HSBC Finance Corp 06 10-K P5
HSBC Holdings PLC
05 March 2007
The following table summarizes information about stock options outstanding under
the Group Share Option Plan at December 31, 2006.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE OUTSTANDING PRICE
-------------------------------------------------------------------------------------------------------
$12.51-15.00............................ 2,181,000 7.34 14.37 - $ -
$15.01-17.50............................ 3,879,800 6.85 15.31 2,909,850 $15.31
The fair value of each option granted under the Group Share Option Plan in 2004,
measured at the grant date, was calculated using a binomial lattice methodology
that is based on the underlying assumptions of the Black-Scholes option pricing
model. When modeling options with vesting that are dependent on attainment of
certain performance conditions over a period of time, these performance targets
are incorporated into the model using Monte-Carlo simulation. The expected life
of options depends on the behavior of option holders, which is incorporated into
the option model consistent with historic observable data. The fair values are
inherently subjective and uncertain due to the assumptions made and the
limitations of the model used. The significant weighted average assumptions used
to estimate the fair value of the options granted by year are as follows:
2006 2005 2004
----------------------------------------------------------------------------------------
Risk-free interest rate..................................... - - 4.9%
Expected life............................................... - - 6.9 years
Expected volatility......................................... - - 25.0%
Prior to our acquisition by HSBC, certain employees were eligible to participate
in the former Household stock option plan. Employee stock options generally
vested equally over four years and expired 10 years from the date of grant. Upon
completion of our acquisition by HSBC, all options granted prior to November
2002 vested and became outstanding options to purchase HSBC ordinary shares.
Options granted under the former Household plan subsequent to October 2002 were
converted into options to purchase ordinary shares of HSBC, but did not vest
under the change in control. Compensation expense related to the former
Household
157
plan totaled $3 million in 2006, $6 million in 2005 and $8 million in 2004. All
shares under the former Household plan fully vested in 2006.
Information with respect to stock options granted under the former Household
plan is as follows:
2006 2005 2004
---------------------- ---------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
HSBC AVERAGE HSBC AVERAGE HSBC AVERAGE
ORDINARY PRICE PER ORDINARY PRICE PER ORDINARY PRICE PER
SHARES SHARE SHARES SHARE SHARES SHARE
----------------------------------------------------------------------------------------------------
Outstanding at beginning
of year................. 36,032,006 $16.09 38,865,993 $15.71 45,194,343 $14.76
Granted................... - - - - - -
Exercised................. (9,825,954) 12.73 (2,609,665) 10.92 (5,780,935) 8.43
Transferred in/(out)...... 47,580 8.62 (142,292) 12.15 (517,321) 14.58
Expired or canceled....... (258,043) 16.78 (82,030) 7.97 (30,094) 10.66
---------- ------ ---------- ------ ---------- ------
Outstanding at end of
year.................... 25,995,589 $17.34 36,032,006 $16.09 38,865,993 $15.71
========== ====== ========== ====== ========== ======
Exercisable at end of
year.................... 25,995,589 $17.34 34,479,337 $16.21 35,373,778 $16.21
========== ====== ========== ====== ========== ======
The transfers shown above primarily relate to employees who have transferred
between HTSU and us during each year and to certain of our U.K. employees who
were transferred to HBEU as part of the sale of our U.K. credit card business in
December 2005.
The following table summarizes information about the number of HSBC ordinary
shares subject to outstanding stock options under the former Household plan, at
December 31, 2006:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE OUTSTANDING PRICE
-------------------------------------------------------------------------------------------------------
$1.00 - $5.00........................... 8,576 1.64 1.88 8,576 1.88
$5.01 - $10.00.......................... 465,504 .86 9.38 465,504 9.38
$10.01 - $12.50......................... 3,106,302 5.67 10.68 3,106,302 10.68
$12.51 - $15.00......................... 2,920,776 1.79 13.90 2,920,776 13.90
$15.01 - $17.50......................... 5,799,498 2.64 16.97 5,799,498 16.97
$17.51 - $20.00......................... 6,287,589 3.84 18.41 6,287,589 18.41
$20.01 - $25.00......................... 7,407,344 4.87 21.37 7,407,344 21.37
RESTRICTED SHARE PLANS Subsequent to our acquisition by HSBC, key employees are
also provided awards in the form of restricted shares ("RSRs") under HSBC's
Restricted Share Plan prior to 2005 and under the Group Share Plan beginning in
2005. Annual awards to employees in 2005 and 2006 are fully vested after three
years. We also issue a small number of off-cycle grants each year for
recruitment, retention and reward. These RSR awards vest over a varying period
of time depending on the nature of the award, the longest of which vests over a
five year period. Annual awards to employees in 2004 vest over five years
contingent upon the achievement of certain company performance targets.
158
Information with respect to RSRs awarded under HSBC's Restricted Share
Plan/Group Share Plan, all of which are in HSBC ordinary shares, is as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2006 2005 2004
--------------------------------------------------------------------------------------------------
RSRs awarded.......................................... 4,959,838 6,669,152 2,996,878
Weighted-average fair market value per share.......... $ 16.96 $ 15.86 $ 15.09
RSRs outstanding at December 31....................... 14,326,693 11,787,706 7,030,688
Compensation cost: (in millions)
Pre-tax............................................. $ 82 $ 42 $ 17
After-tax........................................... 52 27 11
Prior to the merger, Household's executive compensation plans also provided for
issuance of RSRs which entitled an employee to receive a stated number of shares
of Household common stock if the employee satisfied the conditions set by the
Compensation Committee for the award. Upon completion of the merger with HSBC,
all RSRs granted under the former Household plan prior to November 2002 vested
and became outstanding shares of HSBC. RSRs granted under the former Household
plan subsequent to October 2002 were converted into rights to receive HSBC
ordinary shares. Upon vesting, the employee can elect to receive either HSBC
ordinary shares or American depository shares.
Information with respect to RSRs awarded under the pre-merger Household plan,
all of which are in HSBC ordinary shares, is as follows:
2006 2005 2004
----------------------------------------------------------------------------------------------
RSRs awarded.............................................. - - -
Weighted-average fair market value per share.............. $ - $ - $ -
RSRs outstanding at December 31........................... 653,900 1,309,073 2,238,628
Compensation cost: (in millions)
Pre-tax................................................. $ 4 $ 6 $ 8
After-tax............................................... 2 4 5
EMPLOYEE STOCK PURCHASE PLANS The HSBC Holdings Savings-Related Share Option
Plan (the "HSBC Sharesave Plan"), which replaced the former Household employee
stock purchase plan, allows eligible employees to enter into savings contracts
to save up to approximately $450 per month, with the option to use the savings
to acquire ordinary shares of HSBC at the end of the contract period. There are
currently three types of plans offered which allow the participant to select
saving contracts of a 1, 3 or 5 year length. The 1 year contract period was
offered for the first time in 2006. The options for the 1 year plan are
automatically exercised if the current share price is at or above the strike
price, which is at a 15 percent discount to the fair market value of the shares
on grant date. If the current share price is below the strike price, the
participants have the ability to exercise the option during the six months
following the maturity date if the share price rises. The options under the 3
and 5 year plans are exercisable within six months following the third or fifth
year, respectively, of the commencement of the related savings contract, at a 20
percent discount for options granted in 2006, 2005 and 2004. HSBC ordinary
shares granted and the related fair value of the options for 2006, 2005 and 2004
are presented below:
2006 2005 2004
------------------------ ------------------------ ------------------------
HSBC FAIR VALUE HSBC HSBC HSBC FAIR VALUE
ORDINARY PER SHARE OF ORDINARY ORDINARY ORDINARY PER SHARE OF
SHARES SHARES SHARES SHARES SHARES SHARES
GRANTED GRANTED GRANTED GRANTED GRANTED GRANTED
--------------------------------------------------------------------------------------------------------
1 year vesting period... 296,410 2.60 - - - -
3 year vesting period... 598,814 3.42 1,064,168 3.73 1,124,776 $3.44
5 year vesting period... 124,563 3.49 236,782 3.78 303,981 $3.80
159
Compensation expense related to the grants under the HSBC Sharesave Plan totaled
$5 million in 2006, $6 million in 2005 and $5 million in 2004.
The fair value of each option granted under the HSBC Sharesave Plan was
estimated as of the date of grant using a third party option pricing model:
2006 2005 2004
----------------------------------------------------------------------------------------------------
Risk-free interest rate........................ 5.0% 4.3% 4.9%
Expected life.................................. 1, 3 OR 5 YEARS 3 or 5 years 3 or 5 years
Expected volatility............................ 17.0% 20.0% 25.0%
20. PENSION AND OTHER POSTRETIREMENT BENEFITS
--------------------------------------------------------------------------------
DEFINED BENEFIT PENSION PLANS We adopted FASB Statement No. 158, "Employer's
Accounting for Defined Benefit Pension and Other Postretirement Plans," ("SFAS
No. 158") on December 31, 2006. SFAS No. 158 requires balance sheet recognition
of the funded status of pension and other postretirement benefits with the
offset to accumulated other comprehensive income. The adoption of SFAS No. 158
at December 31, 2006 had no impact on our pension liability. Deferred tax
liabilities increased by $1 million and shareholder's equity was decreased by $1
million through accumulated other comprehensive income.
In November 2004, sponsorship of the domestic defined benefit pension plan of
HSBC Finance Corporation and the domestic defined benefit pension plan of HSBC
Bank USA were transferred to HSBC North America. Effective January 1, 2005, the
two separate plans were combined into a single HSBC North America defined
benefit pension plan which facilitates the development of a unified employee
benefit policy and unified employee benefit plan administration for HSBC
companies operating in the United States. As a result, the pension liability
relating to our domestic defined benefit plan of $49 million, net of tax, was
transferred to HSBC North America as a capital transaction in the first quarter
of 2005.
The components of pension expense for the domestic defined benefit plan
reflected in our consolidated statement of income are shown in the table below.
The pension expense for the years ended December 31, 2006 and 2005 reflects the
portion of the pension expense of the combined HSBC North America pension plan
which has been allocated to HSBC Finance Corporation.
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2006 2005 2004
----------------------------------------------------------------------------------------------------
(IN MILLIONS)
Service cost - benefits earned during the period........ $48 $46 $52
Interest cost on projected benefit obligation........... 60 54 46
Expected return on assets............................... (77) (78) (82)
Amortization of prior service cost...................... - - -
Recognized losses (gains)............................... 15 4 (5)
--- --- ---
Pension expense......................................... $46 $26 $11
=== === ===
The information and activity presented below as of and for the years ended
December 31, 2006 and 2005 relates to the post-merger HSBC North America defined
benefit pension plan, unless noted otherwise. The information and activity
presented as of December 31, 2004 reflect the pre-merger HSBC Finance
Corporation domestic defined benefit pension plan balances and activity.
160
The assumptions used in determining pension expense of the domestic defined
benefit plan are as follows:
2006 2005 2004
-----------------------------------------------------------------------------------------------------
(POST-MERGER) (POST-MERGER) (PRE-MERGER)
Discount rate.......................................... 5.70% 6.00% 6.25%
Salary increase assumption............................. 3.75 3.75 3.75
Expected long-term rate of return on plan assets....... 8.00 8.33 8.75
HSBC North America retains both an unrelated third party as well as an affiliate
to provide investment consulting services. Given the plan's current allocation
of equity and fixed income securities and using investment return assumptions
which are based on long term historical data, the long term expected return for
plan assets is reasonable. The funded status of the post-merger HSBC North
America pension plan and not the interests of HSBC Finance Corporation at
December 31, 2006 was a liability of $130 million.
A reconciliation of beginning and ending balances of the fair value of plan
assets associated with the domestic defined benefit pension plan is shown below.
The activity shown below reflects the activity of the merged HSBC North America
plan.
YEAR ENDED
DECEMBER 31,
---------------
2006 2005
-----------------------------------------------------------------------------
(IN MILLIONS)
Fair value of plan assets at beginning of year.............. $2,383 $1,000
Transfer in of assets from the former HSBC Bank USA pension
plan...................................................... - 1,304
Actual return on plan assets................................ 246 168
Employer contributions...................................... - -
Benefits paid............................................... (62) (89)
------ ------
Fair value of plan assets at end of year.................... $2,567 $2,383
====== ======
It is currently not anticipated that employer contributions to the domestic
defined benefit plan will be made in 2007.
The allocation of the domestic pension plan assets at December 31, 2006 and 2005
is as follows:
PERCENTAGE OF
PLAN ASSETS AT
DECEMBER 31,
--------------
2006 2005
----------------------------------------------------------------------------
Equity securities........................................... 69% 69%
Debt securities............................................. 30 31
Other....................................................... 1 -
--- ---
Total....................................................... 100% 100%
=== ===
There were no investments in HSBC ordinary shares or American depository shares
at December 31, 2006 or 2005.
The primary objective of the defined benefit pension plan is to provide eligible
employees with regular pension benefits. Since the domestic plans are governed
by the Employee Retirement Income Security Act of 1974 ("ERISA"), ERISA
regulations serve as guidance for the management of plan assets. Consistent with
prudent standards of preservation of capital and maintenance of liquidity, the
goals of the plans are to earn the highest possible rate of return consistent
with the tolerance for risk as determined by the investment committee in its
role as a fiduciary. In carrying out these objectives, short-term fluctuations
in the value of plan assets are considered secondary to long-term investment
results. Both a third party and an affiliate are used to provide investment
consulting services such as recommendations on the type of funds to be invested
in
161
and monitoring the performance of fund managers. In order to achieve the return
objectives of the plans, the plans are diversified to ensure that adverse
results from one security or security class will not have an unduly detrimental
effect on the entire investment portfolio. Assets are diversified by type,
characteristic and number of investments as well as by investment style of
management organization. Equity securities are invested in large, mid and small
capitalization domestic stocks as well as international stocks.
A reconciliation of beginning and ending balances of the projected benefit
obligation of the domestic defined benefit pension plan is shown below and
reflects the projected benefit obligation of the merged HSBC North America plan.
YEAR ENDED
DECEMBER 31,
----------------
2006 2005
------------------------------------------------------------------------------
(IN MILLIONS)
Projected benefit obligation at beginning of year........... $2,530 $1,019
Transfer in from the HSBC Bank USA defined benefit plan..... - 1,174
Service cost................................................ 102 94
Interest cost............................................... 145 130
Actuarial (gains) losses.................................... (17) 202
Benefits paid............................................... (62) (89)
------ ------
Projected benefit obligation at end of year................. $2,698 $2,530
====== ======
Our share of the projected benefit obligation at December 31, 2006 is
approximately $1.1 billion. The accumulated benefit obligation for the
post-merger domestic HSBC North America defined benefit pension plan was $2.4
billion at December 31, 2006 and $2.2 billion at December 31, 2005. Our share of
the accumulated benefit obligation was approximately $1.0 billion at December
31, 2006 and $1.1 billion at December 31, 2005.
Estimated future benefit payments for the HSBC North America domestic defined
benefit plan and HSBC Finance Corporation's share of those payments are as
follows:
HSBC HSBC FINANCE
NORTH CORPORATION'S
AMERICA SHARE
-------------------------------------------------------------------------------------
(IN MILLIONS)
2007........................................................ $122 $ 61
2008........................................................ 130 65
2009........................................................ 137 68
2010........................................................ 144 71
2011........................................................ 156 76
2012-2016................................................... 927 433
The assumptions used in determining the projected benefit obligation of the
domestic defined benefit plans at December 31 are as follows:
2006 2005 2004
-----------------------------------------------------------------------------------------------------
(POST-MERGER) (POST-MERGER) (PRE-MERGER)
Discount rate.......................................... 5.90% 5.70% 6.00%
Salary increase assumption............................. 3.75 3.75 3.75
FOREIGN DEFINED BENEFIT PENSION PLANS We sponsor additional defined benefit
pension plans for our foreign based employees. Pension expense for our foreign
defined benefit pension plans was $2 million in 2006, $2 million in 2005 and $2
million in 2004. For our foreign defined benefit pension plans, the fair value
of plan assets was $160 million at December 31, 2006 and $135 million at
December 31, 2005. The projected benefit
162
obligation for our foreign defined benefit pension plans was $191 million at
December 31, 2006 and $164 million at December 31, 2005.
SUPPLEMENTAL RETIREMENT PLAN A non-qualified supplemental retirement plan is
also provided. This plan, which is currently unfunded, provides eligible
employees defined pension benefits outside the qualified retirement plan.
Benefits are based on average earnings, years of service and age at retirement.
The projected benefit obligation was $92 million at December 31, 2006 and $73
million at December 31, 2005. Pension expense related to the supplemental
retirement plan was $11 million in 2006 and 2005 and $19 million in 2004. An
additional minimum liability of $6 million related to this plan was recognized
in 2004 and reversed in 2005.
