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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
___________________

FORM 10-Q
___________________

(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2015

OR
¨
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 001-08198
___________________

HSBC FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
86-1052062
(State of incorporation)
 
(I.R.S. Employer Identification No.)
26525 North Riverwoods Boulevard, Suite 100, Mettawa, Illinois
 
60045
(Address of principal executive offices)
 
(Zip Code)

(224) 880-7000
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  ý    No  ¨

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  ý    No  ¨

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  ¨    No  ý

As of July 31, 2015, there were 68 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
 
Part I
 
Page
Item 1.
Financial Statements (Unaudited):
 
 
 
 
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 3.
Item 4.
 
 
Part II
 
 
Item 1.
Item 5.
Item 6.


2


HSBC Finance Corporation

PART I

Item 1.    Financial Statements.
 
 

CONSOLIDATED STATEMENT OF INCOME (LOSS) (UNAUDITED)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
 
(in millions)
Interest income
$
407

 
$
492

 
$
839

 
$
998

Interest expense on debt held by:
 
 
 
 
 
 
 
Non-affiliates
186

 
211

 
381

 
427

HSBC affiliates
53

 
56

 
106

 
114

Interest expense
239

 
267

 
487

 
541

Net interest income
168

 
225

 
352

 
457

Provision for credit losses
192

 
(197
)
 
219

 
(195
)
Net interest income after provision for credit losses
(24
)
 
422

 
133

 
652

Other revenues:
 
 
 
 
 
 
 
Derivative related income (expense)
90

 
(90
)
 
(7
)
 
(180
)
Gain on debt designated at fair value and related derivatives
74

 
42

 
133

 
73

Servicing and other fees from HSBC affiliates
6

 
6

 
12

 
14

Lower of amortized cost or fair value adjustment on receivables held for sale
(54
)
 
97

 
(71
)
 
208

Other income
22

 
(8
)
 
29

 
14

Total other revenues
138

 
47

 
96

 
129

Operating expenses:
 
 
 
 
 
 
 
Salaries and employee benefits
61

 
51

 
103

 
107

Occupancy and equipment expenses, net
8

 
9

 
16

 
18

Real estate owned expenses
1

 

 
5

 
12

Other administrative expenses
394

 
(12
)
 
434

 
68

Support services from HSBC affiliates
58

 
73

 
112

 
133

Total operating expenses
522

 
121

 
670

 
338

Income (loss) from continuing operations before income tax
(408
)
 
348

 
(441
)
 
443

Income tax expense (benefit)
(200
)
 
112

 
(228
)
 
95

Income (loss) from continuing operations
(208
)
 
236

 
(213
)
 
348

Discontinued operations (Note 2):
 
 
 
 
 
 
 
Loss from discontinued operations before income tax
(9
)
 
(9
)
 
(9
)
 
(20
)
Income tax benefit
1

 
2

 
1

 
7

Loss from discontinued operations
(8
)
 
(7
)
 
(8
)
 
(13
)
Net income (loss)
$
(216
)
 
$
229

 
$
(221
)
 
$
335


The accompanying notes are an integral part of the consolidated financial statements.

3


HSBC Finance Corporation

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
 
(in millions)
Net income (loss)
$
(216
)
 
$
229

 
$
(221
)
 
$
335

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Net change in unrealized gains (losses), net of tax, on:
 
 
 
 
 
 
 
Derivatives designated as cash flow hedges
9

 
9

 
20

 
23

Other comprehensive income, net of tax
9

 
9

 
20

 
23

Total comprehensive income (loss)
$
(207
)
 
$
238

 
$
(201
)
 
$
358


The accompanying notes are an integral part of the consolidated financial statements.


4


HSBC Finance Corporation

CONSOLIDATED BALANCE SHEET (UNAUDITED)
 
June 30, 2015
 
December 31, 2014
 
(in millions,
except share data)
Assets
 
 
 
Cash
$
153

 
$
157

Interest bearing deposits with banks
2,002

 
2,000

Securities purchased under agreements to resell
1,092

 
3,863

Receivables, net (including $1.9 billion and $3.0 billion at June 30, 2015 and December 31, 2014, respectively, collateralizing long-term debt and net of credit loss reserves of $408 million and $2.2 billion at June 30, 2015 and December 31, 2014, respectively)
10,049

 
21,242

Receivables held for sale
10,310

 
860

Properties and equipment, net
60

 
63

Real estate owned
123

 
159

Deferred income taxes, net
2,669

 
2,444

Other assets
1,044

 
1,109

Assets of discontinued operations
21

 
63

Total assets
$
27,523

 
$
31,960

Liabilities
 
 
 
Debt:
 
 
 
Due to affiliates (including $500 million and $512 million at June 30, 2015 and December 31, 2014, respectively, carried at fair value)
$
5,931

 
$
6,945

Long-term debt (including $4.6 billion and $6.8 billion at June 30, 2015 and December 31, 2014, respectively, carried at fair value and $1.0 billion and $1.5 billion at June 30, 2015 and December 31, 2014, respectively, collateralized by receivables)
12,988

 
16,427

Total debt
18,919

 
23,372

Derivative related liabilities
63

 
82

Liability for postretirement benefits
214

 
221

Other liabilities
1,405

 
1,091

Liabilities of discontinued operations
60

 
71

Total liabilities
20,661

 
24,837

Shareholders’ equity
 
 
 
Redeemable preferred stock:
 
 
 
Series B (1,501,100 shares authorized, $0.01 par value, 575,000 shares issued and outstanding at both June 30, 2015 and December 31, 2014)
575

 
575

Series C (1,000 shares authorized, $0.01 par value, 1,000 shares issued and outstanding at both June 30, 2015 and December 31, 2014)
1,000

 
1,000

Common shareholder’s equity:
 
 
 
Common stock ($0.01 par value, 100 shares authorized; 68 shares issued and outstanding at both June 30, 2015 and December 31, 2014)

 

Additional paid-in-capital
23,989

 
23,987

Accumulated deficit
(18,657
)
 
(18,374
)
Accumulated other comprehensive loss
(45
)
 
(65
)
Total common shareholder’s equity
5,287

 
5,548

Total shareholders’ equity
6,862

 
7,123

Total liabilities and shareholders’ equity
$
27,523

 
$
31,960


The accompanying notes are an integral part of the consolidated financial statements.

