16th May 2005 11:15
HSBC Holdings PLC16 May 2005 PART 1 -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-Q --------------------- (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to________ COMMISSION FILE NUMBER 1-8198 --------------------- HSBC FINANCE CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 86-1052062 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 2700 SANDERS ROAD, PROSPECT HEIGHTS, ILLINOIS 60070 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (847) 564-5000 REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE --------------------- Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. (X) No ( ) Indicate by check mark whether the registrant is an accelerated filer (asdefined in Rule 12b-2 of the Exchange Act). Yes ( ) No (X) At April 30, 2005, there were 50 shares of the registrant's common stockoutstanding, all of which were owned indirectly by HSBC Holdings plc. THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONH(1)(A) AND (B) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THEREDUCED DISCLOSURE FORMAT.-------------------------------------------------------------------------------- HSBC FINANCE CORPORATION FORM 10-Q TABLE OF CONTENTS PART I. FINANCIAL INFORMATION-----------------------------------------------------------------------------------Item 1. Consolidated Financial Statements Statement of Income......................................... 3 Balance Sheet............................................... 4 Statement of Changes in Shareholder's Equity................ 5 Statement of Cash Flows..................................... 6 Notes to Consolidated Financial Statements.................. 7Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements.................................. 16 Executive Overview.......................................... 16 Basis of Reporting.......................................... 19 Receivables Review.......................................... 20 Results of Operations....................................... 21 Segment Results - Managed Basis............................. 27 Credit Quality.............................................. 31 Liquidity and Capital Resources............................. 37 Risk Management............................................. 41 Reconciliations to GAAP Financial Measures.................. 43Item 4. Controls and Procedures..................................... 47 PART II. OTHER INFORMATION-----------------------------------------------------------------------------------Item 5. Other Information........................................... 47Item 6. Exhibits.................................................... 47Signature.................................................................... 48 2 PART I. FINANCIAL INFORMATION--------------------------------------------------------------------------------ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS HSBC Finance Corporation--------------------------------------------------------------------------------CONSOLIDATED STATEMENT OF INCOME THREE MONTHS ENDED MARCH 31, 2005 2004----------------------------------------------------------------------------- (IN MILLIONS) Finance and other interest income........................... $2,950 $2,528Interest expense............................................ 1,062 708 ------ ------NET INTEREST INCOME......................................... 1,888 1,820Provision for credit losses................................. 841 928 ------ ------NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES....... 1,047 892 ------ ------Other revenues: Securitization revenue.................................... 85 348 Insurance revenue......................................... 221 211 Investment income......................................... 33 41 Derivative income......................................... 260 52 Fee income................................................ 306 265 Taxpayer financial services revenue....................... 243 206 Other income.............................................. 314 100 ------ ------TOTAL OTHER REVENUES........................................ 1,462 1,223 ------ ------Costs and expenses: Salaries and employee benefits............................ 497 485 Sales incentives.......................................... 82 78 Occupancy and equipment expenses.......................... 87 83 Other marketing expenses.................................. 180 132 Other servicing and administrative expenses............... 258 226 Support services from HSBC affiliates..................... 209 177 Amortization of intangibles............................... 107 116 Policyholders' benefits................................... 122 113 ------ ------TOTAL COSTS AND EXPENSES.................................... 1,542 1,410 ------ ------Income before income tax expense............................ 967 705Income tax expense.......................................... 341 235 ------ ------NET INCOME.................................................. $ 626 $ 470 ====== ====== The accompanying notes are an integral part of the consolidated financialstatements. 3 HSBC Finance Corporation-------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET MARCH 31, DECEMBER 31, 2005 2004----------------------------------------------------------------------------------------------- (IN MILLIONS, EXCEPT SHARE DATA) ASSETSCash........................................................ $ 622 $ 392Securities purchased under agreements to resell............. 282 2,651Securities.................................................. 