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)
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OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended June 30,
2010
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
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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
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13-2764867
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(State of
Incorporation)
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(I.R.S. Employer Identification
No.)
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452 Fifth Avenue, New York
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10018
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(Address of principal executive
offices)
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(Zip
Code)
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(212) 525-5000
Registrants telephone
number, including area code
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes x No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes 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)
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 July 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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Part I.
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Item 1.
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Financial Statements (Unaudited)
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Consolidated Statement of Income (Loss)
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3
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Consolidated Balance Sheet
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4
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Consolidated Statement of Changes in
Shareholders Equity
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6
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Consolidated Statement of Cash Flows
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7
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Notes to Consolidated Financial Statements
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8
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Item 2.
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Managements Discussion and Analysis of Financial Condition
and Results of Operations
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Forward-Looking Statements
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73
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Executive Overview
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73
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Basis of Reporting
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80
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Balance Sheet Review
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83
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Results of Operations
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88
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Segment Results IFRSs Basis
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101
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Credit Quality
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110
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Liquidity and Capital Resources
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119
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Off-Balance Sheet Arrangements
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122
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Fair Value
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125
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Risk Management
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130
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Average Balances and Interest Rates
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138
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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140
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Item 4.
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Controls and Procedures
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140
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Part II
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Item 1.
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Legal Proceedings
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140
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Item 6.
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Exhibits
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142
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Index
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143
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Signature
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145
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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
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Six Months Ended
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June 30,
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June 30,
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2010
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2009
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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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1,109
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$
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1,462
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$
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2,320
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$
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3,008
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Securities
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270
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221
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512
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498
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Trading assets
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35
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51
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67
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110
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Short-term investments
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29
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22
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57
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46
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Other
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12
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13
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23
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24
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Total interest income
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1,455
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1,769
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2,979
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3,686
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Interest expense:
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Deposits
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152
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267
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315
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580
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Short-term borrowings
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22
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15
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43
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34
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Long-term debt
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148
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210
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288
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447
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Total interest expense
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322
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492
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646
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1,061
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Net interest income
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1,133
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1,277
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2,333
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2,625
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Provision for credit losses
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456
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1,067
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667
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2,241
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Net interest income after provision for credit
losses
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677
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210
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1,666
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384
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Other revenues:
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Credit card fees
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249
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342
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482
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699
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Other fees and commissions
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200
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216
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492
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447
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Trust income
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27
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30
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53
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62
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Trading revenue (loss)
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128
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153
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332
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(1
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Net
other-than-temporary
impairment
losses(1)
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(13
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(20
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(41
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(58
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Other securities gains, net
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1
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246
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22
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293
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Servicing and other fees from HSBC affiliates
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37
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45
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73
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77
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Residential mortgage banking revenue (loss)
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(80
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59
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(117
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124
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Gain (loss) on instruments designated at fair value and related
derivatives
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182
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(357
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228
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(246
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Other income (expense)
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9
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(138
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167
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(71
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Total other revenues
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740
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576
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1,691
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1,326
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Operating expenses:
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Salaries and employee benefits
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280
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302
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547
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593
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Support services from HSBC affiliates
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458
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419
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976
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842
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Occupancy expense, net
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65
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88
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136
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151
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Other expenses
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190
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279
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400
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474
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Total operating expenses
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993
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1,088
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2,059
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2,060
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Income (loss) before income tax expense (benefit)
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424
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(302
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1,298
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(350
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)
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Income tax expense (benefit)
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124
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(53
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444
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(12
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Net income (loss)
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$
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300
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$
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(249
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$
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854
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$
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(338
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)
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(1) |
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During the three and six months
ended June 30, 2010, net
other-than-temporary
impairment (OTTI) on securities
available-for-sale
and held to maturity totaling $70 million and
$103 million in recoveries, respectively, were recognized
which included $83 million and $144 million in
recoveries, respectively, recognized in accumulated other
comprehensive income (AOCI), and $13 million
and $41 million, respectively, of OTTI losses recognized in
other revenues. During the three and six month periods ended
June 30, 2009, $43 million and $159 million,
respectively, of gross OTTI losses on securities
available-for-sale
were recognized, of which $23 million and
$101 million, respectively, were recognized in AOCI, net of
tax.
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The accompanying notes are an integral part of the consolidated
financial statements.
3
HSBC USA Inc.
CONSOLIDATED
BALANCE SHEET (UNAUDITED)
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June 30,
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December 31,
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2010
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2009
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(in millions)
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Assets
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Cash and due from banks
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$
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2,719
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$
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3,159
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Interest bearing deposits with banks
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14,076
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20,109
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Federal funds sold and securities purchased under agreements to
resell
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15,490
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1,046
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Trading assets
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29,148
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25,815
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Securities
available-for-sale
(includes $1.3 billion and $1.1 billion at
June 30, 2010 and December 31, 2009, respectively,
collateralizing long-term
debt)(1)
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36,955
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27,806
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Securities held to maturity (fair value of $3.9 billion and
$2.9 billion at June 30, 2010 and December 31,
2009, respectively, and includes $1.2 billion at
June 30, 2010 collateralizing short-term
borrowings)(1)
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3,719
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2,762
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Loans (includes $3.1 billion at June 30, 2010 and
$2.7 billion at December 31, 2009 collateralizing
debt)(1)
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73,661
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79,489
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Less allowance for credit losses
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2,950
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3,861
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Loans, net
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70,711
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75,628
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Loans held for sale (includes $1.5 billion and
$1.1 billion designated under fair value option at
June 30, 2010 and December 31, 2009, respectively)
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2,567
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2,908
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Properties and equipment, net
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519
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533
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Intangible assets, net
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350
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484
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Goodwill
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2,647
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2,647
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Other
assets(1)
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7,540
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8,182
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Total
assets(1)
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$
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186,441
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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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21,450
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$
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20,813
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Interest bearing (includes $5.8 billion and
$4.2 billion designated under fair value option at
June 30, 2010 and December 31, 2009, respectively)
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70,521
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69,894
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Deposits in foreign offices:
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Noninterest bearing
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1,479
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1,105
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Interest bearing
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28,113
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26,525
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Total deposits
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121,563
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118,337
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Short-term
borrowings(1)
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16,033
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6,512
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Long-term debt (includes $4.9 billion and $4.6 billion
designated under fair value option at June 30, 2010 and
December 31, 2009, respectively, and $2.2 billion and
$3.0 billion at June 30, 2010 and December 31,
2009, respectively, collateralized by loans and
available-for-sale
securities)(1)
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17,751
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18,008
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Total debt
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155,347
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142,857
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Trading liabilities
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10,877
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8,010
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Interest, taxes and other
liabilities(1)
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3,817
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|
5,035
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Total
liabilities(1)
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170,041
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155,902
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Shareholders equity
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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 ($5 par; 150,000,000 shares authorized;
712 shares issued and outstanding at June 30, 2010 and
December 31, 2009)
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-
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-
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Additional paid-in capital
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13,793
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13,795
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Retained earnings
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863
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45
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Accumulated other comprehensive income (loss)
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179
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(228
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)
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Total common shareholders equity
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14,835
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13,612
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Total shareholders equity
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16,400
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|
|
|
15,177
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|
|
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Total liabilities and shareholders equity
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$
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186,441
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$
|
171,079
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|
|
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|
|
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(1) |
|
The following table presents
information on assets and liabilities related to variable
interest entities (VIEs) that are consolidated in
the totals above at June 30, 2010 and December 31,
2009.
|
4
HSBC USA Inc.
CONSOLIDATED
BALANCE SHEET (UNAUDITED) (Continued)
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Securities
available-for-sale
|
|
$
|
1,276
|
|
|
$
|
1,138
|
|
Securities held to maturity
|
|
|
1,156
|
|
|
|
-
|
|
Loans, net
|
|
|
14,953
|
|
|
|
15,953
|
|
Other assets
|
|
|
748
|
|
|
|
753
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
18,133
|
|
|
$
|
17,844
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
$
|
3,191
|
|
|
$
|
-
|
|
Long-term debt
|
|
|
2,242
|
|
|
|
3,040
|
|
Interest, taxes and other liabilities
|
|
|
1,117
|
|
|
|
1,418
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
6,550
|
|
|
$
|
4,458
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
5
HSBC USA Inc.
CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
(UNAUDITED)
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Preferred stock
|
|
|
|
|
|
|
|
|
Balance at beginning and end of period
|
|
$
|
1,565
|
|
|
$
|
1,565
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
|
|
|
|
|
|
Balance at beginning and end of period
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
13,795
|
|
|
|
11,694
|
|
Capital contributions from parent
|
|
|
-
|
|
|
|
2,167
|
|
Return of capital on preferred shares issued to CT Financial
Services, Inc.
|
|
|
(3
|
)
|
|
|
(55
|
)
|
Employee benefit plans and other
|
|
|
1
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
13,793
|
|
|
|
13,806
|
|
|
|
|
|
|
|
|
|
|
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-temporary
impairment on debt securities, net of tax
|
|
|
-
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period, as adjusted
|
|
|
46
|
|
|
|
260
|
|
Net income (loss)
|
|
|
854
|
|
|
|
(338
|
)
|
Cash dividends declared on preferred stock
|
|
|
(37
|
)
|
|
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
863
|
|
|
|
(115
|
)
|
|
|
|
|
|
|
|
|
|
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-temporary
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 as
applicable on:
|
|
|
|
|
|
|
|
|
Securities
available-for-sale,
not
other-than-temporarily
impaired
|
|
|
533
|
|
|
|
134
|
|
Other-than-temporarily
impaired securities available for
sale(1)
|
|
|
69
|
|
|
|
(61
|
)
|
Other-than-temporarily
impaired securities held to
maturity(1)
|
|
|
38
|
|
|
|
-
|
|
Derivatives classified as cash flow hedges
|
|
|
13
|
|
|
|
33
|
|
Unrecognized actuarial gains, transition obligation and prior
service costs relating to pension and postretirement benefits,
net of tax
|
|
|
-
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax
|
|
|
653
|
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
179
|
|
|
|
(690
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
$
|
16,400
|
|
|
$
|
14,566
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
854
|
|
|
$
|
(338
|
)
|
Other comprehensive income, net of tax
|
|
|
653
|
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
1,507
|
|
|
$
|
(226
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
During the six months ended
June 30, 2010, net OTTI on securities
available-for-sale
and held to maturity totaling $103 million in recoveries
were recognized which included OTTI losses of $41 million
recognized in other revenues. During the six months ended
June 30, 2009, $159 million of gross OTTI losses on
securities
available-for-sale
were recognized, of which $58 million was recognized in
other revenues.
|
The accompanying notes are an integral part of the consolidated
financial statements.
6
HSBC USA Inc.
CONSOLIDATED
STATEMENT OF CASH FLOWS (UNAUDITED)
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
854
|
|
|
$
|
(338
|
)
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
329
|
|
|
|
145
|
|
Provision for credit losses
|
|
|
667
|
|
|
|
2,241
|
|
Other-than-temporarily
impaired
available-for-sale
and held to maturity securities
|
|
|
41
|
|
|
|
58
|
|
Realized gains on securities available for sale
|
|
|
(22
|
)
|
|
|
(293
|
)
|
Net change in other assets and liabilities
|
|
|
(130
|
)
|
|
|
1,503
|
|
Net change in loans held for sale:
|
|
|
|
|
|
|
|
|
Originations of loans
|
|
|
(1,903
|
)
|
|
|
(3,185
|
)
|
Sales and collection of loans held for sale
|
|
|
2,368
|
|
|
|
3,204
|
|
Tax refund anticipation loans:
|
|
|
|
|
|
|
|
|
Originations of loans
|
|
|
(3,082
|
)
|
|
|
(9,000
|
)
|
Transfers of loans to HSBC Finance, including premium
|
|
|
3,086
|
|
|
|
9,011
|
|
Net change in trading assets and liabilities
|
|
|
(1,062
|
)
|
|
|
1,634
|
|
LOCOM on receivables held for sale
|
|
|
(72
|
)
|
|
|
145
|
|
Mark-to-market
on financial instruments designated at fair value and related
derivatives
|
|
|
(228
|
)
|
|
|
246
|
|
Net change in fair value of derivatives and hedged items
|
|
|
13
|
|
|
|
(162
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
859
|
|
|
|
5,209
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Net change in interest bearing deposits with banks
|
|
|
6,033
|
|
|
|
5,916
|
|
Net change in federal funds sold and securities purchased under
agreements to resell
|
|
|
(14,444
|
)
|
|
|
5,598
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
Purchases of securities
available-for-sale
|
|
|
(24,985
|
)
|
|
|
(22,771
|
)
|
Proceeds from sales of securities
available-for-sale
|
|
|
15,449
|
|
|
|
14,587
|
|
Proceeds from maturities of securities
available-for-sale
|
|
|
1,343
|
|
|
|
4,390
|
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
Purchases of securities held to maturity
|
|
|
(1,395
|
)
|
|
|
(152
|
)
|
Proceeds from maturities of securities held to maturity
|
|
|
153
|
|
|
|
194
|
|
Change in loans:
|
|
|
|
|
|
|
|
|
Originations, net of collections
|
|
|
20,680
|
|
|
|
24,853
|
|
Recurring loans purchases from HSBC Finance
|
|
|
(16,580
|
)
|
|
|
(18,400
|
)
|
Cash paid on bulk purchase of loans from HSBC Finance
|
|
|
-
|
|
|
|
(8,821
|
)
|
Loans sold to third parties
|
|
|
(138
|
)
|
|
|
3,961
|
|
Net cash used for acquisitions of properties and equipment
|
|
|
(24
|
)
|
|
|
(11
|
)
|
Other, net
|
|
|
93
|
|
|
|
292
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(13,815
|
)
|
|
|
9,636
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Net change in deposits
|
|
|
3,156
|
|
|
|
(10,492
|
)
|
Net change in short-term borrowings
|
|
|
9,521
|
|
|
|
(2,517
|
)
|
Change in long-term debt:
|
|
|
|
|
|
|
|
|
Issuance of long-term debt
|
|
|
1,210
|
|
|
|
1,554
|
|
Repayment of long-term debt
|
|
|
(1,499
|
)
|
|
|
(5,481
|
)
|
Debt repayment by consolidated VIE
|
|
|
(136
|
)
|
|
|
(408
|
)
|
Debt related to the sale and leaseback of property
|
|
|
303
|
|
|
|
-
|
|
Capital contribution from parent
|
|
|
-
|
|
|
|
2,167
|
|
Return of capital on preferred shares issued to CT Financial
Services, Inc.
|
|
|
(3
|
)
|
|
|
(55
|
)
|
Other increases in capital surplus
|
|
|
1
|
|
|
|
-
|
|
Dividends paid
|
|
|
(37
|
)
|
|
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
12,516
|
|
|
|
(15,269
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash and due from banks
|
|
|
(440
|
)
|
|
|
(424
|
)
|
Cash and due from banks at beginning of period
|
|
|
3,159
|
|
|
|
2,972
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks at end of period
|
|
$
|
2,719
|
|
|
$
|
2,548
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash flow investing
activities
|
|
|
|
|
|
|
|
|
Trading securities pending settlement
|
|
$
|
(596
|
)
|
|
$
|
580
|
|
Transfer of loans to held for sale
|
|
$
|
39
|
|
|
$
|
289
|
|
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 statement
7
HSBC USA Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
Note
|
|
|
|
Page
|
|
|
|
1
|
|
|
Organization and Basis of Presentation
|
|
|
8
|
|
|
2
|
|
|
Trading Assets and Liabilities
|
|
|
9
|
|
|
3
|
|
|
Securities
|
|
|
10
|
|
|
4
|
|
|
Loans
|
|
|
20
|
|
|
5
|
|
|
Allowance for Credit Losses
|
|
|
23
|
|
|
6
|
|
|
Loans Held for Sale
|
|
|
24
|
|
|
7
|
|
|
Intangible Assets
|
|
|
25
|
|
|
8
|
|
|
Goodwill
|
|
|
26
|
|
|
9
|
|
|
Derivative Financial Assets
|
|
|
26
|
|
|
10
|
|
|
Fair Value Option
|
|
|
33
|
|
|
11
|
|
|
Income Taxes
|
|
|
35
|
|
|
12
|
|
|
Pension and Other Postretirement Benefits
|
|
|
37
|
|
|
13
|
|
|
Related Party Transactions
|
|
|
38
|
|
|
14
|
|
|
Regulatory Capital
|
|
|
43
|
|
|
15
|
|
|
Business Segments
|
|
|
44
|
|
|
16
|
|
|
Variable Interest Entities
|
|
|
48
|
|
|
17
|
|
|
Guarantee Arrangements, Contingencies and Pledged Assets
|
|
|
52
|
|
|
18
|
|
|
Fair Value Measurements
|
|
|
56
|
|
|
19
|
|
|
Restructuring Activities
|
|
|
70
|
|
|
20
|
|
|
New Accounting Pronouncements
|
|
|
71
|
|
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 20, New Accounting
Pronouncements for further details and related impacts.
8
HSBC USA Inc.
2. Trading
Assets and Liabilities
Trading assets and liabilities are summarized in the following
table.
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Trading assets:
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$
|
727
|
|
|
$
|
615
|
|
U.S. Government agency
|
|
|
74
|
|
|
|
34
|
|
U.S. Government sponsored
enterprises(1)
|
|
|
52
|
|
|
|
16
|
|
Asset-backed securities
|
|
|
1,451
|
|
|
|
1,815
|
|
Corporate and foreign bonds
|
|
|
2,374
|
|
|
|
2,369
|
|
Other securities
|
|
|
78
|
|
|
|
491
|
|
Precious metals
|
|
|
16,388
|
|
|
|
12,256
|
|
Fair value of derivatives
|
|
|
8,004
|
|
|
|
8,219
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,148
|
|
|
$
|
25,815
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities:
|
|
|
|
|
|
|
|
|
Securities sold, not yet purchased
|
|
$
|
1,519
|
|
|
$
|
131
|
|
Payables for precious metals
|
|
|
3,140
|
|
|
|
2,556
|
|
Fair value of derivatives
|
|
|
6,218
|
|
|
|
5,323
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,877
|
|
|
$
|
8,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes mortgage-backed securities
of $6 million and $13 million issued or guaranteed by
the Federal National Mortgage Association (FNMA) and
$46 million and $3 million issued or guaranteed by the
Federal Home Loan Mortgage Corporation (FHLMC) at
June 30, 2010 and December 31, 2009, respectively.
|
At June 30, 2010 and December 31, 2009, the fair value
of derivatives included in trading assets has been reduced by
$2.9 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 June 30, 2010 and December 31, 2009, the fair value
of derivatives included in trading liabilities has been reduced
by $5.2 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.
9
HSBC USA Inc.
3. Securities
The amortized cost and fair value of the securities
available-for-sale
and securities held to maturity are summarized in the following
tables.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Credit Gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Component
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
of OTTI
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
June 30, 2010
|
|
Cost
|
|
|
Securities
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
(in millions)
|
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$
|
9,947
|
|
|
$
|
-
|
|
|
$
|
486
|
|
|
$
|
(5
|
)
|
|
$
|
10,428
|
|
U.S. Government sponsored
enterprises:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
52
|
|
|
|
-
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
52
|
|
Direct agency obligations
|
|
|
1,949
|
|
|
|
-
|
|
|
|
104
|
|
|
|
-
|
|
|
|
2,053
|
|
U.S. Government agency issued or guaranteed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
10,286
|
|
|
|
-
|
|
|
|
325
|
|
|
|
-
|
|
|
|
10,611
|
|
Collateralized mortgage obligations
|
|
|
6,251
|
|
|
|
-
|
|
|
|
206
|
|
|
|
(1
|
)
|
|
|
6,456
|
|
Direct agency obligations
|
|
|
22
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
23
|
|
Obligations of U.S. states and political subdivisions
|
|
|
610
|
|
|
|
-
|
|
|
|
20
|
|
|
|
(3
|
)
|
|
|
627
|
|
Asset backed securities collateralized by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
339
|
|
|
|
22
|
|
|
|
-
|
|
|
|
(64
|
)
|
|
|
297
|
|
Commercial mortgages
|
|
|
573
|
|
|
|
-
|
|
|
|
18
|
|
|
|
(6
|
)
|
|
|
585
|
|
Home equity
|
|
|
546
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
(152
|
)
|
|
|
392
|
|
Auto
|
|
|
21
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21
|
|
Student loans
|
|
|
32
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
30
|
|
Other
|
|
|
123
|
|
|
|
-
|
|
|
|
1
|
|
|
|
(17
|
)
|
|
|
107
|
|
Corporate and other domestic debt
securities(2)
|
|
|
691
|
|
|
|
-
|
|
|
|
9
|
|
|
|
-
|
|
|
|
700
|
|
Foreign debt
securities(2)
|
|
|
3,094
|
|
|
|
-
|
|
|
|
76
|
|
|
|
-
|
|
|
|
3,170
|
|
Equity
securities(3)
|
|
|
1,399
|
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
|
|
1,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
securities
|
|
$
|
35,935
|
|
|
$
|
20
|
|
|
$
|
1,251
|
|
|
$
|
(251
|
)
|
|
$
|
36,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government sponsored
enterprises:(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
1,793
|
|
|
$
|
-
|
|
|
$
|
155
|
|
|
$
|
-
|
|
|
$
|
1,948
|
|
U.S. Government agency issued or guaranteed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
104
|
|
|
|
-
|
|
|
|
15
|
|
|
|
-
|
|
|
|
119
|
|
Collateralized mortgage obligations
|
|
|
333
|
|
|
|
-
|
|
|
|
36
|
|
|
|
-
|
|
|
|
369
|
|
Obligations of U.S. states and political subdivisions
|
|
|
140
|
|
|
|
-
|
|
|
|
5
|
|
|
|
(1
|
)
|
|
|
144
|
|
Asset backed securities collateralized by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
193
|
|
|
|
-
|
|
|
|
2
|
|
|
|
(12
|
)
|
|
|
183
|
|
Asset backed securities (predominantly credit card ) and other
debt securities held by consolidated
VIE(5)
|
|
|
1,364
|
|
|
|
(208
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
1,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
held-to-maturity
securities
|
|
$
|
3,927
|
|
|
$
|
(208
|
)
|
|
$
|
213
|
|
|
$
|
(13
|
)
|
|
$
|
3,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
HSBC USA Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Component
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
of 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 $33 million and $38 million issued or
guaranteed by FNMA at June 30, 2010 and December 31,
2009, respectively, and $19 million and $21 million
issued or guaranteed by FHLMC at June 30, 2010 and
December 31, 2009, respectively.
|
|
(2) |
|
At June 30, 2010 and
December 31, 2009, other domestic debt securities included
$676 million and $677 million, respectively, 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.
|
11
HSBC USA Inc.
|
|
|
(3) |
|
Includes preferred equity
securities at amortized cost issued by FNMA $2 million at
June 30, 2010 and December 31, 2009. Balances at
June 30, 2010 and December 31, 2009 reflect cumulative
other-than-temporary
impairment charges of $203 million.
|
|
(4) |
|
Includes securities at amortized
cost of $661 million and $678 million issued or
guaranteed by FNMA at June 30, 2010 and December 31,
2009, respectively, and $1.1 billion and $1.2 billion
issued and guaranteed by FHLMC at June 30, 2010 and
December 31, 2009, respectively.
|
|
(5) |
|
Relates to securities held by
Bryant Park Funding LLC which are consolidated effective
January 1, 2010. See Note 16, Variable Interest
Entities for additional information.
|
A summary of gross unrealized losses and related fair values as
of June 30, 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
|
|
|
|
|
|
|
Gross
|
|
|
Aggregate
|
|
|
|
|
|
Gross
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Unrealized
|
|
|
Fair Value of
|
|
|
Number of
|
|
|
Unrealized
|
|
|
Fair Value of
|
|
June 30, 2010
|
|
Securities
|
|
|
Losses
|
|
|
Investment
|
|
|
Securities
|
|
|
Losses
|
|
|
Investment
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
1
|
|
|
$
|
(5
|
)
|
|
$
|
108
|
|
U.S. Government sponsored enterprises
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14
|
|
|
|
(1
|
)
|
|
|
11
|
|
U.S. Government agency issued or guaranteed
|
|
|
9
|
|
|
|
(1
|
)
|
|
|
380
|
|
|
|
5
|
|
|
|
-
|
|
|
|
23
|
|
Obligations of U.S. states and political subdivisions
|
|
|
10
|
|
|
|
(1
|
)
|
|
|
38
|
|
|
|
7
|
|
|
|
(2
|
)
|
|
|
63
|
|
Asset-backed securities
|
|
|
8
|
|
|
|
(14
|
)
|
|
|
34
|
|
|
|
75
|
|
|
|
(227
|
)
|
|
|
817
|
|
Corporate and other domestic debt securities
|
|
|
1
|
|
|
|
-
|
|
|
|
176
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Foreign debt securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
25
|
|
Equity securities
|
|
|
1
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale
|
|
|
32
|
|
|
$
|
(16
|
)
|
|
$
|
630
|
|
|
|
103
|
|
|
$
|
(235
|
)
|
|
$
|
1,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government sponsored enterprises
|
|
|
7
|
|
|
$
|
-
|
|
|
$
|
74
|
|
|
|
1
|
|
|
$
|
-
|
|
|
$
|
-
|
|
U.S. Government agency issued or guaranteed
|
|
|
8
|
|
|
|
-
|
|
|
|
3
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
Obligations of U.S. states and political subdivisions
|
|
|
19
|
|
|
|
-
|
|
|
|
9
|
|
|
|
14
|
|
|
|
(1
|
)
|
|
|
23
|
|
Asset-backed securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
|
|
(12
|
)
|
|
|
137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity
|
|
|
34
|
|
|
$
|
-
|
|
|
$
|
86
|
|
|
|
28
|
|
|
$
|
(13
|
)
|
|
$
|
160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
HSBC USA Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year or Less
|
|
|
Greater Than One Year
|
|
|
|
|
|
|
Gross
|
|
|
Aggregate
|
|
|
|
|
|
Gross
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Unrealized
|
|
|
Fair Value of
|
|
|
Number of
|
|
|
Unrealized
|
|
|
Fair Value of
|
|
December 31, 2009
|
|
Securities
|
|
|
Losses
|
|
|
Investment
|
|
|
Securities
|
|
|
Losses
|
|
|
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 first six
months of 2010 as overall market conditions improved. We have
reviewed the securities for which there is an unrealized loss in
accordance with our accounting policies for
other-than-temporary
impairment. During the three and six months ended June 30,
2010, 24 and 37 debt securities, respectively, 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 $70 million and $103 million
during the three and six months ended June 30, 2010 on
these investments. The credit loss component of the applicable
debt securities totaling $13 million and $41 million
was recorded as a component of net
other-than-temporary
impairment losses in the accompanying consolidated statement of
income (loss) for the three and six months ended June 30,
2010, respectively, while the remaining non-credit portion
representing a net recovery during the six month period of a
portion of previously recorded impairment losses was recognized
in other comprehensive income. During the three and six months
ended June 30, 2009, eight and seventeen debt securities
were determined to be
other-than-temporarily
impaired. As a result, we recorded
other-than-temporary
impairment charges of $43 million and $159 million
during the three and six months ended June 30, 2009 on
these investments. The credit loss component of the applicable
debt securities totaling $20 million and $58 million
was recorded as a component of net
other-than-temporary
impairment losses in the accompanying consolidated statement of
income (loss) for the three and six months ended June 30,
2009,
13
HSBC USA Inc.
respectively, 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.
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 at the reporting date. If
impaired, we 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 78 percent and 72 percent of total
available-for-sale
and held to maturity securities as of June 30, 2010 and
December 31, 2009, respectively, our assessment for credit
loss was concentrated on private label asset backed securities.
Substantially all of the private label asset-backed securities
are supported by residential mortgages, home equity loans or
commercial mortgages. Our assessment for credit loss was
concentrated on this particular asset class because of the
following inherent risk factors:
|
|
|
|
|
The recovery of the U.S. economy remains sluggish;
|
|
|
|
The continued deterioration of the U.S. housing markets
with increasing delinquencies and foreclosure;
|
|
|
|
No real traction in government sponsored programs in loan
modifications;
|
|
|
|
A lack of refinancing activities within certain segments of the
mortgage market, even at the current low interest rate
environment, and the re-defaulted rate for refinanced loans;
|
|
|
|
The unemployment rate remains high despite recent modest
improvement, and consumer confidence remains low;
|
|
|
|
The decline in the occupancy rate in commercial
properties; and
|
|
|
|
The severity and duration of unrealized loss.
|
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
|
14
HSBC USA Inc.
|
|
|
|
|
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 June 30, 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 in the table below. Prime mortgage collateral types
comprise approximately 61 percent of the
other-than-temporary
impairments we have recognized during the first six months of
2010. The assumptions were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second liens/Home
|
June 30, 2010
|
|
Prime
|
|
Alt-A
|
|
Equity Mortgages
|
|
|
Cumulative default rate
|
|
|
1-27
|
%
|
|
|
8-34
|
%
|
|
|
12-20
|
%
|
Loss severity
|
|
|
16-78
|
%
|
|
|
20-80
|
%
|
|
|
100
|
%
|
Prepayment speeds
|
|
|
1-31
|
%
|
|
|
1-15
|
%
|
|
|
6-8
|
%
|
The dollar amounts of asset-backed securities for which an
other-than-temporary
impairment losses were recognized in the six months ended
June 30, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
|
|
|
|
Balance as of June 30, 2010
|
|
|
Loss Charged to
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
|
|
|
Profit and Loss
|
|
|
|
Cost
|
|
|
Impairment Loss
|
|
|
Fair Value
|
|
|
in 2010
|
|
|
|
|
|
(in millions)
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
$
|
265
|
|
|
$
|
(53
|
)
|
|
$
|
212
|
|
|
$
|
18
|
|
Home equity loans
|
|
|
34
|
|
|
|
-
|
|
|
|
34
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
299
|
|
|
|
(53
|
)
|
|
|
246
|
|
|
|
24
|
|
Held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset backed securities (predominately Credit Card)
|
|
|
255
|
|
|
|
-
|
|
|
|
255
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
554
|
|
|
$
|
(53
|
)
|
|
$
|
501
|
|
|
$
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additionally, there was $14 million of
other-than-temporary
impairment realized on securities sold in the six months ended
June 30, 2010.
15
HSBC USA Inc.
The amortized cost and fair value of those asset-backed
securities with unrealized loss of more than 12 months for
which no
other-than-temporary-impairment
has been recognized at June 30, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2010
|
|
|
|
|
|
|
Unrealized Losses for
|
|
|
|
|
|
|
Amortized Cost
|
|
|
More Than 12 Months
|
|
|
Fair Value
|
|
|
|
|
|
(in millions)
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
$
|
301
|
|
|
$
|
(50
|
)
|
|
$
|
251
|
|
Commercial mortgages
|
|
|
89
|
|
|
|
(6
|
)
|
|
|
83
|
|
Home equity loans
|
|
|
511
|
|
|
|
(152
|
)
|
|
|
359
|
|
Auto loans
|
|
|
7
|
|
|
|
-
|
|
|
|
7
|
|
Student loans
|
|
|
31
|
|
|
|
(2
|
)
|
|
|
29
|
|
Other
|
|
|
105
|
|
|
|
(17
|
)
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
1,044
|
|
|
|
(227
|
)
|
|
|
817
|
|
Held-to-maturity classification:
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
149
|
|
|
|
(12
|
)
|
|
|
137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,193
|
|
|
$
|
(239
|
)
|
|
$
|
954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Although the fair value of a particular security is below its
amortized cost for more than 12 months, it does not
necessarily result in a credit loss and hence
other-than-temporary
impairment. The decline in fair value may be caused by, among
other things, the illiquidity of the market. To the extent we do
not intend to sell the debt security and it is
more-likely-than-not
we will not be required to sell the security before the recovery
of the amortized cost basis, no
other-than-temporary
impairment is deemed to have occurred. The fair value of most of
the asset-backed securities has recovered significantly as the
economy has started to recover from the financial crisis.
The excess of amortized cost over the present value of expected
future cash flows recognized during the six months ended
June 30, 2010 and 2009 on our
other-than-temporarily
impaired debt securities, which represents the credit loss
associated with these securities, was $41 million and
$58 million, 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 $188 million as of June 30,
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.
16
HSBC USA Inc.
The following table summarizes the roll-forward of credit losses
on debt securities that were
other-than-temporarily
impaired which have been recognized in income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Credit losses at the beginning of the period
|
|
$
|
73
|
|
|
$
|
43
|
|
|
$
|
81
|
|
|
$
|
5
|
|
Credit losses related to securities for which an
other-than-temporary
impairment was not previously recognized
|
|
|
6
|
|
|
|
1
|
|
|
|
20
|
|
|
|
53
|
|
Increase in credit losses for which an
other-than-temporary
impairment was previously recognized
|
|
|
7
|
|
|
|
19
|
|
|
|
21
|
|
|
|
5
|
|
Reduction of credit losses recognized prior to the sale of
securities
|
|
|
(48
|
)
|
|
|
-
|
|
|
|
(63
|
)
|
|
|
-
|
|
Reductions of credit losses for increases in cash flows expected
to be collected that are recognized over the remaining life of
the security
|
|
|
(5
|
)
|
|
|
-
|
|
|
|
(26
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit losses at the end of the period
|
|
$
|
33
|
|
|
$
|
63
|
|
|
$
|
33
|
|
|
$
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2010, we held 120 individual asset-backed
securities in the
available-for-sale
portfolio, of which 33 were also wrapped by a monoline insurance
company. The asset backed securities backed by a monoline wrap
comprised $499 million of the total aggregate fair value of
asset-backed securities of $1.4 billion at June 30,
2010. The gross unrealized losses on these securities were
$168 million at June 30, 2010. We do not consider the
monoline wrap of any non-investment grade monoline insurers and
therefore as of June 30, 2010, we only considered the
financial guarantee of monoline insurers on securities for
purposes of evaluating
other-than-temporary
impairment with a fair value of $172 million. Four
securities wrapped by below investment grade monoline insurance
companies with an aggregate fair value of $34 million were
deemed to be
other-than-temporarily
impaired at June 30, 2010.
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.
As discussed above, certain asset-backed securities have an
embedded financial guarantee provided by monoline insurers.
Because the financial guarantee is not a separate and distinct
contract from the asset-backed security, they are considered as
a single unit of account for fair value measurement and
impairment assessment purposes. The monoline insurers are
regulated by the insurance commissioners of the relevant states
and certain monoline insurers that write the financial guarantee
contracts are public companies. 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. We perform both a
credit as well as a liquidity analyses on the monoline insurers
each quarter. Our analysis also compares
market-based
credit default spreads, when available, to assess the
appropriateness of our monoline insurers creditworthiness.
Based on the public information available, including the
regulatory reviews and actions undertaken by the state insurance
commissions and the published financial results, we determine
the degree of reliance to be placed on the financial guarantee
policy in estimating the cash flows to be collected for the
purpose of recognizing and measuring impairment loss.
17
HSBC USA Inc.
A credit downgrade to non-investment grade is a key but not the
only factor in determining the credit risk or the monoline
insurers ability to fulfill its contractual obligation
under the financial guarantee arrangement. Although a monoline
may have been down-graded by the rating agencies or have been
ordered to commute its operations by the insurance
commissioners, it may retain the ability and the obligation to
continue to pay claims in the near term. We evaluate the
short-term liquidity of and the ability to pay claims by the
monoline insurers in estimating the amounts of cash flows
expected to be collected from specific asset-backed securities
for the purpose of assessing and measuring credit loss.
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 Gains
|
|
|
Realized (Losses)
|
|
|
(Losses) Gains
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Three months ended June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale
|
|
$
|
67
|
|
|
$
|
(81
|
)
|
|
$
|
(14
|
)
|
Securities held to maturity
|
|
|
2
|
|
|
|
-
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
69
|
|
|
$
|
(81
|
)
|
|
$
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale
|
|
$
|
226
|
|
|
$
|
(48
|
)
|
|
$
|
178
|
|
Securities held to maturity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
226
|
|
|
$
|
(48
|
)
|
|
$
|
178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale
|
|
$
|
99
|
|
|
$
|
(115
|
)
|
|
$
|
(16
|
)
|
Securities held to maturity
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
99
|
|
|
$
|
(118
|
)
|
|
$
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale
|
|
$
|
287
|
|
|
$
|
(100
|
)
|
|
$
|
187
|
|
Securities held to maturity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
287
|
|
|
$
|
(100
|
)
|
|
$
|
187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and fair values of securities
available-for-sale
and securities held to maturity at June 30, 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 June 30, 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 June 30, 2010. Yields on tax-exempt
obligations have been computed on a taxable equivalent basis
using applicable statutory tax rates.
18
HSBC USA Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After One
|
|
|
After Five
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
But Within
|
|
|
But Within
|
|
|
After Ten
|
|
|
|
One Year
|
|
|
Five Years
|
|
|
Ten Years
|
|
|
Years
|
|
|
|
|
|
Taxable Equivalent Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
as of June 30, 2010
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars are in millions)
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$
|
-
|
|
|
|
-
|
%
|
|
$
|
4,249
|
|
|
|
1.07
|
%
|
|
$
|
2,742
|
|
|
|
3.42
|
%
|
|
$
|
2,956
|
|
|
|
4.38
|
%
|
U.S. Government sponsored enterprises
|
|
|
-
|
|
|
|
-
|
|
|
|
8
|
|
|
|
3.79
|
|
|
|
1,319
|
|
|
|
3.96
|
|
|
|
674
|
|
|
|
4.22
|
|
U.S. Government agency issued or guaranteed
|
|
|
4
|
|
|
|
4.45
|
|
|
|
-
|
|
|
|
-
|
|
|
|
251
|
|
|
|
4.79
|
|
|
|
16,304
|
|
|
|
4.13
|
|
Obligations of U.S. states and political subdivisions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
253
|
|
|
|
4.23
|
|
|
|
357
|
|
|
|
4.47
|
|
Asset-backed securities
|
|
|
7
|
|
|
|
2.23
|
|
|
|
122
|
|
|
|
5.34
|
|
|
|
43
|
|
|
|
1.06
|
|
|
|
1,482
|
|
|
|
3.26
|
|
Corporate and other domestic debt securities
|
|
|
115
|
|
|
|
1.53
|
|
|
|
576
|
|
|
|
1.57
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Foreign debt securities
|
|
|
321
|
|
|
|
1.98
|
|
|
|
2,738
|
|
|
|
2.65
|
|
|
|
35
|
|
|
|
3.22
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortized cost
|
|
$
|
447
|
|
|
|
1.89
|
%
|
|
$
|
7,693
|
|
|
|
1.74
|
%
|
|
$
|
4,643
|
|
|
|
3.67
|
%
|
|
$
|
21,773
|
|
|
|
4.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value
|
|
$
|
449
|
|
|
|
|
|
|
$
|
7,818
|
|
|
|
|
|
|
$
|
4,892
|
|
|
|
|
|
|
$
|
22,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government sponsored enterprises
|
|
$
|
-
|
|
|
|
-
|
%
|
|
$
|
30
|
|
|
|
7.95
|
%
|
|
$
|
2
|
|
|
|
6.82
|
%
|
|
$
|
1,761
|
|
|
|
6.19
|
%
|
U.S. Government agency issued or guaranteed
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
7.62
|
|
|
|
431
|
|
|
|
6.67
|
|
Obligations of U.S. states and political subdivisions
|
|
|
9
|
|
|
|
5.29
|
|
|
|
29
|
|
|
|
5.53
|
|
|
|
15
|
|
|
|
4.67
|
|
|
|
87
|
|
|
|
5.30
|
|
Asset-backed securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
193
|
|
|
|
6.11
|
|
Asset backed securities issued by consolidated VIE
|
|
|
352
|
|
|
|
1.51
|
|
|
|
550
|
|
|
|
1.58
|
|
|
|
254
|
|
|
|
.35
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortized cost
|
|
$
|
361
|
|
|
|
1.61
|
%
|
|
$
|
609
|
|
|
|
2.07
|
%
|
|
$
|
277
|
|
|
|
.77
|
%
|
|
$
|
2,472
|
|
|
|
6.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value
|
|
$
|
361
|
|
|
|
|
|
|
$
|
613
|
|
|
|
|
|
|
$
|
278
|
|
|
|
|
|
|
$
|
2,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in FHLB stock and FRB stock of $119 million and
$476 million, respectively, were included in other assets
at June 30, 2010. Investments in FHLB stock and FRB stock
of $152 million and $476 million, respectively, were
included in other assets at December 31, 2009.
