HSBC FinCorp Restated10Q/1 04
HSBC Holdings PLC
31 March 2005
PART 2
TOTAL RESTRUCTURED BY RESTRUCTURE PERIOD - DOMESTIC PORTFOLIO(1)
(MANAGED BASIS)
MARCH 31, DECEMBER 31, MARCH 31,
2004 2003 2003
------------------------------------------------------------------------------------------------
Never restructured........................................ 84.7% 84.4% 83.3%
Restructured:
Restructured in the last 6 months....................... 6.2 6.7 7.5
Restructured in the last 7-12 months.................... 3.9 3.8 3.6
Previously restructured beyond 12 months................ 5.2 5.1 5.6
--------- --------- ---------
Total ever restructured(2).............................. 15.3 15.6 16.7
--------- --------- ---------
Total..................................................... 100.0% 100.0% 100.0%
========= ========= =========
TOTAL RESTRUCTURED BY PRODUCT - DOMESTIC PORTFOLIO(1)
(MANAGED BASIS)
(IN MILLIONS)
Real estate secured....................................... $ 9,506 $ 9,548 $ 9,163
Auto finance.............................................. 1,255 1,295 1,248
MasterCard/Visa........................................... 505 584 549
Private label............................................. 990 1,065 1,226
Personal non-credit card.................................. 3,913 4,075 4,128
--------- --------- ---------
Total..................................................... $ 16,169 $ 16,567 $ 16,314
========= ========= =========
(AS A PERCENT OF MANAGED RECEIVABLES)
Real estate secured....................................... 18.9% 19.4% 20.0%
Auto finance.............................................. 13.9 14.7 16.9
MasterCard/Visa........................................... 2.8 3.1 3.4
Private label............................................. 7.0 7.1 9.6
Personal non-credit card.................................. 26.3 26.6 25.8
--------- --------- ---------
Total(2).................................................. 15.3% 15.6% 16.7%
========= ========= =========
---------------
(1) Excludes foreign businesses, commercial and other. Amounts also include
accounts as to which the delinquency status has been reset to current for
reasons other than restructuring (e.g., correcting the misapplication of a
timely payment.)
(3) Total including foreign businesses was 14.4 percent at March 31, 2004, 14.7
percent at December 31, 2003, and 15.8 percent at March 31, 2003.
44
Household International Inc., and Subsidiaries
--------------------------------------------------------------------------------
The amount of domestic and foreign managed receivables in forbearance,
modification, credit card services approved consumer credit counseling
accommodations, rewrites or other account management techniques for which we
have reset delinquency and that is not included in the restructured or
delinquency statistics was approximately $1.0 billion or .8 percent of managed
receivables at March 31, 2004, $1.0 billion or .9 percent of managed receivables
at December 31, 2003 and $1.1 billion or 1.0 percent of managed receivables at
March 31, 2003.
LIQUIDITY AND CAPITAL RESOURCES
--------------------------------------------------------------------------------
The funding synergies resulting from our merger with HSBC have allowed us to
reduce our reliance on traditional sources to fund our growth. We continue to
focus on balancing our use of affiliate and third-party funding sources to
minimize funding expense while maximizing liquidity. As discussed below, we
decreased affiliate and third-party debt and initial securitization levels
during the current quarter as we used proceeds from the sale of real estate
secured receivables to HSBC Bank USA to assist in the funding of our businesses.
Because we are now a subsidiary of HSBC, our credit spreads relative to
treasuries have tightened. We recognized cash funding expense savings, primarily
as a result of these tightened credit spreads, in excess of $70 million for the
current quarter and less than $5 million for the prior-year quarter compared to
the funding costs we would have incurred using average spreads from the first
half of 2002. It is anticipated that these tightened credit spreads and other
funding synergies will eventually enable HSBC to realize annual cash funding
expense savings, including external fee savings, in excess of $1 billion per
year as our existing term debt matures over the course of the next few years.
The portion of these savings to be realized by Household will depend in large
part upon the amount and timing of the proposed domestic private label and
MasterCard and Visa credit card receivable transfers to HSBC Bank USA and other
initiatives between Household and HSBC subsidiaries.
INVESTMENT SECURITIES Investment securities totaled $6.7 billion at March 31,
2004 and $11.1 billion at December 31, 2003. Included in the March 31, 2004
balance was $2.2 billion dedicated to our credit card bank and $3.3 billion held
by our insurance subsidiaries. Included in the December 31, 2003 balance was
$2.4 billion dedicated to our credit card bank and $3.1 billion held by our
insurance subsidiaries. Our investment securities balance at December 31, 2003
was unusually high as a result of the cash received from the $2.8 billion real
estate secured loan sale to HSBC Bank USA on December 31, 2003 as well as excess
liquidity.
COMMERCIAL PAPER, BANK AND OTHER BORROWINGS Commercial paper, bank and other
borrowings totaled $9.1 billion at both March 31, 2004 and December 31, 2003.
Included in this total was outstanding Euro commercial paper sold to customers
of HSBC of $3.0 billion at March 31, 2004 and $2.8 billion at December 31, 2003.
45
Household International Inc., and Subsidiaries
--------------------------------------------------------------------------------
DUE TO AFFILIATES AND OTHER HSBC RELATED FUNDING As of March 31, 2004, HSBC
related funding totaled $14.1 billion, compared to $14.7 billion at December 31,
2003, as detailed in the table below.