DEFINED CONTRIBUTION PLANS Various 401(k) savings plans and profit sharing plans
exist for employees meeting certain eligibility requirements. Under these plans,
each participant's contribution is matched by the company up to a maximum of 6
percent of the participant's compensation. Company contributions are in the form
of cash. Total expense for these plans for HSBC Finance Corporation was $98
million in 2006, $91 million in 2005 and $82 million in 2004.
Effective January 1, 2005, HSBC Finance Corporation's 401(k) savings plans
merged with the HSBC Bank USA's 401(k) savings plan under HSBC North America.
POSTRETIREMENT PLANS OTHER THAN PENSIONS Our employees also participate in plans
which provide medical, dental and life insurance benefits to retirees and
eligible dependents. These plans cover substantially all employees who meet
certain age and vested service requirements. We have instituted dollar limits on
our payments under the plans to control the cost of future medical benefits.
The net postretirement benefit cost included the following:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2006 2005 2004
----------------------------------------------------------------------------------------------------
(IN MILLIONS)
Service cost - benefits earned during the period........ $ 6 $ 5 $ 4
Interest cost........................................... 14 15 13
Expected return on assets............................... - - -
Amortization of prior service cost...................... - - -
Recognized (gains) losses............................... - - -
--- --- ---
Net periodic postretirement benefit cost................ $20 $20 $17
=== === ===
The assumptions used in determining the net periodic postretirement benefit cost
for our domestic postretirement benefit plans are as follows:
2006 2005 2004
----------------------------------------------------------------------------------------------------
(POST-MERGER) (POST-MERGER) (PRE-MERGER)
Discount rate......................................... 5.70% 6.00% 6.25%
Salary increase assumption............................ 3.75 3.75 3.75
163
A reconciliation of the beginning and ending balances of the accumulated
postretirement benefit obligation is as follows:
YEAR ENDED
DECEMBER 31,
-------------
2006 2005
---------------------------------------------------------------------------
(IN MILLIONS)
Accumulated benefit obligation at beginning of year......... $242 $254
Service cost................................................ 6 5
Interest cost............................................... 14 15
Foreign currency exchange rate changes...................... - 1
Actuarial gains............................................. (8) (15)
Benefits paid............................................... (22) (18)
---- ----
Accumulated benefit obligation at end of year............... $232 $242
==== ====
Our postretirement benefit plans are funded on a pay-as-you-go basis. We
currently estimate that we will pay benefits of approximately $16 million
relating to our postretirement benefit plans in 2007. The funded status of our
postretirement benefit plans was a liability of $232 million at December 31,
2006.
Estimated future benefit payments for our domestic plans are as follows:
(IN MILLIONS)
----------------------------------------------------------------------------
2007........................................................ $16
2008........................................................ 17
2009........................................................ 18
2010........................................................ 18
2011........................................................ 18
2012-2016................................................... 92
The assumptions used in determining the benefit obligation of our domestic
postretirement benefit plans at December 31 are as follows:
2006 2005 2002
--------------------------------------------------------------------------------
Discount rate............................................... 5.90% 5.70% 6.00%
Salary increase assumption.................................. 3.75 3.75 3.75
A 10.4 percent annual rate of increase in the gross cost of covered health care
benefits was assumed for 2007. This rate of increase is assumed to decline
gradually to 5.0 percent in 2014.
Assumed health care cost trend rates have an effect on the amounts reported for
health care plans. A one-percentage point change in assumed health care cost
trend rates would increase (decrease) service and interest costs and the
postretirement benefit obligation as follows:
ONE PERCENT ONE PERCENT
INCREASE DECREASE
---------------------------------------------------------------------------------------
(IN MILLIONS)
Effect on total of service and interest cost components..... $.5 $(.4)
Effect on postretirement benefit obligation................. 6 (6)
21. BUSINESS SEGMENTS
--------------------------------------------------------------------------------
We have three reportable segments: Consumer, Credit Card Services, and
International. Our segments are managed separately and are characterized by
different middle-market consumer lending products, origination processes, and
locations. Our Consumer segment consists of our Consumer Lending, Mortgage
Services, Retail Services, and Auto Finance businesses. Our Credit Card Services
segment consists of our domestic
164
MasterCard and Visa and other credit card business. Our International segment
consists of our foreign operations in Canada, the United Kingdom, the Republic
of Ireland and prior to November 9, 2006, our operations in Slovakia, the Czech
Republic and Hungary. The Consumer segment provides real estate secured,
automobile secured, personal non-credit card and private label loans. Loans are
offered with both revolving and closed-end terms and with fixed or variable
interest rates. Loans are originated through branch locations, correspondents,
mortgage brokers, direct mail, telemarketing, independent merchants or
automobile dealers. The Credit Card Services segment offers MasterCard and Visa
and other credit card loans throughout the United States primarily via strategic
affinity and co-branding relationships, direct mail, and our branch network to
non-prime customers. We also cross sell our credit cards to existing real estate
secured, private label and tax services customers. The International segment
offers secured and unsecured lines of credit and secured and unsecured
closed-end loans primarily in the United Kingdom, Canada and the Republic of
Ireland. In addition, the United Kingdom operation offers credit insurance in
connection with all loan products. All segments offer products and service
customers through the Internet. The All Other caption includes our insurance and
taxpayer financial services and commercial businesses, each of which falls below
the quantitative threshold tests under Statement of Financial Accounting
Standard No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"), for determining reportable segments, as well as
our corporate and treasury activities. 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.
The composition of our business segments is consistent with that reported in our
2005 Form 10-K. However, corporate goals and individual goals of executives are
currently calculated in accordance with IFRSs under which HSBC prepares its
consolidated financial statements. In 2006 we initiated a project to refine the
monthly internal management reporting process to place a greater emphasis on
IFRS management basis reporting (a non-U.S. GAAP financial measure) ("IFRS
Management Basis"). As a result, operating results are now 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
private label and real estate secured receivables transferred to HSBC Bank USA
have not been sold and remain on our balance sheet. Operations are monitored and
trends are evaluated on an IFRS Management Basis because the customer loan sales
to HSBC Bank USA were conducted primarily to appropriately fund prime customer
loans within HSBC and such customer loans continue to be managed and serviced by
us without regard to ownership. Therefore, we have changed the measurement of
segment profit to IFRS Management Basis in order to align with our revised
internal reporting structure. However, we continue to monitor capital adequacy,
establish dividend policy and report to regulatory agencies on an U.S. GAAP
basis. A summary of the significant differences between U.S. GAAP and IFRSs as
they impact our results are summarized below:
Securitizations - On an IFRSs basis, securitized receivables are treated as
owned. Any gains recorded under U.S. GAAP on these transactions are
reversed. An owned loss reserve is established. The impact from
securitizations resulting in higher net income under IFRSs is due to the
recognition of income on securitized receivables under U.S. GAAP in prior
periods.
Derivatives and hedge accounting (including fair value adjustments) - The
IFRSs derivative accounting model is similar to U.S. GAAP requirements, but
IFRSs does not permit use of the short-cut method of hedge effectiveness
testing. Unlike U.S. GAAP, IFRSs permits hedge accounting for hedges of
forecasted cash flows. The differences between U.S. GAAP and IFRSs relate
primarily to the fact that a different population of derivatives qualified
for hedge accounting under IFRSs than U.S. GAAP throughout the period and
that HSBC Finance Corporation elected the fair value option under IFRSs on
a significant portion of its fixed rate debt which was being hedged by
receive fixed swaps. U.S. GAAP does not currently permit the use of the
fair value option.
Intangible assets - Intangible assets under IFRSs are significantly lower
than that under U.S. GAAP as the newly created intangibles associated with
our acquisition by HSBC are reflected in goodwill for IFRSs therefore,
amortization of intangible assets is lower under IFRSs.
165
Purchase accounting adjustments - There are differences in the valuation of
assets and liabilities under U.K. GAAP (which were carried forward into
IFRSs) and U.S. GAAP which result in a different amortization for the HSBC
acquisition. Additionally there are differences in the valuation of assets
and liabilities under IFRSs and U.S. GAAP resulting from the Metris
acquisition in December 2005.
Deferred loan origination costs and premiums - Under IFRSs loan origination
cost deferrals are more stringent and result in lower costs being deferred
than permitted under U.S. GAAP. In addition, all deferred loan origination
fees, costs and loan premiums must be recognized based on the expected life
of the receivables under IFRSs as part of the effective interest
calculation while under U.S. GAAP they may be amortized on either a
contractual or expected life basis.
Credit loss impairment provisioning - IFRSs requires a discounted cash flow
methodology for estimating impairment on pools of homogeneous customer
loans which requires the incorporation of the time value of money relating
to recovery estimates. Also under IFRSs, future recoveries on charged-off
loans are accrued for on a discounted basis and interest is recorded based
on collectibility.
Loans held for resale - IFRSs requires loans held for resale to be treated
as trading assets and recorded at their fair market value. Under U.S. GAAP,
loans held for resale are designated as loans on the balance sheet and
recorded at the lower of amortized cost or market. Under U.S. GAAP, the
income and expenses related to loans held for sale are reported similarly
to loans held for investment. Under IFRSs, the income and expenses related
to loans held for sale are reported in other operating income.
Interest recognition - The calculation of effective interest rates under
IFRS 39 requires an estimate of "all fees and points paid or recovered
between parties to the contract" that are an integral part of the effective
interest rate be included. In 2006, we implemented a methodology for
calculating the effective interest rate for introductory rate credit card
receivables under IFRS over the expected life of the product. Also in 2006,
we implemented a methodology to include prepayment penalties as part of the
effective interest rate and recognize such penalties over the expected life
of the receivables. U.S. GAAP generally prohibits recognition of interest
income to the extent the net interest in the loan would increase to an
amount greater than the amount at which the borrower could settle the
obligation. Also under U.S. GAAP, prepayment penalties are generally
recognized as received.
Other - There are other less significant differences between IFRS and U.S.
GAAP relating to pension expense, changes in tax estimates and other less
significant items.
See "Basis of Reporting" in Item 7. Management's Discussion and Analysis of
Financial Condition and results of Operations in this 2006 Form 10-K for a more
complete discussion of differences between U.S. GAAP and IFRSs.
For comparability purposes, we have restated segment results for the year ended
December 31, 2005 to the IFRS Management Basis. When HSBC began reporting IFRS
results in 2005, it elected to take advantage of certain options available
during the year of transition from U.K. GAAP to IFRSs which provided, among
other things, an exemption from applying certain IFRSs retrospectively.
Therefore, the segment results reported for the year ended December 31, 2004 are
presented on an IFRS Management Basis excluding the retrospective application of
IAS 32, "Financial Instruments: Presentation" and IAS 39, "Financial
Instruments: Recognition and Measurement which took effect on January 1, 2005
and, as a result, the accounting for credit loss impairment provisioning,
deferred loan origination costs and premiums and derivative income for the year
ended December 31, 2004 remain in accordance with U.K. GAAP, HSBC's previous
basis of reporting. Credit loss provisioning under U.K. GAAP differs from IFRSs
in that IFRSs require a discounted cash flow methodology for estimating
impairment as well as accruing for future recoveries of charged-off loans on a
discounted basis. Under U.K. GAAP only sales incentives were treated as deferred
loan origination costs which results in lower deferrals than those reported
under IFRSs. Additionally, deferred costs and fees could be amortized over the
contractual life of the underlying receivable rather than the expected life as
required under IFRSs. Derivative and hedge accounting under U.K. GAAP differs
from U.S. GAAP in many respects, including the determination of when a hedge
exists as well as the reporting of gains and losses. For a more detailed
discussion of the differences between IFRSs and U.K. GAAP, see Exhibit 99.2 to
this Form 10-K.
166
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
CREDIT ADJUSTMENTS/ BASIS MANAGEMENT
CARD INTER- ALL RECONCILING CONSOLIDATED BASIS
IFRS
CONSUMER SERVICES NATIONAL OTHER ITEMS TOTALS ADJUSTMENTS(7)
ADJUSTMENTS(6)
------------------------------------------------------------------------------------------------------------------------
------
(IN MILLIONS)
YEAR ENDED DECEMBER 31, 2006
Net interest
income.............. $ 8,588 $ 3,151 $ 826 $ (768)(10) $ - $ 11,797 $ (1,254) $
(228)
Other operating
income (Total other
revenues)........... 909 2,360 283 705 (291)(2) 3,966 299
180
Loan impairment
charges (Provision
for credit
losses)............. 4,983 1,500 535 (2) 6(3) 7,022 (646)
225
Operating expenses
(Total costs and
expenses)........... 2,998 1,841 495 588 - 5,922 (22)
(28)
Income tax expense
(benefit)........... 528 784 37 (326) (110)(4) 913 (89)
20
Net income........... 988 1,386 42 (323) (187) 1,906 (198)
(265)
Operating net
income(1)........... 988 1,386 42 (401) (187) 1,828 (198)
(265)
Customer loans
(Receivables)....... 144,573 28,221 9,520 199 - 182,513 (21,372)
895
Assets............... 146,395 28,780 10,764 29,944 (8,197)(5) 207,686 (21,931)
(5,871)
Intersegment
revenues............ 242 20 33 (4) (291)(2) - -
-
Depreciation and
amortization........ 34 67 17 120 - 238 -
179
Goodwill............. 46 530 11 9,510 - 10,097 -
(3,087)
Expenditures for
long-lived
assets(8)........... 76 1 13 58 - 148 -
-
-------- ------- ------- ------- ------- -------- -------- -----
---
YEAR ENDED DECEMBER 31, 2005
Net interest
income.............. $ 8,401 $ 2,150 $ 971 $ (834) $ - $ 10,688 $ (1,438) $
(734)
Other operating
income (Total other
revenues)........... 814 1,892 770 602 (140)(2) 3,938 500
(443)
Loan impairment
charges (Provision
for credit
losses)............. 3,362 1,453 620 (41) 9(3) 5,403 (629)
(291)
Operating expenses
(Total costs and
expenses)........... 2,757 1,315 635 574 - 5,281 (23)
107
Income tax expense
(benefit)........... 1,115 461 5 (364) (54)(4) 1,163 (94)
(178)
Net income........... 1,981 813 481 (401) (95) 2,779 (192)
(815)
Operating net
income(1)........... 1,981 813 481 (401) (95) 2,779 (192)
(815)
Customer loans
(Receivables)....... 128,095 25,979 9,328 211 - 163,613 (20,306)
(3,394)
Assets............... 130,375 28,453 10,905 26,634 (8,220)(5) 188,147 (20,247)
(10,725)
Intersegment
revenues............ 108 21 17 (6) (140)(2) - -
-
Depreciation and
amortization........ 44 26 30 143 - 243 -
275
Goodwill............. - 521 11 9,464 - 9,996 -
(2,993)
Expenditures for
long-lived
assets(8)........... 24 525 32 28 - 609 -
2
-------- ------- ------- ------- ------- -------- -------- -----
---
IFRS U.S. GAAP
RECLASS- CONSOLIDATED
IFICATIONS(9) TOTALS
--------------------- -------------------------------
(IN MILLIONS)
YEAR ENDED DECEMBER 3
Net interest
income.............. $ (127) $ 10,188
Other operating
income (Total other
revenues)........... 978 5,423
Loan impairment
charges (Provision
for credit
losses)............. (37) 6,564
Operating expenses
(Total costs and
expenses)........... 888 6,760
Income tax expense
(benefit)........... - 844
Net income........... - 1,443
Operating net
income(1)........... - 1,365
Customer loans
(Receivables)....... - 162,036
Assets............... (425) 179,459
Intersegment
revenues............ - -
Depreciation and
amortization........ (32) 385
Goodwill............. - 7,010
Expenditures for
long-lived
assets(8)........... - 148
-------- --------
YEAR ENDED DECEMBER 3
Net interest
income.............. $ (132) $ 8,384
Other operating
income (Total other
revenues)........... 968 4,963
Loan impairment
charges (Provision
for credit
losses)............. 60 4,543
Operating expenses
(Total costs and
expenses)........... 776 6,141
Income tax expense
(benefit)........... - 891
Net income........... - 1,772
Operating net
income(1)........... - 1,772
Customer loans
(Receivables)....... - 139,913
Assets............... (506) 156,669
Intersegment
revenues............ - -
Depreciation and
amortization........ (61) 457
Goodwill............. - 7,003
Expenditures for
long-lived
assets(8)........... - 611
-------- --------
167
IFRS
MANAGEMENT
CREDIT ADJUSTMENTS/ BASIS MANAGEMENT
CARD INTER- ALL RECONCILING CONSOLIDATED BASIS
IFRS
CONSUMER SERVICES NATIONAL OTHER ITEMS TOTALS ADJUSTMENTS(7)
ADJUSTMENTS(6)
------------------------------------------------------------------------------------------------------------------------
------
(IN MILLIONS)
YEAR ENDED DECEMBER 31, 2004
Net interest
income.............. $ 8,180 $ 2,226 $ 899 $ (49) $ - $ 11,256 $ (192) $
(3,132)
Other operating
income (Total other
revenues)........... 502 1,581 313 528 (137)(2) 2,787 571
521
Loan impairment
charges (Provision
for credit
losses)............. 3,151 1,786 408 (2) 2(3) 5,345 (139)
(1,185)
Operating expenses
(Total costs and
expenses)........... 2,777 1,205 615 490 - 5,087 -
(237)
Income tax expense
(benefit)........... 1,017 295 67 (125) (50)(4) 1,204 185
(389)
Net income........... 1,737 521 122 116 (89) 2,407 333
(800)
Operating net
income(1)........... 1,324 522 122 132 (89) 2,011 333
(706)
Customer loans
(Receivables)....... 107,769 19,615 13,102 308 - 140,794 (17,225)
(16,714)
Assets............... 109,238 19,702 14,263 31,103 (8,212)(5) 166,094 (17,270)
(18,005)
Intersegment
revenues............ 101 25 15 (4) (137)(2) - -
-
Depreciation and
amortization........ 33 54 40 102 - 229 -
289
Goodwill............. 876 249 1 8,615 - 9,741 -
(2,885)
Expenditures for
long-lived
assets(8)........... 18 4 20 54 - 96 -
-
-------- ------- ------- ------- ------- -------- -------- -----
---
IFRS U.S. GAAP
RECLASS- CONSOLIDATED
IFICATIONS(9) TOTALS
--------------------- -------------------------------
(IN MILLIONS)
YEAR ENDED DECEMBER 3
Net interest
income.............. $ (130) $ 7,802
Other operating
income (Total other
revenues)........... 1,284 5,163
Loan impairment
charges (Provision
for credit
losses)............. 313 4,334
Operating expenses
(Total costs and
expenses)........... 841 5,691
Income tax expense
(benefit)........... - 1,000
Net income........... - 1,940
Operating net
income(1)........... - 1,638
Customer loans
(Receivables)....... - 106,855
Assets............... (629) 130,190
Intersegment
revenues............ - -
Depreciation and
amortization........ (35) 483
Goodwill............. - 6,856
Expenditures for
long-lived
assets(8)........... - 96
-------- --------
---------------
(1) This non-U.S. GAAP financial measure is provided for comparison of our
operating trends only and should be read in conjunction with our owned basis
U.S. GAAP financial information. Operating net income in 2004 excludes the
gain on the bulk sale of domestic private label credit card receivables of
$423 million (after-tax) and the impact of the adoption of FFIEC charge-off
policies for the domestic private label (excluding retail sales contracts at
our consumer lending business) and credit card portfolios of $121 million
(after-tax). See "Basis of Reporting" for additional discussion on the use
of non-U.S. GAAP financial measures.
