HSBC Finance Corporation 2Q 2013 Form 10-Q

2.     Discontinued Operations

2012 Discontinued Operations:

Insurance On March 29, 2013, we sold our interest in substantially all of our insurance subsidiaries to Enstar Group Ltd. ("Enstar") for $153 million in cash and recorded a gain on sale of $21 million ($13 million after-tax), which is reflected in the table below. During the twelve months ended December 31, 2012, we had previously recorded a lower of amortized cost or fair value less cost to sell adjustment of $119 million ($90 million after-tax).

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

⁽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 which are part of our discontinued Insurance operations at June 30, 2013 and December 31, 2012, which are reported as a component of Assets of discontinued operations and Liabilities of discontinued operations in our consolidated balance sheet.

Commercial Our Commercial business has been in run-off since 1994. Prior to the second quarter of 2012, this business continued to be reported within continuing operations as we continued to generate cash flow from the ongoing collection of the receivables, including interest and fees. Beginning in the second quarter of 2012, we have reported our Commercial business in discontinued operations as there are no longer any outstanding receivable balances or any remaining significant cash flows generated from this business. Our Commercial business was previously included in the "All Other" caption in our segment reporting. The following summarizes the operating results of our discontinued Commercial business for the periods presented:

⁽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.

2011 Discontinued Operations:

Card and Retail Services On May 1, 2012, HSBC, through its wholly-owned subsidiaries HSBC Finance Corporation, HSBC USA Inc. and other wholly-owned affiliates, sold its Card and Retail Services business to Capital One Financial Corporation ("Capital One") for a premium of 8.75 percent of receivables. In addition to receivables, the sale included real estate and certain other assets and liabilities which were sold at book value or, in the case of real estate, appraised value. Under the terms of the agreement, interests in facilities in Chesapeake, Virginia; Las Vegas, Nevada; Mettawa, Illinois; Volo, Illinois; Hanover, Maryland; Salinas, California; Sioux Falls, South Dakota and Tigard, Oregon were sold or transferred to Capital One, although we have entered into site-sharing arrangements for certain of these locations for a period of time. The total cash consideration was $11.8 billion, which resulted in a pre-tax gain of $2.2 billion ($1.4 billion after-tax) being recorded during the second quarter of 2012. The majority of the employees in our Card and Retail Services business transferred to Capital One. As such, no significant one-time closure or severance costs were incurred as a result of this transaction. Our Card and Retail Services business is reported in discontinued operations.

The following summarizes the operating results of our discontinued Card and Retail Services business for the periods presented:

⁽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 the six months ended June 30, 2012, amount includes a gain of $79 million resulting from the sale of account relationships to HSBC Bank USA which we had previously purchased from HSBC Bank USA in July 2004. 

⁽³⁾     For the six months ended June 30, 2013, amount includes an incremental expense of $100 million recorded based on additional information received relating to actions taken and to be taken in connection with an industry review of enhancement services products. We continue to review information relating to our enhancement services products. As additional information becomes available, further adjustments may be required. Additionally for the three and six months ended June 30, 2013, the amounts also reflect a legal accrual of $40 million as well as expenses related to activities to complete the separation of the credit card operational infrastructure between us and Capital One. We expect costs associated with the separation of the credit card operational infrastructure to continue through the remainder of 2013. See Note 16, "Litigation and Regulatory Matters," for further discussion of the legal accrual.

The following summarizes the assets and liabilities of our discontinued Card and Retail Services business at June 30, 2013 and December 31, 2012 which are reported as a component of Assets of discontinued operations and Liabilities of discontinued operations in our consolidated balance sheet.

⁽¹⁾        At June 30, 2013 and December 31, 2012, other liabilities primarily consists of amounts due to Capital One for cash collections we have received on customer accounts while we continue to service these accounts on an interim basis. Additionally at June 30, 2013 and December 31, 2012, other liabilities also includes $158 million and $59 million, respectively, with respect to enhancement services products as discussed above.