
|
|
|
1,280
|
|
|
|
-
|
|
|
|
1,280
|
|
BBB+ to
Unrated(1)
|
|
|
138
|
|
|
|
3
|
|
|
|
141
|
|
|
|
(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
There were no transfers between Level 1 and
Level 2 during the three months ended March 31, 2011
or 2010.
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 the
three months ended March 31, 2011 or 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gains and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Transfers
|
|
|
Transfers
|
|
|
|
|
|
Current Period
|
|
|
|
Jan. 1,
|
|
|
|
|
|
Comp.
|
|
|
|
|
|
|
|
|
|
|
|
Into
|
|
|
Out of
|
|
|
Mar. 31,
|
|
|
Unrealized
|
|
|
|
2011
|
|
|
Income
|
|
|
Income
|
|
|
Purchases
|
|
|
Issuances
|
|
|
Settlement
|
|
|
Level 3
|
|
|
Level 3
|
|
|
2011
|
|
|
Gains (Losses)
|
|
|
|
|
|
(in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government sponsored enterprises
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
-
|
|
Asset-backed securities
|
|
|
20
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
2
|
|
|
|
-
|
|
|
|
21
|
|
|
|
-
|
|
U.S. corporate debt securities
|
|
|
3
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
24
|
|
|
$
|
-
|
|
|
$
|
(1
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(1
|
)
|
|
$
|
2
|
|
|
$
|
-
|
|
|
$
|
24
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
Mar. 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
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(2
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
Obligations of U.S. states and political subdivisions
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Asset-backed securities
|
|
|
26
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
27
|
|
|
|
2
|
|
U.S. corporate debt securities
|
|
|
20
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
|
|
|
(17
|
)
|
|
|
10
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
49
|
|
|
$
|
-
|
|
|
$
|
(1
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(1
|
)
|
|
$
|
9
|
|
|
$
|
(19
|
)
|
|
$
|
37
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
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 March 31, 2011 and
2010, 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
|
|
|
|
March 31, 2011
|
|
|
March 31,
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
2011
|
|
|
|
|
|
(In millions)
|
|
|
Real estate secured receivables held for sale at fair value
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5
|
|
|
$
|
5
|
|
|
$
|
1
|
|
Real estate
owned(1)
|
|
|
-
|
|
|
|
924
|
|
|
|
-
|
|
|
|
924
|
|
|
|
(75
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value on a non-recurring basis
|
|
$
|
-
|
|
|
$
|
924
|
|
|
$
|
5
|
|
|
$
|
929
|
|
|
$
|
(74
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gains
|
|
|
|
|
|
|
(Losses) for the
|
|
|
|
Non-Recurring Fair Value Measurements as of
|
|
|
Year Ended
|
|
|
|
March 31, 2010
|
|
|
March 31,
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Real estate secured receivables held for sale at fair value
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
-
|
|
Real estate
owned(1)
|
|
|
-
|
|
|
|
780
|
|
|
|
-
|
|
|
|
780
|
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value on a non-recurring basis
|
|
$
|
-
|
|
|
$
|
780
|
|
|
$
|
3
|
|
|
$
|
783
|
|
|
$
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
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 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.
|
45
HSBC Finance Corporation
|
|
|
|
|
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 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.
46
HSBC Finance Corporation
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.
Long-term debt and Due to affiliates: 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.
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.
16. 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,
47
HSBC Finance Corporation
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 when 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 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
48
HSBC Finance Corporation
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 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 and April 7, 2011, the Court issued
other rulings clarifying the scope of discovery. Plaintiffs have
mailed the claim forms with the modified language and class
members 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.
Debt Cancellation Litigation. Between July 2010 and
May 2011, eight substantially similar putative class actions
were filed against our subsidiaries, HSBC Bank Nevada, N.A.
(HSBC Bank Nevada) and HSBC Card Services Inc.:
Rivera et al. v. HSBC Bank Nevada et al. (D.N.J.
10-CV-03375); Esslinger et al v. HSBC Bank Nevada,
N.A. et al. (E.D. Pa. 10-CV-03213); McAlister et al. v.
HSBC Bank Nevada, N.A. et al. (W.D. Wash. 10-CV-05831);
Mitchell v. HSBC Bank Nevada, N.A. et al. (D. Md.
10-CV-03232); Samuels v. HSBC Bank Nevada, N.A. et al.
(N.D. III. 11-CV-00548); McKinney v. HSBC Card
Services et al. (S.D. III. 10-CV-00786); Chastain v.
HSBC Bank Nevada, N.A. (South Carolina Court of Common
Pleas,
13th
Circuit) (filed as a counterclaim to a pending collections
action); Colton et al. v. HSBC Bank Nevada, N.A. et al.
(C.D. Ca. 11-CV-03742). These actions principally allege
that cardholders were enrolled in debt cancellation or
suspension products and challenge various marketing or
administrative practices relating to those products. The
plaintiffs claims include breach of contract and the
implied covenant of good faith and fair dealing,
unconscionability, unjust enrichment, and violations of state
consumer protection and deceptive acts and practices statutes.
The Mitchell action was dismissed by the plaintiff in
March 2011. At this time, we are unable to reasonably estimate
the liability, if any, that might arise as a result of these
actions and will continue to defend the claims vigorously.
49
HSBC Finance Corporation
Governmental
and Regulatory Matters
Foreclosure Practices As previously reported, HSBC
Finance Corporation and certain of our affiliates were among the
servicers subject to the joint examination by 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. As a result of that review, HSBC Finance Corporation
and our parent, HSBC North America, have entered into a consent
cease and desist order with the Federal Reserve (the
Federal Reserve Servicing Consent Order), and our
affiliate, HSBC Bank USA, has entered into a similar consent
order with the OCC (together with the Federal Reserve Servicing
Consent Order, the Servicing Consent Orders). The
Federal Reserve Servicing Consent Order requires us to take
prescribed actions to address the deficiencies noted in the
joint examination and described in the consent order. These
actions include the submission of plans, programs, policies and
procedures for:
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strengthening board oversight of servicing operations, including
oversight of risk management, internal audit and compliance
programs;
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coordinating communications with borrowers regarding loss
mitigation and foreclosure;
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governance of outsourcing of servicing, loss mitigation and
foreclosure functions;
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enhancing our servicing compliance program;
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enhancing control and oversight of the Mortgage Electronic
Registration System related activities;
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review and remediation, as necessary, of management information
systems for servicing, loss mitigation and foreclosure
activities;
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improving compliance training regarding servicing, loss
mitigation and foreclosure activities and communications with
borrowers; and
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enhancing internal audit of servicing, loss mitigation and
foreclosure operations.
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The Federal Reserve Servicing Consent Order also requires us to
retain a consultant to review specified foreclosure proceedings
and report on various aspects of our foreclosure processes,
including whether any borrower was injured financially as a
result of any identified deficiencies. We will be required to
remediate deficiencies identified in any foreclosure filings or
proceedings and reimburse or otherwise remediate borrowers where
required. The Federal Reserve Servicing Consent Order also
requires us to perform a comprehensive assessment of risk
management in our servicing operations and to submit a risk
management program to address, among other things, any findings
of weaknesses in the risk assessment. We are required to submit
quarterly progress reports to the Federal Reserve.
The Servicing Consent Orders do not preclude additional
enforcement actions against HSBC Finance Corporation by bank
regulatory, governmental or law enforcement agencies, such as
state Attorneys General, which could include the imposition of
fines and actions to recover civil money penalties and other
financial penalties relating to the activities that were the
subject of the Servicing Consent Orders. We may also see an
increase in private litigation concerning our practices. The
Federal Reserve has indicated that it believes monetary
sanctions are appropriate for the enforcement actions it
recently announced and that it plans to announce monetary
penalties. While we believe it is possible that civil money
penalties will be imposed on HSBC Finance Corporation, we are
unable at this time to estimate reliably the amounts, or range
of possible amounts, of any such penalties.
17. New
Accounting Pronouncements
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 April 2011, the FASB
issued an 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
50
HSBC Finance Corporation
identifying and disclosing troubled debt restructurings, the new
guidance would be effective for interim and annual reporting
periods beginning on or after June 15, 2011, and would be
applied retrospectively to restructurings occurring on or after
January 1, 2011. 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 beginning on or 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 have
now been identified as troubled debt restructurings.
Implementation of this Accounting Standards Update will result
in significantly higher volumes of re-aged and modified accounts
being reported as troubled debt restructurings. Although we are
in the process of evaluating the impact of adopting this
Accounting Standards Update, we currently expect the impact will
be material. Additionally, we continue to review our current
customer account management policies and practices to determine
if any changes will be made in future periods as a result of
this guidance.
This Accounting Standards Update also clarified the effective
date for new disclosure requirements for troubled debt
restructurings. The new disclosure requirements for trouble debt
restructurings will also be effective for interim and annual
periods beginning on or after June 15, 2011.
51
HSBC Finance Corporation
Item 2. Managements
Discussion and Analysis of Financial Condition and Results of
Operations
Forward-Looking
Statements
Managements Discussion and Analysis of Financial Condition
and Results of Operations (MD&A) should be read
in conjunction with the consolidated financial statements, notes
and tables included elsewhere in this report and with our Annual
Report on
Form 10-K
for the year ended December 31, 2010 (the 2010
Form 10-K).
MD&A may contain certain statements that may be
forward-looking in nature within the meaning of the Private
Securities Litigation Reform Act of 1995. In addition, we may
make or approve certain statements in future filings with the
SEC, in press releases, or oral or written presentations by
representatives of HSBC Finance Corporation that are not
statements of historical fact and may also constitute
forward-looking statements. Words such as may,
will, should, would,
could, appears, believe,
intends, expects, estimates,
targeted, plans,
anticipates, goal and similar
expressions are intended to identify forward-looking statements
but should not be considered as the only means through which
these statements may be made. These matters or statements will
relate to our future financial condition, economic forecast,
results of operations, plans, objectives, performance or
business developments and will involve known and unknown risks,
uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different
from that which was expressed or implied by such forward-looking
statements. Forward-looking statements are based on our current
views and assumptions and speak only as of the date they are
made. HSBC Finance Corporation undertakes no obligation to
update any forward-looking statement to reflect subsequent
circumstances or events.
Executive
Overview
HSBC Finance Corporation is an indirect wholly owned subsidiary
of HSBC Holdings plc (HSBC). HSBC Finance
Corporation may also be referred to in MD&A as
we, us, or our.
The following discussion of our financial condition and results
of operations excludes the results of our discontinued
operations from all periods presented unless otherwise noted.
See Note 2, Discontinued Operations, in the
accompanying consolidated financial statements for further
discussion of these operations.
Current Environment During the first three
months of 2011, economic conditions in the United States
continued to improve. While the pace of improvement has
generally been slow, there are signs the recovery is gaining
momentum as job growth in the first quarter showed moderate
improvement. However, serious threats to economic growth remain
including rising oil prices, continued pressure and uncertainty
in the housing market and elevated unemployment levels.
Marketplace liquidity continues to remain ample and companies in
the financial sector continue to be 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. During the first
quarter of 2011, we continued to see home prices decline in many
markets as housing prices remain under pressure due to elevated
foreclosure levels. How sustainable these improvements will be
in the absence of government actions remains to be seen.
While job creation in the private sector improved during the
first quarter of 2011, there continues to be uncertainty as to
how pronounced the economic recovery will be. Despite an
increasing trend in consumer spending, consumer confidence
continues to be low based on historical standards and after
posting five consecutive months of improvement, fell again
during March, raising questions about the continued willingness
by consumers to spend in the coming months, particularly if oil
prices continue to rise. 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 8.8 percent in
March 2011, decreasing from a rate of 9.4 percent at
December 2010. 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 23 states are at or above the
U.S. national average. Unemployment rates in 4 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
52
HSBC Finance Corporation
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.
Mortgage lending industry trends continue to be affected by the
following in 2011:
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>
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Overall levels of delinquencies remain elevated;
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>
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Mortgage loan originations from 2005 to 2008 continue to perform
worse than originations from prior periods;
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>
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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 few years;
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>
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During the first quarter of 2011, home prices generally declined
as housing prices continue to remain under pressure due to
elevated foreclosure levels;
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>
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Lower secondary market demand for subprime loans resulting in
reduced liquidity for subprime mortgages; and
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>
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Tighter lending standards by mortgage lenders which impacts the
ability of borrowers to refinance existing mortgage loans.
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In our credit card business, while consumer spending remained
relatively strong during the first quarter of 2011, we saw
continued declines in our credit card receivable balances due to
increased receivable run-off in the segments of our credit card
receivable portfolio for which we no longer originate new
accounts and seasonal improvements in collection activities as
some customers use their tax refunds to make payments. While
credit card marketing increased during the first quarter of
2011, marketing remains low compared to historical levels.
Credit quality continued to improve during the current quarter
as the impact of the current economic environment, including
continued 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 continued to result
in reductions to revenue, the impact has been mitigated by
improved credit quality for our Cards business in the first
quarter of 2011.
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, a sustained recovery of the housing markets
and stabilization in energy prices 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, 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. These conditions in
combination with the impact of recent regulatory changes,
including the continued implementation of the Dodd-Frank
Wall Street Reform and Consumer Protection Act of 2010
(Dodd-Frank) will continue to impact our results
through 2011 and beyond, the degree of which is largely
dependent upon the nature and extent of the economic recovery.
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 servicers begin to increase foreclosure activities
and market properties in large numbers which is
53
HSBC Finance Corporation
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.
Recent Regulatory Developments As previously
reported, HSBC Finance Corporation and certain of our affiliates
were among the servicers subject to the joint examination by 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. As a result of that review, HSBC Finance Corporation
and our parent, HSBC North America Holdings Inc.
(HSBC North America), have entered into a consent
cease and desist order with the Federal Reserve (the
Federal Reserve Servicing Consent Order), and our
affiliate, HSBC Bank USA, has entered into a similar consent
order with the OCC (together with the Federal Reserve Servicing
Consent Order, the Servicing Consent Orders). The
Federal Reserve Servicing Consent Order requires us to take
prescribed actions to address the deficiencies noted in the
joint examination and described in the consent order. See
Note 16, Litigation and Regulatory Matters, in
the accompanying consolidated financial statements for further
discussion of these actions.
The requirements of the Servicing Consent Orders will increase
our operational, reputational and legal risk profiles and
implementation of its provisions will require additional
financial and managerial resources. In addition, the Servicing
Consent Orders do not preclude additional enforcement actions
against us or HSBC North America by bank regulatory,
governmental or law enforcement agencies, including the
imposition of fines and actions to recover civil money penalties
and other financial penalties relating to the activities that
were the subject of the Servicing Consent Orders. We may also
see an increase in private litigation concerning our practices.
HSBC Finance Corporation and its affiliates take these
regulatory matters very seriously, and we have been working
closely with our regulators to address these issues quickly and
efficiently. Additionally, we have already made several key
procedural improvements to enhance our foreclosure processes as
a result of our own internal reviews. We have resumed
foreclosures on a limited basis in certain geographies. It will
be a number of months before we resume foreclosures in all
jurisdictions as we need to ensure we are satisfied that
applicable enhanced processes have been implemented.
We remain committed to assisting customers who are experiencing
financial difficulties, and we will continue to review our
policies and processes to make modification and other account
management alternatives for the benefit of our customers more
easily accessible to those in need of assistance. Home
preservation continues to be a cornerstone of our business, and
foreclosure is viewed as a last resort. Foreclosure proceedings
are only instituted when other reasonable alternatives have been
exhausted and where the borrower is seriously delinquent. We
also offer assistance, including financial, to those wishing to
leave a property without having to go through the foreclosure
process.
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.
As discussed in 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 lending operations
currently consist of our credit card and retail services
business and include primarily MasterCard and Visa credit cards
and private label credit cards. A significant portion of new
credit card and all new
54
HSBC Finance Corporation
private label receivable originations are sold on a daily basis
to HSBC Bank USA, National Association (HSBC Bank
USA). Our credit card receivable portfolio totaled
$9.2 billion at March 31, 2011 reflecting a decrease
of 7 percent since December 31, 2010. This decrease
reflects receivable run-off in the segments of our credit card
receivable portfolio for which we no longer originate new
accounts and seasonal improvements in collection activities as
some customers use their tax refunds to make payments. These
decreases were partially offset by increases in receivables
associated with new account activity. Although marketing levels
increased in 2011, they remain low compared to historical levels.
The real estate secured and personal non-credit card receivable
portfolios of our Consumer Lending and Mortgage Services
businesses, which totaled $53.7 billion at March 31,
2011, 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 real
estate secured receivable portfolios of our run-off Consumer
Lending and Mortgage Services businesses to decline between
50 percent and 60 percent over the next five years.
Attrition will not be linear during this period. While lower,
charge-off related receivable run-off will continue 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.