MARCH 31, DECEMBER 31,
2004 2003
--------------------------------------------------------------------------------------
(IN BILLIONS)
Debt issued to HSBC subsidiaries:
Domestic short-term borrowings......................... - $ 2.6
Drawings on bank lines in the U.K. .................... $ 3.8 3.4
Term debt.............................................. 1.3 1.3
Preferred securities issued by Household Capital Trust
VIII.................................................. .3 .3
----- -----
Total debt issued to HSBC subsidiaries................. 5.4 7.6
----- -----
Debt issued to HSBC clients:
Euro commercial paper.................................. 3.0 2.8
Term debt.............................................. .5 .4
----- -----
Total debt issued to HSBC clients...................... 3.5 3.2
Preferred stock issued to HSBC.............................. 1.1 1.1
Real estate secured receivable activity with HSBC Bank USA:
Cash received on sales (cumulative).................... 3.7 2.8
Direct purchases from correspondents................... .4 -
----- -----
Total real estate secured receivable activity with HSBC
Bank USA.............................................. 4.1 2.8
----- -----
Total HSBC related funding.................................. $14.1 $14.7
===== =====
Proceeds from the December 2003 sale of $2.8 billion of real estate secured
loans to HSBC Bank USA, which at year-end 2003 had been temporarily held as
investment securities, were used to pay-down domestic short-term borrowings in
the first quarter of 2004. Proceeds from the March 2004 real estate secured
receivable sale were used to pay-down commercial paper balances which had been
used as temporary funding in the first quarter of 2004 and to fund various debt
maturities. In April 2004, we received $1 billion from medium-term notes with a
10-year maturity sold to a subsidiary of HSBC. An additional $900 million of
medium-term notes with maturities of 2-3 years were sold to a subsidiary of HSBC
in May 2004.
As of March 31, 2004, we had revolving credit facilities with HSBC of $2.5
billion domestically and $4.5 billion in the U.K. There have been no draws on
the domestic line. We also had derivative contracts with a notional value of
approximately $47.8 billion, or approximately 70 percent of total derivative
contracts, outstanding with HSBC affiliates.
LONG-TERM DEBT Long-term debt (with original maturities over one year) decreased
to $77.8 billion at March 31, 2004 from $79.6 billion at December 31, 2003. The
decrease in senior and senior subordinated debt was the result of debt
maturities and reduced issuances. Issuances during the quarter included the
following:
- $350 million of domestic medium-term notes
- $140 million of foreign currency-denominated bonds (all of which were
issued to customers of HSBC)
- $450 million of InterNotes(SM) (retail-oriented medium-term notes)
46
Household International Inc., and Subsidiaries
--------------------------------------------------------------------------------
SELECTED CAPITAL RATIOS were as follows:
MARCH 31, DECEMBER 31,
2004 2003
---------------------------------------------------------------------------------------
(RESTATED) (RESTATED)
TETMA(1).................................................... 7.67% 7.03%
TETMA + Owned Reserves(1)................................... 10.61 9.89
Tangible common equity to tangible managed assets(1)........ 5.59 5.04
Common and preferred equity to owned assets................. 15.55 14.69
Excluding purchase accounting adjustments:
TETMA(1)............................................... 9.69 8.94
TETMA + Owned Reserves(1).............................. 12.64 11.81
Tangible common equity to tangible managed assets(1)... 7.64 6.98
---------------
(1) TETMA, TETMA + Owned Reserves and tangible common equity to tangible managed
assets represent non-GAAP financial ratios that are used by Household
management and certain rating agencies to evaluate capital adequacy and may
differ from similarly named measures presented by other companies. See
"Basis of Reporting" for additional discussion on the use of non-GAAP
financial measures and "Reconciliations to GAAP Financial Measures" for
quantitative reconciliations to the equivalent GAAP basis financial measure.
In April 2004, Fitch Ratings revised our Rating Outlook to Positive from Stable
and raised our Support Rating to "1" from "2". In addition, Fitch affirmed our
"A" senior long-term and "F1" commercial paper ratings. We are committed to
maintaining at least a mid-single "A" rating and as part of that effort will
continue to review appropriate capital levels with our rating agencies.
SECURITIZATIONS AND SECURED FINANCINGS Securitizations (which are structured to
receive sale treatment under Statement of Financial Accounting Standards No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, a Replacement of FASB Statement No. 125," ("SFAS
No. 140")) and secured financings (which do not receive sale treatment under
SFAS No. 140) of consumer receivables are used to limit our reliance on the
unsecured debt markets and often are more cost-effective than alternative
funding sources.
In a securitization, a designated pool of non-real estate consumer receivables
is removed from the balance sheet and transferred to an unaffiliated trust. This
unaffiliated trust is a qualifying special purpose entity ("QSPE") as defined by
SFAS No. 140 and, therefore, is not consolidated. The QSPE funds its receivable
purchase through the issuance of securities to investors, entitling them to
receive specified cash flows during the life of the securities. The securities
are collateralized by the underlying receivables transferred to the QSPE. At the
time of sale, an interest-only strip receivable is recorded, representing the
present value of the cash flows we expect to receive over the life of the
securitized receivables, net of estimated credit losses. Under the terms of the
securitizations, we receive annual servicing fees on the outstanding balance of
the securitized receivables and the rights to future residual cash flows on the
sold receivables after the investors receive their contractual return. Cash
flows related to the interest-only strip receivables and servicing the
receivables are collected over the life of the underlying securitized
receivables.
In a secured financing, a designated pool of receivables, typically real estate
secured, are conveyed to a wholly owned limited purpose subsidiary which in turn
transfers the receivables to a trust which sells interests to investors.
Repayment of the debt issued by the trust is secured by the receivables
transferred. The transactions are structured as secured financings under SFAS
No. 140. Therefore, the receivables and the underlying debt of the trust remain
on our balance sheet. We do not recognize a gain in a secured financing
transaction. Because the receivables and the debt remain on our balance sheet,
revenues and expenses are reported consistently with our owned balance sheet
portfolio. Using this source of funding results in similar cash flows as issuing
debt through alternative funding sources.
47
Household International Inc., and Subsidiaries
--------------------------------------------------------------------------------
Receivables securitized (excluding replenishments of certificateholder
interests) were as follows:
THREE MONTHS
ENDED MARCH 31,
---------------
2004 2003
-----------------------------------------------------------------------------
(IN MILLIONS)
Auto finance................................................ - $ 411
MasterCard/Visa............................................. $50 320
Personal non-credit card.................................... - 510
--- ------
Total....................................................... $50 $1,241
=== ======
Securitization levels were much lower in 2004 as we used funding from HSBC,
including proceeds from receivable sales, to assist in the funding of our
operations.
Our securitized receivables totaled $24.4 billion at March 31, 2004, compared to
$26.2 billion at December 31, 2003. As of March 31, 2004, closed-end real estate
secured receivables totaling $6.2 billion secured $5.1 billion of outstanding
debt related to securitization transactions which were structured as secured
financings. At December 31, 2003, closed-end real estate secured receivables
totaling $8.0 billion secured $6.7 billion of outstanding debt related to
secured financing transactions. Securitizations structured as sales represented
21 percent of the funding associated with our managed portfolio at both March
31, 2004 and December 31, 2003. Secured financings represented 4 percent of the
funding associated with our managed portfolio at March 31, 2004 and 5 percent at
December 31, 2003.
We believe the market for securities backed by receivables is a reliable,
efficient and cost-effective source of funds. Securitizations and secured
financings of consumer receivables have been, and will continue to be, a source
of our funding and liquidity. We currently anticipate, however, that we will
rely less on securitizations and secured financings in 2004 compared to 2003 and
in the future as we receive funding from HSBC and its clients to partially fund
our operations. Under U.K. GAAP, as reported by HSBC, securitizations are
treated as secured financings. Therefore, we may structure more of our
securitization transactions as financings under U.S. GAAP in the future in order
to more closely align our accounting treatment with HSBC's U.K. GAAP treatment
for these transactions.
2004 FUNDING STRATEGY Our current estimated domestic funding needs and sources
for 2004 are summarized in the table that follows. Because we cannot predict
with any degree of certainty the timing as to when or if all approvals will be
received for our proposed transfer of receivables to HSBC Bank USA, these
transfers are not contemplated in the following 2004 funding plan. If these
proposed transfers do occur, our external funding needs will decrease.
(IN BILLIONS)
----------------------------------------------------------------------------
FUNDING NEEDS:
Net asset growth.......................................... $14-16
Commercial paper, term debt and securitization
maturities............................................. 24-26
Other..................................................... 2-5
------
Total funding needs, including growth..................... $40-47
======
FUNDING SOURCES:
External funding, including HSBC clients.................. $32-36
HSBC and HSBC subsidiaries................................ 8-11
------
Total funding sources..................................... $40-47
======
48
HOUSEHOLD INTERNATIONAL, INC.
RECONCILIATIONS TO GAAP FINANCIAL MEASURES
THREE MONTHS ENDED
------------------------
MARCH 31, MARCH 31,
2004 2003
--------------------------------------------------------------------------------------
(RESTATED) (RESTATED)
(DOLLAR AMOUNTS ARE IN
MILLIONS)
RETURN ON AVERAGE ASSETS:
Net income.................................................. $ 470 $ 390
HSBC acquisition related costs and other merger related
items incurred by Household, after-tax.................... - 167
---------- ----------
Operating net income........................................ $ 470 $ 557
---------- ----------
Average assets:
Owned basis............................................... $ 119,388 $ 100,438
Serviced with limited recourse............................ 25,278 24,155
---------- ----------
Managed basis............................................. $ 144,666 $ 124,593
---------- ----------
Return on average owned assets.............................. 1.57% 1.55%
Return on average owned assets, operating basis............. 1.57 2.22
Return on average managed assets............................ 1.30 1.25
Return on average managed assets, operating basis........... 1.30 1.79
========== ==========
RETURN ON AVERAGE COMMON SHAREHOLDER'S EQUITY:
Net income.................................................. $ 470 $ 390
Dividends on preferred stock................................ (18) (22)
---------- ----------
Net income available to common shareholders................. 452 368
HSBC acquisition related costs and other merger related
items incurred by Household............................... - 167
---------- ----------
Operating net income available to common shareholders....... $ 452 $ 535
---------- ----------
Average common shareholder's equity......................... $ 16,645 $ 9,548
---------- ----------
Return on average common shareholder's equity............... 10.9% 15.4%
Return on average common shareholder's equity, operating
basis..................................................... 10.9 22.4
========== ==========
NET INTEREST MARGIN:
Net interest income:
Owned basis............................................... $ 1,820 $ 1,628
Serviced with limited recourse............................ 754 726
---------- ----------
Managed basis............................................. $ 2,574 $ 2,354
---------- ----------
Average interest-earning assets:
Owned basis............................................... $ 99,676 $ 89,565
Serviced with limited recourse............................ 25,278 24,155
---------- ----------
Managed basis............................................. $ 124,954 $ 113,720
---------- ----------
Owned basis net interest margin............................. 7.30% 7.27%
Managed basis net interest margin........................... 8.24 8.28
========== ==========
MANAGED BASIS RISK ADJUSTED REVENUE:
Net interest income......................................... $ 2,574 $ 2,354
Other revenues, excluding securitization revenue............ 1,072 1,170
Less: Net charge-offs....................................... (1,442) (1,272)
---------- ----------
Risk adjusted revenue....................................... 2,204 2,252
Average interest-earning assets............................. $ 124,954 $ 113,720
---------- ----------
Managed basis risk adjusted revenue......................... 7.06% 7.92%
========== ==========
49
HOUSEHOLD INTERNATIONAL, INC.
RECONCILIATIONS TO GAAP FINANCIAL MEASURES
THREE MONTHS ENDED
---------------------------------------------------
MARCH 31, 2004 MARCH 31, 2003 DECEMBER 31, 2003
-----------------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS ARE IN MILLIONS)
CONSUMER NET CHARGE-OFF RATIO:
Consumer net charge-offs:
Owned basis............................................... $ 970 $ 874 $ 884
Serviced with limited recourse............................ 472 398 420
---------- ---------- ----------
Managed basis............................................. $ 1,442 $ 1,272 $ 1,304
---------- ---------- ----------
Average consumer receivables:
Owned basis............................................... $ 92,974 $ 82,920 $ 94,187
Serviced with limited recourse............................ 25,278 24,155 24,568
---------- ---------- ----------
Managed basis............................................. $ 118,252 $ 107,075 $ 118,755
---------- ---------- ----------
Owned basis consumer net charge-off ratio................... 4.17% 4.22% 3.75%
Managed basis consumer net charge-off ratio................. 4.88 4.75 4.39
========== ========== ==========
RESERVES AS A PERCENTAGE OF NET CHARGE-OFFS
Loss reserves:
Owned basis............................................... $ 3,753 $ 3,483 $ 3,793
Serviced with limited recourse............................ 2,159 1,776 2,374
---------- ---------- ----------
Managed basis............................................. $ 5,912 $ 5,259 $ 6,167
---------- ---------- ----------
Net charge-offs:
Owned basis............................................... $ 970 $ 874 $ 884
Serviced with limited recourse............................ 472 398 420
---------- ---------- ----------
Managed basis............................................. $ 1,442 $ 1,272 $ 1,304
---------- ---------- ----------
Owned basis reserves as a percentage of net charge-offs..... 96.7% 99.6% 107.3%
Managed basis reserves as a percentage of net charge-offs... 102.5 103.3(1) 118.2
========== ========== ==========
EFFICIENCY RATIO (RESTATED):
Total costs and expenses less policyholders' benefits....... $ 1,297 $ 1,327
HSBC acquisition related costs incurred by Household........ - (198)
---------- ----------
Total costs and expenses less policyholders' benefits,
excluding nonrecurring items.............................. $ 1,297 $ 1,129
---------- ----------
Net interest income and other revenues less policyholders'
benefits:
Owned basis............................................... $ 2,930 $ 2,991
Serviced with limited recourse............................ 253 407
---------- ----------
Managed basis............................................. $ 3,183 $ 3,398
---------- ----------
Owned basis efficiency ratio................................ 44.3% 44.4%
Owned basis efficiency ratio, operating basis............... 44.3 37.7
Managed basis efficiency ratio.............................. 40.7 39.1
Managed basis efficiency ratio, operating basis............. 40.7 33.2
========== ==========
(1) Ratio does not recompute based on numbers presented due to rounding.
50
HOUSEHOLD INTERNATIONAL, INC.
RECONCILIATIONS TO GAAP FINANCIAL MEASURES
MARCH 31, DECEMBER 31, MARCH 31,
2004 2003 2003
------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS ARE IN MILLIONS)
TWO-MONTHS-AND-OVER-CONTRACTUAL DELINQUENCY:
Consumer two-months-and-over-contractual delinquency:
Owned basis........................................... $ 4,671 $ 4,936 $ 4,567
Serviced with limited recourse........................ 1,280 1,432 1,178
---------- ---------- ----------
Managed basis......................................... $ 5,951 $ 6,368 $ 5,745
---------- ---------- ----------
Consumer receivables:
Owned basis........................................... $ 93,299 $ 92,012 $ 83,023
Serviced with limited recourse........................ 24,357 26,201 24,256
---------- ---------- ----------
Managed basis......................................... $ 117,656 $ 118,213 $ 107,279
---------- ---------- ----------
Consumer two-months-and-over-contractual delinquency:
Owned basis........................................... 5.01% 5.36% 5.50%
Managed basis......................................... 5.06 5.39 5.36
========== ========== ==========
RESERVES AS A PERCENTAGE OF RECEIVABLES:
Loss reserves:
Owned basis........................................... $ 3,753 $ 3,793 $ 3,483
Serviced with limited recourse........................ 2,159 2,374 1,776
---------- ---------- ----------
Managed basis......................................... $ 5,912 $ 6,167 $ 5,259
---------- ---------- ----------
Receivables:
Owned basis........................................... $ 93,650 $ 92,378 $ 83,438
Serviced with limited recourse........................ 24,357 26,201 24,256
---------- ---------- ----------
Managed basis......................................... $ 118,007 $ 118,579 $ 107,694
---------- ---------- ----------
Reserves as a percentage of receivables:
Owned basis........................................... 4.01% 4.11% 4.17%
Managed basis......................................... 5.01 5.20 4.88
========== ========== ==========
RESERVES AS A PERCENTAGE OF NONPERFORMING LOANS:
Loss reserves:
Owned basis........................................... $ 3,753 $ 3,793 $ 3,483
Serviced with limited recourse........................ 2,159 2,374 1,776
---------- ---------- ----------
Managed basis......................................... $ 5,912 $ 6,167 $ 5,259
---------- ---------- ----------
Nonperforming loans:
Owned basis........................................... $ 3,881 $ 4,050 $ 3,760
Serviced with limited recourse........................ 1,055 1,176 967
---------- ---------- ----------
Managed basis......................................... $ 4,936 $ 5,226 $ 4,727
---------- ---------- ----------
Reserves as a percentage of nonperforming loans:
Owned basis........................................... 96.7% 93.7% 92.6%
Managed basis......................................... 119.8 118.0 111.3
========== ========== ==========
51
HOUSEHOLD INTERNATIONAL, INC.
RECONCILIATIONS TO GAAP FINANCIAL MEASURES
MARCH 31, DECEMBER 31,
2004 2003
---------------------------------------------------------------------------------------
(RESTATED) (RESTATED)
(DOLLAR AMOUNTS ARE IN
MILLIONS)
TANGIBLE COMMON EQUITY:
Common shareholder's equity................................. $ 16,909 $ 16,391
Exclude:
Unrealized losses on cash flow hedging instruments........ 27 10
Unrealized gains on investments and interest-only strip
receivables............................................. (216) (167)
Intangible assets......................................... (2,749) (2,856)
Goodwill.................................................. (6,853) (6,697)
---------- ----------
Tangible common equity...................................... 7,118 6,681
Purchase accounting adjustments............................. 2,595 2,548
---------- ----------
Tangible common equity, excluding purchase accounting
adjustments............................................... $ 9,713 $ 9,229
========== ==========
TANGIBLE SHAREHOLDER'S EQUITY:
Tangible common equity...................................... $ 7,118 $ 6,681
Preferred stock............................................. 1,100 1,100
Mandatorily redeemable preferred securities of Household
Capital Trusts............................................ 1,029 1,031
Adjustable Conversion-Rate Equity Security Units............ 522 519
---------- ----------
Tangible shareholder's equity............................... 9,769 9,331
Purchase accounting adjustments............................. 2,541 2,492
---------- ----------
Tangible shareholder's equity, excluding purchase accounting
adjustments............................................... $ 12,310 $ 11,823
========== ==========
TANGIBLE SHAREHOLDER'S EQUITY PLUS OWNED LOSS RESERVES:
Tangible shareholder's equity............................... $ 9,769 $ 9,331
Owned loss reserves......................................... 3,753 3,793
---------- ----------
Tangible shareholder's equity plus owned loss reserves...... 13,522 13,124
Purchase accounting adjustments............................. 2,541 2,492
---------- ----------
Tangible shareholder's equity plus owned loss reserves,
excluding purchase accounting adjustments................. $ 16,063 $ 15,616
========== ==========
TANGIBLE MANAGED ASSETS:
Owned assets................................................ $ 115,835 $ 119,052
Receivables serviced with limited recourse.................. 24,357 26,001
---------- ----------
Managed assets.............................................. 140,192 145,253
Exclude:
Intangible assets......................................... (2,749) (2,856)
Goodwill.................................................. (6,853) (6,697)
Derivative financial assets............................... (3,152) (3,016)
---------- ----------
Tangible managed assets..................................... 127,438 132,684
Purchase accounting adjustments............................. (371) (431)
---------- ----------
Tangible managed assets, excluding purchase accounting
adjustments............................................... $ 127,067 $ 132,253
========== ==========
EQUITY RATIOS:
Common and preferred equity to owned assets................. 15.55% 14.69%
Tangible common equity to tangible managed assets........... 5.59 5.04
Tangible shareholder's equity to tangible managed assets
("TETMA")................................................. 7.67 7.03
Tangible shareholder's equity plus owned loss reserves to
tangible managed assets ("TETMA + Owned Reserves")........ 10.61 9.89
Excluding purchase accounting adjustments:
Tangible common equity to tangible managed assets......... 7.64 6.98
TETMA..................................................... 9.69 8.94
TETMA + Owned Reserves.................................... 12.64 11.81
========== ==========
52
ITEM 4. CONTROLS AND PROCEDURES
--------------------------------------------------------------------------------
DISCLOSURE CONTROLS As of the end of the period covered by this report, with the
participation of our Chief Executive Officer and Chief Financial Officer, we
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange
Act of 1934). Based upon that evaluation, our Chief Executive Officer and our
Chief Financial Officer concluded that as of the end of such period, our
disclosure controls and procedures were effective in timely alerting them to
material information relating to Household International, Inc. required to be
included in our periodic reports with the Securities and Exchange Commission.
As a result of a subsequent evaluation of the effectiveness of our disclosure
controls and procedures as of the end of the period covered by our Annual Report
on Form 10-K for the year ended December 31, 2004, with the participation of our
Chief Executive Officer and Chief Financial Officer, we identified a material
weakness in our internal controls over financial reporting relating to the
process of establishing and maintaining effective hedges under the "shortcut"
method of accounting pursuant to Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities." As a
result, and as set forth in Note 2 to the Consolidated Financial Statements and
the "Restatement" section included in Item 2, Management's Discussion and
Analysis of Financial Condition and Results of Operations, we have restated our
unaudited consolidated financial statements for the periods covered by this
report. We have also undertaken remedial action to address and correct the
weakness in our internal controls over this process.
INTERNAL CONTROLS In the process of finalizing our quarterly results and the
purchase price allocation resulting from our merger with HSBC, we identified
certain matters indicative of control weaknesses. On investigation and analysis,
our inquiries indicated some weaknesses in internal controls as related to
certain of our processes and we reported these to the Audit Committee.
Consequently, we determined that certain adjustments to prior fair value
estimates were necessary which resulted in a net increase to goodwill in the
approximate amount of $141 million. The adjustments related principally to
writing off several aged items remaining on intercompany accounts and to
correcting errors noted in respect of various marketing, rent and payroll
accruals that arose over several prior periods.
Management has undertaken measures to strengthen the corporation's internal
controls by dedicating additional personnel to the account reconciliation
function and by reinforcing the corporation's accounting policies governing such
items. Management and the Audit Committee continue to review these exceptions to
determine whether additional measures are required.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
--------------------------------------------------------------------------------
GENERAL We are parties to various legal proceedings resulting from ordinary
business activities relating to our current and/or former operations. Certain of
these actions are or purport to be class actions seeking damages in very large
amounts. These actions assert violations of laws and/or unfair treatment of
consumers. Due to the uncertainties in litigation and other factors, we cannot
be certain that we will ultimately prevail in each instance. We believe that our
defenses to these actions have merit and any adverse decision should not
materially affect our consolidated financial condition.
MERGER LITIGATION Several lawsuits were filed alleging violations of law with
respect to the merger with HSBC. We believe that the claims lack merit and the
defendants deny the substantive allegations of the lawsuits. These lawsuits are
described below.
Between August 27, 2002 and January 15, 2003, derivative lawsuits on behalf of
the company and class actions on behalf of Household common stockholders were
filed against Household and certain of its officers and directors. See Bailey v.
Aldinger, et al., No 02 CH 16476 (Circuit Court, Cook County, Illinois, Chancery
Division); McLaughlin v. Aldinger, et al., No. 02 CH 20683 (Circuit Court, Cook
County, Illinois, Chancery Division); Pace v. Aldinger, et al., No. 02 CH 19270
(Circuit Court, Cook
53
County, Illinois, Chancery Division); Williamson v. Aldinger, et al., No. 03
600331 (United States District Court for the Northern District of Illinois). The
lawsuits principally asserted claims for breach of fiduciary duty in connection
with our restatement of earnings announced on August 14, 2002, the allegedly
improper lending practices by Household's subsidiaries and the alleged failure
by certain Household officers to take appropriate steps to maximize the value of
the merger transaction between Household and HSBC Holdings plc announced on
November 14, 2002. On March 18, 2003, a memorandum of understanding was signed
by the parties containing the essential terms of the settlement of all four
lawsuits. Those settlement terms included a $55 million reduction in the
termination fee for the Household-HSBC merger, a supplemental disclosure to
Household shareholders in the supplemental Household proxy statement, a
confirmation from Goldman Sachs stating that as of the date of the confirmation
it was aware of nothing that would cause it to withdraw its November 14, 2002
opinion about the fairness of the Household-HSBC merger to Household's common
shareholders and payment by the defendants of plaintiff's costs relating to
notice to stockholders as well as $2.0 million in attorneys fees for plaintiffs'
counsel.
A stipulation reflecting the settlement was signed by the parties on September
22, 2003 and the Circuit Court, Cook County, Illinois, Chancery Division
preliminarily approved the settlement of the Bailey, McLaughlin and Pace
lawsuits on September 29, 2003 and directed that notice be provided to Household
stockholders and class members. Following the distribution of the notice, the
Circuit Court, Cook County, Illinois, Chancery Division held a settlement
fairness hearing on December 23, 2003. Issuance of a final judgment order
approving the settlement of the Bailey, McLaughlin and Pace lawsuits is still
pending. The United States District Court for the Northern District of Illinois
has delayed further action in the Williamson lawsuit until the state court
actions are resolved.
CONSUMER LENDING LITIGATION During the past several years, the press has widely
reported certain industry related concerns that may impact us. Some of these
involve the amount of litigation instituted against finance and insurance
companies operating in certain states and the large awards obtained from juries
in those states (Alabama and Mississippi are illustrative). Like other companies
in this industry, some of our subsidiaries are involved in a number of lawsuits
pending against them in these states. The Alabama and Mississippi cases, in
particular, generally allege inadequate disclosure or misrepresentation of
financing terms. In some suits, other parties are also named as defendants.
Unspecified compensatory and punitive damages are sought. Several of these suits
purport to be class actions or have multiple plaintiffs. The judicial climate in
these states is such that the outcome of all of these cases is unpredictable.
Although our subsidiaries believe they have substantive legal defenses to these
claims and are prepared to defend each case vigorously, a number of such cases
have been settled or otherwise resolved for amounts that in the aggregate are
not material to our operations. Appropriate insurance carriers have been
notified of each claim, and a number of reservations of rights letters have been
received. Certain of the financing of merchandise claims have been partially
covered by insurance.
On November 25, 2003, we announced the proposed settlement of nationwide class
action litigation with the Association of Community Organizations for Reform Now
("ACORN") and certain borrowers relating to the mortgage lending practices of
HFC's retail branch consumer lending operations (the "ACORN Settlement
Agreement"). Pursuant to the ACORN Settlement Agreement, HFC will provide
monetary relief for certain class members who did not participate in the
settlement with the state attorneys general and regulatory agencies, as
described above, and non-monetary relief for all class members, including those
who participated in the settlement, amongst other relief. The ACORN Settlement
Agreement was approved by the United States District Court for the Northern
District of California on April 30, 2004. The agreed upon relief will not have a
material impact to our financial condition or operating model.
SECURITIES LITIGATION In August 2002, we restated previously reported
consolidated financial statements. The restatement related to certain MasterCard
and Visa co-branding and affinity credit card relationships and a third party
marketing agreement, which were entered into between 1992 and 1999. All were
part of our Credit Card Services segment. In consultation with our prior
auditors, Arthur Andersen LLP, we treated payments made in connection with these
agreements as prepaid assets and amortized them in accordance with the
underlying economics of the agreements. Our current auditor, KPMG LLP, advised
54
us that, in its view, these payments should have either been charged against
earnings at the time they were made or amortized over a shorter period of time.
The restatement resulted in a $155.8 million, after-tax, retroactive reduction
to retained earnings at December 31, 1998. As a result of the restatement, and
other corporate events, including, e.g. the 2002 settlement with 50 states and
the District of Columbia relating to real estate lending practices, Household,
and its directors, certain officers and former auditors, have been involved in
various legal proceedings, some of which purport to be class actions. A number
of these actions allege violations of federal securities laws, were filed
between August and October 2002, and seek to recover damages in respect of
allegedly false and misleading statements about our common stock. To date, none
of the class claims has been certified. These legal actions have been
consolidated into a single purported class action, Jaffe v. Household
International, Inc., et al., No. 02 C 5893 (N.D. Ill., filed August 19, 2002),
and a consolidated and amended complaint was filed on March 7, 2003. The amended
complaint purports to assert claims under the federal securities laws, on behalf
of all persons who purchased or otherwise acquired Household securities between
October 23, 1997 and October 11, 2002, arising out of alleged false and
misleading statements in connection with Household's sales and lending
practices, the 2002 state settlement agreement referred to above, the
restatement and the HSBC merger. The amended complaint, which also names as
defendants Arthur Andersen LLP, Goldman, Sachs & Co., and Merrill Lynch, Pierce,
Fenner & Smith, Inc., fails to specify the amount of damages sought. In May
2003, we, and other defendants, filed a motion to dismiss the complaint. On
March 19, 2004, the Court granted in part, and denied in part the defendant's
motion to dismiss the complaint. The Court dismissed all claims against Merrill
Lynch, Pierce, Fenner & Smith, Inc. and Goldman Sachs & Co. The Court also
dismissed certain claims alleging strict liability for alleged misrepresentation
of material facts based on statute of limitations grounds. The claims that
remain against some or all of the defendants essentially allege the defendants
knowingly made a false statement of a material fact in conjunction with the
purchase or sale of securities, that the plaintiffs justifiably relied on such
statement, the false statement(s) caused the plaintiffs' damages, and that some
or all of the defendants should be liable for those alleged statements.
Discovery has begun.
Other actions arising out of the restatement, which purport to assert claims
under ERISA on behalf of participants in Household's Tax Reduction Investment
Plan, have been consolidated into a single purported class action, In re
Household International, Inc. ERISA Litigation, Master File No. 02 C 7921 (N.D.
Ill). A consolidated and amended complaint was filed against Household, William
Aldinger and individuals on the Administrative Investment Committee of the plan.
The consolidated complaint purports to assert claims under ERISA that are
similar to the claims in the Jaffe case. Essentially, the plaintiffs allege that
the defendants breached their fiduciary duties to the plan by investing in
Household stock and failing to disclose information to Plan participants. A
motion to dismiss the complaint was filed in June 2003. On March 30, 2004, the
Court granted in part, and denied in part, the defendants' motion to dismiss the
complaint. The Court dismissed all claims alleging that some or all of the
defendants breached their co-fiduciary obligations; misrepresented the prudence
of investing in Household stock; failed to disclose nonpublic information
regarding alleged accounting and lending improprieties; and failed to provide
other defendants with non-public information. The claims that remain essentially
allege that some or all of the defendants failed to prudently manage plan assets
by continuing to invest in, or provide matching contributions of, Household
stock. Discovery has begun.
On June 27, 2003, a case entitled, West Virginia Laborers Pension Trust Fund v.
Caspersen, et al., was filed in the Chancery Division of the Circuit Court of
Cook County, Illinois as case number 03CH10808. This purported class action
names as defendants the directors of Beneficial Corporation at the time of the
1998 merger of Beneficial Corporation into a subsidiary of Household, and claims
that those directors' due diligence of the Company at the time they considered
the merger was inadequate. The Complaint claims that as a result of some of the
securities law and other violations alleged in the Jaffe case, the Company's
common shares lost value. Under the merger agreement with Beneficial
Corporation, we assumed the defense of this litigation. In September of 2003,
the defendants filed a motion to dismiss. Plaintiffs conducted limited discovery
relating to the jurisdictional issues raised in the defendants' motion to
dismiss. Briefs for that motion are being prepared. The insurance carriers for
Beneficial Corporation have been notified of the action.
55
With respect to these securities litigation matters, we believe that we have
not, and our officers and directors have not, committed any wrongdoing and in
each instance there will be no finding of improper activities that may result in
a material liability to us or any of our officers or directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------------------------------------------------------
(a) Exhibits
12 Statement of Computation of Ratio of Earnings to Fixed
Charges and to Combined Fixed Charges and Preferred Stock
Dividends.
31 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.1 Debt and Preferred Stock Securities Ratings.
99.2 Report of KPMG LLP, independent registered public accounting
firm.
99.3 Letter of independent registered public accounting firm,
KPMG LLP, regarding unaudited interim financial information.
(b) Reports on Form 8-K
During the first quarter of 2004, the Registrant filed a Current Report on Form
8-K on March 1, 2004 with respect to the financial supplement pertaining to the
financial results of Household International, Inc. for the quarter and twelve
months ended December 31, 2003.
56
SIGNATURE
--------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HSBC FINANCE CORPORATION
(formerly known as Household
International, Inc.)
(Registrant)
Date: March 31, 2005
/s/ Simon C. Penney
--------------------------------------
Simon C. Penney
Senior Executive Vice President and
Chief Financial Officer
57
EXHIBIT INDEX
--------------------------------------------------------------------------------
12 Statement of Computation of Ratio of Earnings to Fixed
Charges and to Combined Fixed Charges and Preferred Stock
Dividends.
31 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.1 Debt and Preferred Stock Securities Ratings.
99.2 Report of KPMG LLP, independent registered public accounting
firm.
99.3 Letter of independent registered public accounting firm,
KPMG LLP, regarding unaudited interim financial information.
EXHIBIT 12
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND TO
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
THREE
MONTHS MARCH 29 JANUARY 1
ENDED THROUGH THROUGH
MARCH 31, MARCH 31, MARCH 28,
2004 2003 2003
----------------------------------------------------------------------------------------------------
(SUCCESSOR) (SUCCESSOR) (PREDECESSOR)
(RESTATED) (RESTATED)
(IN MILLIONS)
Net income............................................... $ 470 $ 144 $ 246
Income taxes............................................. 235 82 182
-------- ----- --------
Income before income taxes............................... 705 226 428
-------- ----- --------
Fixed charges:
Interest expense(1).................................... 708 19 898
Interest portion of rentals(2)......................... 14 1 18
-------- ----- --------
Total fixed charges...................................... 722 20 916
-------- ----- --------
Total earnings as defined................................ $ 1,427 $ 246 $ 1,344
======== ===== ========
Ratio of earnings to fixed charges....................... 1.98 12.30 1.47(4)
Preferred stock dividends(3)............................. 27 - 32
Ratio of earnings to combined fixed charges and preferred
stock dividends........................................ 1.91 12.30 1.42(4)
-------- ----- --------
---------------
(1) For financial statement purposes for the periods January 1 through March 28,
2003 and March 29 through March 31, 2003, these amounts are reduced for
income earned on temporary investment of excess funds, generally resulting
from over-subscriptions of commercial paper issuances.
(2) Represents one-third of rentals, which approximates the portion representing
interest.
(3) Preferred stock dividends are grossed up to their pretax equivalents.
(4) The ratios for the period January 1 through March 28, 2003 have been
negatively impacted by $167 million (after-tax) of HSBC acquisition related
costs and other merger related items incurred by Household. Excluding these
charges, our ratio of earnings to fixed charges would have been 1.69 and our
ratio of earnings to combined fixed charges and preferred stock dividends
would have been 1.63. These non-GAAP financial ratios are provided for
comparison of our operating trends only.
EXHIBIT 31
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, William F. Aldinger, Chairman and Chief Executive Officer of HSBC Finance
Corporation (formerly known as Household International, Inc.), certify that:
1. I have reviewed this amended report on Form 10-Q/A of HSBC Finance
Corporation;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation;
and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies and material weaknesses in the
design or operation of internal controls over financial reporting which
are reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 31, 2005
/s/ WILLIAM F. ALDINGER
--------------------------------------
William F. Aldinger
Chairman and Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Simon C. Penney, Senior Executive Vice President and Chief Financial Officer
of HSBC Finance Corporation (formerly known as Household International, Inc.),
certify that:
1. I have reviewed this amended report on Form 10-Q/A of HSBC Finance
Corporation;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation;
and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies and material weaknesses in the
design or operation of internal controls over financial reporting which
are reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 31, 2005
/s/ SIMON C. PENNEY
--------------------------------------
Simon C. Penney
Senior Executive Vice President and
Chief Financial Officer
EXHIBIT 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the amended Quarterly Report of HSBC Finance Corporation,
formerly known as Household International, Inc. (the "Company"), on Form 10-Q/A
for the period ending March 31, 2004 as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, William F. Aldinger, Chairman
and Chief Executive Officer of HSBC Finance Corporation, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ WILLIAM F. ALDINGER
--------------------------------------
William F. Aldinger
Chairman and Chief Executive Officer
March 31, 2005
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the amended Quarterly Report of HSBC Finance Corporation,
formerly known as Household International, Inc. (the "Company"), on Form 10-Q/A
for the period ending March 31, 2004 as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, Simon C. Penney, Senior
Executive Vice President and Chief Financial Officer, of HSBC Finance
Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ SIMON C. PENNEY
--------------------------------------
Simon C. Penney
Senior Executive Vice President and
Chief Financial Officer
March 31, 2005
This certification accompanies each Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.
Signed originals of these written statements required by Section 906 of the
Sarbanes-Oxley Act of 2002 have been provided to HSBC Finance Corporation and
will be retained by HSBC Finance Corporation and furnished to the Securities and
Exchange Commission or its staff upon request.
EXHIBIT 99.1
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
DEBT AND PREFERRED STOCK SECURITIES RATINGS
STANDARD & MOODY'S
POOR'S INVESTORS
CORPORATION SERVICE FITCH, INC.
---------------------------------------------------------------------------------------------------
AT MARCH 31, 2004
Household International, Inc.
Senior debt............................................... A A2 A
Preferred stock........................................... BBB+ Baa1 A-
Household Finance Corporation
Senior debt............................................... A A1 A
Senior subordinated debt.................................. A- A2 A-
Commercial paper.......................................... A-1 P-1 F-1
HFC Bank plc
Senior debt............................................... A A1 A
Commercial paper.......................................... A-1 P-1 F-1
Household Bank (SB), N.A
Senior debt............................................... A A1 A
EXHIBIT 99.2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholder
HSBC Finance Corporation
We have reviewed the consolidated balance sheet of HSBC Finance Corporation
(formerly Household International, Inc.) (the Company), an indirect wholly-owned
subsidiary of HSBC Holdings plc, and subsidiaries as of March 31, 2004
(successor basis), and the related consolidated statements of income, changes in
shareholder's(s') equity and cash flows for the three months ended March 31,
2004 (successor basis) and for the periods January 1, 2003 through March 28,
2003 (predecessor basis) and March 29, 2003 through March 31, 2003 (successor
basis). These consolidated financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with the standards established by the
Public Company Accounting Oversight Board (United States). A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, HSBC Finance
Corporation was acquired by HSBC Holdings plc on March 28, 2003 in a purchase
business combination recorded under the "push-down" method of accounting. As a
result of the acquisition, the consolidated financial information for the period
after the acquisition is presented on a different cost basis than that for the
period before the acquisition and, therefore, is not comparable.
As discussed in Note 2 to the consolidated financial statements, HSBC Finance
Corporation has restated its consolidated financial statements as of March 31,
2004 (successor basis) and for the three months ended March 31, 2004 (successor
basis) and the period March 29, 2003 through March 31, 2003 (successor basis).
/s/ KPMG LLP
Chicago, Illinois
May 17, 2004 (except as to Note 2, which is as of March 31, 2005)
EXHIBIT 99.3
HSBC Finance Corporation
Prospect Heights, Illinois
Re: Quarterly Report Pursuant to Section 13 of the Securities Exchange Act of
1934 for the quarterly period ended March 31, 2004 as filed on Form 10-Q/A
on March 31, 2005
With respect to the subject quarterly report pursuant to Section 13 of the
Securities Exchange Act of 1934 for the quarterly period ended March 31, 2004 as
filed on Form 10-Q/A on March 31, 2005, we acknowledge our awareness of the use
therein of our report dated May 17, 2004 (except as to Note 2, which is as of
March 31, 2005) related to our reviews of interim financial information.
Pursuant to Rule 436 under the Securities Act of 1933 (the Act), such report is
not considered part of a registration statement prepared or certified by an
accountant, or a report prepared or certified by an accountant within the
meaning of Sections 7 and 11 of the Act.
/s/ KPMG LLP
Chicago, Illinois
March 31, 2005
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