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EX-31 - EX-31 - HSBC Finance Corpc60907exv31.htm
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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form 10-Q
 
 
 
 
     
(Mark One)
x
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2010
OR
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from            to           
 
 
Commission file number 1-8198
 
 
 
 
HSBC FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
 
     
Delaware
(State of Incorporation)
26525 North Riverwoods Boulevard, Mettawa, Illinois
(Address of principal executive offices)
  86-1052062
(I.R.S. Employer Identification No.)
60045
(Zip Code)
 
(224) 544-2000
Registrant’s telephone number, including area code
 
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x     No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o Accelerated filer o Non-accelerated filer x Smaller reporting company o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No x
 
As of October 31, 2010, there were 66 shares of the registrant’s common stock outstanding, all of which are owned by HSBC Investments (North America) Inc.
 


 

 
HSBC FINANCE CORPORATION
 
FORM 10-Q
 
TABLE OF CONTENTS
 
             
             
Part/Item No.
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PART II            
      120  
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    123  
    125  
 EX-12
 EX-31
 EX-32


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Table of Contents

HSBC Finance Corporation
 
Part I. FINANCIAL INFORMATION
 
Item 1.  Financial Statements
 
CONSOLIDATED STATEMENT OF INCOME (LOSS) (UNAUDITED)
 
                                 
    Three Months Ended
    Nine Months Ended
 
    September 30,     September 30,  
    2010     2009     2010     2009  
   
          (in millions)        
 
Finance and other interest income
  $ 1,749     $ 2,269     $ 5,493     $ 7,292  
Interest expense on debt held by:
                               
HSBC affiliates
    33       51       107       205  
Non-affiliates
    656       861       2,208       2,759  
                                 
Net interest income
    1,060       1,357       3,178       4,328  
Provision for credit losses
    1,509       2,117       4,970       7,166  
                                 
Net interest income (loss) after provision for credit losses
    (449 )     (760 )     (1,792 )     (2,838 )
                                 
Other revenues:
                               
Insurance revenue
    69       83       213       261  
Investment income
    24       31       75       83  
Net other-than-temporary impairment losses
    -       -       -       (20 )
Derivative related income (expense)
    (374 )     (179 )     (972 )     67  
Gain (loss) on debt designated at fair value and related derivatives
    (1 )     (1,247 )     602       (1,904 )
Fee income
    47       159       156       510  
Enhancement services revenue
    99       115       303       374  
Taxpayer financial services revenue
    -       2       29       95  
Gain on bulk receivable sales to HSBC affiliates
    -       -       -       50  
Gain on receivable sales to HSBC affiliates
    143       101       401       319  
Servicing and other fees from HSBC affiliates
    167       182       560       564  
Lower of cost or fair value adjustment on receivables held for sale
    -       (4 )     2       (337 )
Other income
    25       18       45       80  
                                 
Total other revenues
    199       (739 )     1,414       142  
                                 
Operating expenses:
                               
Salaries and employee benefits
    149       249       476       911  
Occupancy and equipment expenses, net
    25       22       67       158  
Other marketing expenses
    73       50       208       127  
Real estate owned expenses
    75       29       154       175  
Other servicing and administrative expenses
    163       194       563       620  
Support services from HSBC affiliates
    296       220       840       717  
Amortization of intangibles
    35       39       108       119  
Policyholders’ benefits
    36       50       116       153  
Goodwill and other intangible asset impairment charges
    -       -       -       2,308  
                                 
Total operating expenses
    852       853       2,532       5,288  
                                 
Loss before income tax benefit
    (1,102 )     (2,352 )     (2,910 )     (7,984 )
Income tax benefit
    393       1,118       1,062       1,392  
                                 
Loss from continuing operations
    (709 )     (1,234 )     (1,848 )     (6,592 )
Discontinued Operations (Note 2):
                               
Income (loss) from discontinued auto finance operations
    (65 )     43       (42 )     (72 )
Income tax benefit
    23       10       15       21  
                                 
Income (loss) from discontinued operations
    (42 )     53       (27 )     (51 )
                                 
Net loss
  $ (751 )   $ (1,181 )   $ (1,875 )   $ (6,643 )
                                 
 
 
The accompanying notes are an integral part of the consolidated financial statements.


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HSBC Finance Corporation
 
CONSOLIDATED BALANCE SHEET (UNAUDITED)
 
                 
    September 30,
    December 31,
 
    2010     2009  
   
    (in millions, except
 
    share data)  
 
Assets
               
Cash
  $ 174     $ 289  
Interest bearing deposits with banks
    15       17  
Securities purchased under agreements to resell
    4,795       2,850  
Securities available-for-sale
    3,422       3,187  
Receivables, net (including $6.7 billion and $6.8 billion at September 30, 2010 and December 31, 2009, respectively, collateralizing long-term debt)
    63,860       74,308  
Receivables held for sale
    4       3  
Intangible assets, net
    640       748  
Properties and equipment, net
    188       201  
Real estate owned
    908       592  
Derivative financial assets
    61       -  
Deferred income taxes, net
    2,789       2,891  
Other assets
    1,861       4,639  
Assets of discontinued operations
    141       4,828  
                 
Total assets
  $ 78,858     $ 94,553  
                 
Liabilities
               
Debt:
               
Due to affiliates
  $ 8,308     $ 9,043  
Commercial paper
    3,057       4,291  
Long-term debt (including $23.0 billion and $26.7 billion at September 30, 2010 and December 31, 2009 carried at fair value and $4.4 billion and $4.7 billion at September 30, 2010 and December 31, 2009, respectively, collateralized by receivables)
    57,907       68,880  
                 
Total debt
    69,272       82,214  
                 
Insurance policy and claim reserves
    984       996  
Derivative related liabilities
    -       60  
Liability for postretirement benefits
    260       268  
Other liabilities
    1,689       1,829  
Liabilities of discontinued operations
    7       807  
                 
Total liabilities
    72,212       86,174  
                 
Shareholders’ equity
               
Redeemable preferred stock, 1,501,100 shares authorized, Series B, $0.01 par value, 575,000 shares issued
    575       575  
Common shareholder’s equity:
               
Common stock, $0.01 par value, 100 shares authorized, 66 shares and 65 shares issued at September 30, 2010 and December 31, 2009, respectively
    -       -  
Additional paid-in capital
    23,322       23,119  
Accumulated deficit
    (16,634 )     (14,732 )
Accumulated other comprehensive loss
    (617 )     (583 )
                 
Total common shareholder’s equity
    6,071       7,804  
                 
Total liabilities and shareholders’ equity
  $ 78,858     $ 94,553  
                 
 
 
The accompanying notes are an integral part of the consolidated financial statements.


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HSBC Finance Corporation
 
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
 
                 
Nine Months Ended September 30,   2010     2009  
   
    (in millions)  
 
Preferred stock
               
Balance at beginning and end of period
  $ 575     $ 575  
                 
Common shareholder’s equity
               
Additional paid-in capital
               
Balance at beginning of period
  $ 23,119     $ 21,485  
Capital contribution from parent company
    200       2,685  
Return of capital to parent company
    -       (1,043 )
Employee benefit plans, including transfers and other
    3       (8 )
                 
Balance at end of period
  $ 23,322     $ 23,119  
                 
Accumulated deficit
               
Balance at beginning of period
  $ (14,732 )   $ (7,245 )
Net loss
    (1,875 )     (6,643 )
Dividends:
               
Preferred stock
    (27 )     (27 )
                 
Balance at end of period
  $ (16,634 )   $ (13,915 )
                 
Accumulated other comprehensive loss
               
Balance at beginning of period
  $ (583 )   $ (1,378 )
Net change in unrealized gains (losses), net of tax, on:
               
Derivatives classified as cash flow hedges
    (115 )     540  
Securities available-for-sale, not other-than-temporarily impaired
    89       95  
Other-than-temporarily impaired debt securities available-for-sale(1)
    2       -  
Postretirement benefit plan adjustment, net of tax
    (8 )     15  
Foreign currency translation adjustments
    (2 )     13  
                 
Other comprehensive income, net of tax
    (34 )     663  
                 
Balance at end of period
  $ (617 )   $ (715 )
                 
Total common shareholder’s equity
  $ 6,071     $ 8,489  
                 
Comprehensive income (loss)
               
Net loss
  $ (1,875 )   $ (6,643 )
Other comprehensive income (loss)
    (34 )     663  
                 
Comprehensive loss
  $ (1,909 )   $ (5,980 )
                 
 
 
(1) During the nine months ended September 30, 2010, gross other-than-temporary impairment (“OTTI”) recoveries on available-for-sale securities totaled $2 million, all relating to the non-credit component of OTTI previously recorded in accumulated other comprehensive income (“AOCI”).
 
 
The accompanying notes are an integral part of the consolidated financial statements.


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HSBC Finance Corporation
 
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
 
                 
Nine Months Ended September 30,   2010     2009  
   
    (in millions)  
 
Cash flows from operating activities
               
Net loss
  $ (1,875 )   $ (6,643 )
Loss from discontinued operations
    (27 )     (51 )
                 
Loss from continuing operations
    (1,848 )     (6,592 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Provision for credit losses
    4,970       7,166  
Gain on bulk sale of receivables to HSBC Bank USA, National Association (“HSBC Bank USA”)
    -       (50 )
Gain on receivable sales to HSBC affiliates
    (401 )     (319 )
Goodwill and other intangible impairment
    -       2,308  
Loss on sale of real estate owned, including lower of cost or market adjustments
    50       101  
Insurance policy and claim reserves
    (44 )     (2 )
Depreciation and amortization
    134       149  
Mark-to-market on debt designated at fair value and related derivatives
    5       2,358  
Originations of loans held for sale
    (25,298 )     (27,674 )
Sales and collections on loans held for sale
    25,702       28,190  
Foreign exchange and derivative movements on long-term debt and net change in non-FVO related derivative assets and liabilities
    (316 )     (145 )
Other-than-temporary impairment on securities
    -       20  
Lower of cost or fair value on receivables held for sale
    (2 )     337  
Net change in other assets
    2,819       117  
Net change in other liabilities
    (147 )     (498 )
Other, net
    412       151  
                 
Cash provided by operating activities – continuing operations
    6,036       5,617  
Cash provided by operating activities – discontinued operations
    571       406  
                 
Net cash provided by operating activities
    6,607       6,023  
                 
Cash flows from investing activities
               
Securities:
               
Purchased
    (694 )     (353 )
Matured
    302       294  
Sold
    137       135  
Net change in short-term securities available-for-sale
    163       31  
Net change in securities purchased under agreements to resell
    (1,945 )     (3,741 )
Net change in interest bearing deposits with banks
    2       (1 )
Proceeds from sale of affiliate preferred stock shares to HSBC plc
    -       242  
Proceeds from sale of Low Income Housing Tax Credit Investment Funds to HSBC Bank USA
    -       106  
Receivables:
               
Net (originations) collections
    3,844       4,899  
Purchases and related premiums
    (33 )     (32 )
Proceeds from sales of real estate owned
    964       1,165  
Cash received from bulk sales of receivables to HSBC Bank USA
    -       6,043  
Purchases of properties and equipment
    (21 )     (47 )
                 
Cash provided by investing activities – continuing operations
    2,719       8,741  
Cash provided by investing activities – discontinued operations
    3,613       4,702  
                 
Net cash provided by investing activities
    6,332       13,443  
                 
 
 
The accompanying notes are an integral part of the consolidated financial statements.


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HSBC Finance Corporation
 
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (Continued)
 
                 
Nine Months Ended September 30,   2010     2009  
   
    (in millions)  
 
Cash flows from financing activities
               
Debt:
               
Net change in short-term debt
    (1,234 )     (5,018 )
Net change in due to affiliates
    (735 )     (3,717 )
Long-term debt issued
    654       3,118  
Repayments of long-term debt
    (11,577 )     (14,155 )
Insurance:
               
Policyholders’ benefits paid
    (60 )     (62 )
Cash received from policyholders
    49       26  
Capital contribution from parent
    200       2,410  
Return of capital to parent
    -       (1,043 )
Shareholder’s dividends
    (27 )     (27 )
                 
Cash used in financing activities – continuing operations
    (12,730 )     (18,468 )
Cash used in financings activities – discontinued operations
    (346 )     (998 )
                 
Net cash used in financing activities
    (13,076 )     (19,466 )
                 
Net change in cash
    (137 )     -  
Cash at beginning of period(1)
    311       255  
                 
Cash at end of period(2)
  $ 174     $ 255  
                 
Supplemental Noncash Investing and Capital Activities:
               
Fair value of properties added to real estate owned
  $ 1,330     $ 963  
                 
Transfer of receivables to held for sale
    2,910       611  
                 
Transfer of receivables to held for investment
    -       806  
                 
Extinguishment of indebtedness related to receivable sales
  $ (431 )   $ (6,077 )
                 
Redemption of the junior subordinated notes underlying the mandatorily redeemable preferred securities of the Household Capital Trust VIII for common stock
  $ -     $ 275  
                 
 
 
(1) Cash at beginning of period includes $22 million and $17 million for discontinued operations at January 1, 2010 and 2009, respectively.
 
(2) Cash at end of period includes $15 million for discontinued operations at September 30, 2009.
 
 
The accompanying notes are an integral part of the consolidated financial statements.


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HSBC Finance Corporation
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
                 
Note       Page
 
 
 
1
        8  
 
2
        9  
 
3
        10  
 
4
        14  
 
5
        18  
 
6
        21  
 
7
        21  
 
8
        23  
 
9
        23  
 
10
        24  
 
11
        29  
 
12
        31  
 
13
        33  
 
14
        35  
 
15
        40  
 
16
        45  
 
17
        46  
 
18
        54  
 
19
        54  
 
1.  Organization and Basis of Presentation
 
HSBC Finance Corporation is an indirect wholly owned subsidiary of HSBC North America Holdings Inc. (“HSBC North America”), which is an indirect wholly owned subsidiary of HSBC Holdings plc (“HSBC”). The accompanying unaudited interim consolidated financial statements of HSBC Finance Corporation and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal and recurring adjustments considered necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods have been made. HSBC Finance Corporation and its subsidiaries may also be referred to in this Form 10-Q as “we,” “us” or “our.” These unaudited interim consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2009 (the “2009 Form 10-K”). Certain reclassifications have been made to prior period amounts to conform to the current period presentation. Unless otherwise indicated, information included in these notes to consolidated financial statements relates to continuing operations for all periods presented. In August 2010, we sold the remainder of our auto finance receivable portfolio and as a result our auto finance business is now reported as discontinued operations. See Note 2, “Discontinued Operations,” for further details.
 