We continue to evaluate our operations as we seek to optimize
our risk profile and cost efficiencies as well as our liquidity,
capital and funding requirements. This could result in further
strategic actions that may include changes to our legal
structure, asset levels, cost structure or product offerings in
support of HSBCs strategic priorities. As part of this
continuing evaluation, a strategic review of HSBCs U.S.
credit card and private label businesses is underway as HSBC
seeks to redistribute resources and reallocate capital to
support strategically-aligned businesses. As a result, we have
removed any distinction between core and non-core within these
financial statements.
We also continue to focus on cost optimization efforts to ensure
realization of cost efficiencies. During the first quarter of
2011, in an effort to create a more sustainable cost structure,
we initiated a formal review to identify areas where we may be
able to streamline or redesign operations within certain
functions to reduce or eliminate costs. To date, we have
identified various opportunities to reduce costs through
organizational structure redesign, vendor spending,
discretionary spending and other general efficiency initiatives.
This review will continue throughout 2011 and, as a result, we
may incur restructuring charges during the remainder of 2011,
the amount of which will depend on the actions that are
ultimately implemented.
Performance, Developments and Trends Our
operating results improved during the first quarter of 2011. We
reported a loss from continuing operations of $19 million
during the three months ended March 31, 2011 compared to a
loss from continuing operations of $646 million during the
three months ended March 31, 2010. Our loss from continuing
operations before taxes was $212 million during the three
months ended March 31, 2011 compared to a loss from
continuing operations before tax of $998 million during the
prior year quarter. Our results in these periods were
significantly impacted by the change in the fair value of debt
and related derivatives for which we have elected fair value
option. In order to better understand the underlying performance
trends of our business, the following
55
HSBC Finance Corporation
table summarizes the impact of this item on our income (loss)
from continuing operations before income tax for all periods
presented:
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Three Months Ended March 31,
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2011
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2010
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Loss from continuing operations before income tax, as reported
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$
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(212
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)
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$
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(998
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)
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(Gain) loss in value of fair value option debt and related
derivatives
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29
|
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(133
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)
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Loss from continuing operations before income tax, excluding
above
items(1)
|
|
$
|
(183
|
)
|
|
$
|
(1,131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Represents a
non-U.S.
GAAP financial measure.
|
Excluding the impact of the change in the fair value of debt and
related derivatives for which we have elected fair value option
in the above table, our results for the three months ended
March 31, 2011 improved $948 million compared to the
three months ended March 31, 2010 driven by lower provision
for credit losses and higher other revenues, partially offset by
lower net interest income and higher operating expenses.
Net interest income decreased during the three months ended
March 31, 2011 as compared to the prior year quarter. The
decrease reflects lower average receivables as a result of
receivable liquidation and a lower overall receivable yield. The
lower overall receivable yield was driven by lower yields in our
credit card receivable portfolio, partially offset by higher
yields in our personal non-credit card receivable portfolio as
yields in our real estate secured receivable portfolio were
essentially flat during the quarter. Overall receivable yields
were also 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 the three months ended
March 31, 2011 was partially offset by higher net interest
income on our non-insurance investment portfolio reflecting
higher levels of investments held and slightly higher yields and
lower interest expense due to lower average borrowings and lower
average rates. Net interest margin was 5.12 percent for the
three months ended March 31, 2011 compared to
5.32 percent for the year-ago quarter reflecting lower
overall yields as discussed above, partially offset by lower
cost of funds as a percentage of average interest-earning
assets. See Results of Operations in this MD&A
for additional discussion regarding net interest income and net
interest margin.
Other revenues during the three months ended March 31, 2011
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
increased during the three months ended March 31, 2011
primarily due to higher derivative related income, partially
offset by lower fee income and lower servicing and other fees
from HSBC affiliates. During the three months ended
March 31, 2011, rising long-term interest rates resulted in
a positive
mark-to-market
adjustment of $63 million on our portfolio of
non-qualifying economic hedges as compared to a negative
mark-to-market
adjustment of $38 million in the prior year quarter. Our
portfolio of non-qualifying economic hedges lowers 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 do not qualify as
effective hedges under hedge accounting principles. Lower fee
income reflects lower late and overlimit fees due to lower
volumes and lower delinquency levels, changes in customer
behavior and continuing impacts from changes required by the
Credit Card Accountability Responsibility and Disclosure Act of
2009 (Card Act). Lower servicing and other fees from
HSBC affiliates reflect lower levels of receivables being
serviced. See Results of Operations for a more
detailed discussion of other revenues.
Our provision for credit losses decreased significantly during
the three months ended March 31, 2011 as compared to the
prior year quarter as discussed below.
|
|
|
|
|
Provision for credit losses for our credit card receivable
portfolio decreased during the three months ended March 31,
2011. The decrease reflects lower receivable levels as a result
of receivable run-off in the segments of our credit card
receivable portfolio for which we no longer originate new
accounts. 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 and charge-off levels as
|
56
HSBC Finance Corporation
|
|
|
|
|
customer payment rates have continued to be strong during the
first quarter of 2011 as well as higher recovery rates and
improvements in economic conditions. The impact on credit card
receivable losses from the current economic environment,
including continued 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 during the first quarter of 2011
reflecting lower receivable levels as the portfolios continue to
liquidate, lower delinquency and charge-off levels and
improvements in economic conditions. The decrease also reflects
lower loss severities as compared to the prior year quarter
reflecting 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. These decreases were partially offset by the impact of
continued high unemployment levels and lower receivable
prepayments.
|
The decrease in the provision for credit losses also reflects
lower loss estimates on troubled debt restructurings (TDR
Loans) as compared to the prior year quarter reflecting
lower volumes of TDR Loans as well as the impact of an increase
in the percentage of TDR Loans that are performing due to
charge-off of nonperforming TDR Loans. These decreases were
partially offset by the impact of lower estimated cash flows
from these receivables due to economic expectations about home
prices and other changes in assumptions including the length of
time these receivables will remain on our books as a result of
the suspension of foreclosure activity as discussed more fully
below. See Real Estate Owned for further discussion
of the foreclosure suspension. These offsets have resulted in an
overall increase in credit loss reserves on first lien real
estate secured TDR Loans at March 31, 2011 as compared to
December 31, 2010.
|
|
|
|
|
The provision for credit losses for our personal non-credit card
receivables decreased significantly during the three months
ended March 31, 2011 reflecting lower receivable levels as
compared to the prior year quarter, lower delinquency and
charge-off levels, improvements in economic conditions and lower
reserve requirements on TDR Loans.
|
See Results of Operations for a more detailed
discussion of our provision for credit losses.
Credit loss reserves at March 31, 2011 decreased as
compared to December 31, 2010 as we recorded provision for
credit losses less than net charge-offs of $781 million
during the current quarter. Lower credit loss reserve levels
reflect lower receivable levels, improved economic conditions,
including lower delinquency levels, and an increase in the
amount of real estate secured receivables which have been
written down to net realizable value less cost to sell. The
decrease in credit loss reserves was partially offset by higher
reserve levels on TDR Loans. See Credit Quality for
further discussion of credit loss reserves. Reserve levels for
real estate secured receivables at our Mortgage Services and
Consumer Lending businesses as well as for receivables in our
credit card business can be further analyzed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Secured Receivables
|
|
|
Credit Card
|
|
|
|
Consumer Lending
|
|
|
Mortgage Services
|
|
|
Receivables
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Credit loss reserves at beginning of period
|
|
$
|
2,409
|
|
|
$
|
3,047
|
|
|
$
|
1,781
|
|
|
$
|
2,385
|
|
|
$
|
984
|
|
|
$
|
1,824
|
|
Provision for credit losses
|
|
|
435
|
|
|
|
587
|
|
|
|
255
|
|
|
|
455
|
|
|
|
76
|
|
|
|
201
|
|
Charge-offs(1)
|
|
|
(610
|
)
|
|
|
(861
|
)
|
|
|
(433
|
)
|
|
|
(655
|
)
|
|
|
(345
|
)
|
|
|
(592
|
)
|
Recoveries
|
|
|
16
|
|
|
|
14
|
|
|
|
11
|
|
|
|
16
|
|
|
|
56
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit loss reserves at end of period
|
|
$
|
2,250
|
|
|
$
|
2,787
|
|
|
$
|
1,614
|
|
|
$
|
2,201
|
|
|
$
|
771
|
|
|
$
|
1,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A significant portion of our receivable portfolio is considered
troubled debt restructures (TDR Loans) which are
reserved using a discounted cash flow analysis and generally
results in a higher reserve requirement for these loans.
Additionally, a significant portion of real estate secured
receivables in our portfolio are carried at net realizable
57
HSBC Finance Corporation
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:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Total receivable portfolio
|
|
$
|
62,997
|
|
|
$
|
66,383
|
|
|
|
|
|
|
|
|
|
|
Real estate secured receivables carried at net realizable value
less cost to sell
|
|
$
|
5,405
|
|
|
$
|
5,095
|
|
TDR Loans:
|
|
|
|
|
|
|
|
|
Credit card
|
|
|
392
|
|
|
|
427
|
|
Real estate
secured(1)
|
|
|
7,584
|
|
|
|
7,875
|
|
Personal non-credit card
|
|
|
649
|
|
|
|
704
|
|
|
|
|
|
|
|
|
|
|
TDR Loans
|
|
|
8,625
|
|
|
|
9,006
|
|
|
|
|
|
|
|
|
|
|
Receivables carried at either net realizable value or reserved
for using a discounted cash flow methodology
|
|
$
|
14,030
|
|
|
$
|
14,101
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
27.5
|
%
|
|
|
26.3
|
%
|
|
|
|
|
|
|
|
|
|
Receivables carried at either net realizable value or reserved
for using a discounted cash flow methodology as a percentage of
total receivables
|
|
|
22.3
|
%
|
|
|
21.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Excludes TDR Loans which are recorded at net realizable value
less cost to sell.
|
Total operating expenses increased $15 million, or
2 percent during the three months ended March 31, 2011
primarily due to higher real estate owned (REO)
expenses and higher marketing expenses for credit card
receivables partially offset by lower salaries and employee
benefits and other servicing and administrative expenses as a
result of continued entity-wide initiatives to reduce costs. See
Results of Operations for a more detailed discussion
of operating expenses.
Our effective income tax rate for continuing operations was
(91.0) percent during the three months ended March 31, 2011
and (35.3) percent the prior year quarter. The effective tax
rate for the three months ended March 31, 2011 was
significantly impacted by a release of valuation allowance
previously established on foreign tax credits as well as by
state taxes, including states where we file combined unitary
state tax returns with other HSBC affiliates. During the first
quarter of 2011, HSBC North America identified an additional tax
planning strategy which is expected to generate sufficient
taxable foreign source income to allow us to recognize and
utilize foreign tax credits currently on our balance sheet
before they expire. See Note 10, Income Taxes,
in the accompanying consolidated financial statements for
further discussion.
The financial information set forth below summarizes selected
financial highlights of HSBC Finance Corporation for the three
month periods ended March 31, 2011 and 2010 and as of
March 31, 2011 and December 31, 2010.
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Loss from continuing operations
|
|
$
|
(19
|
)
|
|
$
|
(646
|
)
|
Return on average owned assets (ROA)
|
|
|
(.10
|
)%
|
|
|
(2.78
|
)%
|
Return on average common shareholders equity
(ROE)
|
|
|
(3.29
|
)
|
|
|
(35.05
|
)
|
Net interest margin
|
|
|
5.12
|
|
|
|
5.32
|
|
Consumer net charge-off ratio, annualized
|
|
|
9.67
|
|
|
|
13.52
|
|
Efficiency
ratio(1)
|
|
|
59.46
|
|
|
|
48.64
|
|
58
HSBC Finance Corporation
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Receivables:
|
|
|
|
|
|
|
|
|
Credit card
|
|
$
|
9,249
|
|
|
$
|
9,897
|
|
All
other(2)
|
|
|
53,748
|
|
|
|
56,486
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
62,997
|
|
|
$
|
66,383
|
|
|
|
|
|
|
|
|
|
|
Two-month-and-over contractual delinquency ratio
|
|
|
12.92
|
%
|
|
|
14.41
|
%
|
|
|
(1)
|
Ratio of total costs and expenses less policyholders
benefits to net interest income and other revenues less
policyholders benefits.
|
|
(2)
|
All other consists primarily of the liquidating receivable
portfolios in our Consumer Lending and Mortgage Services
businesses.
|
Performance Ratios Our efficiency ratio from
continuing operations was 59.46 percent during the three
months ended March 31, 2011 as compared to
48.64 percent in the prior year quarter. Our efficiency
ratio in both periods was impacted by the change in the fair
value of debt for which we have elected fair value option
accounting. Excluding this item from both periods, our
efficiency ratio remained higher during the first quarter of
2011 primarily due to lower net interest income driven by
receivable portfolio liquidation and lower overall receivable
yields as well as lower other revenues while operating expenses
increased driven by higher REO expenses.
Our return on average common shareholders equity
(ROE) was (3.29) percent for the three months ended
March 31, 2011 compared to (35.05) percent in the year-ago
quarter. Our return on average owned assets (ROA)
was (.10) percent for the three months ended March 31, 2011
compared to (2.78) percent in the year-ago quarter. Both ROE and
ROA improved as compared to the year-ago quarter due to a lower
net loss during the current period than during the prior year
quarter.
Receivables Receivables were
$63.0 billion at March 31, 2011 and $66.4 billion
at December 31, 2010. The decrease in our credit card
receivable portfolio reflects increased receivable run-off in
the segments of our credit card receivable portfolio for which
we no longer originate new accounts. These decreases were
partially offset by increases in receivables associated with new
account activity. The decrease in our real estate secured and
personal non-credit card 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. The
decrease for all receivable products also reflects seasonal
improvements in our collection activities during the first
quarter of the year as some customers use their tax refunds to
make payments. 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 12.92 percent at March 31, 2011 as
compared to 14.41 percent at December 31, 2010.
Dollars of contractual delinquency decreased for all receivable
products reflecting lower receivable levels due to lower
origination volumes and improved credit quality including
continued strong payment rates in our credit card receivable
portfolio and continued liquidation of our real estate secured
and personal non-credit receivable portfolios. The decrease for
all receivable products also reflects seasonal improvements in
our collection activities during the first quarter of the year
as some customers use their tax refunds to make payments. The
delinquency ratio decreased as compared to December 31,
2010 as dollars of delinquency decreased at a faster pace than
receivable levels. See Credit Quality-Delinquency
for a more detailed discussion of our delinquency ratios.
Overall dollars of net charge-offs decreased as compared to both
the prior quarter and prior year quarter as all receivable
portfolios were positively impacted in both periods by lower
delinquency levels as a result of lower receivable levels,
improvements in economic conditions and lower levels of personal
bankruptcy filings. For real estate secured receivables, dollars
of net charge-offs in both periods were also positively impacted
by an increase in the number of
deeds-in-lieu
accepted and as compared to the prior year quarter an increase
in short sales, which
59
HSBC Finance Corporation
result in lower losses compared to loans which are subject to a
formal foreclosure process. Compared to the prior quarter,
dollars of net charge-offs in our real estate secured receivable
portfolio were essentially flat, as the improvements noted
above, in addition to other operational efficiencies in the
charge-off process in the fourth quarter of 2010, were largely
offset by a change in the timing for recognizing additional
charge-offs on loans greater than 180 days past due which
resulted in a one-time reversal of charge-off and an offsetting
increase to credit loss reserves in the fourth quarter of 2010.
Dollars of net charge-offs for all receivable portfolios
continued to be impacted by high unemployment levels. Net
charge-offs of consumer receivables as a percentage of average
consumer receivables (net charge-off ratio)
decreased to 9.67 percent for the three months ended
March 31, 2011 as compared to 9.98 percent for the
quarter ended December 31, 2010 and 13.52 percent for
the quarter ended March 31, 2010. As compared to both
periods, the decrease reflects lower dollars of net charge-offs
as discussed above which outpaced the decrease in average
receivables. See Credit
Quality-Net
Charge-offs of Consumer Receivables for a more detailed
discussion of our net charge-off ratios.
Funding and Capital During the first quarter
of 2011, we did not receive any capital contributions from HSBC
Investments (North America) Inc. (HINO). However,
until we return to profitability, HSBCs continued support
may be 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.
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. Therefore, we have determined that we
have the positive intent and ability to hold our receivable
portfolios for the foreseeable future and, as such, have
classified these portfolios as held 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
7.70 percent and 7.37 percent at March 31, 2011
and December 31, 2010, 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.
As discussed in previous filings, HSBC North America is required
to implement Basel II provisions 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.
