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EX-31 - EXHIBIT 31 - HSBC Finance Corphbio93015ex31.htm
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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 September 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 October 30, 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
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
(in millions)
Interest income
$
396

 
$
473

 
$
1,235

 
$
1,471

Interest expense on debt held by:
 
 
 
 
 
 
 
Non-affiliates
164

 
209

 
545

 
636

HSBC affiliates
50

 
54

 
156

 
168

Interest expense
214

 
263

 
701

 
804

Net interest income
182

 
210

 
534

 
667

Provision for credit losses
18

 
(43
)
 
237

 
(238
)
Net interest income after provision for credit losses
164

 
253

 
297

 
905

Other revenues:
 
 
 
 
 
 
 
Derivative related expense
(128
)
 
(7
)
 
(135
)
 
(187
)
Gain on debt designated at fair value and related derivatives
34

 
72

 
167

 
145

Servicing and other fees from HSBC affiliates
5

 
6

 
17

 
20

Lower of amortized cost or fair value adjustment on receivables held for sale
(83
)
 
84

 
(154
)
 
292

Other income
74

 
14

 
103

 
28

Total other revenues
(98
)
 
169

 
(2
)
 
298

Operating expenses:
 
 
 
 
 
 
 
Salaries and employee benefits
55

 
47

 
158

 
154

Occupancy and equipment expenses, net
8

 
8

 
24

 
26

Real estate owned expenses
6

 
2

 
11

 
14

Other administrative expenses
109

 
52

 
543

 
120

Support services from HSBC affiliates
54

 
65

 
166

 
198

Total operating expenses
232

 
174

 
902

 
512

Income (loss) from continuing operations before income tax
(166
)
 
248

 
(607
)
 
691

Income tax expense (benefit)
(129
)
 
87

 
(357
)
 
182

Income (loss) from continuing operations
(37
)
 
161

 
(250
)
 
509

Discontinued operations (Note 2):
 
 
 
 
 
 
 
Loss from discontinued operations before income tax
(3
)
 
(4
)
 
(12
)
 
(24
)
Income tax benefit (expense)
3

 
(5
)
 
4

 
2

Loss from discontinued operations

 
(9
)
 
(8
)
 
(22
)
Net income (loss)
$
(37
)
 
$
152

 
$
(258
)
 
$
487


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
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
(in millions)
Net income (loss)
$
(37
)
 
$
152

 
$
(258
)
 
$
487

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Net change in unrealized gains (losses), net of tax, on:
 
 
 
 
 
 
 
Derivatives designated as cash flow hedges
8

 
11

 
28

 
34

Pension and postretirement benefit plan adjustments

 
1

 

 
1

Other comprehensive income, net of tax
8

 
12

 
28

 
35

Total comprehensive income (loss)
$
(29
)
 
$
164

 
$
(230
)
 
$
522


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


4


HSBC Finance Corporation

CONSOLIDATED BALANCE SHEET (UNAUDITED)
 
September 30, 2015
 
December 31, 2014
 
(in millions,
except share data)
Assets
 
 
 
Cash
$
131

 
$
157

Interest bearing deposits with banks
1,503

 
2,000

Securities purchased under agreements to resell
531

 
3,863

Receivables, net (including $1.8 billion and $3.0 billion at September 30, 2015 and December 31, 2014, respectively, collateralizing long-term debt and net of credit loss reserves of $341 million and $2.2 billion at September 30, 2015 and December 31, 2014, respectively)
9,434

 
21,242

Receivables held for sale
10,041

 
860

Properties and equipment, net
5

 
63

Real estate owned
101

 
159

Deferred income taxes, net
2,793

 
2,444

Other assets
1,076

 
1,109

Assets of discontinued operations
21

 
63

Total assets
$
25,636

 
$
31,960

Liabilities
 
 
 
Debt:
 
 
 
Due to affiliates (including $505 million and $512 million at September 30, 2015 and December 31, 2014, respectively, carried at fair value)
$
4,936

 
$
6,945

Long-term debt (including $4.6 billion and $6.8 billion at September 30, 2015 and December 31, 2014, respectively, carried at fair value and $943 million and $1.5 billion at September 30, 2015 and December 31, 2014, respectively, collateralized by receivables)
12,206

 
16,427

Total debt
17,142

 
23,372

Derivative related liabilities
59

 
82

Liability for postretirement benefits
214

 
221

Other liabilities
1,358

 
1,091

Liabilities of discontinued operations
60

 
71

Total liabilities
18,833

 
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 September 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 September 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 September 30, 2015 and December 31, 2014)

