UNITED STATES SECURITIES
AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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(Mark One)
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
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OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31,
2010
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
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OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number 1-8198
HSBC FINANCE
CORPORATION
(Exact name of registrant as
specified in its charter)
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Delaware
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86-1052062
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(State of
Incorporation)
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(I.R.S. Employer Identification
No.)
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26525 North Riverwoods Boulevard, Mettawa, Illinois
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60045
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(Address of principal executive
offices)
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(Zip Code)
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(224) 544-2000
Registrants telephone
number, including area code
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes x No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer x
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No x
As of April 30, 2010, there were 65 shares of the
registrants common stock outstanding, all of which are
owned by HSBC Investments (North America) Inc.
HSBC
FINANCE CORPORATION
FORM 10-Q
TABLE OF
CONTENTS
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Part/Item No.
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Page
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3
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4
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5
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6
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8
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52
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52
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60
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64
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67
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67
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76
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82
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97
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101
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104
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107
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108
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108
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Part II
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108
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110
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111
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113
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EX-12 |
EX-31 |
EX-32 |
2
HSBC
Finance Corporation
Item 1. Financial
Statements
CONSOLIDATED
STATEMENT OF INCOME (LOSS) (UNAUDITED)
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Three Months Ended March 31,
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2010
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2009
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(in millions)
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Finance and other interest income
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$
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2,071
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$
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2,846
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Interest expense on debt held by:
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HSBC affiliates
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39
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95
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Non-affiliates
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828
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1,072
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Net interest income
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1,204
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1,679
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Provision for credit losses
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1,919
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2,945
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Net interest income (loss) after provision for credit
losses
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(715
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)
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(1,266
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)
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Other revenues:
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Insurance revenue
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68
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93
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Investment income
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27
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27
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Net
other-than-temporary
impairment losses
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-
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(20
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)
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Derivative related income (expense)
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(102
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)
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38
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Gain on debt designated at fair value and related derivatives
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133
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4,112
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Fee income
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89
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228
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Enhancement services revenue
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103
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135
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Taxpayer financial services revenue
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29
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90
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Gain on bulk receivable sales to HSBC affiliates
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-
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57
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Gain on receivable sales to HSBC affiliates
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116
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128
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Servicing and other fees from HSBC affiliates
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238
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204
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Lower of cost or fair value adjustment on receivables held for
sale
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-
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(170
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)
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Other income
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10
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46
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Total other revenues
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711
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4,968
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Operating expenses:
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Salaries and employee benefits
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176
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420
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Occupancy and equipment expenses, net
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29
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102
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Other marketing expenses
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57
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50
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Real estate owned expenses
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39
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105
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Other servicing and administrative expenses
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249
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266
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Support services from HSBC affiliates
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298
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268
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Amortization of intangibles
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39
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42
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Policyholders benefits
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42
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55
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Goodwill and other intangible asset impairment charges
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-
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667
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Total operating expenses
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929
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1,975
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Income (loss) before income tax expense (benefit)
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(933
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)
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1,727
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Income tax benefit (expense)
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330
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(855
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)
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Net income (loss)
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$
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(603
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)
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$
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872
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The accompanying notes are an integral part of the consolidated
financial statements.
3
HSBC Finance Corporation
CONSOLIDATED
BALANCE SHEET (UNAUDITED)
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March 31,
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December 31,
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2010
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2009
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(in millions, except
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share data)
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Assets
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Cash
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$
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189
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$
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311
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Interest bearing deposits with banks
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10
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17
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Securities purchased under agreements to resell
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5,186
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2,850
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Securities
available-for-sale
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3,195
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3,187
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Receivables, net (including $7.5 billion and
$8.0 billion at March 31, 2010 and December 31,
2009, respectively, collateralizing long-term debt)
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73,516
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78,131
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Receivables held for sale
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3
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536
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Intangible assets, net
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709
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748
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Properties and equipment, net
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198
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201
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Real estate owned
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661
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592
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Derivative financial assets
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-
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-
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Deferred income taxes, net
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2,848
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3,014
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Other assets
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3,561
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4,966
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Total assets
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$
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90,076
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$
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94,553
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Liabilities
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Debt:
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Due to affiliates
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$
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9,023
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$
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9,043
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Commercial paper
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3,700
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4,291
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Long-term debt (including $26.7 billion at March 31,
2010 and December 31, 2009 carried at fair value and
long-term debt collateralized by receivables of
$5.1 billion and $5.5 billion at March 31, 2010
and December 31, 2009, respectively)
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66,488
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69,658
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Total debt
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79,211
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82,992
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Insurance policy and claim reserves
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996
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996
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Derivative related liabilities
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45
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60
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Liability for post-retirement benefits
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263
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268
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Other liabilities
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1,791
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1,858
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Total liabilities
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82,306
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86,174
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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, $0.01 par value, 100 shares authorized,
65 shares issued at March 31, 2010 and
December 31, 2009
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-
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-
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Additional paid-in capital
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23,120
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23,119
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Accumulated deficit
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(15,344
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)
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(14,732
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)
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Accumulated other comprehensive loss
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(581
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)
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(583
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)
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Total common shareholders equity
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7,195
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7,804
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Total liabilities and shareholders equity
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$
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90,076
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$
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94,553
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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
(UNAUDITED)
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Three Months Ended March 31,
|
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2010
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2009
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(in millions)
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Preferred stock
|
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Balance at beginning and end of period
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$
|
575
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$
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575
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Common shareholders equity
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|
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Additional paid-in capital
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Balance at beginning of period
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$
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23,119
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$
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21,485
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Capital contribution from parent company
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-
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1,155
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Return of capital to parent company
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-
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(1,043
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)
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Employee benefit plans, including transfers and other
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1
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(5
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)
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Balance at end of period
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$
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23,120
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$
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21,592
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Accumulated deficit
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Balance at beginning of period
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$
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(14,732
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)
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$
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(7,245
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)
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Net income (loss)
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(603
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)
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872
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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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)
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|
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Balance at end of period
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$
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(15,344
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)
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$
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(6,382
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)
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Accumulated other comprehensive loss
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|
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Balance at beginning of period
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$
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(583
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)
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|
$
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(1,378
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)
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Net change in unrealized gains (losses), net of tax, on:
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Derivatives classified as cash flow hedges
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(7
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)
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270
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Securities
available-for-sale,
not
other-than-temporarily
impaired
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11
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(22
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)
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Other-than-temporarily
impaired debt securities
available-for-sale(1)
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1
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-
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Postretirement benefit plan adjustment, net of tax
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1
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16
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Foreign currency translation adjustments
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(4
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)
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|
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(4
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)
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|
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|
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Other comprehensive income, net of tax
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|
2
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|
|
|
260
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|
|
|
|
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|
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Balance at end of period
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$
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(581
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)
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|
$
|
(1,118
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)
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|
|
|
|
|
|
|
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Total common shareholders equity
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$
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7,195
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|
$
|
14,092
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|
|
|
|
|
|
|
|
|
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Comprehensive income (loss)
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|
|
|
|
|
|
|
|
Net income (loss)
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|
$
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(603
|
)
|
|
$
|
872
|
|
Other comprehensive income
|
|
|
2
|
|
|
|
260
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
(601
|
)
|
|
$
|
1,132
|
|
|
|
|
|
|
|
|
|
|
|
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(1) |
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During the three months ended
March 31, 2010, gross
other-than-temporary
impairment (OTTI) recoveries on
available-for-sale
securities totaled $1 million relating to the non-credit
component of OTTI previously recorded in accumulated other
comprehensive income.
|
The accompanying notes are an integral part of the consolidated
financial statements.
5
HSBC Finance Corporation
CONSOLIDATED
STATEMENT OF CASH FLOWS (UNAUDITED)
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(603
|
)
|
|
$
|
872
|
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
Provision for credit losses
|
|
|
1,919
|
|
|
|
2,945
|
|
Gain on bulk sale of receivables to HSBC Bank USA, National
Association (HSBC Bank USA)
|
|
|
-
|
|
|
|
(57
|
)
|
Gain on receivable sales to HSBC affiliates
|
|
|
(116
|
)
|
|
|
(128
|
)
|
Goodwill and other intangible impairment
|
|
|
-
|
|
|
|
667
|
|
Loss on sale of real estate owned, including lower of cost or
market adjustments
|
|
|
10
|
|
|
|
84
|
|
Insurance policy and claim reserves
|
|
|
(12
|
)
|
|
|
(2
|
)
|
Depreciation and amortization
|
|
|
45
|
|
|
|
55
|
|
Mark-to-market
on debt designated at fair value and related derivatives
|
|
|
78
|
|
|
|
(3,992
|
)
|
Originations of loans held for sale
|
|
|
(7,834
|
)
|
|
|
(8,791
|
)
|
Sales and collections on loans held for sale
|
|
|
7,950
|
|
|
|
9,043
|
|
Purchase of auto finance receivables from HSBC Bank USA for
immediate sale
|
|
|
(379
|
)
|
|
|
-
|
|
Cash proceeds from sale of auto finance receivables
|
|
|
379
|
|
|
|
-
|
|
Foreign exchange and derivative movements on long-term debt and
net change in non-FVO related derivative assets and liabilities
|
|
|
(844
|
)
|
|
|
(1,342
|
)
|
Other-than-temporary
impairment on securities
|
|
|
-
|
|
|
|
20
|
|
Lower of cost or fair value on receivables held for sale
|
|
|
-
|
|
|
|
170
|
|
Net change in other assets
|
|
|
1,553
|
|
|
|
2,338
|
|
Net change in other liabilities
|
|
|
(70
|
)
|
|
|
(15
|
)
|
Other, net
|
|
|
181
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
2,257
|
|
|
|
1,993
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Securities:
|
|
|
|
|
|
|
|
|
Purchased
|
|
|
(304
|
)
|
|
|
(179
|
)
|
Matured
|
|
|
136
|
|
|
|
124
|
|
Sold
|
|
|
74
|
|
|
|
10
|
|
Net change in short-term securities
available-for-sale
|
|
|
111
|
|
|
|
106
|
|
Net change in securities purchased under agreements to resell
|
|
|
(2,336
|
)
|
|
|
(4,576
|
)
|
Net change in interest bearing deposits with banks
|
|
|
7
|
|
|
|
3
|
|
Receivables:
|
|
|
|
|
|
|
|
|
Net (originations) collections
|
|
|
2,161
|
|
|
|
2,568
|
|
Purchases and related premiums
|
|
|
(11
|
)
|
|
|
(10
|
)
|
Proceeds from sales of real estate owned
|
|
|
293
|
|
|
|
399
|
|
Cash received from bulk sales of receivables to HSBC Bank USA
|
|
|
-
|
|
|
|
8,821
|
|
Cash received in sale of auto finance servicing operations and
receivables held for sale
|
|
|
551
|
|
|
|
-
|
|
Purchases of properties and equipment
|
|
|
(5
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
677
|
|
|
|
7,257
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
6
HSBC Finance Corporation
CONSOLIDATED
STATEMENT OF CASH FLOWS (UNAUDITED) (Continued)
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
Net change in short-term debt
|
|
|
(591
|
)
|
|
|
(4,366
|
)
|
Net change in due to affiliates
|
|
|
(20
|
)
|
|
|
(1,051
|
)
|
Long-term debt issued
|
|
|
119
|
|
|
|
1,600
|
|
Long-term debt retired
|
|
|
(2,551
|
)
|
|
|
(5,155
|
)
|
Insurance:
|
|
|
|
|
|
|
|
|
Policyholders benefits paid
|
|
|
(19
|
)
|
|
|
(21
|
)
|
Cash received from policyholders
|
|
|
15
|
|
|
|
14
|
|
Capital contribution from parent
|
|
|
-
|
|
|
|
880
|
|
Return of capital to parent
|
|
|
-
|
|
|
|
(1,043
|
)
|
Shareholders dividends
|
|
|
(9
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(3,056
|
)
|
|
|
(9,151
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
|
(122
|
)
|
|
|
99
|
|
Cash at beginning of period
|
|
|
311
|
|
|
|
255
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
189
|
|
|
$
|
354
|
|
|
|
|
|
|
|
|
|
|
Supplemental Noncash Investing and Capital Activities:
|
|
|
|
|
|
|
|
|
Fair value of properties added to real estate owned
|
|
$
|
372
|
|
|
$
|
363
|
|
|
|
|
|
|
|
|
|
|
Extinguishment of indebtedness related to bulk receivable sale
|
|
$
|
-
|
|
|
$
|
(6,077
|
)
|
|
|
|
|
|
|
|
|
|
Redemption of the junior subordinated notes underlying the
mandatorily redeemable preferred securities of the Household
Capital Trust VIII for common stock
|
|
$
|
-
|
|
|
$
|
275
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements
7
HSBC Finance Corporation
1. Organization
and Basis of Presentation
HSBC Finance Corporation is an indirect wholly owned subsidiary
of HSBC North America Holdings Inc. (HSBC North
America), which is an indirect wholly owned subsidiary of
HSBC Holdings plc (HSBC). The accompanying unaudited
interim consolidated financial statements of HSBC Finance
Corporation and its subsidiaries have been prepared in
accordance with accounting principles generally accepted in the
United States of America (U.S. GAAP) for
interim financial information and with the instructions to
Form 10-Q
and Article 10 of
Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
all normal and recurring adjustments considered necessary for a
fair presentation of financial position, results of operations
and cash flows for the interim periods have been made. HSBC
Finance Corporation and its subsidiaries may also be referred to
in this
Form 10-Q
as we, us or our. These
unaudited interim consolidated financial statements should be
read in conjunction with our Annual Report on
Form 10-K
for the year ended December 31, 2009 (the 2009
Form 10-K).
Certain reclassifications have been made to prior period amounts
to conform to the current period presentation.
The consolidated financial statements have been prepared on the
basis that we will continue as a going concern. Such assertion
contemplates the significant losses recognized in recent years
and the challenges we anticipate with respect to a sustainable
return to profitability under prevailing economic conditions.
HSBC continues to be fully committed and has the capacity and
willingness to continue to provide the necessary capital and
liquidity to fund our operations.
The preparation of financial statements in conformity with
U.S. GAAP requires 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.
During the first quarter of 2010, we adopted new accounting
guidance on the consolidation of variable interest entities
(VIEs) and new disclosure requirements relating to
fair value measurements. See Note 19, New Accounting
Pronouncements for further details and related impacts.
2. Sale
of Auto Finance Servicing Operations and Certain Auto Finance
Receivables
In March 2010, we sold our auto finance receivable servicing
operations as well as both delinquent and non-delinquent auto
finance receivables with a carrying value of $927 million
(par value of $1.0 billion), of which $379 million was
purchased from HSBC Bank USA immediately prior to the sale at
estimated fair value, to
8
HSBC Finance Corporation
Santander Consumer USA Inc. (SC USA) for
$930 million in cash. Under the terms of the agreement, our
auto finance receivable servicing facilities in San Diego,
California and Lewisville, Texas were assigned to SC USA and the
majority of the employees from those locations were offered the
opportunity to transfer to SC USA at the time of close. SC USA
will service the remainder of our auto finance receivable
portfolio as well as the auto finance receivable portfolio we
had previously serviced for HSBC Bank USA. As the receivables
sold were previously classified as held for sale and written
down to the lower of cost or fair value, we recorded a gain of
$5 million ($3 million after-tax) during the first
quarter of 2010 which primarily related to the sale of the auto
servicing platform and reversal of certain accruals related to
leases assumed by SC USA. While this business is currently
operating in run-off mode, we will not report it as a
discontinued operation after this transaction because we will
continue to generate cash flow from the on-going collection of
the receivables, including interest and fees.
3. Strategic
Initiatives
As discussed in prior filings, we have been engaged in a
continuing, comprehensive evaluation of the strategies and
opportunities of our operations. In light of the unprecedented
developments in the retail credit markets, particularly in the
residential mortgage industry, this evaluation resulted in
decisions to lower the risk profile of our operations, to reduce
our capital and liquidity requirements by reducing the size of
our balance sheet and to rationalize and maximize the efficiency
of our operations. As a result, a number of strategic actions
have been undertaken beginning in mid-2007 which are summarized
below:
2009 Strategic Initiatives During 2009, we
undertook a number of actions including the following:
|
|
|
|
>
|
In November 2009, we entered into an agreement to sell our auto
finance receivable serving operations and certain auto finance
receivables. See Note 2, Sale of Auto Finance
Servicing Operations and Certain Auto Finance Receivables,
for further discussion regarding this transaction.
|
|
|
>
|
Throughout 2009, we decided to exit certain lease arrangements
and consolidate a variety of locations across the United States.
As a result, we have or will exit certain facilities
and/or
significantly reduce our occupancy space over the next 9 to
15 months in the following locations: Bridgewater, New
Jersey; Minnetonka, Minnesota; Wood Dale, Illinois; Elmhurst,
Illinois; Sioux Falls, South Dakota and Tampa, Florida.
Additionally, we have consolidated our operations in Virginia
Beach, Virginia into our Chesapeake, Virginia facility and
consolidated certain servicing functions currently performed in
Brandon, Florida to facilities in Buffalo, New York and
Elmhurst, Illinois.
|
|
|
>
|
In late February 2009, we decided to discontinue new customer
account originations for all products by our Consumer Lending
business and close all branch offices.
|
9
HSBC Finance Corporation
Summary of Restructuring Liability Related to 2009
Strategic Initiatives The following summarizes the
changes in the restructure liability during the three months
ended March 31, 2010 and 2009, respectively, relating to
actions implemented during 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-Time
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination and
|
|
|
Lease Termination
|
|
|
|
|
|
|
|
|
|
Other Employee
|
|
|
and Associated
|
|
|
|
|
|
|
|
|
|
Benefits
|
|
|
Costs
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring liability at January 1, 2010
|
|
$
|
13
|
|
|
$
|
12
|
|
|
$
|
2
|
|
|
$
|
27
|
|
Restructuring costs recorded during the period
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
Restructuring costs paid during the period
|
|
|
(3
|
)
|
|
|
(5
|
)
|
|
|
-
|
|
|
|
(8
|
)
|
Adjustments to the restructure liability during the period
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructure liability at March 31, 2010
|
|
$
|
11
|
|
|
$
|
8
|
|
|
$
|
2
|
|
|
$
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring liability at January 1, 2009
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Restructuring costs recorded during the period
|
|
|
87
|
|
|
|
54
|
|
|
|
14
|
|
|
|
155
|
|
Restructuring costs paid during the period
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
(1
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructure liability at March 31, 2009
|
|
$
|
87
|
|
|
$
|
50
|
|
|
$
|
13
|
|
|
$
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Strategic Initiatives During 2008, we
undertook a number of actions including the following:
|
|
|
|
>
|
During the third quarter of 2008, closed servicing facilities
located in Jacksonville, Florida and White Marsh, Maryland in
our Card and Retail Services business and redeployed these
activities to other facilities in our Card and Retail Services
business.
|
|
|
>
|
Reduced headcount in our Card and Retail Services business
during the fourth quarter of 2008;
|
|
|
>
|
In March 2008, reduced the size of our Auto Finance business and
in July 2008 discontinued all new auto finance originations from
our dealer and
direct-to-consumer
channels; and
|
|
|
>
|
Ceased operations of Solstice Capital Group, Inc, a subsidiary
of our Consumer Lending business which originated real estate
secured receivables for resale.
|
10
HSBC Finance Corporation
Summary of Restructuring Liability Related to 2008
Strategic Initiatives The following summarizes the
changes in the restructure liability during the three months
ended March 31, 2010 and 2009 relating to the actions
implemented during 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-Time
|
|
|
Lease
|
|
|
|
|
|
|
Termination and
|
|
|
Termination
|
|
|
|
|
|
|
Other Employee
|
|
|
and Associated
|
|
|
|
|
|
|
Benefits
|
|
|
Costs
|
|
|
Total
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Three months ended March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructure liability at January 1, 2010
|
|
$
|
-
|
|
|
$
|
4
|
|
|
$
|
4
|
|
Restructuring costs recorded during the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Restructuring costs paid during the period
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Liability assumed by third
party(1)
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructure liability at March 31, 2010
|
|
$
|
-
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructure liability at January 1, 2009
|
|
$
|
10
|
|
|
$
|
10
|
|
|
$
|
20
|
|
Restructuring costs recorded during the period
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
Restructuring costs paid during the period
|
|
|
(8
|
)
|
|
|
(1
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructure liability at March 31, 2009
|
|
$
|
3
|
|
|
$
|
9
|
|
|
$
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
During the first quarter of 2010,
certain leases of our auto finance operations were assumed by SC
USA. See Note 2, Sale of Auto Finance Servicing
Operations and Certain Auto Finance Receivables, for
additional information regarding this transaction.
|
2007 Actions Beginning in mid-2007 we undertook a
number of actions including the following:
|
|
|
|
>
|
Discontinued correspondent channel acquisitions of our Mortgage
Services business;
|
|
|
>
|
Ceased operations of Decision One Mortgage Company;
|
|
|
>
|
Reduced the Consumer Lending branch network to approximately
1,000 branches at December 31, 2007; and
|
|
|
>
|
Closed our loan underwriting, processing and collections center
in Carmel, Indiana.
|
The following summarizes the changes in the restructure
liability during the three months ended March 31, 2010 and
2009 relating to the actions implemented during 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-Time
|
|
|
|
|
|
|
|
|
|
Termination and
|
|
|
Lease Termination
|
|
|
|
|
|
|
Other Employee
|
|
|
and Associated
|
|
|
|
|
|
|
Benefits
|
|
|
Costs
|
|
|
Total
|
|
|
|
|
|
(in millions)
|
|
|
Three months ended March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructure liability at January 1, 2010
|
|
$
|
-
|
|
|
$
|
14
|
|
|
$
|
14
|
|
Restructuring costs recorded during the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Restructuring costs paid during the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructure liability at March 31, 2010
|
|
$
|
-
|
|
|
$
|
14
|
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructure liability at January 1, 2009
|
|
$
|
1
|
|
|
$
|
17
|
|
|
$
|
18
|
|
Restructuring costs recorded during the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Restructuring costs paid during the period
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructure liability at March 31, 2009
|
|
$
|
-
|
|
|
$
|
16
|
|
|
$
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
HSBC Finance Corporation
Summary of Restructuring Activities The following
table summarizes the net cash and non-cash expenses recorded for
all restructuring activities during the three months ended
March 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-Time
|
|
|
|
|
|
|
|
|
Fixed Assets
|
|
|
|
|
|
|
Termination and
|
|
|
Lease Termination
|
|
|
|
|
|
and Other
|
|
|
|
|
|
|
Other Employee
|
|
|
and Associated
|
|
|
|
|
|
Non-Cash
|
|
|
|
|
|
|
Benefits(1)
|
|
|
Costs(2)
|
|
|
Other(3)
|
|
|
Adjustments(4)
|
|
|
Total
|
|
|
|
|
|
(in millions)
|
|
|
Three months ended March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Lending closure
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2
|
|
Three months ended March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto Finance
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1
|
|
Consumer Lending
closure(5)
|
|
|
87
|
|
|
|
54
|
|
|
|
14
|
|
|
|
14
|
|
|
|
169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
88
|
|
|
$
|
54
|
|
|
$
|
14
|
|
|
$
|
14
|
|
|
$
|
170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
One-time termination and other
employee benefits are included as a component of Salaries and
employee benefits in the consolidated statement of income (loss).
|
|
(2) |
|
Lease termination and associated
costs are included as a component of Occupancy and equipment
expenses in the consolidated statement of income (loss).
|
|
(3) |
|
The other expenses are included as
a component of Other servicing and administrative expenses in
the consolidated statement of income (loss).
|
|
(4) |
|
Includes $29 million of fixed
asset write offs during the three months ended March 31,
2009, which were recorded as a component of Other servicing and
administrative expenses in the consolidated statement of income
(loss). The three months ended March 31, 2009 also includes
$3 million relating to stock based compensation and other
benefits, a curtailment gain of $16 million and a reduction
of pension expense of $2 million which were recorded as a
component of Salaries and employee benefits in the consolidated
statement of income (loss).
|
|
(5) |
|
Excludes intangible asset
impairment charges of $14 million recorded during the three
months ended March 31, 2009.
|
4. Securities
Securities consisted of the following
available-for-sale
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Component
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
of OTTI
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
March 31, 2010
|
|
Cost
|
|
|
Securities(4)
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
(in millions)
|
|
|
U.S. Treasury
|
|
$
|
425
|
|
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
426
|
|
U.S. government sponsored
enterprises(1)
|
|
|
134
|
|
|
|
-
|
|
|
|
4
|
|
|
|
(1
|
)
|
|
|
137
|
|
U.S. government agency issued or guaranteed
|
|
|
17
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
18
|
|
Obligations of U.S. states and political subdivisions
|
|
|
30
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
31
|
|
Asset-backed
securities(2)
|
|
|
87
|
|
|
|
(10
|
)
|
|
|
2
|
|
|
|
-
|
|
|
|
79
|
|
U.S. corporate debt
securities(3)
|
|
|
1,621
|
|
|
|
-
|
|
|
|
68
|
|
|
|
(13
|
)
|
|
|
1,676
|
|
Foreign debt securities
|
|
|
346
|
|
|
|
-
|
|
|
|
15
|
|
|
|
(1
|
)
|
|
|
360
|
|
Equity securities
|
|
|
12
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
Money market funds
|
|
|
425
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
3,097
|
|
|
|
(10
|
)
|
|
|
92
|
|
|
|
(15
|
)
|
|
|
3,164
|
|
Accrued investment income
|
|
|
31
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
available-for-sale
|
|
$
|
3,128
|
|
|
$
|
(10
|
)
|
|
$
|
92
|
|
|
$
|
(15
|
)
|
|
$
|
3,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
HSBC Finance Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Component
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
of OTTI
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
December 31, 2009
|
|
Cost
|
|
|
Securities(4)
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
(in millions)
|
|
|
U.S. Treasury
|
|
$
|
196
|
|
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
(1
|
)
|
|
$
|
196
|
|
U.S. government sponsored
enterprises(1)
|
|
|
95
|
|
|
|
-
|
|
|
|
3
|
|
|
|
(1
|
)
|
|
|
97
|
|
U.S. government agency issued or guaranteed
|
|
|
20
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
21
|
|
Obligations of U.S. states and political subdivisions
|
|
|
31
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
32
|
|
Asset-backed
securities(2)
|
|
|
94
|
|
|
|
(11
|
)
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
83
|
|
U.S. corporate debt
securities(3)
|
|
|
1,684
|
|
|
|
-
|
|
|
|
60
|
|
|
|
(20
|
)
|
|
|
1,724
|
|
Foreign debt securities
|
|
|
351
|
|
|
|
-
|
|
|
|
15
|
|
|
|
-
|
|
|
|
366
|
|
Equity securities
|
|
|
12
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
Money market funds
|
|
|
627
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
3,110
|
|
|
|
(11
|
)
|
|
|
83
|
|
|
|
(24
|
)
|
|
|
3,158
|
|
Accrued investment income
|
|
|
29
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
available-for-sale
|
|
$
|
3,139
|
|
|
$
|
(11
|
)
|
|
$
|
83
|
|
|
$
|
(24
|
)
|
|
$
|
3,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $55 million and
$65 million of mortgage-backed securities issued by the
Federal National Mortgage Association and the Federal Home Loan
Mortgage Corporation as of March 31, 2010 and
December 31, 2009, respectively.
|
|
(2) |
|
The majority of our asset-backed
securities are residential mortgage-backed securities at
March 31, 2010 and December 31, 2009.
|
|
(3) |
|
At March 31, 2010 and
December 31, 2009, the majority of our U.S. corporate debt
securities represent investments in the financial services,
consumer products, healthcare and industrials sectors.
|
|
(4) |
|
For
available-for-sale
debt securities which are
other-than-temporarily
impaired, the non-credit loss component of
other-than-temporarily
impairment (OTTI) is recorded in accumulated other
comprehensive income.
|
A summary of gross unrealized losses and related fair values as
of March 31, 2010 and December 31, 2009, classified as
to the length of time the losses have existed follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than One Year
|
|
|
Greater Than One Year
|
|
|
|
|
|
|
Gross
|
|
|
Aggregate
|
|
|
|
|
|
Gross
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Unrealized
|
|
|
Fair Value of
|
|
|
Number
|
|
|
Unrealized
|
|
|
Fair Value of
|
|
March 31, 2010
|
|
Securities
|
|
|
Losses
|
|
|
Investments
|
|
|
of Securities
|
|
|
Losses
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
(dollars are in millions)
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
|
16
|
|
|
$
|
-
|
|
|
$
|
174
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
U.S. government sponsored enterprises
|
|
|
8
|
|
|
|
-
|
|
|
|
36
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
4
|
|
U.S. government agency issued or guaranteed
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Obligations of U.S. states and political subdivisions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
Asset-backed securities
|
|
|
3
|
|
|
|
-
|
|
|
|
3
|
|
|
|
19
|
|
|
|
(10
|
)
|
|
|
35
|
|
U.S. corporate debt securities
|
|
|
57
|
|
|
|
(3
|
)
|
|
|
165
|
|
|
|
43
|
|
|
|
(10
|
)
|
|
|
142
|
|
Foreign debt securities
|
|
|
14
|
|
|
|
(1
|
)
|
|
|
51
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98
|
|
|
$
|
(4
|
)
|
|
$
|
429
|
|
|
|
64
|
|
|
$
|
(21
|
)
|
|
$
|
181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
HSBC Finance Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than One Year
|
|
|
Greater Than One Year
|
|
|
|
|
|
|
Gross
|
|
|
Aggregate
|
|
|
|
|
|
Gross
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Unrealized
|
|
|
Fair Value of
|
|
|
Number of
|
|
|
Unrealized
|
|
|
Fair Value of
|
|
December 31, 2009
|
|
Securities
|
|
|
Losses
|
|
|
Investments
|
|
|
Securities
|
|
|
Losses
|
|
|
Investments
|
|
|
|
|
|
(dollars are in millions)
|
|
|
U.S. Treasury
|
|
|
17
|
|
|
$
|
(1
|
)
|
|
$
|
97
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
U.S. government sponsored enterprises
|
|
|
1
|
|
|
|
-
|
|
|
|
5
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
4
|
|
U.S. government agency issued or guaranteed
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Obligations of U.S. states and political subdivisions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
Asset-backed securities
|
|
|
7
|
|
|
|
(1
|
)
|
|
|
10
|
|
|
|
18
|
|
|
|
(12
|
)
|
|
|
34
|
|
U.S. corporate debt securities
|
|
|
59
|
|
|
|
(3
|
)
|
|
|
170
|
|
|
|
50
|
|
|
|
(17
|
)
|
|
|
150
|
|
Foreign debt securities
|
|
|
12
|
|
|
|
-
|
|
|
|
33
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96
|
|
|
$
|
(5
|
)
|
|
$
|
315
|
|
|
|
70
|
|
|
$
|
(30
|
)
|
|
$
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized losses decreased during the first quarter of
2010 primarily due to the impact of lower credit spreads and
interest rates. We have reviewed our securities for which there
is an unrealized loss in accordance with our accounting policies
for
other-than-temporary
impairment. Although no
other-than-temporary
impairments were recorded during the first quarter of 2010, we
did recognize a $1 million recovery in accumulated other
comprehensive income relating to the non-credit component of
other-than-temporary
impairment previously recognized in accumulated other
comprehensive income.
Our decision in the first quarter of 2009 to discontinue new
customer account originations in our Consumer Lending business
adversely impacted certain insurance subsidiaries that hold
perpetual preferred securities. Therefore, during the first
quarter of 2009 we determined it was more-likely-than-not that
we would be required to sell the portfolio of perpetual
preferred securities prior to recovery of amortized cost and,
therefore, these securities were deemed to be
other-than-temporarily
impaired. We subsequently sold our entire portfolio of perpetual
preferred securities during the second quarter of 2009. Prior to
their sale, we recorded $20 million of impairment losses in
the first quarter of 2009 related to these perpetual preferred
securities as a component of investment income. The entire
unrealized loss was recorded in earnings in accordance with new
accounting guidance which we early adopted effective
January 1, 2009 related to the recognition of
other-than-temporary
impairment and is described more fully below, as we determined
it was more-likely-than-not that we would be required to sell
the portfolio of perpetual preferred securities prior to
recovery of amortized cost.
On-Going Assessment for
Other-Than-Temporary
Impairment On a quarterly basis, we perform an
assessment to determine whether there have been any events or
economic circumstances to indicate that a security with an
unrealized loss has suffered
other-than-temporary
impairment. A debt security is considered impaired if the fair
value is less than its amortized cost basis at the reporting
date. If impaired, we then assess whether the unrealized loss is
other-than-temporary.
An unrealized loss is generally deemed to be
other-than-temporary
and a credit loss is deemed to exist if the present value of the
expected future cash flows is less than the amortized cost basis
of the debt security. As a result, the credit loss component of
an
other-than-temporary
impairment write-down for debt securities is recorded in
earnings while the remaining portion of the impairment loss is
recognized net of tax in other comprehensive income (loss)
provided we do not intend to sell the underlying debt security
and it is more-likely-than-not that we would not have to sell
the debt security prior to recovery.
For all our debt securities, as of the reporting date we do not
have the intention to sell these securities and believe we will
not be required to sell these securities for contractual,
regulatory or liquidity reasons.
14
HSBC Finance Corporation
We consider the following factors in determining whether a
credit loss exists and the period over which the debt security
is expected to recover:
|
|
|
|
|
The length of time and the extent to which the fair value has
been less than the amortized cost basis;
|
|
|
|
The level of credit enhancement provided by the structure which
includes, but is not limited to, credit subordination positions,
overcollateralization, protective triggers and financial
guarantees provided by monoline wraps;
|
|
|
|
Changes in the near term prospects of the issuer or underlying
collateral of a security, such as changes in default rates, loss
severities given default and significant changes in prepayment
assumptions;
|
|
|
|
The level of excess cash flows generated from the underlying
collateral supporting the principal and interest payments of the
debt securities; and
|
|
|
|
Any adverse change to the credit conditions of the issuer or the
security such as credit downgrades by the rating agencies.
|
At March 31, 2010, approximately 92 percent of our
corporate debt securities are rated A- or better and
approximately 66 percent of our asset-backed securities,
which totaled $79 million are rated AAA.
Although no
other-than-temporary
impairments were recorded during the first quarter of 2010,
without a sustained economic recovery,
other-than-temporary
impairments may occur in future periods.
Proceeds from the sale or call of
available-for-sale
investments totaled $74 million and $10 million during
the three months ended March 31, 2010 and 2009,
respectively. We realized gross gains of $3 million and
$1 million during the three months ended March 31,
2010 and 2009, respectively. We realized gross losses of less
than $1 million during the three months ended
March 31, 2010 and 2009.
15
HSBC Finance Corporation
Contractual maturities of and yields on investments in debt
securities for those with set maturities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2010
|
|
|
|
Due
|
|
|
After 1
|
|
|
After 5
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
but Within
|
|
|
but Within
|
|
|
After
|
|
|
|
|
|
|
1 Year
|
|
|
5 Years
|
|
|
10 Years
|
|
|
10 Years
|
|
|
Total
|
|
|
|
|
|
(dollars are in millions)
|
|
|
U.S. Treasury:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
$
|
145
|
|
|
$
|
279
|
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
425
|
|
Fair value
|
|
|
145
|
|
|
|
280
|
|
|
|
1
|
|
|
|
-
|
|
|
|
426
|
|
Yield(1)
|
|
|
.20
|
%
|
|
|
2.00
|
%
|
|
|
4.96
|
%
|
|
|
-
|
|
|
|
1.39
|
%
|
U.S. government sponsored enterprises:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
$
|
50
|
|
|
$
|
7
|
|
|
$
|
38
|
|
|
$
|
39
|
|
|
$
|
134
|
|
Fair value
|
|
|
50
|
|
|
|
7
|
|
|
|
40
|
|
|
|
40
|
|
|
|
137
|
|
Yield(1)
|
|
|
.26
|
%
|
|
|
5.30
|
%
|
|
|
4.74
|
%
|
|
|
4.93
|
%
|
|
|
3.15
|
%
|
U.S. government agency issued or guaranteed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
17
|
|
|
$
|
17
|
|
Fair value
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18
|
|
|
|
18
|
|
Yield(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5.06
|
%
|
|
|
5.06
|
%
|
Obligations of U.S. states and political subdivisions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
12
|
|
|
$
|
18
|
|
|
$
|
30
|
|
Fair value
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
|
|
19
|
|
|
|
31
|
|
Yield(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
4.07
|
%
|
|
|
4.06
|
%
|
|
|
4.06
|
%
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
$
|
-
|
|
|
$
|
20
|
|
|
$
|
15
|
|
|
$
|
52
|
|
|
$
|
87
|
|
Fair value
|
|
|
-
|
|
|
|
22
|
|
|
|
15
|
|
|
|
42
|
|
|
|
79
|
|
Yield(1)
|
|
|
-
|
|
|
|
4.92
|
%
|
|
|
5.13
|
%
|
|
|
3.06
|
%
|
|
|
3.85
|
%
|
U.S. corporate debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
$
|
120
|
|
|
$
|
759
|
|
|
$
|
211
|
|
|
$
|
531
|
|
|
$
|
1,621
|
|
Fair value
|
|
|
123
|
|
|
|
804
|
|
|
|
218
|
|
|
|
531
|
|
|
|
1,676
|
|
Yield(1)
|
|
|
4.50
|
%
|
|
|
4.83
|
%
|
|
|
4.71
|
%
|
|
|
5.36
|
%
|
|
|
4.96
|
%
|
Foreign debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
$
|
23
|
|
|
$
|
235
|
|
|
$
|
53
|
|
|
$
|
35
|
|
|
$
|
346
|
|
Fair value
|
|
|
23
|
|
|
|
247
|
|
|
|
53
|
|
|
|
37
|
|
|
|
360
|
|
Yield(1)
|
|
|
3.28
|
%
|
|
|
4.36
|
%
|
|
|
3.58
|
%
|
|
|
6.43
|
%
|
|
|
4.38
|
%
|
|
|
|
(1) |
|
Computed by dividing annualized
interest by the amortized cost of respective investment
securities.
|
16
HSBC Finance Corporation
5. Receivables
Receivables consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Real estate secured
|
|
$
|
56,900
|
|
|
$
|
59,535
|
|
Auto finance
|
|
|
3,346
|
|
|
|
3,961
|
|
Credit card
|
|
|
10,597
|
|
|
|
11,626
|
|
Personal non-credit card
|
|
|
9,423
|
|
|
|
10,486
|
|
Commercial and other
|
|
|
48
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
Total receivables
|
|
|
80,314
|
|
|
|
85,658
|
|
HSBC acquisition purchase accounting fair value adjustments
|
|
|
(10
|
)
|
|
|
(11
|
)
|
Accrued finance charges
|
|
|
1,794
|
|
|
|
1,929
|
|
Credit loss reserve for receivables
|
|
|
(8,417
|
)
|
|
|
(9,264
|
)
|
Unearned credit insurance premiums and claims reserves
|
|
|
(165
|
)
|
|
|
(181
|
)
|
|
|
|
|
|
|
|
|
|
Total receivables, net
|
|
$
|
73,516
|
|
|
$
|
78,131
|
|
|
|
|
|
|
|
|
|
|
Secured financings of $5.1 billion at March 31, 2010
are secured by $7.5 billion of closed-end real estate
secured and auto finance receivables. Secured financings of
$5.5 billion at December 31, 2009 were secured by
$8.0 billion of closed-end real estate secured and auto
finance receivables.
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.
Purchased Receivable Portfolios In November 2006,
we acquired $2.5 billion of real estate secured receivables
from Champion Mortgage (Champion) a division of
KeyBank, N.A. Receivables purchased for which at the time of
acquisition there was evidence of deterioration in credit
quality since origination and for which it was probable that all
contractually required payments would not be collected and that
the associated line of credit had been closed, if applicable,
were recorded at an amount dependent upon the cash flows
expected to be collected at the time of acquisition
(Purchased Credit-Impaired Receivables). The
difference between these expected cash flows and the purchase
price represents an accretable yield which is amortized to
interest income over the life of the receivable. The carrying
amount of Champion real estate secured receivables subject to
these accounting requirements was $33 million and
$36 million at March 31, 2010 and December 31,
2009, respectively, and is included in the real estate secured
receivables in the table above. The outstanding contractual
balance of these receivables was $63 million and
$66 million at March 31, 2010 and December 31,
2009, respectively. Credit loss reserves of $29 million and
$31 million as of March 31, 2010 and December 31,
2009, respectively, were held for the acquired Champion
receivables subject to accounting requirements for Purchased
Credit-Impaired Receivables due to a decrease in the expected
future cash flows since the acquisition.
As part of our acquisition of Metris Companies Inc.
(Metris) on December 1, 2005, we acquired
$5.3 billion of credit card receivables some of which were
also subject to the accounting requirements for Purchased
Credit- Impaired Receivables as described above. During the
fourth quarter of 2009, the accretable yield was fully amortized
to interest income and there was no remaining difference between
the carrying value and the outstanding contractual balances of
these Purchased Credit-Impaired Receivables. At March 31,
2010 and December 31, 2009, we no longer have any
receivables acquired from Metris which are subject to these
accounting requirements.
17
HSBC Finance Corporation
The following summarizes the accretable yield on Champion during
the three months ended March 31, 2010 and for the Champion
and Metris receivables during the three months ended
March 31, 2009:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2010(1)(2)
|
|
|
2009(1)(2)
|
|
|
|
|
|
(in millions)
|
|
|
Accretable yield at beginning of period
|
|
$
|
(13
|
)
|
|
$
|
(28
|
)
|
Accretable yield amortized to interest income during the period
|
|
|
1
|
|
|
|
7
|
|
Reclassification of non-accretable
difference(3)
|
|
|
2
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
Accretable yield at end of
period(4)
|
|
$
|
(10
|
)
|
|
$
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For the Champion portfolio, there
was a reclassification of non-accretable difference of
$2 million during the three months ended March 31,
2010. During the three months ended March 31, 2009, there
were no reclassifications of non-accretable difference.
|
|
(2) |
|
For the Metris portfolio, there was
a reclassification of non-accretable difference of
$8 million during the three months ended March 31,
2009.
|
|
(3) |
|
Reclassification (from)
non-accretable difference represents an increase to the
estimated cash flows to be collected on the underlying portfolio
and reclassification to non-accretable difference represents a
decrease to the estimated cash flows to be collected on the
underlying portfolio.
|
|
(4) |
|
At March 31, 2010, the entire
remaining accretable yield is related to the Champion portfolio.
The accretable yield related to the Metris portfolio was fully
amortized to interest income during the fourth quarter of 2009.
|
Collateralized funding transactions We maintain a
secured conduit credit facility with commercial banks which
provides for secured financing of receivables on a revolving
basis totaling $400 million. Of the amount available under
this facility, no amounts were utilized at March 31, 2010
or December 31, 2009. The amount available under these
facilities will vary based on the timing and volume of secured
financing transactions and our general liquidity plans.
Troubled
Debt
Restructurings
The following table presents information about our TDR Loans:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
TDR
Loans(1):
|
|
|
|
|
|
|
|
|
Real estate
secured(2):
|
|
|
|
|
|
|
|
|
Mortgage Services
|
|
$
|
4,522
|
|
|
$
|
4,350
|
|
Consumer Lending
|
|
|
5,244
|
|
|
|
4,776
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
|
9,766
|
|
|
|
9,126
|
|
Auto finance
|
|
|
217
|
|
|
|
284
|
|
Credit card
|
|
|
485
|
|
|
|
473
|
|
Personal non-credit card
|
|
|
751
|
|
|
|
726
|
|
|
|
|
|
|
|
|
|
|
Total TDR Loans
|
|
$
|
11,219
|
|
|
$
|
10,609
|
|
|
|
|
|
|
|
|
|
|
18
HSBC Finance Corporation
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Credit loss reserves for TDR Loans:
|
|
|
|
|
|
|
|
|
Real estate secured:
|
|
|
|
|
|
|
|
|
Mortgage Services
|
|
$
|
1,225
|
|
|
$
|
1,137
|
|
Consumer Lending
|
|
|
1,081
|
|
|
|
1,002
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
|
2,306
|
|
|
|
2,139
|
|
Auto finance
|
|
|
57
|
|
|
|
61
|
|
Credit card
|
|
|
162
|
|
|
|
158
|
|
Personal non-credit card
|
|
|
448
|
|
|
|
353
|
|
|
|
|
|
|
|
|
|
|
Total credit loss reserves for TDR
Loans(3)
|
|
$
|
2,973
|
|
|
$
|
2,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes TDR balances reported as
receivables held for sale for which there are no credit loss
reserves as they are carried at the lower of cost or fair value.
At March 31, 2010, there were no TDR loans included in
receivables held for sale. At December 31, 2009, TDR Loans
included $53 million of auto finance receivables held for
sale.
|
|
(2) |
|
At March 31, 2010 and
December 31, 2009, TDR Loans totaling $1.0 billion and
$773 million, respectively, are recorded at net realizable
value less cost to sell and, therefore, have no credit loss
reserve associated with them.
|
|
(3) |
|
Included in credit loss reserves.
