e10vq
UNITED STATES SECURITIES
AND
EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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(Mark One)
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þ
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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, 2007
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OR
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o
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number 1-8198
HSBC FINANCE
CORPORATION
(Exact name of registrant as
specified in its charter)
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Delaware
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86-1052062
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(State of
Incorporation)
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(I.R.S. Employer Identification
No.)
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2700 Sanders Road, Prospect
Heights, Illinois
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60070
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(Address of principal executive
offices)
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(Zip
Code)
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(847) 564-5000
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 þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer 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 þ
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of April 30, 2007, there were 56 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 I.
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FINANCIAL INFORMATION
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Item 1.
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Consolidated Financial Statements
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Statement of Income
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3
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Balance Sheet
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4
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Statement of Changes in
Shareholders Equity
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5
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Statement of Cash Flows
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6
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Notes to Consolidated Financial
Statements
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7
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Item 2.
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Managements Discussion and
Analysis of Financial Condition and Results of Operations
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Forward-Looking Statements
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25
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Executive Overview
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25
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Basis of Reporting
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29
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Receivables Review
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35
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Results of Operations
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38
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Segment Results IFRS
Management Basis
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44
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Credit Quality
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49
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Liquidity and Capital Resources
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57
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Risk Management
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61
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Reconciliations to
GAAP Financial Measures
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63
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Item 4.
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Controls and Procedures
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64
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Part II.
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OTHER INFORMATION
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Item 1.
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Legal Proceedings
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64
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Item 6.
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Exhibits
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66
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Signature
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67
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2
Part I.
FINANCIAL INFORMATION
_
_
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Item 1.
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Consolidated
Financial Statements
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HSBC
Finance Corporation
CONSOLIDATED
STATEMENT OF INCOME
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Three months ended March 31,
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2007
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2006
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(in millions)
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Finance and other interest income
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$
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4,712
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$
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4,087
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Interest expense:
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HSBC affiliates
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234
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153
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Non-affiliates
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1,837
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1,470
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Net interest
income
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2,641
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2,464
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Provision for credit losses
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1,700
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866
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Net interest income after
provision for credit losses
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941
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1,598
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Other revenues:
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Securitization related revenue
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21
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71
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Insurance revenue
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230
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244
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Investment income
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26
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34
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Derivative income (expense)
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(7
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)
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57
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Gain (loss) on debt designated at
fair value and related derivatives
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144
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-
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Fee income
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573
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382
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Enhancement services revenue
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148
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123
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Taxpayer financial services revenue
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239
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234
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Gain on receivable sales to HSBC
affiliates
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95
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85
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Servicing and other fees from HSBC
affiliates
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133
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118
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Other income
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40
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73
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Total other
revenues
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1,642
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1,421
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Costs and expenses:
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Salaries and employee benefits
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609
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581
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Sales incentives
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68
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80
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Occupancy and equipment expenses
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78
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83
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Other marketing expenses
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220
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173
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Other servicing and administrative
expenses
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263
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253
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Support services from HSBC
affiliates
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285
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252
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Amortization of intangibles
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63
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80
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Policyholders benefits
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124
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118
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Total costs and
expenses
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1,710
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1,620
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Income before income tax expense
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873
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1,399
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Income tax expense
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332
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511
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Net income
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$
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541
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$
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888
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The accompanying notes are an
integral part of the consolidated financial statements.
3
HSBC
Finance Corporation
CONSOLIDATED
BALANCE SHEET
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March 31,
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December 31,
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2007
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2006
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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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550
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$
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871
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Interest bearing deposits with
banks
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87
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424
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Securities purchased under
agreements to resell
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59
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171
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Securities
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4,079
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4,695
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Receivables, net
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155,309
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157,262
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Intangible assets, net
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2,165
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2,218
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Goodwill
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6,905
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7,010
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Properties and equipment, net
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431
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426
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Real estate owned
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863
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794
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Derivative financial assets
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1,676
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1,461
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Other assets
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5,364
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5,103
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Total assets
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$
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177,488
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$
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180,435
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Liabilities
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Debt:
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Commercial paper, bank and other
borrowings
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$
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10,879
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$
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11,055
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Due to affiliates
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15,064
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15,172
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Long term debt (with original
maturities over one year, including $30,712 million at
March 31, 2007 and $0 at December 31, 2006 carried at
fair value)
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125,466
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127,590
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Total debt
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151,409
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153,817
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Insurance policy and claim reserves
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1,068
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1,319
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Derivative related liabilities
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1,456
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1,222
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Liability for pension benefits
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|
359
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|
355
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Other liabilities
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3,513
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|
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3,632
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Total
liabilities
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157,805
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160,345
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Shareholders
equity
|
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Redeemable preferred stock,
1,501,100 shares authorized, Series B, $0.01 par
value, 575,000 shares issued
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575
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575
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Common shareholders equity:
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Common stock, $0.01 par
value, 100 shares authorized, 56 shares issued
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-
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-
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Additional paid-in capital
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|
17,464
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|
|
|
17,279
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|
Retained earnings
|
|
|
1,413
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|
|
|
1,877
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|
Accumulated other comprehensive
income
|
|
|
231
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|
|
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359
|
|
|
|
|
|
|
|
|
|
|
Total common
shareholders equity
|
|
|
19,108
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|
|
|
19,515
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|
|
|
|
|
|
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Total liabilities and
shareholders equity
|
|
$
|
177,488
|
|
|
$
|
180,435
|
|
|
|
|
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The accompanying notes are an
integral part of the consolidated financial statements.
4
HSBC
Finance Corporation
CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
|
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Three months ended March 31,
|
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2007
|
|
|
2006
|
|
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|
(in millions)
|
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Preferred
stock
|
|
|
|
|
|
|
|
|
Balance at beginning and end of
period
|
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$
|
575
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|
|
$
|
575
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|
|
|
|
|
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|
|
|
|
Common shareholders
equity
|
|
|
|
|
|
|
|
|
Additional paid-in
capital
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
17,279
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|
|
$
|
17,145
|
|
Capital contribution from parent
company
|
|
|
200
|
|
|
|
-
|
|
Employee benefit plans, including
transfers and other
|
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(15
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)
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|
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(13
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)
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|
|
|
|
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Balance at end of period
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|
$
|
17,464
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|
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$
|
17,132
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|
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Retained earnings
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Balance at beginning of period
|
|
$
|
1,877
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|
|
$
|
1,280
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|
Adjustment to initially apply the
fair value method of accounting under FASB statement
No. 159, net of tax
|
|
|
(539
|
)
|
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|
-
|
|
Net income
|
|
|
541
|
|
|
|
888
|
|
Dividends:
|
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Preferred stock
|
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(9
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)
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|
|
(9
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)
|
Common stock
|
|
|
(457
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)
|
|
|
-
|
|
|
|
|
|
|
|
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Balance at end of period
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|
$
|
1,413
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|
|
$
|
2,159
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive
income
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
359
|
|
|
$
|
479
|
|
Net change in unrealized gains
(losses), net of tax, on:
|
|
|
|
|
|
|
|
|
Derivatives classified as cash
flow hedges
|
|
|
(126
|
)
|
|
|
54
|
|
Securities available for sale and
interest-only strip receivables
|
|
|
7
|
|
|
|
(33
|
)
|
Foreign currency translation
adjustments
|
|
|
(9
|
)
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of
tax
|
|
|
(128
|
)
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
231
|
|
|
$
|
515
|
|
|
|
|
|
|
|
|
|
|
Total common
shareholders equity
|
|
$
|
19,108
|
|
|
$
|
19,806
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
541
|
|
|
$
|
888
|
|
Other comprehensive income
|
|
|
(128
|
)
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
413
|
|
|
$
|
924
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an
integral part of the consolidated financial statements.
5
HSBC
Finance Corporation
STATEMENT
OF CASH FLOWS
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(in millions)
|
|
|
Cash flows from operating
activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
541
|
|
|
$
|
888
|
|
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Gain on receivable sales to HSBC
affiliates
|
|
|
(95
|
)
|
|
|
(85
|
)
|
Provision for credit losses
|
|
|
1,700
|
|
|
|
866
|
|
Insurance policy and claim reserves
|
|
|
(22
|
)
|
|
|
(49
|
)
|
Depreciation and amortization
|
|
|
88
|
|
|
|
109
|
|
Net change in other assets
|
|
|
107
|
|
|
|
(312
|
)
|
Net change in other liabilities
|
|
|
(306
|
)
|
|
|
412
|
|
Net change in loans held for sale
|
|
|
590
|
|
|
|
496
|
|
Net change in derivative related
assets and liabilities
|
|
|
565
|
|
|
|
103
|
|
Net change in debt designated at
fair value and related derivatives
|
|
|
(220
|
)
|
|
|
-
|
|
Excess tax benefits from
share-based compensation arrangements
|
|
|
-
|
|
|
|
(4
|
)
|
Other, net
|
|
|
396
|
|
|
|
(94
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities
|
|
|
3,344
|
|
|
|
2,330
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities
|
|
|
|
|
|
|
|
|
Securities:
|
|
|
|
|
|
|
|
|
Purchased
|
|
|
(292
|
)
|
|
|
(224
|
)
|
Matured
|
|
|
264
|
|
|
|
183
|
|
Sold
|
|
|
18
|
|
|
|
120
|
|
Net change in short-term securities
available for sale
|
|
|
258
|
|
|
|
(208
|
)
|
Net change in securities purchased
under agreements to resell
|
|
|
112
|
|
|
|
(13
|
)
|
Net change in interest bearing
deposits with banks
|
|
|
174
|
|
|
|
(216
|
)
|
Receivables:
|
|
|
|
|
|
|
|
|
Originations, net of collections
|
|
|
(307
|
)
|
|
|
(8,361
|
)
|
Purchases and related premiums
|
|
|
(194
|
)
|
|
|
(9
|
)
|
Net change in interest-only strip
receivables
|
|
|
7
|
|
|
|
(1
|
)
|
Cash received in sale of U.K.
credit card business
|
|
|
-
|
|
|
|
90
|
|
Properties and equipment:
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
(31
|
)
|
|
|
(8
|
)
|
Sales
|
|
|
1
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities
|
|
|
10
|
|
|
|
(8,639
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities
|
|
|
|
|
|
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
Net change in short-term debt and
deposits
|
|
|
(180
|
)
|
|
|
2,800
|
|
Net change in due to affiliates
|
|
|
(94
|
)
|
|
|
(52
|
)
|
Long term debt issued
|
|
|
4,234
|
|
|
|
8,278
|
|
Long term debt retired
|
|
|
(7,357
|
)
|
|
|
(4,961
|
)
|
Redemption of company obligated
mandatorily redeemable preferred securities of subsidiary trusts
|
|
|
-
|
|
|
|
(206
|
)
|
Insurance:
|
|
|
|
|
|
|
|
|
Policyholders benefits paid
|
|
|
(23
|
)
|
|
|
(58
|
)
|
Cash received from policyholders
|
|
|
15
|
|
|
|
88
|
|
Capital contribution from parent
|
|
|
200
|
|
|
|
-
|
|
Shareholders dividends
|
|
|
(464
|
)
|
|
|
(9
|
)
|
Excess tax benefits from
share-based compensation arrangements
|
|
|
-
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
(3,669
|
)
|
|
|
5,884
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash
|
|
|
(6
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
|
(321
|
)
|
|
|
(427
|
)
|
Cash at beginning of period
|
|
|
871
|
|
|
|
903
|
|
|
|
|
|
|
|
|
|
|
Cash at end of
period
|
|
$
|
550
|
|
|
$
|
476
|
|
|
|
|
|
|
|
|
|
|
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 and subsidiaries is an indirect wholly
owned subsidiary of HSBC North America Holdings Inc. (HSBC
North America), which is an indirect wholly owned
subsidiary of HSBC 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 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, 2006 (the 2006
Form 10-K).
Certain reclassifications have been made to prior period amounts
to conform to the current period presentation.
The preparation of financial statements in conformity with
U.S. GAAP requires the use of estimates and assumptions
that affect reported amounts and disclosures. Actual results
could differ from those estimates. Interim results should not be
considered indicative of results in future periods.
|
|
2.
|
Sale
of U.K. Insurance Operations
|
As part of our continuing evaluation of strategic alternatives
with respect to our U.K. operations, we have entered into a
non-binding agreement to sell the capital stock of our U.K.
insurance operations (U.K. Insurance Operations) to
a third party for cash. The sales price will be determined, in
part, based on the actual net book value of the assets sold at
the time the sale is closed which is anticipated in the third
quarter of 2007. The agreement also provides for the purchaser
to distribute insurance products through our U.K. branch network
for which we will receive commission revenue. The sale is
subject to satisfactory completion of final due diligence, the
execution of a definitive agreement and any regulatory approvals
that may be required. At March 31, 2007, we have classified
the U.K. Insurance Operations as Held for Sale and
combined assets of $470 million and liabilities of
$236 million related to the U.K. Insurance Operations
separately in our consolidated balance sheet within other assets
and other liabilities.
Our U.K. Insurance Operations are reported in the International
Segment. As our carrying value for the U.K. Insurance
Operations, including allocated goodwill, was more than the
estimated purchase price based on the March 31,
2007 net book value, we have recorded an adjustment of
$31 million as a component of total costs and expenses to
record our investment in these operations at the lower of cost
or market. At March 31, 2007, the assets consisted
primarily of investments of $525 million, insurance
reserves and unearned premiums applicable to credit risks on
consumer receivables of ($136) million and goodwill of
$73 million. The liabilities consist primarily of insurance
reserves which totaled $235 million at March 31, 2007.
The purchaser will assume all the liabilities of the U.K.
Insurance Operations as a result of this transaction. Due to our
continuing involvement as discussed above, this transaction did
not meet the discontinued operation reporting requirements
contained in SFAS No. 144, Accounting for the
Impairment and Disposal of Long-Lived Assets.
7
HSBC
Finance Corporation
Securities consisted of the following
available-for-sale
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
March 31, 2007
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
(in millions)
|
|
|
Corporate debt securities
|
|
$
|
2,134
|
|
|
$
|
10
|
|
|
$
|
(35
|
)
|
|
$
|
2,109
|
|
Money market funds
|
|
|
988
|
|
|
|
-
|
|
|
|
-
|
|
|
|
988
|
|
U.S. government sponsored
enterprises(1)
|
|
|
348
|
|
|
|
1
|
|
|
|
(2
|
)
|
|
|
347
|
|
U.S. government and Federal
agency debt securities
|
|
|
37
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
36
|
|
Non-government mortgage backed
securities
|
|
|
303
|
|
|
|
-
|
|
|
|
-
|
|
|
|
303
|
|
Other
|
|
|
261
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
4,071
|
|
|
|
11
|
|
|
|
(40
|
)
|
|
|
4,042
|
|
Accrued investment income
|
|
|
37
|
|
|
|
-
|
|
|
|
-
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale
|
|
$
|
4,108
|
|
|
$
|
11
|
|
|
$
|
(40
|
)
|
|
$
|
4,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
December 31, 2006
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
(in millions)
|
|
|
Corporate debt securities
|
|
$
|
2,530
|
|
|
$
|
11
|
|
|
$
|
(40
|
)
|
|
$
|
2,501
|
|
Money market funds
|
|
|
1,051
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,051
|
|
U.S. government sponsored
enterprises(1)
|
|
|
369
|
|
|
|
1
|
|
|
|
(3
|
)
|
|
|
367
|
|
U.S. government and Federal
agency debt securities
|
|
|
43
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
42
|
|
Non-government mortgage backed
securities
|
|
|
271
|
|
|
|
-
|
|
|
|
-
|
|
|
|
271
|
|
Other
|
|
|
428
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
4,692
|
|
|
|
12
|
|
|
|
(47
|
)
|
|
|
4,657
|
|
Accrued investment income
|
|
|
38
|
|
|
|
-
|
|
|
|
-
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale
|
|
$
|
4,730
|
|
|
$
|
12
|
|
|
$
|
(47
|
)
|
|
$
|
4,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes primarily mortgage-backed securities issued by the
Federal National Mortgage Association and the Federal Home Loan
Mortgage Corporation.
|
The decrease in securities available for sale is due to the
reclassification of $525 million of securities related to
the U.K. Insurance Operation which at March 31, 2007 are
classified as Held for Sale and included within
other assets.
Money market funds include $741 million at March 31,
2007 and $854 million at December 31, 2006 which are
restricted for the sole purpose of paying down certain secured
financings at the established payment date.
8
HSBC
Finance Corporation
A summary of gross unrealized losses and related fair values as
of March 31, 2007 and December 31, 2006, classified as
to the length of time the losses have existed follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than One Year
|
|
|
Greater Than One Year
|
|
|
|
Number
|
|
|
Gross
|
|
|
Aggregate
|
|
|
Number
|
|
|
Gross
|
|
|
Aggregate
|
|
|
|
of
|
|
|
Unrealized
|
|
|
Fair Value of
|
|
|
of
|
|
|
Unrealized
|
|
|
Fair Value of
|
|
March 31, 2007
|
|
Securities
|
|
|
Losses
|
|
|
Investments
|
|
|
Securities
|
|
|
Losses
|
|
|
Investments
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Corporate debt securities
|
|
|
116
|
|
|
$
|
(6
|
)
|
|
$
|
400
|
|
|
|
493
|
|
|
$
|
(29
|
)
|
|
$
|
1,134
|
|
U.S. government sponsored
enterprises
|
|
|
24
|
|
|
|
-(1
|
)
|
|
|
58
|
|
|
|
38
|
|
|
|
(2
|
)
|
|
|
126
|
|
U.S. government and Federal
agency debt securities
|
|
|
6
|
|
|
|
-(1
|
)
|
|
|
21
|
|
|
|
13
|
|
|
|
(1
|
)
|
|
|
11
|
|
Non-government mortgage backed
securities
|
|
|
16
|
|
|
|
-(1
|
)
|
|
|
78
|
|
|
|
9
|
|
|
|
-
|
|
|
|
6
|
|
Other
|
|
|
13
|
|
|
|
-(1
|
)
|
|
|
29
|
|
|
|
44
|
|
|
|
(2
|
)
|
|
|
148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than One Year
|
|
|
Greater Than One Year
|
|
|
|
Number
|
|
|
Gross
|
|
|
Aggregate
|
|
|
Number
|
|
|
Gross
|
|
|
Aggregate
|
|
|
|
of
|
|
|
Unrealized
|
|
|
Fair Value of
|
|
|
of
|
|
|
Unrealized
|
|
|
Fair Value of
|
|
December 31, 2006
|
|
Securities
|
|
|
Losses
|
|
|
Investments
|
|
|
Securities
|
|
|
Losses
|
|
|
Investments
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Corporate debt securities
|
|
|
133
|
|
|
$
|
(6
|
)
|
|
$
|
465
|
|
|
|
511
|
|
|
$
|
(34
|
)
|
|
$
|
1,178
|
|
U.S. government sponsored
enterprises
|
|
|
30
|
|
|
|
-
|
(1)
|
|
|
101
|
|
|
|
43
|
|
|
|
(3
|
)
|
|
|
149
|
|
U.S. government and Federal
agency debt securities
|
|
|
8
|
|
|
|
-
|
(1)
|
|
|
21
|
|
|
|
20
|
|
|
|
(1
|
)
|
|
|
16
|
|
Non-government mortgage backed
securities
|
|
|
10
|
|
|
|
-
|
(1)
|
|
|
60
|
|
|
|
9
|
|
|
|
-
|
|
|
|
7
|
|
Other
|
|
|
16
|
|
|
|
-
|
(1)
|
|
|
57
|
|
|
|
52
|
|
|
|
(3
|
)
|
|
|
173
|
|
|
|
(1) |
Less than $500 thousand.
|
The gross unrealized losses on our securities available for sale
have decreased during the first quarter of 2007 due to a decline
in the intermediate and long-term interest rates during the
quarter. The contractual terms of these securities do not permit
the issuer to settle the securities at a price less than the par
value of the investment. Since substantially all of these
securities are rated A- or better, and because we have the
ability and intent to hold these investments until maturity or a
market price recovery, these securities are not considered
other-than-temporarily
impaired.
9
HSBC
Finance Corporation
Receivables consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(in millions)
|
|
|
Real estate secured
|
|
$
|
96,329
|
|
|
$
|
97,761
|
|
Auto finance
|
|
|
12,633
|
|
|
|
12,504
|
|
Credit card
|
|
|
27,293
|
|
|
|
27,714
|
|
Private label
|
|
|
2,500
|
|
|
|
2,509
|
|
Personal non-credit card
|
|
|
21,201
|
|
|
|
21,367
|
|
Commercial and other
|
|
|
158
|
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
Total receivables
|
|
|
160,114
|
|
|
|
162,036
|
|
HSBC acquisition purchase
accounting fair value adjustments
|
|
|
(41
|
)
|
|
|
(60
|
)
|
Accrued finance charges
|
|
|
2,238
|
|
|
|
2,228
|
|
Credit loss reserve for receivables
|
|
|
(6,798
|
)
|
|
|
(6,587
|
)
|
Unearned credit insurance premiums
and claims reserves
|
|
|
(258
|
)
|
|
|
(412
|
)
|
Interest-only strip receivables
|
|
|
6
|
|
|
|
6
|
|
Amounts due and deferred from
receivable sales
|
|
|
48
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
Total receivables, net
|
|
$
|
155,309
|
|
|
$
|
157,262
|
|
|
|
|
|
|
|
|
|
|
HSBC acquisition purchase accounting fair value adjustments
represent adjustments which have been pushed down to
record our receivables at fair value on March 28, 2003, the
date we were acquired by HSBC.
We have a subsidiary, Decision One Mortgage Company, LLC
(Decision One), which directly originates mortgage
loans sourced by mortgage brokers and sells all loans to
secondary market purchasers, which historically has included our
Mortgage Services businesses. Loans held for sale to external
parties by this subsidiary totaled $1.1 billion at
March 31, 2007 and $1.6 billion at December 31,
2006 and are included in real estate secured receivables. Our
Consumer Lending business also had loans held for sale totaling
$17 million at March 31, 2007 and $32 million at
December 31, 2006 as a result of the purchase of Solstice
Capital Group Inc. (Solstice) on October 4,
2006.
In November 2006, we acquired $2.5 billion of real estate
secured receivables from Champion Mortgage
(Champion) a division of KeyBank, N.A. and on
December 1, 2005 we acquired $5.3 billion of
receivables as part of our acquisition of Metris Companies Inc.
(Metris). The receivables acquired were subject to
the requirements of Statement of Position
03-3,
Accounting for Certain Loans or Debt Securities Acquired
in a Transfer
(SOP 03-3)
to the extent there was evidence of deterioration of credit
quality since origination and for which it was probable, at
acquisition, that all contractually required payments would not
be collected and in the case of Metris, that the associated line
of credit had been closed.
The carrying amount of Champion real estate secured receivables
subject to the requirements of
SOP 03-3
was $104 million at March 31, 2007 and
$116 million at December 31, 2006 and is included in
the real estate secured receivables in the table above. The
outstanding contractual balance of these receivables was
$125 million at March 31, 2007 and $143 million
at December 31, 2006. At March 31, 2007 and
December 31, 2006, no credit loss reserve for the portions
of the acquired receivables subject to
SOP 03-3
had been established as there had been no decrease to the
expected future cash flows since the acquisition. There were no
additions to accretable yield or reclassifications from
non-accretable yield during the quarter ended March 31,
2007.
The carrying amount of the Metris receivables which were subject
to
SOP 03-3
was $185 million of March 31, 2007 and
$223 million at December 31, 2006 and is included in
the credit card receivables in the table above. The outstanding
contractual balance of these receivables was $273 million
at March 31, 2007 and $334 million at
10
HSBC
Finance Corporation
December 31, 2006. At March 31, 2007 and
December 31, 2006, no credit loss reserve for the acquired
receivables subject to
SOP 03-3
had been established as there had been no decrease to the
expected future cash flows since the acquisition. There were no
additions to accretable yield or reclassifications from
non-accretable yield during the quarter ended March 31,
2007 and 2006.
The following summarizes the accretable yield on Metris and
Champion receivables at March 31, 2007 and March 31,
2006:
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(in millions)
|
|
|
Accretable yield beginning of
period
|
|
$
|
(76
|
)
|
|
$
|
(122
|
)
|
Accretable yield amortized to
interest income during the period
|
|
|
15
|
|
|
|
30
|
|
Reclassification from
non-accretable difference
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Accretable yield at end of period
|
|
$
|
(61
|
)
|
|
$
|
(92
|
)
|
|
|
|
|
|
|
|
|
|
Real estate secured receivables are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(in millions)
|
|
|
Real estate secured:
|
|
|
|
|
|
|
|
|
Closed-end:
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
77,201
|
|
|
$
|
77,901
|
|
Second lien
|
|
|
14,756
|
|
|
|
15,090
|
|
Revolving:
|
|
|
|
|
|
|
|
|
First lien
|
|
|
509
|
|
|
|
556
|
|
Second lien
|
|
|
3,863
|
|
|
|
4,214
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
receivables
|
|
$
|
96,329
|
|
|
$
|
97,761
|
|
|
|
|
|
|
|
|
|
|
We generally serve non-conforming and non-prime consumers. Such
customers are individuals who have limited credit histories,
modest incomes, high
debt-to-income
ratios or have experienced credit problems caused by occasional
delinquencies, prior charge-offs, bankruptcy or other credit
related actions. As a result, the majority of our secured
receivables have a high
loan-to-value
ratio. Our non-branch origination channels offer interest-only
loans primarily for resale in the secondary market and expect to
continue to do so. These interest-only loans allow customers to
pay the interest only portion of the monthly payment for a
period of time which results in lower payments during the
initial loan period. Recent guidance from Federal regulatory
authorities requires that such loan products be underwritten on
the fully amortizing payment and not the initial lower payment
amount. Our non-branch origination channels recently amended
their underwriting practices to ensure full compliance with this
guidance. However, subsequent events affecting a customers
financial position could affect the ability of customers to
repay the loan at some future date the principal payments are
required. As with all our other non-conforming and nonprime loan
products, we underwrite and price interest-only loans in a
manner that is intended to compensate us for their anticipated
risk. At March 31, 2007, the outstanding balance of our
interest-only loans was $6.1 billion, or 4 percent of
receivables. At December 31, 2006, the outstanding balance
of our interest-only loans was $6.2 billion, or
4 percent of receivables.
