(Mark One) | ||
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the quarterly period ended September 30,
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
|
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) |
Large accelerated filer o | Accelerated filer o | Non-accelerated filer x | Smaller reporting company o |
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PART II | ||||||||
119 | ||||||||
119 | ||||||||
120 | ||||||||
121 | ||||||||
123 | ||||||||
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 |
2
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in millions) | ||||||||||||||||
Finance and other interest income
|
$ | 1,019 | $ | 1,226 | $ | 3,239 | $ | 3,817 | ||||||||
Interest expense on debt issued to:
|
||||||||||||||||
HSBC affiliates
|
44 | 33 | 119 | 107 | ||||||||||||
Non-affiliates
|
523 | 651 | 1,712 | 2,123 | ||||||||||||
Interest expense
|
567 | 684 | 1,831 | 2,230 | ||||||||||||
Net interest income
|
452 | 542 | 1,408 | 1,587 | ||||||||||||
Provision for credit losses
|
2,182 | 1,305 | 3,473 | 4,290 | ||||||||||||
Net interest loss after provision for credit losses
|
(1,730 | ) | (763 | ) | (2,065 | ) | (2,703 | ) | ||||||||
Other revenues:
|
||||||||||||||||
Insurance revenue
|
64 | 69 | 188 | 213 | ||||||||||||
Investment income
|
33 | 24 | 91 | 75 | ||||||||||||
Derivative related income (expense)
|
(913 | ) | (374 | ) | (1,036 | ) | (972 | ) | ||||||||
Gain on debt designated at fair value and related derivatives
|
792 | (1 | ) | 1,008 | 602 | |||||||||||
Servicing and other fees from HSBC affiliates
|
4 | 7 | 18 | 30 | ||||||||||||
Other income
|
4 | 27 | 21 | 52 | ||||||||||||
Total other revenues
|
(16 | ) | (248 | ) | 290 | - | ||||||||||
Operating expenses:
|
||||||||||||||||
Salaries and employee benefits
|
42 | 61 | 146 | 213 | ||||||||||||
Occupancy and equipment expenses, net
|
14 | 18 | 43 | 39 | ||||||||||||
Real estate owned expenses
|
38 | 75 | 174 | 154 | ||||||||||||
Other servicing and administrative expenses
|
56 | 73 | 358 | 262 | ||||||||||||
Support services from HSBC affiliates
|
85 | 77 | 258 | 197 | ||||||||||||
Policyholders benefits
|
37 | 36 | 111 | 116 | ||||||||||||
Total operating expenses
|
272 | 340 | 1,090 | 981 | ||||||||||||
Loss from continuing operations before income tax
|
(2,018 | ) | (1,351 | ) | (2,865 | ) | (3,684 | ) | ||||||||
Income tax benefit
|
689 | 479 | 1,154 | 1,334 | ||||||||||||
Loss from continuing operations
|
(1,329 | ) | (872 | ) | (1,711 | ) | (2,350 | ) | ||||||||
Discontinued Operations (Note 2):
|
||||||||||||||||
Income from discontinued operations before income tax
|
372 | 184 | 861 | 732 | ||||||||||||
Income tax expense
|
(104 | ) | (64 | ) | (280 | ) | (257 | ) | ||||||||
Income from discontinued operations
|
268 | 120 | 581 | 475 | ||||||||||||
Net loss
|
$ | (1,061 | ) | $ | (752 | ) | $ | (1,130 | ) | $ | (1,875 | ) | ||||
3
September 30, |
December 31, |
|||||||
2011 | 2010 | |||||||
(in millions, |
||||||||
except share data) | ||||||||
Assets
|
||||||||
Cash
|
$ | 227 | $ | 166 | ||||
Interest bearing deposits with banks
|
12 | 1,016 | ||||||
Securities purchased under agreements to resell
|
2,875 | 4,311 | ||||||
Securities
available-for-sale
|
3,658 | 3,371 | ||||||
Receivables, net (including $5.4 billion and
$5.9 billion at September 30, 2011 and
December 31, 2010, respectively, collateralizing long-term
debt)
|
45,157 | 52,338 | ||||||
Receivables held for sale
|
- | 4 | ||||||
Properties and equipment, net
|
91 | 101 | ||||||
Real estate owned
|
371 | 962 | ||||||
Derivative financial assets
|
3 | 75 | ||||||
Deferred income taxes, net
|
3,176 | 2,779 | ||||||
Other assets
|
1,598 | 1,380 | ||||||
Assets of discontinued operations
|
10,158 | 10,628 | ||||||
Total assets
|
$ | 67,326 | $ | 77,131 | ||||
Liabilities
|
||||||||
Debt:
|
||||||||
Due to affiliates (including $425 million and
$436 million at September 30, 2011 and
December 31, 2010, respectively, carried at fair value)
|
$ | 8,741 | $ | 8,255 | ||||
Commercial paper
|
4,303 | 3,156 | ||||||
Long-term debt (including $16.0 billion and
$20.8 billion at September 30, 2011 and
December 31, 2010 carried at fair value and
$3.4 billion and $3.9 billion at September 30,
2011 and December 31, 2010, respectively, collateralized by
receivables)
|
43,179 | 54,405 | ||||||
Total debt
|
56,223 | 65,816 | ||||||
Insurance policy and claim reserves
|
989 | 982 | ||||||
Derivative related liabilities
|
275 | 2 | ||||||
Liability for postretirement benefits
|
259 | 265 | ||||||
Other liabilities
|
1,564 | 1,315 | ||||||
Liabilities of discontinued operations
|
1,077 | 1,031 | ||||||
Total liabilities
|
60,387 | 69,411 | ||||||
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 shareholders equity:
|
||||||||
Common stock, $0.01 par value, 100 shares authorized,
67 and 66 shares issued and outstanding at
September 30, 2011 and December 31, 2010, respectively
|
- | - | ||||||
Additional paid-in capital
|
23,727 | 23,321 | ||||||
Accumulated deficit
|
(17,911 | ) | (16,685 | ) | ||||
Accumulated other comprehensive loss
|
(452 | ) | (491 | ) | ||||
Total common shareholders equity
|
5,364 | 6,145 | ||||||
Total shareholders equity
|
6,939 | 7,720 | ||||||
Total liabilities and shareholders equity
|
$ | 67,326 | $ | 77,131 | ||||
4
Nine Months Ended September 30, | 2011 | 2010 | ||||||
(in millions) | ||||||||
Preferred stock
|
||||||||
Balance at beginning and end of period
|
$ | 1,575 | $ | 575 | ||||
Common shareholders equity
|
||||||||
Additional paid-in capital
|
||||||||
Balance at beginning of period
|
23,321 | 23,119 | ||||||
Capital contribution from parent
|
400 | 200 | ||||||
Employee benefit plans, including transfers and other
|
6 | 3 | ||||||
Balance at end of period
|
23,727 | 23,322 | ||||||
Accumulated deficit
|
||||||||
Balance at beginning of period
|
(16,685 | ) | (14,732 | ) | ||||
Net loss
|
(1,130 | ) | (1,875 | ) | ||||
Dividends:
|
||||||||
Preferred stock
|
(96 | ) | (27 | ) | ||||
Balance at end of period
|
(17,911 | ) | (16,634 | ) | ||||
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
|
4 | (115 | ) | |||||
Securities
available-for-sale,
not
other-than-temporarily
impaired
|
40 | 89 | ||||||
Other-than-temporarily
impaired debt securities
available-for-sale(1)
|
(1 | ) | 2 | |||||
Postretirement benefit plan adjustment, net of tax
|
1 | (8 | ) | |||||
Foreign currency translation adjustments
|
(5 | ) | (2 | ) | ||||
Other comprehensive income (loss), net of tax
|
39 | (34 | ) | |||||
Balance at end of period
|
(452 | ) | (617 | ) | ||||
Total common shareholders equity at end of
period
|
$ | 5,364 | $ | 6,071 | ||||
Comprehensive loss
|
||||||||
Net loss
|
$ | (1,130 | ) | $ | (1,875 | ) | ||
Other comprehensive income (loss)
|
39 | (34 | ) | |||||
Comprehensive loss
|
$ | (1,091 | ) | $ | (1,909 | ) | ||
(1) | During the nine months ended September 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. |
5
Nine Months Ended September 30, | 2011 | 2010 | ||||||
(in millions) | ||||||||
Cash flows from operating activities
|
||||||||
Net loss
|
$ | (1,130 | ) | $ | (1,875 | ) | ||
Income from discontinued operations
|
581 | 475 | ||||||
Loss from continuing operations
|
(1,711 | ) | (2,350 | ) | ||||
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
|
||||||||
Provision for credit losses
|
3,473 | 4,290 | ||||||
Loss on sale of real estate owned, including lower of amortized
cost or market adjustments
|
83 | 50 | ||||||
Insurance policy and claim reserves
|
(13 | ) | (44 | ) | ||||
Depreciation and amortization
|
13 | 20 | ||||||
Mark-to-market
on debt designated at fair value and related derivatives
|
(534 | ) | 5 | |||||
Sales and collections on loans held for sale
|
(1 | ) | 2 | |||||
Foreign exchange and derivative movements on long-term debt and
net change in non-FVO related derivative assets and liabilities
|
(140 | ) | (316 | ) | ||||
Net change in other assets
|
(631 | ) | 2,464 | |||||
Net change in other liabilities
|
241 | 75 | ||||||
Lower of amortized cost or fair value on receivables held for
sale
|
- | (2 | ) | |||||
Other, net
|
227 | 376 | ||||||
Cash provided by operating activities-continuing operations
|
1,007 | 4,570 | ||||||
Cash provided by operating activities-discontinued operations
|
1,530 | 2,022 | ||||||
Net cash provided by operating activities
|
2,537 | 6,592 | ||||||
Cash flows from investing activities
|
||||||||
Securities:
|
||||||||
Purchased
|
(970 | ) | (694 | ) | ||||
Matured
|
208 | 302 | ||||||
Sold
|
809 | 137 | ||||||
Net change in short-term securities
available-for-sale
|
(260 | ) | 163 | |||||
Net change in securities purchased under agreements to resell
|
1,436 | (1,945 | ) | |||||
Net change in interest bearing deposits with banks
|
1,004 | (1 | ) | |||||
Receivables:
|
||||||||
Net collections
|
2,772 | 3,435 | ||||||
Proceeds from sales of real estate owned
|
1,271 | 964 | ||||||
Purchases of properties and equipment
|
(1 | ) | (8 | ) | ||||
Cash provided by investing activities-continuing operations
|
6,269 | 2,353 | ||||||
Cash provided by investing activities-discontinued operations
|
(375 | ) | 3,994 | |||||
Net cash provided by investing activities
|
5,894 | 6,347 | ||||||
Cash flows from financing activities
|
||||||||
Debt:
|
||||||||
Net change in commercial paper
|
1,147 | (1,234 | ) | |||||
Net change in due to affiliates
|
498 | (735 | ) | |||||
Long-term debt issued
|
245 | 459 | ||||||
Long-term debt retired
|
(10,488 | ) | (11,577 | ) | ||||
Insurance:
|
||||||||
Policyholders benefits paid
|
(69 | ) | (60 | ) | ||||
Cash received from policyholders
|
49 | 49 | ||||||
Capital contribution from parent
|
400 | 200 | ||||||
Shareholders dividends
|
(96 | ) | (27 | ) | ||||
Net cash used in financing activities-continuing operations
|
(8,314 | ) | (12,925 | ) | ||||
Net cash used in financing activities-discontinued operations
|
- | (151 | ) | |||||
Net cash used in financing activities
|
(8,314 | ) | (13,076 | ) | ||||
Net change in cash
|
117 | (137 | ) | |||||
Cash at beginning of
period(1)
|
175 | 311 | ||||||
Cash at end of
period(2)
|
$ | 292 | $ | 174 | ||||
Supplemental Noncash Investing and Capital Activities:
|
||||||||
Fair value of properties added to real estate owned
|
$ | 763 | $ | 1,330 | ||||
Transfer of receivables to held for sale
|
8,620 | 2,910 | ||||||
Extinguishment of indebtedness related to receivable sales
|
- | (431 | ) |
(1) | Cash at beginning of period includes $9 million and $142 million for discontinued operations as of January 1, 2011 and January 1, 2010, respectively. | |
(2) | Cash at end of period includes $65 million and $40 million for discontinued operations as of September 30, 2011 and September 30, 2010, respectively. |
6
1. | Organization and Basis of Presentation |
2. | Discontinued Operations |
7
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in millions) | ||||||||||||||||
Finance and other interest income
|
$ | 492 | $ | 547 | $ | 1,488 | $ | 1,683 | ||||||||
Interest
expense(1)
|
22 | 29 | 72 | 91 | ||||||||||||
Net interest income
|
470 | 518 | 1,416 | 1,592 | ||||||||||||
Provision for credit
losses(2)
|
152 | 205 | 424 | 680 | ||||||||||||
Net interest income after provision for credit losses
|
318 | 313 | 992 | 912 | ||||||||||||
Fee income and enhancement services revenue
|
187 | 141 | 487 | 442 | ||||||||||||
Gain on receivable sales with affiliates
|
145 | 143 | 407 | 401 | ||||||||||||
Servicing and other fees from HSBC affiliates
|
154 | 160 | 463 | 472 | ||||||||||||
Other income
|
3 | 3 | 12 | 11 | ||||||||||||
Total other revenues
|
489 | 447 | 1,369 | 1,326 | ||||||||||||
Salaries and employee benefits
|
69 | 87 | 219 | 258 | ||||||||||||
Other marketing expenses
|
57 | 71 | 221 | 203 | ||||||||||||
Other servicing and administrative expenses
|
78 | 99 | 337 | 325 | ||||||||||||
Support services from affiliates
|
209 | 214 | 623 | 624 | ||||||||||||
Amortization of intangibles
|
22 | 34 | 91 | 103 | ||||||||||||
Total operating expenses
|
435 | 505 | 1,491 | 1,513 | ||||||||||||
Income from discontinued operations before income tax
|
$ | 372 | $ | 255 | $ | 870 | $ | 725 | ||||||||
(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. |
8
(2) | For periods following the transfer of the receivables to held for sale, the receivables are included as part of the disposal group held for sale to Capital One which is carried at the lower of amortized cost or fair value. As a result, we no longer record provisions for credit losses, including charge-offs, for these receivables. |
September 30, |
December 31, |
|||||||
2011 | 2010 | |||||||
(in millions) | ||||||||
Cash
|
$ | 65 | $ | 9 | ||||
Receivables(1)
|
8,677 | 8,995 | ||||||
Intangible assets
|
514 | 605 | ||||||
Properties and equipment, net
|
94 | 101 | ||||||
Other assets
|
799 | 722 | ||||||
Assets of discontinued operations
|
$ | 10,149 | $ | 10,432 | ||||
Long-term debt
|
$ | 211 | $ | 212 | ||||
Other liabilities
|
857 | 802 | ||||||
Liabilities of discontinued operations
|
$ | 1,068 | $ | 1,014 | ||||
(1) | At September 30, 2011, receivables are recorded net of reserves at the time of transfer to held for sale. At December 31, 2010, receivables were carried at amortized cost and reduced by credit loss reserves. At December 31, 2010, credit loss reserves totaled $979 million. |
9
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in millions) | ||||||||||||||||
Net interest income and other
revenues(1)
|
$ | 1 | $ | 1 | $ | 2 | $ | 87 | ||||||||
Income (loss) from discontinued operations before income tax
|
- | (6 | ) | (4 | ) | 49 |
(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. |
September 30, |
December 31, |
|||||||
2011 | 2010 | |||||||
(in millions) | ||||||||
Deferred income tax, net
|
$ | - | $ | 3 | ||||
Other assets
|
5 | 55 | ||||||
Assets of discontinued operations
|
$ | 5 | $ | 58 | ||||
Other liabilities
|
$ | 1 | $ | 10 | ||||
Liabilities of discontinued operations
|
$ | 1 | $ | 10 | ||||
10
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in millions) | ||||||||||||||||
Net interest income and other
revenues(1)
|
$ | - | $ | 44 | $ | - | $ | 218 | ||||||||
Income (loss) from discontinued operations before income tax
|
- | (65 | ) | (5 | ) | (42 | ) |
(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. |
September 30, |
December 31, |
|||||||
2011 | 2010 | |||||||
(in millions) | ||||||||
Deferred income tax, net
|
$ | 2 | $ | 4 | ||||
Other assets
|
2 | 134 | ||||||
Assets of discontinued operations
|
$ | 4 | $ | 138 | ||||
Other liabilities
|
$ | 8 | $ | 7 | ||||
Liabilities of discontinued operations
|
$ | 8 | $ | 7 | ||||
3. | Strategic Initiatives |
> | 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 exited certain facilities and/or significantly reduced our occupancy space in the following locations: Elmhurst, Illinois and Tampa, Florida. Additionally, we consolidated certain servicing functions previously performed in Brandon, Florida to facilities in Buffalo, New York and Elmhurst, Illinois. | |
> | 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. |
11
4. | Securities |
Non-Credit |
||||||||||||||||||||
Loss |
||||||||||||||||||||
Component |
Gross |
Gross |
||||||||||||||||||
Amortized |
of OTTI |
Unrealized |
Unrealized |
Fair |
||||||||||||||||
September 30, 2011 | Cost | Securities | Gains | Losses | Value | |||||||||||||||
(in millions) | ||||||||||||||||||||
U.S. Treasury
|
$ | 365 | $ | - | $ | 11 | $ | - | $ | 376 | ||||||||||
U.S. government sponsored
enterprises(1)
|
421 | - | 6 | - | 427 | |||||||||||||||
U.S. government agency issued or guaranteed
|
6 | - | - | - | 6 | |||||||||||||||
Obligations of U.S. states and political subdivisions
|
1 | - | - | - | 1 | |||||||||||||||
Asset-backed
securities(2)
|
52 | (9 | ) | 1 | - | 44 | ||||||||||||||
U.S. corporate debt
securities(3)
|
1,519 | - | 150 | (6 | ) | 1,663 | ||||||||||||||
Foreign debt
securities(4)
|
526 | - | 22 | (2 | ) | 546 | ||||||||||||||
Equity securities
|
10 | - | - | - | 10 | |||||||||||||||
Money market funds
|
558 | - | - | - | 558 | |||||||||||||||
Subtotal
|
3,458 | (9 | ) | 190 | (8 | ) | 3,631 | |||||||||||||
Accrued investment income
|
27 | - | - | - | 27 | |||||||||||||||
Total securities
available-for-sale
|
$ | 3,485 | $ | (9 | ) | $ | 190 | $ | (8 | ) | $ | 3,658 | ||||||||
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 $21 million and $33 million of mortgage-backed securities issued by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation as of September 30, 2011 and December 31, 2010, respectively. | |
(2) | Includes $21 and $31 million of residential mortgage-backed securities at September 30, 2011 and December 31, 2010, respectively. |
12
(3) | At September 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 September 30, 2011 or December 31, 2010. |
Less Than One Year | Greater Than One Year | |||||||||||||||||||||||
Gross |
Aggregate |
Gross |
Aggregate |
|||||||||||||||||||||
Number of |
Unrealized |
Fair Value of |
Number of |
Unrealized |
Fair Value of |
|||||||||||||||||||
September 30, 2011 | Securities | Losses | Investments | Securities | Losses | Investments | ||||||||||||||||||
(dollars are in millions) | ||||||||||||||||||||||||
U.S. Treasury
|
2 | $ | - | $ | 1 | - | $ | - | $ | - | ||||||||||||||
U.S. government sponsored enterprises
|
4 | - | 61 | - | - | - | ||||||||||||||||||
U.S. government agency issued or guaranteed
|
- | - | - | - | - | - | ||||||||||||||||||
Obligations of U.S. states and political subdivisions
|
- | - | - | - | - | - | ||||||||||||||||||
Asset-backed securities
|
- | - | - | 6 | (9 | ) | 12 | |||||||||||||||||
U.S. corporate debt securities
|
130 | (5 | ) | 177 | 5 | (1 | ) | 22 | ||||||||||||||||
Foreign debt securities
|
63 | (2 | ) | 96 | - | - | - | |||||||||||||||||
Equity Securities
|
1 | - | 5 | - | - | - | ||||||||||||||||||
200 | $ | (7 | ) | $ | 340 | 11 | $ | (10 | ) | $ | 34 | |||||||||||||
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 | |||||||||||||
13
| 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. |
14
Amortized |
Unrealized Losses for |
Fair |
||||||||||
Cost | More Than 12 Months | Value | ||||||||||
(in millions) | ||||||||||||
Asset-backed securities at:
|
||||||||||||
September 30, 2011
|
$ | - | $ | - | $ | - | ||||||
December 31, 2010
|
3 | - | 3 |
15
Due |
After 1 |
After 5 |
||||||||||||||||||
Within |
but Within |
but Within |
After |
|||||||||||||||||
September 30, 2011 | 1 Year | 5 Years | 10 Years | 10 Years | Total | |||||||||||||||
(dollars are in millions) | ||||||||||||||||||||
U.S. Treasury:
|
||||||||||||||||||||
Amortized cost
|
$ | 183 | $ | 181 | $ | 1 | $ | - | $ | 365 | ||||||||||
Fair value
|
183 | 192 | 1 | - | 376 | |||||||||||||||
Yield(1)
|
.72 | % | 2.34 | % | 4.96 | % | - | 1.54 | % | |||||||||||
U.S. government sponsored enterprises:
|
||||||||||||||||||||
Amortized cost
|
$ | 366 | $ | 17 | $ | 16 | $ | 22 | $ | 421 | ||||||||||
Fair value
|
366 | 17 | 18 | 26 | 427 | |||||||||||||||
Yield(1)
|
.14 | % | 2.31 | % | 4.72 | % | 4.64 | % | .64 | % | ||||||||||
U.S. government agency issued or guaranteed:
|
||||||||||||||||||||
Amortized cost
|
$ | - | $ | - | $ | - | $ | 6 | $ | 6 | ||||||||||
Fair value
|
- | - | - | 6 | 6 | |||||||||||||||
Yield(1)
|
- | - | - | 4.99 | % | 4.99 | % | |||||||||||||
Obligations of U.S. states and political subdivisions:
|
||||||||||||||||||||
Amortized cost
|
$ | - | $ | - | $ | - | $ | 1 | $ | 1 | ||||||||||
Fair value
|
- | - | - | 1 | 1 | |||||||||||||||
Yield(1)
|
- | - | - | 5.50 | % | 5.50 | % | |||||||||||||
Asset-backed securities:
|
||||||||||||||||||||
Amortized cost