5


HSBC Finance Corporation

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
Six Months Ended June 30,
2015
 
2014
 
(in millions)
Preferred stock
 
 
 
Balance at beginning and end of period
$
1,575

 
$
1,575

Common shareholder’s equity
 
 
 
Common stock
 
 
 
Balance at beginning and end of period

 

Additional paid-in-capital
 
 
 
Balance at beginning of period
23,987

 
23,968

Employee benefit plans, including transfers and other
2

 
(5
)
Balance at end of period
23,989

 
23,963

Accumulated deficit
 
 
 
Balance at beginning of period
(18,374
)
 
(18,774
)
Net income (loss)
(221
)
 
335

Dividends on preferred stock
(62
)
 
(62
)
Balance at end of period
(18,657
)
 
(18,501
)
Accumulated other comprehensive income (loss)
 
 
 
Balance at beginning of period
(65
)
 
(108
)
Other comprehensive income
20

 
23

Balance at end of period
(45
)
 
(85
)
Total common shareholder’s equity at end of period
5,287

 
5,377

Total shareholders' equity at end of period
$
6,862

 
$
6,952


The accompanying notes are an integral part of the consolidated financial statements.

6


HSBC Finance Corporation

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30,
2015
 
2014
 
(in millions)
Cash flows from operating activities
 
 
 
Net income (loss)
$
(221
)
 
$
335

Loss from discontinued operations
(8
)
 
(13
)
Income (loss) from continuing operations
(213
)
 
348

Adjustments to reconcile income (loss) to net cash used in operating activities:
 
 
 
Provision for credit losses
219

 
(195
)
Lower of amortized cost or fair value adjustment on receivables held for sale
71

 
(208
)
Gain on sale of real estate owned, including lower of amortized cost or fair value adjustments
(4
)
 
(12
)
Depreciation and amortization
4

 
4

Mark-to-market on debt designated at fair value and related derivatives
(16
)
 
63

Foreign exchange and derivative movements on long-term debt and net change in non-fair value option related derivative assets and liabilities
(380
)
 
(79
)
Net change in other assets
(160
)
 
193

Net change in other liabilities
326

 
(143
)
Other, net
(9
)
 
50

Cash provided by (used in) operating activities – continuing operations
(162
)
 
21

Cash provided by operating activities – discontinued operations
20

 
55

Cash provided by (used in) operating activities
(142
)
 
76

 
 
 
 
Cash flows from investing activities
 
 
 
Net change in securities purchased under agreements to resell
2,771

 
1,280

Net change in interest bearing deposits with banks
(2
)
 

Receivables:
 
 
 
Net collections
1,052

 
1,013

Proceeds from sales of receivables
321

 
950

Proceeds from sales of real estate owned
113

 
309

Cash provided by investing activities – continuing operations
4,255

 
3,552

Cash provided by investing activities – discontinued operations

 

Cash provided by investing activities
4,255

 
3,552


7


HSBC Finance Corporation

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (Continued)
Six Months Ended June 30,
2015
 
2014
 
(in millions)
 
 
 
 
Cash flows from financing activities
 
 
 
Debt:
 
 
 
Net change in due to affiliates
(1,002
)
 
(1,001
)
Long-term debt retired
(3,054
)
 
(2,545
)
Shareholders’ dividends
(62
)
 
(62
)
Cash used in financing activities – continuing operations
(4,118
)
 
(3,608
)
Cash used in financing activities – discontinued operations

 

Cash used in financing activities
(4,118
)
 
(3,608
)
Net change in cash
(5
)
 
20

Cash at beginning of period(1)
175

 
198

Cash at end of period(2)
$
170

 
$
218

Supplemental Noncash Investing and Capital Activities:
 
 
 
Fair value of properties added to real estate owned
$
74

 
$
155

Transfer of receivables to held for sale
10,002

 
534

 
(1) 
Cash at beginning of period includes $18 million and $23 million for discontinued operations as of January 1, 2015 and 2014, respectively.
(2) 
Cash at end of period includes $17 million and $23 million for discontinued operations as of June 30, 2015 and 2014, respectively.

The accompanying notes are an integral part of the consolidated financial statements.

8


HSBC Finance Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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” and, together with its subsidiaries, "HSBC Group"). 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, 2014 (the "2014 Form 10-K"). Certain reclassifications have been made to prior period amounts to conform to the current period presentation.
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 historically and the challenges we anticipate with respect to a sustained return to profitability under prevailing and forecasted economic and business conditions. HSBC continues to be fully committed and has the capacity to continue to provide the necessary capital and liquidity to fund continuing operations.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Unless otherwise noted, information included in these notes to the consolidated financial statements relates to continuing operations for all periods presented. See Note 2, "Discontinued Operations," for further details. Interim results should not be considered indicative of results in future periods.

2.
Discontinued Operations
 
2012 Discontinued Operations:
Commercial In 2012, we began reporting our Commercial business in discontinued operations as there were no longer any outstanding receivable balances or any remaining significant cash flows generated from this business. At June 30, 2015 and December 31, 2014, assets of our Commercial business totaled $21 million and $62 million, respectively. There were no liabilities in our Commercial business at either June 30, 2015 or December 31, 2014. The following table summarizes the operating results of our discontinued Commercial business for the periods presented:

9


HSBC Finance Corporation

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
 
(in millions)
Net interest income and other revenues
$
1

 
$
4

 
$
8

 
$
6

Income from discontinued operations before income tax
1

 
3

 
5

 
4

2011 Discontinued Operations:
Card and Retail Services In May 2012, HSBC, through its wholly-owned subsidiaries HSBC Finance Corporation, HSBC USA Inc. ("HSBC USA") and other wholly-owned affiliates, sold its Card and Retail Services business to Capital One Financial Corporation (“Capital One”). In addition to receivables, the sale included real estate and certain other assets and liabilities which were sold at book value or, in the case of real estate, appraised value.
The following table summarizes the operating results of our discontinued Card and Retail Services business for the periods presented:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
 