Prior to adoption of Basel II, HSBC North America is required to
successfully complete a parallel run by measuring regulatory
capital under both the new regulatory capital rules and the
existing general risk-based rules for a period of at least four
quarters. Successful completion of the parallel run period
requires the approval of U.S. regulators. HSBC North
America began the parallel run period in January 2010 which
encompasses enhancements to a number of risk policies, processes
and systems to align with the Basel II final rule
requirements. It is uncertain as to when HSBC North America will
receive approval from the Federal Reserve Board, its primary
regulator. Regulatory approval may not occur until later in 2011
or in 2012. HSBC North America has integrated Basel II
metrics into its management reporting and decision making
processes.
60
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.
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
|
|
Income (loss) from continuing operations before income tax from
prior year
|
|
$
|
(998
|
)
|
|
$
|
1,700
|
|
Increase (decrease) in income from continuing operations before
income tax expense attributable to:
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
(205
|
)
|
|
|
(429
|
)
|
Provision for credit losses
|
|
|
1,082
|
|
|
|
915
|
|
Mark-to-market
on derivatives which do not qualify as effective hedges
|
|
|
101
|
|
|
|
(41
|
)
|
Gain (loss) on debt designated at fair value and related
derivatives
|
|
|
(162
|
)
|
|
|
(3,979
|
)
|
Credit card fee income and enhancement services revenue
|
|
|
(30
|
)
|
|
|
(167
|
)
|
Gain on bulk and on-going receivable sales to HSBC affiliates
|
|
|
(3
|
)
|
|
|
(62
|
)
|
Servicing and other fees from HSBC affiliates
|
|
|
(15
|
)
|
|
|
(16
|
)
|
Lower of cost or market adjustment on receivables held for sale
|
|
|
-
|
|
|
|
170
|
|
Salaries and employee benefits
|
|
|
36
|
|
|
|
238
|
|
Other marketing
|
|
|
(30
|
)
|
|
|
(8
|
)
|
REO expenses
|
|
|
(67
|
)
|
|
|
67
|
|
Goodwill and other intangible asset impairment charges
|
|
|
-
|
|
|
|
667
|
|
All other
activity(1)
|
|
|
79
|
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
786
|
|
|
|
(2,698
|
)
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income tax for current
period
|
|
$
|
(212
|
)
|
|
$
|
(998
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Reflects other activity for other revenues and operating
expenses.
|
For additional discussion regarding changes in the components of
income and expense, see 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
61
HSBC Finance Corporation
down to HSBC Finance Corporation for both U.S. GAAP
and IFRSs. The following table reconciles our net loss on a
U.S. GAAP basis to net loss on an IFRSs basis:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Net loss U.S. GAAP basis
|
|
$
|
(21
|
)
|
|
$
|
(603
|
)
|
Adjustments, net of tax:
|
|
|
|
|
|
|
|
|
Derivatives and hedge accounting (including fair value
adjustments)
|
|
|
(2
|
)
|
|
|
(3
|
)
|
Intangible assets
|
|
|
8
|
|
|
|
11
|
|
Loan origination
|
|
|
(6
|
)
|
|
|
5
|
|
Loan impairment
|
|
|
(281
|
)
|
|
|
26
|
|
Loans held for sale
|
|
|
(7
|
)
|
|
|
(18
|
)
|
Interest recognition
|
|
|
(3
|
)
|
|
|
(2
|
)
|
Other-than-temporary
impairments on
available-for-sale
securities
|
|
|
-
|
|
|
|
1
|
|
Securities
|
|
|
6
|
|
|
|
14
|
|
Present value of long term insurance business
|
|
|
6
|
|
|
|
4
|
|
Pension and other postretirement benefit costs
|
|
|
5
|
|
|
|
37
|
|
Release of tax valuation allowances
|
|
|
18
|
|
|
|
-
|
|
Loss on sale of auto finance receivable and other related assets
|
|
|
-
|
|
|
|
(34
|
)
|
Other
|
|
|
4
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
Net loss IFRSs basis
|
|
|
(273
|
)
|
|
|
(563
|
)
|
Tax benefit IFRSs basis
|
|
|
362
|
|
|
|
313
|
|
|
|
|
|
|
|
|
|
|
Loss before tax IFRSs basis
|
|
$
|
(635
|
)
|
|
$
|
(876
|
)
|
|
|
|
|
|
|
|
|
|
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
discounting of cash flows including recovery estimates at the
original effective interest rate of the pool of customer loans.
The amount of impairment relating to the discounting of future
cash flows unwinds with the passage of time, and is recognized
in interest income. Also under IFRSs, if the recognition of a
write-down to net realizable value on secured loans decreases
because collateral values have improved and the
62
HSBC Finance Corporation
improvement can be related objectively to an event occurring
after recognition of the write-down, such write-down can be
reversed, which is not permitted under U.S. GAAP.
Additionally under IFRSs, future recoveries on charged-off loans
or loans written down to net realizable value less cost to
obtain title and sell 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. Under IFRSs, interest on impaired
loans is recorded at the effective interest rate on the customer
loans balance net of impairment allowances, and therefore
reflects the collectibility of the loans.
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
changes in estimated contractual cash flows, including 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, 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 2011 and 2010, under IFRSs we
recorded additional gains as these shares vest. The additional
shares are not recorded 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
63
HSBC Finance Corporation
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.
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.
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 exceeded the higher of the projected benefit obligation
or fair value of plan assets 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.
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.
Share-based bonus arrangements Under IFRSs,
the recognition of compensation expense related to share-based
bonuses begins on January 1 of the current year for awards
expected to be granted in the first quarter of the following
year. Under U.S. GAAP, the recognition of compensation
expense related to share-based bonuses does not begin until the
date the awards are granted.
Release of tax valuation allowances Reflects
differences in the timing of amounts of deferred tax assets that
can be realized between U.S. GAAP and IFRSs.
Other There are other differences between
IFRSs and U.S. GAAP including purchase accounting and other
miscellaneous items.
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.
Receivables
Review
The following table summarizes receivables at March 31,
2011 and increases (decreases) since December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases
|
|
|
|
|
|
|
(Decreases) From
|
|
|
|
March 31,
|
|
|
December 31, 2010
|
|
|
|
2011
|
|
|
$
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card
|
|
$
|
9,249
|
|
|
$
|
(648
|
)
|
|
|
(6.5
|
)%
|
Real estate
secured(1)(2)
|
|
|
47,216
|
|
|
|
(2,120
|
)
|
|
|
(4.3
|
)
|
Personal non-credit card
|
|
|
6,506
|
|
|
|
(611
|
)
|
|
|
(8.6
|
)
|
Commercial and other
|
|
|
26
|
|
|
|
(7
|
)
|
|
|
(21.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables
|
|
$
|
62,997
|
|
|
$
|
(3,386
|
)
|
|
|
(5.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
HSBC Finance Corporation
|
|
(1) |
Real estate secured receivables are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases
|
|
|
|
|
|
|
(Decreases) From
|
|
|
|
March 31,
|
|
|
December 31, 2010
|
|
|
|
2011
|
|
|
$
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Mortgage Services
|
|
$
|
15,167
|
|
|
$
|
(815
|
)
|
|
|
(5.1
|
)%
|
Consumer Lending
|
|
|
32,043
|
|
|
|
(1,304
|
)
|
|
|
(3.9
|
)
|
All other
|
|
|
6
|
|
|
|
(1
|
)
|
|
|
(14.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
$
|
47,216
|
|
|
$
|
(2,120
|
)
|
|
|
(4.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) |
At March 31, 2011 and December 31, 2010, real estate
secured receivables includes $5.4 billion and
$5.1 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.
|
Credit card receivables Credit card receivables have
decreased since December 31, 2010 as a result of receivable
run-off in the segments of our credit card receivable portfolio
for which we no longer originate new accounts and seasonal
improvements in our collection activities during the first
quarter of the year as some customers use their tax refunds to
make payments. These decreases were partially offset by
increases in receivables associated with new account activity.
While marketing levels continue to be low compared to historical
levels, we believe the recent increases in direct marketing
mailings and new customer account originations for portions of
our non-prime credit card receivable portfolio, when coupled
with a reduction in seasonal collection factors experienced in
the first quarter, will likely result in lower run-off of credit
card receivables during the remainder of 2011.
Real estate secured receivables Real estate secured
receivables can be further analyzed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases
|
|
|
|
|
|
|
(Decreases) From
|
|
|
|
March 31,
|
|
|
December 31, 2010
|
|
|
|
2011
|
|
|
$
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Real estate
secured(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed-end:
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
41,884
|
|
|
$
|
(1,788
|
)
|
|
|
(4.1
|
)%
|
Second lien
|
|
|
4,005
|
|
|
|
(255
|
)
|
|
|
(6.0
|
)
|
Revolving:
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
182
|
|
|
|
(5
|
)
|
|
|
(2.7
|
)
|
Second lien
|
|
|
1,145
|
|
|
|
(72
|
)
|
|
|
(5.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate
secured(2)
|
|
$
|
47,216
|
|
|
$
|
(2,120
|
)
|
|
|
(4.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
modification.
|
|
(2)
|
Excludes receivables held for sale. Real estate secured
receivables held for sale included $5 million and
$4 million primarily of closed-end, first lien receivables
at March 31, 2011 and December 31, 2010.
|
As previously discussed, real estate markets in a large portion
of the United States have been 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
65
HSBC Finance Corporation
loan-to-value
ratios for our real estate secured receivable portfolios are
presented in the table below as of March 31, 2011 and
December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refreshed
LTVs(1)(2)
|
|
|
|
Refreshed
LTVs(1)(2)
|
|
|
at December 31, 2010
|
|
|
|
at March 31, 2011
|
|
|
|
|
|
Mortgage
|
|
|
|
Consumer
Lending(3)
|
|
|
Mortgage Services
|
|
|
Consumer
Lending(3)
|
|
|
Services
|
|
|
|
First
|
|
|
Second
|
|
|
First
|
|
|
Second
|
|
|
First
|
|
|
Second
|
|
|
First
|
|
|
Second
|
|
|
|
Lien
|
|
|
Lien
|
|
|
Lien
|
|
|
Lien
|
|
|
Lien
|
|
|
Lien
|
|
|
Lien
|
|
|
Lien
|
|
|
|
|
LTV<80%
|
|
|
40
|
%
|
|
|
18
|
%
|
|
|
34
|
%
|
|
|
8
|
%
|
|
|
39
|
%
|
|
|
18
|
%
|
|
|
34
|
%
|
|
|
8
|
%
|
80%£LTV<90%
|
|
|
17
|
|
|
|
12
|
|
|
|
18
|
|
|
|
10
|
|
|
|
18
|
|
|
|
13
|
|
|
|
18
|
|
|
|
11
|
|
90%£LTV<100%
|
|
|
17
|
|
|
|
20
|
|
|
|
21
|
|
|
|
19
|
|
|
|
17
|
|
|
|
20
|
|
|
|
21
|
|
|
|
19
|
|
LTV³100%
|
|
|
26
|
|
|
|
50
|
|
|
|
27
|
|
|
|
63
|
|
|
|
26
|
|
|
|
49
|
|
|
|
27
|
|
|
|
62
|
|
Average LTV for portfolio
|
|
|
86
|
|
|
|
100
|
|
|
|
89
|
|
|
|
110
|
|
|
|
87
|
|
|
|
100
|
|
|
|
89
|
|
|
|
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 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 Federal Housing Finance Agencys
(formerly known as the Office of Federal Housing Enterprise
Oversight) 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
March 31, 2011 and December 31, 2010 information in
the table above reflects current estimated property values using
HPIs as of December 31, 2010 and September 30, 2010,
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 $1.1 billion and
$1.2 billion at March 31, 2011 and December 31,
2010, respectively.
|
The following table summarizes various real estate secured
receivables information (excluding receivables held for sale)
for our Mortgage Services and Consumer Lending businesses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
|
Mortgage
|
|
|
Consumer
|
|
|
Mortgage
|
|
|
Consumer
|
|
|
|
Services
|
|
|
Lending
|
|
|
Services
|
|
|
Lending
|
|
|
|
|
Fixed
rate(3)
|
|
$
|
9,637
|
(1)
|
|
$
|
30,596
|
(2)
|
|
$
|
10,014
|
(1)
|
|
$
|
31,827
|
(2)
|
Adjustable
rate(3)
|
|
|
5,530
|
|
|
|
1,447
|
|
|
|
5,968
|
|
|
|
1,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,167
|
|
|
$
|
32,043
|
|
|
$
|
15,982
|
|
|
$
|
33,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
13,154
|
|
|
$
|
28,916
|
|
|
$
|
13,821
|
|
|
$
|
30,042
|
|
Second lien
|
|
|
2,013
|
|
|
|
3,127
|
|
|
|
2,161
|
|
|
|
3,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,167
|
|
|
$
|
32,043
|
|
|
$
|
15,982
|
|
|
$
|
33,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable
rate(3)
|
|
$
|
4,563
|
|
|
$
|
1,447
|
|
|
$
|
4,898
|
|
|
$
|
1,520
|
|
Interest
only(3)
|
|
|
967
|
|
|
|
-
|
|
|
|
1,070
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustable
rate(3)
|
|
$
|
5,530
|
|
|
$
|
1,447
|
|
|
$
|
5,968
|
|
|
$
|
1,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stated income
|
|
$
|
2,519
|
|
|
$
|
-
|
|
|
$
|
2,703
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes fixed rate interest-only
receivables of $228 million and $235 million at
March 31, 2011 and December 31, 2010, respectively.
|
|
(2) |
|
Includes fixed rate interest-only
receivables of $25 million and $27 million at
March 31, 2011 and December 31, 2010, 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.
|
66
HSBC Finance Corporation
The decrease in real estate secured receivable balances since
December 31, 2010 reflects the continuing liquidation of
these portfolios which will continue going forward and seasonal
improvements in our collection activities during the first
quarter of the year as some customers use their tax refunds to
make payments. The liquidation rates in our real estate secured
receivable portfolios also 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.
Personal non-credit card receivables The decrease
in personal non-credit card receivable balances since
December 31, 2010 reflects the continuing liquidation of
these portfolios which will continue going forward and seasonal
improvements in our collection activities during the first
quarter of the year as some customers use their tax refunds to
make payments.
Real
Estate Owned
We obtain real estate by taking possession of the collateral
pledged as security for real estate secured receivables
(REO). 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
|
|
|
|
Mar. 31,
|
|
|
Dec. 31,
|
|
|
Sept. 30,
|
|
|
June 30,
|
|
|
Mar. 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
|
|
Number of REO properties at end of period
|
|
|
10,016
|
|
|
|
10,749
|
|
|
|
9,629
|
|
|
|
8,249
|
|
|
|
6,826
|
|
Number of properties added to REO inventory in the period
|
|
|
5,408
|
|
|
|
5,657
|
|
|
|
5,316
|
|
|
|
4,996
|
|
|
|
4,143
|
|
Average loss on sale of REO
properties(1)
|
|
|
14.9
|
%
|
|
|
15.3
|
%
|
|
|
10.1
|
%
|
|
|
4.2
|
%
|
|
|
3.9
|
%
|
Average total loss on foreclosed
properties(2)
|
|
|
54.6
|
%
|
|
|
53.6
|
%
|
|
|
52.1
|
%
|
|
|
48.9
|
%
|
|
|
49.0
|
%
|
Average time to sell REO properties (in days)
|
|
|
167
|
|
|
|
165
|
|
|
|
158
|
|
|
|
156
|
|
|
|
170
|
|
|
|
|
(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. These losses are
incurred after we take title to the property.
|
|
(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 (excluding any accrued
finance income) plus any other ancillary amounts owed (e.g.,
real estate tax advances) which were incurred prior to our
taking title to the property.
|
As previously reported, beginning in late 2010 we suspended all
new foreclosure proceedings and in early 2011 suspended
foreclosures where judgment had not yet been entered while we
enhanced foreclosure documentation and processes for
foreclosures and re-filed affidavits where necessary. During the
first quarter of 2011, we added 5,408 properties to REO
inventory which reflects loans for which we had either accepted
the deed to the property in lieu of payment or for which we had
received a foreclosure judgment prior to the suspension of
foreclosures. We expect sizeable decreases in the number of
properties added to REO inventory beginning in the second
quarter and continuing through the remainder of 2011 as the
impact of our earlier decision to suspend foreclosure
proceedings becomes reflected in our reported numbers.
The number of REO properties at March 31, 2011 decreased as
compared to December 31, 2010 driven by the suspension of
foreclosures as discussed above as well as an increase in the
number of REO properties sold during the current quarter. As
discussed above, we expect a sizeable decrease in REO properties
in the near term as a result of our earlier decision to suspend
foreclosures. Although we have resumed foreclosures on a limited
basis in certain geographies, it will be a number of months
before we resume foreclosures in all jurisdictions as we need to
ensure we are satisfied that applicable enhanced processes have
been implemented. Local governments and states may also
67
HSBC Finance Corporation
require additional processes in the future which could slow the
foreclosure process once resumed, again leading to a slowdown in
growth of REO properties.