19
HSBC USA Inc.
4. Loans
Loans consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Commercial loans:
|
|
|
|
|
|
|
|
|
Construction and other real estate
|
|
$
|
8,574
|
|
|
$
|
8,858
|
|
Other commercial
|
|
|
20,928
|
|
|
|
21,446
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
29,502
|
|
|
|
30,304
|
|
|
|
|
|
|
|
|
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
Home equity mortgages
|
|
|
3,972
|
|
|
|
4,164
|
|
Other residential mortgages
|
|
|
13,566
|
|
|
|
13,722
|
|
Private label cards
|
|
|
12,747
|
|
|
|
15,091
|
|
Credit cards
|
|
|
11,274
|
|
|
|
13,048
|
|
Auto finance
|
|
|
1,279
|
|
|
|
1,701
|
|
Other consumer
|
|
|
1,321
|
|
|
|
1,459
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
44,159
|
|
|
|
49,185
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
73,661
|
|
|
$
|
79,489
|
|
|
|
|
|
|
|
|
|
|
Secured financings of $2.2 billion at June 30, 2010
are secured by $1.5 billion of credit cards and restricted
available-for-sale
securities of $1.3 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, and
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
(Purchased Credit-Impaired Loans). 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. At June 30, 2010, the
accretable yield has been fully amortized to interest income and
there is no remaining difference between the carrying value and
the outstanding contractual balances of these Purchased
Credit-Impaired Loans for the GM portfolio. At June 30,
2010, we no longer have any receivables from the purchased GM
portfolio which are subject to these accounting requirements.
The carrying amount of the Purchased Credit-Impaired Loans, net
of credit loss reserves at June 30, 2010 totaled
$36 million for the UP Portfolio, and is included in credit
card loans. The outstanding contractual balance at June 30,
2010 for these receivables was $55 million for the UP
Portfolio. 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 $6 million and $18 million as of June 30, 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 expected future cash flows since the
20
HSBC USA Inc.
acquisition. The following summarizes the change in accretable
yield associated with the Purchased Credit-Impaired Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Accretable yield at beginning of period
|
|
$
|
(22
|
)
|
|
$
|
(80
|
)
|
|
$
|
(29
|
)
|
|
$
|
(95
|
)
|
Accretable yield amortized to interest income during the period
|
|
|
4
|
|
|
|
14
|
|
|
|
11
|
|
|
|
29
|
|
Reclassification to non-accretable difference
|
|
|
6
|
|
|
|
16
|
|
|
|
6
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretable yield at end of
period(1)
|
|
$
|
(12
|
)
|
|
$
|
(50
|
)
|
|
$
|
(12
|
)
|
|
$
|
(50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
At June 30, 2010, the entire
remaining accretable yield is related to the UP portfolio. The
accretable yield related to the GM portfolio was fully amortized
to interest income during the second quarter of 2010.
|
Troubled Debt Restructurings The following tables
present information about our TDR Loans and the related credit
loss reserves for TDR Loans:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
TDR Loans:
|
|
|
|
|
|
|
|
|
Commercial loans:
|
|
|
|
|
|
|
|
|
Construction and other real estate
|
|
$
|
200
|
|
|
$
|
100
|
|
Other commercial
|
|
|
151
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
351
|
|
|
|
168
|
|
|
|
|
|
|
|
|
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
299
|
|
|
|
173
|
|
Private label cards
|
|
|
237
|
|
|
|
216
|
|
Credit cards
|
|
|
176
|
|
|
|
102
|
|
Auto
finance(1)
|
|
|
46
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
758
|
|
|
|
543
|
|
|
|
|
|
|
|
|
|
|
Total TDR
Loans(3)
|
|
$
|
1,109
|
|
|
$
|
711
|
|
|
|
|
|
|
|
|
|
|
21
HSBC USA Inc.
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Allowance for credit losses for TDR
Loans(2):
|
|
|
|
|
|
|
|
|
Commercial loans:
|
|
|
|
|
|
|
|
|
Construction and other real estate
|
|
$
|
41
|
|
|
$
|
14
|
|
Other commercial
|
|
|
17
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
58
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
51
|
|
|
|
34
|
|
Private label cards
|
|
|
83
|
|
|
|
51
|
|
Credit cards
|
|
|
62
|
|
|
|
24
|
|
Auto finance
|
|
|
12
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
208
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
Total Allowance for credit losses for TDR Loans
|
|
$
|
266
|
|
|
$
|
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 allowance for credit losses for TDR Loans is
determined using a discounted cash flow impairment analysis.
|
|
(3) |
|
Includes balances of
$241 million and $65 million at June 30, 2010 and
December 31, 2009, respectively which are classified as
non-accrual loans.
|
The following table presents information about average TDR Loan
balances and interest income recognized on TDR loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Average balance of TDR Loans
|
|
$
|
973
|
|
|
$
|
420
|
|
|
$
|
867
|
|
|
$
|
398
|
|
Interest income recognized on TDR Loans
|
|
|
17
|
|
|
|
7
|
|
|
|
30
|
|
|
|
13
|
|
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.
|
22
HSBC USA Inc.
The following table summarizes the balances of high LTV,
interest-only and ARM loans in our loan portfolios, including
certain loans held for sale, at June 30, 2010 and
December 31, 2009, respectively.
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in billions)
|
|
|
Residential mortgage loans with high LTV and no mortgage
insurance(1)
|
|
$
|
1.1
|
|
|
$
|
1.2
|
|
Interest-only residential mortgage loans
|
|
|
2.8
|
|
|
|
3.3
|
|
ARM
loans(2)
|
|
|
7.7
|
|
|
|
7.7
|
|
|
|
|
(1) |
|
Residential mortgage loans with
high LTV and no mortgage insurance includes both fixed rate and
adjustable rate mortgages. Excludes $149 million and
$232 million of
sub-prime
residential mortgage loans held for sale at June 30, 2010
and December 31, 2009, respectively.
|
|
(2) |
|
ARM loan balances above exclude
$139 million and $209 million of
sub-prime
residential mortgage loans held for sale at June 30, 2010
and December 31, 2009, respectively. During the remainder
of 2010 and during 2011, approximately $49 million and
$448 million, 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 $1.0 billion and
$1.4 billion at June 30, 2010 and December 31,
2009, respectively.
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Closed end:
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
13,566
|
|
|
$
|
13,722
|
|
Second lien
|
|
|
500
|
|
|
|
570
|
|
Revolving:
|
|
|
|
|
|
|
|
|
Second lien
|
|
|
3,472
|
|
|
|
3,594
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
17,538
|
|
|
$
|
17,886
|
|
|
|
|
|
|
|
|
|
|
5. Allowance
for Credit Losses
An analysis of the allowance for credit losses is presented in
the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
Three Months Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Balance at beginning of period
|
|
$
|
3,224
|
|
|
$
|
3,465
|
|
|
$
|
3,861
|
|
|
$
|
2,397
|
|
Provision for credit losses
|
|
|
456
|
|
|
|
1,067
|
|
|
|
667
|
|
|
|
2,241
|
|
Charge-offs
|
|
|
(816
|
)
|
|
|
(865
|
)
|
|
|
(1,750
|
)
|
|
|
(1,479
|
)
|
Recoveries
|
|
|
82
|
|
|
|
81
|
|
|
|
164
|
|
|
|
152
|
|
Allowance on loans transferred to held for sale
|
|
|
-
|
|
|
|
(8
|
)
|
|
|
-
|
|
|
|
(8
|
)
|
Allowance related to bulk loan purchase from HSBC Finance
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
437
|
|
Other
|
|
|
4
|
|
|
|
-
|
|
|
|
8
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
2,950
|
|
|
$
|
3,740
|
|
|
$
|
2,950
|
|
|
$
|
3,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
HSBC USA Inc.
6. Loans
Held for Sale
Loans held for sale consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Commercial loans
|
|
$
|
1,554
|
|
|
$
|
1,126
|
|
|
|
|
|
|
|
|
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
985
|
|
|
|
1,386
|
|
Auto finance
|
|
|
-
|
|
|
|
353
|
|
Other consumer
|
|
|
28
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
1,013
|
|
|
|
1,782
|
|
|
|
|
|
|
|
|
|
|
Total loans held for sale
|
|
$
|
2,567
|
|
|
$
|
2,908
|
|
|
|
|
|
|
|
|
|
|
We originate certain 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 at
June 30, 2010 and December 31, 2009. The fair value of
commercial loans held for sale under this program was
$1.0 billion and $1.1 billion at June 30, 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 first six months of
2010, the market value of these loans decreased slightly due to
wider credit spreads. In 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 these commercial loans was
$543 million at June 30, 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
$478 million and $757 million at June 30, 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 second
quarter of 2010, we sold subprime residential mortgage loans
with a book value of $215 million to unaffiliated third
parties.
During the first quarter of 2010, auto finance loans held for
sale with a carrying value of $353 million were sold to
HSBC Finance to facilitate completion of a 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
June 30, 2010, we experienced a decrease in the valuation
allowance during the first six months of 2010 due primarily to
lower balances and sales. The valuation allowance on loans held
for sale was $535 million and $910 million at
June 30, 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 losses of
$10 million and $16 million during the three and six
months ended June 30, 2010, respectively compared to gains
of $28 million and $57 million during the three and
six months ended June 30, 2009, respectively.
24
HSBC USA Inc.
7. Intangible
Assets
Intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Mortgage servicing rights
|
|
$
|
326
|
|
|
$
|
457
|
|
Other
|
|
|
24
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
$
|
350
|
|
|
$
|
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:
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
|
Annualized constant prepayment rate (CPR)
|
|
23.5%
|
|
14.6%
|
Constant discount rate
|
|
15.1%
|
|
17.9%
|
Weighted average life
|
|
3.3 years
|
|
4.8 years
|
Residential MSRs activity is summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Fair value of MSRs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
444
|
|
|
$
|
313
|
|
|
$
|
450
|
|
|
$
|
333
|
|
Additions related to loan sales
|
|
|
10
|
|
|
|
37
|
|
|
|
26
|
|
|
|
65
|
|
Changes in fair value due to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in valuation inputs or assumptions used in the valuation
models
|
|
|
(119
|
)
|
|
|
88
|
|
|
|
(114
|
)
|
|
|
60
|
|
Realization of cash flows
|
|
|
(18
|
)
|
|
|
(4
|
)
|
|
|
(45
|
)
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
317
|
|
|
$
|
434
|
|
|
$
|
317
|
|
|
$
|
434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
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:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Outstanding principal balances at period end
|
|
$
|
48,803
|
|
|
$
|
50,390
|
|
|
|
|
|
|
|
|
|
|
Custodial balances maintained and included in noninterest
bearing deposits at period end
|
|
$
|
945
|
|
|
$
|
923
|
|
|
|
|
|
|
|
|
|
|
Servicing fees collected are included in residential mortgage
banking revenue and totaled $30 million and
$62 million during the three and six months ended
June 30, 2010, respectively. Servicing fees totaled
$32 million and $66 million during the three and six
months ended June 30, 2009, respectively.
Commercial Mortgage Servicing Rights Commercial MSRs,
which are accounted for using the lower of cost or fair value
method, totaled $9 million and $7 million at
June 30, 2010 and December 31, 2009.
Other Intangible Assets Other intangible assets,
which result from purchase business combinations, are comprised
of favorable lease arrangements of $18 million and
$20 million at June 30, 2010 and December 31,
2009, respectively, and customer lists in the amount of
$6 million and $7 million at June 30, 2010 and
December 31, 2009, respectively.
8. Goodwill
Goodwill was $2.6 billion at June 30, 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
as of both June 30, 2010 and March 31, 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. If significant deterioration in
the economic and credit conditions 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, market making 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
26
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 $17 million and
$22 million during the three and six months ended
June 30, 2010, respectively, compared to net losses of
$1.6 million and net gains of $2.5 million during the
three and six months ended June 30, 2009, respectively,
which are reported in other income (expense) 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 $28 million and decreased the carrying value of our debt
by $272 million during the six months ended June 30,
2010 and 2009, respectively. We amortized $2.5 million and
$4.3 million of basis adjustments related to terminated
and/or
re-designated fair value hedge relationships during the three
and six months ended June 30, 2010, respectively. We
amortized $4 million and $7 million of basis
adjustments related to terminated
and/or
re-designated fair value hedge relationships during the three
and six months ended June 30, 2009, respectively. The total
accumulated unamortized basis adjustment amounted to an increase
in the carrying value of our debt of $81 million and
$57 million as of June 30, 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
|
|
June 30,
|
|
|
December 31,
|
|
|
Balance Sheet
|
|
June 30,
|
|
|
December 31,
|
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Interest rate contracts
|
|
Other assets
|
|
$
|
37
|
|
|
$
|
133
|
|
|
Interest, taxes & other liabilities
|
|
$
|
327
|
|
|
$
|
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.
|
27
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
|
|
|
Six Months Ended
|
|
|
|
Recognized in Income on
|
|
June 30,
|
|
|
June 30,
|
|
|
|
Derivatives
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Interest rate contracts
|
|
Other income (expense)
|
|
$
|
(473
|
)
|
|
$
|
(75
|
)
|
|
$
|
(486
|
)
|
|
$
|
(86
|
)
|
Interest rate contracts
|
|
Interest income
|
|
|
20
|
|
|
|
(85
|
)
|
|
|
37
|
|
|
|
(70
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
(453
|
)
|
|
$
|
(160
|
)
|
|
$
|
(449
|
)
|
|
$
|
(156
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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)
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts/AFS securities
|
|
$
|
(15
|
)
|
|
$
|
(473
|
)
|
|
$
|
88
|
|
|
$
|
485
|
|
|
$
|
(8
|
)
|
|
$
|
123
|
|
|
$
|
20
|
|
|
$
|
(123
|
)
|
Interest rate contracts/commercial loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest rate contracts/subordinated debt
|
|
|
35
|
|
|
|
-
|
|
|
|
(22
|
)
|
|
|
5
|
|
|
|
(77
|
)
|
|
|
(198
|
)
|
|
|
(83
|
)
|
|
|
196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20
|
|
|
$
|
(473
|
)
|
|
$
|
66
|
|
|
$
|
490
|
|
|
$
|
(85
|
)
|
|
$
|
(75
|
)
|
|
$
|
(63
|
)
|
|
$
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts/AFS securities
|
|
$
|
(18
|
)
|
|
$
|
(513
|
)
|
|
$
|
132
|
|
|
$
|
524
|
|
|
$
|
(16
|
)
|
|
$
|
187
|
|
|
$
|
38
|
|
|
$
|
(183
|
)
|
Interest rate contracts/commercial loans
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
-
|
|
Interest rate contracts/subordinated debt
|
|
|
56
|
|
|
|
26
|
|
|
|
(63
|
)
|
|
|
(15
|
)
|
|
|
(54
|
)
|
|
|
(272
|
)
|
|
|
(164
|
)
|
|
|
271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
37
|
|
|
$
|
(486
|
)
|
|
$
|
70
|
|
|
$
|
508
|
|
|
$
|
(70
|
)
|
|
$
|
(86
|
)
|
|
$
|
(125
|
)
|
|
$
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 recognized
in earnings. 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 June 30, 2010, and December 31, 2009,
28
HSBC USA Inc.
active cash flow hedge relationships extend or mature through
January 2012 and June 2010, respectively. During the three and
six months ended June 30, 2010, $2 million and
$5 million, 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. During the three and six months
ended June 30, 2009, $13 million and $30 million,
respectively, of losses related to terminated
and/or
re-designated cash flow hedge relationships were amortized to
earnings from accumulated other comprehensive income. The
interest accrual related to the derivative contract is
recognized in interest income.
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
|
|
June 30,
|
|
|
December 31,
|
|
|
Balance Sheet
|
|
June 30,
|
|
|
December 31,
|
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Interest rate contracts
|
|
Other assets
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Interest, taxes & other liabilities
|
|
$
|
13
|
|
|
$
|
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
|
|
|
Portion)
|
|
from AOCI into Income
|
|
Portion)
|
|
Effectiveness
|
|
Portion)
|
|
|
2010
|
|
2009
|
|
(Effective Portion)
|
|
2010
|
|
2009
|
|
Testing)
|
|
2010
|
|
2009
|
|
|
|
(In millions)
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
$
|
8
|
|
|
$
|
64
|
|
|
(expense)
|
|
$
|
(2
|
)
|
|
$
|
13
|
|
|
(expense)
|
|
$
|
-
|
|
|
$
|
-
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
$
|
15
|
|
|
$
|
90
|
|
|
(expense)
|
|
$
|
(5
|
)
|
|
$
|
30
|
|
|
(expense)
|
|
$
|
-
|
|
|
$
|
7
|
|
Trading and Other Derivatives In addition to risk
management, we enter into derivative instruments for trading and
market making 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 June 30, 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 (expense). In
addition, we also from time to time have designated certain
forward
29
HSBC USA Inc.
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.
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
|
|
June 30,
|
|
|
December 31,
|
|
|
Balance Sheet
|
|
June 30,
|
|
|
December 31,
|
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Interest rate contracts
|
|
Trading assets
|
|
$
|
35,659
|
|
|
$
|
27,085
|
|
|
Trading Liabilities
|
|
$
|
36,324
|
|
|
$
|
27,546
|
|
Foreign exchange contracts
|
|
Trading assets
|
|
|
14,814
|
|
|
|
12,920
|
|
|
Trading Liabilities
|
|
|
14,520
|
|
|
|
14,087
|
|
Equity contracts
|
|
Trading assets
|
|
|
1,424
|
|
|
|
2,281
|
|
|
Trading Liabilities
|
|
|
1,375
|
|
|
|
2,297
|
|
Precious Metals contracts
|
|
Trading assets
|
|
|
734
|
|
|
|
918
|
|
|
Trading Liabilities
|
|
|
1,030
|
|
|
|
897
|
|
Credit contracts
|
|
Trading assets
|
|
|
17,281
|
|
|
|
17,772
|
|
|
Trading Liabilities
|
|
|
17,160
|
|
|
|
17,687
|
|
Other
|
|
Trading assets
|
|
|
22
|
|
|
|
6
|
|
|
Trading Liabilities
|
|
|
1
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
69,934
|
|
|
$
|
60,982
|
|
|
|
|
$
|
70,410
|
|
|
$
|
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
|
|
June 30,
|
|
|
December 31,
|
|
|
Balance Sheet
|
|
June 30,
|
|
|
December 31,
|
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Interest rate contracts
|
|
Other assets
|
|
$
|
504
|
|
|
$
|
229
|
|
|
Interest, taxes & other liabilities
|
|
$
|
5
|
|
|
$
|
15
|
|
Foreign exchange contracts
|
|
Other assets
|
|
|
45
|
|
|
|
51
|
|
|
Interest, taxes & other liabilities
|
|
|
20
|
|
|
|
2
|
|
Equity contracts
|
|
Other assets
|
|
|
-
|
|
|
|
180
|
|
|
Interest, taxes & other liabilities
|
|
|
185
|
|
|
|
16
|
|
Credit contracts
|
|
Other assets
|
|
|
5
|
|
|
|
15
|
|
|
Interest, taxes & other liabilities
|
|
|
12
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
554
|
|
|
$
|
475
|
|
|
|
|
$
|
222
|
|
|
$
|
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.
|
30
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 (Loss)
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
Recognized in Income
|
|
June 30,
|
|
|
June 30,
|
|
|
|
on Derivatives
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Interest rate contracts
|
|
Trading revenue (loss)
|
|
$
|
35
|
|
|
$
|
(243
|
)
|
|
$
|
(18
|
)
|
|
$
|
(147
|
)
|
Foreign exchange contracts
|
|
Trading revenue (loss)
|
|
|
67
|
|
|
|
489
|
|
|
|
(11
|
)
|
|
|
571
|
|
Equity contracts
|
|
Trading revenue (loss)
|
|
|
(4
|
)
|
|
|
131
|
|
|
|
10
|
|
|
|
121
|
|
Precious Metals contracts
|
|
Trading revenue (loss)
|
|
|
139
|
|
|
|
9
|
|
|
|
304
|
|
|
|
29
|
|
Credit contracts
|
|
Trading revenue (loss)
|
|
|
64
|
|
|
|
484
|
|
|
|
31
|
|
|
|
(151
|
)
|
Other
|
|
Trading revenue (loss)
|
|
|
17
|
|
|
|
(74
|
)
|
|
|
38
|
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
318
|
|
|
$
|
796
|
|
|
$
|
354
|
|
|
$
|
391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Derivatives
|
|
|
|
Location of Gain (Loss)
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
Recognized in Income
|
|
June 30,
|
|
|
June 30,
|
|
|
|
on Derivatives
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Interest rate contracts
|
|
Other income (expense)
|
|
$
|
344
|
|
|
$
|
(283
|
)
|
|
$
|
401
|
|
|
$
|
(420
|
)
|
Foreign exchange contracts
|
|
Other income (expense)
|
|
|
(14
|
)
|
|
|
29
|
|
|
|
(24
|
)
|
|
|
35
|
|
Equity contracts
|
|
Other income (expense)
|
|
|
(267
|
)
|
|
|
167
|
|
|
|
(125
|
)
|
|
|
166
|
|
Credit contracts
|
|
Other income (expense)
|
|
|
5
|
|
|
|
(85
|
)
|
|
|
(4
|
)
|
|
|
(94
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
68
|
|
|
$
|
(172
|
)
|
|
$
|
248
|
|
|
$
|
(313
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 product transactions. As of June 30, 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 June 30, 2010, is
$8.6 billion for which we have posted collateral of
$6.8 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 posted collateral of
$8.6 billion. Substantially all of the collateral posted is
in the form of cash which is reflected in either interest
bearing deposits with banks or other assets. See Note 17,
Guarantee Arrangements, Contingencies and Pledged
Assets for further details.
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
31
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
|
|
$
|
-
|
|
|
$
|
22
|
|
|
$
|
112
|
|
P-2
|
|
|
122
|
|
|
|
125
|
|
|
|
209
|
|
S&P
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Ratings
|
Short-Term Ratings
|
|
AA
|
|
AA-
|
|
A+
|
|
|
|
(in millions)
|
|
A-1+
|
|
$
|
-
|
|
|
$
|
168
|
|
|
$
|
220
|
|
A-1
|
|
|
126
|
|
|
|
294
|
|
|
|
346
|
|
We would be required to post $183 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.
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
(in billions)
|
|
|
Interest rate:
|
|
|
|
|
|
|
|
|
Futures and forwards
|
|
$
|
353.4
|
|
|
$
|
156.0
|
|
Swaps
|
|
|
1,530.3
|
|
|
|
1,221.5
|
|
Options written
|
|
|
179.3
|
|
|
|
59.5
|
|
Options purchased
|
|
|
178.3
|
|
|
|
66.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,241.3
|
|
|
|
1,503.0
|
|
Foreign Exchange:
|
|
|
|
|
|
|
|
|
Swaps, futures and forwards
|
|
|
554.8
|
|
|
|
486.2
|
|
Options written
|
|
|
30.4
|
|
|
|
43.0
|
|
Options purchased
|
|
|
30.9
|
|
|
|
43.1
|
|
Spot
|
|
|
57.0
|
|
|
|
39.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
673.1
|
|
|
|
611.7
|
|
Commodities, equities and precious metals:
|
|
|
|
|
|
|
|
|
Swaps, futures and forwards
|
|
|
41.9
|
|
|
|
26.4
|
|
Options written
|
|
|
8.2
|
|
|
|
10.3
|
|
Options purchased
|
|
|
14.5
|
|
|
|
15.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64.6
|
|
|
|
52.0
|
|
Credit derivatives
|
|
|
760.2
|
|
|
|
768.5
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,739.2
|
|
|
$
|
2,935.2
|
|
|
|
|
|
|
|
|
|
|
32
HSBC USA Inc.
10. Fair
Value Option
We report our results to HSBC in accordance with its reporting
basis, International Financial Reporting Standards
(IFRSs). 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 certain
commercial loans including 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 related
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
June 30, 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 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 how the instruments are managed. At
June 30, 2010, these commercial foreign currency
denominated loans for which we elected fair value option had a
fair value of $543 million and an unpaid principal balance
of $540 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 June 30, 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 interest rates.
Fixed rate debt accounted for under FVO at June 30, 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 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 June 30, 2010, interest
bearing deposits in domestic offices included $5.8 billion
of structured deposits accounted for under FVO which had an
unpaid principal balance of $5.8 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 June 30, 2010 included
structured notes of $3.2 billion accounted for under FVO
which had an unpaid principal balance of $3.2 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 on this
debt is recorded as interest expense in the consolidated
statement of income (loss). The components of gain (loss)
33
HSBC USA Inc.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
Long-
|
|
|
|
|
|
|
|
|
|
|
|
Long-
|
|
|
|
|
|
|
|
|
|
|
|
|
Term
|
|
|
Hybrid
|
|
|
|
|
|
|
|
|
Term
|
|
|
Hybrid
|
|
|
|
|
|
|
Loans
|
|
|
Debt
|
|
|
Instruments
|
|
|
Total
|
|
|
Loans
|
|
|
Debt
|
|
|
Instruments
|
|
|
Total
|
|
|
|
|
|
(in millions)
|
|
|
Interest rate component
|
|
$
|
2
|
|
|
$
|
(178
|
)
|
|
$
|
191
|
|
|
$
|
15
|
|
|
$
|
-
|
|
|
$
|
164
|
|
|
$
|
(232
|
)
|
|
$
|
(68
|
)
|
Credit risk component
|
|
|
(45
|
)
|
|
|
123
|
|
|
|
23
|
|
|
|
101
|
|
|
|
95
|
|
|
|
(325
|
)
|
|
|
36
|
|
|
|
(194
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
mark-to-market
on financial instruments designated at fair value
|
|
|
(43
|
)
|
|
|
(55
|
)
|
|
|
214
|
|
|
|
116
|
|
|
|
95
|
|
|
|
(161
|
)
|
|
|
(196
|
)
|
|
|
(262
|
)
|
Mark-to-market
on the related derivatives
|
|
|
(5
|
)
|
|
|
239
|
|
|
|
(188
|
)
|
|
|
46
|
|
|
|
-
|
|
|
|
(299
|
)
|
|
|
181
|
|
|
|
(118
|
)
|
Net realized gain (losses) on the related derivatives
|
|
|
-
|
|
|
|
20
|
|
|
|
-
|
|
|
|
20
|
|
|
|
-
|
|
|
|
17
|
|
|
|
6
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on instruments designated at fair value and related
derivatives
|
|
$
|
(48
|
)
|
|
$
|
204
|
|
|
$
|
26
|
|
|
$
|
182
|
|
|
$
|
95
|
|
|
$
|
(443
|
)
|
|
$
|
(9
|
)
|
|
$
|
(357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
Long-
|
|
|
|
|
|
|
|
|
|
|
|
Long-
|
|
|
|
|
|
|
|
|
|
|
|
|
Term
|
|
|
Hybrid
|
|
|
|
|
|
|
|
|
Term
|
|
|
Hybrid
|
|
|
|
|
|
|
Loans
|
|
|
Debt
|
|
|
Instruments
|
|
|
Total
|
|
|
Loans
|
|
|
Debt
|
|
|
Instruments
|
|
|
Total
|
|
|
|
|
|
(in millions)
|
|
|
Interest rate component
|
|
$
|
3
|
|
|
$
|
(187
|
)
|
|
$
|
17
|
|
|
$
|
(167
|
)
|
|
$
|
-
|
|
|
$
|
255
|
|
|
$
|
(243
|
)
|
|
$
|
12
|
|
Credit risk component
|
|
|
(51
|
)
|
|
|
134
|
|
|
|
46
|
|
|
|
129
|
|
|
|
130
|
|
|
|
(214
|
)
|
|
|
64
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
mark-to-market
on financial instruments designated at fair value
|
|
|
(48
|
)
|
|
|
(53
|
)
|
|
|
63
|
|
|
|
(38
|
)
|
|
|
130
|
|
|
|
41
|
|
|
|
(179
|
)
|
|
|
(8
|
)
|
Mark-to-market
on the related derivatives
|
|
|
(1
|
)
|
|
|
250
|
|
|
|
(24
|
)
|
|
|
225
|
|
|
|
-
|
|
|
|
(467
|
)
|
|
|
257
|
|
|
|
(210
|
)
|
Net realized gain (losses) on the related derivatives
|
|
|
-
|
|
|
|
41
|
|
|
|
-
|
|
|
|
41
|
|
|
|
-
|
|
|
|
31
|
|
|
|
(59
|
)
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on instruments designated at fair value and related
derivatives
|
|
$
|
(49
|
)
|
|
$
|
238
|
|
|
$
|
39
|
|
|
$
|
228
|
|
|
$
|
130
|
|
|
$
|
(395
|
)
|
|
$
|
19
|
|
|
$
|
(246
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
HSBC USA Inc.
11. Income
Taxes
The following table presents our effective tax rates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory federal income tax rate
|
|
$
|
148
|
|
|
|
35.0
|
%
|
|
$
|
(106
|
)
|
|
|
(35.0
|
)%
|
Increase (decrease) in rate resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local taxes, net of federal benefit
|
|
|
5
|
|
|
|
1.2
|
|
|
|
4
|
|
|
|
1.3
|
|
Sale of minority stock interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Valuation allowance on deferred tax assets
|
|
|
(12
|
)
|
|
|
(2.7
|
)
|
|
|
70
|
|
|
|
23.1
|
|
Tax exempt income
|
|
|
(5
|
)
|
|
|
(1.3
|
)
|
|
|
(4
|
)
|
|
|
(1.3
|
)
|
Low income housing and other tax credits
|
|
|
(22
|
)
|
|
|
(5.2
|
)
|
|
|
(16
|
)
|
|
|
(5.1
|
)
|
Effects of foreign operations
|
|
|
14
|
|
|
|
3.3
|
|
|
|
-
|
|
|
|
-
|
|
Uncertain tax provision
|
|
|
(2
|
)
|
|
|
(.5
|
)
|
|
|
1
|
|
|
|
.4
|
|
State rate change effect on net deferred tax assets
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
(.4
|
)
|
Other
|
|
|
(2
|
)
|
|
|
(.6
|
)
|
|
|
(1
|
)
|
|
|
(.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
$
|
124
|
|
|
|
29.2
|
%
|
|
$
|
(53
|
)
|
|
|
(17.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory federal income tax rate
|
|
$
|
454
|
|
|
|
35.0
|
%
|
|
$
|
(123
|
)
|
|
|
(35.0
|
)%
|
Increase (decrease) in rate resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local taxes, net of federal benefit
|
|
|
8
|
|
|
|
.6
|
|
|
|
9
|
|
|
|
2.7
|
|
Sale of minority stock interest
|
|
|
-
|
|
|
|
-
|
|
|
|
74
|
|
|
|
21.1
|
|
Valuation allowance on deferred tax assets
|
|
|
1
|
|
|
|
.1
|
|
|
|
77
|
|
|
|
21.9
|
|
Tax exempt income
|
|
|
(7
|
)
|
|
|
(.5
|
)
|
|
|
(8
|
)
|
|
|
(2.2
|
)
|
Low income housing and other tax credits
|
|
|
(44
|
)
|
|
|
(3.4
|
)
|
|
|
(31
|
)
|
|
|
(8.8
|
)
|
Effects of foreign operations
|
|
|
14
|
|
|
|
1.1
|
|
|
|
-
|
|
|
|
-
|
|
Uncertain tax provision
|
|
|
20
|
|
|
|
1.5
|
|
|
|
(1
|
)
|
|
|
(.3
|
)
|
IRS Audit Effective Settlement
|
|
|
-
|
|
|
|
-
|
|
|
|
(8
|
)
|
|
|
(2.3
|
)
|
State rate change effect on net deferred tax assets
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
.3
|
|
Other
|
|
|
(2
|
)
|
|
|
(.2
|
)
|
|
|
(2
|
)
|
|
|
(.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
$
|
444
|
|
|
|
34.2
|
%
|
|
$
|
(12
|
)
|
|
|
(3.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effective tax rate for the three and six months ended
June 30, 2010 reflects a substantially higher level of
pre-tax income, an increased level of low income housing tax
credits, the impact of a planned liquidation of a foreign
subsidiary and an adjustment of uncertain tax positions. The
effective tax rate for the three and six months ended
June 30, 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
35
HSBC USA Inc.
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
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.
36
HSBC USA Inc.
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
$1.0 billion and $1.7 billion as of June 30, 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 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
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Service cost benefits earned during the period
|
|
$
|
5
|
|
|
$
|
6
|
|
|
$
|
10
|
|
|
$
|
13
|
|
Interest cost on projected benefit obligation
|
|
|
16
|
|
|
|
19
|
|
|
|
33
|
|
|
|
37
|
|
Expected return on assets
|
|
|
(16
|
)
|
|
|
(12
|
)
|
|
|
(31
|
)
|
|
|
(25
|
)
|
Recognized losses
|
|
|
9
|
|
|
|
9
|
|
|
|
18
|
|
|
|
18
|
|
Amortization of prior service cost
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
13
|
|
|
$
|
22
|
|
|
$
|
28
|
|
|
$
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 recognition 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 the 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.
37
HSBC USA Inc.
Components of the net periodic benefit cost for our
postretirement benefits other than pensions are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Service cost benefits earned during the period
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Interest cost
|
|
|
1
|
|
|
|
2
|
|
|
|
2
|
|
|
|
3
|
|
Recognized losses
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
|
Transition amount amortization
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic postretirement benefit cost
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On March 23, 2010, the Patient Protection and Affordable
Care Act was enacted and subsequently amended on March 30,
2010 by the Health Care and Education Reconciliation Act of 2010
(collectively referred to as the Act). The Act is
intended to ensure that more Americans have access to quality,
affordable health care insurance with the provisions of the Act
being phased in beginning in 2010 and continuing for a number of
years. Based on an intensive analysis of the Act, there has been
no impact on our consolidated financial statements for the
period ended June 30, 2010 as it relates to either our
ongoing active employee benefit plans or our postretirement
retiree-only medical plans. We have also performed an analysis
related to the provisions to be implemented in future periods
and based on the Act as currently written, we currently do not
believe there will be a material impact to our financial
position or results of operation in future periods. Should the
provisions of the Act be amended in future periods, the
estimated impact to our financial position or results of
operations in future periods could change.
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:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
(in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
445
|
|
|
$
|
362
|
|
Interest bearing deposits with banks
|
|
|
223
|
|
|
|
198
|
|
Federal funds sold and securities purchased under resale
agreements
|
|
|
719
|
|
|
|
294
|
|
Trading
assets(1)
|
|
|
17,605
|
|
|
|
12,811
|
|
Loans
|
|
|
1,134
|
|
|
|
1,476
|
|
Other
|
|
|
312
|
|
|
|
852
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
20,438
|
|
|
$
|
15,993
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
12,209
|
|
|
$
|
9,519
|
|
Trading
liabilities(1)
|
|
|
19,776
|
|
|
|
16,848
|
|
Short-term borrowings
|
|
|
2,505
|
|
|
|
446
|
|
Other
|
|
|
1,719
|
|
|
|
1,677
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
36,209
|
|
|
$
|
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.
|
38
HSBC USA Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Income/(Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
30
|
|
|
$
|
50
|
|
|
$
|
66
|
|
|
$
|
97
|
|
Interest expense
|
|
|
(12
|
)
|
|
|
(5
|
)
|
|
|
(22
|
)
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
18
|
|
|
$
|
45
|
|
|
$
|
44
|
|
|
$
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HSBC affiliate income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees and commissions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HSBC Finance
|
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
4
|
|
|
$
|
6
|
|
HSBC Markets (USA) Inc. (HMUS)
|
|
|
7
|
|
|
|
7
|
|
|
|
10
|
|
|
|
9
|
|
Other HSBC affiliates
|
|
|
25
|
|
|
|
30
|
|
|
|
46
|
|
|
|
41
|
|
Fees on transfers of refund anticipation loans to HSBC Finance
|
|
|
-
|
|
|
|
1
|
|
|
|
4
|
|
|
|
11
|
|
Other HSBC affiliates income
|
|
|
3
|
|
|
|
4
|
|
|
|
9
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total affiliate income
|
|
$
|
37
|
|
|
$
|
45
|
|
|
$
|
73
|
|
|
$
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Support services from HSBC affiliates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HSBC Finance
|
|
$
|
(165
|
)
|
|
$
|
(184
|
)
|
|
$
|
(389
|
)
|
|
$
|
(373
|
)
|
HMUS
|
|
|
(57
|
)
|
|
|
(66
|
)
|
|
|
(144
|
)
|
|
|
(137
|
)
|
HSBC Technology & Services (USA) Inc.