(2) Eliminates intersegment revenues.
(3) Eliminates bad debt recovery sales between operating segments.
(4) Tax benefit associated with items comprising adjustments/reconciling items.
(5) Eliminates investments in subsidiaries and intercompany borrowings.
(6) IFRS Adjustments, which have been described more fully above, consist of the
following:
PROVISION TOTAL INCOME
NET FOR COSTS TAX OPERATING
INTEREST OTHER CREDIT AND EXPENSE NET NET
INCOME REVENUES LOSSES EXPENSES (BENEFIT) INCOME INCOME
--------------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
YEAR ENDED DECEMBER 31, 2006
Securitizations........................ $ (244) $ 89 $ 25 $ - $ (62) $(118) $(118)
Derivatives and hedge accounting....... (31) 277 - - 91 155 155
Intangible assets...................... - - - 179 (66) (113) (113)
Purchase accounting.................... 202 64 195 (4) 25 50 50
Deferred loan origination costs and
premiums.............................. (156) 2 - (199) 16 29 29
Credit loss impairment provisioning.... (39) (3) 12 - (20) (34) (34)
Loans held for resale.................. 125 (202) - (32) (17) (28) (28)
Interest recognition................... (38) (16) - - (20) (34) (34)
Other.................................. (47) (31) (7) 28 73 (172) (172)
------- ------- ------- ----- ----- ----- -----
Total.................................. $ (228) $ 180 $ 225 $ (28) $ 20 $(265) $(265)
======= ======= ======= ===== ===== ===== =====
TOTAL
RECEIVABLES ASSETS
--------------------------------------- ----------------------
(IN MILLIONS)
YEAR ENDED DECEMBER 31, 2006
Securitizations........................ $ (948) $ (1,232)
Derivatives and hedge accounting....... - (2,966)
Intangible assets...................... - (1,494)
Purchase accounting.................... 118 (38)
Deferred loan origination costs and
premiums.............................. 457 457
Credit loss impairment provisioning.... (295) (298)
Loans held for resale.................. 1,584 38
Interest recognition................... (53) (53)
Other.................................. 32 (285)
-------- --------
Total.................................. $ 895 $ (5,871)
======== ========
168
PROVISION TOTAL INCOME
NET FOR COSTS TAX OPERATING
INTEREST OTHER CREDIT AND EXPENSE NET NET
INCOME REVENUES LOSSES EXPENSES (BENEFIT) INCOME INCOME
--------------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
YEAR ENDED DECEMBER 31, 2005
Securitizations........................ $ (900) $ (137) $ (315) $ - $(265) $(457) $(457)
Derivatives and hedge accounting....... (41) (60) - - (43) (58) (58)
Intangible assets...................... - - - 272 (100) (172) (172)
Purchase accounting.................... 314 240 51 (15) 138 380 380
Deferred loan origination costs and
premiums.............................. (197) 2 - (187) (2) (6) (6)
Credit loss impairment provisioning.... (55) 34 (42) - 10 11 11
Loans held for resale.................. 126 (79) - 44 1 2 2
Interest recognition................... - - - - - - -
Other.................................. 19 (443) 15 (7) 83 (515) (515)
------- ------- ------- ----- ----- ----- -----
Total.................................. $ (734) $ (443) $ (291) $ 107 $(178) $(815) $(815)
======= ======= ======= ===== ===== ===== =====
YEAR ENDED DECEMBER 31, 2004
Securitizations........................ $(2,462) $ 220 $(1,164) $ - $(390) $(688) $(688)
Derivatives and hedge accounting....... (365) 511 - - 54 92 92
Intangible assets...................... - - - - - - -
Purchase accounting.................... 226 (169) - 289 (71) (161) (177)
Deferred loan origination costs and
premiums.............................. (472) (3) - (511) 13 23 23
Credit loss impairment provisioning.... - - - - - - -
Loans held for resale.................. - - - - - - -
Prepayment penalty..................... - - - - - - -
Interest recognition................... (17) - (7) - (4) (6) (6)
Other.................................. (42) (38) (14) (15) 9 (60) 50
------- ------- ------- ----- ----- ----- -----
Total.................................. $(3,132) $ 521 $(1,185) $(237) $(389) $(800) $ 706
======= ======= ======= ===== ===== ===== =====
TOTAL
RECEIVABLES ASSETS
--------------------------------------- ----------------------
(IN MILLIONS)
YEAR ENDED DECEMBER 31, 2005
Securitizations........................ $ (5,415) $ (7,251)
Derivatives and hedge accounting....... - (2,719)
Intangible assets...................... - (1,222)
Purchase accounting.................... 162 (114)
Deferred loan origination costs and
premiums.............................. 430 430
Credit loss impairment provisioning.... (280) (232)
Loans held for resale.................. 1,723 -
Interest recognition................... - -
Other.................................. (14) 383
-------- --------
Total.................................. $ (3,394) $(10,725)
======== ========
YEAR ENDED DECEMBER 31, 2004
Securitizations........................ $(17,552) $(16,417)
Derivatives and hedge accounting....... - 159
Intangible assets...................... - (775)
Purchase accounting.................... - (265)
Deferred loan origination costs and
premiums.............................. 597 568
Credit loss impairment provisioning.... -
Loans held for resale.................. - -
Prepayment penalty..................... - -
Interest recognition................... - 92
Other.................................. 241 (1,367)
-------- --------
Total.................................. $(16,714) $(18,005)
======== ========
(7) Management Basis Adjustments, which represent the private label and real
estate secured receivables transferred to HBUS, consist of the following:
PROVISION TOTAL INCOME
NET FOR COSTS TAX
OPERATING
INTEREST OTHER CREDIT AND EXPENSE NET
NET
INCOME REVENUES LOSSES EXPENSES (BENEFIT) INCOME
INCOME
---------------------------------------------------------------------------------------------------------------------
--------
(IN MILLIONS)
YEAR ENDED DECEMBER 31, 2006
Private label receivables....................... $(1,175) $287 $(623) $(17) $(75) $(173)
$(173)
Real estate secured receivables................. (99) 12 (23) (5) (21) (38)
(38)
Other........................................... 20 - - - 7 13
13
------- ---- ----- ---- ---- -----
-----
Total........................................... $(1,254) $299 $(646) $(22) $(89) $(198)
$(198)
======= ==== ===== ==== ==== =====
=====
YEAR ENDED DECEMBER 31, 2005
Private label receivables....................... $(1,310) $483 $(594) $(22) $(66) $(145)
$(145)
Real estate secured receivables................. (159) 17 (35) (1) (39) (67)
(67)
Other........................................... 31 - - - 11 20
20
------- ---- ----- ---- ---- -----
-----
Total........................................... $(1,438) $500 $(629) $(23) $(94) $(192)
$(192)
======= ==== ===== ==== ==== =====
=====
YEAR ENDED DECEMBER 31, 2004
Private label receivables....................... $ (9) $559 $(125) $ - $244 $ 431
$ 431
Real estate secured receivables................. (180) 32 (14) - (51) (83)
(83)
Other........................................... (3) (20) - - (8) (15)
(15)
------- ---- ----- ---- ---- -----
-----
Total........................................... $ (192) $571 $(139) $ - $185 $ 333
$ 333
======= ==== ===== ==== ==== =====
=====
TOTAL
RECEIVABLES ASSETS
------------------------------------------------ ----------------------
(IN MILLIONS)
YEAR ENDED DECEMBER 31, 2006
Private label receivables....................... $(18,125) $(18,653)
Real estate secured receivables................. (3,247) (3,278)
Other........................................... - -
-------- --------
Total........................................... $(21,372) $(21,931)
======== ========
YEAR ENDED DECEMBER 31, 2005
Private label receivables....................... $(15,762) $(15,673)
Real estate secured receivables................. (4,544) (4,571)
Other........................................... - (3)
-------- --------
Total........................................... $(20,306) $(20,247)
======== ========
YEAR ENDED DECEMBER 31, 2004
Private label receivables....................... $ 12,217 $(12,225)
Real estate secured receivables................. (5,008) (5,031)
Other........................................... - (14)
-------- --------
Total........................................... $(17,225) $(17,270)
======== ========
(8) Includes goodwill associated with purchase business combinations other than
the HSBC merger as well as capital expenditures.
(9) Represents differences in balance sheet and income statement presentation
between IFRS and U.S. GAAP.
(10)In 2006, the "All Other" caption includes a cumulative adjustment to net
interest income of approximately $207 million, largely to correct the
amortization of purchase accounting adjustments related to certain debt that
was not included in the fair value option adjustments under IFRSs in 2005. A
portion of the amount recognized would otherwise have been recorded for the
year ended December 31, 2005.
169
22. COMMITMENTS AND CONTINGENT LIABILITIES
--------------------------------------------------------------------------------
LEASE OBLIGATIONS: We lease certain offices, buildings and equipment for periods
which generally do not exceed 25 years. The leases have various renewal options.
The office space leases generally require us to pay certain operating expenses.
Net rental expense under operating leases was $134 million in 2006, $132 million
in 2005 and $117 million in 2004.
We have lease obligations on certain office space which has been subleased
through the end of the lease period. Under these agreements, the sublessee has
assumed future rental obligations on the lease.
Future net minimum lease commitments under noncancelable operating lease
arrangements were:
MINIMUM MINIMUM
RENTAL SUBLEASE
YEAR ENDING DECEMBER 31, PAYMENTS INCOME NET
----------------------------------------------------------------------------------------
(IN MILLIONS)
2007........................................................ $182 $ 58 $124
2008........................................................ 144 36 108
2009........................................................ 121 34 87
2010........................................................ 80 15 65
2011........................................................ 42 - 42
Thereafter.................................................. 127 - 127
---- ---- ----
Net minimum lease commitments............................... $696 $143 $553
==== ==== ====
In January 2006 we entered into a lease for a building in the Village of
Mettawa, Illinois. The new facility will consolidate our Prospect Heights, Mount
Prospect and Deerfield offices. Construction of the building began in the spring
of 2006 and the relocation is planned for the first and second quarters of 2008.
The future lease payments for this building are currently estimated as follows:
(IN MILLIONS)
----------------------------------------------------------------------------
2008........................................................ $ 5
2009........................................................ 11
2010........................................................ 11
2011........................................................ 11
Thereafter.................................................. 115
----
$153
====
LITIGATION: 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 which affect all three of our reportable segments.
Certain of these activities are or purport to be class actions seeking damages
in significant amounts. These actions include assertions concerning violations
of laws and/or unfair treatment of consumers.
Due to the uncertainties in litigation and other factors, we cannot be certain
that we will ultimately prevail in each instance. Also, as the ultimate
resolution of these proceedings is influenced by factors that are outside of our
control, it is reasonably possible our estimated liability under these
proceedings may change. However, based upon our current knowledge, our defenses
to these actions have merit and any adverse decision should not materially
affect our consolidated financial condition, results of operations or cash
flows.
OTHER COMMITMENTS: At December 31, 2006, our Mortgage Services business had
commitments with numerous correspondents to purchase up to $104 million of real
estate secured receivables at fair market value, subject to availability based
on underwriting guidelines specified by our mortgage services business. These
commitments have terms of up to one year and can be renewed upon mutual
agreement. Also at
170
December 31, 2006 our Mortgage Services business had outstanding forward sales
commitments relating to real estate secured loans totaling $607 million.
At December 31, 2006, we have a commitment to lend up to $3.0 billion to H&R
Block to fund the purchase of a participation interest in refund anticipation
loans.
23. FAIR VALUE OF FINANCIAL INSTRUMENTS
--------------------------------------------------------------------------------
We have estimated the fair value of our financial instruments in accordance with
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments" ("SFAS No.
107"). Fair value estimates, methods and assumptions set forth below for our
financial instruments are made solely to comply with the requirements of SFAS
No. 107 and should be read in conjunction with the financial statements and
notes in this Annual Report.
A significant portion of our financial instruments do not have a quoted market
price. For these items, fair values were estimated by discounting estimated
future cash flows at estimated current market discount rates. Assumptions used
to estimate future cash flows are consistent with management's assessments
regarding ultimate collectibility of assets and related interest and with
estimates of product lives and repricing characteristics used in our
asset/liability management process. All assumptions are based on historical
experience adjusted for future expectations. Assumptions used to determine fair
values for financial instruments for which no active market exists are
inherently judgmental and changes in these assumptions could significantly
affect fair value calculations.
As required under generally accepted accounting principles, a number of other
assets recorded on the balance sheets (such as acquired credit card
relationships, the value of consumer lending relationships for originated
receivables and the franchise values of our business units) are not considered
financial instruments and, accordingly, are not valued for purposes of this
disclosure. However, on March 29, 2003, as a result of our acquisition by HSBC,
these other assets were adjusted to their fair market value based, in part, on
third party valuation data, under the "push-down" method of accounting. We
believe there continues to be substantial value associated with these assets
based on current market conditions and historical experience. Accordingly, the
estimated fair value of financial instruments, as disclosed, does not fully
represent our entire value, nor the changes in our entire value.
171
The following is a summary of the carrying value and estimated fair value of our
financial instruments:
AT DECEMBER 31,
-------------------------------------------------------------------------
2006 2005
----------------------------------- -----------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE DIFFERENCE VALUE FAIR VALUE DIFFERENCE
-----------------------------------------------------------------------------------------------------
(IN MILLIONS)
ASSETS:
Cash...................... $ 871 $ 871 $ - $ 903 $ 903 $ -
Interest bearing deposits
with banks.............. 424 424 - 384 384 -
Securities purchased under
agreements to resell.... 171 171 - 78 78 -
Securities................ 4,695 4,695 - 4,051 4,051 -
Receivables............... 157,262 154,858 (2,404) 136,989 137,710 721
Due from affiliates....... 528 528 - 518 518 -
Derivative financial
assets.................. 1,461 1,461 - 234 234 -
LIABILITIES:
Commercial paper, bank and
other borrowings........ (11,055) (11,055) - (11,454) (11,454) -
Due to affiliates......... (15,172) (15,308) (136) (15,534) (15,568) (34)
Long term debt............ (127,590) (129,008) (1,418) (105,163) (106,314) (1,151)
Insurance policy and claim
reserves................ (1,319) (1,362) (43) (1,291) (1,336) (45)
Derivative financial
liabilities............. (58) (58) - (292) (292) -
CASH: Carrying value approximates fair value due to cash's liquid nature.
