e10vq

UNITED STATES SECURITIES AND

EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


(Mark One)

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

For the quarterly period ended June 30, 2011
OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-8198

HSBC FINANCE CORPORATION

(Exact name of registrant as specified in its charter)


Delaware (State of Incorporation) 26525 North Riverwoods Boulevard, Mettawa, Illinois (Address of principal executive offices)		86-1052062 (I.R.S. Employer Identification No.) 60045 (Zip Code)

(224) 544-2000

Registrant’s telephone number, including area code

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o	Accelerated filer o	Non-accelerated filer x	Smaller reporting company o

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No

As of July 29, 2011, there were 66 shares of the registrant’s common stock outstanding, all of which are owned by HSBC Investments (North America) Inc.

HSBC Finance Corporation

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED STATEMENT OF INCOME (LOSS) (UNAUDITED)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010

	(in millions)

Finance and other interest income	$	1,620		$	1,799		$	3,216		$	3,744
Interest expense on debt issued to:
HSBC affiliates		37			35			75			74
Non-affiliates		602			772			1,238			1,551

Interest expense		639			807			1,313			1,625

*Net interest income*		981			992			1,903			2,119
Provision for credit losses		781			1,597			1,563			3,461

*Net interest income (loss) after provision for credit losses*		200			(605	)		340			(1,342	)

Other revenues:
Insurance revenue		64			75			124			143
Investment income		33			24			58			51
Derivative related income (expense)		(157	)		(496	)		(123	)		(598	)
Gain on debt designated at fair value and related derivatives		245			470			216			603
Fee income		58			32			104			109
Enhancement services revenue		102			101			206			204
Gain on receivable sales to HSBC affiliates		148			142			261			258
Servicing and other fees from HSBC affiliates		163			161			322			335
Other income		4			17			17			22

*Total other revenues*		660			526			1,185			1,127

Operating expenses:
Salaries and employee benefits		125			158			254			323
Occupancy and equipment expenses, net		20			14			44			42
Other marketing expenses		79			80			164			135
Real estate owned expenses		29			40			135			79
Other servicing and administrative expenses		382			169			549			387
Support services from HSBC affiliates		295			254			586			530
Amortization of intangibles		34			34			68			73
Policyholders’ benefits		33			38			74			80

*Total operating expenses*		997			787			1,874			1,649

Loss from continuing operations before income tax		(137	)		(866	)		(349	)		(1,864	)
Income tax benefit		92			337			285			689

*Loss from continuing operations*		(45	)		(529	)		(64	)		(1,175	)

Discontinued Operations (Note 2):
Income (loss) from discontinued operations before income tax		(4	)		12			(8	)		78
Income tax benefit (expense)		1			(4	)		3			(27	)

*Income (loss) from discontinued operations*		(3	)		8			(5	)		51

*Net loss*	$	(48	)	$	(521	)	$	(69	)	$	(1,124	)

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

HSBC Finance Corporation

CONSOLIDATED BALANCE SHEET (UNAUDITED)


	June 30,			December 31,
	2011			2010

	(in millions,
	except share data)

*Assets*
Cash	$	236		$	175
Interest bearing deposits with banks		1,013			1,016
Securities purchased under agreements to resell		2,767			4,311
Securities available-for-sale		3,518			3,371
Receivables, net (including $5.9 billion and $6.3 billion at June 30, 2011 and December 31, 2010, respectively, collateralizing long-term debt)		56,877			61,333
Receivables held for sale		5			4
Intangible assets, net		537			605
Properties and equipment, net		188			202
Real estate owned		588			962
Derivative financial assets		203			75
Deferred income taxes, net		2,297			2,491
Other assets		2,091			1,791
Assets of discontinued operations		5			196

*Total assets*	$	70,325		$	76,532

*Liabilities*
Debt:
Due to affiliates (including $443 million and $436 million at June 30, 2011 and December 31, 2010, respectively, carried at fair value)	$	8,168		$	8,255
Commercial paper		3,682			3,156
Long-term debt (including $17.4 billion and $20.8 billion at June 30, 2011 and December 31, 2010 carried at fair value and $3.8 billion and $4.1 billion at June 30, 2011 and December 31, 2010, respectively, collateralized by receivables)		47,797			54,616

Total debt		59,647			66,027

Insurance policy and claim reserves		989			982
Derivative related liabilities		-			2
Liability for postretirement benefits		263			265
Other liabilities		1,767			1,519
Liabilities of discontinued operations		10			17

*Total liabilities*		62,676			68,812

*Shareholders’ equity*
Redeemable preferred stock:
Series B (1,501,100 shares authorized, $0.01 par value, 575,000 shares issued and outstanding)		575			575
Series C (1,000 shares authorized, $0.01 par value, 1,000 shares issued and outstanding)		1,000			1,000
Common shareholder’s equity:
Common stock, $0.01 par value, 100 shares authorized, 66 shares issued and outstanding at June 30, 2011 and December 31, 2010		-			-
Additional paid-in capital		23,321			23,321
Accumulated deficit		(16,819	)		(16,685	)
Accumulated other comprehensive loss		(428	)		(491	)

Total common shareholder’s equity		6,074			6,145

*Total shareholders’ equity*		7,649			7,720

*Total liabilities and shareholders’ equity*	$	70,325		$	76,532

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

HSBC Finance Corporation

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)


Six Months Ended June 30,	2011			2010

	(in millions)

*Preferred stock*
Balance at beginning and end of period	$	1,575		$	575

*Common shareholder’s equity*
Additional paid-in capital
Balance at beginning of period		23,321			23,119
Capital contribution from parent		-			200
Employee benefit plans, including transfers and other		-			4

Balance at end of period		23,321			23,323

Accumulated deficit
Balance at beginning of period		(16,685	)		(14,732	)
Net loss		(69	)		(1,124	)
Dividends:
Preferred stock		(65	)		(18	)

Balance at end of period		(16,819	)		(15,874	)

Accumulated other comprehensive loss
Balance at beginning of period		(491	)		(583	)
Net change in unrealized gains (losses), net of tax, on:
Derivatives designated as cash flow hedges		60			(62	)
Securities available-for-sale, not other-than-temporarily impaired		(3	)		52
Other-than-temporarily impaired debt securities available-for-sale⁽¹⁾		(1	)		1
Postretirement benefit plan adjustment, net of tax		1			(5	)
Foreign currency translation adjustments		6			(11	)

Other comprehensive income (loss), net of tax		63			(25	)

Balance at end of period		(428	)		(608	)

*Total common shareholder’s equity at end of period*	$	6,074		$	6,841

*Comprehensive loss*
Net loss	$	(69	)	$	(1,124	)
Other comprehensive income (loss)		63			(25	)

*Comprehensive loss*	$	(6	)	$	(1,149	)


⁽¹⁾		During the six months ended June 30, 2011 and 2010, other-than-temporary impairment (“OTTI”) losses on available-for-sale securities recognized in other revenues and in accumulated other comprehensive income related to the non-credit component were nominal.

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

HSBC Finance Corporation

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)


Six Months Ended June 30,	2011			2010

	(in millions)

*Cash flows from operating activities*
Net loss	$	(69	)	$	(1,124	)
Income (loss) from discontinued operations		(5	)		51

Loss from continuing operations		(64	)		(1,175	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Provision for credit losses		1,563			3,461
Gain on receivable sales to HSBC affiliates		(261	)		(258	)
Loss on sale of real estate owned, including lower of cost or market adjustments		59			11
Insurance policy and claim reserves		(8	)		(28	)
Depreciation and amortization		86			90
Impairment of internally developed software		40			-
Mark-to-market on debt designated at fair value and related derivatives		107			(186	)
Originations of loans held for sale		(16,711	)		(16,580	)
Sales and collections on loans held for sale		16,972			16,841
Foreign exchange and derivative movements on long-term debt and net change in non-FVO related derivative assets and liabilities		425			(1,880	)
Net change in other assets		(144	)		2,905
Net change in other liabilities		248			(7	)
Lower of cost or fair value on receivables held for sale		-			(2	)
Other, net		173			302

Cash provided by operating activities-continuing operations		2,485			3,494
Cash provided by operating activities-discontinued operations		178			288

Net cash provided by operating activities		2,663			3,782

*Cash flows from investing activities*
Securities:
Purchased		(548	)		(529	)
Matured		143			176
Sold		449			111
Net change in short-term securities available-for-sale		(183	)		231
Net change in securities purchased under agreements to resell		1,544			(2,366	)
Net change in interest bearing deposits with banks		3			2
Receivables:
Net collections		2,136			2,884
Purchases and related premiums		(24	)		(21	)
Proceeds from sales of real estate owned		962			628
Purchases of properties and equipment		(2	)		(7	)

Cash provided by investing activities-continuing operations		4,480			1,109
Cash provided by investing activities-discontinued operations		-			1,479

Net cash provided by investing activities		4,480			2,588

*Cash flows from financing activities*
Debt:
Net change in commercial paper		526			(555	)
Net change in due to affiliates		(94	)		(1,513	)
Long-term debt issued		227			353
Long-term debt retired		(7,656	)		(4,625	)
Insurance:
Policyholders’ benefits paid		(49	)		(39	)
Cash received from policyholders		29			33
Capital contribution from parent		-			200
Shareholder’s dividends		(65	)		(18	)

Net cash used in financing activities-continuing operations		(7,082	)		(6,164	)
Net cash used in financing activities-discontinued operations		-			(288	)

Net cash used in financing activities		(7,082	)		(6,452	)

Net change in cash		61			(82	)
Cash at beginning of period⁽¹⁾		175			311

*Cash at end of period*	$	236		$	229

Supplemental Noncash Investing and Capital Activities:
Fair value of properties added to real estate owned	$	647		$	834


⁽¹⁾		Cash at beginning of period includes $22 million for discontinued operations as of January 1, 2010.

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

HSBC Finance Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note			Page


	1	Organization and Basis of Presentation		7
	2	Discontinued Operations		7
	3	Strategic Initiatives		9
	4	Securities		11
	5	Receivables		15
	6	Credit Loss Reserves		20
	7	Intangible Assets		22
	8	Derivative Financial Instruments		22
	9	Fair Value Option		28
	10	Income Taxes		29
	11	Pension and Other Postretirement Benefits		32
	12	Related Party Transactions		32
	13	Business Segments		37
	14	Variable Interest Entities		42
	15	Fair Value Measurements		43
	16	Litigation and Regulatory Matters		50
	17	New Accounting Pronouncements		53


1.	*Organization and Basis of Presentation*

HSBC Finance Corporation is an indirect wholly owned subsidiary of HSBC North America Holdings Inc. (“HSBC North America”), which is an indirect wholly owned subsidiary of HSBC Holdings plc (“HSBC”). The accompanying unaudited interim consolidated financial statements of HSBC Finance Corporation and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal and recurring adjustments considered necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods have been made. HSBC Finance Corporation and its subsidiaries may also be referred to in this Form 10-Q as “we,” “us” or “our.” These unaudited interim consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2010 (the “2010 Form 10-K”) and in our Current Report on Form 8-K filed with the SEC on May 27, 2011, which provided supplemental information to our Annual Report on 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 in recent years and the challenges we anticipate with respect to a near-term return to profitability under prevailing and forecasted economic conditions. HSBC continues to be fully committed and has the capacity to continue to provide the necessary capital and liquidity to fund our 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*

Taxpayer Financial Services During the third quarter of 2010, the Internal Revenue Service (“IRS”) announced it would stop providing information regarding certain unpaid obligations of a taxpayer (the “Debt Indicator”), which has historically served as a significant part of our underwriting process in our Taxpayer Financial Services (“TFS”) business. We determined that, without use of the Debt Indicator, we could no longer offer the product that has historically accounted for the substantial majority of our TFS loan production and that we might not be able to offer the remaining products available under the program in a safe and sound manner. As a result, in December 2010, it was determined that we would not offer any tax refund anticipation loans or related products for the 2011 tax season and we exited the TFS business. As a result of this decision, our TFS business is reported in discontinued operations.

HSBC Finance Corporation

During the fourth quarter of 2010 we recorded closure costs of $25 million which primarily reflect severance costs and the write off of certain pre-paid assets which are included as a component of loss from discontinued operations. At June 30, 2011 and December 31, 2010, the liability associated with these closure costs totaled less than $1 million and $5 million, respectively.

The following summarizes the operating results of our TFS business for the periods presented:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010

	(in millions)

Net interest income and other revenues⁽¹⁾	$	-		$	2		$	1		$	86
Income (loss) from discontinued operations before income tax		(2	)		(1	)		(4	)		55


⁽¹⁾		Interest expense, which is included as a component of net interest income, was allocated to discontinued operations in accordance with our existing internal transfer pricing policy. This policy uses match funding based on the expected lives of the assets and liabilities of the business at the time of origination, subject to periodic review, as demonstrated by the expected cash flows and re-pricing characteristics of the underlying assets.

The following summarizes the assets and liabilities of our TFS business at June 30, 2011 and December 31, 2010 which are reported as Assets of discontinued operations and Liabilities of discontinued operations in our consolidated balance sheet.


	June 30,		December 31,
	2011		2010

	(in millions)

Deferred income tax, net	$	-	$	3
Other assets		-		55

Assets of discontinued operations	$	-	$	58

Other liabilities	$	2	$	10

Liabilities of discontinued operations	$	2	$	10

Auto Finance In March 2010, we sold our auto finance receivable servicing operations as well as a portion of our auto finance receivable portfolio to Santander Consumer USA Inc. (“SC USA”) for $930 million in cash which resulted in a gain of $5 million ($3 million after-tax) during the first quarter of 2010. In August 2010, we sold the remainder of our auto finance receivable portfolio with an outstanding principal balance of $2.6 billion at the time of sale and other related assets to SC USA. The aggregate sales price for the auto finance receivables and other related assets was $2.5 billion which included the transfer of $431 million of indebtedness secured by auto finance receivables, resulting in net cash proceeds of $2.1 billion. We recorded a net loss as a result of this transaction of $43 million ($28 million after-tax) during the third quarter of 2010. This net loss is included as a component of loss from discontinued operations. Severance costs recorded as a result of this transaction were less than $1 million and are included as a component of loss from discontinued operations. As a result of this transaction, our Auto Finance business is reported as discontinued operations.

HSBC Finance Corporation

The following summarizes the operating results of our Auto Finance business for the periods presented:


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2011			2010		2011			2010

	(in millions)

Net interest income and other revenues⁽¹⁾	$	-		$	70	$	-		$	174
Income (loss) from discontinued operations before income tax		(2	)		13		(4	)		23


⁽¹⁾		Interest expense, which is included as a component of net interest income, was allocated to discontinued operations in accordance with our existing internal transfer pricing policy. This policy uses match funding based on the expected lives of the assets and liabilities of the business at the time of origination, subject to periodic review, as demonstrated by the expected cash flows and re-pricing characteristics of the underlying assets.

The following summarizes the assets and liabilities of our Auto Finance business at June 30, 2011 and December 31, 2010 which are reported as Assets of discontinued operations and Liabilities of discontinued operations in our consolidated balance sheet. Other assets of discontinued operations at December 31, 2010 reflect current income taxes receivable on our Auto Finance business for the 2010 tax year.


	June 30,		December 31,
	2011		2010

	(in millions)

Deferred income tax, net	$	2	$	4
Other assets		3		134

Assets of discontinued operations	$	5	$	138

Other liabilities	$	8	$	7

Liabilities of discontinued operations	$	8	$	7


3.	*Strategic Initiatives*

As discussed in prior filings, we have historically performed several comprehensive evaluations of the strategies and opportunities of our operations. As a result of these various evaluations, we discontinued all new customer account originations except in our credit card business. Although a strategic review of our credit card business is in process, there were no significant strategic actions taken during the three or six months ended June 30, 2011 or the year ended December 31, 2010 related to our continuing operations. Summarized below are the strategic actions undertaken in 2009 for our continuing operations as well as information regarding the remaining restructuring liability related to these actions.

2009 Strategic Initiatives During 2009, we undertook a number of actions including the following:


	>	Throughout 2009, we decided to exit certain lease arrangements and consolidate a variety of locations across the United States. The process of closing and consolidating these facilities, which began during the second quarter of 2009, was completed during the fourth quarter of 2010. As a result, we have exited certain facilities and/or significantly reduced our occupancy space in the following locations: Bridgewater, New Jersey; Minnetonka, Minnesota; Wood Dale, Illinois; Elmhurst, Illinois; Sioux Falls, South Dakota and Tampa, Florida. Additionally, we have consolidated our operations in Virginia Beach, Virginia into our Chesapeake, Virginia facility and consolidated certain servicing functions previously performed in Brandon, Florida to facilities in Buffalo, New York and Elmhurst, Illinois.

HSBC Finance Corporation


	>	In late February 2009, we decided to discontinue new customer account originations for all products by our Consumer Lending business and close all branch offices.

The following summarizes the changes in the restructure liability during the three and six months ended June 30, 2011 and 2010, respectively, relating to actions implemented during 2009:


	One-Time
	Termination and			Lease Termination
	Other Employee			and Associated
	Benefits⁽¹⁾			Costs⁽²⁾			Other⁽³⁾			Total

	(in millions)

Three Months Ended June 30, 2011:
Restructuring liability at beginning of period	$	4		$	4		$	-		$	8
Restructuring costs paid during the period		-			(1	)		-			(1	)

Restructure liability at end of period	$	4		$	3		$	-		$	7

Three Months Ended June 30, 2010:
Restructuring liability at beginning of period	$	8		$	8		$	2		$	18
Restructuring costs recorded during the period		-			4			-			4
Restructuring costs paid during the period		(3	)		(2	)		-			(5	)
Adjustments to the restructure liability during the period		-			(2	)		(2	)		(4	)

Restructure liability at end of period	$	5		$	8		$	-		$	13

Six Months Ended June 30, 2011:
Restructuring liability at beginning of period	$	4		$	6		$	-		$	10
Restructuring costs paid during the period		-			(3	)		-			(3	)

Restructure liability at end of period	$	4		$	3		$	-		$	7

Six Months Ended June 30, 2010:
Restructuring liability at beginning of period	$	10		$	12		$	2		$	24
Restructuring costs recorded during the period		1			4			-			5
Restructuring costs paid during the period		(6	)		(7	)		-			(13	)
Adjustments to the restructure liability during the period		-			(1	)		(2	)		(3	)

Restructure liability at end of period	$	5		$	8		$	-		$	13


⁽¹⁾		One-time termination and other employee benefits are included as a component of salaries and employee benefits in the consolidated statement of income (loss).

⁽²⁾		Lease termination and associated costs are included as a component of occupancy and equipment expenses in the consolidated statement of income (loss).

⁽³⁾		The other expenses are included as a component of Other servicing and administrative expenses in the consolidated statement of income (loss).

HSBC Finance Corporation


4.	*Securities*

Securities consisted of the following available-for-sale investments:


			Non-Credit
			Loss
			Component			Gross		Gross
	Amortized		of OTTI			Unrealized		Unrealized			Fair
June 30, 2011	Cost		Securities			Gains		Losses			Value

	(in millions)

U.S. Treasury	$	447	$	-		$	10	$	-		$	457
U.S. government sponsored enterprises⁽¹⁾		207		-			5		-			212
U.S. government agency issued or guaranteed		7		-			1		-			8
Obligations of U.S. states and political subdivisions		5		-			-		-			5
Asset-backed securities⁽²⁾		57		(8	)		1		-			50
U.S. corporate debt securities⁽³⁾		1,610		-			86		(3	)		1,693
Foreign debt securities⁽⁴⁾		503		-			17		(1	)		519
Equity securities		9		-			-		-			9
Money market funds		538		-			-		-			538

Subtotal		3,383		(8	)		120		(4	)		3,491
Accrued investment income		27		-			-		-			27

Total securities available-for-sale	$	3,410	$	(8	)	$	120	$	(4	)	$	3,518


			Non-Credit
			Loss
			Component			Gross		Gross
	Amortized		of OTTI			Unrealized		Unrealized			Fair
December 31, 2010	Cost		Securities			Gains		Losses			Value

	(in millions)

U.S. Treasury	$	341	$	-		$	8	$	-		$	349
U.S. government sponsored enterprises⁽¹⁾		282		-			4		(1	)		285
U.S. government agency issued or guaranteed		10		-			1		-			11
Obligations of U.S. states and political subdivisions		29		-			1		-			30
Asset-backed securities⁽²⁾		65		(7	)		2		-			60
U.S. corporate debt securities⁽³⁾		1,714		-			94		(6	)		1,802
Foreign debt securities⁽⁴⁾		424		-			19		(1	)		442
Equity securities		9		-			-		-			9
Money market funds		353		-			-		-			353

Subtotal		3,227		(7	)		129		(8	)		3,341
Accrued investment income		30		-			-		-			30

Total securities available-for-sale	$	3,257	$	(7	)	$	129	$	(8	)	$	3,371


⁽¹⁾		Includes $24 million and $33 million of mortgage-backed securities issued by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation as of June 30, 2011 and December 31, 2010, respectively.

⁽²⁾		Includes $23 and $31 million of residential mortgage-backed securities at June 30, 2011 and December 31, 2010, respectively.

⁽³⁾		At June 30, 2011 and December 31, 2010, the majority of our U.S. corporate debt securities represent investments in the financial services, consumer products, healthcare and industrials sectors.

⁽⁴⁾		There were no foreign debt securities issued by the governments of Portugal, Ireland, Italy, Greece or Spain at June 30, 2011 or December 31, 2010.

HSBC Finance Corporation

A summary of gross unrealized losses and related fair values as of June 30, 2011 and December 31, 2010, classified as to the length of time the losses have existed follows:


	Less Than One Year							Greater Than One Year
			Gross			Aggregate				Gross			Aggregate
	Number of		Unrealized			Fair Value of		Number of		Unrealized			Fair Value of
June 30, 2011	Securities		Losses			Investments		Securities		Losses			Investments

	(dollars are in millions)

U.S. Treasury		1	$	-		$	20		-	$	-		$	-
U.S. government sponsored enterprises		7		-			60		-		-			-
U.S. government agency issued or guaranteed		-		-			-		-		-			-
Obligations of U.S. states and political subdivisions		3		-			1		-		-			-
Asset-backed securities		-		-			-		6		(8	)		13
U.S. corporate debt securities		106		(2	)		189		3		(1	)		13
Foreign debt securities		50		(1	)		99		-		-			-
Equity Securities		1		-			4		-		-			-

		168	$	(3	)	$	373		9	$	(9	)	$	26


	Less Than One Year							Greater Than One Year
			Gross			Aggregate				Gross			Aggregate
	Number of		Unrealized			Fair Value of		Number of		Unrealized			Fair Value of
December 31, 2010	Securities		Losses			Investments		Securities		Losses			Investments

	(dollars are in millions)

U.S. Treasury		1	$	-		$	25		-	$	-		$	-
U.S. government sponsored enterprises		13		(1	)		139		-		-			-
U.S. government agency issued or guaranteed		-		-			-		-		-			-
Obligations of U.S. states and political subdivisions		4		-			5		-		-			-
Asset-backed securities		-		-			-		8		(7	)		18
U.S. corporate debt securities		100		(5	)		209		6		(1	)		23
Foreign debt securities		24		(1	)		56		-		-			-
Equity Securities		1		-			4		-		-			-

		143	$	(7	)	$	438		14	$	(8	)	$	41

Gross unrealized losses decreased slightly during the first half of 2011 primarily due to the impact of lower interest rates. We have reviewed our securities for which there is an unrealized loss in accordance with our accounting policies for other-than-temporary impairment (“OTTI”). As a result of our reviews, OTTI of less than $1 million was recognized in earnings on certain debt securities during the three and six months ended June 30, 2011 and 2010. During the six months ended June 30, 2011, we recognized a $1 million loss in other comprehensive income relating to the non-credit component of OTTI as compared to a $1 million recovery related to OTTI previously recognized in accumulated other comprehensive income during the year-ago period. We do not consider any other securities to be other-than-temporarily impaired because we expect to recover the entire amortized cost basis of the securities and we neither intend to nor expect to be required to sell the securities prior to recovery, even if that equates to holding securities until their individual maturities. However, additional other-than-temporary impairments may occur in future periods if the credit quality of the securities deteriorates.

HSBC Finance Corporation

On-Going Assessment for Other-Than-Temporary Impairment On a quarterly basis, we perform an assessment to determine whether there have been any events or economic circumstances to indicate that a security with an unrealized loss has suffered other-than-temporary impairment. A debt security is considered impaired if the fair value is less than its amortized cost basis at the reporting date. If impaired, we then assess whether the unrealized loss is other-than-temporary.

An unrealized loss is generally deemed to be other-than-temporary and a credit loss is deemed to exist if the present value of the expected future cash flows is less than the amortized cost basis of the debt security. As a result, the credit loss component of an other-than-temporary impairment write-down for debt securities is recorded in earnings while the remaining portion of the impairment loss is recognized net of tax in other comprehensive income (loss) provided we do not intend to sell the underlying debt security and it is more-likely-than-not that we would not have to sell the debt security prior to recovery.

For all our debt securities, as of the reporting date we do not have the intention to sell these securities and believe we will not be required to sell these securities for contractual, regulatory or liquidity reasons.

We consider the following factors in determining whether a credit loss exists and the period over which the debt security is expected to recover:


	•	The length of time and the extent to which the fair value has been less than the amortized cost basis;

	•	The level of credit enhancement provided by the structure which includes, but is not limited to, credit subordination positions, overcollateralization, protective triggers and financial guarantees provided by monoline wraps;

	•	Changes in the near term prospects of the issuer or underlying collateral of a security, such as changes in default rates, loss severities given default and significant changes in prepayment assumptions;

	•	The level of excess cash flows generated from the underlying collateral supporting the principal and interest payments of the debt securities; and

	•	Any adverse change to the credit conditions of the issuer or the security such as credit downgrades by the rating agencies.

At June 30, 2011, approximately 93 percent of our corporate debt securities are rated A- or better and approximately 62 percent of our asset-backed securities, which totaled $50 million are rated “AAA.” At December 31, 2010, approximately 92 percent of our corporate debt securities were rated A- or better and approximately 66 percent of our asset-backed securities, which totaled $60 million were rated “AAA.” Although OTTI of less than $1 million was recorded in earnings during the six months ended June 30, 2011 and 2010, additional other-than-temporary impairments may occur in future periods.

Proceeds from the sale, call or redemption of available-for-sale investments totaled $339 million and $449 million during the three and six months ended June 30, 2011, respectively, compared to $37 million and $111 million during the three and six months ended June 30, 2010, respectively. We realized gross gains of $12 million and $15 million during the three and six months ended June 30, 2011, respectively, compared to $1 million and $4 million during the three and six months ended June 30, 2010, respectively. We realized gross losses of less than $1 million during both the six months ended June 30, 2011 and 2010.

HSBC Finance Corporation

Contractual maturities of and yields on investments in debt securities for those with set maturities were as follows:


	Due			After 1			After 5
	Within			but Within			but Within			After
June 30, 2011	1 Year			5 Years			10 Years			10 Years			Total

	(dollars are in millions)

U.S. Treasury:
Amortized cost	$	219		$	227		$	1		$	-		$	447
Fair value		220			236			1			-			457
Yield⁽¹⁾		.64	%		2.18	%		4.96	%		-			1.44	%
U.S. government sponsored enterprises:
Amortized cost	$	79		$	76		$	28		$	24		$	207
Fair value		79			77			32			24			212
Yield⁽¹⁾		.13	%		1.07	%		4.67	%		4.71	%		1.62	%
U.S. government agency issued or guaranteed:
Amortized cost	$	-		$	-		$	-		$	7		$	7
Fair value		-			-			-			8			8
Yield⁽¹⁾		-			-			-			4.99	%		4.99	%
Obligations of U.S. states and political subdivisions:
Amortized cost	$	-		$	4		$	-		$	1		$	5
Fair value		-			4			-			1			5
Yield⁽¹⁾		-			4.30	%		-			5.49	%		4.43	%
Asset-backed securities:
Amortized cost	$	-		$	26		$	4		$	27		$	57
Fair value		-			27			4			19			50
Yield⁽¹⁾		-			4.84	%		6.08	%		1.55	%		3.35	%
U.S. corporate debt securities:
Amortized cost	$	99		$	747		$	211		$	553		$	1,610
Fair value		100			781			226			586			1,693
Yield⁽¹⁾		2.98	%		3.65	%		4.99	%		5.33	%		4.36	%
Foreign debt securities:
Amortized cost	$	17		$	411		$	35		$	40		$	503
Fair value		17			425			35			42			519
Yield⁽¹⁾		2.46	%		3.16	%		4.65	%		5.78	%		3.45	%


⁽¹⁾	Computed by dividing annualized interest by the amortized cost of respective investment securities.

HSBC Finance Corporation


5.	*Receivables*

Receivables consisted of the following:


	June 30,			December 31,
	2011			2010

	(in millions)

Real estate secured:
First lien	$	40,672		$	43,859
Second lien		4,919			5,477

Total real estate secured		45,591			49,336
Credit card		9,212			9,897
Personal non-credit card		6,012			7,117
Commercial and other		26			33

Total receivables		60,841			66,383
HSBC acquisition purchase accounting fair value adjustments		41			43
Accrued finance income		1,408			1,521
Credit loss reserves		(5,325	)		(6,491	)
Unearned credit insurance premiums and claims reserves		(88	)		(123	)

Total receivables, net	$	56,877		$	61,333

HSBC acquisition purchase accounting fair value adjustments represent adjustments which have been “pushed down” to record our receivables at fair value at the date of acquisition by HSBC.

Net deferred origination fees for real estate secured and personal non-credit card receivables totaled $277 million and $304 million at June 30, 2011 and December 31, 2010, respectively. Annual fees for credit card receivables are netted with direct lending costs, deferred, and amortized on a straight-line basis over one year. Deferred annual fees for credit card receivables, net of related direct lending costs, totaled $142 million and $134 million at June 30, 2011 and December 31, 2010, respectively.

At June 30, 2011 and December 31, 2010, we had a net unamortized premium on our receivables of $202 million and $254 million, respectively. Unearned income on personal non-credit card receivables totaled $16 million and $30 million at June 30, 2011 and December 31, 2010, respectively.

Collateralized funding transactions Secured financings issued under our current conduit credit facilities as well as secured financings previously issued under public trusts with a balance of $3.8 billion at June 30, 2011 are secured by $5.9 billion of closed-end real estate secured and credit card receivables. Secured financings issued under conduit credit facilities as well as secured financings previously issued under public trusts with a balance of $4.1 billion at December 31, 2010 were secured by $6.3 billion of closed-end real estate secured and credit card receivables.

Age Analysis of Past Due Receivables The following tables summarize the past due status of our receivables at June 30, 2011 and December 31, 2010. The aging of past due amounts is determined based on the contractual delinquency status of payments made under 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 may be

HSBC Finance Corporation

affected by customer account management policies and practices such as re-age or modification. Additionally, delinquency status is also impacted by payment percentage requirements which vary between servicing platforms.

Days Past Due

Total

June 30, 2011

1 – 29 days

30 – 89 days

90+ days

Past Due

Current

Receivables⁽¹⁾

(in millions)

Real estate secured:

First lien

6,759

4,110

5,353

16,222

24,450

40,672

Second lien

870

456

297

1,623

3,296

4,919

Total real estate secured

7,629

4,566

5,650

17,845

27,746

45,591

Credit card

428

288

274

990

8,222

9,212

Personal non-credit card

808

439

307

1,554

4,458

6,012

Commercial and other

Total receivables

8,865

5,293

6,231

20,389

40,452

60,841


	Days Past Due						Total				Total
December 31, 2010	1 – 29 days		30 – 89 days		90+ days		Past Due		Current		Receivables⁽¹⁾

	(in millions)

Real estate secured:
First lien	$	7,024	$	4,909	$	5,977	$	17,910	$	25,949	$	43,859
Second lien		935		568		421		1,924		3,553		5,477

Total real estate secured		7,959		5,477		6,398		19,834		29,502		49,336
Credit card		473		363		437		1,273		8,624		9,897
Personal non-credit card		968		604		507		2,079		5,038		7,117
Commercial and other		-		-		-		-		33		33

Total receivables	$	9,400	$	6,444	$	7,342	$	23,186	$	43,197	$	66,383


⁽¹⁾		The receivable balances included in this table reflects the principal amount outstanding on the loan and various 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 loans. However, these basis adjustments on the loans are excluded in other presentations regarding delinquent account balances.

Nonperforming receivables Nonaccrual receivables (including receivables held for sale) and accruing receivables 90 or more days delinquent are summarized in the following table.


	June 30,			December 31,
	2011			2010

	(dollars are in millions)

Nonperforming receivables:
Credit card (accruing receivables 90 or more days delinquent)⁽¹⁾	$	280		$	447
Nonaccrual receivable portfolios⁽²⁾:
Real estate secured⁽³⁾		5,619			6,360
Personal non-credit card		320			530

Total nonperforming receivables		6,219			7,337
Real estate owned		588			962

Total nonperforming assets	$	6,807		$	8,299

Credit loss reserves as a percent of nonperforming receivables held for investment⁽⁴⁾		85.7	%		88.5	%

HSBC Finance Corporation


⁽¹⁾		Credit card receivables continue to accrue interest after they become 90 or more days delinquent, consistent with industry practice.

⁽²⁾		Nonaccrual receivables reflect all loans which are 90 or more days contractually delinquent. Nonaccrual receivables do not include receivables which have made qualifying payments and have been re-aged and the contractual delinquency status reset to current as such activity, in our judgment, evidences continued payment probability. If a re-aged loan subsequently experiences payment default and becomes 90 or more days contractually delinquent, it will be reported as nonaccrual.

⁽³⁾		At both June 30, 2011 and December 31, 2010, nonaccrual real estate secured receivables include $4.1 billion of receivables that are carried at the lower of cost or net realizable value less cost to sell.

⁽⁴⁾		Ratio represents credit loss reserves divided by the corresponding outstanding balance of total nonperforming receivables. Nonperforming receivables include accruing loans contractually past due 90 days or more.

Interest income on nonaccrual receivables that would have been recorded if the nonaccrual receivables had been current in accordance with contractual terms during the period was approximately $429 million during the six months ended June 30, 2011 and approximately $472 million during the six months ended June 30, 2010. Interest income that was recorded on these nonaccrual loans was approximately $96 million during the six months ended June 30, 2011 and approximately $155 million during the six months ended June 30, 2010 of which portions have been written-off.

Troubled Debt Restructurings The following table presents information about our TDR Loans:


	June 30,		December 31,
	2011		2010

	(in millions)

TDR Loans⁽¹⁾⁽²⁾:
Real estate secured:
First lien	$	8,444	$	8,697
Second lien		581		647

Total real estate secured⁽³⁾⁽⁴⁾		9,025		9,344
Credit card		355		427
Personal non-credit card		615		704

Total TDR Loans	$	9,995	$	10,475


	June 30,		December 31,
	2011		2010

	(in millions)

Credit loss reserves for TDR Loans:
Real estate secured:
First lien	$	1,730	$	1,728
Second lien		218		258

Total real estate secured		1,948		1,986
Credit card		129		154
Personal non-credit card		330		395

Total credit loss reserves for TDR Loans⁽¹⁾⁽⁵⁾	$	2,407	$	2,535


⁽¹⁾		TDR Loans are considered to be impaired loans regardless of accrual status.

HSBC Finance Corporation


⁽²⁾		The TDR Loan balances included in the table above reflect the current carrying amount of TDR Loans 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. The following table reflects the unpaid principal balance of TDR Loans:


	June 30,		December 31,
	2011		2010

	(in millions)

Real estate secured:
First lien	$	9,589	$	9,650
Second lien		636		709

Total real estate secured		10,225		10,359
Credit card		359		434
Personal non-credit card		616		705

Total TDR Loans	$	11,200	$	11,498


⁽³⁾		At June 30, 2011 and December 31, 2010, TDR Loans totaling $1.7 billion and $1.5 billion, respectively, are recorded at net realizable value less cost to sell and, therefore, generally do not have credit loss reserves associated with them.
⁽⁴⁾		The following table summarizes real estate secured TDR Loans for our Mortgage Services and Consumer Lending businesses:


	June 30,		December 31,
	2011		2010

	(in millions)

Mortgage Services	$	3,839	$	4,114
Consumer Lending		5,186		5,230

Total real estate secured	$	9,025	$	9,344


⁽⁵⁾		Included in credit loss reserves.

Additional information relating to TDR Loans is presented in the table below:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2011		2010		2011		2010

	(in millions)

Average balance of TDR Loans:
Real estate secured:
First lien	$	8,493	$	8,999	$	8,547	$	8,890
Second lien		596		724		613		721

Total real estate secured		9,089		9,723		9,160		9,611
Credit card		373		478		391		478
Personal non-credit card		632		754		653		747

Total average balance of TDR Loans	$	10,094	$	10,955	$	10,204	$	10,836

Interest income recognized on TDR Loans:
Real estate secured:
First lien	$	103	$	105	$	200	$	209
Second lien		10		10		17		20

Total real estate secured		113		115		217		229
Credit card		7		14		16		28
Personal non-credit card		12		12		25		22

Total interest income recognized on TDR Loans	$	132	$	141	$	258	$	279

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 considered 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:


	June 30, 2011					December 31, 2010
	Dollars of		Delinquency			Dollars of		Delinquency
	Delinquency		Ratio			Delinquency		Ratio

	(dollars are in millions)

Real estate secured:
First lien	$	6,568		16.15	%	$	7,504		17.11	%
Second lien		478		9.71			667		12.18

Total real estate secured		7,046		15.45			8,171		16.56
Credit card		406		4.40			612		6.18
Personal non-credit card		489		8.14			779		10.94

Total	$	7,941		13.06	%	$	9,562		14.41	%

Nonperforming The status of our consumer receivable portfolio are summarized in the following table:


					Accruing Loans
					Contractually Past
	Performing		Nonaccrual		Due 90 days or
	Loans		Loans		More⁽¹⁾		Total

	(in millions)

At June 30, 2011
Real estate secured	$	39,972	$	5,619	$	-	$	45,591
Credit cards		8,932		-		280		9,212
Personal non-credit card		5,692		320		-		6,012

Total	$	54,596	$	5,939	$	280	$	60,815

At December 31, 2010
Real estate secured	$	42,976	$	6,360	$	-	$	49,336
Credit cards		9,450		-		447		9,897
Personal non-credit card		6,587		530		-		7,117

Total	$	59,013	$	6,890	$	447	$	66,350


⁽¹⁾		Credit card receivables continue to accrue interest after they become 90 days or more delinquent, consistent with industry practice.

Troubled debt restructurings See discussion of TDR Loans above for further details on this credit quality indicator.

Concentrations of Credit Risk We have historically served non-conforming and non-prime consumers. Such customers are individuals who have limited credit histories, modest incomes, high debt-to-income ratios or have experienced credit problems caused by occasional delinquencies, prior charge-offs, bankruptcy or other credit related actions. The majority of our secured receivables and receivables held for sale have high loan-to-value ratios. Our receivables and receivables held for sale portfolios include the following types of loans:


	•	Interest-only loans – A loan which allows a customer to pay the interest-only portion of the monthly payment for a period of time which results in lower payments during the initial loan period. However, subsequent events affecting a customer’s financial position could affect their ability to repay the loan in the future when the principal payments are required.

HSBC Finance Corporation


	•	ARM loans – A loan which allows the lender to adjust pricing on the loan in line with interest rate movements. A customer’s financial situation and the general interest rate environment at the time of the interest rate reset could affect the customer’s ability to repay or refinance the loan after adjustment.