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2010
|
|
2009
|
|
|
|
(in millions)
|
|
Average balance of TDR
Loans(1)
|
|
$
|
10,982
|
|
|
$
|
5,528
|
|
Interest income recognized on TDR Loans
|
|
|
145
|
|
|
|
96
|
|
|
|
|
(1) |
|
During the third and fourth
quarters of 2009, we developed enhanced tracking capabilities to
identify and report TDR Loans which impacts the comparability
between the periods reported above. See Note 7,
Receivables, in our 2009
Form 10-K
for further discussion of these enhanced tracking capabilities.
|
Concentrations of Credit Risk We have historically
served non-conforming and non-prime consumers. Such customers
are individuals who have limited credit histories, modest
incomes, high
debt-to-income
ratios or have experienced credit problems caused by occasional
delinquencies, prior charge-offs, bankruptcy or other credit
related actions. The majority of our secured receivables and
receivables held for sale have high
loan-to-value
ratios. Our receivables and receivables held for sale portfolios
include the following types of loans:
|
|
|
|
|
Interest-only loans A loan which allows a customer
to pay the interest-only portion of the monthly payment for a
period of time which results in lower payments during the
initial loan period. However, subsequent events affecting a
customers financial position could affect their ability to
repay the loan in the future when the principal payments are
required.
|
|
|
|
ARM loans A loan which allows the lender to adjust
pricing on the loan in line with interest rate movements. A
customers financial situation and the general interest
rate environment at the time of the interest rate reset could
affect the customers ability to repay or refinance the
loan after adjustment.
|
|
|
|
Stated income loans Loans underwritten based upon
the loan applicants representation of annual income, which
is not verified by receipt of supporting documentation.
|
19
HSBC Finance Corporation
The following table summarizes the outstanding balances of
interest-only loans, ARM loans and stated income loans in our
receivable portfolios at March 31, 2010 and
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in billions)
|
|
|
Interest-only loans
|
|
$
|
1.3
|
|
|
$
|
1.4
|
|
ARM
loans(1)(2)
|
|
|
9.3
|
|
|
|
9.8
|
|
Stated income loans
|
|
|
3.4
|
|
|
|
3.7
|
|
|
|
|
(1) |
|
ARM loans with initial reset dates
after March 31, 2010 are not significant.
|
|
(2) |
|
We do not have any option ARM loans
in our portfolio.
|
At March 31, 2010 and December 31, 2009,
interest-only, ARM and stated income loans comprise
19 percent and 20 percent of real estate secured
receivables, including receivables held for sale, respectively.
6. Credit
Loss Reserves
An analysis of credit loss reserves was as follows:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Credit loss reserves at beginning of period
|
|
$
|
9,264
|
|
|
$
|
12,415
|
|
Provision for credit losses
|
|
|
1,919
|
|
|
|
2,945
|
|
Charge-offs
|
|
|
(2,963
|
)
|
|
|
(2,523
|
)
|
Recoveries
|
|
|
197
|
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
Credit loss reserves at end of period
|
|
$
|
8,417
|
|
|
$
|
12,972
|
|
|
|
|
|
|
|
|
|
|
Credit loss reserves since March 31, 2009 were
significantly impacted by changes in our charge-off policies for
real estate secured, personal non-credit card and auto finance
receivables which impacts comparability between periods. See
Note 8, Changes in Charge-off Policies, in our
2009
Form 10-K
for further discussion.
7. Receivables
Held for Sale
Receivables held for sale, which are carried at the lower of
cost or fair value, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Real estate
secured(1)
|
|
$
|
3
|
|
|
$
|
3
|
|
Auto finance
|
|
|
-
|
|
|
|
533
|
|
|
|
|
|
|
|
|
|
|
Total receivables held for sale, net
|
|
$
|
3
|
|
|
$
|
536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Consists of real estate secured
receivables in our Mortgage Services which were originated with
the intent to sell.
|
20
HSBC Finance Corporation
The following table shows the activity in receivables held for
sale during the three months ended March 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
Receivables held for sale, beginning of period
|
|
$
|
536
|
|
|
$
|
16,680
|
|
Receivables purchased from HSBC USA Inc for immediate sale to SC
USA(1)
|
|
|
379
|
|
|
|
-
|
|
Transfer of auto finance receivables into receivables held for
sale at the lower of cost or fair value
|
|
|
15
|
|
|
|
-
|
|
Receivable sales
|
|
|
(927
|
)
|
|
|
(14,850
|
)
|
Additional lower of cost or fair value adjustment subsequent to
transfer to receivables held for sale
|
|
|
-
|
|
|
|
(170
|
)
|
Transfer of real estate secured receivables into receivables
held for investment at the lower of cost or fair value
|
|
|
-
|
|
|
|
(214
|
)
|
Net change in receivable balance
|
|
|
-
|
|
|
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
Receivables held for sale, end of period
|
|
$
|
3
|
|
|
$
|
1,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 2, Sale of Auto
Finance Servicing Operations and Certain Auto Finance
Receivables, for additional information regarding this
transaction.
|
In March 2010, we sold a portfolio of auto finance receivables
to SC USA. See Note 2, Sale of Auto Finance Servicing
Operations and Certain Auto Finance Receivables, for
details of this transaction.
In January 2009, we sold our GM and UP Portfolios as well as
certain auto finance receivables to HSBC Bank USA. See
Note 4, Receivable Portfolio Sales to HSBC Bank
USA, in our 2009
Form 10-K
for details of these transactions.
In March 2009, we transferred real estate secured receivables
previously classified as receivables held for sale to
receivables held for investment as we now intend to hold these
receivables for the foreseeable future, generally twelve months
for real estate secured receivables. These receivables were
transferred at the fair market value as of the date of transfer
of $214 million. The outstanding contractual balance of
these receivables was $278 million at March 31, 2009.
The valuation allowance on receivables held for sale was
$6 million and $18 million at March 31, 2010 and
December 31, 2009, respectively.
21
HSBC Finance Corporation
8. Intangible
Assets
Intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Gross
|
|
|
Charges
|
|
|
Amortization
|
|
|
Value
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased credit card relationships and related programs
|
|
$
|
1,736
|
|
|
$
|
-
|
|
|
$
|
1,027
|
|
|
$
|
709
|
|
Consumer loan related relationships
|
|
|
333
|
|
|
|
163
|
|
|
|
170
|
|
|
|
-
|
|
Technology, customer lists and other contracts
|
|
|
282
|
|
|
|
9
|
|
|
|
273
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,351
|
|
|
$
|
172
|
|
|
$
|
1,470
|
|
|
$
|
709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased credit card relationships and related programs
|
|
$
|
1,736
|
|
|
$
|
-
|
|
|
$
|
992
|
|
|
$
|
744
|
|
Consumer loan related relationships
|
|
|
333
|
|
|
|
163
|
|
|
|
170
|
|
|
|
-
|
|
Technology, customer lists and other contracts
|
|
|
282
|
|
|
|
9
|
|
|
|
269
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,351
|
|
|
$
|
172
|
|
|
$
|
1,431
|
|
|
$
|
748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated amortization expense associated with our intangible
assets for each of the following years is as follows:
|
|
|
|
|
Year Ending December 31,
|
|
(in millions)
|
|
|
|
|
2010
|
|
$
|
142
|
|
2011
|
|
|
138
|
|
2012
|
|
|
135
|
|
2013
|
|
|
99
|
|
2014
|
|
|
72
|
|
During the first quarter of 2010, our intangible assets related
to technology, customer lists and other contracts became fully
amortized.
9. Goodwill
Changes in the carrying amount of goodwill are as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Balance at January 1,
|
|
$
|
-
|
|
|
$
|
2,294
|
|
Goodwill impairment related to our Insurance Services business
|
|
|
-
|
|
|
|
(260
|
)
|
Goodwill impairment related to our Card and Retail Services
business
|
|
|
-
|
|
|
|
(393
|
)
|
|
|
|
|
|
|
|
|
|
Balance at March 31,
|
|
$
|
-
|
(1)
|
|
$
|
1,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
At March 31, 2010 and 2009,
accumulated impairment losses on goodwill totaled
$6.3 billion and $4.6 billion, respectively.
|
As a result of the continuing deterioration of economic
conditions throughout 2008 and into 2009 as well as the adverse
impact to our Insurance Services business which resulted from
the closure of all of our Consumer Lending branches, we wrote
off all of our remaining goodwill balance during 2009, of which
$653 million was written off during the first quarter of
2009. See Note 14, Goodwill, in our 2009
Form 10-K
for additional information.
22
HSBC Finance Corporation
10. Derivative
Financial Instruments
Our business activities involve analysis, evaluation, acceptance
and management of some degree of risk or combination of risks.
Accordingly, we have comprehensive risk management policies to
address potential financial risks, which include credit risk,
liquidity risk, market risk, and operational risks. Our risk
management policy is designed to identify and analyze these
risks, to set appropriate limits and controls, and to monitor
the risks and limits continually by means of reliable and
up-to-date
administrative and information systems. Our risk management
policies are primarily carried out in accordance with practice
and limits set by the HSBC Group Management Board. The HSBC
Finance Corporation Asset Liability Committee (ALCO)
meets regularly to review risks and approve appropriate risk
management strategies within the limits established by the HSBC
Group Management Board. Additionally, our Audit Committee
receives regular reports on our liquidity positions in relation
to the established limits. In accordance with the policies and
strategies established by ALCO, in the normal course of
business, we enter into various transactions involving
derivative financial instruments. These derivative financial
instruments primarily are used to manage our market risk.
Objectives for Holding Derivative Financial Instruments
Market risk (which includes interest rate and foreign
currency exchange risks) is the possibility that a change in
interest rates or foreign exchange rates will cause a financial
instrument to decrease in value or become more costly to settle.
Historically, customer demand for our loan products shifted
between fixed rate and floating rate products, based on market
conditions and preferences. These shifts in loan products
resulted in different funding strategies and produced different
interest rate risk exposures. Additionally, the mix of
receivables on our balance sheet and the corresponding market
risk is changing as we manage the liquidation of several of our
receivable portfolios. We maintain an overall risk management
strategy that utlizes interest rate and currency derivative
financial instruments to mitigate our exposure to fluctuations
caused by changes in interest rates and currency exchange rates
related to our debt liabilities. We manage our exposure to
interest rate risk primarily through the use of interest rate
swaps. We manage our exposure to foreign currency exchange risk
primarily through the use of cross currency interest rate swaps.
We do not use leveraged derivative financial instruments.
Interest rate swaps are contractual agreements between two
counterparties for the exchange of periodic interest payments
generally based on a notional principal amount and
agreed-upon
fixed or floating rates. The majority of our interest rate swaps
are used to manage our exposure to changes in interest rates by
converting floating rate debt to fixed rate or by converting
fixed rate debt to floating rate. We have also entered into
currency swaps to convert both principal and interest payments
on debt issued from one currency to the appropriate functional
currency.
We do not manage credit risk or the changes in fair value due to
the changes in credit risk by entering into derivative financial
instruments such as credit derivatives or credit default swaps.
Control Over Valuation Process and Procedures A
control framework has been established which is designed to
ensure that fair values are either determined or validated by a
function independent of the risk-taker. To that end, the
ultimate responsibility for the determination of fair values
rests with the HSBC Finance Valuation Committee. The HSBC
Finance Valuation Committee establishes policies and procedures
to ensure appropriate valuations. Fair values for derivatives
are determined by management using valuation techniques,
valuation models and inputs that are developed, reviewed,
validated and approved by the Quantitative Risk and Valuation
Group of an affiliate, HSBC Bank USA. These valuation models
utilize discounted cash flows or an option pricing model
adjusted for counterparty credit risk and market liquidity. The
models used apply appropriate control processes and procedures
to ensure that the derived inputs are used to value only those
instruments that share similar risk to the relevant benchmark
indexes and therefore demonstrate a similar response to market
factors. In addition, a validation process is followed which
includes participation in peer group consensus pricing surveys,
to ensure that valuation inputs incorporate market
participants risk expectations and risk premium.
Credit Risk By utilizing derivative financial
instruments, we are exposed to counterparty credit risk.
Counterparty credit risk is our primary exposure on our interest
rate swap portfolio. Counterparty credit risk is the risk that
the counterparty to a transaction fails to perform according to
the terms of the contract. We manage the counterparty credit (or
repayment) risk in derivative instruments through established
credit approvals, risk control limits,
23
HSBC Finance Corporation
collateral, and ongoing monitoring procedures. We utilize an
affiliate, HSBC Bank USA, as the primary provider of domestic
derivative products. We have never suffered a loss due to
counterparty failure.
At March 31, 2010 and December 31, 2009, substantially
all of our existing derivative contracts are with HSBC
subsidiaries, making them our primary counterparty in derivative
transactions. Most swap agreements require that payments be made
to, or received from, the counterparty when the fair value of
the agreement reaches a certain level. Generally, third-party
swap counterparties provide collateral in the form of cash which
is recorded in our balance sheet as derivative financial assets
or derivative related liabilities. At March 31, 2010 and
December 31, 2009, we provided third party swap
counterparties with $37 million and $46 million of
collateral, respectively. When the fair value of our agreements
with affiliate counterparties requires the posting of
collateral, it is provided in either the form of cash and
recorded on the balance sheet, consistent with third party
arrangements, or in the form of securities which are not
recorded on our balance sheet. At March 31, 2010 and
December 31, 2009, the fair value of our agreements with
affiliate counterparties required the affiliate to provide
collateral of $2.5 billion and $3.4 billion,
respectively, all of which was provided in cash. These amounts
are offset against the fair value amount recognized for
derivative instruments that have been offset under the same
master netting arrangement and recorded in our balance sheet as
a component of derivative financial asset or derivative related
liabilities. At March 31, 2010, we had derivative contracts
with a notional value of $57.6 billion, including
$56.6 billion outstanding with HSBC Bank USA. At
December 31, 2009, we had derivative contracts with a
notional value of approximately $59.7 billion, including
$58.6 billion outstanding with HSBC Bank USA. Derivative
financial instruments are generally expressed in terms of
notional principal or contract amounts which are much larger
than the amounts potentially at risk for nonpayment by
counterparties.
To manage our exposure to changes in interest rates, we enter
into interest rate swap agreements and currency swaps which have
been designated as fair value or cash flow hedges under
derivative accounting principles. We currently utilize the
long-haul method to assess effectiveness of all derivatives
designated as hedges. In the tables that follow below, the fair
value disclosed does not include swap collateral that we either
receive or deposit with our interest rate swap counterparties.
Such swap collateral is recorded on our balance sheet at an
amount which approximates fair value and is netted on the
balance sheet with the fair value amount recognized for
derivative instruments.
Fair Value Hedges Fair value hedges include
interest rate swaps to convert our fixed rate debt to variable
rate debt and currency swaps to convert debt issued from one
currency into U.S. dollar variable debt. All of our fair
value hedges are associated with debt. We recorded fair value
adjustments for fair value hedges which increased the carrying
value of our debt by $96 million and $85 million at
March 31, 2010 and December 31, 2009, respectively.
The following table provides information related to the location
of derivative fair values in the consolidated balance sheet for
our fair value hedges.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
|
|
|
|
Fair Value as of
|
|
|
|
|
Fair Value as of
|
|
|
|
Balance Sheet
|
|
March 31,
|
|
|
December 31,
|
|
|
Balance Sheet
|
|
March 31,
|
|
|
December 31,
|
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
(in millions)
|
|
|
Interest rate swaps
|
|
Derivative
financial assets
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Derivative
related liabilities
|
|
$
|
38
|
|
|
$
|
39
|
|
Currency swaps
|
|
Derivative
financial assets
|
|
|
238
|
|
|
|
312
|
|
|
Derivative
related liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value hedges
|
|
|
|
$
|
238
|
|
|
$
|
312
|
|
|
|
|
$
|
38
|
|
|
$
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
HSBC Finance Corporation
The following table presents fair value hedging information,
including the gain (loss) recorded on the derivative and where
that gain (loss) is recorded in the consolidated statement of
income (loss) as well as the offsetting gain (loss) on the
hedged item that is recognized in current earnings, the net of
which represents hedge ineffectiveness.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain
|
|
|
|
|
|
|
|
|
|
Amount of Gain
|
|
|
(Loss)
|
|
|
|
|
|
|
|
|
|
(Loss) Recognized in
|
|
|
Recognized in
|
|
|
|
|
|
Location of
|
|
Location of
|
|
Income
|
|
|
Income
|
|
|
|
|
|
Gain (Loss)
|
|
Gain (Loss)
|
|
On the
|
|
|
On the
|
|
|
|
|
|
Recognized in
|
|
Recognized in
|
|
Derivative
|
|
|
Hedged Items
|
|
|
|
|
|
Income on
|
|
Income on
|
|
Three Months Ended March 31,
|
|
|
|
Hedged Item
|
|
Derivative
|
|
Hedged Item
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Interest rate swaps
|
|
Fixed rate
borrowings
|
|
Derivative
related income
|
|
Derivative
related income
|
|
$
|
2
|
|
|
$
|
(4
|
)
|
|
$
|
(6
|
)
|
|
$
|
11
|
|
Currency swaps
|
|
Fixed rate
borrowings
|
|
Derivative
related income
|
|
Derivative
related income
|
|
|
11
|
|
|
|
42
|
|
|
|
(10
|
)
|
|
|
(33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
$
|
13
|
|
|
$
|
38
|
|
|
$
|
(16
|
)
|
|
$
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Hedges Cash flow hedges include interest
rate swaps to convert our variable rate debt to fixed rate debt
and currency swaps to convert debt issued from one currency into
pay fixed debt of the appropriate functional currency. Gains and
(losses) on unexpired derivative instruments designated as cash
flow hedges are reported in accumulated other comprehensive
income (loss) net of tax and totaled a loss of $514 million
and $490 million at March 31, 2010 and
December 31, 2009, respectively. We expect
$446 million ($288 million after tax) of currently
unrealized net losses will be reclassified to earnings within
one year; however, these reclassed unrealized losses will be
offset by decreased interest expense associated with the
variable cash flows of the hedged items and will result in no
significant net economic impact to our earnings. The following
table provides information related to the location of derivative
fair values in the consolidated balance sheet for our cash flow
hedges.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
|
|
|
|
Fair Value as of
|
|
|
|
|
Fair Value as of
|
|
|
|
Balance Sheet
|
|
March 31,
|
|
|
December 31,
|
|
|
Balance Sheet
|
|
March 31,
|
|
|
December 31,
|
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
(in millions)
|
|
|
Interest rate swaps
|
|
Derivative
financial assets
|
|
$
|
(388
|
)
|
|
$
|
(358
|
)
|
|
Derivative
related liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
Currency swaps
|
|
Derivative
financial assets
|
|
|
755
|
|
|
|
1,362
|
|
|
Derivative
related liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash flow hedges
|
|
|
|
$
|
367
|
|
|
$
|
1,004
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
HSBC Finance Corporation
The following table provides the gain or loss recorded on our
cash flow hedging relationships.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassed
|
|
|
|
|
Gain (Loss)
|
|
|
|
Gain (Loss)
|
|
|
|
|
from
|
|
|
|
|
Recognized
|
|
|
|
Recognized in
|
|
|
|
|
Accumulated
|
|
|
Location of Gain
|
|
in
|
|
|
|
OCI
|
|
|
Location of Gain
|
|
OCI into
|
|
|
(Loss) Recognized
|
|
Income on
|
|
|
|
on Derivative
|
|
|
(Loss) Reclassified
|
|
Income
|
|
|
in Income on
|
|
Derivative
|
|
|
|
(Effective
|
|
|
from Accumulated
|
|
(Effective
|
|
|
the Derivative
|
|
(Ineffective
|
|
|
|
Portion)
|
|
|
OCI into Income
|
|
Portion)
|
|
|
(Ineffective
|
|
Portion)
|
|
Three Months Ended March 31,
|
|
2010
|
|
|
2009
|
|
|
(Effective Portion)
|
|
2010
|
|
|
2009
|
|
|
Portion)
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
(28
|
)
|
|
$
|
138
|
|
|
Interest expense
|
|
$
|
(19
|
)
|
|
$
|
(3
|
)
|
|
Derivative related
income
|
|
$
|
-
|
|
|
$
|
1
|
|
Interest rate swaps
|
|
|
-
|
|
|
|
-
|
|
|
Gain on bulk receivable sale to HSBC affiliates
|
|
|
-
|
|
|
|
(80
|
)
|
|
|
|
|
-
|
|
|
|
-
|
|
Currency swaps
|
|
|
(7
|
)
|
|
|
181
|
|
|
Interest expense
|
|
|
(9
|
)
|
|
|
(19
|
)
|
|
Derivative related income
|
|
|
3
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(35
|
)
|
|
$
|
319
|
|
|
|
|
$
|
(28
|
)
|
|
$
|
(102
|
)
|
|
|
|
$
|
3
|
|
|
$
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Qualifying Hedging Activities We may enter
into interest rate and currency swaps which are not designated
as hedges under derivative accounting principles. These
financial instruments are economic hedges but do not qualify for
hedge accounting and are primarily used to minimize our exposure
to changes in interest rates and currency exchange rates. The
following table provides information related to the location and
derivative fair values in the consolidated balance sheet for our
non-qualifying hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
|
|
|
|
Fair Value as of
|
|
|
|
|
Fair Value as of
|
|
|
|
Balance Sheet
|
|
March 31,
|
|
|
December 31,
|
|
|
Balance Sheet
|
|
March 31,
|
|
|
December 31,
|
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
(in millions)
|
|
|
Interest rate contracts
|
|
Derivative
financial assets
|
|
$
|
150
|
|
|
$
|
188
|
|
|
Derivative related liabilities
|
|
$
|
11
|
|
|
$
|
12
|
|
Currency contracts
|
|
Derivative
financial assets
|
|
|
36
|
|
|
|
72
|
|
|
Derivative
related liabilities
|
|
|
6
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-qualifying hedges
|
|
|
|
$
|
186
|
|
|
$
|
260
|
|
|
|
|
$
|
17
|
|
|
$
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides detail of the gain or loss recorded
on our non-qualifying hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain(Loss)
|
|
|
|
|
|
Recognized in Income
|
|
|
|
|
|
On Derivative
|
|
|
|
Location of Gain (Loss)
|
|
Three Months Ended
|
|
|
|
Recognized in Income
|
|
March 31,
|
|
|
|
on Derivative
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Interest rate contracts
|
|
Derivative related income
|
|
$
|
(102
|
)
|
|
$
|
(16
|
)
|
Currency contracts
|
|
Derivative related income
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
(102
|
)
|
|
$
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
26
HSBC Finance Corporation
In addition to the non-qualifying hedges described above, we
have elected the fair value option for certain issuances of our
fixed rate debt and have entered into interest rate and currency
swaps related to debt carried at fair value. The interest rate
and currency swaps associated with this debt are considered
economic hedges and realized gains and losses are reported as
Gain on debt designated at fair value and related
derivatives within other revenues. The derivatives related
to fair value option debt are included in the tables below. See
Note 11, Fair Value Option, for further
discussion.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
|
|
|
|
Fair Value as of
|
|
|
|
|
Fair Value as of
|
|
|
|
Balance Sheet
|
|
March 31,
|
|
|
December 31,
|
|
|
Balance Sheet
|
|
March 31,
|
|
|
December 31,
|
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
|
|
(in millions)
|
|
|
Interest rate swaps
|
|
Derivative financial assets
|
|
$
|
1,085
|
|
|
$
|
1,034
|
|
|
Derivative related liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
Currency swaps
|
|
Derivative financial assets
|
|
|
574
|
|
|
|
752
|
|
|
Derivative related liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-qualifying hedges
|
|
|
|
$
|
1,659
|
|
|
$
|
1,786
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides the gain or loss recorded on the
derivatives related to fair value option debt, primarily due to
changes in interest rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized
|
|
|
|
Location of Gain (Loss)
|
|
in Income On Derivative
|
|
|
|
Recognized in Income
|
|
Three Months Ended March 31,
|
|
|
|
on Derivative
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Interest rate swaps
|
|
Gain on debt designated at fair value and related derivatives
|
|
$
|
233
|
|
|
$
|
(14
|
)
|
Currency swaps
|
|
Gain on debt designated at fair value and related derivatives
|
|
|
78
|
|
|
|
154
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
311
|
|
|
$
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
27
HSBC Finance Corporation
Notional Value of Derivative Contracts The
following table summarizes the notional values of derivative
contracts:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
(in millions)
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
9,670
|
|
|
$
|
11,585
|
|
Currency swaps
|
|
|
14,520
|
|
|
|
15,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,190
|
|
|
|
26,958
|
|
|
|
|
|
|
|
|
|
|
Non-qualifying economic hedges:
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Interest rate:
|
|
|
|
|
|
|
|
|
Swaps
|
|
|
8,057
|
|
|
|
7,081
|
|
Purchased caps
|
|
|
544
|
|
|
|
682
|
|
Foreign exchange:
|
|
|
|
|
|
|
|
|
Swaps
|
|
|
1,291
|
|
|
|
1,291
|
|
Forwards
|
|
|
190
|
|
|
|
349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,082
|
|
|
|
9,403
|
|
|
|
|
|
|
|
|
|
|
Derivatives associated with debt carried at fair value:
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
19,169
|
|
|
|
19,169
|
|
Currency swaps
|
|
|
4,122
|
|
|
|
4,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,291
|
|
|
|
23,291
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
57,563
|
|
|
$
|
59,652
|
|
|
|
|
|
|
|
|
|
|
11. Fair
Value Option
Long-term debt at March 31, 2010 of $66.5 billion
includes $26.7 billion of fixed rate debt carried at fair
value. At March 31, 2010, we did not elect FVO for
$17.7 billion of fixed rate long-term debt currently
carried on our balance sheet. Fixed rate debt accounted for
under FVO at March 31, 2010 had an aggregate unpaid
principal balance of $25.7 billion which includes a foreign
currency translation adjustment relating to our foreign
denominated FVO debt which increased the debt balance by
$261 million. Long-term debt at December 31, 2009
includes $26.7 billion of fixed rate debt accounted for
under FVO. At December 31, 2009, we did not elect FVO for
$19.0 billion of fixed rate long-term debt currently
carried on our balance sheet. Fixed rate debt accounted for
under FVO at December 31, 2009 had an aggregate unpaid
principal balance of $25.9 billion which includes a foreign
currency translation adjustment relating to our foreign
denominated FVO debt which increased the debt balance by
$488 million.
We determine the fair value of the fixed rate debt accounted for
under FVO through the use of a third party pricing service. Such
fair value represents the full market price (credit and interest
rate impact) based on observable market data for the same or
similar debt instruments. See Note 17, Fair Value
Measurements, for a description of the methods and
significant assumptions used to estimate the fair value of our
fixed rate debt accounted for under FVO.
28
HSBC Finance Corporation
The components of Gain on debt designated at fair value
and related derivatives are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Mark-to-market
on debt designated at fair
value(1):
|
|
|
|
|
|
|
|
|
Interest rate component
|
|
$
|
(143
|
)
|
|
$
|
181
|
|
Credit risk component
|
|
|
(35
|
)
|
|
|
3,791
|
|
|
|
|
|
|
|
|
|
|
Total
mark-to-market
on debt designated at fair value
|
|
|
(178
|
)
|
|
|
3,972
|
|
Mark-to-market
on the related
derivatives(1)
|
|
|
100
|
|
|
|
20
|
|
Net realized gains on the related derivatives
|
|
|
211
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
Gain on debt designated at fair value and related derivatives
|
|
$
|
133
|
|
|
$
|
4,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Mark-to-market
on debt designated at fair value and related derivatives
excludes market value changes due to fluctuations in foreign
currency exchange rates. Foreign currency translation gains
(losses) recorded in derivative related income associated with
debt designated at fair value was a gain of $227 million
and $196 million for the three months ended March 31,
2010 and 2009, respectively. Offsetting gains (losses) recorded
in derivative related income associated with the related
derivatives was a loss of $227 million and
$196 million for the three months ended March 31, 2010
and 2009, respectively.
|
The movement in the fair value reflected in gain on debt
designated at fair value and related derivatives includes the
effect of credit spread changes and interest rate changes,
including any ineffectiveness in the relationship between the
related swaps and our debt and any realized gains or losses on
those swaps. With respect to the credit component, as credit
spreads widen accounting gains are booked and the reverse is
true if credit spreads narrow. Differences arise between the
movement in the fair value of our debt and the fair value of the
related swap due to the different credit characteristics and
differences in the calculation of fair value for debt and
derivatives. The size and direction of the accounting
consequences of such changes can be volatile from period to
period but do not alter the cash flows intended as part of the
documented interest rate management strategy. On a cumulative
basis, we have recorded fair value option adjustments which
increased the value of our debt by $1,020 million and
$842 million at March 31, 2010 and December 31,
2009, respectively.
The change in the fair value of the debt and the change in value
of the related derivatives reflect the following:
|
|
|
Interest rate curve A decrease in long term
U.S. interest rates during the first quarter of 2010
resulted in a loss in the interest rate component on the
mark-to-market
of the debt and gain on the
mark-to-market
of the related derivative. In the first quarter of 2009, changes
in the debt interest rate component and the derivative market
value reflect a steepening in the U.S. LIBOR curve. During
this period, interest rates for instruments with terms of three
years or less decreased while interest rates for instruments
with terms of greater than three years increased. Changes in the
value of the interest rate component of the debt as compared to
the related derivative are also affected by differences in cash
flows and valuation methodologies for the debt and the
derivatives. Cash flows on debt are discounted using a single
discount rate from the bond yield curve for each bonds
applicable maturity while derivative cash flows are discounted
using rates at multiple points along the U.S. LIBOR yield
curve. The impacts of these differences vary as short-term and
long-term interest rates shift and time passes. Furthermore,
certain derivatives have been called by the counterparty
resulting in certain FVO debt having no related derivatives. As
a result, approximately 7 percent of our FVO debt does not
have a corresponding derivative at March 31, 2010. Income
from net realized gains increased due to reduced short term
U.S. interest rates.
|
|
|
Credit Our secondary market credit spreads
tightened during the first quarter of 2010 due to continued
increases in market confidence and improvements in marketplace
liquidity. During the first quarter of 2009, our credit spreads
widened dramatically subsequent to the announcement of the
discontinuation of all new customer account originations in our
Consumer Lending business and closure of the Consumer Lending
branch offices as well as the credit rating downgrades in early
March 2009. In the first quarter of 2009, credit spreads also
widened
|
29
HSBC Finance Corporation
as new issue and secondary bond market credit spreads widened
due to a general lack of liquidity in the secondary bond market
during the prior year period.
Net income volatility, whether based on changes in the interest
rate or credit risk components of the
mark-to-market
on debt designated at fair value and the related derivatives,
impacts the comparability of our reported results between
periods. Accordingly, gain on debt designated at fair value and
related derivatives for the three months ended March 31,
2010 should not be considered indicative of the results for any
future periods.
12. Income
Taxes
Effective tax rates are analyzed as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Tax expense (benefit) at the U.S. Federal statutory income tax
rate
|
|
$
|
(326
|
)
|
|
|
(35.0
|
)%
|
|
$
|
604
|
|
|
|
35.0
|
%
|
Increase (decrease) in rate resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-deductible goodwill
|
|
|
-
|
|
|
|
-
|
|
|
|
224
|
|
|
|
13.0
|
|
Bulk sale of receivable portfolios to an HSBC affiliate
|
|
|
-
|
|
|
|
-
|
|
|
|
(47
|
)
|
|
|
(2.7
|
)
|
State and local taxes, net of Federal benefit
|
|
|
(4
|
)
|
|
|
(.4
|
)
|
|
|
30
|
|
|
|
1.7
|
|
State rate change effect on net deferred taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
32
|
|
|
|
1.9
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
|
|
.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
(330
|
)
|
|
|
(35.4
|
)%
|
|
$
|
855
|
|
|
|
49.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effective tax rate for the three months ended March 31,
2010 was impacted by state and local taxes. The effective tax
rate for the three months ended March 31, 2009 was
significantly impacted by the non-tax deductible impairment of
goodwill related to the Card and Retail Services and Insurance
Services businesses. The effective tax rate for the three months
ended March 31, 2009 was also impacted by a change in
estimate in the state tax rate for jurisdictions where we file
combined unitary state tax returns with other HSBC affiliates.
HSBC North America Consolidated Income Taxes We
are included in HSBC North Americas consolidated Federal
income tax return and in various combined state income tax
returns. As such, we have entered into a tax allocation
agreement with HSBC North America and its subsidiary entities
(the HNAH Group) included in the consolidated
returns which govern the current amount of taxes to be paid or
received by the various entities included in the consolidated
return filings. As a result, we have looked at the HNAH
Groups consolidated deferred tax assets and various
sources of taxable income, including the impact of HSBC and HNAH
Group tax planning strategies, in reaching conclusions on
recoverability of deferred tax assets. Where a valuation
allowance is determined to be necessary at the HSBC North
America consolidated level, such allowance is allocated to
principal subsidiaries within the HNAH Group as described below
in a manner that is systematic, rational and consistent with the
broad principles of accounting for income taxes.
The HNAH Group evaluates deferred tax assets for recoverability
using a consistent approach which considers the relative impact
of negative and positive evidence, including historical
financial performance, projections of future taxable income,
future reversals of existing taxable temporary differences, tax
planning strategies and any available carryback capacity.
In evaluating the need for a valuation allowance, the HNAH Group
estimates future taxable income based on management approved
business plans, future capital requirements and ongoing tax
planning strategies, including capital support from HSBC
necessary as part of such plans and strategies. The HNAH Group
has continued to consider the impact of the economic environment
on the North American businesses and the expected growth of the
30
HSBC Finance Corporation
deferred tax assets. This evaluation process involves
significant management judgment about assumptions that are
subject to change from period to period.
In conjunction with the HNAH Group deferred tax evaluation
process, based on our forecasts of future taxable income, which
include assumptions about the depth and severity of home price
depreciation and the U.S. economic downturn, including
unemployment levels and their related impact on credit losses,
we currently anticipate that our results of future operations
will generate sufficient taxable income to allow us to realize
our deferred tax assets. However, since the recent market
conditions have created significant downward pressure and
volatility on our near-term pre-tax book income, our analysis of
the realizability of the deferred tax assets significantly
discounts any future taxable income expected from continuing
operations and relies to a greater extent on continued capital
support from our parent, HSBC, including tax planning strategies
implemented in relation to such support. HSBC has indicated they
remain fully committed and have the capacity and willingness to
provide capital as needed to run operations, maintain sufficient
regulatory capital, and fund certain tax planning strategies.
Only those tax planning strategies that are both prudent and
feasible, and which management has the ability and intent to
implement, are incorporated into our analysis and assessment.
The primary and most significant strategy is HSBCs
commitment to reinvest excess HNAH Group capital to reduce debt
funding or otherwise invest in assets to ensure that it is more
likely than not that the deferred tax assets will be utilized.
Currently, it has been determined that the HNAH Groups
primary tax planning strategy, in combination with other tax
planning strategies, provides support for the realization of the
net deferred tax assets recorded for the HNAH Group. Such
determination is based on HSBCs business forecasts and
assessment as to the most efficient and effective deployment of
HSBC capital, most importantly including the length of time such
capital will need to be maintained in the U.S. for purposes
of the tax planning strategy.
Notwithstanding the above, the HNAH Group has valuation
allowances against certain specific tax attributes such as
foreign tax credits, certain state related deferred tax assets
and certain tax loss carryforwards for which the aforementioned
tax planning strategies do not provide appropriate support.
HNAH Group valuation allowances are allocated to the principal
subsidiaries, including us. The methodology allocates the
valuation allowance to the principal subsidiaries based
primarily on the entitys relative contribution to the
growth of the HSBC North America consolidated deferred tax asset
against which the valuation allowance is being recorded.
If future results differ from the HNAH Groups current
forecasts or the primary tax planning strategy were to change, a
valuation allowance against the remaining net deferred tax
assets may need to be established which could have a material
adverse effect on our results of operations, financial condition
and capital position. The HNAH Group will continue to update its
assumptions and forecasts of future taxable income, including
relevant tax planning strategies, and assess the need for such
incremental valuation allowances.
Absent the capital support from HSBC and implementation of the
related tax planning strategies, the HNAH Group, including us,
would be required to record a valuation allowance against the
remaining deferred tax assets.
HSBC Finance Corporation Income Taxes We recognize
deferred tax assets and liabilities for the future tax
consequences related to differences between the financial
statement carrying amounts of existing assets and liabilities
and their respective tax bases, and for tax credits and net
operating and other losses. Our net deferred tax assets,
including deferred tax liabilities and valuation allowances,
totaled $2.8 billion and $3.0 billion as of
March 31, 2010 and December 31, 2009, respectively.
We are currently under audit by the Internal Revenue Service as
well as various state and local tax jurisdictions. Although one
or more of these audits may be concluded within the next
12 months, it is not possible to reasonably estimate the
impact of the results from these audits on our uncertain tax
positions at this time.
31
HSBC Finance Corporation
13. Pension
and Other Postretirement Benefits
The components of pension expense for the defined benefit
pension plan reflected in our consolidated statement of income
(loss) are shown in the table below and reflect the portion of
the pension expense of the combined HSBC North America Pension
Plan (either the HSBC North America Pension Plan or the
Plan) which has been allocated to HSBC Finance
Corporation:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Service cost benefits earned during the period
|
|
$
|
6
|
|
|
$
|
9
|
|
Interest cost on projected benefit obligation
|
|
|
15
|
|
|
|
17
|
|
Expected return on assets
|
|
|
(14
|
)
|
|
|
(12
|
)
|
Recognized losses
|
|
|
9
|
|
|
|
9
|
|
Amortization of prior service cost
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Pension expense
|
|
$
|
15
|
|
|
$
|
23
|
|
|
|
|
|
|
|
|
|
|
Pension expense decreased during the first quarter of 2010 due
to lower service and interest costs as a result of reduced
headcount from our previously discussed strategic decisions.
Also contributing to lower pension expense was the realization
of higher returns on plan assets solely due to higher asset
levels.
During the first quarter of 2010, we announced that the Board of
Directors of HSBC North America had approved a plan to cease all
future benefit accruals for legacy participants under the final
average pay formula components of the HSBC North America Pension
Plan (the Plan) effective January 1, 2011.
Future accruals to legacy participants under the Plan will
thereafter be provided under the cash balance based formula
which is now used to calculate benefits for employees hired
after December 31, 1996. Furthermore, all future benefit
accruals under the Supplemental Retirement Income Plan will also
cease effective January 1, 2011.
The aforementioned changes to the Plan have been accounted for
as a negative plan amendment and, therefore, the reduction in
our share of HSBC North Americas projected benefit
obligation as a result of this decision will be amortized to net
periodic pension cost over future service periods of the
affected employees. The changes to the Supplemental Retirement
Income Plan have been accounted for as a plan curtailment, which
resulted in no significant immediate recognition of income or
expense.
Components of the net periodic benefit cost for our
post-retirement medical plan benefits other than pensions are as
follows:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Service cost benefits earned during the period
|
|
$
|
1
|
|
|
$
|
1
|
|
Interest cost
|
|
|
2
|
|
|
|
3
|
|
Gain on curtailment
|
|
|
-
|
|
|
|
(16
|
)
|
Recognized gains
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
Net periodic post-retirement benefit cost (income)
|
|
$
|
3
|
|
|
$
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
During the three months ended March 31, 2009, we recorded a
curtailment gain of $16 million as a result of the decision
in late February 2009 to discontinue new customer account
originations for all products by our Consumer Lending business
and close all branch offices.
32
HSBC Finance Corporation
14. Related
Party Transactions
In the normal course of business, we conduct transactions with
HSBC and its subsidiaries. These transactions occur at
prevailing market rates and terms and include funding
arrangements, derivative execution, purchases and sales of
receivables, servicing arrangements, information technology and
some centralized support services, item and statement processing
services, banking and other miscellaneous services. The
following tables present related party balances and the income
and (expense) generated by related party transactions:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
December 31, 2009
|
|
|
|
(in millions)
|
|
Assets and (Liabilities):
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
176
|
|
|
$
|
295
|
|
Securities purchased under agreements to resell
|
|
|
3,485
|
|
|
|
1,550
|
|
Derivative related assets (liability), net
|
|
|
(33
|
)
|
|
|
(56
|
)
|
Other assets
|
|
|
136
|
|
|
|
123
|
|
Due to affiliates
|
|
|
(9,023
|
)
|
|
|
(9,043
|
)
|
Other liabilities
|
|
|
(56
|
)
|
|
|
(194
|
)
|
33
HSBC Finance Corporation
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Income/(Expense):
|
|
|
|
|
|
|
|
|
Interest expense paid to HSBC
affiliates(1)
|
|
$
|
(220
|
)
|
|
$
|
(297
|
)
|
Interest income from HSBC affiliates
|
|
|
1
|
|
|
|
3
|
|
Net gain on bulk sale of receivables to HSBC Bank USA
|
|
|
-
|
|
|
|
57
|
|
HSBC affiliate income:
|
|
|
|
|
|
|
|
|
Gain on receivable sales to HSBC affiliates:
|
|
|
|
|
|
|
|
|
Daily sales of private label receivable originations
|
|
|
38
|
|
|
|
17
|
|
Daily sales of credit card receivables
|
|
|
78
|
|
|
|
109
|
|
Sales of real estate secured receivables
|
|
|
-
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Total gain on receivable sales to HSBC affiliates
|
|
|
116
|
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
Servicing and other fees from HSBC affiliates:
|
|
|
|
|
|
|
|
|
HSBC Bank USA:
|
|
|
|
|
|
|
|
|
Real estate secured servicing and related fees
|
|
|
3
|
|
|
|
1
|
|
Private label and card receivable servicing and related fees
|
|
|
153
|
|
|
|
167
|
|
Auto finance receivable servicing and related fees
|
|
|
9
|
|
|
|
14
|
|
Taxpayer financial services loan servicing and other fees
|
|
|
56
|
|
|
|
-
|
|
Other servicing, processing, origination and support revenues
from HSBC Bank USA and other HSBC affiliates
|
|
|
3
|
|
|
|
9
|
|
HSBC Technology and Services (USA) Inc. (HTSU)
servicing fees and rental revenue
|
|
|
14
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
Total servicing and other fees from HSBC affiliates
|
|
|
238
|
|
|
|
204
|
|
|
|
|
|
|
|
|
|
|
Taxpayer financial services loan origination and other fees
|
|
|
(4
|
)
|
|
|
(10
|
)
|
Support services from HSBC affiliates:
|
|
|
|
|
|
|
|
|
HTSU
|
|
|
(257
|
)
|
|
|
(216
|
)
|
HSBC Global Resourcing (UK) Ltd.
|
|
|
(34
|
)
|
|
|
(44
|
)
|
Other HSBC affiliates
|
|
|
(7
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
Total support services from HSBC affiliates
|
|
|
(298
|
)
|
|
|
(268
|
)
|
|
|
|
|
|
|
|
|
|
Stock based compensation expense with HSBC
|
|
|
(4
|
)
|
|
|
(15
|
)
|
Insurance commission paid to HSBC Bank Canada
|
|
|
(5
|
)
|
|
|
(5
|
)
|
|
|
|
(1) |
|
Includes interest expense paid to
HSBC affiliates for debt held by HSBC affiliates as well as net
interest paid to or received from HSBC affiliates on risk
management positions related to non-affiliated debt.
|
Transactions
with HSBC Bank USA:
|
|
|
In January 2009, we sold our GM and UP Portfolios to HSBC Bank
USA with an outstanding principal balance of $12.4 billion
at the time of sale and recorded a gain on the bulk sale of
these receivables of $130 million. This gain was partially
offset by a loss of $80 million recorded on the termination
of cash flow hedges associated with the $6.1 billion of
indebtedness transferred to HSBC Bank USA as part of these
transactions. We retained the customer account relationships and
by agreement sell on a daily basis all new credit card
receivable originations for the GM and UP Portfolios to HSBC
Bank USA. We continue to service the GM and UP receivables for
HSBC Bank USA for a fee. Information regarding these receivables
is summarized in the table below.
|
34
HSBC Finance Corporation
|
|
|
In January 2009, we also sold certain auto finance receivables
with an outstanding principal balance of $3.0 billion at
the time of sale to HSBC Bank USA and recorded a gain on the
bulk sale of these receivables of $7 million. In March
2010, we repurchased $379 million of these auto finance
receivables from HSBC Bank USA and immediately sold them to SC
USA. See Note 2, Sale of Auto Finance Servicing
Operations and Certain Auto Finance Receivables, for
further discussion of the transaction with SC USA. Prior to the
sale of our receivable servicing operations to SC USA in March
2010, we serviced these auto finance receivables for HSBC Bank
USA for a fee. Information regarding these receivables is
summarized in the table below.
|
|
|
In July 2004 we purchased the account relationships associated
with $970 million of credit card receivables from HSBC Bank
USA and on a daily basis, we sell new receivable originations on
these credit card accounts to HSBC Bank USA. We continue to
service these loans for a fee. Information regarding these
receivables is summarized in the table below.
|
|
|
In December 2004, we sold to HSBC Bank USA our private label
receivable portfolio (excluding retail sales contracts at our
Consumer Lending business). We continue to service the sold
private label and credit card receivables and receive servicing
and related fee income from HSBC Bank USA. We retained the
customer account relationships and by agreement sell on a daily
basis all new private label receivable originations and new
receivable originations on these credit card accounts to HSBC
Bank USA. Information regarding these receivables is summarized
in the table below.
|
|
|
In 2003 and 2004, we sold approximately $3.7 billion of
real estate secured receivables to HSBC Bank USA. We continue to
service these receivables for a fee. Information regarding these
receivables is summarized in the table below.
|
The following table summarizes the private label, credit card
(including the GM and UP Portfolios), auto finance and real
estate secured receivables we are servicing for HSBC Bank USA at
March 31, 2010 and December 31, 2009 as well as the
receivables sold on a daily basis during the three months ended
March 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Cards
|
|
|
|
|
|
|
|
|
|
|
General
|
|
Union
|
|
|
|
Auto
|
|
Real Estate
|
|
|
|
|
Private Label
|
|
Motors
|
|
Privilege
|
|
Other
|
|
Finance
|
|
Secured
|
|
Total
|
|
|
|
(in billions)
|
|
Receivables serviced for HSBC Bank USA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
$
|
13.9
|
|
|
$
|
4.7
|
|
|
$
|
4.9
|
|
|
$
|
1.9
|
|
|
$
|
-
|
|
|
$
|
1.7
|
|
|
$
|
27.1
|
|
December 31, 2009
|
|
|
15.6
|
|
|
|
5.4
|
|
|
|
5.3
|
|
|
|
2.1
|
|
|
|
2.1
|
|
|
|
1.8
|
|
|
|
32.3
|
|
Total of receivables sold on a daily basis to HSBC Bank USA
during:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2010
|
|
$
|
3.0
|
|
|
$
|
3.1
|
|
|
$
|
.7
|
|
|
$
|
1.0
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7.8
|
|
Three months ended March 31, 2009
|
|
|
3.6
|
|
|
|
3.4
|
|
|
|
.8
|
|
|
|
1.0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8.8
|
|
Fees received for servicing these loan portfolios totaled
$164 million and $182 million during the three months
ended March 31, 2010 and 2009, respectively.
|
|
|
The GM and UP credit card receivables as well as the private
label receivables are sold to HSBC Bank USA on a daily basis at
a sales price for each type of portfolio determined using a fair
value calculated semi-annually in April and October by an
independent third party based on the projected future cash flows
of the receivables. The projected future cash flows are
developed using various assumptions reflecting the historical
performance of the receivables and adjusted for key factors such
as the anticipated economic and regulatory environment. The
independent third party uses these projected future cash flows
and a discount rate to determine a range of fair values. We use
the mid-point of this range as the sales price.
|
|
|
In the second quarter of 2008, our Consumer Lending business
launched a new program with HSBC Bank USA to sell real estate
secured receivables to the Federal Home Loan Mortgage
Corporation (Freddie Mac). Our Consumer Lending
business originated the loans in accordance with Freddie
Macs underwriting criteria. The loans were then sold to
HSBC Bank USA, generally within 30 days. HSBC Bank USA
repackaged the loans and
|
35
HSBC Finance Corporation
|
|
|
sold them to Freddie Mac under their existing Freddie Mac
program. During the three months ended March 31, 2009, we
sold $51 million of real estate secured loans to HSBC Bank
USA for a gain on sale of $2 million. This program was
discontinued in late February 2009 as a result of our decision
to discontinue new customer account originations in our Consumer
Lending business.
|
|
|
|
HSBC Bank USA services a portfolio of real estate secured
receivables for us with an outstanding principal balance of
$1.4 billion and $1.5 billion at March 31, 2010
and December 31, 2009, respectively. Fees paid relating to
the servicing of this portfolio totaled less than
$1 million during the three months ended March 31,
2010 and $2 million during the three months ended March 31,
2009 and are reported in Support services from HSBC affiliates.