The average total loss on foreclosed properties for the three
months ended March 31, 2011 increased as compared to the
prior quarter due to continuing declines in home prices due in
part to the continued elevated levels of foreclosed properties.
The average loss on sale of REO properties improved slightly
during the current quarter reflecting a lower volume of
properties sold which were located in regions that have
experienced the greatest deterioration in home prices in the
last few years.
Results
of Operations
Net interest income The following table summarizes
net interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
2011
|
|
|
2010
|
|
|
(Decrease)
|
|
Three Months Ended March 31,
|
|
$
|
|
|
%(1)
|
|
|
$
|
|
|
%(1)
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Finance and other interest income
|
|
$
|
1,596
|
|
|
|
8.86
|
%
|
|
$
|
1,945
|
|
|
|
9.18
|
%
|
|
$
|
(349
|
)
|
|
|
(17.94
|
)%
|
Interest expense
|
|
|
674
|
|
|
|
3.74
|
|
|
|
818
|
|
|
|
3.86
|
|
|
|
(144
|
)
|
|
|
(17.60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
922
|
|
|
|
5.12
|
%
|
|
$
|
1,127
|
|
|
|
5.32
|
%
|
|
$
|
(205
|
)
|
|
|
(18.19
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
% Columns: comparison to average
owned interest-earning assets.
|
Net interest income decreased during the three months ended
March 31, 2011 as compared to the prior year quarter. The
decrease reflects lower average receivables as a result of
receivable liquidation and a lower overall receivable yield. As
discussed more fully below, the lower overall receivable yield
was driven by lower yields in our credit card receivable
portfolio, partially offset by higher yields in our personal
non-credit card receivable portfolio as yields in our real
estate secured receivable portfolio were essentially flat.
Overall receivable yields were also 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 the three months ended March 31, 2011 was partially
offset by higher net interest income on our non-insurance
investment portfolio reflecting higher levels of investments
held and slightly higher yields and lower interest expense due
to lower average borrowings and lower average rates.
We experienced lower overall yields in our receivable portfolio;
however, receivable yields vary between receivable products.
Lower yields in our credit card receivable portfolio reflect the
impact of the Card Act including periodic re-evaluations of rate
increases and restrictions on repricing of delinquent accounts,
partially offset by the impact of lower levels of nonperforming
receivables. We anticipate credit card loan yields in future
periods may continue to be negatively impacted by the provisions
of the Card Act requiring certain rate increases to be
periodically re-evaluated. Yields in our personal non-credit
card receivable portfolio increased as a result of significantly
lower levels of nonaccrual receivables as compared to the prior
year quarter. Yields in our real estate secured receivable
portfolio were essentially flat during the first quarter of 2011
as compared to the prior year quarter as the impact of lower
levels of nonperforming assets was offset by a shift in mix to
higher levels of lower yielding first lien real estate secured
receivables as higher yielding second lien real estate secured
receivables have run-off at a faster pace.
68
HSBC Finance Corporation
Net interest margin was 5.12 percent for the three months
ended March 31, 2011 compared to 5.32 percent for the
year-ago quarter. Net interest margin for the first quarter of
2011 decreased due to lower overall yields as discussed above,
partially offset by lower cost of funds as a percentage of
average interest-earning assets.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2011
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income/net interest margin from prior year
|
|
$
|
1,127
|
|
|
|
5.32
|
%
|
|
|
|
|
|
|
|
|
|
Impact to net interest income resulting from:
|
|
|
|
|
|
|
|
|
Lower receivable levels
|
|
|
(168
|
)
|
|
|
|
|
Receivable yields:
|
|
|
|
|
|
|
|
|
Receivable pricing
|
|
|
(70
|
)
|
|
|
|
|
Impact of nonperforming assets
|
|
|
76
|
|
|
|
|
|
Impact of loan modifications
|
|
|
26
|
|
|
|
|
|
Receivable mix
|
|
|
(90
|
)
|
|
|
|
|
Non-insurance investment income
|
|
|
(1
|
)
|
|
|
|
|
Cost of funds
|
|
|
21
|
|
|
|
|
|
Other
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/net interest margin for current year
|
|
$
|
922
|
|
|
|
5.12
|
%
|
|
|
|
|
|
|
|
|
|
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 following
table summarizes provision for credit losses by business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Provision for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card
|
|
$
|
76
|
|
|
$
|
201
|
|
|
$
|
(125
|
)
|
|
|
(62.2
|
)%
|
Mortgage Services
|
|
|
255
|
|
|
|
455
|
|
|
|
(200
|
)
|
|
|
(44.0
|
)
|
Consumer Lending:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate secured
|
|
|
435
|
|
|
|
587
|
|
|
|
(152
|
)
|
|
|
(25.9
|
)
|
Personal non-credit card
|
|
|
16
|
|
|
|
621
|
|
|
|
(605
|
)
|
|
|
(97.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consumer Lending
|
|
|
451
|
|
|
|
1,208
|
|
|
|
(757
|
)
|
|
|
(62.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
782
|
|
|
$
|
1,864
|
|
|
$
|
(1,082
|
)
|
|
|
(58.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our provision for credit losses decreased significantly during
the three months ended March 31, 2011 as compared to the
prior year quarter as discussed below.
|
|
|
|
|
Provision for credit losses for our credit card receivable
portfolio decreased during the three months ended March 31,
2011. The decrease reflects lower receivable levels as a result
of receivable run-off in the segments of our credit card
receivable portfolio for which we no longer originate new
accounts. 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 and charge-off levels as
|
69
HSBC Finance Corporation
|
|
|
|
|
customer payment rates have continued to be strong during the
first quarter of 2011 as well as higher recovery rates and
improvements in economic conditions. The impact on credit card
receivable losses from the current economic environment,
including continued 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 during the first quarter of 2011
reflecting lower receivable levels as the portfolios continue to
liquidate, lower delinquency and charge-off levels and
improvements in economic conditions. The decrease also reflects
lower loss severities as compared to the prior year quarter
reflecting 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. These decreases were partially
offset by the impact of continued high unemployment levels and
lower receivable prepayments.
|
The decrease in the provision for credit losses also reflects
lower loss estimates on TDR Loans as compared to the prior year
quarter reflecting lower volumes of TDR Loans as well as the
impact of an increase in the percentage of TDR Loans that are
performing due to charge-off of nonperforming TDR Loans. These
decreases were partially offset by the impact of lower estimated
cash flows from these receivables due to economic expectations
about home prices and other changes in assumptions including the
length of time these receivables will remain on our books as a
result of the suspension of foreclosure activity as previously
discussed. These offsets have resulted in an overall increase in
credit loss reserves on first lien real estate secured TDR Loans
at March 31, 2011 as compared to December 31, 2010.
|
|
|
|
|
The provision for credit losses for our personal non-credit card
receivables decreased during the three months ended
March 31, 2011 reflecting significantly lower receivable
levels as compared to the prior year quarter, lower delinquency
and charge-off levels, improvements in economic conditions and
lower reserve requirements on TDR Loans.
|
Net charge-off dollars totaled $1.6 billion and
$2.7 billion during the three months ended March 31,
2011 and 2010, respectively. The decrease was driven by lower
delinquency levels as a result of lower average receivable
levels and improvements in the U.S. economic conditions.
See Credit Quality for further discussion of our net
charge-offs.
Credit loss reserves at March 31, 2011 decreased as
compared to December 31, 2010 as we recorded provision for
credit losses less than net charge-offs of $781 million
during the current quarter. Lower credit loss reserve levels
reflect lower receivable levels, improved economic conditions,
including lower delinquency levels, and an increase in the
amount of real estate secured receivables which have been
written down to net realizable value less cost to sell. The
decrease in credit loss reserves was partially offset by higher
reserve levels on TDR Loans. See Credit Quality for
further discussion of credit loss reserves.
70
HSBC Finance Corporation
Other revenues The following table summarizes
other revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Insurance revenue
|
|
$
|
60
|
|
|
$
|
68
|
|
|
$
|
(8
|
)
|
|
|
(11.8
|
)%
|
Investment income
|
|
|
25
|
|
|
|
27
|
|
|
|
(2
|
)
|
|
|
(7.4
|
)
|
Derivative related income (expense)
|
|
|
34
|
|
|
|
(102
|
)
|
|
|
136
|
|
|
|
100+
|
|
Gain (loss) on debt designated at fair value and related
derivatives
|
|
|
(29
|
)
|
|
|
133
|
|
|
|
(162
|
)
|
|
|
(100+
|
)
|
Fee income
|
|
|
46
|
|
|
|
77
|
|
|
|
(31
|
)
|
|
|
(40.3
|
)
|
Enhancement services revenue
|
|
|
104
|
|
|
|
103
|
|
|
|
1
|
|
|
|
1.0
|
|
Gain on receivable sales to HSBC affiliates
|
|
|
113
|
|
|
|
116
|
|
|
|
(3
|
)
|
|
|
(2.6
|
)
|
Servicing and other fees from HSBC affiliates
|
|
|
159
|
|
|
|
174
|
|
|
|
(15
|
)
|
|
|
(8.6
|
)
|
Other income
|
|
|
13
|
|
|
|
5
|
|
|
|
8
|
|
|
|
100+
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other revenues
|
|
$
|
525
|
|
|
$
|
601
|
|
|
$
|
(76
|
)
|
|
|
(12.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance revenue decreased during the first quarter of
2011 as a result of a decrease in the number of credit insurance
policies in force since March 31, 2010 primarily due to the
run-off of our Consumer Lending portfolio.
Investment income includes interest income on
available-for-sale
securities in our insurance investment portfolio as well as
realized gains and losses from the sale of all investment
securities. Investment income decreased during the three months
ended March 31, 2011 due to lower average balances and
lower yields on money market funds as well as lower gains on
sales of securities.
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:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Net realized losses
|
|
$
|
(20
|
)
|
|
$
|
(64
|
)
|
Mark-to-market
on derivatives which do not qualify as effective hedges
|
|
|
63
|
|
|
|
(38
|
)
|
Ineffectiveness
|
|
|
(9
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
34
|
|
|
$
|
(102
|
)
|
|
|
|
|
|
|
|
|
|
Derivative related income increased during 2011. As previously
discussed, our Consumer Lending and Mortgage Services real
estate secured receivables are remaining on the balance sheet
longer due to lower prepayment rates. At March 31, 2011, we
had $11.2 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 and
$4.9 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. Rising
long-term interest rates during the first quarter of 2011
71
HSBC Finance Corporation
had a positive impact on the
mark-to-market
on this portfolio of swaps, while falling long-term interest
rates during the first quarter of 2010 resulted in negative
mark-to-market
adjustments in the prior year quarter. 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 the first
quarter of 2011 as a result of lower losses on terminations of
non-qualifying hedges due to changes in rates during the quarter
as well as changes in the timing of the non-qualifying hedge
terminations.
During the first quarter of 2011, ineffectiveness related
primarily to our cross currency cash flow hedges. During the
first quarter of 2010, ineffectiveness income was less than
$1 million as the impact on our cross currency hedges of
falling U.S. long term rates was offset by falling long
term foreign interest rates.
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 three months ended March 31, 2011
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 loss on debt
designated at fair value and related derivatives during the
three months ended March 31, 2011 primarily reflects the
impact of rising long-term interest rates and tightening of our
credit spreads during the quarter. During the three months ended
March 31, 2010, the gain on debt designated at fair value
and related derivatives reflects a decrease in long-term
U.S. interest rates as well as a tightening of our credit
spreads during the prior year quarter. See Note 9,
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 the first quarter of
2011 as a result of lower late and overlimit fees due to lower
volumes and lower delinquency levels, changes in customer
behavior and continuing impacts from changes required by the
Card Act. The Card Act 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.
Enhancement services revenue, which consists of ancillary
credit card revenue from products such as Account Secure Plus
(debt protection) and Identity Protection Plan, were essentially
flat during the quarter.
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 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 decrease in the first quarter of 2011
reflects lower overall premium due to lower revenues partly due
to the impact of the Card Act partially offset by the impact of
improving credit quality, contract renegotiations with certain
merchants and repricing initiatives in certain portfolios. The
decrease in overall premiums was partially offset by higher
volumes of private label credit card receivables sold during the
quarter.
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 the
first quarter of 2011 reflects lower levels of receivables being
serviced for HSBC Bank USA as well as lower rental revenue from
HTSU.
Other income increased in the three months ended
March 31, 2011 primarily due to lower losses on sales of
miscellaneous commercial assets.
72
HSBC Finance Corporation
Operating expenses The following table
summarizes total costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Salaries and employee benefits
|
|
$
|
129
|
|
|
$
|
165
|
|
|
$
|
(36
|
)
|
|
|
(21.8
|
)%
|
Occupancy and equipment expenses
|
|
|
24
|
|
|
|
28
|
|
|
|
(4
|
)
|
|
|
(14.3
|
)
|
Other marketing expenses
|
|
|
85
|
|
|
|
55
|
|
|
|
30
|
|
|
|
54.5
|
|
Real estate owned expenses
|
|
|
106
|
|
|
|
39
|
|
|
|
67
|
|
|
|
100+
|
|
Other servicing and administrative expenses
|
|
|
167
|
|
|
|
218
|
|
|
|
(51
|
)
|
|
|
(23.4
|
)
|
Support services from HSBC affiliates
|
|
|
291
|
|
|
|
276
|
|
|
|
15
|
|
|
|
5.4
|
|
Amortization of intangibles
|
|
|
34
|
|
|
|
39
|
|
|
|
(5
|
)
|
|
|
(12.8
|
)
|
Policyholders benefits
|
|
|
41
|
|
|
|
42
|
|
|
|
(1
|
)
|
|
|
(2.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
$
|
877
|
|
|
$
|
862
|
|
|
$
|
15
|
|
|
|
1.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits were lower during the
first quarter of 2011 as a result of the continuing reduced
scope of our business operations and the impact of entity-wide
initiatives to reduce costs. The decrease in the first quarter
of 2011 also reflects the impact of the transfer of certain
employees during the third quarter of 2010 to a subsidiary of
HSBC Bank USA although this decrease was offset by an increase
in support services from HSBC affiliates.
Occupancy and equipment expenses decreased in the first
quarter of 2011 primarily due to lower rental expense and
utilities reflecting the impact of the continuing reduced scope
of our business operations.
Other marketing expenses include payments for
advertising, direct mail programs and other marketing
expenditures. Other marketing expenses increased during the
first quarter of 2011 as we increased direct marketing mailings
and new customer account originations for portions of our credit
card receivable portfolio based on recent performance trends in
this portfolio. 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.
Real estate owned expenses increased in the first quarter
of 2011 as a result of higher average number of REO properties
held as compared to the prior year quarter and higher losses on
REO properties held as home prices declined during the first
quarter of 2011 while home prices were essentially flat during
the prior year quarter. 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 valuation allowances during the holding period
and, ultimately, higher losses at the time the property is sold.
Other servicing and administrative expenses decreased
during the first quarter of 2011 as a result of the continuing
reduction of the scope of our business operations and the impact
of entity wide initiatives to reduce costs including lower third
party collection costs as our receivable portfolio continue to
run-off.
Support services from HSBC affiliates increased during
the first quarter of 2011 due to the transfer in July 2010 of
certain employees to a subsidiary of HSBC Bank USA as discussed
above. This increase was partially offset by lower expenses for
services provided by an affiliate outside the U.S. due to a
decrease in offshore personnel headcount as compared to prior
year driven by cost containment measures and overall
organizational restructuring.
Amortization of intangibles decreased during the first
quarter of 2011 as certain of our intangible assets became fully
amortized during the first quarter of 2010.
Policyholders benefits decreased during the first
quarter of 2011 due to lower claims on credit insurance policies
as there are fewer such policies in place primarily due to the
run-off of our Consumer Lending portfolio.
73
HSBC Finance Corporation
Efficiency ratio Our efficiency ratio from continuing
operations was 59.46 percent during the three months ended
March 31, 2011 as compared to 48.64 percent in the
prior year quarter. Our efficiency ratio in both periods was
impacted by the change in the fair value of debt for which we
have elected fair value option accounting. Excluding this item
from both periods, our efficiency ratio remained higher during
the first quarter of 2011 primarily due to lower net interest
income driven by receivable portfolio liquidation and lower
overall receivable yields as well as lower other revenues while
operating expenses increased driven by higher REO expenses.
Segment
Results IFRS 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 and
Commercial businesses. 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.
