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 September 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 October 31, 2010, there were 712 shares of the
registrants common stock outstanding, all of which are
owned by HSBC North America Inc.
HSBC USA
INC.
FORM 10-Q
TABLE OF
CONTENTS
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Part/Item No.
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Page
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3
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4
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6
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7
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8
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Managements Discussion and Analysis of Financial Condition
and Results of Operations
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74
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74
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83
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85
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91
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104
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113
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123
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127
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129
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134
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142
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Quantitative and Qualitative Disclosures About Market Risk
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144
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Controls and Procedures
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144
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Part II
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Legal Proceedings
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144
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Exhibits
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146
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147
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149
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EX-12 |
EX-31 |
EX-32 |
2
HSBC USA
Inc.
Part I.
FINANCIAL INFORMATION
Item 1. Financial
Statements
CONSOLIDATED
STATEMENT OF INCOME (LOSS) (UNAUDITED)
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Three Months Ended
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Nine Months Ended
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September 30,
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September 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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1,023
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$
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1,370
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$
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3,343
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$
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4,378
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Securities
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311
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233
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823
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731
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Trading assets
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33
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52
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100
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162
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Short-term investments
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26
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22
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83
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68
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Other
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12
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11
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35
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35
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Total interest income
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1,405
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1,688
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4,384
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5,374
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Interest expense:
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Deposits
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139
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224
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454
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804
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Short-term borrowings
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22
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17
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65
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51
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Long-term debt
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153
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187
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441
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634
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Total interest expense
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314
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428
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960
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1,489
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Net interest income
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1,091
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1,260
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3,424
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3,885
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Provision for credit losses
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245
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1,006
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912
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3,247
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Net interest income after provision for credit
losses
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846
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254
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2,512
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638
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Other revenues:
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Credit card fees
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226
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333
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708
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1,032
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Other fees and commissions
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211
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188
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703
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635
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Trust income
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26
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30
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79
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92
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Trading revenue
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166
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353
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498
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351
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Net
other-than-temporary
impairment
losses(1)
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(4
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(26
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(45
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(84
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Other securities gains, net
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37
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5
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59
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299
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Servicing and other fees from HSBC affiliates
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44
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35
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117
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112
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Residential mortgage banking revenue (loss)
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11
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15
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(106
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139
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Gain (loss) on instruments designated at fair value and related
derivatives
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89
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44
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317
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(201
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)
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Other income (expense)
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10
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(82
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177
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(154
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)
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Total other revenues
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816
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895
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2,507
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2,221
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Operating expenses:
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Salaries and employee benefits
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283
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280
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830
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873
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Support services from HSBC affiliates
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479
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386
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1,455
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1,228
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Occupancy expense, net
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66
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60
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202
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211
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Other expenses
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194
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193
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594
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668
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Total operating expenses
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1,022
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919
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3,081
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2,980
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Income (loss) before income tax expense
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640
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230
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1,938
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(121
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)
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Income tax expense
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223
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69
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667
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56
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Net income (loss)
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$
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417
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$
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161
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$
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1,271
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$
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(177
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)
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(1) |
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During the three and nine months
ended September 30, 2010, net
other-than-temporary
impairment (OTTI) on securities
available-for-sale
and held to maturity totaling $13 million in losses and
$90 million in recoveries, respectively, were recognized
which included $9 million in losses and $135 million
in recoveries, respectively, recognized in accumulated other
comprehensive income (AOCI), net of tax and
$4 million and $45 million, respectively, of OTTI
losses recognized in other revenues. During the three and nine
months ended September 30, 2009, $28 million and
$188 million, respectively, of gross OTTI losses on
securities
available-for-sale
were recognized, of which $2 million and $104 million,
respectively, were recognized in AOCI, net of tax.
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The accompanying notes are an integral part of the consolidated
financial statements.
3
HSBC USA Inc.
CONSOLIDATED
BALANCE SHEET (UNAUDITED)
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September 30,
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December 31,
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2010
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2009
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(in millions)
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Assets
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Cash and due from banks
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$
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2,939
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$
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3,159
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Interest bearing deposits with
banks(1)
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15,709
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20,109
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Federal funds sold and securities purchased under agreements to
resell
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11,432
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1,046
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Trading assets
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31,164
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25,815
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Securities
available-for-sale
(includes $659 million and $1.1 billion at
September 30, 2010 and December 31, 2009,
respectively, collateralizing long-term
debt)(1)
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41,332
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27,806
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Securities held to maturity (fair value of $3.6 billion and
$2.9 billion at September 30, 2010 and
December 31, 2009, respectively, and includes
$871 million at September 30, 2010 collateralizing
short-term
borrowings)(1)
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3,344
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2,762
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Loans (includes $2.3 billion at September 30, 2010 and
$2.7 billion at December 31, 2009 collateralizing
debt)(1)
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72,214
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79,489
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Less allowance for credit losses
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2,512
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3,861
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Loans, net
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69,702
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75,628
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Loans held for sale (includes $1.5 billion and
$1.1 billion designated under fair value option at
September 30, 2010 and December 31, 2009, respectively)
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2,452
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2,908
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Properties and equipment, net
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516
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533
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Intangible assets, net
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330
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484
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Goodwill
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2,626
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2,647
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Other
assets(1)
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10,628
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8,182
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Total
assets(1)
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$
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192,174
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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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21,018
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$
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20,813
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Interest bearing (includes $6.6 billion and
$4.2 billion designated under fair value option at
September 30, 2010 and December 31, 2009, respectively)
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71,156
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69,894
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Deposits in foreign offices:
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Noninterest bearing
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1,426
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1,105
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Interest bearing
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25,346
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26,525
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Total deposits
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118,946
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118,337
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Short-term
borrowings(1)
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20,046
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6,512
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Long-term debt (includes $5.5 billion and $4.6 billion
designated under fair value option at September 30, 2010
and December 31, 2009, respectively, and $1.3 billion
and $3.0 billion at September 30, 2010 and
December 31, 2009, respectively, collateralized by loans
and
available-for-sale
securities)(1)
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18,559
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18,008
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Total debt
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157,551
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142,857
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Trading liabilities
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11,835
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8,010
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Interest, taxes and other
liabilities(1)
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5,655
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5,035
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Total
liabilities(1)
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175,041
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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 ($5 par; 150,000,000 shares authorized;
712 shares issued and outstanding at September 30,
2010 and December 31, 2009)
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-
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|
-
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Additional paid-in capital
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|
|
13,786
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|
|
|
13,795
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Retained earnings
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|
1,262
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|
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|
45
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Accumulated other comprehensive income (loss)
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|
520
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|
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(228
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)
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Total common shareholders equity
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|
15,568
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|
|
|
13,612
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|
|
|
|
|
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Total shareholders equity
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|
17,133
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|
|
|
15,177
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|
|
|
|
|
|
|
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Total liabilities and shareholders equity
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$
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192,174
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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 September 30, 2010 and
December 31, 2009.
|
4
HSBC USA Inc.
CONSOLIDATED
BALANCE SHEET (UNAUDITED) (Continued)
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
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(in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Interest bearing deposits with banks
|
|
$
|
2
|
|
|
$
|
-
|
|
Securities
available-for-sale
|
|
|
659
|
|
|
|
1,138
|
|
Securities held to maturity
|
|
|
871
|
|
|
|
-
|
|
Loans, net
|
|
|
13,869
|
|
|
|
15,953
|
|
Other assets
|
|
|
699
|
|
|
|
753
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
16,100
|
|
|
$
|
17,844
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
$
|
3,006
|
|
|
$
|
-
|
|
Long-term debt
|
|
|
1,398
|
|
|
|
3,040
|
|
Interest, taxes and other liabilities
|
|
|
1,132
|
|
|
|
1,418
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
5,536
|
|
|
$
|
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)
|
|
|
|
|
|
|
|
|
Nine Months Ended September 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
|
|
|
(6
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
13,786
|
|
|
|
13,807
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
1,271
|
|
|
|
(177
|
)
|
Cash dividends declared on preferred stock
|
|
|
(55
|
)
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
1,262
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
881
|
|
|
|
502
|
|
Other-than-temporarily
impaired securities available for
sale(1)
|
|
|
56
|
|
|
|
(60
|
)
|
Other-than-temporarily
impaired securities held to
maturity(1)
|
|
|
49
|
|
|
|
-
|
|
Derivatives classified as cash flow hedges
|
|
|
10
|
|
|
|
148
|
|
Unrecognized actuarial gains, transition obligation and prior
service costs relating to pension and postretirement benefits,
net of tax
|
|
|
(2
|
)
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax
|
|
|
994
|
|
|
|
598
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
520
|
|
|
|
(204
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
$
|
17,133
|
|
|
$
|
15,196
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,271
|
|
|
$
|
(177
|
)
|
Other comprehensive income, net of tax
|
|
|
994
|
|
|
|
598
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
2,265
|
|
|
$
|
421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
During the nine months ended
September 30, 2010, net OTTI on securities
available-for-sale
and held to maturity totaling $90 million in recoveries
were recognized which included OTTI losses of $45 million
recognized in other revenues. During the nine months ended
September 30, 2009, $188 million of gross OTTI losses
on securities
available-for-sale
were recognized, of which $84 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)
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,271
|
|
|
$
|
(177
|
)
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
528
|
|
|
|
251
|
|
Provision for credit losses
|
|
|
912
|
|
|
|
3,247
|
|
Other-than-temporarily
impaired
available-for-sale
and held to maturity securities
|
|
|
45
|
|
|
|
84
|
|
Realized gains on securities available for sale
|
|
|
(59
|
)
|
|
|
(299
|
)
|
Net change in other assets and liabilities
|
|
|
(657
|
)
|
|
|
1,227
|
|
Net change in loans held for sale:
|
|
|
|
|
|
|
|
|
Originations of loans
|
|
|
(2,885
|
)
|
|
|
(4,355
|
)
|
Sales and collection of loans held for sale
|
|
|
3,017
|
|
|
|
4,709
|
|
Tax refund anticipation loans:
|
|
|
|
|
|
|
|
|
Originations of loans
|
|
|
(3,082
|
)
|
|
|
(9,020
|
)
|
Transfers of loans to HSBC Finance, including premium
|
|
|
3,086
|
|
|
|
9,031
|
|
Net change in trading assets and liabilities
|
|
|
(2,231
|
)
|
|
|
1,142
|
|
LOCOM on loans held for sale
|
|
|
(65
|
)
|
|
|
154
|
|
Mark-to-market
on financial instruments designated at fair value and related
derivatives
|
|
|
(317
|
)
|
|
|
201
|
|
Net change in fair value of derivatives and hedged items
|
|
|
(29
|
)
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(466
|
)
|
|
|
6,224
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Net change in interest bearing deposits with banks
|
|
|
4,400
|
|
|
|
(2,564
|
)
|
Net change in federal funds sold and securities purchased under
agreements to resell
|
|
|
(10,386
|
)
|
|
|
6,350
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
Purchases of securities
available-for-sale
|
|
|
(34,637
|
)
|
|
|
(32,300
|
)
|
Proceeds from sales of securities
available-for-sale
|
|
|
20,369
|
|
|
|
17,058
|
|
Proceeds from maturities of securities
available-for-sale
|
|
|
2,081
|
|
|
|
11,215
|
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
Purchases of securities held to maturity
|
|
|
(1,791
|
)
|
|
|
(152
|
)
|
Proceeds from maturities of securities held to maturity
|
|
|
934
|
|
|
|
235
|
|
Change in loans:
|
|
|
|
|
|
|
|
|
Originations, net of collections
|
|
|
28,326
|
|
|
|
36,396
|
|
Recurring loans purchases from HSBC Finance
|
|
|
(25,298
|
)
|
|
|
(27,625
|
)
|
Cash paid on bulk purchase of loans from HSBC Finance
|
|
|
-
|
|
|
|
(8,821
|
)
|
Auto loans sold to third party
|
|
|
1,559
|
|
|
|
-
|
|
Loans sold to third parties
|
|
|
495
|
|
|
|
3,997
|
|
Net cash used for acquisitions of properties and equipment
|
|
|
(43
|
)
|
|
|
(24
|
)
|
Other, net
|
|
|
85
|
|
|
|
173
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(13,906
|
)
|
|
|
3,938
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Net change in deposits
|
|
|
297
|
|
|
|
(3,677
|
)
|
Debt:
|
|
|
|
|
|
|
|
|
Net change in short-term borrowings
|
|
|
13,534
|
|
|
|
(2,236
|
)
|
Issuance of long-term debt
|
|
|
3,932
|
|
|
|
3,778
|
|
Repayment of long-term debt
|
|
|
(3,651
|
)
|
|
|
(10,068
|
)
|
Debt repayment by consolidated VIE
|
|
|
(189
|
)
|
|
|
(418
|
)
|
Debt issued related to the sale and leaseback of property
|
|
|
309
|
|
|
|
-
|
|
Repayment of debt related to the sale and leaseback of property
|
|
|
(16
|
)
|
|
|
-
|
|
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
|
|
|
(6
|
)
|
|
|
1
|
|
Dividends paid
|
|
|
(55
|
)
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
14,152
|
|
|
|
(10,563
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash and due from banks
|
|
|
(220
|
)
|
|
|
(401
|
)
|
Cash and due from banks at beginning of period
|
|
|
3,159
|
|
|
|
2,972
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks at end of period
|
|
$
|
2,939
|
|
|
$
|
2,571
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash flow investing
activities
|
|
|
|
|
|
|
|
|
Trading securities pending settlement
|
|
$
|
(707
|
)
|
|
$
|
511
|
|
Transfer of loans to held for sale
|
|
|
1,209
|
|
|
|
360
|
|
Transfer of Goodwill and Property to Assets held for sale
|
|
|
23
|
|
|
|
-
|
|
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
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.
2. Exit
of Wholesale Banknotes Business
In June 2010, we decided that the wholesale banknotes business
(Banknotes Business) within our Global Banking and
Markets segment did not fit with our core strategy in the United
States and, therefore, decided to discontinue this business.
This business, which has been managed out of the United States
with operations in key locations worldwide, arranged for the
physical distribution of banknotes globally to central banks,
large commercial banks and currency exchanges. The
discontinuation of our Banknotes Business will allow us to focus
strategic attention on our core businesses. As a result of this
decision, during the second quarter of 2010 we recorded closure
costs of $13 million, primarily related to termination and
other employee benefits. During the third quarter of 2010, we
released $4 million of closure costs as we adjusted a
variety of previously estimated costs. No significant additional
8
HSBC USA Inc.
closure costs are expected. At September 30, 2010, the
restructuring liability relating to this decision totaled
$9 million.
As part of the decision to exit the Banknotes Business, in
September 2010 we agreed to sell the assets of our Asian
banknotes operations (Asian Banknotes Operations) to
an unaffiliated third party for total consideration of
approximately $11 million in cash. As a result, during the
third quarter of 2010 we classified the assets of the Asian
Banknotes Operations of $23 million, including an
allocation of goodwill of $21 million, as held for sale
which are included as a component of other assets. At
September 30, 2010, the assets of our Asian Banknotes
Operations held for sale totaled $11 million subsequent to
the recording of a lower of cost or fair value adjustment of
$12 million as the carrying value of the assets being sold
exceeded the agreed upon sales price. The sale was completed in
October 2010.
The exit of our Banknotes Business, including the sale of our
Asian Banknotes Operations, is expected to be substantially
completed in the fourth quarter of 2010. At that time, we will
begin to report the results of our Banknotes Business as
discontinued operations.
3. Trading
Assets and Liabilities
Trading assets and liabilities are summarized in the following
table.
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Trading assets:
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$
|
2,280
|
|
|
$
|
615
|
|
U.S. Government agency
|
|
|
101
|
|
|
|
34
|
|
U.S. Government sponsored
enterprises(1)
|
|
|
5
|
|
|
|
16
|
|
Asset-backed securities
|
|
|
1,256
|
|
|
|
1,815
|
|
Corporate and foreign bonds
|
|
|
4,015
|
|
|
|
2,369
|
|
Other securities
|
|
|
70
|
|
|
|
491
|
|
Precious metals
|
|
|
14,736
|
|
|
|
12,256
|
|
Fair value of derivatives
|
|
|
8,701
|
|
|
|
8,219
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
31,164
|
|
|
$
|
25,815
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities:
|
|
|
|
|
|
|
|
|
Securities sold, not yet purchased
|
|
$
|
1,492
|
|
|
$
|
131
|
|
Payables for precious metals
|
|
|
3,736
|
|
|
|
2,556
|
|
Fair value of derivatives
|
|
|
6,607
|
|
|
|
5,323
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,835
|
|
|
$
|
8,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes mortgage-backed securities
of $5 million and $13 million issued or guaranteed by
the Federal National Mortgage Association (FNMA) and
$0 million and $3 million issued or guaranteed by the
Federal Home Loan Mortgage Corporation (FHLMC) at
September 30, 2010 and December 31, 2009, respectively.
|
At September 30, 2010 and December 31, 2009, the fair
value of derivatives included in trading assets has been reduced
by $4.3 billion and $2.7 billion, respectively,
relating to amounts recognized for the obligation to return cash
collateral received under master netting agreements with
derivative counterparties.
At September 30, 2010 and December 31, 2009, the fair
value of derivatives included in trading liabilities has been
reduced by $6.9 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.
4. 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
|
|
September 30, 2010
|
|
Cost
|
|
|
Securities
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
(in millions)
|
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$
|
12,801
|
|
|
$
|
-
|
|
|
$
|
697
|
|
|
$
|
(1
|
)
|
|
$
|
13,497
|
|
U.S. Government sponsored
enterprises:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
49
|
|
|
|
-
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
49
|
|
Direct agency obligations
|
|
|
2,081
|
|
|
|
-
|
|
|
|
231
|
|
|
|
-
|
|
|
|
2,312
|
|
U.S. Government agency issued or guaranteed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
11,361
|
|
|
|
-
|
|
|
|
394
|
|
|
|
-
|
|
|
|
11,755
|
|
Collateralized mortgage obligations
|
|
|
7,645
|
|
|
|
-
|
|
|
|
256
|
|
|
|
-
|
|
|
|
7,901
|
|
Direct agency obligations
|
|
|
63
|
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
|
|
66
|
|
Obligations of U.S. states and political subdivisions
|
|
|
573
|
|
|
|
-
|
|
|
|
30
|
|
|
|
(1
|
)
|
|
|
602
|
|
Asset-backed securities collateralized by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
38
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5
|
)
|
|
|
33
|
|
Commercial mortgages
|
|
|
539
|
|
|
|
-
|
|
|
|
23
|
|
|
|
(5
|
)
|
|
|
557
|
|
Home equity
|
|
|
497
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(147
|
)
|
|
|
350
|
|
Auto
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10
|
|
Student loans
|
|
|
30
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
28
|
|
Other
|
|
|
120
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(16
|
)
|
|
|
104
|
|
Corporate and other domestic debt
securities(2)
|
|
|
691
|
|
|
|
-
|
|
|
|
9
|
|
|
|
-
|
|
|
|
700
|
|
Foreign debt
securities(2)
|
|
|
2,498
|
|
|
|
-
|
|
|
|
85
|
|
|
|
-
|
|
|
|
2,583
|
|
Equity
securities(3)
|
|
|
781
|
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
|
|
785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
securities
|
|
$
|
39,777
|
|
|
$
|
-
|
|
|
$
|
1,733
|
|
|
$
|
(178
|
)
|
|
$
|
41,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government sponsored
enterprises:(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
1,724
|
|
|
$
|
-
|
|
|
$
|
162
|
|
|
$
|
-
|
|
|
$
|
1,886
|
|
U.S. Government agency issued or guaranteed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
98
|
|
|
|
-
|
|
|
|
14
|
|
|
|
-
|
|
|
|
112
|
|
Collateralized mortgage obligations
|
|
|
331
|
|
|
|
-
|
|
|
|
37
|
|
|
|
-
|
|
|
|
368
|
|
Obligations of U.S. states and political subdivisions
|
|
|
126
|
|
|
|
-
|
|
|
|
5
|
|
|
|
(1
|
)
|
|
|
130
|
|
Asset-backed securities collateralized by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
194
|
|
|
|
-
|
|
|
|
5
|
|
|
|
(3
|
)
|
|
|
196
|
|
Asset-backed securities (predominantly credit card) and other
debt securities held by consolidated
VIE(5)
|
|
|
1,068
|
|
|
|
(197
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
held-to-maturity
securities
|
|
$
|
3,541
|
|
|
$
|
(197
|
)
|
|
$
|
223
|
|
|
$
|
(4
|
)
|
|
$
|
3,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
HSBC USA Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Credit Gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 $31 million and $38 million issued or
guaranteed by FNMA at September 30, 2010 and
December 31, 2009, respectively, and $18 million and
$21 million issued or guaranteed by FHLMC at
September 30, 2010 and December 31, 2009, respectively.
|
|
(2) |
|
At September 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 $2.1 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 of $2 million
at September 30, 2010 and December 31, 2009,
respectively. Balances at September 30, 2010 and
December 31, 2009 reflect cumulative
other-than-temporary
impairment charges of $204 million and $203 million,
respectively.
|
|
(4) |
|
Includes securities at amortized
cost of $646 million and $678 million issued or
guaranteed by FNMA at September 30, 2010 and
December 31, 2009, respectively, and $1.1 billion and
$1.2 billion issued and guaranteed by FHLMC at
September 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 17, Variable Interest
Entities for additional information.
|
A summary of gross unrealized losses and related fair values as
of September 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
|
|
September 30, 2010
|
|
Securities
|
|
|
Losses
|
|
|
Investment
|
|
|
Securities
|
|
|
Losses
|
|
|
Investment
|
|
|
|
|
|
|
|
|
|
|
|
(dollars are in millions)
|
|
|
|
|
|
|
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
|
4
|
|
|
$
|
(1
|
)
|
|
$
|
146
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
U.S. Government sponsored enterprises
|
|
|
7
|
|
|
|
-
|
|
|
|
11
|
|
|
|
13
|
|
|
|
(1
|
)
|
|
|
10
|
|
U.S. Government agency issued or guaranteed
|
|
|
4
|
|
|
|
-
|
|
|
|
13
|
|
|
|
1
|
|
|
|
-
|
|
|
|
2
|
|
Obligations of U.S. states and political subdivisions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
|
|
(1
|
)
|
|
|
38
|
|
Asset-backed securities
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
3
|
|
|
|
56
|
|
|
|
(174
|
)
|
|
|
506
|
|
Corporate and other domestic debt securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Foreign debt securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
25
|
|
Equity securities
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale
|
|
|
17
|
|
|
$
|
(2
|
)
|
|
$
|
173
|
|
|
|
76
|
|
|
$
|
(176
|
)
|
|
$
|
581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government sponsored enterprises
|
|
|
16
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
1
|
|
|
$
|
-
|
|
|
$
|
-
|
|
U.S. Government agency issued or guaranteed
|
|
|
553
|
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
Obligations of U.S. states and political subdivisions
|
|
|
20
|
|
|
|
(1
|
)
|
|
|
7
|
|
|
|
11
|
|
|
|
-
|
|
|
|
17
|
|
Asset-backed securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
|
|
|
(3
|
)
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity
|
|
|
589
|
|
|
$
|
(1
|
)
|
|
$
|
8
|
|
|
|
20
|
|
|
$
|
(3
|
)
|
|
$
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 in 2010 primarily due to a
reduction in credit spreads for asset-backed securities during
the first nine 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 nine months ended
September 30, 2010, five and 38 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 losses of $13 million and recoveries of
$90 million during the three and nine months ended
September 30, 2010 on these investments. The credit loss
component of the applicable debt securities totaling
$4 million and $45 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 nine months ended
September 30, 2010, respectively, while the remaining
non-credit portion representing a net recovery during the nine
month period of a portion of previously recorded impairment
losses was recognized in other comprehensive income. During the
three and nine months ended September 30, 2009, 14 and 18
debt securities were determined to be
other-than-temporarily
impaired. As a result, we recorded
other-than-temporary
impairment charges of $28 million and $188 million
during the three and nine months ended September 30, 2009
on these investments. The credit loss component of the
applicable debt securities totaling $26 million and
$84 million was recorded as a component of net
other-than-temporary
impairment losses in the accompanying consolidated statement of
income (loss) for the
13
HSBC USA Inc.
three and nine months ended September 30, 2009,
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 87 percent and 72 percent of total
available-for-sale
and held to maturity securities as of September 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 weakness in the U.S. housing markets with
high levels of delinquency and foreclosure;
|
|
|
|
A lack of 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-default 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.
|
In determining whether a credit loss exists and the period over
which the debt security is expected to recover, we considered
the following factors:
|
|
|
|
|
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;
|
14
HSBC USA Inc.
|
|
|
|
|
The level of excessive cash flows generated from the underlying
collateral supporting the principal and interest payments of the
debt securities; and
|
|
|
|
Any adverse change to the credit conditions of the issuer, the
monoline insurer or the security such as credit downgrades by
the rating agencies.
|
We use a standard valuation model to measure the credit loss for
available-for-sale
and held to maturity securities. The valuation model captures
the composition of the underlying collateral and the cash flow
structure of the security. Management develops inputs to the
model based on external analyst reports and forecasts and
internal credit assessments. Significant inputs to the model
include delinquencies, collateral types and related contractual
features, estimated rates of default, loss given default and
prepayment assumptions. Using the inputs, the model estimates
cash flows generated from the underlying collateral and
distributes those cash flows to respective tranches of
securities considering credit subordination and other credit
enhancement features. The projected future cash flows
attributable to the debt security held are discounted using the
effective interest rates determined at the original acquisition
date if the security bears a fixed rate of return. The discount
rate is adjusted for the floating index rate for securities
which bear a variable rate of return, such as LIBOR-based
instruments.
As of September 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 56 percent of the
other-than-temporary
impairments we have recognized during the first nine months of
2010. The assumptions were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second liens/Home
|
|
September 30, 2010
|
|
Prime
|
|
|
Alt-A
|
|
|
Equity Mortgages
|
|
|
|
|
Constant default rate
|
|
|
1-8
|
%
|
|
|
1-6
|
%
|
|
|
9-15
|
%
|
Loss severity
|
|
|
17-60
|
%
|
|
|
29-77
|
%
|
|
|
100
|
%
|
Prepayment speeds
|
|
|
2-30
|
%
|
|
|
1-19
|
%
|
|
|
4-10
|
%
|
The dollar amounts of asset-backed securities for which
other-than-temporary
impairment losses were recognized in the nine months ended
September 30, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
|
|
|
|
Balance as of September 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
|
|
$
|
21
|
|
|
$
|
(3
|
)
|
|
$
|
18
|
|
|
$
|
1
|
|
Home equity loans
|
|
|
15
|
|
|
|
-
|
|
|
|
15
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
36
|
|
|
|
(3
|
)
|
|
|
33
|
|
|
|
6
|
|
Held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset backed securities (predominately Credit Card)
|
|
|
251
|
|
|
|
-
|
|
|
|
251
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
287
|
|
|
$
|
(3
|
)
|
|
$
|
284
|
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additionally, there was $35 million of
other-than-temporary
impairment realized on securities sold in the nine months ended
September 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 September 30, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2010
|
|
|
|
|
|
|
Unrealized Losses for
|
|
|
|
|
|
|
Amortized Cost
|
|
|
More Than 12 Months
|
|
|
Fair Value
|
|
|
|
|
|
(in millions)
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
$
|
13
|
|
|
$
|
(3
|
)
|
|
$
|
10
|
|
Commercial mortgages
|
|
|
39
|
|
|
|
(5
|
)
|
|
|
34
|
|
Home equity loans
|
|
|
482
|
|
|
|
(145
|
)
|
|
|
337
|
|
Auto loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Student loans
|
|
|
30
|
|
|
|
(2
|
)
|
|
|
28
|
|
Other
|
|
|
103
|
|
|
|
(16
|
)
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
667
|
|
|
|
(171
|
)
|
|
|
496
|
|
Held-to-maturity
classification:
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
61
|
|
|
|
(3
|
)
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
728
|
|
|
$
|
(174
|
)
|
|
$
|
554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, illiquidity in 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 recovers from the financial crisis.
The excess of amortized cost over the present value of expected
future cash flows recognized during the nine months ended
September 30, 2010 and 2009 on our
other-than-temporarily
impaired debt securities, which represents the credit loss
associated with these securities, was $45 million and
$84 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 $197 million as of
September 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
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Credit losses at the beginning of the period
|
|
$
|
33
|
|
|
$
|
63
|
|
|
$
|
81
|
|
|
$
|
5
|
|
Credit losses related to securities for which an
other-than-temporary
impairment was not previously recognized
|
|
|
-
|
|
|
|
3
|
|
|
|
20
|
|
|
|
77
|
|
Increase in credit losses for which an
other-than-temporary
impairment was previously recognized
|
|
|
4
|
|
|
|
23
|
|
|
|
25
|
|
|
|
7
|
|
Reduction for credit losses previously recognized on sold
securities
|
|
|
(34
|
)
|
|
|
-
|
|
|
|
(97
|
)
|
|
|
-
|
|
Reductions of credit losses for increases in cash flows expected
to be collected that are recognized over the remaining life of
the security
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
(27
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit losses at the end of the period
|
|
$
|
2
|
|
|
$
|
89
|
|
|
$
|
2
|
|
|
$
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2010, we held 91 individual asset-backed
securities in the
available-for-sale
portfolio, of which 28 were also wrapped by a monoline
insurance company. The asset-backed securities backed by a
monoline wrap comprised $451 million of the total aggregate
fair value of asset-backed securities of $1.1 billion at
September 30, 2010. The gross unrealized losses on these
securities were $162 million at September 30, 2010. We
did not take into consideration the value of the monoline wrap
of any non-investment grade monoline insurers as of
September 30, 2010 and, therefore, we only considered the
financial guarantee of monoline insurers on securities for
purposes of evaluating
other-than-temporary
impairment with a fair value of $157 million. Four
securities wrapped by below investment grade monoline insurance
companies with an aggregate fair value of $20 million were
deemed to be
other-than-temporarily
impaired at September 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 on 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 analysis 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 credit 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)
|
|
|
Gains (Losses)
|
|
|
|
|
|
(in millions)
|
|
|
Three months ended September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale
|
|
$
|
78
|
|
|
$
|
(44
|
)
|
|
$
|
34
|
|
Securities held to maturity
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
78
|
|
|
$
|
(45
|
)
|
|
$
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale
|
|
$
|
9
|
|
|
$
|
(30
|
)
|
|
$
|
(21
|
)
|
Securities held to maturity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9
|
|
|
$
|
(30
|
)
|
|
$
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale
|
|
$
|
148
|
|
|
$
|
(130
|
)
|
|
$
|
18
|
|
Securities held to maturity
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
148
|
|
|
$
|
(134
|
)
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale
|
|
$
|
345
|
|
|
$
|
(130
|
)
|
|
$
|
215
|
|
Securities held to maturity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
345
|
|
|
$
|
(130
|
)
|
|
$
|
215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and fair values of securities
available-for-sale
and securities held to maturity at September 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 September 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 September 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 September 30, 2010
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars are in millions)
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$
|
-
|
|
|
|
-
|
%
|
|
$
|
4,249
|
|
|
|
1.07
|
%
|
|
$
|
4,228
|
|
|
|
2.54
|
%
|
|
$
|
4,324
|
|
|
|
4.23
|
%
|
U.S. Government sponsored enterprises
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,647
|
|
|
|
4.02
|
|
|
|
483
|
|
|
|
4.27
|
|
U.S. Government agency issued or guaranteed
|
|
|
4
|
|
|
|
4.46
|
|
|
|
1
|
|
|
|
4.99
|
|
|
|
239
|
|
|
|
4.80
|
|
|
|
18,825
|
|
|
|
3.92
|
|
Obligations of U.S. states and political subdivisions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
252
|
|
|
|
4.25
|
|
|
|
321
|
|
|
|
4.47
|
|
Asset-backed securities
|
|
|
-
|
|
|
|
-
|
|
|
|
115
|
|
|
|
5.36
|
|
|
|
8
|
|
|
|
1.52
|
|
|
|
1,111
|
|
|
|
2.86
|
|
Corporate and other domestic debt securities
|
|
|
115
|
|
|
|
1.53
|
|
|
|
576
|
|
|
|
1.48
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Foreign debt securities
|
|
|
250
|
|
|
|
1.79
|
|
|
|
2,238
|
|
|
|
2.57
|
|
|
|
10
|
|
|
|
5.36
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortized cost
|
|
$
|
369
|
|
|
|
1.74
|
%
|
|
$
|
7,179
|
|
|
|
1.64
|
%
|
|
$
|
6,384
|
|
|
|
3.07
|
%
|
|
$
|
25,064
|
|
|
|
3.94
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value
|
|
$
|
371
|
|
|
|
|
|
|
$
|
7,321
|
|
|
|
|
|
|
$
|
6,733
|
|
|
|
|
|
|
$
|
26,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government sponsored enterprises
|
|
$
|
-
|
|
|
|
-
|
%
|
|
$
|
27
|
|
|
|
7.95
|
%
|
|
$
|
2
|
|
|
|
6.92
|
%
|
|
$
|
1,695
|
|
|
|
6.17
|
%
|
U.S. Government agency issued or guaranteed
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
7.63
|
|
|
|
423
|
|
|
|
6.56
|
|
Obligations of U.S. states and political subdivisions
|
|
|
11
|
|
|
|
5.38
|
|
|
|
27
|
|
|
|
5.53
|
|
|
|
17
|
|
|
|
4.73
|
|
|
|
71
|
|
|
|
5.24
|
|
Asset-backed securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
194
|
|
|
|
6.08
|
|
Asset-backed securities issued by consolidated VIE
|
|
|
871
|
|
|
|
1.12
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortized cost
|
|
$
|
882
|
|
|
|
1.17
|
%
|
|
$
|
54
|
|
|
|
6.73
|
%
|
|
$
|
25
|
|
|
|
5.58
|
%
|
|
$
|
2,383
|
|
|
|
6.20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value
|
|
$
|
882
|
|
|
|
|
|
|
$
|
57
|
|
|
|
|
|
|
$
|
27
|
|
|
|
|
|
|
$
|
2,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in Federal Home Loan Bank (FHLB) stock
and Federal Reserve Bank (FRB) stock of
$119 million and $476 million, respectively, were
included in other assets at September 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.
Loans consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Commercial loans:
|
|
|
|
|
|
|
|
|
Construction and other real estate
|
|
$
|
8,468
|
|
|
$
|
8,858
|
|
Other commercial
|
|
|
21,670
|
|
|
|
21,446
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
30,138
|
|
|
|
30,304
|
|
|
|
|
|
|
|
|
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
Home equity mortgages
|
|
|
3,892
|
|
|
|
4,164
|
|
Other residential mortgages
|
|
|
13,625
|
|
|
|
13,722
|
|
Private label cards
|
|
|
12,460
|
|
|
|
15,091
|
|
Credit cards
|
|
|
10,815
|
|
|
|
13,048
|
|
Auto finance
|
|
|
-
|
|
|
|
1,701
|
|
Other consumer
|
|
|
1,284
|
|
|
|
1,459
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
42,076
|
|
|
|
49,185
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
72,214
|
|
|
$
|
79,489
|
|
|
|
|
|
|
|
|
|
|
Secured financings of $1.3 billion at September 30,
2010 are secured by $1.0 billion of credit cards and
restricted
available-for-sale
securities of $659 million. 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.
In August 2010, we sold auto finance loans with an outstanding
principal balance of $1.2 billion at date of sale and other
related assets to Santander Consumer USA (SC USA)
for $1.2 billion in cash which resulted in a gain on sale
of $9 million.
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. The accretable yield for the
GM portfolio became fully amortized to interest income during
the second quarter of 2010 and, as such, 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
September 30, 2010 totaled $29 million for the UP
Portfolio, and is included in credit card loans. The outstanding
contractual balance at September 30, 2010 for the UP
Portfolio was $44 million. 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
$4 million and $18 million as of September 30,
2010 and December 31, 2009, respectively, were held for the
acquired receivables subject to the accounting requirements for
20
HSBC USA Inc.