 

Additional paid-in-capital
23,291

 
23,381

Accumulated deficit
(18,026
)
 
(17,768
)
Accumulated other comprehensive loss
(37
)
 
(65
)
Total common shareholder’s equity
5,228

 
5,548

Total shareholders’ equity
6,803

 
7,123

Total liabilities and shareholders’ equity
$
25,636

 
$
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)
Nine Months Ended September 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
23,381

 
23,485

Dividends on preferred stock
(93
)
 
(93
)
Employee benefit plans, including transfers and other
3

 
19

Balance at end of period
23,291

 
23,411

Accumulated deficit
 
 
 
Balance at beginning of period
(17,768
)
 
(18,291
)
Net income (loss)
(258
)
 
487

Balance at end of period
(18,026
)
 
(17,804
)
Accumulated other comprehensive income (loss)
 
 
 
Balance at beginning of period
(65
)
 
(108
)
Other comprehensive income
28

 
35

Balance at end of period
(37
)
 
(73
)
Total common shareholder’s equity at end of period
5,228

 
5,534

Total shareholders' equity at end of period
$
6,803

 
$
7,109


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

6


HSBC Finance Corporation

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30,
2015
 
2014
 
(in millions)
Cash flows from operating activities
 
 
 
Net income (loss)
$
(258
)
 
$
487

Loss from discontinued operations
(8
)
 
(22
)
Income (loss) from continuing operations
(250
)
 
509

Adjustments to reconcile income (loss) to net cash used in operating activities:
 
 
 
Provision for credit losses
237

 
(238
)
Lower of amortized cost or fair value adjustment on receivables held for sale
154

 
(292
)
Gain on sale of real estate owned, including lower of amortized cost or fair value adjustments
(1
)
 
(19
)
Depreciation and amortization
5

 
6

Mark-to-market on debt designated at fair value and related derivatives
(9
)
 
57

Foreign exchange and derivative movements on long-term debt and net change in non-fair value option related derivative assets and liabilities
(411
)
 
(567
)
Net change in other assets
(296
)
 
311

Net change in other liabilities
260

 
(128
)
Other, net
(5
)
 
124

Cash used in operating activities – continuing operations
(316
)
 
(237
)
Cash provided by operating activities – discontinued operations
22

 
49

Cash used in operating activities
(294
)
 
(188
)
 
 
 
 
Cash flows from investing activities
 
 
 
Net change in securities purchased under agreements to resell
3,332

 
2,083

Net change in interest bearing deposits with banks
497

 

Receivables:
 
 
 
Net collections
1,695

 
1,504

Proceeds from sales of receivables
431

 
1,237

Proceeds from sales of real estate owned
159

 
413

Sales of properties and equipment
54

 

Cash provided by investing activities – continuing operations
6,168

 
5,237

Cash provided by investing activities – discontinued operations

 

Cash provided by investing activities
6,168

 
5,237


7


HSBC Finance Corporation

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (Continued)
Nine Months Ended September 30,
2015
 
2014
 
(in millions)
 
 
 
 
Cash flows from financing activities
 
 
 
Debt:
 
 
 
Net change in due to affiliates
(2,002
)
 
(1,812
)
Long-term debt retired
(3,805
)
 
(3,146
)
Shareholders’ dividends
(93
)
 
(93
)
Cash used in financing activities – continuing operations
(5,900
)
 
(5,051
)
Cash used in financing activities – discontinued operations

 

Cash used in financing activities
(5,900
)
 
(5,051
)
Net change in cash
(26
)
 
(2
)
Cash at beginning of period(1)
175

 
198

Cash at end of period(2)
$
149

 
$
196

Supplemental Noncash Investing and Capital Activities:
 
 
 
Fair value of properties added to real estate owned
$
100

 
$
217

Transfer of receivables to held for sale
10,250

 
748

 
(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 $18 million and $23 million for discontinued operations as of September 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.
During the third quarter of 2015, we reclassified preferred dividends within common shareholder's equity in order to properly present dividends as a reduction to additional paid-in-capital rather than as an increase to accumulated deficit for all periods. Total common shareholder's equity, total shareholders' equity and reported net income for all periods were unaffected. The following table reflects the impact of this reclassification for the periods below:
 
December 31, 2013(1)
 