	•	Stated income loans – Loans underwritten based upon the loan applicant’s representation of annual income, which is not verified by receipt of supporting documentation.

The following table summarizes the outstanding balances of interest-only loans, ARM loans and stated income loans in our receivable portfolios at June 30, 2011 and December 31, 2010:


	June 30,		December 31,
	2011		2010

	(in billions)

Interest-only loans	$	1.1	$	1.3
ARM loans⁽¹⁾⁽²⁾		6.6		7.5
Stated income loans		2.4		2.7


⁽¹⁾		Receivable classification as ARM loans is based on the classification at the time of receivable origination and does not reflect any changes in the classification that may have occurred as a result of any loan modification.

⁽²⁾		We do not have any adjustable rate mortgages loans in our portfolio where the borrower is offered options on the amount of monthly payment they can make.

At June 30, 2011 and December 31, 2010, interest-only, ARM and stated income loans comprised 17 percent and 18 percent, respectively, of real estate secured receivables, including receivables held for sale.


6.	*Credit Loss Reserves*

An analysis of credit loss reserves was as follows:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010

	(in millions)

Credit loss reserves at beginning of period	$	5,710		$	8,265		$	6,491		$	9,091
Provision for credit losses		781			1,597			1,563			3,461
Charge-offs		(1,356	)		(2,634	)		(3,116	)		(5,504	)
Recoveries		190			170			387			350

Credit loss reserves at end of period	$	5,325		$	7,398		$	5,325		$	7,398

HSBC Finance Corporation

The following table summarizes the changes in credit loss reserves by product/class and the related receivable balance by product during the three and six months ended June 30, 2011 and 2010:


	Real Estate Secured
	First			Second			Credit			Personal Non-			Comm’l
	Lien			Lien			Card			Credit Card			and Other		Total

	(in millions)

Three Months Ended June 30, 2011:
Credit loss reserve balances at beginning of period	$	3,167		$	694		$	765		$	1,084		$	-	$	5,710
Provision for credit losses		406			133			199			43			-		781
Charge-offs		(579	)		(208	)		(280	)		(289	)		-		(1,356	)
Recoveries		9			16			50			115			-		190

Net charge-offs		(570	)		(192	)		(230	)		(174	)		-		(1,166	)

Credit loss reserve balance at end of period	$	3,003		$	635		$	734		$	953		$	-	$	5,325

Three Months Ended June 30, 2010:
Credit loss reserve balances at beginning of period	$	3,879		$	1,108		$	1,488		$	1,790		$	-	$	8,265
Provision for credit losses		599			346			280			372			-		1,597
Charge-offs		(1,106	)		(373	)		(531	)		(624	)		-		(2,634	)
Recoveries		12			16			57			85			-		170

Net charge-offs		(1,094	)		(357	)		(474	)		(539	)		-		(2,464	)

Credit loss reserve balance at end of period	$	3,384		$	1,097		$	1,294		$	1,623		$	-	$	7,398

Six Months Ended June 30, 2011:
Credit loss reserve balances at beginning of period	$	3,355		$	832		$	978		$	1,326		$	-	$	6,491
Provision for credit losses		991			238			273			61			-		1,563
Charge-offs		(1,362	)		(468	)		(623	)		(663	)		-		(3,116	)
Recoveries		19			33			106			229			-		387

Net charge-offs		(1,343	)		(435	)		(517	)		(434	)		-		(2,729	)

Credit loss reserve balance at end of period	$	3,003		$	635		$	734		$	953		$	-	$	5,325

Ending balance: collectively evaluated for impairment	$	1,260		$	415		$	605		$	623		$	-	$	2,903
Ending balance: individually evaluated for impairment⁽¹⁾		1,730			218			129			330			-		2,407
Ending balance: loans acquired with deteriorated credit quality		13			2			-			-			-		15

Total credit loss reserves	$	3,003		$	635		$	734		$	953		$	-	$	5,325

Receivables:
Collectively evaluated for impairment	$	28,579		$	4,262		$	8,857		$	5,397		$	26	$	47,121
Individually evaluated for impairment⁽¹⁾		6,775			568			355			615			-		8,313
Receivables carried at net realizable value		5,283			83			-			-			-		5,366
Receivables acquired with deteriorated credit quality		35			6			-			-			-		41

Total receivables	$	40,672		$	4,919		$	9,212		$	6,012		$	26	$	60,841

Six Months Ended June 30, 2010:
Credit loss reserve balances at beginning of period	$	3,997		$	1,430		$	1,816		$	1,848		$	-	$	9,091
Provision for credit losses		1,518			472			479			992			-		3,461
Charge-offs		(2,152	)		(843	)		(1,119	)		(1,390	)		-		(5,504	)
Recoveries		21			38			118			173			-		350

Net charge-offs		(2,131	)		(805	)		(1,001	)		(1,217	)		-		(5,154	)

Credit loss reserve balance at end of period	$	3,384		$	1,097		$	1,294		$	1,623		$	-	$	7,398

Ending balance: collectively evaluated for impairment	$	1,523		$	794		$	1,136		$	1,195		$	-	$	4,648
Ending balance: individually evaluated for impairment⁽¹⁾		1,848			300			158			428			-		2,734
Ending balance: loans acquired with deteriorated credit quality		13			3			-			-			-		16

Total credit loss reserves	$	3,384		$	1,097		$	1,294		$	1,623		$	-	$	7,398

Receivables:
Collectively evaluated for impairment	$	35,417		$	5,609		$	9,658		$	7,786		$	48	$	58,518
Individually evaluated for impairment⁽¹⁾		7,750			705			461			746			-		9,662
Receivables carried at net realizable value		4,506			52			-			-			-		4,558
Receivables acquired with deteriorated credit quality		36			8			-			-			-		44

Total receivables	$	47,709		$	6,374		$	10,119		$	8,532		$	48	$	72,782


⁽¹⁾		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.

HSBC Finance Corporation


7.	*Intangible Assets*

Intangible assets consisted of the following:


			Cumulative
			Impairment		Accumulated		Carrying
	Gross		Charges		Amortization		Value

	(in millions)

June 30, 2011
Purchased credit card relationships and related programs⁽¹⁾	$	1,736	$	-	$	1,199	$	537
Consumer loan related relationships		333		163		170		-
Technology, customer lists and other contracts		261		9		252		-

Total	$	2,330	$	172	$	1,621	$	537

December 31, 2010
Purchased credit card relationships and related programs	$	1,736	$	-	$	1,131	$	605
Consumer loan related relationships		333		163		170		-
Technology, customer lists and other contracts		261		9		252		-

Total	$	2,330	$	172	$	1,553	$	605


⁽¹⁾	Purchased credit card relationships are being amortized to their estimated residual value of $162 million.

Estimated amortization expense associated with our intangible assets for each of the following years is as follows:


Year Ending December 31,	(in millions)


2011	$	138
2012		135
2013		99
2014		71


8.	*Derivative Financial Instruments*

Our business activities involve analysis, evaluation, acceptance and management of some degree of risk or combination of risks. Accordingly, we have comprehensive risk management policies to address potential financial risks, which include credit risk, liquidity risk, market risk, and operational risks. Our risk management policy is designed to identify and analyze these risks, to set appropriate limits and controls, and to monitor the risks and limits continually by means of reliable and up-to-date administrative and information systems. Our risk management policies are primarily carried out in accordance with practice and limits set by the HSBC Group Management Board. The HSBC Finance Corporation Asset Liability Committee (“ALCO”) meets regularly to review risks and approve appropriate risk management strategies within the limits established by the HSBC Group Management Board. Additionally, our Risk Committee receives regular reports on our interest rate and liquidity risk positions in relation to the established limits. In accordance with the policies and strategies established by ALCO, in the normal course of business, we enter into various transactions involving derivative financial instruments. These derivative financial instruments primarily are used as economic hedges to manage risk.

Objectives for Holding Derivative Financial Instruments Market risk (which includes interest rate and foreign currency exchange risks) is the possibility that a change in interest rates or foreign exchange rates will cause a financial instrument to decrease in value or become more costly to settle. Prior to our ceasing originations in our Consumer Lending business and ceasing purchase activities in our Mortgage Services business, customer demand for our loan products shifted between fixed rate and floating rate products, based on market conditions and preferences. These shifts in loan products resulted in different funding strategies and produced different interest rate risk exposures. Additionally, the mix of receivables on our balance sheet and the corresponding market risk is

HSBC Finance Corporation

changing as we manage the liquidation of several of our receivable portfolios. We maintain an overall risk management strategy that utilizes interest rate and currency derivative financial instruments to mitigate our exposure to fluctuations caused by changes in interest rates and currency exchange rates related to our debt liabilities. We manage our exposure to interest rate risk primarily through the use of interest rate swaps with the main objective of managing the interest rate volatility due to a mismatch in the duration of our assets and liabilities. We manage our exposure to foreign currency exchange risk primarily through the use of cross currency interest rate swaps. We do not use leveraged derivative financial instruments.

Interest rate swaps are contractual agreements between two counterparties for the exchange of periodic interest payments generally based on a notional principal amount and agreed-upon fixed or floating rates. The majority of our interest rate swaps are used to manage our exposure to changes in interest rates by converting floating rate debt to fixed rate or by converting fixed rate debt to floating rate. We have also entered into currency swaps to convert both principal and interest payments on debt issued from one currency to the appropriate functional currency.

We do not manage credit risk or the changes in fair value due to the changes in credit risk by entering into derivative financial instruments such as credit derivatives or credit default swaps.

Control Over Valuation Process and Procedures A control framework has been established which is designed to ensure that fair values are either determined or validated by a function independent of the risk-taker. To that end, the ultimate responsibility for the determination of fair values rests with the HSBC Finance Valuation Committee. The HSBC Finance Valuation Committee establishes policies and procedures to ensure appropriate valuations. Fair values for derivatives are determined by management using valuation techniques, valuation models and inputs that are developed, reviewed, validated and approved by the Quantitative Risk and Valuation Group of an HSBC affiliate. These valuation models utilize discounted cash flows or an option pricing model adjusted for counterparty credit risk and market liquidity. The models used apply appropriate control processes and procedures to ensure that the derived inputs are used to value only those instruments that share similar risk to the relevant benchmark indexes and therefore demonstrate a similar response to market factors. In addition, a validation process is followed which includes participation in peer group consensus pricing surveys, to ensure that valuation inputs incorporate market participants’ risk expectations and risk premium.

Credit Risk By utilizing derivative financial instruments, we are exposed to counterparty credit risk. Counterparty credit risk is our primary exposure on our interest rate swap portfolio. Counterparty credit risk is the risk that the counterparty to a transaction fails to perform according to the terms of the contract. We manage the counterparty credit (or repayment) risk in derivative instruments through established credit approvals, risk control limits, collateral, and ongoing monitoring procedures. We utilize an affiliate, HSBC Bank USA, as the primary provider of domestic derivative products. We have never suffered a loss due to counterparty failure.

At June 30, 2011 and December 31, 2010, substantially all of our existing derivative contracts are with HSBC subsidiaries, making them our primary counterparty in derivative transactions. Most swap agreements require that payments be made to, or received from, the counterparty when the fair value of the agreement reaches a certain level. Generally, non-affiliate swap counterparties provide collateral in the form of cash which is recorded in our balance sheet as derivative related liabilities. At June 30, 2011 and December 31, 2010, we provided third party swap counterparties with $17 million and $33 million of collateral, respectively, in the form of cash. When the fair value of our agreements with affiliate counterparties requires the posting of collateral, it is provided in either the form of cash and recorded on the balance sheet, consistent with third party arrangements, or in the form of securities which are not recorded on our balance sheet. At June 30, 2011 and December 31, 2010, the fair value of our agreements with affiliate counterparties required the affiliate to provide collateral of $2.8 billion and $2.5 billion, respectively, all of which was provided in cash. These amounts are offset against the fair value amount recognized for derivative instruments that have been offset under the same master netting arrangement and recorded in our balance sheet as a component of derivative financial asset or derivative related liabilities. At June 30, 2011, we had derivative contracts with a notional value of approximately $45.8 billion, including $45.4 billion outstanding with HSBC Bank USA. At December 31, 2010, we had derivative contracts with a notional value of $50.5 billion, including $49.9 billion outstanding with HSBC Bank USA. Derivative financial instruments are generally

HSBC Finance Corporation

expressed in terms of notional principal or contract amounts which are much larger than the amounts potentially at risk for nonpayment by counterparties.

To manage our exposure to changes in interest rates, we entered into interest rate swap agreements and currency swaps which have been designated as fair value or cash flow hedges under derivative accounting principles or are treated as non-qualifying hedges. We currently utilize the long-haul method to assess effectiveness of all derivatives designated as hedges. In the tables that follow below, the fair value disclosed does not include swap collateral that we either receive or deposit with our interest rate swap counterparties. Such swap collateral is recorded on our balance sheet at an amount which approximates fair value and is netted on the balance sheet against the fair value amount recognized for derivative instruments.

Fair Value Hedges Fair value hedges include interest rate swaps to convert our fixed rate debt to variable rate debt and currency swaps to convert debt issued from one currency into U.S. dollar variable rate debt. All of our fair value hedges are associated with debt. We recorded fair value adjustments for fair value hedges which increased the carrying value of our debt by $51 million at both June 30, 2011 and December 31, 2010. The following table provides information related to the location of derivative fair values in the consolidated balance sheet for our fair value hedges.


	Asset Derivatives Fair Value						Liability Derivatives Fair Value
	Balance Sheet	June 30,		December 31,			Balance Sheet	June 30,		December 31,
	Location	2011		2010			Location	2011		2010

		(in millions)						(in millions)

Interest rate swaps	Derivative financial assets	$	13	$	(4	)	Derivative related liabilities	$	5	$	18
Currency swaps	Derivative financial assets		215		124		Derivative related liabilities		-		-

Total		$	228	$	120			$	5	$	18

The following table presents fair value hedging information, including the gain (loss) recorded on the derivative and where that gain (loss) is recorded in the consolidated statement of income (loss) as well as the offsetting gain (loss) on the hedged item that is recognized in current earnings, the net of which represents hedge ineffectiveness.


			Amount of						Amount of						Amount of						Amount of
			Gain (Loss)						Gain (Loss)						Gain (Loss)						Gain (Loss)
			Recognized						Recognized						Recognized						Recognized
		Location of Gain	in Income						in Income						in Income						in Income
		(Loss) Recognized	on the						on Hedged						on the						on Hedged
		in Income on	Derivative						Items						Derivative						Items
		Hedged Item	Three Months Ended June 30,												Six Months Ended June 30,
	Hedged Item	and Derivative	2011			2010			2011			2010			2011			2010			2011			2010

			(in millions)

Interest rate swaps	Fixed rate borrowings	Derivative related income (expense)	$	32		$	39		$	(34	)	$	(18	)	$	24		$	40		$	(24	)	$	(23	)
Currency swaps	Fixed rate borrowings	Derivative related income (expense)		(4	)		(12	)		12			10			(24	)		(1	)		28			-

Total			$	28		$	27		$	(22	)	$	(8	)	$	-		$	39		$	4		$	(23	)

Cash Flow Hedges Cash flow hedges include interest rate swaps to convert our variable rate debt to fixed rate debt and by fixing future interest rate resets of floating rate debt as well as currency swaps to convert debt issued from one currency into U.S. dollar fixed rate debt. Gains and losses on current derivative instruments designated as cash flow hedges are reported in accumulated other comprehensive income (loss) (“OCI”) net of tax and totaled a loss of $454 million and $492 million at June 30, 2011 and December 31, 2010, respectively. We expect $366 million ($237 million after-tax) of currently unrealized net losses will be reclassified to earnings within one year. However, these reclassified unrealized losses will be offset by decreased interest expense associated with the variable cash

HSBC Finance Corporation

flows of the hedged items and will result in no significant net economic impact to our earnings. The following table provides information related to the location of derivative fair values in the consolidated balance sheet for our cash flow hedges.


	Asset Derivatives Fair Value							Liability Derivatives Fair Value
	Balance Sheet	June 30,			December 31,			Balance Sheet	June 30,		December 31,
	Location	2011			2010			Location	2011		2010

		(in millions)							(in millions)

Interest rate swaps	Derivative financial assets	$	(414	)	$	(437	)	Derivative related liabilities	$	-	$	-
Currency swaps	Derivative financial assets		1,242			985		Derivative related liabilities		-		-

Total		$	828		$	548			$	-	$	-

The following table provides the gain or loss recorded on our cash flow hedging relationships.


	Gain (Loss)														Gain (Loss)
	Recognized														Recognized
	in OCI on						Location of Gain	Gain (Loss)						Location of Gain	In Income
	Derivative						(Loss) Reclassified	Reclassified from						(Loss) Recognized	on Derivative
	(Effective						from Accumulated	AOCI into Income						in Income	(Ineffective
	Portion)						OCI into Income	(Effective Portion)						on the Derivative	Portion)
	2011			2010			(Effective Portion)	2011			2010			(Ineffective Portion)	2011			2010

	(in millions)							(in millions)							(in millions)

Three Months Ended June 30,
Interest rate swaps	$	(33	)	$	(99	)	Interest expense	$	(12	)	$	(18	)	Derivative related Income	$	-		$	-
Currency swaps		10			(10	)	Interest expense		(6	)		(8	)	Derivative related Income		4			(29	)

Total	$	(23	)	$	(109	)		$	(18	)	$	(26	)		$	4		$	(29	)

Six Months Ended June 30,
Interest rate swaps	$	22		$	(127	)	Interest expense	$	(23	)	$	(37	)	Derivative related Income	$	2		$	-
Currency swaps		38			(17	)	Interest expense		(13	)		(17	)	Derivative related Income		(5	)		(26	)

Total	$	60		$	(144	)		$	(36	)	$	(54	)		$	(3	)	$	(26	)

Non-Qualifying Hedging Activities We may enter into interest rate and currency swaps which are not designated as hedges under derivative accounting principles. These financial instruments are economic hedges but do not qualify for hedge accounting and are primarily used to minimize our exposure to changes in interest rates and currency exchange rates through more closely matching both the structure and projected duration of our liabilities to the structure and duration of our assets. The following table provides information related to the location and derivative fair values in the consolidated balance sheet for our non-qualifying hedges:

HSBC Finance Corporation


	Asset Derivatives Fair Value					Liability Derivatives Fair Value
	Balance Sheet	June 30,		December 31,		Balance Sheet	June 30,		December 31,
	Location	2011		2010		Location	2011		2010

		(in millions)					(in millions)

Interest rate swaps	Derivative financial assets	$	93	$	165	Derivative related liabilities	$	5	$	5
Currency swaps	Derivative financial assets		110		67	Derivative related liabilities		-		-

Total		$	203	$	232		$	5	$	5

The following table provides detail of the gain or loss recorded on our non-qualifying hedges:


		Amount of Gain (Loss)
		Recognized in Income
		on Derivative
		Three Months Ended						Six Months Ended
	Location of Gain (Loss)	June 30,						June 30,
	Recognized in Income on Derivative	2011			2010			2011			2010

		(in millions)

Interest rate contracts	Derivative related income (expense)	$	(168	)	$	(486	)	$	(125	)	$	(588	)
Currency contracts	Derivative related income (expense)		1			-			1			-

Total		$	(167	)	$	(486	)	$	(124	)	$	(588	)

We have elected the fair value option for certain issuances of our fixed rate debt and have entered into interest rate and currency swaps related to debt carried at fair value. The interest rate and currency swaps associated with this debt are non-qualifying hedges but are considered economic hedges and realized gains and losses are reported as “Gain (loss) on debt designated at fair value and related derivatives” within other revenues. The derivatives related to fair value option debt are included in the tables below. See Note 9, “Fair Value Option,” for further discussion.

Asset Derivatives Fair Value

Liability Derivatives Fair Value

Balance Sheet

June 30,

December 31,

Balance Sheet

June 30,

December 31,

Location

2011

2010

Location

2011

2010

(in millions)

Interest rate swaps

Derivative financial assets

784

907

Derivative related liabilities

Currency swaps

Derivative financial assets

979

739

Derivative related liabilities

Total

1,763

1,646

HSBC Finance Corporation

The following table provides the gain or loss recorded on the derivatives related to fair value option debt, primarily due to changes in interest rates:


		Amount of Gain (Loss)
		Recognized in Income
		on Derivative
		Three Months Ended				Six Months Ended
	Location of Gain (Loss)	June 30,				June 30,
	Recognized in Income on Derivative	2011		2010		2011		2010

		(in millions)

Interest rate contracts	Gain (loss) on debt designated at fair value and related derivatives	$	137	$	313	$	136	$	546
Currency contracts	Gain (loss) on debt designated at fair value and related derivatives		87		78		13		156

Total		$	224	$	391	$	149	$	702

Notional Value of Derivative Contracts The following table summarizes the notional values of derivative contracts:


	June 30,		December 31,
	2011		2010

	(in millions)

Derivatives designated as hedging instruments:
Interest rate swaps	$	8,823	$	8,917
Currency swaps		8,950		10,018

		17,773		18,935

Non-qualifying economic hedges:
Derivatives not designated as hedging instruments:
Interest rate:
Swaps		11,623		11,449
Purchased caps		31		173
Foreign exchange:
Swaps		1,054		1,221
Forwards		98		123

		12,806		12,966

Derivatives associated with debt carried at fair value:
Interest rate swaps		11,873		15,212
Currency swaps		3,376		3,376

		15,249		18,588

Total	$	45,828	$	50,489

HSBC Finance Corporation


9.	*Fair Value Option*

We have elected FVO reporting for certain of our fixed rate debt issuances. At June 30, 2011, fixed rate debt accounted for under FVO totaled $17.8 billion, of which $17.4 billion is included as a component of long-term debt and $443 million is included as a component of due to affiliates. At June 30, 2011, we had not elected FVO for $14.0 billion of fixed rate long-term debt carried on our balance sheet. Fixed rate debt accounted for under FVO at June 30, 2011 has an aggregate unpaid principal balance of $17.0 billion which included a foreign currency translation adjustment relating to our foreign denominated FVO debt which increased the debt balance by $696 million.

At December 31, 2010, fixed rate debt accounted for under FVO totaled $21.3 billion, of which $20.8 billion was included as a component of long-term debt and $436 million was included as a component of due to affiliates. At December 31, 2010, we had not elected FVO for $16.8 billion of fixed rate long-term debt carried on our balance sheet. Fixed rate debt accounted for under FVO at December 31, 2010 had an aggregate unpaid principal balance of $20.4 billion which included a foreign currency translation adjustment relating to our foreign denominated FVO debt which increased the debt balance by $404 million.

We determine the fair value of the fixed rate debt accounted for under FVO through the use of a third party pricing service. Such fair value represents the full market price (credit and interest rate impact) based on observable market data for the same or similar debt instruments. See Note 15, “Fair Value Measurements,” for a description of the methods and significant assumptions used to estimate the fair value of our fixed rate debt accounted for under FVO.

The components of gain on debt designated at fair value and related derivatives are as follows:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010

	(in millions)

Mark-to-market on debt designated at fair value⁽¹⁾:
Interest rate component	$	(87	)	$	(346	)	$	132		$	(489	)
Credit risk component		108			425			(65	)		390

Total mark-to-market on debt designated at fair value		21			79			67			(99	)
Mark-to-market on the related derivatives⁽¹⁾		66			186			(174	)		285
Net realized gains on the related derivatives		158			205			323			417

Gain on debt designated at fair value and related derivatives	$	245		$	470		$	216		$	603

⁽¹⁾

Mark-to-market on debt designated at fair value and related derivatives excludes market value changes due to fluctuations in foreign currency exchange rates. Foreign currency translation gains (losses) recorded in derivative related income (expense) associated with debt designated at fair value was a loss of $115 million and $292 million during the three and six months ended June 30, 2011, respectively, compared to a gain of $264 million and $491 million for the three and six months ended June 2010, respectively. Offsetting gains (losses) recorded in derivative related income (expense) associated with the related derivatives was a gain of $115 million and $292 million during the three and six months ended June 30, 2011, respectively, compared to a loss of $264 million and $491 million during the three and six months ended June 30, 2010, respectively.

The movement in the fair value reflected in gain on debt designated at fair value and related derivatives includes the effect of credit spread changes and interest rate changes, including any economic ineffectiveness in the relationship between the related swaps and our debt and any realized gains or losses on those swaps. With respect to the credit component, as credit spreads narrow accounting losses are booked and the reverse is true if credit spreads widen. Differences arise between the movement in the fair value of our debt and the fair value of the related swap due to the different credit characteristics and differences in the calculation of fair value for debt and derivatives. The size and direction of the accounting consequences of such changes can be volatile from period to period but do not alter the cash flows intended as part of the documented interest rate management strategy. On a cumulative basis, we have

HSBC Finance Corporation

recorded fair value option adjustments which increased the value of our debt by $806 million and $873 million at June 30, 2011 and December 31, 2010, respectively.

The change in the fair value of the debt and the change in value of the related derivatives reflect the following:


	•	Interest rate curve – A decrease in U.S. interest rates during the second quarter of 2011 resulted in a loss on the interest rate component on the mark-to-market of the debt and a gain on the mark-to-market of the related derivative during the three months ended June 30, 2011. During the second quarter of 2010, a decrease in long-term U.S. interest rates resulted in a loss in the interest rate component on the mark-to-market of the debt and gain on the mark-to-market of the related derivative. Although long-term U.S. interest rates were marginally lower during the six months ended June 30, 2011, we experienced a gain in the interest component on the mark-to-market of the debt and a loss on the mark-to-market of the related derivatives driven by market movements on certain debt and the related derivatives which will mature in the near term. As these items near maturity, their values are less sensitive to interest rate movements. In the first half of 2010, a decrease in long-term U.S. interest rates resulted in a loss in the interest rate component on the mark-to-market of the debt and a corresponding gain on the mark-to-market of the related derivative. Changes in the value of the interest rate component of the debt as compared to the related derivative are also affected by differences in cash flows and valuation methodologies for the debt and the derivatives. Cash flows on debt are discounted using a single discount rate from the bond yield curve for each bond’s applicable maturity while derivative cash flows are discounted using rates at multiple points along an interest rate yield curve. The impacts of these differences vary as short-term and long-term interest rates shift and time passes. Furthermore, certain derivatives have been called by the counterparty resulting in certain FVO debt having no related derivatives. As a result, approximately 7 percent of our FVO debt does not have a corresponding derivative at June 30, 2011.

	•	Credit – Our secondary market spreads widened during the second quarter of 2011 due to the continuing concerns with the European sovereign debt crisis and the uncertain economic recovery in the United States. During the second quarter of 2010, our secondary market credit spreads also widened as concerns raised by the European sovereign debt crisis in May 2010 impacted credit spreads throughout the U.S. In the first half of 2011, the widening of spreads observed in the second quarter partially offset the tighter spreads recognized during the first quarter of 2011 driven by continued improvement in marketplace liquidity. During the first half of 2010, the widening of our credit spreads in the second quarter of 2010 reversed a slight narrowing of our credit spreads during the first quarter of 2010.

Net income volatility, whether based on changes in the interest rate or credit risk components of the mark-to-market on debt designated at fair value and the related derivatives, impacts the comparability of our reported results between periods. Accordingly, gain on debt designated at fair value and related derivatives for the six months ended June 30, 2011 should not be considered indicative of the results for any future periods.


*10.*	*Income Taxes*

Effective tax rates are analyzed as follows.


Three Months Ended June 30,	2011					2010

	(dollars are in millions)

Tax expense (benefit) at the U.S. Federal statutory income tax rate	$	(48	)	(35.0	)%	$	(303	)	(35.0	)%
Increase (decrease) in rate resulting from:
Adjustment to valuation allowance on deferred tax assets		(30	)	(21.9	)		(9	)	(1.0	)
State and local taxes, net of Federal benefit		(9	)	(6.6	)		(13	)	(1.5	)
Other		(5	)	(3.7	)		(12	)	(1.4	)

Total income tax expense (benefit)	$	(92	)	(67.2	)%	$	(337	)	(38.9	)%

HSBC Finance Corporation


Six Months Ended June 30,	2011					2010

	(dollars are in millions)

Tax expense (benefit) at the U.S. Federal statutory income tax rate	$	(122	)	(35.0	)%	$	(652	)	(35.0	)%
Increase (decrease) in rate resulting from:
Adjustment to valuation allowance on deferred tax assets		(141	)	(40.4	)		(8	)	(.4	)
State and local taxes, net of Federal benefit		(20	)	(5.7	)		(17	)	(.9	)
Other		(2	)	(.6	)		(12	)	(.7	)

Total income tax expense (benefit)	$	(285	)	(81.7	)%	$	(689	)	(37.0	)%

The effective tax rate for the three months ended June 30, 2011 was primarily impacted by the release of valuation allowance on state deferred tax assets. The effective tax rate for the six months ended June 30, 2011 was primarily impacted by a release of valuation allowance previously established on foreign tax credits. The effective tax rate for both the three months and six months ended June 30, 2011 was impacted by a decrease in state uncertain tax positions and state taxes, including the states where we file combined unitary state tax returns with other HSBC affiliates.

HSBC North America Consolidated Income Taxes We are included in HSBC North America’s consolidated Federal income tax return and in various combined state income tax returns. As such, we have entered into a tax allocation agreement with HSBC North America and its subsidiary entities (the “HNAH Group”) included in the consolidated returns which govern the current amount of taxes to be paid or received by the various entities included in the consolidated return filings. As a result, we have looked at the HNAH Group’s consolidated deferred tax assets and various sources of taxable income, including the impact of HSBC and HNAH Group tax planning strategies, in reaching conclusions on recoverability of deferred tax assets. Where a valuation allowance is determined to be necessary at the HSBC North America consolidated level, such allowance is allocated to the principal subsidiaries within the HNAH Group as described below in a manner that is systematic, rational and consistent with the broad principles of accounting for income taxes.

The HNAH Group evaluates deferred tax assets for recoverability using a consistent approach which considers the relative impact of negative and positive evidence, including historical financial performance, projections of future taxable income, future reversals of existing taxable temporary differences, tax planning strategies and any available carryback capacity.

In evaluating the need for a valuation allowance, the HNAH Group estimates future taxable income based on management approved business plans, future capital requirements and ongoing tax planning strategies, including capital support from HSBC necessary as part of such plans and strategies. The HNAH Group has continued to consider the impact of the economic environment on the North American businesses and the expected growth of the deferred tax assets. This evaluation process involves significant management judgment about assumptions that are subject to change from period to period.

In conjunction with the HNAH Group deferred tax evaluation process, based on our forecasts of future taxable income, which include assumptions about the depth and severity of home price depreciation and the U.S. economic downturn, including unemployment levels and their related impact on credit losses, we currently anticipate that our results of future operations will generate sufficient taxable income to allow us to realize our deferred tax assets. However, since these market conditions have created losses in the HNAH Group in recent periods and volatility on our pre-tax book income, our analysis of the realizability of the deferred tax assets significantly discounts any future taxable income expected from continuing operations and relies to a greater extent on continued capital support from our parent, HSBC, including tax planning strategies implemented in relation to such support. HSBC has indicated they remain fully committed and have the capacity and willingness to provide capital as needed to run operations, maintain sufficient regulatory capital, and fund certain tax planning strategies.

Only those tax planning strategies that are both prudent and feasible, and which management has the ability and intent to implement, are incorporated into our analysis and assessment. The primary and most significant strategy is HSBC’s commitment to reinvest excess HNAH Group capital to reduce debt funding or otherwise invest in assets to ensure that it is more likely than not that the deferred tax assets will be utilized.

HSBC Finance Corporation

Currently, it has been determined that the HNAH Group’s primary tax planning strategy, in combination with other tax planning strategies, provides support for the realization of the net deferred tax assets recorded for the HNAH Group. Such determination is based on HSBC’s business forecasts and assessment as to the most efficient and effective deployment of HSBC capital, most importantly including the length of time such capital will need to be maintained in the U.S. for purposes of the tax planning strategy. In the second quarter of 2011, as a result of the capital tax planning strategy an additional $24 million of state deferred tax assets are expected to be realized.

During the first quarter of 2011, the HNAH Group identified an additional tax planning strategy that provides support for the realization of the deferred tax assets recorded for its foreign tax credits and certain state related deferred tax assets. The use of foreign tax credits is limited by the HNAH Group’s U.S. tax liability and the availability of foreign source income. The tax planning strategy, which includes the purchase of foreign bonds and REMIC residual interests, continued to be implemented in the second quarter of 2011. These purchases are expected to generate sufficient foreign source taxable income to allow for the utilization of the foreign tax credits before the credits expire unused and recognition of certain state deferred tax assets. In the second quarter of 2011, this tax planning strategy provided support for the realization of an additional $6 million of deferred tax assets for foreign tax credits.

Notwithstanding the above, the HNAH Group has valuation allowances against certain state deferred tax assets and certain tax loss carryforwards for which the aforementioned tax planning strategies do not provide appropriate support.

HNAH Group valuation allowances are allocated to the principal subsidiaries, including us. The methodology allocates the valuation allowance to the principal subsidiaries based primarily on the entity’s relative contribution to the growth of the HSBC North America consolidated deferred tax asset against which the valuation allowance is being recorded.

If future results differ from the HNAH Group’s current forecasts or the tax planning strategies were to change, a valuation allowance against some or all of the remaining net deferred tax assets may need to be established which could have a material adverse effect on our results of operations, financial condition and capital position. The HNAH Group will continue to update its assumptions and forecasts of future taxable income, including relevant tax planning strategies, and assess the need for such incremental valuation allowances.

Absent the capital support from HSBC and implementation of the related tax planning strategies, the HNAH Group, including us, would be required to record a valuation allowance against the remaining deferred tax assets.

HSBC Finance Corporation Income Taxes We recognize deferred tax assets and liabilities for the future tax consequences related to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for tax credits and net operating and other losses. Our net deferred tax assets, including deferred tax liabilities and valuation allowances, totaled $2.3 billion and $2.5 billion as of June 30, 2011 and December 31, 2010, respectively.

During the second quarter of 2011, we decreased our uncertain tax reserves by $12 million as a result of a pending resolution with the IRS Appeals Office covering the tax periods 1998 through 2005. We anticipate the resolution of this matter within the next twelve months. There is no resulting impact to our uncertain tax reserves.

It is our policy to recognize accrued interest related to unrecognized tax positions in interest expense in the consolidated statement of income (loss) and to recognize penalties related to unrecognized tax positions as a component of other servicing and administrative expenses in the consolidated statement of income (loss). We had accruals for the payment of interest and penalties associated with uncertain tax positions of $64 million and $76 million at June 30, 2011 and December 31, 2010.

Our consolidated federal income tax returns are currently under audit by the Internal Revenue Service for the years 2006 and 2007. The Federal examination is expected to conclude in 2011. We are also subject to federal examination for the years 2008 and forward. The IRS is expected to begin their examination of 2008 and 2009 before the end of 2011. We remain subject to state tax examination for years 1998 and forward.

It is reasonably possible that there could be a change in the amount of our unrecognized tax benefits within the next 12 months due to settlements or statutory expirations in various tax jurisdictions. The total amount of unrecognized

HSBC Finance Corporation

tax benefits that, if recognized, would affect the effective tax rate was $75 million and $96 million at June 30, 2011 and December 31, 2010.


*11.*	*Pension and Other Postretirement Benefits*

The components of pension expense for the defined benefit pension plan reflected in our consolidated statement of income (loss) are shown in the table below and reflect the portion of the pension expense of the combined HSBC North America Pension Plan (either the HSBC North America Pension Plan” or the “Plan”) which has been allocated to HSBC Finance Corporation:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010

	(in millions)

Service cost – benefits earned during the period	$	3		$	6		$	5		$	12
Interest cost on projected benefit obligation		16			16			32			30
Expected return on assets		(17	)		(15	)		(34	)		(28	)
Recognized losses		8			8			16			16
Amortization of prior service cost		(1	)		-			(2	)		(1	)

Pension expense	$	9		$	15		$	17		$	29

Pension expense declined during the first half of 2011 primarily due to higher returns on Plan assets reflecting higher asset levels including additional contributions to the Plan as well as lower service cost as a result of a decrease in the number of active participants in the Plan as well as the impact of the decision to cease future benefit accruals for legacy participants under the final average pay formula components of the Plan effective January 1, 2011.

Components of the net periodic benefit cost for our postretirement medical plan benefits other than pensions are as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2011		2010		2011		2010

	(in millions)

Service cost – benefits earned during the period	$	1	$	-	$	1	$	1
Interest cost		2		2		4		4

Net periodic postretirement benefit cost	$	3	$	2	$	5	$	5


*12.*	*Related Party Transactions*

In the normal course of business, we conduct transactions with HSBC and its subsidiaries. These transactions occur at prevailing market rates and terms and include funding arrangements, derivative execution, purchases and sales of receivables, servicing arrangements, information technology and some centralized support services, item and statement processing services, banking and other miscellaneous services. The following tables present related party balances and the income and (expense) generated by related party transactions for continuing operations:

HSBC Finance Corporation


	June 30,		December 31,
	2011		2010

	(in millions)

Assets:
Cash	$	226	$	168
Interest bearing deposits with banks		1,004		1,009
Securities purchased under agreements to resell		857		2,060
Derivative related assets		197		64
Other assets		311		126

Total assets	$	2,595	$	3,427

Liabilities:
Due to affiliates (includes $443 million and $436 million at June 30, 2011 and December 31, 2010, respectively, carried at fair value)	$	8,168	$	8,255
Derivative related liability		-		2
Other liabilities		143		70

Total liabilities	$	8,311	$	8,327


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010

	(in millions)

Income/(Expense):
Interest income from HSBC affiliates	$	2		$	2		$	4		$	3
Interest expense paid to HSBC affiliates⁽¹⁾		(143	)		(202	)		(296	)		(422	)

Net interest income (loss)		(141	)		(200	)		(292	)		(419	)

Gain/(loss) on FVO debt with affiliate		5			-			(7	)		-

HSBC affiliate income:
Gain on receivable sales to HSBC affiliates:
Daily sales of private label receivable originations		50			50			89			88
Daily sales of credit card receivables		98			92			172			170

Total gain on receivable sales to HSBC affiliates		148			142			261			258

Servicing and other fees from HSBC affiliates:
HSBC Bank USA:
Real estate secured servicing and related fees		3			2			6			5
Private label and card receivable servicing and related fees		156			158			305			311
Other servicing, processing, origination and support revenues from HSBC Bank USA and other HSBC affiliates		4			5			9			9
HSBC Technology and Services (USA) Inc. (“HTSU”) administrative fees and rental revenue⁽²⁾		-			(4	)		2			10

Total servicing and other fees from HSBC affiliates		163			161			322			335

Support services from HSBC affiliates		(295	)		(254	)		(586	)		(530	)

Stock based compensation expense with HSBC		(2	)		(4	)		(6	)		(8	)

Insurance commission paid to HSBC Bank Canada		(4	)		(9	)		(8	)		(14	)


⁽¹⁾		Includes interest expense paid to HSBC affiliates for debt held by HSBC affiliates as well as net interest paid to or received from HSBC affiliates on risk management positions related to non-affiliated debt.
⁽²⁾		Rental revenue/(expense) from HTSU totaled $(2) million and less than $(1) million during the three and six months ended June 30, 2011, respectively, and $(5) million and $6 million during the three and six months ended June 30, 2010, respectively.