Purchased Credit-Impaired Loans due to a decrease in the
expected future cash flows since the acquisition. The following
summarizes the change in accretable yield associated with the
Purchased Credit-Impaired Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Accretable yield at beginning of period
|
|
$
|
(12
|
)
|
|
$
|
(50
|
)
|
|
$
|
(29
|
)
|
|
$
|
(95
|
)
|
Accretable yield amortized to interest income during the period
|
|
|
2
|
|
|
|
10
|
|
|
|
13
|
|
|
|
39
|
|
Reclassification to non-accretable difference
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretable yield at end of
period(1)
|
|
$
|
(10
|
)
|
|
$
|
(40
|
)
|
|
$
|
(10
|
)
|
|
$
|
(40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
At September 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:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
TDR Loans:
|
|
|
|
|
|
|
|
|
Commercial loans:
|
|
|
|
|
|
|
|
|
Construction and other real estate
|
|
$
|
215
|
|
|
$
|
100
|
|
Other commercial
|
|
|
129
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
344
|
|
|
|
168
|
|
|
|
|
|
|
|
|
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
352
|
|
|
|
173
|
|
Private label cards
|
|
|
238
|
|
|
|
216
|
|
Credit cards
|
|
|
209
|
|
|
|
102
|
|
Auto
finance(1)
|
|
|
-
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
799
|
|
|
|
543
|
|
|
|
|
|
|
|
|
|
|
Total TDR
Loans(3)
|
|
$
|
1,143
|
|
|
$
|
711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Allowance for credit losses for TDR
Loans(2):
|
|
|
|
|
|
|
|
|
Commercial loans:
|
|
|
|
|
|
|
|
|
Construction and other real estate
|
|
$
|
45
|
|
|
$
|
14
|
|
Other commercial
|
|
|
10
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
55
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
54
|
|
|
|
34
|
|
Private label cards
|
|
|
80
|
|
|
|
51
|
|
Credit cards
|
|
|
76
|
|
|
|
24
|
|
Auto finance
|
|
|
-
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
210
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
Total Allowance for credit losses for TDR Loans
|
|
$
|
265
|
|
|
$
|
136
|
|
|
|
|
|
|
|
|
|
|
21
HSBC USA Inc.
|
|
|
(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
$261 million and $65 million at September 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
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Average balance of TDR Loans
|
|
$
|
1,140
|
|
|
$
|
524
|
|
|
$
|
969
|
|
|
$
|
455
|
|
Interest income recognized on TDR Loans
|
|
|
18
|
|
|
|
8
|
|
|
|
48
|
|
|
|
22
|
|
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.
|
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 September 30, 2010 and
December 31, 2009, respectively.
|
|
|
|
|
|
|
|
|
|
|
September 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
|
|
|
2.7
|
|
|
|
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 $133 million and
$232 million of
sub-prime
residential mortgage loans held for sale at September 30,
2010 and December 31, 2009, respectively.
|
|
(2) |
|
ARM loan balances above exclude
$105 million and $209 million of
sub-prime
residential mortgage loans held for sale at September 30,
2010 and December 31, 2009, respectively. During the
remainder of 2010 and during 2011, approximately
$23 million and $410 million, respectively, of these
ARM loans will experience their first interest rate reset.
|
22
HSBC USA Inc.
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 September 30, 2010 and
December 31, 2009, respectively.
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Closed end:
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
13,625
|
|
|
$
|
13,722
|
|
Second lien
|
|
|
469
|
|
|
|
570
|
|
Revolving:
|
|
|
|
|
|
|
|
|
Second lien
|
|
|
3,423
|
|
|
|
3,594
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
17,517
|
|
|
$
|
17,886
|
|
|
|
|
|
|
|
|
|
|
An analysis of the allowance for credit losses is presented in
the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
2,950
|
|
|
$
|
3,740
|
|
|
$
|
3,861
|
|
|
$
|
2,397
|
|
Provision for credit losses
|
|
|
245
|
|
|
|
1,006
|
|
|
|
912
|
|
|
|
3,247
|
|
Charge-offs
|
|
|
(729
|
)
|
|
|
(954
|
)
|
|
|
(2,479
|
)
|
|
|
(2,433
|
)
|
Recoveries
|
|
|
79
|
|
|
|
78
|
|
|
|
243
|
|
|
|
230
|
|
Allowance on loans transferred to held for sale
|
|
|
(33
|
)
|
|
|
(4
|
)
|
|
|
(33
|
)
|
|
|
(12
|
)
|
Allowance related to bulk loan purchase from HSBC Finance
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
437
|
|
Other
|
|
|
-
|
|
|
|
1
|
|
|
|
8
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
2,512
|
|
|
$
|
3,867
|
|
|
$
|
2,512
|
|
|
$
|
3,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Commercial loans
|
|
$
|
1,536
|
|
|
$
|
1,126
|
|
|
|
|
|
|
|
|
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
888
|
|
|
|
1,386
|
|
Auto finance
|
|
|
-
|
|
|
|
353
|
|
Other consumer
|
|
|
28
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
916
|
|
|
|
1,782
|
|
|
|
|
|
|
|
|
|
|
Total loans held for sale
|
|
$
|
2,452
|
|
|
$
|
2,908
|
|
|
|
|
|
|
|
|
|
|
We originate certain commercial loans in connection with our
participation in leveraged acquisition finance syndicates. A
substantial majority of these loans were originated with the
intent of selling them to unaffiliated third
23
HSBC USA Inc.
parties and are classified as commercial loans held for sale at
September 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 September 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 nine months of
2010, the market value of these loans remained relatively flat.
In 2010, we provided foreign currency denominated loans to third
parties which are classified as commercial loans held for sale
and for which we also elected to apply fair value option. The
fair value of these commercial loans was $544 million at
September 30, 2010. See Note 11, Fair Value
Option, for additional information.
Residential mortgage loans held for sale include
sub-prime
residential mortgage loans with a fair value of
$410 million and $757 million at September 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 and third quarter of 2010, we sold subprime
residential mortgage loans with a book value of
$264 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. Also as discussed above, during the third quarter of 2010
auto finance loans with a carrying value of $1.2 billion
were transferred to loans held for sale and subsequently sold to
SC USA.
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
September 30, 2010, we experienced a decrease in the
valuation allowance during the first nine months of 2010 due
primarily to lower balances and sales. The valuation allowance
on loans held for sale was $447 million and
$910 million at September 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 is included
in net interest income and trading revenue in the consolidated
statement of income (loss), were gains of $21 million and
$5 million during the three and nine months ended
September 30, 2010, respectively compared to losses of $14
million and gains of $1 million during the three and nine months
ended September 30, 2009, respectively.
Intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Mortgage servicing rights
|
|
$
|
307
|
|
|
$
|
457
|
|
Other
|
|
|
23
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
$
|
330
|
|
|
$
|
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.
24
HSBC USA Inc.
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:
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
|
Annualized constant prepayment rate (CPR)
|
|
21.6%
|
|
14.6%
|
Constant discount rate
|
|
12.7%
|
|
17.9%
|
Weighted average life
|
|
3.5 years
|
|
4.8 years
|
Residential MSRs activity is summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Fair value of MSRs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
317
|
|
|
$
|
434
|
|
|
$
|
450
|
|
|
$
|
333
|
|
Additions related to loan sales
|
|
|
10
|
|
|
|
22
|
|
|
|
36
|
|
|
|
87
|
|
Changes in fair value due to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in valuation inputs or assumptions used in the valuation
models
|
|
|
1
|
|
|
|
(54
|
)
|
|
|
(113
|
)
|
|
|
6
|
|
Realization of cash flows
|
|
|
(30
|
)
|
|
|
(8
|
)
|
|
|
(75
|
)
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
298
|
|
|
$
|
394
|
|
|
$
|
298
|
|
|
$
|
394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information regarding residential mortgage loans serviced for
others, which are not included in the consolidated balance
sheet, is summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Outstanding principal balances at period end
|
|
$
|
47,623
|
|
|
$
|
50,390
|
|
|
|
|
|
|
|
|
|
|
Custodial balances maintained and included in noninterest
bearing deposits at period end
|
|
$
|
936
|
|
|
$
|
923
|
|
|
|
|
|
|
|
|
|
|
Servicing fees collected are included in residential mortgage
banking revenue and totaled $30 million and
$92 million during the three and nine months ended
September 30, 2010, respectively. Servicing fees totaled
$33 million and $99 million during the three and nine
months ended September 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
September 30, 2010 and December 31, 2009.
25
HSBC USA Inc.
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 September 30, 2010 and
December 31, 2009, respectively, and customer lists in the
amount of $5 million and $7 million at
September 30, 2010 and December 31, 2009, respectively.
Goodwill was $2.6 billion at September 30, 2010 and
December 31, 2009, and includes accumulated impairment
losses of $54 million and transfers to a disposal group
held for sale at September 30, 2010 of $21 million.
During the third quarter of 2010, goodwill totaling
$21 million was allocated to our Asian Banknotes Operations
and transferred to assets held for sale. See Note 2,
Exit from Wholesale Banknotes Business, for further
discussion of this transaction.
As a result of the continued focus on economic and credit
conditions in the United States, we performed interim impairment
tests of the goodwill associated with our Global Banking and
Markets and Private Banking reporting units as of
September 30, 2010, 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.
In the 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 the 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 the
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 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.
26
HSBC USA Inc.
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 $9 million and
$30 million during the three and nine months ended
September 30, 2010, respectively, compared to net losses of
$9 million and $6 million during the three and nine
months ended September 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 $34 million and decreased the carrying value of our debt
by $189 million during the nine months ended
September 30, 2010 and 2009, respectively. We amortized
$2.8 million and $7.2 million of basis adjustments
related to terminated
and/or
re-designated
fair value hedge relationships during the three and nine months
ended September 30, 2010, respectively. We amortized less
than $1 million and $2 million of basis adjustments
related to terminated
and/or
re-designated fair value hedge relationships during the three
and nine months ended September 30, 2009, respectively. The
total accumulated unamortized basis adjustment amounted to an
increase in the carrying value of our debt of $84 million
and $57 million as of September 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
|
|
September 30,
|
|
|
December 31,
|
|
|
Balance Sheet
|
|
September 30,
|
|
|
December 31,
|
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Interest rate contracts
|
|
Other assets
|
|
$
|
42
|
|
|
$
|
133
|
|
|
Interest, taxes & other liabilities
|
|
$
|
316
|
|
|
$
|
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.
|
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 income (loss).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized
|
|
|
|
|
|
in Income on
Derivatives(1)
|
|
|
|
Location of Gain or (Loss)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
Recognized in Income on
|
|
September 30,
|
|
|
September 30,
|
|
|
|
Derivatives
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Interest rate contracts
|
|
Interest income
|
|
$
|
(19
|
)
|
|
$
|
(37
|
)
|
|
$
|
18
|
|
|
$
|
(106
|
)
|
Interest rate contracts
|
|
Other income (expense)
|
|
|
(142
|
)
|
|
|
15
|
|
|
|
(628
|
)
|
|
|
(71
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
(161
|
)
|
|
$
|
(22
|
)
|
|
$
|
(610
|
)
|
|
$
|
(177
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
HSBC USA Inc.
|
|
|
(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 September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts/AFS securities
|
|
$
|
(2
|
)
|
|
$
|
(148
|
)
|
|
$
|
56
|
|
|
$
|
150
|
|
|
$
|
(2
|
)
|
|
$
|
(54
|
)
|
|
$
|
27
|
|
|
$
|
59
|
|
Interest rate contracts/commercial loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest rate contracts/subordinated debt
|
|
|
(17
|
)
|
|
|
6
|
|
|
|
(18
|
)
|
|
|
1
|
|
|
|
(35
|
)
|
|
|
69
|
|
|
|
(71
|
)
|
|
|
(83
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(19
|
)
|
|
$
|
(142
|
)
|
|
$
|
38
|
|
|
$
|
151
|
|
|
$
|
(37
|
)
|
|
$
|
15
|
|
|
$
|
(44
|
)
|
|
$
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts/AFS securities
|
|
$
|
(20
|
)
|
|
$
|
(661
|
)
|
|
$
|
187
|
|
|
$
|
673
|
|
|
$
|
(17
|
)
|
|
$
|
132
|
|
|
$
|
65
|
|
|
$
|
(124
|
)
|
Interest rate contracts/commercial loans
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
-
|
|
Interest rate contracts/subordinated debt
|
|
|
39
|
|
|
|
32
|
|
|
|
(81
|
)
|
|
|
(14
|
)
|
|
|
(89
|
)
|
|
|
(202
|
)
|
|
|
(212
|
)
|
|
|
189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18
|
|
|
$
|
(628
|
)
|
|
$
|
107
|
|
|
$
|
658
|
|
|
$
|
(106
|
)
|
|
$
|
(71
|
)
|
|
$
|
(146
|
)
|
|
$
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (loss). 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 (loss) 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 (loss)
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 September 30, 2010, and
December 31, 2009, active cash flow hedge relationships
extend or mature through January 2012 and June 2010,
respectively. During the three and nine months ended
September 30, 2010, $3 million and $8 million,
respectively, of losses related to terminated
and/or
re-designated cash flow hedge relationships were amortized to
earnings from accumulated other comprehensive income (loss).
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 nine months
ended September 30, 2009, $10 million and
$40 million, respectively, of losses related to terminated
and/or
re-designated cash flow hedge relationships were amortized to
earnings from accumulated other comprehensive income (loss). The
interest accrual related to the derivative contract is
recognized in interest income.
28
HSBC USA Inc.
The following table presents the fair value of derivative
instruments that are designated and qualifying as cash flow
hedges and their location on the consolidated balance sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
Assets(1)
|
|
|
Derivative
Liabilities(1)
|
|
|
|
|
|
Fair Value as of
|
|
|
|
|
Fair Value as of
|
|
|
|
Balance Sheet
|
|
September 30,
|
|
|
December 31,
|
|
|
Balance Sheet
|
|
September 30,
|
|
|
December 31,
|
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Interest rate contracts
|
|
Other assets
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Interest, taxes & other liabilities
|
|
$
|
21
|
|
|
$
|
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 September 30,
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
$
|
(7
|
)
|
|
$
|
50
|
|
|
(expense)
|
|
$
|
(3
|
)
|
|
$
|
(10
|
)
|
|
(expense)
|
|
$
|
-
|
|
|
$
|
(1
|
)
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
$
|
8
|
|
|
$
|
141
|
|
|
(expense)
|
|
$
|
(8
|
)
|
|
$
|
(40
|
)
|
|
(expense)
|
|
$
|
(1
|
)
|
|
$
|
6
|
|
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. 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.
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 (expense) while the derivative asset
or liability positions are reflected as other assets or other
liabilities. As of September 30, 2010, we have entered into
credit default swaps which are designated as economic hedges
against the credit risks within our loan portfolio. 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 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.
29
HSBC USA Inc.
The following table presents the fair value of derivative
instruments held for trading purposes and their location on the
consolidated balance sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
Assets(1)
|
|
|
Derivative
Liabilities(1)
|
|
|
|
|
|
Fair Value as of
|
|
|
|
|
Fair Value as of
|
|
|
|
Balance Sheet
|
|
September 30,
|
|
|
December 31,
|
|
|
Balance Sheet
|
|
September 30,
|
|
|
December 31,
|
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Interest rate contracts
|
|
Trading assets
|
|
$
|
47,681
|
|
|
$
|
27,085
|
|
|
Trading Liabilities
|
|
$
|
48,235
|
|
|
$
|
27,546
|
|
Foreign exchange contracts
|
|
Trading assets
|
|
|
17,466
|
|
|
|
12,920
|
|
|
Trading Liabilities
|
|
|
16,764
|
|
|
|
14,087
|
|
Equity contracts
|
|
Trading assets
|
|
|
1,181
|
|
|
|
2,281
|
|
|
Trading Liabilities
|
|
|
1,252
|
|
|
|
2,297
|
|
Precious Metals contracts
|
|
Trading assets
|
|
|
1,060
|
|
|
|
918
|
|
|
Trading Liabilities
|
|
|
1,830
|
|
|
|
897
|
|
Credit contracts
|
|
Trading assets
|
|
|
14,970
|
|
|
|
17,772
|
|
|
Trading Liabilities
|
|
|
14,890
|
|
|
|
17,687
|
|
Other
|
|
Trading assets
|
|
|
24
|
|
|
|
6
|
|
|
Trading Liabilities
|
|
|
3
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
82,382
|
|
|
$
|
60,982
|
|
|
|
|
$
|
82,974
|
|
|
$
|
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
|
|
September 30,
|
|
|
December 31,
|
|
|
Balance Sheet
|
|
September 30,
|
|
|
December 31,
|
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Interest rate contracts
|
|
Other assets
|
|
$
|
673
|
|
|
$
|
229
|
|
|
Interest, taxes & other liabilities
|
|
$
|
12
|
|
|
$
|
15
|
|
Foreign exchange contracts
|
|
Other assets
|
|
|
57
|
|
|
|
51
|
|
|
Interest, taxes & other liabilities
|
|
|
10
|
|
|
|
2
|
|
Equity contracts
|
|
Other assets
|
|
|
181
|
|
|
|
180
|
|
|
Interest, taxes & other liabilities
|
|
|
24
|
|
|
|
16
|
|
Credit contracts
|
|
Other assets
|
|
|
3
|
|
|
|
15
|
|
|
Interest, taxes & other liabilities
|
|
|
15
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
914
|
|
|
$
|
475
|
|
|
|
|
$
|
61
|
|
|
$
|
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
|
|
|
Nine Months Ended
|
|
|
|
Recognized in Income
|
|
September 30,
|
|
|
September 30,
|
|
|
|
on Derivatives
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Interest rate contracts
|
|
Trading revenue (loss)
|
|
$
|
96
|
|
|
$
|
(182
|
)
|
|
$
|
79
|
|
|
$
|
(321
|
)
|
Foreign exchange contracts
|
|
Trading revenue (loss)
|
|
|
272
|
|
|
|
204
|
|
|
|
261
|
|
|
|
775
|
|
Equity contracts
|
|
Trading revenue (loss)
|
|
|
4
|
|
|
|
24
|
|
|
|
14
|
|
|
|
145
|
|
Precious Metals contracts
|
|
Trading revenue (loss)
|
|
|
(25
|
)
|
|
|
21
|
|
|
|
279
|
|
|
|
49
|
|
Credit contracts
|
|
Trading revenue (loss)
|
|
|
(50
|
)
|
|
|
(124
|
)
|
|
|
(19
|
)
|
|
|
(272
|
)
|
Other
|
|
Trading revenue (loss)
|
|
|
(2
|
)
|
|
|
79
|
|
|
|
36
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
295
|
|
|
$
|
22
|
|
|
$
|
650
|
|
|
$
|
413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
Nine Months Ended
|
|
|
|
Recognized in Income
|
|
September 30,
|
|
|
September 30,
|
|
|
|
on Derivatives
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Interest rate contracts
|
|
Other income (expense)
|
|
$
|
197
|
|
|
$
|
140
|
|
|
$
|
598
|
|
|
$
|
(281
|
)
|
Foreign exchange contracts
|
|
Other income (expense)
|
|
|
16
|
|
|
|
(14
|
)
|
|
|
(8
|
)
|
|
|
21
|
|
Equity contracts
|
|
Other income (expense)
|
|
|
386
|
|
|
|
201
|
|
|
|
261
|
|
|
|
367
|
|
Credit contracts
|
|
Other income (expense)
|
|
|
(7
|
)
|
|
|
(54
|
)
|
|
|
(11
|
)
|
|
|
(148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
592
|
|
|
$
|
273
|
|
|
$
|
840
|
|
|
$
|
(41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 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 September 30, 2010, is
$10.0 billion for which we have posted collateral of
$9.0 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 18,
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
|
|
$
|
-
|
|
|
$
|
5
|
|
|
$
|
115
|
|
P-2
|
|
|
58
|
|
|
|
58
|
|
|
|
163
|
|
S&P
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Ratings
|
|
Short-Term Ratings
|
|
AA
|
|
|
AA-
|
|
|
A+
|
|
|
|
|
|
(in millions)
|
|
|
A-1+
|
|
$
|
-
|
|
|
$
|
216
|
|
|
$
|
216
|
|
A-1
|
|
|
112
|
|
|
|
328
|
|
|
|
329
|
|
We would be required to post $129 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.
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
(in billions)
|
|
|
Interest rate:
|
|
|
|
|
|
|
|
|
Futures and forwards
|
|
$
|
486.5
|
|
|
$
|
156.0
|
|
Swaps
|
|
|
1,748.4
|
|
|
|
1,221.5
|
|
Options written
|
|
|
84.1
|
|
|
|
59.5
|
|
Options purchased
|
|
|
83.3
|
|
|
|
66.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,402.3
|
|
|
|
1,503.0
|
|
Foreign Exchange:
|
|
|
|
|
|
|
|
|
Swaps, futures and forwards
|
|
|
604.1
|
|
|
|
486.2
|
|
Options written
|
|
|
28.0
|
|
|
|
43.0
|
|
Options purchased
|
|
|
28.6
|
|
|
|
43.1
|
|
Spot
|
|
|
86.4
|
|
|
|
39.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
747.1
|
|
|
|
611.7
|
|
Commodities, equities and precious metals:
|
|
|
|
|
|
|
|
|
Swaps, futures and forwards
|
|
|
43.1
|
|
|
|
26.4
|
|
Options written
|
|
|
8.7
|
|
|
|
10.3
|
|
Options purchased
|
|
|
15.8
|
|
|
|
15.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67.6
|
|
|
|
52.0
|
|
Credit derivatives
|
|
|
741.6
|
|
|
|
768.5
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,958.6
|
|
|
$
|
2,935.2
|
|
|
|
|
|
|
|
|
|
|
32
HSBC USA Inc.
11. 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 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
September 30, 2010, commercial leveraged acquisition
finance loans held for sale and related 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 related 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
September 30, 2010, these commercial foreign currency
denominated loans for which we elected fair value option had a
fair value of $544 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 September 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 certain 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 these 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 September 30,
2010 totaled $1.8 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 accounted
for under 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 September 30, 2010,
interest bearing deposits in domestic offices included
$6.6 billion of structured deposits accounted for under FVO
which had an unpaid principal balance of $6.5 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 September 30, 2010
included structured notes of $3.7 billion accounted for
under FVO which had an unpaid principal balance of
$3.5 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
33
HSBC USA Inc.
components of gain (loss) related to hybrid instruments
designated at fair value which reflect the instruments described
above are summarized in the table below.
Components of Gain on instruments at fair value and
related derivatives Gain (loss) on instruments
designated at fair value and related derivatives includes the
changes in fair value related to both interest and credit risk
as well as the
mark-to-market
adjustment on derivatives related to the debt designated at fair
value and net realized gains or losses on these derivatives. The
components of gain (loss) on instruments designated at fair
value and related derivatives related to the changes in fair
value of fixed rate debt accounted for under FVO are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
Long-
|
|
|
|
|
|
|
|
|
|
|
|
Long-
|
|
|
|
|
|
|
|
|
|
|
|
|
Term
|
|
|
Hybrid
|
|
|
|
|
|
|
|
|
Term
|
|
|
Hybrid
|
|
|
|
|
|
|
Loans
|
|
|
Debt
|
|
|
Instruments
|
|
|
Total
|
|
|
Loans
|
|
|
Debt
|
|
|
Instruments
|
|
|
Total
|
|
|
|
|
|
(in millions)
|
|
|
Interest rate component
|
|
$
|
1
|
|
|
$
|
(89
|
)
|
|
$
|
(443
|
)
|
|
$
|
(531
|
)
|
|
$
|
-
|
|
|
$
|
(57
|
)
|
|
$
|
(265
|
)
|
|
$
|
(322
|
)
|
Credit risk component
|
|
|
44
|
|
|
|
(3
|
)
|
|
|
2
|
|
|
|
43
|
|
|
|
128
|
|
|
|
(77
|
)
|
|
|
(27
|
)
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
mark-to-market
on financial instruments designated at fair value
|
|
|
45
|
|
|
|
(92
|
)
|
|
|
(441
|
)
|
|
|
(488
|
)
|
|
|
128
|
|
|
|
(134
|
)
|
|
|
(292
|
)
|
|
|
(298
|
)
|
Mark-to-market
on the related derivatives
|
|
|
(2
|
)
|
|
|
126
|
|
|
|
433
|
|
|
|
557
|
|
|
|
-
|
|
|
|
71
|
|
|
|
251
|
|
|
|
322
|
|
Net realized gain (losses) on the related derivatives
|
|
|
-
|
|
|
|
20
|
|
|
|
-
|
|
|
|
20
|
|
|
|
-
|
|
|
|
20
|
|
|
|
-
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on instruments designated at fair value and related
derivatives
|
|
$
|
43
|
|
|
$
|
54
|
|
|
$
|
(8
|
)
|
|
$
|
89
|
|
|
$
|
128
|
|
|
$
|
(43
|
)
|
|
$
|
(41
|
)
|
|
$
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
Long-
|
|
|
|
|
|
|
|
|
|
|
|
Long-
|
|
|
|
|
|
|
|
|
|
|
|
|
Term
|
|
|
Hybrid
|
|
|
|
|
|
|
|
|
Term
|
|
|
Hybrid
|
|
|
|
|
|
|
Loans
|
|
|
Debt
|
|
|
Instruments
|
|
|
Total
|
|
|
Loans
|
|
|
Debt
|
|
|
Instruments
|
|
|
Total
|
|
|
|
|
|
(in millions)
|
|
|
Interest rate component
|
|
$
|
4
|
|
|
$
|
(276
|
)
|
|
$
|
(426
|
)
|
|
$
|
(698
|
)
|
|
$
|
-
|
|
|
$
|
198
|
|
|
$
|
(509
|
)
|
|
$
|
(311
|
)
|
Credit risk component
|
|
|
(7
|
)
|
|
|
131
|
|
|
|
48
|
|
|
|
172
|
|
|
|
258
|
|
|
|
(291
|
)
|
|
|
37
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
mark-to-market
on financial instruments designated at fair value
|
|
|
(3
|
)
|
|
|
(145
|
)
|
|
|
(378
|
)
|
|
|
(526
|
)
|
|
|
258
|
|
|
|
(93
|
)
|
|
|
(472
|
)
|
|
|
(307
|
)
|
Mark-to-market
on the related derivatives
|
|
|
(3
|
)
|
|
|
376
|
|
|
|
409
|
|
|
|
782
|
|
|
|
-
|
|
|
|
(395
|
)
|
|
|
509
|
|
|
|
114
|
|
Net realized gain (losses) on the related derivatives
|
|
|
-
|
|
|
|
61
|
|
|
|
-
|
|
|
|
61
|
|
|
|
-
|
|
|
|
51
|
|
|
|
(59
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on instruments designated at fair value and related
derivatives
|
|
$
|
(6
|
)
|
|
$
|
292
|
|
|
$
|
31
|
|
|
$
|
317
|
|
|
$
|
258
|
|
|
$
|
(437
|
)
|
|
$
|
(22
|
)
|
|
$
|
(201
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
HSBC USA Inc.
12. Income
Taxes
The following table presents our effective tax rates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory federal income tax rate
|
|
$
|
224
|
|
|
|
35.0
|
%
|
|
$
|
80
|
|
|
|
35.0
|
%
|
Increase (decrease) in rate resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local taxes, net of federal benefit
|
|
|
(2
|
)
|
|
|
(.3
|
)
|
|
|
4
|
|
|
|
1.8
|
|
Sale of minority stock interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Valuation allowance on deferred tax assets
|
|
|
(8
|
)
|
|
|
(1.2
|
)
|
|
|
16
|
|
|
|
6.9
|
|
Tax exempt income
|
|
|
(3
|
)
|
|
|
(.5
|
)
|
|
|
(4
|
)
|
|
|
(1.7
|
)
|
Low income housing and other tax credits
|
|
|
(21
|
)
|
|
|
(3.3
|
)
|
|
|
(23
|
)
|
|
|
(10.3
|
)
|
Effects of foreign operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Non-deductible loss on sale of securities
|
|
|
14
|
|
|
|
2.2
|
|
|
|
-
|
|
|
|
-
|
|
Uncertain tax provision
|
|
|
13
|
|
|
|
2.0
|
|
|
|
(1
|
)
|
|
|
(.2
|
)
|
State rate change effect on net deferred tax assets
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
(.6
|
)
|
Other
|
|
|
6
|
|
|
|
.9
|
|
|
|
(2
|
)
|
|
|
(.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
$
|
223
|
|
|
|
34.8
|
%
|
|
$
|
69
|
|
|
|
30.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory federal income tax rate
|
|
$
|
678
|
|
|
|
35.0
|
%
|
|
$
|
(42
|
)
|
|
|
(35.0
|
)%
|
Increase (decrease) in rate resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local taxes, net of federal benefit
|
|
|
4
|
|
|
|
.2
|
|
|
|
14
|
|
|
|
11.2
|
|
Sale of minority stock interest
|
|
|
-
|
|
|
|
-
|
|
|
|
74
|
|
|
|
61.3
|
|
Valuation allowance on deferred tax assets
|
|
|
(7
|
)
|
|
|
(.3
|
)
|
|
|
93
|
|
|
|
76.7
|
|
Tax exempt income
|
|
|
(10
|
)
|
|
|
(.5
|
)
|
|
|
(12
|
)
|
|
|
(9.5
|
)
|
Low income housing and other tax credits
|
|
|
(65
|
)
|
|
|
(3.4
|
)
|
|
|
(54
|
)
|
|
|
(45.1
|
)
|
Effects of foreign operations
|
|
|
14
|
|
|
|
.7
|
|
|
|
(1
|
)
|
|
|
(.4
|
)
|
Non-deductible loss on sale of securities
|
|
|
14
|
|
|
|
.7
|
|
|
|
-
|
|
|
|
-
|
|
Uncertain tax provision
|
|
|
33
|
|
|
|
1.7
|
|
|
|
(1
|
)
|
|
|
(1.2
|
)
|
IRS Audit Effective Settlement
|
|
|
-
|
|
|
|
-
|
|
|
|
(8
|
)
|
|
|
(6.8
|
)
|
State rate change effect on net deferred tax assets
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
(.5
|
)
|
Other
|
|
|
6
|
|
|
|
.3
|
|
|
|
(6
|
)
|
|
|
(4.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
$
|
667
|
|
|
|
34.4
|
%
|
|
$
|
56
|
|
|
|
46.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effective tax rate for the three and nine months ended
September 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, an adjustment of uncertain tax positions and the
non-deductible loss on the sale of securities. The effective tax
rate for the three and nine months ended September 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 Internal
Revenue Service 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 these market conditions
have created losses in the HNAH Group in recent periods and
volatility on our pre-tax book income, our analysis of the
realizability of the deferred tax assets significantly discounts
any future taxable income expected from 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
$878 million and $1.7 billion as of September 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.
13. 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
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Service cost benefits earned during the period
|
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
16
|
|
|
$
|
19
|
|
Interest cost on projected benefit obligation
|
|
|
17
|
|
|
|
18
|
|
|
|
50
|
|
|
|
55
|
|
Expected return on assets
|
|
|
(16
|
)
|
|
|
(13
|
)
|
|
|
(46
|
)
|
|
|
(38
|
)
|
Recognized losses
|
|
|
11
|
|
|
|
10
|
|
|
|
29
|
|
|
|
28
|
|
Partial plan
termination(1)
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
|
|
5
|
|
Amortization of prior service cost
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
17
|
|
|
$
|
26
|
|
|
$
|
45
|
|
|
$
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Effective September 30, 2009,
HSBC North America voluntarily chose to allow all plan
participants whose employment was either terminated as a result
of the strategic restructuring of its businesses between 2007
and 2009 to become fully vested in their accrued pension
benefit, resulting in a partial termination of the plan. In
accordance with interpretations of the Internal Revenue Service
relating to partial plan terminations, plan participants who
voluntarily left the employment of HSBC North America or its
subsidiaries during this period were also deemed to have vested
in their accrued pension benefit through the date their
employment ended. As a result, incremental pension expense of
$5 million, representing our share of the partial plan
termination cost, was recognized during the three months ended
September 30, 2009.
|
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 third quarter of 2010, HSBC North America made a
contribution to the Plan of $187 million.
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
37
HSBC USA Inc.
Supplemental Retirement Income Plan have been accounted for as a
plan curtailment, which resulted in no significant immediate
recognition of income or expense.
Components of the net periodic benefit cost for our
postretirement benefits other than pensions are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Service cost benefits earned during the period
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Interest cost
|
|
|
1
|
|
|
|
1
|
|
|
|
3
|
|
|
|
4
|
|
Recognized losses
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
|
|
2
|
|
Transition amount amortization
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic postretirement benefit cost
|
|
$
|
2
|
|
|
$
|
1
|
|
|
$
|
5
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 analysis of the Act, there has been no impact
on our consolidated financial statements for the period ended
September 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.
14. 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:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
(in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
535
|
|
|
$
|
362
|
|
Interest bearing deposits with banks
|
|
|
235
|
|
|
|
198
|
|
Federal funds sold and securities purchased under resale
agreements
|
|
|
415
|
|
|
|
294
|
|
Trading
assets(1)
|
|
|
20,115
|
|
|
|
12,811
|
|
Loans
|
|
|
1,229
|
|
|
|
1,476
|
|
Other
|
|
|
1,780
|
|
|
|
852
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
24,309
|
|
|
$
|
15,993
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
9,414
|
|
|
$
|
9,519
|
|
Trading
liabilities(1)
|
|
|
23,741
|
|
|
|
16,848
|
|
Short-term borrowings
|
|
|
5,084
|
|
|
|
446
|
|
Other
|
|
|
3,611
|
|
|
|
1,677
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
41,850
|
|
|
$
|
28,490
|
|
|
|
|
|
|
|
|
|
|
38
HSBC USA Inc.
|
|
|
(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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(in millions)
|
|
|
Income/(Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
13
|
|
|
$
|
44
|
|
|
$
|
79
|
|
|
$
|
141
|
|
Interest expense
|
|
|
(12
|
)
|
|
|
(7
|
)
|
|
|
(34
|
)
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
1
|
|
|
$
|
37
|
|
|
$
|
45
|
|
|
$
|
122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HSBC affiliate income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees and commissions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HSBC Finance
|
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
6
|
|
|
$
|
9
|
|
HSBC Markets (USA) Inc. (HMUS)
|
|
|
3
|
|
|
|
7
|
|
|
|
13
|
|
|
|
16
|
|
Other HSBC affiliates
|
|
|
17
|
|
|
|
25
|
|
|
|
63
|
|
|
|
66
|
|
Fees on transfers of refund anticipation loans to HSBC Finance
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
11
|
|
Other HSBC affiliates income
|
|
|
22
|
|
|
|
-
|
|
|
|
31
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total affiliate income
|
|
$
|
44
|
|
|
$
|
35
|
|
|
$
|
117
|
|
|
$
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Support services from HSBC affiliates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HSBC Finance
|
|
$
|
(164
|
)
|
|
$
|
(175
|
)
|
|
$
|
(553
|
)
|
|
$
|
(548
|
)
|
HMUS
|
|
|
(74
|
)
|
|
|
(50
|
)
|
|
|
(218
|
)
|
|
|
(187
|
)
|
HSBC Technology & Services (USA) Inc.
(HTSU)
|
|
|
(195
|
)
|
|
|
(106
|
)
|
|
|
(558
|
)
|
|
|
(353
|
)
|
Other HSBC affiliates
|
|
|
(46
|
)
|
|
|
(55
|
)
|
|
|
(126
|
)
|
|
|
(140
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total support services from HSBC affiliates
|
|
$
|
(479
|
)
|
|
$
|
(386
|
)
|
|
$
|
(1,455
|
)
|
|
$
|
(1,228
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation expense with HSBC
|
|
$
|
(11
|
)
|
|
$
|
(15
|
)
|
|
$
|
(33
|
)
|
|
$
|
(48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transactions Conducted with HSBC Finance Corporation
In connection with its acquisition of HSBC Finance, HSBC
announced its expectation that funding costs for the HSBC
Finance business would be lower as a result of the 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 funding efficiencies. 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
|
39
HSBC USA Inc.
|
|
|
amortized to interest income over the estimated life of the
receivables purchased. In March 2010, we sold $379 million
of auto finance receivables to HSBC Finance including
$353 million previously classified as held for sale, a
substantial majority of which were comprised of the loans
previously purchased from HSBC Finance, who immediately sold
them to a third party who also purchased HSBC Finances
auto finance servicing operations. These loans, which were
previously serviced by HSBC Finance, were serviced by this third
party provider until they were sold in August 2010. 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 nine months ended
September 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
$
|
12.3
|
|
|
$
|
.5
|
|
|
$
|
4.3
|
|
|
$
|
4.3
|
|
|
$
|
1.9
|
|
|
$
|
-
|
|
|
$
|
1.6
|
|
|
$
|
24.9
|
|
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 September 30, 2010
|
|
|
3.5
|
|
|
|
-
|
|
|
|
3.4
|
|
|
|
.8
|
|
|
|
1.1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8.8
|
|
Three months ended September 30, 2009
|
|
|
3.6
|
|
|
|
-
|
|
|
|
3.7
|
|
|
|
.9
|
|
|
|
1.1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9.3
|
|
Nine months ended September 30, 2010
|
|
|
9.9
|
|
|
|
-
|
|
|
|
10.0
|
|
|
|
2.3
|
|
|
|
3.1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25.3
|
|
Nine months ended September 30, 2009
|
|
|
11.0
|
|
|
|
-
|
|
|
|
10.8
|
|
|
|
2.7
|
|
|
|
3.2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27.7
|
|
|
|
|
(1) |
|
Private label commercial are
included in other commercial loans and private label closed end
loans are included in other consumer loans in Note 5,
Loans.
|
Fees paid for servicing these loan portfolios totaled
$159 million and $482 million during the three and
nine months ended September 30, 2010, respectively,
compared to $170 million and $530 million during the
three and nine months ended September 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.
|
40
HSBC USA Inc.
|
|
|
In the fourth quarter of 2009, an initiative was begun to
streamline the servicing of real estate secured receivables
across North America. As a result, certain functions that we had
previously performed for our mortgage customers are now being
performed by HSBC Finance for all North America mortgage
customers, including our mortgage customers. Additionally, we
are currently performing certain functions for all North America
mortgage customers where these functions had been previously
provided separately by each entity. During the three and nine
months ended September 30, 2010, we paid $2 million
and $4 million, respectively, for services we received from
HSBC Finance and received $2 million and $6 million,
respectively, for services we provided to HSBC Finance.
|
|
|
In July 2010, certain employees in the real estate receivable
default servicing department of HSBC Finance were transferred to
the mortgage loan servicing department of a subsidiary of HSBC
Bank USA. These employees continue to service defaulted real
estate secured receivables for HSBC Finance and we receive a fee
for providing these services. During the three months ended
September 30, 2010, we received servicing revenue from HSBC
Finance of $18 million.
|
|
|
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 $164 million
and $553 million during the three and nine months ended
September 30, 2010, respectively. During the three and nine
months ended September 30, 2009, fees paid for these
services totaled $175 million and $548 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 nine months ended
September 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
nine months ended September 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 nine months ended September 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
September 30, 2010 and December 31, 2009.
|
|
|
We extended a secured $1.5 billion uncommitted 364 day
credit facility to certain subsidiaries of HSBC Finance in
December 2009. There were no balances outstanding at
September 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
September 30, 2010 and December 31, 2009.
|
|
|
We service a portfolio of residential mortgage loans owned by
HSBC Finance with an outstanding principal balance of
$1.2 billion and $1.5 billion at September 30,
2010 and December 31, 2009, respectively. The related
servicing fee income was $.3 million and $1.0 million
during the three and nine months ended September 30, 2010,
respectively, which is included in residential mortgage banking
revenue in the consolidated statement of income (loss). During
the three and nine months ended September 30, 2009, the
related servicing fee income totaled $1 million and
$6 million, respectively.
|
41
HSBC USA Inc.