(HTSU)
|
|
|
(191
|
)
|
|
|
(136
|
)
|
|
|
(363
|
)
|
|
|
(247
|
)
|
Other HSBC affiliates
|
|
|
(45
|
)
|
|
|
(33
|
)
|
|
|
(80
|
)
|
|
|
(85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total support services from HSBC affiliates
|
|
$
|
(458
|
)
|
|
$
|
(419
|
)
|
|
$
|
(976
|
)
|
|
$
|
(842
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation expense with HSBC
|
|
$
|
(11
|
)
|
|
$
|
(15
|
)
|
|
$
|
(22
|
)
|
|
$
|
(33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transactions Conducted with HSBC Finance Corporation
In March 2003, HSBC Holdings plc acquired Household
International, Inc. (Household), the predecessor to
HSBC Finance. A stated reason for the acquisition was to bring
together HSBC, one of the worlds most successful deposit
gatherers, with Household, one of the worlds largest
generators of assets. In connection with the acquisition, HSBC
also announced its expectation that funding costs for the
Household business would be lower as a result of the financial
strength and funding diversity of HSBC. As a result, we work
with our affiliates under the oversight of HSBC North America to
maximize opportunities and efficiencies in HSBCs
operations in the U.S., including the funding efficiencies
contemplated at the time of the Household acquisition. The
purchases of the private label portfolio, the GM and UP
Portfolios and certain auto finance loans from HSBC Finance as
discussed in more detail below are indicative of such
efficiencies contemplated.
|
|
|
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
|
39
HSBC USA Inc.
|
|
|
$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 these loans
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.
|
|
|
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 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 and six months ended
June 30, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
$
|
12.6
|
|
|
$
|
.5
|
|
|
$
|
4.5
|
|
|
$
|
4.5
|
|
|
$
|
1.9
|
|
|
$
|
-
|
|
|
$
|
1.7
|
|
|
$
|
25.7
|
|
December 31, 2009
|
|
|
15.0
|
|
|
|
.6
|
|
|
|
5.4
|
|
|
|
5.3
|
|
|
|
2.1
|
|
|
|
2.1
|
|
|
|
1.8
|
|
|
|
32.3
|
|
Total loans purchased on a daily basis from HSBC Finance
during:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2010
|
|
|
3.4
|
|
|
|
-
|
|
|
|
3.5
|
|
|
|
.8
|
|
|
|
1.0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8.7
|
|
Three months ended June 30, 2009
|
|
|
3.8
|
|
|
|
-
|
|
|
|
3.7
|
|
|
|
1.0
|
|
|
|
1.1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9.6
|
|
Six months ended June 30, 2010
|
|
|
6.4
|
|
|
|
-
|
|
|
|
6.6
|
|
|
|
1.5
|
|
|
|
2.0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16.5
|
|
Six months ended June 30, 2009
|
|
|
7.4
|
|
|
|
-
|
|
|
|
7.1
|
|
|
|
1.8
|
|
|
|
2.1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18.4
|
|
|
|
|
(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
$159 million and $323 million during the three and six
months ended June 30, 2010, respectively, compared to
$178 million and $360 million during the three and six
months ended June 30, 2009, respectively.
|
|
|
The GM and UP credit card receivables as well as the private
label credit card receivables 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
|
40
HSBC USA Inc.
|
|
|
mortgage customers. Additionally, we are currently performing
certain functions for all North America mortgage customers where
these functions had been previously provided separately by each
entity. During the three and six months ended June 30,
2010, we paid $1 million and $2 million, respectively,
for services we received from HSBC Finance and received
$2 million and $4 million, respectively, for services
we provided to HSBC Finance.
|
|
|
|
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 more fully
discussed below, as well as other operational and administrative
support. Fees paid for these services totaled $165 million
and $389 million during the three and six months ended
June 30, 2010, respectively. During the three and six
months ended June 30, 2009, fees paid for these services
totaled $184 million and $373 million, 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 a
single third party tax preparer which is 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 $9.4 billion and
$9.0 billion of loans during the six months ended
June 30, 2010 and 2009, respectively, of which
$3.1 billion and $9.0 billion, respectively, were
transferred to HSBC Finance during these periods. During the six
months ended June 30, 2010 and 2009, we received fees of
$4 million and $11 million, respectively, for the
loans we originated and sold to HSBC Finance. Fees earned on the
loans retained on balance sheet and fees paid to HSBC Finance
for servicing and assuming the credit risk for these loans
totaled $65 million and $58 million, respectively,
during the six months ended June 30, 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
June 30, 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 June 30, 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
June 30, 2010 and December 31, 2009.
|
|
|
We service a portfolio of residential mortgage loans owned by
HSBC Finance with an outstanding principal balance of
$1.3 billion and $1.5 billion at June 30, 2010
and December 31, 2009, respectively. The related servicing
fee income was $.3 million and $.6 million during the
three and six months ended June 30, 2010, respectively,
which is included in residential mortgage banking revenue in the
consolidated statement of income (loss). During the three and
six months ended June 30, 2009, the related servicing fee
income totaled $3 million and $5 million, respectively.
|
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 $3.3 billion at
June 30, 2010 and $4.1 billion at December 31,
2009, of which $1.0 billion was outstanding at both
|
41
HSBC USA Inc.
|
|
|
June 30, 2010 and December 31, 2009. Interest income
on these loans and lines totaled $5 million and
$10 million during the three and six months ended
June 30, 2010, respectively, compared to $9 million
and $20 million during the three and six months ended
June 30, 2009, respectively.
|
Other
Transactions with HSBC Affiliates
|
|
|
In June 2010, we sold certain securities with a book value of
$302 million to HSBC Bank plc and recognized a pre-tax loss
of $40 million.
|
|
|
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. Interest expense on this note
totaled $4 million and $8 million during the three and
six month periods ended June 30, 2010, respectively.
|
|
|
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.
|
|
|
We have an unused line of credit with HSBC Bank plc of
$2.5 billion at June 30, 2010 and December 31,
2009.
|
|
|
We have an unused line of credit with HSBC North America Inc.
(HNAI) of $150 million at June 30, 2010
and December 31, 2009.
|
|
|
We have extended loans and lines of credit to various other HSBC
affiliates totaling $1.0 billion at June 30, 2010 and
$1.7 billion at December 31, 2009, of which
$15 million and $527 million was outstanding at
June 30, 2010 and December 31, 2009, respectively.
Interest income on these lines totaled $2 million and
$5 million during the three and six months ended
June 30, 2010, respectively. During the three and six
months ended June 30, 2009, interest income on these lines
totaled $3 million and $6 million, respectively.
|
|
|
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 June 30, 2010 we
held $55 million of commercial paper issued by an HSBC
affiliate sponsored asset backed commercial paper conduit. At
December 31, 2009, no ABCP issued by such conduits 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
$762.3 billion and $673.3 billion at June 30,
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
$17.6 billion and $12.8 billion at June 30, 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 $51 million and $70 million at
June 30, 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.
|
42
HSBC USA Inc.
|
|
|
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 $22 million during
the three and six months ended June 30, 2010, respectively.
During the three and six months ended June 30, 2009, our
share of the expense of these plans totaled $15 million and
$33 million, respectively and is included in Salaries and
employee benefits in the consolidated statement of income (loss).
|
|
|
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 and
$14 million during the three and six months ended
June 30, 2010 are included as a component of Support
services from HSBC affiliates in the consolidated statement of
income (loss). Billing for these services was processed by HTSU.
|
14. Regulatory
Capital
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 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.
|
|
$
|
19,488
|
|
|
|
10.00
|
%
|
|
|
15.35
|
%
|
|
$
|
19,087
|
|
|
|
10.00
|
%
|
|
|
14.19
|
%
|
HSBC Bank USA
|
|
|
19,982
|
|
|
|
10.00
|
|
|
|
15.93
|
|
|
|
19,532
|
|
|
|
10.00
|
|
|
|
14.81
|
|
Tier 1 capital ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HSBC USA Inc.
|
|
|
13,691
|
|
|
|
6.00
|
|
|
|
10.79
|
(3)
|
|
|
12,934
|
|
|
|
6.00
|
|
|
|
9.61
|
|
HSBC Bank USA
|
|
|
14,154
|
|
|
|
6.00
|
|
|
|
11.28
|
(3)
|
|
|
13,354
|
|
|
|
6.00
|
|
|
|
10.13
|
|
Tier 1 leverage ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HSBC USA Inc.
|
|
|
13,691
|
|
|
|
3.00
|
(2)
|
|
|
7.34
|
|
|
|
12,934
|
|
|
|
3.00
|
(2)
|
|
|
7.59
|
|
HSBC Bank USA
|
|
|
14,154
|
|
|
|
5.00
|
|
|
|
7.71
|
|
|
|
13,354
|
|
|
|
5.00
|
|
|
|
8.07
|
|
Risk weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HSBC USA Inc.
|
|
|
126,916
|
(3)
|
|
|
|
|
|
|
|
|
|
|
134,553
|
|
|
|
|
|
|
|
|
|
HSBC Bank USA
|
|
|
125,467
|
(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
June 30, 2010, our risk weighted assets would have been
higher by approximately $2.4 billion which would not have
had a significant impact to our Tier 1 capital ratio.
|
We did not receive any capital contributions from our immediate
parent, HNAI, during the first half of 2010.
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 defined by the
Federal Reserve Act. These capital requirements, which require a
risk-based capital charge of
43
HSBC USA Inc.
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 half of 2010, HSBC Bank USA sold low-quality
auto finance loans with a net book value of approximately
$178 million to a non-bank subsidiary of HSBC USA Inc. to
reduce the capital requirement associated with these assets. In
2009, the net book value of such sales totaled
$455 million. Capital ratios and amounts at June 30,
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 June 30, 2010 and
December 31, 2009, deferred tax assets of $292 million
and $331 million, respectively, were excluded in the
computation of regulatory capital.
15. 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.
44
HSBC USA Inc.
Reconciliation of our IFRS Management Basis segment results to
the U.S. GAAP consolidated totals are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IFRSs Consolidated Amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global
|
|
|
|
|
|
|
|
|
Adjustments/
|
|
|
|
|
|
(2)
|
|
|
(3)
|
|
|
U.S. GAAP
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking and
|
|
|
|
|
|
|
|
|
Reconciling
|
|
|
|
|
|
IFRSs
|
|
|
IFRSs
|
|
|
Consolidated
|
|
|
|
PFS
|
|
|
CF
|
|
|
CMB
|
|
|
Markets
|
|
|
PB
|
|
|
Other
|
|
|
Items
|
|
|
Total
|
|
|
Adjustments
|
|
|
Reclassifications
|
|
|
Totals
|
|
|
|
|
|
(in millions)
|
|
|
Three months ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
238
|
|
|
$
|
484
|
|
|
$
|
176
|
|
|
$
|
143
|
|
|
$
|
45
|
|
|
$
|
(1
|
)
|
|
$
|
(5
|
)
|
|
$
|
1,080
|
|
|
$
|
(13
|
)
|
|
$
|
66
|
|
|
$
|
1,133
|
|
Other operating income
|
|
|
17
|
|
|
|
36
|
|
|
|
96
|
|
|
|
303
|
|
|
|
35
|
|
|
|
216
|
|
|
|
5
|
|
|
|
708
|
|
|
|
(114
|
)
|
|
|
146
|
|
|
|
740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income (loss)
|
|
|
255
|
|
|
|
520
|
|
|
|
272
|
|
|
|
446
|
|
|
|
80
|
|
|
|
215
|
|
|
|
-
|
|
|
|
1,788
|
|
|
|
(127
|
)
|
|
|
212
|
|
|
|
1,873
|
|
Loan impairment charges
|
|
|
29
|
|
|
|
355
|
|
|
|
47
|
|
|
|
(72
|
)
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
357
|
|
|
|
76
|
|
|
|
23
|
|
|
|
456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
226
|
|
|
|
165
|
|
|
|
225
|
|
|
|
518
|
|
|
|
80
|
|
|
|
217
|
|
|
|
-
|
|
|
|
1,431
|
|
|
|
(203
|
)
|
|
|
189
|
|
|
|
1,417
|
|
Operating
expenses(1)
|
|
|
316
|
|
|
|
28
|
|
|
|
171
|
|
|
|
198
|
|
|
|
62
|
|
|
|
13
|
|
|
|
-
|
|
|
|
788
|
|
|
|
16
|
|
|
|
189
|
|
|
|
993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax expense
|
|
$
|
(90
|
)
|
|
$
|
137
|
|
|
$
|
54
|
|
|
$
|
320
|
|
|
$
|
18
|
|
|
$
|
204
|
|
|
$
|
-
|
|
|
$
|
643
|
|
|
$
|
(219
|
)
|
|
$
|
-
|
|
|
$
|
424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at end of period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
20,903
|
|
|
$
|
26,199
|
|
|
$
|
15,752
|
|
|
$
|
182,683
|
|
|
$
|
5,051
|
|
|
$
|
18
|
|
|
$
|
-
|
|
|
$
|
250,606
|
|
|
$
|
(63,964
|
)
|
|
$
|
(201
|
)
|
|
$
|
186,441
|
|
Total loans, net
|
|
|
16,464
|
|
|
|
23,956
|
|
|
|
14,091
|
|
|
|
33,934
|
|
|
|
4,233
|
|
|
|
-
|
|
|
|
-
|
|
|
|
92,678
|
|
|
|
(1,909
|
)
|
|
|
(20,058
|
)
|
|
|
70,711
|
|
Goodwill
|
|
|
876
|
|
|
|
-
|
|
|
|
368
|
|
|
|
497
|
|
|
|
326
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,067
|
|
|
|
580
|
|
|
|
-
|
|
|
|
2,647
|
|
Total deposits
|
|
|
47,991
|
|
|
|
47
|
|
|
|
23,120
|
|
|
|
35,253
|
|
|
|
11,324
|
|
|
|
-
|
|
|
|
-
|
|
|
|
117,735
|
|
|
|
(3,073
|
)
|
|
|
6,901
|
|
|
|
121,563
|
|
Three months ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
240
|
|
|
$
|
520
|
|
|
$
|
180
|
|
|
$
|
222
|
|
|
$
|
46
|
|
|
$
|
(2
|
)
|
|
$
|
(3
|
)
|
|
$
|
1,203
|
|
|
$
|
3
|
|
|
$
|
71
|
|
|
$
|
1,277
|
|
Other operating income
|
|
|
43
|
|
|
|
84
|
|
|
|
82
|
|
|
|
288
|
|
|
|
29
|
|
|
|
(498
|
)
|
|
|
3
|
|
|
|
31
|
|
|
|
449
|
|
|
|
96
|
|
|
|
576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income (loss)
|
|
|
283
|
|
|
|
604
|
|
|
|
262
|
|
|
|
510
|
|
|
|
75
|
|
|
|
(500
|
)
|
|
|
-
|
|
|
|
1,234
|
|
|
|
452
|
|
|
|
167
|
|
|
|
1,853
|
|
Loan impairment charges
|
|
|
172
|
|
|
|
477
|
|
|
|
90
|
|
|
|
197
|
|
|
|
7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
943
|
|
|
|
169
|
|
|
|
(45
|
)
|
|
|
1,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111
|
|
|
|
127
|
|
|
|
172
|
|
|
|
313
|
|
|
|
68
|
|
|
|
(500
|
)
|
|
|
-
|
|
|
|
291
|
|
|
|
283
|
|
|
|
212
|
|
|
|
786
|
|
Operating
expenses(1)
|
|
|
335
|
|
|
|
37
|
|
|
|
158
|
|
|
|
236
|
|
|
|
63
|
|
|
|
38
|
|
|
|
-
|
|
|
|
867
|
|
|
|
9
|
|
|
|
212
|
|
|
|
1,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax expense
|
|
$
|
(224
|
)
|
|
$
|
90
|
|
|
$
|
14
|
|
|
$
|
77
|
|
|
$
|
5
|
|
|
$
|
(538
|
)
|
|
$
|
-
|
|
|
$
|
(576
|
)
|
|
$
|
274
|
|
|
$
|
-
|
|
|
$
|
(302
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at end of period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
22,338
|
|
|
$
|
31,837
|
|
|
$
|
17,954
|
|
|
$
|
172,779
|
|
|
$
|
5,830
|
|
|
$
|
104
|
|
|
$
|
-
|
|
|
$
|
250,842
|
|
|
$
|
(82,409
|
)
|
|
$
|
498
|
|
|
$
|
168,931
|
|
Total loans, net
|
|
|
17,572
|
|
|
|
29,547
|
|
|
|
16,499
|
|
|
|
26,171
|
|
|
|
4,617
|
|
|
|
-
|
|
|
|
-
|
|
|
|
94,406
|
|
|
|
(3,802
|
)
|
|
|
(8,475
|
)
|
|
|
82,129
|
|
Goodwill
|
|
|
876
|
|
|
|
-
|
|
|
|
368
|
|
|
|
497
|
|
|
|
326
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,067
|
|
|
|
580
|
|
|
|
-
|
|
|
|
2,647
|
|
Total deposits
|
|
|
47,632
|
|
|
|
46
|
|
|
|
21,639
|
|
|
|
28,429
|
|
|
|
10,667
|
|
|
|
-
|
|
|
|
-
|
|
|
|
108,413
|
|
|
|
(3,620
|
)
|
|
|
3,802
|
|
|
|
108,595
|
|
Six months ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
479
|
|
|
$
|
1,007
|
|
|
$
|
364
|
|
|
$
|
285
|
|
|
$
|
91
|
|
|
$
|
(10
|
)
|
|
$
|
(13
|
)
|
|
$
|
2,203
|
|
|
$
|
46
|
|
|
$
|
84
|
|
|
$
|
2,333
|
|
Other operating income
|
|
|
63
|
|
|
|
53
|
|
|
|
249
|
|
|
|
741
|
|
|
|
69
|
|
|
|
232
|
|
|
|
13
|
|
|
|
1,420
|
|
|
|
(87
|
)
|
|
|
358
|
|
|
|
1,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income (loss)
|
|
|
542
|
|
|
|
1,060
|
|
|
|
613
|
|
|
|
1,026
|
|
|
|
160
|
|
|
|
222
|
|
|
|
-
|
|
|
|
3,623
|
|
|
|
(41
|
)
|
|
|
442
|
|
|
|
4,024
|
|
Loan impairment charges
|
|
|
26
|
|
|
|
565
|
|
|
|
48
|
|
|
|
(148
|
)
|
|
|
(11
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
480
|
|
|
|
178
|
|
|
|
9
|
|
|
|
667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
516
|
|
|
|
495
|
|
|
|
565
|
|
|
|
1,174
|
|
|
|
171
|
|
|
|
222
|
|
|
|
-
|
|
|
|
3,143
|
|
|
|
(219
|
)
|
|
|
433
|
|
|
|
3,357
|
|
Operating
expenses(1)
|
|
|
587
|
|
|
|
55
|
|
|
|
321
|
|
|
|
407
|
|
|
|
117
|
|
|
|
30
|
|
|
|
-
|
|
|
|
1,517
|
|
|
|
109
|
|
|
|
433
|
|
|
|
2,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax expense
|
|
$
|
(71
|
)
|
|
$
|
440
|
|
|
$
|
244
|
|
|
$
|
767
|
|
|
$
|
54
|
|
|
$
|
192
|
|
|
$
|
-
|
|
|
$
|
1,626
|
|
|
$
|
(328
|
)
|
|
$
|
-
|
|
|
$
|
1,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
427
|
|
|
$
|
1,049
|
|
|
$
|
356
|
|
|
$
|
454
|
|
|
$
|
88
|
|
|
$
|
-
|
|
|
$
|
(14
|
)
|
|
$
|
2,360
|
|
|
$
|
106
|
|
|
$
|
159
|
|
|
$
|
2,625
|
|
Other operating income
|
|
|
83
|
|
|
|
165
|
|
|
|
163
|
|
|
|
509
|
|
|
|
62
|
|
|
|
(343
|
)
|
|
|
14
|
|
|
|
653
|
|
|
|
548
|
|
|
|
125
|
|
|
|
1,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income (loss)
|
|
|
510
|
|
|
|
1,214
|
|
|
|
519
|
|
|
|
963
|
|
|
|
150
|
|
|
|
(343
|
)
|
|
|
-
|
|
|
|
3,013
|
|
|
|
654
|
|
|
|
284
|
|
|
|
3,951
|
|
Loan impairment charges
|
|
|
372
|
|
|
|
1,031
|
|
|
|
171
|
|
|
|
426
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,004
|
|
|
|
382
|
|
|
|
(145
|
)
|
|
|
2,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138
|
|
|
|
183
|
|
|
|
348
|
|
|
|
537
|
|
|
|
146
|
|
|
|
(343
|
)
|
|
|
-
|
|
|
|
1,009
|
|
|
|
272
|
|
|
|
429
|
|
|
|
1,710
|
|
Operating
expenses(1)
|
|
|
630
|
|
|
|
51
|
|
|
|
312
|
|
|
|
435
|
|
|
|
122
|
|
|
|
52
|
|
|
|
-
|
|
|
|
1,602
|
|
|
|
29
|
|
|
|
429
|
|
|
|
2,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax expense
|
|
$
|
(492
|
)
|
|
$
|
132
|
|
|
$
|
36
|
|
|
$
|
102
|
|
|
$
|
24
|
|
|
$
|
(395
|
)
|
|
$
|
-
|
|
|
$
|
(593
|
)
|
|
$
|
243
|
|
|
$
|
-
|
|
|
$
|
(350
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Expenses for the segments include
fully apportioned corporate overhead expenses.
|
|
(2) |
|
IFRSs Adjustments consist of the
accounting differences between U.S. GAAP and IFRSs which have
been described more fully below.
|
|
(3) |
|
Represents differences in balance
sheet and income statement presentation between IFRSs and U.S.
GAAP.
|
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
45
HSBC USA Inc.
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
Effective interest rate The calculation of
effective interest rates under IFRS 39, Financial
Instruments: Recognition and Measurement (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. Under U.S. GAAP, prepayment
penalties are generally recognized as received. U.S. GAAP
also includes interest income on loans held for sale which is
included in other revenues for IFRSs.
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 estimated 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.
Derivative interest expense 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.
Other
operating income (Total other revenues)
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
originated with the intent to sell to be classified 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 related to receivables held for
sale are reported in net interest income or trading revenue.
Under U.S. GAAP, the income 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.
46
HSBC USA Inc.
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).
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 decline in value
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
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. 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.
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
47
HSBC USA Inc.
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 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
Customer loans (Loans) On an IFRSs basis
loans designated as held for sale at the time of origination and
accrued interest are classified as trading assets. However, the
accounting requirements governing when receivables previously
held for investment are transferred to a held for sale category
are more stringent under IFRSs than under U.S. GAAP.
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.
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
$3.2 billion and $3.5 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 was no change to the way we
calculate risk weighted assets against the Bryant Park facility
for the first half of 2010 and as a result, there is also no
impact to our Tier 1 capital ratios at June 30, 2010.
Had we fully transitioned to the Risk Based Capital requirements
at June 30, 2010, our risk weighted assets would have been
higher by approximately $2.4 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
48
HSBC USA Inc.
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; (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 June 30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
Consolidated
|
|
|
Consolidated
|
|
|
Consolidated
|
|
|
Consolidated
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Asset-backed commercial paper conduit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity securities
|
|
$
|
1,156
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Loans
|
|
|
1,598
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other assets
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Short-term borrowings
|
|
|
-
|
|
|
|
3,191
|
|
|
|
-
|
|
|
|
-
|
|
Other liabilities
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
2,756
|
|
|
|
3,193
|
|
|
|
-
|
|
|
|
-
|
|
Securitization vehicles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
13,355
|
|
|
|
-
|
|
|
|
15,953
|
|
|
|
-
|
|
Available-for-sale securities
|
|
|
1,276
|
|
|
|
-
|
|
|
|
1,138
|
|
|
|
-
|
|
Other assets
|
|
|
207
|
|
|
|
-
|
|
|
|
168
|
|
|
|
-
|
|
Long-term debt
|
|
|
-
|
|
|
|
2,187
|
|
|
|
-
|
|
|
|
2,985
|
|
Other liabilities
|
|
|
-
|
|
|
|
1,009
|
|
|
|
-
|
|
|
|
1,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
14,838
|
|
|
|
3,196
|
|
|
|
17,259
|
|
|
|
4,268
|
|
Low income housing limited liability partnership:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
539
|
|
|
|
-
|
|
|
|
585
|
|
|
|
-
|
|
Long term debt
|
|
|
-
|
|
|
|
55
|
|
|
|
-
|
|
|
|
55
|
|
Other liabilities
|
|
|
-
|
|
|
|
106
|
|
|
|
-
|
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
539
|
|
|
|
161
|
|
|
|
585
|
|
|
|
190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,133
|
|
|
$
|
6,550
|
|
|
$
|
17,844
|
|
|
$
|
4,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
HSBC USA Inc.
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 guidance in 2010, 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
private label and other 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, consolidate
them.
At June 30, 2010 and December 31, 2009, the
consolidated assets of these trusts were $14.8 billion and
$17.3 billion, respectively. Debt securities issued by
these VIEs are reported as secured financings in long-term debt.
Certain 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
June 30, 2010 and December 31, 2009 because we were
not the primary beneficiary. The following table provides
additional
50
HSBC USA Inc.
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 June 30, 2010 and
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 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
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
13,851
|
|
|
$
|
1,424
|
|
|
$
|
10,485
|
|
|
$
|
5,050
|
|
Structured note vehicles
|
|
|
178
|
|
|
|
122
|
|
|
|
7,933
|
|
|
|
960
|
|
|
|
7,890
|
|
|
|
569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
178
|
|
|
$
|
122
|
|
|
$
|
21,784
|
|
|
$
|
2,384
|
|
|
$
|
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.
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 $1.4 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 Bryant Park 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 June 30, 2010, we
recorded approximately $169 million of trading assets and
$196 million of long-term
51
HSBC USA Inc.
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.
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, Contingencies and Pledged Assets
Guarantee Arrangements 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 June 30, 2010 and December 31,
2009. Following the table is a description of the various
arrangements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
Carrying
|
|
|
Notional/Maximum
|
|
|
Carrying
|
|
|
Notional/Maximum
|
|
|
|
Value
|
|
|
Exposure to Loss
|
|
|
Value
|
|
|
Exposure to Loss
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Credit
derivatives(1)(2)
|
|
$
|
(8,076
|
)
|
|
$
|
381,699
|
|
|
$
|
(5,751
|
)
|
|
$
|
387,225
|
|
Financial standby letters of credit, net of
participations(3)(4)
|
|
|
-
|
|
|
|
4,381
|
|
|
|
-
|
|
|
|
4,545
|
|
Performance (non-financial) guarantees
|
|
|
-
|
|
|
|
2,994
|
|
|
|
-
|
|
|
|
3,100
|
|
Liquidity asset purchase
agreements(4)
|
|
|
|
|
|
|
1,424
|
|
|
|
-
|
|
|
|
6,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(8,076
|
)
|
|
$
|
390,498
|
|
|
$
|
(5,751
|
)
|
|
$
|
401,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $51.9 billion and
$57.3 billion issued for the benefit of HSBC affiliates at
June 30, 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 $745 million and
$774 million issued for the benefit of HSBC affiliates at
June 30, 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.
|
52
HSBC USA Inc.
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. 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 June 30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
Carrying (Fair)
|
|
|
|
|
|
Carrying (Fair)
|
|
|
|
|
|
|
Value
|
|
|
Notional
|
|
|
Value
|
|
|
Notional
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Sell-protection credit derivative positions
|
|
$
|
(8,076
|
)
|
|
$
|
(381,699
|
)
|
|
$
|
(5,751
|
)
|
|
$
|
(387,225
|
)
|
Buy-protection credit derivative positions
|
|
|
8,986
|
|
|
|
378,514
|
|
|
|
6,693
|
|
|
|
381,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
position(1)
|
|
$
|
910
|
|
|
$
|
(3,185
|
)
|
|
$
|
942
|
|
|
$
|
(5,967
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Positions are presented net in the
table above to provide a complete analysis of our risk exposure
and depict the way we manage our credit derivative portfolio.
The offset of the sell-protection credit derivatives against the
buy-protection
credit derivatives may not be legally binding in the absence of
master netting agreements with the same counterparty.
|
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 June 30, 2010, the total amount of
outstanding financial standby letters of credit (net of
participations) and performance guarantees were
$4.4 billion and $3.0 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 $53 million and $48 million at
June 30,
53
HSBC USA Inc.
2010 and December 31, 2009, respectively. Also included in
other liabilities is an allowance for credit losses on unfunded
standby letters of credit of $29 million and
$27 million at June 30, 2010 and December 31,
2009.
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 June 30, 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
|
|
|
3.2
|
|
|
$
|
152,487
|
|
|
$
|
70,722
|
|
|
$
|
223,209
|
|
Structured CDS
|
|
|
3.0
|
|
|
|
75,262
|
|
|
|
5,338
|
|
|
|
80,600
|
|
Index credit derivatives
|
|
|
3.8
|
|
|
|
63,546
|
|
|
|
1,930
|
|
|
|
65,476
|
|
Total return swaps
|
|
|
8.6
|
|
|
|
12,094
|
|
|
|
320
|
|
|
|
12,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
|
|
303,389
|
|
|
|
78,310
|
|
|
|
381,699
|
|
Standby Letters of
Credit(2)
|
|
|
1.1
|
|
|
|
7,080
|
|
|
|
295
|
|
|
|
7,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
310,469
|
|
|
$
|
78,605
|
|
|
$
|
389,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
A non-investment grade rating of a referenced obligor has a
negative impact to the fair value of the credit derivative and
increases the likelihood that we will be required to perform
under the credit derivative contract. We employ market-based
parameters and, where possible, use the observable credit
spreads of the referenced obligors as measurement inputs in
determining the fair value of the credit derivatives. We believe
that such market parameters are more indicative of the current
status of payment/performance risk than external ratings by the
rating agencies which may not be forward-looking in nature and,
as a result, lag behind those market-based indicators.
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 June 30, 2010 and
December 31, 2009, we have issued $1.4 billion and
54
HSBC USA Inc.
$6.8 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 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 June 30, 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 $205 million and
$66 million as of June 30, 2010 and December 31,
2009, respectively. The increase from year-end was due to an
increase 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 $9 million
during 2009. In May 2010, Visa funded an additional
$500 million into the escrow account and we reduced our
liability by an additional $6 million in the second quarter
of 2010. At June 30, 2010, the contingent liability
recorded was $19 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.
Contingencies In connection with the resolution of
ongoing regulatory and governmental examinations and inquiries,
it is likely we will be subject to some form of formal
enforcement action concerning processes or governance relating
to the subject areas, which may include a written agreement or a
cease and desist order requiring additional remedial measures
and further enhancements to our Bank Secrecy Act and Anti-Money
Laundering policies and procedures. If we are found to have
violated the law, relevant authorities have the power to
55
HSBC USA Inc.
impose civil money penalties, fines and other financial
penalties. We are unable at this time to determine the terms on
which these matters will be resolved, the timing of any formal
enforcement action, or the amount of fines or penalties, if any,
that may be imposed by the regulators or agencies, and, as a
result, no accrual for such costs has been recorded at
June 30, 2010.
Pledged Assets Pledged assets included in the
consolidated balance sheet are summarized in the following table.
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Interest bearing deposits with banks
|
|
$
|
1,431
|
|
|
$
|
1,496
|
|
Trading
assets(1)
|
|
|
588
|
|
|
|
708
|
|
Securities
available-for-sale(2)
|
|
|
14,964
|
|
|
|
11,416
|
|
Securities held to
maturity(3)
|
|
|
1,504
|
|
|
|
457
|
|
Loans(4)
|
|
|
4,566
|
|
|
|
3,933
|
|
Other
assets(5)
|
|
|
4,890
|
|
|
|
6,459
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
27,943
|
|
|
$
|
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.
|
|
(3) |
|
Securities held to maturity include
federal home loan bank collateral at June 30, 2010 and
December 31, 2009, as well as the investment securities of
a consolidated asset backed commercial paper conduit at
June 30, 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
June 30, 2010 loans also include the loans of a
consolidated asset backed commercial paper conduit that
collateralize the conduits outstanding commercial paper.
|
|
(5) |
|
Other assets primarily 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
are recognized at the end of each reporting period.
56
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 June 30, 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
June 30, 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
|
|
$
|
727
|
|
|
$
|
126
|
|
|
$
|
-
|
|
|
$
|
853
|
|
|
$
|
-
|
|
|
$
|
853
|
|
Collateralized debt obligations
|
|
|
-
|
|
|
|
-
|
|
|
|
791
|
|
|
|
791
|
|
|
|
-
|
|
|
|
791
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
-
|
|
|
|
45
|
|
|
|
560
|
|
|
|
605
|
|
|
|
-
|
|
|
|
605
|
|
Home equity
|
|
|
-
|
|
|
|
-
|
|
|
|
32
|
|
|
|
32
|
|
|
|
-
|
|
|
|
32
|
|
Student loans
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
|
|
5
|
|
Other
|
|
|
-
|
|
|
|
4
|
|
|
|
13
|
|
|
|
17
|
|
|
|
-
|
|
|
|
17
|
|
Corporate and other domestic debt securities
|
|
|
-
|
|
|
|
750
|
|
|
|
717
|
|
|
|
1,467
|
|
|
|
-
|
|
|
|
1,467
|
|
Debt Securities issued by foreign entities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
-
|
|
|
|
311
|
|
|
|
197
|
|
|
|
508
|
|
|
|
-
|
|
|
|
508
|
|
Government
|
|
|
-
|
|
|
|
430
|
|
|
|
-
|
|
|
|
430
|
|
|
|
-
|
|
|
|
430
|
|
Equity securities
|
|
|
-
|
|
|
|
28
|
|
|
|
19
|
|
|
|
47
|
|
|
|
-
|
|
|
|
47
|
|
Precious metals trading
|
|
|
-
|
|
|
|
16,388
|
|
|
|
-
|
|
|
|
16,388
|
|
|
|
-
|
|
|
|
16,388
|
|
Derivatives(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
210
|
|
|
|
35,990
|
|
|
|
-
|
|
|
|
36,200
|
|
|
|
-
|
|
|
|
36,200
|
|
Foreign exchange contracts
|
|
|
4
|
|
|
|
14,578
|
|
|
|
277
|
|
|
|
14,859
|
|
|
|
-
|
|
|
|
14,859
|
|
Equity contracts
|
|
|
3
|
|
|
|
1,377
|
|
|
|
44
|
|
|
|
1,424
|
|
|
|
-
|
|
|
|
1,424
|
|
Precious metals contracts
|
|
|
9
|
|
|
|
725
|
|
|
|
-
|
|
|
|
734
|
|
|
|
-
|
|
|
|
734
|
|
Credit contracts
|
|
|
-
|
|
|
|
14,411
|
|
|
|
2,875
|
|
|
|
17,286
|
|
|
|
-
|
|
|
|
17,286
|
|
Other
|
|
|
5
|
|
|
|
5
|
|
|
|
12
|
|
|
|
22
|
|
|
|
-
|
|
|
|
22
|
|
Derivatives netting
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(61,930
|
)
|
|
|
(61,930
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
231
|
|
|
|
67,086
|
|
|
|
3,208
|
|
|
|
70,525
|
|
|
|
(61,930
|
)
|
|
|
8,595
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury. U.S. Government agencies and sponsored enterprises
|
|
|
12,485
|
|
|
|
17,138
|
|
|
|
-
|
|
|
|
29,623
|
|
|
|
-
|
|
|
|
29,623
|
|
Obligations of U.S. states and political subdivisions
|
|
|
-
|
|
|
|
627
|
|
|
|
-
|
|
|
|
627
|
|
|
|
-
|
|
|
|
627
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
-
|
|
|
|
23
|
|
|
|
274
|
|
|
|
297
|
|
|
|
-
|
|
|
|
297
|
|
Commercial mortgages
|
|
|
-
|
|
|
|
575
|
|
|
|
10
|
|
|
|
585
|
|
|
|
-
|
|
|
|
585
|
|
Home equity
|
|
|
-
|
|
|
|
172
|
|
|
|
220
|
|
|
|
392
|
|
|
|
-
|
|
|
|
392
|
|
Auto
|
|
|
-
|
|
|
|
14
|
|
|
|
7
|
|
|
|
21
|
|
|
|
-
|
|
|
|
21
|
|
Student loans
|
|
|
-
|
|
|
|
17
|
|
|
|
13
|
|
|
|
30
|
|
|
|
-
|
|
|
|
30
|
|
Other
|
|
|
-
|
|
|
|
20
|
|
|
|
87
|
|
|
|
107
|
|
|
|
-
|
|
|
|
107
|
|
Corporate and other domestic debt securities
|
|
|
-
|
|
|
|
700
|
|
|
|
-
|
|
|
|
700
|
|
|
|
-
|
|
|
|
700
|
|
Debt Securities issued by foreign entities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
-
|
|
|
|
514
|
|
|
|
-
|
|
|
|
514
|
|
|
|
-
|
|
|
|
514
|
|
Government
|
|
|
-
|
|
|
|
2,656
|
|
|
|
-
|
|
|
|
2,656
|
|
|
|
-
|
|
|
|
2,656
|
|
Equity securities
|
|
|
-
|
|
|
|
1,402
|
|
|
|
-
|
|
|
|
1,402
|
|
|
|
-
|
|
|
|
1,402
|
|
Loans(3)
|
|
|
-
|
|
|
|
1,501
|
|
|
|
11
|
|
|
|
1,512
|
|
|
|
-
|
|
|
|
1,512
|
|
Intangible(4)
|
|
|
-
|
|
|
|
-
|
|
|
|
317
|
|
|
|
317
|
|
|
|
-
|
|
|
|
317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
13,443
|
|
|
$
|
110,532
|
|
|
$
|
6,476
|
|
|
$
|
130,451
|
|
|
$
|
(61,930
|
)
|
|
$
|
68,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits in domestic
offices(5)
|
|
$
|
-
|
|
|
$
|
3,398
|
|
|
$
|
2,381
|
|
|
$
|
5,779
|
|
|
$
|
-
|
|
|
$
|
5,779
|
|
Trading liabilities, excluding derivatives
|
|
|
1,499
|
|
|
|
3,160
|
|
|
|
-
|
|
|
|
4,659
|
|
|
|
-
|
|
|
|
4,659
|
|
Derivatives(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
114
|
|
|
|
36,555
|
|
|
|
-
|
|
|
|
36,669
|
|
|
|
-
|
|
|
|
36,669
|
|
Foreign exchange contracts
|
|
|
26
|
|
|
|
14,234
|
|
|
|
280
|
|
|
|
14,540
|
|
|
|
-
|
|
|
|
14,540
|
|
Equity contracts
|
|
|
-
|
|
|
|
1,375
|
|
|
|
185
|
|
|
|
1,560
|
|
|
|
-
|
|
|
|
1,560
|
|
Precious metals contracts
|
|
|
46
|
|
|
|
984
|
|
|
|
-
|
|
|
|
1,030
|
|
|
|
-
|
|
|
|
1,030
|
|
Credit contracts
|
|
|
-
|
|
|
|
15,937
|
|
|
|
1,235
|
|
|
|
17,172
|
|
|
|
-
|
|
|
|
17,172
|
|
Other
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
Derivatives netting
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(64,192
|
)
|
|
|
(64,192
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
186
|
|
|
|
69,086
|
|
|
|
1,700
|
|
|
|
70,972
|
|
|
|
(64,192
|
)
|
|
|
6,780
|
|
Long-term
debt(6)
|
|
|
-
|
|
|
|
4,682
|
|
|
|
201
|
|
|
|
4,883
|
|
|
|
-
|
|
|
|
4,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
1,685
|
|
|
$
|
80,326
|
|
|
$
|
4,282
|
|
|
$
|
86,293
|
|
|
$
|
(64,192
|
)
|
|
$
|
22,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
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 $8.0 billion and $8.2 billion and trading
derivative liabilities of $6.2 billion and
$5.3 billion as of June 30, 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.
|
Significant Transfers into/out of Levels 1 and 2
There were no significant transfers between
levels 1 and 2 for the three and six months ended
June 30, 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 and six months ended June 30,
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
58
HSBC USA Inc.