Also due to customer demand, we offer adjustable rate mortgage
loans under which pricing adjusts on the receivable in line with
market movements, in some cases, following an introductory fixed
rate period. At March 31, 2007, we had approximately
$27.8 billion in adjustable rate mortgage loans at our
Consumer Lending and Mortgage Services businesses. At
December 31, 2006, we had approximately $29.8 billion
in adjustable rate mortgage loans at our Consumer Lending and
Mortgage Services businesses. In 2007 and 2008, approximately
$9.0 billion and $4.7 billion, respectively, of our
adjustable rate mortgage loans will experience their first
interest rate reset based on receivable levels outstanding at
March 31, 2007. In addition, our analysis indicates that a
significant portion of
11
HSBC
Finance Corporation
the second lien mortgages in our Mortgage Services portfolio at
March 31, 2007 are subordinated to first lien adjustable
rate mortgages that will face a rate reset in the next three
years. As interest rates have risen over the last three years,
many adjustable rate loans are expected to require a
significantly higher monthly payment following their first
adjustment. A customers financial situation at the time of
the interest rate reset could affect our customers ability
to repay the loan after the adjustment.
During 2006 and 2005 we increased our portfolio of stated income
loans. Stated income loans are underwritten based on the loan
applicants representation of annual income which is not
verified by receipt of supporting documentation and,
accordingly, carry a higher risk of default if the customer has
not accurately reflected their income. We price stated income
loans in a manner that is intended to compensate us for their
anticipated risk. The outstanding balance of stated income loans
in our real estate secured portfolio was $11.1 billion at
March 31, 2007 and $11.8 billion at December 31, 2006.
Receivables serviced with limited recourse consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(in millions)
|
|
|
Auto finance
|
|
$
|
222
|
|
|
$
|
271
|
|
Credit card
|
|
|
500
|
|
|
|
500
|
|
Personal non-credit card
|
|
|
73
|
|
|
|
178
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
795
|
|
|
$
|
949
|
|
|
|
|
|
|
|
|
|
|
An analysis of credit loss reserves was as follows:
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(in millions)
|
|
|
Credit loss reserves at beginning
of period
|
|
$
|
6,587
|
|
|
$
|
4,521
|
|
Provision for credit losses
|
|
|
1,700
|
|
|
|
866
|
|
Charge-offs
|
|
|
(1,683
|
)
|
|
|
(1,054
|
)
|
Recoveries
|
|
|
195
|
|
|
|
126
|
|
Other, net
|
|
|
(1
|
)
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
Credit loss reserves at end of
period
|
|
$
|
6,798
|
|
|
$
|
4,468
|
|
|
|
|
|
|
|
|
|
|
Further analysis of credit quality and credit loss reserves and
our credit loss reserve methodology are presented in
Item 2, Managements Discussion and Analysis of
Financial Condition and Results of Operations of this
Form 10-Q
under the caption Credit Quality.
12
HSBC
Finance Corporation
Intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Gross
|
|
|
Amortization
|
|
|
Value
|
|
|
|
|
|
(in millions)
|
|
|
March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased credit card
relationships and related programs
|
|
$
|
1,736
|
|
|
$
|
614
|
|
|
$
|
1,122
|
|
Retail services merchant
relationships
|
|
|
280
|
|
|
|
217
|
|
|
|
63
|
|
Other loan related relationships
|
|
|
333
|
|
|
|
143
|
|
|
|
190
|
|
Trade names
|
|
|
717
|
|
|
|
13
|
|
|
|
704
|
|
Technology, customer lists and
other contracts
|
|
|
282
|
|
|
|
196
|
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,348
|
|
|
$
|
1,183
|
|
|
$
|
2,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased credit card
relationships and related programs
|
|
$
|
1,736
|
|
|
$
|
580
|
|
|
$
|
1,156
|
|
Retail services merchant
relationships
|
|
|
270
|
|
|
|
203
|
|
|
|
67
|
|
Other loan related relationships
|
|
|
333
|
|
|
|
135
|
|
|
|
198
|
|
Trade names
|
|
|
717
|
|
|
|
13
|
|
|
|
704
|
|
Technology, customer lists and
other contracts
|
|
|
282
|
|
|
|
189
|
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,338
|
|
|
$
|
1,120
|
|
|
$
|
2,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated amortization expense associated with our intangible
assets for each of the following years is as follows:
|
|
|
|
|
Year ending December 31,
|
|
|
|
|
|
|
|
(in millions)
|
|
|
2007
|
|
$
|
253
|
|
2008
|
|
|
212
|
|
2009
|
|
|
199
|
|
2010
|
|
|
170
|
|
2011
|
|
|
170
|
|
Thereafter
|
|
|
359
|
|
Goodwill balances associated with our foreign businesses will
change from period to period due to movements in foreign
exchange. During the first quarter of 2007, the impact of
movements in foreign exchange rates on our goodwill balances was
immaterial. Changes in estimates of the tax basis in our assets
and liabilities or other tax estimates recorded pursuant to
Statement of Financial Accounting Standards Number 109,
Accounting for Income Taxes, may result in changes
to our goodwill balances. During the first quarter of 2007, we
decreased our goodwill balance by approximately $32 million
as a result of such changes in tax estimates. In addition,
goodwill of approximately $73 million allocated to our U.K.
Insurance Operations was transferred to assets held for sale.
Effective January 1, 2007, we adopted FASB Interpretation
No. 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement
No. 109 (FIN No. 48).
FIN No. 48 establishes threshold and measurement
attributes for financial statement measurement and recognition
of tax positions taken or expected to be taken in a tax return.
FIN No. 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. The adoption of FIN 48
did not have a significant impact on our financial
13
HSBC
Finance Corporation
results and did not result in a cumulative effect adjustment to
the January 1, 2007 balance of retained earnings. The
adoption resulted in the reclassification of $65 million of
deferred tax liability to current tax liability to account for
uncertainty in the timing of tax benefits as well as the
reclassification of $141 million of deferred tax asset to
current tax asset to account for highly certain pending
adjustments in the timing of tax benefits. The total amount of
unrecognized tax benefits was $273 million at
January 1, 2007 and $251 million at March 31,
2007. The state tax portion of these amounts is reflected gross
and not reduced by the federal tax effect. The total amount of
unrecognized tax benefits that, if recognized, would affect the
effective tax rate was $70 million at January 1, 2007
and $85 million at March 31, 2007.
We remain subject to Federal income tax examination for years
1998 and forward and State income tax examinations for years
1996 and forward. The Company does not anticipate that any
significant tax positions have a reasonable possibility of being
effectively settled within the next twelve months.
It is our policy to recognize interest accrued related to
unrecognized tax benefits as a component of other servicing and
administrative expenses in the consolidated income statement. As
of January 1, 2007, we had accrued $67 million for the
payment of interest associated with uncertain tax positions.
During the three months ended March 31, 2007, we reduced
our accrual for the payment of interest associated with
uncertain tax positions by $3 million.
Our effective tax rates were as follows:
|
|
|
|
|
Three months ended March 31,
2007
|
|
|
38.0
|
%
|
Three months ended March 31,
2006
|
|
|
36.5
|
|
The increase in the effective tax rate for the first quarter of
2007 was primarily due to the adjustment recorded to reduce our
investment in our U.K. Insurance Operations to the lower of cost
or market and the acceleration of tax from sales of leveraged
leases. The effective tax rate differs from the statutory
federal income tax rate primarily because of the effects of
state and local income taxes, tax credits, leveraged lease
sales, and the lower of cost or market adjustment.
|
|
9.
|
Related
Party Transactions
|
In the normal course of business, we conduct transactions with
HSBC and its subsidiaries. These transactions occur at
prevailing market rates and terms and include funding
arrangements, derivative execution, purchases and sales of
receivables, servicing arrangements, information technology
services, item and statement processing services, banking and
other miscellaneous services. The following tables present
related party balances and the income and (expense) generated by
related party transactions:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(in millions)
|
|
|
Assets, (Liabilities) and
Equity:
|
|
|
|
|
|
|
|
|
Derivative financial assets
(liability), net
|
|
$
|
234
|
|
|
$
|
234
|
|
Affiliate preferred stock received
in sale of U.K. credit card
business(1)
|
|
|
294
|
|
|
|
294
|
|
Other assets
|
|
|
596
|
|
|
|
528
|
|
Due to affiliates
|
|
|
(15,064
|
)
|
|
|
(15,172
|
)
|
Other liabilities
|
|
|
(358
|
)
|
|
|
(506
|
)
|
Premium on sale of European
Operations in 2006 to an affiliate recorded as an increase to
additional paid in capital
|
|
|
-
|
|
|
|
13
|
|
|
|
(1) |
Balance may fluctuate between periods due to foreign currency
exchange rate impact.
|
14
HSBC
Finance Corporation
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(in millions)
|
|
|
Income/(Expense):
|
|
|
|
|
|
|
|
|
Interest expense on borrowings
from HSBC and subsidiaries
|
|
$
|
(234
|
)
|
|
$
|
(153
|
)
|
Interest income on advances to
HSBC affiliates
|
|
|
7
|
|
|
|
5
|
|
HSBC Bank USA, N.A. (HSBC
Bank USA):
|
|
|
|
|
|
|
|
|
Real estate secured servicing,
sourcing, underwriting and pricing revenues
|
|
|
2
|
|
|
|
3
|
|
Gain on daily sale of domestic
private label receivable originations
|
|
|
84
|
|
|
|
77
|
|
Gain on daily sale of credit card
receivables
|
|
|
11
|
|
|
|
8
|
|
Taxpayer financial services loan
origination and other fees
|
|
|
(18
|
)
|
|
|
(16
|
)
|
Domestic private label receivable
servicing and related fees
|
|
|
101
|
|
|
|
98
|
|
Other servicing, processing,
origination and support revenues
|
|
|
24
|
|
|
|
10
|
|
Support services from HSBC
affiliates, primarily HSBC Technology and Services (USA) Inc.
(HTSU)
|
|
|
(285
|
)
|
|
|
(252
|
)
|
HTSU:
|
|
|
|
|
|
|
|
|
Rental revenue
|
|
|
12
|
|
|
|
11
|
|
Administrative services revenue
|
|
|
3
|
|
|
|
3
|
|
Servicing and other fees from
other HSBC affiliates
|
|
|
3
|
|
|
|
4
|
|
Stock based compensation expense
with HSBC
|
|
|
(32
|
)
|
|
|
(17
|
)
|
The notional value of derivative contracts outstanding with HSBC
subsidiaries totaled $83.0 billion at March 31, 2007
and $82.8 billion at December 31, 2006. When the fair
value of our agreements with affiliate counterparties requires
the posting of collateral by the affiliate, it is provided in
the form of cash and recorded on our balance sheet, consistent
with third party arrangements. The level of the fair value of
our subsidiaries agreements with affiliate counterparties
above which collateral is required to be posted is
$75 million. At March 31, 2007, the fair value of our
agreements with affiliate counterparties required the affiliate
to provide cash collateral of $1.2 billion which is
recorded in our balance sheet as a component of derivative
related liabilities. At December 31, 2006, the fair value
of our agreements with affiliate counterparties required the
affiliate to provide cash collateral of $1.0 billion which
is recorded in our balance sheet as a component of derivative
related liabilities.
We had extended a line of credit of $2 billion to HSBC USA
Inc. which expired in July of 2006 and was not renewed. No
balances were outstanding under this line at March 31,
2006. Annual commitment fees associated with this line of credit
were recorded in interest income and reflected as Interest
income on advances to HSBC affiliates in the table above.
We have extended a revolving line of credit to HTSU, which was
increased to $.6 billion on January 5, 2007. The
balance outstanding under this line of credit was
$.5 billion at March 31, 2007 and December 31,
2006 and is included in other assets. Interest income associated
with this line of credit is recorded in interest income and
reflected as Interest income on advances to HSBC affiliates
in the table above.
We extended a promissory note of $.2 billion to HSBC
Securities (USA) Inc. (HSI) on December 28,
2005. This promissory note was repaid during January 2006. At
December 31, 2005, this promissory note was included in
other assets. Interest income associated with this line of
credit is recorded in interest income and reflected as
Interest income on advances to HSBC affiliates in the
table above.
We have extended revolving lines of credit to subsidiaries of
HSBC Bank USA for an aggregate total of $2.3 billion. There
are no balances outstanding under any of these lines of credit
at either March 31, 2007 or December 31, 2006.
Due to affiliates includes amounts owed to subsidiaries
of HSBC (other than preferred stock).
At March 31, 2007 and December 31, 2006, we had a
commercial paper back stop credit facility of $2.5 billion
from HSBC supporting domestic issuances and a revolving credit
facility of $5.7 billion from HSBC Bank plc
(HBEU)
15
HSBC
Finance Corporation
to fund our operations in the U.K. As of March 31, 2007,
$4.2 billion was outstanding under the U.K. lines and no
balances were outstanding on the domestic lines. As of
December 31, 2006, $4.3 billion was outstanding under
the U.K. lines and no balances were outstanding on the domestic
lines. Annual commitment fee requirements to support
availability of these lines are included as a component of
Interest expense on borrowings from HSBC and subsidiaries.
In the first quarter of 2007 we sold approximately
$371 million of real estate secured receivables originated
by our subsidiary, Decision One, to HSBC Bank USA and recorded a
pre-tax loss of $.4 million on the sale. In the fourth
quarter of 2006 we sold approximately $669 million of real
estate secured receivables originated by our subsidiary,
Decision One, to HSBC Bank USA and recorded a pre-tax gain of
$17 million on the sale. Each of these sales were effected
as part of our strategy to originate loans through Decision One
for sale and securitization through the mortgage trading
operations of HSBC Bank USA.
On November 9, 2006, as part of our continuing evaluation
of strategic alternatives with respect to our U.K. and European
operations, we sold all of the capital stock of our operations
in the Czech Republic, Hungary, and Slovakia (the European
Operations) to a wholly owned subsidiary of HBEU for an
aggregate purchase price of approximately $46 million.
Because the sale of this business was between affiliates under
common control, the premium received in excess of the book value
of the stock transferred was recorded as an increase to
additional paid-in capital and was not reflected in earnings.
The assets consisted primarily of $199 million of
receivables and goodwill which totaled approximately
$13 million. The liabilities consisted primarily of debt
which totaled $179 million. HBEU assumed all the
liabilities of the European Operations as a result of this
transaction.
In December 2005, we sold our U.K. credit card business,
including $2.5 billion of receivables, the associated
cardholder relationships and the related retained interests in
securitized credit card receivables to HBEU for an aggregate
purchase price of $3.0 billion. The purchase price, which
was determined based on a comparative analysis of sales of other
credit card portfolios, was paid in a combination of cash and
$261 million of preferred stock issued by a subsidiary of
HBEU with a rate of one-year Sterling LIBOR, plus
1.30 percent. In addition to the assets referred to above,
the sale also included the account origination platform,
including the marketing and credit employees associated with
this function, as well as the lease associated with the credit
card call center and related leaseholds and call center
employees to provide customer continuity after the transfer as
well as to allow HBEU direct ownership and control of
origination and customer service. We have retained the
collection operations related to the credit card operations and
have entered into a service level agreement for a period of not
less than two years to provide collection services and other
support services, including components of the compliance,
financial reporting and human resource functions, for the sold
credit card operations to HBEU for a fee. We received
$8 million during both the three months ended
March 31, 2007 and March 31, 2006 under this service
level agreement. Additionally, the management teams of HBEU and
our remaining U.K. operations will be jointly involved in
decision making involving card marketing to ensure that growth
objectives are met for both businesses. Because the sale of this
business was between affiliates under common control, the
premium received in excess of the book value of the assets
transferred of $182 million, including the goodwill
assigned to this business, was recorded as an increase to
additional paid-in capital and has not been included in earnings.
In December 2004, we sold our domestic private label receivable
portfolio (excluding retail sales contracts at our Consumer
Lending business), including the retained interests associated
with our securitized domestic private label receivables to HSBC
Bank USA for $12.4 billion. We continue to service the sold
private label receivables and receive servicing and related fee
income from HSBC Bank USA for these services. As of
March 31, 2007, we were servicing $17.2 billion of
domestic private label receivables for HSBC Bank USA and as of
March 31, 2006, we were servicing $15.9 billion of
domestic private label receivables for HSBC Bank USA. We
received servicing and related fee income from HSBC Bank USA of
$101 million during the three months ended March 31,
2007 and $98 million during the three months ended
March 31, 2006. Servicing and related fee income is
reflected as Domestic private label receivable servicing and
related fees in the table above. We continue to maintain the
related customer account relationships and, therefore, sell new
domestic private label receivable originations (excluding retail
sales contracts) to HSBC Bank USA on a daily basis. We sold
$5.0 billion of private label receivables to HSBC Bank USA
during the three months ended March 31, 2007 and
$4.4 billion during the three months ended March 31,
16
HSBC
Finance Corporation
2006. The gains associated with the sale of these receivables
are reflected in the table above and are recorded in Gain on
daily sale of domestic private label receivable originations.
In the first quarter of 2004, we sold approximately
$.9 billion of real estate secured receivables from our
Mortgage Services business to HSBC Bank USA. Under a separate
servicing agreement, we service all real estate secured
receivables sold to HSBC Bank USA including loans purchased from
correspondents prior to September 1, 2005. As of
March 31, 2007, we were servicing $3.0 billion of real
estate secured receivables for HSBC Bank USA. The fee revenue
associated with these receivables is recorded in servicing fees
from HSBC affiliates and is reflected as Real estate secured
servicing, sourcing, underwriting and pricing revenues in
the above table.
Under various service level agreements, we also provide various
other services to HSBC Bank USA. These services include credit
card servicing and processing activities through our Credit Card
Services business, loan servicing through our Auto Finance
business and other operational and administrative support. Fees
received for these services are reported as servicing fees from
HSBC affiliates and are reflected as Other servicing,
processing, origination and support revenues in the table
above. Additionally, HSBC Bank USA services certain real estate
secured loans on our behalf. Fees paid for these services of
$2 million for the three months ended March 31, 2007
and $1 million for the three months ended March 31,
2006 are reported as support services from HSBC affiliates and
are reflected as Support services from HSBC affiliates,
primarily HTSU in the table above.
During 2003, Household Capital Trust VIII issued
$275 million in mandatorily redeemable preferred securities
to HSBC. Interest expense recorded on the underlying junior
subordinated notes totaled $4 million during both three
month periods ended March 31, 2007 and 2006 and is included
in Interest expense on borrowings from HSBC and subsidiaries
in the table above.
During 2004, our Canadian business began to originate and
service auto loans for an HSBC affiliate in Canada. Fees
received for these services are included in other income and are
reflected in Servicing and other fees from other HSBC
affiliates in the table above.
Since October 1, 2004, HSBC Bank USA has served as an
originating lender for loans initiated by our Taxpayer Financial
Services business for clients of various third party tax
preparers. Starting on January 1, 2007, HSBC Trust Company
(Delaware), N.A. (HTCD) also began to serve as an
originating lender for these loans. We purchase the loans
originated by HSBC Bank USA or HTCD daily for a fee. Origination
fees paid for these loans totaled $18 million during the
three months ended March 31, 2007 and $16 million
during the three months ended March 31, 2006. These
origination fees are included as an offset to taxpayer financial
services revenue and are reflected as Taxpayer financial
services loan origination and other fees in the above table.
On July 1, 2004, HSBC Bank Nevada, National Association
(HBNV), formerly known as Household Bank (SB), N.A.,
purchased the account relationships associated with
$970 million of credit card receivables from HSBC Bank USA
for approximately $99 million, which are included in
intangible assets. The receivables continue to be owned by HSBC
Bank USA. We service these receivables for HSBC Bank USA and
receive servicing and related fee income from HSBC Bank USA. As
of March 31, 2007 we were servicing $1.2 billion of
credit card receivables for HSBC Bank USA. Originations of new
accounts and receivables are made by HBNV and new receivables
are sold daily to HSBC Bank USA. We sold $592 million of
credit card receivables to HSBC Bank USA during the three months
ended March 31, 2007 and $513 million during the three
months ended March 31, 2006. The gains associated with the
sale of these receivables are reflected in the table above and
are recorded in Gain on daily sale of credit card
receivables.
Effective January 1, 2004, our technology services
employees, as well as technology services employees from other
HSBC entities in North America, were transferred to HTSU. In
addition, technology related assets and software purchased
subsequent to January 1, 2004 are generally purchased and
owned by HTSU. Technology related assets owned by HSBC Finance
Corporation prior to January 1, 2004 currently remain in
place and were not transferred to HTSU. In addition to
information technology services, HTSU also provides certain item
processing and statement processing activities to us pursuant to
a master service level agreement. Support services from HSBC
affiliates includes services provided by HTSU as well as
banking services and other miscellaneous services provided by
HSBC Bank USA and other subsidiaries of HSBC. We also receive
revenue from HTSU for rent on certain office
17
HSBC
Finance Corporation
space, which has been recorded as a reduction of occupancy and
equipment expenses, and for certain administrative costs, which
has been recorded as other income.
Additionally, in a separate transaction in December 2005, we
transferred our information technology services employees in the
U.K. to a subsidiary of HBEU. Subsequent to the transfer,
operating expenses relating to information technology, which
have previously been reported as salaries and fringe benefits or
other servicing and administrative expenses, are now billed to
us by HBEU and reported as Support services from HSBC
affiliates. Additionally, during the first
quarter of 2006, the information technology equipment in the
U.K. was sold to HBEU for a purchase price equal to the book
value of these assets of $8 million.
In addition, we utilize HSBC Markets (USA) Inc., a related HSBC
entity, to lead manage the underwriting a majority of our
ongoing debt issuances. Fees paid for such services totaled
approximately $3 million during the three months ended
March 31, 2007 and approximately $15 million during
the three months ended March 31, 2006. For debt not
accounted for under the fair value option, these fees are
amortized over the life of the related debt.
Domestic employees of HSBC Finance Corporation participate in a
defined benefit pension plan sponsored by HSBC North America.
See Note 10, Pension and Other Postretirement
Benefits, for additional information on this pension plan.
Employees of HSBC Finance Corporation participate in one or more
stock compensation plans sponsored by HSBC. Our share of the
expense of these plans was $32 million during the three
months ended March 31, 2007 and $17 million for the
three months ended March 31, 2006. These expenses are
recorded in salary and employee benefits and are reflected in
the above table as Stock based compensation expense with
HSBC.
|
|
10.
|
Pension
and Other Postretirement Benefits
|
Effective January 1, 2005, the two previously separate
domestic defined benefit pension plans of HSBC Finance
Corporation and HSBC Bank USA were combined into a single HSBC
North America defined benefit pension plan which facilitated the
development of a unified employee benefit policy and unified
employee benefit plan for HSBC companies operating in the United
States.
The components of pension expense for the domestic defined
benefit pension plan reflected in our consolidated statement of
income are shown in the table below and reflect the portion of
the pension expense of the combined HSBC North America pension
plan which has been allocated to HSBC Finance Corporation:
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(in millions)
|
|
|
Service cost benefits
earned during the period
|
|
$
|
13
|
|
|
$
|
13
|
|
Interest cost
|
|
|
16
|
|
|
|
15
|
|
Expected return on assets
|
|
|
(21
|
)
|
|
|
(20
|
)
|
Recognized (gains) losses
|
|
|
1
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
9
|
|
|
$
|
11
|
|
|
|
|
|
|
|
|
|
|
We sponsor various additional defined benefit pension plans for
our foreign based employees. Pension expense for our foreign
defined benefit pension plans was $.8 million for the three
months ended March 31, 2007 and $.6 million for the
three months ended March 31, 2006.
18
HSBC
Finance Corporation
Components of the net periodic benefit cost for our
postretirement benefits other than pensions are as follows:
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(in millions)
|
|
|
Service cost benefits
earned during the period
|
|
$
|
1
|
|
|
$
|
1
|
|
Interest cost
|
|
|
3
|
|
|
|
4
|
|
Expected return on assets
|
|
|
-
|
|
|
|
-
|
|
Recognized (gains) losses
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
4
|
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
We have three reportable segments: Consumer, Credit Card
Services and International. Our Consumer segment consists of our
Consumer Lending, Mortgage Services, Retail Services and Auto
Finance businesses. Our Credit Card Services segment consists of
our domestic MasterCard and Visa and other credit card business.
Our International segment consists of our foreign operations in
the United Kingdom, Canada and the Republic of Ireland and,
prior to November 9, 2006, our operations in Slovakia, the
Czech Republic and Hungary. The All Other caption includes our
Insurance and Taxpayer Financial Services and Commercial
businesses, each of which falls below the quantitative threshold
test under SFAS No. 131 for determining reportable
segments, as well as our corporate and treasury activities.
There have been no changes in the basis of our segmentation or
any changes in the measurement of segment profit as compared
with the presentation in our 2006
Form 10-K.
Our segment results are presented on an International Financial
Reporting Standards (IFRSs) management basis (a
non-U.S. GAAP
financial measure) (IFRS Management Basis) as
operating results are monitored and reviewed, trends are
evaluated and decisions about allocating resources, such as
employees, are made almost exclusively on an IFRS Management
Basis. IFRS Management Basis results are IFRSs results which
assume that the private label and real estate secured
receivables transferred to HSBC Bank USA have not been sold and
remain on our balance sheet. Operations are monitored and trends
are evaluated on an IFRS Management Basis because the customer
loan sales to HSBC Bank USA were conducted primarily to
appropriately fund prime customer loans within HSBC and such
customer loans continue to be managed and serviced by us without
regard to ownership. However, we continue to monitor capital
adequacy, establish dividend policy and report to regulatory
agencies on a U.S. GAAP basis.
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.
