Discontinued Operations

9 Months Ended

Sep. 30, 2011

Discontinued Operations [Abstract]

Discontinued Operations

2.   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:

	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.

⁽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.

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.

	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.

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:

	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.

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.

	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

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:

	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.

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.

	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