Last checked at 5 Mar 2007 12:18
HSBC Holdings PLC05 March 2007 PRODUCT CHARGE-OFF POLICIES AND PRACTICES NONACCRUAL POLICIES AND PRACTICES(1)------------------------------------------------------------------------------------------------------- Private label(4,5) Subsequent to the adoption of Interest generally accrues until FFIEC policies in December 2004, charge-off, except for retail sales domestic receivables (excluding contracts at our Consumer Lending retail sales contracts at our business. Interest income accruals Consumer Lending business) are for retail sales contracts are charged-off by the end of the suspended when principal or interest month in which the account payments are more than three months becomes six months contractually contractually delinquent. After delinquent. Our domestic private suspension, interest income is label receivable portfolio generally recorded as collected. (excluding retail sales contracts at our Consumer Lending business) was sold to HSBC Bank USA ("HSBC Bank USA") on December 29, 2004. Prior to December 2004, receivables were generally charged-off the month following the month in which the account became nine months contractually delinquent, however, receivables originated through new domestic merchant relationships beginning in the fourth quarter of 2002 were charged-off by the end of the month in which the account became six months contractually delinquent. Retail sales contracts at our Consumer Lending business generally charge-off the month following the month in which the account becomes nine months contractually delinquent and no payment received in six months, but in no event to exceed 12 months contractually delinquent.Personal non-credit card(4) Generally charged-off the month Interest income accruals are following the month in which the suspended when principal or interest account becomes nine months payments are more than three months contractually delinquent and no contractually delinquent. For PHLs, payment received in six months, interest income accruals resume if but in no event to exceed 12 the receivable becomes less than months contractually delinquent. three months contractually past due. For all other personal non-credit card receivables for which income accruals are suspended, interest income is generally recorded as collected. 118 --------------- (1) For our United Kingdom business, interest income accruals are suspended when principal or interest payments are more than three months contractually delinquent.(2) For our United Kingdom business, real estate secured carrying values in excess of net realizable value are charged-off at time of sale.(3) Our Auto Finance charge-off policy was changed in December 2006. Prior to December 2006, carrying values in excess of net realizable value were charged-off at the earlier of a) sale; b) the collateral having been in our possession for more than 90 days; or c) the loan becoming 150 days contractually delinquent. Charge-offs of $24 million were recorded in December 2006 to reflect this policy change.(4) For our Canada business, the private label and personal non-credit card charge-off policy prior to December 2004 required a charge-off of an account the month following the month in which the account becomes nine months contractually delinquent and no payment was received in six months, but in no event was an account to exceed 18 months contractually delinquent. In December 2004, the policy was revised to charge-off accounts the month following the month in which the account becomes nine months contractually delinquent and no payment is received in six months but in no event is an account to exceed 12 months contractually delinquent. This policy change was not part of the adoption of FFIEC policies discussed in Note 4 and its impact was not material to our net income.(5) For our United Kingdom business, delinquent credit card accounts (prior to their sale in December 2005) were charged-off the month following the month in which the account becomes six months contractually delinquent. Delinquent private label receivables are charged-off the month following the month in which the account becomes nine months contractually delinquent.(6) For our Canada business, carrying values in excess of net realizable value are charged-off at the earlier of a) sale; b) the collateral having been in our possession for more than 90 days; or c) the loan becoming 150 days contractually delinquent and the interest income accruals on auto loans are suspended and the portion of previously accrued interest expected to be uncollectible is written off when principal payments are more than three months contractually past due and resumed when the receivables become less than three months contractually past due. Charge-off involving a bankruptcy for our domestic private label (excludingretail sales contracts at our Consumer Lending business) and credit cardreceivables subsequent to the adoption of FFIEC charge-off policies in December2004 occurs by the end of the month 60 days after notification or 180 daysdelinquent, whichever is sooner. For domestic auto finance receivables, bankruptaccounts are charged off no later than the end of the month in which the loanbecomes 210 days contractually delinquent. Charge-off involving a bankruptcy forour real estate secured and personal non-credit card receivables are consistentwith the credit charge-off policy for these products. Prior to December 2004,charge-offs involving a bankruptcy for our domestic private label (excludingretail sales contracts at our Consumer Lending business) receivables occurred bythe end of the month 90 days after notification. Our domestic private labelreceivable portfolio (excluding retail sales contracts at our Consumer Lendingbusiness) was sold to HSBC Bank USA on December 29, 2004. RECEIVABLES SOLD AND SERVICED WITH LIMITED RECOURSE AND SECURITIZATION RELATEDREVENUE Certain receivables have been securitized and sold to investors withlimited recourse. We have retained the servicing rights to these receivables.Recourse is limited to our rights to future cash flow and any subordinatedinterest that we may retain. Upon sale, these receivables are removed from thebalance sheet and a gain on sale is recognized for the difference between thecarrying value of the receivables and the adjusted sales proceeds. The adjustedsales proceeds include cash received and the present value estimate of futurecash flows to be received over the lives of the sold receivables. Future cashflows are based on estimates of prepayments, the impact of interest ratemovements on yields of receivables and securities issued, delinquency ofreceivables sold, servicing fees and other factors. The resulting gain is alsoadjusted by a provision for estimated probable losses under the recourseprovisions. This provision and the related reserve for receivables serviced withlimited recourse are established at the time of sale to cover all probablecredit losses over-the-life of the receivables sold based on historicalexperience and estimates of expected future performance. The reserves arereviewed periodically by evaluating the estimated future cash flows of eachsecuritized pool to ensure that there is sufficient remaining cash flow to coverestimated future credit losses. Any changes to the estimates for the reserve forreceivables serviced with limited recourse are made in the period they becomeknown. Gains on sale net of recourse provisions, servicing income and excessspread relating to securitized receivables are reported in the accompanyingconsolidated statements of income as securitization revenue. In connection with these transactions, we record an interest-only stripreceivable, representing our contractual right to receive interest and othercash flows from our securitization trusts. Our interest-only strip receivablesare reported at fair value using discounted cash flow estimates as a separatecomponent of receivables net of our estimate of probable losses under therecourse provisions. Cash flow estimates include estimates of prepayments, theimpact of interest rate movements on yields of receivables and securitiesissued, delinquency of receivables sold, servicing fees and estimated probablelosses under the recourse provisions. Unrealized gains and losses are recordedas adjustments to common shareholder's equity in accumulated other comprehensiveincome, net of income taxes. Our interest-only strip receivables are reviewedfor impairment 119 quarterly or earlier if events indicate that the carrying value may not berecovered. Any decline in the fair value of the interest-only strip receivablewhich is deemed to be other than temporary is charged against current earnings. We have also, in certain cases, retained other subordinated interests in thesesecuritizations. Neither the interest-only strip receivables nor the othersubordinated interests are in the form of securities. In order to align our accounting treatment with that of HSBC initially underU.K. GAAP and now under International Financial Reporting Standards ("IFRSs),starting in the third quarter of 2004 we began to structure all newcollateralized funding transactions as secured financings. However, becauseexisting public credit card transactions were structured as sales to revolvingtrusts that require replenishments to support previously issued securities,receivables continue to be sold to these trusts until the revolving periods end,the last of which is expected to occur in the fourth quarter of 2007. Wecontinue to replenish, at reduced levels, personal non-credit card securitiesissued to conduits and record the resulting replenishment gains. PROPERTIES AND EQUIPMENT, NET Properties and equipment are recorded at cost, netof accumulated depreciation and amortization. As a result of our acquisition byHSBC, the amortized cost of our properties and equipment was adjusted to fairmarket value and accumulated depreciation and amortization on a "predecessor"basis was eliminated at the time of the acquisition. For financial reportingpurposes, depreciation is provided on a straight-line basis over the estimateduseful lives of the assets which generally range from 3 to 40 years. Leaseholdimprovements are amortized over the lesser of the economic useful life of theimprovement or the term of the lease. Maintenance and repairs are expensed asincurred. REPOSSESSED COLLATERAL Real estate owned is valued at the lower of cost or fairvalue less estimated costs to sell. These values are periodically reviewed andreduced, if necessary. Costs of holding real estate and related gains and losseson disposition are credited or charged to operations as incurred as a componentof operating expense. Repossessed vehicles, net of loss reserves whenapplicable, are recorded at the lower of the estimated fair market value or theoutstanding receivable balance. INSURANCE Insurance revenues on monthly premium insurance policies arerecognized when billed. Insurance revenues on the remaining insurance contractsare recorded as unearned premiums and recognized into income based on the natureand terms of the underlying contracts. Liabilities for credit insurance policiesare based upon estimated settlement amounts for both reported and incurred butnot yet reported losses. Liabilities for future benefits on annuity contractsand specialty and corporate owned life insurance products are based on actuarialassumptions as to investment yields, mortality and withdrawals. INTANGIBLE ASSETS Intangible assets consist of purchased credit cardrelationships and related programs, retail services merchant relationships,other loan related relationships, trade names, technology, customer lists andother contracts. The trade names are not subject to amortization, as we believethey have indefinite lives. The remaining intangible assets are being amortizedover their estimated useful lives either on a straight-line basis or inproportion to the underlying revenues generated. These useful lives range from 5years for retail services merchant relationships to approximately 10 years forcertain loan related relationships. Intangible assets are reviewed forimpairment using discounted cash flows annually, or earlier if events indicatethat the carrying amounts may not be recoverable. We consider significant andlong-term changes in industry and economic conditions to be our primaryindicator of potential impairment. Impairment charges, when required, arecalculated using discounted cash flows. GOODWILL Goodwill represents the purchase price over the fair value ofidentifiable assets acquired less liabilities assumed from businesscombinations. Goodwill is not amortized, but is reviewed for impairment annuallyusing discounted cash flows but impairment may be reviewed earlier ifcircumstances indicate that the carrying amount may not be recoverable. Weconsider significant and long-term changes in industry and economic conditionsto be our primary indicator of potential impairment. DERIVATIVE FINANCIAL INSTRUMENTS All derivatives are recognized on the balancesheet at their fair value. At the inception of the hedging relationship, wedesignate the derivative as a fair value hedge, a cash flow hedge, or if thederivative does not quality in a hedging relationship, a non-hedging derivative.Fair value hedges include hedges of the fair value of a recognized asset orliability and certain foreign currency hedges. Cash flow hedges 120 include hedges of the variability of cash flows to be received or paid relatedto a recognized asset or liability and certain foreign currency hedges. Changesin the fair value of derivatives designated as fair value hedges, along with thechange in fair value on the hedged risk, are recorded in current periodearnings. Changes in the fair value of derivatives designated as cash flow hedges, to theextent effective as a hedge, are recorded in accumulated other comprehensiveincome and reclassified into earnings in the period during which the hedged itemaffects earnings. Changes in the fair value of derivative instruments notdesignated as hedging instruments and ineffective portions of changes in thefair value of hedging instruments are recognized in other revenue as derivativeincome in the current period. For derivative instruments designated as hedges, we formally document allrelationships between hedging instruments and hedged items. This documentationincludes our risk management objective and strategy for undertaking varioushedge transactions, as well as how hedge effectiveness and ineffectiveness willbe measured. This process includes linking derivatives to specific assets andliabilities on the balance sheet. We also formally assess, both at the hedge'sinception and on a quarterly basis, whether the derivatives that are used inhedging transactions are highly effective in offsetting changes in fair valuesor cash flows of hedged items. This assessment is conducted using statisticalregression analysis. When as a result of the quarterly assessment, it isdetermined that a derivative is not highly effective as a hedge or that it hasceased to be a highly effective hedge, we discontinue hedge accounting as of thebeginning of the quarter in which such determination was made. When hedge accounting is discontinued because it is determined that thederivative no longer qualifies as an effective hedge, the derivative willcontinue to be carried on the balance sheet at its fair value, with changes inits fair value recognized in current period earnings. For fair value hedges, theformerly hedged asset or liability will no longer be adjusted for changes infair value and any previously recorded adjustments to the carrying value of thehedged asset or liability will be amortized in the same manner that the hedgeditem affects income. For cash flow hedges, amounts previously recorded inaccumulated other comprehensive income will be reclassified into income in thesame manner that the hedged item affects income. If the hedging instrument is terminated early, the derivative is removed fromthe balance sheet. Accounting for the adjustments to the hedged asset orliability or adjustments to accumulated other comprehensive income are the sameas described above when a derivative no longer qualifies as an effective hedge. If the hedged asset or liability is sold or extinguished, the derivative willcontinue to be carried on the balance sheet at its fair value, with changes inits fair value recognized in current period earnings. The hedged item, includingpreviously recorded mark-to-market adjustments, is derecognized immediately as acomponent of the gain or loss upon disposition. FOREIGN CURRENCY TRANSLATION We have foreign subsidiaries located in the UnitedKingdom and Canada. The functional currency for each foreign subsidiary is itslocal currency. Assets and liabilities of these subsidiaries are translated atthe rate of exchange in effect on the balance sheet date. Translationadjustments resulting from this process are accumulated in commonshareholder's(s') equity as a component of accumulated other comprehensiveincome. Income and expenses are translated at the average rate of exchangeprevailing during the year. Effects of foreign currency translation in the statements of cash flows areoffset against the cumulative foreign currency adjustment, except for the impacton cash. Foreign currency transaction gains and losses are included in income asthey occur. STOCK-BASED COMPENSATION We account for all of our stock based compensationawards including share options, restricted share awards and the employee stockpurchase plan using the fair value method in accordance with Statement ofFinancial Accounting Standards No. 123(Revised 2004) "Share-Based Payment"(SFAS123(R)"). The fair value of the awards granted is recognized as expenseover the vesting period generally either three or four years for options andthree or five years for restricted share awards. The fair value of each optiongranted, measured at the grant date, is calculated using a binomial latticemethodology that is based on the underlying assumptions of the Black-Scholesoption pricing model. 