The consolidated financial statements have been prepared on the basis that we will continue as a going concern. Such assertion contemplates the significant losses recognized in recent years and the challenges we anticipate with respect to a sustainable return to profitability under prevailing economic conditions. HSBC continues to be fully committed and has the capacity and willingness to continue to provide the necessary capital and liquidity to fund our operations.
 
As previously disclosed in the 2009 Form 10-K, subsequent to the filing of the Form 10-Q for the period ended September 30, 2009 certain tax return filing adjustments were identified which resulted in an increase in the required valuation allowance against deferred tax assets at September 30, 2009 and a decrease in our income tax benefit for the three and nine months ended September 30, 2009. Although we concluded that the impact of these items was not material individually or in the aggregate to the consolidated financial statements for the second or third quarters of 2009 as originally reported, we nonetheless decided to revise the consolidated statement of income (loss) for the three and nine months ended September 30, 2009 previously reported in our quarterly report on Form 10-Q for the period ended September 30, 2009 presented in this quarterly report on Form 10-Q to reflect these changes. This resulted in a decrease to our income tax benefit and an increase in our net loss during the three and


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HSBC Finance Corporation
 
 
nine months ended September 30, 2009 of $52 million and $427 million, respectively, as compared to what was previously reported.
 
The preparation of financial statements in conformity with U.S. GAAP requires the use of estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates. Interim results should not be considered indicative of results in future periods.
 
During the first quarter of 2010, we adopted new accounting guidance on the consolidation of variable interest entities (“VIEs”) and new disclosure requirements relating to fair value measurements. See Note 19, “New Accounting Pronouncements” for further details and related impacts.
 
2.  Discontinued Operations
 
In March 2010, we sold our auto finance receivable servicing operations as well as auto finance receivables with a carrying value of $927 million, of which $379 million was purchased at estimated fair value from HSBC Bank USA immediately prior to the sale, to Santander Consumer USA Inc. (“SC USA”) for $930 million in cash. Under the terms of the agreement, our auto finance servicing facilities in San Diego, California and Lewisville, Texas were assigned to SC USA at the time of close and the majority of the employees from those locations were offered the opportunity to transfer to SC USA. SC USA agreed to service the remainder of our auto finance receivable portfolio. As the receivables sold were previously classified as held for sale and written down to fair value, we recorded a gain of $5 million ($3 million after-tax) during the first quarter of 2010 which primarily related to the sale of the auto servicing platform and reversal of certain accruals related to leases assumed by SC USA.
 
In August 2010, we sold the remainder of our auto finance receivable portfolio with an outstanding principal balance of $2.6 billion at the time of sale and other related assets to SC USA. The aggregate sales price for the auto finance receivables and other related assets was $2.5 billion which included the transfer of $431 million of indebtedness secured by auto finance receivables, resulting in net cash proceeds of $2.1 billion. We recorded a net loss as a result of this transaction of $43 million ($28 million after-tax) during the third quarter of 2010. This net loss is included as a component of loss from discontinued operations. Severance costs recorded as a result of this transaction were less than $1 million and are included as a component of loss from discontinued operations. As a result of this transaction, our Auto Finance business is now reported as discontinued operations for all periods presented.
 
The following summarizes the total revenues and income (loss) before income tax benefit for our Auto Finance business for the periods presented:
 
                                 
    Three Months Ended
    Nine Months Ended
 
    September 30,     September 30,  
    2010(1)     2009     2010(1)     2009  
   
    (in millions)  
 
Net interest income and other revenues(2)
  $ 45     $ 137     $ 218     $ 436  
Income (loss) before income tax benefit
    (65 )     43       (42 )     (72 )
 
 
(1) Amounts shown for 2010 represent totals from the beginning of the period through August 27, 2010, the date of the sale.
 
(2) Interest expense, which is included as a component of net interest income, has been allocated to discontinued operations in accordance with our existing internal transfer pricing policy. This policy uses match funding based on the expected lives of the assets and liabilities of the business at the time of origination, subject to periodic review, as demonstrated by the expected cash flows and re-pricing characteristics of the underlying asset.


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The following summarizes the assets and liabilities of our Auto Finance business at September 30, 2010 and December 31, 2009 which are now reported as Assets of discontinued operations and Liabilities of discontinued operations in our consolidated balance sheet. Other assets of discontinued operations at September 30, 2010 reflects current income taxes receivable on our Auto Finance business for the 2010 tax year.
 
                 
    September 30,
    December 31,
 
    2010     2009  
   
    (in millions)  
 
Cash
  $ -     $ 22  
Receivables, net of credit loss reserves of $172 million at December 31, 2009
    -       3,823  
Receivables held for sale
    -       533  
Deferred income taxes, net
    (3 )     123  
Other assets
    144       327  
                 
Assets of discontinued operations
  $ 141     $ 4,828  
                 
Long-term debt
  $ -     $ 778  
Other liabilities
    7       29  
                 
Liabilities of discontinued operations
  $ 7     $ 807  
                 
 
3.  Strategic Initiatives
 
As discussed in prior filings, in prior years we performed several comprehensive evaluations of the strategies and opportunities of our operations. As a result of these various evaluations, we have discontinued all new customer account originations except in our credit card business. Summarized below are a number of strategic actions which have been undertaken beginning in mid-2007 as part of these evaluations:
 
2009 Strategic Initiatives During 2009, we undertook a number of actions including the following:
 
  Throughout 2009, we decided to exit certain lease arrangements and consolidate a variety of locations across the United States. As a result, we have or will exit certain facilities and/or significantly reduce our occupancy space in the following locations: Bridgewater, New Jersey; Minnetonka, Minnesota; Wood Dale, Illinois; Elmhurst, Illinois; Sioux Falls, South Dakota and Tampa, Florida. Additionally, we have consolidated our operations in Virginia Beach, Virginia into our Chesapeake, Virginia facility and consolidated certain servicing functions currently performed in Brandon, Florida to facilities in Buffalo, New York and Elmhurst, Illinois. The process of closing and consolidating these facilities, which began during the second quarter of 2009, will be completed during the fourth quarter of 2010.
 
  In late February 2009, we decided to discontinue new customer account originations for all products by our Consumer Lending business and close all branch offices.


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Summary of Restructuring Liability Related to 2009 Strategic Initiatives The following summarizes the changes in the restructure liability during the three and nine months ended September 30, 2010 and 2009, respectively, relating to actions implemented during 2009:
 
                                 
    One-Time
                   
    Termination and
    Lease Termination
             
    Other Employee
    and Associated
             
    Benefits     Costs     Other     Total  
   
          (in millions)              
 
Three months ended September 30, 2010:
                               
Restructuring liability at July 1, 2010
  $ 5     $ 8     $ -     $ 13  
Restructuring costs paid during the period
    -       (1 )     -       (1 )
                                 
Restructure liability at September 30, 2010
  $ 5     $ 7     $ -     $ 12  
                                 
Three months ended September 30, 2009:
                               
Restructuring liability at July 1, 2009
  $ 23     $ 31     $ 8     $ 62  
Restructuring costs recorded during the period
    -       3       -       3  
Restructuring costs paid during the period
    (11 )     (16 )     (2 )     (29 )
Adjustments to the restructure liability during the period
    (4 )     -       -       (4 )
                                 
Restructure liability at September 30, 2009
  $ 8     $ 18     $ 6     $ 32  
                                 
Nine months ended September 30, 2010:
                               
Restructuring liability at January 1, 2010
  $ 10     $ 12     $ 2     $ 24  
Restructuring costs recorded during the period
    1       4       -       5  
Restructuring costs paid during the period
    (6 )     (8 )     -       (14 )
Adjustments to the restructure liability during the period
    -       (1 )     (2 )     (3 )
                                 
Restructure liability at September 30, 2010
  $ 5     $ 7     $ -     $ 12  
                                 
Nine months ended September 30, 2009:
                               
Restructuring liability at January 1, 2009
  $ -     $ -     $ -     $ -  
Restructuring costs recorded during the period
    89       57       14       160  
Restructuring costs paid during the period
    (64 )     (39 )     (8 )     (111 )
Adjustments to the restructure liability during the period
    (17 )     -       -       (17 )
                                 
Restructure liability at September 30, 2009
  $ 8     $ 18     $ 6     $ 32  
                                 
 
2008 Strategic Initiatives During 2008, we undertook a number of actions including the following:
 
  During the third quarter of 2008, closed servicing facilities located in Jacksonville, Florida and White Marsh, Maryland in our Card and Retail Services business and redeployed these activities to other facilities in our Card and Retail Services business.
 
  Reduced headcount in our Card and Retail Services business during the fourth quarter of 2008; and
 
  Ceased operations of Solstice Capital Group, Inc, a subsidiary of our Consumer Lending business which originated real estate secured receivables for resale.


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Summary of Restructuring Liability Related to 2008 Strategic Initiatives The following summarizes the changes in the restructure liability during the three and nine months ended September 30, 2010 and 2009 relating to the actions implemented during 2008:
 
                         
    One-Time
    Lease
       
    Termination and
    Termination
       
    Other Employee
    and Associated
       
    Benefits     Costs     Total  
   
    (in millions)  
 
Three months ended September 30, 2010:
                       
Restructure liability at July 1, 2010
  $ -     $ 1     $ 1  
Restructuring costs paid during the period
    -       -       -  
                         
Restructure liability at September 30, 2010
  $ -     $ 1     $ 1  
                         
Three months ended September 30, 2009:
                       
Restructure liability at July 1, 2009
  $ -     $ 4     $ 4  
Restructuring costs paid during the period
    -       (1 )     (1 )
Adjustments to the restructure liability during the period
    -       -       -  
                         
Restructure liability at September 30, 2009
  $ -     $ 3     $ 3  
                         
Nine months ended September 30, 2010:
                       
Restructure liability at January 1, 2010
  $ -     $ 1     $ 1  
Restructuring costs paid during the period
    -       -       -  
                         
Restructure liability at September 30, 2010
  $ -     $ 1     $ 1  
                         
Nine months ended September 30, 2009:
                       
Restructure liability at January 1, 2009
  $ 10     $ 4     $ 14  
Restructuring costs recorded during the period
    1       -       1  
Restructuring costs paid during the period
    (10 )     (1 )     (11 )
Adjustments to the restructure liability during the period
    (1 )     -       (1 )
                         
Restructure liability at September 30, 2009
  $ -     $ 3     $ 3  
                         
 
2007 Actions Beginning in mid-2007 we undertook a number of actions including the following:
 
  Discontinued correspondent channel acquisitions of our Mortgage Services business;
 
  Ceased operations of Decision One Mortgage Company;
 
  Reduced the Consumer Lending branch network to approximately 1,000 branches at December 31, 2007; and
 
  Closed our loan underwriting, processing and collections center in Carmel, Indiana.


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There were no changes in the restructuring liability during the three months ended September 30, 2010 and 2009, respectively, relating to the actions implemented during 2007. The following summarizes the changes in the restructure liability during the nine months ended September 30, 2010 and 2009, respectively, relating to the actions implemented during 2007:
 
                         
    One-Time
    Lease
       
    Termination and
    Termination
       
    Other Employee
    and Associated
       
    Benefits     Costs     Total  
   
    (in millions)  
 
Nine months ended September 30, 2010:
                       
Restructure liability at January 1, 2010
  $ -     $ 14     $ 14  
Adjustments to the restructure liability during the period
    -       (14 )     (14 )
                         
Restructure liability at September 30, 2010
  $ -     $ -     $ -  
                         
Nine months ended September 30, 2009:
                       
Restructure liability at January 1, 2009
  $ 1     $ 17     $ 18  
Restructuring costs paid during the period
    (1 )     (2 )     (3 )
                         
Restructure liability at September 30, 2009
  $ -     $ 15     $ 15  
                         
 
Summary of Restructuring Activities During the three months ended September 30, 2010, we did not record any expense or expense release related to restructuring activities. The following table summarizes the net cash and non-cash expenses recorded for all restructuring activities during the nine months ended September 30, 2010 and three and nine months ended September 30, 2009:
 
                                         
    One-Time
                Fixed Assets
       
    Termination and
    Lease Termination
          and Other
       
    Other Employee
    and Associated
          Non-Cash
       
    Benefits(1)     Costs(2)     Other(3)     Adjustments(4)     Total  
   
    (in millions)  
 
Three months ended September 30, 2009:
2009 Facility Closures
  $ -     $ 3     $ -     $ -     $ 3  
2009 Consumer Lending Closure(5)
    (4 )     -       -       -       (4 )
                                         
Total expense (expense release)
  $ (4 )   $ 3     $ -     $ -     $ (1 )
                                         
Nine months ended September 30, 2010:
2009 Facility Closure
  $ -     $ 4     $ -     $ -     $ 4  
2009 Consumer Lending Closure
    1       (1 )     (2 )     -       (2 )
2007 Mortgage Services initiatives
    -       (14 )     -       -       (14 )
                                         
Total expense (expense release)
  $ 1     $ (11 )   $ (2 )   $ -     $ (12 )
                                         
Nine months ended September 30, 2009:
2009 Facility Closure
  $ 2     $ 3     $ -     $ 3     $ 8  
2009 Consumer Lending Closure(5)
    70       54       14       14       152  
                                         
Total expense
  $ 72     $ 57     $ 14     $ 17     $ 160  
                                         
 
 
(1) One-time termination and other employee benefits are included as a component of Salaries and employee benefits in the consolidated statement of income (loss).
 
(2) Lease termination and associated costs are included as a component of Occupancy and equipment expenses in the consolidated statement of income (loss).
 
(3) The other expenses are included as a component of Other servicing and administrative expenses in the consolidated statement of income (loss).