HSBC Finance Corporation

Transactions with HSBC Bank USA:


•	In January 2009, we sold our GM and UP Portfolios to HSBC Bank USA with an outstanding principal balance of $12.4 billion at the time of sale and recorded a gain on the bulk sale of these receivables of $130 million. This gain was partially offset by a loss of $80 million recorded on the termination of cash flow hedges associated with the $6.1 billion of indebtedness transferred to HSBC Bank USA as part of these transactions. We retained the customer account relationships and by agreement sell on a daily basis all new credit card receivable originations for the GM and UP Portfolios to HSBC Bank USA. We continue to service the GM and UP receivables for HSBC Bank USA for a fee. Information regarding these receivables is summarized in the table below.

•	In July 2004 we purchased the account relationships associated with $970 million of credit card receivables from HSBC Bank USA and on a daily basis, we sell new receivable originations on these credit card accounts to HSBC Bank USA. We continue to service these loans for a fee. Information regarding these receivables is summarized in the table below.

•	In December 2004, we sold to HSBC Bank USA our private label receivable portfolio (excluding retail sales contracts at our Consumer Lending business). We continue to service the sold private label and credit card receivables and receive servicing and related fee income from HSBC Bank USA. We retained the customer account relationships and by agreement sell on a daily basis all new private label receivable originations and new receivable originations on these credit card accounts to HSBC Bank USA. Information regarding these receivables is summarized in the table below.

•	In 2003 and 2004, we sold approximately $3.7 billion of real estate secured receivables to HSBC Bank USA. We continue to service these receivables for a fee. Information regarding these receivables is summarized in the table below.

The following table summarizes the private label, credit card (including the GM and UP Portfolios) and real estate secured receivables we are servicing for HSBC Bank USA at June 30, 2011 and December 31, 2010 as well as the cumulative amount of receivables sold on a daily basis during the three and six months ended June 30, 2011 and 2010:


			Credit Cards
	Private		General		Union				Real Estate
	Label		Motors		Privilege		Other		Secured		Total

	(in billions)

Receivables serviced for HSBC Bank USA:
June 30, 2011	$	11.9	$	4.0	$	3.7	$	1.9	$	1.4	$	22.9
December 31, 2010		13.5		4.5		4.1		2.0		1.5		25.6
Total of receivables sold on a daily basis to HSBC Bank USA during:
Three months ended June 30, 2011	$	3.6	$	3.3	$	0.8	$	1.1	$	-	$	8.8
Three months ended June 30, 2010		3.4		3.5		0.8		1.0		-		8.7
Six months ended June 30, 2011		6.8		6.4		1.5		2.0		-	$	16.7
Six months ended June 30, 2010		6.4		6.6		1.5		2.0		-		16.5

Fees received for servicing these loan portfolios totaled $158 million and $308 million during the three and six months ended June 30, 2011, respectively, compared to $158 million and $313 million during the three and six months ended June 30, 2010, respectively.

The GM and UP credit card receivables as well as the private label receivables are sold to HSBC Bank USA on a daily basis at a sales price for each type of portfolio determined using a fair value calculated semi-annually in April and October by an independent third party based on the projected future cash flows of the receivables. The projected future cash flows are developed using various assumptions reflecting the historical performance of the receivables and adjusted for key factors such as the anticipated economic and regulatory environment. The independent third party uses these projected future cash flows and a discount rate to determine a range of fair values. We use the mid-point of this range as the sales price. If significant information becomes available that would alter the projected

HSBC Finance Corporation

future cash flows, an analysis would be performed to determine if fair value rates needed to be updated prior to the normal semi-annual cycles.


•	Under multiple service level agreements, we also provide various services to HSBC Bank USA, including real estate and credit card servicing and processing activities and other operational and administrative support. Fees received for these services are reported as Servicing and other fees from HSBC affiliates.

•	In the fourth quarter of 2009, an initiative was begun to streamline the servicing of real estate secured receivables across North America. As a result, certain functions that we had previously performed for our mortgage customers are now being performed by HSBC Bank USA for all North America mortgage customers, including our mortgage customers. Additionally, we are currently performing certain functions for all North America mortgage customers where these functions had been previously provided separately by each entity. During the three and six months ended June 30, 2011, we paid $2 million and $4 million, respectively, for services we received from HSBC Bank USA and received $1 million and $3 million, respectively, for services we provided. During the three and six months ended June 30, 2010, we paid $2 million and $4 million, respectively, for services we received from HSBC Bank USA and received $2 million and $3 million, respectively, for services we provided.

•	In July 2010, we transferred certain employees in our real estate secured receivable servicing department to a subsidiary of HSBC Bank USA. These employees continue to service our real estate secured receivable portfolio and we pay a fee to HSBC Bank USA for these services. During the three and six months ended June 30, 2011, we paid $15 million and $32 million, respectively, for services we received from HSBC Bank USA.

•	We have extended revolving lines of credit to subsidiaries of HSBC Bank USA for an aggregate total of $1.0 billion. No balances were outstanding under any of these lines of credit at either June 30, 2011 or December 31, 2010.

•	HSBC Bank USA extended a secured $1.5 billion uncommitted credit facility to certain of our subsidiaries in December 2008. This is a 364 day credit facility which was renewed in November 2010. There were no balances outstanding at June 30, 2011 or December 31, 2010.

•	HSBC Bank USA extended a $1.0 billion committed unsecured credit facility to HSBC Bank Nevada (“HOBN”), a subsidiary of HSBC Finance Corporation, in December 2008. This 364 day credit facility was renewed in December 2010. There were no balances outstanding at June 30, 2011 or December 31, 2010.

•	As it relates to our discontinued TFS operations, HSBC Bank USA and HSBC Trust Company (Delaware) (“HTCD”) originated the loans on behalf of our TFS business for clients of a single third party tax preparer. During 2010, we purchased a portion of the loans originated by HSBC Bank USA and HTDC daily for a fee. A portion of the loans which were originated were retained by HSBC Bank USA and held on its balance sheet. In the event any of the loans which HSBC Bank USA continued to hold on its balance sheet reached a defined delinquency status, we purchased the delinquent loans at par value as we had assumed all credit risk associated with this program. During the three and six months ended June 30, 2010, we received a fee from HSBC Bank USA for both servicing the loans and assuming the credit risk associated with these loans which totaled $2 million and $58 million, respectively, and is included as a component of loss from discontinued operations. For the loans which we purchased from HTCD during the three and six months ended June 30, 2010, we received taxpayer financial services revenue and paid an origination fee to HTCD of $1 million and $4 million, respectively, which is included as a component of loss from discontinued operations.

•	As it relates to our discontinued auto finance operations, in January 2009, we sold certain auto finance receivables with an outstanding principal balance of $3.0 billion at the time of sale to HSBC Bank USA. In March 2010, we repurchased $379 million of these auto finance receivables from HSBC Bank USA and immediately sold them to SC USA. Prior to the sale of our receivable servicing operations to SC USA in March 2010, we serviced these auto finance receivables for HSBC Bank USA for a fee, which is included as a component of loss from discontinued auto operations. In August 2010, we sold the remainder of our auto finance receivable portfolio to SC USA.

HSBC Finance Corporation

Transactions with HSBC Holdings plc:


•	A commercial paper back-stop credit facility of $2.0 billion from HSBC at June 30, 2011 and December 31, 2010 supported our domestic issuances of commercial paper. No balances were outstanding under this credit facility at June 30, 2011 or December 31, 2010. The annual commitment fee requirement to support availability of this line is included as a component of Interest expense – HSBC affiliates in the consolidated statement of income (loss).

•	Employees of HSBC Finance Corporation participate in one or more stock compensation plans sponsored by HSBC. These expenses are recorded in Salary and employee benefits and are reflected in the above table as Stock based compensation expense with HSBC.

Transactions with other HSBC affiliates:


•	HSBC North America’s technology and certain centralized support services including human resources, corporate affairs, risk management, legal, compliance, tax, finance and other shared services are centralized within HTSU. Technology related assets are generally capitalized and recorded on our consolidated balance sheet. HTSU also provides certain item processing and statement processing activities to us. The fees we pay HTSU for the centralized support services and processing activities are included in support services from HSBC affiliates. We also receive fees from HTSU for providing them certain administrative services, such as internal audit, as well as receiving rental revenue from HTSU for certain office space. The fees and rental revenue we receive from HTSU are recorded as a component of servicing and other fees from HSBC affiliates.

•	We use HSBC Global Resourcing (UK) Ltd., an HSBC affiliate located outside of the United States, to provide various support services to our operations including among other areas, customer service, systems, collection and accounting functions. The expenses related to these services of $15 million and $42 million during the three and six months ended June 30, 2011, respectively, and $31 million and $63 million during the three and six months ended June 30, 2010, respectively, are included as a component of Support services from HSBC affiliates in the table above. During 2010 and through February 2011, the expenses for these services for all HSBC North America operations were billed directly to HTSU who then billed these services to the appropriate HSBC affiliate who benefited from the services. Beginning in March 2011, HSBC Global Resourcing (UK) Ltd began billing us directly for the services we receive from them.

•	The notional value of derivative contracts outstanding with HSBC subsidiaries totaled $45.4 billion and $49.9 billion at June 30, 2011 and December 31, 2010, respectively. When the fair value of our agreements with affiliate counterparties requires the posting of collateral, it is provided in either the form of cash and recorded on the balance sheet or in the form of securities which are not recorded on our balance sheet. The fair value of our agreements with affiliate counterparties required the affiliate to provide collateral of $2.8 billion and $2.5 billion at June 30, 2011 and December 31, 2010, respectively, all of which was received in cash. These amounts are offset against the fair value amount recognized for derivative instruments that have been offset under the same master netting arrangement.

•	Due to affiliates includes amounts owed to subsidiaries of HSBC as a result of direct debt issuances. At June 30, 2011 and December 31, 2010, due to affiliates includes $443 million and $436 million, respectively, carried at fair value under FVO reporting. During the three and six months ended June 30, 2011, loss on debt designated at fair value and related derivatives includes $5 million of gain and $7 million of loss, respectively, related to these debt issuances. During the six months ended June 30, 2010, due to affiliates did not include any amounts carried at fair value under FVO reporting.

•	During the second quarter of 2011, we executed a $600 million loan agreement with HSBC North America which provides for three $200 million borrowings with maturities between 2034 and 2035. As of June 30, 2011, there were no amounts outstanding under this loan agreement.

•	During 2010, we executed a $1.0 billion 364-day uncommitted revolving credit agreement with HSBC North America which allowed for borrowings with maturities of up to 15 years, and borrowed the full amount available under this agreement during 2010. During the fourth quarter of 2010, we replaced this loan

HSBC Finance Corporation


	from HSBC North America by repaying the loan and issuing 1,000 shares of Series C preferred stock to HINO for $1.0 billion. Dividends paid on the Series C Preferred Stock totaled $22 million and $47 million during the three and six months ended June 30, 2011, respectively.


•	In December 2010, we made a deposit totaling $1.0 billion with HSBC Bank plc (“HBEU”) at current market rates. The deposit can be withdrawn anytime after June 3, 2011 with 185 days notice, and matures on March 1, 2012. Interest income earned on this deposit, which totaled $1 million and $2 million during the three and six months ended June 30, 2011, respectively, is included in interest income from HSBC affiliates in the table above.

•	We purchase from HSBC Securities (USA) Inc. (“HSI”) securities under an agreement to resell. Interest income recognized on these securities totaled $1 million and $2 million during the three and six months ended June 30, 2011, respectively, and $2 million and $3 million during the three and six months ended June 30, 2010, respectively, and is reflected as interest income from HSBC affiliates in the table above.

•	Support services from HSBC affiliates also includes banking services and other miscellaneous services provided by other subsidiaries of HSBC, including HSBC Bank USA.

•	Domestic employees of HSBC Finance Corporation participate in a defined benefit pension plan and other postretirement benefit plans sponsored by HSBC North America. See Note 11, “Pension and Other Postretirement Benefits,” for additional information on this pension plan.

•	We have utilized HSBC Markets (USA) Inc, (“HMUS”) to lead manage the underwriting of a majority of our ongoing debt issuances as well as manage the debt exchange which occurred during the fourth quarter of 2010. During the three and six months ended June 30, 2011 and 2010, there were no fees paid to HMUS for such services. For debt not accounted for under the fair value option, these fees would be amortized over the life of the related debt and included as a component of interest expense.

•	We continue to guarantee the long-term and medium-term notes issued by our Canadian business prior to its sale to HSBC Bank Canada. During the six months ended June 30, 2011 and 2010, we recorded fees of $2 million and $3 million, respectively, for providing this guarantee. As of June 30, 2011, the outstanding balance of the guaranteed notes was $829 million and the latest scheduled maturity of the notes is May 2012. As part of the sale of our Canadian business to HSBC Bank Canada, the sale agreement allows us to continue to distribute various insurance products through the branch network for a fee. Fees paid to HSBC Bank Canada for distributing insurance products through this network totaled $4 million and $8 million during the three and six months ended June 30, 2011, respectively, and $9 million and $14 million during the three and six months ended June 30, 2010, respectively, and are included in Insurance Commission paid to HSBC Bank Canada in the table above.


*13.*	*Business Segments*

We have two reportable segments: Card and Retail Services and Consumer. Our segments are managed separately and are characterized by different middle-market consumer lending products, origination processes, and locations. Our segment results are reported on a continuing operations basis.

Our Card and Retail Services segment includes our MasterCard, Visa, private label and other credit card operations. The Card and Retail Services segment offers these products throughout the United States primarily via strategic affinity and co-branding relationships, merchant relationships and direct mail. We also offer products and provide customer service through the Internet. The private label receivables, along with the General Motors and Union Privilege receivables are sold daily to HSBC Bank USA which we continue to service for a fee.

Our Consumer segment consists of our run-off Consumer Lending and Mortgage Services businesses. The Consumer segment provided real estate secured and personal non-credit card loans with both revolving and closed-end terms and with fixed or variable interest rates. Loans were originated through branch locations and direct mail. Products were also offered and customers serviced through the Internet. Prior to the first quarter of 2007, we acquired loans from correspondent lenders and prior to September 2007 we also originated loans sourced through mortgage brokers.

HSBC Finance Corporation

While these businesses are operating in run-off mode, they have not been reported as discontinued operations because we continue to generate cash flow from the ongoing collections of the receivables, including interest and fees.

The All Other caption includes our Insurance and Commercial businesses. Each of these businesses falls below the quantitative threshold tests under segment reporting accounting principles for determining reportable segments. The “All Other” caption also includes our corporate and treasury activities, which includes the impact of FVO debt. Certain fair value adjustments related to purchase accounting resulting from our acquisition by HSBC and related amortization have been allocated to corporate, which is included in the “All Other” caption within our segment disclosure.

We report results to our parent, HSBC, in accordance with its reporting basis, International Financial Reporting Standards (“IFRSs”). Our segment results are presented on an IFRSs legal entity basis (“IFRS Basis”) (a non-U.S. GAAP financial measure) as operating results are monitored and reviewed and trends are evaluated on an IFRS Basis. However, we continue to monitor capital adequacy, establish dividend policy and report to regulatory agencies on a U.S. GAAP basis. There have been no changes in measurement or composition of our segment reporting as compared with the presentation in our consolidated financial statements for the fiscal year ended December 31, 2010 included in our Current Report on Form 8-K filed with the SEC on May 27, 2011.

For segment reporting purposes, intersegment transactions have not been eliminated. We generally account for transactions between segments as if they were with third parties.

HSBC Finance Corporation

Reconciliation of our IFRS Basis segment results to the U.S. GAAP consolidated totals are as follows:


	Card and								Adjustments			IFRS Basis									U.S. GAAP
	Retail								Reconciling			Consolidated			IFRS			IFRS			Consolidated
	Services		Consumer			All Other			Items			Totals			Adjustments⁽²⁾			Reclassifications⁽³⁾			Totals

	(in millions)

Three months ended June 30, 2011
Net interest income	$	476	$	668		$	177		$	-		$	1,321		$	(167	)	$	(173	)	$	981
Other operating income (Total other revenues)		466		(10	)		(48	)		(7	)⁽¹⁾		401			36			223			660

Total operating income (loss)		942		658			129			(7	)		1,722			(131	)		50			1,641
Loan impairment charges (Provision for credit losses)		230		872			-			-			1,102			(321	)		-			781

		712		(214	)		129			(7	)		620			190			50			860
Operating expenses		525		226			186			(7	)		930			17			50			997

Profit (loss) before tax	$	187	$	(440	)	$	(57	)	$	-		$	(310	)	$	173		$	-		$	(137	)

Intersegment revenues		8		20			(21	)		(7	)⁽¹⁾		-			-			-			-
Balances at end of period:
Customer loans (Receivables)	$	9,382	$	51,915		$	1,951		$	-		$	63,248		$	(502	)	$	(1,905	)	$	60,841
Assets		9,305		50,940			13,335			-			73,580			(3,172	)		(88	)		70,320

Three months ended June 30, 2010
Net interest income	$	552	$	578		$	180		$	-		$	1,310		$	(94	)	$	(224	)	$	992
Other operating income (Total other revenues)		433		26			(204	)		(6	)⁽¹⁾		249			(14	)		291			526

Total operating income (loss)		985		604			(24	)		(6	)		1,559			(108	)		67			1,518
Loan impairment charges (Provision for credit losses)		356		1,381			-			-			1,737			(140	)		-			1,597

		629		(777	)		(24	)		(6	)		(178	)		32			67			(79	)
Operating expenses		481		206			14			(6	)		695			25			67			787

Profit (loss) before tax	$	148	$	(983	)	$	(38	)	$	-		$	(873	)	$	7		$	-		$	(866	)

Intersegment revenues		2		15			(11	)		(6	)⁽¹⁾		-			-			-			-
Balances at end of period:
Customer loans (Receivables)	$	10,430	$	62,841		$	2,844		$	-		$	76,115		$	(533	)	$	(2,800	)	$	72,782
Assets		9,746		62,371			12,520			-			84,637			(2,701	)		(117	)		81,819

Six months ended June 30, 2011
Net interest income	$	965	$	1,323		$	284		$	-		$	2,572		$	(312	)	$	(357	)	$	1,903
Other operating income (Total other revenues)		880		(42	)		(172	)		(13	)⁽¹⁾		653			7			525			1,185

Total operating income (loss)		1,845		1,281			112			(13	)		3,225			(305	)		168			3,088
Loan impairment charges (Provision for credit losses)		349		2,148			(1	)		-			2,496			(933	)		-			1,563

		1,496		(867	)		113			(13	)		729			628			168			1,525
Operating expenses		1,003		459			222			(13	)		1,671			35			168			1,874

Profit (loss) before tax	$	493	$	(1,326	)	$	(109	)	$	-		$	(942	)	$	593		$	-		$	(349	)

Intersegment revenues		15		34			(36	)		(13	)⁽¹⁾		-			-			-			-
Six months ended June 30, 2010
Net interest income	$	1,138	$	1,156		$	468		$	-		$	2,762		$	(188	)	$	(455	)	$	2,119
Other operating income (Total other revenues)		886		31			(343	)		(13	)⁽¹⁾		561			(28	)		594			1,127

Total operating income (loss)		2,024		1,187			125			(13	)		3,323			(216	)		139			3,246
Loan impairment charges (Provision for credit losses)		592		3,080			(1	)		-			3,671			(210	)		-			3,461

		1,432		(1,893	)		126			(13	)		(348	)		(6	)		139			(215	)
Operating expenses		926		432			70			(13	)		1,415			95			139			1,649

Profit (loss) before tax	$	506	$	(2,325	)	$	56		$	-		$	(1,763	)	$	(101	)	$	-		$	(1,864	)

Intersegment revenues		5		33			(25	)		(13	)⁽¹⁾		-			-			-			-


⁽¹⁾		Eliminates intersegment revenues.
⁽²⁾		IFRS Adjustments consist of the accounting differences between U.S. GAAP and IFRSs which have been described more fully below.
⁽³⁾		Represents differences in balance sheet and income statement presentation between IFRSs and U.S. GAAP.

HSBC Finance Corporation

A summary of the significant differences between U.S. GAAP and IFRSs as they impact our results are presented below:

Net Interest Income

Effective interest rate – The calculation of effective interest rates under IAS 39, “Financial Instruments: Recognition and Measurement” (“IAS 39”), requires an estimate of changes in estimated contractual cash flows, including fees and points paid or recovered between parties to the contract that are an integral part of the effective interest rate be included. U.S. GAAP generally prohibits recognition of interest income to the extent the net investment in the loan would increase to an amount greater than the amount at which the borrower could settle the obligation. Under U.S. GAAP, prepayment penalties are generally recognized as received. U.S. GAAP also includes interest income on loans originated as held for sale which is included in other revenues for IFRSs.

Deferred loan origination costs and fees – Loan origination cost deferrals under IFRSs are more stringent and generally result in lower costs being deferred than permitted under U.S. GAAP. In addition, all deferred loan origination fees, costs and loan premiums must be recognized based on the expected life of the receivables under IFRSs as part of the effective interest calculation while under U.S. GAAP they may be recognized on either a contractual or expected life basis.

Net interest income – Under IFRSs, net interest income includes the interest element for derivatives which correspond to debt designated at fair value. For U.S. GAAP, this is included in Gain on debt designated at fair value and related derivatives which is a component of other revenues. Additionally, under IFRSs, insurance investment income is included in net interest income instead of as a component of other revenues under U.S. GAAP.

Other Operating Income (Total Other Revenues)

Present value of long-term insurance contracts – Under IFRSs, the present value of an in-force (“PVIF”) long-term insurance contract is determined by discounting future cash flows expected to emerge from business currently in force using appropriate assumptions plus a margin in assessing factors such as future mortality, lapse rates and levels of expenses, and a discount rate that reflects the risk free rate plus a margin for operational risk. Movements in the PVIF of long-term insurance contracts are included in other operating income. Under U.S. GAAP, revenue is recognized over the life insurance policy term.

Policyholder benefits – Other revenues under IFRSs include policyholder benefits expense which is classified as other expense under U.S. GAAP.

Loans held for sale – IFRSs requires loans designated as held for sale at the time of origination to be treated as trading assets and recorded at their fair value. Under U.S. GAAP, loans designated as held for sale are reflected as loans and recorded at the lower of amortized cost or fair value. Under IFRSs, the income and expenses related to receivables held for sale are reported in other operating income. Under U.S. GAAP, the income and expenses related to receivables held for sale are reported similarly to loans held for investment.

For receivables transferred to held for sale subsequent to origination, IFRSs requires these receivables to be reported separately on the balance sheet but does not change the recognition and measurement criteria. Accordingly, for IFRSs purposes such loans continue to be accounted for in accordance with IAS 39 with any gain or loss recorded at the time of sale. U.S. GAAP requires loans that meet the held for sale classification requirements be transferred to a held for sale category at the lower of amortized cost or fair value. Under U.S. GAAP, the component of the lower of amortized cost or fair value adjustment related to credit risk is recorded in the statement of income (loss) as provision for credit losses while the component related to interest rates and liquidity factors is reported in the statement of income (loss) in other revenues.

HSBC Finance Corporation

under IFRSs, these receivables were always reported within loans and the measurement criteria did not change. As a result, loan impairment charges are now being recorded under IFRSs which were essentially included as a component of the lower of cost or fair value adjustments under U.S. GAAP.

Securities – Under IFRSs, securities include HSBC shares held for stock plans at fair value. These shares are recorded at fair value through other comprehensive income. If it is determined these shares have become impaired, the fair value loss is recognized in profit and loss and any fair value loss recorded in other comprehensive income is reversed. There is no similar requirement under U.S. GAAP.

During the second quarter of 2009, under IFRSs we recorded income for the value of additional shares attributed to HSBC shares held for stock plans as a result of HSBC’s rights offering earlier in 2009. During 2011 and 2010, under IFRSs we recorded additional gains as these shares vest. The additional shares are not recorded under U.S. GAAP.

Other-than-temporary impairments – Under U.S. GAAP, the credit loss component of an other-than-temporary impairment of a debt security is recognized in earnings while the remaining portion of the impairment loss is recognized in other comprehensive income provided a company concludes it neither intends to sell the security nor concludes that it is more-likely-than-not that it will have to sell the security prior to recovery. Under IFRSs, there is no bifurcation of other-than-temporary impairment and the entire decline in fair value is recognized in earnings.

REO expense – Other revenues under IFRSs includes losses on sale and the lower of amortized cost or fair value less cost to sell adjustments on REO properties which are classified as other expense under U.S. GAAP.

Loan Impairment Charges (Provision for Credit Losses)

IFRSs requires a discounted cash flow methodology for estimating impairment on pools of homogeneous customer loans which requires the discounting of cash flows including recovery estimates at the original effective interest rate of the pool of customer loans. The amount of impairment relating to the discounting of future cash flows unwinds with the passage of time, and is recognized in interest income. Also under IFRSs, if the recognition of a write-down to net realizable value on secured loans decreases because collateral values have improved and the improvement can be related objectively to an event occurring after recognition of the write-down, such write-down can be reversed, which is not permitted under U.S. GAAP. Additionally under IFRSs, future recoveries on charged-off loans or loans written down to net realizable value less cost to obtain title and sell the collateral are accrued for on a discounted basis and a recovery asset is recorded. Subsequent recoveries are recorded to earnings under U.S. GAAP, but are adjusted against the recovery asset under IFRSs. Under IFRSs, interest on impaired loans is recorded at the effective interest rate on the customer loans balance net of impairment allowances, and therefore reflects the collectibility of the loans.

As discussed above, under U.S. GAAP the credit risk component of the initial lower of amortized cost or fair value adjustment related to the transfer of receivables to held for sale is recorded in the statement of income (loss) as provision for credit losses. There is no similar requirement under IFRSs.

Operating Expenses

Policyholder benefits – Operating expenses under IFRSs are lower as policyholder benefits expenses are reported as an offset to other revenues as discussed above.

Pension costs – Net income under U.S. GAAP is lower than under IFRSs as a result of the amortization of the amount by which actuarial losses exceeded the higher of the projected benefit obligation or fair value of plan assets beyond the 10 percent “corridor”. Furthermore, in 2010 changes to future accruals for legacy participants under the HSBC North America Pension Plan were accounted for as a plan curtailment under IFRSs, which resulted in immediate income recognition. Under U.S. GAAP, these changes were considered to be a negative plan amendment which resulted in no immediate income recognition.

Share-based bonus arrangements – Under IFRSs, the recognition of compensation expense related to share-based bonuses begins on January 1 of the current year for awards expected to be granted in the first quarter of the following

HSBC Finance Corporation

year. Under U.S. GAAP, the recognition of compensation expense related to share-based bonuses does not begin until the date the awards are granted.

Assets

Customer loans (Receivables) – On an IFRSs basis, loans designated as held for sale at the time of origination and accrued interest are classified as trading assets. However, the accounting requirements governing when receivables previously held for investment are transferred to a held for sale category are more stringent under IFRSs than under U.S. GAAP. Unearned insurance premiums are reported as a reduction to receivables on a U.S. GAAP basis but are reported as insurance reserves for IFRSs. IFRSs also allows for reversals of write-downs to net realizable value on secured loans when collateral values have improved which is not permitted under U.S. GAAP.

Other – In addition to the differences discussed above, derivative financial assets are higher under IFRSs than under U.S. GAAP as U.S. GAAP permits the netting of certain items. No similar requirement exists under IFRSs.


*14.*	*Variable Interest Entities*

We consolidate variable interest entities (“VIEs”) in which we are deemed to be the primary beneficiary through our holding of a variable interest which is determined as a controlling financial interest. The controlling financial interest is evidenced by the power to direct the activities of a VIE that most significantly impact its economic performance and obligations to absorb losses of, or the right to receive benefits from, the VIE that could be potentially significant to the VIE. We take into account all of our involvements in a VIE in identifying (explicit or implicit) variable interests that individually or in the aggregate could be significant enough to warrant our designation as the primary beneficiary and hence require us to consolidate the VIE or otherwise require us to make appropriate disclosures. We consider our involvement to be significant where we, among other things, (i) provide liquidity facilities to support the VIE’s debt issuances, (ii) enter into derivative contracts to absorb the risks and benefits from the VIE or from the assets held by the VIE, (iii) provide a financial guarantee that covers assets held or liabilities issued, (iv) design, organize and structure the transaction and (v) retain a financial or servicing interest in the VIE.

We are required to evaluate whether to consolidate a VIE when we first become involved and on an ongoing basis. In almost all cases, a qualitative analysis of our involvement in the entity provides sufficient evidence to determine whether we are the primary beneficiary. In rare cases, a more detailed analysis to quantify the extent of variability to be absorbed by each variable interest holder is required to determine the primary beneficiary.

Consolidated VIEs In the ordinary course of business, we have organized special purpose entities (“SPEs”) primarily to meet our own funding needs through collateralized funding transactions. We transfer certain receivables to these trusts which in turn issue debt instruments collateralized by the transferred receivables. The entities used in these transactions are VIEs. As we are the servicer of the assets of these trusts and have retained the benefits and risks, we determined that we are the primary beneficiary of these trusts. Accordingly, we consolidate these entities and report the debt securities issued by them as secured financings in long-term debt. As a result, all receivables transferred in these secured financings have remained and continue to remain on our balance sheet and the debt securities issued by them have remained and continue to be included in long-term debt.

HSBC Finance Corporation

The following table summarizes the assets and liabilities of these consolidated secured financing VIEs as of June 30, 2011 and December 31, 2010:


	June 30, 2011				December 31, 2010
	Consolidated		Consolidated		Consolidated		Consolidated
	Assets		Liabilities		Assets		Liabilities

	(in millions)

Real estate collateralized funding vehicles:
Receivables, net	$	5,033	$	-	$	5,354	$	-
Available-for-sale investments		6		-		104		-
Long-term debt		-		3,560		-		3,882

Subtotal		5,039		3,560		5,458		3,882
Credit card collateralized funding vehicles:
Receivables, net		1,942		-		1,970		-
Long-term debt		-		195		-		195

Subtotal		1,942		195		1,970		195

Total	$	6,981	$	3,755	$	7,428	$	4,077

The assets of the consolidated VIEs serve as collateral for the obligations of the VIEs. The holders of the debt securities issued by these vehicles have no recourse to our general assets.

Unconsolidated VIEs We are involved with VIEs related to low income housing partnerships, leveraged lease and investments in community partnerships that were not consolidated at June 30, 2011 or December 31, 2010 because we are not the primary beneficiary. At June 30, 2011 and December 31, 2010, we have assets totaling $1 million and $9 million, respectively, on our consolidated balance sheet, which represents our maximum exposure to loss for these VIEs.

Additionally, we are involved with other VIEs which provided funding to HSBC Bank USA through collateralized funding transactions. These VIEs are not consolidated at June 30, 2011 or December 31, 2010 because we are not the primary beneficiary as our relationship with these VIEs is limited to servicing certain credit card and private label receivables of the related trusts. In April 2011, the collateralized funding facilities were terminated by HSBC Bank USA.


*15.*	*Fair Value Measurements*

Accounting principles related to fair value measurements provide a framework for measuring fair value and focus on an exit price in the principal (or alternatively, the most advantageous) market accessible in an orderly transaction between willing market participants (the “Fair Value Framework”). The Fair Value Framework establishes a three-tiered fair value hierarchy with Level 1 representing quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs are inputs that are observable for the identical asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are inactive, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability and include situations where there is little, if any, market activity for the asset or liability. Transfers between leveling categories are recognized at the end of each reporting period.

Fair Value of Financial Instruments The fair value estimates, methods and assumptions set forth below for our financial instruments, including those financial instruments carried at cost, are made solely to comply with disclosures required by generally accepted accounting principles in the United States and should be read in conjunction with the financial statements and notes included in this quarterly report. The following table

HSBC Finance Corporation

summarizes the carrying values and estimated fair value of our financial instruments at June 30, 2011 and December 31, 2010.


	June 30, 2011				December 31, 2010
	Carrying		Estimated		Carrying		Estimated
	Value		Fair Value		Value		Fair Value

	(in millions)

Financial assets:
Cash	$	236	$	236	$	175	$	175
Interest bearing deposits with banks		1,013		1,013		1,016		1,016
Securities purchased under agreements to resell		2,767		2,767		4,311		4,311
Securities		3,518		3,518		3,371		3,371
Consumer receivables⁽¹⁾:
Mortgage Services:
First lien		11,675		8,000		12,687		8,810
Second lien		1,659		476		1,832		492

Total Mortgage Services		13,334		8,476		14,519		9,302
Consumer Lending:
First lien		26,920		18,821		28,796		20,589
Second lien		2,810		711		3,000		691

Total Consumer Lending real estate secured receivables		29,730		19,532		31,796		21,280
Non-real estate secured receivables		5,228		3,816		6,004		4,409

Total Consumer Lending		34,958		23,348		37,800		25,689
Credit card		8,612		8,392		9,066		8,963

Total consumer receivables		56,904		40,216		61,385		43,954
Receivables held for sale		5		5		4		4
Due from affiliates		237		237		126		126
Derivative financial assets		203		203		75		75
Financial liabilities:
Commercial paper		3,682		3,682		3,156		3,156
Due to affiliates carried at fair value		443		443		436		436
Due to affiliates		7,725		7,487		7,819		7,518
Long-term debt carried at fair value		17,378		17,378		20,844		20,844
Long-term debt not carried at fair value		30,419		29,928		33,772		32,924
Insurance policy and claim reserves		989		1,092		982		1,184
Derivative financial liabilities		-		-		2		2


⁽¹⁾		The carrying value of consumer receivables presented in the table above reflects the unamortized cost of the receivable, including any accrued interest, less credit loss reserves.

Receivable values presented in the table above were determined using the Fair Value Framework for measuring fair value, which is based on our best estimate of the amount within a range of values we believe would be received in a sale as of the balance sheet date (i.e. exit price). The secondary market demand and estimated value for our receivables has been heavily influenced by the challenging economic conditions during the past few years, including house price depreciation, rising unemployment, changes in consumer behavior, changes in discount rates and the lack of financing options available to support the purchase of receivables. Many investors are non-bank financial institutions or hedge funds with high equity levels and a high cost of debt. For certain consumer receivables, investors incorporate numerous assumptions in predicting cash flows, such as higher charge-off levels and/or slower voluntary prepayment speeds than we, as the servicer of these receivables, believe will ultimately be the case. The investor discount rates reflect this difference in overall cost of capital as well as the potential volatility in the underlying cash flow assumptions, the combination of which may yield a significant pricing discount from our intrinsic value. The estimated fair values at June 30, 2011 and December 31, 2010 reflect these market conditions.

HSBC Finance Corporation

Assets and Liabilities Recorded at Fair Value on a Recurring Basis The following table presents information about our assets and liabilities measured at fair value on a recurring basis as of June 30, 2011 and December 31, 2010, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.


											Total of
	Quoted Prices in										Assets
	Active Markets for		Significant Other			Significant					(Liabilities)
	Identical Assets		Observable Inputs			Unobservable Inputs					Measured at
	(Level 1)		(Level 2)			(Level 3)		Netting⁽¹⁾			Fair Value

	(in millions)

June 30, 2011:
Derivative financial assets:
Interest rate swaps	$	-	$	1,076		$	-	$	-		$	1,076
Currency swaps		-		2,602			-		-			2,602
Foreign exchange forward		-		1			-		-			1
Derivative netting		-		-			-		(3,476	)		(3,476	)

Total derivative financial assets		-		3,679			-		(3,476	)		203
Available-for-sale securities:
U.S. Treasury		457		-			-		-			457
U.S. government sponsored enterprises		-		212			-		-			212
U.S. government agency issued or guaranteed		-		8			-		-			8
Obligations of U.S. states and political subdivisions		-		5			-		-			5
Asset-backed securities		-		31			19		-			50
U.S. corporate debt securities		-		1,679			14		-			1,693
Foreign debt securities:
Government		21		79			-		-			100
Corporate		-		419			-		-			419
Equity securities		9		-			-		-			9
Money market funds		538		-			-		-			538
Accrued interest		2		25			-		-			27

Total available-for-sale securities		1,027		2,458			33		-			3,518

Total assets	$	1,027	$	6,137		$	33	$	(3,476	)	$	3,721

Due to affiliates carried at fair value	$	-	$	(443	)	$	-	$	-		$	(443	)
Long-term debt carried at fair value		-		(17,378	)		-		-			(17,378	)
Derivative related liabilities:
Interest rate swaps		-		(610	)		-		-			(610	)
Currency swaps		-		(56	)		-		-			(56	)
Foreign Exchange Forward		-		-			-		-			-
Derivative netting		-		-			-		666			666

Total derivative related liabilities		-		(666	)		-		666			-

Total liabilities	$	-	$	(18,487	)	$	-	$	666		$	(17,821	)

December 31, 2010:
Derivative financial assets:
Interest rate swaps	$	-	$	1,220		$	-	$	-		$	1,220
Currency swaps		-		2,067			-		-			2,067
Derivative netting		-		-			-		(3,212	)		(3,212	)

Total derivative financial assets		-		3,287			-		(3,212	)		75
Available-for-sale securities:
U.S. Treasury		349		-			-		-			349
U.S. government sponsored enterprises		-		284			1		-			285
U.S. government agency issued or guaranteed		-		11			-		-			11
Obligations of U.S. states and political subdivisions		-		30			-		-			30
Asset-backed securities		-		40			20		-			60
U.S. corporate debt securities		-		1,799			3		-			1,802
Foreign debt securities:
Government		14		84			-		-			98
Corporate		-		344			-		-			344
Equity securities		9		-			-		-			9
Money market funds		353		-			-		-			353
Accrued interest		1		29			-		-			30

Total available-for-sale securities		726		2,621			24		-			3,371

Total assets	$	726	$	5,908		$	24	$	(3,212	)	$	3,446

Due to affiliates carried at fair value	$	-	$	(436	)	$	-	$	-		$	(436	)
Long-term debt carried at fair value		-		(20,844	)		-		-			(20,844	)
Derivative related liabilities:
Interest rate swaps		-		(611	)		-		-			(611	)
Currency swaps		-		(151	)		-		-			(151	)
Foreign Exchange Forward		-		(3	)		-		-			(3	)
Derivative netting		-		-			-		763			763

Total derivative related liabilities		-		(765	)		-		763			(2	)

Total liabilities	$	-	$	(22,045	)	$	-	$	763		$	(21,282	)


⁽¹⁾		Represents counterparty and swap collateral netting which allow the offsetting of amounts relating to certain contracts when certain conditions are met.

HSBC Finance Corporation

The following table provides additional detail regarding the rating of our U.S. corporate debt securities at June 30, 2011 and December 31, 2010:


	Level 2		Level 3		Total

	(in millions)

June 30, 2011:
AAA to AA⁽¹⁾	$	396	$	-	$	396
A+ to A-⁽¹⁾		1,165		12		1,177
BBB+ to Unrated⁽¹⁾		118		2		120
December 31, 2010:
AAA to AA⁽¹⁾	$	381	$	-	$	381
A+ to A-⁽¹⁾		1,280		-		1,280
BBB+ to Unrated⁽¹⁾		138		3		141


⁽¹⁾	We obtain ratings on our U.S. corporate debt securities from both Moody’s Investor Services and Standard and Poor’s Corporation. In the event the ratings we obtain from these agencies differ, we utilize the lower of the two ratings.

Significant Transfers Between Level 1 and Level 2 There were no transfers between Level 1 and Level 2 during the three or six months ended June 30, 2011 or 2010.

Information on Level 3 Assets and Liabilities Securities are transferred into Level 3 classifications when an individual asset-backed security is downgraded below a AAA credit rating or the individual security fails the quarterly pricing comparison test with a variance greater than 5 percent. Securities are transferred into Level 2 classifications when they no longer meet one or both of the above conditions. The table below reconciles the beginning and ending balances for assets recorded at fair value using significant unobservable inputs (Level 3) during the three and six months ended June 30, 2011 or 2010.