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
September 30, 2010 and $4.1 billion at
December 31, 2009, of which $762 million and
$1.0 billion was outstanding at September 30, 2010 and
December 31, 2009, respectively. Interest income on these
loans and lines totaled $4 million and $13 million
during the three and nine months ended September 30, 2010,
respectively, compared to $8 million and $28 million
during the three and nine months ended September 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 $5 million and $13 million during the three
and nine months ended September 30, 2010, respectively.
Interest expense totaled $2 million during both the three
and nine months ended September 30, 2009.
|
|
|
In March 2009, we sold an equity investment in HSBC Private Bank
(Suisse) SA to another HSBC affiliate for cash, resulting in a
gain of $33 million.
|
|
|
We have an unused line of credit with HSBC Bank plc of
$2.5 billion at September 30, 2010 and
December 31, 2009.
|
|
|
We have an unused line of credit with HSBC North America Inc.
(HNAI) of $150 million at September 30,
2010 and December 31, 2009.
|
|
|
We have extended loans and lines of credit to various other HSBC
affiliates totaling $460 million at September 30, 2010
and $1.7 billion at December 31, 2009, of which
$0 million and $527 million was outstanding at
September 30, 2010 and December 31, 2009,
respectively. Interest income on these lines totaled
$.1 million and $5 million during the three and nine
months ended September 30, 2010, respectively. During the
three and nine months ended September 30, 2009, interest
income on these lines totaled $3 million and
$9 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 September 30,
2010 we held $70 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
$772.0 billion and $673.3 billion at
September 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 $20.1 billion and $12.8 billion at
September 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
|
42
HSBC USA Inc.
|
|
|
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 $50 million and $70 million at
September 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 13, Pension
and Other Post-retirement Benefits.
|
|
|
Employees participate in one or more stock compensation plans
sponsored by HSBC. Our share of the expense of these plans on a
pre-tax basis was $11 million and $33 million during
the three and nine months ended September 30, 2010,
respectively. During the three and nine months ended
September 30, 2009, our share of the expense of these plans
totaled $15 million and $48 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
$21 million during the three and nine months ended
September 30, 2010, respectively, are included as a
component of Support services from HSBC affiliates in the
consolidated statement of income (loss). Billing for these
services was processed by HTSU.
|
15. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 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.
|
|
$
|
21,792
|
|
|
|
10.00
|
%
|
|
|
17.46
|
%
|
|
$
|
19,087
|
|
|
|
10.00
|
%
|
|
|
14.19
|
%
|
HSBC Bank USA
|
|
|
21,853
|
|
|
|
10.00
|
|
|
|
17.59
|
|
|
|
19,532
|
|
|
|
10.00
|
|
|
|
14.81
|
|
Tier 1 capital ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HSBC USA Inc.
|
|
|
14,032
|
|
|
|
6.00
|
|
|
|
11.24
|
(3)
|
|
|
12,934
|
|
|
|
6.00
|
|
|
|
9.61
|
|
HSBC Bank USA
|
|
|
14,596
|
|
|
|
6.00
|
|
|
|
11.75
|
(3)
|
|
|
13,354
|
|
|
|
6.00
|
|
|
|
10.13
|
|
Tier 1 leverage ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HSBC USA Inc.
|
|
|
14,032
|
|
|
|
3.00
|
(2)
|
|
|
7.80
|
|
|
|
12,934
|
|
|
|
3.00
|
(2)
|
|
|
7.59
|
|
HSBC Bank USA
|
|
|
14,596
|
|
|
|
5.00
|
|
|
|
8.22
|
|
|
|
13,354
|
|
|
|
5.00
|
|
|
|
8.07
|
|
Risk weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HSBC USA Inc.
|
|
|
124,840
|
(3)
|
|
|
|
|
|
|
|
|
|
|
134,553
|
|
|
|
|
|
|
|
|
|
HSBC Bank USA
|
|
|
124,260
|
(3)
|
|
|
|
|
|
|
|
|
|
|
131,854
|
|
|
|
|
|
|
|
|
|
43
HSBC USA Inc.
|
|
|
(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 17, Variable Interest
Entities. We elected to adopt the transition mechanism for
Risk Based Capital Requirements and, as a result, there was no
change to the risk weighted assets or the Tier 1 capital
ratios for the first half of 2010. As of September 30, 2010
we have begun the transition to the Risk Based Capital
requirements for our Tier 1 capital ratio which will be
complete at March 31, 2011. Had we fully transitioned to
the Risk Based Capital requirements at September 30, 2010,
our risk weighted assets would have been higher by approximately
$2.2 billion which would not have had a significant impact
on our Tier 1 capital ratios.
|
We did not receive any capital contributions from our immediate
parent, HNAI, during the first nine months 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 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. These loans were
subsequently sold to SC USA in August 2010. Capital ratios and
amounts at September 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. We closely monitor the deferred tax assets
for potential limitations or exclusions. At September 30,
2010 and December 31, 2009, deferred tax assets of
$368 million and $331 million, respectively, were
excluded in the computation of regulatory capital.
16. 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.
There have been no changes in the basis of segmentation or
measurement of segment profit as compared with the presentation
in our 2009
Form 10-K.
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
44
HSBC USA Inc.
allocating resources, such as employees are made almost
exclusively on an IFRSs basis since we report results to our
parent, HSBC in accordance with its reporting basis, IFRSs. We
continue to monitor capital adequacy, establish dividend policy
and report to regulatory agencies on a U.S. GAAP legal
entity basis.
Reconciliation of our IFRS Management Basis segment results to
the U.S. GAAP consolidated totals are as follows:
|
|
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
252
|
|
|
$
|
430
|
|
|
$
|
172
|
|
|
$
|
186
|
|
|
$
|
47
|
|
|
$
|
(1
|
)
|
|
$
|
(8
|
)
|
|
$
|
1,078
|
|
|
$
|
(14
|
)
|
|
$
|
27
|
|
|
$
|
1,091
|
|
Other operating income
|
|
|
67
|
|
|
|
97
|
|
|
|
111
|
|
|
|
186
|
|
|
|
34
|
|
|
|
40
|
|
|
|
8
|
|
|
|
543
|
|
|
|
126
|
|
|
|
147
|
|
|
|
816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income (loss)
|
|
|
319
|
|
|
|
527
|
|
|
|
283
|
|
|
|
372
|
|
|
|
81
|
|
|
|
39
|
|
|
|
-
|
|
|
|
1,621
|
|
|
|
112
|
|
|
|
174
|
|
|
|
1,907
|
|
Loan impairment charges
|
|
|
(21
|
)
|
|
|
221
|
|
|
|
50
|
|
|
|
(45
|
)
|
|
|
(13
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
192
|
|
|
|
35
|
|
|
|
18
|
|
|
|
245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
340
|
|
|
|
306
|
|
|
|
233
|
|
|
|
417
|
|
|
|
94
|
|
|
|
39
|
|
|
|
-
|
|
|
|
1,429
|
|
|
|
77
|
|
|
|
156
|
|
|
|
1,662
|
|
Operating
expenses(1)
|
|
|
341
|
|
|
|
58
|
|
|
|
178
|
|
|
|
217
|
|
|
|
63
|
|
|
|
18
|
|
|
|
-
|
|
|
|
875
|
|
|
|
(9
|
)
|
|
|
156
|
|
|
|
1,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax expense
|
|
$
|
(1
|
)
|
|
$
|
248
|
|
|
$
|
55
|
|
|
$
|
200
|
|
|
$
|
31
|
|
|
$
|
21
|
|
|
$
|
-
|
|
|
$
|
554
|
|
|
$
|
86
|
|
|
$
|
-
|
|
|
$
|
640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at end of period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
20,752
|
|
|
$
|
23,830
|
|
|
$
|
16,329
|
|
|
$
|
204,598
|
|
|
$
|
4,866
|
|
|
$
|
21
|
|
|
$
|
-
|
|
|
$
|
270,396
|
|
|
$
|
(77,972
|
)
|
|
$
|
(250
|
)
|
|
$
|
192,174
|
|
Total loans, net
|
|
|
16,486
|
|
|
|
22,283
|
|
|
|
14,632
|
|
|
|
28,554
|
|
|
|
4,040
|
|
|
|
-
|
|
|
|
-
|
|
|
|
85,995
|
|
|
|
(1,914
|
)
|
|
|
(14,379
|
)
|
|
|
69,702
|
|
Goodwill
|
|
|
876
|
|
|
|
-
|
|
|
|
368
|
|
|
|
480
|
|
|
|
326
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,050
|
|
|
|
576
|
|
|
|
-
|
|
|
|
2,626
|
|
Total deposits
|
|
|
47,554
|
|
|
|
44
|
|
|
|
23,547
|
|
|
|
36,945
|
|
|
|
11,529
|
|
|
|
-
|
|
|
|
-
|
|
|
|
119,619
|
|
|
|
(4,823
|
)
|
|
|
4,150
|
|
|
|
118,946
|
|
Three months ended September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
238
|
|
|
$
|
539
|
|
|
$
|
184
|
|
|
$
|
201
|
|
|
$
|
41
|
|
|
$
|
(6
|
)
|
|
$
|
(4
|
)
|
|
$
|
1,193
|
|
|
$
|
(4
|
)
|
|
$
|
71
|
|
|
$
|
1,260
|
|
Other operating income
|
|
|
88
|
|
|
|
98
|
|
|
|
92
|
|
|
|
91
|
|
|
|
23
|
|
|
|
(63
|
)
|
|
|
4
|
|
|
|
333
|
|
|
|
484
|
|
|
|
78
|
|
|
|
895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income (loss)
|
|
|
326
|
|
|
|
637
|
|
|
|
276
|
|
|
|
292
|
|
|
|
64
|
|
|
|
(69
|
)
|
|
|
-
|
|
|
|
1,526
|
|
|
|
480
|
|
|
|
149
|
|
|
|
2,155
|
|
Loan impairment charges
|
|
|
178
|
|
|
|
437
|
|
|
|
51
|
|
|
|
163
|
|
|
|
86
|
|
|
|
-
|
|
|
|
-
|
|
|
|
915
|
|
|
|
120
|
|
|
|
(29
|
)
|
|
|
1,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
148
|
|
|
|
200
|
|
|
|
225
|
|
|
|
129
|
|
|
|
(22
|
)
|
|
|
(69
|
)
|
|
|
-
|
|
|
|
611
|
|
|
|
360
|
|
|
|
178
|
|
|
|
1,149
|
|
Operating
expenses(1)
|
|
|
306
|
|
|
|
18
|
|
|
|
159
|
|
|
|
180
|
|
|
|
58
|
|
|
|
13
|
|
|
|
-
|
|
|
|
734
|
|
|
|
7
|
|
|
|
178
|
|
|
|
919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax expense
|
|
$
|
(158
|
)
|
|
$
|
182
|
|
|
$
|
66
|
|
|
$
|
(51
|
)
|
|
$
|
(80
|
)
|
|
$
|
(82
|
)
|
|
$
|
-
|
|
|
$
|
(123
|
)
|
|
$
|
353
|
|
|
$
|
-
|
|
|
$
|
230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at end of period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
22,025
|
|
|
$
|
30,227
|
|
|
$
|
17,393
|
|
|
$
|
175,845
|
|
|
$
|
5,220
|
|
|
$
|
115
|
|
|
$
|
-
|
|
|
$
|
250,825
|
|
|
$
|
(72,378
|
)
|
|
$
|
(2,938
|
)
|
|
$
|
175,509
|
|
Total loans, net
|
|
|
17,747
|
|
|
|
28,271
|
|
|
|
15,720
|
|
|
|
21,786
|
|
|
|
4,516
|
|
|
|
-
|
|
|
|
-
|
|
|
|
88,040
|
|
|
|
(3,330
|
)
|
|
|
(6,011
|
)
|
|
|
78,699
|
|
Goodwill
|
|
|
876
|
|
|
|
-
|
|
|
|
368
|
|
|
|
497
|
|
|
|
326
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,067
|
|
|
|
580
|
|
|
|
-
|
|
|
|
2,647
|
|
Total deposits
|
|
|
47,285
|
|
|
|
43
|
|
|
|
24,680
|
|
|
|
30,939
|
|
|
|
10,665
|
|
|
|
-
|
|
|
|
-
|
|
|
|
113,612
|
|
|
|
(3,173
|
)
|
|
|
5,110
|
|
|
|
115,549
|
|
Nine months ended September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
730
|
|
|
$
|
1,437
|
|
|
$
|
535
|
|
|
$
|
471
|
|
|
$
|
139
|
|
|
$
|
(9
|
)
|
|
$
|
(21
|
)
|
|
$
|
3,282
|
|
|
$
|
32
|
|
|
$
|
110
|
|
|
$
|
3,424
|
|
Other operating income
|
|
|
132
|
|
|
|
150
|
|
|
|
362
|
|
|
|
927
|
|
|
|
103
|
|
|
|
267
|
|
|
|
21
|
|
|
|
1,962
|
|
|
|
39
|
|
|
|
506
|
|
|
|
2,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income (loss)
|
|
|
862
|
|
|
|
1,587
|
|
|
|
897
|
|
|
|
1,398
|
|
|
|
242
|
|
|
|
258
|
|
|
|
-
|
|
|
|
5,244
|
|
|
|
71
|
|
|
|
616
|
|
|
|
5,931
|
|
Loan impairment charges
|
|
|
6
|
|
|
|
786
|
|
|
|
98
|
|
|
|
(193
|
)
|
|
|
(24
|
)
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
672
|
|
|
|
213
|
|
|
|
27
|
|
|
|
912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
856
|
|
|
|
801
|
|
|
|
799
|
|
|
|
1,591
|
|
|
|
266
|
|
|
|
259
|
|
|
|
-
|
|
|
|
4,572
|
|
|
|
(142
|
)
|
|
|
589
|
|
|
|
5,019
|
|
Operating
expenses(1)
|
|
|
929
|
|
|
|
113
|
|
|
|
499
|
|
|
|
624
|
|
|
|
180
|
|
|
|
47
|
|
|
|
-
|
|
|
|
2,392
|
|
|
|
100
|
|
|
|
589
|
|
|
|
3,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax expense
|
|
$
|
(73
|
)
|
|
$
|
688
|
|
|
$
|
300
|
|
|
$
|
967
|
|
|
$
|
86
|
|
|
$
|
212
|
|
|
$
|
-
|
|
|
$
|
2,180
|
|
|
$
|
(242
|
)
|
|
$
|
-
|
|
|
$
|
1,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
665
|
|
|
$
|
1,588
|
|
|
$
|
540
|
|
|
$
|
655
|
|
|
$
|
129
|
|
|
$
|
(6
|
)
|
|
$
|
(18
|
)
|
|
$
|
3,553
|
|
|
$
|
102
|
|
|
$
|
230
|
|
|
$
|
3,885
|
|
Other operating income
|
|
|
171
|
|
|
|
263
|
|
|
|
255
|
|
|
|
600
|
|
|
|
85
|
|
|
|
(406
|
)
|
|
|
18
|
|
|
|
986
|
|
|
|
1,031
|
|
|
|
204
|
|
|
|
2,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income (loss)
|
|
|
836
|
|
|
|
1,851
|
|
|
|
795
|
|
|
|
1,255
|
|
|
|
214
|
|
|
|
(412
|
)
|
|
|
-
|
|
|
|
4,539
|
|
|
|
1,133
|
|
|
|
434
|
|
|
|
6,106
|
|
Loan impairment charges
|
|
|
550
|
|
|
|
1,468
|
|
|
|
222
|
|
|
|
589
|
|
|
|
90
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,919
|
|
|
|
502
|
|
|
|
(174
|
)
|
|
|
3,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
286
|
|
|
|
383
|
|
|
|
573
|
|
|
|
666
|
|
|
|
124
|
|
|
|
(412
|
)
|
|
|
-
|
|
|
|
1,620
|
|
|
|
631
|
|
|
|
608
|
|
|
|
2,859
|
|
Operating
expenses(1)
|
|
|
936
|
|
|
|
69
|
|
|
|
471
|
|
|
|
615
|
|
|
|
180
|
|
|
|
65
|
|
|
|
-
|
|
|
|
2,336
|
|
|
|
36
|
|
|
|
608
|
|
|
|
2,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax expense
|
|
$
|
(650
|
)
|
|
$
|
314
|
|
|
$
|
102
|
|
|
$
|
51
|
|
|
$
|
(56
|
)
|
|
$
|
(477
|
)
|
|
$
|
-
|
|
|
$
|
(716
|
)
|
|
$
|
595
|
|
|
$
|
-
|
|
|
$
|
(121
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
45
HSBC USA Inc.
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 originated as 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 loans held for sale
are reported in net interest income or trading revenue. Under
U.S. GAAP, the income related to loans 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
46
HSBC USA Inc.
loans continue to be accounted for in accordance with IAS 39,
Financial Instruments: Recognition and Measurement
(IAS 39), with any gain or loss recorded at the time
of sale.
U.S. GAAP requires loans that management intends to sell to
be transferred to a held for sale category at the lower of
amortized cost or fair value. Under U.S. GAAP, the initial
component of the lower of cost or fair value adjustment related
to credit risk is recorded in the consolidated statement of
income (loss) as provision for credit losses while the component
related to interest rates and liquidity factors is reported in
the consolidated statement of income (loss) in other revenues
(losses).
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
47
HSBC USA Inc.
accruals for legacy participants under the HSBC North America
Pension Plan were accounted for as a plan curtailment under
IFRSs, which resulted in immediate income recognition. Under US
GAAP, these changes were considered to be a negative plan
amendment which resulted in no immediate income recognition.
Property Under IFRSs, the value of property
held for own use reflects revaluation surpluses recorded prior
to January 1, 2004. Consequently, the values of tangible
fixed assets and shareholders equity are lower under
U.S. GAAP than under IFRSs. There is a correspondingly
lower depreciation charge and higher net income as well 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.
VIEs The requirements for consolidation of
variable interest entities under U.S. GAAP are based more on the
power to control significant activities as opposed to the
variability in cash flows. As a result, we have been determined
to be the primary beneficiary and have consolidated the Bryant
Park commercial paper conduit under U.S. GAAP, while under
IFRSs this conduit is not consolidated.
17. 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 this facility for the
first half of 2010. As of September 30, 2010, we have begun
the transition to the Risk Based Capital requirements which will
be complete at March 31, 2011. Had we fully transitioned to
the Risk Based Capital requirements at September 30, 2010,
our risk weighted assets would have been higher by approximately
$2.2 billion which would not have had a significant impact
on our Tier 1 capital ratios. See the 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.
48
HSBC USA Inc.
In the ordinary course of business, we have organized special
purpose entities (SPEs) primarily to structure
financial products to meet our clients investment needs
and to securitize financial assets held to meet our own funding
needs. For disclosure purposes, we aggregate SPEs based on the
purpose, risk characteristics and business activities of the
SPEs. Special purpose entities can be a VIE, which is an entity
that lacks sufficient equity investment at risk to finance its
activities without additional subordinated financial support or,
as a group, the holders of the equity investment at risk lack
either a) the power to direct the activities of an entity
that most significantly impacts the entitys economic
performance; b) the obligation to absorb the expected
losses of the entity, the right to receive the expected residual
returns of the entity, or both.
Variable Interest Entities We consolidate VIEs in
which we hold a controlling financial interest as evidenced by
the power to direct the activities of a VIE that most
significantly impact its economic performance and the obligation
to absorb losses of, or the right to receive benefits from, the
VIE that could be potentially significant to the VIE and
therefore are deemed to be the primary beneficiary. We take into
account our entire involvement in a VIE (explicit or implicit)
in identifying variable interests that individually or in the
aggregate could be significant enough to warrant our designation
as the primary beneficiary and hence require us to consolidate
the VIE or otherwise require us to make appropriate disclosures.
We consider our involvement to be significant where we, among
other things, (i) provide liquidity put options or other
liquidity facilities to support the VIEs debt issuances;
(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.
49
HSBC USA Inc.
Consolidated VIEs The following table summarizes
the assets and liabilities of our consolidated VIEs as of
September 30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
Consolidated
|
|
|
Consolidated
|
|
|
Consolidated
|
|
|
Consolidated
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Asset-backed commercial paper conduit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits with banks
|
|
$
|
2
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Held to maturity securities
|
|
|
871
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loans
|
|
|
1,307
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Short-term borrowings
|
|
|
-
|
|
|
|
3,006
|
|
|
|
-
|
|
|
|
-
|
|
Other liabilities
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
2,180
|
|
|
|
3,008
|
|
|
|
-
|
|
|
|
-
|
|
Securitization vehicles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
12,562
|
|
|
|
-
|
|
|
|
15,953
|
|
|
|
-
|
|
Available-for-sale
securities
|
|
|
659
|
|
|
|
-
|
|
|
|
1,138
|
|
|
|
-
|
|
Other assets
|
|
|
182
|
|
|
|
-
|
|
|
|
168
|
|
|
|
-
|
|
Long-term debt
|
|
|
-
|
|
|
|
1,343
|
|
|
|
-
|
|
|
|
2,985
|
|
Other liabilities
|
|
|
-
|
|
|
|
1,028
|
|
|
|
-
|
|
|
|
1,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
13,403
|
|
|
|
2,371
|
|
|
|
17,259
|
|
|
|
4,268
|
|
Low income housing limited liability partnership:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
517
|
|
|
|
-
|
|
|
|
585
|
|
|
|
-
|
|
Long term debt
|
|
|
-
|
|
|
|
55
|
|
|
|
-
|
|
|
|
55
|
|
Other liabilities
|
|
|
-
|
|
|
|
102
|
|
|
|
-
|
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
517
|
|
|
|
157
|
|
|
|
585
|
|
|
|
190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,100
|
|
|
$
|
5,536
|
|
|
$
|
17,844
|
|
|
$
|
4,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-Backed Commercial Paper Conduit As discussed in
more detail below, we provide liquidity facilities to a number
of multi-seller and single-seller asset-backed commercial paper
conduits (ABCP conduits) sponsored by HSBC
affiliates and third parties. These conduits support the
financing needs of customers by facilitating the customers
access to commercial paper markets.
One of these commercial paper conduits otherwise known as Bryant
Park Funding LLC (Bryant Park), was sponsored,
organized and managed to facilitate clients in securing
asset-backed financing collateralized by diverse pools of loan
and lease receivables or investment securities. Bryant Park
funds the purchase of the eligible assets by issuing short-term
commercial paper notes to third party investors. One of our
affiliates provides a program wide letter of credit enhancement
(PWE) to support the creditworthiness of the
commercial paper issued up to a certain amount. We also entered
into a liquidity asset purchase agreement (LAPA), to
provide liquidity support for the commercial paper notes issued
to fund the asset purchases. Prior to the adoption of the new
VIE consolidation 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
50
HSBC USA Inc.
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 September 30, 2010 and December 31, 2009, the
consolidated assets of these trusts were $13.4 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
September 30, 2010 and December 31, 2009 because we
were not the primary beneficiary. The following table provides
additional information on those unconsolidated VIEs, the
variable interests held by us and our maximum exposure to loss
arising from our involvements in those VIEs as of
September 30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 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
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
14,201
|
|
|
$
|
1,308
|
|
|
$
|
10,485
|
|
|
$
|
5,050
|
|
Structured note vehicles
|
|
|
201
|
|
|
|
139
|
|
|
|
7,915
|
|
|
|
828
|
|
|
|
7,890
|
|
|
|
569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
201
|
|
|
$
|
139
|
|
|
$
|
22,116
|
|
|
$
|
2,136
|
|
|
$
|
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
51
HSBC USA Inc.
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 $1.3 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 September 30, 2010, we
recorded approximately $160 million of trading assets and
$185 million of long-term liabilities on our balance sheet
as a result of failed sale accounting treatment for
certain transfers of financial assets. As of December 31,
2009, we recorded approximately $169 million of trading
assets and $205 million of long-term liabilities on our
balance sheet as a result of failed sale accounting
treatment. The financial assets and financial liabilities were
not legally ours and we have no control over the financial
assets which are restricted solely to satisfy the liability.
In addition to our variable interests, we also hold credit
default swaps with these structured note VIEs under which
we receive credit protection on specified reference assets in
exchange for the payment of a premium. Through these
derivatives, the VIEs assume the credit risk associated with the
reference assets which are then passed on to the holders of the
debt instruments they issue. Because they create rather than
absorb variability, the credit default swaps we hold are not
considered variable interests.
We record all investments in, and derivative contracts with,
unconsolidated structured note vehicles at fair value on our
consolidated balance sheet. Our maximum exposure to loss is
limited to the recorded amounts of these instruments.
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
52
HSBC USA Inc.
Note 4, Securities and Note 19, Fair
Value Measurements and therefore, were not disclosed in
this note to avoid redundancy.
18. Guarantee
Arrangements, Contingencies and Pledged Assets
Guarantee Arrangements As part of our normal
operations, we enter into credit derivatives and 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 a guarantee.
The following table presents total carrying value and
contractual amounts of our sell protection credit derivatives
and major off-balance sheet guarantee arrangements as of
September 30, 2010 and December 31, 2009. Following
the table is a description of the various arrangements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 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)
|
|
$
|
(4,174
|
)
|
|
$
|
375,144
|
|
|
$
|
(5,751
|
)
|
|
$
|
387,225
|
|
Financial standby letters of credit, net of
participations(3)(4)
|
|
|
-
|
|
|
|
3,938
|
|
|
|
-
|
|
|
|
4,545
|
|
Performance (non-financial)
guarantees(3)
|
|
|
-
|
|
|
|
2,988
|
|
|
|
-
|
|
|
|
3,100
|
|
Liquidity asset purchase
agreements(4)
|
|
|
-
|
|
|
|
1,308
|
|
|
|
-
|
|
|
|
6,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(4,174
|
)
|
|
$
|
383,378
|
|
|
$
|
(5,751
|
)
|
|
$
|
401,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $58.0 billion and
$57.3 billion issued for the benefit of HSBC affiliates at
September 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 $401 million and
$774 million issued for the benefit of HSBC affiliates at
September 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.
|
Credit-Risk
Related Arrangements:
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
53
HSBC USA Inc.
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 September 30, 2010 and December 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
Carrying (Fair)
|
|
|
|
|
|
Carrying (Fair)
|
|
|
|
|
|
|
Value
|
|
|
Notional
|
|
|
Value
|
|
|
Notional
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Sell-protection credit derivative positions
|
|
$
|
(4,174
|
)
|
|
$
|
(375,144
|
)
|
|
$
|
(5,751
|
)
|
|
$
|
(387,225
|
)
|
Buy-protection credit derivative positions
|
|
|
4,872
|
|
|
|
366,444
|
|
|
|
6,693
|
|
|
|
381,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
position(1)
|
|
$
|
698
|
|
|
$
|
(8,700
|
)
|
|
$
|
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 September 30, 2010, the total amount of
outstanding financial standby letters of credit (net of
participations) and performance guarantees were
$3.9 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 $51 million and $48 million at
September 30, 2010 and December 31, 2009,
respectively. Also included in other liabilities is an allowance
for credit losses on unfunded standby letters of credit of
$24 million and $27 million at September 30, 2010
and December 31, 2009.
54
HSBC USA Inc.
Below is a summary of the credit ratings of credit risk related
guarantees including the credit ratings of counterparties
against which we sold credit protection and financial standby
letters of credit as of September 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
|
|
|
3.1
|
|
|
$
|
106,241
|
|
|
$
|
47,717
|
|
|
$
|
153,958
|
|
Structured CDS
|
|
|
2.7
|
|
|
|
65,177
|
|
|
|
3,910
|
|
|
|
69,087
|
|
Index credit derivatives
|
|
|
3.4
|
|
|
|
35,839
|
|
|
|
103,129
|
|
|
|
138,968
|
|
Total return swaps
|
|
|
8.0
|
|
|
|
11,232
|
|
|
|
1,899
|
|
|
|
13,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
|
|
218,489
|
|
|
|
156,655
|
|
|
|
375,144
|
|
Standby Letters of
Credit(2)
|
|
|
1.1
|
|
|
|
6,807
|
|
|
|
119
|
|
|
|
6,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
225,296
|
|
|
$
|
156,774
|
|
|
$
|
382,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 default of a customer. 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 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 September 30,
2010 and December 31, 2009, we have issued
$1.3 billion and $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 17, Variable Interest Entities for
further information.
Principal Protected Products We structure and sell
products that provide for 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
55
HSBC USA Inc.
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 September 30, 2010 and December 31, 2009. We
have not made any payments under the terms of these structured
products and we consider the probability of such payments 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 $264 million and
$66 million as of September 30, 2010 and
December 31, 2009, respectively. The September 30,
2010 obligation balance of $264 million represents an increase
from December 31, 2009 based on $285 million of charges recorded
through earnings during the year, partially offset by $87
million of payments to third parties which reduced the
obligation. 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 September 30, 2010, the contingent liability
recorded was $19 million. In October 2010, Visa announced
that it had deposited an additional $800 million into the
escrow account, which resulted in a decrease in the conversion
rate at which our Visa Class B shares can be converted into
Class A shares. The impact of this decrease will be
recorded in the fourth quarter. We do not expect these changes
to result in a material adverse effect on our results of
operations.
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,
in the first week of October 2010, HSBC Bank USA entered into a
consent cease and desist order with the Office of the
Comptroller of the Currency (OCC) and our indirect
parent, HSBC North America Holdings Inc. (HSBC North
America), entered into a consent cease and desist order
with the Board of Governors of the Federal Reserve System (the
Federal Reserve Board). These actions require
improvements for an effective compliance risk management program
across our U.S. businesses, including Bank Secrecy Act and
Anti-Money Laundering compliance. The consent orders do not
preclude additional enforcement actions against HSBC Bank USA or
HSBC North America by bank regulatory or law enforcement
agencies, including civil money penalties, fines and other
financial penalties. We are unable at this time to determine the
terms on which the ongoing inquiries will be resolved, including
the timing or the amount of penalties or fines, if any, that may
be imposed by the regulators or agencies in connection with such
resolution and as a result, no accrual has been recorded at
September 30, 2010.
56
HSBC USA Inc.
Pledged Assets Pledged assets included in the
consolidated balance sheet are summarized in the following table.
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Interest bearing deposits with banks
|
|
$
|
1,313
|
|
|
$
|
1,496
|
|
Trading
assets(1)
|
|
|
596
|
|
|
|
708
|
|
Securities
available-for-sale(2)
|
|
|
23,419
|
|
|
|
11,416
|
|
Securities held to
maturity(3)
|
|
|
1,175
|
|
|
|
457
|
|
Loans(4)
|
|
|
3,668
|
|
|
|
3,933
|
|
Other
assets(5)
|
|
|
7,046
|
|
|
|
6,459
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
37,217
|
|
|
$
|
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 state and municipal deposits, and
various short-term and long-term borrowings, as well as
providing capacity for potential secured borrowings from the
Federal Home Loan Bank and the Federal Reserve Bank.
|
|
(3) |
|
Securities held to maturity include
federal home loan bank collateral at September 30, 2010 and
December 31, 2009, as well as the investment securities of
a consolidated asset-backed commercial paper conduit at
September 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
September 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.
|
19. 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 inactive, and inputs other than
quoted prices that are observable for the asset or liability,
such as interest rates and yield curves that are observable at
commonly quoted intervals. Level 3 inputs are unobservable
inputs for the asset or liability and include situations where
there is little, if any, market activity for the asset or
liability. Transfers between leveling categories are recognized
at the end of each reporting period.
57
HSBC USA Inc.
Fair Value of Financial Instruments The fair value
estimates, methods and assumptions set forth below for our
financial instruments, including those financial instruments
carried at cost, are made solely to comply with disclosures
required by generally accepted accounting principles in the
United States and should be read in conjunction with the
financial statements and notes included in this quarterly report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
|
|
|
(in millions)
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term financial assets
|
|
$
|
19,472
|
|
|
$
|
19,472
|
|
|
$
|
24,094
|
|
|
$
|
24,094
|
|
Federal funds sold and securities purchased under resale
agreements
|
|
|
11,432
|
|
|
|
11,432
|
|
|
|
1,046
|
|
|
|
1,046
|
|
Non-derivative trading assets
|
|
|
22,463
|
|
|
|
22,463
|
|
|
|
17,596
|
|
|
|
17,596
|
|
Derivatives
|
|
|
9,657
|
|
|
|
9,657
|
|
|
|
8,831
|
|
|
|
8,831
|
|
Securities
|
|
|
44,676
|
|
|
|
44,895
|
|
|
|
30,568
|
|
|
|
30,686
|
|
Commercial loans, net of allowance for credit losses
|
|
|
29,492
|
|
|
|
29,816
|
|
|
|
29,366
|
|
|
|
29,298
|
|
Commercial loans designated under fair value option and held for
sale
|
|
|
1,536
|
|
|
|
1,536
|
|
|
|
1,126
|
|
|
|
1,126
|
|
Consumer loans, net of allowance for credit losses
|
|
|
40,210
|
|
|
|
35,449
|
|
|
|
46,262
|
|
|
|
41,877
|
|
Consumer loans held for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
888
|
|
|
|
902
|
|
|
|
1,386
|
|
|
|
1,389
|
|
Auto finance
|
|
|
-
|
|
|
|
-
|
|
|
|
353
|
|
|
|
353
|
|
Other consumer
|
|
|
28
|
|
|
|
28
|
|
|
|
43
|
|
|
|
43
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term financial liabilities
|
|
$
|
25,025
|
|
|
$
|
25,025
|
|
|
$
|
11,121
|
|
|
$
|
11,121
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Without fixed maturities
|
|
|
109,934
|
|
|
|
109,934
|
|
|
|
106,890
|
|
|
|
106,890
|
|
Fixed maturities
|
|
|
2,406
|
|
|
|
2,415
|
|
|
|
7,215
|
|
|
|
7,259
|
|
Deposits designated under fair value option
|
|
|
6,606
|
|
|
|
6,606
|
|
|
|
4,232
|
|
|
|
4,232
|
|
Non-derivative trading liabilities
|
|
|
5,228
|
|
|
|
5,228
|
|
|
|
2,687
|
|
|
|
2,687
|
|
Derivatives
|
|
|
7,005
|
|
|
|
7,005
|
|
|
|
5,419
|
|
|
|
5,419
|
|
Long-term debt
|
|
|
13,066
|
|
|
|
13,505
|
|
|
|
13,440
|
|
|
|
13,693
|
|
Long-term debt designated under fair value option
|
|
|
5,493
|
|
|
|
5,493
|
|
|
|
4,568
|
|
|
|
4,568
|
|
Loan values presented in the table above were determined using
the Fair Value Framework for measuring fair value, which is
based on our best estimate of the amount within a range of value
we believe would be received in a sale as of the balance sheet
date (i.e. exit price). The secondary market demand and
estimated value for our loans has been heavily influenced by the
deteriorating economic conditions during the past few years,
including house price depreciation, rising unemployment, changes
in consumer behavior, and changes in discount rates. Many
investors are non-bank financial institutions or hedge funds
with high equity levels and a high cost of debt. For certain
consumer loans, investors incorporate numerous assumptions in
predicting cash flows, such as higher charge-off levels
and/or
slower voluntary prepayment speeds than we, as the servicer of
these loans, believe will ultimately be the case. The investor
discount rates reflect this difference in overall cost of
capital as well as the potential volatility in the underlying
cash flow assumptions, the combination of which may yield a
significant pricing discount from our intrinsic value. The
estimated fair values at September 30, 2010 and
December 31, 2009 reflect these market conditions.