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 Period
|
|
|
|
April 1,
|
|
|
Revenue
|
|
|
Other
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
Into
|
|
|
Out of
|
|
|
Jun. 30
|
|
|
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
|
|
$
|
755
|
|
|
$
|
(106
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
154
|
|
|
$
|
-
|
|
|
$
|
(12
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
791
|
|
|
$
|
(101
|
)
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
826
|
|
|
|
29
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35
|
|
|
|
-
|
|
|
|
(330
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
560
|
|
|
|
16
|
|
Commercial mortgages
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Home equity
|
|
|
25
|
|
|
|
27
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(25
|
)
|
|
|
8
|
|
|
|
(3
|
)
|
|
|
32
|
|
|
|
1
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13
|
|
|
|
-
|
|
|
|
13
|
|
|
|
-
|
|
Corporate and other domestic debt securities
|
|
|
644
|
|
|
|
6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
70
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
717
|
|
|
|
6
|
|
Debt Securities issued by foreign entities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
222
|
|
|
|
(25
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
197
|
|
|
|
(25
|
)
|
Equity securities
|
|
|
19
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19
|
|
|
|
-
|
|
Foreign exchange contracts
|
|
|
(119
|
)
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
129
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
-
|
|
Equity contracts
|
|
|
50
|
|
|
|
(126
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(56
|
)
|
|
|
(18
|
)
|
|
|
9
|
|
|
|
(141
|
)
|
|
|
(147
|
)
|
Credit contracts
|
|
|
1,344
|
|
|
|
331
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(20
|
)
|
|
|
-
|
|
|
|
(15
|
)
|
|
|
1,640
|
|
|
|
181
|
|
Other
|
|
|
2
|
|
|
|
-
|
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
|
|
10
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury, U.S. Government agencies and sponsored enterprises
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
529
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(266
|
)
|
|
|
12
|
|
|
|
-
|
|
|
|
274
|
|
|
|
(3
|
)
|
Commercial mortgages
|
|
|
8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10
|
|
|
|
2
|
|
Home equity
|
|
|
215
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7
|
)
|
|
|
1
|
|
|
|
-
|
|
|
|
220
|
|
|
|
9
|
|
Auto
|
|
|
29
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(22
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
|
|
|
-
|
|
Student loans
|
|
|
12
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13
|
|
|
|
1
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
87
|
|
|
|
-
|
|
|
|
87
|
|
|
|
-
|
|
Loans(3)
|
|
|
12
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11
|
|
|
|
(1
|
)
|
Other assets, excluding
derivatives(4)
|
|
|
444
|
|
|
|
-
|
|
|
|
(108
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(19
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
317
|
|
|
|
(108
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,017
|
|
|
$
|
126
|
|
|
$
|
(99
|
)
|
|
$
|
13
|
|
|
$
|
259
|
|
|
$
|
(3
|
)
|
|
$
|
(631
|
)
|
|
$
|
103
|
|
|
$
|
(9
|
)
|
|
$
|
4,776
|
|
|
$
|
(159
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits in domestic offices
|
|
$
|
(1,940
|
)
|
|
$
|
94
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(624
|
)
|
|
$
|
73
|
|
|
$
|
(168
|
)
|
|
$
|
184
|
|
|
$
|
(2,381
|
)
|
|
$
|
117
|
|
Long-term debt
|
|
|
(604
|
)
|
|
|
40
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(12
|
)
|
|
|
50
|
|
|
|
(37
|
)
|
|
|
362
|
|
|
|
(201
|
)
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
(2,544
|
)
|
|
$
|
134
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(636
|
)
|
|
$
|
123
|
|
|
$
|
(205
|
)
|
|
$
|
546
|
|
|
$
|
(2,582
|
)
|
|
$
|
129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
HSBC USA Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gains and (Losses) Included
in(1)
|
|
|
Net
|
|
|
Transfers
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
|
|
|
|
|
|
Other
|
|
|
Purchases
|
|
|
Into or
|
|
|
|
|
|
Current Period
|
|
|
|
April 1,
|
|
|
(Loss)
|
|
|
Other
|
|
|
Comprehensive
|
|
|
Issuances and
|
|
|
Out
|
|
|
June 30,
|
|
|
Unrealized
|
|
|
|
2009
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Income
|
|
|
Settlements
|
|
|
of Level 3
|
|
|
2009
|
|
|
Gains (Losses)
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets, excluding derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities
|
|
$
|
510
|
|
|
$
|
(10
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(25
|
)
|
|
$
|
102
|
|
|
$
|
577
|
|
|
$
|
(49
|
)
|
Collateralized debt obligations
|
|
|
594
|
|
|
|
(279
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
363
|
|
|
|
-
|
|
|
|
678
|
|
|
|
(81
|
)
|
Other asset-backed securities
|
|
|
28
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6
|
)
|
|
|
9
|
|
|
|
32
|
|
|
|
1
|
|
Corporate and other domestic debt securities
|
|
|
527
|
|
|
|
165
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
318
|
|
|
|
1,009
|
|
|
|
162
|
|
Debt Securities issued by foreign entities
|
|
|
77
|
|
|
|
61
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
138
|
|
|
|
61
|
|
Equity securities
|
|
|
144
|
|
|
|
(113
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(6
|
)
|
|
|
1
|
|
|
|
26
|
|
|
|
(113
|
)
|
Precious metals
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Derivatives,
net(2)
|
|
|
4,687
|
|
|
|
(1,538
|
)
|
|
|
(12
|
)
|
|
|
-
|
|
|
|
(37
|
)
|
|
|
9
|
|
|
|
3,109
|
|
|
|
(2,265
|
)
|
Securities
available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury, U.S. Government agencies and sponsored enterprises
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
3
|
|
|
|
-
|
|
Obligations of U.S. states and political subdivisions
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
-
|
|
Residential mortgage-backed securities
|
|
|
333
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19
|
|
|
|
(28
|
)
|
|
|
(6
|
)
|
|
|
318
|
|
|
|
3
|
|
Commercial mortgage-backed securities
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
Collateralized debt obligations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other asset-backed securities
|
|
|
256
|
|
|
|
-
|
|
|
|
-
|
|
|
|
53
|
|
|
|
(38
|
)
|
|
|
(32
|
)
|
|
|
239
|
|
|
|
45
|
|
Loans(3)
|
|
|
155
|
|
|
|
-
|
|
|
|
11
|
|
|
|
-
|
|
|
|
(38
|
)
|
|
|
-
|
|
|
|
128
|
|
|
|
8
|
|
Other assets, excluding
derivatives(4)
|
|
|
313
|
|
|
|
-
|
|
|
|
84
|
|
|
|
-
|
|
|
|
37
|
|
|
|
-
|
|
|
|
434
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
7,631
|
|
|
$
|
(1,713
|
)
|
|
$
|
83
|
|
|
$
|
72
|
|
|
$
|
221
|
|
|
$
|
402
|
|
|
$
|
6,696
|
|
|
$
|
(2,139
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits in domestic offices
|
|
$
|
(404
|
)
|
|
$
|
-
|
|
|
$
|
(4
|
)
|
|
$
|
-
|
|
|
$
|
(314
|
)
|
|
$
|
2
|
|
|
$
|
(720
|
)
|
|
$
|
(3
|
)
|
Long term debt
|
|
|
(82
|
)
|
|
|
-
|
|
|
|
(11
|
)
|
|
|
-
|
|
|
|
(125
|
)
|
|
|
2
|
|
|
|
(216
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
(486
|
)
|
|
$
|
-
|
|
|
$
|
(15
|
)
|
|
$
|
-
|
|
|
$
|
(439
|
)
|
|
$
|
4
|
|
|
$
|
(936
|
)
|
|
$
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
HSBC USA Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gains and (Losses) Included
in(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Transfers
|
|
|
Transfers
|
|
|
|
|
|
Current Period
|
|
|
|
Jan. 1,
|
|
|
Revenue
|
|
|
Other
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
Into
|
|
|
Out of
|
|
|
Jun. 30
|
|
|
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
|
|
|
$
|
(38
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
235
|
|
|
$
|
-
|
|
|
$
|
(238
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
791
|
|
|
$
|
(95
|
)
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
817
|
|
|
|
79
|
|
|
|
-
|
|
|
|
-
|
|
|
|
54
|
|
|
|
-
|
|
|
|
(411
|
)
|
|
|
21
|
|
|
|
-
|
|
|
|
560
|
|
|
|
20
|
|
Commercial mortgages
|
|
|
4
|
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Home equity
|
|
|
24
|
|
|
|
(48
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
215
|
|
|
|
-
|
|
|
|
(163
|
)
|
|
|
7
|
|
|
|
(3
|
)
|
|
|
32
|
|
|
|
4
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13
|
|
|
|
-
|
|
|
|
13
|
|
|
|
-
|
|
Corporate and other domestic debt securities
|
|
|
1,202
|
|
|
|
(26
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
96
|
|
|
|
-
|
|
|
|
(371
|
)
|
|
|
-
|
|
|
|
(184
|
)
|
|
|
717
|
|
|
|
21
|
|
Debt Securities issued by foreign entities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
195
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
197
|
|
|
|
1
|
|
Equity securities
|
|
|
21
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
19
|
|
|
|
(1
|
)
|
Foreign exchange contracts
|
|
|
(95
|
)
|
|
|
(34
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
129
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
-
|
|
Equity contracts
|
|
|
81
|
|
|
|
(44
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(112
|
)
|
|
|
(75
|
)
|
|
|
9
|
|
|
|
(141
|
)
|
|
|
(114
|
)
|
Credit contracts
|
|
|
1,311
|
|
|
|
150
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(90
|
)
|
|
|
218
|
|
|
|
51
|
|
|
|
1,640
|
|
|
|
(14
|
)
|
Other
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
16
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
|
|
12
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury, U.S. Government agencies and sponsored enterprises
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
-
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
515
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(337
|
)
|
|
|
85
|
|
|
|
(4
|
)
|
|
|
274
|
|
|
|
4
|
|
Commercial mortgages
|
|
|
8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
10
|
|
|
|
3
|
|
Home equity
|
|
|
175
|
|
|
|
-
|
|
|
|
-
|
|
|
|
56
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(11
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
220
|
|
|
|
52
|
|
Auto
|
|
|
43
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(36
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
|
|
|
-
|
|
Student loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
|
|
-
|
|
|
|
13
|
|
|
|
1
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
87
|
|
|
|
-
|
|
|
|
87
|
|
|
|
-
|
|
Loans(3)
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
11
|
|
|
|
(3
|
)
|
|
|
11
|
|
|
|
-
|
|
Other assets, excluding
derivatives(4)
|
|
|
450
|
|
|
|
-
|
|
|
|
(87
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(46
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
317
|
|
|
|
(87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,587
|
|
|
$
|
35
|
|
|
$
|
(71
|
)
|
|
$
|
75
|
|
|
$
|
600
|
|
|
$
|
(3
|
)
|
|
$
|
(1,689
|
)
|
|
$
|
379
|
|
|
$
|
(137
|
)
|
|
$
|
4,776
|
|
|
$
|
(193
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits in domestic offices
|
|
$
|
(1,643
|
)
|
|
$
|
22
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(934
|
)
|
|
$
|
148
|
|
|
$
|
(164
|
)
|
|
$
|
190
|
|
|
$
|
(2,381
|
)
|
|
$
|
67
|
|
Long-term debt
|
|
|
(419
|
)
|
|
|
28
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(221
|
)
|
|
|
79
|
|
|
|
(37
|
)
|
|
|
369
|
|
|
|
(201
|
)
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
(2,062
|
)
|
|
$
|
50
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(1,155
|
)
|
|
$
|
227
|
|
|
$
|
(201
|
)
|
|
$
|
559
|
|
|
$
|
(2,582
|
)
|
|
$
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
HSBC USA Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gains and (Losses) Included
in(1)
|
|
|
Net
|
|
|
Transfers
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
|
|
|
|
|
|
Other
|
|
|
Purchases
|
|
|
Into or
|
|
|
|
|
|
Current Period
|
|
|
|
January 1,
|
|
|
(Loss)
|
|
|
Other
|
|
|
Comprehensive
|
|
|
Issuances and
|
|
|
Out
|
|
|
June 30,
|
|
|
Unrealized
|
|
|
|
2009
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Income
|
|
|
Settlements
|
|
|
of Level 3
|
|
|
2009
|
|
|
Gains (Losses)
|
|
|
|
|
|
(in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets, excluding derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities
|
|
$
|
475
|
|
|
$
|
(51
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(5
|
)
|
|
$
|
158
|
|
|
$
|
577
|
|
|
$
|
(88
|
)
|
Collateralized debt obligations
|
|
|
668
|
|
|
|
(338
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
348
|
|
|
|
-
|
|
|
|
678
|
|
|
|
(133
|
)
|
Other asset-backed securities
|
|
|
36
|
|
|
|
(6
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(7
|
)
|
|
|
9
|
|
|
|
32
|
|
|
|
(5
|
)
|
Corporate and other domestic debt securities
|
|
|
480
|
|
|
|
170
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14
|
|
|
|
345
|
|
|
|
1,009
|
|
|
|
166
|
|
Debt Securities issued by foreign entities
|
|
|
87
|
|
|
|
52
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
138
|
|
|
|
52
|
|
Equity securities
|
|
|
147
|
|
|
|
(94
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(28
|
)
|
|
|
1
|
|
|
|
26
|
|
|
|
(94
|
)
|
Precious metals
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Derivatives,
net(2)
|
|
|
5,283
|
|
|
|
(2,098
|
)
|
|
|
(13
|
)
|
|
|
-
|
|
|
|
(17
|
)
|
|
|
(46
|
)
|
|
|
3,109
|
|
|
|
(2,471
|
)
|
Securities
available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury, U.S. Government agencies and sponsored enterprises
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
3
|
|
|
|
-
|
|
Obligations of U.S. states and political subdivisions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential mortgage-backed securities
|
|
|
164
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9
|
|
|
|
(40
|
)
|
|
|
185
|
|
|
|
318
|
|
|
|
(6
|
)
|
Commercial mortgage-backed securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
|
|
5
|
|
|
|
-
|
|
Collateralized debt obligations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other asset-backed securities
|
|
|
307
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17
|
|
|
|
(63
|
)
|
|
|
(22
|
)
|
|
|
239
|
|
|
|
7
|
|
Loans(3)
|
|
|
136
|
|
|
|
-
|
|
|
|
11
|
|
|
|
-
|
|
|
|
(19
|
)
|
|
|
-
|
|
|
|
128
|
|
|
|
8
|
|
Other assets, excluding
derivatives(4)
|
|
|
333
|
|
|
|
-
|
|
|
|
36
|
|
|
|
-
|
|
|
|
65
|
|
|
|
-
|
|
|
|
434
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
8,116
|
|
|
$
|
(2,365
|
)
|
|
$
|
34
|
|
|
$
|
26
|
|
|
$
|
247
|
|
|
$
|
638
|
|
|
$
|
6,696
|
|
|
$
|
(2,503
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits in domestic offices
|
|
$
|
(234
|
)
|
|
$
|
-
|
|
|
$
|
6
|
|
|
$
|
(500
|
)
|
|
$
|
8
|
|
|
$
|
-
|
|
|
$
|
(720
|
)
|
|
$
|
7
|
|
Long term debt
|
|
|
(57
|
)
|
|
|
-
|
|
|
|
(12
|
)
|
|
|
(151
|
)
|
|
|
4
|
|
|
|
-
|
|
|
|
(216
|
)
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
(291
|
)
|
|
$
|
-
|
|
|
$
|
(6
|
)
|
|
$
|
(651
|
)
|
|
$
|
12
|
|
|
$
|
-
|
|
|
$
|
(936
|
)
|
|
$
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes realized and unrealized
gains and losses.
|
|
(2) |
|
Level 3 net derivatives
included derivative assets of $3.2 billion and
$5.1 billion and derivative liabilities of
$1.7 billion and $2.0 billion at June 30, 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.
|
62
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 June 30, 2010 and
June 30, 2009, and indicates the fair value hierarchy of
the valuation techniques utilized to determine such fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gains
|
|
|
Total Gains
|
|
|
|
Non-Recurring Fair Value Measurements as
|
|
|
(Losses) For the
|
|
|
(Losses) For the
|
|
|
|
of June 30, 2010
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
June 30, 2010
|
|
|
June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Residential mortgage loans held for
sale(1)
|
|
$
|
-
|
|
|
$
|
16
|
|
|
$
|
501
|
|
|
$
|
517
|
|
|
$
|
(27
|
)
|
|
$
|
(32
|
)
|
Other consumer loans held for
sale(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
28
|
|
|
|
28
|
|
|
|
-
|
|
|
|
-
|
|
Impaired
loans(2)
|
|
|
-
|
|
|
|
-
|
|
|
|
377
|
|
|
|
377
|
|
|
|
19
|
|
|
|
32
|
|
Real estate
owned(3)
|
|
|
-
|
|
|
|
82
|
|
|
|
-
|
|
|
|
82
|
|
|
|
2
|
|
|
|
6
|
|
Repossessed
vehicles(3)
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
Commercial loans held for sale
|
|
|
-
|
|
|
|
23
|
|
|
|
-
|
|
|
|
23
|
|
|
|
-
|
|
|
|
-
|
|
Held to maturity asset-backed securities held by consolidated
VIE(4)
|
|
|
-
|
|
|
|
127
|
|
|
|
128
|
|
|
|
255
|
|
|
|
2
|
|
|
|
(3
|
)
|
Building held for use
|
|
|
-
|
|
|
|
-
|
|
|
|
15
|
|
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value on a non-recurring basis
|
|
$
|
-
|
|
|
$
|
252
|
|
|
$
|
1,049
|
|
|
$
|
1,301
|
|
|
$
|
(4
|
)
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gains
|
|
|
Total Gains
|
|
|
|
Non-Recurring Fair Value Measurements as
|
|
|
(Losses) For the
|
|
|
(Losses) For the
|
|
|
|
of June 30, 2009
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
June 30, 2009
|
|
|
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Residential mortgage loans held for
sale(1)
|
|
$
|
-
|
|
|
$
|
290
|
|
|
$
|
990
|
|
|
$
|
1,280
|
|
|
$
|
(66
|
)
|
|
$
|
(159
|
)
|
Auto finance loans held for
sale(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
288
|
|
|
|
288
|
|
|
|
-
|
|
|
|
-
|
|
Other consumer loans held for
sale(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
45
|
|
|
|
45
|
|
|
|
-
|
|
|
|
-
|
|
Impaired
loans(2)
|
|
|
-
|
|
|
|
-
|
|
|
|
198
|
|
|
|
198
|
|
|
|
10
|
|
|
|
27
|
|
Real estate
owned(3)
|
|
|
-
|
|
|
|
75
|
|
|
|
-
|
|
|
|
75
|
|
|
|
1
|
|
|
|
2
|
|
Repossessed
vehicles(3)
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
Building held for use
|
|
|
-
|
|
|
|
-
|
|
|
|
15
|
|
|
|
15
|
|
|
|
(20
|
)
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value on a non-recurring basis
|
|
$
|
-
|
|
|
$
|
370
|
|
|
$
|
1,536
|
|
|
$
|
1,906
|
|
|
$
|
(75
|
)
|
|
$
|
(150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of June 30, 2010 and 2009,
the fair value of the loans held for sale was below cost.
Certain residential mortgage loans held for sale have been
classified as a Level 3 fair value measurement within the
fair value hierarchy as the underlying real estate properties
which determine fair value are illiquid assets as a result of
market conditions and significant inputs in estimating fair
value were unobservable. Additionally, the fair value of these
properties is affected by, among other things, the location, the
payment history and the completeness of the loan documentation.
|
|
(2) |
|
Represents impaired commercial
loans. Certain commercial loans have undergone troubled debt
restructurings and are considered impaired. As a matter of
practical expedient, we measure the credit impairment of a
collateral-dependent loan based on the fair value of the
collateral asset. The collateral often involves real estate
properties that are illiquid due to market conditions. As a
result, these commercial loans are classified as a Level 3
fair value measurement within the fair value hierarchy.
|
63
HSBC USA Inc.
|
|
|
(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 June 30, 2010.
See Note 16, Variable Interest Entities for
additional information.
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
December 31, 2009
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
|
Value
|
|
Value
|
|
Value
|
|
Value
|
|
|
|
|
|
(in millions)
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term financial assets
|
|
$
|
17,706
|
|
|
$
|
17,706
|
|
|
$
|
24,094
|
|
|
$
|
24,094
|
|
Federal funds sold and securities purchased under resale
agreements
|
|
|
15,490
|
|
|
|
15,490
|
|
|
|
1,046
|
|
|
|
1,046
|
|
Non-derivative trading assets
|
|
|
21,144
|
|
|
|
21,144
|
|
|
|
17,596
|
|
|
|
17,596
|
|
Derivatives
|
|
|
8,595
|
|
|
|
8,595
|
|
|
|
8,831
|
|
|
|
8,831
|
|
Securities
|
|
|
40,674
|
|
|
|
40,874
|
|
|
|
30,568
|
|
|
|
30,686
|
|
Commercial loans, net of allowance for credit losses
|
|
|
28,804
|
|
|
|
29,135
|
|
|
|
29,366
|
|
|
|
29,298
|
|
Commercial loans designated under fair value option and held for
sale
|
|
|
1,554
|
|
|
|
1,554
|
|
|
|
1,126
|
|
|
|
1,126
|
|
Consumer loans, net of allowance for credit losses
|
|
|
41,907
|
|
|
|
36,834
|
|
|
|
46,262
|
|
|
|
41,877
|
|
Consumer loans held for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
985
|
|
|
|
1,001
|
|
|
|
1,386
|
|
|
|
1,389
|
|
Auto finance
|
|
|
-
|
|
|
|
-
|
|
|
|
353
|
|
|
|
353
|
|
Other consumer
|
|
|
28
|
|
|
|
28
|
|
|
|
43
|
|
|
|
43
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term financial liabilities
|
|
$
|
18,954
|
|
|
$
|
18,954
|
|
|
$
|
11,121
|
|
|
$
|
11,121
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Without fixed maturities
|
|
|
112,064
|
|
|
|
112,064
|
|
|
|
106,890
|
|
|
|
106,890
|
|
Fixed maturities
|
|
|
3,720
|
|
|
|
3,730
|
|
|
|
7,215
|
|
|
|
7,259
|
|
Deposits designated under fair value option
|
|
|
5,779
|
|
|
|
5,779
|
|
|
|
4,232
|
|
|
|
4,232
|
|
Non-derivative trading liabilities
|
|
|
4,659
|
|
|
|
4,659
|
|
|
|
2,687
|
|
|
|
2,687
|
|
Derivatives
|
|
|
6,780
|
|
|
|
6,780
|
|
|
|
5,419
|
|
|
|
5,419
|
|
Long-term debt
|
|
|
12,868
|
|
|
|
13,133
|
|
|
|
13,440
|
|
|
|
13,693
|
|
Long-term debt designated under fair value option
|
|
|
4,883
|
|
|
|
4,883
|
|
|
|
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
64
HSBC USA Inc.
our intrinsic value. The estimated fair values at June 30,
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
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 June 30, 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 is 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
|
65
HSBC USA Inc.
|
|
|
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 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
$53 million and $48 million at June 30, 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.
|
66
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
-
|
|
|
$
|
41
|
|
|
$
|
80
|
|
|
$
|
-
|
|
|
$
|
339
|
|
|
$
|
464
|
|
|
|
Home equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13
|
|
|
|
Student loans
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AAA -A
|
|
|
4
|
|
|
|
-
|
|
|
|
46
|
|
|
|
93
|
|
|
|
-
|
|
|
|
339
|
|
|
|
482
|
|
BBB -B
|
|
Residential mortgages
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
65
|
|
|
|
-
|
|
|
|
-
|
|
|
|
65
|
|
|
|
Home equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
|
|
2
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total BBB -B
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
68
|
|
|
|
-
|
|
|
|
2
|
|
|
|
70
|
|
CCC-Unrated
|
|
Residential mortgages
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
76
|
|
|
|
-
|
|
|
|
-
|
|
|
|
76
|
|
|
|
Home equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14
|
|
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
13
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total CCC -Unrated
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
103
|
|
|
|
-
|
|
|
|
-
|
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4
|
|
|
$
|
-
|
|
|
$
|
50
|
|
|
$
|
264
|
|
|
$
|
-
|
|
|
$
|
341
|
|
|
$
|
659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
collateralized debt obligations and related
collateral:
|
|
|
|
|
|
|
Rating of Securities:
|
|
Collateral Type:
|
|
Level 3
|
|
|
|
|
|
|
|
(in millions)
|
|
|
AAA -A
|
|
Commercial mortgages
|
|
$
|
-
|
|
|
|
Corporate loans
|
|
|
-
|
|
|
|
Other
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total AAA -A
|
|
|
-
|
|
BBB -B
|
|
Commercial mortgages
|
|
|
167
|
|
|
|
Corporate loans
|
|
|
342
|
|
|
|
Other
|
|
|
160
|
|
|
|
|
|
|
|
|
|
|
Total BBB -B
|
|
|
669
|
|
CCC -Unrated
|
|
Commercial mortgages
|
|
|
52
|
|
|
|
Corporate loans
|
|
|
-
|
|
|
|
Residential mortgages
|
|
|
7
|
|
|
|
Other
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
Total CCC -Unrated
|
|
|
122
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
791
|
|
|
|
|
|
|
|
|
67
HSBC USA Inc.
Available-for-sale
securities backed by 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
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
23
|
|
|
$
|
66
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
89
|
|
|
|
Commercial mortgages
|
|
|
-
|
|
|
|
-
|
|
|
|
575
|
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
585
|
|
|
|
Home equity
|
|
|
-
|
|
|
|
-
|
|
|
|
172
|
|
|
|
1
|
|
|
|
-
|
|
|
|
3
|
|
|
|
176
|
|
|
|
Student loans
|
|
|
-
|
|
|
|
-
|
|
|
|
17
|
|
|
|
13
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30
|
|
|
|
Auto
|
|
|
-
|
|
|
|
-
|
|
|
|
14
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14
|
|
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
20
|
|
|
|
87
|
|
|
|
-
|
|
|
|
-
|
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AAA -A
|
|
|
-
|
|
|
|
-
|
|
|
|
821
|
|
|
|
177
|
|
|
|
-
|
|
|
|
3
|
|
|
|
1,001
|
|
BBB -B
|
|
Residential mortgages
|
|
|
-
|
|
|
|
30
|
|
|
|
-
|
|
|
|
124
|
|
|
|
-
|
|
|
|
-
|
|
|
|
154
|
|
|
|
Home equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
129
|
|
|
|
-
|
|
|
|
-
|
|
|
|
129
|
|
|
|
Auto
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total BBB -B
|
|
|
-
|
|
|
|
30
|
|
|
|
-
|
|
|
|
260
|
|
|
|
-
|
|
|
|
-
|
|
|
|
290
|
|
CCC -Unrated
|
|
Residential mortgages
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
54
|
|
|
|
-
|
|
|
|
-
|
|
|
|
54
|
|
|
|
Home equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
87
|
|
|
|
-
|
|
|
|
-
|
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total CCC -Unrated
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
141
|
|
|
|
-
|
|
|
|
-
|
|
|
|
141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
30
|
|
|
$
|
821
|
|
|
$
|
578
|
|
|
$
|
-
|
|
|
$
|
3
|
|
|
$
|
1,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
68
HSBC USA Inc.
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 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.
|
|
|
Foreign Exchange (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. The carrying value is further reduced, if necessary, on a
quarterly basis 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
69
HSBC USA Inc.
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 otherwise would have been 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
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. Restructuring
Activities
In June 2010, we decided that the wholesale banknotes business
within our Global Banking and Markets segment does not fit with
our core strategy in the U.S. and, therefore, made the
decision to exit this business. This business, which has been
managed out of the United States with operations in key
locations worldwide, arranges for the physical distribution of
banknotes globally to central banks, large commercial banks and
currency exchanges. The discontinuation of this business will
allow us to focus strategic attention on our core businesses. As
a result of this decision, we currently estimate that our
revenues would be reduced by approximately $110 million and
our operating expenses would be reduced by approximately
$40 million on an annualized basis. We expect to incur
closure costs of approximately $17 million, primarily
related to termination and other employee benefit costs, of
which $13 million was recorded in the second quarter of
2010.
70
HSBC USA Inc.
20. 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
$3.2 billion and $3.5 billion, respectively, which
resulted in a decrease 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 was 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
half of 2010. There is also, therefore, no impact to our
Tier 1 capital ratios for the first half of 2010. Had we
fully transitioned to the Risk Based Capital requirements at
June 30, 2010, our risk weighted assets would have been
higher by approximately $2.4 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 is an
SEC filer 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
71
HSBC USA Inc.
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 did not have a material impact to our
financial position or results of operations.
Insurance In April 2010, the FASB issued an update
to clarify that any separate account interests held for the
benefit of policy holders should not be considered to be
insurers interest for assessing the investment for
consolidation. It also clarifies a separate account arrangement
should be considered a subsidiary for the purpose of evaluating
whether the retention of specialized accounting for investments
in consolidation is appropriate. Further, an insurer is not
required to consolidate an investment in which a separate
account holds a controlling financial interest if the investment
is not or would not be consolidated in the stand-alone financial
statements of the separate account. The guidance is effective
for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2010. Early adoption is
permitted with retrospective application to all prior periods
upon the date of adoption.
Loan Modification In April 2010, the FASB issued
an update affecting accounting for loan modifications for those
loans that are acquired with deteriorated credit quality and are
accounted for on a pool basis. It clarifies that the
modifications of such loans do not result in the removal of
those loans from the pool even if the modification of those
loans would otherwise be considered a troubled debt
restructuring. An entity will continue to be required to
consider whether the pool of assets in which the loan is
included is impaired if expected cash flows for the pool change.
The new guidance is effective prospectively for modifications
occurring in the first interim or annual period ending on or
after July 15, 2010. Early application is permitted. This
update will not have any impact on our financial position or
results of operations.
72
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 half of
2010, economic conditions in the United States continued to
improve, although the pace of improvement began to show signs of
slowing during the second quarter. Liquidity has returned to the
financial markets for most sources of funding except for
mortgage securitization and earlier in the year companies were
able to issue debt with credit spreads approaching levels
historically seen prior to the crisis, despite the expiration of
some of the U.S. governments support programs.
However, European sovereign debt fears triggered by Greece in
May 2010 have translated into increased borrowing costs in the
U.S. during the second quarter of 2010. In addition, the
prolonged period of low Federal funds rates continues to put
pressure on spreads earned on our deposit base. While housing
prices have stabilized in many markets and have begun to recover
in others, the first-time homebuyer tax credit as well as low
interest rates attributable to government monetary policy
actions have been the main stabilizing forces improving home
sales and reducing home inventories. Improved market conditions
have also resulted in recovery during the first half 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.
The job market also continued to improve in the first half of
2010, as the economy began to add jobs in March which continued
into the second quarter. Despite improving job creation,
U.S. unemployment rates, which have been a major factor in
the deterioration of credit quality in the U.S., remained high
at 9.5 percent in June 2010, a decrease of 20 basis
points during the quarter and 50 basis points since
December 2009. However, a significant number of
U.S. residents are no longer looking for work and,
therefore, are not reflected in the U.S. unemployment
rates. Unemployment rates in 18 states are greater than the
U.S. national average and unemployment rates in
6 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 8.2 percent. High unemployment rates have
generally been most pronounced in the markets which had
previously experienced the highest appreciation in home values.
Unemployment has continued to have an impact on the provision
for credit losses in our loan portfolio and in loan portfolios
across the industry.
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,
volatility experienced by the credit markets including the
possibility the recent European sovereign debt crisis will
spread and trends in corporate earnings will
73
HSBC USA Inc.
continue to influence the U.S. economic recovery and the
capital markets. In particular, continued improvement in
unemployment rates and a sustained recovery of the housing
markets 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 relatively 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 on 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 the impact of recent and proposed
regulatory changes will continue to impact our results in 2010,
the degree of which is largely dependent upon the nature and
timing of the economic recovery.
Financial Regulatory Reform On July 21, 2010, the
Dodd-Frank Wall Street Reform and Consumer Protection
Act was signed into law. This legislation is a sweeping
overhaul of the financial regulatory system. The new law is
comprehensive and includes many provisions specifically relevant
to our business and the business of our affiliates. For
instance, over a transition period from 2013 to 2015, the
Federal Reserve Board will apply more stringent capital and risk
management requirements on bank holding companies such as HSBC
North America, which will require a minimum leverage ratio of
five percent and a total capital ratio of ten percent. The
legislation also phases out the use of preferred securities for
capital treatment by bank holding companies, which may
negatively impact our capital ratios.
In order to preserve financial stability in the industry, the
legislation has created the Financial Stability Oversight
Council which may take certain actions, including precluding
mergers, restricting financial products offered, restricting or
terminating activities or imposing conditions on activities or
requiring the sale or transfer of assets, against any bank
holding company with assets greater than $50 billion that
is found to pose a grave threat to financial stability. Large
bank holding companies such as HSBC North America, will also be
required to file resolution plans and identify how insured bank
subsidiaries are adequately protected from risk of other
affiliates. The Federal Reserve Board will also adopt a series
of increased supervisory standards to be followed by large bank
holding companies. Additionally, activities of bank holding
companies, such as the ability to acquire U.S. banks or to
engage in non-banking activities, will be more directly tied to
examination ratings of well-managed and well
capitalized. There are also provisions in the Act which
relate to executive compensation, including disclosures
evidencing the relationship between compensation and performance
and a requirement that some executive incentive compensation is
forfeitable in the event of an accounting restatement.
In relation to requirements for bank transactions with
affiliates, the legislation extends current quantitative limits
on credit transactions to now additionally include credit
exposure related to repurchase agreements, derivatives and
securities lending transactions. This provision may limit the
use of intercompany transactions between HSBC Bank USA and its
affiliates which impacts our current funding strategies.
The legislation has numerous provisions addressing derivatives.
There is the imposition of comprehensive regulation of
over-the-counter
(OTC) derivatives markets, including credit default
swaps, as well as limits on FDIC-insured banks OTC
derivatives activities. Most of the significant provisions are
to be implemented within two to three years of the enactment of
the legislation. There is also the requirement for the use of
mandatory derivative clearing houses and exchanges, which will
significantly change the overall derivatives market industry.
The Volcker Rule in the legislation restricts the
extent to which a bank or bank holding company can engage in
proprietary trading activities, including ownership of hedge
funds and private equity funds. These provisions will have
limited impact on us.
The legislation also provides for an increase in FDIC insurance
assessments on FDIC insured banks such as HSBC Bank USA. The
FDIC reserve ratio has been increased from 1.15 to 1.35, with
the target of 1.35 to be reached by 2020. The assessment
methodology will be revised to a methodology based on assets.
This shift will have financial implications for all FDIC-insured
banks.
74
HSBC USA Inc.
The legislation has created the Consumer Financial Protection
Bureau (the CFPB). The CFPB will be a new
independent bureau within the Federal Reserve Board and will act
as a single primary Federal consumer protection supervisor to
regulate credit, savings, payment and other consumer financial
products and services and providers of those products and
services. The CFPB has the authority to issue regulations to
prevent unfair, deceptive or abusive practices in connection
with consumer financial products or services and to ensure
features of any consumer financial products or services are
fully, accurately and effectively disclosed to consumers.
The legislation codifies the current standard of federal
preemption with respect to national banks. However, preemption
no longer extends to national banks operating
subsidiaries, the Office of the Comptroller of the Currency
(OCC) is limited to the extent in which it can make
preemption decisions, and when subject to judicial review, the
OCCs preemptive decisions must be supported by
substantial evidence that they comply with the
preemptive standard. These limitations on federal preemption may
elevate our costs of compliance, while increasing litigation
expenses as a result of plaintiff challenges and the risk of
courts not giving deference to the OCC, as well as increasing
complexity due to the lack of uniformity in state regulations.
It is too early to determine how far reaching and deeply the
limitations on federal preemption will impact our business and
our competitors businesses.
The legislation contains many other consumer related provisions
including provisions addressing mortgage reform. In the area of
mortgage origination, there is the elimination of stated income
loans and a requirement to apply a net tangible benefit test for
all refinancing transactions. There are also numerous revised
servicing requirements for mortgage loans.
The legislation will have a significant impact on the operations
of many financial institutions in the U.S., including HSBC USA
Inc., HSBC Bank USA and HSBC Securities (USA) Inc. As the
legislation calls for extensive regulations to be promulgated to
interpret and implement the legislation, it is not possible to
precisely determine the impact to our operations and financial
results at this time.
Performance, Developments and Trends Our net
income was $300 million and $854 million during the
three and six months ended June 30, 2010, respectively,
compared to a net loss of $249 million and
$338 million during the three and six months ended
June 30, 2009, respectively. Income before taxes was
$424 million and $1.3 billion during the three and six
months ended June 30, 2010, respectively, compared to a
loss before taxes of $302 million and $350 million
during the corresponding three and six months ended
June 30, 2009, respectively. 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 in certain periods 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 income
(loss) before income tax for the three and six months ended
June 30, 2010 and 2009:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
Three Months Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Income (loss) before income tax, as reported
|
|
$
|
424
|
|
|
$
|
(302
|
)
|
|
$
|
1,298
|
|
|
$
|
(350
|
)
|
Change in value of our own fair value option debt and related
derivatives
|
|
|
(204
|
)
|
|
|
443
|
|
|
|
(238
|
)
|
|
|
395
|
|
Gain on sale of MasterCard Class B or Visa Class B
Shares
|
|
|
-
|
|
|
|
(48
|
)
|
|
|
-
|
|
|
|
(48
|
)
|
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) before income tax, excluding above
items(3)
|
|
$
|
220
|
|
|
$
|
93
|
|
|
$
|
900
|
|
|
$
|
(121
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
HSBC USA Inc.