121 Compensation expense relating to restricted share awards is based upon themarket value of the share on the date of grant. In 2004, we began to consider forfeitures for all stock awards grantedsubsequent to March 28, 2003 as part of our estimate of compensation expenserather than adjust compensation expense as forfeitures occur. The cumulativeimpact of the change was not material. INCOME TAXES HSBC Finance Corporation is included in HSBC North America'sconsolidated federal income tax return and in various state income tax returns.In addition, HSBC Finance Corporation files some unconsolidated state taxreturns. Deferred tax assets and liabilities are determined based on differencesbetween financial reporting and tax bases of assets and liabilities and aremeasured using the enacted tax rates and laws that will be in effect. Investmenttax credits generated by leveraged leases are accounted for using the deferralmethod. Changes in estimates of the basis in our assets and liabilities or otherestimates recorded at the date of our acquisition by HSBC or our acquisition ofMetris are adjusted against goodwill. TRANSACTIONS WITH RELATED PARTIES In the normal course of business, we enterinto transactions with HSBC and its subsidiaries. These transactions occur atprevailing market rates and include funding arrangements, derivative execution,purchases and sales of receivables, servicing arrangements, informationtechnology services, item processing and statement processing services, bankingand other miscellaneous services. NEW ACCOUNTING PRONOUNCEMENTS Effective January 1, 2006, we adopted FASB Statement No. 123 (Revised),"Share-Based Payment," ("SFAS No. 123R"). Because we had previously adopted thefair value method of accounting for all equity based awards, the adoption ofSFAS No. 123R did not have a significant impact on our operations or cash flow. Effective January 1, 2006, we adopted FASB Statement No. 154, "AccountingChanges and Error Corrections: a replacement of APB Opinion No. 20 and FASBStatement No. 3" ("SFAS No. 154"). The adoption of SFAS No 154 did not have anyimpact on our financial position or results of operations. Effective January 1, 2006, we adopted FASB Staff Position Nos. FAS 115-1 and FAS124-1 ("FSP 115-1 and FSP 124-1"), "The Meaning of Other-Than-TemporaryImpairment and Its Application to Certain Investments," in response to EmergingIssues Task Force 03-1, "The Meaning of Other-Than-Temporary Impairment and ItsApplication to Certain Investments." The adoption of the impairment guidancecontained in FSP 115-1 and FSP 124-1 did not have a material impact on ourfinancial position or results of operations. In February 2006, the FASB issued FASB Statement No. 155, "Accounting forCertain Hybrid Financial Instruments" ("SFAS No. 155"). SFAS No. 155 permitscompanies to elect to measure at fair value entire financial instrumentscontaining embedded derivatives that would otherwise have to be bifurcated andaccounted for separately. SFAS No. 155 also requires companies to identifyinterests in securitized financial assets that are free standing derivatives orcontain embedded derivatives that would have to be accounted for separately,clarifies which interest-and principal-only strips are subject to SFAS No. 133,and amends SFAS No 140 to revise the conditions of a qualifying special purposeentity. SFAS No. 155 is effective for all financial instruments acquired orissued after the beginning of a company's first fiscal year that begins afterSeptember 15, 2006. Early adoption is permitted as of the beginning of acompany's fiscal year, provided the company has not yet issued financialstatements for that fiscal year. We elected to early adopt SFAS No. 155effective January 1, 2006. The adoption of SFAS No. 155 did not have asignificant impact on our financial position or results of operations. In March 2006, the FASB issued FASB Statement No. 156, "Accounting for Servicingof Financial Assets," ("SFAS No. 156"). SFAS No. 156, which is an amendment toSFAS No. 140, addresses the recognition and measurement of separately recognizedservicing assets and liabilities and provides an approach to simplify theefforts to obtain hedge-like (offset) accounting. SFAS No. 156 is effective forfinancial years beginning after September 15, 2006, with early adoptionpermitted. We elected to early adopt SFAS No. 156 effective January 1, 2006. Aswe do not have servicing assets recorded on our balance sheet the early adoptionof SFAS No. 156 did not have any impact on our financial position or results ofoperations. 122 In September 2006, the FASB issued FASB Statement No. 158, "Employer'sAccounting for Defined Benefit Pension and Other Postretirement Plans," ("SFASNo. 158"). SFAS No. 158 requires balance sheet recognition of the funded statusof pension and other postretirement benefits with the offset to accumulatedother comprehensive income. Employers will recognize actuarial gains and losses,prior service cost, and any remaining transition amounts when recognizing aplan's funded status. SFAS No. 158 is effective for fiscal years ending afterDecember 15, 2006. We adopted SFAS No. 158 effective December 31, 2006. Theadoption of SFAS No. 158 resulted in a reduction of accumulated othercomprehensive income within common shareholder's equity of $1 million atDecember 31, 2006. In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting forUncertainty in Income Taxes - an Interpretation of FASB Statement No. 109" ("FINNo. 48"). FIN No. 48 establishes threshold and measurement attributes forfinancial statement measurement and recognition of tax positions taken orexpected to be taken in a tax return. FIN No. 48 also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure and transition. FIN No. 48 is effective for fiscal yearsbeginning after December 15, 2006. We adopted FIN No. 48 on January 1, 2007. Theadoption of FIN 48 will not have a significant impact on the financial resultsof the Company and will not result in a significant cumulative effect adjustmentto the January 1, 2007 balance of retained earnings. However, it will result inthe reclassification of $65 million of deferred tax liability to current taxliability to account for uncertainty in the timing of tax benefits as well asthe reclassification of $141 million of deferred tax asset to current tax assetto account for highly certain pending adjustments in the timing of tax benefits. In September 2006, the FASB issued FASB Statement No. 157, "Fair ValueMeasurements," ("SFAS No. 157"). SFAS No. 157 establishes a single authoritativedefinition of value, sets out a framework for measuring fair value, and requiresadditional disclosures about fair-value measurements. SFAS No. 157 is effectivefor fiscal years beginning after November 15, 2007, and interim periods withinthose years. Early application is permissible only if no annual or interimfinancial statements have been issued for the earlier periods. We areconsidering whether to elect early adoption of this pronouncement and arecurrently evaluating the impact that adoption of SFAS No. 157 will have on ourfinancial position and results of operations. In September 2006, the U.S. Securities and Exchange Commission issued StaffAccounting Bulletin No. 108, "Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year FinancialStatements" ("SAB 108"). SAB 108 addresses how the effects of prior yearuncorrected misstatements should be considered when quantifying misstatements incurrent year financial statements. SAB 108 requires companies to quantifymisstatements using both the balance sheet and income statement approaches andto evaluate whether either approach results in quantifying an error that ismaterial in light of relevant quantitative and qualitative factors. SAB 108 iseffective for fiscal years ending after November 15, 2006. The adoption of SAB108 did not have an impact on our financial position or results of operations. In February, 2007, the FASB issued FASB Statement No. 159, "The Fair ValueOption for Financial Assets and Financial Liabilities," ("SFAS No. 159") whichcreates an alternative measurement treatment for certain financial assets andfinancial liabilities. SFAS No. 159 permits fair value to be used for both theinitial and subsequent measurements on an instrument by instrument basis, withchanges in the fair value to be recognized in earnings as those changes occur.This election is referred to as the fair value option. SFAS No. 159 alsorequires additional disclosures to compensate for the lack of comparability thatwill arise from the use of the fair value option. SFAS No. 159 is effective forfiscal years beginning after November 15, 2007, with early adoption permitted.Early adoption is permitted as of the beginning of a company's fiscal year,provided the company has not yet issued financial statements for that fiscalyear. We are considering whether to elect early adoption of this pronouncementand are currently evaluating the impact that the adoption of SFAS No. 159 willhave on our financial position and results of operations. We anticipate that wewould apply SFAS No. 159 largely to certain fixed rate debt which are alreadyaccounted for at fair value under IFRSs. Based on our latest analysis, wecurrently estimate that such election would result in a cumulative-effectafter-tax reduction to the January 1, 2007 opening balance of retained earningsof approximately $550 million. 123 3. BUSINESS ACQUISITIONS AND DIVESTITURES-------------------------------------------------------------------------------- SALE OF EUROPEAN OPERATIONS On November 9, 2006, as part of our continuingevaluation of strategic alternatives with respect to our U.K. and Europeanoperations, we sold all of the capital stock of our operations in the CzechRepublic, Hungary, and Slovakia (the "European Operations") to a wholly ownedsubsidiary of HSBC Bank plc ("HBEU"), a U.K. based subsidiary of HSBC, for anaggregate purchase price of approximately $46 million. The assets consistedprimarily of $199 million of receivables and goodwill which totaledapproximately $13 million at November 9, 2006. The liabilities consistedprimarily of debt which totaled $179 million at November 9, 2006. HBEU assumedall the liabilities of the European Operations as a result of this transaction.Because the sale of this business is between affiliates under common control,the premium received in excess of the book value of the stock transferred of $13million, including the goodwill assigned to this business, was recorded as anincrease to additional paid-in capital and will not be reflected in earnings.Our European Operations are reported in the International Segment. The following summarizes the operating results of our European Operations forthe periods presented: PERIOD ENDED YEAR ENDED YEAR ENDED NOVEMBER 9, DECEMBER 31, DECEMBER 31, 2006 2005 2004----------------------------------------------------------------------------------------------------- (IN MILLIONS) Net interest income...................................... $24 $ 22 $ 10Income before income tax expense......................... (5) (8) (11)Income tax expense....................................... - (3) 2Net loss................................................. (5) (11) (9) ACQUISITION OF SOLSTICE CAPITAL GROUP INC ("SOLSTICE") On October 4, 2006 ourConsumer Lending business purchased Solstice with assets of approximately $49million, in an all cash transaction for approximately $50 million. Additionalconsideration may be paid based on Solstice's 2007 pre-tax income. Solsticemarkets a range of mortgage and home equity products to customers through directmail. This acquisition will add momentum to our origination growth plan byproviding an additional channel to customers. The results of Solstice areincluded in our consolidated financial statements beginning October 4, 2006. The purchase price was allocated to the assets and liabilities acquired based ontheir estimated fair values at the acquisition date. These fair valueadjustments represent current estimates and are subject to further adjustment asour valuation data is finalized. Goodwill associated with the Solsticeacquisition is not tax deductible. The initial purchase price allocations may beadjusted within one year of the purchase date for changes in estimates of thefair value of assets acquired and liabilities assumed. The following tablesummarizes the estimated fair values of the acquired and liabilities assumed asa result of the acquisition of Solstice: (IN MILLIONS)--------------------------------------------------------------------------- ASSETS ACQUIRED:Cash........................................................ $11Receivables, net............................................ 37Goodwill.................................................... 46Properties and equipment.................................... 1 --- Total assets acquired..................................... $95 ===LIABILITIES ASSUMED:Other liabilities........................................... $45 --- Total liabilities assumed................................. $45 ===TOTAL PURCHASE PRICE........................................ $50 === 124 ACQUISITION OF METRIS COMPANIES INC. On December 1, 2005, we acquired theoutstanding capital stock of Metris Companies Inc. ("Metris"), a provider offinancial products and services to middle market consumers throughout the UnitedStates, in an all-cash transaction for $1.6 billion. HSBC Investments (NorthAmerica) Inc. ("HINO") made a capital contribution of $1.2 billion to fund aportion of the purchase price. This acquisition expanded our presence in thenear-prime credit card market and strengthened our capabilities to serve thefull spectrum of credit card customers. The results of Metris are included inour consolidated financial statements beginning December 1, 2005. The purchase price was allocated to the assets and liabilities acquired based ontheir estimated fair values at the acquisition date. These preliminary fairvalues were estimated, in part, based on third party valuation data. Goodwillassociated with the Metris acquisition is not tax deductible. In the thirdquarter of 2006, we made an adjustment to our estimated fair value related toMetris following an adverse judgment in litigation involving Metris thatpreceded the merger. This adjustment resulted in a net increase to goodwill ofapproximately $25 million. Since the one-year anniversary of the Metrisacquisition was completed during the fourth quarter of 2006, no furtheracquisition-related adjustments to the purchase price will occur, except forchanges in estimates for the tax basis in our assets and liabilities or othertax estimates recorded at the date of the Metris acquisition pursuant toStatement of Financial Accounting Standards No. 109, "Accounting for IncomeTaxes." SALE OF U.K. CREDIT CARD BUSINESS In December 2005, we sold our U.K. credit cardbusiness, including $2.5 billion of receivables, the associated cardholderrelationships and the related retained interests in securitized credit cardreceivables to HSBC Bank plc ("HBEU"), a U.K. based subsidiary of HSBC, for anaggregate purchase price of $3.0 billion. The purchase price, which wasdetermined based on a comparative analysis of sales of other credit cardportfolios, was paid in a combination of cash and $261 million of preferredstock issued by a subsidiary of HBEU with a rate of one-year Sterling LIBOR,plus 1.30 percent. In addition to the assets referred to above, the sale alsoincluded the account origination platform, including the marketing and creditemployees associated with this function, as well as the lease associated withthe credit card call center and the related leaseholds and call center employeesto provide customer continuity after the transfer as well as to allow HBEUdirect ownership and control of origination and customer service. We haveretained the collection operations related to the credit card operations andhave entered into a service level agreement for a period of not less than twoyears to provide collection services and other support services, includingcomponents of the compliance, financial reporting and human resource functions,for the sold credit card operations to HBEU for a fee. Additionally, themanagement teams of HBEU and our remaining U.K. operations will be jointlyinvolved in decision making involving card marketing to ensure that growthobjectives are met for both businesses. Because the sale of this business isbetween affiliates under common control, the premium received in excess of thebook value of the assets transferred of $182 million, including the goodwillassigned to this business, was recorded as an increase to additional paid incapital and has not been included in earnings. As a result of this sale, our netinterest income, fee income and provision for credit losses related to the U.K.credit card business has been reduced, while other income has increased by thereceipt of servicing and support services revenue from HBEU. The net effect ofthis sale did not result in a material reduction of net income of ourconsolidated results. 4. SALE OF DOMESTIC PRIVATE LABEL RECEIVABLE PORTFOLIO AND ADOPTION OF FFIEC POLICIES-------------------------------------------------------------------------------- On December 29, 2004, we sold our domestic private label receivable portfolio(excluding retail sales contracts at our Consumer Lending business), includingthe retained interests associated with securitized private label receivables, toHSBC Bank USA for an aggregate purchase price of $12.4 billion and recorded again of $663 million ($423 million after-tax). Included in this gain was therelease of $505 million in credit loss reserves associated with the portfolio.The domestic private label receivable portfolio sold consisted of receivableswith a balance of $12.2 billion. The purchase price was determined based upon anindependent valuation opinion. We retained the customer relationships and by agreement will continue to selladditional domestic private label receivable originations (excluding retailsales contracts) generated under current and future private label 125 accounts to HSBC Bank USA on a daily basis at fair market value. We will alsoservice the receivables for HSBC Bank USA for a fee under a service agreementthat was reviewed by the staff of the Board of Governors of the Federal ReserveBoard (the "Federal Reserve Board".) Upon receipt of regulatory approval for the sale of this domestic private labelreceivable portfolio, we adopted charge-off and account management policies inaccordance with the Uniform Retail Credit Classification and Account ManagementPolicy issued by the Federal Financial Institutions Examination Council ("FFIECPolicies") for our domestic private label (excluding retail sales contracts atour Consumer Lending business) and credit card portfolios. The adoption of FFIECcharge-off policies for our domestic private label (excluding retail salescontracts at our Consumer Lending business) and credit card receivables resultedin a reduction to our 2004 net income of $121 million. 5. SECURITIES-------------------------------------------------------------------------------- Securities consisted of the following available-for-sale investments: GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIRDECEMBER 31, 2006 COST GAINS LOSSES VALUE--------------------------------------------------------------------------------------------------- (IN MILLIONS) Corporate debt securities............................ $2,373 $10 $(39) $2,344Money market funds................................... 1,051 - - 1,051U.S. government sponsored enterprises(1)............. 179 - (2) 177U.S. government and Federal agency debt securities... 144 - (1) 143Non-government mortgage backed securities............ 