58
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 September 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
September 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
|
|
$
|
2,294
|
|
|
$
|
92
|
|
|
$
|
-
|
|
|
$
|
2,386
|
|
|
$
|
-
|
|
|
$
|
2,386
|
|
Collateralized debt obligations
|
|
|
-
|
|
|
|
-
|
|
|
|
804
|
|
|
|
804
|
|
|
|
-
|
|
|
|
804
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
-
|
|
|
|
34
|
|
|
|
385
|
|
|
|
419
|
|
|
|
-
|
|
|
|
419
|
|
Home equity
|
|
|
-
|
|
|
|
-
|
|
|
|
15
|
|
|
|
15
|
|
|
|
-
|
|
|
|
15
|
|
Student loans
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
|
|
5
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
13
|
|
|
|
13
|
|
|
|
-
|
|
|
|
13
|
|
Corporate and other domestic debt securities
|
|
|
-
|
|
|
|
2,387
|
|
|
|
754
|
|
|
|
3,141
|
|
|
|
-
|
|
|
|
3,141
|
|
Debt Securities issued by foreign entities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
-
|
|
|
|
127
|
|
|
|
229
|
|
|
|
356
|
|
|
|
-
|
|
|
|
356
|
|
Government
|
|
|
-
|
|
|
|
430
|
|
|
|
-
|
|
|
|
430
|
|
|
|
-
|
|
|
|
430
|
|
Equity securities
|
|
|
-
|
|
|
|
140
|
|
|
|
18
|
|
|
|
158
|
|
|
|
-
|
|
|
|
158
|
|
Precious metals trading
|
|
|
-
|
|
|
|
14,736
|
|
|
|
-
|
|
|
|
14,736
|
|
|
|
-
|
|
|
|
14,736
|
|
Derivatives(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
246
|
|
|
|
48,150
|
|
|
|
-
|
|
|
|
48,396
|
|
|
|
-
|
|
|
|
48,396
|
|
Foreign exchange contracts
|
|
|
15
|
|
|
|
17,305
|
|
|
|
203
|
|
|
|
17,523
|
|
|
|
-
|
|
|
|
17,523
|
|
Equity contracts
|
|
|
-
|
|
|
|
1,269
|
|
|
|
93
|
|
|
|
1,362
|
|
|
|
-
|
|
|
|
1,362
|
|
Precious metals contracts
|
|
|
-
|
|
|
|
1,014
|
|
|
|
46
|
|
|
|
1,060
|
|
|
|
-
|
|
|
|
1,060
|
|
Credit contracts
|
|
|
-
|
|
|
|
12,451
|
|
|
|
2,522
|
|
|
|
14,973
|
|
|
|
-
|
|
|
|
14,973
|
|
Other
|
|
|
-
|
|
|
|
4
|
|
|
|
20
|
|
|
|
24
|
|
|
|
-
|
|
|
|
24
|
|
Derivatives netting
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(73,681
|
)
|
|
|
(73,681
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
261
|
|
|
|
80,193
|
|
|
|
2,884
|
|
|
|
83,338
|
|
|
|
(73,681
|
)
|
|
|
9,657
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury. U.S. Government agencies and sponsored enterprises
|
|
|
15,874
|
|
|
|
19,702
|
|
|
|
4
|
|
|
|
35,580
|
|
|
|
-
|
|
|
|
35,580
|
|
Obligations of U.S. states and political subdivisions
|
|
|
-
|
|
|
|
602
|
|
|
|
-
|
|
|
|
602
|
|
|
|
-
|
|
|
|
602
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
-
|
|
|
|
21
|
|
|
|
12
|
|
|
|
33
|
|
|
|
-
|
|
|
|
33
|
|
Commercial mortgages
|
|
|
-
|
|
|
|
546
|
|
|
|
11
|
|
|
|
557
|
|
|
|
-
|
|
|
|
557
|
|
Home equity
|
|
|
-
|
|
|
|
157
|
|
|
|
193
|
|
|
|
350
|
|
|
|
-
|
|
|
|
350
|
|
Auto
|
|
|
-
|
|
|
|
10
|
|
|
|
-
|
|
|
|
10
|
|
|
|
-
|
|
|
|
10
|
|
Student loans
|
|
|
-
|
|
|
|
16
|
|
|
|
12
|
|
|
|
28
|
|
|
|
-
|
|
|
|
28
|
|
Other
|
|
|
-
|
|
|
|
17
|
|
|
|
87
|
|
|
|
104
|
|
|
|
-
|
|
|
|
104
|
|
Corporate and other domestic debt securities
|
|
|
-
|
|
|
|
700
|
|
|
|
-
|
|
|
|
700
|
|
|
|
-
|
|
|
|
700
|
|
Debt Securities issued by foreign entities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Government
|
|
|
-
|
|
|
|
2,583
|
|
|
|
-
|
|
|
|
2,583
|
|
|
|
-
|
|
|
|
2,583
|
|
Equity securities
|
|
|
-
|
|
|
|
785
|
|
|
|
-
|
|
|
|
785
|
|
|
|
-
|
|
|
|
785
|
|
Loans(3)
|
|
|
-
|
|
|
|
1,501
|
|
|
|
11
|
|
|
|
1,512
|
|
|
|
-
|
|
|
|
1,512
|
|
Intangible(4)
|
|
|
-
|
|
|
|
-
|
|
|
|
298
|
|
|
|
298
|
|
|
|
-
|
|
|
|
298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
18,429
|
|
|
$
|
124,784
|
|
|
$
|
5,730
|
|
|
$
|
148,943
|
|
|
$
|
(73,681
|
)
|
|
$
|
75,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits in domestic
offices(5)
|
|
$
|
-
|
|
|
$
|
3,539
|
|
|
$
|
3,067
|
|
|
$
|
6,606
|
|
|
$
|
-
|
|
|
$
|
6,606
|
|
Trading liabilities, excluding derivatives
|
|
|
1,378
|
|
|
|
3,850
|
|
|
|
-
|
|
|
|
5,228
|
|
|
|
-
|
|
|
|
5,228
|
|
Derivatives(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
114
|
|
|
|
48,470
|
|
|
|
-
|
|
|
|
48,584
|
|
|
|
-
|
|
|
|
48,584
|
|
Foreign exchange contracts
|
|
|
26
|
|
|
|
16,543
|
|
|
|
205
|
|
|
|
16,774
|
|
|
|
-
|
|
|
|
16,774
|
|
Equity contracts
|
|
|
-
|
|
|
|
1,191
|
|
|
|
85
|
|
|
|
1,276
|
|
|
|
-
|
|
|
|
1,276
|
|
Precious metals contracts
|
|
|
46
|
|
|
|
1,738
|
|
|
|
46
|
|
|
|
1,830
|
|
|
|
-
|
|
|
|
1,830
|
|
Credit contracts
|
|
|
-
|
|
|
|
13,715
|
|
|
|
1,190
|
|
|
|
14,905
|
|
|
|
-
|
|
|
|
14,905
|
|
Other
|
|
|
-
|
|
|
|
1
|
|
|
|
2
|
|
|
|
3
|
|
|
|
-
|
|
|
|
3
|
|
Derivatives netting
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(76,367
|
)
|
|
|
(76,367
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
186
|
|
|
|
81,658
|
|
|
|
1,528
|
|
|
|
83,372
|
|
|
|
(76,367
|
)
|
|
|
7,005
|
|
Long-term
debt(6)
|
|
|
-
|
|
|
|
5,246
|
|
|
|
247
|
|
|
|
5,493
|
|
|
|
-
|
|
|
|
5,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
1,564
|
|
|
$
|
94,293
|
|
|
$
|
4,842
|
|
|
$
|
100,699
|
|
|
$
|
(76,367
|
)
|
|
$
|
24,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
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) |
|
As of September 30, 2010 and
December 31, 2009, includes trading derivative assets of
$8.7 billion and $8.2 billion, respectively, and
trading derivative liabilities of $6.6 billion and
$5.3 billion, 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 7, Loans Held for
Sale, for further information.
|
|
(4) |
|
Represents residential mortgage
servicing rights. See Note 8, 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 nine months ended
September 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 nine months ended
September 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
60
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
|
|
|
|
July 1,
|
|
|
Revenue
|
|
|
Other
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
Into
|
|
|
Out of
|
|
|
Sept. 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
|
|
$
|
791
|
|
|
$
|
11
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
34
|
|
|
$
|
-
|
|
|
$
|
(32
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
804
|
|
|
$
|
1
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
560
|
|
|
|
27
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
(196
|
)
|
|
|
-
|
|
|
|
(7
|
)
|
|
|
385
|
|
|
|
13
|
|
Commercial mortgages
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Home equity
|
|
|
32
|
|
|
|
(17
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
|
|
-
|
|
|
|
(12
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
15
|
|
|
|
(17
|
)
|
Other
|
|
|
13
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13
|
|
|
|
-
|
|
Corporate and other domestic debt securities
|
|
|
717
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
754
|
|
|
|
2
|
|
Debt Securities issued by foreign entities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
197
|
|
|
|
32
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
229
|
|
|
|
32
|
|
Equity securities
|
|
|
19
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18
|
|
|
|
(1
|
)
|
Foreign exchange contracts
|
|
|
(3
|
)
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
1
|
|
Equity contracts
|
|
|
(141
|
)
|
|
|
174
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(25
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
8
|
|
|
|
149
|
|
Credit contracts
|
|
|
1,640
|
|
|
|
(264
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
|
|
(46
|
)
|
|
|
(3
|
)
|
|
|
1,332
|
|
|
|
(262
|
)
|
Other
|
|
|
12
|
|
|
|
-
|
|
|
|
6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18
|
|
|
|
6
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury, U.S. Government agencies and sponsored enterprises
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
274
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(255
|
)
|
|
|
-
|
|
|
|
(9
|
)
|
|
|
12
|
|
|
|
-
|
|
Commercial mortgages
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11
|
|
|
|
-
|
|
Home equity
|
|
|
220
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(29
|
)
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
193
|
|
|
|
-
|
|
Auto
|
|
|
7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Student loans
|
|
|
13
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
|
|
-
|
|
Other
|
|
|
87
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
87
|
|
|
|
-
|
|
Loans(3)
|
|
|
11
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11
|
|
|
|
-
|
|
Other assets, excluding
derivatives(4)
|
|
|
317
|
|
|
|
-
|
|
|
|
11
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(30
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
298
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,776
|
|
|
$
|
(35
|
)
|
|
$
|
17
|
|
|
$
|
5
|
|
|
$
|
82
|
|
|
$
|
-
|
|
|
$
|
(581
|
)
|
|
$
|
(42
|
)
|
|
$
|
(20
|
)
|
|
$
|
4,202
|
|
|
$
|
(65
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits in domestic offices
|
|
$
|
(2,381
|
)
|
|
$
|
(164
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(576
|
)
|
|
$
|
54
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
(3,067
|
)
|
|
$
|
(158
|
)
|
Long-term debt
|
|
|
(201
|
)
|
|
|
(16
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(36
|
)
|
|
|
6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(247
|
)
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
(2,582
|
)
|
|
$
|
(180
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(612
|
)
|
|
$
|
60
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
(3,314
|
)
|
|
$
|
(176
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
HSBC USA Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gains and (Losses) Included
in(1)
|
|
|
Net
|
|
|
Transfers
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
|
|
|
|
|
|
Other
|
|
|
Purchases
|
|
|
Into or
|
|
|
|
|
|
Current Period
|
|
|
|
July 1,
|
|
|
(Loss)
|
|
|
Other
|
|
|
Comprehensive
|
|
|
Issuances and
|
|
|
Out
|
|
|
Sept. 30,
|
|
|
Unrealized
|
|
|
|
2009
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Income
|
|
|
Settlements
|
|
|
of Level 3
|
|
|
2009
|
|
|
Gains (Losses)
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets, excluding derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities
|
|
$
|
577
|
|
|
$
|
46
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(44
|
)
|
|
$
|
95
|
|
|
$
|
674
|
|
|
$
|
32
|
|
Collateralized debt obligations
|
|
|
678
|
|
|
|
(43
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
182
|
|
|
|
-
|
|
|
|
817
|
|
|
|
(59
|
)
|
Other asset-backed securities
|
|
|
32
|
|
|
|
14
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(14
|
)
|
|
|
-
|
|
|
|
32
|
|
|
|
6
|
|
Corporate and other domestic debt securities
|
|
|
1,009
|
|
|
|
188
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21
|
|
|
|
-
|
|
|
|
1,218
|
|
|
|
179
|
|
Debt Securities issued by foreign entities
|
|
|
138
|
|
|
|
65
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
203
|
|
|
|
65
|
|
Equity securities
|
|
|
26
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
26
|
|
|
|
-
|
|
Derivatives,
net(2)
|
|
|
3,109
|
|
|
|
(1,157
|
)
|
|
|
9
|
|
|
|
-
|
|
|
|
(271
|
)
|
|
|
27
|
|
|
|
1,717
|
|
|
|
(720
|
)
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury, U.S. Government agencies and sponsored enterprises
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
Residential mortgage-backed securities
|
|
|
318
|
|
|
|
-
|
|
|
|
-
|
|
|
|
56
|
|
|
|
(39
|
)
|
|
|
186
|
|
|
|
521
|
|
|
|
50
|
|
Commercial mortgage-backed securities
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
|
|
|
2
|
|
Other asset-backed securities
|
|
|
239
|
|
|
|
|
|
|
|
-
|
|
|
|
47
|
|
|
|
(60
|
)
|
|
|
-
|
|
|
|
226
|
|
|
|
42
|
|
Loans(3)
|
|
|
128
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
129
|
|
|
|
1
|
|
Other assets, excluding
derivatives(4)
|
|
|
434
|
|
|
|
-
|
|
|
|
(62
|
)
|
|
|
-
|
|
|
|
22
|
|
|
|
-
|
|
|
|
394
|
|
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
6,696
|
|
|
$
|
(887
|
)
|
|
$
|
(52
|
)
|
|
$
|
105
|
|
|
$
|
(203
|
)
|
|
$
|
308
|
|
|
$
|
5,967
|
|
|
$
|
(456
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits in domestic offices
|
|
$
|
(720
|
)
|
|
$
|
(36
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(462
|
)
|
|
$
|
7
|
|
|
$
|
(1,211
|
)
|
|
$
|
(35
|
)
|
Long term debt
|
|
|
(216
|
)
|
|
|
(35
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(129
|
)
|
|
|
13
|
|
|
|
(367
|
)
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
(936
|
)
|
|
$
|
(71
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(591
|
)
|
|
$
|
20
|
|
|
$
|
(1,578
|
)
|
|
$
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
HSBC USA Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gains and (Losses) Included
in(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Transfers
|
|
|
Transfers
|
|
|
|
|
|
Current Period
|
|
|
|
Jan. 1,
|
|
|
Revenue
|
|
|
Other
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
Into
|
|
|
Out of
|
|
|
Sept. 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
|
|
|
$
|
(27
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
269
|
|
|
$
|
-
|
|
|
$
|
(270
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
804
|
|
|
$
|
(94
|
)
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
817
|
|
|
|
106
|
|
|
|
-
|
|
|
|
-
|
|
|
|
55
|
|
|
|
-
|
|
|
|
(607
|
)
|
|
|
21
|
|
|
|
(7
|
)
|
|
|
385
|
|
|
|
19
|
|
Commercial mortgages
|
|
|
4
|
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Home equity
|
|
|
24
|
|
|
|
(65
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
228
|
|
|
|
-
|
|
|
|
(176
|
)
|
|
|
7
|
|
|
|
(3
|
)
|
|
|
15
|
|
|
|
(16
|
)
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13
|
|
|
|
-
|
|
|
|
13
|
|
|
|
-
|
|
Corporate and other domestic debt securities
|
|
|
1,202
|
|
|
|
(23
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
130
|
|
|
|
-
|
|
|
|
(371
|
)
|
|
|
-
|
|
|
|
(184
|
)
|
|
|
754
|
|
|
|
23
|
|
Debt Securities issued by foreign entities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
195
|
|
|
|
33
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
229
|
|
|
|
33
|
|
Equity securities
|
|
|
21
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
18
|
|
|
|
(2
|
)
|
Foreign exchange contracts
|
|
|
(95
|
)
|
|
|
(33
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
129
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
-
|
|
Equity contracts
|
|
|
81
|
|
|
|
130
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(137
|
)
|
|
|
(75
|
)
|
|
|
9
|
|
|
|
8
|
|
|
|
36
|
|
Credit contracts
|
|
|
1,311
|
|
|
|
(112
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(85
|
)
|
|
|
178
|
|
|
|
40
|
|
|
|
1,332
|
|
|
|
(270
|
)
|
Other
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
22
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
18
|
|
|
|
18
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury, U.S. Government agencies and sponsored enterprises
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
3
|
|
|
|
(2
|
)
|
|
|
4
|
|
|
|
-
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
515
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(592
|
)
|
|
|
85
|
|
|
|
(13
|
)
|
|
|
12
|
|
|
|
-
|
|
Commercial mortgages
|
|
|
8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11
|
|
|
|
3
|
|
Home equity
|
|
|
175
|
|
|
|
-
|
|
|
|
-
|
|
|
|
58
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(39
|
)
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
193
|
|
|
|
47
|
|
Auto
|
|
|
43
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(43
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Student loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
12
|
|
|
|
-
|
|
|
|
12
|
|
|
|
1
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
87
|
|
|
|
-
|
|
|
|
87
|
|
|
|
-
|
|
Loans(3)
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
11
|
|
|
|
(3
|
)
|
|
|
11
|
|
|
|
-
|
|
Other assets, excluding
derivatives(4)
|
|
|
450
|
|
|
|
-
|
|
|
|
(76
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(76
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
298
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,587
|
|
|
$
|
3
|
|
|
$
|
(54
|
)
|
|
$
|
80
|
|
|
$
|
682
|
|
|
$
|
(3
|
)
|
|
$
|
(2,271
|
)
|
|
$
|
342
|
|
|
$
|
(164
|
)
|
|
$
|
4,202
|
|
|
$
|
(202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits in domestic offices
|
|
$
|
(1,643
|
)
|
|
$
|
(141
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(1,511
|
)
|
|
$
|
202
|
|
|
$
|
(164
|
)
|
|
$
|
190
|
|
|
$
|
(3,067
|
)
|
|
$
|
(91
|
)
|
Long-term debt
|
|
|
(419
|
)
|
|
|
12
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(257
|
)
|
|
|
84
|
|
|
|
(37
|
)
|
|
|
370
|
|
|
|
(247
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
(2,062
|
)
|
|
$
|
(129
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(1,768
|
)
|
|
$
|
286
|
|
|
$
|
(201
|
)
|
|
$
|
560
|
|
|
$
|
(3,314
|
)
|
|
$
|
(91
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
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
|
|
|
Sept. 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
|
|
|
$
|
2
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(55
|
)
|
|
$
|
252
|
|
|
$
|
674
|
|
|
$
|
5
|
|
Collateralized debt obligations
|
|
|
668
|
|
|
|
(272
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
421
|
|
|
|
-
|
|
|
|
817
|
|
|
|
(109
|
)
|
Other asset-backed securities
|
|
|
36
|
|
|
|
8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(21
|
)
|
|
|
9
|
|
|
|
32
|
|
|
|
4
|
|
Corporate and other domestic debt securities
|
|
|
480
|
|
|
|
358
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35
|
|
|
|
345
|
|
|
|
1,218
|
|
|
|
345
|
|
Debt securities issued by foreign entities
|
|
|
87
|
|
|
|
116
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
203
|
|
|
|
116
|
|
Equity securities
|
|
|
147
|
|
|
|
(94
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(28
|
)
|
|
|
1
|
|
|
|
26
|
|
|
|
(94
|
)
|
Derivatives,
net(2)
|
|
|
5,283
|
|
|
|
(3,256
|
)
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
(286
|
)
|
|
|
(20
|
)
|
|
|
1,717
|
|
|
|
(2,468
|
)
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury, U.S. Government agencies and sponsored enterprises
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
3
|
|
|
|
-
|
|
Residential mortgage-backed securities
|
|
|
164
|
|
|
|
-
|
|
|
|
-
|
|
|
|
71
|
|
|
|
(83
|
)
|
|
|
369
|
|
|
|
521
|
|
|
|
63
|
|
Commercial mortgage-backed securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
5
|
|
|
|
7
|
|
|
|
2
|
|
Other asset-backed securities
|
|
|
307
|
|
|
|
-
|
|
|
|
-
|
|
|
|
64
|
|
|
|
(123
|
)
|
|
|
(22
|
)
|
|
|
226
|
|
|
|
26
|
|
Loans(3)
|
|
|
136
|
|
|
|
-
|
|
|
|
12
|
|
|
|
-
|
|
|
|
(19
|
)
|
|
|
-
|
|
|
|
129
|
|
|
|
8
|
|
Other assets, excluding
derivatives(4)
|
|
|
333
|
|
|
|
-
|
|
|
|
(26
|
)
|
|
|
-
|
|
|
|
87
|
|
|
|
-
|
|
|
|
394
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
8,116
|
|
|
$
|
(3,138
|
)
|
|
$
|
(18
|
)
|
|
$
|
137
|
|
|
$
|
(72
|
)
|
|
$
|
942
|
|
|
$
|
5,967
|
|
|
$
|
(2,106
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits in domestic offices
|
|
$
|
(234
|
)
|
|
$
|
(29
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(964
|
)
|
|
$
|
16
|
|
|
$
|
(1,211
|
)
|
|
$
|
(28
|
)
|
Long term debt
|
|
|
(57
|
)
|
|
|
(46
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(281
|
)
|
|
|
17
|
|
|
|
(367
|
)
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
(291
|
)
|
|
$
|
(75
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(1,245
|
)
|
|
$
|
33
|
|
|
$
|
(1,578
|
)
|
|
$
|
(72
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes realized and unrealized
gains and losses.
|
|
(2) |
|
At September 30, 2010 and
2009, Level 3 net derivatives included derivative
assets of $2.9 billion and $3.5 billion, respectively,
and derivative liabilities of $1.5 billion and
$1.8 billion, 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 8, Intangible
Assets, for additional information.
|
64
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 September 30, 2010 and
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
|
|
|
(Losses) For the
|
|
|
(Losses) For the
|
|
|
|
as of September 30, 2010
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
September 30, 2010
|
|
|
September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Residential mortgage loans held for
sale(1)
|
|
$
|
-
|
|
|
$
|
10
|
|
|
$
|
433
|
|
|
$
|
443
|
|
|
$
|
(10
|
)
|
|
$
|
(42
|
)
|
Other consumer loans held for
sale(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
28
|
|
|
|
28
|
|
|
|
-
|
|
|
|
-
|
|
Impaired
loans(2)
|
|
|
-
|
|
|
|
-
|
|
|
|
572
|
|
|
|
572
|
|
|
|
59
|
|
|
|
150
|
|
Real estate
owned(3)
|
|
|
-
|
|
|
|
70
|
|
|
|
-
|
|
|
|
70
|
|
|
|
3
|
|
|
|
9
|
|
Repossessed
vehicles(3)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial loans held for sale
|
|
|
-
|
|
|
|
32
|
|
|
|
-
|
|
|
|
32
|
|
|
|
-
|
|
|
|
-
|
|
Held to maturity asset-backed securities held by consolidated
VIE(4)
|
|
|
-
|
|
|
|
123
|
|
|
|
128
|
|
|
|
251
|
|
|
|
(1
|
)
|
|
|
(4
|
)
|
Building held for use
|
|
|
-
|
|
|
|
-
|
|
|
|
15
|
|
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value on a non-recurring basis
|
|
$
|
-
|
|
|
$
|
235
|
|
|
$
|
1,176
|
|
|
$
|
1,411
|
|
|
$
|
51
|
|
|
$
|
113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gains
|
|
|
Total Gains
|
|
|
|
Non-Recurring Fair Value Measurements
|
|
|
(Losses) For the
|
|
|
(Losses) For the
|
|
|
|
as of September 30, 2009
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
September 30, 2009
|
|
|
September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Residential mortgage loans held for
sale(1)
|
|
$
|
-
|
|
|
$
|
36
|
|
|
$
|
889
|
|
|
$
|
925
|
|
|
$
|
(15
|
)
|
|
$
|
(174
|
)
|
Auto finance loans held for
sale(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
353
|
|
|
|
353
|
|
|
|
-
|
|
|
|
-
|
|
Other consumer loans held for
sale(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
32
|
|
|
|
32
|
|
|
|
(13
|
)
|
|
|
(13
|
)
|
Impaired
loans(2)
|
|
|
-
|
|
|
|
-
|
|
|
|
371
|
|
|
|
371
|
|
|
|
46
|
|
|
|
136
|
|
Real estate
owned(3)
|
|
|
-
|
|
|
|
77
|
|
|
|
-
|
|
|
|
77
|
|
|
|
1
|
|
|
|
3
|
|
Repossessed
vehicles(3)
|
|
|
-
|
|
|
|
7
|
|
|
|
-
|
|
|
|
7
|
|
|
|
-
|
|
|
|
-
|
|
Building held for use
|
|
|
-
|
|
|
|
-
|
|
|
|
15
|
|
|
|
15
|
|
|
|
-
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value on a non-recurring basis
|
|
$
|
-
|
|
|
$
|
120
|
|
|
$
|
1,660
|
|
|
$
|
1,780
|
|
|
$
|
19
|
|
|
$
|
(68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of September 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.
|
65
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 September 30,
2010. See Note 17, Variable Interest Entities
for additional information.
|
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 September 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.
|
66
HSBC USA Inc.
|
|
|
Consumer Loans The estimated fair value of our
consumer loans were determined by developing an approximate
range of value from a mix of various sources as appropriate for
the respective pool of assets. These sources included, among
other things, value estimates from an HSBC affiliate which
reflect
over-the-counter
trading activity, forward looking discounted cash flow models
using assumptions we believe are consistent with those which
would be used by market participants in valuing such
receivables; trading input from other market participants which
includes observed primary and secondary trades; where
appropriate, the impact of current estimated rating agency
credit tranching levels with the associated benchmark credit
spreads; and general discussions held directly with potential
investors.
|
Model inputs include estimates of future interest rates,
prepayment speeds, loss curves and market discount rates
reflecting managements estimate of the rate that would be
required by investors in the current market 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 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
$51 million and $48 million at September 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.
|
67
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
|
|
$
|
3
|
|
|
$
|
-
|
|
|
$
|
31
|
|
|
$
|
68
|
|
|
$
|
-
|
|
|
$
|
272
|
|
|
$
|
374
|
|
|
|
Home equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
Student loans
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AAA -A
|
|
|
3
|
|
|
|
-
|
|
|
|
36
|
|
|
|
69
|
|
|
|
-
|
|
|
|
272
|
|
|
|
380
|
|
BBB -B
|
|
Residential mortgages
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
26
|
|
|
|
-
|
|
|
|
-
|
|
|
|
26
|
|
|
|
Home equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total BBB -B
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27
|
|
|
|
-
|
|
|
|
1
|
|
|
|
28
|
|
CCC-Unrated
|
|
Residential mortgages
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19
|
|
|
|
Home equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total CCC -Unrated
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
44
|
|
|
|
-
|
|
|
|
-
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3
|
|
|
$
|
-
|
|
|
$
|
36
|
|
|
$
|
140
|
|
|
$
|
-
|
|
|
$
|
273
|
|
|
$
|
452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
180
|
|
|
|
Corporate loans
|
|
|
334
|
|
|
|
Other
|
|
|
158
|
|
|
|
|
|
|
|
|
|
|
Total BBB -B
|
|
|
672
|
|
CCC -Unrated
|
|
Commercial mortgages
|
|
|
63
|
|
|
|
Corporate loans
|
|
|
-
|
|
|
|
Residential mortgages
|
|
|
6
|
|
|
|
Other
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
Total CCC -Unrated
|
|
|
132
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
804
|
|
|
|
|
|
|
|
|
68
HSBC USA Inc.
Available-for-sale
securities backed by collateral:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Mortgages
|
|
|
Prime
|
|
|
Alt-A
|
|
|
Sub-prime
|
|
|
|
|
Rating of Securities:
|
|
Collateral Type:
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA -A
|
|
Residential mortgages
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
17
|
|
|
$
|
5
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
22
|
|
|
|
Commercial mortgages
|
|
|
546
|
|
|
|
11
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
557
|
|
|
|
Home equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
157
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
159
|
|
|
|
Student loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16
|
|
|
|
12
|
|
|
|
-
|
|
|
|
-
|
|
|
|
28
|
|
|
|
Auto
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10
|
|
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17
|
|
|
|
87
|
|
|
|
-
|
|
|
|
-
|
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AAA -A
|
|
|
546
|
|
|
|
11
|
|
|
|
-
|
|
|
|
-
|
|
|
|
217
|
|
|
|
104
|
|
|
|
-
|
|
|
|
2
|
|
|
|
880
|
|
BBB -B
|
|
Residential mortgages
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
Home equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
107
|
|
|
|
-
|
|
|
|
1
|
|
|
|
108
|
|
|
|
Auto
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total BBB -B
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
113
|
|
|
|
-
|
|
|
|
1
|
|
|
|
114
|
|
CCC -Unrated
|
|
Residential mortgages
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
|
|
Home equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
83
|
|
|
|
-
|
|
|
|
-
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total CCC -Unrated
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
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4
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84
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-
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-
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88
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$
|
546
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$
|
11
|
|
|
$
|
-
|
|
|
$
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-
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$
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221
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$
|
301
|
|
|
$
|
-
|
|
|
$
|
3
|
|
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$
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1,082
|
|
|
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|
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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.
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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.
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We perform validations of the fair values obtained from
independent pricing services. Such validations primarily include
sourcing security prices from other independent pricing services
or broker quotes. As the pricing for mortgage and other
asset-backed securities became less transparent during the
credit crisis, we further developed internal valuation
techniques to validate the fair value. The internal validation
techniques utilize inputs derived from observable market data,
incorporate external analysts estimates of probability of
default, loss recovery and prepayments speeds and apply the
discount rates that would be demanded by market participants
under the current market conditions. Depending on the results of
the validation, additional information may be gathered from
other market participants to support the fair value
measurements. A determination is made as to whether adjustments
to the observable inputs are necessary after investigations and
inquiries about the reasonableness of the inputs used and the
methodologies employed by the independent pricing services.
Derivatives Derivatives are recorded at fair
value. Asset and liability positions in individual derivatives
that are covered by legally enforceable master netting
agreements, including cash collateral are offset and presented
net in accordance with accounting principles which allow the
offsetting of amounts relating to certain contracts.
Derivatives traded on an exchange are valued using quoted
prices. OTC derivatives, which comprise a majority of derivative
contract positions, are valued using valuation techniques. The
fair value for the majority of our derivative instruments are
determined based on internally developed models that utilize
independently corroborated market parameters, including interest
rate yield curves, option volatilities, and currency rates. For
complex or long-dated derivative products where market data is
not available, fair value may be affected by the choice of
valuation model and the underlying assumptions about, among
other things, the timing of cash flows and credit spreads. The
fair
69
HSBC USA Inc.
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:
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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.
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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.
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Foreign Exchange (FX) Derivatives FX
transactions use spot and forward FX rates which are quoted in
the broker market.
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Equity Derivatives Use listed equity security
pricing and implied volatilities from equity traded options
position.
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Precious Metal Derivative Use spot and forward metal
rates which are quoted in the broker market.
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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 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
70
HSBC USA Inc.
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:
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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.
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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.
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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.
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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
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HSBC USA Inc.
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 for the first two quarters of 2010,
our risk weighted assets would have been higher by approximately
$2.4 billion for both periods which would not have had a
significant impact to our Tier 1 capital ratios. See
Note 17, 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 those transfers. 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 the requirement to present the Level 3
reconciliation on a gross basis, 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 19, 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 that 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 credit derivatives embedded in interests in
securitized financial assets, unless they are created solely by
subordination of one financial debt instrument to another. The
guidance is effective beginning in the first reporting period
after June 15, 2010, with earlier adoption permitted for
the quarter beginning after March 31, 2010. This
clarification did not have a material impact to our financial
position or results of operations.
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 did not have any impact on our financial position or
results of operations.
72
HSBC USA Inc.
Credit Quality and Allowance for Credit losses Disclosures
In July 2010, the FASB issued an Accounting Standards
Update to provide more transparency about an entitys
allowance for credit losses and the credit quality of its
financing receivables. The update amends the existing disclosure
requirements by requiring an entity to provide a greater level
of disaggregated information to assist financial statement users
in assessing its credit risk exposures and evaluating the
adequacy of its allowance for credit losses. Additionally, the
update requires an entity to disclose credit quality indicators,
past due information, and modification information of its
financing receivables. The amendment is effective beginning in
interim and annual reporting periods ending on or after
December 15, 2010 with disclosures about activity that
occurs during a reporting period effective for interim and
annual reporting periods beginning on or after December 15,
2010.
Accounting for Costs Associated with Acquiring or Renewing
Insurance Contracts In October 2010, the FASB issued
guidance which amends the accounting rules that define which
costs associated with acquiring or renewing insurance contracts
qualify as deferrable acquisition costs by insurance entities.
The guidance is effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15,
2011. Early adoption is permitted, but must be applied as of the
beginning of an entitys annual reporting period. The
adoption of this guidance is not expected to have a material
impact on our financial position or results of operations.
73
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 nine months
of 2010, economic conditions in the United States generally
continued to improve, although the pace of improvement began to
slow during the second quarter and continued into the third
quarter. Liquidity has returned to the financial markets for
most sources of funding except for mortgage securitization and
companies are generally able to issue debt with credit spreads
approaching levels historically seen prior to the financial
crisis, despite the expiration of some of the
U.S. governments support programs. European sovereign
debt fears triggered by Greece in May 2010, which translated
into increased borrowing costs in the U.S. during the
second quarter of 2010, have now subsided. However, the
prolonged period of low Federal funds rates continues to put
pressure on spreads earned on our deposit base. During the first
half of 2010, housing prices stabilized in many markets and
began to recover in others as the first-time homebuyer tax
credit and low interest rates attributable to government
monetary policy actions served as stabilizing forces improving
home sales. However, in the third quarter of 2010, we again
began to see home price declines in many markets as the
homebuyer tax credit has now ended and housing prices remain
under pressure due to elevated foreclosure levels. Improved
market conditions have also resulted in recovery during the
first nine months 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 government actions remains to be seen.
Despite positive job creation overall in 2010, the economy began
to lose jobs again in the third quarter as job creation in the
private sector, while positive, slowed and was more than offset
by reductions in government related jobs which has again raised
fears as to how pronounced any economic recovery may be.
U.S. unemployment rates, which have been a major factor in
the deterioration of credit quality in the U.S., remained high
at 9.6 percent in September 2010, an increase of
10 basis points during the quarter and a decrease of
40 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 14 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 8.3 percent. High unemployment rates have
generally been most pronounced in the markets which had
previously experienced the
74
HSBC USA Inc.
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,
credit market volatility and trends in corporate earnings will
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 already low 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 with September levels consistent with that
experienced early in 2010. 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 regulatory changes will continue to impact our results in
2010, the degree of which is largely dependent upon the nature
and extent of the economic recovery.
In October 2010, certain large mortgage servicers announced
investigations into their internal servicing operations. As
reported, these investigations centered around foreclosure
processing and, shortly thereafter, these servicers also
announced the temporary national suspension of foreclosure
activity. The attorneys general of all states and various state
and federal regulators and policymakers have since initiated
inquiries concerning foreclosure procedures for single family
mortgage loans. We, as well as many other servicers, are
responding to applicable inquiries. In certain instances, the
attorneys general and other regulators have requested that
foreclosure proceedings be placed on hold pending review by each
servicer of its practices. Based on our review to date, we have
found no systemic concerns with our foreclosure processes, nor
have we found instances of robo-signing, and as a
result, we have not suspended foreclosures. Certain courts have
issued new rules relating to foreclosures and we anticipate
scrutiny of foreclosure documentation will increase. Also in
some areas, officials are requiring additional verification of
information filed prior to the foreclosure proceeding. If these
trends continue there could be an extended delay in the
processing of foreclosures, which could have an adverse impact
upon housing prices.
As discussed in prior filings, on May 22, 2009, the Credit
Card Accountability Responsibility and Disclosure Act of 2009
(the CARD Act) was signed into law. For a discussion
of the CARD Act as well as the impact to our operations, see
Segment Results IFRSs Basis.
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 trust preferred
securities for Tier 1 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 Holdings Inc.
(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
75
HSBC USA Inc.
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.
The legislation has created the Bureau of Consumer Financial
Protection (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, federal
preemption of state consumer finance laws will no longer extend
to national banks operating subsidiaries beginning
July 21, 2011. The Office of the Comptroller of the
Currency (OCC) is limited in the extent to which it
can make preemption decisions with respect to state consumer
finance laws. When subject to judicial review, such 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 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. and HSBC Bank USA. 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 $417 million and $1,271 million during the
three and nine months ended September 30, 2010,
respectively, compared to a net income of $161 million
during the three months ended September 30, 2009 and a net
loss of $177 million during the nine months ended
September 30, 2009. Our results in both periods were
impacted by the change in the fair value of our own debt and the
related derivatives
76
HSBC USA Inc.
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 nine months ended September 30, 2010 and 2009:
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|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Income (loss) before income tax, as reported
|
|
$
|
640
|
|
|
$
|
230
|
|
|
$
|
1,938
|
|
|
$
|
(121
|
)
|
Change in value of our own fair value option debt and related
derivatives
|
|
|
(54
|
)
|
|
|
43
|
|
|
|
(292
|
)
|
|
|
437
|
|
Gain on sale of MasterCard Class B or Visa Class B
Shares
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(48
|
)
|
Gain relating to resolution of
lawsuit(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
(5
|
)
|
|
|
(85
|
)
|
Gain on sale of equity interest in Wells Fargo HSBC Trade Bank
|
|
|
-
|
|
|
|
-
|
|
|
|
(66
|
)
|
|
|
-
|
|
Release of VISA litigation accrual
|
|
|
-
|
|
|
|
(9
|
)
|
|
|
(6
|
)
|
|
|
(9
|
)
|
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)
|
|
$
|
586
|
|
|
$
|
264
|
|
|
$
|
1,480
|
|
|
$
|
141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 nine months ended
September 30, 2010 improved significantly as lower
provisions for credit losses and in the nine month period,
higher other revenues were partially offset by lower net
interest income, higher operating expenses and in the three
month period, lower other revenues. During 2010, we continued to
reduce legacy and other risk positions as opportunities arose,
including the sale of $264 million in subprime residential
mortgage loans previously held for sale and continued reductions
in monoline counterparty exposures.