During 2010, changes were made to the management structure
within HSBC North America which has resulted in the alignment of
our Management to be focused on the legal entity results of our
business operations. During the first quarter of 2011, we
re-evaluated and made changes to the financial information used
to manage our business, including the scope and content of the
financial data being reported to our Management, consistent with
this more legal entity focus of our Management. As a result,
beginning in the first quarter of 2011, our operating results
are now monitored and reviewed and trends are evaluated on a
legal entity basis in accordance with International Financial
Reporting Standards (IFRSs), which is the basis on
which we report results to our parent, HSBC. Prior to the first
quarter of 2011, we reported our results on an IFRS Management
Basis which were IFRSs results which assumed that the GM and UP
Portfolios and the private label and real estate secured
receivables transferred to HSBC Bank USA had not been sold and
remained on our balance sheet and the revenues and expenses
related to these receivables remained on our income statement.
As a result of the changes discussed above, in the first quarter
of 2011 we changed the composition of segment profit (loss) from
an IFRS Management Basis of reporting to an IFRS legal entity
basis (IFRS Basis) of reporting in order to align
with our revised internal reporting structure. However we
continue to monitor capital adequacy, establish dividend policy
and report to regulatory agencies on an U.S. GAAP basis.
For comparability purposes, we have restated segment results for
the three months ended March 31, 2010 to be on an IFRS
Basis. There have been no other changes in measurement or
composition of our segment reporting as compared with the
presentation in our 2010
Form 10-K.
A summary of the significant differences between U.S. GAAP
and IFRSs as they impact our results are summarized in
Note 13, Business Segments, in the accompanying
consolidated financial statements as well as under the caption
Basis of Reporting in this MD&A.
74
HSBC Finance Corporation
Card and Retail Services Segment The
following table summarizes the IFRS Basis results for our Card
and Retail Services segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Three Months Ended March 31:
|
|
2011
|
|
|
2010
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
|
|
(dollars are in millions)
|
|
|
|
|
|
Net interest income
|
|
$
|
489
|
|
|
$
|
587
|
|
|
$
|
(98
|
)
|
|
|
(16.7
|
)%
|
Other operating income
|
|
|
414
|
|
|
|
452
|
|
|
|
(38
|
)
|
|
|
(8.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
903
|
|
|
|
1,039
|
|
|
|
(136
|
)
|
|
|
(13.1
|
)
|
Loan impairment charges
|
|
|
119
|
|
|
|
235
|
|
|
|
(116
|
)
|
|
|
(49.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
784
|
|
|
|
804
|
|
|
|
(20
|
)
|
|
|
(2.5
|
)
|
Operating expenses
|
|
|
478
|
|
|
|
445
|
|
|
|
33
|
|
|
|
7.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax
|
|
$
|
306
|
|
|
$
|
359
|
|
|
$
|
(53
|
)
|
|
|
(14.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin, annualized
|
|
|
20.09
|
%
|
|
|
20.42
|
%
|
|
|
-
|
|
|
|
-
|
|
Efficiency ratio
|
|
|
52.93
|
%
|
|
|
42.83
|
%
|
|
|
-
|
|
|
|
-
|
|
Return (after-tax) on average assets
|
|
|
8.26
|
%
|
|
|
8.76
|
%
|
|
|
-
|
|
|
|
-
|
|
Balances at end of period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer loans
|
|
$
|
9,457
|
|
|
$
|
10,950
|
|
|
$
|
(1,493
|
)
|
|
|
(13.6
|
)%
|
Assets
|
|
|
9,363
|
|
|
|
10,129
|
|
|
|
(766
|
)
|
|
|
(7.6
|
)
|
Our Card and Retail Services segment reported a lower profit
before tax for the three months ended March 31, 2011 as
compared to the year-ago quarter driven by lower net interest
income, lower other operating income and higher operating
expenses, partially offset by lower loan impairment charges.
Net interest income decreased during the three months ended
March 31, 2011 primarily due to lower average loans as a
result of increased receivable run-off in the segments of our
credit card receivable portfolio for which we no longer
originate new accounts and lower overall loan yields. Lower loan
yields during the first quarter of 2011 reflect the impact of
the Card Act, including periodic re-evaluations of rate
increases and restrictions on repricing of delinquent accounts,
partially offset by the impact of lower levels of nonperforming
loans. We anticipate credit card loan yields in future periods
may continue to be negatively impacted by the provisions of the
Card Act which require certain rate increases to be periodically
re-evaluated. Net interest margin decreased during the first
quarter of 2011 due to the lower loan yields as discussed above.
The decrease in other operating income during the first quarter
of 2011 was primarily due to lower late and overlimit fees due
to lower volumes, lower delinquency levels, changes in customer
behavior and impacts from changes required by Card Act. The
decrease was partially offset by lower fee charge-off driven by
lower receivables, better roll rates and lower fees billed. The
Card Act has resulted in 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 which
became effective after March 2010.
Operating expenses increased during the first quarter of 2011
due to higher marketing expenses and higher salary expense,
partially offset by lower third party collection costs as our
credit card loan balances decrease and credit quality has
improved. While marketing expenses were higher as compared to
the prior year, overall marketing levels continue to remain low
as compared to historical levels. The trend in salary expense
was impacted by lower pension expense in the prior year quarter
reflecting a one-time curtailment gain of $27 million for
changes made to employees future benefits.
Loan impairment charges decreased during the three months ended
March 31, 2011 reflecting lower loan levels as a result of
loan run-off in the segments of our credit card portfolio for
which we no longer originate new accounts. The decrease also
reflects improvement in the underlying credit quality of the
portfolio including continuing
75
HSBC Finance Corporation
improvements in early stage delinquency roll rates and lower
delinquency and charge-off levels as customer payment rates have
continued to be strong during the first quarter of 2011. The
impact on credit card loan losses from the current economic
environment, including continued high unemployment levels, has
not been as severe as originally expected due in part to
improved customer payment behavior.
The efficiency ratio during the first quarter of 2011
deteriorated driven by the decrease in net interest income and
other operating income as well as higher operating expenses
primarily related to increased marketing expenses as previously
discussed.
The decrease in the ROA ratio during the first quarter of 2011
reflects the impact of the lower profit before tax in the first
quarter of 2011 as well as the impact of lower average assets.
Customer loans Customer loans for our Card and Retail
Services segment totaled $9.5 billion at March 31,
2011, a decrease of 7 percent since December 31, 2010,
as a result of increased receivable run-off in the segments of
our credit card receivable portfolio for which we no longer
originate new accounts and seasonal improvements in our
collection activities during the first quarter of the year as
some customers use their tax refunds to make payments. These
decreases were partially offset by increases in receivables
associated with new account activity.
During the first quarter of 2011, we increased 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 March 31, 2011 include $4.0 billion
associated with certain segments of our portfolio for which we
no longer originate new accounts.
See Receivables Review for additional discussion of
the decreases in our receivable portfolios.
Consumer Segment The following table summarizes
the IFRS Basis results for our Consumer segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Three Months Ended March 31:
|
|
2011
|
|
|
2010
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
655
|
|
|
$
|
579
|
|
|
$
|
76
|
|
|
|
13.1
|
%
|
Other operating income
|
|
|
(32
|
)
|
|
|
5
|
|
|
|
(37
|
)
|
|
|
(100+
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
623
|
|
|
|
584
|
|
|
|
39
|
|
|
|
6.7
|
|
Loan impairment charges
|
|
|
1,276
|
|
|
|
1,699
|
|
|
|
(423
|
)
|
|
|
(24.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(653
|
)
|
|
|
(1,115
|
)
|
|
|
462
|
|
|
|
41.4
|
|
Operating expenses
|
|
|
233
|
|
|
|
227
|
|
|
|
6
|
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax
|
|
$
|
(886
|
)
|
|
$
|
(1,342
|
)
|
|
$
|
456
|
|
|
|
34.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin, annualized
|
|
|
4.75
|
%
|
|
|
3.38
|
%
|
|
|
-
|
|
|
|
-
|
|
Efficiency ratio
|
|
|
37.40
|
%
|
|
|
38.87
|
%
|
|
|
-
|
|
|
|
-
|
|
Return (after-tax) on average assets
|
|
|
(4.11
|
)%
|
|
|
(5.05
|
)%
|
|
|
-
|
|
|
|
-
|
|
Balances at end of period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer loans
|
|
$
|
54,087
|
|
|
$
|
66,529
|
|
|
$
|
(12,442
|
)
|
|
|
(18.7
|
)%
|
Assets
|
|
|
52,946
|
|
|
|
64,999
|
|
|
|
(12,053
|
)
|
|
|
(18.5
|
)%
|
Our Consumer segment reported a lower loss before tax during the
three months ended March 31, 2011 due to higher net
interest income and lower loan impairment charges, partially
offset by lower other operating income and marginally higher
operating expenses.
Loan impairment charges decreased significantly during 2011 as
discussed below.
|
|
|
|
|
Loan impairment charges for the real estate secured loan
portfolios in our Consumer Lending and Mortgage Services
business decreased during the first quarter of 2011 reflecting
lower loan levels as the portfolios
|
76
HSBC Finance Corporation
|
|
|
|
|
continue to liquidate, lower delinquency and charge-off levels
and improvements in economic conditions. The decrease also
reflects lower loss severities as compared to the prior year
quarter reflecting an increase in the number of properties for
which we accepted a
deed-in-lieu
and an increase in short sales, both of which result in lower
losses compared to loans which are subject to a formal
foreclosure process. These decreases were partially offset by
the impact of discounting estimated future amounts to be
received on real estate loans which have been written down to
net realizable value less cost to obtain and sell as well as
foreclosure delays on real estate secured loans which resulted
in higher reserve requirements due to the delay in the timing of
estimated cash flows to be received. The decrease in loan
impairment charges for real estate secured loans was also
partially offset by higher reserve requirements on accrued
finance charges, the impact of continued high unemployment
levels and lower receivable prepayments.
|
The decrease in loan impairment charges also reflects lower loss
estimates on TDR Loans as compared to the prior year quarter
reflecting lower volumes of TDR Loans as well as the impact of
an increase in the percentage of TDR Loans that are performing
due to charge-off of nonperforming TDR Loans. These decreases
were partially offset by lower estimated cash flows from these
receivables due to economic expectations about home prices and
other changes in assumptions including the length of time these
receivables will remain on our books as a result of the
suspension of foreclosure activity as previously discussed.
These offsets have resulted in an overall increase in credit
loss reserves on first lien real estate secured TDR Loans at
March 31, 2011 as compared to December 31, 2010.
|
|
|
|
|
Loan impairment charges for our personal non-credit card
receivables decreased during the three months ended
March 31, 2011 reflecting significantly lower loan levels
as compared to the prior year quarter, lower delinquency and
charge-off levels, improvements in economic conditions and lower
reserve requirements on TDR Loans.
|
During the first quarter of 2011, credit loss reserves decreased
to $5.6 billion as loan impairment charges were
$131 million lower than net charge-offs reflecting lower
loan levels and lower delinquency and charge-off levels as
discussed above as well as lower reserve requirements on
personal non-credit card TDR Loans, partially offset by higher
reserve levels for real estate secured TDR Loans.
Net interest income increased during the three months ended
March 31, 2011 primarily due to higher yields for real
estate secured and personal non-credit card loans and lower
interest expense, partially offset by lower average loans as a
result of loan liquidation. The higher yields in our real estate
secured and personal non-credit card loan portfolios reflect the
impact of lower levels of nonperforming loans as well as higher
amortization associated with the discounting of the loss
reserves associated with real estate secured loans. As yields
vary between loan products, overall loan yields were negatively
impacted by a shift in 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 faster pace than first lien real estate secured
loans. Lower interest expense during the first quarter of 2011
reflects lower average borrowings. Additionally, lower interest
expense also reflects changes in our internal funding strategies
to better match the lives of our loan portfolio with our
external funding which has resulted in lower average rates. Net
interest margin increased in the first quarter of 2011 as
compared to the prior year quarter reflecting the higher loan
yields as discussed above as well as a lower cost of funds as a
percentage of average interest earning assets.
Other operating income decreased during the first quarter of
2011 due to lower credit insurance commissions and higher losses
on REO properties reflecting an increase in the number of REO
properties sold as compared to the prior year quarter and
declines in home prices during the first quarter of 2011 while
home prices were essentially flat during the prior year quarter.
Operating expenses increased during the first quarter of 2011
due to higher REO expenses as a result of a higher average
number of REO properties held.
The efficiency ratio improved during the first quarter of 2011
as the increase in net interest income due to higher loan yields
outpaced the decrease in other operating income and higher
operating expenses.
ROA improved during the first quarter of 2011 primarily due to a
lower net loss as discussed above and the impact of lower
average assets.
77
HSBC Finance Corporation
Customer loans Customer loans for our Consumer segment
can be analyzed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
Increases (Decreases) From December 31, 2010
|
|
|
|
2011
|
|
|
$
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Real estate
secured(1)
|
|
$
|
47,399
|
|
|
$
|
(1,910
|
)
|
|
|
(3.9
|
)%
|
Personal non-credit card
|
|
|
6,688
|
|
|
|
(653
|
)
|
|
|
(8.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total customer loans
|
|
$
|
54,087
|
|
|
$
|
(2,563
|
)
|
|
|
(4.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Real estate secured receivables are
comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases (Decreases) From
|
|
|
|
March 31,
|
|
|
December 31, 2010
|
|
|
|
2011
|
|
|
$
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Consumer Lending
|
|
$
|
32,102
|
|
|
$
|
(1,167
|
)
|
|
|
(3.5
|
)%
|
Mortgage Services
|
|
|
15,297
|
|
|
|
(743
|
)
|
|
|
(4.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
$
|
47,399
|
|
|
$
|
(1,910
|
)
|
|
|
(3.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer loans decreased 5 percent to $54.1 billion at
March 31, 2011 reflecting the continued liquidation of
these portfolios which will continue to decline going forward.
The decrease also reflects seasonal improvements in our
collection activities during the first quarter of the year as
some customers use their tax refunds to make payments. 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.
See Receivables Review for a more detail discussion
of the decreases in our receivable portfolios.
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
78
HSBC Finance Corporation
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-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. 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:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2011
|
|
2010
|
|
|
|
(dollars are in millions)
|
|
Credit loss reserves
|
|
$
|
5,710
|
|
|
$
|
6,491
|
|
Reserves as a percent of:
|
|
|
|
|
|
|
|
|
Receivables(1)(4)
|
|
|
9.06
|
%
|
|
|
9.78
|
%
|
Net
charge-offs(2)(3)
|
|
|
91.3
|
|
|
|
96.1
|
|
Nonperforming
receivables(1)(3)(4)
|
|
|
87.7
|
|
|
|
88.5
|
|
Two-months-and-over contractual
delinquency(1)(4)
|
|
|
70.2
|
|
|
|
67.9
|
|
|
|
|
(1) |
|
These ratios are significantly
impacted by changes 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. 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:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2011
|
|
2010
|
|
|
Reserves as a percentage of:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
9.92
|
%
|
|
|
10.60
|
%
|
Nonperforming loans
|
|
|
230.1
|
|
|
|
198.9
|
|
Two-months-and-over contractual delinquency
|
|
|
143.3
|
|
|
|
121.0
|
|
79
HSBC Finance Corporation
|
|
|
(2) |
|
Reserves as a percent of net
charge-offs for the quarter, annualized.
|
|
(3) |
|
Ratio excludes charge-off and
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. Reserves as a percentage of net charge-off
includes any charge-off recorded on receivables prior to the
transfer to receivables held for sale
|
|
(4) |
|
While reserves associated with
accrued finance changes are reported within our total credit
loss reserve balances noted above, accrued finance charges for
real estate secured receivables and certain personal non-credit
card receivables are not reported within receivables,
nonperforming receivables and two-months-and-over contractual
delinquency.
|
Credit loss reserves at March 31, 2011 decreased as
compared to December 31, 2010 as we recorded provision for
credit losses less than net charge-offs of $781 million
during the three months ended March 31, 2011. Credit loss
reserves were lower for all products as discussed below.
|
|
|
|
|
The decrease in credit loss reserves in our credit card
receivable portfolio reflects lower loss estimates due to lower
receivable levels and improved credit quality including lower
delinquency levels as discussed more fully below. The decrease
in credit loss reserves also reflects continuing improvements in
early stage delinquency roll rates and seasonal improvements in
our collection activities during the first quarter of the year
as some customers use their tax refunds to make payments.
|
|
|
|
The decrease in credit loss reserve levels in our real estate
secured receivable portfolio reflects lower loss estimates due
to lower receivable levels as the portfolio continues to
liquidate, lower delinquency levels as discussed more fully
below. Additionally, the decrease in credit loss reserves
reflects improvements in economic conditions, lower loss
estimates on recently modified loans and seasonal improvements
in our collection activities. The decrease also reflects an
increase of $310 million during the first quarter of 2011
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 receivable totals
until we obtain title to the property. The decrease in credit
loss reserves was partially offset by the impact of continued
high unemployment levels and lower receivable prepayments.
|
The decrease in credit loss reserves for real estate secured
receivables was also partially offset by higher reserve
requirements for TDR Loans reflecting lower estimated cash flows
from these receivables due to economic expectations about home
prices and other changes in assumptions including the length of
time these receivables will remain on our books as a result of
the suspension of foreclosure activity as previously discussed.