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|
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(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 and six months ended
June 30, 2010 improved significantly as higher other
revenues, lower provisions for credit losses and lower operating
expenses were partially offset by lower net interest income.
During 2010, we continued to reduce legacy and other risk
positions as opportunities arose, including the sale of
$537 million in subprime residential mortgage loans
previously held for sale and continued reductions in monoline
counterparty exposures.
Other revenues improved during the three and six months ended
June 30, 2010, driven by significantly higher gains on
instruments designated at fair value and related derivatives
and, in the six month period, higher trading revenue. During the
six months ended June 30, 2009, we experienced significant
reductions in other revenues, largely lower trading revenue
associated with credit derivative products due to the adverse
financial market conditions which existed at that time. Improved
market conditions in 2010 and reduced outstanding exposure have
resulted in a reduction in some of these valuation losses. A
summary of the significant valuation adjustments associated with
market disruptions that impacted revenue for the three and six
months ended June 30, 2010 and 2009 are presented in the
following table.
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Gains (Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance monoline structured credit products
|
|
$
|
17
|
|
|
$
|
6
|
|
|
$
|
73
|
|
|
$
|
(158
|
)
|
Other structured credit products
|
|
|
9
|
|
|
|
(15
|
)
|
|
|
46
|
|
|
|
(220
|
)
|
Mortgage whole loans held for sale, including whole loan
purchase settlement (predominantly subprime)
|
|
|
(17
|
)
|
|
|
(68
|
)
|
|
|
60
|
|
|
|
(154
|
)
|
Other than temporary impairment on securities
available-for-sale
and
held-to-maturity
|
|
|
(13
|
)
|
|
|
(20
|
)
|
|
|
(41
|
)
|
|
|
(58
|
)
|
Leverage acquisition finance loans held for sale
|
|
|
(50
|
)
|
|
|
95
|
|
|
|
(51
|
)
|
|
|
130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(54
|
)
|
|
$
|
(2
|
)
|
|
$
|
87
|
|
|
$
|
(460
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenues during the three and six months ended
June 30, 2010 and 2009 also reflect several non-recurring
items as presented in the table on the previous page as well as
the impact of the changes in value of our own debt and related
derivatives for which we elected fair value option. Excluding
the impact of all these items, other revenue decreased
$435 million and $262 million during the three and six
month periods ended June 30, 2010 due primarily to lower
credit card fees, lower mortgage banking revenue and lower
securities gains, partially offset in the six month period by
higher trading revenue. Lower credit card fees were 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 lower mortgage banking revenue in
both periods was driven by an increase in our estimated exposure
on repurchase obligations associated with previously sold loans.
Securities gains were lower as the prior year periods reflect
gains of $236 million on the sale of securities in the
second quarter of 2009 as part of a strategy to reduce risk.
Net interest income was $1.1 billion and $2.3 billion
during the three and six months ended June 30, 2010,
respectively, compared to $1.3 billion and
$2.6 billion in the year-ago periods. The decrease in both
periods reflects the impact of a higher mix of lower yielding
interest earning assets including higher levels of average
interest bearing deposits with banks as well as Fed funds sold
and securities purchased under agreements to resell, lower
76
HSBC USA Inc.
average loan balances and rates earned on these balances as well
as significantly lower rates earned on securities due to the
aforementioned sales in 2009 to reduce prepayment risk and
risk-weighted asset levels. These reductions were partially
offset by commercial loan repricings and repricing initiatives
on private label cards and credit cards as well as a lower cost
of funds.
Our provision for credit losses decreased $611 million and
$1.6 billion during the three and six months ended
June 30, 2010, respectively, as compared to the year-ago
periods 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 our
residential mortgage loan portfolio as compared with the prior
year periods. Provision for credit losses in both periods 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 periods.
The combination of all of these factors has led to an overall
net recovery in provision for commercial loans during the six
months ended June 30, 2010. Given the nature of the factors
driving the reduction in commercial loan provision during both
periods, the provision levels recognized in the first half of
2010 should not be considered indicative of provision levels
during the remainder of the year.
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 June 30, 2010.
Operating expenses totaled $993 million and
$2.1 billion during the three and six months ended
June 30, 2010, a decrease of $95 million and
$1 million, respectively compared to the corresponding
prior year periods. The decreases in both periods resulted from
lower salaries and employee benefit expense which reflect the
centralization of additional shared services in North America
within HTSU as well as continued cost management efforts, lower
marketing expenses and significantly lower FDIC assessment fees,
as the year-ago periods included a $82 million special
assessment recorded in the second quarter of 2009. These
decreases were partially offset by higher fees paid to HTSU and
other affiliates due to the centralization of additional shared
services across North America. In the six month period, these
decreases were largely offset by higher fees paid to HSBC
Finance related to a change in how the refund anticipation loan
program is managed.
Our efficiency ratio was 52.99 percent for the three months
ended June 30, 2010 compared to 58.75 percent in the
prior year quarter. Our efficiency ratio was 51.17 percent
for the six months ended June 30, 2010 compared to
52.16 percent in the year-ago period. The improvement in
both periods in the efficiency ratio resulted primarily from
higher other revenues and lower operating expenses, partially
offset by decreased net interest income.
Our effective tax rate was 29.2 percent for the three
months ended June 30, 2010 compared to 17.9 percent in
the prior year quarter. Our effective tax rate was
34.2 percent for the six months ended June 30, 2010
compared to 3.4 percent in the year-ago period. The
effective tax rate for the three and six months ended
June 30, 2010 reflects a substantially higher level of
pre-tax income, an increased level of low income housing tax
credits, the impact of a planned liquidation of a foreign
subsidiary and an adjustment of uncertain tax positions. The
effective tax rate for the three and six months ended
June 30, 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.
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
77
HSBC USA Inc.
in April 2010. The sale will result in a gain of approximately
$155 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 June 30, 2010
and December 31, 2009 and for the three and six month
periods ended June 30, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30, 2010
|
|
|
June 30, 2010
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net income (loss)
|
|
$
|
300
|
|
|
$
|
(249
|
)
|
|
$
|
854
|
|
|
$
|
(338
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate of return on average :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
.63
|
%
|
|
|
(.58
|
)%
|
|
|
.92
|
%
|
|
|
(.38
|
)%
|
Total common shareholders equity
|
|
|
7.87
|
|
|
|
(8.83
|
)
|
|
|
11.72
|
|
|
|
(6.23
|
)
|
Net interest margin to average earning assets
|
|
|
2.78
|
|
|
|
3.40
|
|
|
|
2.89
|
|
|
|
3.43
|
|
Efficiency ratio
|
|
|
52.99
|
|
|
|
58.75
|
|
|
|
51.17
|
|
|
|
52.16
|
|
Commercial loan net charge-off
ratio(1)
|
|
|
1.07
|
|
|
|
.87
|
|
|
|
1.18
|
|
|
|
.71
|
|
Consumer loan net charge-off
ratio(1)
|
|
|
5.83
|
|
|
|
5.34
|
|
|
|
6.14
|
|
|
|
4.42
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
$
|
29,502
|
|
|
$
|
30,304
|
|
Consumer loans
|
|
|
44,159
|
|
|
|
49,185
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
73,661
|
|
|
$
|
79,489
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
$
|
2,567
|
|
|
$
|
2,908
|
|
|
|
|
|
|
|
|
|
|
Commercial allowance as a percent of
loans(1)
|
|
|
2.37
|
%
|
|
|
3.10
|
%
|
Commercial two-months-and-over contractual delinquency
|
|
|
2.11
|
|
|
|
3.04
|
|
Consumer allowance as a percent of
loans(1)
|
|
|
5.10
|
|
|
|
5.94
|
|
Consumer two-months-and-over contractual delinquency
|
|
|
5.37
|
|
|
|
5.97
|
|
Loan-to-deposits
ratio(2)
|
|
|
85.11
|
|
|
|
94.36
|
|
Total shareholders equity to total assets
|
|
|
8.80
|
|
|
|
8.87
|
|
Total capital to risk weighted assets
|
|
|
15.35
|
|
|
|
14.19
|
|
Tier 1 capital to risk weighted assets
|
|
|
10.79
|
|
|
|
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 $73.7 billion and
$79.5 billion at June 30, 2010 and December 31,
2009, respectively. The decrease in loans as compared to
December 31, 2009 was 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 fewer active customer accounts, the
continued impact from actions previously taken to reduce risk in
these portfolios, seasonal paydowns in credit card balances
since December 31, 2009 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
78
HSBC USA Inc.
accounting guidance on the consolidation of variable interest
entities which resulted in the consolidation of an incremental
$1.6 billion of commercial loans at June 30, 2010. See
Balance Sheet Review for a more detailed discussion
of the changes in loan balances.
In July 2010, we agreed in principle to sell our auto finance
loan portfolio, with an outstanding principal balance of $1.3
billion at June 30, 2010, and other related assets to an
unaffiliated third party for approximately $1.3 billion in
cash. As a result of this transaction, we anticipate that we
will recognize a small gain during the third quarter of 2010.
Credit Quality Our allowance for credit losses as
a percentage of total loans decreased at June 30, 2010 as
compared to December 31, 2009. The decrease in our
allowance ratio reflects a lower allowance on all of our
consumer loan portfolios due to lower outstanding balances and
improved credit quality due to lower delinquency levels 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 decreased to 5.37 percent
at June 30, 2010 compared to 5.97 percent at
December 31, 2009. Dollars of delinquency fell across all
consumer portfolios during the six months ended June 30,
2010, while outstanding loan balances also declined. The
decrease in the delinquency ratio since December 31, 2009
was driven largely by our residential mortgage, private label
card and credit card portfolios, including the sale of
$215 million of delinquent subprime mortgage whole loans
during the second quarter of 2010. 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) for the three months ended June 30,
2010 increased compared to the prior year quarter driven largely
by higher credit card charge-offs as charge-off levels in 2009
were positively impacted by the purchase of the GM and UP
portfolios, a portion of which was recorded at fair value, net
of anticipated future losses at the time of acquisition.
Excluding credit card receivables, we experienced lower dollars
of charge-off in all loan categories during the second quarter
of 2010 driven by lower receivable levels and improved credit
quality. 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.
Funding and Capital Capital amounts and ratios are
calculated in accordance with current banking regulations. Our
Tier 1 capital ratio was 10.79 percent and
9.61 percent at June 30, 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 half of 2010 as compared
to $2.2 billion during the first half of 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
first half of 2010, HSBC Bank USA sold low quality auto finance
loans with a net book value of approximately $178 million
to a non-bank subsidiary of HSBC USA Inc. to reduce this capital
requirement. Capital ratios and amounts at June 30, 2010
and December 31, 2009 in the table above reflect this
revised regulatory reporting. At June 30, 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
79
HSBC USA Inc.
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, which was initiated in
January 2010, encompasses enhancements to a number of risk
policies, processes and systems to align HSBC Bank USA with the
Basel II final rule requirements. HSBC Bank USA will seek
regulatory approval for adoption when the program enhancements
have been completed which may extend beyond April 1, 2011.
As of June 30, 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.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
Three Months Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Income (loss) before income tax from prior year
|
|
$
|
(302
|
)
|
|
$
|
(292
|
)
|
|
$
|
(350
|
)
|
|
$
|
(734
|
)
|
Increase (decrease) in income before income tax attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet management
activities(1)
|
|
|
(207
|
)
|
|
|
169
|
|
|
|
(419
|
)
|
|
|
530
|
|
Trading revenue
(loss)(2)
|
|
|
(25
|
)
|
|
|
268
|
|
|
|
333
|
|
|
|
824
|
|
Credit card
fees(3)
|
|
|
(93
|
)
|
|
|
134
|
|
|
|
(217
|
)
|
|
|
261
|
|
Loans held for
sale(4)
|
|
|
52
|
|
|
|
59
|
|
|
|
215
|
|
|
|
90
|
|
Residential mortgage banking related
revenue(5)
|
|
|
(139
|
)
|
|
|
50
|
|
|
|
(241
|
)
|
|
|
82
|
|
Gain (loss) on own debt designated at fair value and related
derivatives(6)
|
|
|
647
|
|
|
|
(372
|
)
|
|
|
633
|
|
|
|
(485
|
)
|
Gain (loss) on instruments at fair value and related
derivatives, excluding own
debt(6)
|
|
|
(108
|
)
|
|
|
63
|
|
|
|
(159
|
)
|
|
|
230
|
|
Provision for credit
losses(7)
|
|
|
611
|
|
|
|
(461
|
)
|
|
|
1,574
|
|
|
|
(1,137
|
)
|
All other
activity(8)
|
|
|
(12
|
)
|
|
|
80
|
|
|
|
(71
|
)
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax for current period
|
|
$
|
424
|
|
|
$
|
(302
|
)
|
|
$
|
1,298
|
|
|
$
|
(350
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Balance sheet management activities
are comprised primarily of net interest income and 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.
80
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
Three Months Ended June 30,
|
|
|
Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Net income (loss) U.S. GAAP basis
|
|
$
|
300
|
|
|
$
|
(249
|
)
|
|
$
|
854
|
|
|
$
|
(338
|
)
|
Adjustments, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unquoted equity securities
|
|
|
-
|
|
|
|
(27
|
)
|
|
|
-
|
|
|
|
(20
|
)
|
Reclassification of financial assets
|
|
|
31
|
|
|
|
(159
|
)
|
|
|
21
|
|
|
|
(146
|
)
|
Securities
|
|
|
59
|
|
|
|
(14
|
)
|
|
|
93
|
|
|
|
(108
|
)
|
Derivatives
|
|
|
1
|
|
|
|
4
|
|
|
|
3
|
|
|
|
5
|
|
Loan impairment
|
|
|
2
|
|
|
|
2
|
|
|
|
9
|
|
|
|
7
|
|
Property
|
|
|
31
|
|
|
|
3
|
|
|
|
32
|
|
|
|
5
|
|
Pension costs
|
|
|
4
|
|
|
|
7
|
|
|
|
61
|
|
|
|
14
|
|
Purchased loan portfolios
|
|
|
(1
|
)
|
|
|
44
|
|
|
|
(27
|
)
|
|
|
73
|
|
Servicing assets
|
|
|
5
|
|
|
|
1
|
|
|
|
6
|
|
|
|
10
|
|
Return of capital
|
|
|
-
|
|
|
|
(55
|
)
|
|
|
(3
|
)
|
|
|
(55
|
)
|
Interest recognition
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
12
|
|
|
|
(8
|
)
|
|
|
23
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net profit (loss) IFRSs basis
|
|
|
444
|
|
|
|
(450
|
)
|
|
|
1,072
|
|
|
|
(560
|
)
|
Tax benefit (expense) IFRSs basis
|
|
|
(199
|
)
|
|
|
126
|
|
|
|
(554
|
)
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax IFRSs basis
|
|
$
|
643
|
|
|
$
|
(576
|
)
|
|
$
|
1,626
|
|
|
$
|
(593
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
81
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 decline in value 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. If it is
determined these shares have become impaired, the fair value
loss is recognized in profit and loss and any fair value loss
recorded in other comprehensive income is reversed. There is no
similar requirement under U.S. GAAP. During the second
quarter of 2009 under IFRSs, we recorded income for the value of
additional shares attributed to HSBC shares held for stock plans
as a result of HSBCs rights offering earlier in 2009. The
additional shares are not recorded 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 certain
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.
Additionally, the sale of our 452 Fifth Avenue property,
including the 1 W. 39th Street building in April 2010
resulted in the recognition of a gain under IFRSs while under US
GAAP, such gain is deferred and recognized over ten years due to
our continuing involvement.
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
82
HSBC USA Inc.
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.
Return of capital In 2010 and 2009, this
includes the recognition of $3 million and
$55 million, respectively, 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 June 30, 2010 and increases (decreases)
over prior periods, are summarized in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) from
|
|
|
|
June 30,
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
2010
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Period end assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
$
|
32,285
|
|
|
$
|
(5,367
|
)
|
|
|
(14.3
|
)%
|
|
$
|
7,971
|
|
|
|
32.8
|
%
|
Loans, net
|
|
|
70,711
|
|
|
|
(1,363
|
)
|
|
|
(1.9
|
)
|
|
|
(4,917
|
)
|
|
|
(6.5
|
)
|
Loans held for sale
|
|
|
2,567
|
|
|
|
(41
|
)
|
|
|
(1.6
|
)
|
|
|
(341
|
)
|
|
|
(11.7
|
)
|
Trading assets
|
|
|
29,148
|
|
|
|
4,933
|
|
|
|
20.4
|
|
|
|
3,333
|
|
|
|
12.9
|
|
Securities
|
|
|
40,674
|
|
|
|
2,987
|
|
|
|
7.9
|
|
|
|
10,106
|
|
|
|
33.1
|
|
Other assets
|
|
|
11,056
|
|
|
|
(1,756
|
)
|
|
|
(13.7
|
)
|
|
|
(790
|
)
|
|
|
(6.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
186,441
|
|
|
$
|
(607
|
)
|
|
|
(.3
|
)%
|
|
$
|
15,362
|
|
|
|
9.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funding sources:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
121,563
|
|
|
$
|
(3,248
|
)
|
|
|
(2.6
|
)%
|
|
$
|
3,226
|
|
|
|
2.7
|
%
|
Trading liabilities
|
|
|
10,877
|
|
|
|
773
|
|
|
|
7.7
|
|
|
|
2,867
|
|
|
|
35.8
|
|
Short-term borrowings
|
|
|
16,033
|
|
|
|
4,492
|
|
|
|
38.9
|
|
|
|
9,521
|
|
|
|
100+
|
|
All other liabilities
|
|
|
3,817
|
|
|
|
(3,811
|
)
|
|
|
(50.0
|
)
|
|
|
(1,218
|
)
|
|
|
(24.2
|
)
|
Long-term debt
|
|
|
17,751
|
|
|
|
417
|
|
|
|
2.4
|
|
|
|
(257
|
)
|
|
|
(1.4
|
)
|
Shareholders equity
|
|
|
16,400
|
|
|
|
770
|
|
|
|
4.9
|
|
|
|
1,223
|
|
|
|
8.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
186,441
|
|
|
$
|
(607
|
)
|
|
|
(.3
|
)%
|
|
$
|
15,362
|
|
|
|
9.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
83
HSBC USA Inc.
Loans, Net Loan balances at June 30, 2010 and
increases (decreases) over prior periods, are summarized in the
table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) from
|
|
|
|
June 30,
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
2010
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Total commercial loans
|
|
$
|
29,502
|
|
|
$
|
(132
|
)
|
|
|
(.4
|
)%
|
|
$
|
(802
|
)
|
|
|
(2.6
|
)%
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages, excluding home equity mortgages
|
|
|
13,566
|
|
|
|
54
|
|
|
|
.4
|
|
|
|
(156
|
)
|
|
|
(1.1
|
)
|
Home equity mortgages
|
|
|
3,972
|
|
|
|
(74
|
)
|
|
|
(1.8
|
)
|
|
|
(192
|
)
|
|
|
(4.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential mortgages
|
|
|
17,538
|
|
|
|
(20
|
)
|
|
|
(.1
|
)
|
|
|
(348
|
)
|
|
|
(1.9
|
)
|
Auto finance
|
|
|
1,279
|
|
|
|
(174
|
)
|
|
|
(12.0
|
)
|
|
|
(422
|
)
|
|
|
(24.8
|
)
|
Private label
|
|
|
12,747
|
|
|
|
(719
|
)
|
|
|
(5.3
|
)
|
|
|
(2,344
|
)
|
|
|
(15.5
|
)
|
Credit Card
|
|
|
11,274
|
|
|
|
(542
|
)
|
|
|
(4.6
|
)
|
|
|
(1,774
|
)
|
|
|
(13.6
|
)
|
Other consumer
|
|
|
1,321
|
|
|
|
(50
|
)
|
|
|
(3.6
|
)
|
|
|
(138
|
)
|
|
|
(9.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer loans
|
|
|
44,159
|
|
|
|
(1,505
|
)
|
|
|
(3.3
|
)
|
|
|
(5,026
|
)
|
|
|
(10.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
73,661
|
|
|
|
(1,637
|
)
|
|
|
(2.2
|
)
|
|
|
(5,828
|
)
|
|
|
(7.3
|
)
|
Allowance for credit losses
|
|
|
2,950
|
|
|
|
(274
|
)
|
|
|
(8.5
|
)
|
|
|
(911
|
)
|
|
|
(23.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
$
|
70,711
|
|
|
$
|
(1,363
|
)
|
|
|
(1.9
|
)%
|
|
$
|
(4,917
|
)
|
|
|
(6.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans decreased as compared to March 31, 2010
and December 31, 2009. Commercial loan balances at
June 30, 2010 and March 31, 2010 reflect the
implementation of new accounting guidance relating to the
consolidation of variable interest entities (VIEs)
which resulted in an incremental $1.6 billion and
$1.5 billion of commercial loans being recorded on our
balance sheet. Excluding this impact, commercial loan balances
decreased $207 million and $2.4 billion as compared to
March 31, 2010 and December 31, 2009 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
March 31, 2010 and December 31, 2009. 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 in recent months.
84
HSBC USA Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refreshed
LTVs(1)(2)
|
|
|
Refreshed
LTVs(1)(2)
|
|
|
|
at June 30, 2010
|
|
|
at December 31, 2009
|
|
|
|
First
|
|
|
Second
|
|
|
First
|
|
|
Second
|
|
|
|
Lien
|
|
|
Lien
|
|
|
Lien
|
|
|
Lien
|
|
|
|
|
LTV<80%
|
|
|
71.4
|
%
|
|
|
62.2
|
%
|
|
|
71.5
|
%
|
|
|
62.8
|
%
|
80%£LTV<90%
|
|
|
13.7
|
|
|
|
14.0
|
|
|
|
14.3
|
|
|
|
14.9
|
|
90%£LTV<100%
|
|
|
7.8
|
|
|
|
10.3
|
|
|
|
7.7
|
|
|
|
9.5
|
|
LTV³100%
|
|
|
7.1
|
|
|
|
13.5
|
|
|
|
6.5
|
|
|
|
12.8
|
|
Average LTV for portfolio
|
|
|
68.4
|
|
|
|
74.5
|
|
|
|
68.1
|
|
|
|
74.2
|
|
|
|
|
(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. As a result, actual property values associated with
loans which end in foreclosure may be significantly lower than
the estimates used for purposes of this disclosure.
|
|
(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
March 31, 2010 and September 30, 2009, respectively.
|
Credit card and private label receivable balances decreased
compared to both the prior quarter and year end due to fewer
active customer accounts, the continued impact from actions
previously taken to mitigate risk including tighter underwriting
criteria to lower the risk profile of the portfolio, 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. The decline in balances since
December 31, 2009 also reflects seasonal paydowns in credit
card balances.
Auto finance loans continue to decrease 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
June 30, 2010 and increases (decreases) over prior periods,
are summarized in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) from
|
|
|
|
June 30,
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
2010
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Total commercial loans
|
|
$
|
1,554
|
|
|
$
|
103
|
|
|
|
7.1
|
%
|
|
$
|
428
|
|
|
|
38.0
|
%
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
985
|
|
|
|
(144
|
)
|
|
|
(12.8
|
)
|
|
|
(401
|
)
|
|
|
(28.9
|
)
|
Auto Finance
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(353
|
)
|
|
|
(100.0
|
)
|
Other consumer
|
|
|
28
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(15
|
)
|
|
|
(34.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer loans
|
|
|
1,013
|
|
|
|
(144
|
)
|
|
|
(12.5
|
)
|
|
|
(769
|
)
|
|
|
(43.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans held for sale
|
|
$
|
2,567
|
|
|
$
|
(41
|
)
|
|
|
(1.6
|
)%
|
|
$
|
(341
|
)
|
|
|
(11.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, $1.0 billion and $1.1 billion at
June 30, 2010, March 31, 2010 and December 31,
2009, respectively, all
85
HSBC USA Inc.
of which are recorded at fair value. Commercial loan balances
under this program decreased compared to March 31, 2010 and
December 31, 2009 due to loan sales. In 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 $543 million and
$419 million at June 30, 2010 and March 31, 2010,
respectively. See Note 10, Fair Value Option
for further information.
Residential mortgage loans held for sale include subprime
residential mortgage loans of $478 million,
$734 million and $757 million at June 30, 2010,
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 have declined throughout 2010 largely due to sales,
partially offset by improved valuations as discussed below.
During the second quarter of 2010, we sold subprime residential
mortgage loans with a book value of $215 million to
unaffiliated third parties.
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. Balances at June 30, 2010 and
March 31, 2010 reflect 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 June 30, 2010, we experienced a
decrease in the valuation allowance during the six months ended
June 30, 2010 primarily due to lower balances including
loan sales and reduced volatility in the U.S. residential
mortgage markets.
Trading Assets and Liabilities Trading assets and
liabilities balances at June 30, 2010 and increases
(decreases) over prior periods, are summarized in the table
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) from
|
|
|
|
June 30,
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
2010
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Trading assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities(1)
|
|
$
|
4,756
|
|
|
$
|
(236
|
)
|
|
|
(4.7
|
)%
|
|
$
|
(584
|
)
|
|
|
(10.9
|
)%
|
Precious metals
|
|
|
16,388
|
|
|
|
4,561
|
|
|
|
38.6
|
|
|
|
4,132
|
|
|
|
33.7
|
|
Fair value of derivatives
|
|
|
8,004
|
|
|
|
608
|
|
|
|
8.2
|
|
|
|
(215
|
)
|
|
|
(2.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,148
|
|
|
$
|
4,933
|
|
|
|
20.4
|
%
|
|
$
|
3,333
|
|
|
|
12.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold, not yet purchased
|
|
$
|
1,519
|
|
|
$
|
417
|
|
|
|
37.8
|
%
|
|
$
|
1,388
|
|
|
|
100+
|
%
|
Payable for precious metals
|
|
|
3,140
|
|
|
|
(618
|
)
|
|
|
(16.4
|
)
|
|
|
584
|
|
|
|
22.8
|
|
Fair value of derivatives
|
|
|
6,218
|
|
|
|
974
|
|
|
|
18.6
|
|
|
|
895
|
|
|
|
16.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,877
|
|
|
$
|
773
|
|
|
|
7.7
|
%
|
|
$
|
2,867
|
|
|
|
35.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 June 30, 2010 decreased from both
March 31, 2010 and December 31, 2009 due to lower
security levels primarily from security sales. Securities sold,
not yet purchased increased in both periods due to an increase
in Treasury positions related to hedges in the trading portfolio.
86
HSBC USA Inc.
Higher precious metals trading assets at June 30, 2010 as
compared to both March 31, 2010 and December 31, 2009
were primarily due to higher prices on most metals and higher
gold inventory. Increased payables for precious metals from
December 31, 2009 was due to higher gold balances while the
decline from March 31, 2010 was largely due to a decline in
both silver and gold balances.
Derivative assets and liabilities balances as compared to
December 31, 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. These trends were partially
offset since March 31, 2010 as spreads widened.
Deposits Deposit balances by major depositor
categories at June 30, 2010 and increases (decreases) over
prior periods, are summarized in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) from
|
|
|
|
June 30,
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
2010
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Individuals, partnerships and corporations
|
|
$
|
100,770
|
|
|
$
|
(1,667
|
)
|
|
|
(1.6
|
)%
|
|
$
|
2,363
|
|
|
|
2.4
|
%
|
Domestic and foreign banks
|
|
|
13,543
|
|
|
|
(2,166
|
)
|
|
|
(13.8
|
)
|
|
|
(6
|
)
|
|
|
-
|
|
U.S. Government, states and political subdivisions
|
|
|
4,087
|
|
|
|
(203
|
)
|
|
|
(4.7
|
)
|
|
|
(327
|
)
|
|
|
(7.4
|
)
|
Foreign governments and official institutions
|
|
|
3,163
|
|
|
|
788
|
|
|
|
33.2
|
|
|
|
1,196
|
|
|
|
60.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
121,563
|
|
|
$
|
(3,248
|
)
|
|
|
(2.6
|
)%
|
|
$
|
3,226
|
|
|
|
2.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total core
deposits(1)
|
|
$
|
86,094
|
|
|
$
|
2,643
|
|
|
|
3.2
|
%
|
|
$
|
2,867
|
|
|
|
3.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 half of 2010. Deposits at June 30, 2010 decreased
compared to March 31, 2010, primarily due to reduced
deposits from banks and affiliates. Deposits increased
2.7 percent since December 31, 2009 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 during the first half of 2010 driven by
continuing growth in our Premier balances, along with some
seasonal increases in institutional transaction account balances.
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. Total Premier deposits
have grown to $28.2 billion at June 30, 2010 as
compared to $25.1 billion at March 31, 2010 and
$23.6 billion at December 31, 2009;
|
|
|
|
Retail branch expansion in existing and new geographic markets
to largely support the needs of our internationally minded
customers. During the first half 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.
|
87
HSBC USA Inc.
Short-Term Borrowings Increased balances at
June 30, 2010 as compared to December 31, 2009 reflect
increased levels of securities sold under agreements to
repurchase and higher precious metals borrowings. The increase
as compared to December 31, 2009 also reflects higher
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.
Long-Term Debt Long-term debt has continued to
trend lower in 2010 as we continue to focus on deposit gathering
activities. Incremental issuances from the $40 billion HSBC
Bank USA Global Bank Note Program totaled $77 million and
$253 million during the three and six months ended
June 30, 2010. Total debt outstanding under this program
was $3.6 billion and $3.5 billion at June 30,
2010 and December 31, 2009, respectively.
Incremental long-term debt borrowings from our shelf
registration statement with the Securities and Exchange
Commission totaled $454 million and $957 million
during the three and six months ended June 30, 2010,
respectively, compared to $733 million and
$1,368 million during the year-ago periods. Total long term
debt outstanding under this shelf was $6.0 billion and
$5.5 billion at June 30, 2010 and December 31,
2009, respectively.
Borrowings from the Federal Home Loan Bank (FHLB)
totaled $1.0 billion at both June 30, 2010 and
December 31, 2009. At June 30, 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 $2.5 billion at
June 30, 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 $3.2 billion and $2.2 billion were included
in short-term borrowings and long-term debt at June 30,
2010. Debt obligations of VIEs totaling $3.0 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
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Yield on total earning assets
|
|
|
3.56
|
%
|
|
|
4.71
|
%
|
|
|
3.69
|
%
|
|
|
4.82
|
%
|
Rate paid on interest bearing liabilities
|
|
|
.94
|
|
|
|
1.59
|
|
|
|
.96
|
|
|
|
1.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread
|
|
|
2.62
|
|
|
|
3.12
|
|
|
|
2.73
|
|
|
|
3.15
|
|
Benefit from net non-interest earning or paying funds
|
|
|
.16
|
|
|
|
.28
|
|
|
|
.16
|
|
|
|
.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin to earning
assets(1)
|
|
|
2.78
|
%
|
|
|
3.40
|
%
|
|
|
2.89
|
%
|
|
|
3.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Selected financial ratios are
defined in the Glossary of Terms in our 2009
Form 10-K.
|
88
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
|
|
|
Six Months Ended
|
|
|
|
June 30, 2010
|
|
|
June 30, 2010
|
|
|
|
|
|
|
Interest Rate
|
|
|
|
|
|
Interest Rate
|
|
|
|
Amount
|
|
|
Spread
|
|
|
Amount
|
|
|
Spread
|
|
|
|
|
|
|
|
|
(dollars are in millions)
|
|
|
|
|
|
Net interest income/interest rate spread from prior year
|
|
$
|
1,283
|
|
|
|
3.12
|
%
|
|
$
|
2,637
|
|
|
|
3.15
|
%
|
Increase (decrease) in net interest income associated with:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading related activities
|
|
|
(34
|
)
|
|
|
|
|
|
|
(58
|
)
|
|
|
|
|
Balance sheet management
activities(1)
|
|
|
(19
|
)
|
|
|
|
|
|
|
(124
|
)
|
|
|
|
|
Private label credit card portfolio
|
|
|
(35
|
)
|
|
|
|
|
|
|
(37
|
)
|
|
|
|
|
Credit card portfolio
|
|
|
(43
|
)
|
|
|
|
|
|
|
(63
|
)
|
|
|
|
|
Commercial loans
|
|
|
(66
|
)
|
|
|
|
|
|
|
(101
|
)
|
|
|
|
|
Deposits
|
|
|
24
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
Residential mortgage banking
|
|
|
(15
|
)
|
|
|
|
|
|
|
(25
|
)
|
|
|
|
|
Other activity
|
|
|
43
|
|
|
|
|
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/interest rate spread for current year
|
|
$
|
1,138
|
|
|
|
2.62
|
%
|
|
$
|
2,343
|
|
|
|
2.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 and six
months ended June 30, 2010 due primarily to lower balances
on interest earning trading assets, such as trading bonds, 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
and six months ended June 30, 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 lower short-term rates.
Private Label Credit Card Portfolio Net interest income
on private label credit card receivables was lower during the
three and six months ended June 30, 2010 as a result of
higher premium amortization, lower average balances outstanding
and lower receivable levels at penalty pricing, partially offset
by lower funding costs and repricing initiatives.
Credit Card Portfolios Lower net interest income on
credit card receivables during the current periods primarily
reflects lower average balances outstanding and lower receivable
levels at penalty pricing and for the six month period higher
premium amortization, partially offset by higher spreads driven
by lower funding costs and repricing initiatives.
Commercial Loans Net interest income on commercial loans
was lower during the three and six months ended June 30,
2010 due primarily to lower loan balances, partially offset by
loan repricing, lower levels of non-performing loans and lower
funding costs.
Deposits Higher Higher net interest income on deposits
during both periods 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.
89
HSBC USA Inc.
Residential mortgage banking During the three and six
months ended June 30, 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 $.5 billion of prime adjustable and fixed
rate residential mortgages since June 30, 2009.
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 June 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Commercial
|
|
$
|
9
|
|
|
$
|
166
|
|
|
$
|
(157
|
)
|
|
|
(94.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages, excluding home equity mortgages
|
|
|
10
|
|
|
|
97
|
|
|
|
(87
|
)
|
|
|
(89.7
|
)
|
Home equity mortgages
|
|
|
6
|
|
|
|
66
|
|
|
|
(60
|
)
|
|
|
(90.9
|
)
|
Private label card receivables
|
|
|
198
|
|
|
|
310
|
|
|
|
(112
|
)
|
|
|
(36.1
|
)
|
Credit card receivables
|
|
|
215
|
|
|
|
366
|
|
|
|
(151
|
)
|
|
|
(41.3
|
)
|
Auto finance
|
|
|
10
|
|
|
|
40
|
|
|
|
(30
|
)
|
|
|
(75.0
|
)
|
Other consumer
|
|
|
8
|
|
|
|
22
|
|
|
|
(14
|
)
|
|
|
(63.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
447
|
|
|
|
901
|
|
|
|
(454
|
)
|
|
|
(50.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for credit losses
|
|
$
|
456
|
|
|
$
|
1,067
|
|
|
$
|
(611
|
)
|
|
|
(57.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Six Months Ended June 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Commercial
|
|
$
|
(64
|
)
|
|
$
|
314
|
|
|
$
|
(378
|
)
|
|
|
(100+
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages, excluding home equity mortgages
|
|
|
(9
|
)
|
|
|
259
|
|
|
|
(268
|
)
|
|
|
(100+
|
)
|
Home equity mortgages
|
|
|
(15
|
)
|
|
|
87
|
|
|
|
(102
|
)
|
|
|
(100+
|
)
|
Private label card receivables
|
|
|
307
|
|
|
|
709
|
|
|
|
(402
|
)
|
|
|
(56.7
|
)
|
Credit card receivables
|
|
|
405
|
|
|
|
759
|
|
|
|
(354
|
)
|
|
|
(46.6
|
)
|
Auto finance
|
|
|
35
|
|
|
|
65
|
|
|
|
(30
|
)
|
|
|
(46.2
|
)
|
Other consumer
|
|
|
8
|
|
|
|
48
|
|
|
|
(40
|
)
|
|
|
(83.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
731
|
|
|
|
1,927
|
|
|
|
(1,196
|
)
|
|
|
(62.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for credit losses
|
|
$
|
667
|
|
|
$
|
2,241
|
|
|
$
|
(1,574
|
)
|
|
|
(70.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our credit loss reserves decreased during the three months ended
June 30, 2010 as the provision for credit losses was
$278 million lower than net charge-offs compared to
provision for credit losses greater than net charge-offs of
$283 million in the prior year quarter. Credit loss
reserves also decreased during the six months ended
June 30, 2010 as the provision for credit losses was
$919 million lower than net charge-offs compared to
provision for credit losses greater than net charge-offs of
$914 million in the year-ago period. The provision as a
percentage of average receivables was .61 percent and
.87 percent for the three and six months ended
June 30, 2010 compared to
90
HSBC USA Inc.
1.21 percent and 2.47 percent for the three and six
months ended June 30, 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 both
the current quarter and
year-to-date
period as a result of lower loss estimates in most commercial
portfolios 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 year-ago periods. The
combination of all of these factors has led to an overall net
recovery in provision for commercial loans during the six months
ended June 30, 2010. Given the nature of the factors
driving the reduction in commercial loan provision, the
provision levels recognized in the first half of 2010 should not
be considered indicative of provision levels during the
remainder of 2010.
The provision for credit losses on residential mortgages
including home equity mortgages decreased $147 million and
$370 million during the three and six months ended
June 30, 2010 as compared to the year-ago periods. The
decrease in provision for credit losses on residential mortgages
in both periods was attributable to lower receivable levels and
stabilization in residential mortgage loan credit quality as
dollars of delinquency and charge-off continue to decline
compared to the prior year periods 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 $151 million and $354 million
during the three and six months ended June 30, 2010 as
compared to the year-ago periods due to lower receivable levels,
improved economic and credit conditions, including lower dollars
of delinquency, as well as an improved outlook on future loss
estimates as the impact of the economic environment including
high 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 fewer active customer accounts, the
impact of the actions previously taken to reduce risk as well as
an increased focus by customers to pay down credit card debt.
Provision expense associated with our private label card
portfolio decreased $112 million and $402 million
during the three and six months ended June 30, 2010 as
compared to the year-ago periods due to lower receivable levels,
improved economic and credit conditions including lower
delinquency levels and an improved outlook on future loss
estimates as the impact of the economic environment including
high unemployment levels on losses has not been as severe as
previously anticipated as discussed above. Lower receivable
levels reflect fewer active customer accounts as well as the
exit of certain merchant relationships.
Provision expense associated with our auto finance portfolio
declined in both periods, as the portfolio continues to
liquidate and used car prices have improved.
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 our 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.