|
$ | - | $ | 22 | $ | 4 | $ | 26 | $ | 52 | ||||||||||
Fair value
|
- | 23 | 4 | 17 | 44 | |||||||||||||||
Yield(1)
|
- | 4.84 | % | 6.07 | % | 1.46 | % | 3.26 | % | |||||||||||
U.S. corporate debt securities:
|
||||||||||||||||||||
Amortized cost
|
$ | 125 | $ | 646 | $ | 187 | $ | 561 | $ | 1,519 | ||||||||||
Fair value
|
125 | 670 | 206 | 662 | 1,663 | |||||||||||||||
Yield(1)
|
1.82 | % | 3.48 | % | 5.04 | % | 5.33 | % | 4.22 | % | ||||||||||
Foreign debt securities:
|
||||||||||||||||||||
Amortized cost
|
$ | 42 | $ | 402 | $ | 42 | $ | 40 | $ | 526 | ||||||||||
Fair value
|
43 | 414 | 43 | 46 | 546 | |||||||||||||||
Yield(1)
|
1.41 | % | 3.01 | % | 4.45 | % | 5.78 | % | 3.20 | % |
(1) | Computed by dividing annualized interest by the amortized cost of respective investment securities. |
16
5. | Receivables |
September 30, |
December 31, |
|||||||
2011 | 2010 | |||||||
(in millions) | ||||||||
Real estate secured:
|
||||||||
First lien
|
$ | 39,461 | $ | 43,859 | ||||
Second lien
|
4,735 | 5,477 | ||||||
Total real estate secured
|
44,196 | 49,336 | ||||||
Personal non-credit card
|
5,600 | 7,117 | ||||||
Commercial and other
|
26 | 33 | ||||||
Total receivables
|
49,822 | 56,486 | ||||||
HSBC acquisition purchase accounting fair value adjustments
|
38 | 43 | ||||||
Accrued finance income
|
1,290 | 1,444 | ||||||
Credit loss reserves
|
(5,911 | ) | (5,512 | ) | ||||
Unearned credit insurance premiums and claims reserves
|
(82 | ) | (123 | ) | ||||
Total receivables, net
|
$ | 45,157 | $ | 52,338 | ||||
17
Days Past Due |
Total |
Total |
||||||||||||||||||||||
September 30, 2011 | 1 29 days | 30 89 days | 90+ days | Past Due | Current | Receivables(1) | ||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Continuing operations:
|
||||||||||||||||||||||||
Real estate secured:
|
||||||||||||||||||||||||
First lien
|
$ | 6,265 | $ | 4,372 | $ | 5,804 | $ | 16,441 | $ | 23,020 | $ | 39,461 | ||||||||||||
Second lien
|
821 | 465 | 342 | 1,628 | 3,107 | 4,735 | ||||||||||||||||||
Total real estate
secured(2)
|
7,086 | 4,837 | 6,146 | 18,069 | 26,127 | 44,196 | ||||||||||||||||||
Personal non-credit card
|
749 | 444 | 322 | 1,515 | 4,085 | 5,600 | ||||||||||||||||||
Commercial and other
|
- | - | - | - | 26 | 26 | ||||||||||||||||||
Total receivables continuing operations
|
$ | 7,835 | $ | 5,281 | $ | 6,468 | $ | 19,584 | $ | 30,238 | $ | 49,822 | ||||||||||||
Discontinued credit card
operations(3)
|
$ | 440 | $ | 300 | $ | 292 | $ | 1,032 | $ | 7,645 | $ | 8,677 | ||||||||||||
Days Past Due |
Total |
Total |
||||||||||||||||||||||
December 31, 2010 | 1 29 days | 30 89 days | 90+ days | Past Due | Current | Receivables(1) | ||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Continuing operations:
|
||||||||||||||||||||||||
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(2)
|
7,959 | 5,477 | 6,398 | 19,834 | 29,502 | 49,336 | ||||||||||||||||||
Personal non-credit card
|
968 | 604 | 507 | 2,079 | 5,038 | 7,117 | ||||||||||||||||||
Commercial and other
|
- | - | - | - | 33 | 33 | ||||||||||||||||||
Total receivables continuing operations
|
$ | 8,927 | $ | 6,081 | $ | 6,905 | $ | 21,913 | $ | 34,573 | $ | 56,486 | ||||||||||||
Discontinued credit card
operations(3)
|
$ | 473 | $ | 363 | $ | 437 | $ | 1,273 | $ | 8,624 | $ | 9,897 | ||||||||||||
(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. | |
(2) | At September 30, 2011 and December 31, 2010, approximately 56 percent and 54 percent, respectively, of our real estate secured receivables have been either modified and/or re-aged. | |
(3) | At September 30, 2011, discontinued credit card receivables are included as part of the disposal group held for sale to Capital One which is carried at the lower of amortized cost or fair value. At December 31, 2010, discontinued credit card receivables were carried at amortized cost and as such are not directly comparable to the current period balances. |
18
September 30, |
December 31, |
|||||||
2011 | 2010 | |||||||
(dollars are in millions) | ||||||||
Continuing operations:
|
||||||||
Nonaccrual receivable
portfolios(1):
|
||||||||
Real estate
secured(2)
|
$ | 6,114 | $ | 6,360 | ||||
Personal non-credit card
|
337 | 530 | ||||||
Total nonperforming receivables
|
6,451 | 6,890 | ||||||
Real estate owned
|
371 | 962 | ||||||
Total nonperforming assets continuing operations
|
6,822 | 7,852 | ||||||
Discontinued credit card
operations(4)(5)
|
319 | 447 | ||||||
Total nonperforming assets
|
$ | 7,141 | $ | 8,299 | ||||
Credit loss reserves as a percent of nonperforming
receivables continuing
operations(3)
|
91.6 | % | 80.0 | % | ||||
(1) | 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. If a re-aged loan subsequently experiences payment default and becomes 90 or more days contractually delinquent, it will be reported as nonaccrual. | |
(2) | At September 30, 2011 and December 31, 2010, nonaccrual real estate secured receivables include $4.3 billion and $4.1 billion, respectively, of receivables that are carried at the lower of amortized cost or fair value less cost to sell. | |
(3) | Ratio excludes nonperforming receivables associated with receivable portfolios which are considered held for sale as these receivables are carried at the lower of amortized cost or fair value with no corresponding credit loss reserves. | |
(4) | At September 30, 2011, discontinued credit card receivables are included as part of the disposal group held for sale to Capital One which is carried at the lower of amortized cost or fair value. At December 31, 2010, discontinued credit card receivables were carried at amortized cost and as such are not directly comparable to the current period balances. | |
(5) | Credit card receivables continue to accrue interest after they become 90 or more days delinquent, consistent with industry practice. |
19
Three Months Ended |
Nine Months Ended |
|||||||
September 30, 2011 | September 30, 2011 | |||||||
(in millions) | ||||||||
Real estate secured:
|
||||||||
First lien
|
$ | 1,073 | $ | 4,700 | ||||
Second lien
|
117 | 474 | ||||||
Total real estate secured
|
1,190 | 5,174 | ||||||
Personal non-credit card
|
206 | 891 | ||||||
Total
|
$ | 1,396 | $ | 6,065 | ||||
September 30, |
December 31, |
|||||||
2011 | 2010 | |||||||
(in millions) | ||||||||
TDR
Loans(1)(2):
|
||||||||
Real estate secured:
|
||||||||
First lien
|
$ | 12,105 | $ | 8,697 | ||||
Second lien
|
960 | 647 | ||||||
Total real estate
secured(3)(4)
|
13,065 | 9,344 | ||||||
Personal non-credit card
|
1,315 | 704 | ||||||
Total TDR Loans
|
$ | 14,380 | $ | 10,048 | ||||
20
September 30, |
December 31, |
|||||||
2011 | 2010 | |||||||
(in millions) | ||||||||
Credit loss reserves for TDR Loans:
|
||||||||
Real estate secured:
|
||||||||
First lien
|
$ | 2,876 | $ | 1,728 | ||||
Second lien
|
499 | 258 | ||||||
Total real estate secured
|
3,375 | 1,986 | ||||||
Personal non-credit card
|
668 | 395 | ||||||
Total credit loss reserves for TDR
Loans(5)
|
$ | 4,043 | $ | 2,381 | ||||
(1) | TDR Loans are considered to be impaired loans regardless of accrual status. | |
(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: |
September 30, |
December 31, |
|||||||
2011 | 2010 | |||||||
(in millions) | ||||||||
Real estate secured:
|
||||||||
First lien
|
$ | 13,524 | $ | 9,650 | ||||
Second lien
|
1,024 | 709 | ||||||
Total real estate secured
|
14,548 | 10,359 | ||||||
Personal non-credit card
|
1,315 | 705 | ||||||
Total TDR Loans
|
$ | 15,863 | $ | 11,064 | ||||
(3) | At September 30, 2011 and December 31, 2010, TDR Loans totaling $2.2 billion and $1.5 billion, respectively, are recorded at the lower of amortized cost or fair value less cost to sell. | |
(4) | The following table summarizes real estate secured TDR Loans for our Mortgage Services and Consumer Lending businesses: |
September 30, |
December 31, |
|||||||
2011 | 2010 | |||||||
(in millions) | ||||||||
Mortgage Services
|
$ | 4,753 | $ | 4,114 | ||||
Consumer Lending
|
8,312 | 5,230 | ||||||
Total real estate secured
|
$ | 13,065 | $ | 9,344 | ||||
(5) | Included in credit loss reserves. |
Three Months Ended |
Nine Months Ended |
|||||||
September 30, 2011 | September 30, 2011 | |||||||
(in millions) | ||||||||
Real estate secured:
|
||||||||
First lien
|
$ | 669 | $ | 1,111 | ||||
Second lien
|
66 | 107 | ||||||
Total real estate secured
|
735 | 1,218 | ||||||
Personal non-credit card
|
153 | 264 | ||||||
Total
|
$ | 888 | $ | 1,482 | ||||
21
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in millions) | ||||||||||||||||
Average balance of TDR
Loans(1):
|
||||||||||||||||
Real estate secured:
|
||||||||||||||||
First lien
|
$ | 11,875 | $ | 8,851 | $ | 10,763 | $ | 8,876 | ||||||||
Second lien
|
940 | 705 | 842 | 716 | ||||||||||||
Total real estate secured
|
12,815 | 9,556 | 11,605 | 9,592 | ||||||||||||
Personal non-credit card
|
1,287 | 736 | 1,099 | 744 | ||||||||||||
Total average balance of TDR Loans
|
$ | 14,102 | $ | 10,292 | $ | 12,704 | $ | 10,336 | ||||||||
Interest income recognized on TDR Loans:
|
||||||||||||||||
Real estate secured:
|
||||||||||||||||
First lien
|
$ | 156 | $ | 101 | $ | 419 | $ | 309 | ||||||||
Second lien
|
17 | 9 | 45 | 30 | ||||||||||||
Total real estate secured
|
173 | 110 | 464 | 339 | ||||||||||||
Personal non-credit card
|
39 | 12 | 92 | 35 | ||||||||||||
Total interest income recognized on TDR Loans
|
$ | 212 | $ | 122 | $ | 556 | $ | 374 | ||||||||
(1) | The increase in the average balance of TDR Loans during the three and nine months ended September 30, 2011 reflects, in part, the higher levels of receivables considered to be TDR Loans as a result of the adoption of the new accounting guidance as discussed above. These averages assume the new guidelines were adopted January 1, 2011. |
September 30, 2011 | December 31, 2010 | |||||||||||||||
Dollars of |
Delinquency |
Dollars of |
Delinquency |
|||||||||||||
Delinquency | Ratio | Delinquency | Ratio | |||||||||||||
(dollars are in millions) | ||||||||||||||||
Continuing operations:
|
||||||||||||||||
Real estate secured:
|
||||||||||||||||
First lien
|
$ | 7,233 | 18.33 | % | $ | 7,504 | 17.11 | % | ||||||||
Second lien
|
530 | 11.21 | 667 | 12.18 | ||||||||||||
Total real estate secured
|
7,763 | 17.57 | 8,171 | 16.56 | ||||||||||||
Personal non-credit card
|
518 | 9.24 | 779 | 10.94 | ||||||||||||
Total continuing operations
|
8,281 | 16.63 | 8,950 | 15.85 | ||||||||||||
Discontinued credit card
operations(1)
|
457 | 5.27 | 612 | 6.18 | ||||||||||||
Total
|
$ | 8,738 | 14.94 | % | $ | 9,562 | 14.41 | % | ||||||||
(1) | At September 30, 2011, discontinued credit card receivables are included as part of the disposal group held for sale to Capital One which is carried at the lower of amortized cost or fair value. At December 31, 2010, discontinued credit card receivables were carried at amortized cost and as such are not directly comparable to the current period balances. |
22
Accruing Loans |
||||||||||||||||
Contractually Past |
||||||||||||||||
Performing |
Nonaccrual |
Due 90 Days or |
||||||||||||||
Loans | Loans | More(1) | Total | |||||||||||||
(in millions) | ||||||||||||||||
At September 30, 2011
|
||||||||||||||||
Continuing operations:
|
||||||||||||||||
Real estate
secured(2)
|
$ | 38,082 | $ | 6,114 | $ | - | $ | 44,196 | ||||||||
Personal non-credit card
|
5,263 | 337 | - | 5,600 | ||||||||||||
Total continuing
operations(3)
|
43,345 | 6,451 | - | 49,796 | ||||||||||||
Discontinued
operations(4)
|
8,358 | - | 319 | 8,677 | ||||||||||||
Total
|
$ | 51,703 | $ | 6,451 | $ | 319 | $ | 58,473 | ||||||||
At December 31, 2010
|
||||||||||||||||
Continuing operations
|
||||||||||||||||
Real estate
secured(2)
|
$ | 42,976 | $ | 6,360 | $ | - | $ | 49,336 | ||||||||
Personal non-credit card
|
6,587 | 530 | - | 7,117 | ||||||||||||
Total continuing
operations(3)
|
49,563 | 6,890 | - | 56,453 | ||||||||||||
Discontinued
operations(4)
|
9,450 | - | 447 | 9,897 | ||||||||||||
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. | |
(2) | At September 30, 2011 and December 30, 2010, nonperforming real estate secured receivables include $4.3 billion and $4.1 billion, respectively, of receivables that are carried at fair value less cost to sell. | |
(3) | At September 30, 2011 and December 30, 2010, nonperforming receivables for continuing operations include $2.2 billion and $1.9 billion, respectively, which are TDR Loans, some of which may also be carried at fair value less cost to sell. | |
(4) | At September 30, 2011, discontinued credit card receivables are included as part of the disposal group held for sale to Capital One which is carried at the lower of amortized cost or fair value. At December 31, 2010, discontinued credit card receivables were carried at amortized cost and as such are not directly comparable to the current period balances. |
| 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 customers financial position could affect their ability to repay the loan in the future when the principal payments are required. | |
| ARM loans A loan which allows the lender to adjust pricing on the loan in line with interest rate movements. A customers financial situation and the general interest rate environment at the time of the interest rate reset could affect the customers ability to repay or refinance the loan after adjustment. | |
| Stated income loans Loans underwritten based upon the loan applicants representation of annual income, which is not verified by receipt of supporting documentation. |
23
September 30, |
December 31, |
|||||||
2011 | 2010 | |||||||
(in billions) | ||||||||
Interest-only loans
|
$ | 1.0 | $ | 1.3 | ||||
ARM
loans(1)(2)
|
6.3 | 7.5 | ||||||
Stated income loans
|
2.3 | 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. |
6. | Credit Loss Reserves |
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in millions) | ||||||||||||||||
Credit loss reserves at beginning of period
|
$ | 4,590 | $ | 6,106 | $ | 5,512 | $ | 7,275 | ||||||||
Provision for credit
losses(1)
|
2,182 | 1,305 | 3,473 | 4,290 | ||||||||||||
Charge-offs
|
(973 | ) | (1,699 | ) | (3,467 | ) | (6,084 | ) | ||||||||
Recoveries
|
112 | 123 | 393 | 354 | ||||||||||||
Credit loss reserves at end of period
|
$ | 5,911 | $ | 5,835 | $ | 5,911 | $ | 5,835 | ||||||||
(1) | During both the three and nine months ended September 30, 2011, provision for credit losses included approximately $925 million related to the adoption of new accounting guidance for TDR Loans as discussed above of which approximately $180 million reflects the impact of charges in market conditions during the quarter. |
24
Real Estate Secured | ||||||||||||||||||||
First |
Second |
Personal Non- |
Comml |
|||||||||||||||||
Lien | Lien | Credit Card | and Other | Total | ||||||||||||||||
(in millions) | ||||||||||||||||||||
Three Months Ended September 30, 2011:
|
||||||||||||||||||||
Credit loss reserve balances at beginning of period
|
$ | 3,002 | $ | 635 | $ | 953 | $ | - | $ | 4,590 | ||||||||||
Provision for credit
losses(2)
|
1,534 | 375 | 273 | - | 2,182 | |||||||||||||||
Charge-offs
|
(578 | ) | (168 | ) | (227 | ) | - | (973 | ) | |||||||||||
Recoveries
|
7 | 15 | 90 | - | 112 | |||||||||||||||
Net charge-offs
|
(571 | ) | (153 | ) | (137 | ) | - | (861 | ) | |||||||||||
Credit loss reserve balance at end of period
|
$ | 3,965 | $ | 857 | $ | 1,089 | $ | - | $ | 5,911 | ||||||||||
Three Months Ended September 30, 2010:
|
||||||||||||||||||||
Credit loss reserve balances at beginning of period
|
$ | 3,386 | $ | 1,097 | $ | 1,623 | $ | - | $ | 6,106 | ||||||||||
Provision for credit losses
|
897 | 146 | 262 | - | 1,305 | |||||||||||||||
Charge-offs
|
(908 | ) | (315 | ) | (476 | ) | - | (1,699 | ) | |||||||||||
Recoveries
|
12 | 15 | 96 | - | 123 | |||||||||||||||
Net charge-offs
|
(896 | ) | (300 | ) | (380 | ) | - | (1,576 | ) | |||||||||||
Credit loss reserve balance at end of period
|
$ | 3,387 | $ | 943 | $ | 1,505 | $ | - | $ | 5,835 | ||||||||||
Nine Months Ended September 30, 2011:
|
||||||||||||||||||||
Credit loss reserve balances at beginning of period
|
$ | 3,355 | $ | 832 | $ | 1,325 | $ | - | $ | 5,512 | ||||||||||
Provision for credit
losses(2)
|
2,525 | 613 | 335 | - | 3,473 | |||||||||||||||
Charge-offs
|
(1,941 | ) | (636 | ) | (890 | ) | - | (3,467 | ) | |||||||||||
Recoveries
|
26 | 48 | 319 | - | 393 | |||||||||||||||
Net charge-offs
|
(1,915 | ) | (588 | ) | (571 | ) | - | (3,074 | ) | |||||||||||
Credit loss reserve balance at end of period
|
$ | 3,965 | $ | 857 | $ | 1,089 | $ | - | $ | 5,911 | ||||||||||
Ending balance: collectively evaluated for impairment
|
$ | 1,080 | $ | 357 | $ | 421 | $ | - | $ | 1,858 | ||||||||||
Ending balance: individually evaluated for
impairment(1)
|
2,876 | 499 | 668 | - | 4,043 | |||||||||||||||
Ending balance: loans acquired with deteriorated credit quality
|
9 | 1 | - | - | 10 | |||||||||||||||
Total credit loss reserves
|
$ | 3,965 | $ | 857 | $ | 1,089 | $ | - | $ | 5,911 | ||||||||||
Receivables at September 30, 2011:
|
||||||||||||||||||||
Collectively evaluated for impairment
|
$ | 23,996 | $ | 3,707 | $ | 4,285 | $ | 26 | $ | 32,014 | ||||||||||
Individually evaluated for
impairment(1)
|
9,926 | 933 | 1,315 | - | 12,174 | |||||||||||||||
Receivables carried fair value less cost to sell
|
5,504 | 89 | - | - | 5,593 | |||||||||||||||
Receivables acquired with deteriorated credit quality
|
35 | 6 | - | - | 41 | |||||||||||||||
Total receivables
|
$ | 39,461 | $ | 4,735 | $ | 5,600 | $ | 26 | $ | 49,822 | ||||||||||
Nine Months Ended September 30, 2010:
|
||||||||||||||||||||
Credit loss reserve balances at beginning of period
|
$ | 3,997 | $ | 1,430 | $ | 1,848 | $ | - | $ | 7,275 | ||||||||||
Provision for credit losses
|
2,418 | 618 | 1,254 | - | 4,290 | |||||||||||||||
Charge-offs
|
(3,060 | ) | (1,158 | ) | (1,866 | ) | - | (6,084 | ) | |||||||||||
Recoveries
|
32 | 53 | 269 | - | 354 | |||||||||||||||
Net charge-offs
|
(3,028 | ) | (1,105 | ) | (1,597 | ) | - | (5,730 | ) | |||||||||||
Credit loss reserve balance at end of period
|
$ | 3,387 | $ | 943 | $ | 1,505 | $ | - | $ | 5,835 | ||||||||||
Ending balance: collectively evaluated for impairment
|
$ | 1,531 | $ | 648 | $ | 1,079 | $ | - | $ | 3,258 | ||||||||||
Ending balance: individually evaluated for
impairment(1)
|
1,843 | 292 | 426 | - | 2,561 | |||||||||||||||
Ending balance: loans acquired with deteriorated credit quality
|
13 | 3 | - | - | 16 | |||||||||||||||
Total credit loss reserves
|
$ | 3,387 | $ | 943 | $ | 1,505 | $ | - | $ | 5,835 | ||||||||||
Receivables at September 30, 2010:
|
||||||||||||||||||||
Collectively evaluated for impairment
|
$ | 33,353 | $ | 5,170 | $ | 7,087 | $ | 45 | $ | 45,655 | ||||||||||
Individually evaluated for
impairment(1)
|
7,513 | 676 | 729 | - | 8,918 | |||||||||||||||
Receivables carried at fair value less cost to sell
|
4,811 | 64 | - | - | 4,875 | |||||||||||||||
Receivables acquired with deteriorated credit quality
|
34 | 7 | - | - | 41 | |||||||||||||||
Total receivables
|
$ | 45,711 | $ | 5,917 | $ | 7,816 | $ | 45 | $ | 59,489 | ||||||||||
(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. This amount excludes TDR Loans that are carried at fair value less cost to sell which totaled $2.2 billion at September 30, 2011 and $1.3 billion at September 30, 2010. |
25
(2) | During both the three and nine months ended September 30, 2011, provision for credit losses included $683 million for first lien real estate secured receivables, $83 million for second lien real estate secured receivables and $159 million for personal non-credit card receivables related to the adoption of new accounting guidance for TDR Loans as discussed above. |