Other revenues improved during the nine months ended
September 30, 2010, driven by significantly higher gains on
instruments designated at fair value and related derivatives as
well as higher trading revenue. During the nine months ended
September 30, 2009, we experienced 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. Other
revenues declined, however, during the three month period ended
September 30, 2010 as the impact on trading revenues from
improved market conditions was more pronounced in the prior year
quarter. A
77
HSBC USA Inc.
summary of the significant valuation adjustments associated with
market disruptions that impacted revenue for the three and nine
months ended September 30, 2010 and 2009 are presented in
the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Gains (Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance monoline structured credit products.
|
|
$
|
16
|
|
|
$
|
54
|
|
|
$
|
89
|
|
|
$
|
(104
|
)
|
Other structured credit products
|
|
|
43
|
|
|
|
38
|
|
|
|
89
|
|
|
|
(182
|
)
|
Mortgage whole loans held for sale, including whole loan
purchase settlement (predominantly subprime)
|
|
|
(5
|
)
|
|
|
(28
|
)
|
|
|
55
|
|
|
|
(182
|
)
|
Other than temporary impairment on securities
available-for-sale
and
held-to-maturity
|
|
|
(4
|
)
|
|
|
(26
|
)
|
|
|
(45
|
)
|
|
|
(84
|
)
|
Leverage acquisition finance loans held for sale
|
|
|
44
|
|
|
|
128
|
|
|
|
(7
|
)
|
|
|
258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
94
|
|
|
$
|
166
|
|
|
$
|
181
|
|
|
$
|
(294
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenues during the three and nine months ended
September 30, 2010 and 2009 also reflect several
non-recurring items as presented in the table on the previous
page including 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 $167 million and $434 million during the
three and nine months ended September 30, 2010 due
primarily to lower credit card fees, lower mortgage banking
revenue and in the nine month period lower securities gains,
partially offset in the nine 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 CARD Act which
resulted in lower over limit, late 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 in the
year-to-date
period as the prior year period reflects 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 $3.4 billion
during the three and nine months ended September 30, 2010,
respectively, compared to $1.3 billion and
$3.9 billion in the year-ago periods. The decrease in both
periods reflects the impact of higher levels of lower yielding
interest earning assets including higher levels of average
interest bearing deposits with banks, lower 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, including lower overall average rates on deposits.
Our provision for credit losses was $245 million and
$1.0 billion during the three and nine months ended
September 30, 2010, respectively, as compared to
$1.0 billion and $3.2 billion in the year-ago periods.
The decrease in both periods reflects declines in loan balances
and improvements in economic and credit conditions, including
lower dollars of delinquency 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 nine months ended September 30, 2010.
Given the nature of the factors driving the reduction in
commercial loan provision during both periods, the provision
78
HSBC USA Inc.
levels recognized in the first nine months 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 September 30, 2010.
Operating expenses totaled $1.0 billion and
$3.1 billion during the three and nine months ended
September 30, 2010, an increase of $103 million and
$101 million, respectively compared to the corresponding
prior year periods. The increases in both periods largely
resulted from higher fees paid to HTSU and other affiliates due
to the centralization of additional shared services across North
America, the impact of the transfer of certain employees of HSBC
Finance to the default mortgage loan servicing department (which
cost is offset in other revenues), increased costs associated
with branch expansion, a lower of cost or fair value adjustment
relating to our Asian banknotes operations (Asian
Banknotes Operations) which were classified as held for
sale in September 2010 and in the nine month period, higher fees
paid to HSBC Finance related to a change in how the refund
anticipation loan program is managed and costs associated with
the closure of our banknotes business. These increases were
partially offset by lower salaries and employee benefit expense
exclusive of the default mortgage loan employee transfer
discussed above which reflects the centralization of additional
shared services in North America within HTSU as well as
continued cost management efforts, lower marketing expenses and
in the nine month period, significantly lower FDIC assessment
fees, as the year-ago
year-to-date
period included a $82 million special assessment recorded
in the second quarter of 2009.
Our efficiency ratio was 53.60 percent for the three months
ended September 30, 2010 compared to 42.64 percent in
the prior year quarter. Our efficiency ratio was
51.95 percent for the nine months ended September 30,
2010 compared to 48.80 percent in the year-ago period. The
deterioration in both periods reflects higher operating expenses
while the total of net interest income and other revenues
declined.
Our effective tax rate was 34.8 percent for the three
months ended September 30, 2010 compared to
30.0 percent in the prior year quarter. Our effective tax
rate was 34.4 percent for the nine months ended
September 30, 2010 compared to 46.3 percent in the
year-ago period. The effective tax rate for the three and nine
months ended September 30, 2010 reflects a substantially
higher level of pre-tax income, an increased level of low income
housing tax credits, an adjustment of uncertain tax positions
and the non-deductible loss on the sale of securities. The
effective tax rate for the three and nine months ended
September 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 Internal Revenue Service audit of our 2004 and
2005 federal income tax returns.
In August 2010, we announced to employees that we are
considering strategic options for our mortgage operations, with
the objective of recommending the future course of our prime
mortgage lending and mortgage servicing platforms. Strategic
options may include, but are not limited to, the sale or
outsourcing of all, or part, of these platforms. Under all
options being explored, we plan to continue offering mortgages
to our customers. We expect to complete the review of strategic
options by the end of the fourth quarter.
In June 2010, we decided that the wholesale banknotes business
(Banknotes Business) within our Global Banking and
Markets segment did not fit with our core strategy in the
U.S. and, therefore, decided to exit this business. The
discontinuation of our Banknotes Business will allow us to focus
strategic attention on our core businesses. As part of this
decision, in September 2010 we agreed to sell the assets of our
Asian Banknotes Operations to an unaffiliated third party and
classified the assets of the Asian Banknotes Operations as held
for sale. This resulted in the recording of a lower of cost or
fair value adjustment of $12 million in the third quarter
of 2010 as the carrying value of the assets being sold exceed
the agreed upon sales price.
In April 2010, we completed the sale of our 452 Fifth
Avenue property in New York City, including the
1 W. 39th Street building, for $330 million
in cash. Under the terms of the sale, we will lease back the
entire
79
HSBC USA Inc.
452 Fifth Avenue building for one year and floors one to
eleven for a total of 10 years. The sale resulted in a gain
of approximately $155 million; however, it has been
deferred and will be 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 September 30,
2010 and December 31, 2009 and for the three and nine
months ended September 30, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2010
|
|
|
September 30, 2010
|
|
|
|
|
|
(dollars are in millions)
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Net income (loss)
|
|
$
|
417
|
|
|
$
|
161
|
|
|
$
|
1,271
|
|
|
$
|
(177
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate of return on average :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
.90
|
%
|
|
|
.37
|
%
|
|
|
.91
|
%
|
|
|
(.13
|
)%
|
Total common shareholders equity
|
|
|
10.39
|
|
|
|
4.25
|
|
|
|
11.25
|
|
|
|
(2.47
|
)
|
Net interest margin to average earning assets
|
|
|
2.74
|
|
|
|
3.31
|
|
|
|
2.84
|
|
|
|
3.39
|
|
Efficiency ratio
|
|
|
53.60
|
|
|
|
42.64
|
|
|
|
51.95
|
|
|
|
48.80
|
|
Commercial loan net charge-off
ratio(1)
|
|
|
.86
|
|
|
|
.72
|
|
|
|
1.08
|
|
|
|
.72
|
|
Consumer loan net charge-off
ratio(1)
|
|
|
5.36
|
|
|
|
6.32
|
|
|
|
5.89
|
|
|
|
5.03
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
$
|
30,138
|
|
|
$
|
30,304
|
|
Consumer loans
|
|
|
42,076
|
|
|
|
49,185
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
72,214
|
|
|
$
|
79,489
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
$
|
2,452
|
|
|
$
|
2,908
|
|
|
|
|
|
|
|
|
|
|
Commercial allowance as a percent of
loans(1)
|
|
|
2.14
|
%
|
|
|
3.10
|
%
|
Commercial two-months-and-over contractual delinquency
|
|
|
3.03
|
|
|
|
3.04
|
|
Consumer allowance as a percent of
loans(1)
|
|
|
4.43
|
|
|
|
5.94
|
|
Consumer two-months-and-over contractual delinquency
|
|
|
5.24
|
|
|
|
5.97
|
|
Loan-to-deposits
ratio(2)
|
|
|
83.67
|
|
|
|
94.36
|
|
Total shareholders equity to total assets
|
|
|
8.92
|
|
|
|
8.87
|
|
Total capital to risk weighted assets
|
|
|
17.46
|
|
|
|
14.19
|
|
Tier 1 capital to risk weighted assets
|
|
|
11.24
|
|
|
|
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 Loans excluding loans held for sale were
$72.2 billion and $79.5 billion at September 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, including the sale in
August 2010 of auto finance loans as discussed more fully below.
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
80
HSBC USA Inc.
due to increased paydowns and managed reductions in certain
exposures, largely offset by the adoption of new accounting
guidance on the consolidation of variable interest entities
which resulted in the consolidation of an incremental
$1.3 billion of commercial loans at September 30,
2010. See Balance Sheet Review for a more detailed
discussion of the changes in loan balances.
In August 2010, we sold auto finance loans with a carrying value
of $1.2 billion at date of sale, and other related assets
to Santander Consumer USA (SC USA) for
$1.2 billion in cash. As a result of this transaction, we
recognized a gain of $9 million during the third quarter of
2010.
Credit Quality Our allowance for credit losses as
a percentage of total loans decreased at September 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 5.24 percent
at September 30, 2010 compared to 5.97 percent at
December 31, 2009. Dollars of delinquency fell across all
consumer portfolios during the nine months ended
September 30, 2010, while outstanding loan balances also
declined. The decrease in the consumer delinquency ratio since
December 31, 2009 was driven largely by our residential
mortgage, private label card and credit card portfolios,
including the sale of $264 million of delinquent subprime
mortgage whole loans during the second and third 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
September 30, 2010 decreased compared to the prior year
quarter. We experienced lower dollars of charge-off in all
consumer loan categories during the third 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. 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 11.24 percent and
9.61 percent at September 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
nine months of 2010 as compared to $2.2 billion during the
first nine months 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. These loans were subsequently sold to SC USA in
August 2010. At September 30, 2010 and December 31,
2009, we have exceeded the minimum ratios required.
Subject to regulatory approval, HSBC North America will be
required to implement Basel II provisions no later than
April 1, 2011 in accordance with current regulatory
timelines. HSBC USA Inc. will not report separately under the
new rules, but HSBC Bank USA will report under the new rules on
a stand-alone basis. Increases in regulatory capital may be
required prior to the Basel II adoption date, however, the
exact amount will depend upon our prevailing risk profile.
Adoption must be preceded by a parallel run period of at least
four quarters, and requires the
81
HSBC USA Inc.
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.
During the third quarter of 2010, ten year subordinated debt of
$1.3 billion and $750 million was issued by HSBC Bank
USA and HSBC USA Inc., respectively, to support our capital
position under Basel II and replace Tier 2 capital
lost due to maturities of subordinated debt.
Income Before Income Tax Expense Significant
Trends Income before income tax expense, and various
trends and activity affecting operations, are summarized in the
following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Income (loss) before income tax for prior year
|
|
$
|
230
|
|
|
$
|
(188
|
)
|
|
$
|
(121
|
)
|
|
$
|
(922
|
)
|
Increase (decrease) in income before income tax attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet management
activities(1)
|
|
|
117
|
|
|
|
152
|
|
|
|
(303
|
)
|
|
|
682
|
|
Trading
revenue(2)
|
|
|
(187
|
)
|
|
|
475
|
|
|
|
147
|
|
|
|
1,298
|
|
Credit card
fees(3)
|
|
|
(107
|
)
|
|
|
118
|
|
|
|
(324
|
)
|
|
|
379
|
|
Loans held for
sale(4)
|
|
|
35
|
|
|
|
55
|
|
|
|
251
|
|
|
|
144
|
|
Residential mortgage banking related
revenue(5)
|
|
|
(4
|
)
|
|
|
2
|
|
|
|
(245
|
)
|
|
|
75
|
|
Gain (loss) on own debt designated at fair value and related
derivatives(6)
|
|
|
97
|
|
|
|
(242
|
)
|
|
|
729
|
|
|
|
(726
|
)
|
Gain (loss) on instruments at fair value and related
derivatives, excluding own
debt(6)
|
|
|
(52
|
)
|
|
|
175
|
|
|
|
(211
|
)
|
|
|
404
|
|
Provision for credit
losses(7)
|
|
|
761
|
|
|
|
(348
|
)
|
|
|
2,335
|
|
|
|
(1,485
|
)
|
All other
activity(8)
|
|
|
(250
|
)
|
|
|
31
|
|
|
|
(320
|
)
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax for current period
|
|
$
|
640
|
|
|
$
|
230
|
|
|
$
|
1,938
|
|
|
$
|
(121
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 , 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 11,
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.
|
82
HSBC USA Inc.
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.
In addition to the U.S. GAAP financial results reported in
our consolidated financial statements, MD&A includes
reference to the following information which is presented on a
non-U.S. GAAP
basis:
International Financial Reporting Standards
(IFRSs) Because HSBC reports results in
accordance with IFRSs and IFRSs results are used in measuring
and rewarding performance of employees, our management also
separately monitors net income under IFRSs (a
non-U.S. GAAP
financial measure). The following table reconciles our net
income on a U.S. GAAP basis to net income on an IFRS basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Net income (loss) U.S. GAAP basis
|
|
$
|
417
|
|
|
$
|
161
|
|
|
$
|
1,271
|
|
|
$
|
(177
|
)
|
Adjustments, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unquoted equity securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(20
|
)
|
Reclassification of financial assets
|
|
|
(63
|
)
|
|
|
(244
|
)
|
|
|
(42
|
)
|
|
|
(390
|
)
|
Securities
|
|
|
(11
|
)
|
|
|
3
|
|
|
|
82
|
|
|
|
(101
|
)
|
Derivatives
|
|
|
6
|
|
|
|
6
|
|
|
|
9
|
|
|
|
11
|
|
Loan impairment
|
|
|
4
|
|
|
|
2
|
|
|
|
13
|
|
|
|
9
|
|
Property
|
|
|
(4
|
)
|
|
|
7
|
|
|
|
28
|
|
|
|
14
|
|
Pension costs
|
|
|
8
|
|
|
|
17
|
|
|
|
69
|
|
|
|
31
|
|
Purchased loan portfolios
|
|
|
(13
|
)
|
|
|
-
|
|
|
|
(40
|
)
|
|
|
73
|
|
Servicing assets
|
|
|
(2
|
)
|
|
|
(13
|
)
|
|
|
4
|
|
|
|
(3
|
)
|
Return of capital
|
|
|
-
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
(55
|
)
|
Interest recognition
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
(1
|
)
|
Gain on sale of auto finance loans
|
|
|
26
|
|
|
|
-
|
|
|
|
26
|
|
|
|
-
|
|
Other
|
|
|
(5
|
)
|
|
|
15
|
|
|
|
17
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net profit (loss) IFRSs basis
|
|
|
363
|
|
|
|
(47
|
)
|
|
|
1,434
|
|
|
|
(607
|
)
|
Tax benefit (expense) IFRSs basis
|
|
|
(191
|
)
|
|
|
76
|
|
|
|
(746
|
)
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax IFRSs basis.
|
|
$
|
554
|
|
|
$
|
(123
|
)
|
|
$
|
2,180
|
|
|
$
|
(716
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
83
HSBC USA Inc.
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.
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,
84
HSBC USA Inc.
the difference between all estimated future cash collections and
the purchase price paid is recognized into income using the
effective interest method. An allowance for loan loss is not
established unless the original estimate of expected future cash
collections declines.
Servicing assets Under IAS 38, servicing
assets are initially recorded on the balance sheet at cost and
amortized over the projected life of the assets. Servicing
assets are periodically tested for impairment with impairment
adjustments charged against current earnings. Under
U.S. GAAP, we generally record servicing assets on the
balance sheet at fair value. Subsequent adjustments to fair
value are generally reflected in current period earnings.
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.
Gain on sale of auto finance loans The
differences in the gain on sale of the auto finance loans
primarily reflects differences in the basis of the purchased
loans sold between IFRSs and U.S. GAAP as well as
differences in loan impairment provisioning as discussed above.
The combination of these differences resulted in a higher gain
under IFRSs.
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 September 30, 2010 and increases
(decreases) over prior periods, are summarized in the table
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) from
|
|
|
|
September 30,
|
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
2010
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Period end assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
$
|
30,080
|
|
|
$
|
(2,205
|
)
|
|
|
(6.8
|
)%
|
|
$
|
5,766
|
|
|
|
23.7
|
%
|
Loans, net
|
|
|
69,702
|
|
|
|
(1,009
|
)
|
|
|
(1.4
|
)
|
|
|
(5,926
|
)
|
|
|
(7.8
|
)
|
Loans held for sale
|
|
|
2,452
|
|
|
|
(115
|
)
|
|
|
(4.5
|
)
|
|
|
(456
|
)
|
|
|
(15.7
|
)
|
Trading assets
|
|
|
31,164
|
|
|
|
2,016
|
|
|
|
6.9
|
|
|
|
5,349
|
|
|
|
20.7
|
|
Securities
|
|
|
44,676
|
|
|
|
4,002
|
|
|
|
9.8
|
|
|
|
14,108
|
|
|
|
46.2
|
|
Other assets
|
|
|
14,100
|
|
|
|
3,044
|
|
|
|
27.5
|
|
|
|
2,254
|
|
|
|
19.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
192,174
|
|
|
$
|
5,733
|
|
|
|
3.1
|
%
|
|
$
|
21,095
|
|
|
|
12.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funding sources:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
118,946
|
|
|
$
|
(2,617
|
)
|
|
|
(2.2
|
)%
|
|
$
|
609
|
|
|
|
.5
|
%
|
Trading liabilities
|
|
|
11,835
|
|
|
|
958
|
|
|
|
8.8
|
|
|
|
3,825
|
|
|
|
47.8
|
|
Short-term borrowings
|
|
|
20,046
|
|
|
|
4,013
|
|
|
|
25.0
|
|
|
|
13,534
|
|
|
|
100+
|
|
All other liabilities
|
|
|
5,655
|
|
|
|
1,838
|
|
|
|
48.2
|
|
|
|
620
|
|
|
|
12.3
|
|
Long-term debt
|
|
|
18,559
|
|
|
|
808
|
|
|
|
4.6
|
|
|
|
551
|
|
|
|
3.1
|
|
Shareholders equity
|
|
|
17,133
|
|
|
|
733
|
|
|
|
4.5
|
|
|
|
1,956
|
|
|
|
12.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
192,174
|
|
|
$
|
5,733
|
|
|
|
3.1
|
%
|
|
$
|
21,095
|
|
|
|
12.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85
HSBC USA Inc.
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.
Loans, Net Loan balances at September 30,
2010 and increases (decreases) over prior periods, are
summarized in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) from
|
|
|
|
September 30,
|
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
2010
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Total commercial loans
|
|
$
|
30,138
|
|
|
$
|
636
|
|
|
|
2.2
|
%
|
|
$
|
(166
|
)
|
|
|
(.5
|
)%
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages, excluding home equity mortgages
|
|
|
13,625
|
|
|
|
59
|
|
|
|
.4
|
|
|
|
(97
|
)
|
|
|
(.7
|
)
|
Home equity mortgages
|
|
|
3,892
|
|
|
|
(80
|
)
|
|
|
(2.0
|
)
|
|
|
(272
|
)
|
|
|
(6.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential mortgages
|
|
|
17,517
|
|
|
|
(21
|
)
|
|
|
(.1
|
)
|
|
|
(369
|
)
|
|
|
(2.1
|
)
|
Auto finance
|
|
|
-
|
|
|
|
(1,279
|
)
|
|
|
(100.0
|
)
|
|
|
(1,701
|
)
|
|
|
(100.0
|
)
|
Private label
|
|
|
12,460
|
|
|
|
(287
|
)
|
|
|
(2.3
|
)
|
|
|
(2,631
|
)
|
|
|
(17.4
|
)
|
Credit Card
|
|
|
10,815
|
|
|
|
(459
|
)
|
|
|
(4.1
|
)
|
|
|
(2,233
|
)
|
|
|
(17.1
|
)
|
Other consumer
|
|
|
1,284
|
|
|
|
(37
|
)
|
|
|
(2.8
|
)
|
|
|
(175
|
)
|
|
|
(12.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer loans
|
|
|
42,076
|
|
|
|
(2,083
|
)
|
|
|
(4.7
|
)
|
|
|
(7,109
|
)
|
|
|
(14.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
72,214
|
|
|
|
(1,447
|
)
|
|
|
(2.0
|
)
|
|
|
(7,275
|
)
|
|
|
(9.2
|
)
|
Allowance for credit losses
|
|
|
2,512
|
|
|
|
(438
|
)
|
|
|
(14.8
|
)
|
|
|
(1,349
|
)
|
|
|
(34.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
$
|
69,702
|
|
|
$
|
(1,009
|
)
|
|
|
(1.4
|
)%
|
|
$
|
(5,926
|
)
|
|
|
(7.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans increased as compared to June 30, 2010,
but decreased compared to December 31, 2009. The increase
in commercial loans since June 30, 2010 reflects a seasonal
increase in apparel industry borrowings and increased overdraft
levels. Commercial loan balances at September 30, 2010 and
June 30, 2010 reflect the implementation of new accounting
guidance relating to the consolidation of variable interest
entities (VIEs) which resulted in an incremental
$1.3 billion and $1.6 billion of commercial loans
being recorded on our balance sheet. Excluding this impact,
commercial loan balances decreased $1.5 billion as compared
to 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
June 30, 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
86
HSBC USA Inc.
portfolio, excluding subprime residential mortgage loans held
for sale, are presented in the table below. The trend in these
ratios reflects some element of stabilization in the housing
markets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refreshed
LTVs(1)(2)
|
|
Refreshed
LTVs(1)(2)
|
|
|
at September 30, 2010
|
|
at December 31, 2009
|
|
|
First
|
|
Second
|
|
First
|
|
Second
|
|
|
Lien
|
|
Lien
|
|
Lien
|
|
Lien
|
|
|
LTV<80%
|
|
|
74.5
|
%
|
|
|
62.0
|
%
|
|
|
71.5
|
%
|
|
|
62.8
|
%
|
80%£LTV<90%
|
|
|
13.1
|
|
|
|
15.6
|
|
|
|
14.3
|
|
|
|
14.9
|
|
90%£LTV<100%
|
|
|
7.0
|
|
|
|
10.8
|
|
|
|
7.7
|
|
|
|
9.5
|
|
LTV³100%
|
|
|
5.4
|
|
|
|
11.7
|
|
|
|
6.5
|
|
|
|
12.8
|
|
Average LTV for portfolio
|
|
|
66.9
|
|
|
|
73.5
|
|
|
|
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
June 30, 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 earlier in the year. At September 30, 2010,
private label receivables include $905 million associated with
merchants for which we no longer finance new purchases.
Auto finance receivable balances decreased compared to both the
prior quarter and year end. As previously discussed, in August
2010 we sold $1.2 billion of auto finance loans to SC USA.
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
September 30, 2010 and increases (decreases) over prior
periods are summarized in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) from
|
|
|
|
September 30,
|
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
2010
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Total commercial loans
|
|
$
|
1,536
|
|
|
$
|
(18
|
)
|
|
|
(1.2
|
)%
|
|
$
|
410
|
|
|
|
36.4
|
%
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
888
|
|
|
|
(97
|
)
|
|
|
(9.8
|
)
|
|
|
(498
|
)
|
|
|
(35.9
|
)
|
Auto Finance
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(353
|
)
|
|
|
(100.0
|
)
|
Other consumer
|
|
|
28
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(15
|
)
|
|
|
(34.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer loans
|
|
|
916
|
|
|
|
(97
|
)
|
|
|
(9.6
|
)
|
|
|
(866
|
)
|
|
|
(48.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans held for sale
|
|
$
|
2,452
|
|
|
$
|
(115
|
)
|
|
|
(4.5
|
)%
|
|
$
|
(456
|
)
|
|
|
(15.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87
HSBC USA Inc.
We originate commercial loans in connection with our
participation in 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 September 30,
2010, June 30, 2010 and December 31, 2009,
respectively, all of which are recorded at fair value.
Commercial loan balances under this program decreased compared
to June 30, 2010 and December 31, 2009 due to loan
sales. In 2010, we provided foreign currency denominated loans
to third parties 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 $544 million and $543 million at
September 30, 2010 and June 30, 2010, respectively.
See Note 11, Fair Value Option for further
information.
Residential mortgage loans held for sale include subprime
residential mortgage loans of $410 million,
$478 million and $757 million at September 30,
2010, June 30, 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 and third quarters of 2010,
we sold subprime residential mortgage loans with a book value of
$215 million and $49 million, respectively, 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 September 30,
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 September 30, 2010, we experienced a
decrease in the valuation allowance during the nine months ended
September 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 September 30, 2010 and increases
(decreases) over prior periods, are summarized in the table
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) from
|
|
|
|
September 30,
|
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
2010
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Trading assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities(1)
|
|
$
|
7,727
|
|
|
$
|
2,971
|
|
|
|
62.5
|
%
|
|
$
|
2,387
|
|
|
|
44.7
|
%
|
Precious metals
|
|
|
14,736
|
|
|
|
(1,652
|
)
|
|
|
(10.1
|
)
|
|
|
2,480
|
|
|
|
20.2
|
|
Fair value of derivatives
|
|
|
8,701
|
|
|
|
697
|
|
|
|
8.7
|
|
|
|
482
|
|
|
|
5.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
31,164
|
|
|
$
|
2,016
|
|
|
|
6.9
|
%
|
|
$
|
5,349
|
|
|
|
20.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold, not yet purchased
|
|
$
|
1,492
|
|
|
$
|
(27
|
)
|
|
|
(1.8
|
)%
|
|
$
|
1,361
|
|
|
|
100+
|
%
|
Payable for precious metals
|
|
|
3,736
|
|
|
|
596
|
|
|
|
19.0
|
|
|
|
1,180
|
|
|
|
46.2
|
|
Fair value of derivatives
|
|
|
6,607
|
|
|
|
389
|
|
|
|
6.3
|
|
|
|
1,284
|
|
|
|
24.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,835
|
|
|
$
|
958
|
|
|
|
8.8
|
%
|
|
$
|
3,825
|
|
|
|
47.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
88
HSBC USA Inc.
Securities balances at September 30, 2010 increased from
both June 30, 2010 and December 31, 2009 due to an
increase in Treasury positions related to hedges in the trading
portfolio. Securities sold, not yet purchased remained flat
compared to June 30, 2010 levels but increased compared to
December 31, 2009 due to an increase in Treasury positions
related to hedges in the trading portfolio.
Precious metals trading assets at September 30, 2010
decreased as compared to June 30, 2010 but increased
compared to December 31, 2009. The decrease since
June 30, 2010 reflects unwinding of specific transactions
during the quarter, while the increase since December 2009 was
primarily due to higher prices on most metals and higher gold
inventory. The higher payable for precious metals as compared to
both June 30, 2010 and December 31, 2009 was primarily
due to higher 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 increased from small spread widening in all
sectors.
Deposits Deposit balances by major depositor
categories at September 30, 2010 and increases (decreases)
over prior periods, are summarized in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) from
|
|
|
|
September 30,
|
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
2010
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Individuals, partnerships and corporations
|
|
$
|
101,042
|
|
|
$
|
272
|
|
|
|
.3
|
%
|
|
$
|
2,635
|
|
|
|
2.7
|
%
|
Domestic and foreign banks
|
|
|
12,942
|
|
|
|
(601
|
)
|
|
|
(4.4
|
)
|
|
|
(607
|
)
|
|
|
(4.5
|
)
|
U.S. Government, states and political subdivisions
|
|
|
4,158
|
|
|
|
71
|
|
|
|
1.7
|
|
|
|
(256
|
)
|
|
|
(5.8
|
)
|
Foreign governments and official institutions
|
|
|
804
|
|
|
|
(2,359
|
)
|
|
|
(74.6
|
)
|
|
|
(1,163
|
)
|
|
|
(59.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
118,946
|
|
|
$
|
(2,617
|
)
|
|
|
(2.2
|
)%
|
|
$
|
609
|
|
|
|
.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total core
deposits(1)
|
|
$
|
86,241
|
|
|
$
|
147
|
|
|
|
.2
|
%
|
|
$
|
3,014
|
|
|
|
3.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 nine of 2010. Deposits at September 30, 2010
decreased compared to June 30, 2010, primarily due to
reduced deposits from banks and affiliates. Deposits have
remained relatively stable since December 31, 2009 as
higher deposits from affiliates as well as growth in
branch-based deposit products driven primarily by our Premier
and branch expansion strategies and continued stability in the
online savings product offset our efforts 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 nine months 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 $28.8 billion at September 30, 2010 as
compared to $28.2 billion at June 30, 2010 and
$23.6 billion at December 31, 2009;
|
89
HSBC USA Inc.
|
|
|
|
|
Retail branch expansion in existing and new geographic markets
to largely support the needs of our internationally minded
customers. During the first nine months of 2010, we opened five
new branches in the states of California and Virginia; and
|
|
|
|
Driving cross-sell through closer alignment across all lines of
business.
|
Short-Term Borrowings Increased balances at
September 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 increased at
September 30, 2010 compared to both June 30, 2010 and
December 31, 2009 driven by the collective issuance of
$2.0 billion in subordinated debt by HSBC Bank USA and HSBC
USA Inc. during the third quarter of 2010, partially offset by
long-term debt retirements.
Incremental issuances from the $40 billion HSBC Bank USA
Global Bank Note Program totaled $1.5 billion and
$1.8 billion during the three and nine months ended
September 30, 2010. Total debt outstanding under this
program was $4.9 billion and $3.5 billion at
September 30, 2010 and December 31, 2009, respectively.
Incremental long-term debt borrowings from our shelf
registration statement with the Securities and Exchange
Commission totaled $1.1 billion and $2.1 billion
during the three and nine months ended September 30, 2010,
respectively, compared to $923 million and
$2.0 billion during the year-ago periods. Total long term
debt outstanding under this shelf was $6.6 billion and
$5.5 billion at September 30, 2010 and
December 31, 2009, respectively.
Borrowings from the Federal Home Loan Bank (FHLB)
totaled $1.0 billion at both September 30, 2010 and
December 31, 2009. At September 30, 2010, we had the
ability to access further borrowings of up to $3.0 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 $1.2 billion and $2.5 billion at
September 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 $3.0 billion and $1.4 billion were included
in short-term borrowings and long-term debt, respectively, at
September 30, 2010. Debt obligations of VIEs totaling
$3.0 billion were included in long-term debt at
December 31, 2009. See Note 17, Variable
Interest Entities in the accompanying consolidated
financial statements for additional information regarding VIE
arrangements.
90
HSBC USA Inc.
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
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Yield on total earning assets
|
|
|
3.53
|
%
|
|
|
4.43
|
%
|
|
|
3.64
|
%
|
|
|
4.69
|
%
|
Rate paid on interest bearing liabilities
|
|
|
.94
|
|
|
|
1.36
|
|
|
|
.95
|
|
|
|
1.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread
|
|
|
2.59
|
|
|
|
3.07
|
|
|
|
2.69
|
|
|
|
3.13
|
|
Benefit from net non-interest earning or paying funds
|
|
|
.15
|
|
|
|
.24
|
|
|
|
.15
|
|
|
|
.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin to earning
assets(1)
|
|
|
2.74
|
%
|
|
|
3.31
|
%
|
|
|
2.84
|
%
|
|
|
3.39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Selected financial ratios are
defined in the Glossary of Terms in our 2009
Form 10-K.
|
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
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2010
|
|
|
September 30, 2010
|
|
|
|
|
|
|
Interest Rate
|
|
|
|
|
|
Interest Rate
|
|
|
|
Amount
|
|
|
Spread
|
|
|
Amount
|
|
|
Spread
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income/interest rate spread from prior year
|
|
$
|
1,266
|
|
|
|
3.07
|
%
|
|
$
|
3,903
|
|
|
|
3.13
|
%
|
Increase (decrease) in net interest income associated with:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading related activities
|
|
|
(36
|
)
|
|
|
|
|
|
|
(94
|
)
|
|
|
|
|
Balance sheet management
activities(1)
|
|
|
35
|
|
|
|
|
|
|
|
(89
|
)
|
|
|
|
|
Private label credit card portfolio
|
|
|
(66
|
)
|
|
|
|
|
|
|
(103
|
)
|
|
|
|
|
Credit card portfolio
|
|
|
(82
|
)
|
|
|
|
|
|
|
(145
|
)
|
|
|
|
|
Commercial loans
|
|
|
(59
|
)
|
|
|
|
|
|
|
(160
|
)
|
|
|
|
|
Deposits
|
|
|
46
|
|
|
|
|
|
|
|
84
|
|
|
|
|
|
Residential mortgage banking
|
|
|
(1
|
)
|
|
|
|
|
|
|
(26
|
)
|
|
|
|
|
Other activity
|
|
|
(7
|
)
|
|
|
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/interest rate spread for current year
|
|
$
|
1,096
|
|
|
|
2.59
|
%
|
|
$
|
3,439
|
|
|
|
2.69
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 nine
months ended September 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 Higher net interest
income from balance sheet management activities during the three
month period ended September 30, 2010 reflects additional
purchases of US Treasuries and Government National Mortgage
Association mortgage-backed securities. Lower net interest
income from balance sheet
91
HSBC USA Inc.
management activities during the nine months ended
September 30, 2010 was due primarily to the sale of
securities in the first half of 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 nine months ended September 30, 2010 as a result
of higher premiums, 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 nine month period higher
premiums, 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 nine months ended
September 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 net interest income on deposits during
both periods is due primarily to improved spreads in the
Personal Financial Services and Commercial Banking business
segments. Although these segments continue to be affected by
falling interest rates and growth in customer deposits in higher
yielding deposit products such as premier investor accounts,
this has been offset by pricing initiatives, an overall slightly
less competitive retail market, and higher funding credits.
Residential mortgage banking During the three and nine
months ended September 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 $494 million of prime adjustable and fixed
rate residential mortgages since September 30, 2009.
Other Activity Lower net interest income on other
activity during the three month period ended September 30,
2010 was largely driven by lower net interest income on auto
finance receivables. Higher net interest income from other
activity during the nine month period ended September 30,
2010 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 September 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Commercial
|
|
$
|
12
|
|
|
$
|
246
|
|
|
$
|
(234
|
)
|
|
|
(95.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages, excluding home equity mortgages
|
|
|
(23
|
)
|
|
|
92
|
|
|
|
(115
|
)
|
|
|
(100+
|
)
|
Home equity mortgages
|
|
|
8
|
|
|
|
79
|
|
|
|
(71
|
)
|
|
|
(89.9
|
)
|
Private label card receivables
|
|
|
134
|
|
|
|
272
|
|
|
|
(138
|
)
|
|
|
(50.7
|
)
|
Credit card receivables
|
|
|
108
|
|
|
|
275
|
|
|
|
(167
|
)
|
|
|
(60.7
|
)
|
Auto finance
|
|
|
-
|
|
|
|
20
|
|
|
|
(20
|
)
|
|
|
(100.0
|
)
|
Other consumer
|
|
|
6
|
|
|
|
22
|
|
|
|
(16
|
)
|
|
|
(72.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
233
|
|
|
|
760
|
|
|
|
(527
|
)
|
|
|
(69.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for credit losses
|
|
$
|
245
|
|
|
$
|
1,006
|
|
|
$
|
(761
|
)
|
|
|
(75.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92
HSBC USA Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Nine Months Ended September 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Commercial
|
|
$
|
(52
|
)
|
|
$
|
560
|
|
|
$
|
(612
|
)
|
|
|
(100+
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages, excluding home equity mortgages
|
|
|
(32
|
)
|
|
|
351
|
|
|
|
(383
|
)
|
|
|
(100+
|
)
|
Home equity mortgages
|
|
|
(7
|
)
|
|
|
166
|
|
|
|
(173
|
)
|
|
|
(100+
|
)
|
Private label card receivables
|
|
|
441
|
|
|
|
981
|
|
|
|
(540
|
)
|
|
|
(55.0
|
)
|
Credit card receivables
|
|
|
513
|
|
|
|
1,034
|
|
|
|
(521
|
)
|
|
|
(50.4
|
)
|
Auto finance
|
|
|
35
|
|
|
|
85
|
|
|
|
(50
|
)
|
|
|
(58.8
|
)
|
Other consumer
|
|
|
14
|
|
|
|
70
|
|
|
|
(56
|
)
|
|
|
(80.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
964
|
|
|
|
2,687
|
|
|
|
(1,723
|
)
|
|
|
(64.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for credit losses
|
|
$
|
912
|
|
|
$
|
3,247
|
|
|
$
|
(2,335
|
)
|
|
|
(71.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our credit loss reserves decreased during the three months ended
September 30, 2010 as the provision for credit losses was
$405 million lower than net charge-offs compared to
provision for credit losses greater than net charge-offs of
$130 million in the prior year quarter. Credit loss
reserves also decreased during the nine months ended
September 30, 2010 as the provision for credit losses was
$1,324 million lower than net charge-offs compared to
provision for credit losses greater than net charge-offs of
$1,044 million in the year-ago period. The provision as a
percentage of average receivables was .34 percent and
1.21 percent for the three and nine months ended
September 30, 2010 compared to 1.19 percent and
3.67 percent for the three and nine months ended
September 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 nine
months ended September 30, 2010. These decreases were
partially offset in both periods by a specific provision
relating to a single commercial real estate lending
relationship. Given the nature of the factors driving the
reduction in commercial loan provision, the provision levels
recognized in the first nine months 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 $186 million and
$556 million during the three and nine months ended
September 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 $167 million and $521 million
during the three and nine months ended September 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
customer payment behavior, home price stability and the impact
of tighter underwriting initiated in prior periods. Lower
receivable
93
HSBC USA Inc.