19
HSBC
Finance Corporation
Reconciliation of our IFRS Management Basis segment results to
the U.S. GAAP consolidated totals are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IFRS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
|
|
|
|
|
|
|
|
|
Adjustments/
|
|
|
Basis
|
|
|
Management
|
|
|
|
|
|
IFRS
|
|
|
U.S. GAAP
|
|
|
|
|
|
|
Card
|
|
|
Inter-
|
|
|
All
|
|
|
Reconciling
|
|
|
Consolidated
|
|
|
Basis
|
|
|
IFRS
|
|
|
Reclass-
|
|
|
Consolidated
|
|
|
|
Consumer
|
|
|
Services
|
|
|
national
|
|
|
Other
|
|
|
Items
|
|
|
Totals
|
|
|
Adjustments(4)
|
|
|
Adjustments(5)
|
|
|
ifications(6)
|
|
|
Totals
|
|
|
|
|
|
(in millions)
|
|
|
Three months ended
March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
2,158
|
|
|
$
|
821
|
|
|
$
|
204
|
|
|
$
|
(227
|
)
|
|
$
|
-
|
|
|
$
|
2,956
|
|
|
$
|
(310
|
)
|
|
$
|
4
|
|
|
$
|
(9
|
)
|
|
$
|
2,641
|
|
Other operating income (Total other
revenues)
|
|
|
192
|
|
|
|
698
|
|
|
|
47
|
|
|
|
487
|
|
|
|
(67
|
)(1)
|
|
|
1,357
|
|
|
|
40
|
|
|
|
47
|
|
|
|
198
|
|
|
|
1,642
|
|
Loan impairment charges (Provision
for credit losses)
|
|
|
1,220
|
|
|
|
420
|
|
|
|
248
|
|
|
|
(1
|
)
|
|
|
1
|
(2)
|
|
|
1,888
|
|
|
|
(177
|
)
|
|
|
(11
|
)
|
|
|
-
|
|
|
|
1,700
|
|
Operating expenses (Total costs and
expenses)
|
|
|
759
|
|
|
|
483
|
|
|
|
128
|
|
|
|
155
|
|
|
|
-
|
|
|
|
1,525
|
|
|
|
(3
|
)
|
|
|
(1
|
)
|
|
|
189
|
|
|
|
1,710
|
|
Net income
|
|
|
238
|
|
|
|
389
|
|
|
|
(90
|
)
|
|
|
122
|
|
|
|
(43
|
)
|
|
|
616
|
|
|
|
(61
|
)
|
|
|
(14
|
)
|
|
|
-
|
|
|
|
541
|
|
Customer loans (Receivables)
|
|
|
142,407
|
|
|
|
27,843
|
|
|
|
9,506
|
|
|
|
161
|
|
|
|
-
|
|
|
|
179,917
|
|
|
|
(20,220
|
)
|
|
|
401
|
|
|
|
16
|
|
|
|
160,114
|
|
Assets
|
|
|
142,182
|
|
|
|
27,793
|
|
|
|
10,238
|
|
|
|
29,924
|
|
|
|
(8,203
|
)(3)
|
|
|
201,934
|
|
|
|
(19,990
|
)
|
|
|
(3,403
|
)
|
|
|
(1,053
|
)
|
|
|
177,488
|
|
Intersegment revenues
|
|
|
58
|
|
|
|
5
|
|
|
|
5
|
|
|
|
(1
|
)
|
|
|
(67
|
)(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
2,182
|
|
|
$
|
732
|
|
|
$
|
210
|
|
|
$
|
(251
|
)
|
|
$
|
-
|
|
|
$
|
2,873
|
|
|
$
|
(332
|
)
|
|
$
|
(46
|
)
|
|
$
|
(31
|
)
|
|
$
|
2,464
|
|
Other operating income (Total other
revenues)
|
|
|
238
|
|
|
|
478
|
|
|
|
41
|
|
|
|
336
|
|
|
|
(68
|
)(1)
|
|
|
1,025
|
|
|
|
69
|
|
|
|
80
|
|
|
|
247
|
|
|
|
1,421
|
|
Loan impairment charges (Provision
for credit losses)
|
|
|
550
|
|
|
|
249
|
|
|
|
104
|
|
|
|
(1
|
)
|
|
|
2
|
(2)
|
|
|
904
|
|
|
|
(141
|
)
|
|
|
88
|
|
|
|
15
|
|
|
|
866
|
|
Operating expenses (Total costs and
expenses)
|
|
|
737
|
|
|
|
434
|
|
|
|
112
|
|
|
|
153
|
|
|
|
-
|
|
|
|
1,436
|
|
|
|
(5
|
)
|
|
|
(12
|
)
|
|
|
201
|
|
|
|
1,620
|
|
Net income
|
|
|
719
|
|
|
|
332
|
|
|
|
22
|
|
|
|
(17
|
)
|
|
|
(44
|
)
|
|
|
1,012
|
|
|
|
(79
|
)
|
|
|
(45
|
)
|
|
|
-
|
|
|
|
888
|
|
Customer loans (Receivables)
|
|
|
134,132
|
|
|
|
24,874
|
|
|
|
9,176
|
|
|
|
202
|
|
|
|
-
|
|
|
|
168,384
|
|
|
|
(20,131
|
)
|
|
|
(1,486
|
)
|
|
|
-
|
|
|
|
146,767
|
|
Assets
|
|
|
135,874
|
|
|
|
25,477
|
|
|
|
10,900
|
|
|
|
27,351
|
|
|
|
(8,221
|
)(3)
|
|
|
191,381
|
|
|
|
(18,915
|
)
|
|
|
(4,078
|
)
|
|
|
(4,708
|
)
|
|
|
163,680
|
|
Intersegment revenues
|
|
|
57
|
|
|
|
5
|
|
|
|
7
|
|
|
|
(1
|
)
|
|
|
(68
|
)(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Eliminates intersegment revenues.
|
|
(2)
|
Eliminates bad debt recovery sales between operating segments.
|
|
(3)
|
Eliminates investments in subsidiaries and intercompany
borrowings.
|
|
(4)
|
Management Basis Adjustments represent the private label and
real estate secured receivables transferred to HBUS.
|
|
(5)
|
IFRS Adjustments consist of the accounting differences between
U.S. GAAP and IFRSs which have been described more fully
below.
|
|
(6)
|
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 summarized below:
Securitizations On an IFRSs basis,
securitized receivables are treated as owned. Any gains recorded
under U.S. GAAP on these transactions are reversed. An
owned loss reserve is established. The impact from
securitizations resulting in higher net income under IFRSs is
due to the recognition of income on securitized receivables
under U.S. GAAP in prior periods.
Derivatives and hedge accounting (including fair value
adjustments) The IFRSs derivative accounting
model is similar to U.S. GAAP requirements, but IFRSs does
not permit use of the short-cut method of hedge effectiveness
testing. Prior to January 1, 2007, the differences between
U.S. GAAP and IFRSs related primarily to the fact that a
different population of derivatives qualified for hedge
accounting under IFRSs than U.S. GAAP and that HSBC Finance
Corporation had elected the fair value option under IFRSs on a
significant portion of its fixed rate debt which was being
hedged by receive fixed swaps. Prior to the issuance of FASB
Statement No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities,
(SFAS No. 159) in February 2007,
U.S. GAAP did not
20
HSBC
Finance Corporation
permit the use of the fair value option. As a result of our
early adoption of SFAS No. 159 which is more fully
discussed in Note 12, Fair Value Option,
effective January 1, 2007, we utilize FVO reporting for the
same fixed rate debt issuances under both U.S. GAAP and
IFRSs.
Intangible assets Intangible assets
under IFRSs are significantly lower than that under
U.S. GAAP as the newly created intangibles associated with
our acquisition by HSBC are reflected in goodwill for IFRSs
therefore, amortization of intangible assets is lower under
IFRSs.
Purchase accounting adjustments There
are differences in the valuation of assets and liabilities under
U.K. GAAP (which were carried forward into IFRSs) and
U.S. GAAP which result in a different amortization for the
HSBC acquisition. Additionally there are differences in the
valuation of assets and liabilities under IFRSs and
U.S. GAAP resulting from the Metris acquisition in December
2005.
Deferred loan origination costs and
premiums Under IFRSs, loan origination cost
deferrals are more stringent and result in lower costs being
deferred than permitted under U.S. GAAP. In addition, all
deferred loan origination fees, costs and loan premiums must be
recognized based on the expected life of the receivables under
IFRSs as part of the effective interest calculation while under
U.S. GAAP they may be amortized on either a contractual or
expected life basis.
Credit loss impairment provisioning
IFRSs requires a discounted cash flow methodology for estimating
impairment on pools of homogeneous customer loans which requires
the incorporation of the time value of money relating to
recovery estimates. Also under IFRSs, future recoveries on
charged-off loans are accrued for on a discounted basis and
interest is recorded based on collectibility.
Loans held for resale IFRSs requires
loans held for resale to be treated as trading assets and
recorded at their fair market value. Under U.S. GAAP, loans
held for resale are designated as loans on the balance sheet and
recorded at the lower of amortized cost or market. Under
U.S. GAAP, the income and expenses related to loans held
for sale are reported similarly to loans held for investment.
Under IFRSs, the income and expenses related to loans held for
sale are reported in other operating income.
Interest recognition The calculation
of effective interest rates under IFRS 39 requires an estimate
of all fees and points paid or recovered between parties
to the contract that are an integral part of the effective
interest rate be included. In June 2006, we implemented a
methodology for calculating the effective interest rate for
introductory rate credit card receivables under IFRSs over the
expected life of the product. In December, 2006, we implemented
a methodology to include prepayment penalties as part of the
effective interest rate and recognize such penalties over the
expected life of the receivables. U.S. GAAP generally
prohibits recognition of interest income to the extent the net
interest in the loan would increase to an amount greater than
the amount at which the borrower could settle the obligation.
Also under U.S. GAAP, prepayment penalties are generally
recognized as received.
Other There are other less significant
differences between IFRSs and U.S. GAAP relating to pension
expense, changes in tax estimates and other miscellaneous items.
See Basis of Reporting in Item 7.
Managements Discussion and Analysis of Financial Condition
and results of Operations in our Annual Report on
Form 10-K
for the year ended December 31, 2006 for a more complete
discussion of differences between U.S. GAAP and IFRSs.
Effective January 1, 2007, we early adopted
SFAS No. 159 which provides for a fair value option
election that allows companies to irrevocably elect fair value
as the initial and subsequent measurement attribute for certain
financial assets and liabilities, with changes in fair value
recognized in earnings as they occur. SFAS No. 159
permits the fair value option election (FVO) on
an instrument by instrument basis at the initial recognition of
an asset or liability or upon an event that gives rise to a new
basis of accounting for that instrument. We elected FVO for a
certain issuances of our fixed rate debt in order to align our
accounting treatment with that of HSBC under International
Financial Accounting Standards (IFRSs). Under IFRSs,
an entity can only elect FVO accounting for financial assets and
liabilities that meet certain eligibility criteria which are not
present under SFAS No. 159. When
21
HSBC
Finance Corporation
we elected FVO reporting for IFRSs, in addition to certain fixed
rate debt issuances which did not meet the eligibility criteria,
there were also certain fixed rate debt issuances for which only
a portion of the issuance met the eligibility criteria to
qualify for FVO reporting. To align our U.S. GAAP and IFRSs
accounting treatment, we have adopted SFAS No. 159
only for the fixed rate debt issuances which also qualify for
FVO reporting under IFRSs.
The following table presents information about the eligible
instruments for which we elected FVO and for which a transition
adjustment was recorded.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
|
|
|
|
|
|
Balance Sheet
|
|
|
|
January 1, 2007
|
|
|
|
|
|
January 1, 2007
|
|
|
|
Prior to Adoption
|
|
|
Net Gain (Loss)
|
|
|
After Adoption
|
|
|
|
of FVO
|
|
|
Upon Adoption
|
|
|
of FVO
|
|
|
|
|
|
(in millions)
|
|
|
Fixed rate debt designated at fair
value
|
|
$
|
(30,088
|
)
|
|
$
|
(855
|
)
|
|
$
|
(30,943
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax cumulative-effect of
adoption of FVO
|
|
|
|
|
|
|
(855
|
)
|
|
|
|
|
Increase in deferred tax asset
|
|
|
|
|
|
|
316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After-tax cumulative-effect of
adoption of FVO adjustment to retained earnings
|
|
|
|
|
|
$
|
(539
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long term debt (with original maturities over one year) of
$125.5 billion at March 31, 2007, includes
$30.7 billion of fixed rate debt accounted for under FVO.
We did not elect FVO for $52.7 billion of fixed rate debt
for the reasons discussed above. Fixed rate debt accounted for
under FVO at March 31, 2007 has an aggregate unpaid
principal balance of $30.5 billion.
The fair value of the fixed rate debt accounted for under FVO is
determined by a third party and includes the full market price
(credit and interest rate impact) based on observable market
data. The adoption of FVO has not impacted how interest expense
is calculated and reported for the fixed rate debt instruments.
The adoption of FVO has however impacted the way we report
realized gains and losses on the swaps associated with this debt
which previously qualified as effective hedges under SFAS
No. 133. Upon the adoption of SFAS No. 159 for certain
fixed rate debt, we eliminated hedge accounting on these swaps
and, as a result, realized gains and losses are no longer
reported in interest expense but instead are reported as
Gain (loss) on debt designated at fair value and related
derivatives within other revenues.
During the three months ended March 31, 2007, we recorded a
net gain of $102 million from fair value changes on our
fixed rate debt accounted for under FVO which is included in
Gain (loss) on debt designated at fair value and related
derivatives as a component of other revenues in the
consolidated statement of income.
The net gain of $102 million is comprised as follows:
|
|
|
|
|
Three months ended March 31,
|
|
2007
|
|
|
|
|
|
(in millions)
|
|
|
Interest rate component
|
|
$
|
(142
|
)
|
Credit risk component
|
|
|
244
|
|
|
|
|
|
|
Total
|
|
$
|
102
|
|
|
|
|
|
|
The change in the interest rate component reflects a decline in
the LIBOR curve during the period. The change in the credit risk
component was due to a general widening of finance sector, fixed
income credit spreads in combination with specific spread
widening attributable to our participation in the subprime
mortgage market.
In addition to the mark-to-market on debt designated at fair
value, Gain (loss) on debt designated at fair value and
related derivatives in the consolidated statement of
income also includes the mark-to-market adjustment of
$118 million on the derivatives related to the debt
designated at fair value as well as $76 million of net
realized losses on these derivatives. The total of these
amounts, when combined with the total in the table above, equate
to $144 million for the three months ended March 31,
2007.
22
HSBC
Finance Corporation
|
|
13.
|
Fair
Value Measurements
|
Effective January 1, 2007, we elected to early adopt FASB
Statement No. 157, Fair Value Measurements,
(SFAS No. 157). SFAS No. 157
establishes a single authoritative definition of value, sets out
a framework for measuring fair value, and provides a hierarchal
disclosure framework for assets and liabilities measured at fair
value. The adoption of SFAS No. 157 did not have any
impact on our financial position or results of operations.
The following table presents information about our assets and
liabilities measured at fair value on a recurring basis as of
March 31, 2007, and indicates the fair value hierarchy of
the valuation techniques utilized to determine such fair value.
In general, fair values determined by Level 1 inputs use
quoted prices (unadjusted) in active markets for identical
assets or liabilities that we have the ability to access. Fair
values determined by Level 2 inputs use inputs other than
quoted prices included in Level 1 that are observable for
the asset or liability, either directly or indirectly.
Level 2 inputs include quoted prices for similar assets and
liabilities in active markets, quoted prices for identical or
similar assets or liabilities in markets where there are few
transactions and inputs other than quoted prices that are
observable for the asset or liability, such as interest rates
and yield curves that are observable at commonly quoted
intervals. Level 3 inputs are unobservable inputs for the
asset or liability and include situations where there is little,
if any, market activity for the asset or liability.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
(Liabilities)
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
Measured at
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
Fair Value at
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
|
|
March 31, 2007
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
(in millions)
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk management related,
net(1)
|
|
$
|
1,620
|
|
|
$
|
-
|
|
|
$
|
1,620
|
|
|
$
|
-
|
|
Loan commitments
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
Available for sale securities
|
|
|
4,079
|
|
|
|
4,079
|
|
|
|
-
|
|
|
|
-
|
|
Real estate
owned(2)
|
|
|
955
|
|
|
|
-
|
|
|
|
955
|
|
|
|
-
|
|
Repossessed
vehicles(2)
|
|
|
51
|
|
|
|
-
|
|
|
|
51
|
|
|
|
-
|
|
Long term debt carried at fair
value
|
|
|
30,712
|
|
|
|
-
|
|
|
|
30,712
|
|
|
|
-
|
|
|
|
(1)
|
The fair value disclosed excludes swap collateral that we either
receive or deposit with our interest rate swap counterparties.
The derivative asset and liability presented on the balance
sheet includes swap collateral.
|
|
(2)
|
The fair value disclosed is unadjusted for transaction costs as
required by SFAS No. 157. The amounts recorded in the
consolidated balance sheet are recorded net of transaction costs
as required by FASB Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets.
|
The balances of our commitments which utilize significant
unobservable inputs (Level 3) did not change
significantly during the quarter.
The following table presents information about our assets
measured at fair value on a non-recurring basis as of
March 31, 2007 and indicates the fair value hierarchy of
the valuation techniques utilized to determine such fair value,
as defined by SFAS No. 157.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
(Liabilities)
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
Measured at
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
Fair Value at
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
|
|
March 31, 2007
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
(in millions)
|
|
|
Loans held for sale
|
|
$
|
1,046
|
(1)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,046
|
|
Net investment in U.K. Insurance
Operations held for sale
|
|
|
234
|
|
|
|
-
|
|
|
|
234
|
|
|
|
-
|
|
|
|
(1) |
The fair value disclosed above excludes loans held for sale for
which the fair value exceeds our carrying value.
|
Loans held for sale are recorded at the lower of aggregate cost
or fair value. During the three months ended March 31,
2007, loans held for sale with a carrying value of
$1,107 million were written down to their current fair
23
HSBC
Finance Corporation
value resulting in an impairment charge of $61 million.
Fair value is generally determined by estimating a gross premium
or discount. The estimated gross premium or discount is derived
from historical prices received in relation to the
2-year swap
rate. The historical data is based upon six categories of loans
and the prices received for recent representative portfolio in
relation to the
2-year swap
rate.
In accordance with the provisions of FASB Statement
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, our U.K. Insurance Operations with a
net carrying amount of $265 million, including the goodwill
allocated to these operations, were written down to their fair
value of $234 million, resulting in a loss of
$31 million, which was included as a component of total
costs and expenses during the first quarter of 2007.
Assets and liabilities which could also be measured at fair
value on a non-recurring basis include goodwill and intangible
assets.
|
|
14.
|
New
Accounting Pronouncements
|
In April 2007, the FASB issued FASB Staff Position No. FIN
39-1, Amendment of FASB Interpretation No. 39
(FSP 39-1 ). FSP 39-1 allows entities that
are party to a master netting arrangement to offset the
receivable or payable recognized upon payment or receipt of cash
collateral against fair value amounts recognized for derivative
instruments that have been offset under the same master netting
arrangement in accordance with FASB Interpretation No. 39.
The guidance in FSP 39-1 is effective for fiscal years
beginning after November 15, 2007, with early adoption
permitted. Entities are required to recognize the effects of
applying FSP 39-1 as a change in accounting principle
through retrospective application for all financial statements
presented unless it is impracticable to do so. We are currently
evaluating the impact that adoption will have on our financial
position.
24
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, 2006 (the 2006
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, intends, believe,
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, 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.
Net income was $541 million for the three months ended
March 31, 2007, a decrease of 39 percent, compared to
$888 million in the prior year quarter, largely due to
higher provision for credit losses. The prior year period credit
loss provision benefited from exceptionally low levels of
personal bankruptcy filings in the United States as a result of
the new bankruptcy law which took effect in October 2005, the
impact of significant growth in 2004 and 2005 which had not yet
seasoned and an overall favorable credit environment in the
United States which affects the comparability of the provision
for credit losses between periods. Higher costs and expenses to
support growth also contributed to the decrease in net income,
partially offset by higher other revenues and higher net
interest income. When compared to the year-ago period, the
increase in provision for credit losses in 2007 reflects higher
levels of receivables, higher levels of delinquency driven by
growth and normal portfolio seasoning, progression of portions
of our Mortgage Services portfolio purchased in 2005 and 2006
into various stages of delinquency and to charge-off and
increased levels of personal bankruptcy filings as discussed
below. Credit loss provision also increased during the quarter
due to higher loss estimates at our United Kingdom business due
to a refinement in the methodology used to calculate roll rate
percentages which we believe results in a better estimate of
probable losses currently inherent in the loan portfolio. Also
in the first quarter of 2007, our Consumer Lending provision
reflected higher loss estimates in second lien loans purchased
in 2004 through the third quarter of 2006. At March 31,
2007, the outstanding principal balance of second lien loans
acquired by the Consumer Lending business during this period was
approximately $1.5 billion.
The increase in net interest income during the three months
ended March 31, 2007 was due to growth in average
receivables and an improvement in the overall yield on the
portfolio, partly offset by a higher cost of funds. Changes in
receivable mix also contributed to the increase in yield due to
the impact of increased levels of higher yielding credit card
receivables due in part to lower securitization levels, and
higher levels of average second lien real estate secured loans
as compared to the year-ago quarter. Overall yield improvements
were partially offset by the impact of growth in non-performing
assets. Other revenues increased due to higher fee income and
enhancement services revenue, as well as the impact of adopting
FASB Statement No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities,
(SFAS No. 159) effective January 1,
2007 which, based on the change in the fair value of the
underlying fair value optioned debt related to credit risk,
contributed approximately $244 million to other revenues,
as discussed more fully below. These increases were partially
offset by lower derivative income, lower other income and lower
25
HSBC
Finance Corporation
securitization related revenue. Fee income and enhancement
services revenue were higher in the three months ended
March 31, 2007 as a result of higher volumes in our credit
card portfolios. Lower derivative income was due to changes in
the interest rate curve and to the adoption of
SFAS No. 159. Rising interest rates during the fourth
quarter of 2005 and the first half of 2006 caused the net
outgoing payments on pay variable/received fix economic hedges
to increase during the three months ended March 31, 2007 as
compared with the same period in 2006. Additionally, as a result
of the adoption of SFAS No. 159, we eliminated hedge
accounting for all fixed rate debt designated at fair value. The
fair value change in the associated swaps, which accounted for
the majority of the derivative income in the first quarter of
2006, is now reported as Gain (loss) on debt designated at
fair value and related derivatives in the consolidated
statement of income along with the
mark-to-market
on the fixed rate debt. The decrease in other income was
primarily due to lower gains on sales of real estate secured
receivables by our Decision One mortgage operations.
Securitization related revenue decreased due to reduced
securitization activity.
Our return on average owned assets (ROA) was
1.19 percent for the quarter ended March 31, 2007
compared to 2.18 percent for the quarter ended
March 31, 2006. ROA decreased during the quarter ended
March 31, 2007 as a result of the lower net income during
the period, as discussed above, and higher average assets for
the period.
We continue to monitor the impact of several trends affecting
the mortgage lending industry. Real estate markets in a large
portion of the United States have been affected by a general
slowing in the rate of appreciation in property values, or an
actual decline in some markets, while the period of time
available properties remain on the market has increased.
Additionally, the ability of some borrowers to repay their
adjustable rate mortgage (ARM) loans have been
impacted as the interest rates on their loans increase as rates
adjust under their contracts. Interest rate adjustments on first
mortgages may also have a direct impact on a borrowers
ability to repay any underlying second lien mortgage loan on a
property. Similarly, as interest-only mortgage loans leave the
interest-only payment period, the ability of borrowers to make
the increased payments may be impacted. Numerous studies have
been published indicating that mortgage loan originations
throughout the industry from 2005 and 2006 are performing worse
than originations from prior periods.
In 2005 and continuing into the first six months of 2006, second
lien mortgage loans in our Mortgage Services business increased
significantly as a percentage of total loans acquired when
compared to prior periods. During the second quarter of 2006, we
began to witness deterioration in the performance of mortgage
loans acquired in 2005 by our Mortgage Services business,
particularly in the second lien and portions of the first lien
portfolios. The deterioration continued in the third quarter and
fourth quarters of 2006 and began to affect these same
components of loans acquired in 2006 by this business. In the
fourth quarter of 2006 deterioration of these components
worsened considerably, largely related to the first lien
adjustable rate mortgage portfolio, as well as loans in the
second lien portfolios. In the first quarter of 2007,
deterioration of these components continued although the rate of
the increase in delinquency has slowed from prior quarters. A
significant number of our second lien customers have underlying
adjustable rate first mortgages that face repricing in the
near-term which has impacted the probability of repayment on the
related second lien mortgage loan. As the interest rate
adjustments will occur in an environment of substantially higher
interest rates, lower home value appreciation and tightening
credit, we expect the probability of default for adjustable rate
first mortgages subject to repricing as well as any second lien
mortgage loans that are subordinate to an adjustable rate first
lien will be greater than what we have historically experienced.
Accordingly, while overall credit performance, as measured by
delinquency and charge-off is generally performing as expected
across other parts of our domestic mortgage portfolio, we are
continuing to report higher delinquency and losses in the
Mortgage Services business, largely as a result of the affected
2005 and 2006 originations progressing to various stages of
delinquency and to charge-off. Numerous risk mitigation efforts
have been implemented relating to the affected components of the
Mortgage Services portfolio. These include enhanced segmentation
and analytics to identify the higher risk portions of the
portfolio and increased collections capacity. As appropriate and
in accordance with defined policies, we will restructure
and/or
modify loans if we believe the customer will continue to pay. We
are also contacting customers who have adjustable rate mortgage
loans nearing the first reset that we expect will be the most
impacted by a rate adjustment in order to assess their ability
to make the adjusted payment and, as appropriate, modify the
loans. In the second half of 2006, we slowed growth in this
portion of the portfolio by implementing repricing initiatives
in selected origination segments and tightening underwriting
criteria, especially for second lien, stated income and lower
credit scoring segments. In March 2007,
26
HSBC
Finance Corporation
we announced our decision to discontinue correspondent channel
acquisitions by our Mortgage Services business. However, our
Decision One wholesale operation, which closes loans sourced by
brokers primarily for resale in the secondary market, and our
branch-based Consumer Lending business retail channel will
continue. These actions, combined with normal portfolio
attrition will continue to result in significant reductions in
the principal balance of our Mortgage Services loan portfolio
during 2007. We expect portions of the Mortgage Services
portfolio to remain under pressure as the 2005 and 2006
originations season further progressing to various stages of
delinquency and ultimately to
charge-off.
Effective January 1, 2007, we early adopted
SFAS No. 159 which provides for a fair value option
election that allows companies to irrevocably elect fair value
as the initial and subsequent measurement attribute for certain
assets and liabilities, with changes in fair value recognized in
earnings when they occur. SFAS No. 159 permits the fair
value option election (FVO) on an instrument by
instrument basis at the initial recognition of an asset or
liability or upon an event that gives rise to a new basis of
accounting for that instrument. We elected FVO for certain
issuances of our fixed rate debt in order to align our
accounting treatment with that of HSBC under International
Financial Accounting Standards (IFRSs). The adoption
of SFAS No. 159 resulted in a $539 million
cumulative-effect after-tax reduction to the January 1,
2007 opening balance sheet.