(in millions)
Net interest income and other revenues
$

 
$

 
$

 
$

Income (loss) from discontinued operations before income tax(1)
(10
)
 
(12
)
 
(14
)
 
(24
)
 
(1) 
For the three and six months ended June 30, 2015, the amounts primarily relate to legal accruals. For the three and six months ended June 30, 2014, the amounts include expenses related to activities to complete the separation of the credit card operational infrastructure between us and Capital One.
There were no assets in our discontinued Card and Retail Services business at June 30, 2015. At December 31, 2014, assets of our discontinued Card and Retail Services business totaled $1 million. Liabilities of our Card and Retail Services business totaled $60 million and $71 million, at June 30, 2015 and December 31, 2014, respectively, which primarily consists of certain legal accruals.
Through our discontinued Cards and Retail Services business, we previously offered or participated in the marketing, distribution, or servicing of products, such as identity theft protection and credit monitoring products, that were ancillary to the provision of credit to the consumer (enhancement services products). We ceased the marketing, distribution and servicing of these products by May 2012. The offering and administration of these, and other enhancement services products such as debt protection products, has been the subject of enforcement actions against other institutions by regulators, including the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency (“OCC”), and the Federal Deposit Insurance Corporation. These enforcement actions have resulted in orders to pay restitution to customers and the assessment of penalties in substantial amounts. We have made restitution to certain customers in connection with certain enhancement services products and we continue to cooperate with our regulators in connection with their on-going review. In light of the actions regulators have taken in relation to other credit card issuers regarding their enhancement services products, one or more regulators may order us to pay additional restitution to customers and/or impose civil money penalties or other relief arising from our prior offering and administration of such enhancement services products. In light of the actions taken by regulators with respect to other credit card issuers, our own past remediation, together with consideration of mitigating factors, including any differences between product features offered and actions we have taken as compared to other credit card issuers, the range of reasonably possible losses for any additional remediation, if ordered by our regulators, in excess of our recorded liability, including civil money penalties, is between zero and $0.5 billion at June 30, 2015.


10


HSBC Finance Corporation

3.
Receivables
 
Receivables consisted of the following:
 
June 30, 2015
 
December 31, 2014
 
(in millions)
Real estate secured:
 
 
 
First lien
$
8,235

 
$
20,153

Second lien
2,072

 
2,517

Total real estate secured receivables
10,307

 
22,670

Accrued interest income and other
150

 
789

Credit loss reserve for receivables
(408
)
 
(2,217
)
Total receivables, net
$
10,049

 
$
21,242

In June 2015, we expanded our receivable sales program which resulted in the transfer of receivables with a carrying value of $11,399 million, including accrued interest, to held for sale. See Note 5, "Receivables Held for Sale," for additional information.
Deferred origination fees, net of costs, totaled $63 million and $159 million at June 30, 2015 and December 31, 2014, respectively, and are included in the receivables balance. Net unamortized premium on our receivables totaled $45 million and $76 million at June 30, 2015 and December 31, 2014, respectively, and are also included in the receivables balance.
Collateralized funding transactions  Secured financings previously issued under public trusts with a balance of $1,012 million at June 30, 2015 are secured by $1,915 million of closed-end real estate secured receivables. Secured financings previously issued under public trusts with a balance of $1,489 million at December 31, 2014 were secured by $2,999 million of closed-end real estate secured receivables.
Aging Analysis of Past Due Receivables The following tables summarize the past due status of our receivables at June 30, 2015 and December 31, 2014. The aging of past due amounts is determined based on the contractual delinquency status of payments made under the terms of the receivable. An account is generally considered to be contractually delinquent when payments have not been made in accordance with the loan terms. Delinquency status is affected by customer account management policies and practices such as re-aging.
 
Past Due
Total Past Due
 
 
 
Total Receivables(2)
June 30, 2015
30 – 89 days
 
90+ days
 
Current(1)
 
 
(in millions)
Real estate secured:
 
 
 
 
 
 
 
 
 
First lien
$
202

 
$
242

 
$
444

 
$
7,791

 
$
8,235

Second lien
107

 
66

 
173

 
1,899

 
2,072

Total real estate secured receivables
$
309

 
$
308

 
$
617

 
$
9,690

 
$
10,307

 
Past Due
 
Total
Past Due
 
 
 
Total
Receivables(2)
December 31, 2014
30 – 89 days
 
90+ days
 
Current(1)
 
 
(in millions)
Real estate secured:
 
 
 
 
 
 
 
 
 
First lien
$
1,572

 
$
902

 
$
2,474

 
$
17,679

 
$
20,153

Second lien
165

 
100

 
265

 
2,252

 
2,517

Total real estate secured receivables
$
1,737

 
$
1,002

 
$
2,739

 
$
19,931

 
$
22,670

 
(1) 
Receivables less than 30 days past due are presented as current.
(2) 
The receivable balances included in this table reflects the principal amount outstanding on the loan net of any charge-off recorded in accordance with our existing charge-off policies and includes certain basis adjustments to the loan such as unearned income, unamortized deferred fees and costs on originated loans, purchase accounting fair value adjustments and premiums or discounts on purchased loans. However, these basis adjustments on the loans are excluded in other presentations of dollars of two-months-and-over contractual delinquency, nonaccrual receivable and nonperforming receivable account balances.