367 - (1) 366Other................................................ 578 2 (4) 576 ------ --- ---- ------Subtotal............................................. 4,692 12 (47) 4,657Accrued investment income............................ 38 - - 38 ------ --- ---- ------Total securities available for sale.................. $4,730 $12 $(47) $4,695 ====== === ==== ====== GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIRDECEMBER 31, 2005 COST GAINS LOSSES VALUE--------------------------------------------------------------------------------------------------- (IN MILLIONS) Corporate debt securities............................ $2,337 $23 $(38) $2,322Money market funds................................... 315 - - 315U.S. government sponsored enterprises(1)............. 96 - (2) 94U.S. government and Federal agency debt securities... 744 - (4) 740Non-government mortgage backed securities............ 88 - (1) 87Other................................................ 463 1 (5) 459 ------ --- ---- ------Subtotal............................................. 4,043 24 (50) 4,017Accrued investment income............................ 34 - - 34 ------ --- ---- ------Total securities available for sale.................. $4,077 $24 $(50) $4,051 ====== === ==== ====== --------------- (1) Includes primarily mortgage-backed securities issued by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Proceeds from the sale of available-for-sale investments totaled approximately$.5 billion in 2006, $.4 billion in 2005 and $.9 billion in 2004. We realizedgross gains of $125 million in 2006, $12 million in 2005 and $15 million in2004. We realized gross losses of $2 million in 2006, $12 million in 2005 and $3million in 2004. 126 Money market funds at December 31, 2006 include $854 million which is restrictedfor the sole purpose of paying down certain secured financings at theestablished payment date. There were no such restricted balances at December 31,2005. A summary of gross unrealized losses and related fair values as of December 31,2006, classified as to the length of time the losses have existed is presentedin the following table: LESS THAN ONE YEAR GREATER THAN ONE YEAR --------------------------------------- --------------------------------------- GROSS AGGREGATE GROSS AGGREGATE NUMBER OF UNREALIZED FAIR VALUE OF NUMBER OF UNREALIZED FAIR VALUE OFDECEMBER 31, 2006 SECURITIES LOSSES INVESTMENTS SECURITIES LOSSES INVESTMENTS------------------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) Corporate debt securities.............. 130 $(5) $433 503 $(34) $1,151U.S. government sponsored enterprises............. 19 -(1) 77 22 (2) 84U.S. government and Federal agency debt securities.............. 10 -(1) 27 30 (1) 54Non-government mortgage... 20 -(1) 78 25 (1) 40Other..................... 18 -(1) 89 55 (4) 195 LESS THAN ONE YEAR GREATER THAN ONE YEAR --------------------------------------- --------------------------------------- GROSS AGGREGATE GROSS AGGREGATE NUMBER OF UNREALIZED FAIR VALUE OF NUMBER OF UNREALIZED FAIR VALUE OFDECEMBER 31, 2005 SECURITIES LOSSES INVESTMENTS SECURITIES LOSSES INVESTMENTS------------------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) Corporate debt securities.............. 272 $(14) $695 381 $(24) $898U.S. government sponsored enterprises............. 11 -(1) 28 25 (2) 64U.S. government and Federal agency debt securities.............. 18 (1) 71 40 (3) 117Non-government mortgage... 3 -(1) 4 16 (1) 22Other..................... 12 (1) 49 49 (4) 148 --------------- (1) Less than $500 thousand. The gross unrealized losses on our securities available for sale were flatduring 2006. The contractual terms of these securities do not permit the issuerto settle the securities at a price less than the par value of the investment.Since substantially all of these securities are rated A- or better, and becausewe have the ability and intent to hold these investments until maturity or amarket price recovery, these securities are not considered other-thantemporarily impaired. The amortized cost of our securities available for sale was adjusted to fairmarket value at the time of the merger with HSBC. See Note 23, "Fair Value ofFinancial Instruments," for further discussion of the relationship between thefair value of our assets and liabilities. 127 Contractual maturities of and yields on investments in debt securities were asfollows: AT DECEMBER 31, 2006 ---------------------------------------------------- DUE AFTER 1 AFTER 5 WITHIN BUT WITHIN BUT WITHIN AFTER 1 YEAR 5 YEARS 10 YEARS 10 YEARS TOTAL---------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) Corporate debt securities: Amortized cost.............................. $474 $1,054 $247 $598 $2,373 Fair value.................................. 472 1,036 242 594 2,344 Yield(1).................................... 3.68% 4.47% 5.29% 5.60% 4.68%U.S. government sponsored enterprises: Amortized cost.............................. $ 50 $ 69 $ 5 $ 55 $ 179 Fair value.................................. 49 69 5 54 177 Yield(1).................................... 4.59% 4.98% 5.05% 4.33% 4.68%U.S. government and Federal agency debt securities: Amortized cost.............................. $ 32 $ 28 $ 21 $ 63 $ 144 Fair value.................................. 31 28 21 63 143 Yield(1).................................... 4.58% 3.66% 4.53% 4.85% 4.51% --------------- (1) Computed by dividing annualized interest by the amortized cost of respective investment securities. 6. RECEIVABLES-------------------------------------------------------------------------------- Receivables consisted of the following: AT DECEMBER 31, ------------------- 2006 2005--------------------------------------------------------------------------------- (IN MILLIONS) Real estate secured......................................... $ 97,761 $ 82,826Auto finance................................................ 12,504 10,704Credit card................................................. 27,714 24,110Private label............................................... 2,509 2,520Personal non-credit card.................................... 21,367 19,545Commercial and other........................................ 181 208 -------- --------Total receivables........................................... 162,036 139,913HSBC acquisition purchase accounting fair value adjustments............................................... (60) 63Accrued finance charges..................................... 2,228 1,831Credit loss reserve for owned receivables................... (6,587) (4,521)Unearned credit insurance premiums and claims reserves...... (412) (505)Interest-only strip receivables............................. 6 23Amounts due and deferred from receivable sales.............. 51 185 -------- --------Total receivables, net...................................... $157,262 $136,989 ======== ======== HSBC acquisition purchase accounting fair value adjustments representadjustments which have been "pushed down" to record our receivables at fairvalue at the date of acquisition by HSBC. We have a subsidiary, Decision One Mortgage Company, LLC, which directlyoriginates mortgage loans sourced by mortgage brokers and sells all loans tosecondary market purchasers, including our Mortgage Services businesses. Loansheld for sale to external parties by this subsidiary totaled $1.6 billion at 128 December 31, 2006 and $1.7 billion at December 31, 2005 and are included in realestate secured receivables. At December 31, 2006 our Consumer Lending businessalso had loans held for sale totaling $32 million as a result of the Solsticepurchase. In November 2006, we sold our European Operations, including $199 million ofreceivables to a wholly owned subsidiary of HBEU. In December 2005, we sold ourU.K. based credit card operations, including $2.5 billion of receivables and therelated retained interests in securitized credit card receivables to HBEU. SeeNote 3, "Business Acquisitions and Divestitures," for additional informationregarding these sales. In November 2006, we acquired $2.5 billion of real estate secured receivablesfrom Champion Mortgage ("Champion") a division of KeyBank, N.A. and as part ofour acquisition of Metris on December 1, 2005, we acquired $5.3 billion ofreceivables. These receivables acquired were subject to the requirements ofStatement of Position 03-3, "Accounting for Certain Loans or Debt SecuritiesAcquired in a Transfer" ("SOP 03-3") to the extent there was evidence ofdeterioration of credit quality since origination and for which it was probable,at acquisition, that all contractually required payments would not be collectedand that the associated line of credit had been closed. The following table summarizes, for Champion, the outstanding receivablebalances, the cash flows expected to be collected and the fair value of thereceivables to which SOP 03-3 has been applied: (IN MILLIONS)--------------------------------------------------------------------------- Outstanding contractual receivable balance at acquisition... $ 152Cash flows expected to be collected at acquisition.......... 136Basis in acquired receivables at acquisition................ 117 The carrying amount of Champion real estate secured receivables subject to therequirements of SOP 03-3 was $116 million at December 31, 2006 and is includedin the real estate secured receivables in the table above. The outstandingcontractual balance of these receivables was $143 million at December 31, 2006.At December 31, 2006, no credit loss reserve for the acquired receivablessubject to SOP 03-3 has been established as there has been no decrease to theexpected future cash flows since the acquisition. As discussed more fully in Note 3, "Business Acquisitions and Divestitures," aspart of our acquisition of Metris on December 1, 2005, we acquired $5.3 billionof receivables. The carrying amount of the credit card receivables which weresubject to SOP 03-3 was $223 million at December 31, 2006 and $414 million atDecember 31, 2005 and is included in the credit card receivables in the tableabove. The outstanding contractual balance of these receivables was $334 millionat December 31, 2006 and $804 million at December 31, 2005. At December 31,2006, no credit loss reserve for the acquired receivables subject to SOP 03-3has been established as there has been no decrease to the expected future cashflows since the acquisition. There was a reclassification to accretable yieldfrom non-accretable difference during 2006. This reclassification fromnon-accretable difference represents an increase to the estimated cash flows tobe collected on the underlying Metris portfolio. The following summarizes the accretable yield on Metris and Champion receivablesat December 31, 2006: (IN MILLIONS)--------------------------------------------------------------------------- Accretable yield at December 31, 2005....................... $(122)Accretable yield additions during the period................ (19)Accretable yield amortized to interest income during the period.................................................... 100Reclassification from non-accretable difference............. (35) -----Accretable yield at December 31, 2006....................... $ (76) ===== 129 Real estate secured receivables are comprised of the following: AT DECEMBER 31, ----------------- 2006 2005------------------------------------------------------------------------------- (IN MILLIONS) Real estate secured: Closed-end: First lien............................................. $77,901 $66,819 Second lien............................................ 15,090 11,815 Revolving: First lien............................................. 556 626 Second lien............................................ 4,214 3,566 ------- ------- Total real estate secured receivables..................... $97,761 $82,826 ======= ======= Foreign receivables included in receivables were as follows: AT DECEMBER 31, --------------------------------------------------- UNITED KINGDOM AND THE REST OF EUROPE CANADA ------------------------ ------------------------ 2006 2005 2004 2006 2005 2004----------------------------------------------------------------------------------------------- (IN MILLIONS) Real estate secured....................... $1,786 $1,654 $1,832 $1,766 $1,380 $1,042Auto finance.............................. - - - 311 270 54Credit card............................... - - 2,264 215 147 -Private label............................. 1,333 1,330 2,249 887 834 821Personal non-credit card.................. 2,425 3,038 3,562 697 607 517Commercial and other...................... - - - - - 2 ------ ------ ------ ------ ------ ------Total..................................... $5,544 $6,022 $9,907 $3,876 $3,238 $2,436 ====== ====== ====== ====== ====== ====== Foreign receivables represented 6 percent of receivables at December 31, 2006and 7 percent of receivables at December 31, 2005. Receivables serviced with limited recourse consisted of the following: AT DECEMBER 31, --------------- 2006 2005----------------------------------------------------------------------------- (IN MILLIONS) Auto finance................................................ $271 $1,192Credit card................................................. 500 1,875Personal non-credit card.................................... 178 1,007 ---- ------Total....................................................... $949 $4,074 ==== ====== We maintain facilities with third parties which provide for the securitizationor secured financing of receivables on both a revolving and non-revolving basistotaling $19.0 billion, of which $9.1 billion were utilized at December 31,2006. The amount available under these facilities will vary based on the timingand volume of public securitization or secured financing transactions and ourgeneral liquidity plans. 130 Contractual maturities of our receivables were as follows: AT DECEMBER 31, 2006 -------------------------------------------------------------------- 2007 2008 2009 2010 2011 THEREAFTER TOTAL----------------------------------------------------------------------------------------------------------- (IN MILLIONS) Real estate secured.................. $ 528 $ 479 $ 388 $ 423 $ 591 $ 95,352 $ 97,761Auto finance......................... 2,983 2,744 2,496 2,100 1,487 694 12,504Credit card.......................... 3,768 2,961 2,503 2,132 1,828 14,522 27,714Private label........................ 1,167 532 349 216 118 127 2,509Personal non-credit card............. 2,448 1,640 2,394 3,922 6,035 4,928 21,367Commercial and other................. 1 - 45 58 - 77 181 ------- ------ ------ ------ ------- -------- --------Total................................ $10,895 $8,356 $8,175 $8,851 $10,059 $115,700 $162,036 ======= ====== ====== ====== ======= ======== ======== A substantial portion of consumer receivables, based on our experience, will berenewed or repaid prior to contractual maturity. The above maturity scheduleshould not be regarded as a forecast of future cash collections. The following table summarizes contractual maturities of receivables due afterone year by repricing characteristic: AT DECEMBER 31, 2006 --------------------- OVER 1 BUT WITHIN OVER 5 YEARS 5 YEARS----------------------------------------------------------------------------------- (IN MILLIONS) Receivables at predetermined interest rates................. $26,977 $ 95,521Receivables at floating or adjustable rates................. 8,464 20,179 ------- --------Total....................................................... $35,441 $115,700 ======= ======== Nonaccrual consumer receivables totaled $4.8 billion (including $482 millionrelating to foreign operations) at December 31, 2006 and $3.5 billion (including$463 million relating to foreign operations) at December 31, 2005. Interestincome that would have been recorded if such nonaccrual receivables had beencurrent and in accordance with contractual terms was approximately $639 million(including $72 million relating to foreign operations) in 2006 and $475 million(including $66 million relating to foreign operations) in 2005. Interest incomethat was included in finance and other interest income prior to these loansbeing placed on nonaccrual status was approximately $338 million (including $36million relating to foreign operations) in 2006 and $229 million (including $31million relating to foreign operations) in 2005. For an analysis of reserves forcredit losses, see our "Analysis of Credit Loss Reserves Activity" inManagement's Discussion and Analysis and Note 7, "Credit Loss Reserves." Interest-only strip receivables are reported net of our estimate of probablelosses under the recourse provisions for receivables serviced with limitedrecourse. Reductions to our interest-only strip receivables in 2006 reflect theimpact of reduced securitization levels, including our decision in 2004 tostructure new collateralized funding transactions as secured financings. Amounts due and deferred from receivable sales include assets established forcertain receivable sales, including funds deposited in spread accounts, and netcustomer payments due from (to) the securitization trustee. We issued securities backed by dedicated home equity loan receivables of $4.8billion in 2006 and $4.5 billion in 2005. We issued securities backed bydedicated auto finance loan receivables of $2.8 billion in 2006 and $3.4 billionin 2005. We issued securities backed by dedicated credit card receivables of$4.8 billion in 2006 and $1.8 billion in 2005. We issued securities backed bydedicated personal non-credit card receivables of $2.5 billion in 2006. Foraccounting purposes, these transactions were structured as secured financings, 131 therefore, the receivables and the related debt remain on our balance sheet.Additionally, as part of the Metris acquisition in 2005, we assumed $4.6 billionof securities backed by credit card receivables which were accounted for assecured financings. Real estate secured receivables included closed-end realestate secured receivables totaling $9.7 billion at December 31, 2006 and $7.5billion at December 31, 2005 that secured the outstanding debt related to thesetransactions. Auto finance receivables totaling $6.0 billion at December 31,2006 and $5.1 billion at December 31, 2005 secured the outstanding debt relatedto these transactions. Credit card receivables totaling $8.9 billion at December31, 2006 and $7.1 billion at December 31, 2005 secured the outstanding debtrelated to these transactions. Personal non-credit card receivables of $3.5billion at December 31, 2006 secured the outstanding debt related to thesetransactions. There were no transactions structured as secured financings in2005 for personal non-credit card receivables. 7. CREDIT LOSS RESERVES-------------------------------------------------------------------------------- An analysis of credit loss reserves was as follows: AT DECEMBER 31, ------------------------ 2006 2005 2004-------------------------------------------------------------------------------------- (IN MILLIONS) Credit loss reserves at beginning of period................. $4,521 $3,625 $3,793Provision for credit losses................................. 