As part of our continuing evaluation of strategic alternatives
with respect to our U.K. operations, we have entered into a
non-binding agreement to sell the capital stock of our U.K.
insurance operations (U.K. Insurance Operations) to
a third party for cash. The sales price will be determined, in
part, based on the actual net book value of the assets sold at
the time the sale is closed which is anticipated in the third
quarter of 2007. The agreement also provides for the purchaser
to distribute insurance products through our U.K. branch network
for which we will receive commission revenue. The sale is
subject to satisfactory completion of final due diligence, the
execution of a definitive agreement and any regulatory approvals
that may be required. At March 31, 2007, we have classified
the U.K. Insurance Operations as Held for Sale and
combined assets of $470 million and liabilities of
$236 million related to the U.K. Insurance Operations
separately in our consolidated balance sheet within other assets
and other liabilities. Because our carrying value for the U.K.
Insurance Operations, including allocated goodwill, was more
than the estimated purchase price based on the March 31,
2007 net book value, we have recorded an adjustment of
$31 million to total costs and expenses to record our
investment in these operations at the lower of cost or market
value. We continue to evaluate the scope of our other U.K.
operations.
In 2007, we began a strategic review of our Taxpayer Financial
Services (TFS) business to ensure that we offer only
the most value-added tax products. As a result, in March 2007 we
announced that beginning with the 2008 tax season we will
discontinue pre-season and pre-file products. The
discontinuation of these specific tax products will not have a
material effect on our consolidated results of operations. The
strategic review of our TFS business remains on-going.
27
HSBC
Finance Corporation
The financial information set forth below summarizes selected
financial highlights of HSBC Finance Corporation as of
March 31, 2007 and 2006 and for the three month periods
ended March 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net income
|
|
$
|
541
|
|
|
$
|
888
|
|
Return on average owned assets
(ROA)
|
|
|
1.19
|
%
|
|
|
2.18
|
%
|
Return on average common
shareholders(s) equity (ROE)
|
|
|
11.14
|
|
|
|
18.14
|
|
Net interest margin
|
|
|
6.40
|
|
|
|
6.69
|
|
Consumer net charge-off ratio,
annualized
|
|
|
3.69
|
|
|
|
2.58
|
|
Efficiency
ratio(1)
|
|
|
38.13
|
|
|
|
39.87
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
2007
|
|
|
2006
|
|
|
|
|
Receivables
|
|
$
|
160,114
|
|
|
$
|
146,767
|
|
Two-month-and-over contractual
delinquency ratio
|
|
|
4.64
|
%
|
|
|
3.66
|
%
|
|
|
(1) |
Ratio of total costs and expenses less policyholders
benefits to net interest income and other revenues less
policyholders benefits.
|
Receivables were $160.1 billion at March 31, 2007,
$162.0 billion at December 31, 2006 and
$146.8 billion at March 31, 2006. While real estate
secured receivables have been a primary driver of growth in
recent years, in the first quarter of 2007 real estate growth in
our Consumer Lending business was more than offset by lower
receivable balances in our Mortgage Services business resulting
from the decision in the second quarter of 2006 to reduce
purchases of second lien and selected higher risk products in
our Mortgage Services business. Additionally, our decision to
discontinue correspondent channel acquisitions by our Mortgage
Services business, as discussed above, will result in a
significant reduction in the receivable balance in the Mortgage
Services portfolio on an on-going basis. Compared to
December 31, 2006, receivable levels primarily reflect
attrition in our Mortgage Services portfolio as discussed above
and in our credit card portfolio due to normal seasonal run-off,
partially offset by growth in our Consumer Lending and Auto
Finance businesses. Compared to March 31, 2006, we
experienced growth in all our receivable products, with real
estate secured receivables being the primary contributor of the
growth.
Our two-months-and-over contractual delinquency ratio increased
compared to both the prior year quarter and prior quarter.
Compared to the prior year quarter, with the exception of our
private label portfolio, all products reported higher
delinquency levels due to the seasoning of a growing portfolio
including higher real estate secured delinquency primarily at
our Mortgage Services business. Compared to the prior quarter,
the increase was primarily due to higher real estate secured
delinquency levels, primarily at our Mortgage Services business
driven in part by the effect of lower receivable levels,
partially offset by lower delinquency levels at our Auto Finance
business which included seasonal improvements in collections in
the first quarter as customers use their tax refunds to reduce
their outstanding balances. Delinquency levels for our other
products were generally flat compared to the prior quarter.
Net charge-offs as a percentage of average consumer receivables
for the quarter increased compared to both the prior year
quarter and prior quarter. Compared to the prior year quarter,
we experienced higher net charge-offs in our real estate secured
portfolio, in particular at our Mortgage Services business as
discussed above, and in our credit card portfolio. The increase
in our credit card portfolio was largely due to increased levels
of personal bankruptcy filings as compared to the exceptionally
low levels experienced in the first quarter of 2006 following
enactment of new bankruptcy law in the United States. Compared
to the prior quarter, the increases in our real estate secured
and credit card portfolios were partially offset by lower net
charge-offs as a percentage of average consumer receivables for
our auto finance portfolio as a result of seasonal improvements
in collection activities coupled with the one time
$24 million acceleration of charge-offs in the fourth
quarter of 2006 due to Auto Finances charge-off policy
change. The increases in real estate secured net charge-off was
driven largely by our Mortgage Services business as the higher
level of delinquencies we began to experience last year are
beginning to migrate to charge-off. The
28
HSBC
Finance Corporation
increase in net charge-offs in our credit card portfolio is due
to the seasoning of a growing portfolio, partially offset by
seasonal improvements in collection activities.
Our efficiency ratio improved compared to the prior year
quarter. Excluding the $244 million change in fair value on
the fixed rate debt related to credit risk resulting from the
adoption of SFAS No. 159, the efficiency ratio for the
three months ended March 31, 2007 deteriorated from the
prior year quarter by 64 basis points. The deterioration
was a result of higher provision for credit losses and higher
costs and expenses to support receivable growth, partially
offset by higher net interest income and higher fee income and
enhancement services revenues due to higher levels of
receivables.
During the first quarter of 2007, we supplemented funding
through unsecured debt issuances with proceeds from the
continuing sale of newly originated domestic private label
receivables to HSBC Bank USA, debt issued to affiliates and
increased levels of secured financings.
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 U.S. GAAP basis of
reporting. Certain reclassifications have been made to prior
year amounts to conform to the current year presentation.
Equity Ratios Tangible shareholders
equity to tangible managed assets (TETMA), tangible
shareholders equity plus owned loss reserves to tangible
managed assets (TETMA + Owned Reserves) and tangible
common equity to tangible managed assets are
non-U.S. GAAP
financial measures that are used by HSBC Finance Corporation
management and certain rating agencies to evaluate capital
adequacy. These ratios exclude the equity impact of
SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities, SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities, the impact of the adoption of
SFAS No. 159 including the subsequent changes in fair
value recognized in earnings associated with credit risk on debt
for which we elected the fair value option. Preferred securities
issued by certain non-consolidated trusts are also considered
equity in the TETMA and TETMA + Owned Reserves calculations
because of their long-term subordinated nature and our ability
to defer dividends. Managed assets include owned assets plus
loans which we have sold and service with limited recourse. We
and certain rating agencies also monitor our equity ratios
excluding the impact of the HSBC acquisition purchase accounting
adjustments. We do so because we believe that the HSBC
acquisition purchase accounting adjustments represent non-cash
transactions which do not affect our business operations, cash
flows or ability to meet our debt obligations. These ratios 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 owned assets
ratio. For a quantitative reconciliation of these
non-U.S. GAAP
financial measures to common and preferred equity to owned
assets ratio, see Reconciliations to
U.S. GAAP Financial Measures.
International Financial Reporting
Standards Because HSBC reports results in
accordance with IFRSs and IFRSs results are used in measuring
and rewarding performance of employees, our management also
separately monitors
29
HSBC
Finance Corporation
net income under IFRSs (a
non-U.S. GAAP
financial measure). The following table reconciles our net
income on a U.S. GAAP basis to net income on an IFRSs basis:
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(in millions)
|
|
|
Net income
U.S. GAAP basis
|
|
$
|
541
|
|
|
$
|
888
|
|
adjustments, net of tax:
|
|
|
|
|
|
|
|
|
Securitizations
|
|
|
(1
|
)
|
|
|
21
|
|
Derivatives and hedge accounting
(including fair value adjustments)
|
|
|
(17
|
)
|
|
|
(71
|
)
|
Intangible assets
|
|
|
26
|
|
|
|
36
|
|
Purchase accounting adjustments
|
|
|
9
|
|
|
|
32
|
|
Loan origination
|
|
|
4
|
|
|
|
(20
|
)
|
Loan impairment
|
|
|
(7
|
)
|
|
|
9
|
|
Loans held for sale
|
|
|
(29
|
)
|
|
|
-
|
|
Interest recognition
|
|
|
13
|
|
|
|
-
|
|
Lower of cost or market adjustment
for U.K. Insurance Operations
|
|
|
(6
|
)
|
|
|
-
|
|
Other
|
|
|
18
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
Net income IFRSs basis
|
|
$
|
551
|
|
|
$
|
930
|
|
|
|
|
|
|
|
|
|
|
Differences between U.S. GAAP and IFRSs are as follows:
Securitizations
IFRSs
|
|
|
|
|
The recognition of securitized assets is governed by a
three-step process, which may be applied to the whole asset, or
a part of an asset:
|
|
|
|
|
|
If the rights to the cash flows arising from securitized assets
have been transferred to a third party and all the risks and
rewards of the assets have been transferred, the assets
concerned are derecognized.
|
|
|
If the rights to the cash flows are retained by HSBC but there
is a contractual obligation to pay them to another party, the
securitized assets concerned are derecognized if certain
conditions are met such as, for example, when there is no
obligation to pay amounts to the eventual recipient unless an
equivalent amount is collected from the original asset.
|
|
|
If some significant risks and rewards of ownership have been
transferred, but some have also been retained, it must be
determined whether or not control has been retained. If control
has been retained, HSBC continues to recognize the asset to the
extent of its continuing involvement; if not, the asset is
derecognized.
|
|
|
|
|
|
The impact from securitizations resulting in higher net income
under IFRSs is due to the recognition of income on securitized
receivables under U.S. GAAP in prior periods.
|
U.S. GAAP
|
|
|
|
|
SFAS 140 Accounting for Transfers and Servicing of
Finance Assets and Extinguishments of Liabilities requires
that receivables that are sold to a special purpose entity
(SPE) and securitized can only be derecognized and a
gain or loss on sale recognized if the originator has
surrendered control over the securitized assets.
|
|
|
Control is surrendered over transferred assets if, and only if,
all of the following conditions are met:
|
|
|
|
|
|
The transferred assets are put presumptively beyond the reach of
the transferor and its creditors, even in bankruptcy or other
receivership.
|
|
|
Each holder of interests in the transferee (i.e. holder of
issued notes) has the right to pledge or exchange their
beneficial interests, and no condition constrains this right and
provides more than a trivial benefit to the transferor.
|
30
HSBC
Finance Corporation
|
|
|
|
|
The transferor does not maintain effective control over the
assets through either an agreement that obligates the transferor
to repurchase or to redeem them before their maturity or through
the ability to unilaterally cause the holder to return specific
assets, other than through a
clean-up
call.
|
|
|
|
|
|
If these conditions are not met the securitized assets should
continue to be consolidated.
|
|
|
When HSBC retains an interest in the securitized assets, such as
a servicing right or the right to residual cash flows from the
SPE, HSBC recognizes this interest at fair value on sale of the
assets to the SPE.
|
Derivatives
and hedge accounting
IFRSs
|
|
|
|
|
Derivatives are recognized initially, and are subsequently
remeasured, at fair value. Fair values of exchange-traded
derivatives are obtained from quoted market prices. Fair values
of
over-the-counter
(OTC) derivatives are obtained using valuation
techniques, including discounted cash flow models and option
pricing models.
|
|
|
In the normal course of business, the fair value of a derivative
on initial recognition is considered to be the transaction price
(that is the fair value of the consideration given or received).
However, in certain circumstances the fair value of an
instrument will be evidenced by comparison with other observable
current market transactions in the same instrument (without
modification or repackaging) or will be based on a valuation
technique whose variables include only data from observable
markets, including interest rate yield curves, option
volatilities and currency rates. When such evidence exists, HSBC
recognizes a trading gain or loss on inception of the
derivative. When unobservable market data have a significant
impact on the valuation of derivatives, the entire initial
change in fair value indicated by the valuation model is not
recognized immediately in the income statement but is recognized
over the life of the transaction on an appropriate basis or
recognized in the income statement when the inputs become
observable, or when the transaction matures or is closed out.
|
|
|
Derivatives may be embedded in other financial instruments; for
example, a convertible bond has an embedded conversion option.
An embedded derivative is treated as a separate derivative when
its economic characteristics and risks are not clearly and
closely related to those of the host contract, its terms are the
same as those of a stand-alone derivative, and the combined
contract is not held for trading or designated at fair value.
These embedded derivatives are measured at fair value with
changes in fair value recognized in the income statement.
|
|
|
Derivatives are classified as assets when their fair value is
positive, or as liabilities when their fair value is negative.
Derivative assets and liabilities arising from different
transactions are only netted if the transactions are with the
same counterparty, a legal right of offset exists, and the cash
flows are intended to be settled on a net basis.
|
|
|
The method of recognizing the resulting fair value gains or
losses depends on whether the derivative is held for trading, or
is designated as a hedging instrument and, if so, the nature of
the risk being hedged. All gains and losses from changes in the
fair value of derivatives held for trading are recognized in the
income statement. When derivatives are designated as hedges,
HSBC classifies them as either: (i) hedges of the change in
fair value of recognized assets or liabilities or firm
commitments (fair value hedge); (ii) hedges of
the variability in highly probable future cash flows
attributable to a recognized asset or liability, or a forecast
transaction (cash flow hedge); or (iii) hedges
of net investments in a foreign operation (net investment
hedge). Hedge accounting is applied to derivatives
designated as hedging instruments in a fair value, cash flow or
net investment hedge provided certain criteria are met.
|
Hedge Accounting:
|
|
|
|
|
It is HSBCs policy to document, at the inception of a
hedge, the relationship between the hedging instruments and
hedged items, as well as the risk management objective and
strategy for undertaking the hedge. The policy also requires
documentation of the assessment, both at hedge inception and on
an ongoing basis, of whether the derivatives used in the hedging
transactions are highly effective in offsetting changes in fair
values or cash flows of hedged items attributable to the hedged
risks.
|
31
HSBC
Finance Corporation
Fair value hedge:
|
|
|
|
|
Changes in the fair value of derivatives that are designated and
qualify as fair value hedging instruments are recorded in the
income statement, together with changes in the fair values of
the assets or liabilities or groups thereof that are
attributable to the hedged risks.
|
|
|
If the hedging relationship no longer meets the criteria for
hedge accounting, the cumulative adjustment to the carrying
amount of a hedged item is amortized to the income statement
based on a recalculated effective interest rate over the
residual period to maturity, unless the hedged item has been
derecognized whereby it is released to the income statement
immediately.
|
Cash flow hedge:
|
|
|
|
|
The effective portion of changes in the fair value of
derivatives that are designated and qualify as cash flow hedges
are recognized in equity. Any gain or loss relating to an
ineffective portion is recognized immediately in the income
statement.
|
|
|
Amounts accumulated in equity are recycled to the income
statement in the periods in which the hedged item will affect
the income statement. However, when the forecast transaction
that is hedged results in the recognition of a non-financial
asset or a non-financial liability, the gains and losses
previously deferred in equity are transferred from equity and
included in the initial measurement of the cost of the asset or
liability.
|
|
|
When a hedging instrument expires or is sold, or when a hedge no
longer meets the criteria for hedge accounting, any cumulative
gain or loss existing in equity at that time remains in equity
until the forecast transaction is ultimately recognized in the
income statement. When a forecast transaction is no longer
expected to occur, the cumulative gain or loss that was reported
in equity is immediately transferred to the income statement.
|
Net investment hedge:
|
|
|
|
|
Hedges of net investments in foreign operations are accounted
for in a similar manner to cash flow hedges. Any gain or loss on
the hedging instrument relating to the effective portion of the
hedge is recognized in equity; the gain or loss relating to the
ineffective portion is recognized immediately in the income
statement. Gains and losses accumulated in equity are included
in the income statement on the disposal of the foreign operation.
|
Hedge effectiveness testing:
|
|
|
|
|
IAS 39 requires that at inception and throughout its life, each
hedge must be expected to be highly effective (prospective
effectiveness) to qualify for hedge accounting. Actual
effectiveness (retrospective effectiveness) must also be
demonstrated on an ongoing basis.
|
|
|
The documentation of each hedging relationship sets out how the
effectiveness of the hedge is assessed.
|
|
|
For prospective effectiveness, the hedging instrument must be
expected to be highly effective in achieving offsetting changes
in fair value or cash flows attributable to the hedged risk
during the period for which the hedge is designated. For
retrospective effectiveness, the changes in fair value or cash
flows must offset each other in the range of 80 per cent to
125 per cent for the hedge to be deemed effective.
|
Derivatives that do not qualify for hedge accounting:
|
|
|
|
|
All gains and losses from changes in the fair value of any
derivatives that do not qualify for hedge accounting are
recognized immediately in the income statement.
|
U.S. GAAP
|
|
|
|
|
The accounting under SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities is
generally consistent with that under IAS 39, which HSBC has
followed in its IFRSs reporting from January 1, 2005, as
described above. However, specific assumptions regarding hedge
effectiveness under U.S. GAAP are not permitted by IAS 39.
|
|
|
The requirements of SFAS No. 133 have been effective
from January 1, 2001.
|
|
|
The U.S. GAAP shortcut method permits an
assumption of zero ineffectiveness in hedges of interest rate
risk with an interest rate swap provided specific criteria have
been met. IAS 39 does not permit such an
|
32
HSBC
Finance Corporation
|
|
|
|
|
assumption, requiring a measurement of actual ineffectiveness at
each designated effectiveness testing date. As of March 31,
2007, we do not have any hedges accounted for under the shortcut
method.
|
|
|
|
|
|
In addition, IFRSs allows greater flexibility in the designation
of the hedged item. Under U.S. GAAP, all contractual cash
flows must form part of the designated relationship, whereas IAS
39 permits the designation of identifiable benchmark interest
cash flows only.
|
|
|
Under U.S. GAAP, derivatives receivable and payable with
the same counterparty may be reported net on the balance sheet
when there is an executed ISDA Master Netting Arrangement
covering enforceable jurisdictions. These contracts do not meet
the requirements for offset under IAS 32 and hence are presented
gross on the balance sheet under IFRSs.
|
Designation
of financial assets and liabilities at fair value through profit
and loss
IFRSs
|
|
|
|
|
Under IAS 39, a financial instrument, other than one held for
trading, is classified in this category if it meets the criteria
set out below, and is so designated by management. An entity may
designate financial instruments at fair value where the
designation:
|
|
|
|
|
|
eliminates or significantly reduces a measurement or recognition
inconsistency that would otherwise arise from measuring
financial assets or financial liabilities or recognizing the
gains and losses on them on different bases; or
|
|
|
applies to a group of financial assets, financial liabilities or
a combination of both that is managed and its performance
evaluated on a fair value basis, in accordance with a documented
risk management or investment strategy, and where information
about that group of financial instruments is provided internally
on that basis to management; or
|
|
|
relates to financial instruments containing one or more embedded
derivatives that significantly modify the cash flows resulting
from those financial instruments.
|
|
|
|
|
|
Financial assets and financial liabilities so designated are
recognized initially at fair value, with transaction costs taken
directly to the income statement, and are subsequently
remeasured at fair value. This designation, once made, is
irrevocable in respect of the financial instruments to which it
relates. Financial assets and financial liabilities are
recognized using trade date accounting.
|
|
|
Gains and losses from changes in the fair value of such assets
and liabilities are recognized in the income statement as they
arise, together with related interest income and expense and
dividends.
|
U.S. GAAP
|
|
|
|
|
Prior to the adoption of SFAS No. 159, generally, for
financial assets to be measured at fair value with gains and
losses recognized immediately in the income statement, they were
required to meet the definition of trading securities in
SFAS 115, Accounting for Certain Investments in Debt
and Equity Securities. Financial liabilities were usually
reported at amortized cost under U.S. GAAP.
|
|
|
SFAS No. 159 was issued in February 2007, which
provides for a fair value option election that allows companies
to irrevocably elect fair value as the initial and subsequent
measurement attribute for certain financial assets and
liabilities, with changes in fair value recognized in earnings
as they occur. SFAS No. 159 permits the fair value
option election on an instrument by instrument basis at the
initial recognition of an asset or liability or upon an event
that gives rise to a new basis of accounting for that
instrument. We adopted SFAS No. 159 retroactive to
January 1, 2007.
|
Goodwill,
Purchase Accounting and Intangibles
IFRSs
|
|
|
|
|
Prior to 1998, goodwill under U.K. GAAP was written off against
equity. HSBC did not elect to reinstate this goodwill on its
balance sheet upon transition to IFRSs. From January 1,
1998 to December 31, 2003 goodwill was capitalized and
amortized over its useful life. The carrying amount of goodwill
existing at December 31, 2003 under U.K. GAAP was carried
forward under the transition rules of IFRS 1 from
January 1, 2004, subject to certain adjustments.
|
33
HSBC
Finance Corporation
|
|
|
|
|
IFRS 3 Business Combinations requires that goodwill
should not be amortized but should be tested for impairment at
least annually at the reporting unit level by applying a test
based on recoverable amounts.
|
|
|
Quoted securities issued as part of the purchase consideration
are fair valued for the purpose of determining the cost of
acquisition at their market price on the date the transaction is
completed.
|
U.S. GAAP
|
|
|
|
|
Up to June 30, 2001, goodwill acquired was capitalized and
amortized over its useful life which could not exceed
25 years. The amortization of previously acquired goodwill
ceased with effect from December 31, 2001.
|
|
|
Quoted securities issued as part of the purchase consideration
are fair valued for the purpose of determining the cost of
acquisition at their average market price over a reasonable
period before and after the date on which the terms of the
acquisition are agreed and announced.
|
Loan
origination
IFRSs
|
|
|
|
|
Certain loan fee income and incremental directly attributable
loan origination costs are amortized to the income statement
over the life of the loan as part of the effective interest
calculation under IAS 39.
|
U.S. GAAP
|
|
|
|
|
Certain loan fee income and direct but not necessarily
incremental loan origination costs, including an apportionment
of overheads, are amortized to the income statement account over
the life of the loan as an adjustment to interest income
(SFAS No. 91 Accounting for Nonrefundable Fees
and Costs Associated with Originating or Acquiring Loans and
Initial Direct Costs of Leases.)
|
Loan
impairment
IFRSs
|
|
|
|
|
Where statistical models, using historic loss rates adjusted for
economic conditions, provide evidence of impairment in
portfolios of loans, their values are written down to their net
recoverable amount. The net recoverable amount is the present
value of the estimated future recoveries discounted at the
portfolios original effective interest rate. The
calculations include a reasonable estimate of recoveries on
loans individually identified for write-off pursuant to
HSBCs credit guidelines.
|
U.S. GAAP
|
|
|
|
|
Where the delinquency status of loans in a portfolio is such
that there is no realistic prospect of recovery, the loans are
written off in full, or to recoverable value where collateral
exists. Delinquency depends on the number of days payment is
overdue. The delinquency status is applied consistently across
similar loan products in accordance with HSBCs credit
guidelines. When local regulators mandate the delinquency status
at which write-off must occur for different retail loan products
and these regulations reasonably reflect estimated recoveries on
individual loans, this basis of measuring loan impairment is
reflected in U.S. GAAP accounting. Cash recoveries relating
to pools of such written-off loans, if any, are reported as loan
recoveries upon collection.
|
Loans
held for resale
IFRSs
|
|
|
|
|
Under IAS 39, loans held for resale are treated as trading
assets.
|
|
|
As trading assets, loans held for resale are initially recorded
at fair value, with changes in fair value being recognized in
current period earnings.
|
|
|
Any gains realized on sales of such loans are recognized in
current period earnings on the trade date.
|
U.S. GAAP
|
|
|
|
|
Under U.S. GAAP, loans held for resale are designated as
loans on the balance sheet.
|
34
HSBC
Finance Corporation
|
|
|
|
|
Such loans are recorded at the lower of amortized cost or market
value (LOCOM). Therefore, recorded value cannot exceed amortized
cost.
|
|
|
Subsequent gains on sales of such loans are recognized in
current period earnings on the settlement date.
|
Interest
recognition
IFRSs
|
|
|
|
|
The calculation and recognition of effective interest rates
under IAS 39 requires an estimate of all fees and points
paid or received between parties to the contract that are
an integral part of the effective interest rate be included.
|
U.S. GAAP
|
|
|
|
|
FAS 91 also generally requires all fees and costs
associated with originating a loan to be recognized as interest,
but when the interest rate increases during the term of the loan
it prohibits the recognition of interest income to the extent
that the net investment in the loan would increase to an amount
greater than the amount at which the borrower could settle the
obligation.
|
IFRS Management Basis Reporting Our segment
results are presented on an IFRSs management basis (a
non-U.S. GAAP
financial measure) (IFRS Management Basis) as
operating results are monitored and reviewed, trends are
evaluated and decisions about allocating resources, such as
employees, are made almost exclusively on an IFRS Management
Basis. IFRS Management Basis results are IFRSs results which
assume that the private label and real estate secured
receivables transferred to HSBC Bank USA have not been sold and
remain on our balance sheet. Operations are monitored and trends
are evaluated on an IFRS Management Basis because the customer
loan sales to HSBC Bank USA were conducted primarily to
appropriately fund prime customer loans within HSBC and such
customer loans continue to be managed and serviced by us without
regard to ownership. However, we continue to monitor capital
adequacy, establish dividend policy and report to regulatory
agencies on a U.S. GAAP basis. A summary of the significant
differences between U.S. GAAP and IFRSs as they impact our
results are summarized in Note 11, Business
Segments.