7. | Derivative Financial Instruments |
26
Asset Derivatives Fair Value | Liability Derivatives Fair Value | |||||||||||||||||||
Balance Sheet |
September 30, |
December 31, |
Balance Sheet |
September 30, |
December 31, |
|||||||||||||||
Location | 2011 | 2010 | Location | 2011 | 2010 | |||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||
Interest rate swaps
|
Derivative financial assets | $ | 21 | $ | (4 | ) | Derivative related liabilities | $ | - | $ | 18 | |||||||||
Currency swaps
|
Derivative | Derivative related | ||||||||||||||||||
financial assets | 108 | 124 | liabilities | - | - | |||||||||||||||
Total
|
$ | 129 | $ | 120 | $ | - | $ | 18 | ||||||||||||
27
Amount of |
Amount of |
Amount of |
Amount of |
|||||||||||||||||||||||||||||||||
Gain (Loss) |
Gain (Loss) |
Gain (Loss) |
Gain (Loss) |
|||||||||||||||||||||||||||||||||
Recognized |
Recognized |
Recognized |
Recognized |
|||||||||||||||||||||||||||||||||
in Income |
in Income |
in Income |
in Income |
|||||||||||||||||||||||||||||||||
Location of Gain |
on the |
on Hedged |
on the |
on Hedged |
||||||||||||||||||||||||||||||||
(Loss) Recognized |
Derivative | Items | Derivative | Items | ||||||||||||||||||||||||||||||||
in Income on |
Three Months Ended |
Nine Months Ended |
||||||||||||||||||||||||||||||||||
Hedged Item |
September 30, | September 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) | $ | 19 | $ | 9 | $ | (16 | ) | $ | (3 | ) | $ | 43 | $ | 49 | $ | (40 | ) | $ | (26 | ) | ||||||||||||||
Currency swaps
|
Fixed rate | Derivative related | ||||||||||||||||||||||||||||||||||
borrowings | income (expense) | 3 | (6 | ) | 5 | 4 | (21 | ) | (7 | ) | 33 | 4 | ||||||||||||||||||||||||
Total
|
$ | 22 | $ | 3 | $ | (11 | ) | $ | 1 | $ | 22 | $ | 42 | $ | (7 | ) | $ | (22 | ) | |||||||||||||||||
Asset Derivatives Fair Value | Liability Derivatives Fair Value | |||||||||||||||||||
Balance Sheet |
September 30, |
December 31, |
Balance Sheet |
September 30, |
December 31, |
|||||||||||||||
Location | 2011 | 2010 | Location | 2011 | 2010 | |||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||
Interest rate swaps
|
Derivative financial assets | $ | (587 | ) | $ | (437 | ) | Derivative related liabilities | $ | - | $ | - | ||||||||
Currency swaps
|
Derivative | Derivative related | ||||||||||||||||||
financial assets | 543 | 985 | liabilities | - | - | |||||||||||||||
Total
|
$ | (44 | ) | $ | 548 | $ | - | $ | - | |||||||||||
28
Gain (Loss) |
Gain (Loss) |
|||||||||||||||||||||||||||
Gain (Loss) |
Reclassified |
Recognized |
||||||||||||||||||||||||||
Recognized |
from |
In Income |
||||||||||||||||||||||||||
in OCI on |
Location of Gain |
AOCI into |
Location of Gain |
on |
||||||||||||||||||||||||
Derivative |
(Loss) Reclassified |
Income |
(Loss) Recognized |
Derivative |
||||||||||||||||||||||||
(Effective |
from Accumulated |
(Effective |
in Income |
(Ineffective |
||||||||||||||||||||||||
Portion) |
OCI into Income |
Portion) |
on the Derivative |
Portion) | ||||||||||||||||||||||||
2011 | 2010 | (Effective Portion) | 2011 | 2010 | (Ineffective Portion) | 2011 | 2010 | |||||||||||||||||||||
(in millions) | (in millions) | (in millions) | ||||||||||||||||||||||||||
Three Months Ended September 30,
|
||||||||||||||||||||||||||||
Interest rate swaps
|
$ | (169 | ) | $ | (84 | ) | Interest expense | $ | (8 | ) | $ | (14 | ) | Derivative related Income | $ | 2 | $ | - | ||||||||||
Currency swaps
|
70 | (18 | ) | Interest expense | (6 | ) | (9 | ) | Derivative related Income | - | (8 | ) | ||||||||||||||||
Total
|
$ | (99 | ) | $ | (102 | ) | $ | (14 | ) | $ | (23 | ) | $ | 2 | $ | (8 | ) | |||||||||||
Nine Months Ended September 30,
|
||||||||||||||||||||||||||||
Interest rate swaps
|
$ | (147 | ) | $ | (211 | ) | Interest expense | $ | (31 | ) | $ | (51 | ) | Derivative related Income | $ | 4 | $ | - | ||||||||||
Currency swaps
|
108 | (35 | ) | Interest expense | (19 | ) | (26 | ) | Derivative related Income | (5 | ) | (34 | ) | |||||||||||||||
Total
|
$ | (39 | ) | $ | (246 | ) | $ | (50 | ) | $ | (77 | ) | $ | (1 | ) | $ | (34 | ) | ||||||||||
Asset Derivatives Fair Value | Liability Derivatives Fair Value | |||||||||||||||||||
Balance Sheet |
September 30, |
December 31, |
Balance Sheet |
September 30, |
December 31, |
|||||||||||||||
Location | 2011 | 2010 | Location | 2011 | 2010 | |||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||
Interest rate swaps
|
Derivative financial assets | $ | (797 | ) | $ | 165 | Derivative related liabilities | $ | 2 | $ | 5 | |||||||||
Currency swaps
|
Derivative financial assets | 94 | 67 | Derivative related liabilities | - | - | ||||||||||||||
Total
|
$ | (703 | ) | $ | 232 | $ | 2 | $ | 5 | |||||||||||
29
Amount of Gain (Loss) |
||||||||||||||||||
Recognized in Income |
||||||||||||||||||
on Derivative | ||||||||||||||||||
Three Months Ended |
Nine Months Ended |
|||||||||||||||||
Location of Gain (Loss) |
September 30, | September 30, | ||||||||||||||||
Recognized in Income on Derivative | 2011 | 2010 | 2011 | 2010 | ||||||||||||||
(in millions) | ||||||||||||||||||
Interest rate contracts
|
Derivative related income (expense) | $ | (929 | ) | $ | (369 | ) | $ | (1,054 | ) | $ | (957 | ) | |||||
Currency contracts
|
Derivative related income (expense) | 3 | (1 | ) | 4 | (1 | ) | |||||||||||
Total
|
$ | (926 | ) | $ | (370 | ) | $ | (1,050 | ) | $ | (958 | ) | ||||||
Asset Derivatives Fair Value | Liability Derivatives Fair Value | |||||||||||||||||||
Balance Sheet |
September 30, |
December 31, |
Balance Sheet |
September 30, |
December 31, |
|||||||||||||||
Location | 2011 | 2010 | Location | 2011 | 2010 | |||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||
Interest rate swaps
|
Derivative financial assets | $ | 793 | $ | 907 | Derivative related liabilities | $ | - | $ | - | ||||||||||
Currency swaps
|
Derivative | Derivative related | ||||||||||||||||||
financial assets | 874 | 739 | liabilities | - | - | |||||||||||||||
Total
|
$ | 1,667 | $ | 1,646 | $ | - | $ | - | ||||||||||||
Amount of Gain (Loss) |
||||||||||||||||||
Recognized in Income |
||||||||||||||||||
on Derivative | ||||||||||||||||||
Three Months Ended |
Nine Months Ended |
|||||||||||||||||
Location of Gain (Loss) |
September 30, | September 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 | $ | 128 | $ | 279 | $ | 264 | $ | 825 | |||||||||
Currency contracts
|
Gain (loss) on debt designated at fair value and related derivatives | 169 | 86 | 182 | 242 | |||||||||||||
Total
|
$ | 297 | $ | 365 | $ | 446 | $ | 1,067 | ||||||||||
30
September 30, |
December 31, |
|||||||
2011 | 2010 | |||||||
(in millions) | ||||||||
Derivatives designated as hedging instruments:
|
||||||||
Interest rate swaps
|
$ | 8,466 | $ | 8,917 | ||||
Currency swaps
|
8,195 | 10,018 | ||||||
16,661 | 18,935 | |||||||
Non-qualifying economic hedges:
|
||||||||
Derivatives not designated as hedging instruments:
|
||||||||
Interest rate:
|
||||||||
Swaps
|
11,223 | 11,449 | ||||||
Purchased caps
|
- | 173 | ||||||
Foreign exchange:
|
||||||||
Swaps
|
1,054 | 1,221 | ||||||
Forwards
|
94 | 123 | ||||||
12,371 | 12,966 | |||||||
Derivatives associated with debt carried at fair value:
|
||||||||
Interest rate swaps
|
11,843 | 15,212 | ||||||
Currency swaps
|
3,376 | 3,376 | ||||||
15,219 | 18,588 | |||||||
Total
|
$ | 44,251 | $ | 50,489 | ||||
8. | Fair Value Option |
31
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in millions) | ||||||||||||||||
Mark-to-market
on debt designated at fair
value(1):
|
||||||||||||||||
Interest rate component
|
$ | (184 | ) | $ | (176 | ) | $ | (52 | ) | $ | (665 | ) | ||||
Credit risk component
|
679 | (190 | ) | 614 | 200 | |||||||||||
Total
mark-to-market
on debt designated at fair value
|
495 | (366 | ) | 562 | (465 | ) | ||||||||||
Mark-to-market
on the related
derivatives(1)
|
146 | 175 | (28 | ) | 460 | |||||||||||
Net realized gains on the related derivatives
|
151 | 190 | 474 | 607 | ||||||||||||
Gain on debt designated at fair value and related derivatives
|
$ | 792 | $ | (1 | ) | $ | 1,008 | $ | 602 | |||||||
(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 gain of $241 million and a loss of $51 million during the three and nine months ended September 30, 2011, respectively, compared to a loss of $434 million and a gain of $57 million for the three and nine months ended September 2010, respectively. Offsetting gains (losses) recorded in derivative related income (expense) associated with the related derivatives was a loss of $241 million and a gain of $51 million during the three and nine months ended September 30, 2011, respectively, compared to a gain of $434 million and a loss of $57 million during the three and nine months ended September, 30, 2010, respectively. |
| Interest rate curve A significant decrease in U.S. interest rates for periods greater than two years during the third quarter of 2011 resulted in a loss in the interest rate component on the mark-to-market of the debt and a gain on the mark-to-market of the related derivative. During the third quarter of 2010 U.S. interest rates decreased resulting in a loss in the interest rate component on the mark-to-market of the debt and a gain on the mark-to-market of the related derivative. While long-term rates were lower during the nine months ended September 30, 2011, changes in market movements on certain debt and related derivatives that mature in the near term resulted in a loss in the interest rate component on the mark-to-market of the debt and a loss on the mark-to-market of the related derivative. As these items near maturity, their values are less sensitive to interest rate movements. A decrease in long term U.S. interest rates for the nine months ending September 30, 2010 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 bonds 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. |
32
Approximately 3 percent and 7 percent of our FVO debt does not have a corresponding derivative at September 30, 2011 and December 31, 2010, respectively. |
| Credit Our secondary market credit spreads widened substantially during the third quarter of 2011 due to the continuing concerns with the European sovereign debt crisis which has caused spreads to widen throughout the financial services industry as well as the uncertain economic recovery in the United States. During the third quarter of 2010 our secondary spreads tightened as marketplace liquidity improved throughout the quarter. During the first nine months of 2011, the widening of our credit spreads observed during the current quarter offset the overall tightening of our credit spreads recognized during the first half of 2011. During the same period 2010, the tightening of our credit spreads due to improved market place liquidity reversed the widening of our credit spreads during the first half of 2010. |
9. | Income Taxes |
Three Months Ended September 30, | 2011 | 2010 | ||||||||||||||
(dollars are in millions) | ||||||||||||||||
Tax expense (benefit) at the U.S. Federal statutory income tax
rate
|
$ | (706 | ) | (35.0 | )% | $ | (473 | ) | (35.0 | )% | ||||||
Increase (decrease) in rate resulting from:
|
||||||||||||||||
Adjustment to valuation allowance on deferred tax assets
|
(3 | ) | (.2 | ) | (1 | ) | (.1 | ) | ||||||||
State and local taxes, net of Federal benefit
|
(2 | ) | (.1 | ) | (9 | ) | (.7 | ) | ||||||||
Uncertain tax positions
|
28 | 1.4 | - | - | ||||||||||||
Other
|
(6 | ) | (.2 | ) | 4 | .3 | ||||||||||
Total income tax expense (benefit)
|
$ | (689 | ) | (34.1 | )% | $ | (479 | ) | (35.5 | )% | ||||||
Nine Months Ended September 30, | 2011 | 2010 | ||||||||||||||
(dollars are in millions) | ||||||||||||||||
Tax expense (benefit) at the U.S. Federal statutory income tax
rate
|
$ | (1,003 | ) | (35.0 | )% | $ | (1,289 | ) | (35.0 | )% | ||||||
Increase (decrease) in rate resulting from:
|
||||||||||||||||
Adjustment to valuation allowance on deferred tax assets
|
(144 | ) | (5.0 | ) | (9 | ) | (.2 | ) | ||||||||
State and local taxes, net of Federal benefit
|
(27 | ) | (1.0 | ) | (28 | ) | (.8 | ) | ||||||||
Uncertain tax positions
|
25 | 1.0 | - | - | ||||||||||||
Other
|
(5 | ) | (.3 | ) | (8 | ) | (.2 | ) | ||||||||
Total income tax expense (benefit)
|
$ | (1,154 | ) | (40.3 | )% | $ | (1,334 | ) | (36.2 | )% | ||||||
33
34
35
10. | Pension and Other Postretirement Benefits |
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in millions) | ||||||||||||||||
Service cost benefits earned during the period
|
$ | 1 | $ | 4 | $ | 4 | $ | 11 | ||||||||
Interest cost on projected benefit obligation
|
8 | 10 | 25 | 29 | ||||||||||||
Expected return on assets
|
(10 | ) | (9 | ) | (29 | ) | (27 | ) | ||||||||
Recognized losses
|
4 | 6 | 12 | 17 | ||||||||||||
Amortization of prior service cost
|
- | (1 | ) | - | (1 | ) | ||||||||||
Pension expense
|
$ | 3 | $ | 10 | $ | 12 | $ | 29 | ||||||||
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in millions) | ||||||||||||||||
Service cost benefits earned during the period
|
$ | - | $ | - | $ | - | $ | 1 | ||||||||
Interest cost
|
1 | 2 | 3 | 4 | ||||||||||||
Net periodic postretirement benefit cost
|
$ | 1 | $ | 2 | $ | 3 | $ | 5 | ||||||||
11. | Related Party Transactions |
36
September 30, |
December 31, |
|||||||
2011 | 2010 | |||||||
(in millions) | ||||||||
Assets:
|
||||||||
Cash
|
$ | 220 | $ | 160 | ||||
Interest bearing deposits with banks
|
4 | 1,009 | ||||||
Securities purchased under agreements to resell
|
2,765 | 2,060 | ||||||
Derivative related assets
|
- | 64 | ||||||
Other assets
|
202 | 126 | ||||||
Total assets
|
$ | 3,191 | $ | 3,419 | ||||
Liabilities:
|
||||||||
Due to affiliates (includes $425 million and
$436 million at September 30, 2011 and
December 31, 2010, respectively, carried at fair value)
|
$ | 8,741 | $ | 8,255 | ||||
Derivative related liability
|
275 | 2 | ||||||
Other
liabilities(1)
|
(65 | ) | (60 | ) | ||||
Total liabilities
|
$ | 8,951 | $ | 8,197 | ||||
(1) | Other liabilities includes $133 million and $119 million at September 30, 2011 and December 31, 2010, respectively, related to accrued interest receivable on derivative positions with affiliates. |
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in millions) | ||||||||||||||||
Income/(Expense):
|
||||||||||||||||
Interest income from HSBC affiliates
|
$ | 1 | $ | 2 | $ | 5 | $ | 5 | ||||||||
Interest expense paid to HSBC
affiliates(1)
|
(140 | ) | (179 | ) | (436 | ) | (601 | ) | ||||||||
Net interest income (loss)
|
(139 | ) | (177 | ) | (431 | ) | (596 | ) | ||||||||
Gain/(loss) on FVO debt with affiliate
|
19 | - | 12 | - | ||||||||||||
Servicing and other fees from HSBC affiliates:
|
||||||||||||||||
HSBC Bank USA:
|
||||||||||||||||
Real estate secured servicing and related fees
|
2 | 4 | 8 | 9 | ||||||||||||
Other servicing, processing, origination and support revenues
from HSBC Bank USA and other HSBC affiliates
|
3 | 3 | 9 | 12 | ||||||||||||
HSBC Technology and Services (USA) Inc. (HTSU)
administrative fees and rental
revenue(2)
|
(1 | ) | - | 1 | 9 | |||||||||||
Total servicing and other fees from HSBC affiliates
|
4 | 7 | 18 | 30 | ||||||||||||
Support services from HSBC affiliates
|
(85 | ) | (77 | ) | (258 | ) | (197 | ) | ||||||||
Stock based compensation expense with HSBC
|
(1 | ) | (2 | ) | (6 | ) | (7 | ) | ||||||||
Insurance commission paid to HSBC Bank Canada
|
(5 | ) | (4 | ) | (13 | ) | (18 | ) | ||||||||
(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 $(3) million during the three and nine months ended September 30, 2011, respectively, and $(1) million and $5 million during the three and nine months ended September 30, 2010, respectively. |
37
| In 2003 and 2004, we sold approximately $3.7 billion of real estate secured receivables to HSBC Bank USA and continue to service these receivables for a fee. At September 30, 2011 and December 31, 2010, we were servicing receivables totaling $1.4 billion and $1.5 billion. Servicing fees for these receivables totaled less than $1 million and $3 million during the three and nine months ended September 30, 2011, respectively, compared to $2 million and $4 million in the year-ago periods. |
| 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 nine months ended September 30, 2011, we paid $3 million and $7 million, respectively, for services we received from HSBC Bank USA and received $2 million and $5 million, respectively, for services we provided. During the three and nine months ended September 30, 2010, we paid $2 million and $6 million, respectively, for services we received from HSBC Bank USA and received $2 million and $5 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 nine months ended September 30, 2011, we paid $15 million and $47 million, respectively, for services we received from HSBC Bank USA. |
| 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 September 30, 2011 or December 31, 2010. |
| As it relates to our discontinued credit card operations, 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 but retained the customer account relationships. In December 2004, we sold our private label receivable portfolio (excluding retail sales contracts at our Consumer Lending business) to HSBC Bank USA and also retained the customer account relationships. In July 2004, we purchased the account relationships associated with $970 million of credit card receivables from HSBC Bank USA. In each of these transactions, we agreed to sell on a daily basis all new receivable originations on these account relationships to HSBC Bank USA and service these receivables for a fee. The following table summarizes the receivable portfolios we are servicing for HSBC Bank USA at September 30, 2011 and December 31, 2010 as well as the cumulative amount of receivables sold on a daily basis during the three and nine months ended September 30, 2011 and 2010: |
38
Credit Card | ||||||||||||||||||||||||
Private |
General |
Union |
||||||||||||||||||||||
Label | Motors | Privilege | Other | Total | ||||||||||||||||||||
(in billions) | ||||||||||||||||||||||||
Receivables serviced for HSBC Bank USA:
|
||||||||||||||||||||||||
September 30, 2011
|
$ | 11.8 | $ | 4.0 | $ | 3.6 | $ | 1.9 | $ | 21.3 | ||||||||||||||
December 31, 2010
|
13.5 | 4.5 | 4.1 | 2.0 | 24.1 | |||||||||||||||||||
Total of receivables sold on a daily basis to HSBC Bank USA
during:
|
||||||||||||||||||||||||
Three months ended September 30, 2011
|
$ | 3.7 | $ | 3.2 | $ | .8 | $ | 1.0 | $ | 8.7 | ||||||||||||||
Three months ended September 30, 2010
|
3.5 | 3.4 | .8 | 1.1 | 8.8 | |||||||||||||||||||
Nine months ended September 30, 2011
|
10.5 | 9.6 | 2.3 | 3.0 | $ | 25.4 | ||||||||||||||||||
Nine months ended September 30, 2010
|
9.9 | 10.0 | 2.3 | 3.1 | 25.3 |
| 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 nine months ended September 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 less than $1 million and $58 million, respectively, and is included as a component of income from discontinued |
39
operations. For the loans which we purchased from HTCD during the three and nine months ended September 30, 2010, we received taxpayer financial services revenue and paid an origination fee to HTCD of less than $1 million and $4 million, respectively, which is included as a component of income 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 income from discontinued auto operations. In August 2010, we sold the remainder of our auto finance receivable portfolio to SC USA. |