3,990 4,327Receivables, net............................................ 110,132 104,815Intangible assets, net...................................... 2,594 2,705Goodwill.................................................... 6,835 6,856Properties and equipment, net............................... 481 487Real estate owned........................................... 509 587Derivative financial assets................................. 3,017 4,049Other assets................................................ 3,541 3,321 -------- --------TOTAL ASSETS................................................ $132,003 $130,190 ======== ========LIABILITIESDebt: Deposits.................................................. $ 42 $ 47 Commercial paper, bank and other borrowings............... 10,608 9,013 Due to affiliates......................................... 15,035 13,789 Long term debt (with original maturities over one year)... 83,191 85,378 -------- --------Total debt.................................................. 108,876 108,227Insurance policy and claim reserves......................... 1,310 1,303Derivative related liabilities.............................. 575 432Other liabilities........................................... 3,589 3,287 -------- -------- TOTAL LIABILITIES......................................... 114,350 113,249SHAREHOLDER'S EQUITYRedeemable preferred stock held by HSBC Investments (North America) Inc. ............................................ 1,100 1,100Common shareholder's equity: Common stock, $0.01 par value, 100 shares authorized, 50 shares issued...................................... - - Additional paid-in capital............................. 14,673 14,627 Retained earnings...................................... 1,179 571 Accumulated other comprehensive income................. 701 643 -------- --------TOTAL COMMON SHAREHOLDER'S EQUITY........................... 16,553 15,841 -------- --------TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY.................. $132,003 $130,190 ======== ======== The accompanying notes are an integral part of the consolidated financialstatements. 4 HSBC Finance Corporation-------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY THREE MONTHS ENDED MARCH 31, 2005 2004------------------------------------------------------------------------------- (IN MILLIONS) PREFERRED STOCK Balance at beginning and end of period.................... $ 1,100 $ 1,100 ======= =======COMMON SHAREHOLDER'S EQUITY ADDITIONAL PAID-IN CAPITAL Balance at beginning of period......................... $14,627 $14,645 Return of capital...................................... - (11) Employee benefit plans and other....................... 46 6 ------- ------- Balance at end of period............................... $14,673 $14,640 ------- ------- RETAINED EARNINGS Balance at beginning of period......................... $ 571 $ 1,303 Net income............................................. 626 470 Dividends: Preferred stock...................................... (18) (18) ------- ------- Balance at end of period............................... $ 1,179 $ 1,755 ------- ------- ACCUMULATED OTHER COMPREHENSIVE INCOME Balance at beginning of period......................... $ 643 $ 443 Net change in unrealized gains (losses) on: Derivatives classified as cash flow hedges........... 134 (17) Securities available for sale and interest-only strip receivables......................................... (16) 49 Foreign currency translation adjustments............... (60) 39 ------- ------- Other comprehensive income, net of tax................. 58 71 ------- ------- Balance at end of period............................... $ 701 $ 514 ------- -------TOTAL COMMON SHAREHOLDER'S EQUITY........................... $16,553 $16,909 ------- -------COMPREHENSIVE INCOME Net income................................................ $ 626 $ 470 Other comprehensive income................................ 58 71 ------- -------COMPREHENSIVE INCOME........................................ $ 684 $ 541 ======= ======= The accompanying notes are an integral part of the consolidated financialstatements. 5 HSBC Finance Corporation-------------------------------------------------------------------------------- STATEMENT OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 2005 2004--------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIESNet income.................................................. $ 626 $ 470Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for credit losses............................... 841 928 Insurance policy and claim reserves....................... (29) (36) Depreciation and amortization............................. 142 145 Net change in interest-only strip receivables............. 89 112 Net change in other assets................................ (235) (162) Net change in other liabilities........................... 382 350 Other, net................................................ (117) 93 -------- --------Net cash provided by (used in) operating activities......... 1,699 1,900 -------- --------CASH FLOWS FROM INVESTING ACTIVITIESSecurities: Purchased................................................. (178) (608) Matured................................................... 95 572 Sold...................................................... 34 59Net change in short-term securities available for sale...... 335 4,387Net change in securities purchased under agreements to resell.................................................... 2,369 -Receivables: Originations, net of collections.......................... (14,422) (10,927) Purchases and related premiums............................ (8) (33) Initial and fill-up securitizations....................... 2,957 7,942 Sales to affiliates....................................... 4,720 856Properties and equipment: Purchases................................................. (17) (12) Sales..................................................... 1 1 -------- --------Net cash provided by (used in) investing activities......... (4,114) 2,237 -------- --------CASH FLOWS FROM FINANCING ACTIVITIESDebt: Net change in short-term debt and deposits................ 1,593 (54) Net change in time certificates........................... (2) (133) Net change in due to affiliates........................... 1,430 (2,247) Long term debt issued..................................... 3,984 929 Long term debt retired.................................... (4,386) (2,861)Insurance: Policyholders' benefits paid.............................. (56) (31) Cash received from policyholders.......................... 84 29 -------- --------Net cash provided by (used in) financing activities......... 2,647 (4,368) -------- --------Effect of exchange rate changes on cash..................... (2) (33) -------- --------Net change in cash.......................................... 230 (264)Cash at beginning of period................................. 392 463 -------- --------CASH AT END OF PERIOD....................................... $ 622 $ 199 ======== ======== The accompanying notes are an integral part of the consolidated financialstatements. 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND BASIS OF PRESENTATION-------------------------------------------------------------------------------- HSBC Finance Corporation is an indirect wholly owned subsidiary of HSBC NorthAmerica Holdings Inc. ("HNAH"), which is a wholly owned subsidiary of HSBCHoldings plc ("HSBC"). The accompanying unaudited interim consolidated financialstatements of HSBC Finance Corporation and its subsidiaries have been preparedin accordance with accounting principles generally accepted in the United Statesof America ("U.S. GAAP") for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they donot include all of the information and footnotes required by generally acceptedaccounting principles for complete financial statements. In the opinion ofmanagement, all normal and recurring adjustments considered necessary for a fairpresentation of financial position, results of operations and cash flows for theinterim periods have been made. HSBC Finance Corporation may also be referred toin this Form 10-Q as "we," "us" or "our." These unaudited interim consolidatedfinancial statements should be read in conjunction with our Annual Report onForm 10-K for the year ended December 31, 2004 (the "2004 Form 10-K"). Certainreclassifications have been made to prior period amounts to conform to thecurrent period presentation. The preparation of financial statements in conformity with U.S. GAAP requiresthe use of estimates and assumptions that affect reported amounts anddisclosures. Actual results could differ from those estimates. Interim resultsshould not be considered indicative of results in future periods. Interim financial statement disclosures required by U.S. GAAP regarding segmentsare included in the Management's Discussion and Analysis of Financial Conditionand Results of Operations ("MD&A") section of this Form 10-Q. 2. SECURITIES-------------------------------------------------------------------------------- Securities consisted of the following available-for-sale investments: GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIRMARCH 31, 2005 COST GAINS LOSSES VALUE--------------------------------------------------------------------------------------------------- (IN MILLIONS) Corporate debt securities............................ $2,299 $21 $(37) $2,283Money market funds................................... 208 - - 208Time deposits........................................ 256 - - 256U.S. government and federal agency debt securities... 601 - (5) 596Non-government mortgage backed securities............ 68 - (1) 67Other................................................ 543 2 (6) 539 ------ --- ---- ------Subtotal............................................. 3,975 23 (49) 3,949Accrued investment income............................ 41 - - 41 ------ --- ---- ------Total securities available for sale.................. $4,016 $23 $(49) $3,990 ====== === ==== ====== 7 GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIRDECEMBER 31, 2004 COST GAINS LOSSES VALUE--------------------------------------------------------------------------------------------------- (IN MILLIONS) Corporate debt securities............................ $2,520 $27 $(14) $2,533Money market funds................................... 254 - - 254Time deposits........................................ 486 - - 486U.S. government and federal agency debt securities... 393 - (3) 390Non-government mortgage backed securities............ 74 - (1) 73Other................................................ 554 1 (3) 552 ------ --- ---- ------Subtotal............................................. 4,281 28 (21) 4,288Accrued investment income............................ 39 - - 39 ------ --- ---- ------Total securities available for sale.................. $4,320 $28 $(21) $4,327 ====== === ==== ====== A summary of gross unrealized losses and related fair values as of March 31,2005 and December 31, 2004, classified as to the length of time the losses haveexisted follows: LESS THAN ONE YEAR GREATER THAN ONE YEAR --------------------------------------- --------------------------------------- GROSS AGGREGATE GROSS AGGREGATE NUMBER OF UNREALIZED FAIR VALUE OF NUMBER OF UNREALIZED FAIR VALUE OFMARCH 31, 2005 SECURITIES LOSSES INVESTMENTS SECURITIES LOSSES INVESTMENTS------------------------------------------------------------------------------------------------------------------ (DOLLARS ARE IN MILLIONS) Corporate debt securities...... 