91
HSBC USA Inc.
Other Revenues The components of other revenues
are summarized in the following tables.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Three Months Ended June 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Credit card fees
|
|
$
|
249
|
|
|
$
|
342
|
|
|
$
|
(93
|
)
|
|
|
(27.2
|
)%
|
Other fees and commissions
|
|
|
200
|
|
|
|
216
|
|
|
|
(16
|
)
|
|
|
(7.4
|
)
|
Trust income
|
|
|
27
|
|
|
|
30
|
|
|
|
(3
|
)
|
|
|
(10.0
|
)
|
Trading revenue
|
|
|
128
|
|
|
|
153
|
|
|
|
(25
|
)
|
|
|
(16.3
|
)
|
Net
other-than-temporary
impairment losses
|
|
|
(13
|
)
|
|
|
(20
|
)
|
|
|
7
|
|
|
|
35.0
|
|
Other securities gains, net
|
|
|
1
|
|
|
|
246
|
|
|
|
(245
|
)
|
|
|
(99.6
|
)
|
HSBC affiliate income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees and commissions
|
|
|
34
|
|
|
|
41
|
|
|
|
(7
|
)
|
|
|
(17.1
|
)
|
Other affiliate income
|
|
|
3
|
|
|
|
4
|
|
|
|
(1
|
)
|
|
|
(25.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total HSBC affiliate income
|
|
|
37
|
|
|
|
45
|
|
|
|
(8
|
)
|
|
|
(17.8
|
)
|
Residential mortgage banking revenue
(loss)(1)
|
|
|
(80
|
)
|
|
|
59
|
|
|
|
(139
|
)
|
|
|
(100+
|
)
|
Gain (loss) on instruments at fair value and related
derivatives(2)
|
|
|
182
|
|
|
|
(357
|
)
|
|
|
539
|
|
|
|
100+
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation of loans held for sale
|
|
|
(16
|
)
|
|
|
(68
|
)
|
|
|
52
|
|
|
|
76.5
|
|
Insurance
|
|
|
4
|
|
|
|
6
|
|
|
|
(2
|
)
|
|
|
(33.3
|
)
|
Earnings from equity investments
|
|
|
4
|
|
|
|
5
|
|
|
|
(1
|
)
|
|
|
(20.0
|
)
|
Miscellaneous income
|
|
|
17
|
|
|
|
(81
|
)
|
|
|
98
|
|
|
|
100+
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
9
|
|
|
|
(138
|
)
|
|
|
147
|
|
|
|
100+
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other revenues
|
|
$
|
740
|
|
|
$
|
576
|
|
|
$
|
164
|
|
|
|
28.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92
HSBC USA Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Six Months Ended June 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Credit card fees
|
|
$
|
482
|
|
|
$
|
699
|
|
|
$
|
(217
|
)
|
|
|
(31.0
|
)%
|
Other fees and commissions
|
|
|
492
|
|
|
|
447
|
|
|
|
45
|
|
|
|
10.1
|
|
Trust income
|
|
|
53
|
|
|
|
62
|
|
|
|
(9
|
)
|
|
|
(14.5
|
)
|
Trading revenue (loss)
|
|
|
332
|
|
|
|
(1
|
)
|
|
|
333
|
|
|
|
100+
|
|
Net
other-than-temporary
impairment losses
|
|
|
(41
|
)
|
|
|
(58
|
)
|
|
|
17
|
|
|
|
29.3
|
|
Other securities gains, net
|
|
|
22
|
|
|
|
293
|
|
|
|
(271
|
)
|
|
|
(92.5
|
)
|
HSBC affiliate income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees and commissions
|
|
|
64
|
|
|
|
67
|
|
|
|
(3
|
)
|
|
|
(4.5
|
)
|
Other affiliate income
|
|
|
9
|
|
|
|
10
|
|
|
|
(1
|
)
|
|
|
(10.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total HSBC affiliate income
|
|
|
73
|
|
|
|
77
|
|
|
|
(4
|
)
|
|
|
(5.2
|
)
|
Residential mortgage banking revenue
(loss)(1)
|
|
|
(117
|
)
|
|
|
124
|
|
|
|
(241
|
)
|
|
|
(100+
|
)
|
Gain (loss) on instruments at fair value and related
derivatives(2)
|
|
|
228
|
|
|
|
(246
|
)
|
|
|
474
|
|
|
|
100+
|
|
Other income :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation of loans held for sale
|
|
|
61
|
|
|
|
(154
|
)
|
|
|
215
|
|
|
|
100+
|
|
Insurance
|
|
|
9
|
|
|
|
13
|
|
|
|
(4
|
)
|
|
|
(30.8
|
)
|
Earnings from equity investments
|
|
|
7
|
|
|
|
21
|
|
|
|
(14
|
)
|
|
|
(66.7
|
)
|
Miscellaneous income
|
|
|
90
|
|
|
|
49
|
|
|
|
41
|
|
|
|
83.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
167
|
|
|
|
(71
|
)
|
|
|
238
|
|
|
|
100+
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other revenues
|
|
$
|
1,691
|
|
|
$
|
1,326
|
|
|
$
|
365
|
|
|
|
27.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes servicing fees received
from HBSC Finance of $2 million and $4 million during
the three and six months ended June 30, 2010, respectively,
and $3 million and $6 million during the three and six
months ended June 30, 2009.
|
|
(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 both
periods were due primarily to lower receivable levels as a
result of fewer active customer accounts, changes in customer
behavior, increased seasonality in the first quarter of 2010,
the continuing impact of efforts to manage risk initiated in
prior periods, improved delinquency levels and the
implementation of certain provisions of the CARD Act earlier in
the year which has resulted in lower overlimit and payment
processing fees. Also contributing to the decrease were higher
revenue share payments due to improved cash flows and higher
reversals of fee income stemming from reduced charge-off
activity upon acquisition of the GM and UP Portfolios in the
first half of 2009 due to purchase accounting.
Other Fees and Commissions Other fee-based income
decreased during the three month period ended June 30,
2010, but increased in the
year-to-date
period. During both the three and six month periods, we
experienced lower commitment and facility fees on commercial
loans. In the
year-to-date
period, these decreases were more than offset by higher refund
anticipation loan fees. Beginning in 2010, we began to keep a
portion of originated refund anticipation loans, which is
seasonal principally to the first quarter, 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 both periods
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.
93
HSBC USA Inc.
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 June 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Trading revenue (loss)
|
|
$
|
128
|
|
|
$
|
153
|
|
|
$
|
(25
|
)
|
|
|
(16.3
|
)%
|
Net interest income
|
|
|
16
|
|
|
|
50
|
|
|
|
(34
|
)
|
|
|
(68.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading related revenue (loss)
|
|
$
|
144
|
|
|
$
|
203
|
|
|
$
|
(59
|
)
|
|
|
(29.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
28
|
|
|
$
|
(43
|
)
|
|
$
|
71
|
|
|
|
100+
|
%
|
Balance sheet management
|
|
|
41
|
|
|
|
33
|
|
|
|
8
|
|
|
|
24.2
|
|
Foreign exchange and banknotes
|
|
|
72
|
|
|
|
89
|
|
|
|
(17
|
)
|
|
|
(19.1
|
)
|
Precious metals
|
|
|
14
|
|
|
|
14
|
|
|
|
-
|
|
|
|
-
|
|
Global banking
|
|
|
(12
|
)
|
|
|
110
|
|
|
|
(122
|
)
|
|
|
(100+
|
)
|
Other trading
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
|
|
100+
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading related revenue (loss)
|
|
$
|
144
|
|
|
$
|
203
|
|
|
$
|
(59
|
)
|
|
|
(29.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Six Months Ended June 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Trading revenue (loss)
|
|
$
|
332
|
|
|
$
|
(1
|
)
|
|
$
|
333
|
|
|
|
100+
|
%
|
Net interest income
|
|
|
19
|
|
|
|
77
|
|
|
|
(58
|
)
|
|
|
(75.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading related revenue (loss)
|
|
$
|
351
|
|
|
$
|
76
|
|
|
$
|
275
|
|
|
|
100+
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
135
|
|
|
$
|
(340
|
)
|
|
$
|
475
|
|
|
|
100+
|
%
|
Balance sheet management
|
|
|
73
|
|
|
|
44
|
|
|
|
29
|
|
|
|
65.9
|
|
Foreign exchange and banknotes
|
|
|
128
|
|
|
|
210
|
|
|
|
(82
|
)
|
|
|
(39.0
|
)
|
Precious metals
|
|
|
34
|
|
|
|
34
|
|
|
|
-
|
|
|
|
-
|
|
Global banking
|
|
|
(17
|
)
|
|
|
128
|
|
|
|
(145
|
)
|
|
|
(100+
|
)
|
Other trading
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
(100+
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading related revenue (loss)
|
|
$
|
351
|
|
|
$
|
76
|
|
|
$
|
275
|
|
|
|
100+
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading revenue (loss) decreased in the three month period ended
June 30, 2010 compared to the prior year quarter but
improved significantly in the six month period as the year-ago
six month period 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.
During the three month periods ended June 30, 2010 and
2009, the value of credit derivatives remained fairly stable.
Trading revenue related to derivatives improved during the three
and six months ended June 30, 2010 due to the performance
of structured credit products which reported total gains of
$26 million and $119 million during the
94
HSBC USA Inc.
three and six months ended June 30, 2010, respectively, as
compared to total losses of $21 million and
$378 million during the year-ago periods. The performance
of credit derivatives remained stable during the first half 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 and six months ended June 30, 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.
Foreign exchange and banknotes revenue declined in both periods
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 both
periods as a result of continuing demand for metals due to
economic conditions.
Global banking revenue decreased during the three and six months
ended June 30, 2010 due to a decline in corporate bond
values compared to gains in the year ago periods.
Net
Other-Than-Temporary
Impairment (Losses) Recoveries During the three and six
months ended June 30, 2010, 24 debt securities and 37 debt
securities, respectively, were determined to have either initial
other-than-temporary
impairment or changes to previous
other-than-temporary
impairment estimates compared to 8 and 17 debt securities,
respectively, which were determined to be
other-than-temporarily
impaired in the year-ago periods. The following table presents
the various components of
other-than-temporary
impairment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Total
other-than-temporary
impairment recoveries (losses)
|
|
$
|
70
|
|
|
$
|
(43
|
)
|
|
$
|
103
|
|
|
$
|
(159
|
)
|
Portion of loss (recovery) recognized in other comprehensive
income, before taxes
|
|
|
(83
|
)
|
|
|
23
|
|
|
|
(144
|
)
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
other-than-temporary
impairment losses recognized in the consolidated statement of
income (loss)
|
|
$
|
(13
|
)
|
|
$
|
(20
|
)
|
|
$
|
(41
|
)
|
|
$
|
(58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Available-for-sale
securities
|
|
$
|
1
|
|
|
$
|
198
|
|
|
$
|
22
|
|
|
$
|
245
|
|
Sale of MasterCard or Visa Class B Shares
|
|
|
-
|
|
|
|
48
|
|
|
|
-
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other securities gains, net
|
|
$
|
1
|
|
|
$
|
246
|
|
|
$
|
22
|
|
|
$
|
293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains and losses from sales of securities are
summarized in Note 3, Securities, in the
accompanying consolidated financial statements.
During the second quarter and first six months of 2010, we sold
$6.7 billion and $10.6 billion, respectively, of US
treasury, municipal, mortgage-backed and other asset-backed
securities as part of a strategy to adjust portfolio risk
95
HSBC USA Inc.
duration as well as to reduce risk-weighted asset levels and
recognized gains of $51 million and $82 million and
losses of $50 million and $60 million, respectively,
during these periods which is included as a component of other
security gains, net above.
During the second quarter and first six months of 2009, we sold
$9.4 billion and $12.8 billion of mortgage backed and
other asset backed securities as part of a strategy to reduce
prepayment risk as well as risk-weighted asset levels and
recognized gains of $224 million and $283 million and
losses of $26 million and $38 million, respectively,
during these periods which is included as a component of other
securities gains, net above.
HSBC Affiliate Income Affiliate income was lower in both
periods due to lower fees and commissions earned from HSBC
Markets USA (HMUS) and other HSBC affiliates as
compared to the year-ago periods and, in the six month period,
lower fees on tax refund anticipation loans as beginning in
2010, we now transfer only a portion of these loans to HSBC
Finance upon origination as discussed above.
Residential Mortgage Banking Revenue (Loss) 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 June 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
54
|
|
|
$
|
69
|
|
|
$
|
(15
|
)
|
|
|
(21.7
|
)%
|
Servicing related income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fee income
|
|
|
30
|
|
|
|
32
|
|
|
|
(2
|
)
|
|
|
(6.3
|
)
|
Changes in fair value of MSRs due to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in valuation inputs or assumptions used in valuation
model
|
|
|
(119
|
)
|
|
|
88
|
|
|
|
(207
|
)
|
|
|
(100+
|
)
|
Realization of cash flows
|
|
|
(18
|
)
|
|
|
(4
|
)
|
|
|
(14
|
)
|
|
|
(100+
|
)
|
Trading Derivative instruments used to offset
changes in value of MSRs
|
|
|
137
|
|
|
|
(99
|
)
|
|
|
236
|
|
|
|
100+
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total servicing related income
|
|
|
30
|
|
|
|
17
|
|
|
|
13
|
|
|
|
76.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originations and sales related income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) on sales of residential mortgages
|
|
|
(108
|
)
|
|
|
26
|
|
|
|
(134
|
)
|
|
|
(100+
|
)
|
Trading and hedging activity
|
|
|
(10
|
)
|
|
|
11
|
|
|
|
(21
|
)
|
|
|
(100+
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originations and sales related income (loss)
|
|
|
(118
|
)
|
|
|
37
|
|
|
|
(155
|
)
|
|
|
(100+
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other mortgage income
|
|
|
8
|
|
|
|
5
|
|
|
|
3
|
|
|
|
60.0
|
|
Total residential mortgage banking revenue included in other
revenues (losses)
|
|
|
(80
|
)
|
|
|
59
|
|
|
|
(139
|
)
|
|
|
(100+
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential mortgage banking related revenue (loss)
|
|
$
|
(26
|
)
|
|
$
|
128
|
|
|
$
|
(154
|
)
|
|
|
(100+
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96
HSBC USA Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Six Months Ended June 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
110
|
|
|
$
|
135
|
|
|
$
|
(25
|
)
|
|
|
(18.5
|
)%
|
Servicing related income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fee income
|
|
|
62
|
|
|
|
66
|
|
|
|
(4
|
)
|
|
|
(6.1
|
)
|
Changes in fair value of MSRs due to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in valuation inputs or assumptions used in valuation
model
|
|
|
(114
|
)
|
|
|
60
|
|
|
|
(174
|
)
|
|
|
(100+
|
)
|
Realization of cash flows
|
|
|
(45
|
)
|
|
|
(24
|
)
|
|
|
(21
|
)
|
|
|
(87.5
|
)
|
Trading Derivative instruments used to offset
changes in value of MSRs
|
|
|
148
|
|
|
|
(63
|
)
|
|
|
211
|
|
|
|
100+
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total servicing related income
|
|
|
51
|
|
|
|
39
|
|
|
|
12
|
|
|
|
30.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originations and sales related income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) on sales of residential mortgages
|
|
|
(167
|
)
|
|
|
59
|
|
|
|
(226
|
)
|
|
|
(100+
|
)
|
Trading and hedging activity
|
|
|
(15
|
)
|
|
|
17
|
|
|
|
(32
|
)
|
|
|
(100+
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originations and sales related income (loss)
|
|
|
(182
|
)
|
|
|
76
|
|
|
|
(258
|
)
|
|
|
(100+
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other mortgage income
|
|
|
14
|
|
|
|
9
|
|
|
|
5
|
|
|
|
55.6
|
|
Total residential mortgage banking revenue included in other
revenues (losses)
|
|
|
(117
|
)
|
|
|
124
|
|
|
|
(241
|
)
|
|
|
(100+
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential mortgage banking related revenue
|
|
$
|
(7
|
)
|
|
$
|
259
|
|
|
$
|
(266
|
)
|
|
|
(100+
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lower net interest income during both periods reflects lower
loan balances, partially offset by lower funding costs as well
as reduced deferred loan origination cost amortization on lower
average outstandings. Lower loan balances reflect the sale of
approximately $0.5 billion of prime adjustable and fixed
rate residential mortgages since June 30, 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 increased in both periods driven
by better net hedged MSR performance, partially offset by lower
servicing fee income as the average serviced loan portfolio
declined as new originations sold were more than offset by
prepayments.
Originations and sales related income decreased in both periods
primarily due to lower gains from loan sales and a higher
estimate of exposure on repurchase obligations associated with
previously sold loans. We recorded gains of $30 million and
$67 million in the three and six months ended June 30,
2009 related to held mortgage asset sales. There were no held
mortgage asset sales in the first half of 2010. During the three
and six month periods ended June 30, 2010, we recorded
expense of $117 million and $190 million,
respectively, due to an increase in our estimated exposure
associated with repurchase obligations on loans previously sold.
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
unfunded commitments, certain other commercial loans, 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.
Valuation on Loans Held for Sale Valuation adjustments on
loans held for sale improved during the three and six months
ended June 30, 2010, as there has been reduced volatility
in the U.S. residential mortgage market driven by
97
HSBC USA Inc.
stabilization of home prices in the U.S. since
June 30, 2009. 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
$478 million and $757 million as of June 30, 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).
Valuations on loans held for sale in the six months ended
June 30, 2010 also reflects an $89 million settlement
relating to certain whole loans previously purchased for re-sale
from a third party.
Other Income (Loss) Excluding the valuation of loans held
for sale as discussed above, other income (loss) improved during
the three and six months ended June 30, 2010 due largely to
higher miscellaneous income due to gains related to credit
derivatives used to economically hedge certain commercial loans.
For the six month period ended June 30, 2009, other income
(loss) 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 six months ended June 30, 2010
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.
98
HSBC USA Inc.
Operating Expenses The components of operating
expenses are summarized in the following tables.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Three Months Ended June 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Salaries and employee benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
|
|
$
|
145
|
|
|
$
|
155
|
|
|
$
|
(10
|
)
|
|
|
(6.5
|
)%
|
Employee benefits
|
|
|
135
|
|
|
|
147
|
|
|
|
(12
|
)
|
|
|
(8.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total salaries and employee benefits
|
|
|
280
|
|
|
|
302
|
|
|
|
(22
|
)
|
|
|
(7.3
|
)
|
Occupancy expense, net
|
|
|
65
|
|
|
|
88
|
|
|
|
(23
|
)
|
|
|
(26.1
|
)
|
Support services from HSBC affiliates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees paid to HSBC Finance for loan servicing and other
administrative support
|
|
|
165
|
|
|
|
184
|
|
|
|
(19
|
)
|
|
|
(10.3
|
)
|
Fees paid to HMUS
|
|
|
57
|
|
|
|
66
|
|
|
|
(9
|
)
|
|
|
(13.6
|
)
|
Fees paid to HTSU
|
|
|
191
|
|
|
|
136
|
|
|
|
55
|
|
|
|
40.4
|
|
Fees paid to other HSBC affiliates
|
|
|
45
|
|
|
|
33
|
|
|
|
12
|
|
|
|
36.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total support services from HSBC affiliates
|
|
|
458
|
|
|
|
419
|
|
|
|
39
|
|
|
|
9.3
|
|
Other expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment and software
|
|
|
11
|
|
|
|
10
|
|
|
|
1
|
|
|
|
10.0
|
|
Marketing
|
|
|
25
|
|
|
|
30
|
|
|
|
(5
|
)
|
|
|
(16.7
|
)
|
Outside services
|
|
|
32
|
|
|
|
17
|
|
|
|
15
|
|
|
|
88.2
|
|
Professional fees
|
|
|
17
|
|
|
|
16
|
|
|
|
1
|
|
|
|
6.3
|
|
Telecommunications
|
|
|
4
|
|
|
|
3
|
|
|
|
1
|
|
|
|
33.3
|
|
Postage, printing and office supplies
|
|
|
3
|
|
|
|
5
|
|
|
|
(2
|
)
|
|
|
(44.2
|
)
|
Off-balance sheet credit reserves
|
|
|
(4
|
)
|
|
|
2
|
|
|
|
(6
|
)
|
|
|
(100+
|
)
|
FDIC assessment fee
|
|
|
33
|
|
|
|
117
|
|
|
|
(84
|
)
|
|
|
(71.8
|
)
|
Insurance business
|
|
|
(2
|
)
|
|
|
21
|
|
|
|
(23
|
)
|
|
|
(100+
|
)
|
Miscellaneous
|
|
|
71
|
|
|
|
58
|
|
|
|
13
|
|
|
|
22.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
190
|
|
|
|
279
|
|
|
|
(89
|
)
|
|
|
(32.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
993
|
|
|
$
|
1,088
|
|
|
$
|
(95
|
)
|
|
|
(8.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel average number
|
|
|
9,007
|
|
|
|
9,598
|
|
|
|
|
|
|
|
|
|
Efficiency ratio
|
|
|
52.99
|
%
|
|
|
58.75
|
%
|
|
|
|
|
|
|
|
|
99
HSBC USA Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Six Months Ended June 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Salaries and employee benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
|
|
$
|
284
|
|
|
$
|
308
|
|
|
$
|
(24
|
)
|
|
|
(7.8
|
)%
|
Employee benefits
|
|
|
263
|
|
|
|
285
|
|
|
|
(22
|
)
|
|
|
(7.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total salaries and employee benefits
|
|
|
547
|
|
|
|
593
|
|
|
|
(46
|
)
|
|
|
(7.8
|
)
|
Occupancy expense, net
|
|
|
136
|
|
|
|
151
|
|
|
|
(15
|
)
|
|
|
(9.9
|
)
|
Support services from HSBC affiliates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees paid to HSBC Finance for loan servicing and other
administrative support
|
|
|
389
|
|
|
|
373
|
|
|
|
16
|
|
|
|
4.3
|
|
Fees paid to HMUS
|
|
|
144
|
|
|
|
137
|
|
|
|
7
|
|
|
|
5.1
|
|
Fees paid to HTSU
|
|
|
363
|
|
|
|
247
|
|
|
|
116
|
|
|
|
47.0
|
|
Fees paid to other HSBC affiliates
|
|
|
80
|
|
|
|
85
|
|
|
|
(5
|
)
|
|
|
(5.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total support services from HSBC affiliates
|
|
|
976
|
|
|
|
842
|
|
|
|
134
|
|
|
|
15.9
|
|
Other expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment and software
|
|
|
22
|
|
|
|
20
|
|
|
|
2
|
|
|
|
10.0
|
|
Marketing
|
|
|
53
|
|
|
|
67
|
|
|
|
(14
|
)
|
|
|
(20.9
|
)
|
Outside services
|
|
|
54
|
|
|
|
44
|
|
|
|
10
|
|
|
|
22.7
|
|
Professional fees
|
|
|
29
|
|
|
|
33
|
|
|
|
(4
|
)
|
|
|
(12.1
|
)
|
Telecommunications
|
|
|
7
|
|
|
|
7
|
|
|
|
-
|
|
|
|
-
|
|
Postage, printing and office supplies
|
|
|
7
|
|
|
|
8
|
|
|
|
(1
|
)
|
|
|
(12.5
|
)
|
Off-balance sheet credit reserves
|
|
|
(12
|
)
|
|
|
(2
|
)
|
|
|
(10
|
)
|
|
|
(100+
|
)
|
FDIC assessment fee
|
|
|
69
|
|
|
|
151
|
|
|
|
(82
|
)
|
|
|
(54.3
|
)
|
Insurance business
|
|
|
(3
|
)
|
|
|
43
|
|
|
|
(46
|
)
|
|
|
(100+
|
)
|
Miscellaneous
|
|
|
174
|
|
|
|
103
|
|
|
|
71
|
|
|
|
68.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
400
|
|
|
|
474
|
|
|
|
(74
|
)
|
|
|
(15.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
2,059
|
|
|
$
|
2,060
|
|
|
$
|
(1
|
)
|
|
|
-
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel average number
|
|
|
9,085
|
|
|
|
9,823
|
|
|
|
|
|
|
|
|
|
Efficiency ratio
|
|
|
51.17
|
%
|
|
|
52.16
|
%
|
|
|
|
|
|
|
|
|
Salaries and Employee Benefits Salaries and employee
benefits expense decreased during both periods 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 decreased in
both periods due largely to the transfer of additional shared
services employees and their related workspace expenses to an
affiliate, as discussed below, which was partially offset by
higher occupancy expense associated with the expansion of the
core banking network within the PFS segment and in the six month
period, $8 million in lease abandonment costs associated
with the closure of several non-strategic branches recorded
during the first quarter of 2010. Subsequent to June 30,
2009, we opened 16 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 an HSBC affiliate
located outside of the United States which provides operational
support to our businesses,
100
HSBC USA Inc.
including among other areas, customer service, systems,
collection and accounting functions. Higher support services
from HSBC affiliates in both periods reflects the increased
level of services provided, including 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 which totaled $2 million and
$58 million during the three and six months ended
June 30, 2010. These increases were partially offset by
lower levels of receivables being serviced.
Marketing Expenses Lower marketing and promotional
expenses in both periods 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 and CMB business segments.
Other Expenses Other expenses (excluding marketing
expenses) decreased in both periods driven by lower FDIC
assessment fees as the year-ago period included a
$82 million special assessment recorded in the second
quarter of 2009. This was partially offset by higher
miscellaneous expenses including higher legal costs, higher
collection agency costs, higher outside services costs and in
the six month period, higher interest accruals for state tax
exposures.
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
52.99 percent and 51.17 percent for the three and six
months ended June 30, 2010 compared to 58.75 percent
and 52.16 percent in the year-ago periods. The improvement
in the efficiency ratio in both periods resulted primarily from
higher other revenues and lower operating expenses, partially
offset by decreased net interest income.
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.
We report to our parent, HSBC, in accordance with its reporting
basis, IFRSs. As a result, 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. 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 15, 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 2010, we continue to direct resources towards the
expansion of the core retail banking business and 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 2010
with the opening of four new branches (all of which occurred in
the first quarter) in geographic markets with international
connectivity as well as continued investment in the HSBC brand.
We intend to open additional new branches as the opportunity
arises. Average personal deposits in the second quarter of 2010
increased approximately 1.5 percent compared to the level
experienced in the second quarter of 2009. Online savings
balances have grown to $16.1 billion at June 30, 2010
as compared to $15.6 billion at December 31, 2009.
Premier customers increased to 429,179 at June 30, 2010, a
21 percent increase from December 31, 2009 and a
41 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.
101
HSBC USA Inc.
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 sold prime adjustable and
fixed rate mortgage loan portfolios to third parties in prior
years. No such sales occurred during the first half of 2010. For
the three and six months ended June 30, 2009, we sold
approximately $2.1 billion and $4.0 billion,
respectively, of prime adjustable and fixed rate residential
mortgage loans to third parties. We retained the servicing
rights in relation to the mortgages upon sale. As a result,
average residential mortgage loans outstanding have continued to
decline during the second quarter of 2010, decreasing
approximately 25 percent as compared to average residential
mortgage loans outstanding during the second quarter of 2009.
The following table summarizes the IFRSs Basis results for our
PFS segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Three Months Ended June 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
238
|
|
|
$
|
240
|
|
|
$
|
(2
|
)
|
|
|
(.8
|
)%
|
Other operating income
|
|
|
17
|
|
|
|
43
|
|
|
|
(26
|
)
|
|
|
(60.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
255
|
|
|
|
283
|
|
|
|
(28
|
)
|
|
|
(9.9
|
)
|
Loan impairment charges
|
|
|
29
|
|
|
|
172
|
|
|
|
(143
|
)
|
|
|
(83.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
226
|
|
|
|
111
|
|
|
|
115
|
|
|
|
100+
|
|
Operating expenses
|
|
|
316
|
|
|
|
335
|
|
|
|
(19
|
)
|
|
|
(5.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax
|
|
$
|
(90
|
)
|
|
$
|
(224
|
)
|
|
$
|
134
|
|
|
|
59.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Six Months Ended June 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
479
|
|
|
$
|
427
|
|
|
$
|
52
|
|
|
|
12.2
|
%
|
Other operating income
|
|
|
63
|
|
|
|
83
|
|
|
|
(20
|
)
|
|
|
(24.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
542
|
|
|
|
510
|
|
|
|
32
|
|
|
|
6.3
|
|
Loan impairment charges
|
|
|
26
|
|
|
|
372
|
|
|
|
(346
|
)
|
|
|
(93.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
516
|
|
|
|
138
|
|
|
|
378
|
|
|
|
100+
|
|
Operating expenses
|
|
|
587
|
|
|
|
630
|
|
|
|
(43
|
)
|
|
|
(6.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax
|
|
$
|
(71
|
)
|
|
$
|
(492
|
)
|
|
$
|
421
|
|
|
|
85.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our PFS segment reported a loss before tax during the three and
six months ended June 30, 2010 which was lower than the
losses before tax during the year-ago periods. The improvement
was driven primarily by lower loan impairment charges as well as
lower operating expenses and in the six month period, higher net
interest income, partially offset by lower other operating
income.
Net interest income increased during the six month period
compared to the prior year period, driven by a combination of
customer rate cuts and additional funding credits on deposits.
The higher net interest income was partially offset by lower
levels of mortgage loans outstanding in part due to mortgage
loan sales of approximately $0.5 billion since
June 30, 2009. For the three month period, interest income
remained flat.
Other operating income decreased during both periods reflecting
the impact of increases in our estimate of exposure on
repurchase obligations associated with previously sold loans
which reduced other operating income in 2010 by
$117 million in the second quarter and $190 million in
the six month period. Additionally, other operating income in
both prior year periods include intersegment charges from the
Global Banking and Markets segment of $61 million
102
HSBC USA Inc.
in the second quarter and $163 million
year-to-date
relating to costs associated with early termination of the
funding associated with residential mortgage loan sales in the
first and second quarters of 2009. This was partially offset by
net gains on the sales of these residential mortgage loans in
2009 of $31 million in the second quarter and
$70 million in the
year-to-date
period.
Loan impairment charges declined in the three and six months
ended June 30, 2010, driven largely by stabilization in
residential mortgage loan credit quality as dollars of
delinquency and loss severities in the first half of 2010 have
moderated which, along with lower loan balances, has led to an
improvement in our future loss estimates.
Operating expenses decreased in both periods as lower FDIC
assessment fees largely driven by the special assessment in the
second quarter of 2009 were partially offset by higher costs
from shared support services and higher costs from the expansion
of our branch network. Also contributing to the decrease during
the six months ended June 30, 2010 was 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 and a
recovery of $6 million in the second quarter of 2010
related to the Visa legal accrual previously established in 2007.
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.
The following table summarizes the IFRSs Basis results for our
CF segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Three Months Ended June 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
484
|
|
|
$
|
520
|
|
|
$
|
(36
|
)
|
|
|
(6.9
|
)%
|
Other operating income
|
|
|
36
|
|
|
|
84
|
|
|
|
(48
|
)
|
|
|
(57.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
520
|
|
|
|
604
|
|
|
|
(84
|
)
|
|
|
(13.9
|
)
|
Loan impairment charges
|
|
|
355
|
|
|
|
477
|
|
|
|
(122
|
)
|
|
|
(25.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
165
|
|
|
|
127
|
|
|
|
38
|
|
|
|
29.9
|
|
Operating expenses
|
|
|
28
|
|
|
|
37
|
|
|
|
(9
|
)
|
|
|
(24.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax
|
|
$
|
137
|
|
|
$
|
90
|
|
|
$
|
47
|
|
|
|
52.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Six Months Ended June 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
1,007
|
|
|
$
|
1,049
|
|
|
$
|
(42
|
)
|
|
|
(4.0
|
)%
|
Other operating income
|
|
|
53
|
|
|
|
165
|
|
|
|
(112
|
)
|
|
|
(67.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
1,060
|
|
|
|
1,214
|
|
|
|
(154
|
)
|
|
|
(12.7
|
)
|
Loan impairment charges
|
|
|
565
|
|
|
|
1,031
|
|
|
|
(466
|
)
|
|
|
(45.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
495
|
|
|
|
183
|
|
|
|
312
|
|
|
|
100+
|
|
Operating expenses
|
|
|
55
|
|
|
|
51
|
|
|
|
4
|
|
|
|
7.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax
|
|
$
|
440
|
|
|
$
|
132
|
|
|
$
|
308
|
|
|
|
100+
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103
HSBC USA Inc.
Our CF segment reported a higher profit before tax during the
three and six months ended June 30, 2010 largely due to
lower loan impairment charges which was partially offset by
lower other operating income and lower net interest income.
Net interest income was lower in both periods driven by lower
outstanding receivable levels, lower yield due to lower
receivable levels at penalty pricing primarily due to the impact
of the new credit card legislation, higher premium amortization
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 decline and be replaced by new volume. This was
partially offset by repricing initiatives, a lower cost of funds
due to a lower short term interest rate environment and a
refinement to the assumptions used in allocating interest to the
portion of the GM and UP portfolio previously recorded at fair
value.
Other operating income decreased during both periods 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 both periods due to lower receivable levels driven by
fewer active customer accounts, 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 as well as an improved outlook on
future loss estimates as the impact of the economic environment
including high 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 periods 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 decreased during the second quarter due to
lower FDIC assessment fees as the second quarter of 2009
included a special FDIC assessment. This was partially offset by
higher collection costs on bad debt accounts which were
previously reported in loan impairment charges and higher fraud
expenses. For the year-to date period, the higher collection and
fraud expenses more than offset the impact of lower FDIC
assessment fees.
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 which
take effect on August 22, 2010. 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. 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 second quarter and first half of 2010, interest rate
spreads, while improved from the prior year periods, 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 a 16 percent decrease
in loans outstanding to middle-market customers at June 30,
2010 as compared to a year-ago, while deposits from
middle-market customers at June 30, 2010 grew
18 percent since June 30, 2009. The business banking
loan portfolio has seen an 8 percent
104
HSBC USA Inc.
decrease in loans outstanding since June 30, 2009 resulting
from an increase in paydowns and a decline in the demand for new
credit facilities, while business banking customer deposits at
June 30, 2010 grew 4 percent compared to June 2009
levels. The commercial real estate business continues to focus
on deal quality and portfolio management rather than volume,
which resulted in a 7 percent decline in outstanding
receivables for this portfolio since June 2009. Average customer
deposit balances across all CMB business lines during the six
months ended June 30, 2010 increased 9 percent as
compared to the year-ago period and average loans during the six
months ended June 30, 2010 decreased 15 percent as
compared to the year-ago 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 which is included in other operating income.
The following table summarizes the IFRSs Basis results for our
CMB segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Three Months Ended June 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
176
|
|
|
$
|
180
|
|
|
$
|
(4
|
)
|
|
|
(2.2
|
)%
|
Other operating income
|
|
|
96
|
|
|
|
82
|
|
|
|
14
|
|
|
|
17.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
272
|
|
|
|
262
|
|
|
|
10
|
|
|
|
3.8
|
|
Loan impairment charges
|
|
|
47
|
|
|
|
90
|
|
|
|
(43
|
)
|
|
|
(47.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
225
|
|
|
|
172
|
|
|
|
53
|
|
|
|
30.8
|
|
Operating expenses
|
|
|
171
|
|
|
|
158
|
|
|
|
13
|
|
|
|
8.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax
|
|
$
|
54
|
|
|
$
|
14
|
|
|
$
|
40
|
|
|
|
100+
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Six Months Ended June 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
364
|
|
|
$
|
356
|
|
|
$
|
8
|
|
|
|
2.2
|
%
|
Other operating income
|
|
|
249
|
|
|
|
163
|
|
|
|
86
|
|
|
|
52.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
613
|
|
|
|
519
|
|
|
|
94
|
|
|
|
18.1
|
|
Loan impairment charges
|
|
|
48
|
|
|
|
171
|
|
|
|
(123
|
)
|
|
|
(71.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
565
|
|
|
|
348
|
|
|
|
217
|
|
|
|
62.4
|
|
Operating expenses
|
|
|
321
|
|
|
|
312
|
|
|
|
9
|
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax
|
|
$
|
244
|
|
|
$
|
36
|
|
|
$
|
208
|
|
|
|
100+
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our CMB segment reported a higher profit before tax during the
three and six months ended June 30, 2010 due to higher
other operating income, lower loan impairment charges and in the
year-to-date
period, higher net interest income, partially offset by higher
operating expenses.
Net interest income decreased modestly in the second quarter of
2010 as lower loan balances offset growth in deposit balances
and improved loan spreads from re-pricing activities in the
second half of 2009. Net interest income increased in the
year-to-date
period due to growth in deposit balances and improved loan
spreads, partially offset by lower loan balances.
Other operating income increased during both periods reflecting
higher income on our low income housing investments. The
increase in the six months ended June 30, 2010 also
reflects a $66 million gain on the sale of our equity
investment in WHTB.
Loan impairment charges improved in both periods as economic
conditions began to improve and credit quality began to
stabilize resulting in improvements in the financial
circumstances of several customer relationships which
105
HSBC USA Inc.
led to credit upgrades on certain problem credits, lower
charge-offs and fewer customer downgrades across all business
lines.
Operating expenses increased during both periods due to higher
amortization of low income housing investment activity, which is
offset in other operating income, and higher performance related
compensation costs, which were partially offset by lower FDIC
assessment fees as the year-ago periods included a special FDIC
assessment recorded during the second quarter of 2009. The
increase during the six months ended June 30, 2010 was
partially offset by a $16 million pension curtailment gain
recorded in the first quarter of 2010 as previously discussed.
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 second
quarter and first half of 2010 benefited from improved credit
market conditions, which led to an increase in the credit
quality of our corporate lending relationships, lower securities
impairment charges, and reduced losses in legacy positions as
compared to the year ago periods. As credit markets have
stabilized, results from legacy positions including credit
derivatives and subprime mortgage loans have contributed to
higher Other Operating Income. 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.
Under the provisions of the IAS 39 amendment issued in October
2008, 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
June 30, 2010 and 2009 would have been higher by
$118 million and $257 million, respectively, and our
profit before tax for the six months ended June 30, 2010
and 2009 would have been higher by $188 million and
$238 million, respectively.