The higher loss estimates have resulted in an overall increase
in credit loss reserves on first lien real estate secured TDR
Loans at March 31, 2011 as compared to December 31,
2010. These higher loss estimates for TDR Loans were partially
offset by lower new TDR Loan volumes and an increase in the
percentage of TDR Loans that are performing due to charge-off of
nonperforming TDR Loans during the quarter.
|
|
|
|
|
Credit loss reserve levels in our personal non-credit card
portfolio decreased as a result of lower receivable levels
including lower delinquency and charge-off levels as well as
improvements in economic conditions. The decrease also reflects
lower reserve requirements on personal non-credit card TDR Loans
due to lower new TDR Loan volumes and an increase in the
percentage of TDR Loans that are performing due to charge-off of
nonperforming TDR Loans during the quarter.
|
At March 31, 2011, approximately $5.4 billion, or
11 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
$7.6 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 $1.0 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, 28 percent of our real estate secured receivable
portfolio and 22 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.
80
HSBC Finance Corporation
Credit loss estimates for our credit card receivable portfolio
relate primarily to non-prime credit card receivables. 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 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 less deterioration during the
recent economic downturn. 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.
Reserve ratios Following is a discussion of changes in
the reserve ratios we consider in establishing reserve levels.
Reserves as a percentage of receivables were lower at
March 31, 2011 as compared to December 31, 2010 driven
by lower dollars of delinquency for all products as discussed
more fully below. 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 than second lien real estate secured
and personal non-credit card receivables as these receivables
have run-off or charged-off at a faster pace. The decline in
this ratio was partially offset by higher reserve levels for
real estate secured TDR Loans as discussed above.
Reserves as a percentage of net charge-offs at March 31,
2011 decreased as compared to December 31, 2010 as the
decline in reserve levels as discussed above was at a faster
pace than the decline in dollars of net charge-offs.
Reserves as a percentage of nonperforming loans in both periods
was impacted by 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 significantly during
the first quarter of 2011 as decreases in nonperforming loans
outpaced the decreases in reserves due to higher reserve levels
on real estate secured TDR Loans as discussed above.
Reserves as a percentage of two-months-and-over contractual
delinquency increased as compared to December 31, 2010.
This ratio has been significantly impacted by 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 143.3 percent at
March 31, 2011 as compared to 121.0 percent at
December 31, 2010 as dollars of delinquency decreased at a
faster pace than reserve levels due to higher reserve levels on
real estate secured TDR Loans as discussed above.
81
HSBC Finance Corporation
The following table summarizes the changes in credit loss
reserves by product during the three months ended March 31,
2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Secured
|
|
|
|
Personal
|
|
|
|
|
First
|
|
Second
|
|
Credit
|
|
Non-Credit
|
|
|
|
|
Lien
|
|
Lien
|
|
Card
|
|
Card
|
|
Total
|
|
|
|
(in millions)
|
|
Three months ended March 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at beginning of period
|
|
$
|
3,355
|
|
|
$
|
832
|
|
|
$
|
978
|
|
|
$
|
1,326
|
|
|
$
|
6,491
|
|
Provision for credit losses
|
|
|
585
|
|
|
|
105
|
|
|
|
74
|
|
|
|
18
|
|
|
|
782
|
|
Charge-offs
|
|
|
(783
|
)
|
|
|
(260
|
)
|
|
|
(343
|
)
|
|
|
(374
|
)
|
|
|
(1,760
|
)
|
Recoveries
|
|
|
10
|
|
|
|
17
|
|
|
|
56
|
|
|
|
114
|
|
|
|
197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(773
|
)
|
|
|
(243
|
)
|
|
|
(287
|
)
|
|
|
(260
|
)
|
|
|
(1,563
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
3,167
|
|
|
$
|
694
|
|
|
$
|
765
|
|
|
$
|
1,084
|
|
|
$
|
5,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at beginning of period
|
|
$
|
3,997
|
|
|
$
|
1,430
|
|
|
$
|
1,816
|
|
|
$
|
1,848
|
|
|
$
|
9,091
|
|
Provision for credit losses
|
|
|
919
|
|
|
|
126
|
|
|
|
199
|
|
|
|
620
|
|
|
|
1,864
|
|
Charge-offs
|
|
|
(1,046
|
)
|
|
|
(470
|
)
|
|
|
(588
|
)
|
|
|
(766
|
)
|
|
|
(2,870
|
)
|
Recoveries
|
|
|
9
|
|
|
|
22
|
|
|
|
61
|
|
|
|
88
|
|
|
|
180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(1,037
|
)
|
|
|
(448
|
)
|
|
|
(527
|
)
|
|
|
(678
|
)
|
|
|
(2,690
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
3,879
|
|
|
$
|
1,108
|
|
|
$
|
1,488
|
|
|
$
|
1,790
|
|
|
$
|
8,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
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):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2011
|
|
2010
|
|
|
|
(dollars are in millions)
|
|
Dollars of contractual delinquency:
|
|
|
|
|
|
|
|
|
Credit card receivables
|
|
$
|
481
|
|
|
$
|
612
|
|
Real estate
secured(1)(2)(3)
|
|
|
7,058
|
|
|
|
8,171
|
|
Personal non-credit card
|
|
|
596
|
|
|
|
779
|
|
|
|
|
|
|
|
|
|
|
Total receivables
|
|
$
|
8,135
|
|
|
$
|
9,562
|
|
|
|
|
|
|
|
|
|
|
Delinquency ratio:
|
|
|
|
|
|
|
|
|
Credit card receivables
|
|
|
5.20
|
%
|
|
|
6.18
|
%
|
Real estate
secured(1)(2)(3)
|
|
|
14.95
|
|
|
|
16.56
|
|
Personal non-credit card
|
|
|
9.16
|
|
|
|
10.94
|
|
|
|
|
|
|
|
|
|
|
Total receivables
|
|
|
12.92
|
%
|
|
|
14.41
|
%
|
|
|
|
|
|
|
|
|
|
82
HSBC Finance Corporation
|
|
|
(1) |
|
Real estate secured
two-months-and-over contractual delinquency and as a percentage
of consumer receivables and receivables held for sale for our
Mortgage Services and Consumer Lending businesses are comprised
of the following:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2011
|
|
2010
|
|
|
|
(dollars are in millions)
|
|
Dollars of contractual delinquency:
|
|
|
|
|
|
|
|
|
Mortgage Services:
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
2,338
|
|
|
$
|
2,643
|
|
Second lien
|
|
|
184
|
|
|
|
243
|
|
|
|
|
|
|
|
|
|
|
Total Mortgage Services
|
|
$
|
2,522
|
|
|
$
|
2,886
|
|
|
|
|
|
|
|
|
|
|
Consumer Lending:
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
4,199
|
|
|
$
|
4,861
|
|
Second lien
|
|
|
337
|
|
|
|
424
|
|
|
|
|
|
|
|
|
|
|
Total Consumer Lending
|
|
$
|
4,536
|
|
|
$
|
5,285
|
|
|
|
|
|
|
|
|
|
|
Delinquency ratio:
|
|
|
|
|
|
|
|
|
Mortgage Services:
|
|
|
|
|
|
|
|
|
First lien
|
|
|
17.76
|
%
|
|
|
19.12
|
%
|
Second lien
|
|
|
9.14
|
|
|
|
11.23
|
|
|
|
|
|
|
|
|
|
|
Total Mortgage Services
|
|
|
16.62
|
%
|
|
|
18.05
|
%
|
|
|
|
|
|
|
|
|
|
Consumer Lending::
|
|
|
|
|
|
|
|
|
First lien
|
|
|
14.52
|
%
|
|
|
16.18
|
%
|
Second lien
|
|
|
10.79
|
|
|
|
12.81
|
|
|
|
|
|
|
|
|
|
|
Total Consumer Lending
|
|
|
14.16
|
%
|
|
|
15.85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) |
|
The following reflects dollars of
contractual delinquency and the delinquency ratio for
interest-only, ARM and stated income real estate secured
receivables:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2011
|
|
2010
|
|
|
|
(dollars are in millions)
|
|
Dollars of contractual delinquency:
|
|
|
|
|
|
|
|
|
Interest-only loans
|
|
$
|
404
|
|
|
$
|
423
|
|
ARM loans
|
|
|
1,727
|
|
|
|
1,987
|
|
Stated income loans
|
|
|
609
|
|
|
|
683
|
|
Delinquency ratio:
|
|
|
|
|
|
|
|
|
Interest-only loans
|
|
|
33.11
|
%
|
|
|
31.76
|
%
|
ARM loans
|
|
|
24.75
|
|
|
|
26.54
|
|
Stated income loans
|
|
|
24.20
|
|
|
|
25.28
|
|
|
|
|
(3) |
|
At March 31, 2011 and
December 31, 2010, dollars of real estate secured
delinquency includes $4.1 billion and $4.2 billion,
respectively, of receivables that are carried at the lower of
cost or net realizable value.
|
Dollars of delinquency decreased $1.4 billion since
December 31, 2010 with decreases for all receivable
products reflecting lower receivable levels as discussed above
and the impact of improved economic conditions. The decrease
also reflects seasonal improvements in our collection activities
during the first quarter of the year as previously discussed.
The decrease was also partially offset by the continuing high
unemployment levels. As it relates to our real estate secured
receivable portfolio, the decrease in dollars of delinquency was
partially offset by the impact of our suspension of foreclosure
activities as previously discussed, as receivables are staying
on our books longer.
The delinquency ratio decreased as compared to December 31,
2010 driven by the factors discussed above as dollars of
delinquency declined at a faster pace than receivable levels.
83
HSBC Finance Corporation
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 Receivables The following
table summarizes net charge-off of receivables both in dollars
and as a percent of average 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 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 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
Three Months
Ended(1)
|
|
2011
|
|
|
2010
|
|
|
2010
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net charge-off dollars:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card receivables
|
|
$
|
287
|
|
|
$
|
312
|
|
|
$
|
527
|
|
Real estate
secured(2)(3)
|
|
|
1,016
|
|
|
|
1,022
|
|
|
|
1,485
|
|
Personal non-credit card
|
|
|
260
|
|
|
|
355
|
|
|
|
678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables continuing operations
|
|
|
1,563
|
|
|
|
1,689
|
|
|
|
2,690
|
|
Discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables
|
|
$
|
1,563
|
|
|
$
|
1,689
|
|
|
$
|
2,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-off ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card receivables
|
|
|
11.92
|
%
|
|
|
12.60
|
%
|
|
|
18.73
|
%
|
Real estate
secured(2)(3)
|
|
|
8.43
|
|
|
|
8.12
|
|
|
|
10.17
|
|
Personal non-credit card
|
|
|
15.26
|
|
|
|
19.13
|
|
|
|
27.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables continuing operations
|
|
|
9.67
|
|
|
|
9.98
|
|
|
|
13.52
|
|
Discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
8.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables
|
|
|
9.67
|
%
|
|
|
9.98
|
%
|
|
|
13.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate secured net charge-offs and REO expense as a percent
of average real estate secured receivables
|
|
|
9.31
|
|
|
|
9.07
|
%
|
|
|
10.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The net charge-off ratio for all
quarterly periods presented is net charge-offs for the quarter,
annualized, as a percentage of average receivables for the
quarter.
|
84
HSBC Finance Corporation
|
|
|
(2) |
|
Real estate secured net charge-off
dollars, annualized, as a percentage of average receivables for
our Mortgage Services and Consumer Lending businesses are
comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
March 31,
|
Three Months Ended
|
|
2011
|
|
2010
|
|
2010
|
|
|
|
(dollars are in millions)
|
|
Net charge-off dollars:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
312
|
|
|
$
|
305
|
|
|
$
|
441
|
|
Second lien
|
|
|
110
|
|
|
|
132
|
|
|
|
196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mortgage Services
|
|
$
|
422
|
|
|
$
|
437
|
|
|
$
|
637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Lending:
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
461
|
|
|
$
|
433
|
|
|
$
|
597
|
|
Second lien
|
|
|
133
|
|
|
|
152
|
|
|
|
251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consumer Lending
|
|
$
|
594
|
|
|
$
|
585
|
|
|
$
|
848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-off ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
9.27
|
%
|
|
|
8.66
|
%
|
|
|
10.56
|
%
|
Second lien
|
|
|
21.10
|
|
|
|
23.52
|
|
|
|
27.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mortgage Services
|
|
|
10.85
|
%
|
|
|
10.68
|
%
|
|
|
13.04
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Lending:
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
6.26
|
%
|
|
|
5.68
|
%
|
|
|
6.93
|
%
|
Second lien
|
|
|
16.63
|
|
|
|
17.54
|
|
|
|
22.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consumer Lending
|
|
|
7.28
|
%
|
|
|
6.88
|
%
|
|
|
8.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) |
|
Net charge-off dollars and the net
charge-off ratio for ARM loans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
March 31,
|
Three Months Ended
|
|
2011
|
|
2010
|
|
2010
|
|
|
|
(dollars are in millions)
|
|
Net charge-off dollars ARM Loans
|
|
$
|
230
|
|
|
$
|
233
|
|
|
$
|
326
|
|
Net charge-off ratio ARM Loans
|
|
|
12.74
|
%
|
|
|
12.04
|
%
|
|
|
13.67
|
%
|
Overall dollars of net charge-offs decreased as compared to both
the prior quarter and prior year quarter as all receivable
portfolios were positively impacted in both periods by lower
delinquency levels as a result of lower receivable levels,
improvements in economic conditions and lower levels of personal
bankruptcy filings and for real estate secured receivables, an
increase in the number of
deed-in-lieu
accepted and as compared to the prior year quarter an increase
in short sales both of which result in lower losses compared to
loans which are subject to a formal foreclosure process.
Compared to the prior quarter, while overall dollars of net
charge-offs decreased, dollars of net charge-offs in our real
estate secured receivable portfolio were essentially flat, as
the improvements noted above, in addition to other operational
efficiencies in the charge-off process in the fourth quarter of
2010, were largely offset by a change in the timing for
recognizing additional charge-offs on loans greater than
180 days past due which resulted in a one-time reversal of
charge-off and an offsetting increase to credit loss reserves in
the fourth quarter of 2010. These decreases were partially
offset for all receivable portfolios by the impact of continued
high unemployment levels.
The net charge-off ratio for total receivables from continuing
operations decreased 31 basis points as compared to the
prior quarter and 385 basis points as compared to the prior
year quarter. As compared to the prior year quarter, the
decrease reflects lower dollars of net charge-offs as discussed
above which outpaced the decrease in average receivables. As
compared to the prior quarter, the decrease primarily reflects a
lower net charge-off ratio for our credit card and personal
non-credit card receivables as the decrease in net charge-off
dollars for credit card and personal non-credit card receivables
outpaced the decrease in average receivables during this period,
partially offset by a higher net charge-off ratio for real
estate secured receivables as charge-offs were essentially flat
as discussed above.
85
HSBC Finance Corporation
Real estate charge-offs and REO expenses as a percentage of
average real estate secured receivables increased during the
first quarter of 2011 as compared to the prior quarter as the
impact of lower dollars of net charge-offs and REO expenses
during the first quarter of 2011 as compared to the prior
quarter was offset by the impact of lower average receivable
levels. See Results of Operations for further
discussion of REO expenses.
Nonperforming Assets Nonperforming assets are
summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Nonperforming receivables:
|
|
|
|
|
|
|
|
|
Credit card (accruing receivables 90 or more days
delinquent)(1)
|
|
$
|
353
|
|
|
$
|
447
|
|
Nonaccrual receivable
portfolios(2):
|
|
|
|
|
|
|
|
|
Real estate
secured(3)(4)
|
|
|
5,749
|
|
|
|
6,360
|
|
Personal non-credit card
|
|
|
415
|
|
|
|
530
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming receivables
|
|
|
6,517
|
|
|
|
7,337
|
|
Real estate owned
|
|
|
847
|
|
|
|
962
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
7,364
|
|
|
$
|
8,299
|
|
|
|
|
|
|
|
|
|
|
Credit loss reserves as a percent of nonperforming
receivables(5)
|
|
|
87.7
|
%
|
|
|
88.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 receivables held for sale, are comprised
of the following:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Real estate secured:
|
|
|
|
|
|
|
|
|
Closed-end:
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
5,382
|
|
|
$
|
5,910
|
|
Second lien
|
|
|
257
|
|
|
|
320
|
|
Revolving:
|
|
|
|
|
|
|
|
|
First lien
|
|
|
6
|
|
|
|
6
|
|
Second lien
|
|
|
104
|
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
$
|
5,749
|
|
|
$
|
6,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4) |
|
At March 31, 2011 and
December 31, 2010, non-accrual real estate secured
receivables include $4.0 billion and $4.1 billion,
respectively, of receivables that are carried at net realizable
value less cost to sell.
|
|
(5) |
|
Ratio 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.
|
Total nonperforming receivables decreased at March 31, 2011
as a result of the lower delinquency levels during the first
quarter of 2011 as well as the impact of lower receivable
levels. The decrease in nonperforming real estate secured
receivables was partially offset by the impact of our suspension
of foreclosures as previously discussed. Real estate secured
nonaccrual loans include stated income loans at our Mortgage
Services business of $509 million and $557 million at
March 31, 2011 and December 31, 2010, 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
86
HSBC Finance Corporation
more consecutive six-month modifications are considered troubled
debt restructurings for purposes of determining loss reserve
estimates.
