UNITED STATES SECURITIES
AND
EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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(Mark One)
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31,
2010
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
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Commission file number 1-7436
HSBC USA Inc.
(Exact name of registrant as
specified in its charter)
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Maryland
(State of Incorporation)
452 Fifth Avenue, New York
(Address of principal executive offices)
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13-2764867
(I.R.S. Employer Identification No.)
10018
(Zip Code)
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(212) 525-5000
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Registrants telephone number, including area code
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Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes x No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer x
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Smaller reporting company o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No x
As of April 30, 2010, there were 712 shares of the
registrants common stock outstanding, all of which are
owned by HSBC North America Inc.
HSBC USA
Inc.
FORM 10-Q
TABLE OF CONTENTS
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Part/Item No.
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Page
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3
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4
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5
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6
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7
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66
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66
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72
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75
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80
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89
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96
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105
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108
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111
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116
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124
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Quantitative and Qualitative Disclosures About Market Risk
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125
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Controls and Procedures
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125
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Legal Proceedings
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126
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Exhibits
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126
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127
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129
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EX-12 |
EX-31 |
EX-32 |
2
HSBC USA
Inc.
PART I. FINANCIAL
INFORMATION
Item 1. Financial
Statements
CONSOLIDATED
STATEMENT OF INCOME (LOSS) (UNAUDITED)
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Three Months Ended March 31,
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2010
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2009
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(in millions)
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Interest income:
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Loans
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$
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1,211
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$
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1,546
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Securities
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242
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277
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Trading assets
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32
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59
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Short-term investments
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28
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24
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Other
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11
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11
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Total interest income
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1,524
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1,917
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Interest expense:
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Deposits
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163
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313
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Short-term borrowings
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21
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19
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Long-term debt
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140
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237
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Total interest expense
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324
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569
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Net interest income
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1,200
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1,348
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Provision for credit losses
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211
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1,174
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Net interest income after provision for credit
losses
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989
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174
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Other revenues:
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Credit card fees
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233
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357
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Other fees and commissions
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292
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231
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Trust income
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26
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32
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Trading revenue (loss)
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204
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(154
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)
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Net
other-than-temporary
impairment
losses(1)
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(28
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)
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(38
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Other securities gains, net
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21
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47
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Servicing and other fees from HSBC affiliates
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36
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32
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Residential mortgage banking revenue (loss)
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(37
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65
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Gain on instruments designated at fair value and related
derivatives
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46
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112
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Other income
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158
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66
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Total other revenues
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951
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750
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Operating expenses:
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Salaries and employee benefits
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267
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291
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Support services from HSBC affiliates
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518
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423
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Occupancy expense, net
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71
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63
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Other expenses
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210
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195
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Total operating expenses
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1,066
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972
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Income (loss) before income tax expense
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874
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(48
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Income tax expense
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320
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41
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Net income (loss)
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$
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554
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$
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(89
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(1) |
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During the three months ended
March 31, 2010, net
other-than-temporary
impairment (OTTI) recoveries on securities
available-for-sale
and held to maturity totaling $33 million were recognized,
which included $61 million in recoveries recognized in
accumulated other comprehensive income, partially offset by
$28 million of OTTI losses recognized in other revenues.
During the three months ended March 31, 2009,
$116 million of gross
other-than-temporary
impairment losses on securities
available-for-sale
were recognized, of which $78 million was recognized in
accumulated other comprehensive income.
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The accompanying notes are an integral part of the consolidated
financial statements.
3
HSBC USA
Inc.
CONSOLIDATED
BALANCE SHEET (UNAUDITED)
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March 31,
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December 31,
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2010
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2009
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(in millions)
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Assets
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Cash and due from banks
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$
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2,291
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$
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3,159
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Interest bearing deposits with banks (includes $1 million
at March 31, 2010 relating to consolidated variable
interest entities (VIEs))
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32,463
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20,109
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Federal funds sold and securities purchased under agreements to
resell
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2,898
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1,046
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Trading assets
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24,215
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25,815
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Securities
available-for-sale
(includes $1.0 billion and $1.1 billion at
March 31, 2010 and December 31, 2009, respectively,
relating to consolidated VIEs that collateralize long-term debt)
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33,820
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27,806
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Securities held to maturity (fair value of $4.0 billion and
$2.9 billion at March 31, 2010 and December 31,
2009, respectively and includes $1.2 billion at
March 31, 2010 relating to consolidated VIEs, all of which
were collateralizing short-term borrowings)
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3,867
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2,762
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Loans (includes $16.0 billion at March 31, 2010 and
$16.3 billion at December 31, 2009 relating to
consolidated VIEs of which $3.3 billion and
$2.7 billion at March 31, 2010 and December 31,
2009, respectively, were collateralizing debt)
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75,298
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79,489
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Less allowance for credit losses
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3,224
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3,861
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Loans, net
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72,074
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75,628
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Loans held for sale (includes $1.5 billion and
$1.1 billion designated under fair value option at
March 31, 2010 and December 31, 2009, respectively)
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2,608
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2,908
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Properties and equipment, net
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529
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533
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Intangible assets, net
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476
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484
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Goodwill
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2,647
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2,647
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Other assets (includes $564 million and $585 million
at March 31, 2010 and December 31, 2009, respectively,
relating to consolidated VIEs)
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9,160
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8,182
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Total assets
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$
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187,048
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$
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171,079
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Liabilities
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Debt:
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Deposits in domestic offices:
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Noninterest bearing
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$
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18,513
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$
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20,813
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Interest bearing (includes $5.1 billion and
$4.2 billion designated under fair value option at
March 31, 2010 and December 31, 2009, respectively)
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71,805
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69,894
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Deposits in foreign offices:
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Noninterest bearing
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1,361
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1,105
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Interest bearing
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33,132
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26,525
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Total deposits
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124,811
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118,337
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Short-term borrowings (includes $3.2 billion at
March 31, 2010 relating to consolidated VIEs)
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11,541
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6,512
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Long-term debt (includes $4.8 billion and $4.6 billion
designated under fair value option at March 31, 2010 and
December 31, 2009, respectively, and $2.2 billion and
$3.0 billion at March 31, 2010 and December 31,
2009, respectively, relating to consolidated VIEs of which
$2.2 billion and $3.0 billion, respectively, relate to
long-term debt collateralized by receivables and
available-for-sale
securities)
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17,334
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18,008
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Total debt
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153,686
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142,857
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Trading liabilities
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10,104
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8,010
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Interest, taxes and other liabilities (includes
$1.0 billion and $1.4 billion at March 31, 2010
and December 31, 2009, respectively, relating to
consolidated VIEs)
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7,628
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5,035
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Total liabilities
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171,418
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155,902
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Shareholders equity
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|
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Preferred stock
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1,565
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1,565
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Common shareholders equity:
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Common stock ($5 par; 150,000,000 shares authorized;
712 shares issued and outstanding at March 31, 2010
and December 31, 2009)
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-
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-
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Additional paid-in capital
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13,794
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13,795
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Retained earnings
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581
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45
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Accumulated other comprehensive loss
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|
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(310
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)
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|
|
(228
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)
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Total common shareholders equity
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14,065
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13,612
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|
|
|
|
|
|
|
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Total shareholders equity
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15,630
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|
|
15,177
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|
|
|
|
|
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Total liabilities and shareholders equity
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$
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187,048
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$
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171,079
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|
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The accompanying notes are an integral part of the consolidated
financial statements.
4
HSBC USA
Inc.
CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
(UNAUDITED)
|
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|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
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2010
|
|
|
2009
|
|
|
|
|
|
|
|
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(in millions)
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|
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Preferred stock
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|
|
|
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|
|
|
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|
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Balance at beginning and end of period
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$
|
1,565
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|
$
|
1,565
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|
|
|
|
|
|
|
|
|
|
|
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Common stock
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|
|
|
|
|
|
|
|
|
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Balance at beginning and end of period
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|
-
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|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Additional paid-in capital
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|
|
|
|
|
|
|
|
|
|
|
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Balance at beginning of period
|
|
|
13,795
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|
|
|
11,694
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|
|
|
|
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Capital contributions from parent
|
|
|
-
|
|
|
|
1,067
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|
|
|
|
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Return of capital on preferred shares issued to CT Financial
Services, Inc.
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|
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(3
|
)
|
|
|
-
|
|
|
|
|
|
Employee benefit plans and other
|
|
|
2
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
13,794
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|
|
|
12,761
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
45
|
|
|
|
245
|
|
|
|
|
|
Adjustment to initially apply new guidance for consolidation of
VIEs, net of tax
|
|
|
1
|
|
|
|
-
|
|
|
|
|
|
Adjustment to initially apply new guidance for
other-than-temporarily
impairment on debt securities, net of tax
|
|
|
-
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period, as adjusted
|
|
|
46
|
|
|
|
260
|
|
|
|
|
|
Net income (loss)
|
|
|
554
|
|
|
|
(89
|
)
|
|
|
|
|
Cash dividends declared on preferred stock
|
|
|
(19
|
)
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
581
|
|
|
|
152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
(228
|
)
|
|
|
(787
|
)
|
|
|
|
|
Adjustment to initially apply new guidance for consolidation of
VIEs, net of tax
|
|
|
(246
|
)
|
|
|
-
|
|
|
|
|
|
Adjustment to initially apply new guidance for
other-than-temporarily
impairment on debt securities, net of tax
|
|
|
-
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period, as adjusted
|
|
|
(474
|
)
|
|
|
(802
|
)
|
|
|
|
|
Net change in unrealized gains (losses), net of tax on:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale,
not
other-than-temporarily
impaired
|
|
|
104
|
|
|
|
127
|
|
|
|
|
|
Other-than-temporarily
impaired securities available for
sale(1)
|
|
|
25
|
|
|
|
(50
|
)
|
|
|
|
|
Other-than-temporarily
impaired securities held to
maturity(1)
|
|
|
26
|
|
|
|
-
|
|
|
|
|
|
Derivatives classified as cash flow hedges
|
|
|
6
|
|
|
|
28
|
|
|
|
|
|
Unrecognized actuarial gains, transition obligation and prior
service costs relating to pension and postretirement benefits,
net of tax
|
|
|
3
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax
|
|
|
164
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
(310
|
)
|
|
|
(691
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
$
|
15,630
|
|
|
$
|
13,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
554
|
|
|
$
|
(89
|
)
|
|
|
|
|
Other comprehensive income, net of tax
|
|
|
164
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
718
|
|
|
$
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
During the three months ended
March 31, 2010, net OTTI recoveries on securities
available-for-sale
and held to maturity totaling $33 million were recognized,
which included OTTI losses of $28 million recognized in
other revenues. During the three months ended March 31,
2009, $116 million of gross
other-than-temporary
impairment losses on securities
available-for-sale
were recognized, of which $38 million was recognized in
other revenues (losses).
|
The accompanying notes are an integral part of the consolidated
financial statements.
5
HSBC USA
Inc.
CONSOLIDATED
STATEMENT OF CASH FLOWS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
554
|
|
|
$
|
(89
|
)
|
|
|
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
154
|
|
|
|
55
|
|
|
|
|
|
Provision for credit losses
|
|
|
211
|
|
|
|
1,174
|
|
|
|
|
|
Deferred income tax provision (benefit)
|
|
|
273
|
|
|
|
(280
|
)
|
|
|
|
|
Other-than-temporarily
impaired
available-for-sale
and held to maturity securities
|
|
|
28
|
|
|
|
38
|
|
|
|
|
|
Realized losses (gains) on securities available for sale
|
|
|
(21
|
)
|
|
|
(47
|
)
|
|
|
|
|
Net change in other assets and liabilities
|
|
|
2,161
|
|
|
|
1,124
|
|
|
|
|
|
Net change in loans held for sale:-
|
|
|
|
|
|
|
|
|
|
|
|
|
Originations of loans
|
|
|
(947
|
)
|
|
|
(1,952
|
)
|
|
|
|
|
Sales and collection of loans held for sale
|
|
|
1,516
|
|
|
|
1,955
|
|
|
|
|
|
Tax refund anticipation loans transferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Originations of loans
|
|
|
(3,068
|
)
|
|
|
(9,000
|
)
|
|
|
|
|
Transfers of loans to HSBC Finance, including premium
|
|
|
3,072
|
|
|
|
9,010
|
|
|
|
|
|
Net change in trading assets and liabilities
|
|
|
2,937
|
|
|
|
(1,507
|
)
|
|
|
|
|
LOCOM on receivables held for sale
|
|
|
(85
|
)
|
|
|
76
|
|
|
|
|
|
Mark-to-market
on financial instruments designated at fair value and related
derivatives
|
|
|
(46
|
)
|
|
|
(112
|
)
|
|
|
|
|
Net change in fair value of derivatives and hedged items
|
|
|
(111
|
)
|
|
|
(424
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
6,628
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in interest bearing deposits with banks
|
|
|
(12,354
|
)
|
|
|
9,603
|
|
|
|
|
|
Net change in federal funds sold and securities purchased under
agreements to resell
|
|
|
(1,852
|
)
|
|
|
(4,847
|
)
|
|
|
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of securities
available-for-sale
|
|
|
(12,721
|
)
|
|
|
(4,444
|
)
|
|
|
|
|
Proceeds from sales of securities
available-for-sale
|
|
|
6,076
|
|
|
|
3,103
|
|
|
|
|
|
Proceeds from maturities of securities
available-for-sale
|
|
|
699
|
|
|
|
3,454
|
|
|
|
|
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of securities held to maturity
|
|
|
(1,434
|
)
|
|
|
(59
|
)
|
|
|
|
|
Proceeds from maturities of securities held to maturity
|
|
|
104
|
|
|
|
66
|
|
|
|
|
|
Change in loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Originations, net of collections
|
|
|
10,944
|
|
|
|
9,579
|
|
|
|
|
|
Recurring loans purchases from HSBC Finance
|
|
|
(7,834
|
)
|
|
|
(4,599
|
)
|
|
|
|
|
Cash paid on bulk purchase of loans from HSBC Finance
|
|
|
-
|
|
|
|
(8,821
|
)
|
|
|
|
|
Loans sold to third parties
|
|
|
(41
|
)
|
|
|
1,824
|
|
|
|
|
|
Net cash used for acquisitions of properties and equipment
|
|
|
(14
|
)
|
|
|
(17
|
)
|
|
|
|
|
Other, net
|
|
|
98
|
|
|
|
333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(18,329
|
)
|
|
|
5,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in deposits
|
|
|
6,377
|
|
|
|
(3,727
|
)
|
|
|
|
|
Net change in short-term borrowings
|
|
|
5,029
|
|
|
|
(689
|
)
|
|
|
|
|
Change in long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of long-term debt
|
|
|
577
|
|
|
|
303
|
|
|
|
|
|
Repayment of long-term debt
|
|
|
(980
|
)
|
|
|
(2,486
|
)
|
|
|
|
|
Debt repayment by consolidated VIE
|
|
|
(150
|
)
|
|
|
(139
|
)
|
|
|
|
|
Capital contribution from parent
|
|
|
-
|
|
|
|
1,067
|
|
|
|
|
|
Return of capital on preferred shares issued to CT Financial
Services, Inc.
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
|
|
Other increases in capital surplus
|
|
|
2
|
|
|
|
-
|
|
|
|
|
|
Dividends paid
|
|
|
(19
|
)
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
10,833
|
|
|
|
(5,690
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and due from banks
|
|
|
(868
|
)
|
|
|
(494
|
)
|
|
|
|
|
Cash and due from banks at beginning of period
|
|
|
3,159
|
|
|
|
2,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks at end of period
|
|
$
|
2,291
|
|
|
$
|
2,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash flow investing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities pending settlement
|
|
$
|
(757
|
)
|
|
$
|
(368
|
)
|
|
|
|
|
Assumption of indebtedness from HSBC Finance related to the bulk
loan purchase
|
|
$
|
-
|
|
|
$
|
6,077
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
6
HSBC USA
Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
Note
|
|
|
|
Page
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
22
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
|
33
|
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
|
44
|
|
|
|
|
|
|
|
|
48
|
|
|
|
|
|
|
|
|
52
|
|
|
|
|
|
|
|
|
64
|
|
1. Organization
and Basis of Presentation
HSBC USA Inc. 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 USA Inc. and its
subsidiaries (collectively HUSI) 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,
as well as in accordance with predominant practices within the
banking industry. 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 USA Inc. 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, 2009 (the 2009
Form 10-K).
Certain reclassifications have been made to prior period amounts
to conform to the current period presentation.
The preparation of financial statements in conformity with
U.S. GAAP requires the use of estimates and assumptions
that affect reported amounts and disclosures. Actual results
could differ from those estimates. Interim results should not be
considered indicative of results in future periods.
During the first quarter of 2010, we adopted new accounting
guidance on the consolidation of variable interest entities
(VIEs) and new disclosure requirements relating to
fair value measurements. See Note 19, New Accounting
Pronouncements for further details and related impacts.
7
HSBC USA Inc.
2. Trading
Assets and Liabilities
Trading assets and liabilities are summarized in the following
table.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Trading assets:
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$
|
733
|
|
|
$
|
615
|
|
U.S. Government agency
|
|
|
44
|
|
|
|
34
|
|
U.S. Government sponsored
enterprises(1)
|
|
|
90
|
|
|
|
16
|
|
Asset-backed securities
|
|
|
1,720
|
|
|
|
1,815
|
|
Corporate and foreign bonds
|
|
|
2,329
|
|
|
|
2,369
|
|
Other securities
|
|
|
76
|
|
|
|
491
|
|
Precious metals
|
|
|
11,827
|
|
|
|
12,256
|
|
Fair value of derivatives
|
|
|
7,396
|
|
|
|
8,219
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24,215
|
|
|
$
|
25,815
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities:
|
|
|
|
|
|
|
|
|
Securities sold, not yet purchased
|
|
$
|
1,102
|
|
|
$
|
131
|
|
Payables for precious metals
|
|
|
3,758
|
|
|
|
2,556
|
|
Fair value of derivatives
|
|
|
5,244
|
|
|
|
5,323
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,104
|
|
|
$
|
8,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes mortgage-backed securities
of $61 million and $13 million issued or guaranteed by
the Federal National Mortgage Association (FNMA) and
$29 million and $3 million issued or guaranteed by the
Federal Home Loan Mortgage Corporation (FHLMC) at
March 31, 2010 and December 31, 2009, respectively.
|
At March 31, 2010 and December 31, 2009, the fair
value of derivatives included in trading assets have been
reduced by $2.3 billion and $2.7 billion,
respectively, relating to amounts recognized for the obligation
to return cash collateral received under master netting
agreements with derivative counterparties.
At March 31, 2010 and December 31, 2009, the fair
value of derivatives included in trading liabilities have been
reduced by $5.7 billion and $7.2 billion,
respectively, relating to amounts recognized for the right to
reclaim cash collateral paid under master netting agreements
with derivative counterparties.
8
HSBC USA Inc.
3. Securities
The amortized cost and fair value of the securities
available-for-sale
and securities held to maturity portfolios are summarized in the
following tables.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Component of
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
OTTI
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
March 31, 2010
|
|
Cost
|
|
|
Securities
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
(in millions)
|
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$
|
11,340
|
|
|
$
|
-
|
|
|
$
|
32
|
|
|
$
|
(64
|
)
|
|
$
|
11,308
|
|
U.S. Government sponsored
enterprises:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
56
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
55
|
|
Direct agency obligations
|
|
|
1,938
|
|
|
|
-
|
|
|
|
2
|
|
|
|
(49
|
)
|
|
|
1,891
|
|
U.S. Government agency issued or guaranteed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
6,531
|
|
|
|
-
|
|
|
|
116
|
|
|
|
(12
|
)
|
|
|
6,635
|
|
Collateralized mortgage obligations
|
|
|
6,268
|
|
|
|
-
|
|
|
|
137
|
|
|
|
-
|
|
|
|
6,405
|
|
Obligations of U.S. states and political subdivisions
|
|
|
611
|
|
|
|
-
|
|
|
|
13
|
|
|
|
(3
|
)
|
|
|
621
|
|
Asset backed securities collateralized by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
914
|
|
|
|
(36
|
)
|
|
|
1
|
|
|
|
(93
|
)
|
|
|
786
|
|
Commercial mortgages
|
|
|
573
|
|
|
|
-
|
|
|
|
16
|
|
|
|
(9
|
)
|
|
|
580
|
|
Home equity
|
|
|
581
|
|
|
|
(13
|
)
|
|
|
-
|
|
|
|
(161
|
)
|
|
|
407
|
|
Auto
|
|
|
46
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
46
|
|
Student loans
|
|
|
34
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
30
|
|
Other
|
|
|
123
|
|
|
|
-
|
|
|
|
1
|
|
|
|
(15
|
)
|
|
|
109
|
|
Corporate and other domestic debt
securities(2)
|
|
|
702
|
|
|
|
-
|
|
|
|
8
|
|
|
|
-
|
|
|
|
710
|
|
Foreign debt
securities(2)
|
|
|
3,047
|
|
|
|
-
|
|
|
|
60
|
|
|
|
-
|
|
|
|
3,107
|
|
Equity
securities(3)
|
|
|
1,126
|
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
|
|
1,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
securities
|
|
$
|
33,890
|
|
|
$
|
(49
|
)
|
|
$
|
390
|
|
|
$
|
(411
|
)
|
|
$
|
33,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government sponsored
enterprises:(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
1,825
|
|
|
$
|
-
|
|
|
$
|
107
|
|
|
$
|
(5
|
)
|
|
$
|
1,927
|
|
U.S. Government agency issued or guaranteed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
108
|
|
|
|
-
|
|
|
|
15
|
|
|
|
-
|
|
|
|
123
|
|
Collateralized mortgage obligations
|
|
|
336
|
|
|
|
-
|
|
|
|
26
|
|
|
|
(1
|
)
|
|
|
361
|
|
Obligations of U.S. states and political subdivisions
|
|
|
152
|
|
|
|
-
|
|
|
|
5
|
|
|
|
(1
|
)
|
|
|
156
|
|
Asset backed securities collateralized by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
192
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(18
|
)
|
|
|
174
|
|
Asset backed securities (predominantly credit card ) and other
debt securities held by consolidated
VIE(5)
|
|
|
1,400
|
|
|
|
(220
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
1,180
|
|
Foreign debt securities
|
|
|
74
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
held-to-maturity
securities
|
|
$
|
4,087
|
|
|
$
|
(220
|
)
|
|
$
|
153
|
|
|
$
|
(25
|
)
|
|
$
|
3,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
HSBC USA Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Component of
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
OTTI
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
December 31, 2009
|
|
Cost
|
|
|
Securities
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
(in millions)
|
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$
|
7,448
|
|
|
$
|
-
|
|
|
$
|
27
|
|
|
$
|
(73
|
)
|
|
$
|
7,402
|
|
U.S. Government sponsored
enterprises:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
59
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
58
|
|
Direct agency obligations
|
|
|
1,948
|
|
|
|
-
|
|
|
|
5
|
|
|
|
(65
|
)
|
|
|
1,888
|
|
U.S. Government agency issued or guaranteed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
4,081
|
|
|
|
-
|
|
|
|
93
|
|
|
|
(13
|
)
|
|
|
4,161
|
|
Collateralized mortgage obligations
|
|
|
6,324
|
|
|
|
-
|
|
|
|
107
|
|
|
|
(7
|
)
|
|
|
6,424
|
|
Obligations of U.S. states and political subdivisions
|
|
|
741
|
|
|
|
-
|
|
|
|
13
|
|
|
|
(5
|
)
|
|
|
749
|
|
Asset backed securities collateralized by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
1,041
|
|
|
|
(55
|
)
|
|
|
1
|
|
|
|
(122
|
)
|
|
|
865
|
|
Commercial mortgages
|
|
|
573
|
|
|
|
-
|
|
|
|
7
|
|
|
|
(14
|
)
|
|
|
566
|
|
Home equity
|
|
|
620
|
|
|
|
(29
|
)
|
|
|
-
|
|
|
|
(219
|
)
|
|
|
372
|
|
Auto
|
|
|
65
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
64
|
|
Student loans
|
|
|
35
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5
|
)
|
|
|
30
|
|
Other
|
|
|
23
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
24
|
|
Corporate and other domestic debt
securities(2)
|
|
|
872
|
|
|
|
-
|
|
|
|
7
|
|
|
|
(15
|
)
|
|
|
864
|
|
Foreign debt
securities(2)
|
|
|
3,035
|
|
|
|
-
|
|
|
|
44
|
|
|
|
(3
|
)
|
|
|
3,076
|
|
Equity
securities(3)
|
|
|
1,260
|
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
|
|
1,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
securities
|
|
$
|
28,125
|
|
|
$
|
(84
|
)
|
|
$
|
308
|
|
|
$
|
(543
|
)
|
|
$
|
27,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government sponsored
enterprises:(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
1,854
|
|
|
$
|
-
|
|
|
$
|
103
|
|
|
$
|
(5
|
)
|
|
$
|
1,952
|
|
U.S. Government agency issued or guaranteed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
113
|
|
|
|
-
|
|
|
|
12
|
|
|
|
-
|
|
|
|
125
|
|
Collateralized mortgage obligations
|
|
|
341
|
|
|
|
-
|
|
|
|
25
|
|
|
|
(2
|
)
|
|
|
364
|
|
Obligations of U.S. states and political subdivisions
|
|
|
161
|
|
|
|
-
|
|
|
|
6
|
|
|
|
(1
|
)
|
|
|
166
|
|
Asset backed securities collateralized by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
192
|
|
|
|
-
|
|
|
|
1
|
|
|
|
(21
|
)
|
|
|
172
|
|
Foreign debt securities
|
|
|
101
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
held-to-maturity
securities
|
|
$
|
2,762
|
|
|
$
|
-
|
|
|
$
|
147
|
|
|
$
|
(29
|
)
|
|
$
|
2,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes securities at amortized
cost of $36 million and $38 million issued or
guaranteed by FNMA at March 31, 2010 and December 31,
2009, respectively, and $20 million and $21 million
issued or guaranteed by FHLMC at March 31, 2010 and
December 31, 2009, respectively.
|
|
(2) |
|
At March 31, 2010 and
December 31, 2009, other domestic debt securities included
$677 million of securities at amortized cost fully backed
by the Federal Deposit Insurance Corporation (FDIC)
and foreign debt securities consisted of $2.2 billion and
$2.7 billion of securities fully backed by foreign
governments, respectively.
|
|
(3) |
|
Includes preferred equity
securities at amortized cost issued by FNMA of $2.0 million
at March 31, 2010 and December 31, 2009. Balances at
March 31, 2010 and December 31, 2009 reflect
cumulative
other-than-temporary
impairment charges of $203 million.
|
|
(4) |
|
Includes securities at amortized
cost of $673 million and $678 million issued or
guaranteed by FNMA at March 31, 2010 and December 31,
2009, respectively, and $1.2 billion issued and guaranteed
by FHLMC at March 31, 2010 and December 31, 2009.
|
|
(5) |
|
Relates to securities held by
Bryant Park Funding LLC which is consolidated effective
January 1, 2010. See Note 16, Variable Interest
Entities for additional information.
|
10
HSBC USA Inc.
A summary of gross unrealized losses and related fair values as
of March 31, 2010 and December 31, 2009, classified as
to the length of time the losses have existed follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year or Less
|
|
|
Greater Than One Year
|
|
|
|
Number
|
|
|
Gross
|
|
|
Aggregate
|
|
|
Number
|
|
|
Gross
|
|
|
Aggregate
|
|
|
|
of
|
|
|
Unrealized
|
|
|
Fair Value
|
|
|
of
|
|
|
Unrealized
|
|
|
Fair Value
|
|
March 31, 2010
|
|
Securities
|
|
|
Losses
|
|
|
of Investment
|
|
|
Securities
|
|
|
Losses
|
|
|
of Investment
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
|
27
|
|
|
$
|
(47
|
)
|
|
$
|
5,935
|
|
|
|
2
|
|
|
$
|
(17
|
)
|
|
$
|
114
|
|
U.S. Government sponsored enterprises
|
|
|
27
|
|
|
|
(28
|
)
|
|
|
1,233
|
|
|
|
25
|
|
|
|
(22
|
)
|
|
|
503
|
|
U.S. Government agency issued or guaranteed
|
|
|
20
|
|
|
|
(6
|
)
|
|
|
3,968
|
|
|
|
30
|
|
|
|
(6
|
)
|
|
|
557
|
|
Obligations of U.S. states and political subdivisions
|
|
|
18
|
|
|
|
(1
|
)
|
|
|
87
|
|
|
|
8
|
|
|
|
(2
|
)
|
|
|
67
|
|
Asset-backed securities
|
|
|
12
|
|
|
|
(26
|
)
|
|
|
100
|
|
|
|
88
|
|
|
|
(256
|
)
|
|
|
966
|
|
Corporate and other domestic debt securities
|
|
|
4
|
|
|
|
-
|
|
|
|
225
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Foreign debt securities
|
|
|
3
|
|
|
|
-
|
|
|
|
55
|
|
|
|
1
|
|
|
|
-
|
|
|
|
25
|
|
Equity securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale
|
|
|
111
|
|
|
$
|
(108
|
)
|
|
$
|
11,603
|
|
|
|
154
|
|
|
$
|
(303
|
)
|
|
$
|
2,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government sponsored enterprises
|
|
|
8
|
|
|
$
|
(5
|
)
|
|
$
|
178
|
|
|
|
1
|
|
|
$
|
-
|
|
|
$
|
-
|
|
U.S. Government agency issued or guaranteed
|
|
|
12
|
|
|
|
(1
|
)
|
|
|
40
|
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
Obligations of U.S. states and political subdivisions
|
|
|
25
|
|
|
|
(1
|
)
|
|
|
9
|
|
|
|
13
|
|
|
|
-
|
|
|
|
21
|
|
Asset-backed securities
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
7
|
|
|
|
11
|
|
|
|
(17
|
)
|
|
|
122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity
|
|
|
46
|
|
|
$
|
(8
|
)
|
|
$
|
234
|
|
|
|
30
|
|
|
$
|
(17
|
)
|
|
$
|
143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
HSBC USA Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year or Less
|
|
|
Greater Than One Year
|
|
|
|
Number
|
|
|
Gross
|
|
|
Aggregate
|
|
|
Number
|
|
|
Gross
|
|
|
Aggregate
|
|
|
|
of
|
|
|
Unrealized
|
|
|
Fair Value
|
|
|
of
|
|
|
Unrealized
|
|
|
Fair Value
|
|
December 31, 2009
|
|
Securities
|
|
|
Losses
|
|
|
of Investment
|
|
|
Securities
|
|
|
Losses
|
|
|
of Investment
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
|
16
|
|
|
$
|
(55
|
)
|
|
$
|
2,978
|
|
|
|
1
|
|
|
$
|
(18
|
)
|
|
$
|
94
|
|
U.S. Government sponsored enterprises
|
|
|
30
|
|
|
|
(50
|
)
|
|
|
1,441
|
|
|
|
27
|
|
|
|
(16
|
)
|
|
|
262
|
|
U.S. Government agency issued or guaranteed
|
|
|
85
|
|
|
|
(19
|
)
|
|
|
1,509
|
|
|
|
18
|
|
|
|
(1
|
)
|
|
|
43
|
|
Obligations of U.S. states and political subdivisions
|
|
|
26
|
|
|
|
(3
|
)
|
|
|
166
|
|
|
|
11
|
|
|
|
(2
|
)
|
|
|
79
|
|
Asset-backed securities
|
|
|
5
|
|
|
|
(1
|
)
|
|
|
35
|
|
|
|
109
|
|
|
|
(360
|
)
|
|
|
1,137
|
|
Corporate and other domestic debt securities
|
|
|
3
|
|
|
|
(8
|
)
|
|
|
83
|
|
|
|
2
|
|
|
|
(7
|
)
|
|
|
43
|
|
Foreign debt securities
|
|
|
5
|
|
|
|
(3
|
)
|
|
|
384
|
|
|
|
1
|
|
|
|
-
|
|
|
|
25
|
|
Equity securities
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale
|
|
|
172
|
|
|
$
|
(139
|
)
|
|
$
|
6,596
|
|
|
|
169
|
|
|
$
|
(404
|
)
|
|
$
|
1,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government sponsored enterprises
|
|
|
10
|
|
|
$
|
(5
|
)
|
|
$
|
261
|
|
|
|
1
|
|
|
$
|
-
|
|
|
$
|
-
|
|
U.S. Government agency issued or guaranteed
|
|
|
7
|
|
|
|
(2
|
)
|
|
|
39
|
|
|
|
6
|
|
|
|
-
|
|
|
|
-
|
|
Obligations of U.S. states and political subdivisions
|
|
|
22
|
|
|
|
(1
|
)
|
|
|
12
|
|
|
|
12
|
|
|
|
-
|
|
|
|
19
|
|
Asset-backed securities
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
6
|
|
|
|
11
|
|
|
|
(20
|
)
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity
|
|
|
40
|
|
|
$
|
(9
|
)
|
|
$
|
318
|
|
|
|
30
|
|
|
$
|
(20
|
)
|
|
$
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized losses within the
available-for-sale
and
held-to-maturity
portfolios decreased overall primarily due to a reduction in
credit spreads for asset backed securities during the three
months ended March 31, 2010 as market conditions continue
to improve. We have reviewed the securities for which there is
an unrealized loss in accordance with our accounting policies
for
other-than-temporary
impairment described below. During the three months ended
March 31, 2010, 19 debt securities were determined to have
either initial
other-than-temporary
impairment or changes to previous
other-than-temporary
impairment estimates. We recorded net
other-than-temporary
impairment recoveries of $33 million during the three
months ended March 31, 2010 on these investments. The
credit loss component of the applicable debt securities totaling
$28 million was recorded as a component of net
other-than-temporary
impairment losses in the accompanying consolidated statement of
income (loss), while the remaining non-credit portion
representing a net recovery of a portion of previously recorded
impairment losses was recognized in other comprehensive income.
During the three months ended March 31, 2009, nine debt
securities were determined to be
other-than-temporarily
impaired. As a result, we recorded
other-than-temporary
impairment charges of $116 million during the three months
ended March 31, 2009 on these investments. The credit loss
component of the applicable debt securities totaling
$38 million was recorded as a component of net
other-than-temporary
impairment losses in the accompanying consolidated statement of
income (loss), while the remaining non-credit portion of the
impairment loss was recognized in other comprehensive income.
We do not consider any other securities to be
other-than-temporarily
impaired as we expect to recover the amortized cost basis of
these securities and we neither intend nor expect to be required
to sell these 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.
12
HSBC USA Inc.
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 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 securities held in the
available-for-sale
or
held-to-maturity
portfolio for which unrealized losses have existed for a period
of time, we do not have the intention to sell and believe we
will not be required to sell the securities for contractual,
regulatory or liquidity reasons as of the reporting date. As
debt securities issued by U.S. Treasury,
U.S. Government agencies and government sponsored entities
accounted for 75 percent and 72 percent of total
available-for-sale
and held to maturity securities as of March 31, 2010 and
December 31, 2009, respectively, our assessment for credit
loss was concentrated on private label asset backed securities.
We considered the following factors in determining whether a
credit loss exists and the period over which the debt security
is expected to recover:
|
|
|
|
|
The length of time and the extent to which the fair value has
been less than the amortized cost basis;
|
|
|
|
The level of credit enhancement provided by the structure, which
includes but is not limited to credit subordination positions,
over collateralization, 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 excessive 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, the
monoline insurer or the security such as credit downgrades by
the rating agencies.
|
We use a standard valuation model to measure the credit loss for
available-for-sale
and held to maturity securities. The valuation model captures
the composition of the underlying collateral and the cash flow
structure of the security. Management develops inputs to the
model based on external analyst reports and forecasts and
internal credit assessments. Significant inputs to the model
include delinquencies, collateral types and related contractual
features, estimated rates of default, loss given default and
prepayment assumptions. Using the inputs, the model estimates
cash flows generated from the underlying collateral and
distributes those cash flows to respective tranches of
securities considering credit subordination and other credit
enhancement features. The projected future cash flows
attributable to the debt security held are discounted using the
effective interest rates determined at the original acquisition
date if the security bears a fixed rate of return. The discount
rate is adjusted for the floating index rate for securities
which bear a variable rate of return, such as LIBOR-based
instruments.
As of March 31, 2010,
available-for-sale
debt securities with
other-than-temporary
impairment for which a portion of the impairment loss remains in
accumulated other comprehensive income consisted entirely of
asset-backed securities collateralized by residential mortgages
or home equity loans. Specific market based assumptions were
used to appropriately model and value the credit component of
each individual prime, Alt-A and second lien/home equity
mortgage backed security due to the diversified geographical,
FICO and vintage
(2005-2007)
characteristics of the underlying loans. This has resulted in a
wide range of assumptions across the analyzed securities as
presented
13
HSBC USA Inc.
in the table below. Prime mortgage collateral types comprise
approximately 84 percent of the
other-than-temporary
impairments we have recognized during the three months ended
March 31, 2010. The assumptions were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second liens/Home
|
March 31, 2010
|
|
Prime
|
|
Alt-A
|
|
equity mortgages
|
|
|
Cumulative default rate
|
|
|
5-14
|
%
|
|
|
7-14
|
%
|
|
|
9-19
|
%
|
Loss severity
|
|
|
32-60
|
%
|
|
|
33-74
|
%
|
|
|
100
|
%
|
Prepayment speeds
|
|
|
4-20
|
%
|
|
|
1-8
|
%
|
|
|
6-9
|
%
|
The excess of amortized cost over the present value of expected
future cash flows on our
other-than-temporarily
impaired debt securities, which represents the credit loss
associated with these securities, was $28 million and
$38 million for the three months ended March 31, 2010
and 2009, respectively. The excess of the present value of
expected future cash flows over fair value, representing the
non-credit component of the unrealized loss associated with all
other-than-temporarily
impaired securities, was $269 million as of March 31,
2010. Since we do not have the intention to sell the securities
and have sufficient capital and liquidity to hold these
securities until a full recovery of the fair value occurs, only
the credit loss component is reflected in the consolidated
statement of income (loss). The non-credit component of the
unrealized loss is recorded, net of taxes, in other
comprehensive income.
The following table summarizes the roll-forward of credit losses
on debt securities held by us for which a portion of an
other-than-temporary
impairment is recognized in other comprehensive income:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Credit losses at the beginning of the period
|
|
$
|
129
|
|
|
$
|
5
|
|
Credit losses related to securities for which an
other-than-temporary
impairment was not previously recognized
|
|
|
19
|
|
|
|
38
|
|
Increase in credit losses for which an
other-than-temporary
impairment was previously recognized
|
|
|
9
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Ending balance of credit losses on debt securities held for
which a portion of an
other-than-temporary
impairment was recognized in other comprehensive income
|
|
$
|
157
|
|
|
$
|
43
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2010, we held 157 individual asset-backed
securities in the
available-for-sale
portfolio, of which 34 were also wrapped by a monoline insurance
company. The asset backed securities backed by a monoline wrap
comprised $547 million of the total aggregate fair value of
asset-backed securities of $2.0 billion at March 31,
2010. The gross unrealized losses on these securities were
$176 million at March 31, 2010. We do not consider the
monoline wrap of any non-investment grade monoline insurers and
therefore as of March 31, 2010, we considered the financial
guarantee of monoline insurers on securities for purposes of
evaluating
other-than-temporary
impairment with a fair value of $241 million. Four of the
securities wrapped by the downgraded monoline insurance
companies with an aggregate fair value of $38 million were
deemed to be
other-than-temporarily
impaired at March 31, 2010. In evaluating the extent of our
reliance on investment grade monoline insurance companies,
consideration is given to our assessment of the creditworthiness
of the monoline and other market factors.
At December 31, 2009, we held 159 individual asset-backed
securities in the
available-for-sale
portfolio, of which 32 were also wrapped by a monoline insurance
company. The asset backed securities backed by a monoline wrap
comprised $441 million of the total aggregate fair value of
asset-backed securities of $1.9 billion at
December 31, 2009. The gross unrealized losses on these
securities were $219 million at December 31, 2009.
During 2009, three monoline insurers were downgraded to below
investment grade. As a result, we did not take into
consideration the financial guarantee from two of those monoline
insurers and placed only limited reliance of the financial
guarantee of the third monoline insurer. As of December 31,
2009, we considered the financial guarantee of monoline insurers
on securities with a fair value of $235 million. Four of
the securities wrapped by the downgraded monoline insurance
companies with an aggregate fair value of $35 million were
deemed to be
other-than-temporarily
impaired at December 31, 2009. In evaluating the extent of
our reliance on investment grade monoline insurance companies,
consideration is given to our assessment of the creditworthiness
of the monoline and other market factors.
14
HSBC USA Inc.
The following table summarizes realized gains and losses on
investment securities transactions attributable to
available-for-sale
and held to maturity securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Net
|
|
|
|
Realized
|
|
|
Realized
|
|
|
Realized
|
|
|
|
Gains
|
|
|
(Losses)
|
|
|
(Losses) Gains
|
|
|
|
|
|
(in millions)
|
|
|
Three months ended March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale
|
|
$
|
32
|
|
|
$
|
(34
|
)
|
|
$
|
(2
|
)
|
Securities held to maturity
|
|
|
-
|
|
|
|
(5
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32
|
|
|
$
|
(39
|
)
|
|
$
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale
|
|
$
|
61
|
|
|
$
|
(52
|
)
|
|
$
|
9
|
|
Securities held to maturity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
61
|
|
|
$
|
(52
|
)
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
HSBC USA Inc.
The amortized cost and fair values of securities
available-for-sale
and securities held to maturity at March 31, 2010, are
summarized in the table below by contractual maturity. Expected
maturities differ from contractual maturities because borrowers
have the right to prepay obligations without prepayment
penalties in certain cases. Securities
available-for-sale
amounts exclude equity securities as they do not have stated
maturities. The table below also reflects the distribution of
maturities of debt securities held at March 31, 2010,
together with the approximate taxable equivalent yield of the
portfolio. The yields shown are calculated by dividing annual
interest income, including the accretion of discounts and the
amortization of premiums, by the amortized cost of securities
outstanding at March 31, 2010. Yields on tax-exempt
obligations have been computed on a taxable equivalent basis
using applicable statutory tax rates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After One
|
|
|
After Five
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
But Within
|
|
|
But Within
|
|
|
After Ten
|
|
March 31, 2010
|
|
One Year
|
|
|
Five Years
|
|
|
Ten Years
|
|
|
Years
|
|
Taxable Equivalent Basis
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$
|
599
|
|
|
|
.97
|
%
|
|
$
|
6,882
|
|
|
|
1.08
|
%
|
|
$
|
1,619
|
|
|
|
3.51
|
%
|
|
$
|
2,240
|
|
|
|
4.54
|
%
|
U.S. Government sponsored enterprises
|
|
|
-
|
|
|
|
-
|
|
|
|
8
|
|
|
|
3.78
|
|
|
|
1,405
|
|
|
|
3.89
|
|
|
|
581
|
|
|
|
4.56
|
|
U.S. Government agency issued or guaranteed
|
|
|
4
|
|
|
|
4.45
|
|
|
|
-
|
|
|
|
4.99
|
|
|
|
266
|
|
|
|
4.78
|
|
|
|
12,529
|
|
|
|
3.45
|
|
Obligations of U.S. states and political subdivisions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
254
|
|
|
|
4.23
|
|
|
|
357
|
|
|
|
4.46
|
|
Asset-backed securities
|
|
|
29
|
|
|
|
2.14
|
|
|
|
126
|
|
|
|
5.28
|
|
|
|
162
|
|
|
|
3.85
|
|
|
|
1,905
|
|
|
|
3.72
|
|
Corporate and other domestic debt securities
|
|
|
115
|
|
|
|
1.53
|
|
|
|
587
|
|
|
|
1.53
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Foreign debt securities
|
|
|
-
|
|
|
|
-
|
|
|
|
3,012
|
|
|
|
2.56
|
|
|
|
35
|
|
|
|
3.22
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortized cost
|
|
$
|
747
|
|
|
|
1.12
|
%
|
|
$
|
10,615
|
|
|
|
1.58
|
%
|
|
$
|
3,741
|
|
|
|
3.80
|
%
|
|
$
|
17,612
|
|
|
|
3.67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value
|
|
$
|
751
|
|
|
|
|
|
|
$
|
10,691
|
|
|
|
|
|
|
$
|
3,719
|
|
|
|
|
|
|
$
|
17,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government sponsored enterprises
|
|
$
|
-
|
|
|
|
7.39
|
%
|
|
$
|
32
|
|
|
|
7.95
|
%
|
|
$
|
2
|
|
|
|
6.79
|
%
|
|
$
|
1,791
|
|
|
|
6.20
|
%
|
U.S. Government agency issued or guaranteed
|
|
|
-
|
|
|
|
7.74
|
|
|
|
-
|
|
|
|
7.39
|
|
|
|
5
|
|
|
|
7.59
|
|
|
|
439
|
|
|
|
6.62
|
|
Obligations of U.S. states and political subdivisions
|
|
|
10
|
|
|
|
5.28
|
|
|
|
31
|
|
|
|
6.15
|
|
|
|
17
|
|
|
|
6.70
|
|
|
|
94
|
|
|
|
5.78
|
|
Asset-backed securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
192
|
|
|
|
6.10
|
|
Asset backed securities issued by consolidated VIE
|
|
|
327
|
|
|
|
1.60
|
|
|
|
600
|
|
|
|
-
|
|
|
|
253
|
|
|
|
.35
|
|
|
|
-
|
|
|
|
-
|
|
Foreign debt securities
|
|
|
74
|
|
|
|
2.64
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortized cost
|
|
$
|
411
|
|
|
|
1.89
|
%
|
|
$
|
663
|
|
|
|
2.11
|
%
|
|
$
|
277
|
|
|
|
.93
|
%
|
|
$
|
2,516
|
|
|
|
6.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value
|
|
$
|
411
|
|
|
|
|
|
|
$
|
669
|
|
|
|
|
|
|
$
|
280
|
|
|
|
|
|
|
$
|
2,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in FHLB stock and FRB stock of $152 million and
$475 million, respectively, were included in other assets
at March 31, 2010. Investments in FHLB stock and FRB stock
of $152 million and $476 million, respectively, were
included in other assets at December 31, 2009.
16
HSBC USA Inc.
4. Loans
Loans consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Commercial loans:
|
|
|
|
|
|
|
|
|
Construction and other real estate
|
|
$
|
8,794
|
|
|
$
|
8,858
|
|
Other commercial
|
|
|
20,840
|
|
|
|
21,446
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
29,634
|
|
|
|
30,304
|
|
|
|
|
|
|
|
|
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
Home equity mortgages
|
|
|
4,046
|
|
|
|
4,164
|
|
Other residential mortgages
|
|
|
13,512
|
|
|
|
13,722
|
|
Private label cards
|
|
|
13,466
|
|
|
|
15,091
|
|
Credit cards
|
|
|
11,816
|
|
|
|
13,048
|
|
Auto finance
|
|
|
1,453
|
|
|
|
1,701
|
|
Other consumer
|
|
|
1,371
|
|
|
|
1,459
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
45,664
|
|
|
|
49,185
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
75,298
|
|
|
$
|
79,489
|
|
|
|
|
|
|
|
|
|
|
Secured financings of $2.2 billion at March 31, 2010
are secured by $1.8 billion of credit cards, as well as
restricted
available-for-sale
securities of $1.0 billion. Secured financings of
$550 million and $2.5 billion at December 31,
2009 were secured by $180 million and $2.6 billion of
private label cards and credit cards, respectively, as well as
restricted
available-for-sale
securities of $417 million and $721 million,
respectively.
Purchased Loan Portfolios In January 2009, we
purchased the General Motors MasterCard receivable portfolio
(GM Portfolio) and the AFL-CIO Union Plus
MasterCard/Visa receivable portfolio (UP Portfolio)
with an aggregate outstanding principal balance of
$6.3 billion and $6.1 billion, respectively from HSBC
Finance Corporation (HSBC Finance).
Purchased loans for which at the time of acquisition there was
evidence of deterioration in credit quality since origination
and for which it was probable that all contractually required
payments would not be collected and that the associated line of
credit has been closed were recorded upon acquisition at an
amount based upon the cash flows expected to be collected. The
difference between these expected cash flows and the purchase
price represents accretable yield which is amortized to interest
income over the life of the loan. The carrying amount of the
Purchased Credit-Impaired Loans, net of credit loss reserves at
March 31, 2010 totaled $55 million and
$43 million for the GM and UP Portfolios, respectively, and
is included in credit card loans. The outstanding contractual
balances at March 31, 2010 for these receivables were
$58 million and $68 million for the GM and UP
Portfolios, respectively. The carrying amount of the Purchased
Credit-Impaired Loans, net of credit loss reserves at
December 31, 2009 totaled $63 million and
$52 million for the GM and UP Portfolios, respectively, and
is included in credit card loans. The outstanding contractual
balances at December 31, 2009 for these receivables were
$73 million and $86 million for the GM and UP
Portfolios, respectively. Credit loss reserves of
$11 million and $18 million as of March 31, 2010
and December 31, 2009, respectively, were held for the
acquired GM and UP receivables subject to the accounting
requirements for Purchased Credit-Impaired Loans due to a
decrease in the
17
HSBC USA Inc.
expected future cash flows since the acquisition. The following
summarizes the change in accretable yield associated with the
Purchased Credit-Impaired Loans:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Accretable yield at beginning of period
|
|
$
|
(29
|
)
|
|
$
|
(95
|
)
|
Accretable yield amortized to interest income during the period
|
|
|
7
|
|
|
|
15
|
|
Reclassification to non-accretable difference
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Accretable yield at end of period
|
|
$
|
(22
|
)
|
|
$
|
(80
|
)
|
|
|
|
|
|
|
|
|
|
Troubled
Debt
Restructurings The
following tables present information about our TDR Loans and the
related credit loss reserves for TDR Loans:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
TDR Loans:
|
|
|
|
|
|
|
|
|
Commercial loans:
|
|
|
|
|
|
|
|
|
Construction and other real estate
|
|
$
|
139
|
|
|
$
|
100
|
|
Other commercial
|
|
|
91
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
230
|
|
|
|
168
|
|
|
|
|
|
|
|
|
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
229
|
|
|
|
173
|
|
Private label cards
|
|
|
230
|
|
|
|
216
|
|
Credit cards
|
|
|
130
|
|
|
|
102
|
|
Auto
finance(1)
|
|
|
44
|
|
|
|
52
|
|
Other consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
633
|
|
|
|
543
|
|
|
|
|
|
|
|
|
|
|
Total TDR Loans
|
|
$
|
863
|
|
|
$
|
711
|
|
|
|
|
|
|
|
|
|
|
18
HSBC USA Inc.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Allowance for credit losses for TDR
Loans(2):
|
|
|
|
|
|
|
|
|
Commercial loans:
|
|
|
|
|
|
|
|
|
Construction and other real estate
|
|
$
|
18
|
|
|
$
|
14
|
|
Other commercial
|
|
|
5
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
23
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
53
|
|
|
|
34
|
|
Private label cards
|
|
|
56
|
|
|
|
51
|
|
Credit cards
|
|
|
32
|
|
|
|
24
|
|
Auto finance
|
|
|
12
|
|
|
|
11
|
|
Other consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
153
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
Total Allowance for credit losses for TDR Loans
|
|
$
|
176
|
|
|
$
|
136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The TDR loan balances include
$12 million of auto finance loans held for sale at
December 31, 2009, for which there are no credit loss
reserves as these loans are carried at the lower of cost or fair
value.
|
|
(2) |
|
Included in the allowance for
credit losses.
|
The following table presents information about average TDR Loan
balances and interest income recognized on TDR loans:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2010
|
|
2009
|
|
|
|
(in millions)
|
|
Average balance of TDR Loans
|
|
$
|
770
|
|
|
$
|
341
|
|
Interest income recognized on TDR Loans
|
|
|
13
|
|
|
|
6
|
|
Concentrations
of Credit
Risk Our
loan portfolio includes the following types of loans:
|
|
|
|
|
High
loan-to-value
(LTV) loans Certain residential
mortgages on primary residences with LTV ratios equal to or
exceeding 90 percent at the time of origination and no
mortgage insurance, which could result in the potential
inability to recover the entire investment in loans involving
foreclosed or damaged properties.
|
|
|
|
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 the ability of
customers to repay the loan in the future when the principal
payments are required.
|
|
|
|
Adjustable rate mortgage (ARM) loans A
loan which allows us to adjust pricing on the loan in line with
market 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 the adjustment.
|
19
HSBC USA Inc.