The decrease during the first quarter of 2010 reflects a
renegotiation of servicing fees for this portfolio.
|
|
|
In the third quarter of 2009, we sold $86 million of Low
Income Housing Tax Credit Investment Funds to HSBC Bank USA for
a loss on sale of $15 million (after-tax).
|
|
|
Under multiple service level agreements, we also provide various
services to HSBC Bank USA, including real estate and credit card
servicing and processing activities, auto finance loan servicing
and other operational and administrative support. Fees received
for these services are reported as Servicing and other fees from
HSBC affiliates.
|
|
|
In the fourth quarter of 2009, an initiative was begun to
streamline the servicing of real estate secured receivables
across North America. As a result, certain functions that we had
previously performed for our mortgage customers are now being
performed by HSBC Bank USA for all North America mortgage
customers, including our mortgage customers. Additionally, we
are currently performing certain functions for all North America
mortgage customers where these functions had been previously
provided separately by each entity. During the three months
ended March 31, 2010, we paid $2 million for services
we received from HSBC Bank USA and received $1 million for
services we had provided.
|
|
|
HSBC Bank USA and HSBC Trust Company (Delaware)
(HTCD) are the originating lenders on our behalf for
loans initiated by our Taxpayer Financial Services business for
clients of a third party tax preparer. We historically purchased
the loans originated by HSBC Bank USA and HTCD daily for a fee.
During the first quarter of 2010, we began purchasing a smaller
portion of these loans. The loans which we previously purchased
are now held on HSBC Bank USAs balance sheet. In the event
any of the loans which HSBC Bank USA continues to hold on its
balance sheet reach a defined delinquency status, we purchase
the delinquent loans at par value as we have assumed all credit
risk associated with this program. We receive a fee from HSBC
Bank USA for both servicing the loans and assuming the credit
risk associated with these loans which totaled $56 million
for the three months ended March 31 2010. In the table above,
these fees are shown as taxpayer financial services loan
servicing and other fees. For the loans which we continue to
purchase from HTCD, we receive taxpayer financial services
revenue and pay an origination fee to HTCD. Fees paid for
originations totaled $4 million and $10 million during
the three months ended March 31, 2010 and 2009,
respectively, and are included as an offset to taxpayer
financial services revenue. In the table above, these
origination fees are shown as taxpayer financial services loan
origination and other fees.
|
|
|
We have extended revolving lines of credit to subsidiaries of
HSBC Bank USA for an aggregate total of $1.0 billion. No
balances were outstanding under any of these lines of credit at
either March 31, 2010 or December 31, 2009.
|
|
|
HSBC Bank USA extended a secured $1.5 billion uncommitted
credit facility to certain of our subsidiaries in December 2008.
This is a 364 day credit facility which was renewed in
November 2009. There were no balances outstanding at
March 31, 2010 or December 31, 2009.
|
|
|
HSBC Bank USA extended a $1.0 billion committed unsecured
credit facility to HSBC Bank Nevada (HOBN), a
subsidiary of HSBC Finance Corporation, in December 2008. This
364 day credit facility was renewed in December 2009. There
were no balances outstanding at March 31, 2010 or
December 31, 2009.
|
36
HSBC Finance Corporation
Transactions
with HSBC Holdings plc:
|
|
|
At March 31, 2010 and December 31, 2009, a commercial
paper back-stop credit facility of $2.5 billion from HSBC
supported our domestic issuances of commercial paper. No
balances were outstanding under this credit facility at
March 31, 2010 or December 31, 2009. The annual
commitment fee requirement to support availability of this line
is included as a component of Interest expense HSBC
affiliates in the consolidated statement of income (loss).
|
|
|
In late February 2009, we effectively converted
$275 million of mandatorily redeemable preferred securities
of the Household Capital Trust VIII which had been issued
during 2003 to common stock by redeeming the junior subordinated
notes underlying the preferred securities and then issuing
common stock to HSBC Investments (North America) Inc.
(HINO). Interest expense recorded on the underlying
junior subordinated notes totaled $3 million during the
three months ended March 31, 2009. This interest expense is
included in Interest expense HSBC affiliates in the
consolidated statement of income (loss).
|
|
|
Employees of HSBC Finance Corporation participate in one or more
stock compensation plans sponsored by HSBC. These expenses are
recorded in Salary and employee benefits and are reflected in
the above table as Stock based compensation expense with HSBC.
|
Transactions
with other HSBC affiliates:
|
|
|
Technology and some centralized support services including human
resources, corporate affairs, risk management and other shared
services and beginning in January 2010, legal, compliance, tax
and finance, in North America are centralized within HTSU.
Technology related assets are generally purchased and owned by
HTSU but may also be capitalized and recorded on our
consolidated balance sheet. HTSU also provides certain item
processing and statement processing activities which are
included in Support services from HSBC affiliates. We also
receive revenue from HTSU for rent on certain office space,
which has been recorded as a component of servicing and other
fees from HSBC affiliates. Rental revenue from HTSU was
$12 million and $11 million during the three months
ended March 31, 2010 and 2009, respectively.
|
|
|
The notional value of derivative contracts outstanding with HSBC
subsidiaries totaled $56.6 billion and $58.6 billion
at March 31, 2010 and December 31, 2009, respectively.
When the fair value of our agreements with affiliate
counterparties requires the posting of collateral, it is
provided in either the form of cash and recorded on the balance
sheet or in the form of securities which are not recorded on our
balance sheet. The fair value of our agreements with affiliate
counterparties required the affiliate to provide collateral of
$2.5 billion and $3.4 billion at March 31, 2010
and December 31, 2009, respectively, all of which was
received in cash. These amounts are offset against the fair
value amount recognized for derivative instruments that have
been offset under the same master netting arrangement.
|
|
|
Due to affiliates includes amounts owed to subsidiaries of HSBC
as a result of direct debt issuances (other than preferred
stock).
|
|
|
In September 2008, we borrowed $1.0 billion from an
existing uncommitted credit facility with HSBC Bank plc
(HBEU). The borrowing was for 60 days and
matured in November 2008. We renewed this borrowing for an
additional 95 days. The borrowing matured in February 2009
and we chose not to renew it at that time. Interest expense on
this borrowing totaled $5 million during the three months
ended March 31, 2009.
|
|
|
In October 2008, we borrowed $1.2 billion from an
uncommitted money market facility with a subsidiary of HSBC Asia
Pacific (HBAP). The borrowing was for six months,
matured in April 2009 and we chose not to renew it at that time.
Interest expense on this borrowing totaled $18 million
during the three months ended March 31, 2009.
|
|
|
We purchase securities from HSBC Securities (USA) Inc.
(HSI) under an agreement to resell. Interest income
recognized on these securities totaled $1 million and
$2 million during the three months ended March 31,
2010 and 2009, respectively, and is reflected as Interest income
paid to HSBC affiliates in the table above.
|
37
HSBC Finance Corporation
|
|
|
We use HSBC Global Resourcing (UK) Ltd., an HSBC affiliate
located outside of the United States, to provide various support
services to our operations including among other areas, customer
service, systems, collection and accounting functions. The
expenses related to these services of $34 million and
$44 million during the three months ended March 31,
2010 and 2009, respectively, are included as a component of
Support services from HSBC affiliates in the table above.
|
|
|
Support services from HSBC affiliates also include banking
services and other miscellaneous services provided by other
subsidiaries of HSBC, including HSBC Bank USA.
|
|
|
Employees of HSBC Finance Corporation participate in a defined
benefit pension plan and other post-retirement benefit plans
sponsored by HSBC North America. See Note 13, Pension
and Other Post-retirement Benefits, for additional
information on this pension plan.
|
|
|
Historically, we have utilized HSBC Markets (USA) Inc,
(HMUS) to lead manage the underwriting of term debt
issuances. There were no fees paid to the affiliate for such
services during 2010 or 2009. For debt not accounted for under
the fair value option, these fees are amortized over the life of
the related debt and included as a component of interest expense.
|
|
|
We continue to guarantee the long-term and medium-term notes
issued by our Canadian business prior to its sale to HSBC Bank
Canada. During the three months ended March 31, 2010 and
2009, we recorded fees of $1 million for providing this
guarantee. As of March 31, 2010, the outstanding balance of
the guaranteed notes was $2.4 billion and the latest
scheduled maturity of the notes is May 2012. The sale agreement
with HSBC Bank Canada allows us to continue to distribute
various insurance products through the branch network for a fee.
Fees paid to HSBC Bank Canada for distributing insurance
products through this network during the three months ended
March 31, 2010 and 2009 were $5 million and are
included in insurance Commission paid to HSBC Bank Canada in the
table above.
|
15. Business
Segments
We have two reportable segments: Card and Retail Services and
Consumer. Our segments are managed separately and are
characterized by different middle-market consumer lending
products, origination processes, and locations. Our segment
results are reported on a continuing operations basis. There
have been no changes in our measurement of segment profit (loss)
or the basis of segmentation as compared with the presentation
in our 2009
Form 10-K.
Our Card and Retail Services segment comprises our core
operations and includes our MasterCard, Visa, private label and
other credit card operations. The Card and Retail Services
segment offers these products throughout the United States
primarily via strategic affinity and co-branding relationships,
merchant relationships and direct mail. We also offer products
and provide customer service through the Internet.
Our Consumer segment consists of our run-off Consumer Lending,
Mortgage Services and Auto Finance businesses which are no
longer considered central to our core operations. The Consumer
segment provided real estate secured, auto finance and personal
non-credit card loans. Loans were offered with both revolving
and closed-end terms and with fixed or variable interest rates.
Loans were originated through branch locations and direct mail.
Products were also offered and customers serviced through the
Internet. Prior to the first quarter of 2007, we acquired loans
from correspondent lenders and prior to September 2007 we also
originated loans through mortgage brokers. While these
businesses are operating in run-off mode, they have not been
reported as discontinued operations because we continue to
generate cash flow from the ongoing collections of the
receivables, including interest and fees.
The All Other caption includes our Insurance business which
continues to be a core part of our operations as well as our
Taxpayer Financial Services and Commercial businesses which are
no longer considered central to our core operations. Each of
these businesses falls below the quantitative threshold tests
under segment reporting accounting principles for determining
reportable segments. The All Other caption also
includes our corporate and treasury activities, which includes
the impact of FVO debt. Certain fair value adjustments related
to purchase accounting resulting from our acquisition by HSBC
and related amortization have been allocated to corporate, which
is included in the All Other caption within our
segment disclosure including goodwill arising from our
acquisition by HSBC.
38
HSBC Finance Corporation
We report results to our parent, HSBC, in accordance with its
reporting basis, IFRSs. Our segment results are presented on an
IFRS Management Basis (a
non-U.S. GAAP
financial measure) as operating results are monitored and
reviewed, trends are evaluated and decisions about allocating
resources such as employees are made almost exclusively on an
IFRS Management Basis. IFRS Management Basis results are IFRSs
results which assume that the GM and UP credit card, auto
finance, private label and real estate secured receivables
transferred to HSBC Bank USA have not been sold and remain on
our balance sheet and the revenues and expenses related to these
receivables remain on our income statement. IFRS Management
Basis also assumes that the purchase accounting fair value
adjustments relating to our acquisition by HSBC have been
pushed down to HSBC Finance Corporation. Operations
are monitored and trends are evaluated on an IFRS Management
Basis because the receivable sales to HSBC Bank USA were
conducted primarily to fund prime customer loans more
efficiently through bank deposits and such receivables continue
to be managed 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 legal entity basis.
For segment reporting purposes, intersegment transactions have
not been eliminated. We generally account for transactions
between segments as if they were with third parties.
Reconciliation of our IFRS Management Basis segment results to
the U.S. GAAP consolidated totals are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IFRS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Card and
|
|
|
|
|
|
|
|
|
Adjustments/
|
|
|
Basis
|
|
|
Management
|
|
|
|
|
|
IFRS
|
|
|
U.S. GAAP
|
|
|
|
Retail
|
|
|
|
|
|
All
|
|
|
Reconciling
|
|
|
Consolidated
|
|
|
Basis
|
|
|
IFRS
|
|
|
Reclass-
|
|
|
Consolidated
|
|
|
|
Services
|
|
|
Consumer
|
|
|
Other
|
|
|
Items
|
|
|
Totals
|
|
|
Adjustments(3)
|
|
|
Adjustments(4)
|
|
|
ifications(5)
|
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
1,279
|
|
|
$
|
707
|
|
|
$
|
285
|
|
|
$
|
-
|
|
|
$
|
2,271
|
|
|
$
|
(741
|
)
|
|
$
|
(95
|
)
|
|
$
|
(231
|
)
|
|
$
|
1,204
|
|
Other operating income (Total other revenues)
|
|
|
391
|
|
|
|
(58
|
)
|
|
|
(59
|
)
|
|
|
(7
|
)(1)
|
|
|
267
|
|
|
|
95
|
|
|
|
46
|
|
|
|
303
|
|
|
|
711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income (loss)
|
|
|
1,670
|
|
|
|
649
|
|
|
|
226
|
|
|
|
(7
|
)
|
|
|
2,538
|
|
|
|
(646
|
)
|
|
|
(49
|
)
|
|
|
72
|
|
|
|
1,915
|
|
Loan impairment charges (Provision for credit losses)
|
|
|
537
|
|
|
|
1,758
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
2,294
|
|
|
|
(309
|
)
|
|
|
(66
|
)
|
|
|
-
|
|
|
|
1,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,133
|
|
|
|
(1,109
|
)
|
|
|
227
|
|
|
|
(7
|
)
|
|
|
244
|
|
|
|
(337
|
)
|
|
|
17
|
|
|
|
72
|
|
|
|
(4
|
)
|
Operating expenses
|
|
|
452
|
|
|
|
267
|
|
|
|
82
|
|
|
|
(7
|
)
|
|
|
794
|
|
|
|
(11
|
)
|
|
|
74
|
|
|
|
72
|
|
|
|
929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax
|
|
$
|
681
|
|
|
$
|
(1,376
|
)
|
|
$
|
145
|
|
|
$
|
-
|
|
|
$
|
(550
|
)
|
|
$
|
(326
|
)
|
|
$
|
(57
|
)
|
|
$
|
-
|
|
|
$
|
(933
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment revenues
|
|
|
3
|
|
|
|
18
|
|
|
|
(14
|
)
|
|
|
(7
|
)(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balances at end of period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer loans (Receivables)
|
|
|
34,987
|
|
|
|
73,143
|
|
|
|
1,745
|
|
|
|
-
|
|
|
|
109,875
|
|
|
|
(27,271
|
)
|
|
|
(590
|
)
|
|
|
(1,700
|
)
|
|
|
80,314
|
|
Assets
|
|
|
33,519
|
|
|
|
71,558
|
|
|
|
15,002
|
|
|
|
-
|
|
|
|
120,079
|
|
|
|
(26,483
|
)
|
|
|
(3,384
|
)
|
|
|
(136
|
)
|
|
|
90,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
1,340
|
|
|
$
|
1,035
|
|
|
$
|
256
|
|
|
$
|
-
|
|
|
$
|
2,631
|
|
|
$
|
(724
|
)
|
|
$
|
(84
|
)
|
|
$
|
(144
|
)
|
|
$
|
1,679
|
|
Other operating income (Total other revenues)
|
|
|
660
|
|
|
|
(39
|
)
|
|
|
4,030
|
|
|
|
(7
|
)(1)
|
|
|
4,644
|
|
|
|
103
|
|
|
|
(85
|
)
|
|
|
306
|
|
|
|
4,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income (loss)
|
|
|
2,000
|
|
|
|
996
|
|
|
|
4,286
|
|
|
|
(7
|
)
|
|
|
7,275
|
|
|
|
(621
|
)
|
|
|
(169
|
)
|
|
|
162
|
|
|
|
6,647
|
|
Loan impairment charges (Provision for credit losses)
|
|
|
1,511
|
|
|
|
2,435
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,946
|
|
|
|
(839
|
)
|
|
|
(162
|
)
|
|
|
-
|
|
|
|
2,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
489
|
|
|
|
(1,439
|
)
|
|
|
4,286
|
|
|
|
(7
|
)
|
|
|
3,329
|
|
|
|
218
|
|
|
|
(7
|
)
|
|
|
162
|
|
|
|
3,702
|
|
Operating expenses
|
|
|
488
|
|
|
|
557
|
|
|
|
1,677
|
|
|
|
(7
|
)
|
|
|
2,715
|
|
|
|
3
|
|
|
|
(905
|
)
|
|
|
162
|
|
|
|
1,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax
|
|
$
|
1
|
|
|
$
|
(1,996
|
)
|
|
$
|
2,609
|
|
|
$
|
-
|
|
|
$
|
614
|
|
|
$
|
215
|
|
|
$
|
898
|
|
|
$
|
-
|
|
|
$
|
1,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment revenues
|
|
|
2
|
|
|
|
34
|
|
|
|
(29
|
)
|
|
|
(7
|
)(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balances at end of period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer loans (Receivables)
|
|
$
|
42,867
|
|
|
$
|
95,651
|
|
|
$
|
1,076
|
|
|
$
|
-
|
|
|
$
|
139,594
|
|
|
$
|
(33,686
|
)
|
|
$
|
(441
|
)
|
|
$
|
(2,409
|
)
|
|
$
|
103,058
|
|
Assets
|
|
|
40,976
|
|
|
|
92,139
|
|
|
|
13,609
|
|
|
|
(3
|
)(2)
|
|
|
146,721
|
|
|
|
(32,225
|
)
|
|
|
(3,137
|
)
|
|
|
(166
|
)
|
|
|
111,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Eliminates intersegment revenues.
|
39
HSBC Finance Corporation
|
|
|
(2) |
|
Eliminates investments in
subsidiaries and intercompany borrowings.
|
|
(3) |
|
Management Basis Adjustments
represent the GM and UP credit card Portfolios and the auto
finance, private label and real estate secured receivables
transferred to HSBC Bank USA.
|
|
(4) |
|
IFRS Adjustments consist of the
accounting differences between U.S. GAAP and IFRSs which have
been described more fully below.
|
|
(5) |
|
Represents differences in balance
sheet and income statement presentation between IFRSs and U.S.
GAAP.
|
Further discussion of the differences between IFRSs and
U.S. GAAP are presented in Item 2,
Managements Discussion and Analysis of Financial
Condition and Results of Operations of this
Form 10-Q
under the caption Basis of Reporting. A summary of
the significant differences between U.S. GAAP and IFRSs as
they impact our results are presented below:
Net
interest income
Effective interest rate The calculation of
effective interest rates under IFRS 39, Financial
Instruments: Recognition and Measurement (IAS 39),
requires an estimate of all fees and points paid or
recovered between parties to the contract that are an
integral part of the effective interest rate be included.
U.S. GAAP generally prohibits recognition of interest
income to the extent the net interest in the loan would increase
to an amount greater than the amount at which the borrower could
settle the obligation. Under U.S. GAAP, prepayment
penalties are generally recognized as received. U.S. GAAP
also includes interest income on loans held for resale which is
included in other revenues for IFRSs.
Deferred loan origination costs and fees Loan
origination cost deferrals under IFRSs are more stringent and
result in lower costs being deferred than permitted under
U.S. GAAP. In addition, all deferred loan origination fees,
costs and loan premiums must be recognized based on the expected
life of the receivables under IFRSs as part of the effective
interest calculation while under U.S. GAAP they may be
recognized on either a contractual or expected life basis.
Derivative interest expense Under IFRSs, net
interest income includes the interest element for derivatives
which correspond to debt designated at fair value. For
U.S. GAAP, this is included in Gain (loss) on debt
designated at fair value and related derivatives which is a
component of other revenues. Additionally, under IFRSs,
insurance investment income is included in net interest income
instead of as a component of other revenues under U.S. GAAP.
Other
operating income (Total other revenues)
Present value of long-term insurance
contracts Under IFRSs, the present value of an
in-force (PVIF) long-term insurance contract is
determined by discounting future cash flows expected to emerge
from business currently in force using appropriate assumptions
in assessing factors such as future mortality, lapse rates and
levels of expenses, and a discount rate that reflects the risk
premium attributable to the respective long-term insurance
business. Movements in the PVIF of long-term insurance contracts
are included in other operating income. Under U.S. GAAP,
revenue is recognized over the life insurance policy term.
Policyholder benefits Other revenues under
IFRSs includes policyholder benefits expense which is classified
as other expense under U.S. GAAP.
Loans held for sale IFRSs requires loans
designated as held for resale at the time of origination to be
treated as trading assets and recorded at their fair market
value. Under U.S. GAAP, loans designated as held for resale
are reflected as loans and recorded at the lower of amortized
cost or fair value. Under IFRSs, the income and expenses related
to receivables held for sale are reported in other operating
income. Under U.S. GAAP, the income and expenses related to
receivables held for sale are reported similarly to loans held
for investment.
For receivables transferred to held for sale subsequent to
origination, IFRSs requires these receivables to be reported
separately on the balance sheet but does not change the
recognition and measurement criteria. Accordingly, for IFRSs
purposes such loans continue to be accounted for in accordance
with IAS 39 with any gain or loss recorded at the time of sale.
U.S. GAAP requires loans that management intends to sell to
be transferred to a held for sale category at the lower of cost
or fair value. Under U.S. GAAP, the component of the lower
of cost or fair value
40
HSBC Finance Corporation
adjustment related to credit risk is recorded in the statement
of loss as provision for credit losses while the component
related to interest rates and liquidity factors is reported in
the statement of loss in other revenues.
Certain receivables that were previously classified as held for
sale under U.S. GAAP have now been transferred to held for
investment as we now intend to hold for the foreseeable future.
Under U.S. GAAP, these receivables were subject to lower of
cost or fair value adjustments while held for sale and have been
transferred to held for investment at their current carrying
value. Under IFRSs, these receivables were always reported
within loans and the measurement criteria did not change. As a
result, loan impairment charges are now being recorded under
IFRSs which were essentially included as a component of the
lower of cost or fair value adjustments under U.S. GAAP.
Securities Under IFRSs, securities include
HSBC shares held for stock plans at fair value. These shares are
recorded at fair value through other comprehensive income and
subsequently recognized in profit and loss as the shares vest.
If it is determined these shares have become impaired, the fair
value loss is recognized in profit and loss and any fair value
loss recorded in other comprehensive income is reversed. There
is no similar requirement under U.S. GAAP.
Other-than-temporary
impairments Under U.S. GAAP we are allowed
to evaluate perpetual preferred securities for potential
other-than-temporary
impairment similar to a debt security provided there has been no
evidence of deterioration in the credit of the issuer and record
the unrealized losses as a component of other comprehensive
income. There are no similar provisions under IFRSs as all
perpetual preferred securities are evaluated for
other-than-temporary
impairment as equity securities.
Under U.S. GAAP, the credit loss component of an
other-than-temporary
impairment of a debt security is recognized in earnings while
the remaining portion of the impairment loss is recognized in
other comprehensive income provided a company concludes it
neither intends to sell the security nor concludes that it is
more-likely-than-not that it will have to sell the security
prior to recovery. Under IFRSs, there is no bifurcation of
other-than-temporary
impairment and the entire decline in value is recognized in
earnings.
REO Expense Other revenues under IFRSs
includes losses on sale and the lower of cost or fair value
adjustments on REO properties which are classified as other
expense under U.S. GAAP.
Loan impairment charges (Provision for credit
losses)
IFRSs requires a discounted cash flow methodology for estimating
impairment on pools of homogeneous customer loans which requires
the incorporation of the time value of money relating to
recovery estimates. Also under IFRSs, future recoveries on
charged-off loans are accrued for on a discounted basis and a
recovery asset is recorded. Subsequent recoveries are recorded
to earnings under U.S. GAAP, but are adjusted against the
recovery asset under IFRSs. Interest is recorded based on
collectibility under IFRSs.
As discussed above, under U.S. GAAP the credit risk
component of the lower of cost or fair value adjustment related
to the transfer of receivables to held for sale is recorded in
the statement of loss as provision for credit losses. There is
no similar requirement under IFRSs.
Operating
expenses
Goodwill impairments Goodwill impairment
under IFRSs was higher than that under U.S. GAAP due to
higher levels of goodwill established under IFRSs as well as
differences in how impairment is measured as U.S. GAAP
requires a two-step impairment test which requires the fair
value of goodwill to be determined in the same manner as the
amount of goodwill recognized in a business combination.
Policyholder benefits Operating expenses
under IFRSs are lower as policyholder benefits expenses are
reported as an offset to other revenues as discussed above.
Pension costs Net income under U.S. GAAP
is lower than under IFRSs as a result of the amortization of the
amount by which actuarial losses exceed gains beyond the
10 percent corridor. Furthermore, in 2010
changes to future accruals for legacy participants under the
HSBC North America Pension Plan were accounted for as a plan
41
HSBC Finance Corporation
curtailment under IFRSs, which resulted in immediate income
recognition. Under U.S. GAAP, these changes were considered
to be a negative plan amendment which resulted in no immediate
income recognition.
Assets
Customer loans (Receivables) On an IFRSs
basis loans designated as held for sale at the time of
origination and accrued interest are classified in other assets.
However, the accounting requirements governing when receivables
previously held for investment are transferred to a held for
sale category are more stringent under IFRSs than under
U.S. GAAP. Unearned insurance premiums are reported as a
reduction to receivables on a U.S. GAAP basis but are
reported as insurance reserves for IFRSs.
Other In addition to the differences
discussed above, derivative financial assets are higher under
IFRSs than under U.S. GAAP as U.S. GAAP permits the
netting of certain items. No similar requirement exists under
IFRSs.
16. Variable
Interest Entities
On January 1, 2010, we adopted the new guidance which
amends the accounting for the consolidation of variable interest
entities. The new guidance changed the approach for determining
the primary beneficiary of a VIE from a quantitative approach
focusing on risk and reward to a qualitative approach focusing
on the power to direct the activities of the VIE and the
obligation to absorb losses
and/or the
right to receive benefits of the VIE. The adoption of the new
guidance has not resulted in any changes to consolidated
entities for us.
Variable Interest Entities We consolidate
VIEs in which we hold a controlling financial interest as
evidenced by the power to direct the activities of a VIE that
most significantly impact its economic performance and the
obligation to absorb losses of, or the right to receive benefits
from, the VIE that could be potentially significant to the VIE
and therefore are deemed to be the primary beneficiary. We take
into account all of our involvements in a VIE in identifying
(explicit or implicit) variable interests that individually or
in the aggregate could be significant enough to warrant our
designation as the primary beneficiary and hence require us to
consolidate the VIE or otherwise require us to make appropriate
disclosures. We consider our involvement to be significant where
we, among other things, (i) provide liquidity facilities to
support the VIEs debt issuances, (ii) enter into
derivative contracts to absorb the risks and benefits from the
VIE or from the assets held by the VIE, (iii) provide a
financial guarantee that covers assets held or liabilities
issued, (iv) design, organize and structure the transaction
and (v) retain a financial or servicing interest in the VIE.
We are required to evaluate whether to consolidate a VIE when we
first become involved and on an ongoing basis. In almost all
cases, a qualitative analysis of our involvement in the entity
provides sufficient evidence to determine whether we are the
primary beneficiary. In rare cases, a more detailed analysis to
quantify the extent of variability to be absorbed by each
variable interest holder is required to determine the primary
beneficiary.
Consolidated VIEs In the ordinary course of
business, we have organized special purpose entities
(SPEs) primarily to meet our own funding needs
through collateralized funding transactions. We transfer certain
receivables to these trusts which in turn issue debt instruments
collateralized by the transferred receivables. The entities used
in these transactions are VIEs and we are deemed to be their
primary beneficiary because we hold beneficial interests that
expose us to the majority of their expected losses. Accordingly,
we consolidate these entities and report the debt securities
issued by them as secured financings in long-term debt. This has
not changed as a result of the new accounting guidance effective
January 1, 2010. As a result, all receivables transferred
in these secured financings have remained and continue to remain
on our balance sheet and the debt securities issued by them have
remained and continue to be included in long-term debt.
42
HSBC Finance Corporation
The following table summarizes the assets and liabilities of
these consolidated secured financing VIEs as of March 31,
2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Consolidated
|
|
|
Consolidated
|
|
|
Consolidated
|
|
|
Consolidated
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
|
|
Liabilities
|
|
|
|
|
|
(in millions)
|
|
|
Real estate collateralized funding vehicles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables, net
|
|
$
|
6,244
|
|
|
$
|
-
|
|
|
$
|
6,404
|
|
|
$
|
-
|
|
Available-for-sale
investments
|
|
|
10
|
|
|
|
-
|
|
|
|
13
|
|
|
|
-
|
|
Long-term debt
|
|
|
-
|
|
|
|
4,482
|
|
|
|
-
|
|
|
|
4,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
6,254
|
|
|
|
4,482
|
|
|
|
6,417
|
|
|
|
4,678
|
|
Credit card collateralized funding vehicles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables, net
|
|
|
1,585
|
|
|
|
-
|
|
|
|
1,821
|
|
|
|
-
|
|
Long-term debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
1,585
|
|
|
|
-
|
|
|
|
1,821
|
|
|
|
-
|
|
Auto finance collateralized funding vehicles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables, net
|
|
|
838
|
|
|
|
-
|
|
|
|
1,145
|
|
|
|
-
|
|
Other assets
|
|
|
117
|
|
|
|
-
|
|
|
|
152
|
|
|
|
-
|
|
Long-term debt
|
|
|
-
|
|
|
|
586
|
|
|
|
-
|
|
|
|
778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
955
|
|
|
|
586
|
|
|
|
1,297
|
|
|
|
778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,794
|
|
|
$
|
5,068
|
|
|
$
|
9,535
|
|
|
$
|
5,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The assets of the consolidated VIEs serve as collateral for the
obligations of the VIEs. The holders of the debt securities
issued by these vehicles have no recourse to our general credit.
Unconsolidated VIEs We are involved with VIEs
related to low income housing partnerships, leveraged leases and
investments in community partnerships that were not consolidated
at March 31, 2010 or December 31, 2009 because we are
not the primary beneficiary. At March 31, 2010, we have
assets totaling $37 million on our consolidated balance
sheet which represents our maximum exposure to loss for these
VIEs.
Additionally, we are involved with other VIEs which currently
provide funding to HSBC Bank USA through collateralized funding
transactions. We have not consolidated these VIEs at
March 31, 2010 or December 31, 2009 because we are not
the primary beneficiary as our relationship with these VIEs is
limited to servicing certain credit card and private label
receivables of the related trusts.
17. Fair
Value Measurements
Accounting principles related to fair value measurements provide
a framework for measuring fair value and focuses on an exit
price in the principal (or alternatively, the most advantageous)
market accessible in an orderly transaction between willing
market participants (the Fair Value Framework). The
Fair Value Framework establishes a three-tiered fair value
hierarchy with Level 1 representing quoted prices
(unadjusted) in active markets for identical assets or
liabilities. Fair values determined by Level 2 inputs are
inputs that are observable for the identical asset or liability,
either directly or indirectly. Level 2 inputs include
quoted prices for similar assets or liabilities in active
markets, quoted prices for identical or similar assets or
liabilities in markets that are disorderly, and inputs other
than quoted prices that are observable for the asset or
liability, such as interest rates and yield curves that are
observable at commonly quoted intervals. Level 3 inputs are
unobservable inputs for the asset or liability and include
situations where there is little, if any, market activity for
the asset or liability. Transfers between leveling categories
are recognized at the end of each reporting period.
43
HSBC Finance Corporation
Assets and Liabilities Recorded at Fair Value on a
Recurring Basis The following table presents information
about our assets and liabilities measured at fair value on a
recurring basis as of March 31, 2010 and December 31,
2009, and indicates the fair value hierarchy of the valuation
techniques utilized to determine such fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
(Liabilities)
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
Measured at
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
|
|
Fair Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
(in millions)
|
|
|
March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial
assets(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
1,292
|
|
|
$
|
-
|
|
|
$
|
1,292
|
|
|
$
|
-
|
|
Currency swaps
|
|
|
1,793
|
|
|
|
-
|
|
|
|
1,793
|
|
|
|
-
|
|
Derivative netting
|
|
|
(635
|
)
|
|
|
-
|
|
|
|
(635
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative financial assets
|
|
|
2,450
|
|
|
|
-
|
|
|
|
2,450
|
|
|
|
-
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
|
426
|
|
|
|
426
|
|
|
|
-
|
|
|
|
-
|
|
U.S. government sponsored enterprises
|
|
|
137
|
|
|
|
21
|
|
|
|
116
|
|
|
|
-
|
|
U.S. government agency issued or guaranteed
|
|
|
18
|
|
|
|
-
|
|
|
|
18
|
|
|
|
-
|
|
Obligations of U.S. states and political subdivisions
|
|
|
31
|
|
|
|
-
|
|
|
|
31
|
|
|
|
-
|
|
Asset-backed securities
|
|
|
79
|
|
|
|
-
|
|
|
|
52
|
|
|
|
27
|
|
U.S. corporate debt securities
|
|
|
1,676
|
|
|
|
-
|
|
|
|
1,666
|
|
|
|
10
|
|
Foreign debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
|
|
|
81
|
|
|
|
9
|
|
|
|
72
|
|
|
|
-
|
|
Corporate
|
|
|
279
|
|
|
|
-
|
|
|
|
279
|
|
|
|
-
|
|
Equity securities
|
|
|
12
|
|
|
|
-
|
|
|
|
12
|
|
|
|
-
|
|
Money market funds
|
|
|
425
|
|
|
|
425
|
|
|
|
-
|
|
|
|
-
|
|
Accrued interest
|
|
|
31
|
|
|
|
2
|
|
|
|
29
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
securities
|
|
|
3,195
|
|
|
|
883
|
|
|
|
2,275
|
|
|
|
37
|
|
Total assets
|
|
$
|
5,645
|
|
|
$
|
883
|
|
|
$
|
4,725
|
|
|
$
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt carried at fair value
|
|
$
|
(26,690
|
)
|
|
$
|
-
|
|
|
$
|
(26,690
|
)
|
|
$
|
-
|
|
Derivative related
liabilities(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
(494
|
)
|
|
|
-
|
|
|
|
(494
|
)
|
|
|
-
|
|
Currency swaps
|
|
|
(190
|
)
|
|
|
-
|
|
|
|
(190
|
)
|
|
|
-
|
|
Foreign Exchange Forward
|
|
|
(6
|
)
|
|
|
-
|
|
|
|
(6
|
)
|
|
|
-
|
|
Derivative netting
|
|
|
635
|
|
|
|
-
|
|
|
|
635
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative related liabilities
|
|
|
(55
|
)
|
|
|
-
|
|
|
|
(55
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
(26,745
|
)
|
|
$
|
-
|
|
|
$
|
(26,745
|
)
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial
assets(1)
|
|
$
|
3,363
|
|
|
$
|
-
|
|
|
$
|
3,363
|
|
|
$
|
-
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
|
196
|
|
|
|
196
|
|
|
|
-
|
|
|
|
-
|
|
U.S. government sponsored enterprises
|
|
|
97
|
|
|
|
21
|
|
|
|
74
|
|
|
|
2
|
|
U.S. government agency issued or guaranteed
|
|
|
21
|
|
|
|
-
|
|
|
|
21
|
|
|
|
-
|
|
Obligations of U.S. states and political subdivisions
|
|
|
32
|
|
|
|
-
|
|
|
|
31
|
|
|
|
1
|
|
Asset-backed securities
|
|
|
83
|
|
|
|
-
|
|
|
|
57
|
|
|
|
26
|
|
U.S. corporate debt securities
|
|
|
1,724
|
|
|
|
-
|
|
|
|
1,704
|
|
|
|
20
|
|
Foreign debt securities
|
|
|
366
|
|
|
|
10
|
|
|
|
356
|
|
|
|
-
|
|
Equity securities
|
|
|
12
|
|
|
|
-
|
|
|
|
12
|
|
|
|
-
|
|
Money market funds
|
|
|
627
|
|
|
|
627
|
|
|
|
-
|
|
|
|
-
|
|
Accrued interest
|
|
|
29
|
|
|
|
1
|
|
|
|
28
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
securities
|
|
|
3,187
|
|
|
|
855
|
|
|
|
2,283
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
6,550
|
|
|
$
|
855
|
|
|
$
|
5,646
|
|
|
$
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt carried at fair value
|
|
$
|
(26,745
|
)
|
|
$
|
-
|
|
|
$
|
(26,745
|
)
|
|
$
|
-
|
|
Derivative related liabilities
|
|
|
(59
|
)
|
|
|
-
|
|
|
|
(59
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
(26,804
|
)
|
|
$
|
-
|
|
|
$
|
(26,804
|
)
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The fair value disclosed does not
include swap collateral which was a net liability of
$2.4 billion and $3.4 billion at March 31, 2010
and December 31, 2009, respectively, and that we either
received or deposited with our interest rate swap
counterparties. Such swap collateral is recorded on our balance
sheet at an amount which approximates fair value and
is netted on the balance sheet with the fair value amount
recognized for derivative instruments when certain conditions
are met.
|
44
HSBC Finance Corporation
The following table provides additional detail regarding the
rating of our U.S. corporate debt securities at
March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
(in millions)
|
|
|
AAA to
AA(1)
|
|
$
|
383
|
|
|
$
|
-
|
|
|
$
|
383
|
|
A+ to
A-(1)
|
|
|
1,153
|
|
|
|
3
|
|
|
|
1,156
|
|
BBB+ to
Unrated(1)
|
|
|
130
|
|
|
|
7
|
|
|
|
137
|
|
|
|
|
(1) |
|
We obtain ratings on our U.S.
corporate debt securities from both Moodys Investor
Services and Standard and Poors Corporation. In the event
the ratings we obtain from these agencies differ, we utilize the
lower of the two ratings.
|
Significant Transfers Into/Out of Level 1 and
Level 2 There were no transfers between
Level 1 (quoted unadjusted prices in active markets for
identical assets or liabilities) and Level 2 (using inputs
that are observable for the identical asset or liability, either
directly or indirectly) during the three months ended
March 31, 2010.
Information on Level 3 Assets and Liabilities
The table below reconciles the beginning and ending
balances for assets recorded at fair value using significant
unobservable inputs (Level 3) during the three months
ended March 31, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gains and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Losses)
|
|
|
|
|
|
|
|
|
|
|
|
Transfers
|
|
|
Transfers
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in
|
|
|
|
|
|
|
|
|
|
|
|
Out of
|
|
|
Out of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
Current Periods
|
|
|
|
Jan. 1,
|
|
|
|
|
|
Comp.
|
|
|
|
|
|
|
|
|
|
|
|
and Into
|
|
|
and Into
|
|
|
Mar. 31
|
|
|
Unrealized
|
|
|
|
2010
|
|
|
Income
|
|
|
Income
|
|
|
Purchases
|
|
|
Issuances
|
|
|
Settlement
|
|
|
Level 3
|
|
|
Level 2
|
|
|
2010
|
|
|
Gains (Losses)
|
|
|
|
|
|
(in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government sponsored enterprises
|
|
$
|
2
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(2
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
Obligations of U.S. states and
political subdivisions
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Asset-backed securities
|
|
|
26
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
27
|
|
|
|
(10
|
)
|
U.S. corporate debt securities
|
|
|
20
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
|
|
|
(17
|
)
|
|
|
10
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
49
|
|
|
$
|
-
|
|
|
$
|
(1
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(1
|
)
|
|
$
|
9
|
|
|
$
|
(19
|
)
|
|
$
|
37
|
|
|
$
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gains and (Losses) Included in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Transfers
|
|
|
Transfers
|
|
|
|
|
|
Current Periods
|
|
|
|
Jan. 1,
|
|
|
|
|
|
Comp.
|
|
|
|
|
|
|
|
|
|
|
|
Into
|
|
|
Out of
|
|
|
Mar. 31
|
|
|
Unrealized
|
|
|
|
2009
|
|
|
Income
|
|
|
Income
|
|
|
Purchases
|
|
|
Issuances
|
|
|
Settlement
|
|
|
Level 3
|
|
|
Level 3
|
|
|
2009
|
|
|
Gains (Losses)
|
|
|
|
|
|
(in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government sponsored enterprises
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2
|
|
|
$
|
-
|
|
|
$
|
2
|
|
|
$
|
-
|
|
Asset-backed securities
|
|
|
38
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
|
|
(18
|
)
|
|
|
30
|
|
|
|
(32
|
)
|
U.S. corporate debt securities
|
|
|
84
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16
|
|
|
|
(72
|
)
|
|
|
32
|
|
|
|
(8
|
)
|
Foreign debt securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
-
|
|
|
|
6
|
|
|
|
-
|
|
Equity Securities
|
|
|
51
|
|
|
|
(8
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
42
|
|
|
|
-
|
|
Accrued interest
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
175
|
|
|
$
|
(8
|
)
|
|
$
|
(2
|
)
|
|
$
|
4
|
|
|
$
|
-
|
|
|
$
|
(1
|
)
|
|
$
|
36
|
|
|
$
|
(91
|
)
|
|
$
|
113
|
|
|
$
|
(40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
HSBC Finance Corporation
The amount of total gains or losses for the three months ended
March 31, 2010 and 2009 included in income attributable to
the change in unrealized losses relating to assets still held at
March 31, 2010 and 2009 was $0 million and
$(8) million, respectively.