The following table summarizes TDR Loans that are shown as
nonperforming receivables in the table above:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Real estate secured
|
|
$
|
1,711
|
|
|
$
|
1,825
|
|
Credit card
|
|
|
14
|
|
|
|
20
|
|
Personal non-credit card
|
|
|
72
|
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,797
|
|
|
$
|
1,935
|
|
|
|
|
|
|
|
|
|
|
For additional information related to TDR Loans, see
Note 4, Receivables, to our accompanying
consolidated financial statements.
Customer Account Management Policies and
Practices 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 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 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 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.
It is our practice to defer past due interest on re-aged real
estate secured and personal non-credit card accounts to the end
of the loan period. We do not accrue interest on these past due
interest payments consistent with our 2002 settlement agreement
with the state attorneys general. 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. See
Customer Account Management Policies and Practices
in our 2010
Form 10-K
for additional information.
In April 2011, the FASB issued an 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.
87
HSBC Finance Corporation
Implementing this Accounting Standards Update effective
July 1, 2011 will result in significantly higher volumes of
re-aged and modified accounts being reported as troubled debt
restructurings. TDR Loans are typically reserved for using a
discounted cash flow methodology which generally results in a
higher reserve requirement for these loans. Although we are in
the process of evaluating the impact of adopting this Accounting
Standards Update, we currently expect the impact will be
material. Additionally, we continue to review our current
customer account management policies and practices to determine
if any changes will be made in future periods as a result of
this guidance.
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 361,200 real estate secured loans with an
aggregate outstanding receivable balance of $42.3 billion
at the time of modification
and/or
re-age under our foreclosure avoidance programs which are
described below and a proactive ARM reset modification program
which is more fully described in our 2010
Form 10-K.
These totals include approximately 75,500 real estate secured
loans with an outstanding receivable balance of
$11.4 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 March 31, 2011
|
|
of Loans
|
|
|
Action
|
|
|
|
|
Current or less than
30-days
delinquent
|
|
|
44
|
%
|
|
|
42
|
%
|
30- to
59-days
delinquent
|
|
|
6
|
|
|
|
6
|
|
60-days or
more delinquent
|
|
|
15
|
|
|
|
19
|
|
Paid-in-full
|
|
|
8
|
|
|
|
7
|
|
Charged-off, transferred to real estate owned or sold
|
|
|
27
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
March 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collection re-age only
|
|
|
91.1
|
|
|
|
30.7
|
|
|
$
|
7,763
|
|
|
$
|
2,718
|
|
Modification
only(2)
|
|
|
10.1
|
|
|
|
6.6
|
|
|
|
1,112
|
|
|
|
745
|
|
Modification re-age
|
|
|
67.6
|
|
|
|
45.5
|
|
|
|
8,166
|
|
|
|
5,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans modified and/or
re-aged(3)
|
|
|
168.8
|
|
|
|
82.8
|
|
|
$
|
17,041
|
|
|
$
|
8,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 5,
Receivables, in the accompanying consolidated
financial statements.
|
|
(2) |
|
Includes loans that have been
modified under a proactive ARM reset modification program which
is fully described in our 2010
Form 10-K.
|
88
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
|
|
|
|
|
March 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current or less than
30-days
delinquent
|
|
|
70
|
%
|
|
|
67
|
%
|
|
|
67
|
%
|
|
|
67
|
%
|
30- to
59-days
delinquent
|
|
|
9
|
|
|
|
8
|
|
|
|
10
|
|
|
|
9
|
|
60-days or
more delinquent
|
|
|
21
|
|
|
|
25
|
|
|
|
23
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
In addition to the account management techniques discussed
above, we have also increased the use of
deed-in-lieu
and short sales beginning 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 lower than losses from foreclosed loans, or
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 be elevated 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 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
89
HSBC Finance Corporation
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 2011, 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 qualifying 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 the three
months ended March 31, 2011 and 2010, some of which may
have also been re-aged:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Receivable
|
|
|
|
Number of Accounts
|
|
|
Balance
|
|
|
|
Consumer
|
|
|
Mortgage
|
|
|
Consumer
|
|
|
Mortgage
|
|
|
|
Lending
|
|
|
Services
|
|
|
Lending
|
|
|
Services
|
|
|
|
|
|
(accounts are in thousands)
|
|
|
(dollars are in billions)
|
|
|
Foreclosure avoidance
programs(1)(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2011
|
|
|
5.6
|
|
|
|
4.6
|
|
|
$
|
.8
|
|
|
$
|
.6
|
|
Three months ended March 31, 2010
|
|
|
11.0
|
|
|
|
7.7
|
|
|
|
1.6
|
|
|
|
1.0
|
|
|
|
|
(1) |
|
Includes all loans modified during
the three months ended March 31, 2011 and 2010 regardless
of whether the loan was also re-aged.
|
|
(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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mar. 31,
|
|
|
Dec. 31,
|
|
|
Sept. 30,
|
|
|
June 30,
|
|
|
Mar. 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
|
|
Weighted-average contractual rate reduction in basis points on
account modifications during the
period(1)(2)
|
|
|
340
|
|
|
|
333
|
|
|
|
341
|
|
|
|
339
|
|
|
|
329
|
|
Average payment relief provided on account modifications as a
percentage of total payment prior to
modification(2)
|
|
|
27.2
|
%
|
|
|
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 $1.1 billion, $1.2 billion,
$1.2 billion, $1.3 billion and 1.4 billion as of
March 31, 2011, December 31, 2010, September 30,
2010, June 30, 2010 and March 31, 2010, respectively.
|
90
HSBC Finance Corporation
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. It is our
practice to defer past due interest on re-aged real estate
secured and personal non-credit card accounts to the end of the
loan period. We do not accrue interest on these past due
interest payments consistent with our 2002 settlement agreement
with the state attorneys general.
We continue to monitor and track information related to accounts
that have been re-aged. At March 31, 2011, approximately
90 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. TDR
Loans are typically reserved for using a discounted cash flow
methodology.
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)
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
Never re-aged
|
|
|
58.4
|
%
|
|
|
59.3
|
%
|
Re-aged:
|
|
|
|
|
|
|
|
|
Re-aged in the last 6 months
|
|
|
12.3
|
|
|
|
10.5
|
|
Re-aged in the last 7-12 months
|
|
|
8.5
|
|
|
|
10.0
|
|
Previously re-aged beyond 12 months
|
|
|
20.8
|
|
|
|
20.2
|
|
|
|
|
|
|
|
|
|
|
Total ever re-aged
|
|
|
41.6
|
|
|
|
40.7
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
Re-aged by
Product(1)(2)(3)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Real estate
secured(5)
|
|
$
|
23,570
|
|
|
|
49.9
|
%
|
|
$
|
24,125
|
|
|
|
48.9
|
%
|
Credit card
|
|
|
376
|
|
|
|
4.1
|
|
|
|
412
|
|
|
|
4.2
|
|
Personal non-credit card
|
|
|
2,360
|
|
|
|
36.3
|
|
|
|
2,565
|
|
|
|
36.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
26,306
|
|
|
|
41.6
|
%
|
|
$
|
27,102
|
|
|
|
40.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The tables above include 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.
|
91
HSBC Finance Corporation
|
|
|
(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
March 31, 2011 and December 31, 2010, the unpaid
principal balance of re-ages without receipt of a payment
totaled $754 million and $737 million, respectively.
|
|
(5) |
|
The Mortgage Services and Consumer
Lending businesses real estate secured re-ages are as shown in
the following table:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Mortgage Services
|
|
$
|
8,552
|
|
|
$
|
8,914
|
|
Consumer Lending
|
|
|
15,018
|
|
|
|
15,211
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
$
|
23,570
|
|
|
$
|
24,125
|
|
|
|
|
|
|
|
|
|
|
The overall decrease in dollars of re-aged loans during the
first quarter of 2011 reflects the lower delinquency and
receivable levels as discussed above. At March 31, 2011 and
December 31, 2010, $6.1 billion (23 percent of
total re-aged loans in the Re-age Table) and
$7.1 billion (26 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 March 31, 2011 and
December 31, 2010 as well as the unemployment rate for
these states for March 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables at
|
|
|
Percent of
|
|
|
|
|
|
|
March 31, 2011
|
|
|
Total Receivable
|
|
|
Unemployment
|
|
|
|
Credit
|
|
|
Real Estate
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
Rates for
|
|
|
|
Cards
|
|
|
Secured
|
|
|
Other
|
|
|
2011
|
|
|
2010
|
|
|
March
2011(1)
|
|
|
|
|
California
|
|
|
10.6
|
%
|
|
|
9.8
|
%
|
|
|
5.6
|
%
|
|
|
9.5
|
%
|
|
|
9.6
|
%
|
|
|
12.0
|
%
|
New York
|
|
|
7.4
|
|
|
|
7.1
|
|
|
|
6.8
|
|
|
|
7.1
|
|
|
|
7.0
|
|
|
|
8.0
|
|
Florida
|
|
|
6.8
|
|
|
|
6.2
|
|
|
|
5.7
|
|
|
|
6.2
|
|
|
|
6.3
|
|
|
|
11.1
|
|
Pennsylvania
|
|
|
4.2
|
|
|
|
6.0
|
|
|
|
6.5
|
|
|
|
5.8
|
|
|
|
5.7
|
|
|
|
7.8
|
|
Ohio
|
|
|
4.2
|
|
|
|
5.5
|
|
|
|
6.1
|
|
|
|
5.4
|
|
|
|
5.4
|
|
|
|
8.9
|
|
|
|
(1) |
The U.S. national unemployment rate for March 2011 was
8.8 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.
Liquidity
and Capital Resources
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.
92
HSBC Finance Corporation
Debt due to affiliates and other HSBC related funding are
summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in billions)
|
|
|
Due to HSBC
affiliates(1)
|
|
$
|
8.3
|
|
|
$
|
8.3
|
|
|
|
|
|
|
|
|
|
|
Debt outstanding to HSBC clients:
|
|
|
|
|
|
|
|
|
Euro commercial paper
|
|
|
.5
|
|
|
|
.4
|
|
Term debt
|
|
|
.3
|
|
|
|
.3
|
|
|
|
|
|
|
|
|
|
|
Total debt outstanding to HSBC clients
|
|
|
.8
|
|
|
|
.7
|
|
Cash received on bulk and subsequent sales of credit card
receivables to HSBC Bank USA, net (cumulative)
|
|
|
7.7
|
|
|
|
8.4
|
|
Cash received on bulk and subsequent sales of private label
credit card receivables to HSBC Bank USA, net (cumulative)
|
|
|
13.1
|
|
|
|
14.4
|
|
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
|
)
|
|
|
(6.4
|
)
|
|
|
|
|
|
|
|
|
|
Total real estate secured receivable activity with HSBC Bank USA
(cumulative)
|
|
|
1.5
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
Cash received from sale of U.K. and Canadian operations to HSBC
affiliates
|
|
|
3.4
|
|
|
|
3.4
|
|
Capital contributions by HINO (cumulative)
|
|
|
8.8
|
|
|
|
8.8
|
|
Issuance of Series C Preferred Stock to HINO
|
|
|
1.0
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
Total HSBC related funding
|
|
$
|
44.6
|
|
|
$
|
46.5
|
|
|
|
|
|
|
|
|
|
|
(1) At
March 31, 2011 and December 31, 2010, due to HSBC
affiliates includes $448 million and $436 million,
respectively, carried at fair value.
At both March 31, 2011 and December 31, 2010, funding
from HSBC, including debt issuances to HSBC subsidiaries and
clients, represented 16 percent of our total debt and
preferred stock funding, respectively.
We have a $1.5 billion uncommitted secured credit facility
and a $1.0 billion committed unsecured credit facility from
HSBC Bank USA. At March 31, 2011 and December 31,
2010, there were no balances outstanding under either of these
facilities. Additionally, at March 31, 2011 and
December 31, 2010, we have a committed
back-up line
of credit totaling $2.0 billion with an HSBC affiliate. At
March 31, 2011 and December 31, 2010, there were no
balances outstanding under the
back-up line
of credit.
We have derivative contracts with a notional value of
$48.6 billion, or approximately 99 percent of total
derivative contracts, outstanding with HSBC affiliates at
March 31, 2011 and $49.9 billion, or approximately
99 percent, at December 31, 2010.
Interest Bearing Deposits with Banks and Other Short-Term
Investments Interest bearing deposits with banks
totaled $1.0 billion at both March 31, 2011 and
December 31, 2010, respectively. Securities purchased under
agreements to resell totaled $5.2 billion and
$4.3 billion at March 31, 2011 and December 31,
2010, 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 and an
increase in collateral required from counterparties under our
derivative agreements.
Commercial paper totaled $3.8 billion
and $3.2 billion at March 31, 2011 and
December 31, 2010, respectively. Included in this total was
outstanding Euro commercial paper sold to customers of HSBC of
$499 million and $450 million at March 31, 2011
and December 31, 2010, respectively. Our funding strategies
are structured such that committed bank credit facilities exceed
100 percent of outstanding commercial paper.
93
HSBC Finance Corporation
We had committed
back-up
lines of credit totaling $6.3 billion at March 31,
2011 and December 31, 2010, respectively. At March 31,
2011 and December 31, 2010, one of these facilities
totaling $2.0 billion was with an HSBC affiliate to support
our issuance of commercial paper. In April 2011, we refinanced
all of our third party
back-up
lines, totaling $4.3 billion, into a new $4.0 billion
credit facility, split evenly between tenors of 364 days
and three years. As of the date of this filing,
back-up
lines of credit now total $6.0 billion.
Long-term debt decreased to
$52.0 billion at March 31, 2011 from
$54.6 billion at December 31, 2010. The following
table summarizes issuances and repayments of long-term debt for
continuing operations during the three months ended
March 31, 2011 and 2010:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Long-term debt issued
|
|
$
|
162
|
|
|
$
|
119
|
|
Long-term debt retired
|
|
|
(3,106
|
)
|
|
|
(2,359
|
)
|
|
|
|
|
|
|
|
|
|
Net long-term debt retired
|
|
$
|
(2,944
|
)
|
|
$
|
(2,240
|
)
|
|
|
|
|
|
|
|
|
|
The long-term debt issued during the first quarter of 2011
relates to
InterNotessm
(retail-oriented medium-term notes).
We have secured conduit credit facilities with commercial banks
which provide for secured financings of receivables on a
revolving basis totaling $650 million at March 31,
2011 and December 31, 2010, respectively. At both
March 31, 2011 and December 31, 2010,
$455 million was available under these facilities. These
facilities will mature in the second quarter of 2011 and are
renewable at the banks option.
Secured financings issued under our current conduit credit
facilities as well as secured financings previously issued under
public trusts of $3.9 billion at March 31, 2011 are
secured by $6.1 billion of closed-end real estate secured
and credit card receivables. Secured financings of
$4.1 billion at December 31, 2010 were secured by
$6.3 billion of closed-end real estate secured and credit
card receivables. The following table shows by product type the
receivables which secure our secured financings:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in billions)
|
|
|
Real estate secured
|
|
$
|
5.7
|
|
|
$
|
5.9
|
|
Credit card
|
|
|
.4
|
|
|
|
.4
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6.1
|
|
|
$
|
6.3
|
|
|
|
|
|
|
|
|
|
|
Common Equity During the first quarter of
2011, HINO did not make any capital contribution to us. However,
until we return to profitability, we may be dependent upon
additional 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 have 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
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.