INTEREST BEARING DEPOSITS WITH BANKS: Carrying value approximates fair value due
to the asset's liquid nature.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL: The fair value of securities
purchased under agreements to resell approximates carrying value due to their
short-term maturity.
SECURITIES: Securities are classified as available-for-sale and are carried at
fair value on the balance sheets. Fair values are based on quoted market prices
or dealer quotes. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
RECEIVABLES: The fair value of adjustable rate receivables generally
approximates carrying value because interest rates on these receivables adjust
with changing market interest rates. The fair value of fixed rate consumer
receivables was estimated by discounting future expected cash flows at interest
rates which approximate the current interest rates that would achieve a similar
return on assets with comparable risk characteristics. Receivables also includes
our interest-only strip receivables. The interest-only strip receivables are
carried at fair value on our balance sheets. Fair value is based on an estimate
of the present value of future cash flows associated with securitizations of
certain real estate secured, auto finance, credit card, private label and
personal non-credit card receivables.
DUE FROM AFFILIATES: Carrying value approximates fair value because the interest
rates on these receivables adjust with changing market interest rates.
COMMERCIAL PAPER, BANK AND OTHER BORROWINGS: 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. At December 31, 2006 deposits have been classified as
bank and other borrowings due to their short-term nature. Prior period amounts
have been reclassed to conform to the current presentation.
172
DUE TO AFFILIATES: The estimated fair value of our debt instruments due to
affiliates was determined by discounting future expected cash flows at current
interest rates offered for similar types of debt instruments. Carrying value is
typically used to estimate the fair value of floating rate debt.
LONG TERM DEBT: The estimated fair value of our fixed rate debt instruments was
determined using either quoted market prices or by discounting future expected
cash flows at current interest rates offered for similar types of debt
instruments. Carrying value is typically used to estimate the fair value of
floating rate debt.
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 at December 31, 2006 and 2005. The fair
value of other insurance reserves is not required to be determined in accordance
with SFAS No. 107.
DERIVATIVE FINANCIAL ASSETS AND LIABILITIES: All derivative financial assets and
liabilities, which exclude amounts receivable from or payable to swap
counterparties, are carried at fair value on the balance sheet. Where practical,
quoted market prices were used to determine fair value of these instruments. For
non-exchange traded contracts, fair value was determined using discounted cash
flow modeling techniques in lieu of market value quotes. We enter into foreign
exchange contracts to hedge our exposure to currency risk on foreign denominated
debt. We also enter into interest rate contracts to hedge our exposure to
interest rate risk on assets and liabilities, including debt. As a result,
decreases/increases in the fair value of derivative financial instruments which
have been designated as effective hedges are offset by a corresponding
increase/decrease in the fair value of the individual asset or liability being
hedged. See Note 14, "Derivative Financial Instruments," for additional
discussion of the nature of these items.
24. CONCENTRATION OF CREDIT RISK
--------------------------------------------------------------------------------
A concentration of credit risk is defined as a significant credit exposure with
an individual or group engaged in similar activities or having similar economic
characteristics that would cause their ability to meet contractual obligations
to be similarly affected by changes in economic or other conditions.
We generally serve non-conforming and non-prime consumers. Such customers are
individuals who have limited credit histories, modest incomes, high
debt-to-income ratios or have experienced credit problems caused by occasional
delinquencies, prior charge-offs, bankruptcy or other credit related actions. As
a result, the majority of our secured receivables have a high loan-to-value
ratio. Due to customer demand we offer interest-only loans and expect to
continue to do so. These interest-only loans allow customers to pay only the
accruing interest for a period of time which results in lower payments during
the initial loan period. Depending on a customer's financial situation, the
subsequent increase in the required payment to begin making payment towards the
loan principal could affect our customer's ability to repay the loan at some
future date when the interest rate resets and/or principal payments are
required. As with all our other non-conforming and nonprime loan products, we
underwrite and price interest-only loans in a manner that is appropriate to
compensate for their higher risk. At December 31, 2006, the outstanding balance
of our interest-only loans was $6.2 billion, or 4 percent of receivables. At
December 31, 2005, the outstanding balance of our interest-only loans was $4.9
billion, or 3 percent of receivables.
Also due to customer demand, we offer adjustable rate mortgage loans which
allows us to adjust pricing on the receivable in line with market movements. At
December 31, 2006, we had approximately $29.8 billion in adjustable rate
mortgage loans at our Consumer Lending and Mortgage Services businesses. In 2007
and 2008, approximately $10.8 billion and $5.1 billion, respectively, of our
adjustable rate mortgage loans will experience their first interest rate reset
based on receivable levels outstanding at December 31, 2006. In addition, our
analysis indicates that a significant portion of the second lien mortgages in
our Mortgage Services portfolio at December 31, 2006 are subordinated to first
lien adjustable rate mortgages that will face a rate reset in the next three
years. As interest rates have risen over the last three years, many adjustable
rate loans are expected to require a significantly higher monthly payment
following their first adjustment. A customer's financial situation at the time
of the interest rate reset could affect our customer's ability to repay the loan
after the adjustment.
173
Additionally during 2006 and 2005 we increased our portfolio of stated income
(low documentation) loans. Stated income loans have a lower income documentation
requirement during the underwriting process and, accordingly, carry a higher
risk of default if the customer has not accurately reflected their income. We
price stated income loans in a manner that is appropriate to compensate for
their higher risk. The outstanding balance of our stated income loan portfolio
was $11.8 billon at December 31, 2006 and $7.3 billion at December 31, 2005.
Because we primarily lend to consumers, we do not have receivables from any
industry group that equal or exceed 10 percent of total receivables at December
31, 2006 and 2005. We lend nationwide and our receivables are distributed as
follows at December 31, 2006:
PERCENT OF TOTAL
DOMESTIC
STATE/REGION RECEIVABLES
-------------------------------------------------------------------------------
California.................................................. 13%
Midwest (IL, IN, IA, KS, MI, MN, MO, NE, ND, OH, SD, WI).... 23
Southeast (AL, FL, GA, KY, MS, NC, SC, TN).................. 20
Middle Atlantic (DE, DC, MD, NJ, PA, VA, WV)................ 15
Southwest (AZ, AR, LA, NM, OK, TX).......................... 10
Northeast (CT, ME, MA, NH, NY, RI, VT)...................... 11
West (AK, CO, HI, ID, MT, NV, OR, UT, WA, WY)............... 8
25. GEOGRAPHIC DATA
--------------------------------------------------------------------------------
The tables below summarize our owned basis assets, revenues and income before
income taxes by material country. Purchase accounting adjustments are reported
within the appropriate country.
AT DECEMBER 31,
----------------------------------------------------------
IDENTIFIABLE ASSETS LONG-LIVED ASSETS(1)
------------------------------ -------------------------
2006 2005 2004 2006 2005 2004
-----------------------------------------------------------------------------------------------
(IN MILLIONS)
United States...................... $168,597 $145,955 $115,938 $9,046 $9,382 $ 8,974
United Kingdom..................... 6,592 7,006 11,468 452 403 942
Canada............................. 4,181 3,479 2,581 157 153 129
Europe............................. 89 229 203 - 3 3
-------- -------- -------- ------ ------ -------
Total.............................. $179,459 $156,669 $130,190 $9,655 $9,941 $10,048
======== ======== ======== ====== ====== =======
---------------
(1) Includes properties and equipment, goodwill and acquired intangibles.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
REVENUES INCOME BEFORE INCOME TAXES
--------------------------- ---------------------------
2006 2005 2004 2006 2005 2004
--------------------------------------------------------------------------------------------------
(IN MILLIONS)
United States.......................... $21,130 $15,961 $14,326 $2,330 $2,609 $2,858
United Kingdom......................... 1,222 1,737 1,426 (170) (37) 6
Canada................................. 601 450 340 129 96 82
Europe................................. 32 31 16 (2) (5) (6)
------- ------- ------- ------ ------ ------
Total.................................. $22,985 $18,179 $16,108 $2,287 $2,663 $2,940
======= ======= ======= ====== ====== ======
174
HSBC Finance Corporation
--------------------------------------------------------------------------------
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
THREE THREE THREE THREE THREE THREE THREE
THREE
MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS
MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
ENDED
DEC. 31, SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30,
MAR. 31,
2006 2006 2006 2006 2005 2005 2005
2005
------------------------------------------------------------------------------------------------------------------------
---------
(IN MILLIONS)
Finance and other interest income....... $4,629 $4,535 $4,311 $4,087 $3,725 $3,402 $3,139
$2,950
Interest expense:
HSBC affiliates....................... 320 283 173 153 206 222 134
151
Non-affiliates........................ 1,736 1,650 1,589 1,470 1,221 1,017 970
911
------ ------ ------ ------ ------ ------ ------
------
Net interest income..................... 2,573 2,602 2,549 2,464 2,298 2,163 2,035
1,888
Provision for credit losses on owned
receivables........................... 3,066 1,384 1,248 866 1,310 1,361 1,031
841
------ ------ ------ ------ ------ ------ ------
------
Net interest income after provision for
credit losses......................... (493) 1,218 1,301 1,598 988 802 1,004
1,047
------ ------ ------ ------ ------ ------ ------
------
Other revenues:.........................
Securitization related revenue.......... 21 24 51 71 31 41 54
85
Insurance revenue....................... 251 280 226 244 257 251 255
234
Investment income....................... 175 31 34 34 35 33 33
33
Derivative income (expense)............. 72 68 (7) 57 (34) (53) 76
260
Fee income.............................. 558 542 429 382 469 439 354
306
Enhancement services revenue............ 133 129 130 123 98 86 79
75
Taxpayer financial services income...... - 4 20 234 17 (1) 18
243
Gain on receivable sales to HSBC
affiliates............................ 139 101 97 85 105 99 109
100
Servicing and other fees from HSBC
affiliates............................ 151 121 116 118 111 109 109
111
Other income............................ (7) 34 79 73 86 135 74
41
------ ------ ------ ------ ------ ------ ------
------
Total other revenues.................... 1,493 1,334 1,175 1,421 1,175 1,139 1,161
1,488
------ ------ ------ ------ ------ ------ ------
------
Costs and expenses:
Salaries and fringe benefits............ 617 571 564 581 536 513 526
497
Sales incentives........................ 86 94 98 80 108 117 90
82
Occupancy and equipment expense......... 77 78 79 83 82 83 82
87
Other marketing expenses................ 268 197 176 173 170 196 185
180
Other servicing and administrative
expenses.............................. 353 287 222 253 267 186 180
284
Support services from HSBC
affiliates............................ 304 261 270 252 237 226 217
209
Amortization of acquired
intangibles........................... 63 63 63 80 65 90 83
107
Policyholders' benefits................. 119 123 107 118 109 109 116
122
------ ------ ------ ------ ------ ------ ------
------
Total costs and expenses................ 1,887 1,674 1,579 1,620 1,574 1,520 1,479
1,568
------ ------ ------ ------ ------ ------ ------
------
Income before income taxes.............. (887) 878 897 1,399 589 421 686
967
Income taxes............................ (323) 327 329 511 196 140 214
341
------ ------ ------ ------ ------ ------ ------
------
Net income.............................. $ (564) $ 551 $ 568 $ 888 $ 393 $ 281 $ 472
$ 626
====== ====== ====== ====== ====== ====== ======
======
Operating net income(1)................. $ (642) $ 551 $ 568 $ 888 $ 393 $ 281 $ 472
$ 626
====== ====== ====== ====== ====== ====== ======
======
---------------
(1)Operating net income is a non-U.S. GAAP financial measure and is provided for
comparison of our operating trends only and should be read in conjunction
with our owned basis U.S. GAAP financial information. For the three months
ended December 31, 2006, operating net income excludes the $78 million
(after-tax) gain on the sale of our investment in Kanbay.
175
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
--------------------------------------------------------------------------------
There were no disagreements on accounting and financial disclosure matters
between HSBC Finance Corporation and its independent accountants during 2006.
ITEM 9A. CONTROLS AND PROCEDURES.
--------------------------------------------------------------------------------
We maintain a system of internal and disclosure controls and procedures designed
to ensure that information required to be disclosed by HSBC Finance Corporation
in the reports we file or submit under the Securities Exchange Act of 1934, as
amended, (the "Exchange Act"), is recorded, processed, summarized and reported
on a timely basis. Our Board of Directors, operating through its audit
committee, which is composed entirely of independent outside directors, provides
oversight to our financial reporting process.
We conducted an evaluation, with the participation of the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this report.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were effective as
of the end of the period covered by this report so as to alert them in a timely
fashion to material information required to be disclosed in reports we file
under the Exchange Act.
There have been no significant changes in our internal and disclosure controls
or in other factors which could significantly affect internal and disclosure
controls subsequent to the date that we carried out our evaluation.
HSBC Finance Corporation continues the process to complete a thorough review of
its internal controls as part of its preparation for compliance with the
requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Section 404
requires our management to report on, and our external auditors to attest to,
the effectiveness of our internal control structure and procedures for financial
reporting. As a non-accelerated filer under Rule 12b-2 of the Exchange Act, our
first report under Section 404 will be contained in our Form 10-K for the period
ended December 31, 2007.
ITEM 9B. OTHER INFORMATION.
--------------------------------------------------------------------------------
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
--------------------------------------------------------------------------------
DIRECTORS
Set forth below is certain biographical information relating to the members of
HSBC Finance Corporation's Board of Directors. Each director is elected
annually. There are no family relationships among the directors.
WILLIAM R. P. DALTON, age 63, joined HSBC Finance Corporation's Board in April
2003. Mr. Dalton retired in May 2004 as an Executive Director of HSBC Holdings
plc, a position he held from April 1998. He also served HSBC as Global Head of
Personal Financial Services from August 2000 to May 2004. From April 1998 to
January 2004 he was Chief Executive of HSBC Bank plc. Mr. Dalton held positions
with various HSBC entities for 25 years.
Mr. Dalton is a member of the Compensation Committee.
GARY G. DILLON, age 72, joined HSBC Finance Corporation's Board in 1984. Mr.
Dillon retired as Chairman of the Board of Schwitzer Group (a manufacturer of
engine components) in March 1999. He had served as Chairman of Schwitzer from
1991 and Chief Executive Officer of Schwitzer from 1989. From 1989 to 1997 he
also served as President of Schwitzer. Prior to 1989 he was President and Chief
Executive Officer of Household Manufacturing, Inc., the former diversified
manufacturing subsidiary of HSBC Finance Corporation.
176
Mr. Dillon is currently a member of the Compensation, Executive and Audit
Committees and will retire from the Board in April 2007.
J. DUDLEY FISHBURN, age 60, joined HSBC Finance Corporation's Board in 1995. Mr.
Fishburn became Chairman of the Board of HFC Bank Ltd. (HSBC Finance
Corporation's primary subsidiary in the United Kingdom) in 1998. He is also on
the Board of HSBC Bank (UK) plc. He previously served as the Conservative Member
of Parliament for Kensington in London from 1988 to 1997. Prior to entering
Parliament, Mr. Fishburn was Executive Editor for The Economist Newspaper Ltd.
from 1979 until 1988. He is also a Director of Altria Inc., Henderson Smaller
Companies Investment Trust plc and Beazley Group plc. He is a trustee of the
Foundation for Liver Research, The Peabody Trust and Reading University.
Mr. Fishburn is a member of the Nominating & Governance Committee.
DOUGLAS J. FLINT, age 51, joined HSBC Finance Corporation's Board in February
2007. Mr. Flint serves as the Group Finance Director with responsibility for
strategy, investor relations, finance and tax at HSBC. He joined HSBC as an
executive Director in 1995. Mr. Flint chaired the Financial Reporting Council's
review of the Turnbull Guidance on Internal Control, served on the Accounting
Standards Board and the Standards Advisory Council of the International
Accounting Standards Board from 2001 to 2004 and is former partner in KPMG. He
is a non-executive Director of BP plc since January 2005.
Mr. Flint is an ex-officio non-voting member of the Audit Committee.
CYRUS F. FREIDHEIM, JR., age 71, joined HSBC Finance Corporation's Board in
1992. He currently serves as the Chief Executive Officer of the Sun-Times Media
Group Inc., and is a member of the Board since October 2005. Mr. Freidheim
served as Chairman of the Board and Chief Executive Officer of Chiquita Brands
International, Inc. from March 2002 until January 2004 and Chairman until May
2004. In March 2002, he retired as Vice Chairman of Booz, Allen & Hamilton, Inc.
(a management consulting firm), with which he had been affiliated since 1966. He
is also a Director of Allegheny Energy, Inc. and Virgin America Inc. He is a
Trustee for The Brookings Institution, Rush University Medical Center, Chicago
Council on Global Affairs and the Chicago Symphony Orchestra. Mr. Freidheim is a
Member of the Advisory Council of the Mendosa School of Business at the
University of Notre Dame, The Economic Club of Chicago and The Commercial Club
of Chicago, Council of Foreign Relations.