			Total Gains and
			(Losses)
			Included in
					Other									Transfers		Transfers					Current Period
	April 1				Comp.									Into		Out of			June 30,		Unrealized
	2011		Income		Income			Purchases		Issuances		Settlement		Level 3		Level 3			2011		Gains (Losses)

	(in millions)

Assets:
Securities available-for-sale:
U.S. Government sponsored enterprises	$	1	$	-	$	-		$	-	$	-	$	-	$	-	$	(1	)	$	-	$	-
Asset-backed securities		21		-		(3	)		-		-		-		1		-			19		(1	)
U.S. corporate debt securities		2		-		-			-		-		-		12		-			14		1

Total assets	$	24	$	-	$	(3	)	$	-	$	-	$	-	$	13	$	(1	)	$	33	$	-


			Total Gains and
			(Losses)
			Included in
					Other									Transfers		Transfers					Current Period
	April 1				Comp.									Into		Out of			June 30,		Unrealized
	2010		Income		Income			Purchases		Issuances		Settlement		Level 3		Level 3			2010		Gains (Losses)

	(in millions)

Assets:
Securities available-for-sale:
U.S. Government sponsored enterprises	$	-	$	-	$	-		$	-	$	-	$	-	$	2	$	-		$	2	$	1
Asset-backed securities		27		-		(3	)		-		-		-		-		-			24		-
U.S. corporate debt securities		10		-		-			-		-		-		-		(7	)		3		-

Total assets	$	37	$	-	$	(3	)	$	-	$	-	$	-	$	2	$	(7	)	$	29	$	1

HSBC Finance Corporation


			Total Gains and
			(Losses)
			Included in
					Other										Transfers		Transfers					Current Period
	Jan. 1,				Comp.										Into		Out of			June 30,		Unrealized
	2011		Income		Income			Purchases		Issuances		Settlement			Level 3		Level 3			2011		Gains (Losses)

	(in millions)

Assets:
Securities available-for-sale:
U.S. Government sponsored enterprises	$	1	$	-	$	-		$	-	$	-	$	-		$	-	$	(1	)	$	-	$	-
Asset-backed securities		20		-		(3	)		-		-		(1	)		3		-			19		(1	)
U.S. corporate debt securities		3		-		(1	)		-		-		-			12		-			14		1

Total assets	$	24	$	-	$	(4	)	$	-	$	-	$	(1	)	$	15	$	(1	)	$	33	$	-


			Total Gains and
			(Losses)
			Included in
					Other										Transfers		Transfers					Current Period
	Jan. 1,				Comp.										Into		Out of			June 30,		Unrealized
	2010		Income		Income			Purchases		Issuances		Settlement			Level 3		Level 3			2010		Gains (Losses)

	(in millions)

Assets:
Securities available-for-sale:
U.S. Government sponsored enterprises	$	2	$	-	$	-		$	-	$	-	$	-		$	2	$	(2	)	$	2	$	1
Obligations of U.S. states and political subdivision		1		-		-			-		-		(1	)		-		-			-		-
Asset-backed securities		26		-		(4	)		-		-		-			2		-			24		2
U.S. corporate debt securities		20		-		-			-		-		-			8		(25	)		3		-

Total assets	$	49	$	-	$	(4	)	$	-	$	-	$	(1	)	$	12	$	(27	)	$	29	$	3

Assets and Liabilities Recorded at Fair Value on a Non-recurring Basis The following table presents information about our assets and liabilities measured at fair value on a non-recurring basis as of June 30, 2011 and 2010, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.


									Total Gains			Total Gains
	Non-Recurring Fair Value Measurements as of								(Losses) for the			(Losses) for the
	June 30, 2011								Three Months Ended			Six Months Ended
	Level 1		Level 2		Level 3		Total		June 30, 2011			June 30, 2011

	(in millions)

Real estate secured receivables held for sale at fair value	$	-	$	-	$	5	$	5	$	-		$	1
Real estate owned⁽¹⁾		-		625		-		625		(39	)		(114	)
Impairment of certain previously capitalized software development costs⁽²⁾		-		-		-		-		(40	)		(40	)

Total assets at fair value on a non-recurring basis	$	-	$	625	$	5	$	630	$	(79	)	$	(153	)

HSBC Finance Corporation


									Total Gains			Total Gains
	Non-Recurring Fair Value Measurements as of								(Losses) for the			(Losses) for the
	June 30, 2010								Three Months Ended			Six Months Ended
	Level 1		Level 2		Level 3		Total		June 30, 2010			June 30, 2010

	(in millions)

Real estate secured receivables held for sale at fair value	$	-	$	-	$	5	$	5	$	2		$	2
Real estate owned⁽¹⁾		-		877		-		877		(42	)		(81	)

Total assets at fair value on a non-recurring basis	$	-	$	877	$	5	$	882	$	(40	)	$	(79	)


⁽¹⁾	Real estate owned is required to be reported on the balance sheet net of transactions costs. The real estate owned amounts in the table above reflect the fair value of the underlying asset unadjusted for transaction costs.
⁽²⁾	In the second quarter of 2011, a decision was made by HSBC to significantly reduce new or additional investments within the Card and Retail Services platform outside of the credit card servicing platform. As a result, we recorded an impairment charge of $40 million representing the full amount of certain previously capitalized software costs which are no longer realizable. The impairment charge was recorded in other servicing and administrative expenses in our consolidated statement of income (loss) and is included in the results of our Card and Retail Services segment.

Valuation Techniques The following summarizes the valuation methodologies used for assets and liabilities recorded at fair value and for estimating fair value for financial instruments not recorded at fair value but for which fair value disclosures are required.

Cash: Carrying value approximates fair value due to cash’s liquid nature.

Interest bearing deposits with banks: Carrying value approximates fair value due to the asset’s liquid nature.

Securities purchased under agreements to resell: The fair value of securities purchased under agreements to resell approximates carrying value due to the short-term maturity of the agreements.

Securities: Fair value for our available-for-sale securities is generally determined by a third party valuation source. The pricing services generally source fair value measurements from quoted market prices and if not available, the security is valued based on quotes from similar securities using broker quotes and other information obtained from dealers and market participants. For securities which do not trade in active markets, such as fixed income securities, the pricing services generally utilize various pricing applications, including models, to measure fair value. The pricing applications are based on market convention and use inputs that are derived principally from or corroborated by observable market data by correlation or other means. The following summarizes the valuation methodology used for our major security types:


	•	U.S. Treasury, U.S. government agency issued or guaranteed and Obligations of U.S. States and political subdivisions – As these securities transact in an active market, the pricing services source fair value measurements from quoted prices for the identical security or quoted prices for similar securities with adjustments as necessary made using observable inputs which are market corroborated.

	•	U.S. government sponsored enterprises – For certain government sponsored mortgage-backed securities which transact in an active market, the pricing services source fair value measurements from quoted prices for the identical security or quoted prices for similar securities with adjustments as necessary made using observable inputs which are market corroborated. For government sponsored mortgage-backed securities which do not transact in an active market, fair value is determined using discounted cash flow models and inputs related to interest rates, prepayment speeds, loss curves and market discount rates that would be required by investors in the current market given the specific characteristics and inherent credit risk of the underlying collateral.

HSBC Finance Corporation


	•	Asset-backed securities – Fair value is determined using discounted cash flow models and inputs related to interest rates, prepayment speeds, loss curves and market discount rates that would be required by investors in the current market given the specific characteristics and inherent credit risk of the underlying collateral.

	•	U.S. corporate and foreign debt securities – For non-callable corporate securities, a credit spread scale is created for each issuer. These spreads are then added to the equivalent maturity U.S. Treasury yield to determine current pricing. Credit spreads are obtained from the new issue market, secondary trading levels and dealer quotes. For securities with early redemption features, an option adjusted spread (“OAS”) model is incorporated to adjust the spreads determined above. Additionally, the pricing services will survey the broker/dealer community to obtain relevant trade data including benchmark quotes and updated spreads.

	•	Preferred equity securities – In general, for perpetual preferred securities, fair value is calculated using an appropriate spread over a comparable U.S. Treasury security for each issue. These spreads represent the additional yield required to account for risk including credit, refunding and liquidity. The inputs are derived principally from or corroborated by observable market data.

	•	Money market funds – Carrying value approximates fair value due to the asset’s liquid nature.

Significant inputs used in the valuation of our investment securities include selection of an appropriate risk-free rate, forward yield curve and credit spread which establish the ultimate discount rate used to determine the net present value of estimated cash flows. For asset-backed securities, selection of appropriate prepayment rates, default rates and loss severities also serve as significant inputs in determining fair value. We perform validations of the fair values sourced from the independent pricing services at least quarterly. Such validation principally includes sourcing security prices from other independent pricing services or broker quotes. The validation process provides us with information as to whether the volume and level of activity for a security has significantly decreased and assists in identifying transactions that are not orderly. Depending on the results of the validation, additional information may be gathered from other market participants to support the fair value measurements. A determination will be made as to whether adjustments to the observable inputs are necessary as a result of investigations and inquiries about the reasonableness of the inputs used and the methodologies employed by the independent pricing services.

Receivables and receivables held for sale: The estimated fair value of our receivables was determined by developing an approximate range of value from a mix of various sources as appropriate for the respective pool of assets. These sources include, among other items, value estimates from an HSBC affiliate which reflect over-the-counter trading activity; forward looking discounted cash flow models using assumptions we believe are consistent with those which would be used by market participants in valuing such receivables; trading input from other market participants which includes observed primary and secondary trades; where appropriate, the impact of current estimated rating agency credit tranching levels with the associated benchmark credit spreads; and general discussions held directly with potential investors. For revolving products, the estimated fair value excludes future draws on the available credit line as well as other items and, therefore, does not include the fair value of the entire relationship.

Valuation inputs include estimates of future interest rates, prepayment speeds, default and loss curves, estimated collateral values and market discount rates reflecting management’s estimate of the rate of return that would be required by investors in the current market given the specific characteristics and inherent credit risk of the receivables. Some of these inputs are influenced by collateral value changes and unemployment rates. To the extent available, such inputs are derived principally from or corroborated by observable market data by correlation and other means. We perform periodic validations of our valuation methodologies and assumptions based on the results of actual sales of such receivables. In addition, from time to time, we will engage a third party valuation specialist to measure the fair value of a pool of receivables. Portfolio risk management personnel provide further validation through discussions with third party brokers. Since an active market for these receivables does not exist, the fair value measurement process uses unobservable significant inputs which are specific to the performance characteristics of the various receivable portfolios.

HSBC Finance Corporation

Real estate owned: Fair value is determined based on third party appraisals obtained at the time we take title to the property and, if less than the carrying value of the loan, the carrying value of the loan is adjusted to the fair value. The carrying value is further reduced, if necessary, on a quarterly basis to reflect observable local market data, including local area sales data.

Due from affiliates: Carrying value approximates fair value because the interest rates on these receivables adjust with changing market interest rates.

Commercial paper: The fair value of these instruments approximates existing carrying value because interest rates on these instruments adjust with changes in market interest rates due to their short-term maturity or repricing characteristics.

Long-term debt and Due to affiliates: Fair value was primarily determined by a third party valuation source. The pricing services source fair value from quoted market prices and, if not available, expected cash flows are discounted using the appropriate interest rate for the applicable duration of the instrument adjusted for our own credit risk (spread). The credit spreads applied to these instruments were derived from the spreads recognized in the secondary market for similar debt as of the measurement date. Where available, relevant trade data is also considered as part of our validation process.

Insurance policy and claim reserves: The fair value of insurance reserves for periodic payment annuities was estimated by discounting future expected cash flows at estimated market interest rates.

Derivative financial assets and liabilities: Derivative values are defined as the amount we would receive or pay to extinguish the contract using a market participant as of the reporting date. The values are determined by management using a pricing system maintained by HSBC Bank USA. In determining these values, HSBC Bank USA uses quoted market prices, when available, principally for exchange-traded options. For non-exchange traded contracts, such as interest rate swaps, fair value is determined using discounted cash flow modeling techniques. Valuation models calculate the present value of expected future cash flows based on models that utilize independently-sourced market parameters, including interest rate yield curves, option volatilities, and currency rates. Valuations may be adjusted in order to ensure that those values represent appropriate estimates of fair value. These adjustments are generally required to reflect factors such as market liquidity and counterparty credit risk that can affect prices in arms-length transactions with unrelated third parties. Finally, other transaction specific factors such as the variety of valuation models available, the range of unobservable model inputs and other model assumptions can affect estimates of fair value. Imprecision in estimating these factors can impact the amount of revenue or loss recorded for a particular position.

Counterparty credit risk is considered in determining the fair value of a financial asset. The Fair Value Framework specifies that the fair value of a liability should reflect the entity’s non-performance risk and accordingly, the effect of our own credit risk (spread) has been factored into the determination of the fair value of our financial liabilities, including derivative instruments. In estimating the credit risk adjustment to the derivative assets and liabilities, we take into account the impact of netting and/or collateral arrangements that are designed to mitigate counterparty credit risk.


*16.*	*Litigation and Regulatory Matters*

In addition to the matters described below, in the ordinary course of business, we are routinely named as defendants in, or as parties to, various legal actions and proceedings relating to activities of our current and/or former operations. These actual or threatened legal actions and proceedings may include claims for substantial or indeterminate compensatory or punitive damages, or for injunctive relief. In the ordinary course of business, we also are subject to governmental and regulatory examinations, information-gathering requests, investigations and proceedings (both formal and informal), certain of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief. In connection with formal and informal inquiries by these regulators, we receive numerous requests, subpoenas and orders seeking documents, testimony and other information in connection with various aspects of our regulated activities.

HSBC Finance Corporation

In view of the inherent unpredictability of litigation and regulatory matters, particularly where the damages sought are substantial or indeterminate or when the proceedings or investigations are in the early stages, we cannot determine with any degree of certainty the timing or ultimate resolution of litigation and regulatory matters or the eventual loss, fines, penalties or business impact, if any, that may result. We establish reserves for litigation and regulatory matters when those matters present loss contingencies that are both probable and can be reasonably estimated. The actual costs of resolving litigation and regulatory matters, however, may be substantially higher than the amounts reserved for those matters.

Given the substantial or indeterminate amounts sought in certain of these matters, and the inherent unpredictability of such matters, an adverse outcome in certain of these matters could have a material adverse effect on our consolidated financial statements in particular quarterly or annual periods.

Litigation

Card Services Litigation Since June 2005, HSBC Finance Corporation, HSBC North America, and HSBC, as well as other banks and Visa Inc. and Master Card Incorporated, were named as defendants in four class actions filed in Connecticut and the Eastern District of New York; Photos Etc. Corp. et al. v. Visa U.S.A., Inc., et al. (D. Conn. No. 3:05-CV-01007 (WWE)): National Association of Convenience Stores, et al. v. Visa U.S.A., Inc., et al.(E.D.N.Y. No. 05-CV 4520 (JG)); Jethro Holdings, Inc., et al. v. Visa U.S.A., Inc. et al. (E.D.N.Y. No. 05-CV-4521 (JG)); and American Booksellers Ass’n v. Visa U.S.A., Inc. et al. (E.D.N.Y. No. 05-CV-5391 (JG)). Numerous other complaints containing similar allegations (in which no HSBC entity is named) were filed across the country against Visa Inc., MasterCard Incorporated and other banks. These actions principally allege that the imposition of a no-surcharge rule by the associations and/or the establishment of the interchange fee charged for credit card transactions causes the merchant discount fee paid by retailers to be set at supracompetitive levels in violation of the Federal antitrust laws. These suits have been consolidated and transferred to the Eastern District of New York. The consolidated case is: In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, MDL 1720, E.D.N.Y. (“MDL 1720”). A consolidated, amended complaint was filed by the plaintiffs on April 24, 2006 and a second consolidated amended complaint was filed on January 29, 2009. The parties are engaged in discovery, motion practice and mediation. On February 7, 2011, MasterCard Incorporated, Visa Inc., the other defendants, including HSBC Finance Corporation, and certain affiliates of the defendants entered into settlement and judgment sharing agreements (the “Agreements”) that provide for the apportionment of certain defined costs and liabilities that the defendants, including HSBC Finance Corporation and our affiliates, may incur, jointly and/or severally, in the event of an adverse judgment or global settlement of one or all of these actions. The Agreements also cover any other potential or future actions that are transferred for coordinated pre-trial proceedings with MDL 1720. We continue to defend the claims in this action vigorously and our entry into the Agreements in no way serves as an admission as to the validity of the allegations in the complaints. Similarly, the Agreements have had no impact on our ability to quantify the potential impact from this action, if any, and we are unable to do so at this time.

Securities Litigation As a result of an August 2002 restatement of previously reported consolidated financial statements and other corporate events, including the 2002 settlement with 46 states and the District of Columbia relating to real estate lending practices, Household International and certain former officers were named as defendants in a class action lawsuit, Jaffe v. Household International, Inc., et al., No. 02 C 5893 (N.D. Ill., filed August 19, 2002). The complaint asserted claims under § 10 and § 20 of the Securities Exchange Act of 1934, on behalf of all persons who acquired and disposed of Household International common stock between July 30, 1999 and October 11, 2002. The claims alleged that the defendants knowingly or recklessly made false and misleading statements of material fact relating to Household’s Consumer Lending operations, including collections, sales and lending practices, some of which ultimately led to the 2002 state settlement agreement, and facts relating to accounting practices evidenced by the restatement. A jury trial concluded on April 30, 2009 and the jury rendered a verdict on May 7 partially in favor of the plaintiffs with respect to Household International and three former officers. A second phase of the case was to proceed to determine the actual damages, if any, due to the plaintiff class and issues of reliance. On November 22, 2010, the Court issued a ruling on the second phase of the case. On the issue of

HSBC Finance Corporation

reliance, the Court ruled that claim forms would be mailed to class members and that class members who file claims would be asked to check a “YES” or “NO” box to a question that asks whether they would have purchased Household stock had they known false and misleading statements inflated the stock price. As for damages, the Court set out a method for calculating damages for class members who file claims. As previously reported, in Court filings in March 2010, plaintiff’s lawyers have estimated that damages could range ‘somewhere between $2.4 billion to $3.2 billion to class members’, before pre-judgment interest. The defendants filed a motion for reconsideration from the Court’s November 22 ruling. On January 14, 2011, the Court partially granted that motion, slightly modifying the claim form; allowing defendants to take certain discovery on the issue of reliance and reserving on the issue whether the defendants would ultimately be entitled to a jury trial on the issues of reliance and damages. On January 31, 2011 and April 7, 2011, the Court issued other rulings clarifying the scope of discovery. Plaintiffs mailed the claim forms with the modified language to class members.

Class members had until May 24 to file claims. In filings with the Court, plaintiffs indicated that the Court-appointed claims administrator mailed claim forms for delivery to 646,715 potential class members and received 77,436 claims by the May 24, 2011 deadline. Plaintiffs also indicated that the claims administrator has determined preliminarily that 45,332 of the claimants have an allowed loss, and that the “preliminary, estimated damages for these potential class members, subject to revision as duplicate claims are identified and supplemental information is received, exceeds $2,000,000,000.” All submitted claims are subject to a validation process that, as indicated in the plaintiffs’ filings, will not be completed until December 2011. Once the claims administration process is complete, plaintiffs are expected to ask the Court to assess pre-judgment interest to be included as part of the Court’s final judgment.

The date on which the Court may enter a final judgment is not known at this time and the timing and outcome of the ultimate resolution of this matter is uncertain. When a final judgment is entered by the District Court, the parties have 30 days in which to appeal the verdict to the Seventh Circuit Court of Appeals. We continue to believe that we have meritorious grounds for appeal of one or more of the rulings in the case and intend to appeal the Court’s final judgment, which could involve a substantial amount. Upon appeal, we will be required to secure the judgment in order to suspend execution of the judgment while the appeal is ongoing by depositing cash in an interest-bearing escrow account or posting an appeal bond in the amount of the judgment (including any pre-judgment interest awarded). Given the complexity and uncertainties associated with the actual determination of damages, including the outcome of any appeals, there is a wide range of possible damages. We believe we have meritorious grounds for appeal on matters of both liability and damages, and will argue on appeal that damages should be zero or a relatively insignificant amount. If the Appeals Court partially accepts or rejects our arguments, the cost of damages, including pre-judgment interest, could be higher, and may lie in a range from a relatively insignificant amount to somewhere in the region of $3.0 billion.

Debt Cancellation Litigation. Between July 2010 and May 2011, eight substantially similar putative class actions were filed against our subsidiaries, HSBC Bank Nevada, N.A. (“HSBC Bank Nevada”) and HSBC Card Services Inc.: Rizera et al. v. HSBC Bank Nevada et al. (D.N.J. 10-CV-03375); Esslinger et al v. HSBC Bank Nevada, N.A. et al. (E.D. Pa. 10-CV-03213); McAlister et al. v. HSBC Bank Nevada, N.A. et al. (W.D. Wash. 10-CV-05831); Mitchell v. HSBC Bank Nevada, N.A. et al. (D. Md. 10-CV-03232); Samuels v. HSBC Bank Nevada, N.A. et al. (N.D. III. 11-CV-00548); McKinney v. HSBC Card Services et al. (S.D. III. 10-CV-00786); Chastain v. HSBC Bank Nevada, N.A. (South Carolina Court of Common Pleas, 13th Circuit) (filed as a counterclaim to a pending collections action); Colton et al. v. HSBC Bank Nevada, N.A. et al. (C.D. Ca. 11-CV-03742). These actions principally allege that cardholders were enrolled in debt cancellation or suspension products and challenge various marketing or administrative practices relating to those products. The plaintiffs’ claims include breach of contract and the implied covenant of good faith and fair dealing, unconscionability, unjust enrichment, and violations of state consumer protection and deceptive acts and practices statutes. The Mitchell action was dismissed by the plaintiff in March 2011. In July 2011, the parties in Rizera, Esslinger, McAlister, Samuels, McKinney and Colton executed a memorandum of settlement and filed notices of settlement of all claims in each respective court. The parties are currently in the process of memorializing the terms and conditions of settlement in a formal agreement, which will be submitted to one court on a consolidated basis for approval. We are adequately reserved for the proposed settlement.

HSBC Finance Corporation

Governmental and Regulatory Matters

Foreclosure Practices As previously reported, HSBC Finance Corporation and our indirect parent, HSBC North America, entered into a consent cease and desist order with the Federal Reserve Board (the “Federal Reserve”) (the “Federal Reserve Servicing Consent Order”), and our affiliate, HSBC Bank USA, entered into a similar consent order with the Office of the Comptroller of the Currency (“OCC”) (together with the Federal Reserve Servicing Consent Order, the “Servicing Consent Orders”) following completion of a broad horizontal review of industry foreclosure practices. The effective date of the Servicing Consent Orders was April 13, 2011. The Federal Reserve Servicing Consent Order requires us to take prescribed actions to address the deficiencies noted in the joint examination and described in the consent order. We continue to work with the Federal Reserve and the OCC to define and address the requirements of the Servicing Consent Orders as described in our Form 10-Q for the quarter ended March 31, 2011.

The Servicing Consent Orders require us to review foreclosures from January 2009 to December 2010 to determine if any customer was financially injured as a result of an error in the foreclosure process. An independent consultant has been retained to conduct that review, and remediation, including restitution, may be required if a customer is found to have been financially injured. The Servicing Consent Orders do not preclude additional enforcement actions against HSBC Finance Corporation by bank regulatory, governmental or law enforcement agencies, such as the Department of Justice or State Attorneys General, which could include the imposition of fines and actions to recover civil money penalties and other financial penalties relating to the activities that were the subject of the Servicing Consent Orders. We may also see an increase in private litigation concerning our practices. The Federal Reserve has indicated in a press release that it believes monetary sanctions are appropriate for the enforcement actions and that it plans to announce monetary penalties. While we believe it is possible that civil money penalties will be imposed on HSBC Finance Corporation, we are unable at this time to estimate reliably the amounts, or range of possible amounts, of any such penalties.

As has been reported in the media, we understand that the five largest U.S. mortgage servicers are engaged in discussions with bank regulators, the U.S. Department of Justice and State Attorneys General regarding a broader settlement with respect to foreclosure and other mortgage servicing practices. Media reports suggest that the settlement will involve a substantial dollar payment. Following the conclusion of these discussions and the announcement of any such settlement with the five largest servicers, we expect that the next nine largest mortgage servicers, including HSBC Finance Corporation and HSBC Bank USA, will be approached regarding a settlement although the timing and proposed terms of such settlement discussions are not presently known.


*17.*	*New Accounting Pronouncements*

Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts In October 2010, the FASB issued guidance which amends the accounting rules that define which costs associated with acquiring or renewing insurance contracts qualify as deferrable acquisition costs by insurance entities. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. Early adoption is permitted, but must be applied as of the beginning of an entity’s annual reporting period. The adoption of this guidance is not expected to have a material impact on our financial position or results of operations.

Clarifications to Accounting for Troubled Debt Restructurings by Creditors In April 2011, the FASB issued an Accounting Standards Update which provides additional guidance to assist creditors in determining whether a restructuring of a receivable meets the criteria to be considered a troubled debt restructuring (“TDR”), for purposes of the identification and disclosure of troubled debt restructurings, as well as for recording impairment. For purposes of identifying and disclosing troubled debt restructurings, the new guidance would be effective for interim and annual reporting periods beginning on or after June 15, 2011, and would be applied retrospectively to restructurings occurring on or after January 1, 2011. For purposes of measuring impairment of a receivable restructured in a troubled debt restructuring, the proposed clarifications would be effective on a prospective basis for interim and annual periods beginning on or after June 15, 2011. An entity must disclose the total amount of receivables and the allowance for credit losses as of the end of the period of adoption related to those receivables that have now been identified as troubled debt restructurings. Implementation of this Accounting Standards Update will result in significantly higher volumes of re-aged and modified accounts being reported as troubled debt restructurings. Although we are in the

HSBC Finance Corporation

process of evaluating the impact of adopting this Accounting Standards Update, we currently expect the impact will be material. Additionally, we continue to review our current customer account management policies and practices to determine if any changes will be made in future periods as a result of this guidance.

This Accounting Standards Update also clarified the effective date for new disclosure requirements for troubled debt restructurings. The new disclosure requirements for trouble debt restructurings will also be effective for interim and annual periods beginning on or after June 15, 2011.

Repurchase Agreements In April 2011, the FASB issued a new Accounting Standards Update related to repurchase agreements. This new guidance removes the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and the related collateral maintenance guidance from the assessment of effective control. As a result, an entity is no longer required to consider the sufficiency of the collateral exchanged but will evaluate the transferor’s contractual rights and obligations to determine whether it maintains effective control over the transferred assets. The new guidance is required to be applied prospectively for all transactions that occur on or after January 1, 2012. Adoption is not expected to have a material impact on our financial position or results of operations.

Fair Value Measurements and Disclosures In May 2011, the FASB issued an Accounting Standards Update to converge with newly issued IFRS 13, Fair Value Measurement (“IFRS 13”). This new guidance primarily clarifies existing fair value measurement requirements but also makes some other amendments to align with the newly issued IFRS 13. The new guidance clarifies that the application of the highest and best use and valuation premise concepts are not relevant when measuring the fair value of financial assets or of liabilities, that is, an entity will not be able to group financial instruments for the purposes of measuring their fair value. However, an exception exists where a reporting entity manages its financial instruments on the basis of its net exposure. This Accounting Standards Update also requires new and enhanced disclosures on the quantification and valuation processes for significant unobservable inputs, transfers between Levels 1 and 2, and the categorization of all fair value measurements into the fair value hierarchy, even where those measurements are only for disclosure purposes. The guidance is effective prospectively from January 1, 2012. Adoption is not expected to have a material impact on our financial position or results of operations.

Presentation of Comprehensive Income In June 2011, the FASB issued a new Accounting Standards Update on the presentation of other comprehensive income. This Update requires entities to present net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income. The option to present items of other comprehensive income in the statement of changes in equity is eliminated. This Accounting Standards Update also requires reclassification adjustments between net income and other comprehensive income to be shown on the face of the statements. The new guidance is effective from January 1, 2012 with full retrospective application. Early adoption is permitted.

HSBC Finance Corporation

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the consolidated financial statements, notes and tables included elsewhere in this report and with our Annual Report on Form 10-K for the year ended December 31, 2010 (the “2010 Form 10-K”) and in our Current Report on Form 8-K filed with the SEC on May 27, 2011, which provided supplemental information to our Annual Report on Form 10-K. MD&A may contain certain statements that may be forward-looking in nature within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, we may make or approve certain statements in future filings with the SEC, in press releases, or oral or written presentations by representatives of HSBC Finance Corporation that are not statements of historical fact and may also constitute forward-looking statements. Words such as “may,” “will,” “should,” “would,” “could,” “appears,” “believe,” “intends,” “expects,” “estimates,” “targeted,” “plans,” “anticipates,” “goal” and similar expressions are intended to identify forward-looking statements but should not be considered as the only means through which these statements may be made. These matters or statements will relate to our future financial condition, economic forecast, results of operations, plans, objectives, performance or business developments and will involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from that which was expressed or implied by such forward-looking statements. Forward-looking statements are based on our current views and assumptions and speak only as of the date they are made. HSBC Finance Corporation undertakes no obligation to update any forward-looking statement to reflect subsequent circumstances or events.

Executive Overview

HSBC Finance Corporation is an indirect wholly owned subsidiary of HSBC Holdings plc (“HSBC”). HSBC Finance Corporation may also be referred to in MD&A as “we”, “us”, or “our”.

The following discussion of our financial condition and results of operations excludes the results of our discontinued operations from all periods presented unless otherwise noted. See Note 2, “Discontinued Operations,” in the accompanying consolidated financial statements for further discussion of these operations.

Current Environment While the U.S. economy continued its overall slow recovery during the first half of 2011, the pace of recovery slowed even further during the second quarter due to renewed weakness in the economy driven by higher energy costs, supply disruptions in the manufacturing sector and a significant reduction in the pace of new job creation. Serious threats to economic growth remain including high energy prices, the uncertainty of a political compromise on the Federal fiscal debt ceiling, continued pressure and uncertainty in the housing market and elevated unemployment levels. In June, the Federal Reserve lowered its forecasts for economic growth in 2011 to between 2.7 percent and 2.9 percent. Marketplace liquidity continues to remain ample, however, renewed European sovereign debt fears triggered by Greece and other countries as well as increased concerns regarding government spending and the budget deficit continue to impact the financial markets including interest rates and spreads. During the first half of 2011, we continued to see home prices decline in many markets as housing prices remain under pressure due to elevated foreclosure levels.

While job creation in the private sector remained positive during the first half of 2011, there continues to be uncertainty as to how pronounced the economic recovery will be. Consumer spending began to decline again in the second quarter as higher gas prices and a weak labor market made consumers reluctant to spend. In addition, consumer confidence continues to be low based on historical standards, raising questions about the continued willingness by consumers to spend in the coming months, particularly if energy prices remain high. U.S. unemployment rates, which have been a major factor in the deterioration of credit quality in the U.S., remained high at 9.2 percent in June 2011. While the unemployment rate marginally improved from a rate of 9.4 percent at December 2010, it actually increased 40 basis points during the second quarter. Also, a significant number of U.S. residents are no longer looking for work and, therefore, are not reflected in the U.S. unemployment rates. Unemployment rates in 18 states are at or above the U.S. national average. Unemployment rates in 7 states are at or above 10.0 percent, including California and Florida,

HSBC Finance Corporation

states where we have receivable portfolios in excess of 5 percent of our total outstanding receivables. High unemployment rates have generally been most pronounced in the markets which had previously experienced the highest appreciation in home values. Unemployment has continued to have an impact on the provision for credit losses in our loan portfolio and in loan portfolios across the industry.

Mortgage lending industry trends continue to be affected by the following in 2011:


	>	Overall levels of delinquencies remain elevated;

	>	Mortgage loan originations from 2005 through 2008 continue to perform worse than originations from prior periods;

	>	Significant delays in foreclosure proceedings as a result of the broad horizontal review of industry foreclosure practices by the Federal Reserve Board and the Office of the Comptroller of the Currency;

	>	Real estate markets in a large portion of the United States continue to be affected by stagnation or declines in property values experienced over the last few years;

	>	Foreclosure levels remain elevated which has contributed to a continued general decline in home prices during the first half of 2011;

	>	Lower secondary market demand for subprime loans resulting in reduced liquidity for subprime mortgages; and

	>	Tighter lending standards by mortgage lenders which impacts the ability of borrowers to refinance existing mortgage loans.

In our credit card business, while consumer spending remained relatively strong during the first half of 2011, we saw continued declines in our credit card receivable balances due to increased receivable run-off in the segments of our credit card receivable portfolio for which we no longer originate new accounts and in the first quarter of 2011 seasonal improvements in collection activities as some customers use their tax refunds to make payments. While credit card marketing increased during the first half of 2011, marketing remains low compared to historical levels. Credit quality remained strong during the current quarter as the impact of continued high unemployment rates has not been as severe as originally expected due in part to improved customer payment behavior which has resulted in continued improvements in delinquency levels. While implementation of changes required by the Credit Card Accountability Responsibility and Disclosure Act of 2009 (“CARD Act”) continued to result in reductions to revenue, the impact has been mitigated by improved credit quality for our credit card business in the first half of 2011 compared to the prior year period.

Concerns about the future of the U.S. economy, including the pace and magnitude of recovery from the recent economic recession, consumer confidence, volatility in energy prices, credit market volatility and trends in corporate earnings will continue to influence the U.S. economic recovery and the capital markets. In particular, improvement in unemployment rates, a sustained recovery of the housing markets and stabilization in energy prices remain critical components of a broader U.S. economic recovery. Further weakening in these components as well as in consumer confidence may result in additional deterioration in consumer payment patterns and credit quality. Weak consumer fundamentals including declines in wage income, wealth and a difficult job market continue to depress consumer confidence. Additionally, there is uncertainty as to the future course of monetary policy and uncertainty as to the impact on the economy and consumer confidence as the remaining actions taken by the government to restore faith in the capital markets and stimulate consumer spending end. These conditions in combination with the impact of recent regulatory changes, including the continued implementation of the “Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010” (“Dodd-Frank”) will continue to impact our results through 2011 and beyond, the degree of which is largely dependent upon the nature and extent of the economic recovery.

Due to the significant slow-down in foreclosures, and in some instances, cessation of all foreclosure processing by numerous loan servicers, for some period of time there may be some reduction in the number of properties being marketed following foreclosure which may increase demand for properties currently on the market resulting in a

HSBC Finance Corporation

stabilization of home prices but could also result in a larger number of vacant properties in communities creating downward pressure on general property values. As a result, the short term impact of the foreclosure processing delay is highly uncertain. However, the longer term impact is even more uncertain as servicers begin to increase foreclosure activities and market properties in large numbers which is likely to create a significant over-supply of housing inventory. This could lead to a significant increase in loss severity on REO properties, which would also adversely impact our provision for credit losses.

As a result of industry-wide compliance issues, certain courts and state legislatures have issued new rules or statutes relating to foreclosures. Scrutiny of foreclosure documentation has increased in some courts. Also, in some areas, officials are requiring additional verification of information filed prior to the foreclosure proceeding. If these trends continue, there could be additional delays in the processing of foreclosures, which could have an adverse impact upon housing prices which is likely to result in higher loss severities while foreclosures are delayed.

Growing government indebtedness, a large budget deficit and failure to increase the Federal debt ceiling have resulted in two major rating agencies placing their U.S. sovereign debt rating on negative watch. While the need to build a political consensus around an increase in current sovereign debt ceiling is the immediate concern, there is an underlying risk that lower growth, fiscal challenges and a general lack of political consensus will result in a deterioration of the U.S. credit standing over the longer term. While the potential effects of a U.S. downgrade are broad and impossible to accurately predict, they could include a widening of sovereign and corporate credit spreads, devaluation of the U.S. dollar and a general market move away from riskier assets.

2011 Regulatory Developments As previously reported, HSBC Finance Corporation and our indirect parent, HSBC North America Holdings Inc. (“HSBC North America”), have entered into a consent cease and desist order with the Federal Reserve Board (the “Federal Reserve”) (the “Federal Reserve Servicing Consent Order”) and our affiliate, HSBC Bank USA, has entered into a similar consent order with the Office of the Comptroller of the Currency (“OCC”) (together with the Federal Reserve Servicing Consent Order, the “Servicing Consent Orders”) following completion of a broad horizontal review of industry foreclosure practices. The Federal Reserve Servicing Consent Order requires us to take prescribed actions to address the deficiencies noted in the joint examination and described in the consent order. We continue to work with the Federal Reserve and the OCC to define and address the requirements of the Servicing Consent Orders. As a result, we expect the associated costs of compliance will increase in future periods as we continue to address the requirements of the order. See Note 16, “Litigation and Regulatory Matters,” in the accompanying consolidated financial statements for further discussion of these actions.

We remain committed to assisting customers who are experiencing financial difficulties, and we will continue to review our policies and processes to make modification and other account management alternatives for the benefit of our customers more easily accessible to those in need of assistance. Home preservation continues to be a cornerstone of our business, and foreclosure is viewed as a last resort. Foreclosure proceedings are only instituted when other reasonable alternatives have been exhausted and where the borrower is seriously delinquent. We also offer assistance, including financial, to those wishing to leave a property without having to go through the foreclosure process.

Business Focus HSBC Holdings plc acquired Household International, Inc. (“Household”), the predecessor to HSBC Finance Corporation, in March 2003. In connection with the acquisition, HSBC also announced its expectation that funding costs for the Household businesses would be lower as a result of the financial strength and funding diversity of HSBC. As a result, we work with our affiliates under the oversight of HSBC North America to maximize opportunities and efficiencies in HSBC’s operations in the U.S., including funding efficiencies.

As discussed in prior filings, during the past few years we have made numerous strategic decisions regarding our operations, with the intent to lower the risk profile of our operations as well as reduce the capital and liquidity requirements of our operations by reducing the size of the balance sheet. Although currently under a strategic review, our lending operations currently consist of our credit card and retail services business and include primarily MasterCard and Visa credit cards and private label credit cards. A significant portion of new credit card and all new private label receivable originations are sold on a daily basis to HSBC Bank USA, National Association (“HSBC

HSBC Finance Corporation

Bank USA”). Our credit card receivable portfolio totaled $9.2 billion at June 30, 2011 reflecting a decrease of 7 percent since December 31, 2010. This decrease reflects receivable run-off largely in the segments of our credit card receivable portfolio for which we no longer originate new accounts and, in the first quarter of 2011, seasonal improvements in collection activities as some customers use their tax refunds to make payments. These decreases were partially offset by increases in receivables associated with new account activity. Although marketing levels increased in 2011, they remain low compared to historical levels. Current marketing levels should not be considered indicative of marketing expenses for any future periods.

The real estate secured and personal non-credit card receivable portfolios of our Consumer Lending and Mortgage Services businesses, which totaled $51.5 billion at June 30, 2011, are currently running off. The timeframe in which these portfolios will liquidate is dependent upon the rate at which receivables pay off or charge-off prior to their maturity, which fluctuates for a variety of reasons such as interest rates, availability of refinancing, home values and individual borrowers’ credit profile, all of which are outside of our control. In light of the current economic conditions and mortgage industry trends described above, our loan prepayment rates have slowed when compared to historical experience even though interest rates remain low. Additionally, our loan modification programs which are primarily designed to improve cash collections and avoid foreclosure as determined to be appropriate, are contributing to these slower loan prepayment rates.