September 30, 2014
 
December 31, 2014(1)
 
(in millions)
Additional Paid-in-Capital:
 
 
 
 
 
As previously reported
$
23,968

 
$
23,987

 
$
23,987

After reclassification
23,485

 
23,411

 
23,381

 
 
 
 
 
 
Accumulated Deficit:
 
 
 
 
 
As previously reported
$
(18,774
)
 
$
(18,380
)
 
$
(18,374
)
After reclassification
(18,291
)
 
(17,804
)
 
(17,768
)
 
 
 
 
 
 
Cumulative dividends reclassified
$
483

 
$
576

 
$
606

 
(1) 
Also reflects the opening balances at January 1, 2015 and 2014 presented in the consolidated statement of changes in shareholders' equity.
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.

9


HSBC Finance Corporation

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 September 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 September 30, 2015 or December 31, 2014. The following table summarizes the operating results of our discontinued Commercial business for the periods presented:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
(in millions)
Net interest income and other revenues
$
2

 
$
3

 
$
10

 
$
9

Income from discontinued operations before income tax
1

 
2

 
6

 
6

2011 Discontinued Operations:
Card and Retail Services In 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
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
(in millions)
Net interest income and other revenues
$

 
$

 
$

 
$

Loss from discontinued operations before income tax(1)
(4
)
 
(6
)
 
(18
)
 
(30
)
 
(1) 
For the three and nine months ended September 30, 2015, the amounts primarily relate to legal accruals. For the three and nine months ended September 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 September 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 September 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

10


HSBC Finance Corporation

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 September 30, 2015.

3.
Receivables
 
Receivables consisted of the following:
 
September 30, 2015
 
December 31, 2014
 
(in millions)
Real estate secured:
 
 
 
First lien
$
7,675

 
$
20,153

Second lien
1,954

 
2,517

Total real estate secured receivables
9,629

 
22,670

Accrued interest income and other
146

 
789

Credit loss reserve for receivables
(341
)
 
(2,217
)
Total receivables, net
$
9,434

 
$
21,242

Deferred origination fees, net of costs, totaled $61 million and $159 million at September 30, 2015 and December 31, 2014, respectively, and are included in the receivables balance. Net unamortized premium on our receivables totaled $38 million and $76 million at September 30, 2015 and December 31, 2014, respectively, and are also included in the receivables balance.
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.
Collateralized funding transactions  Secured financings previously issued under public trusts with a balance of $943 million at September 30, 2015 are secured by $1,846 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 (excluding receivables held for sale) at September 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. 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 in the aging analysis of past due receivables between periods.
 
Past Due
Total Past Due
 
 
 
Total Receivables(2)
September 30, 2015
30 – 89 days
 
90+ days
 
Current(1)
 
 
(in millions)
Real estate secured:
 
 
 
 
 
 
 
 
 
First lien
$
197

 
$
220

 
$
417

 
$
7,258

 
$
7,675

Second lien
113

 
60

 
173

 
1,781

 
1,954

Total real estate secured receivables
$
310

 
$
280

 
$
590

 
$
9,039

 
$
9,629


11


HSBC Finance Corporation

 
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.
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:
 
September 30, 2015
 
December 31, 2014
 
(in millions)
Nonaccrual receivable portfolios(1):
 
 
 
Real estate secured(2)
$
292

 
$
1,024

Receivables held for sale(3)
813

 
509

Total nonaccrual receivables(4)
$
1,105

 
$
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 September 30, 2015 and December 31, 2014, nonaccrual real estate secured receivables held for investment include $189 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 $464 million and $627 million at September 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:
Nine Months Ended September 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
$
125

 
$
271

Interest income that was recorded on nonaccrual receivables included in interest income on nonaccrual loans during the period
37

 
68


12


HSBC Finance Corporation

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. TDR Loans are considered to be impaired loans regardless of their accrual status.
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 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 held for investment and receivables held for sale which as a result of any account management action taken during the three and nine months ended September 30, 2015 and 2014 became classified as TDR Loans as well as a summary of the type of account management action taken.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
(in millions)
Real estate secured receivables classified as TDR Loans during the period:
 
 
 
 
 
 
 
First lien held for investment
$
19

 
$
127

 
$
161

 
$
521

Second lien held for investment
13

 
17

 
41

 
68

Real estate secured receivables held for sale
68

 
19

 
155

 
63

Total
$
100

 
$
163

 
$
357

 
$
652

 
 
 
 
 
 
 
 
Types of account management actions taken during the period:
 
 
 
 
 
 
 
Modifications, primarily interest rate modifications
$
41

 
$
54

 
$
141

 
$
218

Re-age of past due account
59

 
109

 
216

 
434

Total(1)
$
100

 
$
163

 
$
357

 
$
652

 
(1) 
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 nine months ended September 30, 2014 has been adjusted to reflect the corrected classification. The total amounts reported remain unchanged.