Mr. Freidheim is the Lead Director and as such is the Chair of the Executive
Committee and an ex-officio member of the Audit, Compensation and Nominating and
Governance Committees.
ROBERT K. HERDMAN, age 58, joined HSBC Finance Corporation's Board in 2004. He
also serves as a member of the Board of Directors of HSBC North America Holdings
Inc. Mr. Herdman is a partner and Managing Director of Kalorama Partners LLC, a
Washington, D.C. consulting firm. Mr. Herdman was the Chief Accountant of the
U.S. Securities and Exchange Commission from October 2001 to November 2002. The
Chief Accountant serves as the principal advisor to the Commission on accounting
and auditing matters, and is responsible for formulating and administering the
accounting program and policies of the Commission. Prior to joining the SEC, Mr.
Herdman was Ernst & Young's Vice Chairman of Professional Practice for its
Assurance and Advisory Business Services (AABS) practice in the Americas and the
Global Director of AABS Professional Practice for Ernst & Young International.
Mr. Herdman was the senior E&Y partner responsible for the firms' relationships
with the SEC, Financial Accounting Standards Board (FASB) and American Institute
of Certified Public Accountants (AICPA). He was on the AICPA's SEC Practice
Section Executive Committee (1995-2001) and a member of the AICPA's Board of
Directors (2000-2001).
Mr. Herdman is Chair of the Audit Committee.
GEORGE A. LORCH, age 65, joined HSBC Finance Corporation's Board in 1994. He
also serves as a member of the Board of Directors of HSBC North America Holdings
Inc. From May 2000 until August 2000, Mr. Lorch served as Chairman, President
and Chief Executive Officer of Armstrong Holdings, Inc. (the parent of Armstrong
World Industries, Inc.). Mr. Lorch served as Chairman of the Board, Chief
Executive Officer and President of Armstrong World Industries, Inc. (a
manufacturer of interior finishes) from 1994 and President
177
and Chief Executive Officer from 1993 until May 1994. Mr. Lorch is a Director of
The Williams Companies, Inc., Autoliv, Inc. and Pfizer Inc.
Mr. Lorch is Chair of the Compensation Committee and a member of the Nominating
& Governance Committee.
LARREE M. RENDA, age 48, joined HSBC Finance Corporation's Board in 2001. Ms.
Renda has been employed by Safeway Inc. since 1974. She became Executive Vice
President, Chief Strategist and Administrative Officer of Safeway, Inc. in
November, 2005. Prior to her current position she served as Executive Vice
President for Retail Operations, Human Resources, Public Affairs, Labor and
Government Relations since 1999. Prior to this position, she was a Senior Vice
President from 1994 to 1999, and a Vice President from 1991 to 1994. She is also
a director and Chairwoman of the Board of The Safeway Foundation and serves on
the board of directors for Casa Ley, S.A. de C.V. Ms. Renda is a member of the
Retailing Initiative Advisory Board of the Wharton School of Business and serves
as a Trustee on the National Joint Labor Management Committee. Additionally she
serves on the board of directors of both the California and U.S. Chamber of
Commerce and serves as a National Vice President of the Muscular Dystrophy
Association.
Ms. Renda is Chair of the Nominating & Governance Committee and a member of the
Audit Committee.
MICHAEL R. P. SMITH, age 50, joined HSBC Finance Corporation's Board in 2006.
Mr. Smith joined the HSBC Group in 1978 and since that time has held a wide
variety of posts in Hong Kong, the Asia-Pacific region, the UK, Australia, the
Middle East and South America. Mr. Smith is the President and Chief Executive
Officer of The Hongkong and Shanghai Banking Corporation. He became Chairman of
HSBC Bank Malaysia Berhad and a director of HSBC Bank Australia Limited in
January 2004 and Chairman of Hang Seng Bank Limited in April 2005 and in June
2005, he took on the role of Global Head of Commercial Banking for the HSBC
Group, positions he continues to hold. Mr. Smith is a member of VISA
International Asia Pacific Regional Board, as well as a Fellow of the Hong Kong
Management Association. He is Head of Advisory Council of Asia Investment
Corporation and a member of Chongqing Mayor's International Economic Advisory
Council.
178
EXECUTIVE OFFICERS
Information regarding the executive officers of HSBC Finance Corporation as of
March 5, 2007 is presented in the following table.
-----------------------------------------------------------------------------------------------
YEAR
NAME AGE APPOINTED PRESENT POSITION
-----------------------------------------------------------------------------------------------
Brendan P. McDonagh 48 2007 Chief Executive Officer
Andrew C. Armishaw 44 2004 Group Executive - Chief Information Officer
Patrick A. Cozza 51 2004 Group Executive
Thomas M. Detelich 50 2002 Group Executive
Walter G. Menezes 61 2004 Group Executive
David D. Gibbons 51 2007 Senior Executive Vice President - Corporate Risk
and Compliance
Kenneth H. Robin 60 1989 Senior Executive Vice President - General Counsel
& Corporate Secretary
Christopher D. Spooner 56 2006 Senior Executive Vice President
Anthony J. Murphy 47 2007 Senior Executive Vice President - Portfolio
Management
Steven B. Gonabe 55 2005 Executive Vice President - Administration
Lisa M. Sodeika 43 2004 Executive Vice President - Corporate Affairs
Mark A. Melas 50 2007 Executive Vice President - Corporate Real Estate
John J. Haines 43 2004 Managing Director - Auto Finance
Joseph W. Hoff 56 2005 Managing Director - Retail Services
Gary R. Esposito 46 2005 Managing Director - Mortgage Services
Patrick J. Burke 45 2006 Managing Director - Card Services
Thomas M. Kimble 58 2007 Managing Director - Strategic Cost Initiative and
Global Resourcing
Beverley A. Sibblies 45 2004 Senior Vice President - Chief Financial Officer
William H. Kesler 55 2006 Senior Vice President - Treasurer
James E. Binyon 43 2006 Vice President and Chief Accounting Officer
-----------------------------------------------------------------------------------------------
Brendan P. McDonagh, Chief Executive Officer of HSBC Finance Corporation since
February 2007. Mr. McDonagh served as Chief Operating Officer of HSBC Finance
Corporation prior to his appointment as Chief Executive Officer in February
2007. From December 2006 to February 2007, Mr. McDonagh held the title of Group
Executive of HSBC Finance Corporation. From October 2004 to December 2006 he
served as Chief Operating Officer of HSBC Bank USA. He is also a Group General
Manager of HSBC Holdings plc having been appointed as such in August 2005. An
international manager for the HSBC Group for more than twenty five years, Mr.
McDonagh began his career with HSBC in 1979, completing various assignments
throughout the world. In September 2002, he transferred to the United States to
run the retail and commercial banking operations of HSBC Bank USA. Mr. McDonagh
is active in several US and Ireland organizations including the New York
Regional Board of the American Ireland Fund and USA Board of Co-operation
Ireland. Mr. McDonagh is Chairman-elect of the Consumer Bankers Association.
Andrew C. Armishaw, Group Executive and Chief Information Officer of HSBC
Finance Corporation and Senior Executive Vice President and Chief Information
Officer of HSBC North America Holdings Inc. since January 2004. From January
2001 to December 2003 Mr. Armishaw was Head of Global Resourcing for HSBC and
from 1994 to 1999 was Chief Executive Officer of First Direct (a subsidiary of
HSBC) and Chief Information Officer of First Direct.
Patrick A. Cozza, Group Executive of HSBC Finance Corporation since April 2004.
Prior to that Mr. Cozza became President - Refund Lending and Insurance Services
in 2002 and Managing Director and Chief
179
Executive Officer - Refund Lending in 2000. He also serves on the board of
directors of Junior Achievement in New Jersey, Cancer Hope Network, Somerset
Business Partnership and American Council of Life Insurers PAC. Mr. Cozza serves
as board member and officer of Household Life Insurance Company, First Central
National Life Insurance Company and HSBC Insurance Company of Delaware, all
subsidiaries of HSBC Finance Corporation.
Thomas M. Detelich, Group Executive, Consumer and Mortgage Lending of HSBC
Finance Corporation since August 2006. Mr. Detelich is also a Group General
Manager for HSBC since October 1, 2006. He became Group Executive, Consumer
Lending in July 2002. Mr. Detelich also held the positions of Managing Director
at Beneficial Corporation from March 2000 to July 2002 and Managing Director of
Household Finance Corporation from January 1999 to July 2002 and regional
general manager of consumer lending in 1998. Mr. Detelich was formerly with
Transamerica for 21 years, becoming Executive Vice President of Branch
Operations in 1997.
Walter G. Menezes, Group Executive of HSBC Finance Corporation since April 2004
and is responsible for HSBC Finance Corporation's credit card and private label
credit card operations. Mr. Menezes is also a Group General Manager for HSBC
since October 1, 2006. Mr. Menezes held the title of President and Chief
Executive Officer for Auto Finance from 2002 to August 2004 and Managing
Director and Chief Credit Officer of Credit Card Services since from 1998 to
2002. He joined HSBC Finance Corporation in 1996 as National Director
Collections - Credit Card Services.
David D. Gibbons, Senior Executive Vice President, Corporate Risk and Compliance
of HSBC Finance Corporation and of HSBC North America Holdings Inc. since
February 2007. Prior to that Mr. Gibbons was Senior Executive Vice President,
Chief Risk Officer of HSBC Finance Corporation and of HSBC North America
Holdings Inc. since March 2004. Mr. Gibbons served as Deputy Comptroller for
Special Supervision from October 2002 to March 2004, was with the Office of the
Comptroller of the Currency from September 1977 to March 2004 and served as
Deputy Comptroller of the Currency for Credit Risk from 1997 to 2002.
Kenneth H. Robin, Senior Executive Vice President, General Counsel and Corporate
Secretary of HSBC Finance Corporation since May 2003 and Senior Executive Vice
President, General Counsel and Corporate Secretary of HSBC North America
Holdings Inc. since January 2004. Prior to that Mr. Robin was Senior Vice
President, General Counsel and Secretary of HSBC Finance Corporation, since
1993.
Christopher D. Spooner, Senior Executive Vice President of HSBC Finance
Corporation and Senior Executive Vice President and Chief Financial Officer of
HSBC North America Holdings Inc. since December 2006. Mr. Spooner has held
various positions since arriving at HSBC in 1994 including Group Tax Controller
and Head of Group Financial Planning and Tax for HSBC Holdings plc., a position
he continues to hold.
Anthony J. Murphy, Senior Executive Vice President - Portfolio Management for
HSBC Finance Corporation since February 2007. Prior to his appointment to this
position, Mr. Murphy was President and Chief Executive Officer of HSBC
Securities (USA) Inc. and Chief Operating Officer of CIBM Americas. He was also
Co-Head of Corporate, Investment Banking and Markets (CIBM Americas) since
November 2004. Mr. Murphy has been with the HSBC Group since 1990. Prior to his
appointment as Chief Executive Officer of HSBC Securities (USA) Inc. in April
2003, Mr. Murphy served as Chief Strategic Officer of CIBM Americas from 2000.
Prior to that assignment, he was Head of Market Risk Management for HSBC Bank
plc and HSBC Investment Bank in London from 1996.
Steven B. Gonabe, Executive Vice President of Administration of HSBC Finance
Corporation and of HSBC North America Holdings Inc. since July 2005. From June
1997 to July 2005 Mr. Gonabe was Vice President of Human Resources for HSBC
credit card services, auto finance and mortgage services businesses. Mr. Gonabe
has served on the board of directors for the United Way of Monterey County and
is a member of the Junior Achievement of Silicon Valley and Monterey Bay,
California. He is currently involved with Students in Free Enterprise (SIFE), an
organization designed to develop an understanding of the principles of financial
education for young people.
Lisa M. Sodeika, Executive Vice President of Corporate Affairs of HSBC Finance
Corporation and of HSBC North America Holdings Inc. since June 2005. Ms. Sodeika
directs HSBC North America's public affairs,
180
employee communications, government relations, consumer advocacy, community
development and philanthropic services activities. From January 2003 to June
2005 Ms. Sodeika was Senior Vice President - Corporate Affairs and Vice
President - Consumer Affairs. Since joining HSBC Finance Corporation, Ms.
Sodeika has held management positions in a variety of operational areas within
the consumer finance and retail services businesses including marketing,
collections, quality assurance and compliance, underwriting and human resources.
Ms. Sodeika serves as chairperson of the Federal Reserve Board's Consumer
Advisory Council.
Mark A. Melas, Executive Vice President - Corporate Real Estate, North America
since 2000. Prior to that, Mr. Melas held the position of Senior Vice President
from April 1995. From 1978 through March 1995 he was employed at New York
Telephone (NYNEX) as an Area Operations Manager in Corporate Real Estate.
John J. Haines, Managing Director of Auto Finance of HSBC Finance Corporation
since joining HSBC Finance Corporation in August 2004. From May 1989 to August
2004 Mr. Haines worked for General Electric where most recently he was Senior
Vice President - Products and Services for General Electric Fleet Services and
Senior Vice President - North American Operations for General Electric Fleet
Services. Mr. Haines is a member of the Automotive Finance Committee of the
Consumer Bankers Association. Mr. Haines is on the Board of Directors of the San
Diego Chamber of Commerce, United Way and NP Strategies, a non-profit
organization.
Joseph W. Hoff, Managing Director of Retail Services of HSBC Finance Corporation
since March 2005. Mr. Hoff served as Chief Financial Officer for the Retail
Services business from April 1995 to March 2005. He has been with HSBC Finance
Corporation since 1976 in various accounting and corporate finance positions.
Gary R. Esposito, Managing Director and Chief Executive Officer of Mortgage
Services for HSBC North America Holdings Inc. From 2002 to 2005, Mr. Esposito
held the positions of Managing Director - U.S. branch operations for the
Consumer Lending business and was the President, Chief Executive Officer and
Chairman for HSBC Canada from October 2000 to November 2003. He was also
National Director, branch and retail operations from 1998 through 2000. He has
been with HSBC Finance Corporation since 1982.
Patrick J. Burke, Managing Director and Chief Executive Officer of Credit Card
Services for HSBC Finance since January 2006. He was appointed President and
Chief Executive Officer of HSBC Financial Limited Canada in January 2003 until
July 2006. Patrick was appointed Chief Financial Officer with HFC Bank Limited
from 2000 until 2003. From the start of his career with HSBC in 1989, Patrick
has served the company in many roles including Deputy Director of Mergers and
Acquisitions and Vice President of Strategy and Development.
Thomas M. Kimble, Managing Director - Strategic Cost Initiative and Global
Resourcing of HSBC Finance Corporation and of HSBC North America Holdings Inc.
since February 2007. Prior to his appointment to this position, since July 2006
Mr. Kimble served as the Managing Director - Global Projects and Operations for
HSBC North America Holdings Inc. and prior to that, Managing Director of
Operations for Household/ HSBC Card Services for eight years. Mr. Kimble has
been active in the Salinas Valley Chamber of Commerce and is a past president of
the Chamber. He is also a Past President of Shelter Outreach Plus, a domestic
violence shelter.
Beverley A. Sibblies, Senior Vice President and Chief Financial Officer of HSBC
Finance Corporation and Executive Vice President of Finance of HSBC North
America Holdings Inc. since October 2005. Ms. Sibblies joined HSBC Finance
Corporation in November 2004 as the Senior Vice President and Chief Accounting
Officer. Prior to joining HSBC Finance Corporation, she served as Executive Vice
President and Chief Financial Officer for EMC Mortgage from June 2000 to
February 2004. Prior to that, she served as a partner in the financial services
practice of Deloitte & Touche, LLP from July 1997 to June 2000.
William H. Kesler, Senior Vice President - Treasurer since April 1, 2006. Mr.
Kesler joined HSBC Finance Corporation in 1992 and since that time has held
various treasury management positions. He is a trustee of the Hospice of
Northeastern Illinois Foundation and serves on the Foundation's executive
committee.
181
James E. Binyon, Vice President and Chief Accounting Officer since February
2006, and from September 2004 was Vice President and Controller of Corporate
Finance. From November 2001 to August 2004 he served as Finance Director of
First Direct, and from February 1995 to October 2001 was Senior Area Accounting
Manager, and Manager - Balance Sheet Management for HSBC Hong Kong. Mr. Binyon
was Manager-Asset Management & Funding, and Manager - Treasury Audit Department
between 1992 and 1995. Prior to joining HSBC, Mr. Binyon spent five years at
KPMG.
CORPORATE GOVERNANCE
--------------------------------------------------------------------------------
BOARD OF DIRECTORS - COMMITTEES AND CHARTERS
The Board of Directors of HSBC Finance Corporation has four standing committees:
the Audit Committee, the Compensation Committee, the Nominating and Governance
Committee and the Executive Committee. The charters of the above-mentioned
committees, as well as our Corporate Governance Standards, are available on our
website at www.hsbcusa.com or upon written request made to HSBC Finance
Corporation, 2700 Sanders Road, Prospect Heights, Illinois 60070, Attention:
Corporate Secretary.