566 $(32) $1,500 43 $(5) $97U.S. government and federal agency debt securities....... 66 (4) 318 17 (1) 31Non-government mortgage backed securities................... 15 (1) 24 - - -Other.......................... 57 (6) 263 - - - LESS THAN ONE YEAR GREATER THAN ONE YEAR --------------------------------------- --------------------------------------- GROSS AGGREGATE GROSS AGGREGATE NUMBER OF UNREALIZED FAIR VALUE OF NUMBER OF UNREALIZED FAIR VALUE OFDECEMBER 31, 2004 SECURITIES LOSSES INVESTMENTS SECURITIES LOSSES INVESTMENTS------------------------------------------------------------------------------------------------------------------ (IN MILLIONS) Corporate debt securities...... 254 $ (6) $ 636 218 $(8) $647U.S. government and federal agency debt securities....... - - - 61 (3) 278Non-government mortgage backed securities................... - - - 3 (1) 6Other.......................... 21 (2) 114 42 (1) 130 The gross unrealized losses on our securities available for sale have increasedduring the three months ended March 31, 2005 due to a general increase ininterest rates. The contractual terms of these securities do not permit theissuer to settle the securities at a price less than the par value of theinvestment. Since substantially all of these securities are rated A- or better,and because we have the ability and intent to hold these investments untilmaturity or a market price recovery, these securities are not considered otherthan temporarily impaired. 8 3. RECEIVABLES-------------------------------------------------------------------------------- Receivables consisted of the following: MARCH 31, DECEMBER 31, 2005 2004-------------------------------------------------------------------------------------- (IN MILLIONS) Real estate secured......................................... $ 68,486 $ 64,820Auto finance................................................ 8,107 7,544MasterCard(1)/Visa(1)....................................... 15,554 14,635Private label............................................... 3,130 3,411Personal non-credit card.................................... 16,608 16,128Commercial and other........................................ 276 317 -------- --------Total owned receivables..................................... 112,161 106,855Purchase accounting fair value adjustments.................. 172 201Accrued finance charges..................................... 1,466 1,394Credit loss reserve for owned receivables................... (3,581) (3,625)Unearned credit insurance premiums and claims reserves...... (615) (631)Interest-only strip receivables............................. 242 323Amounts due and deferred from receivable sales.............. 287 298 -------- --------Total owned receivables, net................................ 110,132 104,815Receivables serviced with limited recourse.................. 11,486 14,225 -------- --------Total managed receivables, net.............................. $121,618 $119,040 ======== ======== --------------- (1) MasterCard is a registered trademark of MasterCard International, Incorporated and Visa is a registered trademark of VISA USA, Inc. Purchase accounting fair value adjustments represent adjustments which have been"pushed down" to record our receivables at fair value on March 28, 2003, thedate we were acquired by HSBC. Interest-only strip receivables are reported net of our estimate of probablelosses under the recourse provisions for receivables serviced with limitedrecourse. Our estimate of the recourse obligation totaled $661 million at March31, 2005 and $890 million at December 31, 2004. Interest-only strip receivablesalso included fair value mark-to-market adjustments, which increased the balanceby $85 million at March 31, 2005 and $76 million at December 31, 2004. Receivables serviced with limited recourse consisted of the following: MARCH 31, DECEMBER 31, 2005 2004-------------------------------------------------------------------------------------- (IN MILLIONS) Real estate secured......................................... $ 73 $ 81Auto finance................................................ 2,175 2,679MasterCard/Visa............................................. 6,140 7,583Personal non-credit card.................................... 3,098 3,882 ------- -------Total....................................................... $11,486 $14,225 ======= ======= 9 The combination of receivables owned and receivables serviced with limitedrecourse, which comprises our managed portfolio, is shown below: MARCH 31, DECEMBER 31, 2005 2004-------------------------------------------------------------------------------------- (IN MILLIONS) Real estate secured......................................... $ 68,559 $ 64,901Auto finance................................................ 10,282 10,223MasterCard/Visa............................................. 21,694 22,218Private label............................................... 3,130 3,411Personal non-credit card.................................... 19,706 20,010Commercial and other........................................ 