13


HSBC Finance Corporation

The tables below present information about our TDR Loans and TDR Loans held for sale, including the related allowance for credit losses. The TDR Loan carrying value trend in the table below reflects 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.
 
September 30, 2015
 
December 31, 2014
 
Carrying Value
 
Unpaid Principal Balance
 
Carrying Value
 
Unpaid Principal Balance
 
(in millions)
TDR Loans:(1)
 
 
 
 
 
 
 
Real estate secured:
 
 
 
 
 
 
 
First lien(2)
$
890

 
$
1,025

 
$
9,630

 
$
9,931

Second lien(2)
674

 
760

 
915

 
1,050

Real estate secured receivables held for sale(3)
7,447

 
9,226

 
650

 
1,004

Total real estate secured TDR Loans
$
9,011

 
$
11,011

 
$
11,195

 
$
11,985

 
 
 
 
 
 
 
 
Credit loss reserves for TDR Loans:(4)
 
 
 
 
 
 
 
Real estate secured:
 
 
 
 
 
 
 
First lien
$
105

 
 
 
$
1,738

 
 
Second lien
146

 
 
 
244

 
 
Total credit loss reserves for real estate secured TDR Loans(3)
$
251

 
 
 
$
1,982

 
 
 
(1) 
At September 30, 2015 and December 31, 2014, the unpaid principal balance reflected above includes $718 million and $549 million, respectively, which have received a reduction in the unpaid principal balance as part of an account management action.
(2) 
At September 30, 2015 and December 31, 2014, the carrying value of TDR Loans held for investment totaling $249 million and $517 million, respectively, are recorded at the lower of amortized cost or fair value of the collateral less cost to sell.
(3) 
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.
(4) 
Included in credit loss reserves.
The following table provides additional information about the average balance and interest income recognized on TDR Loans and TDR Loans held for sale.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
(in millions)
Average balance of TDR Loans:
 
 
 
 
 
 
 
Real estate secured:
 
 
 
 
 
 
 
First lien
$
8,281

 
$
11,203

 
$
9,408

 
$
11,638

Second lien
804

 
952

 
858

 
991

Total average balance of TDR Loans
$
9,085

 
$
12,155

 
$
10,266

 
$
12,629

 
 
 
 
 
 
 
 
Interest income recognized on TDR Loans:
 
 
 
 
 
 
 
Real estate secured:
 
 
 
 
 
 
 
First lien
$
170

 
$
193

 
$
525

 
$
599

Second lien
21

 
24

 
65

 
72

Total interest income recognized on TDR Loans
$
191

 
$
217

 
$
590

 
$
671


14


HSBC Finance Corporation

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 nine months ended September 30, 2015 and 2014.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
(in millions)
Real estate secured:
 
 
 
 
 
 
 
First lien
$
6

 
$
71

 
$
68

 
$
307

Second lien
6

 
13

 
20

 
44

Real estate secured receivables held for sale
32

 
7

 
71

 
30

Total
$
44

 
$
91

 
$
159

 
$
381

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.
 
September 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
$
277

 
3.61
%
 
$
1,388

 
6.89
%
Second lien
98

 
5.02

 
154

 
6.12

Real estate secured receivables held for sale
1,137

 
11.32

 
530

 
61.63

Total real estate secured receivables(2)
$
1,512

 
7.69
%
 
$
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 September 30, 2015 and December 31, 2014, total real estate secured receivables includes $602 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 September 30, 2015(1)
 
 
 
 
 
Real estate secured(2)(3)
$
9,337

 
$
292

 
$
9,629

Real estate secured receivables held for sale
9,228

 
813

 
10,041

Total
$
18,565

 
$
1,105

 
$
19,670

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


15


HSBC Finance Corporation

 
(1) 
The 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 September 30, 2015 and December 31, 2014, nonaccrual real estate secured receivables held for investment include $189 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 September 30, 2015 and December 31, 2014, nonaccrual real estate secured receivables held for investment include $176 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 $464 million and $627 million at September 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.