Assets and Liabilities Recorded at Fair Value on a
Non-recurring Basis The following table presents
information about our assets and liabilities measured at fair
value on a non-recurring basis as of March 31, 2010 and
March 31, 2009, and indicates the fair value hierarchy of
the valuation techniques utilized to determine such fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gains
|
|
|
|
Non-Recurring Fair Value Measurements as
|
|
|
(Losses) For the
|
|
|
|
of March 31, 2010
|
|
|
Three Months Ended
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
March 31, 2010
|
|
|
|
|
|
(in millions)
|
|
|
Real estate secured receivables held for sale at fair value
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
owned(1)
|
|
$
|
-
|
|
|
$
|
780
|
|
|
$
|
-
|
|
|
$
|
780
|
|
|
$
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repossessed
vehicles(1)
|
|
$
|
-
|
|
|
$
|
20
|
|
|
$
|
-
|
|
|
$
|
20
|
|
|
$
|
-(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Losses) For the
|
|
|
|
Non-Recurring Fair Value Measurements as
|
|
|
Three Months Ended
|
|
|
|
of March 31, 2009
|
|
|
March 31,
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Real estate secured
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
41
|
|
|
$
|
41
|
|
|
$
|
(2
|
)
|
Credit cards
|
|
|
-
|
|
|
|
-
|
|
|
|
1,360
|
|
|
|
1,360
|
|
|
|
(167
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables held for sale at fair
value(3)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,401
|
|
|
$
|
1,401
|
|
|
$
|
(169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill(4)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,641
|
|
|
$
|
1,641
|
|
|
$
|
(653
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets(4)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
20
|
|
|
$
|
20
|
|
|
$
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
owned(1)
|
|
$
|
-
|
|
|
$
|
888
|
|
|
$
|
-
|
|
|
$
|
888
|
|
|
$
|
(97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repossessed
vehicles(1)
|
|
$
|
-
|
|
|
$
|
47
|
|
|
$
|
-
|
|
|
$
|
47
|
|
|
$
|
-(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Real estate owned and repossessed
vehicles are required to be reported on the balance sheet net of
transaction costs. The real estate owned and repossessed vehicle
amounts in the table above reflect the fair value of the
underlying asset unadjusted for transaction costs.
|
|
(2) |
|
Repossessed vehicles are typically
sold within two months of repossession. As a result, fair value
adjustments subsequent to repossession are not significant.
|
|
(3) |
|
Excludes $8 million of
receivables held for sale at March 31, 2009 for which the
fair value exceeds carrying value.
|
|
(4) |
|
During the three months ended
March 31, 2009, goodwill with a carrying amount of
$260 million allocated to our Insurance Services business
and $2,034 million allocated to our Card and Retail
Services businesses was written down to its implied fair value
of $0 million and $1,641 million, respectively.
Additionally, technology, customer lists and customer loan
related relationship intangible assets totaling $34 million
were written down to their implied fair value of
$20 million during the three months ended March 31,
2009. No write-down of goodwill or intangible assets occurred
during the three months ended March 31, 2010.
|
Fair Value of Financial Instruments The fair value
estimates, methods and assumptions set forth below for our
financial instruments, including those financial instruments
carried at cost, are made solely to comply with disclosures
required by generally accepted accounting principles in the
United States and should be read in conjunction with the
financial statements and notes included in this quarterly
report. The following table
46
HSBC Finance Corporation
summarizes the carrying values and estimated fair value of our
financial instruments at March 31, 2010 and
December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
Value
|
|
|
Fair Value
|
|
|
Value
|
|
|
Fair Value
|
|
|
|
|
|
(in millions)
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
189
|
|
|
$
|
189
|
|
|
$
|
311
|
|
|
$
|
311
|
|
Interest bearing deposits with banks
|
|
|
10
|
|
|
|
10
|
|
|
|
17
|
|
|
|
17
|
|
Securities purchased under agreements to resell
|
|
|
5,186
|
|
|
|
5,186
|
|
|
|
2,850
|
|
|
|
2,850
|
|
Securities
|
|
|
3,195
|
|
|
|
3,195
|
|
|
|
3,187
|
|
|
|
3,187
|
|
Consumer receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
14,510
|
|
|
|
9,190
|
|
|
|
15,244
|
|
|
|
8,824
|
|
Second lien
|
|
|
2,248
|
|
|
|
645
|
|
|
|
2,331
|
|
|
|
672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mortgage Services
|
|
|
16,758
|
|
|
|
9,835
|
|
|
|
17,575
|
|
|
|
9,496
|
|
Consumer Lending:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
31,546
|
|
|
|
21,725
|
|
|
|
32,751
|
|
|
|
20,918
|
|
Second lien
|
|
|
3,619
|
|
|
|
1,051
|
|
|
|
3,791
|
|
|
|
1,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consumer Lending real estate secured receivables
|
|
|
35,165
|
|
|
|
22,776
|
|
|
|
36,542
|
|
|
|
22,067
|
|
Non-real estate secured receivables
|
|
|
7,705
|
|
|
|
5,379
|
|
|
|
8,776
|
|
|
|
5,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consumer Lending
|
|
|
42,870
|
|
|
|
28,155
|
|
|
|
45,318
|
|
|
|
27,915
|
|
Credit card
|
|
|
9,197
|
|
|
|
8,685
|
|
|
|
9,905
|
|
|
|
9,358
|
|
Auto Finance
|
|
|
3,033
|
|
|
|
2,872
|
|
|
|
3,556
|
|
|
|
3,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer receivables
|
|
|
71,858
|
|
|
|
49,547
|
|
|
|
76,354
|
|
|
|
50,117
|
|
Receivables held for sale
|
|
|
3
|
|
|
|
3
|
|
|
|
536
|
|
|
|
536
|
|
Due from affiliates
|
|
|
136
|
|
|
|
136
|
|
|
|
123
|
|
|
|
123
|
|
Derivative financial assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
|
3,700
|
|
|
|
3,700
|
|
|
|
4,291
|
|
|
|
4,291
|
|
Due to affiliates
|
|
|
9,023
|
|
|
|
9,131
|
|
|
|
9,043
|
|
|
|
9,259
|
|
Long-term debt carried at fair value
|
|
|
26,690
|
|
|
|
26,690
|
|
|
|
26,745
|
|
|
|
26,745
|
|
Long-term debt not carried at fair value
|
|
|
39,798
|
|
|
|
38,700
|
|
|
|
42,913
|
|
|
|
41,144
|
|
Insurance policy and claim reserves
|
|
|
996
|
|
|
|
1,112
|
|
|
|
996
|
|
|
|
1,092
|
|
Derivative financial liabilities
|
|
|
45
|
|
|
|
45
|
|
|
|
60
|
|
|
|
60
|
|
Receivable values presented in the table above were determined
using the Fair Value Framework for measuring fair value, which
is based on our best estimate of the amount within a range of
value we believe would be received in a sale as of the balance
sheet date (i.e. exit price). The secondary market demand and
estimated value for our receivables has been heavily influenced
by the deteriorating economic conditions during the past few
years, including house price depreciation, rising unemployment,
changes in consumer behavior, and changes in discount rates.
Many investors are non-bank financial institutions or hedge
funds with high equity levels and a high cost of debt. For
certain consumer receivables, investors incorporate numerous
assumptions in predicting cash flows, such as higher charge-off
levels
and/or
slower voluntary prepayment speeds than we, as the servicer of
these receivables, believe will ultimately be the case. The
investor discount rates reflect this difference in overall cost
of capital as well as the potential volatility in the underlying
cash flow assumptions, the combination of which may yield a
significant
47
HSBC Finance Corporation
pricing discount from our intrinsic value. The estimated fair
values at March 31, 2010 and December 31, 2009 reflect
these market conditions.
Valuation Techniques The following summarizes the
valuation methodologies used for assets and liabilities recorded
at fair value and for estimating fair value for financial
instruments not recorded at fair value but for which fair value
disclosures are required.
Cash: Carrying value approximates fair value due to
cashs liquid nature.
Interest bearing deposits with banks: Carrying value
approximates fair value due to the assets liquid nature.
Securities purchased under agreements to resell: The
fair value of securities purchased under agreements to resell
approximates carrying value due to the short-term maturity of
the agreements.
Securities: Fair value for our
available-for-sale
securities is generally determined by a third party valuation
source. The pricing services generally source fair value
measurements from quoted market prices and if not available, the
security is valued based on quotes from similar securities using
broker quotes and other information obtained from dealers and
market participants. For securities which do not trade in active
markets, such as fixed income securities, the pricing services
generally utilize various pricing applications, including
models, to measure fair value. The pricing applications are
based on market convention and use inputs that are derived
principally from or corroborated by observable market data by
correlation or other means. The following summarizes the
valuation methodology used for our major security types:
|
|
|
U.S. Treasury, U.S. government agency issued or
guaranteed and Obligations of U.S. States and political
subdivisions As these securities transact in an
active market, the pricing services source fair value
measurements from quoted prices for the identical security or
quoted prices for similar securities with adjustments as
necessary made using observable inputs which are market
corroborated.
|
|
|
U.S. government sponsored enterprises For
certain government sponsored mortgage-backed securities which
transact in an active market, the pricing services source fair
value measurements from quoted prices for the identical security
or quoted prices for similar securities with adjustments as
necessary made using observable inputs which are market
corroborated. For government sponsored mortgage-backed
securities which do not transact in an active market, fair value
is determined using discounted cash flow models and inputs
related to interest rates, prepayment speeds, loss curves and
market discount rates that would be required by investors in the
current market given the specific characteristics and inherent
credit risk of the underlying collateral.
|
|
|
Asset-backed securities Fair value is determined
using discounted cash flow models and inputs related to interest
rates, prepayment speeds, loss curves and market discount rates
that would be required by investors in the current market given
the specific characteristics and inherent credit risk of the
underlying collateral.
|
|
|
U.S. corporate and foreign debt securities For
non-callable corporate securities, a credit spread scale is
created for each issuer. These spreads are then added to the
equivalent maturity U.S. Treasury yield to determine
current pricing. Credit spreads are obtained from the new issue
market, secondary trading levels and dealer quotes. For
securities with early redemption features, an option adjusted
spread (OAS) model is incorporated to adjust the
spreads determined above. Additionally, the pricing services
will survey the broker/dealer community to obtain relevant trade
data including benchmark quotes and updated spreads.
|
|
|
Preferred equity securities In general, for
perpetual preferred securities, fair value is calculated using
an appropriate spread over a comparable U.S. Treasury
security for each issue. These spreads represent the additional
yield required to account for risk including credit, refunding
and liquidity. The inputs are derived principally from or
corroborated by observable market data.
|
|
|
Money market funds Carrying value approximates fair
value due to the assets liquid nature.
|
Significant inputs used in the valuation of our investment
securities include selection of an appropriate risk-free rate,
forward yield curve and credit spread which establish the
ultimate discount rate used to determine the net present value
of estimated cash flows. For asset-backed securities, selection
of appropriate prepayment rates,
48
HSBC Finance Corporation
default rates and loss severities also serve as significant
inputs in determining fair value. We perform validations of the
fair values sourced from the independent pricing services at
least quarterly. Such validation principally includes sourcing
security prices from other independent pricing services or
broker quotes. The validation process provides us with
information as to whether the volume and level of activity for a
security has significantly decreased and assists in identifying
transactions that are not orderly. Depending on the results of
the validation, additional information may be gathered from
other market participants to support the fair value
measurements. A determination will be made as to whether
adjustments to the observable inputs are necessary as a result
of investigations and inquiries about the reasonableness of the
inputs used and the methodologies employed by the independent
pricing services.
Receivables and Receivables held for sale: The
estimated fair value of our receivables was determined by
developing an approximate range of value from a mix of various
sources as appropriate for the respective pool of assets. These
sources include, among other items, value estimates from an HSBC
affiliate which reflect
over-the-counter
trading activity; forward looking discounted cash flow models
using assumptions we believe are consistent with those which
would be used by market participants in valuing such
receivables; trading input from other market participants which
includes observed primary and secondary trades; where
appropriate, the impact of current estimated rating agency
credit tranching levels with the associated benchmark credit
spreads; and general discussions held directly with potential
investors.
Model inputs include estimates of future interest rates,
prepayment speeds, default and loss curves, and market discount
rates reflecting managements estimate of the rate of
return that would be required by investors in the current market
given the specific characteristics and inherent credit risk of
the receivables. Some of these inputs are influenced by home
price changes and unemployment rates. To the extent available,
such inputs are derived principally from or corroborated by
observable market data by correlation and other means. We
perform periodic validations of our valuation methodologies and
assumptions based on the results of actual sales of such
receivables. In addition, from time to time, we will engage a
third party valuation specialist to measure the fair value of a
pool of receivables. Portfolio risk management personnel provide
further validation through discussions with third party brokers
and other market participants. Since an active market for these
receivables does not exist, the fair value measurement process
uses unobservable significant inputs which are specific to the
performance characteristics of the various receivable portfolios.
Real estate owned: Fair value is determined based on
third party appraisals obtained at the time we take title to the
property and, if less than the carrying value of the loan, the
carrying value of the loan is adjusted to the fair value. Within
three months on the market, the carrying value is further
reduced, if necessary, to reflect observable local market data,
including local area sales data.
Repossessed vehicles: Fair value is determined based
on current Black Book values, which represent current observable
prices in the wholesale auto auction market.
Due from affiliates: Carrying value approximates
fair value because the interest rates on these receivables
adjust with changing market interest rates.
Commercial paper: The fair value of these
instruments approximates existing carrying value because
interest rates on these instruments adjust with changes in
market interest rates due to their short-term maturity or
repricing characteristics.
Due to affiliates: The estimated fair value of our
fixed rate and floating rate debt due to affiliates was
determined using discounted future expected cash flows at
current interest rates and credit spreads offered for similar
types of debt instruments.
Long-term debt: Fair value was primarily determined
by a third party valuation source. The pricing services source
fair value from quoted market prices and, if not available,
expected cash flows are discounted using the appropriate
interest rate for the applicable duration of the instrument
adjusted for our own credit risk (spread). The credit spreads
applied to these instruments were derived from the spreads
recognized in the secondary market for similar
49
HSBC Finance Corporation
debt as of the measurement date. Where available, relevant trade
data is also considered as part of our validation process.
Insurance policy and claim reserves: The fair value
of insurance reserves for periodic payment annuities was
estimated by discounting future expected cash flows at estimated
market interest rates.
Derivative financial assets and
liabilities: Derivative values are defined as the
amount we would receive or pay to extinguish the contract using
a market participant as of the reporting date. The values are
determined by management using a pricing system maintained by
HSBC Bank USA. In determining these values, HSBC Bank USA uses
quoted market prices, when available, principally for
exchange-traded options. For non-exchange traded contracts, such
as interest rate swaps, fair value is determined using
discounted cash flow modeling techniques. Valuation models
calculate the present value of expected future cash flows based
on models that utilize independently-sourced market parameters,
including interest rate yield curves, option volatilities, and
currency rates. Valuations may be adjusted in order to ensure
that those values represent appropriate estimates of fair value.
These adjustments, which are applied consistently over time, are
generally required to reflect factors such as market liquidity
and counterparty credit risk that can affect prices in
arms-length transactions with unrelated third parties. Finally,
other transaction specific factors such as the variety of
valuation models available, the range of unobservable model
inputs and other model assumptions can affect estimates of fair
value. Imprecision in estimating these factors can impact the
amount of revenue or loss recorded for a particular position.
Counterparty credit risk is considered in determining the fair
value of a financial asset. The Fair Value Framework specifies
that the fair value of a liability should reflect the
entitys non-performance risk and accordingly, the effect
of our own credit risk (spread) has been factored into the
determination of the fair value of our financial liabilities,
including derivative instruments. In estimating the credit risk
adjustment to the derivative assets and liabilities, we take
into account the impact of netting
and/or
collateral arrangements that are designed to mitigate
counterparty credit risk.
18. Contingent
Liabilities
Both we and certain of our subsidiaries are parties to various
legal proceedings resulting from ordinary business activities
relating to our current
and/or
former operations. Certain of these activities are or purport to
be class actions seeking damages in very large amounts. These
actions include assertions concerning violations of laws
and/or
unfair treatment of consumers.
We accrue for litigation-related liabilities when it is probable
that such a liability has been incurred and the amount of the
loss can be reasonably estimated. While the outcome of
litigation is inherently uncertain, we believe, in light of all
information known to us at March 31, 2010, that our
litigation reserves are adequate at such date. We review
litigation reserves at least quarterly, and the reserves may be
increased or decreased in the future to reflect further relevant
developments. We believe that our defenses to the claims
asserted against us in our currently active litigation have
merit and any adverse decision should not materially affect our
consolidated financial condition. However, losses may be
material to our results of operations for any particular future
periods depending on our income level for that period.
On May 7, 2009, the jury in the class action
Jaffe v. Household International Inc., et. al
returned a verdict partially in favor of the plaintiffs with
respect to Household International and three former officers for
certain of the claims arising out of alleged false and
misleading statements made in connection with certain activities
of Household International, Inc. between July 30, 1999 and
October 11, 2002. Despite the verdict at the District Court
level, we continue to believe, after consultation with counsel,
that neither Household nor its former officers committed any
wrongdoing and that we will either prevail on our outstanding
motions to dismiss or that the Seventh Circuit will reverse the
trial Court verdict upon appeal. As such, it is not probable a
loss has been incurred as of March 31, 2010 as a result of
this verdict. Therefore, no loss accrual was established as a
result of the verdict.
50
HSBC Finance Corporation
19. New
Accounting Pronouncements
Accounting for transfers of financial
assets In June 2009, the FASB issued guidance which
amends the accounting for transfers of financial assets by
eliminating the concept of a qualifying special-purpose entity
(QSPE) and provides additional guidance with regard
to the accounting for transfers of financial assets. The
guidance is effective for all interim and annual periods
beginning after November 15, 2009. We adopted this guidance
on January 1, 2010. The adoption of this guidance did not
have any impact on our financial position or results of
operations.
Accounting for consolidation of variable interest
entities In June 2009, the FASB issued guidance
which amends the accounting rules related to the consolidation
of variable interest entities (VIE). The guidance
changes the approach for determining the primary beneficiary of
a VIE from a quantitative risk and reward model to a qualitative
model, based on control and economics. Effective January 1,
2010, certain VIEs which are not consolidated currently will be
required to be consolidated. The guidance is effective for all
interim and annual periods beginning after November 15,
2009. The adoption of this guidance on January 1, 2010 did
not have an impact on our financial position or results of
operations. See Note 16, Special Purpose
Entities, in these consolidated financial statements for
additional information.
Improving Disclosures about Fair Value
Measurements In January 2010, the FASB issued
guidance to improve disclosures about fair value measurements.
The guidance requires entities to disclose separately the
amounts of significant transfers in and out of Level 1 and
Level 2 fair measurements and describe the reasons for the
same. It also requires Level 3 reconciliation to be
presented on a gross basis, while disclosing purchases, sales,
issuances and settlements separately. The guidance is effective
for interim and annual financial periods beginning after
December 15, 2009 except for gross basis presentation for
Level 3 reconciliation, which is effective for interim and
annual periods beginning after December 15, 2010. We
adopted the new disclosure requirements in their entirety
effective January 1, 2010. See Note 17, Fair
Value Measurements in these consolidated financial
statements.
Subsequent Events In February 2010, the FASB
amended certain recognition and disclosure requirements for
subsequent events. The guidance clarifies an entity that either
(a) is an SEC filer, or (b) is a conduit bond obligor
for conduit debt securities that are traded in a public market
is required to evaluate subsequent events through the date the
financial statements are issued and in all other cases through
the date the financial statements are available to be issued.
The guidance eliminates the requirement to disclose the date
through which subsequent events are evaluated for an SEC filer.
The guidance was effective upon issuance. Adoption did not have
an impact on our financial position or results of operations.
Derivatives and Hedging In March 2010, the
FASB issued a clarification on the scope exception for embedded
credit derivatives. The guidance eliminates the scope exception
for bifurcation of embedded credit derivatives in interests in
securitized financial assets, unless they are created solely by
subordination of one financial debt instrument to another. The
guidance is effective beginning in the first reporting period
after June 15, 2010, with earlier adoption permitted for
the quarter beginning after March 31, 2010. This
clarification is not expected to have a material impact to our
financial position or results of operations.
51
HSBC Finance Corporation
Item 2. Managements
Discussion and Analysis of Financial Condition and Results of
Operations
Forward-Looking Statements Managements
Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) should be read in conjunction
with the consolidated financial statements, notes and tables
included elsewhere in this report and with our Annual Report on
Form 10-K
for the year ended December 31, 2009 (the 2009
Form 10-K).
MD&A may contain certain statements that may be
forward-looking in nature within the meaning of the Private
Securities Litigation Reform Act of 1995. In addition, we may
make or approve certain statements in future filings with the
SEC, in press releases, or oral or written presentations by
representatives of HSBC Finance Corporation that are not
statements of historical fact and may also constitute
forward-looking statements. Words such as may,
will, should, would,
could, appears, believe,
intends, expects, estimates,
targeted, plans,
anticipates, goal and similar
expressions are intended to identify
forward-looking
statements but should not be considered as the only means
through which these statements may be made. These matters or
statements will relate to our future financial condition,
economic forecast, results of operations, plans, objectives,
performance or business developments and will involve known and
unknown risks, uncertainties and other factors that may cause
our actual results, performance or achievements to be materially
different from that which was expressed or implied by such
forward-looking statements. Forward-looking statements are based
on our current views and assumptions and speak only as of the
date they are made. HSBC Finance Corporation undertakes no
obligation to update any forward-looking statement to reflect
subsequent circumstances or events.
Executive
Overview
HSBC Finance Corporation is an indirect wholly owned subsidiary
of HSBC Holdings plc (HSBC). HSBC Finance
Corporation may also be referred to in MD&A as
we, us, or our.
Current Environment During the first quarter
of 2010, economic conditions in the United States continued to
improve. Liquidity has returned to the financial markets for all
sources of funding except for mortgage securitization and
companies are able to issue debt with credit spreads now
approaching levels historically seen prior to the crisis,
despite the U.S. governments exit from some of its
support programs. While the slowing pace of job losses is
helping the housing markets, the first-time homebuyer tax credit
as well as low interest rates resulting from government monetary
policy actions have been the main forces driving up home sales
and shrinking home inventories, which has resulted in home price
stabilization, particularly in the middle and lower price
sectors. How sustainable these improvements will be in the
absence of these government actions remains to be seen.
Deterioration in the job market continued to ease in the first
quarter of 2010 as job losses slowed in the first two months of
the year and job gains of over 150,000 were reported for March
2010, the biggest monthly gain in the last three years. Despite
the improving job picture, U.S. unemployment rates, which
have been a major factor in the deterioration of credit quality
in the U.S., remained stubbornly high at 9.7 percent in
March 2010, a decrease of only 30 basis points since
December 2009. In addition, a significant number of
U.S. residents are no longer looking for work and are not
reflected in the U.S. unemployment rates. Unemployment
rates in 17 states are greater than the U.S. national
average. The increases in unemployment rates have been most
pronounced in the markets which had previously experienced the
highest appreciation in home values. Unemployment rates in
11 states are at or above 11 percent, including
California and Florida, states where we have receivable
portfolios in excess of 5 percent of our total outstanding
receivables. Unemployment has continued to have an impact on the
provision for credit losses in our loan portfolio and in loan
portfolios across the industry.
52
HSBC Finance Corporation
Although we noted signs of improvement in mortgage lending
industry trends during the first quarter of 2010, we continue to
be affected by the following:
|
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|
|
>
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Overall levels of delinquencies remain elevated;
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>
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Mortgage loan originations from 2005 to 2008 continue to perform
worse than originations from prior periods;
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>
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Real estate markets in a large portion of the United States
continue to be affected by stagnation or declines in property
values experienced over the last three years;
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>
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While home prices have begun to stabilize in most markets,
including some parts of California, they remain under pressure
due to elevated foreclosure levels;
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>
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Lower secondary market demand for subprime loans resulting in
reduced liquidity for subprime mortgages; and
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>
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Tighter lending standards by mortgage lenders which impacts a
borrowers ability to refinance existing mortgage loans.
|
Concerns about the future of the U.S. economy, including
the pace and magnitude of recovery from the recent economic
recession, consumer confidence, volatility in energy prices,
previous volatility experienced by the credit markets and
corporate earnings will continue to influence the
U.S. economic recovery and the capital markets. In
particular, continued improvement in unemployment rates and a
sustained recovery of the housing market continue to remain
critical components of a broader U.S. economic recovery.
Further weakening in these components as well as in consumer
confidence may result in additional deterioration in consumer
payment patterns and credit quality. Although consumer
confidence has improved from the levels seen early in 2009, it
remains low on a historical basis. Weak consumer fundamentals,
including declines in wage income, reduced consumer spending,
declines in wealth and a difficult job market, continue to
depress consumer confidence. Additionally there is uncertainty
as to the future course of monetary policy and uncertainty as to
the impact on the economy and consumer confidence when the
remaining actions taken by the government to restore faith in
the capital markets and stimulate consumer spending end. These
conditions in combination with general economic weakness and
recent and proposed regulatory changes will likely continue to
impact our results in 2010, the degree of which is largely
dependent upon the nature and timing of an economic recovery and
the impact of any further regulatory changes.
The U.S. Federal government and banking regulators
continued their efforts to stabilize the U.S. economy and
reform the financial markets throughout 2009 and into 2010. In
June 2009, the Administration unveiled its proposal for a
sweeping overhaul of the financial regulatory system. The
Financial Regulatory Reform proposals are comprehensive and
include the creation of an inter-agency Financial Services
Oversight Council to, among other things, identify emerging
risks and advise the Federal Reserve Board regarding
institutions whose failure could pose a threat to financial
stability; expand the Federal Reserve Boards powers to
regulate these systemically-important institutions and impose
more stringent capital and risk management requirements; create
a Consumer Financial Protection Agency (the CFPA) as
a single primary Federal consumer protection supervisor, which
will regulate credit, savings, payment and other consumer
financial products and services and providers of those products
and services; and impose comprehensive regulation of
over-the-counter
(OTC) derivatives markets, including credit default
swaps, and prudent supervision of OTC derivatives dealers. In
December 2009, the House of Representatives passed The Wall
Street Reform and Consumer Protection Act, which addresses many
of the Administrations proposed reforms. Similar
legislation was approved in March 2010 by the U.S. Senate
Committee on Banking, Housing and Urban Affairs. In addition, on
January 14, 2010, the Administration announced its
intention to propose a Financial Crisis Responsibility Fee to be
assessed against financial institutions with more than
$50 billion in consolidated assets for at least
10 years. It is likely that some portion of the financial
regulatory reform proposals will be adopted and enacted. The
reforms may have a significant impact on the operations of
financial institutions in the U.S., including us and our
affiliates. However, it is not possible to assess the impact of
financial regulatory reform until final legislation has been
enacted and the related regulations have been adopted.
53
HSBC Finance Corporation
As discussed in prior filings, on May 22, 2009, the Credit
Card Accountability Responsibility and Disclosure Act of 2009
(the CARD Act) was signed into law. For a complete
discussion of the CARD Act as well as the impact to our
operations, see Segment Results IFRS
Management Basis.
Business Focus As discussed in this and prior
filings, during the past few years we have made numerous
strategic decisions regarding our operations, with the intent to
lower the risk profile of our operations as well as reduce the
capital and liquidity requirements of our operations by reducing
the size of the balance sheet. As a result of these strategic
decisions, our core operations currently consist of our credit
card and retail services business, as well as our insurance
operations. Our lending products currently include primarily
MasterCard and Visa credit cards and private label credit cards.
A portion of new credit card and all new private label
receivable originations are sold on a daily basis to HSBC Bank
USA, National Association (HSBC Bank USA). Our core
credit card receivable portfolio totaled $10.6 billion at
March 31, 2010 reflecting a decrease of 9 percent
since December 31, 2009 as a result of seasonal trends,
numerous actions we have taken to manage risk beginning in the
fourth quarter of 2007, including reduced marketing levels as
well as an increased focus by consumers to reduce outstanding
credit card debt which has resulted in a higher level of balance
run-off compared to what we typically have seen in the first
quarter due to seasonality.
Our Consumer Lending, Mortgage Services and Auto Finance
businesses are not considered central to our core operations. As
a result, the real estate secured, auto finance and personal
non-credit card receivable portfolios of these non-core
businesses, which totaled $69.7 billion at March 31,
2010 are currently liquidating. The timeframe in which these
portfolios will liquidate is dependent upon numerous factors
some of which are beyond our control. The rate at which
receivables pay off prior to their maturity fluctuates for a
variety of reasons such as interest rates, availability of
refinancing, home values and individual borrowers credit
profile all of which are outside of our control. In light of the
current economic conditions and mortgage industry trends
described above, our loan prepayment rates have slowed when
compared to historical experience even though interest rates
remain low. However, we have experienced some improvements in
overall loan payment rates during the first quarter of 2010 due
to the impact of government stimulus programs which have
targeted our customer base and seasonality. Additionally, our
loan modification programs which are designed to maximize cash
collections and avoid foreclosure or repossession if
economically reasonable, are contributing to these slower loan
prepayment rates.
While difficult to project both loan prepayment rates and
default rates, based on current experience we expect the
receivable portfolios of our non-core businesses to decline
between 55 percent and 65 percent over the next four
to five years and be comprised primarily of real estate secured
receivables at the end of this period. Attrition will not be
linear during this period. Over the next two years, charge-off
related receivable run-off is expected to remain high due to the
economic environment. Run-off will later slow as charge-offs
decline and the remaining real estate secured receivables stay
on the balance sheet longer due to the impact of modifications
and/or the
lack of
re-financing
alternatives.
During the first quarter of 2010 we completed the sale of both
our auto finance receivable servicing operations as well as
$927 million of auto finance receivables (of which
$379 million was purchased from HSBC Bank USA immediately
prior to the sale) to Santander Consumer USA, Inc. (SC
USA). See Note 2, Sale of Auto Finance
Servicing Operations and Certain Auto Finance Receivables,
in the accompanying consolidated financial statements for
further details of this transaction.
We continue to evaluate our operations as we seek to optimize
our risk profile as well as our liquidity, capital and funding
requirements and review opportunities in the subprime credit
card industry as the credit markets stabilize. This could result
in further strategic actions that may include changes to our
legal structure, asset levels and further alterations or
refinement of product offerings as we work to reposition our
active businesses for long-term success. Although nothing is
currently contemplated, we continue to evaluate additional ways
to identify funding opportunities with HSBC Bank USA, within the
regulatory framework.
54
HSBC Finance Corporation
Performance, Developments and Trends Our net
loss was $603 million during the three months ended
March 31, 2010 compared to net income of $872 million
in the prior year quarter. Our results in both periods were
significantly impacted by the change in the fair value of debt
and related derivatives for which we have elected fair value
option and in the three months ended March 31, 2009,
goodwill and other intangible asset impairment charges, which
need to be excluded to understand the underlying performance
trends of our business. The following table summarizes the
collective impact of these items on our income (loss) before
income tax for the periods presented:
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|
|
|
|
|
|
Three Months Ended March 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
Income (loss) before income tax, as reported
|
|
$
|
(933
|
)
|
|
$
|
1,727
|
|
Gain in value of fair value option debt and related derivatives
|
|
|
(133
|
)
|
|
|
(4,112
|
)
|
Goodwill and other intangible asset impairment charges
|
|
|
-
|
|
|
|
667
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax, excluding above
items(1)
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|
$
|
(1,066
|
)
|
|
$
|
(1,718
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents a
non-U.S.
GAAP financial measure.
|
Excluding the collective impact of the items in the above table,
our results for the three months ended March 31, 2010
improved $652 million compared to the three months ended
March 31, 2009 as lower net interest income and lower other
revenues were more than offset by a lower provision for credit
losses and lower operating expenses.
The underlying performance trends of our business have also been
impacted by changes to our charge-off policies for our real
estate secured and personal non-credit card receivables in
December 2009 (the December 2009 Charge-off Policy
Changes). Beginning in December 2009, we now write down
real estate secured receivables to net realizable value less
estimated cost to sell generally no later than the end of the
month in which the account becomes 180 days contractually
delinquent. For personal non-credit card receivables, charge-off
now occurs generally no later than the end of the month in which
the account becomes 180 days contractually delinquent. As a
result of these actions, delinquent real estate secured and
personal non-credit card receivables charge-off earlier during
the first quarter of 2010 than in the historical periods. See
our 2009
Form 10-K
for further discussion of these policy changes.
Net interest income decreased during the three months ended
March 31, 2010 as compared to the prior year quarter
primarily due to lower average receivables as a result of
receivable liquidation, risk mitigation efforts, an increased
focus by consumers to reduce outstanding credit card debt and
lower levels of performing receivables. The decrease also
reflects lower overall yields on our receivable portfolio
including the impact of the December 2009 Charge-off Policy
Changes as real estate secured and personal non-credit card
receivables now charge-off earlier than in the historical period
and as a result all of the underlying accrued interest income is
reversed against net interest income upon charge-off earlier as
well. Net interest income was also negatively impacted by a
shift in receivable mix to higher levels of lower yielding first
lien real estate secured receivables as higher yielding credit
card, auto finance and personal non-credit card receivables
have run-off at a faster pace than real estate secured
receivables. These decreases were partially offset by lower
interest expense due to lower average rates for floating rate
borrowings on lower average borrowings.
Our real estate secured and personal non-credit card receivable
portfolios reported lower yields during the first quarter of
2010, while our credit card receivable portfolio reported higher
yields. Lower yields in our real estate secured and personal
non-credit card receivable portfolios reflect the higher levels
of loan modifications since March 31, 2009 and the impact
of the December 2009 Charge-off Policy Changes as discussed
above. Yields on our credit card receivable portfolio increased
during the first quarter of 2010 as a result of repricing
initiatives during the fourth quarter of 2009 which were
partially offset by the implementation of certain provisions of
new credit card legislation including restrictions impacting
repricings of delinquent accounts. We also experienced lower
yields on our non-insurance investment portfolio held for
liquidity management purposes. These investments are short term
in nature and the lower yields reflect decreasing rates on
overnight investments. Net interest margin decreased to
5.42 percent during the three months ended March 31,
2010 compared to 5.87 percent during the three months
55
HSBC Finance Corporation
ended March 31, 2009 due to lower overall yields on our
receivable portfolio as discussed above, partially offset by
lower funding costs.
Other revenues during the three months ended March 31, 2010
and 2009 were impacted by a gain on debt designated at fair
value and related derivatives, although the impact was
significantly greater during the year-ago quarter. Excluding the
gain on debt designated at fair value and related derivatives
from both periods, other revenues decreased during the three
months ended March 31, 2010 due to lower fee income, lower
enhancement services revenues, lower derivative income and lower
taxpayer financial services (TFS) revenue, partially
offset by higher servicing and other fees from HSBC affiliates
and lower fair value write-downs on receivables held for sale.
Lower fee income reflects lower late and overlimit fees due to
lower volumes and lower delinquency levels, changes in customer
behavior and impacts from the implementation of certain
provisions of new credit card legislation which resulted in
lower overlimit fees as well as restrictions on fees charged to
process on-line and telephone payments. Lower enhancement
services revenue reflects the impact of lower credit card
receivable levels. Lower derivative related income reflects the
impact of falling long term U.S. interest rates on our
portfolio of pay fixed/receive variable non-qualifying hedges
and the impact of changes in foreign currency rates on our cross
currency hedges. Lower taxpayer financial services
(TFS) revenues reflect changes in the way this
program is jointly managed between us and HSBC Bank USA.
Beginning in the first quarter of 2010, a portion of the loans
we previously purchased are now retained by HSBC USA Inc. and we
receive a fee from HSBC Bank USA for both servicing the loans
and assuming the credit risk associated with these loans. As a
result, the decrease in TFS revenue during the first quarter of
2010 is largely offset by higher servicing and other fee revenue
related to these loans which is recorded as a component of
servicing and other fees from HSBC affiliates. Higher servicing
and other fees from HSBC affiliates reflects the new servicing
and other fees related to TFS loans as discussed above,
partially offset by lower levels of other receivables being
serviced for HSBC Bank USA and the transition of services we
previously performed for HSBC affiliates to HSBC
Technology & Services (USA) Inc. (HTSU).
Lower fair value markdowns during the current quarter reflect a
smaller portfolio of held for sale receivables than during the
year-ago quarter.
Our provision for credit losses decreased significantly during
the three months ended March 31, 2010 as compared to the
year-ago quarter as a result of a lower provision for credit
losses in our core credit card receivable portfolio as well as
lower provision for credit losses on receivables in our non-core
Mortgage Services, Consumer Lending and Auto Finance businesses.
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Provision for credit losses in our core credit card receivable
portfolio decreased $368 million during the three months
ended March 31, 2010 due to lower receivable levels as a
result of actions taken beginning in the fourth quarter of 2007
to manage risk as well as an increased focus by consumers to
reduce outstanding credit card debt. The decrease also reflects
the impact of improvement in the underlying credit quality of
the portfolio including improved early stage delinquency roll
rates as economic conditions improved. The impact of higher
unemployment rates on credit card receivable losses has not been
as severe due in part to improved cash flow from government
stimulus activities that meaningfully benefit our non-prime
customers. The lower provision for credit losses was partially
offset by portfolio seasoning.
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The provision for credit losses in our Mortgage Services
business decreased $223 million in the first quarter of
2010 as a result of lower receivable levels as the portfolio
continues to liquidate, delinquency levels continue to decrease,
economic conditions improved and a higher percentage of
charge-offs were on first lien loans which generally have lower
charge-offs than second lien loans. These decreases were
partially offset by the impact of higher levels of troubled debt
restructurings (TDR Loans) as compared to the
year-ago quarter and higher loss estimates associated with these
receivables which are not prepaying as quickly as historically
experienced as well as the impact of higher unemployment levels.
While recent loss severities on foreclosed loans have been lower
as compared to the year-ago quarter as home prices have begun to
stabilize in most markets, the impact of lower severities was
offset by a higher estimate of charge-offs related to loans
where we have previously decided not to pursue foreclosure.
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|
|
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The provision for credit losses in our Consumer Lending business
decreased $339 million in the first quarter of 2010
reflecting lower receivable levels as both the real estate
secured and personal non-credit card
|
56
HSBC Finance Corporation
receivable portfolios continue to liquidate, delinquency levels
continue to decrease and economic conditions improved. The
decrease in provision for real estate secured receivables also
reflects a higher percentage of charge-offs on first lien loans
which generally have lower charge-offs than second lien loans as
well as an improved outlook on current inherent losses for first
lien real estate secured receivables originated in 2005 and
earlier as the current trends for deterioration in delinquencies
and charge-offs in these vintages have stabilized. These
decreases in the provision for credit losses for real estate
secured receivables were partially offset by lower receivable
prepayments, portfolio seasoning, higher levels of unemployment
and increased levels of troubled debt restructures including
higher reserve requirements associated with these receivables.
While recent loss severities on foreclosed loans have been lower
as compared to the year-ago quarter as home prices have begun to
stabilize in most markets, the impact of lower severities was
offset by a higher estimate of charge-offs related to loans
where we have previously decided not to pursue foreclosure. The
decrease in the provision for credit losses for personal
non-credit card receivables reflects lower receivable levels,
lower delinquency levels and improvements in economic
conditions, partially offset by higher levels of TDR Loans
including higher reserve requirements associated with these
receivables.
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|
|
|
|
The provision for credit losses in our auto finance receivable
portfolio decreased as a result of lower receivable levels as
the portfolio continues to liquidate. Lower receivable levels
also reflect the transfer of $533 million of auto finance
receivable to receivables held for sale subsequent to
March 31, 2009. Additionally, we experienced lower loss
severities driven by improvements in prices on repossessed
vehicles.
|
In recent years, the impact of seasonal patterns in our
provision for credit losses has been masked by the impact of a
sustained deterioration in credit quality across all of our
receivable portfolios. As the credit quality in our portfolios
stabilize, we anticipate that these seasonal patterns will
re-emerge as a more significant component of our overall trend
in loss provision.
See Results of Operations for a more detailed
discussion of our provision for credit losses.
During the three months ended March 31, 2010, the provision
for credit losses was $847 million lower than net
charge-offs. During the year-ago quarter, the provision for
credit losses was higher than net charge-offs by
$557 million. Lower credit loss reserves at March 31,
2010 reflect lower receivable levels, improved economic and
credit conditions including lower delinquency levels and the
continued stabilization of the housing markets. These conditions
have resulted in an overall improved outlook on future loss
estimates. Reserve levels for real estate secured receivables at
our Mortgage Services and Consumer Lending businesses as well as
for receivables in our credit card business can be further
analyzed as follows:
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Real Estate Secured
Receivables(1)
|
|
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Credit Card
|
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|
Consumer Lending
|
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|
Mortgage Services
|
|
|
Receivables
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Credit loss reserves at January 1,
|
|
$
|
3,047
|
|
|
$
|
3,392
|
|
|
$
|
2,385
|
|
|
$
|
3,726
|
|
|
$
|
1,824
|
|
|
$
|
2,258
|
|
Provision for credit losses
|
|
|
587
|
|
|
|
860
|
|
|
|
455
|
|
|
|
678
|
|
|
|
201
|
|
|
|
569
|
|
Charge-offs
|
|
|
(861
|
)
|
|
|
(398
|
)
|
|
|
(655
|
)
|
|
|
(593
|
)
|
|
|
(592
|
)
|
|
|
(557
|
)
|
Recoveries
|
|
|
14
|
|
|
|
5
|
|
|
|
16
|
|
|
|
8
|
|
|
|
62
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit loss reserves at March 31,
|
|
$
|
2,787
|
|
|
$
|
3,859
|
|
|
$
|
2,201
|
|
|
$
|
3,819
|
|
|
$
|
1,495
|
|
|
$
|
2,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Credit loss reserves since
March 31, 2009 were significantly impacted by changes in
our charge-off policies for real estate secured receivables
which impacts comparability between periods. See Note 8,
Changes in Charge-off Policies, in our 2009
Form 10-K
for further discussion.
|
57
HSBC Finance Corporation
Total operating expenses decreased significantly during the
first quarter of 2010 as compared to three months ended
March 31, 2009, due in part to the following items recorded
during the year-ago period:
|
|
|
|
|
Restructuring charges totaling $169 million related to the
decision to discontinue all new customer account originations
for our Consumer Lending business and to close the Consumer
Lending branch offices. See Note 3, Strategic
Initiatives, in the accompanying consolidated financial
statements for additional information related to this decision;
|
|
|
|
Goodwill impairment charges of $653 million related to our
Card and Retail Services and Insurance Services businesses;
|
|
|
|
Impairment charges of $14 million relating to technology,
customer lists and loan related relationships resulting from the
discontinuation of originations for our Consumer Lending
business.
|
Excluding these items in the year-ago quarter, total operating
expenses remained lower, decreased 18 percent, due to lower
salary expense, lower occupancy and equipment expenses and lower
real estate owned expenses reflecting the further reduced scope
of our business operations since March 31, 2009 and
continued entity-wide initiatives to reduce costs, partially
offset by higher collection costs.
Our effective income tax rate was 35.37 percent for the
three months ended March 31, 2010 compared to
49.51 percent in the year-ago quarter. The effective tax
rate for the three months ended March 31, 2009 was
significantly impacted by the non-tax deductible impairment of
goodwill related to the Card and Retail Services and Insurance
Services businesses. The effective tax rate for the prior year
quarter was also impacted by a change in estimate in the state
tax rate for jurisdictions where we file combined unitary state
tax returns with other HSBC affiliates.
The financial information set forth below summarizes selected
financial highlights of HSBC Finance Corporation for the three
month periods ended March 31, 2010 and 2009 and as of
March 31, 2010 and December 31, 2009.
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net income (loss)
|
|
$
|
(603
|
)
|
|
$
|
872
|
|
Return on average owned assets (ROA)
|
|
|
(2.59
|
)%
|
|
|
2.96
|
%
|
Return on average common shareholders equity
(ROE)
|
|
|
(32.74
|
)
|
|
|
26.54
|
|
Net interest margin
|
|
|
5.42
|
|
|
|
5.87
|
|
Consumer net charge-off ratio, annualized
|
|
|
13.28
|
|
|
|
9.02
|
|
Efficiency
ratio(1)
|
|
|
47.36
|
|
|
|
29.13
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Receivables:
|
|
|
|
|
|
|
|
|
Core(2)
|
|
$
|
10,597
|
|
|
$
|
11,626
|
|
Non-core(3)
|
|
|
69,717
|
|
|
|
74,032
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
80,314
|
|
|
$
|
85,658
|
|
|
|
|
|
|
|
|
|
|
Receivables held for sale
|
|
$
|
3
|
|
|
$
|
536
|
|
|
|
|
|
|
|
|
|
|
Two-month-and-over contractual delinquency ratio
|
|
|
13.60
|
%
|
|
|
14.58
|
%
|
|
|
|
(1) |
|
Ratio of total costs and expenses
less policyholders benefits to net interest income and
other revenues less policyholders benefits.
|
|
(2) |
|
Core receivables consist of our
credit card receivable portfolios.
|
|
(3) |
|
Non-core receivables consists
primarily of the liquidating receivable portfolios in our
Consumer Lending, Mortgage Services and Auto Finance businesses.
|
58
HSBC Finance Corporation
Performance Ratios Our efficiency ratio was
47.36 percent for the three months ended March 31,
2010 compared to 29.13 percent in the year-ago quarter. Our
efficiency ratio during the three months ended March 31,
2010 and 2009 was impacted by the change in the fair value of
debt for which we have elected fair value option accounting.
Additionally, the three months ended March 31, 2009 was
also significantly impacted by the goodwill and intangible asset
impairment charges and Consumer Lending closure costs, as
discussed above. Excluding these items from the periods
presented, our efficiency ratio increased 735 basis points
during the first quarter of 2010 as receivable portfolio
liquidation and declining overall yields on our receivable
portfolio caused net interest income to decrease more rapidly
than operating expenses. The volatility between periods in other
revenues, including lower derivative income and lower fee
income, partially offset by improved lower fair value
write-downs on receivables held for sale also significantly
impacted the efficiency ratio during the current period.
Our return on average common shareholders equity
(ROE) was (32.74) percent for the three months ended
March 31, 2010 compared to 26.54 percent in the
year-ago quarter. Our return on average owned assets
(ROA) was (2.59) percent for the three months ended
March 31, 2010 compared to 2.96 percent in the
year-ago quarter. ROE and ROA were impacted by the change in the
fair value of debt for which we have elected fair value option
accounting. Additionally, the three months ended March 31,
2009 were also significantly impacted by the goodwill and
intangible asset impairment charges and Consumer Lending closure
costs, as discussed above. Excluding these items, ROE decreased
603 basis points as compared to the year-ago quarter.