6,564 4,543 4,334Charge-offs................................................. (5,164) (4,100) (4,409)Recoveries.................................................. 645 447 376Other, net.................................................. 21 6 (469) ------ ------ ------Credit loss reserves at end of period....................... $6,587 $4,521 $3,625 ------ ------ ------ Further analysis of credit quality and credit loss reserves is presented in Item7, "Management's Discussion and Analysis of Financial Condition and Results ofOperations" of Form 10-K under the caption "Credit Quality." 8. ASSET SECURITIZATIONS-------------------------------------------------------------------------------- We have sold receivables in various securitization transactions. We continue toservice and receive servicing fees on the outstanding balance of thesesecuritized receivables. We also retain rights to future cash flows arising fromthese receivables after the investors receive their contractual return. We havealso, in certain cases, retained other subordinated interests in thesesecuritizations. These transactions result in the recording of an interest-onlystrip receivable which represents the value of the future residual cash flowsfrom securitized receivables. The investors and the securitization trusts haveonly limited recourse to our assets for failure of debtors to pay. That recourseis limited to our rights to future cash flow and any subordinated interest weretain. Servicing assets and liabilities are not recognized in conjunction withour securitizations since we receive adequate compensation relative to currentmarket rates to service the receivables sold. See Note 2, "Summary ofSignificant Accounting Policies," for further discussion on our accounting forinterest-only strip receivables. In the third quarter of 2004, we began to structure all new collateralizedfunding transactions as secured financings. However, because existing publiccredit card transactions were structured as sales to revolving trusts thatrequire replenishments of receivables to support previously issued securities,receivables will continue to be sold to these trusts until the revolving periodsend, the last of which is expected to occur in the fourth quarter of 2007. Inaddition, we continue to replenish at reduced levels, certain non-publicpersonal non-credit card securities issued to conduits and record the resultingreplenishment gains. Securitization related revenue includes income associated with the current andprior period securitization of receivables with limited recourse structured assales. Such income includes gains on sales, net of our estimate of probablecredit losses under the recourse provisions, servicing income and excess spreadrelating to those receivables. 132 YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 2006 2005 2004-------------------------------------------------------------------------------------------------------- Net initial gains(1)........................................ $ - $ - $ 25Net replenishment gains(2).................................. 30 154 414Servicing revenue and excess spread......................... 137 57 569 ---- ---- ------Total securitization related revenue........................ $167 $211 $1,008 ==== ==== ====== --------------- (1) Net initial gains reflect inherent recourse provisions of $47 million in 2004. (2) Net replenishment gains reflect inherent recourse provisions of $41 million in 2006, $252 million in 2005 and $850 million in 2004. Net initial gains represent gross initial gains net of our estimate of probablecredit losses under the recourse provisions. There were no net initial gains in2006 or 2005. Net initial gains and the key economic assumptions used inmeasuring the net initial gains from securitizations for 2004 were as follows: AUTO CREDIT PRIVATEYEAR ENDED DECEMBER 31, FINANCE CARD LABEL TOTAL------------------------------------------------------------------------------------------------ 2004Net initial gains (in millions)............................. $ 6(2) $ 14 $ 5 $25Key economic assumptions:(1) Weighted-average life (in years).......................... 2.1 .3 .4 Payment speed............................................. 35.0% 93.5% 93.5% Expected credit losses (annual rate)...................... 5.7 4.9 4.8 Discount rate on cash flows............................... 10.0 9.0 10.0 Cost of funds............................................. 3.0 1.5 1.4 --------------- (1) Weighted-average annual rates for securitizations entered into during the period for securitizations of loans with similar characteristics. (2) In 2004, auto finance was involved in a securitization which later was restructured as a secured financing. The initial gain reflected above was the gain on the initial transaction that remained after the securitization was restructured, as required under Emerging Issues Task Force Issue No. 02-9. Certain securitization trusts, such as credit cards, are established at fixedlevels and require frequent sales of new receivables into the trust to replacereceivable run-off. These replenishments totaled $2.5 billion in 2006, $8.8billion in 2005 and $30.3 billion in 2004. 133 Cash flows received from securitization trusts were as follows: PERSONAL REAL ESTATE AUTO CREDIT PRIVATE NON-CREDITYEAR ENDED DECEMBER 31, SECURED FINANCE CARD LABEL CARD TOTAL------------------------------------------------------------------------------------------------------- (IN MILLIONS) 2006Proceeds from initial securitizations...................... $- $ - $ - $ - $ - $ -Servicing fees received................ - 16 22 - 10 48Other cash flow received on retained interests(1)......................... - 97 108 - 18 2232005Proceeds from initial securitizations...................... $- $ - $ - $ - $ - $ -Servicing fees received................ - 45 97 - 46 188Other cash flow received on retained interests(1)......................... - 40 243 - 52 3352004Proceeds from initial securitizations...................... $- $ -(2) $550 $190 $ - $ 740Servicing fees received................ 1 86 185 93 161 526Other cash flow received on retained interests(1)......................... 4 (1) 696 252 80 1,031 --------------- (1) Other cash flows include all cash flows from interest-only strip receivables, excluding servicing fees. (2) In 2004, auto finance was involved in a securitization which was later restructured as a secured financing. These transactions are reported net in the table above. At December 31, 2006, the sensitivity of the current fair value of theinterest-only strip receivables to an immediate 10 percent and 20 percentunfavorable change in assumptions are presented in the table below. Thesesensitivities are based on assumptions used to value our interest-only stripreceivables at December 31, 2006. PERSONAL AUTO CREDIT NON-CREDIT FINANCE CARD CARD------------------------------------------------------------------------------------------- Carrying value (fair value) of interest-only strip receivables............................................... $ (4) $ 9 $ 1Weighted-average life (in years)............................ .7 .3 .3Payment speed assumption (annual rate)...................... 74.3% 98.9% 99.2% Impact on fair value of 10% adverse change................ $ - $ (1) $ - Impact on fair value of 20% adverse change................ (1) (2) -Expected credit losses (annual rate)........................ 10.0% 3.7% 9.8% Impact on fair value of 10% adverse change................ $ (2) $ - $ - Impact on fair value of 20% adverse change................ (3) (1) (1)Discount rate on residual cash flows (annual rate).......... 10.0% 9.0% 11.0% Impact on fair value of 10% adverse change................ $ - $ - $ - Impact on fair value of 20% adverse change................ (1) - -Variable returns to investors (annual rate)................. - 4.7% 6.0% Impact on fair value of 10% adverse change................ $ - $ (1) $ - Impact on fair value of 20% adverse change................ - (1) (1) These sensitivities are hypothetical and should not be considered to bepredictive of future performance. As the figures indicate, the change in fairvalue based on a 10 percent variation in assumptions cannot necessarily beextrapolated because the relationship of the change in assumption to the changein fair value may not be 134 linear. Also, in this table, the effect of a variation in a particularassumption on the fair value of the residual cash flow is calculatedindependently from any change in another assumption. In reality, changes in onefactor may contribute to changes in another (for example, increases in marketinterest rates may result in lower prepayments) which might magnify orcounteract the sensitivities. Furthermore, the estimated fair values asdisclosed should not be considered indicative of future earnings on theseassets. Static pool credit losses are calculated by summing actual and projected futurecredit losses and dividing them by the original balance of each pool of asset.Due to the short term revolving nature of credit card receivables, theweighted-average percentage of static pool credit losses is not considered to bematerially different from the weighted-average charge-off assumptions used indetermining the fair value of our interest-only strip receivables in the tableabove. At December 31, 2006, static pool credit losses for auto finance loanssecuritized in 2003 were estimated to be 10.0 percent. Receivables and two-month-and-over contractual delinquency for our owned andserviced with limited recourse receivables were as follows: AT DECEMBER 31, ----------------------------------------------------- 2006 2005 ------------------------- ------------------------- RECEIVABLES DELINQUENT RECEIVABLES DELINQUENT OUTSTANDING RECEIVABLES OUTSTANDING RECEIVABLES-------------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) OWNED RECEIVABLES: First mortgage(1).............................. $ 15 3.01% $ 21 8.41% Real estate secured............................ 97,761 3.54 82,826 2.72 Auto finance................................... 12,504 3.18 10,704 3.04 Credit card.................................... 27,714 4.57 24,110 3.66 Private label.................................. 2,509 5.31 2,520 5.43 Personal non-credit card....................... 21,367 10.17 19,545 9.40 -------- ----- -------- ----- Total consumer................................. 161,870 4.59 139,726 3.89 Commercial..................................... 166 - 187 - -------- ----- -------- -----Total owned receivables.......................... $162,036 4.59% $139,913 3.89% ======== ===== ======== =====RECEIVABLES SERVICED WITH LIMITED RECOURSE: Auto finance................................... $ 271 6.64% $ 1,192 7.55% Credit card.................................... 500 2.00 1,875 1.60 Personal non-credit card....................... 178 14.61 1,007 12.41 -------- ----- -------- -----Total receivables serviced with limited recourse....................................... $ 949 5.69% $ 4,074 6.01% ======== ===== ======== ===== --------------- (1) Includes our liquidating legacy first and reverse mortgage portfolios. 135 Average receivables and net charge-offs for our owned and serviced with limitedrecourse receivables were as follows: YEAR ENDED DECEMBER 31, ----------------------------------------------------- 2006 2005 ------------------------- ------------------------- AVERAGE NET AVERAGE NET RECEIVABLES CHARGE-OFFS RECEIVABLES CHARGE-OFFS-------------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) OWNED RECEIVABLES: First mortgage(1).............................. $ 18 1.28% $ 24 .90% Real estate secured............................ 92,318 1.00 73,097 .76 Auto finance................................... 11,660 3.67 9,074 3.27 Credit card.................................... 25,065 5.56 17,823 7.12 Private label.................................. 2,492 5.80 2,948 4.83 Personal non-credit card....................... 20,611 7.89 17,558 7.88 -------- ----- -------- ----- Total consumer.............................. 152,164 2.97 120,524 3.03 Commercial..................................... 177 .43 231 2.60 -------- ----- -------- -----Total owned receivables.......................... $152,341 2.97% $120,755 3.03% ======== ===== ======== =====RECEIVABLES SERVICED WITH LIMITED RECOURSE: Real estate secured............................ $ - -% $ 23 -% Auto finance................................... 720 10.28 1,863 10.90 Credit card.................................... 974 3.49 4,871 5.52 Personal non-credit card....................... 498 9.24 2,398 9.84 -------- ----- -------- -----Total receivables serviced with limited recourse....................................... $ 2,192 7.03% $ 9,155 7.73% ======== ===== ======== ===== --------------- (1) Includes our liquidating legacy first and reverse mortgage portfolios. 9. PROPERTIES AND EQUIPMENT, NET-------------------------------------------------------------------------------- AT DECEMBER 31, ------------------- DEPRECIABLE 2006 2005 LIFE----------------------------------------------------------------------------------------------- (IN MILLIONS) Land........................................................ $ 29 $ 28 -Buildings and improvements.................................. 315 288 10-40 yearsFurniture and equipment..................................... 146 376 3-10 ---- ----Total....................................................... 490 692Accumulated depreciation and amortization................... 64 234 ---- ----Properties and equipment, net............................... $426 $458 ==== ==== Depreciation and amortization expense totaled $115 million in 2006, $131 millionin 2005 and $127 million in 2004. 136 10. INTANGIBLE ASSETS-------------------------------------------------------------------------------- Intangible assets consisted of the following: ACCUMULATED CARRYINGDECEMBER 31, 2006 GROSS AMORTIZATION VALUE---------------------------------------------------------------------------------------------- (IN MILLIONS) Purchased credit card relationships and related programs.... $1,736 $ 580 $1,156Retail services merchant relationships...................... 270 203 67Other loan related relationships............................ 333 135 198Trade names................................................. 717 13 704Technology, customer lists and other contracts.............. 282 189 93 ------ ------ ------Total....................................................... $3,338 $1,120 $2,218 ====== ====== ====== ACCUMULATED CARRYINGDECEMBER 31, 2005 GROSS AMORTIZATION VALUE---------------------------------------------------------------------------------------------- (IN MILLIONS) Purchased credit card relationships and related programs.... $1,736 $442 $1,294Retail services merchant relationships...................... 270 149 121Other loan related relationships............................ 326 104 222Trade names................................................. 717 13 704Technology, customer lists and other contracts.............. 282 143 139 ------ ---- ------Total....................................................... $3,331 $851 $2,480 ====== ==== ====== During the third quarter of 2006, we completed our annual impairment test ofintangible assets. As a result of our testing, we determined that the fair valueof each intangible asset exceeded its carrying value. Therefore we haveconcluded that none of our intangible assets are impaired. Weighted-average amortization periods for our intangible assets as of December31, 2006 were as follows: (IN MONTHS)-------------------------------------------------------------------------- Purchased credit card relationships and related programs.... 106Retail services merchant relationships...................... 60Other loan related relationships............................ 109Technology, customer lists and other contracts.............. 85Intangible assets........................................... 95 Intangible amortization expense totaled $269 million in 2006, $345 million in2005 and $363 million in 2004. The trade names are not subject to amortization as we believe they haveindefinite lives. The remaining acquired intangibles are being amortized asapplicable over their estimated useful lives either on a straight-line basis orin proportion to the underlying revenues generated. These useful lives rangefrom 5 years for retail services merchant relationships to approximately 10years for certain loan related relationships. Our purchased credit cardrelationships have estimated residual values of $162 million as of December 31,2006. 137 Estimated amortization expense associated with our intangible assets for each ofthe following years is as follows: YEAR ENDING DECEMBER 31, (IN MILLIONS)--------------------------------------------------------------------------- 2007........................................................ $2532008........................................................ 2112009........................................................ 1982010........................................................ 1692011........................................................ 169Thereafter.................................................. 354 11. GOODWILL-------------------------------------------------------------------------------- Goodwill balances associated with our foreign businesses will change from periodto period due to movements in foreign exchange. Changes in estimates of the taxbasis in our assets and liabilities or other tax estimates recorded at the dateof our acquisition by HSBC or our acquisition of Metris are adjusted againstgoodwill pursuant to Statement of Financial Accounting Standards No. 109,"Accounting for Income Taxes." Changes in the carrying amount of goodwill are as follows: 2006 2005----------------------------------------------------------------------------- (IN MILLIONS) Balance at beginning of year................................ $7,003 $6,856Adjustment to Metris purchase price......................... 21 -Acquisitions - 2006 Solstice; 2005 primarily Metris......... 46 533Goodwill allocated to our European Operations sold to HBEU...................................................... (13) -Goodwill allocated to the U.K. credit card business sold to HBEU...................................................... - (218)Change in estimate of the tax basis of assets and liabilities recorded in the HSBC acquisition.............. (89) (76)Change in estimate of the tax basis of assets and liabilities recorded in the Metris acquisition............ (13) -Impact of foreign currency translation...................... 