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(4) Includes $29 million of fixed asset write-offs during the nine months ended September 30, 2009, which were recorded as a component of Other servicing and administrative expenses in the consolidated statement of income (loss). The nine months ended September 30, 2009 also includes $3 million relating to stock based compensation and other benefits, a curtailment gain of $16 million and a reduction of pension expense of $2 million which were recorded as a component of Salaries and employee benefits in the consolidated statement of income (loss).
 
(5) Excludes intangible asset impairment charges of $14 million recorded during the nine months ended September 30, 2009.
 
4.  Securities
 
Securities consisted of the following available-for-sale investments:
 
                                         
          Non-Credit
                   
          Loss
                   
          Component
    Gross
    Gross
       
    Amortized
    of OTTI
    Unrealized
    Unrealized
    Fair
 
September 30, 2010   Cost     Securities(4)     Gains     Losses     Value  
   
    (in millions)  
 
U.S. Treasury
  $ 315     $ -     $ 12     $ -     $ 327  
U.S. government sponsored enterprises(1)
    314       -       7       -       321  
U.S. government agency issued or guaranteed
    13       -       -       -       13  
Obligations of U.S. states and political subdivisions
    29       -       2       -       31  
Asset-backed securities(2)
    73       (9 )     3       -       67  
U.S. corporate debt securities(3)
    1,685       -       148       (2 )     1,831  
Foreign debt securities
    361       -       26       -       387  
Equity securities
    9       -       -       -       9  
Money market funds
    404       -       -       -       404  
                                         
Subtotal
    3,203       (9 )     198       (2 )     3,390  
Accrued investment income
    32       -       -       -       32  
                                         
Total securities available-for-sale
  $ 3,235     $ (9 )   $ 198     $ (2 )   $ 3,422  
                                         
 
                                         
          Non-Credit
                   
          Loss
                   
          Component
    Gross
    Gross
       
    Amortized
    of OTTI
    Unrealized
    Unrealized
    Fair
 
December 31, 2009   Cost     Securities(4)     Gains     Losses     Value  
   
    (in millions)  
 
U.S. Treasury
  $ 196     $ -     $ 1     $ (1 )   $ 196  
U.S. government sponsored enterprises(1)
    95       -       3       (1 )     97  
U.S. government agency issued or guaranteed
    20       -       1       -       21  
Obligations of U.S. states and political subdivisions
    31       -       1       -       32  
Asset-backed securities(2)
    94       (11 )     2       (2 )     83  
U.S. corporate debt securities(3)
    1,684       -       60       (20 )     1,724  
Foreign debt securities
    351       -       15       -       366  
Equity securities
    12       -       -       -       12  
Money market funds
    627       -       -       -       627  
                                         
Subtotal
    3,110       (11 )     83       (24 )     3,158  
Accrued investment income
    29       -       -       -       29  
                                         
Total securities available-for-sale
  $ 3,139     $ (11 )   $ 83     $ (24 )   $ 3,187  
                                         
 
 
(1) Includes $40 million and $65 million of mortgage-backed securities issued by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation as of September 30, 2010 and December 31, 2009, respectively.


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(2) The majority of our asset-backed securities are residential mortgage-backed securities at September 30, 2010 and December 31, 2009.
 
(3) At September 30, 2010 and December 31, 2009, the majority of our U.S. corporate debt securities represent investments in the financial services, consumer products, healthcare and industrials sectors.
 
(4) For available-for-sale debt securities which are other-than-temporarily impaired, the non-credit loss component of other-than-temporary impairment (“OTTI”) is recorded in accumulated other comprehensive income.
 
A summary of gross unrealized losses and related fair values as of September 30, 2010 and December 31, 2009, classified as to the length of time the losses have existed follows:
 
                                                 
    Less Than One Year     Greater Than One Year  
          Gross
    Aggregate
          Gross
    Aggregate
 
    Number of
    Unrealized
    Fair Value of
    Number of
    Unrealized
    Fair Value of
 
September 30, 2010   Securities     Losses(1)     Investments     Securities     Losses(1)     Investments  
   
    (dollars are in millions)  
 
U.S. Treasury
    -     $ -     $ -       -     $ -     $ -  
U.S. government sponsored enterprises
    2       -       4       -       -       -  
U.S. government agency issued or guaranteed
    -       -       -       -       -       -  
Obligations of U.S. states and political subdivisions
    3       -       -       -       -       -  
Asset-backed securities
    -       -       -       9       (9 )     19  
U.S. corporate debt securities
    12       (1 )     39       14       (1 )     43  
Foreign debt securities
    -       -       -       -       -       -  
                                                 
      17     $ (1 )   $ 43       23     $ (10 )   $ 62  
                                                 
 
                                                 
    Less Than One Year     Greater Than One Year  
          Gross
    Aggregate
          Gross
    Aggregate
 
    Number of
    Unrealized
    Fair Value of
    Number of
    Unrealized
    Fair Value of
 
December 31, 2009   Securities     Losses(1)     Investments     Securities     Losses(1)     Investments  
   
    (dollars are in millions)  
 
U.S. Treasury
    17     $ (1 )   $ 97       -     $ -     $ -  
U.S. government sponsored enterprises
    1       -       5       1       (1 )     4  
U.S. government agency issued or guaranteed
    -       -       -       -       -       -  
Obligations of U.S. states and political subdivisions
    -       -       -       1       -       -  
Asset-backed securities
    7       (1 )     10       18       (12 )     34  
U.S. corporate debt securities
    59       (3 )     170       50       (17 )     150  
Foreign debt securities
    12       -       33       -       -       -  
                                                 
      96     $ (5 )   $ 315       70     $ (30 )   $ 188  
                                                 
 
 
(1) Includes gross unrealized losses as well as the non-credit loss component of OTTI securities which is recognized in accumulated other comprehensive income.
 
Gross unrealized losses decreased during the first nine months of 2010 primarily due to the impact of lower interest rates. We have reviewed our securities for which there is an unrealized loss in accordance with our accounting policies for other-than-temporary impairment (“OTTI”). As a result of this review, other-than-temporary impairment of less than $1 million was recognized in earnings on certain debt securities in both the three and nine months ended September 30, 2010. In addition, we recognized a recovery in accumulated other comprehensive income


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relating to the non-credit component of other-than-temporary impairment previously recognized in accumulated other comprehensive income totaling $2 million during the nine months ended September 30, 2010.
 
Our decision in the first quarter of 2009 to discontinue new customer account originations in our Consumer Lending business adversely impacted certain insurance subsidiaries that held preferred securities. Therefore, during the first quarter of 2009 we determined it was more-likely-than-not that we would be required to sell our entire portfolio of preferred securities prior to recovery of amortized cost and we determined that all of our perpetual preferred securities were deemed to be other-than-temporarily impaired. We subsequently sold our entire portfolio of preferred securities during the second quarter of 2009. During the nine months ended September 2009, we recorded $20 million of impairment losses related to these perpetual preferred securities as a component of investment income. The entire unrealized loss was recorded in earnings in accordance with new accounting guidance which we early adopted effective January 1, 2009 related to the recognition of other-than-temporary impairment and is described more fully below, as we determined it was more-likely-than-not that we would be required to sell our perpetual preferred securities prior to recovery of amortized cost.
 
On-Going Assessment for Other-Than-Temporary Impairment On a quarterly basis, we perform an assessment to determine whether there have been any events or economic circumstances to indicate that a security with an unrealized loss has suffered other-than-temporary impairment. A debt security is considered impaired if the fair value is less than its amortized cost basis at the reporting date. If impaired, we then assess whether the unrealized loss is other-than-temporary.
 
An unrealized loss is generally deemed to be other-than-temporary and a credit loss is deemed to exist if the present value of the expected future cash flows is less than the amortized cost basis of the debt security. As a result, the credit loss component of an other-than-temporary impairment write-down for debt securities is recorded in earnings while the remaining portion of the impairment loss is recognized net of tax in other comprehensive income (loss) provided we do not intend to sell the underlying debt security and it is more-likely-than-not that we would not have to sell the debt security prior to recovery.
 
For all our debt securities, as of the reporting date we do not have the intention to sell these securities and believe we will not be required to sell these securities for contractual, regulatory or liquidity reasons.
 
We consider the following factors in determining whether a credit loss exists and the period over which the debt security is expected to recover:
 
  •  The length of time and the extent to which the fair value has been less than the amortized cost basis;
 
  •  The level of credit enhancement provided by the structure which includes, but is not limited to, credit subordination positions, overcollateralization, protective triggers and financial guarantees provided by monoline wraps;
 
  •  Changes in the near term prospects of the issuer or underlying collateral of a security, such as changes in default rates, loss severities given default and significant changes in prepayment assumptions;
 
  •  The level of excess cash flows generated from the underlying collateral supporting the principal and interest payments of the debt securities; and
 
  •  Any adverse change to the credit conditions of the issuer or the security such as credit downgrades by the rating agencies.
 
At September 30, 2010, approximately 91 percent of our corporate debt securities are rated A- or better and approximately 68 percent of our asset-backed securities, which totaled $67 million are rated “AAA.” Although other-than-temporary impairments of less than $1 million were recorded in earnings during the nine months ended September 30, 2010, without a sustained economic recovery, additional other-than-temporary impairments may occur in future periods.
 
Proceeds from the sale or call of available-for-sale investments totaled $25 million and $137 million during the three and nine months ended September 30, 2010, respectively, compared to $79 million and $138 million during


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the three and nine months ended September 30, 2009, respectively. We realized gross gains of $1 million and $5 million during the three and nine months ended September 30, 2010, respectively, compared to gross gains of $7 million and $11 million during the three and nine months ended September 30, 2009, respectively. We realized no gross losses and losses of less than $1 million during the three and nine months ended September 30, 2010, respectively, compared to no gross losses and losses of $3 million during the three and nine months ended September 30, 2009, respectively.
 
Contractual maturities and yields on investments in debt securities for those with set maturities were as follows:
 
                                         
    At September 30, 2010
    Due
  After 1
  After 5
       
    Within
  but Within
  but Within
  After
   
    1 Year   5 Years   10 Years   10 Years   Total
 
    (dollars are in millions)
 
U.S. Treasury:
                                       
Amortized cost
  $ 28     $ 286     $ 1     $ -     $ 315  
Fair value
    28       298       1       -       327  
Yield(1)
    .37 %     2.02 %     4.96 %     -       1.89 %
U.S. government sponsored enterprises:
                                       
Amortized cost
  $ 185     $ 64     $ 32     $ 33     $ 314  
Fair value
    185       65       35       36       321  
Yield(1)
    .24 %     1.52 %     4.70 %     4.88 %     1.44 %
U.S. government agency issued or guaranteed:
                                       
Amortized cost
  $ -     $ -     $ -     $ 13     $ 13  
Fair value
    -       -       -       13       13  
Yield(1)
    -       -       -       5.03 %     5.03 %
Obligations of U.S. states and political subdivisions:
                                       
Amortized cost
  $ -     $ -     $ 11     $ 18     $ 29  
Fair value
    -       -       12       19       31  
Yield(1)
    -       -       4.08 %     4.05 %     4.07 %
Asset-backed securities:
                                       
Amortized cost
  $ -     $ 20     $ 13     $ 40     $ 73  
Fair value
    -       21       14       32       67  
Yield(1)
    -       4.93 %     5.29 %     2.59 %     3.72 %
U.S. corporate debt securities:
                                       
Amortized cost
  $ 131     $ 787     $ 215     $ 552     $ 1,685  
Fair value
    133       845       238       615       1,831  
Yield(1)
    4.43 %     4.47 %     4.66 %     5.37 %     4.79 %
Foreign debt securities:
                                       
Amortized cost
  $ 15     $ 263     $ 46     $ 37     $ 361  
Fair value
    16       279       49       43       387  
Yield(1)
    2.98 %     4.12 %     3.71 %     6.36 %     4.25 %
 
 
(1) Computed by dividing annualized interest by the amortized cost of respective investment securities.


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5.  Receivables
 
Receivables consisted of the following:
 
                 
    September 30,
    December 31,
 
    2010     2009  
   
    (in millions)  
 
Real estate secured
  $ 51,628     $ 59,535  
Credit card
    9,888       11,626  
Personal non-credit card
    7,816       10,486  
Commercial and other
    45       50  
                 
Total receivables
    69,377       81,697  
HSBC acquisition purchase accounting fair value adjustments
    (7 )     (11 )
Accrued finance charges
    1,596       1,895  
Credit loss reserve for receivables
    (6,971 )     (9,091 )
Unearned credit insurance premiums and claims reserves
    (135 )     (182 )
                 
Total receivables, net
  $ 63,860     $ 74,308  
                 
 
HSBC acquisition purchase accounting fair value adjustments represent adjustments which have been “pushed down” to record our receivables at fair value on March 28, 2003, the date we were acquired by HSBC.
 
Purchased Receivable Portfolios In November 2006, we acquired $2.5 billion of real estate secured receivables from Champion Mortgage (“Champion”) a division of KeyBank, N.A. Receivables purchased for which at the time of acquisition there was evidence of deterioration in credit quality since origination and for which it was probable that all contractually required payments would not be collected and that the associated line of credit had been closed, if applicable, were recorded at an amount dependent upon the cash flows expected to be collected at the time of acquisition (“Purchased Credit-Impaired Receivables”). The difference between these expected cash flows and the purchase price represents an accretable yield which is amortized to interest income over the life of the receivable. The carrying amount of Champion real estate secured receivables subject to these accounting requirements was $41 million and $36 million at September 30, 2010 and December 31, 2009, respectively, and is included in the real estate secured receivables in the table above. The outstanding contractual balance of these receivables was $58 million and $66 million at September 30, 2010 and December 31, 2009, respectively. Credit loss reserves of $16 million and $31 million as of September 30, 2010 and December 31, 2009, respectively, were held for the acquired Champion receivables subject to accounting requirements for Purchased Credit-Impaired Receivables due to a decrease in the expected future cash flows since the acquisition.
 