Although our net loss improved significantly during the current
quarter, our net loss in 2010 represented a higher percentage of
average common shareholders equity for the three months
ended March 31, 2010 than as compared to the year-ago
quarter as our equity decreased as a result of the losses
sustained. Excluding these items, ROA increased 47 basis
points as compared to the year-ago quarter as the improvement in
our results during the quarter outpaced the decrease in lower
average assets.
Receivables Receivables were $80.3 billion at
March 31, 2010 and $85.7 billion at December 31,
2009. The decrease in our core credit card receivable portfolio
since December 31, 2009 reflects the continuing impact of
actions taken to mitigate risk, including reduced marketing
levels and an increased focus of consumers to reduce outstanding
credit card debt. The decrease in our non-core receivable
portfolios since December 31, 2009 reflects the continued
liquidation of these portfolios which will continue to decline
going forward and, as it relates to our real estate secured
receivable portfolio, partially offset by declines in loan
prepayments as fewer refinancing opportunities for our customers
exist and the previously discussed trends impacting the mortgage
lending industry. All receivable portfolios were impacted by
seasonal improvements in collection activities during the first
quarter as some customers use their tax refunds to make
payments. See Receivables Review for a more detailed
discussion of the decreases in receivable balances.
Receivables held for sale were $3 million at March 31,
2010 and $536 million at December 31, 2009. The
decrease reflects the sale of auto finance receivables to SC USA
in the first quarter of 2010. See Note 2, Sale of
Auto Finance Servicing Operations and Certain Auto Finance
Receivables, in the accompanying consolidated financial
statements for further details of this transaction.
Credit Quality Dollars of two-months-and-over
contractual delinquency as a percentage of receivables and
receivables held for sale (delinquency ratio)
decreased to 13.60 percent at March 31, 2010 as
compared to 14.27 percent at December 31, 2009. Lower
dollars of contractual delinquency reflect lower receivable
levels due to lower origination volumes in our core credit card
receivable portfolio and continued liquidation of our non-core
receivable portfolios as well as seasonal improvements in our
collection activities during the first quarter as some customers
use their tax refunds to make payments. We believe the seasonal
improvements were higher than historically experienced during
the first quarter due to an increased focus by consumers to
reduce credit card debt due in part to higher tax refunds and
the impact of the government stimulus programs which have
targeted our customer base resulting in higher overall payment
rates. Lower dollars of delinquency in our core credit card
receivable portfolio also reflect improved early stage
delinquency roll rates due to improvements in economic
conditions and seasonal improvements in collection. The
delinquency ratio decreased as compared to the prior quarter as
the dollars of delinquency decreased at faster pace than
receivable levels. See Credit Quality-Delinquency
for a more detailed discussion of our delinquency ratios.
59
HSBC Finance Corporation
Net charge-offs of consumer receivables as a percentage of
average consumer receivables (net charge-off ratio)
decreased to 13.28 percent for the three months ended
March 31, 2010 as compared to the quarter ended
December 31, 2009 and increased as compared to the quarter
ended March 31, 2009. The net charge-off ratio and net
charge-off dollars for the three months ended December 31,
2009 were significantly impacted by the December 2009 Charge-off
Policy Changes for real estate secured and personal non-credit
card receivables, which resulted in charge-offs being recognized
sooner for these products and increased net charge-off dollars
by $3.5 billion during the three months ended
December 31, 2009. Excluding the one-time impact of the
adoption of these policy changes during the prior quarter, net
charge-off dollars and ratios were still higher compared to the
prior quarter reflecting the new underlying charge-off trend for
real estate secured and personal non-credit card receivables
which will likely remain higher during the remainder of 2010 as
compared to historical periods as well as the impact of higher
levels of contractual delinquency in prior periods migrating to
charge-off. Higher real estate secured receivable net charge-off
dollars were partially offset by lower charge-offs of second
lien loans which generally have higher charge-offs than first
lien loans. Net charge-off dollars for all receivable products
were positively impacted by lower average receivable levels,
partially offset by portfolio seasoning and high unemployment
levels. In addition to the impact of the charge-off policy
changes discussed above, the increase in the net charge-off
ratio also reflects the impact of lower average receivables. See
Credit
Quality-Net
Charge-offs of Consumer Receivables for a more detailed
discussion of our net charge-off ratios.
We anticipate delinquency and charge-off levels will remain
elevated during the remainder of 2010. The extent to which
delinquency and charge-off levels remain elevated will be
determined by certain factors, including the pace and magnitude
of recovery from the recent economic recession, unemployment
levels, consumer confidence, volatility in energy and home
prices and corporate earnings which will continue to influence
the U.S. economic recovery and the capital markets.
Funding and Capital During the first quarter of
2010, we did not receive any capital contributions from HSBC
Investments (North America) Inc. (HINO). We
currently believe planned balance sheet attrition, cash
generated from operations, potential asset sales and the
issuance of cost effective retail debt will provide sufficient
liquidity. However, until we return to profitability,
HSBCs continued support is required to properly manage our
business operations and maintain appropriate levels of capital.
HSBC has provided significant capital in support of our
operations in the last few years and has indicated that they are
fully committed and have the capacity and willingness to
continue that support.
The tangible common equity to tangible assets ratio was
7.39 percent and 7.60 percent at March 31, 2010
and December 31, 2009, respectively. This ratio represents
a
non-U.S. GAAP
financial ratio that is used by HSBC Finance Corporation
management, certain rating agencies and our credit providing
banks to evaluate capital adequacy and may be different from
similarly named measures presented by other companies. See
Basis of Reporting and Reconciliations to
U.S. GAAP Financial Measures for additional
discussion and quantitative reconciliation to the equivalent
U.S. GAAP basis financial measure.
Basis of
Reporting
Our consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United
States (U.S. GAAP). Certain reclassifications
have been made to prior year amounts to conform to the current
year presentation.
In addition to the U.S. GAAP financial results reported in
our consolidated financial statements, MD&A includes
reference to the following information which is presented on a
non-U.S. GAAP
basis:
Equity Ratios Tangible common equity to tangible
assets is a
non-U.S. GAAP
financial measures that is used by HSBC Finance Corporation
management, certain rating agencies and our credit providing
banks to evaluate capital adequacy. This ratio excludes the
equity impact of unrealized gains (losses) on cash flow hedging
instruments, postretirement benefit plan adjustments and
unrealized gains (losses) on investments as well as subsequent
changes in fair value recognized in earnings associated with
debt for which we elected the fair value option and the related
derivatives. This ratio may differ from similarly named measures
presented by other companies. The most directly
60
HSBC Finance Corporation
comparable U.S. GAAP financial measure is the common and
preferred equity to total assets ratio. For a quantitative
reconciliation of these
non-U.S. GAAP
financial measures to our common and preferred equity to total
assets ratio, see Reconciliations to
U.S. GAAP Financial Measures.
International Financial Reporting Standards
Because HSBC reports results in accordance with
International Financial Reporting Standards (IFRSs)
and IFRSs results are used in measuring and rewarding
performance of employees, our management also separately
monitors net income under IFRSs (a
non-U.S. GAAP
financial measure). All purchase accounting fair value
adjustments relating to our acquisition by HSBC have been
pushed down to HSBC Finance Corporation for both
U.S. GAAP and IFRSs consistent with our IFRS Management
Basis presentation. The following table reconciles our net
income on a U.S. GAAP basis to net income on an IFRSs basis:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Net income U.S. GAAP basis
|
|
$
|
(603
|
)
|
|
$
|
872
|
|
Adjustments, net of tax:
|
|
|
|
|
|
|
|
|
Derivatives and hedge accounting (including fair value
adjustments)
|
|
|
(3
|
)
|
|
|
8
|
|
Intangible assets
|
|
|
11
|
|
|
|
12
|
|
Loan origination
|
|
|
5
|
|
|
|
15
|
|
Loan impairment
|
|
|
21
|
|
|
|
9
|
|
Loans held for sale
|
|
|
(52
|
)
|
|
|
3
|
|
Interest recognition
|
|
|
3
|
|
|
|
2
|
|
Other-than-temporary
impairments on
available-for-sale
securities
|
|
|
1
|
|
|
|
9
|
|
Securities
|
|
|
14
|
|
|
|
(75
|
)
|
Goodwill and intangible asset impairment charges
|
|
|
-
|
|
|
|
(956
|
)
|
Pension and other postretirement benefit costs
|
|
|
37
|
|
|
|
16
|
|
Other
|
|
|
3
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
Net income IFRSs basis
|
|
|
(563
|
)
|
|
|
(98
|
)
|
Tax benefit IFRSs basis
|
|
|
313
|
|
|
|
(927
|
)
|
|
|
|
|
|
|
|
|
|
Loss before tax IFRSs basis
|
|
$
|
(876
|
)
|
|
$
|
829
|
|
|
|
|
|
|
|
|
|
|
A summary of the significant differences between U.S. GAAP
and IFRSs as they impact our results are presented below:
Derivatives and hedge accounting (including fair value
adjustments) The historical use of the
shortcut and long haul hedge accounting
methods for U.S. GAAP resulted in different cumulative
adjustments to the hedged item for both fair value and cash flow
hedges. These differences are recognized in earnings over the
remaining term of the hedged items. All of the hedged
relationships which previously qualified under the shortcut
method provisions of derivative accounting principles have been
redesignated and are now either hedges under the long-haul
method of hedge accounting or included in the fair value option
election.
Intangible assets Intangible assets under
IFRSs are significantly lower than those under U.S. GAAP as
the newly created intangibles associated with our acquisition by
HSBC were reflected in goodwill for IFRSs. As a result,
amortization of intangible assets is lower under IFRSs.
Deferred loan origination costs and fees
Under IFRSs, loan origination cost deferrals are more stringent
and result in lower costs being deferred than permitted under
U.S. GAAP. In addition, all deferred loan origination fees,
costs and loan premiums must be recognized based on the expected
life of the receivables under IFRSs as part of the effective
interest calculation while under U.S. GAAP they may be
recognized on either a contractual or expected life basis. As a
result, in years with lower levels of receivable originations,
net income is lower under U.S. GAAP as the higher costs
deferred in prior periods are amortized into income without the
benefit of similar levels of cost deferrals for current period
originations.
61
HSBC Finance Corporation
Loan impairment provisioning IFRSs requires a
discounted cash flow methodology for estimating impairment on
pools of homogeneous customer loans which requires the
incorporation of the time value of money relating to recovery
estimates. Also under IFRSs, future recoveries on charged-off
loans are accrued for on a discounted basis and a recovery asset
is recorded. Subsequent recoveries are recorded to earnings
under U.S. GAAP, but are adjusted against the recovery
asset under IFRSs. Interest is recorded based on collectibility
under IFRSs.
Loans held for sale IFRSs requires loans
designated as held for sale at the time of origination to be
treated as trading assets and recorded at their fair market
value. Under U.S. GAAP, loans designated as held for sale
are reflected as loans and recorded at the lower of amortized
cost or fair value. Under U.S. GAAP, the income and
expenses related to receivables held for sale are reported
similarly to loans held for investment. Under IFRSs, the income
and expenses related to receivables held for sale are reported
in other operating income.
For receivables transferred to held for sale subsequent to
origination, IFRSs requires these receivables to be reported
separately on the balance sheet but does not change the
recognition and measurement criteria. Accordingly for IFRSs
purposes, such loans continue to be accounted for in accordance
with IFRS 39, Financial Instruments: Recognition and
Measurement (IAS 39), with any gain or loss
recorded at the time of sale. U.S. GAAP requires loans that
management intends to sell to be transferred to a held for sale
category at the lower of cost or fair value.
Certain receivables that were previously classified as held for
sale under U.S. GAAP have now been transferred to held for
investment as we now intend to hold for the foreseeable future.
Under U.S. GAAP, these receivables were subject to lower of
cost or fair value (LOCOM) adjustments while held
for sale and have been transferred to held for investment at
LOCOM. Under IFRSs, these receivables were always reported
within loans and the measurement criteria did not change. As a
result, loan impairment charges are now being recorded under
IFRSs which were essentially included as a component of the
lower of cost or fair value adjustments under U.S. GAAP.
Interest recognition The calculation of
effective interest rates under IAS 39 requires an estimate of
all fees and points paid or recovered between parties to
the contract that are an integral part of the effective
interest rate be included. U.S. GAAP generally prohibits
recognition of interest income to the extent the net 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.
Securities Under IFRSs, securities include
HSBC shares held for stock plans at fair value. These shares are
recorded at fair value through other comprehensive income and
subsequently recognized in profit and loss as the shares vest.
If it is determined these shares have become impaired, the fair
value loss is recognized in profit and loss and any fair value
loss recorded in other comprehensive income is reversed. There
is no similar requirement under U.S. GAAP.
Other-than-temporary
impairment on
available-for-sale
securities Under U.S. GAAP we are allowed
to evaluate perpetual preferred securities for potential
other-than-temporary
impairment similar to a debt security provided there has been no
evidence of deterioration in the credit of the issuer and record
the unrealized losses as a component of other comprehensive
income. There are no similar provisions under IFRSs as all
perpetual preferred securities are evaluated for
other-than-temporary
impairment as equity securities. Under IFRSs all impairments are
reported in other operating income.
Under U.S. GAAP, the credit loss component of an
other-than-temporary
impairment of a debt security is recognized in earnings while
the remaining portion of the impairment loss is recognized in
other comprehensive income provided a company concludes it
neither intends to sell the security nor concludes that it is
more-likely-than-not that it will have to sell the security
prior to recovery. Under IFRSs, there is no bifurcation of
other-than-temporary
impairment and the entire decline in value is recognized in
earnings.
Present value of long-term insurance
contracts Under IFRSs, the present value of an
in-force (PVIF) long-term insurance contracts is
determined by discounting future cash flows expected to emerge
from business currently in force using appropriate assumptions
in assessing factors such as future mortality, lapse rates and
levels of expenses, and a discount rate that reflects the risk
premium attributable to the respective long-term insurance
business.
62
HSBC Finance Corporation
Movements in the PVIF of long-term insurance contracts are
included in other operating income. Under U.S. GAAP,
revenue is recognized over the life insurance policy term.
Goodwill and other intangible asset impairment
charges Goodwill levels established as a result
of our acquisition by HSBC were higher under IFRSs than
U.S. GAAP as the HSBC purchase accounting adjustments
reflected higher levels of intangibles under U.S. GAAP.
Consequently, the amount of goodwill allocated to our Card and
Retail Services and Insurance Services businesses and written
off during the three months ended March 31, 2009 was
greater under IFRSs. Additionally, the intangible assets
allocated to our Consumer Lending business and written off
during the first quarter of 2009 were higher under
U.S. GAAP. There are also differences in the valuation of
assets and liabilities under IFRSs and U.S. GAAP resulting
from the Metris acquisition in December 2005.
Pension and other postretirement benefit costs
Net income under U.S. GAAP is lower than under IFRSs as
a result of the amortization of the amount by which actuarial
losses exceed gains beyond the 10 percent
corridor. Furthermore in 2010 changes to future
accruals for legacy participants under the HSBC North America
Pension Plan were accounted for as a plan curtailment under
IFRSs, which resulted in immediate income recognition. Under US
GAAP, these changes were considered to be a negative plan
amendment which resulted in no immediate income recognition.
During the first quarter of 2009, the curtailment gain related
to postretirement benefits during the first quarter of 2009 also
resulted in a lower net income under U.S. GAAP than IFRSs.
Other There are other differences between
IFRSs and U.S. GAAP including purchase accounting and other
miscellaneous items.
IFRS Management Basis Reporting As previously
discussed, corporate goals and individual goals of executives
are currently calculated in accordance with IFRSs under which
HSBC prepares its consolidated financial statements. As a
result, operating results are being monitored and reviewed,
trends are being evaluated and decisions about allocating
resources, such as employees, are being made almost exclusively
on an IFRS Management Basis. IFRS Management Basis results are
IFRSs results which assume that the GM and UP Portfolios and the
auto finance, private label and real estate secured receivables
transferred to HSBC Bank USA have not been sold and remain on
our balance sheet and the revenues and expenses related to these
receivables remain on our income statement. Additionally, IFRS
Management Basis assumes that all purchase accounting fair value
adjustments relating to our acquisition by HSBC have been
pushed down to HSBC Finance Corporation. Operations
are monitored and trends are evaluated on an IFRS Management
Basis because the receivable sales to HSBC Bank USA were
conducted primarily to appropriately fund prime customer loans
more efficiently through bank deposits and such receivables
continue to be managed and serviced by us without regard to
ownership. Accordingly, our segment reporting is on an IFRS
Management Basis. However, we continue to monitor capital
adequacy, establish dividend policy and report to regulatory
agencies on an U.S. GAAP legal entity basis. A summary of
the significant differences between U.S. GAAP and IFRSs as
they impact our results are also summarized in Note 15,
Business Segments, in the accompanying consolidated
financial statements.
Quantitative Reconciliations of
Non-U.S. GAAP Financial
Measures to U.S. GAAP Financial Measures For
quantitative reconciliations of
non-U.S. GAAP
financial measures presented herein to the equivalent GAAP basis
financial measures, see Reconciliations to
U.S. GAAP Financial Measures.
63
HSBC Finance Corporation
Receivables
Review
The following table summarizes receivables and receivables held
for sale at March 31, 2010 and increases (decreases) since
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases (Decreases) From
|
|
|
|
|
|
|
March 31,
|
|
|
December 31, 2009
|
|
|
|
|
|
|
2010
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core receivable portfolios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card
|
|
$
|
10,597
|
|
|
$
|
(1,029
|
)
|
|
|
(8.9
|
)%
|
|
|
|
|
Non-core receivable portfolios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
secured(1)(2)
|
|
|
56,900
|
|
|
|
(2,635
|
)
|
|
|
(4.4
|
)
|
|
|
|
|
Auto finance
|
|
|
3,346
|
|
|
|
(615
|
)
|
|
|
(15.5
|
)
|
|
|
|
|
Personal non-credit card
|
|
|
9,423
|
|
|
|
(1,063
|
)
|
|
|
(10.1
|
)
|
|
|
|
|
Commercial and other
|
|
|
48
|
|
|
|
(2
|
)
|
|
|
(4.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-core receivable portfolios
|
|
|
69,717
|
|
|
|
(4,315
|
)
|
|
|
(5.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables
|
|
$
|
80,314
|
|
|
$
|
(5,344
|
)
|
|
|
(6.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables held for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate secured
|
|
$
|
3
|
|
|
$
|
-
|
|
|
|
-
|
%
|
|
|
|
|
Auto finance
|
|
|
-
|
|
|
|
(533
|
)
|
|
|
(100.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables held for sale
|
|
$
|
3
|
|
|
$
|
(533
|
)
|
|
|
(99.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables and receivables held for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core credit card receivables
|
|
$
|
10,597
|
|
|
$
|
(1,029
|
)
|
|
|
(8.9
|
)%
|
|
|
|
|
Non-core receivable portfolios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate secured
|
|
|
56,903
|
|
|
|
(2,635
|
)
|
|
|
(4.4
|
)
|
|
|
|
|
Auto finance
|
|
|
3,346
|
|
|
|
(1,148
|
)
|
|
|
(25.5
|
)
|
|
|
|
|
Personal non-credit card
|
|
|
9,423
|
|
|
|
(1,063
|
)
|
|
|
(10.1
|
)
|
|
|
|
|
Commercial and other
|
|
|
48
|
|
|
|
(2
|
)
|
|
|
(4.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-core receivable portfolios
|
|
|
69,720
|
|
|
|
(4,848
|
)
|
|
|
(6.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables and receivables held for sale
|
|
$
|
80,317
|
|
|
$
|
(5,877
|
)
|
|
|
(6.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Real estate secured receivables are
comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases (Decreases) From
|
|
|
|
|
|
|
March 31,
|
|
|
December 31, 2009
|
|
|
|
|
|
|
2010
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
(dollars are in millions)
|
|
|
|
|
|
Mortgage Services
|
|
$
|
18,943
|
|
|
$
|
(998
|
)
|
|
|
(5.0
|
)%
|
|
|
|
|
Consumer Lending
|
|
|
37,949
|
|
|
|
(1,637
|
)
|
|
|
(4.1
|
)
|
|
|
|
|
All other
|
|
|
8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
$
|
56,900
|
|
|
$
|
(2,635
|
)
|
|
|
(4.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
HSBC Finance Corporation
|
|
|
(2) |
|
At March 31, 2010 and
December 31, 2009, real estate secured receivables includes
$4.3 billion and $3.4 billion, respectively, of
receivables that have been written down to their net realizable
value less cost to sell in accordance with our existing
charge-off policy.
|
Core credit card receivables Credit card
receivables have decreased since December 31, 2009 as a
result of actions taken beginning in the fourth quarter of 2007
to manage risk including tightening initial credit lines and
sales authorization criteria, closing inactive accounts,
decreasing credit lines, tightening underwriting criteria,
tightening cash access and reducing marketing levels, as well as
seasonal paydowns in credit card balances and an increased focus
and ability on the part of consumers to reduce outstanding
credit card debt. In 2008, we identified certain segments of our
credit card portfolio which have been the most impacted by the
housing and economic conditions and we stopped all new account
originations in those market segments. Based on performance
trends which began in the second half of 2009, we resumed
limited direct marketing mailings and new customer account
originations for portions of our non-prime credit card
receivable portfolio which will likely result in lower run-off
of credit card receivables through the remainder of 2010.
Non-core receivable portfolios Real estate secured
receivables in our non-core receivable portfolios can be further
analyzed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases (Decreases) From
|
|
|
|
|
|
|
March 31,
|
|
|
December 31, 2009
|
|
|
|
|
|
|
2010
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Real estate secured:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed-end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
49,724
|
|
|
$
|
(2,053
|
)
|
|
|
(4.0
|
)%
|
|
|
|
|
Second lien
|
|
|
5,413
|
|
|
|
(452
|
)
|
|
|
(7.7
|
)
|
|
|
|
|
Revolving:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
206
|
|
|
|
(5
|
)
|
|
|
(2.4
|
)
|
|
|
|
|
Second lien
|
|
|
1,557
|
|
|
|
(125
|
)
|
|
|
(7.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate
secured(1)
|
|
$
|
56,900
|
|
|
$
|
(2,635
|
)
|
|
|
(4.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes receivables held for sale.
Real estate secured receivables held for sale included
$3 million primarily of closed-end, first lien receivables
at March 31, 2010 and December 31, 2009.
|
As previously discussed, real estate markets in a large portion
of the United States have been affected by stagnation or
declines in property values. As such, the
loan-to-value
(LTV) ratios for our real estate secured receivable
portfolios have generally deteriorated since origination.
Receivables which have an LTV greater than 100 percent have
historically had a greater likelihood of becoming delinquent,
resulting in higher credit losses for us. Refreshed
loan-to-value
ratios for our real estate secured receivable portfolios are
presented in the table below as of March 31, 2010 and
December 31, 2009. The trend in the ratio since
December 31, 2009 reflects the continued stabilization in
housing markets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refreshed
LTVs(1)(2)
|
|
|
Refreshed
LTVs(1)(2)
|
|
|
|
at March 31, 2010
|
|
|
at December 31, 2009
|
|
|
|
|
|
|
Mortgage
|
|
|
Consumer
|
|
|
Mortgage
|
|
|
|
Consumer
Lending(3)
|
|
|
Services
|
|
|
Lending(3)
|
|
|
Services
|
|
|
|
First
|
|
|
Second
|
|
|
First
|
|
|
Second
|
|
|
First
|
|
|
Second
|
|
|
First
|
|
|
Second
|
|
|
|
Lien
|
|
|
Lien
|
|
|
Lien
|
|
|
Lien
|
|
|
Lien
|
|
|
Lien
|
|
|
Lien
|
|
|
Lien
|
|
|
|
|
LTV<80%
|
|
|
36
|
%
|
|
|
18
|
%
|
|
|
31
|
%
|
|
|
8
|
%
|
|
|
35
|
%
|
|
|
18
|
%
|
|
|
30
|
%
|
|
|
8
|
%
|
80%£LTV<90%
|
|
|
17
|
|
|
|
12
|
|
|
|
18
|
|
|
|
11
|
|
|
|
18
|
|
|
|
12
|
|
|
|
18
|
|
|
|
12
|
|
90%£LTV<100%
|
|
|
19
|
|
|
|
21
|
|
|
|
22
|
|
|
|
20
|
|
|
|
19
|
|
|
|
22
|
|
|
|
23
|
|
|
|
20
|
|
LTV³100%
|
|
|
28
|
|
|
|
49
|
|
|
|
29
|
|
|
|
61
|
|
|
|
28
|
|
|
|
48
|
|
|
|
29
|
|
|
|
60
|
|
Average LTV for portfolio
|
|
|
88
|
%
|
|
|
100
|
%
|
|
|
91
|
%
|
|
|
109
|
%
|
|
|
88
|
%
|
|
|
100
|
%
|
|
|
91
|
%
|
|
|
109
|
%
|
65
HSBC Finance Corporation
|
|
|
(1) |
|
Refreshed LTVs for first liens are
calculated as the current estimated property value expressed as
a percentage of the receivable balance as of the reporting date
(including any charge-offs recorded to reduce receivables to
their net realizable value less cost to sell in accordance with
our existing charge-off policies). Refreshed LTVs for second
liens are calculated as the current estimated property value
expressed as a percentage of the receivable balance as of the
reporting date plus the senior lien amount at origination. For
purposes of this disclosure, current estimated property values
are derived from the propertys appraised value at the time
of receivable origination updated by the change in the Office of
Federal Housing Enterprise Oversights house pricing index
(HPI) at either a Core Based Statistical Area
(CBSA) or state level. The estimated value of the
homes could vary from actual fair values due to changes in
condition of the underlying property, variations in housing
price changes within metropolitan statistical areas and other
factors.
|
|
(2) |
|
For purposes of this disclosure,
current estimated property values are calculated using the most
current HPIs available and applied on an individual loan
basis, which results in an approximately three month delay in
the production of reportable statistics for the current period.
Therefore, the March 31, 2010 information in the table
above reflects current estimated property values using HPIs as
of December 31, 2009. For December 31, 2009,
information in the table above reflects current estimated
property values using HPIs as of September 30, 2009.
|
|
(3) |
|
Excludes the Consumer Lending
receivable portfolios serviced by HSBC Bank USA which had a
total outstanding principal balance of $1.4 billion and
$1.5 billion at March 31, 2010 and December 31,
2009, respectively.
|
The following table summarizes various real estate secured
receivables information (excluding receivables held for sale)
for our Mortgage Services and Consumer Lending businesses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Mortgage
|
|
|
Consumer
|
|
|
Mortgage
|
|
|
Consumer
|
|
|
|
Services
|
|
|
Lending
|
|
|
Services
|
|
|
Lending
|
|
|
|
|
Fixed
rate(3)
|
|
$
|
11,466
|
(1)
|
|
$
|
36,176
|
(2)
|
|
$
|
11,962
|
(1)
|
|
$
|
37,717
|
(2)
|
Adjustable
rate(3)
|
|
|
7,477
|
|
|
|
1,773
|
|
|
|
7,979
|
|
|
|
1,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,943
|
|
|
$
|
37,949
|
|
|
$
|
19,941
|
|
|
$
|
39,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
16,229
|
|
|
$
|
33,705
|
|
|
$
|
16,979
|
|
|
$
|
35,014
|
|
Second lien
|
|
|
2,714
|
|
|
|
4,244
|
|
|
|
2,962
|
|
|
|
4,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,943
|
|
|
$
|
37,949
|
|
|
$
|
19,941
|
|
|
$
|
39,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable
rate(3)
|
|
$
|
6,455
|
|
|
$
|
1,773
|
|
|
$
|
6,895
|
|
|
$
|
1,869
|
|
Interest-only(3)
|
|
|
1,022
|
|
|
|
-
|
|
|
|
1,084
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustable
rate(3)
|
|
$
|
7,477
|
|
|
$
|
1,773
|
|
|
$
|
7,979
|
|
|
$
|
1,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stated income
|
|
$
|
3,413
|
|
|
$
|
-
|
|
|
$
|
3,677
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes fixed rate interest-only
loans of $268 million and $283 million at
March 31, 2010 and December 31, 2009, respectively.
|
|
(2) |
|
Includes fixed rate interest-only
loans of $32 million and $36 million at March 31,
2010 and December 31, 2009, respectively.
|
|
(3) |
|
Receivable classification between
fixed rate, adjustable rate and interest-only receivables is
based on the classification at the time of receivable
origination and does not reflect any changes in the
classification that may have occurred as a result of any loan
modifications.
|
All of our non-core receivable portfolio balances have decreased
from December 31, 2009 reflecting the continued liquidation
of these portfolios which will continue going forward as well as
seasonal improvements in collection activities during the first
quarter as some customers use their tax refunds to make
payments. The decreases in our real estate secured receivable
portfolios were partially offset by declines in loan prepayments
as fewer refinancing opportunities for our customers exist and
the trends impacting the mortgage lending industry as previously
discussed.
Receivables Held for Sale The decrease in
receivables held for sale since December 31, 2009 reflects
the sale of auto finance receivables to SC USA in the first
quarter of 2010. See Note 2, Sale of Auto Finance
Servicing Operations and Certain Auto Finance Receivables,
in the accompanying consolidated financial statements for
further details of this transaction.
66
HSBC Finance Corporation
Real
Estate Owned
We obtain real estate by taking possession of the collateral
pledged as security for real estate secured receivables
(REO). REO properties are made available for sale in
an orderly fashion with the proceeds used to reduce or repay the
outstanding receivable balance. The following table provides
quarterly information regarding our REO properties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Mar. 31,
|
|
|
Dec. 31,
|
|
|
Sept. 30,
|
|
|
June 30,
|
|
|
Mar. 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
|
|
Number of REO properties at end of period
|
|
|
6,826
|
|
|
|
6,060
|
|
|
|
6,266
|
|
|
|
7,105
|
|
|
|
8,643
|
|
Number of properties added to REO inventory in the period
|
|
|
4,143
|
|
|
|
3,422
|
|
|
|
3,448
|
|
|
|
3,463
|
|
|
|
4,143
|
|
Average loss on sale of REO
properties(1)
|
|
|
3.9
|
%
|
|
|
5.4
|
%
|
|
|
8.4
|
%
|
|
|
13.0
|
%
|
|
|
16.9
|
%
|
Average total loss on foreclosed
properties(2)
|
|
|
49.0
|
%
|
|
|
49.8
|
%
|
|
|
51.6
|
%
|
|
|
52.4
|
%
|
|
|
52.0
|
%
|
Average time to sell REO properties (in days)
|
|
|
170
|
|
|
|
172
|
|
|
|
184
|
|
|
|
194
|
|
|
|
201
|
|
|
|
|
(1) |
|
Property acquired through
foreclosure is initially recognized at its fair value less
estimated costs to sell (Initial REO Carrying
Value). The average loss on sale of REO properties is
calculated as cash proceeds less the Initial REO Carrying Value
divided by the Initial REO Carrying Value.
|
|
(2) |
|
The average total loss on
foreclosed properties sold each quarter includes both the loss
on sale of the REO property as discussed above and the
cumulative write-downs recognized on the loans up to the time of
foreclosure. This average total loss on foreclosed properties is
expressed as a percentage of the unpaid loan principal balance
prior to write-down plus any other ancillary amounts owed (e.g.,
real estate tax advances) which were incurred prior to our
taking title to the property.
|
The number of REO properties at March 31, 2010 increased as
compared to December 31, 2009 due to reductions in the
delays in processing foreclosures which began during 2008 as a
result of backlogs in foreclosure proceedings and actions by
local governments and certain states that lengthened the
foreclosure process. We anticipate the number of REO properties
will increase in future periods if the backlogs in foreclosure
proceedings continue to be reduced. The decline in both the
average loss on sale of REO properties and the average total
loss on foreclosed properties during the three months ended
March 31, 2010 reflects the continued stabilization of home
prices during this period in most markets. Delays in foreclosure
proceedings do not delay loss recognition as such losses are
reflected as part of the allowance for credit losses prior to
the write-down to net realizable value.
Results
of Operations
Net interest income The following table summarizes
net interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
2010
|
|
|
2009
|
|
|
(Decrease)
|
|
Three Months Ended March 31,
|
|
$
|
|
|
%(1)
|
|
|
$
|
|
|
%(1)
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Finance and other interest income
|
|
$
|
2,071
|
|
|
|
9.33
|
%
|
|
$
|
2,846
|
|
|
|
9.95
|
%
|
|
$
|
(775
|
)
|
|
|
(27.2
|
)%
|
Interest expense
|
|
|
867
|
|
|
|
3.91
|
|
|
|
1,167
|
|
|
|
4.08
|
|
|
|
(300
|
)
|
|
|
(25.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
1,204
|
|
|
|
5.42
|
%
|
|
$
|
1,679
|
|
|
|
5.87
|
%
|
|
$
|
(475
|
)
|
|
|
(28.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
% Columns: comparison to average
owned interest-earning assets.
|
Net interest income decreased during the three months ended
March 31, 2010 as compared to the year-ago quarter
primarily due to lower average receivables as a result of
receivable liquidation, risk mitigation efforts, an increased
focus by consumers to reduce outstanding credit card debt and
lower levels of performing receivables. The decrease also
reflects lower overall yields on our receivable portfolio,
including the impact of the December 2009 Charge-off Policy
Changes as real estate secured and personal non-credit card
receivables now charge-off earlier than in the
67
HSBC Finance Corporation
historical period which results in all of the underlying accrued
interest being reversed against net interest income upon
charge-off earlier as well. Net interest income was also
negatively impacted by a shift in receivable mix to higher
levels of lower yielding first lien real estate secured
receivables as higher yielding credit card, auto finance and
personal non-credit card receivables have run-off at a faster
pace than real estate secured receivables. These decreases were
partially offset by lower interest expense due to lower average
rates on lower average borrowings. The lower average rates
reflect the impact of lower effective rates on floating rate
debt.
Our real estate secured and personal non-credit card receivable
portfolios reported lower yields during the first quarter of
2010, while our credit card receivable portfolio reported higher
yields. Lower yields in our real estate secured and personal
non-credit card receivable portfolios reflect the higher levels
of loan modifications since March 31, 2009 and the impact
of the December 2009 Charge-off Policy Changes as discussed
above. Yields on our credit card receivable portfolio increased
during the first quarter of 2010 as a result of repricing
initiatives during the fourth quarter of 2009 which were
partially offset by the implementation of certain provisions of
new credit card legislation including restrictions impacting
repricing of delinquent accounts. We also experienced lower
yields on our non-insurance investment portfolio held for
liquidity management purposes. These investments are short term
in nature and the lower yields reflect decreasing rates on
overnight investments.
Net interest margin was 5.42 percent during the three
months ended March 31, 2010 compared to 5.87 percent
during the three months ended March 31, 2009. Net interest
margin decreased during the first quarter of 2010 due to lower
overall yields on our receivable portfolio as discussed above,
partially offset by lower funding costs. The following table
shows the impact of these items on net interest margin:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Net interest margin March 31, 2009 and 2008,
respectively
|
|
|
5.87
|
%
|
|
|
6.31
|
%
|
Impact to net interest margin resulting from:
|
|
|
|
|
|
|
|
|
Receivable yields:
|
|
|
|
|
|
|
|
|
Receivable pricing
|
|
|
.07
|
|
|
|
.27
|
|
Receivable mix
|
|
|
(.35
|
)
|
|
|
(.22
|
)
|
Impact of non-performing assets
|
|
|
(.16
|
)
|
|
|
(.59
|
)
|
Impact of loan modifications
|
|
|
(.17
|
)
|
|
|
(.49
|
)
|
Non-insurance investment income
|
|
|
(.03
|
)
|
|
|
(.23
|
)
|
Cost of funds
|
|
|
.19
|
|
|
|
.82
|
|
|
|
|
|
|
|
|
|
|
Net interest margin March 31, 2010 and 2009,
respectively
|
|
|
5.42
|
%
|
|
|
5.87
|
%
|
|
|
|
|
|
|
|
|
|
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 the caption Risk Management for
additional information regarding interest rate risk and
derivative financial instruments.
68
HSBC Finance Corporation
Provision for credit losses The following table
summarizes provision for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Three Months Ended March 31,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Provision for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card
|
|
$
|
201
|
|
|
$
|
569
|
|
|
$
|
(368
|
)
|
|
|
(64.7
|
)%
|
Mortgage Services
|
|
|
455
|
|
|
|
678
|
|
|
|
(223
|
)
|
|
|
(32.9
|
)
|
Consumer Lending
|
|
|
1,210
|
|
|
|
1,549
|
|
|
|
(339
|
)
|
|
|
(21.9
|
)
|
Auto Finance
|
|
|
53
|
|
|
|
149
|
|
|
|
(96
|
)
|
|
|
(64.4
|
)
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for credit losses
|
|
$
|
1,919
|
|
|
$
|
2,945
|
|
|
$
|
(1,026
|
)
|
|
|
(34.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our provision for credit losses decreased significantly during
the three months ended March 31, 2010 as compared to the
year-ago quarter as a result of a lower provision for credit
losses in our core credit card receivable portfolio as well as
lower provision for credit losses in our non-core Mortgage
Services, Consumer Lending and Auto Finance businesses as
discussed below.
|
|
|
|
|
Provision for credit losses in our core credit card receivable
portfolio decreased $368 million during the three months
ended March 31, 2010 due to lower receivable levels as a
result of actions taken beginning in the fourth quarter of 2007
to manage risk as well as an increased focus by consumers to
reduce outstanding credit card debt. The decrease also reflects
the impact of improvement in the underlying credit quality of
the portfolio including improved early stage delinquency roll
rates as economic conditions improved. The impact of higher
unemployment rates on credit card receivable losses has not been
as severe due in part to improved cash flow from government
stimulus activities that meaningfully benefit our non-prime
customers. The lower provision for credit losses was partially
offset by portfolio seasoning.
|
|
|
|
The provision for credit losses in our Mortgage Services
business decreased $223 million in the first quarter of
2010 as a result of lower receivable levels as the portfolio
continues to liquidate, delinquency levels continue to decrease,
economic conditions improved and a higher percentage of
charge-offs were on first lien loans which generally have lower
charge-offs than second lien loans. These decreases were
partially offset by the impact of higher levels of TDR Loans as
compared to the year-ago quarter and higher loss estimates
associated with these receivables which are not prepaying as
quickly as historically experienced as well as the impact of
higher unemployment levels. While recent loss severities on
foreclosed loans have been lower as compared to the year-ago
quarter as home prices have begun to stabilize in most markets,
the impact of lower severities was offset by a higher estimate
of charge-offs related to loans where we have previously decided
not to pursue foreclosure.
|
|
|
|
The provision for credit losses in our Consumer Lending business
decreased $339 million in the first quarter of 2010
reflecting lower receivable levels as both the real estate
secured and personal non-credit card receivable portfolios
continue to liquidate, delinquency levels continue to decrease
and economic conditions improve. The decrease in provision for
real estate secured receivables also reflects a higher
percentage of charge-offs on first lien loans which generally
have lower charge-offs than second lien loans as well as an
improved outlook on current inherent losses for first lien real
estate secured receivables originated in 2005 and earlier as the
current trends for deterioration in delinquencies and
charge-offs in these vintages have stabilized These decreases in
the provision for credit losses for real estate secured
receivables were partially offset by lower receivable
prepayments, portfolio seasoning, higher levels of unemployment
and increased levels of TDR Loans including higher reserve
requirements associated with these receivables. While recent
loss severities on foreclosed loans have been lower as compared
to the year-ago quarter as home prices have begun to stabilize
in most markets, the impact of lower severities was offset by a
higher estimate of charge-offs related to loans where we have
previously decided not to pursue foreclosure. The decrease in
the provision for credit losses for personal non-credit card
receivables reflects lower receivable levels, lower delinquency
levels and
|
69
HSBC Finance Corporation
improvements in economic conditions, partially offset by the
impact of slightly higher levels of charge-off and higher levels
of TDR Loans including higher reserve requirements associated
with these receivables.
|
|
|
|
|
The provision for credit losses in our auto finance receivable
portfolio decreased as a result of lower receivable levels as
the portfolio continues to liquidate. Lower receivable levels
also reflect the transfer of $533 million of auto finance
receivable to receivables held for sale subsequent to
March 31, 2009. Additionally, we experienced lower loss
severities driven by improvements in prices on repossessed
vehicles.
|
In recent years, the impact of seasonal patterns in our
provision for credit losses has been masked by the impact of a
sustained deterioration in credit quality across all of our
receivable portfolios. As the credit quality in our portfolios
stabilize, we anticipate that these seasonal patterns will
re-emerge as a more significant component of our overall trend
in loss provision.
Net charge-off dollars totaled $2.8 billion and
$2.4 billion during the three months ended March 31,
2010 and 2009. The increase reflects the impact of the December
2009 Charge-off Policy Changes for real estate secured and
personal non-credit card receivables. As a result of these
policy changes, net charge-off dollars are higher during the
first quarter of 2010 than they otherwise would have been and
will likely remain higher during the remainder of 2010 as
compared to historical periods. See Note 8, Changes
in Charge-off Policies, in our 2009
Form 10-K
for further discussion of this policy change. These increases
were partially offset by the impact of lower receivable levels,
the continued stabilization of the housing market including
lower loss severities on foreclosed loans as well as a shift in
charge-off mix in real estate secured receivables to higher
levels of first lien loans which generally have lower
charge-offs than second lien loans. Net charge-off dollars in
our core credit card receivable portfolio were positively
impacted by improvements in the U.S. economic conditions as
well as an increased focus by consumers to reduce outstanding
credit card debt. For further discussion see Credit
Quality in this
Form 10-Q.
Credit loss reserves at March 31, 2010 decreased as
compared to December 31, 2009 as we recorded provision for
credit losses less than net charge-offs of $847 million
during the current quarter. Credit loss reserves were lower for
all products as compared to December 31, 2009 reflecting
lower dollars of delinquency and lower receivable levels in all
receivable portfolios. The decrease in credit loss reserves in
our credit card receivable portfolio reflects lower loss
estimates due to lower receivable levels due to the actions
previously taken to reduce risk which has led to improved credit
quality including lower delinquency levels as well as an
increased focus by consumers to reduce outstanding credit card
debt. The lower delinquency levels also resulted from improved
early stage delinquency roll rates as economic conditions
improved and seasonal improvements in our collection activities.
The decrease in credit loss reserve levels in our real estate
secured receivable portfolio also reflects lower receivable
levels as the portfolio continues to liquidate and a significant
decrease in delinquency as the delinquent balances continue to
migrate to charge-off and are replaced by lower levels of new
delinquency volume as the portfolio continues to season and loss
severities on foreclosed loans continue to stabilize. Seasonal
improvements in our collection activities as previously
discussed also contributed to the decline in real estate
delinquency levels. The decreases in real estate secured credit
loss reserves were partially offset by higher loss estimates for
TDR Loans driven by higher volumes and slower liquidation.
Credit loss reserve levels in our personal non-credit card
portfolio declined modestly in the quarter as lower reserve
requirements due to lower delinquency levels and lower balances
were partially offset by higher reserve requirements on TDR
Loans due to an increase in volume and expected loss rates.
During the first quarter of 2010, we continued to experience
increases in the level of TDR Loans, driven largely by increased
levels of real estate secured TDR Loans. Beginning in 2008, we
significantly increased the use of loan modifications in an
effort to assist customers who are experiencing financial
difficulties. As a result, TDR Loans are also increasing as
these higher levels of modified loans become eligible to be
reported as TDR Loans under our existing policy. Although TDR
Loans generally carry a higher reserve requirement, in most
cases their delinquency status was reset to current upon
modification. Therefore, a significant portion of these balances
will not be reported in two-months-and-over contractual
delinquency and non-performing loans unless they subsequently
experience payment defaults. For further discussion of credit
loss reserves see Credit Quality in this
Form 10-Q.
70
HSBC Finance Corporation
Other revenues The following table summarizes
other revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Three Months Ended March 31,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Insurance revenue
|
|
$
|
68
|
|
|
$
|
93
|
|
|
$
|
(25
|
)
|
|
|
(26.9
|
)%
|
Investment income
|
|
|
27
|
|
|
|
27
|
|
|
|
-
|
|
|
|
-
|
|
Net
other-than-temporary
impairment losses
|
|
|
-
|
|
|
|
(20
|
)
|
|
|
20
|
|
|
|
100.0
|
|
Derivative related income (expense)
|
|
|
(102
|
)
|
|
|
38
|
|
|
|
(140
|
)
|
|
|
(100+
|
)
|
Gain on debt designated at fair value and related derivatives
|
|
|
133
|
|
|
|
4,112
|
|
|
|
(3,979
|
)
|
|
|
(96.8
|
)
|
Fee income
|
|
|
89
|
|
|
|
228
|
|
|
|
(139
|
)
|
|
|
(61.0
|
)
|
Enhancement services revenue
|
|
|
103
|
|
|
|
135
|
|
|
|
(32
|
)
|
|
|
(23.7
|
)
|
Taxpayer financial services revenue
|
|
|
29
|
|
|
|
90
|
|
|
|
(61
|
)
|
|
|
(67.8
|
)
|
Gain on bulk sale of receivables to HSBC Bank USA
|
|
|
-
|
|
|
|
57
|
|
|
|
(57
|
)
|
|
|
(100.0
|
)
|
Gain on receivable sales to HSBC affiliates
|
|
|
116
|
|
|
|
128
|
|
|
|
(12
|
)
|
|
|
(9.4
|
)
|
Servicing and other fees from HSBC affiliates
|
|
|
238
|
|
|
|
204
|
|
|
|
34
|
|
|
|
16.7
|
|
Lower of cost or fair value adjustment on receivables held for
sale
|
|
|
-
|
|
|
|
(170
|
)
|
|
|
170
|
|
|
|
100.0
|
|
Other income
|
|
|
10
|
|
|
|
46
|
|
|
|
(36
|
)
|
|
|
(78.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other revenues
|
|
$
|
711
|
|
|
$
|
4,968
|
|
|
$
|
(4,257
|
)
|
|
|
(85.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance revenue decreased during the first quarter of
2010 as a result of lower credit related premiums due largely to
the decision in late February 2009 to discontinue all new
customer account originations in our Consumer Lending business.