| A commercial paper back-stop credit facility of $2.0 billion from HSBC at September 30, 2011 and December 31, 2010 supported our domestic issuances of commercial paper. No balances were outstanding under this credit facility at September 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. |
| HSBC North Americas 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 $4 million and $11 million during the three and nine months ended September 30, 2011, respectively, and $6 million and $19 million during the three and nine months ended September 30, 2010, respectively, are included as a component of Support services from HSBC affiliates in the table above. During 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 $43.8 billion and $49.9 billion at September 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 $1.3 billion and $2.5 billion at September 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. |
40
| Due to affiliates includes amounts owed to subsidiaries of HSBC as a result of direct debt issuances. At September 30, 2011 and December 31, 2010, due to affiliates includes $425 million and $436 million, respectively, carried at fair value under FVO reporting. During the three and nine months ended September 30, 2011, loss on debt designated at fair value and related derivatives includes a gain of $19 million and $12 million, respectively, related to these debt issuances. During the nine months ended September 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 September 30, 2011, $600 million was 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 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 $21 million and $68 million during the three and nine months ended September 30, 2011, respectively. |
| In December 2010, we made a deposit totaling $1.0 billion with HSBC Bank plc (HBEU) at current market rates. This deposit was withdrawn during the third quarter of 2011. Interest income earned on this deposit, which totaled $1 million and $3 million during the three and nine months ended September 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 less than $1 million and $2 million during the three and nine months ended September 30, 2011, respectively, and $2 million and $5 million during the three and nine months ended September 30, 2010, respectively, and is reflected as interest income from HSBC affiliates in the table above. |
| Support services from HSBC affiliates also include banking services and other miscellaneous services provided by other subsidiaries of HSBC, including HSBC Bank USA. |
| 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 10, 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 nine months ended September 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 nine months ended September 30, 2011 and 2010, we recorded fees of $2 million and $4 million, respectively, for providing this guarantee. As of September 30, 2011, the outstanding balance of the guaranteed notes was $766 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 $5 million and $13 million during the three and nine months ended September 30, 2011, respectively, and $4 million and $18 million during the three and nine months ended September 30, 2010, respectively, and are included in Insurance Commission paid to HSBC Bank Canada in the table above. |
12. | Business Segments |
41
42
Adjustments |
IFRS Basis |
U.S. GAAP |
||||||||||||||||||||||||||
Reconciling |
Consolidated |
IFRS |
IFRS |
Consolidated |
||||||||||||||||||||||||
Consumer | All Other | Items | Totals | Adjustments(2) | Reclassifications(3) | Totals | ||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||
Three months ended September 30, 2011
|
||||||||||||||||||||||||||||
Net interest income
|
$ | 714 | $ | 140 | $ | - | $ | 854 | $ | (238 | ) | $ | (164 | ) | $ | 452 | ||||||||||||
Other operating income (Total other revenues)
|
(1 | ) | (337 | ) | (7 | )(1) | (345 | ) | 85 | 244 | (16 | ) | ||||||||||||||||
Total operating income (loss)
|
713 | (197 | ) | (7 | ) | 509 | (153 | ) | 80 | 436 | ||||||||||||||||||
Loan impairment charges (Provision for credit losses)
|
1,821 | 2 | - | 1,823 | 359 | - | 2,182 | |||||||||||||||||||||
(1,108 | ) | (199 | ) | (7 | ) | (1,314 | ) | (512 | ) | 80 | (1,746 | ) | ||||||||||||||||
Operating expenses
|
172 | 22 | (7 | ) | 187 | 5 | 80 | 272 | ||||||||||||||||||||
Profit (loss) before tax
|
$ | (1,280 | ) | $ | (221 | ) | $ | - | $ | (1,501 | ) | $ | (517 | ) | $ | - | $ | (2,018 | ) | |||||||||
Intersegment revenues
|
22 | (15 | ) | (7 | )(1) | - | - | - | - | |||||||||||||||||||
Balances at end of period:
|
||||||||||||||||||||||||||||
Customer loans (Receivables)
|
$ | 49,992 | $ | 209 | $ | - | $ | 50,201 | $ | (269 | ) | $ | (110 | ) | $ | 49,822 | ||||||||||||
Assets
|
48,629 | 11,758 | - | 60,387 | (3,138 | ) | (81 | ) | 57,168 | |||||||||||||||||||
Three months ended September 30, 2010
|
||||||||||||||||||||||||||||
Net interest income
|
$ | 592 | $ | 222 | $ | - | $ | 814 | $ | (64 | ) | $ | (208 | ) | $ | 542 | ||||||||||||
Other operating income (Total other revenues)
|
(2 | ) | (546 | ) | (6 | )(1) | (554 | ) | 1 | 305 | (248 | ) | ||||||||||||||||
Total operating income (loss)
|
590 | (324 | ) | (6 | ) | 260 | (63 | ) | 97 | 294 | ||||||||||||||||||
Loan impairment charges (Provision for credit losses)
|
1,385 | - | - | 1,385 | (80 | ) | - | 1,305 | ||||||||||||||||||||
(795 | ) | (324 | ) | (6 | ) | (1,125 | ) | 17 | 97 | (1,011 | ) | |||||||||||||||||
Operating expenses
|
222 | 18 | (6 | ) | 234 | 9 | 97 | 340 | ||||||||||||||||||||
Profit (loss) before tax
|
$ | (1,017 | ) | $ | (342 | ) | $ | - | $ | (1,359 | ) | $ | 8 | $ | - | $ | (1,351 | ) | ||||||||||
Intersegment revenues
|
16 | (10 | ) | (6 | )(1) | - | - | - | - | |||||||||||||||||||
Balances at end of period:
|
||||||||||||||||||||||||||||
Customer loans (Receivables)
|
$ | 59,665 | $ | 1,998 | $ | - | $ | 61,663 | $ | (299 | ) | $ | (1,875 | ) | $ | 59,489 | ||||||||||||
Assets
|
59,880 | 13,083 | - | 72,963 | (4,008 | ) | (135 | ) | 68,820 | |||||||||||||||||||
Nine months ended September 30, 2011
|
||||||||||||||||||||||||||||
Net interest income
|
$ | 2,037 | $ | 429 | $ | - | $ | 2,466 | $ | (536 | ) | $ | (522 | ) | $ | 1,408 | ||||||||||||
Other operating income (Total other revenues)
|
(43 | ) | (508 | ) | (18 | )(1) | (569 | ) | 90 | 769 | 290 | |||||||||||||||||
Total operating income (loss)
|
1,994 | (79 | ) | (18 | ) | 1,897 | (446 | ) | 247 | 1,698 | ||||||||||||||||||
Loan impairment charges (Provision for credit losses)
|
3,969 | 4 | - | 3,973 | (500 | ) | - | 3,473 | ||||||||||||||||||||
(1,975 | ) | (83 | ) | (18 | ) | (2,076 | ) | 54 | 247 | (1,775 | ) | |||||||||||||||||
Operating expenses
|
631 | 217 | (18 | ) | 830 | 13 | 247 | 1,090 | ||||||||||||||||||||
Profit (loss) before tax
|
$ | (2,606 | ) | $ | (300 | ) | $ | - | $ | (2,906 | ) | $ | 41 | $ | - | $ | (2,865 | ) | ||||||||||
Intersegment revenues
|
58 | (40 | ) | (18 | )(1) | - | - | - | - | |||||||||||||||||||
Nine months ended September 30, 2010
|
||||||||||||||||||||||||||||
Net interest income
|
$ | 1,748 | $ | 696 | $ | - | $ | 2,444 | $ | (199 | ) | $ | (658 | ) | $ | 1,587 | ||||||||||||
Other operating income (Total other revenues)
|
29 | (889 | ) | (16 | )(1) | (876 | ) | (19 | ) | 895 | - | |||||||||||||||||
Total operating income (loss)
|
1,777 | (193 | ) | (16 | ) | 1,568 | (218 | ) | 237 | 1,587 | ||||||||||||||||||
Loan impairment charges (Provision for credit losses)
|
4,465 | 2 | - | 4,467 | (177 | ) | - | 4,290 | ||||||||||||||||||||
(2,688 | ) | (195 | ) | (16 | ) | (2,899 | ) | (41 | ) | 237 | (2,703 | ) | ||||||||||||||||
Operating expenses
|
655 | 59 | (16 | ) | 698 | 46 | 237 | 981 | ||||||||||||||||||||
Profit (loss) before tax
|
$ | (3,343 | ) | $ | (254 | ) | $ | - | $ | (3,597 | ) | $ | (87 | ) | $ | - | $ | (3,684 | ) | |||||||||
Intersegment revenues
|
50 | (34 | ) | (16 | )(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. |
43
44
45
13. | Variable Interest Entities |
46
September 30, 2011 | December 31, 2010 | |||||||||||||||
Consolidated |
Consolidated |
Consolidated |
Consolidated |
|||||||||||||
Assets | Liabilities | Assets | Liabilities | |||||||||||||
(in millions) | ||||||||||||||||
Real estate collateralized funding vehicles:
|
||||||||||||||||
Receivables, net
|
$ | 4,726 | $ | - | $ | 5,354 | $ | - | ||||||||
Available-for-sale
investments
|
7 | - | 104 | - | ||||||||||||
Long-term debt
|
- | 3,427 | - | 3,882 | ||||||||||||
Total
|
$ | 4,733 | $ | 3,427 | $ | 5,458 | $ | 3,882 | ||||||||
14. | Fair Value Measurements |
47
September 30, 2011 | December 31, 2010 | |||||||||||||||
Carrying |
Estimated |
Carrying |
Estimated |
|||||||||||||
Value | Fair Value | Value | Fair Value | |||||||||||||
(in millions) | ||||||||||||||||
Financial assets:
|
||||||||||||||||
Cash
|
$ | 227 | $ | 227 | $ | 175 | $ | 175 | ||||||||
Interest bearing deposits with banks
|
12 | 12 | 1,016 | 1,016 | ||||||||||||
Securities purchased under agreements to resell
|
2,875 | 2,875 | 4,311 | 4,311 | ||||||||||||
Securities
|
3,658 | 3,658 | 3,371 | 3,371 | ||||||||||||
Consumer
receivables(1):
|
||||||||||||||||
Mortgage Services:
|
||||||||||||||||
First lien
|
11,039 | 7,584 | 12,687 | 8,810 | ||||||||||||
Second lien
|
1,519 | 468 | 1,832 | 492 | ||||||||||||
Total Mortgage Services
|
12,558 | 8,052 | 14,519 | 9,302 | ||||||||||||
Consumer Lending:
|
||||||||||||||||
First lien
|
25,356 | 18,031 | 28,796 | 20,589 | ||||||||||||
Second lien
|
2,542 | 719 | 3,000 | 691 | ||||||||||||
Total Consumer Lending real estate secured receivables
|
27,898 | 18,750 | 31,796 | 21,280 | ||||||||||||
Non-real estate secured receivables
|
4,671 | 3,477 | 6,004 | 4,409 | ||||||||||||
Total Consumer Lending
|
32,569 | 22,227 | 37,800 | 25,689 | ||||||||||||
Total consumer receivables
|
45,127 | 30,279 | 52,319 | 34,991 | ||||||||||||
Receivables held for sale
|
- | - | 4 | 4 | ||||||||||||
Due from affiliates
|
202 | 202 | 126 | 126 | ||||||||||||
Derivative financial assets
|
3 | 3 | 75 | 75 | ||||||||||||
Financial liabilities:
|
||||||||||||||||
Commercial paper
|
4,303 | 4,303 | 3,156 | 3,156 | ||||||||||||
Due to affiliates carried at fair value
|
425 | 425 | 436 | 436 | ||||||||||||
Due to affiliates
|
8,316 | 7,988 | 7,819 | 7,518 | ||||||||||||
Long-term debt carried at fair value
|
16,025 | 16,025 | 20,844 | 20,844 | ||||||||||||
Long-term debt not carried at fair value
|
27,154 | 26,093 | 33,772 | 32,924 | ||||||||||||
Insurance policy and claim reserves
|
989 | 1,274 | 982 | 1,184 | ||||||||||||
Derivative financial liabilities
|
275 | 275 | 2 | 2 |
(1) | The carrying amount of consumer receivables presented in the table above reflects the unamortized cost of the receivable, including any accrued interest, less credit loss reserves. |
48
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) | ||||||||||||||||||||
September 30, 2011:
|
||||||||||||||||||||
Derivative financial assets:
|
||||||||||||||||||||
Interest rate swaps
|
$ | - | $ | 1,144 | $ | - | $ | - | $ | 1,144 | ||||||||||
Currency swaps
|
- | 1,737 | - | - | 1,737 | |||||||||||||||
Foreign exchange forward
|
- | - | - | - | - | |||||||||||||||
Derivative netting
|
- | - | - | (2,878 | ) | (2,878 | ) | |||||||||||||
Total derivative financial assets
|
- | 2,881 | - | (2,878 | ) | 3 | ||||||||||||||
Available-for-sale
securities:
|
||||||||||||||||||||
U.S. Treasury
|
376 | - | - | - | 376 | |||||||||||||||
U.S. government sponsored enterprises
|
- | 427 | - | - | 427 | |||||||||||||||
U.S. government agency issued or guaranteed
|
- | 6 | - | - | 6 | |||||||||||||||
Obligations of U.S. states and political subdivisions
|
- | 1 | - | - | 1 | |||||||||||||||
Asset-backed securities
|
- | 27 | 17 | - | 44 | |||||||||||||||
U.S. corporate debt securities
|
- | 1,635 | 28 | - | 1,663 | |||||||||||||||
Foreign debt securities:
|
||||||||||||||||||||
Government
|
20 | 93 | - | - | 113 | |||||||||||||||
Corporate
|
- | 433 | - | - | 433 | |||||||||||||||
Equity securities
|
10 | - | - | - | 10 | |||||||||||||||
Money market funds
|
558 | - | - | - | 558 | |||||||||||||||
Accrued interest
|
1 | 25 | 1 | - | 27 | |||||||||||||||
Total
available-for-sale
securities
|
965 | 2,647 | 46 | - | 3,658 | |||||||||||||||
Total assets
|
$ | 965 | $ | 5,528 | $ | 46 | $ | (2,878 | ) | $ | 3,661 | |||||||||
Due to affiliates carried at fair value
|
$ | - | $ | (425 | ) | $ | - | $ | - | $ | (425 | ) | ||||||||
Long-term debt carried at fair value
|
- | (16,025 | ) | - | - | (16,025 | ) | |||||||||||||
Derivative related liabilities:
|
||||||||||||||||||||
Interest rate swaps
|
- | (1,715 | ) | - | - | (1,715 | ) | |||||||||||||
Currency swaps
|
- | (116 | ) | - | - | (116 | ) | |||||||||||||
Foreign Exchange Forward
|
- | (3 | ) | - | - | (3 | ) | |||||||||||||
Derivative netting
|
- | - | - | 1,559 | 1,559 | |||||||||||||||
Total derivative related liabilities
|
(1,834 | ) | - | 1,559 | (275 | ) | ||||||||||||||
Total liabilities
|
$ | - | $ | (18,284 | ) | $ | - | $ | 1,559 | $ | (16,725 | ) | ||||||||
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. |
49
Level 2 | Level 3 | Total | ||||||||||
(in millions) | ||||||||||||
September 30, 2011:
|
||||||||||||
AAA to
AA-(1)
|
$ | 425 | $ | - | $ | 425 | ||||||
A+ to
A-(1)
|
1,083 | 14 | 1,097 | |||||||||
BBB+ to
Unrated(1)
|
127 | 14 | 141 | |||||||||
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 Moodys Investor Services, Fitch and Standard and Poors Corporation. In the event the ratings we obtain from these agencies differ, we utilize the lower of the three ratings. |
Total Gains and |
||||||||||||||||||||||||||||||||||||||||
(Losses) |
||||||||||||||||||||||||||||||||||||||||
Included in | ||||||||||||||||||||||||||||||||||||||||
Other |
Transfers |
Transfers |
Current Period |
|||||||||||||||||||||||||||||||||||||
July 1 |
Comp. |
Into |
Out of |
Sept. 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
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||
Asset-backed securities
|
19 | - | (2 | ) | - | - | - | - | - | 17 | (1 | ) | ||||||||||||||||||||||||||||
U.S. corporate debt securities
|
14 | - | - | - | - | - | 26 | (12 | ) | 28 | 1 | |||||||||||||||||||||||||||||
Total assets
|
$ | 33 | $ | - | $ | (2 | ) | $ | - | $ | - | $ | - | $ | 26 | $ | (12 | ) | $ | 45 | $ | - | ||||||||||||||||||
Total Gains and |
||||||||||||||||||||||||||||||||||||||||
(Losses) |
||||||||||||||||||||||||||||||||||||||||
Included in | ||||||||||||||||||||||||||||||||||||||||
Other |
Transfers |
Transfers |
Current Period |
|||||||||||||||||||||||||||||||||||||
July 1 |
Comp. |
Into |
Out of |
Sept. 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 | $ | - | ||||||||||||||||||||
Asset-backed securities
|
24 | - | (3 | ) | - | - | - | - | - | 21 | 1 | |||||||||||||||||||||||||||||
U.S. corporate debt securities
|
3 | - | - | - | - | - | - | - | 3 | - | ||||||||||||||||||||||||||||||
Total assets
|
$ | 29 | $ | - | $ | (3 | ) | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 26 | $ | 1 | |||||||||||||||||||
50
Total Gains and |
||||||||||||||||||||||||||||||||||||||||
(Losses) |
||||||||||||||||||||||||||||||||||||||||
Included in | ||||||||||||||||||||||||||||||||||||||||
Other |
Transfers |
Transfers |
Current Period |
|||||||||||||||||||||||||||||||||||||
Jan. 1, |
Comp. |
Into |
Out of |
Sept. 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 | - | (5 | ) | - | - | (1 | ) | 3 | - | 17 | (2 | ) | |||||||||||||||||||||||||||
U.S. corporate debt securities
|
3 | - | (1 | ) | - | - | - | 38 | (12 | ) | 28 | 2 | ||||||||||||||||||||||||||||
Total assets
|
$ | 24 | $ | - | $ | (6 | ) | $ | - | $ | - | $ | (1 | ) | $ | 41 | $ | (13 | ) | $ | 45 | $ | - | |||||||||||||||||
Total Gains and |
||||||||||||||||||||||||||||||||||||||||
(Losses) |
||||||||||||||||||||||||||||||||||||||||
Included in | ||||||||||||||||||||||||||||||||||||||||
Other |
Transfers |
Transfers |
Current Period |
|||||||||||||||||||||||||||||||||||||
Jan. 1, |
Comp. |
Into |
Out of |
Sept. 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 | - | (7 | ) | - | - | - | 2 | - | 21 | 3 | |||||||||||||||||||||||||||||
U.S. corporate debt securities
|
20 | - | - | - | - | - | 8 | (25 | ) | 3 | - | |||||||||||||||||||||||||||||
Total assets
|
$ | 49 | $ | - | $ | (7 | ) | $ | - | $ | - | $ | (1 | ) | $ | 12 | $ | (27 | ) | $ | 26 | $ | 4 | |||||||||||||||||
Total Gains |
Total Gains |
|||||||||||||||||||||||
Non-Recurring Fair Value Measurements as of |
(Losses) for the |
(Losses) for the |
||||||||||||||||||||||
September 30, 2011 |
Three Months Ended |
Nine Months Ended |
||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | September 30, 2011 | September 30, 2011 | |||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Real estate
owned(1)
|
$ | - | $ | 403 | $ | - | $ | 403 | $ | (41 | ) | $ | (155 | ) | ||||||||||
Total Gains |
Total Gains |
|||||||||||||||||||||||
Non-Recurring Fair Value Measurements as of |
(Losses) for the |
(Losses) for the |
||||||||||||||||||||||
September 30, 2010 |
Three Months Ended |
Nine Months Ended |
||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | September 30, 2010 | September 30, 2010 | |||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Real estate secured receivables held for sale at fair value
|
$ | - | $ | - | $ | 4 | $ | 4 | $ | - | $ | 2 | ||||||||||||
Real estate
owned(1)
|
- | 994 | - | 994 | (58 | ) | (139 | ) | ||||||||||||||||
Total assets at fair value on a non-recurring basis
|
$ | - | $ | 994 | $ | 4 | $ | 998 | $ | (58 | ) | $ | (137 | ) | ||||||||||
(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. |
51
| 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. | |
| 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 amount approximates fair value due to the assets liquid nature. |
52
53
15. | Litigation and Regulatory Matters |
54
55
56
16. | New Accounting Pronouncements |
57
58
59
> | Overall levels of delinquencies remain elevated; | |
> | While we ceased originating mortgage loans in early 2009, mortgage loan originations from 2006 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, culminating in the issuance of consent orders to many servicers; | |
> | 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; | |
> | Levels of foreclosed properties and properties in the process of being foreclosed remain elevated which has contributed to a continued general decline in home prices during the first nine months 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. |
60
61
62
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in millions) | ||||||||||||||||
Loss from continuing operations before income tax, as reported
|
$ | (2,018 | ) | $ | (1,351 | ) | $ | (2,865 | ) | $ | (3,684 | ) | ||||
(Gain) loss in value of fair value option debt and related
derivatives
|
(792 | ) | 1 | (1,008 | ) | (602 | ) | |||||||||
Incremental provision for credit losses recorded as a result of
adopting new accounting guidance on TDR
Loans(2)
|
745 | - | 745 | - | ||||||||||||
Loss from continuing operations before income tax, excluding
above
items(1)
|
$ | (2,065 | ) | $ | (1,350 | ) | $ | (3,128 | ) | $ | (4,286 | ) | ||||
(1) | Represents a non-U.S. GAAP financial measure. |
(2) | The total incremental loan loss provision recorded as a result of adopting new accounting guidance on TDR Loans was $925 million which included the impact of changes in market conditions during the quarter of $180 million which is excluded for purposes of this presentation. For purposes of this presentation, we are excluding the impact associated with changes in market conditions during the quarter. |
63
64