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 nine months ended September 30, 2015 and 2014:
 
Real Estate Secured
 
Personal Non- Credit Card
 
Total
 
First Lien
 
Second Lien
 
 
(in millions)
Three Months Ended September 30, 2015:
 
 
 
 
 
 
 
Credit loss reserve rollforward:
 
 
 
 
 
 
 
Credit loss reserve balances at beginning of period
$
200

 
$
208

 
$

 
$
408

Provision for credit losses(1)
11

 
7

 

 
18

Net charge-offs:
 
 
 
 
 
 
 
Charge-offs(1)(2)
(63
)
 
(27
)
 

 
(90
)
Recoveries
4

 
1

 

 
5

Total net charge-offs
(59
)
 
(26
)
 

 
(85
)
Credit loss reserve balance at end of period
$
152

 
$
189

 
$

 
$
341

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

 
$
319

 
$

 
$
2,217

Provision for credit losses(1)
215

 
22

 

 
237

Net charge-offs:
 
 
 
 
 
 
 
Charge-offs(1)(2)
(1,979
)
 
(156
)
 

 
(2,135
)
Recoveries
18

 
4

 

 
22

Total net charge-offs
(1,961
)
 
(152
)
 

 
(2,113
)
Credit loss reserve balance at end of period
$
152

 
$
189

 
$

 
$
341

Reserve components:
 
 
 
 
 
 
 
Collectively evaluated for impairment
$
45

 
$
43

 
$

 
$
88

Individually evaluated for impairment(3)
95

 
146

 

 
241

Receivables carried at the lower of amortized cost or fair value of the collateral less cost to sell
12

 

 

 
12

Receivables acquired with deteriorated credit quality

 

 

 

Total credit loss reserves
$
152

 
$
189

 
$

 
$
341

 
 
 
 
 
 
 
 

16


HSBC Finance Corporation

 
Real Estate Secured
 
Personal Non- Credit Card
 
Total
 
First Lien
 
Second Lien
 
 
(in millions)
Receivables:
 
 
 
 
 
 
 
Collectively evaluated for impairment
$
6,709

 
$
1,272

 
$

 
$
7,981

Individually evaluated for impairment(3)
661

 
654

 

 
1,315

Receivables carried at the lower of amortized cost or fair value of the collateral less cost to sell
301

 
27

 

 
328

Receivables acquired with deteriorated credit quality
4

 
1

 

 
5

Total receivables
$
7,675

 
$
1,954

 
$

 
$
9,629

Three Months Ended September 30, 2014:
 
 
 
 
 
 
 
Credit loss reserve rollforward:
 
 
 
 
 
 
 
Credit loss reserve balances at beginning of period
$
2,296

 
$
396

 
$

 
$
2,692

Provision for credit losses
(45
)
 
3

 
(1
)
 
(43
)
Net charge-offs:
 
 
 
 
 
 
 
Charge-offs(2)
(168
)
 
(43
)
 

 
(211
)
Recoveries
20

 
4

 
1

 
25

Total net charge-offs
(148
)
 
(39
)
 
1

 
(186
)
Credit loss reserve balance at end of period
$
2,103

 
$
360

 
$

 
$
2,463

Nine Months Ended September 30, 2014:
 
 
 
 
 
 
 
Credit loss reserve rollforward:
 
 
 
 
 
 
 
Credit loss reserve balance at beginning of period
$
2,777

 
$
496

 
$

 
$
3,273

Provision for credit losses
(184
)
 
(36
)
 
(18
)
 
(238
)
Net charge-offs:
 
 
 
 
 
 
 
Charge-offs(2)
(559
)
 
(157
)
 

 
(716
)
Recoveries
69

 
57

 
18

 
144

Total net charge-offs
(490
)
 
(100
)
 
18

 
(572
)
Credit loss reserve balance at end of period
$
2,103

 
$
360

 
$

 
$
2,463

Reserve components:
 
 
 
 
 
 
 
Collectively evaluated for impairment
$
201

 
$
90

 
$

 
$
291

Individually evaluated for impairment(3)
1,865

 
270

 

 
2,135

Receivables carried at the lower of amortized cost or fair value of the collateral less cost to sell
35

 

 

 
35

Receivables acquired with deteriorated credit quality
2

 

 

 
2

Total credit loss reserves
$
2,103

 
$
360

 
$

 
$
2,463

Receivables:
 