11


HSBC Finance Corporation

Nonaccrual receivables Nonaccrual receivables and nonaccrual receivables held for sale are all receivables which are 90 or more days contractually delinquent as well as second lien loans (regardless of delinquency status) where the first lien loan that we own or service is 90 or more days contractually delinquent. Nonaccrual receivables do not include receivables which have made qualifying payments and have been re-aged such that the contractual delinquency status has been reset to current. If a re-aged loan subsequently experiences payment default and becomes 90 or more days contractually delinquent, it will be reported as nonaccrual.
Nonaccrual receivables and nonaccrual receivables held for sale consisted of the following:
 
June 30, 2015
 
December 31, 2014
 
(in millions)
Nonaccrual receivable portfolios(1):
 
 
 
Real estate secured(2)
$
320

 
$
1,024

Receivables held for sale(3)
806

 
509

Total nonaccrual receivables(4)
$
1,126

 
$
1,533

 
(1) 
The receivable balances included in this table reflects the principal amount outstanding on the loan net of any charge-off recorded in accordance with our existing charge-off policies but excludes any basis adjustments to the loan such as unearned income, unamortized deferred fees and costs on originated loans, purchase accounting fair value adjustments and premiums or discounts on purchased loans. Additionally, the balances in this table related to receivables which have been classified as held for sale have been reduced by the lower of amortized cost or fair value adjustment recorded as well as the credit loss reserves associated with these receivables prior to the transfer.
(2) 
At June 30, 2015 and December 31, 2014, nonaccrual real estate secured receivables held for investment include $208 million and $417 million, respectively, of receivables that are carried at the lower of amortized cost or fair value of the collateral less cost to sell.
(3) 
For a discussion of the movements between the components of nonaccrual receivables, see Note 5, "Receivables Held for Sale," which includes discussion of the expansion of our receivable sales program in the second quarter of 2015.
(4) 
Nonaccrual receivables do not include receivables totaling $499 million and $627 million at June 30, 2015 and December 31, 2014, respectively, which have been written down to the lower of amortized cost or fair value of the collateral less cost to sell which are less than 90 days contractually delinquent and not accruing interest.
The following table provides additional information on our total nonaccrual receivables:
Six Months Ended June 30,
2015
 
2014
 
(in millions)
Interest income that would have been recorded if the nonaccrual receivable had been current in accordance with contractual terms during the period
$
81

 
$
176

Interest income that was recorded on nonaccrual receivables included in interest income on nonaccrual loans during the period
19

 
31

Troubled Debt Restructurings  We report as trouble debt restructurings ("TDR Loans") substantially all receivables modified as a result of a financial difficulty, regardless of whether the modification was permanent or temporary, including all modifications with trial periods. Additionally, we report as TDR Loans all re-ages, except first time early stage delinquency re-ages where the customer has not been granted a prior re-age or modification. TDR Loans also include receivables discharged under Chapter 7 bankruptcy and not re-affirmed. TDR Loans are considered to be impaired loans. The TDR Loan balances in the tables below reflect the principal amount outstanding on the loan net of any charge-off recorded in accordance with our existing charge-off policies and includes all basis adjustments on the loan, such as unearned income, unamortized deferred fees and costs on originated loans and premiums or discounts on purchased loans. Additionally, the carrying amount of TDR Loans classified as held for sale has been reduced by both the lower of amortized cost or fair value adjustment as well as the credit loss reserves associated with these receivables prior to the transfer.
Modifications for real estate secured receivables may include changes to one or more terms of the loan, including, but not limited to, a change in interest rate, an extension of the amortization period, a reduction in payment amount and partial forgiveness or deferment of principal. A substantial amount of our modifications involve interest rate reductions which lower the amount of interest income we are contractually entitled to receive for a period of time in future periods. By lowering the interest rate and making other changes to the loan terms, we believe we are able to increase the amount of cash flow that will ultimately be collected from the loan, given the borrower's financial condition. Re-aging is an account management action that results in the resetting of the contractual delinquency status of an account to current which generally requires the receipt of two qualifying payments. TDR Loans are reserved for based on the present value of expected future cash flows discounted at the loans' original effective interest rate which generally results in a higher reserve requirement for these loans. The portion of the credit loss reserves on TDR Loans that is associated with the discounting of cash flows is released from credit loss reserves over the life of the TDR Loan. There are

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HSBC Finance Corporation

no credit loss reserves associated with TDR Loans classified as held for sale as they are carried at the lower of amortized cost or fair value.
The following table presents information about receivables and receivables held for sale which as a result of any account management action taken during the three and six months ended June 30, 2015 and 2014 became classified as TDR Loans.
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
 
(in millions)
Real estate secured:
 
 
 
 
 
 
 
First lien
$
17

 
$
169

 
$
142

 
$
394

Second lien
12

 
23

 
28

 
51

Real estate secured receivables held for sale
77

 
25

 
87

 
44

Total(1)
$
106

 
$
217

 
$
257

 
$
489

 
(1) 
The following table summarizes the actions taken during the three and six months ended June 30, 2015 and 2014 which resulted in the above receivables being classified as a TDR Loan.
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
 
(in millions)
Modifications, primarily interest rate modifications
$
40

 
$
80

 
$
100

 
$
164

Re-age of past due account
66

 
137

 
157

 
325

Total
$
106

 
$
217

 
$
257

 
$
489

During the first quarter of 2015, it was determined that loan balances totaling $160 million previously reported as modifications in the table above during the first quarter of 2014 should have been reported as a re-age. Accordingly, the modification and re-age information presented in the table above for the six months ended June 30, 2014 has been adjusted to reflect the corrected classification. The total amounts reported remain unchanged.
Receivables and receivables held for sale reported as TDR Loans are summarized in the table below. The trends reflected in this table reflect the impact of the transfer of additional receivables to held for sale as a result of the expansion of the receivable sales program as the majority of the receivables transferred to held for sale were previously classified as TDR Loans.
 
June 30, 2015
 
December 31, 2014
 
(in millions)
TDR Loans:(1)(2)
 
 
 
Real estate secured:
 
 
 
First lien(3)
$
1,043

 
$
9,630

Second lien(3)
698

 
915

Real estate secured receivables held for sale(4)
7,433

 
650

Total real estate secured TDR Loans
$
9,174

 
$
11,195

 
 
 
 
Credit loss reserves for TDR Loans:(5)
 
 
 
Real estate secured:
 
 
 
First lien
$
139

 
$
1,738

Second lien
159

 
244

Total credit loss reserves for real estate secured TDR Loans(4)
$
298

 
$
1,982

 
(1) 
TDR Loans are considered to be impaired loans regardless of accrual status.
(2) 
The following table reflects the unpaid principal balance of TDR Loans:

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HSBC Finance Corporation

 
June 30, 2015
 
December 31, 2014
 
(in millions)
Real estate secured:
 
 
 