The following table summarizes the balances of high LTV,
interest-only and ARM loans in our loan portfolios, including
loans held for sale, at March 31, 2010 and
December 31, 2009, respectively.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in billions)
|
|
|
Residential mortgage loans with high LTV and no mortgage
insurance(1)
|
|
$
|
1.2
|
|
|
$
|
1.2
|
|
Interest-only residential mortgage loans
|
|
|
2.8
|
|
|
|
3.3
|
|
ARM
loans(2)
|
|
|
7.6
|
|
|
|
7.7
|
|
|
|
|
(1) |
|
Residential mortgage loans with
high LTV and no mortgage insurance includes both fixed rate and
adjustable rate mortgages. Excludes $223 million and
$232 million of
sub-prime
residential mortgage loans held for sale at March 31, 2010
and December 31, 2009, respectively.
|
|
(2) |
|
ARM loan balances above exclude
$200 million and $209 million of
sub-prime
residential mortgage loans held for sale at March 31, 2010
and December 31, 2009, respectively. During the remainder
of 2010 and during 2011, approximately $.2 billion and
$.5 billion, respectively, of these ARM loans will
experience their first interest rate reset.
|
Concentrations of first and second liens within the outstanding
residential mortgage loan portfolio are summarized in the
following table. Amounts in the table exclude closed end first
lien loans held for sale of $1.1 billion and
$1.4 billion at March 31, 2010 and December 31,
2009, respectively.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Closed end:
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
13,512
|
|
|
$
|
13,722
|
|
Second lien
|
|
|
536
|
|
|
|
570
|
|
Revolving:
|
|
|
|
|
|
|
|
|
Second lien
|
|
|
3,510
|
|
|
|
3,594
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
17,558
|
|
|
$
|
17,886
|
|
|
|
|
|
|
|
|
|
|
5. Allowance
for Credit Losses
An analysis of the allowance for credit losses is presented in
the following table:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Balance at beginning of period
|
|
$
|
3,861
|
|
|
$
|
2,397
|
|
Provision for credit losses
|
|
|
211
|
|
|
|
1,174
|
|
Charge-offs
|
|
|
(934
|
)
|
|
|
(614
|
)
|
Recoveries
|
|
|
82
|
|
|
|
71
|
|
Allowance related to bulk loan purchase from HSBC Finance
|
|
|
-
|
|
|
|
437
|
|
Other
|
|
|
4
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
3,224
|
|
|
$
|
3,465
|
|
|
|
|
|
|
|
|
|
|
20
HSBC USA Inc.
6. Loans
Held for Sale
Loans held for sale consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Commercial loans
|
|
$
|
1,451
|
|
|
$
|
1,126
|
|
|
|
|
|
|
|
|
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
1,129
|
|
|
|
1,386
|
|
Auto finance
|
|
|
-
|
|
|
|
353
|
|
Other consumer
|
|
|
28
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
1,157
|
|
|
|
1,782
|
|
|
|
|
|
|
|
|
|
|
Total loans held for sale
|
|
$
|
2,608
|
|
|
$
|
2,908
|
|
|
|
|
|
|
|
|
|
|
We originate commercial loans largely in connection with our
participation in a number of leveraged acquisition finance
syndicates. A substantial majority of these loans were
originated with the intent of selling them to unaffiliated third
parties and are classified as commercial loans held for sale at
March 31, 2010 and December 31, 2009. The fair value
of commercial loans held for sale under this program were
$1.0 billion and $1.1 billion at March 31, 2010
and December 31, 2009, respectively, all of which are
recorded at fair value as we have elected to designate these
loans under fair value option. During the three months ended
March 31, 2010, the market value of these loans increased
due to narrowing credit spreads. In the first quarter of 2010,
we provided foreign currency denominated loans to a third party
which are classified as commercial loans held for sale and for
which we elected to apply fair value option. The fair value of
commercial loans held for sale under this program was
$419 million at March 31, 2010. See Note 10,
Fair Value Option, for additional information.
Residential mortgage loans held for sale include
sub-prime
residential mortgage loans with a fair value of
$734 million and $757 million at March 31, 2010
and December 31, 2009, respectively, which were acquired
from unaffiliated third parties and from HSBC Finance with the
intent of securitizing or selling the loans to third parties.
Also included in residential mortgage loans held for sale are
first mortgage loans originated and held for sale primarily to
various government sponsored enterprises.
During the three months ended March 31, 2010, auto finance
loans held for sale with a carrying value of $353 million
were sold to HSBC Finance to facilitate completion of their loan
sale to a third party.
Other consumer loans held for sale consist of student loans.
Excluding the commercial loans designated under fair value
option discussed above, loans held for sale are recorded at the
lower of cost or fair value. While the initial book value of
loans held for sale continued to exceed fair value at
March 31, 2010, we experienced a decrease in the valuation
allowance during the first quarter of 2010 due primarily to
lower balances. The valuation allowance on loans held for sale
was $884 million and $910 million at March 31,
2010 and December 31, 2009, respectively.
Loans held for sale are subject to market risk, liquidity risk
and interest rate risk, in that their value will fluctuate as a
result of changes in market conditions, as well as the interest
rate and credit environment. Interest rate risk for residential
mortgage loans held for sale is partially mitigated through an
economic hedging program to offset changes in the fair value of
the mortgage loans held for sale. Trading related revenue
associated with this economic hedging program, which are
included in net interest income and trading revenue (loss) in
the consolidated statement of income (loss), were loss of
$6 million and gain of $28 million during the three
months ended March 31, 2010 and 2009, respectively.
21
HSBC USA Inc.
7. Intangible
Assets
Intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Mortgage servicing rights
|
|
$
|
451
|
|
|
$
|
457
|
|
Other
|
|
|
25
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
$
|
476
|
|
|
$
|
484
|
|
|
|
|
|
|
|
|
|
|
Mortgage Servicing Rights
(MSRs) A servicing asset is a contract
under which estimated future revenues from contractually
specified cash flows, such as servicing fees and other ancillary
revenues, are expected to exceed the obligation to service the
financial assets. We recognize the right to service mortgage
loans as a separate and distinct asset at the time they are
acquired or when originated loans are sold.
MSRs are subject to credit, prepayment and interest rate risk,
in that their value will fluctuate as a result of changes in
these economic variables. Interest rate risk is mitigated
through an economic hedging program that uses securities and
derivatives to offset changes in the fair value of MSRs. Since
the hedging program involves trading activity, risk is
quantified and managed using a number of risk assessment
techniques, which are addressed in more detail in the 2009
Form 10-K.
Residential Mortgage Servicing
Rights Residential MSRs are initially measured at
fair value at the time that the related loans are sold and are
remeasured at fair value at each reporting date (the fair value
measurement method). Changes in fair value of the asset are
reflected in residential mortgage banking revenue in the period
in which the changes occur. Fair value is determined based upon
the application of valuation models and other inputs. The
valuation models incorporate assumptions market participants
would use in estimating future cash flows. The reasonableness of
these valuation models is periodically validated by reference to
external independent broker valuations and industry surveys.
Fair value of residential MSRs is calculated using the following
critical assumptions:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Annualized constant prepayment rate (CPR)
|
|
|
15.2
|
%
|
|
|
14.6
|
%
|
Constant discount rate
|
|
|
16.1
|
%
|
|
|
17.9
|
%
|
Weighted average life
|
|
|
4.8 years
|
|
|
|
4.8 years
|
|
Residential MSRs activity is summarized in the following table:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Fair value of MSRs:
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
450
|
|
|
$
|
333
|
|
Additions related to loan sales
|
|
|
16
|
|
|
|
28
|
|
Changes in fair value due to:
|
|
|
|
|
|
|
|
|
Change in valuation inputs or assumptions used in the valuation
models
|
|
|
5
|
|
|
|
(25
|
)
|
Realization of cash flows
|
|
|
(27
|
)
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
444
|
|
|
$
|
313
|
|
|
|
|
|
|
|
|
|
|
22
HSBC USA Inc.
Information regarding residential mortgage loans serviced for
others, which are not included in the consolidated balance
sheet, is summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
|
|
(in millions)
|
|
Outstanding principal balances at period end
|
|
$
|
49,800
|
|
|
$
|
50,390
|
|
|
|
|
|
|
|
|
|
|
Custodial balances maintained and included in noninterest
bearing deposits at
period end
|
|
$
|
1,126
|
|
|
$
|
923
|
|
|
|
|
|
|
|
|
|
|
Servicing fees collected are included in residential mortgage
banking revenue and totaled $32 million and
$34 million during the three months ended March 31,
2010 and 2009, respectively.
Commercial Mortgage Servicing
Rights Commercial MSRs, which are accounted for
using the lower of cost or fair value method, totaled
$7 million at March 31, 2010 and December 31,
2009.
Other Intangible Assets Other intangible
assets, which result from purchase business combinations, are
comprised of favorable lease arrangements of $19 million
and $20 million at March 31, 2010 and
December 31, 2009, respectively, and customer lists in the
amount of $6 million and $7 million at March 31,
2010 and December 31, 2009, respectively.
8. Goodwill
Goodwill was $2.6 billion at March 31, 2010 and
December 31, 2009 and includes accumulated impairment
losses of $54 million. As a result of the continued focus
on economic and credit conditions in the U.S., we performed
interim impairment tests of the goodwill associated with our
Global Banking and Markets and Private Banking reporting units
during the first quarter of 2010. As a result of these tests,
the fair value of our Global Banking and Markets and Private
Banking reporting units continue to exceed their carrying value,
including goodwill. Our goodwill impairment testing however is
highly sensitive to certain assumptions and estimates used. In
the event of significant deterioration in the economic and
credit conditions beyond the levels already reflected in our
cash flow forecasts occur, or changes in the strategy or
performance of our business or product offerings occur, an
interim impairment test will again be required.
9. Derivative
Financial Instruments
In our normal course of business, we enter into derivative
contracts for trading and risk management purposes. For
financial reporting purposes, a derivative instrument is
designated in one of following categories: (a) financial
instruments held for trading, (b) hedging instruments
designated as a qualifying hedge under derivative accounting
principles or (c) a non-qualifying economic hedge. The
derivative instruments held are predominantly swaps, futures,
options and forward contracts. All freestanding derivatives,
including bifurcated embedded derivatives, are stated at fair
value. Where we enter into enforceable master netting
arrangements with counterparties, the master netting
arrangements permit us to net those derivative asset and
liability positions and to offset cash collateral held and
posted with the same counterparty.
Derivatives Held for Risk Management
Purposes Our risk management policy requires us to
identify, analyze and manage risks arising from the activities
conducted during our normal course of business. We use
derivative instruments as an asset and liability management tool
to manage our exposures in interest rate, foreign currency and
credit risks in existing assets and liabilities, commitments and
forecasted transactions. The accounting for changes in fair
value of a derivative instrument will depend on whether the
derivative has been designated and qualifies for hedge
accounting under derivative accounting principles.
Accounting principles for qualifying hedges require detailed
documentation that describes the relationship between the
hedging instrument and the hedged item, including, but not
limited to, the risk management objectives and hedging strategy
and the methods to assess the effectiveness of the hedging
relationship. We designate derivative
23
HSBC USA Inc.
instruments to offset the fair value risk and cash flow risk
arising from fixed-rate and floating-rate assets and liabilities
as well as forecasted transactions. We assess the hedging
relationships, both at the inception of the hedge and on an
ongoing basis, using a regression approach to determine whether
the designated hedging instrument is highly effective in
offsetting changes in the fair value or cash flows of the hedged
item. We discontinue hedge accounting when we determine that a
derivative is not expected to be effective going forward or has
ceased to be highly effective as a hedge, the hedging instrument
is terminated, or when the designation is removed by us.
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 with the fair
value amount recognized for derivative instruments.
Fair Value Hedges In the normal course of
business, we hold fixed-rate loans and securities and issue
fixed-rate senior and subordinated debt obligations. The fair
value of fixed-rate (USD and non-USD denominated) assets and
liabilities fluctuates in response to changes in interest rates
or foreign currency exchange rates. We utilize interest rate
swaps, interest rate forward and futures contracts and foreign
currency swaps to minimize the effect on earnings caused by
interest rate and foreign currency volatility.
For reporting purposes, changes in fair value of a derivative
designated in a qualifying fair value hedge, along with the
changes in the fair value of the hedged asset or liability that
is attributable to the hedged risk, are recorded in current
period earnings. We recognized net gains of $5 million
during the three months ended March 31, 2010 and net gains
of $4 million during the three months ended March 31,
2009 which are reported as other income (loss) in the
consolidated statement of income (loss), which represents the
ineffective portion of all fair value hedges. The interest
accrual related to the derivative contract is recognized in
interest income.
The changes in fair value of the hedged item designated in a
qualifying hedge are captured as an adjustment to the carrying
value of the hedged item (basis adjustment). If the hedging
relationship is terminated and the hedged item continues to
exist, the basis adjustment is amortized over the remaining term
of the original hedge. We recorded basis adjustments for active
fair value hedges which increased the carrying value of our debt
by $27 million and decreased the carrying value of our debt
by $75 million during the three months ended March 31,
2010 and 2009, respectively. We amortized less than
$2 million and $1 million of basis adjustments related
to terminated
and/or
re-designated fair value hedge relationships during the three
months ended March 31, 2010 and 2009, respectively. The
total accumulated unamortized basis adjustment amounted to an
increase in the carrying value of our debt of $82 million
and $57 million as of March 31, 2010 and
December 31, 2009, respectively.
The following table presents the fair value of derivative
instruments that are designated and qualifying as fair value
hedges and their location on the balance sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
Assets(1)
|
|
Derivative
Liabilities(1)
|
|
|
|
|
Fair Value as of
|
|
|
|
Fair Value as of
|
|
|
Balance Sheet
|
|
March 31,
|
|
December 31,
|
|
Balance Sheet
|
|
March 31,
|
|
December 31,
|
|
|
Location
|
|
2010
|
|
2009
|
|
Location
|
|
2010
|
|
2009
|
|
|
|
(in millions)
|
|
Interest rate contracts
|
|
|
Other assets
|
|
|
$
|
128
|
|
|
$
|
133
|
|
|
|
Interest, taxes &
other liabilities
|
|
|
$
|
24
|
|
|
$
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The derivative assets and
derivative liabilities presented above may be eligible for
netting and consequently may be shown net against a different
line item on the consolidated balance sheet. The balance sheet
categories in the above table represent the location of the
assets and liabilities absent the netting of the balances.
|
24
HSBC USA Inc.
The following table presents the gains and losses on derivative
instruments designated and qualifying as hedging instruments in
fair value hedges and their locations on the consolidated
statement of (loss) income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss)
|
|
|
|
|
|
Recognized in Income on
|
|
|
|
|
|
Derivatives(1)
|
|
|
|
Location of Gain or (Loss)
|
|
Three Months Ended
|
|
|
|
Recognized in Income on
|
|
March 31,
|
|
|
|
Derivatives
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Interest rate contracts
|
|
Other income (loss)
|
|
$
|
(13
|
)
|
|
$
|
(12
|
)
|
Interest rate contracts
|
|
Interest income
|
|
|
18
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
5
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The gains and losses associated
with the contracts were presented in multiple lines on the
consolidated statement of income (loss) as shown above.
|
The following table presents information on gains and losses on
the hedged items in fair value hedges and their location on the
consolidated statement of income (loss).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) on
|
|
|
|
|
|
|
|
|
Gain (Loss) on
|
|
|
|
Gain/(Loss) on
|
|
|
Hedged
|
|
|
Gain (Loss) on
|
|
|
Hedged
|
|
|
|
Derivative
|
|
|
Items
|
|
|
Derivative
|
|
|
Items
|
|
|
|
Interest
|
|
|
Other
|
|
|
Interest
|
|
|
Other
|
|
|
Interest
|
|
|
Other
|
|
|
Interest
|
|
|
Other
|
|
|
|
Income
|
|
|
Income
|
|
|
Income
|
|
|
Income
|
|
|
Income
|
|
|
Income
|
|
|
Income
|
|
|
Income
|
|
|
|
(Expense)
|
|
|
(Expense)
|
|
|
(Expense)
|
|
|
(Expense)
|
|
|
(Expense)
|
|
|
(Expense)
|
|
|
(Expense)
|
|
|
(Expense)
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2010
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Interest rate contracts/AFS securities
|
|
$
|
(2
|
)
|
|
$
|
(39
|
)
|
|
$
|
43
|
|
|
$
|
38
|
|
|
$
|
(7
|
)
|
|
$
|
64
|
|
|
$
|
18
|
|
|
$
|
(60
|
)
|
Interest rate contracts/commercial loans
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
-
|
|
Interest rate contracts/subordinated debt
|
|
|
20
|
|
|
|
26
|
|
|
|
(40
|
)
|
|
|
(19
|
)
|
|
|
23
|
|
|
|
(74
|
)
|
|
|
(82
|
)
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18
|
|
|
$
|
(13
|
)
|
|
$
|
4
|
|
|
$
|
18
|
|
|
$
|
16
|
|
|
$
|
(12
|
)
|
|
$
|
(64
|
)
|
|
$
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Hedges We own or issue floating rate
financial instruments and enter into forecasted transactions
that give rise to variability in future cash flows. As a part of
our risk management strategy, we use interest rate swaps,
currency swaps and futures contracts to mitigate risk associated
with variability in the cash flows. We also hedge the
variability in interest cash flows arising from on-line savings
deposits.
Changes in fair value associated with the effective portion of a
derivative instrument designated as a qualifying cash flow hedge
are recognized initially in accumulated other comprehensive
income. When the cash flows for which the derivative is hedging
materialize and are recorded in income or expense, the
associated gain or loss from the hedging derivative previously
recorded in accumulated other comprehensive income is released
into the corresponding income or expense account. If a cash flow
hedge of a forecasted transaction is de-designated because it is
no longer highly effective, or if the hedge relationship is
terminated, the cumulative gain or loss on the hedging
derivative will continue to be reported in accumulated other
comprehensive income unless the hedged forecasted transaction is
no longer expected to occur, at which time the cumulative gain
or loss is released into earnings. As of March 31, 2010,
and December 31, 2009, active cash flow hedge relationships
extend or mature through January 2012 and June 2010,
respectively. During the three months ended March 31, 2010
and 2009, $3 million of losses and $17 million of
gains, respectively, of losses related to terminated
and/or
re-designated cash flow hedge relationships were amortized to
earnings from accumulated other comprehensive income. During the
next twelve months, we expect to amortize $9 million of
remaining losses to earnings resulting from these terminated
and/or
re-designated cash flow hedges. The interest accrual related to
the derivative contract is recognized in interest income.
25
HSBC USA Inc.
The following table presents the fair value of derivative
instruments that are designated and qualifying as cash flow
hedges and their location on the consolidated balance sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
Assets(1)
|
|
|
Derivative
Liabilities(1)
|
|
|
|
|
|
|
Fair Value as of
|
|
|
|
|
|
Fair Value as of
|
|
|
|
Balance Sheet
|
|
|
March 31,
|
|
|
December 31,
|
|
|
Balance Sheet
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
Location
|
|
|
2010
|
|
|
2009
|
|
|
Location
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Interest rate contracts
|
|
|
Other assets
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
Interest, taxes &
other liabilities
|
|
|
$
|
22
|
|
|
$
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The derivative assets and
derivative liabilities presented above may be eligible for
netting and consequently may be shown net against a different
line item on the consolidated balance sheet. Balance sheet
categories in the above table represent the location of the
assets and liabilities absent the netting of the balances.
|
The following table presents information on gains and losses on
derivative instruments designated and qualifying as hedging
instruments in cash flow hedges and their locations on the
income statement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
|
|
or (Loss) Recognized
|
|
Gain (Loss)
|
|
|
Gain (Loss)
|
|
|
|
Reclassified
|
|
in Income on
|
|
Reclassed
|
|
|
Recognized in
|
|
|
|
from
|
|
the Derivative
|
|
from
|
|
|
AOCI on
|
|
|
|
AOCI into
|
|
(Ineffective
|
|
AOCI
|
|
|
Derivative
|
|
Location of Gain
|
|
Income
|
|
Portion and Amount
|
|
into Income
|
|
|
(Effective
|
|
or (Loss) Reclassified
|
|
(Effective
|
|
Excluded from
|
|
(Ineffective
|
Three Months Ended
|
|
Portion)
|
|
from AOCI into Income
|
|
Portion)
|
|
Effectiveness
|
|
Portion)
|
March 31,
|
|
2010
|
|
2009
|
|
(Effective Portion)
|
|
2010
|
|
2009
|
|
Testing)
|
|
2010
|
|
2009
|
|
|
|
(in millions)
|
|
Interest rate contracts
|
|
$
|
7
|
|
|
$
|
26
|
|
|
Other income (loss)
|
|
$
|
(3
|
)
|
|
$
|
(17
|
)
|
|
Other income (loss)
|
|
$
|
-
|
|
|
$
|
7
|
|
Trading and Other Derivatives We enter into
derivative instruments for short-term profit taking purposes, to
repackage risks and structure trades to facilitate clients
needs for various risk taking and risk modification purposes. We
manage our risk exposure by entering into offsetting derivatives
with other financial institutions to mitigate the market risks,
in part or in full, arising from our trading activities with our
clients. In addition, we also enter into buy protection credit
derivatives with other market participants to manage our
counterparty credit risk exposure. Where we enter into
derivatives for trading purposes, realized and unrealized gains
and losses are recognized as trading revenue (loss). Credit
losses arising from counterparty risks on over-the-counter
derivative instruments and offsetting buy protection credit
derivative positions are recognized as an adjustment to the fair
value of the derivatives and are recorded in trading revenue
(loss).
Derivative instruments designated as economic hedges that do not
qualify for hedge accounting are recorded at fair value through
profit and loss. Realized and unrealized gains and losses are
recognized in other income (loss) while the derivative asset or
liability positions are reflected as other assets or other
liabilities. As of March 31, 2010, we have entered into
credit default swaps which are designated as economic hedges
against the credit risks within our loan portfolio and certain
own debt issuances. In the event of an impairment loss occurring
in a loan that is economically hedged, the impairment loss is
recognized as provision for credit losses while the gain on the
credit default swap is recorded as other income (loss). In
addition, we also from time to time have designated certain
forward purchase or sale of to-be-announced (TBA)
securities to economically hedge mortgage servicing rights.
Changes in the fair value of TBA positions, which are considered
derivatives, are recorded in residential mortgage banking
revenue.
26
HSBC USA Inc.
The following table presents the fair value of derivative
instruments held for trading purposes and their location on the
consolidated balance sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
Assets(1)
|
|
|
Derivative
Liabilities(1)
|
|
|
|
|
|
Fair Value as of
|
|
|
|
|
Fair Value as of
|
|
|
|
Balance Sheet
|
|
March 31,
|
|
|
December 31,
|
|
|
Balance Sheet
|
|
March 31,
|
|
|
December 31,
|
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Interest rate contracts
|
|
Trading assets
|
|
$
|
27,016
|
|
|
$
|
27,085
|
|
|
Trading Liabilities
|
|
$
|
27,503
|
|
|
$
|
27,546
|
|
Foreign exchange contracts
|
|
Trading assets
|
|
|
12,758
|
|
|
|
12,920
|
|
|
Trading Liabilities
|
|
|
13,416
|
|
|
|
14,087
|
|
Equity contracts
|
|
Trading assets
|
|
|
1,159
|
|
|
|
2,281
|
|
|
Trading Liabilities
|
|
|
1,160
|
|
|
|
2,297
|
|
Precious Metals contracts
|
|
Trading assets
|
|
|
486
|
|
|
|
918
|
|
|
Trading Liabilities
|
|
|
657
|
|
|
|
897
|
|
Credit contracts
|
|
Trading assets
|
|
|
15,793
|
|
|
|
17,772
|
|
|
Trading Liabilities
|
|
|
15,701
|
|
|
|
17,687
|
|
Other
|
|
Trading assets
|
|
|
22
|
|
|
|
6
|
|
|
Trading Liabilities
|
|
|
3
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
57,234
|
|
|
$
|
60,982
|
|
|
|
|
$
|
58,440
|
|
|
$
|
62,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The derivative assets and
derivative liabilities presented above may be eligible for
netting and consequently may be shown net against a different
line item on the consolidated balance sheet. Balance sheet
categories in the above table represent the location of the
assets and liabilities absent the netting of the balances.
|
The following table presents the fair value of derivative
instruments held for other purposes and their location on the
balance sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
Assets(1)
|
|
|
Derivative
Liabilities(1)
|
|
|
|
|
|
Fair Value as of
|
|
|
|
|
Fair Value as of
|
|
|
|
Balance Sheet
|
|
March 31,
|
|
|
December 31,
|
|
|
Balance Sheet
|
|
March 31,
|
|
|
December 31,
|
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
Other assets
|
|
$
|
234
|
|
|
$
|
229
|
|
|
Interest, taxes &
other liabilities
|
|
$
|
38
|
|
|
$
|
15
|
|
Foreign exchange contracts
|
|
Other assets
|
|
|
48
|
|
|
|
51
|
|
|
Interest, taxes &
other liabilities
|
|
|
2
|
|
|
|
2
|
|
Equity contracts
|
|
Other assets
|
|
|
183
|
|
|
|
180
|
|
|
Interest, taxes &
other liabilities
|
|
|
16
|
|
|
|
16
|
|
Credit contracts
|
|
Other assets
|
|
|
5
|
|
|
|
15
|
|
|
Interest, taxes &
other liabilities
|
|
|
28
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
470
|
|
|
$
|
475
|
|
|
|
|
$
|
84
|
|
|
$
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The derivative assets and
derivative liabilities presented above may be eligible for
netting and consequently may be shown net against a different
line item on the consolidated balance sheet. Balance sheet
categories in the above table represent the location of the
assets and liabilities absent the netting of the balances.
|
27
HSBC USA Inc.
The following table presents information on gains and losses on
derivative instruments held for trading purposes and their
locations on the statement of income (loss).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss)
|
|
|
|
|
|
Recognized in Income on
|
|
|
|
|
|
Derivatives
|
|
|
|
Location of Gain
|
|
Three Months Ended
|
|
|
|
(Loss) Recognized in
|
|
March 31,
|
|
|
|
Income on Derivatives
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Interest rate contracts
|
|
Trading revenue (loss)
|
|
$
|
(53
|
)
|
|
$
|
96
|
|
Foreign exchange contracts
|
|
Trading revenue (loss)
|
|
|
(78
|
)
|
|
|
81
|
|
Equity contracts
|
|
Trading revenue (loss)
|
|
|
14
|
|
|
|
(10
|
)
|
Precious Metals contracts
|
|
Trading revenue (loss)
|
|
|
165
|
|
|
|
24
|
|
Credit contracts
|
|
Trading revenue (loss)
|
|
|
(33
|
)
|
|
|
(638
|
)
|
Other
|
|
Trading revenue (loss)
|
|
|
21
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
36
|
|
|
$
|
(405
|
)
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents information on gains and losses on
derivative instruments held for other purposes and their
locations on the statement of income (loss).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss)
|
|
|
|
|
|
Recognized in Income on
|
|
|
|
Location of Gain
|
|
Derivatives
|
|
|
|
(Loss) Recognized in
|
|
Three Months Ended March 31,
|
|
|
|
Income on Derivatives
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Interest rate contracts
|
|
Other income (loss)
|
|
$
|
57
|
|
|
$
|
(138
|
)
|
Foreign exchange contracts
|
|
Other income (loss)
|
|
|
(10
|
)
|
|
|
6
|
|
Equity contracts
|
|
Other income (loss)
|
|
|
142
|
|
|
|
(1
|
)
|
Credit contracts
|
|
Other income (loss)
|
|
|
(9
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
180
|
|
|
$
|
(142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Credit-Risk-Related Contingent Features We
enter into total return swap, interest rate swap, cross-currency
swap and credit default swap contracts, amongst others which
contain provisions that require us to maintain a specific credit
rating from each of the major credit rating agencies. Sometimes
the derivative instrument transactions are a part of broader
structured products transaction. As of March 31, 2010, HSBC
Bank USA was given credit ratings of AA and Aa3 by S&P and
Moodys, respectively, and was given a short-term debt
rating of
A-1+ and
P-1 by
S&P and Moodys, respectively. If HSBC Bank USAs
credit ratings were to fall below the current ratings, the
counterparties to our derivative instruments could demand
additional collateral to be posted with them. The amount of
additional collateral required to be posted will depend on
whether HSBC Bank USA is downgraded by one or more notches as
well as whether the downgrade is in relation to long-term or
short-term ratings. The aggregate fair value of all derivative
instruments with credit-risk-related contingent features that
are in a liability position as of March 31, 2010, is
$8.1 billion for which we have posted collateral of
$4.9 billion. The aggregate fair value of all derivative
instruments with credit-risk-related contingent features that
are in a liability position as of December 31, 2009, is
$9.3 billion for which we have posted collateral of
$8.1 billion.
In the event of a credit downgrade, we do not expect HSBC Bank
USAs long-term ratings to go below A2 and A+ and the
short-term ratings to go below
P-2 and
A-1 by
Moodys and S&P, respectively. The following tables
summarize our obligation to post additional collateral (from the
current collateral level) in certain hypothetical commercially
reasonable downgrade scenarios. It is not appropriate to
accumulate or extrapolate information
28
HSBC USA Inc.
presented in the table below to determine our total obligation
because the information presented to determine the obligation in
hypothetical rating scenarios is not mutually exclusive.
Moodys
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Ratings
|
Short-Term Ratings
|
|
Aa3
|
|
A1
|
|
A2
|
|
|
|
(in millions)
|
|
P-1
|
|
$
|
-
|
|
|
$
|
157
|
|
|
$
|
248
|
|
P-2
|
|
|
124
|
|
|
|
260
|
|
|
|
345
|
|
S&P
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Ratings
|
Short-Term Ratings
|
|
AA
|
|
AA-
|
|
A+
|
|
|
|
(in millions)
|
|
A-1+
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
49
|
|
A-1
|
|
|
143
|
|
|
|
143
|
|
|
|
192
|
|
We would be required to post $250 million of additional
collateral on total return swaps and certain other transactions
if HSBC Bank USA is downgraded by S&P and Moodys by
two notches on our long term rating accompanied by one notch
downgrade in our short term rating.
Notional Value of Derivative Contracts The
following table summarizes the notional values of derivative
contracts.
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
(in billions)
|
|
|
Interest rate:
|
|
|
|
|
|
|
|
|
Futures and forwards
|
|
$
|
283.6
|
|
|
$
|
156.0
|
|
Swaps
|
|
|
1,368.6
|
|
|
|
1,221.5
|
|
Options written
|
|
|
53.4
|
|
|
|
59.5
|
|
Options purchased
|
|
|
59.9
|
|
|
|
66.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,765.5
|
|
|
|
1,503.0
|
|
Foreign Exchange:
|
|
|
|
|
|
|
|
|
Swaps, futures and forwards
|
|
|
549.5
|
|
|
|
486.2
|
|
Options written
|
|
|
27.0
|
|
|
|
43.0
|
|
Options purchased
|
|
|
27.7
|
|
|
|
43.1
|
|
Spot
|
|
|
77.2
|
|
|
|
39.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
681.4
|
|
|
|
611.7
|
|
Commodities, equities and precious metals:
|
|
|
|
|
|
|
|
|
Swaps, futures and forwards
|
|
|
30.1
|
|
|
|
26.4
|
|
Options written
|
|
|
7.8
|
|
|
|
10.3
|
|
Options purchased
|
|
|
13.6
|
|
|
|
15.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51.5
|
|
|
|
52.0
|
|
Credit derivatives
|
|
|
779.9
|
|
|
|
768.5
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,278.3
|
|
|
$
|
2,935.2
|
|
|
|
|
|
|
|
|
|
|
29
HSBC USA Inc.
10. Fair
Value Option
HSBC complies with International Financial Reporting Standards
(IFRSs) for its financial reporting. We have elected to apply
fair value option accounting to selected financial instruments
in most cases to align the measurement attributes of those
instruments under U.S. GAAP and IFRSs and to simplify the
accounting model applied to those financial instruments. We
elected to apply the fair value option (FVO)
reporting to commercial leveraged acquisition finance loans and
related unfunded commitments, certain fixed rate long-term debt
issuances and hybrid instruments which include all structured
notes and structured deposits. Changes in fair value for these
assets and liabilities are reported as gain (loss) on
instruments designated at fair value and related derivatives in
the consolidated statement of income (loss).
Loans We elected to apply FVO to all
commercial leveraged acquisition finance loans held for sale and
unfunded commitments. The election allows us to account for
these loans and commitments at fair value which is consistent
with the manner in which the instruments are managed. As of
March 31, 2010, commercial leveraged acquisition finance
loans held for sale and unfunded commitments of
$1.0 billion carried at fair value had an aggregate unpaid
principal balance of $1.1 billion. As of December 31,
2009, commercial leveraged acquisition finance loans held for
sale and unfunded commitments of $1.1 billion carried at
fair value had an aggregate unpaid principal balance of
$1.3 billion.
In the first quarter of 2010, we provided foreign currency
denominated loans to a third party for which we simultaneously
entered into a series of derivative transactions to hedge
certain risks associated with these loans. We elected to apply
fair value option to these loans which allows us to account for
them in a manner which is consistent with the manner in which
the instruments are managed. At March 31, 2010, these
commercial foreign currency denominated loans for which we
elected fair value option had a fair value of $419 million
and an unpaid principal balance of $423 million.
These loans are included in loans held for sale in the
consolidated balance sheet. Interest from these loans is
recorded as interest income in the consolidated statement of
income (loss). Because a substantial majority of the loans
elected for the fair value option are floating rate assets,
changes in their fair value are primarily attributable to
changes in loan-specific credit risk factors. The components of
gain (loss) related to loans designated at fair value are
summarized in the table below.
As of March 31, 2010 and December 31, 2009, no loans
for which the fair value option has been elected are
90 days or more past due or on nonaccrual status.
Long-Term Debt (Own Debt Issuances) We
elected to apply FVO for fixed rate long-term debt for which we
had applied or otherwise would elect to apply fair value hedge
accounting. The election allows us to achieve a similar
accounting effect without meeting the rigorous hedge accounting
requirements. We measure the fair value of the debt issuances
based on inputs observed in the secondary market. Changes in
fair value of these instruments are attributable to changes of
our own credit risk and the interest rate.
Fixed rate debt accounted for under FVO at March 31, 2010
totaled $1.7 billion and had an aggregate unpaid principal
balance of $1.8 billion. Fixed rate debt accounted for
under FVO at December 31, 2009 totaled $1.7 billion
and had an aggregate unpaid principal balance of
$1.8 billion. Interest paid on the fixed rate debt elected
for FVO is recorded as interest expense in the consolidated
statement of income (loss). The components of gain (loss)
related to long-term debt designated at fair value are
summarized in the table below.
Hybrid Instruments We elected to apply fair
value option accounting principles to all of our hybrid
instruments, inclusive of structured notes and structured
deposits, issued after January 1, 2006. As of
March 31, 2010, interest bearing deposits in domestic
offices included $5.1 billion of structured deposits
accounted for under FVO which had an unpaid principal balance of
$5.0 billion. As of December 31, 2009, interest
bearing deposits in domestic offices included $4.2 billion
of structured deposits accounted for under FVO which had an
unpaid principal balance of $4.2 billion. Long-term debt at
March 31, 2010 included structured notes of
$3.2 billion accounted for under FVO which had an unpaid
principal balance of $3.0 billion. Long-term debt at
December 31, 2009 included structured notes of
$2.9 billion accounted for under FVO which had an unpaid
principal balance of $2.7 billion. Interest
30
HSBC USA Inc.
incurred was recorded as interest expense in the consolidated
statement of income (loss). The components of gain (loss)
related to hybrid instruments designated at fair value which
reflect the instruments described above are summarized in the
table below.
Components of Gain on instruments at fair value and
related derivatives Gain (loss) on instruments
designated at fair value and related derivatives includes the
changes in fair value related to both interest and credit risk
as well as the
mark-to-market
adjustment on derivatives related to the debt designated at fair
value and net realized gains or losses on these derivatives. The
components of gain (loss) on instruments designated at fair
value and related derivatives related to the changes in fair
value of fixed rate debt accounted for under FVO are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
Long -Term Debt
|
|
|
Hybrid Instruments
|
|
|
Total
|
|
|
|
|
|
(in millions)
|
|
|
Three months ended March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate component
|
|
$
|
1
|
|
|
$
|
(9
|
)
|
|
$
|
(174
|
)
|
|
$
|
(183
|
)
|
Credit risk component
|
|
|
(6
|
)
|
|
|
11
|
|
|
|
23
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
mark-to-market
on financial instruments designated at fair value
|
|
|
(5
|
)
|
|
|
2
|
|
|
|
(151
|
)
|
|
|
(154
|
)
|
Mark-to-market
on the related derivatives
|
|
|
5
|
|
|
|
10
|
|
|
|
164
|
|
|
|
179
|
|
Net realized gain (losses) on the related derivatives
|
|
|
-
|
|
|
|
21
|
|
|
|
-
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on instruments designated at fair value and related
derivatives
|
|
$
|
-
|
|
|
$
|
33
|
|
|
$
|
13
|
|
|
$
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate component
|
|
$
|
-
|
|
|
$
|
91
|
|
|
$
|
(12
|
)
|
|
$
|
79
|
|
Credit risk component
|
|
|
35
|
|
|
|
111
|
|
|
|
28
|
|
|
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
mark-to-market
on financial instruments designated at fair value
|
|
|
35
|
|
|
|
202
|
|
|
|
16
|
|
|
|
253
|
|
Mark-to-market
on the related derivatives
|
|
|
-
|
|
|
|
(167
|
)
|
|
|
77
|
|
|
|
(90
|
)
|
Net realized gain (losses) on the related derivatives
|
|
|
-
|
|
|
|
14
|
|
|
|
(65
|
)
|
|
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on instruments designated at fair value and related
derivatives
|
|
$
|
35
|
|
|
$
|
49
|
|
|
$
|
28
|
|
|
$
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
HSBC USA Inc.
11. Income
Taxes
The following table presents our effective tax rates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Statutory federal income tax rate
|
|
$
|
306
|
|
|
|
35.0
|
%
|
|
$
|
(17
|
)
|
|
|
(35.0
|
)%
|
Increase (decrease) in rate resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local taxes, net of federal benefit
|
|
|
4
|
|
|
|
.5
|
|
|
|
5
|
|
|
|
11.5
|
|
Sale of minority stock interest
|
|
|
-
|
|
|
|
-
|
|
|
|
74
|
|
|
|
154.6
|
|
Tax exempt income
|
|
|
(3
|
)
|
|
|
(.3
|
)
|
|
|
(4
|
)
|
|
|
(8.0
|
)
|
Low income housing and other tax credits
|
|
|
(22
|
)
|
|
|
(2.5
|
)
|
|
|
(15
|
)
|
|
|
(32.2
|
)
|
Effects of foreign operations
|
|
|
13
|
|
|
|
1.5
|
|
|
|
6
|
|
|
|
12.3
|
|
Uncertain tax provision
|
|
|
23
|
|
|
|
2.6
|
|
|
|
(2
|
)
|
|
|
(4.7
|
)
|
IRS Audit Effective Settlement
|
|
|
-
|
|
|
|
-
|
|
|
|
(8
|
)
|
|
|
(17.1
|
)
|
State rate change effect on net deferred tax assets
|
|
|
(1
|
)
|
|
|
(.1
|
)
|
|
|
2
|
|
|
|
4.7
|
|
Other
|
|
|
-
|
|
|
|
(.1
|
)
|
|
|
-
|
|
|
|
(.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
$
|
320
|
|
|
|
36.6
|
%
|
|
$
|
41
|
|
|
|
85.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effective tax rate in 2010 reflects a substantially higher
level of pre-tax income, an increased level of low income
housing tax credits and an adjustment of uncertain tax
positions. The effective tax rate for 2009 was significantly
impacted by the relative level of pre-tax income, the sale of a
minority stock interest that was treated as a dividend for tax
purposes and the settlement of an IRS audit of our 2004 and 2005
federal income tax returns.
HSBC North America Consolidated Income Taxes We
are included in HSBC North Americas consolidated Federal
income tax return and in various combined state income tax
returns. As such, we have entered into a tax allocation
agreement with HSBC North America and its subsidiary entities
(the HNAH Group) included in the consolidated
returns which govern the current amount of taxes to be paid or
received by the various entities included in the consolidated
return filings. As a result, we have looked at the HNAH
Groups consolidated deferred tax assets and various
sources of taxable income, including the impact of HSBC and HNAH
Group tax planning strategies, in reaching conclusions on
recoverability of deferred tax assets. Where a valuation
allowance is determined to be necessary at the HSBC North
America consolidated level, such allowance is allocated to
principal subsidiaries within the HNAH Group as described below
in a manner that is systematic, rational and consistent with the
broad principles of accounting for income taxes.
The HNAH Group evaluates deferred tax assets for recoverability
using a consistent approach which considers the relative impact
of negative and positive evidence, including historical
financial performance, projections of future taxable income,
future reversals of existing taxable temporary differences, tax
planning strategies and any available carryback capacity.
In evaluating the need for a valuation allowance, the HNAH Group
estimates future taxable income based on management approved
business plans, future capital requirements and ongoing tax
planning strategies, including capital support from HSBC
necessary as part of such plans and strategies. The HNAH Group
has continued to consider the impact of the economic environment
on the North American businesses and the expected growth of the
deferred tax assets. This evaluation process involves
significant management judgment about assumptions that are
subject to change from period to period.
In conjunction with the HNAH Group deferred tax evaluation
process, based on our forecasts of future taxable income, which
include assumptions about the depth and severity of home price
depreciation and the U.S. economic downturn, including
unemployment levels and their related impact on credit losses,
we currently anticipate that our results of future operations
will generate sufficient taxable income to allow us to realize
our deferred tax assets. However, since the recent market
conditions have created significant downward pressure and
volatility on our near-term pre-tax book income, our analysis of
the realizability of the deferred tax assets significantly
discounts any future taxable income expected from continuing
operations and relies to a greater extent on continued capital
32
HSBC USA Inc.
support from our parent, HSBC, including tax planning strategies
implemented in relation to such support. HSBC has indicated they
remain fully committed and have the capacity and willingness to
provide capital as needed to run operations, maintain sufficient
regulatory capital, and fund certain tax planning strategies.
Only those tax planning strategies that are both prudent and
feasible, and which management has the ability and intent to
implement, are incorporated into our analysis and assessment.
The primary and most significant strategy is HSBCs
commitment to reinvest excess HNAH Group capital to reduce debt
funding or otherwise invest in assets to ensure that it is more
likely than not that the deferred tax assets will be utilized.
Currently, it has been determined that the HNAH Groups
primary tax planning strategy, in combination with other tax
planning strategies, provides support for the realization of the
net deferred tax assets recorded for the HNAH Group. Such
determination is based on HSBCs business forecasts and
assessment as to the most efficient and effective deployment of
HSBC capital, most importantly including the length of time such
capital will need to be maintained in the U.S. for purposes
of the tax planning strategy.
Notwithstanding the above, the HNAH Group has valuation
allowances against certain specific tax attributes such as
foreign tax credits, certain state related deferred tax assets
and certain tax loss carryforwards for which the aforementioned
tax planning strategies do not provide appropriate support.
HNAH Group valuation allowances are allocated to the principal
subsidiaries, including us. The methodology allocates the
valuation allowance to the principal subsidiaries based
primarily on the entitys relative contribution to the
growth of the HSBC North America consolidated deferred tax asset
against which the valuation allowance is being recorded.
If future results differ from the HNAH Groups current
forecasts or the primary tax planning strategy were to change, a
valuation allowance against the remaining net deferred tax
assets may need to be established which could have a material
adverse effect on our results of operations, financial condition
and capital position. The HNAH Group will continue to update its
assumptions and forecasts of future taxable income, including
relevant tax planning strategies, and assess the need for such
incremental valuation allowances.
Absent the capital support from HSBC and implementation of the
related tax planning strategies, the HNAH Group, including us,
would be required to record a valuation allowance against the
remaining deferred tax assets.
HSBC USA Inc. Income Taxes We recognize deferred
tax assets and liabilities for the future tax consequences
related to the differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases, and for tax credits and state net
operating losses. Our net deferred tax assets, net of both
deferred tax liabilities and valuation allowances, totaled
$1.4 billion and $1.7 billion as of March 31,
2010 and December 31, 2009 respectively. The decrease in
net deferred tax assets is primarily due to the reduction in the
allowance for credit losses and a decrease in the overall net
unrealized losses on
available-for-sale
securities.
The Internal Revenue Service began its audit of our 2006 and
2007 income tax returns in 2009, with an anticipated completion
by the end of 2010. We are currently under audit by various
state and local tax jurisdictions, and although one or more of
these audits may be concluded within the next 12 months, it
is not possible to reasonably estimate the impact on our
uncertain tax positions at this time.
12. Pensions
and Other Post Retirement 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
33
HSBC USA Inc.
North America Pension Plan (either the HSBC North America
Pension Plan or the Plan) which has been
allocated to HSBC USA Inc.:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Service cost benefits earned during the period
|
|
$
|
5
|
|
|
$
|
7
|
|
Interest cost on projected benefit obligation
|
|
|
17
|
|
|
|
18
|
|
Expected return on assets
|
|
|
(15
|
)
|
|
|
(13
|
)
|
Recognized losses
|
|
|
9
|
|
|
|
9
|
|
Amortization of prior service cost
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
15
|
|
|
$
|
21
|
|
|
|
|
|
|
|
|
|
|
Pension expense declined in 2010 due to lower service cost and
interest cost as a result of reduced headcount. Also
contributing to lower pension expense was the realization of
higher returns on plan assets solely due to higher asset levels.
During the first quarter of 2010, we announced that the Board of
Directors of HSBC North America had approved a plan to cease all
future benefit accruals for legacy participants under the final
average pay formula components of the HSBC North America Pension
Plan (the Plan) effective January 1, 2011.
Future accruals to legacy participants under the Plan will
thereafter be provided under the cash balance based formula
which is now used to calculate benefits for employees hired
after December 31, 1996. Furthermore, all future benefit
accruals under the Supplemental Retirement Income Plan will also
cease effective January 1, 2011.
The aforementioned changes to the Plan have been accounted for
as a negative plan amendment and, therefore, the reduction in
our share of HSBC North Americas projected benefit
obligation as a result of this decision will be amortized to net
periodic pension cost over future service periods of the
affected employees. The changes to the Supplemental Retirement
Income Plan have been accounted for as a plan curtailment, which
resulted in no significant immediate recognition of income or
expense.
Components of the net periodic benefit cost for our
postretirement benefits other than pensions are as follows:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Service cost benefits earned during the period
|
|
$
|
-
|
|
|
$
|
-
|
|
Interest cost
|
|
|
1
|
|
|
|
1
|
|
Recognized losses
|
|
|
-
|
|
|
|
1
|
|
Transition amount amortization
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
Net periodic postretirement benefit cost
|
|
$
|
1
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
34
HSBC USA Inc.
13. 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 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:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
441
|
|
|
$
|
362
|
|
Interest bearing deposits with banks
|
|
|
196
|
|
|
|
198
|
|
Federal funds sold and securities purchased under resale
agreements
|
|
|
459
|
|
|
|
294
|
|
Trading
assets(1)
|
|
|
13,288
|
|
|
|
12,811
|
|
Loans
|
|
|
1,552
|
|
|
|
1,476
|
|
Other
|
|
|
593
|
|
|
|
852
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
16,529
|
|
|
$
|
15,993
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
16,581
|
|
|
$
|
9,519
|
|
Trading
liabilities(1)
|
|
|
16,026
|
|
|
|
16,848
|
|
Short-term borrowings
|
|
|
1,440
|
|
|
|
446
|
|
Other
|
|
|
1,415
|
|
|
|
1,677
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
35,462
|
|
|
$
|
28,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Trading assets and liabilities
exclude the impact of netting which allow the offsetting of
amounts relating to certain contracts if certain conditions are
met.
|
35
HSBC USA Inc.
|
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Income/(Expense):
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
36
|
|
|
$
|
47
|
|
Interest expense
|
|
|
10
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss)
|
|
$
|
26
|
|
|
$
|
40
|
|
|
|
|
|
|
|
|
|
|
HSBC affiliate income:
|
|
|
|
|
|
|
|
|
Fees and commissions:
|
|
|
|
|
|
|
|
|
HSBC Finance
|
|
$
|
1
|
|
|
$
|
3
|
|
HSBC Markets (USA) Inc. (HMUS)
|
|
|
3
|
|
|
|
2
|
|
Other HSBC affiliates
|
|
|
22
|
|
|
|
11
|
|
Fees on transfers of refund anticipation loans to HSBC Finance
|
|
|
4
|
|
|
|
10
|
|
Other HSBC affiliates income
|
|
|
6
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
Total affiliate income
|
|
$
|
36
|
|
|
$
|
32
|
|
|
|
|
|
|
|
|
|
|
Support services from HSBC affiliates:
|
|
|
|
|
|
|
|
|
HSBC Finance
|
|
$
|
224
|
|
|
$
|
189
|
|
HMUS
|
|
|
75
|
|
|
|
71
|
|
HSBC Technology & Services (USA) Inc.
(HTSU)
|
|
|
172
|
|
|
|
111
|
|
Other HSBC affiliates
|
|
|
47
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
Total support services from HSBC affiliates
|
|
$
|
518
|
|
|
$
|
423
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation expense with HSBC
|
|
$
|
11
|
|
|
$
|
18
|
|
|
|
|
|
|
|
|
|
|
Transactions
Conducted with HSBC Finance Corporation
|
|
|
|
|
In January 2009, we purchased the GM and UP Portfolios from HSBC
Finance, with an outstanding principal balance of
$12.4 billion at the time of sale, at a total net premium
of $113 million. Premiums paid are amortized to interest
income over the estimated life of the receivables purchased.