 
 
 
 
 
 
Collectively evaluated for impairment
$
10,839

 
$
1,718

 
$

 
$
12,557

Individually evaluated for impairment(3)
9,326

 
920

 

 
10,246

Receivables carried at the lower of amortized cost or fair value of the collateral less cost to sell
662

 
28

 

 
690

Receivables acquired with deteriorated credit quality
8

 
2

 

 
10

Total receivables
$
20,835

 
$
2,668

 
$

 
$
23,503

 
(1) 
The provision for credit losses and charge-offs for real estate secured receivables during the three and nine months ended September 30, 2015 includes $12 million and $232 million, respectively, related to the lower of amortized cost or fair value adjustment attributable to credit factors for receivables transferred to held for sale. See Note 5, "Receivables Held for Sale," for additional information. The provision for credit losses for real estate secured receivables during the nine months ended September 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 nine months ended September 30, 2015 and 2014 and, accordingly, we recognized the existing credit loss reserves on these receivables as additional charge-off totaling $24 million and $1,617 million during the three and nine months ended September 30, 2015 compared with $12 million and $50 million during the three and nine months ended September 30, 2014, respectively.

17


HSBC Finance Corporation

(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 $249 million and $509 million at September 30, 2015 and 2014, respectively. The reserve component above excludes credit loss reserves totaling $10 million and $26 million at September 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.

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:
 
September 30, 2015
 
December 31, 2014
 
(in millions)
Real estate secured receivables held for sale:
 
 
 
First lien
$
9,866

 
$
860

Second lien
175

 

Total real estate secured receivables held for sale
$
10,041

 
$
860

As discussed in prior filings, we transfer to held for sale and initiate sale activities for first lien real estate secured receivables 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 expanded 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. The expansion of our sales program has accelerated our existing run-off strategy and, as a result, we recorded pre-tax severance expense of $11 million and $33 million during the three and nine months ended September 30, 2015, respectively, related to approximately 700 employees who will be impacted over the course of our receivable sales program.
Under our expanded sales program, during the three and nine months ended September 30, 2015 we transferred real estate secured receivables to held for sale with a total unpaid principal balance (excluding accrued interest) of approximately $280 million and $11,711 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 $284 million and $12,099 million, including accrued interest, during the three and nine months ended September 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 the three and nine months ended September 30, 2015, we recorded an initial lower of amortized cost or fair value adjustment of $12 million and $232 million, respectively, 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 nine months ended September 30, 2015, we recorded $84 million and $153 million, respectively, of additional lower of amortized cost or fair value adjustment on receivables held for sale as a component of total other revenues in the consolidated statement of income (loss) as a result of a change in the estimated pricing on specific pools of loans.
During the three and nine months ended September 30, 2014, we transferred real estate secured receivables to held for sale with an unpaid principal balance (excluding accrued interest) of approximately $302 million and $1,171 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 $236 million and $910 million, including accrued interest, for the three and nine months ended September 30, 2014, respectively. During the three and nine months ended September 30, 2014 we recorded an initial lower of amortized cost or fair value adjustment of $10 million and $112 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 nine months ended September 30, 2014, we reversed $97 million and $410 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 nine 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.
During the three and nine months ended September 30, 2015, we sold real estate secured receivables with an aggregate unpaid principal balance of $176 million (aggregate carrying value of $107 million including accrued interest) and $605 million (aggregate

18


HSBC Finance Corporation

carrying value of $408 million including accrued interest), respectively, at the time of sale to a third-party investor. Aggregate cash consideration for these real estate secured receivables totaled $110 million and $431 million, during the three and nine months ended September 30, 2015, respectively. We realized a gain on these transactions of approximately $2 million and $20 million, net of transaction costs, during the three and nine months ended September 30, 2015, respectively.
We entered into an agreement to sell a tranche of real estate secured receivables with an unpaid principal balance of approximately $2.0 billion on November 1, 2015. We currently expect that we will incur a loss at the time of sale in the region of $15 million, which includes transaction costs.
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 for which the underlying collateral was sold in a short sale during the three and nine months ended September 30, 2015 and 2014.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
(in millions)
Carrying value of real estate secured receivables:
 
 
 
 
 
 
 
Transferred to REO after obtaining title to the underlying collateral
$
25

 
$
43

 
$
71

 
$
160

Underlying collateral sold in a short sale
15

 
16

 
41

 
47

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
(1
)
 