First lien
$
1,187

 
$
9,931

Second lien
792

 
1,050

Real estate secured receivables held for sale
9,358

 
1,004

Total real estate secured TDR Loans
$
11,337

 
$
11,985

At June 30, 2015 and December 31, 2014, the unpaid principal balances reflected above include $683 million and $549 million, respectively, which have received a reduction in the unpaid principal balance as part of an account management action.
(3) 
At June 30, 2015 and December 31, 2014, TDR Loans held for investment totaling $256 million and $517 million, respectively, are recorded at the lower of amortized cost or fair value of the collateral less cost to sell.
(4) 
There are no credit loss reserves associated with receivables classified as held for sale as they are carried at the lower of amortized cost or fair value.
(5) 
Included in credit loss reserves.
The following table discloses receivables and receivables held for sale which were classified as TDR Loans during the previous 12 months which subsequently became sixty days or greater contractually delinquent during the three and six months ended June 30, 2015 and 2014.
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
 
(in millions)
Real estate secured:
 
 
 
 
 
 
 
First lien
$
7

 
$
94

 
$
62

 
$
236

Second lien
5

 
14

 
14

 
31

Real estate secured receivables held for sale
37

 
7

 
39

 
23

Total
$
49

 
$
115

 
$
115

 
$
290

The following table provides additional information relating to TDR Loans, including TDR Loans held for sale:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
 
(in millions)
Average balance of TDR Loans:
 
 
 
 
 
 
 
Real estate secured:
 
 
 
 
 
 
 
First lien
$
9,715

 
$
11,722

 
$
9,972

 
$
11,856

Second lien
864

 
985

 
884

 
1,010

Total average balance of TDR Loans
$
10,579

 
$
12,707

 
$
10,856

 
$
12,866

Interest income recognized on TDR Loans:
 
 
 
 
 
 
 
Real estate secured:
 
 
 
 
 
 
 
First lien
$
175

 
$
200

 
$
355

 
$
406

Second lien
22

 
24

 
44

 
49

Total interest income recognized on TDR Loans
$
197

 
$
224

 
$
399

 
$
455


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HSBC Finance Corporation

Consumer Receivable Credit Quality Indicators  Credit quality indicators used for consumer receivables include a loan’s delinquency status, whether the loan is performing and whether the loan is a TDR Loan.
Delinquency The following table summarizes dollars of two-months-and-over contractual delinquency and as a percent of total receivables and receivables held for sale (“delinquency ratio”) for our loan portfolio. As previously discussed, in June 2015 we expanded our receivable sales program and transferred receivables with a carrying value of $11,399 million, including accrued interest, to held for sale during the second quarter of 2015 which creates a lack of comparability between dollars of contractual delinquency and the delinquency ratio between periods.
 
June 30, 2015
 
December 31, 2014
 
Dollars of
Delinquency
 
Delinquency
Ratio
 
Dollars of
Delinquency
 
Delinquency
Ratio
 
(dollars are in millions)
Real estate secured receivables(1):
 
 
 
 
 
 
 
First lien
$
302

 
3.67
%
 
$
1,388

 
6.89
%
Second lien
101

 
4.87

 
154

 
6.12

Real estate secured receivables held for sale
1,108

 
10.75

 
530

 
61.63

Total real estate secured receivables(2)
$
1,511

 
7.33
%
 
$
2,072

 
8.81
%
 
(1) 
The receivable balances included in this table reflects the principal amount outstanding on the loan net of any charge-off recorded in accordance with our existing charge-off policies but excludes any basis adjustments to the loan such as unearned income, unamortized deferred fees and costs on originated loans, purchase accounting fair value adjustments and premiums or discounts on purchased loans. Additionally, the balances in this table related to receivables which have been classified as held for sale have been reduced by the lower of amortized cost or fair value adjustment recorded as well as the credit loss reserves associated with these receivables prior to the transfer.
(2) 
At June 30, 2015 and December 31, 2014, total real estate secured receivables includes $615 million and $745 million, respectively, that are in the process of foreclosure.
Nonperforming The following table summarizes the status of receivables and receivables held for sale.
 
Accruing Loans
 
Nonaccrual
Loans(4)
 
Total
 
(in millions)
At June 30, 2015(1)
 
 
 
 
 
Real estate secured(2)(3)
$
9,987

 
$
320

 
$
10,307

Real estate secured receivables held for sale
9,504

 
806

 
10,310

Total
$
19,491

 
$
1,126

 
$
20,617

At December 31, 2014(1)
 
 
 
 
 
Real estate secured(2)(3)
$
21,646

 
$
1,024

 
$
22,670

Real estate secured receivables held for sale
351

 
509

 
860

Total
$
21,997

 
$
1,533

 
$
23,530

 
(1) 
The receivable balances included in this table reflect the current carrying amount of the loan excluding certain basis adjustments to the loan such as deferred fees and costs on originated loans, purchase accounting fair value adjustments and premiums or discounts on purchased receivables.
(2) 
At June 30, 2015 and December 31, 2014, nonaccrual real estate secured receivables held for investment include $208 million and $417 million, respectively, of receivables that are carried at the lower of amortized cost or fair value of the collateral less cost to sell.
(3) 
At June 30, 2015 and December 31, 2014, nonaccrual real estate secured receivables held for investment include $197 million and $739 million, respectively, of TDR Loans, some of which may also be carried at fair value of the collateral less cost to sell.
(4) 
Nonaccrual loans do not include receivables totaling $499 million and $627 million at June 30, 2015 and December 31, 2014, respectively, which have been written down to the lower of amortized cost or fair value of the collateral less cost to sell which are less than 90 days contractually delinquent and not accruing interest.
Troubled debt restructurings  See discussion of TDR Loans above for further details on this credit quality indicator.