55 (92) ------ ------Balance at end of year...................................... $7,010 $7,003 ====== ====== Goodwill established as a result of our acquisition by HSBC has not beenallocated to or included in the reported results of our reportable segments asthe acquisition by HSBC was outside of the ongoing operational activities of ourreportable segments. This is consistent with management's view of our reportablesegment results. Goodwill relating to acquisitions, such as Metris and Solsticeare included in the reported respective segment results as these acquisitionsspecifically related to the operations and is consistent with management's viewof the segment results. See Note 21, "Business Segments," for furtherinformation on goodwill by reportable segment. During the third quarter of 2006, we completed our annual impairment test ofgoodwill. For purposes of this test, we assigned the goodwill established as aresult of our acquisition by HSBC to our reporting units (as defined in SFAS No.142, "Goodwill and Other Intangible Assets"). The fair value of each of thereporting units to which goodwill was assigned exceeded its carrying valueincluding goodwill, resulting in a conclusion that none of our goodwill isimpaired. As required by SFAS No. 142, "Goodwill and Other Intangible Assets," subsequentto the sale of our European Operations we performed an interim goodwillimpairment test for our remaining U.K. operations. As the estimated fair valueof our remaining U.K. operations exceeded its carrying value subsequent to thesale, we concluded that the remaining goodwill assigned to this reporting unitwas not impaired. As previously 138 reported, we continue to evaluate the scope of our U.K. operations and, as aresult, it is reasonably possible we could make changes in the future. As a result of the adverse change in the business climate experienced by ourMortgage Services business in the second half of 2006, we performed an interimgoodwill impairment test for this reporting unit as of December 31, 2006. As theestimated fair value of our Mortgage Services business exceeded our carryingvalue, we concluded that the remaining goodwill assigned to this reporting unitwas not impaired. We are currently evaluating the most effective structure forour Mortgage Services operations which, depending upon the outcome, may changethe scope and size of this business going forward. 12. COMMERCIAL PAPER, BANK AND OTHER BORROWINGS-------------------------------------------------------------------------------- COMMERCIAL BANK AND OTHER PAPER BORROWINGS TOTAL------------------------------------------------------------------------------------------------- (IN MILLIONS) 2006Balance................................................... $11,012 $ 43 $11,055Highest aggregate month-end balance....................... 17,530Average borrowings........................................ 12,344 494 12,838Weighted-average interest rate: At year-end............................................. 5.3% 2.8% 5.3% Paid during year........................................ 5.0 3.3 4.92005Balance................................................... $11,360 $ 94 $11,454Highest aggregate month-end balance....................... 14,801Average borrowings........................................ 11,877 111 11,988Weighted-average interest rate: At year-end............................................. 4.2% 3.9% 4.2% Paid during year........................................ 3.4 2.5 3.42004Balance................................................... $ 8,969 $ 91 $ 9,060Highest aggregate month-end balance....................... 16,173Average borrowings........................................ 11,403 126 11,529Weighted-average interest rate: At year-end............................................. 2.2% 2.5% 2.2% Paid during year........................................ 1.8 1.9 1.8 Commercial paper included obligations of foreign subsidiaries of $223 million atDecember 31, 2006, $442 million at December 31, 2005 and $248 million atDecember 31, 2004. Bank and other borrowings included obligations of foreignsubsidiaries of $35 million at December 31, 2006, $55 million at December 31,2005 and $52 million at December 31, 2004. At December 31, 2006 deposits of $36million, primarily held by our U.K. business, have been classified as bank andother borrowings due to their short-term nature. Prior period amounts have beenreclassified to conform to the current presentation. Interest expense for commercial paper, bank and other borrowings totaled $628million in 2006, $402 million in 2005 and $213 million in 2004. We maintain various bank credit agreements primarily to support commercial paperborrowings and also to provide funding in the U.K. We had committed back-uplines and other bank lines of $17.0 billion at December 31, 2006, including $7.7billion with HSBC and subsidiaries and $16.3 billion at December 31, 2005,including $8.0 billion with HSBC and subsidiaries. Our U.K. subsidiary had drawn$4.3 billion at December 31, 2006 and $4.2 billion on its bank lines of creditat December 31, 2005 which are included in 139 Due to Affiliates for both periods. Formal credit lines are reviewed annuallyand expire at various dates through 2009. Borrowings under these lines generallyare available at a surcharge over LIBOR. The most restrictive financialcovenants contained in the back-up line agreements that could restrictavailability is an obligation to maintain minimum common and preferredshareholder's equity of $11.0 billion which is substantially below our December31, 2006 common and preferred shareholders' equity balance of $20.1 billion.Because our U.K. subsidiary receives its funding directly from HSBC, weeliminated all third-party back-up lines at our U.K. subsidiary in 2004. Annualcommitment fee requirements to support availability of these lines at December31, 2006 totaled $8 million and included $1 million for the HSBC lines. Annualcommitment fee requirements to support availability of these lines at December31, 2005 totaled $9 million and included $2 million for the HSBC lines. 13. LONG TERM DEBT (WITH ORIGINAL MATURITIES OVER ONE YEAR)-------------------------------------------------------------------------------- AT DECEMBER 31, -------------------- 2006 2005---------------------------------------------------------------------------------- (IN MILLIONS) SENIOR DEBT FIXED RATE: 8.875% Adjustable Conversion-Rate Equity Security Units................................................. $ 542 $ 541 Secured financings: 3.00% to 3.99%; due 2007 to 2008..................... 195 3,947 4.00% to 4.49%; due 2007 to 2010..................... 1,312 2,254 4.50% to 4.99%; due 2007 to 2011..................... 3,956 1,024 Other fixed rate senior debt: 2.40% to 3.99%; due 2007 to 2010..................... 6,880 2,864 4.00% to 4.99%; due 2007 to 2023..................... 16,806 21,902 5.00% to 5.49%; due 2007 to 2023..................... 16,657 6,188 5.50% to 5.99%; due 2007 to 2024..................... 16,031 7,188 6.00% to 6.49%; due 2007 to 2033..................... 9,591 8,453 6.50% to 6.99%; due 2007 to 2033..................... 4,981 8,076 7.00% to 7.49%; due 2007 to 2032..................... 3,364 4,587 7.50% to 7.99%; due 2007 to 2032..................... 3,249 4,906 8.00% to 9.00%; due 2007 to 2012..................... 1,263 1,244 VARIABLE INTEREST RATE: Secured financings - 2.63% to 5.28%; due 2007 to 2010.................................................. 16,364 7,893 Other variable interest rate senior debt - 2.16% to 6.73%; due 2007 to 2018............................... 24,666 21,488JUNIOR SUBORDINATED NOTES ISSUED TO CAPITAL TRUSTS.......... 1,031 1,443UNAMORTIZED DISCOUNT........................................ (377) (341)HSBC ACQUISITION PURCHASE ACCOUNTING FAIR VALUE ADJUSTMENTS............................................... 1,079 1,506 -------- --------TOTAL LONG TERM DEBT........................................ $127,590 $105,163 ======== ======== HSBC acquisition purchase accounting fair value adjustments representadjustments which have been "pushed down" to record our long term debt at fairvalue at the date of our acquisition by HSBC. Secured financings of $21.8 billion at December 31, 2006 are secured by $28.1billion of real estate secured, auto finance, credit card and personalnon-credit card receivables. Secured financings of $15.1 billion at December 31,2005 are secured by $19.7 billion of real estate secured, auto finance andcredit card receivables. 140 At December 31, 2006, long term debt included carrying value adjustmentsrelating to derivative financial instruments which decreased the debt balance by$1.3 billion and a foreign currency translation adjustment relating to ourforeign denominated debt which increased the debt balance by $2.4 billion. AtDecember 31, 2005, long term debt included carrying value adjustments relatingto derivative financial instruments which decreased the debt balance by $862million and a foreign currency translation adjustment relating to our foreigndenominated debt which increased the debt balance by $272 million. Weighted-average interest rates were 5.5 percent at December 31, 2006 and 5.3percent at December 31, 2005 (excluding HSBC acquisition purchase accountingadjustments). Interest expense for long term debt was $5.8 billion in 2006, $3.7billion in 2005, $2.6 billion in 2004. The most restrictive financial covenantscontained in the terms of our debt agreements are the maintenance of a minimumcommon and preferred shareholder's equity of $11.0 billion which issubstantially lower than our common and preferred shareholders' equity balanceof $20.1 billion at December 31, 2006. Debt denominated in a foreign currency isincluded in the applicable rate category based on the effective U.S. dollarequivalent rate as summarized in Note 14, "Derivative Financial Instruments." In 2002, we issued $541 million of 8.875 percent Adjustable Conversion-RateEquity Security Units. Each Adjustable Conversion-Rate Equity Security Unitconsisted initially of a contract to purchase, for $25, a number of shares ofHSBC Finance Corporation (formerly known as Household International, Inc.)common stock on February 15, 2006 and a senior note issued by our then whollyowned subsidiary, Household Finance Corporation, with a principal amount of $25.In November 2005 we remarketed the notes and reset the rate. All remaining stockpurchase contracts matured on February 15, 2006 and HSBC issued ordinary sharesfor the remaining stock purchase contracts on that date. The following table summarizes our junior subordinated notes issued to capitaltrusts ("Junior Subordinated Notes") and the related company obligatedmandatorily redeemable preferred securities ("Preferred Securities"): HOUSEHOLD CAPITAL TRUST IX ("HCT IX")------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) JUNIOR SUBORDINATED NOTES: Principal balance......................................... $ 1,031 Interest rate............................................. 5.91% Redeemable by issuer...................................... November 2015 Stated maturity........................................... November 2035PREFERRED SECURITIES: Rate...................................................... 5.91% Face value................................................ $ 1,000 Issue date................................................ November 2005 In the first quarter of 2006, we redeemed the junior subordinated notes issuedto Household Capital Trust VI with an outstanding principal balance of $206million. In the fourth quarter of 2006, we redeemed the junior subordinatednotes issued to Household Capital Trust VII with an outstanding principalbalance of $206 million. The Preferred Securities must be redeemed when the Junior Subordinated Notes arepaid. The Junior Subordinated Notes have a stated maturity date, but areredeemable by us, in whole or in part, beginning on the dates indicated above atwhich time the Preferred Securities are callable at par ($25 per PreferredSecurity) plus accrued and unpaid dividends. Dividends on the PreferredSecurities are cumulative, payable quarterly in arrears, and are deferrable atour option for up to five years. We cannot pay dividends on our preferred andcommon stocks during such deferments. The Preferred Securities have aliquidation value of $25 per preferred security. Our obligations with respect tothe Junior Subordinated Notes, when considered 141 together with certain undertakings of HSBC Finance Corporation with respect tothe Trusts, constitute full and unconditional guarantees by us of the Trusts'obligations under the respective Preferred Securities. Maturities of long term debt at December 31, 2006 were as follows: (IN MILLIONS)--------------------------------------------------------------------------- 2007........................................................ $ 26,5552008........................................................ 22,1362009........................................................ 17,1282010........................................................ 12,8242011........................................................ 13,960Thereafter.................................................. 34,987 --------Total....................................................... $127,590 ======== Certain components of our long term debt may be redeemed prior to its statedmaturity. 14. DERIVATIVE FINANCIAL INSTRUMENTS-------------------------------------------------------------------------------- Our business activities involve analysis, evaluation, acceptance and managementof some degree of risk or combination of risks. Accordingly, we havecomprehensive risk management policies to address potential financial risks,which include credit risk (which includes counterparty credit risk), liquidityrisk, market risk, and operational risks. Our risk management policy is designedto identify and analyze these risks, to set appropriate limits and controls, andto monitor the risks and limits continually by means of reliable and up-to-dateadministrative and information systems. Our risk management policies areprimarily carried out in accordance with practice and limits set by the HSBCGroup Management Board. The HSBC Finance Corporation Asset Liability Committee("ALCO") meets regularly to review risks and approve appropriate risk managementstrategies within the limits established by the HSBC Group Management Board.Additionally, our Audit Committee receives regular reports on our liquiditypositions in relation to the established limits. In accordance with the policiesand strategies established by ALCO, in the normal course of business, we enterinto various transactions involving derivative financial instruments. Thesederivative financial instruments primarily are used to manage our market risk.For further information on our strategies for managing interest rate and foreignexchange rate risk, see the "Risk Management" section within our Management'sDiscussion and Analysis of Financial Condition and Results of Operations. OBJECTIVES FOR HOLDING DERIVATIVE FINANCIAL INSTRUMENTS Market risk (whichincludes interest rate and foreign currency exchange risks) is the possibilitythat a change in interest rates or foreign exchange rates will cause a financialinstrument to decrease in value or become more costly to settle. Customer demandfor our receivable products shifts between fixed rate and floating rateproducts, based on market conditions and preferences. These shifts in loanproducts result in different funding strategies and produce different interestrate risk exposures. We maintain an overall risk management strategy that uses avariety of interest rate and currency derivative financial instruments tomitigate our exposure to fluctuations caused by changes in interest rates andcurrency exchange rates. We manage our exposure to interest rate risk primarilythrough the use of interest rate swaps, but also use forwards, futures, options,and other risk management instruments. We manage our exposure to foreigncurrency exchange risk primarily through the use of currency swaps, options andforwards. We do not use leveraged derivative financial instruments for interestrate risk management. Interest rate swaps are contractual agreements between two counterparties forthe exchange of periodic interest payments generally based on a notionalprincipal amount and agreed-upon fixed or floating rates. The majority of ourinterest rate swaps are used to manage our exposure to changes in interest ratesby converting floating rate debt to fixed rate or by converting fixed rate debtto floating rate. We have also entered into currency swaps to convert bothprincipal and interest payments on debt issued from one currency to theappropriate functional currency. 