276 317 -------- --------Total....................................................... $123,647 $121,080 ======== ======== 4. CREDIT LOSS RESERVES-------------------------------------------------------------------------------- An analysis of credit loss reserves was as follows: THREE MONTHS ENDED MARCH 31, 2005 2004------------------------------------------------------------------------------ (IN MILLIONS) Owned receivables: Credit loss reserves at beginning of period............... $3,625 $ 3,793 Provision for credit losses............................... 841 928 Charge-offs............................................... (953) (1,050) Recoveries................................................ 90 80 Other, net................................................ (22) 2 ------ ------- Credit loss reserves for owned receivables................ 3,581 3,753 ------ -------Receivables serviced with limited recourse: Credit loss reserves at beginning of period............... 890 2,374 Provision for credit losses............................... 30 253 Charge-offs............................................... (271) (499) Recoveries................................................ 16 27 Other, net................................................ (4) 4 ------ ------- Credit loss reserves for receivables serviced with limited recourse............................................... 661 2,159 ------ -------Credit loss reserves for managed receivables................ $4,242 $ 5,912 ====== ======= Reductions to the provision for credit losses on owned receivables and overallreserve levels in 2005 reflect the impact of the bulk sale of our domesticprivate label receivables to HSBC Bank USA, National Association ("HSBC BankUSA") in December 2004. Reductions to the provision for credit losses andoverall reserve levels on receivables serviced with limited recourse in 2005reflect the impact of reduced securitization levels, including our decision tostructure new collateralized funding transactions as secured financings. Further analysis of credit quality and credit loss reserves and our credit lossreserve methodology are presented in Item 7, "Management's Discussion andAnalysis of Financial Condition and Results of Operations" of this Form 10-Qunder the caption "Credit Quality." 10 5. INTANGIBLE ASSETS-------------------------------------------------------------------------------- Intangible assets consisted of the following: ACCUMULATED CARRYING GROSS AMORTIZATION VALUE---------------------------------------------------------------------------------------------- (IN MILLIONS) MARCH 31, 2005Purchased credit card relationships and related programs.... $1,719 $412 $1,307Retail services merchant relationships...................... 270 109 161Other loan related relationships............................ 326 78 248Trade names................................................. 718 - 718Technology, customer lists and other contracts.............. 281 121 160 ------ ---- ------Total....................................................... $3,314 $720 $2,594 ====== ==== ====== DECEMBER 31, 2004Purchased credit card relationships and related programs.... $1,723 $355 $1,368Retail services merchant relationships...................... 270 95 175Other loan related relationships............................ 326 71 255Trade names................................................. 718 - 718Technology, customer lists and other contracts.............. 281 92 189 ------ ---- ------Total....................................................... $3,318 $613 $2,705 ====== ==== ====== Estimated amortization expense associated with our intangible assets for each ofthe following years is as follows: YEAR ENDING DECEMBER 31,--------------------------------------------------------------------------- (IN MILLIONS) 2005........................................................ $3512006........................................................ 3442007........................................................ 3262008........................................................ 2312009........................................................ 123Thereafter.................................................. 368 6. GOODWILL-------------------------------------------------------------------------------- Goodwill balances associated with our foreign businesses will change from periodto period due to movements in foreign exchange. Since the one-year anniversaryof our acquisition by HSBC was completed in the first quarter of 2004, nofurther acquisition-related adjustments to our goodwill balance will occur,except for changes in estimates of the tax basis in our assets and liabilitiesor other tax estimates recorded at the date of our acquisition by HSBC, pursuantto Statement of Financial Accounting Standards Number 109, "Accounting forIncome Taxes." During the first quarter of 2005, we reduced our goodwill balanceby approximately $2 million as a result of such changes in tax estimates. 7. INCOME TAXES-------------------------------------------------------------------------------- Our effective tax rates were as follows: Three months ended March 31, 2005........................... 35.3%Three months ended March 31, 2004........................... 33.3 11 The increase in the effective tax rate in the first quarter of 2005 isattributable to higher state tax rates and higher pretax income without acorresponding increase in low income housing tax credits. The effective tax ratediffers from the statutory federal income tax rate primarily because of theeffects of state and local income taxes and tax credits. 