HSBC Finance retained the customer account relationships
associated with these credit card portfolios. On a daily basis
we purchase all new credit card loan originations for the GM and
UP Portfolios from HSBC Finance. HSBC Finance continues to
service these credit card loans for us for a fee. Information
regarding these loans is summarized in the table below.
|
|
|
|
In January 2009, we also purchased certain auto finance loans,
with an outstanding principal balance of $3.0 billion from
HSBC Finance at the time of sale, at a total net discount of
$226 million. Discounts are amortized to interest income
over the estimated life of the receivables purchased. In March
2010, we sold $379 million of auto finance receivables to
HSBC Finance including $353 million previously classified
as held for sale, a substantial majority of which were comprised
of the loans previously purchased from HSBC Finance, who
immediately sold them to a third party who also purchased HSBC
Finances auto finance servicing operations. These loans,
which were previously serviced by HSBC Finance, are now serviced
by this third party provider. Information regarding the loans
purchased from HSBC Finance which remain on our balance sheet at
March 31, 2010 is summarized in the table below.
|
|
|
|
In July 2004, we sold the account relationships associated with
$970 million of credit card receivables to HSBC Finance and
on a daily basis, we purchase new originations on these credit
card receivables. HSBC Finance continues to service these loans
for us for a fee. Information regarding these loans is
summarized in the table below.
|
36
HSBC USA Inc.
|
|
|
|
|
In December 2004, we purchased the private label credit card
receivable portfolio as well as private label commercial and
closed end loans from HSBC Finance. HSBC Finance retained the
customer account relationships and by agreement we purchase on a
daily basis substantially all new private label originations
from HSBC Finance. HSBC Finance continues to service these loans
for us for a fee. Information regarding these loans is
summarized in the table below.
|
|
|
|
In 2003 and 2004, we purchased approximately $3.7 billion
of residential mortgage loans from HSBC Finance. HSBC Finance
continues to service these loans for us for a fee. Information
regarding these loans is summarized in the table below.
|
The following table summarizes the private label card, private
label commercial and closed end loans, credit card (including
the GM and UP credit card portfolios), auto finance and real
estate secured loans serviced for us by HSBC Finance as well as
the daily loans purchased during the three months ended March
2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Label
|
|
|
Credit Cards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and
|
|
|
General
|
|
|
Union
|
|
|
|
|
|
Auto
|
|
|
Residential
|
|
|
|
|
|
|
Cards
|
|
|
Closed End
Loans(1)
|
|
|
Motors
|
|
|
Privilege
|
|
|
Other
|
|
|
Finance
|
|
|
Mortgage
|
|
|
Total
|
|
|
|
|
|
(in billions)
|
|
|
Loans serviced by HSBC Finance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
$
|
13.4
|
|
|
$
|
.5
|
|
|
$
|
4.7
|
|
|
$
|
4.9
|
|
|
$
|
1.9
|
|
|
$
|
-
|
|
|
$
|
1.7
|
|
|
$
|
27.1
|
|
December 31, 2009
|
|
|
15.0
|
|
|
|
.6
|
|
|
|
5.4
|
|
|
|
5.3
|
|
|
|
2.1
|
|
|
|
2.1
|
|
|
|
1.8
|
|
|
|
32.3
|
|
Total receivables purchased on a daily basis from HSBC
Finance during:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2010
|
|
|
3.0
|
|
|
|
-
|
|
|
|
3.1
|
|
|
|
.7
|
|
|
|
1.0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7.8
|
|
Three months ended March 31, 2009
|
|
|
3.6
|
|
|
|
-
|
|
|
|
3.4
|
|
|
|
.8
|
|
|
|
1.0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8.8
|
|
|
|
|
(1) |
|
Private label commercial are
included in other commercial loans and private label closed end
loans are included in other consumer loans in Note 4,
Loans.
|
Fees paid for servicing these loan portfolios totaled
$164 million and $182 million during the three months
ended March 31, 2010 and 2009, respectively.
|
|
|
|
|
The GM and UP credit card receivables as well as the private
label credit card receivables that are purchased from HSBC
Finance 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
adjusting 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.
|
|
|
|
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 Finance 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 months ended March 31, 2010, we paid $1 million
for services we received from HSBC Finance and received
$2 million for services we had provided.
|
|
|
|
In the second quarter of 2008, HSBC Finance launched a new
program with HSBC Bank USA to sell loans originated in
accordance with the Federal Home Loan Mortgage
Corporations (Freddie Mac) underwriting
criteria to HSBC Bank USA who then sells them to Freddie Mac
under its existing Freddie Mac program. During the three months
ended 2009, $51 million of real estate secured loans were
purchased by HSBC Bank USA under this program. This program was
discontinued in February 2009 as a result of the decision to
discontinue new receivable originations in HSBC Finances
Consumer Lending business.
|
37
HSBC USA Inc.
|
|
|
|
|
Support services from HSBC affiliates include charges by HSBC
Finance under various service level agreements for loan
origination and servicing, including the servicing of the
portfolios previously discussed and beginning in 2010, the
servicing of certain tax refund anticipation loans, as well as
other operational and administrative support. Fees paid for
these services totaled $224 million and $189 million
during the three months ended March 31, 2010 and 2009,
respectively.
|
|
|
|
Our wholly-owned subsidiaries, HSBC Bank USA and HSBC
Trust Company (Delaware), N.A. (HTCD), are the
originating lenders on behalf of HSBC Finance for a federal
income tax refund anticipation loan program for clients of third
party tax preparers which are managed by HSBC Finance. By
agreement, HSBC Bank USA and HTCD process applications, fund and
subsequently transfer a portion of these loans to HSBC Finance.
Prior to 2010, all loans were transferred to HSBC Finance.
Beginning in 2010, we began keeping a portion of these loans on
our balance sheet and earn a fee. The loans we keep are
transferred to HSBC Finance at par only upon reaching a defined
delinquency status. We pay HSBC Finance a fee to service the
loans we retain on our balance sheet and to assume the credit
risk associated with these receivables. HSBC Bank USA and HTCD
originated approximately $9.3 billion and $9.0 billion
of loans during the three months ended March 31, 2010 and
2009, respectively, of which $3.1 billion and
$9.0 billion, respectively, were transferred to HSBC
Finance during these periods. This resulted in fees of
$4 million and $10 million during the three months
ended March 31, 2010 and 2009, respectively. Fees earned on
the loans retained on balance sheet and fees paid to HSBC
Finance totaled $62 million and $56 million,
respectively, during the three months ended March 31, 2010.
|
|
|
|
Certain of our consolidated subsidiaries have revolving lines of
credit totaling $1.0 billion with HSBC Finance. There were
no balances outstanding under any of these lines of credit at
March 31, 2010 and December 31, 2009.
|
|
|
|
We extended a secured $1.5 billion uncommitted 364 day
credit facility to HSBC Finance in December 2009. There were no
balances outstanding at March 31, 2010 and
December 31, 2009.
|
|
|
|
We extended a $1.0 billion committed unsecured 364 day
credit facility to HSBC Bank Nevada, a subsidiary of HSBC
Finance, in December 2009. There were no balances outstanding at
March 31, 2010 and December 31, 2009.
|
|
|
|
We service a portfolio of residential mortgage loans owned by
HSBC Finance with an outstanding principal balance of
$1.4 billion and $1.5 billion at March 31, 2010
and December 31, 2009, respectively. The related servicing
fee income was $.3 million and $2 million during the
three months ended March 31, 2010 and 2009, respectively,
which is included in residential mortgage banking revenue in the
consolidated statement of income (loss).
|
Transactions
Conducted with HMUS
|
|
|
|
|
We utilize HSBC Securities (USA) Inc. (HSI), a
subsidiary of HMUS, for broker dealer, debt and preferred stock
underwriting, customer referrals, loan syndication and other
treasury and traded markets related services, pursuant to
service level agreements. Fees charged by HSI for broker dealer,
loan syndication services, treasury and traded markets related
services are included in support services from HSBC affiliates.
Debt underwriting fees charged by HSI are deferred as a
reduction of long-term debt and amortized to interest expense
over the life of the related debt. Preferred stock issuance
costs charged by HSI are recorded as a reduction of capital
surplus. Customer referral fees paid to HSI are netted against
customer fee income, which is included in other fees and
commissions.
|
|
|
|
We have extended loans and lines, some of them uncommitted, to
HMUS and its subsidiaries in the amount of $4.1 billion, of
which $1.0 billion was outstanding at March 31, 2010
and December 31, 2009. Interest income on these loans and
lines totaled $5 million and $11 million during the
three months ended March 31, 2010 and 2009, respectively.
|
38
HSBC USA Inc.
Other
Transactions with HSBC Affiliates
|
|
|
|
|
HSBC North America extended a $1.0 billion senior note to
us in August 2009. This is a five year floating rate note which
matures on August 28, 2014 with interest due quarterly
beginning in November 2009.
|
|
|
|
In March 2009, we sold an equity investment in HSBC Private Bank
(Suisse) SA to another HSBC affiliate for cash, resulting in a
gain of $33 million in the first quarter of 2009.
|
|
|
|
We have an unused line of credit with HSBC Bank plc of
$2.5 billion at March 31, 2010 and December 31,
2009.
|
|
|
|
We have an unused line of credit with HSBC North America Inc.
(HNAI) of $150 million at March 31, 2010
and December 31, 2009.
|
|
|
|
We have extended loans and lines of credit to various other HSBC
affiliates totaling $1.4 billion, of which
$376 million and $527 million was outstanding at
March 31, 2010 and December 31, 2009, respectively.
Interest income on these lines totaled $3 million during
the three months ended March 31, 2010 and 2009.
|
|
|
|
Historically, we have provided support to several HSBC affiliate
sponsored asset backed commercial paper (ABCP)
conduits by purchasing
A-1/P-1
rated commercial paper issued by them. At March 31, 2010 we
held $30 million of commercial paper issued by an HSBC
affiliate sponsored asset backed commercial paper conduit. At
December 31, 2009, no ABCP was held.
|
|
|
|
We routinely enter into derivative transactions with HSBC
Finance and other HSBC affiliates as part of a global HSBC
strategy to offset interest rate or other market risks
associated with debt issues and derivative contracts with
unaffiliated third parties. The notional value of derivative
contracts related to these contracts was approximately
$705.6 billion and $673.3 billion at March 31,
2010 and December 31, 2009, respectively. The net credit
exposure (defined as the recorded fair value of derivative
receivables) related to the contracts was approximately
$13.3 billion and $12.8 billion at March 31, 2010
and December 31, 2009, respectively. Our Global Banking and
Markets business accounts for these transactions on a mark to
market basis, with the change in value of contracts with HSBC
affiliates substantially offset by the change in value of
related contracts entered into with unaffiliated third parties.
|
|
|
|
In December 2008, HSBC Bank USA entered into derivative
transactions with another HSBC affiliate to offset the risk
associated with the contingent loss trigger options
embedded in certain leveraged super senior (LSS) tranched credit
default swaps. These transactions are expected to significantly
reduce income volatility for HSBC Bank USA by transferring the
volatility to the affiliate. The recorded fair value of
derivative assets related to these derivative transactions was
approximately $43 million and $70 million at
March 31, 2010 and December 31, 2009, respectively.
|
|
|
|
Technology and some centralized operational services including
human resources, finance, treasury, corporate affairs,
compliance, legal, tax and other shared services in North
America are centralized within HTSU. Technology related assets
and software purchased are generally purchased and owned by
HTSU. HTSU also provides certain item processing and statement
processing activities which are included in Support services
from HSBC affiliates in the consolidated statement of income
(loss).
|
|
|
|
Our domestic employees participate in a defined benefit pension
plan sponsored by HSBC North America. Additional information
regarding pensions is provided in Note 12, Pension
and Other Post-retirement Benefits.
|
|
|
|
Employees participate in one or more stock compensation plans
sponsored by HSBC. Our share of the expense of these plans on a
pre-tax basis was $11 million and $18 million during
the three months ended March 31, 2010 and 2009,
respectively.
|
|
|
|
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 $7 million during the
three months ended March 31, 2010 are included as a
component of Support services from HSBC affiliates in the table
above. Billing for these services was processed by HTSU.
|
39
HSBC USA Inc.
14. Business
Segments
We have five distinct segments that we utilize for management
reporting and analysis purposes, which are generally based upon
customer groupings, as well as products and services offered.
Net interest income of each segment represents the difference
between actual interest earned on assets and interest paid on
liabilities of the segment, adjusted for a funding charge or
credit. Segments are charged a cost to fund assets (e.g.
customer loans) and receive a funding credit for funds provided
(e.g. customer deposits) based on equivalent market rates. The
objective of these charges/credits is to transfer interest rate
risk from the segments to one centralized unit in Global Banking
and Markets and more appropriately reflect the profitability of
segments.
Certain other revenue and operating expense amounts are also
apportioned among the business segments based upon the benefits
derived from this activity or the relationship of this activity
to other segment activity. These inter-segment transactions are
accounted for as if they were with third parties.
Our segment results are presented under International Financial
Reporting Standards (IFRSs) (a
non-U.S. GAAP
financial measure) as operating results are monitored and
reviewed, trends are evaluated and decisions about allocating
resources, such as employees are made almost exclusively on an
IFRSs basis since we report results to our parent, HSBC in
accordance with its reporting basis, IFRSs. We continue to
monitor capital adequacy, establish dividend policy and report
to regulatory agencies on a U.S. GAAP legal entity basis.
Reconciliation of our IFRS Management Basis segment results to
the U.S. GAAP consolidated totals are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IFRSs Consolidated Amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3)
|
|
|
(4)
|
|
|
U.S. GAAP
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking and
|
|
|
|
|
|
|
|
|
Adjustments/
|
|
|
|
|
|
IFRSs
|
|
|
IFRSs
|
|
|
Consolidated
|
|
|
|
PFS
|
|
|
CF
|
|
|
CMB
|
|
|
Markets
|
|
|
PB
|
|
|
Other
|
|
|
Reconciling Items
|
|
|
Total
|
|
|
Adjustments
|
|
|
Reclassifications
|
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
241
|
|
|
$
|
523
|
|
|
$
|
188
|
|
|
$
|
142
|
|
|
$
|
46
|
|
|
$
|
(9
|
)
|
|
$
|
(8
|
)
|
|
$
|
1,123
|
|
|
$
|
59
|
|
|
$
|
18
|
|
|
$
|
1,200
|
|
Other operating income
|
|
|
48
|
|
|
|
18
|
|
|
|
154
|
|
|
|
437
|
|
|
|
35
|
|
|
|
12
|
|
|
|
8
|
|
|
|
712
|
|
|
|
27
|
|
|
|
212
|
|
|
|
951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income (loss)
|
|
|
289
|
|
|
|
541
|
|
|
|
342
|
|
|
|
579
|
|
|
|
81
|
|
|
|
3
|
|
|
|
-
|
|
|
|
1,835
|
|
|
|
86
|
|
|
|
230
|
|
|
|
2,151
|
|
Loan impairment
charges(2)
|
|
|
(3
|
)
|
|
|
210
|
|
|
|
1
|
|
|
|
(76
|
)
|
|
|
(11
|
)
|
|
|
2
|
|
|
|
-
|
|
|
|
123
|
|
|
|
100
|
|
|
|
(12
|
)
|
|
|
211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
292
|
|
|
|
331
|
|
|
|
341
|
|
|
|
655
|
|
|
|
92
|
|
|
|
1
|
|
|
|
-
|
|
|
|
1,712
|
|
|
|
(14
|
)
|
|
|
242
|
|
|
|
1,940
|
|
Operating
expenses(1)
|
|
|
272
|
|
|
|
28
|
|
|
|
150
|
|
|
|
209
|
|
|
|
55
|
|
|
|
15
|
|
|
|
-
|
|
|
|
729
|
|
|
|
95
|
|
|
|
242
|
|
|
|
1,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax expense
|
|
$
|
20
|
|
|
$
|
303
|
|
|
$
|
191
|
|
|
$
|
446
|
|
|
$
|
37
|
|
|
$
|
(14
|
)
|
|
$
|
-
|
|
|
$
|
983
|
|
|
$
|
(109
|
)
|
|
$
|
-
|
|
|
$
|
874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at end of period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
21,442
|
|
|
$
|
27,150
|
|
|
$
|
15,958
|
|
|
$
|
170,338
|
|
|
$
|
4,859
|
|
|
$
|
15
|
|
|
$
|
-
|
|
|
$
|
239,762
|
|
|
$
|
(52,674
|
)
|
|
$
|
(40
|
)
|
|
$
|
187,048
|
|
Total loans, net
|
|
|
16,506
|
|
|
|
25,240
|
|
|
|
14,312
|
|
|
|
18,538
|
|
|
|
4,162
|
|
|
|
-
|
|
|
|
-
|
|
|
|
78,758
|
|
|
|
(2,175
|
)
|
|
|
(4,509
|
)
|
|
|
72,074
|
|
Goodwill
|
|
|
876
|
|
|
|
-
|
|
|
|
368
|
|
|
|
497
|
|
|
|
326
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,067
|
|
|
|
580
|
|
|
|
-
|
|
|
|
2,647
|
|
Total deposits
|
|
|
49,182
|
|
|
|
91
|
|
|
|
23,097
|
|
|
|
30,719
|
|
|
|
10,990
|
|
|
|
-
|
|
|
|
-
|
|
|
|
114,079
|
|
|
|
(2,581
|
)
|
|
|
13,313
|
|
|
|
124,811
|
|
Three months ended March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
187
|
|
|
$
|
529
|
|
|
$
|
176
|
|
|
$
|
232
|
|
|
$
|
42
|
|
|
$
|
1
|
|
|
$
|
(11
|
)
|
|
$
|
1,156
|
|
|
$
|
102
|
|
|
$
|
90
|
|
|
$
|
1,348
|
|
Other operating income
|
|
|
40
|
|
|
|
81
|
|
|
|
81
|
|
|
|
221
|
|
|
|
33
|
|
|
|
156
|
|
|
|
11
|
|
|
|
623
|
|
|
|
99
|
|
|
|
28
|
|
|
|
750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income (loss)
|
|
|
227
|
|
|
|
610
|
|
|
|
257
|
|
|
|
453
|
|
|
|
75
|
|
|
|
157
|
|
|
|
-
|
|
|
|
1,779
|
|
|
|
201
|
|
|
|
118
|
|
|
|
2,098
|
|
Loan impairment
charges(2)
|
|
|
200
|
|
|
|
554
|
|
|
|
81
|
|
|
|
229
|
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
1,061
|
|
|
|
214
|
|
|
|
(101
|
)
|
|
|
1,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
56
|
|
|
|
176
|
|
|
|
224
|
|
|
|
78
|
|
|
|
157
|
|
|
|
-
|
|
|
|
718
|
|
|
|
(13
|
)
|
|
|
219
|
|
|
|
924
|
|
Operating
expenses(1)
|
|
|
296
|
|
|
|
14
|
|
|
|
154
|
|
|
|
199
|
|
|
|
59
|
|
|
|
13
|
|
|
|
-
|
|
|
|
735
|
|
|
|
18
|
|
|
|
219
|
|
|
|
972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax expense
|
|
$
|
(269
|
)
|
|
$
|
42
|
|
|
$
|
22
|
|
|
$
|
25
|
|
|
$
|
19
|
|
|
$
|
144
|
|
|
$
|
-
|
|
|
$
|
(17
|
)
|
|
$
|
(31
|
)
|
|
$
|
-
|
|
|
$
|
(48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at end of period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
25,747
|
|
|
$
|
32,897
|
|
|
$
|
18,830
|
|
|
$
|
230,214
|
|
|
$
|
4,890
|
|
|
$
|
111
|
|
|
$
|
-
|
|
|
$
|
312,689
|
|
|
$
|
(129,683
|
)
|
|
$
|
(1,237
|
)
|
|
$
|
181,769
|
|
Total loans, net
|
|
|
20,674
|
|
|
|
31,240
|
|
|
|
17,331
|
|
|
|
39,171
|
|
|
|
4,080
|
|
|
|
-
|
|
|
|
-
|
|
|
|
112,496
|
|
|
|
(5,523
|
)
|
|
|
(21,896
|
)
|
|
|
85,077
|
|
Goodwill
|
|
|
876
|
|
|
|
-
|
|
|
|
368
|
|
|
|
497
|
|
|
|
326
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,067
|
|
|
|
580
|
|
|
|
-
|
|
|
|
2,647
|
|
Total deposits
|
|
|
47,525
|
|
|
|
36
|
|
|
|
21,018
|
|
|
|
35,247
|
|
|
|
11,486
|
|
|
|
2
|
|
|
|
-
|
|
|
|
115,314
|
|
|
|
(5,343
|
)
|
|
|
5,359
|
|
|
|
115,330
|
|
|
|
|
(1) |
|
Expenses for the segments include
fully apportioned corporate overhead expenses.
|
|
(2) |
|
The provision assigned to the
segments is based on the segments net charge-offs and the
change in allowance for credit losses.
|
|
(3) |
|
IFRSs Adjustments consist of the
accounting differences between U.S. GAAP and IFRSs which have
been described more fully below.
|
|
(4) |
|
Represents differences in balance
sheet and income statement presentation between IFRSs and U.S.
GAAP.
|
40
HSBC USA Inc.
Further discussion of the differences between IFRSs and
U.S. GAAP are presented in Item 2,
Managements Discussion and Analysis of Financial
Condition and Results of Operations of this
Form 10-Q
under the caption Basis of Reporting. A summary of
the significant differences between U.S. GAAP and IFRSs as
they impact our results are presented below:
Net
interest income
Deferred loan origination costs and fees
Certain loan fees and incremental direct loan costs, which would
not have been incurred but for the origination of loans, are
deferred and amortized to earnings over the life of the loan
under IFRSs. Certain loan fees and direct incremental loan
origination costs, including internal costs directly
attributable to the origination of loans in addition to direct
salaries, are deferred and amortized to earnings under
U.S. GAAP.
Loan origination deferrals under IFRSs are more stringent and
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.
Under IFRSs, net interest income includes the interest element
for derivatives which corresponds to debt designated at fair
value. For U.S. GAAP, this is included in gain on financial
instruments designated at fair value and related derivatives
which is a component of other revenues (losses).
Other
operating income (Total other revenues (losses))
Derivatives Effective January 1, 2008,
U.S. GAAP removed the observability requirement of
valuation inputs to recognize the difference between transaction
price and fair value as profit at inception in the consolidated
statement of (loss) income. Under IFRSs, recognition is
permissible only if the inputs used in calculating fair value
are based on observable inputs. If the inputs are not
observable, profit and loss is deferred and is recognized:
(1) over the period of contract, (2) when the data
becomes observable, or (3) when the contract is settled.
This causes the net income under U.S. GAAP to be different
than under IFRSs.
Unquoted equity securities Under IFRSs,
equity securities which are not quoted on a recognized exchange,
but for which fair value can be reliably measured, are required
to be measured at fair value. Securities measured at fair value
under IFRSs are classified as either
available-for-sale
securities, with changes in fair value recognized in
shareholders equity, or as trading securities, with
changes in fair value recognized in income. Under
U.S. GAAP, equity securities that are not quoted on a
recognized exchange are not considered to have a readily
determinable fair value and are required to be measured at cost,
less any provisions for known impairment, and classified in
other assets.
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 market
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 net interest income
on trading. Under U.S. GAAP, the income and expenses
related to receivables held for sale are reported similarly to
loans held for investment.
For loans 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
measurement criteria. Accordingly, for IFRSs purposes such loans
continue to be accounted for in accordance with IAS 39,
Financial Instruments: Recognition and Measurement
(IAS 39), with any gain or loss recorded at the time
of sale.
U.S. GAAP requires loans that management intends to sell to
be transferred to a held for sale category at the lower of
amortized cost or fair value. Under U.S. GAAP, the initial
component of the lower of cost or fair value adjustment related
to credit risk is recorded in the consolidated statement of
income (loss) as provision for credit losses while the component
related to interest rates and liquidity factors is reported in
the consolidated statement of income (loss) in other revenues
(losses).
41
HSBC USA Inc.
Reclassification of financial assets Certain
securities were reclassified from trading assets to
loans and receivables under IFRSs as of July 1,
2008 pursuant to an amendment to IAS 39 and are no longer marked
to market. In November 2008, additional securities were
similarly transferred to loans and receivables. These securities
continue to be classified as trading assets under
U.S. GAAP.
Additionally, certain Leverage Acquisition Finance
(LAF) loans were classified as Trading
Assets for IFRSs and to be consistent, an irrevocable fair
value option was elected on these loans under U.S. GAAP on
January 1, 2008. These loans were reclassified to
loans and advances as of July 1, 2008 pursuant
to the IAS 39 amendment discussed above. Under U.S. GAAP,
these loans are classified as held for sale and
carried at fair value due to the irrevocable nature of the fair
value option.
Servicing assets Under IAS 38, servicing
assets are initially recorded on the balance sheet at cost and
amortized over the projected life of the assets. Servicing
assets are periodically tested for impairment with impairment
adjustments charged against current earnings. Under
U.S. GAAP, servicing assets are initially recorded on the
balance sheet at fair value. Subsequent adjustments to fair
value are generally reflected in current period earnings.
Securities Effective January 1, 2009
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
accumulated other comprehensive income provided we have
concluded we do not intend to sell the security and it is
more-likely-than-not that we will not have to sell the security
prior to recovery. Under IFRSs, there is no bifurcation of
other-than temporary impairment and the entire portion is
recognized in earnings. Also under IFRSs, recoveries in
other-than-temporary
impairment are recognized immediately in earnings while under
U.S. GAAP, they are amortized to income over the remaining
life of the security. There are also other less significant
differences in measuring
other-than-temporary
impairment under IFRSs versus U.S. GAAP.
Under IFRSs, securities include HSBC shares held for stock plans
at fair value. These shares held for stock plans are recorded at
fair value through other comprehensive income and subsequently
recognized in profit and loss as the shares vest. If it is
determined these shares have become impaired, the fair value
loss is recognized in profit and loss and any fair value loss
recorded in other comprehensive income is reversed. There is no
similar requirement under U.S. GAAP.
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 incorporation of the time value of money relating to
recovery estimates. Also under IFRSs, future recoveries on
charged-off loans 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. Interest is recorded based on
collectability under IFRSs.
As discussed above, under U.S. GAAP, the credit risk
component of the initial lower of cost or fair value adjustment
related to the transfer of receivables to held for sale is
recorded in the consolidated statement of income (loss) as
provision for credit losses. There is no similar requirement
under IFRSs.
Operating
expenses
Pension costs Costs under U.S. GAAP are
higher than under IFRSs as a result of the amortization of the
amount by which actuarial losses exceed gains 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 US GAAP, these changes were considered to be
a negative plan amendment which resulted in no immediate income
recognition.
Property Under IFRSs, the value of property
held for own use reflects revaluation surpluses recorded prior
to January 1, 2004. Consequently, the values of tangible
fixed assets and shareholders equity are lower under
U.S. GAAP than under IFRSs. There is a correspondingly
lower depreciation charge and higher net income as well
42
HSBC USA Inc.
as higher gains (or smaller losses) on the disposal of fixed
assets under U.S. GAAP. For investment properties, net
income under U.S. GAAP does not reflect the unrealized gain
or loss recorded under IFRSs for the period.
Assets
Derivatives Under U.S. GAAP, derivative
receivables and payables with the same counterparty may be
reported on a net basis in the balance sheet when there is an
executed International Swaps and Derivatives Association, Inc.
(ISDA) Master Netting Arrangement. In addition, under
U.S. GAAP, fair value amounts recognized for the obligation
to return cash collateral received or the right to reclaim cash
collateral paid are offset against the fair value of derivative
instruments. Under IFRSs, these agreements do not necessarily
meet the requirements for offset, and therefore such derivative
receivables and payables are presented gross on the balance
sheet.
Goodwill IFRSs and U.S. GAAP require
goodwill to be tested for impairment at least annually, or more
frequently if circumstances indicate that goodwill may be
impaired. For IFRSs, goodwill was amortized until 2005, however
goodwill was amortized under U.S. GAAP until 2002, which
resulted in a lower carrying amount of goodwill under IFRSs.
Capital amounts and ratios of HSBC USA Inc. and HSBC Bank USA,
calculated in accordance with current banking regulations, are
summarized in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Capital
|
|
|
Well-Capitalized
|
|
|
Actual
|
|
|
Capital
|
|
|
Well-Capitalized
|
|
|
Actual
|
|
|
|
Amount
|
|
|
Minimum
Ratio(1)
|
|
|
Ratio
|
|
|
Amount
|
|
|
Minimum
Ratio(1)
|
|
|
Ratio
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Total capital ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HSBC USA Inc.
|
|
$
|
19,695
|
|
|
|
10.00
|
%
|
|
|
15.49
|
%
|
|
$
|
19,087
|
|
|
|
10.00
|
%
|
|
|
14.19
|
%
|
HSBC Bank USA
|
|
|
20,158
|
|
|
|
10.00
|
|
|
|
16.11
|
|
|
|
19,532
|
|
|
|
10.00
|
|
|
|
14.81
|
|
Tier 1 capital ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HSBC USA Inc.
|
|
|
13,662
|
|
|
|
6.00
|
|
|
|
10.75(3
|
)
|
|
|
12,934
|
|
|
|
6.00
|
|
|
|
9.61
|
|
HSBC Bank USA
|
|
|
14,091
|
|
|
|
6.00
|
|
|
|
11.26(3
|
)
|
|
|
13,354
|
|
|
|
6.00
|
|
|
|
10.13
|
|
Tier 1 leverage ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HSBC USA Inc.
|
|
|
13,662
|
|
|
|
3.00
|
(2)
|
|
|
7.56
|
|
|
|
12,934
|
|
|
|
3.00
|
(2)
|
|
|
7.59
|
|
HSBC Bank USA
|
|
|
14,091
|
|
|
|
5.00
|
|
|
|
7.96
|
|
|
|
13,354
|
|
|
|
5.00
|
|
|
|
8.07
|
|
Risk weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HSBC USA Inc.
|
|
|
127,126(3
|
)
|
|
|
|
|
|
|
|
|
|
|
134,553
|
|
|
|
|
|
|
|
|
|
HSBC Bank USA
|
|
|
125,101(3
|
)
|
|
|
|
|
|
|
|
|
|
|
131,854
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
HSBC USA Inc. and HSBC Bank USA are
categorized as well-capitalized, as defined by their
principal regulators. To be categorized as well-capitalized
under regulatory guidelines, a banking institution must have the
minimum ratios reflected in the above table, and must not be
subject to a directive, order, or written agreement to meet and
maintain specific capital levels.
|
|
(2) |
|
There is no Tier 1 leverage
ratio component in the definition of a well-capitalized bank
holding company. The ratio shown is the minimum required ratio.
|
|
(3) |
|
Effective January 1, 2010, we
began consolidating a commercial paper conduit managed by HSBC
Bank USA as a result of adopting new guidance related to the
consolidation of variable interest entities as more fully
discussed in Note 16, Variable Interest
Entities. Since we elected to adopt the transition
mechanism for Risk Based Capital Requirements, there is no
change to the risk weighted assets or the Tier 1 capital
ratios for the first two quarters of 2010. Had we fully
transitioned to the Risk Based Capital requirements at
March 31, 2010, our risk weighted assets would have been
higher by approximately $2 billion which would not have had
a significant impact to our Tier 1 capital ratio.
|
In the first quarter of 2010, we received no capital
contributions from our immediate parent, HNAI.
As part of the regulatory approvals with respect to the
aforementioned receivable purchases completed in January 2009,
HSBC Bank USA and HSBC made certain additional capital
commitments to ensure that HSBC Bank USA holds sufficient
capital with respect to the purchased receivables that are or
may become low-quality assets, as
43
HSBC USA Inc.
defined by the Federal Reserve Act. These capital requirements,
which require a risk-based capital charge of 100 percent
for each low-quality asset transferred or arising in
the purchased portfolios rather than the eight percent capital
charge applied to similar assets that are not part of the
transferred portfolios, are applied both for purposes of
satisfying the terms of the commitments and for purposes of
measuring and reporting HSBC Bank USAs risk-based capital
and related ratios. This treatment applies as long as the
low-quality assets are owned by an insured bank. During the
first quarter of 2010, HSBC Bank USA sold low-quality auto
finance loans with a net book value of approximately
$103 million to a non-bank subsidiary of HSBC USA Inc. to
reduce the capital requirement associated with these assets.
Capital ratios and amounts at March 31, 2010 and
December 31, 2009 in the table above reflect this reporting.
Regulatory guidelines impose certain restrictions that may limit
the inclusion of deferred tax assets in the computation of
regulatory capital. Continued losses, including losses
associated with FVO elections, coupled with bad debt provisions
that exceed charge-offs are creating additional deferred tax
assets, which could, from time to time, result in such
exclusion. We closely monitor the deferred tax assets for
potential limitations or exclusions. At March 31, 2010,
deferred tax assets of $119 million were excluded in the
computation of regulatory capital.
|
|
16.
|
Variable
Interest Entities
|
On January 1, 2010, we adopted new guidance issued by the
Financial Accounting Standards Board in June 2009 which amends
the accounting for the consolidation of variable interest
entities (VIEs). The new guidance changed the
approach for determining the primary beneficiary of a VIE from a
quantitative approach focusing on risk and reward to a
qualitative approach focusing on (a) the power to direct
the activities of the VIE and (b) the obligation to absorb
losses
and/or the
right to receive benefits that could be significant to the VIE.
The adoption of the new guidance has resulted in the
consolidation of one commercial paper conduit managed by HSBC
Bank USA as discussed more fully below. The impact of
consolidating this entity beginning on January 1, 2010
resulted in an increase to our assets and liabilities of
$3.5 billion and $3.8 billion, respectively, which
resulted in a $1 million increase to the opening balance of
retained earnings in common shareholders equity and a
$246 million reduction to the opening balance of other
comprehensive income in common shareholders equity. Since
we elected to adopt the transition mechanism for Risk Based
Capital requirements, there will be no change to the way we
calculate risk weighted assets against the Bryant Park
facilities for the first two quarters of 2010 and as a result,
there is also no change to Tier 1 capital ratios for the
first two quarters of 2010. Had we fully transitioned to the
Risk Based Capital requirements at March 31, 2010, our risk
weighted assets would have been higher by approximately
$2 billion which would not have had a significant impact to
our Tier 1 capital ratios. See asset-backed commercial
paper conduit portion of the table Consolidated
VIEs presented below for additional details of the
assets and liabilities relating to this newly consolidated
entity.
In the ordinary course of business, we have organized special
purpose entities (SPEs) primarily to structure
financial products to meet our clients investment needs
and to securitize financial assets held to meet our own funding
needs. For disclosure purposes, we aggregate SPEs based on the
purpose, risk characteristics and business activities of the
SPEs. Special purpose entities can be a VIE, which is an entity
that lacks sufficient equity investment at risk to finance its
activities without additional subordinated financial support or,
as a group, the holders of the equity investment at risk lack
either a) the power to direct the activities of an entity
that most significantly impacts the entitys economic
performance; b) the obligation to absorb the expected
losses of the entity, the right to receive the expected residual
returns of the entity, or both.
Variable Interest Entities We consolidate
VIEs in which we hold a controlling financial interest as
evidenced by the power to direct the activities of a VIE that
most significantly impact its economic performance and the
obligation to absorb losses of, or the right to receive benefits
from, the VIE that could be potentially significant to the VIE
and therefore are deemed to be the primary beneficiary. We take
into account our entire involvement in a VIE (explicit or
implicit) in identifying variable interests that individually or
in the aggregate could be significant enough to warrant our
designation as the primary beneficiary and hence require us to
consolidate the VIE or otherwise require us to make appropriate
disclosures. We consider our involvement to be significant where
we, among other things, (i) provide liquidity put options
or other liquidity facilities to support the VIEs debt
issuances;
44
HSBC USA Inc.
(ii) enter into derivative contracts to absorb the risks
and benefits from the VIE or from the assets held by the VIE;
(iii) provide a financial guarantee that covers assets held
or liabilities issued; (iv) design, organize and structure
the transaction; and (v) retain a financial or servicing
interest in the VIE.
We are required to evaluate whether to consolidate a VIE when we
first become involved and on an ongoing basis. In almost all
cases, a qualitative analysis of our involvement in the entity
provides sufficient evidence to determine whether we are the
primary beneficiary. In rare cases, a more detailed analysis to
quantify the extent of variability to be absorbed by each
variable interest holder is required to determine the primary
beneficiary.
Consolidated VIEs The following table summarizes
the assets and liabilities of our consolidated VIEs as of
March 31, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Consolidated
|
|
|
Consolidated
|
|
|
Consolidated
|
|
|
Consolidated
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
|
|
Liabilities
|
|
|
|
|
|
(in Millions)
|
|
|
Asset-backed commercial paper conduit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits with banks
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Held to maturity securities
|
|
|
1,247
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loans
|
|
|
1,523
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other assets
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Short-term borrowings
|
|
|
-
|
|
|
|
3,240
|
|
|
|
-
|
|
|
|
-
|
|
Other liabilities
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
2,773
|
|
|
|
3,241
|
|
|
|
-
|
|
|
|
-
|
|
Securitization vehicles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
14,427
|
|
|
|
-
|
|
|
|
16,292
|
|
|
|
-
|
|
Available for sale investments
|
|
|
1,004
|
|
|
|
-
|
|
|
|
1,138
|
|
|
|
-
|
|
Long-term debt
|
|
|
-
|
|
|
|
2,171
|
|
|
|
-
|
|
|
|
2,985
|
|
Other liabilities
|
|
|
-
|
|
|
|
796
|
|
|
|
-
|
|
|
|
1,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
15,431
|
|
|
|
2,967
|
|
|
|
17,430
|
|
|
|
4,268
|
|
Low income housing limited liability partnership:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
562
|
|
|
|
-
|
|
|
|
585
|
|
|
|
-
|
|
Long term debt
|
|
|
-
|
|
|
|
55
|
|
|
|
-
|
|
|
|
55
|
|
Other liabilities
|
|
|
-
|
|
|
|
126
|
|
|
|
-
|
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
562
|
|
|
|
181
|
|
|
|
585
|
|
|
|
190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,766
|
|
|
$
|
6,389
|
|
|
$
|
18,015
|
|
|
$
|
4,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-Backed Commercial Paper Conduit As discussed
in more detail below, we provide liquidity facilities to a
number of multi-seller and single-seller asset-backed commercial
paper conduits (ABCP conduits) sponsored by HSBC
affiliates and third parties. These conduits support the
financing needs of customers by facilitating the customers
access to commercial paper markets.
One of these commercial paper conduits otherwise known as Bryant
Park Funding LLC (Bryant Park), was sponsored,
organized and managed to facilitate clients in securing
asset-backed financing collateralized by diverse pools of loan
and lease receivables or investment securities. Bryant Park
funds the purchase of the eligible assets by issuing short-term
commercial paper notes to third party investors. One of our
affiliates provides a program wide letter of credit enhancement
(PWE) to support the creditworthiness of the
commercial paper issued up to a certain amount. We also entered
into a liquidity asset purchase agreement (LAPA), to
provide liquidity support for the commercial paper notes issued
to fund the asset purchases. Prior to the adoption of the new
VIE consolidation
45
HSBC USA Inc.
guidance, determination of the primary beneficiary was
predominantly based on a quantitative risk and reward analysis
and, because our affiliate held the PWE that absorbs (receives)
a majority of the expected losses (residual returns), the
affiliate was considered to be the primary beneficiary. However,
under the new guidance adopted January 1, 2010, we are
considered to be the primary beneficiary because we have the
power to direct the activities of the conduit that most
significantly impact its economic performance including
a) determining which eligible assets to acquire;
b) risk managing the portfolio held; and c) managing
the refinancing of commercial paper.
The liquidity facility we provide in the form of a LAPA can be
drawn upon by the conduit in the event it cannot issue
commercial paper notes or does not have sufficient funds
available to pay maturing commercial paper. Under the LAPA, we
are obligated, subject to certain conditions, to purchase the
eligible assets previously funded for an amount not to exceed
the face value of the commercial paper in order to provide the
conduit with funds to repay the maturing notes. As such, we are
exposed to the market risk and the credit risk of the underlying
assets held by Bryant Park only to the extent the liquidity
facility is drawn.
Securitization Vehicles We utilize entities that are
structured as trusts to securitize certain private label and
other credit card receivables where securitization provides an
attractive source of low cost funding. We transfer certain
credit card receivables to these trusts which in turn issue debt
instruments collateralized by the transferred receivables. As
our affiliate is the servicer of the assets of these trusts we
performed a detailed analysis and determined that we retain the
benefits and risks and are the primary beneficiary of the trusts
and, as a result, have historically consolidated the trusts.
At March 31, 2010 and December 31, 2009, the
consolidated assets of these trusts were $15.4 billion and
$17.4 billion, respectively and were reported in loans and
securities
available-for-sale.
Debt securities issued by these VIEs are reported as secured
financings in long-term debt. The assets of the consolidated
VIEs serve as collateral for the obligations of the VIEs. The
holders of the debt securities issued by these vehicles have no
recourse to our general credit.
Low Income Housing Limited Liability
Partnership During the third quarter of 2009, all low
income housing investments held by us were transferred to a
Limited Liability Partnership (LLP) in exchange for
debt and equity while a non-affiliated third party invested cash
for an equity interest that is mandatorily redeemable at a
future date. The LLP was created in order to ensure the
utilization of future tax benefits from these low income housing
tax projects. The LLP was deemed to be a VIE as it does not have
sufficient equity investment at risk to finance its activities.
Upon entering into this transaction, we concluded that we are
the primary beneficiary of the LLP due to the nature of our
continuing involvement and, as a result, consolidate the LLP and
report the equity interest issued to the third party investor as
other liabilities and the consolidated assets of the LLP in
other assets in our consolidated financial statements. The
investments held by the LLP represent equity investments in the
underlying low income housing partnerships for which the LLP
applies equity-method accounting. The LLP does not consolidate
the underlying partnerships because it does not have the power
to direct the activities of the partnerships that most
significantly impact the economic performance of the
partnerships.
Unconsolidated VIEs We also have variable
interests with other VIEs that were not consolidated at
March 31, 2010 and December 31, 2009 because we were
not the primary beneficiary. The following table provides
additional information on those unconsolidated VIEs, the
variable interests held by us and our maximum exposure to loss
arising from our involvements in those VIEs as of March 31,
2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Variable Interests
|
|
|
Variable Interests
|
|
|
Total Assets in
|
|
|
Maximum
|
|
|
Total Assets in
|
|
|
Maximum
|
|
|
|
Held Classified
|
|
|
Held Classified
|
|
|
Unconsolidated
|
|
|
Exposure
|
|
|
Unconsolidated
|
|
|
Exposure
|
|
|
|
as Assets
|
|
|
as Liabilities
|
|
|
VIEs
|
|
|
to Loss
|
|
|
VIEs
|
|
|
to Loss
|
|
|
|
|
|
(in millions)
|
|
|
Asset-backed commercial paper conduits
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
13,366
|
|
|
$
|
2,011
|
|
|
$
|
10,485
|
|
|
$
|
5,050
|
|
Structured note vehicles
|
|
|
161
|
|
|
|
112
|
|
|
|
7,213
|
|
|
|
453
|
|
|
|
7,890
|
|
|
|
569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
161
|
|
|
$
|
112
|
|
|
$
|
20,579
|
|
|
$
|
2,464
|
|
|
$
|
18,375
|
|
|
$
|
5,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information on the types of variable interest entities with
which we are involved, the nature of our involvement and the
variable interests held in those entities is presented below.
46
HSBC USA Inc.
Asset-Backed Commercial Paper Conduits Separately
from the facility discussed above, we provide liquidity
facilities to a number of multi-seller and single-seller
asset-backed commercial paper conduits (ABCP
conduits) sponsored by HSBC affiliates and by third
parties. These conduits support the financing needs of customers
by facilitating the customers access to commercial paper
markets.
Customers sell financial assets, such as trade receivables, to
ABCP conduits, which fund the purchases by issuing short-term
highly-rated commercial paper collateralized by the assets
acquired. In a multi-seller conduit, any number of companies may
be originating and selling assets to the conduit whereas a
single-seller conduit acquires assets from a single company. We,
along with other financial institutions, provide liquidity
facilities to ABCP conduits in the form of lines of credit or
asset purchase commitments. Liquidity facilities provided to
multi-seller conduits support transactions associated with a
specific seller of assets to the conduit and we would only be
required to provide support in the event of certain triggers
associated with those transactions and assets. Liquidity
facilities provided to single-seller conduits are not identified
with specific transactions or assets and we would be required to
provide support upon occurrence of certain triggers that
generally affect the conduit as a whole. Our obligations are
generally pari passu with those of other institutions that also
provide liquidity support to the same conduit or for the same
transactions. We do not provide any program-wide credit
enhancements to ABCP conduits.
Each seller of assets to an ABCP conduit typically provides
collateral in the form of excess assets and therefore bears the
risk of first loss related to the specific assets transferred.
We do not transfer our own assets to the conduits. We have no
ownership interests in, perform no administrative duties for,
and do not service any of the assets held by the conduits. We
are not the primary beneficiary and do not consolidate any of
the ABCP conduits to which we provide liquidity facilities,
other than Bryant Park as discussed above. Credit risk related
to the liquidity facilities provided is managed by subjecting
them to our normal underwriting and risk management processes.
The $2.0 billion maximum exposure to loss presented in the
table above represents the maximum amount of loans and asset
purchases we could be required to fund under the liquidity
facilities. The maximum loss exposure is estimated assuming the
facilities are fully drawn and the underlying collateralized
assets are in default with zero recovery value. The reduction in
amounts outstanding since December 31, 2009 reflects the
consolidation of a previously unconsolidated commercial paper
conduit as a result of adopting new accounting guidance relating
to the consolidation of VIEs effective January 1,
2010, as more fully described above.
Structured Note Vehicles Our involvement in
structured note vehicles includes entering into derivative
transactions such as interest rate and currency swaps, and
investing in their debt instruments. With respect to several of
these VIEs, we hold variable interests in the form of total
return swaps entered into in connection with the transfer of
certain assets to the VIEs. In these transactions, we
transferred financial assets from our trading portfolio to the
VIEs and entered into total return swaps under which we receive
the total return on the transferred assets and pay a market rate
of return. The transfers of assets in these transactions do not
qualify as sales under the applicable accounting literature and
are accounted for as secured borrowings. Accordingly, the
transferred assets continue to be recognized as trading assets
on our balance sheet and the funds received are recorded as
liabilities in long-term debt. As of March 31, 2010, we
recorded approximately $146 million of trading assets and
$174 million of long-term liabilities on our balance sheet
as a result of failed sale accounting treatment for
certain transfers of financial assets. As of December 31,
2009, we recorded approximately $169 million of trading
assets and $205 million of long-term liabilities on our
balance sheet as a result of failed sale accounting
treatment. The financial assets and financial liabilities were
not legally ours and we have no control over the financial
assets which are restricted solely to satisfy the liability.
In addition to our variable interests, we also hold credit
default swaps with these structured note VIEs under which
we receive credit protection on specified reference assets in
exchange for the payment of a premium. Through these
derivatives, the VIEs assume the credit risk associated with the
reference assets which are then passed on to the holders of the
debt instruments they issue. Because they create rather than
absorb variability, the credit default swaps we hold are not
considered variable interests.
We record all investments in, and derivative contracts with,
unconsolidated structured note vehicles at fair value on our
consolidated balance sheet. Our maximum exposure to loss is
limited to the recorded amounts of these instruments.
47
HSBC USA Inc.
Beneficial Interests Issued by Third-party Sponsored
Securitization Entities We hold certain beneficial
interests issued by third-party sponsored securitization
entities which may be considered as variable interest entities.
The investments are transacted at arms-length and
decisions to invest are based on credit analysis on underlying
collateral assets or the issuer. We are a passive investor in
these issuers and do not have the power to direct the activities
of these issuers. As such, we do not consolidate these
securitization entities. Additionally, we do not have other
involvements in servicing or managing the collateral assets or
provide financial or liquidity support to these issuers that
potentially give rise to risk of loss exposure. These
investments are an integral part of the disclosure in
Note 3, Securities and Note 18, Fair
Value Measurements and therefore, were not disclosed in
this Note to avoid redundancy.
|
|
17.
|
Guarantee
Arrangements and Pledged Assets
|
As part of our normal operations, we enter into various
off-balance sheet guarantee arrangements with affiliates and
third parties. These arrangements arise principally in
connection with our lending and client intermediation activities
and include standby letters of credit and certain credit
derivative transactions. The contractual amounts of these
arrangements represent our maximum possible credit exposure in
the event that we are required to fulfill the maximum obligation
under the contractual terms of the guarantee.
The following table presents total carrying value and
contractual amounts of our major off-balance sheet guarantee
arrangements as of March 31, 2010 and December 31,
2009. Following the table is a description of the various
arrangements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Carrying
|
|
|
Notional/Maximum
|
|
|
Carrying
|
|
|
Notional/Maximum
|
|
|
|
Value
|
|
|
Exposure to Loss
|
|
|
Value
|
|
|
Exposure to Loss
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Credit
derivatives(1),(2)
|
|
$
|
(3,845
|
)
|
|
$
|
394,459
|
|
|
$
|
(5,751
|
)
|
|
$
|
387,225
|
|
Financial standby letters of credit, net of
participations(3),(4)
|
|
|
-
|
|
|
|
4,638
|
|
|
|
-
|
|
|
|
4,545
|
|
Performance (non-financial) guarantees
|
|
|
-
|
|
|
|
3,059
|
|
|
|
-
|
|
|
|
3,100
|
|
Liquidity asset purchase
agreements(4)
|
|
|
-
|
|
|
|
2,011
|
|
|
|
-
|
|
|
|
5,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(3,845
|
)
|
|
$
|
404,167
|
|
|
$
|
(5,751
|
)
|
|
$
|
399,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $56.9 billion and
$57.3 billion issued for the benefit of HSBC affiliates at
March 31, 2010 and December 31, 2009, respectively.
|
|
(2) |
|
For credit derivatives, the maximum
loss is represented by the notional amounts without
consideration of mitigating effects from collateral or recourse
arrangements.
|
|
(3) |
|
Includes $741 million and
$774 million issued for the benefit of HSBC affiliates at
March 31, 2010 and December 31, 2009, respectively.
|
|
(4) |
|
For standby letters of credit and
liquidity asset purchase agreements, maximum loss represents
losses to be recognized assuming the letter of credit and
liquidity facilities have been fully drawn and the obligors have
defaulted with zero recovery.
|
Credit-Risk
Related Guarantees:
Credit Derivatives Credit derivatives are financial
instruments that transfer the credit risk of a reference
obligation from the credit protection buyer to the credit
protection seller who is exposed to the credit risk without
buying the reference obligation. We sell credit protection on
underlying reference obligations (such as loans or securities)
by entering into credit derivatives, primarily in the form of
credit default swaps, with various institutions. We account for
all credit derivatives at fair value. Where we sell credit
protection to a counterparty that holds the reference
obligation, the arrangement is effectively a financial guarantee
on the reference obligation. Under a credit derivative contract,
the credit protection seller will reimburse the credit
protection buyer upon occurrence of a credit event (such as
bankruptcy, insolvency, restructuring or failure to meet payment
obligations when due) as defined in the derivative contract, in
return for a periodic premium. Upon occurrence of a credit
event, we will pay the counterparty the stated notional amount
of the derivative contract and receive the underlying reference
obligation.
48
HSBC USA Inc.
The recovery value of the reference obligation received could be
significantly lower than its notional principal amount when a
credit event occurs.
Certain derivative contracts are subject to master netting
arrangements and related collateral agreements. A party to a
derivative contract may demand that the counterparty post
additional collateral in the event its net exposure exceeds
certain predetermined limits and when the credit rating falls
below a certain grade. We set the collateral requirements by
counterparty such that the collateral covers various
transactions and products, and is not allocated to specific
individual contracts.
We manage our exposure to credit derivatives using a variety of
risk mitigation strategies where we enter into offsetting hedge
positions or transfer the economic risks, in part or in
entirety, to investors through the issuance of structured credit
products. We actively manage the credit and market risk exposure
in the credit derivative portfolios on a net basis and, as such,
retain no or a limited net sell protection position at any time.
The following table summarizes our net credit derivative
positions as of March 31, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Carrying (Fair)
|
|
|
|
|
|
Carrying (Fair)
|
|
|
|
|
|
|
Value
|
|
|
Notional
|
|
|
Value
|
|
|
Notional
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Sell-protection credit derivative positions
|
|
$
|
(3,845
|
)
|
|
$
|
394,459
|
|
|
$
|
(5,751
|
)
|
|
$
|
387,225
|
|
Buy-protection credit derivative positions
|
|
|
4,672
|
|
|
|
385,393
|
|
|
|
6,693
|
|
|
|
381,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net position
|
|
$
|
827
|
|
|
$
|
9,066
|
|
|
$
|
942
|
|
|
$
|
5,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby Letters of Credit A standby letter of credit
is issued to a third party for the benefit of a customer and is
a guarantee that the customer will perform or satisfy certain
obligations under a contract. It irrevocably obligates us to pay
a specified amount to the third party beneficiary if the
customer fails to perform the contractual obligation. We issue
two types of standby letters of credit: performance and
financial. A performance standby letter of credit is issued
where the customer is required to perform some nonfinancial
contractual obligation, such as the performance of a specific
act, whereas a financial standby letter of credit is issued
where the customers contractual obligation is of a
financial nature, such as the repayment of a loan or debt
instrument. As of March 31, 2010, the total amount of
outstanding financial standby letters of credit (net of
participations) and performance guarantees were
$4.6 billion and $3.1 billion, respectively. As of
December 31, 2009, the total amount of outstanding
financial standby letters of credit (net of participations) and
performance guarantees were $4.5 billion and
$3.1 billion, respectively.
The issuance of a standby letter of credit is subject to our
credit approval process and collateral requirements. We charge
fees for issuing letters of credit commensurate with the
customers credit evaluation and the nature of any
collateral. Included in other liabilities are deferred fees on
standby letters of credit, which represent the fair value of the
stand-ready obligation to perform under these guarantees,
amounting to $55 million and $48 million at
March 31, 2010 and December 31, 2009, respectively.
Also included in other liabilities is an allowance for credit
losses on unfunded standby letters of credit of $27 million
at March 31, 2010 and December 31, 2009.
49
HSBC USA Inc.