| The overall provision for credit loss for real estate secured receivables increased during the three months ended September 30, 2011 driven by higher provisions for credit losses in our Consumer Lending real estate secured receivable portfolio, partially offset by lower provisions for credit losses in our Mortgage Services real estate secured receivable portfolio. During the nine months ended September 30, 2011, provision for credit losses was lower for both our Consumer Lending and Mortgage Services real estate secured receivable portfolios. |
| The provision for credit losses for our personal non-credit card receivables decreased during the three and nine months ended September 30, 2011 reflecting lower receivable, delinquency and charge-off levels as compared to the year-ago periods and lower reserve requirements on the legacy TDR Loan population. |
Real Estate Secured Receivables | ||||||||||||||||
Consumer Lending | Mortgage Services | |||||||||||||||
Three Months Ended September 30, | 2011 | 2010 | 2011 | 2010 | ||||||||||||
(in millions) | ||||||||||||||||
Credit loss reserves at beginning of period
|
$ | 2,143 | $ | 2,588 | $ | 1,497 | $ | 1,897 | ||||||||
Provision for credit
losses(1)
|
1,364 | 600 | 545 | 444 | ||||||||||||
Charge-offs
|
(441 | ) | (718 | ) | (306 | ) | (505 | ) | ||||||||
Recoveries
|
12 | 16 | 10 | 11 | ||||||||||||
Credit loss reserves at end of period
|
$ | 3,078 | $ | 2,486 | $ | 1,746 | $ | 1,847 | ||||||||
65
Real Estate Secured Receivables | ||||||||||||||||
Consumer Lending | Mortgage Services | |||||||||||||||
Nine Months Ended September 30, | 2011 | 2010 | 2011 | 2010 | ||||||||||||
(in millions) | ||||||||||||||||
Credit loss reserves at beginning of period
|
$ | 2,409 | $ | 3,047 | $ | 1,781 | $ | 2,384 | ||||||||
Provision for credit
losses(1)
|
2,127 | 1,832 | 1,011 | 1,204 | ||||||||||||
Charge-offs
|
(1,501 | ) | (2,438 | ) | (1,077 | ) | (1,781 | ) | ||||||||
Recoveries
|
43 | 45 | 31 | 40 | ||||||||||||
Credit loss reserves at end of period
|
$ | 3,078 | $ | 2,486 | $ | 1,746 | $ | 1,847 | ||||||||
(1) | During the three and nine months ended September 30, 2011, provision for credit losses for our Consumer Lending real estate secured receivables included $596 million related to the adoption of new accounting guidance for TDRs. During the three and nine months ended September 30, 2011, provision for credit losses for our Mortgage Services real estate secured receivables included $170 million related to the adoption of new accounting guidance for TDR Loans. |
September 30, |
December 31, |
|||||||
2011 | 2010 | |||||||
(in millions) | ||||||||
Total receivable portfolio
|
$ | 49,822 | $ | 56,486 | ||||
Real estate secured receivables carried at fair value less cost
to sell
|
$ | 5,593 | $ | 5,095 | ||||
TDR Loans:
|
||||||||
Real estate
secured(1)
|
10,859 | 7,875 | ||||||
Personal non-credit card
|
1,315 | 704 | ||||||
TDR Loans
|
12,174 | 8,579 | ||||||
Receivables carried at either fair value less cost to sell or
reserved for using a discounted cash flow methodology
|
$ | 17,767 | $ | 13,674 | ||||
Real estate secured receivables carried at either fair value
less cost to sell or reserved for using a discounted cash flow
methodology as a percentage of real estate secured receivables
|
37.23 | % | 26.29 | % | ||||
Receivables carried at either fair value less cost to sell or
reserved for using a discounted cash flow methodology as a
percentage of total receivables
|
35.66 | % | 24.21 | % | ||||
(1) | Excludes TDR Loans which are recorded at fair value less cost to sell and included separately in the table. |
66
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(dollars are in millions) | ||||||||||||||||
Loss from continuing operations
|
$ | (1,329 | ) | $ | (872 | ) | $ | (1,711 | ) | $ | (2,350 | ) | ||||
Return on average assets
|
(8.89 | )% | (4.74 | )% | (3.61 | )% | (4.03 | )% | ||||||||
Return on average common shareholders equity
|
(106.61 | ) | (66.96 | ) | (42.80 | ) | (57.82 | ) | ||||||||
Net interest margin
|
3.05 | 2.63 | 2.98 | 2.52 | ||||||||||||
Consumer net charge-off ratio, annualized
|
6.80 | 10.32 | 7.77 | 11.83 | ||||||||||||
Efficiency
ratio(1)
|
58.90 | 117.83 | 61.69 | 58.80 |
September 30, |
December 31, |
|||||||
2011 | 2010 | |||||||
(dollars are in millions) | ||||||||
Receivables:
|
||||||||
Real estate secured
|
$ | 44,196 | $ | 49,336 | ||||
Personal non-credit card
|
5,600 | 7,117 | ||||||
Commercial and other
|
26 | 33 | ||||||
Total
|
$ | 49,822 | $ | 56,486 | ||||
Two-month-and-over contractual delinquency ratio
|
16.63 | % | 15.85 | % | ||||
(1) | Ratio of total costs and expenses less policyholders benefits to net interest income and other revenues less policyholders benefits. |
67
68
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(dollars are in millions) | ||||||||||||||||
Finance and other interest income
|
$ | 492 | $ | 547 | $ | 1,488 | $ | 1,683 | ||||||||
Interest expense
|
22 | 29 | 72 | 91 | ||||||||||||
Net interest income
|
470 | 518 | 1,416 | 1,592 | ||||||||||||
Provision for credit
losses(3)
|
152 | 205 | 424 | 680 | ||||||||||||
Net interest income after provision for credit losses
|
318 | 313 | 992 | 912 | ||||||||||||
Fee income and enhancement services revenue
|
187 | 141 | 487 | 442 | ||||||||||||
Gain on receivable sales with affiliates
|
145 | 143 | 407 | 401 | ||||||||||||
Servicing and other fees from HSBC affiliates
|
154 | 160 | 463 | 472 | ||||||||||||
Other income
|
3 | 3 | 12 | 11 | ||||||||||||
Total other revenues
|
489 | 447 | 1,369 | 1,326 | ||||||||||||
Salaries and employee benefits
|
69 | 87 | 219 | 258 | ||||||||||||
Other marketing expenses
|
57 | 71 | 221 | 203 | ||||||||||||
Other servicing and administrative expenses
|
78 | 99 | 337 | 325 | ||||||||||||
Support services from affiliates
|
209 | 214 | 623 | 624 | ||||||||||||
Amortization of intangibles
|
22 | 34 | 91 | 103 | ||||||||||||
Total operating expenses
|
435 | 505 | 1,491 | 1,513 | ||||||||||||
Income from discontinued operations before income tax
|
$ | 372 | $ | 255 | $ | 870 | $ | 725 | ||||||||
Net interest margin
|
20.68 | % | 20.49 | % | 20.26 | % | 20.00 | % | ||||||||
Efficiency
ratio(1)
|
45.35 | 52.33 | 53.54 | 51.85 |
September 30, |
December 31, |
|||||||
2011 | 2010 | |||||||
(dollars are in millions) | ||||||||
Credit card
receivables(2)
|
$ | 8,677 | $ | 9,897 |
(1) | Ratio of total costs and expenses less policyholders benefits to net interest income and other revenues less policyholders benefits. |
(2) | At September 30, 2011, credit card receivables are included as part of the disposal group held for sale to Capital One which is carried at the lower of amortized cost or fair value, as they are held for sale to Capital One as discussed above. At December 31, 2010, credit card receivables were carried at amortized cost and as such are not directly comparable to the current period balances. |
(3) | For periods following the transfer of the receivables to held for sale, the receivables are included as part of the disposal group held for sale to Capital One which is carried at the lower of amortized cost or fair value and we no longer record provisions for credit losses, including charge-offs, for these receivables. |
69
70
71
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in millions) | ||||||||||||||||
Loss from continuing operations before income tax from prior year
|
$ | (1,351 | ) | $ | (2,592 | ) | $ | (3,684 | ) | $ | (8,135 | ) | ||||
Increase (decrease) in income from continuing operations before
income tax expense attributable to:
|
||||||||||||||||
Net interest income
|
(90 | ) | (191 | ) | (179 | ) | (819 | ) | ||||||||
Provision for credit losses, excluding impact of adopting new
Accounting Standard Update for TDR Loans
|
(132 | ) | 389 | 1,562 | 1,519 | |||||||||||
Impact of adopting new Accounting Standards Update for TDR Loans
|
(745 | ) | - | (745 | ) | - | ||||||||||
Mark-to-market
on derivatives which do not qualify as effective hedges
|
(542 | ) | (202 | ) | (176 | ) | (874 | ) | ||||||||
Gain (loss) on debt designated at fair value and related
derivatives
|
793 | 1,246 | 406 | 2,506 | ||||||||||||
Gain on bulk and on-going receivable sales to HSBC affiliates
|
- | - | - | 78 | ||||||||||||
Servicing and other fees from HSBC affiliates
|
(3 | ) | (20 | ) | (12 | ) | (51 | ) | ||||||||
Lower of amortized cost or market adjustment on receivables held
for sale
|
- | 1 | (2 | ) | 10 | |||||||||||
Salaries and employee benefits
|
19 | 71 | 67 | 339 | ||||||||||||
REO expenses
|
37 | (46 | ) | (20 | ) | 21 | ||||||||||
Goodwill and other intangible asset impairment charges
|
- | - | - | 1,780 | ||||||||||||
All other
activity(1)
|
(4 | ) | (7 | ) | (82 | ) | (58 | ) | ||||||||
(667 | ) | 1,241 | 819 | 4,451 | ||||||||||||
Loss from continuing operations before income tax for current
period
|
$ | (2,018 | ) | $ | (1,351 | ) | $ | (2,865 | ) | $ | (3,684 | ) | ||||
(1) | Reflects other activity for other revenues and operating expenses. |
72
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net loss U.S. GAAP basis
|
$ | (1,061 | ) | $ | (752 | ) | $ | (1,130 | ) | $ | (1,875 | ) | ||||
Adjustments, net of tax:
|
||||||||||||||||
Derivatives and hedge accounting (including fair value
adjustments)
|
(1 | ) | (4 | ) | (6 | ) | (12 | ) | ||||||||
Intangible assets
|
5 | 9 | 21 | 28 | ||||||||||||
Loan origination cost deferrals
|
9 | 3 | 6 | 13 | ||||||||||||
Loan impairment
|
359 | (28 | ) | (23 | ) | (25 | ) | |||||||||
Loans previously held for sale
|
(4 | ) | (14 | ) | (18 | ) | (47 | ) | ||||||||
Credit card receivables transferred to held for sale and
included in discontinued operations for U.S. GAAP
|
(53 | ) | - | (53 | ) | - | ||||||||||
Interest recognition
|
5 | 1 | 1 | 1 | ||||||||||||
Other-than-temporary
impairments on
available-for-sale
securities
|
- | 1 | - | 2 | ||||||||||||
Securities
|
(2 | ) | - | 5 | 15 | |||||||||||
Present value of long-term insurance contracts
|
(41 | ) | (5 | ) | (32 | ) | 3 | |||||||||
Pension and other postretirement benefit costs
|
5 | 7 | 14 | 49 | ||||||||||||
Release of tax valuation allowances
|
(6 | ) | - | 6 | - | |||||||||||
Loss on sale of auto finance receivables and other related assets
|
- | (13 | ) | - | (47 | ) | ||||||||||
Other
|
(10 | ) | 14 | (25 | ) | 20 | ||||||||||
Net loss IFRSs basis
|
(795 | ) | (781 | ) | (1,234 | ) | (1,875 | ) | ||||||||
Tax benefit IFRSs basis
|
426 | 431 | 937 | 1,077 | ||||||||||||
Loss before tax IFRSs basis
|
$ | (1,221 | ) | $ | (1,212 | ) | $ | (2,171 | ) | $ | (2,952 | ) | ||||
73
74
75
Increases (Decreases) From | ||||||||||||||||||||
September 30, |
June 30, 2011 | December 31, 2010 | ||||||||||||||||||
2011 | $ | % | $ | % | ||||||||||||||||
(dollars are in millions) | ||||||||||||||||||||
Receivables:
|
||||||||||||||||||||
Real estate
secured(1)(2)
|
$ | 44,196 | $ | (1,395 | ) | (3.1 | )% | $ | (5,140 | ) | (10.4 | )% | ||||||||
Personal non-credit card
|
5,600 | (412 | ) | (6.9 | ) | (1,517 | ) | (21.3 | ) | |||||||||||
Commercial and other
|
26 | - | - | (7 | ) | (21.2 | ) | |||||||||||||
Total receivables
|
$ | 49,822 | $ | (1,807 | ) | (3.5 | )% | $ | (6,664 | ) | (11.8 | )% | ||||||||
(1) | Real estate secured receivables are comprised of the following: |
Increases (Decreases) From | ||||||||||||||||||||
September 30, |
June 30, 2011 | December 31, 2010 | ||||||||||||||||||
2011 | $ | % | $ | % | ||||||||||||||||
(dollars are in millions) | ||||||||||||||||||||
Mortgage Services
|
$ | 14,015 | $ | (520 | ) | (3.6 | )% | $ | (1,967 | ) | (12.3 | )% | ||||||||
Consumer Lending
|
30,176 | (874 | ) | (2.8 | ) | (3,171 | ) | (9.5 | ) | |||||||||||
All other
|
5 | (1 | ) | (16.7 | ) | (2 | ) | (28.6 | ) | |||||||||||
Total real estate secured
|
$ | 44,196 | $ | (1,395 | ) | (3.1 | )% | $ | (5,140 | ) | (10.4 | )% | ||||||||
(2) | At September 30, 2011, June 30, 2011 and December 31, 2010, real estate secured receivables includes $5.6 billion, $5.4 billion and $5.1 billion, respectively, of receivables that have been written down to their fair value less cost to sell in accordance with our existing charge-off policy. |
September 30, 2011 | June 30, 2011 | December 31, 2010 | ||||||||||||||||||||||
Mortgage |
Consumer |
Mortgage |
Consumer |
Mortgage |
Consumer |
|||||||||||||||||||
Services | Lending | Services | Lending | Services | Lending | |||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Fixed
rate(3)
|
$ | 9,086 | (1) | $ | 28,841 | (2) | $ | 9,353 | (1) | $ | 29,663 | (2) | $ | 10,014 | (1) | $ | 31,827 | (2) | ||||||
Adjustable
rate(3)
|
4,929 | 1,335 | 5,182 | 1,387 | 5,968 | 1,520 | ||||||||||||||||||
Total
|
$ | 14,015 | $ | 30,176 | $ | 14,535 | $ | 31,050 | $ | 15,982 | $ | 33,347 | ||||||||||||
First lien
|
$ | 12,228 | $ | 27,237 | $ | 12,644 | $ | 28,031 | $ | 13,821 | $ | 30,042 | ||||||||||||
Second lien
|
1,787 | 2,939 | 1,891 | 3,019 | 2,161 | 3,305 | ||||||||||||||||||
Total
|
$ | 14,015 | $ | 30,176 | $ | 14,535 | $ | 31,050 | $ | 15,982 | $ | 33,347 | ||||||||||||
Adjustable
rate(3)
|
$ | 4,124 | $ | 1,335 | $ | 4,310 | $ | 1,387 | $ | 4,898 | $ | 1,520 | ||||||||||||
Interest
only(3)
|
805 | - | 872 | - | 1,070 | - | ||||||||||||||||||
Total adjustable
rate(3)
|
$ | 4,929 | $ | 1,335 | $ | 5,182 | $ | 1,387 | $ | 5,968 | $ | 1,520 | ||||||||||||
Total stated income
|
$ | 2,267 | $ | - | $ | 2,379 | $ | - | $ | 2,703 | $ | - | ||||||||||||
(1) | Includes fixed rate interest-only receivables of $174 million, $181 million and $235 million at September 30, 2011, June 30, 2011 and December 31, 2010, respectively. |
76
(2) | Includes fixed rate interest-only receivables of $21 million, $23 million and $27 million at September 30, 2011, June 30, 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. |
Refreshed
LTVs(1)(2) |
||||||||||||||||||||||||||||||||
Refreshed
LTVs(1)(2) |
at December 31, 2010 | |||||||||||||||||||||||||||||||
at September 30, 2011 |
Mortgage |
|||||||||||||||||||||||||||||||
Consumer Lending(3) | Mortgage Services | Consumer Lending(3) | Services | |||||||||||||||||||||||||||||
First |
Second |
First |
Second |
First |
Second |
First |
Second |
|||||||||||||||||||||||||
Lien | Lien | Lien | Lien | Lien | Lien | Lien | Lien | |||||||||||||||||||||||||
LTV<80%
|
37 | % | 16 | % | 32 | % | 7 | % | 39 | % | 18 | % | 34 | % | 8 | % | ||||||||||||||||
80%£LTV<90%
|
16 | 10 | 16 | 8 | 18 | 13 | 18 | 11 | ||||||||||||||||||||||||
90%£LTV<100%
|
16 | 17 | 19 | 15 | 17 | 20 | 21 | 19 | ||||||||||||||||||||||||
LTV³100%
|
31 | 57 | 33 | 70 | 26 | 49 | 27 | 62 | ||||||||||||||||||||||||
Average LTV for portfolio
|
89 | 105 | 92 | 115 | 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 fair 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 fair 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 propertys appraised value at the time of receivable origination updated by the change in the Federal Housing Finance Agencys (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 HPIs 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 September 30, 2011 and December 31, 2010 information in the table above reflects current estimated property values using HPIs as of June 30, 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 higher 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 September 30, 2011 and December 31, 2010, respectively. |
77
Three Months Ended | ||||||||||||||||||||
Sept. 30, |
June 30, |
Mar. 31, |
Dec. 31, |
Sept. 30, |
||||||||||||||||
2011 | 2011 | 2011 | 2010 | 2010 | ||||||||||||||||
Number of REO properties at end of period
|
4,250 | 6,854 | 10,016 | 10,749 | 9,629 | |||||||||||||||
Number of properties added to REO inventory in the period
|
1,378 | 2,495 | 5,408 | 5,657 | 5,316 | |||||||||||||||
Average loss on sale of REO
properties(1)
|
8.9 | % | 7.0 | % | 7.9 | % | 8.4 | % | 5.4 | % | ||||||||||
Average total loss on foreclosed
properties(2)
|
56.4 | % | 54.9 | % | 54.6 | % | 53.6 | % | 52.1 | % | ||||||||||
Average time to sell REO properties (in days)
|
196 | 169 | 167 | 165 | 158 |
(1) | Property acquired through foreclosure is initially recognized at the lower of amortized cost or its fair value less estimated costs to sell (Initial REO Carrying Amount). The average loss on sale of REO properties is calculated as cash proceeds less the Initial REO Carrying Amount divided by the unpaid loan principal balance prior to write-down (excluding any accrued finance income) plus certain other ancillary disbursements that, by law, are reimbursable from the cash proceeds (e.g., real estate tax advances) and were incurred prior to our taking title to the property. This ratio represents the portion of our total loss on foreclosed properties that occurred after we took title to the property. |
78
(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 certain other ancillary disbursements that, by law, are reimbursable from the cash proceeds (e.g., real estate tax advances) and were incurred prior to our taking title to the property. |
79
Increase |
||||||||||||||||||||||||
2011 | 2010 | (Decrease) | ||||||||||||||||||||||
Three Months Ended September 30, | $ | %(1) | $ | %(1) | Amount | % | ||||||||||||||||||
(dollars are in millions) | ||||||||||||||||||||||||
Finance and other interest income
|
$ | 1,019 | 7.23 | % | $ | 1,226 | 7.12 | % | $ | (207 | ) | (16.9 | )% | |||||||||||
Interest expense
|
589 | 4.18 | 774 | 4.49 | (185 | ) | (23.9 | ) | ||||||||||||||||
Net interest income
|
$ | 430 | 3.05 | % | $ | 452 | 2.63 | % | $ | (22 | ) | (4.9 | )% | |||||||||||
Increase |
||||||||||||||||||||||||
2011 | 2010 | (Decrease) | ||||||||||||||||||||||
Nine Months Ended September 30, | $ | %(1) | $ | %(1) | Amount | % | ||||||||||||||||||
(dollars are in millions) | ||||||||||||||||||||||||
Finance and other interest income
|
$ | 3,239 | 7.23 | % | $ | 3,817 | 7.13 | % | $ | (578 | ) | (15.1 | )% | |||||||||||
Interest expense
|
1,903 | 4.25 | 2,467 | 4.61 | (564 | ) | (22.9 | ) | ||||||||||||||||
Net interest income
|
$ | 1,336 | 2.98 | % | $ | 1,350 | 2.52 | % | $ | (14 | ) | (1.0 | )% | |||||||||||
(1) | % Columns: comparison to average owned interest-earning assets. |
80
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, 2011 | September 30, 2011 | |||||||||||||||
(dollars are in millions) | ||||||||||||||||
Net interest income/net interest margin from prior year
|
$ | 452 | 2.63 | % | $ | 1,350 | 2.52 | % | ||||||||
Impact to net interest income resulting from:
|
||||||||||||||||
Lower receivable levels
|
(216 | ) | (613 | ) | ||||||||||||
Receivable yields:
|
||||||||||||||||
Receivable pricing
|
(6 | ) | (48 | ) | ||||||||||||
Impact of nonperforming assets
|
22 | 111 | ||||||||||||||
Volume and rate impact of modified loans
|
10 | 54 | ||||||||||||||
Receivable mix
|
(21 | ) | (185 | ) | ||||||||||||
Interest receivable related to income tax receivables
|
1 | 100 | ||||||||||||||
Non-insurance investment income (rate and volume)
|
(1 | ) | 3 | |||||||||||||
Cost of funds (rate and volume)
|
187 | 564 | ||||||||||||||
Other
|
2 | - | ||||||||||||||
Net interest income/net interest margin for current year
|
$ | 430 | 3.05 | % | $ | 1,336 | 2.98 | % | ||||||||
Increase (Decrease) | ||||||||||||||||
Three Months Ended September 30, | 2011 | 2010 | Amount | % | ||||||||||||
(dollars are in millions) | ||||||||||||||||
Provision for credit losses:
|
||||||||||||||||
Mortgage Services
|
$ | 545 | $ | 444 | $ | 101 | 22.7 | % | ||||||||
Consumer Lending:
|
||||||||||||||||
Real estate secured
|
1,364 | 600 | 764 | 100+ | ||||||||||||
Personal non-credit card
|
273 | 261 | 12 | 4.6 | ||||||||||||