8. RELATED PARTY TRANSACTIONS-------------------------------------------------------------------------------- In the normal course of business, we conduct transactions with HSBC and itssubsidiaries. These transactions include funding arrangements, purchases andsales of receivables, servicing arrangements, information technology services,item and statement processing services, banking and other miscellaneousservices. The following tables present related party balances and the income and(expense) generated by related party transactions: MARCH 31, DECEMBER 31, 2005 2004-------------------------------------------------------------------------------------- (IN MILLIONS) ASSETS, (LIABILITIES) AND EQUITY:Derivative financial assets, net............................ $ 2,368 $ 3,297Other assets................................................ 1,007 604Due to affiliates........................................... (15,035) (13,789)Other liabilities........................................... (144) (168)Preferred stock............................................. 1,100 1,100 THREE MONTHS THREE MONTHS ENDED ENDED MARCH 31, MARCH 31, 2005 2004----------------------------------------------------------------------------------------- (IN MILLIONS) INCOME/(EXPENSE):Interest expense on borrowings from HSBC and subsidiaries... $(151) $ (53)Interest income on HSBC USA, Inc. advances.................. 4 -HSBC Bank USA: Real estate secured servicing revenues.................... 5 2 Real estate secured sourcing, underwriting and pricing revenues............................................... - 1 Gain on daily sale of domestic private label receivable originations........................................... 92 - Gain on sale of real estate secured and MasterCard/Visa receivables............................................ 8 15 Taxpayer financial services loan origination fees......... (14) - Other servicing, processing, origination and support revenues............................................... 100 3Support services from HSBC affiliates, primarily HSBC Technology and Services (USA) Inc. ....................... (209) (177)HSBC Technology and Services (USA) Inc.: Rental revenue............................................ 10 8 Administrative services revenue........................... 5 4Other income from HSBC affiliates........................... 2 - The notional value of derivative contracts outstanding with HSBC subsidiariestotaled $61.8 billion at March 31, 2005 and $62.6 billion at December 31, 2004.Affiliate swap counterparties have provided collateral in the form ofsecurities, which are not recorded on our balance sheet and totaled $1.7 billionat March 31, 2005 and $2.2 billion at December 31, 2004. We have extended a line of credit of $2 billion to HSBC USA, Inc. at interestrates comparable to third-party rates for a line of credit with similar terms.The balance outstanding under this line was $.6 billion at March 31, 2005 andDecember 31, 2004 and is included in other assets. Interest income associatedwith 12 this line of credit is recorded in interest income and reflected as interestincome on HSBC USA, Inc. advances in the table above. We extended a line of credit of $.4 billion to HSBC Investments (North America)Inc. on March 31, 2005 at interest rates comparable to third-party rates for aline of credit with similar terms. The entire $.4 billion line of credit wasoutstanding at March 31, 2005 and is included in other assets. As of the date ofthis filing, this line of credit is due on demand but no later than June 2,2005. Due to affiliates also includes amounts owed to subsidiaries of HSBC (other thanpreferred stock). This funding was at interest rates (both the underlyingbenchmark rate and credit spreads) comparable to third-party rates for debt withsimilar maturities. At March 31, 2005, we had revolving credit facilities of $2.5 billion from HSBCdomestically and $10.0 billion from HSBC in the U.K., of which $7.2 billion wasoutstanding under the U.K. lines and no balances were outstanding on thedomestic lines. As of December 31, 2004, $7.4 billion was outstanding under theU.K. lines and no balances were outstanding on the domestic lines. Annualcommitment fee requirements to support availability of these lines are paid on aquarterly basis. Expense recognized for commitment fees totaled $.6 million forthe three months ended March 31, 2005 and $.4 million for the three months endedMarch 31, 2004 and are included as a component of interest expense. In the first quarter of 2004, we sold approximately $.9 billion of real estatesecured receivables from our mortgage services business to HSBC Bank USA andrecorded a pre-tax gain of $15 million on the sale. Under a separate servicingagreement, we have agreed to service all real estate secured receivables sold toHSBC Bank USA including all future business they purchase from ourcorrespondents. As of March 31, 2005, we were servicing $5.3 billion of realestate secured receivables for HSBC Bank USA. We also received fees from HSBCBank USA pursuant to a service level agreement under which we sourced,underwrote and priced $.6 billion of real estate secured receivables purchasedby HSBC Bank USA during the three months ended March 31, 2005 and $.4 billionduring the three months ended March 31, 2004. These revenues have been recordedas other income and are reflected as real estate secured servicing revenues andreal estate secured sourcing, underwriting and pricing revenues from HSBC BankUSA in the above table. In December 2004, we sold our domestic private label receivable portfolio,including the retained interests associated with our securitized domesticprivate label receivables, to HSBC Bank USA. We continue to service the soldprivate label receivables and receive servicing fee income from HSBC Bank USAfor these services. As of March 31, 2005, we were servicing $14.8 billion ofdomestic private label receivables for