As part of our acquisition of Metris Companies Inc. (“Metris”) on December 1, 2005, we acquired $5.3 billion of credit card receivables some of which were also subject to the accounting requirements for Purchased Credit-Impaired Receivables as described above. During the fourth quarter of 2009, the accretable yield was fully amortized to interest income and there was no remaining difference between the carrying value and the outstanding contractual balances of these Purchased Credit-Impaired Receivables. At September 30, 2010 and December 31, 2009, we no longer have any receivables acquired from Metris which are subject to these accounting requirements.


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The following summarizes the accretable yield on Champion during the three and nice months ended September 30, 2010 and for the Champion and Metris receivables during the three and nine months ended September 30, 2009:
 
                                 
    Three Months Ended
    Nine Months Ended
 
    September 30,     September 30,  
    2010(1)     2009(1)(2)     2010(1)     2009(1)(2)  
   
          (in millions)        
 
Accretable yield at beginning of period
  $ (15 )   $ (22 )   $ (13 )   $ (28 )
Accretable yield amortized to interest income during the period
    1       8       3       23  
Reclassification of non-accretable difference(3)
    (3 )     -       (7 )     (9 )
                                 
Accretable yield at end of period(4)
  $ (17 )   $ (14 )   $ (17 )   $ (14 )
                                 
 
 
(1) For the Champion portfolio, there was a reclassification of non-accretable difference of $3 million and $7 million during the three and nine months ended September 30, 2010. There was a reclassification to non-accretable difference of $1 million during both the three and nine months ended September 30, 2009.
 
(2) For the Metris portfolio, there was a reclassification of accretable difference of $1 and $10 million during the three and nine months ended September 30, 2009.
 
(3) Reclassification of non-accretable difference represents an increase to the estimated cash flows to be collected on the underlying portfolio.
 
(4) At September 30, 2010, the entire remaining accretable yield is related to the Champion portfolio. The accretable yield related to the Metris portfolio was fully amortized to interest income during the fourth quarter of 2009.
 
Collateralized funding transactions We currently have secured conduit credit facilities with commercial banks which provide for secured financings of receivables on a revolving basis totaling $650 million and $400 million at September 30, 2010 and December 31, 2009, respectively. At September 30, 2010 and December 31, 2009, $455 million and $400 million, respectively, were available under these facilities. These facilities will mature in the second quarter of 2011 and are renewable at the banks’ option. The amount available under these facilities will vary based on the timing and volume of secured financing transactions and as part of our ongoing liquidity management plans.
 
Secured financings issued under our current conduit credit facilities as well as secured financings previously issued under public trusts of $4.4 billion at September 30, 2010 are secured by $6.7 billion of closed-end real estate secured and credit card receivables. Secured financings of $4.7 billion at December 31, 2009 are secured by $6.8 billion of closed-end real estate secured receivables.
 
Troubled Debt Restructurings The following table presents information about receivables for which we have modified the terms of the loan as part of a troubled debt restructuring (“TDR Loans”):
 
                 
    September 30,
    December 31,
 
    2010     2009  
   
    (in millions)  
 
TDR Loans:
               
Real estate secured(1):
               
Mortgage Services
  $ 4,242     $ 4,350  
Consumer Lending
    5,232       4,776  
                 
Total real estate secured
    9,474       9,126  
Credit card
    462       473  
Personal non-credit card
    729       726  
                 
Total TDR Loans(2)
  $ 10,665     $ 10,325  
                 
 


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    September 30,
    December 31,
 
    2010     2009  
   
    (in millions)  
 
Credit loss reserves for TDR Loans:
               
Real estate secured:
               
Mortgage Services
  $ 1,033     $ 1,137  
Consumer Lending
    1,102       1,002  
                 
Total real estate secured
    2,135       2,139  
Credit card
    166       158  
Personal non-credit card
    426       353  
                 
Total credit loss reserves for TDR Loans(1)(3)
  $ 2,727     $ 2,650  
                 
 
 
(1) The balances at September 30, 2010 and December 31, 2009, include TDR Loans totaling $1.3 billion and $773 million, respectively, are recorded at net realizable value less cost to sell and, therefore, have no credit loss reserve associated with them.
 
(2) Includes $1.9 billion and $1.7 billion at September 30, 2010 and December 31, 2009, respectively, which are classified as nonaccrual receivables.
 
(3) Included in credit loss reserves.
 
                                 
    Three Months Ended
  Nine Months Ended
    September 30,   September 30,
    2010   2009   2010   2009
 
    (in millions)
 
Average balance of TDR Loans(1)
  $ 10,758     $ 5,745     $ 10,810     $ 5,479  
Interest income recognized on TDR Loans
    133       96       413       275  
 
 
(1) During the third and fourth quarters of 2009, we developed enhanced tracking capabilities to identify and report TDR Loans which impacts the comparability between the periods reported above. See Note 7, “Receivables,” in our 2009 Form 10-K for further discussion of these enhanced tracking capabilities.
 
Concentrations of Credit Risk We have historically served non-conforming and non-prime consumers. Such customers are individuals who have limited credit histories, modest incomes, high debt-to-income ratios or have experienced credit problems caused by occasional delinquencies, prior charge-offs, bankruptcy or other credit related actions. The majority of our secured receivables and receivables held for sale have high loan-to-value ratios. Our receivables and receivables held for sale portfolios include the following types of loans:
 
  •  Interest-only loans – A loan which allows a customer to pay the interest-only portion of the monthly payment for a period of time which results in lower payments during the initial loan period. However, subsequent events affecting a customer’s financial position could affect their ability to repay the loan in the future when the principal payments are required.
 
  •  ARM loans – A loan which allows the lender to adjust pricing on the loan in line with interest rate movements. A customer’s financial situation and the general interest rate environment at the time of the interest rate reset could affect the customer’s ability to repay or refinance the loan after adjustment.
 
  •  Stated income loans – Loans underwritten based upon the loan applicant’s representation of annual income, which is not verified by receipt of supporting documentation.

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The following table summarizes the outstanding balances of interest-only loans, ARM loans and stated income loans in our receivable portfolios at September 30, 2010 and December 31, 2009:
 
                 
    September 30,
  December 31,
    2010   2009
 
    (in billions)
 
Interest-only loans
  $ 1.4     $ 1.8  
ARM loans(1)(2)
    8.0       9.8  
Stated income loans
    2.9       3.7  
 
 
(1) Receivable classification as ARM loans is based on the classification at the time of receivable origination and does not reflect any changes in the classification that may have occurred as a result of any loan modification.
 
(2) We do not have any option ARM loans in our portfolio.
 
At September 30, 2010 and December 31, 2009, interest-only, ARM and stated income loans comprise 18 percent and 20 percent of real estate secured receivables, including receivables held for sale, respectively.
 
6.  Credit Loss Reserves
 
An analysis of credit loss reserves is as follows:
 
                                 
    Three Months Ended
    Nine Months Ended
 
    September 30,     September 30,  
    2010     2009     2010     2009  
   
    (in millions)  
 
Credit loss reserves at beginning of period
  $ 7,398     $ 12,522     $ 9,091     $ 12,030  
Provision for credit losses
    1,509       2,117       4,970       7,166  
Charge-offs
    (2,117 )     (2,420 )     (7,622 )     (7,216 )
Recoveries
    181       131       532       370  
                                 
Credit loss reserves at end of period
  $ 6,971     $ 12,350     $ 6,971     $ 12,350  
                                 
 
Credit loss reserves since September 30, 2009 were significantly impacted by changes in our charge-off policies for real estate secured and personal non-credit card receivables which impacts comparability between periods. See Note 8, “Changes in Charge-off Policies,” in our 2009 Form 10-K for further discussion.
 
7.  Receivables Held for Sale
 
Receivables held for sale, which are carried at the lower of cost or fair value, consisted of the following:
 
                 
    September 30,
    December 31,
 
    2010     2009  
   
    (in millions)  
 
Real estate secured receivables held for sale, net(1)
  $ 4     $ 3  
                 
 
 
(1) Consists of real estate secured receivables in our Mortgage Services business which were originated with the intent to sell.


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The following table shows the activity in receivables held for sale during the three and nine months ended September 30, 2010 and 2009:
 
                                 
    Three Months Ended
    Nine Months Ended
 
    September 30,     September 30,  
    2010     2009     2010     2009  
   
    (in millions)  
 
Receivables held for sale, beginning of period
  $ 5     $ 650     $ 3     $ 14,196  
Receivable sales
    -       (32 )     -       (12,384 )
Lower of cost or fair value adjustment subsequent to transfer to receivables held for sale
    -       (4 )     2       (337 )
Transfer into receivables held for investment at the lower of cost or fair value:
                               
Real estate secured
    -       (2 )     -       (216 )
Credit card
    -       -       -       (590 )
Net change in receivable balance
    (1 )     (50 )     (1 )     (107 )
                                 
Receivables held for sale, end of period
  $ 4     $ 562     $ 4     $ 562  
                                 
 
In January 2009, we sold our GM and UP Portfolios to HSBC Bank USA. See Note 4, “Receivable Portfolio Sales to HSBC Bank USA,” in our 2009 Form 10-K for details of these transactions.
 
In March 2009 and September 2009, we transferred real estate secured receivables previously classified as receivables held for sale to receivables held for investment as we now intend to hold these receivables for the foreseeable future, generally twelve months for real estate secured receivables. These receivables were transferred at the fair market value on the date of transfer of $216 million.
 
In June 2009, we transferred credit card receivables previously classified as receivables held for sale to receivables held for investment as we now intend to hold these receivables for the foreseeable future. These receivables were transferred at their current fair market value of $590 million.
 
The valuation allowance on receivables held for sale was $3 million and $7 million at September 30, 2010 and December 31, 2009, respectively.
 
As it relates to our discontinued auto finance operations, in July 2010, we transferred auto finance receivables to held for sale with an outstanding principal balance of $2.9 billion at the time of transfer and recorded a lower of cost or fair value adjustment of $87 million attributable to credit which was included as a component of loss from discontinued operations. These receivables were sold to SC USA in August 2010. See Note 2, “Discontinued Operations,” for additional information.


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8.  Intangible Assets
 
Intangible assets consisted of the following:
 
                                 
          Cumulative
             
          Impairment
    Accumulated
    Carrying
 
    Gross     Charges     Amortization     Value  
   
    (in millions)  
 
September 30, 2010
                               
Purchased credit card relationships and related programs(1)
  $ 1,736     $ -     $ 1,096     $ 640  
Consumer loan related relationships
    333       163       170       -  
Technology, customer lists and other contracts
    261       9       252       -  
                                 
Total
  $ 2,330     $ 172     $ 1,518     $ 640  
                                 
December 31, 2009
                               
Purchased credit card relationships and related programs(1)
  $ 1,736     $ -     $ 992     $ 744  
Consumer loan related relationships
    333       163       170       -  
Technology, customer lists and other contracts
    261       9       248       4  
                                 
Total
  $ 2,330     $ 172     $ 1,410     $ 748  
                                 
 
 
(1) Purchased credit card relationships are being amortized to their estimated residual value of $162 million at September 30, 2010 and December 31, 2009.
 
Estimated amortization expense associated with our intangible assets for each of the following years is as follows:
 
         
Year Ending December 31,   (in millions)
 
 
2010
  $ 142  
2011
    138  
2012
    135  
2013
    99  
2014
    72  
 
During the first quarter of 2010, our intangible assets related to technology, customer lists and other contracts became fully amortized.
 
9.  Goodwill
 
Changes in the carrying amount of goodwill are as follows:
 
                 
    2010     2009  
   
    (in millions)  
 
Balance at January 1,
  $ -     $ 2,294  
Goodwill impairment related to our Insurance Services business
    -       (260 )
Goodwill impairment related to our Card and Retail Services business
    -       (2,034 )
                 
Balance at September 30,(1)
  $ -     $ -  
                 
 
 
(1) At both September 30, 2010 and 2009, accumulated impairment losses on goodwill totaled $6.0 billion.
 
As a result of the continuing deterioration of economic conditions throughout 2008 and into 2009 as well as the adverse impact to our Insurance Services business which resulted from the closure of all of our Consumer Lending branches, we wrote off all of our remaining goodwill balance during 2009, of which $2.3 billion was written off


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during the nine months ended September 30, 2009. See Note 14, “Goodwill,” in our 2009 Form 10-K for additional information.
 
10.  Derivative Financial Instruments
 
Our business activities involve analysis, evaluation, acceptance and management of some degree of risk or combination of risks. Accordingly, we have comprehensive risk management policies to address potential financial risks, which include credit risk, liquidity risk, market risk, and operational risks. Our risk management policy is designed to identify and analyze these risks, to set appropriate limits and controls, and to monitor the risks and limits continually by means of reliable and up-to-date administrative and information systems. Our risk management policies are primarily carried out in accordance with practice and limits set by the HSBC Group Management Board. The HSBC Finance Corporation Asset Liability Committee (“ALCO”) meets regularly to review risks and approve appropriate risk management strategies within the limits established by the HSBC Group Management Board. Additionally, our Audit Committee receives regular reports on our interest rate and liquidity risk positions in relation to the established limits. In accordance with the policies and strategies established by ALCO, in the normal course of business, we enter into various transactions involving derivative financial instruments. These derivative financial instruments primarily are used as economic hedges to manage risk.
 
Objectives for Holding Derivative Financial Instruments Market risk (which includes interest rate and foreign currency exchange risks) is the possibility that a change in interest rates or foreign exchange rates will cause a financial instrument to decrease in value or become more costly to settle. Historically, customer demand for our loan products shifted between fixed rate and floating rate products, based on market conditions and preferences. These shifts in loan products resulted in different funding strategies and produced different interest rate risk exposures. Additionally, the mix of receivables on our balance sheet and the corresponding market risk is changing as we manage the liquidation of several of our receivable portfolios. We maintain an overall risk management strategy that utilizes interest rate and currency derivative financial instruments to mitigate our exposure to fluctuations caused by changes in interest rates and currency exchange rates related to our debt liabilities. We manage our exposure to interest rate risk primarily through the use of interest rate swaps with the main objective of better matching the duration of our liabilities to the duration of our assets. We manage our exposure to foreign currency exchange risk primarily through the use of cross currency interest rate swaps. We do not use leveraged derivative financial instruments.
 