Below is a summary of the credit ratings of credit risk related
guarantees including the credit ratings of counterparties
against which we sold credit protection and financial standby
letters of credit as of March 31, 2010 as an indicative
proxy of payment risk:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Credit Ratings of the Obligors or the Transactions
|
|
|
|
Life
|
|
|
Investment
|
|
|
Non-Investment
|
|
|
|
|
Notional/Contractual Amounts
|
|
(in years)
|
|
|
Grade
|
|
|
Grade
|
|
|
Total
|
|
|
|
|
|
|
|
|
(dollars are in millions)
|
|
|
|
|
|
Sell-protection Credit
Derivatives(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single name CDS
|
|
|
3.29
|
|
|
$
|
154,769
|
|
|
$
|
67,399
|
|
|
$
|
222,168
|
|
Structured CDS
|
|
|
2.96
|
|
|
|
47,454
|
|
|
|
2,754
|
|
|
|
50,208
|
|
Index credit derivatives
|
|
|
3.41
|
|
|
|
105,674
|
|
|
|
3,632
|
|
|
|
109,306
|
|
Total return swaps
|
|
|
8.50
|
|
|
|
11,960
|
|
|
|
817
|
|
|
|
12,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
|
|
319,857
|
|
|
|
74,602
|
|
|
|
394,459
|
|
Standby Letters of
Credit(2)
|
|
|
1.2
|
|
|
|
7,351
|
|
|
|
346
|
|
|
|
7,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
327,208
|
|
|
$
|
74,948
|
|
|
$
|
402,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The credit ratings in the table
represent external credit ratings for classification as
investment grade and non-investment grade.
|
|
(2) |
|
External ratings for most of the
obligors are not available. Presented above are the internal
credit ratings which are developed using similar methodologies
and rating scale equivalent to external credit ratings for
purposes of classification as investment grade and
non-investment grade.
|
Our internal groupings are determined based on HSBCs risk
rating systems and processes which assign a credit grade based
on a scale which ranks the risk of loss from a customer as
either low risk, satisfactory risk, fair risk, watch,
substandard, doubtful or loss. The groupings are determined and
used for managing risk and determining level of credit exposure
appetite based on the customers operating performance,
liquidity, capital structure and debt service ability. In
addition, we also incorporate subjective judgments into the risk
rating process concerning such things as industry trends,
comparison of performance to industry peers and perceived
quality of management. We compare our internal risk ratings to
outside external rating agency benchmarks, where possible, at
the time of formal review and regularly monitor whether our risk
ratings are comparable to the external ratings benchmark data.
Written
Put Options, Non Credit-Risk Related Guarantees and Indemnity
Arrangements:
Liquidity Asset Purchase Agreements We provide
liquidity facilities to a number of multi-seller and
single-seller asset-backed commercial paper conduits sponsored
by affiliates and third parties. The conduits finance the
purchase of individual assets by issuing commercial paper to
third party investors. Each liquidity facility is transaction
specific and has a maximum limit. Pursuant to the liquidity
agreements, we are obligated, subject to certain limitations, to
purchase the eligible assets from the conduit at an amount not
to exceed the face value of the commercial paper in the event
the conduit is unable to refinance its commercial paper. A
liquidity asset purchase agreement is essentially a conditional
written put option issued to the conduit where the exercise
price is the face value of the commercial paper. As of
March 31, 2010 and December 31, 2009, we have issued
$2.0 billion and $5.1 billion, respectively, of
liquidity facilities to provide liquidity support to the
commercial paper issued by various conduits. The decline since
December 31, 2009 reflects our consolidation of the Bryant
Park commercial paper conduit effective January 1, 2010.
See Note 16, Variable Interest Entities for
further information.
Principal Protected Products We structure and sell
products that guarantee the return of principal to investors on
a future date. These structured products have various reference
assets and we are obligated to cover any shortfall between the
market value of the underlying reference portfolio and the
principal amount at maturity. We manage such shortfall risk by,
among other things, establishing structural and investment
constraints. Additionally, the structures require liquidation of
the underlying reference portfolio when certain pre-determined
triggers are breached and the proceeds from liquidation are
required to be invested in zero-coupon bonds that would generate
sufficient funds to repay the principal amount upon maturity. We
may be exposed to market (gap) risk at liquidation
50
HSBC USA Inc.
and, as such, may be required to make up the shortfall between
the liquidation proceeds and the purchase price of the zero
coupon bonds. These principal protected products are accounted
for on a fair value basis. The notional amounts of these
principal protected products were not material as of
March 31, 2010 and December 31, 2009. We have not made
any payment under the terms of these structured products and we
consider the probability of payments under these guarantees to
be remote.
Sale of Mortgage Loans We originate and sell
mortgage loans to government sponsored entities and provide
various representations and warranties related to, among other
things, the ownership of the loans, the validity of the liens,
the loan selection and origination process, and the compliance
to the origination criteria established by the agencies. In the
event of a breach of our representations and warranties, we may
be obligated to repurchase the loans with identified defects or
to indemnify the buyers. Our contractual obligation arises only
when the representations and warranties are breached. Our
estimated liability for obligations arising from the breach of
representations and warranties was $116 million and
$66 million as of March 31, 2010 and December 31,
2009, respectively. The increase from year-end was due to an
increase of $50 million in the reserve for potential
repurchase liability exposures related primarily to previously
originated mortgages through broker channels.
Visa Covered Litigations We are an equity member of
Visa Inc. (Visa). Prior to its initial public
offering (IPO) on March 19, 2008, Visa
completed a series of transactions to reorganize and restructure
its operations and to convert membership interests into equity
interests. Pursuant to the restructuring, we, along with all the
Class B shareholders, agreed to indemnify Visa for the
claims and obligations arising from certain specific covered
litigations. Class B shares are convertible into listed
Class A shares upon (i) settlement of the covered
litigations or (ii) the third anniversary of the IPO,
whichever is earlier. The indemnification is subject to the
accounting and disclosure requirements. Visa used a portion of
the IPO proceeds to establish a $3.0 billion escrow account
to fund future claims arising from those covered litigations
(the escrow was subsequently increased to $4.1 billion). In
July 2009, Visa exercised its rights to sell shares of existing
Class B shareholders in order to increase the escrow
account and announced that it had deposited an additional
$700 million into the escrow account. As a result, we
re-evaluated the contingent liability we have recorded relating
to this litigation and reduced our liability by
$8.6 million during 2009. At March 31, 2010, the
contingent liability recorded was $25 million.
Clearinghouses and Exchanges We are a member of
various exchanges and clearinghouses that trade and clear
securities
and/or
futures contracts. As a member, we may be required to pay a
proportionate share of the financial obligations of another
member who defaults on its obligations to the exchange or the
clearinghouse. Our guarantee obligations would arise only if the
exchange or clearinghouse had exhausted its resources. Any
potential contingent liability under these membership agreements
cannot be estimated. However, we believe that any potential
requirement to make payments under these agreements is remote.
Pledged Assets Pledged assets included in the
consolidated balance sheet are summarized in the following table.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Interest bearing deposits with banks
|
|
$
|
1,359
|
|
|
$
|
1,496
|
|
Trading
assets(1)
|
|
|
532
|
|
|
|
708
|
|
Securities
available-for-sale(2)
|
|
|
13,568
|
|
|
|
11,416
|
|
Securities held to
maturity(3)
|
|
|
1,667
|
|
|
|
457
|
|
Loans(4)
|
|
|
4,507
|
|
|
|
3,933
|
|
Other
assets(5)
|
|
|
4,945
|
|
|
|
6,459
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
26,578
|
|
|
$
|
24,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Trading assets are primarily
pledged against liabilities associated with consolidated
variable interest entities.
|
|
(2) |
|
Securities
available-for-sale
are primarily pledged against various short-term and long-term
borrowings.
|
51
HSBC USA Inc.
|
|
|
(3) |
|
Securities held to maturity include
federal home loan bank collateral at March 31, 2010 and
December 31, 2009, as well as the investment securities of
a consolidated asset backed commercial paper conduit at
March 31, 2010 that collateralize the conduits
outstanding commercial paper.
|
|
(4) |
|
Loans are primarily private label
card and other credit card receivables pledged against long-term
secured borrowings and residential mortgage loans pledged
against long-term borrowings from the Federal Home Loan Bank. At
March 31, 2010 loans also include the loans of a
consolidated asset backed commercial paper conduit that
collateralize the conduits outstanding commercial paper.
|
|
(5) |
|
Other assets represent cash on
deposit with non-banks related to derivative collateral support
agreements.
|
18. Fair
Value Measurements
Accounting principles related to fair value measurements provide
a framework for measuring fair value and focuses 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 disorderly, 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,
when determined to be appropriate, are recognized at the end of
each reporting period.
52
HSBC USA Inc.
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 March 31, 2010 and December 31,
2009, and indicates the fair value hierarchy of the valuation
techniques utilized to determine such fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements on a Recurring Basis as of
March 31, 2010
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Gross Balance
|
|
|
Netting(1)
|
|
|
Net Balance
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury. U.S. Government agencies and sponsored enterprises
|
|
$
|
733
|
|
|
$
|
134
|
|
|
$
|
-
|
|
|
$
|
867
|
|
|
$
|
-
|
|
|
$
|
867
|
|
|
|
|
|
Collateralized debt obligations
|
|
|
-
|
|
|
|
-
|
|
|
|
755
|
|
|
|
755
|
|
|
|
-
|
|
|
|
755
|
|
|
|
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
-
|
|
|
|
114
|
|
|
|
826
|
|
|
|
940
|
|
|
|
-
|
|
|
|
940
|
|
|
|
|
|
Home equity
|
|
|
-
|
|
|
|
-
|
|
|
|
25
|
|
|
|
25
|
|
|
|
-
|
|
|
|
25
|
|
|
|
|
|
Corporate and other domestic debt securities
|
|
|
-
|
|
|
|
936
|
|
|
|
644
|
|
|
|
1,580
|
|
|
|
-
|
|
|
|
1,580
|
|
|
|
|
|
Debt Securities issued by foreign entities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
-
|
|
|
|
128
|
|
|
|
222
|
|
|
|
350
|
|
|
|
-
|
|
|
|
350
|
|
|
|
|
|
Government
|
|
|
-
|
|
|
|
430
|
|
|
|
-
|
|
|
|
430
|
|
|
|
-
|
|
|
|
430
|
|
|
|
|
|
Equity securities
|
|
|
-
|
|
|
|
26
|
|
|
|
19
|
|
|
|
45
|
|
|
|
-
|
|
|
|
45
|
|
|
|
|
|
Precious metals trading
|
|
|
-
|
|
|
|
11,827
|
|
|
|
-
|
|
|
|
11,827
|
|
|
|
-
|
|
|
|
11,827
|
|
|
|
|
|
Derivatives(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
144
|
|
|
|
27,234
|
|
|
|
-
|
|
|
|
27,378
|
|
|
|
-
|
|
|
|
27,378
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
1
|
|
|
|
12,558
|
|
|
|
247
|
|
|
|
12,806
|
|
|
|
-
|
|
|
|
12,806
|
|
|
|
|
|
Equity contracts
|
|
|
-
|
|
|
|
1,163
|
|
|
|
179
|
|
|
|
1,342
|
|
|
|
-
|
|
|
|
1,342
|
|
|
|
|
|
Precious metals contracts
|
|
|
2
|
|
|
|
484
|
|
|
|
-
|
|
|
|
486
|
|
|
|
-
|
|
|
|
486
|
|
|
|
|
|
Credit contracts
|
|
|
-
|
|
|
|
13,202
|
|
|
|
2,596
|
|
|
|
15,798
|
|
|
|
-
|
|
|
|
15,798
|
|
|
|
|
|
Other
|
|
|
9
|
|
|
|
9
|
|
|
|
4
|
|
|
|
22
|
|
|
|
-
|
|
|
|
22
|
|
|
|
|
|
Derivatives netting
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(49,838
|
)
|
|
|
(49,838
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
156
|
|
|
|
54,650
|
|
|
|
3,026
|
|
|
|
57,832
|
|
|
|
(49,838
|
)
|
|
|
7,994
|
|
|
|
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury. U.S. Government agencies and sponsored enterprises
|
|
|
13,202
|
|
|
|
13,092
|
|
|
|
-
|
|
|
|
26,294
|
|
|
|
-
|
|
|
|
26,294
|
|
|
|
|
|
Obligations of U.S. states and political subdivisions
|
|
|
-
|
|
|
|
621
|
|
|
|
-
|
|
|
|
621
|
|
|
|
-
|
|
|
|
621
|
|
|
|
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
-
|
|
|
|
257
|
|
|
|
529
|
|
|
|
786
|
|
|
|
-
|
|
|
|
786
|
|
|
|
|
|
Commercial mortgages
|
|
|
-
|
|
|
|
572
|
|
|
|
8
|
|
|
|
580
|
|
|
|
-
|
|
|
|
580
|
|
|
|
|
|
Home equity
|
|
|
-
|
|
|
|
192
|
|
|
|
215
|
|
|
|
407
|
|
|
|
-
|
|
|
|
407
|
|
|
|
|
|
Auto
|
|
|
-
|
|
|
|
17
|
|
|
|
29
|
|
|
|
46
|
|
|
|
-
|
|
|
|
46
|
|
|
|
|
|
Student loans
|
|
|
-
|
|
|
|
18
|
|
|
|
12
|
|
|
|
30
|
|
|
|
-
|
|
|
|
30
|
|
|
|
|
|
Other
|
|
|
-
|
|
|
|
109
|
|
|
|
-
|
|
|
|
109
|
|
|
|
-
|
|
|
|
109
|
|
|
|
|
|
Corporate and other domestic debt securities
|
|
|
-
|
|
|
|
710
|
|
|
|
-
|
|
|
|
710
|
|
|
|
-
|
|
|
|
710
|
|
|
|
|
|
Debt Securities issued by foreign entities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
-
|
|
|
|
539
|
|
|
|
-
|
|
|
|
539
|
|
|
|
-
|
|
|
|
539
|
|
|
|
|
|
Government
|
|
|
-
|
|
|
|
2,568
|
|
|
|
-
|
|
|
|
2,568
|
|
|
|
-
|
|
|
|
2,568
|
|
|
|
|
|
Equity securities
|
|
|
-
|
|
|
|
1,130
|
|
|
|
-
|
|
|
|
1,130
|
|
|
|
-
|
|
|
|
1,130
|
|
|
|
|
|
Loans(3)
|
|
|
-
|
|
|
|
1,436
|
|
|
|
12
|
|
|
|
1,448
|
|
|
|
-
|
|
|
|
1,448
|
|
|
|
|
|
Intangible(4)
|
|
|
-
|
|
|
|
-
|
|
|
|
444
|
|
|
|
444
|
|
|
|
-
|
|
|
|
444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
14,091
|
|
|
$
|
89,506
|
|
|
$
|
6,766
|
|
|
$
|
110,363
|
|
|
$
|
(49,838
|
)
|
|
$
|
60,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits in domestic
offices(5)
|
|
$
|
-
|
|
|
$
|
3,117
|
|
|
$
|
1,940
|
|
|
$
|
5,057
|
|
|
$
|
-
|
|
|
$
|
5,057
|
|
|
|
|
|
Trading liabilities, excluding derivatives
|
|
|
966
|
|
|
|
3,894
|
|
|
|
-
|
|
|
|
4,860
|
|
|
|
-
|
|
|
|
4,860
|
|
|
|
|
|
Derivatives(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
85
|
|
|
|
27,502
|
|
|
|
-
|
|
|
|
27,587
|
|
|
|
-
|
|
|
|
27,587
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
48
|
|
|
|
13,003
|
|
|
|
367
|
|
|
|
13,418
|
|
|
|
-
|
|
|
|
13,418
|
|
|
|
|
|
Equity contracts
|
|
|
2
|
|
|
|
1,044
|
|
|
|
130
|
|
|
|
1,176
|
|
|
|
-
|
|
|
|
1,176
|
|
|
|
|
|
Precious metals contracts
|
|
|
38
|
|
|
|
619
|
|
|
|
-
|
|
|
|
657
|
|
|
|
-
|
|
|
|
657
|
|
|
|
|
|
Credit contracts
|
|
|
-
|
|
|
|
14,477
|
|
|
|
1,252
|
|
|
|
15,729
|
|
|
|
-
|
|
|
|
15,729
|
|
|
|
|
|
Other
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
3
|
|
|
|
-
|
|
|
|
3
|
|
|
|
|
|
Derivatives netting
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(53,196
|
)
|
|
|
(53,196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
174
|
|
|
|
56,646
|
|
|
|
1,750
|
|
|
|
58,570
|
|
|
|
(53,196
|
)
|
|
|
5,374
|
|
|
|
|
|
Long-term
debt(6)
|
|
|
-
|
|
|
|
4,215
|
|
|
|
604
|
|
|
|
4,819
|
|
|
|
-
|
|
|
|
4,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
1,140
|
|
|
$
|
67,872
|
|
|
$
|
4,294
|
|
|
$
|
73,306
|
|
|
$
|
(53,196
|
)
|
|
$
|
20,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
HSBC USA Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements on a Recurring Basis as of
December 31, 2009
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Gross Balance
|
|
|
Netting(1)
|
|
|
Net Balance
|
|
|
|
|
|
(in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury. U.S. Government agencies and sponsored enterprises
|
|
$
|
615
|
|
|
$
|
50
|
|
|
$
|
-
|
|
|
$
|
665
|
|
|
$
|
-
|
|
|
$
|
665
|
|
Residential mortgage-backed securities
|
|
|
-
|
|
|
|
129
|
|
|
|
821
|
|
|
|
950
|
|
|
|
-
|
|
|
|
950
|
|
Collateralized debt obligations
|
|
|
-
|
|
|
|
-
|
|
|
|
831
|
|
|
|
831
|
|
|
|
-
|
|
|
|
831
|
|
Other asset-backed securities
|
|
|
-
|
|
|
|
9
|
|
|
|
25
|
|
|
|
34
|
|
|
|
-
|
|
|
|
34
|
|
Corporate and other domestic debt securities
|
|
|
-
|
|
|
|
792
|
|
|
|
1,202
|
|
|
|
1,994
|
|
|
|
-
|
|
|
|
1,994
|
|
Debt Securities issued by foreign entities
|
|
|
-
|
|
|
|
213
|
|
|
|
196
|
|
|
|
409
|
|
|
|
-
|
|
|
|
409
|
|
Equity securities
|
|
|
-
|
|
|
|
436
|
|
|
|
21
|
|
|
|
457
|
|
|
|
-
|
|
|
|
457
|
|
Precious metals trading
|
|
|
-
|
|
|
|
12,256
|
|
|
|
-
|
|
|
|
12,256
|
|
|
|
-
|
|
|
|
12,256
|
|
Derivatives(2)
|
|
|
129
|
|
|
|
58,391
|
|
|
|
3,074
|
|
|
|
61,594
|
|
|
|
(52,763
|
)
|
|
|
8,831
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury. U.S. Government agencies and sponsored enterprises
|
|
|
9,291
|
|
|
|
10,639
|
|
|
|
3
|
|
|
|
19,933
|
|
|
|
-
|
|
|
|
19,933
|
|
Obligations of U.S. states and political subdivisions
|
|
|
-
|
|
|
|
749
|
|
|
|
-
|
|
|
|
749
|
|
|
|
-
|
|
|
|
749
|
|
Residential mortgage-backed securities
|
|
|
-
|
|
|
|
350
|
|
|
|
515
|
|
|
|
865
|
|
|
|
-
|
|
|
|
865
|
|
Commercial mortgage-backed securities
|
|
|
-
|
|
|
|
558
|
|
|
|
8
|
|
|
|
566
|
|
|
|
-
|
|
|
|
566
|
|
Other asset-backed securities
|
|
|
-
|
|
|
|
273
|
|
|
|
217
|
|
|
|
490
|
|
|
|
-
|
|
|
|
490
|
|
Corporate and other domestic debt securities
|
|
|
-
|
|
|
|
864
|
|
|
|
-
|
|
|
|
864
|
|
|
|
-
|
|
|
|
864
|
|
Debt Securities issued by foreign entities
|
|
|
-
|
|
|
|
3,076
|
|
|
|
-
|
|
|
|
3,076
|
|
|
|
-
|
|
|
|
3,076
|
|
Equity securities
|
|
|
-
|
|
|
|
1,263
|
|
|
|
-
|
|
|
|
1,263
|
|
|
|
-
|
|
|
|
1,263
|
|
Loans(3)
|
|
|
-
|
|
|
|
1,122
|
|
|
|
4
|
|
|
|
1,126
|
|
|
|
-
|
|
|
|
1,126
|
|
Intangible(4)
|
|
|
-
|
|
|
|
-
|
|
|
|
450
|
|
|
|
450
|
|
|
|
-
|
|
|
|
450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
10,035
|
|
|
$
|
91,170
|
|
|
$
|
7,367
|
|
|
$
|
108,572
|
|
|
$
|
(52,763
|
)
|
|
$
|
55,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits in domestic
offices(5)
|
|
$
|
-
|
|
|
$
|
2,589
|
|
|
$
|
1,643
|
|
|
$
|
4,232
|
|
|
$
|
-
|
|
|
$
|
4,232
|
|
Trading liabilities, excluding derivatives
|
|
|
34
|
|
|
|
2,653
|
|
|
|
-
|
|
|
|
2,687
|
|
|
|
-
|
|
|
|
2,687
|
|
Derivatives(2)
|
|
|
213
|
|
|
|
60,639
|
|
|
|
1,781
|
|
|
|
62,633
|
|
|
|
(57,214
|
)
|
|
|
5,419
|
|
Long-term
debt(6)
|
|
|
-
|
|
|
|
4,149
|
|
|
|
419
|
|
|
|
4,568
|
|
|
|
-
|
|
|
|
4,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
247
|
|
|
$
|
70,030
|
|
|
$
|
3,843
|
|
|
$
|
74,120
|
|
|
$
|
(57,214
|
)
|
|
$
|
16,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents counterparty and cash
collateral netting which allow the offsetting of amounts
relating to certain contracts if certain conditions are met.
|
|
(2) |
|
Includes trading derivative assets
of $7.4 billion and $8.2 billion and trading
derivative liabilities of $5.2 billion and
$5.3 billion as of March 31, 2010 and
December 31, 2009, respectively, as well as derivatives
held for hedging and commitments accounted for as derivatives.
|
|
(3) |
|
Includes leveraged acquisition
finance and other commercial loans held for sale or risk-managed
on a fair value basis for which we have elected to apply the
fair value option. See Note 6, Loans Held for
Sale, for further information.
|
|
(4) |
|
Represents residential mortgage
servicing rights. See Note 7, Intangible
Assets, for further information on residential mortgage
servicing rights.
|
|
(5) |
|
Represents structured deposits
risk-managed on a fair value basis for which we have elected to
apply the fair value option.
|
|
(6) |
|
Includes structured notes and own
debt issuances which we have elected to measure on a fair value
basis.
|
54
HSBC USA Inc.
Significant Transfers into/ out of Levels 1 and
2 There were no significant transfers between
levels 1 and 2 for the three months ended March 31,
2010.
Information on Level 3 Assets and
Liabilities The following table summarizes
additional information about changes in the fair value of
Level 3 assets and liabilities during the three months
ended March 31, 2010 and 2009. As a risk management
practice, we may risk manage the Level 3 assets and
liabilities, in whole or in part, using securities and
derivative positions that are classified as Level 1 or
Level 2 measurements within the fair value hierarchy. Since
those Level 1 and Level 2 risk management positions
are not included in the table below, the information provided
does not reflect the effect of such risk management activities
related to the Level 3 assets and liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gains and (Losses) Included
in(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Transfers
|
|
|
Transfers
|
|
|
|
|
|
Current Periods
|
|
|
|
Jan. 1,
|
|
|
Revenue
|
|
|
Other
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
Into
|
|
|
Out of
|
|
|
Mar. 31
|
|
|
Unrealized
|
|
|
|
2010
|
|
|
(Loss)
|
|
|
Revenue
|
|
|
Income
|
|
|
Purchases
|
|
|
Issuances
|
|
|
Settlements
|
|
|
Level 3
|
|
|
Level 3
|
|
|
2010
|
|
|
Gains (Losses)
|
|
|
|
|
|
(in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets, excluding derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized debt obligations
|
|
$
|
832
|
|
|
$
|
25
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
222
|
|
|
$
|
-
|
|
|
$
|
(324
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
755
|
|
|
$
|
11
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
817
|
|
|
|
13
|
|
|
|
-
|
|
|
|
-
|
|
|
|
94
|
|
|
|
-
|
|
|
|
(119
|
)
|
|
|
21
|
|
|
|
-
|
|
|
|
826
|
|
|
|
15
|
|
Commercial mortgages
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
-
|
|
Home equity
|
|
|
24
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
3
|
|
|
|
-
|
|
|
|
25
|
|
|
|
(2
|
)
|
Corporate and other domestic debt securities
|
|
|
1,202
|
|
|
|
(31
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
25
|
|
|
|
-
|
|
|
|
(368
|
)
|
|
|
-
|
|
|
|
(184
|
)
|
|
|
644
|
|
|
|
15
|
|
Debt Securities issued by foreign entities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
195
|
|
|
|
27
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
222
|
|
|
|
27
|
|
Equity securities
|
|
|
21
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
19
|
|
|
|
(1
|
)
|
Foreign exchange contracts
|
|
|
(95
|
)
|
|
|
(25
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(119
|
)
|
|
|
(24
|
)
|
Equity contracts
|
|
|
81
|
|
|
|
83
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(57
|
)
|
|
|
(58
|
)
|
|
|
1
|
|
|
|
50
|
|
|
|
45
|
|
Credit contracts
|
|
|
1,311
|
|
|
|
(181
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(70
|
)
|
|
|
218
|
|
|
|
66
|
|
|
|
1,344
|
|
|
|
(425
|
)
|
Other
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
2
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury, U.S. Government agencies and sponsored enterprises
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
-
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
515
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(71
|
)
|
|
|
73
|
|
|
|
(4
|
)
|
|
|
529
|
|
|
|
11
|
|
Commercial mortgages
|
|
|
8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8
|
|
|
|
-
|
|
Home equity
|
|
|
175
|
|
|
|
-
|
|
|
|
-
|
|
|
|
45
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
215
|
|
|
|
42
|
|
Auto
|
|
|
43
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(14
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
29
|
|
|
|
-
|
|
Student loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
|
|
-
|
|
|
|
12
|
|
|
|
-
|
|
Loans(3)
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11
|
|
|
|
(3
|
)
|
|
|
12
|
|
|
|
-
|
|
Other assets, excluding
derivatives(4)
|
|
|
450
|
|
|
|
-
|
|
|
|
21
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(27
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
444
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,587
|
|
|
$
|
(90
|
)
|
|
$
|
27
|
|
|
$
|
61
|
|
|
$
|
341
|
|
|
$
|
-
|
|
|
$
|
(1,059
|
)
|
|
$
|
280
|
|
|
$
|
(130
|
)
|
|
$
|
5,017
|
|
|
$
|
(263
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits in domestic offices
|
|
$
|
(1,643
|
)
|
|
$
|
(71
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(310
|
)
|
|
$
|
74
|
|
|
$
|
(7
|
)
|
|
$
|
17
|
|
|
$
|
(1,940
|
)
|
|
$
|
(53
|
)
|
Long-term debt
|
|
|
(419
|
)
|
|
|
(12
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(209
|
)
|
|
|
29
|
|
|
|
-
|
|
|
|
7
|
|
|
|
(604
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
(2,062
|
)
|
|
$
|
(83
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(519
|
)
|
|
$
|
103
|
|
|
$
|
(7
|
)
|
|
$
|
24
|
|
|
$
|
(2,544
|
)
|
|
$
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
HSBC USA Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gains and (Losses) Included
in(1)
|
|
|
Net
|
|
|
Transfers
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
|
|
|
|
|
|
Other
|
|
|
Purchases
|
|
|
Into or
|
|
|
|
|
|
Current Periods
|
|
|
|
January 1,
|
|
|
(Loss)
|
|
|
Other
|
|
|
Comprehensive
|
|
|
Issuances and
|
|
|
Out
|
|
|
March 31,
|
|
|
Unrealized
|
|
|
|
2009
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Income
|
|
|
Settlements
|
|
|
of Level 3
|
|
|
2009
|
|
|
Gains (Losses)
|
|
|
|
|
|
(in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets, excluding derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities
|
|
$
|
475
|
|
|
$
|
(40
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
20
|
|
|
$
|
55
|
|
|
$
|
510
|
|
|
$
|
(41
|
)
|
Collateralized debt obligations
|
|
|
668
|
|
|
|
(59
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(15
|
)
|
|
|
-
|
|
|
|
594
|
|
|
|
(59
|
)
|
Other asset-backed securities
|
|
|
36
|
|
|
|
(8
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
28
|
|
|
|
(8
|
)
|
Corporate and other domestic debt securities
|
|
|
480
|
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15
|
|
|
|
27
|
|
|
|
527
|
|
|
|
5
|
|
Debt Securities issued by foreign entities
|
|
|
87
|
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
77
|
|
|
|
(10
|
)
|
Equity securities
|
|
|
147
|
|
|
|
19
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(22
|
)
|
|
|
-
|
|
|
|
144
|
|
|
|
19
|
|
Precious metals
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Derivatives,
net(2)
|
|
|
5,283
|
|
|
|
(561
|
)
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
21
|
|
|
|
(55
|
)
|
|
|
4,687
|
|
|
|
(421
|
)
|
Securities
available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. states and political subdivisions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
2
|
|
|
|
-
|
|
Residential mortgage-backed securities
|
|
|
164
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(9
|
)
|
|
|
(14
|
)
|
|
|
192
|
|
|
|
333
|
|
|
|
(9
|
)
|
Commercial mortgage-backed securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
|
|
5
|
|
|
|
-
|
|
Collateralized debt obligations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other asset-backed securities
|
|
|
307
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(36
|
)
|
|
|
(25
|
)
|
|
|
10
|
|
|
|
256
|
|
|
|
(36
|
)
|
Loans(3)
|
|
|
136
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19
|
|
|
|
-
|
|
|
|
155
|
|
|
|
-
|
|
Other assets, excluding
derivatives(4)
|
|
|
333
|
|
|
|
-
|
|
|
|
(48
|
)
|
|
|
-
|
|
|
|
28
|
|
|
|
-
|
|
|
|
313
|
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
8,116
|
|
|
$
|
(654
|
)
|
|
$
|
(49
|
)
|
|
$
|
(45
|
)
|
|
$
|
27
|
|
|
$
|
236
|
|
|
$
|
7,631
|
|
|
$
|
(588
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits in domestic offices
|
|
|
(234
|
)
|
|
|
-
|
|
|
|
12
|
|
|
|
-
|
|
|
|
(188
|
)
|
|
|
6
|
|
|
|
(404
|
)
|
|
|
9
|
|
Long term debt
|
|
|
(57
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(27
|
)
|
|
|
2
|
|
|
|
(82
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
(291
|
)
|
|
$
|
-
|
|
|
$
|
12
|
|
|
$
|
-
|
|
|
$
|
(215
|
)
|
|
$
|
8
|
|
|
$
|
(486
|
)
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes realized and unrealized
gains and losses.
|
|
(2) |
|
Level 3 net derivatives
included derivative assets of $3.0 billion and
$7.3 billion and derivative liabilities of
$1.8 billion and $2.6 billion at March 31, 2010
and 2009, respectively.
|
|
(3) |
|
Includes Level 3 corporate
lending activities risk-managed on a fair value basis for which
we have elected the fair value option.
|
|
(4) |
|
Represents residential mortgage
servicing activities. See Note 7, Intangible
Assets, for additional information.
|
56
HSBC USA Inc.
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 March 31, 2010 and
March 31, 2009, and indicates the fair value hierarchy of
the valuation techniques utilized to determine such fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gains
|
|
|
|
Non-Recurring Fair Value Measurements
|
|
|
(Losses) For the
|
|
|
|
as of March 31, 2010
|
|
|
Three Months Ended
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
March 31, 2010
|
|
|
|
|
|
(in millions)
|
|
|
Residential mortgage loans held for
sale(1)
|
|
$
|
-
|
|
|
$
|
150
|
|
|
$
|
761
|
|
|
$
|
911
|
|
|
$
|
(5
|
)
|
Other consumer loans held for
sale(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
28
|
|
|
|
28
|
|
|
|
-
|
|
Impaired
loans(2)
|
|
|
-
|
|
|
|
-
|
|
|
|
718
|
|
|
|
718
|
|
|
|
5
|
|
Real estate
owned(3)
|
|
|
-
|
|
|
|
63
|
|
|
|
-
|
|
|
|
63
|
|
|
|
1
|
|
Repossessed
vehicles(3)
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
Commercial loans held for sale
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
Held to maturity asset-backed securities held by consolidated
VIE(4)
|
|
|
-
|
|
|
|
-
|
|
|
|
254
|
|
|
|
254
|
|
|
|
(5
|
)
|
Building held for use
|
|
|
-
|
|
|
|
-
|
|
|
|
15
|
|
|
|
15
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value on a non-recurring basis
|
|
$
|
-
|
|
|
$
|
221
|
|
|
$
|
1,776
|
|
|
$
|
1,997
|
|
|
$
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gains
|
|
|
|
Non-Recurring Fair Value Measurements
|
|
|
(Losses) For the
|
|
|
|
as of March 31, 2009
|
|
|
Three Months Ended
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
March 31, 2009
|
|
|
|
|
|
(in millions)
|
|
|
Residential mortgage loans held for
sale(1)
|
|
$
|
-
|
|
|
$
|
723
|
|
|
$
|
1,109
|
|
|
$
|
1,832
|
|
|
$
|
(93
|
)
|
Other consumer loans held for
sale(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
45
|
|
|
|
45
|
|
|
|
-
|
|
Impaired
loans(2)
|
|
|
-
|
|
|
|
-
|
|
|
|
97
|
|
|
|
97
|
|
|
|
8
|
|
Real estate
owned(3)
|
|
|
-
|
|
|
|
65
|
|
|
|
-
|
|
|
|
65
|
|
|
|
(2
|
)
|
Repossessed
vehicles(3)
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value on a non-recurring basis
|
|
$
|
-
|
|
|
$
|
789
|
|
|
$
|
1,251
|
|
|
$
|
2,040
|
|
|
$
|
(87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of March 31, 2010 and
March 31, 2009, the fair value of the loans held for sale
was below cost.
|
|
(2) |
|
Represents impaired commercial
loans. We use the fair value estimate of the underlying
collateral to approximate the fair value of the commercial loans.
|
|
(3) |
|
Real estate owned and repossessed
vehicles are required to be reported on the balance sheet net of
transaction costs. The real estate owned and repossessed vehicle
amounts in the table above reflect the fair value of the
underlying asset unadjusted for transaction costs.
|
|
(4) |
|
Represents held to maturity
securities which were held at fair value at March 31, 2010.
See Note 16, Variable Interest Entities for
additional information.
|
57
HSBC USA Inc.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
|
|
|
(in millions)
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term financial assets
|
|
$
|
35,532
|
|
|
$
|
35,532
|
|
|
$
|
24,094
|
|
|
$
|
24,094
|
|
Federal funds sold and securities purchased under resale
agreements
|
|
|
2,898
|
|
|
|
2,898
|
|
|
|
1,046
|
|
|
|
1,046
|
|
Non-derivative trading assets
|
|
|
16,819
|
|
|
|
16,819
|
|
|
|
17,596
|
|
|
|
17,596
|
|
Derivatives
|
|
|
7,994
|
|
|
|
7,994
|
|
|
|
8,831
|
|
|
|
8,831
|
|
Securities
|
|
|
37,687
|
|
|
|
37,815
|
|
|
|
30,568
|
|
|
|
30,686
|
|
Commercial loans, net of allowance for credit losses
|
|
|
28,867
|
|
|
|
29,205
|
|
|
|
29,366
|
|
|
|
29,298
|
|
Commercial loans designated under fair value option and held for
sale
|
|
|
1,451
|
|
|
|
1,451
|
|
|
|
1,126
|
|
|
|
1,126
|
|
Consumer loans, net of allowance for credit losses
|
|
|
43,207
|
|
|
|
38,552
|
|
|
|
46,262
|
|
|
|
41,877
|
|
Consumer loans held for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
1,129
|
|
|
|
1,132
|
|
|
|
1,386
|
|
|
|
1,389
|
|
Auto finance
|
|
|
-
|
|
|
|
-
|
|
|
|
353
|
|
|
|
353
|
|
Other consumer
|
|
|
28
|
|
|
|
28
|
|
|
|
43
|
|
|
|
43
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term financial liabilities
|
|
$
|
18,669
|
|
|
$
|
18,669
|
|
|
$
|
11,121
|
|
|
$
|
11,121
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Without fixed maturities
|
|
|
114,632
|
|
|
|
114,632
|
|
|
|
106,890
|
|
|
|
106,890
|
|
Fixed maturities
|
|
|
5,122
|
|
|
|
5,156
|
|
|
|
7,215
|
|
|
|
7,259
|
|
Deposits designated under fair value option
|
|
|
5,057
|
|
|
|
5,057
|
|
|
|
4,232
|
|
|
|
4,232
|
|
Non-derivative trading liabilities
|
|
|
4,860
|
|
|
|
4,860
|
|
|
|
2,687
|
|
|
|
2,687
|
|
Derivatives
|
|
|
5,374
|
|
|
|
5,374
|
|
|
|
5,419
|
|
|
|
5,419
|
|
Long-term debt
|
|
|
12,515
|
|
|
|
12,765
|
|
|
|
13,440
|
|
|
|
13,693
|
|
Long-term debt designated under fair value option
|
|
|
4,819
|
|
|
|
4,819
|
|
|
|
4,568
|
|
|
|
4,568
|
|
Loan 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 value
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 loans has been heavily influenced by the
deteriorating economic conditions during the past few years,
including house price depreciation, rising unemployment, changes
in consumer behavior, and changes in discount rates. Many
investors are non-bank financial institutions or hedge funds
with high equity levels and a high cost of debt. For certain
consumer loans, 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 loans, 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 March 31, 2010 and
December 31, 2009 reflect these market conditions.
Valuation Techniques Following is a
description of valuation methodologies used for assets and
liabilities recorded at fair value and for estimating fair value
for those financial instruments not recorded at fair value for
which fair value disclosure is required.
Short-term financial assets and liabilities
The carrying value of certain financial assets and liabilities
recorded at cost is considered to approximate fair value because
they are short-term in nature, bear interest rates that
58
HSBC USA Inc.
approximate market rates, and generally have negligible credit
risk. These items include cash and due from banks, interest
bearing deposits with banks, accrued interest receivable,
customer acceptance assets and liabilities and short-term
borrowings.
Federal funds sold and purchased and securities purchased and
sold under resale and repurchase agreements
Federal funds sold and purchased and securities purchased and
sold under resale and repurchase agreements are recorded at
cost. A significant majority of these transactions are
short-term in nature and, as such, the recorded amounts
approximate fair value. For transactions with long-dated
maturities, fair value is based on dealer quotes for instruments
with similar terms and collateral.
Loans Except for leveraged loans, selected
residential mortgage loans and certain foreign currency
denominated commercial loans, we do not record loans at fair
value on a recurring basis. From time to time, we record on a
non-recurring basis negative adjustment to loans. The
write-downs can be based on observable market price of the loan
or the underlying collateral value. In addition, fair value
estimates are determined based on the product type, financial
characteristics, pricing features and maturity. Where
applicable, similar loans are grouped based on loan types and
maturities and fair values are estimated on a portfolio basis.
|
|
|
|
|
Mortgage Loans Held for Sale Certain residential
mortgage loans are classified as held for sale and are recorded
at the lower of cost or fair value. As of March 31, 2010,
the fair value of these loans is below their amortized cost. The
fair value of these mortgage loans is determined based on the
valuation information observed in alternative exit markets, such
as the whole loan market, adjusted for portfolio specific
factors. These factors include the location of the collateral,
the
loan-to-value
ratio, the estimated rate and timing of default, the probability
of default or foreclosure and loss severity if foreclosure does
occur.
|
|
|
|
Leveraged Loans We record leveraged loans and
revolvers held for sale at fair value. Where available, market
consensus pricing obtained from independent sources are used to
estimate the fair value of the leveraged loans and revolvers. In
determining the fair value, we take into consideration the
number of participants submitting pricing information, the range
of pricing information and distribution, the methodology applied
by the pricing services to cleanse the data and market
liquidity. Where consensus pricing information is not available,
fair value is estimated using observable market prices of
similar instruments or inputs, including bonds, credit
derivatives, and loans with similar characteristics. Where
observable market parameters are not available, fair value is
determined based on contractual cash flows, adjusted for the
probability of default and estimated recoveries where
applicable, discounted at the rate demanded by market
participants under current market conditions. In those cases, we
also consider the loan specific attributes and inherent credit
risk and risk mitigating factors such as collateral arrangements
in determining fair value.
|
|
|
|
Commercial Loans Commercial loans and commercial
real estate loans are valued by discounting the contractual cash
flows, adjusted for prepayments and the borrowers credit
risk, using a discount rate that reflects the current rates
offered to borrowers of similar credit standing for the
remaining term to maturity and our own estimate of liquidity
premium.
|
|
|
|
Commercial impaired loans Fair value is determined
based on the pricing quotes obtained from an independent third
party appraisal.
|
|
|
|
Consumer Loans The estimated fair value of our
consumer loans were determined by developing an approximate
range of value from a mix of various sources as appropriate for
the respective pool of assets. These sources included, among
other things, 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.
|
Model inputs include estimates of future interest rates,
prepayment speeds, loss curves and market discount rates
reflecting managements estimate of the rate that would be
required by investors in the current market
59
HSBC USA Inc.
given the specific characteristics and inherent credit risk of
the receivables. Some of these inputs are influenced by home
price 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 may 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
and other market participants. 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.
Lending-related Commitments The fair value of
commitments to extend credit, standby letters of credit and
financial guarantees are not included in the table. The majority
of the lending related commitments are not carried at fair value
on a recurring basis nor are they actively traded. These
instruments generate fees, which approximate those currently
charged to originate similar commitments, which are recognized
over the term of the commitment period. Deferred fees on
commitments and standby letters of credit totaled
$55 million and $48 million at March 31, 2010 and
December 31, 2009, respectively.
Precious Metals Trading Precious metals
trading primarily include physical inventory which are valued
using spot prices.
Securities Where available, debt and equity
securities are valued based on quoted market prices. If a quoted
market price for the identical security is not available, the
security is valued based on quotes from similar securities,
where possible. For certain securities, internally developed
valuation models are used to determine fair values or validate
quotes obtained from pricing services. The following summarizes
the valuation methodology used for our major security classes:
|
|
|
|
|
U.S. Treasury, U.S. Government agency issued or
guaranteed and Obligations of U.S. state and political
subdivisions As these securities transact in an
active market, fair value measurements are based on 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, fair value measurements are based
on 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 primarily based on
pricing information obtained from pricing services and is
verified by internal review processes.
|
|
|
|
Asset-backed securities, including collateralized debt
obligations Fair value is primarily determined based
on pricing information obtained from independent pricing
services adjusted for the characteristics and the performance of
the underlying collateral.
|
60
HSBC USA Inc.
Additional information relating to asset-backed securities and
collateralized debt obligations is presented in the following
tables:
Trading
asset-backed securities and related collateral:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit quality of collateral:
|
|
Prime
|
|
|
Alt-A
|
|
|
Sub-prime
|
|
|
|
|
Rating of securities:
|
|
Collateral type:
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
AAA - A
|
|
Residential mortgages
|
|
$
|
4
|
|
|
$
|
-
|
|
|
$
|
103
|
|
|
$
|
131
|
|
|
$
|
-
|
|
|
$
|
381
|
|
|
$
|
619
|
|
|
|
Home equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AAA - A
|
|
|
4
|
|
|
|
-
|
|
|
|
110
|
|
|
|
143
|
|
|
|
-
|
|
|
|
381
|
|
|
|
638
|
|
BBB-B
|
|
Residential mortgages
|
|
|
-
|
|
|
|
15
|
|
|
|
-
|
|
|
|
75
|
|
|
|
-
|
|
|
|
-
|
|
|
|
90
|
|
|
|
Home equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total BBB -B
|
|
|
-
|
|
|
|
15
|
|
|
|
-
|
|
|
|
78
|
|
|
|
-
|
|
|
|
-
|
|
|
|
93
|
|
CCC-Unrated
|
|
Residential mortgages
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
224
|
|
|
|
-
|
|
|
|
-
|
|
|
|
224
|
|
|
|
Home equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total CCC - Unrated
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
234
|
|
|
|
-
|
|
|
|
-
|
|
|
|
234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4
|
|
|
$
|
15
|
|
|
$
|
110
|
|
|
$
|
455
|
|
|
$
|
-
|
|
|
$
|
381
|
|
|
$
|
965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
collateralized debt obligations and related
collateral:
|
|
|
|
|
|
|
Credit quality of collateral:
|
|
Rating of securities:
|
|
Collateral type:
|
|
Level 3
|
|
|
|
|
|
(in millions)
|
|
|
AAA - A
|
|
Commercial mortgages
|
|
$
|
-
|
|
|
|
Corporate loans
|
|
|
-
|
|
|
|
Other
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total AAA - A
|
|
|
-
|
|
BBB-B
|
|
Commercial mortgages
|
|
|
72
|
|
|
|
Corporate loans
|
|
|
357
|
|
|
|
Other
|
|
|
204
|
|
|
|
|
|
|
|
|
|
|
Total BBB - B
|
|
|
633
|
|
CCC-Unrated
|
|
Commercial mortgages
|
|
|
50
|
|
|
|
Corporate loans
|
|
|
-
|
|
|
|
Other
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
Total CCC - Unrated
|
|
|
122
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
755
|
|
|
|
|
|
|
|
|
61
HSBC USA Inc.
Available-for-sale
securities backed by collateral:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit quality of collateral:
|
|
Prime
|
|
|
Alt-A
|
|
|
Sub-prime
|
|
|
|
|
Rating of securities:
|
|
Collateral type:
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
AAA A
|
|
Residential mortgages
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
255
|
|
|
$
|
98
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
353
|
|
|
|
Commercial mortgages
|
|
|
-
|
|
|
|
-
|
|
|
|
572
|
|
|
|
8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
580
|
|
|
|
Home equity
|
|
|
-
|
|
|
|
-
|
|
|
|
192
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
194
|
|
|
|
Student loans
|
|
|
-
|
|
|
|
-
|
|
|
|
18
|
|
|
|
12
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30
|
|
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
109
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AAA - A
|
|
|
-
|
|
|
|
-
|
|
|
|
1,146
|
|
|
|
118
|
|
|
|
-
|
|
|
|
2
|
|
|
|
1,266
|
|
BBB-B
|
|
Residential mortgages
|
|
|
-
|
|
|
|
30
|
|
|
|
-
|
|
|
|
155
|
|
|
|
-
|
|
|
|
-
|
|
|
|
185
|
|
|
|
Home equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
205
|
|
|
|
-
|
|
|
|
1
|
|
|
|
206
|
|
|
|
Auto
|
|
|
-
|
|
|
|
-
|
|
|
|
17
|
|
|
|
29
|
|
|
|
-
|
|
|
|
-
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total BBB -B
|
|
|
-
|
|
|
|
30
|
|
|
|
17
|
|
|
|
389
|
|
|
|
-
|
|
|
|
1
|
|
|
|
437
|
|
CCC-Unrated
|
|
Residential mortgages
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
246
|
|
|
|
-
|
|
|
|
-
|
|
|
|
248
|
|
|
|
Home equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total CCC - Unrated
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
253
|
|
|
|
-
|
|
|
|
-
|
|
|
|
255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
30
|
|
|
$
|
1,165
|
|
|
$
|
760
|
|
|
$
|
-
|
|
|
$
|
3
|
|
|
$
|
1,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other domestic debt and foreign debt securities (corporate and
government) 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 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, we survey the
broker/dealer community to obtain relevant trade data including
benchmark quotes and updated spreads.
|
|
|
|
Equity securities Since most of our securities are
transacted in active markets, fair value measurements are
determined based on quoted prices for the identical security.
For mutual fund investments, we receive monthly statements from
the investment manager with the estimated fair value.
|
We perform validations of the fair values obtained from
independent pricing services. Such validations primarily include
sourcing security prices from other independent pricing services
or broker quotes. As the pricing for mortgage and other
asset-backed securities became less transparent during the
credit crisis, we further developed internal valuation
techniques to validate the fair value. The internal validation
techniques utilize inputs derived from observable market data,
incorporate external analysts estimates of probability of
default, loss recovery and prepayments speeds and apply the
discount rates that would be demanded by market participants
under the current market conditions. Depending on the results of
the validation, additional information may be gathered from
other market participants to support the fair value
measurements. A determination is made as to whether adjustments
to the observable inputs are necessary after investigations and
inquiries about the reasonableness of the inputs used and the
methodologies employed by the independent pricing services.
Derivatives Derivatives are recorded at fair
value. Asset and liability positions in individual derivatives
that are covered by legally enforceable master netting
agreements, including cash collateral are offset and presented
net in accordance with accounting principles which allow the
offsetting of amounts relating to certain contracts.
Derivatives traded on an exchange are valued using quoted
prices. OTC derivatives, which comprise a majority of derivative
contract positions, are valued using valuation techniques. The
fair value for the majority of our derivative instruments are
determined based on internally developed models that utilize
independently corroborated market parameters, including interest
rate yield curves, option volatilities, and currency rates. For
complex or long-dated derivative products where market data is
not available, fair value may be affected by the choice of
valuation model and the underlying assumptions about, among
other things, the timing of cash flows and credit spreads. The
fair values of certain structured derivative products are
sensitive to unobservable inputs such as default correlations of
62
HSBC USA Inc.
the referenced credit and volatilities of embedded options.
These estimates are susceptible to significant change in future
periods as market conditions change.
Significant Inputs related to derivative classes are broken down
as follows:
|
|
|
|
|
Credit Derivatives Use credit default curves and
recovery rates which are generally provided by broker quotes and
various pricing services. Certain credit derivatives may also
use correlation inputs in their model valuation. Correlation is
derived using market quotes from brokers and various pricing
services.
|
|
|
|
Interest Rate Derivatives Swaps use interest rate
curves based on currency that are actively quoted by brokers and
other pricing services. Options will also use volatility inputs
which are also quoted in the broker market.
|
|
|
|
FX Derivatives FX transactions use spot and forward
fx rates which are quoted in the broker market.
|
|
|
|
Equity Derivatives Use listed equity security
pricing and implied volatilities from equity traded options
position.
|
|
|
|
Precious Metal Derivative spot and forward metal
rates which are quoted in the broker market.
|
We may adjust valuations derived using the methods described
above in order to ensure that those values represent appropriate
estimates of fair value. These adjustments, which are applied
consistently over time, are generally required to reflect
factors such as bid-ask spreads and counterparty credit risk
that can affect prices in arms-length transactions with
unrelated third parties. Such adjustments are based on
management judgment and may not be observable.
Real Estate Owned Fair value is determined
based on third party appraisals obtained at the time we take
title to the property and, if less than the carrying value of
the loan, the carrying value of the loan is adjusted to the fair
value. After three months on the market the carrying value is
further reduced, if necessary, to reflect observable local
market data including local area sales data.
Repossessed Autos Fair value is determined
based on current Black Book values, which represent current
observable prices in the wholesale auto auction market.
Mortgage Servicing Rights We elected to
measure residential mortgage servicing rights, which are
classified as intangible assets, at fair value. The fair value
for the residential mortgage servicing rights is determined
based on an option adjusted approach which involves discounting
servicing cash flows under various interest rate projections at
risk-adjusted rates. The valuation model also incorporates our
best estimate of the prepayment speed of the mortgage loans,
cost to service and discount rates which are unobservable. As
changes in interest rates is a key factor affecting the
prepayment speed and hence the fair value of the mortgage
servicing rights, we use various interest rate derivatives and
forward purchase contracts of mortgage-backed securities to
risk-manage the mortgage servicing rights.
Structured Notes Certain structured notes
were elected to be measured at fair value in their entirety
under fair value option accounting principles. As a result,
derivative features embedded in the structured notes are
included in the valuation of fair value. The valuation of
embedded derivatives may include significant unobservable inputs
such as correlation of the referenced credit names or volatility
of the embedded option. Other significant inputs include
interest rates (yield curve), time to maturity, expected loss
and loss severity.