Total Consumer Lending
|
1,637 | 861 | 776 | 90.1 | ||||||||||||
$ | 2,182 | $ | 1,305 | $ | 877 | 67.2 | % | |||||||||
81
Increase (Decrease) | ||||||||||||||||
Nine Months Ended September 30, | 2011 | 2010 | Amount | % | ||||||||||||
(dollars are in millions) | ||||||||||||||||
Provision for credit losses:
|
||||||||||||||||
Mortgage Services
|
$ | 1,011 | $ | 1,204 | $ | (193 | ) | (16.0 | )% | |||||||
Consumer Lending:
|
||||||||||||||||
Real estate secured
|
2,127 | 1,832 | 295 | 16.1 | ||||||||||||
Personal non-credit card
|
335 | 1,254 | (919 | ) | (73.3 | ) | ||||||||||
Total Consumer Lending
|
2,462 | 3,086 | (624 | ) | (20.2 | ) | ||||||||||
$ | 3,473 | $ | 4,290 | $ | (817 | ) | (19.0 | )% | ||||||||
| The overall provision for credit loss for real estate secured receivables increased during the three months ended September 30, 2011 driven by higher provisions for credit losses in our Consumer Lending real estate secured receivable portfolio, partially offset by lower provisions for credit losses in our Mortgage Services real estate secured receivable portfolio. During the nine months ended September 30, 2011, provision for credit losses was lower for both our Consumer Lending and Mortgage Services real estate secured receivable portfolios. |
| The provision for credit losses for our personal non-credit card receivables decreased during the three and nine months ended September 30, 2011 reflecting lower receivable, delinquency and charge-off levels as compared to the year-ago periods and lower reserve requirements on the legacy TDR Loan population. |
82
Increase |
||||||||||||||||
(Decrease) | ||||||||||||||||
Three Months Ended September 30, | 2011 | 2010 | Amount | % | ||||||||||||
(dollars are in millions) | ||||||||||||||||
Insurance revenue
|
$ | 64 | $ | 69 | $ | (5 | ) | (7.2 | )% | |||||||
Investment income
|
33 | 24 | 9 | .4 | ||||||||||||
Derivative related income (expense)
|
(913 | ) | (374 | ) | (539 | ) | (100+ | ) | ||||||||
Gain on debt designated at fair value and related derivatives
|
792 | (1 | ) | 793 | 100+ | |||||||||||
Servicing and other fees from HSBC affiliates
|
4 | 7 | (3 | ) | (42.9 | ) | ||||||||||
Other income
|
4 | 27 | (23 | ) | (85.2 | ) | ||||||||||
Total other revenues
|
$ | (16 | ) | $ | (248 | ) | $ | 232 | 93.5 | % | ||||||
Increase |
||||||||||||||||
(Decrease) | ||||||||||||||||
Nine Months Ended September 30, | 2011 | 2010 | Amount | % | ||||||||||||
(dollars are in millions) | ||||||||||||||||
Insurance revenue
|
$ | 188 | $ | 213 | $ | (25 | ) | (11.7 | )% | |||||||
Investment income
|
91 | 75 | 16 | 21.3 | ||||||||||||
Derivative related income (expense)
|
(1,036 | ) | (972 | ) | (64 | ) | (6.6 | ) | ||||||||
Gain on debt designated at fair value and related derivatives
|
1,008 | 602 | 406 | 67.4 | ||||||||||||
Servicing and other fees from HSBC affiliates
|
18 | 30 | (12 | ) | (40.0 | ) | ||||||||||
Other income
|
21 | 52 | (31 | ) | (59.6 | ) | ||||||||||
Total other revenues
|
$ | 290 | $ | - | $ | 290 | 100+ | % | ||||||||
83
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in millions) | ||||||||||||||||
Net realized losses
|
$ | (41 | ) | $ | (27 | ) | $ | (79 | ) | $ | (163 | ) | ||||
Mark-to-market
on derivatives which do not qualify as effective hedges
|
(885 | ) | (343 | ) | (971 | ) | (795 | ) | ||||||||
Ineffectiveness
|
13 | (4 | ) | 14 | (14 | ) | ||||||||||
Total
|
$ | (913 | ) | $ | (374 | ) | $ | (1,036 | ) | $ | (972 | ) | ||||
84
Increase |
||||||||||||||||
(Decrease) | ||||||||||||||||
Three Months Ended September 30, | 2011 | 2010 | Amount | % | ||||||||||||
(dollars are in millions) | ||||||||||||||||
Salaries and employee benefits
|
$ | 42 | $ | 61 | $ | (19 | ) | (31.1 | )% | |||||||
Occupancy and equipment expenses
|
14 | 18 | (4 | ) | (22.2 | ) | ||||||||||
Real estate owned expenses
|
38 | 75 | (37 | ) | (49.3 | ) | ||||||||||
Other servicing and administrative expenses
|
56 | 73 | (17 | ) | (23.3 | ) | ||||||||||
Support services from HSBC affiliates
|
85 | 77 | 8 | 10.4 | ||||||||||||
Policyholders benefits
|
37 | 36 | 1 | 2.8 | ||||||||||||
Total costs and expenses
|
$ | 272 | $ | 340 | $ | (68 | ) | (20.0 | )% | |||||||
Increase |
||||||||||||||||
(Decrease) | ||||||||||||||||
Nine Months Ended September 30, | 2011 | 2010 | Amount | % | ||||||||||||
(dollars are in millions) | ||||||||||||||||
Salaries and employee benefits
|
$ | 146 | $ | 213 | $ | (67 | ) | (31.5 | )% | |||||||
Occupancy and equipment expenses
|
43 | 39 | 4 | 10.3 | ||||||||||||
Real estate owned expenses
|
174 | 154 | 20 | 13.0 | ||||||||||||
Other servicing and administrative expenses
|
358 | 262 | 96 | 36.6 | ||||||||||||
Support services from HSBC affiliates
|
258 | 197 | 61 | 31.0 | ||||||||||||
Policyholders benefits
|
111 | 116 | (5 | ) | (4.3 | ) | ||||||||||
Total costs and expenses
|
$ | 1,090 | $ | 981 | $ | 109 | 11.1 | % | ||||||||
85
86
Increase |
||||||||||||||||
(Decrease) | ||||||||||||||||
Three Months Ended September 30, | 2011 | 2010 | Amount | % | ||||||||||||
(dollars are in millions) | ||||||||||||||||
Net interest income
|
$ | 714 | $ | 592 | $ | 122 | 20.6 | % | ||||||||
Other operating income
|
(1 | ) | (2 | ) | 1 | 50.0 | ||||||||||
Total operating income
|
713 | 590 | 123 | 20.8 | ||||||||||||
Loan impairment charges
|
1,821 | 1,385 | 436 | 31.5 | ||||||||||||
(1,108 | ) | (795 | ) | (313 | ) | (39.4 | ) | |||||||||
Operating expenses
|
172 | 222 | (50 | ) | (22.5 | ) | ||||||||||
Loss before tax
|
$ | (1,280 | ) | $ | (1,017 | ) | $ | (263 | ) | (25.9 | )% | |||||
Net interest margin, annualized
|
5.61 | % | 3.86 | % | - | - | ||||||||||
Efficiency ratio
|
24.12 | 37.63 | - | - | ||||||||||||
Return (after-tax) on average assets
|
(6.58 | ) | (4.29 | ) | - | - |
Increase |
||||||||||||||||
(Decrease) | ||||||||||||||||
Nine Months Ended September 30, | 2011 | 2010 | Amount | % | ||||||||||||
(dollars are in millions) | ||||||||||||||||
Net interest income
|
$ | 2,037 | $ | 1,748 | $ | 289 | 16.5 | % | ||||||||
Other operating income
|
(43 | ) | 29 | (72 | ) | (100+ | ) | |||||||||
Total operating income
|
1,994 | 1,777 | 217 | 12.2 | ||||||||||||
Loan impairment charges
|
3,969 | 4,465 | (496 | ) | (11.1 | ) | ||||||||||
(1,975 | ) | (2,688 | ) | 713 | 26.5 | |||||||||||
Operating expenses
|
631 | 655 | (24 | ) | (3.7 | ) | ||||||||||
Loss before tax
|
$ | (2,606 | ) | $ | (3,343 | ) | $ | 737 | 22.0 | % | ||||||
Net interest margin, annualized
|
5.12 | % | 3.60 | % | - | - | ||||||||||
Efficiency ratio
|
31.64 | 36.86 | - | - | ||||||||||||
Return (after-tax) on average assets
|
(4.26 | ) | (4.44 | ) | - | - | ||||||||||
Balances at end of period:
|
||||||||||||||||
Customer loans
|
$ | 49,992 | $ | 59,665 | $ | (9,673 | ) | (16.2 | )% | |||||||
Assets
|
48,629 | 59,880 | (11,251 | ) | (18.8 | ) |
88
| Loan impairment charges for the real estate secured loans portfolios in our Consumer Lending and Mortgage Services business increased during the third quarter of 2011 due to additional credit loss reserves booked in the quarter relating to a significant deterioration in delinquency on accounts less than 180 days contractually delinquent which we believe to be greater than normal seasonal trends than we would otherwise expect to occur. The increase also reflects higher estimated costs to obtain the underlying property securing the loan and the impact of discounting estimated future amounts to be received on real estate loans which have been written down to fair 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. These increases were partially offset by lower loan levels as the portfolios continue to liquidate, lower dollars of delinquency and lower charge-off levels as compared to the prior year period. |
| Loan impairment charges for personal non-credit card loans decreased during the three and nine months ended September 30, 2011 reflecting lower loan, delinquency and charge-off levels as compared to the year-ago periods and lower reserve requirements on impaired loans, partially offset by the impact of continued high unemployment levels. |
89
Increases (Decreases) From | ||||||||||||||||||||
September 30, |
June 30, 2011 | December 31, 2010 | ||||||||||||||||||
2011 | $ | % | $ | % | ||||||||||||||||
(dollars are in millions) | ||||||||||||||||||||
Real estate
secured(1)
|
$ | 44,244 | $ | (1,516 | ) | (3.3 | )% | $ | (5,068 | ) | (10.3 | )% | ||||||||
Personal non-credit card
|
5,748 | (407 | ) | (6.6 | ) | (1,590 | ) | (21.7 | ) | |||||||||||
Total customer loans
|
$ | 49,992 | $ | (1,923 | ) | (3.7 | )% | $ | (6,658 | ) | (11.8 | )% | ||||||||
(1) | Real estate secured receivables are comprised of the following: |
Increases (Decreases) From | ||||||||||||||||||||
September 30, |
June 30, 2011 | December 31, 2010 | ||||||||||||||||||
2011 | $ | % | $ | % | ||||||||||||||||
(dollars are in millions) | ||||||||||||||||||||
Mortgage Services
|
$ | 14,079 | $ | (588 | ) | (4.0 | )% | $ | (1,961 | ) | (12.2 | )% | ||||||||
Consumer Lending
|
30,165 | (928 | ) | (3.0 | ) | (3,107 | ) | (9.3 | ) | |||||||||||
Total real estate secured
|
$ | 44,244 | $ | (1,516 | ) | (3.3 | )% | $ | (5,068 | ) | (10.3 | )% | ||||||||
90
91
September 30, |
June 30, |
December 31, |
||||||||||
2011 | 2011 | 2010 | ||||||||||
(dollars are in millions) | ||||||||||||
Credit loss
reserves(5)
|
$ | 5,911 | $ | 4,590 | $ | 5,512 | ||||||
Reserves as a percent of:
|
||||||||||||
Receivables(1)(2)
|
11.86 | % | 8.89 | % | 9.76 | % | ||||||
Net
charge-offs(3)(4)
|
171.6 | 122.5 | 99.9 | |||||||||
Two-months-and-over contractual
delinquency(1)(2)(4)
|
71.4 | 60.9 | 61.6 | |||||||||
Nonperforming
receivables(1)(2)(4)
|
91.6 | 77.4 | 80.0 |
(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 amortized cost or fair value less cost to sell. Prior to the third quarter of 2011, real estate secured receivables which had been written down to fair value less cost to sell typically did not carry credit loss reserves. As discussed above, beginning in the third quarter of 2011, we have begun recording reserves for these receivables to reflect an estimate of additional loss following an interior appraisal of the property. The following table shows these ratios excluding the receivables written down to fair value less cost to sell and any associated credit loss reserves. |
September 30, |
June 30, |
December 31, |
||||||||||
2011 | 2011 | 2010 | ||||||||||
Reserves as a percentage of:
|
||||||||||||
Receivables
|
12.36 | % | 9.67 | % | 10.54 | % | ||||||
Two-months-and-over contractual delinquency
|
141.5 | 135.2 | 114.0 | |||||||||
Nonperforming loans
|
249.2 | 244.0 | 192.2 |
(2) | 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. | |
(3) | Reserves as a percent of net charge-offs for the quarter, annualized. | |
(4) | 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 amortized 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 | |
(5) | Credit loss reserves include $443 million, $118 million and $97 million related to receivables which have been written down to the lower of amortized cost or fair value less cost to sell primarily reflecting an estimate of additional loss following an interior appraisal of the property as previously discussed. |
92
| The increase in credit loss reserve levels for our real estate secured receivable portfolio as compared to June 30, 2011 reflects the impact of higher delinquency levels during the current quarter as discussed more fully below as well as the impact of lower receivable prepayments and continued high unemployment levels. The increase also reflects reserves for receivables written down to fair value less cost to sell to reflect an estimate of additional loss following an interior appraisal of the property as discussed above. These increases were partially offset by lower receivable levels. |
| Credit loss reserve levels in our personal non-credit card portfolio decreased as compared to both periods due to lower receivable levels and 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 non-performing TDR Loans. These decreases were partially offset by the impact of increases in delinquency levels during the quarter and continued high unemployment levels. |
93
94
Real Estate Secured |
Personal |
|||||||||||||||
First |
Second |
Non-Credit |
||||||||||||||
Lien | Lien | Card | Total | |||||||||||||
(in millions) | ||||||||||||||||
Three months ended September 30, 2011:
|
||||||||||||||||
Balances at beginning of period
|
$ | 3,002 | $ | 635 | $ | 953 | $ | 4,590 | ||||||||
Provision for credit
losses(1)
|
1,534 | 375 | 273 | 2,182 | ||||||||||||
Charge-offs
|
(578 | ) | (168 | ) | (227 | ) | (973 | ) | ||||||||
Recoveries
|
7 | 15 | 90 | 112 | ||||||||||||
Net charge-offs
|
(571 | ) | (153 | ) | (137 | ) | (861 | ) | ||||||||
Balance at end of period
|
$ | 3,965 | $ | 857 | $ | 1,089 | $ | 5,911 | ||||||||
Three months ended September 30, 2010:
|
||||||||||||||||
Balances at beginning of period
|
$ | 3,386 | $ | 1,097 | $ | 1,623 | $ | 6,106 | ||||||||
Provision for credit losses
|
897 | 146 | 262 | 1,305 | ||||||||||||
Charge-offs
|
(908 | ) | (315 | ) | (476 | ) | (1,699 | ) | ||||||||
Recoveries
|
12 | 15 | 96 | 123 | ||||||||||||
Net charge-offs
|
(896 | ) | (300 | ) | (380 | ) | (1,576 | ) | ||||||||
Balance at end of period
|
$ | 3,387 | $ | 943 | $ | 1,505 | $ | 5,835 | ||||||||
Nine months ended September 30, 2011:
|
||||||||||||||||
Balances at beginning of period
|
$ | 3,355 | $ | 832 | $ | 1,325 | $ | 5,512 | ||||||||
Provision for credit
losses(1)
|
2,525 | 613 | 335 | 3,473 | ||||||||||||
Charge-offs
|
(1,941 | ) | (636 | ) | (890 | ) | (3,467 | ) | ||||||||
Recoveries
|
26 | 48 | 319 | 393 | ||||||||||||
Net charge-offs
|
(1,915 | ) | (588 | ) | (571 | ) | (3,074 | ) | ||||||||
Balance at end of period
|
$ | 3,965 | $ | 857 | $ | 1,089 | $ | 5,911 | ||||||||
Nine months ended September 30, 2010:
|
||||||||||||||||
Balances at beginning of period
|
$ | 3,997 | $ | 1,430 | $ | 1,848 | $ | 7,275 | ||||||||
Provision for credit losses
|
2,418 | 618 | 1,254 | 4,290 | ||||||||||||
Charge-offs
|
(3,060 | ) | (1,158 | ) | (1,866 | ) | (6,084 | ) | ||||||||
Recoveries
|
32 | 53 | 269 | 354 | ||||||||||||
Net charge-offs
|
(3,028 | ) | (1,105 | ) | (1,597 | ) | (5,730 | ) | ||||||||
Balance at end of period
|
$ | 3,387 | $ | 943 | $ | 1,505 | $ | 5,835 | ||||||||
(1) | During both the three and nine months ended September 30, 2011, provision for credit losses included $683 million for first lien real estate secured receivables, $83 million for second lien real estate secured receivables and $159 million for personal non-credit card receivables related to the adoption of new accounting guidance for TDR Loans as discussed above. |
95
September 30, |
June 30, |
December 31, |
||||||||||
2011 | 2011 | 2010 | ||||||||||
(dollars are in millions) | ||||||||||||
Dollars of contractual delinquency:
|
||||||||||||
Continuing operations:
|
||||||||||||
Real estate
secured(1)(2)(3)
|
$ | 7,763 | $ | 7,046 | $ | 8,171 | ||||||
Personal non-credit card
|
518 | 489 | 779 | |||||||||
Total consumer continuing operations
|
8,281 | 7,535 | 8,950 | |||||||||
Discontinued credit card operations
|
457 | 406 | 612 | |||||||||
Total consumer
|
$ | 8,738 | $ | 7,941 | $ | 9,562 | ||||||
Delinquency ratio:
|
||||||||||||
Continuing operations:
|
||||||||||||
Real estate
secured(1)(2)(3)
|
17.57 | % | 15.45 | % | 16.56 | % | ||||||
Personal non-credit card
|
9.24 | 8.14 | 10.94 | |||||||||
Total consumer continuing operations
|
16.63 | 14.60 | 15.85 | |||||||||
Discontinued credit card operations
|
5.27 | 4.40 | 6.18 | |||||||||
Total consumer
|
14.94 | % | 13.06 | % | 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: |
96
September 30, |
June 30, |
December 31, |
||||||||||
2011 | 2011 | 2010 | ||||||||||
(dollars are in millions) | ||||||||||||
Dollars of contractual delinquency:
|
||||||||||||
Mortgage Services:
|
||||||||||||
First lien
|
$ | 2,470 | $ | 2,254 | $ | 2,643 | ||||||
Second lien
|
169 | 163 | 243 | |||||||||
Total Mortgage Services
|
$ | 2,639 | $ | 2,417 | $ | 2,886 | ||||||
Consumer Lending:
|
||||||||||||
First lien
|
$ | 4,763 | $ | 4,315 | $ | 4,861 | ||||||
Second lien
|
361 | 314 | 424 | |||||||||
Total Consumer Lending
|
$ | 5,124 | $ | 4,629 | $ | 5,285 | ||||||
Delinquency ratio:
|
||||||||||||
Mortgage Services:
|
||||||||||||
First lien
|
20.20 | % | 17.82 | % | 19.12 | % | ||||||
Second lien
|
9.43 | 8.61 | 11.23 | |||||||||
Total Mortgage Services
|
18.83 | % | 16.62 | % | 18.05 | % | ||||||
Consumer Lending:
|
||||||||||||
First lien
|
17.49 | % | 15.39 | % | 16.18 | % | ||||||
Second lien
|
12.31 | 10.41 | 12.81 | |||||||||
Total Consumer Lending
|
16.98 | % | 14.91 | % | 15.85 | % | ||||||
(2) | The following reflects dollars of contractual delinquency and the delinquency ratio for interest-only, ARM and stated income real estate secured receivables: |
September 30, |
June 30, |
December 31, |
||||||||||
2011 | 2011 | 2010 | ||||||||||
(dollars are in millions) | ||||||||||||
Dollars of contractual delinquency:
|
||||||||||||
Interest-only loans
|
$ | 400 | $ | 385 | $ | 423 | ||||||
ARM loans
|
1,814 | 1,658 | 1,987 | |||||||||
Stated income loans
|
617 | 576 | 683 | |||||||||
Delinquency ratio:
|
||||||||||||
Interest-only loans
|
40.04 | % | 35.76 | % | 31.76 | % | ||||||
ARM loans
|
28.96 | 25.24 | 26.54 | |||||||||
Stated income loans
|
27.22 | 24.22 | 25.28 |
(3) | At September 30, 2011, June 30, 2011 and December 31, 2010, dollars of real estate secured delinquency includes $4.4 billion, $4.2 billion and $4.2 billion, respectively, of receivables that are carried at the lower of amortized cost or fair value less cost to sell. |
97
98
September 30, |
June 30, |
September 30, |
||||||||||
Three Months Ended(1) | 2011 | 2011 | 2010 | |||||||||
(dollars are in millions) | ||||||||||||
Net charge-off dollars:
|
||||||||||||
Continuing operations:
|
||||||||||||
Real estate
secured(2)(3)
|
$ | 724 | $ | 763 | $ | 1,196 | ||||||
Personal non-credit card
|
137 | 174 | 380 | |||||||||
Total receivables continuing operations
|
861 | 937 | 1,576 | |||||||||
Discontinued credit card operations
|
127 | 229 | 360 | |||||||||
Total receivables
|
$ | 988 | $ | 1,166 | $ | 1,936 | ||||||
Net charge-off ratio:
|
||||||||||||
Continuing operations:
|
||||||||||||
Real estate
secured(2)(3)
|
6.46 | % | 6.59 | % | 9.05 | % | ||||||
Personal non-credit card
|
9.42 | 11.13 | 18.60 | |||||||||
Total receivables continuing operations
|
6.80 | 7.13 | 10.32 | |||||||||
Discontinued operations
|
8.23 | 9.94 | 12.19 | |||||||||
Total receivables
|
6.95 | % | 7.55 | % | 10.63 | % | ||||||
Real estate secured net charge-offs and REO expense as a percent
of average real estate secured receivables
|
6.80 | % | 6.84 | % | 9.61 | % | ||||||
(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: |
September 30, |
June 30, |
September 30, |
||||||||||
Three Months Ended | 2011 | 2011 | 2010 | |||||||||
(dollars are in millions) | ||||||||||||
Net charge-off dollars:
|
||||||||||||
Mortgage Services:
|
||||||||||||
First lien
|
$ | 226 | $ | 242 | $ | 360 | ||||||
Second lien
|
70 | 86 | 134 | |||||||||
Total Mortgage Services
|
$ | 296 | $ | 328 | $ | 494 | ||||||
Consumer Lending:
|
||||||||||||
First lien
|
$ | 345 | $ | 329 | $ | 536 | ||||||
Second lien
|
83 | 106 | 166 | |||||||||
Total Consumer Lending
|
$ | 428 | $ | 435 | $ | 702 | ||||||
Net charge-off ratio:
|
||||||||||||
Mortgage Services:
|
||||||||||||
First lien
|
7.26 | % | 7.51 | % | 9.62 | % | ||||||
Second lien
|
15.23 | 17.62 | 22.16 | |||||||||
Total Mortgage Services
|
8.28 | % | 8.83 | % | 11.36 | % | ||||||