Audit Committee
The primary purpose of the audit committee is to assist the Board of Directors
in fulfilling its oversight responsibilities relating to HSBC Finance
Corporation's system of internal controls over financial reporting and its
accounting, auditing and financial reporting practices. The audit committee is
currently comprised of the following independent Directors (as defined by HSBC
Finance Corporation's Corporate Governance Standards which are based upon the
rules of the New York Stock Exchange): Gary G. Dillon, Robert K. Herdman and
Larree M. Renda. In addition, Cyrus F. Freidheim, Jr., Lead Director, and
Douglas J. Flint, Group Finance Director of HSBC, are non-voting members of the
audit committee. The Board has determined that each of these individuals is
financially literate. The Board of Directors has determined that Robert K.
Herdman qualifies as an audit committee financial expert.
Compensation Committee
The primary purpose of the Compensation Committee is to assist the Board of
Directors in discharging its responsibilities related to the compensation of the
Chief Executive Officer of HSBC Finance Corporation and the officers that are
direct reports to the Chief Executive Officer and such other officers as may be
designated by the Board of Directors. The Compensation Committee is currently
comprised of the following directors: George A. Lorch (Chair), William R. P.
Dalton, Gary G. Dillon and Cyrus F. Freidheim, Jr. (ex-officio member). With the
exception of Mr. Dalton, all members of the Compensation Committee are
independent directors under HSBC Finance Corporation's Corporate Governance
Standards.
The Charter of the Compensation Committee lists the primary responsibilities,
powers and authorities of the Compensation Committee. The listed items include
(i) review and approve corporate goals and performance objectives relevant to
the compensation of the Chief Executive Officer and executive officers, evaluate
the performance of the Chief Executive Officer and executive officers in light
of those goals and objectives, and review its findings with the Board of
Directors in executive session, (ii) submit recommendations concerning base
salary, performance-based cash and long term equity-based incentive awards for
the Chief Executive Officer and executive officers to the Remuneration Committee
of HSBC ("REMCO") for approval, (iii) recommend to REMCO equity incentives under
HSBC plans to all employees, except those awards that the Chief Executive
Officer may determine based upon a delegation of authority by REMCO, (iv) review
and approve benefits and perquisites of the Chief Executive Officer and
executive officers to the extent such benefits are not available to all
employees, (v) recommend to the Board of Directors and REMCO the creation or
amendment of any welfare, or tax qualified employee benefit plan or program of
HSBC Finance Corporation, or any long-term executive compensation plan or
program of HSBC Finance Corporation whose participants include the Chief
Executive Officer or executive officers, (vi) review and recommend to REMCO any
employment and severance contracts for the Chief Executive Officer and executive
officers, as well as any severance payouts to such officers, (vii) review and
consider "best practices" of peer companies
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with respect to compensation philosophies, policies and practices, (viii) review
management's Compensation Discussion and Analysis ("CD&A") to be included in
HSBC Finance Corporation's Annual Report on Form 10-K, discuss the CD&A's
content with management, and prepare the Compensation Committee Report
concerning the CD&A and recommend to the Board of Directors that the CD&A be
included in the annual report on Form 10-K and (ix) engage in an annual self
assessment with the goal for continuing improvement, and to review and assess
the adequacy of this charter at least annually and recommend any proposed
changes to the Board of Directors for approval.
The Compensation Committee may in its discretion retain and discharge
consultants to assist the Compensation Committee in evaluating director, Chief
Executive Officer or executive officer compensation and to determine the
appropriate terms of engagement and the fees to be paid to such consultants. The
Chief Executive Officer is given full authority, which may be delegated, to
establish the compensation and salary ranges for all other employees of HSBC
Finance Corporation and its subsidiaries whose salaries are not subject to
review by the Compensation Committee and approval by REMCO. For more information
about the compensation policy of HSBC Finance Corporation please see Item 11.
Executive Compensation - Compensation Discussion and Analysis.
Nominating and Governance Committee
The primary purpose of the Nominating and Governance Committee is to assist the
Board of Directors of HSBC Finance Corporation in discharging its
responsibilities related to identifying and nominating members of the Board of
Directors to the Board, recommending the composition of each committee of the
Board of Directors and the Chair of each committee, establishing and reviewing
HSBC Finance Corporation's corporate governance and making recommendations to
the Board of Directors regarding compensation for service of the non-executive
Board members. The Nominating and Governance Committee ensures that HSBC Finance
Corporation maintains "best practices" with respect to corporate governance in
order to ensure effective representation of its stakeholders.
The Nominating and Governance Committee is currently comprised of the following
directors: J. Dudley Fishburn, Cyrus F. Freidheim, Jr. (ex-officio member),
George A. Lorch and Larree M. Renda (Chair). With the exception of Mr. Fishburn,
all members of the Nominating and Governance Committee are independent directors
under HSBC Finance Corporation's Corporate Governance Standards.
Executive Committee
The Executive Committee may exercise the powers and authority of the Board of
Directors in the management of the business and affairs of the corporation
during the intervals between meetings of the Board of Directors. Messrs. Gary G.
Dillon and Cyrus F. Freidheim, Jr. are members of the Executive Committee.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act, as amended, requires certain of our
Directors, executive officers and any persons who own more than ten percent of a
registered class of our equity securities to report their initial ownership and
any subsequent change to the SEC and the New York Stock Exchange ("NYSE"). With
respect to the 6.36% Series B Preferred Stock of HSBC Finance Corporation, we
reviewed copies of all reports furnished to us and obtained written
representations from our Directors and executive officers that no other reports
were required. Based solely on a review of copies of such forms furnished to us
and written representations from the applicable Directors and executive
officers, all required reports of changes in beneficial ownership were filed on
a timely basis for the 2006 fiscal year.
CODE OF ETHICS
HSBC Finance Corporation's Board of Directors has adopted a Code of Ethics for
Senior Financial Officers. That Code of Ethics is incorporated by reference in
Exhibit 14 to this Annual Report on Form 10-K. HSBC Finance Corporation also has
a general code of ethics applicable to all employees that is referred to as its
Statement of Business Principles and Code of Ethics. That document is available
on our website at
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www.hsbcusa.com or upon written request made to HSBC Finance Corporation, 2700
Sanders Road, Prospect Heights, Illinois 60070, Attention: Corporate Secretary.
ITEM 11. EXECUTIVE COMPENSATION.
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COMPENSATION DISCUSSION AND ANALYSIS ("2006 CD&A")
The following discussion summarizes the principles, objectives and factors
considered by HSBC Finance Corporation in evaluating and determining the
compensation of executive officers in 2006. Specific compensation information
relating to Siddharth N. Mehta, Chairman and Chief Executive Officer of HSBC
Finance Corporation until February 15, 2007; Thomas M. Detelich and Walter G.
Menezes, Group Executives; Kenneth H. Robin, Senior Executive Vice President,
General Counsel and Corporate Secretary; and Beverley A. Sibblies, Senior Vice
President and Chief Financial Officer, is contained in this portion of the Form
10-K.
OVERSIGHT OF COMPENSATION DECISIONS
HSBC Finance Corporation is a wholly owned subsidiary of HSBC Holdings plc
("HSBC"). The Board of Directors of HSBC has the authority to delegate any of
its powers, authorities and judgments to any committee consisting of one or more
directors and has established a Remuneration Committee ("REMCO") for the purpose
of setting the remuneration policy for HSBC and its subsidiaries and the
compensation of senior executives. REMCO's responsibilities include reviewing
and approving performance-based remuneration by reference to corporate goals and
objectives established by the Board of Directors of HSBC from time to time and
approving overall market positioning of the compensation package, individual
base salaries and increases, and annual and long-term incentive/bonus
arrangements for certain executives, including Messrs. Mehta, Detelich, Menezes
and Robin. In November 2006, REMCO delegated its authority for approval of
salaries and annual cash incentive awards relating to certain classes of
executives to Michael F. Geoghegan, the HSBC Group Chief Executive (the "HSBC
CEO"). However, REMCO retained exclusive authority over compensation of the more
senior executives within HSBC and its subsidiaries. As a result, REMCO had
authority over the compensation of Messrs. Mehta, Detelich and Menezes in 2006
while the HSBC CEO had authority over Mr. Robin. REMCO has exclusive authority
with respect to all long-term incentive plan awards involving interests in HSBC
ordinary shares.
The members of REMCO in 2006 were Sir Mark Moody-Stuart (Chairman), W.K.L. Fung,
S. Hintze, Sir John Kemp-Welch (until retirement on May 26, 2006) and J.D.
Coombe (effective as of June 1, 2006), all of whom were or are non-executive
directors of HSBC. REMCO has retained the services of Towers Perrin, a human
resource consulting firm, to provide independent advice on executive
compensation issues.
The Compensation Committee of the Board of Directors of HSBC Finance Corporation
(the "Compensation Committee") seeks to ensure that our compensation policies
and practices support the objectives of HSBC Finance Corporation's compensation
program, which is based upon compensation objectives established by REMCO. The
Compensation Committee makes advisory recommendations for all compensation to be
paid to our Chief Executive Officer and each of his direct reports.
Throughout the year, management of our Human Resources Department consults with
HSBC Human Resources executives concerning compensation policies and specific
awards for certain executives. Our Human Resources executives work with the
Compensation Committee to prepare a comprehensive annual compensation package
for Mr. Mehta and each executive officer that reports to him. This package is
prepared and late in each calendar year is forwarded to HSBC Human Resources
management for submission to REMCO and the HSBC CEO, as appropriate, and
includes advisory recommendations for salary for the ensuing calendar year, a
preliminary performance-based cash award and an equity-based long-term incentive
award. As the performance-based cash award is dependent upon satisfaction of
objectives that cannot be evaluated until the end of the performance measurement
year, the final determination of that component of
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compensation is not made until the Compensation Committee receives reports from
management concerning satisfaction of corporate, business unit and individual
objectives in January. REMCO or the HSBC CEO, as appropriate, will approve or
revise the advisory recommendations provided by the Compensation Committee. The
terms of compensation for Ms. Sibblies are proposed by the Chief Financial
Officer of HSBC North America Holdings Inc., in consultation with our Human
Resources executives, and is approved by the HSBC Finance Corporation Chief
Executive Officer.
The Compensation Committee is comprised of the following individuals: George A.
Lorch (Chair), William R. P. Dalton, Gary G. Dillon and Cyrus F. Freidheim, Jr.
(ex-officio member). During 2006, with the exception of Mr. Dalton, the
Compensation Committee was composed of independent directors, as defined under
HSBC Finance Corporation's Corporate Governance Standards. Additional
information with regard to the Compensation Committee, including a description
of its responsibilities under the its charter, is contained in the section of
this Form 10-K entitled Item 10. Directors, Executive Officers and Corporate
Governance -- Corporate Governance.
OBJECTIVES OF HSBC FINANCE CORPORATION'S COMPENSATION PROGRAM
Our compensation program is designed to support the successful recruitment,
development, and retention of high performing executive talent and to incent
those executives to achieve HSBC Finance Corporation's short-term business
objectives and to optimize its long-term financial returns. We design our
compensation programs to be competitive with a comparator group of benchmark
financial institutions. HSBC Finance Corporation's comparator group is comprised
of U.S.-based organizations that compete with us for business, customers, and
executive talent. Our comparator group includes American Express Company, Bank
of America Corporation, Capital One Financial Corporation, Countrywide Financial
Corporation, Citigroup, Inc., FifthThird Bancorp, JP Morgan Chase, MBNA
Corporation, National City Corporation, US Bancorp, Wachovia Corporation and
Wells Fargo & Company (collectively, the "Comparator Group"). While most of
these organizations are publicly held companies, our operations are of
comparable scale and complexity and our compensation program is designed to
provide the flexibility to offer compensation that is competitive with the
Comparator Group so that we may attract and retain the highest performing
executives.
The philosophy underlying our executive compensation program which is designed
to promote the compensation objectives of our parent, HSBC, is as follows:
Link to Company Performance
We seek to offer competitive base salaries with a significant portion of
variable compensation components determined by measuring performance of the
executives, their business unit(s), HSBC Finance Corporation and HSBC. The
performance-based cash compensation plans that are more fully described under
Elements of Compensation - Annual Performance-Based Awards, emphasize revenue
and expense growth, net income, receivable growth, profits, and other key
performance measures. Other considerations taken into account in setting
compensation policies and making compensation decisions include demonstrated
leadership, future potential, adherence to HSBC's ethical standards and the
ability to leverage capabilities across businesses. Corporate, business unit
and/or individual goals are established at the beginning of each year.
Compensation plans motivate our executives to improve the overall performance
and profitability of HSBC as well as the specific region, unit, or function to
which they are assigned. Each executive's individual performance and
contribution is considered in making salary adjustments and determining the
amount of annual performance bonus paid and the value of HSBC equity shares
granted each year.
We have historically used grants of stock options and restricted shares to
reward and provide longer term incentives for our executives. However, in 2005,
HSBC adopted a new philosophy to provide only restricted shares, called
"Achievement Shares", which vest on a specified date if the executive remains
employed through that date and "Performance Shares" that require continued
employment and satisfaction of corporate performance conditions designed to
reinforce a long-term focus on HSBC's Managing for Growth strategy and
delivering value to its shareholders. Performance shares are granted to the most
senior executives whose
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business units have the ability to have a direct impact on HSBC's consolidated
results. Achievement share awards are granted to other high performing
executives.
Competitive Compensation Levels and Marketplace Research
We endeavor to maintain compensation programs that are competitive with our
Comparator Group. We operate in a highly competitive business environment, in
which our Comparator Group and other financial services companies continuously
look to gain market share and competitive advantage by hiring top executive
talent. On an annual basis and as needed when recruiting, we compare the
compensation for our executive officers to that of executives with similar
responsibilities and scope of business. In 2006 the Compensation Committee
considered comparative data from a general industry survey of 340 non-financial
services companies, a financial services survey of 150 companies and a survey of
our Comparator Group to help establish compensation levels for our executives.
We research the types of compensation programs provided by other companies,
compensation levels for executives, details of certain compensation programs,
historical marketplace compensation trends, marketplace practices regarding pay
mix, stock vesting terms, equity ownership levels, the amount of pay that is
derived from equity incentives and the benefits provided to executives. We also
research different aspects of performance, including the relationship between
performance and pay, a comparison of HSBC Finance Corporation's historical
performance to our Comparator Group, and types of performance measures that are
used by other companies for their annual and long-term incentive programs.
Research data is gathered from several different sources, including general
surveys of the marketplace and through retained compensation consultants.
Our compensation programs generally provide executives with the opportunity to
earn a base salary that is near the 50th percentile average of our Comparator
Group. We believe this represents a competitive base salary for meeting general
business objectives. However, total compensation, which includes incentive
awards, is targeted to be in the 75th percentile if we, HSBC and the executive
meet established performance goals. This provides greater incentive to achieve
higher performance standards and the specific goals established by the
Compensation Committee each year. The level of compensation paid to an executive
from year to year will differ based upon performance. This year-to-year
difference stems mainly from HSBC Finance Corporation's and/or an individual
business unit's performance results and, for individuals eligible for
performance-based stock awards, awards may vary based upon HSBC's performance
results. Compensation levels will also increase or decrease based on the
executive's individual performance and level of responsibility.
We also track the amount of an executive's compensation that is subject to
multi-year vesting restrictions and the Compensation Committee considers a
wealth accumulation analysis and total annual compensation summary for each
executive. This information helps the Compensation Committee to gauge our
ability to retain highly talented executives and provide advice on competitive
compensation packages to REMCO or to the HSBC CEO, as appropriate.
Repricing of Stock Options and Timing of Option Grants
The exercise price of stock options under historical Household International,
Inc. option plans was based upon the stock price on the date the option grant
was approved. For HSBC discretionary option plans, the exercise price of awards
made in 2003 and 2004 was the higher of the average market value for ordinary
shares on the five business days preceding the grant date or the market value on
the date of the grant.
HSBC also offers all employees a plan in which options to acquire ordinary
shares are awarded when an employee commits to contribute up to L250 (or the
equivalent) each month for one, three or five years. At the end of the term, the
accumulated amount, plus interest, may be used to purchase shares under the
option, if the employee chooses to do so. The exercise price for such options is
the average market value for ordinary shares on the five business days preceding
the date of the invitation to participate, less a 15-20% discount (depending
upon the term).
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We do not, and our parent, HSBC does not, reprice stock option grants. In
addition, we and HSBC have never engaged in the practice known as "back-dating"
of stock option grants.
Dilution from Equity-Based Compensation
While dilution is not a primary factor in determining award amounts, there are
limits to the number of shares that can be issued under HSBC equity programs
which were established by vote of HSBC shareholders in 2005.