Receivables
Review
The following table summarizes receivables at March 31,
2007 and increases (decreases) over prior periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases (decreases) from
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
March 31,
|
|
|
2006
|
|
|
2006
|
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Real estate
secured(1)
|
|
$
|
96,329
|
|
|
$
|
(1,432
|
)
|
|
|
(1.5
|
)%
|
|
$
|
6,837
|
|
|
|
7.6
|
%
|
Auto finance
|
|
|
12,633
|
|
|
|
129
|
|
|
|
1.0
|
|
|
|
1,447
|
|
|
|
12.9
|
|
Credit card
|
|
|
27,293
|
|
|
|
(421
|
)
|
|
|
(1.5
|
)
|
|
|
3,844
|
|
|
|
16.4
|
|
Private label
|
|
|
2,500
|
|
|
|
(9
|
)
|
|
|
(.4
|
)
|
|
|
72
|
|
|
|
3.0
|
|
Personal non-credit
card(2)
|
|
|
21,201
|
|
|
|
(166
|
)
|
|
|
(.8
|
)
|
|
|
1,195
|
|
|
|
6.0
|
|
Commercial and other
|
|
|
158
|
|
|
|
(23
|
)
|
|
|
(12.7
|
)
|
|
|
(48
|
)
|
|
|
(23.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total owned receivables
|
|
$
|
160,114
|
|
|
$
|
(1,922
|
)
|
|
|
(1.2
|
)%
|
|
$
|
13,347
|
|
|
|
9.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Mortgage Services purchases receivables originated by other
lenders referred to as correspondents. In December, the business
was aligned under common executive management with our Consumer
Lending business. In March 2007, we announced that Mortgage
Services was ceasing correspondent channel acquisitions of
receivables. Consumer Lending is a distinct business that
sources, underwrites and closes
|
35
HSBC
Finance Corporation
|
|
|
loans through a network of 1,396
branch offices located throughout the United States. The
Mortgage Services and Consumer Lending businesses comprise the
majority of our real estate secured portfolio as shown in the
following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases (decreases) from
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
March 31,
|
|
|
2006
|
|
|
2006
|
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Mortgage Services
|
|
$
|
44,674
|
|
|
$
|
(3,294
|
)
|
|
|
(6.9
|
)%
|
|
$
|
(1,784
|
)
|
|
|
(3.8
|
)%
|
Consumer Lending
|
|
|
47,924
|
|
|
|
1,698
|
|
|
|
3.7
|
|
|
|
7,994
|
|
|
|
20.0
|
|
Foreign and all other
|
|
|
3,731
|
|
|
|
164
|
|
|
|
4.6
|
|
|
|
627
|
|
|
|
20.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
$
|
96,329
|
|
|
$
|
(1,432
|
)
|
|
|
(1.5
|
)%
|
|
$
|
6,837
|
|
|
|
7.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) |
Personal non-credit card receivables are comprised of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases (decreases) from
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
March 31,
|
|
|
2006
|
|
|
2006
|
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Domestic personal non-credit card
|
|
$
|
13,871
|
|
|
$
|
108
|
|
|
|
.8
|
%
|
|
$
|
1,927
|
|
|
|
16.1
|
%
|
Union Plus personal non-credit card
|
|
|
213
|
|
|
|
(22
|
)
|
|
|
(9.4
|
)
|
|
|
(85
|
)
|
|
|
(28.5
|
)
|
Personal homeowner loans
|
|
|
4,181
|
|
|
|
(66
|
)
|
|
|
(1.6
|
)
|
|
|
(60
|
)
|
|
|
(1.4
|
)
|
Foreign personal non-credit card
|
|
|
2,936
|
|
|
|
(186
|
)
|
|
|
(6.0
|
)
|
|
|
(587
|
)
|
|
|
(16.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total personal non-credit card
|
|
$
|
21,201
|
|
|
$
|
(166
|
)
|
|
|
(.8
|
)%
|
|
$
|
1,195
|
|
|
|
6.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate secured receivables can be further analyzed as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases (decreases) from
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
March 31,
|
|
|
2006
|
|
|
2006
|
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Real estate secured:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed-end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
77,201
|
|
|
$
|
(700
|
)
|
|
|
(.9
|
)%
|
|
$
|
6,591
|
|
|
|
9.3
|
%
|
Second lien
|
|
|
14,756
|
|
|
|
(334
|
)
|
|
|
(2.2
|
)
|
|
|
561
|
|
|
|
4.0
|
|
Revolving:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
509
|
|
|
|
(47
|
)
|
|
|
(8.5
|
)
|
|
|
(79
|
)
|
|
|
(13.4
|
)
|
Second lien
|
|
|
3,863
|
|
|
|
(351
|
)
|
|
|
(8.3
|
)
|
|
|
(236
|
)
|
|
|
(5.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
$
|
96,329
|
|
|
$
|
(1,432
|
)
|
|
|
(1.5
|
)%
|
|
$
|
6,837
|
|
|
|
7.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
HSBC
Finance Corporation
The following table summarizes various real estate secured
receivables information for our Mortgage Services and Consumer
Lending businesses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007
|
|
|
December 31, 2006
|
|
|
March 31, 2006
|
|
|
|
Mortgage
|
|
|
Consumer
|
|
|
Mortgage
|
|
|
Consumer
|
|
|
Mortgage
|
|
|
Consumer
|
|
|
|
Services
|
|
|
Lending
|
|
|
Services
|
|
|
Lending
|
|
|
Services
|
|
|
Lending
|
|
|
|
|
|
(in millions)
|
|
|
Fixed rate
|
|
$
|
20,518
|
(1)
|
|
$
|
44,236
|
(2)
|
|
$
|
21,733
|
(1)
|
|
$
|
42,675
|
(2)
|
|
$
|
19,714
|
|
|
$
|
38,033
|
|
Adjustable rate
|
|
|
24,156
|
|
|
|
3,688
|
|
|
|
26,235
|
|
|
|
3,551
|
|
|
|
26,744
|
|
|
|
1,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
44,674
|
|
|
$
|
47,924
|
|
|
$
|
47,968
|
|
|
$
|
46,226
|
|
|
$
|
46,458
|
|
|
$
|
39,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
35,630
|
|
|
$
|
41,294
|
|
|
$
|
38,031
|
|
|
$
|
39,684
|
|
|
$
|
36,444
|
|
|
$
|
34,181
|
|
Second lien
|
|
|
9,044
|
|
|
|
6,630
|
|
|
|
9,937
|
|
|
|
6,542
|
|
|
|
10,014
|
|
|
|
5,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
44,674
|
|
|
$
|
47,924
|
|
|
$
|
47,968
|
|
|
$
|
46,226
|
|
|
$
|
46,458
|
|
|
$
|
39,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable rate
|
|
$
|
18,141
|
|
|
$
|
3,688
|
|
|
$
|
20,108
|
|
|
$
|
3,551
|
|
|
$
|
20,024
|
|
|
$
|
1,897
|
|
Interest only
|
|
|
6,015
|
|
|
|
-
|
|
|
|
6,127
|
|
|
|
-
|
|
|
|
6,720
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustable rate
|
|
$
|
24,156
|
|
|
$
|
3,688
|
|
|
$
|
26,235
|
|
|
$
|
3,551
|
|
|
$
|
26,744
|
|
|
$
|
1,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stated income
|
|
$
|
11,063
|
|
|
$
|
-
|
|
|
$
|
11,772
|
|
|
$
|
-
|
|
|
$
|
11,637
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes fixed rate interest-only loans of $48 million at
March 31, 2007 and $32 million at December 31,
2006.
|
|
(2)
|
Includes fixed rate interest-only loans of $54 million at
March 31, 2007 and $46 million at December 31,
2006.
|
At March 31, 2007, real estate secured loans originated and
acquired subsequent to December 31, 2004 by our Mortgage
Services business accounted for approximately 73 percent of
total Mortgage Services receivables in a first lien and
approximately 88 percent of total Mortgage Services
receivables in a second lien position. At December 31,
2006, real estate secured loans originated and acquired
subsequent to December 31, 2004 by our Mortgage Services
business accounted for approximately 70 percent of total
Mortgage Services receivables in a first lien and approximately
90 percent of total Mortgage Services receivables in a
second lien position.
Receivable increases (decreases) since March 31,
2006 Real estate secured receivables increased
significantly over the year-ago period driven by growth in our
branch business. Growth in our branch-based Consumer Lending
business improved due to higher sales volumes as we continue to
emphasize real estate secured loans, including a near-prime
mortgage product, as well as a decline in loan prepayments due
to the higher interest rate environment which resulted in lower
run-off rates. Also contributing to the increase was the
acquisition of the $2.5 billion Champion portfolio in
November 2006. Our Mortgage Services correspondent business
experienced growth through June 2006 as management continued to
focus on junior lien loans through portfolio acquisitions and
expanded sources for purchasing newly originated loans from flow
correspondents. In the second half of 2006, management revised
its business plan and reduced purchases of second lien and
selected higher risk products which has resulted in attrition in
the Mortgage Services portfolio. As previously discussed, in
March 2007, we announced our decision to discontinue
correspondent channel acquisitions by our Mortgage Services
business. However, our Decision One wholesale channel and our
Consumer Lending retail channel will continue. These actions,
combined with normal portfolio attrition will result in
significant reductions in the principal balance of our Mortgage
Services loan portfolio during 2007. We have also experienced
strong real estate secured growth in our foreign real estate
secured receivables as a result of our continuing Canadian
branch operation expansions.
Auto finance receivables increased over the year-ago period due
to organic growth principally in the near-prime portfolio as a
result of increases in newly originated loans acquired from our
dealer network and growth in the consumer direct loan program.
Additionally as compared to the year-ago period, we experienced
continued growth from the expansion of an auto finance program
in Canada. Credit card receivables reflect strong domestic
organic growth in our Union Privilege and non-prime portfolios
including Metris as well as continued growth in our Canadian
credit card receivables. Lower securitization levels also
contributed to the increase as compared to the
37
HSBC
Finance Corporation
year-ago period. Private label receivables increased as compared
to March 31, 2006 as a result of growth in our Canadian
business and changes in the foreign exchange rate since
March 31, 2006, partially offset by the termination of new
domestic retail sales contract originations in October 2006 and
lower retail sales volumes in the U.K. Personal non-credit card
receivables increased as a result of increased marketing,
including several large direct mail campaigns and changes in the
foreign exchange rate since March 31, 2006.
Receivable increases (decreases) since December 31,
2006 Real estate secured receivables have decreased
since December 31, 2006. As discussed above, actions taken
at our Mortgage Services business combined with normal portfolio
attrition, resulted in a decline in the overall portfolio
balance at our Mortgage Services business since
December 31, 2006. These decreases were partially offset by
real estate secured growth in our Consumer Lending business. In
addition, the decline in loan prepayments has continued during
the first quarter of 2007 which has resulted in lower run-off
rates for our real estate secured portfolio. Growth in our auto
finance portfolio reflects organic growth and increased volume.
The decrease in our credit card receivables reflects normal
seasonal run-off, partially offset by growth in our non-prime
portfolios including Metris. Private label receivables decreased
due to the termination of new domestic retail sales contract
originations in October 2006 partially offset by growth in our
U.K. private label portfolio. Personal non-credit card
receivables decreased primarily due to lower levels of foreign
personal non-credit card receivables.
Results
of Operations
Unless noted otherwise, the following discusses amounts reported
in our consolidated statement of income.
Net interest income The following table summarizes
net interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease)
|
|
Three months ended March 31,
|
|
2007
|
|
|
(1)
|
|
|
2006
|
|
|
(1)
|
|
|
Amount
|
|
|
%
|
|
|
|
|
Finance and other interest income
|
|
$
|
4,712
|
|
|
|
11.42
|
%
|
|
$
|
4,087
|
|
|
|
11.10
|
%
|
|
$
|
625
|
|
|
|
15.3
|
%
|
Interest expense
|
|
|
2,071
|
|
|
|
5.02
|
|
|
|
1,623
|
|
|
|
4.41
|
|
|
|
448
|
|
|
|
27.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
2,641
|
|
|
|
6.40
|
%
|
|
$
|
2,464
|
|
|
|
6.69
|
%
|
|
$
|
177
|
|
|
|
7.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
% Columns: comparison to average owned interest-earning assets.
|
The increase in net interest income during the quarter ended
March 31, 2007 was due to higher average receivables and
higher overall yields, partially offset by higher interest
expense. Overall yields increased due to increases in our rates
on fixed and variable rate products which reflected market
movements and various other repricing initiatives. Yields were
also favorably impacted by receivable mix with increased levels
of higher yielding products such as credit cards, due in part to
reduced securitization levels and higher levels of average
second lien real estate secured loans. Overall yield
improvements were partially offset by the impact of growth in
non-performing assets. The higher interest expense, which
contributed to lower net interest margin, was due to a larger
balance sheet and a significantly higher cost of funds due to a
rising interest rate environment. This was partially offset by
the adoption of SFAS No. 159, which resulted in
$76 million of realized losses on swaps which previously
were accounted for as effective hedges under SFAS No. 133
and reported as interest expense now being reported in other
revenues. In addition, as part of our overall liquidity
management strategy, we continue to extend the maturity of our
liability profile which results in higher interest expense. Our
purchase accounting fair value adjustments include both
amortization of fair value adjustments to our external debt
obligations and receivables. Amortization of purchase accounting
fair value adjustments increased net interest income by
$46 million during the quarter ended March 31, 2007
and $114 million during the quarter ended March 31,
2006.
Net interest margin was 6.40 percent during the three
months ended March 31, 2007 compared to 6.69 percent
in the year-ago period. Net interest margin decreased in the
first quarter of 2007 as the improvement in the overall yield on
38
HSBC
Finance Corporation
our receivable portfolio, as discussed above, was more than
offset by the higher funding costs. The following table shows
the impact of these items on net interest margin:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Net interest margin
March 31, 2006 and 2005, respectively
|
|
|
6.69
|
%
|
|
|
6.68
|
%
|
Impact to net interest margin
resulting from:
|
|
|
|
|
|
|
|
|
Receivable pricing
|
|
|
.20
|
|
|
|
.32
|
|
Receivable mix
|
|
|
.03
|
|
|
|
.08
|
|
Sale of U.K. card business in
December 2005
|
|
|
-
|
|
|
|
.04
|
|
Metris acquisition in December 2005
|
|
|
-
|
|
|
|
.36
|
|
Cost of funds change
|
|
|
(.61
|
)
|
|
|
(.67
|
)
|
Investment securities mix
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
.09
|
|
|
|
(.12
|
)
|
|
|
|
|
|
|
|
|
|
Net interest margin
March 31, 2007 and 2006, respectively
|
|
|
6.40
|
%
|
|
|
6.69
|
%
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease)
|
|
|
|
2007
|
|
|
2006
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Three months ended March 31,
|
|
$
|
1,700
|
|
|
$
|
866
|
|
|
$
|
834
|
|
|
|
96.3
|
%
|
Our provision for credit losses increased significantly during
the first quarter of 2007 compared to the year-ago quarter due
to higher levels of receivables due in part to lower
securitization levels, higher levels of delinquency driven by
growth, normal portfolio seasoning and the progression of
portions of our Mortgage Services portfolio purchased in 2005
and 2006 into various stages of delinquency and charge-off, a
higher mix of second lien product in Mortgage Services,
increased levels of personal bankruptcy filings as compared to
the exceptionally low filing levels experienced in the first
quarter of 2006 as a result of the new bankruptcy law in the
United States which went into effect in October 2005, and weaker
early stage performance in certain Consumer Lending real estate
secured loans originated since late 2005 consistent with the
industry trends for fixed rate mortgages.
Beginning in the second quarter of 2006, we began to experience
a deterioration in the performance of mortgage loans acquired in
2005 by our Mortgage Services business, particularly in the
second lien and portions of the first lien portfolio which,
later in the year, began to affect the same components of loans
originated in 2006 by this business, which resulted in higher
delinquency, charge-offs and loss estimates in these portfolios.
In the first quarter of 2007, we have seen higher levels of net
charge-off in these components as the higher delinquency we
began to experience in the prior year is now beginning to
migrate to charge-off and continuing increased delinquency
although the rate of increase in delinquency has slowed from
prior quarters. Our provision for credit losses in the first
quarter of 2007 also reflects higher loss estimates in second
lien loans purchased in 2004 through the third quarter of 2006
by our Consumer Lending business which increased credit loss
reserves $87 million during the quarter. At March 31,
2007, the outstanding principal balance of second lien loans
acquired by the Consumer Lending business during this period was
approximately $1.5 billion. Our provision for credit losses
in the first quarter also reflects the impact from a refinement
in the methodology used to calculate roll rate percentages at
our United Kingdom business which increased credit loss reserves
$117 million which we believe reflects a better estimate of
probable losses currently inherent in the loan portfolio.
Net charge-off dollars increased $560 million during the
three months ended March 31, 2007 as compared to the
year-ago quarter. This increase was driven by our Mortgage
Services business, as loans originated and acquired in
39
HSBC
Finance Corporation
2005 and early 2006 are progressing to charge-off as well as
higher receivable levels, portfolio seasoning in our credit card
portfolio and increased levels of personal bankruptcy filings as
compared to the exceptionally low filing levels experienced in
the first quarter of 2006 as a result of the new bankruptcy law
in the United States. The provision for credit losses may vary
from quarter to quarter depending on the product mix and credit
quality of loans in our portfolio. See Credit
Quality included in this MD&A for further discussion
of factors affecting the provision for credit losses.
Other revenues The following table summarizes
other revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease)
|
|
Three months ended March 31,
|
|
2007
|
|
|
2006
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Securitization related revenue
|
|
$
|
21
|
|
|
$
|
71
|
|
|
$
|
(50
|
)
|
|
|
(70.4
|
)%
|
Insurance revenue
|
|
|
230
|
|
|
|
244
|
|
|
|
(14
|
)
|
|
|
(5.7
|
)
|
Investment income
|
|
|
26
|
|
|
|
34
|
|
|
|
(8
|
)
|
|
|
(23.5
|
)
|
Derivative income (expense)
|
|
|
(7
|
)
|
|
|
57
|
|
|
|
(64
|
)
|
|
|
(100+
|
)
|
Gain (loss) on debt designated at
fair value and related derivatives
|
|
|
144
|
|
|
|
-
|
|
|
|
144
|
|
|
|
100.0
|
|
Fee income
|
|
|
573
|
|
|
|
382
|
|
|
|
191
|
|
|
|
50.0
|
|
Enhancement services revenue
|
|
|
148
|
|
|
|
123
|
|
|
|
25
|
|
|
|
20.3
|
|
Taxpayer financial services revenue
|
|
|
239
|
|
|
|
234
|
|
|
|
5
|
|
|
|
2.1
|
|
Gain on receivable sales to HSBC
affiliates
|
|
|
95
|
|
|
|
85
|
|
|
|
10
|
|
|
|
11.8
|
|
Servicing and other fees from HSBC
affiliates
|
|
|
133
|
|
|
|
118
|
|
|
|
15
|
|
|
|
12.7
|
|
Other income
|
|
|
40
|
|
|
|
73
|
|
|
|
(33
|
)
|
|
|
(45.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other revenues
|
|
$
|
1,642
|
|
|
$
|
1,421
|
|
|
$
|
221
|
|
|
|
15.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitization related revenue is the result of
the securitization of our receivables and includes the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease)
|
|
Three months ended March 31,
|
|
2007
|
|
|
2006
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net replenishment
gains(1)
|
|
$
|
8
|
|
|
$
|
15
|
|
|
$
|
(7
|
)
|
|
|
(46.7
|
)%
|
Servicing revenue and excess spread
|
|
|
13
|
|
|
|
56
|
|
|
|
(43
|
)
|
|
|
(76.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
21
|
|
|
$
|
71
|
|
|
$
|
(50
|
)
|
|
|
(70.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Net replenishment gains reflect inherent recourse provisions of
$5 million in the first quarter of 2007 and
$14 million in the first quarter of 2006.
|
The decline in securitization related revenue in the three
months ended March 31, 2007 was due to decreases in the
level of securitized receivables as a result of our decision in
the third quarter of 2004 to structure all new collateralized
funding transactions as secured financings. Because existing
public credit card transactions were structured as sales to
revolving trusts that require replenishments of receivables to
support previously issued securities, receivables continue to be
sold to these trusts until the revolving periods end, the last
of which is currently projected to occur in the fourth quarter
of 2007. While the termination of sale treatment on new
collateralized funding activity and the reduction of sales under
replenishment agreements reduced our reported net income, there
is no impact on cash received from operations.
Insurance revenue decreased in the first three
months of 2007 primarily due to lower insurance sales volumes in
our U.K. operations, including a planned phase out of the use of
a specific broker between January and April 2007. Insurance
revenue in our domestic operations was essentially flat as
increases in premiums in the quarter were more than offset by
the cancellation effective January 1, 2007 of a policy
whereby we pay for losses which exceed a threshold specified in
the policy.
40
HSBC
Finance Corporation
Investment income, which includes income on
securities available for sale in our insurance business and
realized gains and losses from the sale of securities, decreased
in the first three months of 2007 primarily due to lower average
investment levels.
Derivative income includes realized and unrealized
gains and losses on derivatives which do not qualify as
effective hedges under SFAS No. 133 as well as the
ineffectiveness on derivatives which are qualifying hedges.
Prior to the election of FVO reporting for certain fixed rate
debt, we accounted for the realized gains and losses on swaps
associated with this debt which qualified as effective hedges
under SFAS No. 133 in interest expense and any
ineffectiveness which resulted from changes in the fair value of
the swaps as compared to changes in the interest rate component
value of the debt was recorded as a component of derivative
income. With the adoption of SFAS No. 159 beginning in
January 2007, we eliminated hedge accounting on these swaps and
as a result, realized and unrealized gains and losses on these
derivatives are now included in Gain (loss) on debt
designated at fair value and related derivatives in the
consolidated statement of income which impacts the comparability
of derivative income between periods. Derivative income is
summarized in the table below:
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(in millions)
|
|
|
Net realized gains (losses)
|
|
$
|
(9
|
)
|
|
$
|
4
|
|
Mark-to-market
on derivatives which do not qualify as effective hedges
|
|
|
5
|
|
|
|
(10
|
)
|
Ineffectiveness
|
|
|
(3
|
)
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(7
|
)
|
|
$
|
57
|
|
|
|
|
|
|
|
|
|
|
Derivative income decreased in the three months ended
March 31, 2007 due to changes in the interest rate curve
and to the adoption of SFAS No. 159. Rising interest
rates during the fourth quarter of 2005 and the first half of
2006 caused the net outgoing payments on pay variable/received
fix economic hedges to increase during the three month period
ended March 31, 2007 as compared to the year-ago period.
Furthermore, as discussed above, the mark-to-market on the swaps
associated with debt we have now designated at fair value, as
well as the mark-to-market on the interest rate component of the
debt, which accounted for the majority of the ineffectiveness
recorded in the first quarter of 2006, is now reported in the
consolidated income statement as Gain (loss) on debt
designated at fair value and related derivatives.
Additionally, subsequent to March 31, 2006, we have
redesignated all remaining short cut hedge relationships as
hedges under the long-haul method of accounting. Redesignation
of swaps as effective hedges reduces the overall volatility of
reported mark-to-market income, although re-establishing such
swaps as long-haul hedges creates volatility as a result of
hedge ineffectiveness.
Net income volatility, whether based on changes in interest
rates for swaps which do not qualify for hedge accounting, the
ineffectiveness recorded on our qualifying hedges under the long
haul method of accounting or the impact from adopting SFAS No.
159, affects the comparability of our reported results between
periods. Accordingly, derivative income for the three months
ended March 31, 2007 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 a result of adopting
SFAS No. 159 effective January 1, 2007 as well as
the fair value changes and realized gains (losses) on the
related derivatives associated with debt designated at fair
value. Prior to the election of FVO reporting for certain fixed
rate debt, we accounted for the realized gains and losses on
swaps associated with this debt which qualified as effective
hedges under SFAS No. 133 in interest expense and any
ineffectiveness which resulted from changes in the value of the
swaps as compared to changes in the interest rate
41
HSBC
Finance Corporation
component value of the debt was recorded in derivative income.
These components are summarized in the table below:
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(in millions)
|
|
|
Mark-to-market
on debt designated at fair value:
|
|
|
|
|
|
|
|
|
Interest rate component
|
|
$
|
(142
|
)
|
|
$
|
-
|
|
Credit risk component
|
|
|
244
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total mark-to-market on debt
designated at fair value
|
|
|
102
|
|
|
|
-
|
|
Mark-to-market
on the related derivatives
|
|
|
118
|
|
|
|
-
|
|
Net realized gains (losses) on the
related derivatives
|
|
|
(76
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
144
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
The changes in the fair value of the debt associated with
interest rates and the change in the value of the related
derivatives reflects a decline in the LIBOR curve during the
first quarter of 2007. The changes in credit risk were due to a
general widening of financial sector, fixed income credit
spreads in combination with specific spread widening
attributable to our participation in the subprime mortgage
market.
Fee income, which includes revenues from fee-based
products such as credit cards, increased in the three months
ended March 31, 2007 due to higher credit card fees,
particularly relating to our non-prime credit card portfolios
due to higher levels of credit card receivables.
Enhancement services revenue, which consists of
ancillary credit card revenue from products such as Account
Secure Plus (debt protection) and Identity Protection Plan, was
higher in the three months ended March 31, 2007 primarily
as a result of higher levels of credit card receivables and
higher customer acceptance levels.
Taxpayer financial services (TFS)
revenue increased during the three months ended
March 31, 2007 due to increased loan volume in the 2007 tax
season.
Gain on receivable sales to HSBC affiliates includes
the daily sales of domestic private label receivable
originations (excluding retail sales contracts) and certain
credit card account originations to HSBC Bank USA. The increase
in the first quarter of 2007 reflects higher sales volumes of
domestic private label receivable and credit card account
originations as well as higher rates on our credit card account
originations.
Servicing and other fees from HSBC represents
revenue received under service level agreements under which we
service credit card and domestic private label receivables as
well as real estate secured and auto finance receivables for
HSBC affiliates. The increases primarily relate to higher levels
of receivables being serviced on behalf of HSBC Bank USA.
Other income decreased in the first quarter of 2007
primarily due to lower gains on sales of real estate secured
receivables by our Decision One mortgage operations.
42
HSBC
Finance Corporation
Costs
and expenses
The following table summarizes total costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(decrease)
|
|
Three months ended March 31,
|
|
2007
|
|
|
2006
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Salaries and employee benefits
|
|
$
|
609
|
|
|
$
|
581
|
|
|
$
|
28
|
|
|
|
4.8
|
%
|
Sales incentives
|
|
|
68
|
|
|
|
80
|
|
|
|
(12
|
)
|
|
|
(15.0
|
)
|
Occupancy and equipment expenses
|
|
|
78
|
|
|
|
83
|
|
|
|
(5
|
)
|
|
|
(6.0
|
)
|
Other marketing expenses
|
|
|
220
|
|
|
|
173
|
|
|
|
47
|
|
|
|
27.2
|
|
Other servicing and administrative
expenses
|
|
|
263
|
|
|
|
253
|
|
|
|
10
|
|
|
|
4.0
|
|
Support services from HSBC
affiliates
|
|
|
285
|
|
|
|
252
|
|
|
|
33
|
|
|
|
13.1
|
|
Amortization of intangibles
|
|
|
63
|
|
|
|
80
|
|
|
|
(17
|
)
|
|
|
(21.3
|
)
|
Policyholders benefits
|
|
|
124
|
|
|
|
118
|
|
|
|
6
|
|
|
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
$
|
1,710
|
|
|
$
|
1,620
|
|
|
$
|
90
|
|
|
|
5.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits increased in the
first quarter of 2007 as a result of additional staffing,
primarily in our Consumer Lending, Retail Services and Canadian
operations as well as in our corporate functions to support the
growth which has occurred since March 2006. Salary and employee
benefits for the first quarter of 2007 also includes employee
severance, including benefits for employees to be terminated as
part of the announcement in March 2007 to discontinue
correspondent channel acquisitions by our Mortgage Services
business. These increases were partially offset by lower salary
expense in our Credit Card Services operations due to the
completion of the integration of the Metris acquisition which
occurred in December 2005.