HSBC Bank USA. Servicing fee income fromHSBC Bank USA received for the three month period ended March 31, 2005 of $92million is included in the table above as a component of other servicing,processing, origination and support revenues from HSBC Bank USA. We continue tomaintain the related customer account relationships and, therefore, sell newdomestic private label receivable originations to HSBC Bank USA on a dailybasis. Gains on the sale of $4,253 million of private label receivables to HSBCBank USA in the first quarter of 2005 are reflected in the table above and arerecorded in other income. Under several service level agreements, we also provide services to HSBC BankUSA. These services include credit card servicing and processing activitiesthrough our credit card services business, loan origination and servicingthrough our auto finance business and other operational and administrativesupport. Fees received for these services are reported as other income and areincluded in the table above as a component of other servicing, processing,origination and support revenues from HSBC Bank USA. During 2003, Household Capital Trust VIII issued $275 million in mandatorilyredeemable preferred securities to HSBC. Interest expense recorded on theunderlying junior subordinated notes totaled $4 million during both three monthperiods ended March 31, 2005 and 2004 and is included in interest expense onborrowings from HSBC and subsidiaries in the table above. During the third quarter of 2004, our Canadian business began to originate andservice auto loans for an HSBC affiliate in Canada. Fees received for theseservices of $2 million for the three months ended 13 March 31, 2005 are included in other income and are reflected in other incomefrom HSBC affiliates in the above table. Effective October 1, 2004, HSBC Bank USA became the originating lender for loansinitiated by our taxpayer financial services business for clients of variousthird party tax preparers. We purchase the loans originated by HSBC Bank USAdaily for a fee. Origination fees paid to HSBC Bank USA totaled $14 millionduring the three months ended March 31, 2005 and are included as an offset totaxpayer financial services revenue and are reflected as taxpayer financialservices loan origination fees in the above table. On July 1, 2004, HSBC Bank Nevada, National Association ("HBNV"), formerly knownas Household Bank (SB), N.A., purchased the account relationships associatedwith $970 million of MasterCard and Visa credit card receivables from HSBC BankUSA for approximately $99 million, which are included in intangible assets. Thereceivables continue to be owned by HSBC Bank USA. Originations of new accountsand receivables are made by HBNV and new receivables are sold daily to HSBC BankUSA. Gains on the sale of $467 million of credit card receivables to HSBC BankUSA in the first quarter of 2005 are reflected in the table above and arerecorded in other income. Effective January 1, 2004, our technology services employees, as well astechnology services employees from other HSBC entities in North America, weretransferred to HSBC Technology and Services (USA) Inc. ("HTSU"). In addition,technology related assets and software purchased subsequent to January 1, 2004are generally purchased and owned by HTSU. Technology related assets owned byHSBC Finance Corporation prior to January 1, 2004 currently remain in place andwere not transferred to HTSU. In addition to information technology services,HTSU also provides certain item processing and statement processing activitiesto us pursuant to a master service level agreement. Support services from HSBCaffiliates includes services provided by HTSU as well as banking services andother miscellaneous services provided by HSBC Bank USA and other subsidiaries ofHSBC. We also receive revenue from HTSU for certain office space which we haverented to them, which has been recorded as a reduction of occupancy andequipment expenses, and for certain administrative costs, which has beenrecorded as other income. In addition, we utilize a related HSBC entity to lead manage substantially allongoing debt issuances. Fees paid for such services totaled approximately $3million for the three months ended March 31, 2005 and approximately $.3 millionfor the three months ended March 31, 2004. These fees are amortized over thelife of the related debt as a component of interest expense. 9. PENSION AND OTHER POSTRETIREMENT BENEFITS-------------------------------------------------------------------------------- In November 2004, sponsorship of the U.S. defined benefit pension plan of HSBCFinance Corporation and the U.S. defined benefit pension plan of HSBC Bank USAwas transferred to HNAH. Effective January 1, 2005, the two separate plans weremerged into a single defined benefit pension plan which facilitates thedevelopment of a unified employee benefit policy and unified employee benefitplan administration for HSBC affiliates operating in the U.S. As a result, thepension liability relating to our U.S. defined benefit plan was transferred, netof tax, to HNAH as a capital transaction in the first quarter of 2005. 14 Components of net periodic benefit cost related to our defined benefit pensionplans and our postretirement benefits other than pensions were as follows: OTHER POSTRETIREMENT PENSION BENEFITS BENEFITS ---------------- --------------THREE MONTHS ENDED MARCH 31, 2005 2004 2005 2004------------------------------------------------------------------------------------------------ (IN MILLIONS) Service cost - benefits earned during the period............ $ 13 $ 14 $ 1 $ 1Interest cost............................................... 15 13 4 3Expected return on assets................................... (22) (23) - -Recognized (gains) losses................................... 1 (1) - - ---- ---- ----- -----Net periodic benefit cost................................... $ 7 $ 3 $ 5 $ 4 ==== ==== ===== ===== 10. NEW ACCOUNTING PRONOUNCEMENTS-------------------------------------------------------------------------------- In March 2004, the Financial Accounting Standards Board ("FASB") reached aconsensus on Emerging Issues Task Force 03-1, "The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments"("EITF 03-1"). EITF 03-1 provides guidance for determining when an investment isimpaired and whether the impairment is other than temporary. EITF 03-1 alsoincorporates into its consensus the required disclosures about unrealized losseson investments announced by the EITF in late 2003 and adds new disclosurerequirements relating to cost-method investments. The new disclosurerequirements are effective for annual reporting periods ending after June 15,2004 and the new impairment accounting guidance was to become effective forreporting periods beginning after June 15, 2004. In September 2004, the FASBdelayed the effective date of EITF 03-1 for measurement and recognition ofimpairment losses until implementation guidance is issued. We do not expect theadoption of the impairment guidance contained in EITF 03-1 to have a materialimpact on our financial position or results of operations. In December 2004, the FASB issued FASB Statement No. 123(Revised), "Share-BasedPayment," ("SFAS No. 123R"). SFAS No. 123R requires public entities to measurethe cost of stock-based compensation based on the grant date fair value of theaward as well as other additional disclosure requirements. On March 28, 2005,the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107which amended the compliance date to allow public companies to comply with theprovisions of SFAS No. 123R at the beginning of their next fiscal year thatbegins after June 15, 2005, instead of the next reporting period as originallyrequired by SFAS No. No. 123R. Because we currently apply the fair value methodof accounting for all equity based awards, the adoption of SFAS 123R will nothave a significant effect on the results of our operations or other cash flows. 15 HSBC Finance Corporation.-------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-------------------------------------------------------------------------------- FORWARD-LOOKING STATEMENTS-------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results ofOperations ("MD&A") should be read in conjunction with the consolidatedfinancial statements, notes and tables included elsewhere in this report andwith our Annual Report on Form 10-K for the year ended December 31, 2004 (the"2004 Form 10-K"). MD&A may contain certain statements that may beforward-looking in nature within the meaning of the Private SecuritiesLitigation Reform Act of 1995. Our results may differ materially from thosenoted in the forward-looking statements. Words such as "believe", "expects","estimates", "targeted", "anticipates", "goal" and similar expressions areintended to identify forward-looking statements but should not be considered asthe only means through which these statements may be made. Statements that arenot historical facts, including statements about management's beliefs andexpectations, are forward-looking statements which involve inherent risks anduncertainties and are based on current views and assumptions. A number offactors could cause actual results to differ materially from those contained inany forward-looking statements. For a list of important factors that may affectour actual results, see Cautionary Statement on Forward Looking Statements inPart I, Item 1 of our 2004 Form 10-K. EXECUTIVE OVERVIEW-------------------------------------------------------------------------------- HSBC Finance Corporation is an indirect wholly owned subsidiary of HSBC Holdingsplc ("HSBC"). HSBC Finance Corporation may also be referred to in MD&A as "we","us", or "our". In addition to owned basis reporting, we also monitor ouroperations and evaluate trends on a managed basis (a non-GAAP financialmeasure), which assumes that securitized receivables have not been sold and arestill on our balance sheet. See "Basis of Reporting" for further discussion ofthe reasons we use this non-GAAP financial measure. In measuring our results, management's primary focus is on managed receivablesgrowth and net income. Net income was $626 million for the quarter ended March31, 2005, an increase of 33 percent, compared to net income of $470 million inthe prior year quarter. The increase in net income was primarily due to higherother revenues, lower provision for credit losses, higher net interest incomeand higher taxpayer financial services ("TFS") revenue, partially offset byhigher operating expenses. The increase in other revenues was due to higherderivative income resulting from increases in interest rates associated with theforward yield curve during the current quarter which significantly increased thevalue of our pay fixed/receive variable interest rate swaps. In addition, higherother income also contributed to increases in other revenues primarily due tothe gains on daily sales of domestic private label receivable originations andfees earned for servicing the sold domestic private label receivables resultingfrom the sale of this portfolio to HSBC Bank USA in December 2004. Theseincreases were partially offset by lower securitization revenue due to reducedRelated Shares:
HSBC Holdings