As a result of this decision, we no longer issue credit
insurance policies in this business segment but continue to
collect premiums on existing policies. The decreases in
insurance revenue were partially offset by growth in the
simplified issue term life insurance product that was introduced
in 2007.
Investment income includes interest income on securities
available-for-sale
as well as realized gains and losses from the sale of
securities. Investment income was flat as compared to the
year-ago quarter as higher gains on sales of securities were
offset by the impact of lower average investment balances and
significantly lower yields on money market funds.
Net other-than temporary impairment (OTTI) losses
During the first quarter of 2010, no OTTI losses on
securities
available-for-sale
were recognized. During the first quarter of 2009,
$20 million of OTTI was recorded on our portfolio of
perpetual preferred securities which was subsequently sold
during the second quarter of 2009. For further information, see
Note 4, Securities, in the accompanying
consolidated financial statements.
Derivative related income (expense) includes realized and
unrealized gains and losses on derivatives which do not qualify
as effective hedges under hedge accounting principles as well as
the ineffectiveness on derivatives which are qualifying hedges.
Designation of swaps as effective hedges reduces the volatility
that would otherwise result from
mark-to-market
accounting. All derivatives are economic hedges of the
underlying debt instruments regardless of the accounting
treatment. Derivative related income (expense) is summarized in
the table below:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Net realized losses
|
|
$
|
(64
|
)
|
|
$
|
(20
|
)
|
Mark-to-market
on derivatives which do not qualify as effective hedges
|
|
|
(38
|
)
|
|
|
3
|
|
Ineffectiveness
|
|
|
-
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(102
|
)
|
|
$
|
38
|
|
|
|
|
|
|
|
|
|
|
71
HSBC Finance Corporation
As previously discussed, the deterioration in marketplace and
economic conditions has resulted in our Consumer Lending and
Mortgage Services real estate secured receivables remaining on
the balance sheet longer due to lower prepayment rates. To
offset the increase in duration of these receivables and the
corresponding increase in interest rate risk as measured by the
present value of a basis point (PVBP),
$7.9 billion of interest rate swaps were outstanding during
the first quarter of 2010. Of these, $5.5 billion were
longer-dated pay fixed/receive variable interest rate swaps and
$2.4 billion were shorter-dated receive fixed/pay variable
rate interest rate swaps. While these hedge positions acted as
economic hedges by lowering our overall interest rate risk, they
did not qualify as effective hedges under hedge accounting
principles. The results of these non-qualifying hedges in the
first quarter of 2010 negatively impacted the net realized
losses and
mark-to-market
on derivatives which do not qualify as effective hedges. The
increase in net realized losses during the first quarter of 2010
reflects the impact of falling long term U.S. interest
rates on our portfolio of pay fixed/received variable
non-qualifying hedges. During the first quarter of 2010,
ineffectiveness income was less than $1 million as the
impact on our cross currency hedges of falling U.S. long
term rates was offset by falling long term foreign interest
rates. In the first quarter of 2009, ineffectiveness income
reflects the impact of rising long-term foreign interest rates
and falling long-term U.S. interest rates on our cross
currency cash flow hedges.
Net income volatility, whether based on changes in interest
rates for swaps which do not qualify for hedge accounting or
ineffectiveness recorded on our qualifying hedges under the long
haul method of accounting, impacts the comparability of our
reported results between periods. Accordingly, derivative
related income for the three months ended March 31, 2010
should not be considered indicative of the results for any
future periods.
Gain on debt designated at fair value and related derivatives
reflects fair value changes on our fixed rate debt accounted
for under FVO as well as the fair value changes and realized
gains (losses) on the related derivatives associated with debt
designated at fair value. These components are summarized in the
table below:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Gain (loss)
|
|
|
|
|
|
|
|
|
Mark-to-market
on debt designated at fair
value(1):
|
|
|
|
|
|
|
|
|
Interest rate component
|
|
$
|
(143
|
)
|
|
$
|
181
|
|
Credit risk component
|
|
|
(35
|
)
|
|
|
3,791
|
|
|
|
|
|
|
|
|
|
|
Total
mark-to-market
on debt designated at fair value
|
|
|
(178
|
)
|
|
|
3,972
|
|
Mark-to-market
on the related derivatives
|
|
|
100
|
|
|
|
20
|
|
Net realized gains on the related derivatives
|
|
|
211
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
133
|
|
|
$
|
4,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Mark-to-market
on debt designated at fair value and related derivatives
excludes market value changes due to fluctuations in foreign
currency exchange rates. Foreign currency translation gains
(losses) recorded in derivative income associated with debt
designated at fair value was a gain of $227 million and
$196 million during the three months ended March 31,
2010 and 2009, respectively. Offsetting gains (losses) recorded
in derivative income associated with the related derivatives was
a loss of $227 million and $196 million during the
three months ended March 31, 2010 and 2009, respectively.
|
The change in the fair value of the debt and the change in value
of the related derivatives reflect the following:
|
|
|
|
|
Interest rate curve A decrease in long term
U.S. interest rates during the first quarter of 2010
resulted in a loss in the interest rate component on the
mark-to-market
of the debt and gain on the
mark-to-market
of the related derivative. In the first quarter of 2009, changes
in the debt interest rate component and the derivative market
value reflect a steepening in the U.S. LIBOR curve. During
this period, interest rates for instruments with terms of three
years or less decreased while interest rates for instruments
with terms of greater than three years increased. Changes in the
value of the interest rate component of the debt as compared to
the related derivative are also affected by differences in cash
flows and valuation methodologies for the debt and the
derivatives. Cash flows on debt are discounted using a single
discount rate from the bond yield curve for
|
72
HSBC Finance Corporation
|
|
|
|
|
each bonds applicable maturity while derivative cash flows
are discounted using rates at multiple points along the
U.S. LIBOR yield curve. The impacts of these differences
vary as short-term and long-term interest rates shift and time
passes. Furthermore, certain derivatives have been called by the
counterparty resulting in certain FVO debt having no related
derivatives. As a result, approximately 7 percent of our
FVO debt does not have a corresponding derivative at
March 31, 2010. Income from net realized gains increased
due to reduced short term U.S. interest rates.
|
|
|
|
|
|
Credit Our secondary market credit spreads
tightened during the first quarter of 2010 due to continued
increases in market confidence and improvements in marketplace
liquidity. During the first quarter of 2009, our credit spreads
widened dramatically subsequent to the announcement of the
discontinuation of all new customer account originations in our
Consumer Lending business and closure of the Consumer Lending
branch offices as well as the credit rating downgrades in early
March 2009. In the first quarter of 2009, credit spreads also
widened as new issue and secondary bond market credit spreads
widened due to a general lack of liquidity in the secondary bond
market during the prior year period.
|
Net income volatility, whether based on changes in either the
interest rate or credit risk components of the mark-to market on
debt designated at fair value and the related derivatives,
impacts the comparability of our reported results between
periods. Accordingly, gain on debt designated at fair value and
related derivatives for the three months ended March 31,
2010 should not be considered indicative of the results for any
future periods.
Fee income, which includes revenues from fee-based
products such as credit cards, decreased during the first
quarter of 2010 as a result of lower late, overlimit and
interchange fees due to lower volumes and lower delinquency
levels, changes in customer behavior and impacts from changes
required by the new credit card legislation. As compared to the
year-ago quarter, the new credit card legislation has resulted
in significant decreases in overlimit fees as customers must now
opt-in for such fees as well as restrictions on fees charged to
process on-line and telephone payments.
Enhancement services revenue, which consists of ancillary
credit card revenue from products such as Account Secure Plus
(debt protection) and Identity Protection Plan, decreased during
the first quarter of 2010 as a result of the impact of lower new
origination volumes.
Taxpayer financial services (TFS) revenue
decreased during the first quarter of 2010 as a result of
changes in the way the TFS program is jointly managed between us
and HSBC USA Inc. Beginning in the first quarter of 2010, a
portion of the loans we previously purchased are now retained by
HSBC USA Inc. and we receive a fee for both servicing the loans
and for assuming the credit risk associated with these loans. As
a result, the decrease in TFS revenue during the first quarter
of 2010 is largely offset by higher servicing and other fee
revenue related to these loans which is recorded as a component
of servicing and other fees from HSBC affiliates.
Gain on bulk sale of receivables to HSBC Bank USA during
the first quarter of 2009 reflects the gain on the January 2009
sales of the GM and UP Portfolios, with an outstanding
receivable balance of $12.4 billion at the time of sale,
and $3.0 billion of auto finance receivables to HSBC Bank
USA. These gains were partially offset by a loss recorded on the
termination of cash flow swaps associated with $6.1 billion
of indebtedness transferred to HSBC Bank USA as part of these
transactions. No similar transaction occurred during the first
quarter of 2010.
Gain on receivable sales to HSBC affiliates consists
primarily of daily sales of private label receivable
originations and certain credit card account originations to
HSBC Bank USA. The decrease during the first quarter of 2010 was
due to lower premiums on new GM and UP receivable originations
reflecting the deteriorating credit environment since
March 31, 2009 and projected impacts of changes required by
the new credit card legislation as well as lower origination
volumes for private label receivables. These decreases were
partially offset by higher premiums on the
73
HSBC Finance Corporation
daily sales of private label receivable originations reflecting
higher yields on private label receivables since March 2009
driven by the benefits from contract renegotiation with certain
merchants.
Servicing and other fees from HSBC affiliates represents
revenue received under service level agreements under which we
service real estate secured, credit card, auto finance, private
label receivables and beginning in the first quarter of 2010,
taxpayer financial services loans for HSBC affiliates. The
increase during the three months ended March 31, 2010
reflects the servicing and other fees related to TFS loans as
discussed above, partially offset by lower levels of other
receivables being serviced for HSBC Bank USA as well as HSBC
Technology & Services (USA) Inc. (HTSU)
providing services that we previously provided to other HSBC
affiliates.
Lower of cost or fair value adjustment on receivables held
for sale includes the non-credit portion of the lower of
cost or fair value adjustment recorded on receivables at the
date they are transferred to held for sale as well as the credit
and non-credit portion of all lower of cost or fair value
adjustments recorded on receivables held for sale subsequent to
the transfer. During the first quarter of 2009, we had higher
levels of receivables held for sale and the lower of cost or
fair value adjustments on receivables held for sale reflects the
impact of current market conditions on pricing at the time.
Other income decreased in the three months ended
March 31, 2010 due to lower gains on sales of miscellaneous
commercial assets. During the first quarter of 2010, other
income includes a gain of $5 million on the sale of our
auto finance servicing operations and auto finance receivables
to Santander Consumer USA (SC USA). See Note 2,
Sale of Auto Finance Servicing Operations and Certain Auto
Finance Receivables, in the accompanying consolidated
financial statements for additional information regarding this
transaction.
Operating expenses The following table summarizes
total costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Three Months Ended March 31,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Salaries and employee benefits
|
|
$
|
176
|
|
|
$
|
420
|
|
|
$
|
(244
|
)
|
|
|
(58.1
|
)%
|
Occupancy and equipment expenses
|
|
|
29
|
|
|
|
102
|
|
|
|
(73
|
)
|
|
|
(71.6
|
)
|
Other marketing expenses
|
|
|
57
|
|
|
|
50
|
|
|
|
7
|
|
|
|
14.0
|
|
Real estate owned expenses
|
|
|
39
|
|
|
|
105
|
|
|
|
(66
|
)
|
|
|
(62.9
|
)
|
Other servicing and administrative expenses
|
|
|
249
|
|
|
|
266
|
|
|
|
(17
|
)
|
|
|
(6.4
|
)
|
Support services from HSBC affiliates
|
|
|
298
|
|
|
|
268
|
|
|
|
30
|
|
|
|
11.2
|
|
Amortization of intangibles
|
|
|
39
|
|
|
|
42
|
|
|
|
(3
|
)
|
|
|
(7.1
|
)
|
Policyholders benefits
|
|
|
42
|
|
|
|
55
|
|
|
|
(13
|
)
|
|
|
(23.6
|
)
|
Goodwill and other intangible asset impairment charges
|
|
|
-
|
|
|
|
667
|
|
|
|
(667
|
)
|
|
|
(100.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
$
|
929
|
|
|
$
|
1,975
|
|
|
$
|
(1,046
|
)
|
|
|
(53.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits was significantly lower
during the first quarter of 2010 as a result of the reduced
scope of our business operations, including the change in
headcount from the strategic decisions implemented, the impact
of entity-wide initiatives to reduce costs, and the
centralization of additional shared services in North America,
including, among other things, legal, compliance, tax and
finance. Prior period costs included severance costs of
$88 million during the three months ended March 31,
2009 primarily related to our decision in February 2009 to
discontinue new account originations for all products in our
Consumer Lending business and close all branch offices. See
Note 3, Strategic Initiatives, in the
accompanying consolidated financial statements for a complete
description of these decisions.
Occupancy and equipment expenses included lease
termination and associated costs of $54 million during the
three months ended March 31, 2009 related to the decision
to close the Consumer Lending branch offices. Excluding the
impact of this item, occupancy and equipment expense was lower
in the first quarter of 2010 due to lower
74
HSBC Finance Corporation
depreciation, utilities and repair and maintenance expenses as a
result of the reduction of the scope of our business operations
since March 2009.
Other marketing expenses include payments for
advertising, direct mail programs and other marketing
expenditures. During the first quarter of 2010, marketing
expenses increased slightly as we have resumed limited direct
marketing mailings and new customer account originations for
portions of our non-prime credit card receivable portfolio based
on recent performance trends in this portfolio. Although other
marketing expenses increased slightly during the quarter,
overall marketing levels remain low. Current marketing levels
should not be considered indicative of marketing expenses for
any future periods.
Real estate owned expenses decreased in the first quarter
of 2010 as a result of lower levels of real estate owned as
compared to the year-ago quarter due to backlogs in foreclosure
proceedings and actions taken by local governments and certain
states that have lengthened the foreclosure process. The
decrease also reflects lower losses on sales of REO properties
during the first quarter of 2010 as compared to the year-ago
quarter as home prices continued to stabilize during the first
quarter of 2010 which results in less deterioration in value
between the date we take title to the property and when the
property is ultimately sold.
Other servicing and administrative expenses included
fixed asset write-downs of $29 million during the three
months ended March 31, 2009 related to the decision to
close the Consumer Lending branch offices. Excluding the impact
of this item, other servicing and administrative expenses
increased during the first quarter of 2010 as a result of higher
expenses associated with receivables in the process of
foreclosure. Additionally, a portion of this increase related to
a change in the classification of certain pre-foreclosure costs,
which during the first quarter of 2009 were reported as part of
charge-off. In the first quarter of 2010, such costs are
recorded in other servicing and administrative expenses which
resulted in an incremental $28 million being recorded in
other servicing and administrative expenses during the three
months ended March 31, 2010. These increases in other and
servicing and administrative expenses were partially offset by
the impact of entity wide initiatives to reduce costs.
Support services from HSBC affiliates increased during
the three months ended March 31, 2010 as beginning in
January 2010 it includes legal, compliance, tax and finance and
other shared services charged to us by HTSU which were
previously recorded in salaries and employee benefits. Support
services from HSBC affiliates also includes services charged to
us by an HSBC affiliate located outside of the United States
which provides operational support to our businesses, including
among other areas, customer service, systems, collection and
accounting functions.
Amortization of intangibles decreased in the first
quarter of 2010 due to lower amortization for technology and
customer lists due to the write off of a portion of these
intangibles during the first quarter of 2009 as a result of the
decision to discontinue all new account originations in our
Consumer Lending business.
Policyholders benefits decreased during the first
quarter of 2010 due to declines in life and disability claims on
credit insurance policies since we are no longer issuing these
policies in relation to Consumer Lending loans, partially offset
by higher claims on a new term life product due to growth in
this product offering.
Goodwill and other intangible asset impairment charges
during the first quarter of 2009 include a goodwill
impairment charge of $653 million related to our Card and
Retail Services and Insurance Services businesses. All goodwill
was written off prior to the first quarter of 2010. See
Note 14, Goodwill, our 2009
Form 10-K
for further discussion of the goodwill impairment. Additionally
during the first quarter of 2009, we recorded impairment charges
of $14 million for intangible assets associated with our
Consumer Lending business as a result of our decision to
discontinue new customer account originations for all products.
See Note 3, Strategic Initiatives, and
Note 8, Intangible Assets, in our 2009
Form 10-K
for further discussion of the impairment. There were no
intangible asset impairment charges during the first quarter of
2010.
Efficiency ratio The following table summarizes our owned
basis efficiency ratio:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
|
Three months ended March 31
|
|
|
47.36
|
%
|
|
|
29.13
|
%
|
75
HSBC Finance Corporation
Our efficiency ratio during the three months ended
March 31, 2010 and 2009 was impacted by the change in the
fair value of debt for which we have elected fair value option
accounting. Additionally, the three months ended March 31,
2009 was also significantly impacted by the goodwill and
intangible asset impairment charges and Consumer Lending closure
costs, as discussed above. Excluding these items from the
periods presented, our efficiency ratio increased 735 basis
points during the first quarter of 2010 as receivable portfolio
liquidation and declining overall yields on our receivable
portfolio caused net interest income to decrease more rapidly
than operating expenses. The volatility between periods in other
revenues, including lower derivative income and lower fee
income, partially offset by improved lower fair value
write-downs on receivables held for sale also significantly
impacted the efficiency ratio during the current period.
Segment
Results IFRS Management Basis
We have two reportable segments: Card and Retail Services and
Consumer. Our segments are managed separately and are
characterized by different middle-market consumer lending
products, origination processes and locations. Our segment
results are reported on a continuing operations basis.
Our Card and Retail Services segment comprises our core
operations and includes our MasterCard, Visa, private label and
other credit card operations. The Card and Retail Services
segment offers these products throughout the United States
primarily via strategic affinity and co-branding relationships,
merchant relationships and direct mail. We also offer products
and provide customer service through the Internet.
Our Consumer segment consists of our run-off Consumer Lending,
Mortgage Services and Auto Finance businesses which are no
longer considered central to our core operations. The Consumer
segment provided real estate secured, auto finance and personal
non-credit card loans. Loans were offered with both revolving
and closed-end terms and with fixed or variable interest rates.
Loans were originated through branch locations and direct mail.
Products were also offered and customers serviced through the
Internet. Prior to the first quarter of 2007, we acquired loans
through correspondent channels and prior to September 2007 we
also originated loans sourced through mortgage brokers. While
these businesses are operating in run-off mode, they have not
been reported as discontinued operations because we continue to
generate cash flow from the ongoing collections of the
receivables, including interest and fees.
The All Other caption includes our Insurance
operations which continue to be a core part of our operations as
well as our Taxpayer Financial Services and Commercial
businesses which are no longer considered central to our
operations. Each of these businesses falls below the
quantitative threshold tests under segment reporting rules for
determining reportable segments. The All Other
caption also includes our corporate and treasury activities,
which includes the impact of FVO debt. Certain fair value
adjustments related to purchase accounting resulting from our
acquisition by HSBC and related amortization have been allocated
to corporate, which is included in the All Other
caption within our segment disclosure. Goodwill which was
established as a result of our acquisition by HSBC was not
allocated to or included in the reported results of our
reportable segments as the acquisition by HSBC was outside of
the ongoing operational activities of our reportable segments,
consistent with managements view of our reportable segment
results. Such goodwill of $1.6 billion was impaired during
the first quarter of 2009. Goodwill relating to acquisitions
subsequent to our acquisition by HSBC was included in the
reported respective segment results as those acquisitions
specifically related to the business, consistent with
managements view of the segment results.
There have been no changes in our measurement of segment profit
(loss) or basis of segmentation as compared with the
presentation in our 2009
Form 10-K.
We report results to our parent, HSBC, in accordance with its
reporting basis, IFRSs. Our segment results are presented on an
IFRS Management Basis (a
non-U.S. GAAP
financial measure) as operating results are monitored and
reviewed, trends are evaluated and decisions about allocating
resources such as employees are made almost exclusively on an
IFRS Management Basis. Accordingly, our segment reporting is on
an IFRS Management Basis. IFRS Management Basis results are
IFRSs results which assume that the GM and UP credit card
portfolios and the auto finance, private label and real estate
secured receivables transferred to HSBC Bank USA have not been
sold
76
HSBC Finance Corporation
and remain on our balance sheet and the revenues and expenses
related to these receivables remain on our income statement.
IFRS Management Basis also assumes that the purchase accounting
fair value adjustments relating to our acquisition by HSBC have
been pushed down to HSBC Finance Corporation.
Operations are monitored and trends are evaluated on an IFRS
Management Basis because the receivable sales to HSBC Bank USA
were conducted primarily to fund prime customer loans more
efficiently through bank deposits and such receivables continue
to be managed 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 legal entity basis. A summary of the significant
differences between U.S. GAAP and IFRSs as they impact our
results are summarized in Note 15, Business
Segments, in the accompanying consolidated financial
statements.
Card and Retail Services Segment The following
table summarizes the IFRS Management Basis results for our Card
and Retail Services segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Three Months Ended March 31:
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
1,279
|
|
|
$
|
1,340
|
|
|
$
|
(61
|
)
|
|
|
(4.6
|
)%
|
Other operating income
|
|
|
391
|
|
|
|
660
|
|
|
|
(269
|
)
|
|
|
(40.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
1,670
|
|
|
|
2,000
|
|
|
|
(330
|
)
|
|
|
(16.5
|
)
|
Loan impairment charges
|
|
|
537
|
|
|
|
1,511
|
|
|
|
(974
|
)
|
|
|
(64.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,133
|
|
|
|
489
|
|
|
|
644
|
|
|
|
100+
|
|
Operating expenses
|
|
|
452
|
|
|
|
488
|
|
|
|
(36
|
)
|
|
|
(7.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax
|
|
$
|
681
|
|
|
$
|
1
|
|
|
$
|
680
|
|
|
|
100+
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment revenues
|
|
$
|
3
|
|
|
$
|
2
|
|
|
$
|
1
|
|
|
|
50.0
|
%
|
Net interest margin, annualized
|
|
|
13.97
|
%
|
|
|
12.04
|
%
|
|
|
-
|
|
|
|
-
|
|
Efficiency ratio
|
|
|
27.07
|
|
|
|
24.40
|
|
|
|
-
|
|
|
|
-
|
|
Return (after-tax) on average assets
|
|
|
4.99
|
|
|
|
(.07
|
)
|
|
|
-
|
|
|
|
-
|
|
Balances at end of period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer loans
|
|
$
|
34,987
|
|
|
$
|
42,867
|
|
|
$
|
(7,880
|
)
|
|
|
(18.4
|
)%
|
Assets
|
|
|
33,519
|
|
|
|
40,976
|
|
|
|
(7,457
|
)
|
|
|
(18.2
|
)
|
Our Card and Retail Services segment reported a higher profit
before tax for the three months ended March 31, 2010 as
compared the year-ago quarter due to lower loan impairment
charges and lower operating expenses, partially offset by lower
operating income and lower net interest income.
Loan impairment charges decreased during the first quarter of
2010 as compared to the year-ago quarter due to lower loan
levels as a result of actions taken beginning in the fourth
quarter of 2007 to manage risk, lower consumer spending as well
as an increased focus by consumers to reduce outstanding credit
card debt. The decrease also reflects the impact of improvement
in the underlying credit quality of the portfolio including
improved early stage delinquency roll rates as economic
conditions improved. The impact of higher unemployment rates on
credit card receivable losses has not been as severe due in part
to improved cash flow from government stimulus activities that
meaningfully benefit our non-prime customers and the
aforementioned actions previously implemented to reduce risk.
Lower loan impairment charges were partially offset by portfolio
seasoning. During the three months ended March 31, 2010, we
decreased credit loss reserves to $3.3 billion as loan
impairment charges were $678 million lower than net
charge-offs. During the three months ended March 31, 2009,
we increased credit loss reserves to $4.6 billion as loan
impairment charges were $203 million greater than net
charge-offs.
Net interest income decreased due to lower interest income,
partially offset by lower interest expense. The lower interest
income reflects the impact of lower overall loan levels,
partially offset by higher loan yields. Loan yields
77
HSBC Finance Corporation
increased during the first quarter of 2010 as a result of
repricing initiatives during the fourth quarter of 2009 and
higher yields on private label receivables since March 2009
driven by the benefits from contract renegotiation with certain
merchants which were partially offset by the implementation of
certain provisions of new credit card legislation including
restrictions impacting repricing of delinquent accounts. Net
interest margin increased due to higher loan yields as discussed
above and lower cost of funds. The decrease in other operating
income was primarily due to lower late and overlimit fees due to
lower volumes, lower delinquency levels, changes in customer
behavior and impacts from changes required by new credit card
legislation. As compared to the year-ago quarter, the new credit
card legislation has resulted in significant decreases in
overlimit fees as customers must now opt-in for such fees as
well as restrictions on fees charged to process on-line and
telephone payments. Additionally, other operating income
reflects lower enhancement services revenue due to lower
volumes. Operating expenses decreased due to lower salary and
pension expenses, partially offset by higher collection costs
and higher marketing expenses, although overall marketing levels
remain low.
The efficiency ratio during the first quarter of 2010
deteriorated as the decrease in other operating income,
primarily due to lower fee income as a result of the impact of
the new credit card legislation and lower delinquency levels,
more than offset the decreases in operating expenses.
The increase in the ROA ratio during the first quarter of 2010
was primarily due to the impact of the significantly higher
profit before tax, driven by the lower loan impairment charges
during the first quarter of 2010 as discussed above, partially
offset by the impact of lower average receivable levels as
discussed below.
As discussed in prior filings, on May 22, 2009, the Credit
Card Accountability Responsibility and Disclosure Act of 2009
(the CARD Act) was signed into law. We have
implemented the provisions of the CARD Act that took effect in
August 2009 and February 2010 and continue to make changes to
processes and systems in order to comply with the remaining
provisions of the CARD Act by the applicable August 2010
effective date. The CARD Act has required us to make changes to
our business practices, and will likely require us and our
competitors to manage risk differently than has historically
been the case. Pricing, underwriting and product changes have
either been implemented or are under analysis to partially
mitigate the impact of the new legislation. Although we
currently believe the implementation of these new rules is
likely to have a material adverse financial impact to us, the
full impact of the CARD Act continues to be uncertain at this
time as it will ultimately depend upon the Federal Reserve and
other government agencies interpretations of some of the
provisions discussed above, including the proposed limits on
late fees charged by card issuers which are not expected to be
published until June 2010, successful implementation of our
strategies, consumer behavior and the actions of our
competitors. Although managements estimates are subject to
change as additional interpretations of the provisions are
issued, we currently estimate that the impact of the CARD Act
including the mitigating actions referred to above could be a
reduction in revenue net of loss provision of approximately
$200 million to $300 million during 2010.
Customer loans Customer loans for our Card and Retail
Services segment can be analyzed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases (Decreases) From
|
|
|
|
|
|
|
March 31,
|
|
|
December 31, 2009
|
|
|
|
|
|
|
2010
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Credit card
|
|
$
|
20,944
|
|
|
$
|
(2,200
|
)
|
|
|
(9.5
|
)%
|
|
|
|
|
Private label
|
|
|
13,948
|
|
|
|
(1,677
|
)
|
|
|
(10.7
|
)
|
|
|
|
|
Other
|
|
|
95
|
|
|
|
(9
|
)
|
|
|
(8.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
34,987
|
|
|
$
|
(3,886
|
)
|
|
|
(10.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer loans decreased 10 percent during the first
quarter of 2010 reflecting lower consumer spending levels,
primarily in our prime credit card and private label loan
portfolios, the impact of actions taken to manage risk as well
as seasonal paydowns in credit card balances. The decrease also
reflects an increased focus by consumers to reduce outstanding
credit card debt due in part to higher tax refunds and the
impact of government stimulus
78
HSBC Finance Corporation
programs which have targeted our customer base resulting in
higher overall payment rates. In 2008, we identified certain
segments of our credit card portfolio which have been the most
impacted by the housing and economic conditions and we stopped
all new account originations in those market segments. Based on
recent performance trends which began in the second half of
2009, we resumed limited direct marketing mailings and new
customer account originations for portions of our non-prime
credit card portfolio which will likely result in lower run-off
of credit card loans through the remainder of 2010.
See Receivables Review for additional discussion of
the decreases in our receivable portfolios.
Performance Trends The following is additional key
performance data related to our Card and Retail Services
portfolios. The information is based on IFRS Management Basis
results.
Our Cards and Retail Services portfolios consist of three key
segments. The non-prime portfolios are primarily originated
through direct mail channels (the Non-prime
Portfolio). The prime portfolio consists primarily of
General Motors, Union Privilege and Retail Services receivables
(the Prime Portfolio). These receivables are
primarily considered prime at origination, however the credit
profile of some customers will subsequently change due to
changes in customer circumstances. The other portfolio is
comprised of several run-off portfolios and receivables
originated under alternative marketing programs such as third
party turndown programs (the Other Portfolio). The
Other Portfolio includes certain adjustments not allocated to
either the Non-prime or Prime Portfolios. The Other Portfolio
contains both prime and non-prime receivables.
The following table includes key financial metrics for our Card
and Retail Services business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change between
|
|
|
|
Quarter Ended
|
|
|
Mar. 31, 2010
|
|
|
|
Mar. 31,
|
|
|
Dec. 31,
|
|
|
Sept. 30,
|
|
|
June 30,
|
|
|
Mar. 31,
|
|
|
and
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
Dec. 31, 2009
|
|
|
|
|
|
(dollars are in millions)
|
|
|
|
|
|
Receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-prime
|
|
$
|
8,632
|
|
|
$
|
9,462
|
|
|
$
|
9,951
|
|
|
$
|
10,426
|
|
|
$
|
11,164
|
|
|
|
(8.8
|
)%
|
Prime
|
|
|
24,068
|
|
|
|
26,806
|
|
|
|
26,753
|
|
|
|
27,760
|
|
|
|
28,805
|
|
|
|
(10.2
|
)
|
Other
|
|
|
2,287
|
|
|
|
2,605
|
|
|
|
2,619
|
|
|
|
2,795
|
|
|
|
2,898
|
|
|
|
(12.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
34,987
|
|
|
$
|
38,873
|
|
|
$
|
39,323
|
|
|
$
|
40,981
|
|
|
$
|
42,867
|
|
|
|
(10.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-prime
|
|
|
21.04
|
%
|
|
|
20.18
|
%
|
|
|
20.17
|
%
|
|
|
19.57
|
%
|
|
|
20.36
|
%
|
|
|
4.3
|
%
|
Prime
|
|
|
10.84
|
|
|
|
9.67
|
|
|
|
9.71
|
|
|
|
9.00
|
|
|
|
9.10
|
|
|
|
12.1
|
|
Other
|
|
|
20.15
|
|
|
|
17.68
|
|
|
|
15.77
|
|
|
|
17.88
|
|
|
|
8.71
|
|
|
|
14.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
13.97
|
%
|
|
|
12.85
|
%
|
|
|
12.79
|
%
|
|
|
12.33
|
%
|
|
|
12.04
|
%
|
|
|
8.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquency Dollars:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-prime
|
|
$
|
787
|
|
|
$
|
975
|
|
|
$
|
1,006
|
|
|
$
|
1,045
|
|
|
$
|
1,233
|
|
|
|
(19.3
|
)%
|
Prime
|
|
|
1,027
|
|
|
|
1,222
|
|
|
|
1,250
|
|
|
|
1,245
|
|
|
|
1,309
|
|
|
|
(16.0
|
)
|
Other
|
|
|
195
|
|
|
|
241
|
|
|
|
241
|
|
|
|
239
|
|
|
|
273
|
|
|
|
(19.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,009
|
|
|
$
|
2,438
|
|
|
$
|
2,497
|
|
|
$
|
2,529
|
|
|
$
|
2,815
|
|
|
|
(17.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously discussed, customer loans have decreased by
10 percent as compared to December 31, 2009. The Prime
Portfolio has decreased at a faster rate than the Non-Prime
Portfolio due to a higher seasonal impact for the Prime
Portfolio as loans in this portfolio tend to have higher
spending levels in the fourth quarter which are paid off during
the first quarter. Net interest margin for both the Non-prime
and Prime Portfolios remains strong as a result of repricing
initiatives during the fourth quarter of 2009, partially offset
by the implementation of certain provisions of new credit card
legislation.
While we have seen deterioration in performance across the Cards
and Retail Services segment during the past 12 months, the
Non-prime Portfolio performance has deteriorated to a lesser
degree relative to our Prime Portfolio
79
HSBC Finance Corporation
through this stage of the economic cycle. Dollars of delinquency
and net charge-off dollars in the Non-prime Portfolio have
deteriorated at a lower rate than our Prime Portfolio as
non-prime customers typically have lower home ownership, smaller
credit lines which have lower minimum payment requirements and
benefits from government stimulus programs.
The trends discussed above are at a point in time. Given the
volatile economic conditions, there can be no certainty such
trends will continue in the future.
Consumer Segment The following table summarizes
the IFRS Management Basis results for our Consumer segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
Three Months Ended March 31:
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
707
|
|
|
$
|
1,035
|
|
|
$
|
(328
|
)
|
|
|
(31.7
|
)%
|
Other operating income
|
|
|
(58
|
)
|
|
|
(39
|
)
|
|
|
(19
|
)
|
|
|
(48.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
649
|
|
|
|
996
|
|
|
|
(347
|
)
|
|
|
(34.8
|
)
|
Loan impairment charges
|
|
|
1,758
|
|
|
|
2,435
|
|
|
|
(677
|
)
|
|
|
(27.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,109
|
)
|
|
|
(1,439
|
)
|
|
|
330
|
|
|
|
22.9
|
|
Operating expenses
|
|
|
267
|
|
|
|
557
|
|
|
|
(290
|
)
|
|
|
(52.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax
|
|
$
|
(1,376
|
)
|
|
$
|
(1,996
|
)
|
|
$
|
620
|
|
|
|
31.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment revenues
|
|
$
|
18
|
|
|
$
|
34
|
|
|
$
|
(16
|
)
|
|
|
(47.1
|
)%
|
Net interest margin, annualized
|
|
|
3.70
|
%
|
|
|
4.22
|
%
|
|
|
-
|
|
|
|
-
|
|
Efficiency ratio
|
|
|
41.14
|
|
|
|
55.92
|
|
|
|
-
|
|
|
|
-
|
|
Return (after-tax) on average assets
|
|
|
(4.64
|
)
|
|
|
(5.53
|
)
|
|
|
-
|
|
|
|
-
|
|
Balances at end of period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer loans
|
|
$
|
73,143
|
|
|
$
|
95,651
|
|
|
$
|
(22,508
|
)
|
|
|
(23.5
|
)%
|
Assets
|
|
|
71,558
|
|
|
|
92,139
|
|
|
|
(20,581
|
)
|
|
|
(22.3
|
)
|
Our Consumer segment reported a lower net loss during the three
months ended March 31, 2010 as compared to the year-ago
quarter due to lower loan impairment charges and lower operating
expenses, partially offset by lower net interest income and
lower other operating income.
Loan impairment charges decreased significantly during the three
months ended March 31, 2010 as compared to the year-ago
quarter as a result of a lower provision for credit losses in
our non-core Mortgage Services, Consumer Lending businesses and
Auto Finance businesses as discussed below.
|
|
|
|
|
Loan impairment charges in our Mortgage Services business
decreased $264 million in the first quarter of 2010 as a
result of lower loan levels as the portfolio continues to
liquidate, delinquency levels continue to decrease, economic
conditions improved and a higher percentage of charge-offs were
on first lien loans which generally have lower charge-offs than
second lien loans. These decreases were partially offset by the
impact of higher levels of TDR Loans as compared to the year-ago
quarter and higher loss estimates associated with these loans
which are not prepaying as quickly as historically experienced
as well as the impact of higher unemployment levels. While
recent loss severities on foreclosed loans have been lower as
compared to the year-ago quarter as home prices have begun to
stabilize in most markets, the impact of lower severities was
offset by a higher estimate of charge-offs related to loans
where we have previously decided not to pursue foreclosure.
|
|
|
|
Loan impairment charges in our Consumer Lending business
decreased $339 million in the first quarter of 2010
reflecting lower loan levels as both the real estate secured and
personal non-credit card loan portfolios continue to liquidate,
delinquency levels continue to decrease and economic conditions
continue to improve.
|
80
HSBC Finance Corporation
The decrease in loan impairment charges for real estate secured
loans also reflects a higher percentage of charge-offs on first
lien loans which generally have lower charge-offs than second
lien loans as well as an improved outlook on current inherent
losses for first lien real estate secured receivables originated
in 2005 and earlier as the current trends for deterioration in
delinquencies and charge-offs in these vintages have stabilized.
These decreases in loan impairment charges for real estate
secured loans were partially offset by lower loan prepayments,
portfolio seasoning, higher levels of unemployment and increased
levels of TDR Loans including higher reserve requirements
associated with these loans. While recent loss severities on
foreclosed loans have been lower as compared to the year-ago
quarter as home prices have begun to stabilize in most markets,
the impact of lower severities was offset by a higher estimate
of charge-offs related to loans where we have previously decided
not to pursue foreclosure. The decrease in loan impairment
charges for personal non-credit card receivables reflects lower
loan levels, lower delinquency levels and improvements in
economic conditions, partially offset by the impact of slightly
higher levels of charge-off and higher levels of TDR Loans
including higher reserve requirements associated with these
loans.
|
|
|
|
|
Loan impairment charges in our auto finance receivable portfolio
decreased as a result of lower loan levels as the portfolio
continues to liquidate. Additionally, we experienced lower loss
severities driven by improvements in prices on repossessed
vehicles.
|
During the first quarter of 2010, credit loss reserves decreased
to $7.0 billion as loan impairment charges were
$520 million lower than net charge-offs. During the first
quarter of 2009, credit loss reserves increased to
$10.7 billion as loan impairment charges were
$414 million greater than net charge-offs. Credit loss
reserves since March 2009 were significantly impacted by the
December 2009 Charge-off Policy Changes.
Net interest income decreased due to lower average loans as a
result of loan liquidation including lower levels of performing
receivables. The decrease also reflects lower overall yields on
our loan portfolio including the impact of the December 2009
Charge-off Policy Changes as real estate secured and personal
non-credit card loans now charge-off earlier than in historical
periods and as a result, all of the underlying accrued interest
income is reversed against net interest income upon charge-off
earlier as well. Net interest income was also negatively
impacted by a shift in receivable mix to higher levels of lower
yielding first lien real estate secured loans as higher yielding
auto finance and personal non-credit card receivables have
run-off at a faster pace than real estate secured receivables.
Lower yields in our real estate secured and personal non-credit
card portfolios reflect the higher levels of loan modifications
since March 31, 2009 and the impact of the December 2009
Charge-off Policy Changes as previously discussed. These
decreases were partially offset by lower interest expense due to
lower average borrowings. The decrease in net interest margin
reflects the lower loan yields as discussed above.
Other operating income decreased as compared to the year-ago
quarter primarily due to a loss of $77 million from the
sale of the auto finance servicing operations and certain auto
finance receivables to SC USA as previously discussed. Under
U.S. GAAP we reported a gain on this transaction with SC
USA as the receivables sold were transferred to receivables held
for sale at the lower of cost or fair value during the fourth
quarter of 2009. Other operating income also decreased due to
lower credit insurance commissions, partially offset by lower
losses on sales of REO properties. Lower losses on sales of REO
properties during the first quarter of 2010 reflects the
continued stabilization of home prices during the first quarter
of 2010 which results in less deterioration in value between the
date we take title to the property and when the property is
ultimately sold.
Operating expenses during the prior year quarter included
$159 million of costs related to the decision to
discontinue new originations for all products in our Consumer
Lending business and close the Consumer Lending branch offices.
In addition, we were required to perform an interim intangible
asset impairment test for our remaining Consumer Lending
intangible asset which resulted in an impairment charge of
$5 million during the first quarter of 2009. See
Note 5, Strategic Initiatives, in our 2009
Form 10-K
for additional information regarding this decision. Excluding
these items from the year-ago period, operating expenses
remained lower, decreasing 32 percent due to the reductions
in the scope of our business operations as well as other cost
containment measures, lower REO expenses and lower pension
expense.
81
HSBC Finance Corporation
The efficiency ratio during the first quarter of 2009 was
impacted by the $164 million in restructuring and
impairment charges discussed above. Excluding the impact of the
restructuring charges from the year-ago period, the efficiency
ratio increased 168 basis points as the decrease in net
interest income due to lower loan levels and lower yields
outpaced the decrease in operating expenses.
ROA increased during the first quarter of 2010 primarily due to
a lower net loss than the prior year quarter reflecting the
lower loan impairment charges and lower operating expenses,
partially offset by lower net interest income due to lower loan
levels and lower yields and the impact of lower average assets.
Customer loans Customer loans for our Consumer segment
can be analyzed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases (Decreases) From December 31,
|
|
|
|
March 31,
|
|
|
2009
|
|
|
|
2010
|
|
|
$
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Real estate
secured(1)
|
|
$
|
58,569
|
|
|
$
|
(2,692
|
)
|
|
|
(4.4
|
)%
|
Auto finance
|
|
|
4,900
|
|
|
|
(854
|
)
|
|
|
(14.8
|
)
|
Personal non-credit card
|
|
|
9,674
|
|
|
|
(1,036
|
)
|
|
|
(9.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total customer loans
|
|
$
|
73,143
|
|
|
$
|
(4,582
|
)
|
|
|
(5.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Real estate secured receivables are
comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases (Decreases) From
|
|
|
|
|
|
|
December 31,
|
|
|
|
March 31,
|
|
|
2009
|
|
|
|
2010
|
|
|
$
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Consumer Lending
|
|
$
|
37,857
|
|
|
$
|
(1,640
|
)
|
|
|
(4.2
|
)%
|
Mortgage Services
|
|
|
20,712
|
|
|
|
(1,052
|
)
|
|
|
(4.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
$
|
58,569
|
|
|
$
|
(2,692
|
)
|
|
|
(4.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer loans decreased 5.9 percent as compared to
December 31, 2009 reflecting the continued liquidation of
these portfolios which will continue to decline going forward as
well as seasonal improvements in collection activities during
the first quarter as some customers use their tax refunds to
make payments. The decreases in our real estate secured loan
portfolios were partially offset by declines in loan prepayments
as fewer refinancing opportunities for our customers exist and
the trends impacting the mortgage lending industry as previously
discussed.
See Receivables Review for a more detail discussion
of the decreases in our receivable portfolios.
Credit
Quality
Credit
Loss Reserves
We maintain credit loss reserves to cover probable inherent
losses of principal, accrued interest and fees, including late,
overlimit and annual fees. Credit loss reserves are based on a
range of estimates and are intended to be adequate but not
excessive. We estimate probable losses for consumer receivables
using a roll rate migration analysis that estimates the
likelihood that a loan will progress through the various stages
of delinquency, or buckets, and ultimately charge-off based upon
recent historical performance experience of other loans in our
portfolio. This analysis considers delinquency status, loss
experience and severity and takes into account whether loans are
in bankruptcy, have been re-aged or rewritten, or are subject to
forbearance, an external debt management plan, hardship,
modification, extension or deferment. Our credit loss reserves
take into consideration the loss severity expected based on the
underlying collateral, if any, for the loan in the event of
default based on recent trends.
82
HSBC Finance Corporation
Delinquency status may be affected by customer account
management policies and practices, such as the re-age of
accounts, forbearance agreements, extended payment plans,
modification arrangements, external debt management programs and
deferments. When customer account management policies or changes
thereto, shift loans from a higher delinquency
bucket to a lower delinquency bucket, this will be
reflected in our roll rate statistics. To the extent that
re-aged or modified accounts have a greater propensity to roll
to higher delinquency buckets, this will be captured in the roll
rates. Since the loss reserve is computed based on the composite
of all of these calculations, this increase in roll rate will be
applied to receivables in all respective delinquency buckets,
which will increase the overall reserve level. In addition, loss
reserves on consumer receivables are maintained to reflect our
judgment of portfolio risk factors that may not be fully
reflected in the statistical roll rate calculation or when
historical trends are not reflective of current inherent losses
in the portfolio. Portfolio risk factors considered in
establishing loss reserves on consumer receivables include
product mix, unemployment rates, bankruptcy trends, the credit
performance of modified loans, geographic concentrations, loan
product features such as adjustable rate loans, economic
conditions, such as national and local trends in housing markets
and interest rates, portfolio seasoning, account management
policies and practices, current levels of charge-offs and
delinquencies, changes in laws and regulations and other items
which can affect consumer payment patterns on outstanding
receivables, such as natural disasters.