Interest rate swaps are contractual agreements between two counterparties for the exchange of periodic interest payments generally based on a notional principal amount and agreed-upon fixed or floating rates. The majority of our interest rate swaps are used to manage our exposure to changes in interest rates by converting floating rate debt to fixed rate or by converting fixed rate debt to floating rate. We have also entered into currency swaps to convert both principal and interest payments on debt issued from one currency to the appropriate functional currency.
 
We do not manage credit risk or the changes in fair value due to the changes in credit risk by entering into derivative financial instruments such as credit derivatives or credit default swaps.
 
Control Over Valuation Process and Procedures A control framework has been established which is designed to ensure that fair values are either determined or validated by a function independent of the risk-taker. To that end, the ultimate responsibility for the determination of fair values rests with the HSBC Finance Valuation Committee. The HSBC Finance Valuation Committee establishes policies and procedures to ensure appropriate valuations. Fair values for derivatives are determined by management using valuation techniques, valuation models and inputs that are developed, reviewed, validated and approved by the Quantitative Risk and Valuation Group of an affiliate, HSBC Bank USA. These valuation models utilize discounted cash flows or an option pricing model adjusted for counterparty credit risk and market liquidity. The models used apply appropriate control processes and procedures to ensure that the derived inputs are used to value only those instruments that share similar risk to the relevant benchmark indexes and therefore demonstrate a similar response to market factors. In addition, a validation process is followed which includes participation in peer group consensus pricing surveys, to ensure that valuation inputs incorporate market participants’ risk expectations and risk premium.


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Credit Risk By utilizing derivative financial instruments, we are exposed to counterparty credit risk. Counterparty credit risk is our primary exposure on our interest rate swap portfolio. Counterparty credit risk is the risk that the counterparty to a transaction fails to perform according to the terms of the contract. We manage the counterparty credit (or repayment) risk in derivative instruments through established credit approvals, risk control limits, collateral, and ongoing monitoring procedures. We utilize an affiliate, HSBC Bank USA, as the primary provider of domestic derivative products. We have never suffered a loss due to counterparty failure.
 
At September 30, 2010 and December 31, 2009, substantially all of our existing derivative contracts are with HSBC subsidiaries, making them our primary counterparty in derivative transactions. Most swap agreements require that payments be made to, or received from, the counterparty when the fair value of the agreement reaches a certain level. Generally, third-party swap counterparties provide collateral in the form of cash which is recorded in our balance sheet as derivative related liabilities. At September 30, 2010 and December 31, 2009, we provided third party swap counterparties with $19 million and $46 million of collateral, respectively, in the form of cash. When the fair value of our agreements with affiliate counterparties requires the posting of collateral, it is provided in either the form of cash and recorded on the balance sheet, consistent with third party arrangements, or in the form of securities which are not recorded on our balance sheet. At September 30, 2010 and December 31, 2009, the fair value of our agreements with affiliate counterparties required the affiliate to provide collateral of $2.1 billion and $3.4 billion, respectively, all of which was provided in cash. These amounts are offset against the fair value amount recognized for derivative instruments that have been offset under the same master netting arrangement and recorded in our balance sheet as a component of derivative financial asset or derivative related liabilities. At September 30, 2010, we had derivative contracts with a notional value of $52.9 billion, including $52.3 billion outstanding with HSBC Bank USA. At December 31, 2009, we had derivative contracts with a notional value of approximately $59.7 billion, including $58.6 billion outstanding with HSBC Bank USA. Derivative financial instruments are generally expressed in terms of notional principal or contract amounts which are much larger than the amounts potentially at risk for nonpayment by counterparties.
 
To manage our exposure to changes in interest rates, we entered into interest rate swap agreements and currency swaps which have been designated as fair value or cash flow hedges under derivative accounting principles. We currently utilize the long-haul method to assess effectiveness of all derivatives designated as hedges. In the tables that follow below, the fair value disclosed does not include swap collateral that we either receive or deposit with our interest rate swap counterparties. Such swap collateral is recorded on our balance sheet at an amount which approximates fair value and is netted on the balance sheet with the fair value amount recognized for derivative instruments.
 
Fair Value Hedges Fair value hedges include interest rate swaps to convert our fixed rate debt to variable rate debt and currency swaps to convert debt issued from one currency into U.S. dollar variable debt. All of our fair value hedges are associated with debt. We recorded fair value adjustments for fair value hedges which increased the carrying value of our debt by $93 million and $85 million at September 30, 2010 and December 31, 2009, respectively. The following table provides information related to the location of derivative fair values in the consolidated balance sheet for our fair value hedges.
 
                                         
    Asset Derivatives     Liability Derivatives  
        Fair Value as of         Fair Value as of  
    Balance Sheet
  September 30,
    December 31,
    Balance Sheet
  September 30,
    December 31,
 
    Location   2010     2009     Location   2010     2009  
   
        (in millions)         (in millions)  
 
    Derivative                   Derivative related                
Interest rate swaps
  financial assets   $ 13     $ -     liabilities   $ 2     $ 39  
    Derivative                   Derivative related                
Currency swaps
  financial assets     157       312     liabilities     -       -  
                                         
Total fair value hedges
      $ 170     $ 312         $ 2     $ 39  
                                         


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The following table presents fair value hedging information, including the gain (loss) recorded on the derivative and where that gain (loss) is recorded in the consolidated statement of income (loss) as well as the offsetting gain (loss) on the hedged item that is recognized in current earnings, the net of which represents hedge ineffectiveness.
 
                                                                         
            Amount of Gain
    Amount of Gain
    Amount of Gain
    Amount of Gain
 
            (Loss)
    (Loss)
    (Loss)
    (Loss)
 
        Location of
  Recognized in
    Recognized in
    Recognized in
    Recognized in
 
        Gain (Loss)
  Income
    Income
    Income
    Income
 
        Recognized in
  On the
    On Hedged
    On the
    On Hedged
 
        Income on
  Derivative     Items     Derivative     Items  
        Hedged Item
  Three Months Ended September 30,     Nine Months Ended September 30,  
    Hedged Item   and Derivative   2010     2009     2010     2009     2010     2009     2010     2009  
   
            (in millions)  
 
Interest rate swaps
  Fixed rate
borrowings
  Derivative
related income
  $ 9     $ 1     $ (3 )   $ -     $ 49     $ (7 )   $ (26 )   $ 15  
Currency swaps
  Fixed rate
borrowings
  Derivative
related income
    (6 )     11       4       (10 )     (7 )     44       4       (42 )
                                                                         
Total
          $ 3     $ 12     $ 1     $ (10 )   $ 42     $ 37     $ (22 )   $ (27 )
                                                                         
 
Cash Flow Hedges Cash flow hedges include interest rate swaps to convert our variable rate debt to fixed rate debt and currency swaps to convert debt issued from one currency into U.S. dollar fixed rate debt. Gains and (losses) on unexpired derivative instruments designated as cash flow hedges are reported in accumulated other comprehensive income (loss) (“OCI”) net of tax and totaled a loss of $652 million and $490 million at September 30, 2010 and December 31, 2009, respectively. We expect $444 million ($286 million after-tax) of currently unrealized net losses will be reclassified to earnings within one year. However, these reclassed unrealized losses will be offset by decreased interest expense associated with the variable cash flows of the hedged items and will result in no significant net economic impact to our earnings. The following table provides information related to the location of derivative fair values in the consolidated balance sheet for our cash flow hedges.
 
                                         
    Asset Derivatives     Liability Derivatives  
        Fair Value as of         Fair Value as of  
    Balance Sheet
  September 30,
    December 31,
    Balance Sheet
  September 30,
    December 31,
 
    Location   2010     2009     Location   2010     2009  
   
        (in millions)         (in millions)  
 
    Derivative                   Derivative related                
Interest rate swaps
  financial assets   $ (591 )   $ (358 )   liabilities   $ -     $ -  
    Derivative                   Derivative related                
Currency swaps
  financial assets     904       1,362     liabilities     -       -  
                                         
Total cash flow hedges
      $ 313     $ 1,004         $ -     $ -  
                                         


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The following table provides the gain or loss recorded on our cash flow hedging relationships.
 
                                                         
                    Gain (Loss)
        Gain (Loss)
 
    Gain (Loss)
        Reclassed
        Recognized
 
    Recognized in
        from
    Location of Gain
  in
 
    OCI
    Location of Gain
  AOCI into
    (Loss) Recognized
  Income on
 
    on Derivative
    (Loss) Reclassified
  Income
    in Income on
  Derivative
 
    (Effective
    from Accumulated
  (Effective
    the Derivative
  (Ineffective
 
    Portion)     OCI into Income
  Portion)     (Ineffective
  Portion)  
Three Months Ended September 30,   2010     2009     (Effective Portion)   2010     2009     Portion)   2010     2009  
   
    (in millions)         (in millions)         (in millions)  
 
Three Months Ended September 30,
                                                       
Interest rate swaps
  $ (84 )   $ (13 )   Interest expense   $ (14 )   $ (2 )   Derivative
related Income
  $ -     $ -  
Currency swaps
    (18 )     (29 )   Interest expense     (9 )     (9 )   Derivative
related Income
    (8 )     (1 )
                                                         
Total
  $ (102 )   $ (42 )       $ (23 )   $ (11 )       $ (8 )   $ (1 )
                                                         
Nine Months Ended September 30,
                                                       
Interest rate swaps
  $ (211 )   $ 359     Interest expense   $ (51 )   $ (9 )   Derivative
related Income
  $ -     $ 9  
Interest rate swaps
    -       -     Gain on bulk receivable sale to HSBC affiliates     -       (80 )         -       -  
Currency swaps
    (35 )     354     Interest expense     (26 )     (41 )   Derivative
related Income
    (34 )     61  
                                                         
Total
  $ (246 )   $ 713         $ (77 )   $ (130 )       $ (34 )   $ 70  
                                                         
 
Non-Qualifying Hedging Activities We may enter into interest rate and currency swaps which are not designated as hedges under derivative accounting principles. These financial instruments are economic hedges but do not qualify for hedge accounting and are primarily used to minimize our exposure to changes in interest rates and currency exchange rates through more closely matching both the structure and duration of our liabilities to the structure and duration of our assets. The following table provides information related to the location and derivative fair values in the consolidated balance sheet for our non-qualifying hedges:
 
                                         
    Asset Derivatives     Liability Derivatives  
        Fair Value as of         Fair Value as of  
    Balance Sheet
  September 30,
    December 31,
    Balance Sheet
  September 30,
    December 31,
 
    Location   2010     2009     Location   2010     2009  
        (in millions)         (in millions)  
 
Interest rate contracts
  Derivative
financial assets
  $ (616 )   $ 188     Derivative
related liabilities
  $ 1     $ 12  
Currency contracts
  Derivative
financial assets
    126       72     Derivative
related liabilities
    -       9  
                                         
Total non-qualifying hedges
      $ (490 )   $ 260         $ 1     $ 21  
                                         


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The following table provides detail of the realized and unrealized gains and losses recorded on our non-qualifying hedges:
 
                                     
        Amount of Gain (Loss) Recognized in Income on Derivative  
    Location of Gain (Loss)
  Three Months Ended
    Nine Months Ended
 
    Recognized in Income
  September 30,     September 30,  
    on Derivative   2010     2009     2010     2009  
   
        (in millions)  
 
Interest rate contracts
  Derivative related income   $ (369 )   $ (183 )   $ (957 )   $ (11 )
Currency contracts
  Derivative related income     (1 )     3       (1 )     (2 )
                                     
Total
      $ (370 )   $ (180 )   $ (958 )   $ (13 )
                                     
 
We have elected the fair value option for certain issuances of our fixed rate debt and have entered into interest rate and currency swaps related to debt carried at fair value. The interest rate and currency swaps associated with this debt are non-qualifying hedges but are considered economic hedges and realized gains and losses are reported as “Gain (loss) on debt designated at fair value and related derivatives” within other revenues. The derivatives related to fair value option debt are included in the tables below. See Note 11, “Fair Value Option,” for further discussion.
 
                                         
    Asset Derivatives     Liability Derivatives  
        Fair Value as of         Fair Value as of  
    Balance Sheet
  September 30,
    December 31,
    Balance Sheet
  September 30,
    December 31,
 
    Location   2010     2009     Location   2010     2009  
   
        (in millions)         (in millions)  
 
    Derivative                   Derivative related                
Interest rate swaps
  financial assets   $ 1,335     $ 1,034     liabilities   $ -     $ -  
    Derivative                   Derivative related                
Currency swaps
  financial assets     855       752     liabilities     -       -  
                                         
Total non-qualifying hedges
      $ 2,190     $ 1,786         $ -     $ -  
                                         
 
The following table provides the gain or loss recorded on the derivatives related to fair value option debt, primarily due to changes in interest rates:
 
                                     
        Amount of Gain (Loss) Recognized in Income On Derivative  
    Location of Gain (Loss)
  Three Months Ended
    Nine Months Ended
 
    Recognized in Income
  September 30,     September 30,  
    on Derivative   2010     2009     2010     2009  
   
        (in millions)  
 
Interest rate contracts
  Gain (loss) on debt designated at fair value and related derivatives   $ 279     $ 292     $ 825     $ (17 )
Currency contracts
  Gain (loss) on debt designated at fair value and related derivatives     86       85       242       180  
                                     
Total
      $ 365     $ 377     $ 1,067     $ (163 )
                                     


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Notional Value of Derivative Contracts The following table summarizes the notional values of derivative contracts:
 
                 
    September 30, 2010     December 31, 2009  
   
    (in millions)  
 
Derivatives designated as hedging instruments:
               
Interest rate swaps
  $ 8,392     $ 11,585  
Currency swaps
    11,962       15,373  
                 
      20,354       26,958  
                 
Non-qualifying economic hedges:
               
Derivatives not designated as hedging instruments:
               
Interest rate:
               
Swaps
    11,246       7,081  
Purchased caps
    221       682  
Foreign exchange:
               
Swaps
    1,228       1,291  
Forwards
    140       349  
                 
      12,835       9,403  
                 
Derivatives associated with debt carried at fair value:
               
Interest rate swaps
    16,356       19,169  
Currency swaps
    3,376       4,122  
                 
      19,732       23,291  
                 
Total
  $ 52,921     $ 59,652  
                 
 
11.  Fair Value Option
 
Long-term debt at September 30, 2010 of $57.9 billion includes $23.0 billion of fixed rate debt carried at fair value. At September 30, 2010, we did not elect fair value option (“FVO”) for $16.2 billion of fixed rate long-term debt or any of the variable rate debt currently carried on our balance sheet. Fixed rate debt accounted for under FVO at September 30, 2010 had an aggregate unpaid principal balance of $21.7 billion which includes a foreign currency translation adjustment relating to our foreign denominated FVO debt which decreased the debt balance by $431 million. Long-term debt at December 31, 2009 includes $26.7 billion of fixed rate debt accounted for under FVO. At December 31, 2009, we did not elect FVO for $19.0 billion of fixed rate long-term debt currently carried on our balance sheet. Fixed rate debt accounted for under FVO at December 31, 2009 had an aggregate unpaid principal balance of $25.9 billion which includes a foreign currency translation adjustment relating to our foreign denominated FVO debt which increased the debt balance by $488 million.
 