94
HSBC Finance Corporation
Selected capital ratios are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2011
|
|
2010
|
|
|
Tangible common equity to tangible
assets(1)
|
|
|
7.70
|
%
|
|
|
7.37
|
%
|
Common and preferred equity to total assets
|
|
|
10.35
|
|
|
|
10.09
|
|
|
|
(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.
|
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 March 31, 2011 and
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in billions)
|
|
|
Private label and credit
cards(1)(2)
|
|
$
|
100
|
|
|
$
|
99
|
|
Other consumer lines of credit
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Open lines of credit
|
|
$
|
101
|
|
|
$
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Amounts include open lines of credit totaling $90.1 billion
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 March 31, 2011 and
December 31, 2010.
|
2011 Funding Strategy Our current range of
estimates for funding needs and sources for 2011 are summarized
in the table that follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1
|
|
|
April 1
|
|
|
|
|
|
|
|
|
|
|
|
|
through
|
|
|
through
|
|
|
Estimated
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
Full Year
|
|
|
|
2011
|
|
|
2011
|
|
|
2011
|
|
|
|
|
|
(in billions)
|
|
|
Funding needs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset
growth/(attrition)(1)
|
|
$
|
(2
|
)
|
|
$
|
(2
|
)
|
|
|
-
|
|
|
|
0
|
|
|
$
|
(4
|
)
|
|
|
-
|
|
|
|
(2
|
)
|
Commercial paper maturities
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
|
|
3
|
|
|
|
3
|
|
|
|
-
|
|
|
|
3
|
|
Term debt maturities
|
|
|
3
|
|
|
|
10
|
|
|
|
-
|
|
|
|
11
|
|
|
|
13
|
|
|
|
-
|
|
|
|
14
|
|
Other
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
2
|
|
|
|
1
|
|
|
|
-
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total funding needs
|
|
$
|
1
|
|
|
$
|
12
|
|
|
|
-
|
|
|
|
16
|
|
|
$
|
13
|
|
|
|
-
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funding sources:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper issuances
|
|
$
|
1
|
|
|
$
|
4
|
|
|
|
-
|
|
|
|
5
|
|
|
$
|
5
|
|
|
|
-
|
|
|
|
6
|
|
Short term investment
|
|
|
(1
|
)
|
|
|
5
|
|
|
|
-
|
|
|
|
5
|
|
|
|
4
|
|
|
|
-
|
|
|
|
4
|
|
Term debt issuances
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
Secured financings, including conduit facility renewals
|
|
|
-
|
|
|
|
0
|
|
|
|
-
|
|
|
|
1
|
|
|
|
0
|
|
|
|
-
|
|
|
|
1
|
|
HSBC and HSBC subsidiaries, including capital infusions
|
|
|
-
|
|
|
|
0
|
|
|
|
-
|
|
|
|
1
|
|
|
|
0
|
|
|
|
-
|
|
|
|
1
|
|
Other(2)
|
|
|
1
|
|
|
|
2
|
|
|
|
-
|
|
|
|
3
|
|
|
|
3
|
|
|
|
-
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total funding sources
|
|
$
|
1
|
|
|
$
|
12
|
|
|
|
-
|
|
|
|
16
|
|
|
$
|
13
|
|
|
|
-
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Net of receivable charge-off.
|
|
(2)
|
Primarily reflects cash provided by operating activities and
sales of REO properties.
|
95
HSBC Finance Corporation
For the remainder of 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 or if HSBC North America
calls upon us to execute certain strategies in order to address
capital considerations 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.
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 the three months ended March 31, 2011
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;
|
|
|
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 HSBC affiliate. 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.
96
HSBC Finance Corporation
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.
|
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 March 31,
2011 and December 31, 2010, our Level 3 instruments
recorded at fair value on a recurring basis include
$24 million and $24 million, respectively, primarily
U.S. corporate debt securities and asset-backed securities.
As of March 31, 2011 and December 31, 2010, our
Level 3 assets recorded at fair value on a non-recurring
basis included receivables held for sale totaling
$5 million and $4 million, respectively.
Transfers between leveling categories are recognized at the end
of each reporting period.
Transfers Between Level 1 and Level 2
Measurements There were no transfers between
Level 1 and Level 2 during the three months ended
March 31, 2011 and 2010.
97
HSBC Finance Corporation
Transfers Between Level 2 and Level 3
Measurements Assets recorded at fair value on a
recurring basis at March 31, 2011 and December 31,
2010 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 15, 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 the first quarter of
2011, we transferred $2 million of asset-back securities,
from Level 2 to Level 3 which met one or both of the
conditions described above. During the first quarter of 2010, we
transferred $19 million of individual securities, primarily
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
$9 million from Level 2 to Level 3 of individual
corporate debt securities and asset-backed securities which met
one or both of the conditions described above.
We reported a total of $24 million of
available-for-sale
securities, or approximately 1 percent of our securities
portfolio as Level 3 at both March 31, 2011 and
December 31, 2010. At both March 31, 2011 and
December 31, 2010, total Level 3 assets as a
percentage of total assets measured at fair value on a recurring
basis were 1 percent.
See Note 15, 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
Credit Risk
Management 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. See the captions Credit Quality and Risk
Management in our 2010
Form 10-K
for a detailed description of our policies regarding the
establishment of credit loss reserves, our delinquency and
charge-off policies and practices and our customer account
management policies and practices. Also see Note 2,
Summary of Significant Accounting Policies and New
Accounting Pronouncements, in our 2010
Form 10-K
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.
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
98
HSBC Finance Corporation
counterparties with collateral totaling $28 million and
$33 million at March 31, 2011 and December 31,
2010, respectively. The fair value of our agreements with
affiliate counterparties required the affiliate to provide cash
collateral of $2.9 billion and $2.5 billion at
March 31, 2011 and December 31, 2010, respectively.
These amounts are offset against the fair value amount
recognized for derivative instruments that have been offset
under the same master netting arrangement.
There have been no significant changes in our approach to credit
risk management since December 31, 2010.
Liquidity Risk Management Continued success
in reducing the size of our run-off real estate secured and
personal non-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 attrition due to
elevated charge-offs and the interruption of our foreclosure
process as discussed above 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 as
discussed more fully in our 2010 Form
10-K. 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. 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 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 March 31,
2011 and December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard &
|
|
|
Moodys
|
|
|
|
|
|
|
Poors
|
|
|
Investors
|
|
|
|
|
|
|
Corporation
|
|
|
Service
|
|
|
Fitch, Inc.
|
|
|
|
|
As of March 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior debt
|
|
|
A
|
|
|
|
A3
|
|
|
|
AA-
|
|
Senior subordinated debt
|
|
|
BBB+
|
|
|
|
Baa1
|
|
|
|
A+
|
|
Commercial paper
|
|
|
A-1
|
|
|
|
P-1
|
|
|
|
F-1+
|
|
Series B preferred stock
|
|
|
BBB-
|
|
|
|
Baa2
|
|
|
|
A+
|
|
As of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior debt
|
|
|
A
|
|
|
|
A3
|
|
|
|
AA-
|
|
Senior subordinated debt
|
|
|
BBB+
|
|
|
|
Baa1
|
|
|
|
A+
|
|
Commercial paper
|
|
|
A-1
|
|
|
|
P-1
|
|
|
|
F-1+
|
|
Series B preferred stock
|
|
|
BBB-
|
|
|
|
Baa2
|
|
|
|
A+
|
|
As of March 31, 2011, there were no pending actions in
terms of changes to ratings for HSBC Finance Corporation from
any of the rating agencies listed above.
There have been no significant changes in our approach to
liquidity risk management since December 31, 2010.
Market Risk Management 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
March 31, 2011 and December 31, 2010, our absolute
PVBP limit was $9.00 million and $8.20 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 March 31, 2011 and
December 31, 2010 dictated that the value of the balance
sheet could not increase or decrease
99
HSBC Finance Corporation
by more than $9.00 million or $8.20 million,
respectively. During the first quarter of 2011, the PVBP limit
was increased to accommodate potential adjustments to our
nonqualified hedge positions.
The following table shows the components of our absolute PVBP
position at March 31, 2011 and December 31, 2010
broken down by currency risk:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
USD
|
|
$
|
2.105
|
|
|
$
|
6.351
|
|
JPY
|
|
|
.132
|
|
|
|
.132
|
|
|
|
|
|
|
|
|
|
|
Absolute PVBP risk
|
|
$
|
2.237
|
|
|
$
|
6.483
|
|
|
|
|
|
|
|
|
|
|
Subsequent to the PVBP limit adjustment discussed above, we
performed a comprehensive review of the projected cash flows to
be generated by our remaining real estate secured receivable
portfolio. The result of this analysis indicated a reduction in
the average life of the mortgage cash flows and a corresponding
decrease in our reported PVBP position. An evaluation of the
PVBP limit is underway and will likely result in a reduction to
the limit should we conclude our risk profile can be sustained
at this lower level.
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 2011
and 2010 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:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Decrease in net interest income following a hypothetical
25 basis points rise in interest rates applied at the
beginning of each quarter over the next 12 months
|
|
$
|
6
|
|
|
$
|
38
|
|
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
|
|
|
43
|
|
|
|
43
|
|
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, changes to our foreclosure processes 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.
There has been no significant change in our approach to market
risk management since December 31, 2010.
Operational Risk Management There has been no
significant change in our approach to operational risk
management since December 31, 2010.
Compliance Risk Management There has been no
significant change in our approach to compliance risk management
since December 31, 2010.
Reputational Risk Management There has been
no significant change in our approach to reputational risk
management since December 31, 2010.
Strategic Risk Management There has been no
significant change in our approach to strategic risk management
since December 31, 2010.
100
HSBC Finance Corporation
RECONCILIATIONS
TO U.S. GAAP FINANCIAL MEASURES
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Tangible common equity:
|
|
|
|
|
|
|
|
|
Common shareholders equity
|
|
$
|
6,149
|
|
|
$
|
6,145
|
|
Exclude:
|
|
|
|
|
|
|
|
|
Fair value option adjustment
|
|
|
(327
|
)
|
|
|
(453
|
)
|
Unrealized (gains) losses on cash flow hedging instruments
|
|
|
510
|
|
|
|
575
|
|
Unrealized (gains) losses on investments
|
|
|
(62
|
)
|
|
|
(74
|
)
|
Intangible assets
|
|
|
(571
|
)
|
|
|
(605
|
)
|
|
|
|
|
|
|
|
|
|
Tangible common equity
|
|
$
|
5,699
|
|
|
$
|
5,588
|
|
|
|
|
|
|
|
|
|
|
Tangible shareholders equity:
|
|
|
|
|
|
|
|
|
Tangible common equity
|
|
$
|
5,699
|
|
|
$
|
5,588
|
|
Preferred stock
|
|
|
1,575
|
|
|
|
1,575
|
|
Mandatorily redeemable preferred securities of Household Capital
Trusts
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
Tangible shareholders equity
|
|
$
|
8,274
|
|
|
$
|
8,163
|
|
|
|
|
|
|
|
|
|
|
Tangible assets:
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
74,612
|
|
|
$
|
76,532
|
|
Exclude:
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
(571
|
)
|
|
|
(605
|
)
|
Derivative financial assets
|
|
|
(4
|
)
|
|
|
(75
|
)
|
|
|
|
|
|
|
|
|
|
Tangible assets
|
|
$
|
74,037
|
|
|
$
|
75,852
|
|
|
|
|
|
|
|
|
|
|
Equity ratios:
|
|
|
|
|
|
|
|
|
Common and preferred equity to total assets
|
|
|
10.35
|
%
|
|
|
10.09
|
%
|
Tangible common equity to tangible
assets(1)
|
|
|
7.70
|
|
|
|
7.37
|
|
Tangible shareholders equity to tangible
assets(1)
|
|
|
11.18
|
|
|
|
10.76
|
|
101
HSBC Finance Corporation
Item 3.
Quantitative and Qualitative Disclosures about Market
Risk
See Item 2, Managements Discussion and Analysis
of Financial Conditions and Results of Operations, under
the caption Risk Management Market Risk
of this
Form 10-Q.
Item 4.
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 March 31, 2011 that has materially affected,
or is reasonably likely to materially affect, our internal
control over financial reporting.
PART II.
OTHER INFORMATION
Item 1. Legal
Proceedings
See Litigation and Regulatory Matters in Note 16,
Litigation and Regulatory Matters, in the
accompanying consolidated financial statements beginning on
page 47 for our legal proceedings disclosure, which is
incorporated herein by reference.
Item 6. Exhibits
Exhibits included in this Report:
|
|
|
|
|
|
12
|
|
|
Statement of Computation of Ratio of Earnings to Fixed Charges
and to Combined Fixed Charges and Preferred Stock Dividends
|
|
31
|
|
|
Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
|
|
32
|
|
|
Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
102
HSBC Finance Corporation
Index
Account management policies and practices 87
Assets:
by business
segment 37
fair value of
financial assets 42
fair value
measurements 41
nonperforming 86
Balance sheet (consolidated) 4
Basel II 60
Basis of reporting 61
Business:
consolidated
performance review 55
focus 54
Capital:
2011 funding
strategy 95
common equity
movements 94
consolidated statement
of changes 5
selected capital
ratios 94
Cards and Retail Services business segment 36, 75
Cash flow (consolidated) 6
Cautionary statement regarding forward-looking
statements 52
Compliance risk 100
Consumer business segment 36, 76
Controls and procedures 102
Credit quality 78
Credit risk:
concentration 19,
92
management 98
Current environment 52
Deferred tax assets 30
Derivatives:
cash flow
hedges 24
fair value
hedges 24
income
(expense) 71
non-qualifying
hedges 25
notional
value 27
Discontinued operations 7
Equity:
consolidated statement
of changes 5
ratios 95
Equity securities
available-for-sale 11
Estimates and assumptions 7
Executive overview 52
Fair value measurements:
assets and liabilities
recorded at fair value on a
recurring
basis 43
assets and liabilities
recorded at fair value on a
non-recurring
basis 45
control over valuation
process 96
financial
instruments 41
hierarchy 97
transfers into/out of
level one and
two 44,
97
transfers into/out of
level two and
three 44,
98
valuation
techniques 45
Fee income 72
Financial highlights metrics 58
Financial liabilities:
designated at fair
value 27
fair value of
financial liabilities 42
Forward looking statements 52
Funding 60, 92
Gain (loss) on debt designated at fair value and
related derivatives 28, 72
Geographic concentration of receivables 92
Impairment:
available-for-sale
securities 12
credit
losses 20, 56, 69
nonperforming
receivables 86
Income tax expense 29
Insurance:
policyholders benefits
expense 73
revenue 71
Intangible assets 22
Internal control 102
Interest income:
net interest
income 68
sensitivity 100
Key performance indicators 58
Legal proceedings 47
Liabilities:
commercial
paper 93
commitments, lines of
credit 94
financial liabilities
designated at
fair
value 27
long-term
debt 94
Liquidity and capital resources 92
Liquidity risk 99
Litigation and regulatory matters 47
Loans and advances see Receivables
Loan impairment charges see Provision for
credit
losses
Market risk 99
Market turmoil see Current Environment
Mortgage lending products 15, 64
Net interest income 68
New accounting pronouncements 50
Operating expenses 73
Operational risk 100
Other revenues 71
Pension and other postretirement benefits 31
Performance, developments and trends 55
103
HSBC Finance Corporation
Profit (loss) before tax:
by segment
IFRSs management basis 37
consolidated 3
Provision for credit losses 56, 69
Ratios:
capital 95
charge-off
(net) 84
credit loss reserve
related 79
earnings to fixed
charges Exhibit 12
efficiency 59,
74
financial 58
Re-aged receivables 91
Real estate owned 67
Receivables:
by
category 15, 64
by charge-off
(net) 84
by
delinquency 82
geographic
concentration 92
modified and/or
re-aged 88
nonperforming 86
overall
review 64
risk
concentration 19, 92
troubled debt
restructures 17, 57, 87
Reconciliation to U.S. GAAP financial measures 101
Reconciliation of U.S. GAAP results to IFRSs 62
Refreshed
loan-to-value 66
Related party transactions 31
Reputational risk 100
Results of operations 68
Risk elements in the loan portfolio by product 19
Risk management:
credit 98
compliance 100
liquidity 99
market 99
operational 100
reputational 100
strategic 100
Securities:
fair
value 11, 43
maturity
analysis 14
Segment results IFRSs management basis:
card and retail
services 37, 75
consumer 37,
76
All Other
grouping 37
overall
summary 36, 74
Selected financial data 58
Sensitivity:
projected net interest
income 100
Statement of changes in shareholders
equity 5
Statement of changes in comprehensive income
(loss) 5
Statement of income (loss) 3
Strategic initiatives and focus 9, 54
Strategic risk 100
Table of contents 2
Tangible common equity to tangible managed
assets 95
Tax expense 29
Troubled debt restructures 17, 57, 87
Variable interest entities 40
104
HSBC Finance Corporation
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
HSBC FINANCE CORPORATION
(Registrant)
Michael A. Reeves
Executive Vice President
and Chief Financial Officer
Date: May 11, 2011
105
Exhibit Index
|
|
|
|
|
|
12
|
|
|
Statement of Computation of Ratio of Earnings to Fixed Charges
and to Combined Fixed Charges and Preferred Stock Dividends
|
|
31
|
|
|
Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
|
|
32
|
|
|
Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
106