2

 
(1
)
 
4

Underlying collateral sold in a short sale

 
1

 
2

 
2


19


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 nine months ended September 30, 2015 and 2014:
 
Receivables
Held for Sale
 
(in millions)
Three Months Ended September 30, 2015:
 
Real estate secured receivables held for sale at beginning of period
$
10,310

Real estate secured receivable sales
(107
)
Lower of amortized cost or fair value adjustment on real estate secured receivables held for sale
(83
)
Carrying value of real estate secured receivables held for sale settled through short sale or transfer to REO
(40
)
Change in real estate secured receivable balance, including collections
(287
)
Transfer of real estate secured receivables into held for sale at the lower of amortized cost or fair value(1)(2)
248

Real estate secured receivables held for sale at end of period(3)
$
10,041

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

Real estate secured receivable sales
(408
)
Lower of amortized cost or fair value adjustment on real estate secured receivables held for sale
(154
)
Carrying value of real estate secured receivables held for sale settled through short sale or transfer to REO
(112
)
Change in real estate secured receivable balance, including collections
(395
)
Transfer of real estate secured receivables into held for sale at the lower of amortized cost or fair value(1)(2)
10,250

Real estate secured receivables held for sale at end of period(3)
$
10,041

 
 
Three Months Ended September 30, 2014:
 
Real estate secured receivables held for sale at beginning of period
$
1,874

Real estate secured receivable sales
(272
)
Lower of amortized cost or fair value adjustment on real estate secured receivables held for sale
94

Carrying value of real estate secured receivables held for sale settled through short sale or transfer to REO
(59
)
Change in real estate secured receivable balance, including collections
(11
)
Transfer of real estate secured receivables into held for sale at the lower of amortized cost or fair value(1)(2)
214

Real estate secured receivables held for sale at end of period(3)
$
1,840

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

Real estate secured receivable sales
(1,156
)
Lower of amortized cost or fair value adjustment on real estate secured receivables held for sale
404

Carrying value of real estate secured receivables held for sale settled through short sale or transfer to REO
(207
)
Change in real estate secured receivable balance, including collections
12

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)
748

Real estate secured receivables held for sale at end of period(3)
$
1,840

 
(1) 
The initial lower of amortized cost or fair value adjustment on receivables transferred into held for sale during the three and nine months ended September 30, 2015, totaled $12 million and $232 million, respectively, compared with $10 million and $112 million during the three and nine months ended September 30, 2014, respectively.
(2) 
Amount includes any accrued interest associated with the receivable.
(3) 
Real estate secured receivables held for sale in the table above are presented net of the valuation allowance.

20


HSBC Finance Corporation

(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.
The following table provides a rollforward of our valuation allowance for the three and nine months ended September 30, 2015 and 2014. See Note 13, "Fair Value Measurements," for a discussion of the factors impacting the fair value of these receivables.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
(in millions)
Balance at beginning of period
$
33

 
$

 
$

 
$
329

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

 
10

 

 
112

Increase in (release of) valuation allowance resulting from changes in fair value
83

 
(94
)
 
154

 
(404
)
Valuation allowance on real estate secured receivables transferred to held for investment

 

 

 
(4
)
Change in valuation allowance for loans sold
(33
)
 
103

 
(54
)
 
129

Change in valuation allowance for collections, charged-off, transferred to REO or short sale
21

 
(19
)
 
4

 
(162
)
Balance at end of period
$
104

 
$

 
$
104

 
$



21


HSBC Finance Corporation

The following table summarizes the components of the lower of amortized cost or fair value adjustment during the three and nine months ended September 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 September 30, 2015:
 
 
 
 
 
 
 
Lower of amortized cost or fair value adjustments recorded as a component of:
 
 
 
 
 
 
 
Provision for credit losses(1)
$
12

 
$

 
$

 
$
12

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

 

 

 

Subsequent to initial transfer to held for sale
84

 
(1
)
 

 
83

Lower of amortized cost or fair value adjustment recorded through other revenues
84

 
(1
)
 

 
83

Lower of amortized cost or fair value adjustment
$
96

 
$
(1
)
 
$

 
$
95

 
 
 
 
 
 
 
 
Three Months Ended September 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)
$
10

 
$

 
$

 
$
10

Subsequent to initial transfer to held for sale
(97
)
 
2

 
1

 
(94
)
Lower of amortized cost or fair value adjustment recorded through other revenues(3)