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HSBC Finance Corporation

4.
Credit Loss Reserves
 
The following table summarizes the changes in credit loss reserves by product and the related receivable balance by product during the three and six months ended June 30, 2015 and 2014:
 
Real Estate Secured
 
Personal Non- Credit Card
 
Total
 
First Lien
 
Second Lien
 
 
(in millions)
Three Months Ended June 30, 2015:
 
 
 
 
 
 
 
Credit loss reserve rollforward:
 
 
 
 
 
 
 
Credit loss reserve balances at beginning of period
$
1,839

 
$
271

 
$

 
$
2,110

Provision for credit losses(1)
167

 
25

 

 
192

Net charge-offs:
 
 
 
 
 
 
 
Charge-offs(1)(2)
(1,808
)
 
(90
)
 

 
(1,898
)
Recoveries
2

 
2

 

 
4

Total net charge-offs
(1,806
)
 
(88
)
 

 
(1,894
)
Credit loss reserve balance at end of period
$
200

 
$
208

 
$

 
$
408

Six Months Ended June 30, 2015:
 
 
 
 
 
 
 
Credit loss reserve rollforward:
 
 
 
 
 
 
 
Credit loss reserve balance at beginning of period
$
1,898

 
$
319

 
$

 
$
2,217

Provision for credit losses(1)
204

 
15

 

 
219

Net charge-offs:
 
 
 
 
 
 
 
Charge-offs(1)(2)
(1,916
)
 
(129
)
 

 
(2,045
)
Recoveries
14

 
3

 

 
17

Total net charge-offs
(1,902
)
 
(126
)
 

 
(2,028
)
Credit loss reserve balance at end of period
$
200

 
$
208

 
$

 
$
408

Reserve components:
 
 
 
 
 
 
 
Collectively evaluated for impairment
$
57

 
$
49

 
$

 
$
106

Individually evaluated for impairment(3)
129

 
159

 

 
288

Receivables carried at the lower of amortized cost or fair value of the collateral less cost to sell
13

 

 

 
13

Receivables acquired with deteriorated credit quality
1

 

 

 
1

Total credit loss reserves
$
200

 
$
208

 
$

 
$
408

Receivables:
 
 
 
 
 
 
 
Collectively evaluated for impairment
$
7,105

 
$
1,366

 
$

 
$
8,471

Individually evaluated for impairment(3)
806

 
679

 

 
1,485

Receivables carried at the lower of amortized cost or fair value of the collateral less cost to sell
315

 
26

 

 
341

Receivables acquired with deteriorated credit quality
9

 
1

 

 
10

Total receivables
$
8,235

 
$
2,072

 
$

 
$
10,307

Three Months Ended June 30, 2014:
 
 
 
 
 
 
 
Credit loss reserve rollforward:
 
 
 
 
 
 
 
Credit loss reserve balances at beginning of period
$
2,526

 
$
471

 
$

 
$
2,997

Provision for credit losses
(115
)
 
(69
)
 
(13
)
 
(197
)
Net charge-offs:
 
 
 
 
 
 
 
Charge-offs(2)
(143
)
 
(52
)
 

 
(195
)
Recoveries
28

 
46

 
13

 
87

Total net charge-offs
(115
)
 
(6
)
 
13

 
(108
)
Credit loss reserve balance at end of period
$
2,296

 
$
396

 
$

 
$
2,692

Six Months Ended June 30, 2014:
 
 
 
 
 
 
 

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HSBC Finance Corporation

 
Real Estate Secured
 
Personal Non- Credit Card
 
Total
 
First Lien
 
Second Lien
 
 
(in millions)
Credit loss reserve rollforward:
 
 
 
 
 
 
 
Credit loss reserve balance at beginning of period
$
2,777

 
$
496

 
$

 
$
3,273

Provision for credit losses
(139
)
 
(39
)
 
(17
)
 
(195
)
Net charge-offs:
 
 
 
 
 
 
 
Charge-offs(2)
(391
)
 
(115
)
 

 
(506
)
Recoveries
49

 
54

 
17

 
120

Total net charge-offs
(342
)
 
(61
)
 
17

 
(386
)
Credit loss reserve balance at end of period
$
2,296

 
$
396

 
$

 
$
2,692

Reserve components:
 
 
 
 
 
 
 
Collectively evaluated for impairment
$
299

 
$
77

 
$

 
$
376

Individually evaluated for impairment(3)
1,946

 
318

 

 
2,264

Receivables carried at the lower of amortized cost or fair value of the collateral less cost to sell
49

 

 

 
49

Receivables acquired with deteriorated credit quality
2

 
1

 

 
3

Total credit loss reserves
$
2,296

 
$
396

 
$

 
$
2,692

Receivables:
 
 
 
 
 
 
 
Collectively evaluated for impairment
$
11,279

 
$
1,810

 
$

 
$
13,089

Individually evaluated for impairment(3)
9,575

 
948

 

 
10,523

Receivables carried at the lower of amortized cost or fair value of the collateral less cost to sell
819

 
31

 

 
850

Receivables acquired with deteriorated credit quality
9

 
2

 

 
11

Total receivables
$
21,682

 
$
2,791

 
$

 
$
24,473

 
(1) 
The provision for credit losses and charge-offs for real estate secured receivables during the three and six months ended June 30, 2015 includes $220 million related to the lower of amortized cost or fair value adjustment attributable to credit factors for receivables transferred to held for sale in June 2015. See Note 5, "Receivables Held for Sale," for additional information. The provision for credit losses for real estate secured receivables during the six months ended June 30, 2015 was impacted by a release of approximately $19 million associated with a correction to our credit loss reserve calculation for a segment of our portfolio.
(2) 
For collateral dependent receivables that are transferred to held for sale, existing credit loss reserves at the time of transfer are recognized as a charge-off. We transferred to held for sale certain real estate secured receivables during the three and six months ended June 30, 2015 and 2014 and, accordingly, we recognized the existing credit loss reserves on these receivables as additional charge-off totaling $1,578 million and $1,593 million during the three and six months ended June 30, 2015 compared with $18 million and $38 million during the three and six months ended June 30, 2014, respectively.
(3) 
These amounts represent TDR Loans for which we evaluate reserves using a discounted cash flow methodology. Each loan is individually identified as a TDR Loan and then grouped together with other TDR Loans with similar characteristics. The discounted cash flow impairment analysis is then applied to these groups of TDR Loans. The receivable balance above excludes TDR Loans that are carried at the lower of amortized cost or fair value of the collateral less cost to sell which totaled $256 million and $544 million at June 30, 2015 and 2014, respectively. The reserve component above excludes credit loss reserves totaling $10 million and $34 million at June 30, 2015 and 2014, respectively, for TDR Loans that are carried at the lower of amortized cost or fair value of the collateral less cost to sell. These receivables and credit loss reserves are reflected within receivables and credit loss reserves carried at the lower of amortized cost or fair value of the collateral less cost to sell in the table above.