While our credit loss reserves are available to absorb losses in
the entire portfolio, we specifically consider the credit
quality and other risk factors for each of our products. We
recognize the different inherent loss characteristics in each of
our products as well as customer account management policies and
practices and risk management/collection practices. We also
consider key ratios in developing our overall loss reserve
estimate, including reserves to nonperforming loans, reserves as
a percentage of net charge-offs, reserves as a percentage of
two-months-and-over contractual delinquency and months coverage
ratios. Loss reserve estimates are reviewed periodically and
adjustments are reported in earnings when they become known. As
these estimates are influenced by factors outside of our control
such as consumer payment patterns and economic conditions, there
is uncertainty inherent in these estimates, making it reasonably
possible that they could change.
In establishing reserve levels, given the general decline in
home prices that have occurred over the past three years in the
U.S., we anticipate that losses in our real estate secured
receivable portfolios will continue to be incurred with greater
frequency and severity than experienced prior to 2007. There is
currently little secondary market liquidity for subprime
mortgages. As a result of these conditions, lenders have
significantly tightened underwriting standards, substantially
limiting the availability of alternative and subprime mortgages.
As fewer financing options currently exist in the marketplace
for home buyers, properties in certain markets are remaining on
the market for longer periods of time which contributes to home
price depreciation. For many of our customers, the ability to
refinance and access equity in their homes is no longer an
option as home prices remain stagnant in many markets and have
depreciated in others. These housing market trends were
exacerbated by the recent economic downturn, including high
levels of unemployment, and these industry trends continue to
impact our portfolio. It is generally believed that a sustained
recovery of the housing market, as well as unemployment rates,
is not expected to begin to occur until later during 2010 and
possibly beyond. We have considered these factors in
establishing our credit loss reserve levels, as appropriate.
While we have noted signs of improvement in these industry and
housing market trends during the first quarter of 2010 as
previously discussed, it is impossible to predict whether such
improvement will continue in future periods.
83
HSBC Finance Corporation
The following table sets forth credit loss reserves for the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Credit loss reserves
|
|
$
|
8,417
|
|
|
$
|
9,264
|
|
Reserves as a percent of:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
10.48
|
%
|
|
|
10.82
|
%
|
Net
charge-offs(1)(2)
|
|
|
76.1
|
|
|
|
39.6
|
(3)
|
Nonperforming
receivables(2)
|
|
|
100.2
|
|
|
|
101.8
|
|
Two-months-and-over contractual delinquency
|
|
|
77.1
|
|
|
|
75.4
|
|
|
|
|
(1) |
|
Reserves as a percent of net
charge-offs for the quarter, annualized.
|
|
(2) |
|
Ratio excludes nonperforming
receivables and charge-offs associated with receivable
portfolios which are considered held for sale as these
receivables are carried at the lower of cost or fair value with
no corresponding credit loss reserves.
|
|
(3) |
|
The December 2009 Charge-off Policy
Changes as previously discussed resulted in an acceleration of
charge-off for certain real estate secured and personal non
credit card receivables during the fourth quarter of 2009 which
would have otherwise occurred during future periods.
|
Credit loss reserves at March 31, 2010 decreased as
compared to December 31, 2009 as we recorded provision for
credit losses less than net charge-offs of $847 million
during the current quarter. Credit loss reserves were lower for
all products as compared to December 31, 2009 reflecting
lower dollars of delinquency and lower receivable levels in all
receivable portfolios as previously discussed. The decrease in
credit loss reserves in our credit card receivable portfolio
reflects lower loss estimates due to lower receivable levels as
a result of the actions previously taken to reduce risk which
has led to improved credit quality including lower delinquency
levels as well as an increased focus by consumers to reduce
outstanding credit card debt. The lower delinquency levels also
reflect improved early stage delinquency roll rates as economic
conditions improved and seasonal improvements in our collection
activities. The decrease in credit loss reserve levels in our
real estate secured receivable portfolio also reflects lower
receivable levels as the portfolio continues to liquidate and a
significant decrease in delinquency as the delinquent balances
continue to migrate to charge-off and are replaced by lower
levels of new delinquency volume as the portfolio continues to
season and loss severities on foreclosed loans and economic
conditions continue to improve. Seasonal improvements in our
collection activities as previously discussed also contributed
to the decline in real estate delinquency levels. The decreases
in real estate secured credit loss reserves were partially
offset by higher loss estimates for TDR Loans driven by higher
volumes and slower liquidation rates. Credit loss reserve levels
in our personal non-credit card portfolio declined modestly in
the quarter as lower reserve requirements due to lower
delinquency levels and lower balances were partially offset by
higher reserve requirements on TDR Loans due to an increase in
volumes and expected loss rates.
Credit loss estimates for our core credit card receivable
portfolio relate primarily to our non-prime credit card
receivable portfolio. Our non-prime credit card receivable
product is structured for customers with low credit scores. The
products have lower credit lines and are priced for higher risk.
The deterioration of the housing markets in the U.S. over
the past three years has affected the credit performance of our
entire credit card portfolio, particularly in states which
previously had experienced the greatest home price appreciation.
Our non-prime credit card receivable portfolio concentration in
these states is approximately proportional to the
U.S. population, but a substantial majority of our
non-prime customers are renters who are, on the whole,
demonstrating a better payment history on their loans than
homeowners in the portfolio as a whole. Furthermore, our lower
credit scoring customers within our non-prime portfolio, which
have an even lower home ownership rate, have shown the least
deterioration through this stage of the economic cycle. In
addition, through March 31, 2010 increases in unemployment
rates have resulted in less credit deterioration in the
non-prime portfolios as compared to prime portfolios. However,
there can be no certainty that these trends will continue.
At March 31, 2010, approximately $4.3 billion, or
8 percent of our real estate secured receivable portfolio
has been written down to net realizable value less cost to sell.
In addition, approximately $8.7 billion of real estate
secured
84
HSBC Finance Corporation
loans which have not been written down to net realizable value
less cost to sell are considered TDR Loans, which are reserved
using a discounted cash flow analysis which generally results in
a higher reserve requirement.
Reserves as a percentage of receivables decreased to
10.48 percent at March 31, 2010 compared to
10.82 percent at December 31, 2009 due to a
significant decline in delinquency levels as discussed above as
the decrease in credit loss reserves outpaced the decrease in
receivable levels. In the current quarter, this ratio was also
impacted by an increase in the level of real estate secured
receivables which have been written down to the lower of cost or
net realizable value and do not require corresponding credit
loss reserves.
Reserves as a percentage of net charge-offs (quarter net
charge-offs, annualized) were 76.1 percent at
March 31, 2010 compared to 39.6 percent at
December 31, 2009. Reserves as a percentage of net
charge-offs (quarter net charge-offs, annualized) at
December 31, 2009 was significantly impacted by the
December 31, 2009 Charge-off Policy Change. The ratio at
March 31, 2010 reflects a revised trend for dollars of net
charge-offs as under the new charge-off policy implemented in
the fourth quarter of 2009, real estate secured and personal
non-credit card receivables now charge-off earlier than under
the previous practice, resulting in a need to hold less reserves.
Reserves as a percentage of nonperforming receivables decreased
to 100.2 percent at March 31, 2010 from
101.8 percent at December 31, 2009. The decrease was
driven by our credit card portfolio as decreases in credit loss
reserves in this portfolio outpaced the decrease in
nonperforming credit card receivables due to the improvements in
early stage credit card delinquency as previously discussed,
partially offset by increased reserves on TDR Loans in our
Consumer Lending and Mortgage Services portfolios.
Reserves as a percentage of two-months-and-over contractual
delinquency increased to 77.1 percent at March 31,
2010 from 75.4 percent at December 31, 2009 as the
decrease in dollars of contractual delinquency outpaced the
decrease in credit loss reserves due, in part, to seasonal
improvements in collection activities during the first quarter
of the year as some customers use their tax refunds to make
payments as well as increased reserves on TDR Loans.
The following table summarizes the changes in credit loss
reserves by product during the three months ended March 31,
2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Secured
|
|
|
|
|
|
|
|
|
Personal
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Auto
|
|
|
Credit
|
|
|
Non-Credit
|
|
|
Comml
|
|
|
|
|
|
|
Lien
|
|
|
Lien
|
|
|
Finance
|
|
|
Card
|
|
|
Card
|
|
|
and Other
|
|
|
Total
|
|
|
|
|
|
(in millions)
|
|
|
Three months ended March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at beginning of period
|
|
$
|
3,997
|
|
|
$
|
1,430
|
|
|
$
|
174
|
|
|
$
|
1,816
|
|
|
$
|
1,847
|
|
|
$
|
-
|
|
|
$
|
9,264
|
|
Provision for credit losses
|
|
|
919
|
|
|
|
126
|
|
|
|
56
|
|
|
|
199
|
|
|
|
619
|
|
|
|
-
|
|
|
|
1,919
|
|
Charge-offs
|
|
|
(1,046
|
)
|
|
|
(470
|
)
|
|
|
(93
|
)
|
|
|
(588
|
)
|
|
|
(766
|
)
|
|
|
-
|
|
|
|
(2,963
|
)
|
Recoveries
|
|
|
9
|
|
|
|
22
|
|
|
|
17
|
|
|
|
61
|
|
|
|
88
|
|
|
|
-
|
|
|
|
197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(1,037
|
)
|
|
|
(448
|
)
|
|
|
(76
|
)
|
|
|
(527
|
)
|
|
|
(678
|
)
|
|
|
-
|
|
|
|
(2,766
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
3,879
|
|
|
$
|
1,108
|
|
|
$
|
154
|
|
|
$
|
1,488
|
|
|
$
|
1,788
|
|
|
$
|
-
|
|
|
$
|
8,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at beginning of period
|
|
$
|
4,998
|
|
|
$
|
2,115
|
|
|
$
|
401
|
|
|
$
|
2,249
|
|
|
$
|
2,652
|
|
|
$
|
-
|
|
|
$
|
12,415
|
|
Provision for credit losses
|
|
|
1,222
|
|
|
|
318
|
|
|
|
150
|
|
|
|
567
|
|
|
|
688
|
|
|
|
-
|
|
|
|
2,945
|
|
Charge-offs
|
|
|
(579
|
)
|
|
|
(412
|
)
|
|
|
(264
|
)
|
|
|
(553
|
)
|
|
|
(715
|
)
|
|
|
-
|
|
|
|
(2,523
|
)
|
Recoveries
|
|
|
2
|
|
|
|
10
|
|
|
|
17
|
|
|
|
54
|
|
|
|
52
|
|
|
|
-
|
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(577
|
)
|
|
|
(402
|
)
|
|
|
(247
|
)
|
|
|
(499
|
)
|
|
|
(663
|
)
|
|
|
-
|
|
|
|
(2,388
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
5,643
|
|
|
$
|
2,031
|
|
|
$
|
304
|
|
|
$
|
2,317
|
|
|
$
|
2,677
|
|
|
$
|
-
|
|
|
$
|
12,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85
HSBC Finance Corporation
Delinquency The following table summarizes dollars
of two-months-and-over contractual delinquency and
two-months-and-over contractual delinquency as a percent of
consumer receivables and receivables held for sale
(delinquency ratio):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Dollars of Contractual Delinquency:
|
|
|
|
|
|
|
|
|
Core receivables:
|
|
|
|
|
|
|
|
|
Credit card receivables
|
|
$
|
979
|
|
|
$
|
1,211
|
|
Non-core receivable portfolios:
|
|
|
|
|
|
|
|
|
Real estate
secured(1)(2)(3)
|
|
|
8,622
|
|
|
|
9,395
|
|
Auto finance
|
|
|
161
|
|
|
|
252
|
|
Personal non-credit card
|
|
|
1,159
|
|
|
|
1,432
|
|
|
|
|
|
|
|
|
|
|
Total non-core receivables
|
|
|
9,942
|
|
|
|
11,079
|
|
|
|
|
|
|
|
|
|
|
Total receivables
|
|
$
|
10,921
|
|
|
$
|
12,290
|
|
|
|
|
|
|
|
|
|
|
Delinquency Ratio:
|
|
|
|
|
|
|
|
|
Core receivables:
|
|
|
|
|
|
|
|
|
Credit card receivables
|
|
|
9.24
|
%
|
|
|
10.41
|
%
|
Non-core receivable portfolios:
|
|
|
|
|
|
|
|
|
Real estate
secured(1)(2)(3)
|
|
|
15.15
|
|
|
|
15.78
|
|
Auto finance
|
|
|
4.82
|
|
|
|
5.62
|
|
Personal non-credit card
|
|
|
12.29
|
|
|
|
13.65
|
|
|
|
|
|
|
|
|
|
|
Total non-core receivables
|
|
|
14.27
|
|
|
|
14.87
|
|
|
|
|
|
|
|
|
|
|
Total receivables
|
|
|
13.60
|
%
|
|
|
14.27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Real estate secured
two-months-and-over contractual delinquency and as a percentage
of consumer receivables and receivables held for sale for our
Mortgage Services and Consumer Lending businesses are comprised
of the following:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
|
|
(dollars are in millions)
|
|
Dollars of Contractual Delinquency:
|
|
|
|
|
|
|
|
|
Mortgage Services:
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
2,824
|
|
|
$
|
2,992
|
|
Second lien
|
|
|
305
|
|
|
|
381
|
|
|
|
|
|
|
|
|
|
|
Total Mortgage Services
|
|
$
|
3,129
|
|
|
$
|
3,373
|
|
|
|
|
|
|
|
|
|
|
Consumer Lending:
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
4,970
|
|
|
$
|
5,380
|
|
Second lien
|
|
|
523
|
|
|
|
642
|
|
|
|
|
|
|
|
|
|
|
Total Consumer Lending
|
|
$
|
5,493
|
|
|
$
|
6,022
|
|
|
|
|
|
|
|
|
|
|
Delinquency Ratio:
|
|
|
|
|
|
|
|
|
Mortgage Services:
|
|
|
|
|
|
|
|
|
First lien
|
|
|
17.40
|
%
|
|
|
17.62
|
%
|
Second lien
|
|
|
11.22
|
|
|
|
12.87
|
|
|
|
|
|
|
|
|
|
|
Total Mortgage Services
|
|
|
16.51
|
%
|
|
|
16.91
|
%
|
|
|
|
|
|
|
|
|
|
Consumer Lending::
|
|
|
|
|
|
|
|
|
First lien
|
|
|
14.75
|
%
|
|
|
15.37
|
%
|
Second lien
|
|
|
12.32
|
|
|
|
14.03
|
|
|
|
|
|
|
|
|
|
|
Total Consumer Lending
|
|
|
14.47
|
%
|
|
|
15.21
|
%
|
|
|
|
|
|
|
|
|
|
86
HSBC Finance Corporation
|
|
|
(2) |
|
The following reflects dollars of
contractual delinquency and the delinquency ratio for
interest-only, ARM and stated income real estate secured
receivables:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
|
|
(dollars are in millions)
|
|
Dollars of Contractual Delinquency:
|
|
|
|
|
|
|
|
|
Interest-only loans
|
|
$
|
406
|
|
|
$
|
416
|
|
ARM loans
|
|
|
2,369
|
|
|
|
2,536
|
|
Stated income loans
|
|
|
820
|
|
|
|
861
|
|
Delinquency Ratio:
|
|
|
|
|
|
|
|
|
Interest-only loans
|
|
|
30.70
|
%
|
|
|
29.63
|
%
|
ARM loans
|
|
|
25.61
|
|
|
|
25.76
|
|
Stated income loans
|
|
|
24.03
|
|
|
|
23.42
|
|
|
|
|
(3) |
|
At March 31, 2010 and
December 31, 2009, real estate secured delinquency includes
$3.7 billion and $3.3 billion, respectively, of
receivables that are carried at the lower of cost or net
realizable value.
|
Core credit card receivables Dollars of
delinquency for our core credit card receivables decreased
during the first quarter of 2010 reflecting lower receivable
levels due to the actions previously taken to tighten
underwriting and reduce the risk profile of the portfolio as
well as an increased focus by consumers to reduce outstanding
credit card debt. The lower delinquency levels also reflect
improved early stage delinquency roll rates as economic
conditions improved as well as seasonal improvements in our
collection activities during the first quarter as some customers
use their tax refunds to make payments.
The delinquency ratio for our credit card receivable portfolio
at March 31, 2010 decreased 117 basis points as
compared to December 31, 2009 as dollars of credit card
delinquency decreased at a faster pace than receivable levels
during the first quarter of 2010. A significant portion of the
improvements in collection activities during the first quarter
of 2010 were on delinquent accounts as economic conditions
continued to improve.
Non-core receivable portfolios Dollars of
delinquency for our non-core receivable portfolios decreased
$1.1 billion in the first quarter of 2010 as all products
reported lower delinquency levels as the portfolios continue to
liquidate and delinquent balances continue to migrate to
charge-off. These balances are being replaced with lower levels
of new delinquency volume as the portfolios continue to season
and economic conditions improve. The lower delinquency levels
also resulted from seasonal improvements in our collection
activities during the first quarter as discussed above. We
believe the decrease in dollars of delinquency in our personal
non-credit card receivable portfolios is also, in part, a result
of the risk mitigation actions we have taken since 2007 to
tighten underwriting and reduce the risk profile of this
portfolio.
The delinquency ratio for our non-core receivable portfolios at
March 31, 2010 also decreased compared to December 31,
2009 due to the factors discussed above.
Net Charge-offs of Consumer Receivables The table
below summarizes dollars of net charge-off of consumer
receivables for the quarter and as a percent of average consumer
receivables, annualized, (net charge-off ratio).
During a quarter that receivables are transferred to receivables
held for sale, those receivables continue to be included in the
average consumer receivable balances prior to such transfer and
any charge-offs related to those receivables prior to such
transfer remain in our net charge-off totals. However, for
periods following the transfer to the held for sale
classification, the receivables are no longer included in
average consumer receivable balance as such loans are carried at
the lower of cost or fair value and there are no longer any
charge-offs reported associated with these receivables.
The dollars of net charge-offs and the net-charge-off ratio for
the three months ended March 31, 2010 are not comparable to
the historical periods as comparability has been impacted by the
December 2009 Charge-off Policy Changes for real estate secured
and personal non-credit card receivables. Charge-off for these
receivables under the revised policy is recognized sooner for
these products than during the historical periods. Additionally,
dollars of net
87
HSBC Finance Corporation
charge-off and the net charge-off ratio for the three months
ended December 31, 2009 include the one-time impact of the
adoption of these policy changes which resulted in
$3.5 billion of incremental net-charge offs during the
fourth quarter of 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
Three Months
Ended(1)
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net Charge-off dollars:
|
|
|
|
|
|
|
|
|
|
|
|
|
Core receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card receivables
|
|
$
|
527
|
|
|
$
|
536
|
|
|
$
|
499
|
|
Non-core receivable portfolios:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
secured(2)(3)
|
|
|
1,485
|
|
|
|
3,485
|
|
|
|
979
|
|
Auto finance
|
|
|
76
|
|
|
|
101
|
|
|
|
247
|
|
Personal non-credit card
|
|
|
678
|
|
|
|
1,724
|
|
|
|
663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-core receivables
|
|
|
2,239
|
|
|
|
5,310
|
|
|
|
1,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables
|
|
$
|
2,766
|
|
|
$
|
5,846
|
|
|
$
|
2,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Charge-off ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
Core receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card receivables
|
|
|
18.73
|
%
|
|
|
18.84
|
%
|
|
|
15.48
|
%
|
Non-core receivable portfolios:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
secured(2)(3)
|
|
|
10.17
|
|
|
|
22.09
|
|
|
|
5.54
|
|
Auto finance
|
|
|
8.22
|
|
|
|
9.37
|
|
|
|
13.88
|
|
Personal non-credit card
|
|
|
27.32
|
|
|
|
57.54
|
|
|
|
17.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-core receivables
|
|
|
12.44
|
|
|
|
26.76
|
|
|
|
8.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables
|
|
|
13.28
|
%
|
|
|
25.75
|
%
|
|
|
9.02
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate secured net charge-offs and REO expense as a percent
of average real estate secured receivables
|
|
|
10.43
|
%
|
|
|
22.24
|
%
|
|
|
6.14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The net charge-off ratio for all
quarterly periods presented is net charge-offs for the quarter,
annualized, as a percentage of average consumer receivables for
the quarter.
|
|
(2) |
|
Real estate secured net charge-off
dollars, annualized, as a percentage of average consumer
receivables for our Mortgage Services and Consumer Lending
businesses are comprised of the following:
|
88
HSBC Finance Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
Three Months Ended
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net charge-off dollars:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
441
|
|
|
$
|
1,126
|
|
|
$
|
392
|
|
Second lien
|
|
|
196
|
|
|
|
353
|
|
|
|
193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mortgage Services
|
|
$
|
637
|
|
|
$
|
1,479
|
|
|
$
|
585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Lending:
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
597
|
|
|
$
|
1,500
|
|
|
$
|
185
|
|
Second lien
|
|
|
251
|
|
|
|
506
|
|
|
|
209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consumer Lending
|
|
$
|
848
|
|
|
$
|
2,006
|
|
|
$
|
394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-off ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
10.56
|
%
|
|
|
24.89
|
%
|
|
|
7.56
|
%
|
Second lien
|
|
|
27.46
|
|
|
|
43.84
|
|
|
|
18.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mortgage Services
|
|
|
13.04
|
%
|
|
|
27.75
|
%
|
|
|
9.42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Lending::
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
6.93
|
%
|
|
|
16.33
|
|
|
|
1.85
|
%
|
Second lien
|
|
|
22.61
|
|
|
|
40.61
|
|
|
|
14.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consumer Lending
|
|
|
8.73
|
%
|
|
|
19.23
|
%
|
|
|
3.44
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) |
|
Net charge-off dollars and the net
charge-off ratio for ARM loans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
March 31,
|
Three Months Ended
|
|
2010
|
|
2009
|
|
2009
|
|
|
|
(dollars are in millions)
|
|
Net charge-off dollars ARM Loans
|
|
$
|
326
|
|
|
$
|
1,070
|
|
|
$
|
392
|
|
Net charge-off ratio ARM Loans
|
|
|
13.67
|
%
|
|
|
40.52
|
%
|
|
|
12.03
|
%
|
Core credit card receivables Dollars of net
charge-offs for our core credit card receivables decreased
slightly as compared to the quarter ended December 31,
2009, but increased as compared to the year-ago quarter. During
the year-ago quarter, dollars of net charge-offs were positively
impacted by the sale of $107 million of credit card
receivables which occurred in December 2008 all of which were
greater than 150 days contractually delinquent at the time
of the sale. These receivables, which were charged-off
immediately prior to the sale, would otherwise have migrated to
charge-off during the first quarter of 2009. Excluding the
impact of this transaction, dollars of net charge-offs also
decreased as compared to the year-ago quarter. The decrease in
dollars of net charge-off compared to both the prior quarter and
prior year quarter reflects lower average receivable levels as
previously discussed, including lower delinquency levels and
improved economic conditions, partially offset by portfolio
seasoning and continued high levels of unemployment.
89
HSBC Finance Corporation
The net charge-off ratio for our credit card receivable
portfolio decreased 11 basis points as compared to the
quarter ended December 31, 2009 and, excluding the impact
of the transaction discussed above, decreased 7 basis
points as compared to the year-ago quarter as the decrease in
dollars of net charge-offs as slightly outpaced the decrease in
average receivables.
Non-core receivable portfolios Excluding the
one-time impact of the adoption of the December 2009 Charge-off
Policy Changes in the fourth quarter of 2009 as discussed above,
dollars of net charge-offs for our non-core receivable portfolio
increased as compared to both the prior quarter and prior year
quarter. The increase reflects higher dollars of net charge-offs
in our real estate secured and personal non-credit card
receivable portfolios as receivables now charge-off earlier
under the new policy resulting in a new underlying charge-off
trend as the portfolios continue to season as well as the impact
of higher levels of contractual delinquency in prior periods
which are now migrating to charge-off. The increase in net
charge-off dollars for real estate secured receivables excluding
the December 2009 Charge-off Policy Changes in both periods was
partially offset by lower loss severities on foreclosed loans
due to continued stabilization in the housing markets, and, as
compared to the year-ago quarter, a higher percentage of
charge-offs on first lien loans which generally have lower
charge-offs than second lien loans. Lower net charge-off dollars
for auto finance receivables reflects improvements in loss
severities from continuing improvement in pricing for used
vehicles as well as lower receivable levels as the portfolio
continues to liquidate. Dollars of net charge-offs for all
receivable products in our non-core receivable portfolios were
negatively impacted by the continuing high levels of
unemployment.
Excluding the impact of the charge-off policy changes discussed
above, the net charge-off ratio for our non-core receivable
portfolios increased as compared to both the prior quarter and
prior year quarter. The increase reflects the impact of the new
underlying charge-off trend as a result of the December 2009
Charge-off Policy Change as well as the impact of lower average
receivable levels.
Nonperforming Assets Nonperforming assets are
summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Core receivables:
|
|
|
|
|
|
|
|
|
Credit card receivables (accruing receivables 90 or more days
delinquent)(3)
|
|
$
|
742
|
|
|
$
|
890
|
|
Non-core nonaccrual receivable portfolios (nonaccrual
receivables)(1):
|
|
|
|
|
|
|
|
|
Real estate
secured(2)(5)
|
|
|
6,669
|
|
|
|
6,989
|
|
Auto finance
|
|
|
162
|
|
|
|
219
|
|
Personal non-credit card
|
|
|
824
|
|
|
|
998
|
|
|
|
|
|
|
|
|
|
|
Total non-core receivable portfolios
|
|
|
7,655
|
|
|
|
8,206
|
|
Nonaccrual receivables held for sale
|
|
|
2
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming receivables
|
|
|
8,399
|
|
|
|
9,135
|
|
Real estate owned
|
|
|
661
|
|
|
|
592
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
9,060
|
|
|
$
|
9,727
|
|
|
|
|
|
|
|
|
|
|
Credit loss reserves as a percent of nonperforming
receivables(4)
|
|
|
100.2
|
%
|
|
|
101.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Nonaccrual receivables reflect all
loans which are 90 or more days contractually delinquent.
Nonaccrual receivables do not include receivables which have
made qualifying payments and have been re-aged and the
contractual delinquency status reset to current as such
activity, in our judgment, evidences continued payment
probability. If a re-aged loan subsequently experiences payment
default and becomes 90 or more days contractually delinquent, it
will be reported as nonaccrual.
|
90
HSBC Finance Corporation
|
|
|
(2) |
|
Nonaccrual real estate secured
receivables are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
|
|
(in millions)
|
|
Real estate secured:
|
|
|
|
|
|
|
|
|
Closed-end:
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
6,111
|
|
|
$
|
6,298
|
|
Second lien
|
|
|
385
|
|
|
|
510
|
|
Revolving:
|
|
|
|
|
|
|
|
|
First lien
|
|
|
3
|
|
|
|
2
|
|
Second lien
|
|
|
170
|
|
|
|
179
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
$
|
6,669
|
|
|
$
|
6,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) |
|
Consistent with industry practice,
accruing consumer receivables 90 or more days delinquent
includes credit card receivables.
|
|
(4) |
|
Ratio excludes nonperforming
receivables associated with receivable portfolios which are
considered held for sale as these receivables are carried at the
lower of cost or fair value with no corresponding credit loss
reserves.
|
|
(5) |
|
At March 31, 2010 and
December 31, 2009, non-accrual real estate secured
receivables includes $3.7 billion and $3.3 billion,
respectively, of receivables that are carried at the lower of
cost or net realizable value.
|
The decrease in total nonperforming receivables since
December 31, 2009 reflects the lower delinquency levels for
all receivable products as discussed above. Higher levels of
real estate owned at March 31, 2010 reflects improvements
in processing foreclosure activities following backlogs
throughout 2009 in foreclosure proceedings and actions by local
governments and certain states that have lengthened the
foreclosure process. Real estate nonaccrual receivables include
stated income loans at our Mortgage Services business of
$661 million and $683 million at March 31, 2010
and December 31, 2009, respectively.
As discussed more fully below, we have numerous account
management policies and practices to assist our customers in
accordance with their individual needs, including either
temporarily or permanently modifying loan terms. Loans which
have been granted a permanent modification, a twelve-month or
longer modification, or two or more consecutive six-month
modifications are considered troubled debt restructurings for
purposes of determining loss reserve estimates.
The following table summarizes TDR Loans which are shown as
nonperforming assets in the table above:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Real estate secured
|
|
$
|
1,605
|
|
|
$
|
1,607
|
|
Auto finance
|
|
|
10
|
|
|
|
20
|
|
Credit card
|
|
|
36
|
|
|
|
36
|
|
Personal non-credit card
|
|
|
101
|
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,752
|
|
|
$
|
1,769
|
|
|
|
|
|
|
|
|
|
|
For additional information related to TDR Loans, see
Note 5, Receivables, to our accompanying
consolidated financial statements.
Customer Account Management Policies and Practices
Our policies and practices for the collection of
consumer receivables, including our customer account management
policies and practices, permit us to modify the terms of loans,
either temporarily or permanently,
and/or to
reset the contractual delinquency status of an account to
current, based on indicia or criteria which, in our judgment,
evidence continued payment probability as well as a continued
desire for the borrower to stay in their home. Such policies and
practices vary by product and are designed to manage customer
relationships, maximize collection opportunities and avoid
foreclosure or repossession if
91
HSBC Finance Corporation
economically expedient. If a re-aged account subsequently
experiences payment defaults, it will again become contractually
delinquent.
Modification As a result of the marketplace conditions
previously described, in the fourth quarter of 2006 we began
performing extensive reviews of our account management policies
and practices particularly in light of the current needs of our
customers. As a result of these reviews, beginning in the fourth
quarter of 2006, we significantly increased our use of
modifications in response to what we expected would be a longer
term need of assistance by our customers due to the weak housing
market and U.S. economy. In these instances, our Mortgage
Services and Consumer Lending businesses actively use account
modifications to modify the rate
and/or
payment on a number of qualifying loans and generally re-age
certain of these accounts upon receipt of two or more modified
payments and other criteria being met. This account management
practice is designed to assist borrowers who may have purchased
a home with an expectation of continued real estate appreciation
or whose income has subsequently temporarily declined.
Based on the economic environment and expected slow recovery of
housing values, during 2008 we developed additional analytical
review tools leveraging best practices to assist us in
identifying customers who are willing to pay, but are expected
to have longer term disruptions in their ability to pay. Using
these analytical review tools, we expanded our foreclosure
avoidance programs to assist customers who did not qualify for
assistance under prior program requirements or who required
greater assistance than available under the programs. The
expanded program requires certain documentation as well as
receipt of two qualifying payments before the account may be
re-aged. Prior to July 2008, for our Consumer Lending customers,
receipt of one qualifying payment was required for a modified
account before the account would be re-aged. We also increased
the use of longer term modifications to provide assistance in
accordance with the needs of our customers which may result in
higher credit loss reserve requirements. For selected customer
segments, this expanded program lowers the interest rate on
fixed rate loans and for ARM loans the expanded program modifies
the loan to a lower interest rate than scheduled at the first
interest rate reset date. The eligibility requirements for this
expanded program allow more customers to qualify for payment
relief and in certain cases can result in a lower interest rate
than allowed under other existing programs. During the third
quarter of 2009, we increased certain documentation requirements
for participation in these programs. By late 2009, the volume of
loans that qualified for a new modification had fallen
significantly. We expect the volume of new modifications to
continue to decline as we believe a smaller percentage of our
customers with unmodified loans will benefit from loan
modification in a way that will not ultimately result in a
repeat default on their loan. Additionally, volumes of new loan
modifications are expected to decrease as we are no longer
originating real estate secured receivables as well as the
impact of the continued seasoning of a liquidating portfolio and
improvements in economic conditions. We will continue to
evaluate our consumer relief programs as well as all aspects of
our account management practices to ensure our programs benefit
our customers in accordance with their financial needs in ways
that are economically viable for both our customers and our
stakeholders. We have elected not to participate in the
U.S. Treasury sponsored programs as we believe our programs
provide more meaningful assistance to our customers.
A loan modified under these programs is only included in the
re-aging statistics table (Re-age Table) on
page 95 if the delinquency status of the loan was reset as
a part of the modification or was re-aged in the past for other
reasons. Not all loans modified under these programs have the
delinquency status reset and, therefore, are not considered to
have been re-aged.
The following table summarizes loans modified during the first
quarter of 2010, some of which may have also been re-aged:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Receivable
|
|
|
Number of
|
|
Balance at Time of
|
|
|
Accounts Modified
|
|
Modification
|
|
|
Consumer
|
|
Mortgage
|
|
Consumer
|
|
Mortgage
|
Three Months Ended March 31, 2010
|
|
Lending
|
|
Services
|
|
Lending
|
|
Services
|
|
|
|
(dollars are in billions)
|
|
Foreclosure Avoidance
Programs(1)(2)
|
|
|
11,000
|
|
|
|
7,700
|
|
|
$
|
1.6
|
|
|
$
|
1.0
|
|
92
HSBC Finance Corporation
|
|
|
(1) |
|
Includes all loans modified under
these programs during the three months ended March 31, 2010
regardless of whether the loan was also re-aged.
|
|
(2) |
|
If qualification criteria are met,
customer modification may occur on more than one occasion for
the same account. For purposes of the table above, an account is
only included in the modification totals once in an annual
period and not for each separate modification.
|
In addition to the foreclosure avoidance program described
above, beginning in October 2006 we also established a program
specifically designed to meet the needs of select customers with
ARMs nearing their first interest rate reset and payment reset
that we expected would be negatively impacted by the rate
adjustment. Under the Proactive ARM Reset Modification Program,
we proactively contacted these customers and, as appropriate and
in accordance with defined policies, we modified the loans
allowing time for the customer to seek alternative financing or
improve their individual situation. At the end of the
modification period, we re-evaluated the loan to determine if an
extension of the modification term is warranted. If the loan is
less than
30-days
delinquent and has not received assistance under any other risk
mitigation program, typically the modification may be extended
for an additional twelve-month period at a time provided the
customer demonstrates an ongoing need for assistance. A loan
that has been modified under the Proactive ARM Modification
Program for twelve-months or longer is generally considered a
TDR Loan. Loans modified as part of this specific risk
mitigation effort are not considered to have been re-aged as
these loans were not contractually delinquent at the time of the
modification. However, if the loan had been re-aged in the past
for other reasons or qualified for a re-age subsequent to the
modification, it is included in the Re-age Table. While
this program is on-going, the volume of new modifications under
the Proactive ARM Reset Modification Program has significantly
decreased as we ceased offering ARM loans in 2007 and the
majority of our existing ARM loan portfolio has passed the
loans initial reset date. Since the inception of the
Proactive ARM Reset Modification Program in October 2006, we
have modified approximately 13,200 loans with an aggregate
outstanding principal balance of $2.2 billion at the time
of the modification.
As a result of the expansion of our modification and re-age
programs in response to the marketplace conditions previously
described, modification and re-age volumes since January 2007
for real estate secured receivables have significantly
increased. Since January 2007, we have cumulatively modified
and/or
re-aged approximately 333,600 real estate secured loans with an
aggregate outstanding principal balance of $39.5 billion at
the time of modification
and/or
re-age under the Foreclosure Avoidance/Account Modification
Programs and the Proactive ARM Modification Programs described
above. These totals include approximately 64,600 real estate
secured loans with an outstanding principal balance of
$9.9 billion that received two or more modifications since
January 2007 and, therefore, may be classified as TDR Loans. The
following provides information about the subsequent performance
of all real estate secured loans granted a modification
and/or
re-age since January 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Receivable
|
|
|
|
Number
|
|
|
Balance at Time of
|
|
Status as of March 31, 2010
|
|
of Loans
|
|
|
Modification
|
|
|
|
|
Current or less than
30-days
delinquent
|
|
|
48
|
%
|
|
|
47
|
%
|
30- to
59-days
delinquent
|
|
|
9
|
|
|
|
9
|
|
60-days or
more delinquent
|
|
|
18
|
|
|
|
23
|
|
Paid-in-full
|
|
|
6
|
|
|
|
5
|
|
Charged-off, transferred to real estate owned or sold
|
|
|
19
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
We continue to work with advocacy groups in select markets to
assist in encouraging our customers with financial needs to
contact us. We have also implemented new training programs to
ensure that our customer service representatives are focused on
helping the customer through difficulties, are knowledgeable
about the re-aging and modification programs available and are
able to advise each customer of the best solutions for their
individual circumstance.
93
HSBC Finance Corporation
We also support a variety of national and local efforts in
homeownership preservation and foreclosure avoidance.
The following table shows the number of real estate secured
accounts remaining in our portfolio as well as the outstanding
receivable balance of these accounts as of the period indicated
for loans that were either re-aged only, modified only or
modified and re-aged:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Receivable
|
|
|
|
Number of
Accounts(1)
|
|
|
Balance(1)(4)
|
|
|
|
Consumer
|
|
|
Mortgage
|
|
|
Consumer
|
|
|
Mortgage
|
|
|
|
Lending
|
|
|
Services
|
|
|
Lending
|
|
|
Services
|
|
|
|
|
|
(accounts are in thousands)
|
|
|
(dollars are in millions)
|
|
|
March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans re-aged only
|
|
|
89.8
|
|
|
|
36.0
|
|
|
$
|
7,687
|
|
|
$
|
3,292
|
|
Loans modified
only(2)
|
|
|
16.2
|
|
|
|
10.2
|
|
|
|
1,998
|
|
|
|
1,216
|
|
Loans modified and re-aged
|
|
|
68.3
|
|
|
|
52.1
|
|
|
|
8,824
|
|
|
|
6,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans modified and/or
re-aged(3)
|
|
|
174.3
|
|
|
|
98.3
|
|
|
$
|
18,509
|
|
|
$
|
11,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans re-aged only
|
|
|
91.3
|
|
|
|
36.5
|
|
|
$
|
7,779
|
|
|
$
|
3,331
|
|
Loans modified
only(2)
|
|
|
16.6
|
|
|
|
10.6
|
|
|
|
2,096
|
|
|
|
1,274
|
|
Loans modified and re-aged
|
|
|
67.5
|
|
|
|
53.1
|
|
|
|
8,805
|
|
|
|
6,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans modified and/or
re-aged(3)
|
|
|
175.4
|
|
|
|
100.2
|
|
|
$
|
18,680
|
|
|
$
|
11,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Loans which have been granted a
permanent modification, a twelve-month or longer modification,
or two or more consecutive six-month modifications are
considered troubled debt restructurings for purposes of
determining loss reserves. For additional information related to
our troubled debt restructurings, see Note 5,
Receivables, in the accompanying consolidated
financial statements.
|
|
(2) |
|
Includes loans that have been
modified under the Proactive ARM Modification program described
above.
|
|
(3) |
|
The following table provides
information at March 31, 2010 regarding the delinquency
status of loans remaining in the portfolio that were granted
modifications of loan terms and/or re-aged:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
|
|
|
|
Receivable
|
|
|
|
Number of Accounts
|
|
|
Balance
|
|
|
|
Consumer
|
|
|
Mortgage
|
|
|
Consumer
|
|
|
Mortgage
|
|
|
|
Lending
|
|
|
Services
|
|
|
Lending
|
|
|
Services
|
|
|
|
|
March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current or less than
30-days
delinquent
|
|
|
66
|
%
|
|
|
67
|
%
|
|
|
62
|
%
|
|
|
67
|
%
|
30- to
59-days
delinquent
|
|
|
11
|
|
|
|
9
|
|
|
|
13
|
|
|
|
10
|
|
60-days or
more delinquent
|
|
|
23
|
|
|
|
24
|
|
|
|
25
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current or less than
30-days
delinquent
|
|
|
62
|
%
|
|
|
64
|
%
|
|
|
59
|
%
|
|
|
65
|
%
|
30- to
59-days
delinquent
|
|
|
13
|
|
|
|
11
|
|
|
|
14
|
|
|
|
11
|
|
60-days or
more delinquent
|
|
|
25
|
|
|
|
25
|
|
|
|
27
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4) |
|
The outstanding receivable balance
included in this table reflects the principal amount outstanding
on the loan excluding any basis adjustments to the loan such as
unearned income, unamortized deferred fees and costs on
originated loans, purchase accounting fair value adjustments and
premiums or discounts on purchased loans.
|
94
HSBC Finance Corporation
Re-age Our re-aging policies and practices vary by
product and are described in detail in the Credit
Quality section of our 2009
Form 10-K.
The fact that the re-aging criteria may be met for a particular
account does not require us to re-age that account, and the
extent to which we re-age accounts that are eligible under the
criteria will vary depending upon our view of prevailing
economic conditions and other factors which may change from
period to period. In addition, for some products, accounts may
be re-aged without receipt of a payment in certain special
circumstances (e.g. upon reaffirmation of a debt owed to
us in connection with a Chapter 7 bankruptcy proceeding).
We use account re-aging as an account and customer management
tool in an effort to increase the cash flow from our account
relationships, and accordingly, the application of this tool is
subject to complexities, variations and changes from time to
time. These policies and practices are continually under review
and assessment to assure that they meet the goals outlined
above, and accordingly, we modify or permit exceptions to these
general policies and practices from time to time. In addition,
exceptions to these policies and practices may be made in
specific situations in response to legal or regulatory
agreements or orders.
We continue to monitor and track information related to accounts
that have been re-aged. Currently, approximately 83 percent
of all re-aged receivables are real estate secured products,
which in general have less loss severity exposure because of the
underlying collateral. Credit loss reserves, including reserves
on TDR Loans, take into account whether loans have been re-aged,
rewritten or are subject to forbearance, an external debt
management plan, modification, extension or deferment. Our
credit loss reserves, including reserves on TDR Loans, also take
into consideration the loss severity expected based on the
underlying collateral, if any, for the loan.
We used certain assumptions and estimates to compile our
re-aging statistics. The systemic counters used to compile the
information presented below exclude from the reported statistics
loans that have been reported as contractually delinquent but
have been reset to a current status because we have determined
that the loans should not have been considered delinquent (e.g.,
payment application processing errors). When comparing re-aging
statistics from different periods, the fact that our re-age
policies and practices will change over time, that exceptions
are made to those policies and practices, and that our data
capture methodologies have been enhanced, should be taken into
account.
Re-age Table(1)
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Never re-aged
|
|
|
60.2
|
%
|
|
|
61.6
|
%
|
Re-aged:
|
|
|
|
|
|
|
|
|
Re-aged in the last 6 months
|
|
|
12.3
|
|
|
|
12.2
|
|
Re-aged in the last 7-12 months
|
|
|
12.2
|
|
|
|
13.6
|
|
Previously re-aged beyond 12 months
|
|
|
15.3
|
|
|
|
12.6
|
|
|
|
|
|
|
|
|
|
|
Total ever re-aged
|
|
|
39.8
|
|
|
|
38.4
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
Re-aged by
Product(1)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Real estate
secured(2)
|
|
$
|
26,724
|
|
|
|
47.0
|
%
|
|
$
|
27,036
|
|
|
|
45.4
|
%
|
Auto finance
|
|
|
1,523
|
|
|
|
45.5
|
|
|
|
2,021
|
|
|
|
45.0
|
|
Credit card
|
|
|
497
|
|
|
|
4.7
|
|
|
|
527
|
|
|
|
4.5
|
|
Personal non-credit card
|
|
|
3,358
|
|
|
|
35.6
|
|
|
|
3,678
|
|
|
|
35.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
32,102
|
|
|
|
39.8
|
%
|
|
$
|
33,262
|
|
|
|
38.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95
HSBC Finance Corporation
|
|
|
(1) |
|
Excludes commercial and other.
|
|
(2) |
|
The Mortgage Services and Consumer
Lending businesses real estate secured re-ages are as shown in
the following table:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Mortgage Services
|
|
$
|
10,419
|
|
|
$
|
10,699
|
|
Consumer Lending
|
|
|
16,305
|
|
|
|
16,337
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured
|
|
$
|
26,724
|
|
|
$
|
27,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) |
|
The outstanding receivable balance
included in this table reflects the principal amount outstanding
on the loan net of unearned income, unamortized deferred fees
and costs on originated loans, purchase accounting fair value
adjustments and premiums or discounts on purchased loans.
|
The overall decrease in dollars of re-aged loans during the
three months ended March 31, 2010 reflects the lower
delinquency and receivable levels as discussed above including
the impact of the sale of certain auto finance receivables to SC
USA during the first quarter of 2010. At March 31, 2010 and
December 31, 2009, $7.5 billion (23 percent of
total re-aged loans in the Re-age Table) and
$8.1 billion (24 percent of total re-aged loans in the
Re-age Table), respectively, of re-aged accounts have
subsequently experienced payment defaults and are included in
our two-months-and-over contractual delinquency at the period
indicated.
Other Account Management Techniques In addition to our
modification and re-aging policies and practices, we employ
other customer account management techniques in respect of
delinquent accounts that are similarly designed to manage
customer relationships, maximize collection opportunities and
avoid foreclosure or repossession if commercially sensible and
reasonably possible. These additional customer account
management techniques include, at our discretion, actions such
as extended payment arrangements, approved external debt
management plans, forbearance, loan rewrites
and/or
deferment pending a change in circumstances. We typically use
these customer account management techniques with individual
borrowers in transitional situations, usually involving borrower
hardship circumstances or temporary setbacks that are expected
to affect the borrowers ability to pay the contractually
specified amount for some period of time. For example, under a
forbearance agreement, we may agree not to take certain
collection or credit agency reporting actions with respect to
missed payments, often in return for the borrowers
agreement to pay us an additional amount with future required
payments. In some cases, these additional customer account
management techniques may involve us agreeing to lower the
contractual payment amount
and/or
reduce the periodic interest rate.