While difficult to project both loan prepayment rates and default rates, based on current experience we expect the real estate secured receivable portfolios of our run-off Consumer Lending and Mortgage Services businesses to decline to between 40 percent and 50 percent of the December 31, 2010 receivable levels over the next four to five years. Attrition will not be linear during this period. While in the near term charge-off related receivable run-off will likely continue to remain elevated due to the economic environment, run-off is beginning to slow as charge-offs decline and the remaining real estate secured receivables stay on the balance sheet longer due to the impact of modifications and/or the lack of re-financing alternatives.

We continue to evaluate our operations as we seek to optimize our risk profile and cost efficiencies as well as our liquidity, capital and funding requirements. This could result in further strategic actions that may include changes to our legal structure, asset levels, cost structure or product offerings in support of HSBC’s strategic priorities. As part of this continuing evaluation, a strategic review of HSBC’s U.S. credit card and private label businesses is underway as HSBC seeks to redistribute resources and reallocate capital to support strategically-aligned businesses.

We also continue to focus on cost optimization efforts to ensure realization of cost efficiencies. During the first quarter of 2011, in an effort to create a more sustainable cost structure, we initiated a formal review to identify areas where we may be able to streamline or redesign operations within certain functions to reduce or eliminate costs. To date, we have identified various opportunities to reduce costs through organizational structure redesign, vendor spending, discretionary spending and other general efficiency initiatives. Cost reduction initiatives achieved to date include workforce reductions which have resulted in a reduction in total legal entity FTE’s of 12 percent since December 31, 2010, as well as reductions in marketing levels which began during the second quarter of 2011. Workforce reductions are also occurring in certain non-compliance shared services functions which we expect will result in reductions to future allocated costs for these functions. This review will continue throughout 2011 and, as a result, we may incur restructuring charges during the remainder of 2011, the amount of which will depend on the actions that are ultimately implemented.

Performance, Developments and Trends Our operating results improved during the first half of 2011. We reported a loss from continuing operations of $45 million and $64 million during the three and six months ended June 30, 2011, respectively, compared to a loss from continuing operations of $529 million and $1.2 billion during the three and six months ended June 30, 2010, respectively. We reported a loss from continuing operations before taxes of $137 million and $349 million during the three and six months ended June 30, 2011, respectively, compared to a loss from continuing operations before tax of $866 million and $1.9 billion during the three and six months ended June 30, 2010, respectively. Our results in these periods were significantly impacted by the change in the fair value of debt and related derivatives for which we have elected fair value option. In order to better understand the underlying performance trends of our business, the following table summarizes the impact of this item on our income (loss) from continuing operations before income tax for all periods presented:

HSBC Finance Corporation


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010

	(in millions)

Loss from continuing operations before income tax, as reported	$	(137	)	$	(866	)	$	(349	)	$	(1,864	)
Gain in value of fair value option debt and related derivatives		(245	)		(470	)		(216	)		(603	)

Loss from continuing operations before income tax, excluding above items⁽¹⁾	$	(382	)	$	(1,336	)	$	(565	)	$	(2,467	)


⁽¹⁾	Represents a non-U.S. GAAP financial measure.

Excluding the impact of the change in the fair value of debt and related derivatives for which we have elected fair value option in the above table, our results for the three and six months ended June 30, 2011 improved $954 million and $1.9 billion, respectively, compared to the three and six months ended June 30, 2010 driven by lower provision for credit losses and higher other revenues driven by lower derivative related income (expense), partially offset by lower net interest income and higher operating expenses.

Net interest income decreased during the three and six months ended June 30, 2011 as compared to the year-ago periods. The decrease in both periods reflects lower average receivables as a result of receivable liquidation partially offset by higher yields for all receivable products and an increase in our estimate of interest receivable relating to income tax receivables of $80 million in the second quarter of 2011 which is recorded as a component of finance and other interest income. Higher overall receivable yields in both periods were partially offset by the negative impact of a shift in receivable mix to higher levels of lower yielding first lien real estate secured receivables as higher yielding second lien real estate secured and personal non-credit card receivables have run-off at a faster pace than first lien real estate secured receivables. The decrease in net interest income was partially offset by lower interest expense due to lower average borrowings and lower average rates. Net interest margin was 5.63 percent and 5.37 percent for the three and six months ended June 30, 2011, respectively, compared to 4.82 percent and 5.08 percent for the year-ago periods. Excluding the impact of the increase in estimated interest receivable relating to income tax receivables discussed above, net interest margin remained higher during both the three and six month periods as a result of higher overall receivable yields and a lower cost of funds as a percentage of average interest-earning assets. See “Results of Operations” in this MD&A for additional discussion regarding net interest income and net interest margin.

Other revenues during the three and six months ended June 30, 2011 were impacted by changes in the value of debt designated at fair value and related derivatives. Excluding the gain on debt designated at fair value and related derivatives, other revenues increased during the three and six months ended June 30, 2011 primarily due to lower derivative related income (expense) and during the three months ended June 30, 2011 higher fee income. Lower derivative related income (expense) during both periods reflects the impact of falling long-term interest rates on the mark-to-market on derivatives in our non-qualifying economic hedge portfolio which were less pronounced in 2011 and resulted in losses of $149 million and $86 million during the three and six months ended June 30, 2011 compared to losses of $414 million and $452 million in the year-ago periods. Our portfolio of non-qualifying economic hedges acted as economic hedges by lowering our overall interest rate risk through more closely matching both the structure and duration of our liabilities to the structure and duration of our assets even though they did not qualify as effective hedges under hedge accounting principles. Higher fee income in the current quarter reflects lower fee charge-offs driven by improved credit quality, improved roll rates and lower fees billed, partially offset by lower late fees, changes in customer behavior and continuing impacts from changes required by the CARD Act. See “Results of Operations” for a more detailed discussion of other revenues.

Our provision for credit losses decreased significantly during the three and six months ended June 30, 2011 as compared to the three and six months ended June 30, 2010 as discussed below.

HSBC Finance Corporation


	•	Provision for credit losses for our credit card receivable portfolio decreased during the three and six months ended June 30, 2011 due to lower receivable levels as a result of receivable run-off. The decrease also reflects improvement in the underlying credit quality of the portfolio including improvements in early stage delinquency roll rates and lower delinquency and charge-off levels as customer payment rates have continued to be strong during the first half of 2011 as well as improvements in economic conditions. The impact on credit card receivable losses from the current economic environment, including continued high unemployment levels, has not been as severe as originally expected due in part to improved customer payment behavior.

	•	The provision for credit losses for the real estate secured receivable portfolios in our Consumer Lending and Mortgage Services business decreased during the three and six months ended June 30, 2011 reflecting lower receivable levels as the portfolios continue to liquidate, lower dollars of delinquency and charge-off and improvements in economic conditions. The decrease also reflects lower loss severities as compared to the year-ago periods reflecting an increase in the percentage of properties added to REO inventory during the period for which we accepted a deed-in-lieu which results in lower losses compared to loans which are subject to a formal foreclosure process. These decreases were partially offset by the impact of continued high unemployment levels and lower receivable prepayments.

The decrease in the provision for credit losses also reflects lower loss estimates on troubled debt restructurings (“TDR Loans”) reflecting lower volumes of TDR Loans as well as the impact of an increase in the percentage of TDR Loans that are performing due to charge-off of nonperforming TDR Loans. During the six months ended June 30, 2011, these decreases were partially offset by the impact of lower estimated cash flows from TDR Loans due to economic expectations about home prices and other changes in assumptions including the length of time these receivables will remain on our books as a result of the temporary suspension of foreclosure activity as discussed above.


	•	The provision for credit losses for our personal non-credit card receivables decreased significantly during the three and six months ended June 30, 2011 reflecting lower receivable levels as compared to the year-ago periods, lower dollars of delinquency and charge-off, improvements in economic conditions and lower reserve requirements on TDR Loans.

See “Results of Operations” for a more detailed discussion of our provision for credit losses.

During the three and six months ended June 30, 2011, we decreased our credit loss reserves as the provision for credit losses was $385 million and $1.2 billion, respectively, lower than net charge-offs. The lower credit loss reserves at June 30, 2011 as compared to December 31, 2010 reflect lower receivable levels including lower dollars of delinquency and lower reserve requirements on TDR Loans. See “Credit Quality” for further discussion of credit loss reserves. Reserve levels for real estate secured receivables at our Mortgage Services and Consumer Lending businesses as well as for receivables in our credit card business can be further analyzed as follows:


	Real Estate Secured Receivables												Credit Card
	Consumer Lending						Mortgage Services						Receivables
Three Months Ended June 30,	2011			2010			2011			2010			2011			2010

	(in millions)

Credit loss reserves at beginning of period	$	2,250		$	2,787		$	1,614		$	2,201		$	771		$	1,495
Provision for credit losses		328			645			211			305			199			278
Charge-offs		(450	)		(859	)		(338	)		(621	)		(281	)		(533	)
Recoveries		15			15			10			12			49			58

Credit loss reserves at end of period	$	2,143		$	2,588		$	1,497		$	1,897		$	738		$	1,298

HSBC Finance Corporation


	Real Estate Secured Receivables												Credit Card
	Consumer Lending						Mortgage Services						Receivables
Six Months Ended June 30,	2011			2010			2011			2010			2011			2010

	(in millions)

Credit loss reserves at beginning of period	$	2,409		$	3,047		$	1,781		$	2,385		$	984		$	1,824
Provision for credit losses		763			1,232			466			760			275			479
Charge-offs		(1,060	)		(1,720	)		(771	)		(1,276	)		(626	)		(1,125	)
Recoveries		31			29			21			28			105			120

Credit loss reserves at end of period	$	2,143		$	2,588		$	1,497		$	1,897		$	738		$	1,298

A significant portion of our receivable portfolio is considered to be TDR Loans which are reserved using a discounted cash flow analysis and generally results in a higher reserve requirement for these loans. Additionally, a significant portion of real estate secured receivables in our portfolio are carried at net realizable value less cost to sell. The following table summarizes these receivables, which either carry higher reserves using a discounted cash flow analysis or are carried at net realizable value, in comparison to our entire receivable portfolio:


	June 30,			December 31,
	2011			2010

	(in millions)

Total receivable portfolio	$	60,841		$	66,383

Real estate secured receivables carried at net realizable value less cost to sell	$	5,366		$	5,095
TDR Loans:
Credit card		355			427
Real estate secured⁽¹⁾		7,343			7,875
Personal non-credit card		615			704

TDR Loans		8,313			9,006

Receivables carried at either net realizable value or reserved for using a discounted cash flow methodology	$	13,679		$	14,101

Real estate secured receivables carried at either net realizable value or reserved for using a discounted cash flow methodology as a percentage of real estate secured receivables		27.9	%		26.3	%

Receivables carried at either net realizable value or reserved for using a discounted cash flow methodology as a percentage of total receivables		22.5	%		21.2	%


⁽¹⁾		Excludes TDR Loans which are recorded at net realizable value less cost to sell.

Total operating expenses increased $210 million, or 27 percent, and $225 million, or 14 percent, during the three and six months ended June 30, 2011, respectively, primarily due to increased legal reserves reflecting increased exposure estimates on certain litigation matters and an impairment of certain previously capitalized software development costs recorded during the second quarter and during the year-to-date period higher marketing and real estate owned (“REO”) expenses. These increases were partially offset by lower salaries and employee benefits as a result of the continuing reduced scope of our business operations and the impact of entity-wide initiatives to reduce costs. See “Results of Operations” for a more detailed discussion of operating expenses.

Our effective tax rate for the three months ended June 30, 2011 was significantly impacted by a release of valuation allowance on state deferred tax assets. The effective tax rate for the six months ended June 30, 2011 was significantly impacted by a release of valuation allowance previously established on foreign tax credits as during the first quarter of 2011 HSBC North America identified an additional tax planning strategy which is expected to generate sufficient taxable foreign source income to allow us to recognize and utilize foreign tax credits currently on

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our balance sheet before they expire. This strategy continued to be implemented during the second quarter of 2011. The effective tax rate for both the three months and six months ended June 30, 2011 was impacted by a decrease in state uncertain tax positions and state taxes, including the states where we file combined unitary state tax returns with other HSBC affiliates. See Note 10, “Income Taxes,” in the accompanying consolidated financial statements for further discussion.

The financial information set forth below summarizes selected financial highlights of HSBC Finance Corporation for the three and six months ended June 30, 2011 and 2010 and as of June 30, 2011 and December 31, 2010.


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010

	(dollars are in millions)

Loss from continuing operations	$	(45	)	$	(529	)	$	(64	)	$	(1,175	)
Return on average owned assets (“ROA”)		(.25	)%		(2.43	)%		(.17	)%		(2.61	)%
Return on average common shareholder’s equity (“ROE”)		(4.71	)		(30.77	)		(4.00	)		(33.96	)
Net interest margin		5.63			4.82			5.37			5.08
Consumer net charge-off ratio, annualized		7.55			13.16			8.63			13.35
Efficiency ratio⁽¹⁾		59.95			50.61			59.72			49.56


	June 30,			December 31,
	2011			2010

	(dollars are in millions)

Receivables:
Credit card	$	9,212		$	9,897
All other⁽²⁾		51,629			56,486

Total	$	60,841		$	66,383

Two-month-and-over contractual delinquency ratio		13.06	%		14.41	%


⁽¹⁾		Ratio of total costs and expenses less policyholders’ benefits to net interest income and other revenues less policyholders’ benefits.
⁽²⁾		All other consists primarily of the liquidating receivable portfolios in our Consumer Lending and Mortgage Services businesses.

Performance Ratios Our efficiency ratio in all periods was impacted by the change in the fair value of debt for which we have elected fair value option accounting. Excluding this item from all periods, our efficiency ratio improved during the three months ended June 30, 2011 but deteriorated as compared to the year-ago period. The improvement during the current quarter reflects the impact of lower derivative related income (expense), partially offset by the impact of higher operating expenses due to increased legal reserves reflecting increased exposure estimates on certain litigation matters and the impairment of certain previously capitalized software development costs and slightly lower net interest income in the quarter. The deterioration during the six months ended June 30, 2011 reflects the higher operating expenses discussed above, which also included higher marketing and REO expenses in the year-to-date period, and lower net interest income, partially offset by lower derivative related income (expense).

Our return on average common shareholder’s equity (“ROE”) was (4.71) percent and (4.00) percent for the three and six months ended June 30, 2011, respectively, compared to (30.77) percent and (33.96) percent in the year-ago periods. Our return on average owned assets (“ROA”) was (.25) percent and (.17) percent for the three and six months ended June 30, 2011, respectively, compared to (2.43) percent and (2.61) percent in the year-ago periods. Both ROE and ROA improved as compared to the year-ago periods due to a lower net loss during the current year periods than during the year-ago periods.

Receivables Receivables were $60.8 billion at June 30, 2011, $63.0 billion at March 31, 2011 and $66.4 billion at December 31, 2010. Receivable levels compared to both March 31, 2011 and December 31, 2010 decreased across all products. The decrease in our credit card receivable portfolio since March 31, 2011 and December 31, 2010

HSBC Finance Corporation

reflects continued receivable run-off largely in the segments of our credit card receivable portfolio for which we no longer originate new accounts, partially offset in both periods by increases in receivables associated with new account activity. The decrease in both periods in our real estate secured and personal non-credit card receivable portfolios reflects the continued liquidation of these portfolios which will continue going forward. As it relates to our real estate secured receivable portfolio, liquidation rates continue to be impacted by declines in loan prepayments as fewer refinancing opportunities for our customers exist and the previously discussed trends impacting the mortgage lending industry. The decrease for all receivable products since December 31, 2010 also reflects seasonal improvements in our collection activities during the first quarter of the year as some customers use their tax refunds to make payments. See “Receivables Review” for a more detailed discussion of the decreases in receivable balances.

Credit Quality Dollars of two-months-and-over contractual delinquency as a percentage of receivables and receivables held for sale (“delinquency ratio”) at June 30, 2011 was 13.06 percent compared to 12.92 percent at March 31, 2011 and 14.41 percent at December 31, 2010. Dollars of delinquency decreased as compared to March 31, 2011 and December 31, 2010 for all three of our receivable products as a result of lower receivable levels as discussed above, partially offset by the continuing high unemployment levels. Additionally, as compared to December 31, 2010, the decrease in dollars of delinquency for all receivable products also reflects seasonal improvements in our collection activities during the first quarter of the year. Dollars of delinquency for real estate secured receivables were negatively impacted by our temporary suspension of foreclosure activities as previously discussed, as the rate at which receivables are transferred to REO has slowed. The delinquency ratio decreased as compared to December 31, 2010 as dollars of delinquency as discussed above decreased at a faster pace than receivable levels. As compared to March 31, 2011, the delinquency ratio increased modestly as receivable levels decreased at a faster pace than dollars of delinquency due to the impact of our temporary suspension of foreclosure activities previously discussed. See “Credit Quality-Delinquency” for a more detailed discussion of our delinquency ratios.

Overall dollars of net charge-offs decreased as compared to both the prior quarter and prior year quarter as all receivable portfolios were positively impacted by lower dollars of delinquency as a result of lower receivable levels and lower levels of personal bankruptcy filings. The decrease in dollars of net charge-offs for real estate secured receivables has also been impacted by improvements in the volume of loans which flow into late stage delinquency as well as the impact of our temporary suspension of foreclosure activities because once the foreclosure process commences a higher payment is required for an account to be re-aged. These decreases were partially offset for all receivable portfolios by the impact of continued high unemployment levels. As compared to the prior year quarter, the decrease for all receivable products also reflects improvements in economic conditions. Net charge-off of consumer receivables as a percentage of average consumer receivables (“net charge-off ratio”) decreased as compared to both the prior quarter and prior year quarter as the decrease in dollars of net charge-offs as discussed above outpaced the decrease in average receivables. See “Credit Quality-Net Charge-offs of Consumer Receivables” for a more detailed discussion of our net charge-off ratios.

Funding and Capital During the first half of 2011, we did not receive any capital contributions from HSBC Investments (North America) Inc. (“HINO”). However, until we return to profitability, HSBC’s continued support may be required to properly manage our business operations and maintain appropriate levels of capital. HSBC has provided significant capital in support of our operations in the last few years and has indicated that it is fully committed and has the capacity and willingness to continue that support.

In the current market environment, market pricing continues to value the cash flows associated with our Consumer Lending and Mortgage Services receivable portfolios at amounts which are significantly lower than what we believe will ultimately be realized. Therefore, we have determined that we have the positive intent and ability to hold these receivables for the foreseeable future and, as such, have classified our Consumer Lending and Mortgage Services receivable portfolios as held for investment purposes. However, should market pricing improve in the future or if HSBC North America calls upon us to execute certain strategies in order to address capital considerations, it could result in the reclassification of a portion of these portfolios into receivables held for sale.

HSBC Finance Corporation

The tangible common equity to tangible assets ratio was 8.10 percent and 7.37 percent at June 30, 2011 and December 31, 2010, respectively. This ratio represents a non-U.S. GAAP financial ratio that is used by HSBC Finance Corporation management, certain rating agencies and our credit providing banks to evaluate capital adequacy and may be different from similarly named measures presented by other companies. See “Basis of Reporting” and “Reconciliations to U.S. GAAP Financial Measures” for additional discussion and quantitative reconciliation to the equivalent U.S. GAAP basis financial measure.

As discussed in previous filings, HSBC North America is required to implement Basel II provisions in accordance with current regulatory timelines. While we will not report separately under the new rules, the composition of our balance sheet will impact the overall HSBC North America regulatory capital requirement. Prior to adoption of Basel II, HSBC North America is required to successfully complete a parallel run by measuring regulatory capital under both the new regulatory capital rules and the existing general risk-based rules for a period of at least four quarters. Successful completion of the parallel run period requires the approval of U.S. regulators. HSBC North America began the parallel run period in January 2010 which encompasses enhancements to a number of risk policies, processes and systems to align with the Basel II final rule requirements. It is uncertain as to when HSBC North America will receive approval from the Federal Reserve Board, its primary regulator. Regulatory approval may not occur until 2012. HSBC North America has integrated Basel II metrics into its management reporting and decision making processes.

Income (Loss) Before Income Tax Expense – Significant Trends Loss from continuing operations before income tax expense, and various trends and activity affecting operations, are summarized in the following table.


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010

	(in millions)

Loss from continuing operations before income tax from prior year	$	(866	)	$	(7,404	)	$	(1,864	)	$	(5,704	)
Increase (decrease) in income from continuing operations before income tax expense attributable to:
Net interest income		(11	)		(421	)		(216	)		(850	)
Provision for credit losses		816			673			1,898			1,588
Mark-to-market on derivatives which do not qualify as effective hedges		265			(631	)		366			(672	)
Gain (loss) on debt designated at fair value and related derivatives		(225	)		5,239			(387	)		1,260
Credit card fee income and enhancement services revenue		27			(129	)		(3	)		(296	)
Gain on bulk and on-going receivable sales to HSBC affiliates		6			52			3			(10	)
Servicing and other fees from HSBC affiliates		2			(31	)		(13	)		(47	)
Lower of cost or market adjustment on receivables held for sale		(2	)		165			(2	)		335
Salaries and employee benefits		33			96			69			334
Other marketing		1			(51	)		(29	)		(59	)
REO expenses		11			-			(56	)		67
Goodwill and other intangible asset impairment charges		-			1,641			-			2,308
Impairment of certain previously capitalized software development costs		(40	)		-			(40	)		-
All other activity⁽¹⁾		(154	)		(65	)		(75	)		(118	)

		729			6,538			1,515			3,840

Loss from continuing operations before income tax for current period	$	(137	)	$	(866	)	$	(349	)	$	(1,864	)


⁽¹⁾		Reflects other activity for other revenues and operating expenses.

HSBC Finance Corporation

For additional discussion regarding changes in the components of income and expense, see “Results of Operations.”

Basis of Reporting

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). Unless noted, the discussion of our financial condition and results of operations included in MD&A are presented on a continuing operations basis of reporting. Certain reclassifications have been made to prior year amounts to conform to the current year presentation.

In addition to the U.S. GAAP financial results reported in our consolidated financial statements, MD&A includes reference to the following information which is presented on a non-U.S. GAAP basis:

Equity Ratios Tangible common equity to tangible assets is a non-U.S. GAAP financial measure that is used by HSBC Finance Corporation management, certain rating agencies and our credit providing banks to evaluate capital adequacy. This ratio excludes from equity the impact of unrealized gains (losses) on cash flow hedging instruments, postretirement benefit plan adjustments, unrealized gains (losses) on investments, intangible assets as well as subsequent changes in fair value recognized in earnings associated with debt for which we elected the fair value option and the related derivatives. This ratio may differ from similarly named measures presented by other companies. The most directly comparable U.S. GAAP financial measure is the common and preferred equity to total assets ratio. For a quantitative reconciliation of these non-U.S. GAAP financial measures to our common and preferred equity to total assets ratio, see “Reconciliations to U.S. GAAP Financial Measures.”

International Financial Reporting Standards Because HSBC reports results in accordance with International Financial Reporting Standards (“IFRSs”) and IFRSs results are used in measuring and rewarding performance of employees, our management also separately monitors net income under IFRSs (a non-U.S. GAAP financial measure). All purchase accounting fair value adjustments relating to our acquisition by HSBC have been “pushed down” to HSBC Finance Corporation for both U.S. GAAP and IFRSs. The following table reconciles our net loss on a U.S. GAAP basis to net loss on an IFRSs basis:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010


Net loss – U.S. GAAP basis	$	(48	)	$	(521	)	$	(69	)	$	(1,124	)
Adjustments, net of tax:
Derivatives and hedge accounting (including fair value adjustments)		(3	)		(5	)		(5	)		(8	)
Intangible assets		8			8			16			19
Loan origination cost deferrals		3			5			(3	)		10
Loan impairment		(101	)		(23	)		(382	)		3
Loans previously held for sale		(7	)		(15	)		(14	)		(33	)
Interest recognition		(1	)		2			(4	)		-
Other-than-temporary impairments on available-for-sale securities		-			-			-			1
Securities		1			1			7			15
Present value of long-term insurance contracts		3			4			9			8
Pension and other postretirement benefit costs		4			5			9			42
Release of tax valuation allowances		(6	)		-			12			-
Loss on sale of auto finance receivables and other related assets		-			-			-			(34	)
Other		(19	)		8			(15	)		7

Net loss – IFRSs basis		(166	)		(531	)		(439	)		(1,094	)
Tax benefit – IFRSs basis		148			333			510			646

Loss before tax – IFRSs basis	$	(314	)	$	(864	)	$	(949	)	$	(1,740	)

HSBC Finance Corporation

A summary of the significant differences between U.S. GAAP and IFRSs as they impact our results are presented below:

Derivatives and hedge accounting (including fair value adjustments) – The historical use of the “shortcut” and “long haul” hedge accounting methods for U.S. GAAP resulted in different cumulative adjustments to the hedged item for both fair value and cash flow hedges. These differences are recognized in earnings over the remaining term of the hedged items. All of the hedged relationships which previously qualified under the shortcut method provisions of derivative accounting principles have been redesignated and are now either hedges under the long-haul method of hedge accounting or included in the fair value option election.

Intangible assets – Intangible assets under IFRSs are significantly lower than those under U.S. GAAP as the newly created intangibles associated with our acquisition by HSBC were reflected in goodwill for IFRSs. As a result, amortization of intangible assets is lower under IFRSs.

Loan origination cost deferrals – Under IFRSs, loan origination cost deferrals are more stringent and generally result in lower costs being deferred than permitted under U.S. GAAP. In addition, all deferred loan origination fees, costs and loan premiums must be recognized based on the expected life of the receivables under IFRSs as part of the effective interest calculation while under U.S. GAAP they may be recognized on either a contractual or expected life basis. As a result, in years with lower levels of receivable originations, net income is lower under U.S. GAAP as the higher costs deferred in prior periods are amortized into income without the benefit of similar levels of cost deferrals for current period originations.

Loan impairment – IFRSs requires a discounted cash flow methodology for estimating impairment on pools of homogeneous customer loans which requires the discounting of cash flows including recovery estimates at the original effective interest rate of the pool of customer loans. The amount of impairment relating to the discounting of future cash flows unwinds with the passage of time, and is recognized in interest income. Also under IFRSs, if the recognition of a write-down to net realizable value on secured loans decreases because collateral values have improved and the improvement can be related objectively to an event occurring after recognition of the write-down, such write-down can be reversed, which is not permitted under U.S. GAAP. Additionally under IFRSs, future recoveries on charged-off loans or loans written down to net realizable value less cost to obtain title and sell the collateral are accrued for on a discounted basis and a recovery asset is recorded. Subsequent recoveries are recorded to earnings under U.S. GAAP, but are adjusted against the recovery asset under IFRSs. Under IFRSs, interest on impaired loans is recorded at the effective interest rate on the customer loans balance net of impairment allowances, and therefore reflects the collectibility of the loans.

Loans previously held for sale – IFRSs requires loans designated as held for sale at the time of origination to be treated as trading assets and recorded at their fair value. Under U.S. GAAP, loans designated as held for sale are reflected as loans and recorded at the lower of amortized cost or fair value. Under U.S. GAAP, the income and expenses related to receivables held for sale are reported similarly to loans held for investment. Under IFRSs, the income and expenses related to receivables held for sale are reported in other operating income.

For receivables transferred to held for sale subsequent to origination, IFRSs requires these receivables to be reported separately on the balance sheet but does not change the recognition and measurement criteria. Accordingly for IFRSs purposes, such loans continue to be accounted for in accordance with IAS 39, “Financial Instruments: Recognition and Measurement” (“IAS 39”), with any gain or loss recorded at the time of sale. U.S. GAAP requires loans that meet the held for sale classification requirements be transferred to a held for sale category at the lower of amortized cost or fair value.

Certain receivables that were previously classified as held for sale under U.S. GAAP have now been transferred to held for investment as we now intend to hold for the foreseeable future. Under U.S. GAAP, these receivables were subject to lower of amortized cost or fair value (“LOCOM”) adjustments while classified as held for sale and have been transferred to held for investment at LOCOM. Under IFRSs, these receivables were always reported within loans and the measurement criteria did not change. As a result, loan impairment charges are now being recorded under IFRSs which were essentially included as a component of the lower of amortized cost or fair value adjustments under U.S. GAAP.

HSBC Finance Corporation

Interest recognition – The calculation of effective interest rates under IAS 39 requires an estimate of changes in estimated contractual cash flows, including fees and points paid or recovered between parties to the contract that are an integral part of the effective interest rate be included. U.S. GAAP generally prohibits recognition of interest income to the extent the net investment in the loan would increase to an amount greater than the amount at which the borrower could settle the obligation. Also under U.S. GAAP, prepayment penalties are generally recognized as received.

Other-than-temporary impairment on available-for-sale securities – Under U.S. GAAP, the credit loss component of an other-than-temporary impairment of a debt security is recognized in earnings while the remaining portion of the impairment loss is recognized in other comprehensive income provided a company concludes it neither intends to sell the security nor concludes that it is more-likely-than-not that it will have to sell the security prior to recovery. Under IFRSs, there is no bifurcation of other-than-temporary impairment and the entire decline in fair value is recognized in earnings.

Securities – Under IFRSs, securities include HSBC shares held for stock plans at fair value. These shares are recorded at fair value through other comprehensive income and subsequently recognized in profit and loss as the shares vest. If it is determined these shares have become impaired, the fair value loss is recognized in profit and loss and any fair value loss recorded in other comprehensive income is reversed. There is no similar requirement under U.S. GAAP.

Pension and other postretirement benefit costs – Net income under U.S. GAAP is lower than under IFRSs as a result of the amortization of the amount by which actuarial losses exceeded the higher of the projected benefit obligation or fair value of plan assets beyond the 10 percent “corridor.” Furthermore in 2010 changes to future accruals for legacy participants under the HSBC North America Pension Plan were accounted for as a plan curtailment under IFRSs, which resulted in immediate income recognition. Under U.S. GAAP, these changes were considered to be a negative plan amendment which resulted in no immediate income recognition.

Release of tax valuation allowances – Reflects differences in the timing of amounts of deferred tax assets that can be realized between U.S. GAAP and IFRSs.

Loss on sale of auto finance receivables and other related assets – The differences in the loss on sale of the auto finance receivables between IFRSs and U.S. GAAP primarily reflect the differences in loan impairment provisioning between IFRSs and U.S. GAAP as discussed above. These differences resulted in a higher loss under IFRSs, as future recoveries are accrued for on a discounted basis.

Other – There are other differences between IFRSs and U.S. GAAP including purchase accounting, share-based bonus arrangements and other miscellaneous items.

Quantitative Reconciliations of Non-U.S. GAAP Financial Measures to U.S. GAAP Financial Measures For quantitative reconciliations of non-U.S. GAAP financial measures presented herein to the equivalent GAAP basis financial measures, see “Reconciliations to U.S. GAAP Financial Measures.”

HSBC Finance Corporation

Receivables Review

The following table summarizes receivables at June 30, 2011 and increases (decreases) since March 31, 2011 and December 31, 2010:


			Increases (Decreases) From
	June 30,		March 31, 2011						December 31, 2010
	2011		$			%			$			%

	(dollars are in millions)

Receivables:
Credit card	$	9,212	$	(37	)		(.4	)%	$	(685	)		(6.9	)%
Real estate secured⁽¹⁾⁽²⁾		45,591		(1,625	)		(3.4	)		(3,745	)		(7.6	)
Personal non-credit card		6,012		(494	)		(7.6	)		(1,105	)		(15.5	)
Commercial and other		26		-			-			(7	)		(21.2	)

Total receivables	$	60,841	$	(2,156	)		(3.4	)%	$	(5,542	)		(8.3	)%


⁽¹⁾	Real estate secured receivables are comprised of the following:


			Increases (Decreases) From
	June 30,		March 31, 2011						December 31, 2010
	2011		$			%			$			%

	(dollars are in millions)

Mortgage Services	$	14,535	$	(632	)		(4.2	)%	$	(1,447	)		(9.1	)%
Consumer Lending		31,050		(993	)		(3.1	)		(2,297	)		(6.9	)
All other		6		-			-			(1	)		(14.3	)

Total real estate secured	$	45,591	$	(1,625	)		(3.4	)%	$	(3,745	)		(7.6	)%


⁽²⁾		At June 30, 2011, March 31, 2011 and December 31, 2010, real estate secured receivables includes $5.4 billion, $5.2 billion and $5.1 billion, respectively, of receivables that have been written down to their net realizable value less cost to sell in accordance with our existing charge-off policy.

Credit card receivables Credit card receivables as compared to March 31, 2011 were essentially flat as receivable run-off in the segments of our credit card receivable portfolio for which we no longer originate new accounts was partially offset by increases in receivables associated with new account activity. As compared to December 31, 2010, the decrease was attributable to run-off in all segments of our credit card portfolio, including seasonal improvements in our collection activities during the first quarter of the year as some customers use their tax refunds to make payments. At June 30, 2011, March 31, 2011 and December 31, 2010, our credit card loan balances include $3.7 billion, $3.9 billion and $4.2 billion, respectively, associated with certain segments of our portfolio for which we no longer originate new accounts.

HSBC Finance Corporation

Real estate secured receivables The following table summarizes various real estate secured receivables information (excluding receivables held for sale) for our Mortgage Services and Consumer Lending businesses:


	June 30, 2011						March 31, 2011						December 31, 2010
	Mortgage			Consumer			Mortgage			Consumer			Mortgage			Consumer
	Services			Lending			Services			Lending			Services			Lending

	(in millions)

Fixed rate⁽³⁾	$	9,353	⁽¹⁾	$	29,663	⁽²⁾	$	9,637	⁽¹⁾	$	30,596	⁽²⁾	$	10,014	⁽¹⁾	$	31,827	⁽²⁾
Adjustable rate⁽³⁾		5,182			1,387			5,530			1,447			5,968			1,520

Total	$	14,535		$	31,050		$	15,167		$	32,043		$	15,982		$	33,347

First lien	$	12,644		$	28,031		$	13,154		$	28,916		$	13,821		$	30,042
Second lien		1,891			3,019			2,013			3,127			2,161			3,305

Total	$	14,535		$	31,050		$	15,167		$	32,043		$	15,982		$	33,347

Adjustable rate⁽³⁾	$	4,310		$	1,387		$	4,563		$	1,447		$	4,898		$	1,520
Interest only⁽³⁾		872			-			967			-			1,070			-

Total adjustable rate⁽³⁾	$	5,182		$	1,387		$	5,530		$	1,447		$	5,968		$	1,520

Total stated income	$	2,379		$	-		$	2,519		$	-		$	2,703		$	-


⁽¹⁾		Includes fixed rate interest-only receivables of $181 million, $228 million and $235 million at June 30, 2011, March 31, 2011 and December 31, 2010, respectively.

⁽²⁾		Includes fixed rate interest-only receivables of $23 million, $25 million and $27 million at June 30, 2011, March 31, 2011 and December 31, 2010, respectively.

⁽³⁾		Receivable classification between fixed rate, adjustable rate, and interest-only receivables is based on the classification at the time of receivable origination and does not reflect any changes in the classification that may have occurred as a result of any loan modifications.

The decrease in real estate secured receivable balances since March 31, 2011 and December 31, 2010 reflects the continuing liquidation of these portfolios which will continue going forward. The liquidation rates in our real estate secured receivable portfolios also continue to be impacted by declines in loan prepayments as fewer refinancing opportunities for our customers exist and by the trends impacting the mortgage lending industry as discussed above. As compared to December 31, 2010, the decrease also reflects seasonal improvements in our collection activities during the first quarter of the year as some customers use their tax refunds to make payments.

As previously discussed, real estate markets in a large portion of the United States have been affected by stagnation or declines in property values. As such, the loan-to-value (“LTV”) ratios for our real estate secured receivable portfolios have generally deteriorated since origination. Receivables which have an LTV greater than 100 percent have historically had a greater likelihood of becoming delinquent, resulting in higher loss severities which could adversely impact our provision for credit losses. Refreshed loan-to-value ratios for our real estate secured receivable portfolios are presented in the table below as of June 30, 2011 and December 31, 2010.

HSBC Finance Corporation


	Refreshed LTVs⁽¹⁾⁽²⁾												Refreshed LTVs⁽¹⁾⁽²⁾
	at June 30, 2011												at December 31, 2010
	Consumer						Mortgage						Consumer						Mortgage
	Lending⁽³⁾						Services						Lending⁽³⁾						Services
	First			Second			First			Second			First			Second			First			Second
	Lien			Lien			Lien			Lien			Lien			Lien			Lien			Lien


LTV<80%		38	%		17	%		33	%		8	%		39	%		18	%		34	%		8	%
80%£LTV<90%		16			11			17			9			18			13			18			11
90%£LTV<100%		16			18			19			16			17			20			21			19
LTV³100%		30			54			31			67			26			49			27			62
Average LTV for portfolio		88			103			90			113			87			100			89			109

⁽¹⁾

Refreshed LTVs for first liens are calculated using the receivable balance as of the reporting date (including any charge-offs recorded to reduce receivables to their net realizable value less cost to sell in accordance with our existing charge-off policies). Refreshed LTVs for second liens are calculated using the receivable balance as of the reporting date (including any charge-offs recorded to reduce receivables to their net realizable value less cost to sell in accordance with our existing charge-off policies) plus the senior lien amount at origination. For purposes of this disclosure, current estimated property values are derived from the property’s appraised value at the time of receivable origination updated by the change in the Federal Housing Finance Agency’s (formerly known as the Office of Federal Housing Enterprise Oversight) house pricing index (“HPI”) at either a Core Based Statistical Area (“CBSA”) or state level. The estimated value of the homes could vary from actual fair values due to changes in condition of the underlying property, variations in housing price changes within metropolitan statistical areas and other factors. As a result, actual property values associated with loans which end in foreclosure may be significantly lower than the estimated values used for purposes of this disclosure.


⁽²⁾		For purposes of this disclosure, current estimated property values are calculated using the most current HPI’s available and applied on an individual loan basis, which results in an approximately three month delay in the production of reportable statistics for the current period. Therefore, the June 30, 2011 and December 31, 2010 information in the table above reflects current estimated property values using HPIs as of March 31, 2011 and September 30, 2010, respectively. Given the recent declines in property values in certain markets, the refreshed LTVs of our portfolio may, in fact, be lower than reflected in the table.

⁽³⁾		Excludes the purchased receivable portfolios of our Consumer Lending business which totaled $1.1 billion and $1.2 billion at June 30, 2011 and December 31, 2010, respectively.

Personal non-credit card receivables The decrease in personal non-credit card receivable balances since March 31, 2011 and December 31, 2010 reflects the continuing liquidation of this portfolio which will continue going forward. As compared to December 31, 2010, the decrease also reflects seasonal improvements in our collection activities during the first quarter of the year as some customers use their tax refunds to make payments.