We determine the fair value of the fixed rate debt accounted for under FVO through the use of a third party pricing service. Such fair value represents the full market price (credit and interest rate impact) based on observable market data for the same or similar debt instruments. See Note 17, “Fair Value Measurements,” for a description of the methods and significant assumptions used to estimate the fair value of our fixed rate debt accounted for under FVO.


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The components of “Gain (loss) on debt designated at fair value and related derivatives” are as follows:
 
                                 
    Three Months Ended
    Nine Months Ended
 
    September 30,     September 30  
    2010     2009     2010     2009  
   
 
Mark-to-market on debt designated at fair value(1):
                               
Interest rate component
  $ (176 )   $ (156 )   $ (665 )   $ 732  
Credit risk component
    (190 )     (1,468 )     200       (2,799 )
                                 
Total mark-to-market on debt designated at fair value
    (366 )     (1,624 )     (465 )     (2,067 )
Mark-to-market on the related derivatives(1)
    175       194       460       (291 )
Net realized gains on the related derivatives
    190       183       607       454  
                                 
Gain (loss) on debt designated at fair value and related derivatives
  $ (1 )   $ (1,247 )   $ 602     $ (1,904 )
                                 
 
 
(1) Mark-to-market on debt designated at fair value and related derivatives excludes market value changes due to fluctuations in foreign currency exchange rates. Foreign currency translation gains (losses) recorded in derivative related income associated with debt designated at fair value was a loss of $434 million and gain of $57 million for the three and nine months ended September 30, 2010, respectively, compared to a loss of $160 million and a gain of $152 million for the three and nine months ended September 30, 2009, respectively. Offsetting gains (losses) recorded in derivative related income associated with the related derivatives was a gain of $434 million and loss of $57 million for the three and nine months ended September 30, 2010, respectively, compared to a gain of $160 million and loss of $152 million during the three and nine months ended September 30, 2009, respectively.
 
The movement in the fair value reflected in gain (loss) on debt designated at fair value and related derivatives includes the effect of credit spread changes and interest rate changes, including any economic ineffectiveness in the relationship between the related swaps and our debt and any realized gains or losses on those swaps. With respect to the credit component, as credit spreads widen accounting gains are booked and the reverse is true if credit spreads narrow. Differences arise between the movement in the fair value of our debt and the fair value of the related swap due to the different credit characteristics and differences in the calculation of fair value for debt and derivatives. The size and direction of the accounting consequences of such changes can be volatile from period to period but do not alter the cash flows intended as part of the documented interest rate management strategy. On a cumulative basis, we have recorded fair value option adjustments which increased the value of our debt by $1.3 billion and $842 million at September 30, 2010 and December 31, 2009, respectively.
 
The change in the fair value of the debt and the change in value of the related derivatives reflect the following:
 
•  Interest rate curve – Interest rates in the U.S. decreased during the three and nine months ended September 30, 2010. These decreasing interest rates resulted in a loss in the interest rate component on the mark-to-market of the debt and a gain on the mark-to-market of the related derivative in both periods. During the three months ended September 30, 2009, the U.S. LIBOR curve shifted down resulting in losses in the interest rate component of the mark-to-market on debt designated at fair value and gains in the mark-to-market on the related derivative. During the nine months ended September 30, 2009, the U.S. LIBOR curve steepened reflecting decreases in interest rates for instruments with terms of two years or less while interest rates for instruments with terms of three years or more increased resulting in gains on the mark-to-market of the debt designated at fair value and losses on the mark-to-market of the related derivative. Changes in the value of the interest rate component of the debt as compared to the related derivative are also affected by differences in cash flows and valuation methodologies for the debt and the derivatives. Cash flows on debt are discounted using a single discount rate from the bond yield curve for each bond’s applicable maturity while derivative cash flows are discounted using rates at multiple points along the U.S. LIBOR yield curve. The impacts of these differences vary as short-term and long-term interest rates shift and time passes. Furthermore, certain derivatives have been called by the counterparty resulting in certain FVO debt having no related derivatives. As a result, approximately 7 percent of our FVO debt does not have a corresponding derivative at September 30, 2010. Income from net realized gains increased due to reduced short term U.S. interest rates.


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•  Credit – Our secondary market credit spreads tightened during the third quarter of 2010 as market place liquidity improved throughout the U.S. during the quarter. This tightening during the third quarter of 2010 partially reversed the widening of our credit spreads which occurred during the first half of 2010. During the second and third quarters of 2009, our credit spreads tightened due to an increase in market confidence and an improvement in marketplace liquidity which reversed a substantial widening of our credit spreads during the first quarter of 2009.
 
Net income volatility, whether based on changes in the interest rate or credit risk components of the mark-to-market on debt designated at fair value and the related derivatives, impacts the comparability of our reported results between periods. Accordingly, gain (loss) on debt designated at fair value and related derivatives for the nine months ended September 30, 2010 should not be considered indicative of the results for any future periods.
 
12.  Income Taxes
 
Effective tax rates are analyzed as follows.
 
                                 
Three Months Ended September 30,   2010     2009  
   
    (dollars are in millions)  
 
Tax expense (benefit) at the U.S. Federal statutory income tax rate
  $ (386 )     (35.0 )%   $ (823 )     (35.0 )%
Increase (decrease) in rate resulting from:
                               
Valuation allowance
    (1 )     (.1 )     (307 )     (13.1 )
State and local taxes, net of Federal benefit
    (8 )     (.8 )     (13 )     (.5 )
Other
    2       .2       25       1.1  
                                 
Total income tax expense (benefit)
  $ (393 )     (35.7 )%   $ (1,118 )     (47.5 )%
                                 
 
                                 
Nine Months Ended September 30,   2010     2009  
   
    (dollars are in millions)  
 
Tax expense (benefit) at the U.S. Federal statutory income tax rate
  $ (1,019 )     (35.0 )%   $ (2,794 )     (35.0 )%
Increase (decrease) in rate resulting from:
                               
Valuation allowance
    (9 )     (.3 )     590       7.4  
Non-deductible goodwill
    -       -       798       10.0  
Bulk sale of receivable portfolios to an HSBC affiliate
    -       -       (47 )     (.6 )
State and local taxes, net of Federal benefit
    (26 )     (.9 )     (8 )     (.1 )
State rate change effect on net deferred taxes
    -       -       30       .4  
Other
    (8 )     (.3 )     39       .5  
                                 
Total income tax expense (benefit)
  $ (1,062 )     (36.5 )%   $ (1,392 )     (17.4 )%
                                 
 
The effective tax rate for three and nine months ended September 30, 2010 was impacted by state taxes, including states where we file combined unitary state tax returns with other HSBC affiliates.
 
The effective tax rate for three and nine months ended September 30, 2009 was significantly impacted by the incremental valuation allowance on deferred tax assets recorded in 2009 and, in the year-to-date period, the non-tax deductible impairment of goodwill related to our Card and Retail Services and Insurance Services businesses as well as by state taxes, including states where we file combined unitary state tax returns with other HSBC affiliates. The effective tax rate for the nine months ended September 30, 2009 was also impacted by a change in estimate in the state tax rate for jurisdictions where we file combined unitary state tax returns with other HSBC affiliates and the sale of receivable portfolios to an HSBC affiliate.
 
HSBC North America Consolidated Income Taxes We are included in HSBC North America’s consolidated Federal income tax return and in various combined state income tax returns. As such, we have entered into a tax


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allocation agreement with HSBC North America and its subsidiary entities (“the HNAH Group”) included in the consolidated returns which govern the current amount of taxes to be paid or received by the various entities included in the consolidated return filings. As a result, we have looked at the HNAH Group’s consolidated deferred tax assets and various sources of taxable income, including the impact of HSBC and HNAH Group tax planning strategies, in reaching conclusions on recoverability of deferred tax assets. Where a valuation allowance is determined to be necessary at the HSBC North America consolidated level, such allowance is allocated to principal subsidiaries within the HNAH Group as described below in a manner that is systematic, rational and consistent with the broad principles of accounting for income taxes.
 
The HNAH Group evaluates deferred tax assets for recoverability using a consistent approach which considers the relative impact of negative and positive evidence, including historical financial performance, projections of future taxable income, future reversals of existing taxable temporary differences, tax planning strategies and any available carryback capacity.
 
In evaluating the need for a valuation allowance, the HNAH Group estimates future taxable income based on management approved business plans, future capital requirements and ongoing tax planning strategies, including capital support from HSBC necessary as part of such plans and strategies. The HNAH Group has continued to consider the impact of the economic environment on the North American businesses and the expected growth of the deferred tax assets. This evaluation process involves significant management judgment about assumptions that are subject to change from period to period.
 
In conjunction with the HNAH Group deferred tax evaluation process, based on our forecasts of future taxable income, which include assumptions about the depth and severity of home price depreciation and the U.S. economic downturn, including unemployment levels and their related impact on credit losses, we currently anticipate that our results of future operations will generate sufficient taxable income to allow us to realize our deferred tax assets. However, since these market conditions have created losses in the HNAH Group in recent periods and volatility on our pre-tax book income, our analysis of the realizability of the deferred tax assets significantly discounts any future taxable income expected from continuing operations and relies to a greater extent on continued capital support from our parent, HSBC, including tax planning strategies implemented in relation to such support. HSBC has indicated they remain fully committed and have the capacity and willingness to provide capital as needed to run operations, maintain sufficient regulatory capital, and fund certain tax planning strategies.
 
Only those tax planning strategies that are both prudent and feasible, and which management has the ability and intent to implement, are incorporated into our analysis and assessment. The primary and most significant strategy is HSBC’s commitment to reinvest excess HNAH Group capital to reduce debt funding or otherwise invest in assets to ensure that it is more likely than not that the deferred tax assets will be utilized.
 
Currently, it has been determined that the HNAH Group’s primary tax planning strategy, in combination with other tax planning strategies, provides support for the realization of the net deferred tax assets recorded for the HNAH Group. Such determination is based on HSBC’s business forecasts and assessment as to the most efficient and effective deployment of HSBC capital, most importantly including the length of time such capital will need to be maintained in the U.S. for purposes of the tax planning strategy.
 
Notwithstanding the above, the HNAH Group has valuation allowances against certain specific tax attributes such as foreign tax credits, certain state related deferred tax assets and certain tax loss carryforwards for which the aforementioned tax planning strategies do not provide appropriate support.
 
HNAH Group valuation allowances are allocated to the principal subsidiaries, including us. The methodology allocates the valuation allowance to the principal subsidiaries based primarily on the entity’s relative contribution to the growth of the HSBC North America consolidated deferred tax asset against which the valuation allowance is being recorded.
 
If future results differ from the HNAH Group’s current forecasts or the primary tax planning strategy were to change, a valuation allowance against the remaining net deferred tax assets may need to be established which could have a material adverse effect on our results of operations, financial condition and capital position. The HNAH


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Group will continue to update its assumptions and forecasts of future taxable income, including relevant tax planning strategies, and assess the need for such incremental valuation allowances.
 
Absent the capital support from HSBC and implementation of the related tax planning strategies, the HNAH Group, including us, would be required to record a valuation allowance against the remaining deferred tax assets.
 
HSBC Finance Corporation Income Taxes We recognize deferred tax assets and liabilities for the future tax consequences related to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for tax credits and net operating and other losses. Our net deferred tax assets, including deferred tax liabilities and valuation allowances, totaled $2.8 billion and $2.9 billion as of September 30, 2010 and December 31, 2009, respectively.
 
We are currently under audit by the Internal Revenue Service as well as various state and local tax jurisdictions. Although one or more of these audits may be concluded within the next 12 months, it is not possible to reasonably estimate the impact of the results from these audits on our uncertain tax positions at this time.
 
13.  Pension and Other Postretirement Benefits
 
The components of pension expense for the defined benefit pension plan reflected in our consolidated statement of income (loss) are shown in the table below and reflect the portion of the pension expense of the combined HSBC North America Pension Plan (either the “HSBC North America Pension Plan” or the “Plan”) which has been allocated to HSBC Finance Corporation:
 
                                 
    Three Months Ended
    Nine Months Ended
 
    September 30,     September 30,  
    2010     2009     2010     2009  
   
    (in millions)  
 
Service cost – benefits earned during the period
  $ 6     $ 9     $ 17     $ 26  
Interest cost on projected benefit obligation
    15       17       45       50  
Expected return on assets
    (13 )     (12 )     (41 )     (35 )
Partial plan termination(1)
    -       9       -       9  
Recognized losses
    9       8       26       25  
Amortization of prior service cost
    (1 )     -       (2 )     -  
                                 
Net periodic pension cost
  $ 16     $ 31     $ 45     $ 75  
                                 
 
 
(1) Effective September 30, 2009, HSBC North America voluntarily chose to allow all plan participants whose employment was either terminated as a result of the strategic restructuring of its businesses between 2007 and 2009 to become fully vested in their accrued pension benefit, resulting in a partial termination of the plan. In accordance with interpretations of the Internal Revenue Service relating to partial plan terminations, plan participants who voluntarily left the employment of HSBC North America or its subsidiaries during this period were also deemed to have vested in their accrued pension benefit through the date their employment ended. As a result, incremental pension expense of $9 million, representing our share of the partial plan termination cost, was recognized during the three months ended September 30, 2009.
 