Consumer Lending:
|
||||||||||||
First lien
|
5.00 | % | 4.63 | % | 6.75 | % | ||||||
Second lien
|
11.18 | 13.78 | 17.80 | |||||||||
Total Consumer Lending
|
5.60 | % | 5.52 | % | 7.91 | % | ||||||
99
(3) | Net charge-off dollars and the net charge-off ratio for ARM loans are as follows: |
September 30, |
June 30, |
September 30, |
||||||||||
Three Months Ended | 2011 | 2011 | 2010 | |||||||||
(dollars are in millions) | ||||||||||||
Net charge-off dollars ARM Loans
|
$ | 151 | $ | 172 | $ | 282 | ||||||
Net charge-off ratio ARM Loans
|
9.41 | % | 10.18 | % | 13.63 | % |
100
September 30, |
June 30, |
December 31, |
||||||||||
2011 | 2011 | 2010 | ||||||||||
(dollars are in millions) | ||||||||||||
Nonperforming receivables:
|
||||||||||||
Continuing operations
|
||||||||||||
Nonaccrual receivable
portfolios(2):
|
||||||||||||
Real estate
secured(3)(4)
|
$ | 6,114 | $ | 5,619 | $ | 6,360 | ||||||
Personal non-credit card
|
337 | 320 | 530 | |||||||||
Total nonperforming receivables
|
6,451 | 5,939 | 6,890 | |||||||||
Real estate owned
|
371 | 588 | 962 | |||||||||
Total nonperforming assets continuing operations
|
6,822 | 6,527 | 7,852 | |||||||||
Discontinued credit card
operations(1)
|
319 | 280 | 447 | |||||||||
Total nonperforming assets
|
$ | 7,141 | $ | 6,807 | $ | 8,299 | ||||||
Credit loss reserves as a percent of nonperforming
receivables continuing
operations(5)
|
91.6 | % | 77.4 | % | 80.0 | % | ||||||
(1) | Includes credit card receivables which 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. If a re-aged loan subsequently experiences payment default and becomes 90 or more days contractually delinquent, it will be reported as nonaccrual. | |
(3) | Nonaccrual real estate secured receivables, including receivables held for sale, are comprised of the following: |
September 30, |
June 30, |
December 31, |
||||||||||
2011 | 2011 | 2010 | ||||||||||
(in millions) | ||||||||||||
Real estate secured:
|
||||||||||||
Closed-end:
|
||||||||||||
First lien
|
$ | 5,751 | $ | 5,302 | $ | 5,910 | ||||||
Second lien
|
249 | 215 | 320 | |||||||||
Revolving:
|
||||||||||||
First lien
|
8 | 6 | 6 | |||||||||
Second lien
|
106 | 96 | 124 | |||||||||
Total real estate secured
|
$ | 6,114 | $ | 5,619 | $ | 6,360 | ||||||
(4) | At September 30, 2011, June 30, 2011 and December 31, 2010, nonaccrual real estate secured receivables include $4.3 billion, $4.1 billion and $4.1 billion, respectively, of receivables that are carried at fair 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 amortized cost or fair value with no corresponding credit loss reserves. |
101
September 30, |
June 30, |
December 31, |
||||||||||
2011 | 2011 | 2010 | ||||||||||
(in millions) | ||||||||||||
Continuing operations:
|
||||||||||||
Real estate secured
|
$ | 2,103 | $ | 1,679 | $ | 1,825 | ||||||
Personal non-credit card
|
137 | 57 | 90 | |||||||||
Total continuing operations
|
$ | 2,240 | $ | 1,736 | $ | 1,915 | ||||||
| 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 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. |
102
Outstanding Receivable |
||||||||
Balance at Time of |
||||||||
Number |
Account Modification |
|||||||
Status as of September 30, 2011 | of Loans | Action | ||||||
Current or less than
30-days
delinquent
|
37 | % | 36 | % | ||||
30- to
59-days
delinquent
|
7 | 7 | ||||||
60-days or
more delinquent
|
18 | 22 | ||||||
Paid-in-full
|
8 | 8 | ||||||
Charged-off, transferred to real estate owned or sold
|
30 | 27 | ||||||
100 | % | 100 | % | |||||
103
Outstanding Receivable |
||||||||||||||||
Number of Accounts(1) | Balance(1)(4) | |||||||||||||||
Consumer |
Mortgage |
Consumer |
Mortgage |
|||||||||||||
Lending | Services | Lending | Services | |||||||||||||
(accounts are in thousands) | (dollars are in millions) | |||||||||||||||
September 30, 2011:
|
||||||||||||||||
Collection re-age only
|
91.1 | 29.2 | $ | 7,702 | $ | 2,562 | ||||||||||
Modification
only(2)
|
8.7 | 5.8 | 929 | 621 | ||||||||||||
Modification re-age
|
67.3 | 44.2 | 7,904 | 5,118 | ||||||||||||
Total loans modified and/or
re-aged(3)
|
167.1 | 79.2 | $ | 16,535 | $ | 8,301 | ||||||||||
June 30, 2011:
|
||||||||||||||||
Collection re-age only
|
91.1 | 29.9 | $ | 7,739 | $ | 2,630 | ||||||||||
Modification
only(2)
|
9.2 | 6.0 | 999 | 664 | ||||||||||||
Modification re-age
|
67.5 | 44.8 | 8,051 | 5,281 | ||||||||||||
Total loans modified and/or
re-aged(3)
|
167.8 | 80.7 | $ | 16,789 | $ | 8,575 | ||||||||||
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) | See Note 5, Receivables, in the accompanying consolidated financial statements for additional information describing modified and/or re-aged loans which are accounted for as troubled debt restructurings. | |
(2) | Includes loans that have been modified under a proactive ARM reset modification program which is fully described in our 2010 Form 10-K. | |
(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: |
Outstanding Receivable |
||||||||||||||||
Number of Accounts | Balance | |||||||||||||||
Consumer |
Mortgage |
Consumer |
Mortgage |
|||||||||||||
Lending | Services | Lending | Services | |||||||||||||
September 30, 2011:
|
||||||||||||||||
Current or less than
30-days
delinquent
|
63 | % | 62 | % | 60 | % | 64 | % | ||||||||
30- to
59-days
delinquent
|
11 | 9 | 12 | 9 | ||||||||||||
60-days or
more delinquent
|
26 | 29 | 28 | 27 | ||||||||||||
100 | % | 100 | % | 100 | % | 100 | % | |||||||||
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 | % | |||||||||
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 fair 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. |
104
105
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):
|
||||||||||||||||
Nine months ended September 30, 2011
|
14.0 | 10.9 | $ | 2.0 | $ | 1.4 | ||||||||||
Nine months ended September 30, 2010
|
21.3 | 14.7 | 3.1 | 2.0 |
(1) | Includes all loans modified during the nine months ended September 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. |
Sept. 30, |
June 30, |
Mar. 31, |
Dec. 31, |
Sept. 30, |
||||||||||||||||
2011 | 2011 | 2011 | 2010 | 2010 | ||||||||||||||||
Weighted-average contractual rate reduction in basis points on
account modifications during the
period(1)(2)
|
343 | 336 | 340 | 333 | 341 | |||||||||||||||
Average payment relief provided on account modifications as a
percentage of total payment prior to
modification(2)
|
27.1 | % | 27.1 | % | 27.2 | % | 25.4 | % | 27.6 | % |
(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, $1.1 billion, $1.2 billion and $1.2 billion as of September 30, 2011, June 30, 2011, March 31, 2011, December 31, 2010 and September 30, 2010, respectively. |
106
September 30, |
June 30, |
December 31, |
||||||||||
2011 | 2011 | 2010 | ||||||||||
Continuing operations:
|
||||||||||||
Never re-aged
|
50.6 | % | 51.1 | % | 52.7 | % | ||||||
Re-aged:
|
||||||||||||
Re-aged in the last 6 months
|
9.0 | 12.7 | 12.3 | |||||||||
Re-aged in the last 7-12 months
|
13.3 | 11.7 | 11.6 | |||||||||
Previously re-aged beyond 12 months
|
27.1 | 24.5 | 23.4 | |||||||||
Total ever re-aged
|
49.4 | 48.9 | 47.3 | |||||||||
Total continuing operations:
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
Discontinued credit card operations:
|
||||||||||||
Never re-aged
|
96.5 | 96.3 | 95.8 | |||||||||
Re-aged
|
3.5 | 3.7 | 4.2 | |||||||||
Total discontinued operations
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
September 30, |
June 30, |
December 31, |
||||||||||||||||||||||
2011 | 2011 | 2010 | ||||||||||||||||||||||
(dollars are in millions) | ||||||||||||||||||||||||
Continuing operations:
|
||||||||||||||||||||||||
Real estate
secured(5)
|
$ | 22,589 | 51.1 | % | $ | 23,053 | 50.6 | % | $ | 24,125 | 48.9 | % | ||||||||||||
Personal non-credit card
|
2,032 | 36.3 | 2,189 | 36.4 | 2,565 | 36.0 | ||||||||||||||||||
Total continuing operations
|
24,621 | 49.4 | 25,242 | 48.9 | 26,690 | 47.3 | ||||||||||||||||||
Discontinued credit card operations
|
329 | 3.5 | 344 | 3.7 | 412 | 4.2 | ||||||||||||||||||
Total
|
$ | 24,950 | 42.7 | % | $ | 25,586 | 41.9 | % | $ | 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. |
107
(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 September 30, 2011, June 30, 2011 and December 31, 2010, the unpaid principal balance of re-ages without receipt of a payment totaled $784 million, $772 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: |
September 30, |
June 30, |
December 31, |
||||||||||
2011 | 2011 | 2010 | ||||||||||
(in millions) | ||||||||||||
Mortgage Services
|
$ | 7,999 | $ | 8,258 | $ | 8,914 | ||||||
Consumer Lending
|
14,590 | 14,795 | 15,211 | |||||||||
Total real estate secured
|
$ | 22,589 | $ | 23,053 | $ | 24,125 | ||||||
Percentage of Portfolio |
||||||||||||||||
Receivables at |
Percent of |
|||||||||||||||
September 30, 2011 | Total Receivables | |||||||||||||||
Real Estate |
September 30, |
December 31, |
||||||||||||||
Secured | Other | 2011 | 2010 | |||||||||||||
California
|
9.58 | % | 5.19 | % | 9.09 | % | 9.42 | % | ||||||||
New York
|
7.17 | 6.81 | 7.13 | 6.95 | ||||||||||||
Pennsylvania
|
6.10 | 6.68 | 6.16 | 6.00 | ||||||||||||
Florida
|
6.02 | 5.73 | 5.99 | 6.18 | ||||||||||||
Ohio
|
5.53 | 6.21 | 5.60 | 5.58 |
108
September 30, |
December 31, |
|||||||
2011 | 2010 | |||||||
(in billions) | ||||||||
Due to HSBC
affiliates(1)
|
$ | 8.7 | $ | 8.3 | ||||
Debt outstanding to HSBC clients:
|
||||||||
Euro commercial paper
|
.4 | .4 | ||||||
Term debt
|
.1 | .3 | ||||||
Total debt outstanding to HSBC clients
|
.5 | .7 | ||||||
Cash received on bulk and subsequent sales of credit card
receivables to HSBC Bank USA, net (cumulative)
|
7.4 | 8.4 | ||||||
Cash received on bulk and subsequent sales of private label
credit card receivables to HSBC Bank USA, net (cumulative)
|
12.7 | 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)
|
9.2 | 8.8 | ||||||
Issuance of Series C Preferred Stock to HINO
|
1.0 | 1.0 | ||||||
Total HSBC related funding
|
$ | 44.3 | $ | 46.5 | ||||
(1) | At September 30, 2011 and December 31, 2010, due to HSBC affiliates includes $425 million and $436 million, respectively, carried at fair value. |
109
Nine Months Ended September 30, | 2011 | 2010 | ||||||
Long-term debt issued
|
$ | 245 | $ | 459 | ||||
Long-term debt retired
|
(10,488 | ) | (11,577 | ) | ||||
Net long-term debt retired
|
$ | (10,243 | ) | $ | (11,118 | ) | ||
110
September 30, |
December 31, |
|||||||
2011 | 2010 | |||||||
Tangible common equity to tangible
assets(1)
|
6.78 | % | 7.31 | % | ||||
Common and preferred equity to total assets
|
10.31 | 10.01 |
(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. |
September 30, |
December 31, |
|||||||
2011 | 2010 | |||||||
(in billions) | ||||||||
Private label and credit
cards(1)(2)
|
$ | 103.8 | $ | 99.2 | ||||
Other consumer lines of credit
|
.6 | .5 | ||||||
Open lines of credit
|
$ | 104.4 | $ | 99.7 | ||||
(1) | Amounts at September 30, 2011 include open lines of credit totaling $93.0 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 September 30, 2011 and December 31, 2010. |
Actual |
Estimated |
|||||||||||||||||||||||||||
January 1 |
October 1 |
|||||||||||||||||||||||||||
through |
through |
Estimated |
||||||||||||||||||||||||||
September 30, |
December 31, |
Full Year |
||||||||||||||||||||||||||
2011 | 2011 | 2011 | ||||||||||||||||||||||||||
(in billions) | ||||||||||||||||||||||||||||
Funding needs:
|
||||||||||||||||||||||||||||
Net asset
growth/(attrition)(1)
|
$ | (3 | ) | $ | (1 | ) | - | 1 | $ | (4 | ) | - | (2 | ) | ||||||||||||||
Commercial paper maturities
|
3 | 0 | - | 0 | 3 | - | 3 | |||||||||||||||||||||
Term debt maturities
|
10 | 3 | - | 4 | 13 | - | 14 | |||||||||||||||||||||
Secured financing maturities
|
1 | 0 | - | 1 | 1 | - | 2 | |||||||||||||||||||||
Total funding needs
|
$ | 11 | $ | 2 | - | 6 | $ | 13 | - | 17 | ||||||||||||||||||
Funding sources:
|
||||||||||||||||||||||||||||
Commercial paper issuances
|
$ | 4 | $ | 0 | - | 1 | $ | 4 | - | 5 | ||||||||||||||||||
Short term investment
|
2 | 2 | - | 3 | 4 | - | 5 | |||||||||||||||||||||
Term debt issuances
|
- | 0 | - | 1 | 0 | - | 1 | |||||||||||||||||||||
HSBC and HSBC subsidiaries, including capital infusions
|
1 | 0 | - | 0 | 1 | - | 1 | |||||||||||||||||||||
Other(2)
|
4 | 0 | - | 1 | 4 | - | 5 | |||||||||||||||||||||
Total funding sources
|
$ | 11 | $ | 2 | - | 6 | $ | 13 | - | 17 | ||||||||||||||||||
(1) | Net of receivable charge-off. | |
(2) | Primarily reflects cash provided by operating activities and sales of REO properties. |
111
| 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; | |
| 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. |
112
| 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. |
113
| 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. |
114
Standard & |
Moodys |
|||||||||||
Poors |
Investors |
|||||||||||
Corporation | Service | Fitch, Inc. | ||||||||||
As of September 30, 2011:
|
||||||||||||
Senior debt
|
A | A3 | 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
|
A | A3 | AA- | |||||||||
Senior subordinated debt
|
BBB+ | Baa1 | A+ | |||||||||
Commercial paper
|
A-1 | P-1 | F-1+ | |||||||||
Series B preferred stock
|
BBB- | Baa2 | A |
115
September 30, |
December 31, |
|||||||
2011 | 2010 | |||||||
(in millions) | ||||||||
USD
|
$ | 2.318 | $ | 6.351 | ||||
JPY
|
.150 | .132 | ||||||
Absolute PVBP risk
|
$ | 2.468 | $ | 6.483 | ||||
September 30, |
December 31, |
|||||||
2011 | 2010 | |||||||
(in millions) | ||||||||
Increase (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
|
$ | 14 | $ | (38 | ) | |||
Increase (decrease) 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
|
(2 | ) | 43 |
116
117
September 30, |
December 31, |
|||||||
2011 | 2010 | |||||||
(dollars are in millions) | ||||||||
Tangible common equity:
|
||||||||
Common shareholders equity
|
$ | 5,364 | $ | 6,145 | ||||
Exclude:
|
||||||||
Fair value option adjustment
|
(777 | ) | (453 | ) | ||||
Unrealized (gains) losses on cash flow hedging instruments
|
571 | 575 | ||||||
Postretirement benefit plan adjustments, net of tax
|
(1 | ) | | |||||
Unrealized (gains) losses on investments
|
(113 | ) | (74 | ) | ||||
Intangible assets
|
(514 | ) | (605 | ) | ||||
Tangible common equity
|
$ | 4,530 | $ | 5,588 | ||||
Tangible shareholders equity:
|
||||||||
Tangible common equity
|
$ | 4,530 | $ | 5,588 | ||||
Preferred stock
|
1,575 | 1,575 | ||||||
Mandatorily redeemable preferred securities of Household Capital
Trusts
|
1,000 | 1,000 | ||||||
Tangible shareholders equity
|
$ | 7,105 | $ | 8,163 | ||||
Tangible assets:
|
||||||||
Total assets
|
$ | 67,326 | $ | 77,131 | ||||
Exclude:
|
||||||||
Intangible assets
|
(514 | ) | (605 | ) | ||||
Derivative financial assets
|
(3 | ) | (75 | ) | ||||
Tangible assets
|
$ | 66,809 | $ | 76,451 | ||||
Equity ratios:
|
||||||||
Common and preferred equity to total assets
|
10.31 | % | 10.01 | % | ||||
Tangible common equity to tangible assets
|
6.78 | 7.31 | ||||||
Tangible shareholders equity to tangible assets
|
10.63 | 10.68 |
118
119
10 | Purchase and Assumption Agreement, dated as of August 10, 2011, among HSBC Finance Corporation, HSBC USA Inc., HSBC Technology and Services (USA) Inc. and Capital One Financial Corporation (incorporated by reference to Exhibit 2.1 to the Companys Current Report on Form 8-K filed August 12, 2011) | |||
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 September 30, 2011, formatted in eXentsible Business Reporting Language (XBRL) interactive date files: (i) the Consolidated Statement of Income for the three and nine months ended September 30, 2011 and 2010, (ii) the Consolidated Balance Sheet as of September 30, 2011 and December 31. 2010, (iii) the Consolidated Statement of Changes in Shareholders Equity for the nine months ended September 30, 2011 and 2010, (iv) the Consolidated Statement of Cash Flows for the nine months ended September 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. |
120
121
122
10 | Purchase and Assumption Agreement, dated August 10, 2011 among HSBC Finance Corporation, HSBC USA Inc., HSBC Technology and Services (USA) Inc. and Capital One Financial Corporation (incorporated by reference to Exhibit 2.1 to the Companys Current Report on Form 8-K filed August 12, 2011) | |||
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 September 30, 2011, formatted in eXentsible Business Reporting Language (XBRL) interactive date files: (i) the Consolidated Statement of Income for the three and nine months ended September 30, 2011 and 2010, (ii) the Consolidated Balance Sheet as of September 30, 2011 and December 31. 2010, (iii) the Consolidated Statement of Changes in Shareholders Equity for the nine months ended September 30, 2011 and 2010, (iv) the Consolidated Statement of Cash Flows for the nine months ended September 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. |
124
Nine Months Ended September 30, | 2011 | 2010 | ||||||
(dollars are in millions) | ||||||||
Loss from continuing operations
|
$ | (1,711 | ) | $ | (2,350 | ) | ||
Income tax
|
1,154 | 1,334 | ||||||
Loss from continuing operations before income tax
|
(2,865 | ) | (3,684 | ) | ||||
Fixed charges:
|
||||||||
Interest expense
|
1,831 | 2,230 | ||||||
Interest portion of
rentals(1)
|
7 | 4 | ||||||
Total fixed charges
|
1,838 | 2,234 | ||||||
Total earnings (loss) from continuing operations as defined
|
$ | (1,027 | ) | $ | (1,450 | ) | ||
Ratio of earnings to fixed charges
|
(.56 | ) | (.65 | ) | ||||
Preferred stock
dividends(2)
|
148 | 42 | ||||||
Ratio of earnings (loss) to combined fixed charges and preferred
stock dividends
|
(.52 | ) | (.64 | ) |
(1) | Represents one-third of rentals, which approximates the portion representing interest. | |
(2) | Preferred stock dividends are grossed up to their pretax equivalents. |
Consolidated Balance Sheet (Unaudited) (Parenthetical) (USD $) | Sep. 30, 2011 | Dec. 31, 2010 |
---|---|---|
Receivables, collateralizing long-term debt | $ 5,400,000,000 | $ 5,900,000,000 |
Due to affiliate, carried at fair value | 425,000,000 | 436,000,000 |
Long-term debt, carried at fair value | 16,000,000,000 | 20,800,000,000 |
Long-term debt, collateralized by receivables | $ 3,400,000,000 | $ 3,900,000,000 |
Common stock, par value | $ 0.01 | $ 0.01 |
Common stock, shares authorized | 100 | 100 |
Common stock, shares issued | 67 | 66 |
Common stock, shares outstanding | 67 | 66 |
Series B Preferred Stock | ||
Redeemable preferred stock, shares authorized | 1,501,100 | 1,501,100 |
Redeemable preferred stock, par value | $ 0.01 | $ 0.01 |
Redeemable preferred stock, shares issued | 575,000 | 575,000 |
Redeemable preferred stock, shares outstanding | 575,000 | 575,000 |
Series C Preferred Stock | ||
Redeemable preferred stock, shares authorized | 1,000 | 1,000 |
Redeemable preferred stock, par value | $ 0.01 | $ 0.01 |
Redeemable preferred stock, shares issued | 1,000 | 1,000 |
Redeemable preferred stock, shares outstanding | 1,000 | 1,000 |
New Accounting Pronouncements | 9 Months Ended | ||||
---|---|---|---|---|---|
Sep. 30, 2011 | |||||
New Accounting Pronouncements [Abstract] | |||||
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 provided 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 reporting of troubled debt
restructurings, as well as for recording impairment. In the
third quarter of 2011, we adopted this Accounting Standards
Update. As required, the new guidance was applied
retrospectively to restructurings occurring on or after
January 1, 2011 and for purposes of measuring impairment on
these receivables, a discounted cash flow approach was applied.