142 Forwards and futures are agreements between two parties, committing one to selland the other to buy a specific quantity of an instrument on some future date.The parties agree to buy or sell at a specified price in the future, and theirprofit or loss is determined by the difference between the arranged price andthe level of the spot price when the contract is settled. We have used bothinterest rate and foreign exchange rate forward contracts as well as interestrate futures contracts. We use foreign exchange rate forward contracts to reduceour exposure to foreign currency exchange risk. Interest rate forward andfutures contracts are used to hedge resets of interest rates on our floatingrate assets and liabilities. Cash requirements for forward contracts include thereceipt or payment of cash upon the sale or purchase of the instrument. Purchased options grant the purchaser the right, but not the obligation, toeither purchase or sell a financial instrument at a specified price within aspecified period. The seller of the option has written a contract which createsan obligation to either sell or purchase the financial instrument at theagreed-upon price if, and when, the purchaser exercises the option. We use capsto limit the risk associated with an increase in rates and floors to limit therisk associated with a decrease in rates. CREDIT RISK By utilizing derivative financial instruments, we are exposed tocounterparty credit risk. Counterparty credit risk is our primary exposure onour interest rate swap portfolio. Counterparty credit risk is the risk that thecounterparty to a transaction fails to perform according to the terms of thecontract. We control the counterparty credit (or repayment) risk in derivativeinstruments through established credit approvals, risk control limits,collateral, and ongoing monitoring procedures. Our exposure to credit risk forfutures is limited as these contracts are traded on organized exchanges. Eachday, changes in futures contract values are settled in cash. In contrast, swapagreements and forward contracts have credit risk relating to the performance ofthe counterparty. We utilize an affiliate, HSBC Bank USA, as the primaryprovider of new domestic derivative products. We have never suffered a loss dueto counterparty failure. At December 31, 2006, most of our existing derivative contracts are with HSBCsubsidiaries, making them our primary counterparty in derivative transactions.Most swap agreements require that payments be made to, or received from, thecounterparty when the fair value of the agreement reaches a certain level.Generally, third-party swap counterparties provide collateral in the form ofcash which is recorded in our balance sheet as other assets or derivativerelated liabilities and totaled a net liability of $158 million at December 31,2006 for third-party counterparties. Beginning in the second quarter of 2006,when the fair value of our agreements with affiliate counterparties requires theposting of collateral by the affiliate, it is provided in the form of cash andrecorded on the balance sheet, consistent with third party arrangements.Previously, the posting of collateral by affiliates was provided in the form ofsecurities, which were not recorded on our balance sheet. Also during 2006, welowered the fair value of our agreements with affiliate counterparties abovewhich collateral is required to be posted to $75 million. At December 31, 2006,the fair value of our agreements with affiliate counterparties required theaffiliate to provide cash collateral of $1.0 billion which is recorded in ourbalance sheet as a component of derivative related liabilities. At December 31,2006, we had derivative contracts with a notional value of approximately $94.4billion, including $86.3 billion outstanding with HSBC Bank USA. Derivativefinancial instruments are generally expressed in terms of notional principal orcontract amounts which are much larger than the amounts potentially at risk fornonpayment by counterparties. FAIR VALUE AND CASH FLOW HEDGES To manage our exposure to changes in interestrates, we enter into interest rate swap agreements and currency swaps which havebeen designated as fair value or cash flow hedges under SFAS No. 133. Prior tothe acquisition by HSBC, the majority of our fair value and cash flow hedgeswere effective hedges which qualified for the shortcut method of accounting.Under the Financial Accounting Standards Board's interpretations of SFAS No.133, the shortcut method of accounting was no longer allowed for interest rateswaps which were outstanding at the time of the acquisition by HSBC. As a resultof the acquisition, we were required to reestablish and formally document thehedging relationship associated with all of our fair value and cash flow hedginginstruments and assess the effectiveness of each hedging relationship, both atinception of the hedge relationship and on an ongoing basis. Due to deficienciesin our contemporaneous hedge documentation at the time of acquisition, we lostthe ability to apply hedge accounting to our entire cash flow and fair valuehedging portfolio that existed at the time of acquisition by HSBC. During 2005,we reestablished hedge treatment under the long haul method of accounting for asignificant number of the 143 derivatives in this portfolio. We currently utilize the long-haul method to testeffectiveness of all derivatives designated as hedges. Fair value hedges include interest rate swaps which convert our fixed rate debtto variable rate debt and currency swaps which convert debt issued from onecurrency into pay variable debt of the appropriate functional currency. Hedgeineffectiveness associated with fair value hedges is recorded in other revenuesas derivative income and was a gain of $252 million ($159 million after tax) in2006, a gain of $117 million ($75 million after tax) in 2005 and a gain of $.6million ($.4 million after tax) in 2004. All of our fair value hedges wereassociated with debt during 2006, 2005 and 2004. We recorded fair valueadjustments for unexpired fair value hedges which decreased the carrying valueof our debt by $292 million at December 31, 2006 and $695 million at December31, 2005. Cash flow hedges include interest rate swaps which convert our variable ratedebt to fixed rate debt and currency swaps which convert debt issued from onecurrency into pay fixed debt of the appropriate functional currency. Gains and(losses) on unexpired derivative instruments designated as cash flow hedges (netof tax) are reported in accumulated other comprehensive income and totaled again of $256 million ($161 million after tax) at December 31, 2006 and $237million ($151 million after tax) at December 31, 2005. We expect $121 million($76 million after tax) of currently unrealized net gains will be reclassifiedto earnings within one year, however, these unrealized gains will be offset byincreased interest expense associated with the variable cash flows of the hedgeditems and will result in no significant net economic impact to our earnings.Hedge ineffectiveness associated with cash flow hedges recorded in otherrevenues as derivative income was a loss of $83 million ($53 million after tax)in 2006, a loss of $76 million ($49 million after tax) in 2005 and wasimmaterial in 2004. At December 31, 2006, $1,461 million of derivative instruments, at fair value,were recorded as derivative financial assets and $58 million as derivativerelated liabilities. At December 31, 2005, $234 million of derivativeinstruments, at fair value, were recorded in derivative financial assets and$292 million in derivative related liabilities. Information related to deferred gains and losses before taxes on terminatedderivatives was as follows: 2006 2005---------------------------------------------------------------------------------- (IN MILLIONS) Deferred gains.............................................. $ 156 $ 180Deferred losses............................................. 176 196Weighted-average amortization period: Deferred gains............................................ 7 years 6 years Deferred losses........................................... 6 years 6 yearsIncreases (decreases) to carrying values resulting from net deferred gains and losses: Long term debt............................................ $ (47) $ (25) Accumulated other comprehensive income.................... 27 9 144 Information related to deferred gains and losses before taxes on discontinuedhedges was as follows: 2006 2005---------------------------------------------------------------------------------- (IN MILLIONS) Deferred gains.............................................. $ 269 $ 331Deferred losses............................................. 1,052 232Weighted-average amortization period: Deferred gains............................................ 5 years 4 years Deferred losses........................................... 5 years 5 yearsIncreases (decreases) to carrying values resulting from net deferred gains and losses: Long term debt............................................ $ (941) $ (76) Accumulated other comprehensive income.................... 158 175 Amortization of net deferred gains (losses) totaled ($80) million in 2006, ($12)million in 2005, ($23) million in 2004. NON-QUALIFYING HEDGING ACTIVITIES We may use forward rate agreements, interestrate caps, exchange traded options, and interest rate and currency swaps whichare not designated as hedges under SFAS No. 133, either because they do notqualify as effective hedges or because we lost the ability to apply hedgeaccounting following our acquisition by HSBC as discussed above. These financialinstruments are economic hedges but do not qualify for hedge accounting and areprimarily used to minimize our exposure to changes in interest rates andcurrency exchange rates. Unrealized and realized gains (losses) on derivativeswhich were not designated as hedges are reported in other revenues as derivativeincome and totaled $21 million ($14 million after tax) in 2006, $208 million($133 million after tax) in 2005 and $510 million ($324 million after tax) in2004. DERIVATIVE INCOME Derivative income as discussed above includes realized andunrealized gains and losses on derivatives which do not qualify as effectivehedges under SFAS No. 133 as well as the ineffectiveness on derivativesassociated with our qualifying hedges and is summarized in the table below: 2006 2005 2004-------------------------------------------------------------------------------- (IN MILLIONS) Net realized gains (losses)................................. $ (7) $ 52 $ 68Mark-to-market on derivatives which do not qualify as effective hedges.......................................... 28 156 442Ineffectiveness............................................. 169 41 1 ---- ---- ----Total....................................................... $190 $249 $511 ==== ==== ==== Net income volatility, whether based on changes in interest rates for swapswhich do not qualify for hedge accounting or ineffectiveness recorded on ourqualifying hedges under the long-haul method of accounting, impacts thecomparability of our reported results between periods. Accordingly, derivativeincome for the year ended December 31, 2006 should not be considered indicativeof the results for any future periods. 145 DERIVATIVE FINANCIAL INSTRUMENTS The following table summarizes derivativefinancial instrument activity: EXCHANGE TRADED NON-EXCHANGE TRADED ------------------------------ ------------------------------------------ INTEREST RATE FOREIGN EXCHANGE FUTURES CONTRACTS INTEREST RATE CONTRACTS ------------------ OPTIONS RATE CURRENCY -------------------- PURCHASED SOLD PURCHASED SWAPS SWAPS PURCHASED SOLD------------------------------------------------------------------------------------------------------------- (IN MILLIONS) 2006Notional amount, 2005........... $ - $ - $ 4,870 $ 49,468 $21,719 $ 1,633 $ 465New contracts................... - - - - - - -New contracts purchased from subsidiaries of HSBC........... - - 20,205 61,205 8,687 2,071 5,694Matured or expired contracts.... - - (17,675) (5,319) (4,291) (2,851) (5,710)Terminated contracts............ - - (2,800) (49,571) - - -Change in Notional amount....... - - - 1,217 (1,274) - -Change in foreign exchange rate........................... - - - - - 221 134In-substance maturities(1)...... - - - - - - -Assignment of contracts to subsidiaries of HSBC........... - - - - - - - - - - - - - - ---- ---- ------- -------- ------- -------- --------Notional amount, 2006........... $ - $ - $ 4,600 $ 57,000 $24,841 $ 1,074 $ 583 ==== ==== ======= ======== ======= ======== ========Fair value, 2006(3): Fair value hedges.............. $ - $ - $ - $ (740) $ (26) $ - $ - Cash flow hedges............... - - - 14 1,976 - - Net investment in foreign operations................... - - - - - - - Non-hedging derivatives........ - - - (64) 244 4 (6) ---- ---- ------- -------- ------- -------- -------- Total.......................... $ - $ - $ - $ (790) $ 2,194 $ 4 $ (6) ==== ==== ======= ======== ======= ======== ========2005Notional amount, 2004........... $ - $ - $ 1,691 $ 45,253 $18,150 $ 1,146 $ 614New contracts................... - - - 1 - - -New contracts purchased from subsidiaries of HSBC........... - - 5,570 25,373 6,824 1,113 4,860Matured or expired contracts.... - - (2,391) (5,657) (3,255) (482) (4,762)Terminated contracts............ - - - (15,502) - (144) (247)In-substance maturities(1)...... - - - - - - -Assignment of contracts to subsidiaries of HSBC........... - - - - - - - - - - - - - - ---- ---- ------- -------- ------- -------- --------Notional amount, 2005........... $ - $ - $ 4,870 $ 49,468 $21,719 $ 1,633 $ 465 ==== ==== ======= ======== ======= ======== ========Fair value, 2005(3): Fair value hedges.............. $ - $ - $ - $ (612) $ (178) $ - $ - Cash flow hedges............... - - - 103 658 (22) - Net investment in foreign operations................... - - - - - - - Non-hedging derivatives........ - - - (31) 24 - - ---- ---- ------- -------- ------- -------- -------- Total.......................... $ - $ - $ - $ (540) $ 504 $ (22) $ - ==== ==== ======= ======== ======= ======== ========2004Notional amount, 2003........... $ - $ - $ 1,900 $ 41,312 $16,538 $ 1,223 $ 594New contracts................... - - - - - 1,628 1,432New contracts purchased from subsidiaries of HSBC........... - - 3,491 29,607 11,457 17,988 8,778Matured or expired contracts.... - - (3,700) (7,568) (1,407) (14,343) (4,840)Terminated contracts............ - - - (7,211) (5,333) - -In-substance maturities(1)...... - - - - - (5,350) (5,350)Assignment of contracts to subsidiaries of HSBC........... - - - (10,887) (3,105) - - ---- ---- ------- -------- ------- -------- --------Notional amount, 2004........... $ - $ - $ 1,691 $ 45,253 $18,150 $ 1,146 $ 614 ==== ==== ======= ======== ======= ======== ========Fair value, 2004(3): Fair value hedges.............. $ - $ - $ - $ (46) $ - $ - $ (2) Cash flow hedges............... - - - 12 403 24 - Non-hedging derivatives........ - - - (81) 3,670 - - ---- ---- ------- -------- ------- -------- -------- Total.......................... $ - $ - $ - $ (115) $ 4,073 $ 24 $ (2) ==== ==== ======= ======== ======= ======== ======== NON-EXCHANGE TRADED ---------------------------- INTEREST RATE FORWARD CONTRACTS CAPS ------------------ AND PURCHASED SOLD FLOORS TOTAL-------------------------------- --------------------------------------- (IN MILLIONS) 2006Notional amount, 2005........... $ 172 $ - $10,700 $ 89,027New contracts................... - - - -New contracts purchased from subsidiaries of HSBC........... 1,344 - 65 99,271Matured or expired contracts.... - - (4,505) (40,351)Terminated contracts............ (1,516) - - (53,887)Change in Notional amount....... - - - (57)Change in foreign exchange rate........................... - - - 355In-substance maturities(1)...... - - - -Assignment of contracts to subsidiaries of HSBC........... - - - - - - - - ------- ---- ------- --------Notional amount, 2006........... $ 0 $ - $ 6,260 $ 94,358 ======= ==== ======= ========Fair value, 2006(3): Fair value hedges.............. $ - $ - $ - $ (766) Cash flow hedges............... - - - 1,990 Net investment in foreign operations................... - - - - Non-hedging derivatives........ - - 1 179 ------- ---- ------- -------- Total.......................... $ - $ - $ 1 $ 1,403 ======= ==== ======= ========2005Notional amount, 2004........... $ 374 $ - $ 4,380 $ 71,608New contracts................... - - 30 31New contracts purchased from subsidiaries of HSBC........... 1,707 - 8,433 53,880Matured or expired contracts.... - - (1,894) (18,441)Terminated contracts............ (1,909) - (249) (18,051)In-substance maturities(1)...... - - - -Assignment of contracts to subsidiaries of HSBC........... - - - - - - - - ------- ---- ------- --------Notional amount, 2005........... $ 172 $ - $10,700 $ 89,027 ======= ==== ======= ========Fair value, 2005(3): Fair value hedges.............. $ - $ - $ - $ (790) Cash flow hedges............... - - - 739 Net investment in foreign operations................... - - - - Non-hedging derivatives........ - - - (7) ------- ---- ------- -------- Total.......................... $ - $ - $ - $ (58) ======= ==== ======= ========2004Notional amount, 2003........... $ 174 $ - $ 6,627 $ 68,368New contracts................... - - - 3,060New contracts purchased from subsidiaries of HSBC........... 1,643 - 444 73,408Matured or expired contracts.... (1,443) - (2,691) (35,992)Terminated contracts............ - - - (12,544)In-substance maturities(1)...... - - - (10,700)Assignment of contracts to subsidiaries of HSBC........... - - - (13,992) ------- ---- ------- --------Notional amount, 2004........... $ 374 $ - $ 4,380 $ 71,608 ======= ==== ======= ========Fair value, 2004(3): Fair value hedges.............. $ - $ - $ - $ (48) Cash flow hedges............... - - - 439 Non-hedging derivatives........ - - - 3,589 ------- ---- ------- -------- Total.......................... $ - $ - $ - $ 3,980 ======= ==== ======= ======== --------------- (1) Represent contracts terminated as the market execution technique of closing the transaction either (a) just prior to maturity to avoid delivery of the underlying instrument or (b) at the maturity of the underlying items being hedged. (2) Under the Financial Accounting Standards Board's interpretations of SFAS No. 133, the shortcut method of accounting was no longer allowed for interest rate swaps which were outstanding at the time of the acquisition by HSBC. (3) (Bracketed) unbracketed amounts represent amounts to be (paid) received by us had these positions been closed out at the respective balance sheet date. Bracketed amounts do not necessarily represent risk of loss as the fair value of the derivative financial instrument and the items being hedged must be evaluated together. See Note 23, "Fair Value of Financial Instruments," for further discussion of the relationship between the fair value of our assets and liabilities. 146 We operate in three functional currencies, the U.S. dollar, the British poundand the Canadian dollar. The U.S. dollar is the functional currency forexchange-traded interest rate futures contracts and options. Non-exchange tradedinstruments are restated in U.S. dollars by country as follows: FOREIGN EXCHANGE INTEREST RATE RATE CONTRACTS FORWARD OTHER RISK INTEREST RATE CURRENCY ---------------- CONTRACTS MANAGEMENT SWAPS SWAPS PURCHASED SOLD PURCHASED INSTRUMENTS--------------------------------------------------------------------------------------------------------- (IN MILLIONS) 2006United States................. $54,703 $24,841 $1,068 $571 $ - $ 6,260Canada........................ 1,207 - 6 12 - -United Kingdom................ 1,090 - - - - - ------- ------- ------ ---- ---- ------- $57,000 $24,841 $1,074 $583 $ - $ 6,260 ======= ======= ====== ==== ==== =======2005United States................. $47,693 $21,175 $1,622 $465 $ - $10,700Canada........................ 855 - 11 - 172 -United Kingdom................ 920 544 - - - - ------- ------- ------ ---- ---- ------- $49,468 $21,719 $1,633 $465 $172 $10,700 ======= ======= ====== ==== ==== =======2004United States................. $42,365 $17,543 $1,146 $599 $ - $ 4,345Canada........................ 582 - - 15 374 -United Kingdom................ 2,306 607 - - - 35 ------- ------- ------ ---- ---- ------- $45,253 $18,150 $1,146 $614 $374 $ 4,380 ======= ======= ====== ==== ==== ======= Long term debt hedged using derivative financial instruments which qualify forhedge accounting at December 31, 2006 included debt of $51.0 billion hedged byinterest rate swaps and debt of $22.7 billion hedged by currency swaps. Thesignificant terms of the derivative financial instruments have been designed tomatch those of the related asset or liability. The following table summarizes the maturities and related weighted-averagereceive/pay rates of interest rate swaps outstanding at December 31, 2006: 2007 2008 2009 2010 2011 2012 THEREAFTER TOTAL------------------------------------------------------------------------------------------------------------ (DOLLARS ARE IN MILLIONS) PAY A FIXED RATE/RECEIVE A FLOATING RATE: Notional value.............. $8,650 $10,220 $ 6,963 $ 232 $ 153 $ 15 $ 436 $26,669 Weighted-average receive rate...................... 5.34% 5.36% 5.05% 2.08% 2.08% 2.06% 2.14% 5.17% Weighted-average pay rate... 4.75 5.03 5.17 4.10 4.36 4.21 4.98 4.96 ------ ------- ------- ------ ------ ------ ------- -------PAY A FLOATING RATE/RECEIVE A FIXED RATE: Notional value.............. $ 484 $ 2,584 $ 5,657 $3,119 $5,550 $3,159 $ 9,778 $30,331 Weighted-average receive rate...................... 3.13 3.71 4.19 4.28 4.55 4.45 5.18 4.56 Weighted-average pay rate... 5.38 5.30 5.12 5.38 5.45 5.37 5.31 5.31 ------ ------- ------- ------ ------ ------ ------- ------- Total notional value........ $9,134 $12,804 $12,620 $3,351 $5,703 $3,174 $10,214 $57,000 ====== ======= ======= ====== ====== ====== ======= =======TOTAL WEIGHTED-AVERAGE RATES ON SWAPS: Receive rate................ 5.22% 5.03% 4.67% 4.13% 4.48% 4.44% 5.05% 4.84% Pay rate.................... 4.78 5.08 5.15 5.29 5.42 5.37 5.29 5.15 147 The floating rates that we pay or receive are based on spot rates fromindependent market sources for the index contained in each interest rate swapcontract, which generally are based on either 1, 3 or 6-month LIBOR. Thesecurrent floating rates are different than the floating rates in effect when thecontracts were initiated. Changes in spot rates impact the variable rateinformation disclosed above. However, these changes in spot rates also impactthe interest rate on the underlying assets or liabilities. In addition to the information included in the tables above, we had unusedcommitments to extend credit related to real estate secured loans totaling $1.4billion at December 31, 2006 and $1.4 billion at December 31, 2005. Commitmentsto extend credit are agreements, with fixed expiration dates, to lend to acustomer as long as there is no violation of any condition established in theagreement. These commitments are considered derivative instruments in accordancewith SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments andHedging Activities" ("SFAS No. 149) and, as a result, are recorded on ourbalance sheet at fair market value which resulted in a liability of $2.7 millionat December 31, 2006 and a liability of $.3 million at December 31 2005. We also had outstanding forward sales commitments related to real estate securedloans totaling $607 million at December 31, 2006 and $450 million as of December31, 2005. Forward sales commitments are considered derivative instruments underSFAS No. 149 and, as a result, are recorded on our balance sheet at fair marketvalue which resulted in an asset of $1.4 million at December 31, 2006 and anasset of $.4 million at December 31, 2005. 15. INCOME TAXES-------------------------------------------------------------------------------- Total income taxes were: YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 2006 2005 2004---------------------------------------------------------------------------------------------------- (IN MILLIONS) Provision for income taxes related to operations........ $ 844 $891 $1,000Income taxes related to adjustments included in common shareholder's equity: Unrealized gains (losses) on investments and interest-only strip receivables, net............... (11) (29) (71) Unrealized gains (losses) on cash flow hedging instruments........................................ (192) 74 61 Minimum pension liability............................. - 2 (2) Adjustment to initially apply FASB Statement No. 158................................................ 1 - - Foreign currency translation adjustments.............. (9) (6) 12 Exercise of stock based compensation.................. (21) (9) (18) Tax on sale of European Operations to affiliate....... 3 - - Tax on sale of U.K. credit card business to affiliate.......................................... - (21) - ----- ---- ------Total................................................... $ 615 $902 $ 982 ===== ==== ====== 148 Provisions for income taxes related to operations were: YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 2006 2005 2004---------------------------------------------------------------------------------------------------- (IN MILLIONS) CURRENTUnited States........................................... $1,396 $1,253 $ 593Foreign................................................. 8 4 59 ------ ------ ------Total current........................................... 1,404 1,257 652 ------ ------ ------DEFERREDUnited States........................................... (541) (396) 348Foreign................................................. (19) 30 - ------ ------ ------Total deferred.......................................... (560) (366) 348 ------ ------ ------Total income taxes...................................... $ 844 $ 891 $1,000 ====== ====== ====== The significant components of deferred provisions attributable to income fromoperations were: YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 2006 2005 2004---------------------------------------------------------------------------------------------------- (IN MILLIONS) Deferred income tax (benefit) provision (excluding the effects of other components).......................... $(566) $(342) $348Adjustment of valuation allowance....................... 2 (2) -Change in operating loss carryforwards.................. 8 (12) -Adjustment to statutory tax rate........................ (4) (10) - ----- ----- ----Deferred income tax provision........................... $(560) $(366) $348 ===== ===== ==== Income before income taxes were: YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 2006 2005 2004---------------------------------------------------------------------------------------------------- (IN MILLIONS) United States........................................... $2,361 $2,560 $2,786Foreign................................................. (74) 103 154 ------ ------ ------Total income before income taxes........................ $2,287 $2,663 $2,940 ====== ====== ====== Effective tax rates are analyzed as follows: YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 2006 2005 2004---------------------------------------------------------------------------------------------------- (IN MILLIONS) Statutory Federal income tax rate....................... 35.0% 35.0% 35.0%Increase (decrease) in rate resulting from: State and local taxes, net of Federal benefit......... 4.1 .9 1.4 Low income housing and other tax credits.............. (3.5) (3.2) (2.9) Other................................................. 1.3 .8 .5 ---- ---- ----Effective tax rate...................................... 36.9% 33.5% 34.0% ==== ==== ==== 149 Temporary differences which gave rise to a significant portion of deferred taxassets and liabilities were as follows: AT DECEMBER 31, --------------- 2006 2005----------------------------------------------------------------------------- (IN MILLIONS) DEFERRED TAX ASSETSCredit loss reserves........................................ $2,053 $1,438Other reserves.............................................. 84 129Market value adjustment..................................... 311 95Other....................................................... 549 509 ------ ------Total deferred tax assets................................... 2,997 2,171Valuation allowance......................................... (25) (28) ------ ------Total deferred tax assets net of valuation allowance........ 2,972 2,143 ------ ------DEFERRED TAX LIABILITIESIntangibles................................................. 838 779Fee income.................................................. 568 545Deferred loan origination costs............................. 312 239Receivables................................................. 97 163Other....................................................... 181 262 ------ ------Total deferred tax liabilities.............................. 1,996 1,988 ------ ------Net deferred tax asset...................................... $ 976 $ 155 ====== ====== Based upon the level of historical taxable income and the reversal of thedeferred tax liabilities over the periods over which the deferred tax assets aredeductible, management believes that it is more likely than not we would realizethe benefits of these deductible differences net of the valuation allowancenoted above. Provision for U.S. income tax had not been made on net undistributed earnings offoreign subsidiaries of $178 million at December 31, 2006 and $293 million atDecember 31, 2005. We have determined that no U.S. tax liability will arise uponrepatriation of these earnings. The American Jobs Creation Act of 2004 (the "AJCA") included provisions to allowa deduction of 85% of certain foreign earnings that are repatriated in 2004 or2005. We elected to apply this provision to a $489 million distribution inDecember 2005 by our U.K. subsidiary. Tax of $26 million related to thisdistribution is included as part of the current 2005 U.S. tax expense shownabove. At December 31, 2006, we had net operating loss carryforwards of $740 millionfor state tax purposes which expire as follows: $226 million in 2007-2011; $162million in 2012-2016; $201 million in 2017-2021 and $151 million in 2022 andforward. 16. REDEEMABLE PREFERRED STOCK-------------------------------------------------------------------------------- On December 15, 2005, we issued four shares of common stock to HINO in exchangefor the Series A Preferred Stock. See Note 18, "Related Party Transactions," forfurther discussion. In June 2005, we issued 575,000 shares of 6.36 percent Non-Cumulative PreferredStock, Series B ("Series B Preferred Stock"). Dividends on the Series BPreferred Stock are non-cumulative and payable quarterly at a rate of 6.36percent commencing September 15, 2005. The Series B Preferred Stock may beredeemed at our option after June 23, 2010 at $1,000 per share, plus accrueddividends. The redemption and liquidation value is $1,000 per share plus accruedand unpaid dividends. The holders of Series B Preferred Stock are entitled topayment before any capital distribution is made to the common shareholder andhave no voting rights except for the right to elect two additional members tothe board of directors in the event that dividends have not been declared andpaid for six quarters, or as otherwise provided by law. Additionally, as long asany shares of the Series B Preferred Stock are outstanding, the authorization,creation or issuance of any class or series of 150 stock which would rank prior to the Series B Preferred Stock with respect todividends or amounts payable upon liquidation or dissolution of HSBC FinanceCorporation must be approved by the holders of at least two-thirds of the sharesof Series B Preferred Stock outstanding at that time. Related issuance costs of$16 million have been recorded as a reduction of additional paid-in capital. In2006, we declared dividends totaling $37 million on the Series B Preferred Stockwhich were paid prior to December 31, 2006. In 2005, we declared dividendstotaling $17 million on the Series B Preferred Stock which were paid prior toDecember 31, 2005. 17. ACCUMULATED OTHER COMPREHENSIVE INCOME-------------------------------------------------------------------------------- Accumulated other comprehensive income includes certain items that are reporteddirectly within a separate component of shareholders' equity. The followingtable presents changes in accumulated other comprehensive income balances. YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 2006 2005 2004-------------------------------------------------------------------------------------------------------- (IN MILLIONS) Unrealized gains (losses) on investments and interest-only strip receivables: Balance at beginning of period............................ $ (2) $ 54 $ 168 Other comprehensive income for period: Net unrealized holding gains (losses) arising during period, net of tax of $(34) million, $29 million and $67 million, respectively............................. 57 (56) (106) Reclassification adjustment for gains realized in net income, net of taxes of $45 million, $- million and $4 million, respectively................................. (78) - (8) ----- ----- ----- Total other comprehensive income for period............... (21) (56) (114) ----- ----- ----- Balance at end of period.................................. (23) (2) 54 ----- ----- -----Unrealized gains (losses) on cash flow hedging instruments: Balance at beginning of period............................ 260 119 (11) Other comprehensive income for period: Net gains (losses) arising during period, net of tax of $124 million, $(92) million and $(34) million respectively.......................................... (204) 173 72 Reclassification adjustment for gains (losses) realized in net income, net of tax of $68 million, $18 million and $(27) million, respectively....................... (117) (32) 58 ----- ----- ----- Total other comprehensive income for period............... (321) 141 130 ----- ----- ----- Balance at end of period.................................. (61) 260 119 ----- ----- -----Pension liability: Balance at beginning of period............................ - (4) - Other comprehensive income for period: Pension liability settlement adjustment, net of tax of $- million, $(2) million and $2 million, respectively.......................................... - 4 (4) ----- ----- ----- Adjustment to initially apply FASB Statement No. 158, net of tax of $(1) million.................................. (1) - - Total other comprehensive income for period............... (1) 4 (4) ----- ----- ----- Balance at end of period.................................. (1) - (4) ----- ----- -----Foreign currency translation adjustments: Balance at beginning of period............................ 221 474 286 Other comprehensive income for period: Translation gains (losses), net of tax of $9 million, $6 million and $(12) million, respectively............... 223 (253) 188 ----- ----- ----- Total other comprehensive income for period............... 223 (253) 188 ----- ----- ----- Balance at end of period.................................. 444 221 474 ----- ----- -----Total accumulated other comprehensive income (loss) at end of period................................................. $ 359 $ 479 $ 643 ===== ===== ===== 151 18. RELATED PARTY TRANSACTIONS-------------------------------------------------------------------------------- In the normal course of business, we conduct transactions with HSBC and itssubsidiaries. These transactions occur at prevailing market rates and terms andinclude funding arrangements, derivative execution, purchases and sales ofreceivables, servicing arrangements, information technology services, item andstatement processing services, banking and other miscellaneous services. Thefollowing tables present related party balances and the income and (expense)generated by related party transactions: AT DECEMBER 31, 2006 2005--------------------------------------------------------------------------------- (IN MILLIONS) ASSETS, (LIABILITIES) AND EQUITY:Derivative financial assets (liability), net................ $ 234 $ (260)Affiliate preferred stock received in sale of U.K. credit card business(1).......................................... 294 261Other assets................................................ 528 518Due to affiliates........................................... (15,172) (15,534)Other liabilities........................................... (506) (271)Premium on sale of European Operation in 2006 and U.K. credit card business in 2005 to affiliates recorded as an increase to additional paid in capital.................... 13 182 --------------- (1) Balance will fluctuate due to foreign currency exchange rate impact. FOR THE YEAR ENDED DECEMBER 31, 2006 2005 2004------------------------------------------------------------------------------------- INCOME/(EXPENSE):Interest expense on borrowings from HSBC and subsidiaries... $ (929) $(713) $(343)Interest income on advances to HSBC affiliates.............. 25 37 5Dividend income from affiliate preferred stock.............. 18 - -HSBC Bank USA: Real estate secured servicing, sourcing, underwriting and pricing revenues....................................... 12 19 17 Gain on bulk sales of real estate secured receivables..... 17 - 15 Gain on bulk sale of domestic private label receivable portfolio.............................................. - - 663 Gain on daily sale of domestic private label receivable originations........................................... 367 379 3 Gain on daily sale of credit card receivables............. 38 34 21 Taxpayer financial services loan origination and other fees................................................... (18) (15) - Domestic private label receivable servicing and related fees................................................... 393 368 3 Other servicing, processing, origination and support revenues............................................... 73 28 16Support services from HSBC affiliates, primarily HSBC Technology and Services (USA) Inc. ("HTSU")............... (1,087) (889) (750)HTSU: Rental revenue............................................ 45 42 33 Administrative services revenue........................... 12 14 18 Servicing and other fees from other HSBC affiliates....... 16 11 3Stock based compensation expense with HSBC.................. (100) (66) (45) The notional value of derivative contracts outstanding with HSBC subsidiariestotaled $87.4 billion at December 31, 2006 and $72.2 billion at December 31,2005. Beginning in the second quarter of 2006, when the fair value of ouragreements with affiliate counterparties requires the posting of collateral bythe affiliate, it is provided in the form of cash and recorded on our balancesheet, consistent with third party arrangements. Previously, the posting ofcollateral by affiliates was provided in the form of securities, which were notrecorded on our balance sheet. Also during 2006, we lowered the level of thefair value of our agreements with affiliate counterparties above whichcollateral is required to be posted to $75 million. At December 31, 2006, 152 the fair value of our agreements with affiliate counterparties required theaffiliate to provide cash collateral of $1.0 billion which is recorded in ourbalance sheet as a component of derivative related liabilities. At December 31,2005, the fair value of our agreements with affiliate counterparties was belowthe level requiring posting of collateral. As such, at December 31, 2005, wewere not holding any swap collateral from HSBC affiliates in the form of cash orsecurities. We extended a line of credit of $2 billion to HSBC USA Inc. at interest ratescomparable to third-party rates for a line of credit with similar terms. Thisline expired in July of 2006 and was not renewed. No balances were outstandingunder this line at December 31, 2005. Interest income associated with this lineof credit is recorded in interest income and reflected as Interest income onadvances to HSBC affiliates in the table above. We extended a revolving line of credit of $.5 billion to HTSU on June 28, 2005at interest rates comparable to third-party rates for a line of credit withsimilar terms. The balance outstanding under this line of credit was $.5 billionand $.4 billion at December 31, 2006 and 2005 respectively and is included inother assets. Interest income associated with this line of credit is recorded ininterest income and reflected as Interest income on advances to HSBC affiliatesin the table above. We extended a promissory note of $.5 billion to HSBC Securities (USA) Inc.