The amount of receivables subject to forbearance, non-real
estate secured receivable modification, rewrites or other
customer account management techniques for which we have reset
delinquency and that is not included in the re-aged or
delinquency statistics was approximately $123 million or
.2 percent of receivables and receivables held for sale at
March 31, 2010 and $153 million or .2 percent at
December 31, 2009.
When we use a customer account management technique, we may
treat the account as being contractually current and will not
reflect it as a delinquent account in our delinquency
statistics. However, if the account subsequently experiences
payment defaults, it will again become contractually delinquent.
Re-aged accounts are specifically considered in the reserving
process. We generally consider loan rewrites to involve an
extension of a new loan, and such new loans are not reflected in
our delinquency or re-aging statistics. Our account management
actions vary by product and are under continual review and
assessment to determine that they meet the goals outlined above.
96
HSBC Finance Corporation
Geographic Concentrations The following table
reflects the percentage of receivables and receivables held for
sale by state which individually account for 5 percent or
greater of our portfolio as of March 31, 2010 as well as
the unemployment rate for these states as of March 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Portfolio
|
|
|
|
|
|
Unemployment
|
|
|
|
Receivables
|
|
|
Percent of
|
|
|
Rates as of
|
|
|
|
Credit
|
|
|
Real Estate
|
|
|
|
|
|
Total
|
|
|
March 31,
|
|
|
|
Cards
|
|
|
Secured
|
|
|
Other
|
|
|
Receivables
|
|
|
2010(1)
|
|
|
|
|
California
|
|
|
11.2
|
%
|
|
|
10.6
|
%
|
|
|
6.8
|
%
|
|
|
10.4
|
%
|
|
|
12.6
|
%
|
Florida
|
|
|
7.1
|
|
|
|
6.5
|
|
|
|
5.8
|
|
|
|
6.7
|
|
|
|
12.3
|
|
New York
|
|
|
7.5
|
|
|
|
6.7
|
|
|
|
6.7
|
|
|
|
6.6
|
|
|
|
8.6
|
|
Pennsylvania
|
|
|
4.1
|
|
|
|
5.7
|
|
|
|
6.3
|
|
|
|
5.4
|
|
|
|
9.0
|
|
Ohio
|
|
|
4.2
|
|
|
|
5.4
|
|
|
|
5.7
|
|
|
|
5.2
|
|
|
|
11.0
|
|
|
|
|
(1) |
|
The U.S. national unemployment rate
as of March 31, 2010 was 9.7 percent.
|
Because our underwriting, collections and processing functions
are centralized, we can quickly change our credit standards and
intensify collection efforts in specific locations. We believe
this lowers risks resulting from such geographic concentrations.
Liquidity
and Capital Resources
HSBC Related Funding Debt due to affiliates and
other HSBC related funding are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in billions)
|
|
|
Debt issued to HSBC subsidiaries:
|
|
|
|
|
|
|
|
|
Term debt
|
|
$
|
9.0
|
|
|
$
|
9.0
|
|
|
|
|
|
|
|
|
|
|
Debt outstanding to HSBC clients:
|
|
|
|
|
|
|
|
|
Euro commercial paper
|
|
|
.6
|
|
|
|
.7
|
|
Term debt
|
|
|
1.8
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
Total debt outstanding to HSBC clients
|
|
|
2.4
|
|
|
|
2.5
|
|
Cash received on bulk and subsequent sales of credit card
receivables to HSBC Bank USA, net (cumulative)
|
|
|
9.2
|
|
|
|
10.3
|
|
Cash received on bulk sale of auto finance receivables to HSBC
Bank USA, net (cumulative)
|
|
|
2.4
|
|
|
|
2.8
|
|
Cash received on bulk and subsequent sales of private label
credit card receivables to HSBC Bank USA, net (cumulative)
|
|
|
14.8
|
|
|
|
16.6
|
|
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
|
|
|
(6.2
|
)
|
|
|
(6.1
|
)
|
|
|
|
|
|
|
|
|
|
Total real estate secured receivable activity with HSBC Bank USA
|
|
|
1.7
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
Cash received from sale of U.K. Operations to HOHU
|
|
|
.4
|
|
|
|
.4
|
|
Cash received from sale of U.K. credit card business to HSBC
Bank plc (HBEU)
|
|
|
2.7
|
|
|
|
2.7
|
|
Cash received from sale of Canadian Operations to HSBC Bank
Canada
|
|
|
.3
|
|
|
|
.3
|
|
Capital contributions by HSBC Investments (North America) Inc.
(cumulative)
|
|
|
8.6
|
|
|
|
8.6
|
|
|
|
|
|
|
|
|
|
|
Total HSBC related funding
|
|
$
|
51.5
|
|
|
$
|
55.0
|
|
|
|
|
|
|
|
|
|
|
97
HSBC Finance Corporation
At March 31, 2010 and December 31, 2009, funding from
HSBC, including debt issuances to HSBC subsidiaries and clients,
represented 14 percent of our total debt and preferred
stock funding.
Cash proceeds received from the sale of our Canadian Operations
to HSBC Bank Canada, the sale of our U.K. Operations to HOHU,
the sale of our European Operations to an HBEU affiliate and the
sale of our U.K. credit card business to HBEU were used to pay
down short-term domestic borrowings, including outstanding
commercial paper balances, and draws on bank lines from HBEU.
Proceeds received from the bulk sale and subsequent daily sales
of private label and credit card receivables to HSBC Bank USA
and the proceeds from the bulk sale of certain auto finance
receivables were used to pay down maturing long-term debt and
short-term domestic borrowings, including outstanding commercial
paper balances, and to pay down maturing long-term debt.
Proceeds from each of these transactions as well as the ongoing
daily sales were also used to fund ongoing operations.
We have a $1.5 billion uncommitted secured credit facility
and a $1.0 billion committed unsecured credit facility from
HSBC Bank USA. At March 31, 2010 and December 31,
2009, there were no balances outstanding under either of these
lines.
We had derivative contracts with a notional value of
$56.6 billion, or approximately 98 percent of total
derivative contracts, outstanding with HSBC affiliates at
March 31, 2010 and $58.6 billion, or approximately
98 percent at December 31, 2009. Such arrangements
reduce the counterparty risk exposure related to the derivatives
portfolio.
Interest bearing deposits with banks and other short-term
investments Interest bearing deposits with banks
totaled $10 million and $17 million at March 31,
2010 and December 31, 2009, respectively. Securities
purchased under agreements to resell totaled $5.2 billion
and $2.9 billion at March 31, 2010 and
December 31, 2009, respectively. The increase in the amount
of securities purchased under agreements to resell is due to the
generation of additional liquidity as a result of the receipt of
tax related payments, issuances of long-term retail debt and the
run-off of our liquidating receivable portfolios.
Commercial paper totaled $3.7 billion
and $4.3 billion at March 31, 2010 and
December 31, 2009, respectively. Included in this total was
outstanding Euro commercial paper sold to customers of HSBC of
$582 million and $664 million at March 31, 2010
and December 31, 2009, respectively. Commercial paper
balances were lower at March 31, 2010 as a result of our
higher short-term liquid investment portfolio and the continued
run-off of our liquidating receivable portfolios. Our funding
strategies are structured such that committed bank credit
facilities exceed 100 percent of outstanding commercial
paper.
We had committed
back-up
lines of credit totaling $7.8 billion at March 31,
2010 and December 31, 2009, of which $2.5 billion was
with HSBC affiliates, to support our issuance of commercial
paper. The $2.5 billion credit facility with an HSBC
affiliate was renewed in September 2009 for an additional
364 days. We had $4.3 billion in
back-up
lines with third parties that were scheduled to mature in April
and May of 2010. These lines were replaced in April 2010 with a
new $3.2 billion
back-up
credit facility, split evenly between tenors of 364 days
and 2 years. Given the overall reduction in our balance
sheet, the new lower level of
back-up
lines in support of our current commercial paper issuance
program is consistent with our reduced 2010 funding requirements.
Long-term debt decreased to
$66.5 billion at March 31, 2010 from
$69.7 billion at December 31, 2009. The following
table summarizes issuances and retirements of long-term debt
during 2010 and 2009:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Long-term debt issued
|
|
$
|
119
|
|
|
$
|
1,600
|
|
Long-term debt
retired(1)
|
|
|
(2,551
|
)
|
|
|
(5,155
|
)
|
|
|
|
|
|
|
|
|
|
Net long-term debt retired
|
|
$
|
(2,432
|
)
|
|
$
|
(3,555
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Additionally, during the first
quarter of 2009, long-term debt of $6.1 billion was assumed
by HSBC Bank USA in connection with their purchase of the GM and
UP Portfolios, as discussed previously.
|
98
HSBC Finance Corporation
Issuances of long-term debt during the first quarter of 2010
included $119 million of
InterNotessm
(retail-oriented medium-term notes).
At March 31, 2010 and December 31, 2009, we had
secured conduit credit facilities with commercial banks which
provides for secured financings of receivables on a revolving
basis totaling $400 million. Of the amounts available under
these facilities, no amounts were utilized at March 31,
2010 or December 31, 2009. The facilities will mature in
the second quarter of 2010 and are renewable at the banks
option.
Common Equity During the first quarter of
2010, we did not receive any capital contributions from HINO.
However, until we return to profitability, we are dependent upon
the continued capital support of HSBC to continue our business
operations and maintain selected capital ratios. HSBC has
provided significant capital in support of our operations in the
last few years and has indicated that they are fully committed
and have the capacity and willingness to continue that support.
Selected capital ratios In managing capital,
we develop targets for tangible common equity to tangible
assets. This ratio target is based on discussions with HSBC and
rating agencies, risks inherent in the portfolio and the
projected operating environment and related risks. Additionally,
effective September 30, 2009, we are required by our credit
providing banks to maintain a minimum tangible common equity to
tangible assets ratio of 6.75 percent. This ratio excludes
the equity impact of unrealized gains (losses) on cash flow
hedging instruments, postretirement benefit plan adjustments and
unrealized gains (losses) on investments as well as subsequent
changes in fair value recognized in earnings associated with
debt for which we elected the fair value option and the related
derivatives. Our targets may change from time to time to
accommodate changes in the operating environment or other
considerations such as those listed above.
Selected capital ratios are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
|
Tangible common equity to tangible
assets(1)
|
|
|
7.39
|
%
|
|
|
7.60
|
%
|
Common and preferred equity to total assets
|
|
|
8.63
|
|
|
|
8.86
|
|
|
|
|
(1) |
|
Tangible common equity to tangible
assets represents a
non-U.S.
GAAP financial ratio that is used by HSBC Finance Corporation
management and applicable rating agencies to evaluate capital
adequacy and may differ from similarly named measures presented
by other companies. See Basis of Reporting for
additional discussion on the use of
non-U.S.
GAAP financial measures and Reconciliations to U.S.
GAAP Financial Measures for quantitative
reconciliations to the equivalent U.S. GAAP basis financial
measure.
|
The following summarizes our credit ratings at March 31,
2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard &
|
|
|
Moodys
|
|
|
|
|
|
|
Poors
|
|
|
Investors
|
|
|
|
|
|
|
Corporation
|
|
|
Service
|
|
|
Fitch, Inc.
|
|
|
|
|
As of March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior debt
|
|
|
A
|
|
|
|
A3
|
|
|
|
AA-
|
|
Commercial paper
|
|
|
A-1
|
|
|
|
P-1
|
|
|
|
F-1+
|
|
Series B preferred stock
|
|
|
BBB
|
|
|
|
Baa2
|
|
|
|
A+
|
|
As of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior debt
|
|
|
A
|
|
|
|
A3
|
|
|
|
AA-
|
|
Commercial paper
|
|
|
A-1
|
|
|
|
P-1
|
|
|
|
F-1+
|
|
Series B preferred stock
|
|
|
BBB
|
|
|
|
Baa2
|
|
|
|
A+
|
|
99
HSBC Finance Corporation
Secured financings Secured financings issued
during the three months ended March 31, 2010 and 2009 are
summarized in the following table:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Auto finance
|
|
$
|
-
|
|
|
$
|
-
|
|
Credit card
|
|
|
-
|
|
|
|
-
|
|
Personal non-credit card
|
|
|
-
|
|
|
|
1,600
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
-
|
|
|
$
|
1,600
|
|
|
|
|
|
|
|
|
|
|
Secured financings of $5.1 billion at March 31, 2010
are secured by $7.5 billion of closed-end real estate
secured and auto finance receivables. Secured financings of
$5.5 billion at December 31, 2009 are secured by
$8.0 billion of closed-end real estate secured and auto
finance receivables. The following table shows by product type
the receivables which secure our secured financings:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in billions)
|
|
|
Real estate secured
|
|
$
|
6.6
|
|
|
$
|
6.8
|
|
Auto finance
|
|
|
.9
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7.5
|
|
|
$
|
8.0
|
|
|
|
|
|
|
|
|
|
|
Commitments We also enter into commitments to meet
the financing needs of our customers. In most cases, we have the
ability to reduce or eliminate these open lines of credit. As a
result, the amounts below do not necessarily represent future
cash requirements at March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in billions)
|
|
|
Private label and credit
cards(1)(2)
|
|
$
|
99
|
|
|
$
|
96
|
|
Other consumer lines of credit
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Open lines of credit
|
|
$
|
100
|
|
|
$
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
These totals include open lines of
credit related to private label credit cards and the GM and UP
Portfolios for which we sell all new receivable originations to
HSBC Bank USA on a daily basis.
|
|
(2) |
|
Includes an estimate for acceptance
of credit offers mailed to potential customers prior to
March 31, 2010 and December 31, 2009.
|
100
HSBC Finance Corporation
2010 Funding Strategy Our current range of
estimates for funding needs and sources for 2009 are summarized
in the table that follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1
|
|
|
April 1
|
|
|
|
|
|
|
|
|
|
|
|
|
through
|
|
|
through
|
|
|
Estimated
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
Full Year
|
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
|
|
|
(in billions)
|
|
|
Funding needs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset growth/(attrition)
|
|
$
|
(1
|
)
|
|
$
|
(4
|
)
|
|
|
-
|
|
|
|
(2
|
)
|
|
$
|
(5
|
)
|
|
|
-
|
|
|
|
(3
|
)
|
Commercial paper maturities
|
|
|
1
|
|
|
|
0
|
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
|
|
|
-
|
|
|
|
2
|
|
Term debt maturities
|
|
|
2
|
|
|
|
13
|
|
|
|
-
|
|
|
|
15
|
|
|
|
15
|
|
|
|
-
|
|
|
|
17
|
|
Secured financings, including conduit facility maturities
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
2
|
|
|
|
1
|
|
|
|
-
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total funding needs
|
|
$
|
2
|
|
|
$
|
10
|
|
|
|
-
|
|
|
|
16
|
|
|
$
|
12
|
|
|
|
-
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funding sources:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper issuances
|
|
$
|
(2
|
)
|
|
$
|
4
|
|
|
|
-
|
|
|
|
6
|
|
|
$
|
2
|
|
|
|
-
|
|
|
|
4
|
|
Term debt issuances
|
|
|
-
|
|
|
|
0
|
|
|
|
-
|
|
|
|
2
|
|
|
|
0
|
|
|
|
-
|
|
|
|
2
|
|
Asset transfers and loan sales
|
|
|
1
|
|
|
|
0
|
|
|
|
-
|
|
|
|
2
|
|
|
|
1
|
|
|
|
-
|
|
|
|
3
|
|
Secured financings, including conduit facility renewals
|
|
|
-
|
|
|
|
0
|
|
|
|
-
|
|
|
|
1
|
|
|
|
0
|
|
|
|
-
|
|
|
|
1
|
|
HSBC and HSBC subsidiaries, including capital infusions
|
|
|
-
|
|
|
|
0
|
|
|
|
-
|
|
|
|
2
|
|
|
|
0
|
|
|
|
-
|
|
|
|
2
|
|
Other(1)
|
|
|
3
|
|
|
|
6
|
|
|
|
-
|
|
|
|
3
|
|
|
|
9
|
|
|
|
-
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total funding sources
|
|
$
|
2
|
|
|
$
|
10
|
|
|
|
-
|
|
|
|
16
|
|
|
$
|
12
|
|
|
|
-
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Primarily reflects cash provided by
operating activities.
|
For the remainder of 2010, the combination of portfolio
attrition, cash generated from operations, the receipt of tax
related payments and the possible issuance of debt will generate
the liquidity necessary to meet our maturing debt obligations.
These sources of liquidity may be supplemented with HSBC
affiliate funding and sales of receivable portfolios.
Commercial paper outstanding will continue to be lower
throughout 2010. The majority of outstanding commercial paper is
expected to be directly placed, domestic commercial paper. Euro
commercial paper will continue to be marketed predominately to
HSBC clients.
Fair
Value
Net income volatility arising from changes in either interest
rate or credit components of the
mark-to-market
on debt designated at fair value and related derivatives affects
the comparability of reported results between periods.
Accordingly, gain on debt designated at fair value and related
derivatives for the three months ended March 31, 2010
should not be considered indicative of the results for any
future period.
Control Over Valuation Process and Procedures A
control framework has been established which is designed to
ensure that fair values are either determined or validated by a
function independent of the risk-taker. To that end, the
ultimate responsibility for the determination of fair values
rests with the HSBC Finance Valuation Committee. The HSBC
Finance Valuation Committee establishes policies and procedures
to ensure appropriate valuations. Fair values for debt
securities and long-term debt for which we have elected fair
value option are determined by a third-party valuation source
(pricing service) by reference to external quotations on the
identical or similar instruments. An independent price
validation process is also utilized. For price validation
purposes, we obtain quotations from at least one other
independent pricing source for each financial instrument, where
possible. We consider the following factors in determining fair
values:
|
|
|
|
|
similarities between the asset or the liability under
consideration and the asset or liability for which quotation is
received;
|
|
|
|
whether the security is traded in an active or inactive market;
|
|
|
|
consistency among different pricing sources;
|
101
HSBC Finance Corporation
|
|
|
|
|
the valuation approach and the methodologies used by the
independent pricing sources in determining fair value;
|
|
|
|
the elapsed time between the date to which the market data
relates and the measurement date; and
|
|
|
|
the manner in which the fair value information is sourced.
|
Greater weight is given to quotations of instruments with recent
market transactions, pricing quotes from dealers who stand ready
to transact, quotations provided by market-makers who originally
underwrote such instruments, and market consensus pricing based
on inputs from a large number of participants. Any significant
discrepancies among the external quotations are reviewed by
management and adjustments to fair values are recorded where
appropriate.
Fair values for derivatives are determined by management using
valuation techniques, valuation models and inputs that are
developed, reviewed, validated and approved by the Quantitative
Risk and Valuation Group of an affiliate, HSBC Bank USA. These
valuation models utilize discounted cash flows or an option
pricing model adjusted for counterparty credit risk and market
liquidity. The models used apply appropriate control processes
and procedures to ensure that the derived inputs are used to
value only those instruments that share similar risk to the
relevant benchmark indexes and therefore demonstrate a similar
response to market factors. In addition, a validation process is
followed which includes participation in peer group consensus
pricing surveys, to ensure that valuation inputs incorporate
market participants risk expectations and risk premium.
We have various controls over our valuation process and
procedures for receivables held for sale. As these fair values
are generally determined using modeling techniques, the controls
may include independent development or validation of the logic
within the valuation models, the inputs to those models, and
adjustments required to outside valuation models. The inputs and
adjustments to valuation models are reviewed with management and
reconciled to inputs and assumptions used in other internal
valuation processes. In addition, from time to time, certain
portfolios are valued by independent third parties, primarily
for related party transactions, which are used to validate our
internal models.
Fair Value Hierarchy Accounting principles related
to fair value measurements establish a fair value hierarchy
structure that prioritizes the inputs to valuation techniques
used to determine the fair value of an asset or liability (the
Fair Value Framework). The Fair Value Framework
distinguishes between inputs that are based on observed market
data and unobservable inputs that reflect market
participants assumptions. It emphasizes the use of
valuation methodologies that maximize market inputs. For
financial instruments carried at fair value, the best evidence
of fair value is a quoted price in an actively traded market
(Level 1). Where the market for a financial instrument is
not active, valuation techniques are used. The majority of
valuation techniques use market inputs that are either
observable or indirectly derived from and corroborated by
observable market data for substantially the full term of the
financial instrument (Level 2). Because Level 1 and
Level 2 instruments are determined by observable inputs,
less judgment is applied in determining their fair values. In
the absence of observable market inputs, the financial
instrument is valued based on valuation techniques that feature
one or more significant unobservable inputs (Level 3). The
determination of the level of fair value hierarchy within which
the fair value measurement of an asset or a liability is
classified often requires judgment. We consider the following
factors in developing the fair value hierarchy:
|
|
|
|
|
whether the asset or liability is transacted in an active market
with a quoted market price that is readily available;
|
|
|
|
the size of transactions occurring in an active market;
|
|
|
|
the level of bid-ask spreads;
|
|
|
|
a lack of pricing transparency due to, among other things, the
complexity of the product structure and market liquidity;
|
|
|
|
whether only a few transactions are observed over a significant
period of time;
|
|
|
|
whether the pricing quotations vary substantially among
independent pricing services;
|
|
|
|
whether the inputs to the valuation techniques can be derived
from or corroborated with market data; and
|
|
|
|
whether significant adjustments are made to the observed pricing
information or model output to determine the fair value.
|
102
HSBC Finance Corporation
Level 1 inputs are unadjusted quoted prices in active
markets that the reporting entity has the ability to access for
the identical assets or liabilities. A financial instrument is
classified as a Level 1 measurement if it is listed on an
exchange or is an instrument actively traded in the OTC market
where transactions occur with sufficient frequency and volume.
We regard financial instruments that are listed on the primary
exchanges of a country, such as equity securities and derivative
contracts, to be actively traded. Non-exchange-traded
instruments classified as Level 1 assets include securities
issued by the U.S. Treasury.
Level 2 inputs are inputs that are observable either
directly or indirectly but do not qualify as Level 1
inputs. We generally classify derivative contracts, corporate
debt including asset-backed securities as well as our own debt
issuance for which we have elected fair value option which are
not traded in active markets, as Level 2 measurements.
Currently, substantially all such items qualify as Level 2
measurements. These valuations are typically obtained from a
third party valuation source which, in the case of derivatives,
includes valuations provided by an affiliate, HSBC Bank USA.
Level 3 inputs are unobservable inputs for the asset or
liability and include situations where there is little, if any,
market activity for the asset or liability. Level 3 inputs
incorporate market participants assumptions about risk and
the risk premium required by market participants in order to
bear that risk. We develop Level 3 inputs based on the best
information available in the circumstances. As of March 31,
2010 and December 31, 2009, our Level 3 instruments
recorded at fair value on a recurring basis include
$37 million and $49 million, respectively, primarily
U.S. corporate debt securities and asset-backed securities.
As of March 31, 2010 and December 31, 2009, our
Level 3 assets recorded at fair value on a non-recurring
basis included the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
|
|
(in millions)
|
|
Receivables held for sale
|
|
$
|
3
|
|
|
$
|
3
|
|
Transfers between leveling categories are recognized at the end
of each reporting period.
Transfers
Into (Out of) Level 1 and 2 Measurements
During
the first quarter of 2010, there were no transfers of assets or
liabilities between Level 1 and Level 2.
Transfers
Into (Out of) Level 2 and Level 3 Measurements
Assets
recorded at fair value on a recurring basis at March 31,
2010 and 2009 which have been classified as using Level 3
measurements include certain U.S. corporate debt securities
and mortgage-backed securities. Securities are classified as
using Level 3 measurements when one or both of the
following conditions are met:
|
|
|
|
|
An asset-backed security is downgraded below a AAA credit
rating; or
|
|
|
|
An individual security fails the quarterly pricing comparison
test, which is described more fully in Note 17, Fair
Value Measurements, in the accompanying consolidated
financial statements, with a variance greater than
5 percent.
|
Transfers into or out of Level 3 classifications, net,
represents changes in the mix of individual securities that meet
one or both of the above conditions. During the first quarter of
2010, we transferred $19 million of individual securities,
primarily corporate debt securities, from Level 3 to
Level 2 as they no longer met one or both of the conditions
described above, which was partially offset by the transfer of
$9 million from Level 2 to Level 3 of individual
corporate debt securities and asset-backed securities which met
one or both of the conditions described above. During the first
quarter of 2009, we transferred $91 million of individual
corporate debt securities and
asset-backed
securities from Level 3 to Level 2 as they no longer
met one or both of the conditions described above, which was
partially offset by the transfer of $36 million from
Level 2 to Level 3 of individual securities, primarily
corporate debt securities and asset-backed securities, which met
one or both of the conditions described above. As a result, we
reported a total of $37 million and $49 million of
available-for-sale
securities, or approximately 1 percent and 2 percent
of our securities portfolio as Level 3 at March 31,
2010 and December 31, 2009, respectively. At
103
HSBC Finance Corporation
March 31, 2010 and December 31, 2009, total
Level 3 assets as a percentage of total assets measured at
fair value on a recurring basis was 1 percent.
See Note 17, Fair Value Measurements in the
accompanying consolidated financial statements for further
details including our valuation techniques as well as the
classification hierarchy associated with assets and liabilities
measured at fair value.
Risk
Management
Credit Risk
Day-to-day
management of credit risk is administered by the HSBC North
America Chief Retail Credit Officer who reports to the HSBC
North America Chief Risk Officer. The HSBC North America Chief
Risk Officer reports to our Chief Executive Officer and to the
Group Managing Director and Chief Risk Officer of HSBC. The
business unit retail risk management functions report directly
to the HSBC North America Chief Retail Credit Officer. While our
product offerings have been significantly reduced as a result of
our decision to discontinue all new customer account
originations in our Consumer Lending and Auto Finance
businesses, there have not been significant changes to our
credit risk management process. We have established detailed
policies to address the credit risk that arises from our lending
activities. Our credit and portfolio management procedures focus
on sound underwriting, effective collections and customer
account management efforts for each loan. Our lending
guidelines, which delineate the credit risk we are willing to
take and the related terms, are specific not only for each
product, but also take into consideration various other factors
including borrower characteristics, return on equity, capital
deployment and our overall risk appetite. We also have specific
policies to ensure the establishment of appropriate credit loss
reserves on a timely basis to cover probable losses of
principal, interest and fees. See the captions Credit
Quality and Risk Management in our 2009
Form 10-K
for a detailed description of our policies regarding the
establishment of credit loss reserves, our delinquency and
charge-off policies and practices and our customer account
management policies and practices. Also see Note 2,
Summary of Significant Accounting Policies and New
Accounting Pronouncements, in our 2009
Form 10-K
for further discussion of our policies surrounding credit loss
reserves. Our policies and procedures are consistent with HSBC
standards and are regularly reviewed and updated both on an HSBC
Finance Corporation and HSBC level. The credit risk function
continues to refine early warning indicators and
reporting, including stress testing scenarios on the basis of
current experience. These risk management tools are embedded
within our business planning process.
Counterparty credit risk is our primary exposure on our interest
rate swap portfolio. Counterparty credit risk is the risk that
the counterparty to a transaction fails to perform according to
the terms of the contract. Currently the majority of our
existing derivative contracts are with HSBC subsidiaries, making
them our primary counterparty in derivative transactions. Most
swap agreements, both with unaffiliated and affiliated third
parties, require that payments be made to, or received from, the
counterparty when the fair value of the agreement reaches a
certain level. Generally, third-party swap counterparties
provide collateral in the form of cash which is recorded in our
balance sheet as derivative financial assets or derivative
related liabilities. We provided third party swap counterparties
with collateral totaling $37 million and $46 million
at March 31, 2010 and December 31, 2009, respectively.
The fair value of our agreements with affiliate counterparties
required the affiliate to provide cash collateral of
$2.5 billion and $3.4 billion at March 31, 2010
and December 31, 2009, respectively. These amounts are
offset against the fair value amount recognized for derivative
instruments that have been offset under the same master netting
arrangement. See Note 10, Derivative Financial
Instruments, in the accompanying consolidated financial
statements for additional information related to interest rate
risk management and Note 17, Fair Value
Measurements, for information regarding the fair value of
our financial instruments.
There have been no significant changes in our approach to credit
risk management since December 31, 2009.
Liquidity Risk Continued success in reducing the
size of our non-core receivable portfolio as well as further
reductions in our core credit card portfolio will impact our
liquidity management process going forward. Lower cash flow as a
result of declining receivable balances as well as lower cash
generated from attrition due to elevated charge-offs, may not
provide sufficient cash to fully cover maturing debt over the
next four to five years. The required incremental funding will
be generated through the execution of alternative liquidity
management
104
HSBC Finance Corporation
strategies, including selected debt issuances and receivable
portfolio sales. In the event a portion of this incremental
funding is met through issuances of unsecured term debt to
either retail or institutional investors, these issuances would
better match the projected cash flows of the remaining run-off
portfolio and partly reduce reliance on direct HSBC support.
HSBC has indicated it remains fully committed and has the
capacity and willingness to continue to provide such support.
Maintaining our credit ratings is an important part of
maintaining our overall liquidity profile. As indicated by the
major rating agencies, our credit ratings are directly dependent
upon the continued support of HSBC. A credit ratings downgrade
would increase borrowing costs, and depending on its severity,
substantially limit access to capital markets, require cash
payments or collateral posting and permit termination of certain
contracts material to us. Other conditions that could negatively
affect our liquidity include unforeseen capital requirements, a
strengthening of the U.S. dollar, a slowdown in the rate of
attrition of our balance sheet and an inability to obtain
expected funding from HSBC, its subsidiaries and clients.
There have been no significant changes in our approach to
liquidity risk management since December 31, 2009.
Market Risk HSBC has certain limits and benchmarks
that serve as additional guidelines in determining the
appropriate levels of interest rate risk. One such limit is
expressed in terms of the Present Value of a Basis Point, which
reflects the change in value of the balance sheet for a one
basis point movement in all interest rates without considering
other correlation factors or assumptions. At March 31, 2010
and December 31, 2009, our absolute PVBP limit was
$8.70 million and $8.95 million, respectively, which
included the risk associated with the hedging instruments we
employed. Thus, for a one basis point change in interest rates,
the policy at March 31, 2010 and December 31, 2009
dictated that the value of the balance sheet could not increase
or decrease by more than $8.70 million and
$8.95 million, respectively.
The following table shows the components of absolute PVBP at
March 31, 2010 and December 31, 2009 broken down by
currency risk:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
USD
|
|
$
|
6.668
|
|
|
$
|
6.657
|
|
JPY
|
|
|
.096
|
|
|
|
.099
|
|
|
|
|
|
|
|
|
|
|
Absolute PVBP risk
|
|
$
|
6.764
|
|
|
$
|
6.756
|
|
|
|
|
|
|
|
|
|
|
We also monitor the impact that an immediate hypothetical
increase or decrease in interest rates of 25 basis points
applied at the beginning of each quarter over a 12 month
period would have on our net interest income assuming for 2010
and 2009 a declining balance sheet and the current interest rate
risk profile. These estimates include the impact on net interest
income of debt and related derivatives carried at fair value and
also assume we would not take any corrective actions in response
to interest rate movements and, therefore, exceed what most
likely would occur if rates were to change by the amount
indicated. The following table summarizes such estimated impact:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
|
|
(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
|
|
$
|
68
|
|
|
$
|
66
|
|
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
|
|
|
73
|
|
|
|
70
|
|
A principal consideration supporting both of the PVBP and margin
of risk analyses is the projected prepayment of loan balances
for a given economic scenario. Individual loan underwriting
standards in combination with housing valuations, loan
modification programs and macroeconomic factors related to
available mortgage credit are the key assumptions driving these
prepayment projections. While we have utilized a number of
sources to refine these projections, we cannot currently project
precise prepayment rates with a high degree of certainty in all
economic
105
HSBC Finance Corporation
environments given recent, significant changes in both subprime
mortgage underwriting standards and property valuations across
the country.
There has been no significant change in our approach to market
risk management since December 31, 2009.
Operational Risk There has been no significant
change in our approach to operational risk management since
December 31, 2009.
Compliance Risk There has been no significant
change in our approach to compliance risk management since
December 31, 2009.
Reputational Risk There has been no significant
change in our approach to reputational risk management since
December 31, 2009.
Strategic Risk There has been no significant
change in our approach to strategic risk management since
December 31, 2009.
106
HSBC Finance Corporation
HSBC
FINANCE CORPORATION
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Tangible common equity:
|
|
|
|
|
|
|
|
|
Common shareholders equity
|
|
$
|
7,195
|
|
|
$
|
7,804
|
|
Exclude:
|
|
|
|
|
|
|
|
|
Fair value option adjustment
|
|
|
(473
|
)
|
|
|
(518
|
)
|
Unrealized (gains) losses on cash flow hedging instruments
|
|
|
639
|
|
|
|
633
|
|
Postretirement benefit plan adjustments, net of tax
|
|
|
(9
|
)
|
|
|
(8
|
)
|
Unrealized (gains) losses on
available-for-sale
investments
|
|
|
(43
|
)
|
|
|
(31
|
)
|
Intangible assets
|
|
|
(709
|
)
|
|
|
(748
|
)
|
|
|
|
|
|
|
|
|
|
Tangible common equity
|
|
$
|
6,600
|
|
|
$
|
7,132
|
|
|
|
|
|
|
|
|
|
|
Tangible shareholders(s) equity:
|
|
|
|
|
|
|
|
|
Tangible common equity
|
|
$
|
6,600
|
|
|
$
|
7,132
|
|
Preferred stock
|
|
|
575
|
|
|
|
575
|
|
Mandatorily redeemable preferred securities of Household Capital
Trusts
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
Tangible shareholders(s) equity
|
|
$
|
8,175
|
|
|
$
|
8,707
|
|
|
|
|
|
|
|
|
|
|
Tangible assets:
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
90,076
|
|
|
$
|
94,553
|
|
Exclude:
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
(709
|
)
|
|
|
(748
|
)
|
Derivative financial assets
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Tangible assets
|
|
$
|
89,367
|
|
|
$
|
93,805
|
|
|
|
|
|
|
|
|
|
|
Equity ratios:
|
|
|
|
|
|
|
|
|
Common and preferred equity to total assets
|
|
|
8.63
|
%
|
|
|
8.86
|
%
|
Tangible common equity to tangible assets
|
|
|
7.39
|
|
|
|
7.60
|
|
Tangible shareholders(s) equity to tangible assets
|
|
|
9.15
|
|
|
|
9.28
|
|
107
HSBC Finance Corporation
See Item 2, Managements Discussion and Analysis
of Financial Conditions and Results of Operations, under
the caption Risk Management Market Risk
of this
Form 10-Q.
Evaluation of Disclosure Controls and Procedures
We maintain a system of internal and disclosure controls
and procedures designed to ensure that information required to
be disclosed by HSBC Finance Corporation in the reports we file
or submit under the Securities Exchange Act of 1934, as amended,
(the Exchange Act), is recorded, processed,
summarized and reported on a timely basis. Our Board of
Directors, operating through its audit committee, which is
composed entirely of independent outside directors, provides
oversight to our financial reporting process.
We conducted an evaluation, with the participation of the Chief
Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures as of
the end of the period covered by this report. Based upon that
evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures
were effective as of the end of the period covered by this
report so as to alert them in a timely fashion to material
information required to be disclosed in reports we file under
the Exchange Act.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over
financial reporting that occurred during the quarter ended
March 31, 2010 that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
PART II. OTHER
INFORMATION
Item 1. Legal
Proceedings
General We are party to various legal proceedings,
including actions that are or purport to be class actions,
resulting from ordinary business activities relating to our
current
and/or
former operations. These actions generally 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. However, losses may be material to our results of
operations for any particular future period depending on our
income level for that period. Where appropriate, insurance
carriers have been notified.
Card Services Litigation Since June 2005, HSBC
Finance Corporation, HSBC North America, and HSBC, as well as
other banks and Visa Inc. and Master Card Incorporated, were
named as defendants in four class actions filed in Connecticut
and the Eastern District of New York; Photos Etc. Corp. et
al. v. Visa U.S.A., Inc., et al. (D. Conn.
No. 3:05-CV-01007
(WWE)): National Association of Convenience Stores, et
al. v. Visa U.S.A., Inc., et al. (E.D.N.Y.
No. 05-CV
4520 (JG)); Jethro Holdings, Inc., et al. v. Visa
U.S.A., Inc. et al. (E.D.N.Y.
No. 05-CV-4521
(JG)); and American Booksellers Assn v. Visa
U.S.A., Inc. et al. (E.D.N.Y.
No. 05-CV-5391
(JG)). Numerous other complaints containing similar allegations
(in which no HSBC entity is named) were filed across the country
against Visa Inc., MasterCard Incorporated and other banks.
These actions principally allege that the imposition of a
no-surcharge rule by the associations
and/or the
establishment of the interchange fee charged for credit card
transactions causes the merchant discount fee paid by retailers
to be set at supracompetitive levels in violation of the Federal
antitrust laws. These suits have been consolidated and
transferred to the Eastern District of New York. The
consolidated case is: In re Payment Card Interchange Fee and
Merchant Discount Antitrust Litigation, MDL 1720, E.D.N.Y. A
consolidated, amended complaint was filed by the plaintiffs on
April 24, 2006 and a second consolidated amended complaint
was filed on January 29, 2009. The parties are engaged in
discovery and motion practice. 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 related to
certain MasterCard and Visa co-branding and affinity credit card
relationships and a third party marketing
108
HSBC Finance Corporation
agreement, which were entered into between 1992 and 1999. All
were part of our Card Services operations. As a result of the
restatement and other corporate events, including, e.g., the
2002 settlement with 46 states and the District of Columbia
relating to real estate lending practices, Household
International and certain former officers were named as
defendants in a class action lawsuit, Jaffe v. Household
International, Inc., et al., No. 02 C 5893 (N.D. Ill.,
filed August 19, 2002).
The complaint, as narrowed by Court rulings, asserted claims
under § 10 and § 20 of the Securities
Exchange Act of 1934, on behalf of all persons who acquired and
disposed of Household International common stock between
July 30, 1999 and October 11, 2002. The claims alleged
that the defendants knowingly or recklessly made false and
misleading statements of material facts relating to
Households Consumer Lending operations, including
collections, sales and lending practices, some of which
ultimately led to the 2002 state settlement agreement, and
facts relating to accounting practices evidenced by the
restatement. The plaintiffs claim that these statements were
made in conjunction with the purchase or sale of securities,
that they justifiably relied on one or more of those statements,
that the false statement(s) caused the plaintiffs damages,
and that some or all of the defendants should be liable for
those damages.
A jury trial began on March 30, 2009 and closing arguments
concluded on April 30, 2009. The jury deliberated over the
course of four days before rendering a verdict on May 7
partially in favor of the plaintiffs with respect to Household
International and three former officers. The jury found 17 of 40
alleged misstatements actionable and that the first actionable
statement occurred on March 23, 2001. This effectively
excludes claims for purchases made prior to that date. We filed
a motion requesting that the Court set aside the jurys
verdict and enter a verdict in favor of all defendants on all
claims and a motion for a new trial.
A second phase of the case will proceed to determine the actual
damages, if any, due to the plaintiff class. Although the jury
determined that the loss per common share attributable to the
alleged misstatements varied by day and ranged from -$4.60 (no
loss) to $23.94, how this stage of the case will proceed has not
been determined by the Court. Matters to be determined include,
but are not limited to, whether there will be discovery to
determine if shareholders actually relied upon statements found
to be misleading, the process for determining which shareholders
purchased securities on or after March 23, 2001 and sold
during the relevant period (the sale window potentially
extending up to 90 days after October 11, 2002), as
well as other procedural matters and eligibility criteria. The
parties have submitted briefs outlining each sides
proposed structure for this second phase of the case. Given the
complexity associated with this phase of the case, it is
impossible at this time to determine whether any damages will
eventually be awarded, or the amount of any such award.
There are also several motions pending that would dispose of the
case prior to a determination of actual damages, including
defendants motion for summary judgment as filed in May
2008 and motions to direct a verdict made at the close of both
the plaintiffs and defendants cases. When any final
judgment is entered by the District Court at the conclusion of
the damages phase of the case, the parties have 30 days in
which to appeal the verdict to the Seventh Circuit Court of
Appeals.
Despite the verdict at the District Court level, we continue to
believe, after consultation with counsel, that neither Household
nor its former officers engaged in any wrongdoing and that we
will either prevail on our outstanding motions or that the
Seventh Circuit will reverse the trial Court verdict upon appeal.
Governmental and Regulatory Matters. HSBC
Finance and certain of its affiliates and current and former
employees are or may be subject to formal and informal
investigations, as well as subpoenas
and/or
requests for information, from various governmental and
self-regulatory agencies relating to our business activities. In
all such cases, HSBC Finance and its affiliates cooperate fully
and engage in efforts to resolve these matters.
109
HSBC Finance Corporation
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
|
110
HSBC Finance Corporation
Index
Account management policies and practices 91
Assets:
by business
segment 39
fair value of
financial assets 46
fair value
measurements 43
nonperforming 90
Balance sheet (consolidated) 4
Basis of reporting 8, 60
Business:
consolidated
performance review 55
focus 54
Capital:
2010 funding
strategy 101
common equity
movements 99
consolidated statement
of changes 5
selected capital
ratios 99
Cards and Retail Services business segment 38, 77
Cash flow (consolidated) 6
Cautionary statement regarding forward-looking
statements 52
Consumer business segment 38, 80
Contingent liabilities 50
Controls and procedures 108
Credit quality 59, 82
Credit risk:
component of fair
value option 29, 72
concentration 19
management 104
Current environment 52
Deferred tax assets 31
Derivatives:
cash flow
hedges 25
fair value
hedges 24
income
(expense) 71
non-qualifying
hedges 26
notional
value 28
Equity:
consolidated statement
of changes 5
ratios 99
Equity securities
available-for-sale 12
Estimates and assumptions 8
Executive overview 52
Fair value measurements:
assets and liabilities
recorded at fair value on a
recurring
basis 44
assets and liabilities
recorded at fair value on a
non-recurring
basis 46
control over valuation
process 101
financial
instruments 47
hierarchy 102
transfers into/out of
level one and
level
two 45, 103
transfers into/out of
level two and
level
three 45, 103
valuation
techniques 48
Fee income 73
Financial highlights metrics 58
Financial liabilities:
designated at fair
value 28, 72
fair value of
financial liabilities 47
Forward looking statements 52
Funding 60, 101
Geographic concentration of receivables 97
Goodwill 22
Impairment:
available-for-sale
securities 14, 71
credit
losses 20, 56, 69
nonperforming
receivables 90
Income (loss) from financial instruments designated at
fair
value 29, 72
Income tax expense 30
Insurance:
policyholders benefits
expense 75
revenue 71
Intangible assets 22
Internal control 108
Interest income:
net interest
income 67
sensitivity 105
Key performance indicators 58
Legal proceedings 50, 108
Liabilities:
commercial
paper 98
commitments, lines of
credit 98
financial liabilities
designated at
fair
value 28, 72
long-term
debt 98
Liquidity and capital resources 97
Litigation 50, 108
Loans and advances see Receivables
Loan impairment charges see Provision for
credit
losses
Market risk 105
Market turmoil see Current Environment
Mortgage lending products 17, 64
Net interest income 67
New accounting pronouncements 51
Operating expenses 74
Operational risk 106
Other revenues 71
Pension and other postretirement benefits 32
Performance, developments and trends 55
Profit (loss) before tax:
by segment
IFRSs management basis 39
111
HSBC Finance Corporation
consolidated 3
Provision for credit losses 56, 69
Ratios:
capital 99
charge-off
(net) 88
credit loss reserve
related 84
earnings to fixed
charges Exhibit 12
efficiency 59,
75
financial 58
Re-aged receivables 95
Real estate owned 67
Receivables:
by
category 17, 64
by charge-off
(net) 88
by
delinquency 86
geographic
concentration 97
held for
sale 20, 66
modified and/or
re-aged 94
nonperforming 90
overall
review 64
risk
concentration 19, 97
troubled debt
restructures 18, 70, 91
Reconciliation to U.S. GAAP financial measures 107
Reconciliation of U.S. GAAP results to IFRSs 39,
61
Refreshed
loan-to-value 65
Related party transactions 33
Results of operations 67
Risk elements in the loan portfolio by product 19
Risk management:
credit 104
compliance 106
liquidity 104
market 105
operational 106
reputational 106
strategic 106
Securities:
fair
value 12, 44
maturity
analysis 16
Segment results IFRSs management basis:
card and retail
services 38, 77
consumer 38,
80
All Other
grouping 38
overall
summary 38, 76
Selected financial data 58
Sensitivity:
projected net interest
income 105
Special purpose entities 42
Statement of changes in shareholders
equity 5
Statement of changes in comprehensive income 5
Statement of income (loss) 3
Strategic initiatives and focus 9, 54
Table of contents 2
Tangible common equity to tangible managed
assets 60,
99, 107
Troubled debt restructures 18, 70, 91
Variable interest entities 42
112
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.
Date: May 7, 2010
HSBC FINANCE CORPORATION
(Registrant)
Edgar D. Ancona
Senior Executive Vice President and
Chief Financial Officer
113
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
|