Cash flows of the funded notes are discounted at the appropriate
rate for the applicable duration of the instrument adjusted for
our own credit spreads. The credit spreads applied to these
instruments are derived from the spreads at which institutions
of similar credit standing would offer for issuing similar
structured instruments as of the measurement date. The market
spreads for structured notes are generally lower than the credit
spreads observed for plain vanilla debt or in the credit default
swap market.
Long-term Debt We elected to apply fair value
option to certain own debt issuances for which fair value hedge
accounting was applied. These own debt issuances elected under
FVO are traded in secondary markets and, as such, the fair value
is determined based on observed prices for the specific
instrument. The observed market price of these
63
HSBC USA Inc.
instruments reflects the effect of our own credit spreads. 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.
For long-term debt recorded at cost, fair value is determined
based on quoted market prices where available. If quoted market
prices are not available, fair value is based on dealer quotes,
quoted prices of similar instruments, or internally developed
valuation models adjusted for own credit risks.
Deposits For fair value disclosure purposes,
the carrying amount of deposits with no stated maturity (e.g.,
demand, savings, and certain money market deposits), which
represents the amount payable upon demand, is considered to
approximate fair value. For deposits with fixed maturities, fair
value is estimated by discounting cash flows using market
interest rates currently offered on deposits with similar
characteristics and maturities.
Valuation Adjustments Where applicable, we
make valuation adjustments to the measurements of financial
instruments to ensure that they are recorded at fair value.
Management judgment is required in determining the appropriate
level of valuation adjustments. The level of valuation
adjustments reflects the risks and the characteristics of a
specific type of product, related contractual terms and the
liquidity associated with the product and the market in which
the product transacts. Valuation adjustments for complex
instruments are unobservable. Such valuation adjustments, which
have been consistently applied, include the following:
|
|
|
|
|
Credit risk adjustment an adjustment to reflect the
creditworthiness of the counterparty for OTC products where the
market parameters may not be indicative of the creditworthiness
of the counterparty. For derivative instruments, the market
price implies parties to the transaction have credit ratings
equivalent to AA. Therefore, we will make an appropriate credit
risk adjustment to reflect the counterparty credit risk if
different from an AA credit rating.
|
|
|
|
Market data/model uncertainty an adjustment to
reflect uncertainties in the fair value measurements determined
based on unobservable market data inputs. Since one or more
significant parameters may be unobservable and must be
estimated, the resultant fair value estimates have inherent
measurement risk. In addition, the values derived from valuation
techniques are affected by the choice of valuation model. When
different valuation techniques are available, the choice of
valuation model can be subjective and in those cases, an
additional valuation adjustment may be applied to mitigate the
potential risk of measurement error. In most cases, we perform
analysis on key unobservable inputs to determine the appropriate
parameters to use in estimating the fair value adjustments.
|
|
|
|
Liquidity adjustment a type of bid-offer adjustment
to reflect the difference between the
mark-to-market
valuation of all open positions in the portfolio and the close
out cost. The liquidity adjustment is a portfolio level
adjustment and is a function of the liquidity and volatility of
the underlying risk positions.
|
19. New
Accounting Pronouncements
Accounting for transfers of financial
assets In June 2009, the FASB issued guidance which
amends the accounting for transfers of financial assets by
eliminating the concept of a qualifying special-purpose entity
(QSPE) and provides additional guidance with regard
to the accounting for transfers of financial assets. The
guidance is effective for all interim and annual periods
beginning after November 15, 2009. We adopted this guidance
on January 1, 2010. The adoption of this guidance did not
have a material impact on our financial position or results of
operations.
Accounting for consolidation of variable interest
entities In June 2009, the FASB issued guidance
which amends the accounting rules related to the consolidation
of variable interest entities (VIEs). The guidance
changes the approach for determining the primary beneficiary of
a VIE from a quantitative risk and reward model to a qualitative
model based on control and economics. Effective January 1,
2010, certain VIEs which are not consolidated currently will be
required to be consolidated. Under this new guidance, we
consolidated one asset-backed commercial paper conduit where we
provide substantially all of the liquidity facilities and have
the ability to direct most significant activities. The impact of
consolidating this entity on January 1, 2010 resulted in an
increase to our assets and liabilities of approximately
$3.5 billion and $3.8 billion, respectively, which
resulted in a decrease
64
HSBC USA Inc.
to the opening balance of common shareholders equity which
was recorded as an increase to retained earnings of
$1 million and a reduction to other comprehensive income of
$246 million. Since we elected to adopt the transition
mechanism for Risk Based Capital Requirements, there will be no
change to the way we calculate risk weighted assets against the
liquidity facilities of the above mentioned asset-backed
commercial paper conduit for the first two quarters of 2010.
There is therefore also no change to the Tier 1 capital
ratios for the first two quarters of 2010. Had we fully
transitioned to the Risk Based Capital requirements at
March 31, 2010, our risk weighted assets would have been
higher by approximately $2 billion which would not have had
a significant impact to our Tier 1 capital ratios. See
Note 16, Variable Interest Entities in these
consolidated financial statements for additional information.
Improving Disclosures about Fair Value
Measurements In January 2010, the FASB issued
guidance to improve disclosures about fair value measurements.
The guidance requires entities to disclose separately the
amounts of significant transfers in and out of Level 1 and
Level 2 fair measurements and describe the reasons for the
same. It also requires Level 3 reconciliation to be
presented on a gross basis, while disclosing purchases, sales,
issuances and settlements separately. The guidance is effective
for interim and annual financial periods beginning after
December 15, 2009, except for gross basis presentation for
Level 3 reconciliation, which is effective for interim and
annual periods beginning after December 15, 2010. We
adopted the new disclosure requirements in their entirety
effective January 1, 2010. See Note 18, Fair
Value Measurements in these consolidated financial
statements.
Subsequent Events In February 2010, the FASB
amended certain recognition and disclosure requirements for
subsequent events. The guidance clarifies an entity that either
(a) is an SEC filer, or (b) is a conduit bond obligor
for conduit debt securities that are traded in a public market
is required to evaluate subsequent events through the date the
financial statements are issued and in all other cases through
the date the financial statements are available to be issued.
The guidance eliminates the requirement to disclose the date
through which subsequent events are evaluated for an SEC filer.
The guidance was effective upon issuance. Adoption did not have
an impact on our financial position or results of operations.
Consolidation In February 2010, the FASB
issued an update that amends the guidance for consolidation of
certain investment funds. The revised guidance deferred the
consolidation requirements for a reporting entity that has an
interest in an entity (1) that has all the attributes of an
investment company, (2) for which it is industry practice
to apply measurement principles for financial reporting purposes
that are consistent with that of investment company, or
(3) which is a registered money market fund and is required
to comply or operate in accordance with certain requirements of
Investment Companies Act of 1940. An entity that qualifies for
deferral will have to comply with disclosure requirements
applicable to reporting entities with variable interests in
variable interest entities. The guidance is effective for all
interim and annual periods beginning after November 15,
2009. Adoption did not have an impact on our financial position
or results of operations.
Derivatives and Hedging In March 2010, the
FASB issued a clarification on the scope exception for embedded
credit derivatives. The guidance eliminates the scope exception
for bifurcation of embedded credit derivatives in interests in
securitized financial assets, unless they are created solely by
subordination of one financial debt instrument to another. The
guidance is effective beginning in the first reporting period
after June 15, 2010, with earlier adoption permitted for
the quarter beginning after March 31, 2010. This
clarification is not expected to have a material impact to our
financial position or results of operations.
65
HSBC USA Inc.
Item 2. Managements
Discussion and Analysis of Financial Condition and Results of
Operations
Forward-Looking
Statements
Managements Discussion and Analysis of Financial Condition
and Results of Operations (MD&A) should be read
in conjunction with the consolidated financial statements, notes
and tables included elsewhere in this report and with our Annual
Report on
Form 10-K
for the year ended December 31, 2009 (the 2009
Form 10-K).
MD&A may contain certain statements that may be
forward-looking in nature within the meaning of the Private
Securities Litigation Reform Act of 1995. In addition, we may
make or approve certain statements in future filings with the
SEC, in press releases, or oral or written presentations by
representatives of HSBC USA Inc. that are not statements of
historical fact and may also constitute forward-looking
statements. Words such as may, will,
should, would, could,
appears, believe, intends,
expects, estimates,
targeted, plans,
anticipates, goal and similar
expressions are intended to identify forward-looking statements
but should not be considered as the only means through which
these statements may be made. These matters or statements will
relate to our future financial condition, economic forecast,
results of operations, plans, objectives, performance or
business developments and will involve known and unknown risks,
uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different
from that which was expressed or implied by such forward-looking
statements. Forward-looking statements are based on our current
views and assumptions and speak only as of the date they are
made. HSBC USA Inc. undertakes no obligation to update any
forward-looking statement to reflect subsequent circumstances or
events.
Executive
Overview
HSBC USA Inc. is an indirect wholly owned subsidiary of HSBC
Holdings plc (HSBC). HSBC USA Inc. may also be
referred to in MD&A as we, us, or
our.
Current Environment During the first quarter
of 2010, economic conditions in the United States continued to
improve. Liquidity has returned to the financial markets for
most sources of funding except for mortgage securitization and
companies are able to issue debt with credit spreads now
approaching levels historically seen prior to the crisis,
despite the U.S. governments exit from some of its
support programs. However, the prolonged period of low Federal
funds rates continues to put pressure on spreads earned on our
deposit base. While the slowing pace of job losses is helping
the housing markets, the first-time homebuyer tax credit as well
as low interest rates resulting from government monetary policy
actions have been the main forces driving up home sales and
shrinking home inventories, which has resulted in home price
stabilization, particularly in the middle and lower price
sectors. Improved market conditions have also resulted in
recovery during the first quarter of 2010 of some of the
valuation losses previously recorded on several asset classes
during 2008 and into 2009. How sustainable these improvements
will be in the absence of these government actions remains to be
seen.
Deterioration in the job market continued to ease in the first
quarter of 2010 as job losses slowed in the first two months of
the year and job gains of over 150,000 were reported in March,
the biggest monthly gain in the last three years. Despite the
improving job picture, U.S. unemployment rates, which have
been a major factor in the deterioration of credit quality in
the U.S., remained stubbornly high at 9.7 percent in March
2010, a decrease of only 30 basis points since December
2009. In addition, a significant number of U.S. residents
are no longer looking for work and, therefore, are not reflected
in the U.S. unemployment rates. Unemployment rates in
17 states are greater than the U.S. national average
and unemployment rates in 11 states are at or above
11 percent while in New York, where approximately
32 percent of our loan portfolio is concentrated,
unemployment remained lower than the national average at
8.6 percent. The increases in unemployment rates have been
most pronounced in the markets which had previously experienced
the highest appreciation in home values. Unemployment has
continued to have an impact on the provision for credit losses
in our loan portfolio and in loan portfolios across the industry.
Concerns about the future of the U.S. economy, including
the pace and magnitude of recovery from the recent economic
recession, consumer confidence, volatility in energy prices,
previous volatility experienced by the credit markets and
corporate earnings will continue to influence the
U.S. economic recovery and the capital markets. In
66
HSBC USA Inc.
particular, continued improvement in unemployment rates and a
sustained recovery of the housing markets continue to remain
critical components of a broader U.S. economic recovery.
Further weakening in these components as well as in consumer
confidence may result in additional deterioration in consumer
payment patterns and credit quality. Although consumer
confidence has improved from the levels seen early in 2009, it
remains low on a historical basis. Weak consumer fundamentals
including declines in wage income, reduced consumer spending,
declines in wealth and a difficult job market continue to
depress consumer confidence. Additionally, there is uncertainty
as to the future course of monetary policy and uncertainty as to
the impact to the economy and consumer confidence when the
remaining actions taken by the government to restore faith in
the capital markets and stimulate consumer spending end. These
conditions in combination with general economic weakness and
recent and proposed regulatory changes will likely continue to
impact our results in 2010, the degree of which is largely
dependent upon the nature and timing of an economic recovery and
the impact of any further regulatory changes.
The U.S. Federal government and banking regulators
continued their efforts to stabilize the U.S. economy and
reform the financial markets throughout 2009 and into 2010. In
June 2009, the Administration unveiled its proposal for a
sweeping overhaul of the financial regulatory system. The
Financial Regulatory Reform proposals are comprehensive and
include the creation of an inter-agency Financial Services
Oversight Council to, among other things, identify emerging
risks and advise the Federal Reserve Board regarding
institutions whose failure could pose a threat to financial
stability; expand the Federal Reserve Boards powers to
regulate these systemically-important institutions and impose
more stringent capital and risk management requirements; create
a Consumer Financial Protection Agency (the CFPA) as
a single primary Federal consumer protection supervisor, which
will regulate credit, savings, payment and other consumer
financial products and services and providers of those products
and services; and impose comprehensive regulation of
over-the-counter
(OTC) derivatives markets, including credit default
swaps, and prudent supervision of OTC derivatives dealers. In
December 2009, the House of Representatives passed The Wall
Street Reform and Consumer Protection Act, which addresses many
of the Administrations proposed reforms. Similar
legislation was approved in March 2010 by the U.S. Senate
Committee on Banking, Housing and Urban Affairs. In addition, on
January 14, 2010, the Administration announced its
intention to propose a Financial Crisis Responsibility Fee to be
assessed against financial institutions with more than
$50 billion in consolidated assets for at least
10 years. It is likely that some portion of the financial
regulatory reform proposals will be adopted and enacted. The
reforms may have a significant impact on the operations of
financial institutions in the U.S., including us and our
affiliates. However, it is not possible to assess the impact of
financial regulatory reform until final legislation has been
enacted and the related regulations have been adopted.
Performance, Developments and Trends Our net
income was $554 million during the three months ended
March 31, 2010 compared to a net loss of $89 million
in the prior year quarter. Our income before income tax was
$874 million during the three months ended March 31,
2010 compared to a loss before income tax of $48 million
during the prior year quarter. Our results in both periods were
impacted by the change in the fair value of our own debt and the
related derivatives for which we have elected fair value option
and other non-recurring items which distort the ability of
investors to compare the underlying performance trends of our
business. The following table summarizes the collective impact
of these items on our loss before income tax for the three
months ended March 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Income (loss) before income tax, as reported
|
|
$
|
874
|
|
|
$
|
(48
|
)
|
Change in value of our own fair value option debt and related
derivatives
|
|
|
(33
|
)
|
|
|
(49
|
)
|
Gain relating to resolution of
lawsuit(1)
|
|
|
(5
|
)
|
|
|
(85
|
)
|
Gain on sale of equity interest in Wells Fargo HSBC Trade Bank
|
|
|
(66
|
)
|
|
|
-
|
|
Revenue associated with whole loan purchase
settlement(2)
|
|
|
(89
|
)
|
|
|
-
|
|
Gain on sale of equity interest in HSBC Private Bank (Suisse)
S.A.
|
|
|
-
|
|
|
|
(33
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income tax,
excluding above
items(3)
|
|
$
|
681
|
|
|
$
|
(215
|
)
|
|
|
|
|
|
|
|
|
|
67
HSBC USA Inc.
|
|
|
(1) |
|
The proceeds of the resolution of
this lawsuit in 2009 were used to redeem 100 preferred shares
held by CT Financial Services, Inc. as provided under the terms
of the preferred shares. The proceeds received in 2010 represent
the final judgment.
|
|
(2) |
|
Represents loans previously
purchased for resale from a third party.
|
|
(3) |
|
Represents a
non-U.S.
GAAP financial measure.
|
Our overall results for the three months ended March 31,
2010 improved significantly compared to the prior year quarter
as higher other revenues (losses) and lower provisions for
credit losses were partially offset by lower net interest income
and higher operating expenses.
Other revenues (losses) improved significantly compared to the
prior year quarter due primarily to the prior year quarter
reflecting reductions in other revenues (losses), largely
trading revenue associated with credit derivative products due
to the adverse financial market conditions which existed at that
time. Improved market conditions in 2010 have resulted in a
recovery of some of these valuation losses. A summary of the
significant valuation adjustments associated with market
disruptions that impacted revenue for the three month periods
ended March 31, 2010 and 2009 are presented in the
following table.
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Gains (Losses)
|
|
|
|
|
|
|
|
|
Insurance monoline structured credit products
|
|
$
|
56
|
|
|
$
|
(164
|
)
|
Other structured credit products
|
|
|
37
|
|
|
|
(193
|
)
|
Mortgage whole loans held for sale, including whole loan
purchase settlement (predominantly subprime)
|
|
|
77
|
|
|
|
(86
|
)
|
Other than temporary impairment on securities
available-for-sale
and
held-to-maturity
|
|
|
(28
|
)
|
|
|
(38
|
)
|
Leverage acquisition finance loans held for sale
|
|
|
(1
|
)
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
141
|
|
|
$
|
(446
|
)
|
|
|
|
|
|
|
|
|
|
Other revenues (losses) also improved during the quarter due to
higher gains on sales of equity investments and a gain
associated with a settlement related to certain whole loans
previously purchased for re-sale from a third party. These
increases were partially offset by lower credit card fees due to
lower levels of credit card and private label receivables,
changes in customer behavior, and lower delinquency levels as
well as the recent implementation of certain provisions of the
Credit Card Accountability Responsibility and Disclosure Act of
2009 (CARD Act) which resulted in lower over limit
and payment processing fees.
The market turmoil experienced over the past couple of years has
created stress for certain counterparties with whom we conduct
business as part of our lending and client intermediation
activities. We assess, monitor and control credit risk with
formal standards, policies and procedures that are designed to
ensure credit risks are assessed accurately, approved properly,
monitored regularly and managed actively. Consequently, we
believe any loss exposure related to counterparties with whom we
conduct business has been adequately reflected in our financial
statements at March 31, 2010.
Net interest income was $1,200 million during the three
months ended March 31, 2010 compared to $1,348 million
in the prior year quarter. The decrease reflects the impact of a
higher mix of lower yielding interest earning assets including
higher levels of interest bearing deposits with banks, lower
average loan balances and rates earned on these balances and
significantly lower rates earned on securities due to sales in
2009 to reduce prepayment risk and risk-weighted asset levels.
These reductions were partially offset by commercial loan
repricings and lower promotional balances on private label
credit cards as well as a lower cost of funds.
Our provision for credit losses decreased $963 million
during the first quarter of 2010 as compared to the year-ago
quarter as loan balances declined, economic and credit
conditions improved, including lower dollars of delinquency
since year-end in part due to seasonality and continued
stabilization in the housing markets. These conditions have
resulted in improved outlook on future loss estimates for our
credit card, and private label receivables as well as for
68
HSBC USA Inc.
our residential mortgage loan portfolio. Provision for credit
losses also decreased for both loans and loan commitments in the
commercial loan portfolio due to lower outstanding balances
including managed reductions in certain exposures and
improvements in the financial circumstances of several customer
relationships which led to credit upgrades on certain problem
credits and lower levels of nonperforming loans and criticized
assets. Also contributing to the decrease were fewer customer
downgrades across all business lines compared to the prior year
period. The combination of all of these factors has led to a net
recovery in provision for commercial loans during the three
months ended March 31, 2010. Given the nature of the
factors driving the reduction in commercial loan provision
during the quarter, the provision levels recognized in the first
quarter of 2010 should not be considered indicative of provision
levels in future quarters.
Operating expenses totaled $1,066 million in the first
quarter of 2010, an increase of 9.67 percent from the
year-ago quarter. Lower salaries and employee benefit expense
reflecting the centralization of additional shared services in
North America in HTSU as well as continued cost management
efforts and lower marketing expenses were offset by higher fees
paid to HTSU and other affiliates than the prior year quarter
due to the centralization of additional shared services across
North America and a change to how the refund anticipation loan
program is managed, which resulted in higher fees paid to HSBC
Finance.
Our efficiency ratio was 49.58 percent for the three months
ended March 31, 2010 as compared to 46.33 in the year-ago
period. The deterioration in the efficiency ratio in the first
quarter of 2010 resulted primarily from decreased net interest
income and higher operating expenses which were partially offset
by higher other revenues.
Our effective tax rate was 36.6 percent during the three
months ended March 31, 2010 as compared to
85.4 percent in the year-ago quarter. The effective tax
rate in 2010 reflects a substantially higher level of pre-tax
income, an increased level of low income housing tax credits and
an adjustment of uncertain tax positions. The effective tax rate
for 2009 was significantly impacted by the relative level of
pre-tax income, the sale of a minority stock interest that was
treated as a dividend for tax purposes and the settlement of an
IRS audit.
In October 2009, we announced that we had agreed to sell our
452 Fifth Avenue property in New York City, including the
1W. 39th Street building, for $330 million in cash. Under
the terms of the deal, we will lease back the entire
452 Fifth Avenue building for one year and floors one to
eleven for a total of 10 years. The transaction closed in
April 2010. The sale will result in a gain of approximately
$150 million; however, it will be deferred and recognized
over ten years due to our continuing involvement. The
headquarters of HSBC Bank USA remains in New York.
The financial information set forth below summarizes selected
financial highlights of HSBC USA Inc. as of March 31, 2010
and December 31, 2009 and for the three month periods ended
March 31, 2010 and 2009.
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net Income (loss)
|
|
$
|
554
|
|
|
$
|
(89
|
)
|
|
|
|
|
|
|
|
|
|
Rate of return on average :
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
1.22
|
%
|
|
|
(.20
|
)%
|
Total common shareholders equity
|
|
|
15.79
|
|
|
|
(3.60
|
)
|
Net interest margin to average earning assets
|
|
|
3.01
|
|
|
|
3.46
|
|
Efficiency ratio
|
|
|
49.58
|
|
|
|
46.33
|
|
Commercial loan net charge-off
ratio(1)
|
|
|
1.29
|
|
|
|
.56
|
|
Consumer loan net charge-off
ratio(1)
|
|
|
6.43
|
|
|
|
3.55
|
|
69
HSBC USA Inc.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
$
|
29,634
|
|
|
$
|
30,304
|
|
Consumer loans
|
|
|
45,664
|
|
|
|
49,185
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
75,298
|
|
|
$
|
79,489
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
$
|
2,608
|
|
|
$
|
2,908
|
|
|
|
|
|
|
|
|
|
|
Commercial allowance as a percent of
loans(1)
|
|
|
2.59
|
%
|
|
|
3.10
|
%
|
Commercial two-months-and-over contractual delinquency
|
|
|
2.33
|
|
|
|
3.04
|
|
Consumer allowance as a percent of
loans(1)
|
|
|
5.38
|
|
|
|
5.94
|
|
Consumer two-months-and-over contractual delinquency
|
|
|
6.00
|
|
|
|
5.97
|
|
Loan-to-deposits
ratio(2)
|
|
|
89.49
|
|
|
|
94.36
|
|
Total shareholders equity to total assets
|
|
|
8.36
|
|
|
|
8.87
|
|
Total capital to risk weighted assets
|
|
|
15.49
|
|
|
|
14.19
|
|
Tier 1 capital to risk weighted assets
|
|
|
10.75
|
|
|
|
9.61
|
|
|
|
|
(1) |
|
Excludes loans held for sale.
|
|
(2) |
|
Represents period end loans, net of
loss reserves, as a percentage of domestic deposits less
certificate of deposits equal to or greater than $100 thousand.
|
Loans excluding loans held for sale were $75.3 billion at
March 31, 2010 and $79.5 billion at December 31,
2009. Loans declined compared to December 31, 2009 driven
by run-off in all of our consumer portfolios. We continue to
sell the majority of new residential mortgage loan originations
to government sponsored enterprises and to allow the existing
on-balance sheet portfolio to run-off. The decline in credit
card and private label receivables reflects lower customer
spending, the continued impact from actions previously taken to
reduce risk in these portfolios, seasonal paydowns in credit
card balances and an increased focus by customers to reduce
outstanding credit card debt. Commercial loans also decreased
compared to year-end due to increased paydowns and managed
reductions in certain exposures, partially offset by the
adoption of new accounting guidance on the consolidation of
variable interest entities which resulted in the consolidation
of an incremental $1.5 billion of commercial loans in the
quarter. See Balance Sheet Review for a more
detailed discussion of the changes in loan balances.
Credit Quality Our allowance for credit
losses as a percentage of total loans decreased during the three
months ended March 31, 2010 as compared to
December 31, 2009. The decrease in our allowance ratio
reflects a lower allowance on our residential mortgage, credit
card and private label receivable portfolios due to lower
outstanding balances and improved credit quality, in part due to
seasonality and improvement in economic conditions. Our
commercial loan allowance for credit losses ratio also fell as
economic conditions and related credit quality began to
stabilize and our future loss estimates improved.
Consumer two-months-and-over contractual delinquency as a
percentage of loans and loans held for sale (delinquency
ratio) for consumer loans increased to 6.00 percent
at March 31, 2010 as compared to 5.97 percent at
December 31, 2009. Dollars of delinquency fell across all
consumer portfolios during the quarter while outstanding loan
balances also declined. The slight increase in the delinquency
ratio since December 31, 2009 was driven by our residential
mortgage loan portfolio as loan balances in this portfolio
declined at a faster rate than delinquency. See Credit
Quality in this MD&A for a more detailed discussion
of the decrease in the delinquency ratios.
Net charge-offs as a percentage of average loans (net
charge-off ratio) decreased 5 basis points as
compared to December 31, 2009 primarily due to lower
residential mortgage and private label card charge-offs. We
experienced lower dollars of charge-off in all loan categories
during the first quarter of 2010 driven by lower receivable
levels
70
HSBC USA Inc.
and improved credit quality, in part due to seasonality. These
favorable trends were partially offset by the impact from
continued weakness in the U.S. economy including continued
high unemployment levels and portfolio seasoning, as the higher
levels of delinquency reported in prior periods continue to
migrate to charge-off. Lower average outstanding loan balances
as discussed above have also contributed to the increase in our
charge-off ratio. See Credit Quality in this
MD&A for a more detailed discussion of the net charge-off
ratio and criticized asset balances.
Funding and Capital Capital amounts and
ratios are calculated in accordance with current banking
regulations. Our Tier 1 capital ratio was 10.75 percent and
9.61 percent at March 31, 2010 and December 31,
2009, respectively. Our capital levels remain well above levels
established by current banking regulations as well
capitalized. We received no capital contributions from our
immediate parent, HNAI during the first quarter of 2010 as
compared to $1.1 billion during the year-ago quarter which
was used to support the credit card and auto finance receivable
purchases from HSBC Finance in January 2009.
As part of the regulatory approvals with respect to the
affiliate receivable purchases completed in January 2009, HSBC
Bank USA and HSBC made certain additional capital commitments to
ensure that HSBC Bank USA holds sufficient capital with respect
to the purchased receivables that are or may become
low-quality assets, as defined by the Federal
Reserve Act. These capital requirements, which require a
risk-based capital charge of 100 percent for each
low-quality asset transferred or arising in the
purchased portfolios rather than the eight percent capital
charge applied to similar assets that are not part of the
transferred portfolios, are applied both for purposes of
satisfying the terms of the commitments and for purposes of
measuring and reporting HSBC Bank USAs risk-based capital
and related ratios. This treatment applies as long as the
low-quality assets are owned by an insured bank. During the
three months ended March 31, 2010, HSBC Bank USA sold low
quality auto finance loans with a net book value of
approximately $103 million to a non-bank subsidiary of HSBC
USA Inc. to reduce this capital requirement. Capital ratios and
amounts at March 31, 2010 and December 31, 2009 in the
table above reflect this revised regulatory reporting. At
March 31, 2010 and December 31, 2009, we have exceeded
the minimum ratios required.
Subject to regulatory approval, HSBC North America will be
required to adopt Basel II provisions no later than
April 1, 2011. HSBC USA will not report separately under
the new rules, but HSBC Bank USA will report under the new rules
on a stand-alone basis. Whether any increase in regulatory
capital will be required prior to the Basel II adoption
date will depend upon our prevailing risk profile. Adoption must
be preceded by a parallel run period of at least four quarters,
and requires the approval of U.S. regulators. This parallel
run was initiated in January 2010.
As of March 31, 2010, there are no pending actions in terms
of changes to ratings on the debt of HSBC USA Inc. or HSBC Bank
USA from any of the rating agencies.
71
HSBC USA Inc.
Income Before Income Tax Expense Significant
Trends Income before income tax expense, and
various trends and activity affecting operations, are summarized
in the following table.
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Income (loss) before income tax from prior year
|
|
$
|
(48
|
)
|
|
$
|
(442
|
)
|
Increase (decrease) in income before income tax attributable to:
|
|
|
|
|
|
|
|
|
Balance sheet management
activities(1)
|
|
|
(192
|
)
|
|
|
361
|
|
Trading related
activities(2)
|
|
|
358
|
|
|
|
590
|
|
Credit card
fees(3)
|
|
|
(124
|
)
|
|
|
128
|
|
Loans held for
sale(4)
|
|
|
163
|
|
|
|
31
|
|
Residential mortgage banking related
revenue(5)
|
|
|
(102
|
)
|
|
|
32
|
|
Gain (loss) on own debt designated at fair value and related
derivatives(6)
|
|
|
(16
|
)
|
|
|
49
|
|
Gain (loss) on instruments at fair value and related
derivatives, excluding own
debt(6)
|
|
|
(50
|
)
|
|
|
63
|
|
Provision for credit
losses(7)
|
|
|
963
|
|
|
|
(676
|
)
|
All other
activity(8)
|
|
|
(78
|
)
|
|
|
(184
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax for current period
|
|
$
|
874
|
|
|
$
|
(48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Balance sheet management activities
are comprised primarily of net interest income and, to a lesser
extent, gains on sales of investments, resulting from management
of interest rate risk associated with the repricing
characteristics of balance sheet assets and liabilities. For
additional discussion regarding Global Banking and Markets net
interest income, trading revenues, and the Global Banking and
Markets business segment see the caption Business
Segments section of this MD&A.
|
|
(2) |
|
For additional discussion regarding
trading revenue (losses), see the caption Results of
Operations in this MD&A.
|
|
(3) |
|
For additional discussion regarding
credit card fees, see the caption Results of
Operations in this MD&A.
|
|
(4) |
|
For additional discussion regarding
loans held for sale, see the caption Balance Sheet
Revenue in this MD&A.
|
|
(5) |
|
For additional discussion regarding
residential mortgage banking revenue, see the caption
Results of Operations in this MD&A.
|
|
(6) |
|
For additional discussion regarding
fair value option and fair value measurement, see Note 10,
Fair Value Option, in the accompanying consolidated
financial statements.
|
|
(7) |
|
For additional discussion regarding
provision for credit losses, see the caption Results of
Operations in this MD&A.
|
|
(8) |
|
Represents other core banking
activities.
|
Basis of
Reporting
Our consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United
States (U.S. GAAP). Certain reclassifications
have been made to prior year amounts to conform to the current
year presentation.
72
HSBC USA Inc.
In addition to the U.S. GAAP financial results reported in
our consolidated financial statements, MD&A includes
reference to the following information which is presented on a
non-U.S. GAAP
basis:
International Financial Reporting Standards
(IFRSs) Because HSBC reports results in
accordance with IFRSs and IFRSs results are used in measuring
and rewarding performance of employees, our management also
separately monitors net income under IFRSs (a
non-U.S. GAAP
financial measure). The following table reconciles our net
income on a U.S. GAAP basis to net income on an IFRS basis.
|
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Net income (loss) U.S. GAAP basis
|
|
$
|
554
|
|
|
$
|
(89
|
)
|
Adjustments, net of tax:
|
|
|
|
|
|
|
|
|
Unquoted equity securities
|
|
|
-
|
|
|
|
7
|
|
Reclassification of financial assets
|
|
|
(10
|
)
|
|
|
13
|
|
Securities
|
|
|
34
|
|
|
|
(94
|
)
|
Derivatives
|
|
|
2
|
|
|
|
1
|
|
Loan impairment
|
|
|
7
|
|
|
|
5
|
|
Property
|
|
|
1
|
|
|
|
2
|
|
Pension costs
|
|
|
57
|
|
|
|
7
|
|
Purchased loan portfolios
|
|
|
(26
|
)
|
|
|
29
|
|
Servicing assets
|
|
|
1
|
|
|
|
9
|
|
Return of capital
|
|
|
(3
|
)
|
|
|
-
|
|
Interest recognition
|
|
|
-
|
|
|
|
(1
|
)
|
Other
|
|
|
10
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Net profit (loss) IFRSs basis
|
|
|
627
|
|
|
|
(110
|
)
|
Tax benefit (expense) IFRSs basis
|
|
|
356
|
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax IFRSs basis
|
|
$
|
983
|
|
|
$
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
A summary of the significant differences between U.S. GAAP
and IFRSs as they impact our results are presented below:
Unquoted equity securities Under IFRSs,
equity securities which are not quoted on a recognized exchange,
but for which fair value can be reliably measured, are required
to be measured at fair value. Securities measured at fair value
under IFRSs are classified as either
available-for-sale
securities, with changes in fair value recognized in
shareholders equity, or as trading securities, with
changes in fair value recognized in income. Under
U.S. GAAP, equity securities that are not quoted on a
recognized exchange are not considered to have a readily
determinable fair value and are required to be measured at cost,
less any provisions for known impairment, in other assets.
Reclassification of financial assets Certain
securities were reclassified from trading assets to
loans and receivables under IFRSs as of July 1,
2008 pursuant to an amendment to IAS 39, Financial
Instruments: Recognition and Measurement (IAS
39), and are no longer marked to market under IFRSs. In
November 2008, additional securities were similarly transferred
to loans and receivables. These securities continue to be
classified as trading assets under U.S. GAAP.
Additionally, certain Leverage Acquisition Finance
(LAF) loans were classified as Trading
Assets for IFRSs and to be consistent, an irrevocable fair
value option was elected on these loans under U.S. GAAP on
January 1, 2008. These loans were reclassified to
loans and advances as of July 1, 2008 pursuant
to the IAS 39 amendment discussed above. Under U.S. GAAP,
these loans are classified as held for sale and
carried at fair value due to the irrevocable nature of the fair
value option.
73
HSBC USA Inc.
Securities Effective January 1, 2009
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
accumulated other comprehensive income provided we have
concluded we do not intend to sell the security and it is
more-likely-than-not that we will not have to sell the security
prior to recovery. Under IFRSs, there is no bifurcation of
other-than-temporary
impairment and the entire portion is recognized in earnings.
Also under IFRSs, recoveries in
other-than-temporary
impairment related to improvement in the underlying credit
characteristics of the investment are recognized immediately in
earnings while under U.S. GAAP, they are amortized to
income over the remaining life of the security. There are also
less significant differences in measuring
other-than-temporary
impairment under IFRSs versus U.S. GAAP.
Under IFRSs, securities include HSBC shares held for stock plans
at fair value. These shares held for stock plans are recorded at
fair value through other comprehensive income and subsequently
recognized in profit and loss as the shares vest. If it is
determined these shares have become impaired, the fair value
loss is recognized in profit and loss and any fair value loss
recorded in other comprehensive income is reversed. There is no
similar requirement under U.S. GAAP.
Derivatives Effective January 1, 2008,
U.S. GAAP removed the observability requirement of
valuation inputs to allow up-front recognition of the difference
between transaction price and fair value in the consolidated
statement of loss. Under IFRSs, recognition is permissible only
if the inputs used in calculating fair value are based on
observable inputs. If the inputs are not observable, profit and
loss is deferred and is recognized 1) over the period of
contract, 2) when the data becomes observable, or
3) when the contract is settled.
Loan impairment IFRSs requires a discounted
cash flow methodology for estimating impairment on pools of
homogeneous consumer loans which requires the incorporation of
the time value of money relating to recovery estimates. Also
under IFRSs, future recoveries on charged-off loans are
accounted 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.
Property Under IFRSs, the value of property
held for own use reflects revaluation surpluses recorded prior
to January 1, 2004. Consequently, the values of tangible
fixed assets and shareholders equity are lower under
U.S. GAAP than under IFRSs. There is a correspondingly
lower depreciation charge and higher net income as well as
higher gains (or smaller losses) on the disposal of fixed assets
under U.S. GAAP. For investment properties, net income
under U.S. GAAP does not reflect the unrealized gain or
loss recorded under IFRSs for the period.
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 exceed gains 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 US GAAP, these changes were considered to be
a negative plan amendment which resulted in no immediate income
recognition.
Purchased Loan Portfolios Under US GAAP,
purchased loans for which there has been evidence of credit
deterioration at the time of acquisition are recorded at an
amount based on the net cash flows expected to be collected.
This generally results in only a portion of the loans in the
acquired portfolio being recorded at fair value. Under IFRSs,
the entire purchased portfolio is recorded at fair value. When
recording purchased loans at fair value, the difference between
all estimated future cash collections and the purchase price
paid is recognized into income using the effective interest
method. An allowance for loan loss is not established unless the
original estimate of expected future cash collections declines.
Servicing assets Under IAS 38, servicing
assets are initially recorded on the balance sheet at cost and
amortized over the projected life of the assets. Servicing
assets are periodically tested for impairment with impairment
adjustments charged against current earnings. Under
U.S. GAAP, we generally record servicing assets on the
balance sheet at fair value. Subsequent adjustments to fair
value are generally reflected in current period earnings.
74
HSBC USA Inc.
Return of capital In 2010, this includes the
recognition of $3 million relating to the payment to CT
Financial Services, Inc. in connection with the resolution of a
lawsuit which for IFRS was treated as the satisfaction of a
liability and not as revenue and a subsequent capital
transaction as was the case under U.S. GAAP.
Interest recognition The calculation of
effective interest rates under IAS 39 requires an estimate of
all 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 interest in
the loan would increase to an amount greater than the amount at
which the borrower could settle the obligation. Also under
U.S. GAAP, prepayment penalties are generally recognized as
received.
Other Other includes the net impact of
certain adjustments which represent differences between
U.S. GAAP and IFRSs that were not individually material,
including deferred loan origination costs and fees,
restructuring costs and loans held for sale.
Balance
Sheet Review
We utilize deposits and borrowings from various sources to
provide liquidity, fund balance sheet growth, meet cash and
capital needs, and fund investments in subsidiaries. Balance
sheet totals at March 31, 2010 and increases (decreases)
over December 31, 2009, are summarized in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
(Decrease) from
|
|
|
|
March 31,
|
|
|
December 31, 2009
|
|
|
|
2010
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Period end assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
$
|
37,652
|
|
|
$
|
13,338
|
|
|
|
54.9
|
%
|
Loans, net
|
|
|
72,074
|
|
|
|
(3,554
|
)
|
|
|
(4.7
|
)
|
Loans held for sale
|
|
|
2,608
|
|
|
|
(300
|
)
|
|
|
(10.3
|
)
|
Trading assets
|
|
|
24,215
|
|
|
|
(1,600
|
)
|
|
|
(6.2
|
)
|
Securities
|
|
|
37,687
|
|
|
|
7,119
|
|
|
|
23.3
|
|
Other assets
|
|
|
12,812
|
|
|
|
966
|
|
|
|
8.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
187,048
|
|
|
$
|
15,969
|
|
|
|
9.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funding sources:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
124,811
|
|
|
$
|
6,474
|
|
|
|
5.5
|
%
|
Trading liabilities
|
|
|
10,104
|
|
|
|
2,094
|
|
|
|
26.1
|
|
Short-term borrowings
|
|
|
11,541
|
|
|
|
5,029
|
|
|
|
77.2
|
|
All other liabilities
|
|
|
7,628
|
|
|
|
2,593
|
|
|
|
51.5
|
|
Long-term debt
|
|
|
17,334
|
|
|
|
(674
|
)
|
|
|
(3.7
|
)
|
Shareholders equity
|
|
|
15,630
|
|
|
|
453
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
187,048
|
|
|
$
|
15,969
|
|
|
|
9.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term Investments Short-term investments
include cash and due from banks, interest bearing deposits with
banks, Federal funds sold and securities purchased under resale
agreements. Balances will fluctuate from period to period
depending upon our liquidity position at the time.
75
HSBC USA Inc.
Loans, Net Loan balances at March 31, 2010
and increases (decreases) over December 31, 2009, are
summarized in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
(Decrease) from
|
|
|
|
March 31,
|
|
|
December 31, 2009
|
|
|
|
2010
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Total commercial loans
|
|
$
|
29,634
|
|
|
$
|
(670
|
)
|
|
|
(2.2
|
)%
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages, excluding home equity mortgages
|
|
|
13,512
|
|
|
|
(210
|
)
|
|
|
(1.5
|
)
|
Home equity mortgages
|
|
|
4,046
|
|
|
|
(118
|
)
|
|
|
(2.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential mortgages
|
|
|
17,558
|
|
|
|
(328
|
)
|
|
|
(1.8
|
)
|
Auto finance
|
|
|
1,453
|
|
|
|
(248
|
)
|
|
|
(14.6
|
)
|
Private label
|
|
|
13,466
|
|
|
|
(1,625
|
)
|
|
|
(10.8
|
)
|
Credit Card
|
|
|
11,816
|
|
|
|
(1,232
|
)
|
|
|
(9.4
|
)
|
Other consumer
|
|
|
1,371
|
|
|
|
(88
|
)
|
|
|
(6.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer loans
|
|
|
45,664
|
|
|
|
(3,521
|
)
|
|
|
(7.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
75,298
|
|
|
|
(4,191
|
)
|
|
|
(5.3
|
)
|
Allowance for credit losses
|
|
|
3,224
|
|
|
|
(637
|
)
|
|
|
(16.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
$
|
72,074
|
|
|
$
|
(3,554
|
)
|
|
|
(4.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans decreased compared to December 31, 2009.
Commercial loan balances at March 31, 2010 reflect the
implementation of new accounting guidance relating to the
consolidation of variable interest entities (VIEs)
which resulted in an incremental $1.5 billion of commercial
loans being recorded on our balance sheet. Excluding this
impact, commercial loan balances decreased $2.1 billion in
the quarter due to increased paydowns and managed reductions in
certain exposures, including higher underwriting standards and
lower overall demand from our core customer base.
Residential mortgage loans have decreased as compared to
year-end. As a result of balance sheet initiatives to manage
interest rate risk and improve the structural liquidity of HSBC
Bank USA, we sell a majority of our new residential loan
originations through the secondary markets and have allowed the
existing loan portfolio to run off, resulting in reductions in
loan balances. The decreases were partially offset by increases
to the portfolio associated with originations targeted at our
Premier customer relationships.
As previously discussed, real estate markets in a large portion
of the United States have been and continue to be affected by
stagnation or declines in property values. As a result, the
loan-to-value
(LTV) ratios for our mortgage loan portfolio have
generally deteriorated since origination. Refreshed
loan-to-value
ratios for our mortgage loan portfolio, excluding subprime
residential mortgage loans held for sale, are presented in the
table below. The trend in these ratios reflects the continued
stabilization in the housing markets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refreshed
LTVs(1)(2)
|
|
|
Refreshed
LTVs(1)(2)
|
|
|
|
at March 31, 2010
|
|
|
at December 31, 2009
|
|
|
|
First Lien
|
|
|
Second Lien
|
|
|
First Lien
|
|
|
Second Lien
|
|
|
|
|
LTV<80%
|
|
|
71.6
|
%
|
|
|
62.4
|
%
|
|
|
71.5
|
%
|
|
|
62.8
|
%
|
80%£LTV<90%
|
|
|
14.0
|
|
|
|
14.3
|
|
|
|
14.3
|
|
|
|
14.9
|
|
90%£LTV<100%
|
|
|
7.5
|
|
|
|
10.0
|
|
|
|
7.7
|
|
|
|
9.5
|
|
LTV³100%
|
|
|
6.9
|
|
|
|
13.3
|
|
|
|
6.5
|
|
|
|
12.8
|
|
Average LTV for portfolio
|
|
|
68.1
|
|
|
|
74.4
|
|
|
|
68.1
|
|
|
|
74.2
|
|
76
HSBC USA Inc.
|
|
|
(1) |
|
Refreshed LTVs for first liens are
calculated as the current estimated property value expressed as
a percentage of the receivable balance as of the reporting date.
Refreshed LTVs for second liens are calculated as the current
estimated property value expressed as a percentage of the
receivable balance as of the reporting date plus the senior lien
amount at origination. Current estimated property values are
derived from the propertys appraised value at the time of
receivable origination updated by the change in the Office of
Federal Housing Enterprise Oversights 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.
|
|
(2) |
|
Current 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. Therefore, the information in the table above
reflects current estimated property values using HPIs as of
December 31, 2009 and September 30, 2009, respectively.
|
Credit card and private label receivable balances decreased due
to lower consumer spending, the continued impact from actions
previously taken to mitigate risk including tighter underwriting
criteria to lower the risk profile of the portfolio, seasonal
paydowns in credit card balances and an increased focus by
customers to reduce outstanding credit card debt and, as it
relates to the private label portfolio, the exit of certain
merchant relationships.
Auto finance loans have decreased due to run-off of the
portfolio purchased from HSBC Finance and the continued run-off
of our indirect auto financing loans which we no longer
originate.
Other consumer loans have decreased primarily due to the
discontinuation of originations of student loans and run-off of
our installment loan portfolio.
Loans Held for Sale Loans held for sale at
March 31, 2010 and increases (decreases) over
December 31, 2009, are summarized in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
(Decrease) from
|
|
|
|
March 31,
|
|
|
December 31, 2009
|
|
|
|
2010
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Total commercial loans
|
|
$
|
1,451
|
|
|
$
|
325
|
|
|
|
28.9
|
%
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
1,129
|
|
|
|
(257
|
)
|
|
|
(18.5
|
)
|
Auto Finance
|
|
|
-
|
|
|
|
(353
|
)
|
|
|
(100.0
|
)
|
Other consumer
|
|
|
28
|
|
|
|
(15
|
)
|
|
|
(34.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer loans
|
|
|
1,157
|
|
|
|
(625
|
)
|
|
|
(35.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans held for sale
|
|
$
|
2,608
|
|
|
$
|
(300
|
)
|
|
|
(10.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We originate commercial loans in connection with our
participation in a number of leveraged acquisition finance
syndicates. A substantial majority of these loans were
originated with the intent of selling them to unaffiliated third
parties and are classified as commercial loans held for sale.
Commercial loans held for sale under this program were
$1.0 billion and $1.1 billion at March 31, 2010
and December 31, 2009, respectively, all of which are
recorded at fair value. Commercial loan balances under this
program decreased compared to December 31, 2009 due to loan
sales. In the first quarter of 2010, we provided foreign
currency denominated loans to a third party which are classified
as commercial loans held for sale and for which we elected to
apply fair value option. The fair value of commercial loans held
for sale under this program was $419 million at
March 31, 2010. See Note 10, Fair Value
Option for further information.
Residential mortgage loans held for sale include subprime
residential mortgage loans of $734 million and
$757 million at March 31, 2010 and December 31,
2009, respectively, that were acquired from unaffiliated third
parties and from HSBC Finance with the intent of securitizing or
selling the loans to third parties. Also included in residential
mortgage loans held for sale are first mortgage loans originated
and held for sale primarily to various government sponsored
enterprises. We retain the servicing rights in relation to these
mortgages upon sale. Balances declined in the first quarter due
to sales, partially offset by improved valuations as discussed
below.
77
HSBC USA Inc.
Auto finance loans held for sale at December 31, 2009 were
sold to HSBC Finance during the first quarter of 2010 to
facilitate the completion of a loan sale by HSBC Finance to a
third party.
Other consumer loans held for sale consist of student loans
which we no longer originate. The decrease since
December 31, 2009 reflects the sale of a portion of these
loans in the first quarter of 2010.
Loans held for sale are recorded at the lower of cost or market
value. While the book value of loans held for sale continued to
exceed fair value at March 31, 2010, we experienced a
decrease in the valuation allowance during the first quarter of
2010 due to improved conditions and reduced volatility in the
U.S. residential mortgage markets.
Trading Assets and Liabilities Trading assets and
liabilities balances at March 31, 2010 and increases
(decreases) over December 31, 2009, are summarized in the
table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
(Decrease) from
|
|
|
|
March 31,
|
|
|
December 31, 2009
|
|
|
|
2010
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Trading assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities(1)
|
|
$
|
4,992
|
|
|
$
|
(348
|
)
|
|
|
(6.5
|
)%
|
Precious metals
|
|
|
11,827
|
|
|
|
(429
|
)
|
|
|
(3.5
|
)
|
Fair value of derivatives
|
|
|
7,396
|
|
|
|
(823
|
)
|
|
|
(10.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24,215
|
|
|
$
|
(1,600
|
)
|
|
|
(6.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold, not yet purchased
|
|
$
|
1,102
|
|
|
$
|
971
|
|
|
|
100+
|
%
|
Payable for precious metals
|
|
|
3,758
|
|
|
|
1,202
|
|
|
|
47.0
|
|
Fair value of derivatives
|
|
|
5,244
|
|
|
|
(79
|
)
|
|
|
(1.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,104
|
|
|
$
|
2,094
|
|
|
|
26.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes U.S. Treasury securities,
securities issued by U.S. Government agencies and U.S.
Government sponsored enterprises, other asset backed securities,
corporate bonds and debt securities.
|
Securities balances at March 31, 2010 decreased slightly
from year-end as increased market values for asset-backed
securities were offset by lower security levels.
Lower precious metals trading assets at March 31, 2010 as
compared to December 31, 2009 were primarily due to lower
gold inventory. Higher payables for precious metals from
year-end were due to increased balances in gold and silver.
Derivative assets and liabilities balances as compared to
year-end 2009 were impacted by market volatility as valuations
of foreign exchange, interest rate and credit derivatives all
reduced from spread tightening in all sectors. Also, credit
derivative levels continued to decrease as we actively sought to
reduce exposure.
78
HSBC USA Inc.
Deposits Deposit balances by major depositor
categories at March 31, 2010 and increases (decreases) over
December 31, 2009, are summarized in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) from
|
|
|
|
March 31,
|
|
|
December 31, 2009
|
|
|
|
2010
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Individuals, partnerships and corporations
|
|
$
|
102,437
|
|
|
$
|
4,030
|
|
|
|
4.1
|
%
|
Domestic and foreign banks
|
|
|
15,709
|
|
|
|
2,160
|
|
|
|
15.9
|
|
U.S. Government, states and political subdivisions
|
|
|
4,290
|
|
|
|
(124
|
)
|
|
|
(2.8
|
)
|
Foreign governments and official institutions
|
|
|
2,375
|
|
|
|
408
|
|
|
|
20.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
124,811
|
|
|
$
|
6,474
|
|
|
|
5.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total core
deposits(1)
|
|
$
|
83,451
|
|
|
$
|
224
|
|
|
|
.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We monitor core
deposits as a key measure for assessing results of our
core banking network. Consistent with the regulatory definition,
core deposits generally include all domestic demand, money
market and other savings accounts, as well as time deposits with
balances not exceeding $100,000.
|
Deposits continued to be a key source of funding during the
first quarter of 2010. Total deposits at March 31, 2010
increased 5.5 percent compared to year-end due largely to
higher deposits from affiliates as well as growth in
branch-based deposit products driven primarily by our Premier
and branch expansion strategies and continued growth in the
online savings product. Given our overall liquidity position, we
continue to manage down low margin wholesale deposits in order
to maximize profitability. Our relative liquidity strength has
also allowed us to lower rates to be in line with our
competition on several low margin deposit products. Core
domestic deposits, which are the substantial source of our core
liquidity, increased modestly during the quarter as a
significant portion of the growth in deposits was driven by an
increase in affiliate deposits which are not eligible for
inclusion in the regulatory definition of core deposits referred
to in the table above.
We maintain a growth strategy for our core retail banking
business, which includes building deposits and wealth management
across multiple markets, channels and segments. This strategy
includes various initiatives, such as:
|
|
|
|
|
HSBC Premier, HSBCs global banking service that offers
internationally minded mass affluent customers unique
international services seamlessly delivered through HSBCs
global network coupled with a premium local service with a
dedicated premier relationship manager. In 2010, Premier
Investor savings has grown to $8.1 billion at
March 31, 2010 as compared to $7.4 billion at
December 31, 2009 and Premier Checking has grown to
$4.4 billion at March 31, 2010 compared to
$4.2 billion at December 31, 2009;
|
|
|
|
Internet based products, including Online Savings, Online
Payment and Online Certificate of Deposit accounts. Online
Savings balances have grown to $16.2 billion at
March 31, 2010 as compared to $15.6 billion at
December 31, 2009. Online certificates of deposit have
declined to $630 million at March 31, 2010 compared to
$741 million at December 31, 2009. In January 2010,
HSBC Direct was rebranded to HSBC Advance, which is consistent
with our global focus;
|
|
|
|
Retail branch expansion in existing and new geographic markets
to largely support the needs of our internationally minded
customers. During the first quarter of 2010, we opened four new
branches in the states of California and Virginia; and
|
|
|
|
Driving cross-sell through closer alignment across all lines of
business.
|
Short-Term Borrowings Increased balances at
March 31, 2010 from December 31, 2009 levels were
driven by increased commercial paper balances due to the
consolidation of the Bryant Park commercial paper conduit as a
result of adopting new VIE accounting guidance effective
January 1, 2010 and higher precious metals borrowings.