Sales incentives decreased in the first quarter of
2007 due to lower origination volumes in our Mortgage Services
business due to the decision to reduce purchases including
second lien and selected higher risk products in the second half
of 2006 as well as lower volumes in our Consumer Lending
business. As Mortgage Services terminates loan acquisitions,
sales incentives will decrease in the future.
Occupancy and equipment expenses decreased in the
first quarter of 2007 due to lower repairs and maintenance costs
as well as lower depreciation and utility expenses. These
decreases were partially offset by higher rental expenses.
Other marketing expenses includes payments for
advertising, direct mail programs and other marketing
expenditures. The increase in the first quarter of 2007 was
primarily due to increased domestic credit card and co-branded
credit card marketing expenses.
Other servicing and administrative
expenses increased during the three months ended
March 31, 2007 due to higher systems costs and lower
deferrals for origination costs due to lower volumes as well as
a valuation adjustment of $31 million to record our
investment in the U.K. Insurance Operations at the lower of cost
or market as a result of designating this operation as
Held for Sale. These increases were partially offset
by lower insurance operating expense in our domestic operations
and an increase in our estimate of interest receivable of
approximately $55 million relating to various contingent
tax items with the taxing authority.
Support services from HSBC affiliates includes
technology and other services charged to us by HSBC Technology
and Services (USA) Inc. (HTSU), which increased in
the first quarter of 2007 primarily due to growth.
Amortization of intangibles decreased in the first
quarter of 2007 as an individual contractual relationship became
fully amortized in the first quarter of 2006.
Policyholders benefits increased in the first
quarter of 2007 for both our domestic and U.K. operations. The
increase in our domestic operations was due to an increase in
claims reserves for expected losses. The increase in our U.K.
operations was due to higher claims in the current quarter,
partially offset by lower sales volumes.
43
HSBC
Finance Corporation
Efficiency ratio The following table summarizes our
owned basis efficiency ratio:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Three months ended March 31
|
|
|
38.13
|
%
|
|
|
39.87
|
%
|
Our efficiency ratio improved compared to the prior year
quarter. Excluding the $244 million change in fair value on
the fixed rate debt related to credit risk resulting from the
adoption of SFAS No. 159, the efficiency ratio for the
three months ended March 31, 2007 deteriorated from the
prior year quarter by 64 basis points. The deterioration
was a result of higher provision for credit losses and higher
costs and expenses to support receivable growth, partially
offset by higher net interest income and higher fee income and
enhancement services revenues due to higher levels of
receivables.
Segment
Results IFRS Management Basis
We have three reportable segments: Consumer, Credit Card
Services and International. Our Consumer segment consists of our
Consumer Lending, Mortgage Services, Retail Services and Auto
Finance businesses. Our Credit Card Services segment consists of
our domestic MasterCard, Visa and Discover credit card business.
Our International segment consists of our foreign operations in
the United Kingdom, Canada, the Republic of Ireland and prior to
November 9, 2006, our operations in Slovakia, the Czech
Republic and Hungary. The All Other caption includes our
Insurance and Taxpayer Financial Services and Commercial
businesses, each of which falls below the quantitative threshold
test under SFAS No. 131 for determining reportable
segments, as well as our corporate and treasury activities.
There have been no changes in the basis of our segmentation or
any changes in the measurement of segment profit as compared
with the presentation in our 2006
Form 10-K.
Our segment results are presented on an IFRS Management Basis (a
non-U.S. GAAP
financial measure) as operating results are monitored and
reviewed, trends are evaluated and decisions about allocating
resources such as employees are made almost exclusively on an
IFRS Management Basis. IFRS Management Basis results are IFRSs
results which assume that the private label and real estate
secured receivables transferred to HSBC Bank USA have not been
sold and remain on our balance sheet. Operations are monitored
and trends are evaluated on an IFRS Management Basis because the
customer loan sales to HSBC Bank USA were conducted primarily to
appropriately fund prime customer loans within HSBC and such
customer loans continue to be managed and serviced by us without
regard to ownership. However, we continue to monitor capital
adequacy, establish dividend policy and report to regulatory
agencies on a U.S. GAAP basis. A summary of the significant
differences between U.S. GAAP and IFRSs as they impact our
results are summarized in Note 11, Business
Segments.
Consumer Segment The following table
summarizes the IFRS Management Basis results for our Consumer
segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease)
|
|
Three months ended March 31
|
|
2007
|
|
|
2006
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net income
|
|
$
|
238
|
|
|
$
|
719
|
|
|
$
|
(481
|
)
|
|
|
(66.9
|
)%
|
Net interest income
|
|
|
2,158
|
|
|
|
2,182
|
|
|
|
(24
|
)
|
|
|
(1.1
|
)
|
Other operating income
|
|
|
192
|
|
|
|
238
|
|
|
|
(46
|
)
|
|
|
(19.3
|
)
|
Loan impairment charges
|
|
|
1,220
|
|
|
|
550
|
|
|
|
670
|
|
|
|
100.0+
|
|
Operating expenses
|
|
|
759
|
|
|
|
737
|
|
|
|
22
|
|
|
|
3.0
|
|
Intersegment revenues
|
|
|
58
|
|
|
|
57
|
|
|
|
1
|
|
|
|
1.8
|
|
Customer loans
|
|
|
142,407
|
|
|
|
134,132
|
|
|
|
8,275
|
|
|
|
6.2
|
|
Assets
|
|
|
142,182
|
|
|
|
135,874
|
|
|
|
6,308
|
|
|
|
4.6
|
|
Net interest margin, annualized
|
|
|
6.00
|
%
|
|
|
6.62
|
%
|
|
|
-
|
|
|
|
-
|
|
Return on average assets
|
|
|
.66
|
|
|
|
2.15
|
|
|
|
-
|
|
|
|
-
|
|
44
HSBC
Finance Corporation
Our Consumer segment reported lower net income in the first
quarter of 2007 due to higher loan impairment charges, lower net
interest income, lower other operating income and higher
operating expenses.
Loan impairment charges for the Consumer segment increased
significantly during the first quarter of 2007 as compared to
the year-ago quarter. The increase in loan impairment charges
was driven by the progression of mortgage loans acquired in 2005
and 2006 by our Mortgage Services business, particularly in the
second lien and portions of the first lien portfolios, to
various stages of delinquency and to charge-off. Also
contributing to the increase was higher loss estimates at our
Consumer Lending business due to receivable growth, portfolio
seasoning as well as higher loss estimates in second lien loans
purchased in 2004 through the third quarter of 2006 which
increased credit loss reserves $87 million during the
quarter. At March 31, 2007, the outstanding principal
balance of second lien loans acquired by the Consumer Lending
business during this period was approximately $1.5 billion.
Loan impairment charges during the first quarter of 2006
benefited from historically low levels of bankruptcy filings
following the enactment of new bankruptcy law in the United
States which became effective in the fourth quarter of 2005. In
the first quarter of 2007, we increased loss reserve levels as
the provision for credit losses was greater than net charge-offs
by $139 million.
Net interest income decreased during the first quarter of 2007
as higher finance and other interest income primarily due to
higher average customer loans and higher overall yields was more
than offset by higher interest expense. Overall yields reflect
growth in real estate secured customer loans at current market
rates and a greater mix of higher yielding second lien real
estate secured loans and personal non-credit card customer loans
due to growth. The higher interest expense was due to a larger
balance sheet and a significantly higher cost of funds due to a
rising interest rate environment. The decrease in net interest
margin was a result of the cost of funds increasing more rapidly
than our ability to increase receivable yields. The decrease in
other operating income in the three months ended March 31,
2007 was primarily due to lower gains on sales of real estate
secured receivables by our Decision One mortgage operations,
partially offset by higher late and overlimit fees. Operating
expenses were higher in the first quarter of 2007 primarily due
to lower deferred loan origination costs as mortgage origination
volumes have declined.
Customer loans for our Consumer segment can be further analyzed
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases (decreases) from
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
March 31,
|
|
|
2006
|
|
|
2006
|
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Real estate secured
|
|
$
|
94,159
|
|
|
$
|
(1,212
|
)
|
|
|
(1.3
|
)%
|
|
$
|
5,139
|
|
|
|
5.8
|
%
|
Auto finance
|
|
|
12,557
|
|
|
|
90
|
|
|
|
.7
|
|
|
|
732
|
|
|
|
6.2
|
|
Private label, including
co-branded cards
|
|
|
17,477
|
|
|
|
(979
|
)
|
|
|
(5.3
|
)
|
|
|
1,158
|
|
|
|
7.1
|
|
Personal non-credit card
|
|
|
18,214
|
|
|
|
(65
|
)
|
|
|
(.4
|
)
|
|
|
1,246
|
|
|
|
7.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total customer loans
|
|
$
|
142,407
|
|
|
$
|
(2,166
|
)
|
|
|
(1.5
|
)%
|
|
$
|
8,275
|
|
|
|
6.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Real estate secured receivables are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases (decreases) from
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
March 31,
|
|
|
2006
|
|
|
2006
|
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Mortgage Services
|
|
$
|
46,555
|
|
|
$
|
(2,917
|
)
|
|
|
(5.9
|
)%
|
|
$
|
(2,775
|
)
|
|
|
(5.6
|
)%
|
Consumer Lending
|
|
|
47,604
|
|
|
|
1,705
|
|
|
|
3.7
|
|
|
|
7,914
|
|
|
|
19.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
$
|
94,159
|
|
|
$
|
(1,212
|
)
|
|
|
(1.3
|
)%
|
|
$
|
5,139
|
|
|
|
5.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer loans decreased 2 percent at March 31, 2007
as compared to $144.6 billion at December 31, 2006.
Real estate secured loans decreased at March 31, 2007 as
compared to the prior quarter. The decrease in real estate
45
HSBC
Finance Corporation
secured loans was primarily at our Mortgage Services business as
we have continued to tighten underwriting standards for loans
purchased from correspondents, which included the reduction of
purchases of second lien and selected higher risk segments.
Additionally, in March 2007, we announced our decision to
discontinue all loan acquisitions by our Mortgage Services
business. Although we will continue the current operating
strategies for our Decision One wholesale channel, this will
result in significant reductions in our Mortgage Services real
estate portfolio throughout 2007 and in subsequent years. The
decreases in real estate secured loans at our Mortgage Services
business were partially offset by increases in the real estate
secured portfolio at our Consumer Lending business as a result
of sales volumes in excess of run-off. In addition, the decline
in loan prepayments has continued during the first quarter of
2007 which has resulted in lower run-off rates for our real
estate secured portfolio. Growth in our auto finance portfolio
reflects organic growth and increased volume. The decrease in
our private label portfolio is due to normal seasonal run-off,
partially offset by growth in the co-branded card portfolio
launched by our Retail Services operations during 2006.
Compared to March 31, 2006, customer loans increased
6 percent. Real estate growth in 2006 was strong as a
result of strong growth in our branch-based Consumer Lending
business. In addition, our correspondent business experienced
growth through June 2006 as management continued to focus on
junior lien loans and expanded our sources for purchasing newly
originated loans from flow correspondents. However, as
previously discussed above, in the second half of 2006,
management revised its business plan and began tightening
underwriting standards on loans purchased from correspondents
including reducing purchases of second lien and selected higher
risk segments. Growth in our branch-based Consumer Lending
business reflects strong sales volumes as we continue to
emphasize real estate secured loans, including a near-prime
mortgage product. Real estate secured customer loans also
increased as a result of the acquisition of the
$2.5 billion Champion portfolio in November 2006. In
addition, a decline in loan prepayments in 2006 resulted in
lower run-off rates for our real estate secured portfolio which
also contributed to overall growth. Our Auto Finance business
also reported organic growth, principally in the near-prime
portfolio, from increased volume in both the dealer network and
the consumer direct loan program. The private label portfolio
increased from the year-ago quarter due to organic growth and
the co-branded card portfolio launched by our Retail Services
operations during 2006. Growth in our personal non-credit card
portfolio was the result of increased marketing, including
several large direct mail campaigns.
ROA was .66 percent for the first quarter of 2007, compared
to 2.15 percent in the year-ago period. The decrease in the
ROA ratio in the first quarter of 2007 is primarily due to the
increase in loan impairment charges as discussed above, as well
as higher average assets.
Credit Card Services Segment The following
table summarizes the IFRS Management Basis results for our
Credit Card Services segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease)
|
|
Three months ended March 31
|
|
2007
|
|
|
2006
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net income
|
|
$
|
389
|
|
|
$
|
332
|
|
|
$
|
57
|
|
|
|
17.2
|
%
|
Net interest income
|
|
|
821
|
|
|
|
732
|
|
|
|
89
|
|
|
|
12.2
|
|
Other operating income
|
|
|
698
|
|
|
|
478
|
|
|
|
220
|
|
|
|
46.0
|
|
Loan impairment charges
|
|
|
420
|
|
|
|
249
|
|
|
|
171
|
|
|
|
68.7
|
|
Operating expenses
|
|
|
483
|
|
|
|
434
|
|
|
|
49
|
|
|
|
11.3
|
|
Intersegment revenues
|
|
|
5
|
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
Customer loans
|
|
|
27,843
|
|
|
|
24,874
|
|
|
|
2,969
|
|
|
|
11.9
|
|
Assets
|
|
|
27,793
|
|
|
|
25,477
|
|
|
|
2,316
|
|
|
|
9.1
|
|
Net interest margin, annualized
|
|
|
11.74
|
%
|
|
|
11.40
|
%
|
|
|
-
|
|
|
|
-
|
|
Return on average assets
|
|
|
5.54
|
|
|
|
4.99
|
|
|
|
-
|
|
|
|
-
|
|
46
HSBC
Finance Corporation
Our Credit Card Services segment reported higher net income in
the first quarter of 2007. The increase in net income was
primarily due to higher net interest income and higher other
operating income, partially offset by higher loan impairment
charges and higher operating expenses.
Net interest income increased in the three months ended
March 31, 2007 largely as a result of higher overall yields
due in part to higher levels of non-prime customer loans,
partially offset by higher interest expense. Net interest margin
increased primarily due to higher overall yields due to
increases in non-prime customer loans, higher pricing on
variable rate products and other repricing initiatives. These
increases were partially offset by a higher cost of funds.
Although our non-prime customer loans tend to have smaller
balances, they generate higher returns both in terms of net
interest margin and fee income.
Increases in other operating income resulted from portfolio
growth which resulted in higher late fees, higher overlimit fees
and higher enhancement services revenue from products such as
Account Secure Plus (debt waiver) and Identity Protection Plan.
Higher operating expenses were also incurred to support
receivable growth including increases in marketing expenses. The
increase in marketing expenses in the first quarter of 2007 was
due to increased investment in our non-prime portfolio.
Loan impairment charges were higher in the first quarter of 2007
due to higher net charge-off reflecting receivable growth and
portfolio seasoning as well as an increase in bankruptcy filings
as compared to the year-ago period which benefited from reduced
levels of personal bankruptcy filings following the enactment of
new bankruptcy law in the United States which went into effect
in October 2005. We reduced loss reserves by recording loss
provision less than net charge-off of $27 million in the
first quarter of 2007 as overall consumer loans outstanding
declined due to normal seasonal run-off.
Customer loans decreased 1 percent to $27.8 billion
compared to $28.2 billion at December 31, 2006. The
decrease during the quarter was due primarily to normal seasonal
run-off, partially offset by growth in our non-prime portfolio,
including Metris. Compared to March 31, 2006, customer
loans increased 12 percent. The increase reflects strong
domestic organic growth in our Union Privilege as well as other
non-prime portfolios, including Metris.
The increase in ROA in the first quarter of 2007 is primarily
due to the higher net income as discussed above, partially
offset by higher average assets.
International Segment The following table
summarizes the IFRS Management Basis results for our
International segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(decrease)
|
|
Three months ended March 31
|
|
2007
|
|
|
2006
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net (loss) income
|
|
$
|
(90
|
)
|
|
$
|
22
|
|
|
$
|
(112
|
)
|
|
|
(100.0+
|
)%
|
Net interest income
|
|
|
204
|
|
|
|
210
|
|
|
|
(6
|
)
|
|
|
(2.9
|
)
|
Other operating income
|
|
|
47
|
|
|
|
41
|
|
|
|
6
|
|
|
|
14.6
|
|
Loan impairment charges
|
|
|
248
|
|
|
|
104
|
|
|
|
144
|
|
|
|
100.0+
|
|
Operating expenses
|
|
|
128
|
|
|
|
112
|
|
|
|
16
|
|
|
|
14.3
|
|
Intersegment revenues
|
|
|
5
|
|
|
|
7
|
|
|
|
(2
|
)
|
|
|
(28.6
|
)
|
Customer loans
|
|
|
9,506
|
|
|
|
9,176
|
|
|
|
330
|
|
|
|
3.6
|
|
Assets
|
|
|
10,238
|
|
|
|
10,900
|
|
|
|
(662
|
)
|
|
|
(6.1
|
)
|
Net interest margin, annualized
|
|
|
8.20
|
%
|
|
|
8.52
|
%
|
|
|
-
|
|
|
|
-
|
|
Return on average assets
|
|
|
(3.43
|
)
|
|
|
.79
|
|
|
|
-
|
|
|
|
-
|
|
Our International segment reported lower net income in the first
quarter of 2007 primarily due to higher loan impairment charges,
higher operating expenses and lower net interest income,
partially offset by higher other
47
HSBC
Finance Corporation
operating income. Applying constant currency rates, which uses
the average rate of exchange for the 2006 quarter to translate
current period net income, the net loss in the first quarter of
2007 would have been lower by $13 million.
Loan impairment charges increased in the first quarter of 2007
primarily due to a refinement in the methodology used to
calculate roll rate percentages by our U. K. operations which
increased credit loss reserves $117 million and which we
believe reflects a better estimate of probable losses currently
inherent in the loan portfolio. Despite the challenging
financial circumstances faced by some of our customers in the
U.K., the performance of our U.K. loan portfolios as measured by
delinquency and charge-offs was steady during the first quarter
of 2007. Loss reserves at our Canadian operations increased
$3 million due to receivable growth.
Net interest income decreased during the first quarter of 2007
primarily as a result of lower receivable levels in our U.K.
subsidiary and higher interest expense. The lower receivable
levels were due to decreased sales volumes in the U.K. resulting
from a continuing challenging credit environment in the U.K. as
well as the sale of our European Operations in November 2006.
This was partially offset by higher net interest income in our
Canadian operations due to growth in customer loans. Net
interest margin decreased in the first quarter of 2007 primarily
due to lower yields on customer loans due to a focus over the
last six months on secured lending, which have lower yields,
rather than unsecured lending, the impact of the sale of the
European Operations in November 2006 as well as a higher cost of
funds.
Other operating income increased in the first quarter of 2007,
due to higher credit card fee income in our Canadian operations,
partially offset by lower insurance revenues in the U.K. due to
lower sales volumes and a planned phase out of the use of a
specific broker between January and April 2007. Operating
expenses increased to support receivable growth.
Customer loans for our International segment can be further
analyzed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases (decreases) from
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
March 31,
|
|
|
2006
|
|
|
2006
|
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Real estate secured
|
|
$
|
3,717
|
|
|
$
|
165
|
|
|
|
4.6
|
%
|
|
$
|
624
|
|
|
|
20.2
|
%
|
Auto finance
|
|
|
233
|
|
|
|
(13
|
)
|
|
|
(5.3
|
)
|
|
|
69
|
|
|
|
42.1
|
|
Credit card
|
|
|
2,255
|
|
|
|
25
|
|
|
|
1.1
|
|
|
|
188
|
|
|
|
9.1
|
|
Private label
|
|
|
303
|
|
|
|
(7
|
)
|
|
|
(2.3
|
)
|
|
|
30
|
|
|
|
11.0
|
|
Personal non-credit card
|
|
|
2,998
|
|
|
|
(184
|
)
|
|
|
(5.8
|
)
|
|
|
(581
|
)
|
|
|
(16.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total customer loans
|
|
$
|
9,506
|
|
|
$
|
(14
|
)
|
|
|
(.1
|
)%
|
|
$
|
330
|
|
|
|
3.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer loans were $9.5 billion at March 31, 2007 and
December 31, 2006. Increases in both the secured and
unsecured portfolios of our Canadian operations were offset by
lower personal non-credit card loans in our U.K. operations.
Applying constant currency rates, customer loans at
March 31, 2007 would not have been materially different
using December 31, 2006 exchange rates.
Compared to March 31, 2006, receivables increased
4 percent primarily as a result of foreign exchange
impacts. Applying constant currency rates, customer loans at
March 31, 2007 would have been approximately
$670 million lower. Excluding the positive foreign exchange
impacts, lower customer loans in our U.K. operations were
partially offset by higher customer loans in our Canadian
business. Our U.K. based private label loans decreased due to
continuing lower retail sales volume following a slow down in
retail consumer spending. Lower personal non-credit card loans
in the U.K. reflect lower volumes as the U.K. branch network has
placed a greater emphasis on secured lending. Additionally,
receivable levels at March 31, 2007 reflect the sale in
November 2006 of $203 million of customer loans related to
our European operations. The increase in our Canadian business
is due to growth in both the secured and unsecured customer loan
portfolios of our Canadian operations.
48
HSBC
Finance Corporation
ROA was (3.43) percent for the first quarter of 2007 compared to
.79 percent in the year-ago period. The decrease in the ROA
ratio in the first quarter of 2007 is primarily due to the
increase in loan impairment charges as discussed above,
partially offset by lower average assets.
As part of our continuing evaluation of strategic alternatives
with respect to our U.K. operations, we have entered into a
non-binding agreement to sell the capital stock of our U.K.
Insurance Operations to a third party for cash. The sales price
will be determined, in part, based on the actual net book value
of the assets sold at the time the sale is closed which is
anticipated in the third quarter of 2007. The agreement also
provides for the purchaser to distribute insurance products
through our U.K. branch network for which we will receive
commission revenue. The sale is subject to satisfactory
completion of final due diligence, the execution of a definitive
agreement, and any regulatory approvals that may be required. At
March 31, 2007, we have classified the U.K. Insurance
Operations as Held for Sale which included
$470 million of assets and liabilities of $236 million
within the International segment. After taking into
consideration the goodwill allocated to the U.K. Insurance
Operations of $79 million, which is included in the
All Other caption within our segment disclosures,
the carrying value of the U.K. Insurance Operations was higher
than the estimated purchase price based on the March 31,
2007 net book value. The adjustment of $37 million to
record our investment in these operations at the lower of cost
or market has been recorded in the All Other
caption. We continue to evaluate the scope of our other U.K.
operations.
Credit
Quality
Credit
Loss Reserves
We maintain credit loss reserves to cover probable losses of
principal, interest and fees, including late, overlimit and
annual fees. Credit loss reserves are based on a range of
estimates and are intended to be adequate but not excessive. We
estimate probable losses for consumer receivables using a roll
rate migration analysis that estimates the likelihood that a
loan will progress through the various stages of delinquency, or
buckets, and ultimately charge-off. This analysis considers
delinquency status, loss experience and severity and takes into
account whether loans are in bankruptcy, have been restructured
or rewritten, or are subject to forbearance, an external debt
management plan, hardship, modification, extension or deferment.
Our credit loss reserves also take into consideration the loss
severity expected based on the underlying collateral, if any,
for the loan in the event of default. Delinquency status may be
affected by customer account management policies and practices,
such as the restructure of accounts, forbearance agreements,
extended payment plans, modification arrangements, external debt
management programs, loan rewrites and deferments. If customer
account management policies, or changes thereto, shift loans
from a higher delinquency bucket to a
lower delinquency bucket, this will be reflected in
our roll rate statistics. To the extent that restructured
accounts have a greater propensity to roll to higher delinquency
buckets, this will be captured in the roll rates. Since the loss
reserve is computed based on the composite of all of these
calculations, this increase in roll rate will be applied to
receivables in all respective delinquency buckets, which will
increase the overall reserve level. In addition, loss reserves
on consumer receivables are maintained to reflect our judgment
of portfolio risk factors that may not be fully reflected in the
statistical roll rate calculation. Risk factors considered in
establishing loss reserves on consumer receivables include
recent growth, product mix, bankruptcy trends, geographic
concentrations, loan product features such as adjustable rate
loans, economic conditions, such as national and local trends in
housing markets and interest rates, portfolio seasoning, account
management policies and practices, current levels of charge-offs
and delinquencies, changes in laws and regulations and other
items which can affect consumer payment patterns on outstanding
receivables, such as natural disasters and global pandemics.
While our credit loss reserves are available to absorb losses in
the entire portfolio, we specifically consider the credit
quality and other risk factors for each of our products. We
recognize the different inherent loss characteristics in each of
our products as well as customer account management policies and
practices and risk management/collection practices. Charge-off
policies are also considered when establishing loss reserve
requirements to ensure the appropriate reserves exist for
products with longer charge-off periods. We also consider key
ratios such as reserves to nonperforming loans, reserves as a
percentage of net charge-offs and number of months charge-off
coverage in developing our loss reserve estimate. Loss reserve
estimates are reviewed periodically and adjustments are reported
in earnings when they become known. As these estimates are
influenced by factors outside of our
49
HSBC
Finance Corporation
control, such as consumer payment patterns and economic
conditions, there is uncertainty inherent in these estimates,
making it reasonably possible that they could change.