The following table summarizes IFRSs Basis results for the
Global Banking and Markets segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Three Months Ended June 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
143
|
|
|
$
|
222
|
|
|
$
|
(79
|
)
|
|
|
(35.6
|
)%
|
Other operating income
|
|
|
303
|
|
|
|
288
|
|
|
|
15
|
|
|
|
5.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
446
|
|
|
|
510
|
|
|
|
(64
|
)
|
|
|
(12.5
|
)
|
Loan impairment charges
|
|
|
(72
|
)
|
|
|
197
|
|
|
|
(269
|
)
|
|
|
(100+
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
518
|
|
|
|
313
|
|
|
|
205
|
|
|
|
65.5
|
|
Operating expenses
|
|
|
198
|
|
|
|
236
|
|
|
|
(38
|
)
|
|
|
(16.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax
|
|
$
|
320
|
|
|
$
|
77
|
|
|
$
|
243
|
|
|
|
100+
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106
HSBC USA Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Six Months Ended June 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
285
|
|
|
$
|
454
|
|
|
$
|
(169
|
)
|
|
|
(37.2
|
)%
|
Other operating income
|
|
|
741
|
|
|
|
509
|
|
|
|
232
|
|
|
|
45.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
1,026
|
|
|
|
963
|
|
|
|
63
|
|
|
|
6.5
|
|
Loan impairment charges
|
|
|
(148
|
)
|
|
|
426
|
|
|
|
(574
|
)
|
|
|
(100+
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,174
|
|
|
|
537
|
|
|
|
637
|
|
|
|
100+
|
|
Operating expenses
|
|
|
407
|
|
|
|
435
|
|
|
|
(28
|
)
|
|
|
(6.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax
|
|
$
|
767
|
|
|
$
|
102
|
|
|
$
|
665
|
|
|
|
100+
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our Global Banking and Markets segment performance continued to
improve during the three and six months ended June 30, 2010
due primarily to higher other operating income, lower loan
impairment charges and lower operating expenses, partially
offset by lower net interest income.
Net interest income decreased during both periods 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 in both periods 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 $23 million and 114 million during the
three and six months ended June 30, 2010, respectively, as
compared to losses of $21 million and $378 million
during the year-ago periods, 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 2010, resulting in gains of
$17 million and $73 million during the three and six
months ended June 30, 2010, respectively, as compared to
gains of $6 million and losses of $158 million during
the year-ago periods.
Valuation losses of $29 million and $41 million during
the three and six months ended June 30, 2010, respectively,
were recorded against the fair values of
sub-prime
residential mortgage loans held for sale as compared to
valuation losses of $68 million and $154 million
during the year-ago periods. During the six months ended
June 30, 2010, other operating income includes intersegment
income of $2 million from PFS relating fees charged for the
early termination of funding compared to $163 million
during the year-ago period. Additionally, other operating income
for the six months ended June 30, 2010 includes a gain of
$89 million associated with a settlement relating to
certain loans previously purchased for resale from a third party.
Loan impairment charges decreased in both periods due to
reductions in higher risk rated loan balances and stabilization
of credit downgrades. In addition, during the three and six
months ended June 30, 2009, impairments included a charge
of $140 million and $317 million, respectively, on
securities determined to be
other-than-temporarily
impaired compared to no similar impairments in the current year.
Operating expenses decreased in both periods largely due to
lower FDIC assessment fees as the year-ago periods included a
special FDIC assessment recorded in the second quarter of 2009.
Additionally, expenses in the six month period ended
June 30, 2010 include a $7 million pension curtailment
gain. The decreases in both periods were partially offset by
higher performance related compensation.
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 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,
107
HSBC USA Inc.
investment advice including discretionary portfolio management,
alternative investments and corporate finance solutions, as well
as wealth planning for trusts and estates.
Average client deposit levels increased 4 percent as
compared to the prior year quarter as growth in deposits from
core clients was partially offset by withdrawals from domestic
institutional clients during 2009. Total average loans (mostly
domestic) in the second quarter of 2010 decreased 3 percent
compared to the prior year quarter from runoff and reductions of
commercial loan borrowings partially offset by growth in the
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 7 percent compared to the prior
year quarter to $33 billion at June 30, 2010, and
12 percent since December 31, 2009, primarily
reflecting the loss of certain domestic institutional custody
clients.
The following table summarizes IFRSs Basis results for the PB
segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Three Months Ended June 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
45
|
|
|
$
|
46
|
|
|
$
|
(1
|
)
|
|
|
(2.2
|
)%
|
Other operating income
|
|
|
35
|
|
|
|
29
|
|
|
|
6
|
|
|
|
20.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
80
|
|
|
|
75
|
|
|
|
5
|
|
|
|
6.7
|
|
Loan impairment charges
|
|
|
-
|
|
|
|
7
|
|
|
|
(7
|
)
|
|
|
(100+
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
68
|
|
|
|
12
|
|
|
|
17.6
|
|
Operating expenses
|
|
|
62
|
|
|
|
63
|
|
|
|
(1
|
)
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax
|
|
$
|
18
|
|
|
$
|
5
|
|
|
$
|
13
|
|
|
|
100+
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Six Months Ended June 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
91
|
|
|
$
|
88
|
|
|
$
|
3
|
|
|
|
3.4
|
%
|
Other operating income
|
|
|
69
|
|
|
|
62
|
|
|
|
7
|
|
|
|
11.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
160
|
|
|
|
150
|
|
|
|
10
|
|
|
|
6.7
|
|
Loan impairment charges
|
|
|
(11
|
)
|
|
|
4
|
|
|
|
(15
|
)
|
|
|
(100+
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
171
|
|
|
|
146
|
|
|
|
25
|
|
|
|
17.1
|
|
Operating expenses
|
|
|
117
|
|
|
|
122
|
|
|
|
(5
|
)
|
|
|
(4.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax
|
|
$
|
54
|
|
|
$
|
24
|
|
|
$
|
30
|
|
|
|
100+
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our PB segment reported a higher profit before tax for the three
and six months ended June 30, 2010 due primarily to lower
loan impairment charges, higher other operating income and lower
operating expenses.
Net interest income was three percent higher in the second
quarter of 2010 compared to the first quarter of 2010 reflecting
increased deposit balances and better overall spreads. Net
interest income increased modestly in the
year-to-date
period primarily due to higher loan volume and improved interest
spreads on loans and deposits.
Other operating income increased in both periods primarily due
to higher fees on managed products, structured products and
recurring fund fees.
Loan impairment charges were lower in both periods due to lower
reserves required relating to certain exposure, several paydowns
and other improvements in client credit ratings.
108
HSBC USA Inc.
Operating expenses decreased in both periods due to lower staff
costs and lower FDIC assessment fees as the year-ago periods
included a special FDIC assessment recorded during the second
quarter of 2009. Additionally, operating expense for the six
months ended June 30, 2010 includes a $5 million
pension curtailment gain as discussed above.
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. Results in the six month period in 2010 and both 2009
periods also include the impact of the resolution of a lawsuit
as discussed below. Results for both 2010 periods include a gain
on the sale of our 452 Fifth Avenue property in New York
City, including the 1 W. 39th Street building The
results for six months ended June 30, 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.
The following table summarizes IFRSs Basis results for the Other
segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Three Months Ended June 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
(1
|
)
|
|
$
|
(2
|
)
|
|
$
|
1
|
|
|
|
50.0
|
%
|
Other operating income
|
|
|
216
|
|
|
|
(498
|
)
|
|
|
714
|
|
|
|
100+
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
215
|
|
|
|
(500
|
)
|
|
|
715
|
|
|
|
100+
|
|
Loan impairment charges
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
(100+
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
217
|
|
|
|
(500
|
)
|
|
|
717
|
|
|
|
100+
|
|
Operating expenses
|
|
|
13
|
|
|
|
38
|
|
|
|
(25
|
)
|
|
|
(65.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax
|
|
$
|
204
|
|
|
$
|
(538
|
)
|
|
$
|
742
|
|
|
|
100+
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Six Months Ended June 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
(10
|
)
|
|
$
|
-
|
|
|
$
|
(10
|
)
|
|
|
(100+
|
)%
|
Other operating income
|
|
|
232
|
|
|
|
(343
|
)
|
|
|
575
|
|
|
|
100+
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
222
|
|
|
|
(343
|
)
|
|
|
565
|
|
|
|
100+
|
|
Loan impairment charges
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
222
|
|
|
|
(343
|
)
|
|
|
565
|
|
|
|
100+
|
|
Operating expenses
|
|
|
30
|
|
|
|
52
|
|
|
|
(22
|
)
|
|
|
(42.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax
|
|
$
|
192
|
|
|
$
|
(395
|
)
|
|
$
|
587
|
|
|
|
100+
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating income in both periods was impacted by changes
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 relating to these
instruments of $184 million and $197 million for the
three and six months ended June 30, 2010, respectively,
compared to losses of $460 million and $426 million in
the year-ago periods. Other operating income in the six months
ended June 30, 2010 and 2009 includes gains of
$5 million and $85 million which were partially offset
by expenses of $3 million and $55 million,
respectively, all related to the resolution of a lawsuit whose
proceeds in 2009 were used to redeem preferred stock issued to
CTUS Inc. In addition, other operating income during the three
and six month periods ended June 30, 2010 includes a
$56 million gain on sale of our 452 Fifth Avenue
property in New York City, including the 1 W. 39th
Street building and, for the six months ended June 30,
2009, includes a $43 million gain on the sale of the equity
investment referred to above.
109
HSBC USA Inc.
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, under certain circumstances, 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.
Our grades align with U.S. regulatory risk ratings and are
mapped to our probability of default master scale. These
probability of default estimates are validated on an annual
basis using back-testing of actual default rates and
benchmarking of the internal ratings with external rating agency
data like S&P ratings and default rates. Substantially, all
appraisals in connection with commercial real estate loans are
ordered by the independent real estate appraisal unit at HSBC.
The appraisal must be reviewed and accepted by this unit. For
loans greater than $250,000, an appraisal must be ordered when
the loan is classified as Substandard in accordance to the
definition provided by the Office of the Comptroller of the
Currency. On average, it is approximately four weeks from the
time the appraisal is ordered until it is completed and the
values accepted by HSBCs independent appraisal review
unit. Subsequent provisions or charge-offs are completed
shortly thereafter, generally within the quarter of when the
appraisal was received.
In situations where an external appraisal is not used to fair
value the underlying collateral of impaired loans, current
information such as rent rolls and operating statements of the
subject property are reviewed and presented in a standardized
format. Operating results such as net operating income and cash
flows before and after debt service are established and reported
with relevant ratios. Third-party market data is gathered and
reviewed for relevance to the subject collateral. Data is also
collected from similar properties within the portfolio. Actual
sales levels of condominiums, operating income and expense
figures and rental data on a square foot basis are derived from
existing loans and, when appropriate, used as comparables for
the subject property. Property specific data, augmented by
market data research, is used to project a stabilized year of
income and expense to create a
10-year cash
flow model to be discounted at appropriate rates into present
value. These valuations are then used to determine if any
impairment on the underlying loans exists and an appropriate
allowance is recorded when warranted.
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.
The roll rate methodology is a migration analysis based on
contractual delinquency and rolling average historical loss
experience which captures the increased likelihood of an account
migrating to charge-off as the past due status of such account
increases. The roll rate models used were developed by tracking
the movement of delinquencies by age of delinquency by month
(bucket) over a specified time period. Each bucket
represents a period of delinquency in
30-day
increments. The roll from the last delinquency bucket results in
charge-off. Delinquency is a method for determining aging of
past due accounts based on the status of payments under the
loan. The roll
110
HSBC USA Inc.
percentages are converted to reserve requirements for each
delinquency period (i.e., 30 days, 60 days, etc.). Average
roll rates are developed to avoid temporary aberrations caused
by seasonal trends in delinquency experienced by some product
types. We have determined that a
12-month
average roll rate balances the desire to avoid temporary
aberrations, while at the same time analyzing recent historical
data. The calculations are performed monthly and are done
consistently from period to period. In addition, loss reserves
on consumer receivables including credit card receivables are
maintained to reflect our judgment of portfolio risk factors
which may not be fully reflected in the statistical roll rate
calculation.
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. 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 half 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Allowance for credit losses
|
|
$
|
2,950
|
|
|
$
|
3,224
|
|
|
$
|
3,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of Allowance for credit losses to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
2.37
|
%
|
|
|
2.59
|
%
|
|
|
3.10
|
%
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages, excluding home equity mortgages
|
|
|
1.80
|
|
|
|
2.07
|
|
|
|
2.53
|
|
Home equity mortgages
|
|
|
2.62
|
|
|
|
3.16
|
|
|
|
4.44
|
|
Private label card receivables
|
|
|
7.43
|
|
|
|
7.43
|
|
|
|
7.85
|
|
Credit card receivables
|
|
|
7.81
|
|
|
|
8.16
|
|
|
|
8.48
|
|
Auto finance
|
|
|
2.58
|
|
|
|
2.55
|
|
|
|
2.12
|
|
Other consumer loans
|
|
|
3.26
|
|
|
|
3.50
|
|
|
|
4.46
|
|
Total consumer loans
|
|
|
5.10
|
|
|
|
5.38
|
|
|
|
5.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4.00
|
%
|
|
|
4.28
|
%
|
|
|
4.86
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
charge-offs(1)(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
220.19
|
%
|
|
|
190.80
|
%
|
|
|
211.26
|
%
|
Consumer
|
|
|
85.73
|
|
|
|
80.45
|
|
|
|
92.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.20
|
%
|
|
|
93.31
|
%
|
|
|
107.55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming
loans(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
70.41
|
%
|
|
|
69.34
|
%
|
|
|
65.44
|
%
|
Consumer
|
|
|
128.01
|
|
|
|
131.87
|
|
|
|
150.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
107.25
|
%
|
|
|
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.
|
111
HSBC USA Inc.
Changes in the allowance for credit losses by general loan
categories for the three and six months ended June 30, 2010
and 2009 are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgages,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding
|
|
|
|
|
|
Private
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
|
|
|
Home
|
|
|
Label
|
|
|
Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
Equity
|
|
|
Card
|
|
|
Card
|
|
|
Auto
|
|
|
Other
|
|
|
|
|
|
|
Commercial
|
|
|
Mortgages
|
|
|
Mortgages
|
|
|
Receivables
|
|
|
Receivables
|
|
|
Finance
|
|
|
Consumer
|
|
|
Total
|
|
|
|
|
|
(in millions)
|
|
|
Three months ended June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at beginning of period
|
|
$
|
767
|
|
|
$
|
280
|
|
|
$
|
128
|
|
|
$
|
1,000
|
|
|
$
|
964
|
|
|
$
|
37
|
|
|
$
|
48
|
|
|
$
|
3,224
|
|
Charge-offs
|
|
|
90
|
|
|
|
46
|
|
|
|
30
|
|
|
|
289
|
|
|
|
331
|
|
|
|
13
|
|
|
|
17
|
|
|
|
816
|
|
Recoveries
|
|
|
11
|
|
|
|
-
|
|
|
|
-
|
|
|
|
38
|
|
|
|
30
|
|
|
|
(1
|
)
|
|
|
4
|
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
79
|
|
|
|
46
|
|
|
|
30
|
|
|
|
251
|
|
|
|
301
|
|
|
|
14
|
|
|
|
13
|
|
|
|
734
|
|
Provision for credit losses
|
|
|
9
|
|
|
|
10
|
|
|
|
6
|
|
|
|
198
|
|
|
|
215
|
|
|
|
10
|
|
|
|
8
|
|
|
|
456
|
|
Allowance related to bulk loan purchases from HSBC Finance
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
698
|
|
|
$
|
244
|
|
|
$
|
104
|
|
|
$
|
947
|
|
|
$
|
881
|
|
|
$
|
33
|
|
|
$
|
43
|
|
|
$
|
2,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at beginning of period
|
|
$
|
669
|
|
|
$
|
310
|
|
|
$
|
160
|
|
|
$
|
1,256
|
|
|
$
|
964
|
|
|
$
|
39
|
|
|
$
|
67
|
|
|
$
|
3,465
|
|
Charge-offs
|
|
|
87
|
|
|
|
55
|
|
|
|
53
|
|
|
|
373
|
|
|
|
248
|
|
|
|
26
|
|
|
|
23
|
|
|
|
865
|
|
Recoveries
|
|
|
11
|
|
|
|
5
|
|
|
|
3
|
|
|
|
45
|
|
|
|
10
|
|
|
|
6
|
|
|
|
1
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
76
|
|
|
|
50
|
|
|
|
50
|
|
|
|
328
|
|
|
|
238
|
|
|
|
20
|
|
|
|
22
|
|
|
|
784
|
|
Provision for credit losses
|
|
|
166
|
|
|
|
97
|
|
|
|
66
|
|
|
|
310
|
|
|
|
366
|
|
|
|
40
|
|
|
|
22
|
|
|
|
1,067
|
|
Allowance on loans transferred to held for sale
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8
|
)
|
|
|
-
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
759
|
|
|
$
|
357
|
|
|
$
|
176
|
|
|
$
|
1,238
|
|
|
$
|
1,092
|
|
|
$
|
51
|
|
|
$
|
67
|
|
|
$
|
3,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2010::
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at beginning of period
|
|
$
|
938
|
|
|
$
|
347
|
|
|
$
|
185
|
|
|
$
|
1,184
|
|
|
$
|
1,106
|
|
|
$
|
36
|
|
|
$
|
65
|
|
|
$
|
3,861
|
|
Charge-offs
|
|
|
199
|
|
|
|
95
|
|
|
|
66
|
|
|
|
624
|
|
|
|
691
|
|
|
|
37
|
|
|
|
38
|
|
|
|
1,750
|
|
Recoveries
|
|
|
21
|
|
|
|
1
|
|
|
|
-
|
|
|
|
80
|
|
|
|
55
|
|
|
|
(1
|
)
|
|
|
8
|
|
|
|
164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
178
|
|
|
|
94
|
|
|
|
66
|
|
|
|
544
|
|
|
|
636
|
|
|
|
38
|
|
|
|
30
|
|
|
|
1,586
|
|
Provision for credit losses
|
|
|
(64
|
)
|
|
|
(9
|
)
|
|
|
(15
|
)
|
|
|
307
|
|
|
|
405
|
|
|
|
35
|
|
|
|
8
|
|
|
|
667
|
|
Allowance related to bulk loan purchases from HSBC Finance
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
698
|
|
|
$
|
244
|
|
|
$
|
104
|
|
|
$
|
947
|
|
|
$
|
881
|
|
|
$
|
33
|
|
|
$
|
43
|
|
|
$
|
2,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at beginning of period
|
|
$
|
572
|
|
|
$
|
207
|
|
|
$
|
167
|
|
|
$
|
1,171
|
|
|
$
|
208
|
|
|
$
|
5
|
|
|
$
|
67
|
|
|
$
|
2,397
|
|
Charge-offs
|
|
|
143
|
|
|
|
120
|
|
|
|
90
|
|
|
|
725
|
|
|
|
315
|
|
|
|
31
|
|
|
|
55
|
|
|
|
1,479
|
|
Recoveries
|
|
|
16
|
|
|
|
11
|
|
|
|
12
|
|
|
|
83
|
|
|
|
16
|
|
|
|
7
|
|
|
|
7
|
|
|
|
152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
127
|
|
|
|
109
|
|
|
|
78
|
|
|
|
642
|
|
|
|
299
|
|
|
|
24
|
|
|
|
48
|
|
|
|
1,327
|
|
Provision for credit losses
|
|
|
314
|
|
|
|
259
|
|
|
|
87
|
|
|
|
709
|
|
|
|
759
|
|
|
|
65
|
|
|
|
48
|
|
|
|
2,241
|
|
Allowance on loans transferred to held for sale
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8
|
)
|
|
|
-
|
|
|
|
(8
|
)
|
Allowance related to bulk loan purchases from HSBC Finance
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
424
|
|
|
|
13
|
|
|
|
-
|
|
|
|
437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
759
|
|
|
$
|
357
|
|
|
$
|
176
|
|
|
$
|
1,238
|
|
|
$
|
1,092
|
|
|
$
|
51
|
|
|
$
|
67
|
|
|
$
|
3,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The allowance for credit losses at June 30, 2010 decreased
$274 million, or 8.50 percent as compared to
March 31, 2010 and $911 million, or 23.59 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 continued improvement in
delinquency including early stage delinquency roll rates as
economic conditions improved. The decrease in the allowance for
our residential mortgage loan portfolio and HELOC and Home
Equity loan portfolios reflects lower receivable levels and
dollars of delinquency, stabilization in loss severities and,
112
HSBC USA Inc.
as it relates to December 31, 2009, an improved outlook for
incurred future losses. Reserve requirements in our commercial
loan portfolio have 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
ongoing weakness in the U.S. economy, including elevated
unemployment rates.
The allowance for credit losses as a percentage of total loans
at June 30, 2010 decreased as compared to March 31,
2010 and December 31, 2009 for the reasons discussed above.
The allowance for credit losses as a percentage of net
charge-offs at June 30, 2010 declined as compared to
December 31, 2009 as the decline in reserve levels
discussed above outpaced the decline in dollars of net
charge-off as the higher delinquency levels reported in prior
periods migrated to charge-off. Compared to March 31, 2010,
the allowance for credit losses as a percentage of net
charge-offs increased driven by lower private label card and
credit card charge-offs which declined at a faster pace than the
corresponding allowance for credit losses.
The allowance for credit losses by major loan categories,
excluding loans held for sale, is presented in the following
table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
Loans to
|
|
|
|
|
|
Loans to
|
|
|
|
|
|
Loans to
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
Total
|
|
|
|
|
|
Total
|
|
|
|
Amount
|
|
|
Loans(1)
|
|
|
Amount
|
|
|
Loans(1)
|
|
|
Amount
|
|
|
Loans(1)
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Commercial(2)
|
|
$
|
698
|
|
|
|
40.05
|
%
|
|
$
|
767
|
|
|
|
39.36
|
%
|
|
$
|
938
|
|
|
|
38.12
|
%
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages, excluding home equity mortgages
|
|
|
244
|
|
|
|
18.42
|
|
|
|
280
|
|
|
|
17.94
|
|
|
|
347
|
|
|
|
17.26
|
|
Home equity mortgages
|
|
|
104
|
|
|
|
5.39
|
|
|
|
128
|
|
|
|
5.37
|
|
|
|
185
|
|
|
|
5.24
|
|
Private label card receivables
|
|
|
947
|
|
|
|
17.30
|
|
|
|
1,000
|
|
|
|
17.88
|
|
|
|
1,184
|
|
|
|
18.99
|
|
Credit card receivables
|
|
|
881
|
|
|
|
15.31
|
|
|
|
964
|
|
|
|
15.69
|
|
|
|
1,106
|
|
|
|
16.41
|
|
Auto finance
|
|
|
33
|
|
|
|
1.74
|
|
|
|
37
|
|
|
|
1.93
|
|
|
|
36
|
|
|
|
2.14
|
|
Other consumer
|
|
|
43
|
|
|
|
1.79
|
|
|
|
48
|
|
|
|
1.83
|
|
|
|
65
|
|
|
|
1.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
2,252
|
|
|
|
59.95
|
|
|
|
2,457
|
|
|
|
60.64
|
|
|
|
2,923
|
|
|
|
61.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,950
|
|
|
|
100.00
|
%
|
|
$
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
On-balance sheet allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific
|
|
$
|
239
|
|
|
$
|
237
|
|
|
$
|
326
|
|
Collective
|
|
|
416
|
|
|
|
485
|
|
|
|
549
|
|
Unallocated
|
|
|
43
|
|
|
|
45
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total on-balance sheet allowance
|
|
|
698
|
|
|
|
767
|
|
|
|
938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance sheet allowance
|
|
|
111
|
|
|
|
114
|
|
|
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial allowances
|
|
$
|
809
|
|
|
$
|
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.
113
HSBC USA Inc.
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
$111 million, $114 million and $188 million at
June 30, 2010, 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 since
December 31, 2009 relates in part to the consolidation of a
previously unconsolidated commercial paper VIE as of
January 1, 2010, which resulted in the reclassification of
this reserve on our balance sheet. Off-balance sheet exposures
are summarized under the caption Off-Balance Sheet
Arrangements in this MD&A.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Dollars of Delinquency:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
656
|
|
|
$
|
723
|
|
|
$
|
954
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage, excluding home equity mortgages
|
|
|
1,286
|
|
|
|
1,551
|
|
|
|
1,595
|
|
Home equity mortgages
|
|
|
174
|
|
|
|
184
|
|
|
|
173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential
mortgages(1)
|
|
|
1,460
|
|
|
|
1,735
|
|
|
|
1,768
|
|
Private label card receivables
|
|
|
478
|
|
|
|
510
|
|
|
|
622
|
|
Credit card receivables
|
|
|
449
|
|
|
|
515
|
|
|
|
587
|
|
Auto finance
|
|
|
27
|
|
|
|
33
|
|
|
|
48
|
|
Other consumer
|
|
|
13
|
|
|
|
16
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
2,427
|
|
|
|
2,809
|
|
|
|
3,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,083
|
|
|
$
|
3,532
|
|
|
$
|
3,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquency Ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
2.11
|
%
|
|
|
2.33
|
%
|
|
|
3.04
|
%
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage, excluding home equity mortgages
|
|
|
8.84
|
|
|
|
10.59
|
|
|
|
10.56
|
|
Home equity mortgages
|
|
|
4.38
|
|
|
|
4.55
|
|
|
|
4.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential
mortgages(1)
|
|
|
7.88
|
|
|
|
9.28
|
|
|
|
9.17
|
|
Private label card receivables
|
|
|
3.75
|
|
|
|
3.79
|
|
|
|
4.12
|
|
Credit card receivables
|
|
|
3.98
|
|
|
|
4.36
|
|
|
|
4.50
|
|
Auto finance
|
|
|
2.11
|
|
|
|
2.27
|
|
|
|
2.34
|
|
Other consumer
|
|
|
.96
|
|
|
|
1.14
|
|
|
|
1.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
5.37
|
|
|
|
6.00
|
|
|
|
5.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4.04
|
%
|
|
|
4.53
|
%
|
|
|
4.85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The following reflects dollars of
contractual delinquency and delinquency ratios for interest-only
loans and ARM loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Dollars of Delinquency:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-only loans
|
|
$
|
164
|
|
|
$
|
214
|
|
|
$
|
236
|
|
ARM loans
|
|
|
535
|
|
|
|
634
|
|
|
|
802
|
|
Delinquency Ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-only loans
|
|
|
5.79
|
%
|
|
|
7.26
|
%
|
|
|
6.94
|
%
|
ARM loans
|
|
|
6.71
|
|
|
|
7.94
|
|
|
|
9.58
|
|
Our total two-months-and-over contractual delinquency ratio
decreased 49 basis points as compared to the prior quarter.
Our two-months-and-over contractual delinquency ratio for
consumer loans decreased to 5.37 percent at June 30,
2010 as compared to 6.00 percent at March 31, 2010.
Dollars of delinquency fell across all consumer
114
HSBC USA Inc.
portfolios, particularly in residential mortgage as well as
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
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. The lower dollars of delinquency also
resulted from continued improvement in early stage delinquency
roll rates. The decrease in our residential mortgage loan
delinquency since March 31, 2010 reflects continued
stabilization of the real estate markets including loss
severities and improving economic conditions, as well as the
sale of $215 million of delinquent subprime mortgage whole
loans during the quarter. Overall delinquency levels however,
continue to be impacted by elevated unemployment levels.
Our commercial two-months-and-over contractual delinquency ratio
improved 22 basis points since March 31, 2010 driven
by a decline in dollars of delinquency as balances related to
certain problem loans were reduced.
Compared to December 31, 2009, our delinquency ratio
decreased 81 basis points at June 30, 2010, largely
due to lower dollars of delinquency and improved economic
conditions as discussed above.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net Charge-off Dollars:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
79
|
|
|
$
|
99
|
|
|
$
|
76
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage, excluding home equity mortgages
|
|
|
46
|
|
|
|
48
|
|
|
|
50
|
|
Home equity mortgages
|
|
|
30
|
|
|
|
36
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential mortgages
|
|
|
76
|
|
|
|
84
|
|
|
|
100
|
|
Private label card receivables
|
|
|
251
|
|
|
|
293
|
|
|
|
328
|
|
Credit card receivables
|
|
|
301
|
|
|
|
335
|
|
|
|
238
|
|
Auto finance
|
|
|
14
|
|
|
|
24
|
|
|
|
20
|
|
Other consumer
|
|
|
13
|
|
|
|
17
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
655
|
|
|
|
753
|
|
|
|
708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
734
|
|
|
$
|
852
|
|
|
$
|
784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Charge-off Ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
1.07
|
%
|
|
|
1.29
|
%
|
|
|
.87
|
%
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage, excluding home equity mortgages
|
|
|
1.36
|
|
|
|
1.43
|
|
|
|
1.34
|
|
Home equity mortgages
|
|
|
2.99
|
|
|
|
3.56
|
|
|
|
4.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential mortgages
|
|
|
1.74
|
|
|
|
1.92
|
|
|
|
2.06
|
|
Private label card receivables
|
|
|
7.68
|
|
|
|
8.29
|
|
|
|
8.54
|
|
Credit card receivables
|
|
|
10.38
|
|
|
|
10.93
|
|
|
|
6.84
|
|
Auto finance
|
|
|
4.10
|
|
|
|
6.11
|
|
|
|
3.05
|
|
Other consumer
|
|
|
3.88
|
|
|
|
4.93
|
|
|
|
5.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
5.83
|
|
|
|
6.43
|
|
|
|
5.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3.94
|
%
|
|
|
4.40
|
%
|
|
|
3.56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115
HSBC USA Inc.
Our net charge-off ratio as a percentage of average loans
decreased 46 basis points compared to the prior quarter
primarily due to lower residential mortgage and private label
card and credit card charge-offs. We experienced lower dollars
of charge-off in all loan categories as compared to the prior
quarter, driven by lower receivable levels and improved credit
quality. These favorable trends were partially offset by the
impact from 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 and continued moderation in loss
severities as the real estate markets have stabilized in most
areas. Charge-off dollars and ratios for private label card and
credit 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.
Commercial charge-off dollars and ratios decreased compared to
the first quarter of 2010 as 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
38 basis points, driven largely by higher credit card
charge-offs as charge-off levels in this book during the second
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 amount of average
credit card receivables outstanding during the second quarter of
2009 without a proportional amount of 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 the second quarter of 2010 compared
to 2009 levels. Our auto finance net charge-off ratio increased
as compared to the year-ago quarter as the non-delinquent
receivables purchased from HSBC Finance in January 2009 continue
to season and migrate to charge-off. Our commercial charge-off
ratio increased compared to the prior year period as charge-off
levels remained flat while average outstanding balances declined.
116
HSBC USA Inc.
Nonperforming Assets Nonperforming assets are
summarized in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Nonaccrual loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land loans
|
|
$
|
401
|
|
|
$
|
453
|
|
|
$
|
477
|
|
Other real estate
|
|
|
237
|
|
|
|
185
|
|
|
|
167
|
|
Other commercial
|
|
|
255
|
|
|
|
372
|
|
|
|
623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
893
|
|
|
|
1,010
|
|
|
|
1,267
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages, excluding home equity mortgages
|
|
|
921
|
|
|
|
934
|
|
|
|
875
|
|
Home equity mortgages
|
|
|
92
|
|
|
|
105
|
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential mortgages
|
|
|
1,013
|
|
|
|
1,039
|
|
|
|
982
|
|
Credit card receivables
|
|
|
3
|
|
|
|
3
|
|
|
|
3
|
|
Auto finance
|
|
|
27
|
|
|
|
32
|
|
|
|
40
|
|
Others
|
|
|
9
|
|
|
|
9
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer loans
|
|
|
1,052
|
|
|
|
1,083
|
|
|
|
1,034
|
|
Nonaccrual loans held for sale
|
|
|
224
|
|
|
|
432
|
|
|
|
446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonaccruing loans
|
|
|
2,169
|
|
|
|
2,525
|
|
|
|
2,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing loans contractually past due 90 days or
more:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
98
|
|
|
|
96
|
|
|
|
166
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
Private label card receivables
|
|
|
348
|
|
|
|
375
|
|
|
|
449
|
|
Credit card receivables
|
|
|
332
|
|
|
|
376
|
|
|
|
429
|
|
Auto finance
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other consumer
|
|
|
27
|
|
|
|
29
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer loans
|
|
|
707
|
|
|
|
780
|
|
|
|
909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accruing loans contractually past due 90 days or
more
|
|
|
805
|
|
|
|
876
|
|
|
|
1,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
|
2,974
|
|
|
|
3,401
|
|
|
|
3,822
|
|
Other real estate and owned assets
|
|
|
138
|
|
|
|
79
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
3,112
|
|
|
$
|
3,480
|
|
|
$
|
3,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses as a percent of nonperforming
loans(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
70.41
|
%
|
|
|
69.34
|
%
|
|
|
65.44
|
%
|
Consumer
|
|
|
128.01
|
|
|
|
131.87
|
|
|
|
150.45
|
|
|
|
|
(1) |
|
Represents our commercial or
consumer allowance for credit losses, as appropriate divided by
the corresponding outstanding balance of total nonperforming
loans held for investment. Nonperforming loans include accruing
loans contractually past due 90 days or more. 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 June 30, 2010 as
compared to March 31 2010 and December 31, 2009 are related
primarily to commercial loans. Commercial nonaccrual loans
decreased as compared to both periods 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 March 31, 2010
and December 31, 2009 reflect lower outstanding balances
and improvements in credit quality including lower dollars of
delinquency in those
117
HSBC USA Inc.
periods. During the second quarter of 2010, we also experienced
a significant decline in non-accrual loans held for sale largely
due to the sale of $215 million of non-accrual subprime
mortgage loans during the quarter.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Impaired commercial loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
970
|
(1)
|
|
$
|
1,146
|
(1)
|
|
$
|
1,458
|
(1)
|
Amount with impairment reserve
|
|
|
638
|
|
|
|
835
|
|
|
|
1,127
|
|
Impairment reserve
|
|
|
298
|
|
|
|
305
|
|
|
|
336
|
|
|
|
|
(1) |
|
Includes TDR Loans of
$123 million, $103 million and $88 million at
June 30, 2010, March 31, 2010 and December 31,
2009, respectively.
|
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
|
|
|
|
June 30,
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
2010
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
|
|
|
Special mention:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
$
|
2,825
|
|
|
$
|
56
|
|
|
|
2.0
|
%
|
|
$
|
(184
|
)
|
|
|
(6.1
|
)%
|
Substandard:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
|
2,787
|
|
|
|
(459
|
)
|
|
|
(14.1
|
)
|
|
|
(736
|
)
|
|
|
(20.9
|
)
|
Consumer loans
|
|
|
1,951
|
|
|
|
(97
|
)
|
|
|
(4.7
|
)
|
|
|
(158
|
)
|
|
|
(7.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total substandard
|
|
|
4,738
|
|
|
|
(556
|
)
|
|
|
(10.5
|
)
|
|
|
(894
|
)
|
|
|
(15.9
|
)
|
Doubtful:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
|
233
|
|
|
|
(91
|
)
|
|
|
(28.1
|
)
|
|
|
(271
|
)
|
|
|
(53.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,796
|
|
|
$
|
(591
|
)
|
|
|
(7.0
|
)%
|
|
$
|
(1,349
|
)
|
|
|
(14.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decreases in criticized commercial loans in the first and
second quarters 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.
118
HSBC USA Inc.
Geographic Concentrations Regional exposure at
June 30, 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
|
|
|
46.5
|
%
|
|
|
37.9
|
%
|
|
|
10.9
|
%
|
North Central United States
|
|
|
4.0
|
|
|
|
8.6
|
|
|
|
27.4
|
|
North Eastern United States
|
|
|
10.4
|
|
|
|
9.5
|
|
|
|
14.7
|
|
Southern United States
|
|
|
21.7
|
|
|
|
18.4
|
|
|
|
26.4
|
|
Western United States
|
|
|
16.9
|
|
|
|
25.6
|
|
|
|
20.2
|
|
Other
|
|
|
.5
|
|
|
|
-
|
|
|
|
.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 it as
a holding company. 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 recent economic turmoil, we continue to
reduce our reliance on debt capital markets and to increase
deposits. During the first half of 2010, we retired long-term
debt totaling $1.5 billion and deposits increased
3 percent. We continue to manage our overall balance sheet
by reducing low margin investments and deposits while continuing
to manage the overall balance sheet risk.
Interest bearing deposits with banks totaled
$14.1 billion and $20.1 billion at June 30, 2010
and December 31, 2009, respectively.
Federal funds sold and securities purchased under
agreements to resell totaled $15.5 billion and
$1.0 billion at June 30, 2010 and December 31,
2009, respectively. Balances increased during the six months
ended June 30, 2010 as we redeployed surplus liquidity
using repurchase agreements.
Short-term borrowings totaled $16.0 billion
and $6.5 billion at June 30, 2010 and
December 31, 2009, respectively. See Balance Sheet
Review for further analysis and discussion on short-term
borrowing trends.
Deposits totaled $121.6 billion and
$118.3 billion at June 30, 2010 and December 31,
2009, respectively. See Balance Sheet Review for
further analysis and discussion on deposit trends.
Long-term debt decreased to $17.8 billion at
June 30, 2010 from $18.0 billion at December 31,
2009. The following table summarizes issuances and retirements
of long term debt during the six months ended June 30, 2010
and 2009:
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Long-term debt issued
|
|
$
|
1,210
|
|
|
$
|
1,554
|
|
Long-term debt retired
|
|
|
(1,499
|
)
|
|
|
(5,481
|
)
|
|
|
|
|
|
|
|
|
|
Net long-term debt (retired)
|
|
$
|
(289
|
)
|
|
$
|
(3,927
|
)
|
|
|
|
|
|
|
|
|
|
119
HSBC USA Inc.
Issuances of long-term debt during the first half of 2010
included $1,210 million, of which $253 million 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 $5.4 billion is
available at June 30, 2010. HSBC Bank USA also has a
$40 billion Global Bank Note Program of which
$19.7 billion is available at June 30, 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 June 30, 2010 and at 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 June 30, 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 June 30 2010, credit card receivables and restricted
available-for-sale
investments totaling $2.7 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. Public debt
associated with these transactions totaled $1.3 billion and
$1.8 billion at June 30, 2010 and December 31,
2009, respectively. The public debt is expected to be fully paid
in the second half of 2010.
At June 30, 2010, we had conduit credit facilities with
commercial and investment banks under which our operations may
issue securities up to $2.2 billion backed with private
label card and credit card receivables. The facilities are
annually renewable at the providers option. At
June 30, 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 six months, pricing has declined compared to 2009 but is
still elevated by historical standards.
Available-for-sale
investments included $1.3 billion and $1.1 billion at
June 30, 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 six months ended
June 30, 2010, no capital contributions were made to us by
HNAI, our immediate parent.
120
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:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Tier 1 capital to risk weighted assets
|
|
|
10.79
|
%(1)
|
|
|
9.61
|
%
|
Tier 1 capital to average assets
|
|
|
7.34
|
|
|
|
7.59
|
|
Total equity to total assets
|
|
|
8.80
|
|
|
|
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 was no change to the Tier 1 capital
ratios for the first half of 2010. Had we fully transitioned to
the Risk Based Capital requirements at June 30, 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.
|
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 14,
Regulatory Capital, in the accompanying consolidated
financial statements
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 initial
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.