79
HSBC USA Inc.
Long-Term Debt Long-term debt has continued to
decline as our overall asset levels have decreased and we
continue to focus on deposit gathering activities. Incremental
issuances from the $40 billion HSBC Bank USA Global Bank
Note Program totaled $147 million during the three months
ended March 31, 2010. Total debt outstanding under this
program was $3.6 billion and $3.5 billion at
March 31, 2010 and December 31, 2009.
Incremental long-term debt borrowings from our shelf
registration statement with the Securities and Exchange
Commission totaled $430 million and $282 million
during the three months ended March 31, 2010 and 2009,
respectively. Total long term debt outstanding under this shelf
was $5.7 billion and $5.5 billion at March 31,
2010 and December 31, 2009.
We had borrowings from the Federal Home Loan Bank
(FHLB) of $1.0 billion at both March 31,
2010 and December 31, 2009. At March 31, 2010, we had
the ability to access further borrowings of up to
$2.0 billion based on the amount pledged as collateral with
the FHLB.
In January 2009 as part of the purchase of the GM and UP
Portfolio from HSBC Finance, we assumed $6.1 billion of
securities backed by credit card receivables which were
accounted for as secured financings. Borrowings under these
facilities totaled $2.2 billion and $2.4 billion at
March 31, 2010 and December 31, 2009, respectively.
We have entered into a series of transactions with VIEs
organized by HSBC affiliates and unrelated third parties. We are
the primary beneficiary of certain of these VIEs under the
applicable accounting literature and, accordingly, we have
consolidated the assets and the debt of these VIEs. As mentioned
above, on January 1, 2010, we adopted new guidance issued
by the Financial Accounting Standards Board which amends
accounting rules relating to the consolidation of VIEs.
Application of this new guidance has resulted in the
consolidation of one additional VIE and, therefore, the
consolidated debt of VIEs we now report is greater than
that reported in previous periods. Debt obligations of VIEs
totaling $5.4 billion were included in short-term
borrowings and long-term debt at March 31, 2010. Debt
obligations of VIEs totaling $3.1 billion were included in
long-term debt at December 31, 2009. See Note 16,
Variable Interest Entities in the accompanying
consolidated financial statements for additional information
regarding VIE arrangements.
Results
of Operations
Net Interest Income Net interest income is the
total interest income on earning assets less the total interest
expense on deposits and borrowed funds. In the discussion that
follows, interest income and rates are presented and analyzed on
a taxable equivalent basis to permit comparisons of yields on
tax-exempt and taxable assets. An analysis of consolidated
average balances and interest rates on a taxable equivalent
basis is presented in this MD&A under the caption
Consolidated Average Balances and Interest Rates.
The significant components of net interest margin are summarized
in the following table:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Yield on total earning assets
|
|
|
3.82
|
%
|
|
|
4.92
|
%
|
Rate paid on interest bearing liabilities
|
|
|
0.97
|
|
|
|
1.74
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread
|
|
|
2.85
|
|
|
|
3.18
|
|
Benefit from net non-interest earning or paying funds
|
|
|
0.16
|
|
|
|
0.28
|
|
|
|
|
|
|
|
|
|
|
Net interest margin to earning
assets(1)
|
|
|
3.01
|
%
|
|
|
3.46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Selected financial ratios are
defined in the Glossary of Terms in our 2009 Form
10-K.
|
80
HSBC USA Inc.
Significant trends affecting the comparability of 2010 and
2009 net interest income and interest rate spread are
summarized in the following table. Net interest income in the
table is presented on a taxable equivalent basis.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
Interest Rate
|
|
|
|
Amount
|
|
|
Spread
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income/interest rate spread from prior year
|
|
$
|
1,354
|
|
|
|
3.18
|
%
|
Increase (decrease) in net interest income associated with:
|
|
|
|
|
|
|
|
|
Trading related activities
|
|
|
(61
|
)
|
|
|
|
|
Balance sheet management
activities(1)
|
|
|
(105
|
)
|
|
|
|
|
Private label credit card portfolio
|
|
|
(6
|
)
|
|
|
|
|
Credit card portfolio
|
|
|
(16
|
)
|
|
|
|
|
Commercial loans
|
|
|
(35
|
)
|
|
|
|
|
Deposits
|
|
|
14
|
|
|
|
|
|
Residential mortgage banking
|
|
|
(10
|
)
|
|
|
|
|
Other activity
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/interest rate spread for current year
|
|
$
|
1,205
|
|
|
|
2.85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents our activities to manage
interest rate risk associated with the repricing characteristics
of balance sheet assets and liabilities. Interest rate risk, and
our approach to manage such risk, are described under the
caption Risk Management in this Form
10-Q.
|
Trading Related Activities Net interest income for
trading related activities decreased during the three months
ended March 31, 2010 due primarily to lower average
balances of trading assets which was partially offset by lower
cost of funds.
Balance Sheet Management Activities Lower net interest
income from balance sheet management activities during the three
months ended March 31, 2010 was due primarily to the sale
of securities in 2009 and the re-investment of proceeds into
lower margin securities, partially offset by positions taken in
expectation of decreasing short-term rates.
Private Label Credit Card Portfolio Net interest income
on private label credit card receivables was lower during the
first quarter of 2010 as a result of lower average balances
outstanding, partially offset by lower funding costs.
Credit Card Portfolios Lower net interest income on
credit card receivables during the first quarter of 2010
primarily reflects lower average balances outstanding, partially
offset by higher spreads driven by lower funding costs.
Commercial Loans Net interest income on commercial loans
was lower during the first quarter of 2010 due primarily to
lower loan balances, partially offset by loan repricing, lower
levels of non-performing loans and lower funding costs.
Deposits Higher net interest income during the first
quarter of 2010 on deposits is due primarily to spread expansion
on core banking activities in the Personal Financial Services
and Commercial Banking business segments. These segments
continue to be affected by falling interest rates and growth in
customer deposits in higher yielding deposit products, such as
online savings and premier investor accounts, but this has been
offset by pricing initiatives and an overall slightly less
competitive retail market.
Residential mortgage banking During the first quarter of
2010, lower net interest income resulted from lower average
residential loan outstandings partially offset by lower funding
costs. Lower average residential loans outstanding resulted in
part from the sale of approximately $2.6 billion of prime
adjustable and fixed rate residential mortgages since
March 31, 2009.
81
HSBC USA Inc.
Other Activity Higher net interest income from other
activity was primarily due to lower interest expense related to
long term debt and higher net interest income related to
interest bearing deposits with banks. This was partially offset
by lower net interest income on auto finance receivables.
Provision for Credit Losses The provision for
credit losses associated with various loan portfolios is
summarized in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
Three Months Ended March 31
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Commercial
|
|
$
|
(73
|
)
|
|
$
|
148
|
|
|
$
|
(221
|
)
|
|
|
(100
|
+)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages, excluding and home equity
|
|
|
(19
|
)
|
|
|
162
|
|
|
|
(181
|
)
|
|
|
(100
|
+)
|
Home equity mortgages
|
|
|
(21
|
)
|
|
|
21
|
|
|
|
(42
|
)
|
|
|
(100
|
+)
|
Private label card receivables
|
|
|
109
|
|
|
|
399
|
|
|
|
(290
|
)
|
|
|
(72.7
|
)
|
Credit card receivables
|
|
|
190
|
|
|
|
393
|
|
|
|
(203
|
)
|
|
|
(51.7
|
)
|
Auto finance
|
|
|
25
|
|
|
|
25
|
|
|
|
-
|
|
|
|
-
|
|
Other consumer
|
|
|
-
|
|
|
|
26
|
|
|
|
(26
|
)
|
|
|
(100.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
284
|
|
|
|
1,026
|
|
|
|
(742
|
)
|
|
|
(72.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for credit losses
|
|
$
|
211
|
|
|
$
|
1,174
|
|
|
$
|
(963
|
)
|
|
|
(82.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We decreased our credit loss reserves during the three months
ended March 31, 2010 as the provision for credit losses was
$641 million lower than net charge-offs compared to
provision for credit losses greater than net charge-offs of
$631 million in the prior year quarter. The provision as a
percentage of average receivables was .26 percent at
March 31, 2010 compared to 1.26 percent at
March 31, 2009. The decrease in credit loss provision
reflects lower loss estimates in our commercial and consumer
loan portfolios as discussed in more detail below.
Commercial loan provision for credit losses decreased for the
three months ended March 31, 2010 as a result of lower loss
estimates in most commercial portfolios since year-end due to
lower outstanding balances including managed reductions in
certain exposures and improvements in the financial
circumstances of several customer relationships which led to
credit upgrades on certain problem credits and lower levels of
nonperforming loans and criticized assets. Also contributing to
the decrease were fewer customer downgrades across all business
lines compared to the prior year period. The combination of all
of these factors has led to a net recovery in provision for
commercial loans during the three months ended March 31,
2010. Given the nature of the factors driving the reduction in
commercial loan provision during the quarter, the provision
levels recognized in the first quarter of 2010 should not be
considered indicative of provision levels in future quarters.
The provision for credit losses on residential mortgages
including home equity mortgages decreased $223 million
during the first quarter of 2010 as compared to the prior year
quarter. The decrease in provision for credit losses on
residential mortgages was attributable to lower receivable
levels and stabilization in residential mortgage loan credit
quality as dollars of delinquency in the first quarter of 2010
have remained relatively flat since year-end and charge-off
dollars continue to decline compared to the prior year period as
outstanding balances continue to fall and loss severities
stabilize. These factors have resulted in an improved outlook on
future loss estimates.
The provision for credit losses associated with credit card
receivables decreased $203 million in the first quarter of
2010 due to lower receivable levels, improved economic and
credit conditions, including lower dollars of delinquency since
year-end in part due to seasonality, portfolio seasoning, as
well as an improved outlook on future loss estimates as the
impact of higher unemployment rates on losses has not been as
severe as previously anticipated due in part to improved cash
flow from government stimulus activities, home price stability
and the impact of tighter underwriting initiated in prior
periods. Lower receivable levels reflect lower consumer
spending,
82
HSBC USA Inc.
the impact of the actions previously taken to reduce risk and
increased seasonality as customers focus on paying down credit
card debt. These decreases were partially offset by portfolio.
Provision expense associated with our private label card
portfolio decreased $290 million during the first quarter
of 2010, due to lower receivable levels, improved economic and
credit conditions and an improved outlook on future loss
estimates as the impact of higher unemployment levels on losses
has not been as severe as previously anticipated as discussed
above.
Provision expense associated with our auto finance portfolio
remained flat during the first quarter of 2010 as the impact of
lower receivable levels was offset by portfolio seasoning.
Our methodology and accounting policies related to the allowance
for credit losses are presented in Critical Accounting
Policies and Estimates in MD&A and in Note 2,
Summary of Significant Accounting Policies and New
Accounting Pronouncements in 2009
Form 10-K.
See Credit Quality in this MD&A for additional
commentary on the allowance for credit losses associated with
our various loan portfolios.
Other Revenues The components of other revenues
are summarized in the following tables.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
Three Months Ended March 31
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Credit card fees
|
|
$
|
233
|
|
|
$
|
357
|
|
|
$
|
(124
|
)
|
|
|
(34.7
|
)%
|
Other fees and commissions
|
|
|
292
|
|
|
|
231
|
|
|
|
61
|
|
|
|
26.4
|
|
Trust income
|
|
|
26
|
|
|
|
32
|
|
|
|
(6
|
)
|
|
|
(18.8
|
)
|
Trading revenue (loss)
|
|
|
204
|
|
|
|
(154
|
)
|
|
|
358
|
|
|
|
100
|
+
|
Net
other-than-temporary
impairment losses
|
|
|
(28
|
)
|
|
|
(38
|
)
|
|
|
10
|
|
|
|
26.3
|
|
Other securities gains, net
|
|
|
21
|
|
|
|
47
|
|
|
|
(26
|
)
|
|
|
(55.3
|
)
|
HSBC affiliate income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees and commissions
|
|
|
30
|
|
|
|
26
|
|
|
|
4
|
|
|
|
15.4
|
|
Other affiliate income
|
|
|
6
|
|
|
|
6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total HSBC affiliate income
|
|
|
36
|
|
|
|
32
|
|
|
|
4
|
|
|
|
12.5
|
|
Residential mortgage banking
revenue(1)
|
|
|
(37
|
)
|
|
|
65
|
|
|
|
(102
|
)
|
|
|
(100
|
+)
|
Gain on instruments at fair value and related
derivatives(2)
|
|
|
46
|
|
|
|
112
|
|
|
|
(66
|
)
|
|
|
(58.9
|
)
|
Other income :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation of loans held for sale
|
|
|
77
|
|
|
|
(86
|
)
|
|
|
163
|
|
|
|
100
|
+
|
Insurance
|
|
|
5
|
|
|
|
7
|
|
|
|
(2
|
)
|
|
|
(28.6
|
)
|
Earnings from equity investments
|
|
|
3
|
|
|
|
15
|
|
|
|
(12
|
)
|
|
|
(80.0
|
)
|
Miscellaneous income
|
|
|
73
|
|
|
|
130
|
|
|
|
(57
|
)
|
|
|
(43.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
158
|
|
|
|
66
|
|
|
|
92
|
|
|
|
100
|
+
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other revenues
|
|
$
|
951
|
|
|
$
|
750
|
|
|
$
|
201
|
|
|
|
26.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes servicing fees received
from HBSC Finance of $2 million and $4 million during
the three months ended March 31, 2010 and 2009,
respectively.
|
|
(2) |
|
Includes gains and losses
associated with financial instruments elected to be measured at
fair value and the related derivatives. See Note 10,
Fair Value Option, of the accompanying consolidated
financial statements for additional information.
|
Credit Card Fees Lower credit card fees during the three
months ended March 31, 2010 were due primarily to lower
receivable levels as a result of lower consumer spending,
changes in customer behavior, increased seasonality in the
quarter, the continuing impact of efforts to manage risk
initiated in prior periods, improved delinquency levels, as well
as the implementation of certain provisions of the CARD Act
earlier in the year which has resulted in lower
83
HSBC USA Inc.
overlimit and payment processing fees. Higher reversals of fee
income stemming from reduced charge-off activity upon
acquisition of the GM and UP Portfolios in the first quarter of
2009 due to purchase accounting also contributed to the decrease.
Other Fees and Commissions Other fee-based income
increased during the first quarter of 2010 largely due to higher
refund anticipation loan fees. Beginning in 2010, we began to
keep a portion of originated refund anticipation loans on our
balance sheet. As a result, we earn fee income on these loans.
The loans we keep are transferred to HSBC Finance at par only if
they reach a certain defined delinquency status.
Trust Income Trust income declined in the first
quarter of 2010 primarily due to lower domestic custody fees
from lower assets under management and margin pressures as money
market assets have shifted from higher fee asset classes to
lower fee institutional class funds.
Trading Revenue (Loss) is generated by participation in
the foreign exchange, rates, credit and precious metals markets.
The following table presents trading related revenue (loss) by
business. The data in the table includes net interest income
earned on trading instruments, as well as an allocation of the
funding benefit or cost associated with the trading positions.
The trading related net interest income component is included in
net interest income on the consolidated statement of income
(loss). Trading revenues related to the mortgage banking
business are included in residential mortgage banking revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Three Months Ended March 31
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Trading revenue (loss)
|
|
$
|
204
|
|
|
$
|
(154
|
)
|
|
$
|
358
|
|
|
|
100
|
+%
|
Net interest income
|
|
|
(8
|
)
|
|
|
53
|
|
|
|
(61
|
)
|
|
|
(100
|
+)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading related revenue (loss)
|
|
$
|
196
|
|
|
$
|
(101
|
)
|
|
$
|
297
|
|
|
|
100
|
+%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
107
|
|
|
|
(268
|
)
|
|
|
375
|
|
|
|
100
|
+
|
Balance sheet management
|
|
|
21
|
|
|
|
12
|
|
|
|
9
|
|
|
|
75.0
|
|
Foreign exchange and banknotes
|
|
|
56
|
|
|
|
131
|
|
|
|
(75
|
)
|
|
|
(57.3
|
)
|
Precious metals
|
|
|
20
|
|
|
|
21
|
|
|
|
(1
|
)
|
|
|
(4.8
|
)
|
Global banking
|
|
|
(5
|
)
|
|
|
3
|
|
|
|
(8
|
)
|
|
|
(100
|
+)
|
Other trading
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
(100
|
+)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading related revenue (loss)
|
|
$
|
196
|
|
|
$
|
(101
|
)
|
|
$
|
297
|
|
|
|
100
|
+%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading revenue (loss) improved significantly compared to the
prior year quarter as the prior year quarter reflects reductions
to revenue associated with credit derivative products due to the
adverse market conditions which existed at that time. Improved
market conditions in 2010 have resulted in a recovery of some of
these valuation losses.
Trading revenue related to derivatives improved during the three
months ended March 31, 2010 due to the performance of
structured credit products which reported total gains of
$93 million during the first quarter of 2010 as compared to
total losses of $357 million during the prior year quarter.
The performance of credit derivatives remained stable during the
first quarter of 2010 as credit spread volatility and, the
outlook for corporate defaults improved and exposures to several
counterparties, including monoline insurers, were reduced as a
result of the early termination of transactions. Partly
offsetting the improvement in structured credit revenue were
reductions in other derivative products substantially due to
lower deal activity.
Trading income related to balance sheet management activities
improved in the three months ended March 31, 2010 primarily
due to more favorable trends in credit spreads on asset-backed
securities held for trading purposes and increased sales of
mortgage-backed and other asset-backed securities held for
trading purposes.
84
HSBC USA Inc.
Foreign exchange and banknotes revenue declined in the first
quarter primarily due to lower volumes and narrower trading
spreads in foreign exchange and a reduction in demand for
physical currency in banknotes.
Precious metals continued to deliver strong results in the first
quarter of 2010 as a result of continuing demand for metals due
to economic conditions.
Global banking revenue decreased during the three months ended
March 31, 2010 due to a decline in corporate bond values
compared to a gain in the year ago period.
Net
Other-Than-Temporary
Impairment (Losses) Recoveries During the three months ended
March 31, 2010, 19 debt securities were determined to
have either initial
other-than-temporary
impairment or changes to previous
other-than-temporary
impairment estimates compared to nine debt securities which were
determined to be
other-than-temporarily
impaired in the year-ago quarter. The following table presents
the various components of
other-than-temporary
impairment.
|
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Total
other-than-temporary
impairment recoveries (losses)
|
|
$
|
33
|
|
|
$
|
(116
|
)
|
Portion of loss (recovery) recognized in other comprehensive
income, before taxes
|
|
|
(61
|
)
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
Net
other-than-temporary
impairment losses recognized in the consolidated statement of
income (loss)
|
|
$
|
(28
|
)
|
|
$
|
(38
|
)
|
|
|
|
|
|
|
|
|
|
Other Securities Gains, Net We maintain various
securities portfolios as part of our balance sheet
diversification and risk management strategies. The following
table summarizes the net other securities gains (losses)
resulting from various strategies.
|
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Securities
available-for-sale
|
|
$
|
-
|
|
|
$
|
-
|
|
Balance sheet diversity and reduction of risk
|
|
|
21
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
Other securities gains, net
|
|
$
|
21
|
|
|
$
|
47
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains and losses from sales of securities are
summarized in Note 6, Securities, in the
accompanying consolidated financial statements.
During the first quarter of 2010, we sold $4.0 billion of
US treasury, municipal, mortgage-backed and other asset-backed
securities as part of a strategy to adjust portfolio risk
duration as well as to reduce risk-weighted asset levels and
recognized a gain of $18 million, which is included as a
component of other security gains, net above. Gross realized
gains and losses from sales of securities are summarized in
Note 6, Securities, in the accompanying
consolidated financial statements.
HSBC Affiliate Income Affiliate income was higher during
the first quarter of 2010 due to higher fees and commissions
earned from HSBC Markets USA (HMUS) and other HSBC
affiliates as compared to the year-ago quarter including higher
account analysis servicing charges. These increases were
partially offset by lower fees on tax refund anticipation loans
as beginning in 2010, as we now transfer only a portion of these
loans to HSBC Finance upon origination as discussed above.
85
HSBC USA Inc.
Residential Mortgage Banking Revenue The following table
presents the components of residential mortgage banking revenue.
The net interest income component of the table is included in
net interest income in the consolidated statement of income
(loss) and reflects actual interest earned, net of interest
expense and corporate transfer pricing.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Three Months Ended March 31
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
|
|
(dollars are in millions)
|
|
|
|
|
|
Net interest income
|
|
$
|
56
|
|
|
$
|
66
|
|
|
$
|
(10
|
)
|
|
|
(15.2
|
)%
|
Servicing related income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fee income
|
|
|
32
|
|
|
|
34
|
|
|
|
(2
|
)
|
|
|
(5.9
|
)
|
Changes in fair value of MSRs due to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in valuation inputs or assumptions used in valuation
model
|
|
|
5
|
|
|
|
(25
|
)
|
|
|
30
|
|
|
|
100
|
+
|
Realization of cash flows
|
|
|
(27
|
)
|
|
|
(23
|
)
|
|
|
(4
|
)
|
|
|
(17.4
|
)
|
Trading Derivative instruments used to offset
changes in value of MSRs
|
|
|
11
|
|
|
|
36
|
|
|
|
(25
|
)
|
|
|
(69.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total servicing related income
|
|
|
21
|
|
|
|
22
|
|
|
|
(1
|
)
|
|
|
(4.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originations and sales related income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) on sales of residential mortgages
|
|
|
(60
|
)
|
|
|
34
|
|
|
|
(94
|
)
|
|
|
(100
|
+)
|
Trading and hedging activity
|
|
|
(5
|
)
|
|
|
5
|
|
|
|
(10
|
)
|
|
|
(100
|
+)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originations and sales related income (loss)
|
|
|
(65
|
)
|
|
|
39
|
|
|
|
(104
|
)
|
|
|
(100
|
+)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other mortgage income
|
|
|
7
|
|
|
|
4
|
|
|
|
3
|
|
|
|
75.0
|
|
Total residential mortgage banking revenue included in other
revenues (losses)
|
|
|
(37
|
)
|
|
|
65
|
|
|
|
(102
|
)
|
|
|
(100
|
+)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential mortgage banking related revenue
|
|
$
|
19
|
|
|
$
|
131
|
|
|
$
|
(112
|
)
|
|
|
(85.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average residential mortgage loans
|
|
$
|
15,730
|
|
|
$
|
21,580
|
|
|
$
|
(5,850
|
)
|
|
|
(27.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lower net interest income during the three months ended
March 31, 2010 reflects lower loan balances, partially
offset by lower funding costs as well as reduced deferred cost
amortization on lower average outstandings. Lower loan balances
reflect the sale of approximately $2.6 billion of prime
adjustable and fixed rate residential mortgages since
March 31, 2009, for which we retained the servicing rights.
We continue to sell the majority of new loan originations to
government sponsored enterprises and private investors.
Consistent with our Premier strategy, additions to the portfolio
are comprised largely of premier relationship products.
Total servicing related income remained relatively flat in the
first quarter of 2010, as the average serviced loan portfolio
remained consistent with the year-ago quarter as new
originations sold were offset by prepayments.
Originations and sales related income decreased in the current
quarter primarily due to lower gains from loan sales and an
increase in our reserve for potential repurchase liability
exposures. We recorded gains of $37 million in the first
quarter of 2009. There were no asset sales in the first quarter
of 2010.
Gain on Instruments Designated at Fair Value and Related
Derivatives We have elected to apply fair value option
accounting to commercial leveraged acquisition finance loans and
certain other commercial loans, unfunded commitments, certain
own fixed-rate debt issuances and all structured notes and
structured deposits issued after January 1, 2006 that
contain embedded derivatives. We also use derivatives to
economically hedge the interest rate risk associated with
certain financial instruments for which fair value has been
elected. See Note 10, Fair Value Option, in the
accompanying consolidated financial statements for additional
information, including a breakout of these amounts by individual
component.
86
HSBC USA Inc.
Valuation on Loans Held for Sale Valuation adjustments on
loans held for sale improved during the first quarter of 2010,
as there has been reduced volatility in the
U.S. residential mortgage market driven by stabilization of
home prices in the U.S. as compared to the year-ago
quarter. Valuations on loans held for sale relate primarily to
residential mortgage loans purchased from third parties and HSBC
affiliates with the intent of securitization or sale. Included
in this portfolio are
sub-prime
residential mortgage loans with a fair value of
$734 million and $757 million as of March 31,
2010 and December 31, 2009, respectively. Loans held for
sale are recorded at the lower of their aggregate cost or market
value, with adjustments to market value being recorded as a
valuation allowance. Valuations on residential mortgage loans we
originate are recorded as a component of residential mortgage
banking revenue in the consolidated statement of income (loss).
Valuation on loans held for sale in the first quarter of 2010
also reflects an $89 million settlement relating to certain
whole loans previously purchased for re-sale from a third party.
In addition, we recorded valuation adjustments on education
loans held for sale of $8 million during the three months
ended March 31, 2009.
Other Income (Loss) Excluding the valuation of loans held
for sale as discussed above, other income (loss) decreased
during the first quarter of 2010 due largely to lower
miscellaneous income as the year-ago quarter included a gain on
the sale of our equity interest in HSBC Private Bank (Suisse)
S.A. of $33 million as well as an $85 million gain
related to a judgment whose proceeds were used to redeem 100
preferred shares issued to CT Financial Services, Inc., while
the current period reflects a $66 million gain relating to
the sale of our equity investment in Wells Fargo HSBC Trade Bank.
The obligation to redeem the preferred shares upon our receipt
of the proceeds from the judgment represented a contractual
arrangement established in connection with our purchase of a
community bank from CT Financial Services Inc. in 1997 at which
time this litigation remained outstanding. The $85 million
we received, net of applicable taxes, was remitted in April 2009
to Toronto Dominion, which now holds beneficial ownership
interest in CT Financial Services Inc., and the preferred shares
were redeemed. In the first quarter of 2010, we received a final
payment of $5 million related to this judgment which was
again remitted to Toronto Dominion, net of tax in March 2010.
87
HSBC USA Inc.
Operating Expenses The components of operating
expenses are summarized in the following tables.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Three Months Ended March 31
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Salaries and employee benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
|
|
$
|
139
|
|
|
$
|
153
|
|
|
$
|
(14
|
)
|
|
|
(9.2
|
)%
|
Employee benefits
|
|
|
128
|
|
|
|
138
|
|
|
|
(10
|
)
|
|
|
(7.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total salaries and employee benefits
|
|
|
267
|
|
|
|
291
|
|
|
|
(24
|
)
|
|
|
(8.2
|
)
|
Occupancy expense, net
|
|
|
71
|
|
|
|
63
|
|
|
|
8
|
|
|
|
12.7
|
|
Support services from HSBC affiliates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees paid to HSBC Finance for loan servicing and other
administrative support
|
|
|
224
|
|
|
|
189
|
|
|
|
35
|
|
|
|
18.5
|
|
Fees paid to HMUS
|
|
|
75
|
|
|
|
71
|
|
|
|
4
|
|
|
|
5.6
|
|
Fees paid to HTSU
|
|
|
172
|
|
|
|
111
|
|
|
|
61
|
|
|
|
55.0
|
|
Fees paid to other HSBC affiliates
|
|
|
47
|
|
|
|
52
|
|
|
|
(5
|
)
|
|
|
(9.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total support services from HSBC affiliates
|
|
|
518
|
|
|
|
423
|
|
|
|
95
|
|
|
|
22.5
|
|
Other expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment and software
|
|
|
11
|
|
|
|
10
|
|
|
|
1
|
|
|
|
10.0
|
|
Marketing
|
|
|
28
|
|
|
|
37
|
|
|
|
(9
|
)
|
|
|
(24.3
|
)
|
Outside services
|
|
|
22
|
|
|
|
27
|
|
|
|
(5
|
)
|
|
|
(18.5
|
)
|
Professional fees
|
|
|
12
|
|
|
|
17
|
|
|
|
(5
|
)
|
|
|
(29.4
|
)
|
Telecommunications
|
|
|
3
|
|
|
|
4
|
|
|
|
(1
|
)
|
|
|
(25.0
|
)
|
Postage, printing and office supplies
|
|
|
4
|
|
|
|
3
|
|
|
|
1
|
|
|
|
33.3
|
|
Off-balance sheet credit reserves
|
|
|
(8
|
)
|
|
|
(4
|
)
|
|
|
(4
|
)
|
|
|
(100.0
|
)
|
FDIC assessment fee
|
|
|
36
|
|
|
|
34
|
|
|
|
2
|
|
|
|
5.9
|
|
Insurance business
|
|
|
(1
|
)
|
|
|
22
|
|
|
|
(23
|
)
|
|
|
(100
|
+)
|
Miscellaneous
|
|
|
103
|
|
|
|
45
|
|
|
|
58
|
|
|
|
100
|
+
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
210
|
|
|
|
195
|
|
|
|
15
|
|
|
|
7.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
1,066
|
|
|
$
|
972
|
|
|
$
|
94
|
|
|
|
9.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel average number
|
|
|
9,162
|
|
|
|
10,047
|
|
|
|
|
|
|
|
|
|
Efficiency ratio
|
|
|
49.58
|
%
|
|
|
46.33
|
%
|
|
|
|
|
|
|
|
|
Salaries and Employee Benefits Salaries and employee
benefits expense decreased during the three months ended
March 31, 2010 due to the transfer of additional support
services employees to HTSU, as described below, as well as lower
bonus accruals.
Occupancy Expense, Net Occupancy expense in the first
quarter of 2010 increased as the transfer of additional shared
services employees and their related workspace expenses to an
affiliate, as discussed below, was more than offset offset by
higher occupancy expense associated with the expansion of the
core banking network within the PFS segment and $8 million
in lease abandonment costs associated with the closure of
several non-strategic branches recorded during the first quarter
of 2010. Subsequent to March 31, 2009, we opened 20 new
branches resulting in higher rental expenses, depreciation of
leasehold improvements, utilities and other occupancy expenses.
Support services from HSBC affiliates includes technology
and certain centralized support services, including human
resources, corporate affairs and other shared services and
beginning in January 2010, legal, compliance, tax and finance
charged to us by HTSU. Support services from HSBC affiliates
also includes services charged to us by
88
HSBC USA Inc.
an HSBC affiliate located outside of the United States which
provides operational support to our businesses, including among
other areas, customer service, systems, collection and
accounting functions. Higher support services from HSBC
affiliates during the three months ended March 31, 2010
reflect the increased level of services provided during the
quarter, including $56 million of fees paid to HSBC Finance
for servicing and assuming the credit risk associated with
refund anticipation loans originated and held on our balance
sheet as a result of the change in the management of the refund
anticipation loan program between HSBC Bank USA and HSBC Finance
beginning in 2010. These increases were partially offset by
lower levels of receivables being serviced.
Marketing Expenses Lower marketing and promotional
expenses during the three months ended March 31, 2010
reflect continued optimization of marketing spend as a result of
general cost saving initiatives, partially offset by a
continuing investment in HSBC brand activities and marketing
support for branch expansion initiatives, primarily within the
PFS business segment.
Other Expenses Other expenses (excluding marketing
expenses) increased during the first quarter of 2010 reflecting
higher miscellaneous expenses due to higher legal costs, higher
interest accruals for state tax exposures, and higher collection
agency costs and higher corporate insurance costs as compared to
the year-ago quarter, partially offset by lower outside and
professional services fees.
Efficiency Ratio Our efficiency ratio, which is the ratio
of total operating expenses, reduced by minority interests, to
the sum of net interest income and other revenues, was
49.58 percent and 46.33 percent for the three months
ended March 31, 2010 and 2009, respectively. The
deterioration in the efficiency ratio in the first quarter of
2010 resulted primarily from decreased net interest income and
higher operating expenses which were partially offset by higher
other revenues.
Segment
Results IFRSs Basis
We have five distinct segments that are utilized for management
reporting and analysis purposes. The segments, which are based
upon customer groupings as well as products and services
offered, are described under Item 1, Business
in our 2009
Form 10-K.
There have been no changes in the basis of segmentation or
measurement of segment profit (loss) as compared with the
presentation in our 2009
Form 10-K.
Our segment results are presented on an IFRSs Basis (a
non-U.S. GAAP
financial measure) as operating results are monitored and
reviewed, trends are evaluated and decisions about allocating
resources such as employees are made almost exclusively on an
IFRSs basis since we report to our parent, HSBC, who prepares
its consolidated financial statements in accordance with IFRSs.
However, we continue to monitor capital adequacy, establish
dividend policy and report to regulatory agencies on a
U.S. GAAP basis. The significant differences between
U.S. GAAP and IFRSs as they impact our results are
summarized in Note 14, Business Segments, in
the accompanying consolidated financial statements and under the
caption Basis of Reporting in the MD&A section
of this
Form 10-Q.
Personal Financial Services
(PFS) During the first quarter of 2010,
we continue to direct resources towards the expansion of the
core retail banking business, in particular, the growth of HSBC
Premier, HSBCs global banking service that offers
customers a seamless international service. In addition,
expansion of the branch network continued during the first
quarter of 2010 with the opening of four new branches in
geographic markets with international connectivity as well as
continued investment in the HSBC brand. We currently plan to
open an additional 2 branches in 2010. As a result, average
personal deposits increased 1.9 percent during the three
months ended March 31, 2010 and Premier customers increased
to 384,500 at March 31, 2010, a 38 percent increase
from the year-ago quarter. We remain focused on providing
differentiated premium services to the internationally minded
mass affluent and upwardly mobile customers. In January 2010,
HSBC Direct was rebranded to HSBC Advance, which is consistent
with our global focus.
We continue to sell the majority of new residential mortgage
loan originations to government sponsored enterprises and to
allow the existing on balance sheet portfolio to run-off.
Consistent with the Premier strategy, additions to our portfolio
are primarily comprised of Premier relationship products. In
addition to normal sale activity, we periodically sell prime
adjustable and fixed rate mortgage loan portfolios to third
parties. No such sales occurred
89
HSBC USA Inc.
during the three months ended March 31, 2010. For the three
months ended March 31, 2009, we sold approximately
$1.8 billion of prime adjustable and fixed rate residential
mortgage loans to third parties. We retained the servicing
rights in relation to the mortgages upon sale. Average
residential mortgage loans outstanding have continued to decline
during the first quarter of 2010, decreasing approximately
30 percent as compared to average residential mortgage
loans outstanding during the first quarter of 2009.
The following table summarizes the IFRSs Basis results for our
PFS segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Three Months Ended March 31
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
241
|
|
|
$
|
187
|
|
|
$
|
54
|
|
|
|
29
|
%
|
Other operating income
|
|
|
48
|
|
|
|
40
|
|
|
|
8
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
289
|
|
|
|
227
|
|
|
|
62
|
|
|
|
27
|
|
Loan impairment charges (recoveries)
|
|
|
(3
|
)
|
|
|
200
|
|
|
|
(203
|
)
|
|
|
(100
|
+)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
292
|
|
|
|
27
|
|
|
|
265
|
|
|
|
100
|
+
|
Operating expenses
|
|
|
272
|
|
|
|
296
|
|
|
|
(24
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax
|
|
$
|
20
|
|
|
$
|
(269
|
)
|
|
$
|
289
|
|
|
|
100
|
+%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our PFS segment reported a profit before tax during the first
quarter of 2010 compared to a loss before tax during the first
quarter of 2009, driven by higher net interest income, higher
other operating income, lower loan impairment charges and lower
operating expenses.
Net interest income increased during the three months ended
March 31, 2010, driven by a combination of customer rate
cuts and additional funding credits on deposits as well as wider
interest rate spreads on credit card balances due to reduced
funding costs in the lower short-term rate environment. This was
partially offset by lower levels of mortgage loans outstanding
driven by mortgage loan sales of approximately $4.5 billion
during 2009.
Other operating income increased during the three months ended
March 31, 2010 as other operating income for the first
three months of 2009 reflects a $102 million intersegment
charge from the Global Banking and Markets segment relating to
the cost associated with early termination of the funding
associated with the mortgage loan sales, which was partially
offset by a net gain on the sale of these mortgage loans of
$39 million. Excluding the impact of these items in 2009,
other operating income decreased in 2010 due primarily to an
increase in the reserve for potential repurchase liability
exposures in mortgage loans.
Loan impairment charges declined in the first quarter of 2010,
driven largely by stabilization in residential mortgage loan
credit quality as dollars of delinquency and loss severities in
the first quarter have moderated which, along with lower loan
balances, has led to an improvement in our future loss estimates.
Operating expenses decreased in the first quarter of 2010,
reflecting the benefit of a $48 million pension curtailment
gain as a result of the decision in February 2010 to cease all
future benefit accruals for legacy participants under the final
average pay formula components of the HSBC North America defined
benefit pension plan. Excluding the impact of the pension
curtailment, operating expenses were modestly higher in the
first quarter of 2010 driven by allocated costs from shared
services and from the expansion of our branch network. These
increases were partially offset by cost reductions in legacy
branches and marketing expenses.
Consumer Finance (CF) The CF
segment includes the private label and co-brand credit cards, as
well as other loans acquired from HSBC Finance or its
correspondents, including the GM and UP Portfolios and auto
finance loans purchased in January 2009 and portfolios of
nonconforming residential mortgage loans (the HMS
Portfolio) purchased in 2003 and 2004. HSBC Finance
services the receivables purchased for a fee.
90
HSBC USA Inc.
The following table summarizes the IFRSs Basis results for our
CF segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
Three Months Ended March 31
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
523
|
|
|
$
|
529
|
|
|
$
|
(6
|
)
|
|
|
(1
|
)%
|
Other operating income
|
|
|
18
|
|
|
|
81
|
|
|
|
(63
|
)
|
|
|
(78
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
541
|
|
|
|
610
|
|
|
|
(69
|
)
|
|
|
(11
|
)
|
Loan impairment charges
|
|
|
210
|
|
|
|
554
|
|
|
|
(344
|
)
|
|
|
(62
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
331
|
|
|
|
56
|
|
|
|
275
|
|
|
|
100
|
+
|
Operating expenses
|
|
|
28
|
|
|
|
14
|
|
|
|
14
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax
|
|
$
|
303
|
|
|
$
|
42
|
|
|
$
|
261
|
|
|
|
100
|
+%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our CF segment reported a higher profit before tax during the
first quarter of 2010 due to lower loan impairment charges,
which was partially offset by lower other operating income and
higher operating expenses while net interest income remained
relatively flat.
Net interest income remained relatively flat in the three months
ended March 31, 2010 as higher credit card and private
label card yields as a result of pricing initiatives and a lower
cost of funds due to a lower short term interest rate
environment, which were offset by lower outstanding receivable
levels and higher charge-offs of credit card interest as the GM
and UP portfolios recorded at fair value upon purchase in
January 2009, continue to season and be replaced by new volume.
Other operating income decreased during the three months ended
March 31, 2010 due to lower fee income resulting from lower
levels of credit card receivables outstanding including lower
late fees on these portfolios driven by changes in customer
behavior and lower delinquency levels, higher revenue share
payments and the impact of the new credit card legislation.
These decreases were partially offset by lower servicing fees on
portfolios serviced by our affiliate, HSBC Finance (which is
recorded as a reduction to other operating income) due to lower
outstanding receivable levels.
Loan impairment charges associated with credit card receivables,
including private label credit card receivables, decreased
during the three months ended March 31, 2010 due to lower
receivable levels driven by lower customer spending, higher
customer payment rates and previous risk mitigation efforts.
Also contributing to the decrease were improved economic and
credit conditions including lower dollars of delinquency since
year-end in part due to seasonality as well as an improved
outlook on future loss estimates as the impact of higher
unemployment levels on losses has not been as severe as
previously anticipated. In addition, the GM and UP Portfolios
experienced increased loan impairment charges in the prior year
quarter as these portfolios were recorded at fair value when
they were purchased in January 2009 which resulted in no
allowance for loan losses being established upon acquisition,
creating the need to establish loan loss reserves as new volume
was originated.
Operating expenses increased in the first quarter of 2010 due to
higher collection costs on bad debt accounts which were
previously reported in loan impairment charges and higher fraud
expenses, partially offset by lower receivable levels.
As discussed in previous filings, on May 22, 2009, the CARD
Act was signed into law. We have implemented the provisions of
the CARD Act that took effect in August 2009 and February 2010
and continue to make changes to processes and systems in order
to comply with the remaining provisions of the CARD Act by the
applicable August 2010 effective date. The CARD Act has required
us to make changes to our business practices, and will likely
require us and our competitors to manage risk differently than
has historically been the case. Pricing, underwriting and
product changes in response to the new legislation have either
been implemented or are under analysis. The full impact of the
CARD Act continues to be uncertain at this time as it will
ultimately depend upon the Federal Reserve and other government
agencies final interpretations of some of the provisions
discussed above, including the
91
HSBC USA Inc.
proposed limits on late fees charged by card issuers, which are
not expected to be published until June 2010, successful
implementation of our strategies, consumer behavior and the
actions of our competitors. However, we currently believe the
implementation of these new rules will not have a material
adverse impact to us as any impact would be limited to only a
portion of the existing affected loan portfolio as the purchase
price on sales volume paid to HSBC Finance has been adjusted to
reflect the new requirements.
Commercial Banking (CMB) Our
Commercial Banking segment serves three client groups, notably
Commercial (Middle Market Enterprises), Business Banking and
Commercial Real Estate. CMBs business strategy is to be
the leader in international banking in target markets. In the
U.S., CMB strives to execute on that vision and strategy by
proactively targeting the growing number of U.S. companies
that are increasingly in need of international banking,
financial products and services. The products and services
provided to these client groups are offered through multiple
delivery systems including the branch banking network.
In the first quarter of 2010, interest rate spreads continued to
be pressured from a low interest rate environment, while loan
impairment charges improved. Customer deleveraging and higher
rates of repayment have resulted in an 28 percent decrease
in loans outstanding to middle-market customers during the three
months ended March 31, 2010 as compared to the same 2009
period, while average deposits from middle-market customers grew
24 percent during the three months ended March 31,
2010 as compared to the same 2009 period. The business banking
loan portfolio has seen a nine percent decrease in loans
outstanding due to tightened credit standards and the
competitive environment while business banking customer deposits
at March 31, 2010 grew nine percent compared to March 2009
levels. The commercial real estate business continues to focus
on deal quality and portfolio management rather than volume,
which resulted in an overall decline in outstanding receivables
for this portfolio since March 2009. Average customer deposit
balances across all CMB business lines during the three months
ended March 31, 2010 increased 12 percent as compared
to the same 2009 period and average loans in the first quarter
of 2010 decreased 16 percent as compared to the same 2009
period. In February 2010, we completed the sale of our interest
in Wells Fargo HSBC Trade Bank (WHTB) to Wells Fargo
and recorded a gain of $66 million during the current
quarter included in other operating income.
The following table summarizes the IFRSs Basis results for our
CMB segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
Three Months Ended March 31
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
188
|
|
|
$
|
176
|
|
|
$
|
12
|
|
|
|
7
|
%
|
Other operating income
|
|
|
154
|
|
|
|
81
|
|
|
|
73
|
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
342
|
|
|
|
257
|
|
|
|
85
|
|
|
|
33
|
|
Loan impairment charges
|
|
|
1
|
|
|
|
81
|
|
|
|
(80
|
)
|
|
|
(99
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
341
|
|
|
|
176
|
|
|
|
165
|
|
|
|
94
|
|
Operating expenses
|
|
|
150
|
|
|
|
154
|
|
|
|
(4
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax
|
|
$
|
191
|
|
|
$
|
22
|
|
|
$
|
169
|
|
|
|
100
|
+%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our CMB segment reported a higher profit before tax during the
first quarter of 2010 due to higher net interest income, higher
other operating income, lower loan impairment charges, and lower
operating expenses.
Net interest income increased compared to the prior year quarter
due to growth in deposit balances and improved loan spreads from
repricing activities in 2009, partially offset by lower loan
balances.
Other operating income increased during the three months ended
March 31, 2010 largely due to a $66 million gain on
the sale of our equity investment in WHTB. Also contributing to
the increase was higher income on our low income housing
investments.
92
HSBC USA Inc.
Loan impairment charges improved in the first quarter of 2010 as
economic conditions began to improve and credit quality began to
stabilize resulting in lower charge-offs and fewer customer
downgrades across all business lines.
Operating expenses decreased in the first quarter of 2010
compared to the prior year quarter due to the benefit of a
$16 million pension curtailment gain as previously
discussed. Excluding the impact of the pension curtailment,
operating expenses rose in 2010, driven by higher amortization
of low income housing investment activity, which is offset in
other operating income, and higher legal costs.
Global Banking and Markets Our Global Banking
and Markets business segment supports HSBCs emerging
markets-led and financing-focused global strategy by leveraging
HSBC Group advantages and scale, strength in emerging markets
and Global Markets products expertise in order to focus on
delivering international products to U.S. clients and local
products to international clients with New York as the hub for
the Americas business.
There are four major lines of business within Global Banking and
Markets: Global Banking, Global Markets, Transaction Banking and
Asset Management. The Global Banking business line includes
corporate lending and investment banking activities, and this
unit also coordinates client relationships across all Global
Markets and Banking products. The Global Markets business
services the requirements of the worlds central banks,
corporations, institutional investors and financial institutions
through our global trading platforms and distribution
capabilities. Transaction banking provides payments and cash
management, trade finance, supply chain, security services and
banknotes services primarily to corporations and financial
institutions. Asset Management provides investment solutions to
institutions, financial intermediaries and individual investors.
The Global Banking and Markets segment results in the first
quarter of 2010 benefited from reduced loses in non-core
positions, strong event driven business and improved credit
performance as compared to the year-ago quarter. As credit
markets have stabilized, the impact to other operating income
from credit derivatives and subprime mortgage loans has
improved, which has led to a considerable improvement in results
for the segment. Substantial counterparty credit reserves for
monoline exposure and significant valuation losses were taken in
both the trading and
available-for-sale
securities portfolios throughout 2008 and into 2009 due to the
market volatility.
On October 11, 2008, the International Accounting Standards
Board (IASB) issued an amendment to IAS 39 which
permits entities to transfer financial assets from the Trading
classification into the
Available-for-sale
or Loans and Receivables classifications if the entity has the
intention and ability to hold the assets for the foreseeable
future or until maturity. Temporary changes in the market value
of re-classified assets no longer impact current period
earnings. Instead, these assets are
marked-to-market
(through other comprehensive income) if classified as
Available-for-sale
Securities and are subject to on-going impairment tests.
Following careful analysis of the implications and with
consideration given to industry and peer practices, we elected
to re-classify $1.8 billion in leveraged loans and high
yield notes and $892 million in securities held for balance
sheet management purposes from trading assets to loans and
available-for-sale
investment securities, effective July 1, 2008. In November
2008, $967 million in additional securities were also
transferred from trading assets to
available-for-sale
investment securities. If these IFRS reclassifications had not
been made, our profit before tax for the quarter ended
March 31, 2010 and 2009 would have been higher by
$15 million and lower by $19 million respectively.
93
HSBC USA Inc.
The following table summarizes IFRSs Basis results for the
Global Banking and Markets segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
Three Months Ended March 31
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
142
|
|
|
$
|
232
|
|
|
$
|
(90
|
)
|
|
|
(39
|
)%
|
Other operating income
|
|
|
437
|
|
|
|
221
|
|
|
|
216
|
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
579
|
|
|
|
453
|
|
|
|
126
|
|
|
|
28
|
|
Loan impairment charges (recoveries)
|
|
|
(76
|
)
|
|
|
229
|
|
|
|
(305
|
)
|
|
|
(100
|
+)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
655
|
|
|
|
224
|
|
|
|
431
|
|
|
|
192
|
|
Operating expenses
|
|
|
209
|
|
|
|
199
|
|
|
|
10
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax
|
|
$
|
446
|
|
|
$
|
25
|
|
|
$
|
421
|
|
|
|
100
|
+%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our Global Banking and Markets segment performance continued to
improve during the first quarter of 2010 due primarily to higher
other operating income and lower loan impairment charges,
partially offset by lower net interest income and higher
operating expenses.
Net interest income decreased during the first quarter of 2010
as a result of sales of higher yielding assets in our
available-for-sale
securities portfolio since March 2009 which were made for risk
management purposes, and lower margins on deposit balances.
Other operating income increased $216 million during the
first quarter of 2010 as compared to the year-ago quarter due to
improved performance of credit derivatives and
sub-prime
mortgage loans held for sale as well as higher fees in
Transaction Banking. Partially offsetting these improvements
were reductions in intersegment income, foreign exchange trading
and other derivative products.
Other operating income reflects gains on structured credit
products of $59 million during the three months ended
March 31, 2010 as compared to losses of $256 million
during the year-ago quarter, as the credit markets stabilized
resulting in fewer losses from hedging activity and counterparty
exposures. Exposure to insurance monolines continued to impact
revenues as deterioration abated in the first quarter of 2010,
resulting in gains of $56 million during the three months
ended March 31, 2010 as compared to losses of
$164 million during the year-ago quarter.
Valuation losses of $11 million during the first quarter of
2010 were recorded against the fair values of
sub-prime
residential mortgage loans held for sale as compared to
valuation losses of $86 million during the year-ago
quarter. Other operating income in 2010 also reflects a gain of
$89 million associated with a settlement relating to
certain loans previously purchased for resale from a third
party. Other operating income during the first quarter of 2010
also reflects intersegment income of $2 million from PFS
relating fees charged for the early termination of funding
compared to $103 million during the year-ago quarter.
Loan impairment charges decreased during the first quarter of
2010 due to reductions in higher risk rated loan balances and
stabilization of credit downgrades. In addition, impairments
included a charge of $143 million on securities determined
to be
other-than-temporarily
impaired during the three months ended March 31, 2009
compared to no similar impairments in the current year.
Operating expenses increased during the first quarter of 2010,
largely due to legal settlement costs and higher performance
related compensation, partially offset by a $7 million
pension curtailment gain.
Private Banking (PB) As part of
HSBCs global network, the PB segment offers integrated
domestic and international services to high net worth clients,
their families and their businesses. These services address both
resident and non-resident financial needs. During the first
quarter of 2010, we continued to dedicate resources to
strengthen product and service leadership in the wealth
management market. Areas of focus are banking and cash
management, investment advice including discretionary portfolio
management, alternative investments and corporate finance
solutions, as well as wealth planning for trusts and estates.
94
HSBC USA Inc.
Average client deposit levels during the first three months of
2010 decreased four percent as compared to the same 2009 period
as domestic institutional clients began in the second quarter of
2009 to invest their liquidity in investment products with low
risk. Distinctively, total average loans (mostly domestic) in
the first quarter of 2010 increased five percent compared to the
same 2009 period from large and short term loans and increased
tailored mortgage product. Substantial reductions from a
challenging economic environment and outflows from domestic
custody clients affected market value of client assets under
management, which decreased 11 percent compared to a year
ago to $34 billion at March 31, 2010, and
9 percent since December 31, 2009, reflecting the loss
of certain domestic custody clients.
The following table summarizes IFRSs Basis results for the PB
segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Three Months Ended March 31
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
46
|
|
|
$
|
42
|
|
|
$
|
4
|
|
|
|
10
|
%
|
Other operating income
|
|
|
35
|
|
|
|
33
|
|
|
|
2
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
81
|
|
|
|
75
|
|
|
|
6
|
|
|
|
8
|
|
Loan impairment recoveries
|
|
|
(11
|
)
|
|
|
(3
|
)
|
|
|
(8
|
)
|
|
|
(100
|
+)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92
|
|
|
|
78
|
|
|
|
14
|
|
|
|
18
|
|
Operating expenses
|
|
|
55
|
|
|
|
59
|
|
|
|
(4
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax
|
|
$
|
37
|
|
|
$
|
19
|
|
|
$
|
18
|
|
|
|
95
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our PB segment reported a higher profit before tax for the three
months ended March 31, 2010 as compared to the prior year
period due primarily to lower loan impairment charges, higher
net interest income and lower operating expenses.