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 $138 million and $540 million
during the three and nine months ended September 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 continued to liquidate
and used car prices improved. The decrease also reflects the
impact of the sale of $1.2 billion of auto finance loans in
August 2010.
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.
Other Revenues The components of other revenues
are summarized in the following tables.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Three Months Ended September 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Credit card fees
|
|
$
|
226
|
|
|
$
|
333
|
|
|
$
|
(107
|
)
|
|
|
(32.1
|
)%
|
Other fees and commissions
|
|
|
211
|
|
|
|
188
|
|
|
|
23
|
|
|
|
12.2
|
|
Trust income
|
|
|
26
|
|
|
|
30
|
|
|
|
(4
|
)
|
|
|
(13.3
|
)
|
Trading revenue
|
|
|
166
|
|
|
|
353
|
|
|
|
(187
|
)
|
|
|
(53.0
|
)
|
Net
other-than-temporary
impairment losses
|
|
|
(4
|
)
|
|
|
(26
|
)
|
|
|
22
|
|
|
|
84.6
|
|
Other securities gains, net
|
|
|
37
|
|
|
|
5
|
|
|
|
32
|
|
|
|
100+
|
|
HSBC affiliate income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees and commissions
|
|
|
22
|
|
|
|
35
|
|
|
|
(13
|
)
|
|
|
(37.1
|
)
|
Other affiliate income
|
|
|
22
|
|
|
|
-
|
|
|
|
22
|
|
|
|
100+
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total HSBC affiliate income
|
|
|
44
|
|
|
|
35
|
|
|
|
9
|
|
|
|
25.7
|
|
Residential mortgage banking revenue
(loss)(1)
|
|
|
11
|
|
|
|
15
|
|
|
|
(4
|
)
|
|
|
(26.7
|
)
|
Gain (loss) on instruments at fair value and related
derivatives(2)
|
|
|
89
|
|
|
|
44
|
|
|
|
45
|
|
|
|
100+
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation of loans held for sale
|
|
|
(5
|
)
|
|
|
(40
|
)
|
|
|
35
|
|
|
|
87.5
|
|
Insurance
|
|
|
4
|
|
|
|
6
|
|
|
|
(2
|
)
|
|
|
(33.3
|
)
|
Earnings from equity investments
|
|
|
15
|
|
|
|
4
|
|
|
|
11
|
|
|
|
100+
|
|
Miscellaneous income
|
|
|
(4
|
)
|
|
|
(52
|
)
|
|
|
48
|
|
|
|
92.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
10
|
|
|
|
(82
|
)
|
|
|
92
|
|
|
|
100+
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other revenues
|
|
$
|
816
|
|
|
$
|
895
|
|
|
$
|
(79
|
)
|
|
|
(8.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94
HSBC USA Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Nine Months Ended September 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Credit card fees
|
|
$
|
708
|
|
|
$
|
1,032
|
|
|
$
|
(324
|
)
|
|
|
(31.4
|
)%
|
Other fees and commissions
|
|
|
703
|
|
|
|
635
|
|
|
|
68
|
|
|
|
10.7
|
|
Trust income
|
|
|
79
|
|
|
|
92
|
|
|
|
(13
|
)
|
|
|
(14.1
|
)
|
Trading revenue (loss)
|
|
|
498
|
|
|
|
351
|
|
|
|
147
|
|
|
|
41.9
|
|
Net
other-than-temporary
impairment losses
|
|
|
(45
|
)
|
|
|
(84
|
)
|
|
|
39
|
|
|
|
46.4
|
|
Other securities gains, net
|
|
|
59
|
|
|
|
299
|
|
|
|
(240
|
)
|
|
|
(80.3
|
)
|
HSBC affiliate income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees and commissions
|
|
|
86
|
|
|
|
102
|
|
|
|
(16
|
)
|
|
|
(15.7
|
)
|
Other affiliate income
|
|
|
31
|
|
|
|
10
|
|
|
|
21
|
|
|
|
100+
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total HSBC affiliate income
|
|
|
117
|
|
|
|
112
|
|
|
|
5
|
|
|
|
4.5
|
|
Residential mortgage banking revenue
(loss)(1)
|
|
|
(106
|
)
|
|
|
139
|
|
|
|
(245
|
)
|
|
|
(100+
|
)
|
Gain (loss) on instruments at fair value and related
derivatives(2)
|
|
|
317
|
|
|
|
(201
|
)
|
|
|
518
|
|
|
|
100+
|
|
Other income :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation of loans held for sale
|
|
|
56
|
|
|
|
(195
|
)
|
|
|
251
|
|
|
|
100+
|
|
Insurance
|
|
|
13
|
|
|
|
19
|
|
|
|
(6
|
)
|
|
|
(31.6
|
)
|
Earnings from equity investments
|
|
|
22
|
|
|
|
25
|
|
|
|
(3
|
)
|
|
|
(12.0
|
)
|
Miscellaneous income
|
|
|
86
|
|
|
|
(3
|
)
|
|
|
89
|
|
|
|
100+
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
177
|
|
|
|
(154
|
)
|
|
|
331
|
|
|
|
100+
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other revenues
|
|
$
|
2,507
|
|
|
$
|
2,221
|
|
|
$
|
286
|
|
|
|
12.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes servicing fees received
from HBSC Finance of $2 million and $6 million during
the three and nine months ended September 30, 2010,
respectively, and $3 million and $10 million during
the three and nine months ended September 30, 2009.
|
|
(2) |
|
Includes gains and losses
associated with financial instruments elected to be measured at
fair value and the related derivatives. See Note 11,
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, 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. The CARD Act has resulted in significant decreases in
overlimit fees as customers must now opt-in for such fees,
restrictions on fees charged to process on-line and telephone
payments and in the third quarter of 2010, lower late fees due
to limits on fee that can be assessed. Also contributing to the
decrease were higher revenue share payments due to improved cash
flows and in the nine month period, higher reversals of fee
income stemming from reduced charge-off activity upon
acquisition of the GM and UP Portfolios in the first nine months
of 2009 due to purchase accounting.
Other Fees and Commissions Other fee-based income
increased during both periods driven by higher commercial loan
fee accruals, a $15 million reclassification of auto loan
servicing fees paid to SC USA into operating expenses in August
2010 and in the
year-to-date
period, 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.
95
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 September 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Trading revenue (loss)
|
|
$
|
166
|
|
|
$
|
353
|
|
|
$
|
(187
|
)
|
|
|
(53.0
|
)%
|
Net interest income
|
|
|
(2
|
)
|
|
|
34
|
|
|
|
(36
|
)
|
|
|
(100+
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading related revenue (loss)
|
|
$
|
164
|
|
|
$
|
387
|
|
|
$
|
(223
|
)
|
|
|
(57.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
68
|
|
|
$
|
58
|
|
|
$
|
10
|
|
|
|
17.2
|
%
|
Balance sheet management
|
|
|
4
|
|
|
|
28
|
|
|
|
(24
|
)
|
|
|
(85.7
|
)
|
Foreign exchange and banknotes
|
|
|
71
|
|
|
|
98
|
|
|
|
(27
|
)
|
|
|
(27.6
|
)
|
Precious metals
|
|
|
12
|
|
|
|
3
|
|
|
|
9
|
|
|
|
100+
|
|
Global banking
|
|
|
10
|
|
|
|
203
|
|
|
|
(193
|
)
|
|
|
(95.1
|
)
|
Other trading
|
|
|
(1
|
)
|
|
|
(3
|
)
|
|
|
2
|
|
|
|
66.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading related revenue
|
|
$
|
164
|
|
|
$
|
387
|
|
|
$
|
(223
|
)
|
|
|
(57.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Nine Months Ended September 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Trading revenue (loss)
|
|
$
|
498
|
|
|
$
|
351
|
|
|
$
|
147
|
|
|
|
41.9
|
%
|
Net interest income
|
|
|
18
|
|
|
|
112
|
|
|
|
(94
|
)
|
|
|
(83.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading related revenue (loss)
|
|
$
|
516
|
|
|
$
|
463
|
|
|
$
|
53
|
|
|
|
11.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
202
|
|
|
$
|
(283
|
)
|
|
$
|
485
|
|
|
|
100+
|
%
|
Balance sheet management
|
|
|
78
|
|
|
|
74
|
|
|
|
4
|
|
|
|
5.4
|
|
Foreign exchange and banknotes
|
|
|
200
|
|
|
|
307
|
|
|
|
(107
|
)
|
|
|
(34.9
|
)
|
Precious metals
|
|
|
46
|
|
|
|
36
|
|
|
|
10
|
|
|
|
27.8
|
|
Global banking
|
|
|
(7
|
)
|
|
|
332
|
|
|
|
(339
|
)
|
|
|
(100+
|
)
|
Other trading
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading related revenue
|
|
$
|
516
|
|
|
$
|
463
|
|
|
$
|
53
|
|
|
|
11.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading revenue decreased in the three month period ended
September 30, 2010 compared to the prior year quarter but
improved significantly in the nine month period as the year-ago
nine 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 months ended September 30, 2010 and 2009,
the value of credit derivatives remained fairly stable.
Trading revenue related to derivatives improved during the three
months ended September 30, 2010 due to higher revenue from
other credit related products which reported total gains of
$4 million during the three ended
96
HSBC USA Inc.
September 30, 2010, as compared to losses of
$25 million during the year-ago period. This improvement
resulted from favorable credit spread movements. Trading revenue
related to derivatives improved during the nine months ended
September 30, 2010 largely due to the performance of
structured credit products which reported total gains of
$178 million during the nine months ended
September 30, 2010, as compared to losses of
$286 million during the year-ago period. The performance of
credit derivatives remained stable during the first nine months
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 credit derivatives revenue in both
periods were reductions in other derivative products
substantially due to lower deal activity.
Trading income related to balance sheet management activities
declined in the three month period ended September 30, 2010
primarily due to losses on securities held for trading purposes
but improved in the
year-to-date
period as the losses referred to above were more than offset by
more favorable trends in credit spreads on asset-backed
securities.
Foreign exchange and banknotes revenue declined in both periods
primarily due to lower volumes and narrower trading spreads in
foreign exchange.
Precious metals continued to deliver strong results in both
periods as a result of continuing demand for metals as a
perceived safe investment.
Global banking revenue decreased significantly during the three
and nine months ended September 30, 2010 due to a reduction
in corporate bond positions and lower price volatility as
compared to the year ago periods.
Net
Other-Than-Temporary
Impairment (Losses) Recoveries During the three and nine
months ended September 30, 2010, five debt securities and
38 debt securities, respectively, were determined to have either
initial
other-than-temporary
impairment or changes to previous
other-than-temporary
impairment estimates compared to 14 and 18 debt securities 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
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Total
other-than-temporary
impairment recoveries (losses)
|
|
$
|
(13
|
)
|
|
$
|
(28
|
)
|
|
$
|
90
|
|
|
$
|
(188
|
)
|
Portion of loss (recovery) recognized in other comprehensive
income, before taxes
|
|
|
9
|
|
|
|
2
|
|
|
|
(135
|
)
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
other-than-temporary
impairment losses recognized in the consolidated statement of
income (loss)
|
|
$
|
(4
|
)
|
|
$
|
(26
|
)
|
|
$
|
(45
|
)
|
|
$
|
(84
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Available-for-sale
securities
|
|
$
|
37
|
|
|
$
|
5
|
|
|
$
|
59
|
|
|
$
|
251
|
|
Sale of MasterCard or Visa Class B Shares
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other securities gains, net
|
|
$
|
37
|
|
|
$
|
5
|
|
|
$
|
59
|
|
|
$
|
299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains and losses from sales of securities are
summarized in Note 4, Securities, in the
accompanying consolidated financial statements.
97
HSBC USA Inc.
During the three and nine months ended September 30, 2010,
we sold $3.2 billion and $14.0 billion, respectively,
of US treasury, municipal, mortgage-backed and other
asset-backed securities as part of a strategy to adjust
portfolio risk duration as well as to reduce risk-weighted asset
levels and recognized gains of $59 million and
$142 million, respectively, and losses of $22 million
and $83 million, respectively, during these periods which
is included as a component of other security gains, net above.
During the three and nine months ended September 30, 2009,
we sold $129 million 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 $9 million and $293 million and
losses of $4 million and $42 million, respectively,
during these periods.
HSBC Affiliate Income Affiliate income was higher in both
periods due to higher fees and commissions earned from HSBC
Finance affiliates as compared to the year-ago periods driven by
the transfer of certain real estate default servicing employees
from HSBC Finance in July 2010, partially offset by lower fees
and commissions earned from HSBC Markets USA and other HSBC
affiliates and, in the nine 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.
During the third quarter of 2010, the Internal Revenue Service
(IRS) announced it would stop providing information
regarding certain unpaid obligations of a taxpayer (the
Debt Indicator), which has historically served as a
significant part of our underwriting process for Taxpayer
Financial Services (TFS) tax refund products. We
determined that, without use of the Debt Indicator, we could no
longer offer the product that has historically accounted for the
substantial majority of our TFS loan production and that we
might not be able to offer the remaining products available
under the program in a safe and sound manner.
On October 15, 2010, H&R Block commenced an action in
the United Stated District Court for The Eastern District of
Missouri seeking injunctive relief compelling HSBC Finance and
other HSBC North America subsidiaries, including HSBC Bank USA
and HSBC Trust Company (Delaware), N.A., to continue to fund tax
refund anticipation loans and refund anticipation checks for the
2011 tax season. We believe that the decision of the IRS to stop
issuing the Debt Indicator, a recent Supervisory Letter from the
Office of the Comptroller of the Currency, and certain
contractual provision provide defenses to the claim and support
the decision regarding the suspension of offering these tax
refund products. H&R Blocks request for a temporary
restraining order was denied on October 18, 2010. The Court
scheduled a
four-day
evidentiary hearing on the preliminary injunction for November
15-18, 2010.
While we cannot determine the manner in which this dispute will
ultimately be resolved, there will likely be a significant
decrease in, or elimination of, TFS volumes and related revenue
in 2011, which, in either case, is not expected to have a
material impact on our financial position or results of
operations.
98
HSBC USA Inc.
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 September 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
54
|
|
|
$
|
55
|
|
|
$
|
(1
|
)
|
|
|
(1.8
|
)%
|
Servicing related income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fee income
|
|
|
30
|
|
|
|
33
|
|
|
|
(3
|
)
|
|
|
(9.1
|
)
|
Changes in fair value of MSRs due to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in valuation inputs or assumptions used in valuation
model
|
|
|
1
|
|
|
|
(54
|
)
|
|
|
55
|
|
|
|
100+
|
|
Realization of cash flows
|
|
|
(30
|
)
|
|
|
(8
|
)
|
|
|
(22
|
)
|
|
|
(100+
|
)
|
Trading Derivative instruments used to offset
changes in value of MSRs
|
|
|
71
|
|
|
|
59
|
|
|
|
12
|
|
|
|
20.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total servicing related income
|
|
|
72
|
|
|
|
30
|
|
|
|
42
|
|
|
|
100+
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originations and sales related income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains on sales of residential mortgages
|
|
|
5
|
|
|
|
14
|
|
|
|
(9
|
)
|
|
|
(64.3
|
)
|
Provision for repurchase obligations
|
|
|
(95
|
)
|
|
|
(21
|
)
|
|
|
(74
|
)
|
|
|
(100+
|
)
|
Trading and hedging activity
|
|
|
21
|
|
|
|
(13
|
)
|
|
|
34
|
|
|
|
100+
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originations and sales related income (loss)
|
|
|
(69
|
)
|
|
|
(20
|
)
|
|
|
(49
|
)
|
|
|
(100+
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other mortgage income
|
|
|
8
|
|
|
|
5
|
|
|
|
3
|
|
|
|
60.0
|
|
Total residential mortgage banking revenue included in other
revenues
|
|
|
11
|
|
|
|
15
|
|
|
|
(4
|
)
|
|
|
(26.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential mortgage banking related revenue
|
|
$
|
65
|
|
|
$
|
70
|
|
|
$
|
(5
|
)
|
|
|
(7.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99
HSBC USA Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Nine Months Ended September 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
164
|
|
|
$
|
190
|
|
|
$
|
(26
|
)
|
|
|
(13.7
|
)%
|
Servicing related income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fee income
|
|
|
92
|
|
|
|
99
|
|
|
|
(7
|
)
|
|
|
(7.1
|
)
|
Changes in fair value of MSRs due to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in valuation inputs or assumptions used in valuation
model
|
|
|
(113
|
)
|
|
|
6
|
|
|
|
(119
|
)
|
|
|
(100+
|
)
|
Realization of cash flows
|
|
|
(75
|
)
|
|
|
(32
|
)
|
|
|
(43
|
)
|
|
|
(100+
|
)
|
Trading Derivative instruments used to offset
changes in value of MSRs
|
|
|
219
|
|
|
|
(4
|
)
|
|
|
223
|
|
|
|
100+
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total servicing related income
|
|
|
123
|
|
|
|
69
|
|
|
|
54
|
|
|
|
78.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originations and sales related income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains on sales of residential mortgages
|
|
|
28
|
|
|
|
95
|
|
|
|
(67
|
)
|
|
|
(70.5
|
)
|
Provision for repurchase obligations
|
|
|
(285
|
)
|
|
|
(42
|
)
|
|
|
(243
|
)
|
|
|
(100+
|
)
|
Trading and hedging activity
|
|
|
6
|
|
|
|
3
|
|
|
|
3
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originations and sales related income (loss)
|
|
|
(251
|
)
|
|
|
56
|
|
|
|
(307
|
)
|
|
|
(100+
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other mortgage income
|
|
|
22
|
|
|
|
14
|
|
|
|
8
|
|
|
|
57.1
|
|
Total residential mortgage banking revenue included in other
revenues
|
|
|
(106
|
)
|
|
|
139
|
|
|
|
(245
|
)
|
|
|
(100+
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential mortgage banking related revenue
|
|
$
|
58
|
|
|
$
|
329
|
|
|
$
|
(271
|
)
|
|
|
(82.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $494 million of prime adjustable and fixed
rate residential mortgages since September 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
increased cash flows and 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.
Higher gains from normal loan sales (excluding held mortgage
asset sales) were more than offset by higher estimates of
exposure on repurchase obligations associated with previously
sold loans. In addition, we recorded gains of $67 million
in the nine months ended September 30, 2009 related to held
mortgage asset sales. There were no held mortgage asset sales in
the first nine months of 2010. During the three and nine months
ended September 30, 2010, we recorded expense of
$95 million and $285 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 11, Fair Value Option, in the
accompanying consolidated financial statements for additional
information, including a breakout of these amounts by individual
component.
100
HSBC USA Inc.
Valuation on Loans Held for Sale Valuation adjustments on
loans held for sale improved during the three and nine months
ended September 30, 2010, as there has been reduced
volatility in the U.S. residential mortgage market driven
by stabilization of home prices in the U.S. since
September 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
$410 million and $757 million as of September 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 nine months ended
September 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 nine months ended September 30, 2010 due
largely to higher miscellaneous income due to improved
performance related to credit derivatives used to economically
hedge certain commercial loans and a $9 million gain on the
sale of auto finance loans to SC USA, partially offset by a
$12 million lower of cost or fair value adjustment on the
assets of our Asian Banknotes Operations which was classified as
held for sale in the third quarter of 2010. For the nine months
ended September 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 nine months ended September 30, 2010 other income
(loss) 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.
101
HSBC USA Inc.
Operating Expenses The components of operating
expenses are summarized in the following tables.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Three Months Ended September 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Salaries and employee benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
|
|
$
|
156
|
|
|
$
|
156
|
|
|
$
|
-
|
|
|
|
-
|
%
|
Employee benefits
|
|
|
127
|
|
|
|
124
|
|
|
|
3
|
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total salaries and employee benefits
|
|
|
283
|
|
|
|
280
|
|
|
|
3
|
|
|
|
1.1
|
|
Occupancy expense, net
|
|
|
66
|
|
|
|
60
|
|
|
|
6
|
|
|
|
10.0
|
|
Support services from HSBC affiliates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees paid to HSBC Finance for loan servicing and other
administrative support
|
|
|
164
|
|
|
|
175
|
|
|
|
(11
|
)
|
|
|
(6.3
|
)
|
Fees paid to HMUS
|
|
|
74
|
|
|
|
50
|
|
|
|
24
|
|
|
|
48.0
|
|
Fees paid to HTSU
|
|
|
195
|
|
|
|
106
|
|
|
|
89
|
|
|
|
84.0
|
|
Fees paid to other HSBC affiliates
|
|
|
46
|
|
|
|
55
|
|
|
|
(9
|
)
|
|
|
(16.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total support services from HSBC affiliates
|
|
|
479
|
|
|
|
386
|
|
|
|
93
|
|
|
|
24.1
|
|
Other expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment and software
|
|
|
12
|
|
|
|
11
|
|
|
|
1
|
|
|
|
9.1
|
|
Marketing
|
|
|
28
|
|
|
|
28
|
|
|
|
-
|
|
|
|
-
|
|
Outside services
|
|
|
46
|
|
|
|
26
|
|
|
|
20
|
|
|
|
76.9
|
|
Professional fees
|
|
|
20
|
|
|
|
21
|
|
|
|
(1
|
)
|
|
|
(4.8
|
)
|
Telecommunications
|
|
|
3
|
|
|
|
4
|
|
|
|
(1
|
)
|
|
|
(25.0
|
)
|
Postage, printing and office supplies
|
|
|
4
|
|
|
|
3
|
|
|
|
1
|
|
|
|
33.3
|
|
Off-balance sheet credit reserves
|
|
|
(17
|
)
|
|
|
1
|
|
|
|
(18
|
)
|
|
|
(100+
|
)
|
FDIC assessment fee
|
|
|
34
|
|
|
|
26
|
|
|
|
8
|
|
|
|
30.8
|
|
Insurance business
|
|
|
1
|
|
|
|
5
|
|
|
|
(4
|
)
|
|
|
(80.0
|
)
|
Miscellaneous
|
|
|
63
|
|
|
|
68
|
|
|
|
(5
|
)
|
|
|
(7.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
194
|
|
|
|
193
|
|
|
|
1
|
|
|
|
.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
1,022
|
|
|
$
|
919
|
|
|
$
|
103
|
|
|
|
11.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel average number
|
|
|
10,014
|
|
|
|
9,557
|
|
|
|
|
|
|
|
|
|
Efficiency ratio
|
|
|
53.60
|
%
|
|
|
42.64
|
%
|
|
|
|
|
|
|
|
|
102
HSBC USA Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Nine Months Ended September 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Salaries and employee benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
|
|
$
|
440
|
|
|
$
|
464
|
|
|
$
|
(24
|
)
|
|
|
(5.2
|
)%
|
Employee benefits
|
|
|
390
|
|
|
|
409
|
|
|
|
(19
|
)
|
|
|
(4.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total salaries and employee benefits
|
|
|
830
|
|
|
|
873
|
|
|
|
(43
|
)
|
|
|
(4.9
|
)
|
Occupancy expense, net
|
|
|
202
|
|
|
|
211
|
|
|
|
(9
|
)
|
|
|
(4.3
|
)
|
Support services from HSBC affiliates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees paid to HSBC Finance for loan servicing and other
administrative support
|
|
|
553
|
|
|
|
548
|
|
|
|
5
|
|
|
|
.9
|
|
Fees paid to HMUS
|
|
|
218
|
|
|
|
187
|
|
|
|
31
|
|
|
|
16.6
|
|
Fees paid to HTSU
|
|
|
558
|
|
|
|
353
|
|
|
|
205
|
|
|
|
58.1
|
|
Fees paid to other HSBC affiliates
|
|
|
126
|
|
|
|
140
|
|
|
|
(14
|
)
|
|
|
(10.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total support services from HSBC affiliates
|
|
|
1,455
|
|
|
|
1,228
|
|
|
|
227
|
|
|
|
18.5
|
|
Other expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment and software
|
|
|
34
|
|
|
|
31
|
|
|
|
3
|
|
|
|
9.7
|
|
Marketing
|
|
|
81
|
|
|
|
95
|
|
|
|
(14
|
)
|
|
|
(14.7
|
)
|
Outside services
|
|
|
100
|
|
|
|
70
|
|
|
|
30
|
|
|
|
42.9
|
|
Professional fees
|
|
|
49
|
|
|
|
54
|
|
|
|
(5
|
)
|
|
|
(9.3
|
)
|
Telecommunications
|
|
|
10
|
|
|
|
12
|
|
|
|
(2
|
)
|
|
|
(16.7
|
)
|
Postage, printing and office supplies
|
|
|
11
|
|
|
|
11
|
|
|
|
-
|
|
|
|
-
|
|
Off-balance sheet credit reserves
|
|
|
(29
|
)
|
|
|
(1
|
)
|
|
|
(28
|
)
|
|
|
(100+
|
)
|
FDIC assessment fee
|
|
|
103
|
|
|
|
177
|
|
|
|
(74
|
)
|
|
|
(41.8
|
)
|
Insurance business
|
|
|
(2
|
)
|
|
|
48
|
|
|
|
(50
|
)
|
|
|
(100+
|
)
|
Miscellaneous
|
|
|
237
|
|
|
|
171
|
|
|
|
66
|
|
|
|
38.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
594
|
|
|
|
668
|
|
|
|
(74
|
)
|
|
|
(11.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
3,081
|
|
|
$
|
2,980
|
|
|
$
|
101
|
|
|
|
3.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel average number
|
|
|
9,394
|
|
|
|
9,734
|
|
|
|
|
|
|
|
|
|
Efficiency ratio
|
|
|
51.95
|
%
|
|
|
48.80
|
%
|
|
|
|
|
|
|
|
|
Salaries and Employee Benefits Salaries and employee
benefits expense increased during the three month period due to
the transfer of certain employees from HSBC Finance to the
default mortgage loan servicing department of a subsidiary of
HSBC Bank USA in July 2010, partially offset by lower expense
due to the transfer of additional support services employees to
HTSU, as described below. In the nine month period, salaries and
employee benefits expense was lower as the transfer of
additional support services employees to HTSU more than offset
the increase associated with the transfer of certain employees
from HSBC Finance to the default mortgage loan servicing
department as discussed above as well as exit costs associated
with the closure of our banknotes business.
Occupancy Expense, Net Occupancy expense in the prior
year-to-date
period reflects a $20 million impairment of a data center
building held for use. Excluding the impact of this impairment,
occupancy expense increased in both periods due largely to the
expansion of the core banking network within the PFS segment and
in the nine month period, $8 million in lease abandonment
costs associated with the closure of several non-strategic
branches recorded during the first quarter of 2010, partially
offset by the transfer of additional shared services employees
and their related workspace expenses to an affiliate earlier in
the year, as discussed below. Subsequent to September 30,
2009,
103
HSBC USA Inc.
we opened 12 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, 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 $0 million and
$58 million during the three and nine months ended
September 30, 2010. These increases were partially offset
by lower levels of receivables being serviced.
Marketing Expenses Lower marketing and promotional
expenses during the nine months ended September 30, 2010
reflects 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. During the three months ended
September 30, 2010, marketing expenses were flat.
Other Expenses Other expenses (excluding marketing
expenses) increased during the three month period but decreased
in the
year-to-date
period. During the three months ended September 30, 2010,
higher other expenses reflect higher miscellaneous expenses
including higher legal costs, higher collection agency costs and
higher outside services costs, partially offset by improved
estimates of off-balance sheet exposure. Other expenses
decreased in the
year-to-date
period as the factors above were more than offset by lower FDIC
assessment fees as the year-ago period included an
$82 million special assessment recorded in the second
quarter of 2009.
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
53.60 percent and 51.95 percent for the three and nine
months ended September 30, 2010 compared to
42.64 percent and 48.80 percent in the year-ago
periods. The deterioration in both periods reflects higher
operating expenses while the total of net interest income and
other revenues declined.
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 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 16, 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 five new branches 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
104
HSBC USA Inc.
deposits in the third quarter of 2010 increased approximately
4.8 percent compared to the level experienced in the third
quarter of 2009. Premier customers increased to 461,600 at
September 30, 2010, a 30 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.
We continue to sell the majority of new residential mortgage
loan originations to government sponsored enterprises.
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. For the nine months ended September 30, 2009, we
sold approximately $4.0 billion of prime adjustable and
fixed rate residential mortgage loans to third parties. No such
sales occurred during the first nine months of 2010. 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 third quarter of 2010,
decreasing approximately 11 percent as compared to average
residential mortgage loans outstanding during the third quarter
of 2009.
The following table summarizes the IFRSs Basis results for our
PFS segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Three Months Ended September 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
252
|
|
|
$
|
238
|
|
|
$
|
14
|
|
|
|
5.9
|
%
|
Other operating income
|
|
|
67
|
|
|
|
88
|
|
|
|
(21
|
)
|
|
|
(23.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
319
|
|
|
|
326
|
|
|
|
(7
|
)
|
|
|
(2.1
|
)
|
Loan impairment charges
|
|
|
(21
|
)
|
|
|
178
|
|
|
|
(199
|
)
|
|
|
(100+
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
340
|
|
|
|
148
|
|
|
|
192
|
|
|
|
100+
|
|
Operating expenses
|
|
|
341
|
|
|
|
306
|
|
|
|
35
|
|
|
|
11.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax
|
|
$
|
(1
|
)
|
|
$
|
(158
|
)
|
|
$
|
157
|
|
|
|
99.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Nine Months Ended September 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
730
|
|
|
$
|
665
|
|
|
$
|
65
|
|
|
|
9.8
|
%
|
Other operating income
|
|
|
132
|
|
|
|
171
|
|
|
|
(39
|
)
|
|
|
(22.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
862
|
|
|
|
836
|
|
|
|
26
|
|
|
|
3.1
|
|
Loan impairment charges
|
|
|
6
|
|
|
|
550
|
|
|
|
(544
|
)
|
|
|
(98.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
856
|
|
|
|
286
|
|
|
|
570
|
|
|
|
100+
|
|
Operating expenses
|
|
|
929
|
|
|
|
936
|
|
|
|
(7
|
)
|
|
|
(.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax
|
|
$
|
(73
|
)
|
|
$
|
(650
|
)
|
|
$
|
577
|
|
|
|
88.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our PFS segment reported a loss before tax during the three and
nine months ended September 30, 2010 which was lower than
the losses before tax during the year-ago periods. The
improvement in both periods was driven primarily by lower loan
impairment charges as well as higher net interest income which
was partially offset by lower other operating income and in the
three month period, higher operating expenses.
Net interest income increased during both periods, 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 $494 million since
September 30, 2009.
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
105
HSBC USA Inc.
$95 million and $285 million during the three and nine
months ended September 30, 2010. In addition, changes to
Regulation E implemented on July 1, 2010 reduced
deposit fee income by almost $9 million in both periods.
Other operating income in the prior year to date period includes
intersegment charges from the Global Banking and Markets segment
of $163 million relating to costs associated with early
termination of the funding associated with residential mortgage
loan sales in 2009. This was partially offset by net gains on
the sales of these residential mortgage loans in 2009 of
$70 million.
Loan impairment charges declined in the three and nine months
ended September 30, 2010, driven largely by stabilization
in residential mortgage loan credit quality as dollars of
delinquency and loss severities in the first nine months of 2010
have moderated which, along with lower loan balances, has led to
an improvement in our future loss estimates.
Operating expenses increased in the third quarter of 2010 driven
by higher costs from shared services and from the expansion of
our branch network. Operating expenses declined in the
year-to-date
period as the higher costs described above were more than offset
by lower FDIC assessment fees largely driven by the special
assessment in the second quarter of 2009. In addition, there was
a $48 million pension curtailment gain recorded in the
first quarter of 2010 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. There was
also 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 certain auto finance
loans which were sold to SC USA in August 2010 as well as
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 September 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
430
|
|
|
$
|
539
|
|
|
$
|
(109
|
)
|
|
|
(20.2
|
)%
|
Other operating income
|
|
|
97
|
|
|
|
98
|
|
|
|
(1
|
)
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
527
|
|
|
|
637
|
|
|
|
(110
|
)
|
|
|
(17.3
|
)
|
Loan impairment charges
|
|
|
221
|
|
|
|
437
|
|
|
|
(216
|
)
|
|
|
(49.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
306
|
|
|
|
200
|
|
|
|
106
|
|
|
|
53.0
|
|
Operating expenses
|
|
|
58
|
|
|
|
18
|
|
|
|
40
|
|
|
|
100+
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax
|
|
$
|
248
|
|
|
$
|
182
|
|
|
$
|
66
|
|
|
|
36.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
Nine Months Ended September 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
1,437
|
|
|
$
|
1,588
|
|
|
$
|
(151
|
)
|
|
|
(9.5
|
)%
|
Other operating income
|
|
|
150
|
|
|
|
263
|
|
|
|
(113
|
)
|
|
|
(43.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
1,587
|
|
|
|
1,851
|
|
|
|
(264
|
)
|
|
|
(14.3
|
)
|
Loan impairment charges
|
|
|
786
|
|
|
|
1,468
|
|
|
|
(682
|
)
|
|
|
(46.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
801
|
|
|
|
383
|
|
|
|
418
|
|
|
|
100+
|
|
Operating expenses
|
|
|
113
|
|
|
|
69
|
|
|
|
44
|
|
|
|
63.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax
|
|
$
|
688
|
|
|
$
|
314
|
|
|
$
|
374
|
|
|
|
100+
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106
HSBC USA Inc.
Our CF segment reported a higher profit before tax during the
three and nine months ended September 30, 2010 largely due
to lower loan impairment charges which was partially offset by
lower net interest income, higher operating expenses and lower
other operating 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 premiums 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 in the
year-to-date
period, 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, lower
delinquency levels, the impact of the new credit card
legislation, higher charge-off of credit card fees on the GM and
UP portfolios due to the runoff of purchase accounting as
discussed above and, in the
year-to-date
period, higher revenue share payments. 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 including the transfer of the servicing of the auto
finance loans in March 2010 to SC USA and a $49 million gain in
August 2010 on the sale of the auto finance loans to SC USA.
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 increased in both periods due to higher
collection costs on bad debt accounts which were previously
reported in loan impairment charges, higher fraud expenses and
increased servicing costs associated with the transfer of the
servicing associated with our auto finance portfolio from HSBC
Finance to SC USA. In the
year-to-date
period, this increase was partially offset by the impact of
higher FDIC assessment fees in the prior year period due to a
special FDIC assessment during the second quarter of 2009.
As discussed in previous filings, on May 22, 2009, the CARD
Act was signed into law. We have implemented all provisions of
the CARD Act. 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.
107
HSBC USA Inc.
In the three and nine months ended September 30, 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
4 percent decrease in loans outstanding to middle-market
customers at September 30, 2010 as compared to a year-ago.
The business banking loan portfolio has seen a 7 percent
decrease in loans outstanding since September 30, 2009
resulting from an increase in paydowns and a decline in the
demand for new credit facilities, while business banking
customer deposits at September 30, 2010 grew 1 percent
compared to September 2009 levels. The commercial real estate
business continues to focus on deal quality and portfolio
management rather than volume, which resulted in a
6 percent decline in outstanding receivables for this
portfolio since September 30, 2009. Average customer
deposit balances across all CMB business lines during the nine
months ended September 30, 2010 increased 7 percent as
compared to the year-ago period and average loans during the
nine months ended September 30, 2010 decreased
13 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 September 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
172
|
|
|
$
|
184
|
|
|
$
|
(12
|
)
|
|
|
(6.5
|
)%
|
Other operating income
|
|
|
111
|
|
|
|
92
|
|
|
|
19
|
|
|
|
20.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
283
|
|
|
|
276
|
|
|
|
7
|
|
|
|
2.5
|
|
Loan impairment charges
|
|
|
50
|
|
|
|
51
|
|
|
|
(1
|
)
|
|
|
(2.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
233
|
|
|
|
225
|
|
|
|
8
|
|
|
|
3.6
|
|
Operating expenses
|
|
|
178
|
|
|
|
159
|
|
|
|
19
|
|
|
|
11.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax
|
|
$
|
55
|
|
|
$
|
66
|
|
|
$
|
(11
|
)
|
|
|
(16.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
Nine Months Ended September 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
535
|
|
|
$
|
540
|
|
|
$
|
(5
|
)
|
|
|
(.9
|
)%
|
Other operating income
|
|
|
362
|
|
|
|
255
|
|
|
|
107
|
|
|
|
42.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
897
|
|
|
|
795
|
|
|
|
102
|
|
|
|
12.8
|
|
Loan impairment charges
|
|
|
98
|
|
|
|
222
|
|
|
|
(124
|
)
|
|
|
(55.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
799
|
|
|
|
573
|
|
|
|
226
|
|
|
|
39.4
|
|
Operating expenses
|
|
|
499
|
|
|
|
471
|
|
|
|
28
|
|
|
|
5.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax
|
|
$
|
300
|
|
|
$
|
102
|
|
|
$
|
198
|
|
|
|
100+
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our CMB segment reported a lower profit before tax during the
three months ended September 30, 2010 as higher operating
expenses and lower net interest income were partially offset by
higher other operating income. For the nine months ended
September 30, 2010, profit before tax was higher as higher
other operating income and lower loan impairment charges were
partially offset by lower net interest income and higher
operating expenses.