The following table summarizes credit loss reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Owned credit loss reserves
|
|
$
|
6,798
|
|
|
$
|
6,587
|
|
|
$
|
4,468
|
|
Reserves as a percent of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
4.25
|
%
|
|
|
4.07
|
%
|
|
|
3.04
|
%
|
Net
charge-offs(1)
|
|
|
114.2
|
|
|
|
119.9
|
|
|
|
120.4
|
|
Nonperforming loans
|
|
|
116.1
|
|
|
|
114.8
|
|
|
|
103.3
|
|
|
|
(1) |
Quarter-to-date,
annualized.
|
Credit loss reserve levels at March 31, 2007 increased as
compared to December 31, 2006 as we recorded loss provision
in excess of net charge-offs of $212 million during the
three months ended March 31, 2007. This increase was
largely due to higher reserve requirements in our Consumer
Lending and United Kingdom businesses. At our Consumer Lending
business, we recorded loss provision in excess of net
charge-offs of $115 million primarily due to higher loss
estimates in second lien loans purchased from 2004 through the
third quarter of 2006. At March 31, 2007, the outstanding
principal balance of second lien loans acquired by the Consumer
Lending business during this period was approximately
$1.5 billion. Our United Kingdom business recorded loss
provision in excess of net charge-off of $106 million which
was largely attributable to a refinement in the methodology used
to calculate roll rate percentages which we believe reflects a
better estimate of probable loss currently inherent in the loan
portfolio. We recorded loss provision in excess of net
charge-offs at our Mortgage Services business of
$55 million primarily due to continued higher delinquency
levels as previously discussed although the rate of increase has
slowed from prior quarters. These increases were partially
offset by the impact of normal seasonal run-off in our credit
card portfolio as well as seasonal improvements in our
collection activities in the first quarter as customers across
our businesses use their tax refunds to reduce their outstanding
balances.
Credit loss reserves at March 31, 2007 increased
significantly as compared to March 31, 2006 primarily as a
result of the higher delinquency and loss estimates at our
Mortgage Services business. In addition, the higher credit loss
reserve levels are the result of higher levels of receivables
due in part to lower securitization levels, higher dollars of
delinquency in our other businesses driven by growth and
portfolio seasoning, weakening early stage performance
consistent with the industry trend in certain Consumer Lending
real estate secured loans originated since late 2005 and
increased levels of personal bankruptcy filings as compared to
the exceptionally low levels experienced in the first quarter of
2006 following enactment of new bankruptcy legislation in the
United States.
As previously discussed, we are experiencing higher delinquency
and loss estimates at our Mortgage Services business as compared
to the year-ago period. Credit loss reserve levels of
$2.1 billion at our Mortgage Services business at
March 31, 2007, which are consistent with our credit loss
reserve levels at December 31, 2006, reflect our best
estimate of losses in the portfolio. In establishing these
reserve levels we considered the severity of losses expected to
be incurred, particularly in our second lien portfolio, above
our historical experience given the current housing market
trends in the United States. We also considered the ability of
borrowers to repay their first lien adjustable rate mortgage
loans at higher contractual reset rates given increases in
interest rates by the Federal Reserve Bank from June 2004
through June 2006, as well as their ability to repay any
underlying second lien mortgage outstanding. Because first lien
adjustable rate mortgage loans are generally well secured,
ultimate losses associated with such loans are dependent to a
large extent on the status of the housing market and interest
rate environment. Therefore, although it is probable that
incremental losses will occur as a result of rate resets on
first lien adjustable rate mortgage loans, such losses are
estimable and, therefore, included in our credit loss reserves
only in situations where the payment has either already reset or
will reset in the near term. A significant portion of the
Mortgage Services second lien mortgages are subordinate to a
first lien adjustable rate loan. For customers with second lien
mortgage loans that are subordinate to a first lien adjustable
rate mortgage loan, the probability of repayment of the second
lien
50
HSBC
Finance Corporation
mortgage loan is significantly reduced. The impact of future
changes, if any, in the housing market will not have a
significant impact on the ultimate loss expected to be incurred
since these loans, based on history and other factors, are
expected to behave like unsecured loans. As a result, expected
losses for these second lien loans held in our Mortgage Services
portfolio are included in our credit loss reserve levels at
March 31, 2007.
Reserves as a percentage of receivables at March 31, 2007
were higher than at March 31, 2006 and December 31,
2006 due to the impact of additional reserve requirements as
discussed above and, compared to December 31, 2006, lower
receivable levels. Reserves as a percentage of net charge-offs
decreased as compared to March 31, 2006 as the higher net
charge-offs in our Credit Card Services and Mortgage Services
business in the first quarter of 2007 more than offset the
increase in reserves, primarily at our Mortgage Services
business. The increase in charge-offs in our Credit Card
Services business is due to increased levels of personal
bankruptcy filings as compared to the exceptionally low levels
experienced in the first quarter of 2006 following enactment of
the new bankruptcy law in the United States. Compared to
December 31, 2006, reserves as a percentage of net
charge-offs decreased slightly as charge-offs increased more
rapidly than reserve levels during the quarter. Reserves as a
percentage of nonperforming loans increased as compared to both
March 31, 2006 and December 31, 2006 as reserve levels
grew more rapidly than nonperforming loans primarily due to the
higher reserve requirements in our Consumer Lending and United
Kingdom businesses as previously discussed.
Delinquency
The following table summarizes two-months-and-over contractual
delinquency (as a percent of consumer receivables):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
|
|
Real estate
secured(1)
|
|
|
3.73
|
%
|
|
|
3.54
|
%
|
|
|
2.46
|
%
|
Auto finance
|
|
|
2.32
|
|
|
|
3.18
|
|
|
|
2.17
|
|
Credit card
|
|
|
4.53
|
|
|
|
4.57
|
|
|
|
4.35
|
|
Private label
|
|
|
5.27
|
|
|
|
5.31
|
|
|
|
5.50
|
|
Personal non-credit card
|
|
|
10.21
|
|
|
|
10.17
|
|
|
|
8.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
4.64
|
%
|
|
|
4.59
|
%
|
|
|
3.66
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Real estate secured two-months-and-over contractual delinquency
(as a percent of consumer receivables) are comprised of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
|
|
Mortgage Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
4.98
|
%
|
|
|
4.50
|
%
|
|
|
2.94
|
%
|
Second lien
|
|
|
6.69
|
|
|
|
5.74
|
|
|
|
1.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mortgage Services
|
|
|
5.33
|
|
|
|
4.75
|
|
|
|
2.70
|
|
Consumer Lending:
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
2.01
|
|
|
|
2.07
|
|
|
|
1.87
|
|
Second lien
|
|
|
3.32
|
|
|
|
3.06
|
|
|
|
2.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consumer Lending
|
|
|
2.20
|
|
|
|
2.21
|
|
|
|
1.99
|
|
Foreign and all other:
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
1.65
|
|
|
|
1.58
|
|
|
|
1.77
|
|
Second lien
|
|
|
5.07
|
|
|
|
5.38
|
|
|
|
5.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Foreign and all other
|
|
|
4.35
|
|
|
|
4.59
|
|
|
|
4.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
|
3.73
|
%
|
|
|
3.54
|
%
|
|
|
2.46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total delinquency increased 5 basis points, compared to the
prior quarter. The increase was due to higher real estate
secured delinquency levels primarily at our Mortgage Services
business as previously discussed, partially offset by lower
delinquency levels at our Auto Finance business.
Two-months-and-over contractual delinquency as a
51
HSBC
Finance Corporation
percentage of consumer receivables was broadly flat in the
quarter across all our other products which included seasonal
improvements in our collection activities in the first quarter
as customers use their tax refunds to reduce their outstanding
balances. The decrease in our auto finance portfolio ratio
reflects seasonal improvements in collection activities as well
as the impact of the change in the charge-off policy in the
fourth quarter of 2006 as accounts are now charging off sooner.
The increase in delinquency in our personal non-credit card
portfolio ratio reflects maturation of a growing domestic
portfolio as well as slight deterioration of certain customer
groups in our domestic portfolio. Dollars of delinquency
decreased slightly compared to the prior quarter as increases in
delinquency in our real estate secured portfolios were more than
offset by decreases in other products, particularly in our auto
finance portfolio, as discussed above.
Compared to the year-ago period, total delinquency increased
98 basis points largely due to higher real estate secured
delinquency levels primarily at our Mortgage Services business
as previously discussed. With the exception of our private label
portfolio, all products reported higher delinquency levels due
to higher receivable levels. Additionally, the increase in the
Consumer Lending real estate delinquency ratio reflects the
addition of the Champion portfolio. While the Champion portfolio
carries higher delinquency, its low
loan-to-value
ratios are expected to result in lower charge-offs compared to
the existing portfolio. The increase in our auto finance and
credit card delinquency ratios is due to the seasoning of a
growing portfolio. The increase in the credit card delinquency
levels is also due to higher bankruptcy levels. The decrease in
our private label portfolio (which primarily consists of our
foreign private label portfolio and domestic retail sales
contracts that were not sold to HSBC Bank USA in December
2004) reflects receivable growth in our foreign portfolios.
The increase in delinquency in our personal non-credit card
portfolio ratio reflects maturation of a growing domestic
portfolio as well as deterioration of certain customer groups in
our domestic portfolio.
Net
Charge-offs of Consumer Receivables
The following table summarizes net charge-offs of consumer
receivables (as a percent, annualized, of average consumer
receivables):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
|
|
Real estate
secured(1)
|
|
|
1.74
|
%
|
|
|
1.28
|
%
|
|
|
.75
|
%
|
Auto
finance(2)
|
|
|
3.64
|
|
|
|
4.97
|
|
|
|
3.50
|
|
Credit card
|
|
|
7.08
|
|
|
|
6.79
|
|
|
|
4.00
|
|
Private
label(2)
|
|
|
5.87
|
|
|
|
6.68
|
|
|
|
5.62
|
|
Personal non-credit
card(2)
|
|
|
7.96
|
|
|
|
7.92
|
|
|
|
7.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(2)
|
|
|
3.69
|
%
|
|
|
3.46
|
%
|
|
|
2.58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate secured net
charge-offs and REO expense as a percent of average real estate
secured receivables
|
|
|
1.86
|
%
|
|
|
1.68
|
%
|
|
|
.89
|
%
|
|
|
(1) |
Real estate secured net charge-off of consumer receivables as a
percent, annualized, of average consumer receivables are
comprised of the following:
|
52
HSBC
Finance Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
|
|
Mortgage Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
1.17
|
%
|
|
|
.91
|
%
|
|
|
.67
|
%
|
Second lien
|
|
|
7.97
|
|
|
|
4.40
|
|
|
|
1.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mortgage Services
|
|
|
2.55
|
|
|
|
1.66
|
|
|
|
.77
|
|
Consumer Lending:
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
.80
|
|
|
|
.85
|
|
|
|
.71
|
|
Second lien
|
|
|
1.93
|
|
|
|
1.02
|
|
|
|
1.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consumer Lending
|
|
|
.96
|
|
|
|
.88
|
|
|
|
.75
|
|
Foreign and all other:
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
1.34
|
|
|
|
.89
|
|
|
|
.24
|
|
Second lien
|
|
|
1.29
|
|
|
|
1.15
|
|
|
|
.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Foreign and all other
|
|
|
1.30
|
|
|
|
1.10
|
|
|
|
.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
|
1.74
|
%
|
|
|
1.28
|
%
|
|
|
.75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) |
In December 2006, our Auto Finance business changed its
charge-off policy to provide that the principal balance of auto
loans in excess of the estimated net realizable value will be
charged-off 30 days (previously 90 days) after the
financed vehicle has been repossessed if it remains unsold,
unless it becomes 150 days contractually delinquent, at
which time such excess will be charged off. This resulted in a
one-time acceleration of charge-offs in December 2006, which
totaled $24 million. Excluding the impact of this change
the auto finance net charge-off ratio would have been
4.19 percent in the quarter ended December 31, 2006.
Also in the fourth quarter of 2006, our U.K. business
discontinued a forbearance program related to unsecured loans.
Under the forbearance program, eligible delinquent accounts
would not be subject to charge-off if certain minimum payment
conditions were met. The cancellation of this program resulted
in a one-time acceleration of charge-off which totaled
$89 million. Excluding the impact of the change in the U.K.
forbearance program, the private label net charge-off ratio
would have been 5.85 percent and the personal non-credit
card net charge-off ratio would have been 6.32 percent in
the quarter ended December 31, 2006. Excluding the impact
of both changes, the total consumer charge-off ratio would have
been 3.17 percent for the quarter ended December 31,
2006.
|
Net charge-offs as a percent, annualized, of average consumer
receivables increased 23 basis points compared to the prior
quarter primarily due to higher charge-offs in our real estate
secured portfolios, in particular at our Mortgage Services
business due to the progression to charge-off of certain loans
acquired in 2005 and 2006. We anticipate the increase in the net
charge-off ratio for our real estate secured portfolio will
continue throughout 2007 as the loans purchased by Mortgage
Services in 2005 and 2006 continue to progress to various stages
of delinquency and ultimately charge-off. The increase in the
Consumer Lending real estate secured net charge-off ratio was
primarily due to portfolio seasoning. The charge-off ratio for
our Auto Finance business decreased due to the seasonal
improvements in collection activities in the first quarter as
well as the impact of the one-time acceleration of charge-offs
in December 2006 related to the change in the charge-off policy
described above. The increase in our credit card ratio is due to
the seasoning of a growing portfolio, partially offset by
seasonal improvements in collection activities. Excluding the
impact of the discontinuance of a forbearance program in our
U.K. business in the prior quarter, the private label charge-off
ratio was essentially flat compared to the prior quarter.
Excluding the impact of the discontinuance of a forbearance
program in our U.K. business in the prior quarter, the personal
non-credit card charge-off ratio increased reflecting portfolio
seasoning as well as a slight deterioration of certain customer
groups in our domestic portfolio.
As compared to the prior year quarter, net charge-offs as a
percent, annualized, of average consumer receivables increased
111 basis points primarily due to higher charge-offs in our
real estate secured portfolios, as discussed above, as well as
higher charge-offs in our credit card portfolio. The increase in
charge-offs in the credit card portfolio is due to increased
levels of personal bankruptcy filings as compared to the
exceptionally low levels experienced in the first quarter of
2006 following enactment of the new bankruptcy law in the United
States. The increase in the auto finance portfolio is due to
seasoning of a growing portfolio.
53
HSBC
Finance Corporation
Nonperforming
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Nonaccrual
receivables(1),(2)
|
|
$
|
4,945
|
|
|
$
|
4,807
|
|
|
$
|
3,582
|
|
Accruing consumer receivables 90
or more days delinquent
|
|
|
909
|
|
|
|
929
|
|
|
|
742
|
|
Renegotiated commercial loans
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming receivables
|
|
|
5,855
|
|
|
|
5,737
|
|
|
|
4,325
|
|
Real estate owned
|
|
|
863
|
|
|
|
794
|
|
|
|
563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
6,718
|
|
|
$
|
6,531
|
|
|
$
|
4,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit loss reserves as a percent
of nonperforming receivables
|
|
|
116.1
|
%
|
|
|
114.8
|
%
|
|
|
103.3
|
%
|
|
|
(1) |
Nonaccrual receivables are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
|
|
|
(in millions)
|
|
|
Real estate secured:
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed-end:
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
2,032
|
|
|
$
|
1,893
|
|
|
$
|
1,352
|
|
Second lien
|
|
|
521
|
|
|
|
482
|
|
|
|
320
|
|
Revolving:
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
17
|
|
|
|
22
|
|
|
|
29
|
|
Second lien
|
|
|
225
|
|
|
|
187
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
|
2,795
|
|
|
|
2,584
|
|
|
|
1,773
|
|
Auto finance
|
|
|
291
|
|
|
|
394
|
|
|
|
241
|
|
Credit card
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Private label
|
|
|
77
|
|
|
|
76
|
|
|
|
77
|
|
Personal non-credit card
|
|
|
1,782
|
|
|
|
1,753
|
|
|
|
1,490
|
|
Commercial and other
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonaccrual receivables
|
|
$
|
4,945
|
|
|
$
|
4,807
|
|
|
$
|
3,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) |
As previously discussed, in December 2006, our Auto Finance
business changed its charge-off policy and in connection with
this policy change also changed the methodology for reporting
two-months-and-over contractual delinquency. These changes
resulted in an increase in nonaccrual receivables at
December 31, 2006. Prior period amounts have been restated
to conform to the current year presentation.
|
Compared to December 31, 2006, the increase in total
nonperforming assets is due to higher levels of real estate
secured nonaccrual receivables at our Mortgage Services business
due to the progression of certain loans acquired in 2005 and
2006 to various stages of delinquency as previously discussed.
Real estate secured nonaccrual loans included stated income
loans at our Mortgage Services business of $682 million at
March 31, 2007, $571 million at December 31,
2006, and $194 million at March 31, 2006. Consistent
with industry practice, accruing consumer receivables 90 or more
days delinquent includes domestic credit card receivables.
Account Management
Policies and Practices
Our policies and practices for the collection of consumer
receivables, including our customer account management policies
and practices, permit us to reset the contractual delinquency
status of an account to current, 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, maximize collection opportunities
and avoid foreclosure or repossession if reasonably possible. If
the account subsequently experiences payment defaults, it will
again become contractually delinquent.
54
HSBC
Finance Corporation
The tables below summarize approximate restructuring statistics
in our managed basis domestic portfolio. Managed basis assumes
that securitized receivables have not been sold and remain on
our balance sheet. We report our restructuring statistics on a
managed basis only because the receivables that we securitize
are subject to underwriting standards comparable to our owned
portfolio, are generally serviced and collected without regard
to ownership and result in a similar credit loss exposure for
us. As the level of our securitized receivables have fallen over
time, managed basis and owned basis results have now largely
converged. As previously reported, in prior periods we used
certain assumptions and estimates to compile our restructure
statistics. The systemic counters used to compile the
information presented below exclude from the reported statistics
loans that have been reported as contractually delinquent but
have been reset to a current status because we have determined
that the loans should not have been considered delinquent (e.g.,
payment application processing errors). When comparing
restructuring statistics from different periods, the fact that
our restructure policies and practices will change over time,
that exceptions are made to those policies and practices, and
that our data capture methodologies have been enhanced, should
be taken into account.
55
HSBC
Finance Corporation
Total Restructured by Restructure Period Domestic
Portfolio(1)
(Managed
Basis)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Never restructured
|
|
|
87.9
|
%
|
|
|
89.1
|
%
|
|
|
89.7
|
%
|
Restructured:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured in the last
6 months
|
|
|
5.6
|
|
|
|
4.8
|
|
|
|
4.0
|
|
Restructured in the last
7-12 months
|
|
|
2.8
|
|
|
|
2.4
|
|
|
|
2.4
|
|
Previously restructured beyond
12 months
|
|
|
3.7
|
|
|
|
3.7
|
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ever
restructured(2)
|
|
|
12.1
|
|
|
|
10.9
|
|
|
|
10.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Restructured by
Product Domestic
Portfolio(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Managed Basis)
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate secured
|
|
$
|
11,779
|
|
|
$
|
10,344
|
|
|
$
|
8,395
|
|
Auto finance
|
|
|
1,919
|
|
|
|
1,881
|
|
|
|
1,712
|
|
Credit card
|
|
|
802
|
|
|
|
816
|
|
|
|
937
|
|
Private
label(3)
|
|
|
30
|
|
|
|
31
|
|
|
|
26
|
|
Personal non-credit card
|
|
|
3,722
|
|
|
|
3,600
|
|
|
|
3,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,252
|
|
|
$
|
16,672
|
|
|
$
|
14,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(As a percent of managed
receivables)
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate secured
|
|
|
12.7
|
%
|
|
|
11.0
|
%
|
|
|
9.7
|
%
|
Auto finance
|
|
|
15.3
|
|
|
|
15.1
|
|
|
|
14.5
|
|
Credit card
|
|
|
2.9
|
|
|
|
2.9
|
|
|
|
3.8
|
|
Private
label(3)
|
|
|
11.5
|
|
|
|
10.9
|
|
|
|
7.3
|
|
Personal non-credit card
|
|
|
20.3
|
|
|
|
19.5
|
|
|
|
19.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(2)
|
|
|
12.1
|
%
|
|
|
10.9
|
%
|
|
|
10.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Excludes foreign businesses, commercial and other.
|
(2)
|
Total including foreign businesses was 11.7 percent at
March 31, 2007, 10.6 percent at December 31, 2006
and 10.1 percent at March 31, 2006.
|
(3)
|
Only reflects consumer lending retail sales contracts which have
historically been classified as private label. All other
domestic private label receivables were sold to HSBC Bank USA in
December 2004.
|
The increase in restructured loans was primarily attributable to
higher levels of real estate secured restructures due to
portfolio growth and seasoning, including higher restructure
levels at our Mortgage Services business as we continue to work
with our customers who, in our judgment, evidence continued
payment probability. Additionally, beginning in the fourth
quarter of 2006, we expanded the use of account modification at
our Mortgage Services business to modify the rate and/or payment
on a number of qualifying loans and restructured certain of
those accounts after receipt of one modified payment and if
certain other criteria were met. Such accounts are included in
the above restructure statistics beginning in the fourth quarter
of 2006.
See Credit Quality Statistics for further
information regarding owned basis and managed basis delinquency,
charge-offs and nonperforming loans.
The amount of domestic and foreign managed receivables in
forbearance, modification (excluding Mortgage Services for
March 31, 2007 and December 31, 2006), credit card
services approved consumer credit counseling accommodations,
rewrites or other customer account management techniques for
which we have reset delinquency and that is not included in the
restructured or delinquency statistics was approximately
$.3 billion or .2 percent of managed receivables at
March 31, 2007 and December 31, 2006, and
$.4 billion or .3 percent of managed receivables at
March 31, 2006.
56
HSBC
Finance Corporation
Liquidity
and Capital Resources
We continue to focus on balancing our use of affiliate and third
party funding sources to minimize funding expense while managing
liquidity. During the first quarter of 2007, we supplemented
unsecured debt issuances with proceeds from the continuing sale
of newly originated domestic private label receivables to HSBC
Bank USA, debt issued to affiliates and increased levels of
secured financings.
Debt due to affiliates and other HSBC related funding are
summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(in billions)
|
|
|
Debt issued to HSBC subsidiaries:
|
|
|
|
|
|
|
|
|
Drawings on bank lines in the U.K.
and Europe
|
|
$
|
4.2
|
|
|
$
|
4.3
|
|
Term debt
|
|
|
10.6
|
|
|
|
10.6
|
|
Preferred securities issued by
Household Capital Trust VIII to HSBC
|
|
|
.3
|
|
|
|
.3
|
|
|
|
|
|
|
|
|
|
|
Total debt outstanding to HSBC
subsidiaries
|
|
|
15.1
|
|
|
|
15.2
|
|
|
|
|
|
|
|
|
|
|
Debt outstanding to HSBC clients:
|
|
|
|
|
|
|
|
|
Euro commercial paper
|
|
|
2.9
|
|
|
|
3.0
|
|
Term debt
|
|
|
1.1
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
Total debt outstanding to HSBC
clients
|
|
|
4.0
|
|
|
|
4.2
|
|
Cash received on bulk and
subsequent sales of domestic private label credit card
receivables to HSBC Bank USA, net (cumulative)
|
|
|
17.2
|
|
|
|
17.9
|
|
Real estate secured receivable
activity with HSBC Bank USA:
|
|
|
|
|
|
|
|
|
Cash received on sales (cumulative)
|
|
|
3.7
|
|
|
|
3.7
|
|
Direct purchases from
correspondents (cumulative)
|
|
|
4.2
|
|
|
|
4.2
|
|
Reductions in real estate secured
receivables sold to HSBC Bank USA
|
|
|
(4.9
|
)
|
|
|
(4.7
|
)
|
|
|
|
|
|
|
|
|
|
Total real estate secured
receivable activity with HSBC Bank USA
|
|
|
3.0
|
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
Cash received from sale of
European Operations to HBEU affiliate
|
|
|
-(1
|
)
|
|
|
-(1
|
)
|
Cash received from sale of U.K.
credit card business to HBEU
|
|
|
2.7
|
|
|
|
2.7
|
|
Capital contribution by HSBC
Investments (North America) Inc. (HINO) (cumulative)
|
|
|
1.6
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
Total HSBC related funding
|
|
$
|
43.6
|
|
|
$
|
44.6
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Less than $100 million.
|
Funding from HSBC, including debt issuances to HSBC subsidiaries
and clients, represented 13 percent of our total debt and
preferred stock funding at March 31, 2007 and
December 31, 2006.
Cash proceeds of $46 million from the November 2006 sale of
the European Operations and the December 2005 sale of our U.K.
credit card receivables to HBEU of $2.7 billion in cash
were used to partially pay down drawings on bank lines from HBEU
for the U.K. and fund operations. Proceeds received from the
bulk sale and subsequent daily sales of domestic private label
credit card receivables to HSBC Bank USA of $17.9 billion
were used to pay down short-term domestic borrowings, including
outstanding commercial paper balances, and to fund operations.
At March 31, 2007, we had a commercial paper back stop
credit facility of $2.5 billion from HSBC supporting
domestic issuances and a revolving credit facility of
$5.7 billion from HBEU to fund our operations in the U.K.
At March 31, 2007, $4.2 billion was outstanding under
the HBEU lines for the U.K. and no balances were outstanding
under the domestic lines. At March 31, 2007, we had
derivative contracts with a notional value of
$83.0 billion, or approximately 87 percent of total
derivative contracts, outstanding with HSBC affiliates. At
December 31, 2006, we
57
HSBC
Finance Corporation
had derivative contracts with a notional value of
$82.8 billion, or approximately 88 percent of total
derivative contracts, outstanding with HSBC affiliates.
Securities and other short-term
investments Securities totaled $4.1 billion at
March 31, 2007 and $4.7 billion at December 31,
2006. Securities purchased under agreements to resell totaled
$59 million at March 31, 2007 and $171 million at
December 31, 2006. Interest bearing deposits with banks
totaled $87 million at March 31, 2007 and
$424 million at December 31, 2006. The decreases in
securities and interest bearing deposits with banks is largely
due to the reclassification of the assets of the U.K. Insurance
Operations which at March 31, 2007 are classified as
Held for Sale.
Commercial paper, bank and other
borrowings totaled $10.9 billion at
March 31, 2007 and $11.1 billion at December 31,
2006. Our funding strategy requires that bank credit facilities
will at all times exceed 85% of outstanding commercial paper and
that the combination of bank credit facilities and undrawn
committed conduit facilities will, at all times, exceed 115% of
outstanding commercial paper. Included in this total was
outstanding Euro commercial paper sold to customers of HSBC of
$2.9 billion at March 31, 2007 and $3.0 billion
at December 31, 2006.
Long term debt (with original maturities over
one year) decreased to $125.5 billion at March 31,
2007 from $127.6 billion at December 31, 2006.