Net interest income increased during the three months ended
March 31, 2010 compared to the year ago period primarily
due to higher loan volume and improved interest spreads on loans
and deposits.
Other operating income increased in 2010 primarily due to higher
fees on managed products, structured products and recurring fund
fees.
Loan impairment recoveries were higher compared to the prior
year quarter due to lower reserves required relating to exposure
on a specific relationship, several paydowns and other
improvements in client credit ratings.
Operating expenses decreased for the three months ended
March 31, 2010, driven by a $5 million reduction to
expense related to a pension curtailment gain as previously
discussed. Excluding this item, operating expenses remained
modestly lower as a result of lower staff costs.
Other The other segment primarily includes
adjustments made at the corporate level for fair value option
accounting related to certain debt issued, as well as any
adjustments to the fair value on HSBC shares held for stock
plans. The results for the first quarter of 2009 also include
the earnings on an equity investment in HSBC Private Bank
(Suisse) S.A which was sold in March 2009 for a gain.
95
HSBC USA Inc.
The following table summarizes IFRSs Basis results for the Other
segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Three Months Ended March 31
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
(9
|
)
|
|
$
|
1
|
|
|
$
|
(10
|
)
|
|
|
(100
|
+)%
|
Other operating income
|
|
|
12
|
|
|
|
156
|
|
|
|
(144
|
)
|
|
|
(92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
3
|
|
|
|
157
|
|
|
|
(154
|
)
|
|
|
(98
|
)
|
Loan impairment charges
|
|
|
2
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
157
|
|
|
|
(156
|
)
|
|
|
(99
|
)
|
Operating expenses
|
|
|
15
|
|
|
|
13
|
|
|
|
2
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax
|
|
$
|
(14
|
)
|
|
$
|
144
|
|
|
$
|
(158
|
)
|
|
|
(100
|
+)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating income in both periods reflects decreases in the
fair value of certain debt instruments to which fair value
option was elected. Along with the related fair value option
derivatives, we recorded total gains of $12 million and
$35 million for the three months ended March 31, 2010
and 2009, respectively relating to these instruments. Other
operating income in the three months ended March 31, 2010
and 2009 includes gains of $5 million and $85 million,
respectively, related to the resolution of a lawsuit whose
proceeds in 2009 were used to redeem preferred stock issued to
CTUS Inc. Other operating income in 2009 also includes a
$43 million gain on the sale of the equity investment
referred to above.
Credit
Quality
We enter into a variety of transactions in the normal course of
business that involve both on and off-balance sheet credit risk.
Principal among these activities is lending to various
commercial, institutional, governmental and individual
customers. We participate in lending activity throughout the
U.S. and, on a limited basis, internationally.
Allowance for Credit Losses For commercial
and select consumer loans, we conduct a periodic assessment on a
loan-by-loan
basis of losses we believe to be inherent in the loan portfolio.
When it is deemed probable based upon known facts and
circumstances that full contractual interest and principal on an
individual loan will not be collected in accordance with its
contractual terms, the loan is considered impaired. An
impairment reserve is established based on the present value of
expected future cash flows, discounted at the loans
original effective interest rate, or as a practical expedient,
the loans observable market price or the fair value of the
collateral if the loan is collateral dependent. Updated
appraisals for collateral dependent loans are generally obtained
only when such loans are considered troubled and the frequency
of such updates are generally based on management judgment under
the specific circumstances on a
case-by-case
basis. Problem commercial loans are assigned various obligor
grades under the allowance for credit losses methodology. Each
credit grade has a probability of default estimate.
Probable losses for pools of homogeneous consumer loans are
generally estimated using a roll rate migration analysis that
estimates the likelihood that a loan will progress through the
various stages of delinquency, or buckets, and ultimately charge
off. This analysis considers delinquency status, loss experience
and severity and takes into account whether loans are in
bankruptcy, have been restructured, rewritten, or are subject to
forbearance, an external debt management plan, hardship,
modification, extension or deferment. The allowance for credit
losses on consumer receivables also takes into consideration the
loss severity expected based on the underlying collateral, if
any, for the loan in the event of default based on historical
and recent trends.
Our allowance for credit losses methodology and our accounting
policies related to the allowance for credit losses are
presented in further detail in Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations in our 2009
Form 10-K
under the caption Critical Accounting Policies and
Estimates and in Note 2, Summary of Significant
Accounting Policies and New Accounting Pronouncements, of
the consolidated financial statements included in our 2009
Form 10-K.
Our approach toward credit risk management is summarized in
Item 7.
96
HSBC USA Inc.
Managements Discussion and Analysis of Financial Condition
and Results of Operations in our 2009
Form 10-K
under the caption Risk Management. There have been
no material revisions to our policies or methodologies during
the first three months of 2010, although we continue to monitor
current market conditions and will adjust credit policies as
deemed necessary.
The following table sets forth the allowance for credit losses
for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Allowance for credit losses
|
|
$
|
3,224
|
|
|
$
|
3,861
|
|
|
|
|
|
|
|
|
|
|
Ratio of Allowance for credit losses to:
|
|
|
|
|
|
|
|
|
Loans:(1)
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
2.59
|
%
|
|
|
3.10
|
%
|
Consumer:
|
|
|
|
|
|
|
|
|
Residential mortgages, excluding home equity mortgages
|
|
|
2.07
|
|
|
|
2.53
|
|
Home equity mortgages
|
|
|
3.16
|
|
|
|
4.44
|
|
Private label card receivables
|
|
|
7.43
|
|
|
|
7.85
|
|
Credit card receivables
|
|
|
8.16
|
|
|
|
8.48
|
|
Auto finance
|
|
|
2.55
|
|
|
|
2.12
|
|
Other consumer loans
|
|
|
3.50
|
|
|
|
4.46
|
|
Total consumer loans
|
|
|
5.38
|
|
|
|
5.94
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4.28
|
%
|
|
|
4.86
|
%
|
|
|
|
|
|
|
|
|
|
Net
charge-offs(1)(2):
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
190.80
|
%
|
|
|
313.71
|
%
|
Consumer
|
|
|
80.45
|
|
|
|
104.06
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
93.31
|
%
|
|
|
124.23
|
%
|
|
|
|
|
|
|
|
|
|
Nonperforming
loans(1):
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
69.34
|
%
|
|
|
65.44
|
%
|
Consumer
|
|
|
131.87
|
|
|
|
150.45
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
108.58
|
%
|
|
|
114.36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Ratios exclude loans held for sale
as these loans are carried at the lower of cost or market.
|
|
(2) |
|
Quarter-to-date
net charge-offs, annualized.
|
97
HSBC USA Inc.
Changes in the allowance for credit losses by general loan
categories for the three months ended March 31, 2010 and
2009 are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
excluding
|
|
|
HELOCs
|
|
|
Private
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HELOCs
|
|
|
and Home
|
|
|
Label
|
|
|
Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and Home
|
|
|
Equity
|
|
|
Card
|
|
|
Card
|
|
|
Auto
|
|
|
Other
|
|
|
|
|
|
|
Commercial(1)
|
|
|
Equity
|
|
|
Mortgages
|
|
|
Receivables
|
|
|
Receivables
|
|
|
Finance
|
|
|
Consumer
|
|
|
Total
|
|
|
|
|
|
(In millions)
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at beginning of period
|
|
$
|
938
|
|
|
$
|
347
|
|
|
$
|
185
|
|
|
$
|
1,184
|
|
|
$
|
1,106
|
|
|
$
|
36
|
|
|
$
|
65
|
|
|
$
|
3,861
|
|
Charge-offs
|
|
|
109
|
|
|
|
49
|
|
|
|
36
|
|
|
|
335
|
|
|
|
360
|
|
|
|
24
|
|
|
|
21
|
|
|
|
934
|
|
Recoveries
|
|
|
10
|
|
|
|
1
|
|
|
|
-
|
|
|
|
42
|
|
|
|
25
|
|
|
|
-
|
|
|
|
4
|
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
99
|
|
|
|
48
|
|
|
|
36
|
|
|
|
293
|
|
|
|
335
|
|
|
|
24
|
|
|
|
17
|
|
|
|
852
|
|
Provision for credit losses
|
|
|
(73
|
)
|
|
|
(19
|
)
|
|
|
(21
|
)
|
|
|
109
|
|
|
|
190
|
|
|
|
25
|
|
|
|
-
|
|
|
|
211
|
|
Allowance related to bulk loan purchases from HSBC Finance
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
767
|
|
|
$
|
280
|
|
|
$
|
128
|
|
|
$
|
1,000
|
|
|
$
|
964
|
|
|
$
|
37
|
|
|
$
|
48
|
|
|
$
|
3,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at beginning of period
|
|
$
|
572
|
|
|
$
|
207
|
|
|
$
|
167
|
|
|
$
|
1,171
|
|
|
$
|
208
|
|
|
$
|
5
|
|
|
$
|
67
|
|
|
$
|
2,397
|
|
Charge-offs
|
|
|
56
|
|
|
|
65
|
|
|
|
37
|
|
|
|
352
|
|
|
|
67
|
|
|
|
5
|
|
|
|
32
|
|
|
|
614
|
|
Recoveries
|
|
|
5
|
|
|
|
6
|
|
|
|
9
|
|
|
|
38
|
|
|
|
6
|
|
|
|
1
|
|
|
|
6
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
51
|
|
|
|
59
|
|
|
|
28
|
|
|
|
314
|
|
|
|
61
|
|
|
|
4
|
|
|
|
26
|
|
|
|
543
|
|
Provision for credit losses
|
|
|
148
|
|
|
|
162
|
|
|
|
21
|
|
|
|
399
|
|
|
|
393
|
|
|
|
25
|
|
|
|
26
|
|
|
|
1,174
|
|
Allowance related to bulk loan purchases from HSBC Finance
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
424
|
|
|
|
13
|
|
|
|
-
|
|
|
|
437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
669
|
|
|
$
|
310
|
|
|
$
|
160
|
|
|
$
|
1,256
|
|
|
$
|
964
|
|
|
$
|
39
|
|
|
$
|
67
|
|
|
$
|
3,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The allowance for credit losses at March 31, 2010 decreased
$637 million, or 16.50 percent as compared to
December 31, 2009 reflecting lower loss estimates on our
private label credit card, credit card and residential mortgage
loan portfolios. The lower allowance on our private label credit
card and credit card portfolio was due to lower receivable
levels including actions previously taken to reduce risk which
has led to improved credit quality including lower delinquency
levels as well as an increased focus by consumers to reduce
outstanding credit card debt. The lower delinquency levels also
resulted from improved early stage delinquency roll rates as
economic conditions improved and seasonal improvements in our
collection activities. The decrease in the allowance for our
residential mortgage loan portfolio and HELOC and Home Equity
loan portfolios is due to stabilization in dollars of
delinquency and in loss severities and an improved outlook for
incurred future losses. Reserve requirements in our commercial
loan portfolio also declined due to run-off, including managed
reductions in certain exposures and improvements in the
financial circumstances of several customer relationships.
Reserve levels for all loan categories remain elevated due to
continued weakness in the U.S. economy, including elevated
unemployment rates.
The allowance for credit losses as a percentage of total loans
at March 31, 2010 decreased as compared to
December 31, 2009 for the reasons discussed above.
The allowance for credit losses as a percentage of net
charge-offs at March 31, 2010 declined compared to
December 31, 2009 as the decline in reserve levels as
discussed above outpaced the decline in dollars of net
charge-off.
98
HSBC USA Inc.
An allocation of the allowance for credit losses by major loan
categories, excluding loans held for sale, is presented in the
following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
Loans to
|
|
|
|
|
|
Loans to
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
Total
|
|
|
|
Amount
|
|
|
Loans(1)
|
|
|
Amount
|
|
|
Loans(1)
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Commercial(2)
|
|
$
|
767
|
|
|
|
39.36
|
%
|
|
$
|
938
|
|
|
|
38.12
|
%
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages, excluding home equity mortgages
|
|
|
280
|
|
|
|
17.94
|
|
|
|
347
|
|
|
|
17.26
|
|
Home equity mortgages
|
|
|
128
|
|
|
|
5.37
|
|
|
|
185
|
|
|
|
5.24
|
|
Private label card receivables
|
|
|
1,000
|
|
|
|
17.88
|
|
|
|
1,184
|
|
|
|
18.99
|
|
Credit card receivables
|
|
|
964
|
|
|
|
15.69
|
|
|
|
1,106
|
|
|
|
16.41
|
|
Auto finance
|
|
|
37
|
|
|
|
1.93
|
|
|
|
36
|
|
|
|
2.14
|
|
Other consumer
|
|
|
48
|
|
|
|
1.83
|
|
|
|
65
|
|
|
|
1.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
2,457
|
|
|
|
60.64
|
|
|
|
2,923
|
|
|
|
61.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,224
|
|
|
|
100.00
|
%
|
|
$
|
3,861
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes loans held for sale.
|
|
(2) |
|
Components of the commercial
allowance for credit losses, including exposure relating to
off-balance sheet credit risk, and the increases (decreases) in
comparison with prior periods, are summarized in the following
table:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(In millions)
|
|
|
On-balance sheet allowance:
|
|
|
|
|
|
|
|
|
Specific
|
|
$
|
237
|
|
|
$
|
326
|
|
Collective
|
|
|
485
|
|
|
|
549
|
|
Transfer risk
|
|
|
-
|
|
|
|
-
|
|
Unallocated
|
|
|
45
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
Total on-balance sheet allowance
|
|
|
767
|
|
|
|
938
|
|
|
|
|
|
|
|
|
|
|
Off-balance sheet allowance
|
|
|
114
|
|
|
|
188
|
|
|
|
|
|
|
|
|
|
|
Total commercial allowances
|
|
$
|
881
|
|
|
$
|
1,126
|
|
|
|
|
|
|
|
|
|
|
While our allowance for credit loss is available to absorb
losses in the entire portfolio, we specifically consider the
credit quality and other risk factors for each of our products
in establishing the allowance for credit losses.
Reserves for Off-Balance Sheet Credit Risk We
also maintain a separate reserve for credit risk associated with
certain off-balance sheet exposures, including letters of
credit, unused commitments to extend credit and financial
guarantees. This reserve, included in other liabilities, was
$114 million and $188 million at March 31, 2010
and December 31, 2009, respectively. The related provision
is recorded as a miscellaneous expense and is a component of
operating expenses. The decrease in off-balance sheet reserves
relates in part to the consolidation of a previously
unconsolidated commercial paper VIE as of January 1, 2010,
which resulted in the elimination of this exposure requirement.
Off-balance sheet exposures are summarized under the caption
Off-Balance Sheet Arrangements and Contractual
Obligations in this MD&A.
99
HSBC USA Inc.
Delinquency The following table summarizes dollars
of two-months-and-over contractual delinquency and
two-months-and-over
contractual delinquency as a percent of total loans and loans
held for sale (delinquency ratio):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Dollars of Delinquency:
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
723
|
|
|
$
|
954
|
|
Consumer:
|
|
|
|
|
|
|
|
|
Residential mortgage, excluding home equity mortgages
|
|
|
1,551
|
|
|
|
1,595
|
|
Home equity mortgages
|
|
|
184
|
|
|
|
173
|
|
|
|
|
|
|
|
|
|
|
Total residential
mortgages(1)
|
|
|
1,735
|
|
|
|
1,768
|
|
Private label card receivables
|
|
|
510
|
|
|
|
622
|
|
Credit card receivables
|
|
|
515
|
|
|
|
587
|
|
Auto finance
|
|
|
33
|
|
|
|
48
|
|
Other consumer
|
|
|
16
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
2,809
|
|
|
|
3,043
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,532
|
|
|
$
|
3,997
|
|
|
|
|
|
|
|
|
|
|
Delinquency Ratio:
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
2.33
|
%
|
|
|
3.04
|
%
|
Consumer:
|
|
|
|
|
|
|
|
|
Residential mortgage, excluding home equity mortgages
|
|
|
10.59
|
|
|
|
10.56
|
|
Home equity mortgages
|
|
|
4.55
|
|
|
|
4.15
|
|
|
|
|
|
|
|
|
|
|
Total residential
mortgages(1)
|
|
|
9.28
|
|
|
|
9.17
|
|
Private label card receivables
|
|
|
3.79
|
|
|
|
4.12
|
|
Credit card receivables
|
|
|
4.36
|
|
|
|
4.50
|
|
Auto finance
|
|
|
2.27
|
|
|
|
2.34
|
|
Other consumer
|
|
|
1.14
|
|
|
|
1.20
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
6.00
|
|
|
|
5.97
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4.53
|
%
|
|
|
4.85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The following reflects dollars of
contractual delinquency and delinquency ratios for interest-only
loans and ARM loans:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
|
|
(dollars are in millions)
|
|
Dollars of Delinquency:
|
|
|
|
|
|
|
|
|
Interest-only loans
|
|
$
|
214
|
|
|
$
|
236
|
|
ARM loans
|
|
|
634
|
|
|
|
802
|
|
Delinquency Ratio:
|
|
|
|
|
|
|
|
|
Interest-only loans
|
|
|
7.26
|
%
|
|
|
6.94
|
%
|
ARM loans
|
|
|
7.94
|
|
|
|
9.58
|
|
Our total two-months-and-over contractual delinquency ratio
decreased 32 basis points since December 31, 2009. Our
two-months-and-over contractual delinquency ratio for consumer
loans increased to 6.00 percent at March 31, 2010 as
compared to 5.97 percent at December 31, 2009. Dollars
of delinquency fell across all consumer portfolios
100
HSBC USA Inc.
during the quarter particularly in private label card and credit
card receivables while outstanding loan balances also declined.
Dollars of delinquency in our private label card and credit card
receivable portfolios fell during the quarter reflecting lower
outstanding balances due to the continued impact of actions
previously taken to tighten underwriting and reduce risk in
these portfolios, increased focus by consumers to paydown credit
card debt and lower purchase volumes. The lower dollars of
delinquency also resulted from improved early stage delinquency
roll rates and seasonal improvements in our collection
activities as some customers use tax refunds to make payments.
The slight increase in the delinquency ratio since
December 31, 2009 was driven by our residential mortgage
loan portfolio as loans in this portfolio declined at a faster
rate than delinquency, which stabilized in the quarter as
economic conditions improved, real estate markets and loss
severities continued to stabilize and collection activity
benefited from seasonal improvements.
In addition, overall delinquency levels continue to be impacted
by elevated unemployment levels.
Our commercial two-months-and-over contractual delinquency ratio
improved 71 basis points since December 31, 2009,
driven by a significant decline in dollars of delinquency as
balances related to certain problem loans were reduced.
Net Charge-offs of Loans The following table
summarizes net charge-off dollars as well as the net charge-off
of loans for the quarter, annualized, as a percent of average
loans, excluding loans held for sale, (net charge-off
ratio):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net Charge-off Dollars:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
99
|
|
|
$
|
112
|
|
|
$
|
51
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage, excluding home equity mortgages
|
|
|
48
|
|
|
|
60
|
|
|
|
59
|
|
Home equity mortgages
|
|
|
36
|
|
|
|
38
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential mortgages
|
|
|
84
|
|
|
|
98
|
|
|
|
87
|
|
Private label card receivables
|
|
|
293
|
|
|
|
312
|
|
|
|
314
|
|
Credit card receivables
|
|
|
335
|
|
|
|
337
|
|
|
|
61
|
|
Auto finance
|
|
|
24
|
|
|
|
26
|
|
|
|
4
|
|
Other consumer
|
|
|
17
|
|
|
|
20
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
753
|
|
|
|
793
|
|
|
|
492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
852
|
|
|
$
|
905
|
|
|
$
|
543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Charge-off Ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
1.29
|
%
|
|
|
1.42
|
%
|
|
|
.56
|
%
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage, excluding home equity mortgages
|
|
|
1.43
|
|
|
|
1.70
|
|
|
|
1.36
|
|
Home equity mortgages
|
|
|
3.56
|
|
|
|
3.52
|
|
|
|
2.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential mortgages
|
|
|
1.92
|
|
|
|
2.12
|
|
|
|
1.59
|
|
Private label card receivables
|
|
|
8.29
|
|
|
|
8.44
|
|
|
|
7.77
|
|
Credit card receivables
|
|
|
10.95
|
|
|
|
10.18
|
|
|
|
1.85
|
|
Auto finance
|
|
|
6.18
|
|
|
|
5.73
|
|
|
|
.62
|
|
Other consumer
|
|
|
4.83
|
|
|
|
5.26
|
|
|
|
5.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
6.43
|
|
|
|
6.37
|
|
|
|
3.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4.40
|
%
|
|
|
4.45
|
%
|
|
|
2.37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101
HSBC USA Inc.
Our net charge-off ratio as a percentage of average loans
decreased 5 basis points compared to the prior quarter
primarily due to lower residential mortgage and private label
card charge-offs. We experienced lower dollars of charge-off in
all loan categories during the first quarter of 2010 driven by
lower receivable levels and improved credit quality, in part due
to seasonality. These favorable trends were partially offset by
the impact from continued weakness in the U.S. economy
including continued high unemployment levels and portfolio
seasoning.
Charge-off dollars and ratios decreased in the residential
mortgage loan portfolio compared to the prior quarter reflecting
lower outstanding balances, moderation in loss severities as the
real estate markets have stabilized in most areas and seasonal
improvements in collections. Charge-off dollars and ratios for
private label card receivables also declined compared to the
prior quarter due to lower receivable balances, including
increased focus by customers to paydown debt as well as
improving credit quality resulting from actions previously taken
to reduce risk in the portfolio and seasonal improvements in
collection activities. While charge-off dollars in our credit
card portfolio fell in the quarter, charge-off ratios for our
credit card portfolio increased as average credit card
receivables declined at a faster pace than charge-off.
Commercial charge-off dollars and ratios also declined compared
to the prior quarter as the first quarter of 2010 reflects
recoveries on certain problem credits which were sold during the
quarter. Additionally charge-offs in middle market and business
banking were lower, based on improving trends in portfolio
quality.
Compared to the year-ago quarter, our charge-off ratio increased
203 basis points, driven largely by higher credit card
charge-offs as charge-off levels in this book during the first
quarter of 2009 were positively impacted by the purchase of the
GM and UP portfolio, a portion of which was recorded at fair
value, net of anticipated future losses at the time of
acquisition. This resulted in a substantial increase in average
credit card receivables outstanding during the first quarter of
2009 without a corresponding increase in credit card
charge-offs. The portion of the portfolio not subject to this
accounting and newly generated receivables are now seasoning,
resulting in increased charge-offs during first quarter of 2010
compared to 2009 levels. Our auto finance net charge-off ratio
increased as compared to the year-ago quarter as the receivables
purchased from HSBC Finance in January 2009 continue to season.
Auto finance charge-offs during the first quarter of 2009 was
favorably impacted by the non-delinquent status of the loans
purchased which are now seasoning and are migrating to
charge-off.
102
HSBC USA Inc.
Nonperforming Assets Nonperforming assets are
summarized in the following table.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Nonaccrual loans:
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
Construction and other real estate
|
|
$
|
638
|
|
|
$
|
644
|
|
Other commercial
|
|
|
372
|
|
|
|
623
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
1,010
|
|
|
|
1,267
|
|
Consumer:
|
|
|
|
|
|
|
|
|
Residential mortgages, excluding home equity mortgages
|
|
|
934
|
|
|
|
875
|
|
Home equity mortgages
|
|
|
105
|
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
Total residential mortgages
|
|
|
1,039
|
|
|
|
982
|
|
Credit card receivables
|
|
|
3
|
|
|
|
3
|
|
Auto finance
|
|
|
32
|
|
|
|
40
|
|
Others
|
|
|
9
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
Total consumer loans
|
|
|
1,083
|
|
|
|
1,034
|
|
Nonaccrual loans held for sale
|
|
|
432
|
|
|
|
446
|
|
|
|
|
|
|
|
|
|
|
Total nonaccruing loans
|
|
|
2,525
|
|
|
|
2,747
|
|
|
|
|
|
|
|
|
|
|
Accruing loans contractually past due 90 days or
more:
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
96
|
|
|
|
166
|
|
Consumer:
|
|
|
|
|
|
|
|
|
Private label card receivables
|
|
|
375
|
|
|
|
449
|
|
Credit card receivables
|
|
|
376
|
|
|
|
429
|
|
Auto finance
|
|
|
-
|
|
|
|
-
|
|
Other consumer
|
|
|
29
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
Total consumer loans
|
|
|
780
|
|
|
|
909
|
|
Accruing loans contractually past due 90 days or more held
for sale
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total accruing loans contractually past due 90 days or
more
|
|
|
876
|
|
|
|
1,075
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
|
3,401
|
|
|
|
3,822
|
|
Other real estate and owned assets
|
|
|
79
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
3,480
|
|
|
$
|
3,894
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses as a percent of nonperforming
loans(1)
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
69.34
|
%
|
|
|
65.44
|
%
|
Consumer
|
|
|
131.87
|
|
|
|
150.45
|
|
|
|
|
(1) |
|
Ratio excludes nonperforming loans
associated with loan portfolios which are considered held for
sale as these loans are carried at the lower of cost or market.
|
Decreases in nonperforming loans at March 31, 2010 as
compared to December 31, 2009 are related primarily to
commercial loans. Commercial nonaccrual loans decreased due
largely to managed reductions in certain exposures and
stabilization of credit quality in certain components of the
book. Decreases in accruing loans past due 90 days or more
since December 31, 2009 reflect lower outstanding balances
and improvements in credit quality including lower dollars of
delinquency.
103
HSBC USA Inc.
Accrued but unpaid interest on loans placed on nonaccrual status
generally is reversed and reduces current income at the time
loans are so categorized. Interest income on these loans may be
recognized to the extent of cash payments received. In those
instances where there is doubt as to collectability of
principal, any cash interest payments received are applied as
reductions of principal. Loans are not reclassified as accruing
until interest and principal payments are brought current and
future payments are reasonably assured.
Impaired Commercial Loans A commercial loan
is considered to be impaired when it is deemed probable that all
principal and interest amounts due, according to the contractual
terms of the loan agreement, will not be collected. Probable
losses from impaired loans are quantified and recorded as a
component of the overall allowance for credit losses. Generally,
impaired commercial loans include loans in nonaccrual status,
loans that have been assigned a specific allowance for credit
losses, loans that have been partially or wholly charged off and
loans designated as troubled debt restructurings. Impaired
commercial loan statistics are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
|
|
(in millions)
|
|
Impaired commercial loans:
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
1,146
|
|
|
$
|
1,458
|
|
Amount with impairment reserve
|
|
|
835
|
|
|
|
1,127
|
|
Impairment reserve
|
|
|
305
|
|
|
|
336
|
|
Criticized Assets Criticized asset
classifications are based on the risk rating standards of our
primary regulator. Problem loans are assigned various criticized
facility grades. We also assign obligor grades which are used
under our allowance for credit losses methodology. The following
facility grades are deemed to be criticized. Criticized assets
are summarized in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
(Decrease) from
|
|
|
|
March 31,
|
|
|
December 31, 2009
|
|
|
|
2010
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Special mention:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
$
|
2,769
|
|
|
$
|
(240
|
)
|
|
|
(8.0
|
)
|
Substandard:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
|
3,246
|
|
|
|
(277
|
)
|
|
|
(7.9
|
)
|
Consumer loans
|
|
|
2,048
|
|
|
|
(61
|
)
|
|
|
(2.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total substandard
|
|
|
5,294
|
|
|
|
(338
|
)
|
|
|
(6.0
|
)
|
Doubtful:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
|
324
|
|
|
|
(180
|
)
|
|
|
(35.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,387
|
|
|
$
|
(758
|
)
|
|
|
(8.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in criticized commercial loans in the first quarter
of 2010 resulted primarily from changes in the financial
condition of certain customers, some of which were upgraded
during the quarter as well as paydowns related to certain
exposures.
104
HSBC USA Inc.
Geographic Concentrations Regional exposure
at March 31, 2010 for certain loan portfolios is summarized
in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
Construction and
|
|
|
Residential
|
|
|
Credit
|
|
|
|
Other Real
|
|
|
Mortgage
|
|
|
Card
|
|
|
|
Estate Loans
|
|
|
Loans
|
|
|
Receivables
|
|
|
|
|
New York State
|
|
|
45.66
|
%
|
|
|
37.41
|
%
|
|
|
10.69
|
%
|
North Central United States
|
|
|
4.05
|
|
|
|
8.90
|
|
|
|
27.25
|
|
North Eastern United States
|
|
|
10.39
|
|
|
|
9.69
|
|
|
|
14.63
|
|
Southern United States
|
|
|
21.97
|
|
|
|
18.74
|
|
|
|
26.57
|
|
Western United States
|
|
|
17.44
|
|
|
|
25.24
|
|
|
|
20.50
|
|
Other
|
|
|
.49
|
|
|
|
.02
|
|
|
|
.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity
and Capital Resources
Effective liquidity management is defined as making sure we can
meet customer loan requests, customer deposit
maturities/withdrawals and other cash commitments efficiently
under both normal operating conditions and under unpredictable
circumstances of industry or market stress. To achieve this
objective, we have guidelines that require sufficient liquidity
to cover potential funding requirements and to avoid
over-dependence on volatile, less reliable funding markets.
Guidelines are set for the consolidated balance sheet of HSBC
USA Inc. to ensure that it is a source of strength for our
regulated, deposit-taking banking subsidiary, as well as to
address the more limited sources of liquidity available to us.
Similar guidelines are set for the balance sheet of HSBC Bank
USA to ensure that it can meet its liquidity needs in various
stress scenarios. Cash flow analysis, including stress testing
scenarios, forms the basis for liquidity management and
contingency funding plans.
As a result of the economic turmoil, beginning in 2008 and
continuing through the first quarter of 2010, we continue to
reduce our reliance on debt capital markets and to increase
deposits. During the first quarter of 2010, we retired long-term
debt of $980 million and deposits have increased
5 percent. We continue to manage our overall balance sheet
downward by reducing low margin investments and deposits while
continuing to manage the overall balance sheet risk.
Interest bearing deposits with banks totaled
$32.5 billion and $20.1 billion at March 31, 2010
and December 31, 2009, respectively.
Federal funds sold and securities purchased under
agreements to resell totaled $2.9 billion and
$1.0 billion at March 31, 2010 and December 31,
2009, respectively. Balances increased during the three months
ended March 31, 2010 as we redeployed surplus liquidity
using repurchase agreements.
Short-term borrowings totaled $11.5 billion
and $6.5 billion at March 31, 2010 and
December 31, 2009, respectively. See Balance Sheet
Review for further analysis and discussion on short-term
borrowing trends.
Deposits totaled $124.8 billion and
$118.3 billion at March 31, 2010 and December 31,
2009, respectively. See Balance Sheet Review for
further analysis and discussion on deposit trends.
105
HSBC USA Inc.
Long-term debt decreased to $17.3 billion at
March 31, 2010 from $18.0 billion at December 31,
2009. The following table summarizes issuances and retirements
of long term debt during the three months ended March 31,
2010 and 2009:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Long-term debt issued
|
|
$
|
577
|
|
|
$
|
303
|
|
Long-term debt retired
|
|
|
(980
|
)
|
|
|
(2,486
|
)
|
|
|
|
|
|
|
|
|
|
Net long-term debt retired
|
|
$
|
(403
|
)
|
|
$
|
(2,183
|
)
|
|
|
|
|
|
|
|
|
|
Issuances of long-term debt during the first quarter of 2010
included $577 million, $147 million of which was
issued by HSBC Bank USA.
Under our shelf registration statement on file with the
Securities and Exchange Commission, we may issue debt securities
or preferred stock. The shelf has no dollar limit, but the
ability to issue debt is limited by the issuance authority
granted by the Board of Directors. We are currently authorized
to issue up to $15 billion, of which $6.5 billion is
available at March 31, 2010. HSBC Bank USA also has a
$40 billion Global Bank Note Program of which
$3.6 billion is available at March 31, 2010.
As a member of the New York Federal Home Loan Bank (FHLB), we
have a secured borrowing facility which is collateralized by
residential and commercial mortgage loans and investment
securities. At March 31, 2010 and December 31, 2009,
long-term debt included $1.0 billion under this facility.
The facility also allows access to further borrowings of up to
$2.0 billion based upon the amount pledged as collateral
with the FHLB.
At March 31, 2010 and December 31, 2009, we had a
$2.5 billion unused line of credit with HSBC Bank plc, a
HSBC U.K.-based subsidiary, to support issuances of commercial
paper.
At March 31, 2010, credit card receivables and restricted
available-for-sale
investments totaling $2.8 billion secured $2.2 billion
of outstanding public debt and conduit facilities. At
December 31, 2009, private label card receivables, credit
card receivables and restricted
available-for-sale
investments totaling $3.9 billion secured $3.0 billion
of outstanding public debt and conduit facilities.
At March 31, 2010, we had conduit credit facilities with
commercial and investment banks under which our operations may
issue securities up to $2.1 billion backed with private
label card and credit card receivables. The facilities are
annually renewable at the providers option. At
March 31, 2010, credit card receivables of
$1.2 billion were used to collateralize $900 million
of funding transactions structured as secured financings under
these funding programs. At December 31, 2009, private label
card and credit card receivables of $1.7 billion were used
to collateralize $1.2 billion of funding transactions
structured as secured financings under these funding programs.
For the conduit credit facilities that have renewed during the
past three months, pricing has declined compared to 2009 but is
still elevated.
Available-for-sale
investments included $1.0 billion and $1.1 billion at
March 31, 2010 and December 31, 2009, respectively,
which were restricted for the sole purpose of paying down
certain secured financings at the established payment date.
The securities issued in connection with collateralized funding
transactions may pay off sooner than originally scheduled if
certain events occur. Early payoff of securities may occur if
established delinquency or loss levels are exceeded or if
certain other events occur. For all other transactions, early
payoff of the securities begins if the annualized portfolio
yield drops below a base rate or if certain other events occur.
Presently we do not anticipate that any early payoff will take
place. If early payoff were to occur, our 2010 funding
requirements would not increase significantly.
Preferred Equity Refer to Note 19,
Preferred Stock of the consolidated financial
statements included in our 2009
Form 10-K
for information regarding all outstanding preferred share issues.
Common Equity During the three months ended
March 31, 2010, no capital contributions were made by HNAI,
our immediate parent, to us.
106
HSBC USA Inc.
Selected Capital Ratios Capital amounts and ratios
are calculated in accordance with current banking regulations.
In managing capital, we develop targets for Tier 1 capital
to risk weighted assets and Tier 1 capital to average
assets. Our targets may change from time to time to accommodate
changes in the operating environment or other considerations
such as those listed above. Selected capital ratios are
summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
|
Tier 1 capital to risk weighted assets
|
|
|
10.75
|
%(1)
|
|
|
9.61
|
%
|
Tier 1 capital to average assets
|
|
|
7.56
|
|
|
|
7.59
|
|
Total equity to total assets
|
|
|
8.36
|
|
|
|
8.87
|
|
|
|
|
(1) |
|
Effective January 1, 2010, we
began consolidating a commercial paper conduit managed by HSBC
Bank USA as a result of adopting new guidance related to the
consolidation of variable interest entities. Since we elected to
adopt the transition mechanism for Risk Based Capital
requirements, there is no change to the Tier 1 capital
ratios for the first two quarters of 2010. Had we fully
transitioned to the Risk Based Capital requirements at
March 31, 2010, our Tier 1 capital ratios would not
have been significantly impacted. See Note 16,
Variable Interest Entities, in the accompanying
consolidated financial statements for further discussion of the
consolidation of this entity and related impacts.
|
HSBC USA Inc. manages capital in accordance with the HSBC Group
policy. HSBC North America and HSBC Bank USA have each approved
an Internal Capital Adequacy Assessment Process
(ICAAP) that works in conjunction with the HSBC
Groups ICAAP. The ICAAP evaluates regulatory capital
adequacy, economic capital adequacy, rating agency requirements
and capital adequacy under a stress scenario. Our intitial
approach is to meet our capital needs for this stress scenario
locally through activities which reduce risk. To the extent that
local alternatives are insufficient or unavailable, we will rely
on capital support from our parent, in accordance with
HSBCs capital management policy. HSBC has indicated that
they are fully committed and have the capacity to provide
capital as needed to run operations, maintain sufficient
regulatory capital ratios and fund certain tax planning
strategies.
We and HSBC Bank USA are required to meet minimum capital
requirements established by the principal regulators. Risk-based
capital amounts and ratios are presented in Note 15,
Regulatory Capital, in the accompanying consolidated
financial statements.
Subject to regulatory approval, HSBC North America will be
required to adopt Basel II provisions no later than
April 1, 2011. HSBC USA will not report separately under
the new rules, but HSBC Bank USA will report under the new rules
on a stand-alone basis. Whether any increase in regulatory
capital will be required prior to the Basel II adoption
date will depend upon our prevailing risk profile. Adoption must
be preceded by a parallel run period of at least four quarters,
and requires the approval of U.S. regulators. This parallel
run was initiated in January 2010.
HSBC Bank USA is subject to restrictions that limit the transfer
of funds from it to us and our nonbank subsidiaries (including
affiliates) in so-called covered transactions. In
general, covered transactions include loans and other extensions
of credit, investments and asset purchases, as well as certain
other transactions involving the transfer of value from a
subsidiary bank to an affiliate or for the benefit of an
affiliate. Unless an exemption applies, covered transactions by
a subsidiary bank with a single affiliate are limited to 10% of
the subsidiary banks capital and surplus and, with respect
to all covered transactions with affiliates in the aggregate, to
20% of the subsidiary banks capital and surplus. Also,
loans and extensions of credit to affiliates generally are
required to be secured in specified amounts. A banks
transactions with its nonbank affiliates are also generally
required to be on arms length terms.
As part of the regulatory approvals with respect to the GM and
UP receivable purchases completed in January 2009, we and HSBC
made certain additional capital commitments to ensure that HSBC
Bank USA holds sufficient capital with respect to the purchased
receivables that are or become low-quality assets,
as defined by the Federal Reserve Act. During the first quarter
of 2010, HSBC Bank USA sold low-quality auto finance loans with
a net book value of approximately $103 million to a
non-bank subsidiary of HSBC USA Inc. to reduce the capital
requirement associated with these assets. As discussed above, we
have established an Internal Capital Adequacy Assessment Process
(ICAAP). Under ICAAP, capital adequacy is evaluated
through the examination of regulatory capital ratios (measured
under current and Basel II rules), economic capital and
stress testing. The results of the ICAAP are forwarded to HSBC
and, to the extent that this evaluation identifies potential
capital needs, incorporated into the
107
HSBC USA Inc.
HSBC capital management process. HSBC has provided capital
support in the past and has indicated its commitment and
capacity to fund the needs of the business in the future.
2010 Funding Strategy Our current range of
estimates for funding needs and sources for 2010 are summarized
in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
Estimated
|
|
|
|
|
|
|
January 1
|
|
|
April 1
|
|
|
|
|
|
|
through
|
|
|
through
|
|
|
Estimated
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
Full Year
|
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
|
|
|
(in billions)
|
|
|
Funding needs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loan growth (attrition), excluding asset transfers
|
|
$
|
(2
|
)
|
|
$
|
3
|
|
|
$
|
1
|
|
Net asset transfers
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Long-term debt maturities
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
|
Secured financings, including conduit facility maturities
|
|
|
1
|
|
|
|
2
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total funding needs
|
|
$
|
(1
|
)
|
|
$
|
6
|
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funding sources:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash from operations
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
1
|
|
Core deposit growth
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
|
Other deposit growth
|
|
|
6
|
|
|
|
(5
|
)
|
|
|
1
|
|
Loan sales
|
|
|
2
|
|
|
|
-
|
|
|
|
2
|
|
Long-term debt issuance
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
Short-term funding/investments
|
|
|
(11
|
)
|
|
|
8
|
|
|
|
(3
|
)
|
Secured financings, including conduit facility renewals
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
|
Other, including capital infusions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total funding sources
|
|
$
|
(1
|
)
|
|
$
|
6
|
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The above table reflects our current funding strategy. Daily
balances fluctuate as we accommodate customer needs and take
advantage of market opportunities, while ensuring that we have
liquidity in place to support the balance sheet maturity funding
profile. Should market conditions deteriorate, we have
contingency plans to generate additional liquidity through the
sales of assets or financing transactions. Our prospects for
growth are dependent upon access to the capital markets and our
ability to attract and retain deposits. We remain confident in
our ability to access the market for long-term debt funding
needs in the current market environment. Deposits are expected
to grow as we continue to expand our core domestic banking
network. We continue to seek well-priced and stable customer
deposits as customers move funds to larger, well-capitalized
institutions due to a volatile market.
We will continue to sell a majority of new mortgage loan
originations to government sponsored enterprises and private
investors.
For further discussion relating to our sources of liquidity and
contingency funding plan, see the caption Risk
Management in this MD&A.
Off-Balance Sheet Arrangements As part of
our normal operations, we enter into various off-balance sheet
arrangements with affiliates and third parties. These
arrangements arise principally in connection with our lending
and client intermediation activities and involve primarily
extensions of credit and guarantees.
As a financial services provider, we routinely extend credit
through loan commitments and lines and letters of credit and
provide financial guarantees, including derivative transactions
that meet the definition of a guarantee. The contractual amounts
of these financial instruments represent our maximum possible
credit exposure in the event that
108
HSBC USA Inc.
a counterparty draws down the full commitment amount or we are
required to fulfill our maximum obligation under a guarantee.
The following table provides maturity information related to our
off-balance sheet arrangements. Many of these commitments and
guarantees expire unused or without default. As a result, we
believe that the contractual amount is not representative of the
actual future credit exposure or funding requirements.
Descriptions of these arrangements are found in Item 7,
Managements Discussion and Analysis of Financial
Condition and Results of Operations of our 2009
Form 10-K
under the caption Off-Balance Sheet Arrangements and
Contractual Obligations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2010
|
|
|
|
|
|
|
One
|
|
|
Over One
|
|
|
Over
|
|
|
|
|
|
Balance at
|
|
|
|
Year
|
|
|
through
|
|
|
Five
|
|
|
|
|
|
December 31,
|
|
|
|
or Less
|
|
|
Five Years
|
|
|
Years
|
|
|
Total
|
|
|
2009
|
|
|
|
|
|
(in billions)
|
|
|
Standby letters of credit, net of
participations(1)
|
|
$
|
5.3
|
|
|
$
|
2.3
|
|
|
$
|
.1
|
|
|
$
|
7.7
|
|
|
$
|
7.6
|
|
Commercial letters of credit
|
|
|
.8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
.8
|
|
|
|
.7
|
|
Credit derivatives considered
guarantees(2)
|
|
|
52.7
|
|
|
|
286.7
|
|
|
|
55.0
|
|
|
|
394.4
|
|
|
|
387.2
|
|
Other commitments to extend credit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
15.6
|
|
|
|
25.0
|
|
|
|
3.0
|
|
|
|
43.6
|
|
|
|
48.9
|
|
Consumer
|
|
|
7.1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7.1
|
|
|
|
6.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
81.5
|
|
|
$
|
314.0
|
|
|
$
|
58.1
|
|
|
$
|
453.6
|
|
|
$
|
451.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $741 million and
$774 million issued for the benefit of HSBC affiliates at
March 31, 2010 and December 31, 2009, respectively.
|
|
(2) |
|
Includes $56.9 billion and
$57.3 billion issued for the benefit of HSBC affiliates at
March 31, 2010 and December 31, 2009, respectively.
|
We provide liquidity support to a number of multi-seller and
single seller asset backed commercial paper conduits (ABCP
conduits). The tables below present information on our
liquidity facilities with ABCP conduits at March 31, 2010.
The maximum exposure to loss presented in the first table
represents the maximum contractual amount of loans and asset
purchases we could be required to make under the liquidity
agreements. This amount does not reflect the funding limits
discussed above and also assumes that we suffer a total loss on
all amounts advanced and all assets purchased from the ABCP
conduits. As such, we believe that this measure significantly
overstates our expected loss exposure. See Item 7,
Managements Discussion and Analysis of Financial
Condition and Results of Operations of our 2009
Form 10-K
under the caption Off-Balance Sheet Arrangements and
Contractual Obligations for additional information on
these ABCP conduits.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conduit
|
|
|
|
|
|
Conduit
|
|
|
|
|
|
|
Maximum
|
|
|
Assets(1)
|
|
|
Weighted
|
|
|
Funding(1)
|
|
|
Weighted
|
|
|
|
Exposure
|
|
|
Total
|
|
|
Average Life
|
|
|
Commercial
|
|
|
Average Life
|
|
Conduit Type
|
|
to Loss
|
|
|
Assets
|
|
|
(Months)
|
|
|
Paper
|
|
|
(Days)
|
|
|
|
|
|
|
|
|
(dollars are in millions)
|
|
|
|
|
|
HSBC affiliate sponsored (multi-seller)
|
|
$
|
1,457
|
|
|
$
|
967
|
|
|
|
19
|
|
|
$
|
954
|
|
|
|
38
|
|
Third-party sponsored:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-seller
|
|
|
554
|
|
|
|
6,783
|
|
|
|
36
|
|
|
|
6,783
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,011
|
|
|
$
|
7,750
|
|
|
|
|
|
|
$
|
7,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For multi-seller conduits, the
amounts presented represent only the specific assets and related
funding supported by our liquidity facilities. For single-seller
conduits, the amounts presented above represent the total assets
and funding of the conduit
|
109
HSBC USA Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
|
|
|
Average Credit
Quality(1)
|
|
Asset Class
|
|
Mix
|
|
|
AAA
|
|
|
AA+/AA
|
|
|
A
|
|
|
A−
|
|
|
BB/BB−
|
|
|
B−
|
|
|
|
|
Multi-seller conduits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities backed by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto loans and leases
|
|
|
32
|
%
|
|
|
42
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
58
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
Trade receivables
|
|
|
9
|
|
|
|
100
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Credit card receivables
|
|
|
56
|
|
|
|
35
|
|
|
|
-
|
|
|
|
65
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Capital calls
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Equipment loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Auto dealer floor plan loans
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
42
|
%
|
|
|
-
|
%
|
|
|
39
|
%
|
|
|
19
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-seller conduits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities backed by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto loans and leases
|
|
|
100
|
%
|
|
|
99
|
%
|
|
|
1
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
Loans and trade receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto loans and leases
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
99
|
%
|
|
|
1
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Credit quality is based on Standard
and Poors ratings at March 31, 2010 except for loans
and trade receivables held by single-seller conduits, which are
based on our internal ratings. For the single-seller conduits,
external ratings are not available; however, our internal credit
ratings were developed using similar methodologies and rating
scales equivalent to the external credit ratings.
|
We receive fees for providing these liquidity facilities. Credit
risk on these obligations is managed by subjecting them to our
normal underwriting and risk management processes.
During the first quarter of 2010, U.S. asset backed
commercial paper volumes improved as there are signs that most
major bank conduit sponsors are extending new financing but at a
slower pace. Credit spreads in the multi-seller conduit market
have trended lower since the beginning of the year following a
pattern that is prevalent across the U.S. credit markets.
In the ABCP market, the success of the TALF program revived the
term ABS market and has been the primary catalyst for the
lowering of spreads in the ABCP market. The lower supply of ABCP
has led to greater investor liquidity for the large bank
sponsors that are attracting demand from money fund investors.
The improved demand for higher quality ABCP programs has led to
an improved market sentiment and less volatility in issuance
spreads.
The preceding tables do not include information on liquidity
facilities that we previously provided to certain Canadian
multi-seller ABCP conduits that have been subject to
restructuring agreements. As a result of specific difficulties
in the Canadian asset backed commercial paper markets, we
entered into various agreements during the second half of 2007
modifying obligations with respect to these facilities.
Under one of these agreements, known as the Montreal Accord, a
restructuring proposal to convert outstanding commercial paper
into longer term securities was approved by ABCP noteholders and
endorsed by the Canadian justice system in 2008. The
restructuring plan was formally executed during the first
quarter of 2009. As part of the enhanced collateral pool
established for the restructuring, we have provided a
$394 million Margin Funding Facility to new Master Conduit
Vehicles, which is currently undrawn. HSBC Bank USA derivatives
transactions with the previous conduit vehicles have been
assigned to new Master Conduit Vehicles. Under the
restructuring, collateral provided to us to mitigate the
derivatives exposures is significantly higher than it was prior
to the restructuring.
110
HSBC USA Inc.
Also in Canada but separately from the Montreal Accord, as part
of an ABCP conduit restructuring executed in the second quarter
of 2008, we agreed to hold long-term securities of
$300 million (denominated in Canadian dollars) and provide
a $95 million credit facility. At of March 31, 2010
this credit facility was undrawn and approximately
$295 million (U.S. dollars) of long-term securities
were held. At December 31, 2009, approximately
$1 million of the credit facility was drawn and
$285 million (U.S. dollars) of long term securities
were held. The change in value of securities held from
December 31, 2009 was due to weaker U.S. dollar versus
the Canadian dollar.
As of March 31, 2010 and December 31, 2009, other than
the Margin Funding Facilities referred to above, we no longer
have outstanding liquidity facilities to Canadian ABCP conduits
subject to the Montreal Accord or other agreements. However, we
hold $10 million of long-term securities that were
converted from a liquidity drawing which fell under the Montreal
Accord restructuring agreement.
We have established and manage a number of constant net asset
value (CNAV) money market funds that invest in
shorter-dated highly-rated money market securities to provide
investors with a highly liquid and secure investment. These
funds price the assets in their portfolio on an amortized cost
basis, which enables them to create and liquidate shares at a
constant price. The funds, however, are not permitted to price
their portfolios at amortized cost if that amount varies by more
than 50 basis points from the portfolios market
value. In that case, the fund would be required to price its
portfolio at market value and consequently would no longer be
able to create or liquidate shares at a constant price. We do
not consolidate the CNAV funds as they are not VIEs and we do
not hold a majority voting interest.
Fair
Value
Fair value measurement accounting principles require a reporting
entity to take into consideration its own credit risk in
determining the fair value of financial liabilities. The
incorporation of our own credit risk accounted for a decrease of
$34 million and $139 million in the fair value of
financial liabilities during three months ended March 31,
2010 and 2009, respectively.
Net income volatility arising from changes in either interest
rate or credit components of the
mark-to-market
on debt designated at fair value and related derivatives affects
the comparability of reported results between periods.
Accordingly, the loss on debt designated at fair value and
related derivatives during the first quarter of 2010 should not
be considered indicative of the results for any future period.
Control Over Valuation Process and
Procedures A control framework has been established
which is designed to ensure that fair values are either
determined or validated by a function independent of the
risk-taker. To that end, the ultimate responsibility for the
determination of fair values rests with Finance. Finance
establishes policies and procedures to ensure appropriate
valuations. For fair values determined by reference to external
quotations on the identical or similar assets or liabilities, an
independent price validation process is utilized. For price
validation purposes, quotations from at least two independent
pricing sources are obtained for each financial instrument,
where possible. We consider the following factors in determining
fair values:
|
|
|
|
|
similarities between the asset or the liability under
consideration and the asset or liability for which quotation is
received;
|
|
|
|
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 source of the fair value information.
|
Greater weight is given to quotations of instruments with recent
market transactions, pricing quotes from dealers who stand ready
to transact, quotations provided by market-makers who originally
structured such instruments, and
111
HSBC USA Inc.
market consensus pricing based on inputs from a large number of
participants. Any significant discrepancies among the external
quotations are reviewed by management and adjustments to fair
values are recorded where appropriate.
For fair values determined by using internal valuation
techniques, valuation models and inputs are developed by the
business and are reviewed, validated and approved by the
Quantitative Risk and Valuation Group (QRVG) or
other independent valuation control teams within Finance. Any
subsequent material changes are reviewed and approved by the
Valuation Committee which is comprised of representatives from
the business and various control groups. Where available, we
also participate in pricing surveys administered by external
pricing services to validate our valuation models and the model
inputs. The fair values of the majority of financial assets and
liabilities are determined using well developed valuation models
based on observable market inputs. The fair value measurements
of these assets and liabilities require less judgment. However,
certain assets and liabilities are valued based on proprietary
valuation models that use one or more significant unobservable
inputs and judgment is required to determine the appropriate
level of adjustments to the fair value to address, among other
things, model and input uncertainty. Any material adjustments to
the fair values are reported to management.