Real Estate Owned

We obtain real estate by taking possession of the collateral pledged as security for real estate secured receivables (“REO”). REO properties are made available for sale in an orderly fashion with the proceeds used to reduce or repay the outstanding receivable balance. The following table provides quarterly information regarding our REO properties:


	Three Months Ended
	June 30,			Mar. 31,			Dec. 31,			Sept. 30,			June 30,
	2011			2011			2010			2010			2010


Number of REO properties at end of period		6,854			10,016			10,749			9,629			8,249
Number of properties added to REO inventory in the period		2,495			5,408			5,657			5,316			4,996
Average loss on sale of REO properties⁽¹⁾		13.4	%		14.9	%		15.3	%		10.1	%		4.2	%
Average total loss on foreclosed properties⁽²⁾		54.9	%		54.6	%		53.6	%		52.1	%		48.9	%
Average time to sell REO properties (in days)		169			167			165			158			156


⁽¹⁾		Property acquired through foreclosure is initially recognized at its fair value less estimated costs to sell (“Initial REO Carrying Value”). The average loss on sale of REO properties is calculated as cash proceeds less the Initial REO Carrying Value divided by the Initial REO Carrying Value. These losses are incurred after we take title to the property.

HSBC Finance Corporation


⁽²⁾		The average total loss on foreclosed properties sold each quarter includes both the loss on sale of the REO property as discussed above and the cumulative write-downs recognized on the loans up to the time we took title to the property. This calculation of the average total loss on foreclosed properties uses the unpaid loan principal balance prior to write-down (excluding any accrued finance income) plus any other ancillary amounts owed (e.g., real estate tax advances) which were incurred prior to our taking title to the property.

As previously reported, beginning in late 2010 we suspended all new foreclosure proceedings and in early 2011 suspended foreclosures where judgment had not yet been entered while we enhanced foreclosure documentation and processes for foreclosures and re-filed affidavits where necessary. During the first and second quarters of 2011, we added 5,408 properties and 2,495 properties, respectively, to REO inventory which reflects loans for which we had either accepted the deed to the property in lieu of payment or for which we had received a foreclosure judgment prior to the suspension of foreclosures. We expect the number of REO properties added to inventory on a quarterly basis to remain low through the remainder of 2011 as the impact of our earlier decision to suspend foreclosure proceedings continues to become reflected in our reported numbers.

The number of REO properties at June 30, 2011 decreased as compared to March 31, 2011 driven by the temporary suspension of foreclosures as previously discussed above as well as continuing strong sales of REO properties during the current quarter. As discussed above, we expect REO properties to continue to decrease in the near term as a result of our earlier decision to suspend foreclosures. Although we have resumed foreclosures on a limited basis in certain geographies, it will be a number of months before we resume all foreclosure activities in all states as we need to ensure we are satisfied that applicable enhanced processes have been implemented. Local governments and states may also require additional processes in the future which could slow the foreclosure process once fully resumed, again leading to a slowdown in growth of REO properties.

The average total loss on foreclosed properties for the three months ended June 30, 2011 increased slightly as compared to the prior quarter reflecting continued declines in home prices due in part to the continued elevated levels of foreclosed properties. The average loss on sale of REO properties improved slightly during the current quarter reflecting a lower volume of properties sold which were located in regions that have experienced the greatest deterioration in home prices in the last few years.

Results of Operations

Net interest income The following table summarizes net interest income:


											Increase
	2011					2010					(Decrease)
Three Months Ended June 30,	$		%⁽¹⁾			$		%⁽¹⁾			Amount			%

	(dollars are in millions)

Finance and other interest income	$	1,620		9.30	%	$	1,799		8.74	%	$	(179	)		(9.9	)%
Interest expense		639		3.67			807		3.92			(168	)		(20.8	)

Net interest income	$	981		5.63	%	$	992		4.82	%	$	(11	)		(1.1	)%


											Increase
	2011					2010					(Decrease)
Six Months Ended June 30,	$		%⁽¹⁾			$		%⁽¹⁾			Amount			%

	(dollars are in millions)

Finance and other interest income	$	3,216		9.07	%	$	3,744		8.97	%	$	(528	)		(14.1	)%
Interest expense		1,313		3.70			1,625		3.89			(312	)		(19.2	)

Net interest income	$	1,903		5.37	%	$	2,119		5.08	%	$	(216	)		(10.2	)%


⁽¹⁾		% Columns: comparison to average owned interest-earning assets.

HSBC Finance Corporation

offset by higher yields for all receivable products as discussed more fully below and an increase in our estimate of interest receivable relating to income tax receivables of $80 million which is recorded as a component of finance and other interest income. Higher overall receivable yields in both periods were partially offset by the negative impact of a shift in receivable mix to higher levels of lower yielding first lien real estate secured receivables as higher yielding second lien real estate secured and personal non-credit card receivables have run-off at a faster pace than first lien real estate secured receivables. The decrease in net interest income was partially offset by lower interest expense due to lower average borrowings and lower average rates.

While receivable yields vary between receivable products, during both the three and six months ended June 30, 2011 we experienced higher overall yields for all receivable products. Higher yields in our credit card receivable portfolio reflect the impact of improved credit quality as compared to the year-ago periods, partially offset by impacts of the CARD Act including periodic re-evaluations of rate increases and restrictions on repricing of delinquent accounts. Higher yields in our real estate secured and personal non-credit card receivable portfolios reflect the impact of lower levels of nonaccrual receivables as compared to the year-ago periods.

Net interest margin was 5.63 percent and 5.37 percent for the three and six months ended June 30, 2011, respectively, compared to 4.82 percent and 5.08 percent for the year-ago periods. Net interest margin during the three and six months ended June 30, 2011 were positively impacted by the increase in estimated interest receivable relating to income tax receivables as discussed above. Excluding the impact of this item, net interest margin remained higher at 5.17 percent and 5.14 percent during both the three and six month periods ended June 30, 2011, respectively, as a result of higher overall receivable yields and a lower cost of funds as a percentage of average interest-earning assets.

Significant trends affecting the comparability of net interest income and net interest margin for the three and six months ended June 30, 2011 are summarized in the following table.


	Three Months Ended					Six Months Ended
	June 30, 2011					June 30, 2011

	(dollars are in millions)

Net interest income/net interest margin from prior year	$	992		4.82	%	$	2,119		5.08	%

Impact to net interest income resulting from:
Lower receivable levels		(151	)				(319	)
Receivable yields:
Receivable pricing		(33	)				(100	)
Impact of nonperforming assets		81					162
Volume and rate impact of modified loans		18					38
Receivable mix		(49	)				(140	)
Interest receivable related to income tax receivables		80					80
Non-insurance investment income		-					(1	)
Cost of funds		26					48
Other		17					16

Net interest income/net interest margin for current year	$	981		5.63	%	$	1,903		5.37	%

The varying maturities and repricing frequencies of both our assets and liabilities expose us to interest rate risk. When the various risks inherent in both the asset and the debt do not meet our desired risk profile, we use derivative financial instruments to manage these risks to acceptable interest rate risk levels. See “Risk Management” for additional information regarding interest rate risk and derivative financial instruments.

HSBC Finance Corporation

Provision for credit losses The following table summarizes provision for credit losses by business:


					Increase
					(Decrease)
Three Months Ended June 30,	2011		2010		Amount			%

	(dollars are in millions)

Provision for credit losses:
Credit card	$	199	$	278	$	(79	)		(28.4	)%
Mortgage Services		211		305		(94	)		(30.8	)
Consumer Lending:
Real estate secured		328		645		(317	)		(49.1	)
Personal non-credit card		43		369		(326	)		(88.3	)

Total Consumer Lending		371		1,014		(643	)		(63.4	)

	$	781	$	1,597	$	(816	)		(51.1	)%


					Increase
					(Decrease)
Six Months Ended June 30,	2011		2010		Amount			%

	(dollars are in millions)

Provision for credit losses:
Credit card	$	275	$	479	$	(204	)		(42.6	)%
Mortgage Services		466		760		(294	)		(38.7	)
Consumer Lending:
Real estate secured		763		1,232		(469	)		(38.1	)
Personal non-credit card		59		990		(931	)		(94.0	)

Total Consumer Lending		822		2,222		(1,400	)		(63.0	)

	$	1,563	$	3,461	$	(1,898	)		(54.8	)%

Our provision for credit losses decreased significantly during the three and six months ended June 30, 2011 as compared to the year-ago periods as discussed below.


	•	Provision for credit losses for our credit card receivable portfolio decreased during the three and six months ended June 30, 2011 due to lower receivable levels as a result of receivable run-off. The decrease also reflects improvement in the underlying credit quality of the portfolio including improvements in early stage delinquency roll rates and lower delinquency and charge-off levels as customer payment rates have continued to be strong during the first half of 2011 as well as improvements in economic conditions. The impact on credit card receivable losses from the current economic environment, including continued high unemployment levels, has not been as severe as originally expected due in part to improved customer payment behavior.

	•	The provision for credit losses for the real estate secured receivable portfolios in our Consumer Lending and Mortgage Services business decreased during the three and six months ended June 30, 2011 reflecting lower receivable levels as the portfolios continue to liquidate, lower dollars of delinquency and charge-off and improvements in economic conditions. The decrease also reflects lower loss severities as compared to the year-ago periods reflecting an increase in the percentage of properties added to REO inventory during the period for which we accepted a deed-in-lieu which results in lower losses compared to loans which are subject to a formal foreclosure process. These decreases were partially offset by the impact of continued high unemployment levels and lower receivable prepayments.

HSBC Finance Corporation

The decrease in the provision for credit losses also reflects lower loss estimates on TDR Loans reflecting lower volumes of TDR Loans as well as the impact of an increase in the percentage of TDR Loans that are performing due to charge-off of nonperforming TDR Loans. During the six months ended June 30, 2011, these decreases were partially offset by the impact of lower estimated cash flows from TDR Loans due to economic expectations about home prices and other changes in assumptions including the length of time these receivables will remain on our books as a result of the temporary suspension of foreclosure activity as discussed above.


	•	The provision for credit losses for our personal non-credit card receivables decreased significantly during the three and six months ended June 30, 2011 reflecting lower receivable levels as compared to the year-ago periods, lower dollars of delinquency and charge-off, improvements in economic conditions and lower reserve requirements on TDR Loans.

Net charge-off dollars totaled $1.2 billion and $2.7 billion during the three and six months ended June 30, 2011, respectively, compared to $2.5 billion and $5.2 billion during the year-ago periods. The decrease was driven by lower delinquency levels as a result of lower average receivable levels and improvements in economic conditions. See “Credit Quality” for further discussion of our net charge-offs.

Credit loss reserves at June 30, 2011 decreased as compared to March 31, 2011 and December 31, 2010 as we recorded provision for credit losses less than net charge-offs of $385 million and $1.2 billion during the three and six months ended June 30, 2011. Lower credit loss reserves reflect lower receivable levels including lower delinquency levels and lower reserve levels on TDR Loans. See “Credit Quality” for further discussion of credit loss reserves.

Other revenues The following table summarizes other revenues:


							Increase
							(Decrease)
Three Months Ended June 30,	2011			2010			Amount			%

	(dollars are in millions)

Insurance revenue	$	64		$	75		$	(11	)		(14.7	)%
Investment income		33			24			9			37.5
Derivative related income (expense)		(157	)		(496	)		339			68.3
Gain on debt designated at fair value and related derivatives		245			470			(225	)		(47.9	)
Fee income		58			32			26			81.3
Enhancement services revenue		102			101			1			1.0
Gain on receivable sales to HSBC affiliates		148			142			6			4.2
Servicing and other fees from HSBC affiliates		163			161			2			1.2
Other income		4			17			(13	)		(76.5	)

Total other revenues	$	660		$	526		$	134			25.5	%


							Increase
							(Decrease)
Six Months Ended June 30,	2011			2010			Amount			%

	(dollars are in millions)

Insurance revenue	$	124		$	143		$	(19	)		(13.3	)%
Investment income		58			51			7			13.7
Derivative related income (expense)		(123	)		(598	)		475			79.4
Gain on debt designated at fair value and related derivatives		216			603			(387	)		(64.2	)
Fee income		104			109			(5	)		(4.6	)
Enhancement services revenue		206			204			2			1.0
Gain on receivable sales to HSBC affiliates		261			258			3			1.2
Servicing and other fees from HSBC affiliates		322			335			(13	)		(3.9	)
Other income		17			22			(5	)		(22.7	)

Total other revenues	$	1,185		$	1,127		$	58			5.1	%

HSBC Finance Corporation

Insurance revenue decreased during both periods as a result of a decrease in the number of credit insurance policies in force since March 31, 2009 primarily due to the run-off of our Consumer Lending portfolio.

Investment income includes interest income on available-for-sale securities in our insurance investment portfolio as well as realized gains and losses from the sale of all investment securities. Investment income increased in both periods due to higher gains on sales of securities, partially offset by lower average balances and lower yields on money market funds.

Derivative related income (expense) includes realized and unrealized gains and losses on derivatives which do not qualify as effective hedges under hedge accounting principles as well as the ineffectiveness on derivatives which are qualifying hedges. Designation of swaps as effective hedges reduces the volatility that would otherwise result from mark-to-market accounting. All derivatives are economic hedges of the underlying debt instruments regardless of the accounting treatment. Derivative related income (expense) is summarized in the table below:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010

	(in millions)

Net realized losses	$	(18	)	$	(72	)	$	(38	)	$	(136	)
Mark-to-market on derivatives which do not qualify as effective hedges		(149	)		(414	)		(86	)		(452	)
Ineffectiveness		10			(10	)		1			(10	)

Total	$	(157	)	$	(496	)	$	(123	)	$	(598	)

Derivative related income (expense) decreased during the three and six months ended June 30, 2011 as compared to the year-ago periods. As previously discussed, our Consumer Lending and Mortgage Services real estate secured receivables are remaining on the balance sheet longer due to lower prepayment rates. At June 30, 2011, we had $11.5 billion of interest rate swaps outstanding for the purpose of offsetting the increase in the duration of these receivables and the corresponding increase in interest rate risk as measured by the present value of a basis point (“PVBP”). While these positions acted as economic hedges by lowering our overall interest rate risk by more closely matching both the structure and duration of our liabilities to the structure and duration of our assets, they did not qualify as effective hedges under hedge accounting principles. As a result, these positions are carried at fair value and are marked-to-market through income while the item being hedged is not carried at fair value and no offsetting fair value adjustment is recorded. Of these non-qualifying hedges, $7.0 billion were longer-dated pay fixed/receive variable interest rate swaps and $4.5 billion were shorter-dated receive fixed/pay variable interest rate swaps. Market value movements for these non-qualifying hedges may be volatile during periods in which long term interest rates fluctuate, but they effectively lock in fixed interest rates for a set period of time which results in funding that is better aligned with longer term assets. Falling long-term interest rates during both the first half of 2011 and 2010 had a negative impact on the mark-to-market on this portfolio of swaps although the decrease in long-term interest rates was less pronounced during the first half of 2011. Overtime, we may elect to further reduce our exposure to rising interest rates through the execution of additional pay fixed/receive variable interest rate swaps. Net realized losses were lower during the first half of 2011 as a result of lower losses on terminations of non-qualifying hedges due to changes in rates during the period as well as changes in the timing of the non-qualifying hedge terminations.

During the three months ended June 30, 2011, ineffectiveness income reflects the impact of rising long-term foreign rates and falling long-term U.S. interest rates on our cross currency hedges. During the six months ended June 30, 2011, ineffectiveness income during the current quarter was partially offset by the impact of rising long-term U.S. interest rates on our cross currency hedges that occurred during the first quarter of 2011. In the year-ago periods, ineffectiveness reflects the impact of falling U.S. long-term rates on our cross currency cash flow hedges, partially offset by falling long-term foreign interest rates.

HSBC Finance Corporation

Net income volatility, whether based on changes in interest rates for swaps which do not qualify for hedge accounting or ineffectiveness recorded on our qualifying hedges under the long haul method of accounting, impacts the comparability of our reported results between periods. Accordingly, derivative related income (expense) for the six months ended June 30, 2011 should not be considered indicative of the results for any future periods.

Gain on debt designated at fair value and related derivatives reflects fair value changes on our fixed rate debt accounted for under FVO as well as the fair value changes and realized gains (losses) on the related derivatives associated with debt designated at fair value. The gain on debt designated at fair value and related derivatives in the three and six months ended June 30, 2011 was driven by the impact of interest accruals on pay floating swaps reflecting the continuing low interest rate environment, and in the three month period, a widening of credit spreads. In the six month ended June 30, 2011, the gain was partially offset by the impact of overall tighter credit spreads as well as the net impact of a loss on the mark-to-market of the related derivatives and a gain in the interest rate component on the mark-to-market of the debt driven by market movements on certain debt and related derivatives which will mature in the near-term. As these items near maturity, their values are less sensitive to interest rate movements. During the three and six months ended June 30, 2010, the gain on debt designated at fair value and related derivatives reflects a widening of credit spreads during the year-ago periods as well as a decrease in long-term U.S. interest rates. See Note 11, “Fair Value Option,” in the accompanying consolidated financial statements for additional information, including a break out of the components of the gain on debt designated at fair value and related derivatives.

Fee income, which includes revenues from fee-based products such as credit cards, increased during the three months ended June 30, 2011 and decreased slightly during the year-to-date period. Both periods were negatively impacted by lower late fees due to lower volumes and lower delinquency levels, changes in customer behavior and continuing impacts from changes required by the CARD Act. However, during the three months ended June 30, 2011, these negative impacts were more than offset by lower fee charge-offs than the prior year quarter driven by improved credit quality, better roll rates and lower fees billed. In addition, overlimit fees, which significantly decreased since the implementation of certain provisions of the CARD Act which required customers to opt-in for such overlimit fees, began to increase during the three months ended June 30, 2011 as more customers have opted-in.

Enhancement services revenue, which consists of ancillary credit card revenue from products such as Account Secure Plus (debt protection) and Identity Protection Plan, were essentially flat during both periods.

We have decided to make changes in our pricing policies related to our currently marketed credit card product. In addition, we are planning other administrative changes for the credit card and private label products during the third quarter of 2011. While the impact of these changes will begin to be noted in enhancement services revenue during the second half of 2011, we anticipate a significant decrease in enhancement services revenue over time as the new products being marketed to customers reflect these pricing changes.

Gain on receivable sales to HSBC affiliates consists primarily of daily sales of private label receivable originations and certain credit card account originations to HSBC Bank USA and increased in both periods reflecting higher volumes of private label credit card receivables sold during both periods and during the three months ended June 30, 2011, higher overall premiums. The higher overall premiums during the current quarter reflect the impact of improving credit quality and repricing initiatives in certain portfolios, partially offset by lower revenues due to regulatory capital requirements. Overall premiums during the year-to-date period were essentially flat.

Servicing and other fees from HSBC affiliates represents revenue received under service level agreements under which we service real estate secured, credit card and private label receivables as well as rental revenue from HSBC Technology & Services (USA) Inc. (“HTSU”) for certain office and administrative costs. The three months ended June 30, 2010 were impacted by a change in methodology to allocate rental expense between us and HTSU and an adjustment was made in the second quarter of 2010 to conform to this methodology for all of 2010. Excluding the impact of this item from the prior year quarter, Servicing and other fees from HSBC affiliates decreased during both the three and six months ended June 30, 2011 primarily due to lower levels of receivables being serviced for HSBC Bank USA as well as lower rental revenue from HTSU.

HSBC Finance Corporation

Other income decreased in the three and six months ended June 30, 2011 primarily due to lower gains on sales of miscellaneous commercial assets.

Operating expenses The following table summarizes total costs and expenses:


					Increase
					(Decrease)
Three Months Ended June 30,	2011		2010		Amount			%

	(dollars are in millions)

Salaries and employee benefits	$	125	$	158	$	(33	)		(20.9	)%
Occupancy and equipment expenses		20		14		6			42.9
Other marketing expenses		79		80		(1	)		(1.3	)
Real estate owned expenses		29		40		(11	)		(27.5	)
Other servicing and administrative expenses		382		169		213			100.0+
Support services from HSBC affiliates		295		254		41			16.1
Amortization of intangibles		34		34		-			-
Policyholders’ benefits		33		38		(5	)		(13.2	)

Total costs and expenses	$	997	$	787	$	210			26.7	%


					Increase
					(Decrease)
Six Months Ended June 30,	2011		2010		Amount			%

	(dollars are in millions)

Salaries and employee benefits	$	254	$	323	$	(69	)		(21.4	)%
Occupancy and equipment expenses		44		42		2			4.8
Other marketing expenses		164		135		29			21.5
Real estate owned expenses		135		79		56			70.9
Other servicing and administrative expenses		549		387		162			41.9
Support services from HSBC affiliates		586		530		56			10.6
Amortization of intangibles		68		73		(5	)		(6.8	)
Policyholders’ benefits		74		80		(6	)		(7.5	)

Total costs and expenses	$	1,874	$	1,649	$	225			13.6	%

Salaries and employee benefits were lower during both periods as a result of the continuing reduced scope of our business operations and the impact of entity-wide initiatives to reduce costs. The decrease in both periods also reflects the impact of the transfer of certain employees during the third quarter of 2010 to a subsidiary of HSBC Bank USA although this decrease was offset by an increase in support services from HSBC affiliates.

Occupancy and equipment expenses were impacted during the three and six months ended June 30, 2010 by the reduction in a lease liability of $14 million associated with an office of our Mortgage Services business which became fully subleased during the second quarter of 2010. Excluding this item from the year-ago periods, occupancy and equipment expenses decreased during the three and six months ended June 30, 2011 due to lower rental expense and utilities reflecting the impact of the continuing reduced scope of our business operations.

Other marketing expenses include payments for advertising, direct mail programs and other marketing expenditures. Other marketing expenses increased during the year-to-date period but were flat during the three months ended June 30, 2011. The increase during the year-to-date period reflects increased direct marketing mailings and new customer account originations for portions of our credit card receivable portfolio based on recent performance trends in this portfolio. However, during the three months ended June 30, 2011, we incurred lower

HSBC Finance Corporation

levels of direct marketing mailings than that experienced earlier in 2011. Current marketing levels should not be considered indicative of marketing expenses for any future periods.

Real estate owned expenses decreased during the three months ended June 30, 2011 primarily due to lower holding costs for REO properties resulting from a significant decrease in the number of new REO properties added to inventory during the current quarter due to the temporary suspension of foreclosure activities. REO expenses increased during the six months ended June 30, 2011 as a result of an increase in the number of REO properties sold as compared to the year-ago periods, higher losses on REO properties held due to declines in home prices during the first half of 2011 and higher holding costs as compared to the year-ago period. During periods in which home prices deteriorate, the reduction in value between the date we take title to the property and when the property is ultimately sold results in higher valuation allowances during the holding period and, ultimately, higher losses at the time the property is sold.

Other servicing and administrative expenses increased during both periods as a result of an increase in legal reserves of $175 million related to increased exposure estimates on certain litigation matters. The increase in both periods also reflects a charge of $40 million relating to the impairment of certain previously capitalized software development costs which are no longer realizable as a result of the decision made by HSBC to significantly reduce new or additional investments within the Card and Retail Services platform outside of the credit card servicing platform. These increases were partially offset by the continuing reduction in the scope of our business operations and the impact of entity wide initiatives to reduce costs including lower third party collection costs as our receivable portfolios continue to run-off.

Support services from HSBC affiliates increased during the three and six months ended June 30, 2011 due to the transfer in July 2010 of certain employees to a subsidiary of HSBC Bank USA as discussed above. This increase was partially offset by lower expenses for services provided by an affiliate outside the U.S. due to a decrease in offshore personnel headcount as compared to prior year driven by cost containment measures and overall organizational restructuring.

Amortization of intangibles were flat during the three months ended June 30, 2011, but decreased during the six months ended June 30, 2011 as certain of our intangible assets became fully amortized during the first quarter of 2010.

Policyholders’ benefits decreased during the three and six months ended June 30, 2011 due to lower claims on credit insurance policies as there are fewer such policies in place primarily due to the run-off of our Consumer Lending portfolio.

Efficiency ratio Our efficiency ratio from continuing operations was 59.95 percent and 59.72 percent during the three and six months ended June 30, 2011 as compared to 50.61 percent and 49.56 percent in the year-ago periods. Our efficiency ratio in all periods was impacted by the change in the fair value of debt for which we have elected fair value option accounting. Excluding this item from all periods, our efficiency ratio improved during the three months ended June 30, 2011 but deteriorated as compared to the year-ago period. The improvement during the current quarter reflects the impact of lower derivative related income (expense), partially offset by the impact of higher operating expenses due to increased legal reserves reflecting increased exposure estimates on certain litigation matters and the impairment of certain previously capitalized software development costs and slightly lower net interest income in the quarter. The deterioration during the six months ended June 30, 2011 reflects the higher operating expenses discussed above, which also included higher marketing and REO expenses in the year-to-date period, and lower net interest income, partially offset by lower derivative related income (expense).

HSBC Finance Corporation

Segment Results – IFRS Basis

A summary of the significant differences between U.S. GAAP and IFRSs as they impact our results are summarized in Note 13, “Business Segments,” in the accompanying consolidated financial statements as well as under the caption “Basis of Reporting” in this MD&A.

HSBC Finance Corporation

Card and Retail Services Segment The following table summarizes the IFRS Basis results for our Card and Retail Services segment:


							Increase
							(Decrease)
Three Months Ended June 30,	2011			2010			Amount			%

	(dollars are in millions)

Net interest income	$	476		$	552		$	(76	)		(13.8	)%
Other operating income		466			433			33			7.6

Total operating income		942			985			(43	)		(4.4	)
Loan impairment charges		230			356			(126	)		(35.4	)

		712			629			83			13.2
Operating expenses		525			481			44			9.1

Profit (loss) before tax	$	187		$	148		$	39			26.4	%

Net interest margin, annualized		20.25	%		20.54	%		-			-
Efficiency ratio		55.73	%		48.83	%		-			-
Return (after-tax) on average assets		5.12	%		3.71	%		-			-
Balances at end of period:
Customer loans	$	9,382		$	10,430		$	(1,048	)		(10.0	)%
Assets		9,305			9,746			(441	)		(4.5	)


							Increase
							(Decrease)
Six Months Ended June 30,	2011			2010			Amount			%

	(dollars are in millions)

Net interest income	$	965		$	1,138		$	(173	)		(15.2	)%
Other operating income		880			886			(6	)		(.7	)

Total operating income		1,845			2,024			(179	)		(8.8	)
Loan impairment charges		349			592			(243	)		(41.0	)

		1,496			1,432			64			4.5
Operating expenses		1,003			926			77			8.3

Profit (loss) before tax	$	493		$	506		$	(13	)		(2.6	)%

Net interest margin, annualized		20.17	%		20.46	%		-			-
Efficiency ratio		54.36	%		45.75	%		-			-
Return (after-tax) on average assets		6.70	%		6.32	%		-			-

Our Card and Retail Services segment results were impacted in both periods by a charge of $40 million relating to the impairment of certain previously capitalized software development costs which are no longer realizable as a result of the decision made by HSBC to significantly reduce new or additional investments within the Card and Retail Services platform outside of the credit card servicing platform. Excluding this item from both periods, profit before tax in our Card and Retail Services segment was higher during the three and six months ended June 30, 2011 as compared to the year-ago periods primarily due to lower loan impairment charges and during the current quarter, higher other operating income, partially offset by lower net interest income and higher operating expenses.

Net interest income decreased during the three and six months ended June 30, 2011 primarily due to lower average loans as a result of increased receivable run-off in the segments of our credit card receivable portfolio for which we no longer originate new accounts and lower overall loan yields. Lower loan yields during the three and six months

HSBC Finance Corporation

ended June 30, 2011 reflect the impact of the CARD Act, including periodic re-evaluations of rate increases and restrictions on repricing of delinquent accounts. These decreases were partially offset by the impact of improved credit quality. We anticipate credit card loan yields in future periods may continue to be negatively impacted by the provisions of the CARD Act which require certain rate increases to be periodically re-evaluated. Net interest margin decreased during both periods due to the lower loan yields as discussed above.

Other operating income increased during the three months ended June 30, 2011 and decreased slightly during the year-to-date period. Both periods were negatively impacted by lower late fees due to lower volumes and lower delinquency levels, changes in customer behavior and continuing impacts from changes required by the CARD Act. However, during the three months ended June 30, 2011, these negative impacts were more than offset by lower fee charge-offs as compared to the prior year quarter driven by improved credit quality, improved roll rates and lower fees billed. In addition, overlimit fees, which significantly decreased since the implementation of certain provisions of the CARD Act which required customers to opt-in for such overlimit fees, began to increase during the three months ended June 30, 2011 as more customers have opted-in.

Operating expenses increased during both periods driven largely by the impairment of certain previously capitalized software development costs of $40 million as discussed above and higher legal expense and in the year-to-date period higher marketing and salary expense. These increases were partially offset by lower third party collection costs as our credit card loan balances have decreased and credit quality has improved. While marketing expenses were higher during the six months ended June 30, 2011, during the second quarter of 2011 we incurred lower levels of direct marketing mailings than that experienced earlier in 2011 which resulted in marketing expenses during the three months ended June 30, 2011 being essentially flat. Current marketing levels should not be considered indicative of marketing expenses for any future periods. The trend in salary expense was impacted by lower pension expense in the prior year-to-date period reflecting a one-time curtailment gain of $27 million for changes made to employees’ future benefits.

Loan impairment charges decreased during the three and six months ended June 30, 2011 as compared to the year-ago periods reflecting lower loan levels as a result of portfolio run-off. The decrease also reflects improvement in the underlying credit quality of the portfolio including continuing improvements in early stage delinquency roll rates and lower delinquency and charge-off levels as customer payment rates have continued to be strong during the first half of 2011. The impact on credit card loan losses from the current economic environment, including continued high unemployment levels, has not been as severe as originally expected due in part to improved customer payment behavior.

The efficiency ratio during the three and six months ended June 30, 2011 deteriorated driven by the decrease in net interest income as well as higher operating expenses primarily related to the impairment charge discussed above and in the year-to-date period higher marketing expenses as previously discussed.

The increase in the ROA ratio during the three and six months ended June 30, 2011 reflects the impact of lower average assets and during the three months ended June 30, 2011 higher profit before tax.

Customer loans Customer loans for our Card and Retail Services segment totaled $9.4 billion at June 30, 2011, a decrease of less than one percent since March 31, 2011 and a decrease of 8 percent since December 31, 2010. As compared to March 31, 2011, credit card receivables were essentially flat as receivable run-off in the segments of our credit card receivable portfolio for which we no longer originate new accounts was largely offset by increases in receivables associated with new account activity. As compared to December 31, 2010, the decrease was attributable to run-off in all segments of our credit card portfolio, including seasonal improvements in our collection activities during the first quarter of the year as some customers use their tax refunds to make payments.

See “Receivables Review” for additional discussion of the decreases in our receivable portfolios.

HSBC Finance Corporation

Consumer Segment The following table summarizes the IFRS Basis results for our Consumer segment:


							Increase
							(Decrease)
Three Months Ended June 30,	2011			2010			Amount			%

	(dollars are in millions)

Net interest income	$	668		$	578		$	90			15.6	%
Other operating income		(10	)		26			(36	)		(100+	)

Total operating income		658			604			54			8.9
Loan impairment charges		872			1,381			(509	)		(36.9	)

		(214	)		(777	)		563			72.5
Operating expenses		226			206			20			9.7

Profit (loss) before tax	$	(440	)	$	(983	)	$	543			55.2	%

Net interest margin, annualized		5.05	%		3.58	%		-			-
Efficiency ratio		34.35	%		34.11	%		-			-
Return (after-tax) on average assets		(2.18	)%		(3.93	)%		-			-
Balances at end of period:
Customer loans	$	51,915		$	62,841		$	(10,926	)		(17.4	)%
Assets		50,940			62,371			(11,431	)		(18.3	)


							Increase
							(Decrease)
Six Months Ended June 30,	2011			2010			Amount			%

	(dollars are in millions)

Net interest income	$	1,323		$	1,156		$	167			14.4	%
Other operating income		(42	)		31			(73	)		(100+	)

Total operating income		1,281			1,187			94			7.9
Loan impairment charges		2,148			3,080			(932	)		(30.3	)

		(867	)		(1,893	)		1,026			54.2
Operating expenses		459			432			27			6.3

Profit (loss) before tax	$	(1,326	)	$	(2,325	)	$	999			43.0	%

Net interest margin, annualized		4.89	%		3.47	%		-			-
Efficiency ratio		35.83	%		36.39	%		-			-
Return (after-tax) on average assets		(3.18	)%		(4.51	)%		-			-

Our Consumer segment reported a lower loss before tax during the three and six months ended June 30, 2011 due to lower loan impairment charges and higher net interest income, partially offset by lower other operating income and higher operating expenses.

Loan impairment charges decreased significantly during the three and six months ended June 30, 2011 as discussed below.


	•	Loan impairment charges for the real estate secured loan portfolios in our Consumer Lending and Mortgage Services business decreased during the three and six months ended June 30, 2011 reflecting lower loan levels as the portfolios continue to liquidate, lower dollars of delinquency and charge-off and improvements in economic conditions. The decrease also reflects lower loss severities as compared to the year-ago periods reflecting an increase in the percentage of properties added to REO inventory during the period for which we accepted a deed-in-lieu which results in lower losses compared to loans which are subject to a formal

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		foreclosure process. These decreases were partially offset by the impact of discounting estimated future amounts to be received on real estate loans which have been written down to net realizable value less cost to obtain and sell the collateral as well as foreclosure delays on real estate secured loans which resulted in higher reserve requirements due to the delay in the timing of estimated cash flows to be received. The decrease in loan impairment charges for real estate secured loans was also partially offset by higher reserve requirements on accrued finance charges, the impact of continued high unemployment levels and lower loan prepayments.

The decrease in loan impairment charges also reflects lower loss estimates for impaired loans reflecting lower volumes of impaired loans as well as the impact of an increase in the percentage of impaired loans that are performing due to charge-off of nonperforming impaired loans. During the six months ended June 30, 2011, these decreases were partially offset by lower estimated cash flows from these loans due to economic expectations about home prices and other changes in assumptions including the length of time these loans will remain on our books as a result of the temporary suspension of foreclosure activity as previously discussed.


	•	Loan impairment charges for our personal non-credit card loans decreased significantly during the three and six months ended June 30, 2011 reflecting lower loan levels as compared to the year-ago periods, lower dollars of delinquency and charge-off, improvements in economic conditions and lower reserve requirements on impaired loans.

During the three months ended June 30, 2011, loan impairment charges were $113 million lower than net charge-offs reflecting lower loan levels and lower delinquency and charge-off levels as well as lower reserve requirements on impaired loans. During the six months ended June 30, 2011, loan impairment charges were $17 million greater than net charge-offs as the year-to-date period includes the impact of lower anticipated cash flows on impaired loans as discussed above. During the first half of 2011, we decreased credit loss reserves to $5.3 billion from $5.5 billion at December 31, 2010 reflecting lower loan levels and lower dollars of delinquency and charge-off partially offset by higher levels of impairment relating to the discounting of future cash flows related to foreclosure delays.

Net interest income increased during the three and six months ended June 30, 2011 primarily due to higher yields for real estate secured and personal non-credit card loans and lower interest expense, partially offset by lower average loan levels as a result of loan liquidation. The higher yields in our real estate secured and personal non-credit card loan portfolios reflect the impact of lower levels of nonperforming loans as well as higher amortization associated with the discounting of the estimated future cash flows associated with real estate secured loans due to the passage of time. As yields vary between loan products, overall loan yields were negatively impacted by a shift in mix to higher levels of lower yielding first lien real estate secured loans as higher yielding second lien real estate secured and personal non-credit card loans have run-off at a faster pace than first lien real estate secured loans. Lower interest expense during the first half of 2011 reflects lower average borrowings. Additionally, lower interest expense in both periods also reflects changes in our internal funding strategies to better match the lives of our loan portfolio with our external funding which has resulted in lower average rates. Net interest margin increased in the three and six months ended June 30, 2011 as compared to the year-ago periods reflecting the higher loan yields as discussed above as well as a lower cost of funds as a percentage of average interest earning assets.

Other operating income decreased during the three and six months ended June 30, 2011 due to lower credit insurance commissions and higher losses on REO properties reflecting an increase in the number of REO properties sold as compared to the year-ago periods and declines in home prices during the first half of 2011.

Operating expenses during the three and six months ended June 30, 2010 were impacted by the reduction in a lease liability of $15 million associated with an office of our Mortgage Services business which became fully subleased during the second quarter of 2010. Excluding this item from the year-ago periods, operating expenses increased 2 percent and 3 percent, respectively during the three and six months ended June 30, 2010. The increase during the three months ended June 30, 2011 reflects higher legal fees, partially offset by lower holding costs on REO properties. The increase during the six months ended June 30, 2011 reflects higher legal fees, higher REO holding costs and higher pension costs, partially offset by lower third party collection costs as our receivable portfolios

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continue to run-off. While holding costs on REO properties were higher in the year-to-date period, holding costs during three months ended June 30, 2011 were lower due to a significant decrease in the number of new REO properties in the current quarter due to the temporary suspension of foreclosure activities previously discussed. The trend in pension expense in the six months ended June 30, 2011 was impacted by lower pension expense in the prior year-to-date period reflecting a one-time curtailment gain of $18 million for changes made to employees’ future benefits.

The efficiency ratio was essentially flat during the three months ended June 30, 2011 as the lower other operating income and higher operating expenses as discussed above were offset by higher net interest income. The efficiency ratio improved during the six month period as the impact of higher net interest income more than offset the higher operating expenses.

ROA improved during the three and six months ended June 30, 2011 primarily due to a lower net loss as discussed above and the impact of lower average assets.

Customer loans Customer loans for our Consumer segment can be analyzed as follows:


			Increases (Decreases) From
			March 31,						December 31,
	June 30,		2011						2010
	2011		$			%			$			%

	(dollars are in millions)

Real estate secured⁽¹⁾	$	45,757		(1,642	)		(3.5	)%		(3,552	)		(7.2	)%
Personal non-credit card		6,158		(530	)		(7.9	)		(1,183	)		(16.1	)

Total customer loans	$	51,915	$	(2,172	)		(4.0	)%	$	(4,735	)		(8.4	)%


⁽¹⁾		Real estate secured receivables are comprised of the following:


			Increases (Decreases) From
			March 31,
	June 30,		2011						December 31, 2010
	2011		$			%			$			%

	(dollars are in millions)

Mortgage Services	$	14,667	$	(630	)		(4.1	)%	$	(1,373	)		(8.6	)%
Consumer Lending		31,090		(1,012	)		(3.2	)		(2,179	)		(6.5	)

Total real estate secured	$	45,757	$	(1,642	)		(3.5	)%	$	(3,552	)		(7.2	)%

Customer loans decreased to $51.9 billion at June 30, 2011 as compared to $54.1 billion at March 31, 2011 and $56.7 billion at December 31, 2010 reflecting the continued liquidation of these portfolios which will continue to decline going forward. As compared to December 31, 2010, the decrease also reflects seasonal improvements in our collection activities during the first quarter of the year as some customers use their tax refunds to make payments. The liquidation rates in our real estate secured loan portfolio continues to be impacted by declines in loan prepayments as fewer refinancing opportunities for our customers exist and the trends impacting the mortgage lending industry as previously discussed.

See “Receivables Review” for a more detail discussion of the decreases in our receivable portfolios.