17


HSBC Finance Corporation

5.
Receivables Held for Sale
 
Real Estate Secured Receivables Real estate secured receivables held for sale which are carried at the lower of amortized cost or fair value are comprised of the following:
 
June 30, 2015
 
December 31, 2014
 
(in millions)
Real estate secured receivables held for sale:
 
 
 
First lien
$
10,152

 
$
860

Second lien
158

 

Total real estate secured receivables held for sale
$
10,310

 
$
860

As discussed in prior filings, we initiate sale activities for first lien real estate secured receivables in our held for investment portfolio when a receivable meets pre-determined criteria and is written down to the lower of amortized cost or fair value of the collateral less cost to sell in accordance with our existing charge-off policies (generally 180 days past due).
In June 2015, we decided to expand our sales program to include substantially all of our first lien real estate secured receivables held for investment which have been either re-aged, modified or subject to a bankruptcy filing since 2007, along with any second lien balances associated with these receivables which resulted in the transfer of receivables with a carrying value of $11,399 million, including accrued interest, to receivables held for sale as we no longer had the intent to hold these receivables. Upon transferring these receivables to held for sale, we recorded an initial lower of amortized cost or fair value adjustment of $220 million in the second quarter of 2015, all of which was attributed to credit factors and recorded as a component of the provision for credit losses as there was no objective, verifiable evidence to indicate non-credit factors were associated with the decline in fair value. The expansion of our sales program will accelerate our existing run-off strategy and, as a result, during the second quarter of 2015, we recorded pre-tax expense of $22 million for severance costs related to approximately 700 employees over the course of our receivable sales program.
During the three and six months ended June 30, 2015, under our expanded sales program we transferred real estate secured receivables to held for sale with a total unpaid principal balance (excluding accrued interest) of approximately $11,000 million and $11,431 million, respectively, at the time of transfer. The carrying value of these receivables prior to transfer after considering the fair value of the property less cost to sell, as applicable, was approximately $11,504 million and $11,815 million, including accrued interest, during the three and six months ended June 30, 2015, respectively. As we plan to sell these receivables to third party investors, fair value represents the price we believe a third party investor would pay to acquire the receivable portfolios. During both the three and six months ended June 30, 2015, we recorded an initial lower of amortized cost or fair value adjustment of $220 million associated with the newly transferred loans all of which was attributed to credit factors and recorded as a component of the provision for credit losses in the consolidated statement of income (loss).
During the three and six months ended June 30, 2015, we recorded $53 million and $69 million, respectively, of additional lower of amortized cost or fair value adjustment on receivables held for sale as a result of a change in the estimated pricing on specific pools of loans.
During the three and six months ended June 30, 2014, we transferred real estate secured receivables to held for sale with an unpaid principal balance (excluding accrued interest) of approximately $430 million and $869 million, respectively, at the time of transfer. The carrying value of these receivables prior to transfer after considering the fair value of the property less cost to sell was approximately $332 million and $674 million, including accrued interest, for the three and six months ended June 30, 2014, respectively. During the three and six months ended June 30, 2014 we recorded an initial lower of amortized cost or fair value adjustment of $42 million and $102 million, respectively, associated with the newly transferred loans, all of which was attributable to non-credit related factors and recorded as a component of total other revenues in the consolidated statement of income (loss). These receivables were already carried at the lower of amortized cost or fair value of the collateral less cost to sell.
During the three and six months ended June 30, 2014, we reversed $137 million and $313 million, respectively, of the lower of amortized cost or fair value adjustment previously recorded primarily due to an increase in the fair value of the real estate secured receivables held for sale as conditions in the housing industry showed improvement during the first six months of 2014 due to improvements in property values as well as lower required market yields and increased investor demand for these types of receivables.

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HSBC Finance Corporation

Historically, receivables held for sale have been sold to investors or, if the foreclosure process is completed prior to sale, the underlying properties acquired in satisfaction of the receivables have been classified as real estate owned ("REO") and sold. As we continue to work with borrowers, we have also historically agreed to short sales whereby the property is sold by the borrower at a price which has been pre-negotiated with us and the borrower is released from further obligation. Accordingly, based on the projected timing of loan sales and the expected flow of foreclosure volume into REO or settled through a short sale, a portion of the real estate secured receivables classified as held for sale will ultimately become REO or settled through a short sale. As a result, a portion of the non-credit fair value adjustment on receivables held for sale may be reversed in earnings over time. The following table summarizes the activity of real estate secured receivables either transferred to REO or the underlying collateral sold in a short sale during the three and six months ended June 30, 2015 and 2014.
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
 
(in millions)
Carrying value of real estate secured receivables:
 
 
 
 
 
 
 
Transferred to REO after obtaining title to the underlying collateral
$
22

 
$
47

 
$
46

 
$
117

Underlying collateral sold in a short sale
15

 
20

 
26

 
31

Impact to lower of amortized cost or fair value adjustment previously recorded resulting from the transfer to REO or short sales:
 
 
 
 
 
 
 
Transferred to REO after obtaining title to the underlying collateral

 
(2
)
 

 
2

Underlying collateral sold in a short sale
1

 

 
2

 
1


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HSBC Finance Corporation

Receivable Held for Sale Activity During the Period The following table summarizes the activity in receivables held for sale during the three and six months ended June 30, 2015 and 2014:
 
Receivables
Held for Sale
 
(in millions)
Three Months Ended June 30, 2015:
 
Real estate secured receivables held for sale at beginning of period
$
1,097

Real estate secured receivable sales
(301
)
Lower of amortized cost or fair value adjustment on real estate secured receivables held for sale
(54
)
Carrying value of real estate secured receivables held for sale settled through short sale or transfer to REO
(37
)
Change in real estate secured receivable balance, including collections
(101
)
Transfer of real estate secured receivables into held for sale at the lower of amortized cost or fair value(1)(2)
9,706