Fair Value Hierarchy Fair value measurement
accounting principles establish a fair value hierarchy structure
that prioritizes the inputs to determine the fair value of an
asset or liability (the Fair Vale Framework). The
Fair Value Framework distinguishes between inputs that are based
on observed market data and unobservable inputs that reflect
market participants assumptions. It emphasizes the use of
valuation methodologies that maximize observable market inputs.
For financial instruments carried at fair value, the best
evidence of fair value is a quoted price in an actively traded
market (Level 1). Where the market for a financial
instrument is not active, valuation techniques are used. The
majority of our valuation techniques use market inputs that are
either observable or indirectly derived from and corroborated by
observable market data for substantially the full term of the
financial instrument (Level 2). Because Level 1 and
Level 2 instruments are determined by observable inputs,
less judgment is applied in determining their fair values. In
the absence of observable market inputs, the financial
instrument is valued based on valuation techniques that feature
one or more significant unobservable inputs (Level 3). The
determination of the level of fair value hierarchy within which
the fair value measurement of an asset or a liability is
classified often requires judgment and may change over time as
market conditions evolve. We consider the following factors in
developing the fair value hierarchy:
|
|
|
|
|
whether the asset or liability is transacted in an active market
with a quoted market price;
|
|
|
|
the level of bid-ask spreads;
|
|
|
|
a lack of pricing transparency due to, among other things,
complexity of the product and market liquidity;
|
|
|
|
whether only a few transactions are observed over a significant
period of time;
|
|
|
|
whether the pricing quotations vary substantially among
independent pricing services;
|
|
|
|
whether 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.
|
Level 1 inputs are unadjusted quoted prices in active
markets that the reporting entity has the ability to access for
identical assets or liabilities. A financial instrument is
classified as a Level 1 measurement if it is listed on an
exchange or is an instrument actively traded in the
over-the-counter
(OTC) market where transactions occur with
sufficient frequency and volume. We regard financial instruments
such as equity securities and derivative contracts listed on the
primary exchanges of a country to be actively traded.
Non-exchange-traded instruments classified as Level 1
assets include securities issued by the U.S. Treasury or by
other foreign governments, to-be-announced (TBA)
securities and non-callable securities issued by
U.S. government sponsored entities.
Level 2 inputs are inputs that are observable either
directly or indirectly but do not qualify as Level 1
inputs. We classify mortgage pass-through securities, agency and
certain non-agency mortgage collateralized obligations, certain
derivative contracts, asset-backed securities, corporate debt,
preferred securities and leveraged loans as Level 2
measurements. Where possible, at least two quotations from
independent sources are obtained based on
112
HSBC USA Inc.
transactions involving comparable assets and liabilities to
validate the fair value of these instruments. Where significant
differences arise among the independent pricing quotes and the
internally determined fair value, we investigate and reconcile
the differences. If the investigation results in a significant
adjustment to the fair value, the instrument will be classified
as Level 3 within the fair value hierarchy. In general, we
have observed that there is a correlation between the credit
standing and the market liquidity of a non-derivative instrument.
Level 2 derivative instruments are generally valued based
on discounted future cash flows or an option pricing model
adjusted for counterparty credit risk and market liquidity. The
fair value of certain structured derivative products is
determined using valuation techniques based on inputs derived
from observable benchmark index tranches traded in the OTC
market. Appropriate control processes and procedures have been
applied to ensure that the derived inputs are applied to value
only those instruments that share similar risks to the relevant
benchmark indices and therefore demonstrate a similar response
to market factors. In addition, a validation process has been
established, which includes participation in peer group
consensus pricing surveys, to ensure that valuation inputs
incorporate market participants risk expectations and risk
premium.
Level 3 inputs are unobservable estimates that management
expects market participants would use to determine the fair
value of the asset or liability. That is, Level 3 inputs
incorporate market participants assumptions about risk and
the risk premium required by market participants in order to
bear that risk. We develop Level 3 inputs based on the best
information available in the circumstances. As of March 31,
2010 and December 31, 2009, our Level 3 instruments
included the following: collateralized debt obligations
(CDOs) and collateralized loan obligations
(CLOs) for which there is a lack of pricing
transparency due to market illiquidity, certain structured
credit and structured equity derivatives where significant
inputs (e.g., volatility or default correlations) are not
observable, credit default swaps with certain monoline insurers
where the deterioration in the creditworthiness of the
counterparty has resulted in significant adjustments to fair
value, U.S. subprime mortgage loans and subprime related
asset-backed securities, mortgage servicing rights, and
derivatives referenced to illiquid assets of less desirable
credit quality.
Transfers between leveling categories, when determined to be
appropriate, are recognized at the end of each reporting period.
Material Transfers Into (Out of) Level 1 and
Level 2 Measurements During the three months ended
March 31, 2010, there were no material transfers into or
out of Level 1 and Level 2 measurements.
Level 3 Measurements The following table
provides information about Level 3 assets/liabilities in
relation to total assets/liabilities measured at fair value as
of March 31, 2010 and December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Level 3
assets(1)(2)
|
|
$
|
8,542
|
|
|
$
|
9,179
|
|
Total assets measured at fair
value(3)
|
|
|
112,360
|
|
|
|
111,231
|
|
Level 3 liabilities
|
|
|
4,294
|
|
|
|
3,843
|
|
Total liabilities measured at fair
value(1)
|
|
|
73,306
|
|
|
|
74,120
|
|
Level 3 assets as a percent of total assets measured at
fair value
|
|
|
7.6
|
%
|
|
|
8.3
|
%
|
Level 3 liabilities as a percent of total liabilities
measured at fair value
|
|
|
5.9
|
%
|
|
|
5.2
|
%
|
|
|
|
(1) |
|
Presented without netting which
allows the offsetting of amounts relating to certain contracts
if certain conditions are met.
|
|
(2) |
|
Includes $6.8 billion of
recurring Level 3 assets and $1.8 billion of
non-recurring Level 3 assets at March 31, 2010 and
$7.4 billion of recurring Level 3 assets and
$1.8 billion of non-recurring Level 3 assets at
December 31, 2009.
|
|
(3) |
|
Includes $110.4 billion of
assets measured on a recurring basis and $2.0 billion of
assets measured on a non-recurring basis at March 31, 2010
and $108.6 billion of non-recurring Level 3 assets and
$2.7 billion of non-recurring Level 3 assets at
December 31, 2009.
|
Material
Changes in Fair Value for Level 3 Assets and
Liabilities
Derivative Assets and Counterparty Credit Risk We have
entered into credit default swaps with monoline insurers to
hedge our credit exposure in certain asset-backed securities and
synthetic CDOs. Beginning in 2007 and continuing into 2009, the
creditworthiness of the monoline insurers had deteriorated
significantly. However, beginning in the second half of 2009 and
continuing in the first quarter of 2010, the deterioration
previously experienced began to
113
HSBC USA Inc.
ease. As a result, we made a $56 million positive credit
risk adjustment and a $164 million negative credit risk
adjustment to the fair value of our credit default swap
contracts, which is reflected in trading revenue (loss) during
the three months ended March 31, 2010 and 2009,
respectively. We have recorded a cumulative credit loss
adjustment of $531 million against our monoline exposure as
of March 31, 2010.
Loans As of March 31, 2010 and December 31,
2009, we have classified $761 million and
$793 million, respectively, of mortgage whole loans held
for sale as a non-recurring Level 3 financial asset. These
mortgage loans are accounted for on a lower of cost or fair
value basis. Based on our assessment, we recorded a gain of
$77 million and a loss of $86 million for such
mortgage loans during the three months ended March 31, 2010
and 2009, respectively. The changes in fair value are recorded
as other revenues (losses) in the consolidated statement of
income (loss).
Material Additions to and Transfers Into (Out of)
Level 3 Measurements During the three months
ended March 31, 2010, we transferred $109 million of
mortgage and other asset-backed securities from Level 2 to
Level 3 as the availability of observable inputs continued
to decline. In addition, we transferred $218 million of
credit derivatives from Level 2 to Level 3.
During the three months ended March 31, 2009, we
transferred $264 million of mortgage and other asset-backed
securities and $27 million of corporate bonds from
Level 2 to Level 3 as the availability of observable
inputs continued to decline. In addition, we transferred
$55 million of credit derivatives from Level 2 to
Level 3.
See Note 18, Fair Value Measurements, in the
accompanying consolidated financial statements for information
on additions to and transfers into (out of) Level 3
measurements during the three months ended March 31, 2010
and 2009 as well as for further details including the
classification hierarchy associated with assets and liabilities
measured at fair value.
114
HSBC USA Inc.
Credit Quality of Assets Underlying Asset-backed
Securities The following tables summarize the types
and credit quality of the assets underlying our asset-backed
securities as well as certain collateralized debt obligations
and collateralized loan obligations held as of March 31,
2010:
Asset-backed
securities backed by consumer finance collateral:
Credit
quality of collateral:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime
|
|
|
Alt-A
|
|
|
Sub-prime
|
|
Credit quality of collateral:
|
|
|
|
|
Prior to
|
|
|
2006-
|
|
|
Prior to
|
|
|
2006-
|
|
|
Prior to
|
|
|
2006-
|
|
Year of issuance:
|
|
|
|
Total
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Rating of securities:
|
|
Collateral type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
Home equity loans
|
|
$
|
12
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
12
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
Auto loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Student loans
|
|
|
30
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
|
|
18
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Residential mortgages
|
|
|
942
|
|
|
|
4
|
|
|
|
-
|
|
|
|
560
|
|
|
|
-
|
|
|
|
378
|
|
|
|
-
|
|
|
|
Commercial mortgages
|
|
|
580
|
|
|
|
-
|
|
|
|
-
|
|
|
|
105
|
|
|
|
475
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Other
|
|
|
116
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
116
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AAA
|
|
|
1,680
|
|
|
|
4
|
|
|
|
-
|
|
|
|
689
|
|
|
|
609
|
|
|
|
378
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AA
|
|
Home equity loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Residential mortgages
|
|
|
27
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AA
|
|
|
27
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
|
|
Home equity loans
|
|
|
194
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
191
|
|
|
|
2
|
|
|
|
-
|
|
|
|
Auto loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Residential mortgages
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total A
|
|
|
197
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
191
|
|
|
|
2
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BBB
|
|
Home equity loans
|
|
|
209
|
|
|
|
-
|
|
|
|
-
|
|
|
|
208
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
Residential mortgages
|
|
|
36
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
36
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total BBB
|
|
|
245
|
|
|
|
-
|
|
|
|
-
|
|
|
|
208
|
|
|
|
36
|
|
|
|
1
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BB
|
|
Residential mortgages
|
|
|
209
|
|
|
|
15
|
|
|
|
-
|
|
|
|
155
|
|
|
|
39
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total BB
|
|
|
209
|
|
|
|
15
|
|
|
|
-
|
|
|
|
155
|
|
|
|
39
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
B
|
|
Auto loans
|
|
|
46
|
|
|
|
-
|
|
|
|
-
|
|
|
|
46
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Residential mortgages
|
|
|
30
|
|
|
|
30
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total B
|
|
|
76
|
|
|
|
30
|
|
|
|
-
|
|
|
|
46
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CCC
|
|
Home equity loans
|
|
|
17
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Residential mortgages
|
|
|
472
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
470
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total CCC
|
|
|
489
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
487
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrated
|
|
Residential mortgages
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,923
|
|
|
$
|
49
|
|
|
$
|
-
|
|
|
$
|
1,128
|
|
|
$
|
1,362
|
|
|
$
|
381
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115
HSBC USA Inc.
Collateralized
debt obligations (CDO) and collateralized loan obligations
(CLO):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit quality of collateral:
|
|
|
|
|
A or Higher
|
|
|
BBB
|
|
|
BB/B
|
|
|
CCC
|
|
|
Unrated
|
|
|
|
|
Rating of securities:
|
|
Collateral type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
Corporate loans
|
|
$
|
357
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
357
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
Commercial mortgages
|
|
|
122
|
|
|
|
-
|
|
|
|
-
|
|
|
|
72
|
|
|
|
50
|
|
|
|
-
|
|
|
|
Trust preferred
|
|
|
204
|
|
|
|
-
|
|
|
|
204
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Aircraft leasing
|
|
|
72
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
72
|
|
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
755
|
|
|
$
|
-
|
|
|
$
|
204
|
|
|
$
|
429
|
|
|
$
|
50
|
|
|
$
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total asset-backed securities
|
|
$
|
3,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Changes in Significant Unobservable
Inputs The fair value of certain financial
instruments is measured using valuation techniques that
incorporate pricing assumptions not supported by, derived from
or corroborated by observable market data. The resultant fair
value measurements are dependent on unobservable input
parameters which can be selected from a range of estimates and
may be interdependent. Changes in one or more of the significant
unobservable input parameters may change the fair value
measurements of these financial instruments. For the purpose of
preparing the financial statements, the final valuation inputs
selected are based on managements best judgment that
reflect the assumptions market participants would use in pricing
similar assets or liabilities.
The unobservable input parameters selected are subject to the
internal valuation control processes and procedures. When we
perform a test of all the significant input parameters to the
extreme values within the range at the same time, it could
result in an increase of the overall fair value measurement of
approximately $278 million or a decrease of the overall
fair value measurement of approximately $278 million as of
March 31, 2010. The effect of changes in significant
unobservable input parameters are primarily driven by mortgage
whole loans held for sale or securitization, certain
asset-backed securities including CDOs, and the uncertainty in
determining the fair value of credit derivatives executed
against monoline insurers.
Risk
Management
Overview Some degree of risk is inherent in
virtually all of our activities. For the principal activities
undertaken, the following are considered to be the most
important types of risks:
|
|
|
|
|
Credit risk is the potential that a borrower or
counterparty will default on a credit obligation, as well as the
impact on the value of credit instruments due to changes in the
probability of borrower default.
|
|
|
|
Liquidity risk is the potential that an institution will
be unable to meet its obligations as they become due or fund its
customers because of inadequate cash flow or the inability to
liquidate assets or obtain funding itself.
|
|
|
|
Interest rate risk is the potential impairment of net
interest income due to mismatched pricing between assets and
liabilities.
|
|
|
|
Market risk is the potential for losses in daily mark to
market positions (mostly trading) due to adverse movements in
money, foreign exchange, equity or other markets and includes
both interest rate risk and trading risk.
|
|
|
|
Operational risk is the risk of loss resulting from
inadequate or failed internal processes, people or systems or
from external events (including legal and compliance risk but
excluding strategic and reputational risk)
|
|
|
|
Fiduciary risk is the risk associated with offering
services honestly and properly to clients in a fiduciary
capacity in accordance with Regulation 12 CFR 9,
Fiduciary Activity of National Banks.
|
|
|
|
Reputational risk involves the safeguarding of our
reputation and can arise from social, ethical or environmental
issues, or as a consequence of operational and other risk events.
|
116
HSBC USA Inc.
|
|
|
|
|
Strategic risk is the risk to earnings or capital arising
from adverse business decisions or improper implementation of
those decisions.
|
There have been no significant changes to the policies or
approach for managing various types of risk as disclosed in our
2009
Form 10-K,
although we continue to monitor current market conditions and
will adjust risk management policies and procedures as deemed
necessary. See Risk Management in Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations in our 2009
Form 10-K
for a more complete discussion of the objectives of our risk
management system as well as our risk management policies and
practices. Our risk management process involves the use of
various simulation models. We believe that the assumptions used
in these models are reasonable, but actual events may unfold
differently than what is assumed in the models. Consequently,
model results may be considered reasonable estimates, with the
understanding that actual results may vary significantly from
model projections.
Credit Risk Management Credit risk is the
potential that a borrower or counterparty will default on a
credit obligation, as well as the impact on the value of credit
instruments due to changes in the probability of borrower
default.
Credit risk is inherent in various on- and off-balance sheet
instruments and arrangements, such as:
|
|
|
|
|
loan portfolios;
|
|
|
|
investment portfolios;
|
|
|
|
unfunded commitments such as letters of credit and lines of
credit that customers can draw upon; and
|
|
|
|
treasury instruments, such as interest rate swaps which, if more
valuable today than when originally contracted, may represent an
exposure to the counterparty to the contract.
|
While credit risk exists widely in our operations,
diversification among various commercial and consumer portfolios
helps to lessen risk exposure.
Day-to-day
management of credit and market risk is performed by the Chief
Credit Officer, the HSBC North America Chief Retail Credit
Officer and the Head of Market Risk, who report directly to the
HSBC North America Chief Risk Officer and maintain independent
risk functions. The credit risk associated with commercial
portfolios is managed by the Chief Credit Officer, while credit
risk associated with retail consumer loan portfolios, such as
credit cards, installment loans and residential mortgages, is
managed by the HSBC North America Chief Retail Credit Officer.
Further discussion of credit risk can be found under the
Credit Quality caption in this MD&A.
Credit risk associated with derivatives is measured as the net
replacement cost in the event the counterparties with contracts
in a gain position to us fail to perform under the terms of
those contracts. In managing derivative credit risk, both the
current exposure, which is the replacement cost of contracts on
the measurement date, as well as an estimate of the potential
change in value of contracts over their remaining lives are
considered. Counterparties to our derivative activities include
financial institutions, foreign and domestic government
agencies, corporations, funds (mutual funds, hedge funds, etc.),
insurance companies and private clients as well as other HSBC
entities. These counterparties are subject to regular credit
review by the credit risk management department. To minimize
credit risk, we enter into legally enforceable master netting
agreements which reduce risk by permitting the closeout and
netting of transactions with the same counterparty upon
occurrence of certain events. In addition, we reduce credit risk
by obtaining collateral from counterparties. The determination
of the need for and the levels of collateral will vary based on
an assessment of the credit risk of the counterparty.
The total risk in a derivative contract is a function of a
number of variables, such as:
|
|
|
|
|
volatility of interest rates, currencies, equity or corporate
reference entity used as the basis for determining contract
payments;
|
|
|
|
current market events or trends;
|
|
|
|
country risk;
|
117
HSBC USA Inc.
|
|
|
|
|
maturity and liquidity of contracts;
|
|
|
|
credit worthiness of the counterparties in the transaction;
|
|
|
|
the existence of a master netting agreement among the
counterparties; and
|
|
|
|
existence and value of collateral received from counterparties
to secure exposures.
|
The table below presents total credit risk exposure measured
using rules contained in the risk-based capital guidelines
published by U.S. banking regulatory agencies. Risk-based
capital guidelines recognize that bilateral netting agreements
reduce credit risk and, therefore, allow for reductions of
risk-weighted assets when netting requirements have been met. As
a result, risk-weighted amounts for regulatory capital purposes
are a portion of the original gross exposures.
The risk exposure calculated in accordance with the risk-based
capital guidelines potentially overstates actual credit exposure
because: the risk-based capital guidelines ignore collateral
that may have been received from counterparties to secure
exposures; and the risk-based capital guidelines compute
exposures over the life of derivative contracts. However, many
contracts contain provisions that allow us to close out the
transaction if the counterparty fails to post required
collateral. In addition, many contracts give us the right to
break the transactions earlier than the final maturity date. As
a result, these contracts have potential future exposures that
are often much smaller than the future exposures derived from
the risk-based capital guidelines.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Risk associated with derivative contracts:
|
|
|
|
|
|
|
|
|
Total credit risk exposure
|
|
$
|
39,502
|
|
|
$
|
39,856
|
|
Less: collateral held against exposure
|
|
|
3,604
|
|
|
|
3,890
|
|
|
|
|
|
|
|
|
|
|
Net credit risk exposure
|
|
$
|
35,898
|
|
|
$
|
35,966
|
|
|
|
|
|
|
|
|
|
|
Liquidity Risk Management There have been no
material changes to our approach towards liquidity risk
management during the first quarter of 2010. See Risk
Management in Item 7. Managements Discussion
and Analysis of Financial Condition and Results of Operations in
our 2009
Form 10-K
for a more complete discussion of our approach to liquidity
risk. Although our overall approach to liquidity management has
not changed, we continue to enhance our implementation of that
approach to reflect best practices. The past few years have
suggested that in a market crisis, traditional sources of crisis
liquidity such as secured lending and deposits with other banks
may not be available. Similarly, the current regulatory
initiatives are suggesting banks needs to retain a portfolio of
extremely high quality liquid assets. Consistent with these
items, we are expanding our portfolio of high quality sovereign
and sovereign guaranteed securities.
We continuously monitor the impact of market events on our
liquidity positions. In general terms, the strains due to the
credit crisis have been concentrated in the wholesale market as
opposed to the retail market (the latter being the market from
which we source core demand and time deposit accounts).
Financial institutions with less reliance on the wholesale
markets were in many respects less affected by the recent
conditions. Our limited dependence upon the wholesale markets
for funding has been a significant competitive advantage through
the most recent period of financial market turmoil.
Our liquidity management approach includes increased deposits,
potential sales (e.g. residential mortgage loans), and
securitizations/conduits (e.g. credit cards) in liquidity
contingency plans. Total deposits increased $6.5 million
during the three months ended March 31, 2010 as compared to
a decrease of $3.7 billion during the year-ago quarter.
Online savings account growth was $588 million and
$1.1 billion during the three months ended March 31,
2010 and 2009, respectively. Online certificates of deposit
decreased $112 million compared to an increase of
$121 million during the three months ended March 31,
2010 and 2009, respectively.
118
HSBC USA Inc.
Our ability to regularly attract wholesale funds at a
competitive cost is enhanced by strong ratings from the major
credit ratings agencies. At March 31, 2010, we and HSBC
Bank USA maintained the following long and short-term debt
ratings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Moodys
|
|
S&P
|
|
Fitch
|
|
DBRS(*)
|
|
|
HSBC USA Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
P-1
|
|
|
|
A-1+
|
|
|
|
F1+
|
|
|
|
R-1
|
|
Long-term debt
|
|
|
A1
|
|
|
|
AA-
|
|
|
|
AA
|
|
|
|
AA
|
|
HSBC Bank USA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
P-1
|
|
|
|
A-1+
|
|
|
|
F1+
|
|
|
|
R-1
|
|
Long-term debt
|
|
|
Aa3
|
|
|
|
AA
|
|
|
|
AA
|
|
|
|
AA
|
|
|
|
|
* |
|
Dominion Bond Rating Service.
|
As of March 31, 2010, there are no pending actions in terms
of changes to ratings on the debt of HSBC USA Inc. or HSBC Bank
USA from any of the rating agencies.
Interest Rate Risk Management Various techniques
are utilized to quantify and monitor risks associated with the
repricing characteristics of our assets, liabilities and
derivative contracts. Our approach to managing interest rate
risk is summarized in Item 7. Managements Discussion
and Analysis of Financial Condition and Results of Operations in
our 2009
Form 10-K
under the caption Risk Management. There have been
no material changes to our approach towards liquidity risk
management during the first quarter of 2010.
Present Value of a Basis Point (PVBP) is the
change in value of the balance sheet for a one basis point
upward movement in all interest rates. The following table
reflects the PVBP position at March 31, 2010 and
December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
|
|
(in millions)
|
|
Institutional PVBP movement limit
|
|
$
|
6.5
|
|
|
$
|
6.5
|
|
PVBP position at period end
|
|
|
1.7
|
|
|
|
.5
|
|
Economic value of equity is the change in value of the
assets and liabilities (excluding capital and goodwill) for
either a 200 basis point immediate rate increase or
decrease. The following table reflects the economic value of
equity position at March 31, 2010 and December 31,
2009.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
|
|
(values as a percentage)
|
|
Institutional economic value of equity limit
|
|
|
+/−15
|
|
|
|
+/−20
|
|
Projected change in value (reflects projected rate movements on
January 1):
|
|
|
|
|
|
|
|
|
Change resulting from an immediate 200 basis point increase
in interest rates
|
|
|
(5
|
)
|
|
|
(4
|
)
|
Change resulting from an immediate 200 basis point decrease
in interest rates
|
|
|
(4
|
)
|
|
|
(3
|
)
|
The loss in value for a 200 basis point increase or
decrease in rates is a result of the negative convexity of the
residential whole loan and mortgage backed securities
portfolios. If rates decrease, the projected prepayments related
to these portfolios will accelerate, causing less appreciation
than a comparable term, non-convex instrument. If rates
increase, projected prepayments will slow, which will cause the
average lives of these positions to extend and result in a
greater loss in market value.
119
HSBC USA Inc.
Dynamic simulation modeling techniques are utilized to
monitor a number of interest rate scenarios for their impact on
net interest income. These techniques include both rate shock
scenarios, which assume immediate market rate movements by as
much as 200 basis points, as well as scenarios in which
rates rise or fall by as much as 200 basis points over a
twelve month period. The following table reflects the impact on
net interest income of the scenarios utilized by these modeling
techniques.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
December 31, 2009
|
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
|
|
(dollars are in millions)
|
|
Projected change in net interest income (reflects projected rate
movements on January 1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Institutional base earnings movement limit
|
|
|
|
|
|
|
(10
|
)%
|
|
|
|
|
|
|
(10
|
)%
|
Change resulting from a gradual 100 basis point increase in
the yield curve
|
|
$
|
25
|
|
|
|
1
|
|
|
$
|
(17
|
)
|
|
|
-
|
|
Change resulting from a gradual 100 basis point decrease in
the yield curve
|
|
|
(120
|
)
|
|
|
(2
|
)
|
|
|
(65
|
)
|
|
|
(1
|
)
|
Change resulting from a gradual 200 basis point increase in
the yield curve
|
|
|
20
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
Change resulting from a gradual 200 basis point decrease in
the yield curve
|
|
|
(193
|
)
|
|
|
(4
|
)
|
|
|
(105
|
)
|
|
|
(2
|
)
|
Other significant scenarios monitored (reflects projected rate
movements on January 1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change resulting from an immediate 100 basis point increase
in the yield curve
|
|
|
17
|
|
|
|
-
|
|
|
|
20
|
|
|
|
-
|
|
Change resulting from an immediate 100 basis point decrease
in the yield curve
|
|
|
(173
|
)
|
|
|
(3
|
)
|
|
|
(95
|
)
|
|
|
(2
|
)
|
Change resulting from an immediate 200 basis point increase
in the yield curve
|
|
|
(21
|
)
|
|
|
-
|
|
|
|
(14
|
)
|
|
|
-
|
|
Change resulting from an immediate 200 basis point decrease
in the yield curve
|
|
|
(275
|
)
|
|
|
(6
|
)
|
|
|
(179
|
)
|
|
|
(3
|
)
|
The projections do not take into consideration possible
complicating factors such as the effect of changes in interest
rates on the credit quality, size and composition of the balance
sheet. Therefore, although this provides a reasonable estimate
of interest rate sensitivity, actual results will vary from
these estimates, possibly by significant amounts.
Capital Risk/Sensitivity of Other Comprehensive Income
Large movements of interest rates could directly affect some
reported capital balances and ratios. The
mark-to-market
valuation of
available-for-sale
securities is credited on a tax effective basis to accumulated
other comprehensive income. Although this valuation mark is
excluded from Tier 1 and Tier 2 capital ratios, it is
included in two important accounting based capital ratios: the
tangible common equity to tangible assets and the tangible
common equity to risk weighted assets. As of March 31,
2010, we had an
available-for-sale
securities portfolio of approximately $33.8 billion with a
net negative
mark-to-market
of $21 million included in tangible common equity of
$11.4 billion. An increase of 25 basis points in
interest rates of all maturities would lower the mark to market
by approximately $243 million to a net loss of
$264 million with the following results on the tangible
capital ratios. As of December 31, 2009, we had an
available-for-sale
securities portfolio of approximately $27.8 billion with a
net negative
mark-to-market
of $235 million included in tangible common equity of
$11.1 billion. An increase of 25 basis points in
interest rates of all maturities would lower the
120
HSBC USA Inc.
mark to market by approximately $248 million to a net loss
of $483 million with the following results on the tangible
capital ratios.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Actual
|
|
|
Proforma(1)
|
|
|
Actual
|
|
|
Proforma(1)
|
|
|
|
|
Tangible common equity to tangible assets
|
|
|
6.21
|
%
|
|
|
6.14
|
%
|
|
|
6.60
|
%
|
|
|
6.40
|
%
|
Tangible common equity to risk weighted assets
|
|
|
9.01
|
|
|
|
8.89
|
|
|
|
8.26
|
|
|
|
8.00
|
|
|
|
|
(1) |
|
Proforma percentages reflect a
25 basis point increase in interest rates.
|
Market Risk Management There have been no material
changes to our approach towards market risk management during
the first quarter of 2010. See Risk Management in
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations in our 2009
Form 10-K
for a more complete discussion of our approach to market risk.
Value at Risk (VAR) is a technique that estimates
the potential losses that could occur on risk positions as a
result of movements in market rates and prices over a specified
time horizon and to a given level of confidence. VAR
calculations are performed for all material trading activities
and as a tool for managing interest rate risk inherent in
non-trading activities. We calculate VAR daily for a
one-day
holding period to a 99 percent confidence level. At a
99 percent confidence level for a two-year observation
period, we are setting as our limit the fifth worst loss
performance in the last 500 business days.
VAR Trading Activities Our management of
market risk is based on a policy of restricting individual
operations to trading within a list of permissible instruments
authorized, enforcing rigorous new product approval procedures
and restricting trading in the more complex derivative products
to offices with appropriate levels of product expertise and
robust control systems. Market making and proprietary
position-taking is undertaken within Global Banking and Markets.
In addition, at both portfolio and position levels, market risk
in trading portfolios is monitored and controlled using a
complementary set of techniques, including VAR and various
techniques for monitoring interest rate risk as discussed above.
These techniques quantify the impact on capital of defined
market movements.
Trading portfolios reside primarily within the Markets unit of
the Global Banking and Markets business segment, which include
warehoused residential mortgage loans purchased with the intent
of selling them. Portfolios include foreign exchange,
derivatives, precious metals (i.e., gold, silver, platinum),
equities and money market instruments including
repos and securities. Trading occurs as a result of
customer facilitation, proprietary position taking, and economic
hedging. In this context, economic hedging may include, for
example, forward contracts to sell residential mortgages and
derivative contracts which, while economically viable, may not
satisfy the hedge requirements.
The trading portfolios have defined limits pertaining to items
such as permissible investments, risk exposures, loss review,
balance sheet size and product concentrations. Loss
review refers to the maximum amount of loss that may be
incurred before senior management intervention is required.
The following table summarizes trading VAR for the first quarter
of 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
Three Months Ended March 31, 2010
|
|
December 31,
|
|
|
2010
|
|
Minimum
|
|
Maximum
|
|
Average
|
|
2009
|
|
|
|
(in millions)
|
|
Total trading
|
|
$
|
32
|
|
|
$
|
30
|
|
|
$
|
52
|
|
|
$
|
37
|
|
|
$
|
38
|
|
Equities
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
|
|
|
-
|
|
Foreign exchange
|
|
|
4
|
|
|
|
1
|
|
|
|
7
|
|
|
|
4
|
|
|
|
2
|
|
Interest rate directional and credit spread
|
|
|
25
|
|
|
|
25
|
|
|
|
44
|
|
|
|
31
|
|
|
|
33
|
|
121
HSBC USA Inc.
The following table summarizes the frequency distribution of
daily market risk-related revenues for Treasury trading
activities during the three months ended March 31, 2010.
Market risk-related Treasury trading revenues include realized
and unrealized gains (losses) related to Treasury trading
activities, but exclude the related net interest income.
Analysis of the gain (loss) data for the three months ended
March 31, 2010 shows that the largest daily gain was
$11 million and the largest daily loss was $9 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Below
|
|
$(5)
|
|
$0 to
|
|
$5 to
|
|
Over
|
Ranges of Daily Treasury Trading Revenue Earned from Market
Risk-Related Activities
|
|
$(5)
|
|
to $0
|
|
$5
|
|
$10
|
|
$10
|
|
|
|
(in millions)
|
|
Number of trading days market risk-related revenue was within
the stated range
|
|
$
|
3
|
|
|
$
|
18
|
|
|
$
|
29
|
|
|
$
|
10
|
|
|
$
|
1
|
|
VAR Non-trading Activities Interest rate risk
in non-trading portfolios arises principally from mismatches
between the future yield on assets and their funding cost, as a
result of interest rate changes. Analysis of this risk is
complicated by having to make assumptions on embedded
optionality within certain product areas such as the incidence
of mortgage repayments, and from behavioral assumptions
regarding the economic duration of liabilities which are
contractually repayable on demand such as current accounts. The
prospective change in future net interest income from
non-trading portfolios will be reflected in the current
realizable value of these positions, should they be sold or
closed prior to maturity. In order to manage this risk
optimally, market risk in non-trading portfolios is transferred
to Global Markets or to separate books managed under the
supervision of the local Asset and Liability Committee
(ALCO). Once market risk has been consolidated in
Global Markets or ALCO-managed books, the net exposure is
typically managed through the use of interest rate swaps within
agreed limits.
The following table summarizes non-trading VAR for the first
quarter of 2010, assuming a 99% confidence level for a two-year
observation period and a
one-day
holding period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
Three Months Ended March 31, 2010
|
|
|
December 31,
|
|
|
|
2010
|
|
|
Minimum
|
|
|
Maximum
|
|
|
Average
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Interest rate
|
|
$
|
123
|
|
|
$
|
101
|
|
|
$
|
125
|
|
|
$
|
114
|
|
|
$
|
114
|
|
Trading Activities HSBC Mortgage Corporation
(USA) HSBC Mortgage Corporation (USA) is a mortgage banking
subsidiary of HSBC Bank USA. Trading occurs in mortgage banking
operations as a result of an economic hedging program intended
to offset changes in value of mortgage servicing rights and the
salable loan pipeline. Economic hedging may include, for
example, forward contracts to sell residential mortgages and
derivative instruments used to protect the value of MSRs.
MSRs are assets that represent the present value of net
servicing income (servicing fees, ancillary income, escrow and
deposit float, net of servicing costs). MSRs are separately
recognized upon the sale of the underlying loans or at the time
that servicing rights are purchased. MSRs are subject to
interest rate risk, in that their value will decline as a result
of actual and expected acceleration of prepayment of the
underlying loans in a falling interest rate environment.
Interest rate risk is mitigated through an active hedging
program that uses trading securities and derivative instruments
to offset changes in value of MSRs. Since the hedging program
involves trading activity, risk is quantified and managed using
a number of risk assessment techniques.
122
HSBC USA Inc.
Modeling techniques, primarily rate shock analyses, are used to
monitor certain interest rate scenarios for their impact on the
economic value of net hedged MSRs, as reflected in the following
table.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
|
|
(in millions)
|
|
Projected change in net market value of hedged MSRs portfolio
(reflects projected rate movements on April 1):
|
|
|
|
|
|
|
|
|
Value of hedged MSRs portfolio
|
|
$
|
444
|
|
|
$
|
450
|
|
Change resulting from an immediate 50 basis point decrease
in the yield curve:
|
|
|
|
|
|
|
|
|
Change limit (no worse than)
|
|
|
(10
|
)
|
|
|
(16
|
)
|
Calculated change in net market value
|
|
|
2
|
|
|
|
(1
|
)
|
Change resulting from an immediate 50 basis point increase
in the yield curve:
|
|
|
|
|
|
|
|
|
Change limit (no worse than)
|
|
|
(8
|
)
|
|
|
(8
|
)
|
Calculated change in net market value
|
|
|
1
|
|
|
|
2
|
|
Change resulting from an immediate 100 basis point increase
in the yield curve:
|
|
|
|
|
|
|
|
|
Change limit (no worse than)
|
|
|
(12
|
)
|
|
|
(12
|
)
|
Calculated change in net market value
|
|
|
-
|
|
|
|
4
|
|
The economic value of the net, hedged MSRs portfolio is
monitored on a daily basis for interest rate sensitivity. If the
economic value declines by more than established limits for one
day or one month, various levels of management review,
intervention
and/or
corrective actions are required.
The following table summarized the frequency distribution of the
weekly economic value of the MSR asset during the three months
ended March 31, 2010. This includes the change in the
market value of the MSR asset net of changes in the market value
of the underlying hedging positions used to hedge the asset. The
changes in economic value are adjusted for changes in MSR
valuation assumptions that were made during the course of the
year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Below
|
|
$(2) to
|
|
$0 to
|
|
$2 to
|
|
Over
|
Ranges of Mortgage Economic Value from Market Risk-Related
Activities
|
|
$(2)
|
|
$0
|
|
$2
|
|
$4
|
|
$4
|
|
|
|
(in millions)
|
|
Number of trading weeks market risk-related revenue was within
the stated range
|
|
|
1
|
|
|
|
1
|
|
|
|
6
|
|
|
|
4
|
|
|
|
1
|
|
Operational Risk There have been no material
changes to our approach towards operational risk management
during the first quarter of 2010.
Compliance Risk There have been no material
changes to our approach towards compliance risk management
during the first quarter of 2010.
Fiduciary Risk There have been no material changes
to our approach towards fiduciary risk management during the
first quarter of 2010.
Reputational Risk There have been no material
changes to our approach towards reputational risk management
during the first quarter of 2010.
Strategic Risk There have been no material changes
to our approach towards strategic risk management during the
first quarter of 2010.
123
HSBC USA Inc.
CONSOLIDATED
AVERAGE BALANCES AND INTEREST RATES
The following table shows the quarter to date average balances
of the principal components of assets, liabilities and
shareholders equity together with their respective
interest amounts and rates earned or paid, presented on a
taxable equivalent basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate(1)
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate(1)
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits with banks
|
|
$
|
33,867
|
|
|
$
|
22
|
|
|
|
0.26
|
%
|
|
$
|
11,943
|
|
|
$
|
7
|
|
|
|
0.24
|
%
|
Federal funds sold and securities purchased under resale
agreements
|
|
|
2,495
|
|
|
|
6
|
|
|
|
1.01
|
|
|
|
9,990
|
|
|
|
17
|
|
|
|
0.67
|
|
Trading assets
|
|
|
5,399
|
|
|
|
32
|
|
|
|
2.37
|
|
|
|
4,948
|
|
|
|
59
|
|
|
|
4.86
|
|
Securities
|
|
|
32,569
|
|
|
|
247
|
|
|
|
3.08
|
|
|
|
25,848
|
|
|
|
283
|
|
|
|
4.44
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
32,414
|
|
|
|
245
|
|
|
|
3.06
|
|
|
|
37,587
|
|
|
|
326
|
|
|
|
3.52
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
14,820
|
|
|
|
176
|
|
|
|
4.82
|
|
|
|
20,086
|
|
|
|
260
|
|
|
|
5.24
|
|
HELOCs and home equity mortgages
|
|
|
4,103
|
|
|
|
33
|
|
|
|
3.29
|
|
|
|
4,553
|
|
|
|
38
|
|
|
|
3.43
|
|
Private label card receivables
|
|
|
14,326
|
|
|
|
362
|
|
|
|
10.24
|
|
|
|
16,382
|
|
|
|
414
|
|
|
|
10.26
|
|
Credit cards
|
|
|
12,412
|
|
|
|
288
|
|
|
|
9.40
|
|
|
|
13,347
|
|
|
|
352
|
|
|
|
10.70
|
|
Auto finance
|
|
|
1,847
|
|
|
|
82
|
|
|
|
18.13
|
|
|
|
2,594
|
|
|
|
115
|
|
|
|
18.00
|
|
Other consumer
|
|
|
1,468
|
|
|
|
25
|
|
|
|
7.07
|
|
|
|
1,818
|
|
|
|
41
|
|
|
|
9.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
48,976
|
|
|
|
966
|
|
|
|
8.01
|
|
|
|
58,780
|
|
|
|
1,220
|
|
|
|
8.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
81,390
|
|
|
|
1,211
|
|
|
|
6.04
|
|
|
|
96,367
|
|
|
|
1,546
|
|
|
|
6.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
6,802
|
|
|
|
11
|
|
|
|
0.68
|
|
|
|
9,416
|
|
|
|
11
|
|
|
|
0.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
|
162,522
|
|
|
$
|
1,529
|
|
|
|
3.82
|
%
|
|
|
158,512
|
|
|
$
|
1,923
|
|
|
|
4.92
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses
|
|
|
(3,776
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,054
|
)
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
2,655
|
|
|
|
|
|
|
|
|
|
|
|
2,623
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
22,228
|
|
|
|
|
|
|
|
|
|
|
|
27,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
183,629
|
|
|
|
|
|
|
|
|
|
|
$
|
185,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits in domestic offices:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits
|
|
$
|
52,961
|
|
|
$
|
84
|
|
|
|
0.65
|
%
|
|
$
|
46,636
|
|
|
$
|
174
|
|
|
|
1.51
|
%
|
Other time deposits
|
|
|
17,625
|
|
|
|
68
|
|
|
|
1.57
|
|
|
|
20,726
|
|
|
|
119
|
|
|
|
2.34
|
|
Deposits in foreign offices:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign banks deposits
|
|
|
9,500
|
|
|
|
5
|
|
|
|
0.20
|
|
|
|
11,671
|
|
|
|
3
|
|
|
|
0.10
|
|
Other interest bearing deposits
|
|
|
20,519
|
|
|
|
6
|
|
|
|
0.12
|
|
|
|
16,290
|
|
|
|
17
|
|
|
|
0.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits
|
|
|
100,605
|
|
|
|
163
|
|
|
|
0.66
|
|
|
|
95,323
|
|
|
|
313
|
|
|
|
1.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
16,847
|
|
|
|
21
|
|
|
|
0.51
|
|
|
|
10,770
|
|
|
|
19
|
|
|
|
0.71
|
|
Long-term debt
|
|
|
17,627
|
|
|
|
140
|
|
|
|
3.21
|
|
|
|
26,539
|
|
|
|
237
|
|
|
|
3.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
135,079
|
|
|
|
324
|
|
|
|
0.97
|
|
|
|
132,632
|
|
|
|
569
|
|
|
|
1.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/Interest rate spread
|
|
|
|
|
|
$
|
1,205
|
|
|
|
2.85
|
%
|
|
|
|
|
|
$
|
1,354
|
|
|
|
3.18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing deposits
|
|
|
21,285
|
|
|
|
|
|
|
|
|
|
|
|
20,959
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
11,937
|
|
|
|
|
|
|
|
|
|
|
|
18,444
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
15,328
|
|
|
|
|
|
|
|
|
|
|
|
13,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
183,629
|
|
|
|
|
|
|
|
|
|
|
$
|
185,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin on average earning assets
|
|
|
|
|
|
|
|
|
|
|
3.01
|
%
|
|
|
|
|
|
|
|
|
|
|
3.46
|
%
|
Net interest margin on average total assets
|
|
|
|
|
|
|
|
|
|
|
2.66
|
%
|
|
|
|
|
|
|
|
|
|
|
2.96
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Rates are calculated on unrounded
numbers.
|
124
HSBC USA Inc.
Total weighted average rate earned on earning assets is interest
and fee earnings divided by daily average amounts of total
interest earning assets, including the daily average amount on
nonperforming loans. Loan interest for the three months ended
March 31, 2010 and 2009 included fees of $14 million
and $12 million, respectively.
Item 3. Quantitative
and Qualitative Disclosures About Market Risk
Refer to Item 2, Managements Discussion and Analysis
of Financial Condition and Results of Operations, under the
captions Interest Rate Risk Management and
Trading Activities of this
Form 10-Q.
Item 4. Controls
and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain a system of internal and disclosure controls
and procedures designed to ensure that information required to
be disclosed by HSBC USA in the reports we file or submit under
the Securities Exchange Act of 1934, as amended (the
Exchange Act), is recorded, processed, summarized
and reported on a timely basis. Our Board of Directors,
operating through its audit committee, which is composed
entirely of independent outside directors, provides oversight to
our financial reporting process.
We conducted an evaluation, with the participation of the Chief
Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures as of
the end of the period covered by this report. Based upon that
evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures
were effective as of the end of the period covered by this
report so as to alert them in a timely fashion to material
information required to be disclosed in reports we file under
the Exchange Act.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over
financial reporting that occurred during the quarter ended
March 31, 2010 that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
125
HSBC USA Inc.
PART II.
OTHER INFORMATION
Item 1. Legal
Proceedings
General We are parties to various legal
proceedings, including actions that are or purport to be class
actions, resulting from ordinary business activities relating to
our current
and/or
former operations. Due to uncertainties in litigation and other
factors, we cannot be certain that we will ultimately prevail in
each instance. We believe that our defenses to these actions
have merit and any adverse decision should not materially affect
our consolidated financial condition. However, losses may be
material to our results of operations for any particular future
period depending on our income level for that period.
Credit Card Litigation Since June 2005, HSBC
Bank USA, HSBC Finance Corporation, HSBC North America and HSBC,
as well as other banks and Visa Inc. and MasterCard
Incorporated, were named as defendants in four class actions
filed in Connecticut and the Eastern District of New York:
Photos Etc. Corp. et al. v. Visa U.S.A., Inc., et al.
(D. Conn.
No. 3:05-CV-01007
(WWE)); National Association of Convenience Stores, et
al. v. Visa U.S.A., Inc., et al. (E.D.N.Y.
No. 05-CV
4520 (JG)); Jethro Holdings, Inc., et al. v. Visa
U.S.A., Inc. et al. (E.D.N.Y.
No. 05-CV-4521
(JG)); and American Booksellers Asps v. Visa
U.S.A., Inc. et al. (E.D.N.Y.
No. 05-CV-5391
(JG)). Numerous other complaints containing similar allegations
(in which no HSBC entity is named) were filed across the country
against Visa Inc., MasterCard Incorporated and other banks.
These actions principally allege that the imposition of a
no-surcharge rule by the associations
and/or the
establishment of the interchange fee charged for credit card
transactions causes the merchant discount fee paid by retailers
to be set at supracompetitive levels in violation of the Federal
antitrust laws. These suits have been consolidated and
transferred to the Eastern District of New York. The
consolidated case is: In re Payment Card Interchange Fee and
Merchant Discount Antitrust Litigation, MDL 1720, E.D.N.Y. A
consolidated, amended complaint was filed by the plaintiffs on
April 24, 2006 and a second consolidated amended complaint
was filed on January 29, 2009. The parties are engaged in
discovery and motion practice. At this time, we are unable to
quantify the potential impact from this action, if any.
Governmental and Regulatory Matters HSBC USA
and certain of its affiliates and current and former employees
are or may be subject to formal and informal investigations, as
well as subpoenas
and/or
requests for information, from various governmental and
self-regulatory agencies relating to our business activities. In
all such cases, HSBC USA and its affiliates cooperate fully and
engage in efforts to resolve these matters.
Item 6. Exhibits
Exhibits included in this Report:
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12
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Computation of Ratio of Earnings to Fixed Charges and Earnings
to Combined Fixed Charges and Preferred Stock Dividends.
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31
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Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
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32
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Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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126
HSBC USA Inc.
Index
Assets:
by business
segment 40
consolidated average
balances 124
fair value
measurements 52
nonperforming 103
trading 8,
78
Asset-backed commercial paper conduits 45, 50, 109
Asset-backed securities 8, 9, 115
Balance sheet:
consolidated 4
consolidated average
balances 124
review 75
Basel II 71
Basis of reporting 7, 72
Business:
consolidated
performance review 67
Capital:
funding
strategy 108
common equity
movements 106
consolidated statement
of changes 5
regulatory
capital 43
selected capital
ratios 43, 107
Cash flow (consolidated) 6
Cautionary statement regarding forward-looking
statements 66
Collateral pledged assets 51
Collateralized debt obligations 116
Commercial banking segment results (IFRSs) 40, 92
Consumer finance segment results (IFRSs) 40, 90
Controls and procedures 125
Credit card fees 83
Credit quality 70, 96
Credit risk:
adjustment 64
component of fair
value option 31, 86
concentration 19
exposure 118
management 117
related contingent
features 28
related
guarantees 48
Current environment 66
Deferred tax assets 33
Deposits 79, 105
Derivatives:
cash flow
hedges 25
fair value
hedges 24
notional
value 29
trading and
other 26
Equity:
consolidated statement
of changes 5
ratios 43,
107
Equity securities
available-for-sale 9
Estimates and assumptions 7
Executive overview 66
Fair value measurements:
assets and liabilities
recorded at fair value on a
recurring
basis 53
assets and liabilities
recorded at fair value on a
non-recurring
basis 57
control over valuation
process 111
financial
instruments 58
hierarchy 112
transfers into/out of
level one and two 55, 113
transfers into/out of
level two and three 55, 114
valuation
techniques 58
Financial assets:
designated at fair
value 30
reclassification under
IFRSs 93
Financial highlights metrics 69
Financial liabilities:
designated at fair
value 30
fair value of
financial liabilities 53, 58
Forward looking statements 66
Funding 71, 108
Gains less losses from securities 15, 68, 85
Global Banking and Markets:
balance sheet data
(IFRSs) 40
loans and securities
reclassified (IFRSs) 93
segment results
(IFRSs) 40, 93
Geographic concentration of receivables 105
Goodwill 23
Guarantee arrangements 48
Impairment:
available-for-sale
securities 12
credit
losses 20, 68, 82
nonperforming
loans 103
impaired
loans 104
Income (loss) from financial instruments designated at
fair value,
net 31, 86
Income statement 3
Intangible assets 22
Income tax expense 32
Internal control 125
Interest rate risk 119
Key performance indicators 69
Legal proceedings 126
Leveraged finance transactions 30
127
HSBC USA Inc.
Liabilities:
commitments, lines of
credit 49
deposits 79,
105
financial liabilities
designated at
fair
value 30
long-term
debt 80, 106
short-term
borrowings 79, 105
trading 8,
78
Liquidity and capital resources 105
Liquidity risk 118
Litigation 126
Loans:
by
category 17, 76
by charge-off
(net) 101
by
delinquency 100
criticized
assets 104
geographic
concentration 105
held for
sale 21, 77
impaired 104
nonperforming 103
overall
review 76
purchases from HSBC
Finance 17, 37
risk
concentration 19
troubled debt
restructures 18
Loan impairment charges see Provision for
credit losses
Loan-to-deposits ratio 70
Market risk 121
Market turmoil:
current
environment 66
exposures 118
impact on liquidity
risk 105
structured investment
vehicles 46
variable interest
entities 44
Monoline insurers 14, 68, 93
Mortgage lending products 17, 76
Mortgage servicing rights 22
Net interest income 80
New accounting pronouncements 64
Off balance sheet arrangements 108
Operating expenses 88
Operational risk 123
Other revenue 83
Other segment results (IFRSs) 40, 95
Pension and other postretirement benefits 33
Performance, developments and trends 67
Personal financial services segment
results
(IFRSs) 40, 89
Pledged assets 51
Private banking segment results (IFRSs) 40, 94
Profit (loss) before tax:
by segment
IFRSs 40
consolidated 3
Provision for credit losses 68, 82
Ratios:
capital 43,
107
charge-off
(net) 101
credit loss reserve
related 97
earnings to fixed
charges Exhibit 12
efficiency 69,
89
financial 69
loans-to-deposits 70
Reconciliation of U.S. GAAP results to IFRSs 73
Refreshed
loan-to-value 76
Related party transactions 35
Results of operations 80
Risk elements in the loan portfolio 19
Risk management:
credit 117
compliance 123
fiduciary 123
interest
rate 119
liquidity 118
market 121
operational 123
reputational 123
strategic 123
Securities:
fair
value 9, 53
impairment 12,
85
maturity
analysis 16
Segment results IFRSs basis:
personal financial
services 89
consumer
finance 90
commercial
banking 92
global banking and
markets 93
private
banking 94
other 95
overall
summary 40, 89
Selected financial data 69
Sensitivity:
projected net interest
income 120
Statement of changes in shareholders equity 5
Statement of changes in comprehensive income 5
Statement of income (loss) 3
Table of contents 2
Tax expense 32
Trading:
assets 8, 78
derivatives 8,
78, 84
liabilities 8,
78
portfolios 8
Trading revenue (net) 84
Troubled debt restructures 18
Value at risk 121
Variable interest entities 44
128
HSBC USA Inc.
Signature
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
HSBC USA Inc.
(Registrant)
Gerard Mattia
Senior Executive Vice President and
Chief Financial Officer
Date: May 7, 2010
129
HSBC USA Inc.
Exhibit Index
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12
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Computation of Ratio of Earnings to Fixed Charges and Earnings
to Combined Fixed Charges and Preferred Stock Dividends.
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31
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Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
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32
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Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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130