Pension expense decreased during the three and nine months ended September 30, 2010 due to lower service and interest costs as a result of reduced headcount from our previously discussed strategic decisions. Also contributing to lower pension expense was the realization of higher returns on plan assets solely due to higher asset levels.
 
During the third quarter of 2010, HSBC North America made a contribution to the Plan of $187 million.
 
During the first quarter of 2010, we announced that the Board of Directors of HSBC North America had approved a plan to cease all future benefit accruals for legacy participants under the final average pay formula components of the HSBC North America Pension Plan effective January 1, 2011. Future accruals to legacy participants under the Plan will thereafter be provided under the cash balance based formula which is now used to calculate benefits for employees hired after December 31, 1996. Furthermore, all future benefit accruals under the Supplemental


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Retirement Income Plan will also cease effective January 1, 2011. The aforementioned changes to the Plan have been accounted for as a negative plan amendment and, therefore, the reduction in our share of HSBC North America’s projected benefit obligation as a result of this decision will be amortized to net periodic pension cost over future service periods of the affected employees. The changes to the Supplemental Retirement Income Plan have been accounted for as a plan curtailment, which resulted in no significant immediate recognition of income or expense.
 
Components of the net periodic benefit cost for our postretirement medical plan benefits other than pensions are as follows:
 
                                 
    Three Months Ended
    Nine Months Ended
 
    September 30,     September 30,  
    2010     2009     2010     2009  
   
    (in millions)  
 
Service cost – benefits earned during the period
  $ -     $ 1     $ 1     $ 2  
Interest cost
    3       3       7       9  
Gain on curtailment
    -       -       -       (16 )
Recognized gains
    -       (1 )     -       (3 )
                                 
Net periodic postretirement benefit cost (income)
  $ 3     $ 3     $ 8     $ (8 )
                                 
 
During the first quarter of 2009, we recorded a curtailment gain of $16 million as a result of the decision in late February 2009 to discontinue new customer account originations for all products by our Consumer Lending business and close all branch offices.
 
On March 23, 2010, the Patient Protection and Affordable Care Act was enacted and subsequently amended on March 30, 2010 by the Health Care and Education Reconciliation Act of 2010 (collectively referred to as the “Act”). The Act is intended to ensure that more Americans have access to quality, affordable health care insurance with the provisions of the Act being phased in beginning in 2010 and continuing for a number of years. Based on an analysis of the Act, there has been no impact on our consolidated financial statements for the period ended September 30, 2010 as it relates to either our ongoing active employee benefit plans or our postretirement retiree-only medical plans. We have also performed an analysis related to the provisions to be implemented in future periods and based on the Act as currently written, we currently do not believe there will be a material impact to our financial position or results of operations in future periods. Should the provisions of the Act be amended in future periods, the estimated impact to our financial position or results of operations in future periods could change.


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14.  Related Party Transactions
 
In the normal course of business, we conduct transactions with HSBC and its subsidiaries. These transactions occur at prevailing market rates and terms and include funding arrangements, derivative execution, purchases and sales of receivables, servicing arrangements, information technology and some centralized support services, item and statement processing services, banking and other miscellaneous services. The following tables present related party balances and the income and (expense) generated by related party transactions:
 
                 
    September 30, 2010     December 31, 2009  
   
    (in millions)  
 
Assets:
               
Cash
  $ 170     $ 272  
Interest bearing deposits with banks
    7       5  
Securities purchased under agreements to resell
    2,920       1,550  
Derivative related assets
    45       -  
Other assets
    137       123  
                 
Total assets
  $ 3,279     $ 1,950  
                 
Liabilities:
               
Due to affiliates
  $ 8,308     $ 9,043  
Derivative related liability
    -       56  
Other liabilities
    47       186  
                 
Total liabilities
  $ 8,355     $ 9,285  
                 
 
                                 
    Three Months Ended
    Nine Months Ended
 
    September 30,     September 30,  
    2010     2009     2010     2009  
   
    (in millions)  
 
Income/(Expense):
                               
Interest income from HSBC affiliates
  $ 2     $ 2     $ 5     $ 6  
Interest expense paid to HSBC affiliates(1)
    (179 )     (271 )     (601 )     (859 )
                                 
Net interest income (loss)
    (177 )     (269 )     (596 )     (853 )
Net gain on bulk sale of receivables to HSBC Bank USA
    -       -       -       50  
HSBC affiliate income:
                               
Gain on receivable sales to HSBC affiliates:
                               
Daily sales of private label receivable originations
    50       7       138       31  
Daily sales of credit card receivables
    93       94       263       286  
Sales of real estate secured receivables
    -       -       -       2  
                                 
Total gain on receivable sales to HSBC affiliates
    143       101       401       319  
                                 
Gain (Loss) on sale of other assets to HSBC Affiliates
    -       20       -       20  
Loss on sale of affiliate preferred stock
    -       -       -       (6 )
Servicing and other fees from HSBC affiliates:
                               
HSBC Bank USA:
                               
Real estate secured servicing and related fees
    4       1       9       4  
Private label and card receivable servicing and related fees
    158       155       469       482  
Taxpayer financial services loan servicing and other fees
    -       -       58       -  
Other servicing, processing, origination and support revenues from HSBC Bank USA and other HSBC affiliates
    4       11       13       33  
HSBC Technology and Services (USA) Inc. (“HTSU”) administrative fees and rental revenue(2)
    1       15       11       45  
                                 
Total servicing and other fees from HSBC affiliates
    167       182       560       564  
                                 
Taxpayer financial services loan origination and other fees
    -       -       (4 )     (11 )


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    Three Months Ended
    Nine Months Ended
 
    September 30,     September 30,  
    2010     2009     2010     2009  
   
    (in millions)  
 
Support services from HSBC affiliates
    (296 )     (220 )     (840 )     (717 )
Stock based compensation expense with HSBC
    (2 )     (8 )     (10 )     (25 )
Insurance commission paid to HSBC Bank Canada
    (4 )     (4 )     (18 )     (14 )
 
 
(1) Includes interest expense paid to HSBC affiliates for debt held by HSBC affiliates as well as net interest paid to or received from HSBC affiliates on risk management positions related to non-affiliated debt.
 
(2) During the second quarter of 2010, changes were made in the methodology to allocate rental expense between us and HTSU and an adjustment was made to rental revenue to conform to this methodology for all of 2010. Rental revenue from HTSU totaled $5 million during year-to-date period, compared to $11 million and $36 million during the three and nine months ended September 30, 2009, respectively.
 
Transactions with HSBC Bank USA:
 
•  In January 2009, we sold our GM and UP Portfolios to HSBC Bank USA with an outstanding principal balance of $12.4 billion at the time of sale and recorded a gain on the bulk sale of these receivables of $130 million. This gain was partially offset by a loss of $80 million recorded on the termination of cash flow hedges associated with the $6.1 billion of indebtedness transferred to HSBC Bank USA as part of these transactions. We retained the customer account relationships and by agreement sell on a daily basis all new credit card receivable originations for the GM and UP Portfolios to HSBC Bank USA. We continue to service the GM and UP receivables for HSBC Bank USA for a fee. Information regarding these receivables is summarized in the table below.
 
•  In July 2004 we purchased the account relationships associated with $970 million of credit card receivables from HSBC Bank USA and on a daily basis, we sell new receivable originations on these credit card accounts to HSBC Bank USA. We continue to service these loans for a fee. Information regarding these receivables is summarized in the table below.
 
•  In December 2004, we sold to HSBC Bank USA our private label receivable portfolio (excluding retail sales contracts at our Consumer Lending business). We continue to service the sold private label and credit card receivables and receive servicing and related fee income from HSBC Bank USA. We retained the customer account relationships and by agreement sell on a daily basis all new private label receivable originations and new receivable originations on these credit card accounts to HSBC Bank USA. Information regarding these receivables is summarized in the table below.
 
•  In 2003 and 2004, we sold approximately $3.7 billion of real estate secured receivables to HSBC Bank USA. We continue to service these receivables for a fee. Information regarding these receivables is summarized in the table below.

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The following table summarizes the private label, credit card (including the GM and UP Portfolios and real estate secured receivables we are servicing for HSBC Bank USA at September 30, 2010 and December 31, 2009 as well as the receivables sold on a daily basis during the three and nine months ended September 30, 2010 and 2009:
 
                                                         
        Credit Cards            
        General
  Union
      Real Estate
       
    Private Label   Motors   Privilege   Other   Secured   Total    
 
    (in billions)
 
Receivables serviced for HSBC Bank USA:
                                                       
September 30, 2010
  $ 12.8     $ 4.3     $ 4.3     $ 1.9     $ 1.6     $ 24.9          
December 31, 2009
    15.6       5.4       5.3       2.1       1.8       30.2          
Total of receivables sold on a daily basis to HSBC Bank USA during:
                                                       
Three months ended September 30, 2010
  $ 3.5     $ 3.4     $ .8     $ 1.1     $ -     $ 8.8          
Three months ended September 30, 2009
    3.6       3.7       .9       1.1               9.3          
Nine months ended September 30, 2010
  $ 9.9     $ 10.0     $ 2.3     $ 3.1     $ -     $ 25.3          
Nine months ended September 30, 2009
    11.0       10.8       2.7       3.2       -       27.7          
 
Fees received for servicing these loan portfolios totaled $160 million and $474 million during the three and nine months ended September 30, 2010, respectively, compared to $156 million and $486 million during the three and nine months ended September 30, 2009, respectively.
 
•  The GM and UP credit card receivables as well as the private label receivables are sold to HSBC Bank USA on a daily basis at a sales price for each type of portfolio determined using a fair value calculated semi-annually in April and October by an independent third party based on the projected future cash flows of the receivables. The projected future cash flows are developed using various assumptions reflecting the historical performance of the receivables and adjusted for key factors such as the anticipated economic and regulatory environment. The independent third party uses these projected future cash flows and a discount rate to determine a range of fair values. We use the mid-point of this range as the sales price.
 
•  In the second quarter of 2008, our Consumer Lending business launched a new program with HSBC Bank USA to sell real estate secured receivables to the Federal Home Loan Mortgage Corporation (“Freddie Mac”). Our Consumer Lending business originated the loans in accordance with Freddie Mac’s underwriting criteria. The loans were then sold to HSBC Bank USA, generally within 30 days. HSBC Bank USA repackaged the loans and sold them to Freddie Mac under their existing Freddie Mac program. During the three months ended March 31, 2009, we sold $51 million of real estate secured loans to HSBC Bank USA for a gain on sale of $2 million. This program was discontinued in late February 2009 as a result of our decision to discontinue new customer account originations in our Consumer Lending business.
 
•  HSBC Bank USA services a portfolio of real estate secured receivables for us with an outstanding principal balance of $1.2 billion and $1.5 billion at September 30, 2010 and December 31, 2009, respectively. Fees paid relating to the servicing of this portfolio totaled less than $1 million during both the three and nine months ended September 30, 2010 compared to $1 million and $6 million during the year-ago periods. These fees are reported in Support services from HSBC affiliates. The decrease during the first nine months of 2010 reflects a renegotiation of servicing fees for this portfolio.
 
•  In the third quarter of 2009, we sold $86 million of Low Income Housing Tax Credit Investment Funds to HSBC Bank USA for a loss on sale of $15 million (after-tax).
 
•  Under multiple service level agreements, we also provide various services to HSBC Bank USA, including real estate and credit card servicing and processing activities and other operational and administrative support. Fees received for these services are reported as Servicing and other fees from HSBC affiliates. Fees received for auto finance loan servicing are included as a component of Loss from discontinued Auto operations.


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•  In the fourth quarter of 2009, an initiative was begun to streamline the servicing of real estate secured receivables across North America. As a result, certain functions that we had previously performed for our mortgage customers are now being performed by HSBC Bank USA for all North America mortgage customers, including our mortgage customers. Additionally, we are currently performing certain functions for all North America mortgage customers where these functions had been previously provided separately by each entity. During the three and nine months ended September 30, 2010, we paid $2 million and $6 million, respectively, for services we received from HSBC Bank USA and received $2 million and $4 million for services we had provided.
 
•  In July 2010, we transferred certain employees in our real estate secured receivable servicing department to a subsidiary of HSBC Bank USA. These employees continue to service our real estate secured receivable portfolio and we pay a fee to HSBC Bank USA for these services.
 
•  HSBC Bank USA and HSBC Trust Company (Delaware) (“HTCD”) originate loans on behalf of our Taxpayer Financial Services business for clients of a single third party tax preparer. We historically purchased the loans originated by HSBC Bank USA and HTCD daily for a fee. During the first quarter of 2010, we began purchasing a smaller portion of these loans. The loans which we previously purchased are retained by HSBC Bank USA’s balance sheet. In the event any of the loans which HSBC Bank USA continues to hold on its balance sheet reach a defined delinquency status, we purchase the delinquent loans at par value as we have assumed all credit risk associated with this program. We receive a fee from HSBC Bank USA for both servicing the loans and assuming the credit risk associated with these loans which totaled $0 million and $58 million for the three and nine months ended September 30, 2010, respectively. In the table above, these fees are shown as taxpayer financial services loan servicing and other fees. For the loans which we continue to purchase from HTCD, we receive taxpayer financial services revenue and pay an origination fee to HTCD. Fees paid for originations totaled less than $1 million and $4 million during the three and nine months ended September 30, 2010, respectively, and are included as an offset to taxpayer financial services revenue. Fees paid for originations totaled $11 million during the nine months ended September 30, 2009. In the table above, these origination fees are shown as taxpayer financial services loan origination and other fees.
 
•  We have extended revolving lines of credit to subsidiaries of HSBC Bank USA for an aggregate total of $1.0 billion. No balances were outstanding under any of these lines of credit at either September 30, 2010 or December 31, 2009.
 
•  HSBC Bank USA extended a secured $1.5 billion uncommitted credit facility to certain of our subsidiaries in December 2008. This is a 364 day credit facility which was renewed in November 2009. There were no balances outstanding at September 30, 2010 or December 31, 2009.
 
•  HSBC Bank USA extended a $1.0 billion committed unsecured credit facility to HSBC Bank Nevada (“HOBN”), a subsidiary of HSBC Finance Corporation, in December 2008. This 364 day credit facility was renewed in December 2009. There were no balances outstanding at September 30, 2010 or December 31, 2009.
 
•  As it relates to our discontinued operations, in January 2009, we sold certain auto finance receivables with an outstanding principal balance of $3.0 billion at the time of sale to HSBC Bank USA and recorded a gain on the bulk sale of these receivables of $7 million which is included as a component of Loss from discontinued auto operations for the nine months ended September 30, 2009. In March 2010, we repurchased $379 million of these auto finance receivables from HSBC Bank USA and immediately sold them to SC USA. Prior to the sale of our receivable servicing operations to SC USA in March 2010, we serviced these auto finance receivables for HSBC Bank USA for a fee, which is included as a component of Loss from discontinued auto operations. In August 2010, we sold the remainder of our auto finance receivable portfolio to SC USA.
 
Transactions with HSBC Holdings plc:
 
•  A commercial paper back-stop credit facility of $2.0 billion and $2.5 billion from HSBC at September 30, 2010 and December 31, 2009, respectively, supported our domestic issuances of commercial paper. No balances were outstanding under this credit facility at September 30, 2010 or December 31, 2009. The annual commitment fee


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requirement to support availability of this line is included as a component of Interest expense — HSBC affiliates in the consolidated statement of income (loss).
 
•  In late February 2009, we effectively converted $275 million of mandatorily redeemable preferred securities of the Household Capital Trust VIII which had been issued during 2003 to common stock by redeeming the junior subordinated notes underlying the preferred securities and then issuing common stock to HSBC Investments (North America) Inc. (“HINO”). Interest expense recorded on the underlying junior subordinated notes totaled $3 million during the nine months ended September 30, 2009. This interest expense is included in Interest expense — HSBC affiliates in the consolidated statement of income (loss).
 
•  Employees of HSBC Finance Corporation participate in one or more stock compensation plans sponsored by HSBC. These expenses are recorded in Salary and employee benefits and are reflected in the above table as Stock based compensation expense with HSBC.
 
Transactions with other HSBC affiliates:
 
•  HSBC North America’s technology and certain centralized support services including human resources, corporate affairs, risk management and other shared services and beginning in January 2010, legal, compliance, tax and finance are centralized within HTSU. Technology related assets are generally capitalized and recorded on our consolidated balance sheet. HTSU also provides certain item processing and statement processing activities to us. The fees we pay HTSU for the centralized support services and processing activities are included in support services from HSBC affiliates. We also receive fees from HTSU for providing them certain administrative services, such as internal audit, as well as receiving rental revenue from HTSU for certain office space. The fees and rental revenue we receive from HTSU are recorded as a component of servicing and other fees from HSBC affiliates.
 
•  We use HSBC Global Resourcing (UK) Ltd., an HSBC affiliate located outside of the United States, to provide various support services to our operations including among other areas, customer service, systems, collection and accounting functions. The expenses related to these services of $31 million and $95 million during the three and nine months ended September 30, 2010, respectively, are included as a component of Support services from HSBC affiliates in the table above. During the three and nine months ended September 30, 2009, expenses related to these services totaled $38 million and $121 million, respectively. Beginning in 2010, the expenses for these services for all HSBC North America operations are billed directly to HTSU who is providing oversight and review of the majority of all of our intercompany transactions and then bills these services to the appropriate HSBC affiliate who benefited from the services.
 
•  The notional value of derivative contracts outstanding with HSBC subsidiaries totaled $52.3 billion and $58.6 billion at September 30, 2010 and December 31, 2009, respectively. When the fair value of our agreements with affiliate counterparties requires the posting of collateral, it is provided in either the form of cash and recorded on the balance sheet or in the form of securities which are not recorded on our balance sheet. The fair value of our agreements with affiliate counterparties required the affiliate to provide collateral of $2.1 million and $3.4 billion at September 30, 2010 and December 31, 2009, respectively, all of which was received in cash. These amounts are offset against the fair value amount recognized for derivative instruments that have been offset under the same master netting arrangement.
 
•  Due to affiliates includes amounts owed to subsidiaries of HSBC as a result of direct debt issuances (other than preferred stock).
 
•  During the third quarter of 2010, we executed a $1.0 billion 364-day uncommitted revolving credit agreement with HSBC North America. At September 30, 2010, $750 million was outstanding under this agreement.
 
•  In September 2008, we borrowed $1.0 billion from an existing uncommitted credit facility with HSBC Bank plc (“HBEU”). The borrowing was for 60 days and matured in November 2008. We renewed this borrowing for an additional 95 days. The borrowing matured in February 2009 and we chose not to renew it at that time. Interest expense on this borrowing totaled $5 million during the nine months ended September 30, 2009.


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•  In October 2008, we borrowed $1.2 billion from an uncommitted money market facility with a subsidiary of HSBC Asia Pacific (“HBAP”). The borrowing was for six months, matured in April 2009 and we chose not to renew it at that time. Interest expense on this borrowing totaled $19 million during the nine months ended September 30, 2009.
 
•  We purchase securities from HSBC Securities (USA) Inc. (“HSI”) under an agreement to resell. Interest income recognized on these securities totaled $2 million and $5 million during the three and nine months ended September 30, 2010 and $2 million and $6 million during the three and nine months ended September 30, 2009, respectively, and is reflected as interest income paid to HSBC affiliates in the table above.
 
•  Support services from HSBC affiliates also include banking services and other miscellaneous services provided by other subsidiaries of HSBC, including HSBC Bank USA.
 
•  Employees of HSBC Finance Corporation participate in a defined benefit pension plan and other postretirement benefit plans sponsored by HSBC North America. See Note 13, “Pension and Other Postretirement Benefits,” for additional information on this pension plan.
 
•  Historically, we have utilized HSBC Markets (USA) Inc., (“HMUS”) to lead manage the underwriting of term debt issuances. There were no fees paid to the affiliate for such services during the nine months ended September 30, 2010 or 2009. For debt not accounted for under the fair value option, these fees are amortized over the life of the related debt and included as a component of interest expense.
 
•  We continue to guarantee the long-term and medium-term notes issued by our Canadian business prior to its sale to HSBC Bank Canada. During the three and nine months ended September 30, 2010, we recorded fees of $1 million and $4 million, respectively, for providing this guarantee, compared to $2 million and $5 million during the three and nine months ended September 30, 2009, respectively. As of September 30, 2010, the outstanding balance of the guaranteed notes was $1.5 billion and the latest scheduled maturity of the notes is May 2012. The sale agreement with HSBC Bank Canada allows us to continue to distribute various insurance products through the branch network for a fee. Fees paid to HSBC Bank Canada for distributing insurance products through this network during the three and nine months ended September 30, 2010 were $4 million and $18 million, respectively, and are included in insurance commission paid to HSBC Bank Canada in the table above. During the three and nine months ended September 30, 2009, fees paid for the distribution of insurance products totaled $4 million and $14 million, respectively.
 
15.  Business Segments
 
We have two reportable segments: Card and Retail Services and Consumer. Our segments are managed separately and are characterized by different middle-market consumer lending products, origination processes, and locations. Our segment results are reported on a continuing operations basis.
 
Our Card and Retail Services segment comprises our core operations and includes our MasterCard, Visa, private label and other credit card operations. The Card and Retail Services segment offers these products throughout the United States primarily via strategic affinity and co-branding relationships, merchant relationships and direct mail. We also offer products and provide customer service through the Internet.
 
Our Consumer segment consists of our run-off Consumer Lending and Mortgage Services businesses which are no longer considered central to our core operations. The Consumer segment provided real estate secured and personal non-credit card loans with both revolving and closed-end terms and with fixed or variable interest rates. Loans were originated through branch locations and direct mail. Products were also offered and customers serviced through the Internet. Prior to the first quarter of 2007, we acquired loans from correspondent lenders and prior to September 2007 we also originated loans sourced through mortgage brokers. While these businesses are operating in run-off mode, they have not been reported as discontinued operations because we continue to generate cash flow from the ongoing collections of the receivables, including interest and fees.


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The All Other caption includes our Insurance business. It also includes our Taxpayer Financial Services and Commercial businesses which are no longer considered core to our operations. Each of these businesses falls below the quantitative threshold tests under segment reporting accounting principles for determining reportable segments. The “All Other” caption also includes our corporate and treasury activities, which includes the impact of FVO debt. Certain fair value adjustments related to purchase accounting resulting from our acquisition by HSBC and related amortization have been allocated to corporate, which is included in the “All Other” caption within our segment disclosure including goodwill arising from our acquisition by HSBC.
 
As discussed in Note 2, “Discontinued Operations,” in the accompanying consolidated financial statements, our Auto Finance business, which was previously reported in the Consumer segment, is now reported as discontinued operations and is no longer included in our segment presentation.
 
In the second quarter of 2010, we revised the methodology used to allocate interest expense between our reportable segments. The new methodology recognizes that non-receivable assets and liabilities in each of our business segments have a shorter life than previously assumed and incorporates transfer pricing consistent with this revised forecasted life. There have been no other changes in our measurement of segment profit (loss) and, except as noted above, there have been no changes in the basis of segmentation as compared with the presentation in our 2009 Form 10-K.
 
We report results to our parent, HSBC, in accordance with its reporting basis, International Financial Reporting Standards (“IFRSs”). Our segment results are presented on an IFRS Management Basis (a non-U.S. GAAP financial measure) as operating results are monitored and reviewed, trends are evaluated and decisions about allocating resources such as employees are made almost exclusively on an IFRS Management Basis. IFRS Management Basis results are IFRSs results which assume that the GM and UP credit card, private label and real estate secured receivables transferred to HSBC Bank USA have not been sold and remain on our balance sheet and the revenues and expenses related to these receivables remain on our income statement. IFRS Management Basis also assumes that the purchase accounting fair value adjustments relating to our acquisition by HSBC have been “pushed down” to HSBC Finance Corporation. Operations are monitored and trends are evaluated on an IFRS Management Basis because the receivable sales to HSBC Bank USA were conducted primarily to fund prime customer loans more efficiently through bank deposits and such receivables continue to be managed and serviced by us without regard to ownership. However, we continue to monitor capital adequacy, establish dividend policy and report to regulatory agencies on a U.S. GAAP legal entity basis.
 
For segment reporting purposes, intersegment transactions have not been eliminated. We generally account for transactions between segments as if they were with third parties.


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Reconciliation of our IFRS Management Basis segment results to the U.S. GAAP consolidated totals are as follows:
 
                                                                         
                            IFRS
                         
                            Management
                         
    Card and
                Adjustments/
    Basis
    Management
          IFRS
    U.S. GAAP
 
    Retail
          All
    Reconciling
    Consolidated
    Basis
    IFRS
    Reclass-
    Consolidated
 
    Services     Consumer     Other     Items     Totals     Adjustments(3)     Adjustments(4)     ifications(5)     Totals  
   
    (in millions)  
 
Three months ended September 30, 2010
                                                                       
Net interest income
  $ 1,156     $ 599     $ 217     $ -     $ 1,972     $ (628 )   $ (76 )   $ (208 )   $ 1,060  
Other operating income (Total other revenues)
    340       (4 )     (544 )     (6 )(1)     (214 )     108       (1 )     306       199  
                                                                         
Total operating income (loss)
    1,496       595       (327 )     (6 )     1,758       (520 )     (77 )     98       1,259  
Loan impairment charges (Provision for credit losses)
    487       1,402       (2 )     -       1,887       (264 )     (114 )     -       1,509  
                                                                         
      1,009       (807 )     (325 )     (6 )     (129 )     (256 )     37       98       (250 )
Operating expenses
    487       222       36       (6 )     739       (7 )     22       98       852  
                                                                         
Profit (loss) before tax
  $ 522     $ (1,029 )   $ (361 )   $ -     $ (868 )   $ (249 )   $ 15     $ -     $ (1,102 )
                                                                         
Intersegment revenues
    2       16       (12 )     (6 )(1)     -       -       -       -       -  
Balances at end of period:
                                                                       
Customer loans (Receivables)
    32,224       61,258       1,917       -       95,399       (23,650 )     (497 )     (1,875 )     69,377  
Assets
    30,791       61,471       13,463       - (2)     105,725       (23,024 )     (4,092 )     108       78,717  
                                                                         
Three months ended September 30, 2009
                                                                       
Net interest income
  $ 1,302     $ 727     $ 270     $ -     $ 2,299     $ (685 )   $ (53 )   $ (204 )   $ 1,357  
Other operating income (Total other revenues)
    582       30       (1,575 )     (8 )(1)     (971 )     (46 )     (1 )     279       (739 )
                                                                         
Total operating income (loss)
    1,884       757       (1,305 )     (8 )     1,328       (731 )     (54 )     75       618  
Loan impairment charges (Provision for credit losses)
    1,172       1,753       1       -       2,926       (561 )     (248 )     -       2,117  
                                                                         
      712       (996 )     (1,306 )     (8 )     (1,598 )     (170 )     194       75       (1,499 )
Operating expenses
    460       230       51       (8 )     733       6       39       75       853  
                                                                         
Profit (loss) before tax
  $ 252     $ (1,226 )   $ (1,357 )   $ -     $ (2,331 )   $ (176 )   $ 155     $ -     $ (2,352 )
                                                                         
Intersegment revenues
    1       34     $ (27 )     (8 )(1)     -       -       -       -       -  
Balances at end of period:
                                                                       
Customer loans (Receivables)
    39,323       78,811       1,099       -       119,233       (28,623 )     (400 )     (1,606 )     88,604  
Assets
    37,192       76,001       13,959       (2 )(2)     127,150       (27,466 )     (4,267 )     (163 )     95.254  
                                                                         
Nine months ended September 30, 2010