Credit Quality

Credit Loss Reserves We maintain credit loss reserves to cover probable incurred losses of principal, accrued interest and fees, including late, overlimit and annual fees. Credit loss reserves are based on a range of estimates and are intended to be adequate but not excessive. We estimate probable losses for consumer receivables using a roll rate migration analysis that estimates the likelihood that a loan will progress through the various stages of delinquency, or buckets, and ultimately charge-off based upon recent historical performance experience of other loans in our

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portfolio. This analysis considers delinquency status, loss experience and severity and takes into account whether loans are in bankruptcy, have been re-aged, or are subject to forbearance, an external debt management plan, hardship, modification, extension or deferment. Our credit loss reserves take into consideration the expected loss severity based on the underlying collateral, if any, for the loan in the event of default based on recent trends. Delinquency status may be affected by customer account management policies and practices, such as the re-age of accounts, forbearance agreements, extended payment plans, modification arrangements, external debt management programs and deferments. When customer account management policies or changes thereto, shift loans from a “higher” delinquency bucket to a “lower” delinquency bucket, this will be reflected in our roll rate statistics. To the extent that re-aged or modified accounts have a greater propensity to roll to higher delinquency buckets, this will be captured in the roll rates. Since the loss reserve is computed based on the composite of all of these calculations, this increase in roll rate will be applied to receivables in all respective delinquency buckets, which will increase the overall reserve level. In addition, loss reserves on consumer receivables are maintained to reflect our judgment of portfolio risk factors that may not be fully reflected in the statistical roll rate calculation or when historical trends are not reflective of current inherent losses in the portfolio. Portfolio risk factors considered in establishing loss reserves on consumer receivables include product mix, unemployment rates, bankruptcy trends, the credit performance of modified loans, geographic concentrations, loan product features such as adjustable rate loans, the credit performance of second lien loans following more delinquent first lien loans, economic conditions, such as national and local trends in housing markets and interest rates, portfolio seasoning, account management policies and practices, current levels of charge-offs and delinquencies, changes in laws and regulations and other factors which can affect consumer payment patterns on outstanding receivables, such as natural disasters.

While our credit loss reserves are available to absorb losses in the entire portfolio, we specifically consider the credit quality and other risk factors for each of our products. We recognize the different inherent loss characteristics in each of our products as well as customer account management policies and practices and risk management/collection practices. We also consider key ratios in developing our overall loss reserve estimate, including reserves to nonperforming loans, reserves as a percentage of net charge-offs, reserves as a percentage of two-months-and-over contractual delinquency and months coverage ratios. Loss reserve estimates are reviewed periodically and adjustments are reported in earnings when they become known. As these estimates are influenced by factors outside of our control such as consumer payment patterns and economic conditions, there is uncertainty inherent in these estimates, making it reasonably possible that they could change.

In establishing reserve levels, given the general decline in home prices that have occurred since 2007 in the U.S., we anticipate that losses in our real estate secured receivable portfolios will continue to be incurred with greater frequency and severity than experienced prior to 2007. There is currently little secondary market liquidity for subprime mortgages. As a result of these conditions, lenders have significantly tightened underwriting standards, substantially limiting the availability of alternative and subprime mortgages. As fewer financing options currently exist in the marketplace for home buyers, properties in certain markets are remaining on the market for longer periods of time which contributes to home price depreciation. For many of our customers, the ability to refinance and access equity in their homes is no longer an option as home prices remain stagnant in many markets and have depreciated in others. These housing market trends were exacerbated by the recent economic downturn, including high levels of unemployment, and these industry trends continue to impact our portfolio. It is generally believed that a sustained recovery of the housing market, as well as unemployment conditions, is not expected in the near-term. We have considered these factors in establishing our credit loss reserve levels, as appropriate.

HSBC Finance Corporation

The following table sets forth credit loss reserves for our continuing operations for the periods indicated:


	June 30,			March 31,			December 31,
	2011			2011			2010

	(dollars are in millions)

Credit loss reserves	$	5,325		$	5,710		$	6,491
Reserves as a percent of:
Receivables⁽¹⁾⁽⁴⁾		8.75	%		9.06	%		9.78	%
Net charge-offs⁽²⁾⁽³⁾		114.2			91.3			96.1
Two-months-and-over contractual delinquency⁽¹⁾⁽⁴⁾		67.1			70.2			67.9
Nonperforming receivables^(1)(3)(4)		85.7			87.7			88.5


⁽¹⁾		These ratios are significantly impacted by changes in the level of real estate secured receivables which have been written down to the lower of cost or net realizable value less cost to sell. Real estate secured receivables which have been written down to net realizable value less cost to sell typically do not require credit loss reserves. The following table shows these ratios excluding the receivables written down to net realizable value less cost to sell:


	June 30,			March 31,			December 31,
	2011			2011			2010


Reserves as a percentage of:
Receivables		9.60	%		9.89	%		10.60	%
Two-months-and-over contractual delinquency		143.4			143.3			121.0
Nonperforming loans		252.0			230.1			198.9


⁽²⁾		Reserves as a percent of net charge-offs for the quarter, annualized.

⁽³⁾		Ratio excludes charge-off and nonperforming receivables associated with receivable portfolios which are considered held for sale as these receivables are carried at the lower of cost or fair value with no corresponding credit loss reserves. Reserves as a percentage of net charge-off includes any charge-off recorded on receivables prior to the transfer to receivables held for sale

⁽⁴⁾		While reserves associated with accrued finance changes are reported within our total credit loss reserve balances noted above, accrued finance charges for real estate secured receivables and certain personal non-credit card receivables are not reported within receivables, nonperforming receivables and two-months-and-over contractual delinquency.

Credit loss reserves at June 30, 2011 decreased as compared to March 31, 2011 and December 31, 2010 as we recorded provision for credit losses less than net charge-offs of $385 million and $1.2 billion during the three and six months ended June 30, 2011. Credit loss reserves were lower for all products as discussed below.


	•	The decrease in credit loss reserves in our credit card receivable portfolio reflects lower loss estimates due to lower receivable levels and improved credit quality including lower delinquency levels as discussed more fully below. As compared to December 31, 2010 the decrease also reflects seasonal improvements in our collection activities during the first quarter of the year as some customers use their tax refunds to make payments.

	•	The decrease in credit loss reserve levels in our real estate secured receivable portfolio reflects lower loss estimates due to lower receivable levels as the portfolio continues to liquidate and lower dollars of delinquency as discussed more fully below. Additionally, the decrease in credit loss reserves reflects lower loss estimates on recently modified loans and as compared to December 31, 2010, seasonal improvements in our collection activities. The decrease also reflects an increase in real estate secured receivables which have been written down to net realizable value less cost to sell and, therefore, typically do not have credit loss reserves associated with them. At June 30, 2011, 12 percent of our real estate secured receivable portfolio had been written down to net realizable value less cost to sell as compared to 10 percent at December 31, 2010. Real estate secured receivables which have been written down to net realizable value less cost to sell are generally in the process of foreclosure and will remain in our receivable totals until we obtain title to the property. The decrease in credit loss reserves was partially offset by continued high unemployment levels and lower receivable prepayments.

The decrease in credit loss reserves for real estate secured receivables also reflects lower credit loss reserves for TDR Loans due to lower new TDR Loan volumes and an increase in the percentage of TDR Loans that

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are performing due to charge-off of nonperforming TDR Loans. As compared to December 31, 2010, these decreases were partially offset by the impact of lower estimated cash flows from TDR Loans due to economic expectations about home prices and other changes in assumptions including the length of time these receivables will remain as a result of the temporary suspension of foreclosure activities previously discussed.


	•	Credit loss reserve levels in our personal non-credit card portfolio decreased as a result of lower receivable levels including lower dollars of delinquency and charge-off. The decrease also reflects lower reserve requirements on personal non-credit card TDR Loans due to lower new TDR Loan volumes and an increase in the percentage of TDR Loans that are performing due to charge-off of nonperforming TDR Loans.

At June 30, 2011, approximately $5.4 billion, or 12 percent of our real estate secured receivable portfolio has been written down to net realizable value less cost to sell and, therefore, typically do not have credit loss reserves associated with them. In addition, approximately $7.3 billion of real estate secured receivables which have not been written down to net realizable value less cost to sell are considered TDR Loans and $970 million of credit card and personal non-credit card receivables are considered TDR Loans, which are reserved using a discounted cash flow analysis that generally results in a higher reserve requirement. As a result, 28 percent of our real estate secured receivable portfolio and 23 percent of our total receivable portfolio have either been written down to net realizable value less cost to sell or are reserved for using a discounted cash flow analysis.

Credit loss estimates for our credit card receivable portfolio relate to non-prime credit card receivables. Our non-prime credit card receivable product is structured for customers with low credit scores. The products have lower credit lines and are priced for higher risk. The deterioration of the housing markets in the U.S. over the past few years has affected the credit performance of our entire credit card portfolio, particularly in states which previously had experienced the greatest home price appreciation. Our non-prime credit card receivable portfolio concentration in these states is approximately proportional to the U.S. population, but a substantial majority of our non-prime customers are renters who have, on the whole, demonstrated less deterioration during the recent economic downturn. Furthermore, our lower credit scoring customers within our non-prime portfolio, which have an even lower home ownership rate, have shown the least deterioration through this stage of the economic cycle.

Reserve ratios Following is a discussion of changes in the reserve ratios we consider in establishing reserve levels.

Reserves as a percentage of receivables were lower at June 30, 2011 as compared to March 31, 2011 and December 31, 2010 driven by lower dollars of delinquency for all products as discussed more fully below and by higher levels of loans carried at net realizable value less cost to sell and typically do not have credit loss reserves associated with them. Additionally, the decrease reflects lower reserves on TDR Loans as well as a shift in mix in our receivable portfolio to higher levels of first lien real estate secured receivables which generally carry lower reserve requirements than second lien real estate secured and personal non-credit card receivables.

Reserves as a percentage of net charge-offs at June 30, 2011 increased as compared to March 31, 2011 and December 31, 2010 as the decline in dollars of net charge-offs as discussed more fully below was at a faster pace than the decline in reserve levels.

Reserves as a percentage of two-months-and-over contractual delinquency decreased as compared to March 31, 2011 and December 31, 2010. This ratio has been significantly impacted by real estate secured receivables which are carried at net realizable value less cost to sell and typically do not require corresponding credit loss reserves. Excluding receivables carried at net realizable value less cost to sell from this ratio for all periods, reserves as a percentage of two-months-and-over contractual delinquency totaled 143.4 percent at June 30, 2011 as compared to 143.3 percent at March 31, 2011 and 121.0 percent at December 31, 2010. Reserves as a percentage of two-months-and-over contractual delinquency was essentially flat as compared to March 31, 2011 as reserve levels and dollars of delinquency decreased at the same pace during the quarter. As compared to December 31, 2010, reserves as a percentage of two-months-and-over contractual delinquency increased significantly as dollars of delinquency decreased at a faster pace than reserves due to seasonal improvements in collection activities during the first quarter of the year.

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Reserves as a percentage of nonperforming loans in all periods was impacted by nonperforming real estate secured receivables carried at net realizable value less cost to sell which typically do not require corresponding credit loss reserves. Excluding receivables carried at net realizable value less cost to sell from this ratio for all periods, reserves as a percentage of nonperforming loans increased significantly as compared to March 31, 2011 and December 31, 2010 as the decreases in nonperforming loans outpaced the decreases in reserve levels. While nonperforming loan balances have decreased due to run-off, charge-off and as compared to December 31, 2010 seasonal improvements in collection activities, reserve levels have decreased at a slower pace as reserve levels take into consideration our normal seasonal trends for higher delinquency and nonperforming levels during the second half of the year.

The following table summarizes the changes in credit loss reserves by product during the three and six months ended June 2011 and 2010:


	Real Estate Secured									Personal
	First			Second			Credit			Non-Credit
	Lien			Lien			Card			Card			Total

	(in millions)

Three months ended June 30, 2011:
Balances at beginning of period	$	3,167		$	694		$	765		$	1,084		$	5,710
Provision for credit losses		406			133			199			43			781
Charge-offs		(579	)		(208	)		(280	)		(289	)		(1,356	)
Recoveries		9			16			50			115			190

Net charge-offs		(570	)		(192	)		(230	)		(174	)		1,166

Balance at end of period	$	3,003		$	635		$	734		$	953		$	5,325

Three months ended June 30, 2010:
Balances at beginning of period	$	3,879		$	1,108		$	1,488		$	1,790		$	8,265
Provision for credit losses		599			346			280			372			1,597
Charge-offs		(1,106	)		(373	)		(531	)		(624	)		(2,634	)
Recoveries		12			16			57			85			170

Net charge-offs		(1,094	)		(357	)		(474	)		(539	)		(2,464	)

Balance at end of period	$	3,384		$	1,097		$	1,294		$	1,623		$	7,398

Six months ended June 30, 2011:
Balances at beginning of period	$	3,355		$	832		$	978		$	1,326		$	6,491
Provision for credit losses		991			238			273			61			1,563
Charge-offs		(1,362	)		(468	)		(623	)		(663	)		(3,116	)
Recoveries		19			33			106			229			387

Net charge-offs		(1,343	)		(435	)		(517	)		(434	)		(2,729	)

Balance at end of period	$	3,003		$	635		$	734		$	953		$	5,325

Six months ended June 30, 2010:
Balances at beginning of period	$	3,997		$	1,430		$	1,816		$	1,848		$	9,091
Provision for credit losses		1,518			472			479			992			3,461
Charge-offs		(2,152	)		(843	)		(1,119	)		(1,390	)		(5,504	)
Recoveries		21			38			118			173			350

Net charge-offs		(2,131	)		(805	)		(1,001	)		(1,217	)		(5,154	)

Balance at end of period	$	3,384		$	1,097		$	1,294		$	1,623		$	7,398

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Delinquency Our policies and practices for the collection of consumer receivables, including our customer account management policies and practices, permit us to modify the terms of loans, either temporarily or permanently (a “modification”), and/or to reset the contractual delinquency status of an account that is contractually delinquent to current (a “re-age”), based on indicia or criteria which, in our judgment, evidence continued payment probability. Such policies and practices vary by product and are designed to manage customer relationships, improve collection opportunities and avoid foreclosure or repossession as determined to be appropriate. If a re-aged account subsequently experiences payment defaults, it will again become contractually delinquent and be included in our delinquency ratios.

The following table summarizes dollars of two-months-and-over contractual delinquency and two-months-and-over contractual delinquency as a percent of consumer receivables and receivables held for sale (“delinquency ratio”):


	June 30,			March 31,			December 31,
	2011			2011			2010

	(dollars are in millions)

Dollars of contractual delinquency:
Credit card	$	406		$	481		$	612
Real estate secured^(1)(2)(3)		7,046			7,058			8,171
Personal non-credit card		489			596			779

Total receivables	$	7,941		$	8,135		$	9,562

Delinquency ratio:
Credit card		4.40	%		5.20	%		6.18	%
Real estate secured^(1)(2)(3)		15.45			14.95			16.56
Personal non-credit card		8.14			9.16			10.94

Total receivables		13.06	%		12.92	%		14.41	%


⁽¹⁾		Real estate secured two-months-and-over contractual delinquency and as a percentage of consumer receivables and receivables held for sale for our Mortgage Services and Consumer Lending businesses are comprised of the following:


	June 30,			March 31,			December 31,
	2011			2011			2010

	(dollars are in millions)

Dollars of contractual delinquency:
Mortgage Services:
First lien	$	2,254		$	2,338		$	2,643
Second lien		163			184			243

Total Mortgage Services	$	2,417		$	2,522		$	2,886

Consumer Lending:
First lien	$	4,315		$	4,199		$	4,861
Second lien		314			337			424

Total Consumer Lending	$	4,629		$	4,536		$	5,285

Delinquency ratio:
Mortgage Services:
First lien		17.82	%		17.76	%		19.12	%
Second lien		8.61			9.14			11.23

Total Mortgage Services		16.62	%		16.62	%		18.05	%

Consumer Lending::
First lien		15.39	%		14.52	%		16.18	%
Second lien		10.41			10.79			12.81

Total Consumer Lending		14.91	%		14.16	%		15.85	%

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⁽²⁾		The following reflects dollars of contractual delinquency and the delinquency ratio for interest-only, ARM and stated income real estate secured receivables:


	June 30,			March 31,			December 31,
	2011			2011			2010

	(dollars are in millions)

Dollars of contractual delinquency:
Interest-only loans	$	385		$	404		$	423
ARM loans		1,658			1,727			1,987
Stated income loans		576			609			683
Delinquency ratio:
Interest-only loans		35.76	%		33.11	%		31.76	%
ARM loans		25.24			24.75			26.54
Stated income loans		24.22			24.20			25.28


⁽³⁾		At June 30, 2011, March 31, 2011 and December 31, 2010, dollars of real estate secured delinquency includes $4.2 billion, $4.1 billion and $4.2 billion, respectively, of receivables that are carried at the lower of cost or net realizable value.

Dollars of delinquency decreased as compared to March 31, 2011 and December 31, 2010 for all three of our receivable products as a result of lower receivable levels as discussed above, partially offset by the continuing high unemployment levels. Additionally, as compared to December 31, 2010, the decrease in dollars of delinquency for all receivable products also reflects seasonal improvements in our collection activities during the first quarter of the year as previously discussed. Dollars of delinquency for all real estate secured receivables were negatively impacted by our temporary suspension of foreclosure activities as previously discussed as the rate at which receivables are being transferred to REO has slowed. As compared to March 31, 2011, the decrease in dollars of delinquency for real estate secured receivable was less significant as lower dollars of delinquency in our Mortgage Services business were largely offset by higher dollars of delinquency for real estate secured receivables in our Consumer Lending business. Dollars of delinquency in our Consumer Lending real estate secured receivable portfolio increased during the quarter due in part to the portfolio continuing to season.

The delinquency ratio for credit card and personal non-credit card receivables decreased as compared to March 31, 2011 and December 31, 2010 driven by the factors discussed above as dollars of delinquency declined at a faster pace than receivable levels. The delinquency ratio for real estate secured receivables increased as compared to March 31, 2011 as receivable levels decreased at a faster pace than dollars of delinquency due to the impact of our temporary suspension of foreclosure activities previously discussed, particularly in the first lien real estate secured receivable portfolio in our Consumer Lending business. As compared to December 31, 2010, the delinquency ratio for real estate secured receivables decreased as the impact of the seasonal improvements in our collection activities during the first quarter of the year resulted in dollars of delinquency for real estate secured receivables declining at a faster pace than receivable levels.

See “Customer Account Management Policies and Practices” regarding the delinquency treatment of re-aged accounts and accounts subject to forbearance and other customer account management tools.

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Net Charge-offs of Receivables The following table summarizes net charge-off of receivables both in dollars and as a percent of average receivables (“net charge-off ratio”).


	June 30,			March 31,			June 30,
Three Months Ended⁽¹⁾	2011			2011			2010

	(dollars are in millions)

Net charge-off dollars:
Continuing operations:
Credit card	$	230		$	287		$	474
Real estate secured⁽²⁾⁽³⁾		762			1,016			1,451
Personal non-credit card		174			260			539

Total receivables – continuing operations		1,166			1,563			2,464
Discontinued operations		-			-			37

Total receivables	$	1,166		$	1,563		$	2,501

Net charge-off ratio:
Continuing operations:
Credit card		9.94	%		11.92	%		18.14	%
Real estate secured⁽²⁾⁽³⁾		6.59			8.43			10.47
Personal non-credit card		11.13			15.26			24.03

Total receivables – continuing operations		7.55			9.67			13.16
Discontinued operations		-			-			4.79

Total receivables		7.55	%		9.67	%		12.83

Real estate secured net charge-offs and REO expense as a percent of average real estate secured receivables		6.84			9.31			10.76	%


⁽¹⁾		The net charge-off ratio for all quarterly periods presented is net charge-offs for the quarter, annualized, as a percentage of average receivables for the quarter.

⁽²⁾		Real estate secured net charge-off dollars, annualized, as a percentage of average receivables for our Mortgage Services and Consumer Lending businesses are comprised of the following:


	June 30,			March 31,			June 30,
Three Months Ended	2011			2011			2010

	(dollars are in millions)

Net charge-off dollars:
Mortgage Services:
First lien	$	241		$	312		$	451
Second lien		86			110			158

Total Mortgage Services	$	327		$	422		$	609

Consumer Lending:
First lien	$	329		$	461		$	642
Second lien		106			133			200

Total Consumer Lending	$	435		$	594		$	842

Net charge-off ratio:
Mortgage Services:
First lien		7.51	%		9.27	%		11.45	%
Second lien		17.62			21.10			24.25

Total Mortgage Services		8.83	%		10.85	%		13.26	%

Consumer Lending:
First lien		4.63	%		6.26	%		7.78	%
Second lien		13.78			16.63			19.73

Total Consumer Lending		5.52	%		7.28	%		9.09	%

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⁽³⁾		Net charge-off dollars and the net charge-off ratio for ARM loans are as follows:


	June 30,			March 31,			June 30,
Three Months Ended	2011			2011			2010

	(dollars are in millions)

Net charge-off dollars – ARM Loans	$	172		$	230		$	325
Net charge-off ratio – ARM Loans		10.18	%		12.74	%		14.59	%

Overall dollars of net charge-offs decreased as compared to both the prior quarter and prior year quarter as all receivable portfolios were positively impacted by lower dollars of delinquency as a result of lower receivable levels, lower levels of personal bankruptcy filings and for real estate secured receivables the impact of our temporary suspension of foreclosure activities as previously discussed. These decreases were partially offset for all receivable portfolios by the impact of continued high unemployment levels. Dollars of net charge-offs for real estate secured receivables decreased significantly as compared to both March 31, 2011 and December 31, 2010 reflecting the impact of the continuing decreases in dollars of delinquency we have experienced since the second quarter of 2010 as fewer accounts are migrating to charge-off due to lower receivable levels, improvements in the volume of loans which flow into late stage delinquency and the impact of our temporary suspension of foreclosure activities because once the foreclosure process commences a higher payment is required for an account to be re-aged. Lower dollars of net charge-offs for real estate secured receivables also reflect an increase in the number of deed-in-lieu accepted which results in lower losses compared to loans which are subject to a formal foreclosure process. As compared to the prior year quarter, the decrease for all receivable products also reflects improvements in economic conditions.

The net charge-off ratio for total receivables from continuing operations decreased 212 basis points as compared to the prior quarter and 561 basis points as compared to the prior year quarter. The decrease in both periods reflects lower dollars of net charge-offs as discussed above which outpaced the decrease in average receivables.

Real estate charge-offs and REO expenses as a percentage of average real estate secured receivables decreased as compared to both the prior quarter and prior year quarter due to lower dollars of net charge-offs and REO expenses as a result of our temporary suspension of foreclosure activities partially offset by the impact of lower average receivable levels. See “Results of Operations” for further discussion of REO expenses.

Nonperforming Assets Nonperforming assets (including receivables held for sale) are summarized in the following table:


	June 30,			March 31,			December 31,
	2011			2011			2010

	(dollars are in millions)

Nonperforming receivables:
Credit card (accruing receivables 90 or more days delinquent)⁽¹⁾	$	280		$	353		$	447
Nonaccrual receivable portfolios⁽²⁾:
Real estate secured⁽³⁾⁽⁴⁾		5,619			5,749			6,360
Personal non-credit card		320			415			530

Total nonperforming receivables		6,219			6,517			7,337
Real estate owned		588			847			962

Total nonperforming assets	$	6,807		$	7,364		$	8,299

Credit loss reserves as a percent of nonperforming receivables⁽⁵⁾		85.7	%		87.7	%		88.5	%


⁽¹⁾		Credit card receivables continue to accrue interest after they become 90 or more days delinquent, consistent with industry practice.

⁽²⁾		Nonaccrual receivables reflect all loans which are 90 or more days contractually delinquent. Nonaccrual receivables do not include receivables which have made qualifying payments and have been re-aged and the contractual delinquency status reset to current as such activity, in our judgment, evidences continued payment probability. If a re-aged loan subsequently experiences payment default and becomes 90 or more days contractually delinquent, it will be reported as nonaccrual.

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⁽³⁾		Nonaccrual real estate secured receivables, including receivables held for sale, are comprised of the following:


	June 30,		March 31,		December 31,
	2011		2011		2010

			(in millions)

Real estate secured:
Closed-end:
First lien	$	5,302	$	5,382	$	5,910
Second lien		215		257		320
Revolving:
First lien		6		6		6
Second lien		96		104		124

Total real estate secured	$	5,619	$	5,749	$	6,360


⁽⁴⁾		At June 30, 2011, March 31, 2011 and December 31, 2010, non-accrual real estate secured receivables include $4.1 billion, $4.0 billion and $4.1 billion, respectively, of receivables that are carried at net realizable value less cost to sell.

⁽⁵⁾		Ratio excludes nonperforming receivables associated with receivable portfolios which are considered held for sale as these receivables are carried at the lower of cost or fair value with no corresponding credit loss reserves.

The decrease in total nonperforming receivables since March 31, 2011 and December 31, 2010 reflects the impact of lower dollars of delinquency as well as the impact of lower receivable levels. The decrease in nonperforming real estate secured receivables was partially offset by the impact of our temporary suspension of foreclosures as previously discussed. Real estate secured nonaccrual loans include stated income loans at our Mortgage Services business of $481 million, $509 million and $557 million at June 30, 2011, March 31, 2011 and December 31, 2010, respectively.

As discussed more fully below, we have numerous account management policies and practices to assist our customers in accordance with their individual needs, including either temporarily or permanently modifying loan terms. Loans which have been granted a permanent modification, a twelve-month or longer modification, or two or more consecutive six-month modifications are considered troubled debt restructurings for purposes of determining loss reserve estimates. See Note 17, “New Accounting Pronouncements,” for additional discussion on reporting changes for TDR Loans which will become effective in the third quarter of 2011.

The following table summarizes TDR Loans that are shown as nonperforming receivables in the table above:


	June 30,		March 31,		December 31,
	2011		2011		2010

	(in millions)

Real estate secured	$	1,679	$	1,711	$	1,825
Credit card		10		14		20
Personal non-credit card		57		72		90

Total	$	1,746	$	1,797	$	1,935

For additional information related to TDR Loans, see Note 5, “Receivables,” to our accompanying consolidated financial statements.

Customer Account Management Policies and Practices Currently, we utilize the following account management actions:


	•	Modification – Management action that results in a change to the terms and conditions of the loan either temporarily or permanently without changing the delinquency status of the loan. Modifications may include changes to one or more terms of the loan including, but not limited to, a change in interest rate, extension of the amortization period, reduction in payment amount and partial forgiveness or deferment of principal.

	•	Collection Re-age – Management action that results in the resetting of the contractual delinquency status of an account to current but does not involve any changes to the original terms and conditions of the loan. If an

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		account which has been re-aged subsequently experiences a payment default, it will again become contractually delinquent. We use collection re-aging as an account and customer management tool in an effort to increase the cash flow from our account relationships, and accordingly, the application of this tool is subject to complexities, variations and changes from time to time.


	•	Modification Re-age – Management action that results in a change to the terms and conditions of the loan, either temporarily or permanently, and also resets the contractual delinquency status of an account to current as discussed above. If an account which has been re-aged subsequently experiences a payment default, it will again become contractually delinquent.

Our policies and practices for the collection of consumer receivables, including our customer account management policies and practices, permit us to take extraordinary action with respect to delinquent or troubled accounts based on criteria which, in our judgment, evidence continued payment probability, as well as, in the case of real estate secured receivables, a continuing desire for borrowers to stay in their homes. The policies and practices are designed to manage customer relationships, improve collection opportunities and avoid foreclosure as determined to be appropriate. From time to time we re-evaluate these policies and procedures and make changes as deemed appropriate.

It is our practice to defer past due interest on re-aged real estate secured and personal non-credit card accounts to the end of the loan period. We do not accrue interest on these past due interest payments consistent with our 2002 settlement agreement with the state attorneys general. Our policies and practices for managing accounts are continually reviewed and assessed to assure that they meet the goals outlined above, and accordingly, we make exceptions to these general policies and practices from time to time. In addition, exceptions to these policies and practices may be made in specific situations in response to legal agreements, regulatory agreements or orders. See “Customer Account Management Policies and Practices” in our 2010 Form 10-K for additional information.

In April 2011, the FASB issued an Accounting Standards Update which provides additional guidance to assist creditors in determining whether a restructuring of a receivable meets the criteria to be considered a troubled debt restructuring. Implementing this Accounting Standards Update effective July 1, 2011 will result in significantly higher volumes of re-aged and modified accounts being reported as troubled debt restructurings. TDR Loans are typically reserved for using a discounted cash flow methodology which generally results in a higher reserve requirement for these loans. Although we are in the process of evaluating the impact of adopting this Accounting Standards Update, we currently expect the impact will be material. Additionally, we continue to review our current customer account management policies and practices to determine if any changes will be made in future periods as a result of this guidance.

As a result of the expansion of our modification and re-age programs in response to the marketplace conditions previously described, modification and re-age volumes since January 2007 for real estate secured receivables have increased. Since January 2007, we have cumulatively modified and/or re-aged approximately 365,400 real estate secured loans with an aggregate outstanding receivable balance of $42.7 billion at the time of modification and/or re-age under our foreclosure avoidance programs which are described below and a proactive ARM reset modification program which is more fully described in our 2010 Form 10-K. These totals include approximately 77,300 real estate secured loans with an outstanding receivable balance of $11.6 billion that have received two or more modifications since January 2007 and, therefore, may be classified as TDR Loans. The

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following provides information about the subsequent performance of all real estate secured loans granted a modification and/or re-age since January 2007:


				Outstanding Receivable
				Balance at Time of
	Number			Account Modification
Status as of June 30, 2011	of Loans			Action


Current or less than 30-days delinquent		41	%		40	%
30- to 59-days delinquent		7			7
60-days or more delinquent		15			19
Paid-in-full		8			7
Charged-off, transferred to real estate owned or sold		29			27

		100	%		100	%

The following table shows the number of real estate secured accounts remaining in our portfolio as well as the outstanding receivable balance of these accounts as of the period indicated for loans that we have taken an account management action by the type of action taken:


	Number of Accounts⁽¹⁾				Outstanding Receivable Balance⁽¹⁾⁽⁴⁾
	Consumer		Mortgage		Consumer		Mortgage
	Lending		Services		Lending		Services

	(accounts are in thousands)				(dollars are in millions)

June 30, 2011:
Collection re-age only		91.1		29.9	$	7,738	$	2,630
Modification only⁽²⁾		9.5		6.0		1,031		664
Modification re-age		67.2		44.8		8,019		5,281

Total loans modified and/or re-aged⁽³⁾		167.8		80.7	$	16,788	$	8,575

March 31, 2011:
Collection re-age only		91.1		30.7	$	7,763	$	2,718
Modification only⁽²⁾		10.1		6.6		1,112		745
Modification re-age		67.6		45.5		8,166		5,455

Total loans modified and/or re-aged⁽³⁾		168.8		82.8	$	17,041	$	8,918

December 31, 2010:
Collection re-age only		90.0		32.0	$	7,707	$	2,843
Modification only⁽²⁾		11.8		7.6		1,340		868
Modification re-age		67.2		46.8		8,222		5,683

Total loans modified and/or re-aged⁽³⁾		169.0		86.4	$	17,269	$	9,394


⁽¹⁾		Loans which have been granted a permanent modification, a twelve-month or longer modification, or two or more consecutive six-month modifications are considered troubled debt restructurings for purposes of determining loss reserves. For additional information related to our troubled debt restructurings, see Note 5, “Receivables,” in the accompanying consolidated financial statements.

⁽²⁾		Includes loans that have been modified under a proactive ARM reset modification program which is fully described in our 2010 Form 10-K.

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⁽³⁾		The following table provides information regarding the delinquency status of loans remaining in the portfolio that were granted modifications of loan terms and/or re-aged:


	Number of Accounts						Outstanding Receivable Balance
	Consumer			Mortgage			Consumer			Mortgage
	Lending			Services			Lending			Services


June 30, 2011:
Current or less than 30-days delinquent		67	%		66	%		65	%		67	%
30- to 59-days delinquent		11			9			11			9
60-days or more delinquent		22			25			24			24

		100	%		100	%		100	%		100	%

March 31, 2011:
Current or less than 30-days delinquent		70	%		67	%		67	%		67	%
30- to 59-days delinquent		9			8			10			9
60-days or more delinquent		21			25			23			24

		100	%		100	%		100	%		100	%

December 31, 2010:
Current or less than 30-days delinquent		65	%		63	%		62	%		63	%
30- to 59-days delinquent		11			10			12			11
60-days or more delinquent		24			27			26			26

		100	%		100	%		100	%		100	%


⁽⁴⁾		The outstanding receivable balance included in this table reflects the principal amount outstanding on the loan (net of any charge-offs recorded to reduce receivables to their net realizable value less cost to sell in accordance with our existing charge-off policies) excluding 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.

In addition to the account management techniques discussed above, we have also increased the use of deed-in-lieu and short sales beginning in 2010 to assist our real estate secured receivable customers. In a deed-in-lieu, the borrower agrees to surrender the deed to the property without going through foreclosure proceedings and we release the borrower from further obligation. In a short sale, the property is offered for sale to potential buyers at a price which has been pre-negotiated between us and the borrower. This pre-negotiated price is based on updated property valuations and probability of default. Short sales also release the borrower from further obligation. From our perspective, loss severities on deed-in-lieu and short sales are lower than losses from foreclosed loans, or loans where we have previously decided not to pursue foreclosure, and provide resolution to the delinquent receivable over a shorter period of time. We currently anticipate the use of deed-in-lieu and short sales will continue to be elevated in future periods as we continue to work with our customers.

Modification programs As a result of the marketplace conditions previously described, in the fourth quarter of 2006 we began performing extensive reviews of our account management policies and practices particularly in light of the current needs of our customers. As a result of these reviews, beginning in the fourth quarter of 2006, we significantly increased our use of modifications in response to what we expected would be a longer term need of assistance by our customers due to the weak housing market and U.S. economy. In these instances, our Mortgage Services and Consumer Lending businesses actively use account modifications to reduce the rate and/or payment on a number of qualifying loans and generally re-age certain of these accounts upon receipt of two or more modified payments and other criteria being met. This account management practice is designed to assist borrowers who may have purchased a home with an expectation of continued real estate appreciation or whose income has subsequently declined. Additionally, our loan modification programs are designed to improve cash collections and avoid foreclosure as determined to be appropriate.

Based on the economic environment and expected slow recovery of housing values, during 2008 we developed additional analytical review tools leveraging best practices to assist us in identifying customers who are willing to pay, but are expected to have longer term disruptions in their ability to pay. Using these analytical review tools, we expanded our foreclosure avoidance programs to assist customers who did not qualify for assistance under prior program requirements or who required greater assistance than available under the programs. The expanded program

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required certain documentation as well as receipt of two qualifying payments before the account could be re-aged. Prior to July 2008, for our Consumer Lending customers, receipt of one qualifying payment was required for a modified account before the account would be re-aged. We also increased the use of longer term modifications to provide assistance in accordance with the needs of our customers which may result in higher credit loss reserve requirements. For selected customer segments, this expanded program lowers the interest rate on fixed rate loans and for ARM loans the expanded program modifies the loan to a lower interest rate than scheduled at the first interest rate reset date. The eligibility requirements for this expanded program allow more customers to qualify for payment relief and in certain cases can result in a lower interest rate than allowed under other existing programs. During the third quarter of 2009, in order to increase the long-term success rate of our modification programs we increased certain documentation requirements for participation in these programs. By late 2009 and continuing into 2011, the volume of loans that qualified for a new modification had fallen significantly. We expect the volume of new modifications to continue to decline as we believe a smaller percentage of our customers with unmodified loans will benefit from loan modification in a way that will not ultimately result in a repeat default on their loans. Additionally, volumes of new loan modifications are expected to decrease due to the impact of improvements in economic conditions over the long-term, the continued seasoning of a liquidating portfolio and, beginning in the second quarter of 2010, the requirement to receive two qualifying payments in 60 days before an account will be modified. Modification volumes will also be lower going forward as we are no longer originating real estate secured receivables. We will continue to evaluate our consumer relief programs as well as all aspects of our account management practices to ensure our programs benefit our customers in accordance with their financial needs in ways that are economically viable for both our customers and our stakeholders. We have elected not to participate in the U.S. Treasury sponsored programs as we believe our long-standing home preservation programs provide more meaningful assistance to our customers.

Loans modified under these programs are only included in the re-aging statistics table (“Re-age Table”) that is included in our discussion of our re-age programs if the delinquency status of a loan was reset as a part of the modification or was re-aged in the past for other reasons. Not all loans modified under these programs have the delinquency status reset and, therefore, are not considered to have been re-aged.

The following table summarizes loans modified during the six months ended June 30, 2011 and 2010, some of which may have also been re-aged:

Outstanding Receivable Balance

Number of Accounts

at Time of Modification

Consumer

Mortgage

Consumer

Mortgage

Lending

Services

Lending

Services

(accounts are in thousands)

(dollars are in billions)

Foreclosure avoidance programs⁽¹⁾⁽²⁾:

Six months ended June 30, 2011

10.3

8.4

1.5

1.1

Six months ended June 30, 2010

15.8

10.7

2.4

1.5


⁽¹⁾		Includes all loans modified during the six months ended June 30, 2011 and 2010 regardless of whether the loan was also re-aged.

⁽²⁾		If qualification criteria are met, loan modification may occur on more than one occasion for the same account. For purposes of the table above, an account is only included in the modification totals once in an annual period and not for each separate modification in an annual period.

A primary tool used during account modification, involves modifying the monthly payment through lowering the rate on the loan on either a temporary or permanent basis. The following table summarizes the weighted-average

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contractual rate reductions and the average amount of payment relief provided to customers that entered an account modification for the first time during the quarter indicated.


	June 30,			Mar. 31,			Dec. 31,			Sept. 30,			June 30,
	2011			2011			2010			2010			2010


Weighted-average contractual rate reduction in basis points on account modifications during the period⁽¹⁾⁽²⁾		336			340			333			341			339
Average payment relief provided on account modifications as a percentage of total payment prior to modification⁽²⁾		27.1	%		27.2	%		25.4	%		27.6	%		27.3	%


⁽¹⁾		The weighted-average rate reduction was determined based on the rate in effect immediately prior to the modification, which for ARMs may be lower than the rate on the loan at the time of origination.

⁽²⁾		Excludes any modifications on purchased receivable portfolios of our Consumer Lending business which totaled $1.1 billion, $1.1 billion, $1.2 billion, $1.2 billion and $1.3 billion as of June 30, 2011, March 31, 2011, December 31, 2010, September 30, 2010 and June 30, 2010, respectively.

Re-age programs Our policies and practices include various criteria for an account to qualify for re-aging, but do not, however, require us to re-age the account. The extent to which we re-age accounts that are eligible under our existing policies will vary depending upon our view of prevailing economic conditions and other factors which may change from period to period. In addition, exceptions to our policies and practices may be made in specific situations in response to legal or regulatory agreements or orders. It is our practice to defer past due interest on re-aged real estate secured and personal non-credit card accounts to the end of the loan period. We do not accrue interest on these past due interest payments consistent with our 2002 settlement agreement with the state attorneys general.

We continue to monitor and track information related to accounts that have been re-aged. At June 30, 2011, approximately 90 percent of all re-aged receivables are real estate secured products, which in general have less loss severity exposure because of the underlying collateral. Credit loss reserves, including reserves on TDR Loans, take into account whether loans have been re-aged or are subject to forbearance, an external debt management plan, modification, extension or deferment. Our credit loss reserves, including reserves on TDR Loans, also take into consideration the expected loss severity based on the underlying collateral, if any, for the loan. TDR Loans are typically reserved for using a discounted cash flow methodology.

We used certain assumptions and estimates to compile our re-aging statistics. The systemic counters used to compile the information presented below exclude from the reported statistics loans that have been reported as contractually delinquent but have been reset to a current status because we have determined that the loans should not have been considered delinquent (e.g., payment application processing errors). When comparing re-aging statistics from different periods, the fact that our re-age policies and practices will change over time, that exceptions are made to those policies and practices, and that our data capture methodologies have been enhanced, should be taken into account.