Significant issuances during the first quarter of 2007 included
the following:
|
|
|
|
|
$.2 billion of
InterNotessm
(retail-oriented medium-term notes)
|
|
|
$1.0 billion of global debt
|
|
|
$3.1 billion of securities backed by auto finance, credit
card and personal non-credit card receivables. For accounting
purposes, these transactions were structured as secured
financings.
|
In the first quarter of 2006, we redeemed the junior
subordinated notes, issued to Household Capital Trust VI
with an outstanding principal balance of $206 million. In
the fourth quarter of 2006 we redeemed the junior subordinated
notes, issued to Household Capital Trust VII with an
outstanding principal balance of $206 million.
Common Equity In the first quarter of 2007,
HINO made a capital contribution of $200 million to support
ongoing operations. In 2006, in connection with our purchase of
the Champion portfolio, HINO made a capital contribution of
$163 million.
Selected capital ratios In managing capital,
we develop targets for tangible shareholders(s)
equity to tangible managed assets (TETMA), tangible
shareholders(s) equity plus owned loss reserves to
tangible managed assets (TETMA + Owned Reserves) and
tangible common equity to tangible managed assets. These ratio
targets are based on discussions with HSBC and rating agencies,
risks inherent in the portfolio, the projected operating
environment and related risks, and any acquisition objectives.
These ratios exclude the equity impact of
SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities, SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities, and the impact of the adoption of
SFAS No. 159, The Fair Value Option for
Financial Assets and Liabilities, including the subsequent
changes in fair value recognized in earnings associated with
credit risk on debt for which we elected the fair value option.
Preferred securities issued by certain non-consolidated trusts
are also considered equity in the TETMA and TETMA + Owned
Reserves calculations because of their long-term subordinated
nature and our ability to defer dividends. Managed assets
include owned assets plus loans which we have sold and service
with limited recourse. We and certain rating agencies also
monitor our equity ratios excluding the impact of the HSBC
acquisition purchase accounting adjustments. We do so because we
believe that the HSBC acquisition purchase accounting
adjustments represent non-cash transactions which do not affect
our business operations, cash flows or ability to meet our debt
obligations. Our targets may change from time to time to
accommodate changes in the operating environment or other
considerations such as those listed above.
58
HSBC
Finance Corporation
Selected capital ratios are summarized in the
following table:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
TETMA(1)
|
|
|
7.49
|
%
|
|
|
7.16
|
%
|
TETMA + Owned
Reserves(1)
|
|
|
11.55
|
|
|
|
11.02
|
|
Tangible common equity to tangible
managed
assets(1)
|
|
|
6.39
|
|
|
|
6.08
|
|
Common and preferred equity to
owned assets
|
|
|
11.09
|
|
|
|
11.13
|
|
Excluding purchase accounting
adjustments:
|
|
|
|
|
|
|
|
|
TETMA(1)
|
|
|
8.07
|
%
|
|
|
7.80
|
%
|
TETMA + Owned
Reserves(1)
|
|
|
12.13
|
|
|
|
11.66
|
|
Tangible common equity to tangible
managed
assets(1)
|
|
|
6.96
|
|
|
|
6.72
|
|
|
|
(1) |
TETMA, TETMA + Owned Reserves and tangible common equity to
tangible managed assets represent
non-U.S.GAAP
financial ratios that are used by HSBC Finance Corporation
management and certain rating agencies to evaluate capital
adequacy and may 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.
|
Securitizations and secured
financings Securitizations (collateralized funding
transactions structured to receive sale treatment under
Statement of Financial Accounting Standards No. 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, a Replacement of FASB
Statement No. 125,
(SFAS No. 140)) and secured financings
(collateralized funding transactions which do not receive sale
treatment under SFAS No. 140) of consumer
receivables have been a source of funding and liquidity for us.
Securitizations and secured financings have been used to limit
our reliance on the unsecured debt markets and often are more
cost-effective than alternative funding sources.
Securitizations are treated as secured financings under both
IFRS and U.K. GAAP. In order to align our accounting treatment
with that of HSBC initially under U.K. GAAP and now under IFRS,
we began to structure all new collateralized funding
transactions as secured financings in the third quarter of 2004.
However, because existing public credit card transactions were
structured as sales to revolving trusts that require
replenishments of receivables to support previously issued
securities, receivables will continue to be sold to these trusts
and the resulting replenishment gains recorded until the
revolving periods end, the last of which is currently projected
to occur in the fourth quarter of 2007. The termination of sale
treatment on new collateralized funding activity reduced our
reported net income under U.S. GAAP. There was no impact,
however, on cash received from operations. Because we believe
the market for securities backed by receivables is a reliable,
efficient and cost-effective source of funds, we will continue
to use secured financings of consumer receivables as a source of
our funding and liquidity.
There were no securitizations (excluding replenishments of
certificateholder interests) during the first quarter of 2007 or
2006. Secured financings are summarized in the following table:
|
|
|
|
|
|
|
|
|
Three months ended March 31
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(in millions)
|
|
|
Secured financings:
|
|
|
|
|
|
|
|
|
Real estate secured
|
|
$
|
-
|
|
|
$
|
350
|
|
Credit card
|
|
|
1,890
|
|
|
|
1,120
|
|
Auto finance
|
|
|
1,069
|
|
|
|
-
|
|
Personal non-credit card
|
|
|
110
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,069
|
|
|
$
|
1,470
|
|
|
|
|
|
|
|
|
|
|
Our securitized receivables totaled $795 million at
March 31, 2007 compared to $949 million at
December 31, 2006. As of March 31, 2007, outstanding
secured financings of $23.4 billion were secured by
$30.1 billion of real estate secured, auto finance, credit
card and personal non-credit card receivables. Secured
financings of
59
HSBC
Finance Corporation
$21.8 billion at December 31, 2006 were secured by
$28.1 billion of real estate secured, auto finance, credit
card and personal non-credit card receivables. At March 31,
2007, securitizations structured as sales represented
1 percent and secured financings represented
15 percent of the funding associated with our managed
funding portfolio. At December 31, 2006, securitizations
structured as sales represented 1 percent and secured
financings represented 14 percent of the funding associated
with our managed funding portfolio.
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.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(in billions)
|
|
|
Private label, and credit cards
|
|
$
|
190
|
|
|
$
|
186
|
|
Other consumer lines of credit
|
|
|
7
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
Open lines of
credit(1)
|
|
$
|
197
|
|
|
$
|
193
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes an estimate for acceptance of credit offers mailed to
potential customers prior to March 31, 2007 and
December 31, 2006, respectively.
|
At March 31, 2007, our Mortgage Services business had
commitments with numerous correspondents to purchase up to
$188 million of real estate secured receivables at fair
market value, subject to availability based on current
underwriting guidelines specified by our Mortgage Services
business and at prices indexed to general market rates. These
commitments have terms of up to one year, the last of which
expires in June, 2007. Also at March 31, 2007, our Mortgage
Services business had outstanding forward sales commitments
relating to real estate secured loans totaling $352 million
and unused commitments to extend credit relating to real estate
secured loans to customers (as long as certain conditions are
met), totaling $740 million.
At March 31, 2007, we also had a commitment to lend up to
$120 million to H&R Block to fund its acquisition of a
participation interest in refund anticipation loans for the 2007
tax season. At March 31, 2007, H&R Block had
$72 million outstanding under this commitment which is due
no later than June 30, 2007.
2007 Funding Strategy Our current estimated
domestic funding needs and sources for 2007 are summarized in
the table that follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
Estimated
|
|
|
|
|
|
|
January 1
|
|
|
April 1
|
|
|
|
|
|
|
through
|
|
|
through
|
|
|
Estimated
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
Full Year
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
|
|
|
(in billions)
|
|
|
Funding needs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset growth
|
|
$
|
(3
|
)
|
|
$
|
(7) - 3
|
|
|
$
|
(10) -0
|
|
Commercial paper, term debt and
securitization maturities
|
|
|
19
|
|
|
|
11 - 17
|
|
|
|
30 - 36
|
|
Other
|
|
|
(1
|
)
|
|
|
2 - 4
|
|
|
|
1 - 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total funding needs
|
|
$
|
15
|
|
|
$
|
6 - 24
|
|
|
$
|
21 -39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funding sources:
|
|
|
|
|
|
|
|
|
|
|
|
|
External funding, including
commercial paper
|
|
$
|
15
|
|
|
$
|
5 - 21
|
|
|
$
|
20 - 36
|
|
HSBC and HSBC subsidiaries
|
|
|
-
|
|
|
|
1 - 3
|
|
|
|
1 - 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total funding sources
|
|
$
|
15
|
|
|
$
|
6 - 24
|
|
|
$
|
21 - 39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously discussed, we have experienced deterioration in
the performance of mortgage loan originations in our Mortgage
Services business and in March 2007 announced our decision to
discontinue loan acquisitions by that
60
HSBC
Finance Corporation
business. These actions, combined with normal portfolio
attrition and risk mitigation efforts we began in the second
half of 2006, will result in negative growth in our aggregate
portfolio in 2007. As opportunities arise, we may also choose to
sell selected portfolios. Future decisions to constrain growth
in additional portfolios as well as decisions to sell selected
portfolios would also result in negative year over year growth
in the balance sheet.
Risk
Management
Credit Risk There have been no significant
changes in our approach to credit risk management since
December 31, 2006.
At March 31, 2007, we had derivative contracts with a
notional value of approximately $95.3 billion, including
$83.0 billion outstanding with HSBC affiliates. Most swap
agreements, both with unaffiliated and affiliated third parties,
require that payments be made to, or received from, the
counterparty when the fair value of the agreement reaches a
certain level. Generally, third-party swap counterparties
provide collateral in the form of cash which is recorded in our
balance sheet as other assets or derivative related liabilities
and totaled $131 million at March 31, 2007 and
$158 million at December 31, 2006 for third-party
counterparties. Beginning in the second quarter of 2006, when
the fair value of our agreements with affiliate counterparties
require the posting of collateral by the affiliate, it is
provided in the form of cash and recorded on the balance sheet,
consistent with third party arrangements. At March 31,
2007, the fair value of our agreements with affiliate counter
parties required the affiliate to provide cash collateral of
$1.2 billion, which is recorded in our balance sheet as a
component of derivative related liabilities. At
December 31, 2006, the fair value of our agreements with
affiliate counter parties required the affiliate to provide cash
collateral of $1.0 billion, which is recorded in our
balance sheet as a component of derivative related liabilities.
Liquidity Risk There have been no significant
changes in our approach to liquidity risk since
December 31, 2006.
Market Risk HSBC has certain limits and
benchmarks that serve as guidelines in determining the
appropriate levels of interest rate risk. One such limit is
expressed in terms of the Present Value of a Basis Point
(PVBP), which reflects the change in value of the
balance sheet for a one basis point movement in all interest
rates. Our PVBP limit as of March 31, 2007 was
$2 million, which includes the risk associated with hedging
instruments. Thus, for a one basis point change in interest
rates, the policy dictates that the value of the balance sheet
shall not increase or decrease by more than $2 million. As of
March 31, 2007, we had a PVBP position of less than
$1 million reflecting the impact of a one basis point
increase in interest rates. As of December 31, 2006, we had
a PVBP position of $1.1 million.
The total PVBP position will not change as a result of the early
adoption of SFAS No. 159, however instruments
previously accounted for on an accrual basis will now be
accounted for under the fair value option election. As a result,
the PVBP risk for March 31, 2007, summarized in the table
below, reflects a realignment of instruments from
December 31, 2007, between accrual and
mark-to-market.
Total PVBP risk is lower as a result of normal risk management
actions. The following table shows the components of PVBP:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(in millions)
|
|
|
Risk related to our portfolio of
balance sheet items
marked-to-market
|
|
$
|
.5
|
|
|
$
|
(1.8
|
)
|
Risk for all other remaining
assets and liabilities
|
|
|
(.5
|
)
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
Total PVBP risk
|
|
$
|
-
|
|
|
$
|
1.1
|
|
|
|
|
|
|
|
|
|
|
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 a
61
HSBC
Finance Corporation
growing balance sheet and the current interest rate risk
profile. The following table summarizes such estimated impact:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(in millions)
|
|
|
Decrease in net interest income
following a hypothetical 25 basis points rise in interest
rates applied at the beginning of each quarter over the next
12 months
|
|
$
|
217
|
|
|
$
|
180
|
|
Increase in net interest income
following a hypothetical 25 basis points fall in interest
rates applied at the beginning of each quarter over the next
12 months
|
|
$
|
88
|
|
|
$
|
54
|
|
These estimates include the impact of debt and the corresponding
derivative instruments accounted for using the fair value option
under SFAS No. 159. These estimates also assume we
would not take any corrective actions in response to interest
rate movements and, therefore, exceed what most likely would
occur if rates were to change by the amount indicated.
Operational Risk There has been no
significant change in our approach to operational risk
management since December 31, 2006.
Compliance Risk There has been no significant
change in our approach to compliance risk management since
December 31, 2006.
Reputational Risk There has been no
significant change in our approach to reputational risk
management since December 31, 2006.
62
HSBC
FINANCE CORPORATION
RECONCILIATIONS
TO U.S. GAAP FINANCIAL MEASURES
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Tangible common
equity:
|
|
|
|
|
|
|
|
|
Common shareholders equity
|
|
$
|
19,108
|
|
|
$
|
19,515
|
|
Exclude:
|
|
|
|
|
|
|
|
|
Fair value option adjustment
|
|
|
462
|
|
|
|
-
|
|
Unrealized (gains) losses on cash
flow hedging instruments
|
|
|
188
|
|
|
|
61
|
|
Minimum pension liability
|
|
|
1
|
|
|
|
1
|
|
Unrealized gains on investments and
interest-only strip receivables
|
|
|
16
|
|
|
|
23
|
|
Intangible assets
|
|
|
(2,165
|
)
|
|
|
(2,218
|
)
|
Goodwill
|
|
|
(6,905
|
)
|
|
|
(7,010
|
)
|
|
|
|
|
|
|
|
|
|
Tangible common equity
|
|
|
10,705
|
|
|
|
10,372
|
|
HSBC acquisition purchase
accounting adjustments
|
|
|
960
|
|
|
|
1,105
|
|
|
|
|
|
|
|
|
|
|
Tangible common equity, excluding
HSBC acquisition purchase accounting adjustments
|
|
$
|
11,665
|
|
|
$
|
11,477
|
|
|
|
|
|
|
|
|
|
|
Tangible
shareholders(s) equity:
|
|
|
|
|
|
|
|
|
Tangible common equity
|
|
$
|
10,705
|
|
|
$
|
10,372
|
|
Preferred stock
|
|
|
575
|
|
|
|
575
|
|
Mandatorily redeemable preferred
securities of Household Capital Trusts
|
|
|
1,275
|
|
|
|
1,275
|
|
|
|
|
|
|
|
|
|
|
Tangible
shareholders(s) equity
|
|
|
12,555
|
|
|
|
12,222
|
|
HSBC acquisition purchase
accounting adjustments
|
|
|
960
|
|
|
|
1,105
|
|
|
|
|
|
|
|
|
|
|
Tangible
shareholders(s) equity, excluding HSBC acquisition
purchase accounting adjustments
|
|
$
|
13,515
|
|
|
$
|
13,327
|
|
|
|
|
|
|
|
|
|
|
Tangible
shareholders(s) equity plus owned loss
reserves:
|
|
|
|
|
|
|
|
|
Tangible
shareholders(s) equity
|
|
$
|
12,555
|
|
|
$
|
12,222
|
|
Owned loss reserves
|
|
|
6,798
|
|
|
|
6,587
|
|
|
|
|
|
|
|
|
|
|
Tangible
shareholders(s) equity plus owned loss reserves
|
|
|
19,353
|
|
|
|
18,809
|
|
HSBC acquisition purchase
accounting adjustments
|
|
|
960
|
|
|
|
1,105
|
|
|
|
|
|
|
|
|
|
|
Tangible
shareholders(s) equity plus owned loss reserves,
excluding HSBC acquisition purchase accounting adjustments
|
|
$
|
20,313
|
|
|
$
|
19,914
|
|
|
|
|
|
|
|
|
|
|
Tangible managed
assets:
|
|
|
|
|
|
|
|
|
Owned assets
|
|
$
|
177,488
|
|
|
$
|
180,435
|
|
Receivables serviced with limited
recourse
|
|
|
795
|
|
|
|
949
|
|
|
|
|
|
|
|
|
|
|
Managed assets
|
|
|
178,283
|
|
|
|
181,384
|
|
Exclude:
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
(2,165
|
)
|
|
|
(2,218
|
)
|
Goodwill
|
|
|
(6,905
|
)
|
|
|
(7,010
|
)
|
Derivative financial assets
|
|
|
(1,676
|
)
|
|
|
(1,461
|
)
|
|
|
|
|
|
|
|
|
|
Tangible managed assets
|
|
|
167,537
|
|
|
|
170,695
|
|
HSBC acquisition purchase
accounting adjustments
|
|
|
(23
|
)
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
Tangible managed assets, excluding
HSBC acquisition purchase accounting adjustments
|
|
$
|
167,514
|
|
|
$
|
170,759
|
|
|
|
|
|
|
|
|
|
|
Equity ratios:
|
|
|
|
|
|
|
|
|
Common and preferred equity to
owned assets
|
|
|
11.09
|
%
|
|
|
11.13
|
%
|
Tangible common equity to tangible
managed assets
|
|
|
6.39
|
|
|
|
6.08
|
|
Tangible
shareholders(s) equity to tangible managed assets
(TETMA)
|
|
|
7.49
|
|
|
|
7.16
|
|
Tangible
shareholders(s) equity plus owned loss reserves to
tangible managed assets (TETMA + Owned Reserves)
|
|
|
11.55
|
|
|
|
11.02
|
|
Excluding HSBC acquisition purchase
accounting adjustments:
|
|
|
|
|
|
|
|
|
Tangible common equity to tangible
managed assets
|
|
|
6.96
|
|
|
|
6.72
|
|
TETMA
|
|
|
8.07
|
|
|
|
7.80
|
|
TETMA + Owned Reserves
|
|
|
12.13
|
|
|
|
11.66
|
|
|
|
|
|
|
|
|
|
|
63
HSBC
Finance Corporation
Item 4. Controls
and Procedures
We maintain a system of internal and disclosure controls and
procedures designed to ensure that information required to be
disclosed by HSBC Finance Corporation in the reports we file or
submit under the Securities Exchange Act of 1934, as amended,
(the Exchange Act), is recorded, processed,
summarized and reported on a timely basis. Our Board of
Directors, operating through its audit committee, which is
composed entirely of independent outside directors, provides
oversight to our financial reporting process.
We conducted an evaluation, with the participation of the Chief
Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures as of
the end of the period covered by this report. Based upon that
evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures
were effective as of the end of the period covered by this
report so as to alert them in a timely fashion to material
information required to be disclosed in reports we file under
the Exchange Act.
There have been no significant changes in our internal and
disclosure controls or in other factors which could
significantly affect internal and disclosure controls subsequent
to the date that we carried out our evaluation.
HSBC Finance Corporation continues the process to complete a
thorough review of its internal controls as part of its
preparation for compliance with the requirements of
Section 404 of the Sarbanes-Oxley Act of 2002.
Section 404 requires our management to report on, and our
external auditors to attest to, the effectiveness of our
internal control structure and procedures for financial
reporting. As a non-accelerated filer under
Rule 12b-2
of the Exchange Act, our first report under Section 404
will be contained in our
Form 10-K
for the period ended December 31, 2007.
Part II. OTHER
INFORMATION
Item 1. Legal
Proceedings
GENERAL
We are parties to various legal proceedings resulting from
ordinary business activities relating to our current
and/or
former operations. Certain of these actions are or purport to be
class actions seeking damages in very large amounts. These
actions assert violations of laws
and/or
unfair treatment of consumers. Due to the uncertainties in
litigation and other factors, we cannot be certain that we will
ultimately prevail in each instance. We believe that our
defenses to these actions have merit and any adverse decision
should not materially affect our consolidated financial
condition.
CONSUMER
LITIGATION
During the past several years, the press has widely reported
certain industry related concerns that may impact us. Some of
these involve the amount of litigation instituted against
lenders and insurance companies operating in certain states and
the large awards obtained from juries in those states. Like
other companies in this industry, some of our subsidiaries are
involved in lawsuits pending against them in these states. The
cases, in particular, generally allege inadequate disclosure or
misrepresentation of financing terms. In some suits, other
parties are also named as defendants. Unspecified compensatory
and punitive damages are sought. Several of these suits purport
to be class actions or have multiple plaintiffs. The judicial
climate in these states is such that the outcome of all of these
cases is unpredictable. Although our subsidiaries believe they
have substantive legal defenses to these claims and are prepared
to defend each case vigorously, a number of such cases have been
settled or otherwise resolved for amounts that in the aggregate
are not material to our operations. Insurance carriers have been
notified as appropriate, and from time to time reservations of
rights letters have been received.
CREDIT
CARD SERVICES LITIGATION
Since June 2005, HSBC Finance Corporation, HSBC North America,
and HSBC, as well as other banks and the Visa and Master Card
associations, were named as defendants in four class actions
filed in Connecticut and the Eastern District of New York;
Photos Etc. Corp. et al. v. Visa U.S.A., Inc.,
et al. (D. Conn.
No. 3:05-CV-01007
64
HSBC
Finance Corporation
(WWE)): National Association of Convenience Stores,
et al. v. Visa U.S.A., Inc., et al. (E.D.N.Y.
No. 05-CV
4520 (JG)); Jethro Holdings, Inc., et al. v. Visa
U.S.A., Inc. et al. (E.D.N.Y.
No. 05-CV-4521
(JG)); and American Booksellers Assn v. Visa
U.S.A., Inc. et al. (E.D.N.Y.
No. 05-CV-5391
(JG)). Numerous other complaints containing similar allegations
(in which no HSBC entity is named) were filed across the country
against Visa, MasterCard and other banks. These actions
principally allege that the imposition of a no-surcharge rule by
the associations
and/or the
establishment of the interchange fee charged for credit card
transactions causes the merchant discount fee paid by retailers
to be set at supracompetitive levels in violation of the Federal
antitrust laws. In response to motions of the plaintiffs on
October 19, 2005, the Judicial Panel on Multidistrict
Litigation (the MDL Panel) issued an order
consolidating these suits and transferred all of the cases to
the Eastern District of New York. The consolidated case is:
In re Payment Card Interchange Fee and Merchant Discount
Antitrust Litigation, MDL 1720, E.D.N.Y. A
consolidated, amended complaint was filed by the plaintiffs on
April 24, 2006. Discovery has begun. At this time, we are
unable to quantify the potential impact from this action, if any.
SECURITIES
LITIGATION
In August 2002, we restated previously reported consolidated
financial statements. The restatement related to certain
MasterCard and Visa co-branding and affinity credit card
relationships and a third party marketing agreement, which were
entered into between 1992 and 1999. All were part of our Credit
Card Services segment. In consultation with our prior auditors,
Arthur Andersen LLP, we treated payments made in connection with
these agreements as prepaid assets and amortized them in
accordance with the underlying economics of the agreements. Our
current auditor, KPMG LLP, advised us that, in its view, these
payments should have either been charged against earnings at the
time they were made or amortized over a shorter period of time.
The restatement resulted in a $155.8 million, after-tax,
retroactive reduction to retained earnings at December 31,
1998. As a result of the restatement, and other corporate
events, including, e.g., the 2002 settlement with 50 states
and the District of Columbia relating to real estate lending
practices, HSBC Finance Corporation, and its directors, certain
officers and former auditors, have been involved in various
legal proceedings, some of which purport to be class actions. A
number of these actions allege violations of Federal securities
laws, were filed between August and October 2002, and seek to
recover damages in respect of allegedly false and misleading
statements about our common stock. These legal actions have been
consolidated into a single purported class action,
Jaffe v. Household International, Inc., et al.,
No. 02 C 5893 (N.D. Ill., filed August 19, 2002), and
a consolidated and amended complaint was filed on March 7,
2003. On December 3, 2004, the court signed the
parties stipulation to certify a class with respect to the
claims brought under §10 and §20 of the Securities
Exchange Act of 1934. The parties stipulated that plaintiffs
will not seek to certify a class with respect to the claims
brought under §11 and §15 of the Securities Act of
1933 in this action or otherwise.
The amended complaint purports to assert claims under the
Federal securities laws, on behalf of all persons who purchased
or otherwise acquired our securities between October 23,
1997 and October 11, 2002, arising out of alleged false and
misleading statements in connection with our collection, sales
and lending practices, the 2002 state settlement agreement
referred to above, the restatement and the HSBC merger. The
amended complaint, which also names as defendants Arthur
Andersen LLP, Goldman, Sachs & Co., and Merrill Lynch,
Pierce, Fenner & Smith, Inc., fails to specify the
amount of damages sought. In May 2003, we, and other defendants,
filed a motion to dismiss the complaint. On March 19, 2004,
the Court granted in part, and denied in part the
defendants motion to dismiss the complaint. The Court
dismissed all claims against Merrill Lynch, Pierce,
Fenner & Smith, Inc. and Goldman Sachs & Co.
The Court also dismissed certain claims alleging strict
liability for alleged misrepresentation of material facts based
on statute of limitations grounds. The claims that remain
against some or all of the defendants essentially allege the
defendants knowingly made a false statement of a material fact
in conjunction with the purchase or sale of securities, that the
plaintiffs justifiably relied on such statement, the false
statement(s) caused the plaintiffs damages, and that some
or all of the defendants should be liable for those alleged
statements. On February 28, 2006, the Court also dismissed
all alleged §10 claims that arose prior to July 30,
1999, shortening the class period by 22 months. The bulk of
fact discovery concluded on January 31, 2007. Expert
discovery is expected to conclude on September 14, 2007.
Separately, one of the defendants, Arthur Andersen LLP, entered
into a
65
HSBC
Finance Corporation
settlement of the claims against Arthur Andersen. This
settlement received Court approval in April 2006. At this time
we are unable to quantify the potential impact from this action,
if any.
With respect to this securities litigation, we believe that we
have not, and our officers and directors have not, committed any
wrongdoing and in each instance there will be no finding of
improper activities that may result in a material liability to
us or any of our officers or directors.
Item 6. Exhibits
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
|
|
99
|
.1
|
|
Debt and Preferred Stock
Securities Ratings
|
66
HSBC
Finance Corporation
Signature
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
HSBC Finance
Corporation
(Registrant)
Beverley A. Sibblies
Senior Vice President and
Chief Financial Officer
Date: May 14, 2007
67
HSBC
Finance Corporation
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
|
|
99
|
.1
|
|
Debt and Preferred Stock
Securities Ratings
|
68