Perquisites
It is our philosophy to provide few perquisites to executives. The perquisites
we provide are intended to help executives be more productive and efficient or
to protect HSBC Finance Corporation and its executives from certain business
risks and potential threats. Our review of competitive market data indicates
that the perquisites provided to executives are reasonable and within market
practice. See the Summary Compensation Table below for further information on
perquisites awarded to our executives.
Retirement Benefits
We offer a pension retirement plan that executives may participate in that
provides a benefit equal to that provided to all employees of HSBC Finance
Corporation. However, both qualified and non-qualified defined benefit plans are
maintained so that this level of pension benefit can be continued without regard
to certain Internal Revenue Service limits. Executives and other highly
compensated employees can elect to participate in a nonqualified deferred
compensation plan, where such employees can elect to defer the receipt of earned
compensation to a future date. We also maintain a qualified 401(k) plan with
company matching contributions. Another nonqualified deferred compensation plan
provides executives and other highly compensated employees with a company
matching contribution (based on the level of the employee's election to defer
earned compensation to the qualified 401(k) plan) to the extent that such
company contributions cannot be allocated to the 401(k) plan because of certain
Internal Revenue Service limits. We do not pay any above-market or preferential
interest in connection with deferred amounts.
Employment Contracts and Severance Protection
Certain executive officers, including Mr. Mehta, have employment agreements with
HSBC Finance Corporation. The main purpose of the employment agreements is to
protect us from certain business risks (threats from competitors, loss of
confidentiality or trade secrets, disparagement, solicitation of customers and
employees) and to define our right to terminate the employment relationship. The
employment agreements also protect executives from certain risks, such as a
change in control of HSBC Finance Corporation and death or disability. Certain
other executives, including Mr. Menezes, have entered into agreements that only
provide additional severance benefits upon a change of control of HSBC Finance
Corporation. The terms of Messrs. Mehta's and Menezes' employment agreements are
contained in the descriptions of their compensation under the heading
Compensation of Officers Reported in the Summary Compensation Table.
Role of Executive Officers and External Consultants in Compensation Decisions
HSBC Finance Corporation has engaged Strategic Consulting Group, an executive
compensation consulting firm, to provide comparator data and to assist in the
development of competitive compensation packages for our executives. In
addition, in late 2006 the Compensation Committee independently retained
Frederic W. Cook & Co., Inc., to provide compensation consulting services.
Recommendations and comparative data provided by these consultants are reviewed
by the Chief Executive Officer and the Executive Vice President, Administration
of HSBC Finance Corporation, to assist them in making initial recommendations
for compensation of executives to the Compensation Committee. The Chief
Executive Officer is not present when the Compensation Committee receives
comparative data or establishes recommendations for the Chief Executive
Officer's compensation. As discussed above, the Compensation Committee prepares
an annual compensation package for our Chief Executive Officer and his direct
reports. The compensation proposals are forwarded to HSBC's Group General
Manager of Human Resources who provides this information to the
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HSBC CEO for review. As permitted under the terms of REMCO's delegation of
authority, the HSBC CEO may approve cash components of compensation for certain
officers, including Mr. Robin. Cash components for Mr. Mehta (until February 15,
2007) and Messrs. Detelich and Menezes, as well as equity-based advisory
recommendations for all executives are forwarded to REMCO for approval. The HSBC
Group General Manager of Human Resources subsequently informs HSBC Finance Human
Resources executives of approved compensation awards. REMCO is provided with
comparator information from Towers Perrin which obtains compensation data for
executive positions with companies of similar size and complexity that are
subsidiaries of peer financial services companies. In addition, market data has
been obtained from American Express Company, Bank of America Corporation, Bank
One Corporation, BB&T Corporation, Capital One Financial, Citigroup, Inc.
Countrywide Financial Corporation, FifthThird Bancorp, KeyCorp, LaSalle Bank
Corporation, Merrill Lynch & Co., Inc., National City Corporation, The PNC
Financial Services Group Inc., Royal Bank of Canada, State Street Corporation,
Sun Trust Banks, Inc., US Bancorp, Wachovia Corporation, Washington Mutual Inc.
and Wells Fargo & Company. Comparator and market data is used by REMCO to
evaluate the competitiveness of proposed executive compensation.
Accounting Considerations
We adopted the fair value method of accounting under Statement of Financial
Accounting Standards No. 123 (revised 2004), "Share Based Payment" ("SFAS
123(R)") effective January 1, 2006. SFAS 123(R) applies to all equity
instruments granted to employees beginning January 1, 2006 and does not apply to
awards granted in prior periods before the effective date, except to the extent
that prior periods' awards are modified, repurchased or cancelled after the
required effective date. Prior to 2006, we adopted the fair value method of
accounting prospectively in 2002 for all new equity instruments granted to
employees as provided under Statement of Financial Accounting Standards No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure (an
amendment of FASB Statement No. 123)." The Board of Directors believes that this
treatment reflects greater accuracy and transparency of the cost of these
incentives and promotes better corporate governance.
Tax Considerations
Limitations on the deductibility of compensation paid to executive officers
under Section 162(m) of the Internal Revenue Code is not applicable to HSBC
Finance Corporation, as it is not a public corporation as defined by Section
162(m). As such, all compensation to our executive officers is deductible for
federal income tax purposes, unless there are excess golden parachute payments
under Section 4999 of the Internal Revenue Code following a change in control.
ELEMENTS OF COMPENSATION
We strive for a pay mix that reflects our pay-for-performance philosophy and
results-oriented culture. We attract and retain executives that are highly
motivated to achieve results, and our compensation programs support that
environment.
Our philosophy is to place a significant amount of compensation at risk to
ensure that company performance objectives are met. In line with our
pay-for-performance philosophy, on average, approximately 20% of executive
compensation is base salary and 80% of compensation for top executives relates
to short-term and long-term incentives where the amount paid is based upon
defined performance goals. In the case of the HSBC Finance Corporation Chief
Executive Officer, approximately 90% of compensation is targeted to be
performance-based. Of the 80% incentive compensation, on average, approximately
45% of such compensation relates to long-term incentives, while approximately
35% relates to short-term incentives. Our allocation between short-term and
long-term incentives is based on our need to recognize past performance
(short-term incentives) in conjunction with our need to motivate and retain our
talent (long-term incentives). We believe these allocations are competitive
within the market and reinforce our pay-for-performance philosophy which
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requires that a greater part of compensation is at risk and aligns executives'
interests with those of HSBC's shareholders.
The primary elements of executive compensation are base salary, annual
non-equity performance-based awards, and long-term equity-based incentives. In
limited circumstances, discretionary bonuses may also be awarded. In addition,
executives are eligible to receive company funded retirement benefits that are
offered to all employees. Perquisites are not a significant component of
compensation. In establishing executive compensation packages, the Compensation
Committee provides advisory recommendations and ultimately REMCO and/or the HSBC
CEO approve remuneration under each element based on what they believe is an
appropriate balance between performance-based compensation and other forms of
compensation, the level of responsibility and individual contribution of the
executive and competitive practice in the marketplace for executives from
companies of similar industry, size, and complexity as HSBC Finance Corporation.
Base Salary
Base salary is reviewed annually and increases, if any, are based on corporate
and individual performance. When establishing base salaries for executives,
consideration is given to compensation paid for similar positions at companies
included in compensation surveys of our Comparator Group, targeting the 50th
percentile, which the Compensation Committee believes, when combined with
significant performance-based compensation opportunities, enables HSBC Finance
Corporation to attract and retain high performing executives. In addition, other
factors such as individual and corporate performance, potential for future
advancement, specific job responsibilities, length of time in current position,
individual pay history, and comparison to comparable internal positions
(internal equity) influences the final base salary recommendations for
individual executives.
Annual Performance-Based Awards
Annual non-equity performance-based awards are paid in cash upon satisfaction of
individual, business unit, corporate financial and operational goals. Superior
performance is encouraged by placing a significant part of the executive's total
compensation at risk. In the event certain quantitative or qualitative
performance goals are not met, annual performance awards may be less than the
maximum permitted.
Performance goals are set based on prior year's performance, expectations for
the upcoming year, our annual business plan, the HSBC Managing for Growth
business strategy, and objectives related to building value for HSBC
shareholders. The general concept is if both HSBC Finance Corporation and the
executive perform well for the year, the performance award earned should be at a
high level. If either HSBC Finance Corporation or the executive does not perform
well, the award earned should be at a low level.
In support of our pay-for-performance philosophy, we have two annual non-equity
performance-based award programs: the Executive Bonus Pool and the Management
Incentive Program.
EXECUTIVE BONUS POOL The Executive Bonus Pool is an annual cash incentive plan
that is comprised primarily of corporate and business quantitative goals, as
well as one or more qualitative objective goals. The quantitative business and
corporate factors are specific measures of performance that relate to near and
long-term business unit and corporate profitability. The qualitative objective
goals include cross-business initiatives that create revenue, leverage talent
across businesses and share and support execution of "best practices" and/or
adopt another business' "best practice."
Eligibility in the Executive Bonus Pool is determined annually based on
responsibility. Participants are limited to the Chief Executive Officer and his
or her direct reports. In 2006, there were ten participants in the Executive
Bonus Pool, including Messrs. Mehta, Detelich, Menezes and Robin. At the
beginning of each year the Compensation Committee establishes allocations for
the participants in the Executive Bonus Pool based upon data for our Comparator
Group, the relative responsibilities of our executives and the opportunity of
each executive to impact the operating results. The assigned allocations with
respect to the Executive Bonus Pool for Messrs. Mehta, Detelich, Menezes and
Robin in 2006 were 20%, 12%, 12% and 6% respectively.
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The maximum potential aggregate award to all participants in the Executive Bonus
Pool each year is equal to 5% of HSBC Finance Corporation's net income that
exceeds the net income required to achieve a 12% return on average common
stockholder's equity (the "Available Bonus Pool"). The Compensation Committee
recommends actual bonus awards under the Executive Bonus Pool by comparing our
results to the Comparator Group and by evaluating the performance of each
participating executive against the quantitative financial objectives and the
qualitative objectives established at the beginning of each year. The
Compensation Committee is not required to recommend that any, or all, of the
Available Bonus Pool be actually paid out in any year regardless of our
financial performance. Historically, actual aggregate payout awarded to
executives has been less than half of the Available Bonus Pool. An executive's
level of participation in the Executive Bonus Pool does not impact his or her
base salary or long-term incentive compensation. Payouts from the Executive
Bonus Pool are made in February following the measurement year.
In any year, if the return on equity achieved by HSBC Finance Corporation is
less than the designated threshold set by the Compensation Committee, no bonus
will be paid under the Executive Bonus Pool. In 2006, IFRS Management Basis net
income of $2,562 million was required to achieve a 12% return on average common
stockholder's equity. In January 2007, the Compensation Committee provided
advisory recommendations for awards under the Executive Bonus Pool based upon
preliminary 2006 results. In early February it was determined that the return on
average stockholder's equity threshold was not met and the bonus pool was not
funded. However, the Compensation Committee recommended and the HSBC CEO
subsequently agreed that certain executives should receive a discretionary bonus
award equal to the amount that would have been paid if the Executive Bonus Pool
had been funded. REMCO ratified these payments at a meeting held on March 1,
2007. This decision was based upon several factors, including the need to ensure
the continuity of management following the resignation of Mr. Mehta, performance
within the areas of responsibility of the individuals, recognition that the
executives to receive payments were not responsible for the events that led to
the failure to meet the return on average stockholder's equity threshold and
that the executive management team of HSBC Finance Corporation was to receive
reduced long-term equity based awards as a result of the disappointing
consolidated performance of HSBC Finance Corporation. As a result, Messrs.
Detelich, Menezes and Robin received discretionary bonus awards in February
2007.
Under the Executive Bonus Plan, Messrs. Mehta, Detelich, Menezes and Robin
shared several common quantitative financial and operating performance
objectives for the consolidated results of HSBC Finance Corporation. Those
objectives are set out below, but because the average stockholder's equity
threshold was not met and no award could be made under the Executive Bonus Plan,
these objectives were not specifically considered in making the discretionary
bonus awards to Messrs. Detelich, Menezes and Robin.
Those corporate objectives for 2006 were:
Objective
- Profit Before Tax
- Net Income
- Return on Equity
- Receivables Growth
- Revenue Growth
- Expense Growth
- Efficiency Ratio
- The greater of: Reserves to Charge-offs and Reserves to Non-performing
Loans
- Net Charge-off
Messrs. Mehta, Detelich and Menezes had additional common quantitative goals,
Mr. Mehta's relating to the consolidated results of HSBC Finance Corporation
shown above, while Mr. Detelich's were measured on the performance of the
Consumer Lending business and Mr. Menezes' were based upon the performance of
both the Credit Card Services and Retail Services businesses. The quantitative
goals for each were:
- Business Net Income
- Business Revenue
- Business Expense Growth
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- Business Net Charge-off
- Business Two-Month-and-Over Delinquency
- Business Return on Managed Assets
Messrs. Mehta, Detelich, Menezes and Robin shared a common qualitative objective
to leverage capabilities across businesses by initiating or supporting cross
business initiatives that created revenue, leveraging talent across businesses
and sharing and supporting the execution of best practices among HSBC North
America businesses and/or adopting a best practice.
MANAGEMENT INCENTIVE PROGRAM The Management Incentive Program is an annual cash
incentive plan that uses quantitative and qualitative goals to motivate
employees who have a significant role in the corporation that do not participate
in the Executive Bonus Plan. The quantitative objectives may include meeting
revenue and/or receivable targeted growth, a targeted loss reserve ratio, a
targeted equity to managed assets ratio, a targeted earnings per share,
reduction in expenses and charge-offs by specified percentages, specified net
income and operating efficiency ratios for HSBC Finance Corporation and/or the
executive's respective business unit, and an increase in the number of our
products used by each customer. The quantitative objectives often coincide with
those of executives participating in the Executive Bonus Pool. Qualitative
objectives may include key strategic business initiatives or projects for the
executive's respective business unit. Award opportunity and payouts are
determined as a percentage of base salary and are based on comparison to other
internal comparable positions (internal equity) and external market practices.
Cash incentive awards under the Management Incentive Program are paid in
February of the year following the measurement year.
Ms. Sibblies participated in the Management Incentive Program in 2006. A
discussion of the quantitative and qualitative objectives for Ms. Sibblies, and
the performance against those goals can be found below under the heading
Compensation of Officers Reported in the Summary Compensation Table - Chief
Financial Officer Compensation.
Long-term Incentives
Long-term incentive compensation is awarded through grants of HSBC equity
instruments. The purpose of equity-based incentives is to help HSBC Finance
Corporation attract and retain outstanding employees and to promote the growth
and success of our business over a period of time by aligning the financial
interests of these employees with HSBC's shareholders. Historically, equity
incentives were awarded through stock options and restricted share grants.
All stock options granted prior to November 2002 vested in full upon the merger
of HSBC Finance Corporation and HSBC, and options granted in November 2002 have
subsequently vested in full. From the time of the merger in March 2003 to 2005,
options on HSBC ordinary shares were granted to certain executives and
restricted shares to others. The awarded options have an exercise price equal to
the greater of the average market value of HSBC ordinary shares on the five
business days prior to the grant of the option and the market value of HSBC
ordinary shares on the grant date. Option without a performance condition
typically vest in 3, 4 or 5 equal installments based on continued employment and
expire ten years from the grant date. However, certain options awarded to key
executives had a "total shareholder return" performance vesting condition and
only vest if and when the condition is satisfied. No stock options were granted
to executive officers in 2005 or 2006 in conjunction with HSBC's philosophical
shift on the form of equity based compensation.
Awards of restricted shares is another form of long-term incentive compensation
utilized to compensate and incent our employees. When restricted shares are
granted to an executive officer, the underlying shares are held in a trust for
the benefit of the employee and are released only after the defined vesting
conditions are met at the end of the holding period. While in such trust,
dividend equivalents are paid on all underlying shares of restricted stock at
the same rate paid to ordinary shareholders. The dividend equivalents are paid
in the form of additional shares for awards made after 2004 and in cash paid to
the executive for all prior awards.
There are three types of restricted shares used by HSBC: those with a time
vesting condition awarded to recognize significant contribution to HSBC Finance
Corporation ("Achievement Shares"), those with time
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and performance-based vesting conditions ("Performance Shares"), and those with
a time vesting condition for retention purposes ("Retention Awards").
Achievement Shares are awarded to key executives as part of the annual pay
review process in recognition of past performance and to further motivate and
retain executives. The amount granted is based on general guidelines established
by REMCO which include a percentage of base pay, position within HSBC Finance
Corporation and potential for growth. Performance Shares are awarded to key
executives whose performance can have a direct impact on HSBC's consolidated
results and in 2006, within HSBC Finance Corporation, only the Chief Executive
Officer and certain of his direct reports received such awards. Retention Awards
have typically not been granted on an annual basis but rather have been granted
on an as needed basis. No Retention Awards were granted to executive officers in
2006.