Real estate secured receivables held for sale at end of period(3)
$
10,310

 
 
Six Months Ended June 30, 2015:
 
Real estate secured receivables held for sale at beginning of period
$
860

Real estate secured receivable sales
(301
)
Lower of amortized cost or fair value adjustment on real estate secured receivables held for sale
(71
)
Carrying value of real estate secured receivables held for sale settled through short sale or transfer to REO
(72
)
Change in real estate secured receivable balance, including collections
(108
)
Transfer of real estate secured receivables into held for sale at the lower of amortized cost or fair value(1)(2)
10,002

Real estate secured receivables held for sale at end of period(3)
$
10,310

 
 
Three Months Ended June 30, 2014:
 
Real estate secured receivables held for sale at beginning of period
$
2,420

Real estate secured receivable sales
(884
)
Lower of amortized cost or fair value adjustment on real estate secured receivables held for sale
139

Carrying value of real estate secured receivables held for sale settled through short sale or transfer to REO
(67
)
Change in real estate secured receivable balance, including collections
(6
)
Transfer of real estate secured receivables into held for sale at the lower of amortized cost or fair value(1)(2)
272

Real estate secured receivables held for sale at end of period(3)
$
1,874

 
 
Six Months Ended June 30, 2014:
 
Real estate secured receivables held for sale at beginning of period
$
2,047

Real estate secured receivable sales
(884
)
Lower of amortized cost or fair value adjustment on real estate secured receivables held for sale
310

Carrying value of real estate secured receivables held for sale settled through short sale or transfer to REO
(148
)
Change in real estate secured receivable balance, including collections
23

Transfer of real estate secured receivables into held for investment at the lower of amortized cost or fair value(4)
(8
)
Transfer of real estate secured receivables into held for sale at the lower of amortized cost or fair value(1)(2)
534

Real estate secured receivables held for sale at end of period(3)
$
1,874

 
(1) 
The initial lower of amortized cost or fair value adjustment on receivables transferred into held for sale during both the three and six months ended June 30, 2015, totaled $220 million compared with $42 million and $102 million during the three and six months ended June 30, 2014, respectively.
(2) 
Amount includes any accrued interest associated with the receivable.
(3) 
The following table provides a rollforward of our valuation allowance for the three and six months ended June 30, 2015 and 2014. See Note 13, "Fair Value Measurements," for a discussion of the factors impacting the fair value of these receivables.

20


HSBC Finance Corporation

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
 
(in millions)
Balance at beginning of period
$

 
$
165

 
$

 
$
329

Initial valuation allowance for real estate secured receivables transferred to held for sale during the period

 
42

 

 
102

Increase in (release of) valuation allowance resulting from changes in fair value
53

 
(139
)
 
69

 
(310
)
Valuation allowance on real estate secured receivables transferred to held for investment

 

 

 
(4
)
Change in valuation allowance for loans sold
(21
)
 

 
(21
)
 

Change in valuation allowance for collections, charged-off, transferred to REO or short sale
1

 
(68
)
 
(15
)
 
(117
)
Balance at end of period
$
33

 
$

 
$
33

 
$

(4) 
During the first quarter of 2014, we identified a small number of receivables held for sale which did not meet our criteria to be classified as held for sale. As a result we transferred these receivables to held for investment at the lower of amortized cost or fair value.


21


HSBC Finance Corporation

The following table summarizes the components of the lower of amortized cost or fair value adjustment during the three and six months ended June 30, 2015 and 2014:
 
Lower of Amortized Cost or Fair Value Adjustments Associated With
 
 
 
Fair Value
 
REO
 
Short Sales
 
Total
 
(in millions)
(Income)/Expense:
 
 
 
 
 
 
 
Three Months Ended June 30, 2015:
 
 
 
 
 
 
 
Lower of amortized cost or fair value adjustments recorded as a component of:
 
 
 
 
 
 
 
Provision for credit losses(1)
$
220

 
$

 
$

 
$
220

Other revenues:
 
 
 
 
 
 
 
Initial lower of amortized cost or fair value adjustment

 

 

 

Subsequent to initial transfer to held for sale
53

 

 
1

 
54

Lower of amortized cost or fair value adjustment recorded through other revenues
53

 

 
1

 
54

Lower of amortized cost or fair value adjustment
$
273

 
$

 
$
1

 
$
274

 
 
 
 
 
 
 
 
Three Months Ended June 30, 2014:
 
 
 
 
 
 
 
Lower of amortized cost or fair value adjustments recorded as a component of other revenues:
 
 
 
 
 
 
 
Initial lower of amortized cost or fair value adjustment(2)
$
42

 
$

 
$

 
$
42

Subsequent to initial transfer to held for sale
(137
)
 
(2
)
 

 
(139
)
Lower of amortized cost or fair value adjustment recorded through other revenues(3)
$
(95
)
 
$
(2
)
 
$

 
$
(97
)
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2015:
 
 
 
 
 
 
 
Lower of amortized cost or fair value adjustments recorded as a component of:
 
 
 
 
 
 
 
Provision for credit losses(1)
$
220

 
$

 
$

 
$
220

Other revenues:
 
 
 
 
 
 
 
Initial lower of amortized cost or fair value adjustment

 

 

 

Subsequent to initial transfer to held for sale
69

 

 
2

 
71

Lower of amortized cost or fair value adjustment recorded through other revenues
69

 

 
2

 
71

Lower of amortized cost or fair value adjustment
$
289

 
$

 
$
2

 
$
291

 
 
 
 
 
 
 
 
Six Months Ended June 30, 2014:
 
 
 
 
 
 
 
Lower of amortized cost or fair value adjustments recorded as a component of other revenues:
 
 
 
 
 
 
 
Initial lower of amortized cost or fair value adjustment(2)
$
102

 
$

 
$

 
$
102

Subsequent to initial transfer to held for sale
(313
)
 
2

 
1

 
(310
)
Lower of amortized cost or fair value adjustment recorded through other revenues(3)
$
(211
)
 
$
2