Net interest income decreased in both periods as lower loan
balances offset growth in deposit balances and improved loan
spreads from re-pricing activities in late 2009.
108
HSBC USA Inc.
Other operating income increased during both periods reflecting
higher income on our low income housing investments. The
increase in the nine months ended September 30, 2010 also
reflects a $66 million gain on the sale of our equity
investment in WHTB.
Loan impairment charges were flat during the three month period
due to a specific provision on a single commercial real estate
lending relationship. Excluding this item, loan impairment
charges improved in both periods as economic conditions improved
and credit quality began to stabilize resulting in improvements
in the financial circumstances of several customer relationships
which led to credit upgrades on certain problem credits 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, higher retail network expenses
and higher performance related compensation costs, which were
partially offset in the
year-to-date
period by lower FDIC assessment fees due to a special FDIC
assessment recorded during the second quarter of 2009. The
increase during the nine months ended September 30, 2010
was also 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 and security 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 third
quarter and first nine months 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
September 30, 2010 and 2009 would have been higher by
$94 million and $378 million, respectively, and our
profit before tax for the nine months ended September 30,
2010 and 2009 would have been higher by $62 million and
$616 million, respectively.
109
HSBC USA Inc.
The following table summarizes IFRSs Basis results for the
Global Banking and Markets segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Three Months Ended September 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
186
|
|
|
$
|
201
|
|
|
$
|
(15
|
)
|
|
|
(7.5
|
)%
|
Other operating income
|
|
|
186
|
|
|
|
91
|
|
|
|
95
|
|
|
|
100+
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
372
|
|
|
|
292
|
|
|
|
80
|
|
|
|
27.4
|
|
Loan impairment charges
|
|
|
(45
|
)
|
|
|
163
|
|
|
|
(208
|
)
|
|
|
(100+
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
417
|
|
|
|
129
|
|
|
|
288
|
|
|
|
100+
|
|
Operating expenses
|
|
|
217
|
|
|
|
180
|
|
|
|
37
|
|
|
|
20.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax
|
|
$
|
200
|
|
|
$
|
(51
|
)
|
|
$
|
251
|
|
|
|
100+
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Nine Months Ended September 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
471
|
|
|
$
|
655
|
|
|
$
|
(184
|
)
|
|
|
(28.1
|
)%
|
Other operating income
|
|
|
927
|
|
|
|
600
|
|
|
|
327
|
|
|
|
54.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
1,398
|
|
|
|
1,255
|
|
|
|
143
|
|
|
|
11.4
|
|
Loan impairment charges
|
|
|
(193
|
)
|
|
|
589
|
|
|
|
(782
|
)
|
|
|
(100+
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,591
|
|
|
|
666
|
|
|
|
925
|
|
|
|
100+
|
|
Operating expenses
|
|
|
624
|
|
|
|
615
|
|
|
|
9
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax
|
|
$
|
967
|
|
|
$
|
51
|
|
|
$
|
916
|
|
|
|
100+
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our Global Banking and Markets segment performance continued to
improve during the three and nine months ended
September 30, 2010 due primarily to higher other operating
income and lower loan impairment charges, partially offset by
lower net interest income and higher operating expenses.
Net interest income decreased during 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,
sub-prime
mortgage loans held for sale, precious metals trading and higher
fees in transaction banking. Partially offsetting these
improvements in both periods were reductions in foreign exchange
trading as well as banknotes which incurred a lower of cost or
fair value adjustment of $7 million relating to the
reclassification of the Asian portion of this business as held
for sale and, in the
year-to-date
period, lower intersegment income.
Other operating income reflects gains on structured credit
products of $36 million and $90 million during the
three and nine months ended September 30, 2010,
respectively, as compared to gains of $35 million and
losses of $286 million during the year-ago periods, as the
credit markets stabilized beginning in the second half of 2009,
resulting in fewer losses from hedging activity and counterparty
exposures. Exposure to insurance monolines continued to impact
revenues but deterioration abated in 2010, resulting in gains of
$89 million during the nine months ended September 30,
2010, compared to losses of $104 million during the
year-ago periods.
Valuation losses of $9 million and $50 million during
the three and nine months ended September 30, 2010,
respectively, were recorded against the fair values of
sub-prime
residential mortgage loans held for sale as compared to
valuation losses of $28 million and $182 million
during the year-ago periods. Other operating income for the nine
months ended September 30, 2010 includes a gain of
$89 million associated with a settlement relating to
certain loans previously purchased for resale from a third
party. During the nine months ended September 30, 2009,
110
HSBC USA Inc.
other operating income includes intersegment income of
$163 million from PFS charged for the early termination of
funding.
Loan impairment charges decreased in both periods due to
reductions in higher risk rated loan balances and stabilization
of credit downgrades which has led to an overall release in loss
reserves in both periods. In addition, during the three and nine
months ended September 30, 2009, impairments included a
charge of $57 million and $374 million, respectively,
on securities determined to be
other-than-temporarily
impaired compared to no similar impairments in the current year.
Operating expenses increased in both periods largely due to
higher performance related compensation costs and, in the nine
month period, closure costs relating to the banknotes business
which was partially offset in the same period by lower FDIC
assessment fees as the year-ago
year-to-date
period included a special FDIC assessment recorded in the second
quarter of 2009. Additionally, expenses in the nine months ended
September 30, 2010 were also partially offset by a
$7 million pension curtailment gain.
Private Banking (PB) As part of
HSBCs global network, the PB segment offers integrated
domestic and international services to high net worth
individuals, 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, investment advice
including discretionary portfolio management, banking and cash
management, residential mortgages, as well as wealth planning
for trusts and estates.
Average client deposit levels increased 7 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 early 2010. Total average loans
(mostly domestic) in the third quarter of 2010 decreased
5 percent compared to the prior year quarter from runoff
and reductions of commercial loan borrowings partially offset by
growth in the tailored mortgage product. Overall client assets
increased 1 percent compared to the prior year quarter to
$34 billion at September 30, 2010, with net growth in
both discretionary and non-discretionary assets.
The following table summarizes IFRSs Basis results for the PB
segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Three Months Ended September 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
47
|
|
|
$
|
41
|
|
|
$
|
6
|
|
|
|
14.6
|
%
|
Other operating income
|
|
|
34
|
|
|
|
23
|
|
|
|
11
|
|
|
|
47.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
81
|
|
|
|
64
|
|
|
|
17
|
|
|
|
26.6
|
|
Loan impairment charges
|
|
|
(13
|
)
|
|
|
86
|
|
|
|
(99
|
)
|
|
|
(100+
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94
|
|
|
|
(22
|
)
|
|
|
116
|
|
|
|
100+
|
|
Operating expenses
|
|
|
63
|
|
|
|
58
|
|
|
|
5
|
|
|
|
8.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax
|
|
$
|
31
|
|
|
$
|
(80
|
)
|
|
$
|
111
|
|
|
|
100+
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111
HSBC USA Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Nine Months Ended September 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
139
|
|
|
$
|
129
|
|
|
$
|
10
|
|
|
|
7.8
|
%
|
Other operating income
|
|
|
103
|
|
|
|
85
|
|
|
|
18
|
|
|
|
21.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
242
|
|
|
|
214
|
|
|
|
28
|
|
|
|
13.1
|
|
Loan impairment charges
|
|
|
(24
|
)
|
|
|
90
|
|
|
|
(114
|
)
|
|
|
(100+
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
266
|
|
|
|
124
|
|
|
|
142
|
|
|
|
100+
|
|
Operating expenses
|
|
|
180
|
|
|
|
180
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax
|
|
$
|
86
|
|
|
$
|
(56
|
)
|
|
$
|
142
|
|
|
|
100+
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our PB segment reported a higher profit before tax for the three
and nine months ended September 30, 2010 due primarily to
lower loan impairment charges, higher net interest income and
other operating income, partially offset in the three month
period by higher operating expenses.
Net interest income increased in both periods 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 exposures, reductions in
loans outstanding and improvements in client credit ratings. In
addition the prior year periods included a specific provision
relating to a single client relationship.
Operating expenses increased during the three months ended
September 30, 2010 but remained flat during the
year-to-date
period as higher technology costs and higher performance related
pay in both periods was offset in the
year-to-date
period by lower FDIC assessment fees due to a special FDIC
assessment recorded during the second quarter of 2009.
Additionally, operating expense for the nine months ended
September 30, 2010 reflect 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 for the nine month period in 2010 includes a gain
on the sale of our 452 Fifth Avenue property in New York
City, including the 1 W. 39th Street building.
Results for the nine months ended September 30, 2010 and
2009 also include the impact of the resolution of a lawsuit as
discussed below and for the nine months ended September 30,
2009 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 September 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
(1
|
)
|
|
$
|
(6
|
)
|
|
$
|
5
|
|
|
|
83.3
|
%
|
Other operating income
|
|
|
40
|
|
|
|
(63
|
)
|
|
|
103
|
|
|
|
100+
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
39
|
|
|
|
(69
|
)
|
|
|
108
|
|
|
|
100+
|
|
Loan impairment charges
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
|
|
|
|
(69
|
)
|
|
|
108
|
|
|
|
100+
|
|
Operating expenses
|
|
|
18
|
|
|
|
13
|
|
|
|
5
|
|
|
|
38.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax
|
|
$
|
21
|
|
|
$
|
(82
|
)
|
|
$
|
103
|
|
|
|
100+
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112
HSBC USA Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Nine Months Ended September 30,
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
(9
|
)
|
|
$
|
(6
|
)
|
|
$
|
(3
|
)
|
|
|
(50.0
|
)%
|
Other operating income
|
|
|
267
|
|
|
|
(406
|
)
|
|
|
673
|
|
|
|
100+
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
258
|
|
|
|
(412
|
)
|
|
|
670
|
|
|
|
100+
|
|
Loan impairment charges
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
(100.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
259
|
|
|
|
(412
|
)
|
|
|
671
|
|
|
|
100+
|
|
Operating expenses
|
|
|
47
|
|
|
|
65
|
|
|
|
(18
|
)
|
|
|
(27.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax
|
|
$
|
212
|
|
|
$
|
(477
|
)
|
|
$
|
689
|
|
|
|
100+
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating income in both periods was impacted by credit
and interest rate related 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 $34 million
and $231 million for the three and nine months ended
September 30, 2010, respectively, compared to losses of
$63 million and $488 million in the year-ago periods.
Other operating income in the nine months ended
September 30, 2010 and 2009 includes net gains of
$3 million and $30 million, respectively, 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 nine months ended September 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 nine
months ended September 30, 2009, includes a
$43 million gain on the sale of the equity investment
referred to above.
Credit
Quality
We enter into a variety of transactions in the normal course of
business that involve both on and off-balance sheet credit risk.
Principal among these activities is lending to various
commercial, institutional, governmental and individual
customers. We participate in lending activity throughout the
U.S. and, 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.
113
HSBC USA Inc.
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 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 nine months of 2010, although we continue to monitor
current market conditions and will adjust credit policies as
deemed necessary.
114
HSBC USA Inc.
The following table sets forth the allowance for credit losses
for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Allowance for credit losses
|
|
$
|
2,512
|
|
|
$
|
2,950
|
|
|
$
|
3,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of Allowance for credit losses to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
2.14
|
%
|
|
|
2.37
|
%
|
|
|
3.10
|
%
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages, excluding home equity mortgages
|
|
|
1.29
|
|
|
|
1.80
|
|
|
|
2.53
|
|
Home equity mortgages
|
|
|
2.06
|
|
|
|
2.62
|
|
|
|
4.44
|
|
Private label card receivables
|
|
|
6.86
|
|
|
|
7.43
|
|
|
|
7.85
|
|
Credit card receivables
|
|
|
6.65
|
|
|
|
7.81
|
|
|
|
8.48
|
|
Auto finance
|
|
|
-
|
|
|
|
2.58
|
|
|
|
2.12
|
|
Other consumer loans
|
|
|
2.80
|
|
|
|
3.26
|
|
|
|
4.46
|
|
Total consumer loans
|
|
|
4.43
|
|
|
|
5.10
|
|
|
|
5.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3.48
|
%
|
|
|
4.00
|
%
|
|
|
4.86
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
charge-offs(1)(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
254.33
|
%
|
|
|
220.19
|
%
|
|
|
211.26
|
%
|
Consumer
|
|
|
80.26
|
|
|
|
85.73
|
|
|
|
92.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
97.40
|
%
|
|
|
100.20
|
%
|
|
|
107.55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming
loans(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
58.66
|
%
|
|
|
70.41
|
%
|
|
|
65.44
|
%
|
Consumer
|
|
|
112.65
|
|
|
|
128.01
|
|
|
|
150.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
91.09
|
%
|
|
|
107.25
|
%
|
|
|
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.
|
115
HSBC USA Inc.
Changes in the allowance for credit losses by general loan
categories for the three and nine months ended
September 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 September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at beginning of period
|
|
$
|
698
|
|
|
$
|
244
|
|
|
$
|
104
|
|
|
$
|
947
|
|
|
$
|
881
|
|
|
$
|
33
|
|
|
$
|
43
|
|
|
$
|
2,950
|
|
Provision for credit losses
|
|
|
12
|
|
|
|
(23
|
)
|
|
|
8
|
|
|
|
134
|
|
|
|
108
|
|
|
|
-
|
|
|
|
6
|
|
|
|
245
|
|
Charge-offs
|
|
|
(69
|
)
|
|
|
(46
|
)
|
|
|
(32
|
)
|
|
|
(269
|
)
|
|
|
(298
|
)
|
|
|
-
|
|
|
|
(15
|
)
|
|
|
(729
|
)
|
Recoveries
|
|
|
5
|
|
|
|
1
|
|
|
|
-
|
|
|
|
43
|
|
|
|
28
|
|
|
|
-
|
|
|
|
2
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(64
|
)
|
|
|
(45
|
)
|
|
|
(32
|
)
|
|
|
(226
|
)
|
|
|
(270
|
)
|
|
|
-
|
|
|
|
(13
|
)
|
|
|
(650
|
)
|
Allowance on loans transferred to held for sale
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(33
|
)
|
|
|
-
|
|
|
|
(33
|
)
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
646
|
|
|
$
|
176
|
|
|
$
|
80
|
|
|
$
|
855
|
|
|
$
|
719
|
|
|
$
|
-
|
|
|
$
|
36
|
|
|
$
|
2,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at beginning of period
|
|
$
|
759
|
|
|
$
|
357
|
|
|
$
|
176
|
|
|
$
|
1,238
|
|
|
$
|
1,092
|
|
|
$
|
51
|
|
|
$
|
67
|
|
|
$
|
3,740
|
|
Provision for credit losses
|
|
|
246
|
|
|
|
92
|
|
|
|
79
|
|
|
|
272
|
|
|
|
275
|
|
|
|
20
|
|
|
|
22
|
|
|
|
1,006
|
|
Charge-offs
|
|
|
(63
|
)
|
|
|
(55
|
)
|
|
|
(61
|
)
|
|
|
(354
|
)
|
|
|
(363
|
)
|
|
|
(30
|
)
|
|
|
(28
|
)
|
|
|
(954
|
)
|
Recoveries
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
41
|
|
|
|
20
|
|
|
|
6
|
|
|
|
8
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(60
|
)
|
|
|
(55
|
)
|
|
|
(61
|
)
|
|
|
(313
|
)
|
|
|
(343
|
)
|
|
|
(24
|
)
|
|
|
(20
|
)
|
|
|
(876
|
)
|
Allowance on loans transferred to held for sale
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
(4
|
)
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
945
|
|
|
$
|
394
|
|
|
$
|
194
|
|
|
$
|
1,197
|
|
|
$
|
1,025
|
|
|
$
|
43
|
|
|
$
|
69
|
|
|
$
|
3,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at beginning of period
|
|
$
|
938
|
|
|
$
|
347
|
|
|
$
|
185
|
|
|
$
|
1,184
|
|
|
$
|
1,106
|
|
|
$
|
36
|
|
|
$
|
65
|
|
|
$
|
3,861
|
|
Provision for credit losses
|
|
|
(52
|
)
|
|
|
(32
|
)
|
|
|
(7
|
)
|
|
|
441
|
|
|
|
513
|
|
|
|
35
|
|
|
|
14
|
|
|
|
912
|
|
Charge-offs
|
|
|
(268
|
)
|
|
|
(141
|
)
|
|
|
(98
|
)
|
|
|
(893
|
)
|
|
|
(989
|
)
|
|
|
(37
|
)
|
|
|
(53
|
)
|
|
|
(2,479
|
)
|
Recoveries
|
|
|
26
|
|
|
|
2
|
|
|
|
-
|
|
|
|
123
|
|
|
|
83
|
|
|
|
(1
|
)
|
|
|
10
|
|
|
|
243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(242
|
)
|
|
|
(139
|
)
|
|
|
(98
|
)
|
|
|
(770
|
)
|
|
|
(906
|
)
|
|
|
(38
|
)
|
|
|
(43
|
)
|
|
|
(2,236
|
)
|
Allowance on loans transferred to held for sale
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(33
|
)
|
|
|
-
|
|
|
|
(33
|
)
|
Other
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
646
|
|
|
$
|
176
|
|
|
$
|
80
|
|
|
$
|
855
|
|
|
$
|
719
|
|
|
$
|
-
|
|
|
$
|
36
|
|
|
$
|
2,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at beginning of period
|
|
$
|
572
|
|
|
$
|
207
|
|
|
$
|
167
|
|
|
$
|
1,171
|
|
|
$
|
208
|
|
|
$
|
5
|
|
|
$
|
67
|
|
|
$
|
2,397
|
|
Provision for credit losses
|
|
|
560
|
|
|
|
351
|
|
|
|
166
|
|
|
|
981
|
|
|
|
1,034
|
|
|
|
85
|
|
|
|
70
|
|
|
|
3,247
|
|
Charge-offs
|
|
|
(206
|
)
|
|
|
(175
|
)
|
|
|
(151
|
)
|
|
|
(1,079
|
)
|
|
|
(678
|
)
|
|
|
(61
|
)
|
|
|
(83
|
)
|
|
|
(2,433
|
)
|
Recoveries
|
|
|
19
|
|
|
|
11
|
|
|
|
12
|
|
|
|
124
|
|
|
|
36
|
|
|
|
13
|
|
|
|
15
|
|
|
|
230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(187
|
)
|
|
|
(164
|
)
|
|
|
(139
|
)
|
|
|
(955
|
)
|
|
|
(642
|
)
|
|
|
(48
|
)
|
|
|
(68
|
)
|
|
|
(2,203
|
)
|
Allowance on loans transferred to held for sale
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(12
|
)
|
|
|
-
|
|
|
|
(12
|
)
|
Allowance related to bulk loan purchases from HSBC Finance
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
424
|
|
|
|
13
|
|
|
|
-
|
|
|
|
437
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
945
|
|
|
$
|
394
|
|
|
$
|
194
|
|
|
$
|
1,197
|
|
|
$
|
1,025
|
|
|
$
|
43
|
|
|
$
|
69
|
|
|
$
|
3,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The allowance for credit losses at September 30, 2010
decreased $438 million, or 14.9 percent, as compared
to June 30, 2010 and $1,349 million, or
34.9 percent, as compared to December 31, 2009
reflecting lower loss estimates on our private label credit
card, credit card, residential mortgage and commercial 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
116
HSBC USA Inc.
and home equity line of credit (HELOC) and home
equity loan portfolios reflects lower receivable levels and
dollars of delinquency, moderation in loss severities and, as it
relates to December 31, 2009, an improved outlook for
incurred future losses. The decline in the allowance for credit
losses relating to auto finance loans reflects the sale of all
remaining auto loans previously purchased from HSBC Finance to
SC USA in August 2010. 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 however 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 September 30, 2010 decreased as compared to
June 30, 2010 and December 31, 2009 for the reasons
discussed above.
The allowance for credit losses as a percentage of net
charge-offs at September 30, 2010 declined as compared to
both June 30, 2010 and December 31, 2009 as the
decline in reserve levels discussed above outpaced the decline
in dollars of net charge-off. Net charge-off levels continued to
decline while early stage delinquency roll rates continued to
improve.
The allowance for credit losses by major loan categories,
excluding loans held for sale, is presented in the following
table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
June 30, 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)
|
|
$
|
646
|
|
|
|
41.73
|
%
|
|
$
|
698
|
|
|
|
40.05
|
%
|
|
$
|
938
|
|
|
|
38.12
|
%
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages, excluding home equity mortgages
|
|
|
176
|
|
|
|
18.87
|
|
|
|
244
|
|
|
|
18.42
|
|
|
|
347
|
|
|
|
17.26
|
|
Home equity mortgages
|
|
|
80
|
|
|
|
5.39
|
|
|
|
104
|
|
|
|
5.39
|
|
|
|
185
|
|
|
|
5.24
|
|
Private label card receivables
|
|
|
855
|
|
|
|
17.25
|
|
|
|
947
|
|
|
|
17.30
|
|
|
|
1,184
|
|
|
|
18.99
|
|
Credit card receivables
|
|
|
719
|
|
|
|
14.98
|
|
|
|
881
|
|
|
|
15.31
|
|
|
|
1,106
|
|
|
|
16.41
|
|
Auto finance
|
|
|
-
|
|
|
|
-
|
|
|
|
33
|
|
|
|
1.74
|
|
|
|
36
|
|
|
|
2.14
|
|
Other consumer
|
|
|
36
|
|
|
|
1.78
|
|
|
|
43
|
|
|
|
1.79
|
|
|
|
65
|
|
|
|
1.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
1,866
|
|
|
|
58.27
|
|
|
|
2,252
|
|
|
|
59.95
|
|
|
|
2,923
|
|
|
|
61.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,512
|
|
|
|
100.00
|
%
|
|
$
|
2,950
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
On-balance sheet allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific
|
|
$
|
264
|
|
|
$
|
239
|
|
|
$
|
326
|
|
Collective
|
|
|
358
|
|
|
|
416
|
|
|
|
549
|
|
Unallocated
|
|
|
24
|
|
|
|
43
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total on-balance sheet allowance
|
|
|
646
|
|
|
|
698
|
|
|
|
938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance sheet allowance
|
|
|
94
|
|
|
|
111
|
|
|
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial allowances
|
|
$
|
740
|
|
|
$
|
809
|
|
|
$
|
1,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117
HSBC USA Inc.
While our allowance for credit loss is available to absorb
losses in the entire portfolio, we specifically consider the
credit quality and other risk factors for each of our products
in establishing the allowance for credit losses.
Reserves for Off-Balance Sheet Credit Risk We also
maintain a separate reserve for credit risk associated with
certain off-balance sheet exposures, including letters of
credit, unused commitments to extend credit and financial
guarantees. This reserve, included in other liabilities, was
$94 million, $111 million and $188 million at
September 30, 2010, June 30, 2010 and
December 31, 2009, respectively. The related provision is
recorded as a miscellaneous expense and is a component of
operating expenses. The decreases in off-balance sheet reserves
at September 30, 2010 compared to both June 30, 2010
and December 31, 2009 reflect improved credit conditions
and lower outstanding exposure and, as it relates to
December 31, 2009, 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Dollars of Delinquency:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
959
|
|
|
$
|
656
|
|
|
$
|
954
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage, excluding home equity mortgages
|
|
|
1,243
|
|
|
|
1,286
|
|
|
|
1,595
|
|
Home equity mortgages
|
|
|
170
|
|
|
|
174
|
|
|
|
173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential
mortgages(1)
|
|
|
1,413
|
|
|
|
1,460
|
|
|
|
1,768
|
|
Private label card receivables
|
|
|
445
|
|
|
|
478
|
|
|
|
622
|
|
Credit card receivables
|
|
|
383
|
|
|
|
449
|
|
|
|
587
|
|
Auto finance
|
|
|
-
|
|
|
|
27
|
|
|
|
48
|
|
Other consumer
|
|
|
13
|
|
|
|
13
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
2,254
|
|
|
|
2,427
|
|
|
|
3,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,213
|
|
|
$
|
3,083
|
|
|
$
|
3,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquency Ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
3.03
|
%
|
|
|
2.11
|
%
|
|
|
3.04
|
%
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage, excluding home equity mortgages
|
|
|
8.56
|
|
|
|
8.84
|
|
|
|
10.56
|
|
Home equity mortgages
|
|
|
4.37
|
|
|
|
4.38
|
|
|
|
4.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential
mortgages(1)
|
|
|
7.68
|
|
|
|
7.88
|
|
|
|
9.17
|
|
Private label card receivables
|
|
|
3.57
|
|
|
|
3.75
|
|
|
|
4.12
|
|
Credit card receivables
|
|
|
3.54
|
|
|
|
3.98
|
|
|
|
4.50
|
|
Auto finance
|
|
|
-
|
|
|
|
2.11
|
|
|
|
2.34
|
|
Other consumer
|
|
|
.99
|
|
|
|
.96
|
|
|
|
1.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
5.24
|
|
|
|
5.37
|
|
|
|
5.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4.30
|
%
|
|
|
4.04
|
%
|
|
|
4.85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The following reflects dollars of
contractual delinquency and delinquency ratios for interest-only
loans and ARM loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Dollars of Delinquency:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-only loans
|
|
$
|
153
|
|
|
$
|
164
|
|
|
$
|
236
|
|
ARM loans
|
|
|
486
|
|
|
|
535
|
|
|
|
802
|
|
Delinquency Ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-only loans
|
|
|
5.48
|
%
|
|
|
5.79
|
%
|
|
|
6.94
|
%
|
ARM loans
|
|
|
6.06
|
|
|
|
6.71
|
|
|
|
9.58
|
|
118
HSBC USA Inc.
Our total two-months-and-over contractual delinquency ratio
increased 26 basis points as compared to the prior quarter.
Our two-months-and-over contractual delinquency ratio for
consumer loans decreased to 5.24 percent at
September 30, 2010 as compared to 5.37 percent at
June 30, 2010. Dollars of delinquency fell across
substantially all consumer 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 and
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 June 30,
2010 reflects stabilization of the real estate markets and
improving economic conditions. Overall delinquency levels
however, continue to be impacted by elevated unemployment levels.
Our commercial two-months-and-over contractual delinquency ratio
increased 92 basis points since June 30, 2010 driven
by an increase in dollars of delinquency as delinquencies
increased driven by higher commercial real estate delinquency
levels largely relating to four specific lending relationships
while average loans outstanding remained relatively flat.
Compared to December 31, 2009, our delinquency ratio
decreased 55 basis points at September 30, 2010,
largely due to lower dollars of delinquency and improved
economic conditions as discussed above as well as the sale of
$264 million of delinquent subprime mortgage whole loans
during the second and third quarters of 2010.
119
HSBC USA Inc.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net Charge-off Dollars:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
64
|
|
|
$
|
79
|
|
|
$
|
60
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage, excluding home equity mortgages
|
|
|
45
|
|
|
|
46
|
|
|
|
55
|
|
Home equity mortgages
|
|
|
32
|
|
|
|
30
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential mortgages
|
|
|
77
|
|
|
|
76
|
|
|
|
116
|
|
Private label card receivables
|
|
|
226
|
|
|
|
251
|
|
|
|
313
|
|
Credit card receivables
|
|
|
270
|
|
|
|
301
|
|
|
|
343
|
|
Auto finance
|
|
|
-
|
|
|
|
14
|
|
|
|
24
|
|
Other consumer
|
|
|
13
|
|
|
|
13
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
586
|
|
|
|
655
|
|
|
|
816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
650
|
|
|
$
|
734
|
|
|
$
|
876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Charge-off Ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
.86
|
%
|
|
|
1.07
|
%
|
|
|
.72
|
%
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage, excluding home equity mortgages
|
|
|
1.32
|
|
|
|
1.36
|
|
|
|
1.49
|
|
Home equity mortgages
|
|
|
3.23
|
|
|
|
2.99
|
|
|
|
5.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential mortgages
|
|
|
1.74
|
|
|
|
1.74
|
|
|
|
2.41
|
|
Private label card receivables
|
|
|
7.11
|
|
|
|
7.68
|
|
|
|
8.38
|
|
Credit card receivables
|
|
|
9.63
|
|
|
|
10.38
|
|
|
|
9.98
|
|
Auto finance
|
|
|
-
|
|
|
|
4.10
|
|
|
|
4.53
|
|
Other consumer
|
|
|
4.01
|
|
|
|
3.88
|
|
|
|
4.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
5.36
|
|
|
|
5.83
|
|
|
|
6.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3.54
|
%
|
|
|
3.94
|
%
|
|
|
4.13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our net charge-off ratio as a percentage of average loans
decreased 40 basis points compared to the prior quarter
primarily due to lower private label card and credit card
charge-offs 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 in the residential mortgage loan
portfolio remained flat compared to the prior quarter reflecting
stability in outstanding loan balances and continued moderation
in real estate loss severities. Charge-off dollars and ratios
for private label card and credit card receivables 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. Charge-off dollars and
ratios in the auto finance portfolio reflects the transfer of
these loans to held for sale in July 2010.
Commercial charge-off dollars and ratios decreased compared to
the second quarter of 2010 as charge-offs in middle market and
business banking were lower, based on improving trends in
portfolio quality. The decreases were partially offset by a
charge-off associated with a single commercial real estate
lending relationship.
120
HSBC USA Inc.
Compared to the year-ago quarter, our charge-off ratio decreased
59 basis points, driven by lower charge-offs across all
products. Our commercial charge-off ratio increased compared to
the prior year period as charge-off levels remained relatively
flat while average outstanding balances declined.
Nonperforming Assets Nonperforming assets are
summarized in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Nonaccrual loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land loans
|
|
$
|
432
|
|
|
$
|
401
|
|
|
$
|
477
|
|
Other real estate
|
|
|
354
|
|
|
|
237
|
|
|
|
167
|
|
Other commercial
|
|
|
227
|
|
|
|
255
|
|
|
|
623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
1,013
|
|
|
|
893
|
|
|
|
1,267
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages, excluding home equity mortgages
|
|
|
938
|
|
|
|
921
|
|
|
|
875
|
|
Home equity mortgages
|
|
|
86
|
|
|
|
92
|
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential mortgages
|
|
|
1,024
|
|
|
|
1,013
|
|
|
|
982
|
|
Credit card receivables
|
|
|
3
|
|
|
|
3
|
|
|
|
3
|
|
Auto finance
|
|
|
-
|
|
|
|
27
|
|
|
|
40
|
|
Others
|
|
|
9
|
|
|
|
9
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer loans
|
|
|
1,036
|
|
|
|
1,052
|
|
|
|
1,034
|
|
Nonaccrual loans held for sale
|
|
|
170
|
|
|
|
224
|
|
|
|
446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonaccruing loans
|
|
|
2,219
|
|
|
|
2,169
|
|
|
|
2,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing loans contractually past due 90 days or
more:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
88
|
|
|
|
98
|
|
|
|
166
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
Private label card receivables
|
|
|
314
|
|
|
|
348
|
|
|
|
449
|
|
Credit card receivables
|
|
|
279
|
|
|
|
332
|
|
|
|
429
|
|
Other consumer
|
|
|
28
|
|
|
|
27
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer loans
|
|
|
621
|
|
|
|
707
|
|
|
|
909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accruing loans contractually past due 90 days or
more
|
|
|
709
|
|
|
|
805
|
|
|
|
1,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
|
2,928
|
|
|
|
2,974
|
|
|
|
3,822
|
|
Other real estate and owned assets
|
|
|
188
|
|
|
|
138
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
3,116
|
|
|
$
|
3,112
|
|
|
$
|
3,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses as a percent of nonperforming
loans:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
58.66
|
%
|
|
|
70.41
|
%
|
|
|
65.44
|
%
|
Consumer
|
|
|
112.65
|
|
|
|
128.01
|
|
|
|
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.
|
Changes in nonperforming loans outstanding at September 30,
2010 as compared to June 30, 2010 and December 31,
2009 are related primarily to commercial loans. Commercial
nonaccrual loans increased compared to June 30, 2010 driven
largely by the deterioration of a single commercial real estate
lending relationship for which a specific loss provision was
established. Commercial nonaccrual loans decreased as compared
to December 31,
121
HSBC USA Inc.
2009 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 June 30, 2010 and December 31, 2009 reflect
lower outstanding balances and improvements in credit quality
including lower dollars of delinquency in those periods. During
the first nine months of 2010, we also experienced a significant
decline in non-accrual loans held for sale largely due to the
sale of $264 million of non-accrual subprime mortgage loans
during the second and third 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
June 30,
|
|
December 31,
|
|
|
2010
|
|
2010
|
|
2009
|
|
|
|
(in millions)
|
|
Impaired commercial loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
1,076
|
(1)
|
|
$
|
970
|
(1)
|
|
$
|
1,458
|
(1)
|
Amount with impairment reserve
|
|
|
781
|
|
|
|
638
|
|
|
|
1,127
|
|
Impairment reserve
|
|
|
322
|
|
|
|
298
|
|
|
|
336
|
|
|
|
|
(1) |
|
Includes TDR Loans of
$119 million, $123 million and $88 million at
September 30, 2010, June 30, 2010 and
December 31, 2009, respectively.
|
Criticized Loans Criticized loan 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 loans are summarized in the
following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) from
|
|
|
|
September 30,
|
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
2010
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Special mention:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
$
|
2,378
|
|
|
$
|
(447
|
)
|
|
|
(15.8
|
)%
|
|
$
|
(631
|
)
|
|
|
(21.0
|
)%
|
Substandard:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
|
2,376
|
|
|
|
(411
|
)
|
|
|
(14.7
|
)
|
|
|
(1,147
|
)
|
|
|
(32.6
|
)
|
Consumer loans
|
|
|
1,844
|
|
|
|
(107
|
)
|
|
|
(5.5
|
)
|
|
|
(265
|
)
|
|
|
(12.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total substandard
|
|
|
4,220
|
|
|
|
(518
|
)
|
|
|
(10.9
|
)
|
|
|
(1,412
|
)
|
|
|
(25.1
|
)
|
Doubtful:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
|
420
|
|
|
|
187
|
|
|
|
80.3
|
|
|
|
(84
|
)
|
|
|
(16.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,018
|
|
|
$
|
(778
|
)
|
|
|
(10.0
|
)%
|
|
$
|
(2,127
|
)
|
|
|
(23.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122
HSBC USA Inc.
The overall decreases in criticized commercial loans in the
first nine months of 2010 resulted primarily from changes in the
financial condition of certain customers, some of which were
upgraded during the period as well as paydowns related to
certain exposures. Increases in doubtful commercial loans since
June 30, 2010 largely relate to deterioration of a single
commercial real estate lending relationship.
Geographic Concentrations Regional exposure at
September 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
|
|
|
46.1
|
%
|
|
|
38.1
|
%
|
|
|
11.0
|
%
|
North Central United States
|
|
|
4.1
|
|
|
|
8.3
|
|
|
|
27.6
|
|
North Eastern United States
|
|
|
10.5
|
|
|
|
9.4
|
|
|
|
14.7
|
|
Southern United States
|
|
|
21.8
|
|
|
|
18.0
|
|
|
|
26.5
|
|
Western United States
|
|
|
17.5
|
|
|
|
26.2
|
|
|
|
19.8
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
.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. 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
$15.7 billion and $20.1 billion at September 30,
2010 and December 31, 2009, respectively.
Federal funds sold and securities purchased under
agreements to resell totaled $11.4 billion and
$1.0 billion at September 30, 2010 and
December 31, 2009, respectively. The balances increased
during the nine months ended September 30, 2010 as we
redeployed surplus liquidity using repurchase agreements.
Short-term borrowings totaled $20.0 billion
and $6.5 billion at September 30, 2010 and
December 31, 2009, respectively. See Balance Sheet
Review for further analysis and discussion on short-term
borrowing trends.
Deposits totaled $118.9 billion and
$118.3 billion at September 30, 2010 and
December 31, 2009, respectively. See Balance Sheet
Review for further analysis and discussion on deposit
trends.
123
HSBC USA Inc.
Long-term debt increased to $18.6 billion at
September 30, 2010 from $18.0 billion at
December 31, 2009. The following table summarizes issuances
and retirements of long term debt during the nine months ended
September 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Long-term debt issued
|
|
$
|
3,932
|
|
|
$
|
3,778
|
|
Repayment of long-term debt
|
|
|
(3,651
|
)
|
|
|
(10,068
|
)
|
|
|
|
|
|
|
|
|
|
Net long-term debt repayment
|
|
$
|
281
|
|
|
$
|
(6,290
|
)
|
|
|
|
|
|
|
|
|
|
Issuances of long-term debt during the first nine months of 2010
included $4.2 billion, of which $1.8 billion was
issued by HSBC Bank USA. During the third quarter of 2010, ten
year subordinated debt of $1.3 billion and
$750 million was issued by HSBC Bank USA and HSBC USA Inc.,
respectively, to support our capital position under
Basel II and replace Tier 2 capital lost due to
maturities of subordinated debt.