As a result, we have reported an additional $4.8 billion of
receivables as TDRs at September 30, 2011, ($4 million
of which relates to our discontinued credit card operations),
which resulted in approximately $925 million of loan loss
provision being recorded for these receivables on a continuing
operations basis during the third quarter of 2011. Credit loss
reserves on this incremental TDR population on a continuing
operations basis totaled $1.3 billion at September 30,
2011.
This Accounting Standards Update also clarified the effective
date for new disclosure requirements for TDRs which have been
included in Note 5, “Receivables.”
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. 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 liabilities.
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.
|
Document and Entity information | 9 Months Ended | |
---|---|---|
Sep. 30, 2011 | Oct. 31, 2011 | |
Document and Entity Information [Abstract] | ||
Entity Registrant Name | HSBC Finance Corp | |
Entity Central Index Key | 0000354964 | |
Document Type | 10-Q | |
Document Period End Date | Sep. 30, 2011 | |
Amendment Flag | false | |
Document Fiscal Year Focus | 2011 | |
Document Fiscal Period Focus | Q3 | |
Current Fiscal Year End Date | --12-31 | |
Entity Well-known Seasoned Issuer | Yes | |
Entity Voluntary Filers | No | |
Entity Current Reporting Status | Yes | |
Entity Filer Category | Non-accelerated Filer | |
Entity Common Stock, Shares Outstanding | 68 |
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Receivables | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Receivables and Credit Loss Reserves [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Receivables |
Receivables from continuing operations consisted of the
following:
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 $265 million
and $304 million at September 30, 2011 and
December 31, 2010, respectively.
Net unamortized premium on our receivables totaled
$182 million and $254 million at September 30,
2011 and December 31, 2010, respectively. Unearned income
on personal non-credit card receivables totaled $11 million
and $30 million at September 30, 2011 and
December 31, 2010, respectively.
Collateralized funding
transactions Secured financings previously
issued under public trusts with a balance of $3.4 billion
at September 30, 2011 are secured by $5.4 billion of
closed-end real estate secured receivables. Secured financings
previously issued under public trusts with a balance of
$3.9 billion at December 31, 2010 were secured by
$5.9 billion of closed-end real estate secured receivables.
Age Analysis of Past Due
Receivables The following tables summarize
the past due status of our receivables from continuing and
discontinued operations at September 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 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.
Nonperforming receivables Nonaccrual receivables
(including receivables held for sale) for both continuing and
discontinued operations are summarized in the following table.
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 $761 million during the nine months ended
September 30, 2011 and approximately $856 million
during the nine months ended September 30, 2010. Interest
income that was recorded on these nonaccrual loans was
approximately $251 million during the nine months ended
September 30, 2011 and approximately $362 million
during the nine months ended September 30, 2010 of which
portions have been written-off.
Troubled Debt Restructurings Troubled
debt restructurings represent receivables for which the original
contractual terms have been modified to provide for terms that
are less than what we would be willing to accept for new
receivables with comparable risk because of deterioration in the
borrower’s financial status.
During the third quarter of 2011 we adopted a new Accounting
Standards Update which provided additional guidance to determine
whether a restructuring of a receivable meets the criteria to be
considered a TDR Loan. Under this new guidance, we have
determined that all receivables modified as a result of a
financial difficulty for periods of greater than three months,
including all modifications with trial periods, regardless of
whether the modification was permanent or temporary, should be
reported as TDR Loans. Additionally, we have determined that all
re-ages, except first time early stage delinquency re-ages where
the customer has not been granted a prior re-age since the first
quarter of 2007, should be considered TDR Loans. Accordingly,
$1.1 billion of first-time early stage delinquency accounts
which have been re-aged since January 1, 2011 are not being
reported as TDR Loans at September 30, 2011. As required,
the new guidance was applied retrospectively to restructurings
occurring on or after January 1, 2011 and has resulted in
the reporting of an additional $4.1 billion of real estate
secured receivables and an additional $717 million of
personal non-credit card receivables as TDR Loans at
September 30, 2011 with
credit loss reserves of $1.3 billion associated with these
receivables at September 30, 2011. An incremental loan loss
provision for these receivables using a discounted cash flow
analysis of approximately $925 million was recorded during
the third quarter of 2011 which also includes the impact of
changes in market conditions during the quarter of approximately
$180 million. The TDR Loan balances and related credit loss
reserves for consumer receivables reported as of
December 31, 2010 use our previous definition of TDR Loans
as described in our 2010
Form 10-K
and as such, are not directly comparable to the current period
balances. See Note 2, “Discontinued Operations,”
in the accompanying consolidated financial statements for
discussion of the impact of adopting this new guidance on our
discontinued credit card operations.
Modifications for real estate secured and personal non-credit
card receivables may include changes to one or more terms of the
loan, including, but not limited to, a change in interest rate,
an extension of the amortization period, a reduction in payment
amount and partial forgiveness or deferment of principal. A
substantial amount of our modifications involve interest rate
reductions which lower the amount of finance income we are
contractually entitled to receive in future periods. By lowering
the interest rate and making other changes to the loan terms, we
believe we are able to increase the amount of cash flow that
will ultimately be collected from the loan, given the
borrower’s financial condition. Re-aging is an account
management action that results in the resetting of the
contractual delinquency status of an account to current. TDR
Loans are reserved for based on the present value of expected
future cash flows discounted at the loans’ original
effective interest rate which generally results in a higher
reserve requirement for these loans. Once a loan is classified
as a TDR, it continues to be reported as such until it is paid
off or charged-off.
The following table presents information about receivables which
as a result of an account management action during the three and
nine months ended September 30, 2011 became classified as
TDR Loans. During both the three and nine months ended
September 30, 2011, substantially all of the actions
reflect re-aging of past due accounts and loan modifications
involving interest rate reductions.
The following table presents information about our TDR Loans and
the related credit loss reserves for TDR Loans:
The following table discloses receivables which were classified
as TDR Loans during the previous 12 months which became
sixty days or greater contractually delinquent during the three
and nine months ended September 30, 2011:
Additional information relating to TDR Loans is presented in the
table below:
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 for continuing
operations and as a percent of total receivables and receivables
held for sale (“delinquency ratio”) for our loan
portfolio for continuing and discontinued operations:
Nonperforming The status of our consumer receivable
portfolio for continuing and discontinued operations are
summarized in the following table:
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:
The following table summarizes the outstanding balances of
interest-only loans, ARM loans and stated income loans in our
receivable portfolios at September 30, 2011 and
December 31, 2010:
At September 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.
|
Pension and Other Postretirement Benefits | 9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2011 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pension and Other Postretirement Benefits [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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:
Pension expense declined during the first nine months of 2011
primarily due to lower service cost as a result of a decrease in
the number of active participants in the Plan and 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:
|
Organization and Basis of Presentation | 9 Months Ended | ||||
---|---|---|---|---|---|
Sep. 30, 2011 | |||||
Organization and Basis of Presentation [Abstract] | |||||
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 a liquidating business
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.
During the third quarter of 2011, we adopted a new Accounting
Standards Update which provided additional guidance for
determining whether a restructuring of a receivable meets the
criteria to be considered a troubled debt restructuring for
purposes of the identification and reporting of troubled debt
restructurings as well as for recording impairment. This new
Accounting Standards Update also made effective new disclosure
requirements for troubled debt restructurings. See Note 5,
“Receivables,” and Note 16, “New Accounting
Pronouncements,” for further details and related impacts.
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Derivative Financial Instruments | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Derivative Financial Instruments [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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
(previously part of the Audit and 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 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 indices 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 the risk that the counterparty to a
transaction fails to perform according to the terms of the
contract. We manage the counterparty credit (or repayment) risk
in derivative instruments through established credit approvals,
risk control limits, collateral, and ongoing monitoring
procedures. We utilize an affiliate, HSBC Bank USA, as the
primary provider of domestic derivative products. We have never
suffered a loss due to counterparty failure.
At September 30, 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 September 30, 2011 and
December 31, 2010, we provided third party swap
counterparties with $5 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 September 30, 2011 and
December 31, 2010, the fair value of our agreements with
affiliate counterparties required the affiliate to provide
collateral of $1.3 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 assets or derivative related
liabilities. At September 30, 2011, we had derivative
contracts with a notional value of approximately
$44.3 billion, including $43.8 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 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 amount of our debt by $55 million and
$51 million at September 30, 2011 and
December 31, 2010, respectively. The following table
provides information related to the location of derivative fair
values in the consolidated balance sheet for our fair value
hedges.
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.
Cash Flow Hedges Cash flow hedges include interest
rate swaps to convert our variable rate debt to fixed rate debt
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 other comprehensive income (loss)
(“OCI”) net of tax and totaled a loss of
$518 million and $492 million at September 30,
2011 and December 31, 2010, respectively. We expect
$329 million ($213 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 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.
The following table provides the gain or loss recorded on our
cash flow hedging relationships.
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:
The following table provides detail of the gain or loss recorded
on our non-qualifying hedges:
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 8,
“Fair Value Option,” for further discussion.
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:
Notional Value of Derivative Contracts The
following table summarizes the notional values of derivative
contracts:
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Business Segments [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Business Segments |
Through June 30, 2011, we reported the results of our
operations in two reportable segments: Card and Retail Services
and Consumer. These segments were managed separately and were
characterized by different middle-
market consumer lending products, originations processes, and
locations. As previously discussed in Note 2,
“Discontinued Operations,” in August 2011, we agreed
to sell our Card and Retail Services business and these
operations are now reported as discontinued operations. As our
segment results are reported on a continuing operations basis,
beginning in the third quarter of 2011, we have one remaining
reportable segment: Consumer.
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. While these businesses are all 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 as well as our
run-off Union Privilege non-credit card portfolio operations
which is not being sold. 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.
Except as discussed above, there have been no other 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.
Reconciliation of our IFRS Basis segment results to the
U.S. GAAP consolidated totals are as follows:
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.
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 adjustments while held for sale and
have been transferred to held for investment at the lower of
amortized cost or fair value. Since these receivables were not
classified as held for sale
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.
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 fair 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 fair 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 loan 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.
As previously discussed, in the third quarter of 2011 we adopted
new guidance under U.S. GAAP for determining whether a
restructuring of a receivable meets the criteria to be
considered a TDR Loan. Credit loss reserves on TDR Loans are
established based on the present value of expected future cash
flows discounted at the loans’ original effective interest
rate.
Under IFRSs, effective in the third quarter of 2011 the changes
were made to the provisioning methodology for loans subject to
forebearance to measure the effect of credit loss events which
occurred prior to the reporting date. In certain circumstances,
IFRSs may result in a lower overall credit loss reserve than
under U.S. GAAP which is based on all expected future cash flows.
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
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 fair 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.
|
Fair Value Option | 9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Fair Value Option and Fair Value Measurements [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value Option |
We have elected fair value option (“FVO”) reporting
for certain of our fixed rate debt issuances. At
September 30, 2011, fixed rate debt accounted for under FVO
totaled $16.5 billion, of which $16.0 billion is
included as a component of long-term debt and $425 million
is included as a component of due to affiliates. At
September 30, 2011, we had not elected FVO for
$12.3 billion of fixed rate long-term debt carried on our
balance sheet. Fixed rate debt accounted for under FVO at
September 30, 2011 has an aggregate unpaid principal
balance of $16.1 billion which included a foreign currency
translation adjustment relating to our foreign denominated FVO
debt which increased the debt balance by $455 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 14, “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:
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 recorded fair value option adjustments
which increased the value of our debt by $311 million and
$873 million at September 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:
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 nine months ended September 30,
2011 should not be considered indicative of the results for any
future periods.
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Credit Loss Reserves | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Receivables and Credit Loss Reserves [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Credit Loss Reserves |
An analysis of credit loss reserves was as follows:
The following table summarizes the changes in credit loss
reserves by product/class during the three and nine months ended
September 30, 2011 and 2010 and the related receivable
balance by product/class at September 30, 2011 and 2010:
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Discontinued Operations | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Discontinued Operations [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Discontinued Operations |
Card and Retail Services In August 2011, HSBC, through
its wholly-owned subsidiaries HSBC Finance Corporation, HSBC USA
Inc and other wholly-owned affiliates, agreed to sell its Card
and Retail Services business, which includes both our credit
card and private label operations, to Capital One Financial
Group (“Capital One”) for a premium of
8.75 percent of receivables. In addition to receivables,
the sale will include real estate and
certain other assets and liabilities which will be sold at book
value or, in the case of real estate, appraised value at the
date of closing. The total consideration paid to HSBC may be
paid in cash or a combination of cash and common stock to a
maximum of $750 million of common stock (to be priced at
$39.23 per share) at the option of Capital One. Based on
balances at September 30, 2011, the total consideration
that would be allocated to us would be approximately
$12.5 billion, including a premium of approximately
$3.0 billion. Under the terms of the agreement, facilities
in Chesapeake, Virginia; Las Vegas, Nevada; Mettawa, Illinois;
Hanover, Maryland; Salinas, California; Sioux Falls, South
Dakota and Tigard, Oregon will be sold or transferred to Capital
One, although we may enter into site-sharing arrangements for
certain of these locations for a period of time. We also expect
to transfer a data center. The majority of the employees in our
Card and Retail Services business will transfer to Capital One.
As such, we anticipate severance costs or other charges as a
result of this transaction will not be significant. Based on
balances at September 30, 2011, we anticipate recording a
gain of approximately $2.0 billion (after-tax) as a result
of this transaction. However, the final amount recognized will
be dependent upon the balances at the time of closing which is
expected to occur in the second quarter of 2012. The receivables
and other assets being sold to Capital One were transferred to
held for sale during the third quarter of 2011 and, as a result,
we no longer record provisions for credit losses, including
charge-offs, for the receivables. As a result of this
transaction, our Card and Retail Services business, which was
previously included in the Card and Retail Services segment, is
now reported as discontinued operations.
The following summarizes the operating results of our
discontinued Card and Retail Services business for the periods
presented:
The following summarizes the assets and liabilities of our
discontinued Card and Retail Services business at
September 30, 2011 and December 31, 2010 which are
reported as a component of Assets of discontinued operations and
Liabilities of discontinued operations in our consolidated
balance sheet. Of the amounts included in the table below,
assets with a balance of approximately $9.6 billion at
September 30, 2011, consisting primarily of credit card
receivables with an outstanding principal balance of
$9.5 billion, will be sold to Capital One and liabilities
of approximately $100 million at September 30, 2011
will be assumed by Capital One. These assets and liabilities are
considered held for sale at September 30, 2011.
Troubled debt restructurings represent receivables for which the
original contractual terms have been modified to provide for
terms that are less than what we would be willing to accept for
new receivables with comparable risk because of deterioration in
the borrower’s financial status. At September 30,
2011, our discontinued credit card operations had loans which
qualified as troubled debt restructurings (“TDR
Loans”) with an outstanding principal balance of
$337 million. The additional credit card TDR Loans reported
in the third quarter of 2011 as a result of the adoption of the
new Accounting Standards Update was not significant. At
December 31, 2010, our discontinued credit card operations
had TDR Loans with an outstanding principal balance of
$434 million. During the three and nine months ended
September 30, 2011, credit card TDR Loans of
$9 million and $31 million, respectively, which were
classified as TDR Loans during the previous 12 months
became sixty days or greater contractually delinquent during
these periods.
Intangible assets in our discontinued Card and Retail Services
business totaled $514 million and $605 million at
September 30, 2011 and December 31, 2010,
respectively, and reflect purchased credit card relationships
and related programs. For periods following the transfer to held
for sale, no further amortization is recorded. Intangible assets
at September 30, 2011 included $27 million related to
account relationships we purchased from HSBC Bank USA during
July 2004. These relationships are not part of the transaction
with Capital One and we currently expect to sell these
relationships to HSBC Bank USA during the first quarter of 2012.
We have secured conduit credit facilities with commercial banks
which provide for secured financings of credit card receivables
on a revolving basis totaling $650 million at both
September 30, 2011 and December 31, 2010. At
September 30, 2011, secured financings with a balance of
$195 million were secured by $355 million of credit
card receivables. At December 31, 2010, secured financings
with a balance of $195 million were secured by
$390 million of credit card receivables. These secured
financings will be paid in full immediately prior to the sale of
our Card and Retail Services business.
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 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
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.
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
September 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:
The following summarizes the assets and liabilities of our TFS
business at September 30, 2011 and December 31, 2010
which are reported as assets of discontinued operations and
liabilities of discontinued operations in our consolidated
balance sheet.
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.
The following summarizes the operating results of our Auto
Finance business for the periods presented:
The following summarizes the assets and liabilities of our Auto
Finance business at September 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.
|
Strategic Initiatives | 9 Months Ended | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2011 | |||||||||||||||
Strategic Initiatives [Abstract] | |||||||||||||||
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 in our Consumer Lending and Mortgage Services
businesses. As discussed more fully in Note 2,
“Discontinued Operations,” in August 2011 we announced
we had entered into an agreement to sell our Card and Retail
Services business which includes both our credit card and
private label operations and as a result, this business is now
reported within discontinued operations. There were no
significant strategic actions related to our continuing
operations during the three or nine months ended
September 30, 2011 or the year ended December 31,
2010. 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:
The restructuring liability relating to these actions
implemented during 2009 totaled $4 million at
September 30, 2011 and $5 million at December 31,
2010.
|
Related Party Transactions | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Related Party Transactions [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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:
Transactions
with HSBC Bank USA:
Transactions
with HSBC Bank USA involving our Discontinued
Operations:
Gains on the daily sales of the receivables discussed above,
which are included as a component of Income from discontinued
operations in the consolidated statement of income (loss),
totaled $145 million and $407 million during the three
and nine months ended September 30, 2011, respectively,
compared to $143 million and $401 million during the
year-ago periods. Fees received for servicing these loan
portfolios, which are included as a component of Income from
discontinued operations in the consolidated statement of income
(loss), totaled $153 million and $458 million during
the three and nine months ended September 30, 2011,
respectively, compared to $158 million and
$469 million during the year-ago periods.
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
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. With the announcement of the Capital One
transaction, an analysis was performed and an adjustment to the
fair value rates was made effective August 10, 2011 to
reflect the sale of the receivables to a third party during the
first half of 2012. The rates will continue to be updated as
part of our normal semi-annual process until the time the
transaction is completed.
HSBC Bank USA extended a $1.0 billion committed unsecured
credit facility to HSBC Bank Nevada (“HOBN”) which is
part of our credit card operations, in December 2008. This
364 day credit facility was renewed in December 2010. There
were no balances outstanding at September 30, 2011 or
December 31, 2010.
We have extended revolving lines of credit to subsidiaries of
HSBC Bank USA for an aggregate total of $1.0 billion. No
balances were outstanding under any of these lines of credit at
either September 30, 2011 or December 31, 2010.
Transactions
with HSBC Holdings plc:
Transactions
with other HSBC affiliates:
|
Securities | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Securities [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Securities |
Securities consisted of the following
available-for-sale
investments:
A summary of gross unrealized losses and related fair values as
of September 30, 2011 and December 31, 2010,
classified as to the length of time the losses have existed
follows:
Gross unrealized losses were broadly unchanged during the first
nine months of 2011 while gross unrealized gains increased
primarily due to a decrease in interest rates since
December 31, 2010, particularly during the third quarter of
2011 due to market conditions, which increased the value of our
securities. 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, no
OTTI was recognized during the three and nine months ended
September 30, 2011 compared to losses of less than
$1 million recorded during the three and nine months
ended September 30, 2010. During the nine months ended
September 30, 2011, we recognized a $2 million loss in
other comprehensive income relating to the non-credit component
of OTTI as compared to a $2 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.
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:
At September 30, 2011, approximately 92 percent of our
corporate debt securities are rated A- or better and
approximately 61 percent of our asset-backed securities,
which totaled $44 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 no OTTI was recorded during the nine months ended
September 30, 2011 and OTTI of less than $1 million
was recorded in earnings during the nine months ended
September 30, 2010, additional
other-than-temporary
impairments may occur in future periods.
The amortized cost and fair value of asset-backed securities
with unrealized losses of more than 12 months for which no
other-than-temporary
impairment has been recognized at September 30, 2011 and
December 31, 2010 are as follows:
Although the fair value of a particular security is below its
amortized cost for more than 12 months, it does not
necessarily result in a credit loss and hence
other-than-temporary
impairment. The decline in fair value may be caused by, among
other things, the illiquidity of the market. To the extent we do
not intend to sell the debt security and it is
more-likely-than-not we will not be required to sell the
security before the recovery of the amortized cost basis, no
other-than-temporary
impairment is deemed to have occurred.
Proceeds from the sale, call or redemption of
available-for-sale
investments totaled $360 million and $809 million
during the three and nine months ended September 30, 2011,
respectively, compared to $25 million and $137 million
during the three and nine months ended September 30, 2010,
respectively. We realized gross gains of $14 million and
$28 million during the three and nine months ended
September 30, 2011, respectively, compared to
$1 million and $5 million during the three and nine
months ended September 30, 2010, respectively. We realized
gross losses of less than $1 million during the nine months
ended September 30, 2011 and 2010.
Contractual maturities of and yields on investments in debt
securities for those with set maturities were as follows:
|
Fair Value Measurements | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Fair Value Option and Fair Value Measurements [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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
summarizes the carrying amounts and estimated fair value of our
financial instruments at September 30, 2011 and
December 31, 2010.
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 September 30, 2011 and
December 31, 2010 reflect these market conditions.
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 September 30, 2011 and
December 31, 2010, and indicates the fair value hierarchy
of the valuation techniques utilized to determine such fair
value.
The following table provides additional detail regarding the
rating of our U.S. corporate debt securities at
September 30, 2011 and December 31, 2010:
Significant Transfers Between Level 1 and
Level 2 There were no transfers between
Level 1 and Level 2 during the three or nine months
ended September 30, 2011 or 2010.
Information on Level 3 Assets and
Liabilities Securities are transferred into
Level 3 classifications when an individual
non-U.S. government
issued 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 nine months
ended September 30, 2011 or 2010.
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 September 30, 2011 and
2010, and indicates the fair value hierarchy of the valuation
techniques utilized to determine such fair value.
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 amount approximates fair value due to
cash’s liquid nature.
Interest bearing deposits with banks: Carrying
amount 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 amount 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:
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.
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 amount of the loan, the
carrying amount of the loan is adjusted to the fair value. The
carrying amount of the property is further reduced, if
necessary, at least every 45 days to reflect observable
local market data, including local area sales data.
Due from affiliates: Carrying amount 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 amount 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.
|
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