("HSI") on June 27, 2005 at interest rates comparable to third-party rates for aline of credit with similar terms. This promissory note was repaid during July2005. We also extended a promissory note of $.5 billion to HSI on September 29,2005. This promissory note was repaid during October 2005. We extended anadditional promissory note of $.2 billion to HSI on December 28, 2005. This notewas repaid during January 2006. At each reporting date these promissory noteswere included in other assets. Interest income associated with this line ofcredit is recorded in interest income and reflected as Interest income onadvances to HSBC affiliates in the table above. On March 31, 2005, we extended a line of credit of $.4 billion to HINO which wasrepaid during the second quarter of 2005. This line of credit was at interestrates comparable to third-party rates for a line of credit with similar terms.During the second quarter of 2004, we made advances to our immediate parent,HINO, totaling $266 million which were repaid during the third quarter of 2004.Interest income associated with these lines of credit is recorded in interestincome and reflected as Interest income on advances to HSBC affiliates in thetable above. Due to affiliates includes amounts owed to subsidiaries of HSBC (other thanpreferred stock). This funding was at interest rates (both the underlyingbenchmark rate and credit spreads) comparable to third-party rates for debt withsimilar maturities. At December 31, 2006, we had a commercial paper back stop credit facility of$2.5 billion from HSBC supporting domestic issuances and a revolving creditfacility of $5.7 billion from HBEU to fund our operations in the U.K. AtDecember 31, 2005, we had a commercial paper back stop credit facility of $2.5billion from HSBC supporting domestic issuances and a revolving credit facilityof $5.3 billion from HBEU to fund our operations in the U.K. As of December 31,2006, $4.3 billion was outstanding under the U.K. lines and no balances wereoutstanding on the domestic lines. As of December 31, 2005, $4.2 billion wasoutstanding on the U.K. lines and no balances were outstanding on the domesticlines. Annual commitment fee requirements to support availability of these linestotaled $1 million in 2006 and $2 million in 2005 and are included as acomponent of Interest expense on borrowings from HSBC and subsidiaries. On November 9, 2006, as part of our continuing evaluation of strategicalternatives with respect to our U.K. and European operations, we sold all ofthe capital stock of our operations in the Czech Republic, Hungary, and Slovakia(the "European Operations") to a wholly owned subsidiary of HBEU for anaggregate purchase price of approximately $46 million. Because the sale of thisbusiness is between affiliates under common control, the premium received inexcess of the book value of the stock transferred was recorded as an increase toadditional paid-in capital and was not reflected in earnings. The assetsconsisted primarily of $199 million of receivables and goodwill which totaledapproximately $13 million. The liabilities consisted primarily of debt whichtotaled $179 million. HBEU assumed all the liabilities of the EuropeanOperations as a result of this transaction. We do not anticipate that the neteffect of this sale will result in a material reduction of net income of ourconsolidated results. 153 In December 2005, we sold our U.K. credit card business, including $2.5 billionof receivables, the associated cardholder relationships and the related retainedinterests in securitized credit card receivables to HBEU for an aggregatepurchase price of $3.0 billion. The purchase price, which was determined basedon a comparative analysis of sales of other credit card portfolios, was paid ina combination of cash and $261 million of preferred stock issued by a subsidiaryof HBEU with a rate of one-year Sterling LIBOR, plus 1.30 percent. In additionto the assets referred to above, the sale also included the account originationplatform, including the marketing and credit employees associated with thisfunction, as well as the lease associated with the credit card call center andrelated leaseholds and call center employees to provide customer continuityafter the transfer as well as to allow HBEU direct ownership and control oforigination and customer service. We have retained the collection operationsrelated to the credit card operations and have entered into a service levelagreement for a period of not less than two years to provide collection servicesand other support services, including components of the compliance, financialreporting and human resource functions, for the sold credit card operations toHBEU for a fee. We received $30 million in 2006 under this service levelagreement. Additionally, the management teams of HBEU and our remaining U.K.operations will be jointly involved in decision making involving card marketingto ensure that growth objectives are met for both businesses. Because the saleof this business is between affiliates under common control, the premiumreceived in excess of the book value of the assets transferred of $182 million,including the goodwill assigned to this business, has been recorded as anincrease to additional paid in capital and has not been included in earnings. In December 2004, we sold our domestic private label receivable portfolio(excluding retail sales contracts at our Consumer Lending business), includingthe retained interests associated with our securitized domestic private labelreceivables to HSBC Bank USA for $12.4 billion. We recorded an after-tax gain onthe sale of $423 million in 2004. See Note 4, "Sale of Domestic Private LabelReceivable Portfolio and Adoption of FFIEC Policies." We continue to service thesold private label receivables and receive servicing and related fee income fromHSBC Bank USA for these services. As of December 31, 2006, we were servicing$18.1 billion of domestic private label receivables and as of December 31, 2005,we were servicing $17.1 billion of domestic private label receivables for HSBCBank USA. We received servicing and related fee income from HSBC Bank USA of$393 million in 2006 and $368 million during December 2005. Servicing andrelated fee income is reflected as Domestic private label receivable servicingand related fees in the table above. We continue to maintain the relatedcustomer account relationships and, therefore, sell new domestic private labelreceivable originations (excluding retail sales contracts) to HSBC Bank USA on adaily basis. We sold $21.6 billion of private label receivables to HSBC Bank USAin 2006 and $21.1 billion during 2005. The gains associated with the sale ofthese receivables are reflected in the table above and are recorded in Gain ondaily sale of domestic private label receivable originations. In the fourth quarter of 2006 we sold approximately $669 million of real estatesecured receivables originated by our subsidiary, Decision One Mortgage Company,LLC, to HSBC Bank USA and recorded a pre-tax gain of $17 million on the sale. In the first quarter of 2004, we sold approximately $.9 billion of real estatesecured receivables from our Mortgage Services business to HSBC Bank USA andrecorded a pre-tax gain of $15 million on the sale. Under a separate servicingagreement, we have agreed to service all real estate secured receivables sold toHSBC Bank USA including all future business it purchases from ourcorrespondents. As of December 31, 2006, we were servicing $3.3 billion of realestate secured receivables for HSBC Bank USA. We also received fees from HSBCBank USA pursuant to a service level agreement under which we sourced,underwrote and priced $1.5 billion of real estate secured receivables purchasedby HSBC Bank USA during 2005 and $2.8 billion in 2004. The fee revenueassociated with these receivables is recorded in servicing fees from HSBCaffiliates and are reflected as Real estate secured servicing, sourcing,underwriting and pricing revenues in the above table. Purchases of real estatesecured receivables from our correspondents by HSBC Bank USA were discontinuedeffective September 1, 2005. We continue to service the receivables HSBC BankUSA previously purchased from these correspondents. Under various service level agreements, we also provide various services to HSBCBank USA. These services include credit card servicing and processing activitiesthrough our credit card services business, loan origination and servicingthrough our auto finance business and other operational and administrativesupport. 154 Fees received for these services are reported as servicing fees from HSBCaffiliates and are reflected as Other servicing, processing, origination andsupport revenues in the table above. During 2003, Household Capital Trust VIII issued $275 million in mandatorilyredeemable preferred securities to HSBC. The terms of this issuance were asfollows: (DOLLARS ARE IN MILLIONS)---------------------------------------------------------------------------------------- Junior Subordinated Notes: Principal balance......................................... $284 Redeemable by issuer...................................... September 26, 2008 Stated maturity........................................... November 15, 2033Preferred Securities: Rate...................................................... 6.375% Face value................................................ $275 Issue date................................................ September 2003 Interest expense recorded on the underlying junior subordinated notes totaled$18 million in 2006, 2005 and 2004. The interest expense for the HouseholdCapital Trust VIII is included in interest expense - HSBC affiliates in theconsolidated statement of income and is reflected as a component of Interestexpense on borrowings from HSBC and subsidiaries in the table above. During 2004, our Canadian business began to originate and service auto loans foran HSBC affiliate in Canada. Fees received for these services are included inother income and are reflected in Servicing and other fees from other HSBCaffiliates in the above table. Effective October 1, 2004, HSBC Bank USA became the originating lender for loansinitiated by our taxpayer financial services business for clients of variousthird party tax preparers. We purchase the loans originated by HSBC Bank USAdaily for a fee. Origination fees paid to HSBC Bank USA totaled $18 million in2006 and $15 million in 2005. These origination fees are included as an offsetto taxpayer financial services revenue and are reflected as Taxpayer financialservices loan origination and other fees in the above table. On July 1, 2004, HSBC Bank Nevada, National Association ("HBNV"), formerly knownas Household Bank (SB), N.A., purchased the account relationships associatedwith $970 million of credit card receivables from HSBC Bank USA forapproximately $99 million, which are included in intangible assets. Thereceivables continue to be owned by HSBC Bank USA. We service these receivablesfor HSBC Bank USA and receive servicing and related fee income from HSBC BankUSA. As of December 31, 2006 we were servicing $1.2 billion of credit cardreceivables for HSBC Bank USA. Originations of new accounts and receivables aremade by HBNV and new receivables are sold daily to HSBC Bank USA. We sold $2,298million of credit card receivables to HSBC Bank USA in 2006, $2,055 million in2005 and $1,029 million in 2004. The gains associated with the sale of thesereceivables are reflected in the table above and are recorded in Gain on dailysale of credit card receivables. Effective January 1, 2004, our technology services employees, as well astechnology services employees from other HSBC entities in North America, weretransferred to HTSU. In addition, technology related assets and softwarepurchased subsequent to January 1, 2004 are generally purchased and owned byHTSU. Technology related assets owned by HSBC Finance Corporation prior toJanuary 1, 2004 currently remain in place and were not transferred to HTSU. Inaddition to information technology services, HTSU also provides certain itemprocessing and statement processing activities to us pursuant to a masterservice level agreement. Support services from HSBC affiliates includes servicesprovided by HTSU as well as banking services and other miscellaneous servicesprovided by HSBC Bank USA and other subsidiaries of HSBC. We also receiverevenue from HTSU for rent on certain office space, which has been recorded as areduction of occupancy and equipment expenses, and for certain administrativecosts, which has been recorded as other income. Additionally, in a separate transaction in December 2005, we transferred ourinformation technology services employees in the U.K. to a subsidiary of HBEU.Subsequent to the transfer, operating expenses relating to 155 information technology, which have previously been reported as salaries andfringe benefits or other servicing and administrative expenses, are now billedto us by HBEU and reported as support services from HSBC affiliates.Additionally, during the first quarter of 2006, the information technologyequipment in the U.K. was sold to HBEU for a purchase price equal to the bookvalue of these assets of $8 million. In addition, we utilize HSBC Markets (USA) Inc., a related HSBC entity, to leadmanage a majority of our ongoing debt issuances. Fees paid for such servicestotaled approximately $48 million in 2006, $59 million in 2005 and $18 millionin 2004. These fees are amortized over the life of the related debt. In consideration of HSBC transferring sufficient funds to make the payments withrespect to certain HSBC Finance Corporation preferred stock, we issued theSeries A Preferred Stock in the amount of $1.1 billion to HSBC on March 28,2003. In September 2004, HSBC North America issued a new series of preferredstock totaling $1.1 billion to HSBC in exchange for our outstanding Series APreferred Stock. In October 2004, our immediate parent, HINO, issued a newseries of preferred stock to HSBC North America in exchange for our Series APreferred Stock. We paid dividends on our Series A Preferred Stock of $66million in October 2005 and $108 million in October 2004. On December 15, 2005,we issued four shares of common stock to HINO in exchange for the Series APreferred Stock. Domestic employees of HSBC Finance Corporation participate in a defined benefitpension plan sponsored by HSBC North America. See Note 20, "Pension and OtherPostretirement Benefits," for additional information on this pension plan. Employees of HSBC Finance Corporation participate in one or more stockcompensation plans sponsored by HSBC. Our share of the expense of these planswas $100 million in 2006, $66 million in 2005 and $45 million in 2004. Theseexpenses are recorded in salary and employee benefits and are reflected in theabove table as Stock based compensation expense with HSBC. 19. STOCK OPTION PLANS-------------------------------------------------------------------------------- STOCK OPTION PLANS The HSBC Holdings Group Share Option Plan (the "Group ShareOption Plan"), which replaced the former Household stock option plans, was along-term incentive compensation plan available to certain employees prior to2005. Grants were usually made annually. At the 2005 HSBC Annual Meeting ofStockholders, HSBC adopted and the shareholders' approved the HSBC Share Plan("Group Share Plan") to replace this plan. During 2006 and 2005, no furtheroptions were granted to employees although stock option grants from previousyears remain in effect subject to the same conditions as before. In lieu ofoptions, in 2006 and 2005, these employees received grants of shares of HSBCstock subject to certain vesting conditions as discussed further below. Optionsgranted to employees in 2004 vest 100% upon the attainment of certain companyperformance conditions in either year 3, 4 or 5 and expire ten years from thedate of grant. If the performance conditions are not met in year 5, the optionswill be forfeited. Options are granted at market value. Compensation expenserelated to the Group Share Option Plan, which is recognized over the vestingperiod, totaled $6 million in 2006, $6 million in 2005 and $8 million in 2004. 156 Information with respect to the Group Share Option Plan is as follows: 2006 2005 2004 --------------------- --------------------- --------------------- WEIGHTED- WEIGHTED- WEIGHTED- HSBC AVERAGE HSBC AVERAGE HSBC AVERAGE ORDINARY PRICE PER ORDINARY PRICE PER ORDINARY PRICE PER SHARES SHARE SHARES SHARE SHARES SHARE---------------------------------------------------------------------------------------------------- Outstanding at beginning of year....................... 6,100,800 $14.97 6,245,800 $14.96 4,069,800 $15.31Granted...................... - - - - 2,638,000 14.37Exercised.................... - - - - - -Transferred.................. - - (105,000) 14.64 (462,000) 14.69Expired or canceled.......... (40,000) 14.37 (40,000) 14.37 - - --------- ------ --------- ------ --------- ------Outstanding at end of year... 6,060,800 14.97 6,100,800 14.97 6,245,800 14.96 ========= ====== ========= ====== ========= ======Exercisable at end of year... 2,909,850 $15.31 - $ - - $ - ========= ====== ========= ====== ========= ======Weighted-average fair value of options granted......... $ - $ - $ 2.68 ====== ====== ====== The transfers shown above relate to employees who have transferred to other HSBCentities during each year. The transfers in 2005 primarily relate to certain ofour U.K. employees who were transferred to HBEU as part of the sale of our U.K.credit card business in December 2005. The transfers in 2004 relate to ourtechnology services employees who were transferred to HTSU effective January 1,2004. MORE TO FOLLOW This information is provided by RNS The company news service from the London Stock Exchange
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Share Price Information for HSBC Holdings (HSBA)
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Share Price:
688.60
Bid:
688.50
Ask:
688.70
Change:
2.10 (0.31%)
Spread:
0.20 (0.029%)
Open:
691.80
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692.80
Low:
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