As described above, Performance Shares are awarded to an executive and vesting
of those shares is based on achievement of defined levels of future performance
of HSBC. Performance Shares are divided into two equal parts subject to distinct
performance conditions measured over a three year period. A total shareholder
return award, which accounts for 50% of each Performance Share award, will vest
in whole or in part (based on a sliding scale of 0% to 100%) depending upon how
the growth in HSBC's share value, plus declared dividends, compares to the
average shareholder return of a defined competitor group which for 2006 grants
was comprised of 28 major banking institutions including: ABN AMRO Holding N.V.,
Banco Bilbao Vizcaya Argentaria, S.A., Banco Santander Central Hispano S.A.,
Bank of America Corporation, The Bank of New York Company, Inc., Barclays PLC,
BNP Paribas S.A., Citigroup, Inc., Credit Agricole SA, Credit Suisse Group,
Deutsche Bank AG, HBOS plc, JP Morgan Chase, Lloyds TSB Group plc, Mitsubishi
Tokyo Financial Group Inc., Mizuho Financial Group Inc., Morgan Stanley,
National Australia Bank Limited, Royal Bank of Canada, The Royal Bank of
Scotland Group plc, Societe Generale, Standard Chartered PLC, UBS AG, Unicredito
Italiano, US Bancorp, Wachovia Corporation, Wells Fargo & Company and Westpac
Banking Corporation.
The earnings per share award accounts for 50% of each Performance Share award
and is measured using a defined formula based on HSBC's earnings per share
growth over the three-year period as compared to the base-year earnings per
share, which is earnings per share for the year prior to the year the
Performance Shares are granted. None of the earnings per share Performance
Shares will vest unless a minimum earnings per share is reached at the end of
three years.
REMCO maintains discretion to determine that a Performance Share award will not
vest unless REMCO is satisfied that HSBC's financial performance has shown
sustained improvement since the date of the award. REMCO may also waive, amend
or relax performance conditions if it believes the performance conditions have
become unfair or impractical and believes it appropriate to do so. Due to the
probability of one or both of the performance conditions not being met in part
or in full, grants of Performance Shares are for a greater number of shares than
Achievement Share grants. The expected value of Performance Shares is equal to
44% of the face value. Additional information concerning the conditions to
vesting of Performance Share awards is contained in Footnote 2 to the Grants of
Plan Based Awards table on page 200.
COMPENSATION OF OFFICERS REPORTED IN THE SUMMARY COMPENSATION TABLE
Below is a summary of the factors that affected the compensation earned by the
executive officers listed in the Summary Compensation Table in 2006. In
determining the compensation of each of our executives, management and the
Compensation Committee evaluated competitive levels of compensation for officers
managing operations or functions of similar size and complexity and the
importance of retaining executives with the strategic, leadership and financial
skills to ensure our continued growth and success and their potential for
assumption of additional responsibilities.
Chief Executive Officer Compensation
On February 15, 2007, Mr. Mehta resigned as the Chief Executive Officer of HSBC
Finance Corporation. Until that time, he participated in the same programs and
generally received compensation based on the same factors as the other executive
officers. However, Mr. Mehta's overall compensation level reflected his greater
192
degree of policy- and decision-making authority, his higher level of
responsibility with respect to the strategic direction of HSBC Finance
Corporation and his ultimate responsibility for our financial and operational
results.
In January 2006, the Compensation Committee made an advisory recommendation to
REMCO that Mr. Mehta's base salary be increased by $100,000 to its 2006
annualized level of $1,000,000. In reviewing Mr. Mehta's base salary, the
Compensation Committee considered competitive compensation levels and found Mr.
Mehta's then current base salary was below the 50th percentile among
similarly-placed executives in each of the surveys considered, including a
survey of our Comparator Group. The raise placed his base salary at the 50th
percentile of the Comparator Group. REMCO approved the increase in Mr. Mehta's
base salary in February 2006.
Also in January 2006, the Compensation Committee made an advisory recommendation
that Mr. Mehta receive a grant of Performance Shares valued at $4,000,000. The
recommendation reflected the Compensation Committee's view of the value of his
long-term contribution to, and leadership of HSBC Finance Corporation, HSBC
North America Holdings Inc. and HSBC as it seeks to expand the consumer finance
business to appropriate markets worldwide. The recommendation further reflected
the Compensation Committee's desire to retain Mr. Mehta and to incent continued
exceptional performance. On January 23, 2006, REMCO met and considered the
proposed equity based awards for all HSBC executives and awarded Mr. Mehta
Performance Shares with a grant date value of $4,000,010. In making the award,
REMCO also considered internal equity of compensation paid to management peers
within HSBC and its subsidiaries and external benchmarking as described above.
As discussed above, Mr. Mehta's maximum cash performance-based incentive
opportunity for 2006 was 20% of the Executive Bonus Pool, or $7,240,000. Under
his employment agreement (discussed below), Mr. Mehta was entitled to a bonus
guaranteed to be not less than $1,875,000. At a January 2007 meeting, the
Compensation Committee established Mr. Mehta's Annual Cash Incentive Based Award
at $1,875,000. In establishing that recommendation, the Compensation Committee
considered the overall results of HSBC Finance Corporation for 2006 and the
impact of the performance of the Mortgage Services business. However, due to the
disappointing results of the Mortgage Services business, Mr. Mehta voluntarily
waived his right to a guaranteed bonus under his employment agreement.
Other compensation paid to Mr. Mehta in 2006, including perquisites such as a
car allowance and life insurance premiums, was consistent with perquisites paid
to similarly-placed executive officers within and outside of HSBC.
Mr. Mehta had an employment agreement which was scheduled to expire on March 28,
2008. Pursuant to his agreement, Mr. Mehta was to serve as Chairman and Chief
Executive Officer of HSBC Finance Corporation and also Chief Executive Officer
of HSBC North America Holdings Inc. The terms of that agreement are summarized
below.
As stated above, Mr. Mehta resigned as of February 15, 2007. The terms of the
severance arrangements agreed with Mr. Mehta will be described in HSBC Finance
Corporation's 2007 Form 10-K.
During the term of the employment agreement, Mr. Mehta was entitled to receive
an annual base salary (which as of January 1, 2006 was increased to $1 million),
and an annual bonus of at least $1,875,000 (75 percent of the annual average of
his bonus earned in 2003, 2004 and 2005). During the term of the agreement, Mr.
Mehta was eligible to participate in any equity-based incentive compensation
plan or program of HSBC as in effect from time to time for similarly situated
senior executives of HSBC Finance Corporation, as approved by REMCO. In
addition, during the term of the agreement, Mr. Mehta was eligible to
participate in the various retirement, medical, disability and life insurance
plans, programs and arrangements in accordance with the terms of HSBC Finance
Corporation's benefit plans.
Under the terms of the employment agreement, if Mr. Mehta's employment was
terminated by HSBC Finance Corporation other than for "cause" or disability, or
he resigned for "good reason," subject to his execution of a general release in
favor of HSBC Finance Corporation and its affiliates, Mr. Mehta was to
193
continue to receive his base salary and annual bonus described above as if he
had remained employed until March 28, 2008. In addition, to the extent permitted
under the terms of the applicable plans, Mr. Mehta's welfare benefits, umbrella
liability insurance and automobile and financial counseling allowances were to
continue until March 28, 2008, unless he became eligible to participate in
similar plans of another employer prior to that date.
In 2003 and 2005, Mr. Mehta was awarded Retention Awards of HSBC restricted
shares with values of $5 and $8 million, respectively, in each case based on the
closing price of HSBC ordinary shares as of the date of the grant. The 2003
award was to vest in five equal installments on March 28 of each year through
2008. The 2005 award was to vest in five equal installments on March 26 of each
year through 2010. Each award was to vest in full upon termination of Mr.
Mehta's employment by HSBC Finance Corporation other than for cause or , with
respect to the 2003 award, by Mr. Mehta due to a material breach by HSBC Finance
Corporation of Mr. Mehta's employment agreement, or with respect to the 2005
award, by Mr. Mehta for good reason.
Chief Financial Officer Compensation
The Chief Financial Officer of HSBC Finance Corporation, Ms. Beverley A.
Sibblies, participates in general benefits available to officers of the
corporation and the Management Incentive Program. Her cash compensation is
determined by Mr. Mehta upon recommendation of the Chief Financial Officer of
HSBC North America Holdings Inc. in consultation with Human Resources
executives. As with all executives, REMCO has authority over Ms. Sibblies'
Achievement Share awards.
Ms. Sibblies' base salary in 2006 was $375,000. Ms. Sibblies was promoted to
Chief Financial Officer in September 2005 and received a salary increase
reflective of her increased responsibilities at that time. Based upon that
increase and review of comparator data, she did not receive a salary increase in
2006.
Ms. Sibblies' cash incentive compensation under the Management Incentive Program
is determined based upon satisfaction of quantitative and qualitative objectives
that provide for a target cash award equal to 75% of her base salary, up to a
maximum of 150% of base salary. Ms. Sibblies' cash incentive compensation
required satisfaction of objectives that included: the corporation achieving a
targeted net income goal, leveraging talent and promoting collaboration among
HSBC North America management, support of diversity initiatives, effective
implementation of SOX 404 internal controls testing and documentation,
development of mentoring, talent management and succession planning programs
within the Corporate Finance function, design and implementation of enhancements
to accounting processes, oversight of improved clarity of financial disclosures,
and development of accounting staff through participation in HSBC finance
training programs. Management assessed Ms. Sibblies' and HSBC Finance
Corporation's performance against the objectives and found that there was
complete or substantial satisfaction of each. Ms. Sibblies was awarded cash
incentive compensation equal to 145% of her base salary, or $543,750, which was
paid to her in February 2007.
In March 2006, Ms. Sibblies was granted Achievement Shares with a grant date
value of $500,000, which vest in three years and have no performance conditions.
This reflected management's recognition of the value of her contribution to and
leadership of HSBC Finance Corporation, HSBC's desire to retain Ms. Sibblies and
to incent outstanding performance.
Other compensation paid to Ms. Sibblies, including perquisites such as life
insurance premiums, is consistent with perquisites paid to similarly-placed
executive officers within and outside of HSBC.
Mr. Thomas M. Detelich's Compensation
In 2006, Mr. Detelich's base salary remained the same as 2005, at $650,000. For
2006, the Compensation Committee reviewed competitive compensation levels and
found Mr. Detelich's then current cash compensation level was above the 50th
percentile among similarly-placed executives in our Comparator Group. In keeping
with the goal of maintaining executive base salaries in the 50th percentile, it
did not recommend an increase to his salary.
On January 23, 2006, REMCO approved the Compensation Committee's advisory
recommendation that Mr. Detelich receive Performance Shares with a grant date
value of $1,775,687. The award is subject to three-
194
year performance vesting conditions. The vesting criteria of the Performance
Shares is set out in Footnote 2 to the Grants and Plan-based Awards Table on
page 200. The grant reflects REMCO's view of the value of Mr. Detelich's
expected long-term contribution to and leadership of HSBC North America, and
HSBC's desire to retain Mr. Detelich and incent exceptional performance.
As discussed above, Mr. Detelich's maximum cash incentive under the 2006
Executive Bonus Pool was 12% of the available Bonus Pool, or $4,344,000. Based
upon preliminary results of HSBC Finance Corporation, the Compensation Committee
made an advisory recommendation that Mr. Detelich receive a bonus of $2 million.
The Compensation Committee made the award recommendation in recognition of
excellent results within the Consumer Lending business in 2006. In considering
Mr. Detelich's award, the Compensation Committee considered Mr. Detelich's
individual performance, demonstrated leadership, future potential, adherence to
HSBC's ethical standards and the ability to leverage capabilities across
businesses. REMCO agreed with the Compensation Committee's assessment and
approved the award. However, in early February 2007 it was determined that the
return on average stockholder's equity threshold was not met and the Executive
Bonus Pool was not funded. As a result, Mr. Detelich was not entitled to an
award under the plan. Subsequently, the Compensation Committee recommended and
the HSBC CEO agreed that Mr. Detelich should receive a discretionary bonus award
in the amount of $2 million. REMCO ratified these payments at a meeting held on
March 1, 2007. This award was made in recognition of the need to ensure the
continuity of management following the resignation of Mr. Mehta, superior
performance of the Consumer Lending operations under Mr. Detelich's management
and recognition that Mr. Detelich had no responsibility for the events that led
to the failure to meet the return on average stockholder's equity threshold and
the fact that Mr. Detelich's equity award was reduced as a result of the
disappointing consolidated performance of HSBC Finance Corporation.
Other compensation paid to Mr. Detelich, including perquisites such as life
insurance premiums, is consistent with perquisites paid to similarly-placed
executive officers within and outside of HSBC.
Mr. Walter G. Menezes' Compensation
In February 2006, in recognition of his assumption of responsibility of the Card
Services and Retail Services businesses, Mr. Menezes' base salary increased by
$50,000 to its current level of $650,000. To determine Mr. Menezes' base salary,
the Compensation Committee reviewed competitive compensation levels and found
Mr. Menezes' then current cash compensation level fell below the 50th percentile
among similarly-placed executives in our Comparator Group. The Compensation
Committee also considered that Mr. Menezes' base salary was below Mr. Detelich's
who the Compensation Committee deemed to have comparable responsibilities. REMCO
concurred with the Compensation Committee's assessment and, as a result, his
base salary was increased.
On January 23, 2006, REMCO approved the Compensation Committee's advisory
recommendation that Mr. Menezes receive Performance Shares with a grant date
value of $1,775,687. The award is subject to three-year performance vesting
conditions. The vesting criteria of the Performance Shares is set out in
Footnote 2 of the Grants and Plan-based Awards Table on page 200. The grant
reflects REMCO's view of the value of Mr. Menezes' expected long-term
contribution to and leadership of HSBC North America, and HSBC's desire to
retain Mr. Menezes and incent exceptional performance.
As discussed above, Mr. Menezes' maximum cash incentive under the 2006 Executive
Bonus Pool was 12% of the available Bonus Pool, or $4,344,000. Based upon
preliminary results of HSBC Finance Corporation, the Compensation Committee made
an advisory recommendation that Mr. Menezes receive a bonus of $2 million. The
Compensation Committee made the award recommendation in recognition of excellent
results within the Credit Card and Retail Services businesses in 2006. In
considering Mr. Menezes' award, the Compensation Committee considered Mr.
Menezes' individual performance, demonstrated leadership, future potential,
adherence to HSBC's ethical standards and the ability to leverage capabilities
across businesses. REMCO agreed with the Compensation Committee's assessment and
approved the award. However, in early February 2007 it was determined that the
return on average stockholder's equity threshold was not met and the Executive
Bonus Pool was not funded. As a result, Mr. Menezes was not entitled to an award
under the plan. Subsequently, the Compensation Committee recommended and the
HSBC CEO agreed that
195
Mr. Menezes should receive a discretionary bonus award in the amount of $2
million. REMCO ratified these payments at a meeting held on March 1, 2007. This
award was made in recognition of the need to ensure the continuity of management
following the resignation of Mr. Mehta, superior performance of the Credit Card
and Retail Services operations under Mr. Menezes' management and recognition
that Mr. Menezes had no responsibility for the events that led to the failure to
meet the return on average stockholder's equity threshold and the fact that Mr.
Menezes' equity award was reduced as a result of the disappointing consolidated
performance of HSBC Finance Corporation.
Other compensation paid to Mr. Menezes, including perquisites such as life
insurance premiums, is consistent with perquisites paid to similarly-placed
executive officers within and outside of HSBC.
Mr. Menezes, has an employment protection agreement pursuant to which if, during
the 18 month period following a change in control of HSBC Finance Corporation,
Mr. Menezes' employment is terminated due to a "qualifying termination" (which
includes a termination other than for "cause" or disability, or resignation by
Mr. Menezes for "good reason"), he will be entitled to receive a cash payment
consisting of:
- A pro rata annual bonus through the date of termination, based on the
highest of the annual bonuses payable during the three years preceding
the year in which the termination occurs;
- A payment equal to 1.5 times the sum of the applicable base salary and
highest annual bonus; and
- A payment equal to the value of 18 months of additional employer
contributions under HSBC North America's tax-qualified and supplemental
defined contribution plans.
In addition, upon a qualifying termination following a change in control, Mr.
Menezes will be entitled to continued welfare benefit coverage for 18 months
after the date of termination, 18 months of additional age and service credit
under HSBC North America's tax-qualified and supplemental defined benefit
retirement plans, and outplacement services. If any amounts or benefits received
under the employment protection agreement or otherwise are subject to the excise
tax imposed under section 4999 of the Internal Revenue Code, an additional
payment will be made to restore Mr. Menezes to the after-tax position in which
he would have been if the excise tax had not been imposed. However, if a small
reduction in the amount payable would render the excise tax inapplicable, then
this reduction will be made instead.
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