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, which was initiated in January 2010, encompasses
enhancements to a number of risk policies, processes and systems
to align HSBC Bank USA with the Basel II final rule
requirements. HSBC Bank USA will seek regulatory approval for
adoption when the program enhancements have been completed which
may extend beyond April 1, 2011.
HSBC Bank USA is subject to restrictions that limit the transfer
of funds to HSBC USA Inc. and its 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 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 half of
2010, HSBC Bank USA sold low-quality auto finance loans with a
net book value of approximately $178 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
121
HSBC USA Inc.
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 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
|
|
|
July 1
|
|
|
|
|
|
|
through
|
|
|
through
|
|
|
Estimated
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
Full Year
|
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
|
|
|
(in billions)
|
|
|
Funding needs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loan growth (attrition), excluding asset transfers
|
|
$
|
(2
|
)
|
|
$
|
3
|
|
|
$
|
1
|
|
Long-term debt maturities
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
|
Secured financings, including conduit facility maturities
|
|
|
2
|
|
|
|
1
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total funding needs
|
|
$
|
-
|
|
|
$
|
5
|
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funding sources:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash from operations
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Core deposit growth
|
|
|
2
|
|
|
|
1
|
|
|
|
3
|
|
Other deposit growth
|
|
|
8
|
|
|
|
(5
|
)
|
|
|
3
|
|
Long-term debt issuance
|
|
|
-
|
|
|
|
2
|
|
|
|
2
|
|
Short-term funding/investments
|
|
|
(11
|
)
|
|
|
6
|
|
|
|
(5
|
)
|
Secured financings, including conduit facility renewals
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total funding sources
|
|
$
|
-
|
|
|
$
|
5
|
|
|
$
|
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 and in the 2009
Form 10-K.
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 a counterparty draws down the
full commitment amount or we are required to fulfill our maximum
obligation under a guarantee.
122
HSBC USA Inc.
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 June 30, 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)
|
|
$
|
5.0
|
|
|
$
|
2.4
|
|
|
$
|
-
|
|
|
$
|
7.4
|
|
|
$
|
7.6
|
|
Commercial letters of credit
|
|
|
1.0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1.0
|
|
|
|
.7
|
|
Credit derivatives considered
guarantees(2)
|
|
|
47.2
|
|
|
|
283.4
|
|
|
|
51.1
|
|
|
|
381.7
|
|
|
|
387.2
|
|
Other commitments to extend credit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
17.5
|
|
|
|
28.3
|
|
|
|
1.5
|
|
|
|
47.3
|
|
|
|
48.9
|
|
Consumer
|
|
|
7.0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7.0
|
|
|
|
6.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
77.7
|
|
|
$
|
314.1
|
|
|
$
|
52.6
|
|
|
$
|
444.4
|
|
|
$
|
451.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $745 million and
$774 million issued for the benefit of HSBC affiliates at
June 30, 2010 and December 31, 2009, respectively.
|
|
(2) |
|
Includes $48.7 billion and
$57.3 billion issued for the benefit of HSBC affiliates at
June 30, 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 June 30, 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 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)
|
|
$
|
870
|
|
|
$
|
754
|
|
|
|
40
|
|
|
$
|
741
|
|
|
|
14
|
|
Third-party sponsored:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-seller
|
|
|
554
|
|
|
|
6,963
|
|
|
|
38
|
|
|
|
6,643
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,424
|
|
|
$
|
7,717
|
|
|
|
|
|
|
$
|
7,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
123
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
|
|
|
22
|
%
|
|
|
35
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
65
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
Trade receivables
|
|
|
12
|
|
|
|
100
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Credit card receivables
|
|
|
66
|
|
|
|
30
|
|
|
|
-
|
|
|
|
70
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
40
|
%
|
|
|
-
|
%
|
|
|
46
|
%
|
|
|
14
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-seller conduits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities backed by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto loans and leases
|
|
|
100
|
%
|
|
|
97
|
%
|
|
|
3
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
97
|
%
|
|
|
3
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Credit quality is based on external
credit ratings, when available, at June 30, 2010. When not
available, credit quality is based on our internal ratings. 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 half of 2010, U.S. asset backed commercial
paper volumes stabilized as there are signs that most major bank
conduit sponsors are extending new financing to clients but at a
slower pace. Credit spreads in the multi-seller conduit market
have generally 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
Term Asset-Backed Securities Loan Facility 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 demand for the ABCP issued by large
bank-sponsored ABCP programs. The improved demand for higher
quality ABCP programs has led to 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 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
$375 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.
Also in Canada but separately from the Montreal Accord, as part
of an ABCP conduit restructuring executed in 2008, we agreed to
hold long-term securities of $300 million (denominated in
Canadian dollars) and provide a $94 million credit
facility. As of June 30, 2010 this credit facility was
undrawn and approximately $282 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 exchange rate
fluctuations between the U.S. dollar and the Canadian
dollar.
As of June 30, 2010 and December 31, 2009, other than
the facilities referred to above, we no longer have outstanding
liquidity facilities to Canadian ABCP conduits subject to the
Montreal Accord or other agreements.
124
HSBC USA Inc.
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
$146 million and $180 million in the fair value of
financial liabilities during three and six months ended
June 30, 2010, respectively, compared to an increase of
$289 million and $150 million in the prior year
periods.
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 for the six months ended June 30, 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 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
125
HSBC USA Inc.
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 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
126
HSBC USA Inc.
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 June 30,
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 are recognized at the end
of each reporting period.
Material Transfers Into (Out of) Level 1 and
Level 2 Measurements During the three and six
months ended June 30, 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 June 30, 2010 and December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Level 3
assets(1)(2)
|
|
$
|
7,525
|
|
|
$
|
9,179
|
|
Total assets measured at fair
value(3)
|
|
|
130,451
|
|
|
|
111,231
|
|
Level 3 liabilities
|
|
|
4,282
|
|
|
|
3,843
|
|
Total liabilities measured at fair
value(1)
|
|
|
86,293
|
|
|
|
74,120
|
|
Level 3 assets as a percent of total assets measured at
fair value
|
|
|
5.8
|
%
|
|
|
8.3
|
%
|
Level 3 liabilities as a percent of total liabilities
measured at fair value
|
|
|
5.0
|
%
|
|
|
5.2
|
%
|
|
|
|
(1) |
|
Presented without netting which
allows the offsetting of amounts relating to certain contracts
if certain conditions are met.
|
|
(2) |
|
Includes $6.5 billion of
recurring Level 3 assets and $1.0 billion of
non-recurring Level 3 assets at June 30, 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 $130.5 billion of
assets measured on a recurring basis and $1.3 billion of
assets measured on a non-recurring basis at June 30, 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 half of 2010, the deterioration
previously experienced began to ease. As a result, we made a
$73 million positive credit risk adjustment and a
$158 million negative credit risk adjustment to the fair
value of our credit default swap contracts during the six months
ended June 30, 2010 and 2009, respectively, which is
reflected in trading revenue (loss). We have recorded a
cumulative credit adjustment reserve of $398 million
against our monoline exposure at June 30, 2010 compared to
a $1,007 million credit adjustment reserve at
December 31, 2009.
Loans As of June 30, 2010 and December 31,
2009, we have classified $501 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 loss of
$17 million and a
127
HSBC USA Inc.
gain of $60 million for such mortgage loans during the
three and six months ended June 30, 2010, respectively,
compared to losses of $68 million and $154 million
during the year-ago periods. The changes in fair value are
recorded as other revenues in the consolidated statement of
income (loss).
Material Additions to and Transfers Into (Out of)
Level 3 Measurements During the six months ended
June 30, 2010, we transferred $225 million of mortgage
and other asset-backed securities from Level 2 to
Level 3 as the availability of observable inputs continued
to decline and the discrepancy in valuation per independent
pricing services increased. In addition, we transferred
$218 million of credit derivatives from Level 2 to
Level 3 as a result of a qualitative analysis of the
foreign exchange and credit correlation attributes of our model
used for certain credit default swaps.
During the six months ended June 30, 2010, we transferred
$184 million of corporate bonds from Level 3 to
Level 2 due to the availability of observable inputs in the
market including broker and independent pricing service
valuations. In addition, we transferred $369 million of
long-term
debt from Level 3 to Level 2. The
long-term
debt relates to medium term debt issuances where the embedded
equity derivative is no longer unobservable as the derivative
option is closer to maturity and there is more observability in
short term volatility.
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 and six months ended June 30,
2010 and 2009 as well as for further details including the
classification hierarchy associated with assets and liabilities
measured at fair value.
128
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 June 30,
2010:
Asset-backed securities backed by consumer finance
collateral:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime
|
|
|
Alt-A
|
|
|
Sub-prime
|
|
Credit Quality of Collateral:
|
|
|
|
|
Prior to
|
|
|
2006 to
|
|
|
Prior to
|
|
|
2006 to
|
|
|
Prior to
|
|
|
2006 to
|
|
Year of Issuance:
|
|
|
|
Total
|
|
|
2006
|
|
|
Present
|
|
|
2006
|
|
|
Present
|
|
|
2006
|
|
|
Present
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Rating of securities:
|
|
Collateral type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
Home equity loans
|
|
$
|
178
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3
|
|
|
$
|
172
|
|
|
$
|
3
|
|
|
$
|
-
|
|
|
|
Auto loans
|
|
|
14
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Student loans
|
|
|
22
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Residential mortgages
|
|
|
494
|
|
|
|
4
|
|
|
|
-
|
|
|
|
154
|
|
|
|
-
|
|
|
|
336
|
|
|
|
-
|
|
|
|
Commercial mortgages
|
|
|
575
|
|
|
|
-
|
|
|
|
-
|
|
|
|
88
|
|
|
|
487
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Other
|
|
|
21
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AAA
|
|
|
1,304
|
|
|
|
4
|
|
|
|
-
|
|
|
|
302
|
|
|
|
659
|
|
|
|
339
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AA
|
|
Home equity loans
|
|
|
9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Residential mortgages
|
|
|
35
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Student loans
|
|
|
13
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Other
|
|
|
38
|
|
|
|
-
|
|
|
|
-
|
|
|
|
38
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AA
|
|
|
95
|
|
|
|
-
|
|
|
|
-
|
|
|
|
86
|
|
|
|
9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
|
|
Home equity loans
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Residential mortgages
|
|
|
24
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
|
|
9
|
|
|
|
-
|
|
|
|
3
|
|
|
|
Commercial mortgages
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Other
|
|
|
48
|
|
|
|
-
|
|
|
|
-
|
|
|
|
48
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total A
|
|
|
84
|
|
|
|
-
|
|
|
|
-
|
|
|
|
62
|
|
|
|
19
|
|
|
|
-
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BBB
|
|
Home equity loans
|
|
|
105
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
|
|
100
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Residential mortgages
|
|
|
135
|
|
|
|
30
|
|
|
|
-
|
|
|
|
61
|
|
|
|
44
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total BBB
|
|
|
240
|
|
|
|
30
|
|
|
|
-
|
|
|
|
66
|
|
|
|
144
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BB
|
|
Home equity
|
|
|
29
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27
|
|
|
|
2
|
|
|
|
-
|
|
|
|
Residential mortgages
|
|
|
40
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13
|
|
|
|
27
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total BB
|
|
|
69
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13
|
|
|
|
54
|
|
|
|
2
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
B
|
|
Auto loans
|
|
|
7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Residential mortgages
|
|
|
44
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
44
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total B
|
|
|
51
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
|
|
|
44
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CCC
|
|
Home equity loans
|
|
|
80
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
80
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Residential mortgages
|
|
|
101
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20
|
|
|
|
81
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total CCC
|
|
|
181
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20
|
|
|
|
161
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CC
|
|
Residential mortgages
|
|
|
9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D
|
|
Home equity loans
|
|
|
16
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Residential mortgages
|
|
|
16
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total D
|
|
|
32
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
31
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrated
|
|
Home equity loans
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Residential mortgages
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Other
|
|
|
17
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,091
|
|
|
$
|
34
|
|
|
$
|
-
|
|
|
$
|
561
|
|
|
$
|
1,152
|
|
|
$
|
341
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129
HSBC USA Inc.
Collateralized debt obligations (CDO) and collateralized loan
obligations (CLO):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Quality of Collateral:
|
|
|
|
Total
|
|
|
A or Higher
|
|
|
BBB
|
|
|
BB/B
|
|
|
CCC
|
|
|
Unrated
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Rating of securities:
|
|
Collateral type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate loans
|
|
$
|
342
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
342
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
Residential mortgages
|
|
|
7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
|
|
|
Commercial mortgages
|
|
|
219
|
|
|
|
-
|
|
|
|
-
|
|
|
|
167
|
|
|
|
52
|
|
|
|
-
|
|
|
|
Trust preferred
|
|
|
160
|
|
|
|
-
|
|
|
|
160
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Aircraft leasing
|
|
|
63
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
63
|
|
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
791
|
|
|
$
|
-
|
|
|
$
|
160
|
|
|
$
|
509
|
|
|
$
|
52
|
|
|
$
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total asset-backed securities
|
|
$
|
2,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $274 million or a decrease of the overall
fair value measurement of approximately $286 million as of
June 30, 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.
|
130
HSBC USA Inc.
|
|
|
|
|
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.
|
|
|
|
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;
|
131
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.
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Risk associated with derivative contracts:
|
|
|
|
|
|
|
|
|
Total credit risk exposure
|
|
$
|
39,143
|
|
|
$
|
39,856
|
|
Less: collateral held against exposure
|
|
|
3,954
|
|
|
|
3,890
|
|
|
|
|
|
|
|
|
|
|
Net credit risk exposure
|
|
$
|
35,189
|
|
|
$
|
35,966
|
|
|
|
|
|
|
|
|
|
|
Liquidity Risk Management There have been no
material changes to our approach towards liquidity risk
management since December 31, 2009. 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 need 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 $3.2 billion
during the six months ended June 30, 2010. Online savings
account growth was $464 million during the six months ended
June 30, 2010.
132
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 June 30, 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 June 30, 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 interest rate risk
management since December 31, 2009.
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 June 30, 2010 and
December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Institutional PVBP movement limit
|
|
$
|
6.5
|
|
|
$
|
6.5
|
|
PVBP position at period end
|
|
|
3.5
|
|
|
|
.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 June 30, 2010 and December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
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
|
|
|
(4
|
)
|
|
|
(4
|
)
|
Change resulting from an immediate 200 basis point decrease
in interest rates
|
|
|
(6
|
)
|
|
|
(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.
133
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
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
|
|
$
|
111
|
|
|
|
2
|
|
|
$
|
(17
|
)
|
|
|
-
|
|
Change resulting from a gradual 100 basis point decrease in
the yield curve
|
|
|
(245
|
)
|
|
|
(5
|
)
|
|
|
(65
|
)
|
|
|
(1
|
)
|
Change resulting from a gradual 200 basis point increase in
the yield curve
|
|
|
159
|
|
|
|
3
|
|
|
|
5
|
|
|
|
-
|
|
Change resulting from a gradual 200 basis point decrease in
the yield curve
|
|
|
(433
|
)
|
|
|
(9
|
)
|
|
|
(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
|
|
|
149
|
|
|
|
3
|
|
|
|
20
|
|
|
|
-
|
|
Change resulting from an immediate 100 basis point decrease
in the yield curve
|
|
|
(342
|
)
|
|
|
(7
|
)
|
|
|
(95
|
)
|
|
|
(2
|
)
|
Change resulting from an immediate 200 basis point increase
in the yield curve
|
|
|
159
|
|
|
|
3
|
|
|
|
(14
|
)
|
|
|
-
|
|
Change resulting from an immediate 200 basis point decrease
in the yield curve
|
|
|
(353
|
)
|
|
|
(7
|
)
|
|
|
(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 June 30, 2010,
we had an
available-for-sale
securities portfolio of approximately $36.0 billion with a
net positive
mark-to-market
of $1.0 billion included in tangible common equity of
$11.8 billion. An increase of 25 basis points in
interest rates of all maturities would lower the mark to market
by approximately $216 million to a net gain of
$784 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 mark to market
by approximately $248 million to a net loss of
$483 million with the following results on the tangible
capital ratios.
134
HSBC USA Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
Actual
|
|
|
Proforma(1)
|
|
|
Actual
|
|
|
Proforma(1)
|
|
|
|
|
Tangible common equity to tangible assets
|
|
|
6.41
|
%
|
|
|
6.34
|
%
|
|
|
6.60
|
%
|
|
|
6.40
|
%
|
Tangible common equity to risk weighted assets
|
|
|
9.29
|
|
|
|
9.18
|
|
|
|
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 since
December 31, 2009. 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 six months
ended June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
Minimum
|
|
|
Maximum
|
|
|
Average
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Total trading
|
|
$
|
33
|
|
|
$
|
25
|
|
|
$
|
60
|
|
|
$
|
37
|
|
|
$
|
38
|
|
Equities
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
Foreign exchange
|
|
|
4
|
|
|
|
1
|
|
|
|
9
|
|
|
|
4
|
|
|
|
2
|
|
Interest rate directional and credit spread
|
|
|
28
|
|
|
|
23
|
|
|
|
53
|
|
|
|
32
|
|
|
|
33
|
|
135
HSBC USA Inc.
The following table summarizes the frequency distribution of
daily market risk-related revenues for Treasury trading
activities during the six months ended June 30, 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 six months ended
June 30, 2010 shows that the largest daily gain was
$18 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
|
|
|
|
|
Number of trading days market risk-related revenue was within
the stated range
|
|
|
7
|
|
|
|
39
|
|
|
|
53
|
|
|
|
20
|
|
|
|
6
|
|
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 six
months ended June 30, 2010, assuming a 99% confidence level
for a two-year observation period and a
one-day
holding period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
Minimum
|
|
|
Maximum
|
|
|
Average
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Interest rate
|
|
$
|
125
|
|
|
$
|
101
|
|
|
$
|
142
|
|
|
$
|
124
|
|
|
$
|
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.
136
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.
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Projected change in net market value of hedged MSRs portfolio
(reflects projected rate movements on July 1):
|
|
|
|
|
|
|
|
|
Value of hedged MSRs portfolio
|
|
$
|
317
|
|
|
$
|
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
|
|
|
12
|
|
|
|
(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
|
|
|
7
|
|
|
|
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
|
|
|
11
|
|
|
|
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 six months
ended June 30, 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
|
|
|
|
|
Number of trading weeks market risk-related revenue was within
the stated range
|
|
|
3
|
|
|
|
4
|
|
|
|
11
|
|
|
|
6
|
|
|
|
2
|
|
Operational Risk Operational risk is inherent in
all of our business activities. Management of operational risk
includes the ongoing review of our businesses in an effort to
identify opportunities to mitigate certain inherent risks in
existing operations.
Operational risk includes both legal risk and compliance risk.
Due to the increasing scale and complexity of our regulatory
environment, and consistent with the suggestion of our
regulators and the organizational model of HSBC, in the second
quarter of 2010, the Compliance and Legal functions in North
America were divided into two separate functions, whereas before
Compliance had reported to Legal. The Compliance function will
continue to report to the HSBC Head of Group Compliance as well
as functionally to the CEO of HSBC North America. The HSBC Head
of Group Compliance has been appointed as the Acting Head of
Compliance, North America Region until such time as a permanent
Head of HSBC Compliance, North America Region is appointed.
Additional steps have been taken to further strengthen our
compliance risk management approach, including the strengthening
of the Anti-Money Laundering (AML) Office with
responsibility for the guidance and oversight of AML risk
management activities within HSBC North America and its
subsidiaries, including HSBC USA. Efforts to strengthen the
Compliance function will continue.
Fiduciary Risk There have been no material changes
to our approach towards fiduciary risk management since
December 31, 2009.
Reputational Risk There have been no material
changes to our approach towards reputational risk management
since December 31, 2009.
Strategic Risk There have been no material changes
to our approach towards strategic risk management since
December 31, 2009.
137
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 June 30,
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate(1)
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate(1)
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits with banks
|
|
$
|
30,705
|
|
|
$
|
21
|
|
|
|
0.28
|
%
|
|
$
|
11,269
|
|
|
$
|
9
|
|
|
|
0.31
|
%
|
Federal funds sold and securities purchased under resale
agreements
|
|
|
4,368
|
|
|
|
8
|
|
|
|
0.75
|
|
|
|
9,120
|
|
|
|
13
|
|
|
|
0.61
|
|
Trading assets
|
|
|
6,384
|
|
|
|
35
|
|
|
|
2.23
|
|
|
|
4,608
|
|
|
|
51
|
|
|
|
4.45
|
|
Securities
|
|
|
40,292
|
|
|
|
275
|
|
|
|
2.73
|
|
|
|
24,511
|
|
|
|
227
|
|
|
|
3.71
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
31,265
|
|
|
|
240
|
|
|
|
3.08
|
|
|
|
36,172
|
|
|
|
327
|
|
|
|
3.64
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
14,628
|
|
|
|
172
|
|
|
|
4.71
|
|
|
|
18,439
|
|
|
|
232
|
|
|
|
5.06
|
|
HELOCs and home equity mortgages
|
|
|
4,012
|
|
|
|
33
|
|
|
|
3.26
|
|
|
|
4,524
|
|
|
|
38
|
|
|
|
3.28
|
|
Private label card receivables
|
|
|
13,113
|
|
|
|
331
|
|
|
|
10.14
|
|
|
|
15,415
|
|
|
|
411
|
|
|
|
10.69
|
|
Credit cards
|
|
|
11,629
|
|
|
|
246
|
|
|
|
8.50
|
|
|
|
13,963
|
|
|
|
317
|
|
|
|
9.10
|
|
Auto finance
|
|
|
1,365
|
|
|
|
61
|
|
|
|
17.83
|
|
|
|
2,624
|
|
|
|
119
|
|
|
|
18.21
|
|
Other consumer
|
|
|
1,369
|
|
|
|
26
|
|
|
|
7.42
|
|
|
|
1,699
|
|
|
|
18
|
|
|
|
4.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
46,116
|
|
|
|
869
|
|
|
|
7.55
|
|
|
|
56,664
|
|
|
|
1,135
|
|
|
|
8.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
77,381
|
|
|
|
1,109
|
|
|
|
5.74
|
|
|
|
92,836
|
|
|
|
1,462
|
|
|
|
6.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
5,256
|
|
|
|
12
|
|
|
|
0.90
|
|
|
|
8,862
|
|
|
|
13
|
|
|
|
0.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
|
164,386
|
|
|
$
|
1,460
|
|
|
|
3.56
|
%
|
|
|
151,206
|
|
|
$
|
1,775
|
|
|
|
4.71
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses
|
|
|
(3,171
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,666
|
)
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
2,577
|
|
|
|
|
|
|
|
|
|
|
|
2,478
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
26,031
|
|
|
|
|
|
|
|
|
|
|
|
23,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
189,823
|
|
|
|
|
|
|
|
|
|
|
$
|
173,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits in domestic offices:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits
|
|
$
|
54,170
|
|
|
$
|
100
|
|
|
|
0.73
|
%
|
|
$
|
47,006
|
|
|
$
|
149
|
|
|
|
1.27
|
%
|
Other time deposits
|
|
|
16,532
|
|
|
|
41
|
|
|
|
0.99
|
|
|
|
19,472
|
|
|
|
103
|
|
|
|
2.11
|
|
Deposits in foreign offices:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign banks deposits
|
|
|
9,453
|
|
|
|
6
|
|
|
|
0.27
|
|
|
|
9,709
|
|
|
|
3
|
|
|
|
0.12
|
|
Other interest bearing deposits
|
|
|
20,993
|
|
|
|
5
|
|
|
|
0.10
|
|
|
|
15,061
|
|
|
|
12
|
|
|
|
0.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits
|
|
|
101,148
|
|
|
|
152
|
|
|
|
0.60
|
|
|
|
91,248
|
|
|
|
267
|
|
|
|
1.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
18,718
|
|
|
|
22
|
|
|
|
0.47
|
|
|
|
9,198
|
|
|
|
15
|
|
|
|
0.69
|
|
Long-term debt
|
|
|
17,688
|
|
|
|
148
|
|
|
|
3.36
|
|
|
|
23,826
|
|
|
|
210
|
|
|
|
3.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
137,554
|
|
|
|
322
|
|
|
|
0.94
|
|
|
|
124,272
|
|
|
|
492
|
|
|
|
1.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/Interest rate spread
|
|
|
|
|
|
$
|
1,138
|
|
|
|
2.62
|
%
|
|
|
|
|
|
$
|
1,283
|
|
|
|
3.12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing deposits
|
|
|
21,460
|
|
|
|
|
|
|
|
|
|
|
|
20,193
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
14,875
|
|
|
|
|
|
|
|
|
|
|
|
14,938
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
15,934
|
|
|
|
|
|
|
|
|
|
|
|
13,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
189,823
|
|
|
|
|
|
|
|
|
|
|
$
|
173,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin on average earning assets
|
|
|
|
|
|
|
|
|
|
|
2.78
|
%
|
|
|
|
|
|
|
|
|
|
|
3.40
|
%
|
Net interest margin on average total assets
|
|
|
|
|
|
|
|
|
|
|
2.40
|
%
|
|
|
|
|
|
|
|
|
|
|
2.97
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Rates are calculated on unrounded
numbers.
|
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
June 30, 2010 and 2009 included fees of $16 million
and $32 million, respectively.
138
HSBC USA Inc.
The following table shows the
year-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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate(1)
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate(1)
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits with banks
|
|
$
|
32,277
|
|
|
$
|
43
|
|
|
|
0.27
|
%
|
|
$
|
11,604
|
|
|
$
|
16
|
|
|
|
0.28
|
%
|
Federal funds sold and securities purchased under resale
agreements
|
|
|
3,436
|
|
|
|
14
|
|
|
|
0.84
|
|
|
|
9,553
|
|
|
|
30
|
|
|
|
0.64
|
|
Trading assets
|
|
|
5,894
|
|
|
|
67
|
|
|
|
2.30
|
|
|
|
4,777
|
|
|
|
110
|
|
|
|
4.66
|
|
Securities
|
|
|
36,452
|
|
|
|
522
|
|
|
|
2.89
|
|
|
|
25,176
|
|
|
|
510
|
|
|
|
4.09
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
31,835
|
|
|
|
485
|
|
|
|
3.07
|
|
|
|
36,876
|
|
|
|
653
|
|
|
|
3.57
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
14,724
|
|
|
|
348
|
|
|
|
4.77
|
|
|
|
19,258
|
|
|
|
492
|
|
|
|
5.15
|
|
HELOCs and home equity mortgages
|
|
|
4,057
|
|
|
|
66
|
|
|
|
3.28
|
|
|
|
4,539
|
|
|
|
76
|
|
|
|
3.36
|
|
Private label card receivables
|
|
|
13,716
|
|
|
|
693
|
|
|
|
10.19
|
|
|
|
15,896
|
|
|
|
825
|
|
|
|
10.47
|
|
Credit cards
|
|
|
12,026
|
|
|
|
534
|
|
|
|
8.95
|
|
|
|
13,656
|
|
|
|
669
|
|
|
|
9.87
|
|
Auto finance
|
|
|
1,614
|
|
|
|
143
|
|
|
|
17.90
|
|
|
|
2,609
|
|
|
|
234
|
|
|
|
18.11
|
|
Other consumer
|
|
|
1,403
|
|
|
|
51
|
|
|
|
7.32
|
|
|
|
1,758
|
|
|
|
59
|
|
|
|
6.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
47,540
|
|
|
|
1,835
|
|
|
|
7.79
|
|
|
|
57,716
|
|
|
|
2,355
|
|
|
|
8.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
79,375
|
|
|
|
2,320
|
|
|
|
5.89
|
|
|
|
94,592
|
|
|
|
3,008
|
|
|
|
6.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
6,025
|
|
|
|
23
|
|
|
|
0.78
|
|
|
|
9,138
|
|
|
|
24
|
|
|
|
0.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
|
163,459
|
|
|
$
|
2,989
|
|
|
|
3.69
|
%
|
|
|
154,840
|
|
|
$
|
3,698
|
|
|
|
4.82
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses
|
|
|
(3,472
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,362
|
)
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
2,616
|
|
|
|
|
|
|
|
|
|
|
|
2,550
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
24,140
|
|
|
|
|
|
|
|
|
|
|
|
25,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
186,743
|
|
|
|
|
|
|
|
|
|
|
$
|
179,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits in domestic offices:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits
|
|
$
|
53,569
|
|
|
$
|
204
|
|
|
|
0.77
|
%
|
|
$
|
46,822
|
|
|
$
|
323
|
|
|
|
1.39
|
%
|
Other time deposits
|
|
|
17,075
|
|
|
|
89
|
|
|
|
1.04
|
|
|
|
20,096
|
|
|
|
222
|
|
|
|
2.23
|
|
Deposits in foreign offices:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign banks deposits
|
|
|
9,476
|
|
|
|
11
|
|
|
|
0.23
|
|
|
|
10,684
|
|
|
|
6
|
|
|
|
0.11
|
|
Other interest bearing deposits
|
|
|
20,758
|
|
|
|
11
|
|
|
|
0.11
|
|
|
|
15,673
|
|
|
|
29
|
|
|
|
0.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits
|
|
|
100,878
|
|
|
|
315
|
|
|
|
0.63
|
|
|
|
93,275
|
|
|
|
580
|
|
|
|
1.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
17,787
|
|
|
|
43
|
|
|
|
0.49
|
|
|
|
9,979
|
|
|
|
34
|
|
|
|
0.70
|
|
Long-term debt
|
|
|
17,658
|
|
|
|
288
|
|
|
|
3.29
|
|
|
|
25,175
|
|
|
|
447
|
|
|
|
3.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
136,323
|
|
|
|
646
|
|
|
|
0.96
|
|
|
|
128,429
|
|
|
|
1,061
|
|
|
|
1.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/Interest rate spread
|
|
|
|
|
|
$
|
2,343
|
|
|
|
2.73
|
%
|
|
|
|
|
|
$
|
2,637
|
|
|
|
3.15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing deposits
|
|
|
21,373
|
|
|
|
|
|
|
|
|
|
|
|
20,574
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
13,414
|
|
|
|
|
|
|
|
|
|
|
|
16,682
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
15,633
|
|
|
|
|
|
|
|
|
|
|
|
13,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
186,743
|
|
|
|
|
|
|
|
|
|
|
$
|
179,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin on average earning assets
|
|
|
|
|
|
|
|
|
|
|
2.89
|
%
|
|
|
|
|
|
|
|
|
|
|
3.43
|
%
|
Net interest margin on average total assets
|
|
|
|
|
|
|
|
|
|
|
2.53
|
%
|
|
|
|
|
|
|
|
|
|
|
2.96
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Rates are calculated on unrounded
numbers.
|
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 six months ended
June 30, 2010 and 2009 included fees of $30 million
and $44 million, respectively.
139
HSBC USA Inc.
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
June 30, 2010 that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
PART II. OTHER
INFORMATION
Item 1. Legal
Proceedings
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
HSBC Bank USA are subject to formal and informal investigations
by, and have received subpoenas
and/or
requests for information from, various governmental and
regulatory agencies relating to our business activities. In all
such cases, we are cooperating fully and engaging in efforts to
resolve these matters.
140
HSBC USA Inc.
We are the subject of ongoing examinations by the Office of the
Comptroller of the Currency and the Federal Reserve Bank of
Chicago, and inquiries, including grand jury subpoenas and other
requests for information, by government agencies, including the
U.S. Attorneys Office and the U.S. Department of
Justice. These examinations and inquiries pertain to, among
other matters, our Global Banknotes business and our foreign
correspondent banking business, and our compliance with Bank
Secrecy Act (BSA), Anti-Money Laundering
(AML) and Office of Foreign Assets Control
requirements. In response to these matters, we have taken
several initial steps to address the concerns of our regulators
by enhancing risk management and strengthening processes and the
supporting infrastructure in our BSA and AML functions. Actions
initiated to date include, but are not limited to, those
described under Risk Management Operational
Risk above. HSBC USA is committed to maintaining
compliant and effective BSA and AML policies and procedures, and
efforts to strengthen related functions will continue.
In connection with the resolution of these matters, it is likely
we will be subject to some form of formal enforcement action
concerning processes or governance relating to the subject
areas, which may include a written agreement or a cease and
desist order requiring additional remedial measures and further
enhancements to our BSA and AML policies and procedures. If we
are found to have violated the law, relevant authorities have
the power to impose civil money penalties, fines and other
financial penalties. We are unable at this time to determine the
terms on which these matters will be resolved, the timing of any
formal enforcement action, or the amount of fines or penalties,
if any, that may be imposed by the regulators or agencies.
141
HSBC USA Inc.
Item 6. Exhibits
Exhibits included in this Report:
|
|
|
|
|
|
12
|
|
|
Computation of Ratio of Earnings to Fixed Charges and Earnings
to Combined Fixed Charges and Preferred Stock Dividends.
|
|
31
|
|
|
Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
|
|
32
|
|
|
Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
142
HSBC USA Inc.
Index
Assets:
by business
segment 45
consolidated average
balances 138
fair value
measurements 56
nonperforming 117
trading 9
Asset-backed commercial paper conduits 51
Asset-backed securities 9, 10, 57, 129
Balance sheet:
consolidated 4
consolidated average
balances 138
review 83
Basel II 79
Basis of reporting 8, 80
Business:
consolidated
performance review 75
Capital:
funding
strategy 122
common equity
movements 120
consolidated statement
of changes 6
regulatory
capital 43
selected capital
ratios 43, 121
Cash flow (consolidated) 7
Cautionary statement regarding forward-looking
statements 73
Collateral pledged assets 56
Collateralized debt obligations 130
Commercial banking segment results (IFRSs) 45,
104
Consumer finance segment results (IFRSs) 45, 103
Contingencies 56
Controls and procedures 140
Credit card fees 93
Credit quality 79, 110
Credit risk:
adjustment 70
component of fair
value option 34, 97
concentration 22
exposure 132
management 131
related contingent
features 31
related
guarantees 53
Current environment 73
Deferred tax assets 37
Deposits 87, 119
Derivatives:
cash flow
hedges 28
fair value
hedges 27
notional
value 32
trading and
other 29
Equity:
consolidated statement
of changes 6
ratios 43,
121
Equity securities
available-for-sale 10
Estimates and assumptions 8
Executive overview 73
Fair value measurements:
assets and liabilities
recorded at fair value on a
recurring
basis 57
assets and liabilities
recorded at fair value on a
non-recurring
basis 63
control over valuation
process 125
financial
instruments 64
hierarchy 126
transfers into/out of
level one and two 58, 127
transfers into/out of
level two and three 58,
127
valuation
techniques 65
Financial assets:
designated at fair
value 33
reclassification under
IFRSs 106
Financial highlights metrics 78
Financial liabilities:
designated at fair
value 33
fair value of
financial liabilities 57, 64
Forward looking statements 73
Funding 79, 122
Gains less losses from securities 18, 76, 95
Global Banking and Markets:
balance sheet data
(IFRSs) 45, 106
loans and securities
reclassified (IFRSs) 106
segment results
(IFRSs) 45
Geographic concentration of receivables 119
Goodwill 26
Guarantee arrangements 52
Impairment:
available-for-sale
securities 13
credit
losses 23, 77, 90
nonperforming
loans 117
impaired
loans 118
Income (loss) from financial instruments designated at
fair value,
net 34, 97
Income statement 3
Intangible assets 25
Income tax expense 35
Internal control 140
Interest rate risk 133
Key performance indicators 78
Legal proceedings 140
Leveraged finance transactions 33
143
HSBC USA Inc.
Liabilities:
commitments, lines of
credit 53
deposits 87,
119
financial liabilities
designated at
fair
value 33
long-term
debt 88, 119
short-term
borrowings 88, 119
trading 9,
86
Liquidity and capital resources 119
Liquidity risk 132
Litigation 140
Loans:
by
category 20, 84
by charge-off
(net) 115
by
delinquency 114
criticized
assets 118
geographic
concentration 119
held for
sale 24, 85
impaired 118
nonperforming 117
overall
review 84
purchases from HSBC
Finance 20, 40
risk
concentration 22
troubled debt
restructures 21, 118
Loan impairment charges see Provision for
credit losses
Loan-to-deposits ratio 78
Market risk 135
Market turmoil:
current
environment 73
exposures 132
impact on liquidity
risk 119
structured investment
vehicles 50
variable interest
entities 48
Monoline insurers 17, 76, 106
Mortgage lending products 20, 84
Mortgage servicing rights 25
Net interest income 88
New accounting pronouncements 71
Off balance sheet arrangements 122
Operating expenses 99
Operational risk 137
Other revenue 92
Other segment results (IFRSs) 45, 109
Pension and other postretirement benefits 37
Performance, developments and trends 75
Personal financial services segment
results
(IFRSs) 45, 101
Pledged assets 56
Private banking segment results (IFRSs) 45, 107
Profit (loss) before tax:
by segment
IFRSs 45
consolidated 3
Provision for credit losses 77, 90
Ratios:
capital 43,
121
charge-off
(net) 115
credit loss reserve
related 111
earnings to fixed
charges Exhibit 12
efficiency 77,
101
financial 78
loans-to-deposits 78
Reconciliation of U.S. GAAP results to IFRSs 45, 81
Refreshed
loan-to-value 85
Related party transactions 38
Results of operations 88
Risk elements in the loan portfolio 22
Risk management:
credit 131
fiduciary 137
interest
rate 133
liquidity 132
market 135
operational 137
reputational 137
strategic 137
Securities:
fair
value 10, 57
impairment 13,
95
maturity
analysis 19
Segment results IFRSs basis:
personal financial
services 101
consumer
finance 103
commercial
banking 104
global banking and
markets 106
private
banking 107
other 109
overall
summary 44, 101
Selected financial data 78
Sensitivity:
projected net interest
income 134
Statement of changes in shareholders equity 6
Statement of changes in comprehensive income
(loss) 6
Statement of income (loss) 3
Table of contents 2
Tax expense 35
Trading:
assets 9, 86
derivatives 9,
86, 94
liabilities 9,
86
portfolios 9
Trading revenue (net) 94
Troubled debt restructures 21, 118
Value at risk 135
Variable interest entities 48
144
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.
Date: August 2, 2010
HSBC USA Inc.
(Registrant)
John T. McGinnis
Executive Vice President and
Chief Financial Officer
145
HSBC USA Inc.
Exhibit Index
|
|
|
|
|
|
12
|
|
|
Computation of Ratio of Earnings to Fixed Charges and Earnings
to Combined Fixed Charges and Preferred Stock Dividends.
|
|
31
|
|
|
Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
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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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