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 $3.5 billion is
available at September 30, 2010. HSBC Bank USA also has a
$40 billion Global Bank Note Program of which
$18.0 billion is available at September 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 both September 30, 2010 and
December 31, 2009, long-term debt included
$1.0 billion under this facility. The facility also allows
access to further borrowings of up to $3.0 billion based
upon the amount pledged as collateral with the FHLB.
At September 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 September 30 2010, credit card receivables and restricted
available-for-sale
investments totaling $1.7 billion secured $1.3 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 $600 million and
$1.8 billion at September 30, 2010 and
December 31, 2009, respectively. The public debt is
expected to be fully paid during the remainder of 2010.
At September 30, 2010, we had conduit credit facilities
with commercial and investment banks under which our operations
may issue securities up to $2.1 billion backed with private
label card and credit card receivables. The facilities are
annually renewable at the providers option. At
September 30, 2010, credit card receivables of
$995 million were used to collateralize $725 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 nine months, pricing has declined compared to 2009 but is
still elevated by historical standards.
Available-for-sale
investments included $659 million and $1.1 billion at
September 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.
124
HSBC USA Inc.
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 nine months ended
September 30, 2010, no capital contributions were made to
us by HNAI, our immediate parent.
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:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
|
Tier 1 capital to risk weighted assets
|
|
|
11.24
|
%(1)
|
|
|
9.61
|
%
|
Tier 1 capital to average assets
|
|
|
7.80
|
|
|
|
7.59
|
|
Total equity to total assets
|
|
|
8.92
|
|
|
|
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. As of September 30,
2010, we have begun the transition to the Risk Based Capital
requirements for our Tier 1 capital ratio. Had we fully
transitioned to the Risk Based Capital requirements at
September 30, 2010, our risk weighted assets would have
been higher by approximately $2.2 billion which would not
have had a significant impact on our Tier 1 capital ratios.
See Note 17, 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 15,
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 implement Basel II provisions no later than
April 1, 2011 in accordance with current regulatory
timelines. HSBC USA Inc. will not report separately under the
new rules, but HSBC Bank USA will report under the new rules on
a stand-alone basis. Increases in regulatory capital may be
required prior to the Basel II adoption date however, the
exact amount 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
125
HSBC USA Inc.
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. These loans were subsequently sold
to SC USA in August 2010. As discussed above, we have
established an Internal Capital Adequacy Assessment Process
(ICAAP). Under ICAAP, capital adequacy is evaluated
through the examination of regulatory capital ratios (measured
under current and Basel II rules), economic capital and
stress testing. The results of the ICAAP are forwarded to HSBC
and, to the extent that this evaluation identifies potential
capital needs, incorporated into the 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
|
|
|
October 1
|
|
|
|
|
|
|
through
|
|
|
through
|
|
|
Estimated
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
Full Year
|
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
|
|
|
(in billions)
|
|
|
Funding needs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loan growth (attrition), excluding asset transfers
|
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Long-term debt maturities
|
|
|
3
|
|
|
|
-
|
|
|
|
3
|
|
Secured financings, including conduit facility maturities
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
Secured funding maturities
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total funding needs
|
|
$
|
4
|
|
|
$
|
2
|
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funding sources:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash from operations
|
|
$
|
3
|
|
|
$
|
-
|
|
|
$
|
3
|
|
Other deposit growth
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
-
|
|
Loan sales
|
|
|
5
|
|
|
|
-
|
|
|
|
5
|
|
Long-term debt issuance
|
|
|
3
|
|
|
|
-
|
|
|
|
3
|
|
Short-term funding/investments
|
|
|
(9
|
)
|
|
|
3
|
|
|
|
(6
|
)
|
Secured financings, including conduit facility renewals
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total funding sources
|
|
$
|
4
|
|
|
$
|
2
|
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
126
HSBC USA Inc.
Off-Balance
Sheet Arrangements
As part of our normal operations, we enter into credit
derivatives and 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 in certain cases 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 may 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.
The following table provides maturity information related to our
credit derivatives and 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 September 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)
|
|
$
|
4.6
|
|
|
$
|
2.3
|
|
|
$
|
-
|
|
|
$
|
6.9
|
|
|
$
|
7.6
|
|
Commercial letters of credit
|
|
|
1.0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1.0
|
|
|
|
.7
|
|
Credit
derivatives(2)
|
|
|
46.5
|
|
|
|
278.9
|
|
|
|
49.8
|
|
|
|
375.2
|
|
|
|
387.2
|
|
Other commitments to extend credit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
16.6
|
|
|
|
29.8
|
|
|
|
2.0
|
|
|
|
48.4
|
|
|
|
48.9
|
|
Consumer
|
|
|
7.1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7.1
|
|
|
|
6.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
75.8
|
|
|
$
|
311.0
|
|
|
$
|
51.8
|
|
|
$
|
438.6
|
|
|
$
|
451.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $401 million and
$774 million issued for the benefit of HSBC affiliates at
September 30, 2010 and December 31, 2009, respectively.
|
|
(2) |
|
Includes $58.0 billion and
$57.3 billion issued for the benefit of HSBC affiliates at
September 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 September 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
127
HSBC USA Inc.
caption Off-Balance Sheet Arrangements and Contractual
Obligations for additional information on these ABCP
conduits.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conduit
Assets(1)
|
|
|
Conduit
Funding(1)
|
|
|
|
Maximum
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
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)
|
|
$
|
754
|
|
|
$
|
643
|
|
|
|
41
|
|
|
$
|
630
|
|
|
|
14
|
|
Third-party sponsored:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-seller
|
|
|
554
|
|
|
|
7,017
|
|
|
|
39
|
|
|
|
6,697
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,308
|
|
|
$
|
7,660
|
|
|
|
|
|
|
$
|
7,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
8
|
%
|
|
|
-
|
%
|
|
|
100
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
Trade receivables
|
|
|
14
|
|
|
|
100
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Credit card receivables
|
|
|
78
|
|
|
|
30
|
|
|
|
-
|
|
|
|
70
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
37
|
%
|
|
|
8
|
%
|
|
|
54
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-seller conduits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities backed by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto loans and leases
|
|
|
100
|
%
|
|
|
99
|
%
|
|
|
1
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
99
|
%
|
|
|
1
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Credit quality is based on external
credit ratings, when available, at September 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 nine months 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. 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
128
HSBC USA Inc.
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 $388 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 $97 million credit
facility. As of September 30, 2010 this credit facility was
undrawn and approximately $291 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 September 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. 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 increase of
$1 million and a decrease of $179 million in the fair
value of financial liabilities during three and nine months
ended September 30, 2010, respectively, compared to an
increase of $104 million and $254 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 nine months ended September 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;
|
129
HSBC USA Inc.
|
|
|
|
|
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 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.
130
HSBC USA Inc.
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
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
September 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 nine
months ended September 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 September 30, 2010 and December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
|
|
(dollars are in millions)
|
|
Level 3
assets(1)(2)
|
|
$
|
6,906
|
|
|
$
|
9,179
|
|
Total assets measured at fair
value(3)
|
|
|
150,354
|
|
|
|
111,231
|
|
Level 3 liabilities
|
|
|
4,842
|
|
|
|
3,843
|
|
Total liabilities measured at fair
value(1)
|
|
|
100,699
|
|
|
|
74,120
|
|
Level 3 assets as a percent of total assets measured at
fair value
|
|
|
4.6
|
%
|
|
|
8.3
|
%
|
Level 3 liabilities as a percent of total liabilities
measured at fair value
|
|
|
4.8
|
%
|
|
|
5.2
|
%
|
|
|
|
(1) |
|
Presented without netting which
allows the offsetting of amounts relating to certain contracts
if certain conditions are met.
|
|
(2) |
|
Includes $5.7 billion of
recurring Level 3 assets and $1.2 billion of
non-recurring Level 3 assets at September 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 $148.9 billion of
assets measured on a recurring basis and $1.4 billion of
assets measured on a non-recurring basis at September 30,
2010. Includes $108.6 billion of assets measured on a
recurring basis and $2.7 billion of assets measured on a
non-recurring basis at December 31, 2009.
|
131
HSBC USA Inc.
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 nine months of 2010, the deterioration
previously experienced began to ease. As a result, we made a
$89 million positive credit risk adjustment and a
$104 million negative credit risk adjustment to the fair
value of our credit default swap contracts during the nine
months ended September 30, 2010 and 2009, respectively,
which is reflected in trading revenue (loss). We have recorded a
cumulative credit adjustment reserve of $365 million
against our monoline exposure at September 30, 2010
compared to a $1,007 million credit adjustment reserve at
December 31, 2009. The decreases in 2010 reflect both
reductions in our outstanding positions and improvements in
exposure estimates.
Loans As of September 30, 2010 and December 31,
2009, we have classified $433 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
$5 million and a gain of $55 million for such mortgage
loans during the three and nine months ended September 30,
2010, respectively, compared to losses of $28 million and
$182 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 nine months ended
September 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
$178 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 nine months ended September 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
$370 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 19, 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 nine months ended
September 30, 2010 and 2009 as well as for further details
including the classification hierarchy associated with assets
and liabilities measured at fair value.
132
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
September 30, 2010:
Asset-backed securities backed by consumer finance
collateral:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Mortgages
|
|
|
Prime
|
|
|
Alt-A
|
|
|
Sub-prime
|
|
Credit Quality of Collateral:
|
|
|
|
|
Prior to
|
|
|
2006 to
|
|
|
Prior to
|
|
|
2006 to
|
|
|
Prior to
|
|
|
2006 to
|
|
|
Prior to
|
|
|
2006 to
|
|
Year of Issuance:
|
|
|
|
Total
|
|
|
2006
|
|
|
Present
|
|
|
2006
|
|
|
Present
|
|
|
2006
|
|
|
Present
|
|
|
2006
|
|
|
Present
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Rating of securities:
|
|
Collateral type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
Home equity loans
|
|
$
|
160
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
157
|
|
|
$
|
2
|
|
|
$
|
-
|
|
|
|
Auto loans
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Student loans
|
|
|
20
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Residential mortgages
|
|
|
570
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
|
|
298
|
|
|
|
-
|
|
|
|
268
|
|
|
|
-
|
|
|
|
Commercial mortgages
|
|
|
546
|
|
|
|
54
|
|
|
|
492
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Other
|
|
|
18
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AAA
|
|
|
1,324
|
|
|
|
54
|
|
|
|
492
|
|
|
|
4
|
|
|
|
-
|
|
|
|
347
|
|
|
|
157
|
|
|
|
270
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AA
|
|
Home equity loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Residential mortgages
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Student loans
|
|
|
12
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Other
|
|
|
38
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
38
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AA
|
|
|
50
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
50
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
|
|
Home equity loans
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Residential mortgages
|
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
9
|
|
|
|
-
|
|
|
|
4
|
|
|
|
Commercial mortgages
|
|
|
11
|
|
|
|
-
|
|
|
|
11
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Other
|
|
|
48
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
48
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total A
|
|
|
76
|
|
|
|
-
|
|
|
|
11
|
|
|
|
-
|
|
|
|
-
|
|
|
|
52
|
|
|
|
9
|
|
|
|
-
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BBB
|
|
Home equity loans
|
|
|
100
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
98
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Residential mortgages
|
|
|
6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total BBB
|
|
|
106
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8
|
|
|
|
98
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BB
|
|
Home equity
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8
|
|
|
|
2
|
|
|
|
-
|
|
|
|
Residential mortgages
|
|
|
6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total BB
|
|
|
16
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14
|
|
|
|
2
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
B
|
|
Auto loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Residential mortgages
|
|
|
19
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total B
|
|
|
19
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CCC
|
|
Home equity loans
|
|
|
86
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
86
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Residential mortgages
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total CCC
|
|
|
90
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
86
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CC
|
|
Residential mortgages
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D
|
|
Home equity loans
|
|
|
9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Residential mortgages
|
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total D
|
|
|
24
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
23
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrated
|
|
Home equity loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Residential mortgages
|
|
|
13
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Other
|
|
|
12
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Unrated
|
|
|
25
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13
|
|
|
|
12
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,730
|
|
|
$
|
54
|
|
|
$
|
503
|
|
|
$
|
4
|
|
|
$
|
-
|
|
|
$
|
475
|
|
|
$
|
418
|
|
|
$
|
272
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
133
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
|
|
$
|
334
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
334
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
Residential mortgages
|
|
|
6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
Commercial mortgages
|
|
|
243
|
|
|
|
-
|
|
|
|
-
|
|
|
|
180
|
|
|
|
63
|
|
|
|
-
|
|
|
|
Trust preferred
|
|
|
158
|
|
|
|
-
|
|
|
|
158
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Aircraft leasing
|
|
|
63
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
63
|
|
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
804
|
|
|
$
|
-
|
|
|
$
|
158
|
|
|
$
|
514
|
|
|
$
|
63
|
|
|
$
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total asset-backed securities
|
|
$
|
2,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $230 million or a decrease of the overall
fair value measurement of approximately $267 million as of
September 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 as well as losses in value due to rate movements.
|
|
|
|
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 risk but excluding
strategic and reputational risk).
|
|
|
|
Compliance risk is the risk arising from failure to
comply with relevant laws, regulations and regulatory
requirements governing the conduct of specific businesses.
|
134
HSBC USA Inc.
|
|
|
|
|
Fiduciary risk is the risk associated with offering
services honestly and properly to clients in a fiduciary
capacity in accordance with Regulation 12 CFR 9,
Fiduciary Activity of National Banks.
|
|
|
|
Reputational risk involves the safeguarding of our
reputation and can arise from social, ethical or environmental
issues, or as a consequence of operational and other risk events.
|
|
|
|
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 and
other non-retail 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;
|
135
HSBC USA Inc.
|
|
|
|
|
current market events or trends;
|
|
|
|
country risk;
|
|
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Risk associated with derivative contracts:
|
|
|
|
|
|
|
|
|
Total credit risk exposure
|
|
$
|
41,747
|
|
|
$
|
39,856
|
|
Less: collateral held against exposure
|
|
|
6,324
|
|
|
|
3,890
|
|
|
|
|
|
|
|
|
|
|
Net credit risk exposure
|
|
$
|
35,423
|
|
|
$
|
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 $609 million
during the nine months ended September 30, 2010.
136
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 September 30, 2010, we and HSBC
Bank USA maintained the following long and short-term debt
ratings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Moodys
|
|
S&P
|
|
Fitch
|
|
DBRS(1)
|
|
|
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
|
|
|
|
|
(1) |
|
Dominion Bond Rating Service.
|
In August 2010, Standard and Poors changed their outlook
on the long and short term debt ratings of both HSBC USA Inc.
and HSBC Bank USA from negative to
stable and in October 2010, re-affirmed the long and
short term debt ratings of each entity. As of September 30,
2010, there were 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 September 30, 2010 and
December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Institutional PVBP movement limit
|
|
$
|
6.5
|
|
|
$
|
6.5
|
|
PVBP position at period end
|
|
|
1.9
|
|
|
|
.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 September 30, 2010 and December 31,
2009.
|
|
|
|
|
|
|
|
|
|
|
September 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
|
|
|
(3
|
)
|
|
|
(4
|
)
|
Change resulting from an immediate 200 basis point decrease
in interest rates
|
|
|
(4
|
)
|
|
|
(3
|
)
|
The loss in value for a 200 basis point increase or
decrease in rates is a result of the negative convexity of the
residential whole loan and mortgage-backed securities
portfolios. If rates decrease, the projected prepayments related
to these portfolios will accelerate, causing less appreciation
than a comparable term, non-convex instrument. If rates
increase, projected prepayments will slow, which will cause the
average lives of these positions to extend and result in a
greater loss in market value.
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
137
HSBC USA Inc.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 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
|
|
$
|
175
|
|
|
|
4
|
|
|
$
|
17
|
|
|
|
-
|
|
Change resulting from a gradual 100 basis point decrease in
the yield curve
|
|
|
(310
|
)
|
|
|
(7
|
)
|
|
|
(65
|
)
|
|
|
(1
|
)
|
Change resulting from a gradual 200 basis point increase in
the yield curve
|
|
|
251
|
|
|
|
5
|
|
|
|
5
|
|
|
|
-
|
|
Change resulting from a gradual 200 basis point decrease in
the yield curve
|
|
|
(413
|
)
|
|
|
(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
|
|
|
245
|
|
|
|
5
|
|
|
|
20
|
|
|
|
-
|
|
Change resulting from an immediate 100 basis point decrease
in the yield curve
|
|
|
(387
|
)
|
|
|
(8
|
)
|
|
|
(95
|
)
|
|
|
(2
|
)
|
Change resulting from an immediate 200 basis point increase
in the yield curve
|
|
|
258
|
|
|
|
6
|
|
|
|
(14
|
)
|
|
|
-
|
|
Change resulting from an immediate 200 basis point decrease
in the yield curve
|
|
|
(497
|
)
|
|
|
(11
|
)
|
|
|
(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 effectived 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 September 30,
2010, we had an
available-for-sale
securities portfolio of approximately $40.0 billion with a
net positive
mark-to-market
of $1.6 billion included in tangible common equity of
$12.2 billion. An increase of 25 basis points in
interest rates of all maturities would lower the mark-to-market
by approximately $285 million to a net gain of
$1.3 billion 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
Proforma(1)
|
|
|
Actual
|
|
|
Proforma(1)
|
|
|
|
|
Tangible common equity to tangible assets
|
|
|
6.44
|
%
|
|
|
6.35
|
%
|
|
|
6.60
|
%
|
|
|
6.40
|
%
|
Tangible common equity to risk weighted assets
|
|
|
9.77
|
|
|
|
9.62
|
|
|
|
8.26
|
|
|
|
8.00
|
|
|
|
|
(1) |
|
Proforma percentages reflect a
25 basis point increase in interest rates.
|
138
HSBC USA Inc.
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 nine months
ended September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
Minimum
|
|
|
Maximum
|
|
|
Average
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Total trading
|
|
$
|
31
|
|
|
$
|
23
|
|
|
$
|
60
|
|
|
$
|
35
|
|
|
$
|
38
|
|
Equities
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
Foreign exchange
|
|
|
3
|
|
|
|
1
|
|
|
|
9
|
|
|
|
4
|
|
|
|
2
|
|
Interest rate directional and credit spread
|
|
|
25
|
|
|
|
19
|
|
|
|
53
|
|
|
|
30
|
|
|
|
33
|
|
The following table summarizes the frequency distribution of
daily market risk-related revenues for Treasury trading
activities during the nine months ended September 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 nine months ended
September 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
|
|
|
9
|
|
|
|
56
|
|
|
|
87
|
|
|
|
29
|
|
|
|
9
|
|
139
HSBC USA Inc.
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 nine
months ended September 30, 2010, assuming a 99% confidence
level for a two-year observation period and a
one-day
holding period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
Minimum
|
|
|
Maximum
|
|
|
Average
|
|
|
2009
|
|
|
|
|
|
(in millions)
|
|
|
Interest rate
|
|
$
|
141
|
|
|
$
|
101
|
|
|
$
|
170
|
|
|
$
|
130
|
|
|
$
|
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.
Modeling techniques, primarily rate shock analyses, are used to
monitor certain interest rate scenarios for their impact on the
economic value of net hedged residential MSRs, as reflected in
the following table.
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
|
|
(in millions)
|
|
Projected change in net market value of hedged MSRs portfolio
(reflects projected rate movements on October 1):
|
|
|
|
|
|
|
|
|
Value of hedged MSRs portfolio
|
|
$
|
298
|
|
|
$
|
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
|
|
|
(5
|
)
|
|
|
(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
|
|
|
25
|
|
|
|
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
|
|
|
47
|
|
|
|
4
|
|
140
HSBC USA Inc.
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 nine months
ended September 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
|
|
|
5
|
|
|
|
7
|
|
|
|
14
|
|
|
|
8
|
|
|
|
5
|
|
Operational Risk There have been no material
changes to our approach toward operational risk since
December 31, 2009.
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 CEO of HSBC
North America as well as functionally to the HSBC Head of Group
Compliance. 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
increased investment in people, systems and advisory services;
strategic actions to streamline our business; and 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. In addition, a new officer
overseeing AML functions was hired in early October. 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.
141
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 September 30,
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate(1)
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate(1)
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits with banks
|
|
$
|
22,297
|
|
|
$
|
15
|
|
|
|
.28
|
%
|
|
$
|
18,825
|
|
|
$
|
14
|
|
|
|
.28
|
%
|
Federal funds sold and securities purchased under resale
agreements
|
|
|
6,824
|
|
|
|
11
|
|
|
|
.62
|
|
|
|
4,519
|
|
|
|
8
|
|
|
|
.68
|
|
Trading assets
|
|
|
5,775
|
|
|
|
33
|
|
|
|
2.27
|
|
|
|
4,576
|
|
|
|
52
|
|
|
|
4.46
|
|
Securities
|
|
|
41,691
|
|
|
|
316
|
|
|
|
3.00
|
|
|
|
29,313
|
|
|
|
239
|
|
|
|
3.23
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
31,010
|
|
|
|
239
|
|
|
|
3.05
|
|
|
|
34,055
|
|
|
|
265
|
|
|
|
3.09
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
14,525
|
|
|
|
165
|
|
|
|
4.51
|
|
|
|
16,175
|
|
|
|
201
|
|
|
|
4.94
|
|
HELOCs and home equity mortgages
|
|
|
3,934
|
|
|
|
32
|
|
|
|
3.23
|
|
|
|
4,446
|
|
|
|
36
|
|
|
|
3.22
|
|
Private label card receivables
|
|
|
12,619
|
|
|
|
308
|
|
|
|
9.68
|
|
|
|
14,826
|
|
|
|
411
|
|
|
|
11.00
|
|
Credit cards
|
|
|
11,125
|
|
|
|
229
|
|
|
|
8.18
|
|
|
|
13,639
|
|
|
|
300
|
|
|
|
8.73
|
|
Auto finance
|
|
|
762
|
|
|
|
26
|
|
|
|
13.39
|
|
|
|
2,395
|
|
|
|
110
|
|
|
|
18.10
|
|
Other consumer
|
|
|
1,326
|
|
|
|
24
|
|
|
|
7.34
|
|
|
|
1,644
|
|
|
|
47
|
|
|
|
11.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
44,291
|
|
|
|
784
|
|
|
|
7.03
|
|
|
|
53,125
|
|
|
|
1,105
|
|
|
|
8.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
75,301
|
|
|
|
1,023
|
|
|
|
5.39
|
|
|
|
87,180
|
|
|
|
1,370
|
|
|
|
6.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
6,602
|
|
|
|
12
|
|
|
|
.69
|
|
|
|
7,216
|
|
|
|
11
|
|
|
|
.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
|
158,490
|
|
|
$
|
1,410
|
|
|
|
3.53
|
%
|
|
|
151,629
|
|
|
$
|
1,694
|
|
|
|
4.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses
|
|
|
(2,893
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,897
|
)
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
2,547
|
|
|
|
|
|
|
|
|
|
|
|
2,595
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
26,074
|
|
|
|
|
|
|
|
|
|
|
|
22,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
184,218
|
|
|
|
|
|
|
|
|
|
|
$
|
172,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits in domestic offices:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits
|
|
$
|
53,983
|
|
|
$
|
86
|
|
|
|
.63
|
%
|
|
$
|
48,450
|
|
|
$
|
143
|
|
|
|
1.17
|
%
|
Other time deposits
|
|
|
16,542
|
|
|
|
42
|
|
|
|
1.01
|
|
|
|
18,768
|
|
|
|
69
|
|
|
|
1.47
|
|
Deposits in foreign offices:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign banks deposits
|
|
|
6,633
|
|
|
|
5
|
|
|
|
.32
|
|
|
|
10,763
|
|
|
|
3
|
|
|
|
.14
|
|
Other interest bearing deposits
|
|
|
18,720
|
|
|
|
6
|
|
|
|
.13
|
|
|
|
14,568
|
|
|
|
9
|
|
|
|
.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits
|
|
|
95,878
|
|
|
|
139
|
|
|
|
.58
|
|
|
|
92,549
|
|
|
|
224
|
|
|
|
.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
19,057
|
|
|
|
22
|
|
|
|
.47
|
|
|
|
9,233
|
|
|
|
17
|
|
|
|
.71
|
|
Long-term debt
|
|
|
17,231
|
|
|
|
153
|
|
|
|
3.52
|
|
|
|
23,313
|
|
|
|
187
|
|
|
|
3.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
132,166
|
|
|
|
314
|
|
|
|
.94
|
|
|
|
125,095
|
|
|
|
428
|
|
|
|
1.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/Interest rate spread
|
|
|
|
|
|
$
|
1,096
|
|
|
|
2.59
|
%
|
|
|
|
|
|
$
|
1,266
|
|
|
|
3.07
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing deposits
|
|
|
21,456
|
|
|
|
|
|
|
|
|
|
|
|
19,063
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
13,800
|
|
|
|
|
|
|
|
|
|
|
|
13,501
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
16,796
|
|
|
|
|
|
|
|
|
|
|
|
14,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
184,218
|
|
|
|
|
|
|
|
|
|
|
$
|
172,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin on average earning assets
|
|
|
|
|
|
|
|
|
|
|
2.74
|
%
|
|
|
|
|
|
|
|
|
|
|
3.31
|
%
|
Net interest margin on average total assets
|
|
|
|
|
|
|
|
|
|
|
2.36
|
%
|
|
|
|
|
|
|
|
|
|
|
2.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
September 30, 2010 and 2009 included fees of
$18 million and $20 million, respectively.
142
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate(1)
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate(1)
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits with banks
|
|
$
|
28,914
|
|
|
$
|
58
|
|
|
|
.27
|
%
|
|
$
|
14,037
|
|
|
$
|
30
|
|
|
|
.28
|
%
|
Federal funds sold and securities purchased under resale
agreements
|
|
|
4,578
|
|
|
|
25
|
|
|
|
.73
|
|
|
|
7,857
|
|
|
|
38
|
|
|
|
.65
|
|
Trading assets
|
|
|
5,854
|
|
|
|
100
|
|
|
|
2.29
|
|
|
|
4,709
|
|
|
|
162
|
|
|
|
4.59
|
|
Securities
|
|
|
38,218
|
|
|
|
838
|
|
|
|
2.93
|
|
|
|
26,570
|
|
|
|
749
|
|
|
|
3.77
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
31,555
|
|
|
|
724
|
|
|
|
3.06
|
|
|
|
35,926
|
|
|
|
918
|
|
|
|
3.42
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
14,657
|
|
|
|
513
|
|
|
|
4.68
|
|
|
|
18,219
|
|
|
|
693
|
|
|
|
5.09
|
|
HELOCs and home equity mortgages
|
|
|
4,016
|
|
|
|
98
|
|
|
|
3.26
|
|
|
|
4,508
|
|
|
|
112
|
|
|
|
3.31
|
|
Private label card receivables
|
|
|
13,346
|
|
|
|
1,001
|
|
|
|
10.03
|
|
|
|
15,535
|
|
|
|
1,236
|
|
|
|
10.64
|
|
Credit cards
|
|
|
11,722
|
|
|
|
763
|
|
|
|
8.71
|
|
|
|
13,650
|
|
|
|
969
|
|
|
|
9.49
|
|
Auto finance
|
|
|
1,327
|
|
|
|
169
|
|
|
|
17.03
|
|
|
|
2,537
|
|
|
|
344
|
|
|
|
18.10
|
|
Other consumer
|
|
|
1,379
|
|
|
|
75
|
|
|
|
7.32
|
|
|
|
1,719
|
|
|
|
106
|
|
|
|
8.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
46,447
|
|
|
|
2,619
|
|
|
|
7.54
|
|
|
|
56,168
|
|
|
|
3,460
|
|
|
|
8.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
78,002
|
|
|
|
3,343
|
|
|
|
5.73
|
|
|
|
92,094
|
|
|
|
4,378
|
|
|
|
6.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
6,219
|
|
|
|
35
|
|
|
|
.75
|
|
|
|
8,490
|
|
|
|
35
|
|
|
|
.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
|
161,785
|
|
|
$
|
4,399
|
|
|
|
3.64
|
%
|
|
|
153,757
|
|
|
$
|
5,392
|
|
|
|
4.69
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses
|
|
|
(3,277
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,542
|
)
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
2,593
|
|
|
|
|
|
|
|
|
|
|
|
2,565
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
24,791
|
|
|
|
|
|
|
|
|
|
|
|
24,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
185,892
|
|
|
|
|
|
|
|
|
|
|
$
|
177,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits in domestic offices:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits
|
|
$
|
53,708
|
|
|
$
|
290
|
|
|
|
.72
|
%
|
|
$
|
47,371
|
|
|
$
|
466
|
|
|
|
1.31
|
%
|
Other time deposits
|
|
|
16,896
|
|
|
|
131
|
|
|
|
1.03
|
|
|
|
19,648
|
|
|
|
291
|
|
|
|
1.99
|
|
Deposits in foreign offices:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign banks deposits
|
|
|
8,518
|
|
|
|
16
|
|
|
|
.26
|
|
|
|
10,711
|
|
|
|
9
|
|
|
|
.12
|
|
Other interest bearing deposits
|
|
|
20,071
|
|
|
|
17
|
|
|
|
.11
|
|
|
|
15,300
|
|
|
|
38
|
|
|
|
.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits
|
|
|
99,193
|
|
|
|
454
|
|
|
|
.61
|
|
|
|
93,030
|
|
|
|
804
|
|
|
|
1.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
18,216
|
|
|
|
65
|
|
|
|
.48
|
|
|
|
9,728
|
|
|
|
51
|
|
|
|
.70
|
|
Long-term debt
|
|
|
17,514
|
|
|
|
441
|
|
|
|
3.37
|
|
|
|
24,548
|
|
|
|
634
|
|
|
|
3.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
134,923
|
|
|
|
960
|
|
|
|
.95
|
|
|
|
127,306
|
|
|
|
1,489
|
|
|
|
1.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/Interest rate spread
|
|
|
|
|
|
$
|
3,439
|
|
|
|
2.69
|
%
|
|
|
|
|
|
$
|
3,903
|
|
|
|
3.13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing deposits
|
|
|
21,401
|
|
|
|
|
|
|
|
|
|
|
|
20,065
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
13,543
|
|
|
|
|
|
|
|
|
|
|
|
15,609
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
16,025
|
|
|
|
|
|
|
|
|
|
|
|
14,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
185,892
|
|
|
|
|
|
|
|
|
|
|
$
|
177,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin on average earning assets
|
|
|
|
|
|
|
|
|
|
|
2.84
|
%
|
|
|
|
|
|
|
|
|
|
|
3.39
|
%
|
Net interest margin on average total assets
|
|
|
|
|
|
|
|
|
|
|
2.47
|
%
|
|
|
|
|
|
|
|
|
|
|
2.95
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 nine months ended
September 30, 2010 and 2009 included fees of
$48 million and $64 million, respectively.
143
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
September 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, motion practice and mediation. At this time, we are
unable to quantify the potential impact from this action, if any.
Governmental and Regulatory Matters HSBC USA Inc.
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.
144
HSBC USA Inc.
In the first week of October, HSBC Bank USA entered into a
consent cease and desist order with the Office of the
Comptroller of the Currency and our indirect parent, HSBC North
America, entered into a consent cease and desist order with the
Federal Reserve Board. These actions require improvements for an
effective compliance risk management program across our
U.S. businesses, including Bank Secrecy Act
(BSA) and Anti-Money Laundering (AML)
compliance. We had already 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 Inc. is committed to fully addressing the requirements
of the consent orders, and to maintaining compliant and
effective BSA and AML policies and procedures, and efforts to
strengthen related functions will continue.
We remain the subject of ongoing 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 inquiries pertain to,
among other matters, our prior Banknotes Business and our
foreign correspondent banking business, and our compliance with
BSA, AML and Office of Foreign Assets Control requirements.
The consent orders do not preclude additional enforcement
actions against HSBC Bank USA or HSBC North America by bank
regulatory or law enforcement agencies, including civil money
penalties, fines and other financial penalties. We are unable at
this time to determine the terms on which the ongoing inquiries
will be resolved, the timing of such resolution, or the amount
of penalties or fines, if any, that may be imposed by the
regulators or agencies in connection with such resolution.
145
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.
|
146
HSBC USA Inc.
Index
Assets:
by business
segment 45
consolidated average
balances 142
fair value
measurements 57
nonperforming 121
trading 9
Asset-backed commercial paper conduits 50
Asset-backed securities 9, 10, 58, 133
Balance sheet:
consolidated 4
consolidated average
balances 142
review 85
Basel II 81
Basis of reporting 8, 83
Business:
consolidated
performance review 76
Capital:
funding
strategy 126
common equity
movements 125
consolidated statement
of changes 6
regulatory
capital 43
selected capital
ratios 43, 125
Cash flow (consolidated) 7
Cautionary statement regarding forward-looking
statements 74
Collateral pledged assets 57
Collateralized debt obligations 134
Commercial banking segment results (IFRSs) 45,
107
Consumer finance segment results (IFRSs) 45, 106
Contingencies 56
Controls and procedures 144
Credit card fees 95
Credit quality 81, 113
Credit risk:
adjustment 71
component of fair
value option 34, 100
concentration 22
exposure 136
management 135
related contingent
features 31
related
arrangements 53
Current environment 74
Deferred tax assets 37
Deposits 89, 123
Derivatives:
cash flow
hedges 28
fair value
hedges 27
notional
value 32
trading and
other 29
Equity:
consolidated statement
of changes 6
ratios 43,
125
Equity securities
available-for-sale 10
Estimates and assumptions 8
Executive overview 74
Fair value measurements:
assets and liabilities
recorded at fair value on a
recurring
basis 59
assets and liabilities
recorded at fair value on a
non-recurring
basis 65
control over valuation
process 129
financial
instruments 58
hierarchy 130
transfers into/out of
level one and two 60, 131
transfers into/out of
level two and three 60,
131
valuation
techniques 66
Financial assets:
designated at fair
value 33
reclassification under
IFRSs 109
Financial highlights metrics 80
Financial liabilities:
designated at fair
value 33
fair value of
financial liabilities 58, 59
Forward looking statements 74
Funding 81, 126
Gains less losses from securities 18, 78, 97
Global Banking and Markets:
balance sheet data
(IFRSs) 45, 109
loans and securities
reclassified (IFRSs) 109
segment results
(IFRSs) 45
Geographic concentration of receivables 123
Goodwill 26
Guarantee arrangements 53
Impairment:
available-for-sale
securities 13
credit
losses 23, 78, 92
nonperforming
loans 121
impaired
loans 122
Income (loss) from financial instruments designated at
fair value,
net 34, 100
Income statement 3
Intangible assets 24
Income tax expense 35
Internal control 144
Interest rate risk 137
Key performance indicators 80
Legal proceedings 144
Leveraged finance transactions 33
147
HSBC USA Inc.
Liabilities:
commitments, lines of
credit 53
deposits 89,
123
financial liabilities
designated at
fair
value 33
long-term
debt 90, 124
short-term
borrowings 90, 123
trading 9,
88
Liquidity and capital resources 123
Liquidity risk 136
Litigation 144
Loans:
by
category 20, 86
by charge-off
(net) 120
by
delinquency 118
criticized
assets 122
geographic
concentration 123
held for
sale 23, 87
impaired 122
nonperforming 121
overall
review 86
purchases from HSBC
Finance 20, 39
risk
concentration 22
troubled debt
restructures 21, 122
Loan impairment charges see Provision for
credit losses
Loan-to-deposits ratio 80
Market risk 139
Market turmoil:
current
environment 74
exposures 136
impact on liquidity
risk 123
structured investment
vehicles 52
variable interest
entities 48
Monoline insurers 17, 78, 109
Mortgage lending products 20, 86
Mortgage servicing rights 25
Net interest income 91
New accounting pronouncements 71
Off balance sheet arrangements 127
Operating expenses 102
Operational risk 141
Other revenue 94
Other segment results (IFRSs) 45, 112
Pension and other postretirement benefits 37
Performance, developments and trends 76
Personal financial services segment
results
(IFRSs) 45, 104
Pledged assets 57
Private banking segment results (IFRSs) 45, 111
Profit (loss) before tax:
by segment
IFRSs 45
consolidated 3
Provision for credit losses 78, 92
Ratios:
capital 43,
125
charge-off
(net) 120
credit loss reserve
related 115
earnings to fixed
charges Exhibit 12
efficiency 79,
104
financial 80
loans-to-deposits 80
Reconciliation of U.S. GAAP results to IFRSs 45, 83
Refreshed
loan-to-value 87
Related party transactions 38
Results of operations 91
Risk elements in the loan portfolio 22
Risk management:
credit 135
fiduciary 141
interest
rate 137
liquidity 136
market 139
operational 141
reputational 141
strategic 141
Securities:
fair
value 10, 59
impairment 13,
97
maturity
analysis 19
Segment results IFRSs basis:
personal financial
services 104
consumer
finance 106
commercial
banking 107
global banking and
markets 109
private
banking 111
other 112
overall
summary 44, 104
Selected financial data 80
Sensitivity:
projected net interest
income 138
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, 88
derivatives 9,
88, 96
liabilities 9,
88
portfolios 9
Trading revenue (net) 96
Troubled debt restructures 21, 122
Value at risk 139
Variable interest entities 48
148
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: November 5, 2010
HSBC USA Inc.
(Registrant)
John T. McGinnis
Executive Vice President and
Chief Financial Officer
149
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.
|
|
32
|
|
|
Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|