Re-age Table^(1)(2)(3)(4)


	June 30,			March 31,			December 31,
	2011			2011			2010


Never re-aged		58.1	%		58.4	%		59.3	%
Re-aged:
Re-aged in the last 6 months		10.8			12.3			10.5
Re-aged in the last 7-12 months		10.0			8.5			10.0
Previously re-aged beyond 12 months		21.1			20.8			20.2

Total ever re-aged		41.9			41.6			40.7

Total		100.0	%		100.0	%		100.0	%

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Re-aged by Product^(1)(2)(3)(4)


	June 30,				March 31,				December 31,
	2011				2011				2010

	(dollars are in millions)

Real estate secured⁽⁵⁾	$	23,053	50.6	%	$	23,570	49.9	%	$	24,125	48.9	%
Credit card		344	3.7			376	4.1			412	4.2
Personal non-credit card		2,189	36.4			2,360	36.3			2,565	36.0

Total	$	25,586	41.9	%	$	26,306	41.6	%	$	27,102	40.7	%


⁽¹⁾		The tables above include both Collection Re-ages and Modification Re-ages, as discussed above.

⁽²⁾		The outstanding receivable balance included in this table reflects the principal amount outstanding on the loan net of unearned income, unamortized deferred fees and costs on originated loans, purchase accounting fair value adjustments and premiums or discounts on purchased loans, as well as any charge-offs recorded to reduce receivables to their net realizeable value less cost to sell in accordance with our existing charge-off policies.

⁽³⁾		Excludes commercial and other.

⁽⁴⁾		The tables above exclude any accounts re-aged without receipt of a payment which only occurs under special circumstances, such as re-ages associated with disaster or in connection with a bankruptcy filing. At June 30, 2011, March 31, 2011 and December 31, 2010, the unpaid principal balance of re-ages without receipt of a payment totaled $772 million, $754 million and $737 million, respectively.

⁽⁵⁾		The Mortgage Services and Consumer Lending businesses real estate secured re-ages are as shown in the following table:


	June 30,		March 31,		December 31,
	2011		2011		2010

	(in millions)

Mortgage Services	$	8,258	$	8,552	$	8,914
Consumer Lending		14,795		15,018		15,211

Total real estate secured	$	23,053	$	23,570	$	24,125

The overall decrease in dollars of re-aged loans during the second quarter of 2011 reflects the lower delinquency and receivable levels as discussed above. At June 30, 2011, March 31, 2011 and December 31, 2010, $6.1 billion (24 percent of total re-aged loans in the Re-age Table), $6.1 billion (23 percent of total re-aged loans in the Re-age Table) and $7.1 billion (26 percent of total re-aged loans in the Re-age Table), respectively, of re-aged accounts have subsequently experienced payment defaults and are included in our two-months-and-over contractual delinquency at the period indicated.

We continue to work with advocacy groups in select markets to assist in encouraging our customers with financial needs to contact us. We have also implemented new training programs to ensure that our customer service representatives are focused on helping the customer through difficulties, are knowledgeable about the available re-aging and modification programs and are able to advise each customer of the best solutions for their individual circumstance.

We also support a variety of national and local efforts in homeownership preservation and foreclosure avoidance.

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Geographic Concentrations The following table reflects the percentage of receivables and receivables held for sale by state which individually account for 5 percent or greater of our portfolio as of June 30, 2011 and December 31, 2010 as well as the unemployment rate for these states for June 2011.


										Percent of
	Percentage of Portfolio Receivables at June 30, 2011									Total Receivables						Unemployment
	Credit			Real Estate						June 30,			December 31,			Rates for
	Cards			Secured			Other			2011			2010			June 2011⁽¹⁾


California		10.5	%		9.7	%		5.4	%		9.4	%		9.6	%		11.8	%
New York		7.4			7.1			6.8			7.1			7.0			8.0
Florida		6.7			6.1			5.7			6.1			6.3			10.6
Pennsylvania		4.3			6.1			6.6			5.8			5.7			7.6
Ohio		4.2			5.5			6.2			5.4			5.4			8.8


⁽¹⁾	The U.S. national unemployment rate for June 2011 was 9.2 percent.

Because our underwriting, collections and processing functions are centralized, we can quickly change our credit standards and intensify collection efforts in specific locations. We believe this lowers risks resulting from such geographic concentrations.

Liquidity and Capital Resources

HSBC Related Funding In connection with our acquisition by HSBC, funding costs for the HSBC Finance Corporation businesses were expected to be lower as a result of the funding diversity provided by HSBC. We work with our affiliates under the oversight of HSBC North America to maximize funding opportunities and efficiencies in HSBC’s operations in the U.S.

Debt due to affiliates and other HSBC related funding is summarized in the following table:


	June 30,			December 31,
	2011			2010

	(in billions)

Due to HSBC affiliates⁽¹⁾	$	8.2		$	8.3

Debt outstanding to HSBC clients:
Euro commercial paper		.5			.4
Term debt		.1			.3

Total debt outstanding to HSBC clients		.6			.7
Cash received on bulk and subsequent sales of credit card receivables to HSBC Bank USA, net (cumulative)		7.5			8.4
Cash received on bulk and subsequent sales of private label credit card receivables to HSBC Bank USA, net (cumulative)		12.8			14.4
Real estate secured receivable activity with HSBC Bank USA (cumulative):
Cash received on sales		3.7			3.7
Direct purchases from correspondents		4.2			4.2
Reductions in real estate secured receivables sold to HSBC Bank USA		(6.5	)		(6.4	)

Total real estate secured receivable activity with HSBC Bank USA (cumulative)		1.4			1.5

Cash received from sale of U.K. and Canadian operations to HSBC affiliates		3.4			3.4
Capital contributions by HINO (cumulative)		8.8			8.8
Issuance of Series C Preferred Stock to HINO		1.0			1.0

Total HSBC related funding	$	43.7		$	46.5

⁽¹⁾ At June 30, 2011 and December 31, 2010, due to HSBC affiliates includes $443 million and $436 million, respectively, carried at fair value.

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At June 30, 2011 and December 31, 2010, funding from HSBC, including debt issuances to HSBC subsidiaries and clients, represented 17 percent and 16 percent of our total debt and preferred stock funding, respectively.

We have a $1.5 billion uncommitted secured credit facility and a $1.0 billion committed unsecured credit facility from HSBC Bank USA. At June 30, 2011 and December 31, 2010, there were no balances outstanding under either of these facilities. Additionally, at June 30, 2011 and December 31, 2010, we have a committed back-up line of credit totaling $2.0 billion with an HSBC affiliate. At June 30, 2011 and December 31, 2010, there were no balances outstanding under the back-up line of credit.

We have derivative contracts with a notional value of $45.4 billion, or approximately 99 percent of total derivative contracts, outstanding with HSBC affiliates at June 30, 2011 and $49.9 billion, or approximately 99 percent, at December 31, 2010.

Interest Bearing Deposits with Banks and Other Short-Term Investments Interest bearing deposits with banks totaled $1.0 billion at both June 30, 2011 and December 31, 2010, respectively. Securities purchased under agreements to resell totaled $2.8 billion and $4.3 billion at June 30, 2011 and December 31, 2010, respectively. The decrease in the amount of short-term investments primarily reflects higher debt maturities and calls during the current quarter, partially offset by the generation of additional liquidity as a result of the run-off of our liquidating receivable portfolios, the sale of REO properties and an increase in collateral required from counterparties under our derivative agreements.

Commercial paper totaled $3.7 billion and $3.2 billion at June 30, 2011 and December 31, 2010, respectively. Included in this total was outstanding Euro commercial paper sold to customers of HSBC of $510 million and $450 million at June 30, 2011 and December 31, 2010, respectively. Our funding strategies are structured such that committed bank credit facilities exceed 100 percent of outstanding commercial paper.

In April 2011, we refinanced all of our third party back-up lines, totaling $4.3 billion, into a new $4.0 billion credit facility, split evenly between tenors of 364 days and three years. As a result, we have committed back-up lines of credit totaling $6.0 billion at June 30, 2011 compared to $6.3 billion at March 31, 2011 and December 31, 2010, respectively. At June 30, 2011 and December 31, 2010, one of these facilities totaling $2.0 billion was with an HSBC affiliate to support our issuance of commercial paper.

Long-term debt decreased to $47.8 billion at June 30, 2011 from $54.6 billion at December 31, 2010. The following table summarizes issuances and repayments of long-term debt for continuing operations during the three and six months ended June 30, 2011 and 2010:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010

	(in millions)

Long-term debt issued	$	65		$	234		$	227		$	353
Long-term debt retired		(4,550	)		(2,266	)		(7,656	)		(4,625	)

Net long-term debt retired	$	(4,485	)	$	(2,032	)	$	(7,429	)	$	(4,272	)

The long-term debt issued during the first half of 2011 relates to InterNotes^sm (retail-oriented medium-term notes).

We have secured conduit credit facilities with commercial banks which provide for secured financings of receivables on a revolving basis totaling $650 million at both June 30, 2011 and December 31, 2010. At both June 30, 2011 and December 31, 2010, $455 million was available under these facilities. These facilities will mature in the second quarter of 2012 and are renewable at the banks’ option.

During the second quarter of 2011, we decided to call $600 million of retail medium-term notes. This transaction will be completed during July 2011. This transaction will be funded through a $600 million loan agreement with HSBC North America which provides for three $200 million borrowings with maturities between 2034 and 2035. As of June 30, 2011, there were no amounts outstanding under this loan agreement.

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Secured financings issued under our current conduit credit facilities as well as secured financings previously issued under public trusts of $3.8 billion at June 30, 2011 are secured by $5.9 billion of closed-end real estate secured and credit card receivables. Secured financings of $4.1 billion at December 31, 2010 were secured by $6.3 billion of closed-end real estate secured and credit card receivables. The following table shows by product type the receivables which secure our secured financings:


	June 30,		December 31,
	2011		2010

	(in billions)

Real estate secured	$	5.6	$	5.9
Credit card		.3		.4

Total	$	5.9	$	6.3

Common Equity During the first half of 2011, HINO did not make any capital contribution to us. However, until we return to profitability, we may be dependent upon additional capital support of HSBC to continue our business operations and maintain selected capital ratios. HSBC has provided significant capital in support of our operations in the last few years and has indicated that they remain fully committed and have the capacity to continue that support.

Selected capital ratios In managing capital, we develop a target for tangible common equity to tangible assets. This ratio target is based on discussions with HSBC and rating agencies, risks inherent in the portfolio and the projected operating environment and related risks. Additionally, we are required by our credit providing banks to maintain a minimum tangible common equity to tangible assets ratio of 6.75 percent. Our targets may change from time to time to accommodate changes in the operating environment or other considerations such as those listed above.

Selected capital ratios are summarized in the following table:


	June 30,			December 31,
	2011			2010


Tangible common equity to tangible assets⁽¹⁾		8.10	%		7.37	%
Common and preferred equity to total assets		10.88			10.09

⁽¹⁾

Tangible common equity to tangible assets represents a non-U.S. GAAP financial ratio that is used by HSBC Finance Corporation management and applicable rating agencies to evaluate capital adequacy and may differ from similarly named measures presented by other companies. See “Basis of Reporting” for additional discussion on the use of non-U.S. GAAP financial measures and “Reconciliations to U.S. GAAP Financial Measures” for quantitative reconciliations to the equivalent U.S. GAAP basis financial measure.

Commitments We also enter into commitments to meet the financing needs of our customers. In most cases, we have the ability to reduce or eliminate these open lines of credit. As a result, the amounts below do not necessarily represent future cash requirements at June 30, 2011 and December 31, 2010:


	June 30,		December 31,
	2011		2010

	(in billions)

Private label and credit cards⁽¹⁾⁽²⁾	$	101.1	$	99.2
Other consumer lines of credit		.6		.5

Open lines of credit	$	101.7	$	99.7


⁽¹⁾	Amounts at June 30, 2011 include open lines of credit totaling $90.1 billion related to private label credit cards and the GM and UP Portfolios for which we sell all new receivable originations to HSBC Bank USA on a daily basis.

⁽²⁾	Includes an estimate for acceptance of credit offers mailed to potential customers prior to June 30, 2011 and December 31, 2010.

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2011 Funding Strategy Our current range of estimates for funding needs and sources for 2011 are summarized in the table that follows.


				Estimated
	Actual			July 1
	January 1			through
	through			Decem-					Estimated
	June 30,			ber 31,					Full Year
	2011			2011					2011

	(in billions)

Funding needs:
Net asset growth/(attrition)⁽¹⁾	$	(2	)	$	(2	)	-	0	$	(4	)	-	(2	)
Commercial paper maturities		3			0		-	0		3		-	3
Term debt maturities		8			5		-	6		13		-	14
Secured financing maturities		-			1		-	2		1		-	2


Total funding needs	$	9		$	4		-	8	$	13		-	17


Funding sources:
Commercial paper issuances	$	4		$	0		-	1	$	4		-	5
Short term investment		2			2		-	2		4		-	4
Term debt issuances		-			0		-	1		0		-	1
HSBC and HSBC subsidiaries, including capital infusions		-			0		-	1		0		-	1
Other⁽²⁾		3			2		-	3		5		-	6


Total funding sources	$	9		$	4		-	8	$	13		-	17


⁽¹⁾	Net of receivable charge-off.

⁽²⁾	Primarily reflects cash provided by operating activities and sales of REO properties.

For the remainder of 2011, portfolio attrition will again provide a key source of liquidity. The combination of attrition, cash generated from operations, potential asset sales should market pricing for receivables improve or if HSBC North America calls upon us to execute certain strategies in order to address capital considerations and selected retail note issuances will generate the liquidity necessary to meet our maturing debt obligations. If necessary, these sources of liquidity may be supplemented with institutionally placed debt.

Fair Value

Net income volatility arising from changes in either interest rate or credit components of the mark-to-market on debt designated at fair value and related derivatives affects the comparability of reported results between periods. Accordingly, gain on debt designated at fair value and related derivatives for the six months ended June 30, 2011 should not be considered indicative of the results for any future period.

Control Over Valuation Process and Procedures A control framework has been established which is designed to ensure that fair values are either determined or validated by a function independent of the risk-taker. To that end, the ultimate responsibility for the determination of fair values rests with the HSBC Finance Valuation Committee. The HSBC Finance Valuation Committee establishes policies and procedures to ensure appropriate valuations. Fair values for debt securities and long-term debt for which we have elected fair value option are determined by a third-party valuation source (pricing service) by reference to external quotations on the identical or similar instruments. An independent price validation process is also utilized. For price validation purposes, we obtain quotations from at least one other independent pricing source for each financial instrument, where possible. We consider the following factors in determining fair values:


	•	similarities between the asset or the liability under consideration and the asset or liability for which quotation is received;
	•	whether the security is traded in an active or inactive market;
	•	consistency among different pricing sources;

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	•	the valuation approach and the methodologies used by the independent pricing sources in determining fair value;
	•	the elapsed time between the date to which the market data relates and the measurement date; and
	•	the manner in which the fair value information is sourced.

Greater weight is given to quotations of instruments with recent market transactions, pricing quotes from dealers who stand ready to transact, quotations provided by market-makers who originally underwrote such instruments, and market consensus pricing based on inputs from a large number of participants. Any significant discrepancies among the external quotations are reviewed by management and adjustments to fair values are recorded where appropriate.

Fair values for derivatives are determined by management using valuation techniques, valuation models and inputs that are developed, reviewed, validated and approved by the Quantitative Risk and Valuation Group of an HSBC affiliate. These valuation models utilize discounted cash flows or an option pricing model adjusted for counterparty credit risk and market liquidity. The models used apply appropriate control processes and procedures to ensure that the derived inputs are used to value only those instruments that share similar risk to the relevant benchmark indexes and therefore demonstrate a similar response to market factors. In addition, a validation process is followed which includes participation in peer group consensus pricing surveys, to ensure that valuation inputs incorporate market participants’ risk expectations and risk premium.

We have various controls over our valuation process and procedures for receivables held for sale. As these fair values are generally determined using modeling techniques, the controls may include independent development or validation of the logic within the valuation models, the inputs to those models, and adjustments required to outside valuation models. The inputs and adjustments to valuation models are reviewed with management and reconciled to inputs and assumptions used in other internal valuation processes. In addition, from time to time, certain portfolios are valued by independent third parties, primarily for related party transactions, which are used to validate our internal models.

Fair Value Hierarchy Accounting principles related to fair value measurements establish a fair value hierarchy structure that prioritizes the inputs to valuation techniques used to determine the fair value of an asset or liability (the “Fair Value Framework”). The Fair Value Framework distinguishes between inputs that are based on observed market data and unobservable inputs that reflect market participants’ assumptions. It emphasizes the use of valuation methodologies that maximize market inputs. For financial instruments carried at fair value, the best evidence of fair value is a quoted price in an actively traded market (Level 1). Where the market for a financial instrument is not active, valuation techniques are used. The majority of valuation techniques use market inputs that are either observable or indirectly derived from and corroborated by observable market data for substantially the full term of the financial instrument (Level 2). Because Level 1 and Level 2 instruments are determined by observable inputs, less judgment is applied in determining their fair values. In the absence of observable market inputs, the financial instrument is valued based on valuation techniques that feature one or more significant unobservable inputs (Level 3). The determination of the level of fair value hierarchy within which the fair value measurement of an asset or a liability is classified often requires judgment. We consider the following factors in developing the fair value hierarchy:


	•	whether the pricing quotations vary substantially among independent pricing services;
	•	whether the asset or liability is transacted in an active market with a quoted market price that is readily available;
	•	the size of transactions occurring in an active market;
	•	the level of bid-ask spreads;
	•	a lack of pricing transparency due to, among other things, the complexity of the product structure and market liquidity;
	•	whether only a few transactions are observed over a significant period of time;
	•	whether the inputs to the valuation techniques can be derived from or corroborated with market data; and
	•	whether significant adjustments are made to the observed pricing information or model output to determine the fair value.

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Level 1 inputs are unadjusted quoted prices in active markets that the reporting entity has the ability to access for the identical assets or liabilities. A financial instrument is classified as a Level 1 measurement if it is listed on an exchange or is an instrument actively traded in the OTC market where transactions occur with sufficient frequency and volume. We regard financial instruments that are listed on the primary exchanges of a country, such as equity securities and derivative contracts, to be actively traded. Non-exchange-traded instruments classified as Level 1 assets include securities issued by the U.S. Treasury.

Level 2 inputs are inputs that are observable either directly or indirectly but do not qualify as Level 1 inputs. We generally classify derivative contracts, corporate debt including asset-backed securities as well as our own debt issuance for which we have elected fair value option which are not traded in active markets, as Level 2 measurements. Currently, substantially all such items qualify as Level 2 measurements. These valuations are typically obtained from a third party valuation source which, in the case of derivatives, includes valuations provided by an affiliate, HSBC Bank USA.

Level 3 inputs are unobservable inputs for the asset or liability and include situations where there is little, if any, market activity for the asset or liability. Level 3 inputs incorporate market participants’ assumptions about risk and the risk premium required by market participants in order to bear that risk. We develop Level 3 inputs based on the best information available in the circumstances. As of June 30, 2011 and December 31, 2010, our Level 3 instruments recorded at fair value on a recurring basis include $33 million and $24 million, respectively, primarily U.S. corporate debt securities and asset-backed securities. As of June 30, 2011 and December 31, 2010, our Level 3 assets recorded at fair value on a non-recurring basis included receivables held for sale totaling $5 million and $4 million, respectively.

Transfers between leveling categories are recognized at the end of each reporting period.

Transfers Between Level 1 and Level 2 Measurements There were no transfers between Level 1 and Level 2 during the three and six months ended June 30, 2011 and 2010.

Transfers Between Level 2 and Level 3 Measurements Assets recorded at fair value on a recurring basis at June 30, 2011 and December 31, 2010 which have been classified as using Level 3 measurements include certain U.S. corporate debt securities and mortgage-backed securities. Securities are classified as using Level 3 measurements when one or both of the following conditions are met:


	•	An asset-backed security is downgraded below a AAA credit rating; or
	•	An individual security fails the quarterly pricing comparison test with a variance greater than 5 percent.

Transfers into or out of Level 3 classifications, net, represents changes in the mix of individual securities that meet one or both of the above conditions. During the three and six months ended June 30, 2011, we transferred $1 million and $1 million, respectively, of asset-back securities, from Level 3 to Level 2 as they no longer met one or both of the conditions described above which was partially offset by the transfer of $13 million and $15 million, respectively, from Level 2 to Level 3 of individual corporate debt securities and asset-backed securities which met one or both of the conditions described above. During the three and six months ended June 30, 2010, we transferred $7 million and $27 million, respectively, of U.S. government sponsored enterprises and corporate debt securities, from Level 3 to Level 2 as they no longer met one or both of the conditions described above, which was partially offset by the transfer of $2 and $12 million, respectively, from Level 2 to Level 3 of U.S. government sponsored enterprises, corporate debt securities and asset-backed securities which met one or both of the conditions described above.

We reported a total of $33 million and $24 million of available-for-sale securities, or approximately 1 percent and 1 percent of our securities portfolio as Level 3 at June 30, 2011 and December 31, 2010, respectively. At June 30, 2011 and December 31, 2010, total Level 3 assets as a percentage of total assets measured at fair value on a recurring basis were 1 percent and 1 percent, respectively.

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See Note 15, “Fair Value Measurements” in the accompanying consolidated financial statements for further details including our valuation techniques as well as the classification hierarchy associated with assets and liabilities measured at fair value.

Risk Management

Credit Risk Management Day-to-day management of credit risk is administered by the HSBC North America Chief Retail Credit Officer who reports to the HSBC North America Chief Risk Officer. The HSBC North America Chief Risk Officer reports to the HSBC North America Chief Executive Officer and to the Group Managing Director and Chief Risk Officer of HSBC. We have established detailed policies to address the credit risk that arises from our lending activities. Our credit and portfolio management procedures focus on sound underwriting, effective collections and customer account management efforts for each loan. Our lending guidelines, which delineate the credit risk we are willing to take and the related terms, are specific not only for each product, but also take into consideration various other factors including borrower characteristics, return on equity, capital deployment and our overall risk appetite. We also have specific policies to ensure the establishment of appropriate credit loss reserves on a timely basis to cover probable losses of principal, interest and fees. See the captions “Credit Quality” and “Risk Management” in our 2010 Form 10-K for a detailed description of our policies regarding the establishment of credit loss reserves, our delinquency and charge-off policies and practices and our customer account management policies and practices. Also see Note 2, “Summary of Significant Accounting Policies and New Accounting Pronouncements,” in our 2010 Form 10-K for further discussion of our policies surrounding credit loss reserves. Our policies and procedures are consistent with HSBC standards and are regularly reviewed and updated both on an HSBC Finance Corporation and HSBC level. The credit risk function continues to refine “early warning” indicators and reporting, including stress testing scenarios on the basis of current experience. These risk management tools are embedded within our business planning process.

Counterparty credit risk is our primary exposure on our interest rate swap portfolio. Counterparty credit risk is the risk that the counterparty to a transaction fails to perform according to the terms of the contract. Currently the majority of our existing derivative contracts are with HSBC subsidiaries, making them our primary counterparty in derivative transactions. Most swap agreements, both with unaffiliated and affiliated third parties, require that payments be made to, or received from, the counterparty when the fair value of the agreement reaches a certain level. Generally, non-affiliate swap counterparties provide collateral in the form of cash which is recorded in our balance sheet as derivative financial assets or derivative related liabilities. We provided third party swap counterparties with collateral totaling $17 million and $33 million at June 30, 2011 and December 31, 2010, respectively. The fair value of our agreements with affiliate counterparties required the affiliate to provide cash collateral of $2.8 billion and $2.5 billion at June 30, 2011 and December 31, 2010, respectively. These amounts are offset against the fair value amount recognized for derivative instruments that have been offset under the same master netting arrangement.

There have been no significant changes in our approach to credit risk management since December 31, 2010.

Liquidity Risk Management Continued success in reducing the size of our run-off real estate secured and personal non-credit card receivable portfolio will be the primary driver of our liquidity management process going forward. Lower cash flow as a result of declining receivable balances as well as lower cash generated from attrition due to elevated charge-offs and the interruption of our foreclosure process as discussed above may not provide sufficient cash to fully cover maturing debt over the next four to five years. The required incremental funding will be generated through the execution of alternative liquidity management strategies as discussed more fully in our 2010 Form 10-K. In addition to select debt issuances, should market pricing for receivables improve in future years, our intent may change and a portion of this required funding could be generated through selected receivable portfolio sales. In the event a portion of our future incremental funding need is met through issuances of unsecured term debt, we anticipate these issuances would be structured to better match the projected cash flows of the remaining run-off portfolio and reduce reliance on direct HSBC support. HSBC has indicated it remains fully committed and has the capacity and willingness to continue to provide such support.

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Maintaining our credit ratings is an important part of maintaining our overall liquidity profile. As indicated by the major rating agencies, our credit ratings are directly dependent upon the continued support of HSBC. A credit ratings downgrade would increase borrowing costs, and depending on its severity, substantially limit access to capital markets, require cash payments or collateral posting and permit termination of certain contracts material to us.

The following summarizes our credit ratings at June 30, 2011 and December 31, 2010:

Standard &

Moody’s

Poor’s

Investors

Corporation

Service

Fitch, Inc.

As of June 30, 2011:

Senior debt

AA-

Senior subordinated debt

BBB+

Baa1

A+

Commercial paper

A-1

P-1

F-1+

Series B preferred stock

BBB-

Baa2

A+

As of December 31, 2010:

Senior debt

AA-

Senior subordinated debt

BBB+

Baa1

A+

Commercial paper

A-1

P-1

F-1+

Series B preferred stock

BBB-

Baa2

A+

As of June 30, 2011, there were no pending actions in terms of changes to ratings for HSBC Finance Corporation from any of the rating agencies listed above. Standard & Poor’s Corporation has announced it is considering a revised criteria for assessment of parent company support in setting the Issuer Credit Ratings for banks. The final form of the revised criteria, which may be effective by year-end, could result in a negative change to the Standard & Poor’s Corporation credit rating for HSBC Finance Corporation.

There have been no significant changes in our approach to liquidity risk management since December 31, 2010.

Market Risk Management HSBC has certain limits and benchmarks that serve as additional guidelines in determining the appropriate levels of interest rate risk. One such limit is expressed in terms of the Present Value of a Basis Point, which reflects the change in value of the balance sheet for a one basis point movement in all interest rates without considering other correlation factors or assumptions. At June 30, 2011 and December 31, 2010, our absolute PVBP limit was $5.50 million and $8.20 million, respectively, which included the risk associated with the hedging instruments we employed. Thus, for a one basis point change in interest rates, the policy at June 30, 2011 and December 31, 2010 dictated that the value of the balance sheet could not increase or decrease by more than $5.50 million or $8.20 million, respectively. During the second quarter of 2011, the PVBP limit was decreased after we performed a comprehensive review of the projected cash flows to be generated by our remaining real estate secured receivable portfolio. The results of this analysis indicated a reduction in the average life of the real estate secured receivable cash flows and a corresponding decrease in our reported PVBP position, which we concluded would be sustainable for the foreseeable future.

The following table shows the components of our absolute PVBP position at June 30, 2011 and December 31, 2010 broken down by currency risk:


	June 30,		December 31,
	2011		2010

	(in millions)

USD	$	1.746	$	6.351
JPY		0.132		.132

Absolute PVBP risk	$	1.878	$	6.483

We also monitor the impact that an immediate hypothetical increase or decrease in interest rates of 25 basis points applied at the beginning of each quarter over a 12 month period would have on our net interest income assuming for 2011 and 2010 a declining balance sheet and the current interest rate risk profile. These estimates include the impact

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on net interest income of debt and related derivatives carried at fair value and also assume we would not take any corrective actions in response to interest rate movements and, therefore, exceed what most likely would occur if rates were to change by the amount indicated. The following table summarizes such estimated impact:


	June 30,		December 31,
	2011		2010

	(in millions)

Decrease in net interest income following a hypothetical 25 basis points rise in interest rates applied at the beginning of each quarter over the next 12 months	$	12	$	38
Increase in net interest income following a hypothetical 25 basis points fall in interest rates applied at the beginning of each quarter over the next 12 months		41		43

A principal consideration supporting both of the PVBP and margin at risk analyses is the projected prepayment of loan balances for a given economic scenario. Individual loan underwriting standards in combination with housing valuations, loan modification program, changes to our foreclosure processes and macroeconomic factors related to available mortgage credit are the key assumptions driving these prepayment projections. While we have utilized a number of sources to refine these projections, we cannot currently project precise prepayment rates with a high degree of certainty in all economic environments given recent, significant changes in both subprime mortgage underwriting standards and property valuations across the country.

There has been no significant change in our approach to market risk management since December 31, 2010.

Operational Risk Management There has been no significant change in our approach to operational risk management since December 31, 2010.

Compliance Risk Management There has been no significant change in our approach to compliance risk management since December 31, 2010. However, as a result of the Servicing Consent Orders, we have submitted plans and continue to review related areas to address the deficiencies noted in the joint examination and described in the consent orders.

Reputational Risk Management There has been no significant change in our approach to reputational risk management since December 31, 2010.

Strategic Risk Management There has been no significant change in our approach to strategic risk management since December 31, 2010.

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RECONCILIATIONS TO U.S. GAAP FINANCIAL MEASURES


	June 30,			December 31,
	2011			2010

	(dollars are in millions)

Tangible common equity:
Common shareholder’s equity	$	6,074		$	6,145
Exclude:
Fair value option adjustment		(346	)		(453	)
Unrealized (gains) losses on cash flow hedging instruments		515			575
Unrealized (gains) losses on investments		(70	)		(74	)
Intangible assets		(537	)		(605	)

Tangible common equity	$	5,636		$	5,588

Tangible shareholders’ equity:
Tangible common equity	$	5,636		$	5,588
Preferred stock		1,575			1,575
Mandatorily redeemable preferred securities of Household Capital Trusts		1,000			1,000

Tangible shareholders’ equity	$	8,211		$	8,163

Tangible assets:
Total assets	$	70,325		$	76,532
Exclude:
Intangible assets		(537	)		(605	)
Derivative financial assets		(203	)		(75	)

Tangible assets	$	69,585		$	75,852

Equity ratios:
Common and preferred equity to total assets		10.88	%		10.09	%
Tangible common equity to tangible assets		8.10			7.37
Tangible shareholders’ equity to tangible assets		11.80			10.76

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

See Item 2, “Management’s Discussion and Analysis of Financial Conditions and Results of Operations,” under the caption “Risk Management – Market Risk” of this Form 10-Q.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures We maintain a system of internal and disclosure controls and procedures designed to ensure that information required to be disclosed by HSBC Finance Corporation in the reports we file or submit under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), is recorded, processed, summarized and reported on a timely basis. Our Board of Directors, operating through its audit committee, which is composed entirely of independent outside directors, provides oversight to our financial reporting process.

We conducted an evaluation, with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report so as to alert them in a timely fashion to material information required to be disclosed in reports we file under the Exchange Act.

Changes in Internal Control Over Financial Reporting There has been no change in our internal control over financial reporting that occurred during the quarter ended June 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

See “Litigation and Regulatory Matters in Note 16, “Litigation and Regulatory Matters,” in the accompanying consolidated financial statements beginning on page 50 for our legal proceedings disclosure, which is incorporated herein by reference.

Item 6. Exhibits

Exhibits included in this Report:


12		Statement of Computation of Ratio of Earnings to Fixed Charges and to Combined Fixed Charges and Preferred Stock Dividends
31		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	.INS	XBRL Instance Document^(1),(2)
101	.SCH	XBRL Taxonomy Extension Schema Document^(1),(2)
101	.CAL	XBRL Taxonomy Extension Calculation Linkbase Document^(1),(2)
101	.DEF	XBRL Taxonomy Extension Definition Linkbase Document^(1),(2)
101	.LAB	XBRL Taxonomy Extension Label Linkbase Document^(1),(2)
101	.PRE	XBRL Taxonomy Extension Presentation Linkbase Document^(1),(2)


⁽¹⁾	Pursuant to Rule 405 of Regulation S-T, includes the following financial information included in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, formatted in eXentsible Business Reporting Language (“XBRL”) interactive date files: (i) the Consolidated Statement of Income for the three and six months ended June 30, 2011 and 2010, (ii) the Consolidated Balance Sheet as of June 30, 2011 and December 31. 2010, (iii) the Consolidated Statement of Changes in Shareholders’ Equity for the six months ended June 30, 2011 and 2010, (iv) the Consolidated Statement of Cash Flows for the six months ended June 30, 2011 and 2010, and (v) the Notes to Consolidated Financial Statements.

⁽²⁾	As provided in Rule 406T of Regulation S-T, this information shall be not be deemed “filed” for purposes of Section 11 and 12 of the Securities Act of 1933, as amended, and Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.

110

HSBC Finance Corporation

Index

Account management policies and practices  93
Assets:
       by business segment  39
       fair value of financial assets  44
       fair value measurements  43
       nonperforming  16, 92
Balance sheet (consolidated)  4
Basel II  64
Basis of reporting  65
Business:
       consolidated performance review  58
       focus  57
Capital:
       2011 funding strategy  103
       common equity movements  102
       consolidated statement of changes  5
       selected capital ratios  102
Cards and Retail Services business segment  37, 80
Cash flow (consolidated)  6
Cautionary statement regarding forward-looking
       statements  55
Compliance risk  108
Consumer business segment  37, 82
Controls and procedures  110
Credit quality  84
Credit risk:
       concentration  19, 100
       management  106
Current environment  55
Deferred tax assets  31
Derivatives:
       cash flow hedges  24
       fair value hedges  24
       income (expense)  75
       non-qualifying hedges  25
       notional value  27
Discontinued operations  7
Equity:
       consolidated statement of changes  5
       ratios  102
Equity securities available-for-sale  11
Estimates and assumptions  7
Executive overview  55
Fair value measurements:
       assets and liabilities recorded at fair value on a
          recurring basis  45
       assets and liabilities recorded at fair value on a
          non-recurring basis  47
       control over valuation process  103
       financial instruments  44
       hierarchy  104
       transfers into/out of level one and
          two  46, 105
       transfers into/out of level two and
          three  46, 105
       valuation techniques  48
Fee income  76
Financial highlights metrics  62
Financial liabilities:
       designated at fair value  28
       fair value of financial liabilities  45
Forward looking statements  55
Funding  63, 100
Gain (loss) on debt designated at fair value and
  related derivatives  28, 76
Geographic concentration of receivables  100
Impairment:
       available-for-sale securities  12
       credit losses  20, 59, 73
       nonperforming receivables  16, 92
Income tax expense  29
Insurance:
       policyholders benefits expense  78
       revenue  75
Intangible assets  22
Internal control  110
Interest income:
       net interest income  71
       sensitivity  108
Key performance indicators  62
Legal proceedings  50
Liabilities:
       commercial paper  101
       commitments, lines of credit  101
       financial liabilities designated at

          fair value  28
       long-term debt  101
Liquidity and capital resources  100
Liquidity risk  106
Litigation and regulatory matters  50
Loans and advances — see Receivables
Loan impairment charges — see Provision for
       credit losses
Market risk  107
Market turmoil — see Current Environment
Mortgage lending products  15, 68
Net interest income  71
New accounting pronouncements  53
Operating expenses  77
Operational risk  108
Other revenues  74
Pension and other postretirement benefits  32
Performance, developments and trends  58

111

HSBC Finance Corporation

Profit (loss) before tax:
       by segment — IFRSs management basis  39
       consolidated  3
Provision for credit losses  59, 73
Ratios:
       capital  102
       charge-off (net)  91
       credit loss reserve related  86
       delinquency  89
       earnings to fixed charges — Exhibit 12
       efficiency  62, 78
       financial  62
Re-aged receivables  98
Real estate owned  70
Receivables:
       by category  15, 68
       by charge-off (net)  91
       by delinquency  89
       geographic concentration  100
       modified and/or re-aged  95
       nonperforming  16, 92
       overall review  68
       risk concentration  19, 100
       troubled debt restructures  17, 61, 93
Reconciliation to U.S. GAAP financial measures  109
Reconciliation of U.S. GAAP results to IFRSs  65
Refreshed loan-to-value  70
Related party transactions  32
Reputational risk  108
Results of operations  71
Risk elements in the loan portfolio by product  19
Risk management:
       credit  106
       compliance  108
       liquidity  106
       market  107
       operational  108
       reputational  108
       strategic  108
Securities:
       fair value  11, 44
       maturity analysis  14
Segment results — IFRSs management basis:
       card and retail services  39, 80
       consumer  39, 82
       “All Other” grouping  39
       overall summary  37, 79
Selected financial data  62
Sensitivity:
       projected net interest income  108
Statement of changes in shareholders’ equity  5
Statement of changes in comprehensive income
       (loss)  5
Statement of income (loss)  3
Strategic initiatives and focus  9, 57
Strategic risk  108
Table of contents  2
Tangible common equity to tangible managed
       assets  102
Tax expense  29
Troubled debt restructures  17, 61, 93
Variable interest entities  42

112

Exhibit Index


12		Statement of Computation of Ratio of Earnings to Fixed Charges and to Combined Fixed Charges and Preferred Stock Dividends
31		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	.INS	XBRL Instance Document^(1),(2)
101	.SCH	XBRL Taxonomy Extension Schema Document^(1),(2)
101	.CAL	XBRL Taxonomy Extension Calculation Linkbase Document^(1),(2)
101	.DEF	XBRL Taxonomy Extension Definition Linkbase Document^(1),(2)
101	.LAB	XBRL Taxonomy Extension Label Linkbase Document^(1),(2)
101	.PRE	XBRL Taxonomy Extension Presentation Linkbase Document^(1),(2)


⁽¹⁾	Pursuant to Rule 405 of Regulation S-T, includes the following financial information included in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, formatted in eXentsible Business Reporting Language (“XBRL”) interactive date files: (i) the Consolidated Statement of Income for the three and six months ended June 30, 2011 and 2010, (ii) the Consolidated Balance Sheet as of June 30, 2011 and December 31. 2010, (iii) the Consolidated Statement of Changes in Shareholders’ Equity for the six months ended June 30, 2011 and 2010, (iv) the Consolidated Statement of Cash Flows for the six months ended June 30, 2011 and 2010, and (v) the Notes to Consolidated Financial Statements.

⁽²⁾	As provided in Rule 406T of Regulation S-T, this information shall be not be deemed “filed” for purposes of Section 11 and 12 of the Securities Act of 1933, as amended, and Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.

114


Part/Item No.		Page

Part I.

Item 1.	Financial Statements (Unaudited):
	Consolidated Statement of Income (Loss)		3
	Consolidated Balance Sheet		4
	Consolidated Statement of Changes in Shareholders’ Equity		5
	Consolidated Statement of Cash Flows		6
	Notes to Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations:
	Forward-Looking Statements		55
	Executive Overview		55
	Basis of Reporting		65
	Receivables Review		68
	Real Estate Owned		70
	Results of Operations		71
	Segment Results – IFRS Basis		79
	Credit Quality		84
	Liquidity and Capital Resources		100
	Fair Value		103
	Risk Management		106
	Reconciliations to U.S. GAAP Financial Measures		109
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		110
Item 4.	Controls and Procedures		110

Part II

Item 1.	Legal Proceedings		110
Item 6.	Exhibits		110
Index			111
Signature			113
EX-12
EX-31
EX-32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT