HSBC NA Q4 2004 10-K-Part 3

HSBC Holdings PLC 28 February 2005 Part 3 HSBC Finance Corporation -------------------------------------------------------------------------------- GLOSSARY OF TERMS Affinity Credit Card - A MasterCard or Visa account jointly sponsored by the issuer of the card and an organization whose members share a common interest (e.g., the AFL-CIO Union Plus(R) credit card program). Auto Finance Loans - Closed-end loans secured by a first or second lien on a vehicle. Co-Branded Credit Card - A MasterCard or Visa account that is jointly sponsored by the issuer of the card and another corporation (e.g., the GM Card(R)). The account holder typically receives some form of added benefit for using the card. Consumer Net Charge-off Ratio - Net charge-offs of consumer receivables divided by average consumer receivables outstanding. Contractual Delinquency - A method of determining aging of past due accounts based on the status of payments under the loan. Delinquency status may be affected by customer account management policies and practices such as the restructure of accounts, forbearance agreements, extended payment plans, modification arrangements, external debt management plans, loan rewrites and deferments. Efficiency Ratio - Ratio of total costs and expenses less policyholders' benefits to net interest income and other revenues less policyholders' benefits. Fee Income - Income associated with interchange on credit cards and late and other fees from the origination or acquisition of loans. Foreign Exchange Contract - A contract used to minimize our exposure to changes in foreign currency exchange rates. Futures Contract - An exchange-traded contract to buy or sell a stated amount of a financial instrument or index at a specified future date and price. HINO - HSBC Investments (North America) Inc., which is the immediate parent of HSBC Finance Corporation. HNAH - HSBC North America Holdings Inc. and the immediate parent of HINO. HSBC - HSBC Holdings plc. HSBC Bank USA - HSBC Bank USA, National Association HTSU - HSBC Technology and Services (USA) Inc., which provides information technology services to all subsidiaries of HNAH and other subsidiaries of HSBC. Goodwill - Represents the purchase price over the fair value of identifiable assets acquired less liabilities assumed from business combinations. Intangible Assets - Assets (not including financial assets) that lack physical substance. Our acquired intangibles include purchased credit card relationships and related programs, merchant relationships in our retail services business, other loan related relationships, trade names, and technology, customer lists and other contracts. Interchange Fees - Fees received for processing a credit card transaction through the MasterCard or Visa network. Interest-only Strip Receivables - Represent our contractual right to receive interest and other cash flows from our securitization trusts after the investors receive their contractual return. Interest Rate Swap - Contract between two parties to exchange interest payments on a stated principal amount (notional principal) for a specified period. Typically, one party makes fixed rate payments, while the other party makes payments using a variable rate. 80 HSBC Finance Corporation -------------------------------------------------------------------------------- LIBOR - London Interbank Offered Rate. A widely quoted market rate which is frequently the index used to determine the rate at which we borrow funds. Liquidity - A measure of how quickly we can convert assets to cash or raise additional cash by issuing debt. Managed Basis - A non-GAAP method of reporting whereby net interest income, other revenues and credit losses on securitized receivables structured as sales are reported as if those receivables were still held on our balance sheet. Managed Receivables - The sum of receivables on our balance sheet and those that we service for investors as part of our asset securitization program. MasterCard and Visa Receivables - Receivables generated through customer usage of MasterCard and Visa credit cards. Net Interest Income - Interest income from receivables and noninsurance investment securities reduced by interest expense. Net Interest Margin - Net interest income as a percentage of average interest-earning assets. Nonaccrual Loans - Loans on which we no longer accrue interest because ultimate collection is unlikely. Options - A contract giving the owner the right, but not the obligation, to buy or sell a specified item at a fixed price for a specified period. Owned Receivables - Receivables held on our balance sheet. Personal Homeowner Loan ("PHL") - A high loan-to-value real estate loan that has been underwritten and priced as an unsecured loan. These loans are reported as personal non-credit card receivables. Personal Non-Credit Card Receivables - Unsecured lines of credit or closed-end loans made to individuals. Portfolio Seasoning - Relates to the aging of origination vintages. Loss patterns emerge slowly over time as new accounts are booked. Private Label Credit Card - A line of credit made available to customers of retail merchants evidenced by a credit card bearing the merchant's name. Product Vintage Analysis - Refers to loss curves on specific product origination pools by date of origination. Real Estate Secured Loan - Closed-end loans and revolving lines of credit secured by first or second liens on residential real estate. Receivables Serviced with Limited Recourse - Receivables we have securitized in transactions structured as sales and for which we have some level of potential loss if defaults occur. Return on Average Common Shareholder's(s') Equity - Net income less dividends on preferred stock divided by average common shareholder's(s') equity. Return on Average Managed Assets - Net income divided by average managed assets. Return on Average Owned Assets - Net income divided by average owned assets. Secured Financing - The process where interests in a dedicated pool of financial assets are sold to investors. Generally, the receivables are transferred through a limited purpose financing subsidiary to a trust that issues interests that are sold to investors. These transactions do not receive sale treatment under SFAS No. 140. The receivables and related debt remain on our balance sheet. Securitization - The process where interests in a dedicated pool of financial assets, typically credit card, auto or personal non-credit card receivables, are sold to investors. Generally, the receivables are sold to a trust that 81 HSBC Finance Corporation -------------------------------------------------------------------------------- issues interests that are sold to investors. These transactions are structured to receive sale treatment under SFAS No. 140. The receivables are then removed from our balance sheet. Securitization Revenue - Includes income associated with current and prior period securitizations structured as sales of receivables with limited recourse. Such income includes gains on sales, net of our estimate of probable credit losses under the recourse provisions, servicing income and excess spread relating to those receivables. Tangible Common Equity - Common shareholder's(s') equity (excluding unrealized gains and losses on investments and cash flow hedging instruments and any minimum pension liability) less acquired intangibles and goodwill. Tangible Shareholder's(s') Equity - Tangible common equity, preferred stock, company obligated mandatorily redeemable preferred securities of subsidiary trusts (including amounts due to affiliates) and senior debt which contains mandatorily redeemable obligations to purchase HSBC common stock in 2006 (the Adjustable Conversion-Rate Equity Security Units), adjusted for purchase accounting adjustments. Tangible Managed Assets - Total managed assets less acquired intangibles, goodwill and derivative financial assets. Taxpayer Financial Services ("TFS") Income - Our taxpayer financial services business provides consumer tax refund lending in the United States. This income primarily consists of fees received from the consumer for origination of a short term loan which will be repaid from their federal income tax return refund. Whole Loan Sales - Sales of loans to third parties without recourse. Typically, these sales are made pursuant to our liquidity or capital management plans. 82 HSBC FINANCE CORPORATION AND SUBSIDIARIES CREDIT QUALITY STATISTICS - OWNED BASIS 2004 2003 2002 2001 2000 --------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) OWNED TWO-MONTH-AND-OVER CONTRACTUAL DELINQUENCY RATIOS Real estate secured.................................... 2.96% 4.33% 3.91% 2.63% 2.58% Auto finance........................................... 2.07 2.51 3.96 2.92 2.46 MasterCard/Visa........................................ 4.88 5.76 5.97 5.67 4.90 Private label.......................................... 4.13 5.42 6.36 5.99 5.60 Personal non-credit card............................... 8.69 10.01 8.95 8.44 7.62 ------ ------ ------ ------ ------ Total consumer......................................... 4.07% 5.36% 5.34% 4.43% 4.19% ====== ====== ====== ====== ====== RATIO OF OWNED NET CHARGE-OFFS TO AVERAGE OWNED RECEIVABLES FOR THE YEAR Real estate secured.................................... 1.10% .99% .91% .52% .42% Auto finance........................................... 3.43 4.91 6.00 4.00 3.29 MasterCard/Visa(1)..................................... 8.85 9.18 9.46 8.17 6.55 Private label(1)....................................... 6.17 5.75 6.28 5.59 5.34 Personal non-credit card............................... 9.75 9.89 8.26 6.81 7.02 ------ ------ ------ ------ ------ Total consumer(1)...................................... 4.00 4.06 3.81 3.32 3.18 Commercial............................................. - .46 (.40) 2.10 2.69 ------ ------ ------ ------ ------ Total.................................................. 3.98% 4.05% 3.79% 3.31% 3.18% ====== ====== ====== ====== ====== REAL ESTATE CHARGE-OFFS AND REO EXPENSE AS A PERCENT OF AVERAGE REAL ESTATE SECURED RECEIVABLES.............. 1.38% 1.42% 1.29% .84% .70% ------ ------ ------ ------ ------ NONACCRUAL OWNED RECEIVABLES Domestic: Real estate secured.................................. $1,489 $1,777 $1,367 $ 907 $ 686 Auto finance......................................... 155 104 80 69 45 Private label........................................ 24 43 38 39 48 Personal non-credit card............................. 908 898 902 782 610 Foreign................................................ 432 316 264 215 226 ------ ------ ------ ------ ------ Total consumer......................................... 3,008 3,138 2,651 2,012 1,615 Commercial and other................................... 4 6 15 15 42 ------ ------ ------ ------ ------ Total.................................................. $3,012 $3,144 $2,666 $2,027 $1,657 ====== ====== ====== ====== ====== ACCRUING CONSUMER OWNED RECEIVABLES 90 OR MORE DAYS DELINQUENT Domestic: MasterCard/Visa...................................... $ 469 $ 443 $ 343 $ 352 $ 272 Private label........................................ - 429 491 462 355 Foreign................................................ 38 32 27 30 22 ------ ------ ------ ------ ------ Total.................................................. $ 507 $ 904 $ 861 $ 844 $ 649 ====== ====== ====== ====== ====== REAL ESTATE OWNED Domestic............................................... $ 583 $ 627 $ 424 $ 395 $ 333 Foreign................................................ 4 4 3 4 4 ------ ------ ------ ------ ------ Total.................................................. $ 587 $ 631 $ 427 $ 399 $ 337 ====== ====== ====== ====== ====== RENEGOTIATED COMMERCIAL LOANS.......................... $ 2 $ 2 $ 1 $ 2 $ 12 ====== ====== ====== ====== ====== --------------- (1) The adoption of FFIEC charge-off policies for our domestic private label and MasterCard/Visa portfolios in December 2004 increased private label net charge-offs by $155 million (119 basis points) and MasterCard/Visa net charge-offs by $3 million (2 basis points) and total consumer net charge-offs by $158 million (16 basis points) for the year ended December 31, 2004. 83 HSBC FINANCE CORPORATION AND SUBSIDIARIES CREDIT QUALITY STATISTICS - MANAGED BASIS(1) 2004 2003 2002 2001 2000 ---------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) MANAGED TWO-MONTH-AND-OVER CONTRACTUAL DELINQUENCY RATIOS Real estate secured............................... 2.97% 4.35% 3.94% 2.68% 2.63% Auto finance...................................... 2.96 3.84 3.65 3.16 2.55 MasterCard/Visa................................... 3.98 4.16 4.12 4.10 3.49 Private label..................................... 4.13 4.94 6.03 5.48 5.48 Personal non-credit card.......................... 9.30 10.69 9.41 8.87 7.97 ------ ------ ------ ------ ------ Total consumer.................................... 4.24% 5.39% 5.24% 4.46% 4.20% ====== ====== ====== ====== ====== RATIO OF MANAGED NET CHARGE-OFFS TO AVERAGE MANAGED RECEIVABLES FOR THE YEAR Real estate secured............................... 1.10% 1.00% .92% .53% .45% Auto finance...................................... 5.80 7.00 6.63 5.31 4.80 MasterCard/Visa(2)................................ 7.29 7.26 7.12 6.63 5.58 Private label(2).................................. 6.03 5.62 5.75 5.18 5.35 Personal non-credit card.......................... 10.20 9.97 8.32 6.79 6.97 ------ ------ ------ ------ ------ Total consumer(2)................................. 4.61 4.67 4.28 3.73 3.64 Commercial........................................ - .46 (.40) 2.10 2.69 ------ ------ ------ ------ ------ Total............................................. 4.59% 4.66% 4.26% 3.72% 3.63% ====== ====== ====== ====== ====== REAL ESTATE CHARGE-OFFS AND REO EXPENSE AS A PERCENT OF AVERAGE REAL ESTATE SECURED RECEIVABLES..................................... 1.38% 1.42% 1.29% .83% .71% ------ ------ ------ ------ ------ NONACCRUAL MANAGED RECEIVABLES Domestic: Real estate secured............................. $1,496 $1,791 $1,391 $ 941 $ 734 Auto finance.................................... 302 338 272 202 116 Private label................................... 24 43 38 39 48 Personal non-credit card........................ 1,263 1,464 1,320 1,106 902 Foreign........................................... 469 367 311 263 270 ------ ------ ------ ------ ------ Total consumer.................................... 3,554 4,003 3,332 2,551 2,070 Commercial and other.............................. 4 6 15 15 42 ------ ------ ------ ------ ------ Total............................................. $3,558 $4,009 $3,347 $2,566 $2,112 ====== ====== ====== ====== ====== ACCRUING CONSUMER MANAGED RECEIVABLES 90 OR MORE DAYS DELINQUENT Domestic: MasterCard/Visa................................. $ 570 $ 601 $ 513 $ 527 $ 421 Private label................................... - 582 633 503 417 Foreign........................................... 38 32 27 30 22 ------ ------ ------ ------ ------ Total............................................. $ 608 $1,215 $1,173 $1,060 $ 860 ====== ====== ====== ====== ====== --------------- (1) These non-GAAP financial measures are provided for comparison of our operating trends and should be read in conjunction with our owned basis GAAP financial information. Refer to "Reconciliations to GAAP Financial Measures" for a discussion of non-GAAP financial information and for quantitative reconciliations to the equivalent GAAP basis financial measure. (2) The adoption of FFIEC charge-off policies for our domestic private label and MasterCard/Visa portfolios in December 2004 increased private label net charge-offs by $197 million (112 basis points) and MasterCard/Visa net charge-offs by $5 million (2 basis points) and total consumer net charge-offs by $202 million (17 basis points) for the year ended December 31, 2004. 84 HSBC FINANCE CORPORATION AND SUBSIDIARIES ANALYSIS OF CREDIT LOSS RESERVES ACTIVITY - OWNED RECEIVABLES 2004 2003 2002 2001 2000 ------------------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) TOTAL OWNED CREDIT LOSS RESERVES AT JANUARY 1............... $ 3,793 $ 3,333 $ 2,663 $ 2,112 $ 1,757 ------- ------- ------- ------- ------- PROVISION FOR CREDIT LOSSES................................. 4,334 3,967 3,732 2,913 2,117 ------- ------- ------- ------- ------- CHARGE-OFFS Domestic: Real estate secured....................................... (629) (496) (430) (194) (123) Auto finance.............................................. (204) (148) (159) (94) (61) MasterCard/Visa(1)........................................ (1,082) (936) (736) (646) (432) Private label(1).......................................... (788) (684) (650) (591) (537) Personal non-credit card.................................. (1,350) (1,354) (1,193) (893) (724) Foreign..................................................... (355) (257) (223) (237) (233) ------- ------- ------- ------- ------- Total consumer.............................................. (4,408) (3,875) (3,391) (2,655) (2,110) Commercial and other........................................ (1) (3) (2) (12) (17) ------- ------- ------- ------- ------- Total owned receivables charged off......................... (4,409) (3,878) (3,393) (2,667) (2,127) ------- ------- ------- ------- ------- RECOVERIES Domestic: Real estate secured....................................... 18 10 7 5 5 Auto finance.............................................. 6 5 7 1 1 MasterCard/Visa........................................... 103 87 59 52 25 Private label............................................. 79 72 48 61 54 Personal non-credit card.................................. 120 82 92 76 62 Foreign..................................................... 50 34 49 62 58 ------- ------- ------- ------- ------- Total consumer.............................................. 376 290 262 257 205 Commercial and other........................................ - 1 2 - - ------- ------- ------- ------- ------- Total recoveries on owned receivables....................... 376 291 264 257 205 OTHER, NET.................................................. (469) 80 67 48 160 ------- ------- ------- ------- ------- OWNED CREDIT LOSS RESERVES Domestic: Real estate secured....................................... 645 670 551 284 173 Auto finance.............................................. 181 172 126 77 51 MasterCard/Visa........................................... 1,205 806 649 594 541 Private label............................................. 28 519 527 499 425 Personal non-credit card.................................. 1,237 1,348 1,275 1,032 734 Foreign..................................................... 316 247 172 137 142 ------- ------- ------- ------- ------- Total consumer.............................................. 3,612 3,762 3,300 2,623 2,066 Commercial and other........................................ 13 31 33 40 46 ------- ------- ------- ------- ------- TOTAL OWNED CREDIT LOSS RESERVES AT DECEMBER 31............. $ 3,625 $ 3,793 $ 3,333 $ 2,663 $ 2,112 ======= ======= ======= ======= ======= RATIO OF OWNED CREDIT LOSS RESERVES TO: Net charge-offs............................................. 89.9%(2) 105.7% 106.5% 110.5% 109.9% Receivables: Consumer.................................................. 3.39 4.09 4.02 3.31 3.10 Commercial................................................ 8.90 6.80 6.64 7.12 7.43 ------- ------- ------- ------- ------- Total..................................................... 3.39% 4.11% 4.04% 3.33% 3.14% ======= ======= ======= ======= ======= Nonperforming loans: Consumer.................................................. 102.7% 93.2% 94.0% 91.9% 91.2% Commercial................................................ 535.9 469.8 229.7 278.7 85.4 ------- ------- ------- ------- ------- Total..................................................... 103.0% 93.7% 94.5% 92.7% 91.1% ======= ======= ======= ======= ======= --------------- (1) Includes $3 million of MasterCard and Visa and $155 million of private label charge-off relating to the adoption of FFIEC charge-off policies in December 2004. (2) In December 2004 we adopted FFIEC charge-off policies for our domestic private label and MasterCard/Visa portfolios and subsequently sold the domestic private label receivable portfolio. These events had a significant impact on this ratio. Reserves as a percentage of net charge-offs excluding domestic private label net charge-offs and charge-off relating to the adoption of FFIEC was 109.2% at December 31, 2004. 85 HSBC FINANCE CORPORATION AND SUBSIDIARIES ANALYSIS OF CREDIT LOSS RESERVES ACTIVITY - MANAGED RECEIVABLES(1) 2004 2003 2002 2001 2000 ------------------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) TOTAL MANAGED CREDIT LOSS RESERVES AT JANUARY 1............. $ 6,167 $ 5,092 $ 3,811 $ 3,194 $ 2,667 ------- ------- ------- ------- ------- PROVISION FOR CREDIT LOSSES................................. 4,522 6,242 5,655 4,018 3,252 ------- ------- ------- ------- ------- CHARGE-OFFS Domestic: Real estate secured....................................... (631) (500) (437) (203) (140) Auto finance.............................................. (561) (567) (478) (287) (188) MasterCard/Visa(2)........................................ (1,551) (1,462) (1,274) (1,148) (881) Private label(2).......................................... (1,066) (918) (764) (640) (606) Personal non-credit card.................................. (1,919) (1,862) (1,600) (1,196) (1,030) Foreign..................................................... (423) (330) (280) (282) (276) ------- ------- ------- ------- ------- Total consumer.............................................. (6,151) (5,639) (4,833) (3,756) (3,121) Commercial and other........................................ (1) (3) (2) (12) (17) ------- ------- ------- ------- ------- Total managed receivables charged off....................... (6,152) (5,642) (4,835) (3,768) (3,138) ------- ------- ------- ------- ------- RECOVERIES Domestic: Real estate secured....................................... 18 10 7 5 5 Auto finance.............................................. 15 12 17 4 4 MasterCard/Visa........................................... 132 127 96 81 50 Private label............................................. 101 92 56 62 57 Personal non-credit card.................................. 154 106 122 101 79 Foreign..................................................... 58 40 59 72 69 ------- ------- ------- ------- ------- Total consumer.............................................. 478 387 357 325 264 Commercial and other........................................ - 1 2 - - ------- ------- ------- ------- ------- Total recoveries on managed receivables..................... 478 388 359 325 264 OTHER, NET.................................................. (500) 87 102 42 149 ------- ------- ------- ------- ------- MANAGED CREDIT LOSS RESERVES Domestic: Real estate secured....................................... 646 671 561 304 196 Auto finance.............................................. 516 846 759 449 324 MasterCard/Visa........................................... 1,306 1,114 957 975 849 Private label............................................. 28 886 791 603 599 Personal non-credit card.................................. 1,635 2,244 1,697 1,217 958 Foreign..................................................... 371 375 294 223 222 ------- ------- ------- ------- ------- Total consumer.............................................. 4,502 6,136 5,059 3,771 3,148 Commercial and other........................................ 13 31 33 40 46 ------- ------- ------- ------- ------- TOTAL MANAGED CREDIT LOSS RESERVES AT DECEMBER 31........... $ 4,515 $ 6,167 $ 5,092 $ 3,811 $ 3,194 ======= ======= ======= ======= ======= RATIO OF MANAGED CREDIT LOSS RESERVES TO: Net charge-offs............................................. 79.6%(3) 117.4% 113.8% 110.7% 111.1% Receivables: Consumer.................................................. 3.73 5.19 4.73 3.77 3.62 Commercial................................................ 8.90 6.80 6.64 7.12 7.43 ------- ------- ------- ------- ------- Total..................................................... 3.73% 5.20% 4.74% 3.78% 3.65% ======= ======= ======= ======= ======= Nonperforming loans: Consumer.................................................. 108.2% 117.6% 112.3% 104.5% 107.4% Commercial................................................ 535.9 469.8 229.7 278.7 85.4 ------- ------- ------- ------- ------- Total..................................................... 108.4% 118.0% 112.6% 105.0% 107.0% ======= ======= ======= ======= ======= --------------- (1) These non-GAAP financial measures are provided for comparison of our operating trends and should be read in conjunction with our owned basis GAAP financial information. Refer to "Reconciliations to GAAP Financial Measures" for a discussion of non-GAAP financial information and for quantitative reconciliations to the equivalent GAAP basis financial measure. (2) Includes $5 million of MasterCard and Visa and $197 million of private label charge-off relating to the adoption of FFIEC charge-off policies in December 2004. (3) As previously discussed, the adoption of FFIEC charge-off policies for our domestic private label and MasterCard/Visa portfolios and subsequent sale of the domestic private label receivable portfolio in December 2004 had a significant impact on this ratio. Reserves as a percentage of net charge-offs excluding domestic private label net charge-offs and charge-off relating to the adoption of FFIEC was 96.0% at December 31, 2004. 86 HSBC FINANCE CORPORATION AND SUBSIDIARIES NET INTEREST MARGIN - 2004 COMPARED TO 2003 (OWNED BASIS) FINANCE AND INTEREST INCOME/ INTEREST INCREASE/ (DECREASE) DUE TO: AVERAGE OUTSTANDING(1) AVERAGE RATE EXPENSE ------------------- --------------------- ----------- -------------------- VOLUME RATE 2004 2003 2004 2003 2004 2003 VARIANCE VARIANCE(2) VARIANCE(2) ------------------------------------------------------------------------------------------------------------------------ (RESTATED) (RESTATED) (RESTATED) (DOLLARS ARE IN MILLIONS) Receivables: Real estate secured............ $ 56,303 $ 49,852 8.8% 9.7% $ 4,974 $ 4,852 $ 122 $ 594 $(472) Auto finance......... 5,785 2,920 12.2 12.9 706 378 328 351 (23) MasterCard/Visa...... 11,575 9,517 14.8 14.8 1,712 1,406 306 304 2 Private label........ 13,029 11,942 10.8 11.6 1,407 1,379 28 121 (93) Personal non-credit card............... 14,194 14,009 15.7 16.5 2,234 2,314 (80) 30 (110) Commercial and other.............. 354 430 2.5 2.2(6) 9 10 (1) (2) 1 Purchase accounting adjustments........ 319 397 - - (201) (200) (1) (1) - -------- -------- ---- ---- ------- ------- ----- ------ ----- Total receivables...... 101,559 89,067 10.7 11.4 10,841 10,139 702 1,401 (699) Noninsurance investments.......... 4,853 5,280 2.1 2.0 104 103 1 (6) 7 -------- -------- ---- ---- ------- ------- ----- ------ ----- Total interest-earning assets (excluding insurance investments)......... $106,412 $ 94,347 10.3% 10.9% $10,945 $10,242 $ 703 $1,261 $(558) Insurance investments.......... 3,165 3,160 Other assets........... 14,344 12,590 -------- -------- TOTAL ASSETS........... $123,921 $110,097 ======== ======== Debt: Deposits............. $ 88 $ 992 1.9% 3.6% $ 2 $ 36 $ (34) $ (24) $ (10) Commercial paper..... 11,403 6,357 1.8 1.6 210 103 107 91 16 Bank and other borrowings......... 38 1,187 1.9(6) 3.9 1 46 (45) (29) (16) Due to affiliates.... 8,752 3,014 3.9 2.4 343 73 270 204 66 Long term debt (with original maturities over one year)..... 79,834 73,383 3.3 3.6 2,587 2,670 (83) 223 (306) -------- -------- ---- ---- ------- ------- ----- ------ ----- Total debt............. $100,115 $ 84,933 3.1% 3.4% $ 3,143 $ 2,928 $ 215 $ 492 $(277) Other liabilities...... 5,703 9,836 -------- -------- Total liabilities...... 105,818 94,769 Preferred securities... 1,100 1,119 Common shareholder's(s') equity............... 17,003 14,209 -------- -------- TOTAL LIABILITIES AND SHAREHOLDER'S(S') EQUITY............... $123,921 $110,097 ======== ======== NET INTEREST MARGIN - OWNED BASIS(3)(5).... 7.3% 7.8% $ 7,802 $ 7,314 $ 488 $ 769 $(281) ==== ==== ======= ======= ===== ====== ===== INTEREST SPREAD - OWNED BASIS(4)............. 7.2% 7.5% ==== ==== --------------- (1) Nonaccrual loans are included in average outstanding balances. (2) Rate/volume variance is allocated based on the percentage relationship of changes in volume and changes in rate to the total interest variance. For total receivables, total interest-earning assets and total debt, the rate and volume variances are calculated based on the relative weighting of the individual components comprising these totals. These totals do not represent an arithmetic sum of the individual components. (3) Represents net interest income as a percent of average interest-earning assets (4) Represents the difference between the yield earned on interest-earning assets and the cost of the debt used to fund the assets (5) The net interest margin analysis includes the following for foreign businesses: 2004 2003 ------------------------------------------------------------------------------ Average interest-earning assets............................. $10,728 $8,779 Average interest-bearing liabilities........................ 9,127 7,957 Net interest income......................................... 712 660 Net interest margin......................................... 6.6% 7.5% (6) Average rate does not recompute from the dollar figures presented due to rounding. 87 HSBC FINANCE CORPORATION AND SUBSIDIARIES NET INTEREST MARGIN - 2003 COMPARED TO 2002 (OWNED BASIS) FINANCE AND AVERAGE INTEREST INCOME/ OUTSTANDING(1) AVERAGE RATE INTEREST EXPENSE -------------------- ----------------- --------------------- 2003 2002 2003 2002 2003 2002 ------------------------------------------------------------------------------------------------- (RESTATED) (RESTATED) (RESTATED) (DOLLARS ARE IN MILLIONS) Receivables: Real estate secured.......... $ 49,852 $47,258 9.7% 10.7% $ 4,852 $ 5,051 Auto finance................. 2,920 2,529 12.9 14.7 378 373 MasterCard/Visa.............. 9,517 7,569 14.8 14.8 1,406 1,119 Private label................ 11,942 10,775 11.6 12.2 1,379 1,314 Personal non-credit card..... 14,009 13,968 16.5 18.1 2,314 2,526 Commercial and other......... 430 483 2.2(6) 2.1 10 10 Purchase accounting adjustments................ 397 - - - (200) - -------- ------- ---- ---- ------- ------- Total receivables.............. 89,067 82,582 11.4 12.6 10,139 10,393 Noninsurance investments....... 5,280 5,302 2.0 2.5 103 132 -------- ------- ---- ---- ------- ------- Total interest-earning assets (excluding insurance investments)................. $ 94,347 $87,884 10.9% 12.0% $10,242 $10,525 Insurance investments.......... 3,160 3,191 Other assets................... 12,590 5,229 -------- ------- TOTAL ASSETS................... $110,097 $96,304 ======== ======= Debt: Deposits..................... $ 992 $ 5,839 3.6% 6.5% $ 36 $ 380 Commercial paper............. 6,357 6,830 1.6 1.9 103 130 Bank and other borrowings.... 1,187 1,473 3.9 3.4 46 51 Due to affiliates............ 3,014 - 2.4 - 73 - Long term debt (with original maturities over one year)...................... 73,383 69,406 3.6 4.8 2,670 3,310 -------- ------- ---- ---- ------- ------- Total debt..................... $ 84,933 $83,548 3.4% 4.6% $ 2,928 $ 3,871 Other liabilities.............. 9,836 3,251 -------- ------- Total liabilities.............. 94,769 86,799 Preferred securities........... 1,119 865 Common shareholder's(s') equity....................... 14,209 8,640 -------- ------- TOTAL LIABILITIES AND SHAREHOLDER'S(S') EQUITY..... $110,097 $96,304 ======== ======= NET INTEREST MARGIN - OWNED BASIS(3)(5).................. 7.8% 7.6% $ 7,314 $ 6,654 ==== ==== ======= ======= INTEREST SPREAD - OWNED BASIS(4)..................... 7.5% 7.4% ==== ==== INCREASE/ (DECREASE) DUE TO: ------------------------------------ VOLUME RATE VARIANCE VARIANCE(2) VARIANCE(2) ------------------------------- ------------------------------------ (DOLLARS ARE IN MILLIONS) Receivables: Real estate secured.......... $ (199) $ 268 $ (467) Auto finance................. 5 54 (49) MasterCard/Visa.............. 287 288 (1) Private label................ 65 137 (72) Personal non-credit card..... (212) 7 (219) Commercial and other......... - (1) 1 Purchase accounting adjustments................ (200) (200) - ------- ----- ------- Total receivables.............. (254) 781 (1,035) Noninsurance investments....... (29) (1) (28) ------- ----- ------- Total interest-earning assets (excluding insurance investments)................. $ (283) $ 735 $(1,018) Insurance investments.......... Other assets................... TOTAL ASSETS................... Debt: Deposits..................... $ (344) $(224) $ (120) Commercial paper............. (27) (9) (18) Bank and other borrowings.... (5) (11) 6 Due to affiliates............ 73 73 - Long term debt (with original maturities over one year)...................... (640) 181 (821) ------- ----- ------- Total debt..................... $ (943) $ 63 $(1,006) Other liabilities.............. Total liabilities.............. Preferred securities........... Common shareholder's(s') equity....................... TOTAL LIABILITIES AND SHAREHOLDER'S(S') EQUITY..... NET INTEREST MARGIN - OWNED BASIS(3)(5).................. $ 660 $ 672 $ (12) ======= ===== ======= INTEREST SPREAD - OWNED BASIS(4)..................... --------------- (1) Nonaccrual loans are included in average outstanding balances. (2) Rate/volume variance is allocated based on the percentage relationship of changes in volume and changes in rate to the total interest variance. For total receivables, total interest-earning assets and total debt, the rate and volume variances are calculated based on the relative weighting of the individual components comprising these totals. These totals do not represent an arithmetic sum of the individual components (3) Represents net interest income as a percent of average interest-earning assets (4) Represents the difference between the yield earned on interest-earning assets and the cost of the debt used to fund the assets (5) The net interest income analysis includes the following for foreign businesses: 2003 2002 ----------------------------------------------------------------------------- Average interest-earning assets............................. $8,779 $6,616 Average interest-bearing liabilities........................ 7,957 6,076 Net interest income......................................... 660 483 Net interest margin......................................... 7.5% 7.3% (6) Average rate does not recompute from dollar figures presented due to rounding. 88 HSBC FINANCE CORPORATION AND SUBSIDIARIES NET INTEREST MARGIN - 2004 COMPARED TO 2003 AND 2002 (MANAGED BASIS) NET INTEREST MARGIN ON A MANAGED BASIS As receivables are securitized rather than held in our portfolio, net interest margin is reclassified to securitization revenue. We retain a substantial portion of the profit inherent in the receivables while increasing liquidity. The comparability of net interest margin between periods may be impacted by the level and type of receivables securitized. Net interest margin on a managed basis includes finance income earned on our owned receivables as well on our securitized receivables. This finance income is offset by interest expense on the debt recorded on our balance sheet as well as the contractual rate of return on the instruments issued to investors when the receivables were securitized. FINANCE AND INTEREST AVERAGE OUTSTANDING(1) AVERAGE RATE INCOME/INTEREST EXPENSE -------------------------------- -------------------------- -------------------- 2004 2003 2002 2004 2003 2002 2004 2003 2002 ------------------------------------------------------------------------------------------------------------------------ (RESTATED) (RESTATED) (RESTATED) (DOLLARS ARE IN MILLIONS) Receivables: Real estate secured.............. $ 56,462 $ 50,124 $ 47,830 8.8% 9.7% 10.7% $ 4,984 $ 4,874 $ 5,114 Auto finance..................... 9,432 7,918 6,942 13.3 14.9 16.7 1,250 1,180 1,156 MasterCard/Visa.................. 20,674 19,272 17,246 12.7 12.9 13.4 2,627 2,484 2,304 Private label.................... 17,579 16,016 13,615 10.8 11.5 12.2 1,895 1,843 1,663 Personal non-credit card......... 18,986 19,041 18,837 17.2 17.8 18.6 3,260 3,388 3,505 Commercial and other............. 354 430 483 2.5 2.2(5) 2.1 9 10 10 Purchase accounting adjustment... 319 397 - - - - (201) (200) - -------- -------- -------- ----- ----- ----- ------- ------- ------- Total receivables................. 123,806 113,198 104,953 11.2 12.0 13.1 13,824 13,579 13,752 Noninsurance investments.......... 4,853 5,280 5,302 2.1 2.0 2.5 104 103 131 -------- -------- -------- ----- ----- ----- ------- ------- ------- Total interest-earning assets (excluding insurance investments)..................... $128,659 $118,478 $110,255 10.8% 11.5% 12.6% $13,928 $13,682 $13,883 -------- -------- -------- ----- ---- ----- ------- ------- ------- Total debt........................ $122,362 $109,064 $105,919 3.0% 3.2% 4.3% $ 3,671 $ 3,494 $ 4,546 -------- -------- -------- ----- ---- ----- ------- ------- ------- NET INTEREST MARGIN - MANAGED BASIS(3)......................... 8.0% 8.6% 8.5% $10,257 $10,188 $ 9,337 ===== ===== ===== ======= ======= ======= INTEREST SPREAD - MANAGED BASIS(4)......................... 7.8% 8.3% 8.3% ===== ===== ===== INCREASE/(DECREASE) DUE TO: --------------------------------------------------------------------------- 2004 COMPARED TO 2003 2003 COMPARED TO 2002 ------------------------------------ ------------------------------------ VOLUME RATE VOLUME RATE VARIANCE VARIANCE(2) VARIANCE(2) VARIANCE VARIANCE(2) VARIANCE(2) ---------------------------------- --------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) Receivables: Real estate secured.............. $ 110 $ 583 $(473) $ (240) $ 238 $ (478) Auto finance..................... 70 210 (140) 24 153 (129) MasterCard/Visa.................. 143 179 (36) 180 263 (83) Private label.................... 52 173 (121) 180 281 (101) Personal non-credit card......... (128) (10) (118) (117) 38 (155) Commercial and other............. (1) (2) 1 - - - Purchase accounting adjustment... (1) (1) - (170) (170) - ----- ------ ----- ------- ------ ------- Total receivables................. 245 1,253 (1,008) (143) 1,036 (1,179) Noninsurance investments.......... 1 (6) 7 (58) (1) (57) ----- ------ ----- ------- ------ ------- Total interest-earning assets (excluding insurance investments)..................... $ 246 $1,133 $(887) $ (201) $1,025 $(1,226) ----- ------ ----- ------- ------ ------- Total debt........................ $ 177 $ 408 $(231) $(1,052) $ 133 $(1,185) ----- ------ ----- ------- ------ ------- NET INTEREST MARGIN - MANAGED BASIS(3)......................... $ 69 $ 725 $(656) $ 851 $ 892 $ (41) ===== ====== ===== ======= ====== ======= INTEREST SPREAD - MANAGED BASIS(4)......................... --------------- (1) Nonaccrual loans are included in average outstanding balances. (2) Rate/volume variance is allocated based on the percentage relationship of changes in volume and changes in rate to the total interest variance. For total receivables, total interest-earning assets and total debt, the rate and volume variances are calculated based on the relative weighting of the individual components comprising these totals. These totals do not represent an arithmetic sum of the individual components (3) Represents net interest income as a percent of average interest-earning assets (4) Represents the difference between the yield earned on interest-earning assets and cost of the debt used to fund the assets. (5) Average rate does not recompute from dollar figures presented due to rounding. 89 HSBC FINANCE CORPORATION AND SUBSIDIARIES RECONCILIATIONS TO GAAP FINANCIAL MEASURES Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). In addition to the GAAP financial results reported in our consolidated financial statements, MD&A includes reference to the following information which is presented on a non-GAAP basis: OPERATING RESULTS, PERCENTAGES AND RATIOS Certain percentages and ratios have been presented on an operating basis and have been calculated using "operating net income", a non-GAAP financial measure. "Operating net income" is net income excluding certain nonrecurring items. These nonrecurring items are also excluded in calculating our operating basis efficiency ratios. We believe that excluding these items helps readers of our financial statements to understand better the results and trends of our underlying business. MANAGED BASIS REPORTING We monitor our operations and evaluate trends on a managed basis (a non-GAAP financial measure), which assumes that securitized receivables have not been sold and are still on our balance sheet. We manage and evaluate our operations on a managed basis because the receivables that we securitize are subjected to underwriting standards comparable to our owned portfolio, are serviced by operating personnel without regard to ownership and result in a similar credit loss exposure for us. In addition, we fund our operations, review our operating results, and make decisions about allocating resources such as employees and capital on a managed basis. When reporting on a managed basis, net interest margin, provision for credit losses and fee income related to receivables securitized are reclassified from securitization revenue in our owned statements of income into the appropriate caption. Additionally, charge-off and delinquency associated with these receivables are included in our managed basis credit quality statistics. Debt analysts, rating agencies and others also evaluate our operations on a managed basis for the reasons discussed above and have historically requested managed basis information from us. We believe that managed basis information enables investors and other interested parties to better understand the performance and quality of our entire managed loan portfolio and is important to understanding the quality of originations and the related credit risk inherent in our owned portfolio. EQUITY RATIOS Tangible shareholder's(s') equity to tangible managed assets ("TETMA"), tangible shareholder's(s') equity plus owned loss reserves to tangible managed assets ("TETMA + Owned Reserves") and tangible common equity to tangible managed assets are non-GAAP financial measures that are used by HSBC Finance Corporation management or certain rating agencies to evaluate capital adequacy. These ratios may differ from similarly named measures presented by other companies. The most directly comparable GAAP financial measure is common and preferred equity to owned assets. We and certain rating agencies also monitor our equity ratios excluding the impact of purchase accounting adjustments. We do so because we believe that the purchase accounting adjustments represent non-cash transactions which do not affect our business operations, cash flows or ability to meet our debt obligations. Preferred securities issued by certain non-consolidated trusts are considered equity in the TETMA and TETMA + Owned Reserves calculations because of their long-term subordinated nature and the ability to defer dividends. Our Adjustable Conversion-Rate Equity Security Units, which exclude purchase accounting adjustments, are also considered equity in these calculations because they include investor obligations to purchase HSBC ordinary shares in 2006. QUANTITATIVE RECONCILIATIONS OF NON-GAAP FINANCIAL MEASURES TO GAAP FINANCIAL MEASURES For a reconciliation of managed basis net interest income, fee income and provision for credit losses to the comparable owned basis amounts, see Note 23, "Business Segments," to the accompanying consolidated financial statements. For a reconciliation of our owned loan portfolio by product to our managed loan portfolio, see Note 7, "Receivables," to the accompanying consolidated financial statements. Reconciliations of our owned basis and managed basis credit quality, loss reserves, net interest income, selected financial ratios, including operating ratios, and our equity ratios follow. 90 HSBC FINANCE CORPORATION AND SUBSIDIARIES RECONCILIATIONS TO GAAP FINANCIAL MEASURES CREDIT QUALITY STATISTICS - 2004 TWO-MONTHS-AND-OVER CONTRACTUAL DELINQUENCY ------------------------------------------------- YEAR-TO-DATE CHARGE-OFFS, TWO-MONTHS- TWO-MONTHS- NET OF RECOVERIES AND-OVER AND-OVER --------------------------------------------- CONTRACTUAL RECEIVABLES CONTRACTUAL NET AVERAGE NET DELINQUENCY OUTSTANDING DELINQUENCY(1) CHARGE-OFFS RECEIVABLES CHARGE-OFFS(1) ------------------------------------------------------------------------------------------------------------------------ (DOLLARS ARE IN MILLIONS) OWNED: First mortgage(2)....... $ 1 $ 26 5.04% $ 1 $ 32 2.39% Real estate secured..... 1,920 64,820 2.96 620 56,303 1.10 Auto finance............ 156 7,544 2.07 198 5,785 3.43 MasterCard/Visa......... 714 14,635 4.88 1,025 11,575 8.85 Private label........... 141 3,411 4.13 804 13,029 6.17 Personal non-credit card.................. 1,401 16,128 8.69 1,384 14,194 9.75 ------ -------- ----- ------ -------- ----- Total consumer.......... 4,333 106,564 4.07 4,032 100,918 4.00 Commercial.............. - 291 - - 322 - ------ -------- ----- ------ -------- ----- Total................... $4,333 $106,855 4.06% $4,032 $101,240 3.98% ------ -------- ----- ------ -------- ----- SERVICED WITH LIMITED RECOURSE: Real estate secured..... $ 10 $ 81 12.35% $ 2 $ 159 1.26% Auto finance............ 147 2,679 5.49 349 3,647 9.57 MasterCard/Visa......... 170 7,583 2.24 482 9,099 5.30 Private label........... - - - 256 4,550 5.63 Personal non-credit card.................. 461 3,882 11.88 553 4,792 11.54 ------ -------- ----- ------ -------- ----- Total................... $ 788 $ 14,225 5.54% $1,642 $ 22,247 7.38% ------ -------- ----- ------ -------- ----- MANAGED: First mortgage(2)....... $ 1 $ 26 5.04% $ 1 $ 32 2.39% Real estate secured..... 1,930 64,901 2.97 622 56,462 1.10 Auto finance............ 303 10,223 2.96 547 9,432 5.80 MasterCard/Visa......... 884 22,218 3.98 1,507 20,674 7.29 Private label........... 141 3,411 4.13 1,060 17,579 6.03 Personal non-credit card.................. 1,862 20,010 9.30 1,937 18,986 10.20 ------ -------- ----- ------ -------- ----- Total consumer.......... 5,121 120,789 4.24 5,674 123,165 4.61 Commercial.............. - 291 - - 322 - ------ -------- ----- ------ -------- ----- Total................... $5,121 $121,080 4.23% $5,674 $123,487 4.59% ====== ======== ===== ====== ======== ===== --------------- (1) Certain percentages may not recompute from the dollar figures presented due to rounding. (2) Includes our liquidating legacy first and reverse mortgage portfolios. SERVICED WITH OWNED LIMITED RECOURSE MANAGED -------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) NONACCRUAL RECEIVABLES Domestic: Real estate secured....................................... $ 1,489 $ 7 $ 1,496 Auto finance.............................................. 155 147 302 Private label............................................. 24 - 24 Personal non-credit card.................................. 908 355 1,263 Foreign..................................................... 432 37 469 ------- ---- ------- Total consumer.............................................. 3,008 546 3,554 Commercial and other........................................ 4 - 4 - - - ------- ---- ------- Total....................................................... $ 3,012 $546 $ 3,558 ======= ==== ======= ACCRUING CONSUMER RECEIVABLES 90 OR MORE DAYS DELINQUENT Domestic: MasterCard/Visa........................................... $ 469 $101 $ 570 Private label............................................. - - - Foreign..................................................... 38 - 38 ------- ---- ------- Total....................................................... $ 507 $101 $ 608 ======= ==== ======= REAL ESTATE CHARGE-OFFS AND REO EXPENSE AS A PERCENT OF AVERAGE REAL ESTATE SECURED RECEIVABLES Real estate charge-offs and REO expense..................... $ 779 $ 2 $ 781 Average real estate secured receivables..................... 56,303 159 56,462 ------- ---- ------- Real estate charge-offs and REO expense as a percent of average real estate secured receivables(1)................ 1.38% 1.26% 1.38% ======= ==== ======= --------------- (1) Certain percentages may not recompute from the dollar figures presented due to rounding. 91 HSBC FINANCE CORPORATION AND SUBSIDIARIES RECONCILIATIONS TO GAAP FINANCIAL MEASURES CREDIT QUALITY STATISTICS - 2003 TWO-MONTHS-AND-OVER CONTRACTUAL DELINQUENCY ------------------------------------------------- TWO-MONTHS- TWO-MONTHS- YEAR-TO-DATE CHARGE-OFFS, NET OF RECOVERIES AND-OVER AND-OVER ------------------------------------------------ CONTRACTUAL RECEIVABLES CONTRACTUAL NET AVERAGE NET DELINQUENCY OUTSTANDING DELINQUENCY(1) CHARGE-OFFS RECEIVABLES CHARGE-OFFS(1) ------------------------------------------------------------------------------------------------------------------------ (DOLLARS ARE IN MILLIONS) OWNED: First mortgage(2)........ $ 3 $ 35 9.14% $ - $ 39 .77% Real estate secured...... 2,217 51,221 4.33 496 49,852 .99 Auto finance............. 104 4,138 2.51 143 2,920 4.91 MasterCard/Visa.......... 644 11,182 5.76 874 9,517 9.18 Private label............ 683 12,604 5.42 687 11,942 5.75 Personal non-credit card................... 1,285 12,832 10.01 1,385 14,009 9.89 ------ -------- ----- ------ -------- ----- Total consumer........... 4,936 92,012 5.36 3,585 88,279 4.06 Commercial............... - 366 - 2 391 .46 ------ -------- ----- ------ -------- ----- Total.................... $4,936 $ 92,378 5.34% $3,587 $ 88,670 4.05% ------ -------- ----- ------ -------- ----- SERVICED WITH LIMITED RECOURSE: Real estate secured...... $ 21 $ 194 11.05% $ 5 $ 272 1.69% Auto finance............. 234 4,675 5.01 411 4,998 8.22 MasterCard/Visa.......... 237 9,967 2.38 525 9,755 5.38 Private label............ 200 5,261 3.79 214 4,074 5.25 Personal non-credit card................... 740 6,104 12.12 512 5,032 10.17 ------ -------- ----- ------ -------- ----- Total.................... $1,432 $ 26,201 5.47% $1,667 $ 24,131 6.91% ------ -------- ----- ------ -------- ----- MANAGED: First mortgage(2)........ $ 3 $ 35 9.14% $ - $ 39 .77% Real estate secured...... 2,238 51,415 4.35 501 50,124 1.00 Auto finance............. 338 8,813 3.84 554 7,918 7.00 MasterCard/Visa.......... 881 21,149 4.16 1,399 19,272 7.26 Private label............ 883 17,865 4.94 901 16,016 5.62 Personal non-credit card................... 2,025 18,936 10.69 1,897 19,041 9.97 ------ -------- ----- ------ -------- ----- Total consumer........... 6,368 118,213 5.39 5,252 112,410 4.67 Commercial............... - 366 - 2 391 .46 ------ -------- ----- ------ -------- ----- Total.................... $6,368 $118,579 5.37% $5,254 $112,801 4.66% ====== ======== ===== ====== ======== ===== --------------- (1) Certain percentages may not recompute from the dollar figures presented due to rounding. (2) Includes our liquidating legacy first and reverse mortgage portfolios. SERVICED WITH OWNED LIMITED RECOURSE MANAGED -------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) NONACCRUAL RECEIVABLES Domestic: Real estate secured....................................... $ 1,777 $ 14 $ 1,791 Auto finance.............................................. 104 234 338 Private label............................................. 43 - 43 Personal non-credit card.................................. 898 566 1,464 Foreign..................................................... 316 51 367 ------- ---- ------- Total consumer.............................................. 3,138 865 4,003 Commercial and other........................................ 6 - 6 ------- ---- ------- Total....................................................... $ 3,144 $865 $ 4,009 ======= ==== ======= ACCRUING CONSUMER RECEIVABLES 90 OR MORE DAYS DELINQUENT Domestic: MasterCard/Visa........................................... $ 443 $158 $ 601 Private label............................................. 429 153 582 Foreign..................................................... 32 - 32 ------- ---- ------- Total....................................................... $ 904 $311 $ 1,215 ======= ==== ======= REAL ESTATE CHARGE-OFFS AND REO EXPENSE AS A PERCENT OF AVERAGE REAL ESTATE SECURED RECEIVABLES Real estate charge-offs and REO expense..................... $ 708 $ 5 $ 713 Average real estate secured receivables..................... 49,852 272 50,124 ------- ---- ------- Real estate charge-offs and REO expense as a percent of average real estate secured receivables(1)................ 1.42% 1.69% 1.42% ======= ==== ======= --------------- (1) Certain percentages may not recompute from the dollar figures presented due to rounding. 92 HSBC FINANCE CORPORATION AND SUBSIDIARIES RECONCILIATIONS TO GAAP FINANCIAL MEASURES CREDIT QUALITY STATISTICS - 2002 TWO-MONTHS-AND-OVER CONTRACTUAL DELINQUENCY ----------------------------------------------- YEAR-TO-DATE CHARGE-OFFS, TWO-MONTHS- TWO-MONTHS- NET OF RECOVERIES AND-OVER AND-OVER --------------------------------------- CONTRACTUAL RECEIVABLES CONTRACTUAL NET AVERAGE NET DELINQUENCY OUTSTANDING DELINQUENCY(1) CHARGE-OFFS RECEIVABLES CHARGE-OFFS(1) ------------------------------------------------------------------------------------------------------------------------ (DOLLARS ARE IN MILLIONS) OWNED: First mortgage(2).............. $ 4 $ 44 9.71% $ 2 $ 54 3.70% Real estate secured............ 1,794 45,819 3.91 431 47,258 .91 Auto finance................... 80 2,024 3.96 152 2,529 6.00 MasterCard/Visa................ 534 8,947 5.97 716 7,569 9.46 Private label.................. 721 11,339 6.36 676 10,775 6.28 Personal non-credit card....... 1,251 13,970 8.95 1,154 13,968 8.26 ------ -------- ----- ------ -------- ---- Total consumer................. 4,384 82,143 5.34 3,131 82,153 3.81 Commercial..................... - 419 - (2) 429 (.40) ------ -------- ----- ------ -------- ---- Total.......................... $4,384 $ 82,562 5.31% $3,129 $ 82,582 3.79% ------ -------- ----- ------ -------- ---- SERVICED WITH LIMITED RECOURSE: Real estate secured............ $ 31 $ 456 6.82% $ 7 $ 572 1.26% Auto finance................... 192 5,418 3.54 308 4,413 7.00 MasterCard/Visa................ 247 10,006 2.46 512 9,677 5.28 Private label.................. 178 3,578 4.96 107 2,840 3.75 Personal non-credit card....... 579 5,476 10.60 413 4,869 8.49 ------ -------- ----- ------ -------- ---- Total.......................... $1,227 $ 24,934 4.92% $1,347 $ 22,371 6.02% ------ -------- ----- ------ -------- ---- MANAGED: First mortgage(2).............. $ 4 $ 44 9.71% $ 2 $ 54 3.70% Real estate secured............ 1,825 46,275 3.94 438 47,830 .92 Auto finance................... 272 7,442 3.65 460 6,942 6.63 MasterCard/Visa................ 781 18,953 4.12 1,228 17,246 7.12 Private label.................. 899 14,917 6.03 783 13,615 5.75 Personal non-credit card....... 1,830 19,446 9.41 1,567 18,837 8.32 ------ -------- ----- ------ -------- ---- Total consumer................. 5,611 107,077 5.24 4,478 104,524 4.28 Commercial..................... - 419 - (2) 429 (.40) ------ -------- ----- ------ -------- ---- Total.......................... $5,611 $107,496 5.22% $4,476 $104,953 4.26% ====== ======== ===== ====== ======== ==== --------------- (1) Certain percentages may not recompute from the dollar figures presented due to rounding. (2) Includes our liquidating legacy first and reverse mortgage portfolios. SERVICED WITH OWNED LIMITED RECOURSE MANAGED -------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) NONACCRUAL RECEIVABLES Domestic: Real estate secured....................................... $ 1,367 $ 24 $ 1,391 Auto finance.............................................. 80 192 272 Private label............................................. 38 - 38 Personal non-credit card.................................. 902 418 1,320 Foreign..................................................... 264 47 311 ------- ---- ------- Total consumer.............................................. 2,651 681 3,332 Commercial and other........................................ 15 - 15 ------- ---- ------- Total....................................................... $ 2,666 $681 $ 3,347 ======= ==== ======= ACCRUING CONSUMER RECEIVABLES 90 OR MORE DAYS DELINQUENT Domestic: MasterCard/Visa........................................... $ 343 $170 $ 513 Private label............................................. 491 142 633 Foreign..................................................... 27 - 27 ------- ---- ------- Total....................................................... $ 861 $312 $ 1,173 ======= ==== ======= REAL ESTATE CHARGE-OFFS AND REO EXPENSE AS A PERCENT OF AVERAGE REAL ESTATE SECURED RECEIVABLES Real estate charge-offs and REO expense..................... $ 608 $ 7 $ 615 Average real estate secured receivables..................... 47,258 572 47,830 ------- ---- ------- Real estate charge-offs and REO expense as a percent of average real estate secured receivables(1)................ 1.29% 1.28% 1.29% ======= ==== ======= --------------- (1) Certain percentages may not recompute from the dollar figures presented due to rounding. 93 HSBC FINANCE CORPORATION AND SUBSIDIARIES RECONCILIATIONS TO GAAP FINANCIAL MEASURES CREDIT QUALITY STATISTICS - 2001 TWO-MONTHS-AND-OVER CONTRACTUAL DELINQUENCY ----------------------------------------------- YEAR-TO-DATE CHARGE-OFFS, TWO-MONTHS- TWO-MONTHS- NET OF RECOVERIES AND-OVER AND-OVER ---------------------------------- CONTRACTUAL RECEIVABLES CONTRACTUAL NET AVERAGE NET DELINQUENCY OUTSTANDING DELINQUENCY(1)CHARGE-OFFS RECEIVABLES CHARGE-OFFS(1) ------------------------------------------------------------------------------------------------------------------------ (DOLLARS ARE IN MILLIONS) OWNED: First mortgage(2)............... $ 8 $ 63 12.78% $ 2 $ 75 2.28% Real estate secured............. 1,154 43,857 2.63 202 38,851 .52 Auto finance.................... 69 2,369 2.92 93 2,319 4.00 MasterCard/Visa................. 462 8,141 5.67 665 8,138 8.17 Private label................... 699 11,664 5.99 587 10,516 5.59 Personal non-credit card........ 1,126 13,337 8.44 851 12,486 6.81 ------ -------- ----- ------ ------- ---- Total consumer.................. 3,518 79,431 4.43 2,400 72,385 3.32 Commercial...................... - 444 - 10 480 2.10 ------ -------- ----- ------ ------- ---- Total........................... $3,518 $ 79,875 4.40% $2,410 $72,865 3.31% ------ -------- ----- ------ ------- ---- SERVICED WITH LIMITED RECOURSE: Real estate secured............. $ 43 $ 862 5.00% $ 8 $ 1,198 .70% Auto finance.................... 133 4,026 3.29 189 3,004 6.32 MasterCard/Visa................. 252 9,254 2.73 482 9,145 5.27 Private label................... 58 2,150 2.69 48 1,745 2.72 Personal non-credit card........ 469 4,656 10.09 305 4,528 6.74 ------ -------- ----- ------ ------- ---- Total........................... $ 955 $ 20,948 4.56% $1,032 $19,620 5.26% ------ -------- ----- ------ ------- ---- MANAGED: First mortgage(2)............... $ 8 $ 63 12.78% $ 2 $ 75 2.28% Real estate secured............. 1,197 44,719 2.68 210 40,049 .53 Auto finance.................... 202 6,395 3.16 282 5,323 5.31 MasterCard/Visa................. 714 17,395 4.10 1,147 17,283 6.63 Private label................... 757 13,814 5.48 635 12,261 5.18 Personal non-credit card........ 1,595 17,993 8.87 1,156 17,014 6.79 ------ -------- ----- ------ ------- ---- Total consumer.................. 4,473 100,379 4.46 3,432 92,005 3.73 Commercial...................... - 444 - 10 480 2.10 ------ -------- ----- ------ ------- ---- Total........................... $4,473 $100,823 4.44% $3,442 $92,485 3.72% ====== ======== ===== ====== ======= ==== --------------- (1) Certain percentages may not recompute from the dollar figures presented due to rounding. (2) Includes our liquidating legacy first and reverse mortgage portfolios. SERVICED WITH OWNED LIMITED RECOURSE MANAGED -------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) NONACCRUAL RECEIVABLES Domestic: Real estate secured....................................... $ 907 $ 34 $ 941 Auto finance.............................................. 69 133 202 Private label............................................. 39 - 39 Personal non-credit card.................................. 782 324 1,106 Foreign..................................................... 215 48 263 ------- ----- ------- Total consumer.............................................. 2,012 539 2,551 Commercial and other........................................ 15 - 15 ------- ----- ------- Total....................................................... $ 2,027 $ 539 $ 2,566 ======= ===== ======= ACCRUING CONSUMER RECEIVABLES 90 OR MORE DAYS DELINQUENT Domestic: MasterCard/Visa........................................... $ 352 $ 175 $ 527 Private label............................................. 462 41 503 Foreign..................................................... 30 - 30 ------- ----- ------- Total....................................................... $ 844 $ 216 $ 1,060 ======= ===== ======= REAL ESTATE CHARGE-OFFS AND REO EXPENSE AS A PERCENT OF AVERAGE REAL ESTATE SECURED RECEIVABLES Real estate charge-offs and REO expense..................... $ 326 $ 8 $ 334 Average real estate secured receivables..................... 38,850 1,199 40,049 ------- ----- ------- Real estate charge-offs and REO expense as a percent of average real estate secured receivables(1)................ .84% .70% .83% ======= ===== ======= --------------- (1) Certain percentages may not recompute from the dollar figures presented due to rounding. 94 HSBC FINANCE CORPORATION AND SUBSIDIARIES RECONCILIATIONS TO GAAP FINANCIAL MEASURES CREDIT QUALITY STATISTICS - 2000 TWO-MONTHS-AND-OVER CONTRACTUAL DELINQUENCY ------------------------------------------------ YEAR-TO-DATE CHARGE-OFFS, TWO-MONTHS- TWO-MONTHS- NET OF RECOVERIES AND-OVER AND-OVER ----------------------------------- CONTRACTUAL RECEIVABLES CONTRACTUAL NET AVERAGE NET DELINQUENCY OUTSTANDING DELINQUENCY(1) CHARGE-OFFS RECEIVABLES CHARGE-OFFS(1) ------------------------------------------------------------------------------------------------------------------------ (DOLLARS ARE IN MILLIONS) OWNED: First mortgage(2)............... $ 13 $ 89 14.17% $ 1 $ 111 .90% Real estate secured............. 906 35,180 2.58 129 30,682 .42 Auto finance.................... 45 1,851 2.46 60 1,819 3.29 MasterCard/Visa................. 395 8,054 4.90 466 7,126 6.55 Private label................... 580 10,347 5.60 533 9,982 5.34 Personal non-credit card........ 863 11,328 7.62 716 10,195 7.02 ------ ------- ----- ------ ------- ---- Total consumer.................. 2,802 66,849 4.19 1,905 59,915 3.18 Commercial...................... - 510 - 16 583 2.69 ------ ------- ----- ------ ------- ---- Total........................... $2,802 $67,359 4.16% $1,921 $60,498 3.18% ------ ------- ----- ------ ------- ---- SERVICED WITH LIMITED RECOURSE: Real estate secured............. $ 59 $ 1,458 4.01% $ 16 $ 1,848 .90% Auto finance.................... 71 2,712 2.61 124 2,023 6.16 MasterCard/Visa................. 219 9,530 2.30 433 8,985 4.81 Private label................... 78 1,650 4.72 66 1,212 5.41 Personal non-credit card........ 430 4,899 8.78 313 4,566 6.86 ------ ------- ----- ------ ------- ---- Total........................... $ 857 $20,249 4.23% $ 952 $18,634 5.11% ------ ------- ----- ------ ------- ---- MANAGED: First mortgage(2)............... $ 13 $ 89 14.17% $ 1 $ 111 .90% Real estate secured............. 965 36,638 2.63 145 32,530 .45 Auto finance.................... 116 4,563 2.55 184 3,842 4.80 MasterCard/Visa................. 614 17,584 3.49 899 16,111 5.58 Private label................... 658 11,997 5.48 599 11,194 5.35 Personal non-credit card........ 1,293 16,227 7.97 1,029 14,761 6.97 ------ ------- ----- ------ ------- ---- Total consumer.................. 3,659 87,098 4.20 2,857 78,549 3.64 Commercial...................... - 510 - 16 583 2.69 ------ ------- ----- ------ ------- ---- Total........................... $3,659 $87,608 4.18% $2,873 $79,132 3.63% ====== ======= ===== ====== ======= ==== --------------- (1) Certain percentages may not recompute from the dollar figures presented due to rounding. (2) Includes our liquidating legacy first and reverse mortgage portfolios. SERVICED WITH OWNED LIMITED RECOURSE MANAGED -------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) NONACCRUAL RECEIVABLES Domestic: Real estate secured....................................... $ 686 $ 48 $ 734 Auto finance.............................................. 45 71 116 Private label............................................. 48 - 48 Personal non-credit card.................................. 610 292 902 Foreign..................................................... 226 44 270 ------- ------ ------- Total consumer.............................................. 1,615 455 2,070 Commercial and other........................................ 42 - 42 ------- ------ ------- Total....................................................... $ 1,657 $ 455 $ 2,112 ======= ====== ======= ACCRUING CONSUMER RECEIVABLES 90 OR MORE DAYS DELINQUENT Domestic: MasterCard/Visa........................................... $ 272 $ 149 $ 421 Private label............................................. 355 62 417 Foreign..................................................... 22 - 22 ------- ------ ------- Total....................................................... $ 649 $ 211 $ 860 ======= ====== ======= REAL ESTATE CHARGE-OFFS AND REO EXPENSE AS A PERCENT OF AVERAGE REAL ESTATE SECURED RECEIVABLES Real estate charge-offs and REO expense..................... $ 214 $ 16 $ 230 Average real estate secured receivables..................... 30,682 1,848 32,530 ------- ------ ------- Real estate charge-offs and REO expense as a percent of average real estate secured receivables(1)................ .70% .90% .71% ======= ====== ======= --------------- (1) Certain percentages may not recompute from the dollar figures presented due to rounding. 95 HSBC FINANCE CORPORATION AND SUBSIDIARIES RECONCILIATIONS TO GAAP FINANCIAL MEASURES ANALYSIS OF CREDIT LOSS RESERVES ACTIVITY - 2004 SERVICED WITH OWNED LIMITED RECOURSE MANAGED -------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) TOTAL CREDIT LOSS RESERVES AT JANUARY 1..................... $ 3,793 $ 2,374 $ 6,167 ------- ------- ------- PROVISION FOR CREDIT LOSSES................................. 4,334 188 4,522 ------- ------- ------- CHARGE-OFFS Domestic: Real estate secured....................................... (629) (2) (631) Auto finance.............................................. (204) (357) (561) MasterCard/Visa........................................... (1,082) (469) (1,551) Private label............................................. (788) (278) (1,066) Personal non-credit card.................................. (1,350) (569) (1,919) Foreign..................................................... (355) (68) (423) ------- ------- ------- Total consumer.............................................. (4,408) (1,743) (6,151) Commercial and other........................................ (1) - (1) ------- ------- ------- Total receivables charged off............................... (4,409) (1,743) (6,152) ------- ------- ------- RECOVERIES Domestic: Real estate secured....................................... 18 - 18 Auto finance.............................................. 6 9 15 MasterCard/Visa........................................... 103 29 132 Private label............................................. 79 22 101 Personal non-credit card.................................. 120 34 154 Foreign..................................................... 50 8 58 ------- ------- ------- Total consumer.............................................. 376 102 478 Commercial and other........................................ - - - ------- ------- ------- Total recoveries on receivables............................. 376 102 478 OTHER, NET.................................................. (469) (31) (500) ------- ------- ------- CREDIT LOSS RESERVES Domestic: Real estate secured....................................... 645 1 646 Auto finance.............................................. 181 335 516 MasterCard/Visa........................................... 1,205 101 1,306 Private label............................................. 28 - 28 Personal non-credit card.................................. 1,237 398 1,635 Foreign..................................................... 316 55 371 ------- ------- ------- Total consumer.............................................. 3,612 890 4,502 Commercial and other........................................ 13 - 13 ------- ------- ------- TOTAL CREDIT LOSS RESERVES AT DECEMBER 31................... $ 3,625 $ 890 $ 4,515 ======= ======= ======= SERVICED WITH OWNED LIMITED RECOURSE MANAGED ----------------------------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) RESERVES AS A PERCENTAGE OF NET CHARGE-OFFS: Net charge-offs............................................. $ 4,033 89.9% $ 1,641 54.2% $ 5,674 79.6% RESERVES AS A PERCENTAGE OF RECEIVABLES: Receivables: Consumer.................................................. $106,564 3.39 $14,225 6.26% $120,789 3.73% Commercial................................................ 291 8.90 - - 291 8.90 -------- ----- ------- ----- -------- ----- Total..................................................... $106,855 3.39% $14,225 6.26% $121,080 3.73% ======== ===== ======= ===== ======== ===== RESERVES AS A PERCENTAGE OF NONPERFORMING LOANS: Nonperforming loans: Consumer.................................................. $ 3,516 102.7% $ 646 137.8% $ 4,162 108.2% Commercial................................................ 5 535.9 - - 5 535.9 -------- ----- ------- ----- -------- ----- Total..................................................... $ 3,521 103.0% $ 646 137.8% $ 4,167 108.4% ======== ===== ======= ===== ======== ===== 96 HSBC FINANCE CORPORATION AND SUBSIDIARIES RECONCILIATIONS TO GAAP FINANCIAL MEASURES ANALYSIS OF CREDIT LOSS RESERVES ACTIVITY - 2003 SERVICED WITH OWNED LIMITED RECOURSE MANAGED -------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) TOTAL CREDIT LOSS RESERVES AT JANUARY 1..................... $ 3,333 $ 1,759 $ 5,092 ------- ------- ------- PROVISION FOR CREDIT LOSSES................................. 3,967 2,275 6,242 ------- ------- ------- CHARGE-OFFS Domestic: Real estate secured....................................... (496) (4) (500) Auto finance.............................................. (148) (419) (567) MasterCard/Visa........................................... (936) (526) (1,462) Private label............................................. (684) (234) (918) Personal non-credit card.................................. (1,354) (508) (1,862) Foreign..................................................... (257) (73) (330) ------- ------- ------- Total consumer.............................................. (3,875) (1,764) (5,639) Commercial and other........................................ (3) - (3) ------- ------- ------- Total receivables charged off............................... (3,878) (1,764) (5,642) ------- ------- ------- RECOVERIES Domestic: Real estate secured....................................... 10 - 10 Auto finance.............................................. 5 7 12 MasterCard/Visa........................................... 87 40 127 Private label............................................. 72 20 92 Personal non-credit card.................................. 82 24 106 Foreign..................................................... 34 6 40 ------- ------- ------- Total consumer.............................................. 290 97 387 Commercial and other........................................ 1 - 1 ------- ------- ------- Total recoveries on receivables............................. 291 97 388 OTHER, NET.................................................. 80 7 87 ------- ------- ------- CREDIT LOSS RESERVES Domestic: Real estate secured....................................... 670 1 671 Auto finance.............................................. 172 674 846 MasterCard/Visa........................................... 806 308 1,114 Private label............................................. 519 367 886 Personal non-credit card.................................. 1,348 896 2,244 Foreign..................................................... 247 128 375 ------- ------- ------- Total consumer.............................................. 3,762 2,374 6,136 Commercial and other........................................ 31 - 31 ------- ------- ------- TOTAL CREDIT LOSS RESERVES AT DECEMBER 31................... $ 3,793 $ 2,374 $ 6,167 ======= ======= ======= SERVICED WITH OWNED LIMITED RECOURSE MANAGED ----------------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) RESERVES AS A PERCENTAGE OF NET CHARGE-OFFS: Net charge-offs.................................... $ 3,587 105.7% $ 1,667 142.4% $ 5,254 117.4% RESERVES AS A PERCENTAGE OF RECEIVABLES: Receivables: Consumer......................................... $92,012 4.09% $26,201 9.06% $118,213 5.19% Commercial....................................... 366 6.80 - - 366 6.80 ------- ----- ------- ----- -------- ----- Total............................................ $92,378 4.11% $26,201 9.06% $118,579 5.20% ======= ===== ======= ===== ======== ===== RESERVES AS A PERCENTAGE OF NONPERFORMING LOANS: Nonperforming loans: Consumer......................................... $ 4,045 93.2% $ 1,176 201.8% $ 5,221 117.6% Commercial....................................... 5 469.8 - - 5 469.8 ------- ----- ------- ----- -------- ----- Total............................................ $ 4,050 93.7% $ 1,176 201.8% $ 5,226 118.0% ======= ===== ======= ===== ======== ===== 97 HSBC FINANCE CORPORATION AND SUBSIDIARIES RECONCILIATIONS TO GAAP FINANCIAL MEASURES ANALYSIS OF CREDIT LOSS RESERVES ACTIVITY - 2002 SERVICED WITH OWNED LIMITED RECOURSE MANAGED -------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) TOTAL CREDIT LOSS RESERVES AT JANUARY 1..................... $ 2,663 $ 1,148 $ 3,811 ------- ------- ------- PROVISION FOR CREDIT LOSSES................................. 3,732 1,923 5,655 ------- ------- ------- CHARGE-OFFS Domestic: Real estate secured....................................... (430) (7) (437) Auto finance.............................................. (159) (319) (478) MasterCard/Visa........................................... (736) (538) (1,274) Private label............................................. (650) (114) (764) Personal non-credit card.................................. (1,193) (407) (1,600) Foreign..................................................... (223) (57) (280) ------- ------- ------- Total consumer.............................................. (3,391) (1,442) (4,833) Commercial and other........................................ (2) - (2) ------- ------- ------- Total receivables charged off............................... (3,393) (1,442) (4,835) ------- ------- ------- RECOVERIES Domestic: Real estate secured....................................... 7 - 7 Auto finance.............................................. 7 10 17 MasterCard/Visa........................................... 59 37 96 Private label............................................. 48 8 56 Personal non-credit card.................................. 92 30 122 Foreign..................................................... 49 10 59 ------- ------- ------- Total consumer.............................................. 262 95 357 Commercial and other........................................ 2 - 2 ------- ------- ------- Total recoveries on receivables............................. 264 95 359 OTHER, NET.................................................. 67 35 102 ------- ------- ------- CREDIT LOSS RESERVES Domestic: Real estate secured....................................... 551 10 561 Auto finance.............................................. 126 633 759 MasterCard/Visa........................................... 649 308 957 Private label............................................. 527 264 791 Personal non-credit card.................................. 1,275 422 1,697 Foreign..................................................... 172 122 294 ------- ------- ------- Total consumer.............................................. 3,300 1,759 5,059 Commercial and other........................................ 33 - 33 ------- ------- ------- TOTAL CREDIT LOSS RESERVES AT DECEMBER 31................... $ 3,333 $ 1,759 $ 5,092 ======= ======= ======= SERVICED WITH OWNED LIMITED RECOURSE MANAGED --------------------------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) RESERVES AS A PERCENTAGE OF NET CHARGE-OFFS: Net charge-offs........................................ $ 3,129 106.5% $ 1,347 130.6% $ 4,476 113.8% RESERVES AS A PERCENTAGE OF RECEIVABLES: Receivables: Consumer............................................. $82,143 4.02 $24,934 7.06% $107,077 4.73% Commercial........................................... 419 6.64 - - 419 6.64 ------- ----- ------- ----- -------- ----- Total................................................ $82,562 4.04% $24,934 7.06% $107,496 4.74% ======= ===== ======= ===== ======== ===== RESERVES AS A PERCENTAGE OF NONPERFORMING LOANS: Nonperforming loans: Consumer............................................. $ 3,516 94.0% $ 994 177.0% $ 4,510 112.3% Commercial........................................... 12 229.7 - - 12 229.7 ------- ----- ------- ----- -------- ----- Total................................................ $ 3,528 94.5% $ 994 177.0% $ 4,522 112.6% ======= ===== ======= ===== ======== ===== 98 HSBC FINANCE CORPORATION AND SUBSIDIARIES RECONCILIATIONS TO GAAP FINANCIAL MEASURES ANALYSIS OF CREDIT LOSS RESERVES ACTIVITY - 2001 SERVICED WITH OWNED LIMITED RECOURSE MANAGED -------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) TOTAL CREDIT LOSS RESERVES AT JANUARY 1..................... $ 2,112 $ 1,082 $ 3,194 ------- ------- ------- PROVISION FOR CREDIT LOSSES................................. 2,913 1,105 4,018 ------- ------- ------- CHARGE-OFFS Domestic: Real estate secured....................................... (194) (9) (203) Auto finance.............................................. (94) (193) (287) MasterCard/Visa........................................... (646) (502) (1,148) Private label............................................. (591) (49) (640) Personal non-credit card.................................. (893) (303) (1,196) Foreign..................................................... (237) (45) (282) ------- ------- ------- Total consumer.............................................. (2,655) (1,101) (3,756) Commercial and other........................................ (12) - (12) ------- ------- ------- Total receivables charged off............................... (2,667) (1,101) (3,768) ------- ------- ------- RECOVERIES Domestic: Real estate secured....................................... 5 - 5 Auto finance.............................................. 1 3 4 MasterCard/Visa........................................... 52 29 81 Private label............................................. 61 1 62 Personal non-credit card.................................. 76 25 101 Foreign..................................................... 62 10 72 ------- ------- ------- Total consumer.............................................. 257 68 325 Commercial and other........................................ - - - ------- ------- ------- Total recoveries on receivables............................. 257 68 325 OTHER, NET.................................................. 48 (6) 42 ------- ------- ------- CREDIT LOSS RESERVES Domestic: Real estate secured....................................... 284 20 304 Auto finance.............................................. 77 372 449 MasterCard/Visa........................................... 594 381 975 Private label............................................. 499 104 603 Personal non-credit card.................................. 1,032 185 1,217 Foreign..................................................... 137 86 223 ------- ------- ------- Total consumer.............................................. 2,623 1,148 3,771 Commercial and other........................................ 40 - 40 ------- ------- ------- TOTAL CREDIT LOSS RESERVES AT DECEMBER 31................... $ 2,663 $ 1,148 $ 3,811 ======= ======= ======= SERVICED WITH OWNED LIMITED RECOURSE MANAGED -------------------------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) RESERVES AS A PERCENTAGE OF NET CHARGE-OFFS: Net charge-offs............................................. $ 2,410 110.5% $ 1,033 111.2% $ 3,443 110.7% RESERVES AS A PERCENTAGE OF RECEIVABLES: Receivables: Consumer.................................................. $79,431 3.31 $20,948 5.48% $100,379 3.77% Commercial................................................ 444 7.12 - - 444 7.12 ------- ----- ------- ----- -------- ----- Total..................................................... $79,875 3.33% $20,948 5.48% $100,823 3.78% ======= ===== ======= ===== ======== ===== RESERVES AS A PERCENTAGE OF NONPERFORMING LOANS: Nonperforming loans: Consumer.................................................. $ 2,863 91.9% $ 754 152.2% $ 3,617 104.5% Commercial................................................ 11 278.7 - - 11 278.7 ------- ----- ------- ----- -------- ----- Total..................................................... $ 2,874 92.7% $ 754 152.2% $ 3,628 105.0% ======= ===== ======= ===== ======== ===== 99 HSBC FINANCE CORPORATION AND SUBSIDIARIES RECONCILIATIONS TO GAAP FINANCIAL MEASURES ANALYSIS OF CREDIT LOSS RESERVES ACTIVITY - 2000 SERVICED WITH OWNED LIMITED RECOURSE MANAGED -------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) TOTAL CREDIT LOSS RESERVES AT JANUARY 1..................... $ 1,757 $ 910 $ 2,667 ------- ------- ------- PROVISION FOR CREDIT LOSSES................................. 2,117 1,135 3,252 ------- ------- ------- CHARGE-OFFS Domestic: Real estate secured....................................... (123) (17) (140) Auto finance.............................................. (61) (127) (188) MasterCard/Visa........................................... (432) (449) (881) Private label............................................. (537) (69) (606) Personal non-credit card.................................. (724) (306) (1,030) Foreign..................................................... (233) (43) (276) ------- ------- ------- Total consumer.............................................. (2,110) (1,011) (3,121) Commercial and other........................................ (17) - (17) ------- ------- ------- Total receivables charged off............................... (2,127) (1,011) (3,138) ------- ------- ------- RECOVERIES Domestic: Real estate secured....................................... 5 - 5 Auto finance.............................................. 1 3 4 MasterCard/Visa........................................... 25 25 50 Private label............................................. 54 3 57 Personal non-credit card.................................. 62 17 79 Foreign..................................................... 58 11 69 ------- ------- ------- Total consumer.............................................. 205 59 264 Commercial and other........................................ - - - ------- ------- ------- Total recoveries on receivables............................. 205 59 264 OTHER, NET.................................................. 160 (11) 149 ------- ------- ------- CREDIT LOSS RESERVES Domestic: Real estate secured....................................... 173 23 196 Auto finance.............................................. 51 273 324 MasterCard/Visa........................................... 541 308 849 Private label............................................. 425 174 599 Personal non-credit card.................................. 734 224 958 Foreign..................................................... 142 80 222 ------- ------- ------- Total consumer.............................................. 2,066 1,082 3,148 Commercial and other........................................ 46 - 46 ------- ------- ------- TOTAL CREDIT LOSS RESERVES AT DECEMBER 31................... $ 2,112 $ 1,082 $ 3,194 ======= ======= ======= SERVICED WITH OWNED LIMITED RECOURSE MANAGED --------------------------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) RESERVES AS A PERCENTAGE OF NET CHARGE-OFFS: Net charge-offs....................................... $ 1,921 109.9% $ 952 113.6% $ 2,873 111.1% RESERVES AS A PERCENTAGE OF RECEIVABLES: Receivables: Consumer............................................ $66,849 3.10 $20,249 5.34% $87,098 3.62% Commercial.......................................... 510 7.43 - - 510 7.43 ------- ----- ------- ----- ------- ----- Total............................................... $67,359 3.14% $20,249 5.34% $87,608 3.65% ======= ===== ======= ===== ======= ===== RESERVES AS A PERCENTAGE OF NONPERFORMING LOANS: Nonperforming loans: Consumer............................................ $ 2,274 91.2% $ 666 162.5% $ 2,940 107.4% Commercial.......................................... 44 85.4 - - 44 85.4 ------- ----- ------- ----- ------- ----- Total............................................... $ 2,318 91.1% $ 666 162.5% $ 2,984 107.0% ======= ===== ======= ===== ======= ===== 100 HSBC FINANCE CORPORATION AND SUBSIDIARIES RECONCILIATIONS TO GAAP FINANCIAL MEASURES NET INTEREST MARGIN - 2004 COMPARED TO 2003 FINANCE AND INTEREST AVERAGE INCOME/ INTEREST INCREASE/ (DECREASE) DUE TO: OUTSTANDING(1) AVERAGE RATE EXPENSE ------------------------------------ ------------------ ----------- -------------------- VOLUME RATE 2004 2003 2004 2003 2004 2003 VARIANCE VARIANCE(2) VARIANCE(2) ------------------------------------------------------------------------------------------------------------------------ (RESTATED) (RESTATED) (RESTATED) (DOLLARS ARE IN MILLIONS) OWNED: Receivables: Real estate secured...... $ 56,303 $ 49,852 8.8% 9.7% $ 4,974 $ 4,852 $ 122 $ 594 $(472) Auto finance............. 5,785 2,920 12.2 12.9 706 378 328 351 (23) MasterCard/Visa.......... 11,575 9,517 14.8 14.8 1,712 1,406 306 304 2 Private label............ 13,029 11,942 10.8 11.6 1,407 1,379 28 121 (93) Personal non-credit card................... 14,194 14,009 15.7 16.5 2,234 2,314 (80) 30 (110) Commercial and other..... 354 430 2.5 2.2(5) 9 10 (1) (2) 1 Purchase accounting adjustments............ 319 397 - - (201) (200) (1) (1) - -------- ------- ---- ---- ------- ------- ----- ------ ----- Total receivables.......... 101,559 89,067 10.7 11.4 10,841 10,139 702 1,401 (699) Noninsurance investments... 4,853 5,280 2.1 2.0 104 103 1 (6) (7) -------- ------- ---- ---- ------- ------- ----- ------ ----- Total interest-earning assets (excluding insurance investments)... $106,412 $ 94,347 10.3% 10.9% $10,945 $10,242 $ 703 $1,261 $(558) -------- -------- ---- ---- ------- ------- ----- ------ ----- Total debt................. $100,115 $ 84,933 3.1% 3.4% $ 3,143 $ 2,928 $ 215 $ 492 $(277) -------- -------- ---- ---- ------- ------- ----- ------ ----- Net Interest Margin(3)..... 7.3% 7.8% $ 7,802 $ 7,314 $ 488 $ 769 $(281) ==== ==== ======= ======= ===== ====== ===== Interest Spread(4)......... 7.2% 7.5% ==== ==== SERVICED WITH LIMITED RECOURSE: Receivables: Real estate secured...... $ 159 $ 272 6.3% 8.3%(5)$ 10 $ 22 $ (12) $ (11) $ (1) Auto finance............. 3,647 4,998 14.9 16.0 544 802 (258) (141) (117) MasterCard/Visa.......... 9,099 9,755 10.1 11.1 915 1,078 (163) (125) (38) Private label............ 4,550 4,074 10.7 11.4 488 464 24 52 (28) Personal non-credit card................... 4,792 5,032 21.4 21.3 1,026 1,074 (48) (40) (8) -------- -------- ---- ---- ------- ------- ----- ------ ----- Total receivables.......... 22,247 24,131 13.4 14.3 2,983 3,440 (457) (265) (192) -------- -------- ---- ---- ------- ------- ----- ------ ----- Total interest-earning assets (excluding insurance investments)... $ 22,247 $ 24,131 13.4% 14.3% $ 2,983 $ 3,440 $(457) $ (128) $(329) -------- -------- ---- ---- ------- ------- ----- ------ ----- Total debt................. $ 22,247 $ 24,131 2.4% 2.2% $ 528 $ 566 $ (38) $ (84) $ 46 -------- -------- ---- ---- ------- ------- ----- ------ ----- Net Interest Margin(3)..... 11.0% 11.9% $ 2,455 $ 2,874 $(419) $ (44) $(375) ==== ==== ======= ======= ===== ====== ===== Interest Spread(4)......... 11.0% 12.0% ==== ==== MANAGED: Receivables: Real estate secured...... $ 56,462 $ 50,124 8.8% 9.7% $ 4,984 $ 4,874 $ 110 $ 583 $(473) Auto finance............. 9,432 7,918 13.3 14.9 1,250 1,180 70 210 (140) MasterCard/Visa.......... 20,674 19,272 12.7 12.9 2,627 2,484 143 179 (36) Private label............ 17,579 16,016 10.8 11.5 1,895 1,843 52 173 (121) Personal non-credit card................... 18,986 19,041 17.2 17.8 3,260 3,388 (128) (10) (118) Commercial and other..... 354 430 2.5 2.2(5) 9 10 (1) (2) 1 Purchase accounting adjustments............ 319 397 - - (201) (200) (1) (1) - -------- -------- ---- ---- ------- ------- ----- ------ ----- Total receivables.......... 123,806 113,198 11.2 12.0 13,824 13,579 245 1,253 (1,008) Noninsurance investments... 4,853 5,280 2.1 2.0 104 103 1 (6) 7 -------- -------- ---- ---- ------- ------- ----- ------ ----- Total interest-earning assets (excluding insurance investments)... $128,659 $118,478 10.8% 11.5% $13,928 $13,682 $ 246 $1,133 $(887) -------- -------- ---- ---- ------- ------- ----- ------ ----- Total debt................. $122,362 $109,064 3.0% 3.2% $ 3,671 $ 3,494 $ 177 $ 408 $(231) -------- -------- ---- ---- ------- ------- ----- ------ ----- Net Interest Margin(3)..... 8.0% 8.6% $10,257 $10,188 $ 69 $ 725 $(656) ==== ==== ======= ======= ===== ====== ===== Interest Spread(4)......... 7.8% 8.3% ==== ==== --------------- (1) Nonaccrual loans are included in average outstanding balances. (2) Rate/volume variance is allocated based on the percentage relationship of changes in volume and changes in rate to the total interest variance. For total receivables, total interest-earning assets and total debt, the rate and volume variances are calculated based on the relative weighting of the individual components comprising these totals. These totals do not represent an arithmetic sum of the individual components (3) Represents net interest income as a percent of average interest-earning assets (4) Represents the difference between the yield earned on interest-earning assets and cost of the debt used to fund the assets. (5) Average rate does not recompute from dollar figures presented due to rounding. 101 HSBC FINANCE CORPORATION AND SUBSIDIARIES RECONCILIATIONS TO GAAP FINANCIAL MEASURES NET INTEREST MARGIN - 2003 COMPARED TO 2002 FINANCE AND INTEREST INCOME/ INTEREST AVERAGE OUTSTANDING(1) AVERAGE RATE EXPENSE ----------------------- ----------------- -------------------- 2003 2002 2003 2002 2003 2002 --------------------------------------------------------------------------------------------------- (RESTATED) (RESTATED) (RESTATED) (DOLLARS ARE IN MILLIONS) OWNED: Receivables: Real estate secured........... $ 49,852 $ 47,258 9.7% 10.7% $ 4,852 $ 5,051 Auto finance.................. 2,920 2,529 12.9 14.7 378 373 MasterCard/Visa............... 9,517 7,569 14.8 14.8 1,406 1,119 Private label................. 11,942 10,775 11.6 12.2 1,379 1,314 Personal non-credit card...... 14,009 13,968 16.5 18.1 2,314 2,526 Commercial and other.......... 430 483 2.2(5) 2.1 10 10 Purchase accounting adjustments................. 397 - - - (200) - -------- -------- ---- ---- ------- ------- Total receivables.............. 89,067 82,582 11.4 12.6 10,139 10,393 Noninsurance investments....... 5,280 5,302 2.0 2.5 103 132 -------- -------- ---- ---- ------- ------- Total interest-earning assets (excluding insurance investments).................. $ 94,347 $ 87,884 10.9% 12.0% $10,242 $10,525 -------- -------- ---- ---- ------- ------- Total debt..................... $ 84,933 $ 83,548 3.4% 4.6% $ 2,928 $ 3,871 -------- -------- ---- ---- ------- ------- Net Interest Margin(3)......... 7.8% 7.6% $ 7,314 $ 6,654 ==== ==== ======= ======= Interest Spread(4)............. 7.5% 7.4% ==== ==== SERVICED WITH LIMITED RECOURSE: Receivables: Real estate secured........... $ 272 $ 572 8.3%(5) 10.9%(5) $ 22 $ 63 Auto finance.................. 4,998 4,413 16.0 17.8(5) 802 783 MasterCard/Visa............... 9,755 9,677 11.1 12.2 1,078 1,185 Private label................. 4,074 2,840 11.4 12.3 464 349 Personal non-credit card...... 5,032 4,869 21.3 20.1 1,074 979 -------- -------- ---- ---- ------- ------- Total receivables.............. 24,131 22,371 14.3 15.0 3,440 3,359 -------- -------- ---- ---- ------- ------- Total interest-earning assets (excluding insurance investments).................. $ 24,131 $ 22,371 14.3% 15.0% $ 3,440 $ 3,358 -------- -------- ---- ---- ------- ------- Total debt..................... $ 24,131 $ 22,371 2.3% 3.0% $ 566 $ 675 -------- -------- ---- ---- ------- ------- Net Interest Margin(3)......... 11.9% 12.0% $ 2,874 $ 2,683 ==== ==== ======= ======= Interest Spread(4)............. 12.0% 12.0% ==== ==== MANAGED: Receivables: Real estate secured........... $ 50,124 $ 47,830 9.7% 10.7% $ 4,874 $ 5,114 Auto finance.................. 7,918 6,942 14.9 16.7 1,180 1,156 MasterCard/Visa............... 19,272 17,246 12.9 13.4 2,484 2,304 Private label................. 16,016 13,615 11.5 12.2 1,843 1,663 Personal non-credit card...... 19,041 18,837 17.8 18.6 3,388 3,505 Commercial and other.......... 430 483 2.2(5) 2.1 10 10 Purchase accounting adjustments................. 397 - - - (200) - -------- -------- ---- ---- ------- ------- Total receivables.............. 113,198 104,953 12.0 13.1 13,579 13,752 Noninsurance investments....... 5,280 5,302 2.0 2.5 103 131 -------- -------- ---- ---- ------- ------- Total interest-earning assets (excluding insurance investments).................. $118,478 $110,255 11.5% 12.6% $13,682 $13,883 -------- -------- ---- ---- ------- ------- Total debt..................... $109,064 $105,919 3.2% 4.3% $ 3,494 $ 4,546 -------- -------- ---- ---- ------- ------- Net Interest Margin(3)......... 8.6% 8.5% $10,188 $ 9,337 ==== ==== ======= ======= Interest Spread(4)............. 8.3% 8.3% ==== ==== INCREASE/(DECREASE) DUE TO: ------------------------------------ VOLUME RATE VARIANCE VARIANCE(2) VARIANCE(2) ------------------------------- ------------------------------------ (DOLLARS ARE IN MILLIONS) OWNED: Receivables: Real estate secured........... $ (199) $ 268 $ (467) Auto finance.................. 5 54 (49) MasterCard/Visa............... 287 288 (1) Private label................. 65 137 (72) Personal non-credit card...... (212) 7 (219) Commercial and other.......... - (1) 1 Purchase accounting adjustments................. (200) (200) - ------- ------ ------- Total receivables.............. (254) 781 (1,035) Noninsurance investments....... (29) (1) (28) ------- ------ ------- Total interest-earning assets (excluding insurance investments).................. $ (283) $ 724 $(1,007) ------- ------ ------- Total debt..................... $ (943) $ 63 $(1,006) ------- ------ ------- Net Interest Margin(3)......... $ 660 $ 661 $ (1) ======= ====== ======= Interest Spread(4)............. SERVICED WITH LIMITED RECOURSE: Receivables: Real estate secured........... $ (41) $ (30) $ (11) Auto finance.................. 19 99 (80) MasterCard/Visa............... (107) (25) (82) Private label................. 115 144 (29) Personal non-credit card...... 95 31 64 ------- ------ ------- Total receivables.............. 81 218 (137) ------- ------ ------- Total interest-earning assets (excluding insurance investments).................. $ 82 $ 301 $ (219) ------- ------ ------- Total debt..................... $ (109) $ 70 $ (179) ------- ------ ------- Net Interest Margin(3)......... $ 191 $ 231 $ (40) ======= ====== ======= Interest Spread(4)............. MANAGED: Receivables: Real estate secured........... $ (240) $ 238 $ (478) Auto finance.................. 24 153 (129) MasterCard/Visa............... 180 263 (83) Private label................. 180 281 (101) Personal non-credit card...... (117) 38 (155) Commercial and other.......... - (1) 1 Purchase accounting adjustments................. (200) (200) - ------- ------ ------- Total receivables.............. (173) 1,036 (1,209) Noninsurance investments....... (28) (1) (27) ------- ------ ------- Total interest-earning assets (excluding insurance investments).................. $ (201) $1,025 $(1,226) ------- ------ ------- Total debt..................... $(1,052) $ 133 $(1,185) ------- ------ ------- Net Interest Margin(3)......... $ 851 $ 892 $ (41) ======= ====== ======= Interest Spread(4)............. --------------- (1) Nonaccrual loans are included in average outstanding balances. (2) Rate/volume variance is allocated based on the percentage relationship of changes in volume and changes in rate to the total interest variance. For total receivables, total interest-earning assets and total debt, the rate and volume variances are calculated based on the relative weighting of the individual components comprising these totals. These totals do not represent an arithmetic sum of the individual components (3) Represents net interest income as a percent of average interest-earning assets (4) Represents the difference between the yield earned on interest-earning assets and cost of the debt used to fund the assets. (5) Average rate does not recompute from dollar figures presented due to rounding. 102 HSBC FINANCE CORPORATION AND SUBSIDIARIES RECONCILIATIONS TO GAAP FINANCIAL MEASURES SELECTED FINANCIAL DATA AND STATISTICS 2004 2003 2002 2001 2000 ------------------------------------------------------------------------------------------------------------------- (RESTATED) (DOLLARS ARE IN MILLIONS) RETURN ON AVERAGE COMMON SHAREHOLDER'S(S') EQUITY: Net income.................................................. $ 1,940 $ 1,603 $ 1,558 $ 1,848 $ 1,631 Dividends on preferred stock.............................. (72) (76) (63) (16) (9) -------- -------- -------- -------- ------- Net income available to common shareholders................. $ 1,868 $ 1,527 $ 1,495 $ 1,832 $ 1,622 Gain on bulk sale of private label receivables.............. (423) - - - - Adoption of FFIEC charge-off policies for domestic private label and MasterCard/Visa portfolios...................... 121 - - - - HSBC acquisition related costs and other merger related items incurred by HSBC Finance Corporation................ - 167 - - - Settlement charge and related expenses...................... - - 333 - - Loss on the disposition of Thrift assets and deposits....... - - 240 - - -------- -------- -------- -------- ------- Operating net income available to common shareholders....... $ 1,566 $ 1,694 $ 2,068 $ 1,832 $ 1,622 -------- -------- -------- -------- ------- Average common shareholder's(s') equity..................... $ 17,003 $ 14,209 $ 8,640 $ 7,589 $ 6,987 -------- -------- -------- -------- ------- Return on average common shareholder's(s') equity........... 11.0% 10.7% 17.3% 24.1% 23.2% Return on average common shareholder's(s') equity, operating basis..................................................... 9.2 11.9 23.9 24.1 23.2 ======== ======== ======== ======== ======= RETURN ON AVERAGE ASSETS: Net income.................................................. $ 1,940 $ 1,603 $ 1,558 $ 1,848 $ 1,631 Operating net income........................................ 1,638 1,770 2,131 1,848 1,631 -------- -------- -------- -------- ------- Average assets: Owned basis............................................... $123,921 $110,097 $ 96,304 $ 81,782 $69,367 Serviced with limited recourse............................ 22,247 24,131 22,371 19,620 18,634 -------- -------- -------- -------- ------- Managed basis............................................. $146,168 $134,228 $118,675 $101,402 $88,001 -------- -------- -------- -------- ------- Return on average owned assets.............................. 1.57% 1.46% 1.62% 2.26% 2.35% Return on average owned assets, operating basis............. 1.32 1.61 2.21 2.26 2.35% Return on average managed assets............................ 1.33 1.19 1.31 1.82 1.85 Return on average managed assets, operating basis........... 1.12 1.32 1.80 1.82 1.85 ======== ======== ======== ======== ======= EFFICIENCY RATIO: Total costs and expenses less policyholders' benefits....... $ 5,189 $ 4,814 $ 4,447 $ 3,573 $ 3,027 HSBC acquisition related costs and other merger related items incurred by HSBC Finance Corporation.............. - (198) - - - Settlement charge and related expenses.................... - - (525) - - -------- -------- -------- -------- ------- Total costs and expenses less policyholders' benefits, excluding nonrecurring items............................ $ 5,189 $ 4,616 $ 3,922 $ 3,573 $ 3,027 -------- -------- -------- -------- ------- Net interest income and other revenues less policyholders' benefits: Owned basis............................................... $ 12,463 $ 11,256 $ 10,432 $ 9,304 $ 7,644 Serviced with limited recourse............................ 188 2,275 1,923 1,105 1,135 -------- -------- -------- -------- ------- Managed basis............................................. $ 12,651 $ 13,531 $ 12,355 $ 10,409 $ 8,779 -------- -------- -------- -------- ------- Nonrecurring items: Gain on bulk sale of private label receivables............ $ 663 - - - - Adoption of FFIEC charge-off policies for domestic private label and MasterCard/Visa portfolios - owned............ 151 - - - - Adoption of FFIEC charge-off policies for domestic private label and MasterCard/Visa portfolios - managed.......... 107 - - - - Loss on the disposition of Thrift assets and deposits..... - - $ 378 - - Net interest income and other revenues less policyholders' benefits, excluding nonrecurring items: Owned basis............................................... $ 11,951 $ 11,256 $ 10,810 $ 9,304 $ 7,644 Serviced with limited recourse............................ 144 2,275 1,923 1,105 1,135 -------- -------- -------- -------- ------- Managed basis............................................. $ 12,095 $ 13,531 $ 12,733 $ 10,409 $ 8,779 -------- -------- -------- -------- ------- Owned basis efficiency ratio................................ 41.6% 42.8% 42.6% 38.4% 39.6% Owned basis efficiency ratio, operating basis............... 43.4 41.0 36.3 38.4 39.6 Managed basis efficiency ratio.............................. 41.0 35.6 36.0 34.3 34.5 Managed basis efficiency ratio, operating basis............. 42.9 34.1 30.8 34.3 34.5 ======== ======== ======== ======== ======= 103 HSBC FINANCE CORPORATION AND SUBSIDIARIES RECONCILIATIONS TO GAAP FINANCIAL MEASURES SELECTED FINANCIAL DATA AND STATISTICS - (CONTINUED) 2004 2003 2002 2001 2000 ------------------------------------------------------------------------------------------------------------------- (RESTATED) (DOLLARS ARE IN MILLIONS) NET INTEREST MARGIN: Net Interest Income: Owned basis............................................... $ 7,802 $ 7,314 $ 6,654 $ 5,787 $ 4,722 Serviced with limited recourse.......................... 2,455 2,874 2,683 2,094 1,724 -------- -------- -------- -------- ------- Managed basis............................................. $ 10,257 $ 10,188 $ 9,337 $ 7,881 $ 6,446 -------- -------- -------- -------- ------- Average interest-earning assets: Owned basis............................................... $106,412 $ 94,347 $ 87,884 $ 73,759 $61,471 Serviced with limited recourse.......................... 22,247 24,131 22,371 19,620 18,634 -------- -------- -------- -------- ------- Managed basis............................................. $128,659 $118,478 $110,255 $ 93,379 $80,105 -------- -------- -------- -------- ------- Owned basis net interest margin............................. 7.33% 7.75% 7.57% 7.85% 7.68% Managed basis net interest margin........................... 7.97 8.60 8.47 8.44 8.05 ======== ======== ======== ======== ======= MANAGED BASIS RISK ADJUSTED REVENUE: Net interest income......................................... $ 10,257 $ 10,188 $ 9,337 $ 7,881 $ 6,446 Other revenues............................................ 2,143 3,720 3,386 2,831 2,595 Securitization revenue.................................... 2,004 (147) (705) (136) (243) Net charge-offs........................................... (5,674) (5,254) (4,476) (3,443) (2,874) Gain on bulk sale of private label receivables.............. 663 - - - - Loss on disposition of thrift assets...................... - - 378 - - -------- -------- -------- -------- ------- Risk adjusted revenue..................................... 9,393 8,507 7,920 7,133 5,924 Risk adjusted revenue, excluding nonrecurring items....... Adoption of FFIEC charge-off policies for domestic private label and MasterCard/Visa portfolios.......... 309 - - - - Gain on bulk sale of private label receivables........ (663) - - - - -------- -------- -------- -------- ------- Risk adjusted revenue, excluding nonrecurring items............................................. 9,039 8,507 7,920 7,133 5,924 Average interest-earning assets..................... $128,659 $118,478 $110,255 $ 93,379 $80,105 ======== ======== ======== ======== ======= Managed basis risk adjusted revenue....................... 7.30% 7.18% 7.18% 7.64% 7.40% Managed basis risk adjusted revenue, operating basis...... 7.03 7.18 7.18 7.64 7.40 ======== ======== ======== ======== ======= RESERVES AS A PERCENT OF NET CHARGE-OFFS: Loss reserves: Owned basis............................................... $ 3,625 $ 3,793 $ 3,333 $ 2,663 $ 2,112 Serviced with limited recourse............................ 890 2,374 1,759 1,148 1,082 -------- -------- -------- -------- ------- Managed basis............................................... 4,515 6,167 5,092 3,811 3,194 -------- -------- -------- -------- ------- Net charge-offs: Owned basis................................................. $ 4,033 $ 3,587 $ 3,129 $ 2,410 $ 1,922 Serviced with limited recourse.............................. 1,641 1,667 1,347 1,033 952 -------- -------- -------- -------- ------- Managed basis............................................... 5,674 5,254 4,476 3,443 2,874 -------- -------- -------- -------- ------- Nonrecurring items: Net charge-offs for domestic private label receivables sold: Owned basis............................................... $ 709 - - - - Managed basis............................................. 965 - - - - Adoption of FFIEC charge-off policies for MasterCard/Visa portfolio: Owned basis............................................... 3 - - - - Managed basis............................................. 5 - - - - Net charge-offs, excluding nonrecurring items: Owned basis................................................. $ 3,321 $ 3,587 $ 3,129 $ 2,410 $ 1,922 Serviced with limited recourse.............................. 1,383 1,667 1,347 1,033 952 -------- -------- -------- -------- ------- Managed basis............................................... 4,704 5,254 4,476 3,443 2,874 -------- -------- -------- -------- ------- Reserves as a percentage of net charge-offs, owned basis.... 89.9% 105.7% 106.5% 110.5% 109.9% Reserves as a percentage of net charge-offs, managed basis..................................................... 79.6 117.4 113.8 110.7 111.1 Reserves as a percentage of net charge-offs, owned operating basis..................................................... 109.2 105.7 106.5 110.5 109.9 Reserves as a percentage of net charge-offs, managed operating basis........................................... 96.0 117.4 113.8 110.7 111.1 104 HSBC FINANCE CORPORATION AND SUBSIDIARIES RECONCILIATIONS TO GAAP FINANCIAL MEASURES EQUITY RATIOS 2004 2003 2002 2001 2000 ------------------------------------------------------------------------------------------------------------------- (RESTATED) (DOLLARS ARE IN MILLIONS) TANGIBLE COMMON EQUITY: Common shareholder's(s') equity............................. $ 15,841 $ 16,391 $ 9,222 $ 7,843 $ 7,667 Exclude: Unrealized (gains) losses on cash flow hedging instruments............................................. (119) 10 737 699 - Minimum pension liability................................. 4 - 30 - - Unrealized gains on investments and interest-only strip receivables............................................. (53) (167) (319) (223) (24) Intangibles assets........................................ (2,705) (2,856) (386) (456) (556) Goodwill.................................................. (6,856) (6,697) (1,122) (1,107) (1,164) -------- -------- -------- -------- ------- Tangible common equity...................................... 6,112 6,681 8,162 6,756 5,923 Purchase accounting adjustments............................. 2,176 2,498 - - - -------- -------- -------- -------- ------- Tangible common equity, excluding purchase accounting adjustments............................................... $ 8,288 $ 9,179 $ 8,162 $ 6,756 $ 5,923 ======== ======== ======== ======== ======= TANGIBLE SHAREHOLDER'S(S') EQUITY: Tangible common equity...................................... $ 6,112 $ 6,681 $ 8,162 $ 6,756 $ 5,923 Preferred stock............................................. 1,100 1,100 1,193 456 164 Mandatorily redeemable preferred securities of Household Capital Trusts............................................ 994 1,031 975 975 675 Adjustable Conversion-Rate Equity Security Units............ 530 519 511 - - -------- -------- -------- -------- ------- Tangible shareholder's(s') equity........................... 8,736 9,331 10,841 8,187 6,762 Purchase accounting adjustments............................. 2,157 2,442 - - - -------- -------- -------- -------- ------- Tangible shareholder's(s') equity, excluding purchase accounting adjustments.................................... $ 10,893 $ 11,773 $ 10,841 $ 8,187 $ 6,762 ======== ======== ======== ======== ======= TANGIBLE SHAREHOLDER'S(S') EQUITY PLUS OWNED LOSS RESERVES: Tangible shareholder's(s') equity........................... $ 8,736 $ 9,331 $ 10,841 $ 8,187 $ 6,762 Owned loss reserves......................................... 3,625 3,793 3,333 2,663 2,112 -------- -------- -------- -------- ------- Tangible shareholder's(s') equity plus owned loss reserves.................................................. 12,361 13,124 14,174 10,850 8,874 Purchase accounting adjustments............................. 2,157 2,442 - - - -------- -------- -------- -------- ------- Tangible shareholder's(s') equity plus owned loss reserves, excluding purchase accounting adjustments................. $ 14,518 $ 15,566 $ 14,174 $ 10,850 $ 8,874 ======== ======== ======== ======== ======= TANGIBLE MANAGED ASSETS: Owned assets................................................ $130,190 $119,052 $ 97,860 $ 88,911 $76,309 Receivables serviced with limited recourse.................. 14,225 26,201 24,934 20,948 20,249 -------- -------- -------- -------- ------- Managed assets.............................................. 144,415 145,253 122,794 109,859 96,558 Exclude: Intangible assets......................................... (2,705) (2,856) (386) (456) (556) Goodwill.................................................. (6,856) (6,697) (1,122) (1,107) (1,164) Derivative financial assets............................... (4,049) (3,016) (1,864) (97) - -------- -------- -------- -------- ------- Tangible managed assets..................................... 130,805 132,684 119,422 108,199 94,838 Purchase accounting adjustments............................. (202) (431) - - - -------- -------- -------- -------- ------- Tangible managed assets, excluding purchase accounting adjustments............................................... $130,603 $132,253 $119,422 $108,199 $94,838 ======== ======== ======== ======== ======= EQUITY RATIOS: Common and preferred equity to owned assets................. 13.01% 14.69% 10.64% 9.33% 10.26% Tangible common equity to tangible managed assets........... 4.67 5.04 6.83 6.24 6.25 Tangible shareholder's(s') equity to tangible managed assets.................................................... 6.68 7.03 9.08 7.57 7.13 Tangible shareholder's(s') equity plus owned loss reserves to tangible managed assets................................ 9.45 9.89 11.87 10.03 9.36 Excluding purchase accounting adjustments: Tangible common equity to tangible managed assets......... 6.35 6.94 6.83 6.24 6.25 Tangible shareholder's(s') equity to tangible managed assets.................................................. 8.34 8.90 8.90 7.57 7.13 Tangible shareholder's(s') equity plus owned loss reserves to tangible managed assets.............................. 11.12 11.77 11.87 10.03 9.36 ======== ======== ======== ======== ======= 105 HSBC Finance Corporation -------------------------------------------------------------------------------- ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. -------------------------------------------------------------------------------- Information required by this Item is included in sections of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations on the following pages: "Liquidity and Capital Resources", pages 63-71, "Off Balance Sheet Arrangements and Secured Financings", pages 71-75, and "Risk Management", pages 75-79. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. -------------------------------------------------------------------------------- Our 2004 Financial Statements meet the requirements of Regulation S-X. The 2004 Financial Statements and supplementary financial information specified by Item 302 of Regulation S-K are set forth below. 106 HSBC Finance Corporation -------------------------------------------------------------------------------- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholder HSBC Finance Corporation: We have audited the accompanying consolidated balance sheets of HSBC Finance Corporation (a Delaware corporation) (formerly Household International, Inc.), an indirect wholly-owned subsidiary of HSBC Holdings plc, and subsidiaries as of December 31, 2004 (successor basis) and December 31, 2003 (successor basis) and the related consolidated statements of income, changes in shareholder's(s') equity, and cash flows for the year ended December 31, 2004 (successor basis), for the periods January 1, 2003 through March 28, 2003 (predecessor basis) and March 29, 2003 through December 31, 2003 (successor basis), and for the year ended December 31, 2002 (predecessor basis). These consolidated financial statements are the responsibility of HSBC Finance Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of HSBC Finance Corporation's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the aforementioned consolidated financial statements present fairly, in all material respects, the financial position of HSBC Finance Corporation and subsidiaries as of December 31, 2004 (successor basis) and December 31, 2003 (successor basis), and the results of their operations and their cash flows for the year ended December 31, 2004 (successor basis) and March 29, 2003 through December 31, 2003 (successor basis), in conformity with U.S. generally accepted accounting principles. Further, in our opinion, the aforementioned consolidated financial statements present fairly, in all material respects, the results of operations and cash flows of HSBC Finance Corporation and subsidiaries for the period January 1, 2003 through March 28, 2003 (predecessor basis) and for the year ended December 31, 2002 (predecessor basis), in conformity with U.S. generally accepted accounting principles. As discussed in Note 4 to the consolidated financial statements, effective March 28, 2003, HSBC Holdings plc acquired all of the outstanding stock of Household International, Inc. (now HSBC Finance Corporation) in a business combination accounted for as a purchase. 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 periods before the acquisition and, therefore, is not comparable. As discussed in Note 3 to the consolidated financial statements, HSBC Finance Corporation has restated its consolidated financial statements as of December 31, 2003 (successor basis) and for the period March 29, 2003 through December 31, 2003 (successor basis). /s/ KPMG LLP Chicago, Illinois February 28, 2005 107 This information is provided by RNS The company news service from the London Stock Exchange

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